INVESTMENT BANKING IN NIGERIAN AND ECONOMIC DEVELOPMENT
The aim of the study is to determine the effect of Investment banking in Nigerian economic development.
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CHAPTER ONE: INTRODUCTION
1.1 Background to the study
Investment banking has a long history dating back to 1792 as a result of the historic Buttonwood agreement. There is no universally accepted definition of investment banking. In the United States, the Glass-Stegall Act of 1993 imposed a legal definition of investment banking for the purposes of strict legal separation between investment banking and commercial banking.
Subsequently, in 1999 the Glass-Stegall Act of 1993 was amended given way to a universal banking system. In the US investment banks are closely related and intertwined with services pertaining to capital market activities and that was the Nigerian economy emulates. Therefore, investment banking is seen as a class of financial institution that specializes in capital market activities. These activities of investment banks are classic classified services, transaction banking; advisory activities (such as Mergers & Acquisition, Private Equity and in structured finance, etc.); brokerage and; custodian services; trading and sales on the secondary market of a broad class of assets and financial market instruments (e.g. equity, bonds, foreign exchange, commodities, etc. as well as derivatives and structured
Products) on behalf of clients as well as on the bank’s own account; services connected to that such as research and strategy.
According to Dr. Omojefe (2009), investment banks are banks that carry on the underwriting and initial public offering, loan syndication, private equity, mergers and acquisition, and consolidation, and other stock market activities.
Investment banking is a crucial part of financial market development studies in any economy. The reason is that investment banks injunct and sourced in an economy is normally very huge. So, this huge chunk of finance that flows through them can create a great impact on an economy.
Financial market studies in most finance literature have found a positive correlate with the development of the economy in the same vein it is expected that investment banking which is a part of the financial market with impact positively and significantly in the Nigerian economy.
As far as the author is concerned, and from the detailed search conducted no research has been carried out on the impact of investment banks on economic growth and development in Nigeria. This, therefore, leaves a wide knowledge gap that this study seeks to establish.
According to Hartmann‐Wendels et al. (2010), investment banking is defined as a set of “all functions of a bank, which support trading at financial markets”. Subramanyam (2005) defines investment banking to include private placement, initial public offering, stock trading, marketing making, underwriting, broking, asset management, project advisory, business, and financial advisory and mergers and acquisitions. Iannotta (2010) puts the main functions of investment banks in three categories – core or traditional services (advisory and underwriting services), trading and brokerage, and asset management. Investment banks either assist surplus units to invest their surplus funds or deficit units to raise the needed funds for their business activities. Investment banks do not have an inventory of cash deposits to lend as commercial banks do. In essence, an investment bank amongst other things acts as an intermediary and matches sellers of stocks and bonds with buyers of stocks and bonds.
The common opinion in the literature is that investment banking comprises all services which serve financial allocation opportunities, as long as they are provided via securities transactions. Broadly speaking, investment banks assist “the capital market in its function of capital intermediation” (Subramanyam, 2008). The emergence of financial intermediaries is owed to the market imperfections inherent in financial markets. They act as intermediaries between providers and users of financial capital to overcome these imperfections. A common function of investment banks as well as commercial banks is that they act as financial intermediaries. However, the intermediation activities of investment banking aid the economic development in Nigeria.
The investment banks in Nigeria are focused on offering a smooth blend of traditional and customized products for all kinds of customers some of which can be shared. The traditional and crucial function of issuing new securities (bonds and shares) for Private and Government agencies and organizations. The entire issue of securities is bought by the bank and sold to the investors at a higher price. Also, the functions of investment banks in Nigeria are;
- Offering funds for financing major projects such as Oil & Gas, Roads, Plant & Machinery, Infrastructure, Agriculture, etc.
- Finances for Mergers & Acquisitions.
- Aiding Government agencies in bridging the gap of tax mismatches.
- Raising capital through the free share sale on the stock exchange.
In this study, we shall focus on funds mergers managers’ functions of investment banking activities.
Investment banking in Nigeria is therefore confined to the following six areas of operations which are managing and funding, equity-based funds, money market funds, money market funds, bonds market funds, real estate funds, real estate funds, mixed-income funds, ethical funds, and exchange-traded funds. The net assets values of these funds asset year-end 2018 were about N447,679,370,154.99 there is an impressive amount of money flow into the Nigerian economy. The equity-based funds for the period were N14,324,243,344.56 compared to the money market-based funds of N312,173,483,436.15 shows their activities in the money market is far higher.
