Insurance In Tort Laws

INTRODUCTION
This project has been an eye opener for me. It is extremely relevant to the modern times and as the future of India we should understand that it is the common mass that runs the country. Consumer protection rights are an important issue in modern days. The law can be effectively used to stop any abuse of the common people especially illiterate masses who do not understand the rules and regulations which is to be followed while buying particular item. It is law, the controller of the entire society which can stop this abuse from taking place. It can place effective standards guiding a product's genuinity and the proper verification of its price. No extra taxes should be issued according to the seller's wish. I have proceeded by referring to the books written by Avtar Singh, Venkat Rao and others. It has been a wonderful and educational delight in going about this topic and making a project which is of greatest importance in the present day scenario.

DEFINITION OF CONSUMER
The words "consumer", "consumed", "consumption" is all cognate, and when one is defined, the contents of the definition go into all of them wherever they occur in the same act.
Section 2 of the act wherein 'consumer' is defined. According to him, the definition of the consumer will not take a client who engaged the advocate for professional services.
Consumer means any person who-
– Buys any goods for a consideration which has been paid or promised or partly paid and partly promised or under any system or deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly promised or under any system of deferred payment when such use is made with the approval of the person, but does not include a person who obtains such goods for resale or for any commercial purpose
– Hires or avails of any services for a consideration which has been paid or promised or partly paid or partly promised or under any system of deferred payment and includes any beneficiary of such services other than the person who hires or avails of the services for the consideration paid or promised or partly paid or partly promised or under any system of deferred payment when such services are availed of with the approval of the first mentioned person but does not include a person who avails of such services for any commercial support

In Black's Law Dictionary it is to mean:
One who consumes. Individuals who purchase, use, maintain or dispose of products and services. A member of that broad class of people who are influenced by pricing policies, financing practices, quality of goods and services, credit reporting debt collection and other trade practices for which the state and federal consumer laws are enacted.

OBJECTVES OF THE ACT
The act is dedicated, as its preamble shows, to provide for better protection of rights of consumers and for that purpose to make provisions for the establishment of consumer councils and other authorities for settlement of consumer disputes and for other connected matters. In the statement of objects, reasons it is said that and the act seeks to provide speedy and simple redressal to consumer disputes. Quasi judicial body machinery has been set up at the district, state and central levels. These quasi judicial bodies have to observe the principle of natural justice and have been empowered to give relief to a specific nature and to award, wherever appropriate, compensation to consumers. Penalties for non compliance of orders given by quasi judicial bodies have also been provided.
The object and purpose of rendering the act is to render simple, inexpensive and speedy remedy to consumers with complaints against defective goods and deficient services and for that quasi judicial machinery has been sought to be set up at the district, state and national levels. These quasi judicial bodies are required to apply the principle of natural justice and have been empowered to give relief of specific nature and appoint wherever necessary, compensation to consumers.

INSURANCE
An operational definition of insurance is that it is
– The benefit provided by a particular kind of indemnity contract, called an insurance policy;
– That is issued by one of several kinds of legal entities (stock company, mutual company, reciprocal, or Lloyd's syndicate, for example), any of which may be called an insurer;
– In which the insurer promises to pay on behalf of or to indemnify another party, called a policyholder or insured;
– That protects the insured against loss caused by those perils subject to the indemnity in exchange for consideration known as an insurance premium.
The influence of insurance on the law of torts has been significant, both on theoretical level and on practice. Insurance has undermined one of the two main functions of awarding of damages, and it has in cast doubt on the value judgements made by the courts in determining which particular test of liability is appropriate in the given circumstances.
Regardless of whether in the particular circumstances the appropriate principle of liability is intention is malice, fault or strict liability, the purpose of common law damages remains the same. The primary purpose of an award of damages is to compensate the victim for his loss, with view to restoring him as near as possible to the position he would have been in but for the tort of the wrongdoer. But damages have another: by making the wrongdoer responsible for meeting an award of damages, the courts are trying to deter others from committing similar tortuous wrongs.

Insurance vitiates the secondary purpose of damages, at the same time incidentally ensuring that the primary purpose is more often achieved.
It can scarcely be realistically asserted that insured defendants are deterred by the prospect of losing no-claims bonus or by increasing of premium on renewal of their policies. Once it is conceded that insurance renders compensation for the sole purpose of damages but then the tort action itself becomes vulnerable to attack, for there are many ways-some perhaps fairer and administratively cheaper than tort- of compensating a victim for a loss he has suffered .
Prima facie, where a person suffers loss of recognized kind as the result of another's act, then the latter should have to make good that loss. But for valid reasons, the courts have held that, in certain circumstances, the actor will have to compensate his victim only if he is at fault. The victim's right to compensation is, therefore curtailed in an attempt to be fair to both the parties. The courts have made a policy decision that, in the circumstances, it is right to reward a defendant who has been careful by protecting him from liability for the consequences of his actions and that, as a corollary the plaintiff must forego his compensation. The policy decision is made on the supposition that the wrongdoer would himself have to pay for the damages but for this protection; it by no means follows that the same decision would be made if there were no risk of the wrongdoer having to provide the compensation.

It is difficult to judge the victim's right to compensation should be curtailed when that curtailment is not justified by a corresponding benefit to the wrongdoer. The requirement of fault ceases to play its role as the leveler between the victim's legitimate expectations and the wrongdoer's legitimate expectations, and becomes simply a hurdle to the victim's progress to compensation. If it is accepted that no one can insure against liability for harm caused by intentionally to another, then similar arguments can be made by the inappropriateness of the victim's having, in certain circumstances to prove an intention to do him wrong or harm, when it is irrelevant to the wrongdoer whether he had such an intention or not.

