Where does mortgage money actually come from? When you get a $500K mortgage, who actually writes the checks? Most people have no idea. Does it come from a bank? Does it come from the government or some large quasi-governmental agency like Fannie Mae or Freddie Mac? It all seems so confusing and the numbers are so big that they become abstract. But an understanding of where the cash comes from is the first step to understanding how the mortgage industry operates.
You can effectively break down the source of money into two broad categories. On the one hand, you have banks that recycle money that's been deposited into personal and corporate accounts. We all have bank accounts; checking accounts, savings accounts. That money all belongs to us and the bank pays us interest on it. But they, in turn, lend that same money out to people who want to borrow it.
These banks then charge their borrowers a higher interest rate than they offer to their savers. That's how they make their money. They charge what's called "a spread" between their borrowing interest rates and their deposit interest rates. In fact, banks can even lend out more money than they physically have on deposit, based on ratios federally regulated by certain governmental agencies. But the details of that mechanism are beyond the objectives of this article. The point is that banks get money from our deposits and that's what they lend out to their borrowing clients.
The interest rates charged by these banks are heavily influenced by the decisions of the Federal Reserve. Most of us are familiar with Alan Greenspan who has been the chairman of the Fed since 1992. His term just came to an end on January 31 2006 and he is now being replaced by Ben Bernanke. At the time of this recording, the Fed has raised interest rates 14 consecutive times during the past two years to gradually tighten a highly accommodating monetary policy that's been in place since 2001.
The Fed manipulates interest rates by buying and selling bonds in the bond markets. During challenging economic times, the Fed buys bonds on the open market, and they pay for these bonds with cash. As the Fed continues buying bonds, it floods the market with cash. All of this excess cash makes money more available for people who want to borrow and interest rates naturally come down as different lenders compete for a limited number of borrowers. Think about it. If there's excess cash out there, the interest rates to borrow that money gets bid down as different lenders compete for the business. Borrowers naturally go for the lowest rate.
When the economy starts growing again, consumer confidence starts rising and people start spending money again. They buy cars. They buy stainless steel refrigerators. They buy computers. With rising demand, companies can start charging more for their products. Profits start rising and soon, workers start asking for raises and better benefits. That increases costs for companies and a vicious cycle of inflation begins.
Inflation is a complicated phenomenon but suffice it to say, it can send the economy into a tailspin. So, to slow down that cycle, the Fed can start selling bonds on the market. Buyers pay for these bonds with cash and the Fed immediately puts that money away, taking the cash OUT of the economy. With less cash available on the open market, borrowers start bidding up interest rates which dampens the feeding frenzy and keeps the economic growth at a sustainable level.
The interest rate directly affected by the Fed is what's called "the Overnight Rate." This rate is what the banks charge each other. You may or may not be familiar with the Overnight Rate but most of us are familiar with the Prime Rate. This rate is simply the Overnight Rate plus 3. Right now, for example, the Overnight Rate is 4.5% so the Prime Rate is 7.5%. Every time the Fed makes a change, the Prime Rate changes at the exact same time.
There are also a number of indexes that are affected by these policy changes made by the Fed. Some of you have heard of the LIBOR index. If you're curious, the acronym LIBOR stands for the London Inter-Bank Offered Rate. You may have also heard about the MTA index. It stands for the Monthly Treasury Average and there are others like the Cost of Funds Index and so on. All of these indexes are all heavily influenced by the actions of the Fed. So as you can imagine, they have all gone up significantly during the past two years. In 2003, the Prime Rate was at 4.00%. Today, it's at 7.5%. In 2003, the LIBOR and MTA indexes were both around 1.00%. Today, they're at 5.3% and 4.7% respectively.
The Prime Rate and all these various indices govern the interest rates of all variable rate loan products. For example, a home equity line of credit is a variable rate product and is generally tied to the Prime Rate. There are also a lot of loan products these days that are fixed for the first few years, but that become variable after that. Once the fixed period expires, they are tied to one of the indices like the LIBOR or the MTA. Anyone who has a variable rate product has seen their payments go up significantly over the past two years.
We started this discussion by saying there are two primary sources of mortgage money. The first is from bank deposits. The second comes from a wide variety of "investors" who provide money through Wall Street. But don't think these are just a bunch of super wealthy individuals. They're actually Money Managers that are managing our own money. Most of us have investment accounts like Insurance Funds, Pension Funds and various Retirement Funds. Many of the accounts that contain all these funds end up housing huge amounts of cash. You can imagine the Pension Fund for General Motors or some other Fortune 500 company. Think about Insurance Companies like New York Life or State Farm. These companies manage immense sums of money; money they have accumulated from all their contributors - people like you and me.
These huge funds are managed by professional Money Managers. They are always trying to maximize the return they get on this money so they look for good places to invest. For the most part, they end up putting the cash into three main areas. They buy equities; stocks of various companies that trade on the stock exchanges - shares of General Electric or Google or Starbucks Coffee. They also buy corporate and government bonds. That's the second choice. And they buy what's called "mortgage-backed securities". That's the third choice. Well, those are mortgages! They're bundled mortgage loans that are bought and sold on Wall Street every day.
Essentially, these various Money Managers approach the mortgage business and say, "all right, you can lend out our money as long as you follow these guidelines". The guidelines they're referring to are the underwriting guidelines Mortgage Brokers have to follow when helping someone apply for a loan. The interest you pay becomes the return on investment for these Money Managers. So that's where much of the money comes from. Now, within certain limits, many of these loans are insured by Fannie Mae or Freddie Mac as long as they meet their underwriting guidelines. As you can imagine, most investors have guidelines that closely resemble the Fannie Mae or Freddie Mac standard underwriting guidelines. The Fannie Mae and Freddie Mac guidelines are the benchmark for the entire industry.
Today, there's so much money out there, money that has accumulated from Baby Boomers putting money aside for their retirement during the past 25 years, that a lot of investors have widened their guidelines beyond the standard Fannie Mae or Freddie Mac requirements. This is happening through the competitive process. There's a lot of money out there. An economist might say, "there's excess capital" out there. And what happens when there's excess capital? Well, you can bet on two major results. First, you can bet that interest rates will get bid down as various investors compete for the business. Second, you'll start seeing more and more innovative loan programs out there.
You have all seen this in your own lives. You've seen interest rates get bid down lower and lower with the bottom just behind us, back in 2003. Interest rates are now slowly on the rise again and you can bet they'll start rising faster when all the Baby Boomers start retiring in a few years and start drawing money out of those huge pools of investment capital. You've also seen a flood of innovative loan programs. First came all the different Adjustable Rate Mortgages, or ARMs. Then came the Interest Only options. Now, they have these Negative Amortization loans. You know the ones: the loans that start with an interest rate of just 1%. Interest rates were never that low and they never will be. These loans allow borrower to make payments that are not even enough to pay the interest. So the loan balance actually gets bigger each and every month. We've all seen these phenomena play out right in front of our eyes.
On the surface, it looks like all these mortgages come from a few large well known players; companies like Countrywide Mortgage, Wells Fargo, Chase or Bank of America. Yes, these guys are huge players in the mortgage business. But that doesn't mean the money is all theirs. Of course, Wells Fargo and Bank of America have all kinds of regular banking business but their mortgage divisions are generally in the business of packaging and servicing loans. They package the loans and sell them on Wall Street. In many cases, you may not even know because they continue to "service" the loans themselves. That means they do the customer service, they collect your payments and they pass them on to the investor that holds the actual loan, less an administration fee of course.
So again, this is all a direct result of excess capital. There's a lot of money out there and they're all competing for your business; your mortgage. So they're all offering different perks to try and get you to pick them. A lower rate. Looser guidelines. Flexible new loan programs. It's all marketing, trying to get you to borrow their money rather than somebody else's.
Reviewing, there are two sources of mortgage money and both sources come indirectly from you and me. Your bank deposits get recycled and lent back out to the community. Your investment, insurance and retirement funds also get recycled and lent back out. It's all a big circle from our savings to our debts. Obviously, there are some very wealthy people out there who have huge savings and few debts. Others have huge debts and very little savings. But in the aggregate, it's the entire community that lends money to itself and it's the total amount of savings in the community that determines the interest rates within it.
If there's lots of money available, interest rates are low. If there's a shortage of money, interest rates rise. So the fact that we've enjoyed steadily dropping interest rates in recent years is a sign that the economy is healthy and that there's lots of money available. And the fact that rates are now slowly rising is a sign that the pool of investment capital is slowly shrinking. The soon-to-be retiring Baby Boom generation will definitely shrink that pool of money and we can expect interest rates to continue rising as a result. In the meantime, it's still a great time to borrow money and we should all take advantage of it while it lasts.
Wednesday, April 22, 2009
Success starts with the right people in the right jobs
Success starts with the right people in the right jobs. Particularly in leadership positions. But if that's really the belief of most organizations, why is it that so many selections fail at their jobs - or - even worse, just hang on and take up space? Based on feedback from any number of studies, candidates hired for leadership or emerging leadership positions are successful about a third of the time, with success being defined as meeting or exceeding the expectations of the organization. About a third fail, with failure defined as not meeting the expectations of the organization, and about a third survive, with survival being defined as getting close enough to meeting expectations to avoid being let go.Often the rationalization for this level of performance is that the best hitters in baseball only get a hit about 1 out of three times at bat - and they're considered stars. The difference is that once the batter ends an at bat - it's over.But when a failure to get a hit in selection occurs, the problems are just beginning. Low morale, increased turnover, missed goals, reduced profit, possible lawsuits and lowered standards of performance are all part of a poor selection decision. And those problems just get worse as the decision on what to do gets put off - no one likes admitting to a mistake. And the biggest cost - the opportunity cost - the cost of not having the right person in the right job - is by far the biggest cost of a poor selection decision.And yet, many organizations that are constantly striving and working toward improvements in quality, customer service, sales, and profits appear satisfied with the status quo in selection. While they are convinced that standing still in so many areas is actually losing competitive advantage, they don't see the same thing happening in selecting the right people for the right jobs. To the extent they stand still on improving in this most vital of areas, theyre losing competitive advantage.It doesn't have to be that way. In fact, every organization striving to improve their selection batting average can become at least 30% more effective.How can you add 30% effectiveness to your people selection processes - selection including hiring, transfer, promotion and team membership?Here's how:1 - Start with a critical position that has been hard to fill - where turnover and failure to perform have been a problem. Or a critical position where fit with the existing organization is essential to success.2 - Look for biases that have no bearing on the job that may have limited the applicant pool. I don't mean the mandated of race, sex, ethnicity, religion - those should have been dealt with long ago. I'm talking about ensuring your pool of applicants/candidates isn't being restricted by biases and assumptions and cultural differences that have no real basis from a organizational standpoint.3 - Create the key accountabilities for the job using the key stakeholders.. Prepare to be amazed at how different one key stakeholder sees them from another. Get agreement on the top three to five - even if that means having to really negotiate to agreement. This is key at the beginning of the process - agreement here will go a long way to ensuring the people involved in the selection are all on the same page. And the recruiting is targeted.4 - Have the stakeholders identify the education, experience, industry experience, and other hard data elements. These are the quantifiable data points that every candidate must have for further consideration.5 - Identify the behaviors, motivators and personal skills that have been successful in the job. Get them from the people who have been successful in the job, from the people with close contact and interdependence with the job, with the people who manage the job. If assessments of behaviors, attitudes and skills are currently being used, use the results of past assessments to help create the profile. If they are not in use, or the assessments in use don't lend themselves to this process, get ones that do.6 - Have the stakeholders meet to review the findings and to use them to arrive at a profile of the ideal candidate and to prioritize must haves, want to haves and nice to haves. Use assessments to help the stakeholders in this vital step. The process is benchmarking- creating the benchmark against which all candidates will be measured. No more letting the candidate pool set the standards for success.7 - With this information in hand, train and develop an interview team to use it in creating a coordinated interview process. And have the candidates that pass the education, experience and other hard data elements take the same assessments. Review the assessment reports of the candidates against the behavior, motivators and personal skills profile created by the stakeholders in the organization.8 - Use what was learned in this first benchmarking project and apply it to other high value positions. The process has value at all levels - but it does take an investment of time and effort, and the early efforts should be directed at the highest potential gain positions.Organizations that have followed this process have seen major improvements in selecting the right person for the right job. Organizations have seen their comfort level and support for newly selected people jump because there is a firm foundation for the selection decision. And the profile completed by the stakeholders provides the blueprint for development and success of the person selected. Success and retention rates have increased well beyond the 30% level in many organizations.Examine your own process. See what tools you are currently using. Don't be satisfied measuring activity - when evaluating your current process measure results in the success of the selections. Don't confuse survival with success. It's a roadblock to increasing the level of excellence in the talent level of the organization. Real improvement comes with the right person in the right job. Use this process for your own success.
By understanding the performance of socially responsible stocks
By understanding the performance of socially responsible stocks, individual socially responsible stock, the socially responsible investor can gain the profits of socially mindful investing, either through individually socially responsible investments, or by engaging with socially responsible investment funds and socially responsible funds. In addition, the article also confers the sustainable investing approach in investing with ethics, green investing, values investing, and socially responsible investments.
Although socially responsible investing has expanded dominance in the last numerous decades, countless socially responsible investors are still under the feeling that to invest in social good, they must decline certain levels of portfolio performance. However, with the confirmation escalating that socially responsible investment funds strictly match, if not surpass, their market counterparts, many socially responsible investors are capitalizing their earnings – and their involvement to social good.
