Victory Investment

Is Islamic banking a viable alternative to interest-based conventional banking? Is it really any different from conventional finance? Does it offer a better way forward?

These and other questions face the next generation of Islamic bankers as they inherit an industry that, in just the last decade, grew from a niche market serving a largely Muslim population to a global phenomenon offered side-by-side its conventional counterpart. In the aftermath of the global financial crisis, it is now seen in a completely new light as not only an ethical form of finance, but also as a potentially superior one. First, however, we must understand what Islamic finance is and what it is not.

This article places special emphasis on equity-based Islamic finance because, while “good-enough” Shariah-compliant trade and lease based instruments currently predominate the market and manage to satisfy the letter of the law, stakeholders increasingly demand Shariah-based products that fulfill the original spirit of the law.

All banking is debt, equity, trade, or lease based. And all Islamic finance does is simply dispense with the debt. The same proven risk-oriented principles that benefited past generations of equity-based conventional bankers (more profitably than their interest-based counterparts) also ensures the success of future generations of Islamic financiers. The positive impact that Islamic-style equity has on both the profitability of a business and the well being of society contrasts sharply with the negative effects of interest-based instruments.

The demystification of Islamic banking requires an understanding of four basic points: 1) What is an Islamic bank? 2) How is an Islamic bank different from a conventional bank? 3) How is an Islamic bank similar to a conventional bank? and 4) How do the two compare in practice?

An Islamic bank is a financial intermediary that brings together the providers of capital with the users of capital in accordance with the principles of the Shariah (Islamic Sacred Law). Like conventional banks, a combination of products, services and customers loosely determines the type of banking the institution engages in: at a very basic level, investment bankers execute complex, investment-oriented transactions for large institutions; commercial bankers borrow, lease and lend; and retail bankers service consumer-oriented needs. Though increasingly there is considerable overlap across these industry specialties, with commercial banks offering investment banking expertise, investment banks providing retail operations, and retail banks evolving into full-service commercial banks, the burgeoning demand for Shariah compliant instruments at all levels of the banking value chain has Islamic banks repositioning themselves as one-stop financial shops rather than as specialist boutiques.

Islamic banks are unique in that their activities are regulated by rules derived from the Quran, sunna (Prophetic practice), and the traditional schools of scholarship. Certainly, there are banks that offer cosmetically-enhanced products that are Islamic in name only, but the increasing regulation of the industry, the improving sophistication of the customer base, and the genuine demand for authentic Shariah committees, limits the proliferation of these expedient, non-compliant banks.

An Islamic bank is distinguishable from its conventional counterpart by some basic principles, each of which is derived from the Quran, sunna, or both. While thousands of fiqh (Islamic jurisprudence) rulings operationalize specific injunctions from the primary texts, four basic principles govern at least 80% of all Islamic transactions:

: The Arabic word riba refers to “increase” or “addition”, and in the commercial context refers to any incremental increase, however great or small, above the original lent or exchanged amount. While riba is of many types, the most common kind is ordinary commercial interest, where the borrower compensates the lender with an interest payment for the right to use a sum of capital over a period of time.

Often riba is translated as usury, and because in modern times usury normally refers to exorbitant rates of interest, Muslims often mistakenly regard seemingly benign commercial rates of interest as something other than riba. In reality, however, riba refers to any increment above the principal amount, whether it is a soft, development loan charged at 1% annually or a usurious consumption loan charged at 10% monthly. So riba includes both usury and commercial interest.

: The concept of risk sharing is common to all Islamic finance transactions, whether equity, trade, or lease based. A few additional conditions make Islamic finance transactions even more equitable in many cases; such as the ruling that silent partners receive profit no more than is proportionate to their investment, while they may receive less; and that working partners may enjoy more pre-agreed profit than is proportionate to their investment, reflecting an emphasis on reward for work rather than reward for merely possessing capital.

The popularity of debt-style, interest-free instruments like Murabaha (mark-up financing) reflects the infancy of the Islamic banking industry and the tendency to gravitate towards something that mimics interest. But even in Murabaha transactions, where the bank intermediates a purchase by buying the good and charging a mark-up in advance, the condition imposed by the Shariah, and absent in a conventional loan agreement, is that the Islamic bank assumes some of the risk as well by holding the good for a period of time. Few conventional banks will choose to own anything, even if only for a short period.
This distribution of risk is itself an equity-based principle. Such seemingly insignificant conditions are often lost in contractual minutiae, and often confuse the layman into thinking that there is no difference between a given Islamic product and its conventional counterpart, but when things go wrong, the details in an Islamic contract place particular emphasis on the equitable distribution of risk.

: Because Islam restricts the treatment of money as a commodity by declaring unlawful any profit earned from the exchange of like currencies, regardless of the time value of money, transactions are backed by an asset or a service. Asset and service backing ensures that real assets and inventories are created, rather than pyramidic money-lending schemes where money simply creates money and market volatility increases unchecked. Even monetary losses due to inflation are overcome by denominating the exchange of money into an asset with intrinsic utility, such as gold.

Because Islamic banking relies on asset and service backing rather than interest payments, conventional bankers often point to Islamic banking’s inability to service demand for short-term loans. This is less true now than ever before. Islamic banks have now gained the expertise and scale necessary to conduct a broader set of activities. Across the world, Islamic bankers now provide car and home loans, fund short-term working capital requirements, and offer a range of shelf-like instruments.

: Contracts play a central role in Islam. The uncertainty of whether a contractual condition will be fulfilled or not is unacceptable in the Shariah and creates gharar (ambiguity or uncertainty leading to dispute). Conventional insurance, interest, futures and options all contain an element of contractual uncertainty. This is distinct from commercial uncertainty, such as whether a business will be profitable or not, which is acceptable because there is an asset (such as property, plant and equipment) or a service (such as labor) underpinning the risk.

Some of the above mentioned differences between Islamic and conventional banking seem inconsequential, even trivial to some, but these ostensibly insignificant conditions spell the difference between financial dynamism and financial disaster, as will be shown later.

The similarities between Islamic banking and conventional banking far outnumber the dissimilarities, because the basic principles of finance remain the same. Companies still only raise cash in one of two ways, with the first method conforming to Islamic principles: 1) by issuing equity, or stocks, done by selling shares in a company, where the rise and fall of the share’s value reflects the holder’s share in profits and losses; and 2) by raising debt, or large IOUs called bonds, which obligate the company to repay the holder some fixed-income at some given maturity. Like conventional banking, Islamic banking enables the profit-motive, fosters a spirit of transparency and corporate responsibility, and ultimately seeks to promote shareholder value, all within the guidelines of the Shariah. Capitalism, if you will, without the after-taste.

So how do equity-based Islamic banking and interest-based commercial banking compare in practice? The question should be answered on three levels: 1) the profit impact; 2) the economic impact; and 3) the social impact. It is worth emphasizing that in the longer term these levels are inter-related. No company profits unfairly, or suffers adversely, without having a negative residual impact on the economy. And no economy suffers without some concomitant social cost:

: Comparing the profitability of equity and debt, history is quite telling. Between 1926 and 1999 in the United States:

invested in small stocks would now be worth ,117;
in large stocks, ,351;
in corporate bonds, ;
in government bonds, ; and,
invested in an extremely safe Treasury bill would now be worth .
Out of 54 possible 20-year periods between 1926 and 1999, stocks outperformed bonds all 54 times. For the risk averse among us (i.e. bondholders), in bad times the highest returning bonds still managed worse than the lowest returning stocks. In the worst 20-year period for large stocks, grew to .11, and for intermediate government bonds, grew to .58 (Ibbotson Associates, 1999). We have to rethink our concept of risk. The perceived long-term safety of bond investing is as illusory as its profitability is real. Equity is not only historically more profitable but, as these numbers convincingly show, the safer long-term choice. Even risk-adjusted returns are higher for equity than they are for debt.

: The primary objective of most commercial banks is to increase profit by extending loans to creditworthy individuals at the highest possible rate while undertaking the least amount of risk. But this objective focuses both borrower and lender on repayment, not profit. Typically, the lender has little active interest in the borrower’s business; only an interest in the borrower’s ability to repay, often at all costs, including the well being of the business and the borrower. Equity focuses on profit (and loss). If the principal (lender) has an equity share in the business, he will have an almost exclusive focus on the profitability of the business. Knowing that a loss is possible, the principal will make every effort that the agent (borrower) succeeds.

In a debt transaction the borrower loses everything if the business fails, and is still left to repay. While in an equity transaction, the agent loses nothing if the business fails, besides time and effort, and has nothing to repay. Further, debt inhibits innovation by putting undue focus on repayment schedules while equity promotes innovation by focusing on the business itself. Small, growing businesses need to invest time and money to innovate before becoming profitable, a task made difficult by even the most lenient repayment schedules. Early repayment by the borrower precludes reinvestment into innovating the business, while delayed repayment increases subsequent payment sizes.
Too, the confrontational nature of interest-based lending debilitates business. In a debt transaction, the lender and borrower work in conflict, having to negotiate and renegotiate repayment schedules and lending rates. In an equity transaction, the principal and the agent work in concord to make more money.
From a distributive justice perspective, debt tends to centralize capital into larger corporations that are more able to match stable cash flows with repayment schedules. Equity, on the other hand, is more distributive in that it favors smaller companies that provide a greater profit potential. Speculative debt-based borrowing, including borrowing to finance equity purchases, triggered almost every major financial disaster in the modern capital market era. The negative effects are not merely money-deep; debt affects the collective consciousness of the business community, creating a demeaning and disempowered “borrower culture” rather than a vibrant and productive “investment culture.”

: As the Quran mentions in relation to wine and gambling, “In them is great sin, and some profit for men; but the sin is greater than the profit.” (2:219) So too, interest has its share of convenient, short-term advantages, but like other evils, comes at the price of a broader social impact.

Real world examples are illustrative. The IMF and the World Bank aggressively disbursed loans for decades in the name of economic rehabilitation and poverty alleviation. Now recipients of their soft loans and structural adjustment programs are deeper in debt than ever before. Their non-usurious, low-interest loans compounded over time to create a situation where interest payments now exceed original principal amounts often by several orders of magnitude. The world’s poor now pay several times more in interest payments than they do in all social services combined, leaving us with damning evidence that the debt-based sincerity of the IMF and the World Bank only served to spread world poverty.
At a commercial level, interest-based lending centralizes capital into fewer hands. The common man puts a higher proportion of his wealth into interest-based instruments than the wealthy man because he lacks the capital to make long-term investments and requires a ready source of liquidity, like a bank deposit, which returns a low rate. At the same time, the common man’s lower disposable income requires him to continuously borrow capital for consumption purposes, like financing a car, a home or an education. For this, the same man earns a low interest rate and is charged a high borrowing rate.
The owners of capital, on the other hand, include high-worth, decision-making stakeholders of society, like banks, corporations, the government, institutional investors and wealthy individuals. By charging interest, they access the borrowers’ and depositors’ capital at relatively low rates and allocate them with other owners of capital (often in the form of equity-based investments) for significantly higher profits, which serve only to centralize capital among owners. This is neither conspiracy nor collusion. This is the nature of interest. The lines between borrower, depositor and owner are rarely well defined, but one fact remains: the nature of interest-based lending is such that the lower one’s income, the higher one’s borrowing rate and the lower one’s return on deposits. Equity, on the other hand, levels the playing field, so that large and small investors share identical returns.

