1.1BACKGROUND OF STUDY
A large capital project that needs huge investment always encounter problems like insufficiency of funds for capital investments which is a common factor in every economy, more especially in developing countries like Nigeria. Business firms and financial institution like merchant banks and commercial banks have fund ways of solving the problems, (insufficiency of funds for capital investment). One of the remedies is the loan syndicate or multiple credit facilities which is targeted at spreading risks weakening the input of restricting laws, rules and regulations on lending, of the financial institutions.
In addition to that, loan syndicate is a compound work by which loan is a credit facility granted to a customer, which is payable but in installments over a period of time, while syndicate is an association of industrialists or banking consortium formed t carryout some industrial project. In other words, loan syndication is the activity of merchant and commercial banks that takes care of every large loan request from corporate customers.
There is always one or two lender banks to coordinate, facilitate and manage the lending in a mush as there loan is usually a large one.
Loan syndication started with the bankers of the middle age era or time or period, who distributed the trade in lows or income but they failed to adopt a common loan documentation and it shows that it was more on a participating basis than a formalized syndication.
Moreover, modern loan syndication started in the United State of America after the second World War. Though agreement before the war was; for banks to lend money to their customers only on short term basis, hardly exceeding one year as such loans were marched with special deposit. Later, the United State Government introduced on attractive tax incentive that encouraged corporation organization to undertake large capital investment programme designed to march the high growth rate of the economy. So in as much as banks were controlled and regulated by the government in areas of loan growth and reserve requirements, it is still very difficult for one bank to shoulder such lending responsibility.
In Nigeria, loan syndication dated back to 1960’s when a consortium of commercial banks and Acceptance houses discounted trade bills for marketing boards under the produce Bills Finance Scheme. After that then came the formalization of loan syndication in 1970’ of the oil boom. During this period only few merchant banks were incorporated.
Loan syndication has assumed wider intentional dimension because of the need to provide capial to finance the first growing world economy. An international syndication credit is managed and underwritten by one or more financial institutions, normally from a location other than the domicile of the borrower to include lenders from different countries which provides the borrowers access to move than her own currency of domicile.
The spectacular growth of loan syndication as an alternative financial instrument for business organization occurred as a response to several economic factors in Nigeria. Notable among them are:
1.The introduction of the Structural Adjustment Programme (SAP) in 1986, culminating the (eventual conclusion or result) in the establishment of Foreign Exchange Market (FEM) and depreciation of the naira these made imported machineries and equipments very expensive and requiring huge capital outlay (initial capital) which most companies or financial institutions cannot comfortably afford.
But to be specific the Structural Adjustment Programme (SAP) which was introduced under the Leadership of Major General Ibrahim Babangide aimed at;
i)The adoption of appropriate pricing policies in all sectors with greater reliance on market forces and reduction in complex administration controls.
ii) The adoption of a realistic exchange rate policy coupled with the liberalization of external trade payment system.
iii)Further rationalization and restricting of public expenditure and customs tariffs.
2.Deregulation of interest rate made loan syndication attractive to both business organizations and financial institutions.
The above factors combined with the persistent domestic inflation and rising cost of domestic production here increased the magnitude of credit demand by various users of funds, particularly the industrial producers. In addition, there are certain legal and regulatory limitations on lending activities of commercial and merchants banks as such the statutory lending limit as provided in the banking Act of 1969 –S.B. (I).
In order to surmount these legal and regulatory limitations on lending activities of commercial banks and merchant banks.
Loan syndication has become and attractive credit delivery technique aimed at spreading risks and reducing the impact of the restriction laws and regulations.
Also the researcher carefully appraises all aspects of loan syndication as financial alternative in the country from the point of view of the borrowers. This also was made clear in this work that in consideration of numerous or somany merits, it is not used as a last resort but should be considered along – side with other equivalent alternatives.
The most important of this study is to know the popularity of syndicated loan financing among business organization in the country and the extent to which they employ is as financial alternative.
