A Study On Ship Financing In Nigeria
Small and Medium Enterprises (SMEs) have been recognised as critical to economic growth and poverty reduction in developing countries. Shipping businesses represent significant portion of SMEs and have dominated the private sector investments in developed nations. Existing studies have identified funding as a major constraint to SMEs in developing countries.
The banking institution statutorily positioned to assist in SMEs funding in these countries are constrained by a host of factors. This paper investigates the factors affecting banks financing and development of SMEs in the maritime shipping sector of Nigeria. Data for this study were obtained from Likert scaled questionnaires which were administered to a randomly selected sample of commercial banks with shipping portfolios.
Evidence from data analysis using ordered Logit regression model indicates that; risk perception attitude of banks, information constraints on SMEs, lack of skills in SMEs financing and unfavourable regulatory environment are significant factors affecting banks investments in SMEs in Nigeria’s shipping sector. Policy implications of the findings are discussed.
Table Of Content
- Title page
- Certification page
- Table of content
- 1.1. Background Information
- 1.2. Problem Statement
- 1.3. Objectives of the study
- 1.4 Hypothesis of the study
- 1.5 Significance of study
- 1.6 Scope of the study
- 1.7 Definition of terms
- 2.1 Origin of Marine Transport
- 2.2 The Nigerian Maritime Industry
- 2.3 Ship registration
- 2.4 Types of shipping activities
- 2.5 Operational structure of the shipping industry
- 2.6 Analysis of ship financing in the past
- 2.7 Shipping cycles
- 2.8 Types of ship financing
- 2.9 Financial markets
- 2.10 The role of financial institutions
- 2.11 Sources of ship financing
- 2.12 Risks in ship
- 2.13 Benchmarking Overseas Ship Finance Experiences
Materials And Method
- 3.1 Research Methodology/Design
- 3.2 Sample and Sampling Techniques
- 3.3 Research Instruments
- 3.4 Method of Data Analysis
Results And Discussion
- 4.1 Result of Statistical data analysis according to the objectives
- 4.2 Discussions
Conclusion And Recommendation
- 5.1 Summary of major findings
- 5.2 Conclusion
- 5.3 Recommendations
- 5.4 Suggestions for further research
- 5.5 Contribution to Knowledge
1.1 Background to Study
Shipping has existed in over 5000 years and the first sea trade network we know of was between Mesopotamia, Bahrain and Indus River. Shipping is constantly changing and shipping today is far from shipping 5000 years ago. Thanks to the discovery of the global sea routs in the late fifteenth century, the industrial revolution in the late eighteenth century and the dismantling of the colonies in the second half of the twentieth century, shipping went from slow and expensive by land to a tightly knit global business community (Stopford, 2008).
Access to capital is central in building a business community like the shipping industry. High investments cost, due to highly technological vessels, require ship-owners who know how to get funding. “Because shipping is such an old industry, with a history of continuous change, sometimes gradual and occasionally calamitous, we have a unique opportunity to learn from the past.” (Stopford 2008, p. 4)
Finding out how ship-owning companies finance their investments, by using historical data and learn from past years, is the objective of this study. Hopefully, the study will provide answers to financing in the ship-owning industry.
Financing is an important stage in starting an asset-based company such as ship-owning companies. Knowledge of financing and capital can be a prerequisite for the company to create innovative products and services. The CEO of Havila Shipping said in an interview with Sysla (Aadland 2014) that it is important to maintain the maritime cluster in Norway to keep a leading position in the shipping industry. Adjacent to this he mentioned finance as an area of focus among ship-owners, yards, classification-companies, suppliers, insurance and Norwegian mariners. The interview was given when the company flagged out one of their ships to Bahamas because sailing under the Norwegian flag led to inconvenience. This is unfortunate for the maritime industry in Norway.
The maritime industry, which ship-owning companies are a part of, is a knowledge-based industry and important for the Norwegian trade. Norway is a global leader in the field and almost 90 000 people are employed by the maritime industry directly (Fiskeri department et al, 2014). Flagging ships out to other nations is affecting the seafarers’ rights and obligations in the economic, social and welfare issues (Solhaug 2014). Flagging out ships can potentially lead to a defection in the maritime industry and a delay in the development of the knowledge-based industry, including ship-owning companies.
