Performance evaluation of merchant banking in Bangladesh

A merchant bank is a financial institution which is primarily engaged in offering financial

service and provides advice to corporation and to wealthy individuals. The term can also be used
to describe the private equity activities of banking

Investment banking is an American synonym of merchant banking. Investment banks

provide advice on mergers and acquisitions and are involve in financing Industrial Corporation
through buying shares and selling them in relatively small lots to investors.

In the context of Bangladesh, merchant banking includes all financial institution that
combine the function of both development banking and investment banking.

Evolution Merchant Bank

Merchant banks first arose in the Italian states in the middle Ages, when Italian merchant houses-
generally small, family-owned import-export and commodity trading businesses-began to use
their excess capital to finance foreign trade in return for a share of the profits. This trade
generally consisted of lengthy sea voyages. That time the investments were very high risk: war,
bad weather, and piracy were constant threats, and by their nature the voyages were long-term
and illiquid.

In the eighteenth century the merchant banking center shifted from the Italian states to
Amsterdam and then to London, where immigrants from Prussia, France, Ireland, Russia, and the
Italian states formed the core of early British Merchant Banking. Before the Italian and Dutch
houses British houses were generally small, family-owned partnerships, and most of them
continued to trade for their own businesses and to finance the trading by others. At the end of the
eighteenth century, however, the British merchant houses had increased in size and
sophistication and began specializing in trade, marketing, or finance. In the nineteenth century
this sector has been spread out virtually no mercantile houses remained focused on both trade
and finance.

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Performance evaluation of merchant banking in Bangladesh

History of merchant banking

According to Wikipedia, 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 banks 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 inn crops. They had
one great advantage over the locals. Christian was strictly forbidden the sin of usury, defined as
lending at interest. The Jewish newcomers, on the other hand were considered usurious rates by
the church, but the Jews were not subject to the church. In the way they could secure the grain-
sale right 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 merchant
who were trading grain debt instead of grain.

The Jewish trade performed both finance and underwriting functions. He would derive an
income from lending the farmer money to develop and manufacture his annual crop. He would
underwrite the delivery of the crop to the merchant wholesaler who the ultimate purchaser of
the farmer harvests. And he would make arrangement to supply this buyer through alternative
source of supply should any particular farmer in business during a drought or other crop failure
of his crop

Thus in his underlying financial function, the merchant banker would ensure the
continuous smooth flowing of the commodity markets by providing both credit and insurance

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Performance evaluation of merchant banking in Bangladesh

The Necessity of Merchant Banking Services: The economy of the country is often
afflicted with different unpredictable conditions like inflation, unemployment, stagnation and so
forth. The need to sustain a steady growth is necessary for corporations and individuals which is
possible only with a long term strategy and financial options. The merchant banking services
provide solutions and financial options.

These banks provide advisor services to clients based on a particular fee.

They also provide other financial services to mergers and clients. It is the only financial
institute that invests its capital in the clients company. It acts as an intermediary between
those who possess capital and those who need capital.

To help their clients with a number of financial options, the merchant banking services
operate in a number of countries all over the world. In this manner the clients have the
opportunity to survey the different financial options to ensure better growth.

Merchant banking in Bangladesh

Merchant bank were allowed to operate with the hope of playing a meaningful role in
salvaging the country limping stock market, by generating fresh funds, following the 1996 stock
market crash. So far a total of 31 companies received merchant banking licenses from the
Securities and Exchange Commission. The registered merchant bank is Janata bank limited,
BRAC bank limited, city bank limited etc.

Of them a total of 29 companies received merchant banking licenses from the commission
between January 1998 and April 2007. The Citigroup global markets Bangladesh private
obtained the license in the year of 007 and the trust bank in the year of 2008. Six more FIs are to
be approved by the SEC.

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Performance evaluation of merchant banking in Bangladesh

The SEC on September 7, 2008 cancelled the merchant banking license of the Equity Valuation
Research and Distribution Ltd. The Securities and Exchange Commission on October, 2008
cancelled the merchant banking license of the First Securities Services Ltd and the Rapist
Securities and Management limited with immediate effect since they remained inactive for years
together. The First Securities Services was given license to act as issue manager while the Rapist
Securities and Management as full-fledged merchant bank, which was allowed to perform as
issue and portfolio manager as well underwriter for clients.

In the year of 2009, of the 28 merchant banks, 23 had full-fledged merchant banking license,
while four had only issue management license, while four had only issue management license
and one had only portfolio management license.

