Categories
Credit

Internship with Credit Analysis

Internship with Credit Analysis.
Met people from different departments, asked on the Job they perform. I and another trainee passing internship in ORBS had an Introductory meeting, where our supervisors explained Bank structure, its goals and objectives. . During the whole period of internship in Retail Unit, I have learned a lot about the RAM, about Bank products, on how to find potential customers, how to keep them loyal to the Bank, what procedures and legal documentation to set the deal. I was introduced to Asset Sales and RAM work. Worked under the supervision of Senior Relationship Manager, observed the working processes of other units: Customer Service Unit (CSS), Sales Department and Retail Transfer Operations.
Assisted on indoor meeting, as well as on meetings with clients, worked on client base, learned how managers evaluate credit risk RAM – is a relationship Manager, who’s main responsibilities are client search and client support. Now I have realized that in any organization, as well as in the bank, customer relationship is very important, as I would like to say, RAM is the first step of all major banking operations. 3. Remained time I conducted in Corporate Department. Assisted on evaluation of the credit risk analysis of the company, under the supervision of employees. Learned how to make a credit risk analysis: consolidated balance sheet analysis with all ratios required, market analysis.
Benefits to the Student: great opportunity to learn and practice in the sphere of finance and banking business ; learn how to use financial modeling in practice ; life experience of working with real financial documents ; work in the real business environment, under the time pressure The colleagues showed high cooperation in sharing their experience and deep knowledge in the operations of ORBS. The skills and theoretical knowledge acquired on the finance courses in SKIMP was of great value, and I found them very effective in performing my duties and responsibilities. The main difficulty faced during the internship process was the Iterance AT languages AT study (Engel’s) Ana ten language AT ten company’s documents and operations (Russian).

However, this was not a big obstacle because my colleagues helped me to understand and learn the translations and meanings of Russian financial and accounting terms. This internship gave me such benefits as real life banking experience, new skills. I have seen the operations of the bank from different points, I’ve been in different departments during the internship, get accustomed to the variety of Jobs in the Bank, learned the structure, the culture, the goals and objectives. I learned how to evaluate credit risk of both private and corporate customers. Recommendations and suggestions: I would recommend students to take an internship instead research projects or substitute courses, in order to have a working experience before the graduation that will help them more easily get into gear.

Internship with Credit Analysis

Calculate the Price

Approximately 250 words

Total price (USD) $: 10.99

Categories
Credit

The Development Of Credit Unions

The Development Of Credit Unions.
A credit union is a member owned member controlled not-for-profit cooperative financial institution. Credit unions were formed to provide loans to its members at lower rates of interest than would be other wise available.
The first credit union was formed by a group of farmers in Belgium, 1848, during a period of severe economic depression. Townspeople pulled their money together to provide loans to each other. This cooperative approach helped farmers avoid paying the high rates being charged by “loan sharks”. These loans enabled a farmer to buy the necessities to plant a crop or to help members buy coal in bulk at lower prices.
At the time of their origins the only financial assistance available was the local moneylenders. At the time of the depression people who took out loans were forced to pay expensive interest rates. Credit Unions serve low-income people. A person”s ability (income) to repay is considered more important than the desire to sustain the assets of the credit union. Members are borrowing their own money and that of their peers.

By 1900 the first financial cooperative idea had spread from Germany to Canada. Canadas successful efforts influenced two Americans. Pierre Jay the Massachusetts bank commissioner and Edward A. Filene a Boston merchant. These two men helped organized public hearings on the credit union legislative in Massachusetts. This led the establishment of the first Credit Union Act in the United States in 1909.
The growth of credit unions across the U.S. was slow. Fewer than 10 states passed credit union laws. 1934 Congress passed the Federal Credit Union Act. This act set the basic structure, which governs credit unions today, examples:
Member control is democratically exercised regardless of the number of shares held.
Loans, which are primary investment for credit union, are made exclusively to members.
A board of directors supervises management
By 1935 38 states and the District of Columbia had laws permitting the establishment of credit union and over 3,000 were in existence.
In 1970″s credit unions were battling with the government for federal share insurance and the campaign for national fund to support the community developed credit unions (CDCU). In 1970 congress established the National Credit Union Administration (NCUA) an independent agency responsible for regulating and chartering federal credit unions and NCUA and Congress also established the National Credit Union Share Insurance Fund. This enabled the NCUA to insure the shares of all the federal and state credit unions. In 1978 the Federal Credit Union Act was amended to establish a three-member board, appointed by the president, to head NCUA.
Nationally, there are almost 11,000 credit unions with over
73 million members. The Credit Union National Association (CUNA)
is the national trade for credit unions. In addition, there are 50 state credit union leagues and leagues for the District of Columbia and Puerto Rico. The credit union movement is growing throughout the world, including third-world countries and Europe where people need assistance with setting up consumer finance systems. There are over 37,000 credit unions worldwide in 87 nations with over 88 million members.

The Development Of Credit Unions

Calculate the Price

Approximately 250 words

Total price (USD) $: 10.99

Categories
Credit

The Universal Credit Program: Project Management

The Universal Credit Program: Project Management.
Management This report is addressed to the Universal Credit Project Board. Number of words: 1582 Executive Summary The Universal Credit Programme has failed in many eyes because of a lack of good project management. I researched the reasons of the lack of good project management and come to some good conclusions on the following subjects: 1. Project Initiation The programme was underestimated and the goals where to optimistic, the effects of the project initiation are clearly linked back of the complications which appeared later on the project.
For example the project has changed project manager 5 times because of a lack of transparency. The lack of transparency can be linked back to setting to many goals in the project initiation. The project should have research the details better on making an IT programme this big. 2. Project organisation and structure The programme has been approached with an agile method, a lot like scrum-method. The biggest mistake that was made is the lack of use of an agile project framework. It is logical that a programme from this size always includes Waterfall project management’.
But in the Universal Credit programme the waterfall-managing ethod was counterworking the agile approach that was used. The project also lacks of a good stakeholders communication department, the communication with the stakeholders has been a big problem with the Universal Credit programme. More details about these conclusions can be found in the rest of the report. Introduction to the report For the course Project Management (344SAM) I am asked to write an report addressed to the Universal Credit Project Board. This is regarding the bad publicity the project has gotten lately from the press.

The case study consists of an article form Brian Wernham where he claims that the Universal Credit Program has suffered from bad Project Management and a “lack of transparency’. In my research I will only use the information available till 5 September 2013, because this is the date when the report was published. In my research I will be focussing on the following 2 subjects: 1. Project initiation Brief background on project For this project I will be do research on the project management of the Universal Credit Programme.
This program is developed to make a single monthly payment instead of all sorts separately benefits and tax credit top-ups payments. This rogram includes a ‘subsidy to work, people will be encouraged to work this way. To establish this project there must be a solid and reliable IT system. A lot of calculations have to been made and a lot of external influences must be taken in account. I’m going to research: What where the project goals, scope, organisation, business case, constraints? Which organisation and structure has been used?
At the end of the report I will write my conclusions and recommendations. Project Initiation When the project was initiated at the end of 2012, there was a lot criticism on the project. This was mainly because of a lack of transparency; people didn’t really know what the programme meant. 1 1(The Ethical Deficit of the Proposed Universal Credit, Harley Dean, 2012, The Political Quarterly, Vol. 83, No. 2) The project initiation can be divided in 5 segments, which I will describe separately.
Project Goals They are a lot of project goals for the universal credits programme: Good outcomes for claimants, Improved health (mental health especially), Increase the overall level of competencies and qualifications. Get more people from welfare into work. Reduce the amount of people getting homeless. And there are a lot of smaller goals stated in the report. They want to aim to process 95% of new housing benefits within 1 5 days. Also all the claims will merely be online processed. 3 Scope Entrepreneurial Council Board, Corporate Strategy and Governance Board.
Project Organisation The project organisation consists of: 1 . Project Manager 2. Administrative employee 3. Trainee’s for staff 4. Online development 5. Communications and marketing 6. WMT The Entrepreneurial Council Board and WMT monitor the project. Business case There is no business case in the Project initiation document (PID). Constraints The PID says: “The current financial constraint being placed on the Council means we need to be creative about how we continue to deliver our services” 2 The budget and the quality are fixed. l will discuss this part in part 2. ) 2 (Project Initiation document. rtf, Alan Robinson, 2012, https:// knowledgenub. local. gov. uk/) 3 (Project Initation document (PID), Ali Ghanimi (project manager), John Magness (Project sponsor), August 2012, https://knowledgehub. local. gov. uk/) Criticism on the project initiation I will criticise all the parts of the project initiation separately. The project has a lot of goals and sub-goals. This (as seen in the future) will lead to a lack of transparency because there can’t be send out one universal project goal.
Also because of this high amount of goals there will be a lack of focus within the own organisation and even at the project manager. Project organisation The project organisation is monitored by the WMT itself; it could be useful to have influences from external parties. Also as seen in the future the complexity of the IT- part of this program is underestimated in this report. There should be more focus on how this IT-part is going to be set up and what kind of recourses are needed to chieve this. There is stated that no detailed business case is required.
As shown in the future it would have been useful if they have done this part more detailed. The report would have set more directions for the programme as a whole. The price and quality are going to be fixed, getting the price fixed for an programme this size will require a lot of research in advance of the programme starting. This will take a lot of time and money and will exceed the 100million maximum development money that was agreed of in 2012 by the council office. 4 The universal credit has spent over 425 million pound on the development of
Universal Credit, this could have been prevented by focussing more on the use of project management frameworks and a detailed business case which is supported with reliable research. 1 1 (Universal Credit, Incremental IT, Brian Wernham,2013, Course work briefing 344SAM, moodie) project INITIATION DOCUMENT (Pid) Project organisation and structure As seen in the previous part the project used ‘an agile development approach’. The costs and quality were fixed in advance. This is to ensure that the final product is really going to work.
The development method, scrum, has been used, this is a flexible way of developing a roduct. The scrum was used without the use of a project management framework such as the Dynamic Systems Development. The programming was done by the scrum-like approach but as seen in section one of this report; this project has a lot of ‘big picture goals’; these goals fixed and are mainly in the Waterfall’ world. The board wanted a big up front design, which is crossing the scrum-like programming approach which is changing it’s goals and methods in an much higher speed.
This big picture is counterworking the programmers. Below a illustration how the water-scrum-fall model works. In the Universal Credit System the ‘scrum’ didn’t have a change to be agile, once they went in a direction it was impossible to “swim back”. 2 1 (Water-scrum-fall model, Cristian Mesaros, Marketing Manager ,2013, www. iquestgroup. com/en/iquest-news/water-scrum-fall-model-life-sciences’) 2 (Universal Credit, Incremental IT, Brian Wernham,2013, Course work briefing 344SAM, moodle) The Overall governance structure is shown in the image below.
It must be said that the project manager has been replaced 5 times in over a year of this programme running, how is this possible? The lack of transparency from day 1 has resulted in nclear targets. The project has been monitored by the WMT, this monitoring should have been more in collaborating with the lower-level mangers who where working with a way more flexible approach. Also is there a lack of a good stakeholders communication department, the communication with the stakeholders has been very bad and should have gotten more attention. (Preparing for Universal credit, London Borough of Lewisham local authority led pilot, August 2012, https://knowledgenub. local. gov. uk/) Conclusions The Universal Credit System is a project that has cost 4 times what was counted on. How is this possible and where can we put the blame? I’m going to give my conclusions on this research in 2 departments: Project Initiation The project had too much goals, which has lead to haziness for the overall The project has a lot of goals and sub-goals. This (as seen in the future) will lead to a lack of transparency because there cant be send out one universal project goal.
Also money that was agreed of in 2012 by the council office. Project organisation and structure The project has changed 5 times of project manager because of a lack of transparency, intern and extern. Credit programme. I think the board underestimated he complexity ot this programme; overall the Universal Credit programme should have used project management a lot more. Recommendations Below a list of recommendations I make on what could have done better on the Universal Credit programme: Divide the programme in separate parts, with separate goals.

The Universal Credit Program: Project Management

Calculate the Price

Approximately 250 words

Total price (USD) $: 10.99

Categories
Credit

Impact of Applied Agro-Cooperative Credit and Banking on Farmers and Farming

Impact of Applied Agro-Cooperative Credit and Banking on Farmers and Farming.
People depend for good introduction in Agro-Farming not only on good seeds, good fertilizers, good irrigation and good Agro-technology; but they need also short-term, medium and long term loans to meet their other demands at farm level in farming. This genuine situational scene has a power to present an impact of applied cooperative credit and banking on farmers in farming from the point of origin of the Indian Cooperative Credit (a facile credit) movement from the period of working of NIDISH in Madras Province in 1882 to 1904 till date.
This is a good Genesis of this issue with a scientific periodicity which may be perused in following section. An Iota in the facile cooperative credit scene of madras province Nidish a socio-economic social group were working in very active form like the primary cooperative credit societies at farm level in rural Madras province in 1882-1884.
Madras Provinces 1882-1884 :- Fedaric Nicholson’s visit from India to Germany to study the working of The Raiffieson Model Rural Cooperative Credit societies and came back with a finding “Find Raiffieson” because he found 100% similarities in need of Agro – financing for Rural India, with cultural similarities at great scale in rural India and Rural Germany. In India also there was great exploitation done by private moneylenders by charging 75% rate of interest and in Germany also such high interest was taken by Jews/Nazis from Rural Germany Farmers.

The profit motive and usurious practices were similar in India and Germany. In 1882 to 1884 Fedaric Nicholson came back from Germany in Madras Province and recommended to the government to start primary Agro-Cooperative credit and Banking instead of Nidish to protect rural people from great exploitation and usurious practices of private money lender. His report and recommendations were accepted by the Madras provincial government under the control of British government.
This was also studied and accepted by the government of Bombay province Maharashtra due to great vitality in his recommendations in public interest. In 1896, the British government appointed Edward committee (sir Edward as chairman) to study the Indian Rural conditions, needs and scope of working of the primary Agricultural Cooperative Credit societies under the control of British government for the people to work with cooperation of the people for the people with democratic management at grass root level. The Edward Committee 1896-1904 surveyed the Indian Rural agro-banking system and passed first cooperative Societies Act 1904 which was accepted and made applicable for greater India (from Kabul to Burma) with democratic centralised cooperative credit banking; viz; from Kabul to Burma, if any primary Agricultural cooperative society was organised, then it was bound to get registration from Delhi only. This was a real scene from 1904-1908. The distance factor was main problem for formation and registration of Agro-primary Cooperative Credit Societies.
In this era cooperative credit was considered as a facile credit and cooperative banking was accepted a means to achieve the desired goal in a desired time. In 1908, Lawd recommended to add cooperative Audit, with cooperative credit and banking by increasing two sections in the cooperative Act of 1904. Thus total sections from 48 to 50 were made in the first cooperative society’s act of 1904 in 1908-1912. This added great strength to Agro-cooperative credit and banking system for Rural India.
In 1912, the cooperative society Act was again examined by Sir Malcolm I. C. S and others. They suggested to add three sections more for facilitating cooperative credit, Consumption, and Marketing to the people of Rural India to protect them from exploitation of private traders and took them away from cruel clutches of exploiters by using cooperative organisation of the people for the people. It was accepted by the government in public interest.
In 1914-1915, the cooperation was made state sponsored subject to give chance to the state (provincial governments) to frame their own cooperative society Acts on the basis of this model Act of 1904 with due consideration of the interpersonal situations of the concern state in preparation of their own cooperative societies act. It gave good chance to states from Kabul to Burma to register primary Agro-cooperative credit societies for credit and banking activities according to their interpersonal conditions to work and upgrade socio-economic life of rural people by effective working of primary Agro-cooperative credit and banking business.
There was a rapid growth of members of primary Agro-cooperative credit and banking business and growth also found in qualities of services from 1912-1915 in cooperative credit movement in India. The first world war of 1915 gave great shock for the growth of Rural Agro-Cooperative banking due to more involvement of rural people in Indian Army. Therefore there was stunted growth of working of Agro-cooperative credit and banking from 1915 to 1925. There was Second World War in 1930-1935.
The Burma separated from India in 1920 and Shyam, Rangun and Kabul were also separated in 1937-38 and became independent countries. These newly made countries accepted and used Indian model cooperative society Act of 1912-15 to make their own cooperative acts. In 1939-40 in India, the Vijayraghavacharya committee recommended to start linking of cooperative credit with Agro-production and marketing in Madras provinces in Salem district. It was applied in Salem district only for testing. India became independent country in 1947 from the clutches of britishood separate it.
The public finance sub-committee (headed by Dr. D. R. Godgil) in 1946 submitted its report and recommended to allow crop loan systems to Rural people (farmers) to bring new change in farm financing by deciding Maximum Cooperative Credit Limit (M. C. L. ) per farmer, per acre per crop per season to upgrade economic strength of rural borrowers on the one hand by weathering the deep rooted exploitation of private moneylenders which gave a good chance for effective working of rural Agro-cooperative credit and banking on the other.
It was again reviewed by Thakurdas Mehta committee in 1948. This committee recommended starting its application from April 1950 in First Five Year Plan. At this time Ready Recknor was not made crop-wise for farmers but Rs. 500 M. C. L. (Maximum Credit Limit) per acre per crop was approved to apply from 1951 to 1954 in the first five year plan for good financing to farmers through primary Agro-Cooperative credit societies. It was brought in real practices. In 1950-54, A. G. Gorwala I. C. S was appointed to do All India Rural Credit Survey to judge the extent of credit distribution by the cooperative credit societies in presence of several moneylenders. He did survey in 75 districts of India, in 400 villages and 127475 farmers families who found 3. 5% farm financing and banking was done since 1904 to 1954 by cooperative credit societies and 96. 5% was done by non-cooperative agencies. The extent of linking of cooperative credit with farm production and cooperative marketing was found 1% only.
There was major failure of cooperative credit and banking role in rural India in socio-economic upgradation process for farming community. The AIRCS committee 1954 gave remark, “Cooperative have failed but must succeed. ” The AIRCS committee recommended starting CCR (controlled credit recovery) scheme under integrated Approach, viz: linking of cooperative credit with farm production and cooperative marketing to upgrade socio-economic life of farmers on the one hand and quality of services of cooperative credit and banking on the other. This recommendation was applied in second five year plan from 1955 to 1960.
It was found that linking of cooperative credit and marketing increased from 1% to 11% and extent of cooperative credit distribution was increased from 3. 5% to 30% and maximum credit limit (MCL) increased from Rs. 500 to Rs. 1200 per crop per acre per year. This gradual growth gave great encouragement to cooperative credit and banking system in farm financing at a great length. This had motivated for a reliable and very valid effective approach through cooperative credit and banking for rural reorientation as well as upgradation of socio-economic change of rural people in rural India.
This indicated a good desired shifting of cooperative credit business and gave a motivation to cooperative sector to face challenge for a desired change at farm level in the system of farming with Agro-technology. If we examine socio-economic changes from 1950 to 2012 or from first five year plan to 11th five year plan through applied cooperative credit and banking, the desired changes are found based on multiple variables with varieties of risks (challenges for changes). This scene is inviting attention of planners, surveyors, researchers and the governments to identify factors or obstacles affecting in achieving the desired results.
Nobody has made any attempt on this issue at a great length till date to identify the factors affecting the quality of socio-economic change operation of cooperative credit and rural banking practices. There is urgent need and demand of the rural people, primary Agro-cooperative credit societies and applied cooperative banking to identify the problem raising factors and discover reliable and valid solutions to achieve the desired goal in the desired time. Therefore, an attempt is needed to make on this issue. The present study aims to work on this issue at a great length. Objectives of the study
Broadly speaking, this study has main following objectives:- 1. To identify/ analyse the reliable and valid factors affecting the working of applied cooperative credit and banking at grassroots level and also to identify socio-economic changes at farm level and; 2. To explore practical possible solutions as remedial measures to solve the problems at grass root levels, to do socio-economic upgradation of farmers and their farming with help of modern Agro-technology and rational farm financing. Research Design The present study is going to do Exploratory-cum-Descriptive research work.
It is a systematic and purposeful empirical enquiry; it includes surveys and fact-findings enquiries of different kinds. The main characteristics of this method are that the researcher has no control over the variables. It only reports what has happened or what is happening. In which the researcher does not have direct control over independent variables either what has happened or what is happening. But in this solution by the research an attempt has to make to search reliable and valid factors to discover a good solution for solving the problems. Location of the Universe/ Population
B. R. College Agra of the Agra University as centre for the study and district Mewat Haryana has been selected by the purposive sampling method as definite universe of the study. Sampling design:- Sample selected by multistage stratified disproportionate random sampling. Total number of farmers members involved in CCR scheme in Agro-cooperative credit and banking are 380. Their size group and covered credit operation is given as under:- Size groupSize group of farmersTotal Farmers membersTotal Land covered by members in acresSample fractionTotal farmers A0-2. acres14028020%700 B2. 5-5. 0 acres12036020%600 C5. 0-7. 5 acres10060020%500 D7. 5-above acres2012020%100 Total members380126020%1900 Data Collection: – Research instruments:- Schedule-cum-questionnaire has been used for data collection. The Complete participant observation method and interview technique has been used for data collection. We have done pretesting at small scale to judge the effectiveness of the research instruments. It has been found very correct and useful for the work.

