TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study
1.2 Statement of the Problem
1.3 Objective of the Study
1.4 Research Question
1.5 Hypothesis
1.6 Scope of the Study
1.7 Significance of the Study
1.8 Justification for the Study
1.9 Operational Definition of Terms
CHAPTER TWO: REVIEW OF LITERATURE
2.1 Conceptual Review
2.1.1. Relationship Lending
2.1.2 Lending Relationship in Manufacturing Companies
2.1.3 Multiple Relationship of Manufacturing Industries in Banks
2.1.4 The Optimal Number of Lender Banks
Content
2.1.5 Effect of Credit Market Competition on Lending Relationships
2.1.6 Effect of Bank-Firm Relationship
2.1.7 Profitability
2.1.8 Financial Leverage
2.2 Theoretical Review
2.2.1 Theories of Bank Lending
2.2.2 The financial Intermediation theory of banking
2.2.3 Loan Pricing Theory
2.2.4 Firm Characteristics Theories
2.2.5 Theory of Multiple-Lending
2.2.6 Credit Market Theory
2.2.7 The Signaling Arguments
2.2.8 Hold-Up and Soft-Budget-Constraint Theories
2.2.9 Theory of optimal number of banking relationship
2.3 Empirical Review
2.4 Gaps in the Literature
CHAPTER THREE: METHODOLOGY
3.0 Introduction
3.1 Research Design
3.2 Population
3.3 Sample size and sampling Technique
3.4 Method of Data Collection
Content
3.5 Method of Data Analysis
3.6 Model Specification
3.7 Analytical Technique for Model Estimation
3.8 Ethical Consideration
CHAPTER FOUR: DATA ANALYSIS, RESUTS,
DISCUSSION OF FINDINGS
4.0 Introduction
4.1 Graphical Illustration and Descriptive Statistics
4.1.1 Trend of the Variables Overtime
4.2 Descriptive and Summary Statistics
4.3 Correlation Analysis
4.4 Empirical Analysis and Results
4.4.1 Testing for Research Hypothesis
4.4.2 Regression Analysis
4.4.3 Effect of Banking Relationships on Firm Performance
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1 Summary
5.1.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
5.4 Contribution to Knowledge
5.5 Limitation of the Study 55
5.6 Suggestion for Further Studies
Content
References
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Banking is an Economic activity of intense interest to public policy. Banks are subject to extensive prudential and conduct of business regulation. The public sector can also exercise direct and indirect influence over banks’ business decisions through outright ownership. The objective is basically to achieve public goals such as the channeling of funds to vulnerable economic sectors to borrowers with limited access to credit. Public sector involvement can be expressed through financial support, in cases where banks run into trouble, this support can be explicit or implicit in the markets’ expectation that some banks will not be allowed to fail.
Commercial banks have increasingly played a major role in financing public and private entities. Lending which may be on short, medium or long-term basis is one of the services that deposit money banks do render to their customers. In other words, banks do grant loans and advances to individuals, business organizations as well as government in order to enable them embark on investment and development activities as a means of aiding their growth in particular or contributing toward the economic development of a country in general (Bologna, 2011). Deposit money banks are the most important savings, mobilization and financial resource allocation institutions. Consequently, these roles make them an important phenomenon in economic growth and development. Therefore, no matter the sources of the generation of income or the economic policies of the country, deposit money banks would be interested in giving out loans and advances to their numerous customers bearing in mind, the three principles guiding their operations which are, profitability, liquidity and solvency (Adolphus, 2011). However, deposit money banks decisions to lend out loans are influenced by a lot of factors such as the prevailing interest rate, the volume of deposits, the level of their domestic and foreign investment, banks liquidity ratio, prestige and public recognition. The CBN require that their total value of a loan credit facility or any other liability in respect of a borrower, at any time, should not exceed 20% of the shareholders’ funds unimpaired by losses in the case of commercial banks (Bologna, 2011).
Manufacturing sector plays catalytic role in a modern economy and has many dynamic benefits crucial for economic transformation. In a typical advanced country, the manufacturing sector is a leading sector in many respects. It is an avenue for increasing productivity related to import replacement and export expansion, creating foreign exchange earning capacity; and raising employment and per capita income which causes unique consumption patterns. Furthermore, it creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sectors. In terms of contribution to the Gross Domestic Product (GDP), the manufacturing sector is dominant and it has been overtaken to the services sector in a number of organizations for Economic Co-operation and Development (OECD) countries (Anyanwu, 2003).
