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Investment Bank plays an important role in the development

of economy in Bangladesh
Abstract
This report highlights recent economic updates in Bangladesh as of April
2015. Economic growth in Bangladesh was gaining momentum in the first
half of FY15. Capacity utilization improved and investments were showing
some signs of recovery. This growth was also job-friendly. The 12-monthlymoving average inflation decelerated from 7.6 percent in February 2014 to
6.8 percent in February 2015. Investment banks play an important and
active role in the economic development of a country. If the banking
system in a country is effective, efficient and disciplined it brings about a
rapid growth in the various sectors of the economy. There are two broadly
recognized functions of investment banks capital market intermediation
and trading. These are distinct and separate from the functions typically
associated with commercial banks, which accept deposits and make loans.
Investment banks are critical agents of capital formation and price setting.
They also help to coordinate present and future consumption. In
contemporary mixed economies, both governments and large companies
rely on investment banks to raise funds. Historically, investment banks
match those selling securities with those investors. This is known as
"adding liquidity" to a market. For their role, investment bankers are
rewarded as intermediaries, or middlemen. By matching producers with
savers, financial development becomes more efficient and businesses
grow more quickly. Investment banks work with commercial banks to help
determine prevailing market interest rates. Even though there are different
interest rates for commercial and investment products, all interest rates
influence each other.
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At BRAC EPL Investments Limited, Investment Banking Department offers


a full suite of Investment Banking services including traditional merchant
banking activities such as Issue Management & Underwriting. BEIL also
provides value-added services such as Corporate Advisory and Strategic
Capital Raising Initiatives. The institution offers investment services to
cross border transactions as well. Services provided by the Investment
Banking team are IPO & RPO, Rights Issue, Capital Raising, Corporate
Advisory and Underwriting.
An investment bank can also be split into private and public functions with
an information barrier which separates the two to prevent information from
crossing. The private areas of the bank deal with private insider
information that may not be publicly disclosed, while the public areas such
as stock analysis deal with public information.

TABLE OF CONTENT

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Serial No

Particulars
Abstract

Pages No
*

Introduction
5- 7
Investment Banking and Growth
8-9
Investment Banking Activities
9
Economic
Environment
and
sector
in 10
Bangladesh
Factors relating to the Economic Development 10-11
of Bangladesh
Function of Investment Bank & Its Role in 11-12
Economic Development
Investment Bank scenario in Bangladesh
Sample Bank (Importance/ Contribution of

13-14
15

Banks in Economic Development)


Balance of Loan as the purpose of Economic 16-17
Development
Empirical Literature (Empirical Analysis of the 17
Contributions of Investment Banking to the
Economy)
Recommendation
Concluding Remarks

17
18

Reference

19

Introduction

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Investment banks help companies and governments and their agencies to


raise money by issuing and selling securities in the primary market. They
assist public and private corporations in raising funds in the capital
markets (both equity and debt), as well as in providing strategic advisory
services

for

mergers,

acquisitions

and

other

types

of

financial

transactions. Investment banks also act as intermediaries in trading for


clients. Investment banks differ from commercial banks, which take
deposits and make commercial and retail loans. In recent years, however,
the lines between the two types of structures have blurred, especially as
commercial banks have offered more investment banking services.
Investment banks may also differ from brokerages, which in general assist
in the purchase and sale of stocks, bonds, and mutual funds. However
some firms operate as both brokerages and investment banks; this
includes some of the best known financial services firms in the world. In
the strictest definition, investment banking is the raising of funds; both in
debt and equity4, and the division handling this in an investment bank is
often called the "Investment Banking Division" (IBD). Investment banks
serve a number of purposes in the financial and investment world,
including underwriting of new stock issues, handling mergers and
acquisitions, and acting as a financial adviser. Other roles of investment
banks include asset management for large investment funds and personal
wealth management for high-net-worth individuals.

One of the primary roles of an investment bank is to serve as a sort of


intermediary between corporations and investors through initial public
offerings (IPOs). Investment banks provide underwriting services for new
stock issues when a company decides to go public and seeks equity
funding.

