MBS, Moral hazard and the Financial crisis

The primary reason, i believe, for the recent financial crisis was more to do with "Moral hazard" because of the ecosystem that was created out of the so called innovative financial instruments.

Before i go a little deep into this, let me briefly describe what MBS(Mortgage backed securities) mean...

A loan secured by real property is referred to as a mortgage or mortgage loan. Typically, in these kind of  transactions, bank grants the loan to the borrower and the property is kept as collateral with the bank in case the borrower defaults. Based on the type and the value of the collateral, the loan can be characterized into prime or subprime loan or Alt A loan (will discuss this some other day). In the case of US, most of them were sub prime loans meaning "Not so good with respect to loan recovery prospects" loans.

In the typical transaction described above, the bank is earning nothing on the collateral present with the bank and thereby losing a chance to earn more. So, what they do is create a security, issue them to new investors and raise money.

since the bank is raising money from the investors, bank will also have to pay interest to these investors. This is where mortgage comes into picture. The securities issued to these investors are mortgage backed i.e. the interest which the borrowers(mortgage loan takers) pay to the bank is directly passed on to these investors and hence these securities are mortgage backed. (There is a lot to MBS than what has been described above like tranches etc which is not required as of now... will describe them later)

So, essentially, banks do not assume the risk of non payment of mortgage loan takers. since they have linked loan takers with the investors and have made them risk free.(or rather appears to be risk free) and since they were risk free now, the issue of "Moral hazard" comes in.

Banks, now, kept on issuing mortgage loans, without much worry about the borrower, as they have got no risk and the investors(MBS buyers) are the ones bearing the risk. And when this reached a sizeable proportion and when the housing bubble busted then mortgage borrowers failed to pay loans, investors lost their money, there were many bank runs and the whole economy collapsed.

MBS were only one of the instruments that led to these behavior among banks. There were many other instruments in use !!!

Funding Gap in case of banks

Typically, banks accept deposits, make loans and earn the "interest spread" between the deposits and the loans.

At any point of time, banks always need to estimate the expected credit offtake and the deposits expected. Funding gap is calculated as the difference between current and projected credit and deposit flows. If the difference shows the projected need for credit exceeding the expected deposit flows, bank will have to raise additional resources. If the difference shows the projected credit requirement falling short of resources, banks will have to find profitable investment avenues for the surplus resources.

Issue of Haircuts in US Crisis

What happened in the case of US Financial crisis was also related to haircuts. Normally, At the initiation of loan contract, a Bank takes up a collateral and grants a loan considering the type and the value of the collateral. The value of the loan granted depends on the type of collateral and the Haircut (as explained in my previous post).

Now, with the passage of time, the value of collateral changes depending on market conditions. If the value of collateral decreases to less than the value of the loan, then the bank is in a serious risk if the borrower defaults.

In the case of US financial crises of 2007, there were many mortgage borrowers. People took up mortgage loans. Mortgage loans refer to the loans taken against a real property(mortgage) as collateral. Property prices were rising and so the banks were more than happy to give loans against these collaterals. Haircuts were low as they were supposed to bear low risks. But when the property prices plummeted (because of many reasons, will explain some other day), the value of the collateral decreased to less than the value of the loan and the banks, even if sold the collaterals that they had were not able to recover the loan amounts. (it is a different fact that because of huge supply of these collaterals from banks, prices of collaterals decreased further more and resulted in huge losses to banks)

The concept of Haircuts

Most of the times, Whenever one decides to take a loan, he/she needs to deposit collateral with the bank for the loan to be sanctioned. Not every collateral bears the same amount of risk and so they cannot be valued equally.

Take for example, a 100 rs. treasury bond and a 100 rs. stock of company X. Treasury bond is less risky and so with a 100 rs treasury bond as a collateral, a loan of say 90 (say) can be obtained but whereas with a 100 rs stock as collateral, less than 90 rs loan , say 70 rs loan, can be obtained.

And so the Haircut is 10% for Treasury bond and 30% for a stock (in this example). In more generalized terms, Haircut refers to the percentage by which an assets market value is reduced for the purpose of calculating capital requirements, margins and collaterals.