Again the victim's right to compensation is being curtailed without any corresponding benefit to the wrongdoer.
However, insurance has influenced the law of tort on a much more practical level as well. While the fact of insurance is not of itself a reason for imposing liability, there can be no doubt that it does add "a little extra tensile strength" to the chain which a wrongdoer to his responsibilities.
As well it has given new horizon to damages; it is true that traditionally it was considered to inform the court that a defendant was insured, but "those days are long past" and now it is frequently openly recognized that the defendant would be insured.

The policy of insurance constitutes a contract of insurance between Life Insurance Corporation or a subsidiary of General Insurance Company of India, as the case may be, such services such has been undertaken to render under the contract of insurance. However as a rule, occasion to render services arise only when insured surrenders his policy, or the policy matures for payment or the insured dies or any other contingency which gives rise to render service occurs.
Breach of contract of insurance may give rise to a cause of action to file a civil suit, but such breach of contract may itself constitute deficiency in service, so as to give a cause of action to file a complaint under the consumer protection act for one such more relieves awardable hereunder.
Section 13 (4) of the act vests in a redressal agency powers of the Civil Court, while trying a suit in respect of such matters as examination of witnesses on oath and production of documents. Declining to exercise jurisdiction in a case before it only because it involves examination and cross examination of facts, witnesses and production and consideration of documents would amount to abdication of its jurisdiction.

Such discretion can be exercised only when the gives rise to several issues and necessities taking of voluminous oral and documentary evidence, or otherwise involve complex questions of fact and law which can not be decided in time bound proceedings under the consumer protection act.

MOTOR VEHICLE INSURANCE
Where the sale of a vehicle is complete, the title therein passes to the purchaser notwithstanding that his name has not been recorded in the RCBook. Such owner is entitled to get his vehicle insured and also to maintain a claim on the basis of such insurance. The earlier owner, who has lost insurable insurance on the sold vehicle, can not advance a claim on the basis of policy of the said vehicle, earlier taken by him, on the ground that he is still the recorded owner of the said vehicle.
Section 157 of the motor vehicles act is only in respect of third party risks and provides that the certificate of insurance described therein shall be deemed to have been transferred in favour of the person to whom the motor vehicle is being transferred. It does not apply to other risks, if any, covered by the policy. If the transferee wants to avail the benefits of other risks covered by it, he has to enter into an agreement thereof with the investor.

FRAUD BY INSURER
If it is established that the discharge voucher was obtained by fraud, misrepresentation, undue influence or coercive bargaining or compelled by circumstances, the authority of the consumer forum may be justified in granting relief. Mere execution of the discharge voucher would not deprive the consumer of his claim in deficiency of service.

DELAY IN SETTLEMENT OF CLAIM
In Sarveshwar Rao v. National Insurance Company Ltd. , It was held that the delay of two or more years in settling the insurance claim would result in inadequacy in the quality, nature and manner of the service which the insurance company has undertaken to render, and amounts to deficiency in service.
In Delkon India Pvt. Ltd. V. The Oriental Insurance Company Ltd. . The National Commission has held that it was a deficiency of service to have delayed the claim by two years on the ground that the final police report was not coming.

INTERPRETATION OF TERMS

In Skandia Insurance Company v. Kokilaben Chandravadan, the honorable Supreme Court ruled that the exclusion terms of the insurance must be read with so as to serve the main purpose of the policy, which is to indemnify the damages caused to the vehicle.

CONDUCT OF THE INSURER
In Oriental Insurance Co. Ltd. V. Mayur Restaurant and bar, the conduct of the insurer was under question. The commission held that deficiency of the service was established on the part of the opposite party on two counts i) delay in settlement of claims and ii) unreasonable and un maintainable reasons for repudiating the claim of the complainant, and the compensation with the interest and cost was awarded.

SUICIDE BY THE ASSURED
In Life Insurance Corporation v Dharma Vir Anand, the national commission refused to hold the insurance commission liable as the insured committed suicide before the expiry of three years from the date of the policy.

BREACH OF TERMS
In BVNagarjuna v Oriental Insurance Company Ltd., the terms of insurance contract permitted the insured vehicle to carry six passengers at a time but the driver allowed two more persons to get in. It was held that merely adding two more persons without the knowledge of the driver did not amount to indemnification by the insurance company.

NOMINEE'S RIGHTS
In Jagdish Prakash Dagar v. Life Insurance Corporation, it was held that a nominee under a policy of life insurance will be a consumer within the meaning of section 2 (1) (d) of the Consumer Protection Act. The commission held that the nominee could legislatively maintain an action against deficiency raised in service by the arbitrary decision of the insurer.