Long-term vs. short-term corporate focus
Socially responsible investing (SRI) takes the long term vs. short term investment discussion to a socially alert investing level. In comparison to countless corporations who take advantage of natural assets and human labor for short-term profits, a socially responsible stock drives under long-term natural sustainability, lending itself well to green investing. For example, the oil magnates such as Exxon-Mobile and Chevron have experienced exponential expansion in the last numerous years. However, where will these corporations be in 10 or 20 years – when the oil rigs are pumped dry and clients have switched over to hydrogen-fuel cars? In stark contrast, green investing stress the long-term sustainability of corporate social responsibility on the environment, society, and monetary well-being.
Overarching SRI principles
The extensive investment ideology of socially responsible investing are conceptualized based upon unstable techniques of social investing analysis. The execution of social investing in Europe is usually diverse than in the United States, but the underlying essentials are based upon using a set of foundation values. Depending upon the socially responsible investments portfolio or socially responsible funds, the SRI analysis may be based on one or several of the following criteria:
1. Sustainability Practices : This socially conscious investing perspective analyzes whether a company’s business practices are sustainable in the long term. If the business operations negatively impact the environment, economy, communities, or human welfare, then it is not considered sustainable investing for long term profitability.
2. Corporate Governance : This socially responsible investing component analyzes the company’s policies on employee, community, investors, stakeholder, and environment relations. Social investment’s mutual authority analysis is a separate process from the company’s financial outlook.
3. Religious Beliefs : Considered the original father of socially conscious investing, religious beliefs have screened many portfolios. For example, a Catholic screened socially responsible investing portfolio may divest companies that produce contraceptives. Both Christian and Muslim screened socially liable funds are prevalent, imparting strong religious beliefs onto the social investing analysis of opportunities.
4. Public Policy : Geared for socially responsible stock portfolios that include international holdings, the public policy filter analyzes foreign governments’ actions, either on an individual country case-by-case basis, or based upon an international mandate, such as a ban by the UN or NATO.
Socially responsible investment funds’ performance
Beyond the desire to contribute to social good, socially responsible investors are seeking SRI investment performance. Values investing demonstrate that socially conscious investing can be done quite profitably. In fact, in some market conditions, socially responsible funds outperform their market counterparts.
The Domini 400 Social Index (DS 400), the socially responsible investing industry benchmark, has outperformed the S&P 500 since its inception in 1990. According to KLD Indexes, as of November 30, 2007, the DS 400 has enjoyed 11.75% annualized returns, leading ahead of the S&P 500’s 11.21%. The DS 400 screens its index for socially responsible stocks based upon environmental, governance, and social filters, and within its index, there are 250 S&P 500 represented companies, 100 companies not on the S&P 500, and another 50 socially responsible stocks that have demonstrated significant strength in social investing filters.
With the sustained long-term SRI investment returns in the socially responsible investment funds, such as the DS 400, socially conscious investing can match or outperform its market counterparts – dispelling the myth that a socially responsible investor must sacrifice performance for social consciousness.
The risk exposure of socially responsible stocks
However, when comparing SRI indexes against market benchmarks, the question begets: does the performance of socially responsible investment funds come at a higher portfolio risk than its market counterparts?
Considering the rigorous screens of socially responsible investing portfolios, the socially responsible stocks are naturally geared towards companies with smaller market caps. Theoretically, the lower market caps contribute to a higher volatility and beta for the overall socially conscious investing portfolio. For example, the Domini 400 has a weighted average market cap of 83% of the S&P 500.
Beta Coefficient: measurement of an investment’s volatility against the market
However, instead of reducing the overall beta, the socially responsible investments screens minimize the individualized corporate risk. By evaluating a socially responsible stock based upon its governance, sustainability and relationship with stakeholders, social screens reduce the economic risk of the individual corporate holding. For example, by not choosing to invest in tobacco, socially responsible investors shield their portfolios from the negative performance factors of lawsuits. Or, by selecting companies that have good relations with their employees, the negative financial reprimands of strikes are curtailed from the socially responsible investment portfolio.
Risk and volatility are not necessarily synonymous in the world of financial portfolios. Whereas beta may be a good indicator to evaluate the short-term probability that a negative event may occur, this does not specifically analyze the individualized corporate risks. Though socially conscious investing portfolios may have higher betas, the risk of the socially responsible stocks in the portfolios experiencing financial degradation is more limited than the market benchmarks.
Alpha: risk-adjusted measurement of an investment’s excess return over “risk-free” instruments
One of the most compelling factors of socially conscious investing is that despite its demonstrated increased returns, the risk does not necessarily increase. Social investing may be one of the few exceptions to the risk-to-reward ratio. In fact, the performance of the socially responsible funds may not be fully indicative of its true earnings, once the lowered individualized corporate risk is weighted. After adjusting for both short-term and long-term risk, social investing’s alpha may be stronger than the numbers indicate. For more information visit our website http://www.sristocks.com
Although socially responsible investing has expanded dominance in the last numerous decades, countless socially responsible investors are still under the feeling that to invest in social good, they must decline certain levels of portfolio performance. However, with the confirmation escalating that socially responsible investment funds strictly match, if not surpass, their market counterparts, many socially responsible investors are capitalizing their earnings – and their involvement to social good.
Long-term vs. short-term corporate focus
Socially responsible investing (SRI) takes the long term vs. short term investment discussion to a socially alert investing level. In comparison to countless corporations who take advantage of natural assets and human labor for short-term profits, a socially responsible stock drives under long-term natural sustainability, lending itself well to green investing. For example, the oil magnates such as Exxon-Mobile and Chevron have experienced exponential expansion in the last numerous years. However, where will these corporations be in 10 or 20 years – when the oil rigs are pumped dry and clients have switched over to hydrogen-fuel cars? In stark contrast, green investing stress the long-term sustainability of corporate social responsibility on the environment, society, and monetary well-being.
Overarching SRI principles
The extensive investment ideology of socially responsible investing are conceptualized based upon unstable techniques of social investing analysis. The execution of social investing in Europe is usually diverse than in the United States, but the underlying essentials are based upon using a set of foundation values. Depending upon the socially responsible investments portfolio or socially responsible funds, the SRI analysis may be based on one or several of the following criteria:
1. Sustainability Practices : This socially conscious investing perspective analyzes whether a company’s business practices are sustainable in the long term. If the business operations negatively impact the environment, economy, communities, or human welfare, then it is not considered sustainable investing for long term profitability.
2. Corporate Governance : This socially responsible investing component analyzes the company’s policies on employee, community, investors, stakeholder, and environment relations. Social investment’s mutual authority analysis is a separate process from the company’s financial outlook.
3. Religious Beliefs : Considered the original father of socially conscious investing, religious beliefs have screened many portfolios. For example, a Catholic screened socially responsible investing portfolio may divest companies that produce contraceptives. Both Christian and Muslim screened socially liable funds are prevalent, imparting strong religious beliefs onto the social investing analysis of opportunities.
4. Public Policy : Geared for socially responsible stock portfolios that include international holdings, the public policy filter analyzes foreign governments’ actions, either on an individual country case-by-case basis, or based upon an international mandate, such as a ban by the UN or NATO.
Socially responsible investment funds’ performance
Beyond the desire to contribute to social good, socially responsible investors are seeking SRI investment performance. Values investing demonstrate that socially conscious investing can be done quite profitably. In fact, in some market conditions, socially responsible funds outperform their market counterparts.
The Domini 400 Social Index (DS 400), the socially responsible investing industry benchmark, has outperformed the S&P 500 since its inception in 1990. According to KLD Indexes, as of November 30, 2007, the DS 400 has enjoyed 11.75% annualized returns, leading ahead of the S&P 500’s 11.21%. The DS 400 screens its index for socially responsible stocks based upon environmental, governance, and social filters, and within its index, there are 250 S&P 500 represented companies, 100 companies not on the S&P 500, and another 50 socially responsible stocks that have demonstrated significant strength in social investing filters.
With the sustained long-term SRI investment returns in the socially responsible investment funds, such as the DS 400, socially conscious investing can match or outperform its market counterparts – dispelling the myth that a socially responsible investor must sacrifice performance for social consciousness.
The risk exposure of socially responsible stocks
However, when comparing SRI indexes against market benchmarks, the question begets: does the performance of socially responsible investment funds come at a higher portfolio risk than its market counterparts?
Considering the rigorous screens of socially responsible investing portfolios, the socially responsible stocks are naturally geared towards companies with smaller market caps. Theoretically, the lower market caps contribute to a higher volatility and beta for the overall socially conscious investing portfolio. For example, the Domini 400 has a weighted average market cap of 83% of the S&P 500.
Beta Coefficient: measurement of an investment’s volatility against the market
However, instead of reducing the overall beta, the socially responsible investments screens minimize the individualized corporate risk. By evaluating a socially responsible stock based upon its governance, sustainability and relationship with stakeholders, social screens reduce the economic risk of the individual corporate holding. For example, by not choosing to invest in tobacco, socially responsible investors shield their portfolios from the negative performance factors of lawsuits. Or, by selecting companies that have good relations with their employees, the negative financial reprimands of strikes are curtailed from the socially responsible investment portfolio.
Risk and volatility are not necessarily synonymous in the world of financial portfolios. Whereas beta may be a good indicator to evaluate the short-term probability that a negative event may occur, this does not specifically analyze the individualized corporate risks. Though socially conscious investing portfolios may have higher betas, the risk of the socially responsible stocks in the portfolios experiencing financial degradation is more limited than the market benchmarks.
Alpha: risk-adjusted measurement of an investment’s excess return over “risk-free” instruments
One of the most compelling factors of socially conscious investing is that despite its demonstrated increased returns, the risk does not necessarily increase. Social investing may be one of the few exceptions to the risk-to-reward ratio. In fact, the performance of the socially responsible funds may not be fully indicative of its true earnings, once the lowered individualized corporate risk is weighted. After adjusting for both short-term and long-term risk, social investing’s alpha may be stronger than the numbers indicate. For more information visit our website http://www.sristocks.com
With a population of about 6 million people
With a population of about 6 million people, composed of 20 ethnic groups, "with Temne (30%), Mende (30%), Creole (10%) and Other (30%) making up the composition; and with an estimated 935,800 households, Sierra Leone has one of the lowest human development index (HDI) with economic growth estimated at 5.5 percent and inflation at 2.2" (UNDP). The country is scarred by a decade long civil war. And since January 18, 2002 when the war was officially declared over, majority of Sierra Leoneans are today still struggling and in dire conditions.
The persistence of poverty is causing irreversible harm to the Gross Domestic Product (GDP) of Sierra Leone and the good life of her people. The level of poverty and the extreme low levels of incomes due to massive unemployment in Sierra Leone exceed colonial levels by over 60 percent and is not getting better. The country has been classified by a United Nations Human Development Report "as one of the poorest countries in the world with widespread poverty, high infant mortality rate about 182/1000 and life expectancy, among the least in the world, about 38 years; low adult literacy rate estimated at 30% while only 35% of the population had access to safe drinking water in 1998" (UNDP). The country was ranked bottom of the 177 countries listed in the UNDP's Human Development Reports from 1991 to 2004.
The economic costs of unchecked poverty trends will be severe. In the late 70s and the 80s, the widespread students' discontent in the country anticipated the nemesis that befell the country in the 1990s-which could be rightly described as "the age of consequences" when the country had to go through the most brutal civil conflict in modern times claiming thousands of lives with many thousands losing their limbs and causing severe economic losses and the effect on the country's GDP extremely damaging. What this indicates is that the persistence of poverty is creating major security risks and the pervading scenarios of resource scarcity is only causing increased mortality rates as a consequence of unmitigated disease proliferation under extreme conditions.
The social indicators of development in Sierra Leone that fell drastically in the course and aftermath of the 10 years scourge the country underwent putting Sierra Leone at the bottom of UNDP's Human Development Index has not changed much today. More than 80% of the population still falls below the poverty line of $1 per day. Containing poverty, therefore, will require increasing the current levels of support programs that target poor and very poor populations in Sierra Leone and also support increase of women's access to financial services.
Microfinance support structures, for instance, have been found to be quite relevant to poverty alleviation and gradual and steady development in developing countries. And it is no rocket science the way microfinance works: micro loans provided to multiple beneficiaries through microfinance support channels are used as revolving investment funds benefiting many beneficiaries all at once.
However, considerable leadership and organizational development work has to be done to build the capacity of microfinance institutions and micro-financed beneficiaries in Sierra Leone. This is necessary for the microfinance support machine in Sierra Leone so that it exists in a way that it feeds on the success and growth of microfinance supported programs. The growth of microfinance supported programs would translate to supporting more microfinance outreach programs to benefit more Sierra Leoneans thus fueling the engine of economic growth. Periodic programs impact assessments are necessary as well to assess whether microfinance supported programs have had the desired impact on beneficiaries and on the economies of beneficiaries' in various communities.
Per capita poverty in Sierra Leone today is four times as dismal as those in countries like Ghana, Nigeria and Senegal and 10 times as dismal as those in Botswana and South Africa. Sierra Leone is renowned for widespread corruption and as one of the world's most corrupt countries with a per capita income to be the lowest in the world. The current administration must therefore urgently implement a durable national strategy to address the persistent poverty threat through well regulated microfinance structures.
The youth, women and children are by far the most vulnerable to poverty. Widening unemployment increases the mortality rate, and worsening GDP devastates the country at gargantuan proportions. Emerging graduates from higher institutions of learning and vocational institutes are also highly vulnerable to the fallout from the widening unemployment rate in the country, including lack of savings, inadequate healthcare, and almost zero productivity in all sectors of the economy. These categories of unemployed are understandably loath to bear the burdens of the transitioning new political leadership while a whole new crop of politicians continue to corrupt apace.
