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The Progress of any economy mainly depends on the efficient financial system of the
country. Bangladesh economy is no exception of this. This importance of the financial
sector reforms affirms an effective means for solving the problems of economic, financial
and social in Bangladesh 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.
Infact, 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 is essential.
Merchant Bank
A bank that deals mostly in (but is not limited to) international finance, long-term loans
for companies and underwriting. Merchant banks do not provide regular banking services
to the general public.
Form of banking where the bank arranges credit financing, but does not hold the loans in
its investment portfolio to maturity. A merchant bank invests its own capital in leveraged
buyouts, corporate acquisitions, and other structured finance transactions. Merchant
banking is a fee based business, where the bank assumes market risk but no long-term
credit risk. A common form of banking in Europe, merchant banking is gaining
acceptance in the United States, as more banks originate commercial loans and then sell
them to investors rather than hold the loans as portfolio investments. A banque d'affaire is
a French merchant bank, which has more powers than its British counterpart. The
Gramm-Leach-Bliley Act allows financial holding companies, a type of Bank Holding
Company created by the act, to engage in merchant banking activities.
History
Merchant banks, now so called, are in fact the original "banks". These were invented in
the Middle Ages by Italian grain merchants. As the Lombardy merchants and bankers
grew in stature based on the strength of the Lombard plains cereal crops, many displaced
Jews fleeing Spanish persecution were attracted to the trade. They brought with them
ancient practices from the middle and far east silk routes. Originally intended for the
finance of long trading journeys, these methods were now utilized to finance the
production of grain.
The Jews could not hold land in Italy, so they entered the great trading piazzas and halls
of Lombardy, alongside the local traders, and set up their benches to trade in crops. They
had one great advantage over the locals. Christians were strictly forbidden the sin of
usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in
the field, a high-risk loan at what would have been considered usurious rates by the
Church, but did not bind the Jews. In this way they could secure the grain sale rights
against the eventual harvest. They then began to advance against the delivery of grain
shipped to distant ports. In both cases they made their profit from the present discount
against the future price. This two-handed trade was time consuming and soon there arose
a class of merchants, who were trading grain debt instead of grain.
The world of banking and finance is one of many intricacies. Many types of financial
institutions exist, including commercial banking and merchant banking. The difference
between commercial banking and merchant banking lies mainly in the services they
provide, and to whom they are provided. Commercial banking is generally accessible to
anyone for basic banking needs, whereas merchant banks serve mainly large companies
and very wealthy individuals.
Both commercial banking and merchant banking have roots that go back hundreds of
years, if not more. Merchant banks were actually the original banks, and were invented in
the Middle Ages by Italian grain merchants. These merchants, as well as Jewish traders
fleeing persecution in Spain, used merchant banking to finance long trading journeys
Commercial banks are what people typically refer to as "banks." A commercial bank can
provide loans to individuals and small businesses. It raises funds by collecting deposits
from these same groups of people, as well as from interest charged on loans. It also
purchases bonds from governments and corporate entities.
The banks described above are the most common definition of commercial banks.
Commercial banking is also sometimes defined as the provision of banking services such
as checking and loans to large businesses, as distinguished from individual citizens. In as
well as the production of grain.
The use of commercial banks by the average citizen is a relatively new phenomenon,
historically speaking, but moneylenders have engaged in basic banking practices since
the time of ancient Roman Empire. Primitive banking, though, mainly consisted of
changing foreign currency to that of the Empire, rather than investment as we see today.
Today's commercial banks are so common that more people work in the commercial
banking sector than in any other part of the financial services industry.
Modern practices
The definition of merchant banking has changed greatly since the days of the
Rothschilds. The great merchant banking families dealt in everything from underwriting
bonds to originating foreign loans. Bullion trading and bond issuing were some of the
specialties of the Rothschild family. The modern merchant banks, however, tend to
advise corporations and wealthy individuals on how to use their money. The advice
varies from counsel on M&A to recommendation on the type of credit needed. The job of
generating loans and initiating other complex financial transactions has been taken over
by investment banks and private equity firms.
