The Sources of Medium and Long-Term Finance in Africa, in Particular, Nigeria


By: Site Engineer, Staff

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The sources of medium and long-term finance in Africa, in particular, Nigeria, include the Nigerian Industrial Development Bank (NIDB), the Nigerian Bank for Commerce and Industry, the Nigerian Agricultural Cooperative Bank (NACB), the Nigerian Stock Exchange, Insurance Companies, Commercial Banks and State Loan Agencies.

The Nigerian Industrial Development Bank Ltd (NIDB)

The bank was incorporated in 1964, following the reorganization of The Investment Company of Nigeria, which was incorporated in 1959. NIDB has two main objectives. The first is to provide medium and long-term finance (either equity or loan) to Nigerian enterprises in manufacturing, non-petroleum mining, and tourism, including hotels of international standards. The second is to investigate new investment opportunities and encourage businessmen to exploit them.

NIDB invest in projects that are economically and technically viable, and which are promoted by limited liability companies. The minimum financial participation of the bank in any company is about $140, and the maximum does not normally exceed 25% of the equity capital of the borrowing company. Loans are granted for between 5 (five) to 15 (fifteen) years, with a moratorium of 2 years from the date of completion of the project.

It is disbursed only against equipment purchased or expenditure incurred. Interest rate charges are flexible and reflect the current condition in the capital market, as well as the risk of the particular project.

The securities normally accepted by the bank for loans are:

  1. First legal mortgage n fixed assets;
  2. Floating charge on other assets;
  3. The guarantee is given by a reputable bank or parent company;
  4. Pledges of government securities or marketable shares.

The bank also requires that its loans are covered, at least twice, by fixed assets, and reserves the right to inspect the company’s books and plants at its (borrower’s) expense. The bank may also require a limit on the creation of additional debt or distribution of dividends. Finally, regular reports on the financial and physical progress of the borrowing company must be submitted to NIDB.

The Nigerian Bank for Commerce and Industry (NCBI)

The Nigerian Bank for Commerce and Industry was established in 1973, to provide equity capital and loans to indigenous persons, institutions and organizations for medium and long-term investment in commerce and industry. The purpose of establishing the bank was to facilitate the purchase of business made available to Nigerians, following the Indigenization Decree (now Act) of 1972.

The bank can finance the expansion of existing business, or the establishment of a new one. It also assists indigenous enterprises through the identification of viable projects, preparation of feasibility reports and advice on technical and managerial matters. Usually, these services are rendered at a fee.

Equity participation of the bank in any company does not normally exceed 40% of paid-up capital. Loans are granted for periods ranging from 12 to 15 years for the acquisition of fixed assets. The minimum amount of loan that can be granted is about $140, and the maximum is 70% of the total cost of the fixed asset. The interest rate depends on the prevailing interest rate in the capital market and the risk of the enterprise.

The normally accepted securities by NBCI are:

  1. First legal mortgage on fixed assets related to the project being financed;
  2. Bank guarantee;
  3. Government and other marketable securities.

The Nigerian Agricultural and Commerce Bank

The Federal Government established the Nigerian Agricultural Bank in 1973, to provide credit and loan facilities to agricultural projects such as horticulture, poultry, crop farming, pig breeding, fisheries, forestry, and timber production, animal husbandry, and other agro-based industries. The bank finances the only project that is economically and commercially viable. In addition, the investor must have a proven ability to manage the project in an efficient and business-like manner.

The bank grants three classes of loan. Short-term loans are granted for a period not exceeding two years, medium-term loans for between 2 to 5 years, while long-term loans are for 5-15 years. Loans may be granted directly to the individual, business enterprises, whether or not they are incorporated, and to cooperatives, banks and governments for on-lending to farmers. Their interest rate is 5% in the case of direct loans and 3% for lenders.

The Nigerian Agricultural Bank accepts the following as collateral securities:

  1. First legal mortgage on fixed assets or land related to the project
  2. Government or other marketable securities;
  3. Bank or personal guarantee.

The bank does not require its customers to commence repayment of the loan before revenues can be generated from the project. However, it ensures that the loan is repaid as early as practicable.

The Nigerian Stock Exchange

The stock exchange is an institution which facilitates the buying and selling of new and existing securities of companies, government, and statutory corporations that decide to make use of it. Securities are ordinary shares, preference stocks, industrial bonds, and government development stocks.

