FROM THE EDITORS
The Financial Bulletin Money Matters Club IBS, Hyderabad Estd.—2005
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Dear Readers, It gives us immense pleasure to come up with the November, 2017 issue successfully.
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In this issue, we bring to you the much talked about Syrian Economy and The Patronage factors affecting Islamic Banking.
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Green Bonds An initiative started in the year 2007 by few development banks such as European Investment Bank and the World Bank, a Green bond is a tax-exempt bond issued by federally qualified organizations or by municipalities for the development of brownfield sites. These bonds are similar to other bonds but a key difference is that they are tax-exempted and are earmarked towards financing `green' projects. The bond issuer gets capital while the investors get fixed income in the form of interest. When the bond matures, the money is repaid. These bonds were issued in India first by Yes Bank in the year 2015 for an issue of 1,000crore. These have been issued to finance Green Infrastructure Projects in Renewable Energy and Energy Efficiency Projects including Solar Power, Wind Power, Biomass, and Small Hydel Projects. Till now 7,200crore has been raised through green bonds. India has set ambitious renewable energy goals to improve energy access and energy security while taking action on climate change. India has embarked upon an ambitious target of building 175 gigawatt of solar, wind and other renewable energy capacity by Year 2022 and this requires a massive estimated funding of around $264 billion. To achieve the scale required to finance these national targets, new innovative financial instruments such as green bonds need to scale up. Therefore the objectives should be to strengthen and expand the market for green bonds in India.
Benefits of Green Bonds:
The high interest rates and the unattractive terms have raised the cost of renewable energy installations in India as a result green bonds are excellent for bridging the gap Since this is an effective way for an issuer to demonstrate its Green credentials, Green Bonds can help in enhancing an issuer’s reputation. Even for the investors also, green bonds are beneficial because they carry lower risks than other types of bonds The Green bonds the establishment of public-private partnerships that might accelerate the pace of green investment and lead to the adoption of new technologies. As the financial risk and the return characteristics of green bonds are the same as for classic bonds, the main benefits are- lower interest rates. For example- from the one a company could obtain from a bank the possibility of raising larger amounts of capital and greater flexibility in the use of capital . By: Akshat Kapoor
Syria and its Impact on Other Countries Syria once known for its unity, freedom and socialism now has become a living hell on the earth. Today the cold steel power is under the terror of ISIS which has not only shaken its roots but also affected the whole world. Syria’s civil war is now in its sixth year and has driven millions of Syrians to other countries. This has impacted all the neighbouring countries immensely. Today Jordon hosts 1.3 million estimated Syrian refugees, due to which it faces many challenges as Jordan’s economy has its own challenges such as water scarcity, total dependence on oil import for energy and regional stability. Due to increase in the number of refugees since past few years additional challenges faced by Jordan increase in the competition for jobs due to which the wage rate has fallen, overburdened infrastructure such as water and healthcare are at breaking point and strained social services, such as education a county’s security services are struggling to cope up. Coming toward Iraq, the nation itself had internal conflicts and with the emerge of Syria crisis it has been struggling to respond to the massive inflow of the Syrians. Most of the refugees have settled in Kurdistan region of Iraq due to which the population has been increased by 30% in past few years resulting in unemployment, demographic issues, dispute for gas and oil which has resulted into joining of Syrian opposition forces and creating more conflicts.
The land of Troy, Roman Empire, Whirling Dervishes is Turkey. Turkey hosts 2.5 million Syrian refugees making it number one destination among all the neighbouring countries for the Syrians to immigrate. The first wave of refugees came in 2011 and according to the nation’s law people who have lived there for more than five years are eligible to apply for citizenship which will result into equal rights for voting. Many of the refugees come from Syria's northern countryside and already have a conservative tilt, making them potential AKP voters once they obtain citizenship. Additionally, people enter the border illegally resulting in tightening the regulations and policies and making convenient demographic, political and social changes which attracts internal sustainability and conflicts among the Turkish and Syrians. The Syrian crisis has an immense impact on Lebanon which has resulted into violence, political instability, public finance, trade etc. Lebanese government faces issues accommodating the Syrian refugees in terms of medicine, water, and education. For example, the Lebanese education system can only accommodate 100,000 of the 300,000 Syrian refugee children, even after some expansions are enacted in the education sector. Kelley indicated that Lebanon’s welcoming of Syrian refugees will not be sustainable because of these economic and infrastructural pressures. Not only the neighbouring countries but also Europe is paying the price. Due to the intake of the refugees the population of the Muslims increased which resulted in their community growth and impacted the whole of European union along with the Great Britain. Due to which the unemployment rate increased and also increase in the frequency of the terrorist attacks.
