A review on Health sector reforms in India   The health sector reforms in India were started way back in 1970s .The Govt. of India identifies the need HSR and stated in the eighth five year plan. The Eighth Five Year Plan (1992-1997) was the first plan document to state the need for re-structuring of economic management systems, following the macro developments of the 1990s. During this period in the health sector, the concept of free medical care was revoked and people were required to pay, even if partially, for the health services (1). The Ninth Five Year Plan (1997-2002) emphasized the need to review the response of the public, voluntary and private sector health care providers as well as the population themselves to the changing health scenario, to reorganize health services to bring about greater efficiency and effectiveness and to introduce health system reforms to enable the population to obtain optimum care at affordable cost The Ninth Plan sought to increase the involvement of voluntary, private organizations and self-help groups in the provision of health care and ensure inter-sectoral coordination in implementation of health programmes and health-related activities as well as enable the Panchayati Raj Institutions (PRI) in planning and monitoring of health programmes at the local level so as to bring about greater responsiveness to health needs of the people and greater accountability; to promote inter-sectoral coordination and utilise local and community resources for health care(2) .The Tenth Five Year Plan (2002-2007) touches upon reforms at primary, secondary and tertiary level(3).                         Politics influence health systems in significant manner. The goals, priorities, and the strategies, variations in the commitment are largely decided through the political contingencies. There are competing demands on the health systems. The evolution of the health systems is largely shaped by the culture, history, and norms. Client satisfaction is very high. As per NFHS-2 data, an overwhelming majority of clients are satisfied by the services delivered by the public systems. May be the expectations are low or may be our people are so courteous. But on the hand, we have the report from Transparent International, ranked the health system in India is the most corrupt system (4)   The Government has taken several steps for improving the public health care institutions and Strengthening the primary health care infrastructure. However, the situation is compounded by severe resource constraints – financial, technical and human power related, which has resulted in policy makers as well as programme managers at differing levels being faced with difficult choices. In such a situation, attempts are being made through various reform initiatives to ensure that the health needs of the people are met One of the major reform initiatives underway is the Secondary Health System Strengthening Project funded by the World Bank in seven states (Andhra Pradesh, Karnataka, Punjab, West Bengal, Maharashtra, Orissa and Uttar Pradesh). The projects include strengthening FRUs/CHCs and district hospitals so as to improve the availability of emergency care services to patients, to reduce overcrowding at district and tertiary care hospitals, construction works, procurement of equipment, increased availability of ambulances, drugs; improvement in quality of services following skill up gradation training in clinical management, changes in attitudes and behavior of health care providers; reduction in mismatches in health personnel / infrastructure; improvement in hospital waste management, disease surveillance and response system. It is essential to assess both progress and problems in implementation of the reforms in each state and to appropriately modify the content and pace of implementation. Such an overview and analysis of all related issues is necessary to provide evidence to policy makers and other stakeholders in terms of the various dimensions and impact of health sector reform.(5) In the Indian Constitution, health is a state responsibility. During Adjustment, many state governments in India had recourse to Health Systems Development Project loans from the World Bank for carrying out health sector reforms (HSR), of which one of the key policies has been to raise public spending on health care from the abysmally low levels seen up to then. The Health Systems Development Project seeks to develop strategic management capacity; strengthen performance, accountability, and efficiency; and build implementation capacity. Further, it seeks to improve clinical service quality by renovating and expanding district, sub district, and community hospitals and improving access to services. In all seven reforming states, around 15% of the total project cost is borne by the state governments. All the project documents note the low levels of funding for secondary hospitals in the reforming states. This is attributed to the small share of overall public spending allotted to health, the limited portion of total health spending going to hospitals, and, within this, a skewed distribution of funds in favour of the tertiary hospitals. After analysis of the problems of the health sector, the governments of the reforming states have agreed-using terminology ranging from “assurances” to “commitments”-to several undertakings. These are: (i) to enhance the overall size of the health budget; (ii) to redress imbalances in public expenditure between secondary and tertiary care levels; (iii) to safeguard the operations and maintenance components of current expenditure allocations for the secondary health-care sector; (iv) to charge user fees for selected services; and (v) to address workforce issues. The Health Systems Development Project initiated in the seven states recognizes the need for enhanced public spending on health and identifies it as the foremost policy reform to be pursued. Nevertheless, such assurances and conditions have not succeeded in enhancing health sector budgets in states implementing HSR. Worse, HSR has not been able to arrest the decline in the share of health spending within total government spending. The Indian system is especially complicated, as the larger tax resources are controlled by the central government but the major responsibility for health-care spending is bestowed on the states (6).Andhra Pradesh is the first state to go with the HSR.               Health sector reforms in Andhra Pradesh   The state of Andhra Pradesh was formed on 1st November, 1956 under the States’ reorganization scheme. It is the fifth largest State with an area of 2, 76, 754 sq. km, accounting for 8.4 % of India’s territory and also the fifth most populous state with a Population of 75 crores. The state has varied physiographic features ranging from high hills, undulating plains to a coastal deltaic environment. Administratively, Andhra Pradesh is divided into 23 districts, 79 revenue divisions, 1123 mandals, about 27000 villages and 264 towns. AP’s economy grew at 7.2% during 2006-07 — the fourth consecutive year of 6% plus growth. The latest poverty headcount ratio stands at 16%, compared to 23% for India . the third-highest credit rating among the major Indian states; the third best investment climate in the country; and the fourth-lowest corruption level among Indian states Andhra Pradesh was the first Indian state to receive a multi-sector Bank operation – the Andhra Pradesh Economic Restructuring Program for US$ 550 million in 1997 – aimed at helping the state accelerate policy and institutional reforms across a wide range of sectors under a common fiscal framework. It is also the only Indian state where the Bank has disbursed three budget support operations – the First Andhra Pradesh Economic Reform Loan (APERL-1) in March 2002, the Second APERL in February 2004, and the Third APERL in January 2007 – that sought to support the state’s development program.(12) Within AP there are regional, social and gender disparities. Health outcomes are worst among Scheduled Castes (16% of population) and Scheduled Tribes (7% of population), especially those living in underserved areas in North tribal and South drought prone districts, and for women. Effective delivery of quality basic health services is hampered by demand and supply side issues, including poor health infrastructure and staffing.(15)     The reform history in health sector in the State can be traced to Andhra Pradesh First Referral Health System Project, one of the first World Bank aided health system projects in the country. This project, launched in 1995 had been implemented by AP Vaidya Vidhana Parishad (APVVP). Agencies like World Bank and DFID are supporting the reform process in the State. The Bank supported the AP Economic Restructuring Project which included improvement of primary health care as one of the component.(7) The priority reforms focus on improved access to quality and responsive health services, strengthened governance and management in health sector, improved institutional mechanisms for community participation and systems for accountability; and strengthened financial management systems.(15)  The government of Andhra Pradesh [GoAP 1999] Vision 2020 document identifies a seven-point set of priorities for health sector reform: providing universal access to primary healthcare; encouraging private investment in tertiary healthcare; focusing on specific programmes to promote family planning; focusing on improving health levels in disadvantaged groups and backward regions; ensuring a strong prevention focus; enhancing the performance of the public health system; and formulating a state information education and communication (IEC) programme to broadcast information on preventive healthcare.(13) The Government of Andhra Pradesh is embarking on a major health sector reforms to improve health care delivery in the State. D.F.I.D. has expressed its willingness to support these initiatives with a grant of 100 Million pounds over the next five years (2006-2011). The reform initiative will include measures to improve the effectiveness and accountability of public health services, measures to focus on community centric preventive healthcare system and enhance access to quality healthcare for the poorer sections of the population(14) DFID will provide up to £40 million health sector budget support to the DoHMFW, GoAP, over 3 years 2007 – 2010. The sector support will build synergy with National Rural Health Mission (NRHM) which is a health sector reform program of the central government for decentralisation, pro-poor focus, strengthening service delivery(15)     The health sector support will be provided over three years (2007-08 – 2009- 10). It aims at increased use of quality health services, especially by the poorest people and in underserved areas.(16) The main outputs will be: a) Improved access to quality and responsive services, especially in remote and interior areas; b) Governance and management of health sector strengthened; c) Institutional mechanisms for community participation and systems for accountability in functioning; and Financial management systems strengthened and improved public expenditure on health.   The performance of health services would be measured against(17)

* greater effectiveness and improved outcomes of existing programs;
* improved efficiency in the allocation of resources;
* greater access and equity; and
* consumer satisfacfion

Reforms underway in health sector   The major reforms underway are classified under these categories and the activities are noted below and we will look each of them in detail    (I) Reorganization and restructuring of existing government health care system

Establishment of Andhra Pradesh Vaidya Vidhana Parishad Strengthening of referral institutions and fixing of service norms Improvement in drug supplies Formation of Andhra Pradesh Health, Medical & Housing Infrastructure Development Corporation (APHM&HIDC) Strengthening of PHCs as 24-hour MCH centers Establishment of Comprehensive Obstetric & Neonatal Care (CEmONC) centres

(II) Changes in health system organisation, delivery and Management

Formation of Hospital Advisory Committee/ Hospital Development Societies for all PHCs and FRUs/ teaching hospitals Provision of free travel bus passes to pregnant women for antenatal check ups Public Private Partnership

(III) Changes in financing methods

Sukhibhava Scheme (Improvement of Institutional Delivery Services Scheme) User fees

(IV) Reforms related to human resources

Integration and responsibilities of functionaries for planning, implementation and monitoring of programmes of HM & FW department

(V) Involving community in health service delivery and Provision

Women Health Volunteers Scheme

(VI) Reforms to quality of care

Performance indicators for grading the PHCs Performance rating of secondary hospitals

    1.Reorganization and restructuring of existing government health care system   A)Andhra Pradesh Vaidya Vidhana Parishad   AP, has created the Andhra Pradesh Vaidya Vidhana Parishad (APVVP) by enacting an Act in the Legislative Assembly in 1986(8) This was done with the objective to lay greater emphasis on development of both preventive as well as curative health care  and to strengthen necessary linkages at appropriate levels to ensure comprehensive medical and health care services. APVVP has undertaken World Bank assisted Andhra Pradesh First Referral Health Systems Project (APFRHSP) in 1994 for a period of seven years. This has been one of the major projects undertaken by APVVP. The objectives of the project included improvement of efficiency in the allocation and use of health resources through policy and institutional developments and enhanced performance of health system by improving the quality, effectiveness and coverage of health services at the first referral level.   B)Strengthening of referral institutions and fixing of service norms   basic service norms for various categories of hospitals under the administrative control of APVVP have been fixed thereby creating a hierarchy of hospitals according to services and facilities. This system of service norms and referral linkages had been developed with a view to optimise utilisation of resources, avoid duplication and wastage of resources, regulate patient flow and reduce cost of treatment by reduction of patient burden at tertiary hospitals. the district hospital has been prescribed to provide services in eleven specialties for which 9 civil surgeon specialists, 18-20 civil assistant surgeons, 54-84 paramedical staff and other supporting staff have been Posted. C)Improvement in drug supplies To ensure regular supply of drugs at all times and in all situations, a system of three sources of drug supply has been put in place for the hospitals under APVVP: (a) centralised drug procurement system under which the institution has been allotted drugs worth a particular amount based on bed strength (Rs 2000 per bed per quarter); (b) an emergency provision for drugs (Rs 100 per bed per month) has been made to every institution from where emergency procurement of drugs is made; (c) drugs which are in short supply and for which regular rate contract suppliers are not available have been stocked at the office of District Coordinators of Health Service. Under the APFRHSP, const-ruction and repair of 160 hospitals including 81 CHCs, 58 area hospitals and 21 district hospitals had been undertaken.(10)         D)Formation of Andhra Pradesh Health, Medical & Housing Infrastructure Development Corporation (APHM&HIDC)   a separate corporation has been set up in 1987 exclusively for developing housing and other infrastructure for medical and paramedical staff and constructing sub centers, PHCs, hospitals, dispensaries, clinics and other health care centers One of the major projects undertaken by APHM&HIDC has been the World Bank assisted India Population Project-VIII launched for improving the medical care facilities in urban slums in 74 municipalities.   E)Strengthening of PHCs as 24-hour MCH centers   In a move to make available maternal and child health care at all times, 470 PHCs in backward districts have been designated as round the clock Mother and Child Health Centre (earlier called women health centres). One staff nurse, one ANM and three support staff have been appointed in each centre on contractual basis. Staff nurses have been trained to conduct normal deliveries and refer emergency cases. Additional facilities like telephone and vehicle have been provided to the PHCs in order to assist communication and transport for referral of emergency cases. Provision has been made to conduct fortnightly specialist clinics of gynaecology and paediatrics in these centres to detect high risk pregnancies and neonates for referral to FRUs.   F)Establishment of Comprehensive Obstetric & Neonatal Care (CEmONC) centres   The State Government has decided to establish 108, CEmONC centres spread across every district so that pregnant mothers requiring emergency care do not have to travel more than 40-50 kms to receive specialist care. Training of MBBS doctors in anaesthesia, neonatal care and blood transfusion is also planned to support this scheme.   2)Changes in health system organisation, delivery and Management A)Formation of Hospital Advisory Committee/ Hospital Development Societies for all PHCs and FRUs/ teaching hospitals   Hospital Development Societies have been constituted in all tertiary hospitals under the control of Directorate of Medical Education.(18) and after implementing NRHM rogi kalyam samithi at every PHC were formed to ensure the adequate participation of local institution,with an aim to improve effective and efficient services with allowed flexible financial powers. These societies are examples for decentralization . Activities of the society include maintenance of the hospital (including sanitation & water supply, electricity, building & civil works and equipment), purchase of drugs & medicine supplies and equipment. The government has set norms and limits for undertaking these works which are to be adhered to by the Society. The ‘system works’, observed an Unicef team which assessed the impact of RKS towards the end of 2000. The system, however, is not without any lacunae. For, it was pointed out that “overall control of the local RKS bodies remain in the hands of the collector and if he is not interested in health care then the whole thing might just drift(13)   B)Provision of free travel bus passes to pregnant women for antenatal check ups(19)   The Government of Andhra Pradesh has started an innovative scheme in order to enable pregnant women in rural areas to avail antenatal check ups at the nearest PHC/area hospital or FRU. It has tied up with the State Road and Transport Corporation to issue free transportation bus tickets pass to be utilised for three visits. The ANM issues the bus passes to the pregnant women on her house visits.       C)Public Private Partnership(20)   ·         Management of Urban Health Centers by NGOs   Under the World Bank assisted Andhra Pradesh Urban Slum Health Care Project (APUSHCP), 192 urban health centers (UHCs) have been established in 74 municipal towns in 21 districts covering 1848 slums. After withdrawal of support by the World Bank, the project has been funded by the state government since 2002. The outcomes of the project show marked improvement in ANC coverage, institutional deliveries, post natal care and immunisation in the slum population.   ·         108 emergency services                           Govt. has tied up with satyam computers to provide emergency transportation which proved to a most successful programme and many states are following the same like Gujarath. The objective of 108 Ambulances is to save people in life emergency . One ambulance is given for three mandals. Each ambulance fitted with equipment worth Rs.17 lakhs renders its services in life emergencies, road and fire accidents (22)   ·         Rajiv arogya sree    The innovative Govt. insurance scheme to serve people of  poor from the serious ailments now attracting the nation as this programme succeeded. this scheme provides financial support to families of BPL upto 2 lakhs per anum for treating serious ailments. it is proposed to cover the entire state by 2nd October 2008 with the govt. paying the insurance premium for all the beneficiaries .an amount of rs.450 crores are provided to implement the scheme during 2008-09. (21)       3)Changes in financing methods   A)Sukhibhava Scheme(23)   Under the Scheme, a cash assistance of Rs.300 (Rs 200 towards transportation charges and Rs 100 for food and incidental expenses) is paid to pregnant women belonging to below poverty line families who come to government hospitals/APVVP hospitals/ teaching hospitals/PHCs/CHCs for delivery serv-ices. This assistance is payable only to those women with no living children or with one living child.   B)User fees:-   If user fees are charged their main use may lie in optimization of expenditure patterns and better allocation between facilities and within facilities(24). Reddy and Vandemoortele (1996), based on a comprehensive review of user financing of basic social services carried out for UNICEF, point to three other discouraging features of user fees: (1) user financing can result in a sharp reduction in the utilization of services, particularly among the poor; (2) gender biases, seasonal variations and regional economic disparities can aggravate the effects of user financing on equity; (3) user financing  quires adequate capacities, effective decentralisation and continued government support; and (4) user financing can undermine political support for the goal of universal coverage of basic social services. In 2001, the Commission on Macroeconomics and Health (2001) also reached a similar conclusion that user fees end up excluding the poor from essential healthservices, in 2005, the Millennium Project’s recent Report to the UN Secretary General (2005) titled “Investing in Development – A Practical Plan to Achieve the Millennium Development Goals” also forcefully argues for abandoning user fees. The health sector in India has acquired a notorious reputation for inefficiency and corruption at all levels. There is little accountability in both the public and private sectors. Quality standards are practically non-existent as are performance measures and honest reporting. A recent report on human resources for health brought out by Harvard University’s Global Equity Initiative (2004) argues that it is people – health workers alone – who can produce an effective health system and deliver good ealth.(25) 4)Reforms related to human resources Integration and responsibilities of functionaries for planning, implementation and monitoring of programmes of HM & FW department At district level, District Health Coordination Committee (DHCC) has been constituted to ensure proper planning, implementation and monitoring of all programmes/activities of HM&FW Department in the district.  The Committee has been entrusted with the primary responsibility of planning, finalizing, implementing and monitoring the District Health Action Plans and institutionwise health plans in a participatory manner including all concerned officials, other concerned departments and NGOs.   5)Involving community in health service delivery and Provision  

Women Health Volunteers Scheme

  One of the key components of the National Rural Health Mission is to provide every village in the country with a trained female community health activist – ‘ASHA’ or Accredited Social Health Activist. Selected from the village itself and accountable to it, the ASHA will be trained to work as an interface between the community and the public health system. Following are the key components of ASHA(26) A woman, usually a daughter-in-law of a house who has studied upto 7th class and preferably from SC/ST community has been selected as WHV by the Gram Panchayat Health Committee. The selected WHV has been given one month training in health care aspects of pregnancy, antenatal, delivery, post natal and new born care, immunisation, diarrhoea, acute respiratory infections, first-aid and treatment of minor ailments. The training has been provided at Telugu Mahila Pranganams for three weeks and one week field level training at PHCs. Academy of Nursing Studies has been designated as the nodal agency for providing training to WHVs.   6)Reforms to quality of care   A)Performance indicators for grading the PHCs   One of the components of World Bank assisted AP Economic Restructuring Project is improvement of primary health care. In order to improve the quality of primary health care services, a system of performance rating has been developed to rate PHCs and CHCs. The grading has been accorded A to C in descending order   B)Performance rating of secondary hospitals   A performance rating system for secondary hospitals under APVVP has been  introduced. The indicators related to general services (outpatients, inpatients, bed occupancy), emergency services (emergency-OP, emergency-IP, emergency major operations, emergency minor operations), clinical services (major/minor operations, tubectomy, deliveries) and diagnostic services (X-ray, ECG, lab tests and USG) have been developed for the purpose. Normative targets for each type of hospital (district hospital, area hospital, community health center) have been fixed against which the performance is measured and rating assigned. Highest grading is A while lowest grading is C.(27)   Conclusion:-   Introduction of user charges and subcontracting of services to the private sector are the main elements of health sector reforms. The health sector reforms are only a part of drastic reforms in other major sectors undertaken as a part of Andhra Pradesh Economic Restructuring Project (APERP) and the overall impact on the health conditions of people and their access to medical care depend more on the changes proposed outside the health sector. For instance, while exempting the white ration card holders i.e. the poor from the user charges in the government hospitals, it proposes to drastically reduce the number of white card holders to half in the state. The net affect would be to reduce the percent of population eligible for free treatment.(29)   On the other hand the success of 108 EMRI services and overwhelming response from Rajiv Arogya sree scheme are the examples for HSR success. Just like every thing has gots its own pros and cons HSR should be done in such a way where the need exist and according to necessities .   Referances:-   (Note:-most part of the article was taken from ref.no 28 otherwise reference specified)

