LOAN SYNDICATION A SOURCE OF BUSINESS FINANCING
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LOAN SYNDICATION A SOURCE OF BUSINESS FINANCING
Before delving into the specifics of loan syndication, it is important to understand what this term actually means.
A loan is an agreement between the renderer and the leader in terms of monetary consideration to repay either with interest or over a predetermined time period. Syndication, in its simplest form, refers to any financial entity tasked with the task of making loans to recipients.
Now, loan syndication as a form of business finance in Nigeria refers to an arrangement between two or more lending financial institutions to provide a credit facility to a borrower utilising common loan documents.
Before anyone in the country has to engage in any capital project that requires a large sum of money. The expense of these investments has made it possible for one financial institution to fund such a large investment since he cannot foot the bill.
Loan syndication has emerged as an appealing credit distribution mechanism for spreading risks and reducing the impact of restrictive laws and regulations.
There are other issues with loan syndication in the Nigerian economy, such as people claiming that it is very expensive and requires a lot of administrative labour because the effective cost of capital surpasses the interest paid. Second, due to the documentation requirements, loan syndication takes time.
In the area of issues, there would also be certain benefits incurred through loan syndication. Loan syndication decreases the firm’s cost of capital because interest payments are tax deductible. It also saves the borrower the trouble of obtaining an equivalent loan from a different financial organisation.
The repayment plan is frequently tailored to the borrower’s ability to service the debt in terms of cash flow. Furthermore, the borrower deals directly with the loan, which can be adapted to the borrower’s needs via direct negotiation.
Despite the many benefits of syndication loan financing, it is not a business for the faint of heart. A company that desires to borrow using these tactics must conduct extensive research.
Finally, given the capital market’s limited development and preferences for loadable funds in the form of bank credit, loan syndication is sure to become more popular in Nigeria and remain an important technique of credit distribution by financial institutions.
CHAPTER ONE OF LOAN SYNDICATION AS A SOURCE OF BUSINESS FINANCING
1.1 INTRODUCTION ANALYSIS
INTRODUCTION
The relative scarcity of cash for capital investment is a prevalent factor in all economies, particularly in emerging countries such as Nigeria.
Finding a solution to the problem of providing funds for capital investment has been a major preoccupation of financial institutions in Nigeria.
One solution that has emerged is syndicated loan, which aims to spread risks and weaken the impact of restricting laws and regulations lending by financial institutions.
Loan syndication is described as an arrangement between two or more lending financial institutions to supply a borrower with credit utilising standard loan documentation.
Loan syndication has grown dramatically as a source of financial instruments for commercial organisations in Nigeria as a result of many economic reasons. Among the most notable were:
– Restrictions on government credit expansion and monitoring authority to be minimised.
– The elimination of import licencing requirements, allowing more users of imported equipment and machinery to source and warn some into the country.
– Interest rate deregulation made loan syndication appealing to both commercial organisations and financial institutions.
Furthermore, there are/are various legal and regulatory constraints on commercial and merchant banks’ lending activities, such as the statutory lending limit given in Banking Act of 1969 section 13 (1), liquidity requirements, and so on.
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