Chapter - 2
Introduction:
The Progress of any economy mainly depends on the efficient financial system of the
country. Bangladeshi economy is no exception of this. This importance of the financial
sector reforms affirms an effective means for solving the problems of economic, financial
and social in Bangladesh 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.
Infact , 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 is essential.
Capital market
A capital market is a market for securities (debt or equity), where business enterprises
(companies) and governments can raise long-term funds. It is defined as a market in
which money is provided for periods longer than a year, as the raising of short-term funds
takes place on other markets (e.g., the money market). The capital market includes the
stock market (equity securities) and the bond market (debt). Financial regulators, such as
the Securities and Exchange Commission (SEC), oversee the capital markets in their
designated jurisdictions to ensure that investors are protected against fraud, among other
duties.
Capital markets may be classified as primary markets and secondary markets. In primary
markets, new stock or bond issues are sold to investors via a mechanism known as
underwriting. In the secondary markets, existing securities are sold and bought among
investors or traders, usually on a securities exchange, over-the-counter, or elsewhere
capital market
The market for long-term funds where securities such as common stock, preferred stock,
and bonds are traded. Both the primary market for new issues and the secondary market
for existing securities are part of the capital market.
The Capital market is a market ,which deals in long–term loans . It supplies industry
with fixed and working capital and finances medium-term borrowing of the central , state
and local governments. The capital market deals in ordinary stocks, shares and
debentures of corporations and bonds and securities of governments.
In Fact, the Capital markets is related to the supply of and demand for new capital and
stock exchange facilitates such transactions.
In order to understand what the differences between things are you first need to
understand what each of the items is. In this case before you can understand the
difference between capital markets and money markets you are going to need to
understand what capital markets are and what money markets are. Once you understand
the two items are it will be easier to see what the difference or differences are between
the two markets.
What is capital market?
Basically the capital market is a type of financial market, it includes the stocks and bonds
market as well. But in general the capital market is the market for securities where either
companies or the government can raise long term funds. One way that the companies or
the government raise these long term funds is through issuing bonds, which is where a
person buys the bond for a set price and allows the government or company to borrow
their money for a certain time period but they are promised a higher return for allowing
them to borrow the money, the higher return is paid through interest that accrues on the
money that the government or company borrows.
Another way that the companies or government can raise maney in the capital market
is though the stock market, most of the time you don't see the government as a part of
the stock market, but it can actually happen so we need to include them. But how the
stock market works is that the companies decide to sell shares of their stock, which is
basically ownership in the company, to ordinary people and other companies, as a way to
raise money. The people who buy the stock are usually given dividends each year, if the
company has agreed to pay out dividends, so that is another possible return on their
investment.
The capital market actually consists of two markets. The first market is the primary
market and it is where new issues are distributed to investors, and the secondary market
where existing securities are traded. Both of these markets are regulated so that fraud
does not occur and in the United States the U.S. Securities and Exchange Commission is
in charge of regulating the capital market.
Basically the money market is the global financial market for short-term borrowing and
lending and provides short term liquid funding for the global financial system. The
average amount of time that companies borrow money in a money market is about
thirteen months or lower. Some of the more common types of things used in the money
market are certificates of deposits, bankers' acceptance, repurchase agreements and
commercial paper to name a few.
Basically what the money market consists of is banks that borrow and lend to each other,
but other types of finance companies are involved in the money market. What usually
happens is the finance companies fund themselves by issuing large amounts of asset
backed commercial paper that is secured by the promise of eligible assets into an asset
backed commercial paper conduit. Your most common examples of these are auto loans,
mortgage loans, and credit card receivables.
Capital market
• Financial institutions can use short-term savings to lend out in the form of short-
term loans:
o Credit on open account
o Bank overdraft
o Short-term loans
o Bills of exchange
o Factoring of debtors
Basically the difference between the capital markets and money markets is that capital
markets are for long term investments, companies are selling stocks and bonds in order to
borrow money from their investors to improve their company or to purchase assets.