REPUDIATION
Repudiation is defined as the renunciation of a contract (which holds a repudiator liable to be sued for breach of contract, and entitles the repudiatee on accepting the repudiation to treat the contract as at an end
This concept of repudiation is needed in the concept of insurance. The concept of repudiation will be dealt hereto a number of times and to provide beneficiary evidence, the definition has been given.
Unilateral repudiation of its liability, under the contact of by the life insurance corporation or an insurance company does not, by itself oust the jurisdiction of a redressal agency, to go into the sustainability of such repudiation, on facts and in law and to decide and to adjudicate if, in the facts of the case, it amounts to deficiency in service or unfair trade practice, and if so, to award to the aggrieved person, such relief or reliefs under Section 14 (1) of the said Act as he or she is entitled to. The fact that before such repudiation it obtained a report from a surveyor or surveyors also does not oust the jurisdiction of a redressal agents to into the merits of such repudiation, for otherwise in each case the corporation or such company, and deprived the aggrieved person of the cheap and expeditious remedy under the consumer protection act.
Where, however the corporation or the company conducts thorough investigations into the facts which have given rise to claim and other associated facts, and repudiates the claims in good faith after exercise with due care and proper application of mind, the redressal agency should decline to go into the merits of such repudiation and leave the aggrieved person to resort to the regular remedy of a suit in a civil court.
The law does not require the life insurance corporation or an insurance company to accept every claim good or bad, true or false, but it does require the corporation or the company to make a thorough investigation into such claim and to take decisions on it, in good faith, after exercise of due care and proper application of mind and where it does so it renders the service required by it and can not be charged with deficiencies in service, even if, in the ultimate analysis, such decisions is wrong on the facts and in law and the redressal agency would be disinclined to substitute its own judgement in the place of the judgement of the corporation or insurance company.
The question as to whether repudiation of its liability does or does not amount to deficiency in service would depend upon the facts of each case.
Where a cheque sent towards a premium is dishonoured by the drawee bank and consequently the policy is cancelled or it lapses or the injured dies before the proposal is accepted and contract of insurance results, no claim can be founded in such a policy, which was cancelled or has since lapsed, or a contract of insurance, which did not materialize at all. Repudiation of such claim can never amount to deficiency in service.
Insurance agent is not entitled to collect premium on behalf of the corporation. Where an insured issues a bearer cheque towards premium and hands it over the insurance agent who encashes it, but does not deposit the premium with the corporation event till the expiry of the grace period and consequently the policy lapses and meanwhile the insured also dies, his nominee has to blame himself or herself for the indiscretion of the insured and can not blame or fault the corporation.

BASIC PRINCIPLES OF INSURANCE

There are some basic principles concerning the topic of Consumer Protection Law and Insurance.
– Settlement of insurance claim is service, default or negligence therein is deficiency of that service
In the case of Shri Umedilal Agarwal v. United India Assurance Co. Ltd, the National Commission observed as under:
"We find no merit in the contention put forward by the insurance company that a complaint relating to the failure on the part of the insurer to the settle the claim of the insured within a reasonable time and the prayer for the grant of compensation in respect of such delay will not within the jurisdiction of the redressal forums constituted under the consumer protection act.

The provision of facilities in connection with insurance has been specifically included within the scope of the expression "service" by the definition of the said word contained in section 2 (i) (o) of the act. Our attention was invited by Mr. Malhotra, learned counsel for the insurance company to the decision of the Queen's Bench in national transit co. ltd. V. customs and central excise commissioners. The observations contained in the said judgement relating to the scope of the expression insurance occurring in the schedule of the enactment referred to therein are of no assistance to all of us in this case because the context in which that expression is used in the English enactment considered in that case is completely different. Having regard to the philosophy of the consumer protection act and its avowed object of providing cheap and speedy redressal to customers affected by the failure on the part of persons providing service for a consideration, we do not find it possible to hold that the settlement of insurance claims will not be covered by the expression insurance occurring in section 2 (1) (d) .Whenever there is a fault of negligence that will constitute a deficiency in the service on the part of the insurance company and it will perfectly open to the concerned aggrieved customer to approach the Redressal Forums under the act seeking appropriate relief. "

– LIC Agent has no authority in collecting the premium
The supreme court held that under regulation 8 (4) of life insurance corporation of India (agents) regulation, 1972 which had acquired the status of life insurance corporation agents rules with effect from January 31, 1981, which were also published in the gazette, LIC agents were specifically prohibited from collecting premium on behalf of LIC and that in view thereof an inference of implied authority can not also be raised.

– Rejection of claim as false after full investigation
The national commission held as follows:
"From the facts disclosed by the record and particularly averments contained in the consumer affidavit filed by the first respondent it is seen that the insurance company had fully investigated into the claims put forward by the complainant that his claim was rejected. Thus it is not a case where the insurance company did not take a prompt and immediate option for deciding the claims against the insurance company. Having regards to the facts and circumstances of this case and the nature of the controversy between the parties we consider that this is a matter that should be adjudicated before a civil court where the complainant as well as the respondent will have ample opportunities to examine witnesses at length, take out the commission for local inspections etc. and have an elaborate trial of the case. "

– Unilateral reduction in the insurance amount.
The national commission held that the insurance company is not entitled to make a unilateral reduction of Rs. 4, 29,771 from Rs. 30, 12,549 at which its own surveyor assessed the loss.

– Mere repudiation does not render the complaint not maintainable.
The national commission overruled the objection of the insurance company that merely because the insurer had totally repudiated its liability in respect of the claim, no proceedings could validly be initiated by the insured under the consumer protection act.

– Mere unilateral repudiation does not oust the jurisdiction.
The national commission held that merely because the insurer has repudiated the insurance claim under the policy unilaterally, it is difficult to hold that the various redressal forums constituted under the consumer protection act, 1986 will have no jurisdiction to deal with the matter that if such a contention of the insurance company can get a report from the surveyors, repudiate the claim and oust the jurisdiction of the redressal forums, that the redressal forums are, therefore, bound to see whether or not the repudiation was made in good faith on valid and justifiable grounds that if the surveyor or surveyors choose to submit the wrong report and the insurance company repudiates the claims without applying its mind then the repudiation can not be said to be justified that the report of the surveyor will show that the investigations have been proper, fair and thorough and that it has to be remembered that the surveyors bread comes from the employer.