Obamuyi (2013)affirms that banks with high deposits and loans perform better in terms of profitability than banks with low deposits and loans. The author suggested that, since high deposits and loans enhance profitability, policy makers must make savings attractive in order to positively influence the liquidity position of the banks and their lending behaviour. The author further argues that, Nigerian commercial banks observed an era of remarkable profitability, characterized by high competition, huge deposits and varied investment opportunities. This development in the banking industry suggests that banks with well efficient deposits mobilization drive with high-quality lending behaviour will be the most profitable. Since the profitability and survival of businesses depend largely on availability of funds, and deposits constitute the major source of bank financing, it is apparent that there exist a relationship among efficient deposit mobilization, bank lending behavior, and profitability (Bologna, 2011). This explains why most banking firms have put in place aggressive deposit mobilization strategies with focus on customer need identification and offering of sophisticated banking products.
Banking relationships can influence syndicated loans terms. However, the role of lending relationships in syndicated loans remains virtually unexplored. When banks develop a long-term relationship (called a banking relationship, or a lending relationship) with their customers in a syndicated-loan market with repeated transactions, they gather information about the firms. The relevance of financial markets and financial institutions occurs, when they arise to help solve some of the frictions that could be found in real markets. Banks serves multiple purposes such as transforming short term liquid investments such as deposits into long term illiquid assets such as loans, (Diamond &Rajan, 2008). They also economize on collecting and processing the information necessary to make investment and lending decisions. According to these authors, the idea that banks can provide a service in the form of a lending relationship arises out of the value, that firms place on these relationships. This relationship critically depends on the competitiveness of the capital markets. Lending relationships should be most valuable where the information about a firm and its potential investment opportunities are most uncertain.
The development of long-term bank-firm relationships provided benefits, such as reducing information asymmetries, particularly when the borrowers are smaller. Syndicated loans are thus referred to as a hybrid of transactional and relationship banking, (Lee &Mullineaux, 2004). A small business lending can enhance bank value through relationship lending, unlike the transactional lending, the bank can also benefit from its opportunities to cross-sell additional products and services. The firm has an incentive to remain with the relationship bank rather than to defect and begin new relationship with another lender. In any case, because it is costly and time consuming to establish new lending relationships, firms are subject to a lock-in effect with their current relationship lender, which in turn enhances the banks’ profits. When the credit market is competitive and creditors cannot hold equity claims, the lender cannot expect to share in the future surplus of the firm. Since uncertainty about a firm’s prospects is high when the firm is young or distressed, creditors may be forced to charge a high interest rate until the uncertainty is resolved.Banking power at firm and market level is detrimental to the firm, as it increases the probability of credit constraints.
Multiple banking choices, larger, riskier, less profitable and more opaque firms prefer more lending ties, and the number of relationships is also positively correlated with credit market concentration.However, firms that engages in multiple relationships, benefits from competition among lending banks in terms of a lower probability of tightening, though such competition does not fully outweigh the marginal effect of local banking market power.In addition, the impact of competition on access to finance, depends on the quality and scope of credit information sharing mechanisms and better credit information, mitigates the damaging impact of low competition.
Harjoto (2006) and Bosch (2007) try to confirm if banking relationships matter by asking whether commercial and investment banks adopt the same tariff policies. They however, confirmed that in the syndicated loan market, commercial banks are more likely to develop a banking relationship. In contrast, investment banks are more likely to adopt arm’s length transactions, called the transaction banking, so commercial banks could gather information about firms and charge a reduced spread. Harjoto (2006) find that the investment banks charge higher spreads, and they thus provide the first evidence that banking relationships matter. Bosch (2007) also investigates the role of banking relationships in the determination of the spread. He shows that, whereas information asymmetries between the debtor and the lender increase the spread, a preexisting banking relationship reduces it. His result confirms the reasoning of Harjoto (2006) that banking relationships provide information to the banks, decrease the information asymmetries, and therefore allow a reduction of the spread.Banking relationships could have negative consequences for firms, via the so-called hold-up effect. Indeed, banking relationships in loan market, offer banks a competitive advantage because of the private information that banks have about firms. Thus, lending relationships can create switching costs for firms, and banks can charge an information rent.
Mattes(2012) show that if firms suffer from important switching costs, banks exploit their advantage and charge a higher spread. Therefore, banking relationships can offer an information rent to the banks, and can present drawbacks to the firms. Credit extension is essential function of banks and bank management because it strives to satisfy the legitimate credit needs of the community it tends to serve. The Central Bank of Nigeria established a credit act in 1990, which empowered banks to render returns to the credit management system in respect to its entire customers with aggregate outstanding balance of one million naira and above, (Ijaija&Abdulraheem, 2000).This made Nigerian Banks to universally embark on upgrading their control system and risk management, in order to avoid industry financial risk.