Launching an effective regime for robustly coordinated microfinance structures presents an opportunity for APC leadership. The APC leadership must strive to bring microfinance channels into a system that establishes the common understanding for the widespread development impact of microfinance loans being one of the main ways beneficiaries create employment for themselves and be able to overcome food insecurity, address emergencies, and pay for medical and lifecycle expenses. With an efficiently regulated microfinance supply structure, the social impact of microfinance growth can also be seen in the growth of education and in the number of children able to complete secondary education in beneficiary communities. Further, microfinance stakeholders would become empowered in terms of increased self-esteem gained from being able to provide for their family and increased decision-making at the enterprise level.
Untapped Potential
Sierra Leone can learn a great deal from Latin America and East Asia's experience with successfully active microfinance programs. "The largest distribution of loans and mobilization of savings in terms of GNP are recorded in South East Asia (Thailand, Bangladesh, Vietnam, and Indonesia), and Latin America (Bolivia, Honduras, Panama, Jamaica, and Colombia)".
Sierra Leone's microfinance sector, on the other hand, is at a very nascent stage, composed of a mix of projects coordinated by NaCSA (National Commission for Social Action) and some international and other local NGOs. About 60 microfinance NGOs, projects and programs in the country are coordinated by NaCSA's Social Action and Poverty Alleviation (SAPA) program (a government run retail MFI). Only 10% of financial services to micro and small businesses were estimated in 2003.
A distinguishing characteristic of Sierra Leone's financial sector is its high exclusivity, mostly serving the middle class, supporting high margin type enterprises and people with guaranteed salaries. The economic activities of commercial banks are primarily on treasury bills rather than investing assets on business sector lending.
Effort to develop the microfinance sector in order to create an inclusive financial sector that has the potential of directly impacting at least 20% of the total population in terms of income and employment generation in a sustainable manner is a sound approach. The relevance of microfinance to economic development is evident and the gradual integration of microfinance into high level commercial financial activities of banks is key to building an all inclusive financial system.
"NaCSA is a governmental body that was established as a 'Social Fund' in November 2001 by an Act of Parliament as the successor to the National Commission for Reconstruction, Resettlement and Rehabilitation (NCRRR). The NaCSA Microfinance Program (MFP) is primarily a technical assistance and training vehicle for building a viable, sustainable and growing microfinance sub-sector. It operates with its own staff and through the NaCSA network of 16 decentralized offices." A recent ACP-EU-supported national survey of MFIs coordinated by NaCSA evaluated the degree of transparency of reporting processes and the kind of increases in efficiency and progress towards operational self-sufficiency these MFIs are making. The March 2008 survey outcomes were meant to determine the kind of sustainability objectives to be pursued. Data from the national survey are meant to be used to increase the effectiveness of ACP-EU interventions in terms of capacity building, internal controls and promoting a customer orientation.
Given the unique nature of the ACP Business Climate Facility (BizClim)-an ACP-EU joint initiative financed under the 9th European Development Fund (EDF) as a proactive capacity building international development program-the NaCSA coordinated survey project provided the opportunity for ACP-EU to play a leadership role in helping to develop a shared understanding of sector needs and gaps, and to provide vision and strategy for bridging challenges. The ACP-EU values the strategic and deliberate setting of objectives, specific policy replication activities and targets, and building capacity. The ACP-EU survey thus made an assessment of the strategic positioning and comparative advantage of ACP-EU in the broader microfinance context in Sierra Leone and vis-à-vis other players in the microfinance arena. It also examines the relevance and significance of ACP-EU investments and technical assistance to ACP-EU-funded microfinance programs.
ACP-EU has offered its capacity (of programs flexibility and professionalism) to contribute to microfinance development and to help Sierra Leone meets her Millennium Development Goals (MDG) measured in terms of cutting poverty in half by 2015. Sierra Leone has need for support to diversify her community level economies and economic activities if it is going to meet her MDGs. ACP-EU has a distinct capacity to innovate in this area by using the best means available (a microfinance demand and supply survey) to find out about the programs impact of microfinance in Sierra Leone by asking the various stakeholders for their perceptions. Ahmed Saybom Kanu, Administrative Officer for Statistics Sierra Leone explained in a meeting with the author of this essay "that the issue of micro credit has greater sociological dimensions. How these dimensions are looked at, varies. Therefore, it is good to learn more about microfinance and how the sector can be expanded with greater outreach."
Unfortunately, former president Kabbah's NaCSA squandered an opportunity to properly manage the resources provided by the ACP-EU that could have helped underwrite the transition to a vibrant micro financed economy: instead of efficient management of micro loans, it opted for the politically expedient path of giving away micro loans without proper loan management mechanisms. Many of the microfinance beneficiaries, particularly party affiliates, reacted by misusing micro loans resulting in billions of leones used in misplaced priorities. The Kabbah government had less motivation to impose stringent microfinance-efficiency standards, let alone be transparent and conform to ACP-EU standards. The current APC leadership should now be expected to actively debate the capacity of NaCSA on the development of a vibrant microfinance sector. The emphasis should be on creating opportunities for the poor and low income people. In that regard, the country's large informal structure needs to be stimulated and developed through a well coordinated microfinance supply system to absorb huge numbers of the population to become gainfully self employed. "Estimates are that the informal sector accounts for at least two-thirds of the total labor force, and 70% of the urban labor force. More than half the population is under 20 years of age. Of the total population around 65 percent lives in rural areas" (UNCDF).
The Microfinance Landscape
The commercial banks are both major players in the Sierra Leone economy and the country's leading lending institutions. Commercial banks' leadership will therefore be indispensable in the creation of a national regime to coordinate microfinance opportunities. But commercial banks have shown little or no interest in microfinance and they hesitate to help establish a national system capable of channeling the necessary funds to microfinance activities. These banks provide mostly basic financial services with a client base of about 85,000 clients.
Fortunately, the Sierra Leone Commercial Bank (a bank partly owned by government) is beginning to recognize the growth potential of microfinance alternatives. The bank has created opportunities in microfinance borrowing using a group-guarantee methodology with loans to be provided to groups. Also, the other government owned banks, the National Development Bank (NDB), the National Cooperative Development Bank (NCDB), and the Bank of Sierra Leone's community (chiefdom) pilot banks have involved in wholesale and retail finance to MFIs.
The government needs to support the enabling environment to expand the landscape of microfinance operations in Sierra Leone by providing tax breaks to mainstream commercial banks to encourage these banks to support innovations in the area of microfinance. Greater involvement of mainstream commercial banks in microfinance lending should be more than sufficient to quickly transform the nation's microfinance infrastructure from a relief orientation to a self sustaining business-like orientation. The greater involvement of commercial banks strategy will complement the effort of institutions like World Hope International (WHI); the Association of Rural Development (ARD); the American Refugee Committee (ARC), and the Grass Field Women's Development Association which transformed itself into PRIMED (Promoting Initiatives for Micro Enterprise Development) which have been the most recognized microfinance institutions in Sierra Leone.
The government should also take advantage of the potential of the two indigenous financial mechanisms that provide access to credit-the Osusu or rotating savings and credit associations (ROSCAs) and moneylenders. The ROSCAs are common throughout the country and they serve as mechanisms for people to save for medical, bundu society, bride price, or school fees. The moneylenders found throughout the country (with the common terms of borrowing being a 2 for 1 system) have also been crucial in providing microfinance to hardworking Sierra Leoneans at the informal level. The government should provide formal support mechanisms to directly encourage the development and growth of the activities of these ROSCAs and moneylenders rewarding those ROSCAs and moneylenders that successfully manage high numbers of beneficiaries. This performance-based support system would allow ROSCAs and moneylenders to compete for funds by implementing government microfinance goals through a combination of creative ROSCA and money lending initiatives, including the creation of ambitious innovative enterprises and the implementation of regulations that allow high recovery rates. ROSCAs and moneylenders are potential developers of microfinance facilities. Their innovative lending technologies will need to be supported by sustained government subsidies to help them grow and become affordable enough to formalize their activities.
Furthermore, the government should support research and development on and the deployment of innovative microfinance lending technologies and legal status. The need for a fully operational credit bureau to improve the flow of information on current and potential bank customers is becoming even more relevant.
Expectations of the Commons
Microfinance and the enhanced self-esteem that comes with it is the Holy Grail for economic development in Sierra Leone. By meeting microfinance start-up, expansion, consolidation, and integration are sufficient ingredients to support national economic growth. With the capacity to develop and test products in existing markets and new markets the economy booms and repayment of microfinance loans is ensured. Various client-built awareness programs can also be benchmarked from elsewhere to make MFI programs effective in Sierra Leone. The financial flows from microfinance activities would provide a national macroeconomic shock absorber, with more funds from recovered micro loans automatically flowing to growing the economy.
Further, successes of successful MFIs need consolidated. Also, strengthening MFIs and using the right organizational formalization and industry norms (management oversight, organizational policies, procedures and systems) are required. When the productivity of MFIs is increased their scale and scope grow and prices should be adjusted to ensure profitability. Again, the convenience of a special regulatory framework in place for MFI growth will sow seeds for growth and the ambition to venture into new markets.
MFIs should be integral to the formal financial sector. Understanding, therefore, the volume of demand for microfinance can help determine sources that can finance their growth. Demand oriented products can be introduced in communities and in turn successful MFIs in these communities can pay taxes and licensing fees to government to support national economic growth. Also understanding the banking system in Sierra Leone and the modalities involved in providing financial services to poor and low income people can finance growth and attract capital from private capital markets and deposit takings from the public.
Addressing opportunities and constraints for development of the microfinance sector in Sierra Leone is critical. There is a high unmet microfinance demand in the country. By getting to know the gap between the demand and supply of credit for micro and small business activities, to understand the impact of ROSCAs and traditional money lenders to microfinance in Sierra Leone is also critical. The private sector has literally been found to be the engine for growth in developing societies as well as developed societies. But if microfinance beneficiaries can only be financed by collecting cash collaterals then the very essence of microfinance is negated. Grants and soft loans to help build the capacity of microfinance operations in the country are necessary and they define the very essence of microfinance - character and capacity building to help the hopeless succeed in generating income for themselves and to manage their income competently. With microfinance, Sierra Leoneans lacking adequate subsistence and living in poverty are given a chance to start somewhere. The success of microfinance sustains real national economic growth.
And perhaps, however, the most daunting concerns about microfinance is the question of regulation. Microfinance beneficiaries could simply be tempted to renege on their obligations to repay micro loans, undermining the very concept of micro financing completely. Most fundamentally, they would jeopardize the collective benefits of the national microfinance regime. Therefore, the incentives to develop a credit history must be strong, and the price of default in lending must be high. Capacity building of regulatory authorities and development of effective regulatory tools (also a salient recommendation by the 2008 ACP-EU BizClim financed national survey) is essential for effective regulation of microfinance.
As microfinance institutions face increasing demands to put in place stringent regulatory measures, the primary enforcement strategy for dealing with recovery of microloans is to impose the threat of temporary exclusion from the microfinance regime and the loss of future access to micro-credit opportunities. Uncooperative beneficiaries would also lose access to high volume investments, for instance, in the mining and agricultural sectors.
The time has come for the government to enable the growth of microfinance lending technologies. A national microfinance enabling regime would serve the nation's economic interests by promoting innovation and opening up new opportunities and services. Based on the outcomes of the recent ACP-BizClim-supported microfinance demand and supply survey of microfinance beneficiaries and MFIs, demand shows the distinctiveness to be greater than total supply. Strong commitment to sustainability and increased outreach as well as profitability and scale are emphasized. The industry needs considerable support to build capacity, capital base and plans for expansion. The concept of microfinance itself is cost-effective in terms of contributing to development and poverty alleviation. Dollars invested are used more than one time. To therefore foster growth of microfinance, character and capacity building infrastructures need to be supported. Character and capacity building supportive infrastructures have the potential "to bring microfinance institutions to such a scale that they can play a role as an integrated part of the broader financial sector. Successful implementation implies the identification of constraints to sector development and a concerted effort to put in place the various building blocks needed to help bring microfinance to scale and to support financial sectors to become more inclusive" (UNDP).
The persistence of poverty is causing irreversible harm to the Gross Domestic Product (GDP) of Sierra Leone and the good life of her people. The level of poverty and the extreme low levels of incomes due to massive unemployment in Sierra Leone exceed colonial levels by over 60 percent and is not getting better. The country has been classified by a United Nations Human Development Report "as one of the poorest countries in the world with widespread poverty, high infant mortality rate about 182/1000 and life expectancy, among the least in the world, about 38 years; low adult literacy rate estimated at 30% while only 35% of the population had access to safe drinking water in 1998" (UNDP). The country was ranked bottom of the 177 countries listed in the UNDP's Human Development Reports from 1991 to 2004.
The economic costs of unchecked poverty trends will be severe. In the late 70s and the 80s, the widespread students' discontent in the country anticipated the nemesis that befell the country in the 1990s-which could be rightly described as "the age of consequences" when the country had to go through the most brutal civil conflict in modern times claiming thousands of lives with many thousands losing their limbs and causing severe economic losses and the effect on the country's GDP extremely damaging. What this indicates is that the persistence of poverty is creating major security risks and the pervading scenarios of resource scarcity is only causing increased mortality rates as a consequence of unmitigated disease proliferation under extreme conditions.
