Importance of Investment Banks in Economic Development of Nigeria

Alt: = "Aerial view picture of Central Bank of Nigeria Headquarters building"
Aerial view of CBN Headquarters building, Abuja
Source: PropertyPro.ng

Investment bank is a  type of bank that acts as an intermediary that undertakes large and complex financial transactions on behalf other companies or government. Such financial transactions include underwriting/ issuing house for securities issuing companies and investors, facilitating merger of 2 competitors, as financial advisory and brokerage. Investment bank also handles pension funds.
Investment banks play important roles in a country's economic development and sustainability.

Functions of Investment Banks

From the functions of investment banks we can understand their importance in economic development of any developing country like Nigeria. The functions of investment banks are fundamental in Nigeria economic growth.

Financing

Investment banks act as financial intermediary, that assist their clients in raising funds through initial public offers (IPOs) and FPOs or private placements. First of all, they help clients raise funds through placement of bonds and stocks. As noted above, this includes raising capital through an initial public offering (IPO), private placement or other means on behalf of clients. Investment banks generate revenue through consulting fees. Clients turn to investment banks for assistance in raising capital.

Underwriting

An Investment bank provides its clients with securities underwriting and related brokerage services. When an investment bank acquires a stock or debt instrument, the investment bank guarantees to the customer that the investor will purchase the issuance of new shares. Investment banks act as intermediaries between customers and investors.

Sales and Trading

These sales and trading activities of Investment Bank are very different. Investment banks are involved in the sale of securities on the secondary market. Investment banks are a bridge between large corporations and investors. Their primary role is to advise businesses and governments on how to solve their financial problems and help them raise funds through equity offerings, bond issuance or derivatives.

Risk Management

Risk management is an continuous process that includes the analysis of market risk and credit risk that an investment bank or its clients take to their balance sheets during a transaction or transaction. This helps to set limits on the amount of capital that can be traded to prevent the negative effects of bad trades. Credit risk focuses on capital market activity and market risk analyzes sales and trading activity.

Mergers and Acquisitions

Investment banks advise clients on mergers and acquisitions. Investment banks create a variety of mergers and acquisitions models. Investment bankers perform profit or dilution analysis to analyze a company. The bank also confirms the synergy analysis. Investment banks have a separate M&A department that functions within the corporate finance department. The main function of this department is to conduct marketing research and identify companies with surplus funds so that they can purchase other companies willing to sell their business for a variety of reasons. Investment banks around the world are now adopting a new tactic that provides a package to finance the entire merger process.

Research Services

Investment banks provide their clients with research services, including advice on securities trading, financial statement analysis, financial forecasting, and modeling. Investment banks not only provide equity research services, but also provide fixed income research, financial research, economic research and analytical support across a variety of asset classes, markets and customer segments. Most banks have a staff of research analysts who study economic trends and news, individual stocks and industry events, advising institutional clients and internal groups investing in prosperity.

Read also: Permissible and Non-permissible Activities of Merchant and Investment Banks in Nigeria

Importance of Investment Banks in Nigeria’s Economic Development

Going by the functions of investment banks, investment banks provide valuable services to Nigeria’s economy. Investment banks are important agents of capital accumulation and pricing. Governments and large corporations rely on investment banks for financing. Investment banks are considered intermediaries or middlemen because they add liquidity to the market. Matching manufacturers and investors makes your financial development more efficient and your business grows faster. Investment banks work with commercial banks to help determine market interest rates. Market interest rates determine how profitable it is to save and how much it will cost to borrow. A sound financial system is essential to the development of Nigeria. Some of the important roles of investment banks in Nigeria’s economic development are as follows:

Capital Funding and Industry Promotion

Capital is one of the most important aspects of any business or industry. This is the lifeline of  business. Investment banks are closing the capital gap by promoting savings and investment. Mobilize the community's small, fragmented savings to invest in manufacturing businesses

GDP Growth and Investment

Investment Banking has been making direct and indirect investments in Nigeria's economic development for many years. Finances mobilized by investment banks and injected in to the Nigerian economy over the years have facilitated the country’s gross domestic products (GDP). Investment banks through their various activities facilitate both domestic and foreign investments.

Infrastructure development

 The government requires funding to carry out the country's infrastructure development projects.. Investment banks can generate funds for infrastructure development projects undertaken by governments that contribute to economic development.

Advances in Technology

 In today's digital age, technology plays an important role. New technologies are always used in investment banking. All major investment banks have a fair amount of internal software built by technical experts responsible for technical support. Technology has changed significantly over the past few years as more sales and retail departments follow e-commerce.

Job Creation

Job creation is very important in Nigeria as unemployment rate in Nigeria is currently very high. Investment banks can play an important role in job creation. As the number of investment banks increases along with the size of their business, this creates employment opportunities in the country. More jobs are created by raising capital for various industries. Growth in the investment sector creates more jobs, contributing to the overall development of the country. Development of critical states and national infrastructures also creates job directly and indirectly. 

The role of investment banks in economic development

  •  When a company goes public, an investment bank acts as an intermediary, directly buying all or most of the company's stock and then selling the stock on the open market to create immediate liquidity.
  •  Advise businesses and governments on how to solve their financial problems and  help raise funds through public offerings, bond issuance or derivatives.
  •  Investment Banks use a variety of financial models to help  determine how to value these instruments.
  • Investment banks act as middlemen between a company that wants to issue new securities and the public who buy the securities.
  •  Investment banks like JP Morgan and Goldman Sachs manage huge portfolios for pension funds foundation and insurance companies through their management department. Their financial experts assist in selecting the right mix of stocks, debt instruments, and real estate to achieve their clients’ unique goals.
  • Foreign currency revenue plays an important role for a country. It reflects the country’s overall financial strength. Investment banking plays indirectly in the foreign currency revenue as they help to enhance export through their investment activities.

Conclusion

 The role of investment banks in the economic development is to remove the deficiency of capital by stimulating savings and investment. A sound banking system mobilizes the small and scattered savings of the community and makes them available for investment in productive companies. Investment Banking helps individuals or organisations raise capital and provide financial consultancy services to them. Investment banking is the most complex financial mechanisms in the world. Banks are critical agents of capital formation and price setting. Investment banks influences the rate of economic growth because it is a component of aggregate demand and more importantly influences the productive capacity of the economy. From the analysis of the various functions performed by the investment banks as well as their roles in the economic development clearly proves that the role of investment banks in the economic development of Nigeria is significant. It may interest you to know some of the top investment banks operating in the Nigerian economy.

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