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However, only a few small firms provide only this service. Almost all
investment banks are heavily involved in providing additional financial
services for clients, such as the trading of derivatives, fixed income, and
foreign exchange, commodity, and equity securities.

Investment Banking and Growth

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Investment Bank: An investment bank is a financial institution that assists


individuals, corporations, and governments in raising financial capital by
underwriting or acting as the client's agent in the issuance of securities (or
both). An investment bank may also assist companies involved in mergers
and acquisitions (M&A) and provide ancillary services such as market
making, trading of derivatives and equity securities, and FICC services
(fixed income instruments, currencies, and commodities).
Unlike commercial banks and retail banks, investment banks do not take
deposits. The two main lines of business in investment banking are called
the sell side and the buy side. The "sell side" involves trading securities for
cash or for other securities (e.g. facilitating transactions, market-making),
or the promotion of securities (e.g. underwriting, research, etc.). The "buy
side" involves the provision of advice to institutions concerned with buying
investment services. Private equity funds, mutual funds, life insurance
companies, unit trusts, and hedge funds are the most common types of
buy side entities.
A common function of investment banks as well as commercial banks is
that they act as financial intermediaries, however, in different aspects.
While commercial banks directly fulfill primary financial intermediation
functions by taking deposits of investors and distributing this money to
capital acquirers in the form of loans, investment banks rather act as
financial intermediaries for capital market activities by enabling or facilitate
trade between investors and capital acquirers on the capital market. Beside
their role as an intermediary on the capital markets, investment banks
further act as market participants by trading assets on their own account
on the secondary market.
Figure 1: Investment Banking Activities

Investment Banking
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Financial Intermediation
Financial Intermediation

Financial
Financial
Advisory
Advisory

Primary
Primary
Market
Market

Secondary
Secondary
Market
Market

Proprietary Trading
Proprietary Trading

Economic Environment and sector in Bangladesh


During the early 1990s, Bangladesh made considerable progress in
stabilizing and liberalizing its economy. As a result, inflation was much
lower than previously, and average annual real GDP growth in 1992-98 was
above 5%, largely led by exports involving ready-made garments (RMGs).
Indeed, one of the most striking features of Bangladeshs trade is that
textiles and particularly clothing dominate exports: their combined share
grew from 70.4% in 2000 to 83.5% in 2008; by contrast, jute, which had
previously been Bangladeshs main export, comprising around half of total
exports through the mid-2008, accounted for only 6% in 2006. This
dramatic change in the composition of exports is the consequence of
Bangladeshs increased integration into the multilateral trading system.
Now (FY 2014-2015) GDP growth Rate is 6.52%.
Agriculture still accounts for 30% of GDP while employing 63% of total
labour force. The RMG-dominated manufacturing sector and services,
accounting for 9% and 61% of GDP, respectively, have been the sources of
the economys growth.
Factors relating to the Economic Development of Bangladesh:

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Governance
Export competitiveness
Urbanization
The financial sector
Education
Rural Development
Social Welfare
Women and Children Affairs
Youth Development
Education of Bangladesh

Function of Investment Bank & its Role in Economic


Development

Banks accumulate small saving from public and thus form large amount of
capital. Banks invest this capital as the form of loan and advances and
direct investment in profitable sector. By investing capital in productive
sector will boost up the economy of a country.

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Role in Economic Development: Specialized banks channelize fund for


development and growth of a specific sector of the economy. As a result, a
balanced economic development of all sectors is ensured.
Transmission of money: Bank transmits money from one country to
another with the help of his branch across the world by the Cheque of the
bank, Bill of exchange, Draft etc.
Consultancy: In the process of continuous interaction with business
people, banks gather much insight about operations and problems of
industries and business. The executives of the banks are trained for
appraisal of business proposal. This enables the banks to provide advisory
services to the parties whom are interested for setting up industries and
starting a new business.
Employment: Banks provide capital for setting up new industriesbusinesses BMRE of existing industries- business which create scope of
employment of new labors, managers and other kind of employee.
Controlling Money market: The economy of a country is mainly controlled
by its money market. The Central Bank with the help of other Investment
and commercial banks performs its monetary policy to control the money
market.
Credit control: Central Bank takes initiative by using its monetary policy to
control the money supply in the economy by imposition of bank rate
change, Reserve rate change which affects the Credit expansion capacity.
Central banks do this operation through the commercial bank.
Agricultural Development: Commercial bank and the Agricultural bank
provide loan for the purpose of purchasing Seed, Fertilizer and equipment
to the agricultural sector for the development of the economy.