The whole point of Haircut is to have a collateral which is atleast worth the value of loan at any point of time. And at any point of time, if the value of the collateral decreases to less than the value of the loan, then the lender of the money(say bank) will have the risk of loosing on the money i.e. if the borrower defaults then the bank can only recover money to the value of the collateral and since this value has been decreased to less than the value of loan, the bank looses on some part of the loan.

Korean Peninsula and the Six Party Talks!!!

More than a century of history and still going on.....

If i have to put the whole episode in a paragraph or two, let me put it this way...

"A couple (US and Russia) enters into a country (Korea) after the end of era of the villain (Japan) in Korea. They give birth to two babies - North Korea(B1) and South Korea( B2). They then divorce each other and B1 grows up with the Father(Russia) and B2 grows up with the mother (US).

The intense hatred between the parents and the way they bring up their child instills the same hatred between the babies. Mother(US) being a little soft, B2(South Korea) grows up similar to a hero(Kind, Democratic etc.) in a movie whereas B2( North Korea) turns himself into a monster. And the Fight Continues...........In one of their fighting shots, the Mother and B2 enter into the territory of C1(China) . 

As the dictum goes, Enemy's enemy is a friend and So C1 and B1 become good friends. And the fight Continues still...And hence the Six Party talks"

Read on to know the complete story....

Present State of the Koreas :-

The Complete Story……

The current relationship between the Koreas and Japan is to a large extent shaped by the latter’s unsavoury actions during and after the Russo-Japanese War of 1904-05.

Forced or Voluntary Default for Greece

(Wrote this article for an event... posting it here...)

Rising debts and a loss of competitiveness are the main challenges facing Greece Economy. Presently, it does not have any options which can be proved to be good for all.

Problems of Greece increased with the adoption of Euro. In February 1992, European leaders signed the Maastricht Treaty, laying the foundation for monetary union and adoption of the euro. Greece qualified in 2000 and was admitted on 1 January 2001. Prior to the adoption of euro, Annual inflation in Greece was one of the highest in the region and GDP growth was the slowest in Europe.

Adoption of the Euro led to a drop in inflation from an average of 18 percent from 1980–1995 to just above 3 percent from 2000–2007. After averaging annual GDP growth of 1.1 percent from 1980 through 1997, Greece’s economy expanded at an average rate of 4.1 percent over the next ten years, the fourth fastest rate in the Euro area. Per capita GDP rose from 39 percent of that of Germany in 1995 to 71 percent in 2008. It quickly became an attractive destination for foreign capital.

But, this fuelled the domestic demand. Domestic demand growth drove up prices in Greece increasing domestic labor costs and eroding Greek competitiveness. If we have a look at numbers, since 1997, consumer prices have risen by 47 percent and since 2000, per capita employee compensation has grown by over 80 percent. Competitiveness was hurt further by a shift away from manufacturing sectors in favor of the expansion of service and non-tradable sectors. Increase in Revenues increased government spending especially in social transfers and public sector wages.

Reflecting the economy’s rapid growth, public sector deficits averaged 5 percent of GDP from 2000 to 2007. The scenario changed markedly with the financial crisis and when markets realized Greece’s chronic failure to report accurate statistics. GDP expanded by only 2 percent in 2008 and contracted by 2 percent in 2009, pushing down tax revenues and driving up the restated deficit to 7.7 percent in 2008 and 13.6 in 2009. 

With debt levels rising and the IMF projecting it to reach nearly 150 percent by 2012, borrowing costs of Greece skyrocketed. Attempts are being made by EU and IMF to restore the economy of Greece and other EU nations(PIIGS)

Bailing out Greece

There are different views and solutions to restore the economy of Greece and other EU nations in danger. There are three different viable options possible in the existing situation

1.      Greece voluntarily leaving Eurozone

2.      Other EU nations forcing the Greece out of the EMU

3.      Greece undergoing a massive debt restructuring plan and with the aid of IMF and other EU nations, it stabilizes itself

Let us analyze each of these cases in detail in order to understand the best possible option available for Greece. 