With global trends headed in the direction of equity (evidenced by the dramatic emergence in recent decades of the individual investor; the success of the mutual fund; the proliferation of new stock exchanges and equity indices; and an increase in global privatizations) there seems to be a collective acknowledgement that equity is the investment of choice. Debt continues to be a corporate mainstay as the cheaper source of financing, particularly among large, stable borrowers able to reduce their cost of capital by matching expected cash flows with future debt repayments. But to choose debt over equity has severe implications, not just for the business itself but also for society as a whole. Leaving Islamic banking as not only a viable and profitable choice, but also a responsible one.

: Ethica Institute of Islamic Finance.

Gold (element symbol Au) means ‘shining dawn’ in Latin and carries the atomic number of 79. The shiny metal holds value in coins, jewelry and artifacts, and has been a symbol of wealth and power since the beginning of recorded history. It’s been a store of value for more than 5000 years. Historical accounts of ancient Egypt say that gold was abundant than dirt. Millenium later, governments used gold for buying power and commerce, known as the gold standard, where paper money or instruments represented a store of gold reserves. The gold standard came to an end in 1971, and in 1975 the price of gold was finally allowed to fluctuate in the free market.

About 180,000 metric tons of gold have been unearthed in history, which is a little more than the amount needed to fill two Olympic-size swimming pools. More than half of that gold has been mined during the last 50 years. The world’s largest deposits are being depleted, and new large gold discoveries are rare. Extracting gold is most cost efficient in large, easily mined deposits. Since 1880, South Africa has been the source of most of the world’s gold supply. About 50% of all gold ever produced has come from South Africa. In 2007, China overtook South Africa as the world’s largest gold producer. Searching for gold is now a family affair involving small mines in developing countries, where women and children are often employed in hazardous labor at minimal pay. Motivated by rising prices, corporations and individuals are searching for gold the worldwide.

Holders of gold commonly store it in the form of bullion coins or bars, or through investment vehicles like ETFs (Exchange Traded Funds), futures contracts or mining company shares . Investing in or owning gold is used most commonly as a hedge against inflation, political or other economic uncertainty. The current economy is no exception. The continued collapse of the U.S. dollar and the failing of the United States economy under the mulatto Muslim President, Barack Hussein Obama, sent many investors to flock to gold as a possible safe haven.

The investment firm Goldman Sachs put a ,650 price target on gold for 2011. As of Oct 7, 2010, gold futures contracts reached an all-time high of ,364.77 (unadjusted for inflation). Like the recent internet and real estate bubble, some claim that gold is starting to show signs of a speculative bubble. With jewelry accounting for two-thirds of the demand for gold worldwide, some analysts say there is no fundamental support for the rally.

Advance fee fraud, romance scams, investment scams and other criminal operations related to gold are increasingly common. Such scams can range from a business claiming to be a gold bar, gold dust or gold coin supplier to an individual involved in the shipping, investment or sale of gold. Gold scams are common in West Africa but no country is immune. Scams can take place in any country. Investing or buying gold via the internet is especially suspectible to fraud and scams. Gold coins, bars and dust can all be manipulated in quality, or even fake.

Gold investments in West Africa are booming, and the relative political stability in Ghana, West Africa has made the country one of the most attractive new mining investments in Africa. Ghana is Africa’s second-largest gold producer after South Africa. Large international players like Newmont Mining Corp and AngloGoldAshanti have been joined by smaller players like Randgold Resources, Keegan Resources, and others. Industry observers see potential for more deposits in Ghana, and consider the country as still under-explored. New gold finds here fast become the acquisition target of large corporations.

Scam and criminal operations are growing at least as fast as the gold boom. More criminals and scammers mean the risk for getting in on the action in West Africa is very high. Gold scams can involve real government agencies and documentation. Criminals and fraudsters can speak the industry lingo and even provide detailed contracts, shipment details and photos of operations and facilities. Ghana gold scammers are quickly becoming experts.

Deals involving gold purchase, shipment or gold investment via the internet is especially prone to fraud and scams. For cases involving West Africa, a Ghana private investigator, due diligence or Ghana background check service should be used to verify representatives and business operations. For reliable and professional services, there is U.S.-based Wymoo® International which has global operations and field investigators in Accra, Ghana. Another option is Oak House Company which is a small private investigation firm in Accra. Investigators conducting due diligence or background checks for gold should have contacts Ghana government agencies like the Ministry of Lands and National Resources, eological Survey Department of Ghana, and the Precious Minerals Marketing Corporation (PMMC).

Many false companies are now registering with government agencies, making the verification process even more complex. Because of all the gold scams that can take place, conducting international due diligence or a background check is key. To be safe, all international gold deals and transactions should be verified by a professional investigation company.

All the Best,

S. Birch
© 2010 S. Birch

IPO investment India is going to experience in the coming months mega offers from public sector giants and large corporate. An intelligent investor can expect attractive returns. There are many factors; Ever-growing industrial production, Increase in domestic consumer spending, raising exports and good management by the enterprises. It is not a coincidence that IPOs India brings out are oversubscribed many times, at least most of the time.

It is not that, every single initial public offering (IPO) will be a sure winner. By nature, stock markets are harsh taskmasters. Many stocks may be selling at less than their listing prices. However, no one forced the IPO investor to hang on to the sock until its price fell down. Entering and exiting stocks at various times is what the stock market is all about. The other side of the coin is bright; while some shares have lost value, there are others, which have returned high profits. Famous examples are too well known; checking out with the share broker or browsing the net will yield surprising number of success stories. As such, IPO news India and Indian bourses generate has been positive on the long term.

There are two aspects to an IPO. Safety of the investment is the primary one. IPOs India inc. brings out compulsorily disclose certain information as stipulated by the SEBI. (This is not a guarantee by SEBI or any other body. The prospectus is strictly for information purpose.) The second factor is the possible returns on the investment. Management’s track record, business model, the sector in which the company is operating and performance of the peer companies are some of the pointers to profits. Portfolio managers can add their analysis.

An existing stock has some fundamentals and past performance, which helps judgment. This is not the case with IPOs. Some intricacies, for example how much stock is being picked-up by institutions will be first known to the professionals. It will definitely be safer and prudent to discuss with the investment advisor before subscribing to an IPO. Opportunities in terms of IPO investment India offers have been always exciting.

Advice About Pre-Qualifying for a Loan from Parma OH Real Estate Agent Michelle Green

 Buying a home in Parma OH is an exciting experience.  Since it is a major investment you have to be sure that you are ready financially for the added responsibility.  But before you start looking at Parma, OH homes you have to get a lender to qualify you for a purchase price.

 If you have either been a homeowner, or have never bought a home before you can’t just decide how much you want to spend.  There are many variables involved in the formula and everything has to be accounted for, both in income and debt.  Your lender has to have all of the pertinent information to give you a viable amount to work with.

 Since we are a credit driven society you will have to rely largely on your credit score to determine your buying power.  Unless you are paying cash this is the main deciding factor in the process.  Your rating, or your FICO score as it is called, is based on several different areas of your credit history.  How much credit you have available, how much you owe creditors and even past accounts all come into play.   It doesn’t matter if you have many accounts open as long as you have paid on time.  When payments are over 30 days late that’s when your rating takes a hit.

 It is a good idea to look over your credit report for accuracy.  Unfortunately, the three credit bureaus do not always maintain proper records so it is up to you to make sure everything is correct.  A mistake could take months to fix and in the meantime your rating is suffering.  Staying on top of it before you are ready to buy will eliminate any unnecessary delays.

 Your lender will give you a dollar amount of home that you qualify for, based on your income and your debt ratio- the amount of money you owe versus what you make.  The amount they state is written in stone and not open for interpretation.  Going over this amount will not only waste everyone’s time, but will get you excited about a home that you will not be able to close on. Leave the purchase price to the lender- that is what they are trained to do.

 To learn more about how to qualify for a loan, visit Parma Home Sale or call Michelle Green directly to get free tips and tricks at 440-342-0269.

The systemic approach is the direction of scientific knowledge and the methodology of social practice, which is based on the discussion of the objects in systems. it is used as an instrumentarium, which directs the research to the substantiating the wholeness of the object, discovers various contacts in it and gathers them into the total complex.

The systemic approach in its essence is the concrete principles of the dialectical materialism, in the bounds of which, we can discuss the investment process the series of those operations (the kinds of activities), which is fulfilled at the beginning capital (the preface of the process). It increases the value and conditions a definite result (the exit of the process). It is possible to learn the investing process from the position of the systemic approach, because the investment process is an economical system and it has a preface – the complex position of this system (investment surrounding) and exit – the changes of the entering investments into the economical system. The result of investing process got at the exit, defines the development of the economical system, in which the process is going on, and gives in it rise to the rates of the economical growth.

The investment process is realized by ruling. It is discussed to be such a strategy, which guarantees achieve maximum effectiveness and it leads every kind of activity to the maximal growth of the economical system. Ruling consists of the following active cycles:

1.  the analyze of the current position of the investment process, in which consists of: the analyzes of the investment attractiveness and investment business, satisfaction of the requirements for investments of the economical system;

2.  definition of the showing of volume needed by the investments and of the investment attractiveness, to which this volume is conformed;

3.  Working out activities which provide needed position of the systems’ investment attractiveness;

4.  The changes of the incomes in the investments of the economical system, which is provoked by the changes of investment attractiveness;

5.  Changing of the parameters of economical system at the investors’ expenses, which exists in the changing of the rates of economical growth.

Permanent realization of this cycle improves the ruling system of the investment process and increases the defectiveness of functioning of the economical system.

The realization of the systemic approach is situated in the analyzing the investment process not only in the horizontal section (the ruling subject – investment attractiveness – investor – investment business – the volume of the investment – investment object – ruling subject), but also in the vertical one (the world comradeship – country – region – field – manufacture – physical person). Such discussion reduces the quantity of repeated activity of the ruling of investment process and gives the complex theoretical picture of the investment process.

For preparing and realizing effective investment policy it is important to define clearly and simply the criteria of estimating the investment situation formed in the country, economical fields and regions; also working out methodological apparatus adequate to the economical regalia and its successive usage.

