Tanzania economy: Slowing down.

The Tanzanian economy, among the better managed in Africa, is expected to register a growth of only 5% in 2009, down by about 2.5% compared to the previous fiscal. It is a consequence of the global economic slowdown.

A primarily agricultural economy, Tanzania has suffered on account of declining commodity prices. Agriculture provides employment to nearly 80% of those employed. The major agricultural products are coffee, cotton, cashew, tobacco, sugar, etc.

Apart from agriculture, mining and tourism are the other major components of the economy, with tourism contributing the major share of foreign exchange. Tanzania is also a major exporter of gold, apart from coffee and cotton; and imports consumer goods, machinery, crude oil, etc.

The country is alive to the risks of economic downturn on account of the present global eocnomic situation, and has taken steps in the national budget of 2009-10 to address these problems. Agriculture, the mainstay of the economy, will receive special attention in the budget. Infrastructure would be a major area of special focus, with efforts to improve its contribution to economic development through the development of roads, ports, railways, etc.

The GDP of the country is expected to be in the region of 5-6% in 2009, while the inflation rate is around 12%, which the Government is trying to bring down. There are signs of recovery in the economy, but a recent survey showed that the confidence of the business community in the economic system was low. One area of concern is the limited choice of financial instruments available in the market, that does not cater to all kinds of needs of the consumers. Also the dependence on the mining sector has resulted in environmental degradation, on the one hand, and has skewed the revenue streams of the economy.

Hopefully, with the economic outlook at the global level improving, Tanzania may benefit from the cascading effect of it.

Bahamas economy hit by the downturn.

The Bahamas Islands, still among the wealthiest in the Caribbean, however, is struggling to keep its economy above the water, in the face of the global economic crisis.

The two areas that are badly hit by the recession namely, tourism, and financial services, are the two most important industries of the Bahamas. America, that is the epicenter of the global economic crisis is contributing lesser and lesser tourist dollars to the Bahamas every month, and offshore banking has become a dirty word practically, because of the unhealthy and unethical practices that have become the rule in this business.

As a result, the Bahamas is experiencing a mighty squeeze on its revenues. Fiscal 209 is going to see a negative growth of -1.70% in GDP as reported officially. Unemployment is running at 14%, and inflation is inching towards the 3% mark. With problems mounting by the month, the otherwise idyllic setting of the Islands resents a sombre mood today.

The financial services industry that is the second major revenue contributor after tourism, has not been able to absorb the hits emanating from the U.S. Banking crisis, and this has combined with the slowdown in tourism to deal a below-the-belt blow to the economy.

The Bahamas Islands also exports certain minerals, chemicals, fruits, vegetables, etc., and imports include foodstuffs, machinery, transport equipment, etc. Among the major manufacturing industries are plastics, pharma, liquor, etc.

Even though the present Government has adopted investor-friendly policies, it may not have the desired effect very soon. Unless the U.S. recovers from the recession, and its economy moves forward, the Bahamas Islands may not have much of a chance to wriggle out of the present situation.

Finance: Forfaiting-Part III

In earlier articles, we had discussed what is forfaiting and how it works.   In this concluding article, we shall examine the benefits of this system of international trade finance.

The benefits or advantages of Forfaiting may be studied in relation to the parties to the transaction.

Benefits to the Exporter(Seller): 

1)  Elimination of Risk:  One of the major advantages or benefits of Forfaiting is the elimination of risks, to a large extent, mainly of a political, financial, and commercial nature.

Political risk may arise on account of factors like War, Civil War, Disturbances, lack of foreign exhange reserves, restrictions on foreign trade, etc.  

Transfer or payments risk  may arise on account of currency conversion issues.  

 Commercial risk may arise on account of the insolvency or bankruptcy of the importer or even the importer’s Bank, or disputes relating to the merchandise, etc.   Another risk is that of interest rate changes and currency rate fluctuations.

2)  Improves Cash Flows:  One of the major parameters for judging the health of a company is the soundness of its cash flows.   Especially for small and growing concerns, timely conversion of their inventories and recievables ensures a steady supply of internal finance for the purpose of faster turnover and higher sales.

Forfaiting helps an exporter convert his credit sales into cash immediately.   That too, to the full extent of the bill amount.   This type of financing provides much needed maneuverability to the exporter in relation to his future plans, and to be aggressive in the pursuit of his business goals.