(Government of India, Eighth Five Year Plan, (1992-1997) Planning Commission, New Delhi.) (Government of India, Ninth Five Year Plan, (1997- 2002) Planning Commission, New Delhi ) ( Government of India, Tenth Five Year Plan (2002-2007) Planning Commission, New Delhi) ( D. Agarwal Health Sector Reforms: Relevance in India, Indian Journal of Community Medicine Vol. 31, No. 4, October-December, 2006) Health Sector Reforms in India, Initiatives from Nine States ( http://www.idrc.ca/en/ev-118491-201-1-DO_TOPIC.html.The international development research centre) http://www.worldbank.org.in  (The Andhra Pradesh Vaidya Vidhana Parishad Act 1986 (Act No. 29 of 1986 with Amendaments upto 31.03.1989  Dr. MCR Human Resource Development Institute of Andhra Pradesh (Undated). “Andhra Pradesh Vaidya Vidhana Parishad Departmental Manual”  6http://www.aponline.gov.in/apportal/departments/ departments.asp?dep=16&org=98 GoAP (2006), Response to Questionnaire on Health Sector Reforms from MOHFW, GoI. http://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:20970681~pagePK:141137~piPK:141127~theSitePK:295584,00.html#Ongoing_projects Grish kumar,promoting PPP in health services,EPW commentary,july19,2002  (G.O.Ms.No.130, HEALTH MEDICAL AND FAMILY WELFARE (K2) DEPARTMENT. Dated the 24th April, 2006)  ANDHRA PRADESH HEALTH SECTOR REFORM PROGRAMME (APHSRP) Terms of reference for Technical Cooperation (TC) to DoHMFW, GoAP  PRESS INFORMATION BUREAU GOVERNMENT OF INDIA, HEALTHCARE PROJECT IN AP FUNDED BY DFID, New Delhi, March 5, 2008) http://lnweb90.worldbank.org/oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/0CFD6217A8A5BDA2852567F5005D32BD  G.O.Ms.No.403, dated Sept 7th 1998  GoAP (2006), Response to Questionnaire on Health Sector Reforms from MOHFW, GoI. Power Point Presentation of Govt of AP at the 2nd Regional Workshop on Health Sector Reforms: Experiences of Select States at Hyderabad, 14-15th February 2005 and ECTA Working paper 2002/61 Public-Private Partnership: Operational Framework used in Andhra Pradesh and Assam http://www.scribd.com/doc/2208678/AP-Budget-Speech  http://pibhyd.ap.nic.in/er27070702.pdf  Dept. of Health Medical Family Welfare, GoAP (undated), “Sukhibhava (Improvement of Institutional Delivery Services Scheme): Implementation Guidelines to PHC/Hospital  http://mohfw.nic.in/NRHM/Documents/CRM_report_full_report_version.pdf   (A.K.Shiv Kumar,,Budgeting for health ,some considerations) Economic and Political Weekly April 2, 2005  http://mohfw.nic.in/NRHM/asha.htm#abt http://health.ap.nic.in/apvvp/apvvp_stat.html  (http://www.whoindia.org/linkfiles/health_sector_reform_hsr_vol_ii_-_andhra_pradesh.pdf)  (Impact Of Health Sector Reforms On Hospital Services In Andhra Pradesh – A Study Of Trends In The Structures Of Provision And Utilisation Pattern)(centre for economic and social studies) (http://www.cess.ac.in/cesshome/research6b.html)

MBA (Mortgage Bankers Association) Purchase Applications data released today: Mortgage Applications fell a seasonally adjusted 14.1% last week, as applicants shrugged off lower interest rates on fixed-rate loans per the MBA today. (read more)
http://www.millennium-traders.com/news/newscommentary.aspx

Hot Stock picks on the move today for day trading: CF Holdings Incorporated (NYSE: CF) with a daily trading range of over eleven points. Day traders enjoyed the trading activity of CF Industries both on the long and short selling ends. A very nice ride into higher territory began at the opening bell until shortly after the eleven am trading hour. At that point, short sellers moved in for short rides to the down side. At the closing bell, CF Industries tacked on almost 14 points. Overseas Shipholding Group Incorporated (NYSE: OSG) was another active day trading stock today. Day traders began their trading session today taking this stock for a nice ride into lower territory. A bounce began shortly after the one o’clock hour struck. Second Quarter revenues came in at $386.1 Million compared to $274.2 a year ago. Morten Arntzen, President and CEO of OSG commented, “”The crude oil tanker market saw unprecedented levels of strength in the first half of 2008, primarily due to OPEC production increases. This resulted in a significant pick-up in long haul movements at the same time as single hull discrimination increased, creating a strong freight rate environment. On the product tanker side, rates were lifted by a surge in diesel movements worldwide.” Arntzen continued, “Market conditions continue to create a very strong outlook for our crude tankers and the prospects for our other two main businesses are equally compelling. Our investments in the U.S. Flag segment and its 14-vessel new build program will nearly double the unit’s revenues in three years. In the next 12 months our International Flag Product Carrier business will transform as 13 bareboat chartered-in, non-double hull ships are replaced with modern double hull ships having much greater earnings capacity and the LR1 fleet expands. Our world-class technical and commercial platform, fleet portfolio and ample opportunities to further scale our business gives me and the OSG management team a lot to be excited about.” Overseas Shipholding had a trading range on the trading session of over eight points. At the closing bell, Overseas Shipholding posted a loss of just over 5 points.

At the NYSE closing bell on the New York Stock Exchange, here is how the major world indices and major U.S. stock indices ended the session on the world market as well as the emerging markets including the stock market closing bell price:
DOW (Dow Jones Industrial Average) triple digit gain of 186.13 points on the day to end the trading session at 11,583.69
NYSE (New York Stock Exchange) triple digit gain of 146.11 points to end the trading session at 8,565.31
NASDAQ gain of 10.10 points to end the trading session at 2,329.72
S&P 500 gain of 21.06 points to end the trading session at 1,284.26
FTSE All-World excluding – U.S. gain of 3.70 points to end the trading session at 227.10
FTSE RAFI 1000 gain of 72.22 points to end the trading session at 5,028.32
BEL 20 (BEL20) gain of 39.08 points to end the trading session at 3,030.25
CAC 40 (CAC40) gain of 80.06 points to end the trading session at 4,400.55
FTSE100 (UKX100) triple digit gain of 101.6 points to end the trading session at 5,420.80
NIKKEI 225 (NIK/O) triple digit gain of 208.34 points on the day to end the trading session at 13,367.79

New York Stock Exchange (NYSE) stock market indicators for the day:
Advanced stock prices 2,070; declined stock prices 1,110; unchanged stock prices 94; stock prices hitting new highs 42 and stock prices hitting new lows 55.
NYSE quotes for volatile stocks and market trends, as well as stock quotes, stock prices and stock symbols of Day Trading Stock Picks on the New York Stock Exchange stock market for Day Trading online and active Day Trading for those who are or would like to be Day Trading for a living: Transocean Incorporated (NYSE: RIG) stock price gained 8.71 points on the trading session, high on the trading session $141.86, low on the trading session $132.10 for a closing stock price at $141.83; CF Holdings Incorporated (NYSE: CF) stock price gained 13.93 points on the trading session, high on the trading session $167.00, low on the trading session $153.18 for a closing stock price at $166.61; Bunge Limited (NYSE: BG) stock price gained 4.50 points on the trading session, high on the trading session $102.49, low on the trading session $98.10 for a closing stock price at $101.90; Wyeth Corporation (NYSE: WYE) stock price shed 5.37 points on the trading session, high on the trading session $40.80, low on the trading session $38.30 for a closing stock price at $39.74; SPX Corporation (NYSE: SPW) stock price gained 12.87 points on the trading session, high on the trading session $135.66, low on the trading session $126.00 for a closing stock price at $133.52; Overseas Shipholding Group Incorporated (NYSE: OSG) stock price shed 5.18 points on the trading session, high on the trading session $82.70, low on the trading session $74.53 for a closing stock price at $77.49; LandAmerica Financial Group Incorporated (NYSE: LFG) stock price shed 5.66 points on the trading session, high on the trading session $12.00, low on the trading session $9.01 for a closing stock price at $11.06; MetLife Incorporated (NYSE: MET) stock price shed 1.03 points on the trading session, high on the trading session $52.00, low on the trading session $49.65 for a closing stock price at $51.78; Avon Products Incorporated (NYSE: AVP) stock price gained 6.54 points on the trading session, high on the trading session $44.87, low on the trading session $39.52 for a closing stock price at $44.11; Fording Canadian Coal Trust Unit (NYSE: FDG) stock price shed 1.91 points on the trading session, high on the trading session $88.49, low on the trading session $84.95 for a closing stock price at $87.09; Hess Corporation (NYSE: HES) stock price gained 12.72 points on the trading session, high on the trading session $106.97, low on the trading session $92.03 for a closing stock price at $106.97; Overseas Shipholding Group Incorporated (NYSE: OSG) stock price shed 5.18 points on the trading session, high on the trading session $82.70, low on the trading session $74.53 for a closing stock price at $77.49; CME Group Incorporated (NYSE: CME) stock price shed 1.64 points on the trading session, high on the trading session $384.27, low on the trading session $361.82 for a closing stock price at $372.53; Petroleo Brasileiro SA (NYSE: PBR) stock price gained 2.98 points on the trading session, high on the trading session $57.51 low on the trading session $54.00 for a closing stock price at $56.98; ULTRASHORT Financial Corporation (NYSE: SKF) stock price shed 4.51 points on the trading session, high on the trading session $126.91, low on the trading session $115.00 for a closing stock price at $119.15; Potash Corporation Saskatchewan (NYSE: POT) stock price gained 10.39 points on the trading session, high on the trading session $213.38, low on the trading session $203.78 for a closing stock price at $213.38; XTO Energy Incorporated (NYSE: XTO) stock price gained 2.84 points on the trading session, high on the trading session $49.08, low on the trading session $45.50 for a closing stock price at $48.89; United States Steel Corporation (NYSE: X) stock price gained 1.09 points on the trading session, high on the trading session $170.85, low on the trading session $159.47 for a closing stock price at $166.85; CONSOL Energy Incorporated (NYSE: CNX) stock price gained 7.00 points on the trading session, high on the trading session $88.85, low on the trading session $79.79 for a closing stock price at $88.50; Mosaic Company (NYSE: MOS) stock price gained 10.13 points on the trading session, high on the trading session $132.62, low on the trading session $123.02 for a closing stock price at $132.49; Monsanto Company (NYSE: MON) stock price gained 7.95 points on the trading session, high on the trading session $123.88, low on the trading session $116.22 for a closing stock price at $123.65; MasterCard Incorporated (NYSE: MA) stock price gained 8.63 points on the trading session, high on the trading session $272.00, low on the trading session $261.15 for a closing stock price at $270.73; Walter Industries Incorporated (NYSE: WLT) stock price gained 6.69 points on the trading session, high on the trading session $106.78, low on the trading session $96.15 for a closing stock price at $105.95.

National Association of Securities Dealers Automated Quotations (NASDAQ) stock market indicators today:
Advanced stock prices 1,577; declined stock prices 1,275; unchanged stock prices 161; stock prices hitting new highs 47; stock prices hitting new lows 78.
NASDAQ quotes, volatile stocks and market trends, as well as stock quotes, stock prices and stock symbols of Day Trading Stock Picks on the NASDAQ stock market for Day Trading online and active Day Trading for those who are or would like to be Day Trading for a living: Garmin Limited (NasdaqGS: GRMN) stock price shed 10.21 points on the trading session, high on the trading session $40.99, low on the trading session $34.51 for a closing stock price at $34.85; Ultimate Software Group Incorporated (NasdaqGS: ULTI) stock price shed 7.56 points on the trading session, high on the trading session $27.50, low on the trading session $23.12 for a closing stock price at $25.43; Electronic Arts Incorporated (NasdaqGS: ERTS) stock price shed 4.10 points on the trading session, high on the trading session $44.41, low on the trading session $42.47 for a closing stock price at $43.29; Baidu.com Incorporated (NasdaqGS: BIDU) stock price gained 2.12 points on the trading session, high on the trading session $353.37, low on the trading session $343.12 for a closing stock price at $350.24; First Solar Incorporated (NasdaqGS: FSLR) stock price gained 25.78 points on the trading session, high on the trading session $286.00, low on the trading session $271.00 for a closing stock price at $303.97; Sohu.com Incorporated (NasdaqGS: SOHU) stock price shed 0.02 points on the trading session, high on the trading session $78.45, low on the trading session $74.95 for a closing stock price at $76.84.

Market trends on the American Stock Exchange (AMEX) and stock market indicators for today:
Advanced stock prices 734; declined stock prices 445; unchanged stock prices 107; stock prices hitting new highs 10; stock prices hitting new lows 31.

Chicago Board of Trade Futures Market activity for the day, at time of this posting for September 2008 Contracts:
E-mini S&P 500 (ES) end of day price 1,284.75, change 23.00
E-mini NASDAQ-100 (NQ) end of day price 1,856.00, change 14.00
E-mini S&P SmallCap 600 (SMP) end of day price 373.10, change 0.00
$5 DJIA (YM) end of day price 11,582, change 209

World Currencies for the Forex Market, for Forex Trading by active Forex Traders, at time of this posting:
Euro 0.6419 to U.S. Dollars 1.5578
Japanese Yen 108.08 to U.S. Dollars 0.0093
British Pound 0.5047 to U.S. Dollars 1.9815
Canadian Dollar 1.023 to U.S. Dollars 0.9775
Swiss Franc 1.048 to U.S. Dollars 0.9542

Commodity Markets:
Energy Sector: Light Crude (NYMEX: NYM) gained $4.58 on the day for a closing price of the range of $26.77 a gallon ($US per barrel)
Heating Oil (NYMEX: NYM) gained $0.05 on the day for a closing price of $3.55 a gallon ($US per gallon)
Natural Gas (NYMEX: NYM) gained $0.12 on the day for a closing price of $9.25 per million BTU ($US per mmbtu.)
Unleaded Gas (NYMEX: NYM) gained $0.13 on the day for a closing price of $3.14 a gallon ($US per gallon)

Metals Markets:
Gold Market Price (COMEX: CMX) shed $14.10 on the day for a closing price of $912.30 ($US per Troy ounce)
Silver (COMEX: CMX) gained $0.09 on the day for a closing price of $17.47 ($US per Troy ounce)
Platinum (NYMEX: NYM) shed $7.30 on the day for a closing price of $1,738.10 ($US per Troy ounce)
Copper (COMEX: CMX) gained $0.03 on the day for a closing price of $3.65 ($US per pound)

Livestock and Meat Markets (cents per lb.):
Lean Hogs (Chicago Mercantile Exchange: CME) gained 0.30 on the day for a closing price of 72.55
Pork Bellies (Chicago Mercantile Exchange: CME) shed 2.05 on the day for a closing price of 70.00
Live Cattle (Chicago Mercantile Exchange: CME) gained 0.55 on the day for a closing price of 106.15
Feeder Cattle (Chicago Mercantile Exchange: CME) gained 1.00 on the day for a closing price of 113.65

Other Commodities (cents per bushel):
Corn (Chicago Board of Trade: CBT) gained 7.75 on the day for a closing price of 621.25
Soybeans (Chicago Board of Trade: CBT) gained 14.00 on the day for a closing price of 1,405.00

Bond Market:
2 year bond closed with no change at 100 7/32 with a Yield of 2.64, Yield Change +0.01
5 year bond gained 2/32 on the day for a closing price of 100 1/32 with a Yield of 3.36, Yield Change +0.05
10 year bond gained 1/32 on the day for a closing price of 98 20/32 with a Yield of 4.04, Yield Change 0.00
30 year bond shed 8/32 on the day for a closing price of 95 21/32 with a Yield of 4.64, Yield Change +0.01

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Corruption is a major systemic-problem in many developing countries and is of particular importance for India. Studies by the World Bank (World Development Report 2005) have found that corruption was the number one constraint for firms in South Asia and that the two most corrupt public institutions identified by the respondents in India (as well as in most countries in South Asia) were the police and the judiciary. Based on Transparency International’s Corruption Perception Index, India has a score of 2.9 out of 10 in 2005 (a higher score means less corruption), which ranked 88 out of 140 countries (with the range being 1.5 to 9.7), and the ranking relative to other countries has not improved much over the past ten years.

Next, we have two measures for the quality of accounting systems. The disclosure requirements index (from 0 to 1, higher score means more disclosure; LLS 2006) measures the extent to which listed firms have to disclose their ownership structure, business operations and corporate governance mechanisms to legal authorities and the public. India’s score of 0.92 is higher than the averages of all LLSV subgroups of countries, including the English origin countries, suggesting that Indian firms must disclose a large amount of information. However, this does not imply the quality of disclosure is also good. In terms of the degree of earnings management (higher score means more earnings management; Leuz, Nanda, and Wysocki 2003), India’s score is much higher than the average of English origin countries, and is only lower than the German origin countries, suggesting that investors have a difficult time in evaluating Indian companies based on publicly available reports. It seems that while Indian companies produce copious amounts of data, form triumphs over substance in disclosure and with an accounting system that allows considerable flexibility, there is enough room for companies to hide or disguise the truth.

The efficiency and effectiveness of the legal system is of primary importance for contract enforcement, and we have two measures. First, according to the legal formalism (DLLS 2003) index, India has a higher formalism index than the average of English origin countries, and is only lower than that of the French origin countries. The legality index, a composite measure of the effectiveness of a country’s legal institutions, is based on the weighted average of five categories of the quality of legal institutions and government in the country (Berkowitz, Pistor, and Richard 2003). Consistent with other measures, India’s score is lower than the averages of all the subgroups of LLSV countries, suggesting that India’s legal institutions are less effective than those of many countries, and that it will be more difficult; for India to adopt and enforce new legal rules and regulations than other countries.

Finally, as for the business environment in India, a recent World Bank survey
found that, among the top ten obstacles to Indian businesses, the three which the firms
surveyed considered to be a “major” or “very severe” obstacle and exceeding the world average are corruption (the most important problem), availability of electricity, and labor regulations. Threat of nationalization or direct government intervention in business is no longer a major issue in India. With rampant tax evasion, the shadow economy in India is significant. It is estimated to be about 23% of GDP. Creditor and investor rights were largely unprotected in practice, with banks having little bargaining power against willful defaulters. Large corporate houses often got away with default, or got poor projects financed through the state-owned banking sector, often by using connections with influential politicians and bureaucrats.

Since the beginning of liberalization in 1991, two major improvements have taken place in the area of creditor rights protection – the establishment of the quasi-legal Debt Recovery Tribunals that have reduced delinquency and consequently lending rates (Visaria (2005)); and the passing of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act in 2002 and the subsequent Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act in 2004. These laws have paved the way for the establishment of Asset Reconstruction Companies and allow banks and financial institutions to act decisively against defaulting borrowers. In recent years,-recovery has shown significant improvement, presumably because, at least in part, of a well-performing economy (Table 2.1).

2.1. Comparison of Legal Systems: India, Country Groups and Major Emerging Economics*

Creditor

Rights

Anti-director

Rights

Corruption Perception Index

Legal Formalism

Index

Legality

Index

Disclosure

Requirement

Earnings

Managem Score

India

2

5

3.3

3.51

11.35

0.92

19.1

English-origin Ave.

2.28

4.19

5.33

3.02

15.56

0.78

11.69

French-origin Ave.

1.31

2.91

4.39

4.38

13.11

0.45

19.27

German-origin Ave.

2.33

3.04

5.58

3.57

15.53

0.60

23.60

Nordic-origin Ave.

1.75

3.80

9.34

3.32

16.42

0.56

10.15

LLSV Sample Ave.

1.828

3.3729

5.24

3.5830

14.98

0.6031

16.00

China (G)

2

1

3.3

3.40

N/a

N/a

N/a

Pakistan (E)

1

4

2.2

3.74

8.27

0.58

17.8

S. Africa (E)

3

5

4.6

3.68

11.95

0.83

5.6

Argentina (F)

1

2

2.9

5.49

10.31

0.50

N/a

Brazil (F)

1

5

3.3

3.83

11.43

0.25

N/a

Mexico (F)

0

3

3.3

4.82

10.79

0.58

N/a

Malaysia (E)

3

5

5

3.21

13.82

0.92

14.8

Sri Lanka (E)

2

4

3.1

3.89

9.68

0.75

N/a

Thailand(E)

2

4

3.6

4.25

10.70

0.92

18.3

Egypt (F)

2

3

3.3

3.60

10.14

0.50

N/a

Indonesia(F)

2

4

2.4

3.88

8.37

0.50

18.3

Peru(F)

0

3.5

3.3

5.42

9.13

0.33

N/a

Philippines (F)

1

4

2.5

5.00

7.91

0.83

8.8

Turkey (F)

2

3

3.8

3.49

9.88

0.50

N/a

Korea (South )(G)

3

4.5

5.1

3.33

12.24

0.75

26.8

Taiwan (G)

2

3

5.9

3.04

14.26

0.75

22.5

Average of EM

1.69

3.63

3.60

4.00

10.59

0.63

16.61

Source of EM

* Including all emerging economies from Table 1 for which information was available. Notation (E), (F), or (G) against a country indicates that the said country belongs to English, Fresh or German legal origin groups.

