Lending & Securities Course - Research Paper Example

?` Lending & Securities Short & medium Term Commercial Financing by a lending in UAE Executive Summary This paper represents a report of a detailed study on short term and long term commercial financing by a leading bank of United Arab Emirates. The name of the selected bank for this study is National Bank of Abu Dhabi. It is one of the largest banks of UAE which was incorporated in 1968. The company is listed in Abu Dhabi Stock Exchange as NBAD. National Bank of Abu Dhabi, the largest banking groups in United Arab Emirates and also in Middle East in terms of assets (NBAD, 2012, p.1). This financial group was incorporated in 2007 in Dubai Financial Market. The company has successfully proved itself as capable of providing enhanced value added financial services across retail, corporate, investment and Islamic banking across the Gulf Corporation Council region. This organization is highly focused on its long term vision which is to become most dynamic and leading financial service provider base in the Middle East. Introduction This study has been conducted based on secondary research mainly information from the official website of the company. It will deal with in depth research on wide areas of banking activities and its target customers. NBAD practices both commercial and investment banking activities and it offers flawless banking services to individual as well as institutional customers. As this study mainly focuses on commercial lending, therefore, need of long term and short term financing of the potential consumers needed to be analyzed. NBD has disclosed detailed information related to its short and long term lending like starting from the details of different lending schemes for individual as we institutions, investment banking services to business for raising finance and other strategic financial activity, eligibility criteria and requirements of security for lending, banks analysis of future value of securities deposited by the banks etc. National Bank of Abu Dhabi is market leader in core business lines in this industry. The company follows franchisee based business activity. It is the largest banking franchise in UAE with more than 140 branches and 740 ATMs and cash deposit machines across the UAE. This banking group is also major player in the corporate banking or business arena. It provides portfolio management and wealth management services to HNI individuals. The company is a leading player in emerging Islamic banking, investment banking and private banking services in UAE and other Middle East countries. The bank is recognized as a leader in its high competence areas like asset management and financial brokerage services. This company has been well positioned among its target customers for its high value added services and delivering corporate value to shareholders and employees. Apart from its active business operation in UAE, the company is also successfully penetrated in emerging foreign markets like Qatar, United Kingdom, Singapore and Jersey. The overall business activity is maintained by more than 8000 employees from more than 50 nationalities which have made the most diversified cultured organization in UAE region. Corporate social responsibility is key part of its business activity. National Bank of Abu Dhabi is involved in many corporate social activities like charity, education, culture, art and sports. It always focuses on the national culture into its business culture and dedicated to preservation of it. Discussion There are two different types of customers of the bank. One is individual people and another is small and medium businesses that require loans from the bank. Individual customers requires loan for personal requirements like marriage, child’s education etc. they also need loan for buying persona car, buying a property and many other reasons. The bank also offer a complete package of short term and long term lending facility to its priority individual customers under personal banking. It provides short term and long term lending to the businesses. Corporate lending service by the bank includes lending for different types of need of the company. The bank provide business credit card to small and medium companies. The bank mainly focuses on lending to small and medium entrepreneurs that can source finance through creditors like bank and other financial institutions. It offers rent finance to SMEs so that SMEs can access business environment and all facilities and technologies required for a business. The SMEs also can get vehicle finance from the bank for purchasing vehicles for the company’s business activity. Bills discounting is another efficient commercial financing through which the companies can source financing against bills and invoice and also post dated cheques at attractive interest rate. NBAD also provides term loan for urgent requirements of liquid money to the SMEs so that they can manage working capita efficiently. Overdraft is another important medium of lending to the businesses. It is also designed to offer sustainable liquidity and working capital flexibility. Investment banking services is one of the most important and emerging lending activity by the bank to businesses. The bank mainly focuses on the medium size business that wants to raise finance apart from debt. To conduct this strategic financial activity the company needs assistance from investment banks which offer service of raising finance through rights issue. Raising finance for the business expansion through rights is very popular business activity which the first step of capital investment. Medium sized businesses want to diversify into foreign markets and start their business activity there, need to invest huge amount of capital in foreign markets. These types of businesses are the main target customers of leading investment banks across the world (Ritter, 2003, p.278). Medium sized companies generally target the emerging markets for foreign direct investment. They prefer issuing rights for raising fund as rights issue is one of the most efficient to raise fund. Investment banks are recognized for expertise in this service. Rights issue refers to corporate invitation by the companies to the existing shareholders of the companies to buy more shares of the companies. The companies offer shareholders to purchase the new shares at a discounted market price than the current market price of the share of the company. Investment banks provide this service to the businesses and it is called underwriting service of investment banks (Chemmanur & Fulghieri, 1994, p.57). Underwriters are those who issue new share as initial public offering or secondary public offering of companies that need