I've installed QGIS 2.16 and have noticed that the Merge (Vector Menu>Data Management) doesn't appear to have a Folder option anymore. This was the option that allowed you to process/merge a complete folder without having to load layers into your project/workspace first. I've had a look at the changelog for QGIS 2.16 - although fTools have been replaced by Processing tools I can't see why the extra functionality has been removed.
Due to the drop of ftools, there is no chance to merge a whole folder of shapefiles from the GUI anymore. It should be possible with ogr2ogr on the commandline: http://www.northrivergeographic.com/ogr2ogr-merge-shapefiles , but you have to be sure only merging files of the same geometry type.
Merge Vector layers algorithm only deals with loaded layers from the canvas. This is more or less what the SAGA module of the same name already does, but far less than ftoools provided.
I reported the bug at https://hub.qgis.org/issues/15321. Lets see how the developers deal with it.