Scope of Investment Banking:

In the Bangladesh context, financial institutions that carry out some distinct activities are being
addressed as merchant banks. The core functions of merchant banks in Bangladesh include issue
management, underwriting and Portfolio management services. The securities and exchange
commission, based on SRO No 59 of 24 April 1996, and a decision taken by it on 17 August 1997,
invited letters of intent from 14 institutions for registration of merchant banks. Presently, a total of
50 merchant banks are operating in the country, and their aggregate paid-up capital amounts to
about Tk 36 billion. Among them 43 are full-fledged merchant banks. Merchant banks in
Bangladesh are actively governed by the Securities and Exchange Commission (SEC) and
submissively by the Bangladesh Bank. Investment banks act as intermediaries between issuers and
investors. The issuer sells securities to investment bankers who in turn sell the securities to
investors. The investment banks own the securities until they are resold. For firms seeking to raise
long-term funds, investment banks in Bangladesh provide assistance through a number of
functions that involves.

Issue Management function of merchant Banking helps capital market to increase the supply of
securities and companies to raise money from the market in order to expand their operations. A
Issue Manager provides assistance when a Private Limited Company intended to be converted into
Public Limited Company by way of obtaining necessary permission from the relevant authorities,
preparing prospectus for public issue of shares and money, inspection of applications, arranging
for lottery relating to allotment and so forth. The other important function of Merchant Bank is
underwriting operation. It is an arrangement whereby the underwriter undertakes to subscribe the
unsubscribed portion of shares/debentures offered by any Public Limited Company. This
encourages the prospective issuers to offer shares/debentures to the public for subscription and
they can raise fund from the public for implementation of their industrial undertakings.
Underwriters take on the risk of distributing the securities. If they fail to find enough investors,
they will have to hold some securities themselves. Underwriters make their income from the price
difference between the price they pay the issuer and what they collect from investors or from
broker-dealers who buy portions of the offering.

A prime function of Merchant Banks is providing portfolio management services. Management of

a portfolio is the process of selecting asset classes and their weights in the portfolio, maintaining
diversification, executing trades, keeping records, researching, borrowing for leveraging return
etc. This process is quite dynamic and requires instant adjustments when the market patterns shift
to new directions. Merchant banks also performs other important services, like- Corporate
Advisory.

In Bangladesh a Merchant bank is said to be a full-fledged merchant bank that performs all the
aforementioned activities covering Issue Management, Underwriting, and Portfolio Management
and providing Corporate Advisory Services. BRAC EPL Investments Limited is one of the full-
fledged merchant Banks of Bangladesh that delivers a whole range of Investment Banking services
including traditional merchant banking activities such as Issue Management, Corporate Advisory,
Corporate Finance, Underwriting and Portfolio Management. IDLC Finance is another leading
full-fledged merchant Bank of Bangladesh commencing its Merchant Banking operations backs in
1999.

One of the major investment banks in Bangladesh, the Investment Corporation of Bangladesh
(ICB), plays a leading role in developing the capital market in the country. Major functions of ICB
include Merchant Banking operations and operations of unit funds and mutual fund. They are
contributing a lot for the development of investment banks in BD. But still, the investment bank
industry of Bangladesh is not that much developed like the same industry of other developing
countries. Why our industry is less developed or under-performing than the investment bank
industry of other underdeveloped-developing countries, whom we should follow to develop our
own industry & future prospects of our investment bank industry will be discussed later.

Investment Banking in Other Developing Countries versus

Investment Banking in Bangladesh:
There are many developing countries who have investment banks. Bangladesh being a developing
country, has a lot of investment banks but almost none or very few of them are full-fledged. Most
of them are either merchant banks or branch of Non-bank financial institutions or advisory
institutions. We badly are in need of pure investment banks.
Pakistan being one of our neighboring countries, and being close to us on economic performance,
has almost 8 full-fledged investment banks currently. There are many commercial & specialized
banks in Pakistan like- ABN AMRO, Askari Bank Ltd, Bank AL Habib Ltd., Bank Alfalah, Bank
of Tokyo-Mitsubishi Ltd., BMA Capital Management Limited, Citibank, Emirates Bank etc. who
have their investment banking branches all over the country. But there are 8 banks currently in
Pakistan who are completely investment banks (only perform investment banking activities), these
are,

Domestic:

1) Al Towfeek Investment Bank Ltd

2) Ammar Investment Bank Ltd

3) AMZ Securities

4) Atlas Investment Bank Ltd

5) Jehangir Siddique Investment Ltd.

