27 January 2014

Nigeria: The Return of Merchant Banking

The re-entry of merchant banks into the Nigerian financial landscape raises hope for corporate and trade financing.

Merchant banking is again making the news. Not less than three merchant banks have got their licences from the Central Bank of Nigeria, including Rand Merchant Bank and First Discount Merchant, as well as new entrant which got its licence recently. Traditional merchant banks primarily perform international financing activities such as foreign corporate investing, foreign real estate investment, trade finance and international transaction facilitation. Some of the activities that a pure merchant bank is involved in may include issuing letters of credit, transferring funds internationally, trade consulting and co-investment in projects involving trade of one form or another.

Known as "accepting and issuing houses" in the UK and "investment banks" in the U.S., modern merchant banks offer a wide range of activities, including issue management, portfolio management, credit syndication, acceptance credit, counsel on mergers and acquisitions, insurance, etc.

Of these two classes of merchant banks, the U.S. variant initiates loans and then sells them to investors. Even though some of these companies call themselves "merchant banks," they have few, if any, of the characteristics of former merchant banks.

The CBN introduced modified licensing rules for lenders as part of reforms after a debt crisis in 2009 brought the industry to the verge of collapse. Banks are either licensed as holding companies operating local and international units or as national, regional or specialized banks. First Securities Discount House Ltd., based in Lagos, indeed received a merchant-banking license in November, bringing to two the number of such permits given by the central bank. The other is Rand Merchant Bank. Joining the ranks is another investment house which has recently got its own merchant banking licence. The new licences, according to observers, will enable the operators to rapidly build their franchises and provide products and services to the corporate and institutional client segments of the economy. For most analysts, the second coming of merchant banks will further open commerce and international trade for institutions desirable to play in that sector. The current economic growth, coupled with support from government, it is believed that the time is now for merchant banking to thrive with their specialist offerings.

The first merchant bank in Nigeria was Phillip Hill (Nig) Limited which started operations in Nigeria in 1960. In July 1969, it merged its activities with that of Nigerian Acceptances Limited to become the only merchant bank in Nigeria until 1973, when a license to carry out merchant banking business was issued to UDT Bank (Nig) Limited later restructured and named Nigerian Merchant Bank Limited. 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.

Thereafter many merchant banks were established, bringing their tot 35 in the 90's. Some of the notable names include NAL Merchant Bank, Afribank International Bank, Centre-Point Merchant Bank, Devcom merchant Bank, FBN (Merchant Bankers), and Stanbic Merchant Bank.

Others include Pacific merchant Bank, Merchant Banking Corporation, Triumph Merchant Bank, Victory Merchant, Great Merchant Bank, and so on.

However, in 1997, most of the banks were liquidated by the Nigeria Deposit Insurance Corporation as they were largely distressed due to unfavorable economic situation accentuated by the then military government of General Abacha been shut out by the international community.

The economic importance of merchant banking can be gleaned from their service offerings, which include the following: Buying Debt Some merchant banking activity involves buying debt, either from other banks or businesses. A bank that engages in merchant banking purchases debt securities, which represent outstanding debts to consumers such as home buyers, car buyers and small businesses. Merchant banking allows one institution to purchase the debt from the bank that issued the loan, allowing that bank to make new loans and letting the purchasing institution profit from the interest that the borrowers pay, or suffer losses if borrowers default.

Making Loans Merchant banks also make loans directly to businesses and wealthy individuals. These are usually large, long-term loans that would be unavailable elsewhere. They feature complex terms and allow borrowers to fund major investments or expansion projects. For example, if a large business wishes to expand overseas, it may work with a merchant bank to fund the endeavour, paying back the money it borrows over a number of decades with new international revenue. Because of the risk involved in merchant bank loans, banks become heavily involved in the process. > Managing Risk Another major role of merchant banks is managing risk for customers. Merchant banks have access to many different markets, including securities markets and brokers that individuals and businesses would not otherwise have access to. The scale of their investment power allows merchant banks to distribute their investments widely, reducing the amount of risk that the investors they represent need to take on.

Driving Markets As a direct result of their investing to manage risk and create wealth for their customers, merchant banks drive markets. The money they invest in private equity securities, stocks and bonds alters the prices of these financial instruments and affects what other investors must pay for them. Likewise, when merchant banks experience crisis, as during the 2008-2009 recession, the falling value of their securities causes markets to fall.

The lure of this specialized banking is huge as the many discount and investment houses may well seize the opportunity of increased trade between the country and her counter parties to join in the fray.

It is being projected that about 8 merchant banks will emerge by the end of the year.

Copyright © 2014 This Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 2,000 reports a day from more than 130 news organizations and over 200 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.