An Appraisal Of Merchant Banking In Nigeria

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ABSTACT

The purpose of this study is to Appraise Merchant bank and to evaluate the extent Merchant bank have achieved their desired policy within 1981 to 2000.During this period of time, there was fluctuation in the growth rate of bank loans and advances due to inability of debtors to repay loaned fund and wrong perception of the intent of the banking reform. Data were obtained from Central Bank of Nigeria (CBN) statistical bulletin 2006 and was presented using frequencies, charts, and table in analyzing the research question. It was found by the researcher that the total bank loans and advances issued by merchant bank to interested sector of the economy has been on decrease, which means to an extent, they have not achieved their desired policy which aimed at financing large corporate organization. Therefore, this research work ended on this note that bank loans and advances of Merchant bank has been on decrease which enable the researcher do an inference that they have not achieved their desired policy. The essence of Merchant bank in existence is to finance large corporate organization.

 

TABLE OF CONTENT

Title page   

Certification

Dedication

Acknowledgement

Abstract

CHAPTER ONE: INTRODUCTION

    1. Background of the study - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
    2. Statement of Problem     - - -- - - -- - - -- -- - -- - -- - -- - - - - - - - - -
    3. Objectives of the Study - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
    4. Research Question         - - - - - - - - - - - - - - - - - - - - 
    5. Reference   - - - - - - - - - - - - - - - - - - - - - - -

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1   Theoretical Review - - - - - - - - - - - -  - - - - - - - - - - - - - - - - - - - - -

2.1.2 The Main Objectives of Merchant Bankers - - - - - - - - - - - -- - -- - -

2.1.2 Functional/ Service Offered by Merchant Bankers - - - - - - - - - - - - -

2.1.3  Scope for Merchant Banking in Nigeria  - - - - - - - - - - - - - -- - - - - -

2.1.4 The Economic Importance of Merchant Banking - - - - - - - - - - - -

2.1.5 Code of Conduct for Merchant Bankers - - - - - - - - - - - - - - - - - -

2.1.6 Advantages of Merchant Banking    - - - - - - - - - - - - - - - - - - - - - - -

2.1.7 Positive and Negative Management of Merchant Bank - - - - - - - - - -

2.2   Empirical Review - - - -- -- -- -- -- - - -- - -- -- -- -- -- -- -- -- -- - - - - - -

2.2.1 Literature Survey  - - -- - -- - -- -- - - - - - - - - - - - - - - - - - - - - - - - - -

2.2.2 The Evolution of Banking in Nigeria - - - - - - - - - - - - - - - - - - - - - --

2.2.3 CBN Scope, Condition and Minimum Standard for Merchant Banks Regulation No (O) 2010 - -       -        -        -        -        -        -       

2.2.4 The Role of Banks in the Nigeria Economy - - - - - - - - - - - - -- - - - -

2.2.5 Factors on which Growth of Merchant Banking Depends - - - - - - - -

2.2.6 X-ray of Merchant Banking in Nigeria  - - - - - - - - - - - - - - - - - - - -

2.2.7 Overview of Merchant Banking Activities - - - - - - - - - - - - - -- - -

2.2.8 Problems identified with the Structure of Merchant Banking in Nigeria -  

CHAPTER THREE:  RESEARCH METHODOLOGY

3.1 Research Design

3.2 Nature and Source of Data

3.3 Techniques of Data Analysis

Reference

CHAPTER FOUR: DATA PRESENTATION AND INTERPRETATION

4.1 Data Presentation

 CHAPTER FIVE: SUMMARY OF FINDING, CONCLUSION AND RECOMMENDATION

5.1     Introduction

5.2     Summary of Finding

5.3     Conclusion

5.4     Recommendation

          Bibliography

CHAPTER ONE

INTRODUCTION TO THE STUDY

The usefulness of merchant banking (accepting and issuing house) in the United Kingdom is to finance sovereign government through grant of long-term loans and the acceptance of commercial bills pertaining to domestic as well as international trade, and the acceptance of the trade bills and their discounting gave rise to acceptance houses, discount houses and issue houses, finance foreign trade, issue capital, manage individual funds, undertake foreign security business and foreign loan business. Many major merchant banking activities (money-market lending, corporate finance and investment management), are also performed by money market dealers, commercial banks and finance companies, share brokers and investment consultants, unit trust managers, finance foreign trade, issue capital, manage individual funds, undertake foreign security business, foreign loan business and facilitate the business process between a product and the financial requirements for its development. Many major merchant banking activities (money-market lending, corporate finance and investment management), are also performed by money market dealers, commercial banks and finance companies, share brokers and investment consultants, and unit trust managers. In the United Kingdom, merchant banks came on the scene in the late eighteenth century and early nineteenth century. Industrial revolution made England into a powerful trading nation. A merchant banker as primarily a merchant rather than a banker but was entrusted with funds by his customers.