28 : DMS average 30 : DLLS (2003) average

29 : DLLS (2007) average 31 : LSS (2006) average

To summarize, despite strong protection provided by the law, legal protection is considerably weakened in practice due to an inefficient judicial system, characterized by overburdened courts, slow judicial process, and widespread corruption within the legal system and government. While the need for judicial and legal reforms has long been recognized, little legislative action has actually taken place so far (Debroy (2000)). Currently, the government is trying to emulate the success of China by following the Special Economic Zone approach rather than overhauling the entire legal system.

Financial/Business Laws and Regulations in India

Red tape and regulations still rank among the leading deterrents for business and foreign investment in India leading to its latest ranking of 116 out of 155 in the World Bank’s Ease of Doing Business indicator in 2006 (World Bank, 2006). India features consistently in the second half of the sample for all aspects of business regulation (and is out of the top 100 for most aspects) except for investor protection. To start a business in India entrepreneurs have close to twice the number of procedures to follow as in OECD countries, about three and a half times the time delay and close to nine times the cost (as a proportion of per capita income). Delays and costs of dealing with licenses in India is roughly in corresponding proportions with their respective OECD values. Very recently (second half of August 2007), the Government of India has decided to improve this situation and has announced a drastic reduction in the number of approvals and permits necessary to start new business. Whether and when this translates to actual practice is yet to be seen.

It is almost twice as hard to hire people in India as in OECD countries and almost three times as hard and costly to fire them. With have considerable variation in their labor laws across states, Besley and Burgess (2004) show that during the three and half decades before liberalization began in 1991, Indian states that followed more pro-worker policies experienced lower output, investment, employment and productivity in the registered or “formal” sector and higher urban poverty with an increase in informal sector output.

In the area of credit availability, India lags behind not because of creditors’ rights (which is close to OECD standards) but because of the paucity of credit quality information through the use of public registry or coverage of private bureaus. However, India’s excellent investor protection provisions in the law should be viewed together with her performance in contract enforcement where the number of procedures and time delays are about double that in OECD countries and the costs of contract enforcement over four times that in OECD countries.

As for securities markets regulation, using the framework of La Porta et al (2006) that focuses on disclosure and liability requirements as well as the quality of public enforcement of the regulations controlling securities markets, India scores 0.92 in the index of disclosure requirements third highest after the United States and Singapore. As for liability standard, India’s score is the fifth highest, 0.66 while the sample mean is 0.47. In terms of the quality of public enforcement, i.e. the nature and powers of the supervisory authority, the Securities and Exchanges Board of India (SEBI), India scores 0.67, higher than the overall sample mean as well as the English-origin average of 0.52 and 0.62 respectively and ranks 14th in the sample.

In comparing the regulatory powers and performance of SEBI with those of the SEC (Securities and Exchanges, Commission) in the USA, Bose (2005) concludes that while the scope of Indian securities laws, are quite pervasive, there are significant problems in enforcing compliance, particularly in the areas like price manipulation and insider trading. Between 1999 and 2004, Bose finds that SEBI took action in 481 cases as opposed to 2,789 cases for the SEC even though the latter regulates a significantly more mature market. As a ratio of actions taken to the number of companies under their respective jurisdictions, SEBI’s figure comes out to be an unimpressive 0.09 while that of the SEC is 0.52. Also the ratio for action taken to investigations made is quite low for SEBI (e.g. 1 out of 24 cases of issue related manipulation in 1996-97, 7 out of 27 in the 5 year period 1999-2004). As for appeals before higher authorities – the Securities Appellate Tribunal (SAT) or the Finance Ministry – in 30 to 50% of cases, the decision goes against SEBI. Though SEBI has had some success prosecuting intermediaries, it has failed to convince the SAT in its proceedings against corporate insiders and major market players. Thus the quality of public enforcement of securities laws appears to be a problem in India.

The institution of Debt Recovery Tribunals (DRTs) in the early 90’s and the
passing of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002 were aimed at remedying the slowness of the judicial process. The SARFAESI Act paves the way for the establishment of Asset Reconstruction Companies (ARCs) that can take the Non-Performing Assets (NPAs) off the balance sheets of banks and recover them. Operations of these ARCs would be restricted to asset reconstruction and securitizatipn only. It also allows banks and financial institutions to directly seize assets of a defaulting borrower who defaults fails to respond within 60 days of a notice. Borrowers can appeal to DRTs only after the assets are seized and the Act allows the sale of seized assets. The SARFAESI Act itself, however, does not provide a final solution to the recovery problems. With the borrower’s right to approach the DRT, the DRAT (Debt Recovery Appellate Tribunal) and, in some cases, even a High Court, a case can easily be dragged for three to four years during which time the sale of the seized asset cannot take place. It is perhaps too soon to evaluate its effects on reducing defaults but, public sector banks have had some success recovering their loans by seizing and selling assets since the Act came into existence. The recovery rates of bad debts have registered a sharp rise in 2005-06, but it is difficult to separate the contribution of the booming economy to this from that of the improvement in corporate governance.

Another positive development in the area of disclosure has been the adoption of Accounting Standards (AS) 18 by the Institute of Chartered Accountants in India (ICAI) in 2001 which, among other things, makes reporting of “related party transactions” by Indian companies mandatory. Related parties include holding and subsidiary companies, key management personnel and their direct relatives, “parties with control exist” which includes joint ventures and fellow subsidiaries; and other parties like promoters and employee trusts. Transactions include purchase/sale of goods and assets, borrowing, lending and leasing, hiring and agency arrangements, guarantee agreements, transfer of research and development and management contracts. This step has gone a long way in bringing transparency to the dealings of Indian companies, particularly the group-affiliates.

The area of the Ease of Doing Business index where India fares worst is undoubtedly that of closing a business. India has the dubious distinction of being among the countries where it takes the longest time to go through bankruptcy in the world (10 years on an average). Consequently recovery rates are very low too – below 13% as opposed to about 74% in OECD countries. Kang and Naya’r (2004) point out that there is no single comprehensive and integrated policy on corporate bankruptcy in India in the lines of Chapter 11 or Chapter 7 US bankruptcy code. Overlapping jurisdictions of the High Courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR) and the Debt Recovery Tribunals (DRTs) contribute to the costs and delays of bankruptcy. The Companies (Second Amendment) Act, 2002 seeks to address these problems by establishing a National Company Law Tribunal and stipulating a time-bound rehabilitation or liquidation process to within less than two years as well as bringing about other positive changes in the bankruptcy code.

Stock Exchanges in India

India currently has two major stock exchanges: the National Stock Exchange (NSE) established in 1994 and the Bombay Stock Exchange (BSE), the oldest stock exchange in Asia, established in 1875. Up to 1992, BSE was a monopoly, marked with inefficiencies, high costs of intermediation, and manipulative, practices, so that external market users often found themselves disadvantaged. The economics reforms created four new institutions: the Securities and Exchanges: Board of India (SEBI), the National Stock Exchange (NSE), the National Securities Clearing, Corporation (NSCC), and the National Securities Depository (NSDL). The National Stock Exchange (NSE), a limited liability company owned by public sector financial institutions, now accounts for about two-thirds of the stock exchange trading in India, and virtually all of its derivatives trading.

The National Securities Clearing Corporation (NSCC) is the legal counter-party to net obligations of each brokerage firm, and thereby eliminates counter-party risk and possibility of payments crises. It follows a rigorous ‘risk containment’ framework involving collateral and intra-day monitoring. The NSCC, duly assisted by the National Securities Depository (NSDL), has an excellent record of reliable settlement schedules since its inception in the mid-nineties.

The Securities and Exchanges Board of India (SEBI) has introduced a rigorous regulatory regime to ensure fairness, transparency and good practice. For example, for greater transparency, SEBI has mandated mandatory disclosure for all transactions where total quantity of shares is more than 0.5% of the equity of the company. Brokers disclose to the stock exchange, immediately after trade execution, the name of the client in addition to trade details; and the Stock exchange disseminates the information to the general public on the same day.

The new environment of transparency, fairness and efficient regulation led BSE, in 1996, to also become a transparent electronic limit order book market with an efficient trading system similar to the NSE. Equity and equity derivatives trading in India has sky­rocketed to record levels over the course of the last ten years.

In 2005, about 5000 companies were listed and traded on NSE and/or BSE. While the dollar value of trading on the Indian stock exchanges is much lower than the dollar value of trading in Europe or in the US, it is important to note that the number of equity trades on BSE/NSE is ten times greater than that of Euronext or London, and of the same order of magnitude as that of NASDAQ/NYSE. Similarly, the number of derivatives trades on NSE is several times greater than that of Euronext/ London, and of an order of magnitude comparable to US derivatives exchanges. The number of trades is an important indicator of the extent of investor interest and investor participation in equities and equity trading, and emphasizes the crucial importance of corporate governance practices in India.

Enforcing Corporate Governance Laws

Enforcement of corporate laws remains’ the soft underbelly of the legal and corporate governance system in India. The World Bank’s Reports on the Observance of Standards and Codes (ROSC) in its 2004 report on India (World Bank (2004)) found that while India observed or largely observed most of the principles, it could do better in areas like the contribution of nominee directors from financial institutions to monitoring and supervising management; the enforcement of certain laws and regulations like those pertaining to stock listing in major exchanges and insider trading as well as in dealing with violations of the Companies Act – the backbone of the corporate governance system in India. Some of the problems arise because of unsettled questions about jurisdiction issues and powers of the SEBI.

Indian Courts-an assessment

Djankov et al (2003) (DLLS) in. their analysis of “formalism” in the judicial process around the world, gave India a score of 3.34 on its formalism index, higher than the English-origin average of 2.76 but slightly lower than the average for all countries, 3.53. Among the 42 English-origin countries in their sample, India has the 11th highest level of formalism. India has the 16th longest process of evicting a tenant (212 days) among English common law origin countries (average 199 days). For collection on a bounced check, however, India has the 16th shortest duration (106 days) among English common law origin countries (average 176 days). In both cases India’s total duration of the process is significantly shorter than the overall mean duration of all the 109 countries considered (254 for eviction of tenant and 234 for collecting on bounced check). Thus, in spite of its formalism, Indian courts do not seem to perform that poorly (relatively speaking) on these two types of eases considered.

The DLLS assurance notwithstanding, case arrears and decade-long legal battles are commonplace in India. In spite of having around 10,000 courts (not counting tribunals and special courts), India has a serious, shortfall of judicial service. While the USA has 107 judges per million citizens, Canada over 75, Britain over 50 and Australia over 41, for India the figure is slightly over 10, (Debroy (1999)). In April 2003, for instance, the Supreme Court of India had close to 25,000 cases pending before it (Parekh 2001). Hazra and Micevska (2004) report that there are about 20 million cases pending in lower courts and another 3.2 million cases in high courts. A termination dispute contested all the way can take up to 20 years for disposal. Writ petitions in high courts can take between 8 and 20 years for disposal. About 63% of pending civil cases are over a year old and 31% are over 3 years old. Automatic appeals, extensive litigation by the government, underdeveloped alternative mechanisms of dispute resolution like arbitration, the shortfall of judges all contribute to this unenviable state of affairs in Indian courts. Since the same courts try both civil and criminal matters and the latter gets priority, economic disputes suffer even greater delays.

The Small and Medium Enterprises (SME) sector in India

Allen et al (2006) conduct surveys to study the extent to which the formal legal environment directly supports and regulates businesses, particularly small and medium enterprises which form an increasingly important part of the Indian industry. This seems to indicate that the small firms sector operate in a system virtually governed through informal mechanisms based on trust, reciprocity and reputation with little recourse to the legal system and deals with widespread corruption.

Over 80% of the firms surveyed needed a license to start a business, and for about half of them obtaining it was a difficult process. Government officials were most often the problem solved usually through payment of bribes or friends of government officials to negotiate. Clearly, networks and connections are of crucial importance in negotiating the government bureaucracy.

As for conducting day-to-day business, legal concerns are far less important to

them than the unwritten codes of the informal networks in which firms operate. In cases of default and breach of contract, the primary concern is loss of reputation, followed closely by loss of property, with the fear of legal consequences being-the least important concern.

About half of the firms surveyed did not have, a regular legal adviser and less than half of those that did had lawyers in that capacity. For mediation in a business dispute or to enforce a contract, the first choice was “mutual friends or business partners”. Only 20% of the respondents mentioned going to courts as the first option indicating that the legal system, while not as effective as the informal mechanisms, is not altogether absent.

The informal system, however, is not perfect in resolving disputes and has its costs. About half of the respondents experienced a breach of contract or, non-payment with a supplier or major customer in the past three years. Over a third of them renegotiated while over 40% did nothing but continued the business relationships with the offending parties.

In general, the business environment of the SME sector is marked by strong informal mechanisms like family ties, reputation and trust. Legal remedies though present, are far less important than the rules of the informal networks.

References

Allen, F., R. Chakrabarti, S. De, J. Qian and M. Qian, 2006, “Financing Firms in India”, Working paper, The Wharton School.

Bose, Suchismita and Dipankar Coondoo, 2004, ‘The Impact of FII Regulations in India’, Money and Finance, July-December.

Bose, Suchismita, 2005. “Securities Markets Regulation: Lessons from US and Indian Experience”, Money and Finance, Jan-June, 83-124.

Besley, Timothy and Robin Burgess, 2004, “Can Labor Regulation Hinder Economic Performance? Evidence from India” Quarterly Journal of Economics.

Debroy, Bibek, 1999, “Some Issues in Law Reform in India”, in Jean-Jacques Dethier ed. Governance, decentralization, and reform in China, India, and Russia,. Boston; Kluwer Academic Publishers.

Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, 2002. “The Regulation of Entry,” Quarterly Journal of Economics, “Courts,” Quarterly Journal of Economics, 118 (2), 453-517.

Hazra, Arnab K. and Maja Micevska, 2004, “The Problem of Court Congestion: Evidence from Indian Lower Courts”, Working Paper, University of Bonn.

Kang, Nimrit and Nitin Nayar, 2004, “The Evolution of Corporate Bankruptcy Law in India”, Money and Finance, Oct 03 – Mar 04.

The simple answer is that the old fashion mortgage with your friendly Mr. Cribbs at the bank downtown is on the endangered species list. The mortgage market today spans the globe. Within days, weeks and months of a mortgage closing it is sold all over the world in bundles of commercial paper.

This complex network of holders of the note are bought and sold by financial brokers, and a others who make these commercial papers part of their portfolio. The problem occurs when trying to determine who bought the risky, defaulting loans. Some of the loans are in the process of foreclosure, some are at risk for foreclosure and still others are foreclosed. The real problem here is assessing risk to unknown factors. Banks, lending institutions and mortgage companies do not like speculation on risk.

The most significant effect all of these risks have effected the Stock Market is the tightening of the credit market. Some banks and mortgage companies have simply stopped making loans. Others, have made refinancing and new loans with increased restrictions. The credit market is squeezed and that effects big stock market players like banks and financial institutions like Bear Sterns. It also effects consumers who are seeking refinancing and new mortgages.

Within the period of several weeks in late August, 2007 the Federal Reserve dumped billions of dollars into the prime lending market making it easier for banks and lending institutions to make loans and to back their existing position. In addition, the Federal Reserve dropped the interest rate for prime loans to major financial institutions. The next meeting of the Federal Reserve could see even further drops in prime rate interest rates.

With equal vigor to jump on the band wagon, the President of the United States provided the possibility of legislative help for those unsuspecting mortgage holders who were snickered into making bad loans with adjustable rate loans that were predatory in nature. The problem is how can United States legislate bad loans and notes that may no longer be in the United States. Remember, Mr. Cribbs is nearly extinct.

At the present time it appears that there are some bad mortgages out there. Some are held by people with limited income and little credit. Some are held by speculators and house flippers that got caught in the head lights of a slowing real estate market. For the latter mortgage holder it does not appear there is too much sympathy for their financial crisis. The common thread is that no one seems to know how many bad mortgages are on the loose. The stock market hates uncertainty, so that is the reason for all the worry.

The stock market is like my dear old Aunt Nell. She never married and never had a light bulb in her apartment house that was in excess of 40 watts. Her tenants virtually lived in the dark. If the price of milk went up two cents she switched to powdered milk. If her taxes went up a dollar she felt she was on the verge of being destitute.

Summer visits with Aunt Nell were a real hoot. In a nutshell that is what is going on with all the “sky is falling” on Wall Street. Uncertainty moves the market and what is causing on all flutter in the financial stocks.

To assuage all the “Chicken Littles” an the possibility of some real problems both the President of the United States and Chairman Bernanke sang a tune of, “You can’t always get what you, but if you wait sometimes, you get what you need.” No big rescues for speculators, but the promise for a few bones if the economy goes sour.

(MUSHARIKA, MURABIHA, QARDE AL’HASANA, IJAREH, MUDARABA)

Author: EHSAN ZARROKH

ZARROKH2007@YAHOO.COM

2007-04-06

ABSTRACT

Islamic finance is an old concept but a very young discipline in the academic sense. It lacks the required extent and level of theories and models needed for expansion and implementation of the framework provided by Islam. In these circumstances, unawareness and confusion exist as to the form of the Islamic financial system and instruments.

The main difference between the present economic system and the Islamic economic system is that the later is based on keeping in view certain social objectives for the benefit of human beings and society. Islam, through its various principles, guides human life and ensures free enterprise and trade. That is the reason why the conventional banker does not have to be concerned with the moral implications of the business venture for which money is lent.

TABLE OF CONTENTS

1. ABSTRACT

2. The Role of Money

3. Types of Islamic Financial Instruments

4. Risk Mitigating Features

5. Islamic Leasing

7. MUSHARIKA

8. MODARABA

9. CONCLUSIONS

Socio-economic justice is central to the Islamic way of life. Every religion has the same basic aim. In an Islamic environment, an individual not only lives for himself, but his scope of activities and responsibilities extend beyond him to the welfare and interests of society at large. The KORAN is very precise and clear on this issue. There are basically three components of an Islamic economic paradigm:

1. That as vice-regent, man should seek the bounties of the land that God has bestowed on humanity. From the wealth thus obtained, he should enjoy his own share.

2. That he should be magnanimous to others and use a part of the wealth so obtained also for the benefit of his fellow-beings.

3. That his actions should not be willfully damaging to his fellow-beings.

Human society in Islam is based upon the validity of law, of life and the validity of mankind. All these are natural corollaries of the faith. Islamic laws promote the welfare of people by safeguarding their faith, life, intellect, property and their posterity. God nurtures, nourishes, sustains, develops and leads humanity towards perfection. Even though an individual may be making a living because of his efforts, he is not the only one contributing towards that living. There are a number of divine inputs into this effort and therefore, the results of such an effort obviously cannot be construed as entirely proprietary.

Whereas the Islamic banker has a much greater responsibility. This leads us to a very fundamental concept of the Islamic financial system i.e. the relation of investors to the institution is that of partners whereas that of conventional banking is that of creditor-investor.

The Islamic financial system is based on equity whereas the conventional banking system is loan based. Islam is not against the earning of money. In fact, Islam prohibits earning of money through unfair trading practices and other activities that are socially harmful in one way or another. [1]

Those who swallow down usury cannot arise except as one whom SHAITAN (evil) has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury. To whomsoever then the admonition has come from his Lord, then he desists, he shall have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it) – these are the inmates of the fire; they shall abide in it [SURAH 2:275].

Not that there was any ambiguity in the Command of Allah. Far be it from Him to give any order to His Servants, which they can not comprehend. The fact is that those who had surplus money and wanted to earn profit did so either by lending it through RIBA (usury) or by investing it in trade and hypocrites were not prepared to forgo the first option. Hence, they argued that since both were means of earning profit, they were alike and the prohibition of RIBA did not stand to reason.

The practice of RIBA i.e. usury was so deep-rooted in society and continuance of the practice was so undesirable, that Allah warned the believers that if they did not desist, they should be prepared for a war against Allah and His Apostle. This warning was heeded by the Muslim UMMAH and for more than a thousand years the economies of Muslim states were free from RIBA. With the ascendancy of Western influence and its suzerainty over Muslim states, the position changed and an interest-based economy became acceptable. Efforts in Muslim countries to revert to an interest-free economy were hampered by many obstacles. [2]

The Role of Money

The traditional definition of the time value of money leads one to assume that profit maximization is the objective of investors irrespective of whether or not the earning of profit has made someone else worse off. Some economists have termed the maximization of profit as the sole objective of corporations. This view cannot be supported or defended since the profit maximization process may lead to perverse outcomes. When financial operations are removed of moralistic tone, competitive markets fail to achieve the efficient allocation of a country’s resources.

In Islam money in itself is not considered, as actual capital only exists when money, along with other resources, is sunk into productive activities. Linking the use of money to productive purposes invariably brings into action the factor of labor, a process from which benefits pass on to society.