The bond fund also traded by the investment banks with the period was 9,535,438,008.19 compared to the real estate funds traded in a similar period which stands at N45, 624,834,709.87. The fixed-income fund for the period stood at N 26,717,679,220.88 compared to the mixed-income funds which were quoted as N26,778,611,618.89 while ethical funds and exchange-traded funds by investment banks have their net asset value stood at N6,651,402,828.71 and N687,531,204.00 respectively.
In the finance literature, empirical research and studies on investment banking are very scarce both on the local level and international front. Many studies have been conducted on banks without taking into cognizance the functions and roles of investment banking. It is not very clear to the public and generality of persons the role and the activities investment banks played in an economy. They just classify them as the regular banking operations whereas the two have separate functions they carry out on this note this study tends to put in the right perspective the confusion.
The key players of the investment banking terrain in Nigeria include Stanbic IBTC Asset Management Limited, First City Asset Management, Assets and resources management company Limited, etc. A full list of the incorporated invested banks in Nigeria is listed in the appendix of the project.
1.2 Statement of the problem
Nigerian investment banks are facing problems construed from the point of its principal objective to promote a balanced and complementing industrial development. Also, investment banking is still underdeveloped in Nigeria.
Providers of mutual funds such as bonds, fixed-income funds, mixed-income funds exchange-traded funds, etc. have not been able to be linked adequately to the deficit unit at the end of the financial intermediation process because investment banking in Nigeria is not yet still pronounced and its importance is not properly heralded.
Current market rates of securities such as bonds; fixed-income funds and mixed-income funds need the best investment bankers, brokers, analysts to manage in order to achieve the best return from such securities when traded on the capital and money market.
The real estate funds cannot be left out. Sadly, in Nigeria, there is a significant shortage of affordable housing. The housing gap is estimated to stand between 17 and 20 million units. This means that Nigeria needs to build between 17 and 20 million housing units to ensure that Nigerians have this basic human need. In monetary terms, Nigeria may require between N170trillon – N200trillion to bridge the housing gap if each unit costs N10million. This is where investment banks come to play. The shortage of investment banks has limited real estate funds to move from surplus unit to deficit unit. Meanwhile, developments in the real estate sector of the Nigerian economy, which is where activities that will close the housing shortage will take place, have not been impressive.
Subsequently, there is no doubt that investment banking is a major wheel of financial intermediation in the Nigerian economy and should not be neglected. The emergence of the Nigerian Financial Market is believed to have over the years given rise to the money market in the Nigerian economy and the investment banks play a vital role in the Nigerian stock exchange for the proper functioning of the economy.
This gave rise to the study of the relationship between investment banking and Nigerian economic development.
1.3 Aim and objectives of the study
The aim of the study is to determine the effect of Investment banking in Nigerian economic development. The specific objectives of the study are to:
- Examine the impact of bonds and economic development in Nigeria.
- Determine the influence of money market funds and economic development in Nigeria.
- Investigate the effect of fixed income fund and economic development in Nigeria.
- Examine the impact of equity-based funds and economic development in Nigeria.
- Determine the influence of real estate funds and economic development in Nigeria.
- Investigate the effect of mixed-income funds and economic development in Nigeria.
- Investigate the effect of exchange-traded funds and economic development in Nigeria.
1.4 Research Questions
Based on the findings of the research the following research questions were answered
- What is the extent of the relationship between the impact of bonds and economic development in Nigeria?
- What is the magnitude of the relationship between money market funds and economic development in Nigeria?
- What is the relationship between the fixed-income fund and economic development in Nigeria?
- What is the extent of the relationship between the impact of equity-based funds and economic development in Nigeria?
- What is the magnitude of the relationship between real estate funds and economic development in Nigeria?
- What is the relationship between mixed-income funds and economic development in Nigeria?
- What is the relationship between exchanges traded funds and economic development in Nigeria?
1.5 Research Hypotheses
To analyze data collected, the following research hypotheses were stated in their null form and tested
H01: Bonds does not have any significant relationship with economic development in Nigeria
H02: There is no significant relationship between money market fund and economic development in Nigeria
H03: There is no significant relationship between the fixed-income fund and economic development in Nigeria.