By: Barkha Mandhana
Patronage Factors Affecting the Islamic Banking System The instability of the interest based economic system and the continuous crisis in the global economies has resulted in major shifts in the global economic and financial horizons. One of the most important shifts in the global economies stems from the evolution of the Islamic banking system. The Islamic banking system is an interest free banking system that operates through pricing of goods and services instead of pricing of money in the economy. Acceptance of Islamic banking can be viewed from the fact that global conventional banks like HSBS, Standard Chartered Bank, Deutsche Bank, Citibank, etc. have also set up separate Windows/Divisions to provide Islamic financial services. They are not only providing these services to the Muslims clients but also to the non Muslims clients who are interested in profit and loss sharing (PLS) financial instruments. UK, France, China, Singapore and many other countries have developed special regulatory to facilitate the working of Islamic banking. There are many different factors which have contributed to the acceptance of the Islamic banking and are rapidly growing in the market. Some of these factors are economic factors which include the problem of the poverty which is very efficiently handled by the Islamic banking system and also the resistance to the economic crisis and downturns in the economies. In fact the Islamic banking system can serve as safeguard for eliminating the risk of inflation, unemployment and downturns in the economy. The Islamic banking system ensures an efficient and effective utilization of resources in the economy and in true sense serves the purpose of mobilization of funds in the economy.
Another important factor which had led to the speedy growth of the Islamic banking system in different parts of the world is the resistance of the Islamic banking to global financial crises. In the last crises of 2008, it was quite noticeable that the Islamic banking institutions were not as badly struck by the global credit crunch as the interest based financial institutions were stroked. The resistance of the Islamic banking system to global financial crises is another important aspect of the Islamic banking system which has drawn the attention of the banking customers to the Islamic banking market. Some of the factors affecting the Islamic banking system are : Religious factor Attitude of customers are normally influenced by their believes and religion is the base for believe. A conducted study on Muslims and Non-Muslim students found that Muslims students mostly prefer Islamic banking only due to religious factor. Social Influence Influence from the relative, friends and family, was given much more importance by the customers in selection of Islamic bank .In south East Asia study on the adoption of Islamic mobile phone banking results shows that Muslims normally think about the norms and values of their society when they have to make decision regarding the acceptance or rejection of any system or product. Intention to Use A research was conducted in Peshawar to analyze the bank customers profile found that most of the businessmen are not using the banking services as the element of interest is forbidden in Islam rather they are using the most risky and illegal system of Havala. Government Support A study was conducted in Malaysia to measure the influence of different factors influencing the attitude of customers towards selection of Islamic bank. They found Government support an insignificant factor.
