Merchant Banking

A merchant bank, also known as accepting and Issuing houses in UK and as Investment Banks in US, is a financial institution primarily engaged in offering financial services and advice to corporations and wealthy individuals on how to use their money & to lend money. Modern merchant banks offer a wide range of activities, including portfolio management, issue management, underwriting, credit syndication, acceptance credit, counsel on mergers and acquisitions and insurance, etc.

The History of Merchant Bank 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 Jewish, since they had ample fund, could lend to farmers against crops in the field, a high-risk loan. 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 Jewish trader performed both finance (credit) and an underwriting (insurance) functions. He would derive an income from lending the farmer money to develop and manufacture (through seeding, growing, weeding and harvesting) his annual crop (the crop loan at the beginning of the growing season). He would underwrite (insure) the delivery of the crop (through crop or commodity insurance) to the merchant wholesaler who was the ultimate purchaser of the farmers harvest. And he would make arrangements to supply this buyer through alternative sources (the merchant function) of supply (such as grain stores or alternate producer markets), should any particular farming district suffer a seasonal crop failure. He could also keep the farmer (or other commodity producer) in business during a drought or other crop failure, through the issuance of a crop (or commodity) insurance against the hazard of failure of his crop. Thus in his underlying financial function the merchant banker (trader) would ensure the continuous smooth flowing of the commodity (crop, wool, salt; salt-cod, etc.) markets by providing both credit and insurance. This idea of trade finance was, in course of time, introduced to the financial market by the bankers of London in a formal fashion. The only difference is that the merchant bankers are now concerned with financial and Capital Market instruments. In addition to such trade finance, the Merchant Bankers now a day provides Issue Management Services, merger and acquisition services and each day they are thinking of expanding the service horizon of merchant Bank.

Merchant Banking Service in Bangladesh

In Bangladesh Merchant Banking is introduced only a decade ago and until the early 2004 the idea of Merchant Banking was not popular in the country. But the potentials of Merchant Banking system have turned on the switch in the early 2007. It seemed that the organizations realized its profitability and the customer realized the comfort and stability of service of merchant bank all at a time. Suddenly the business of Merchant Bank started to flourish within the financial era of Bangladesh. In Bangladesh Merchant Banks usually provide three distinct services Portfolio Management Services, Issue Management Service and Underwriting Services.

Islam and Merchant Bank Since Merchant Banks are mainly service providers and the major portion of its earning comes as service charges, the system of merchant banking is already Islami Shariah compliant. The only area where the Shariah principle is violated is that Merchant Banks usually provides margin loan facility to their clients. This directly involves interest to the Merchant Banking process. But Islam has the best solutions for both business and banking. Thus, renowned Fakih of different places of the world arrived upon a decision that the shares of different companies actually represent the ownership of a certain portion of a company/organization. Thus shares can be treated as goods/properties and trading of good/properties with the help of banks is completely Shariah Compliant. Eventually it is possible to operate a Shariah based Merchant Bank and trade the Securities in a Capital Market.

Main Operational Area of Merchant Banking Division In our country, Merchant Banks mainly provide the following three services: 1. Issue Management Services 2. Underwriting Services 3. Portfolio Management Services 1. Issue Management Services: Whenever a company floats its shares into the Capital Market, which is known as new issue, the whole procedure of share floating is managed by professional issue managers. Merchant Bank provides this issue management service in the Capital Market. Issue management includes preparing prospectus, corresponding with SEC regarding the IPO, collecting IPO applications, performing allotment through lottery or other measures, managing placements, listing the Company with DSE/CSE and distributing refunds. 2. Underwriting Services: In case of new issue or right issue, Merchant Banks also provide a kind of assurance to that issuer that if the issue is undersubscribed, Merchant Bank will purchase the unsubscribed shares at a predetermined price. This service is known as underwriting service.

3. Portfolio Management Services:

This is the major service area of Merchant Bank in Bangladesh. A portfolio is usually a combination of investment in the Capital Market. Merchant Bank doest have the license to trade shares directly into the Capital Market. Rather it acts as the custodian of shares of the clients, provides them information and helps them constricting a portfolio that minimizes risk and maximizes return. Besides these, Merchant Bank provides its clients loan against their investment, which is popularly known as margin loan, (margin investment in case of Shariah based Merchant Bank). At present the Merchant Banks operative in Bangladesh provide their client margin loan/investment at 1:1.5. That is, if a client invests Tk. 100.00 in the capital market through a Merchant Bank, the Merchant Bank provides the client a loan/investment facility of Tk. 150.00 so that the client can purchase shares worth Tk. 250.00 from the capital market.

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