The central bank of Bangladesh asked the commercial banks to run their merchant banking
business through separately formed subsidiary companies, officials, and bankers. Under those
new regulations, the bank had to convert their existing merchant banking wing or department
into a separate subsidiary company by January 31, 2010. It helped to ensure transparency of the
merchant banking Business.

Recently securities regulators gave its go-ahead to six more financial institutions (FIs) to operate
merchant Banking. Because, analysts questioned their expertise and financial base. The
Securities and Exchange Commission (SEC) also approved rights offer of Bay Leasing and
Investment Ltd.

The six financial Institutions are Jamuna Bank, Mutual Trust Bank Ltd, The City Bank, Summit
Group’s Cosmopolitan Traders Private Ltd, Green Delta Insurance and Alpha Capital
Management Ltd, a unit of Progressive Life Insurance.

According to the Sec officials, the approval will bring the total number of merchant banking at
37. By giving nod to the six FIs to operate as merchant banks the Sec has increased maximum
limit of the merchant banking operation in the stock market to 50 from 35. But, although 31
merchant banks are operating, only a few (only some) are active while the performance of the
rest is “far from being satisfactory”. The merchant Banks should focus on forming their own
portfolios in making the market sustainable an analyst saw no strong case for the SEC motive,
saying it would be of no use unless the companies have professionalism and strong financial

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Performance evaluation of merchant banking in Bangladesh

base. So far, the commission has scrapped six of merchant banks including First Securities
Services Ltd, Prime Securities and Financial Services Ltd, and Mercantile Securities Ltd. ay
Leasing and Investment Ltd will issue one right share to bolster its capital base and to raise the
capacity of SME credit to meet Bangladesh Bank’s directive. It will float 3060000 ordinary
shares as rights offer tk100.00 each at an issue price of Tk. 350.00 per share (including a
premium of Tk.250.00 each)

Merchant Banking Operation in Bangladesh:

Although in the U.S merchant banks offer a wide range of activities, including portfolio
management, credit syndication, acceptance credit, counsel on mergers and acquisitions,
insurance, etc, in case of our country, these services may differ. In Bangladesh, a merchant bank
can perform multiple operation including underwriting, issue management, portfolio
management, merger and acquisition etc. The merchant banking activities were largely fostered
by two distinct developments: Merger and Acquisition activities and increased demand for
venture capital.

1. Underwriting: Underwriting operation is one of the important functions of a merchant

banker by which it can increases the supply of stock/ share and debentures in the market.
It is an arrangement whereby the underwriter undertakes to subscribe the unsubscribed
portion of shares/debentures offered by any public limited company. This encourages the
prospective issuers to offer shares/debentures to the public for subscription and they can
raise funds from the public. One or more investment banking firms may underwrite
public offerings. The underwriters have the responsibility of pricing new shares and
selling them to investors. The company pays the underwriters a fee. Underwriter also
provides advice to a company issuing securities or to an issue manager.
2. Issue Management: Issue management function of merchant banking helps capital
market to increase the supply of securities. Being a issue manager these FIs provide
assistance to the Private Limited Companies intended to be converted into public Limited
companies by way of obtaining necessary permission from the relevant authorities.,
preparing prospectus for public issue of shares and debentures, involving itself in the
collection of application money, scrutiny of applications, arranging for lottery relating to

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Performance evaluation of merchant banking in Bangladesh

allotment, if required, allotment of shares and debentures, refund of application money

etc.
3. Portfolio Investment Management Services: “portfolio means a collection of
investments owned by investors, an institution or a mutual fund and portfolio manager
means the entity responsible for investing a mutual fund’s assets mapping out its
investment strategy and managing day-to-day securities trading. Portfolio management is
the process of building, managing, and assessing an inventory of company products and
projects. One of the most important functions of merchant banking is to provide Portfolio
Management service to the customer. Basically, portfolio management services program
has four different wings to provide portfolio investment management services. The SEC
allowed banks to launch merchant banking operation through opening of separate wing
mainly to deal in portfolio investment on behalf of clients account in order to channel
pool of investors fund into the stock market in an organized market.
4. Merger and Acquisition: The phrase merger and acquisition refers to the aspect of
corporate strategy, corporate finance and management dealing with the buying, selling,
and combining of different companies that can aid, finance, or help a growing company
in a given industry grow rapidly without having to create another business entity.
Merchant banking helps to negotiate companies in this case.