The social indicators of development in Sierra Leone that fell drastically in the course and aftermath of the 10 years scourge the country underwent putting Sierra Leone at the bottom of UNDP's Human Development Index has not changed much today. More than 80% of the population still falls below the poverty line of $1 per day. Containing poverty, therefore, will require increasing the current levels of support programs that target poor and very poor populations in Sierra Leone and also support increase of women's access to financial services.
Microfinance support structures, for instance, have been found to be quite relevant to poverty alleviation and gradual and steady development in developing countries. And it is no rocket science the way microfinance works: micro loans provided to multiple beneficiaries through microfinance support channels are used as revolving investment funds benefiting many beneficiaries all at once.
However, considerable leadership and organizational development work has to be done to build the capacity of microfinance institutions and micro-financed beneficiaries in Sierra Leone. This is necessary for the microfinance support machine in Sierra Leone so that it exists in a way that it feeds on the success and growth of microfinance supported programs. The growth of microfinance supported programs would translate to supporting more microfinance outreach programs to benefit more Sierra Leoneans thus fueling the engine of economic growth. Periodic programs impact assessments are necessary as well to assess whether microfinance supported programs have had the desired impact on beneficiaries and on the economies of beneficiaries' in various communities.
Per capita poverty in Sierra Leone today is four times as dismal as those in countries like Ghana, Nigeria and Senegal and 10 times as dismal as those in Botswana and South Africa. Sierra Leone is renowned for widespread corruption and as one of the world's most corrupt countries with a per capita income to be the lowest in the world. The current administration must therefore urgently implement a durable national strategy to address the persistent poverty threat through well regulated microfinance structures.
The youth, women and children are by far the most vulnerable to poverty. Widening unemployment increases the mortality rate, and worsening GDP devastates the country at gargantuan proportions. Emerging graduates from higher institutions of learning and vocational institutes are also highly vulnerable to the fallout from the widening unemployment rate in the country, including lack of savings, inadequate healthcare, and almost zero productivity in all sectors of the economy. These categories of unemployed are understandably loath to bear the burdens of the transitioning new political leadership while a whole new crop of politicians continue to corrupt apace.
Launching an effective regime for robustly coordinated microfinance structures presents an opportunity for APC leadership. The APC leadership must strive to bring microfinance channels into a system that establishes the common understanding for the widespread development impact of microfinance loans being one of the main ways beneficiaries create employment for themselves and be able to overcome food insecurity, address emergencies, and pay for medical and lifecycle expenses. With an efficiently regulated microfinance supply structure, the social impact of microfinance growth can also be seen in the growth of education and in the number of children able to complete secondary education in beneficiary communities. Further, microfinance stakeholders would become empowered in terms of increased self-esteem gained from being able to provide for their family and increased decision-making at the enterprise level.
Untapped Potential
Sierra Leone can learn a great deal from Latin America and East Asia's experience with successfully active microfinance programs. "The largest distribution of loans and mobilization of savings in terms of GNP are recorded in South East Asia (Thailand, Bangladesh, Vietnam, and Indonesia), and Latin America (Bolivia, Honduras, Panama, Jamaica, and Colombia)".
Sierra Leone's microfinance sector, on the other hand, is at a very nascent stage, composed of a mix of projects coordinated by NaCSA (National Commission for Social Action) and some international and other local NGOs. About 60 microfinance NGOs, projects and programs in the country are coordinated by NaCSA's Social Action and Poverty Alleviation (SAPA) program (a government run retail MFI). Only 10% of financial services to micro and small businesses were estimated in 2003.
A distinguishing characteristic of Sierra Leone's financial sector is its high exclusivity, mostly serving the middle class, supporting high margin type enterprises and people with guaranteed salaries. The economic activities of commercial banks are primarily on treasury bills rather than investing assets on business sector lending.
Effort to develop the microfinance sector in order to create an inclusive financial sector that has the potential of directly impacting at least 20% of the total population in terms of income and employment generation in a sustainable manner is a sound approach. The relevance of microfinance to economic development is evident and the gradual integration of microfinance into high level commercial financial activities of banks is key to building an all inclusive financial system.
"NaCSA is a governmental body that was established as a 'Social Fund' in November 2001 by an Act of Parliament as the successor to the National Commission for Reconstruction, Resettlement and Rehabilitation (NCRRR). The NaCSA Microfinance Program (MFP) is primarily a technical assistance and training vehicle for building a viable, sustainable and growing microfinance sub-sector. It operates with its own staff and through the NaCSA network of 16 decentralized offices." A recent ACP-EU-supported national survey of MFIs coordinated by NaCSA evaluated the degree of transparency of reporting processes and the kind of increases in efficiency and progress towards operational self-sufficiency these MFIs are making. The March 2008 survey outcomes were meant to determine the kind of sustainability objectives to be pursued. Data from the national survey are meant to be used to increase the effectiveness of ACP-EU interventions in terms of capacity building, internal controls and promoting a customer orientation.
Given the unique nature of the ACP Business Climate Facility (BizClim)-an ACP-EU joint initiative financed under the 9th European Development Fund (EDF) as a proactive capacity building international development program-the NaCSA coordinated survey project provided the opportunity for ACP-EU to play a leadership role in helping to develop a shared understanding of sector needs and gaps, and to provide vision and strategy for bridging challenges. The ACP-EU values the strategic and deliberate setting of objectives, specific policy replication activities and targets, and building capacity. The ACP-EU survey thus made an assessment of the strategic positioning and comparative advantage of ACP-EU in the broader microfinance context in Sierra Leone and vis-à-vis other players in the microfinance arena. It also examines the relevance and significance of ACP-EU investments and technical assistance to ACP-EU-funded microfinance programs.
ACP-EU has offered its capacity (of programs flexibility and professionalism) to contribute to microfinance development and to help Sierra Leone meets her Millennium Development Goals (MDG) measured in terms of cutting poverty in half by 2015. Sierra Leone has need for support to diversify her community level economies and economic activities if it is going to meet her MDGs. ACP-EU has a distinct capacity to innovate in this area by using the best means available (a microfinance demand and supply survey) to find out about the programs impact of microfinance in Sierra Leone by asking the various stakeholders for their perceptions. Ahmed Saybom Kanu, Administrative Officer for Statistics Sierra Leone explained in a meeting with the author of this essay "that the issue of micro credit has greater sociological dimensions. How these dimensions are looked at, varies. Therefore, it is good to learn more about microfinance and how the sector can be expanded with greater outreach."
Unfortunately, former president Kabbah's NaCSA squandered an opportunity to properly manage the resources provided by the ACP-EU that could have helped underwrite the transition to a vibrant micro financed economy: instead of efficient management of micro loans, it opted for the politically expedient path of giving away micro loans without proper loan management mechanisms. Many of the microfinance beneficiaries, particularly party affiliates, reacted by misusing micro loans resulting in billions of leones used in misplaced priorities. The Kabbah government had less motivation to impose stringent microfinance-efficiency standards, let alone be transparent and conform to ACP-EU standards. The current APC leadership should now be expected to actively debate the capacity of NaCSA on the development of a vibrant microfinance sector. The emphasis should be on creating opportunities for the poor and low income people. In that regard, the country's large informal structure needs to be stimulated and developed through a well coordinated microfinance supply system to absorb huge numbers of the population to become gainfully self employed. "Estimates are that the informal sector accounts for at least two-thirds of the total labor force, and 70% of the urban labor force. More than half the population is under 20 years of age. Of the total population around 65 percent lives in rural areas" (UNCDF).
The Microfinance Landscape
The commercial banks are both major players in the Sierra Leone economy and the country's leading lending institutions. Commercial banks' leadership will therefore be indispensable in the creation of a national regime to coordinate microfinance opportunities. But commercial banks have shown little or no interest in microfinance and they hesitate to help establish a national system capable of channeling the necessary funds to microfinance activities. These banks provide mostly basic financial services with a client base of about 85,000 clients.
Fortunately, the Sierra Leone Commercial Bank (a bank partly owned by government) is beginning to recognize the growth potential of microfinance alternatives. The bank has created opportunities in microfinance borrowing using a group-guarantee methodology with loans to be provided to groups. Also, the other government owned banks, the National Development Bank (NDB), the National Cooperative Development Bank (NCDB), and the Bank of Sierra Leone's community (chiefdom) pilot banks have involved in wholesale and retail finance to MFIs.
The government needs to support the enabling environment to expand the landscape of microfinance operations in Sierra Leone by providing tax breaks to mainstream commercial banks to encourage these banks to support innovations in the area of microfinance. Greater involvement of mainstream commercial banks in microfinance lending should be more than sufficient to quickly transform the nation's microfinance infrastructure from a relief orientation to a self sustaining business-like orientation. The greater involvement of commercial banks strategy will complement the effort of institutions like World Hope International (WHI); the Association of Rural Development (ARD); the American Refugee Committee (ARC), and the Grass Field Women's Development Association which transformed itself into PRIMED (Promoting Initiatives for Micro Enterprise Development) which have been the most recognized microfinance institutions in Sierra Leone.
The government should also take advantage of the potential of the two indigenous financial mechanisms that provide access to credit-the Osusu or rotating savings and credit associations (ROSCAs) and moneylenders. The ROSCAs are common throughout the country and they serve as mechanisms for people to save for medical, bundu society, bride price, or school fees. The moneylenders found throughout the country (with the common terms of borrowing being a 2 for 1 system) have also been crucial in providing microfinance to hardworking Sierra Leoneans at the informal level. The government should provide formal support mechanisms to directly encourage the development and growth of the activities of these ROSCAs and moneylenders rewarding those ROSCAs and moneylenders that successfully manage high numbers of beneficiaries. This performance-based support system would allow ROSCAs and moneylenders to compete for funds by implementing government microfinance goals through a combination of creative ROSCA and money lending initiatives, including the creation of ambitious innovative enterprises and the implementation of regulations that allow high recovery rates. ROSCAs and moneylenders are potential developers of microfinance facilities. Their innovative lending technologies will need to be supported by sustained government subsidies to help them grow and become affordable enough to formalize their activities.
Furthermore, the government should support research and development on and the deployment of innovative microfinance lending technologies and legal status. The need for a fully operational credit bureau to improve the flow of information on current and potential bank customers is becoming even more relevant.
Expectations of the Commons
Microfinance and the enhanced self-esteem that comes with it is the Holy Grail for economic development in Sierra Leone. By meeting microfinance start-up, expansion, consolidation, and integration are sufficient ingredients to support national economic growth. With the capacity to develop and test products in existing markets and new markets the economy booms and repayment of microfinance loans is ensured. Various client-built awareness programs can also be benchmarked from elsewhere to make MFI programs effective in Sierra Leone. The financial flows from microfinance activities would provide a national macroeconomic shock absorber, with more funds from recovered micro loans automatically flowing to growing the economy.
Further, successes of successful MFIs need consolidated. Also, strengthening MFIs and using the right organizational formalization and industry norms (management oversight, organizational policies, procedures and systems) are required. When the productivity of MFIs is increased their scale and scope grow and prices should be adjusted to ensure profitability. Again, the convenience of a special regulatory framework in place for MFI growth will sow seeds for growth and the ambition to venture into new markets.
MFIs should be integral to the formal financial sector. Understanding, therefore, the volume of demand for microfinance can help determine sources that can finance their growth. Demand oriented products can be introduced in communities and in turn successful MFIs in these communities can pay taxes and licensing fees to government to support national economic growth. Also understanding the banking system in Sierra Leone and the modalities involved in providing financial services to poor and low income people can finance growth and attract capital from private capital markets and deposit takings from the public.
Addressing opportunities and constraints for development of the microfinance sector in Sierra Leone is critical. There is a high unmet microfinance demand in the country. By getting to know the gap between the demand and supply of credit for micro and small business activities, to understand the impact of ROSCAs and traditional money lenders to microfinance in Sierra Leone is also critical. The private sector has literally been found to be the engine for growth in developing societies as well as developed societies. But if microfinance beneficiaries can only be financed by collecting cash collaterals then the very essence of microfinance is negated. Grants and soft loans to help build the capacity of microfinance operations in the country are necessary and they define the very essence of microfinance - character and capacity building to help the hopeless succeed in generating income for themselves and to manage their income competently. With microfinance, Sierra Leoneans lacking adequate subsistence and living in poverty are given a chance to start somewhere. The success of microfinance sustains real national economic growth.
And perhaps, however, the most daunting concerns about microfinance is the question of regulation. Microfinance beneficiaries could simply be tempted to renege on their obligations to repay micro loans, undermining the very concept of micro financing completely. Most fundamentally, they would jeopardize the collective benefits of the national microfinance regime. Therefore, the incentives to develop a credit history must be strong, and the price of default in lending must be high. Capacity building of regulatory authorities and development of effective regulatory tools (also a salient recommendation by the 2008 ACP-EU BizClim financed national survey) is essential for effective regulation of microfinance.
As microfinance institutions face increasing demands to put in place stringent regulatory measures, the primary enforcement strategy for dealing with recovery of microloans is to impose the threat of temporary exclusion from the microfinance regime and the loss of future access to micro-credit opportunities. Uncooperative beneficiaries would also lose access to high volume investments, for instance, in the mining and agricultural sectors.
