Capacity building for merchant banking in Bangladesh

Financial deregulation and innovations have changed the whole structure and functioning of financial markets of many industrialized nations. The growing economic activities influence the growth of financial system of a country, Bangladesh being no exception. However, the pattern, sustainability and rate of growth may vary from country to country, depending on social, political, cultural and economic condition of a country. The financial market of Bangladesh has been going through a fascinating phase providing excellent business opportunities to the financial services sector. The country's financial system witnessed a commendable progress in extending its geographical spread and functional reach. The twenty-seven- year period from 1983 saw an unprecedented expansion and functional diversification of the commercial banking system. With the advent of private commercial banks, the banking services gained due momentum. The momentum in financial institutions helped develop the corporate form of organization. This, in turn, marks the turning point in marking rapid industrialization and economic growth of our country. We can trace several positive features of this corporate organization today. The features include limited liability, separation of ownership, separation of management, easy transferability of ownership interest etc. The growth of capital market is another dimension that can greatly contribute toward faster industrial growth. It is believed that a vibrant, efficient and innovative financial system is at the key to the sustainable growth of an economy and appropriate human capital is core requirement to capture the efficiency and innovations. Background: Merchant banking in Bangladesh is growing with the growth of capital market. Presently three entities are providing merchant banking services. A number of commercial banks are preparing to start providing merchant banking service. This signals a growing competition ahead. The commercial banks already started separating their merchant banking divisions as their subsidiary companies, as required by the regulatory bodies. Some of the banks have already implemented the policy guideline provided by the regulatory bodies. This is a good decision and implementation of this policy would help assess the quality of the profit the commercial banks are generating from different sources. But sudden implementation of the policy and grant of license to the merchant banks as subsidiary companies without capacity building are likely to create an unhealthy competition of business as well as of headhunting of highly ambitious executives having no relevant academic background and required experience. Again sudden implementation of this decision without appropriate capacity building will call for a risky venture. Existing manpower engaged in merchant banking in Bangladesh are neither adequately trained nor have appropriate academic background. It is imperative to think about capacity building in the field of merchant banking. There is no denying the fact that there is a vacuum to be filled with human resources having a business degree followed by formal training. This situation calls for ascertaining the job specification, vis-à-vis the qualities of merchant bankers. Before that, it would be appropriate to briefly outline the functions and services of merchant bankers. Presently, according to Merchant Banking Regulation 1996, the activities of merchant banking are limited to issue management, underwriting and portfolio investment management services, but in future it will cover the wider scope of it for obvious reason of globalization. Scope of Merchant Banking: Though in our country, the merchant bankers render three main services of underwriting, portfolio investment management and issue management, but the broad range of activities include corporate counseling, project counseling, loan syndication, management of capital issues, corporate advisory services, advisory services to mergers and takeovers, consultancy to sick industrial units, and easing. Again, issue management involves the following works: (i) Pre-Issue Work: This relates to appointment of underwriters, brokers, bankers, registrars and advisors and also preparation of draft prospectus, obtaining clearance from stock exchange authorities. (ii) Work During the Issue: This cover ad campaign, organizing investor and broker conferences, deciding appropriate opening and closing dates of the issue, obtaining collection reports, closing the issue etc. (iii) Post-issue Work: In case of oversubscription, of the basis of allotment has to be finalized. This has to be done with the stock exchange authorities. In case of under-subscription, the underwriting liability has to be determined. Prospects of Merchant Banking in Bangladesh: The prospects of merchant banking in Bangladesh can be outlined as under: (1) Growth of Primary Market: If the primary market grows and number of issues increases, the scope for merchant banking will be enhanced. (2) Entry of Foreign Investors: Now Indian capital market directly taps foreign capital through euro issues. Foreign direct investment (FDI) is increased in capital market. Bangladesh can explore the same. So merchant bankers are needed to advice them for their investment in Bangladesh. The increasing number of joint ventures also require expert services of merchant bankers. If more and more non-resident Bangladeshis (NRBs) participate in capital market, there will be great demand for merchant banker services. (3) Changing Policy of Financial Institutions: Now the lending policies of financial institutions are based on project orientation, so the merchant banker services will be needed by corporate enterprise to provide expert guidance. (4) Development of Debt Market: If the debt market is enhanced, there will be tremendous scope for merchant bankers. (5) Corporate Restructuring: Due to liberalization and globalization, the companies are facing a lot of competition. In order to compete, they have to go for restructuring, merger, acquisitions, or disinvestments. This may offer good opportunity to merchant bankers. Qualities of Merchant Banker: In view of the above, the merchant bankers are expected to possess certain qualities as described below: (1) The merchant banker must have knowledge and information about the capital markets, trend in the stock exchange, psychology of the investing public, and technological and economical changes in the country. (2) They must have ability to analyze and evaluate various technical, financial, and economical aspects concerning the formation of an industrial project. (3) They must safeguard the interest of the investing public. So, the integrity and maintenance of high professional standards are necessary for the success of the merchant bankers. (4) The merchant banker should realize the changing environment of capital market and keep cordial relationship with the investors. (5) They must be able to develop innovative capital market instruments for satisfying the changing needs