– Mere unilateral repudiation no ground to oust jurisdiction.
The national commission repelled the objection and observed as under:
"Ordinarily a remedy is available to a consumer in Civil Court but mere repudiation of claim arising out of policy of insurance under section 45 of the insurance act, 1938, can not take away the jurisdiction of the redressal forum constituted under the act. The avowed object of the act is to provide cheap, speedy and efficacious remedy to the consumers and it is with this object that section 3 of the act lies down as follows:
3. Act not in derogation of the provisions of any other law: – the provisions of this act shall be in addition to and not in derogation of the provisions of any other law for the time being in force. "
The national commission overruled the objection in the view of repudiation of contract of insurance by the corporation; the redressal agencies under the act can not entertain the claim of the insured and reiterated the law laid down by it in the Divisional Manager, Life insurance Corporation of India, Andhra Pradesh v. Shri Bhavnam Srinivas Reddy.

– Removal of insured goods on attachment no theft.
It was ruled in the stated case that attachment of certain items of insured Machinery and goods by the bailiff of a civil court, though later found to be illegal and consequent removal did not amount to theft and or house breaking by force so as to entitle the insured to prefer a claim under the policy.

– When repudiation amounts to deficiency and when it does not?
The national has held:
In M / s Rajdeep Leasing and Finance and others v. New India Assurance Company Limited and others –
That rejection of the claim by the insurance company after examining and considering the two separate survey reports from qualified surveyors and three legal opinions from different oriental counsels could not be said to constitute a deficiency in service so as to give a rise in the cause of action for a complaint under the consumer protection act.
In Oriental Insurance Co. Ltd. V Modern Industries Ltd. , The national commission has held that where the cover note inter alia mentions that the risk is subject to the usual terms and conditions of the standard policy, it is equally the responsibility of the complainant to call for these terms and conditions even if they are not sent by the insurance company, as alleged, to understand the extent of risk covered under the policy and associated aspects.

In Life Insurance Corporation of India v. Dr. Sampooran Singh
The complainant had taken out an insurance policy of 40,000 rupees in 1982, for the purpose of payment of estate duty on his only residential house in chandigarh in the event of his death and paid 5 premia, but with the abolition of estate duty on one residential house owner in 1985, the policy became inoperative due to the act of the state and not due to any deficiency on the part of the corporation any dispute between the parties as to the amount payable there under can not be construed as deficiency in service on part of the corporation.

In LIC of India v M / s Kanchan Murlidhar Akkalwar
The complainant applied to the opposite party for housing loan, and on the advice of the latter, she took two LIC policies, one for Rs. 90000 and the other for Rs. 20000 entered into an agreement for the purchase of the house with the house with the owner on the advice of the opposite party obtained a fire policy for Rs. 2 lakhs. The opposite party advised the complainant to obtain a release deed from the zilla parishad co operative society in respect of the she proposed to purchase with a certificate that the said plot is not mortgaged therein. The complainant got a certificate from the Maharashtra government that the vendor had re paid the housing loan and interest thereon due to Zilla Parishad Krishi Karmachari Sehakari Gribe Narman Sanstha and that there was nothing outstanding from him towards loan amount or interest. Still the opposite party did not release the loan. On these facts the national commission by its majority judgement observed that:
"We have carefully gone through the records and heard the counsel. Clause 1 (c) of the loan offer letter clearly states that the advance of the loan is subject to the property being free from encumbrances to the satisfaction of the insurance company and a good and marketable title. at the same time it appears that the respondent-complainant had to go through a number of steps, although necessary, having financial implications and causing mental and physical stress to her and at the end of all of which she was told that no dues certificate given by the maharashtra government in respect of the prospective seller of the property in question, was not "release of mortgage" certificate that was obtained. The respondent complainant perhaps also had in her mind the case of Mr. Vaishempayam who got the loan under similar circumstances. Thus the evasion petition is disposed of as above. "

CONCLUSION
This project topic is increasingly beneficial in the modern times with the consumer protection rights being redressed with due care. It is being advertised in the mass media in our country. The slogan which our consumer is using is: "JAGO GRAHAK JAGO". The time has come to realize the ideal market situation in which the buyers are not persuaded or coerced falsely into buying items which are of no use to them at all. Besides the relationship between buyer and seller should not be damaged at any cost. The relationship between the buyer and seller is said to be a fiduciary relationship and the trust between them should remain intact. A time has come in which the customer should get his proper position in the market conditions. He has to have proper knowledge about what is going on in the market and the concerned prices and the supply and the different other practices referred to.
Insurance is a very sensitive issue in the modern times. People are being hoodwinked into signing up in companies which are turning out to be frauds in the true sense of the term. This project has been an eye opener to me and I have come to realize the importance of the consumer protection act and insurance.

Blue Sky Auto Finance – Are They Reputable?

Many people are looking into auto financing with poor credit and are wondering about Blue Sky auto finance. While there are many ways to get scammed on this type of car loan, there is not any evidence that the Blue Sky company is a scam. There are some easy ways to find out if a company is trying to scam you. One way is to search online and read others' reviews of the company. The Better Business Bureau is an excellent resource to help determine the quality of a company. It's also a good idea to read all the information the company gives you before financing your vehicle to make sure you understand everything.