Foreign:

6) Deutsche bank

7) Escorts Investment Bank Ltd

8) Fidelity Investment Bank Ltd

The stock market of Pakistan is better than that of Bangladesh. Pakistan Stock Exchange (PSX)
has a total market capitalization of 72 billion USD, whereas Dhaka Stock Exchange (DSE) has
47.34 billion USD. In the following graph we can see the growth of the number of full-fledged
investment banks year to year with the growth of stock market (Market Cap & Number of stock)
in Pakistan.
 Relation between Stock Market Growth & Investment Bank
Growth in Pakistan
80

70

60

50

40

30

20

10

0
1990 2000 2010 2019

Market Cap (In Billion) No of Stocks (In decimals) No of Investment Banks

From here we can understand that how much the capital market can influence the growth of full-
fledged investment banks. We can see here year to year Pakistani stock exchange’s “market cap”
& “no of stock enlisted” increased & with that “the number of investment banks” also kept
increasing. So growth & expansion of capital market highly impacts the growth of investment
banking.

This is one of the major reasons why we don’t have a minimum number of full-fledged investment
bank in our country, as our stock market is not that much developed one, efficient one, organized
one or focused one.

Obstacles towards the development full-fledged investment banks in Bangladesh:

1) Ineffective Capital Market:
The most vital reason is that our capital market or stock market is very inefficient,
unorganized, narrow and vulnerable. More company participation is necessary in stock
exchange, or public limited companies are necessary. When the stock market of a country
is inefficient, the investment banking cannot develop in that country.
2) Reluctance of the corporations to go for IPOs:
The Bangladeshi corporations are more depended on the money market, financial
institutions for financing rather than capital market. They reluctant towards publicly
issuing securities. There are many reasons for that, like ease in money market financing,
ease in private financing than public, complicacy of public issue, creation of liability to the
public, ease in defaulting loans on money market, reluctance to share internal information
publicly etc. So as the corporations has reluctance towards IPO, the investment banks,
whose main purpose is underwriting securities, are not developing to the expectation.
3) Bad Influence of the Underwriter Syndicates:
Bangladesh Stock Market does not follow a logical pattern. The prices of the stock, market
index is highly influenced by the underwriter syndicates. It’s a union of personal
underwriters, who creating fake or excess demand & supply pressure in the market can
highly influence the stock price. Due to their influence, autonomy the investment banking
cannot develop a lot.
4) Lack of the Development of Venture Capital Investment:
Unlike developed countries or many other developing countries, Bangladesh does not have
many venture capital fund available. Even in Pakistan, their investment banks are
performing venture capital in big scale where-as in Bangladesh a few institution introduced
it in a small scale. Venture capital is a vital part of investment bank, without development
of venture capital industry, the investment banking can also not flourish a lot in an
economy.

5) Lack of a Developed Derivative market:

Bangladesh Capital Market is very vulnerable. We already faced two big crashes of capital
markets in the last two decades. This crashes are not very usual in other developed
countries. We know that derivative market is very sensitive. The stock market of
 Bangladesh is not yet ready to welcome derivatives, as it is very vulnerable. In addition to
that, the stock market experts in Bangladesh are not yet that expert on derivatives.
Derivatives is a significant tool played by investment banks. Lack of development of
derivative market can also be termed as another reason of weak industry in Bangladesh.
6) Lack of Emphasis on the Capital Market Research:
Bangladesh Government, Finance Ministry, Corporations, Brokers and Investors no one is
at all interested on the research of capital market in Bangladesh. When a company goes for
IPO they do not look for very expert research rather they focus on their initial stock price
to be placed properly & subscription of their stocks. So need for expert investment banks
are not that much available in Bangladesh. Because investment bank is very good at doing
capital market research, emphasis of capital market research can develop the need for
expert investment banks.

These are few reasons why, Bangladesh is lagging behind the other developing countries in case
of investment banking. Mitigation of these issues can thrive the development of investment
banking in our country.

Annex: Table-1.1

Market Cap (in billion No of Stocks Enlisted No of Full-fledged

USD) Investment Banks
1990 38 310 0
2000 51 320 2
2010 67 490 5
2019 72 545 8
References:

1) Pakistan Stock Exchange(PSX) https://www.psx.com.pk/https://www.psx.com.pk/

2) Wall street Prep https://www.wallstreetprep.com
3) Global Banking & Finance https://www.globalbankingandfinance.com
4) Wikipedia https://www.wikipedia.org/