Investment banking in Nigeria | The most profitable areas
What is investment banking? How lucrative is investment banking in Nigeria? What are the most attractive industries for Nigerian investment banking? How can one become an investment banker? If you want to find the answers to these questions, you have come to the right place. Just click on Read More and learn interesting information about investment banking in our country.
What is investment banking? Investment banking is a specific banking sector traditionally associated with the issuance, purchase, and sale of shares and bonds of companies, government agencies, and organizations. Investment banking also includes the provision of services such as brokerage operations, financial engineering (development of new financial instruments and operational schemes). Besides, it also provides mergers and acquisitions of companies.
Investment banking in Nigeria | Primary market and its operations
The traditional and still very important function of Nigerian investment banks is the issuance of new securities (shares and bonds) for enterprises as well as for government agencies and organizations. The investment bank earns money on such transactions by buying out the entire issue of securities from the issuer and selling them to investors at a higher price.
Nigerian firms and government departments sell bonds to borrow funds from investors. They often need money to finance major projects, such as oil and gas industry, building roads, new factories and plants or development of agriculture and other infrastructures. It’s very important for Nigeria today.
Also, government agencies may simply face a lack of tax revenue relative to planned incomes. Besides, firms often require additional funds to purchase other companies. A bond is an obligation to pay a certain amount of money at a specified time in the future. For example, a company can sell bonds at a value of $100, pledging to pay out $105 a year later. It means that it takes 100 dollars for one year at 5% per annum.
Another way to raise funds is to sell shares, which, in essence, represent the firm's obligation to pay the buyer a portion of its profits. Consider, as an example, a firm that gave one million shares to investors. The owner of each share is entitled to receive one-millionth of the company's profit annually until it sells the shares. If the company earns $500,000 this year, investors will receive 50 cents for every share.
In cases where a firm wants to raise capital through the free shares’ sale on the stock exchange, it usually uses the services of an investment bank. Although by law, companies are not required to apply to banks when placing issues, they tend to prefer to place shares specifically through the intermediation of investment banks.
Advantages of investment banking in Nigeria
- Firstly, it may cost firms less than hiring people engaged in the public sale of securities.
- Secondly, an investment bank can immediately pay for the entire issue, and the firm will not have to wait until the whole issue is realized. By certain terms of the contract, the firm can guarantee receipt of money from the issue, regardless of whether the investment bank will be able to sell the entire issue to investors at retail price.
- An investment bank can also organize a wider distribution of securities, which can make it easier for the firm to attract capital in the future.
- An investment bank, depending on its reputation, has the opportunity to ensure investors that the shares placed by them are worth buying. It’s much easier for an investment bank to assess the position and prospects of the issuing company than for investors themselves.
- In addition, an investment bank can provide substantial assistance during periods of difficult financial situation, helping to organize the issuance of new shares and advising corporate clients on risk management and overcoming financial difficulties.
Some Nigerian investment banks, usually called wholesale, sell shares bought from issuers of shares to retailers of stock valuables, which, in turn, sell them to the final investors. Some investment banks are engaged in both wholesale and retail trade in securities, while other banks specialize only in one of these two activities. Retailers can also specialize in servicing a particular region or in trading certain types of securities.
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List of Investment Banks in Nigeria (according to www.globalbankingandfinance.com)
- Access Bank
- Afribank
- Associated Investment Trust Microfinance Bank Limited
- Bank of Industry
- Bank PHB
- Bauchi Investment Corporation Limited
- Central Bank of Nigeria
- Citibank
- Diamond Bank
- Ecobank
- Equitorial Trust Bank
- Federal Mortgage Bank of Nigeria
- Fidelity Bank
- FinBank
- First Bank of Nigeria
- FIRST CITY MONUMENT BANK PLC
- Guaranty Trust Bank
- Intercontinental Bank
- Mainstreet Corporate Banking
- Oceanic Bank
- Savannah Bank
- Skye Bank
- Société Générale Bank of Nigeria
- Spring Bank
- Stanbic IBTC Bank PLC
- Standard Chartered Bank
- Sterling Bank
- Union Bank of Nigeria
- United Bank for Africa
- Unity Bank
- Urban Development Bank of Nigeria
- Wema Bank
- Zenith Bank
Guaranteed placement (underwriting)
A Nigerian or foreign company, seeking to attract capital from outside, handles an appropriate offer to an investment bank. The bank carefully studies the company and, if the results of the study prove to be favorable, it agrees to guarantee the placement of the emission.
Then a bank comes into contact with other investment banks, forming what is called a purchase group. This group has negotiations with the issuer and signs a contract with it. It gives a detailed description of the securities to be sold. Also, the guarantees are formulated. Additionally, the price of the seller's offer and the amount of compensation due to investment banks belonging to the purchasing group are specified. The questions concerning taxes and fees are discussed as well as extraordinary circumstances that give banks the right to exemption from contractual obligations.
Other services offered by investment banks
A natural continuation of the traditional activity of investment banks in the issue and placement of securities is securities that are already in circulation trading. Its important element is financial engineering, which has also been taken up by investment banks. Also, the main activities of these banks include operations in the secondary mortgage market (mortgages) and the bond market, as well as the mergers’ organization and firms’ acquisitions.
The most attractive and profitable industries for investment banking in Nigeria are;
- food production, restaurant business, and ready meals’ delivery
- building business, purchase-sale-lease of real estate
- fashion industry
- agricultural business
- education (private schools and universities)
- sale and service of high-tech gadgets
- car business
- music and film industry
- logistics business
- Internet sales
How to be an investment banker in Nigeria?
To begin with, you need to get a proper education. Besides, it’s desirable to have a job experience in investment banks and companies with a good business reputation. To work in this area in Nigeria, you need to obtain a license for this type of activity. Also, you should have connections with companies to make deals, as well as with firms or private individuals owning capital that can be invested.
Another requirement is a hardworking and motivated junior staff to create presentations, financial models, check verification of documents, etc.
We hope that the information given above has broadened your knowledge of the sphere of investment banking. This area can be very lucrative in Nigeria, however, it requires knowledge and skills.
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Source: Naija.ng