Essay on Investment Banking and its importance in UAE

Introduction
Banking sector is considered as an important source of economy in a country. It is the market
that deals with supply and demand of money by taking people’s deposits and investing or
loaning them. The history of investment banking is way back to industrial revolution when JP
Morgen was the market leader. According to Maverick (2019), the main role of investment bank
consists of merger and Acquisition of companies, underwriting of new stock offered mostly in
IPO and advising companies about their financial activities. The sector is critical for
the industries who could not raise money through conventional ways such as governments. It
helps governments, banks and companies to rise required funds with no threat to fixed interest
expense. UAE has been one the best economies of the world and host to the biggest investment
companies as well. But investment companies are different from investment banks. There is a
difference between both entities where one is underwriter specialist and other one mostly trades
in securities and bonds.
Introduction to investment banking
Investment banking is getting more and more importance in the economy of a country as a result
of its impact on money market of a country (Baig, 2019). They play important role in generating
funds for IPOs as it is easier for the companies to sell their stocks in market to a single entity
rather than masses especially when doing it for the first time. Aggarwal, Prabhala and Puri
(2002) found an evidence supporting that a large portion of shares issued by the companies are
being held by financial institutions in the form of underwritings. IPO can be profitable for
generating required cash for smoothening the business activities of a company. It has been found
that they are also providing brand awareness of company to general public (Demers & Lewellen,

2003). As companies are in initial positions of offering the funds to the general public, the cost
of finding information about the company individually would be high causing less investment by
the people in IPOs. Investment banks can achieve this at lower price by achieving economies of
scale Boyd & Prescott, 1986). The growth of financial institutions is mostly measured by private
credit and market capitalization but for investment banking these measuring techniques are not
applicable (Schröder et al., 2012). Hartmann et al. (2007) provided a better way of measuring the
performance of investment banks. According to them it can be measured by financial innovation
and completion of the market. They argued that it can be found by the amount of money spent by
the bank on new venture financing. One of the greatest roles performed by investment banks is
merger and acquisition. It is a process that can help to generate economy benefit in the country.
For example, in 2000, merger and acquisition accounted for 11% of GDP of the country. As a
specialist of M&A, investment banks can help companies to get into negotiations. The other role
provided by the investment banks is to conduct surveys in order to provide information about the
availability and price of companies to its customers who wants to do mergers. Merger
and acquisitions can play important role in a firm. According to Sorensen
(2000), companies acquire market power through acquisitions. Sometimes acquisitions take
place when inefficient management is working in an organization and it is replaced by an
efficient one.
Investment banking in UAE
Investment banks in UAE also provides a lot of services in the region. It has been found that
merger in UAE is found profitable in term of shareholders wealth in the year of merger
(Fernandez & Kumar, 2014). The middle east region is getting more and more in mergers

and acquisitions deals. In year 2012, 398 deals had been taken place and increased to 442 in the
year 2013.
UAE economic and investment market
UAE was once oil-based economy, but the visionary leaders have seen that the oil will diminish
one day, and they converted their economy from oil-based to investment based by investing
heavily in infrastructure and tourism. As a result of that, UAE is one of the largest economies in
the world with GDP of $421,141. As it is one of the free economies, foreign investment is also
encouraged in the country with investment of $10.3 billion was done in 20182. The resulted
growth created new job opportunities in the country and increased the living standard of the
citizens. UAE also brought head offices of many firms in the country including international
banks. According to the dnb.com, there are 70 main investment banking companies working in
UAE with lot of international banks such HSBC, The Bank of New York Mellon, and Deutsche
Bank. As country is enjoying every low interest rate (1.25% p.a.3). This inspires the individuals
and companies to invest the available cash and savings with investment banks in order to
generate higher ROI. The banks have option to earn better returns in investment rather than
managing deposit accounts. One of the reasons for low interest rate offered in the country is its
low inflation rate that was reported 0.43% in 2019. The low inflation rate discourages the saving
accounts. As a country with lot of business potential, investors come from different region to
invest in the UAE. Most of them depends on local investor to support them financially in their
business startups. It is mostly done in the form of merger and acquisition. Mergers and
1 https://tradingeconomics.com/united-arab-emirates/gdp
2 https://u.ae/en/information-and-services/finance-and-investment/foreign-direct-investment#:~:text=Foreign
%20Direct%20Investment%20(FDI)%20in%20the%20UAE,-According%20to%20the&text=The%20value%20of
%20FDI%20inflow,to%20Arab%20countries%20in%202018.
3 https://www.ceicdata.com/en/indicator/united-arab-emirates/short-term-interest-rate#:~:text=The%20data
%20reached%20an%20all,1.25%20%25%20pa%20in%20Oct%202020.