The Complete Trading Cycle

During a trading process an investor buys the shares and sells the shares and after the trade execution the buyer and the seller receives the shares and funds respectively. This is what the process in stock exchange looks like. But in reality there is much more complex process that goes on at the back end. The transactions in secondary market pass through three distinct phases, viz., trading, clearing and settlement. While the stock exchanges provide the platform for trading, the clearing corporation determines the funds and securities obligations of the trading members and ensures that the trade is settled through exchanges of obligations. The clearing banks and the depositories provide the necessary interface between the custodians/clearing members for settlement of funds and securities obligations of trading members. The clearing process involves determination of what counter-parties owe, and which counter-parties are due to receive on the settlement date, thereafter the obligations are discharged by settlement.

The System applicable in India today is Rolling Settlement. One of the greatest achievements of the current system is settlement of trades within three working days, i.e. T+2 rolling settlement which has replaced account period settlement, which used to take at least a week. days later. This is called ‘T+X’ rolling settlement, where ‘T’ is the trade date and ‘X’ is the number of business days after trade date on which settlement takes place. The rolling settlement prevailing in India is T+2, implying that the outstanding positions at the end of the day ‘T’ are compulsorily settled 2 days after the trade date.

Understanding Rolling Settlement :-

Rolling Settlement involves for major activities. Trading, Clearing, Settlement and Post Settlement(Post settlement has not been explained in this post).

Derivatives - What they are and their types...

IMF puts the definition of financial derivatives as ''Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity, and through which specific financial risks can be traded in financial markets in their own right". A little complicated!!

click here to get a basic hold on to the derivatives and their types explained in a very good fashion...

Shares and Bonds

Shares

Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture.

Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held, at a price. For  e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share.

Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns.

Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders.

Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.

Cumulative Convertible Preference Shares:  A   t ype of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted int equity capital of the company.

Bonds

Bond: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest

payments over the life of the loan. The various types of Bonds are as follows:

Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of

the bond.

Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price.

Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.

Posts in the making!!!

I will be posting articles on these issues shortly....

1. Korean Peninsula and the Six party talks

2. Israel - Palestine conflict

3. Germany Hyperinflation 

4. Ratio Analysis Decoded

Islamic Banks vs Conventional Banks

(Reproducing the article which i had sent to IIM Shillong for their Finance Magazine "Niveshak", though this was never published:P)

Industry forecast suggest that Islamic Banking assets with commercial banks globally, will reach $1.1 trillion in 2012 (2010: $826 bn). If we consider only the Middle East and North African Countries(MENA), which constitute a major share of Islamic Banking industry, Islamic banking assets increased to $416bn in 2010, representing a five year CAGR of 20% compared to less than 9% for leading conventional banks. But Islamic Banking Industry is still fragmented with most Islamic banks holding less than $13bn assets – yet to achieve scale, facing pressure on profitability.

If we compare the performances of IBs with CBs then Islamic Banking industry’s ROE now appears to be stabilizing around 10% down from 23% in 2006. Inspite of having higher financing income, higher provisions and operating costs have contributed to the steep decline in profitability of Islamic banks.

Also if we compare Staff cost/operating expenses(2010), it is 60% in Islamic Banks compared to 54% in conventional banks and the ratio of Staff Cost and Deposits(2010) is 3% and 0.8% respectively. Higher Staff Costs should translate to better performance but Islamic Banks lag behind their conventional peers which again indicates a lack of operational efficiency. A study done by Ernst & Young (‘A Brave New World of Sustainable Growth’ ) suggests that Operational efficiency can improve the Profitability of Islamic Banks by 25%

Comparing IBs and CBs during the Financial Crisis

To assess the impact of the crisis, there was a study carried out by IMF and it used bank-level data covering 2007−10 for about 120 IBs and CBs in eight countries—Bahrain (including offshore), Jordan, Kuwait, Malaysia, Qatar, Saudi Arabia, Turkey, and the UAE and the evidence showed that in 2008, IBs fared better in all countries, except Qatar, the UAE, and Malaysia. In Saudi Arabia, Bahrain offshore, Jordan, and Turkey, the change in profitability was significantly more favorable for IBs. The picture was reversed in 2009, with IBs faring clearly worse in three countries. In Bahrain (including offshore), and the UAE, the profitability of IBs declined significantly more than that of CBs, while in Qatar the increase in IB‘s profitability was significantly lower than that of CBs

