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In Trade Finance, explain what is Open Account

slang — Tue, 13 Apr 2010 15:27:51 +0000

Trade Finance Payment Tool-OPEN Account

In trade finance, there are a few major payment used of which one is called Open account.

Basically, when settlement takes place on open account, it means that the exporter will ship his products to the importer before any payment has been received. The exporter then presents the required documentation to the importer, rather than involving a commercial bank in the process. The importer pays the exporter when the documentation has been received. In US, Europe and even China, Open account is a widely used trade finance technique. However, due to the recent financial crisis many have now opt for traditional methods of trade finance like the letter of credit. By doing so, there will be less risk of counterparty defaults.

What Is Meant by Asset-based Finance? What Are some of the differences between Asset-based finance and Cash Flow-based Loans/Finance

slang — Sat, 10 Apr 2010 03:23:15 +0000

Both asset based finance and cash flow finance are important sources of funding for a business for its short term(working capital) and long term(capital assets) sustainability.

Asset-based finance is a source of funding that is secured by a company’s assets.

This article looks at what is asset based finance and see the difference between the more traditional source of finance namely cash flow loan or finance.

Asset based finance:Accounts Receivables,Inventory,etc

Some features of asset-based finance include:

Lender generally has the right to seize the borrower’s asset(s) in the event that the commitments under the loan agreement is unfulfilled;
Normally referring to the financing by a borrower’s account receivable through factoring or invoice discounting facilities;
However it also includes many more assets like inventory, equipment, plant and machinery, real estates, etc which can also be used to arrange asset-based loans on a revolving or term basis;
Often used when traditional bank financing and other forms of raising finance are difficult to find or expensive. The most common forms of asset-based finance are asset-based loans, factoring and invoice discounting.

Compared to asset-based finance:

Cash flow-based loan is the more traditional one where the lender merely imposes covenants and linking the availability and volume of credit lines to specific earnings and liquidity levels and other metrics relating to the financial results of the borrower.

Cash Flows based finance:PROFIT/EARNINGS?

Below tabulated some of the major differences between Asset-based finance and Cash Flow Finance/ loan:

	Asset-based Loan	Cash Flow-based Loan
1.	An asset based loan is normally structured as a revolving line of credit and secured by tangible short-term(or current) assets such as accounts receivable and inventory.
2.	Borrowers can even raise additional funds or stretch or over-advance loan by using intangible assets like patents, intellectual property or trade names as collateral.
3.	Asset based loan mainly rely on the quality and value of the borrower’s assets	For Cash flow-based loan, depend largely on its earnings/cash flows
4.	Lesser number of restrictive financial covenants linking the availability of funds to the borrower’s financial performance.	Many more number of restrictive financial covenants linking the availability of funds to the borrower’s financial performance.
5	Asset-based loan affected by asset value rather than operational performance hence increase market valuation, etc can helps to increase the volume of credit from lender	Compared to Asset-based, in a cash flow loan, companies often borrow against a multiple of their earnings. Any downwards earnings can results in lesser funds from lender.
6.	Asset-based loan can be more flexible as they are linked to asset value of the collateral. Companies are less affected by quarterly results and less restricted in terms of the availability ad the use of borrowed funds.
7	Asset-based loan is usually the last option for Treasurer to deploy. The traditional cash flow loan usually come first as the mindset is “ the company is doing well, why should we charge our assets to the lenders….

First Foreign Sukuk Listed On Bursa Saham Malaysia

slang — Wed, 02 Dec 2009 03:19:08 +0000

In line with Malaysia’s aspiration to internationalize Bursa Malaysia as the Islamic investment centre, recently there is this foreign listing of US$500 million (RM1.7 billion) sukuk issued by GE Capital.

Details:

The five-year Islamic bond is structured based on the globally accepted Syariah principle of Sukuk Al Ijara.
First foreign sukuk listing on Bursa Malaysia and hope to see more foreign issuance of bonds or sukuk listed here in the near future,” he said.
Bursa Malaysia registered its first local sukuk listings by Petronas and Cagamas in August 2009.

Earlier article described the basics of Islamic financing which might be useful for those unfamiliar with such available source of financing.

Incidentally, we should also know that our country, Malaysia is the world’s largest sukuk issuance centre, with more than 60 per cent of sukuk outstanding globally originated here. It also hosts the world’s largest sukuk market worth at an estimated US$66 billion as at end of June 2009, and remains a key driver of growth for the Malaysian Islamic market

Bank Negara’s Decision on Overnight Policy Rate To Remain At 2 Per cent

slang — Wed, 26 Aug 2009 13:14:10 +0000

Further to earlier article on the OPR’s outlook/forecast by the economists from various banks, at the Monetary Policy Committee meeting held on 26 August 2009, Bank Negara Malaysia decided to leave the Overnight Policy Rate unchanged at 2.00 percent.

Full Text(Source:Reuters):

Since the MPC in July, more signs have emerged to suggest that global economic and financial conditions are improving. Economic activity in some advanced and regional countries has begun to gradually recover in response to the significant fiscal and monetary measures that have been implemented. Economic recovery, however, will likely be a slow process as some of these economies undergo further structural adjustments.