The industry is important to keep Norway’s gross domestic product on a high level. According to the Norwegian Ministry of Trade, Industry and Fishers, the Maritime industry represents 6-9 percent of the value creation in Norway (Fiskeri department et al 2014). Research and development in the financing field may help the ship-owning industry with acquiring capital and facilitate further growth. Understanding when and why one should use the different financing methods is important to make the growth that Norway has experienced sustainable. Therefore this research work is a study on ship financing in Nigeria and how it affects the development of this industry.
1.2 Problem Statement
Small and Medium Enterprises (SMEs) have long been recognised by the World Bank and other multinational agencies as critical to economic growth and poverty reduction. They have increasingly attracted targeted assistance of these international organizations in their increasingly attracted targeted assistance of these international organizations in their interventions in developing countries. SMEs include a wide range of businesses, which differ in their dynamism, technical advancement and risk attitude. Many are relatively stable in their technology, market and scale, while others are more technically advanced, filling crucial product or service niches. Others can be dynamic but high-risk, high-tech “start-ups” (Darlberg Global Development Advisors, 2011). SMEs are critical to job creation, contribute to economic growth and provide a platform for the development of entrepreneurial capabilities including indigenous technology. Thus, national governments have been making efforts toward providing for sustainable growth and development of economy through private sector led initiatives. However, one area attracting increasing global attention in the quest for private sector led development is SMEs in maritime shipping sector.
Maritime shipping comprises a large variety of different businesses which according to UNCTAD (2011) can be categorised as follows: Shipping building, ship owning, ship operation (container ships), ship financing, ship scrapping, ship classification, ship registration, ship insurance (Protection & Indemnity), seafarer supply and port operation (container terminal operators). These areas of maritime activities have prospects for sustained growth as supported by the positive trends in value of exports on ships, floating structures and the world seaborne trade.
Shipping as a service sector is an important component of the national economy. It makes a direct significant contribution to GDP, job creation and provides crucial inputs for the rest of the economy.
Unfortunately, activities in this sector in Nigeria are dominated by a few foreign firms which afford the enormous capital required in this sector. For example, in terms of ship owning and operation, Okoroji and Ukpere (2011) document that only about eight (8) percent of the total number of vessels that called at the Nigerian port terminal between 1997 and 2006 are owned by Nigerians. Igbokwe (2006) finds that Nigeria has only three vessels duly certified for Cabotage shipping services out of one hundred and forty (140) needed by the oil industry. These statistics indicate negative implications on the growth and viability of indigenous SME’s in the maritime sector as they basically lack adequate capacity to operate competitively. Special intervention policies (albeit unproductive) have been initiated by the federal government in the past to correct this imbalance. These include direct funding through Ship Acquisition and Ship Building Fund (SASBF), Cabotage Vessel Financing Fund (CVFF), cargo reservation and outright Cabotage legislation. However, as is tradition in developed maritime nations, ship acquisition and fleet expansion is better done through debt finance which can only be provided by the banking institutions. This fact questions the commitment of the Nigeria’s banking institution especially the commercial banks in providing entrepreneurial finance to SME’s in the shipping sector.
Existing studies have identified funding as a major constraint to entrepreneurs in establishing and managing SMEs in developing countries; notable among such studies include: Abereijo and Fayomi (2005), Beck (2007), Hoff et al. and Gibson (2008). According to Dalberg Global Development Advisors (2011), SMEs which play a crucial role in furthering growth, innovation and prosperity in developing countries are unfortunately, strongly restricted in accessing the capital that they require to grow and expand, with nearly half of SMEs in these countries rating access to finance as a major constraint. A number of factors have been adduced to this development; at one extreme the government has been blamed for not providing direct funding or adequate legislative support for financial institutions to do so; see Cumming et al (2006), Lerner and Antoinette (2005); at the other extreme, financial institutions point to entrepreneurship related factor: lack of lender information, risk profile and legal environment etc.
1.3 Objectives of the Study
The core thrust of this study is to investigate the ship financing structure in the Nigerian middle of the expedition. Nigerian companies face problems far more enormous than their inability to raise the capital is far more historic than others.