Factors related to IBs‘ business model helped contain the adverse impact on profitability in 2008, while weaknesses in risk management practices in some IBs led to larger decline in profitability compared to CBs in 2009. In particular, adherence to Shariah principles precluded IBs from financing or investing in the kind of instruments that have adversely affected their conventional competitors and triggered the global financial crisis. The weak performance in some countries was associated with sectoral concentration and, in some cases, was facilitated by exemptions from concentration limits, highlighting the importance of a neutral regulatory framework for IBs and CBs and strengthening risk management in some banks.

Despite higher profitability during the pre-global crisis period (2005–07), IBs‘ average

profitability for 2008–09 was similar to that of CBs, indicating better cumulative (pre- and post-crisis) profitability and suggesting that higher pre-crisis profitability was not driven by a strategy of greater risk taking. Large IBs have fared better than small ones. Better diversification, economies of scale, and stronger reputation might have contributed to this better performance. This suggests that developing the industry and increasing competition should be achieved through establishing large and well managed IBs that can compete with existing banks. Also IBs‘ credit and asset growth were at least twice higher than that of CBs during the crisis, suggesting a growing market share going forward and larger supervisory responsibility.

While the global crisis gave IBs an opportunity to prove their resilience, it also highlighted the need to address important challenges. The crisis has led to greater recognition of the importance of liquidity risks, and the need for efficient bank resolution framework. Hence, building a well-functioning liquidity management infrastructure is a key priority.

Moreover, regulators and standard-setters for IBs should ensure that the supervisory and legal infrastructure, including for bank resolution, remain relevant to the rapidly changing Islamic financial landscape and global developments. Reform efforts in this regard should interface with the global reform agenda. Greater convergence and harmonization of regulations and products and offering a greater variety of Products consistent with Shariah principles is needed to facilitate an efficient and sustainable growth of the industry.

Commonly used Islamic Banking Financial Products(instruments)

Murabahah

Murabahah (accurate transliteration murābaḥa) is defined as a cost-plus sale, where the seller expressly mentions the cost he has incurred on the commodities to be sold and sells it to another person by adding some profit or mark-up thereon which is known to the buyer. As the requirement includes an 'honest declaration of cost', murabaha is one of three types of bayu-al-amanah ('fiduciary' sale). Other two types of bayu-al-amanah are Tawliyah (sale at cost) and Wadiah (sale at specified loss)].

Istisna’a

Literally the word istisna’ derived from the root word sana’ or to manufacture or to construct something. Istisna’ is an order or request to manufacture something, whereby the requestor invited, induced or caused another to make or manufacture some goods for him. Technically, it is a contract to purchase for a definite price (agreed by both parties) something that may be manufactured later on according to agreed specifications between the parties. In other words, it is a contract of sale of specified items to be manufactured or constructed with an obligation on the part of the manufacturer or contractor to deliver them to the customer upon completion. The contract of Istisna’ creates a moral obligation on the manufacturer to manufacture the goods, but before he starts the work, any one of the parties may cancel the contract after giving a notice to the other. However, after the manufacturer has started the work, the contract cannot be cancelled unilaterally.

Ijarah

An agreement whereby the Bank (lessor) purchases or constructs an asset for lease according to the customer’s request (lessee), based on his promise to lease the asset for a specific period and against certain rent installments. Ijarah could end by transferring the ownership of the asset to the lessee and there must be usufruct. Usufruct is a legal term describing a situation wherein a person or company has a temporary right to use and derive income from someone else's property (provided that it isn't damaged).

Musharakah

An agreement between the Bank and a customer to contribute to a certain investment enterprise, whether existing new, or the ownership of a certain property either permanently or according to a diminishing arrangement ending with the acquisition by the customer of the full ownership. The profit is shared as per the agreement set between parties while the loss is shared in proportion to their shares of capital in the enterprise.