By: Shresht Agarwal
Is China Going to Overtake US Economy? Probably the most important of the tensions stoked up by President Trump is the rivalry between the China and United States. The ultimate determinant of this struggle is Economic strength for the position of Top Nation. In 2016, economy of China produced $21.27 trillion and declared as world largest economy while EU is at second position at $19.1 trillion and U.S. fell at third by producing $18.5 trillion. One of the problem China faces is highest population rating. That is the reason it has poor standard of living. It can only produce $15400 per person while US GDP per capita has $57300. Generally, China products are cheaper because companies pay their worker less than American worker that is why overseas manufactures outsource jobs to china. How has China become such a dominant economic power? China’s economic growth happened due to low cost exports of machinery and equipment. Major Government spending goes to fuel those state owned companies’ exports and they dominate their industry. Major companies are Sinopec, PetroChina, and China National Offshore Oil Corporation. These state owned companies are less profitable than private firms are. From 2013 to 2015, China was the world's largest exporter by exporting $2 trillion of its production in 2016. EU was second and US was third by just $1.47 trillion. China also dominates in exporting major chunk to U.S. i.e. 18%. It extended to African nations by investing in infrastructure in return for oil. It also increased trade agreements with Southeast Asian nations and many Latin American countries
Actually, China “exports” includes final products which China manufactures by importing raw materials from US. China is famous for manufacturing, which are technically American products. Primarily, China exports electrical equipment and other types of machinery that includes data processing equipment and computer as well as optical and medical equipment. It also exports fabric, apparel, fabric and textiles. China is also the world's largest exporter of steel. China is also third largest importer across world. In 2016, it imported $1.4 trillion while U.S. imported $2.2 trillion. Oil and other fuels, plastics, metal ores and organic chemicals imported from Africa and Latin America. China is also world's largest importer of aluminium and copper. How China affects the U.S. Economy? China holds largest foreign U.S. Treasury bills, bonds, and notes. As of August 2017, China holds $1.2 trillion treasury bills. That is 30 percent of the public debt held by foreign countries. The U.S. debt to China is still lower. China pegs its currency (the Yuan) to the US dollar to support the value of dollar because it buys U.S. debt and it devalues the currency when they need to keep its export price competitive. China role is to provide leverage as America’s largest banker. Say, China threatens U.S. to sell part of its holdings whenever it says to raise Yuan’s value. The U.S. has been on highest in economy and on third position on population because of the productivity of its labour that is greater than China. Obviously, China is catching its productivity but still have long way to go with population over four times as U.S. The prospects for China’s economic growth are brighter than America’s. Overtime, China is likely going to continue to rise. However, U.S. will likely remain the largest economy in the world for at least the next 10 to 15 years or might be more. So, the future of U.S. is still unsure. By: Anjulika
Impact of Brexit on Global Economy
In June 23, 2016 Britain decided to hold a referendum to leave the EU (European Union) membership resulting into “Brexit” an abbreviation for "British exit". This has showed a large impact on global markets, causing the British pound to fall to its lowest level against the dollar in 30 years. This process was done based on the article 50 of the Lisbon Treaty and it was started formally on March 29, 2017 Impact on Global Economy: There is no roadmap to follow or analogy to invoke as a guide or pattern for how the Brexit vote will reverberate in the months and years to come. However, many economists surveyed that Brexit will likely reduce UK's real per-capita income level and in the long run it will make the United Kingdom poorer because it will create new barriers to trade, foreign direct investment, and immigration. A few immediate consequences seem highly likely:
There have been many attempts to model the macroeconomic consequences of Brexit, nearly all of which find that there will be a longterm loss of GDP for the UK economy compared with the status quo projections of remaining fully in the EU and its single market. In macroeconomic terms, there is a loss of GDP to an extent and it will also mean a lower level of employment in the UK economy. Demand from other EU countries constitutes around 12% of final demand for UK goods and services and this translates into around 3.3 million jobs.
The withdrawal of European Union membership will push capital away from the region and toward key safe-haven markets including the US Treasuries and to Japan especially. This will further lower market interest rates and raise relative currency values. In export sector of US and Japan it is negative to have a higher US dollar and Japanese yen. In the case of Japan, this will not be helpful to its efforts to re-inflate and reinvigorate the economy after decades of deflation. It also added additional pressure on China to float the Yuan lower as it is in divergence between EU and the US, the largest export markets. The US exports are not that effected compared with trends in domestic demand, but the deflationary pressure on tradable goods will widen the divergence between reasonably strong inflation in the services sector vs. reasonably strong deflation in the goods sector. In 2016, Brexit is likely to take a US Federal Reserve interest rate rise off the table. The US Federal Reserve on 15th June already pared expectations of a further rate rise due to uncertainties about the durability of US growth and the threat of Brexit. But because of Brexit, the Federal Reserve will be forced to keep rates on hold until economic impacts begin to materialize and especially if these impacts turn out to be as negative as most projections. The European Central Bank will be compelled to raise its level of intervention yet again, as risk premiums across the region rise. Among the larger Eurozone members, Italy’s position is now more vulnerable. Each blow to members of the Eurozone periphery also further make Germany’s out performance in the Eurozone even more unsustainable.