Whereas money markets are more of a short term borrowing or lending market where
banks borrow and lend between each other, as well as finance companies and everything
that is borrowed is usually paid back within thirteen months.
Another difference between the two markets is what is being used to do the borrowing or
lending. In the capital markets the most common thing used is stocks and bonds, whereas
with the money markets the most common things used are commercial paper and
certificates of deposits.
3. Give qualitative and quantitative direction to the funds and brings rationale
allocation of resources by converting financial assets into productive physical
benefits .
The recent growth of capital market (CM) of Bangladesh was behind time. We have
witnessed the money market (MM) grow stable in this country over the last decade; our
economy was starving for a matured and stable capital market. The stability came
through a variety of sources namely, educated retail investors, institutional investors and
last but not least the capital market regulators.
As it is a market that involves both the sponsors and investors, the need for a healthy and
stable market became necessary. Through various forms of reforms and automation the
capital market of Bangladesh won the confidence of investors from all walks of life. It is
a fact that capital market outperformed money market by far in the last couple of years
but that was only possible due to the uniform and state of the are technology that has
been used as the platform of our capital market. In addition to that, the government
facilitated our capital market by structuring its monetary and fiscal policies in a pro-
capital market manner.
The central bank (CB) played a thoughtful part in developing our capital market. It
brought transparency to the banking sector, which actually welcomed the retail investors
to join the capital market with high confidence. The performance and healthy return of
the banking sector worked as a crucial component to bring in institutions and foreign
investors. Power and pharmaceutical sector also outperformed the expectations of general
investors; resulting fresh fund injection into our capital market.
Our emerging economy mostly invited the funds from all over the globe. Market capital
has shown amazing growth. Although current market price earning ratio is higher than
that of the neighbouring country but it is my belief that considering the demand for lack
of avenue to invest, the capital market of our country has a bright and attractive future
and untapped sector.
Addressing the issue regarding our capital market, 'liquidity' and lack of "instrument"
would top the list of challenges that we have right now. The major reason for the
existence of the stock market is to provide liquidity of shares and diversified instruments
which helps increase market capitalisation. It also helps investors to gain more
confidence and positively impact Gross Domestic Product (GDP) of our country.
Neighbouring countries such as India and Pakistan have market capitalisation of more
than 75% of their GDP. Comparatively, the Bangladesh capital market accounts for a far
lesser share of its GDP indicating ample scope for future intensification in this sector.
Hence, we should address the above to issues with utmost seriousness and with a future
vision.
As we know, our economy is an emerging one; there is ample scope of growth of our
capital market. Our market cap, accounts for a lower share of our GDP in a comparative
regional perspective. With the help of upcoming issues (IPO) we are very optimistic that
the market capitalisation is reach a higher level within a short span of time. Automation
and introduction of Central Depository helped our capital market to grow considerably.
The regulatory body, namely Securities and Exchange Commission, is continuously
facilitating our capital market with its international standard surveillance and monitoring.
The continuous endeavour of the SEC has resulted in our capital market to be free from
fraudulent and manipulative activities. Thus presence of the SEC has impacted
significantly in the development of the market. However, considering our market size, the
SEC should employ more professionals from private sector. Would bring more dynamism
to the market.
The major drawbacks of our capital market are lack of instruments and liquidity. We can
address these two issues by attracting more companies to the market. In order to make the
market more attractive, the corporate tax bracket can be lowered in order to encourage
sponsors to list their companies in the exchanges. We can also introduce Future and
Option Market and help our already existing bond market to be more vibrant leaving the
investors with more instruments. Although we have some mutual funds (MF) currently
trading in the secondary market, yet we believe there is higher demand for such products,
since MF provides the clients the opportunity to reduce investment risk. With the help of
the bourse, we should welcome hedge funds from different parts of world to invest in our
capital market. Cash management can also play a significant role in overcoming the
drawbacks of our capital market. With the help of efficient and online cash management
our cumbersome settlement procedure could be stream lined. There are other numerous
ways we can reduce the drawbacks of our capital market. Last but not least, international
auditing standard has to be adopted, resulting in more transparency in the financial
activities and reporting. This would draw the attention of general investors and gain then
confidence to invest in every sector. More importantly, in the context of online central
depository system, guaranteed clearing agent for settlement is obvious for market
development.
