Loan Syndication In Banks
(A Case Study Of International Merchant Bank Port – Harcourt)
Loan syndication in banks refers to the process wherein a group of banks or financial institutions collaboratively extend credit to a borrower, typically a large corporation or government entity, who requires a substantial amount of funding. This practice allows the participating banks to spread the risk associated with the loan among themselves, thereby mitigating individual exposure. Syndicated loans are structured and managed by a lead arranger or underwriter, who negotiates terms, pricing, and repayment schedules on behalf of the syndicate. This arrangement provides borrowers access to greater funds than might be available from a single lender, while also enabling lenders to diversify their loan portfolios and participate in deals that may otherwise exceed their risk appetite or lending capacity. Additionally, loan syndication facilitates efficient capital allocation and enhances liquidity in the banking system by redistributing funds to where they are most needed in the economy.
Loan Syndication In Banks (A Case Study Of International Merchant Bank. IMB)
The effect of a good loan syndication management on the profitability of a bank (IMB) and on the economy of a developing country like Nigeria can not be undermined.
This study is being undertaken to find out how IMB manages its loan syndication. This is because a good loan syndication management would have a significant impact on the profitability of the bank. This study will also examine the pattern and lending practices of International Merchant Bank (IMB), and will also attempt to suggest measures to alleviate problems that will be identified.
International Merchant Bank (IMB) was selected as a result of preliminary survey, which indicates that it is the only bank that is willing to assist in this study. This study, when completed will help in enhancing or improving loan syndication management as well as the profitability of bank as regard to loan syndication and to some extent help in making credit available for project that require large capital.
The study was undertaken to find out how IMB manages its loan syndication, a proper loan syndication management would have a significant impact on the profitability of the bank, with this view in mind a detailed analysis of IMB loan syndication management was carried out.
IMB was selected as a result of preliminary survey which indicates that it is the only bank that was willing to assist in the study, and from adequate information gathered through the use of structured questionnaires and personal interview administered to the loan syndication offers of the bank.
It found out that IMB has a specialized department that was specifically established to take care of its syndication functions. It was also found that IMB is risk conscious and so estimate the risk of a loss in any syndicated investment. It was also discovered that IMB insist on the provision of collateral as a securits before any proposal is made.
Based on these findings and others it was recommended that IMB should enlarge its syndication activity and seek for new avenues in order to increase its profitability base and generate growth in the economy. Also it should take greater risk in lending, since this will help to increase total investment in the economy because more loan syndication may be granted even if prospective client are unable to provide collateral securities. And IMB should help client prepare realistic feasibility studies. It is also recommended that the time lag between when loan syndication is granted to client should be reduced.