The purpose of this study is to achieve the following objectives:
- To examine the current problems of ship acquisition in Nigeria.
- To identify the factors considered by shipping companies before collaborating with financiers.
- To identify the factors on which the future development of the market depends
- To determine the most viable ship financing model used by shipping companies.
- To determine the factors that significantly influences the methods of financing ship acquisition.
1.4 Research Hypothesis
H0: There is no significant relationship between the methods of financing ship acquisition and the predictor variables.
H1: There is a significant relationship between the methods of financing ship acquisition and the predictor variables.
1.5 Significance of Study
Thus, further research is needed to identify the constraints hindering banks funding in development of SMEs or the maritime businesses in the shipping sector. The outcome of this study would provide insight into factors affecting the commercial banking institutions in the provision of credit to private sector led SME development.
The study also contributes to the existing body of literature on the issue as well as provides policy recommendations towards the financing of shipping companies in Nigeria.
The findings from this study would also provide basis for designing intervention policies aimed at addressing the funding issues of shipping industry in the maritime/shipping sector.
1.6 Scope and Limitation of the Study
This study on ship financing is focused on the ways and strategies of developing the shipping companies in the industry with financing, and is within the confines of Nigeria.
This study is limited by Time constraints, financial constraints, availability of resources and material, and accessibility of materials for use of the study.
1.7 Definition of Terms
Is an arrangement that uses vessel charter fees as the principal source of repayment, while various forms of collateral structured around shipbuilding and charter agreements are assigned to mitigate credit risk.
Provides clients in the maritime shipping markets with consistent support and customised lending solutions. … The assets we finance include, among others, tankers (crude oil, gas, chemical, product), dry bulk vessels, container vessels, container boxes, car carriers, and ferries.
A ship is a large watercraft that travels the world’s oceans and other sufficiently deep waterways, carrying passengers or goods, or in support of specialized missions, such as defense, research and fishing.
Conclusion and Recommendation
5.1 Summary of Major Findings
At this juncture, it has become obvious that a lot of observations were made during the course of this research work. They are:
That the Nigeria shipping business is predominantly run by foreign shipping lines who have a lot of vessel in their fleets at the detriment of Nigerian entrepreneurs who does not have the financial muscle to acquire vessels and compete with their foreign counterparts.
That the Nigeria banks on the other hand does not engage in shipping finance like their counterparts in other developed countries do, largely due to lack of specialized skills in ship financing, the large amount of money involved, the long repayment period and the risk involved in the shipping business.
That there is lack of deliberate government policies to fast track the development of the maritime sector, most especially in the area of ship financing. Even where little efforts are made like the CABOTAGE ACT 2003, implementation and enforcement has been poor.
That Nigeria as a nation has all it takes to position itself as a shipping hub considering its population, position, human resources and above all the freight to be carried and the market that demands for finished products knowing full well that Nigeria is a consumer based economy.
That foreign shipping company has devised other means of ship financing apart from the traditional ones. Their countries of origin have helped them in no small means by giving them tax incentives where appropriate.
That there is ship financing alternatives available to shipping companies and that there is a significant relationship as regards to ship financing methods and the predictor variables.
The fundamental changed shipping financing conditions require action by shipping companies. They must develop individual tailored solutions. Over the years the Nigerian Shipping companies and the government have failed to do things rightly. This has robbed Nigeria as a nation of billions of dollars in terms of revenue which would have accrued to it.
But on the other hand, if Nigeria positions itself properly, it stands to make huge gains, this is so because Nigeria is blessed with a population of over 160 million people and the biggest economy in Africa who are dependent on finished products from Asia, Europe and America to get them right here in Nigeria.
These products would need to be supplied down here and this is where Nigeria shipping line would have come in handy. In reverse, they would carry petroleum products, agricultural produce and other manufactured products to other parts of the world where they are needed. This would have resulted in huge revenue earnings for Nigeria as a nation. It is believed that the maritime sector is one of the highest money spinning ventures all over the world.