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Industrial Development: Investment Bank provides loan facilities for the


establishment of Large and Small & cottage industry which ultimately
effect the development of the economy of a country.

Investment Bank scenario in Bangladesh


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 funds. It has
an Investors' Account Scheme, which provides small investors with credit
facilities for buying and selling shares listed with the Dhaka and
Chittagong stock exchanges. It also helps investors achieve reasonable
returns on investment in sound shares and provides institutional support
to small investors for purchase and sale of shares. Under the scheme,
small investors are to hold accounts with ICB for loans for purchase of
securities. The interest charged is 15.0% per annum. On behalf of account
holders, ICB purchases and sells securities and maintains the profit and
loss accounts. An investor has the option of taking or not taking the loan. If
no loan is taken, the investor can withdraw funds from the account to the
extent in excess of the margin requirement. When an investor takes a loan,
he/she can withdraw the amount appearing in the account as unutilized
balance. Also, an investor can withdraw securities when his/her account is
closed after clearing dues outstanding in the account. Under the scheme,
ICB gives the custodian service in safekeeping securities of the account
holders, and also collects allotment letters, share certificate, and
dividends.
ICB launched its Unit Fund Scheme on 10 April 1981. This is an open-end
mutual fund, through which small and medium savers get an opportunity to
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invest their savings at any time of the year. The fund is divided into units
known generally as ICB units, each of which bears a certain value in the
assets of the fund. These units are sold to the public. Bangladeshi citizens
living abroad and foreigners residing in the country can also purchase ICB
units. Unit holders are the owners of the fund, while ICB takes the
responsibility of managing the fund and loading and unloading securities
in their interest. ICB floated its first mutual fund in 1980 and the number of
its mutual funds increased to 8 by 2000.The total paid up capital of the
mutual funds is Tk 175 million. In 2001, the corporation disclosed its
decision to issue the 9th mutual fund of Tk 100 million.
In addition to ICB, a number of commercial banks also carry out investment
banking

functions

in

Bangladesh.

The

Securities

and

Exchange

Commission (SEC) has set the minimum paid-up capital requirement for
full-fledged merchant banks to Tk 25 crore. Through the Merchant Bankers
and Portfolio Manager Rules 1996, Securities and Exchange Commission
specified the minimum paid-up capital requirement for different merchant
banking activities. For issue management the minimum paid-up capital
would be Tk 2.5 crore, for under-writing issues and portfolio management,
the minimum paid-up capital would be Tk 12.50 crore. The SEC has a code
of conduct for issue managers, underwriters and portfolio managers and is
empowered to suspend or cancel the certificate of registration for its
violation. [Jamal Uddin Ahmed]

Sample Bank
Importance/ Contribution of Banks in Economic Development: Brac Bank
channelize fund for development and growth of a specific sector of the
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economy, as a result, a balanced economic development of all sectors is


ensured.
For example, they provide industrial loan to Big , medium as well as small
cottage industry for setting new industries, provide funds for agricultural
inputs and equipment which help a balance growth of industrial and
agricultural sectors of the country. The Bank increases its loan providing
facilities every year.