Searching online for Blue Sky auto finance does not turn up any sites at all that indicate this company is a scam. In fact, one can only find information on their services. It does not appear that anyone has had any complaints with them. You can also search for reviews on the company name to find out what other people think about it. It is a good idea to do some research before getting into a bad credit auto loan because this will help you to get the best financing available to you.

A quick search on the Better Business Bureau website indicates there is no Blue Sky auto finance. In fact, the company has received an A rating with the Better Business Bureau. There is only one complaint listed for them in the past 3 years. The complaint involves advertising. It was closed by the Better Business Bureau when they determined the complaint could not be resolved satisfactorily using standard methods of voluntary dispute resolution. The lack of complaints is a good indicator the company is using good business practices. They have been a member of the Better Business Bureau since 2004.

Now that you have sufficient evidence that indicates there is not any Blue Sky auto finance concerns to be worried about, you may wish to consider financing your car loan with them. As with any company, it is still important to be sure to read over the paperwork you're given and make sure you understand the entire loan process. Find out how often your credit might be run, how long the loan might take to process, and any other information about the procedure that you are unsure about. Next, be sure to understand the loan terms and conditions. Double check the interest rate you're offered and make sure you can afford the payments. Shop around if you like to get a good comparison of what other companies might offer you.

When purchasing a vehicle with poor credit, you must be sure to do all of your homework. It is very easy to have a company take advantage of you if you do not understand the loan process. Doing some background investigation on the lender is a great way to avoid being scammed. Do a search on customer reviews, check the Better Business Bureau, and make sure you understand the loan process to get the best loan available. Follow the steps above for Blue Sky auto finance for any company you may be considering.

Revenue-Based Financing for Technology Companies With No Hard Assets

WHAT IS REVENUE-BASED FINANCING?

Revenue-based financing (RBF), also known as royalty-based financing, is a unique form of financing provided by RBF investors to small- to mid-sized businesses in exchange for an agreed-upon percentage of a business' gross revenues.

The capital provider receives monthly payments until his invested capital is repaid, along with a multiple of that invested capital.

Investment funds that provide this unique form of financing are known as RBF funds.

TERMINOLOGY

– The monthly payments are referred to as royalty payments.

– The percentage of revenue paid by the business to the capital provider is referred to as the royalty rate.

– The multiple of invested capital that is paid by the business to the capital provider is referred to as a cap.

CASE STUDY

Most RBF capital providers seek a 20% to 25% return on their investment.

Let's use a very simple example: If a business receives $ 1M from an RBF capital provider, the business is expected to repay $ 200,000 to $ 250,000 per year to the capital provider. That amounts to about $ 17,000 to $ 21,000 paid per month by the business to the investor.

As such, the capital provider expects to receive the invested capital back within 4 to 5 years.

WHAT IS THE ROYALTY RATE?

Each capital provider determines its own expected royalty rate. In our simple example above, we can work backwards to determine the rate.

Let's assume that the business $ produces 5M in gross revenues per year. As indicated above, they $ received 1M from the capital provider. They are paying $ 200,000 back to the investor each year.

The royalty rate in this example is $ 200,000 / $ 5M = 4%

VARIABLE ROYALTY RATE

The royalty payments are proportional to the top line of the business. Everything else being equal, the higher the revenues that the business generates, the higher the monthly royalty payments the business makes to the capital provider.

Traditional debt consists of fixed payments. Therefore, the RBF scenario seems unfair. In a way, the business owners are being punished for their hard work and success in growing the business.

In order to remedy this problem, most royalty financing agreements incorporate a variable royalty rate schedule. In this way, the higher the revenues, the lower the royalty rate applied.

The exact sliding scale schedule is negotiated between the parties involved and clearly outlined in the term sheet and contract.

HOW DOES A BUSINESS EXIT THE REVENUE-BASED FINANCING ARRANGEMENT?

Every business, especially technology businesses, that grow very quickly will eventually outgrow their need for this form of financing.

As the business balance sheet and income statement become stronger, the business will move up the financing ladder and attract the attention of more traditional financing solution providers. The business may become eligible for traditional debt at cheaper interest rates.

As such, every revenue-based financing agreement outlines how a business can buy-down or buy-out the capital provider.

Buy-Down Option:

The business owner always has an option to buy down a portion of the royalty agreement. The specific terms for a buy-down option vary for each transaction.

Generally, the capital provider expects to receive a certain specific percentage (or multiple) of its invested capital before the buy-down option can be exercised by the business owner.

The business owner can exercise the option by making a single payment or multiple lump-sum payments to the capital provider. The payment buys down a certain percentage of the royalty agreement. The invested capital and monthly royalty payments will then be reduced by a proportional percentage.

Buy-Out Option:

In some cases, the business may decide it wants to buy out and extinguish the entire royalty financing agreement.

This often occurs when the business is being sold and the acquirer chooses not to continue the financing arrangement. Or when the business has become strong enough to access cheaper sources of financing and wants to restructure itself financially.

In this scenario, the business has the option to buy out the entire royalty agreement for a predetermined multiple of the aggregate invested capital. This multiple is commonly referred to as a cap. The specific terms for a buy-out option vary for each transaction.

USE OF FUNDS

There are generally no restrictions on how RBF capital can be used by a business. Unlike in a traditional debt arrangement, there are little to no restrictive debt covenants on how the business can use the funds.

