THE ROLES OF BANKS IN FACILITATING FOREIGN BUSINESS FINANCES IN NIGERIA (A CASE STUDY OF FIRST BANK OF NIGERIA PLC)
1.1 BACKGROUND OF THE STUDY
For Quite a long period in the history of banking the foreign business function was relegated to the background yet the provision of a wide range of bank service to bank customer had always involved some aspect of foreign business.
Foreign business implies exchange of goods and services among the citizen of sovereign state or countries.
This research is an appraisal and evaluation of the role of banks in facilitating foreign business finance and the case study is First Bank Plc. The research is looking at the approach of the First bank to foreign business finance that is promoting foreign business links with Nigeria.
The financial system, consist of financial market, financial instruments roles, connection and norms that major types of financial intermediaries are universal banks development banks financial institution, insurance companies credit and saving institution, investment and mortgage institution. All these are also involved in trade activities, but on the other hand, financial intermediaries are very relevant in the study because financial intermediaries are very relevant in the study because financial intermediaries provide a linkage between surplus units and deficit units in the economy. First bank is one of the intermediaries that facilitate the promotion of business link with Nigeria.
The role of banks involved the foreign business finance is very important as to the business.
1.2 STATEMENT OF THE PROBLEM
The main thrust of this study is to analyze the role of bank in foreign business finance that is the approach of First Bank plc to international finance of business. This is with particular reference to the first bank as a sub-sector of financial sector of Nigeria economy.
Nigeria signed the world trade organization (WTO) agreement in December 1994 so it became mandatory for Nigeria to implement trade libercilization with effect from 1st January 1995. before then the federal government of Nigeria has imposed a regime of tariff and customs duties on the importation of goods and services into the country (GATT)
It is necessary requirement by the government likewise the bank to comply with it. Due to infrastructure deficiencies and imposition of taxation at the various tiers of government. Namely: Federal government, State government, local government.
1.3 OBJECTIVE OF THE STUDY
From the above scenario, it is pertinent to note that major objectives for which the study is being undertaken are as follow:
To examine the role of banks in foreign business finance. To examine the operation of the foreign company in Nigeria To examine foreign investment requirement and protection To examine the nature and level of relationship between First bank and other specialized banks in financing international business. To undertake a survey of possible and constraints of the business financing and examine how these constraints can be moving or reduced. To investigate the opinion of the selected sector of the population as to provide a suitable research work. To review the existing and encourage considerable measurement toward support of the foreign investor but better still international business.
1.4 SCOPE OF THE STUDY
First Bank plc of Nigeria and other First Bank correspondent banks these multilateral agencies provide financial assistance to business managers (companies) with a view of promoting efficient use of resources, information and accelerating sustainable economic development. These agencies often require a relationship with a bank in the borrowing companies country.
1.5 DEFINITION OF TERMS
Foreign Business: Known as foreign direct investment in any country
Letter of Credit: This is a confirmed credit the advising banks add its undertaking to pay the settlement to that of the buyers (issuing) bank that opened with a correspondent bank’s trade finance facility.
Bill of Collection: Is a method of settlement whereby exporter said to that importer through correspondent banks.
Issuing Bank: That is the bank within the investor country e.g First Bank.
Correspondent Bank: That is the bank outside the investor country e.g Baraday’s bank of South Africa.
Domiciliary Account: (Non-export domiciliary account) the non-export or ordinary domiciliary account is mainly for all foreign exchange receipts other than proceeds on non oil exports.
Expatriate Quota: Is the official permit to a company conveying permission for the company individual expatriate and also specifying permissible duration.
