The reason for this proposal is to lay out the study foundation and also give light on how developing countries can build strong syndicated loan market in the future. The study will use comparative approach, descriptive design and analytical method to analyze the United Kingdom experiences on the financial sector market and show clearly the lessons that can be learned from such a country plus whether these experiences can be applied in the developing nations. The study will contribute to the current literature of syndicated loan market by showing ways in which the developing countries can follow to build strong financial systems.
This chapter explains the research background and problem analysis; the statement of the problem describes the situation of the study. The chapter also identifies the research methodology, its significance and the purpose of the study.
Generally speaking, financial markets play the role of channelling resources in all nations from the depositor to investor. The significance of this role of the financial sector has obtained much consideration in the latest literature on the growth of the economy. In the very last decade a strong agreement has materialized that efficient economic intermediaries have an important effect on the growth of the economy (Dennis and Mullineaux, 2000).
Current financial systems have an extensive assortment of institutions that are market-oriented for making this process possible. In planned financial systems, this procedure was carried out through governmental initiatives and there were a small number of market-oriented fundamentals of the financial market (Mian, 2006).
Therefore, the first stage in the process of change for the economic sector is the advancement of financial institutions that are market-oriented. Given the distinctive issues faced by economic sectors in many countries, many spectators anticipated that the changeover process would spread over several years. Actually, several developing countries have made notable progression in the most recent decade of change (Beck and Demirg-Kunt, 2009). Though banks are generally visible and frequently dominate the financial market, they are merely a component of the financial intermediation process and funding activities that distribute resources in the financial system fall along extensive and wide range (Bae and Goyal, 2009). Funding begins with the businessman and extends to big company that raises the equity in various ways such as issuance of shares to private placements and globally syndicated loans (Boot and Thakor, 1993).
The term syndicated loan explains a tool in which several lenders provide funds to a single borrower, in reality loan syndication is a group of banks (the syndicate) that lends directly to the borrower under a single loan agreement (Dennis, 2000). The syndication is usually perceived by the lenders as a collection of loan contracts expediently condensed in a single agreement; syndicated loans have become a significant corporate financing technique for large and small firms in developing countries (Armstrong, 2003). Generally, syndicated loans comes from banks, with institutional investors, as well as hedge funds, mutual funds, pension plans, and insurance firms are increasingly being concerned with syndicated lending (Champagne and Kryzanowski, 2007).
The syndicated loan market has been developing robustly ever since 1990s and amounted to approximately $1,000 billion in the year 1999, this amount increased to $2,260 billion in 2004 from very few amounts in the early 80s (Bonin and Paul 1999). However, from 1993 to 1997 the level of syndicated loans improved gradually and in 1998 it fell as a result of the Russian and Asian financial crises, afterwards it increased considerably in the next two years and decreased in 2002 and 2003; the highest volume of syndicated loan was attained in 2004 (Bonin and Paul 1999).
Nowadays, the market for syndicated loan is more intricate than before because of counterparties crossing geographic and political barriers as trade agreement continue to develop the international financial system and as the global network of syndicated loan criss-crosses the world (Hermes and Robert, 2000). Syndicated lending entails parties in Europe, Asia, U.S., Latin America, Africa and Middle East (Hermes and Robert, 2000).
The developing countries vary in size from large nations such as China to moderately small nation like Hungary including a number of smaller nations such as Slovenia and Estonia (Blejer and Marko, 2001). The degree to which dissimilar factors of the financial market institutions grow will be determined by the country size; at the end of the day, small nations are not likely to grow the full range of institutions and markets. In such circumstances, access to international financial and foreign capital markets will exchange with the domestic institutional growth. The trend is not limited to developing markets although it is an attribute of small nations that are well-developed (Bonin et al, 1998). The emerging countries syndicated loan markets such as the BRIC (Brazil, Russia, India and China) must be measured up to frontier countries syndicated loan market as opposed to the developed countries such as United Kingdom (Bonin and Paul, 1999).
Nonetheless, the real sector irregular growth and financial market immaturity leave the developing countries with wide open institutional and legislative gaps in their economic spectra. Additionally, development approaches have been rejected because of taking long time considering the significant of the economic sector to the contemporary economy (Blommestein, 1998). Therefore, any investigation of the developing countries must take into consideration the growth of the financial institutions as well as the significance of the “missing pieces to the overall functioning of the financial sector” (Blommestein, 1998).