The capital provider allows the business managers to use the funds as they see fit to grow the business.

Acquisition financing:

Many technology businesses use RBF funds to acquire other businesses in order to ramp up their growth. RBF capital providers encourage this form of growth because it increases the revenues that their royalty rate can be applied to.

As the business grows by acquisition, the RBF fund receives higher royalty payments and therefore benefits from the growth. As such, RBF funding can be a great source of acquisition financing for a technology company.

BENEFITS OF REVENUE-BASED FINANCING TO TECHNOLOGY COMPANIES

No assets, No personal guarantees, No traditional debt:

Technology businesses are unique in that they rarely have traditional hard assets like real estate, machinery, or equipment. Technology companies are driven by intellectual capital and intellectual property.

These intangible IP assets are difficult to value. As such, traditional lenders give them little to no value. This makes it extremely difficult for small- to mid-sized technology companies to access traditional financing.

Revenue-based financing does not require a business to collateralize the financing with any assets. No personal guarantees are required of the business owners. In a traditional bank loan, the bank often requires personal guarantees from the owners, and pursues the owners' personal assets in the event of a default.

RBF capital provider's interests are aligned with the business owner:

Technology businesses can scale up faster than traditional businesses. As such, revenues can ramp up quickly, which enables the business to pay down the royalty quickly. On the other hand, a poor product brought to market can destroy the business revenues just as quickly.

A traditional creditor such as a bank receives fixed debt payments from a business debtor regardless of whether the business grows or shrinks. During lean times, the business makes the exact same debt payments to the bank.

An RBF capital provider's interests are aligned with the business owner. If the business revenues decrease, the RBF capital provider receives less money. If the business revenues increase, the capital provider receives more money.

As such, the RBF provider wants the business revenues to grow quickly so it can share in the upside. All parties benefit from the revenue growth in the business.

High Gross Margins:

Most technology businesses generate higher gross margins than traditional businesses. These higher margins make RBF affordable for technology businesses in many different sectors.

RBF funds seek businesses with high margins that can comfortably afford the monthly royalty payments.

No equity, No board seats, No loss of control:

The capital provider shares in the success of the business but does not receive any equity in the business. As such, the cost of capital in an RBF arrangement is cheaper in financial & operational terms than a comparable equity investment.

RBF capital providers have no interest in being involved in the management of the business. The extent of their active involvement is reviewing monthly revenue reports received from the business management team in order to apply the appropriate RBF royalty rate.

A traditional equity investor expects to have a strong voice in how the business is managed. He expects a board seat and some level of control.

A traditional equity investor expects to receive a significantly higher multiple of his invested capital when the business is sold. This is because he takes higher risk as he rarely receives any financial compensation until the business is sold.

Cost of Capital:

The RBF capital provider receives payments each month. It does not need the business to be sold in order to earn a return. This means that the RBF capital provider can afford to accept lower returns. This is why it is cheaper than traditional equity.

On the other hand, RBF is riskier than traditional debt. A bank receives fixed monthly payments regardless of the financials of the business. The RBF capital provider can lose his entire investment if the company fails.

On the balance sheet, RBF sits between a bank loan and equity. As such, RBF is generally more expensive than traditional debt financing, but cheaper than traditional equity.

Funds can be received in 30 to 60 days:

Unlike traditional debt or equity investments, RBF does not require months of due diligence or complex valuations.

As such, the turnaround time between delivering a term sheet for financing to the business owner and the funds disbursed to the business can be as little as 30 to 60 days.

Businesses that need money immediately can benefit from this quick turnaround time.

Insurance Law – An Indian Perspective

INTRODUCTION

"Insurance should be bought to protect you against a calamity that would otherwise be financially devastating."

In simple terms, insurance allows someone who suffers a loss or accident to be compensated for the effects of their misfortune. It lets you protect yourself against everyday risks to your health, home and financial situation.

Insurance in India started without any regulation in the Nineteenth Century. It was a typical story of a colonial epoch: few British insurance companies dominating the market serving mostly large urban centers. After the independence, it took a theatrical turn. Insurance was nationalized. First, the life insurance companies were nationalized in 1956, and then the general insurance business was nationalized in 1972. It was only in 1999 that the private insurance companies have been allowed back into the business of insurance with a maximum of 26% of foreign holding .

"The insurance industry is enormous and can be quite intimidating. Insurance is being sold for almost anything and everything you can imagine. Determining what's right for you can be a very daunting task."

Concepts of insurance have been extended beyond the coverage of tangible asset. Now the risk of losses due to sudden changes in currency exchange rates, political disturbance, negligence and liability for the damages can also be covered.

But if a person thoughtfully invests in insurance for his property prior to any unexpected contingency then he will be suitably compensated for his loss as soon as the extent of damage is ascertained.

The entry of the State Bank of India with its proposal of bank assurance brings a new dynamics in the game. The collective experience of the other countries in Asia has already deregulated their markets and has allowed foreign companies to participate. If the experience of the other countries is any guide, the dominance of the Life Insurance Corporation and the General Insurance Corporation is not going to disappear any time soon.
The aim of all insurance is to compensate the owner against loss arising from a variety of risks, which he anticipates, to his life, property and business. Insurance is mainly of two types: life insurance and general insurance. General insurance means Fire, Marine and Miscellaneous insurance which includes insurance against burglary or theft, fidelity guarantee, insurance for employer's liability, and insurance of motor vehicles, livestock and crops.

