The Role of Investment Banking in the Economy

Investment banks play a foundational role in the financial services sector. Yet, their functions are not as well understood as those of other financial institutions, for example, retail and commercial banks.

An investment bank is a non-deposit taking institution licensed by the Capital Markets Authority (CMA) to engage in corporate finance and advisory transactions. These include take-overs, mergers, acquisitions, corporate restructures, privatization of companies and underwriting of securities issued or to be issued to the public.

How do these functions impact the economy? Let’s explore below:

1. Capital Formation

Investment banks remove the deficiency of capital by stimulating saving and investing. They achieve this by mobilizing small and scattered savings from the retail public and high net worth individuals and making them available for investment in the capital markets.

2. Gross Domestic Product (GDP) Growth

Investment banks make direct and indirect investments in the economic development of a country. The amount generated by investment banks increases as time progresses, and this provides a healthy contribution to GDP growth.

3. Employment Opportunity Creation

Investment banks play an important role in creating employment. As investment banks increase the volume of business, so too are employment opportunities created. Growth in the investment sector generates more employment, which helps in the overall development of the country.

4. Infrastructure Development

Governments undertake projects for the infrastructure development of their countries. For the implementation of the project, feasibility studies and funds are required. Investment banks carry out these studies and generate funds, which boosts the development of the economy.

5. Liquidity

Investment banks help the broader financial markets and the economy by matching sellers and investors, therefore adding liquidity to markets. When a company holds an IPO, for example, investment banks will buy all or part of that company’s share directly by acting as an intermediary and subsequently sell them to the general public market thereby creating immediate liquidity.

Standard Investment Bank (SIB) has played the above roles both directly and indirectly especially through the company’s corporate finance department. For more information and inquiries contact us through advisory@sib.co.ke.

Sharon Sifa is a Corporate Finance Associate at Standard Investment Bank.