3)  Gives Competitive Edge:  In a highly competitive environment, buyers are always looking for value for money, and a good deal.

Often, exporters are under pressure to afford credit to their foreign buyers.   Forfaiting comes to the aid of the exporters by encashing their export documents for the full value, while allowing the exporters to export their merchandise on credit.   This adds to the competitive edge of the exporter.

4)  Opens New Markets:  Often, exporters are constrained in their efforts on account of the uncertainty of payments for exports made.   Forfaiting relieves the exporter of this burden, as forfaiting transactions are always without recourse to the seller(exporter).   That is, the forfaiter cannot demand repayment from the exporter in the event of the importer’s default.

5)  Administrative and Legal Issues:  Forfaiting relieves the exporter of the time consuming and sometimes onerous responsibility of administrative and legal work in connection with realization of export proceeds.   The ‘headaches’ associated with export transactions are transferred to the forfaiter.

Benefits to the Forfaiter:

1)  Eliminates Payment Risk:  In business, especially so in international trade, risk comes in many forms, and often small and minor mistakes can prove costly and result in loss either in monetary terms or in terms of prestige, reputation, etc.   And one of the most serious such risks is the risk of non-payment.

In forfaiting, the forfaiter is practically assured of payment, as the exporter’s Draft is pre-accepted by the importer, and further avalized by the importer’s Bank.   Even though payment defaults may still arise on account of insolvency, etc., the degree of safety enjoyed by the forfaiter does make life easier for him.

2)  Remunerative:  The forfaiter is entitled to various pecuniary benefits in forfaiting.   For example, a forfaiter charges interest for the period of credit he extends to the exporter.   Secondly, the forfaiter charges a fee for the various risks associated with the transaction.   Thirdly, the forfaiter charges a certain amount for expected delays in getting reimbursement from the importer.  This is specific to the country of the importer.

Benefits to the Importer(Buyer): 

1) Documentation:   The major advantage to the importer is the assurance that the documents from the exporter have been screened by a professional agency, thereby reducing the risk of misinterpretation, communication gaps, etc.

2) Credit Facility:  Another benefit for the importer is that, he is able to get the goods on credit which provides him space to arrange for payment from the proceeds of the consignment that he has imported, rather than pay upfront.

                                                                                                Concluded

Finance: Forfaiting-Part I

Introduction:  Financing of international trade is a complex and sophisticated affair.   It requires a mechanism that addresses the concerns of both the exporter(seller) and importer(buyer).   Obviously, there are several issues, some of them ticklish in any cross border trade transaction.

Some of the major issues involved here have to do with the solvency and standing of the buyer and seller, the local laws in the respective countries, the different currencies and their differing values, the customs and practices in the two countries impacting on the trade transaction, even the different languages spoken in the two countries, etc.

Such a tall order of demands on the exporter and importer calls for a system that is comprehensive in its scope and application.   Some of the popular systems under which international trade transactions are undertaken are Documentary Credits, and Letters of Guarantee.   Another system or mechanism to conduct foreign trade transactions that is being increasingly used is called “Forfaiting”.

What is Forfaiting?   Forfaiting is a mechanism to finance international trade under which the exporter(seller) gets his Drafts or Bills of Exchange pre-accepted by the importer(buyer) and further avalized by the importer’s Bank, and gets the same purchased by the Forfaiter.   The term “Aval” means a sort of guarantee or commitment on part of the importer’s Bank to honor the exporter’s pre-accepted Draft, irrespective of the importer’s conduct in this regard.

After parting with money to the exporter against the pre-accepted Draft, the Forfaiter, in turn, collects the proceeds of the same from the importer.   Further, this transaction is without recourse to the seller.   That is, the forfaiter cannot revert to the exporter in the event of the importer’s default.

The forfaiter may, in the normal course, wait for his payment to come through the importer’s Bank.   Or, he has also the option to sell the Draft or Bill of Exchange, that he has purchased, to another forfaiter, for consideration, also without recourse.   Thereafter the second forfaiter will claim the proceeds of the Draft from the importer.

The forfaiter is the financier who advances money to the exporter against pre-accepted Drafts and claims his dues from the importer.   And he undertakes this risk without recourse.   That is, if the importer does not pay, the forfaiter accepts the loss.   The most popular instrument against which the forfaiter extends financing is the Draft or Bill of Exchange.   A Bill of Exchange is a financial document that is drawn by the seller on the buyer demanding payment for the goods or services supplied.   It mentions the amount, date, buyer’s name, etc., on the face of it.