LIFE INSURANCE IN INDIA

"Life insurance is the heartfelt love letter ever written.

It calms down the crying of a hungry baby at night. It relieves the heart of a bereaved widow.

It is the comforting whisper in the dark silent hours of the night. "

Life insurance made its debut in India well over 100 years ago. Its salient features are not as widely understood in our country as they ought to be. There is no statutory definition of life insurance, but it has been defined as a contract of insurance whereby the insured agrees to pay certain sums called premiums, at specified time, and in consideration thereof the insurer agreed to pay certain sums of money on certain condition sand in specified way upon happening of a particular event contingent upon the duration of human life.

Life insurance is superior to other forms of savings!

"There is no death. Life Insurance exalts life and defeats death.

It is the premium we pay for the freedom of living after death. "

Savings through life insurance guarantee full protection against risk of death of the saver. In life insurance, on death, the full sum assured is payable (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable.

The essential features of life insurance are a) it is a contract relating to human life, which b) provides for payment of lump-sum amount, and c) the amount is paid after the expiry of certain period or on the death of the assured . The very purpose and object of the assured in taking policies from life insurance companies is to safeguard the interest of his dependents viz., Wife and children as the case may be, in the even of premature death of the assured as a result of the happening in any contingency. A life insurance policy is also generally accepted as security for even a commercial loan.

NON-LIFE INSURANCE

"Every asset has a value and the business of general insurance is related to the protection of economic value of assets."

Non-life insurance means insurance other than life insurance such as fire, marine, accident, medical, motor vehicle and household insurance. Assets would have been created through the efforts of owner, which can be in the form of building, vehicles, machinery and other tangible properties. Since tangible property has a physical shape and consistency, it is subject to many risks ranging from fire, allied perils to theft and robbery.
Few of the General Insurance policies are:

Property Insurance: The home is most valued possession. The policy is designed to cover the various risks under a single policy. It provides protection for property and interest of the insured and family.

Health Insurance: It provides cover, which takes care of medical expenses following hospitalization from sudden illness or accident.
Personal Accident Insurance: This insurance policy provides compensation for loss of life or injury (partial or permanent) caused by an accident. This includes reimbursement of cost of treatment and the use of hospital facilities for the treatment.

Travel Insurance: The policy covers the insured against various eventualities while traveling abroad. It covers the insured against personal accident, medical expenses and repatriation, loss of checked baggage, passport etc.

Liability Insurance: This policy indemnifies the Directors or Officers or other professionals against loss arising from claims made against them by reason of any wrongful Act in their Official capacity.

Motor Insurance: Motor Vehicles Act states that every motor vehicle plying on the road has to be insured, with at least Liability only policy. There are two types of policy one covering the act of liability, while other covers insurers all liability and damage caused to one's vehicles.

JOURNEY FROM AN INFANT TO ADOLESCENCE!

Historical Perspective

The history of life insurance in India dates back to 1818 when it was conceived as a means to provide for English Widows. Interestingly in those days a higher premium was charged for Indian lives than the non-Indian lives as Indian lives were considered more risky for coverage.

The Bombay Mutual Life Insurance Society started its business in 1870. It was the first company to charge same premium for both Indian and non-Indian lives. The Oriental Assurance Company was established in 1880. The General insurance business in India, on the other hand, can trace its roots to the Triton (Tital) Insurance Company Limited, the first general insurance company established in the year 1850 in Calcutta by the British . Till the end of nineteenth century insurance business was almost entirely in the hands of overseas companies.

Insurance regulation formally began in India with the passing of the Life Insurance Companies Act of 1912 and the Provident Fund Act of 1912. Several frauds during 20's and 30's desecrated insurance business in India. By 1938 there were 176 insurance companies. The first comprehensive legislation was introduced with the Insurance Act of 1938 that provided strict State Control over insurance business. The insurance business grew at a faster pace after independence. Indian companies strengthened their hold on this business but despite the growth that was witnessed, insurance remained an urban phenomenon.

The Government of India in 1956, brought together over 240 private life insurers and provident societies under one nationalized monopoly corporation and Life Insurance Corporation (LIC) was born. Nationalization was justified on the grounds that it would create much needed funds for rapid industrialization. This was in conformity with the Government's chosen path of State lead planning and development.

The (non-life) insurance business continued to prosper with the private sector till 1972. Their operations were restricted to organized trade and industry in large cities. The general insurance industry was nationalized in 1972. With this, nearly 107 insurers were amalgamated and grouped into four companies – National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. These were subsidiaries of the General Insurance Company (GIC).

The life insurance industry was nationalized under the Life Insurance Corporation (LIC) Act of India. In some ways, the LIC has become very flourishing. Regardless of being a monopoly, it has some 60-70 million policyholders. Given that the Indian middle-class is around 250-300 million, the LIC has managed to capture some 30 odd percent of it. Around 48% of the customers of the LIC are from rural and semi-urban areas. This probably would not have happened had the charter of the LIC not specifically set out the goal of serving the rural areas. A high saving rate in India is one of the exogenous factors that have helped the LIC to grow rapidly in recent years. Despite the saving rate being high in India (compared with other countries with a similar level of development), Indians display high degree of risk aversion. Thus, nearly half of the investments are in physical assets (like property and gold). Around twenty three percent are in (low yielding but safe) bank deposits. In addition, some 1.3 percent of the GDP are in life insurance related savings vehicles. This figure has doubled between 1985 and 1995.