Types of Islamic Financial Instruments

Demand for monetary instruments is influenced by the variation and level in the market rate what is meant as the market rate of return. The demand for household monetary instruments is mainly for the purpose of circulation of income. Banks need these instruments for:

1. Transaction purposes;

2. Precautionary purposes, in that some unexpected payments have to be made while some expected inflows may not be forthcoming on their due date, and;

3. not only to avoid loss but also to obtain gains in the capital value of financial assets under the expectation that the market rate of return may move in a certain direction.

What differentiates a traditional financial market from others markets is that no tangible good or service is exchanged for any monetary consideration; only a “financial claim” changes hands in the form of a promissory note or a title to any future flow of income adjusted for any capital appreciation. Not all Islamic instruments are purely financial claims. Some of the instruments also represent ownership of the underlying assets together with a claim to underlying cash flows. Basically there are the following four types of Islamic financial instruments:

1. Type “A” is a financial claim of monetary value with recourse to underlying durable assets and related cash flows. This type has a predictable future income stream, is marketable and can be discounted since with the changing of hands, the instrument passes title to the goods and not to the debt. It is basically lease-based.

2. This instrument is partly backed by durable assets and its income is not predictable, but evaluated through an asset valuation process at the end of an agreed and declared duration. The underlying transactions can be a mix of IJARA, MODARABA, MUSHARAKA etc., contracts. This Type may be traded in the secondary market at its fair market price acceptable to the parties involved but not discounted.

3. Type “C” is purely a monetary claim to an expected income stream forthcoming from underlying commercial transactions. Income is evaluated through an asset-valuation process at the end of an agreed and declared period. A transaction of this type may comprise MORABAHA, ISTASNA etc., contracts which are debt claims against third parties in respect to actual commercial transactions. The Type may be traded at its face value declared at the end of each accounting period but cannot be discounted.

4. The Type “D” is purely a financial claim of monetary value but with recourse to certain precious metals such as gold, silver, platinum, etc., or commodities quoted on exchanges. The instrument entitles the holder to take delivery of the underlying asset but does not carry any attached revenue stream except that its price is pegged to the price of the underlying precious metal or commodity quoted at recognized international exchange rates. It can be traded but not discounted. [3]

Risk Mitigating Features

The phenomenon of risk plays a pervasive role in economic life. Without it, financial and capital markets would consist of the exchange of a single instrument each period, the communications industry would cease to exist in so far as this market is concerned and the profession of investment banking would be reduced to that of accounting. Risk is further segregated from uncertainty. A situation is said to involve risk if the randomness facing an economic agent can be expressed in terms of specific numerical probabilities (these probabilities may either be objectively specified, as with lottery tickets or else reflect the individual’s own subjective beliefs). Situations where the agent cannot (or does not) assign actual probabilities to alternative possible occurrences are said to involve uncertainty.

While it is not always true that a riskier asset will pay a higher average rate of return, it is usually return. Risk is an opportunity in financial markets and also a problem. Risk-averse investors require additional return to be at additional risk and, in effect, in a competitive market higher return is accompanied by higher risk. An investor evaluates an asset in terms of its marginal contribution to his/her portfolio.

The fundamental principal of valuation is that the value of any financial asset is the present value of the cash expected. The process requires two steps:

1. Estimating the cash flow, and;

2. Determining the appropriate interest rate that should be used to calculate the present value

The following are the SHARI’AH compliant risk mitigating features:

1. By prior arrangements in the instrument, the investing company, through its banker, would have a priori right in profit sharing up to an agreed upon ratio.

2. The profit will be paid on account on a monthly basis to the investing company as provided in the projected accounts.

3. The final accounting and settlement is accomplished at the end of the term of the instrument when the profit and loss accounts are finalized.

4. In order to mitigate the risk and as per the terms of the instrument, a TAKAFUL fund is established for the term of the instrument.

5. In this TAKAFUL fund where the invested company earmarks a part of their reserves for the TAKAFUL fund.

6. The investing company will contribute 1% of the invested amount.

7. This 1% contribution is made through an advance by the invested company on account of future profits.

8. In case of any loss during the tenancy of the instrument, it will be adjusted against the TAKAFUL fund.

9. The balance will be distributed between investor and at the end of the term of instrument.

10. Through a valuation, value of the investment would be established for the purpose of exercising the put option.

11. The investing company shall have the option to exercise its put option at the value price and the company shall buy this instrument. [4]

Islamic Leasing

But before describing leasing, as aforesaid, let me very briefly touch upon two of the basic or fundamental principles of Islamic finance in order to develop a premise for meaningful discussions on leasing.

1. It has to be asset-based financing:

The first fundamental principle of SHARI’AH is that as opposed to conventional monetary dealing, profit is generated when something having intrinsic utility is sold or offered for use. Money has no intrinsic value. As such dealing in money (same currency) cannot generate profit but a RIBA unless converted into real assets to deal with.

2. There has to be an element of risk:

The second basic element of SHARI’AH is that one cannot claim a profit or fee for a property/transaction, the risk of which was never borne by him.

Based on the above fundamental principles, the most ideal mode or instrument of financing in SHARI’AH are MUSHARAKA and MUDARABA followed by SALAM and ISTINSA.

MORABAHA and leasing are not originally modes of finance. However, to meet certain specific needs where ideal modes like MUSHARAKA or MUDARABA are not workable for whatever reasons, they have been reshaped and allowed in SHARI’AH subject to certain conditions.

1. Leasing described for leasing, IJARAH is an Arabic term with origins in Islamic FIQH, meaning to give something to rent. There are two types of IJAREH. One relates to employing or hiring the services of a person for wages whereas the second type relates to the hiring of any asset or property in order to reap its benefits without the transfer of ownership, or what is called in English “USUFRUKT”. The price or consideration of this is the rent.

It is the second type of IJAREH which is the subject matter of the discussion here because it is generally used as a form of investment and also as a means of finance.

As described earlier, in the light of the two basic cornerstones of SHARIA’H, leasing is a contract whereby usufruct rights to an asset are transferred by the owner, known as the lessor, to another person, known as the lessee, at an agreed-upon price called the rent, and for an agreed-upon period of time called the term of lease.

2. Lease as a mode of financing Strictly speaking leasing is not a means of finance as originally envisaged. It is simply a transaction much as a sale/purchase. As described above, the leasing transaction simply denotes the transfer of the usufruct of a property from one person to another for an agreed-upon price called rent without transferring the corpus i.e. ownership of that asset. Accordingly, the rules of “leasing” closely resemble the rules governing “sale” because in both cases something is transferred to second person for valuable consideration.

Leasing differs from sale only in-so-much-as not transferring the corpus or ownership of the property which remains with the transferor. As such in SHARIA’H, a lease transaction is governed by a separate set of rules, which we shall outline in the following paragraphs.

Although leasing, as originally conceived, is not a means of finance, the financial institutions and the corporate world have adopted it as such. Due to several factors (including tax concessions, etc.), instead of providing an interest-bearing loan, certain financial institutions in the West started to provide requisite equipment to their customers. To arrive at the rent, the total cost of the asset is calculated plus interest or mark-up to be recovered during the period of lease on a monthly or quarterly basis. This type of lease in the West is known as a finance lease, to be distinguished from an operating lease, wherein various basic features of the leasing transaction are ignored which is tantamount to RIBA.

Knowing that leasing is lawfully allowed under SHARIA’H, since it meets one of the basic criteria of asset-based finance, a number of Islamic financial institutions have adopted leasing on this model as carried out by conventional financial institutions without making the necessary modifications that really conform to the rules under SHARIA’H, particularly in regards to assuming the risk of ownership in the leased asset. Great care needs to be exercised to ensure various SHARIA’H requirements, as rendered below, based on the basic two principles of:

1. Asset based finance, and;

2. Assuming a risk element connected to the ownership of the asset.

3. Basic Rules of Leasing

The description or definition given above, under part A, contains the following essential ingredients for outlining the basic rules under SHARIA’H:

1. That it is a contractual obligation.

2. That there has to be a valuable use of the asset and transferability of that usufruct.

3. That the ownership of the asset is retained by the transferor or lessor throughout the lease period. Consumable articles cannot be leased.

4. That the risk and liabilities of ownership lie with the lessor. The leased asset shall remain the risk of the lessor throughout the lease period. Any loss or harm caused by factors beyond the control of the lessee shall be borne by the lessor. However, the lessee is liable to compensate the lessor for any harm to the leased asset caused by any misuse or negligence on the part of the lessee.

5. That the risk and liabilities associated with the use of the asset shall be borne by the lessee. For instance, taxes and other government levies, utilities, etc. However, the contract must specify these items for clarity’s sake.

6. That the term of the lease, period of the lease, its renewal or early termination must be stipulated.

7. Purpose of use. The lessee cannot use the leased assets other than for the purpose specified in the contract or agreed to by the lessor expressly.

8. Commencement of lease. The lease commences from the date of delivery of the asset to the lessee and not from the day of payment or lease agreement, with reference to the commencement of rentals.

9. Determination of rental. The rent for the entire period of the lease must be determined at the time of the contract. Different rates of rent for different phases during the lease period are permissible. This point will be elaborated in the following discussion of the issues.

4. Issues

While operating a leasing business, a number of practical issues have cropped up which warrant discussion and interpretation under SHARIA’H. An exhaustive and conclusive list of such issues is impossible to make. However, certain important and salient issues need to be taken up in these discussions as follows:

1. Joint ownership (Lessors)/Joint Lessees – (permissible)

2. Insurance – Islamic TAKAFUL – (by the owner)

3. Renewal of or variation in the lease period – (permissible if mutually agreed-upon)

4. Future date. Agreement to commence lease on some future date is allowed. However, the rent has to commence from the date of delivery. If the lessee has paid the price and delivery of the asset is delayed by the supplier, then no rent is liable to be paid for the period of delay. It must be noted that future or forward sale in sale/purchase transaction is not permissible in SHARIA’H. This is another major point after ownership transfer which differentiates leasing from a sale/purchase transaction under SHARIA’H.

5. Acquisition of an asset by the lessee. For various reasons, the asset subject to lease may be acquired by the lessee and payment may be disbursed? Through him by the lessor. This is permissible under SHARIA’H on the principles of agent and principal. Here there are two relationships separate from and independent of one and other. The first relationship is that before becoming a lessee, an individual acts as an agent for and behalf of the lessor to acquire the asset. This is an independent arrangement. Once the asset has been acquired with all the risk and reward of ownership to the lessor, then a second relationship is created i.e. the lessor and the lessee under the lease agreement. That cost of acquisition shall be borne by the lessor being owner and not by the lessee.

6. Rentals.

1. Advance rentals are admissible subject to the condition of adjustment against the actual rental when due upon commencement of the lease as discussed before.

2. Unilateral increase by the lessor is not permissible even if stipulated in the contract.

3. Bench marks. The fixing of any bench mark for determining the amount of rent, as with an inflation index etc., is permissible provided that the lease agreement clearly stipulates the same e.g. if the inflation rate as declared by an authoritative body like the State Bank etc. is said to be 10% per annum, then the rent can be increased every year by that percentage.

7. Penalty for late payment of rentals. Penalty or compensation for late payment is not permissible. Rentals once due become a debt obligation or monetary asset which cannot generate profit under SHARIA’H. This situation has been exploited by unscrupulous lessees. In such circumstances, contemporary scholars have provided a solution whereby a penalty can be charged to the lessee for delayed payment though the amount recovered is only to be used for charitable purposes by the lessor. In other words, the late payment charges cannot be taken as income by the lessor. A suitable clause, therefore, is to be incorporated into the lease agreement to avoid any misunderstanding in this regard.

8. Premature termination of lease. Premature termination of lease is allowed provided that the lessee has violated or contravened the terms of the lease or it is by mutual consent of the lessee and the lessor. Any unilateral or unconditional termination of the lease either by the lessor or the lessee without prior notification is contrary to the principles of justice and equity, hence not allowed under SHARIA’H.

9. Repossession of an asset. In the event of early termination, or upon maturity of the term of lease, assets have to return to the lessor unless he voluntarily relinquishes his rights or makes a gift of the leased assets to the lessee. However, rent would be payable only up to the date of termination and not beyond. Entitlement or the right of the lessor to claim rent from any period after termination, even if expressly stipulated in the contract, is not valid under SHARIA’H.

10. Residual value. It is accepted under SHARIA’H that ownership of the asset belongs to the lessor and, therefore, assets should revert back to him upon expiry of the lease. Any stipulation to the contrary in the contract that the lessor can sell or transfer the asset to the lessee upon the expiry of the term of the lease at a pre-determined price called residual value is not considered valid from the point of view of SHARIA’H However, this point is currently a subject matter of debate among contemporary scholars. They are of the view that if a lessor unilaterally undertakes or promises to transfer the ownership to the lessee as a gift or at a token price separate from the lease agreement, then this can be considered validly binding on the lessor at the option of the lessee.

11. What is important is that under SHARIA’H the leasing and sale/purchase transactions are two separate things and should not be mixed up in one contract, as both are independent and governed by separate rules. Nothing, however, in SHARIA’H stops the lessor from giving away the ownership of his assets at his own discretion or good will toward the lessee at any mutually agreed-upon price or as a gift upon the expiry of the leasing contract.

12. Sale and lease back. This is allowed, but only as two separate transactions. That in the first place there is a sale of assets to be purchased by the lessor. This is governed by SHARIA’H rules of sale/purchase at a fair market value. Once the ownership title is validly passed on to the lessee, a lease transaction can then be executed separately through a lease agreement.

13. Sub-lease. Sub-lease by the lessee is permissible under SHARIA’H subject to the consent of the lessor and can be expressly outlined in the lease agreement. In SHARIA’H, however, there are divergent views if the rent arising from the sub-lease is higher than the rent payable on the original lease. Some scholars allow the differential to be retained by the lessee while others feel that the surplus received from the sub-lease should be passed on to the owner i.e. main lessor.

14. Assigning of the lease. Also permissible under SHARIA’H, the lessor can sell the leased assets to a third party along with his rights and obligations. The relationship between lessor and lessee in this case will be determined between the new owner and the lessee. However, the lessor cannot assign the lease without transferring the ownership for monetary consideration. Here the basic SHARIA’H cornerstone of asset-back transaction is not there. Rent receivables are debt obligation which cannot therefore be transacted for a monetary price. Assignment of lease rentals without monetary consideration is, however, not prohibited in SHARIA’H.

15. Securing of the lease. Leased assets can be secured along the same principles governing the assignment i.e. ownership of assets along with the rent. Rent alone without ownership of the assets cannot be secured for the reason of being a debt obligation as discussed before. Securing a lease can be made wholly or partly to one party or to a number of persons. Documentation has to be carefully prepared to ensure the securing instrument represents assets and not the debt or monetary obligation alone. [5]

Some Difficulties

Major hurdles faced by Islamic finance houses are the absence of a necessary legal framework and the lack of adequate infrastructure in the banking and investment fields. [6]

The modern banking system is based on the concept that money should be treated like any other factor of production and must earn some return over a period of time. It is argued that the establishment of large-scale enterprises, and hence material progress, is not possible unless there is an agency that can mobilize financial resources from the public by paying them some interest, while lending these resources to entrepreneurs. By charging these entrepreneurs a higher interest, these agencies were able to utilize the difference (called a spread) to meet their expenses and to make some profit for the owners of the agency (i.e. share-holders). Banks were established to fulfill this need and from the beginning were only authorized to perform this function. They were legally prohibited from entering into trade or industry. When the Government of IRAN decided to introduce an interest-free banking system, this prohibition was removed. After a lot of in-house the banks were told that they were allowed to deal in only 1 to 12 means of financing (only two were classified as “Financing by Lending”).

These two permitted lending without interest by charging the actual expense incurred by the banks to meet their cost of operation and QARDE AL’HASANA. All the rest were either trade-related or investment-type models. These included the purchase of goods by banks and their sale to clients at an appropriate mark-up price on a deferred payment basis, in case of default there being no further mark-up. This sale of goods on mark-up is known as MURABIHA. Other types of financing were hire-purchase, leasing, MUSHARIKA or profit- and-loss-sharing, equity participation and purchase of shares, etc.

Since MURABIHA was the type nearest to lending and since it did not require any expertise in buying and selling commodities, bankers limited most of their financing to this type. In order to eliminate the risk of prospective buyers refusing to accept goods purchased by the banks by reason of not being strictly in accordance with the specifications, banks were allowed to appoint the prospective buyer as their agent for the purchase of the goods and later for the sale of the goods to the buyer’s firm. Furthermore, to give as much leeway to the banks, as safeguards of public money, as possible, the ULAMA did not fix a waiting period between the two stages of buying and selling.

The banks did not assume the role of trader and MORABIHA degenerated into lending on mark-up. The banks rarely hired persons who knew even the basics of trading, nor did they train their existing staff to learn the art. They did not even bother to find out whether their agents had actually purchased the goods or not. The inability or reluctance of banks and financial institutions to change over their operations from lending to trading has been a serious impediment to the Islamisation of the economy.

The blame does not entirely fall on the bankers. Depositors have become so accustomed to their money remaining safe and yet earning profit that if a bank had really ventured to trade and incurred a slight loss, then the depositors would have immediately demanded their money back causing the bank to go bankrupt. In the existing state of morality this was more likely to happen. It actually did happen to a few investment companies that had started with good intention, but could not go on giving away handsome profits to their depositors.

A lack of seriousness and dedication in those responsible for the implementation was also another great impediment to the achievement the goal of an interest-free economy. Many of these individuals thought that in the present world, there was no alternative to interest, yet something had to be done because of demands from the government. Some, who were more influenced by Western education and culture, thought that interest banking was not prohibited by Islam. Yet others thought that the efforts being made were only superficial and in reality the new system was no different from the existing system.

One weakness in the implementation of the proposals to eliminate interest from the system was that people were not sufficiently motivated to sacrifice a part of their financial interests for the sake of carrying out the commands of Allah (SWT), and the Prophet (SAW). Anyone attempting to change a well-established practice must be prepared to make some sacrifice for this, as arguably no noble cause has been achieved without any sacrifice. The prevailing level of public morality within the existing legal and taxation system of the state made it an up-hill struggle to rid the banking system of interest. And it remains so. Beyond this, there are many avenues of making profit that would have to be forgone and many types of modern banking services which also could not be provided by a bank working strictly on Islamic principles. For example, they could not keep their surplus cash in fixed or saving deposits. In spite of these difficulties, those who were engaged in the task of Islamisation took it upon themselves to portray as successful the reforms, while those who pointed out the difficulties were labeled as either a cynic or an opponent of the new system. Anyone who uttered a word of caution was regarded as someone who did not want the experiment of Islamisation to succeed. As a matter of fact, reward in the Hereafter (AAKHIRAT) should have been the main purpose of Islamisation. It might not have attracted many people, but the foundation would have been firm.

One great obstacle in the realisation of the goal of an interest-free economy has been absence of a proper environment. Unfortunately nothing has been done to produce an ideal or a near ideal Islamic environment by government or public leaders. The most important pre-requisite for the enforcement of SHARIA’H is A’DL [translation!!!!!!]. Establishment of the rule of law and ensuring justice to aggrieved persons should be the first task of an Islamic state, yet nothing have been done to achieve this end.

One very important requirement of an ideal environment is an inflation-free economy. Inflation erodes the real value of money, meaning that when a person gives a sum of money on loan and receives the same amount back after one year, he has made a net loss. A major source of inflation is deficit financing. The printing of notes to meet budgetary deficit is in fact an injustice to the public, since the real value of their money is consequently eroded. In this respect too, the government’s performance is very discouraging. Government borrowings at high interest rates and the quantum of the government’s domestic and foreign debts has reached a level which cannot be sustained. There has also been no effort to change the taxation structure so as to bring it to conform to SHARIA’H. [7]

MUSHARIKA

MUSHARIKA represents the most desirable form of Islamic financing arrangements. Yet, in terms of its ability to be an effective and efficient instrument for replacing interest-based transactions, it poses formidable problems.

The salient features of the MUSHARIKA agreement, as practiced by the commercial banks, were as follows:

1. It was a short-term financing arrangement specific only to the parties to the contract.

2. Investment by the banks was made in the form of the sanctioning of a funding limit to the client and the degree of employment of funds was determined on the basis of daily product of outstanding balances due to the bank.

3. All participative funds, including equity, reserves and other non-debt capital was included in the definition of capital qualifying for profits.

4. Profit sharing ratio was determined through negotiations within the boundaries specified by the SBP.

5. Profits for the purpose of sharing were to be determined after apportioning a share of net-income as a management fee to the firm.

6. Provisional profits, based on projected profits, were to be paid to the bank on quarterly basis, subject to a final adjustment on the basis of actual profits or losses.

