Credit Facilities in the Financial Institutions for Financing Construction Projects in Nigeria

Credit Facilities in the Financial Institutions for Financing Construction Projects in Nigeria.

ABSTRACT  

Sometimes construction contractors had to seek external means of raising funds to progress work. Thus, the need for this study titled “Credit Facilities in the Financial Institutions for Financing Construction Projects in Nigeria.”

The study aims at articulating existing credit facilities, their procurement, disbursement, and utilization. In the field study, two sets of questionnaires were administered to 30 and 37 construction contractors and financial institutions respectively in some locations. 26 and 37 of these were answered correctly and returned.

Their responses were collated. Descriptive analysis was used to analyze the data obtained and presented in bar charts, histograms, graphs, and tables. The result revealed that credit facilities are provided by financial institutions for the construction industry.

These credit facilities are:- Short-term (0-1 year) – LPO financing, factoring, treasury bills, which can be used to finance working capital; Medium-term credits (2-10 years) – Leases, hire purchases, are used to acquire plants & equipment, properties; Long-term credit facilities (above 10 years)-shares, stocks, bonds, are used for capitalization and as collaterals.

In conclusion, the study revealed that financial institutions brand the construction industry sector as ‘high risk” as such strict conditions and high-interest charges are used to discourage borrowers.

Lack of accurate records of transactions and good management militate against contractors securing these facilities. It is therefore recommended that; contractors should keep accurate records and ensure good management to enable them to secure these facilities. 

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INTRODUCTION  

Any large construction project involves huge capital flow (materials, machines, manpower, management, finance) from inception to completion and handover.

A shortfall in the capital within the construction process affects the overall timing and cost of the project, which, further affects the contractors’ profit. Resources for construction projects should be adequately planned and scheduled to avoid failure.

Though the contractor is aware of the limited resources available to him to mobilize and carry on with the job, he most times relies entirely on the stage payments made by a client to keep the work going.

Ideally, the legality of a contract is that the clients’ financial payments obligations to the contractor must be met soon as it is due to enable the contractor to proceed with the works diligently and regularly.

Often time clients’ contract obligation of regular payments is not met at the right time, a practical example is the Federal Housing Authority housing project started in 1997 at Gwarimpa, Abuja, yet to be completed to date. This has an adverse effect on the contract.

Contractors thus need alternative means of sourcing capital for carrying out their construction works. Baker (1987) identified the means available to the contractor for sourcing finance as internal and external.

Internal sources are Owners’ capital, company equity capital and, retained earnings. External sources are usually debts (borrowed capital) from financial institutions or otherwise. 

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