Impact of Applied Agro-Cooperative Credit and Banking on Farmers and Farming

Calculate the Price

Approximately 250 words

Total price (USD) $: 10.99

Categories
Credit

Micro Credit System of Asa

Micro Credit System of Asa.
CHAPTER -1 Introduction 1. 1 Reason of doing the assignment Our course instructor Md. Robiul Islam announced to take an assignment instead of two quiz examination. Although this report is mainly for our academic purpose but we think that it will not increase our grade but also will be helpful in our practical lives. For this reason we have completed this report on micro-credit system of ASA. 1. 2 Scope of the study This assignment of preparing a report on the MCS of ASA will help in many sectors other than the academic sectors. Such as: For gathering knowledge about micro-credit system this whole work is very helpful • In our professional sector we can use this experience • The information of this report can be applied in our other courses • We can use this skill for financing various sectors in our practical life • In future it will be easy for us to start a micro-loan financing organization because we have acquired knowledge about micro-credit. 1. 3. Objectives of the Study The objective of the proposed study is to find the micro credit system of ASA.
The following are the objectives of the study: To know the overall function of ASA for the contribution of advancement of micro-credit system in the country • To learn about the consequences of micro-credit practices on the performance of ASA. • To develop knowledge about the systems approach to loan distribution pattern. • To get an idea about the selection of the beneficiary. • To acquire knowledge about the process of matching loan package with requirements of the clients. • To know about orientation process of new loan package. To analyze special motivational techniques to the clients for taking loan. • To know about the weakness, strength, opportunity and thread of the micro-credit of ASA. • To recommend necessary steps for overcoming such problems of ASA. 1. 4 Research Methodology THE POPULATION SAMPLED FOR THE STUDY WAS LIMITED TO THE ASA, ONE OF THE LEADING MICRO-FINANCE ORGANIZATIONS, WHERE I WAS ASSIGNED TO PERFORM THE STUDY. 1. 4. 1 AREA OF DATA COLLECTION: • VILLAGE-PITALGONG, THANA-RUPGONG, DISTRICT-NARAYANGONG • ASA CENTRAL OFFICE:
ASA TOWER, 23/3, KHILJI ROAD, SHYAMOLI MOHAMMEDPUR, DHAKA-1207, BANGLADESH, 1. 4. 2 SOURCES OF DATA COLLECTION: IN ORDER TO CONTRACT THE REPORT I HAVE COLLECTED NECESSARY INFORMATION FROM TWO SOURCES A) PRIMARY SOURCES OF INFORMATION B) SECONDARY SOURCES OF INFORMATION a) PRIMARY SOURCES OF INFORMATION: THE PRIMARY DATA WILL BE COLLECTED FROM THE FOLLOWING SOURCES: • FACE TO FACE CONVERSATION WITH THE RESPECTIVE CLIENTS OF ASA • ORAL INTERVIEW OF THE RESPONSIBLE OFFICERS RELEVANT DOCUMENTS STUDIES AS PROVIDERS BY EARLY RESEARCHERS • OBSERVATION OF THE WORK OF THE FIELD WORKERS OF ASA b) SECONDARY SOURCES OF INFORMATION: THE SECONDARY DATA WILL BE COLLECTED FROM THE FOLLOWING SOURCES: • ANNUAL REPORT OF ASA • A BRIEF ON MICRO CREDIT SYSTEM FOR CLIENTS OF ASA • VARIOUS DOCUMENTS OF THE ASA • EXTENSIVE LITERATURE SEARCH ON THE BASIS OF THIS DOCUMENT OF PUBLICATIONS. I HAVE ASSIGNED THESE REPORT AND DOCUMENT IN THE LIGHT OF ANALYTICAL REVIEW.