7. Shortfalls or excess profits were to be settled through the creation of a [participation] reserve fund, which would attempt to smooth out the payments to the bank.

8. Losses, if any, were to be shared in strict proportion to the bank’s investment in the total capital of the firm.

9. Against the apportioned loss of the bank, ordinary shares were to be issued, which qualified for recon version in MUSHARIKA investment under the original terms of the agreement in case profits accrued in future.

10. Standard securities in the form of pledging and hypothecation stocks or the mortgaging of properties were required against MUSHARIKA financing.

Some of these features of the instrument attracted criticism. For example, the profit sharing arrangement did not strictly conform to the requirements of SHARIA’H particularly in the treatment of losses and the payment of provisional profits or their adjustment through the participation reserve. Secondly, despite being a sharing arrangement, the actual agreement was cast within the framework of a creditor-debtor relationship, and was also protected as such in law. Three, MUSHARIKA also demanded securities which were akin to the relationship between a creditor and debtor. Finally, in the absence of a legal framework regulating the operation of MUSHARIKA, there was no standardization of the agreement, and the terms and conditions of various agreements varied considerably.

MODARABA

MODARABA represents another of the more desirable forms of Islamic financing arrangements.

The salient features of MODARABA companies and their operations are as follows:

1. Only registered companies or those established under specific laws are eligible to register as MODARABA companies.

2. MODARABA can either be specific purpose or multi-purpose and can either be for a fixed term or in perpetuity.

3. On fulfillment of certain conditions, and with the prior approval of the Registrar, MODARABA companies may float MODARABA on the stock exchange, and their certificates of issue will be tradable securities.

4. Each MODARABA will be a separate business and its operations must conform to those approved under the injunctions of SHARIA’H.

5. A Religious Board, to be periodically constituted under the ordinance, will be empowered to declare whether the operations of MODARABA were in conformity with the provisions of SHARIA’H or not.

6. Many disclosure requirements, similar to those applicable to listed companies, are applicable to MODARABAS, including statutory audit, annual meetings and investments and loans to and from the directors of the MODARABA Company.

Evidently, the entire scheme was an elegant formulation of the simple relationship required under a MODARABA contract between labor (DARIB) and capital (RABBULMA’L). The management company was to be remunerated through a fixed management fee paid out of the net income of the MODARABA and the remainder was to go to MODARABA certificate holders, with adequate provisions for retained earnings to ensure future growth.

CONCLUSIONS

To outline the broad features of a strategy which holds the promise of successfully implementing an Islamic system of finance are as follows:

1. The process has to be guided by basic legislative efforts covering all the essential elements of the proposed programmed.

2. The legislation would define RIBA and prohibit transactions connected with RIBA.

3. The application of the law would be unqualified and without exception, thus the entire financial sector, covering banking government finance and foreign transactions would be covered in its ambit.

4. Given the unqualified and non-exceptional nature of the proposed law, even existing relations will have to be converted into permissible forms, for which a suitable time frame, within a phasing-in period, will be allowed.

5. The law should also provide for the Constitution of a SHARIA’H Board which would assist the SBP to formulate permissible means of financing. Such means, specified with the prior approval of the Board, will only be illustrative and no restrictions will be placed on banks and financial institutions to design means of financing which are free of RIBA.

6. A major portion of the law will have to be devoted to a plan of restructuring the fiscal policy which comprises a scheme for the privatization of public sector assets and the use of its proceeds for the settlement of the outstanding stock of public debt.

The proposed strategy is based on the clear recognition of the scope implied by the prohibition of RIBA. This is critical, for otherwise the solution will continue to elude us.

It is ok, but the states which indirectly supported the power of dollar with their economies never had control on volume of dollar emission. The USA government doesn’t have such control either. The right of control has only the Fed of the USA.

The Federal Reserve System (which is the central bank of the USA) is a privately owned organization and it is a property of 20 private banks of the USA. Their principal business is to produce the world money. The Fed owners devoted a lot of time (decades, even centuries) and efforts to achieve that privilege. Here we can mention the 1-st and the 2-nd World Wars and Breton Woods Agreement in 1944 etc., and certainly the establishment of the Fed in1907.

Thus finally a group of private individuals obtained a right to produce dollars, determine the volume and terms of production etc. In the period since 1971 till 2009 the volume of dollars in the world was increased in dozens of times, it exceeded the real volume of products in the world in many times.

Fed owners as private organization first of all and secondly the USA held all the aces in this situation. The advantages of the Fed owners we will discuss later. As for the benefits of the USA, this is the opportunity during the last 38 years (since 1944 and especially since 1971) to live beyond their means.

The USA GDP makes up 20% of the world’s production, and consumption of the USA is 40% of goods produced yearly in the world. How is it possible? It’s possible only as result of dollar emission without production increase and great demand for dollar in countries of the whole world. Exchange of goods and tangible assets for uncovered but popular dollars seems to be very similar to the situation when the Island of Manhattan was bought for $24 (in trinkets and beads) from the American Indians.

Many countries build in their economies to the system of dollar purchasing power support. If they also had a right to provide the control of dollar emission as well as if the USA government had the right of control, the world economy would never undergo a crisis. Real volume of dollars would correspond to the volume of assets, which support the currency.

However dollar emission control is provided only by several private individuals. After all, it is well-known that private individuals have private interests.

I didn’t mean to criticize the Fed, the United States of America or someone else. Let’s not rake anyone over the coals. However we should be realistic to get at a true picture of the world we live in. A true picture of the world will help you understand what is going on, what is doing to be next and what you can do to avoid crisis consequences or make them as soft as possible.

Now we have a question. What made the Fed to produce more dollars than the world economy required for stability?

The matter is that if you are a private individual and have a right to issue dollar, which is supported with the world economy, so you are tempted to start overproduction (if only you are no saint like Maria Theresa, but bankers of Fed are certainly not), as it gives you fantastic opportunities and privileges. That was the real purpose the Fed was established for, that was the real aim of affords to make dollar to become the world currency. Your dollar overproduction is your own business. It is the best business in the world. It is much more profitable than any other way to make money. Drugs, prostitution and arms traffic look like childish sports comparing with the right of dollar production.

Dollar overproduction was organized to get rich (what can be other reason?). With help of this actually virtual money you can buy not virtual but really liquid assets (companies, plants, gold and other asset).

In order to prevent the influence of unsecured part of dollar emission on the product market, which can lead to dollar devaluation (and this will inevitably happen if there are more dollars than products and assets in the world) genius Fed owners invented very effective ways to tie up, to freeze the considerable proportion of dollars in a virtual product.

First of all, they used stock market for this purpose. Usual and normal stock market was changed to a great extent into virtual. Shares of a firm really have a certain price. However, the main and almost the only shares value on a normal market depends on business profitability; that means that shareholders get their income as a part of company profit shared between shareholders. Shares grow in prices in case if annual profit from laid-down capital grows. That is the situation on normal stock market.

The situation will be different on a virtual stock market. You will be explained that profitability is not of a great importance. These 2, 3, 4 or 5% of corporate profit, which earn a corporation, and 10, 20 or 50% of this profit which are shared between shareholders don’t mean anything.

The key condition is increase of capitalization and increase of shares value correspondingly. It’s important that your share holding increased in value. That is the main income from investment. Actually that is a trick for chumps. And don’t be disappointed with a fact that very smart and competent people are among these chumps. “The world wants to be deceived, so let it be deceived.” Unfortunately, this rule is universal, has no exception and applies to very clever people too.

The situation on a virtual stock market is the following:

Imagine that a businessman made one or several million dollars. He starts thinking about widening of investment, for example about building of a new plant. For this purpose he has to go out of his way to develop a high-quality product which will be on demand, to find a building land, to build a plant, to hire personnel, to train them, to lay in supplies of raw materials, to produce some products, to promote own trademark, to sale own products etc. These are huge inputs of own labor, time and health, and you get only petty money from the investment. This kind of work requires your attention and forces daily, monthly and yearly. No pains, no gains. However, a ‘sweet’ stock market comes to hand as an alternative. You don’t have to make any efforts. Your money and your share holdings rise in prices annually. Actually 10-15% annually is added to initial price for you just on paper. No headaches, no special muscle or mental efforts.

It is easy and clear, as free cheese in a well-known device. It is really difficult not to get deceived and not to trust economic analysts, who explain that the main thing is not a company’s profitability but increase of rate value.

This is really very important for those who changed stock market into virtual. Stock market based of increase of stock price can “utilize” or “tie up” dollar in dozen times more than stock market based on shares value evaluation according to the real corporate profitability. It is really important for virtual stock market creators as they count tens of trillions of dollars.

By the way, options, futures and other stock rubbish are also acts in the same performance which we call “virtual stock market”.

That’s why even very smart businessmen were interested in being deceived and in believing in stock market, they had a hope to lighten their burden. In fact, real money you earned doing a job of work were changed in such market into virtual capital.

A stock market trick founders solved not only the problem of ‘freezing’ dollars. Such market provided other fantastic opportunities for them; it provided them with chance to make vast sums of money.

If you control key events of this market and you are a man of means (if you publish dollars you have surely no problem with money as you can always open long-term credit account for yourself), if you create news which will influence the market, and if you set time and order for news to be broadcasted, you will make fantastic sums of money. For all that, your money (in spite of money of those chumps who also try to gamble on a stock exchange) will be not virtual at all, your real profitability will be not 10-15 virtual percents but real  40, 50, 60,…,100%. And it happens year by year.

The main thing is that you always know exactly when you are going to collapse the market after your money is derived from it. And until that moment you will buy up controlling stocks of really profitable enterprises year by year in order to have a great part of real actives in your hands after economy collapse.

Stock market for other participants can be compared with Russian roulette in its most extreme variant when there are five bullets in a six-shot revolver. That is also a gamble, and even in such kind of gambles there are chumps who win, but there will be not many of them as results are determined with certain starting rules.

Stock market was really ensured with money only by 1-2%.  That means that only 1-2% of money can be taken out by invertors without losses, as this market is virtual and it wasn’t supposed that investors could leave this market simultaneously and take out at least the sum they paid at the entry.

This situation is similar to situation at a bank when all clients decide to take their deposits simultaneously. Such bank comes very close to bankruptcy. However, usually a bank should have assets which exceed its liability, and when a bank doesn’t have enough cash to pay clients’ deposits back, this bank is supposed to sell assets in order to meet commitments. In any case a bank will pay at least 80-90 % of deposit back to its clients.

Stock market is totally different, there is no liability at all, nothing is guaranteed and nothing will be paid back ever.

The lowest price of stock market is a real price for shares, which depends on profitability of an enterprise. This price is dozen times lower than shares price on a virtual market.

That’s why I smile when I hear that the USA will assign 700 billion dollars to save their stock market and experts claim that it would be enough.

They need to publish 100 trillion dollars to save virtual stock market; this sum should cover the whole value of the market. But if this money is published the dollar will tumble in 10 times. That’s why nobody is going to save stock market in the form it existed during last decades. It is simply impossible.

Stock market fulfilled certain tasks and its creators don’t need it anymore.

Certainly the market creators are very clever and they will imitate attempts to save stock market until a convenient moment. Prices on stock market will grow for several days (by the way, stock market creators can earn some more money once again as time and volume of growth is determined indeed by them). No stranger will be allowed to win in this gamble.

By the way, did you ever analyze the information given by ‘sophisticated’ experts and analysts about reasons of stock price or oil quotation growth and fall?

For instance, a sophisticated person claims on CNN channel (or any other channel) that the oil price increased $10 per barrel, and the reason of such increase was the information that oil supply in the USA oil storages appeared to be 1 million barrels less than it was expected. Who and in which volume “expected” this and why “expectations” level should be the starting point for published supplies evaluation? Nobody tries to answer this question, but this is another question of the same performance.

First of all, let us say couple words about these 1 million barrels. That is about 131 thousand tons for Brent trademark (or about 2500 tank-wagons of oil). Really such volume of oil is to be consumed in the USA during one hour. There was consumed about 21 million barrels of oil per day in the USA in 2005. Now this is about 24 million barrels. 1 million barrels is 1/8760 part or about 0,012% of annual oil consumption in the USA. One million barrels costs 100 million dollars (if price is 100 dollars per barrel). These 100 million barrels are not lost, they didn’t disappear. This oil is just not brought to oil storages yet. Actually it’s not really certain that oil is still not brought and there is no oil in the storages. He who knows nothing, doubts nothing. What we have here is a piece of informative news for the market. This ‘striking information’ results in cost increase of annual world oil production up to 228 million of dollars (10 dollars x 7,6 barrels in ton x 3 billion tons).

You can evaluate experts’ intelligence yourself when they explain you the reason of price increase up to10 dollars per oil barrel. 99% of other comments by financial experts from stock markets are of the same nature. And now you can make your own conclusion about how much was earned due to this piece of news and who did it.

And now let’s talk about high price of oil. During last 8-10 years we could observe an increase of oil price. High price of oil solved during this period the same tasks as a stock market. It tied up dollars, but in spite of stock market it tied up dollars in real commodity.

Oil is the best choice to tie great amounts of money. It is possible to choose a wrong object and increase price for commodity, which will not be in demand in case price is too high. Oil is really the only commodity which is always in demand. Each citizen driving his own car can hardly be forced to use public transport, it’s practically impossible. Such person would better prefer to stay hungry but save this money to buy petrol and drive his car further more. Actually 69% of oil is refined into petrol or diesel fuel. But for all that oil ties not only money of big corporations but also money of usual citizens, as during last 10 years people possessed too much money and these means became also an early danger for dollar, which is the main commodity of the Fed owners.

Apart from direct tying up several trillion dollars, high oil price is also the best tool to increase prices for other goods (food, mechanical engineering etc.), as each price includes also energy and transport constituents.

Such annual additional rise in prices gave the opportunity to tie up several trillion dollars more.

So the only reason of extremely high price of oil during the last decades was the dollar publishers’ interest. They needed to delay a downfall for several years and get prepared to ‘the managed collapse’ of the world economy.

In order to increase prices so much and clearly explain this fact later they organized a war in Iraq for ‘cheap oil’. But the real purpose was not oil control. The real purpose was to organize that Iraq oil wouldn’t come to the market for several years and that instability in this region would influence on rise in world oil prices.

Let’s continue.

It was ridiculous to observe the messages during spring and summer 2008 that special commission in the USA is looking for traders who are guilty of high oil prices, which makes economy of the USA suffer. Actually these traders were not found.

We shouldn’t blame the Fed of the USA owners. These are just smart as a whip people, who achieved fantastic financial, political and military opportunities to influence our world. They are not obliged to take care of the whole humanity; they are not God after all. They didn’t assume such obligations and don’t have any duties for anybody. They just do their business and build mechanisms for their business to develop and prosper. The purpose of this article is not to accuse anyone; the purpose is to show you a real situation and to help you save your money. Money of those of you who earned them with hard work and saved an average sum of money: 100 thousand up to 1-2 million of dollars. You will not save this money keeping cash. But that is a point for further discussion. And now we shall continue.

Do you know how ‘exchange’ price of gold is set?

Do you think that there are trades on the gold-exchange and balance of supply price and demand price is actually exchange rate? You are wrong. Gold price is set by very clever and respectful people (and that is not irony as people who created such mechanism are really smart and powerful).

Gold price is set by Rothschilds, who meet in their private residence in London. According to exchange bids, which origin is actually unknown, they set gold price. I applauded them in my mind 6-7 years ago when they gradually cut gold price until it became 250 dollars per troy ounce.  Than as if somebody waved a magic wand there appeared a lot of articles claiming that gold doesn’t serve as treasure anymore, that gold lost its ensuring function of a part of gold and foreign currency reserves, and that central banks should get rid of gold. As result central banks of Switzerland and England sold half of their gold reserves to investors. This is about 2500 tones, as far as I know (just guess who bought it). Also as far as I know, central banks not only of England and Switzerland made such decision.

During next 3 years gold price increased to more than $1000 per ounce.

Now the price is about $ 750-800. But don’t worry, it will rise up to $2000 and $3000 if it is necessary. Actually the price will be claimed not in dollars but in other currency which will replace dollar.

Everyone can imagine the perspectives of his own welfare if he had the right to set gold price for the whole world. Would he need to have any other business or this business is worth all other businesses in the world?

And now it’s time to tell what is going on now in the world and what is going to be next.

Now we can observe a ‘managed collapse’. We should understand that there is nothing awful for virtual market creators. Everything is under control. This stage of ‘managed collapse’ is called to bring huge incomes and strengthen positions of the Fed owners in the whole world. A stage of collapse is inevitable as laws of Physics are at work and any financial pyramid is always breaks down in a certain time. Egyptian pyramids are for centuries, but financial pyramids are called to collapse.

It would collapse automatically a little bit later, actually 2-3 years later. But in that case the process wouldn’t be managed and could injure the interest of pyramid creators. A managed collapse was prepared for years. The matter is that during this stage the aim is to get the most important and the most profitable companies for peanuts. It is necessary to control all financial flows and to have a possibility to stop those which can damage interests of buying enterprises (we are talking about financial flows which can help an interesting for buyers enterprise to continue work until the end of crisis).

Can we talk about any preparation? Can we see the traces? We can. In the middle and at the latter half of the 90th bank secrecy was practically cancelled. The official cause for bank secrecy revision was the urgent need to fight against non-payment of taxes. Under the threat of losing USA, Canada and some other bank markets Switzerland and other declaring bank secrecy countries refused to deal with it.

However, it is not enough just to know that some money are transferred from one place to another. It is important to be able to influence the situation if necessary. The next step was September 11, 2001. Events which happened that day solved several tasks, but we shall speak about the only one we are interested in at this article. These events resulted in passing the laws for fighting terrorism financing. It’s easy to realize that terrorists are almost always financed not through banks at all. Actually terror acts need quite moderate sums of money to be organized, usually this are no more than several tens of thousands of dollars.

Actually the main purpose of these laws was to create the mechanism for long-term blockage of any sum of money without court decisions, if it is suspected to be finally a mean for terrorists. Judicial procedure in this case is inconvenient, there should be produced evidence that this was really terrorist money and it’s quite difficult to control a lot of trials around the world. That was the way they received a real tool of necessary influence on situation in future ‘managed collapse’.

It was important for successful forthcoming buying up of important assets that big interesting enterprises didn’t accumulate considerable reserves of money until the moment of decline, which would enable them to survive during the period of ‘managed collapse’.

The possible mechanism for enterprisers to accumulate such hidden reserves is nonpayment of taxes or cash.

As you remember since 2000 it was launched a serious world campaign against enterprises which don’t pay taxes. Do you remember WorldCom and others? They were learned from bitter experience that they should pay in any case, even if accounting situation really allows to have different interpretation and not to pay tax in certain conditions. Someone became a bankrupt, someone was imprisoned. That was demonstrative imprisoning.

The super-profits, which could be earned by companies due to high oil prices and due to trading on the exchange, were withdrawn by means of excise duties and other taxes. Companies actually earned about 20 % of earnings so that they could function and just a little bit prosper. That’s why extremely strict control on tax paying was very important. It was necessary to collect as much taxes as possible.

What purposes were tax sources for (except for financing of budget expenses)? They were the source for various reserved and other funds.

During last 3 years there also was a fight for cash. This solved two strategic tasks. The first task is that no one could make big cash supply, which would support business in case of crisis. The second task is to earn huge sums of money as cash cost was 11-12% of a sum.

From the one hand we can state that fight for taxes is a job of any civilized state and it’s not really preparation to ‘managed collapse’. It is really so. But we should mention that the strictest form of the fight for taxes and oil price grow started simultaneously. We must pay our attention also to the forms of taxpaying fight: they choose demonstrative victim (WorldCom), its relations with big bosses leads to conclusion that the main object of fight are big companies. We also should monitor the purpose this money was sent for (USA stock market, USA mortgage bonds etc.). All these facts lead us to the conclusion which has been already made.

Finally, the day which was expected so much by somebody came. A crisis occurred.

The way European and American banks lost their liquidity is well-known and there is no reason to talk about it once again.

With a wave of a magic wand (and you know whose hands hold this wand) demand on metal production fell down, oil also fell in price, capitalization of companies fell rapidly in several times, banks started credits recalling, mortgage lending and bank loans were stopped.

In other words, the process which can be called ‘the managed collapse’ started at full speed.

Stock market collapsed.  Problems with products distribution made metallurgy, car, building, chemical and other industries suffer. There is no reason to look through all aroused problems; you can find a lot of such information in headlines.

However there are interesting peculiarities: stock markets collapsed immediately (during 1-2 days) and extent of collapse was great enough to make serious even fatal holes in liquidity of enterprises and banks.

