The banks are basically classified in to three: the Central Banks, trade banks (deposit money banks, also known as commercial banks), development banks, and investment or merchant banks. The Central Bank is the government-owned bank with core responsibilities of controlling monetary supply, to ensure price stability in the economy, and to spur economic growth of a country. The Central Bank has supervisory and controlling powers over other banks. This is why it’s called “bank of banks.” Investment and Development Banks functions in parallel towards the objectives of the central bank.
The Word Bank quite agrees that investment banks and development banks are often closely related in many countries especially in developing countries.
Development banks most times play important roles in promoting investment banking, especially in countries with weak securities markets. Nevertheless, the two classes of banking are distinctively different in their businesses.
Difference between Investment Banking and Development Banking
Investment Banking
Investment bank is a type of bank that acts as an intermediary that undertakes large and complex financial transactions on behalf of 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 are established by private investors.
Development Bank
A development bank is a bank specifically established with the purpose of providing long-term financing for various development projects, which help to accelerate economic development of a country or region.
Development bank can operate either regionally or nationally. Development banks are owned by governments or jointly owned by governments and private investors.
Regional development bank provides loans and grants to developing countries in order to promote economic and social development. Examples are the African Development Bank (AfDB), Asian Development Bank (ADB).
Development banks provide medium and long-term loans to prospective investors in the areas of agriculture, industry and commerce. Most developmental projects require long-term loans. Since commercial banks usually provide only short-term capital, the development banks fill the gap by providing medium- and long-term capital to entrepreneurs to finance their enterprises. For instance, the Nigerian Bank of Industry provides finance for industries, while Bank of Agriculture provides credits for agricultural projects.
They make direct investments in various sectors of the economy, thereby contributing directly to economic development. They usually have joint enterprises with private investors in the areas of agriculture, industry and housing.
Development banks offer technical and financial advice to potential investors in various sectors of the economy. They have experts in various fields of business. They can therefore advise investors on how best to carry out their business operations.
Development banks conduct studies on the economy. They usually carry out detailed studies of the economy to be able to identify impediments to economic growth in the areas of operations and to provide solutions to such challenges. Priority projects of the government are identified and embarked on. They are sometimes given mandates to embark upon such projects by the government.
Read also: Development Banks in Nigeria and Their Functions
Conclusion
Investment banking is primarily concerned with designing and underwriting new securities, and selling them to investors. It requires an innovative, market-based approach. While, development banking focuses on making long-term loans; it requires a different mentality, one concerned with analyzing long-term creditworthiness. Investment banking is a trading business; the other an asset-accumulation business. Both investment banking and development banking play important roles in developing a country's financial markets, but their areas of concerns together with problems and opportunities differ.
Read also: Similarities between Commercial Banks and Investment Banks