I HAVE NEED SOME STATISTICAL TOOLS, GRAPHICAL PRESENTATION AND TABLE TO MAKE THIS RESEARCH REPORT. THESE ARE GIVEN THE OVERALL PICTURE OF THE MICRO CREDIT SYSTEM OPERATED BY ASA. 1. 5. LIMITATIONS OF THE STUDY THIS REPORT IS OUR FIRST ASSIGNMENT OF OUR FINANCE COURSE CURRICULUM. WE THE STUDENTS OF FACULTY OF AGRI-BUSINESS MANAGEMENT JUST HAVE COMPLETED OUR 2ND YEAR. SO IN PERFORMING THIS REPORT OUR LACK OF PROPER KNOWLEDGE GREATLY INFLUENCED IN THIS PERFORMANCE. BESIDES ABOVE HAVE TO FACE SOME OTHER LIMITATIONS ARE: • LACK OF AVAILABILITY OF DATA IMPROPER COMBINATION AMONG VARIOUS DEPARTMENTS • TIME IS A LIMITATION THAT WOULD MOSTLY WITH STANDS A COMPREHENSIVE STUDY ON THE TOPIC SELECTED. • UP TO DATA INFORMATION WERE NOT AVAILABLE • UNWILLING TO GIVE INFORMATION MORE BECAUSE OF EXTRA HARASSMENT WITHOUT THEIR RESPONSIBILITY • BEING BUSY ALSO ANOTHER REASON OF NOT GIVING MORE INFORMATION • FINALLY THIS IS MY FIRST JOB EXPERIENCE TO MY KNOWLEDGE ESPECIALLY IN SUCH A RESEARCH STUDY IS LIMITED. CHAPTER – 2 LIETERATURE REVIEW
This paper broadly describes the whole system of micro-credit financing practice operated by ASA. ASA has emerged as one of the largest and most efficient Microfinance Institution (MFI) in the world and has been working relentlessly to assist the poor since its inception in 1978. The major drive behind ASA is to gradually eradicate poverty from society. During its early years, ASA undertook various development programs like awareness building for social action, training local birth attendants, capacity building of journalists, etc.
In the mid-80’s it introduced new programs working in the sector of health and nutrition, education, sanitation, etc. It was at this stage that ASA introduced micro-credit as a pilot project. From its hands on experience in the field, and by evaluating the impact of development assistance, ASA realized that financial solvency, to a great extent, is what the poor need to bringing positive changes in their lives. In 1992, this paradigm shift led ASA to focus solely on microfinance as its tool in fighting poverty.
ASA wanted to evolve its operations to become self-reliant and move away from depending on donor funding and grants – ASA’s Microfinance Model gradually transformed itself to become the globally renowned “ASA Cost–effective and Sustainable Microfinance Model. ” Following this model, ASA became self-sustainable within a short p of time and the organization declared itself a “self-reliant MFI” in 2001. This model, that has been practiced and perfected in the field by ASA, has proved effective in making a branch self-reliant within 12 months.
Any MFI that adopts this model for operations becomes sustainable within the shortest possible time. It has been adopted by many MFIs around the world to get result within the shortest possible time. As of June 2008, ASA has successfully extended its outreach in Bangladesh through 3,324 branches and its 25,125 staff works relentlessly to serve more than 7. 13 million clients in 72,204 villages. In April 2006 ASA formulated its 10-years IT Roadmap – the first step of which called for automating its branch operations by December 2007.
With this target, a world-class software called “ASA Microfinance Management System” (AMMS) was developed by an in-house team of software developers and IT professionals within twelve months. A pilot deployment was done in 89 ASA district offices once AMMS was ready to a beta release. From the experience gathered by this pilot rollout the IT Team successfully deployed a full fledged branch automation system to 3200 of ASA’s branches at one go. Starting in June 2007 this deployment was successfully completed by December 2007, covering the branches within just seven months.
Since 1993, ASA has been providing Technical Assistance (TA) to NGO-MFIs around the world as a microfinance consultant. Thus far, ASA has worked in more than 17 countries around the world, including: • Laos • Cambodia • Tajikistan • Jordan • Ethiopia • Myanmar • Afghanistan • Peru • Mauritius • Indonesia • Yemen • India • Pakistan • Sri Lanka • Nigeria • Philippines • Vietnam A considerable number of visitors and trainees also visit ASA every year with a view to acquiring knowledge about implementation of ASA activities.
In 2005 ASA has established CMI, a microfinance investment fund and makes equity investments in high potential and emerging MFIs in Asia and Africa. CMI’s objective is to accelerate the growth of a number of MFIs by strengthening their financial resources and providing them with the ASA expertise needed to expand and optimize their operational efficiency. ASA has established ASA International (ASAI) (www. asa-international. com) to implement the ASA Model of Microfinance Operations in different countries around the world.
Experienced staff from ASA has been seconded to these institutions to train local staff and design policies and procedures. It is expected that each of these MFIs will, over time, emerge as the market leader in terms of efficiency and scale in each of these markets. This should stimulate competition and encourage other MFIs to reduce their operating expenses and thereby reduce the costs of borrowing for the clients. ASA cooperates with small local NGO-MFIs with the objective of making them self-reliant so that they can independently serve the poor in remote areas.
ASA provides these partner NGOs with technical support as well as loan funds on soft terms. Under this program, ASA has more than 30 partner NGO-MFIs all over the country. For fulfilling the goal of poverty alleviation ASA has introduced these above programs for being self-reliant and introduced, depending on these projects. THEORITICAL BACKGROUND Foundation Phase (1978-1984) ASA was founded in 1978 with the aim of helping the poor organize & empower themselves so that they might establish their political and social rights for a just society.
At that time ASA deliberately avoided lending arguing that loans would distract the rural poor from their fight for a just society. ASA defended the idea that political and social reform were needed before credit. Activists, like ASA’s President Md. Shafiqual Haque Choudhury, who were already working for NGOs founded ASA with assistance of like minded development practitioners. They were dissatisfied with the approach of the then NGOs and wanted a more radical, people-centered approach. They decided to create an alternative by establishing a new NGO – ASA. ASA received formal registration from the government in 1979.
To reach its goal of empowering the poor, ASA stressed the need for building people’s organizations, or groups, through mobilizing landless rural poor. Different programs were undertaken including: • awareness building for social action • legal aid and awareness build-up program • training program • communication support service program • training for rural journalists During this time, the group members of ASA conducted a series of social actions to fight against social injustices, gain their rightful access to institutional / public resources, obtain just wages, enter into the local power structure and have access to land.
Although the general impact of the foundation phase was positive, the programs suffered from substantial limitations: • group members were not able to get a just wage for a long time since the local elite recruited low wage laborers from outside • impact of natural disaster and the huge inflows of aid obstructed the implementation of the social action programs, since the people began to prefer the economic way of solving their problems rather than through conflict • idea of apex organizations, built up from and representing groups of the poor, was not sustainable.
Being poor, members entered these bodies with the intention of having more facilities and fulfilling their self-interest In the light of these limitations, ASA adopted a revised approach to make the development efforts more effective. Reformative Phase (1985-1991) Since a demand for programs of economic activities was rising, ASA decided to introduce an integrated approach, which included social plus income generation.
But although the new approach gave special emphasis on economic activities, ASA stressed the importance of social development aspects. In this phase, empowerment was made through the improvement of health, nutrition, education, sanitation and by credit available to poor. The focus was shifted to women, who play an important role in the field of development.
Again, the reformative phase brought out positive changes in the livelihood of the rural poor, but some constraints were also identified: • many ASA members left the organization to join other organizations, which provided more appropriate products for their needs of credit for income generation purposes • development and implementation of integrated programs took a long time and the group members had a long waiting period to obtain credit • the absence of funds led to uneven distribution, which meant that a few members could obtain large amounts of credit while others got nothing As many ASA group members left ASA to join other NGOs who were providing credit for income generation, ASA decided to specialize itself in microfinance activities. Program Specialization Phase (1992- till date) The main reason for specialization was for ASA to reorient itself to cater to the needs of its members in an effective way. This took the form of providing credit plus programs that eventually led to ASA providing a full microfinance package. The main elements of ASA approach are: • savings and credit for income generation in a cost-effective manner • Member Security Fund (Mini Life Insurance) to shield member from unforeseen hardship The main objectives of this phase are: to alleviate poverty and improve the quality of life of the landless and the asset less rural poor by providing them with appropriate and affordable financial services • reduce the dependence of the poor on the local moneylenders • facilitate additional income earning at micro level for improving the economic status of the women • empower the landless and disadvantaged people In 2001, ASA became financially self-sufficient and does not accept any grants or donations from outside sources since then. CHAPTER – 3 ORGANIZATIONAL OVERVIEW ASA is a highly reputed organization of Bangladesh which operates in many countries all over the world. As it is a micro-credit financing institution it mainly invests by lending small amount of money to the muss people without mortgage. Through their micro-loan policy they have given access to the poor segment of the society to take loan and investing that loan flourish their lives. 1. Historical development of ASA:
Many micro-finance institutions (MFIs) around the world are willing to replicate ASA’s cost-effective and sustainable micro-finance model. Because ASA is working hard in the sector of micro-finance since its establishment in 1978. To give the access of micro-credit to the poor people of Asia and Africa, a global equity investment fund called “Catalyst Microfinance Investors” (CMI) was established in August 2005. On the other hand, people of certain countries are not well aware of the micro-finance programs and this lack of awareness is considered as a serious obstacle of proliferation of MFIs. To meet all of this challenges, ASA foundation (AF) was established in September 2006 registered as a 501(c)3 organization in the state of New York in 2007.
The secretarial office of AF is in New York, USA. 2. Source of fund of the organization: ASA’s work is funded with the support of generous donors. It is a non-profit organization and welcome funds from different sources which will be donated to various small and emerging MFIs around the world for their quick and sustainable development. Through a gradual process of reducing dependency on foreign funds, ASA has established itself as a financially self-reliant MFI and does not accept any grant or donation since 2001. ASA’s total fund for providing microfinance services was BDT 2. 9 billion (USD 435 million) at the end of 2007. [pic] The sources for this fund were: • BDT 1. billion of ASA’s own funds (including reserve fund) • BDT 400 million PKSF loan (this loan was taken earlier) • BDT 4,604 million member’s savings • BDT 4,480 million member’s security fund • BDT 117 million CORDAID loan • BDT 434 million loan insurance • BDT 769 million Debt Management Reserve (DMR), and • BDT 1,965 million from other sources such as staff security, provident fund, etc. 3. Functions of the organization: The foundation’s functions will be to identify donors that wish to support technical assistance in the micro-finance industry and oppose applications from developing MFIs seeking effective TA services. 4. Management of the institution:
With the view to selecting a sample size, multi-stage sampling of management until from the administrative division to members has been done. From all of the 6 administrative divisions of Bangladesh, 12 districts were taken by selecting 2 districts from each division. Then 4 ASA branches from each district were selected . among the branches, 2 were taken from rural and 2 from urban areas. 4 loan offers from each branch were taken. Ex:-4 * 4 = 192 loan officers were selected and 4 groups of each loan officers were taken. 3. 5 Vision, mission and objectives of ASA 3. 5. 1 Vision of ASA The vision of ASA is to establish a poverty free society. 3. 5. 2 Institutional Mission of ASA
The institutional mission of ASA is to support and strengthen the economy at the bottom of the socio-economic pyramid by facilitating access to financial services for the poor, marginalized and disadvantaged. 3. 5. 3 Objectives of ASA The overarching objectives of ASA are to alleviate poverty and improve the quality of lives of the landless and assetless rural poor by providing them with access to financial services. 3. 6 Origin of ASA At the end of Bangladesh’s War for Independence in 1971 the country went through a very complex social and political upheaval. The country needed major infrastructure reconstruction but the overall situation was not suitable for conducting nation building activities. Indeed, the country was faced with instability in the political, social, cultural and economic fields.
The main political constraints were frequent agitations, political unrest and numerous changes of governments, which were too inexperienced to keep the political situation stable. In such circumstances, policy formulation or planning for development was difficult. Moreover, the traditional bureaucratic administrative structure, which followed a top-down approach for development, was not connected with the actual socio-economic reality since the institutional structures could not reach the downtrodden people. With this as the backdrop, a new kind of organization emerged that focused most of its work in the development sector. Some of those national and international organizations, called NGOs (Non-Government Organizations), started different programs to help the poor to introduce positive changes in their lives.
Following the philosophy and the needs of the times, ASA was established in 1978 to materialize these goals through different kinds of development programs. 3. 7 Structure of the Organization ASA is structured in two distinct tiers: the central office and branch offices in the field. Bridging the central and branch offices are the District Offices 3. 7. 1 Head Office Composition: The President of ASA directs the personnel of different sections, which constitute the central office including: Human Resource Management (HRM), Operation, Finance & Management Information System (MIS) Section, Accounts Section, Audit Section, Research and Documentation Section and IT. 3. 7. 2 Branch Composition:
Each branch has one Branch Manager (BM), one Assistant Branch Manager (ABM) and 4 Loan Officers (LO) on average. 3. 7. 3 District Composition: Each district office has District Officials including the District Manager (DM). Assistant District Manager (ADM) and Regional Manager (RM) sit in the different geographically important branches. 3. 8 ASA –Sustainability ASA has been widely recognized one of the world’s largest sustainable, cost-effective and fully grants free Micro Finance Institutions (MFI). Over the last 16 years, ASA has achieved highest Operational Self Sufficiency (OSS) and Financial Self Sufficiency (FSS) within a short period of time.
ASA cost effective model also proven itself in different countries in Asia and Africa. ASA branches have proved its capacity to reach a break even point within a year. ASA has maintained high self sufficiency from the beginning of operations and it continue to date. [pic] ASA has been rated to have the highest OSS and FSS compare with Global MFIs and Asian Largest FIs. 3. 8. 1 How does ASA achieve these numbers? By having: • Lean structure • Faster recruitment and costless informal training • Simplification and Standardization • Less over head cost and standard costs structure • Maximum utilizations of fund • Guided operation based on Manual • Cost control steps • Innovative management 3. 8. Highest productivity and portfolio quality (data as of June 2008) |# |Indicators |Results | |1 |Staffs ratio: head office versus / field |1:106 | | |(total staffs 27142 and head office 257 only ) | | |2 |Rate of recovery |99. 48% | |3 |Portfolio at risk > 30 days |5. 17% | |4 |Portfolio in arrears |2. 90% | |5 |Cost per money lent |0. 46 | |6 |Cost per loan made |$5. 80 | |7 |Loan loss ratio |0. 20% | |8 |Reserve ratio |2. 97% | |9 |Average clients per loan officer |461 | |10 |Average borrower per staff |206 |11 |Average member per branch |2,146 | |12 |Average outstanding loan  per Loan Officer |$31,382 | |13 |Operational Self-Sustainability |179. 14% | |14 |Financial Self-Sustainability |122. 41% | 3. 8. 3 How does an ASA Branch break-even so quickly? ASA’s microfinance model, known as the ‘ASA Sustainable and Cost-effective Microfinance Model’ is different from other models and has already been proven as one of the best in the world.
This model is simple as well as cost-effective. This cost effective method, from Branch Office to the Central Office ensures ASA’s dedication towards its mission for reducing poverty. Each Branch is managed by a Branch Manager (BM), One Assistant Branch Manager (ABM), 4 Loan Officers (LO) and a Peon who are responsible to conduct all activities of the branch smoothly. On an average a mature ASA branch caters to around 2,000 group members and every new branch demands Bangladeshi Taka 6 (six) million (USD 88,000) to start its activities. Once a branch starts operations, it takes (9-12) months for it to break even and become self-sustainable: [pic] The key assumptions in this model are: there are 4 Loan Officers per branch, each with a 500 client target achieving a total of 2,000 clients within a year for the branch • each client receives BDT 10,000 (USD 147) as their initial loan • Loan loss Provisioning is at 0. 5% • Service Charge (interest rate) is 12. 5% flat, calculated for a 45 installment loan spread over 12 months • each member deposits BDT 20 per week as savings and pays BDT 20 as membership fees when joining ASA 3. 9 ASA’s Position in Bangladesh ASA benchmarks itself against its peer NGO MFIs in Bangladesh on a continual basis – this is both to reorient itself to better serve it clients and to keep itself relevant in the Bangladesh development context.
According to the Annual Microfinance Statistics of Bangladesh (Volume-19, December 2006) published by the Credit and Development Forum (CDF) there are 611 NGO MFIs in Bangladesh (including ASA). ASA’s standing in the sector is as follows: |  |611 NGO MFIs |ASA |% | |Members |16 million |5. 16 million |32% | |Cumulative Loan Disbursement |US$ 8,171 million |US$ 2,593 million |32% | |Loan Outstanding |US$ 1,076 million |US$ 309 million |28% |
As can be seen from the statistics above: • ASA’s clients account for 32% of the borrowers in the NGO MFI sector • ASA accounts for 32% of ALL loans given out by the NGO MFIs • ASA accounts for 28% of the portfolio outstanding in the microfinance sector in Bangladesh ASA Branches throughout the Country up to December 2007 [pic] ASA Branch Listing CHAPTER – 4 INVESTMENT PROCEDURE As an innovative institution ASA has multidimensional investments, all of which were developed based on the needs of its clients. The micro loan products include: • Small Loans for female clients • Small Loans for male clients • Small Business Loans • Small Entrepreneur Loans (SEL) Supplementary Loans and Business Development Services (BDS) • Loans for Hardcore Poor • Short Term Loans • IT Loans • Agri-business Loans • Education Loans • Monga (famine) Loans • Interest Free, Flood and Rehabilitation Loans 4. 1 Micro-credit investment packages: i. Small Loan for Female Clients; accounts for 78% of total portfolio |Eligible Criteria |Initial Maximum Loan Size |Interest rate |Loan Term |Repayment Mode |Incremental increase| | | | | | |of loan size | |Economically active poor to|BDT 10,000-20,000 or US$ 150-300 |12. % (flat) |45 weeks |Weekly |BDT 4,000 or US$ 60 | |undertake or strengthen |depending on the economic | | |(37 equal weekly |(maximum) in each | |income generating |potential of area and client’s | | |installments) |loan cycle | |activities |capacity as well | | | | | ii. Hardcore Poor Loan; accounting 1% of total portfolio |Eligible Criteria |Initial Maximum |Interest rate |Loan Term |Repayment Mode |Incremental increase | | |Loan Size | | | |of loan size | |A flexible loan product for |BDT 5,000 or US$ |12. % (flat) |Flexible; 4, 6 |Flexible; Monthly, |BDT 2,000 or US$ 30 | |hardcore/ultra poor to match their |75 | |or 12 months |quarterly and |(maximum); annual | |irregular pattern of income | | | |half-yearly | | |generating activities | | | |installments or at a | | | | | | |time | | iii. Small Business loan; accounts for 12% of total portfolio |Eligible Criteria |Initial Maximum |Interest rate |Loan Term |Repayment Mode |Incremental increase | | |Loan Size | | | |of loan size | |A loan product for informal or formal |BDT 50,000 or US$ |12. % (flat) |One Year |Flexible; Weekly or |BDT 7,000 or US$ 100 | |micro enterprises to promote |735 | | |Monthly |(maximum); in each | |production/enhance business activity and| | | | |loan cycle | |employment generation | | | | | | iv. Small Entrepreneur Lending (SEL); accounts for 6. 5% of total portfolio |Eligible Criteria |Initial Maximum |Interest rate |Loan Term |Repayment Mode |Incremental increase| | |Loan Size | | | |of loan size | |A loan product for informal or formal|BDT 400,000 or US$|12. % (flat) |12/18/24 months |Monthly |Not fixed; depends | |small/micro enterprises to promote |5,900 | | | |on projects | |production/enhance business activity | | | | | | |and employment generation. This | | | | | | |product also caters to Information | | | | | | |Technology related activities | | | | | | v. Agri-business Loan; account to 1. 5% of total portfolio Eligible Criteria |Initial Maximum |Interest rate |Loan Term |Repayment Mode |Incremental increase| | |Loan Size | | | |of loan size | |A loan product for supporting |BDT 400,000 or US$|12. 5% (flat) |12/18/24 months |Monthly |Not fixed; depends | |agribusiness related activities |5,900 | | | |on projects | vi. Small Loan for Male Client (Spouse or Family Head of Female Client) |Eligible Criteria |Initial Maximum |Interest rate |Loan Term |Repayment Mode |Incremental increase | | |Loan Size | | | |of loan size | |A special loan product designed for the |BDT 4,000 or US$ |12. % (flat) |One Year |Monthly (12 equal |BDT 1,000 or US$ 15 | |spouse or family head of ASA’s female |60 | | |monthly installments)|(maximum); annual | |client to cater to the need for | | | | | | |strengthening supplementary/main income | | | | | | |generating activities of the family by | | | | | | |injecting some working capital. It also | | | | | | |intends to support rural households for | | | | | | |their agricultural activities during | | | | | | |seasons | | | | | | vii. Business Development Loan (part of BDS) Eligible Criteria |Initial Maximum |Interest rate |Loan Term |Repayment Mode |Incremental increase| | |Loan Size | | | |of loan size | | | | | | | | |Defaulters who lost projects due to |BDT 5,000 or US$ |12. 5% (flat) |One Year |Flexible; Weekly or |Not fixed; depends | |factors beyond their control and have |75 | | |Monthly |on progress and | |willingness to pay. Mainly to cater to | | | | |capacity | |the need of small and small business | | | | | | |loan clients’ | | | | | | viii. Rehabilitation Loan Eligible Criteria |Initial Maximum |Interest rate |Loan Term |Repayment Mode |Incremental increase| | |Loan Size | | | |of loan size | |A loan product for clients’ affected |BDT 1,000 or US$ |Interest free |12 months |Flexible; Weekly or |NA | |by natural disasters e. g. , flood, |15 | | |Monthly | | |cyclone etc | | | | | | ix. Short Term Loan Eligible Criteria |Initial Maximum |Interest rate |Loan Term |Repayment Mode |Incremental increase| | |Loan Size | | | |of loan size | |A loan product of short duration for |BDT 100,000 or US$|12. 5% (flat) |3 months |Flexible; Monthly or at a|NA | |clients’ having business activities in|1,470 | | |time | | |need during seasons | | | | | | x. Scarcity Loan Eligible Criteria |Initial Maximum |Interest rate |Loan Term |Repayment Mode |Incremental increase| | |Loan Size | | | |of loan size | |A loan product for clients’ in |BDT 3,000 or US$ |12. 5% (flat) |3 months |Flexible; Monthly or at a|NA | |scarcity during lean season; Loan can |45 | | |time | | |be used for both asset building before| | | | | | |the lean season and consumption during| | | | | | |the lean season | | | | | | xi. Education Loan Eligible Criteria |Initial Maximum |Interest rate |Loan Term |Repayment Mode |Incremental increase| | |Loan Size | | | |of loan size | |A loan product to support clients’ |BDT 3,000 or US$ |10% (flat) |One Year |Weekly |NA | |children studying in 8th grade and |45 | | | | | |above | | | | | | 4. 2 Investment information updates: Cumulative disbursement for all these loan products from ASA’s inception up to December 2007 is around US$ 3,600 million. Up to June 2009 ASA’s cumulative Loan disbursement has been TK. 345,161 million (US$ 5,002 million) while loan outstanding (principal) is TK. 23,687 million (US$ 343 million) among almost 4,573,222 borrowers. At the end of 2008 ASA’s Operational Self Sufficiency (OSS) was 143. 61%, Financial Self-sufficiency (FSS) 114. 3% and rate of loan recovery 99. 59%. ASA maintains savings programs and member’s security funds (Mini Life Insurance) with the view to helping the poor absorb unexpected shocks of calamities/disasters. Members are allowed to withdraw their savings whenever they require and interest is provided on their deposits. As of December 2007, the savings balance (savings and security deposits) of ASA’s clients was around US$ 131 million. ASA also provides its clients with one time donation for medical treatment of serious ailments and surgical procedures – including cancer, acid burns, cardiac operations, backbone surgery, brain surgery, kidney damage, cesarean delivery, etc.
Client do not need to deposit money to receive this assistance all of ASA’s clients are automatically eligible for this. The budget of this assistance program in 2008 is around US$ 700,000. 4. 3 Sub-organizations of investment 4. 3. 1 Catalyst Microfinance Investors (CMI): Catalyst Microfinance Investors (CMI) (www. catalyst-microfinance. com) was established by ASA and Sequoia, a Dutch corporate finance and private equity firm, in 2005. CMI is a microfinance investment fund and makes equity investments in high potential and emerging MFIs in Asia and Africa. By the end of December 2007 CMI had raised a total funding commitment of $ 125 million.
Investors behind CMI include high net-worth individuals, microfinance funds and institutional investors – such as banks and pension funds. CMI already has provided loan and made equity investments to a number of MFIs in Sri Lanka, the Philippines, Nigeria and Ghana. 4. 3. 2 ASA International (ASAI): ASA has established ASA International (ASAI) (www. asa-international. com) to implement the ASA Model of Microfinance Operations in different countries around the world. ASAI is primarily funded by CMI and is supported by a number of debt providers in individual countries. ASAI has established greenfield operations in: India, Nigeria, Pakistan, Philippines, Sri Lanka and Ghana.
ASAI operations in each of these countries will follow the highly efficient ASA model – adjusted to meet local condition and unique needs of the people there. 4. 3. 3 Partners: ASA has NGO-MFIs all over the country. This channel created by ASA has also made it possible for partner NGO-MFIs to access soft loan funds from donor and other funding organizations. It is due to ASA’s earnest efforts that CORDAID Netherlands has been extending financial support to 12 partner NGO-MFIs. CORDAID has already approved an amount of 1. 16 million Euros for the year 2005-08 as soft loans for the partner NGOs to implement microfinance programs. ASA took the responsibility to channel this loan fund to NGO MFIs and ensured its proper utilization by providing these partners with technical assistance.
All of these partners NGO-MFIs are building their capability to access funds from PKSF (the apex microfinance wholesale funding institution in the country) and from local commercial banks. 4. 3. 4 ASAUB Though as a micro-credit institution ASA’s main investments are on micro-loan products, but another investment project is The ASA University of Bangladesh. The University started its academic activities in May 2007 after getting approval from the Government of Bangladesh and the University Grants Commission (UGC). Till December 2007, some 1300 students have been enrolled and are attending classes. 4. 4 Micro-credit activities of ASA 4. 4. 1 Branch activity
ASA is a decentralized institution, each branch acts as its own cost and profit center, which encourages efficient use of resources. Responsibility lies on the branch to achieve the most it can at the least cost possible. A daily revenue stream in the form of loan repayments from clients allow each branch to disburse loans, buy materials, etc. The branches have the freedom to carry out all these activities as long as these conform to ASA’s Operations Manual. This manual is one of the most important facilitators for efficiency in ASA. Each branch has one Branch Manager (BM), one Assistant Branch Manager (ABM) and 4 Loan Officers (LO) on average.
Each LO is responsible for overseeing between 18 and 24 groups comprising of 360 – 550 members. Depending on the number of LOs working in a branch, each branch can have between 72 and 120 groups totaling between 1,440 to 2,750 members. Branch Offices do not have accountants or cashiers. LOs are responsible for maintaining daily accounts and rotate to perform the job of cashier. Branch Accounting and transactional accounts are maintained by the Branch Manager. All activities of ASA branches can be done and approved by the branch office itself, as long as it conforms to the ceilings identified by the working manual, which changes each year to keep up with all relevant variables.
Each branch prepares its own annual work plan with fiscal targets and cash flow projection. After money comes in from daily collections (savings, insurance premiums and loan installments; at approximately noon each day), the branch calculates how much it needs for daily accounts or expenditures and then deposits the rest in the bank. The bank acts as a “security guard”, because ASA branches do not have its own security. When a branch needs more money – for example when collection is not enough – it draws money from its bank account. If the branch cannot cover all its payments from its own receipts, it can then request money from headquarters.
Money may also come from other branches in the district, depending on which has  surplus. Thus, funds are distributed evenly through the entire ASA structure. 4. 4. 2 District activity Each district has a team of Regional Managers (RMs) headed by a District Manager (DM). The RM looks after 8-10 branches on average and a district with more than 60 branch offices has an additional district manager. The district manager, additional district manager and regional manager operate from a branch in their own jurisdiction located in district town/city with extra space to accommodate them; there is no separate secretariat for DM. A district consists of 20-114 branches.
The district office is in a centrally located branch of the district town/city with an extra desk for each of the District Officials including the District Manager (DM). Assistant District Manager (ADM) and Regional Manager (RM) sit in the different geographically important branches. RMs, ADMs and DMs always supervise and monitor all the field level activities. They move from branch to branch on a motorcycle provided by ASA. 4. 4. 3 Head Office activity The President of ASA directs the personnel of different sections, which constitute the central office including: Human Resource Management (HRM), Operation, Finance & Management Information System (MIS) Section, Accounts Section, Audit Section, Research and Documentation Section and IT. CHAPTER – 5 Findings of the study
From this study we could much information • Interest rate of small loan packages provided by ASA is too high for the payback ability of the borrowers. • ASA counts the Pay Back Period (PBP) from the day the loan is taken. The client has to pay the 1st installment at the day of loan taking. So, they actually cannot utilize the loan fully. • ASA authority is too much strict about the payment of loan. Their officers take hard to harder initiative to get back the repayment amount including the interest rate. • ASA is giving the opportunity to the poor people to get loan without security and prosper in life by investing that loan. ASA is helping the poverty reduction. As the micro-loan system of ASA emphasizes mainly on women, it has great effect on women empowerment. Recommendations • ASA should reduce their rate of interest. When deciding interest rate they should take into consideration the ability of the borrower. • The administration should be careful and honest so that there would not be any hidden cost. • Before granting loan to any client the officer should have detail information about his/her payback ability. • Before lending money the ASA officers should analyze the profitability of the project where the loan will be invested. • They should be flexible to the poor borrowers on the issue of the repayment of loan.
CONCLUSION ASA is committed to alleviate poverty of the poor segment of society through providing financial assistance to them. All out efforts are given to extend services through different kinds of credit, savings and insurance programs. The ASA Sustainable Micro-finance Model has achieved worldwide reputation for its cost-efficient, fast expanding and effective management skill. ASA offers credit,savings and insurances for its clients. At present, more than 6. 6 million members have registered their name with ASA and they are provided with financial assistance. They invest the loan money in different Income Generating Activities run by themselves.
Initially, they use the profit to repay the installments. A small part of the profit is also used to buy necessary things for the family. After the payment of installments they get opportunity to use the profit for themselves. A large number of them have become self-reliant gradually through running the income generation activities. So after all these assessments we can say that, ASA programs have a very positive impact on the lives of people. BIBLIOGRAPHY 1. Student handout provided by ASA 2. Student information form provided by ASA 3. Prior research report. 4. Brochures of ASA 5. [email protected] org. bd 6. www. google. com. 7. annual report of ASA of 2009 THE END

