WHY INVESTMENT BANKING IS KEY TOWARDS ECONOMIC GROWTH

By Shenif Peera

Flyovers, upgrading of railway lines, commissioning of power projects, construction of pipelines and continuous activities around the capital market space are among noteworthy success stories that we have been witnessing in the recent days.

These projects are massive in size and have significant contribution towards the country’s economy and the overall progress.

The concept of industrialization is yet another aspect of development that provides a comparative advantage by utilizing scarce resources accordingly.

In all this aspect, Investment Banking plays a critical role around the execution and eventually leading to the development of the country.

Globally, Investment Banking forms a core component within the financial hub.

The existence of Investment Banking stimulates the economic growth and employment by arranging massive investments in the respective geography.

On the other hand, Investment Banking also plays an active role in stock exchange market. Indices, bullish, bearish markets, Exchange Traded Funds (ETF), IPOs’ are some of the terms common in the equity space.

It is important to note that raising capital both debt and equity is part of Investment Banking activities and apparently each individual forms part of this journey directly or indirectly. 

In fact the truth is that perusing your daily papers with a cup of tea every morning and recognizing the “happening events” enables each and every one of us appreciate the resources that are dedicated towards these projects.

However, the dedicated energy is far much complex for any proposed project given two critical considerations; the technical feasibility and the financial viability. The latter refers to the funding aspect which forms the base of our discussions around the “overview of Investment Banking in the financial cycle”.

Generally speaking, Investment Banking can be interpreted in several ways with various definitions and products can be expounded under this arm.

One aspect of Investment Banking is that it focuses on “long-term horizon” and “massive deal size” hence relevant to the recent success stories and developments within the Tanzanian space.

The products range from off-balance-sheet items such as advisory to on-balance-sheet components namely debt or equity. The concept is common in the established economies and encouragingly grasping its momentum in the developing countries. In latter situation, commercial banks have expanded into investment banking features unlike the traditional banking system.

With that in mind, Stanbic Bank in Tanzania as one of the commercial banks has an on-ground locally established Investment Banking arm.

The unit respectively, sits under the Corporate and Investment Banking and renders its services to both private (corporates) and public (sovereign) segment in Tanzania. Furthermore, the focus remains on the key sectors of the bank namely Oil & Gas, Power & Infrastructure, Mining and Metals, Industrials, Telecoms and FMCG (including agriculture). Notably, Stanbic Bank once again recouped the “Best Investment Bank in Tanzania” for 2016 honored by EMEA Finance African Banking Awards.

Investment Banking plays a critical role from the inception of an idea to the execution of that particular idea into a prospective project.

Imagine driving a motor vehicle for the first time. An understanding of changing gears, controlling speed and most importantly following traffic rules is vital. Similarly, Investment Banking has it gears such as advisory as an initial step and further conducting the due diligence and analysis (financial modeling and valuations) as the idea stacks up. Governance and compliance refers to the regulations and standards that are not optional.

Advisory forms the base in any transactions initialized from mergers & acquisitions (M&A), corporate restructuring, P&I advisory, Initial Public Offerings (IPO), capital raisings to name few.

The question would then be, do all ideas turn into prospects?

Depending on the merits, ideas that are economically and financially viable will take-off. Remember too, that the factor of demand versus supply of liquidity also determines the right opportunity to be executed. The advisory team is blended with specific knowledge and skills based stakeholders so as to maximize the value of the outcome realistically.

Fairy tales are wonderful stories to visualize but a hard one to materialize. An advisor converts the visualization into practical execution. Post advisory, the aspect of fund raising erupts. Banks have been known for their lending nature but overtime with the evolvement of Investment Banking, the philosophy has changed to arranging the required funding in contrast to lending only.

Funding can be raised from the financial markets and/or capital markets. The latter refers to debt and equity capital markets that involve the financial instruments such as bonds, notes, commercial papers and shares. Timing, costs and diversification are some of the factors to be considered during any issue. Each of the mentioned tools has its treatment within both the accounting standards and principles and the regulatory requirements.

On the perspective of lending, this purely refers to debt arranging from the available liquidity within the local market for local and foreign currency and global markets for foreign currency only. Liquidity and market dynamics are again some of the key factors to bear in mind. Several participants (banks and non-banks) are involved and various structures can be deployed depending on the requirements. These include project finance, diversified lending and leverage to name few with various other technicalities embedded accordingly. This will be discussed thoroughly in the following subsequent segment under debt financing in Investment Banking.

Overall, we are seeing an accelerated change happening all around and the results are more imminent than anticipated previously. To close more success stories, investments are critical and to manage these expectations, Investment Banking is critical. Hence, the count-down has begun.

Shenif is a Manager of Execution in the Department of Investment Banking at Stanbic Bank Tanzania with profound knowledge of structuring and executing bankable transactions and understanding of investment methodologies.