2.1 LITERATURE REVIEW
This chapter will review available literature in the areas of foreign business finance which is also known as international business trade or foreign investment its historical background, definition, objectives and bring about the latest state of knowledge useful for the current research work. there has been a considerable degree of consensus in the literature as to the appropriate and exact definition of Foreign Direct Investment finance. Some called it Foreign Direct Investment e.g by economist and international (multinational) business finance export fro instance, Lipsey and Chrystal (1996) define it as investment, which gives foreign firm owners control over the behaviour of a firm in which the investment is made. According to Franklin R. Root (1978) foreign business finance known to him as foreign direct investment that is a long term investment in a foreign firm that gives the investor managerial control over that firm, it is of excellence business because foreign investor are almost exclusively corporation or individual representing a business enterprises. He further observed that foreign business finance is not simply (or even primarily) an foreign transfer of capital but rather the extension of enterprises according to him involve flow of capital, technology and entrepreneurial skills to the host economy where they are combined with local factor in business production of goods for the local and or export markets.
Franklin R. Root further contented that this transfer or a bundle of factors services retransfer under the control of the investing firm as to the sub-sequent production and marketing activities of the subsidiaries in the host country. His classical exposition of this is in line with the earlier work by Ronald Mckinnon (1973) in which he defined foreign business as a package of finance, modern technology and managerial skill. By the same token, Morgan D.J (1965) observes that privates investments inform of direct investment by business takes with it administrative-technical and managerial skills necessary to begin or expand economic enterprises, these in turn provide training and experience for local personnel.
Foreign business is the business activities which involve the crossing of national boarders, this include foreign manufacturing international trade as well as service industry such as banking tourism, construction, wholesaling and international trade and investment. This has to do with trade between two countries of the world or among countries, foreign business finance as a separate study became necessary due to the inadequacy of the study of international trade deal with all among issues and intricacies that are involve when business is take abroad
This a good knowledge of all related discipline in the humanities become highly relevant when with foreign business finance international business manager must have knowledge such as business administrative accounting and finance international law, political science, and diplomacy. International trade and the international firms are not strange in the conducting of business activities all over the world the mercantilism stated its in United Kingdom in it century or thereafter when gold was being king seen and perceived as an exclusive preservation. The trading at that mechanist would not like buying from abroad.
Thus the promulgation of Corn Law came into being no scorner did this event last then it was realized that trade had to pass across boarder and also the means of exchange. This remediably marked the beginning o international trade.
2.2 HISTORICAL PERSPECTIVE
The first American foreign direct investment are the English Vulcanized rubber plant that was located by colt fire Arms and ford, it was established some few years before the advent of the first world war of 1916 the business failed no sooner than its final inception. In 1866, a Scotch factory started what looked like the first successful American foreign investment by building singer serving machine by the inception of First World War in 1914. American listed manufacturing factories were not less than eight countries of the world. The American were not alone in the establishment of offering direct investment. Its countries like United Kingdom, Germany and Switzerland have established a good number of European businesses, concern like others. There is a clear indication that multinational firms of a sort existed much well before world war I.
2.3 FIRST BANKS PROFIT CONCEPTUAL FRAMEWORK
From its epochal beginning as British West Africa premier financing services provider on March 31, 1894 First Bank has distinguished itself as Nigerian’s leading financial services solution provider and a major contributor to economic development with 530 business location. The bank as one of the largest sales network in Nigeria capital stood at #3 billion (U.S $23.62 million) was issued and fully paid first bank’s ownership is spread over 3000,000 Nigeria citizen and association with its is member board of directors jointly controlling 4.6% of its enquiry. First Bank remains the most profitable Nigerians banks commitment to returning value to shareholders is reflected in the ability to consistently maintain post tax return on equity above industry average, it optical adequacy ratio is above the regulatory minimum of 10%
Earning per share for the bank in 2006 was #3.32 while dividend per share stood at #1.00 in the last decade by playing their roles in the federal government privatization and commercialization scheme first bank has led the financing of private investment infrastructure development in the Nigeria economy with 8 local subsidiaries, the bank operate a full-fledged bank in the U.K and a representative office in south Africa. First bank growth strategy incorporated an all inductive understanding of customer services realties and elimination of impediments to effective service delivery through continued network expansion product development, merger and acquisition and strengthening its global foot print. In further once of this strategy and in line with the imperative of industry consideration the bank acquired its investment banking subsidiary FBN limited and MBC international bank furthermore the bank is currently executing a business combination with ECO bank transitional incorporated (ETI) a pan west African banking group.