In the domestic economy, recent financial and economic indicators, including industrial production, financing trends, consumer and business sentiment, and retrenchments, reaffirm the assessment that economic conditions are stabilising.

Going forward, the expectation remains that the domestic economy will improve in the second half of 2009 and into 2010, following a recovery in domestic demand amidst stabilisation of the global economy.

Inflation declined further in July. As in the previous month, the decline largely reflects the cumulative fall in fuel prices since June 2008, and the easing pressure on food prices. The negative inflation is expected to be temporary and is projected to turn positive as domestic conditions strengthen.

With improving domestic economic conditions and as price pressures are expected to remain benign going forward, the assessment is that the current monetary policy stance is appropriate and will continue to provide support for economic activity

Outlook On Overnight Policy Rate(OPR) Unlikely To Change

slang — Tue, 25 Aug 2009 13:59:15 +0000

Bank Negara’s monetary policy committee holds its sixth meeting of the year today(25 August 2009). There are another two more Meetings until the end of the year.

The following 21 economists surveyed in a Business Times poll:

Action Economics,Affin Investment Bank, AmResearch, Bank Islam, CIMB Investment Bank, Citi, Credit Suisse, DBS Bank, HSBC Bank, Inter-Pacific Research, JPMorgan Chase Bank, Kenanga Investment Bank, Kuwait Finance House, Maybank Investment Bank, MIDF Research, OCBC Bank, OSK Investment Bank, RHB Research, SCB, TA Research and UOB Bank

have the same outlook that the Overnight Policy Rate (OPR) would remain at 2 % until the year-end. They felt that BANK Negara Malaysia is unlikely to change the key interest rate for this month and the rest of the year as it focuses its attention on economic growth. For those who are unaware,the central bank has cut the OPR by a total of 125 basis points, or 1.25 per cent, between November last year and February this year. The present OPR rate is 2%.

More views from economists that OPR should not change:

Standard Chartered Bank economist Alvin Liew -OPR would stay unchanged as inflation was not a concern for the rest of the year while economic recovery was uncertain. Expect monetary policy to take a back seat for the rest of 2009 as fiscal measures exert a more visible impact on the economy,
OCBC Bank economist Selena Ling felt that Bank Negara was more likely to remain cautious and wary about raising rates until gross domestic product figures reverted to positive territory.
Citi economist Kit Wei Zheng expects the first OPR increase in the fourth quarter of next year, after the US Federal Reserve makes its first increase in the second quarter of next year.

Internal And External Sources Of Finance

slang — Sat, 08 Dec 2007 14:45:21 +0000

We can generally differentiate two sources of financing which are:

INTERNAL SOURCES

Traditionally, the major sources of finance for a limited company were internal sources:

Retained profit
Working capital
Sale of assets

EXTERNAL SOURCES

Ownership Capital

Owners’ refers to those people/institutions who are shareholders. Sole traders and partnerships do not have shareholders – the individual or the partners are the owners of the business but do not hold shares.

Shares are units of investment in a limited company, whether it be a public or private limited company.

Shares are generally broken down into two categories:

Ordinary shares
Preference shares

Non-Ownership Capital

Includes the following:

Debentures
Other loans
Overdraft facilities
Hire purchase
Lines of credit from creditors
Grants
Venture capital
Factoring and invoice discounting
Invoice discounting
Leasing

Note Issuance Facility (NIF)

slang — Tue, 17 Jul 2007 15:05:48 +0000

Note Issuance facility is merely a method of financing that involves repeat issues of a short term debt instrument to the most competitive bidder through auctions.

When combined with a Revolving Underwriting Facility (RUF i.e. an underwriting facility which is extended in every round of fund-raising), the issue will devolve on the underwriter, if the bids from investors are above the cut-off rate.
this financing mechanism is also known as RUF/NIF

The advantage is that the borrowing company can access funds long-term at short-term rates. For example, a 3 year underwriting facility for 90 day paper means that the borrower may tap the market up to twelve times in three years

Sukuk And Islamic Capital Market

slang — Thu, 24 May 2007 04:22:46 +0000

The emergence of the Islamic capital market in 2002 with the inaugural sukuk issued by the Malaysian Governement spearheaded the capital markets exponentially as it became the blue print to an increasing variety of instruments which can be used to create an efficient Islamic portfolio in line with portfolio theory and financial planning.
Increasingly, many companies have begun to tap into the sukuk market to take advantage of the increased liquidity in the Islamic world.

This article seeks to give a basic understanding of the sukuk market and to understand what are the various common types of sukuk so that accountants can tapped into this market for their financing needs.

What is sukuk?

