Merchant banks are financial institutions which perform specialised functions, such as acceptance of bills of exchange, issuance of loans for foreign trade transactions, issuance of new shares, and provision of medium and long-term loans. They are sometimes referred to as acceptance houses. In the past, merchant banks were merchants who specialised in trade with particular parts of the world.
The first merchant bank in Nigeria was the Nigerian Acceptance Limited (NAL) established in 1966. There are many merchant banks in Nigeria today. These include: ABC Merchant Bank, Merchant Banking Corporation, Merchant Bank of Africa, First City Merchant Bank, Intercontinental Merchant Bank and Ivory Merchant Bank, but they no longer exist now as a result of reforms in the banking sector of the country’s economy.
Functions of merchant banks
- Discounting bill of exchange: Merchant banks accept and discount bill of exchange.
- Loan to foreign traders: Merchant banks arrange loans at the request of foreign traders.
- Advisers to companies: They act as company advisers by way of telling them possible areas to invest.
- Underwriting of shares: They underwrite new issues of shares.
- Provision of long-term loan: They issue long-term loan to the government and companies abroad for development projects.
- Trust management: Merchant banks act as unit trust management.
- Management of merger bid: They manage take over and merger bids.
- Loan syndication: Merchant banks undertake loan syndication by organising a consortium of institutions to finance business enterprise.
- Provision of corporate management services: They provide services such as investment management, advice and guidance on the management of investment portfolios.
- Acceptance of large deposit: Merchant banks accept large deposits from big time customers.
- Equipment leasing: They assist companies wishing to lease their equipment.
Differences Between Merchant Banks and Commercial Banks
- Provide short-term loan.
- Render personal services such as keeping of jewellery and wills.
- Do not carry out equipment leasing.
- Accept deposits from all categories of people.
- Provide medium and long-term loan.
- Render corporate financial services, e.g. management of investment portfolios.
- Undertake equipment leasing.
- Accept only large deposits.