The emergent entity will be the largest bank in West African and one of the largest banks in African. This is the largest bank group in Nigeria it is made up of:
First Bank of Nigeria Plc (Commercial bank)
FBN (UK) Limited
First Funds Nigeria Limited
First Registrars Nigeria Limited
First Trustee Nigeria Limited
FNB Mortgages Limited
First Bureau de Change Limited.
2.4 REVIEW OF THEORETICAL BENEFIT AND COST OF FOREIGN BUSINESS (FOREIGN DIRECT INVESTMENT) TO HOST COUNTRY
It has been argued that foreign business also known as the foreign investment has multiple effect on the economy of the host country in term of benefits Conercross A.K. (1965) argued that “there is two types of benefits realized from foreign investment addition supplies of capital and on the other hand, new techniques of production and management entrepreneurial skill, new products new ideas. But it primarily investment he. The benefits of foreign business to investment when it takes the provision of experienced managerial and technical services can hardly be exaggerated.
2.5 THE ROLE OF BANK IN FOREIGN BUSINESS FINANCE CANNOT BE NEGLECTED AS OUR CASE STUDY BASED ON FIRST BANK PLC.
Overtime, the bank has handled trade finance transaction in conjunction with multilateral agencies like US First bank, Africa Export Bank (Afrexim bank) Common Wealth Development Corporation (CDC) etc. we have also recently been involved with finance institution like Burp Paribas, export development, Canada etc. for trade finance transaction. These multilateral agencies provide financial assistance to company (preferably private sector companies) with a view to promoting efficient use of resources and acceleration sustainable economic development. These agencies often require a relationship with a bank in the borrowing company country. The process through which company can access funds from the multilateral; agencies involved a step-by-step procedure that began with the company (prospective borrower) identifying viable projects. Which it to undertake.
The borrower then approaches a multilateral agency (directly or through a first bank) with the following details.
1. General Information: Includes borrowing description capital structure ownerships details scope and nature of major activities of the enterprise company history and management. 2. Specific Details of the Project: The borrower is required to give detailed description of the request to the facility, currency and tens of the facility and proposed security bring offered for the facility. 3. Financial Information: The borrower will provide at least 3 years audited accounts to enable the bank have a view of its financial performance power the years. He also required to provide financial projection encapsulating the project balance sheet profit and less account cash flow statement together with supporting assumption. 4. Marketing Strategy: The borrower will present a detained marketing plan for the product to be financial which should include:
- Details of marketing and current market trends and development
- Description of the global market for the product
- Details of tariffs non tariff barriers influencing trade in the product, subsides import and export regulation.
5. Macro Economic and Sect Oral Issues: A review of macro economic and sect oral issues effecting of the project will be provided. The review will include amongst others.
- A description of the export sector within the borrower country
- A description of the export performance of the product to be financed.
- A description of domestic interest rate levels.
- A description of the foreign exchange rate and recent trend in exchange rates once the borrower provides the information listed above, first bank will them undertake comprehensive due diligence and appraisal of the proposal for which financing is being sought first bank will evaluate the technical feasibility economic viability and environment. Impact of the product. The integrity and competence of the project sponsor are also considered in the evaluation if first bank is satisfied with the viability of the project the bank will approve the borrower transaction. Once the transaction is closed, first bank manager the borrower’s account to prevent difficult on repayment obligation to the multilateral agencies.
Our foreign operations department handles foreign trade services through the following modes:
Letter of trade services by type: Irrevocable letter of (credit conferment) irrevocable letter of credit deferred payment stand by letter of credit revolving letter of credit red clause letter of credit bank to bade letter of credit transferable letter of credit. Bill for collection: Method of settlement whereby the exporter entrusts the collection document (financial or commercial) forward delivery to the importer through a correspondent bank in accordance with the instruction contained in collection order / bill history. Domiciliary Account: There are two types namely: non-export domiciliary account and export proceeds domiciliary account. The non-export or domiciliary account is namely for all foreign exchange receipts other proceed on non-oil exports..