Mudarabah
An agreement between the Bank and a third party whereby one party would provide a certain amount of funds which the other party (Mudarib) would invest in a specific enterprise or activity against a specific share in the profit. The Mudarib would bear the loss in case of default, negligence or violation of any of the terms and conditions of the Mudarabah.

Wakalah
An agreement between the Bank and an agent whereby the agent invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakalah.

Sukuk

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law (Shari’ah) and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

Bai’ al-inah (sale and buy-back agreement)
The financier sells an asset to the customer on a deferred-payment basis, and then the asset is repurchased by the financier for cash at a discount. The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency. Some scholars believe that this is not compliant with Shari’ah principles but this principle is still being practice by some Muslim countries, particularly Malaysia.

Bai’ bithaman ajil (deferred payment sale)
This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except Bai’ bithaman ajil is normally offered for long-term deferred payment sale while Murabahah, is normally for short term deferred payment sale e.g. up to 1 year.

Bai muajjal (credit sale)
Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabahah muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price.

Musawamah
Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabahah and Musawamah with all other rules as described in Murabahah remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.

Bai salam
Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver or currencies (these are “ribawi” items) based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

Understanding Mudarabah

One of the Islamic principles is that there should be no reward without risk-bearing. This principle is applicable to both labour and capital. As no payment is allowed to labour unless it is applied to work, so no reward for capital should be allowed unless it is exposed to business risks.

Consider two persons, one of whom has capital but no special skills in business, while the other has managerial skills but possesses no capital. They can co-operate in either of two ways:

1. Debt-financing (the western loan system). The businessman borrows the capital from the capital-owner and invests it in his trade. The capital-owner is to get back his principal and an additional amount on the basis of a fixed rate, called the interest rate, as his compensation for parting with liquidity for a fixed period. The claim of the lender for repayment of the principal plus the payment of the interest becomes viable only after the expiry of this period. This payment is due irrespective of whether the businessman has made a profit using the borrowed money. In the event of a loss, the borrower has to repay the principal amount of the loan, as well as the accrued interest, from his own resources, while the capital-owner loses nothing. Islam views this as an unjust transaction.
   
   
2. Mudarabah (the Islamic way, or PLS - Profit Loss Sharing). The two persons co-operate with each other on the basis of partnership, where the capital-owner provides the capital and the other party puts his management skills into the business. The capital-owner is not involved in the actual day-to-day operation of the business, but is free to stipulate certain conditions that he may deem necessary to ensure the best use of his funds. After the expiry of the period, which may be the termination of the contract or such time that returns are obtained from the business, the capital-owner gets back his principal amount together with a pre-agreed share of the profit.
   
   
   
   
   
   
   

The ratio in which the total profits of the enterprise are distributed between the capital-owner and the manager of the enterprise is determined and mutually agreed at the time of entering the contract, before the beginning of the project. In the event of loss, the capital-owner bears all the loss and the principal is reduced by the amount of the loss. It is the risk of loss that entitles the capital-owner to a share in the profits. The manager bears no financial loss, because he has lost his time and his work has been wasted. This is, in essence, the principle of mudarabah.

There are at least three reasons for considering the mudarabah relationship to be more just than the creditor-debtor relationship:

(i)  Both parties agree on the ratio in which profits will be shared between them.

(ii) The treatment of both parties is uniform in the event of loss, since if the provider of the capital suffers a reduction of his principal, the manager is deprived of a reward for his labour, time and effort.

(iii) Both parties are treated equally if there is any violation of the agreement. If the manager violates anyone of the stipulated conditions, or if he does not work, or is instrumental in causing loss to the business by negligence or bad management, he will have to bear the responsibility for the safe return of the whole amount in question. If, on the other hand, the provider of the capital violates any of the stipulated conditions, for example, by withdrawing his funds before the stipulated time, or by not providing part or full funds at the promised time, etc., he will have to pay the manager a reward equivalent to what he would have earned in similar work.