Micro Credit System of Asa

Calculate the Price

Approximately 250 words

Total price (USD) $: 10.99

Categories
Credit

The Socio Economic Impact Of Credit Environmental Sciences Essay

The Socio Economic Impact Of Credit Environmental Sciences Essay.

Low productiveness coupled with corruptness in the executing of authorities policies and the trouble by aquaculture fish husbandmans to entree recognition which is an of import ingredient for development, increased productiveness and improved supports necessitates this survey. The survey will be conducted to measure the Socio-Economic Impact of Credit on Aquaculture Fish Farmers in Ogun State, Nigeria. This is with the position to measure the consequence of the fish husbandmans ‘ socio-economic features and institutional factors that could impact fish production from aquaculture in the survey country.
Primary informations will be generated through the disposal of semi-structured questionnaires on indiscriminately selected aquaculture fish husbandmans who benefitted from recognition and those who did non ; such that they are equally spread over the 20 ( 20 ) Local Government Areas of Ogun State, Nigeria. The husbandmans will be stratified into donees of recognition ( 40 ) and non-beneficiaries of recognition ( 60 ) , sampled on the footing of three ( 3 ) aquaculture fish husbandmans who benefitted from recognition and three ( 3 ) aquaculture fish husbandmans who did non profit from recognition per Local Government Area ( LGA ) .
The primary informations generated will be scored and the per centums of the parametric quantities will be calculated suitably and presented in frequence tabular arraies. The chief statistical tools that will be employed are average, per centum, whole norm and frequence counts. Descriptive statistical method and illative statistics will be employed to discourse consequences. The consequences would be used to proffer recommendations for betterment, based on findings.

Introduction.
The general aim of this survey is to find the consequence of the fish husbandman ‘s socio-economic features and institutional factors that could impact fish production from aquaculture in the survey country Figs. 1, 2 and 3 ) .
The major purposes of the survey are as follows:
I. Measure the socio-economic features of fish husbandmans who benefitted and those who did non profit from recognition.
two Evaluate the impact of recognition usage on the productiveness of aquaculture in the survey country.
three. Measure the degree of production of fish husbandmans who benefitted from and those who did non profit from recognition.
four. Identify the jobs and/or factors that militate against the coveted impact of recognition on fish husbandmans in Ogun State, Nigeria.
v. Identify the beginning ( s ) of recognition and form of expense to the fish husbandmans.
six. Proffer recommendations for betterment, based on findings.
In order to accomplish the above enunciated major purposes of the survey, the research inquiries for this survey are therefore formulated as follows:
I. “ Do aquaculture angle husbandmans with entree to recognition have a better socio-economic life? ”
two. “ Does entree to recognition impact on the productiveness of aquaculture fish agriculture? ”
three. “ How does the beginning and form of recognition disbursement impact on the overall socio-economic life of aquaculture fish husbandmans? ”
In Nigeria, agricultural funding has long been considered a tough nut to cleft. Even when available, entree to recognition is hard for husbandmans. However, there has been renewed involvement by the Federal Government in get the better ofing the obstructions that hinder entree to agricultural obstructions, as finance is an of import ingredient for development, as it allows agricultural communities to go successful in making supports and better nutrient security.
Despite assorted attempts by the Nigerian authorities at doing good agricultural policies ; through strategies, programmes and establishments, with agricultural recognition strategies, which has been working for many old ages, the public presentation of the sector has non fared better than it was before independency. This has been diversely blamed on the authorities ‘s inability to supply equal budgetary allotment and funding, coupled with corruptness in the executing of the policies ( Eze, C. et Al. 2010 ) .
It is hence pertinent to determine the impact of recognition strategies on the donees, and in peculiar the piscaries sector. It is against this background that this survey is designed to measure the socio-economic impact of recognition on aquaculture fish husbandmans in Ogun State, Nigeria.
Relation to Previous Research.
Though modern aquaculture in Nigeria is of recent pattern, artisanal fishermen and angling communities have for coevalss practiced traditional methods of fish nurturing in tidal pools and inundation fields ( Dada 2007, 1975 ) . FAO, 2003, reported that Nigeria contributed 6.4 % to agricultural production in Africa in twelvemonth 2000, with domestic fish production from aquaculture increasing from 4.5 % in 1999 to 5.5 % in 2000 ( Table 2 ) . Although there is considerable possible for aquaculture in Nigeria, the present part to domestic fish production from this sector is instead low. Out of the estimated one-year production of 467,098 dozenss in 2000, less than 10 % came from aquaculture ( Federal Department of Fisheries, 2003 ) .
In malice of the potency of aquaculture, there are tonss of jobs militating against its development. Prominent among these are hapless choice fish seed and provender, hapless substructure, unequal proficient know-how and recognition ( Olaoye et al. , 2011 ) . Credit which is of great importance to the nutriment of fish agriculture and agricultural development in Nigeria is nevertheless missing in the strategy of things ( Onwuka, 2006 ) . Even when available, entree to recognition is hard for husbandmans in the rural countries despite the fact that it is an indispensable input in agricultural production ( Olaoye, 2010 ) . This could be attributed to miss of information and indirect securities among husbandmans and administrative bureaucratic bottle cervixs.
Out of despair to transform the state ‘s agricultural sector, the Federal Government of Nigeria has since the early 1970s, embarked on significant capital investing programmes in agribusiness, based on the belief that recognition is the “ all in all ” productive input required by husbandmans to transform their productive capacity ( Olowa et al. , 2011 ) . In position of the failed yesteryear recognition strategies and acknowledgment of the of import function recognition dramas in agricultural development and sustainability, prompted the Federal Government of Nigeria to set up recognition strategies such as ; the Agricultural Credit Guarantee Scheme ( ACGS ) and Agricultural Credit Support Scheme ( ACSS ) , amongst others ; to guarantee husbandman ‘s entree to recognition. The constitution of these new recognition strategies notwithstanding, entree to recognition by husbandmans has non well improved. Based on the 2006 Core Welfare Indicators Questionnaire Survey, it is estimated that merely 18 % of farm families ( chiefly small-scale husbandmans ) have entree to fiscal services ( Akramov, 2009 ) .
It is frequently really hard to quantitatively show the impact of recognition on small-scale husbandmans, because it is hard to capture and analyze all of its benefits ( Accion International, 2010 ) . However, Okojie et Al. ( 2010 ) in an interview of freelance workers in Edo State, Nigeria found that micro-credit had a positive impact on the concern and household life of rural inhabitants that had entree to NGO-MFIs. Feijo ( 2001 ) besides found that there was a positive impact on the lives of husbandmans who benefited from the recognition installations of the Program to Support Family agriculture ( PRONAF ) in Brazil, based on the measuring of productiveness growing of their chief harvests.
In the same vena, Oyeyinka et Al. ( 2009 ) , analyzing the impact of donees and non-beneficiaries of the NACRDB smallholder loan strategy in Oyo State, Nigeria, found that the output, income, and entree to improved farm inputs of donees were higher compared to that of non-beneficiaries. Other impacts include betterments in easing economic minutess, pull offing daily resources, accessing services that improve quality of life, protecting against economic exposure, doing productiveness sweetenings and leveraging assets. Finally, participants in the FGD posited that timely recognition proviso facilitates the timely acquisition of farm inputs, which help husbandmans better their support.
Traditional aquaculture system and gaining control piscaries have socio-economic impacts on angling communities in Nigeria. Harmonizing to Federal Department of Fisheries ( 2000 ) , traditional aquaculture systems and gaining control piscaries provide employment for over 1 million people in Nigeria. These systems account for 70 – 90 % of the one-year income of angling communities in Nigeria ( DFID-FAO, 2002 ) . The writers nevertheless pointed out that the income is instead low and can barely prolong them and their households. Gwomna ( 2006 ) submitted that angling communities in Nigeria are socially disadvantaged and lack comfortss like lodging, good imbibing H2O, healthful installations and instruction, therefore compromising their nutritionary security. He besides posited that the socio-economic state of affairss of these angling communities therefore have an impact on the quality of their support.
In this survey, I am adding a new dimension of looking at the socio-economic impact of recognition on aquaculture fish husbandmans in Ogun State, Nigeria from the point of position of multi-credit lines instead a individual recognition installation. This is with the position of highlighting, if any, the interplay of multi-credit lines on the demographics of adoption and its attendant effects on the aquaculture fish husbandmans.
Proposed Methods.
A multi-stage and simple Random Sampling ( SRS ) technique will be used to bring forth primary informations from the field, utilizing sets of structured and pre-tested questionnaires. Aim trying technique will be used to choose three ( 3 ) aquaculture fish husbandmans in each of the 20 ( 20 ) Local Government Areas ( LGAS ) of Ogun State, Nigeria who benefitted from a recognition or loan strategy, while another three ( 3 ) aquaculture fish husbandmans who did non profit from any recognition or loan strategy would be sampled in each of the 20 ( 20 ) Local Government Areas ( LGAs ) .
A sum of One hundred and 20 ( 120 ) aquaculture fish husbandmans will be sampled for the survey, with accent on husbandmans that keep reasonably good and accurate records of their operations. The husbandmans will be divided into two ( 2 ) groups, viz. ; husbandmans that had entree to recognition or loan ( whether ball or informal beginnings ) for aquaculture fish agriculture and the 2nd group, husbandmans who did non entree any signifier of recognition or loan. Sets of questionnaire would be administered on the sampled aquaculture fish husbandmans between the 1st of November 2012 and 16th December 2012. Effort will be made to guarantee equal spread and representation of each Local Government Area.
The primary informations would be generated on the socio-economic features of the aquaculture fish husbandmans, such as ; age, pool size ( s ) , provenders, gender, extension services, rank of Fishermen Co-operative Societies, fish inputs, quality of fish gimmick and income, educational background, recognition beginning ( s ) and form of expense, experience and family size of the husbandman, and jobs restraining aquaculture fish agriculture in Ogun State, Nigeria, etc. , utilizing structured questionnaires.
The secondary informations would be extracted from archived paperss of recognition facilitators, oversing authorities bureaus and relevant published research work and documents. The information would include, the entire one-year fish production and entire aquaculture fish production in Ogun State and Nigeria for the last five old ages ; list of aquaculture fish husbandmans in Ogun State, and list of the different types of aquaculture fish pools, their size and locations ; and relevant literature on aquaculture fish production in Ogun State in peculiar and Nigeria in general. Besides, informations on the sum of loans, figure of loan donees, loan public presentation and the demographics of adoption, etc. The administrations from whom these informations would be extracted from their archives, include ; Ogun State Agricultural Development Project, Ogun State Agricultural Management and Credit Scheme ( OSAMCA ) , Nigeria Agricultural Credit and Rural Development Bank ( NACRDB ) , Ogun State Ministry of Agriculture, Federal Department of Fisheries ( FDF ) , University of Agriculture, Abeokuta and any other relevant bureaus and establishments.
The primary informations generated from the questionnaire will be scored, and the per centums of the parametric quantities will be calculated suitably and presented in frequence tabular arraies. The chief statistical tools that will be employed are average, per centums, and whole norm and frequence counts. Descriptive statistical methods and illative statistics will be used to discourse the information. The descriptive analysis will be used to foreground the nature and frequence of informations and jobs encountered by the aquaculture fish husbandmans in the province.
To buttress the choice of the interview method for informations coevals for the survey, Hirsjarvi et Al. ( 2009 ) and Hirsjarvi ( 2008 ) opined that the interview method is a good method of informations coevals, as it allows for the enlargement of information, clarify desired replies, and acquire exemplifying illustrations. Hirsjarvi and Hume ( 2008 ) define interview as a tool, proposing that the interviewers ‘ talk is to intercede the image of respondents ideas, sentiments, experiences, and feelings. A semi-structured interview type will be chosen for this survey as it is the most suited, sing the nature of the topic.
Contemplations.
This survey is of great importance and involvement to me because it forms portion of what I intend to make in the hereafter and besides its ability to add to the bing organic structure of cognition. It is anticipated that the survey would besides assist broaden my cognition on aquaculture fish agriculture. The survey has the ability to bring forth critical and utile information that could help policy preparation. Though the survey can be clip devouring, dashing and frustrating, it is every bit rewarding.
In transporting out a survey of this nature, there are normally built-in jobs that would necessitate to be addressed in order to carry on a qualitative research that can adequately lend to the bing organic structure of cognition. Some of the awaited jobs and intended solution would be highlighted.
The most awaited challenge is that of the moralss of the respondents, peculiarly in a underdeveloped society like Nigeria, with a reasonably low literacy degree and official corruptness ; makes people leery of each other and apathy towards the behavior of study. This ethical consideration demand to be considered as many of the respondents may be loath to take portion in the survey or may non be really willing to unwrap critical and personal information to an unknown beginning. This is attributable to the uncertainness of what the divulged information will be used for, who might come in contact with such information and how the information would be used.
In position of the high prevalence of crisp corrupt patterns in the society and public establishments, entree to secondary informations from public and private establishments could be hard, and if provided, they may non be a true contemplation of what obtains on land. To work out this job therefore, I intend to guarantee all those that would necessitate to supply information for the survey of their confidentiality and namelessness, while besides acquiring a missive of debut from the University. I besides intend to acquire the consent of respondents before interview and guaranting that they are adequately educated on the intent of the survey and that the information provided will be used strictly for the exclusive intent of survey.
The usage of multi-stage and simple random sample ( SRS ) technique to bring forth primary informations utilizing sets of structured and semi-structured inquiries comes with its ain attendant restrictions, such as the debut of the research workers ‘ prejudice in the class of interview. The prejudices of a research worker on a subject tend to on occasion play itself out on the manner the interview inquiries for the survey are structured. I hence would guarantee that I am as indifferent and open-minded as possible. This is besides pertinent in position of the fact that the survey could assist clarify some salient issues which could assist construct on my cognition of aquaculture fish agriculture.
Finally, to accomplish a research work of high quality, I would use myself to the survey with much diligence, difficult work, committedness and unfastened head.
Decision.
In reasoning this survey, inferals from the analysis of the information generated will be used to proffer recommendations for the betterment of the socio-economic features of the aquaculture fish husbandmans and the ability of the husbandmans to entree recognition, its form of expense and degree of public presentation.
On the whole, all issues that come up from the survey as respects the socio-economic features of the aquaculture fish husbandmans and their entree to recognition will be discussed and recommendations proffered for their betterment.
The survey will be concluded by associating the subject with all the findings of the survey vis-a-vis the aims of the survey.
Timetable.
A. 1st November 2012 to 16th December 2012
Polish of questionnaire and disposal.
Primary informations assemblage through questionnaire disposal.
Expansion of Review of Relevant Literature and Secondary Data Gathering.
Draft write-up of Chapter 1.
B. 17th December 2012 to 13th January 2013.
Extraction and bite of information ( information ) from questionnaire.
Analysis of collated information ( information ) .
Presentation of analyzed information ( information )
Draft write-up of chapter 2.
C. 14th January 2013 to 28th March 2013.
Draft write-up of thesis.
Submission of bill of exchange transcript of thesis.
Submission of concluding transcript of thesis.
Mentions.
Accion International. n.d. Measuring the impact of microfinance: Our Perspective. hypertext transfer protocol: //www.accion.org/Document.Doc? id=794. Accessed July 30, 2010.
Akinbile, L.A. ( 2007 ) . Standardization of socio-economic Status ( SES ) graduated table for farm households in South West Nigeria. Journal of Social Sciences, 14 ( 3 ) : 221-227.
Akramov, K.T ( 2009 ) . Decentralization, agricultural services and determiners of input usage in Nigeria. Discussion Paper 941, Washington, D.C: International Food Policy Research Institute.
Dada, B.F. ( 2007 ) . Fisheries Development in Nigeria. The challenges and chances of accessing fund. The president ‘s reference delivered by Otunba Bamidele Dada ( OON ) at the public talk organised by the Fisheries Society of Nigeria ( FISON ) in Lagos, Nigeria.
Dada, B.F. ( 1975 ) . Present Status and Prospects for Aquaculture in Nigeria. Symposium on Aquaculture in Africa. CIFA/T4, Rome: FAO.
DFID-FAO ( 2002 ) . Contribution of Fisheries Research to the Improvement of Livelihoods in West African Fisheries Communities: Case Study of Nigeria. Rome: DFID-FAO. Available: hypertext transfer protocol: //www.sflp.org/eng/fr/003/doc/rpniga2.doc. Accessed 19th March 2005.
Eze, C. , Lemchi, J.J. , Ugochukwu, A.I. , Eze, V.C. , Awulonu, C.A.O. , and Okon, A.X. ( 2010 ) . Agricultural Financing Policies and rural Development in Nigeria. The 84th Annual Conference of the Agricultural Economics Society, Edinburgh. 29th to 31st March 2010.
Food and Agricultural Organisation ( FAO ) ( 2003 ) . Review of the State of World Aquaculture. FAO Fisheries Circular No. 886, Rev.2. Rome: FAO.
Federal Department of Fisheries ( FDF ) ( 2003 ) . Domestic Fish production by sectors ( 1991-2000 ) . Lagos, Nigeria: Federal Department of Fisheries.
Gwomna, A. ( 2006 ) . The Role of Traditional Aquaculture Systems and Fish in Food Security and Livelihoods of Fishing Communities in two States in Nigeria. Ph.D. Thesis Submitted at The Institute of Aquaculture, University of Stirling, Stirling, Scotland. October 2006.
Okojie, C. ; Monye-Emina, A ; Eghofona, K ; Osaghae, G ; and Ehiakhamen, J.O ( 2010 ) . Institutional environment and entree to microfinance by freelance adult females in the rural countries of Edo State.NSSP Brief No. 14. Washington, D.C: International Food Policy Research Institute.
Shimang, G.N. ( 1999 ) . Status Review of Aquaculture Development in Nigeria ( 1940-1998 ) , Abuja, Nigeria. Federal Department of Fisheries.