H04: Equity-based funds do not have any significant relationship with economic development in Nigeria
H05: There is no significant relationship between real estate funds and economic development in Nigeria
H06: There is no significant relationship between mixed-income funds and economic development in Nigeria.
H07: There is no significant relationship between exchanges traded funds and economic development in Nigeria.
1.6 Significance of the Study
The importance of this study is discussed in this section;
Public: This research project will provide useful information on how investment banks affect the Nigerian economy. This will make more individuals and small businesses aware of various activities of investment banking activities such as trading, merger, and acquisition, and research to improve their standard of living and develop the society at large.
Investors: Investment banking provides information to investors on how to analyze the performance of the industry when making investment decisions.
Government: Also, this research will be of importance to the government by exposing those benefits that will be derived from investment banking. This study will aid the government to highlight possible factors that would be considered in selecting projects to invest in.
Promoters
The study is likely to benefit potential customers of investment banks by waiting to create of possible reasons why investment projects fail.
Management: The study is likely to aid the management in ensuring that they direct loans to economically sound and financially viable projects. Further, it can help the management in intensifying their monitoring
Investment Consultants and Scholars: This study forms a sound basis of feasibility study or bank proposals for credit consideration and is expected to benefit scholars who may wish to pursue further studies in this area.
1.7 Scope of the study
1.7.1 Content Scope: This is the critically examined investment banking and Nigerian economic development. The variables used in the study are; dimensions are money market fund, bond fund, fixed income fund for dimensions, and measures gross domestic product.
1.7.2 Geographical Scope: This study was carried out using data gotten from CBN statistical bulletin in Nigeria and Africagrowth.com
1.7.3 Unit of Analysis: The research encompasses a study of investment banking and Nigerian Economic Development.
1.8 limitation of the study
There is no study undertaken by a researcher that is perfect. Thus, the limitations in this study include certain restrictions in the process of executing the study such as;
- Insufficient finance to pursue all data and relevant materials required for the study.
- Time constraint; the research work was simultaneously engaged in with other academic work and the time required to carry out the research was not adequate, due to the cumbersome nature of gathering relevant information, studying of research projects, and other academic work.
- Limited access to materials related to the study; the school library lacks updated materials relating to the area of this study. The researcher then surfs the internet in search for relevant materials.
- The researcher had to rely mostly on foreign works because of the subject matter is not pronounced yet in Nigeria.
Despite financial and other challenges, the researcher was still prudent enough to accomplish the study.
1.9 Operational Definition of Terms
Investment banking: involves activities in the financial markets such as raising capital for banks, assisting in acquisition and merger, and provides services as market-making and the trading of derivatives, foreign exchange, commodities, and stocks.
Economic development: is the process by which a nation improves the economic, political, and social well-being of its people
Mergers and acquisitions (M&A): are defined as the consolidation of companies.
Sales and trading: The term refers to the various activities relating to the buying and selling of securities or other financial instruments.
Bonds: A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).
Fixed income: Fixed income is a type of investment security that pays investors fixed interest payments until its maturity date
Equity-based funds: An equity fund is a mutual fund that invests principally in stocks
Money market funds: A money market fund is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper
Exchange-traded funds are marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund
Real estate fund: is a type of mutual fund that primarily focuses on investing in securities offered by public real estate companies
Mixed-income funds: A blend fund (or blended fund) is a type of equity mutual fund that includes a mix of both value and growth stocks.
1.10 Organization of the Study
Chapter One
This chapter is known as the introduction. It states the aim and objectives, research questions, and research hypotheses. It also highlights the importance of the research as well as constraints encountered by the researcher.
Chapter Two
This chapter is known as a literature review. Here the researcher reviews existing literature; books, articles, journals, and other publications relating to the research project. This chapter is presented in three sections; theoretical framework, conceptual framework, and empirical review.
Chapter Three
This chapter is known as the research methodology. The method employed in carrying out the research is discussed in this chapter. it states the research design, the population and sample size, data collection instrument, and the method of data analysis.
Chapter Four This chapter is known as data presentation, analysis, and interpretation. Here the data collected by the researcher is presented in tables. The results of the analysis conducted by the researcher as well as the implication of these results are discussed.
Chapter Five
This chapter is known as a summary of findings, conclusions, and recommendations. In this chapter, everything discovered by the researcher after the research is presented in a summarized form along with researchers’ conclusions and recommendations.
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