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`s 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.