A merchant bank should contain some eleven characteristics: high proportion of decision makers as a percentage of total staff; quick decision process; high density of information; intense contact with the environment; loose organizational structure, concentration of short and medium term engagements; emphasis on fee and commission income; innovative instead of repetitive operations; sophisticated services on a national and international level; low rate of profit distribution; and high liquidity ratio.

 Merchant banking services span from the earlier negotiations from a transaction to its actual consummation between buyer and seller. 

 

In particular, the merchant banker acted as a capital sources whose primary activity was directed towards a commodity trader/cargo owner who was involved in the buying, selling, and shipping of goods. The role of the merchant banker, who had the expertise to understand a particular transaction, was to arrange the necessary capital and ensure that the transaction would ultimately produce "collectable" profits. Often, the merchant banker also became involved in the actual negotiations between a buyer and seller in a transaction.

The usefulness of merchant banking in Britain involves collecting deposits and grant credit to a limited extent, act as intermediaries, channeling short term credit from commercial banks through discount houses to merchants engaged in the import and export trade or in the marketing of goods in the domestic market and channeling medium and long term capital from those who wish to lend to those who are in need of funds 

 

Merchant banking in Britain developed partly as a result of the operation of historical factors and partly in response to the requirements of trade and industry for their short and long term needs.

 

The usefulness of merchant banking in India  involves rendering diverse services and functions, such as organizing and extending finance for investment in projects, assistance in financial management, acceptance house business, raising Eurodollar loans and issue of foreign currency bonds, financing of local authorities, financing export of capital goods, ships, hydropower installation, railways, financing of hire-purchase transactions, equipment leasing, mergers and takeovers, valuation of assets, investment management and promotion of investment trusts, engaged in internal finance and long term loans for multinational corporations and governments, advise corporations and wealthy individuals on how to use their money, encourage rapid industrialization, accelerate the growth of economic development, transferring capital funds to those borrowers who are interested in borrowing and the job of generating loans and initiating other complex financial transactions. Not all merchant banks offer all these services. Different merchant bankers specialize in different services. Merchant banking may cover a wide range of financial activities and in the process include a number of different financial institutions.

The economic planning and subsequent liberalization had led the country to an ecstatic phase of development .The development through disintermediation, deregulation, globalization, and emergence of vibrant capital market has contributed to the expansion of opportunities. As a result, capital market has emerged as the major contributor to the growth of foreign exchange reserves of the country. In fact, in the merging world market, India has beaten several developing countries. In the post liberalization era, the finance sector has witnessed a complete metamorphosis. The recent economic reforms encompassed a series of measures to promote investors protection and encourage the growth of capital market. Free entry into capital market for new issues by companies and free pricing of share for new issues has been ensured. Different financial institutions and markets compete for a limited pool of savings by offering different instruments. Money and capital markets increase competition between suppliers. Capital market enables contractual savings and collective investment institutions to play a more active role in the financial system.

The Progress of any economy mainly depends on the efficient financial system of the country. This importance of the financial sector reforms affirms an effective means for solving the problems of economic, financial and social in India and elsewhere in the developing nations of the world. The progress of the securities Industry of any country depends mainly on the flow of funds. In fact, Capital generation is the lifeblood of the capital market without which the health and soundness of the financial system cannot be geared up and for which well-developed capital market as well as money market are essential.

 

The usefulness of merchant banking (investment banks) in United States of America is to developed qualities of integrity, financial expertise, high management stability, loyalty and close relationship with clients.  Many of them have substantial resources of their own and command additional resources through access to commercial banks, financial institutions and the stock market with which they have established intimate relations and enjoy a high creditworthy status.