The time has come for the government to enable the growth of microfinance lending technologies. A national microfinance enabling regime would serve the nation's economic interests by promoting innovation and opening up new opportunities and services. Based on the outcomes of the recent ACP-BizClim-supported microfinance demand and supply survey of microfinance beneficiaries and MFIs, demand shows the distinctiveness to be greater than total supply. Strong commitment to sustainability and increased outreach as well as profitability and scale are emphasized. The industry needs considerable support to build capacity, capital base and plans for expansion. The concept of microfinance itself is cost-effective in terms of contributing to development and poverty alleviation. Dollars invested are used more than one time. To therefore foster growth of microfinance, character and capacity building infrastructures need to be supported. Character and capacity building supportive infrastructures have the potential "to bring microfinance institutions to such a scale that they can play a role as an integrated part of the broader financial sector. Successful implementation implies the identification of constraints to sector development and a concerted effort to put in place the various building blocks needed to help bring microfinance to scale and to support financial sectors to become more inclusive" (UNDP).
These are heavy days for Canadian homeowners
These are heavy days for Canadian homeowners. If you've been in your home even a few years, you've probably already enjoyed a modest climb in the value of your home. Even if you don't intend to sell, it's good to know that your real estate investment is doing well. But we're also enjoying an environment in which mortgage rates have reached historic lows.That combination -- strong valuations and low mortgage rates -- has an unprecedented number of Canadians looking for ways to capitalize on the great opportunities available to them.Whether it's to buy their first home, trade up, or take equity back out of their homes, Canadians are jumping at the opportunity to borrow at today's rock-bottom rates.While many homebuyers are reconsidering the value of fixed-rate mortgages to lock in those low rates, you should keep in mind that adjustable-rate mortgages - the darling of the dropping rate trend - can still offer real value to homeowners. It's a matter of finding the right combination of mortgage features and options.As banks have been joined by other lending institutions, we have seen our menu of ontario mortgage options grow accordingly - with some innovative new mortgage types now available to help Canadians take advantage of today's unusual opportunities.One of the most innovative mortgages we've seen in a very long time is a new adjustable-rate mortgage with some very compelling features. First, it's based on an institutional rate benchmark known as Bankers Acceptance. Most of us are familiar with the rate benchmark known as Canadian Prime - and we are accustomed to assessing mortgage rates based on Prime. The BA, on the other hand, is the rate at which banks will lend money to one another - and it's typically a lower rate (sometimes much lower) than the prime rate offered to a bank's best customers. The new BA-based mortgage - compared to the best prime-based mortgage available - could have saved a mortgage client a bundle over the last several years, primarily because the prime rate tends to be "stickier" in an environment where rates are falling. Often, the more fluid, market-based BA rates deliver the rate change more quickly. The BA rate is no trade secret, by the way; pick up a copy of your favourite financial paper and look for the published money rates to find the Bankers Acceptance Rate.But the attractive rate structure is not the only perk. The same BA-based mortgage - so welldesigned to help clients wring the last quarter point from their mortgage rate - now also comes with a rate cap which guarantees that your rate will never climb higher than 2.15% above the starting base rate - no matter what happens to rates during your mortgage term. There's no worry about locking in too high because the rate is always adjustable down.Only the ceiling is fixed. It's a homebuyers' dream:A mortgage with limited upside and unlimited downside. If you're thinking about buying a home this year, or you haven't had your mortgage reviewed in the last several months, take the opportunity to get an expert assessment of your many options from a mortgage professional. It could be the best investment you'll make this year!
While the U.S. Federal Reserve is expected to cut its benchmark Federal
While the U.S. Federal Reserve is expected to cut its benchmark Federal Funds target rate to a record-low 0.5% at its policymaking Federal Open Market Committee meeting tomorrow (Tuesday), the European Central Bank (ECB) is signaling a reluctance to drop its key rate below 2.0%.
Since the Euro-region slipped into a recession in October, the ECB has cut its main interest rate by 175 basis points to 2.5%. However, the bank’s policymakers, led by ECB President Jean-Claude Trichet, are now sounding calls for more fiscal discipline.
Investors are betting that the ECB will be forced to shave another 50 basis points off its benchmark rate in January, but ECB council member Axel Weber warned last week that the bank “would like to avoid” taking it below that level.
“We should be cautious when our rates approach territory we haven’t explored before,” Weber told Bloomberg News. “Our lowest level so far was 2.0%.”
ECB President Trichet told The Financial Times today (Monday) that there was “a degree of excessive pessimism” when the bursting of the dot-com bubble drove central banks to slash benchmark borrowing costs. Many analysts believe those excessively low lending rates fueled the asset bubbles of the past decade, including the massive run-up in real estate prices whose subsequent collapse helped trigger the current global downturn.
Trichet added that policymakers had a duty “to eliminate as completely as possible all the inbuilt elements in global finance that are amplifying booms and busts.”
ECB Executive Board member Juergen Stark said Dec. 10 that any room left for further rate reductions is “very limited, potentially allowing for small steps only.”
Of course, there are some analysts who believe the recent rhetoric coming from the ECB is just that.
“They will be forced to go to 1.0% or lower by June,” Juergen Michels, chief Euro-region economist at Citigroup Inc. (C) in London told Bloomberg. “The rhetoric at the moment is to justify their forecasts, which are too optimistic.”
The ECB forecasts the greater European economy will contract by 0.5% in 2009, before expanding by about 1.0% in 2010.
If the ECB’s estimates are too generous, the European central bank could again be forced to backtrack on its policy mandates. The ECB actually raised its benchmark rate to 4.25% in July, with policymakers expressing concern that “price and wage-setting behavior could add to inflationary pressures.”
The bank reversed course just four months later in October, cutting its rate by half a point on Oct. 8.
“The ECB should refrain from considering any pause in the easing cycle to avoid falling again behind the curve,” Marco Valli, an economist at UniCredit SpA in Milan, told Bloomberg.
News and Related Story Links:
Bloomberg:ECB Officials Split on Scope For Further Rate Cuts
Financial Times: Trichet warns of fiscal indiscipline
Money Morning: Fed May Cut Rates Again as Policymakers Meet
Money Morning: ECB Cuts Interest Rate by Half Point as Recession Grips Eurozone
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IMF Quietly Creating Three 100%+ Winners
The International Monetary Fund is about to pump $100 billion into a few select countries. This “no strings attached” bailout is creating three 100%+ gainers in the coming days - if you know how to play it. Get all the details in this report: The Trigger Event Strategy: The Only Proven Way to Make Money in an Insane Market. Just go here...
Since the Euro-region slipped into a recession in October, the ECB has cut its main interest rate by 175 basis points to 2.5%. However, the bank’s policymakers, led by ECB President Jean-Claude Trichet, are now sounding calls for more fiscal discipline.
Investors are betting that the ECB will be forced to shave another 50 basis points off its benchmark rate in January, but ECB council member Axel Weber warned last week that the bank “would like to avoid” taking it below that level.
“We should be cautious when our rates approach territory we haven’t explored before,” Weber told Bloomberg News. “Our lowest level so far was 2.0%.”
ECB President Trichet told The Financial Times today (Monday) that there was “a degree of excessive pessimism” when the bursting of the dot-com bubble drove central banks to slash benchmark borrowing costs. Many analysts believe those excessively low lending rates fueled the asset bubbles of the past decade, including the massive run-up in real estate prices whose subsequent collapse helped trigger the current global downturn.
Trichet added that policymakers had a duty “to eliminate as completely as possible all the inbuilt elements in global finance that are amplifying booms and busts.”
ECB Executive Board member Juergen Stark said Dec. 10 that any room left for further rate reductions is “very limited, potentially allowing for small steps only.”
Of course, there are some analysts who believe the recent rhetoric coming from the ECB is just that.
“They will be forced to go to 1.0% or lower by June,” Juergen Michels, chief Euro-region economist at Citigroup Inc. (C) in London told Bloomberg. “The rhetoric at the moment is to justify their forecasts, which are too optimistic.”
The ECB forecasts the greater European economy will contract by 0.5% in 2009, before expanding by about 1.0% in 2010.
If the ECB’s estimates are too generous, the European central bank could again be forced to backtrack on its policy mandates. The ECB actually raised its benchmark rate to 4.25% in July, with policymakers expressing concern that “price and wage-setting behavior could add to inflationary pressures.”
The bank reversed course just four months later in October, cutting its rate by half a point on Oct. 8.
“The ECB should refrain from considering any pause in the easing cycle to avoid falling again behind the curve,” Marco Valli, an economist at UniCredit SpA in Milan, told Bloomberg.
News and Related Story Links:
Bloomberg:ECB Officials Split on Scope For Further Rate Cuts
Financial Times: Trichet warns of fiscal indiscipline
Money Morning: Fed May Cut Rates Again as Policymakers Meet
Money Morning: ECB Cuts Interest Rate by Half Point as Recession Grips Eurozone
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More on this topic (What's this?) ECB Adopts New Collateral Guidelines, Leaves Public In Dark (The Prudent Investor - Seeing To..., 11/21/08) ECB Balance Sheet Hits 2,€€€,€€€,€€€,€€€,€€€ (that's TRILLIONS) (The Prudent Investor - Seeing To..., 11/4/08) Rate cuts: ECB does 0.75% (The Indian Investor's Blog, 12/4/08) Euro: Headed for 1.35? (Kathy Lien, 12/11/08) Read more on European Central Bank (ECB), Interest Rates at Wikinvest
IMF Quietly Creating Three 100%+ Winners
The International Monetary Fund is about to pump $100 billion into a few select countries. This “no strings attached” bailout is creating three 100%+ gainers in the coming days - if you know how to play it. Get all the details in this report: The Trigger Event Strategy: The Only Proven Way to Make Money in an Insane Market. Just go here...
Preparation for equity tradingA farmer in remote Bihar borrows
Preparation for equity tradingA farmer in remote Bihar borrows heavily from his zamindar to pay the dowry for marrying off his 11-year-old daughter (an extreme form of debt that we know will turn the farmer into a bonded labourer forever). A newly married yuppie buys a car, TV, fridge on his credit card?(another form of debt that the yuppie hopes to repay with his zooming salaries). In these instances we see that ?debt? has been incurred to spend beyond one?s current means. We learnt last time that typically whatever we earn either goes into buying food, clothes, or assets like a TV, car, etc. Or we save with the intention to use our savings during our retirement or buy a house, etc. In other words, we spend our earnings today or save it to spend it later. ?Debt? brings in a third element?while we postpone consumption when we save, we spend future savings when we borrow! In simpler terms, ?savings? and ?debt? are like day & night?they can never exist together unless it is twilight. Take the case of Nagesh, who we met up with last time. Nagesh is a very practical person who has learnt from the tough times in his life. Nagesh, just like any other human being, has dreams of buying a car, a big house for his family, but realises that he will only be able to get there in stages as his current earning capacity is too limited. He has been keeping his desires in check while continuing to save regularly and investing a part of it in shares of good companies. Nagesh bought a car last month by selling part of his holding in Zee Telefilms (about 100 shares @ Rs3500 that he had bought over a year back @ Rs100). Manish has been Nagesh?s colleague for the last four years. Manish believes in living life king size. In his very first year he exceeded the credit limit on his credit card. He has been paying through his nose, shelling out interest at 3% per month on his credit card outstandings. Two years back, he availed of a car loan to buy a Maruti 800, at a monthly installment of Rs8000 when his post-tax salary was just Rs14,000! Last year, envious of Nagesh?s newfound wealth in shares, he decided to dabble in shares too. His broker recommended Blue Information Technologies Ltd. as a hot tip that would double in 3 months? time! Full of fervour, without even checking the background of the firm, Nagesh pledged his wife?s gold and borrowed to buy this stock at Rs150. A week later, he discovered that the stock had fallen 35% from his purchase price. When he called up his broker, he was aghast to find out that the stock had been suspended. His interest meter was ticking on the money he had borrowed while his principal was down the tube. Talk of the power of compounding! Moral: Never stretch borrowings to invest in the stock market. Shares are long-term investments that cannot be matched with short-term borrowings. Ideally, one should repay all borrowings and then invest the surplus in equities. So, when we are debt free, we are ready to invest in equities! By the way, one is never too old or young to invest as long as one understands the investment one makes. OK, we have understood that in the long run equities offer the highest returns. We have also learnt that one can invest in equities any time provided one has surpluses after repaying debt and meeting one?s expenditure! But how much do we invest? How much depends on two criteria. One, the risk profile of the investor and two, the liquidity requirements of the investor! Now that we know Nagesh, his father and friend Manish well, let us understand this better through their actions. Risk profile! Yes, let?s face it. No equity investments are free of risk. There is no such thing as a free lunch, mind you! There are a whole basket of risks to contend with and we will understand all of them very soon. For now, we need to appreciate that there are risks of losing. Looking at our three personalities, we can straight away rule out Manish. He can?t afford to take any risks as he is buried deep in debt and can?t afford to lose a penny! Nagesh on the other hand is just 35 years old and has a long bright career ahead of him, so he can afford to take greater exposure in equities and in slightly risky shares too (for instance, some stocks from our ?Emerging Star?, ?Ugly Duckling? and ?Vulture?s Pick? categories). Nagesh?s father, on the other hand, has retired and has no source of income other than the savings he has amassed. So he will be able to afford very little risk. Hence, he should be looking at stocks in our ?Evergreen? or ?Apple Green? categories to choose his investments (which is why, if you remember, Nagesh had suggested HLL to his father). Let us now move on to liquidity. Liquidity requirements signify the need of cash to meet one?s payment obligations (and don?t have anything to do with human beings? fluid intake). Manish needs all the money he can get as he has to meet so many of his loan obligations. Nagesh on the other hand has an idea of his monthly expenses so he has a better fix on his monthly cash requirements. He also needs to maintain a certain amount of cash in liquid savings (savings bank deposit, etc.) just in case there are some unforeseen medical expenses to meet or an unplanned visit to his father?s place. Beyond these requirements, he can look at investing in equities. Nagesh?s father, on the other hand, has to meet his entire expenses from