What is a Merchant Bank?
A merchant bank is a financial organization that provides a variety of services, including underwriting, issuing securities, and merger and acquisition advice to big businesses and rich people. A merchant bank concentrates on investment and corporate finance operations, as opposed to a commercial bank, which primarily accepts deposits and disburses loans.
Merchant banks have a long history, with the first merchant banks appearing in the medieval era in Italy. These early merchant banks were responsible for financing trade and commerce by providing merchants with loans and other financial services. Today, merchant banks continue to play a vital role in financing global trade and commerce by providing business capital and advising companies on mergers and acquisitions.
Some merchant banks are also known as “investment banks,” which is a name used for those that primarily deal with corporate finance, with an emphasis on the underwriting and distribution of securities for companies such as IPOs, secondary offerings, and other securities to raise capital for companies. Investment banks also provide advice on Mergers & acquisitions and other financial strategies and help companies navigate the regulatory environment.
What is Development Bank?
A development bank is a financial institution that provides financial and technical support and funds to developing countries for the purpose of economic development. Development banks are owned or controlled by a national government and are focused on providing long-term financing for projects that promote economic growth and development. They play a critical role in helping to mobilize resources and support development projects in areas such as infrastructure, energy, and agriculture.
One of the main functions of a development bank is to provide long-term financing for infrastructure projects and other investments that may not be attractive to commercial banks due to the projects’ high risk and long-term nature. They also provide project management services and technical assistance to support the implementation of these projects.
Another important role of development banks is to promote economic development by providing financing and support to small and medium-sized enterprises (SMEs). SMEs are critical to economic development as they create jobs and drive innovation, but they struggle to access financing from traditional commercial banks. Development banks can provide the financing, technical assistance, and business development services SMEs need to succeed.\
Difference Between Merchant Bank and Development Bank
- Merchant banks are focused on investment and corporate finance activities, whereas development banks focus on providing financial and technical assistance for economic development in developing countries.
- Merchant banks are owned by private individuals or institutions, and they focus on making a profit, whereas development banks are owned or controlled by national governments, and they focus on promoting economic growth and development.
- Merchant banks tend to focus on providing financing and support to small and medium-sized enterprises, whereas development banks tend to provide long-term financing and support for infrastructure projects, energy, and agriculture.
- Merchant banks tend to have a more flexible investment approach and also tend to be more focused on profitability, whereas development banks tend to have the mandate to promote sustainable development and consider environmental, social, and governance risks.
- Merchant banks tend to focus on a wide range of sectors; however, some merchant banks do specialize in sectors such as technology or renewable energy, whereas development banks may have a specific mandate to support certain industries, such as agriculture or manufacturing.
Comparison Between Merchant Bank and Development Bank
| Parameters of Comparison | Merchant Bank | Development Bank |
| Focused | Corporate Finance Activities | Financial & Technical Assistance |
| Ownership | Private Individuals | National Organizations |
| Function | Financial Support to Small Enterprises | Financial Support to Developing Countries |
| Investment Approach | Flexible | Complex/Rigid |
| Mandate | Wide Range of Sectors | Agriculture and Industries |