Absence of capital gain tax is the most attractive reason for foreign investors (FI) to
invest in Bangladesh capital market, which is not very common in emerging economies
such as Bangladesh. In addition to high return and significant dividend yield, FIs should
be attracted to our capital market because of the easy and hassle free repatriation of
funds.
From the present point of time the future seems bright, not only because of our vibrant
capital market but also of our room for new products. With the introduction of direct
listing and possible book building method, our primary market is improving in line with
the secondary market. The market cap will grow significantly within next few years and
turnover shall reach an international level. Moreover, institutional clients, namely banks
are entering the market with their huge liquid fund causing the capital market to grow
very rapidly. Domestic and international banks have started not only to invest in the
capital market but also to operate brokerage and merchant banking wing. Cross border
trading and index trading are ideas we might adopt in future, which will result in liquidity
and new avenues for investment and minimise our cash market risk.
The Bangladeshi and foreign investors are experiencing the scarcity of diversified
products in Bangladesh. The platform of this market is supply and demand. Due to the
absence of diversified products, the liquidity of market is declining.
Introducing option and future market to our capital market can be a solution to the above
issue. Turnover and market capital of India grew substantially after introducing the
option and future market. However, the investors have to be educated properly to reduce
speculation. Derivatives and option market is unavailable only due to our lack of
professionals and technical weakness and also there are no specific regulations relating to
these products. However, in a very short span of time capital market intermediaries are
bringing in infrastructure changes such as book building, derivative and option market to
our market. Introduction of these products will further broaden investment horizon and
bring enhanced depth and liquidity to our market and attract global customers.
Although we have a bond market but compared to other countries it is very weak. We
have to attract private and public sector companies to issue more bonds and thus increase
liquidity in our bond market.
The need for cooperation among the stock exchanges in this region has to be emphasised
her in order reap tremendous benefits. At present, the level of such cooperations remains
at a very low level. The experience we have had in our respective markets can be
valuable to each other and ought to be exchanged, even though the sizes and
specifications of our markets may vary. Regionwise, we are bound by commonalities in
culture, environment, tradition. The same Socio-political factors affect us rather similarly.
Hence, the knowledge gathered in our respective countries can be valuable to us, who
belong to the same region. Through a friendly dissemination of knowledge and
experience, we can revitalise and energise our economies. Shared knowledge can fuel the
growth of a stronger and more vibrant capital market.
Chapter- 3
List of Registered Merchant Banks In Bangladesh
1. Portfolio management
2. Issue management
3. Project finance
4. Leasing
5. Loan syndication
6. underwriting
1. Portfolio management
i. Portfolio manager
A portfolio manager is a person who makes investment decisions using money other
people have placed under his or her control. In other words, it is a financial career
involved in investment management. They work with a team of analysts and researchers,
and are ultimately responsible for establishing an investment strategy, selecting
appropriate investments and allocating each investment properly for a fund- or asset-
management vehicle.
Portfolio managers are presented with investment ideas from internal buy-side analysts
and sell-side analysts from investment banks. It is their job to sift through the relevant
information and use their judgment to buy and sell securities. Throughout each day, they
read reports, talk to company managers and monitor industry and economic trends
looking for the right company and time to invest the portfolio's capital.
Portfolio managers make decisions about investment mix and policy, matching
investments to objectives, asset allocation for individuals and institutions, and balancing
risk against. performance.