The investment process (that is the process of realizing investments) has every feature of the system: there always is in it a subject (an investor), object (investment object), the connection between them (investment in the purpose of getting income) and surrounding, in which they exist (investment surrounding). It is characterized with a special structure and the opportunity of an exact identification between other economical process. It displays its features as a result of interaction with other systems, protects a definite conception and reflects the points of view, aims and values of the subject of the investment process. Connection is the system-forming factor, because it unites all other elements into one whole (pic. 1). the systemic approach gives an opportunity of exhaustive description of the investment process essence and defines fully its basic concept.

 

The investment process is defined by the formed interaction about situating investments between the investment subject and object for getting income, also the realized investing influence from the side of subject and ruling organs upon the object; and changing of the conditions of investment surrounding.

The investment process doesn’t exist itself and it is always involved into the sphere of following level, that is to say that it must be discussed in the bound of the total approach – discuss the system in the sphere of the interconnections with other systems. This gives us an opportunity of describing the place and role of the investment process as in the separate sphere of the activity and also in the system of the social relations. Every subject is oriented towards the development and always demands the supplementing of resource and changing this or that feature. The orientation towards the supplementing this deficit with own forces, slows the economical growth, because it demands from the subject to provide amused activities and wasting the time the its basic resources on this. In the conditions of specialization, the reducing of own forces makes the subject search for the object, the features of which give him an opportunity of of filling the existed deficit with a minimal investments. The need of investments appears, when the potential of the chosen object does not satisfy the necessary criteria and needs a kind of outer participation for its development. The possibility of the investment development occurs when the resources owned by the subject and its features give the opportunity of needed influence of the object upon the demanded features of the object.

At the moment of fulfilling the investment, investor makes contacts with the concrete object. Under the investors influence the features of the investment object changes and then these changed features in the face of investment income influences upon the investor, changes its features, including – filling the resource deficit. After finishing the investment process, the subject and object begin new existence; consequently, the investment process gives rise to the diffusion of the object and subjects’ features.

The dynamic of the social development is defined by the development of separate spheres of the activity. If the revolutionary sudden changes of this or that sphere of the activity gives stimulus to the unseen before growth, this gives rise to the natural chain reaction of the development of connected to these spheres. If the evolution development of the spheres of activities takes place, its dynamics, as a rule, is defined by the least developed abilities. When the investments and investment income have different subject consistence, that is if they belong to the different spheres of activities, the various investment processes make these spheres inter penetrative. According to this, the logical ruled changing of their development dynamics take place. This provokes the natural chain reaction of the development of the interconnected spheres. Consequently, the investment processes give opportunity of making and keeping natural chain reaction of the interconnected spheres of the activities. These processes appear to be the fastening factor for the social development.

Showing the connections between the basic categories of the investment process give the opportunity of establishing dependence of the investment volume to the factors and conditions of the investment domain, that is the investment surrounding formed in the region.

The picture 1.4 may elucidate basic structural elements of the investment surrounding and the connections between them, which are shown in literature.

                   

Such an approach reflects the most essential sides of the investment process, but doesn’t give us opportunity of taking in mind the influence of the current processes upon the investment surrounding and on the contrary – of the investment surrounding upon the investment process. That’s why we think important to discuss differently the interconnection of the consisting components of the investment process.

The investment attractiveness is a positive category in its context, and the investment risks participating in the process of forming this attractiveness – a negative one. That’s why it is important to turn the quantitative showings of the risks into the quantitative showings of the concept, which is essentially opposite to the concept of “the investment risk” during taking in mind the noncommercial investment risks, as a complex factor of the investment attractiveness. We must call such a concept (the antonym to the concept of the investment risk) “social-economical and economical security of the investors” or, in other words, investment security (consequently, on the macro-economical, regional, field and industrial level). The mentioned changing gives an opportunity of avoiding inter contrary influence upon the resulting showing – the investment attractiveness of two complex factors – the investment potential and noncommercial risks.

Exactly same way, every private factor of these generalized concepts have at the same positive quantitative [removed]with the help of the positive showing – for defining the final level of the field’s investment security), and also negative one (with the help of conceptually “negative” showing – for defining the final level of the noncommercial investment risks of the field).

The investment attractiveness of the social-economical system (SES) is defined the position of the investment potential and the level of the investment risk. The investment assets existed in the region – the real development of the investment business in the SES – is characterized with the intensity of the investments. It its turn, it is defined by the past, current and future investment assets. The past investment asset characterizes the intensity of the investments invested before and gives an opportunity of defining their future profitability, the quantity of the presumable competitor and the most profitable sphere for the capital-investment. The current asset of the investment defines the level of the system’s economical development and gives the opportunity for predicting the volumes of the additional investments and their possible profitability, also to define the position occupied by the investor in the market in the future. Future (expected) investment asset is the oriental for planning whole investment process: from the definition of future volume of the investments till ruling the investment surrounding of the SES – for getting the needed income flow of the capital. Analyzing of these three consisting components of the investment business gives the investor information about the level of competition ability at the SES investment market, also the tendencies of its development and the activities for reducing market.

The wholeness of the investment attractiveness and investment business makes the investment surrounding for the country, region, field, corporation (existed in the manufacture). Though it is important also to reflect reverse connection, that is the influence of the investment surrounding upon the investment business. For example, the current position of the investment surrounding defines the investor’s ideas and his/her activities towards future investments. Improving investment surrounding in the current period gives the stimulus to the development of the competition held between the investors for getting the rights for investment. Also it gives the stimulus to the competition held at the commodity and service market, which helps the lowing of the prices and raising the quality of the production. Parallel to these, the inflow of the investment resources takes place, which gives an opportunity for rational and effective distribution of the existed resources to the ruling organs of the regional development. It reduces the disproportion in the regional development, improves the living social conditions in the region, helps the development of the infrastructure and communications, changes the situation in the investment surrounding according to the demands of development of the regional economy.

The interconnection and subordination between the participating categories of the investment process is represented by the scheme shown in the pic. 1.5.

Taking in mind the peculiarities of the investment process, it mustn’t only be based on the usage of administrative-regulating activities, but also the usage of those economical models, which prove the necessity of this or that activity.

 

According to the said above, the investment process is the successiveness of the stages, motions and operations of the investment business provision. The concrete flow of this process depends on the investment object. Consequently, the division of the investment process into the stages is provoked by the kinds of the investments. We speak, of course about the real and financial investments.

The investment process consists of two main stages; they are (1) making decision about the investments and (2) Realization and exploitation of the investments. It is adopted to divide the first stage into several separate phases (under types), which characterize the real and also financial investments. The quantity of these phases may be different, but three of them are the most typical: a) underlining the goals of the investments; b) definition of the investment direction and c) selecting the concrete object of the investments.

In the process of getting decision about the investments different goals are defined and reflected. The ascending goals are the formal ones, which are in the future used as the criteria of selecting investments.  The formal goals come from the strategical firmness of the investment.

Working out the strategical direction of the investment business is connected with the defining equality of this or that form of the investments on the concrete stage of the perspective period and also with the definition of the direction of investment business including its branch consisting part. The priority selection of the investment forms at this or that stage by the investor is provoked by a number of inner and outer factors.

The functional direction is the most important from the inner factors, those are the basic kinds of the investor’s (manufacture, organization) activities. For example, basic direction of the investment businesses for the institutional investors is investments into the securities. The manufactures of the real sector of the economy, which perform the industrial activities, give priority, as a rule, to the investments into the material and nonmaterial assets.

The financial investment is realized mostly in the form of the manufactures’ (as concurrent, so partner ones) participation in ruling purchasing shared securities, or in the form of temporal placement of free money sources for speculative goals.

From other inner factors important role in selecting the investment direction is played by the strategical direction of the operational activity, size of the manufacture (organization), the stage of the investor’s vital cycle and others.

From the manufactures and organizations of the real sector of economy the growth of financial investments characterizes, as a rule, large-scale industries, which have more opportunity of finding the sources of placing funds into the investments, and those manufactures, which are at the stage of the so-called “ripeness”. More extended form of investments at the earlier stages is the investments in the material and nonmaterial assets.

Among those outer factors, which make an essential influence upon selecting the investment forms the most important are the rate of inflation and the percent rate formed at the financial market.

The formal goals may be the aspiration for increasing profit, widening the scales of the manufacture (activity), obtaining power and prestige in the society; also, solving the social-ecological problems, keeping and increasing the working places and so on.

These goals are not often defined distinctly, are not coordinated according to the priorities or are not verified at the subject of the ability of their realization. That’s why, it’s necessary to point out the real goal of the investments from the formal goals by establishing concrete purposed showings. For example, the formal goal – increasing profit – must be concretized in a number of showings, for which the definition of the achievement quality will be possible. Concretely, it may be the middle quantity of the profit for several years or the showing of net profit, or those other showings, which characterize the earned profit from the investment.

Formal goals of the investments make the decision of defining problems about investment directions easier. Mutual connected, independent and alternative (inter excluding) investments may also be among them.

According to the formation of investment portfolio, the investment process becomes importantly easier at the expense of reducing its stages. In the foreign literature dedicated to this problem, they differ following stages of the investment process:

1.  Selection of the investment policy;

2.  analyzes of the investment market;

3.  re-inspecting the portfolio of the securities;

4.  estimating the investment effectiveness.

At the first stage they define the investment goals and the volume of the necessary sources for its realization, also the quality of risk and profitability for every financial instrument. Selecting those financial assets of the potential kind, which may be included into the portfolio, fulfills this stage.

At the second stage, they concretize the rate of value of the securities’ separate kinds on the foundation of marketing conjuncture formed at the concrete moment and provide the prediction of the share rates’ dynamic of the concrete firm. Such kind of approach is called technical analyze. Basing on the got data they conduct fundamental analyzes. Its essence is analyzing the brought value of all those cash money flows, which is expected to get by the owner of the financial asset.

Third stage of the investment includes selecting concrete assets for the investors, also defining the optimal proportions between the assets in the bounds of investment capital. The bases of it are selection, selection during the operations and the diversification of risk according to total profile.

The fourth stage concerns the periodical estimation of the current portfolio according to the changing the investor’s goals and its deviation from the optimal portfolio. After this selling of the part of purchased securities and buying new ones become possible.

At the last stage they provide periodical estimation of the factual profitability and the level of risk and their comparing with the existed standards.

To the circle of main participants of the investments belong: state, regional and local organs of the government, manufactures and physical persons: they can participate in the process of investments from the side of demand and delivering.

In the conditions of the market economy the circle of the participants of investment process is importantly widened. The web of commercial banks, credit-commercial organizations, investment funds of companies and insuring companies have appeared, which make independently the investment decisions. But still, the state and governmental regional and local organs define their participation in the process of investments. It is represented by holding investment competitions, by selection and proving the investment projects, by licensing and quoting the production, and also by defining the quantity of the percent  rate and taxation. The financial activities of the state, the organs of regional and local government as from the demanding, so the delivering side, influences essentially upon the behavior of the financial institutes and market.