There are three major features of a forfaiting transaction.   One, the forfaiter purchases the exporter’s Draft for the full value of it(100%).   Unlike in a factoring transaction, where a part of the bill amount is retained by the factor as a reserve.

The second major feature is that the forfaiter undertakes  this transaction without recourse to the seller.   The forfaiter cannot revert to the seller to recover the money he had advanced to the seller, in the event of default in payment by the buyer.

The third major feature of the forfaiting transaction is that the forfaiter is practically assured of payment, because the Draft is pre-accepted by the buyer, and also avalized by the buyer’s Banker.

Apart from the above, there are other features and points of interest and value in forfaiting transactions, like there are minimum and maximum limits for the Drafts to be drawn.   Further the Drafts are drawn in the world’s major currencies.

                                                                                            To be continued.

LET THE TAMASHA BEGIN!

Its election time in India folks!   Who are you going to vote for this time?   Does it really make a difference?   Does it even matter if you vote or dont?    That depends on how you look at the issue, and where your own interests lie.

Major Issues:  What are the major election issues in India, this time around?   Well, the comfort zone of “terrorism” is no longer inviting and safe.   It may, infact, give negative returns.   Economics has overtaken all other considerations, and come on to  the forefront of political battles, that lie ahead.   And jobs, the least glamorous, but the most relevant issue affecting dozens of millions of Indians is now uppermost in the minds of the electorate.   Of course, how much of a “mind” the electorate has, is a different matter altogether, given the voting patterns in the past elections!

The Challenges:  The change of guard in America has also changed the old equations for the Indian ruling classes.   The Indian political elite will definitely miss the indulgence of the Bush administration, towards the various sins of omission and commission merrily committed by the Indian elite.   Having enjoyed a jolly ride for eight long years thus, adjusting to the new realities of the changed situation, is not going to be easy for the Indian rulers.

Compounding  their problems is the current economic crisis in the United States, and elsewhere.   Job opportunities in the U.S. for the Indian middle classes are fast drying up.   And a reverse flow of expatriates back to India, after losing their jobs abroad, has begun.   The new American administration has, inevitably perhaps, come out with legislation to protect the American workers, and industry.   Outsourcing of jobs to other countries at the cost of the local labor, and employing aliens ignoring equally qualified locals would be penalized now.   As it so happens, the majority of the jobs outsourced by American companies go to India;  and naturally, now India has to suffer the most on account of these new laws.   Having enjoyed  free lunches for a long time practically, the Indian establishment is now forced to address the long standing issues that remain unresolved even fifty seven years after Independence-Poverty, Unemployment, Illiteracy,  Diseases, Corruption etc., etc., etc.!

Immature Electorate:  On its part, the Indian electorate has rarely displayed the kind of maturity and common sense expected of it in its approach to voting in national elections, in the past.   Political Parties have almost always succeeded in diverting people’s attention with frivolous and even stupid issues, and away from the real issues.   But this time around, the politicians may not have it so easy.   Primarily, on account of the increasingly precarious job situation.   With industry and businesses laying off employees by the hundreds, practically every week, on account of the economic situation(what else), the increasing number of jobless makes it more complicated for the political classes to come up with a neat and  winning combination of promises and slogans, that have invariably paid dividends in the past.

At this point of time, it is difficult to predict the result of the election.   But the election itself should offer an insight into the minds of the Indian electorate, and the public at large.   Has the Indian electorate grown up?   Has it matured?   Has it developed the capacity of seperating the chaff from the grain?   Has it developed the ability to see through the politician’s empty promises?   Has it, at last, learned to recognize the real issues that affect its interests like poverty, unemployment, health, education etc.?   Or has it not learnt anything from its past experience and continues to labor under illusions and delusions?   Does fatalism still play a prominent role in decision making of the Indian electorate?   These, and many more questions will be answered soon.  

Conclusion:  To be fair,  the Indian voter, does not have much of a choice.   All the major political parties have been tried, tested, and found to be wanting.   And the new and smaller parties do not have the necessary fire power or the horse power to reach the goal post!  

Whatever the outcome of these elections, the winning party or combine may end up cursing their luck in winning the elections, given the developing economic crisis that is likely to hit India squarely in the coming months, if not weeks.  