A company that decides to have its securities traded on the stock exchange is said to be a quoted company. At the beginning of 1982, there were only 92 companies listed on the Nigerian Stock Exchange, of which only one was wholly owned and promoted by Nigerian entrepreneurs. The stock exchange provides several benefits to quoted companies.

The first of such benefit is that quoted companies have access to more funds. The Stock Exchange is a market place where investors can buy or sell securities issued by companies who need additional fund to expand their operations. By facilitating the exchange of securities, the stock exchange increases the liquidity of investors, and consequently the rate of investment in the economy.

The second benefit is that quoted companies are able to raise funds at a lower cost than otherwise. Since investors enjoy greater liquidity arising from the stock exchange, they are willing to accept a lower rate of return, thus lowering the cost of capital to the issuing company.

Finally, the stock exchange enables efficient companies to raise funds more easily and at a lower rate than less efficient ones. This occurs because investors tend to place greater values on the securities of efficient companies, and are more willing to invest in them.

The first stock exchange in Nigeria was the Lagos Stock Exchange. It was incorporated in 1960. In 1978, the exchange was reorganized and two branches were created, one in Kaduna and the other in Port Harcourt. The three stock exchanges now make up the Nigerian Stock Exchange.

The Nigeria Stock Exchange is managed by a council consisting of at least seven members. The council issues license to individuals or companies to enable them to operate as dealers or brokers. It also regulates the operations of the exchange, and disciplines dealers when necessary. All business transactions in the exchange are done through licensed dealers, or brokers, who receive a commission for their services.

At the apex of the Nigerian Stock Exchange is the Securities and Exchange Commission (SEC). The Commission’s main function is to determine the price at which new securities are to be sold. It also has the responsibility to ensure that securities are fairly distributed to investors and that proper standards are maintained in the securities market.

A company desiring to raise funds through the Stock Exchange must first be listed. To do this, the company must comply with all the requirements of the exchange, provide all necessary information about itself, and undertake to observe the rules and procedures designed to maintain standards of listed companies.

The purpose of these requirements is to protect the investor and maintain public confidence in the exchange. Once a company is listed, it can raise funds through the exchange, either by the direct public offer of its securities or by private placement.

A direct offer for public subscription is done by issuing a prospectus through a broker, inviting the public to subscribe to its shares. Members of the public may then apply and pay for the number of shares desired. If allotted the shares, such as individual or institution becomes a shareholder of the company and is issued with a share certificate.

The private placement also requires the company to issue a prospectus. However, instead of inviting the public to subscribe to the shares, the broker arranges for them to be sold to a willing purchaser.

Although the Nigerian Stock Exchange has experienced tremendous growth in the last few years, most of the activities have been concentrated on the Lagos Stock Exchange (LSE). The exchange has become a major source in long-term capital for the major companies in Nigeria.

Capital Structure

We shall examine the factors that should be taken into consideration in determining a suitable mix of permanent funds for the business enterprise. The composition of the permanent funds of an enterprise is called it’s capital structure.

Permanent funds are represented by long-term debt, preferred stock, and owners’ equity. All short-term funds, such as accounts payable and reserves, are usually excluded from the capital structure.

The capital structure of an enterprise may take several forms.

Obviously, there are a large number of combinations that an enterprise may have, and each has vital implications for its success. In determining whether to have more or less of a particular type of fund, the enterprise must take the following factors into consideration:

  1. The risk to control by existing shareholders;
  2. The flexibility of future financing;
  3. The pattern of capital structure in the industry;
  4. Availability;
  5. The burden of annual payment;
  6. The cost of different types of capital.

The first consideration is the availability of an alternative source of long-term funds. The form of ownership of a company often restricts the number of alternative forms of long-term financing. An unincorporated company, for example, cannot sell shares publicly to raise more equity capital, nor can it raise long-term loans from institutional lenders.

A particular method of financing may not be available to a company because the existing capital structure precludes the use of that source. Thus, a company that has already borrowed a substantial amount of money may be unable to borrow more because lenders are unwilling to take the risk.

Debt financing imposes on the borrower the burden of repayment of the principal, as well as fixed interest charges. Such repayment must be made whether the company makes a profit or not.