Banks were the first target. Making their life easier banks didn’t like taking the trouble to credit real business sector; it was much more comfortable for them to gamble on a stock exchange with spare money of their clients. Since virtual stock market grew readily and rapidly. And one day it fell rapidly in 20%. If we say it in simple words – banks lost the fifth part of that client money which they gambled on a stock market. Selling shares at the new lower prices would mean setting huge losses and saying good-bye to all hopes that it was occasional fall and everything is going to be ok in a week. Everybody waited for previous prices. Prices however fell in a week more than in twice. The volume of losses became disastrous (prices on virtual stock markets fell in 5 times in some states for today).

Banks got in result big holes in their balances, banks can’t give credits anymore because they are lack of money. European banks start to recall credits which were given to foreign banks and companies because of problems in their countries, which make the situation even more disaster.

The biggest companies lose rapidly their capitalization, which is calculated according to share rates of the company on the virtual stock market. That is the next reason for banks to recall some credits and for rating agencies to decrease a company rating. Credit scale depends on ratings and on capitalization. If these indexes fall down some credits are recalled automatically and a company has no opportunity to take another credit anywhere to survive difficult times.

In general, banks and big companies which depended much on credits found themselves in a very difficult situation.

Actually in working economic model of the world no big enterprise or bank could work without credits during last decades. Credit recourses were widely available and interest rate was sweet for business. However enterprises and banks get in real trouble if they are required to pay credits back before due date. The reasons of recall are very objective; these reasons are mentioned in credit contract– «company’s capitalization falls in 10 %». And we know that capitalization of all companies fell down.

By the way, doesn’t it remind you the beginning of the Great Depression, the crisis in 1929? There also was a situation that according to the share purchase credit conditions a creditor could call his money back during 24 hours (that is called marginal credit). When such requests were made unexpected and simultaneously, borrowers were forced to sell their shares urgently, which lead to immediate market default.

If this scheme worked in the thirties, why shouldn’t it be used today with some variations? Actually it is happening.

Now there is a task to buy up the most interesting and most profitable enterprises for peanuts. How can it be done? Should we just go to an owner and propose him to buy his business at a low price? Even if he has some problems, he will not agree for sure. He will probably wait until crisis is over. He will ignore court actions of creditors, delay legal procedures (which really can be delayed for 2-3 years).

That is not a way for the Fed.

In spite of its intellectual and financial power they don’t have enough resources to carry on thousands of lawsuits with people who would protect their business by hook or by crook. Time factor is also very important here. The whole operation should be finished in the short run, as after buying-up is finished the next more important stage will start. This will be discussed a little bit later.

How to buy-up enterprises and the whole branches of business in short terms and at reasonable prices?

It is simple: a state should save ‘damaged’ owners of big business, their banks and companies. A state would propose some ‘saving’ credits for strategically important companies.

The big business owner will have now a difficult choice:

– either the company’s bankruptcy of will start right now when there are no credits, no sales, and current expenses of the company so huge that they will kill the company in couple months even in case all production is stopped

– or he has to take a state credit and try to hold on as soon as all analysts and experts predict forthcoming upturn in spring and all rates will be of level as in July 2008

However, the matter is that when all expected companies will take credits and sign payment, finances will suffer really serious. When the term to pay credits will come, they will not have enough money to pay. Shares will fall in prices, oil prices also will fall up to 20 dollars per barrel, and demand will be really low. That is a scheme of global property redistribution, which is the main purpose of the stage of ‘managed collapse’. Certainly businesses will become state property first (officials will be strict towards non-paying owners), but later they will be bought by those who are expected to do this.

Now let’s talk about a ‘powerful’ dollar.

Dollar will be ‘strong’ all the time until big and not very big companies will have to pay their dollar credits back. There are a lot of such credits not only in the USA but also in other counties where a myth of the dollar as a strong currency is alive. A ‘strong’ dollar is much more difficult to be paid back and it is much more difficult to be bought in necessary volume for devaluating national currency. Dollar will be strong until the credited big enterprises will not change their owners.

Besides dollar will be ‘strong’ until this ‘strong’ dollar is needed to buy an interesting business. We are talking about profitable middle-size business, which will not become the state property until that moment. When business situation becomes really hopeless and businessmen will be close to lose their business, they will be proposed good sum of ‘strong’ dollars and they will be happy to sell their business.

When these two stages are done, the next in turn is the most interesting and the most dangerous stage.

I would like to mention that this article is for people who have some savings, for small and middle-size businessmen who saved $100 000 up to $2 000 000 with their own hard work. Today global processes can be destructive for results of their hard work. In order to avoid this destructive influence it’s very important to understand what is really going on in the world and what is going to be next. Knowing facts you will be able to make favorable decision in time and save the results of your long-term work.

It is a global property redistribution, which will lead to new configuration of the world with new centers of force. The main purpose of redistribution is of cause big companies, banks and enterprises, but not small and midsize business. Anyway everyone will feel a certain negative influence of redistribution and it’s necessary to get ready to avoid influence or at least to make it moderate.

Let’s continue our description of what s going to be after property redistribution.

Next is going an imminent event, which is dollar default. It’s imminently in any occasion, as dollar over-production by the Federal Reserve System is smart and huge, but still is a pyramid. Thus pyramid fulfilled its tasks and brought incredible profits to the creators, but it’s impossible from the one hand and unnecessary from the other to save it. It’s time for a new scheme to make money; it’s time for new Breton Woods agreements.

It’s impossible to pass to the new world system without rejection of the previous world currency, which is dollar.

There are not so many goods and real assets in the world as published dollars. The total quantity of dollars which were put in circulation is ten times more than the total cost of real assets.

There is no variant of further events left in which America could refuse from dollar default.

That’s why default and dollar rejection is going to happen within the next few months, whatever say different ‘experts’ and ‘analysts’.

The question is how it is going to happen, as it should be very serious and dangerous event for all people including organizers of dollar pyramid. Many of those who will lose everything will possibly reflect on who is guilty in this? The strongest move to solve this problem (and the safest for them) would be realization of default through “big blood”.

I think that they can organize a state of emergency on a world scale with hundred thousand of dead. The attack will be made on the territory of the USA or Israel. Attack on the territory of Europe is less possible, probably, together with the USA and Israel but not separately. Separate attack of Europe only would not meet the task to collapse dollar. The attack will be made probably with nuclear weapon or other ‘dirty’ bombs as there should be hundred thousand people dead and radioactive pollutions of large territories (a similar case in September 11, 2001 with 3 thousand people dead is not right for this time, the scale is too small for default).

Who and how will attack?

I suppose that nuclear weapon of Pakistan will be used in this operation, as it is the only muslim country which possess nuclear weapon. The powerful President Musharraf removed from this post for this purpose in August 2008 (actually the USA participated in that). Several months before Benazir Bhutto was killed (she also was a good leader and nuclear weapon couldn’t get out of hand). Zardari, the widower of Bhotto, came to the power after her death. That is ridiculous personality. A year ago he was a patient of a psychiatrist. While Bhotto twice served as Prime Minister of Pakistan, Zardari was kept in jail on corruption charges and accusations of murder, even his wife couldn’t help him to get cleared. This is the best kind of a governor to pass nuclear weapon to terrorists or to organize that Iranians could ‘buy’ or ‘steal’ it and use for bombing the USA or Israel.

I would remind that Zardari was actually a protege of the USA. In fact the USA today do a lot to provoke anti-American sentiments in Pakistan. How would you evaluate weekly attacks of Pakistan villages at the Afghanistan border by the USA air force, which is explained as pursuit of the talibs? There are 20-40 people dead each time, and usually these are women and children. And how would you evaluate recently published secret order dated July 2008 by Bush, which allows the USA air forces to cross Pakistan border and attack Pakistan territory for fighting with terrorist talibs without Pakistan authority permission.

Such actions have great influence on attitude towards the USA. Pakistan people as well as Pakistan air forces, which possess nuclear weapon, are actually provoked to have negative attitude.

It is obvious that after bombing the USA (or Israel) there will be a war with millions of victims. Since those who will attack America must be punished. It is doesn’t really matter who will attack – Iran with nuclear weapon of Pakistan, or Pakistan itself, or both states together, or Ben Laden who can in one way or another take the nuclear bomb. That will be such kind of important events that the question “if the dollar could be saved” will be inappropriate. You will be given a positive answer that that was a quilt of ‘damned terrorists’ or ‘aggressive states’ etc. They will state that they did everything they could: gave 700 billion of USA dollars in support of stock market, and that actions were proved to have positive influence (Dow Jones Index varies during the last time 8100 up to 9600 points). There was a summit of 20 states and we decided to reform International Monetary Fund and the World Bank to control ‘greedy’ bankers, who are the main crisis initiators, in a proper way. We did a lot to plaster and paint the front of the world financial system (a building which has blasted foundation and cracked bearing wall indeed). As plaster and pain are really two main ways to solve such problems.

We need to understand that humanity deals with genius and very influential group of people, who created the world structure which we live in. In order to understand a sense of their actions we should consider their occupation peculiarities. This will help us to understand their actions and forecast future events.

Accountancy is their education, ideology and mission. And such non-account values as ‘humanism’, ‘kindness’ and ‘compassion’ are outside of their vision.

The main things are figures, profit and bargains.

In situation which requires scarify people to get more profit they wouldn’t hesitate in what should be done. The only really important result for them is profit.

That is a great power of those people and their strategic susceptibility as well. The situation is that during hundred years their principles brought huge profits for them and made them powerful. However one day these principles will work against them and will cause damage to them or their business which their lives were devoted to.

Attendant expenses of their operations cost sometimes dozens million lives: the First World War – 20 million, the Second World War – 60 million of lives.

I hope that dollar collapse will be made in other way without war and without blood of innocent people.

It’s difficult to imagine other scenarios. However, everything is possible, everything is real. It depends only on intellect of the authors.

There are various variants. The most stupid is if the USA refuse dollar, announce default giving the reason that dollar can’t be the world currency anymore because of financial crisis and economic recession. ‘Experts’ and ‘analytics’ as well as a huge number of controlled by the Fed owners mass media outlets will tell stories for the whole world that it’s a historical truth that dollar became world currency for 90% and home currency only for 10%. And as dollar can’t be the world currency anymore (because of very objective reasons, because of the serious world crisis, which happened accidentally), it can’t also remain home currency of the USA. In order to save the most important world economy, which is the economy of the USA (in other words: in order to save the USA economy from a huge flow of dollars from the whole world) – only this great and humane mission makes the USA to refuse dollar and set ‘new dollar’ as home currency.

If during next three months after such announcement the world mass media outlets will promote such ideas 99,9% of people will really start to think that it was real the only and the best way to overcome the situation caused by the most impressive in the whole world history crisis.

In any case, there are much more humane ways to achieve a set purpose (without blood of innocent people of Israel, USA, Iran etc.)

They are also much cheaper than a war (only PR expenses).

This variant is acceptable for decision-makers only if after elimination of a one-polar world they will provide a many-polar world with other principles of getting their profit, other principles of their influence and other principles of world finance system correspondingly.

It seems to me for a while that everything is going to fall back into place: virtual stock markets, building of financial pyramids (using several currencies instead of a single), and so on according to the list.

However, there are also other world models, in which they can save their influence, but they don’t see them or just don’t want to.

If it is true, then the only variant of further events is blood. Only this variant allows claiming that everything was well organized and only due to ‘terrorist’, ‘enemies’ etc. everything was broken.

In other variants the truth will be surely revealed, so it would be rather difficult to prove the necessity to create new pyramids which pretty much similar to previous.

In general, dollar collapse and dollar rejection and default are inevitable.  Inevitability is determined with the fact that today world finance system is build according to finance pyramid principle.

Whatever will be said by ‘experts’, who really work for pyramid creators, this pyramid can’t be saved and now it’s a time of it to collapse. This will happen in the next few months.

Be sure that it is going to happen 100 % unexpectedly for all except those who manage the process. Until the last moment dollar will be strong and everything will go quite all right.

Euro, ruble and other currencies will collapse simultaneously. There will be no default for these currencies but they will to go down in price in 10-15 times because of a great hole in world finances.

When everybody will feel lack of money a new world economic system will be grounded.

The main positions will have those who have profitable assets (real enterprises etc.). Correctly chosen assets will earn new money for owners fast and in great quantities. Such owners will outdo others.

And now let’s talk how you can save your savings if you have such. You can save your savings in today conditions only obtaining real asset. What does ‘real assets’ mean after currency actually is depreciated?

You can save your money buying property, which will be valuable even after the current events. Cars, furnishings or clothing can be in demand, but you should remember that these goods are not good to save your capital. Car becomes cheaper 15% next week after purchase and 50% in three years, so buying a car you are going to have losses. Your money will not be saved and for sure will not increase. Only really valuable assets, which are people’s bare necessities and which are always in demand, should be considered in the situation of crisis.

Works of art (paintings, sculptures) of famous artists are rather good variant. But ‘entrance ticket’ for such purchase is more than million dollars. Forgery is rather possible, so you can buy just a pig in a poke. You also will need very big bank cell which cost 5-6 thousand dollars per month. And actually at time of world economic turmoil people rarely appreciate art giving their preferences to supply daily needs.

There are pros and cons for jewelry. A work of a jeweler makes up a great part of jewelry cost that is why it’s quite difficult to forecast if a certain piece of jewelry is in price in few years, or it will to the contrary fall in price.

High-quality precious stones are good investment to wait till crisis is over. The only disadvantage is that after such global crisis they will be on demand not immediately but during next 3-5 years as people need to solve more important tasks first, such as food, shelter, clothes, business and only after all some money can be saved to buy precious stones.

Good variant would be real estate investment as people always need shelter to live in and offices to work in. Life goes on even during crisis. However, we probably shouldn’t talk here about any profitability as paying capacity of tenants is quite low during crisis and will grow gradually in compliance with growth of economy. You can’t earn on real estate within the next few years as mortgage lending is temporary stopped and there is almost no solvent demand. So real estate investment can be good long-term freezing of capital.

Gold bullions is one of the best variants considering very special attitude to gold of a certain group of people. They love and respect gold during almost thousand years. They will never let gold fall too much in price. But this rule is for their personal gold, the gold they posses, not for your gold or for gold of someone. Gold is the perpetual value, so you can wait for increase in price for ever, or probably 5-7-10 years. In a certain moment gold price will be 2 or 3 thousand dollars instead of $800 for today. I have already mentioned who and how set gold prices.

Are you sure that price is set for you in order you earned too much profit? I wouldn’t play that game. This is historical business of a certain group of people and it for authorized persons only.

The most logical and correct decision would be investment in production of the resources which people will always be in need in shifting sands – food, water, dwelling and tools for production of these goods. Whatever is going on with economy or currency – people will always consume these goods. Investment in these goods production will not only save your savings but also will give you advantage in hard times, when daily needs are brought to the forefront.

The decision should be made as soon as possible, until currency is not and financial systems functionate. Rich for resources Europe is already in a deep crisis, dozens of states are under the threat of default, and recourses of countries in Eastern Europe, where capital deficit is reality, are de facto for sale. Not only useless luxury goods but also lands, plants and farms here are cheap at half the price at the moment. Resources which are of state importance found new owners at the moment.

Ukraine and Eastern Europe are examples. Hundreds of the most valuable resources of this country are for sale now as local owners are on the beach. They just don’t have enough money to maintain their work. There are machine-building plants with several hundred hectares of land, expensive equipment with dozen million dollars potential output! Chemical plants also held up their work because of lack of capital, but there are only few plants like this in the world… Fertile lands, big farms – at the moment their price is thousand times lower then real price. Each invested dollar will bring thousand dollars next year! At http://www.uinvest.com.ua you can check the list of such profitable investments

Certainly it will come to the end soon. Sagacious American and European investors are buying up these resources in great amounts straight away. Buy low sell high. While many people try to squeeze vestiges of virtual money out of stock exchanges, affiliated mutual funds and investment banks, smart investors buy real assets for a mere song. Such assets will cost tomorrow dozen billion dollars again. Actions, which all this project was started for, are being carried out. This is a change of ownership.

Our team attracts capital for buying such kind of assets. People having average income can legally increase their capital in dozen and hundred times. Today they have real chance to do this.

Visit our website http://www.uinvest.com.ua

Basic scientific and radical innovations are recognized as the main means of overcoming structural crisis, that are implement thought acquiring new achievements and rising the effectiveness of traditional development .

In order to move to the stable stage of economic develop it’s important to increase innovational-investment act vitas and to involve new technological directions and basic technologies at trajectory  of firm economic development. The economic policy that is oriented at encouraging  investment, in innovations provide modernization of economy, also gives rise to its competitiveness.

Innovative way of development in investment policy. Thus, the main importance is given to the innovative type of development, that implies the growth of government role in exercising investment policy. Highly development countries. Take the responsibility of financing fields like fundamental  science and high-risk research, as well as the development of scientific research infrastructure. Spreading new ideas and educating population. The implementation of this functions takes place against the background of high-scale investments. that creates favorable conditions  for production growth on the basis of scientific innovations.

Currently, the government tries to develop institutions that will support vestment in new  technologies, stimulate innovative activities, encourage progressive technological changes, that unities financial tab our and informational recourses.

Currently government  tries to create development institutions , which will support investments in new technologies, stimulate innovative activities, encourage progressive technological changes, that unites financial, lab our and informational resources. The state may avoid the responsibility of developing   the production activities , where special markets and competitive relations are formed. At the same time it must encourage new, high-risk directions of investment activities, that pave the way to creating production on the   basis introducing scientific and technical achievements.

For example the wave of economic regulations that spread from developing countries in the late 8 th lost century covered the traditional branches of economy but it had no connection with high-technological sector, conversely the importance of direct state support institutions for innovation activities were risen. At the same time, the importance of working out state strategy for scientist technical and social economic development grows. The state aims at creating enterprises , that will manage to gain com putative advantage over the companies of inner and foreign markets. They  must consentrate their resourses on prospective  fields of production.

The direct instruments of state influence are oriented at supporting  private initiatives and innovative enterprises that will stimulate investment activities in certain fields and production initiatives.

The necessity of financing science and its current condition:

Active investment process, especially in scientific and technological fields, innovative and scientific-technical activities lays in the foundation for economic growth. Nowadays the decline in scientific technical potential is caused by  the fact that there is no more unity between scientific researches and their usage  former. scientific staff has been dismantled  and number of intellectuals have left the country.

Consequently, the country becomes more dependent on foreign trader.

So, in order to create favorable conditions for economic growth capital renewal is essential, but it’s very complicated, because of  the decrease in state financing and absence of ordering production, Science and education have no inner resources for development.

During the last few years there has been significant  reduction of scientific and educational research expenditures. As a result, the share of expenditures in GWP spent on science in 1999 amounted to 0,97%, which is twice less than in 1990. In 2006, the expenses spent on educational field amounted to only 1,5% of the GWP, which is the lowest index among the transitional countries.

Significant reduction of company’s demand on innovations resulted in increase of financing Scientific field from the state budget. Budgetary expenditures on scientific-research and construction work have been absolutely reduced and they are tend to decline against the GWP as veil as the budgetary share of the expenses. The degradation of Scientific potential is proved by sharp decline in expenditures used in research and construction work pond it resulted in dropping behind highly developed countries. Expenditures on Scientific research in the USA (1998) amounted to 794% per person, in Japan – 715. in Germany 511 and 611in Russia, whilst in Georgia it only amounted to 2,8%.

Due to the sharp decline in financing the Scientific field, renovation of scientific facilities detoriorated. The salaries in Scientific field were decreased, The coefficient of renewing main foundations in Scientific technical field significantly dicreased. According to the latest statistical data, 311 ml. Gel was invested in renewing main capital, that amounted to 60% of all the capital invested, in Georgia Instead of renewing Countrys technical market, most of the capital was invested  in activities connected to local market. 29% of this capital was invested in real estate and construction worth.24% in transportation and communications The problem of heeping, supporting and developing fundamental and research centers of science aggravated. During the Soviet era 20% of production was created in the USSR, but now Georgia’s shave in the  World scientific production in only 0,3%.Implementation of innovations require a wide range of activities, from doing research to producing new output. Priorities of innobative activities change at every stage of economic development.

In order to achieve economic growth in current conditions in the country. it is necessary to develop scientific innovations that create new and don’t take into consideration current directions of technological development This lays the foundation for putting so-called innobative multiplication into motion. which is connected to investments and results in production increase. that creates improved scientific innovations. They exchange old technologies. Introduction of this innovations is exercised by new investments, that encourage the further growth in production. Thus, innovative multiplication makes good influence on production growth and takes the economy out of depression and leads it to a long-term development stage.

Distribution of investments on Scientific – technical works.

It’s relatively typical for developed countries to distribute private and state capital investments even on scientific and technical works. For example, The USA’s private investment share in innovative market amounts to 50%. Similarly, according to the figures of state Expertise, 10% of innovations is given a strategically important status and accordingly they are financed from government sources. Japan finances 33% of all scientific research, 73% of scientific-research and constructive works is implemented on the basis of self – financing in the USA, in Germany this index amounts to 70%, in Japan and UK 62%, France and Italy 57%, So the only possible mechanism for promoting social and economic development is it’s technical modernization and move to innovative type of development.