The following are recommendations made in a bid to help cushion the hassles involved in ship financing and acquisition in Nigeria. These suggestions have included measures aimed at awakening the government t to its responsibilities, putting forward to the entrepreneur other financing models available to him / her and once again reminding the Nigeria banks that their core responsibility is to lend to the critical sectors of the economy which creates wealth and of which the maritime sector is one them.
Nigeria shipping lines could look at the option of equity capital financing via initial public offerings (IPO) through the capital markets. This remains the only surest bet when it comes to financing through equity. The classical and best-known form of the capital market issue is the distribution of the shares on the stock exchange. The initial public placement is known as Initial Public Offering (IPO) or “going public”. Via the public trade of shares, a wider potential circle of investors with a multitude of private and institutional investors can be reached. The IPO raises the degree of publicity and the image of the company. The most important motive for an IPO is the financing of internal and external growth equity and the establishment of company succession. Through the sale of shares, fresh capital becomes available to the company, which can be invested in the steady expansion of their own shipping fleet. Equally, this cash inflow can be used to repay loans or shareholders loans. This repayment possibility can secure independence from banks and other capital sources for the listed company in question. If a company is listed, equity increases can increase cash inflows in the future. Thanks to its listed presence, the company has further alternatives, such as the issue of bonds, convertible debt or profit participation certificates. We would all agree that this financing option is apt now because as at today no Nigeria shipping line is listed on the Nigeria Stock Exchange or any other stock exchange in the world.
On the other hand, ship financing through the debt market remains more realistic with the event of current market. We earlier said that ship financing is capital intensive it therefore means that it‟s easier to finance shipping from the debt market than through equity. All the forms of debt financing such as commercial banks loans, bonds and fixed term securities and private placement of debts should be used. It gives a longer repayment period and means that the investor must not wait till he gets all the money before he can finance the ship acquisition.
The Nigeria government should as a matter of urgency decide to re-invest money accruing from the contributory pension scheme to the maritime sector. Deliberate effort should be made by the national assembly to alter the act establishing the pension scheme so as to allow indigenous shipping companies to borrow the accrued saving from pension managers which is believed to have ran into billions of naira to fiancé their ship acquisition at a low interest rate (probable a one-digit interest rate). The advantages here are that since the monies are laying fallow it would make more sense if it is put to proper use for ship financing like it‟s done in developed climes and not also forgetting the fact that the repayment period for shipping loans take a long period of time therefore this would be an ideal form of sourcing loans for ship financing. When loans are paid with their interest, profits would have been made by the pension managers for themselves and their clients.
For shipping companies which have not yet reached reasonable size, rapid consolidation to achieve a larger fleet is an attractive solution. Such a company could then also offer freighting itself. So, through mergers, acquisitions or takeovers, shipping company structures can be achieved, which could survive the tough market.
The difficulty with implementing this option is the considerable interest that companies have in remaining independent. Often, it is only economic emergencies or issues with company succession, which lead to consolidate. Nevertheless, every ship owner should take it into consideration, particularly in cases where they can offer significant advantages in financing and access to freight as well as better economies of scale.
Nigeria banks on the other hand should learn from their counterparts abroad where banks come together and form a consortium of banks to help finance ship acquisition. The advantages here are that funds giving as loans are spread among the participating banks (syndicated loans) and so is also the risk spread evenly.
This helps the bank‟s balance their books avoid uncertainties involved in financing ship acquisitions. To this end, five to ten Nigerian banks can come together to form a consortium of banks with one serving as the coordinator to fiancé shipping bearing in mind their low capital base and in turn also share the risk involved. This will in no small means help on the situation on ground.
Because of the many years of boom for the shipping branch and the profitable market for shipping funds, German banks have taken a leading role in the financing of global shipping.
Even in the recent years of this crisis, German banks have provided equity interim financing, up to 100 percent loan financing for ordered ships and working capital financing and financing of operating costs. All over the world, shipping companies are running to German banks for ship financing. To this end, it won‟t be out of place for Nigerian shipping companies and entrepreneurs to as a matter of urgency to begin to run to German banks to solicit for funds for ship financing. Not also forgetting the fact that German banks are known to have one of the lowest interest rates when it comes to ship financing.