In the end, the economic trade markets and the foreign direct investments in UK are impacted by the UK’s Brexit vote. The financial market reaction will also feed into the far-flung macroeconomic consequences of Brexit. A sharp and sustained rise in the value of the US dollar versus the euro will make the US manufacturing sector weak. By: Hima Bindu
Weather and Climate Derivatives A derivative is a contract between two parties that defines how payments will be made between them at the end of a contract period according to an agreed outcome. The financial derivatives markets are the biggest trading markets in the world and derivatives are the most extensively used for risk-management purposes. They are more cost-effective as compared to traditional insurance policies. Weather derivatives are financial instruments that are used by organizations or individuals as part of a risk management strategy to minimize the risk associated with adverse or unexpected weather conditions. Weather derivatives are indexbased instruments that use weather data collected at a weather station to create an index on which a payout can be made. This index could be total rainfall over a period which may be of relevance for a hydro-generation business or the number where the minimum temperature falls below zero which might be relevant for a farmer protecting against frost damage. Weather conditions tend to affect the production and sales of the organization. During warm winter, utility and energy companies can be left out with surplus supplies of oil or natural gas (because people need less to heat their homes). Or an exceptionally cold summer can leave hotel and airline seats empty. The prices may fluctuate with the change in weather conditions which will result in high or low demand. A weather derivative will be based on an agreed weather outcome such as the severity of winter.
The first weather derivative deal was made when Aquila Energy modeled a dual-commodity hedge for Consolidated Edison (“ConEd”) in July 1996. The transaction comprised ConEd's purchase of electric power from Aquila for the month of August. The price of the power was agreed, and a weather clause was made. This clause stipulated that Aquila would have to pay ConEd a rebate if August turned out to be cooler than expected. The measurement of this was referenced to Cooling Degree Days (CDDs) measured at New York City's Central Park weather station. If total CDDs were from 0 to 10% below the expected, the company received no discount to the power price, but if total CDDs were 11 to 20% below normal, ConEd would receive a $16,000 discount. For greater deviation from normal other discounted levels were chalked out. Weather derivatives slowly began trading over-the-counter in 1997. As the market for such products grew, the Chicago Mercantile Exchange (“CME”) introduced the first exchange-traded weather futures contracts in 1999. Weather risk are divided into two broad categories- ‘Extreme events’ and ‘Regional Climate Anomalies’. Extreme events such as floods, hurricanes, wind storms and hail storms are referred to as ‘Catastrophes’, and traditionally the insurance market handles the high-risk low-probability events. Derivatives are designed to hedge the changes in the volumes of sales rather than in the price of the goods. In the future, the potential of weather derivatives to hedge against climate change to produce a ‘climate derivative’ enable contracts to be let over a number of years as climate fluctuates. Climate derivatives will hedge against changes in the mean or standard deviation of climate. This should be of great interest for companies that have considerable capital tied up in infrastructure such as power lines, and the railway industry with its huge number of overhead electric cables. It would also be useful for companies that have to try to assess the long term future demand for their products for example water companies. However, there is growing awareness of potential growth in the trading of weather futures among agricultural firms, restaurants and companies involved in tourism and travel. This is a sensible approach to risk management and companies will be able to handle fluctuations in demand, caused by the weather, much more effectively. By: Akshita Gupta
RBI’s Independence, a Myth? If we go by law, the Central Bank of India, Reserve Bank of India is not autonomous by law. The RBI Act says, “The Central Government may give directions to the Reserve Bank where considered necessary in public interest to do so, but after consultation with the Governor.” So why the question of RBI as an independent body comes into picture every now and then. But here is the complete rationale behind such a provision of interference by the government. The RBI Act provides the government with the power to give directions to RBI in the public interest, but only after consultation with the Governor of the Central Bank. The rationale is the government body which is elected as people’s representatives can have an upper hand over the central bank on the occasions when public interest is at stake. This doesn’t give Government to interfere in the regular decision makings of RBI. Former RBI Governor Duvvuri Subbarao, has been explicitly accepting that RBI do get pressurized by the GOI for setting interest rates. With one conference conducted by the current RBI Governor Urjit Patel headed the Monetary Policy Committee in June 2017, the message was communicated to the public that the Government is trying to influence the rate cut decision by RBI. The RBI wants the nation citizens to know that the government tries to influence the most important policy tool of RBI i.e. interest rates. This policy tool affects the borrowing costs of investors and households and hence the overall fiscal deficit of the country in long term. In layman’s language, the objective is set by the government and the methodology is set and exercised by RBI. The objective is decided by the Government, which in India is maintaining a range of inflation rates (consumer price index (CPI) inflation of 4% within a band of +/- 2 %) with supporting growth rate.