Mudarabah is the basis of modern Islamic banking on a two-tier basis.

1st tier: The depositors put their money into the bank's investment account and agree to share profits with it. In this case, the depositors are the providers of the capital and the bank functions as the manager of funds.

2nd tier: Entrepreneurs seek finance from the bank for their businesses on the condition that profits accruing from their business will be shared between them and the bank in a mutually agreed proportion, but that any loss will be borne by the bank only. In this case, the bank functions as the provider of capital and the entrepreneur functions as the manager.

Thus, under an Islamic banking system, the cost of capital is not analogous to a zero interest rate, as some people wrongly assume it to be. The only difference between Islamic banking and interest-based banking in this respect is that the cost of capital in interest-based banking is a predetermined fixed rate, while in Islamic banking, it is expressed as a ratio of profit.

Intro to Islamic Banking

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shari'ah (Islamic rulings) . 

While elimination of "Riba" or interest in all its forms is an important feature of the Islamic financial system, Islamic banking is much more. In essence, it aims to eliminate exploitation and to establish a just society by the application of the Shari'ah or Islamic rulings to the operations of banks and other financial institutions. To ensure compliance to the Shari'ah, Islamic banks use the services of religious boards comprised of Shari'ah scholars.

Islamic finance may be viewed as a form of ethical investing, or ethical lending, except that no loans are possible unless they are interest-free. Among the ethical restrictions is the prohibition on alcohol and gambling and the consumption of pork. Islamic funds would never knowingly invest in companies involved in gambling, alcoholic beverages, or porcine food products

Its practitioners and clients need not be Muslim, but they must accept the ethical restrictions underscored by Islamic values.

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shari’ah, known as Fiqh al-Muamalat(Islamic rules on transactions).The principle source of the Shari’ah is The Qur’an followed by the recorded sayings and actions of Prophet Muhammad (pbuh) – the Hadith. Where solutions to problems cannot be found in these two sources, rulings are made based on the consensus of a community leaned scholars, independent reasoning of an Islamic scholar and custom, so long as such rulings do not deviate from the fundamental teachings in The Qur’an.

Page 221 of my 300 page auto biography...

I wrote this article for one of my interviews ...sharing it here....

"everyone burst into laughter. Hahahaha…..What a nice hairstyle I had….

As she was flipping through the pages of the album, a rush of nostalgia hit me that took me back in time. There were Posed class pictures that never quite came out the way they should have been. Pictures of the party that we had on the day when we started a new club in our college, pictures of the football match played with the Differently abled children of Deepalaya school, Pictures of Yasmeen, Pictures of me receiving an award from my first team lead, Pictures of the day when I was given the ‘best innovator’ award, Pictures when I felt satisfied donating money for education, Pictures of my first promotion, Pictures of the achievements on work.

Ooh!!! What a life it has been at various junctures. At 23, it was about getting placed. At 30, it was about playing with my little daughter who was growing up. At 36, it was about appreciating the progressive social context that India was encapsulated in.

At 45 today, it holds a very different meaning for me. Today, happiness means feeling worthy, responsible for having a job done, and done well at that, for having achieved more than I had aimed, for having made a difference to the lives of people around me. Despite all this, there is something missing. A gap I need to fill in. Having changed the fortunes of the companies I worked with, I guess I need to do something for the people now. A big day ahead. Tomorrow’s visit to  "

ended it abruptly because it's just one page and one page ends abruptly most of the times...:P

East Africa food crisis

Its been a long time since the last post....
.......
Anywayz....Read this new post on food crisis and i hope you will find it helpful in some or the other way....

East Africa Food Crisis :_

Read analysis of East Africa food crisis here 
....

Thank You and have a nice day...:)..

Connecting the dots between Taliban, Russia, USA , Afghanistan, Pakistan and Mujahideen......

Because of its strategic location, Afghanistan is seen as a springboard to the huge resources of oil and gas in Central Asia. 1973 military coup led by Soviet-backed Communists in the Afghan army ousted the last scion of the Durrani dynasty. The Soviet Red Army marched into Kabul in December 1978.