Title page
Approval page
Dedication
Acknowledgement
Abstract
Table of contents
CHAPTER ONE
1.1 Introduction
1.2 Statement of problem
1.3 Purpose / objective of study
1.4 Research question
1.5 Significant of the research
1.6 Scope of the research
CHAPTER TWO
2.1 Introduction
2.2 What is loan syndication
2.3 Loan syndication in IMB
2.4 Evolution and development of merchant bank
2.5 Syndication theory and management
2.6 Risk as the foundation and concept of loan syndication
2.7 Diversification theory
2.8 Capital Assets pricing model (CPM)
2.9 Asset portfolio in merchant bank
2.10 Risk in merchant bank
2.11 Principles and practice
2.12 Management of lending
2.13 Lending policies
2.14 Factors in loan syndication formulation
2.15 The principle of good loan syndication policy
2.16 Loan syndication Administration.
2.17 Credit Analysis
2.18 Credit Investigation
2.19 Project analysis or evaluation
2.20 Maturity pattern of merchant banks loan syndication and advances in Nigeria.
CHAPTER THREE
3.1 Introduction
3.2 Research Design
3.3 Sample size and population
3.4 Data collection
3.5 Data analysis
CHAPTER FOUR
4.1 Establishment of loan syndication department
4.2 Main function of loan syndication department
4.3 Estimation of risk of loss
4.4 Appraisal of loan syndication proposal
4.5 Securities Favoured by bank
4.6 Documentation of loan syndication terms
4.7 Role of central bank in loan syndication administration
CHAPTER FIVE
5.0 Summary and findings and recommendation
5.1 Summary of findings
5.2 Recommendation
GENERAL INTRODUCTION
Loan syndication is an inter-bank relationship and facilities in carrying on a common interest in financing a project. Where client borrowing requirement are extremely large and the risk also very light that it exceed the capacity of one banks, as it is often the case with major industrial, commercial, or agricultural undertakings. One bank arranges in close association with the customer syndicate facilities by grouping a consortium of banks to meet such financing request. The organizing bank is called the lead or managing bank, the loan is called consortium loan while the participating banks are referred to as loan syndication and the process of providing the loan is known as loan syndication.
Corporate loan syndication group (CLSG) purchases and sells interest in loan, in the corporate and commercial real estate sector corporate sector loan syndication includes;
– Leverage financing
– Middle market manufacturing
– Commercial financing companied
– Cable and communication companies. Syndication in the real estate sector includes;
– Pooled property funds
– Construction and development
A common feature of the International Merchant Bank management of loan syndication is a classical management of its asset. Loan syndication management is the act of handling a pool of inter bank relationship and their fund so that if not only preserved its original worth but also over time appreciate in value and yields and adequate return, consistent with the level of risk involved.
It is therefore our aim in this researcher to investigate syndication management strategy in international merchant bank and to see whether it is any way influenced by the nature of loans and advances of the bank whether its influenced of a positive or negative nature. According to Ansoff (1965).
Traditionally, the measure of success in a business firm has been profit, it is this measure that distinguished a business organization or from all other forms of social organization.
The factors that are likely to influence a bank’s desire to invest in a particular investment outlet include the nature of the project, the profitability, the cash flow situation and the maturity pattern of the banks. The importance of these various factors in the determination syndication varies from one bank to the other depending on the nature of the management and the overall business environment.
International merchant bank operates in the setting described with the cope of the direction of the bank Act. In this Act, banking business is defined as: the business of receiving money from outsider as deposit, irrespective of the payment of interest and the granting of loans. Advances and acceptances of credit or purchase and sale of securities and in incurring of obligation to acquire claims in respect of loans prior to their maturity or assumption of guarantee and other warrantees for others or the effecting transfers and clearing such other transaction as the minister may, on the recommendation of the central bank order published in the federal government gazette designated as banking business. It is easily seen that loan syndication management appropriately falls within the area of banking business as defined.
The function, objective, operation and setting of the merchant banks differs from those of commercial banks. In this Act of 1968, it is provided that merchant banks could engage in all forms of banking activities those undertaken by commercial bank except the operation of current account for small saves. The merchant banks are licensed to assist in the channeling of liquidity into the economy through granting of medium and long term investment, and also to perform specialized services in the area of equipment leasing, corporate financing project preparation debt factoring and rendering of advisory services among others. The provision on universal banking. For international merchant bank, it was considered that since they normally deal with large customers, which operate expectedly higher level of efficiency. They also need to mange their syndication more professionally to maximize the returns.
STATEMENT OF PROBLEM
Contributing to the literature on the problem of loan syndication management, the study was designed to analyze how international merchant bank select securities in its loan syndication and how these loan are managed until their various dates of maturity. The question the researcher is seeking answers are
a. What are the objectives of loan syndication?
b. What are the problems encountered in the efficient management of loan syndication?
c. What is the effect of loan syndication management on the operation of international merchant bank?
d. How can loan managers select an efficient syndicate?
e. Assessment of the overall performance of the loan syndication department in the bank
f. What is the role of government directives in bank syndication?