Main distributor of money at the financial market is the population, because it gives much more to the investment process, then takes. Of course, it will not be said about the organs and manufactures of the executing government.

The researches of the foreign scientists U. Sharp, G. Alexander and G. Bailey show, that wholly the state and manufactures are net consumers of the money sources, that is that they use more sources then give. More concretely, many large-scale companies for realizing their long termed aims need enormous quantities of money for building factories, buying furniture, working out new products and so on. Besides, by realization active and difficult strategies of ruling cash cash masses, they appear to be main purchasers of securities. Such a situation is created on the side of the state, regional and local governmental organs, the activities of which is connected with the capital investments and guaranteeing current expenses.

The organs of executive government fill the insufficiency of the money sources by producing debt commitments and obligations, and companies by producing shares and other securities.

 

The consistence of the investment project participants and fulfilled functions provided by them, are defined by the following factors:

-    the specifics of investment project, its volume, technological hardness and so on;

-    compatibility of functions by the participants of the investment project during the realization of the project;

-    financial status of the customer, who increases or reduces the influxing the financial structures in the realization of the investment project;

-    providing the customer with the best material resources, building materials, techniques, furniture and so on;

-    selection of the type of ruling the investment project (traditional or progressive).

 

In the ruling the investment projects with the traditional type they differ its following basic participants: sponsors, constructor, distributor of the furniture, the consultant of insurers, legal adviser, the consultants of the taxation and financial branch, creditors and others.

Let’s discuss them in more details.

In a wide understanding, a sponsor is a guarantor; a physical or juridical person, who finances an economical project or a registration of social activities. Also, an orderer, an organizer of a large-scale project or arranger sponsor may be as commercial, so noncommercial structure.

As to the sponsor, as the participant of an investment process, we may call it an orderer, organizer, who connects then activities of every participant of a project, arranges discussions, analyses commercial suggestions of the constructors of financial structures or distributors, realizes marketing researches and selection of the financial partners. In the separate occasions, it becomes responsible for fulfilling such functions of the constructing engineering, as engineer-consulting service, projecting-construction and analytical-calculating works, preparing a technical-economical substantiation, organization and ruling of the manufacture, working out recommendations in the sphere of production realization. These reduce the quantity of the investment process participants.

Project-construction and construction organizations or individuals act the role of a constructor, that is the provider of the work. The constructor can involve other persons in the process of fulfilling the order, who become the sub-renters, and the constructor him/herself becomes the general renter. He appears to be the main fulfiller of the constructive lease agreement and is responsible the before the orderer for the fulfillment total complex of activities established in the agreement.

represents the filial, foster companies or those other firms, which have signed at distributing furniture and providing services. If the manufacture registers an agreement with an orderer for a complex distribution of materials, building techniques and furniture to many of firms, it becomes the general distributor and answers for the whole distribution.

is invited for displaying the insuring risk and estimating the quality of the project’s safety, also, for working out the appropriate recommendations. The juris-consult provides the preparations of the juridical documentation around the project, discusses wholly agreements and contracts.

analyzes the taxation situation existed in the country for realizing the project and also the taxation obligations of every participant, makes recommendations for minimization the taxes.

provides the selection of financial, credit and calculation conditions by combination of the alternative variant for the realization of the project. In the case of influxing foreign investors into the project, he must bring it to the appropriation with the existed international standards. This will make easier the status of the potential investors and creditors.

, as the participants of the investment process, lend money in different terms and conditions. Under these conditions, the creditor has a right of demanding from the debtor to return credit or fulfill other obligations. A state, bank, manufacture or a physical person, investment funds and others may be the creditors.

A traditional form of ruling the investment project, in the time of which the orderer carries out him/herself the functions of ruling, has several defects. First is that the most part of the orderers is not competent enough in every question connected with the project. It makes the level of the risk stronger during getting the ruling decision that gives rise to a number of expenses. Second one is that, the successful ruling, according to the experiences, requests the leader’s systematic participation in the investment process, because the orderer is not always able to do it. And third, this form of ruling the project is characterized by the comparative dispersion of phases and stages as in the time, so in organizing. All these gives rise to the additional problems in the provision of the s’ agreement of its every participant.

Overcoming the mentioned imperfection happens at the moment of moving to the progressive form of the investment project ruling. Its essence is that the leader (manager) of the project becomes the basic figure in the organization and ruling the investment businesses. This may be a construction or construction-projecting organizations’ especially prepared high-qualified specialist or an experienced leader. He/she provides a general ruling of the project including finances, personnel and the construction works.

 

 The final phase of the first stage of the investment process is the selection of concrete objects of the investment, which is fulfilled in the process of planning investments.

They, as a rule, call the process of investment planning the process of forming such a portfolio (investment program) of the projects, which may be discussed as one of the alternative and mostly desired variant for achieving the investment object. Mostly using the mathematical models, which have no ability at all of reflecting every factor of the investment business, provides the planning of investment. That’s why the results of modeling don’t provide making such straight decisions, which would be the guarantee for the achieving the set object. The manufacture’s operative management basing on the results of planning and taking in mind other non-formalized factors provides getting the final decisions about those concrete objects of the investment, which must be included into the investment program of the manufacture.

We must take into account the fact, that the real investments together with achieving the set objects cease quantitative changes as in the material-technical, so in the financial spheres. As to the financial investments, they are separated and touch mostly upon the financial side of the manufacture’s activities.

The investment business also may be isolated (separated) and interconnected. In the first case, in the process of investment business they discuss only alternative variant. Mutual connected investment planning also takes in mind the alternatives of getting decisions in the spheres of financing and organization. So the subject of isolated planning is working out the investment program. In the second case, the aim of the planning is industrial sphere wholly.

Any planning means distinctive period, during which the fulfillment and realization (exploitation) took place. This period is always reduced. It must be mentioned that the subject of investment planning terms is always conflicting. Basic question of the discussion is the ability of correcting the decisions under the influence of the phenomenon happened after finishing the planning section. Though this is a just demand the definition of the future investment decisions’ influence is possible only after these investments are realized.

In the process of investment planning, they divide the terms of planning into the intervals, which are called periods. The realizing decisions of one period are belonged to the beginning of end of the appropriate period. It’s important that this is not reflected at the conceptual side of the investment decisions and influences only the numbering of the period. Got results from the realization of the investments are expressed by the taxes, which are divided into delivery (for example, paying off the other industrial subjects by the investor) and incomes (for example, paid fee to the investor by other industrial subject).

The total sum of the payment during the concrete period equals to the sum of the realized delivery and incomes. If their balance is positive – that is the income overcomes the delivery or on the contrary.

The quantity of those periods during which the income-delivery of the sums takes place, is called either the term of the investment exploitation (in the case of the real investments), or the term of action (in the case of financial investments). This portion of time is either defined beforehand, or discussed as alternating quantity (at the time of getting investment decisions). The freed invested sources are called commonly disinvestments.

In the system of investment planning, the goal of the capital investment in this or that period of time may be the growth of property, increasing the income flow, making the investment profitableness higher and other showings, which characterize the ability of getting prolonged profit.

In the investment models of the planning, the volume of capital investment may change in the definite period of time, for which the plan is working out. During getting decisions, the priority is given to those projects, which guarantee the incomes from the realization of the investment in shorter time. Combination of the payments flow in this or that period of time is realized by the discount method.

The isolated planning of investments is realized during the given budget toward the separate investment objects or the separate investment programs. The term of the investment (investment projects) exploitation may be discussed as a alternating or fixed parameters. The market of capital may be improved and also not improved. The separation of these markets is carried out by usage of distinctions between the percent rates of deposits and credits. Number of limitations of the financial resources in the isolated planning system may be belonged to any period of planning.

 

 

The interconnected investment planning is realized in tight relations with planning the industry-financial activities. This relation is based on the complex formation of the cash flow taking in mind the fact, that like every activity the realization of every investment project needs the financial provision. This means that in the process of realization of the investment program, it is important to balance its financial parameters with the industrial and financial parameters of the manufacture, also, taking in mind the possible reductions. We mean, firstly the potential of own investment resources, the possibility of influxing loan capital, necessity of branch and regional diversification of the investment businesses, also, provision of effective balancing of inner balance, that is profitability, risk and liquidity of investment businesses.

The system of interconnection planning means the existence of many criteria during the selection of investment projects. It is based on ranging the goals and aims of the investment businesses in the system of the goals of business leading, according to either time, or meaning.

The differentiation of the criteria of investment projects’ selection takes place, as a rule, in the section of concrete forms of independent, inter-exclusive (alternative), and interconnected investment projects. Ranging of the goals requests the raging of criteria too. Usually, they use criteria of the net brought values and inner percent rate (inner profitableness) mentioned above, as basic criteria.

During the interconnected investment planning the system of reduction concerns basic and additional reductions. Basic reductions are the most important criteria of the selection. For example, if established basic criteria of the selection of investment projects are the showing of the project’s net brought value, the basic reductions may represent concrete meanings of the following showings: inner percent rate, the total risk level of the project, the terms of repurchasing the investment project and so on.

The additional reductions may be: the level of diversification of risk at the expense of regional and branch consistence; the value of the borrowed capital; the terms of realization of the investment projects; the size of the total volume of investment resources; the volume of the production and realization of the product and so on.

The concept of the second and third phases is essentially different from the real and financial investments, and it is stipulated by the peculiarity of their realization.

In the modern conditions the real investment is the foundation of investment businesses of the most manufactures. The realization of the real investment is characterized with a number of peculiarities; we can separate following ones:

1.  the real investments are straightly connected with the basic activity of the manufacture, the widening of the assortment of the production and improving its quality with the help of involving the achievements of the scientific-technical progress. In other words, investment business and real investment processes are connected and condition each-other;

2.  the real investments, relatively to the financial investments, are followed by bigger economical risks, which, in its turn, means the ability of providing higher profitableness relatively with the financial investments. Economical risks are connected with the peculiarity of the technological processes, factors of the material wearing out and so on;

3.  Real investments are less liquid relatively with the financial ones. The reason for this is a tight purpose of most of the investments in the real industry and very often absence of the abilities of alternative industrial usage. That’s why it is extremely difficult to compensate mistakes made during getting decisions about real investments.

Real investments are realized differently by the investments in the in the basic capital, capital investments in the turnover assets and investment in nonmaterial assets. The realization of the capital-investment, in its turn, happens in several forms and, firstly, it is building of new manufactures, reconstruction of the existed ones, modernization, technical re-equipment, and also, purchasing total prosperity complexes.

is the prerogative of the largest companies with such a policy, which is directed towards increasing its influence at different markets. Real investments of this kind guarantee growth of the total value of the manufacture’s assets, which is conditioned by the growth of abilities of financial potential and joint usage of the system of materials, reducing the level of the manufacture expenses and so on.