            The usefulness of merchant banking in china is to expand and strengthen domestic market, intensify investment to developed regions, rationally expand network into high potential regions; steadily improved business structure and customer base. Merchant bank attached high importance to the innovation and perfection of its Electronic-channels, continuously innovated the functions of online banking and direct banking as effective supplements to our physical channels, and proactively explored the development of mobile finance service .Merchant bank was devoted to building an information system that is safe and reliable, efficient, green and sustainable, and became the first domestic bank to combine information safety management with IT service management, accelerate the establishment of powerful multi-channel distribution system with operating synergies, provide high-quality services, and continuously enhanced brand influence.

The usefulness of merchant banking in Italy involves transferring funds from place to place for others–using bills of exchange which created a well-integrated international exchange market, funding employment for accumulated wealth, engage in sovereign lending, mobilization of skills and knowledge of individual with different backgrounds and experience, developed methods of accounting, both to control their agents and to keep track of complex transactions; the demands of accounting stimulated advances in mathematics. The merchant bankers’ need for rapid communication among their offices drove them to organize efficient private mail services, givers of credit, as receivers of credit, or usually as both. Credit, mainly sales credit, was an intrinsic part of commerce. Indeed, managing this finances was commonly a merchant’s primary concern–where to borrow, extend credit, how to ensure that obligations could be met. For a few, finance developed into a business in its own right: these were the merchant bankers.

 The exchange business drew merchant bankers into lending, and they became the principal financiers of international commerce. Merchant bankers also played a pivotal role in bringing sovereign borrowers into the international money market. For many, however, their involvement with sovereign borrowers proved to be their downfall.

            In a developing economy the need for merchant bank cannot be overemphasized, due to term structure of loans i.e. capital required, raising of the capital, debt-equity ratio, issue of shares and debentures, working capital and fixed capital required. Issue management; Management of issues refers to effective marketing of corporate securities viz., equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as intermediary whose main job is to transfer capital from those who own it to those who need it.

 Mobilization of resources from the capital market by way of public issues\offers for sale etc. calls an expert study and proper evaluation of the prevailing market conditions for which the companies seek the advice of merchant banks

Credit syndication; Credit Syndication refers to obtaining of loans from single development finance institution or a syndicate or consortium. Merchant Banks help corporate clients to raise syndicated loans from commercials banks.

Merchant banks helps in identifying which financial institution should be approached for term loans.

Portfolio management; It refers to the effective management of Securities i.e., the merchant banker helps the investor in matters pertaining to investment decisions. Taxation and inflation are taken into account while advising on investment in different securities. The merchant banker also undertakes the function of buying and selling of securities on behalf of their client companies. Investments are done in such a way that it ensures maximum returns and minimum risks. Corporate counseling covers counseling in the form of project counseling, capital restructuring, project management, public issue management, loan syndication, working capital fixed deposit, lease financing, acceptance credit etc., The scope of corporate counseling is limited to giving suggestions and opinions to the client and help taking actions to solve their problems. It is provided to a corporate unit with a view to ensure better performance, maintain steady growth and create better image among investors.

Project Appraisal: This service helps corporate analyze the soundness of a project, which may be setting up a new unit/expansion/modernization etc. It is a process of examining the technical, commercial, financial and economic viability of a project to ensure that it generates sufficient returns on the resources invested in it. The study of viability involves detached verification of project’s ability to stand the tests of technical, financial and commercial feasibilities and management’s capabilities to successfully implement and run the project. A service project report will be prepared for the company, including finalization of capital structure.

            Medium and long term loan is a challenge because capital market are poorly developed, the net worth requirement is very high, so many professionally experience person/organization cannot come into the picture ,poor new issues, CBN guidelines has restricted their operation to issue management and portfolio management, so the scope of work is Limited. Indigenization decree of 1972 which led to the collapse of merchant banks in the face of international competition which resulted in low or zero activities for the merchant Banks. The absence of a thriving production and manufacturing bas made the government’s objectives of promoting medium and long term activities of merchant banking difficult to achieve. Another challenge is that merchant banks were exempted from Rural Banking Scheme which lasted for 12 years because of their wholesale nature which makes merchant banks distinct.

            The effect of merchant banking in a developing economy is that the economy will not grow, business (both private and public will suffer, mass unemployment, civil unrest. economic and political instability such as Annulment of the June 12, 1993 presidential election that led to political instability and social tension, vacillation of government policies and unfavourable macroeconomic environment-bedeviled by double digit inflation.