The Socio Economic Impact Of Credit Environmental Sciences Essay

Calculate the Price

Approximately 250 words

Total price (USD) $: 10.99

Categories
Credit

Linking Debit or Credit with Normal Balance

Linking Debit or Credit with Normal Balance.
QS 2-3 Linking debit or credit with normal balance C5 Indicate whether a debit or credit decreases the normal balance of each of the following accounts: Notes* *Assets = Liabilities + Owners Equity a. Office Supplies e. Salaries Expense i. Interest Revenue b. Repair Services Revenue f. Owner Capital j. Owner Withdrawals c. Interest Payable g. Prepaid Insurance k. Unearned Revenue d. Accounts Receivable h. Buildings l. Accounts Payable A. Office supplies are an asset and debit decreases the normal balance. B.
Repair services revenue is an asset and credit decreases the normal balance. C. Interest payable uses credit for decrease of normal balance. D. Accounts recievable is an asset and debit will decrease the normal balance. E. Salaries expense uses debit for decrease of normal balance. F. Owner Capital is an asset and credit decreases normal balance. G. Prepaid insurance uses debit for decrease of normal balance. H. Buildings are considered an asset and debit decreases normal balance. I. Interest Revenue uses credit for decrease of normal balance.
J. Owner Withdrawals may use credit for decrease of normal balance. K. Unearned Revenue uses credit for decrease of normal balance. L. Accounts payable uses debit for decrease of normal balance. QS 2-4 Identify whether a debit or credit yields the indicated change for each of the following accounts: *Notes* Assets: Debit to increase, credit to decrease; Liabilities & Equity: Credit to increase, debit to decrease; Income: Credit to increase, debit to decrease; Expenses: debit to increase, credit to decrease. a. To increase Store Equipment f.

To decrease Unearned Revenue b. To increase Owner Withdrawals g. To decrease Prepaid Insurance c. To decrease Cash h. To increase Notes Payable d. To increase Utilities Expense i. To decrease Accounts Receivable e. To increase Fees Earned j. To increase Owner Capital a) Store equipment uses debit to increase. (asset) b) Owner withdrawals use debit to increase. (equity) c) Cash uses credit to decrease. (asset) d) Utilities expense use debit to increase. (expense) e) Fees earned uses credit to increase. (income) f) Unearned revenue uses debit to decrease. asset) g) Prepaid insurance uses credit to decrease. (asset) h) Notes payable uses credit to increase. (liability) i) Accounts receivable uses credit to decrease. (asset) j) Owner capital uses credit to increase. (equity) QS 2-5 *Identify whether the normal balances (in parentheses) assigned to the following accounts are* correct or incorrect. a. Office supplies (Debit) d. Wages Expense (Credit) g. Wages Payable b. Owner Withdrawals (Credit) e. Cash (Debit) (Credit) c. Fees Earned (Debit) f. Prepaid Insurance (Credit) h.
Building (Debit) Office supplies uses debit for a normal balance. (correct) Owner withdrawals does not use credit for a normal balance. (incorrect) Fee’s earned does not use debit for normal balance. (incorrect) Wages expense does not use credit for normal balance. (incorrect) Cash does use debit for normal balance. (correct) Prepaid insurance does not use credit for normal balance. (incorrect) Wages payable does use credit for normal balance. (correct) Building does use debit for normal balance. (correct)

Linking Debit or Credit with Normal Balance

Calculate the Price

Approximately 250 words

Total price (USD) $: 10.99

Categories
Credit

Ford Credit essay

Ford Credit essay.
1.    Facts
Ford Credit (“FC”) is a subsidiary of Ford Motor (“FM”). Its’ activity enables it to finance operations in which FM takes part, but also other operations of same nature but without FM being involved. There is no restraining agreement with regard to this matter between FC and FM. FM does also not have to rely on FC in order to finance its operations, although it may do that.
When FC enters a financing agreement with one of FM’s client, FM is not part in the agreement and does not receive any financial reward from FC.

In a FM product liability case, some plaintiff argued that FC acted as an agent of FM.
2.    Issue:
Major Issue: Is Ford Credit (“FC”) and agent of Ford Motor (“FM”)?
In other words: considering the absence of written agency contract between FM and FC, what other facts would possibly enable the plaintiffs to caracterize an agency?
3.    Rules and analysis:
An agency contract may exist even in the absence of a written agreement in the presence of a subordination between the principal and the agent, which means that the agent works for and under the supervision of the principal (work schedule, mission assigned, objectives, delays etc…).
The fact that FC is an affiliate of FM means that FM holds a majority of shares in FC. But being a majority shareholder does not mean that FC’s activity is under the orders of FM. The fact that FM holds shares in FC does only mean that it has a financial interest in its’ benefits or losses at the end of the financial year.
The fact that FC enters in agreements in operations which do not involve FM leads to think that there is no specific agreement between the two with respect to restraining FM or FC’s activity outside of the group. Neither is there any provision which restrain them from contracting with any third party.
In conclusion, the fact that FC is FM’s subsidiary does not enable to conclude that FC is FM’s agent.
One of the main element which characterizes the presence of an agency, according to case law,  is the fact that the agent is able to alter legal relations between the principal and third parties. FM is selling vehicles to third parties but FC is not a party to these agreements. There is no agreement between FC and FM restricting either FM or FC’s activity to each other. FM is free to finance its’ sales with another organization and FC is allowed to finance operations which do not involve Ford Motors.
In fact, agreements between FM and its’ clients are completely independent from FC and vice versa.
This means that the main element of an agency contract is missing. FC does not have the power to act on behalf of FM and does not appear as such to clients.
4. Conclusion:
The plaintiffs who try to sue FC on behalf of FM’s operations are probably going to loose their action, considering that FC cannot be considered to be an agent of FM in its’ sales operations based on the criteria of shareholding or alteration of legal relations.
 

Ford Credit essay

Calculate the Price

Approximately 250 words

Total price (USD) $: 10.99

Categories
Credit

Impact of Credit Management On Profitability

Impact of Credit Management On Profitability.
Introduction The expansion of International Trade and the accessibility to foreign stock and debt market has given rise to an increase debate on whether or not there is need to be a global set of accounting standards. As companies compete globally for scarce resources, investors and creditors as well as multinational companies are required to bear the cost of reconciling financial statements that are prepared using national standards. It was argued that a common set of practices will provide a “level playing field” for all companies worldwide (Murphy, 2000).
IFRS are standards and interpretations adopted by the International Accounting Standards Board (IASB). They include: International Financial Reporting Standards (IFRS), International Accounting Standards (IAS) and interpretation originated by the International Reporting Standards Interpretation Committee (IFRSIC) (Oyedele, 2011). IFRS represent a single set of high quality, globally accepted accounting standards that can enhance comparability of financial reporting across the globe.
This increased comparability of financial information could result in better investment decisions and ensure a more optimal allocation of resources across the global economy (Jacob and Madu, 2009). Cai and Wong (2010) posited that having a single set of internationally acceptable financial reporting standards will eliminate the need for restatement of financial statements, yet ensure accounting diversity among countries, thus facilitating cross-border movement of capital and greater integration of the global financial markets.