, usually, is connected with the investments in such modern manufactures, which increases the labour production and satisfies the request of the ecological security, also, means the building of new objects.

in the most cases requests moving to the modern technologies of the industry taking in mind the achievements of scientific-technical progress. As a rule, it is connected with the involving of the resource economizing technologies, moving of the production to the modern standards of the quality and so on. The reconstruction may touch upon the building of new objects.

mostly is connected with bringing to conformity the active part of the basic funds to the modern requests of realization the technological processes.

touches upon the changing and purchasing new furniture, mechanisms and basic complexes of the technical system for effective realization of the technological processes. It is not always possible to put a sharp boundary between technical re-equipment and modernization.

Investments in the turnover assets as a rule, serves for widening the turnover funds used by the manufacture. In the most cases it is realized following the capital-investment realization and this essentially is the result of realization capital-investments.

Investments in nonmaterial assets generally mean innovational investments and realized in two basic forms:

Ready scientific – in the form of given patents of technical production, scientific achievements, inventions, commodity marks and so on; With the help of independent machining of the scientific-technical production.

Most part of the real investment forms and kinds – the turnover assets, excluding the innovations of separate kind of the furniture, mechanisms and so on, – are realized in the face of real investments having appropriate business-plans.6 In the business-plans of the investment projects together with the traditional section the subjects of providing the needed level of liquidity of the real investment objects and minimizing the level of investment risks must be worked out and shown.

For preparing the organization and realization of every needed plan documents, as a rule the leader is appointed. The most important plan documents are the calendar plans of the projects and their capital budgets.

The calendar plans are made for definite period of time – year, quarter, month or decade. The data of terms and volume of the realization the separate kinds of activities foreseen by the investment project are represented in them. The terms and character of the activities define the quality of detailing the calendar plans.

Fulfillment of the calendar plan is straightly connected with financing the activities of the investment project. For this purpose, the financial plan is worked out, which, usually is called “the capital budget of the investment project”.  The volumes, terms and sources of the financing any kind of activities considered by the project in the section of separate phase of the calendar plan are substantiated and established in it.

Capital budget consists of two sections: capital expenses of the projects and influxing the needed sources for its realization. The capital expenses are the specified estimation of initial volume of the investment expenses taking into account the reserve of those financial sources, which are needed for recovering unexpected expenses according to the calendar plan.

The section of the “source influx” of the capital budget is the specification of volume of the investment needed resources for the project realization in the section of own sources of the investor, influxed sharing capital, leasing, banking credits and so on.

The synchrony of the income of the sources and the volume of investment expenses must be provided in the capital budget for realizing the works foreseen in the calendar plan.

An important element of the project’s calendar plans and systems of sustaining capital budget taking into account the factors of the investment risk and working out the activities for their neutralization. The investment risk, as a rule, is discussed in the prism of possibility for getting unprofitable financial result. The forms of its displaying may be loosing the planned investment income or shortage for vagueness in the realization of investment projects. The investment project risk is a complex concept and units those various kind of risks, which are connected with the realization of investment projects.

Every stage of the realization of investments is characterized specific kinds of risks. That’s why estimation of whole risk of the project is provided on the foundation of aggregated facts according to the separate stages.

The realization of any investment project is in its essence a unique phenomenon for even one-typed projects. This circumstance makes the individual approach necessary, taking into account the specific information, which is connected with objective and subjective factors of occurring risks during the realization of the investment processes. The long is term of the project realization; the bigger is the vagueness of final results of its realization and, consequently – level of the risk.

We mist take into account the planned size of the cash incomes to get from the investment project depends on future status of appropriate segment of commodity market and effectiveness of commercial activity of the manufacture. It means that the investment risks are greatly conditioned by the commercial risks of a manufacture. In other words, there is a straight connection between the length of the vital cycle of the project and level of the investment-projecting risk. The completeness and trustworthy of the gathered information about every stage of the project’s realization, the level of qualification of the investing management defines greatly the substantiation of taking into account the various factors of the different types of risks.

Let’s name the basic kinds of the risks of investment projecting taking into account the specific conditions in Georgia.

is in important connection with fulfillment of state obligations of the partners in the business, also, lowering the level of liquidity of the turnover sources.

is connected with the late influx of the investment resources from the separate sources, the danger of incomplete financing because of increasing the value of the capital, which is needed for the realization of the project. It is in a straight correlation with the risks of inability of paying and inflation.

. It is characterized bythe flow of invested own and borrowed capital and the incomes conditioned by the investment project and unbalancing of the flow of payments. This risk, together with the risk of the inability of paying is one of the most provoking reasons for bankruptcy of the manufacture.

is connected with the possibility of devaluation of the expected incomes from the investment project and raising the value of capital expenses expressed by the nominal price. In the modern conditions the risk of inflation has permanent character and touches upon most parts of the operations of the project’s realization. Solving the problem of its taking into account and softening neutralizes this permanency.

is related with the risk of inflation. It has own specific in Georgia, which is conditioned by the peculiarity of formation of the financial market and its being not developed.

is the risk of getting incomplete income from the investments on the stage of the project’s realization conditioned by the active circumstances at the expense of the volume and exploitation of the realization. The long are the terms of the project’s realization, the higher is the possibility of this kind of risk.

is conditioned, at the first place, by the absence of the appropriate defense of the rights of the investor’s privacy that appears in the economic of our country the most often.

For neutralization of the possible negative results of the investment projecting risks various measures and arrangement are worked out, which are grouped into the inner and outer measures. Inner measures of the neutralization of the risks concern the foundation of the various insurance and financial funds (reserves) and working out such measures, which will suppress possibility of raising this or that risk. This may be refusing using the low-liquidated assets and the borrowed capital of the important volume, also the mechanism of transferring the risks following the separate operations to the partners.

Foundation of the insurance and financial funds means the reservation of one part of the investment resources for getting over those unexpected negative results, which are not related with the actions of personnel and contractors of the manufacture. Of course, wasting of the part of the own sources of a manufacture, or, more concretely, “freezing”, makes important getting the loan at the market of finances for filling it, that makes the dependence on the outer sources of financing the investment projects stronger.

The outer methods of the neutralizing the projecting risks, in the first place, is insuring the project risks of separate kinds and guaranteeing by the third person. The object of the insuring is the property of the manufacture, which is used in the process of investment process; the responsibility of the manufacture and its personnel towards the third persons; insurance of the participants of the investment project’s realization. The mechanism of guaranteeing is oriented firstly towards the protection of the investors’ rights in case of changing the investor’s conditions.

For the manufactures, which are not institutional investors, the basic direction of the investment business is the realization of the real investments. Herewith, when the conjuncture of the financial market gives the ability of getting significantly higher level of profitability at the invested capital, then the operation activity at the commodity market (the formed situation at the market of securities in Russia in 1995-1996 is a good example of this). Also, in case of existence of temporary free financial resources, the manufactures actively invest sources into the high liquidate financial instruments. Except this, the manufactures invest own capital other manufactures’ regulation funds for diversification and ruling other companies and organizations.

From the economical point of view, the financial investments are such instruments, with the help of with the solving the strategical and operative problems of effective placement of the capital in the country and abroad. The financial investments are mostly realized in the manufactures in the time of having free money sources. They appear in the face of outer investments (except the occasions, when the manufactures expiate their own securities, for example shares).

The most part of the manufactures realize the financial investments for the purpose of getting additional investment income (speculative income) from the usage of the free money sources. The concrete choice of the concrete instruments of the financial investments is wide enough even in the conditions of already formed market.

The level of profitability received from producing the investments into this or that instrument is in the straight relation with the level of risk. Higher is profitability, the higher is the risk of financial set-back.

In the purpose of getting the desired level of profitability of the financial investments and the diversification of risks, the enterprises (investors) purchase financial instruments with different levels of profitability and risk, that is, in other words, they create the portfolio of financial instruments of specific character.

For the changing character of the conjuncture of the financial market, the process of getting desired level of the profitableness requests permanent monitoring of the various instruments’ profitability, risk and liquidity and also making the appropriate ruling decisions related with changing the portfolio of finances; it means the reducing or increasing the share of this or that financial instruments. Such kind of correcting is called “the restructuring of the portfolio”. It is the basic concept of the financial instruments’ operative ruling in the manufactures.

Basic financial instruments of the speculative portfolio of the finances the shared and debt securities, also, deposits and the currency valuables. During the monitoring process, depending on the type of the financial instruments, they take into account and analyze a lot of factors, which influence upon the levels of their profitability, liquidity and risk. From the factors which negatively influence upon the profitability of the shared financial instruments, the most important are:

· growing the level of taxation of the manufactures’ investment profit;

· the conjuncture changing of the volume of companies’ selling (it especially touches upon the oil companies);

· reducing the level of dividends for reducing the volume of the profit;

· reducing the price of net assets of the manufactures;

· speculative games of the participants of stock market.

The growth of the percent middle rate at the market; increasing the level of inflation; increasing the level of taxation of manufacture’s investment profit; degradation of the level of financial firmness of the manufacture; degradation of the pay ability of manufacture belong to the factors, which reduce the level of liquidity of the debt securities. The level of registration rate of the central bank; the firmness of the national currency; financial stability of the institutions of the deposit kind; changing of the percent middle rate at the financial market make and essential influence upon the profitability, risk and liquidity of the cash instruments.

According to the results of the investment market monitoring, they display the separate instruments of the speculative investments and also the tendency of the levels of profitability, risk and liquidity of the whole portfolio. Based on the received information, they make decisions about the necessity of the portfolio restructuring and its direction.

The investment resources during realization of the financial and real investments are used as in the cash, so in the natural form. The formation of the investment resources of the manufactures is connected as with the manufacture itself, so with the processes of gathering and keeping, which take place in the whole country. The rates and scales of the keeping and gathering the investment capital are conditioned by the level of the country development and also the level of the population’s profitability.

The process of formatting the investment resources in the manufacture is permanently working in the face of the incomes received from the basic activities and the activities not for realization, also by taking loans and others. The concrete quantity of those sources, which are used either for the investments, or the consuming needs, are defined by the finance-industrial plan of the manufacture. it depends greatly upon the values of their influx, the growth of the manufacture’s capital and its structure. If a large portion belongs to the sources in the structure, then the abilities of loaning are reduced. At the same time, the value of additional resources influx increases because of increasing the credit risk.

In the system of effective planning of usage and analyses of the financial resources it is very important to point out those various groups of the investments, which differ in specifics and request the usage of the adequate methods of ruling. They differ several characteristical features, with the help of which the classification of the investment resources takes place. 