LET THE TAMASHA BEGIN!

View expressed above are author’s personal.

My Word!

Hypocrisy is a common trait among human beings.   It is neither region, religion, nor color specific.  Though the degree and proportion of it may vary from place to place, and time to time.

The scheduled auction of Mahatma Gandhi’s personal effects by the auction house, Antiquorum in New York on Friday, the 6th of March, has exposed Indian hypocrisy to a worldwide audience.

Gandhi’s philosophy of non violence and religious harmony is yet to be accepted by the majority of Indians in letter and spirit.   Especially in his home state of Gujarat, that has seen recurring incidents of violence over time, reaching genocidal proportions in 2002 in Godhra.   Religious strife in India is taking newer and more dangerous forms, imperilling the very stability of the state.

The Indian Government wants the personal effects of the Mahatma, that include his spectacles, a pair of leather sandals, etc., repatriated to India.   It is examining various ways in which to accomplish this, including the legal option.

The key question to answer for the Government of India is, whether it has a list of all such artefacts of national and historical value, in the possession of foreign individuals and institutions;  and if so, what efforts it has made so far to get them back to India.   It does not do any credit to India’s image if the Government were to be seen making noises whenever such an incident occurs, only to lapse into amnesia once the issue is resolved, either to its satisfaction, or otherwise.  

Meanwhile Mr.Otis, the ‘owner’ of the artefacts under contention, has made an offer to the Indian Government to return the items to India, gratis, provided the Government does something practical to reaffirm its committment to the ideals of the Mahatma, like making higher allocation for education, and generally to do something for the poorest of India.  

While one would not venture into the issue of Mr.Otis’ sincerity in this matter, it is a fact that the Indian Government has put itself in a unenviable position on account of its less than enthusiastic approach to issues of national heritage, that is evident in so many other aspects of its functioning.

Views expressed here are personal ones of the author.

ISLAMIC BANKING AND FINANCE:MUSHARAKA

Literally speaking, Musharaka means partnership or a system of sharing. It is one of the several financing options available under Islamic Banking.
There are two types of Musharaka-Direct and Diminishing.

DIRECT MUSHARAKA: Under this option of financing, the Bank and the Customer form a partnership in which the Bank provides part of the capital to the customer and the customer manages the project apart from providing part of the capital. The proportion of capital provision by the two parties is mutually decided upon in advance. It is the customer that runs the business enterprise.
The notable feature of this partnership is that the liability of the partners is unlimited. When the business suffers a loss, it is distributed between the Banker and the Customer in the agreed proportion, whereas in case of profit, it is shared between the two in proportion to the capital contributed by them. The contract may also provide for the customer to be exempt from running the show or the business, in which case the share of the Bank in the profit would be proportionately higher.

The Musharaka contract is based upon real capital and specific limits and not on the basis of debt. Partners to the contract should know the extent of their participation in the capital and their share in the profits and losses at the time of making the contract. Uncertainty in the terms of the contract would vitiate the contract. Normally, these contracts are pursued by the partners till the final objectives of the venture are achieved. However it is permitted for either of the partners to exit the partnership with the consent of the other.

DIMINISHING MUSHARAKA: In this form of contract, the Banker agrees to part finance the project and also agrees to exit the partnership voluntarily upon repayment of his share of the capital by the other partner, the customer. This repayment must be made within the specified period. The customer agrees to bring in his share of the capital and act as a trustee for the entire capital.
Like in the case of the Direct Musharaka, the loss from the business venture is distributed among the partners in the agreed ratio, whereas profits are shared between them in proportion to their capital contribution.
As per agreement, the Bank agrees to sell its share of its capital to the customer over an agreed period of time, and the customer buys out the Bank share in the partnership so that eventually the customer becomes the master of the whole enterprise.
This type of financing is a very convinient form of financing where customers can rely upon the Bank not only for capital but also managerial expertise. And in the course of time, the customer becomes the sole owner of the business enterprise. For the Banker, this arrangeement ensures a regular, and steady income. Further, losses are shared according to respective share in the capital, thereby reducing the burden of losses.
There is a third kind of Musharaka financing that is akin to Venture Financing which will be the subject of another article.

Author’s Note: Readers may please note that the above article is meant to be a introduction to one of the forms of financing available under the Islamic System, and not an exhaustive study of the same.