History and Development of IFRS Globalization of capital markets is an irreversible process because of the development and growth in science and technology; there are many potential benefits to be gained from mutually recognized and respected international accounting standards. To bridge the gap between accounting standards among countries, the International Accounting Standards Committee (IASC) was founded in 1973 by a group of professional accounting practitioners.
The IASC was to formulate uniform and global accounting standards aimed at reducing the discrepancies in international accounting principles and reporting practices. In this light, the International Accounting Standards Committee (IASC) was established. Since its establishment the IASC has actively been championing the uniformity and standardization of accounting principles for over two decades (Carlson, 1997). In April 2001, the International Accounting Standards Board (IASB) took over the setting of International Accounting Standards from the International Accounting Standards Committee (IASC).
Thenceforth, the IASB updated the already existing International Accounting Standards and referred to them as International Financial Reporting Standards (IFRS). Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IASs were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). In Nigeria, adoption of IFRS was launched in September 2010, by the Honorable Minister, Federal Ministry of Commerce and Industry, Senator Jubril Martins-kuye (OFR).
The adoption was organized such that all stakeholders use the IFRS by January 2014. The adoption was scheduled to start with Public Listed Entities and Significant Public Interest Entities who are expected to adopt the IFRS by January 2012. All Other Public Interest Entities are expected to mandatorily adopt the IFRS for statutory purposes by January 2013, and Small and Medium-sized Entities shall mandatorily adopt IFRS by January 2014. The Importance of IFRS
The adoption of uniform standards cut the costs of doing business across borders by reducing the need for supplementary information. They make information more comparable, thereby enhancing evaluation and analysis by users of financial statements (Adekoye, 2011). Users become more confident of the information they are provided with and presumably, this reduces uncertainty, promotes an efficient allocation of resources and reduces capital costs (Ahmed, 2011).
Esptein (2009), emphasized the fact that universal financial reporting standards will increase market liquidity, decrease transaction costs for investors, lower cost of capital and facilitate international capital formation and flows, various studies conducted on the adoption of IFRS at country level indicated that countries that adopted IFRS experienced huge increases in direct foreign investment (DFI) flows across countries (Irvine and Lucas, 2006). Cai & Wong (2010),in a study of global capital markets demonstrated that capital markets of countries that had adopted IFRS recorded high degree of ntegration among them after their IFRS adoption compared with the period before adoption. In a study on financial data of public listed companies in 15 member states of the European Union (EU) before and after full adoption of IFRS in 2005, Chai at al (2010), found that majority of accounting quality indicators improved after IFRS adoption in the EU. The IFRS enhances comparability and transparency of reported results, easier cross-border stock exchange listings and foreign capital funding, additional and better quality financial information for shareholders and supervisory authorities, improved quality and efficiency of financial report.
Impact of IFRS As a major change program, IFRS conversion affects many parts of our organization, including systems, processes and the wider business. Therefore ultimately, IFRS success depends heavily on how effectively accountants around the world are informed about the process and their willingness to adapt to or embrace change. IFRS could have a positive or negative impact on the financial statements. For example, recognition of interest income using effective interest method may negatively impact profitability as some of the credit related fees will form part of effective interest rate computation.
However, the extent of the impact usually depends on the accounting policies adopted. The impact of IFRS transcends beyond accounting and financial reporting contrary to general misconception. Beyond finance, strategies, processes, people and systems will also be impacted by the conversion exercise. The following are some of the areas in which IFRS can affect our businesses: Systems and processes: IFRS will definitely change the overall presentation and contents of financial statements e. . more disclosures is required in the financial statements; consequently, there is a need to make amendments such as reconfiguration of existing systems, interface and mapping changes, changes to the chart of accounts etc. to generate IFRS compliant financial statements. Performance Management: Performance measures are going to be significantly affected as the effective interest calculation of income, impairment calculation and fair-valuation calculation will impact performance results.
Staff whose performance targets have previously been set using Nigerian GAAP calculations will need to be informed of the impact of IFRS on attaining these targets on their remuneration and the amount of effort that would be required to meet these targets under IFRS. Management reporting: Extensive impact on management reporting resulting in new forms of analysis and reporting. People and Communication: The conversion to IFRS will create a competency and knowledge especially financial control staff. However extensive training and communication plans will be in place to bridge those gaps.
In addition to the aforementioned, the conversion exercise may have impacts on a large number of departments outside Finance including Human Resources, Information Technology, Risk Management, Business Development, Internal audit etc. For example, HR personnel will need to understand the impact of IFRS on staff loans. Some Key Risks Associated With Converting to IFRS Some of the key risks management should be aware of include: Lack of effective communication of the impacts of change to stakeholders the board, audit committees, investors and analyst, the impacts on internal controls and the related processes.
Excessive costs and work levels resulting from ineffective planning and the inability by management to conclude and certify on the design or effectiveness of the company’s internal controls over financial reporting. Enforcement of Financial reporting Standards in Countries around the Globe and the Key Difficulties Faced in the Implementation of the Financial reporting Standards NIGERIA There are a number of institutions and agencies in Nigeria which provide guidelines that determine what information, and in what format such information, should be included in financial reports.
Such institutions are the Institute of Chartered Accountants of Nigeria (ICAN), the Association of National Accountants of Nigeria (ANAN), the Central Bank of Nigeria (CBN), Nigerian Accounting Standards Boards (NASB). Now the Financial Reporting Commercial (FRC), National Insurance Commission (NAICOM), Security and Exchange Commission (SEC), and Corporate Affairs Commission (CAC). These institutions are ready to give up on Nigeria’s GAAP and adopt IFRS from 2012 (Hassab, Epps and Said, 2001; Iyoha and Jimoh, 2011). Mukthar, (2009) sserts that, there is no better time than now to contribute to the debate for the need and feasibility of adopting the IFRS as a financial reporting framework in Nigeria. This is due to the pronouncements by the banker’s committee (a committee of Managing Directors of banks and the Nigerian Stock Exchange (NSE) to the effect that banks and all listed companies should prepare financial statements in accordance with the IFRS. Such pronouncements were made considering that complying with IFRS will facilitate transparency and lead to more disclosure in financial statements which will be useful to stakeholders, especially foreign stakeholders.
IFRS-based financial statements stand to have added advantage in their business relationships with their correspondent banks, multilateral institutions and international investors. Companies that prepare IFRS-based financial statements are also expected to get some boost in their rating. Adoption of the IFRS in Nigeria commenced in January, 2012. UNITED KINGDOM The enforcement of IFRS is under European Enforcement Coordination sessions (EECS) and Committee of European Securities Regulations (CESR). In the UK the body responsible for enforcement of the IFRS is the Financial Reporting Review Panel.
Rolf (2010) suggests in through the CESR Annual Reports in 2010 that harmonization and the enforcement of the IFRS in Europe facilitate an efficient single capital market in Europe within the context of evolving EU legislation. UK’s Department of Trade and Industry (DTI) has since pronounced that publicly traded companies in UK should apply the International Accounting Standard in their individual financial reporting and that all EU listed companies were required to prepare their consolidated Financial Statements under IFRS effective from January, 2005 (ICAEW, 2006’ AECA, 2010 and Rolf, 2010).
PricewaterhouseCoopers (2009) has confirmed that the U. K has since complied with the requirement; also small companies (SMEs) were required to report under IFRS effective from January 1, 2012. TURKEY Sigma, (1995) and Sigma and Hosal, 2005) observed that in 1980, a series of economic decisions following the International Monetary Fund’s (IMF) recommendations were taken to reduce the inflation rate, increase production, and support importing activities. In the reconstruction period starting in the early 1980s, Act No. 499 was put into effect in 1981 by the Parliament to prepare the grounds for establishing the Capital Markets Board (CMB). BRAZIL Brazil is incorporating its accounting standards with the IFRS. According to UNCTAD (2008), the main institutions leading the convergence process are the Brazilian Securities Commission (CVM), the Brazilian Institute of Independent Auditors (IBRACON), and the Central Bank of Brazil. A number of developments have recently advanced the country’s progress towards IFRS.
The Central Bank of Brazil announced that as from 2010 all financial institutions under its supervision will be required to prepare their consolidated financial statements in accordance with IFRS. UNCTAD (2008) also reports that the Brazilian Securities and Exchange Commission has promoted efforts by companies listed in capital markets in Brazil to gradually adopt IFRS. For example, the CVM has been working more closely with IBRACON to accelerate convergence with IFRS and regulatory members.
Companies listed on Sao Paulo Stock Exchange’s New Market are required to provide financial statements prepared in accordance with IFRS or to the US-GAAP, in addition to those that are prepared under Brazilian accounting standards. The Committee of Accounting Pronouncements was set up in Brazil, whose objective will be to achieve full adoption of IFRS in the country. INDIA Ravindra and Shrikhadi (2010) observed that there is a growing international consensus on the International Financial Reporting Standards as acceptable standards for assessment of the financial health of a company across the globe. Based on the recommendations of the core group set up to facilitate IFRS convergence in India, its Ministry of Corporate Affairs (MCA) announced the approach and timelines for achieving convergence with IFRS. Also the Institute of Chartered Accountants of India (ICAI) commenced the process of issuing IFRS equivalent accounting standards. ICAI stated that for companies with exposure in European markets through equity or debt, transparency on IFRS is essential to cheap capital and hence, the proactive approach. ICAI set a time line of 2011 for compulsory switch over to the new standards.
SOUTH AFRICA The South African Institute of Chartered Accountants (SAICA), the Johannesburg Stock Exchange (JSE) and the Accounting Practices Board (APB) of South Africa has recognized the need to be part of a global economy with respect to financial reporting. Local accounting standards in South Africa have been harmonized with international accounting standards since 1993. In February 2004, a decision was taken by the APB to issue the text of IFRS as South African statements of GAAP without any amendments (SIACA, 2006).
The reasons for the ongoing harmonizing and the issuing of the text of IFRS as South African statements of GAAP were: for South African companies to attract foreign investment, to provide credibility to the financial statements of South African companies in the global market, and to do away with the need for dual listed entities to prepare financial statements in accordance with more than one set of accounting standards (Deloitte, 2006). ZIMBABWE Zimbabwe faces a challenge of high inflation that is affecting the wholesome application of the IFRS.
The Institution of Chartered Accountants Zimbabwe (ICAZ, 2010) recommends that the IFRS should be in full application by end of 2010. Although Zimbabwe has economic challenges, the Zimbabwe Stock Exchange it has said that IFRS compliance is mandatory to all listed companies in its Stock Exchange (Tom, 2010). Currently, a ZSE panel of experts is responsible for checking IFRS compliance. It encourages accurate and correct presentation of companies’ financial accounts including historical data and internationally comparable balance sheets and disclosure.
This makes it easier for investors, including external investors. The ZSE (ZSE, 2010) added that IFRS for SME is compulsory which was expected to commence by January, 2011, also the local GAAP which was based on the 1998 version was expected to translate into IFRS. The local tax authority has yet to adopt or convergence plans of tax reporting to the IFRS. KENYA Kenya is one of the earliest countries to adopt the use of the IAS and IFRS in 1999. UNCTAD (2008) confirms that over the years, Kenya has developed a wealth of experience in the use of IFRS, which provide useful insights in he development of strategies by International Standards of Accounting and Reporting (ISAR) to aid other countries in the implementation of IFRS. There a lone stock market in Kenya, the Nairobi Stock Exchange, in which the shares of about 50 companies are traded. In addition to these listed companies, there is also a sizeable number of companies which are either multinationals or companies owned privately by the nationals, as well as a large number of small and medium-sized enterprises (SMEs). In terms of financial reporting, all the companies are required to prepare financial statements based on IFRS.
In most cases, however, SMEs would prepare financial statements for use by the tax authorities or by the banks for purposes of accessing credit. Other public interest companies such as banks, insurance companies, cooperative societies and non-governmental organizations also prepare accounts in accordance with IFRS (Caroline, 2010). UGANDA The Institute of Certified Public Accountants of Uganda (ICPAU, 2009) stipulates that Uganda has adopted IASs, SIC IFRSs and IFRIC without amendment since 1998. All openly accountable bodies are obliged to present their financial statements in compliance with full IFRS.
In additional, Uganda has instructed on the application of IFRS for SMEs at the beginning of 2010. Uganda Security Exchange (USE, 2010) directed that all foreign or national companies listed on the stock exchange to comply with IFRS when the time of reporting was due. TANZANIA According to Tanzania’s National Board of Accountants and Auditors (NBAA, 2009), Tanzania shifted to IFRSs, IPSASs, and ISAs with effect from July, 2004. In that effect, compliance required all preparations of financial statements to be in accordance with the IFRSs no matter the size of the firm.
Pacter (2010), observed that publicly accountable entities were required to use full IFRS including the entities that offer shares to the public, financial institutions such as banks, insurance, pension funds, mutual funds, security brokers or dealers. Also, entities that have essential public service such as utilities; and non-publicly accountable entities are permitted to use the IFRS for SMEs. In that case, all bodies using IFRS for SMEs should apply those pronouncements as issued by the IASB in full and without modification. CANADA
In January 2006, the Accounting Standards Board (AcSB) adopted a strategic plan for embracing IFRSs across the whole country for all public companies and other profit-oriented enterprises that are responsible to large or diverse groups of shareholders in Canada. From that time, AcSB proposed on its section 1506 to house the approval of IFRSs (Peter, Michael, and Ken, 2008, Deloitte, 2011). Peter (2008) recommended that: “The AcSB has recently confirmed January 1, 2011 as the changeover date to which IFRSs was supposed to replace current Canadian Standards and interpretations as GAAP” UNITED STATES OF AMERICA
AICPA (2011) asserts that as far as the USA is concerned; the enforcement of IFRS has taken the following forms. From 2001 to 2004 USA has made effort to implement IFRS. In 2005; The Securities and Exchange Commission (SEC) released a roadmap allowing IFRS filings without GAAP reconciliation for foreign firms by 2009. In 2006; The IASB and the FASB agree to work on a number of major projects. In 2007; The SEC announced that it will accept from foreign filers in the U. S. financial statements prepared in accordance with IFRS, as issued by the IASB, without reconciliation with U.
S. GAAP. Also, the SEC issued a Concept Release asking if U. S. public companies should be given an option to follow IFRS instead of U. S. GAAP. In2008;The SEC was expected to vote on a proposal creating a timeline for moving U. S. public companies to IFRS, also, the FASB and the IASB updated the Norwalk Agreement with the goal of accelerating convergence. In 2009; the IASB ended its moratorium, set in 2005, on the required application of new accounting standards and major amendments to existing standards. The board had frozen its rules while more countries adopted IFRS.
In 2011; Canadian and Indian companies are slated to begin using the global standards, and Japan was slated to have eliminated all major differences between Japanese GAAP and IFRS. In the United States, questions concerning IFRS are expected to be included in the Uniform CPA examination. Year 2013 is the earliest year projected by accounting firms for mandating that large U. S. public companies convert their financials to IFRS, year that the updated Norwalk Agreement expects all major capital markets to operate from one set of accounting tandards (AICPA, 2011). The year 2015 is earliest year the SEC would allow public companies to convert their financials to IFRS (AICPA, 2011). JAPAN Japan financial reporting is guided by both international and domestic factors which fall under the Accounting Standards Board of Japan (ASBJ). From 2004 to 2010, the Japanese Institute of Certified Public Accounts (JICPA) along with ASBJ has made a tremendous move towards the harmonization between Japanese GAAP and IFRS. Some problems remained unsolved as they have to be worked on by 30 June, 2011 (Afaanz, 2011).
According to ( Global Glimpses, 2009) and (Smart, 2012), Japan allowed a number of international companies the use of IFRS and some local companies to use them on their own choice for the year ending March 31, 2010. In 2012, the decision about the mandatory adoption of IFRS by 2016 is expected by the year 2013. HONG KONG Starting in 2005, Hong Kong Financial Reporting Standards (HKFRS) were made identical to the IFRS. While Hong Kong had adopted many of the earlier IAS as Hong Kong standards, some had not been adopted, including IAS 38 and IAS 39.
All of the December, 2003 improvements and new and revised IFRS issued in 2004 and 2005 started taking effect in Hong Kong beginning from 2010. In 2005, implementing Hong Kong Financial Reporting Standards, the challenge sets out a summary of each standard and interpretation. The key changes it makes to accounting in Hong Kong, the most significant implications of its adoption, and related anticipated future developments. There are some Hong Kong standards and several Hong Kong interpretations that do not have counterparts in IFRS.
Also there were several minor wording differences between HKFRS and IFRS (Deloitte, 2008 Tyrone, 2010). CHINA Chinese government had conducted series of accounting standard reforms in 1992, 2001 and 2006 in which each replaced the previous. According to Gingham and Haitao (2010) the Chinese accounting standards were considered to be in great conformity with IFRS. This developments confirm response to the emerging stock market and the increasing demand of foreign investors in China.
Karthik, Donavan and Nancy (2005) and Romanna (2010) have however remarked that although in 2005 China converged with IFRS, but not in full compliance with IFRS requirements. The Chinese Accounting Standards Committee (CASC) is the body charged with developing accounting standards in collaboration with the Ministry of Finance (Elmer, 2011). CASC had issued new standards regarding cash flow statement, lease and other standards in conformity with the IFRS. In February 2006, the Chinese Ministry of Finance promulgated the introduction of Chinese Accounting standards based on IFRS.
In January, 2007, China was obliged to adopt the IFRS so as to get placed into the global capital market (Zhang, Andrew and Collier, 2007). China is considered being the fourth world economy with far reaching economic effect regarding the application of IFRS. Afaanz (2011) argues that although China is adopting the IFRS there are challenges converging domestic standards with the IFRS expected to have been concluded by December 2011, and the application of IFRS to all companies big, small and medium effective January 2012.

Impact of Credit Management On Profitability

Calculate the Price

Approximately 250 words

Total price (USD) $: 10.99

Categories
Credit

The Credit Rating Agencies, Their Role in the Financial Crisis?

The Credit Rating Agencies, Their Role in the Financial Crisis?.
End of Studies Thesis What is the role of the credit rating agencies, which part did they play in the recent Financial Crisis and how can their efficiency be improved? Thesis Supervisor – David Menival Emmeline Beauchamp – Cycle Franco- US – March 2013 Acknowledgments I would first like to thank RMS and especially the CESEM to have taught me a lot, helped me to grow and open up and gave me this incredible opportunity of studying two years in the United States. None of this phenomenal experience would have been possible without them.
I would also like to thank Northeastern University for allowing me to discover a new culture and a different educating system. It also had a tremendous role in my future accomplishment and professional career. In addition, I would like to thank all the professors I had during these four years of studying, whether it is at CESEM or at Northeastern University. They made this journey even more profitable and enjoyable. I would also like to thank David Menival, my thesis supervisor, who accepted to work with me on this project.
Finally, I would like to thank my parents for always supporting my choices and being next to me when I needed them. They have been my guides and models in life and have always encouraged me to be better and push myself. Table of Content Introduction4 I. Credit Rating Agencies: Role and methods5 1) History5 2) Role and methods7 3) The Issuer-Payer model 9 II. The Credit Rating Agencies and the Financial Crisis: is the thermometer responsible for the fever? 12 1) Background of the financial Crisis12 2) Credit Rating Agency are not fully responsible… 14 ) …But they could have done better17 III. What is next? 20 1) Lessons learned from the crisis 20 2) Regularization of the existing Credit Rating system 21 3) A new rating system23 4) Creation of new Credit Rating Agency24 Conclusion26 Exhibits27 Bibliography32 Introduction A credit rating agency is a company whose role is to evaluate the default risk of a borrower, whether it is a private or public company or a State. Since 1909, when Moody’s emitted its first rating, the role of the Credit Rating Agencies has considerably evolved and the methods used have improved.