Customers of Merchant banking

1. Any Bangladeshi over 18 years of age

2. Any Corporate body
3. NRB (s) through NITA Account

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Performance evaluation of merchant banking in Bangladesh

Laws and Regulations:

The SEC granted authority to 17 non-bank financial institution in 1997 to conduct merchant
banking business in Bangladesh under the Securities and Exchange Regulations 1995.

The SEC,. invited letters of intent from 14 institution for the registration of merchant bank based
on SRO No.59 of 24 april 1996, and a decision taken by it on 17 August 1997. Prior to this
decision, seven institutions submitted such letter of intent and SEC gave registration to a total of
19.

Under the SEC merchant banker licensing rules bank working only as issue manager has to
submit at least a documented proposal for an initial public offer of a company, while a merchant
bank licensed to act only as portfolio manager has to form at least five new portfolios of its
clients besides its own, and a merchant bank working as a full-fledged merchant bank has to
manage the IPO, to be underwtiter of two issues and form five new portfolios of its clients
besides its own in a calender year. A full-fledged merchant bank has to perform at leasat two
operatrions among the three including managing portfolio in a calendar year.

Prospects of Merchant Banking in Bangladesh:

The prospects of merchant banking in Bangladesh can be outlined as under:

(1) Growth of Primary Market: If the primary market grows and number of issues increases,
the scope for merchant banking will be enhanced.

(2) Entry of Foreign Investors: Now Indian capital market directly taps foreign capital through
euro issues. Foreign direct investment (FDI) is increased in capital market. Bangladesh can
explore the same. So merchant bankers are needed to advice them for their investment in
Bangladesh. The increasing number of joint ventures also requires expert services of merchant
bankers. If more and more non-resident Bangladeshis (NRBs) participate in capital market, there
will be great demand for merchant banker services.

(3) Changing Policy of Financial Institutions: Now the lending policies of financial

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Performance evaluation of merchant banking in Bangladesh

institutions are based on project orientation, so the merchant banker services will be needed by
corporate enterprise to provide expert guidance.

(4) Development of Debt Market: If the debt market is enhanced, there will be tremendous
scope for merchant bankers.

(5) Corporate Restructuring: Due to liberalization and globalization, the companies are facing
a lot of competition. In order to compete, they have to go for restructuring, merger, acquisitions,
or disinvestments. This may offer good opportunity to merchant bankers.

Findings:

1. The field of merchant banking is yet to be fully explored in Bangladesh and there is a huge
prospect in this field of business.

2. Lack of manpower with adequate merchant banking experience and proper academic
background is a major obstacle.

3. Scope of learning merchant banking through training/conference/workshop is very limited in

Bangladesh.

4. Manpower being employed in merchant banks, asset management companies and brokerage
firms do not have formal training.

5. The Chief Executive Officers (CEOs) of merchant banks should have law backgrounds in the
face of growing legal complexity in this field of business.

Recommendations:

It is evident from the foregoing discussions that the merchant banking, asset management
companies and the brokerage firms are growing by shape and size. Millions of people are getting
involved with the capital market. The merchant banks in Bangladesh today are operating within a

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Performance evaluation of merchant banking in Bangladesh

limited scope. But this scope of merchant bank is expected to be widened. This may be a matter
of time only.
Career plan is another important aspect which has been briefly covered above. Most importantly,
a timely initiative undertaken by the SEC, in terms of training, has been highlighted in a nutshell.
The creation of a training institute like BICM is a testimony to their initiative. This, in fact,
helped us to generate some ideas leading to some recommendations. We would like to humbly
make the following recommendations:

a. Training and development centers of different financial institutions may for the time being
provide the foundation training designing a standardized syllabus.

b. The syllabus and uniform training guidelines may be provided by the regulatory bodies. This
would help ensure quality of training.

c. Gradually, the certificate of qualification which may be provided by BICM may be introduced
as a prerequisite for employment in merchant banks, asset management companies and
brokerage firms.

d. The regulatory bodies may provide a time-frame within which the companies must train all
their human resources and covert them into human capital.

e. Organizations like the World Bank and Asian Development Bank may be approached for fund
for research and development (R & D).

f. An R & D Wing may be set up which may be placed directly under the Chairman of SEC.

g. Merchant banks may be advised to create appropriate job description and job specifications
corresponding to the training syllabus. This would make the training more meaningful and
fruitful.

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Performance evaluation of merchant banking in Bangladesh

Conclusion: Capital market differs from the other markets in many aspects and hence, the
investment process in capital market is also unique and complex. Therefore, professional
portfolio management services as well as other merchant banking services required for ensuring
optimum performance of an investor’s investment portfolio.

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