Technical modernization of equipments and their reconstruction requires attracting important investments in innovative field. Here it is important to activate state policy on scientific and technical branches and to work out important directions for scientific-industrial development of economy. AT the same time, the state, that takes important part on technical modernization of the economic sector must take the responsibility of financing fundamental sector of science and high-risk researches, restore activity of  science financing from the state budget and develop scientific infrastructure. In order to define the proportions of sharing investments its essential to focus on cyclical development of economy and, on Intensive types of re-production, that is reflected on the statistical law of dividing expenditures, for example, spending on fundamental research, applied work, capital investment amounts to 1:3:9:27.

Statistical law of resource division in accordance with scientific-technical potential is used at the production development stage where scientific and technical progress is achieved by practical laws, which help to solve the problems of production stabilization and development.

The reason of decrease in scientific potential the decrease in scientific potential in post communist countries is  caused by lack of restructuring  scientific organizations privatization of research centers has   not brought any desirable results. The reason for this is that enterprises don’t order them to do research. Simultaneously,  scientific staff has got older, the last tend years science suffered from loosing its intellectual potential. In this case, it will  be reasonable to merge different scientific organizations and some research institutions must be transferred to enterprises to manage , in this way  scientific technical potential will become much  stronger.

The sources and ways of funding science restructuring research institutions and dividing it into firms with developed financial, economic marketing and commercial infrastructures will increase the practical use of research work results. Contract based applied science makes the realization of  scientific technical projects they will be implemented at the expense of the state budget, non state expenses attracted by Ventura, sharing  other financial mechanisms. The question of mobilizing these sources  can be solved on the basis of aimed, scientific and technical programs on regional and federal levels in accordance with the market demand.

They can be implemented in the    form of portfolio investments using stock marked tools. Providing  the state with grants and sale guarding institutions by investment agency and trust management has practical  us eye. For forming non budgetary recourses for financial    innovations it is necessary  to use amortization funds on renovation in the part, where production expenses, especially those. spent on research and innovations. are taken into consideration as well as the expenses of wearing out financial expenses , that is included  in the production cost and is reflected on the production prize. In addition to that revenues that  came from selling scientific-technical production, or having the right to own intellectual and industrial units as well as the revenues from scientific and technical units and selling the right to own them must  be considered, too.

The role of innovation foundations .

Practical usage of abovementioned sources is implemented according to the special rules and amounting , on the basis of used methods. The expenses received from these sources are transferred  to a separate  sub account `innovation foundation”  Greeting. State funds for innovations which is aimed at realizing prospective directions  of science  and technical development enables to  work out modern competitive production and organize its production. besides using state budgets expenses,   other  market mechanisms for attracting investments are used as well .

Nowadays mechanism for investing in innovations are used only in case banking structure , which mobilizes recourses and regulates this use in science is taken  into consideration banking  structures directed at investments, accumulate vast sums through creating consortiums and other financial and investment institutions, in order to attract own funds for innovative programs of investment. On condition of Budgetary deficit banks au the phases of innovative   cycle and provide insurance service. Participation of banks in the field creates extra   stimulus for different firms. No other structure manages and controls innovative recourses as the banks.

Effective use of stock market instruments provide opportunities  to attract investments in innovative field. Its main aim is to divide investment recourses among fields and provide inner and foreign  investment flows in more prospective sectors of national economy. Transitional economy doesn’t provide the conditions for populations to transform their savings  into innovative investments and provide economic growth. Monetary potential saved in the country is practically unused. According the same data the amount of savings is much more higher than in the USA and west European countries. In order to invest funds existing in the country in essential sectors of economy it is necessary to make the forms of collective investment perfect, it includes. investment share  funds, credit contacts joint stack and commercial funds . After that government should control their activity and they must draw their . attention to new forms of scientific-innovative and investment forms.

Main stages of innovative development.

Innovative development of economy as any process must be oriented at its stages, levels and phases. First of all the technological basis of the field  whose production has more demand on the market must be renovated. At the  same time the market is expanding  with importing goods, introducing innovations that is oriented at modernizing  recourse-saving technologies and improving consuming qualities. So at this stage our main aim is to create infrastructural and institutional grounds for firming scientific technological  potential. than we have to organize the enterprises that produce and sell new technological range-that enables the country  to restore its positions on the world market of scientific technologies.  Simultaneously the role of the country in production and investment activities that is directed at commercializing innovations must be strengthened. Little  by little of will move from supporting  quantity aspects of scientific technical field to quality aspects and to new  forms of engineering, that use  modern informational technologies.

Main directions of state investment innovative policy of the state in future main directions of  state innovative investment policy are: 1. choosing national priorities of innovative field development for realizing innovative projects, choosing the projects of technologies that influence production growth and rise in country’s  competitiveness. 2. Coordination of activities of  legislative and  executive bodies to work out complex approach to solve this question concerning country’s innovative development, effective functioning of innovative systems and implementation of state’s innovative investment strategy.

3. maintaining and developing scientific and industrial-technological potential of fundamental science, working out employee’s training system for maintaining and developing modern scientific and technological level and developing science to a higher level.

4. Providing favorable economic and financial conditions for activating innovative works, developing ventral, engineering and investment-industrial activities and for rising competitiveness creating  favorable conditions for investing in innovation field enables  modernization of scientific and technical basis of national industry as well as rising the competitions of the country.

New directions of innovative activities and priorities of innovation policy consists of three stages. At on initial stage the main goals are reproduction of the technical basis of the field whose production has stable demand on the market than market expands by producing the goods that replace the imported ones  innovations  are oriented  at modernizing the enterprises, that  use the recourse-saving technologies and improve consuming qualities. So at first it’s necessary to create economic infrastructural and institutional basis for moving to investment stages of state development. At the second  stage the enterprises  that realize the technological order are created. After that the production is introduced on inner and foreign markets that  makes production competitive in the sector where national product were not presented before, and it creates new scopes for demand, where national products dominates to must the demands. At this stage country’s activities are directed at attracting high-scale private investments, creating necessary infrastructure for investment-development their support and perfection.

At the third stage the following important questions must be solved. Country’s support for innovative infrastructure, creating conditions for demand on national products, informational support to enterprises making stable contact with science and industry.

New ways of implementing scientific-innovative  and engineering activities.

A State focuses on new forms of scientific innovation and engineering, that use modern informational technologies and little by little they move from quantity aspects to quality ones, that are implemented in the following way:

1. Maintaining and developing scientific and industrial potential and using them in achieving modern technological level.

2 Choosing rational strategy and priorities for developing innovative field. Implementation  of critical technology and innovative projects in the fields that  influence the effectivness of production and their competitiveness.

3. Creating favorable economic and financial condition for activating innovative works, legal industry and competitiveness.    

-           To implement this measures following practical activities must be exercised:

The process of providing information must be radically improved and commercial structures must be involved in developing scientific educational and innovative activities.

- reconstructing the part of research and project institutions and closing the places working ineffectively.

- Creating the system at venture investment. state support of venture business in scientific technical field is necessary until the industry get interested in them.

- Developing the system of noon. state innovative risk and private  supplly, creating insurance groups within the framework of financial-industrial groups, that will undertake high-risk insurance, that is linked with creating innovative production. insurance companies, together will share the risk.

- Using modern methods for prognosing engineering and scientific production marketing.

-  Developing small innovative business by creating favorable conditions and infrastructure for setting up small enterprises and their functioning.

- Creating suitable legislation, that will regulate relations in intellectual  property field, work out normative acts that are directed at exercising state policy. It foresees involving the results of scientific-technical results in industrial circulation, that is implemented at the expence of the state budget.

- making typical state contracts in order to balance legal interests of the participants in the process from the point of using scientific-technical results.

Thus, following the innovative way of development, must not be the only factor white  working out investment policy. In connection to that, the role of country is defined by creating the mechanisms, which forms national innovative system and develops innovative production.

Creating favorable conditions for developing innovations provides modernization of technological basis of the economy and grows the competitive of national production.

- Preparing typical state contract for balancing legal interests of those who participate in the process of using the results of scientific-technical work.

So the main factor while working out investment policy is to move economy to the innovative way of development. In this regard a country’s main role is to create the mechanisms, that will provide the formation of national innovative system and development of innovative business, that will make the modernization of economy’s technological market of the economy possible and will give risk to competitiveness of national production.

The formation of adequate investment activity model in the market system of economy provides replacement of investment recourse division with new forms of investments. For its part it has to work out the investment policy, that will accord with changed economic conditions.

Official concept of reforming Georgia’s market economy is based on simple monitory principles. Their realization was expressed in size minimizing the country’s role, robotizing foreign economic activities, privatizing state property and forming market structures.

The principles, boundaries and forms of state participation in investment activity

Analysis of Georgian-economic conditions shows that solving important problems in country’s investment development is impossible only on the basis of self regulation, that is distinguished with its low quality. A state needs to strengthen its role in the field of investments, correct economic policy.  At the same time state participation boundaries in the investment process must be defined by taking the way of economic development, that is characteristic to the period of moving to market economy, into consideration conditions of strengthening the state role in the investment process.

Analyzing the possibilities of strengthening state role in investment process, we must take into consideration the fait, that counting’s participation in the process has same boundaries, these boundaries are defined by real financial possibilities, on  the other hand the country must encourage the process of attracting investment rather than blocking them. State participation in investment process is not the same as turning economy to administration process. It implies the increase of a long-term policy of the state, effectiveness of particular activities in the conditions of encouraging investments.

The topic of state participation pineapples in the investment activities is closely linked with limiting necessary financial potential for investment promotion Approximate calculations show that in order to restore the amount of investment to the pre-reform level, foreign investment growth is possible. According to 2002-2012state program in the next five years 10 $ are expected.

As we have at ready mentioned the role of the country as the investor in the market economy is maintained for the fields that are vital and important. More importance is given to regulating the investment process in the way, that creates favorable regime for private investors activities.

The conditions existing in Georgian economic investment strategy is oriented at moving from stable investments to creating necessary investment environment for private investors. These two parts that are essential for the state investment policy must support prosperous fields of production and the policy must have systematic character. 

Defining strategic priorities of investments.

 On defining strategic priorities we must take into consideration competitive advantage exiting on the world market, that is reflected on high-technologies. The brunches which maintain potential advantages are: energy sector, turism, agricultural machines and technologies, food etc .

Investing in innovative production will encourage new directions for investment flow, rising production level and encouraging economic growth. This approach is well known in the world products. Our priority must be effective programs that meet inner needs in economy, in this regard we  have to support national enterprises, and the development of vital brunches of economy.

At the same time it must be taken into account that in the world integrated economy, development of investment cannot be stable and increasing source of profit in producing rival products only in the inner market.

Significant  condition of effectiveness in the state investment policy is to work out the conception of structural alteration in industrial sector. It’s especially concerns about such prioritative approaches according which must be defined the reform strategy and mechanism of industries from different groups, supporting forms and methods from the state, organization models of industrial structures in accordance with real, amongst them institutional conditions in the world economy.

The basis of economic growth and quick development can be large corporations, that have scientific – technical potentials in mobilizing resources and effective  integration possibilities in the world industrial unions. Small business industries, that have really important meaning for the function of market economy, nowadays are singled out with extremely low technical level and lack of investment resources, that make it necessary  to quest  their place in industrial chains of the large structures. The formation of stable and effectively developing, diversificational, corporative unions and financial-industrial groups demand state supporting reinforcement of corporative circle from the state, amongst  them even by means of participation of corporations in the capital. Development of corporative forms will help the realization of long term industrial programs, and create conditions for the stable economic growth.

Stirring to activity of stake investment politics. At a modern stage, stirring to activity of stake investment about the stable economic growth in the basic condition of Georgian economy. Essential approaches of stake investment politics are: the reinforcement of supporting in prroritative tendencies of economic development formation of justifiable and economic conditions of stimulating the interest of investments in the real sector of economy and the agreement between central and regional investment politics.

State investments and supporting in prioritative tendencies of economic development. The realization of up-to-date tasks of economic development demands more active state backing of investment field. Simultaneously, the importance of state investment must be growing up not as mush from the standpoint of size of centralized sources, but from the positions of state guarantees, insurance and orient list of private investors.

The problems of investment budgetary financing. Budgetary financing of investment activities has still been happening on the basis of these approaches that essentially limit the state influence on the course market alterations and structural changings in economy.

Herewith, these shortcomings are not as mush conditioned by restricted possibilities of budgetary system, as by complicated and wrong strategies of sharing centralized investments and the lack of effective control of their usage.

Failures in the state investment politics make it necessary to solve this problem, as afterwards not having orientation or having defective one becoming the problem investors. Analysis confirms the existence of distinct dependence between state priorities and investment motivations of private investors. that must surely be taken into account while working out on perspective tendencies of investment politics. Otherwise  it will be impossible to make ground for stake investment politics and for the agreement of investors’ interests of different levels. Reserved dimensions will again have more passive character and will not guarantee planned results. It must also be mentioned that insufficient or unsystematic backing of separate manufacturers or regions, falls down stimuli of accumulation and afterwards self-financing process and it prevents the formation of business executives market behavior.

While analyzing the problem about the possibilities of manufacturers’ investment support it is impossible not to take into consideration the extreme restriction of budget/ At the same time, modern conditions, the increase of levels in the realization clearness and confirmation of investment politics and consideration of budget planning reality are not less important.

In Georgian economy. where unreliable forms of calculation dominate. it is difficult to male real prognoses about the mass index of money. Budgetary politic is being worked out in the conditions of complicated factors, that aggravates the difficulty of real budget formation and fulfillment of the received one.

State investments, as in the realization of economic growth of prioritative factor; usage of international experience will not be perspective without mentioning up-to-date conditions of Georgian state finances and the inevitability of budget  system alternation. e.g. one of the successful example of economic reforms is the experience of Germany. Its budget system is well formed and it is manifested clearly in the distinction of current and investment expenses in the control of pure usage of budget sources in establishment and protection of maximum size of budget deficit financing at the expense of credits with the sum of for seen investments expenses. This method is called “golden rule” and is established the 115th article of the basic law of Germany.

In Georgian economy, as it is clear from the results of reforms, the compensation of the growth of state non-productive expenses was not happening, correspondingly with the growth of budget investment expenses. On the contrary, it was one of the factors, that conditioned the reduction of state centralized investments and weakening of state investment function. In accordance with, the usage of state investments as the factor of economic growth, requires essential changing’s in the organizations of budget politic and budget system.

While working on the budget, it is necessary to define the prioritative tendencies and use the forming principle of the normative that define the levels of budget, according to the singled out tendencies; division of current and investment budget on the normative basis, denial the possibility of exceeding expenses over incomes while planning the budget; strict definition of sources, how to cover the investment budget deficits. It is also necessary of budget on the usage of sources in control realization technology, in order to reinforce the frscal role of budget fulfillment.

An  important problem, connected to the usage of state investments is their low effectiveness compared with the private ones. While sharing the state Financial resources, used tendencies do not help to increase the effectiveness of investment and restructure national economy.

In the organization of investment process, lack of systematic ground and insufficient quality of budget planning caused permanent  failures in financing the state investment programmers.

This fact approves  that, it is necessary to reinforce the role of selective approach, gather state investments towards the strictly defined prioritative approaches, keep strict control and select competitive projecting during state investment.

Selecting mechanism of investment projects on the basis of competition/ In market economy, where basic criterion of investment is the effectiveness of investment, it is impossible to use the old technologies of sharing unpaidly, among enterprises in centralized capital investments, which don’t stimulate industries to improve their effectiveness, as direct state investments are less effective compared with the private ones. Thus, the most acceptable approach is the state supporting to private investments.

State supporting to private investments is realized in these investment  projects by means of the partial participation of the state, which have passed the competitive casting. The goal of centralized investment resources on the competitive basis is the reinforcement of investment assets, mobilization of private national and foreign investor’s capital towards the prioritative approach in economic development, and the growth of effectiveness in all forms of property such as commercial, budgetary and national-economic investments.

A new rule of financing investment projects in the financial ensuring of investment competent project, gives the right to investors to choose the participation forms. These forms can be as follows:

State investment revocable two year-term credit; its payment percent for the usage, compiles ¼ of central banks refunding rate;

to strengthen the port of these shares of an oncoming enterprise in the state property, that is sold in the market from the income of investment project during two years and the income obtained in this way goes to the state budget.

While taking decision about giving funds from central budget, a leading criterion is to insure the setting of object (industrial powers) into action in the given term, in the conditions of decreasing funds, attracted from the state budget and to increase the effectiveness of the usage of centralized resources.

The obligatory conditions, to present investment projects for the competition are:

In the total amount of money, spent on project realization, the share of centralized investment resources must not be exceeded more than 20%, it must be ensured at the expense of private investor’s own, attracted and borrowed funds.

In total amount of common expenses, investor’s own share mustn’t be less than 20%.

In the field of investors’ supporting, new approaches such as connection to the certification of investment projects, giving state guarantees, creating the budget for development are used.

Certification of investment projects, defines the possibility of increasing state supporting share up to 50%, while such analogies are not producing industrial products for exportation about 30% – for importation, with less price.

In the conditions of budget funds restriction, many investors consider the state guarantees of certified projects, as the most desirable form of state supporting. Guarantees secure about refunding not the total amount of money of risk, but part of it, in case of failure the effective investment project realization, due to the reasons that are not in investor’s compensation; On its side, investor must present counter-guarantees, amongst-mortgage.

Development budget can be formed as the special instrument, that collects investment resources of state budget in order to finance investment projects and attract the funds of private investors.

Development budget resources can be used for partial financing of investment projects, at the initial – competitive, valuable and refundable stages, also the borrowed funds for giving state guarantees on the competitive basis. (When upper limit of guarantees compiles 40% of borrowed funds).

In the competition of procuring the funds for development budget, such investment projects should be taken, that satisfy the following conditions:

Correspondence of development budget to the goals;

Security of positive meanings of pure discounting income;

In the total amount of money for project realization, investor’s own share mustn’t be less than 20%, but for large projects (more than 50 million $ – less than 30%.)

In the countries of developed economy, as a rule, examination of investment projects is made by experts, invited by investors themselves or by the participant financial institutes of project financing.

Selective, restricted supporting of prioritative approaches in industrial development by governments and the competitive selection of effective projects gives distinct results. Foreign experience proves that, such measures, as a rule is an efficacious stimulus of investment attraction and helps to realize projects.

Governance of state property in the state economic sector.

Governance of state property, as the factor of investment effectiveness in the state economic sector. Activation of the state role in the investment field, implies the development of state governance, reaching quantitatively higher level, restructurization of state sector and development for investment providence.

In must be said that, in the countries even under developed market economy, the governance of state sector is fulfilled under strict state governance control, from the interests of national economic development. State sector fulfillers the supporting function only for vitally important and unprofitable industries, but also stimulates local industries.

State sector, must distinctly occupy the leading positions in achieving priorities of economic development and form the potential of economic growth. Simultaneously, investment projects of state industries must be drawn up according to the demands of competition and effectiveness. It is essential that, invested funds to be used purposefully and the movement of financial flows be controlled strictly by the state.

Herewith, while realizing state activities in the real field (amongst in the field of investments), stimulation in  the activities of analogical faces in  non-state sector and not their restriction must surely be taken into account, as enterprises under  the state support are stable on the one hand, but less effective on the other side.

Activation of the state investment role must not be manifested only in effective investment projects of science-capacious industries, high technologies and vitally important fuelds by direct participation. More important constituent part of investment supporting of society in the conditions of market relation development is the encouragement of economic subjects’ investment activities and it must be oriented on progressive structural alteration. This implies the working out of optimum methods of economic regulation, development of accumulation mechanisms and active assistance to turn them into industrial investments.

Formation of institutional-legal and economic surroundings for the stimulation of investments in the real sector of economy.

Greating the available conditions for increasing investment actives by the state, requires purposeful influence on reproductive processes at macro and micro-economic levels. This. most important sphere, where the activation of the state investment role must be manifested effectively and in a new manner, at a new stage of economic reforms is – monetary-credit field.

Monetary-credit methods for investment stimulating. Insuring the growth of stable investments, first of all implies the augmentation of economic monetarism, era diction of money disproportions, reduction of interest rate, renewal of taxation system, depolarization of national currency and its role augmentation.

The increase of economic monetarism is possible by means of restriction of monetary-credit emission. While defining the level of danger of its inflation results, it must be mentioned, that inflation can also be caused by the other factors, besides emission. Thus, struggle against it, cannot be defined only at the basis of emission restriction. First of al it is necessary to provide the functioning of manufacture solidly. The growth of monetarism level in the real sector of Georgian economy is the most indispensable condition, that on its  side is the leading, deflationary factor.

