Brokers vs. Banks! Should banks not be provided with brokerage license? Why are brokers against it?

Mon, Jan 7, 2019 10:26 AM on Exclusive,

Usually, when an initiation is introduced in the country, it has always been backed up with criticism(s). “It can’t go right” is the mainstream judgment Nepalese tend to make before it even gets into practice. In our financial economy, a lot of changes have been taking place since few years ago. Increment of paid up capital, introduction of online trading, access of foreign loans to banks- all of these were followed by some sorts of negative remarks. In the same scenario, NRB has finally provided access to banks in order to provide brokerage services for general public. The motive behind this step was to encourage investment in nooks and corners of the country.

The logic behind the step undertaken by NRB is quite rational. Since commercial banks are escalating their branches rapidly even in the rural areas, taking brokerage services to these investors will be comparatively easier from the side of commercial banks. However, brokerage houses have showed their disagreement in this process. The brokerage firms are in the support that commercial banks should not get license of brokerage service at this current point.

Argument 101: Commercial banks will be involved in insider trading, says brokerage firm.

Sources have claimed that brokerage firms believe commercial banks will be motivated towards insider trading if they run their subsidiary brokerage services. However, what these brokers failed to understand is there is a certain difference between being a broker and being a dealer. As a broker, commercial banks will be executing orders of the investors. They are not dealers who are supposed to trade on behalf of investors.

Argument 102: Cost of opening a new branch in rural exceeds the revenue earned.

Independent brokerage firms are in the view that government never created an environment that supported these firms to open branches in rural areas. In fact, some of these brokers have also concluded the cost of opening a branch in a rural area exceeds the revenue earned by these independent brokers.

If this argument is to be analyzed, it rather reflects broker houses in favor of this argument lack a sense of doing business. In simple words, whenever a company decides to expand its business beyond the existing geographical are, an extra cost will always be seen. However, it is upon the company as how will it create a value to new customers. The broker houses are still not in the favor of opening a new branch outside Kathmandu valley because they believe it will incur an extra cost. However, what they ignore to understand is no matter what, every financial firm will have a challenge to bring in customers from the rural segment of the country. Be it a bank or an investment firm or an insurance company, each of them has to create awareness to the people in rural areas first place. Post this, the residents in rural areas will opt for their services and only revenue can be generated.          

Argument 103: The customer segment of brokerage firms will be overlapped by commercial banks.

In addition to this, they further believe that commercial banks will initiate their brokerage services from the urban areas itself. In a way, commercial banks will overlap the customer segment of the existing brokerage houses.

Here, our independent brokerage firms are rather imposing the negative power of syndicate. This argument clearly opposes the idea of open market economy and democracy. Here is my question to brokers- As an individual, if I have an opportunity to get a better service from a certain commercial bank, why are you interfering in my rights to enjoy that service? It is sad to see that instead of worrying about how can brokerages now differentiate their services from the services of commercial banks, brokerages are rather whining about new competition in the market.

Now that we have looked into why these arguments are rather the reflection of insecurities of the existing brokerage houses instead of a bad decision undertaken by central bank, let us look at the impact that this decision can make.

  • Commercial banks have relatively higher fund than brokerage companies. So, providing access to margin loans also becomes easier. Moreover, when investors go into loss, commercial banks will be able to sustain the loss due to its possession over higher funds. However, brokers have fewer funds so it will be risky for brokers to sustain the loss of investors on margin loans.
  • In the past, only few brokerage firms have provided trainings with the objective of bringing in prospective investors into the market. After the access of license to commercial banks, both brokers and commercial banks will be forced to provide such trainings. The brokerage services will also depend upon networks if the existing firms. Hence, provision of trainings will be a major source of networks to both the firms.
  • Independent brokerage firms can also introduce new products such as app base trading, virtual trading games and other products and schemes in the products. In other words, the independent brokerage firms should be able to come up with better software and technology and gain trust of the authorities that these brokers will be able to handle other market products such as derivatives, forex, etc.
  • The entire stock market has been complaining that the market is in bearish because of less number of participants. Therefore, provision of license of brokerage service to commercial banks and encouragement to open new branches in rural areas of the country will expand the outreach of NEPSE. More people will be informed about stock market and more people will join the market. In a way, both the volume of NEPSE and outreach will substantially increase.

Finally, Zerodha is one of the many stock broker that has established itself as one of the second largest broker unit in India. The founder Nithin Kamath’s journey is itself inspiring to the traders, investors or whosoever related with capital market. Mr. Kamath gained popularity as he introduced discount pricing model and a better technology at Zerodha. Brokers in Nepal should be inspired from such personalities and should be motivated to work to make a better investment environment rather than running after profits. We all acknowledge that there is a lot to be done in Nepalese secondary market so why not we all come together and provide investors a better investing experience?