STOCK MARKET CAPITALIZATION AND FINANCIAL OPENESS IN THE NIGERIAN ECONOMY

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STOCK MARKET CAPITALIZATION AND FINANCIAL OPENESS IN THE NIGERIAN ECONOMY

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The insufficiency of fund for capital investment is a known common factor in every economy especially in developing countries of the world. In developing countries like Nigeria, the low level of capital investment manifests in high unemployment rate, low productivity and a corresponding low standard of living affects a greater majority of the population. Providing solution to this problem has been a major investment preoccupation of financial institutions in Nigeria. Beyond the traditional term loan, bonds, offers and so on, business organizations and financial institutions as well have sought out an avenue to tackle the problem of insufficient fund for capital investment.

One of the solutions they have come up with is loans syndication.

According to Peter S. Rose and Sykia C. Hudglus (2008), a syndicated loan consists of a loan package extended to a corporation by a group of lenders, the loans may be drawn by the borrowing company with the funds used to support business operations or expansions. A syndicated loan can also be defined as an agreement between two borrowers with credit facility utilizing common loan documentation. This study is centered on several variables which are loans and advances being the independent variable while debentures, ordinary shares and preference shares are its dependent variables.

Signoriello, Vincent J. (1991) defined loans as a debt provided by one entity to another entity at an interest rate and evidenced by a note which specifies among other things the principal amount, interest rate and date of repayment.

Advances are sums paid or received before the fulfillment of an obligation such as supply of goods or provisions of services.

Debentures are long term promissory note issued by a borrowing company to the lender acknowledging a substantial debt on which interest is earned, Oye Akinsulere (2002).

Ordinary shares are generally referred to as equity shares, they do not carry any fixed rate of dividend right.

Preference shares normally carry prior right as regards participation in the sharing of profits or in the return of capital and generally carry specified rates of dividend.

In Nigeria, loan syndication can be traced to the 60’s when a consortium of the commercial banks and acceptance house discounted trade bills for the marketing board under the produce bill financial scheme. Although formalize loan syndication came into been during the oil boom of the 70’s where there was need for adequate capital to finance the industrialization programme. Currently, there exist no comprehensive enacted law on loan syndication in the country as to regulate the activities of the financial institutions that load the lead bank and participants in the syndication.

1.2 STATEMENT OF PROBLEM

There are conflicting views as to whether business organizations should be financed by syndicated loan or not.

The opposition to the use of the alternative especially in Nigeria argues that syndicated loan is expensive and involves much administration work.

Also, a review of the role of financial institutions in financing Nigeria business organizations through syndicated loan is of paramount importance. From the above presentations, the following are the statement of the problem;

a) The effect of loans and advances on ordinary shares

(b) The issue of loans, advances and preference shares

1.3 OBJECTIVES OF THE STUDY

The main objective of the study is to find out if loan syndication is an alternative business financing strategy in Nigeria, below are other objectives;

(a) To find out the effect of loans and advances on ordinary shares

(b) To examine the issue of loans and advances on preference shares

1.4 RESEARCH QUESTIONS G

The following are the research questions to be considered in this study:

(a) What are the effect of loans and advances on ordinary shares?

(b) What are the various issues of loans and advances on preference shares?

1.5 STATEMENT OF HYPOTHESIS

Ho1: There is no significant relationship between loans, advances and ordinary shares

Ho2: There is no significant relationship between loans, advances and preference shares

Ho3: There is no significant relationship between loans, advances and debentures.

1.6 SCOPE OF STUDY

This research work is focused on Delta State Nigeria and on five banks that have been selected, which are First Bank of Nigeria Plc, Guaranty Trust Bank, Ecobank Nigeria, United Bank of Africa and lastly Zenith Bank. This study will cover the time period of 2001 – 2014 which is over a decade. The data to be used on this study will be the secondary data and the type of secondary data to be used is the time series data.

1.7 SIGNIFICANCE OF THE STUDY

This study is expected to be of crucial benefit to borrowers seeking help to finance their businesses, it will also be of immense value to students in Accounting and other related courses like Banking and Finance and so on, since it is part of what they will practice at their various place of work.

Also, this study is expected to look into ways of making it easy for financing a capital project which requires a syndicated loan and also to encourage financial firms to jointly finance project which one firm cannot single handedly fund. It is hoped that after this study has been conducted, it will be useful to every bank especially merchant banks and development banks. It will as well provide information to the general public on how to employ loan syndication as an alternative business financing technique.

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