Investment management
The term asset management is often used to refer to the investment management of
collective investments, (not necessarily) whilst the more generic fund management may
refer to all forms of institutional investment as well as investment management for
private investors. Investment managers who specialize in advisory or discretionary
management on behalf of (normally wealthy) private investors may often refer to their
services as wealth management or portfolio management often within the context of so-
called "private banking".
The primary challenge of project management is to achieve all of the project goals[5] and
objectives while honoring the preconceived project constraints.[6] Typical constraints are
scope, time, and budget. The secondary and more ambitious challenge is to optimize the
allocation and integration of inputs necessary to meet pre-defined objectives.
2.Issue management
Early examples of issue management systems appeared in the late 1980s with customer
ticketing systems. Businesses that implemented these systems were often addressing
customer complaints and needed a method to document, track, and manage complaints to
successful resolution. These systems evolved with the widespread introduction of
Information Technology departments, leading to wider deployment of issue management
systems in the form of 'help desk' systems.
Today, help desk and ticketing remain the most prevalent roles for issue management
systems, though common enterprise-wide systems have emerged to consolidate and
increase visibility of issues across an organization.
Purpose:
The purpose of Issues Management is to insure that any concerns
recognized during a project are addressed in a timely manner and do
not go unresolved until they become major problems.
3.Project finance
Project finance is the long term financing of infrastructure and industrial projects based
upon the projected cash flows of the project rather than the balance sheets of the project
sponsors. Usually, a project financing structure involves a number of equity investors,
known as sponsors, as well as a syndicate of banks that provide loans to the operation.
The loans are most commonly non-recourse loans, which are secured by the project
assets and paid entirely from project cash flow, rather than from the general assets or
creditworthiness of the project sponsors, a decision in part supported by financial
modeling. The financing is typically secured by all of the project assets, including the
revenue-producing contracts. Project lenders are given a lien on all of these assets, and
are able to assume control of a project if the project company has difficulties complying
with the loan terms.
Risk identification and allocation is a key component of project finance. A project may
be subject to a number of technical, environmental, economic and political risks,
particularly in developing countries and emerging markets. Financial institutions and
project sponsors may conclude that the risks inherent in project development and
operation are unacceptable (unfinanceable). To cope with these risks, project sponsors in
these industries (such as power plants or railway lines) are generally completed by a
number of specialist companies operating in a contractual network with each other that
allocates risk in a way that allows financing to take place.[2] The various patterns of
implementation are sometimes referred to as "project delivery methods." The financing of
these projects must also be distributed among multiple parties, so as to distribute the risk
associated with the project while simultaneously ensuring profits for each party involved.
A riskier or more expensive project may require limited recourse financing secured by a
surety from sponsors. A complex project finance structure may incorporate corporate
finance, securitization, options, insurance provisions or other types of collateral
enhancement to mitigate unallocated risk.
4.Leasing
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which
it must pay a series of contractual, periodic, tax deductible payments. The lessee is the
receiver of the services or the assets under the lease contract and the lessor is the owner
of the assets. The relationship between the tenant and the landlord is called a tenancy,
and can be for a fixed or an indefinite period of time (called the term of the lease). The
consideration for the lease is called rent. A gross lease is when the tenant pays a flat
rental amount and the landlord pays for all property charges regularly incurred by the
ownership
A lease should be contrasted to a license, which may entitle a person (called a licensee)
to use property, but which is subject to termination at the will of the owner of the
property (called the licensor). An example of a license is the relationship between a
parking lot owner and a person who parks a vehicle in the parking lot.
Term of a lease
If it is for a specified period of time, the term ends automatically when the period expires,
and no notice needs to be given, in the absence of legal requirements.
The term's duration may be conditional, in which case it lasts until some specified event
occurs, such as the death of a specified individual.
A tenancy at will lasts only as long as the parties wish it to, and be terminated without
penalty by either party.