PURPOSE OF STUDY
Considering the paramount need for an efficient task of loan syndication management, this research is to examine the management of loan syndication in international merchant bank. This study is being undertaken to achieve the following;
a. To examine the pattern and lending practice of international merchant bank, and attempt to suggest measures to alleviate problems that will be identified.
b. To find out how central bank’s guidelines affects loan syndication management in international merchant bank.
c. To find out the efficiency of loan syndication management in international merchant.
RESEARCH QUESTION
For the research to effectively attain the purpose of this research work, the following question helped the purposed
a. What are the lending practices of international merchant bank?
b. What are the credit guidelines of loan syndication management in international merchant bank?
c. Is there efficiency in there loan syndication management in international merchant bank?
THE SIGNIFICANCE OF THE RESEARCH
The findings of the study will highlight the importance of loan syndication management to syndication managers. It will provide information to all merchant banks and other companies that deal with lending practices.
Besides, this study will render a great deal of help to institution of higher learning and those who intend to undertake further research in this area. Finally, the study will add to the steadily growing volume of life rafure in the area. I also attempted to give an insight into the problems which international merchant encounter in the execution of their lending practices and examines the extent to which they are coping with their syndication management practices.
THE SCOPE OF THE RESEARCH
The scope of the research is limited to international merchant bank (IMB) in Port Harcourt and was aimed at carrying out analysis of loan syndication practices of the bank.
Loan Syndication In Banks:
Loan syndication is a practice in the banking and finance industry where a group of banks or financial institutions collaborate to provide a large loan to a borrower, usually a corporate entity or a project. Instead of a single lender providing the entire loan amount, multiple lenders come together to share the lending risk and the financial exposure associated with the loan.
The process of loan syndication involves several key steps:
- Identification of Borrower: The borrower, typically a company or project with significant funding requirements, approaches a lead bank (also known as the arranger) to seek financing.
- Lead Bank’s Role: The lead bank plays a central role in the loan syndication process. It assesses the borrower’s creditworthiness, determines the loan terms and conditions, and structures the syndicate.
- Formation of Syndicate: The lead bank reaches out to other banks and financial institutions to gauge their interest in participating in the loan syndicate. These participants are referred to as syndicate members.
- Due Diligence: All participants in the syndicate conduct their own due diligence on the borrower and the proposed loan. This involves assessing the borrower’s financial health, business model, and the feasibility of the project for which the loan is being sought.
- Loan Terms and Documentation: Once the due diligence is complete, the lead bank negotiates the terms and conditions of the loan agreement with the borrower. These terms include the loan amount, interest rate, repayment schedule, covenants, and other relevant provisions.
- Syndication Agreement: Syndicate members sign a syndication agreement that outlines their roles, responsibilities, and the terms of their participation in the loan syndicate.
- Loan Disbursement: After the syndication agreement is in place and all due diligence is complete, the loan is disbursed to the borrower. Each syndicate member provides their portion of the loan amount.
- Loan Monitoring: Throughout the life of the loan, syndicate members collaborate to monitor the borrower’s financial performance and adherence to loan covenants. The lead bank often takes a more active role in this monitoring process.
- Loan Repayment: The borrower repays the loan according to the agreed-upon repayment schedule. Each syndicate member receives their proportionate share of the repayments.
Loan syndication offers several benefits to both borrowers and lenders:
- Borrowers: Borrowers can access larger loan amounts than they might be able to secure from a single lender. This is particularly useful for large projects or acquisitions. Additionally, borrowers benefit from the expertise and resources of multiple financial institutions.
- Lenders: Lenders can diversify their lending risk by sharing exposure to a single borrower. They can also leverage their collective expertise and resources to conduct thorough due diligence and monitor the borrower’s performance.
In summary, loan syndication is a strategy that allows multiple banks or financial institutions to collaborate and provide a large loan to a borrower, spreading the risk and combining their strengths in terms of due diligence and monitoring.