Soon after the invasion, the U.S., wary of Soviet expansionist designs, sold the ‘Islam-is-in-danger’ story to the Islamic World, especially Saudi Arabia and Pakistan. To further its goal of ousting the Communists from Afghanistan, the U.S. engaged the Saudi royal house and the Pakistani political and military establishment to wage a proxy war against the Soviet Red Army.

Pakistan ensured that America’s Central Intelligence Agency (CIA) channeled all weapons, purchased with Saudi money, through the Inter-Services Intelligence (ISI), which trained the Mujahidden from various countries. It was thus that during the Cold War, Afghanistan became a battle-ground for a ‘hot war’ between the world’s two superpowers, though the U.S. sought to fight its war making the Islamic Mujahidden its proxy.

Stirred, shaken, and finally, sapped by the zeal of the Mujahidden, the Soviet Red Army retreated from Afghanistan in 1989. The defeat of a superpower emboldened the Islamists to think in an entirely new way: with limited numbers and limited resources, a holy war could defeat the other superpower also.

As the war ended, the CIA abandoned Pakistan and Afghanistan without taking back the weapons in the hands of the Mujahidden

Birth of Taliban...

During the Soviet occupation of Afghanistan (1979-89), the civil war between the Red Army and the Islamists saw a constant tussle for control of Kabul. The warlords levied and collected taxes from road users passing through their “area”.

 In the summer of 1994, these road bandits stopped a convoy, just north of Kandahar. The convoy belonged to a wealthy and influential Pakistani who demanded that the Pakistani government intervene and secure the release of the captured convoy

The Pakistani government, which did not want to intervene directly, instead directed the ISI to seek the help of the radical Jamiat-e-Ulema Islam (JUI). The JUI ran everal madrassas (Islamic seminaries) where a large number of Afghan students (refugees who fled their homeland during the 1979-89 war) were enrolled. The JUI used these students to organise a local militia against the warlords, which had held the convoy to ransom.

About 2000 volunteers of the JUI, who called themselves ‘Taliban’, meaning ‘students’, freed the convoy after decimating the forces of the warlords. Flush with success, they pressed on and successfully captured Kandahar. The Taliban were given a rousing reception by the locals, who hated the local warlord for the misery he had inflicted on them. The Taliban’s impeccable behavior helped them gain a reputation for being honest and religious. At this time, the Taliban did not impose any of the harsh measures (like the imposition of a strict and ultra-orthodox Islamic code of conduct) for which it later gained international notoriety.

By the end of 1996, the Taliban had captured nearly 90 per cent of the country’s territory including Kabul.

The ousted warlords, mostly non-Pashtuns (unlike the Pashtun-dominated Taliban), joined hands to take on the Taliban. However, as they were left with control of only 10 per cent of the country’s territory, they set up base in the country’s north and hence the anti-Taliban grouping came to be called the Northern Alliance.

The Northern Alliance was lent support –military, diplomatic, and logistical – by Central Asian republics, which feared that the Taliban might sweep into their countries. India, mindful of an anti-India and pro-Pakistan government (read Taliban) in Kabul, also provided the Northern Alliance with the required ‘assistance’.

From then onwards, there is a constant war going on between Taliban and anti-Taliban Forces which all of us are aware of….

MDI Gdpi experience...

Gd topic :- Human activists : Do they work for the society or for their own benefit...
All the 10 members in the group gave some decent points..

Interview :-
M1(madam 1) : tell me about urself..
me :same old story ...


M2 stopped my story in between when i said i am a member of BAKG(business analysis knowledge group) and CSR groups in my company and said ..oh! that was the reason you were speaking that much in the gd....

everyone laughs...eheheh
(but they dont know that i have just enrolled myself formally for BAKG group ...did not attend any meet or any activity or anything :P)

M1:continue
me: blah blah blah...

M1:smthing about ur company and the work u do
me:blah blah blah...

M2:ur hobbies?
me: playing computer games..

M2:what do you get playing computer games..
me: (wasn't prepared for this question..)said about imagination involved in characters, artificial intelligence,explained how gaming is a complex thing from inside...