5.Loan Syndication
Mainly used in extremely large loan situations, syndication allows any one lender to
provide a large loan while maintaining a more prudent and manageable credit exposure
because the lender isn't the only creditor
A loan offered by a group of lenders (called a syndicate) who work together to provide
funds for a single borrower. The borrower could be a corporation, a large project, or
a sovereignty (such as a government). The loan may involve fixed amounts, a credit line,
or a combination of the two. Interest rates can be fixed for the term of the loan or floating
based on a benchmark rate
The main goal of syndicated lending is to spread the risk of a borrower default across
multiple lenders (such as banks) or institutional investors like pensions funds and hedge
funds. Because syndicated loans tend to be much larger than standard bank loans, the risk
of even one borrower defaulting could cripple a single lender. Syndicated loans are also
used in the leveraged buyout community to fund large corporate takeovers with primarily
debt funding.
Syndicated loans can be made on a "best efforts" basis, which means that if enough
investors can't be found, the amount the borrower receives will be lower than originally
anticipated. These loans can also be split into dual tranches for banks (who fund standard
revolvers or lines of credit) and institutional investors (who fund fixed-rate term loans).
6.Underwriting
Underwriting refers to the process that a large financial service provider (bank, insurer,
investment house) uses to assess the eligibility of a customer to receive their products
(equity capital, insurance, mortgage or credit). The name derives from the Lloyd's of
London insurance market. Financial bankers, who would accept some of the risk on a
given venture (historically a sea voyage with associated risks of shipwreck) in exchange
for a premium, would literally write their names under the risk information that was
written on a Lloyd's slip created for this purpose.
Investment Dictionary: Underwriting
1. The process by which investment bankers raise investment capital from investors on
behalf of corporations and governments that are issuing securities (both equity and debt).
1. Detailed credit analysis preceding the granting of a loan, based on credit information
furnished by the borrower, such as employment history, salary, and financial statements;
publicly available information, such as the borrower's credit history, which is detailed in
a Credit Report and the lender's evaluation of the borrower's credit needs and Ability to
Pay.
1. Bank underwriting
2. Securities underwriting
3. Insurance underwriting
Once the underwriting agreement is struck, the underwriter bears the risk of being able to
sell the underlying securities, and the cost of holding them on its books until such time in
the future that they may be favorably sold.
If the instrument is desirable, the underwriter and the securities issuer may choose to
enter into an exclusivity agreement. In exchange for a higher price paid upfront to the
issuer, or other favorable terms, the issuer may agree to make the underwriter the
exclusive agent for the initial sale of the securities instrument. That is, even though third-
party buyers might approach the issuer directly to buy, the issuer agrees to sell
exclusively through the underwriter.
In summary, the securities issuer gets cash up front, access to the contacts and sales
channels of the underwriter, and is insulated from the market risk of being unable to sell
the securities at a good price. The underwriter gets a nice profit from the markup, plus
possibly an exclusive sales agreement.
Until recently commercial banks have been involved in the capital markets mainly
through ownership of brokerage businesses. Seventeen banks operate brokerage
businesses as members of the Dhaka Stock Exchange (DSE). Historically revenue from
securities business was low compared to a bank's core business of deposit-taking and
term-lending. With a rising share market, contribution to revenue from the brokerage
businesses has risen significantly. This has provided a much needed respite to many
banks in the midst of reduced lending and trading activities. Most banks generated this
extra revenue by lending to Beneficial Ownership (BO) accounts of investors against
their stock portfolios at high interest rates (margin loans).
Because of a perception of easy profits, commercial banks are preparing to enter into the
securities market on a larger scale. Many banks have either received or applied for
merchant banking licenses, which would allow them to manage issues, underwrite public
offerings, and offer wealth management services. Currently, banks hold 10, out of a total
31 merchant banking licenses. While diversification of revenue is desirable for banks, it
is also important to note that the business of securities is different from that of banking,
and presents different risks. The foray of commercial banks into the securities market
raises some concerns, both from risk management and competitiveness perspectives.