 

Why are more and more investors risking investment capital offshore from their countries of origin? There is a sense of comfort when doing business in a familiar setting, no matter how bad the economy has become or how restrictive business regulations are. Despite increasingly high taxes many businesses no not venture beyond the confines of their national borders. However, more and more investors are seeking investment opportunities in unfamiliar but potentially very profitable settings. The growth of Chinese industry has been fed to a degree by not only an infusion of Western technology but also Western capital. The same can be said for the so called Asian Tigers like Taiwan, Singapore and the others as well as Japan many years ago. Today investment in the Middle East, Russia, and Latin America is driving growth, emergence of middle classes, and, often, better return on investment than in North America or Europe.

 

Investors are risking investment capital offshore because they believe that the potential rate of return versus the amount of risk work out to be a better option than in their nations of birth. Many “tax haven” countries offer attractive investment opportunities and extremely tax advantaged situations. Many of these nations have found that their flood of investment capital was sufficient to keep business going during the most severe economic down turn in the last seventy-five years. The little country of Panama, for example, saw its rate of economic growth slow to three percent per years when economies were contracting in recession throughout the world. While workers were being laid off in North America skyscrapers were still going up in Panama City. Investors are not just coming to Panama to set up Panama private interest foundations. They are coming to countries throughout Latin America, as well as Asia, to start businesses, investing in a variety of projects, and catch a ride on one or more of the world’s new growth engines.

 

 

Setting up an international business corporation will allow an individual or a company to operate in one jurisdiction and throughout the world. Typically the principals will find a jurisdiction with any of a variety of tax advantages and infrastructure sufficient for their business needs. More often than not an international business company will not do business in its host nation but will trade, operate businesses, provide banking or banking like services, and more to clients throughout the globe. Offshore there is availability of offshore vehicles providing a degree of privacy not seen in other nations. Thus, many will choose a multinational solution including vehicles such as a New Zealand trust, a Panama Private Interest Foundation, a bearer share corporation, and other solutions offering a degree of asset protection and privacy typically not seen in many countries.

 

 

There are a number of things to look at when assessing the risk of investing offshore. These start with economic risk. Namely, will the boom last? An individual or a company will need to look at the factors that make investing in an offshore jurisdiction attractive and come to a decision as to how stable the investment might be and for how long. People who are building skyscrapers in little countries like Panama would seem to believe that these investments will provide substantial returns for generations.

 

Transfer and exchange rate risk have to do with how a nation will allow currency to flow across its borders and if it will modify exchange rates to the detriment of investors. Here nations have track records. There is no lack of offshore jurisdictions where investors have profited for decades and generations. Also, a company setting up in one offshore jurisdiction may choose to move its investments throughout the world and only need to be concerned about tax and banking issues in the jurisdiction where they bank and have their registration.

 

Picking a vibrant and growing region is important. This is evidenced by how the smaller Asian countries around China are leading the way out of the recession. It is evidenced by the growth the middle class throughout Latin America. It is evidenced by the emergence of Brazil as the new South American super power. Latin America, for example, has several free trade regions driving economic growth.

 

What is referred to as political or sovereign risk is the concern of government confiscation of private industries and other attacks on the rights of ownership. Certainly the current situation in Venezuela is a cause of concern for anyone still invested there. However, there are many, many nations throughout the world with pro business governments interested in attracting capital and not interested in starting a stampede for the door by playing games with private ownership rights. Political stability is important. For example, just two generations ago Panama had a military dictatorship in charge and virtually all of Central America, except Costa Rica, were involved in civil war. That era is gone and increasing prosperity is growing the middle class throughout the region. Panama is expanding the Panama Canal and ports up and down the Atlantic Coast of the Americas are upgrading to receive huge container ships full of goods for their industries and increasingly wealthy consumers.

 

A Comprehensive Offshore Solution

 

Those interested in making money offshore will typically seek out someone with long and multinational experience in setting up and managing offshore investment, banking, and business solutions. Such an individual will have insights hard to find short or working in the arena of devising offshore business solutions. It is important to deal with someone who deals in more than one nation. Offshore vehicles will vary from country to country and vehicles such as a New Zealand Offshore Financial Company or a Panama Private Interest Foundation are unique for individual company needs. An individual or company need not bank, set up an international business corporation, or invest in just one nation. Starting out with the right counsel will help the principals arrive at the most advantageous solution when risking investment capital offshore.

The study seeks to provide a critique of the theoretical framework of economic governance as it relates to the financial sector in Zimbabwe and identify institutions in the financial sector and explain their roles. It also seeks to unpack the concepts related to the banking or the financial sector, with specific emphasis on the role of central banking from a policy and developmental perspective. Outline of the economic history of the development of the financial sector in Zimbabwe and the regulatory framework governing the financial sector will also be given. To capture the community’s view and experience of the financial sector within the period 2003 to 2009, recording of community voices has been done, with main emphasis on the views around the  inclusion or exclusion, popular notions of monetary policy and banking, and impact (perceived or real) of these on people’s social conditions. Finally the study seeks to equip the poor and grassroots communities and the working classes, to engage meaningfully in discussions on the role of monetary institutions as part of an ongoing engagement on economic and public policy advocacy.

 

There has been increased call for a greater attention to the development of financial systems in many countries all over the world. The financial sector is well known for its purpose of allocating savings, from surplus units to deficit units. One can have plenty of resources (cash or wealth), but is not prepared to use or consume in the current period but later in the future. And on the other hand an economic agent may need funds for a specific purpose currently but due to some reasons have no adequate funds. So financial institutions help in collecting funds and match the current needs of some investors and hence creating economic development by avoiding idle funds. Some researchers (Herring and Santomero (1991)), argue that the direct impact of financial institutions on the real economy is minor, while the indirect impact of financial markets and institutions on economic performance is extraordinarily important.

 

A financial system which is efficient and healthy is a vital and necessary component for faster economic development. If a financial system is efficient, then it should show profitability improvements, increased funds intermediation, better prices for financial products and quality services for consumers. If the financial system is under tight regulation, financial markets would not be able to function efficiently and the use of resources would not provide desired outcomes. It should also be noted that reforms in other sectors have less impact on the overall economic development if the financial sector is under control, Edirisuriya (2007).

 

As part of the economic growth strategy, many economies have aimed at improving their financial sector. Ghana structured its financial reforms in two phases, FINSAP 1 and FINSAP 2 (Financial Sector Adjustment Program) and the reform for Non- bank financial institutions credit, Gordon (2008). An assessment of the impact of this policy on savings, investment and the growth of income (GDP) in the Ghanaian economy was undertaken by Gordon (2008) and positive impact of the financial sector on the economy. Previously, Ghana operated a tightly regulated financial system and the impacts of these policies on economic development were found to be dismal. The country turned to the International Monetary Fund (IMF) for assistance to reshape the macroeconomic structure, and one of the policy packages was to reform the economy’s financial system. Financial liberalization thereafter affected positively the interest rate, savings, investment and GDP in Ghana. Sri Lanka also went ahead with its financial sector reforms about three decades ago, Piyadasa (2007). The reforms were also spearheaded by the IMF and World Bank, and they encouraged the opening up of financial markets for foreign and domestic competition and to encourage efficient functioning of financial market with less government interferences.  

 

Major economic factors to look at include; the inflation level, rate of economic growth, unemployment levels, balance of payments and the exchange rate (Business Studies Online). A well functioning financial sector is able to influence positively on the economic factors. High levels of inflation have a number of problems; people try to save money and so will spend less, high prices leading to people becoming worse off, costs will increase and exports will decrease hence exporting companies greatly affected leading to unemployment. The Zimbabwean nation has experienced such problems and do not wish to return to such time soon, savings have been eroded.

 

Capital goods production is one of the best ways an economy achieves a long lasting sustainable and stable economy. Financial services stimulate savings, investment and growth of GDP and for that matter economic growth by increasing the rate of capital accumulation and by improving the efficiency with which the economies use that capital, Gordon (2008). Well functioning banks spur on technological innovation by identifying and funding those entrepreneurs with the best chances of successfully implementing innovative products and production process.

 

The research seeks to explore the financial sector in Zimbabwe, its impact on the economy and how the Central bank policies affect the operations and efficiency levels in the economy. It dates back during the crisis period (2003-2009). The crisis originated from Central bank policies adopted during and before the crisis. The Reserve Bank of Zimbabwe (RBZ) adopted an uneconomic formula to control the level of money supply in the economy, and hence it failed to control the economy. The RBZ failed to control its independency status from the political family and hence supported uneconomic projects by printing excess money.

 

The relationship between the RBZ and other financial institutions during the crisis period can be explained y what the RBZ called ‘Financial Indiscipline’ in 2008. It is reported that during the last quarter of 2008 the financial sector had fallen back into territories of indiscipline and general malaise,resulting in the contamination of ethics in such institutions as the Zimbabwe Stock Exchange (ZSE) which invented the deadly phenomena of “burning money”. Indiscipline in banking and stock markets is precisely what has largely been responsible for the global economic crisis particularly in the USA, RBZ Monetary Policy (2009).

 

The RBZ Governor, was quoted in his Monetary Policy Statement, blaming the Financial sector and warning it against indiscipline in the market;

“As true as the sun rises and sets each day, the “miracle” of “burning” money could not be sustained by men and women born of flesh and pretending to have the supernatural powers of our Lord Jesus Christ. It was soon to back-fire and consume those who were stroking the fires in the first place.”

 

The Governor argues that it is the activities of the Financial sector that transforms to the Central bank to be blamed, hence he has warned it several times, and has put measures to control their activities. The Governor specified that new measures constitute a war against idleness as without some gainful activity, citing roadport and world-bank sextillionaires destined for the starvation market. Hence from this evidence the RBZ has both social and economic influence on individuals and companies, and it is the impact of its influence that we seek to analyse. It was pointed out that individual and collective actions of the past have not taken the economy anywhere, particularly in the areas of advancing collective socio-economic programmes, hence RBZ initiated change of behavior, even from the politicians and diplomats. The RBZ set up a 5-year framework to guide the financial sector activities so that no shift from core banking business to speculative transactions.

 

 

Zimbabwe’s financial sector is relatively sophisticated and consists of the Reserve Bank, discount houses, commercial banks, merchant banks, finance houses, building societies, the Post Office Savings Bank, numerous insurance companies and pension funds and a stock exchange. As at 25 January 2009 Zimbabwe has 15 commercial banks and 4 building societies under the supervision of the Reserve Bank of Zimbabwe.  

 

Commercial banks have been and are one of the most important contributors of private sector credit and therefore highly influential over most areas of economic activity. However, currently they are facing financial constraints, as the Reserve bank cannot perform its function as a lender of last resort due to the phasing out of the Zimbabwean local currency. Commercial banks have in fact changed their loan structure, they are now lending short term loans, just for their survival and to certain credible analysed economic agents. Short term loans are very costly as the interest is very high. They can’t be used for sustainable investment, as capital investment needs to be matched with long term loans. Hence, various organisations are financially constrained, with several Small and Medium Enterprises (SMEs) shifting their operations, and the shift is not proper for the growth of the economy as it creates gaps in the economy. The banking sector has since facing problems; they have retrenched their workforce, as they have shut some operations due to the crisis.