Even though their ratings do not constitute buying or selling recommendations, they rapidly gained an almost “biblical authority”. Since the 1980’s, the credit rating agencies have, indeed, become a reference for investors that want to determine the creditworthiness of an entity. Their ratings influence investors’ behaviors and they are indirectly involved in the future of a State or company. After several economic meltdowns and the recent financial crisis, the three big Credit Rating Agencies have been the center of attention.
Is their methodology appropriate to evaluate the creditworthiness of an entity? Does the issuer-payer model insure the best transparence? Their role and implications in the crisis have been meticulously examined and their functioning system has been questioned. Although their role in the crisis in undeniable, are the only responsible of the crisis? The system was defaulting and the predictions of the credit rating agencies turned out to be wrong. Which modifications should we bring to the system to make it more transparent and efficient?
These are the questions we will try to answer throughout this thesis. I. Credit ratings agencies: role and methods Credit Ratings agencies, entity still little known outside the financial communities two years ago, found themselves at the center of attention with the subprime crisis. If everyone more or less gets, now, familiar with what a credit rating agency is, people usually do not know what are the origins of this business, its rationale and its financing model. 1) History
The influence of the three main credit rating agencies (Moody’s, Standard & Poor’s and Fitch Ratings) was build step by step since their inception, in the early 1900’s. Historically, the ratings issued by the agencies did not have more value than the ones given by analysts or economic experts. They acquired this particular status when legislators and regulators attributed them a bigger place in their systems. The development of railroads companies marked the origin of these “Big Three”. These railroad companies were indeed fluctuating and needed nvestments to set up their infrastructures. As investors were concerned and questioned their capacity to reimburse their debts, Henry Varnum Poor published, in 1860, some financial information regarding the creditworthiness of those companies in order to help investors make their decision. Later on, in 1900, John Moody would also start publishing economic data on these companies and finally, in 1909, J. Moody gave his first ratings about railroad companies in “Moody’s Analyses of Railroad Investments” by attributing a letter to each of them; the credit rating was born.
This system was progressively adopted by others credit rating agencies such as Fitch Publishing Company, founded in 1913 by John Knowles Fitch, which would later be known as Fitch Ratings. Finally, Less than thirty years later, the credit rating agency Standard & Poor’s is created after the merger of the Standard’s Statistic Bureau and the Poor’s Publishing Company. The development of the ratings is stimulated by several factors. First, its goal is to offer a service for investors by providing useful information that will help them in their decision-making process.
In addition, the relative large size of the American territory discourage investors to search for information, they would rather pay for it than waste time looking for it. Moreover, the repercussions of the 1929 financial crisis and the consequences of the World War II, giving supremacy to the Economy of the United States, also favored the expansion of the concept of rating. In 1970, after the bankruptcy of Penn Central Railroad, the first doubts regarding the independence of the credit rating agencies appeared. This was the first time that the reliability and seriousness of the ratings were questioned.
In order to reestablish the value of the ratings, the SEC (Securities Exchange Commission) created, in 1975, the “Nationally Recognized Statistical Rating Organization” (NRSRO) designation. The goal was to standardize and formalize the ratings regarding brokerage firms and banks with their capital ratios. At that time, seven agencies obtained the NRSRO designation. In 1990, after several new mergers, the number of NRSRO was only of three: Moody’s investor service, Standard and Poor’s and Fitch Ratings. In 2003, the Canadian agency Dominion Bond Ratings service Ltd also ained the status of NRSRO, followed by A. M Best Company in 2005. In June 2003, after the disorders caused by the bankruptcy of the company Enron, the regulation of the credit rating agencies and their NRSRO status needed to be examined. Multiple reports on the role played by the agencies in this case were published. Even though investors lost faith in them, they all agreed that they should keep the NRSRO status. In 2006, after years of critics toward the credit rating agencies, the functioning rules of the NRSROs were modified and the Credit Rating Agency Reform Act was promulgated.
The objective was to regulate the internal decision process of the credit rating agencies while forbidding the SEC to control the rating system of NRSROs. Right after, in 2007, three more companies were added to the list of NRSROs: Japan Credit Rating Ltd, Rating & Investment Information Inc. and Egan-Jones Rating Company. Since April 2011, the list of agencies that received the NRSRO status counts ten names (See Exhibit 1, page 27). Finally, in July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act reinforced the control over the ratings’ practices.
This included a reduction of the conflicts of interest regarding the ratings of structured products and decreased dependence on ratings. It also allowed investors to sue a credit rating agency in case of fake or reckless rating. For decades, the three main agencies, Moody’s, Standard and Poor’s and Fitch Ratings, have been controlling the market, as high barriers to enter exist. The major ones are the importance of the reputation and the investors’ confidence in their ratings. Since their creation, these agencies have distinguished themselves with a particular role and specific methods. ) Role and Methods The Credit Rating Agencies evaluate the creditworthiness of debtors. Ratings can concern a company as well as a particular emission or securitization or any financial debt. They are usually solicited by the debt issuer but can also be attributed, if non-requested, after collecting public information. Credit Rating Agencies enjoyed a good reputation and an essential role in the financing of economies. Over time, regulators, for practical reasons, tried more and more to impose the use of the notation in the investors’ financing.
This long-term trend follows upon the systematic financing by the market, whether it is in a simple formulation taking the shape of debenture or assimilated loans or new products where the risk of defect is difficult to comprehend because it is diffuse in complex financing methods such as the securitizations. Credit Rating Agencies have the role of processing the information for financial markets. They synthesize the information for market needs and the investors seemed to excessively grant their confidence to this information.
Investors pay close attention to any modifications in ratings or to any entities placed “under observation”. The ratings issued by the credit rating agencies have a trustworthy value. Since investors usually do not take the time to look for information regarding a company or a State, they based their investment choices upon the rating given by the credit rating agencies. Therefore, the role of the credit rating agencies is essential. Basically, these agencies summarize all information available about a company or State and turn it into a rating that will then influence the future of an entity.
However, it is necessary to underline that the ratings given are not buying or selling recommendations, they are only an evaluation of the creditworthiness of an entity, at a defined time, and statically calculated. Next to this informative participation, credit rating agencies contribute to the management of portfolios by giving advice to the investors via the medium-term orientations emitted with the rating. If a company tries to finance itself, the received grading will be determining for the conditions of the operation.
Whether it is by financing through banks or by issuing bonds on the market, the more the grade will be raised, the more the company will be able to find cheap funds at low interest rates. On the other hand, a bad grade will imply higher interest rates and difficulties to find financing. The difference of levels between both interest rates will constitute the risk premium. This problem becomes particularly important for companies or States located within the “speculative” category. Major institutional investors do not want, indeed, to take the risk and, therefore, do not invest on these kinds of values. However, the rating is ot fixed and fluctuates throughout the life of the bonds. A decrease of the rating can lower the price of the bond. Likewise, a raise of the rating can be associated to an increased price of the bond. In order to correctly determine the default risk, Credit Rating Agencies use diverse quantitative and qualitative criteria that they translate into a grade. Credit Rating Agencies distinguish two types of ratings: short and long-term; the traditional rating that applies to loans emitted on the market and the reference rating that measures the risk of counterparty for the investor represented by this issuer.
When evaluating the financial risk, credit rating agencies first take into consideration purely financial numbers such as the profitability, the return on investment, the level of cash flows and debt, the financial flexibility and the liquidity. More and more, the agencies integrate non-quantitative elements such as the governance, the social responsibility of the company and its strategy. It is also necessary to highlight the fact that the rating is usually associated with medium-term orientation, allowing to better estimate the future trend regarding the quality of the issuer.
In some cases, a borrower can be placed “under observation”. The main steps in a company’s life (mergers, acquisitions, big investments…) are indeed, likely to influence and modify their structure. Credit rating agencies, subject to preserving the confidentiality of the received information and avoiding cases of insider trading, can have insider information on the financial state and the future prospects of the analyzed issuer, while reducing the cost of collection and data processing. They distinguish themselves from financial analysts, who, in principle, only have access to the public information.
Even if they can benefit from insider information on behalf of issuers, they are dependent on the information provided by these issuers. Each Credit Rating Agency possesses its own rating system. In broad outline, grades are established from A to D with intermediary levels. Thus, the best grade is AAA, then AA and A for Standard and Poor’s or Aa, A, etc. for Moody’s. In addition, we can also find intermediate ratings; a “+” or a “-“ but also a “1” or a “2” can indeed be added to the grade (e. g. AA+, A-, Aa2, etc. ).
This allows a better and more precise classification of borrowers. These different ratings can be divided in two groups: the first category, “High Grade” includes all ratings between AAA and BBB and the second category, also known as “speculative”, for inferior grades. (See Exhibit 2, page 28) The biggest advantage of this system is to provide information at low costs for potential investors. Thanks to an easily understandable grade, but incorporating a vast amount of information, investors can quickly have an idea of the creditworthiness of a borrower.
The ratings issued by these agencies are a more and more useful tool in the decision-making process of investors looking for relevant information. Current regulation obliges them to certify published information. As we have previously seen with the United States or Greece, the market strongly reacts and sometimes irrationally to any modification of a rating or to a simple announcement of a hypothetical revision. Credit Rating agencies have a real influence on markets. The impact of their decision on issuers and investors is decisive.
On the contrary, an excessive reaction was completely predictable in front of their incapacity to forecast the financial crises of these last decades. 3) The issuer-payer model For more than half a century, investors that paid to obtain financial information about loan issuers financed the credit rating agencies. Thus, companies, local communities, States were given a rating, without asking for one or without their consents, but to answer to requests from bankers or investors that were holding these funds.
Naturally, these “non-requested” ratings were only based on public information concerning such or such company. The Credit Rating Agencies sold their publications to bankers and capital holders who were looking for potential adequate investments. In addition to selling these “manuals”, the credit rating agencies could also offer others services to investors (weekly information about financial results of rated companies, actualization of the ratings, recommendations and advices of purchase and/or sell).
However, the agencies will lose some profits as some investors managed to have the information and the manuals without paying for them. As from the beginning of the 1970s, Credit Rating Agencies started to charge their services to the issuers of bonded debt. This is the issuer-payer model. These issuers of debt (Companies or communities looking for investment) began to more and more directly solicit the agencies in order to obtain a rating. They believed that this rating would reassure investors during a slowdown of economic growth.
Thus, from now on, it is more often the issuers of debts that will request a rating from the credit rating agencies to get an evaluation from them that would allow them to access to credit. This approach contributed widely to consolidate the place of the Credit Rating agencies and “to legitimize” their intervention. In fact, this translates well a swing of the balance of power between those who look for funds to invest in industrial projects and those who hold funds, while waiting for the best yield at the slightest risk.
In a world highly regulated by finance, where pensioners and holders of capital are in a strong position, and where industrial and direct investors are in a position of requestors, it is now, more often, issuers who wish to borrow and will ask to be noted, that will pay the credit rating agencies for their services. This shift from an investor-payer model to an issuer-payer model compromised the independence of the credit rating agencies. In fact, in 2011, only 10% of the revenue of the agencies came from funds’ holders who wanted to know more about the validity, the risk and the potential profitability of an investment.
From now on, the ones looking for capital are the ones financing 90% the credit rating agencies. The “issuer-payer” model strongly modifies the situation of the credit rating agencies. In this situation, the rating agency is used, and paid, by the market player who wishes to be noted to then be able to hope to obtain capital on “financial markets”. The question of the independence of the agency in its rating process is then very directly put: the rating agency will be inclined to note well a company which pays her to then try to obtain capital in good conditions on behalf of miscellaneous “investors”.
However, the market has faith in this independence since a credit rating agency has to protect its reputation, and thus an agency could not take the risk of over evaluating one of its customers by fear of losing its credibility and thus all business. Credit Rating Agencies seem, indeed, more and more subjected to conflicts of interests, which decrease their reliability. The issuers pay the agencies to be noted, while credit rating agencies need the revenues from these same issuers. Besides, more and more often, the credit rating agencies mix two activities: consulting and rating.
Therefore, in addition to evaluating a company, an agency also advises on current operations. A study for the SEC in 2008 revealed that some analysts from certain agencies participated in meetings between investors and issuers in which commission and rating were fixed. These conflict of interest generated criticisms and accusations against credit rating agencies and especially during the recent financial crisis. As the credit rating agencies were essential and indispensable to any players on the market that wanted either to invest or to find capital, they were at the heart of the upheaval.
II. The Credit Rating Agencies and the Financial Crisis: is the thermometer responsible for the fever? In order to determine the responsibility that the credit rating agencies have in the financial crisis of 2008, it is necessary to understand how the crisis happened, which events punctuated it and what has been the behavior of the rating agencies throughout the crisis. 1) Background of the Financial Crisis Everything started when the American housing market suddenly collapsed after a steady rise in the 2000 years.
To finance their consumption and acquisition of a house, American households did not hesitate to get into very high debts. The market was booming so there was a trust in the ability to get its money back with a substantial profit. As counterparty, they pawn their properties. This was a guaranty for banks to be paid because if the borrower could not reimburse what he owed, his property would be sold to honor his debt. When the phenomenon grows and affects a large number of households, the sale of their property causes the collapse of the value of the property.
The downturn of the housing market was reinforced by the subprime system. Since 2002, the American Federal Reserve, which encouraged easy credit to boost the economy, allowed millions of households to become homeowners thanks to premium loans called subprime, with variable interest rates that can reach 18% after three years. These interest rates are fixed according to the value of the property; the greater the value, the lower the rate and vice versa. That is what happened when the housing market collapsed in the United States in the beginning of 2007.
Households, lacking of ways to reimburse their debts to lenders, have caused the bankruptcy of several credit institutions that could not repay themselves since even when taking on the property, this one has a lower value than initially. Finally, banks were also touched by this phenomenon. They have indeed been numerous to invest in these lending institutions. Nevertheless, today, invested funds are gone. In order to compensate these losses on the housing market, banks were forced to sell their shares, leading to a decrease of their values on the financial markets.
The crisis quickly expanded in Europe, where major European banks such as Dexia in France and Benelux or IKB in Germany lost a fair part of their investments. Besides, the bankruptcy of several European banks led to a confidence crisis on European financial markets. Banks have doubts about each other’s contamination by the subprime crisis and therefore, to be cautious, refused to lend money. Since international banks are linked to each other through financial agreements, the crisis rapidly extended, to reach Asia during the summer 2007.
Only one solution seemed conceivable for banking institutions to face this lack of liquidity: sell their shares and bonds. This fast and quick intervention caused a sharp drop in stock value and all the European stock markets were affected (See Exhibits 3 and 4, page 29-30). In order to appease the crisis on the markets but also to bail out banks, the American Federal Reserve (FED) and the Central European Bank (CEB) decided to inject liquidity in the monetary system, hoping to gain back the confidence of investors to help stabilize the situation.
On 9 August 2007, the CEB acted first by making available 94. 8 billion euros to banks, followed shortly by the FED which injected $24 billion to appease the spirits of investors. However, markets initially misinterpreted the message, considering their involvement as a sign of weakness. The next day, the CEB injected again 61 billion euros and the FED, $35 billion, but the markets felt down again. Finally, on August 13, 2007, the same action was repeated and the monetary market as well as stock markets around the world kept their heads above water.
While it seemed like the financial crisis was faded away at the end of 2007, a second wave of crisis appeared from the banking sector at the beginning of 2008. This was due to the creation of new products such as residential mortgage-backed securities (RMBS), Asset-backed Securities (ABS). In fact, credit risk, such as subprime mortgages, were pooled and backed by other assets, more or less risky, in Collateralized Debt Obligations (CDO) (See Exhibit 5, pages 31). These clusters of scattered debts were then sold on the stock exchange by the issuer, like shares of a company could be given up.
This results in the transfer of the risk of non-payment from issuers of mortgages to financial institutions: in particular banks, major consumers of CDO. In order to invest on the CDO market, some financial organisms went even further and created Structured Investment Vehicles (SIV) that did not have to respect the usual rules of prudence of the banking system. This amplified the risks taken and losses impacted on the performance of the bank. Other new products were also created such as Credit Default Swap (CDS), an insurance contract between two entities against a risk faced by one of two entities, such as the non-payment of a debt.
The price of the CDS reflects the confidence in a particular issuer of a debt and is the basis for determining the value of the product of the debt. The crisis took a new dimension on September 15, 2008 with the bankruptcy of Lehman Brothers and AIG (narrowly saved by the Fed), as well as several American and European banks (HBOS in United Kingdom, Fortis in Europe, Dexia in France and Belgium, etc. ). This international and financial crisis still has repercussions on today’s stock markets and the end of the tunnel seems far away. The question raised here is the role played by the Credit Rating agencies in the crisis.
Are they the only ones to blame for everything that happened? Are the actions intended by the rating agencies responsible for the crisis? 2) The credit Rating Agencies are not fully responsible… Ever since the crisis, the credit rating agencies have been easy targets to blame for what happened in 2007 and the years after. Effectively they did not anticipate the downturn of the market, they continued to attribute good rating to banking institutions already hurt by the crisis with an increasing book of bad loans or bad papers that banks will have to deleverage.
Many criticisms have been emitted about toward them. However, it is important to point out that they are not the ones and only responsible for what happened. They did not have power over a lot of factors that went wrong, and for that they cannot be the only to take the fault in the financial crisis. The thermometer could not be responsible for the fever. First of all, they are not responsible for the bankers or mortgage brokers who gave loans unwisely. These institutions lacked of common sense and thinking when offering credits.
Banks and managers perfectly knew that unemployed borrowers would never be able to reimburse their mortgages. They have, indeed, disproportionately opened the gates of credit by taking for guarantee, when they did take some, the increase of real estate prices or their trust in the growth of the economy. They thought that they could make benefits if the debtor did not pay, as they believed that they could force the sale of the house for a higher price. However, real estate prices always end up going down and the economy is fluctuating.
In an attempt to reduce the risk of these new kinds of loans, banks used securitization; they transformed these loans and resold them on the stock market. Therefore, mortgages securitizers are also to blame. Some companies such as Washington Mutual, Morgan Stanley or Bank of America were mortgages originators as well as mortgage securitizers, other like Goldman Sachs, Lehman Brothers and Bears Stearns bought mortgages directly to subprime lenders and pooled them together to resell them to investors. However, as soon as a debtor was not able to pay back his mortgages, the security became toxic and had no more value.
Nevertheless, this was not the last step. Some banks would buy and bundled mortgage backed-securities into collateralized debt obligations, composed of different levels of risk. The creators of these new financial products are also responsible for the crisis. They bet against these risky CDOs by using credit default swap. (See exhibit 5) Government Sponsored Enterprises (GSEs) could also be blame for what happened. They indeed, control the mortgage market. When a bank or a mortgage broker wanted to take off his books a loan, it could sell it to a GSE, which led to a higher number of mortgages.
Fannie Mae and Freddie Mac are the two major GSEs. Alone, they own or guarantee half of the current mortgages. With their “government status”, investors can buy those bonds while asking for a low interest rate in return, as federal government bonds have the safest credit rating in the world. As long as debtors paid back their mortgages, Fannie Mae and Freddie Mac would be able to pay their creditors too. However, as these loans where often given out, even to people we knew could not reimburse, GSEs had to assume the risk. Therefore, we could also say that investors could be blamed for the role they played.
