|images courtesy ventures-africa.com
Before the 2005 banking consolidations in Nigeria, there were more than a hundred banking institutions. These banks offered or claimed to offer different services to different client bases. Some were basically merchants making profits from supporting enterprises. Others were deposit holding institutions, while a few ‘less fashionable’ ones were community banks. There were agricultural banks too. But in reality, many of these banks were distinctions without any difference to the the banking public.After the 2005 banking consolidations, which resulted in the merger of many of these banks, they simply became ‘jacks of all trade’, managing to master all. There were mega banks into mega businesses. The slogan seemed to be ‘anything the customer wanted’. The merchant banks were gone. To some, this was a most pragmatic approach, but not to the regulator. This didn’t go down well with the Central Bank of Nigeria (“CBN“), as it felt this had led to banking (or better put, financial services) conglomerates who simply didn’t have the capacity to effectively govern such huge structures.
Then came the sweeping reforms in 2008, piloted by then CBN Governor Sanusi Lamido Sanusi. The CBN introduced several measures to halt the near failing (if not, failure) of several banks. One of such measures was abolishing universal banking in Nigeria. Banks could no longer (at least in theory) be ‘masters of all’. The 24 banks that existed at this time were essentially deposit money banks. Their territorial reach was also streamlined in accordance with their capital base.
|image courtesy fsdhgroup.com
However, it was recently announced that Kakawa Discount House had applied for a merchant banking licence in 2014 and its application was granted in principle sometime in December 2014. This was not the first of such moves. In fact, in 2012 and 2013, Rand Merchant Bank and FSDH (now FSDH Merchant Bank) had obtained licences from the CBN to transform their existing businesses into merchant banks.
These moves have now brought back the once non-existent merchant banks into the financial services space in Nigeria. No doubt, merchant banks play a vital role in the financial services sector of many economies the world over. Apart from their broad range of advisory and investment-related services, merchant banks provide much needed corporate finance majorly in form of equity stakes and subordinated facilities for companies and trade finance.
They are private equity investors. According to Valentine Craig of the United States Federal Deposit Insurance Corporation “merchant banking is generally understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies”.
Merchant banks first arose in the Italian states in the Middle Ages, when Italian merchant houses (generally small, family-owned, import-export, and commodity-trading businesses) began to use their excess capital to finance foreign trade in return for a share of the profits. This trade generally consisted of lengthy sea voyages. Thus, the investments were very high risk: war, bad weather, and piracy were constant threats, and by their nature the voyages were long-term and illiquid.
However these days merchant banks tend to focus more on corporate investments, corporate loans, portfolio management, credit syndication, bond financing, and merger and acquisitions advisory to even real estate investment as well as trade finance.
The ‘second coming’, as it were, of merchant banks will no doubt open opportunities for increased investments and trade facilitation- roles that have been hitherto left to only commercial banks.
In 2010, in exercising its statutory mandates under the Central Bank of Nigeria Act of 2007and the Banks and other Financial Institutions Act, the CBN issued the Scope, Conditions & Minimum Standards for Merchant Banks Regulations 2010 (the Regulation) to regulate merchant banks and provide for the terms and conditions under which merchant-banking licences will be issued. Under this Regulation, merchant banks are required to have a minimum paid-up share capital (minimum capital base) of N15 billion and not allowed to accept cash deposits except they are beyond N100 million. They are allowed to engage in foreign exchange services, act as issuing houses, act as underwriters, provide financial advisory services, asset management services, custodial services and debt factoring services.
No doubt the lure of this specialized kind of banking will be attractive to many of the existing issues and discount houses and even commercial banks to vie into or establish new entities to engage in merchant banking. This apparently has the potential of opening new opportunities for them and exposing them to new customers. Of course on the regulatory side of things, it calls for more attention from the CBN to ensure merchant banks operate within their licences and stay within the required cash reserve and liquidity ratios that would ensure a sustainable and sound merchant banking system.
With the rise of merchant banks in the financial services sector in Nigeria, there is a new enthusiasm that the sector will continue to expand. This expansion will provide more opportunities for the capitalist who possess an understanding of what it takes to benefit from such expansion and opportunities.
Because merchant banks play the role of investment banks and perform on the international level, its rise is bound to expand the Nigerian market. So while merchant banks assist in raising funds for big multi-national companies and assist in transactions across national borders, they will be creating huge opportunities for real growth.
With the award of merchant-banking licences to three institutions (FirstRand, FSDH and Kakawa Discount House), the coast is apparently clear for merchant banks to sail in the Nigeria’s financial ‘waters’.
One thing is clear, relevant statutes and regulations give CBN ample regulatory powers to effectively ‘regulate’ and ‘mid-wife’ the growth of the merchant banking space in this country. There is no shortage of legal backing for CBN set the tone for merchant-banking activities. This places huge expectations on CBN to ensure that the rise of these institutions leads to the potent opportunities we all crave.
|image courtesy gopixpic.com
 Section 2(d) of the CBN Act provides for the promotion of a sound financial system in Nigeria as one of the principal objects of the CBN.
 Section 1 and 2 of the Banks and Other Financial Institutions Act Cap B4 LFN 2004.
 Section 3 of the Regulation.