 

The performance of the financial sector currently can be explained by the return on investment registered through the Zimbabwe Stock Exchange (ZSE) market. Very few companies registered on the stock exchange are making huge returns. The volatility of the Mining Index and Industrial Index is very low, indicating that it is not worth to invest in shares, as the return is almost to nothing. Also individuals are not able to generate savings to invest in the stock market, as many are earning very low salaries, far below the Poverty Datum Line. Workers are withdrawing all of their salaries in their bank accounts, leaving nothing for the banks to do their own investments. Banks are surviving on the bank charges and minimum balances for investing, making it hard to generate money for lending to the needy investors. Currently the economy is comprised of deficit agents who need to be rescued in the financial drought and very few surplus agents.

 

 

A central bank is known as the apex of the banking structure. A central bank is distinguished from a normal commercial bank because it has a monopoly on creating the currency of that nation, which is loaned to the government in the form of legal tender. Central banks around the world have more or less the same roles they perform for the benefit of the economy, what differs is their efficiency and scale of operation. Most importantly is the level of central bank independency to political influence. Most of the rich countries today have independent central banks, that is, ones which operate under rules designed to prevent political interference. Examples include the European Central Bank  and the Federal Reserve System in the United States.

 

In a summary the general functions can be listed as follows;

1. Supervision of the entire banking system in the economy. (2) Should act as the government advisor on monetary policy. (3) Issue of banknotes and coins (printing money). (4) Acting as banker to other banks. (5) Acting as banker to government. (6) Raising money for the government. (7) Controlling the nation’s currency reserves. (8) Acting as “lender of last resort.” (9) Liaising with international bodies.

 

However it has to be noted that on each and every function, each country’s Central bank has its own level of efficiency depending on the resources, rules governing operations, flexibility and many other factors. The Central bank of Zimbabwe commonly known as the Reserve bank of Zimbabwe (RBZ) also performs some of the above functions and has its own efficiency levels and hence affecting the transition of the economy’s growth pattern.

 

 It is also worthy to explain the several functions of the Central Banks in terms of origin and development perspective. For every Central bank, there are basic functions that it has to undertake for the public’s benefit and also the economy in general. It is taken as the leader who should operate by example and should spearhead the path of which agents are to take. Hence the Central Bank has both Economic and Social influence.

 

Traditional functions refers to the obvious roles that the bank should be carrying. If the Central bank is not efficient in these roles, it can be quickly criticised by every economic agent. Inefficiency is quickly detected.

 

The functions can be given as follows;

1) Public confidentiality. (2) Uniformity in money issued. (3) Easiness in credit control (4) Control in value of money. (5) Economy (6) Elasticity (7) Stability (8) Easiness in monitoring and controlling

 

If the functions are well undertaken by the Central Bank, the economy is said to be stable and economic agents should be earning normal business profits, workers earning decent salaries, goods well priced and social status acceptable.

 

Developmental functions refers to those functions that are strategic in nature and helps the overall economy to be competitive to other nations. They are associated with various economic policies that guide the entire nation on good business practices that enhance efficiency. The functions involves publication of economic data that can be used by various economic agents for their own analysis and economic forecasts, so as to determine the best ways of operation that is profitable and sustainable.

 

The functions can be listed as follows;

1) Economic development (2) Development of banking system (3) Contribution to the development of financial institution (4) Publication of economic data. (5) Supporting of loan to the poor sector (Empowerment) (6) Establishing the commercial banks in joint ventures (7) Development finance

 

If the Central Bank is not correctly partaking the functions, political influence comes into play, because they determine the efficiency of the ruling party. Also the efficient levels of the Central bank towards the developmental functions may be affected by the level of independency it has from the political world.

 

The efficiency and smooth running of many economies depends on the activities and functions of their Central banks, and from this phenomenon will make it necessary to analyse each basic function carried out by the Reserve bank of Zimbabwe.

 

This function refers to the issue of printing paper money and is not as simple as it might seem. Only the central bank has the right to issue bank notes and coins in the economy and no one else. Printing of paper money and issuing of coins is highly depended on an economic formula of which if the formula is bypassed, it will change the path of economic development of the nation and hence causes inflationary effects. During the 2003-2009 period, the RBZ abuses its right of printing and issuing notes and coins and end up printing excess money and hence inflation increases exponential and the economy was unstable. It uses the wrong formula, of issuing the notes and coins. A correct economic formula matches the level of reserves to the amount of paper/ discretionary money in the economy. Due to the abuse of the role, the Zimbabwean dollar, lost its credibility in the economy, and turned into unwanted currency. Economic agents preferred stable currencies than the local currency, enforcement of laws was done to ensure continuous existence of the local currencies but could not work. Penalties were imposed, but still could not work as the RBZ continuously printed more money to finance government expenditure. ‘Good’ money replaced ‘bad’ money in the Zimbabwean economy. Until such a time when the local currency was completely rejected for any transaction, the authorities were forced to authorise the use of other currencies for business transactions (Multicurrency regime).

 

Most payment these days do not involve cash but cheques, standing order, direct debit, credit cards and so on, however cash is important as bank’s cash holdings are a constraint on creation of credit. As of now the RBZ is no longer able to perform the function of issuing notes and coins, because the Zimbabwe has no currency right now. The economy is using South African rands and the United States dollar for business transactions. The amount of forex in the economy depends on the strength of attraction from the services the economy is rending to other nations, donors and credit from international organisations.

 

For the economy to be well function, organisations should be working at full capacity and with no constraints. One major constraints organisations face is the financial constraints. Companies usually obtain loans from banks and financial institutions, ranging from short term loans to long term loans (mortgages). However there is a time when banks are not able to meet demand and hence the Central bank has to be the lender of last resort. The government treasury bill and bond markets are covered by the central bank. It can offer in many types, there are 30 day treasury bills, 90 day treasury bills and 180 days treasury bills. One good thing with the Central bank loans is that they are cheaper as compared to commercial bank loans.

 

The RBZ currently is not able to act as the lender of last resort, there is no production of funds around its activities and neither can it print as there is no currency. The RBZ has lost its credibility, with the economy, other nations and development banks. In fact, it is struggling to pay its own debts, it has accrued during crisis period. Therefore, the bank cannot extend its hands to others rather is waiting for such favours.

 

Because, the Zimbabwean nation currently has no local currency of its own, the RBZ cannot fully advise the government on the central issue on monetary policy. The role implies that the RBZ would control the level of money supply in the economy to allow smooth business operations, and avoid inflationary effects. However, for the monetary policy statement is still issued in the economy, only to explain the happenings in the economy as far as interest rates are concerned. The monetary policy is no longer the road map which economic agents rely on, and it has lost its traditional importance.

 

The Central bank should be at the top of all other banks and hence regulating and monitoring the activities of the sector. The RBZ was in charge during the period, it was monitoring the minimum capital requirement levels. During the period some banks which were not performing according to the required level and not in line with the set regulatory framework were forced to close and some merged, for example the Time Bank was closed, Intermarket Bank was swallowed by ZB Bank family.

 

During the crisis period the RBZ engages itself in various social programs, for example empowering citizens through the Mechanisation Programme. This was of great importance fro some individuals, although not all people were involved and the way it was done through excess printing of money. The program raises social RBZ from the perspective of the awarded population n the Agricultural sector. The RBZ also engaged itself in the housing financing schemes, giving food vouchers to the poor and sourcing cars and perks for court judges. However, there has been debate around the manner in which the bank has traversed its monetary policy duties to usurp the fiscal and other roles. The manner in which this institution has sought to control the mediated public sphere through mostly unorthodox means is said to have fuelled the crisis and has created social inequality as their policies were in quasi format and not able to cover the total population but rather the selected few.

 

The Central Bank is at the top of all financial institutions and of course it is the regulator of all the activities in the financial sector. However, the Central bank receives proposals from the various institutions on the activities that might need to be undertaken to improve the sector and profitability of the institutions. Apart from the Central bank’s influential role, institutions have their own part to take. According to Posen (2006), central bankers cannot count on banking supervisors or budgetary officials to stick to the straight and narrow, even if one assumes that a politically independent central bank will pursue largely the right policy. Japan in the 1990s is a particularly salient illustration of the dangers of lack of coordination between financial and monetary authorities. Arguably, there was a three-way game of chicken between the Bank of Japan, the Ministry of Finance, and the new Financial Services Agency that paralyzed policy for the second half of the 1990s.

 

Central banks are not that powerful that financial institutions can be completely guided by unfavourable policies of the Central banks because of imperfect information and the speed at which researches are made by central banks and individual institutions. Researches by individual institutions are more efficient and faster than those by Central bank because Central banks broaden their research to cover the whole economy. So financial institutions should convince and prove their formulas to the central bank for approval and not only wait for policies by the Central banks. Innovation is the only way in which the financial sector relies on to reduce transaction costs.

 

Pressure applied by international organizations such as the IMF and the World Bank and the introduction of new technologies have forced authorities to relax controls making the financial sector more competitive and efficient in many countries (e.g Ghana and Sri Lanka) whose financial reforms have contributed to economic growth. Therefore for Zimbabwe financial institutions should continue to engage in technology invention despite tight policies from Central bank. Public awareness should also be done to increase the number of participants in the sector. Lack of financial literacy among the people and lack of clear directions from the government to the financial market affect progressing efficiencies further, Piyadasa (2007).

 

Effective communication can be an important and powerful part of the central bank’s toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks’ macroeconomic objectives, Blinder et al (2008). This means that if information is slow or incomplete between the Central bank and the whole financial system problems arise making it difficult to achieve economic goals. The inability to meet economic targets will affect the society as a whole both economically and socially.

 

A few decades ago, conventional wisdom in central banking circles held that monetary policymakers should say as little as possible, and say it cryptically, Blinder (2008). Communication policy has risen in stature from a nuisance to a key instrument in the central banker’s toolkit. As a result, many central banks have become remarkably more transparent and have started placing much greater weight on their communications. The Reserve Bank of Zimbabwe, has been communicating through presentation of monetary policy, magazines and newsletters and newspapers among other methods in an effort to give information to the financial systems on its policies. However, it is the quality of the information that also matters and implications associated.

 

Official statements, reports, and minutes appear to have the clearest and most consistent empirical effects on financial markets. The evidence on the impact of speeches is more mixed. But it, too, is mainly supportive of the idea that central bank communication “creates news.” Communication can be divided into “short-run” central bank communication and “long-run” central bank communication depending on the scope and time horizon objectives.