Balance of Loan as the purpose of Economic Development


(Taka in Millions)
Sector
Agriculture,

2007
Fisheries,24

2008

31,

401

2009
435

March30,

June

2009
560

Forestation

1. Agriculture
2. Fisheries
3. Forestation
Industry
1. Large & Medium

204

314

392

1000

39

139

700
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2. Small & cottage


202
Financed
in
Venture

275
367

253
467

300
520

Capital
Utility supplied Loan
Transportation

1550

2931

3366

5238

1284

2233

2866

4143

111

136

48

95

155

562

452

1000

Poverty Improvement Loan

Different Sector

1092

1808

2035

3000

Total Loan

2870

5721

6695

10318

Communication
Trade & Commerce
1. Retail

&

2. Export
3. Import
4. Hotel & Restaurant.

Analysis: From the above table we see that in the year 2007 the industrial
sector was TK. 24 million but in 2008 it is increasing by 157% i.e. from 24 to
401 million. And in the year 2008-2009 it was increased by 79%. In the
agricultural sector in 2007 was Tk. 204 million but in 2008 it was increased
by 53%. In Trade and commerce the increase is 89%. And the overall loan
providing rate is increasing 2008-2009 is 102% and 2008- end of June 2009
it was 77% increasing. (Brac Bank website)

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Empirical Literature
Empirical literature on finance and growth deals with financial development
in general, which may include the development of the banking sector, stock
market and legal environment. Unlike with theoretical literature however,
the results of these empirical studies cannot be explicitly interpreted for
investment banking. Nevertheless, since investment banking can be
regarded as a part of financial development, the results presented in the
following may indicate a tendency for the effect of investment banking on
the economy.
Empirical Analysis of the Contributions of Investment Banking to the
Economy
An indepth analysis on the use and the perceived benefits of investment
banking products, especially mergers and acquisitions (M&A) advisory by
Bangladeshi companies is conducted. This research is based on a survey
among some companies. This survey is extended to further questions in
the upcoming parts of the study. Throughout the analysis of all parts of the
survey we, inter alia, investigate whether there are significant differences
between companies of different size. In the M&A section, we address the
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use and perceived advantages of investment banks in M&A advisory. M&A


belongs to the core investment banking activities. Most transactions could
not have been taken place without the support of investment banks. Our
empirical study provides evidence on the causal relationship between firm
performance and the participation in M&A and looks for the mediumterm
real economic gains from mergers.

Recommendation
In analyzing the banking operation of the Brac bank we find the following
gaps in terms of its practices.
In the annual balance sheet of The Brac bank we find that they did
not provide any loan in infrastructural and communicational
development of the country. We analyze the balance sheet of the
banks in the year on 2007, 2008 and 2009 and we find that the
balance sheet shows in nil in the sector of Building development,
Utility supply sector and in Transportation and communication
sector. But without the development sector an economy cannot
develop. So, the bank has to consider providing loan in these
sectors which ensure his role in economic development of our
country.
In analyzing the balance sheet in the year 2007, 2008 and 2009 that
the bank have not take any role if the poverty development. They will
not expanses any fund in this sector. So, the bank has to provide
finance in this sector which ensures the development of the
economy of a country.

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Concluding Remarks
In summary, a single investment bank is rather unlikely to impose a risk
spillover upon an entire financial sector. The estimated response of
financial institution groups such as insurance companies, commercial
banks, hedge funds and even the remaining investment banks is very small
compared to the initial shock experienced by a single investment bank. A
single bank obviously does not have enough influence to move a market
segment. Taking into consideration that shocks mostly affect an entire
sector at once, the spillovers originating from the investment bank
portfolio are of greater relevance for the stability of the financial system.
When the entire investment bank sector experiences a shock, the response
by the other financial sectors is more eminent, but remains relatively small.
Interestingly, hedge funds are identified as the main source of systemic
risk for financial institutions and especially for investment banks. The
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spillover to investment banks originating from hedge funds is substantial


and the highest among the portfolio coefficients. Consequently, there is a
downside to financial development with respect to investment banking but
the far greater systemic relevance is found in another institutional group,
namely the hedge funds.

References:
i.

Investment Banking & Brokerage by- John F. Marshall, M.E.


Ellis.

ii.

www.bb.org

iii.

http://www.bis.org/publ/otc_hy1105.pdf

iv.

http://citeseerx.ist.psu.edu/viewdoc/download?
doi=10.1.1.167.4223&re p=rep1&type=pdf.

v.

www.google.com

vi.

www.bracbankbd.com

vii.

www.icb.com
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