Frequently referred to as an Islamic bond but more accurately translated it is an Islamic investment certificate.
Unlike a bond where the issuer is contractually obliged to pay to the bondholders on certain specified dates, interest and principal, under a sukuk structure, holders of the sukuk each hold an beneficial ownership in the underlying assets. Consequently sukuk holders are entitled to share in the revenues generated by the sukuk assets as well as been entitled to share in the proceeds of the realization of the sukuk assets.
Is a form of assets-backed securities
It requires an underlying tangible assets transaction either in an outright sale and purchase transaction or in a master lease transaction
The primary condition for the issuance of sukuk is the existence of assets on the balance sheet of the issuing entity that wants to mobilize its financial resources.
However, the assets need to be Shariah compliant. Hence, the identification of a suitable asset is a critical step in the process of issuing sukuk certificates.

If you noticed, it is very important that sukuk assets need to be Shariah compliant.

So what is Shariah compliant?

Shariah-compliant investment is “ethical” investment organized in compliance with Islamic law.
To comply with Shariah Law, investment must not involve ‘riba’, a kind of usury practised during pre-Islamic times among the Arabs, which involves delaying the payment of debt in return for an increase in its amount – in other words, interest.

For example, Shariah property investment funds must not rent properties to organizations involved in alcohol, armaments, cinema, conventional financial services, tobacco, pornography, pork or gambling
The common types of sukuk are as follows:

	TYPE	BRIEF DESCRIPTION
1	Murabaha Sukuk	One of the most widely used instruments for Islamic short-term financing Based on the notion of purchase finance. The structure is based on a declared mark-up integrated into the selling price with a deferred payment
2	Istisna’a Sukuk	Use to advance funding of real estate development, major industrial projects or purchase of large equipment like aircraft/ships. Generally, the financial institution funds the purchaser or the manufacturer during the construction of the assets,acquires title/ownership of the asset and upon completion of its construction, passes the title/ownership to the purchaser on an agreed deferred payment terms.
3	Salam Sukuk	Refers to a sale wherein the seller undertakes to supply a specific commodity to the buyer at a future date in return for an advanced price paid in full on the spot. Represents a type of forward contract but with actual physical delivery at the maturity of the said contract.
4	Ijara Sukuk	A leasing structure coupled with the right to the lessee to purchase the asset at the end of the lease period The certificates are issued on stand-alone assets identified on the balance sheet. Presently most sukuk issued follow this structure.
5	Mudarabah Sukuk	Comprise an agreement between a party who provides the capital and another party (the entrepreneur) to enable the entrepreneur to carry out business projects based on pre-determined profit sharing ratios. Losses to the business are borne by the provider of the funds.
6	Musharakah Sukuk	Similar to Mudarabah concept except that this structure requires both parties to participate in the funding of the project. Any losses will be shared by both parties up to the size of their respective investments.

Short Term Financing-Bank Overdraft Facility

slang — Tue, 23 Jan 2007 15:14:12 +0000

One of the credit facilities that businessmen can obtain from Financial Institutions is the Bank Overdraft Facility.

This article looks at its characteristics as this is the commonest tool used in company’s debt financing:

Only granted by Commercial banks;
Very convenient ( cheques can be issued for amounts within the agreed limit);
Flexible in terms of the amount and time period required;
Allow us to overdraw our current account of up to an amount agreed upon;
Suitable for short-term commitments in financing the daily needs of the business;
Interest is only charge on amount overdrawn and for the period of its use;
Interest rate varies according to types of borrowers, nature of business, industry of the borrower, security offered, Bank Negara’s directives and the market trends.
Interest rate is always pegged at Base Lending Rate (BLR) + spread
The spread is the profit margin to be earned by the bank.

How this bank facility is granted can be based on any of the following criteria:

Clean basis – given due to the bank’s utmost trust and confidence of it clients’ integrity, financial performance, reputation, etc;
Personal guarantee – directors or any third party guarantees the facility in their personal capacities;
Collaterals given as securities like properties, shares, fixed deposits
Assignment over the expected contract monies –normally where the principal agree to make payment directly to the contractor’s banker;
Purchase/discounting of trade bills- here the bank gives immediate credit before the proceeds of the bills are collected and received. The bills can be drawn at sight or usance.

The main disadvantages are this type of facility is repayable on demand and normally the borrower need to provide security/collateral for the overdraft facility

Bridging & End-Financing

slang — Tue, 23 Jan 2007 13:11:55 +0000

We often hear such terms “Bridging Finance” and “End-Financing” in the housing/property development industry.

This article seeks to give some simple clarifications of such terms used.

Bridging Finance is:

A temporary advance to bridge the financial gap from commencement of a project until the eventual return of the cash when the project is completed;

As it is on a temporary basis, it’s therefore a short term financing tool;

Terms and conditions of the advance will be determined by merits of each project and

Is popularly used by housing developers for developmental costs before sale proceeds of their houses are realized.

End-Financing is:

A facility solely for the benefit of the housing/property developers;
With this facility, the eventual recipient of the loans which are the individual property purchasers can then book the property;
Very useful for the housing/property developer as the availability of end-financing encourage decisive and speedy booking by the public;
The end-financiers which are the financial institutions ensure prompt progress payment on behalf of their clients/purchasers thus ensuring a smooth cash-flow to the housing developer;
Quantum of end financing required depend on project’s viability, number of property units intended to be developed, the developmental costs and the total sale price of the properties.