his savings and would have large requirements for immediate cash. Hence, he can allocate a smaller portion of his savings to invest in equities. Judging the actions of the small world of people we know, we have realised that risk profiles vary with age, current financial position, even one?s own personality. Liquidity requirements too depend on similar factors. These two criteria will be different for different people, but one should not lose sight of one?s risk profile and liquidity requirement while investing in equities.Way of making equity as your ownwhat we now need to figure out is how to evaluate which company to buy. I?m afraid this is where all those fancy sounding valuation tools come in? PE, RONW, ROCE, EVA, etc. Hey, hang on, it?s not as bad as it sounds. Stick around and we?ll demystify all the above in a jiffy. But before you get into the complexities of the various valuations tools you can use and how you calculate them, we must table a fundamental principle: ?Investing in equities is akin to owning a business.? Let?s now explore the full ramifications of this principle. When you put your money in a bank deposit, you take a risk (albeit small, depending on which bank). In return, you get paid a small interest. The bank takes on a higher degree of risk and lends that money at a higher interest rate to some businessman, or to a credit card holder who wants to buy a diamond ring for his wife. The bank pays your interest out of the money he earns from the businessman. Or the doting husband. Whereas, when you buy shares in a company, you are not lending money to the company. By providing capital for the company, which is represented by an equity share, you are participating in the ownership of the company. Clearly, your risk is much greater in this case. Because, in this case, you are entrusting the company with the job of managing risk for you. Relatively, the risk in lending to a bank is limited. For one, most of our neighbourhood banks are nationalised. So bank deposits are perceived to be backed by the government. There is little soul searching to be done as to which bank to choose. Even in doing so, the highest priority is accorded to a Nationalised Bank purely on the safety parameter. Obviously, when you invest in equities, even this notional sense of security, of a government standing guard over your money, isn?t available to you. What kind of business would you like to enter?Let?s look at this another way now. Let?s assume you want to invest your money into a business. How will you decide what kind of business to enter? For starters, it should display the potential to earn you a return in excess of what the prevailing rate of bank interest is, right? Now you need to ask yourself what would be the essential factors in determining this return. And apart from the return angle, what qualitative factors should you be looking for? In the long term, we all look for security. Business, being an entity, is also entitled to aspire for the same. The ideal business would thus have to have horizons where profits can be sustained. Like we mentioned above, there are external factors that determine the direction and growth of the activity. All this would need to be factored into a business plan that would have to sustain itself and grow over a period of years. Of course, on an ongoing basis, we would definitely have to get a feedback on the success of the business. Operations would have to be evaluated from market feedback, while the financial statements would give a view of the profitability of the concern. The same concepts apply to stocksNow, here?s the punch line. Everything we discussed above doesn?t apply only to running a business. The same concepts apply, even if you just own shares in the company. We all know of a document called an annual report. This document is the most basic source for information available on the company?s operations. In the annual reports, the directors dwell, at times in length, explaining the nature of operations and the external environment surrounding the business and how it affected the company during the year. If you take the additional effort of finding out the positioning of the company?s products in the marketplace, it would give a fair idea of the company?s reputation in the field it operates. All this with the objective of figuring out how stable the company?s operation is. The company?s progress can be tracked periodically over close intervals of 3 months. This is through quarterly financial statements, the publication of which has been made mandatory by the regulatory authorities. Next comes the question of management issues. The common question that pops up in this context is: ?How do I externally control the business if I do not have a say in the management??. Ok, let?s assume that you are now running the business you chose. Can you, a single individual, handle all functions of the company? For a while, maybe. But once growth sets in, it would be humanly impossible to manage all the functions of an economic activity, viz. marketing, finance, procurement, etc. That?s when your business will need to morph from outfit to organisation status. Wherein the various functions are distributed across individuals, and finally the same is translated into a unified activity. Similarly, as a shareholder, you end up delegating authority to others to run the organisation you have a stake in. Imagine Mr Narayana Murthy (Infosys), Mr Dadiseth (HLL) and Mr Anji Reddy (Dr Reddy?s) reporting to you. That?s exactly how the cookie crumbles. The company whose equity base you have participated in is answerable. To you, as well as other shareholders of the company. Thus, while you as a joint owner have delegated the operations of the company to the professional managers and the employees, the management in turn is responsible to its shareholders. The management communicates through the balance sheet and the AGM, where shareholders voice their opinion on the performance of the company. Infact, shareholders can actually participate in constructive criticism of the operation of the company.Equity is enigma for most of peopleIf one were to conduct a survey to determine how people saved for their retirement, one would typically get the following responses... ?I put my money in NSC, post office schemes; they double in seven years!? (By the way, HLL in the last seven years is up seven times!!) ?I am too lazy, I leave my money in term deposits with the bank!? (Certain to retire as a pauper!) ?I am clever, I keep deposits with finance companies and co-operative banks. I make upwards of 20%.? (He forgot to mention that a few of them are like CRB! Forget the returns you will not even get your principal!!) A very rare response would be: ?I invest in equities. I bought Infosys @ Rs500, Zee Telefilms @ Rs220?? (Anybody cares to do the sums for him?!) Equities, or shares as they are popularly known, have been an enigma for most people. A majority of the middle class in India considers it akin to gambling. A majority of the rest is fascinated by the volatility and the short-term money-making opportunities and misunderstand equities to be a ?get rich quick? scheme. There are very few people who understand that equities offer the highest returns in the long run, adjusted for inflation or even otherwise. Take the case of Nagesh... Nagesh has had a very conservative upbringing. However, he moved out of his home to pursue his higher studies and his eyes opened! He has been working with a leading MNC as a marketing manager. He has been wisely investing in shares for the last five years, relying on his broker?s advice after doing his own homework. On the other hand, his father worked all his life in a PSU and put all his savings in NSC and Life Insurance. He has retired today and has just realised that all his lifetime savings cannot help him lead a comfortable retired life. Nagesh is now trying to help his father out... Nagesh: Appa, even now it is not too late. You must invest a portion of your savings in equity. You are getting disheartened because you want to live off the meager interest earnings on your savings. If you put a portion of the money in, say HLL, your money will double in 3 years, quadruple in 5 years!! Appa, equities have the ?power of compounding that is unmatched?. Appa: Equity is very volatile. After you told me last time, I have been tracking the Sensex on Star News. It goes up two days then there is some political uncertainty and it falls. Sometimes it falls without any reason or otherwise goes up 15% in four days. I cannot handle it. At least here, my principal is safe and I get a fixed return. Nagesh, if you use the same Sensex as a benchmark, then the index was 1220 in September 1990 and currently trades at 4800 in September 1999, up four times in 9 years! Even if you had put in money at the height of the market frenzy in 1992, you would have still made money. The market benchmark is just an indication; the concept is to invest in specific good companies. Think Company, Appa, and don?t let the short-term market volatility scare you! In September 1990, HLL was trading at Rs115, while it trades at Rs2500 levels now! 22 times in 9 years!! Appa: Even then, why put my savings in risky equities? Nagesh: An equally important thing to understand is: ?Why does one save?? One saves because the productive span for any human being is a small portion of one?s entire life. I may live for 80 years but I can only work between the ages of 24 and 60. Hence, it becomes important during our productive lives to earn surpluses and save them for the period when we can?t be productive and earn. Having said that, Appa, you would also recognise that it is important to retain the purchasing power of our savings. In other words, we all know that we used to purchase grains at Rs2 per kg 5 years back, while we pay Rs10 per kg for the same now. The price will keep on increasing as the population living off a fixed area of land increases. Hence, it is also important that whatever we save now at least fetches us an equal quantity when we retire...have I lost you? Appa: No, I was just thinking. You are right. I deposited Rs10,000 seven years back in NSC and I just got Rs20,000 now. Seven years back, I used to get vegetables for Rs25 and it used to last for a whole week and then we were four of us. Today, I buy vegetables for Rs100 and it barely lasts for a week though there are just the two of us! Nagesh: Exactly. That?s why people used to buy gold and land to protect their savings from inflation. However, those were the days when communities were small and agriculture was the only activity. As population grew, needs grew and there was a compelling need to improve efficiency. Hence, factories came up to exploit economies of scale. To cut a long story short, investment in productive assets is the best way of preserving savings and creating wealth. Equity is the most productive asset. Appa: What is the connection? Nagesh: Equities or shares represent ownership of businesses that own productive assets like plant & machinery and intellectual capital to produce more goods. On the other hand, when you put money in deposits or lend directly, the money ultimately finds its way to purchase productive assets as companies borrow to fund their business! Just like we save to take care of our retirement, productive assets are created to meet greater demand for goods in the future, because of increasing population and its ever increasing needs. Who ever borrows to fund the asset hopes to make more money on his equity than what he pays for on his borrowings. So, savings in deposits or any other fixed income instrument is sub-optimal! Hence, intuitively too, equity has to make lots more money in the long run than any deposits, because there will be no borrowings if the equity owner realises lesser money!! Appa: All that is fine. But some companies don?t do well? Nagesh: Obviously they are risky as certain businesses find the going tough. But collectively, they are not only very essential but very profitable. Hence, the returns on equity are always higher to compensate for the additional risk. Risk is a part and parcel of life. There are so many bus, rail and two wheeler accidents, but that doesn?t mean that we prefer to walk everywhere. Even if we decide to walk, we run the risk of being hit by another vehicle! One should only take care to invest in the right businesses, which have assets capable of earning good returns. Hence, these will have to be businesses that have a bright future. Nobody thinks of buying a bullock cart now!...
As expected, U.S. Federal Reserve policymakers slashed a benchmark interest rate
As expected, U.S. Federal Reserve policymakers slashed a benchmark interest rate yesterday (Tuesday). But they cut it by a bigger-than-expected amount, and did so in an unconventional manner.
Instead of establishing a new, specific primary interest rate, the central bank’s Federal Open Market Committee (FOMC) voted for a target range – 0.0% to 0.25% – a record low. Before yesterday’s cut, the Federal Funds target rate stood at 1.0%.
Instead of addressing the reason for its peculiar target range, the Federal Reserve opted for canned doomsday language that could have appeared verbatim in any of its previous rate cut announcements: It hasn’t been good. It doesn’t look good. And we’re trying to fix it.
Most cryptically, the FOMC said it “will employ all available tools” to promote economic growth and price stability. But those objectives could take some time to achieve.
“The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” the Fed said in a statement.
U.S. stocks soared on the Fed announcement, with the Dow Jones Industrial Average gaining 359.61 points, an increase of 4.2%, to close at 8,924.14. The Standard & Poor’s 500 Index jumped 44.61 points, or 5.14%, to finish the day at 913.18. The tech-laden Nasdaq Composite Index jumped 5.41%.
Since September 2007, U.S. Federal Reserve policymakers have cut the benchmark Fed Funds target rate 10 times – taking it from its starting point at 5.25% to the current rate range, hoping it would encourage bank-to-bank lending, as well as bank-to-consumer lending.
“It’s a highly unorthodox and creative step,” Michael Woolfolk, senior currency strategist at the Bank of New York-Mellon Corp. (BK), told Reuters. “We think it’s the best possible move for the U.S. consumer and for the financial market.”
The rate cut announcement dropped onto a cushion of ugly headlines from earlier in the day:
Consumer prices posted their biggest plunge in 76 years. The U.S. consumer price index (CPI) fell by a seasonally adjusted 1.7%, lead by a 17% decline in energy prices, the Labor Department reported. On a non-seasonally adjusted basis, the CPI fell by 1.9%, the biggest decline since 1932, three years into the Great Depression.
Yields for 30-year Treasuries fell to an all-time low, Bloomberg News reported.
Goldman Sachs Group Inc. (GS) reported a loss of $2.12 billion, or $4.97 a share, for its fiscal fourth quarter.
New building permits and new housing starts hit a record low in November, as permits plummeted 15.6% to 616,000 units from 730,000 in October. Housing starts fell 18.9% to 625,000 from 771,000 in October, Reuters reported.
Joel Naroff, president and chief economist of Naroff Economic Advisors, doesn’t expect the rate cut to do much because banks simply don’t want to lend.
“There is little belief that will do anything as the issue is not the level of rates but the willingness to lend. It may put a little more pressure on other central banks to ease, especially the Europeans,” Naroff wrote in a note to clients. “But other than that and the reduction in some variable-rate loans tied to the prime, the rate cut will not accomplish a whole lot.”
He added: “With the rate near zero, the Fed is basically out of bullets when it comes to the rate cut weapon so we will see what they say about using other mechanisms to add liquidity.”
Money Morning contributing editor Martin Hutchinson said in a recent column that the Fed’s rate cuts – combined with the government’s $700 billion bailout – will push so much money into the financial system that the final result will be widespread inflation – which is essentially an open invitation to profit from gold.
What Else Can the Fed Do?
With little to no room left to cut rates, Fed Chairman Ben S. Bernanke has signaled that he may employ unconventional ways to restore balance to the U.S. financial system.
The Fed extended the lives of recently initiated programs (lending facilities for investment firms, for instance) and is exploring additional moves (like Treasury purchases) aimed at reviving the credit markets.
Meanwhile, the U.S. Treasury Department is working on a plan to rejuvenate the housing market by slashing mortgage rates to 4.5% on new purchases. Experts say that, at some point, these stimuli must take hold, but that’s not necessarily true.
Many of Bernanke’s plans may be an afterthought on Jan. 20, when President-elect Barack Obama takes office with a different economic team and agenda.
