What is Merchant Banking | Meaning, Functions, & Features of Merchant Banking

Merchant Banking
Merchant Banking

What is merchant banking?

Merchant banking is a combination of banking and consultancy services that provides consultancy to its clients for marketing, financial, managerial, and legal matters.

Consultancy here means a merchant bank provides advice, guidance, and services like helping an individual start a business, helping to raise (collect) finance, helping to expand and modernize the business, and helping to restructure the business.

A merchant bank also helps to review sick business units and helps companies register, buy, and sell shares in the stock exchange market.

Historically, merchant banks were banks that dealt with commercial loans and investments. Today, merchant banks play an almost similar role to investment banks.

This was the first modern bank that developed from the simple and ancient merchants; the merchant bank was to trade commodity and also finances production. The name “merchant” should speak a lot about them.

merchant bank
merchant bank

Definition

Merchant banking is a skill-oriented professional service that merchant banks provide in order to cater to their client’s financial needs.

Merchant banks specialize in international trade and thus, excel in transacting with large enterprises.

Quick difference between the Merchant Banks and the Investment Banks

  • Merchant banks offer their services to international finance, which include underwriting and lending companies business loans.
  • Unlike investment banks, which provide a wider variety of services to their customers, merchant banks only help big companies with a high net worth. The investment bank’s customers include cooperatives, institutional investors, and the government.
  • A merchant bank is a banking institute that fulfills companies’ capital requirements in grant loans or shares ownership. On the other hand, investment banks are the intermediary.
  • As regards merchant banks, they are fee-based. Meanwhile, the investment banks are fee-based and also fund based.

The merchant bank has a vast knowledge of international trade. This is the main reason the merchant banks specialize primarily at the international level; they deal only with large and internationally recognized companies across the globe.

The merchant banks’ services include; project promotion, corporate investment, corporate counseling, investing banking, portfolio, advisory services, loan syndication, and a lot more.

Another thing you need to know about merchant bankers is that they are people that undertake the business of issue management; they do this by facilitating the buying and selling of securities. In this case, the bankers are acting as managers.

Because the merchant banks do not deal with the general public, this made them not take deposits or make any withdrawals.

History of Merchant Bank

The history of merchant banking can be drawn back to the Italian nation during the medieval time and France during the late 17th and the early 18th century.

The operation of the merchant banks began as a structured money market that consists of merchant financing and transactions with other available merchants.

Functions of Merchant banks

The following are the major functions being performed by the merchant banks:

1. Equity underwriting

Most large companies will employ the service of the merchant banks; this will help them acquire some capital through the stock market.

This function is majorly achieved by evaluating the number of stocks issued, the value of a business, and the timing of insurance of the new stock.

The function of the merchant bank is also to take charge of all the required paperwork and connection with the appropriate marketing union to publicize the available stock.

2. Portfolio management

This is one vital function of the merchant banking system; they help provide portfolio management services to other institutions ready to invest.

By doing this, they help in the management of the stock in other to enhance the worth of the basic investment.

In addition to their functions, the merchant banks do assist their clients in the process of purchasing and selling securities that will help the investors attain their investment objectives

3. Credit syndication

This is a very important function of the merchant banks to help people process loan applications which is meant to be either short or long-term, the loan funds from financial institutions.

This service is being provided with the help of estimating the total cost involved and developing a commercial plan for the complete project.

Less I forget, they also adopt a loan request for the commercial leaders.

When it comes to credit syndication, it is more of assisting firms in choosing the perfect financial institution to deliver credit facilities and also acting on the terms and conditions of the loan application alongside the loan financier.

Functions of Each Division

Financial functions of merchant banks

  • A merchant bank is a financial institution that helps in raising funds when customers require funds, the role of this department is to help.
  • The banks act as brokers when it comes to the stock exchange market; if clients want to invest in stocks, it is the function of this department to buy and sell the stocks on behalf of the customers.
  • In the financial department, leasing money out to customers is also part of their work.
  • Here, the department also functions in order to manage the dividends and interest.
  • This department contributes to the investment decisions of investors.

Management functions of merchant banks

  • This department functions as a project manager; they provide management services to their customers.
  • They help the company by raising funds through institutional investors, government security, or using other sources.
  • In general, they manage the public issues of the firm they are partnering with.
  • This department offers personal support to businesses.

Features of Merchant Banks

  • A high proportion of decision-makers as a percentage of total staff.
  • Their decision process is quick.
  • It provides quality information.
  • Intense contact with the public.
  • Loose organizational structure
  • Merchant banks concentrate on short and medium-term engagements.
  • Emphasis on fee and commission income.
  • Most of their operations are innovative, not repetitive.
  • It provides sophisticated services both on a national and international level.
  • Low rate of profit distribution.
  • High liquidity ratio

Conclusion

We are confident that we’ve answered your question, “What is merchant banking?”.  Thanks for taking the time to read till the end. We hope you have gained some knowledge.

What else would you like to know about Merchant banks? Let’s discuss this in the comment section.

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