Developing nations usually have institutions which are not well developed and particularly have lesser credibility on their central banks, than developed nations. The lower credibility frequently stems from price instability history, as well as hyperinflation in a number of cases, which is attributable to historical dependence on government funding in presence of undeveloped fiscal system (Bonin et al, 1998). In addition, uncompetitive system of banking plays part in contributing to the problem of public finance that is conventional dependence on banks as the only source of funds, by use of financial repression combined with capital controls (Bonin et al, 1998). Developing nations are viewed as high risk countries because of high default risk on loan borrowed; thus, international lenders will charge high rate of interest plus their financial markets are faced with high imperfections such as loans from bank made under management direction, poor property right protection and government corruption. In this case therefore, the emerging nations as well as frontier markets require different models than those applied in the developed nations.
Research aims and objectives
- To examine whether the models being applied in the developed countries are applicable in the developing world if not then the study will investigate why they require diverse models
- To find out the reasons behind their differences with the developed nations
- To find out whether there is any solution to the differences that can then help build a strong syndicated loan market
- What types of model are applicable in the developed countries and can they be used in the developing nations?
- What reasons can be attributed to the underlying differences?
- Is there a solution to the differences identified that can assist developing countries in building a strong syndicated loan market
Organisation of the study
The lessons from United Kingdom financial market sector, mainly in the perspective of the developing countries, provide the focal point of this study. This study will focus on one element of the financing continuum that has obtained more consideration in the developing countries; this is the banking sector which offer syndicated loan (Le, Gasbarro and Zumwalt, 2007). In the next section this paper will discuss about syndicated loan market evolution in general by giving broad summary of the problem, then demonstrating the theory with nation experiences, and eventually finishing with implication of these occurrences. Banking is critical in the literature review because of its function in the financial sector market in offering loans. In the same section the knowledge gap will be identified in the syndicated loan market (Berglof and Patrick, 2003) which the researcher will fill in order to add to the existing literature.
This study will not be the first to report on the United Kingdom financial market sector; generally, the literature centres on particular problem of change such as restructuring but less attention has been paid on the financial market sector. On the other hand, attention on the financial market sector is frequently an element of a wider concentration in macroeconomic strength and the function of the monetary policy in controlling inflation. Though the output level in a number of developing countries is below the peak level, significant improvement has been done (Barnish, Miller, and Rushmore, 1997). The issues of developing countries are similar to those affecting other nations around the globe; for instance, the financial deficit and capital sufficiency of banks are issues affecting many developing countries. The limitations of Central Asian states are the same as those being experienced in the least developed countries in Asia and Africa.
This chapter will discuss syndicated loans in developing countries, United Kingdom experiences, lessons for the United Kingdom financial sector market and missing gap.
The topic of monetary economics or macroeconomics did not exist in developing nations in the past more than a number of papers on devaluation. Indeed, it was not the right time to be concerned with models in such nations that were planned for the industrialized nations, with their presumption of economic sectors that were open to global flows and which were extremely market-oriented (Simons, 1993). On the other hand, developing nations usually “suffered from financial repression under which the only financial intermediaries were uncompetitive banks and the government itself (which kept nominal interest rates artificially low) rather than by market forces” (Arnone et al, 2006). As a result capital outflows and inflows were discouraged heavily, mainly through capital controls (Arnone et al, 2006).
The main outburst of financial research was incited by capital busts and not greatly by capital booms that existed in the early 70s due to inflow of petro dollars and which was responsible for liberalizing economies of developing countries (Arnone et al, 2006). Moreover, the emerging market literature currently engages an extremely big share of the global macroeconomics and finance field as global capital flows play a vital position in the study of macroeconomic in the developing nations. This entail both market-imperfection models that was intended to consent to practicality of pro-cyclicality, flawed property rights, asymmetric information, default risk and any other imperfect institutions plus efficient-market models planned to explain highly developed countries (Arnone et al, 2006).