New York Federal Reserve Bank President Timothy F. Geithner will be the new administration’s U.S. Treasury secretary, a role that will give Geithner the reins to what’s left of the Bush administration’s $700 billion bailout.
Former Treasury chief Lawrence Summers will head Obama’s National Economic Council. Analysts say this appointment puts Summers in line to succeed Ben S. Bernanke as chairman of the U.S. Federal Reserve in 2010.
New Mexico Gov. Bill Richardson will take over the Commerce Department, and Congressional Budget Office Director Peter Orszag will head the Office of Management and Budget.
Instead of establishing a new, specific primary interest rate, the central bank’s Federal Open Market Committee (FOMC) voted for a target range – 0.0% to 0.25% – a record low. Before yesterday’s cut, the Federal Funds target rate stood at 1.0%.
Instead of addressing the reason for its peculiar target range, the Federal Reserve opted for canned doomsday language that could have appeared verbatim in any of its previous rate cut announcements: It hasn’t been good. It doesn’t look good. And we’re trying to fix it.
Most cryptically, the FOMC said it “will employ all available tools” to promote economic growth and price stability. But those objectives could take some time to achieve.
“The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” the Fed said in a statement.
U.S. stocks soared on the Fed announcement, with the Dow Jones Industrial Average gaining 359.61 points, an increase of 4.2%, to close at 8,924.14. The Standard & Poor’s 500 Index jumped 44.61 points, or 5.14%, to finish the day at 913.18. The tech-laden Nasdaq Composite Index jumped 5.41%.
Since September 2007, U.S. Federal Reserve policymakers have cut the benchmark Fed Funds target rate 10 times – taking it from its starting point at 5.25% to the current rate range, hoping it would encourage bank-to-bank lending, as well as bank-to-consumer lending.
“It’s a highly unorthodox and creative step,” Michael Woolfolk, senior currency strategist at the Bank of New York-Mellon Corp. (BK), told Reuters. “We think it’s the best possible move for the U.S. consumer and for the financial market.”
The rate cut announcement dropped onto a cushion of ugly headlines from earlier in the day:
Consumer prices posted their biggest plunge in 76 years. The U.S. consumer price index (CPI) fell by a seasonally adjusted 1.7%, lead by a 17% decline in energy prices, the Labor Department reported. On a non-seasonally adjusted basis, the CPI fell by 1.9%, the biggest decline since 1932, three years into the Great Depression.
Yields for 30-year Treasuries fell to an all-time low, Bloomberg News reported.
Goldman Sachs Group Inc. (GS) reported a loss of $2.12 billion, or $4.97 a share, for its fiscal fourth quarter.
New building permits and new housing starts hit a record low in November, as permits plummeted 15.6% to 616,000 units from 730,000 in October. Housing starts fell 18.9% to 625,000 from 771,000 in October, Reuters reported.
Joel Naroff, president and chief economist of Naroff Economic Advisors, doesn’t expect the rate cut to do much because banks simply don’t want to lend.
“There is little belief that will do anything as the issue is not the level of rates but the willingness to lend. It may put a little more pressure on other central banks to ease, especially the Europeans,” Naroff wrote in a note to clients. “But other than that and the reduction in some variable-rate loans tied to the prime, the rate cut will not accomplish a whole lot.”
He added: “With the rate near zero, the Fed is basically out of bullets when it comes to the rate cut weapon so we will see what they say about using other mechanisms to add liquidity.”
Money Morning contributing editor Martin Hutchinson said in a recent column that the Fed’s rate cuts – combined with the government’s $700 billion bailout – will push so much money into the financial system that the final result will be widespread inflation – which is essentially an open invitation to profit from gold.
What Else Can the Fed Do?
With little to no room left to cut rates, Fed Chairman Ben S. Bernanke has signaled that he may employ unconventional ways to restore balance to the U.S. financial system.
The Fed extended the lives of recently initiated programs (lending facilities for investment firms, for instance) and is exploring additional moves (like Treasury purchases) aimed at reviving the credit markets.
Meanwhile, the U.S. Treasury Department is working on a plan to rejuvenate the housing market by slashing mortgage rates to 4.5% on new purchases. Experts say that, at some point, these stimuli must take hold, but that’s not necessarily true.
Many of Bernanke’s plans may be an afterthought on Jan. 20, when President-elect Barack Obama takes office with a different economic team and agenda.
New York Federal Reserve Bank President Timothy F. Geithner will be the new administration’s U.S. Treasury secretary, a role that will give Geithner the reins to what’s left of the Bush administration’s $700 billion bailout.
Former Treasury chief Lawrence Summers will head Obama’s National Economic Council. Analysts say this appointment puts Summers in line to succeed Ben S. Bernanke as chairman of the U.S. Federal Reserve in 2010.
New Mexico Gov. Bill Richardson will take over the Commerce Department, and Congressional Budget Office Director Peter Orszag will head the Office of Management and Budget.
"Lower than prime," you heard someone say
"Lower than prime," you heard someone say. Like most Canadians, you were probably first skeptical and then confused. We tend to think of the prime lending rate as the invisible "floor" of lending rates. The very best customers can get very close to that floor. It is theoretically possible, we reason, to actually be ON the floor, but not possible to be below it.Nevertheless, Canadian lenders offer mortgages at prime minus 0.5% to even minus 0.7%. So the floor isn't the lowest you can go. There's something under the "floor". The rate known as "prime" has been the popular benchmark for lending in Canada. When business reporters talk about interest rate movement, they usually talk about what's happening with prime. But there are other benchmarks in money rates, though they are typically for use by professional money managers. The most significant of these is the Banker's Acceptance rate.While "prime" is a set rate which is offered to a lender's best customers, the Banker's Acceptance is the rate which financial institutions use to lend money to one another. And it's typically well below the prime rate. Look for the "Money Rates"section of your favourite newspaper, and you can compare Prime with the Banker'sAcceptance rates for yourself. "Interesting," you think, "but why does it matter?" Well, as new lending institutions begin to offer a slate of innovative new loan options, a new mortgage has emerged that is based on the Banker's Acceptance rate: offering a mortgage rate of 1% over the 3-month Banker's Acceptance.If you compared the rock-bottom prime-based variable mortgage rate - prime less 0.5% to 0.7% - with the new adjustable BA-based rate, you would find that the BA-based rate would have delivered significant savings over the past several years, as rates were dropping. There are two reasons for this. Firstly, the BA-based rates have historically been considerably lower than prime. Secondly, the prime rate tends to be "stickier" in an environment where rates are falling. Often, the more fluid, market-based BA rates deliver the rate change more quickly.Any variable- or adjustable-rate Ontario mortgage is an excellent option when interest rates are either dropping or stable. Not surprisingly, they've been a very popular choice in the past few years. There are some rumblings now that rates may begin to increase, but flexible-rate mortgages still remain an excellent choice for those looking to save some interest. As always, you should consult with a mortgage professional to find the mortgage that suits your personal financial needs. An independent mortgage broker can provide you with information on a broad range of mortgage options from a wide variety of lending institutions, so you can compare features and options at a glance.And remember, it's worth taking some time to look beyond prime and explore what's "under the floor" in mortgage options!
A banking company in India has been defined in the banking
A banking company in India has been defined in the banking companiesact,1949.as one “which transacts the business of banking which means the accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.” Most of the activities a Bank performs are derived from the above definition. In addition, Banks are allowed to perform certain activities which are ancillary to this business of accepting deposits and lending. A bank's relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money - both domestic and foreign - from one place to another. This activity is generally known as "remittance business" in banking parlance. The so called forex (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies.
Functioning of a Bank is among the more complicated of corporate operations. Since Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently. In India, the regulation traditionally has been very strict and in the opinion of certain quarters, responsible for the present condition of banks, where NPAs are of a very high order. The process of financial reforms, which started in 1991, has cleared the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations that a Bank has to work with makes its operations even more complicated, sometimes bordering on illogical. This section, which is also intended for banking professional, attempts to give an overview of the functions in as simple manner as possible. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, and order or otherwise."
KINDS OF BANKS
Financial requirements in a modern economy are of a diverse nature, distinctive variety and large magnitude. Hence, different types of banks have been instituted to cater to the varying needs of the community. Banks in the organized sector can be classified in to the following
1. COMMERCIAL BANKS:-
Commercial banks are joint stock companies dealing in money and credit. In India, however there is a mixed banking system, prior to July 1969, all the commercial banks-73 scheduled and 26 non-scheduled banks, except the state bank of India and its subsidiaries-were under the control of private sector. On July 19, 1969, however, 14mejor commercial banks with deposits of over 50 Corers were nationalized. In April 1980, another six commercial banks of high standing were taken over by the government.
2. CO-OPERATIVE BANKS:-
Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative societies Act of the states. The main objective of co-operative banks is to provide cheap credits to their members. They are based on the principle of self-reliance and mutual co-operation. Co-operative banking system in India has the shape of a pyramid a three tier structure, constituted by:
3. SPECIALIZED BANKS:-
There are specialized forms of banks catering to some special needs with this unique nature of activities. Foreign exchange banks, Industrial banks, Development banks, Land development banks, Exim bank are important.
4. CENTRAL BANK:-
A central bank is the apex financial institution in the banking and financial system
of a country. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. It supervises, control and regulates the activities of the commercial banks. It is a service oriented financial institution. India’s central bank is the reserve bank of India established in 1935.and it was nationalized in 1949.It is free from parliamentary control.
ROLE OF BANKS IN A DEVELOPING ECONOMY
Banks play a very important and dynamic role in the economic life of every modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to the developing countries may be viewed thus:
1. PROMOTING CAPITAL FORMATION:-
A developing economy needs a high rate of capital formation to accelerate the tempo of economic development, but the rate of capital formation depends upon the rate of saving. Unfortunately, in underdeveloped countries, saving is very low. Banks afford facilities for saving and, thus encourage the habits of thrift and industry in the community. They mobilize the ideal and dormant capital of the country and make it available for productive purposes.
2. ENCOURAGING INNOVATION:-
Innovation is another factor responsible for economic development. The entrepreneur in innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth. Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity and progress.
3. MONETSATION:-
Banks are the manufactures of money and they allow many to play its role freely in the economy. Banks monetize debts and also assist the backward subsistence sector of the rural economy by extending their branches in to the rural areas. They must be replaced by the modern commercial bank’s branches.
4. INFLUENCE ECONOMIC ACTIVITY
Banks are in a position to influence economic activity in a country by their influence on the rate interest. They can influence the rate of interest in the money market through its supply of funds. Banks may follow a cheap money policy with low interest rates which will tend to stimulate economic activity.
5. FACILITATOR OF MONETARY POLICY
Thus monetary policy of a country should be conductive to economic development. But a well-developed banking system is on essential pre-condition to the effective implementation of monetary policy. Under-developed countries cannot afford to ignore this fact.
PRINCIPLES OF BANK LENDING POLICIES
The main business of banking company is to grant loans and advances to traders
as well as commercial and industrial institutes. The most important use of banks money is lending. Yet, there are risks in lending. So the banks follow certain principles to minimize the risk:
1. SAFETY
Normally the banker uses the money of depositors in granting loans and advances. So first of all initially the banker while granting loans should think first of the safety of depositor’s money. The purpose behind the safety is to see the financial position of the borrower whether he can pay the debt as well as interest easily.
2. LIQUIDITY
It is a legal duty of a banker to pay on demand the total deposited money to the depositor. So the banker has to keep certain percent cash of the total deposits on hand. Moreover the bank grants loan. It is also for the addition of short term or productive capital. Such type of lending is recovered on demand.
3. PROFITABILITY
Commercial banking is profit earning institutes. Nationalized banks are also not an exception. They should have planning of deposits in a profitability way pay more interest to the depositors and more salary to the employees. Moreover the banker can also incur business cost and can give more benefits to customer.
4. PURPOSE OF LOAN
Banks never lend or advance for any type of purpose. The banks grant loans and advances for the safety of its wealth, and certainty of recovery of loan and the bank lends only for productive purposes. For example, the bank gives such loan for the requirement for unproductive purposes.
5. PRINCIPLE OF DIVERSIFICATION OF RISKS
While lending loans or advances the banks normally keep such securities and assets as a supports so that lending may be safe and secured. Suppose, any particular state is hit by disasters but the bank shall get benefits from the lending to another states units. Thus, he effect on the entire business of banking is reduced.
OBJECTIVES OF THE STUDY
The following are the main objective of the studies.
1. To study the problem in financial crisis and money related query.
2. To evaluate banking is one of the most regulated businesses in the India.
3. To Analysis the role developing economy for the nation.
4. To study dynamic role in delivery and purchase of consumer durables.
Scope of the Study
All persons need money for personal and commercial purposes. Banks are the oldest lending institutions in Indian scenario. They are providing all facilities to all citizens for their own purposes by their terms. To survive in this modern market every bank implements so many new innovative ideas, strategies, and advanced technologies. For that they give each and every minute detail about their institution and projects to Public. They are providing ample facilities to satisfy their customers i.e. Net Banking, Mobile Banking, Door to Door facility, Instant facility, Investment facility, Demat facility, Credit Card facility, Loans and Advances, Account facility etc. And such banks get success to create their own image in public and corporate world. These banks always accept innovative notions in Indian banking scenario like Credit Cards, ATM machines, Risk Management etc. So, as a student business economics I take keen interest in Indian economy and for that banks are the main source of development.
So this must be the first choice for me to select this topic. At this stage every person must know about new innovation, technology of procedure new schemes and new ventures.