additional fund for strategic business activity. Banks disclosed the purpose of issuing rights and the shareholders analyze the potentiality of proposed investment plan or business activity by the company and decide to invest in the form of purchasing issued rights of the companies through investment banks. Investment banks provide opportunity to the shareholders of the companies to increase their financial exposure as he shareholders can purchase companies new shares at discounted price. The bank acts as financial agent between shareholders and company and providing financial benefits to both for some percentage of underwriting fees on the total share issued. The investment banks conduct necessary legal and regulatory activities for issuing right of the company on behalf of the company gets paid by the companies only but not from the shareholders for this financial service. The shareholders are allowed to trade issued shares after completion of initial or secondary public offering. Then the investment banks do not intervention on the traded shares of the company. Investment banks prefer to provide underwriting services to the private limited companies than public limited companies. This means they prefer initial public offering than secondary equity offering of public limited companies. Rights issue is also carried out by self offering by the companies. Public limited companies issue rights in the form of public offering as rights are issued to the general public. Existing shareholders or the new potential investors can buy public offering from a public limited company. But a private limited company can issue rights in the form of issuing more shares to only the existing shareholders of the firm. From companies’ view point raising finance is through rights issue or equity issue is more preferable and also financial beneficial than debt issue. Risk retiring back to the raised capital is less in equity issue whereas the company is liable for paying the debt or credited amount to the creditors (NYU, 2012, p.68). Therefore, the companies should raise finance in its need of finance through rights issue but not through lending from banks or other financial insinuations. Therefore, investment banks are more and more concentrating on this service rather than lending services. They always suggest their corporate client i.e. businesses for issuing equity and they are expertise in this underwriting service (Morrison & Wilhelm, 2007, p.9). Businesses also may directly offer rights to its existing shareholders for purchasing issued shares of the company. But, here risk of the company is higher as the total needed fund may not be raised as all shareholders may not accept the proposal or may not satisfy with the purpose of raising fund by the company. But, investment bank will assure the company in terms of selling all the issued shares of the company otherwise they need to buy and hold the remaining shares until any individual or institution buy agrees to buy this. Therefore, the company will be secured to get the required fund for its proposed business activity (De, 2001, p.28). The company has the right to fix the transferability of shares at the time of issuing new shares. The shareholders are may allowed to transfer the purchased share to other privately or for public limited companies shareholders can trade it publicly or sometimes they can do any of the both. Rights issued by the company to its shareholders are made on a return of tax free dividend of a particular ratio with net earnings of the company. The investment banks ensure this by conducting detailed research on the proposed activity of business for which the company needs additional finance. This is because, the company will receive required fund from the shareholders with an exchange of issued shares (Anson, 2011, p.84). The bank has policies and terms of condition for its lending services. It follows rules and regulations of the central bank of the country. The credit lending or lending liquid cash to the businesses it asks for sufficient securities in terms of assets mainly receivables. The main objective to lending policy is to reduce the risk of bankruptcy in terms of lending. The bank has separate asset analysis department that recommend the value of ending against the proposed security by the businesses. NBAD also provide term loans to the potential and growth driven business with zero or very less security. It appreciates to develop banking relationship with the potential businesses and relies on the business prospect for payback or return of ending. NBAD also offer lending to the businesses that economically downturned due to recent worldwide economic downturn. It also has experienced success of many declined businesses by providing financial solutions. Therefore, the bank practices good corporate governance with its community and customers and stays behind the businesses as lending of last resort. Conclusion National Bank of Abu Dhabi has been high focus on lending service mainly to the small and medium business that needs both commercial assets we as investment banking service from the bank. The bank is very much efficient and specialized in commercial lending and investment banking services. Raising finance for the companies through rights issue is mostly practiced by the bank to fulfill the need of businesses that need equity financing along with the large portfolio of debt financing. The bank also receives government intervention and facilities in terms of subsidized bank rate to take finance from central of the country. NBAD also provide attractive special lending scheme to Emirati owned businesses and these types of business activities are part of good corporate governance of the company. Overall NBAD is expertise lending through commercial banking and investment banking. References Anson, M. J. P. (2011). Quantitative Investment Analysis. John Wiley & Sons. Baker, H.K. & Powell. G. (2009). Understanding Financial Management: A Practical Guide. John Wiley & Sons. Chemmanur, T. j. & Fulghieri. (1994). Investment Bank Reputation, Information Production, and Financial Intermediation. Retrieved from https://www2.bc.edu/~chemmanu/phdfincorp/MF891%20papers/chemmanur%20and%20fulghieri%201994.pdf. De, S. (2001). Capital Raising under Securities Board of India Guidelines: An Economic Examination of Capital Market Reforms in an Emerging Market. Retrieved from http://www.isb.edu/caf/docs/SankarDe.pdf. NBAD. (2012). About NBAD. Retrieved from http://www.nbad.com/en/AboutNBAD/Pages/about-nbad.aspx. Ritter, J. R. (2003). INVESTMENT BANKING AND SECURITIES ISSUANCE. Retrieved from http://bear.warrington.ufl.edu/ritter/publ_papers/investment%20banking%20and%20securities%20issuance.pdf. Read More