Syndicated loans in developing countries
Principles of effective syndicated in developing countries
In the planned country cash acted as a unit of account and took part in a limited role as a medium of exchange. The two-track financial sector was upheld in which family units used money for transactions whereas transactions in the state sector in addition to those between state-possessed production enterprises involved no monetary payment (Simons,1993). The compliance of cash was sustained by a banking sector in which the mono-central bank was an archive for record entity for transactions between production units. In many economies, specialty banks worked independently from the central bank and carried out specific roles where a United Kingdom saving bank with a broad branch network was accountable for gathering family unit deposits and a foreign trade bank handled all transactions involving foreign legal tender (Zuckerman and Sapsford, 2001). The agriculture banks offered short-term financing to the agricultural sectors, while construction banks provided long term infrastructure development and capital projects, thus banking activities were sectioned besides operational lines and played a submissive role to central planning (Zuckerman and Sapsford, 2001).
The intermediation was evident in banking equipments in the UK amongst the depositors and borrowers by way of direct credit since they mainly wanted to achieve the production plan. Risk management and credit evaluation were inappropriate, so these proficiencies were never developed locally (Preece and Mullineaux, 1996). Workers at the overseas trade bank plus those at the central bank engaged in worldwide financial arrangement analyzed overseas exchange risk but in an elementary way.
The first step in banking sector reform in all economies was structural which involved the formation of a two tiers system with retail activities and commercial that was carved out of the portfolio of the mono-central bank. The new central bank was alleged with pursuing fiscal policy, together with exchange rate and made accountable for the management and supervising of the nascent banking sectors, on the other hand, the other tier comprised of the recently made commercial banks the de novo private banks, specialty banks and foreign banks (Narayanan, Rangan, and Rangan, 2004).
The three vital operations of contemporary banking system are disbursements, recording keeping and settlement, as well as the well-organized intermediation between investors and savers and stipulation of the suitable system (an extensive liquidity using indirect financial policy tools) (Megginson, Poulsen, and Sinkey, 1995).
The banking market in most developing economies is fairly small so that just a few local banks will be feasible, therefore, when bankrupt banks emerged to intimidate systemic constancy, the authorities’ coerced mergers and acquisitions upon bigger banks. This sparked the big United Kingdom owned banks to take-over the failing smaller banks with deteriorating balance sheets (Bird, Graham and Rowlands, 1997). The reduction of small banks was needed to downsize banking sectors after extreme entry and the bad means to attain this is to coerce small insolvent banks on bigger feeble banks making the acquirers even more weaker (Bird et al, 1997). Alternatively, the essential lesson is to inflict stricter licensing situations on banks at the start so as to monitor better new participants and not to employ entry of local banks to endorse competition (Bird et al, 1997).
Furthermore, banking is a core future prospecting business, thus future revenue to banking depends on provision of high quality products and services to both commercial and retail consumers as well as fulfilling the short terms and long terms expectations of profitable commercial clientele, plus having arrangements for long term financial support for economically logical savings projects (Bird et al, 1997). In developing economies the licence value of banks has frequently been related to short terms and rent seeking activities, so when designing policy the regulator must pay much attention to the licence value of banks (Arnone et al, 2006).
United Kingdom experiences
In this section the researcher will present the United Kingdom experience and make some remarks concerning the developing economies countries such as emerging and frontiers countries. The experience of United Kingdom reforms will be used to explain the establishment of strong and independents banking sectors that will be able to offer syndicated loans in developing countries (Armstrong, 2003).
The developing countries have varying successes and therefore, the United Kingdom privatization policies consisted of selling and controlling shares in the government owned banking sectors to strategic foreign investors as swiftly as it could (Armstrong, 2003). These sales needed preliminary recapitalization of banks so that the incorporation of recent net value and licence value could attract many foreign investors. The existence of gradual recognition of the poor quality of loans portfolios made some developing countries government to be involved in several recapitalizations of their domestic banking sectors (Armstrong, 2003). Eventually, the government of these developing countries was able to attract strategic foreign investors and hence, signalling the end to bailouts of the banking sectors (Armstrong, 2003).
On the other hand, most of the developing economies inherited banks with stern structural distortions and unstable macroeconomic surroundings, this became nightmares because of the steady hazards that run on weak banking sectors, and it would upset the constancy of the banking sectors and overpower the management system (Armstrong, 2003).