Functioning of a Bank is among the more complicated of corporate operations. Since Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently. In India, the regulation traditionally has been very strict and in the opinion of certain quarters, responsible for the present condition of banks, where NPAs are of a very high order. The process of financial reforms, which started in 1991, has cleared the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations that a Bank has to work with makes its operations even more complicated, sometimes bordering on illogical. This section, which is also intended for banking professional, attempts to give an overview of the functions in as simple manner as possible. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, and order or otherwise."
KINDS OF BANKS
Financial requirements in a modern economy are of a diverse nature, distinctive variety and large magnitude. Hence, different types of banks have been instituted to cater to the varying needs of the community. Banks in the organized sector can be classified in to the following
1. COMMERCIAL BANKS:-
Commercial banks are joint stock companies dealing in money and credit. In India, however there is a mixed banking system, prior to July 1969, all the commercial banks-73 scheduled and 26 non-scheduled banks, except the state bank of India and its subsidiaries-were under the control of private sector. On July 19, 1969, however, 14mejor commercial banks with deposits of over 50 Corers were nationalized. In April 1980, another six commercial banks of high standing were taken over by the government.
2. CO-OPERATIVE BANKS:-
Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative societies Act of the states. The main objective of co-operative banks is to provide cheap credits to their members. They are based on the principle of self-reliance and mutual co-operation. Co-operative banking system in India has the shape of a pyramid a three tier structure, constituted by:
3. SPECIALIZED BANKS:-
There are specialized forms of banks catering to some special needs with this unique nature of activities. Foreign exchange banks, Industrial banks, Development banks, Land development banks, Exim bank are important.
4. CENTRAL BANK:-
A central bank is the apex financial institution in the banking and financial system
of a country. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. It supervises, control and regulates the activities of the commercial banks. It is a service oriented financial institution. India’s central bank is the reserve bank of India established in 1935.and it was nationalized in 1949.It is free from parliamentary control.
ROLE OF BANKS IN A DEVELOPING ECONOMY
Banks play a very important and dynamic role in the economic life of every modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to the developing countries may be viewed thus:
1. PROMOTING CAPITAL FORMATION:-
A developing economy needs a high rate of capital formation to accelerate the tempo of economic development, but the rate of capital formation depends upon the rate of saving. Unfortunately, in underdeveloped countries, saving is very low. Banks afford facilities for saving and, thus encourage the habits of thrift and industry in the community. They mobilize the ideal and dormant capital of the country and make it available for productive purposes.
2. ENCOURAGING INNOVATION:-
Innovation is another factor responsible for economic development. The entrepreneur in innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth. Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity and progress.
3. MONETSATION:-
Banks are the manufactures of money and they allow many to play its role freely in the economy. Banks monetize debts and also assist the backward subsistence sector of the rural economy by extending their branches in to the rural areas. They must be replaced by the modern commercial bank’s branches.
4. INFLUENCE ECONOMIC ACTIVITY
Banks are in a position to influence economic activity in a country by their influence on the rate interest. They can influence the rate of interest in the money market through its supply of funds. Banks may follow a cheap money policy with low interest rates which will tend to stimulate economic activity.
5. FACILITATOR OF MONETARY POLICY
Thus monetary policy of a country should be conductive to economic development. But a well-developed banking system is on essential pre-condition to the effective implementation of monetary policy. Under-developed countries cannot afford to ignore this fact.
PRINCIPLES OF BANK LENDING POLICIES
The main business of banking company is to grant loans and advances to traders
as well as commercial and industrial institutes. The most important use of banks money is lending. Yet, there are risks in lending. So the banks follow certain principles to minimize the risk:
1. SAFETY
Normally the banker uses the money of depositors in granting loans and advances. So first of all initially the banker while granting loans should think first of the safety of depositor’s money. The purpose behind the safety is to see the financial position of the borrower whether he can pay the debt as well as interest easily.
2. LIQUIDITY
It is a legal duty of a banker to pay on demand the total deposited money to the depositor. So the banker has to keep certain percent cash of the total deposits on hand. Moreover the bank grants loan. It is also for the addition of short term or productive capital. Such type of lending is recovered on demand.
3. PROFITABILITY
Commercial banking is profit earning institutes. Nationalized banks are also not an exception. They should have planning of deposits in a profitability way pay more interest to the depositors and more salary to the employees. Moreover the banker can also incur business cost and can give more benefits to customer.
4. PURPOSE OF LOAN
Banks never lend or advance for any type of purpose. The banks grant loans and advances for the safety of its wealth, and certainty of recovery of loan and the bank lends only for productive purposes. For example, the bank gives such loan for the requirement for unproductive purposes.
5. PRINCIPLE OF DIVERSIFICATION OF RISKS
While lending loans or advances the banks normally keep such securities and assets as a supports so that lending may be safe and secured. Suppose, any particular state is hit by disasters but the bank shall get benefits from the lending to another states units. Thus, he effect on the entire business of banking is reduced.
OBJECTIVES OF THE STUDY
The following are the main objective of the studies.
1. To study the problem in financial crisis and money related query.
2. To evaluate banking is one of the most regulated businesses in the India.
3. To Analysis the role developing economy for the nation.
4. To study dynamic role in delivery and purchase of consumer durables.
Scope of the Study
All persons need money for personal and commercial purposes. Banks are the oldest lending institutions in Indian scenario. They are providing all facilities to all citizens for their own purposes by their terms. To survive in this modern market every bank implements so many new innovative ideas, strategies, and advanced technologies. For that they give each and every minute detail about their institution and projects to Public. They are providing ample facilities to satisfy their customers i.e. Net Banking, Mobile Banking, Door to Door facility, Instant facility, Investment facility, Demat facility, Credit Card facility, Loans and Advances, Account facility etc. And such banks get success to create their own image in public and corporate world. These banks always accept innovative notions in Indian banking scenario like Credit Cards, ATM machines, Risk Management etc. So, as a student business economics I take keen interest in Indian economy and for that banks are the main source of development.
So this must be the first choice for me to select this topic. At this stage every person must know about new innovation, technology of procedure new schemes and new ventures.
It is a given fact that any existing company in the professional
It is a given fact that any existing company in the professional realm today faces risks at one time or another. An online marketing business, for instance, faces the risk of not meeting the deadlines set by their clients. So, the proprietors of these businesses would have to make sure that they are indeed equipped to meet, and even beat such deadlines. These are examples of risks that are not too scary in nature. However, when it comes to businesses that deal with money every single working day, then there are indeed a lot of financial risks involved. Such is the case with banks, lending companies, and other financial institutions. Credit risk management is indeed a must, and with the help of credit risk management notes, the very existence of the organization itself can even be saved.It does not matter if you are operating a bank, a lending company, or other types of financial institutions. Just the fact that you are dealing with money and you are lending huge amounts of money to your clients is enough to put your company at financial risk. Imagine what would happen if all of your borrowers would suddenly decide to default their loans. This would jeopardize the status of the financial institution, not to mention it can also shake the very foundation of the institution itself. Thus, there has to be a certain framework developed, and all processes implemented should adhere to this framework.Knowing your customers is a very important part of your framework. In any industry, it is almost always a given to know your customers. This is why companies have to invest in the proper identification of their target markets. Now, there are certain levels when it comes to identifying your target markets, and these include the primary, the secondary, and the tertiary levels. Regardless of what level a particular customer belongs to, the overall market should still be targeted as accurately as possible.Now that you already know your target markets, you should also include in your framework knowing your individual customers. There are so many risks involved in the process of granting loans. Oftentimes, a loan officer would scratch his head, thinking to himself how he never expected a particular borrower or debtor to default in payment. You have to understand that each and every debtor does have every potential to do this, even if his financial status dictates how this is not likely to happen. Thus, a thorough investigation of the debtor has to be implemented. This is a very vital part and should be included in credit risk management notes. What is important here is to check on the borrower's present credit standing as well as his financial background. The borrower's liabilities should also be matched against his assets, to check if he does have sufficient income to pay off his debt.Bear in mind that financial institutions are not the only enterprises that are prone to credit risk. This is precisely why there has to be a properly defined system implemented to deal with credit risk management accordingly.
These days, many banks and financial institutions
These days, many banks and financial institutions are ready to offer mortgage loans to people with good credit history. Moreover, they are ready to offer different types of mortgage loans that suit different people with different needs. The following points present some of the different varieties of such loans that banks and financial institutions offer:
1. Term Loans with Fixed-Term Repayment : These are normal term loan schemes where you get a loan for a fixed duration. The rate of interest can be fixed or can vary based on some benchmark rate.
2. Overdraft-Loan : These are loans in the form of current account overdraft where surplus funds can be parked and therefore interest burden can be minimized. Every month, the overdraft limit is reduced as per the Equated Monthly Installment (EMI) amount.
3. Flexible-Loans : These are loans with a fixed rate of interest for one part of the loan and a floating rate of interest for the other part. It can be designed as per the convenience of the applicant and up to what is allowed under the rules of the bank/financial institution
4. Fixed Interest Loan: These are loans with a fixed rate of interest for the entire duration of the loan. It is well protected against market rate fluctuations. Generally, these rates are somewhat higher than the market rate.
5. Floating Interest Loan: Floating rate of interest is the rate that is linked to the Central Bank's (Federal Reserve) prime lending rate. If the Central Bank increases (decreases) the prime lending rate, then the bank/financial institution also increases (decreases) its interest rate.
Generally, it is advisable to go for floating rate of interest as the rates will be lower when the economy
If you want to know more about getting a mortgage loan visit Mortgage Loanand it is always worthwhile to know about other alternatives that are available. To know about home loans visit Home Loan
1. Term Loans with Fixed-Term Repayment : These are normal term loan schemes where you get a loan for a fixed duration. The rate of interest can be fixed or can vary based on some benchmark rate.
2. Overdraft-Loan : These are loans in the form of current account overdraft where surplus funds can be parked and therefore interest burden can be minimized. Every month, the overdraft limit is reduced as per the Equated Monthly Installment (EMI) amount.
3. Flexible-Loans : These are loans with a fixed rate of interest for one part of the loan and a floating rate of interest for the other part. It can be designed as per the convenience of the applicant and up to what is allowed under the rules of the bank/financial institution
4. Fixed Interest Loan: These are loans with a fixed rate of interest for the entire duration of the loan. It is well protected against market rate fluctuations. Generally, these rates are somewhat higher than the market rate.
5. Floating Interest Loan: Floating rate of interest is the rate that is linked to the Central Bank's (Federal Reserve) prime lending rate. If the Central Bank increases (decreases) the prime lending rate, then the bank/financial institution also increases (decreases) its interest rate.
Generally, it is advisable to go for floating rate of interest as the rates will be lower when the economy
If you want to know more about getting a mortgage loan visit Mortgage Loanand it is always worthwhile to know about other alternatives that are available. To know about home loans visit Home Loan
The US home mortgage trend and the fluctuation of home mortgage rates
The US home mortgage trend and the fluctuation of home mortgage rates are important benchmarks of the overall economy. While there are other other economic factors interest rates are largely tied to the decisions made by the Federal Reserve Bank. Interest rates are adjusted by the Fed according to financial matters in the US such as GDP growth, export and import numbers, and the inflation rate.Mortgage rates are used to help control the economy. If the movement of the economy is considered to be too fast, higher rates are imposed so that individuals and corporations would be less willing to apply for loans. Conversely if the economy seems to be rather slow or stagnant, rates are lowered so that people would be more enticed to engage in additional business transactions. Thus home mortgage trends will generally move up or down as the economy contracts or expands.Trend in Home Mortgage Rates:It is interesting to observe that mortgage rates have been lower than 8.5% since the year 1996, with the lowest rates of about 5.5% seen in the middle of 2005. While individuals might see an extremely different mortgage rate at a particular time due to other factors that affect rates (their salaries or credit histories), the lower trend has generally been observed to be generally consistent throughout the US economy. The fall of interest rates from higher levels prior to 1996 allowed more people to buy their homes, purchase lands, or trade up to larger houses. Perhaps this reflects an effort to speed up the economy from that time until now. However this year, mortgage rates are rising probably because of some unwise lending decisions made during a time of too easy money and rates held at extremely low levels by the Federal Reserve Bank for too long of a time period. A vicious correction is now underway with mortgage markets highly unsettled.Current Home Mortgage Rates:Mortgage rates in the year 2008 are generally higher than that of the previous year with rates of about 6.5 percent for 30-year fixed rate mortgages (FRM). The difference between interest rates this year and last year are not really significantly high as it would entail only a few hundred dollars increase in yearly payments. This probably would not stop many people from getting mortgages, however if the rise continues, you would expect that more people would become hesitant to apply for home loans. The problem with the current trend in home mortgage rates is not so much an increase in rates but an unwillingness of leaders to lend, even to people with good credit histories. The trauma and losses to lenders caused by the ongoing sub prime mortgage debacle starting in 2007 has left many lenders with weak balance sheets and they are operating in a panic mode. A record level of foreclosures in 2008 is causing a sharp contraction in home mortgage lending activity.With probably a few hundred billions of mortgage and derivative instrument write downs still to take place by mortgage lenders the trend for new home mortgage lending will probably remain down for some time to come. However, that is not all bad news for those looking for a new home. People who have cash to work with and a good relationship with their bank can probably find super deals on homes by working directly with stressed out lenders who have an excessive inventory of foreclosed homes on their books. In fact, if you have significant cash on deposit with a bank or financial institution you may not even have to use it for your home purchase. Even with the home mortgage trend down lenders that have non performing loans on their books will be eager to work with those who have capital on deposit and may make deals that will require very little if any of the cash rich home buyers cash to be used as an extra inducement to get foreclosed homes off their books.
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