ELEMENTS OF BANKING/MERCHANT BANKING SYSTEM

1.0 INTRODUCTION

Merchant banking occupied a very important position in the banking system of many economies of the world. It is a bridge between the traditional financial services rendered by the commercial banks and the development banks. The merchant banking system is designed to provide mainly medium-term funds and if ever, long-term to the economy.
The origin of this banking system could be traced to the activities of merchants in the 18th Century England. Ugwuanyi (1991: 182) gave an insight into the activities of these merchants in England thus: "these merchants, who were large and well established traders, sometimes were able to grant trade credit and financial services to their customers by accepting bills of exchange drawn by, or on their customers". He added that for this service of agreeing to be paid in future, or for using his name the merchants receive some money (discounting). This dual role of the merchants selling of goods and offering of special financial services, with time metamorphosed to a special type of banking that is known today as merchant banking.

Ezeuduji (2000: a) reinforced the above views when he added that the activities of immigrant merchants in 13ritain in the eighteenth century
led to the growth of merchant banks. The merchants were considered so reliable that their acceptance of bills of exchange added value to them. He contended that their expertise was beyond the business of acceptance of credit and including long-term finance for projects abroad. These activities were subsequently expanded and formalized into merchant banking business. In essence, merchant banking spans over 200 years.

2.0 OBJECTIVES

At the end of this unit, you shall be able to:

1.  Define Merchant Bank 
2. Discuss Organizational Structure of Merchant Banks 
3. List the Functions of Merchant Banks 
4. State the Sources of Funds to Merchant Banks 

3.0 MAIN CONTENT

3.1 Meaning and Definition of a Merchant Bank

Generally, merchant banks are designed to provide medium to long-term finances to the economy. They are not actually structured to provide short- term finances considered a primary function of the commercial banks whose liabilities are characteristically short-term in nature. The Banking Amendment Act 1979, defined "a merchant bank as any person in Nigeria, who is engaged in wholesale, banking, medium and long-term financing, equipment leasing, debt factoring, investment management, issue and acceptance of bills and management of unit Trusts".

3.2 Organizational Structure of Merchant Banks

The Merchant banking system was fashioned after the unit banking system of the American Commercial Banking System. The Merchant Banks run unit banking system that does not permit the opening of branches outside the head office.
A merchant best is run by a team of management that is responsible to the Board of Directors. The Managing Director oversees the day-to-day activities of the bank which includes the supervision of the key functional departments such as: Banking, Portfolio Management,
Operations, Treasury and Corporate Finance Services.

Self assessment exercise

Discuss Organizational Structure of Merchant Banks

3.3 Functions of Merchant Banks

The functions of merchant banks may be grouped into five as follows:

1.  Portfolio Management Function Merchant: banks do undertake to manage the portfolio of investments of some investors at a fee for such services. 
2. Banking Function :The Banking function include i) Mobilization of deposits from both the private and public sectors of the economy. ii) Granting of loans/advances to individuals, corporate bodies and the government. iii) Equipment leasing. This involves the purchasing and leasing of equipment for rental fees to the bank. iv) Loan Syndication (Consortium lending) Loan syndication involves the coming together of banks or group of banks to provide credit to a customer. Syndication arises if the project to be funded is risky for a single bank, amount involved is enormous, there is need for loan portfolio diversification and the amount required exceeds the legal lending limit of one bank. 
3.  Corporate Finance Services:The corporate services include acting as issuing house to issuers,  assisting in private placement, stockbrokerage services, investment and advisory services. 
4. Treasury Services :The merchant banks do invest in money market instruments such Treasury Bills, Treasury Certificates, etc. They also issue short-term instruments such as certificates of deposits commercial papers etc. 
5. Operation's Services :This includes the remittance and receipt of funds for their customers at both local and international levels. Merchant banks also open letters of credit and accept bills on behalf of their customers in favour of foreign creditors and issued by the creditors respectively. 

3.4 Sources of Funds to Merchant Banks

The main sources of funds to merchant banks include: 

i. Share Capital
Funds are raised through the issuance of shares subscribed to by the individuals, bodies corporate and governments.
ii. Statutory Reserve
The funds statutorily required to be, transferred from profit to reserve account is available for use 'by the banks.
iii. Interest arising from credit facilities and other charges
The cost of funds provided to borrowers as well as various charges for services rendered form part of merchant banks' funds.
iv. Retained Profit
This is the percentage of net profit retained for future expansion. Retained profit remains part of shareholders equity.
v. Debentures Merchant banks raise money through the issuance of debentures.
vi. Mobilized Deposits The huge deposits mobilized from the economy forms part of merchant banks funds.
vi. Borrowing Merchant banks may borrow money from lending institutions including the Central Bank of Nigeria.

Self assessment exercise

Define and explain Merchant Bank.

4.0 CONCLUSION

It is the conclusion in this unit that Merchant banking occupied a very important position in the banking system of many economies of the world. It is a bridge between the traditional financial services rendered by the commercial banks and the development banks. It is designed to provide mainly medium-term funds and if ever, long-term to the economy.

5.0 SUMMARY

In summary, you learnt of the, Meaning and Definition of a Merchant Bank, Organizational Structure of Merchant Banks Functions of Merchant Banks and Sources of Funds to Merchant Banks.