of investors. (6) The merchant bankers must be able to restrict the function to be performed, and concentrate and develop their strength to keep costs under control. Skills Requirement for a Merchant Banker: In order to determine the recruitment criteria of merchant bankers, the job description, job specification and career path of the human resources (HR) engaged in merchant banking in the UK and investment banking in the USA and also neighboring countries have been studied. The study suggests the following qualificationsskills for the fresh candidates: Initiatives Taken by Security Exchange Commission (SEC): It is, indeed , a very good initiative and move undertaken by the SEC that they want to make training must for top stock traders as reported in The Financial Express published this in its issue on March 13, 2011. As the report reveals the Chairman of SEC Mr. Ziaul Haque Khondker told that the regulator had taken the decision to train the top stock traders in view of acute crisis of professional traders and fund managers in the market. In fact this report inspired me to refine my write-up that I wrote long back and discussed with the related officials as well. I found the true reflection of my feelings and perception I developed through study and experience from my present position. I found the problems are rightly identified and initiative is moving toward the right direction. The creation of an Institute like Bangladesh Institute of Capital Market (BICM) is an excellent initiative in an effort to resolve the crisis of quality professionals in the stock market. This institute formally came into being on December 09, 2010 and is yet to start functioning. Initially, the institute will face difficulties but with the sincere effort of all concerned, it will definitely gain an appropriate height as a prestigious training institute. The merchant banks, asset management companies and brokerage houses who are the ultimate beneficiaries of Bangladesh Institute of Capital Market (BICM) may also come forward to help the institutes, in terms of teaching staffs, infrastructural development, fund development and other resources as may be required. Reportedly, there are 37 merchant banks, 11 asset management companies and 384 brokerage firms at the moment We may take lessons from Bangladesh Institute of Bank Management (BIBM). I fully agree with the comments of Mr Abdul Hanna Zoarder , the chief executive president of BICM that the government should fill up the faculty of BICM with top teachers of the country. I would like to add with him that beside government initiative, the good teachers may also come forward sportingly for initial shaping up of the institute as part of their social responsibility. Furthermore, the foreign experts may be invited to work until the institute can function independently. But I am quite hopeful that we have adequate resource persons who can help build this training institute but what we need to do is to start in an organized manner with strong commitment to the nation. At the moment, BICM may start imparting training to the top officials of the stock traders but it must aim to start foundation training as a prerequisite for the fresher to start their career in stock market. Findings: 1. The field of merchant banking is yet to be fully explored in Bangladesh and there is a huge prospect in this field of business. 2. Lack of manpower with adequate merchant banking experience and proper academic background is a major obstacle. 3. Scope of learning merchant banking through trainingconferenceworkshop is very limited in Bangladesh. 4. BICM came up recently with its proposal and it can play a pioneering and appropriate role in imparting training. 5. BICM will initially train the top stock traders. 6. A pool of qualified trainers needs to be created for BICM. 7. Manpower being employed in merchant banks, asset management companies and brokerage firms do not have formal training. 8. The Chief Executive Officers (CEOs) of merchant banks should have law backgrounds in the face of growing legal complexity in this field of business. Conclusions and Recommendations: It is evident from the foregoing discussions that the merchant banking, asset management companies and the brokerage firms are growing by shape and size. Millions of people are getting involved with the capital market. The merchant banks in Bangladesh today are operating within a limited scope. But this scope of merchant bank is expected to be widened. This may be a matter of time only. The capital market of other countries including our neighboring ones may help us learn the lessons. The scope of merchant banking, its prospect in Bangladesh, qualities and job specification of those who would like to undertake their career in stock trading do also need to be high lighted. I consulted a book titled, Financial Instruments and Services by Nalini Prava Tripathy (2007). This has been quite helpful particularly in examining the scope of merchant banking. Career plan is another important aspects which has been briefly covered above. Most importantly, a timely initiative undertaken by the SEC, in terms of training, has been highlighted in a nutshell. The creation of an training institute like BICM is a testimony to their such initiative. This, in fact, helped me to generate some ideas leading to some recommendations. I would like to humbly make the following recommendations: a. BICM may create a pool of qualified resource persons from the professional as well as from the universities. b. BICM may invite foreign experts to conduct the initial courses side by side with the local resource persons. c. Initially the top stock traders may be invited to attend the courses. d. Eventually BICM may start foundation courses for the fresh candidates after they are selected for the merchant banks, asset management companies and stock brokerage firms. e. Training and development centers of different financial institutions may for the time being provide the foundation training designing a standardized syllabus. f. The syllabus and uniform training guidelines may be provided by the regulatory bodies. This would help ensure quality of training. g. Gradually, the certificate of qualification which may be provided by BICM may be introduced as a prerequisite for employment in merchant banks, asset management companies and brokerage firms. h. The regulatory bodies may provide a time-frame within which the companies must train all their human resources and covert them into human capital. i. Organizations like the World Bank and Asian Development Bank may be approached for fund for research and development (R & D). j. An R & D Wing may be set up which may be placed directly under the Chairman of SEC. k. Merchant banks may be advised to create appropriate job description and job specifications corresponding to the training syllabus. This would make the training more meaningful and fruitful. The writer is Senior Executive Vice President (SEVP) and Head of Marketing & HR Division Prime Bank Limited. He can be reached at e-mail: ks090701@primebank.com.bd