Merchant Banking and Functions Performed by Merchant Banks

Merchant banks are considered as the original banking institutes that came into being during the Middle Ages. With the evolution of economic terms and practices, merchant banking services were differentiated from those of an ordinary bank. Today, merchant banks are regarded as the banks of corporate house and organizations.

Ordinary banks provide services to common people as well as organizations, but merchant banking serve a number of needs and requirements of organizations and businesses. The fact that merchant banks are the wholesale banks specifies the use of these banks for some important purposes.

It was hundreds of years ago that the Jews introduced the concept of merchant banking in Italy. The two important functions they would perform included providing credit and underwriting. They provided credit to the farmers in the beginning of the crop growing season so that the latter could grow crops. Underwriting was done in the form of crop insurance that guaranteed the delivery of crops to the buyer. The modern day merchant banking services include these two, along with many other major functions.

Stock underwriting is counted among the most important functions of merchant banking. Utilizing this facility, big enterprises hire the merchant banking services to raise capital from the stock market. A merchant bank would decide the amount and price of the stock, along with the time at which the stock would be issued.

Providing long-term loans is another important function of merchant banks. Ordinary banks issue loan to small businesses and individuals, but they are not capable of handling the long-term loan needs of big enterprises. A merchant bank performs this task and arrange for loans that help an enterprise to start a big project. Merchant banks differentiate themselves from other banks by investing their own capital in the companies of their clients. Apart from enterprises and multinational corporations, these banks also provide loans to government bodies.

Portfolio services too are among the important merchant banking services. These services are fee based and are provided to the corporations regarding business mergers and acquisitions, project counseling and study of an investment vehicle. Corporations, in order to understand the pros and cons and profits and losses associated with these situations, prefer to take advantage of the knowledge and experience of the merchant banks.

Issue management, through which a merchant bank assists the capital market to raise the number of securities, is another important function of these banks. Some of the other merchant banking functions include credit syndication, working capital financing, foreign currency financing, lease financing and so on. It is clear that corporations and enterprises in an economy need these services to survive.

Some of the merchant banks set up in the beginning exist till date. Some of them include names like Schroders and Warburgs. Merchant banks are popular with the name of investment banks in the United States. Though, the actual investment banks differ from merchant banks in the way they offer credit to the clients. In the United Kingdom, these banks are known as houses for accepting and issuing.