A merchant bank is a financial institution which is primarily engaged in offering financial services and provides advice to corporations 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 involved in financing industrial corporations through buying shares and selling them in relatively small lots to investors. In the context of Bangladesh, merchant banking includes all financial institutions that combine the functions of both development banking and investment banking.
History of Merchant Banking:
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, defined as lending at interest. 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 the Jews were not subject to the Church.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
Merchant Banking Operations in Bangladesh
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.
Merchant Banking in Bangladesh:
Merchant banks were allowed to operate with the hope of playing a meaningful role in salvaging the country's limping stock market, by generating fresh funds, following the 1996 stock market crash. So far, a total of 31 companies received merchant banking licences from the Securities and Exchange Commission. The registered merchant banks are: Janata Bank Limited, BRAC Bank Limited, City Bank Limited, Premier Bank Limited, Mutual Trust Bank Limited, Industrial Development Leasing Company of Bangladesh Ltd, Uttara Finance and Investment Limited, Banco Trans World...