Indigenous shipping companies can get loan capital financing through shipping bonds. The issue of shipping bonds presents another alternative source for long term loan capital financing in the form of a ship mortgage. Bonds are securitized loans with a long team investment horizon, a redemption claim and a fixed interest rate (coupon), but which is generally unsecured. Companies issue bonds directly on the stock exchange. Unlike shareholders, holders of bonds are creditors. A benefit, in comparison to bank credit, is the final maturity for bonds. By repaying the bonds at the maturity date, the company does not need to maintain running capital service and can, in this way, improve its liquidity. Except for the annual payment, the entity does not need to make payments.
Creditors have no influence on operational decisions. On the other hand, the government could make policies establishing issuing houses specially for ship financing or better still encourage the Nigeria export and import bank (NEXIM) to lend to the maritime sector specifically for ship financing as it‟s done abroad. A look at the export and import banks of other countries shows that they are in the fore front pioneering ship financing in their various countries. A good example is the export and import bank of Korea and China. But NEXIM on its part does not lend to the financing of shipping. This has not helped matters at all.
The Nigerian government could establish its version of the Norwegian K/S market or the German KG market. Both the Norwegian K/S market and the German KG market are the same and are tax-deferral vehicle employed to finance ship acquisition. Both markets have increased ship financing in no small means in their countries.
The government should help create a strong economic environment. By so doing, investors will take advantage of the environment to invest. It is a known fact all over the world people tend to invest in economies that are less pure to shocks and have a greater and faster and faster time on return on investments. To adhere this, the CABOTAGE ACT must be implemented to the last so that small indigenous shipping lines who don‟t have what it takes to compete with their foreign counterparts can successfully engage in legitimate business in Nigeria and still make profits and not crumble as is normally the case. Then again, stronger economic policies need to be formulated by the government to protect small shipping lines, reduce taxes and help grow the local economy.
Policy abandonment by successive governments should be discouraged in its entirety. Over the years, we have seen new government come on board only for them to cancel all policies of the previous government even when such polices are known to be effective. This has not helped issues as it has always returned stakeholders back to square one and render all initial success recorded null and void. If this ugly trend is arrested it will help build a stable economy, which will in turn boost investor confidence and increase local financing of vessels.
Lastly but not the least, user-end-fund is the way to go as all over the world, ship owners are adopting it as a means of financing new vessels into the fleet and the Nigerian government and business men should work on improving the predictor variables highlighted during the work.
At this juncture one would state categorically that if the Nigeria government, entrepreneur, banks and the shipping companies put into action most of the recommendations highlighted above if not all, then we are on course to make Nigeria a shipping hub in the West African sub-region if not Africa at large.
5.4 Suggestions for Further Research
I think possible areas for further research include a research into which of the financing methods highlighted in this work remains best suited for the Nigerian market in relation to some of the predictor variables identified. This work was only able to highlight the methods adopted by shipping companies operating in Nigeria and the variables that influence their decision to go with a model. It fell short of researching further to ascertain which financing model is best suited for the Nigerian market having already established that there are some predictor variables that influences which model is adopted at the end of the day. A research in this area would allow shipping companies to know which model to adopt once they want to finance ship acquisitions.
One avenue for further study would be a research into the comparative analysis of ship financing in Nigeria and some other selected countries. Without further research into this area, it will not be possible to ascertain what other specific countries are doing right or have adopted over time that we as a country have not be doing. It is important to compare the strengths on one hand and weakness on the other of their ship financing methods cum policies and fashion out a blue print for the Nigerian maritime sector.
5.5 Contribution to Knowledge
The primary aim of this work is to relook at the concept of ship financing from a new perspective.
Most of the studies on ship financing in Nigeria have focused on the problems associated with ship financing in Nigeria and why there are lack of funds for industry players to purchase new vessels.
In this study we have tried to shift the focus to methods adopted by the shipping companies operating in Nigeria as against the problems of ship financing in Nigeria and this has lead to the conclusion that there is a strong relationship between the methods of ship financing and some predictor variables. To this end it is now clearer for a prospective financier of vessel acquisition to analyse the variables at his disposal to actually ascertain which financing model to go with. This will indeed solve the problem of selection of ship financing model that has been a thorn in the flesh of major industry players over the years in Nigeria.
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