Lessons for the United Kingdom financial sector market
After selling managing stakes to strategic holders thereafter the final round of bank recapitalization, some of the developing countries were the first to establish a strong and independent banking sector, others started with somewhat different and less successful strategies before they adopted the approach used in the countries with strong and independent banks (Rhodes, 2000).
The main lesson from these experiences is the significance of severing the connection between the banks and syndicated loans; for instance for small open countries indicates that the foreign contribution is an efficient and perhaps inevitable way to independent well-built banking sectors. Therefore, developing economies embracing this strategy developed banking sectors that are strong and independent (Yang, Gupte and Lukatsky, 2008). The experiences of less-advance reformers show the significance of developing the regulatory structure particularly in unstable macroeconomic situations for the banks. The hyperinflation guides to disintermediation and a noteworthy reduction of the fiscal stand of the economy, microeconomic constancy and well-built bank management are essential circumstances to re-establishing the banking sectors of developing countries (Armstrong, 2003). The experiences of large developing countries point out that the entry of numerous undercapitalized de novo private banks promotes systemic unsteadiness (Boehmer and Megginson, 1990).
In the case of the small open developing countries the participation in local banking is a much more efficient way of encouraging both developments and competition of the banking sectors (Barnish et al, 1997). Nevertheless, the constancy is a requirement situation for adequate foreign entry and well built regulation is a requirement condition for effective management once foreign participation occurs. Therefore, in all developing economies effective regulation needs resources and knowhow to complement legislations. The large closed developing countries have flexibility in designing competent banking sectors; these countries can allow the banks to develop according to any models and they have the chance to allow their local banks to develop steadily and with no major foreign participations (Armstrong, 2003).
Furthermore, some lessons were knowledgeable from the experiences of the developing economies by United Kingdom participating in banking sectors is frequently encouraged, though it is not all clear that an adequately sound set of institutions is in place to hold up the financial sectors needed for growth and expansion.
The missing gap
The developed economies provide challenging paradigms for the functions of financial institutions in corporate finance, one paradigm directed to bank conquered financial sectors and the other one plays a significant role for syndicated loan. This model in which banks play a central role in corporate governance is based on the emerging and frontier countries. The syndicated loan play a crucial role in disciplining companies held widely based on the United Kingdom systems and due to these synergies and complementarities among these institutions each of them has a different cluster of characteristics needed to support its effective operation.
The chapter focuses on how research will be designed and structured; it outlines the approach of the research design and also gives details on how the data will be collected, analyzed and presented.
The study will use descriptive design, analytical method and comparative (normative) approach; these are preferred because the study will be able to analyze a wide range of content on the developed (UK) and developing nations banking industry and how they offer syndicated loans.
Population and Sample
It is hard to take a broad view about the developing countries in general as a result of wide variances amongst them; this is because most of them are emerging economies whose challenges and experiences vary from the frontier economies. A number of examples will be drawn from these groups though much of the argument will centre on largest emerging countries such as the BRIC and the UK experiences will be used as a base for deciding on the solution to the problems faced by developing countries financial sector.
Data description and collection methods
The data for this study will primarily be collected through a survey in form of reading the existing material concerning the banking industry practice in the developed and developing nations.
Anticipated method of analysis and findings
The study intends to generate qualitative information and the data will be collected from the already available literature materials such as books, journals, articles and magazines as well from internet sources.
The study will analyze the data collected using normative comparison that is developed and developing nations banking systems will be compared. This is because the aim of this research is to identify, explain and improve on the current situation of affairs or to develop the same items in future. Data will then be presented inform of pie chart, bar graphs and line graphs where possible; the test of differences will also be appropriate, since it is a comparison between two systems which have varying structures.
This study will not be the first to report on the United Kingdom financial market sector; generally, attention on the financial market sector is frequently an element of a wider concentration in macroeconomic strength and the function of the monetary policy in controlling inflation. Though the output level in a number of developing countries is below the peak level, significant improvement has been done. The issues of developing countries are similar to those affecting other nations around the globe; for instance, the financial deficit and capital sufficiency of banks are issues affecting many developing countries.
Therefore, this research will examine whether the models being applied in the developed countries are applicable in the developing world if not then the study will investigate why they require a diverse models. It will also look at the reasons behind their differences with the developed nations plus find out whether there is any solution to the differences that can then help build a strong syndicated loan market
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