In the decision to finance through debt, the company has to ensure that it will be capable of repaying the principal, as well as the interest charges as they fall due. The only payout associated with the issue of preferred stock is the annual dividend, which is also fixed. Ordinary shareholders are paid a dividend only when profit is made. Thus, the most attractive method of financing on, the criterion of the burden of annual payout is the sale of shares.

However, the cost of the different types of capital should also be taken into consideration. While the cost of debt financing is the interest rate payable, and that of preferred stock is the rate of dividend, the ordinary stock is not without a cost.

The cost of ordinary shares may be treated as its opportunity cost, that is, the returns the firm could have earned if it invested the funds elsewhere. The costs, as well as the initial cost of raising the capital, should be carefully considered in decisions involving alternative financing.

We have already indicated that only ordinary shareholders have voting rights in the company. The financing through ordinary shares increases the number of shareholders, especially if the additional issue cannot be taken up by existing stockholders. Since the additional stockholders have equal rights with existing stockholders, the method of financing tends to dilute the control of the company by existing stockholders. Consideration of the risk of losing control may, therefore, preclude the issue of ordinary shares to raise long-term funds.

An important characteristic of a sound capital structure is the flexibility with which future financing decisions can be made. If the existing capital structure limits the alternatives open to the business, it might be constrained to accept unfavorable terms when financing projects.

The company might also find that it is unable to accept profitable projects because it is unable to raise the necessary funds on competitive terms. The firm must, therefore, strive to have a capital structure that provides it with ample flexibility to take decisions on future financing.

Generally, most industries have a pattern of capital structure that is most appropriate for them. Any major deviation from such a structure is usually considered abnormal or undesirable.

Financing Planning

The assets needed by a business firm include land, buildings equipment, inventory receivable and cash. Financial planning is the process by which the limited funds of the business enterprise are allocated for investment in these assets, for the purpose of maximizing profit.

Budgeting, therefore, involves determining the appropriate level of investment in each of these assets, so as to achieve profit maximization. The result of the budgeting process is a document called a budget. A budget is a plan of how the resources of the enterprise are to be allocated.

The assets of the business enterprise can be divided into two categories – fixed assets and current assets.

(a)        Fixed Assets

Fixed assets are the relatively permanent base, by which the business enterprise produces goods and services, which can be sold for profit. This means that fixed assets are not acquired for resale in the normal course of business. They include land, building, machinery, and equipment. Due to their nature, investment in fixed assets tends to commit funds for a long period of time. Current assets, also referred to as liquid assets, are acquired for the day-to-day operations of the enterprise.

(b)       Current Assets

Current assets are characterized by the ease with which they can be converted into cash. They include cash and marketable securities, receivables, and inventory. Investment in current assets commits funds for a very short period of time. As a result of these differences, the decision processes for determining the level of investment in each of the categories of assets vary.

Capital Budgeting

This is the process by which the level of investment in fixed assets is determined, even though the general principles can be applied to any other asset. The objective of capital budgeting is to analyze the costs and benefits of each asset, for the purpose of choosing among alternative proposals, on the basis of their profitability.

To be in a position to make a choice, the benefits of the use of each alternative asset, as well as the associated costs, must be estimated. Subsequently, proposals are ranked on the basis of their desirability, and the business enterprise is able to accept as many of the projects as they can afford.

Short-Term Budgeting

The business enterprise needs to allocate funds for its day-to-day operations. That is, funds need to be allocated for cash and marketable securities, receivables, and inventory, raw materials, wages and salaries, general administration, advertising and selling activities.

The general, separate budgets are prepared for each of these activities, based on certain standards, such as sales targets. The standards are usually established by the management of the enterprise. From the various budgets, the enterprise is able to develop a budgeted profit and loss statement, as well as a budgeted balance sheet.

Cash Budget

The business enterprise receives cash each time it makes a sale, gives cash when it pays bills and other expenses. The projection of cash receipts and cash disbursements, over a stated period of time is called a cash budget. The cash budget is very important to be a business enterprise, because it indicates when there would be a cash surplus or cash deficit, during the budget period. This enables the enterprise to plan well in advance, when and how to borrow to offset a cash deficit, or how to utilize any surplus cash.


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