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Difficulty: Very hardMerchant, Development, and Specialized Banks

An industrial firm in Nigeria requires underwriting services for a new issue of corporate debentures and equipment leasing for factory expansion, while a regional farming association requires long-tenor, concessionary credit tailored to agricultural storage infrastructure. Which pair of financial institutions is structured to directly fulfill the respective financing requirements of the firm and the association?

  1. A merchant bank and a development bankAnswer
  2. B
    A commercial bank and a merchant bank
  3. C
    A central bank and a specialized mortgage bank
  4. D
    A development bank and a commercial bank

Answer

A merchant bank and a development bank are the financial institutions designed for wholesale corporate investment services and specialized long-term sector development, respectively.
The option selecting a merchant bank and a development bank is correct because merchant banks cater to corporate entities requiring wholesale services such as underwriting debentures, issuing equity, and equipment leasing. Conversely, development banks cater to specific economic sectors (e.g., agriculture or industry) by offering long-term development capital at subsidized or concessionary interest rates.

Step-by-Step Solution

1
Analyze the financial requirements of the industrial firm
Underwriting corporate securities and equipment leasing fall under wholesale investment banking activities.
Merchant banks operate as wholesale financial institutions serving corporate clients with capital market activities, equipment leasing, and debt syndication.
2
Analyze the financial requirements of the farming association
Long-tenor, concessionary agricultural loans require specialized development finance.
Development banks (e.g., Bank of Agriculture, Bank of Industry) are government-backed institutions mandated to fund growth in specific sectors with low-interest, long-term capital where commercial credit is unsuitable.
3
Match the entity requirements to institutional pairings
The firm requires a merchant bank and the association requires a development bank.
Combining a merchant bank for wholesale corporate finance and a development bank for targeted sectoral development satisfies both operational needs.

Key Concept

Distinct Functions of Merchant and Development Banks
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Topics

Merchant, Development, and Specialized Banks

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