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 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
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
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
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 ot
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
- 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
- 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 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.