M2: No, tell us why do you play..what do you get..leave those technical and other stuff...
me: (???????????thought for a while...couldn't get any answer and then i said) it is like eating a chocolate

M2:(everyone confused) eating a chocolate?
me: yes..eating a chocolate energizes you so is playing the game...

everyone started laughing ...

M2:so do you think eating a chocolate energizes you ..it adds some excitement really
me: yes and explained something

then discussion on chocolate and what does it do....:)

end of the discussion ...

M2 : you can go

verdict : Selected.............:)

Stocks and Sensex Series- Article 2

After understanding what are stocks, now it is the time to understand Why do the companies issue stocks and Why do the stock prices move up and down…

Firstly let us understand Why do the companies issue stocks:-

The reason is that at some point every company needs to "raise money". To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock.

A company can borrow by taking a loan from a bank or by issuing bonds. Both methods come under "debt financing". On the other hand, issuing stock is called “equity financing”.

Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way.

All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).

It is important to understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments.

This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

There are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends. Without dividends, an investor can make money on a stock only through its appreciation of the stock price in the open market.

On the downside, any stock may go bankrupt, in which case your investment is worth nothing. 

Why do the stock prices move up and down:-

Stock prices change because of “supply and demand”. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people want to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Understanding supply and demand is easy. What is difficult to understand is what makes people like a particular stock and dislike another stock. If you understand this, you will know what people are buying and what people are selling.

To figure out the likes and dislikes of people, you have to figure out what news is positive for a company and what news is negative and how any news about a company will be interpreted by the people.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter).

If a company's results are better than expected, the price jumps up. If a company's results disappoint  and are worse than expected, then the price will fall.

Of course, it's not just earnings that can change the feeling people have about a stock. During the “dotcom bubble”, for example, the stock price of dozens of internet companies rose without ever making even the smallest profit. As we all know, these high stock prices did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, this fact demonstrates that there are factors other than current earnings that influence stocks.

So, what are "all the factors" that affect the stocks price? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price very very rapidly.

At the most fundamental level, supply and demand in the market determines stock price.There are many types of techniques and methods that investors use to figure out whether a stock price will go up or down. 

IMI gdpi experience..

Date : 25th march 2011
venue :Hyderabad

The first step was to write an essay then gd then pi..

essay topic: International trade barriers work (this is how it was ..same wording..)
 wrote against the topic ...saying it creates work..and supporting arguments from diff. scenarios....was ok..

Gd : one of us (group) was asked to come there and pickup a chit...on which topic would be writte...if we are not comfortable with the first topic then we can pickup another chit...for another topic..

We all agreed with the first topic...

Topic as heard by me : Judiciary system in India
we were given 5 mins to think...and a paper to note down our points...

I started the gd...was speaking continuosly...spoke for about 3-4 mins..was loosing on points...no one was interrupting me... then after 3-4 mins , one guy said "what u are speaking is correct but we are here to discuss about education system in India."

phew!!!!!!!!!!!!!!!!!!!!!

was shocked totally...ppl were shocked and so they were not interrupting me!!!!wow!!!

was totally blank...then that guy spoke for 2-3 mins on the education system...

as soon as he finished ...i took over again and this time i spoke on "education system " :) ...
From then onwards spoke around 5-6 times .....since i had a little research on education system.....

PI:-

dont remember the exact sequence of questions ....

i was asked on "tell me about urself", ur college,why mba(was grilled on this..for about 15-20 mins atleast)...about my performance in GD(??????) ...then asked me to go to Tiss or SPJAIN or other colleges which offer social entrepreneurship, then about my friend in IMI, how should IMI promote itself, what should it do....how much time do i spend online daily, what stuff do i read, what is going on in libya, what is no-fly zone, what will happen if someone imposes no-fly zone and if the other country doesn't follow, what do you think of US taking control of libya in the name of protecting its civilians, what if all the members of UNSC decide against manmohan singh and india and decide to attack...thats it..


Final Results Out on April 17th 2011(today)
Result : Converted