Risk perspective: As new issues are few and far between, margin lending and trading
remain the focus for merchant banking operations. Merchant banks are allowed to
provide as much as 150% of the portfolio value in margin loans. Margin lending
increased significantly in the last year. According to a report published in an English
daily in its issue on July 14, 2009, two commercial banks increased their brokerage profit
during first half of 2009 by 20% and 300% respectively, compared to last year.
Supposing margin interest rate and borrowing costs remained fairly same, it could be
assumed that most commercial banks increased their margin-lending volume in similar
degrees. During that period, market capitalisation of the Dhaka Stock Exchange (DSE)
increased 21%, from Tk. 776.4 billion in June, 2008 to Tk. 938.0 billion in July 2009.
New issues (a total of 16) accounted for only Tk. 4.1 billion of this increase. It can be
safely assumed that margin lending played a role in this significant advance; excess
liquidity drove up the share prices in a market that experienced limited security supply.
Margin lending is attractive to banks for two reasons; first, it earns interest income and
second, it generates trading revenue. This is also true for independent merchant banks not
affiliated with a commercial bank. However, banks can bring to bear enormous amounts
of funds from their deposit base at a low cost. Consequently, they also have the ability to
render a much larger impact on the market. In contrast, independent merchant banks have
higher costs of capital and hence are more selective in margin lending. In a rising market,
margin lending encourages speculative trading and creates significant risk for investors,
for banks and for the market.
Risk to investors: A portfolio created out of borrowed funds magnifies the risk of losses.
A 10% market correction causes as much as 25% loss to an investor who is leveraged
150%. An investor not only absorbs losses incurred on his own money, but also on the
money borrowed, as the lender does not assume any market risk. If significantly
leveraged, an investor may lose a large part of his savings during a big market correction.
Risk to banks: Although margin loans are secured by shares purchased, banks take on
significant risk through such lending. A 40% correction in the market would wipe off the
entire equity of the investor and expose the margin lender to losses. This risk is reflected
in the new banking supervision rules; under Basel II framework, investment in equity
should be risk weighted at 100%. In other words, no matter the quality of share, the
margin loan disbursed against such security would have to be fully risk-weighted.
Risk to the market: Margin lending exacerbates market volatility. A rising market lowers
margin ratio allows further borrowing and encourages more buying. This in turn drives
up the share prices. In a falling market, brokers call for more collateral to cover margin,
often forces investors to sell, which pushes prices down, and creates further selling
pressure. Such increase in volatility is detrimental to market stability.
Banks are important players in capital market, but their unrestrained expansion would
deter the growth of independent merchant banks. If size and easy access to capital
become the only criteria in awarding merchant banking mandates, we will never see a
rise of independent merchant banks that lead their respective markets in innovation and
service quality.
Case for limiting bank participation in the capital markets: Regulators in many countries
favour separation of banking and securities businesses. An early example of this
approach is the Glass Steagall Act of the US Congress of 1933. This Act separated
investment and commercial banking activities, preventing overzealous commercial bank
involvement in stock market. It was deemed that such involvement caused the banking
crisis of 1929 when commercial banks took on too much risk with depositors' money.
The core banking practices of deposit taking, term lending and risk management took a
backseat. In many cases, banks would issue unsound loans to companies in which it had
invested. Clients would also be encouraged to invest in those same stocks. Separation of
banking and securities businesses removed such practices.
The Act was repealed in 1999 under pressure from the financial services industry who
argued that by preventing diversification, the Act made banks riskier. Overnight,
commercial banks, merchant banks and insurance companies merged under the same
umbrella, creating financial behemoths. The most famous example was Citigroup, created
through the merger of Citibank and the Travellers Group. The subsequent misfortune of
Citigroup and other financial omnibuses highlights the relevance of the separation of
banks and securities business. China, the new financial powerhouse, still maintains a
separation between the two businesses.
As we are still developing our financial markets, we need to take a prudent approach to
this issue. Banks should still be allowed to participate in merchant banking, but the
practice of banks' margin lending should be limited with a keen eye on regulatory capital
requirement. This would stop certain institutions from cornering the market by putting in
huge capital in select securities or pulling out; a practice that creates huge volatility.