 

it is widely accepted that the ability of a central bank to affect the economy depends critically on its ability to influence market expectations about the future path of overnight interest rates, and not merely on their current level.

 

The Reserve Bank of Zimbabwe indicated specifically the guidelines to be followed by the banking sector, of which violation was financial indiscipline. This was to ensure uniformity in the sector, so as to manage the crisis. It also shows that the banking sector is well controlled and monitored by the RBZ.

 

 Diagram.

 

Whilst it is a good idea that the Central bank controls and monitors the development in the financial/banking sector, it is also worth for it to adjust and revise its rules and regulations in the earliest time that allows flexibility and innovation in the sector. The RBZ policies are in place for a long time, such strategies are not suitable for a developing and high innovative economy like Zimbabwe. The Zimbabwean financial/banking sector is trying to race with other nations to book a competitive level in the international market. With increasing globalisation there is increased linkages among nations as there are now increased numbers of travellers, the banking sector should be faced by both exogenous and endogenous policy guides.

 

The relationship between the RBZ and Non-Bank financial institutions is one sided as the former is not satisfied by the freedom they enjoy. According to the RBZ there is an absence of a well defined and comprehensive regulatory prudential supervision framework for the Zimbabwe Stock Exchange, Stock Brokers, Insurance Companies and Pension Funds and this has significantly compromised financial stability. Illegal transactions, indiscipline and reckless disregard of rules and regulations have been detected in the sector. There are no prescribed educational credentials for registration of stockbrokers. During the period under study most pension funds and insurance companies were not complying with the minimum prescribed asset requirements of 35% and 30%, respectively.  Hence the RBZ was calling for compliance.

 

The minimum capital requirement  for various institutions were set as follows;

 Diagram.

 

While it was good to have these minimum capital requirements, many companies failed to comply and this automatically indicate that the levels set were quite too high for the period. Any reforms based on such set targets are deemed inappropriate and likely not ensuring stability. The Central bank has to consult various organisations to reach an economic minimum capital requirements, this ensures the smooth operations among institutions. The RBZ should welcome suggestions from the public and various economic agents apart from its research and monitoring management tool kit.

 

 

The Zimbabwe financial sector, although it is currently underpinned by various constraints, it remains one of the best organised sectors in the economy, and strives to improve economic performance. The sector greatly needs the support from the government, implying that means the government should come up with policies that do not interfere with the innovations in the sector. The sector is always the pioneer in innovation and development. The Zimbabwe Stock Market is the second best in Africa after the Johannesburg Stock Market, and this shows that constant support and development of the sector should be done to keep and improve our position. As part of development of the sector, derivative markets can be reintroduced in Zimbabwe, as they improve society relationship and improve risk management for investors. Derivatives improve production through certainty of prices, and through the use of futures and contracts.

 

As the banking sector is the leading sector in most financial systems, the reforms should be mainly directed towards the banking sector. Most of these reforms in the past were mainly advocated by the IMF and the World Bank. To improve the banking sector there are some recommendations worth to be taken care of to ensure efficiency and involve improving private sector participation in the financial sector, removal of restrictions on banking products such as interest rate and loans, exchange rate relaxation, opening up of financial markets for foreign and domestic competition and to encourage efficient functioning of financial market with less government interferences. If banks remain weaker, then they will continue to depend on public support, Petra (2010).

 

The research found out that financial services stimulate savings, investment and growth of national income (GDP) and for that matter economic growth by increasing the rate of capital accumulation and by improving the efficiency with which the economies use that capital. Schumpeter (1912) contends that well- functioning banks spur on technological innovation by identifying and funding those entrepreneurs with the best chances of successfully implementing innovative products and production process. Foreign banks should be allowed to compete with state owned and private sector financial institutions in varying degrees.

 

Financial reforms should mainly be directed towards relaxing the regulatory measures and reducing state’s grip on the system.  It should be noted that developed markets are easily able to adjust to new reforms whilst it is not so easy in emerging market countries. There is a possibility that some temporary economic destabilizations may occur at the beginning of certain reforms. Study on seven countries conducted by the IMF to examine linkages between financial sector reforms and financial crisis has identified a number of destabilization factors (Sundararajan and Balino, 1991). Hence developing nations should not quickly reverse a policy when destabilization occurs because policy makers lose credibility yet their policy may be sustainable in future. Higher level of social rigidities is one of the dominant factors significantly affecting the financial markets and this slows down the benefit of financial reforms.

 

Poorly designed or poorly executed communications clearly can do more harm than good; and it is not obvious that a central bank is always better off by saying more. In practice, central banks do limit their communications. In most cases, internal deliberations are kept secret. Only a few central banks project the future path of their policy rate. Communication is not pre-commitment, that is communication should not be confused to commitment, a public announcement requirement could impede timely and appropriate adjustments to policy.

 

Central bank communication is also a two-way street: It must have both a transmitter and a receiver, and either could be the source of uncertainty or confusion. Moreover, on the receiving end, the same message might be interpreted differently by different listeners who may have different expectations or believe in different models.

 

In conclusion, policies to improve the financial sector should be socially acceptable and socially related. There should be a designed way that links the Central Bank policies and the public view, so that any strong disparity should be justified. For every policy, target population should be seen benefiting from the policy, because it has been argued that, different economic agents are benefiting more than the defined target.

 

As it has to been noticed by various individuals’ testimonies, the period in which the financial sector is in disorder gives people a very hard time because of its direct impact to the economy. Hence it is advised that the authorities should design policies that are in line with the financial sector development and hence it is socially acceptable. Economic development is directly connected to financial development, although some proposed a two way causal effect of the two. Zimbabwe’s financial /banking sector contributes to the level of economic growth, hence should receive adequate support.

Bhattarai, K.(2003) Role of financial markets in an economy, department of economics, University of Hull, UK

Blunder et al (2008),”Central bank communication and monetary policy: A survey of theory and evidence ,” Working Paper Series No. 898 / May.

Disyatat, P (2009): “Unconventional monetary policy in the current crisis”, BIS Quarterly Review, pp 6–7.

Gordon Newlove Asamoah (2008), “The Impact Of The Financial Sector  Reforms On Savings, Investments  And Growth Of Gross Domestic Product (GDP) In Ghana.” International Business & Economics Research Journal – October, Volume 7, Number 10

Panetta, F, T Faeh, G Grande, C Ho, M King, A Levy, F Signoretti, M Taboga and A Zaghini (2009): “An assessment of financial sector rescue programmes”, BIS Papers, no 48, pp 59–64.

Petra Gerlach (2010), “The dependence of the financial system on central bank and government support.”  BIS Quarterly Review, March.

Piyadasa Edirisuriya (2007), “Effects of financial sector reforms in Sri Lanka: Evidence from the banking sector,” Asia Pacific Journal of Finance and Banking Research Vol. 1. No. 1.

Reserve Bank of Zimbabwe Anti-Money Laundering Capacity Building Workshop, Reserve Bank Training Centre, Harare, Zimbabwe, 27 September – 6 October 2000

Reserve Bank of Zimbabwe, Monetary Policy Statement, January 2009

Zimbabwe: Survey of Financial Institutions.

There are several viable reasons to consider commercial property and business opportunity investment possibilities. The ability to finance a commercial mortgage or business loan via income provided by a business and commercial real estate is certainly a sound reason to explore business finance options. The realistic alternative to not include commercial property in the commercial loan should be viewed as a potential bonus for those concerned about property value trends.

The recent negative investment climate for residential real estate investment property has provided investors with new reasons to explore investing in business opportunity and business finance options. We will offer some candid advice about commercial mortgage and business financing as well as an overview about the importance of evaluating business and commercial investment property purchase possibilities.

Business Finance – Investing in Unique Businesses and Special Purpose Properties

Commercial real estate and business opportunity choices include special purpose situations such as funeral homes and golf courses. The unique characteristics of such business investment options translate to enhanced possibilities to differentiate a commercial business and provide added value.

Of course specialized business real estate investing does require special purpose business finance solutions such as golf course financing and funeral home financing. A critical requirement for business investment success is the ability to acquire a business loan that is appropriate for both the business and business owner.

Buy a Business with an SBA Loan for a Commercial Mortgage and Business Opportunity Finance

The option to use SBA financing (Small Business Administration loan) provides a business loan choice not available for residential real estate investing. This form of business financing is available to new business owners and can prove to be instrumental in purchasing a business opportunity or commercial real estate investment.

Business Opportunity Financing Without Real Estate Investment Property

Purchasing a business opportunity does not involve commercial real estate. The lack of a commercial mortgage can be an advantage if real estate values are decreasing because business value is dictated primarily by the business income rather than the real estate.

Business Loan – Commercial Investment Value Driven Primarily by Income

In comparison to residential real estate investment property value depending primarily on location, commercial real estate and business value is primarily determined by business income. This results in less sensitivity to local real estate property value trends. A business loan will require an appraisal evaluating business income, usually over at least three years.

Commercial Loan Precautions – Business Financing Problems to Avoid

Just as there are unique and substantial positive benefits associated with buying a business or commercial real estate investment property, there are also a number of special business loan and commercial mortgage problems to avoid when arranging business financing. For those most familiar with investing in residential real estate, it is important to note that there are over 25 differences between commercial financing and residential investment property financing. There is a critical commercial loan difficulty to anticipate with each difference.

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Ordinary people are literally the regular customers of most financial investment planners as they have not the skills and profession in such fields. That is when they need to seek help from financial professionals who could provide investment advices to assist them in the investment industry. Understanding the types of investment is quite a necessity to help you look for the most suitable planner.

Basically there are two types of investment plan – direct and collective. Direct investment consists of the gilt-edged stock or known as government-issued bonds and the shares of a specific company or also known as issued bonds. Company shares may somewhat encounter regular price fluctuations as they are traded in the stock market and the performance of the company will influence the dividends entitled to you as part of the share owners. Gilts issued by government, however, offer a fixed rate of interest where full return is assured once the bond reaches the maturity deadline. This concept resembles a loan you are giving to the government and due to the built-in certainties; such investments are subjected to lower risks although the return may be lower than the volatile share markets. In fact, both the corporate and government investment bonds can be traded in the stock market, anytime before they mature. But if such actions were taken, the price will flow accordingly to the prevailing stock market rates instead of the fixed interest.

Another type is the collective investment plan. This is where you spread your investment into several different investments by pooling it with other investors. This type of investment can reduce the risks and usually, the pooled investments are managed under a professional fund manager, who decides the types and range of investments. There are investment trusts, unit trusts and the Open-ended Investment Companies (OEICs) to choose from and to avoid rash decisions; this is when you can seek advice from independent financial investment planners. You should take the financial investment advice wisely as the sheer range of investment channels may mislead you to great risks. Disregard of how accurate your intuition may be, the best advice should come from a professional financial adviser.