They bought and invest in financial products they did not know about. They should have conducted researches about what they were purchasing and should have known these were subprime and meant a higher risk of non-payment. However, we have to see the bigger picture. At that time, banks received pressure from higher instances to encourage homeownership and so, to grant loans to the poorest population. The government wanted households with a less comfortable life to be able to buy their own house. The pressure that was put on the banks “forced” them to give mortgages to debtors that would ikely not pay back. This being said, borrowers are also responsible for contracting loans that they pertinently knew they could not afford. Moreover, the credit rating agencies are also not responsible for the debt of the countries. They have often been accused to do be the reason for the deficit of some countries such as Greece. Nevertheless, Greece has always had a huge deficit. They never had a break-even budget in 150 years, and governments from left to right parties systematically laid about the finance of the country.
In addition, the national sport is not the Greco/Roman wrestling or the Marathon but how to avoid paying taxes; nothing in which the rating agencies were involved. Furthermore, regulators could have also done a better job to prevent the crisis. In the United States, several regulators exist and each of them has a specific area of expertise. The regulation of the banking sector is shared between the Federal Reserve (Fed), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (which guarantees the deposits of bank customers) and the Office of the Thrift Supervision (OTS).
There is also The Securities and Exchange Commission (SEC) that is responsible for the supervision of stock exchanges. The Financial Industry Regulatory Authority provides the regulation of brokerage activities. Finally, the Commodity Futures Trading Commission (CFTC) insures the regulation of futures and options markets. This various regulators could have acted to appease the situation. The SEC could have, indeed, regulate lending practices at banks and force them to keep more capital reserves in case of losses.
The Federal Reserve could have contained the housing bubble by setting safer mortgages lending standards, which it failed to do and especially when Alan Greenp who was the head of the FED, refused to improve the examination of the subprime mortgage market. Finally, according to the Financial Crisis Inquiry Report, executives in the main investment banks did not hold enough capital to be fully protected against losses. Some companies, such as Lehman brothers or Citigroup would just hide bad investments off their books.
It is mainly a problem related to the liquidity crisis that led to the bankruptcy of Lehman Brothers. Lehman Brothers, indeed, financed itself on the short-term and lend on the long-term. When the source of the financing dried up (banks did not trust each others by fear of not being paid off), Lehman found himself stuck and was enabled to face its commitments. If the credit rating agencies were not responsible for the mortgage originators or securitizers, the creation of the CDO, the regulators or the executives of the investment banks, they surely played a tremendous role in the crisis ) …But they could have done better The credit rating agencies are responsible for a lot in the financial crisis. Several aspects of their business as well as the actions they have done have been pointed out as the main cause of the crisis. First of all, the pertinence of their business model was questioned, among others the oligopolistic situation of the market and the conflict of interest created by the issuer-payer model. The “Big Three” (Standard & Poor’s, Moody’s and Fitch Ratings) generate 95% of the $6 billion market that the rating business represents.
These three agencies dominate the market and adopt similar methodologies and practices. The business model of the rating agencies establishes itself on the independence and the credibility granted by the financial markets and the authorities of supervision. That is why, in the absence of statutory reforms and / or of the desertion of numerous customers, the leadership of the “Big Three” will be maintained, protected by strong barriers of entry (reforms difficult to set up and loyalty of issuers often connected to the heaviness of the rating process).
Besides, the oligopolistic situation is strengthened by a consolidation, on the initiative and thus for the benefit of the “Big Three”. So, Fitch acquired in June 2000 the fourth American rating agency, Duff and Phelps, and in December 2000 Thomson BankWatch. At the beginning of 2006, Fimalac gave up 20 % of Fitch Group (who, herself, holds Fitch Ratings, Fitch Training and Algorithmics, this last company having been acquired in 2005) to Hearst Corporation. Likewise, the French subsidiary of Standard & Poor’s acquired ADEF (Agency of Financial Evaluation).
Another reason why the credit rating agencies played an important role in the financial crisis is because of the conflicts of interest they were facing with the issuers. If some say that these conflicts of interest were of minor importance since there are always conflicts of interest in relationships, in that case, it had serious consequences on the global economy, as they are one of the causes of the subprime crisis in 2008. It is, indeed, the issuer that pays the rating agency so that this one estimates its capacity to pay off its debt.
It is thus relevant to wonder about the partiality and the objectivity of the rating agencies which find themselves “at the same time judge and judged” and which can be inclined to note well its customers to keep their market share. Besides, the transparency that the rating agencies show in their methodologies and during their changes of ratings is unreliable as far as these sudden reversals seemed to have destabilized the markets. The three major credit rating agencies also contribute to worsen the financial crisis by their practices. They were, indeed, a key factor in the financial meltdown.
They attributed a rating to every products offered on the stock market. Even mortgage-related securities received a good grade, which made it easier to market and sell them. As we have seen previously, the ratings that they gave had an almost “biblical authority”, so investors trusted the rating agencies to be fair and to give relevant grade to each product and did not conduct further investigation regarding their investment. Credit Rating Agencies were necessary to the mortgage-backed securities market; each actor in the process needed them: The issuers, to approve the structure of their deal – The banks, to determine what capital to hold – The investors, to know what to buy Since 1970, when the credit rating agencies got the status of NRSRO, the SEC decided to base the capital requirements for banks on the grades given by the rating agencies. This is also included into the banking capital regulations as the recourse rule, which allows banks to hold less capital for higher-rated securities. The SEC also prevented money market funds to buy securities that did not receive ratings from at least two NRSROs.
Without these good ratings, banks would not have been able to place these financial products so easily onto financial markets, and the investors would have never bought them. Theirs ratings helped the market to go up rapidly and their downgrades between 2007 and 2008 wreaked havoc across markets and firms. These ratings, especially the ones for the mortgage-backed securities, appeared to have been very optimistic. But what we could observe, throughout the crisis, is the gregarious reflex of the credit rating agencies.
They usually agreed on the ratings and when one of them downgraded a security, a company or even a State, the others would usually follow and did the same thing. As we have seen, the Credit Rating Agencies have indeed played an important role in the financial crisis. However, they are not the only one to blame. Thus, we can say that the thermometer is not responsible for the crisis but it could have given a better temperature of the situation. III. What is next? As we discussed, the credit rating agencies have been criticized a lot during the crisis and some flaws of them have been pointed out.
In order to improve their efficiency, it is important to understand what we have learned from the crisis and then propose a better regulation or an alternative to the Big Three. 1) Lessons learned from the Financial Crisis The first lesson learned from the crisis is the impact of the globalization of financial markets. This has linked countries together in a greater extent than they were before. That is why, in today’s economy, any crisis that hits a main country or group of countries will have repercussion on all other countries. The financial crisis of 2008, started in the United States with the subprime bubble.
Then it grew bigger and affected the rest of the world almost immediately compared to the 1929 crisis which also had worldwide impact but more gradually. We have to keep into consideration this new factor and realize that globalization plays an important role in the current worldwide economy. In addition, a country and its financial system need to be better prepared to face the crisis, in order to limit economic and financial damages. This means having a sound and well-regulated environment, keeping its inflation rate low, its exchange rate flexible, and its debt position sustainable.
By doing that, a country would limit its vulnerability in front of any financial crisis. Moreover, the country should use fiscal and monetary policies to be able react quickly in case of external shocks. Another lesson learned is the question of the financial supervision. The global crisis is a crisis of confidence, which must impose rules on investment in the financial market, such as CDS (Credit Default Swaps) and short-selling of securities, clearing of OTC derivatives to reduce risks, CSD (Central settlement and Depository) regulation to protect investors and also Hedge Funds transparency.
In macroeconomics, monitoring means imposing laws and rules on a structure with what is called the invisible hand. In our case, the invisible hand is the World Bank and the International Monetary Fund and the States, which have full power to intervene and better regulate transactions in the financial markets. This crisis also revealed some weaknesses regarding risk planning. Research based on various methods, including country case studies, confirmed that the more the planning is important, the more the quality of the financial services of a country is raised and more the financial intermediation is efficient.
The planning of the risks led a certain number of countries to revise their financial structures to adapt itself to the global economic transformations. Finally, we can say that every good thing comes to an end, positive times do not last forever and the end is most likely going to be painful. In today’s financial system and global economy, we cannot avoid financial crisis, we can just hope that enough efforts will be done to improve our financial system and to limit the impacts of future crisis on our economy.
If we focus on Credit Rating Agencies, to have a sound environment, it is worth considering a better regularization of our existing Credit Rating system, a new and improved rating system or the promotion of totally new credit rating agencies. 2) Regularization of our existing Credit rating system After the dysfunction of our system translated for instance into the collapse of Lehman Brothers, the disappearance of famous institutions such as Bear Sterns or Merrill Lynch, G7 members stressed the financial industry to improve its functioning mode and enhance the regulation.
Several critics have indeed been directed to the credit rating agencies regarding the methodologies used by those agencies (including the growing place of the so-called political factors), the lack of transparency of their decisions, the rudimentary explanation accompanying the changes in notation, the moments selected to realize their announcements of ratings and finally, the potential conflicts of interest. All these aspects need to be taken into consideration when aiming to regulate the rating agencies. Various reform proposals have been recommended.
Among them, you find some proposing the suppression of the government’s influence over this industry, or even the creation of a completely government-sponsored rating entity. However, the final goal is the accuracy of the credit rating. The first main step toward a better regulation happened in 2006, when a new section to the Securities Exchange Act has been added. The objective was to “improve rating quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating industry” (ANNUAL SEC REPORT, supra note 22, at 16).
The market is an oligopoly; the Big Three set the tone for the rest of the industry. Encouraging competition should give more choices to investors, at a lower cost and with better quality ratings. Several rules were added along the way, especially in 2009, when the SEC’s new rule addressed conflicts of interest, fostered competition and required detailed disclosure. For example, a NRSRO could not anymore issue a rating in which it had advised the bank or the issuer for the structure of the product.
Another change emerged from the Dodd-Frank Act, in 2010, where a whole chapter has been dedicated to the rating agencies: “improvements to the regulation of the Credit Rating Agencies”. The Dodd-Frank Act qualified the agencies as “gatekeepers” for the debt market and that is why they needed “public oversight and accountability”. This meant reducing the investors’ reliance on ratings by limiting references to NRSRO ratings from rules, increasing the liability exposure, maintaining and informing on the structure of the ratings, as well as filing control reports yearly.
However, both of these new reforms showed weaknesses, particularly in addressing the conflicts interest coming from the issuer-payer model, or the oligopoly. As mentioned before, several proposals would appear more efficient to answer these problems. The first proposal would be the elimination of the NRSRO status, which would remove any regulatory reliance on the ratings. This would also drive prices down as there would be an increasing competition, but it would also improve the rating quality and the innovation.
Nevertheless, this proposal would lead to a total revision of the entire bank regulatory system and could also increase the pressure to satisfy issuers. The second proposal was to create a totally government-sponsored rating industry. This would make the rating a public good, eliminating any conflicts of interest due to the issuer-payer model. Although appealing because it resolves one of the main critics emitted during the financial crisis, it does not say who is going to pay for the subsidization.
Finally, another more recent proposal called “disclose or disgorge” asks for the agencies to disclose the quality of the ratings they give, which means disclose to the public when a rating is “low quality” or disgorge benefits made with the rating. However, charging penalties would increase the barriers of entry on this market and discourage potential NRSROs. The rating business faces two major problems, the oligopolistic situation of the market that is being maintained by an increased regulation that secures the Big Three, and the issuer-payer model that fosters the conflicts of interest.
Even though several reform proposals have been suggested, none appears to be totally conceivable. 3) A new rating system We have seen that a lot of reform proposals exist in order to enhance and increase regulation of the rating system. These proposals, indeed, reveal that some aspects of this business need to be improved. Eventually, a new rating system is worth considering. First of all, we have realized already touch based, throughout this analysis that the business model of the credit rating agencies needs to be modified, especially the issuer-payer model.
The fact that the issuer is the one that pay the agencies for their ratings creates a conflict of interest that has to go away to insure an accurate and objective rating. In order to solve this issue, a new model is necessary. A possible idea to get there would be to make, not the issuer, but the investors (the ones that want to know the rating of a company or an entity) to finance the credit rating agencies. It is indeed them that need to know the rating of an entity, so it would be fair for them to pay in order to know what they are investing in.
This would solved the problems related to the conflict of interest as rating agencies will not be tempted to give a good grade just to satisfy the client and avoid loosing profits. This was actually the model that existed before 1970, when the issuer-payer model was established. The shift to a model investor-payer would constitute a deep change for the whole rating industry but would eliminate the conflicts of interest. Another change that would be conceivable would be to set up a “rating planning”. The credit rating agencies should emit their grading at a known rhythm.
Therefore, companies or States would know when they would be rated. For example, every January 1st, they could give their ratings for all entities. This would avoid sudden downgrades as we saw during the crisis, where rating agencies lowered the rating of a company right before it went bankrupt. Furthermore, to improve the accuracy of the ratings, a distinction between the rating of a company and a State should be made. In fact, Credit rating agencies do not evaluate the same thing when rating a country or a firm.
That is why different ratings should be given according to the nature of the entity. Finally, this new rating system should have a better transparency of ratings. As this has often been reproach to the agencies, it is clear that we need to improve it. In order to get more transparency in the ratings, the credit rating agencies should be forced to make public some criteria that contributed to the rating process. In addition, when an entity is downgraded, there is ever a clear explanation.
An explicit and standard comment should go along with the new ratings to explain the cause of the downgrade or upgrade. All these improvements should be made to obtain a more transparent and accurate rating. These changes could lead to more efficient and regular ratings where conflicts of interest would be inexistent and where the distinction between entities would improve the relevance of the ratings. 4) Creation of a new credit rating agency Finally, another solution that arises would be the creation of a new rating agency.
This proposition is particularly discussed in Europe. The arguments called in favor of the creation of a European rating agency are multiple. It would be a question, first of all, of introducing more competition into a sector that is today dominated by three major actors. Standard and Poor’s, Moody’s and Fitch Ratings are indeed sharing more than 90 % of the market, a situation which confers to the members of this “Big Three” a tremendous capacity of influence. To create a new rating agency would be a way of having a bigger diversity of points of view.
The trust that would be granted by the investors to a new European agency would depend however on its capacity to avoid the criticism sent to “Big Three” in terms of independence and conflict of interest. It would also be necessary to specify the status of the new agency: a public or a private organization? A public rating agency could face the mistrust of the investors, who could doubt its independence towards public authorities and States, which it would have the mission to evaluate. On the other hand, a private agency would look like a non-profit foundation.
The rating agency would be financed by the investors who would use its notations, and not by the entities emitting the financial products, which would allow guaranteeing its independence. Nevertheless, the future prospects of such a structure remain uncertain: to what extent would it be able to impose itself in front of “Big Three”, in a sector where the experience and the reputation of the institution play a determining role? In addition, a history of ratings would be necessary to evaluate the evolution of an entity and a strict method is mandatory for accurate rating.
A new rating agency would not be able to have all of these factors before several years. To conclude, it is not easy to find the best solution to improve the current rating methods. Different regulations have been tried, all presenting good points but also flaws. However, what we need to enhance is clear: better transparency, a more accurate rating and a suppression of the conflicts of interest. Conclusion The role of the credit rating agencies in today’s economy is crucial. They evaluate the creditworthiness of an entity, influencing investors and interest rates.
However, during the crisis, their role has been criticized. Several factors can explain their controversial position. The oligopolistic situation of the market, their supposedly trustworthy evaluations given by their NRSRO status, as well as the conflicts of interest coming from their issuer-payer model are the main causes of the critics emitted toward them. Recently, the American justice even pressed charges against the rating agencies for their role in the crisis and asked for five billion dollars. Nevertheless, even if the credit rating agencies are the ideal responsible, they are not the only ones to blame.
Now that the crisis revealed the different flaws of their system, we can only improve them going forward. Several regulations have already been approved and others are still under consideration. Other ideas to enhance the rating system include a new financing model, by perhaps considering going back to the investor-payer model, a better transparency of their rating, by showing the criteria used for their ratings, and a distinction between a company or a security and a State, which are two completely different entities.
Lastly, we can wonder if the Credit Rating agencies still have as much influence as they used to. For instance, when downgrading both the United States and France, the repercussions were minors even nonexistent. The lost of their triple A did not bring the interest rates up as it should have, since today the interest rates are historically low in both these countries. Exhibits Exhibit 1 – Credit Rating Agencies with the NRSRO designation Exhibits Exhibit 2 – Rating systems of the Big Three Source: “Credit rating – Wikipedia, the free encyclopedia.  Wikipedia, the free encyclopedia. N. p. , 7 Mar. 2013. Web. 13 Mar. 2013. ;http://en. wikipedia. org/wiki/Credit_rating;. Exhibits Exhibit 3 – Important facts about the crisis Exhibits Exhibit 4 – Evolution of market indexes from August 9 to 16, 2007 Index| Evolution| Dax (Germany)| -4,42%| Dow Jones (USA)| -5,95%| Nasdaq (USA)| -6,16%| FTSE 100 (United Kingdom)| – 8,37 %| CAC 40 (France)| -8,42%| Nikkei (Japan)| -10,3%| Exhibits Exhibit 5 – Residential Mortgage-backed securities These tranches were often purchased by CDOs These tranches were often purchased by CDOs
Source: The financial crisis inquiry report: final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Official government ed. Washington, DC: Financial Crisis Inquiry Commission :, 2011. Print Bibliography * Dupuy, Claude . “La crise financiere 2007-2008 – Les raisons du desordre mondial – C…. ” francetv education – la plateforme des parents, eleves et enseignants. N. p. , n. d. Web. 12 Mar. 2013. ;http://education. francetv. fr/dossier/la-crise-financiere-2007-2008-o21596-chronologie-de-la-crise-2007-2008-780;. Gannon , Jack. “Help the Credit Rating Agencies get it right. ” Annual review of Banking and Financial Law 31 (2012): 1015-1052. www. bu. edu. Web. 10 Mar. 2013. * Gedos, Jean-Guy, Oussama Ben Hmiden, and Jamel Henchiri. “Les Agences de Notations Financieres, Naissance et evolution d’un oligopole controverse. ” Revue Francaise de Gestion 227 (2012): 45-63. Print. * Goldberg, Adam. “Credit Rating Agencies Triggered Financial Crisis, U. S. Congressional Report Finds. ” The Huffington Post. TheHuffingtonPost. com, 13 Apr. 2011. Web. 12 Feb. 2013. * Gourgechon, Gerard. Les Agences de Notations. ” http://alternatives-economiques. fr. N. p. , 17 Jan. 2012. Web. 3 Mar. 2013. <http://alternatives-economiques. fr/blogs/gadrey/files/agences-de-notation26p. pdf>. * Krebs, Joshua. “The Rating Agencies: Where we have been and Where do we go from here?. ” The Journal of Business, Entrepreneurship & the Law 3. 1 (2009): 133-164. Print. * McLean, Bethany, and Joe Nocera. All The Devils Are Here, The Hidden History of the Financial Crisis. New York: Penguin Group, 2010. Print. * “Mieux comprendre la crise – Universcience. ” Cite des Sciences.
N. p. , 1 June 2009. Web. 12 Mar. 2013. <http://www. cite-sciences. fr/fr/bibliotheque-bsi/contenu/c/1239022244230/mieux-comprendre-la-crise/>. * Panchuk, Kerri Ann. “Credit ratings agencies a ‘key cause’ of the financial crisis: Senate report | HousingWire. ” U. S. Housing Finance News | HousingWire. N. p. , 14 Apr. 2011. Web. 12 Mar. 2013. <http://www. housingwire. com/news/2011/04/14/credit-ratings-agencies-key-cause-financial-crisis-senate-report>. * Pelletier, Cecile. “Crise financiere : les cles pour comprendre – La crise des “subprimes”. L’Internaute : actualite, loisirs, culture et decouvertes…. N. p. , n. d. Web. 12 Mar. 2013. <http://www. linternaute. com/actualite/economie/international/crise-financiere/1-crise-des-subprimes. shtml>. * Piliero, Robert D.. “The credit rating agencies: Power, responsibility and accountability. ” Thomson Reuters News and Insight Legal: Legal News, Information and Analysis. N. p. , 19 July 2012. Web. 12 Mar. 2013. <http://newsandinsight. thomsonreuters. com/Legal/Insight/2012/07_-_July/The_credit_rating_agencies__Power,_responsibility_and_accountability/>. The financial crisis inquiry report: final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Official government ed. Washington, DC: Financial Crisis Inquiry Commission, 2011. Print. * Verschoor, Curtis C. “Credit Rating Agency Performance Needs Improvement. ” Strategic Finance 1 Jan. 2013: 17-19. Print. * Vodarevski, Vladimir. “Crise financiere: qui est responsable? – Analyse Liberale. ” Analyse Liberale. N. p. , 22 Feb. 2009. Web. 12 Mar. 2013. <http://economie-analyses-actualites-opinions. over-blog. com/article-28216064. html

The Credit Rating Agencies, Their Role in the Financial Crisis?

Calculate the Price

Approximately 250 words

Total price (USD) $: 10.99