Also, in order to ensure the growth of independent merchant banks, it must be ensured
that mandates such as issue management and underwriting offerings are equitably
awarded to these institutions. The government can take a proactive role by selecting
independent firms for management of government issues. Currently, Investment
Corporation of Bangladesh (ICB) seems to have the sole mandate of such issues, which is
not conducive to a competitive market. We need to develop various counter and
competitive forces in order to ensure a competitive and efficient market.
In today's diverse and unpredictable economy, the need for a sustained profit plan and
long term growth strategy has become essential for both individuals and corporations.
Merchant banking principally involves providing financial services and advice for
individuals and corporations. Merchant banking operations consists of providing clients
with a Variety of financing options to sustain long term growth.
Merchant banks tend to have operations in a variety of countries throughout the world
allowing them to offer an extensive network distribution to help their clients explore
opportunities with alternative finance options.
In banking, a merchant bank is a financial institution that primarily invests its own capital
in a client's company. Merchant banks provide fee based corporate advisory services for
mergers and acquisitions, as well as other financial services. Merchant banking
operations focus on commercial international finance, stock underwriting, and long-term
company loans. These banks work with financial institutions with their primary function
being stock underwriting. They also work in the area of private equity where the
securities of a company are not available for public trading.
The most common private equity investment strategies include venture capital, leveraged
buyouts, distressed investments, growth capital, and mezzanine capital. Leveraged
buyout generally means that they acquire majority control over existing or mature
corporations. Growth capital and venture gains means they invest in newer or rising
corporations without acquiring majority control.
Today, merchant banks are involved in a number of tasks such as credit syndication,
portfolio management, mergers and acquisitions counseling, and acceptance of credit, etc.
Their investments include private equity, structured equity, and bridge debt. They
generally invest in private or public companies to finance growth, acquisitions, and
management/leveraged buyouts and recapitalizations. In some cases, they provide an
invested company with short-term financing for a particular project, or provide short-term
liquidity.
Merchant Banking operations can focus on a particular country or they can expand their
operations in other countries. They can assist sustainable companies undergoing a
financial restructuring requiring short-term liquidity. These banks provide their partners
with financial analysis, capital structuring and strong industry relationships. They provide
the corporate lending, leveraged finance, and investment banking and industry expertise.
Merchant Banking operations provide all types of domestic and foreign banking
transactions, corporate finance services, product knowledge, and management services.
Global merchant banking operations provide individual and corporate investors with the
opportunity to participate globally for access to international investment opportunities,
providing global companies access to a particular market, and opportunities for co-
investment.
Types of Accounts:
Investors’ Discretionary Account (IDA): This leveraged account is managed by the account holder through
us. By this the investor bears the risk of investment and also its gain or loss.
Banks’ Discretionary Account (BDA): With this account the Bank, on behalf of the account holder, uses its
discretion in managing the account. The investor lays down his/her investment objectives and the Bank
designs a portfolio aligning the investors' risk-return profile.
Operational Procedure:
Opening of the Account: Any two Bangladeshi nationals and NRB of sound mind having a minimum age of
18 years may open three IDA/BDA’s-one each in their single name and the other in their joint names.
Building of Portfolio: A diversified portfolio through investment in IPO, Private Placement and Secondary
Market.
Appointment of an Operator: Account holder may appoint any existing account holder of MBW as an
operator of his/her Account.
Services:
Application, Transfer and Collection of Shares and/ or Dividends: Arranged by AB Bank on behalf of
the clients.
IPO and Private Placement: AB Bank furnishes the account holders, information about forthcoming IPOs
and Private Placement through FAX, e-mail and letters upon request.
Statement of Accounts: MBW of AB Bank sends portfolio information to the account holders every 6
months. Besides, the account holders may also obtain information on their portfolios any time upon request.
Investors can access their portfolio any time from any part of the country through SMS and Phone Service.