Essential condition to protect against  the inflated results of monetary-credit emission is to create and put in motion such mechanisms, that change macroeconomic conditions and direct money-flows for supporting manufacture. During the process of using such approach, the size of emission defines the objective demand of industrial sector of economy, expert the funds moved to financial markets.

While defining the parameters of purposeful growth of money, calculation of the structure of money delivery is vitally important. Different channels of money emission have heterogeneous sensibility towards the inflation.  Therefore, expansion of money delivery is possible by payment of promissory notes of non financial industries, by means of banks refinancing and under the purposeful direction of emitted sources to finance the industrial investments. Less inflation channel of emission  is financing industrial investments by the state institutes of development.

Basic instrument for the regulation of money flows, is purposefully the state influence on the dynamic of interest rates. e.g Project supporting of the most importantly acknowledged industries for the purpose of investment activation is possible with preferential rates and by credits. Movement of preferential credits, this time must be realized by state banks system of development and the strict control establishment must expel the usage of funds aimlessly and financial speculations.

Experience of the countries under market economy shows that, regulation of interest rates is generally effective method to reinforce business activity in the period of crisis, when disbalance of economic systems situation is deepening. After achieving balanced progress in economic balance and financial sectors, generally the necessity of state interference in economy is lessening and accordingly the role of state influence on the dynamics of interest rates, formed on money markets is also decreasing.

The usage of state regulation is distinctly cyclic. In the conditions of sharp structural disproportions, when the working of market mechanism can’t provide the keeping, on the one hand, development  of surplus production and devaluation of main capital off, but  on the other hand augmentation of investment activity, the role of state influence on economy, amongst in the field of purposeful control on money flow is expanding, but while moving to the stable growth of economy-decreasing  . It is proved  by the practical analysis about getting over the structural depressants  (post war) in Western European countries and in the USA, and by the restoration of economy in France and Germany.

State regulation of interest rates was applied in the countries, under developed market economy (post war-in Japan, during along period –in France and in the USA during the period of so called `Roosevelt’s new policy, as well as the range of those developing countries , that showed the solid high tempers of economic growth (India, China, South – Eastern Asian countries etc). Important scales of accumulation here was reached for the purpose of national manufacture development, as a result of active influence on interest rates ( on its side, accumulation made it possible to hasten the speeds of economic development) also, for this purpose, direct and indirect methods for the purposeful regulation of money flow and inner accumulations convert into investment were used, namely for the formation of development state banks, loan-saving association and other  specialized credit institutes, through founding district  normative of credit politics for non-state banks and rates of preferential taxation.

For example, in Japan, investment financing and production growth conditions were formed through the state control strengthening on using the population savings and interest rates, which were gathered in postal-saving institutions and banks, afterwards their remittance to the state institutes, long-term crediting banks and truste savings banks took place.

Savings transt formation mechanism into investments in the USA was based on the wide development of loan-savings associations, that attracted the savings of private sector for giving purposeful credits to the range of housing construction and industrial branches.

In many developing countries, stable growth of economy was conditioned by localization of the greater share of money flow in the state banks, that locate mobilized savings in industrial investments and crediting resources, in accordance with the installed priorities of social-economic development.

Improving the structure  of mass of money is also connected to the cutting down  the share of cash, that is in circulation, for what it is necessary to set up strict  restrictions about the cash payment in all the field of economy, to continue calculation through computers and widen barren forms of  payment circulation. Taking these measures will expense the business economic field of banking sector and will be propitious for investment potential growth of the banks.

One of the basic task of payment system, at modern stage is its complete renewal, restriction of barter transaction, driving a great part of taxation means out of circulation, as they don’t  play a part of complete recourse in the formation of saving potential. Main ways to solve this problem are following: realization of inter imputation for financing fixed and circulating capitals, reduction the price of credit resources and security of plural debts.

For increasing the regulation effectiveness of money circulation and expel the activation possibilities of such emissive mechanisms, which are not accompanied with the expansion of goods delivery, it is necessary to strengthen the control and currency regulation.

Formation of effective infrastructure of financial market.

A) The influence on the investments activity of banks.

Looking through the previous system of regulation (in accordance with the selective priorities of economic politics) requires changings of the forms and methods in the banking sector and restructurization of banking system in economy, by meant realization of investment functions of the banks. Restructurized banking system must comply the requirements of armful investing  through high trustworthiness and guidance. It must also ensure the appropriate level of credit delivery resources by means of available interest rates for manufacturing fields.

In the growth of investment activity of banking system, it is essentially important to create the system of investment encouragement and insurance. State guarantees existence is one of the condition just for this. Cutting down the normatives of reserve assignments and preferential taxation are also belonged to these activities.

B) Creation of the system of deposit guarantees.

World experience shows that, the establishment of deposit guarantees is the inevitable component for vast mobilization of the population savings. It potentially increases separate institutes as well as the liquidity of the whole system and is the reliable means against taking deposits unexpectedly and frequently out of the banks.

One of the first systems for deposit insurance was formed in the USA in 1933-34, as a result of additional stabilizers investigation in marketing economy. Nowadays, these systems operate in the range of developing countries (Argentina, Colombia and so on).  Herewith in Great Britain, in the USA and in Canada, they are performed with independent state corporations, but in France and Sweden and private banking links. In Austria, Great  Britain and the Netherlands in the case of broken credit organizations, private deposits are given; In Germany deposit delivery of credit institutes are addressed to, while in Canada – deposit delivery, managing the property of bank and giving crediting guarantees are addressed to.

                                                          Economic Dr of Science,

                                                          professor Lamara Qoqiauri

As the world develops at a speedy pace, as new trends replace old ones sooner than you can blink, more and more people are seeking loans in order to have a comfortable lifestyle. Loans are available under various options and of them, secured loans is one of the most viable ones. These are loans provided against collateral/security. The collateral may be the borrower’s house, car, real estate, stocks or any such asset. Anyone can avail secured loans as long as they have some valuable asset to offer as security.

Taking a secured loan is a good choice when you need to borrow a large sum of money. You can use it for starting a new business, going on a long vacation, buying a new house or any such undertaking that calls for a big budget.

The collateral involved can get you a large amount for loan and, better still, at a comparatively lower rate of interest. The amount available for secured loans ranges from £5000-£100000. However, this amount is dependent upon the value of the collateral provided. The more valuable it is, the bigger the sum that you can borrow. The repayment period may extend up to 30 years.

Repayment options for secured loans are flexible. Early redemption without penalty and deferral of payment for a particular period of time may also be allowed depending upon the lender. The amount can be repaid in low monthly installments.

There are people who shy away from secured loans because of the risk involved in placing an asset as collateral. They should know that this risk becomes real only when they are absolutely unable to repay the loan. Loans are issued solely with the understanding that they will be repaid. It is up to you to know how much you can afford to borrow. As long as the amount is within your repayment capacity, there is no earthly reason why you should not avail a secured loan and make good use of it.

If seniors or baby boomers sit back and wait for things to get better in this unprecedented and never before seen economic disaster in this country and in fact around the world, then they better think again.

With bad news hitting our air waves everyday all day long, it is becoming more increasing for older citizens take matters into their own hands, and not wait for things to change you must change them yourself. So how do you make changes in your financial situation with all of the downturn everywhere you turn! The problem that many are facing around the country is what we can and can not do!

The Stock Market is now down 55% of its high and predicted to go even lower so this is not the solution. Pension funds and many investment funds are invested into the markets and have lost a large portion of the principle balances. (Down as much of 75%) Real Estate values are down all over the country as much as 60% and foreclosures are up 22% since the beginning of the year. Fuel costs have gone down but the up cost that the higher prices caused have not come back down. Unemployment rates hit 8% and in some areas as much as 10% and is expected to increase and stay that way for sometime to come.

So what can seniors and their families do to secure that their futures aren’t heading totally in a downward tail spin. There are solutions and steps that can be taken to alleviate some of the economic pressures that maybe around for many of us for the rest of our lives.

Like I said this is unprecedented in history and there is no one who has the answers or how to fix it. The one thing is sure we need to look out for ourselves and as seniors we need to think about the last place there maybe money available and that is the home.

Your home may not have the value it had four or five years ago which by the way was over inflated in the first place so don’t think you have lost something that shouldn’t have been there in the first place. It was FAKE!

So what is the real value of your home and how is it determined.

If you purchased your home 30 years ago and you paid your home off, the fact is your anticipated appreciation should have been between 3-5% per year. But when the market took off ad many people cash out the equity in their homes with hope that they would sell their homes or would be able to pay it off from their proceeds or gains. This did not happen! In many cases they lost no only the interest but the principle of the investment.

Here is good way to look at the value of your home today!

What did you pay for the home originally! Over the years you lived in the home so what did it cost you! What would it cost you today to replace your home if you sold Take the original purchase price and multiply it out by the national average that should have taken place which would be a national average of 5% Once you have done this take the value and ad 10% for improvements if you did any Now you should have the value that your home should have been without the boom years

If your home doubled in value you are ahead of the game, because not only did you live in it all these years but you also received tax benefits over the years that you paid for it.

Now that you know what the value should have been you can now take a look at what the market says that your home is worth. By visiting a number of websites out there that can give a pretty could idea of what it is worth if you could sell it. The biggest word in the English language is IF……

Now for the big answer to the senior who is struggling to make ends meet and are thinking of where to go to get the money to live off of for the rest of their lives.

The Reverse Mortgage is the answer for many people who are in need of having funds to use for living until they leave this world. This program not only provides you with money to live from, but also gives you great flexibility.

In this program called Reverse Mortgage you are in complete control over the funds that you receive, you have the option of taking all of the money or setting up and monthly income or having a credit line for future use.

One of the best parts of the program is that if you plan on living in your home for the rest of your life you can literally freeze your home value from going down any further, unlike if you take out a conventional mortgage.

In this program you are paying a Mortgage Insurance premium to the Federal Government; too not only protect the lender but to protect you and your heirs! The lender is protected should the home value decline and the loan balance which will increase over time the insurance would make up the difference to cover the loss. For you the or your heirs should the home value be less the loan balance at the time the loan is going to be paid off the insurance would make up the difference and your heirs or you would not have to worry about having to come up with the money. In addition; none of your other assets such as; investments, insurance proceeds or savings can be attached to pay the loan off this is called a NON-RECOURSE LOAN.

So as you can see this is a very important issue for many seniors and how they can make a Reverse Mortgage as part of her financial plan and live without fear of not being able to take care of their needs now or in the future. Plan today for tomorrow and don’t be afraid of a Reverse Mortgage it is truly a program that will change your life for the better and give you money without ever making another payment for as long as you live in the home.

The question for you is whether or not you are keeping up!

1. Forecasting and Demand Management

Many companies need to forecast customer demand because their lead-time to supply is longer than their customers will typically wait for products. The most common method is to forecast at some aggregate level (product family or geography) and then figure out what to send to each store or regional warehouse by essentially making another forecast; such as demand this year will be in the same proportions as last year. This is done because it is, ‘impossible’, to generate and review a forecast for potentially millions of item/location combinations.

Best practice is to let a machine make a statistical forecast for each item in each location and then aggregate this demand for management review and adjustment (by product family or geography). The forecast adjustment can be applied automatically to each item / location in the proportions based on the original forecasts. This practice can be enhanced by so called ‘tournament’ forecasting where the computer program tries out a whole range of possible forecast models and picks the best model on the basis of the lowest, unbiased forecast error. The tournament is re-run every time the underlying demand data is updated (typically weekly or monthly).

If you are not using item/location tournament forecasting, you are not keeping up.

2. Inventory Optimization

A very common method of managing inventories is to apply a policy or rule, typically based on some segmentation analysis (e.g. ABC), to hold a certain number of weeks of historical average demand – for example, 4 weeks of cycle stock and 2 weeks of safety stock. Unfortunately, rules-based approaches tend to be ‘one size fits’ all. This means, by definition, that the rule will deliver the right amount of inventory for some items, too much inventory for other items and too little inventory to meet service levels for other items. As a result, we get inventory imbalances that result it excessive inventory costs, impeded cash flow and poor and/or inconsistent service levels all at the same time. In addition, rules-based approaches are only sensitive to changes in demand. So what, you ask? Well, this means they’re relatively static and not linked to other important factors, such as service level and forecast accuracy. For example, if you want to increase your service levels, you have to estimate (i.e. best guess) what change in your inventory rules will deliver this. If you invest in a forecasting system and improve your forecast accuracy, a ‘weeks supply’ approach won’t reward you with reduced safety stocks. Here again, you have to figure out what the impact is and change the rule yourself. This gets particularly difficult when you have a significant number of items and stocking locations. Fancy doing this for 10,000 products every week!

But there is a solution.

Best Practice is to have a service level goal for demand satisfaction off the shelf and then calculate the necessary inventory parameters (i.e. order quantities and safety stocks), taking into account all the relevant variables:

Now, if we increase our service levels, our inventory parameters for all items adjust automatically because there is a direct link – and our customers are happy because we’re servicing them consistently to target. If we improve our forecast accuracy, our investment in safety stock will be adjusted accordingly, and we’re rewarded with better inventory turns and case flow. The result is the right mix of inventory for each and every time in every location, and the benefits are achieving ‘best in class’ inventory turn rates and customer service levels at the same time.

If you are using rules based approaches to manage inventory, you are not keeping up.

3. Optimisation – Schedules/ rosters / work assignments

The spreadsheet is the most common tool applied to the problem of resource scheduling, be it school class rooms, warehouse order picking, operating theatres, factories, television studios, airports or delivery trucks. The planner in all these businesses is trying to find an optimal solution, but will generally settle for the first ’satisficing’ solution they encounter based on some internal heuristic of what constitutes a good roster, schedule, route or assignment.

Best Practice is to apply computer algorithms to solving the problem and generate an optimal or near optimal solution. Recent advances in both computing power and applied mathematics have made extremely large problems amenable to direct computation as well as lowering the threshold where such methods become economically viable for smaller organisations. Computer algorithms can often throw up options a human planner would never consider and produce solutions that fair, unbiased, more profitable and quicker to produce.

If you employ more than one dedicated planner, who is doing it all ‘by hand’ in a spreadsheet, you are not keeping up.

4. Spare Parts for Capital Intensive Industries

Keeping capital intensive equipment operating is key to delivering profitability in industries such as mining, power generation, electronic networks and commercial airlines. Various maintenance philosophies can be applied to keep the down-time to a minimum involving scheduled pre-emptive replacement, condition monitoring or waiting for a breakdown and then responding rapidly.

Determining the spare parts to be held to support a rapid return to service (assuming an on condition or on break-down methodology where component removal events are randomly distributed) is a ‘black art’ in most industries, and often left to the plant maintenance engineer and advice from the equipment supplier, who may have an interest in selling spares.

Best practice, as often seen in military aviation or NASA, is data intensive since records must be kept of each component failure or removal to provide the basis of a sparing analysis. This kind of record keeping is mandatory in civil aviation but is increasingly found in modern computer based maintenance management systems applied to production plants or data networks. Other factors, such as Essentiality (related to redundancy and failure modes in the machine design), item cost, cost of down-time, failure rates (often expressed as the mean time between failures) and total repair cycle time (if the component can be repaired and returned to the serviceable spares pool) can be combined in a marginal analysis of each incremental spare part/location combination.

The resulting cumulative inventory investment curve represents an ‘efficient frontier’ – a line of optimal spare part inventories that deliver maximum service levels (availability) for the system. Such an analysis can tell you the first, best spare component to buy (and where to put it in a network) to improve the ‘native’ system availability, and then the second, and third spare, until the spares budget is exhausted.

The traditional item by item analytical approach, where only the failure rate, repair time and gut feel are considered, delivers an unrepeatable, biased, sub-optimal spares package for a given budget.

If you operate capital intensive equipment and do not use system based, marginal spares analysis, you are not keeping up.

5. Supply Chain Financing

Many companies have optimised their supply chain networks and inventory deployments, adopted lean manufacturing and streamlined their product development cycles. The final frontier for these leading companies is supply chain financial engineering. Buyers and suppliers are traditionally in conflict as each seeks to optimise their payment terms – buyers try to extend terms and suppliers trying to reduce the time between invoice and payment to match their inventory turn.

Best practice lies in a lender, usually with a relationship with the buyer, to leverage the arbitrage between the cost of debt to the buying firm and the cost of debt to (typically) the smaller supplier.

Payables financing removes the conflict by allowing the supplier to extend terms (say 90 days instead of 60), with the buyer company’s lender funding the invoice as early as the day of issue.

In common with traditional factoring or invoice discounting arrangements, the supplier receives a percentage of the due payment up front. However, with a supplier finance approach, the process is initiated by the buyer through its own bank and, thanks to the buyer’s stronger credit rating, the terms are likely to be more favourable than the terms on offer to the supplier through a local bank. This can be structured as non-recourse funds by banks that are experienced in these reverse factoring solutions.

The lender’s exposure is to the buying company, even though the seller receives the advance payment. The lender can achieve a margin which is higher than its normal return achieved on money loaned to the buyer, but below the cost of funds to the seller, since it is lending against the credit profile of the buyer. The seller benefits from a shorter cash to cash cycle and may be able to pass some of this benefit on to the buyer as a lower price. The buyer benefits from the positive cash flow effect and the potentially lower price – improving profitability, key ratios and growth opportunities. The lender increases its volume of business, improves the margin obtainable on the buyer risk and strengthens the relationship with the buyer.

The key to making such a system viable is process automation and real-time visibility of invoice data enabling all parties to track each invoice, its advance payment and final settlement – reducing risk and cost for the three participants.

If you are a large buyer of goods or services, and are not using automated supply chain financing, you are not keeping up.

6. Optimal Supply Chain Network Design

When one company takes over another, everyone talks about ’synergy benefits’ and ‘economies of scale’, which may be true in terms of market share and product portfolios, but they can be slow and difficult to achieve in the supply chains. The integrator usually starts with at least two of everything – warehouse networks, transport and supply contracts, information systems and organisational cultures. The usual approach is to attempt to ‘cherry pick’ whatever appears best (or cheapest) at the time without necessarily understanding the impact on supply chain risks, inventory levels or customer service. Even without a merger situation, understanding what the growth path should be, at a strategic level for manufacturing and distribution capacity at home and abroad is often painfully reactive. Roughly 80% of the cost of a supply chain is fixed at the design stage – the rest are just rate negotiations.

Best Practice is to use integrated graphical and mathematical models to design the supply chain at the strategic level. The graphical network maps, usually linked to geographic data (such as road network time/distance matrices), allow the non-mathematically inclined to visualise the existing or proposed network. The optimisation solvers attached to the model allow billions of combinations of facility locations, transport links, capacities, inventories and customer allocations to tested and a cost or profit optimal solution defined.

If you are not using mathematical optimisation for strategic network design, you are not keeping up.

7. Sales and Operations Planning

Some businesses behave as if the ‘good old days’ are still with us. They either have plenty of idle capacity that they can flex to meet any customer demand or are comfortable holding plenty of inventory somewhere in the supply chain – and their shareholders are probably unhappy. These businesses often pay a bonus to a salesman who can sell above budget, but cane an operations manager who cannot keep the pipeline full.
To these businesses the budget is a once a year guess at the future (last year plus 5%) and tracking is based on hindsight – what happened last month and where we are year to date. Sales has three sets of numbers – budget, actual and what might have been if Operations had delivered. Operations has the budget and what was planned, as well as what needed to be pushed into the schedule to accommodate ‘urgent’ orders, expedited raw materials and the new customer that just popped up. Accounting has the budget, variances to budget and straight line revenue forecasts.

Best Practice is to run the business using Sales and Operations Planning, on one set of numbers, driven from a forecast for every item sold. On a monthly cycle, forecasts of future demand are run for the coming 18 months, adjusted with market intelligence and new product forecasts and locked as the official Demand Plan for all purposes. This Demand drives the Operations plan – sourcing, capacity planning, labour and materials planning, stock levels and deployment at a rough cut level. The approved Supply Plan then feeds a forward view of costs and revenues that is approved by the CEO and measured against the budget. The budget is effectively the S&OP Plan at the start of the financial year. Top down adjustments imposed by ‘head office’ need to be reflected in the real plans with real actions attached.

Sales is measured and rewarded on the accuracy of the Demand Plan. Operations is held accountable for executing the agreed Supply Plan. The business has an agreed basis for long-term and near term planning and unit costs go down since operations gets a forward view to optimise capacity.

If you’re not running your business on one set of numbers, not using integrated Sales and Operations Planning, you are not keeping up.

Article written by Alan Denton, Senior Manager at GRA. GRA are Australian supply chain consultants and specialise in demand and inventory optimisation. www.gra.net.au