            Due to the challenges mentioned above, the Nigeria government felt the great need to develop merchant banking so as to address the need of favourable macroeconomic environment, long- term loan structure, poor capital market development, channeling the financial surplus of the general public into productive investment avenues, economic and political stability, wholesale-banking mainly from institution investors and firms.

                             Merchant banking business commenced in Nigeria with the establishment and registration of Nigerian Acceptance Limited(a subsidiary of john Holt) on 25th November 1960 and Philips Hills (Nig) Limited(a subsidiary of united kingdom) on 14th September 1960.

            The two companies later merged in 1969 to form the Nigerian acceptances Limited now known as NAL Merchant Bank Limited.

            The merger became necessary due to limited business activities for the banks when they were operating individually. As a matter of fact, NAL Merchant Bank remained the only operating Merchant Bank in Nigeria until 1973.

            Due to increased business activities in Merchant banking especially with the emergence of the oil boom and the indigenization decree which made it possible for Nigerians to own 60 percent shares in Banks many merchant banks were later established with a total number of 34 merchant banks as at 1989.

 

The monopoly was broken in 1973 with the entrance of union Dominion Trust (UDT) Bank Nigeria Limited which was renamed Nigeria merchant Bank Limited in 1977. Ever since many merchant banks entered the scene such that as at 1996 there were a total of 51 merchant banks with 143 branches. Distress and insolvency situations that plagued the Nigeria bank depleted to 23. A Major explanation to the demise of these banks related to the disadvantageous capital sourcing position in the face of commercial banks – their prime competitor’s farther commercial banks using their advantageous capital position eroded the merchant banks of their most cherished assets their professional well trained staff. The Centre could no longer hold ever since (Ezirim 1996, 2006). By the year 2001, the universal banking scheme has come into effect as a deliberate policy of the central Bank. Thus the system was sanitized of any sectional learning. Merchant Banks were free to become commercial while commercial banks were equally free to become merchant or both. Thus, the age – long capital sourcing and utilization advantages/disadvantages and every wall of partition were removed. The total number of banks in the system (now known as deposit money banks) depleted from 115 in 1996 to 88 in 2004 (central bank of Nigeria, 2004). The distress condition witnessed in the banking system was accused of this institutional numerical depletion.

With the policy of the CBN requiring deposit money banks to recapitalize to the tune of N25 billion or lose their license, the 88 remaining banks sought to find ways to comply with the directive. This brought about a situation of scrambled for capital among banks from all sources. Some want into capital market and raised fund. Some merged with other banks; others were acquired; while some used a combination of how or more of the above strategies. The result was the emergency of 25 consolidated banks as at December 31st 2005. In all this, it seemed that the nomenclature, merchant banks simply became a historical matter. The 51 merchant banks of 1996 and the 23 of 2004, seemed to have been consumed by the universal banking experiment of fused into the more globalize banks that arose of the consolidation quagmire.

          Notwithstanding, it is though that the spirit of merchant banking lives or even where their physical identity is suspect. We take a glimpse of this spirit in the specialized service they under took and left as legacy for the Nigeria banking system. The number of merchant banks has since been fluctuating over the years as some have folded up by commercial banks under the present structure of universal banking.            

          However due to paucity of financial instrument and business, the pioneering merchant bank merged in 1969. At the end of the merged process Philip Hill absorb NAL and establish a holding company with the named financial holding Nigeria limited that owned wholly the product of the merger. However, the name NAL was retained and all assets and liabilities of Philip Hill were transferred to NAL. The 1970s and 1980s unlike the 1960s to the early 1970 enjoyed a plethora of Merchant banking activities in the country for in the 1960’s the volume of business was small as there was paucity of instruments traded in the security market, this was  further worsened by the still competition for the few business of 1969. The draught in the industry was further complicated by the civil war, it was not until 1971 that another Merchant bank was established thus breaking the 13 years monopoly enjoyed by NAL other Merchant banks were established in Nigeria in the 1970s and 1980s include: the indigenization policies, oil boom, the second and third development plan, changes in monetary and fiscal policies, structural Adjustment programme (SAP) Government policies of deregulation of the banking sector ,and privatization and commercialization policy. Foreign Exchange Market (FEM) and other policies that promote free market system.

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