The demonetization episode On Nov 8th, 2016 the Government of India came out with a dramatic announcement demonetizing all the Rs.500 and Rs.1,000 currency notes then in circulation. This was possibly the largest such exercise ever in the history of the world (not counting instances in different countries that led to substitution of one set of currency notes with another in one sweep). Going by the data available, this one measure of the Government ensured that in terms of value around 86 per cent of the currency notes in circulation would get vaporized overnight by the extraordinary executive decree. Such a surgical strike seemed to begin with the objective of rooting out the physical black money stock in total. But that was for the start. The Government ‘cleverly’ as well as ‘retrospectively’ shifted the goalpost from time to time so that it could not be faulted by its critics. On the day RBI reported that 99 per cent of the demonetized notes had got back to its chests, the finance minister had the macabre sense of humor to say that confiscation of currency notes was not the objective of the exercise at all. This claim should be seen as the ultimate icing on the demonetized cake.
The entire episode is a lesson as to what happens when political grandstanding and perceived invincibility alone drive economic policies. The total cost of the exercise is hard to fathom – but we now know for sure that it has already taken a toll on the economy by shaving around 1.5 to 2 per cent of GDP growth. More importantly, it has dented the credibility and even the independence of RBI to some extent. That is the price hubris demands and extracts. The Best or the balanced way Until last year, the monetary policy was set by just one person who head the Central Bank, the Governor. But with the formation of the Monetary Policy Committee which comprises both experts and people’s elected representatives (including independent members) it’s said the decisions would be more bias free and more balanced. So, the balanced way to conduct monetary policy in the economy is when the explicit goals or the economic objectives are laid out by the government the
By : Tej Vardhan
The Intervention of Payments Bank in the Indian Economy “Banking is necessary, banks are not.�
-Bill Gates
Banking has been the same as it was, just the methods underwent changes. From those traditional pen and paper methods, Indian economy welcomed the digitalization of banks with arms wide open. Reduced workloads on employees, lowered maintenance cost, easy access came up with the introduction of computer systems. Who thought that these changes would get into our lives making it a cool breeze. But we know, change is the only thing constant in life, banks underwent certain changes, from working offline to online, from cash payments to card payments and net banking. It has been changing drastically, and then in the year 2014, came the concept of Payments Bank. Payments Bank were introduced with a suggestion to cater to the lower income groups and small businesses so that by January 1, 2016 each Indian resident can have a global bank account. The main question that arises is what are Payments Bank? Payments banks are a type of differentiated bank introduced by the RBI for promoting financial inclusion and facilitating payments and remittance flows.
To be exact, it can carry out mostly all banking operations except that it cannot advance loans or issue credits. They can accept a restricted credit of ₹1 lakh per customer which might increase in the future by RBI. Both kind of accountsCurrent Account and Savings Accounts can be operated in such banks. Certain regulations have been put up for such banks, like the minimum capital requirement is ₹100crore, and certain rules regarding the FDI and stake have also been applied. Also, some specific licensing conditions are applicable for these banks, unlike the traditional banks.
Till now, India has only four payments bank out of which the latest one is Fino Payments Bank which started its operations on July 17, 2017. The first Payments Bank was Airtel Payments Bank Ltd, followed by India Post Payments Bank Ltd and Paytm Payments Bank Ltd. Though the approval has already been granted by RBI to 7 more such entities including some major players like, Aditya Birla Nuvo Ltd, Cholamandalam Distribution Services Ltd, Reliance Industries Ltd. Payments Bank will not only help the Indian Economy to rise but also will allow it to fulfil the objective of- ‘Inclusive Growth through Financial Inclusion’.
By: Saloni Hasija
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