The Role of Financial Institutions in the Management of Loan Syndication in Nigeria Economy

The Role of Financial Institutions in the Management of Loan Syndication in Nigeria Economy


Large bank loans are made by syndicates of commercial and Merchant banks as a result of restrictions imposed upon the banks through the Banking Acts and Monetary policy Guidelines.

The following are the prominent features of a syndicated loan or credit.

  1. The numbers of participants are substantial. A minimum of two banks is the standard in Nigeria.
  2. Large amounts of debts are raised, Mitchel and Wall (1980) consider this an advantage, as according to them “a major advantage of syndicated loans for borrowers is the large size of financing available, their flexibility and the fact that they are relatively cheaper to arrange.
  3. Prepayment is customarily permitted
  4. The lending is governed by single common loan documentation
  5. Draw down can be flexible
  6. Syndicated loans are usually structured as term locus with floating interest rates.
  7. Syndicated loans are arranged by lead bank. The lead bank negotiates terms and conditions.  The lead bank could be a commercial bank providing loan funds or either a merchant bank or a commercial bank, which acts solely as the manager to the loan.

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There are two main parties to a Loan syndication viz the lender and borrower.  There are however many lenders involved.  Therefore we may further categories them according to their roles in the Loan syndication process, as the lead bank and participating banks.


When the borrow conceives the idea to embark on an investment programme, the commissions a management consultant to prepare a feasibility report on the proposed project.  The report will among other information, contain the status of the promoters, the type of project, location, management profile sources of raw materials, type of technology to adopted (machines) markets for the products, and project cost (equity and loan capital) and the projected financial information.

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It is common knowledge that profit is the major motivating factor for any business venture.  Therefore, the promoters, while conceiving the idea to embark on a new project or expand the existing one, must have been convinced that the business will generate sufficient cash flow and profit for repayment of any borrowed funds any payment of dividend to the shareholders.  Banked by this idea, the feasibility report must be seen to project the business as one hat will be economically feasible and financially viable.

However, the general profit motivation would not necessarily apply to social services provided by government for which huge loans for such project, usually come from statutory allocations and not from stream of cash flows or viability of the projects.

The borrower submits the feasibility report together with other pertinent information such as Article and memorandum of association, certificate of incorporation audited accounts if the business already existing to his banker to provide the loan.  It is not mandatory that the documents should be submitted to the borrowers existing bankers the borrower is free to submit the documents to any bank of his choice (even where he has no account) if he is convinced that such bank would be in position to provide the entire loan single or lead a successful syndication.


The lead/agent bank has major roles to play in Loan syndication the borrower chooses the lead bank and summits the feasibility report together with other pertinent document to the bank with a request that the bank should lead a syndication of leaders to provide the required credit facilities.  Occasionally banks solicit to lead syndication if they have prior knowledge of the customer’s intention to borrow large sums of money.  For every large locus, two or more banks could lead the syndication and the fees would be shared among them.

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Before accepting to spearhead a Loan syndication a bank must have taken the following factors into consideration.

  1. Effects of frequent changes in government policies on the project
  2. Availability and sources of raw material. Are there alternative sources for raw materials.
  3. Market for finished products locally or overseas. If overseas, what quantity will be exported and what            amount of foreign exchange will be erned.  Will the cash flow projections cover a period of atleast three to five years, and include balance sheets income and funds statement.

Having considered these issues just enumerated and convinced itself about the viability of the project, the next pant in this syndication should make its own independent evaluation of this borrowing and determine the amount of its participating based on such investigations as it deems necessary.


These are the other banks apart from the lead bank (the borrowers agent) who made the syndication possible.  A lending bank may appear both in its capacity as a participating and as a deal under writer (lead manager or co-manager), the explanation for a dual appearance is that one specific unit (normally a subsidiary) is charge with managing the parent banks commitment to the transaction, while the parent bank itself is the dual underwriter with its initial position reduced through the syndication process to an allotted or final participation.

The term co-manager can apply to banks which have accepted underwriting position and are legitimate management group members, influence syndication/retention and fee distribution strategies.  The lead bank contacts the other participants making details of the syndication know to them through the placement information memorandum prepared by it.  Each of the prospective evaluation of the borrowing and determine the amount of its participation base on such investigation as its deems necessary as Waltson and Altingham (1986) rightly pointed out it is not sufficient to allow the manager to make all decision.  After all lead manage has a conflict to interest which must be clearly recognized.

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The participating bank may on their own appoint one of them to represent their interest in certain regards of the syndicated facility.  A bank so appointed is called the Agent Bank.  It is an agent of the lenders and its duty is to monitor the disbursement utilization and repayment of the credit as per lending agreement.

In Nigeria the leading and managing functions are usually combined thus the agent bank is more often than not the same as terminated with singing of the loan agreement and its main role is on the mandate of the borrower, to initiate ways and means of raising the required amount.

This article was extracted from a Project Research Work Topic


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