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What Are the Similarities between Commercial Banking and Merchant Banking?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 05 September 2016
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Commercial banking and merchant banking are two related concepts that are tied to the provision of financial services. The main difference between the two is the fact that while merchant banks are geared toward the provision of these financial services to companies and very wealthy people, commercial banks are less selective about their clientele who include individuals and smaller businesses, such as sole enterprises. As such, the similarities between commercial banking and merchant banking can be drawn from the fact that they are both focused on the provision of different types of financial services to their various clients. Some of these provisions include financial lending services as well as offering financial advice.

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Basically, commercial banks assist their clients in numerous capacities that include the provision of loans to those who meet their requirements, a factor that is aimed toward financially enabling such individuals or companies. Merchant banks also provide a similar service to some of their clients through such a process as the provision of venture capital to select companies. Venture capital serves as a financial enabler for new companies that lack the financial capacity to fully provide the necessary resources needed to establish the company. Usually, merchant banks conduct a full analysis of new companies with the aim of discovering the potential for growth in companies that may be in a high-risk industry. The assistance provided to these new companies is usually in the form of a purchase of equity in the companies, which is a contrast to commercial banks that provide the finance in other forms that include loans and lines of credit.

That is not to say that merchant banks do not provide loans, which is another similarity between commercial banking and merchant banking. Commercial banks provide loans to clients, while merchant banks also provide the same service to select companies. The loans provided to companies are usually long-term and are an addition to other services provided by merchant banks in the form of stock underwriting and buyouts.

Another relationship between commercial banking and merchant banking is in the area of the provision of financial advice to clients. Commercial banks may analyze the financial profile of clients who seek objects like loans and other types of services with the aim of finding out the best manner in which to render a more effective service. Merchant banks usually provide a more thorough and detailed analysis of the financial profile of their clients, usually in exchange for some kind of consideration in the form of fees.

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