A World viewpoint – Life Insurance in India

In many countries, insurance has been a form of savings. In many developed countries, a significant fraction of domestic saving is in the form of donation insurance plans. This is not surprising. The prominence of some developing countries is more surprising. For example, South Africa features at the number two spot. India is nestled between Chile and Italy. This is even more surprising given the levels of economic development in Chile and Italy. Thus, we can conclude that there is an insurance culture in India despite a low per capita income. This promises well for future growth. Specifically, when the income level improves, insurance (especially life) is likely to grow rapidly.

INSURANCE SECTOR REFORM:

Committee Reports: One Known, One Anonymous!

Although Indian markets were privatized and opened up to foreign companies in a number of sectors in 1991, insurance remained out of bounds on both counts. The government wanted to proceed with caution. With pressure from the opposition, the government (at the time, dominated by the Congress Party) decided to set up a committee headed by Mr. RN Malhotra (the then Governor of the Reserve Bank of India).

Malhotra Committee

Liberalization of the Indian insurance market was suggested in a report released in 1994 by the Malhotra Committee, indicating that the market should be opened to private-sector competition, and eventually, foreign private-sector competition. It also investigated the level of satisfaction of the customers of the LIC. Inquisitively, the level of customer satisfaction seemed to be high.

In 1993, Malhotra Committee – headed by former Finance Secretary and RBI Governor Mr. RN Malhotra – was formed to evaluate the Indian insurance industry and recommend its future course. The Malhotra committee was set up with the aim of complementing the reforms initiated in the financial sector. The reforms were aimed at creating a more efficient and competitive financial system suitable for the needs of the economy keeping in mind the structural changes presently happening and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms. In 1994, the committee submitted the report and some of the key recommendations included:

o Structure

Government bet in the insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate.
Competition

Private Companies with a minimum paid up capital of Rs.1 billion should be allowed to enter the sector. No Company should deal in both Life and General Insurance through a single entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state.

o Regulatory Body

The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance – a part of the Finance Ministry- should be made Independent.

o Investments

Compulsory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company (there current holdings to be brought down to this level over a period of time).

o Customer Service

LIC should pay interest on delays in payments beyond 30 days. Insurance companies must be encouraged to set up unit linked pension plans. Computerization of operations and updating of technology to be carried out in the insurance industry. The committee accentuated that in order to improve the customer services and increase the coverage of insurance policies, industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new competitors could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores.

The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body – The Insurance Regulatory and Development Authority.

Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has meticulously stuck to its schedule of framing regulations and registering the private sector insurance companies.

Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. The other decision taken at the same time to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA online service for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products.

The Government of India liberalized the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. Under the current guidelines, there is a 26 percent equity lid for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent.

The opening up of the sector is likely to lead to greater spread and deepening of insurance in India and this may also include restructuring and revitalizing of the public sector companies. In the private sector 12 life insurance and 8 general insurance companies have been registered. A host of private Insurance companies operating in both life and non-life segments have started selling their insurance policies since 2001

Mukherjee Committee

Immediately after the publication of the Malhotra Committee Report, a new committee, Mukherjee Committee was set up to make concrete plans for the requirements of the newly formed insurance companies. Recommendations of the Mukherjee Committee were never disclosed to the public. But, from the information that filtered out it became clear that the committee recommended the inclusion of certain ratios in insurance company balance sheets to ensure transparency in accounting. But the Finance Minister objected to it and it was argued by him, probably on the advice of some of the potential competitors, that it could affect the prospects of a developing insurance company.

LAW COMMISSION OF INDIA ON REVISION OF THE INSURANCE ACT 1938 – 190th Law Commission Report

The Law Commission on 16th June 2003 released a Consultation Paper on the Revision of the Insurance Act, 1938. The previous exercise to amend the Insurance Act, 1938 was undertaken in 1999 at the time of enactment of the Insurance Regulatory Development Authority Act, 1999 ( IRDA Act).

The Commission undertook the present exercise in the context of the changed policy that has permitted private insurance companies both in the life and non-life sectors. A need has been felt to toughen the regulatory mechanism even while streamlining the existing legislation with a view to removing portions that have become superfluous as a consequence of the recent changes.

Among the major areas of changes, the Consultation paper suggested the following:

a. merging of the provisions of the IRDA Act with the Insurance Act to avoid multiplicity of legislations;

b. deletion of redundant and transitory provisions in the Insurance Act, 1938;

c. Amendments reflect the changed policy of permitting private insurance companies and strengthening the regulatory mechanism;

d. Providing for stringent norms regarding maintenance of 'solvency margin' and investments by both public sector and private sector insurance companies;

e. Providing for a full-fledged grievance redressal mechanism that includes:

o The constitution of Grievance Redressal Authorities (GRAs) comprising one judicial and two technical members to deal with complaints / claims of policyholders against insurers (the GRAs are expected to replace the present system of insurer appointed Ombudsman);

o Appointment of adjudicating officers by the IRDA to determine and levy penalties on defaulting insurers, insurance intermediaries and insurance agents;

o Providing for an appeal against the decisions of the IRDA, GRAs and adjudicating officers to an Insurance Appellate Tribunal (IAT) comprising a judge (sitting or retired) of the Supreme Court / Chief Justice of a High Court as presiding officer and two other members having sufficient experience in insurance matters;

o Providing for a statutory appeal to the Supreme Court against the decisions of the IAT.

LIFE & NON-LIFE INSURANCE – Development and Growth!

The year 2006 turned out to be a momentous year for the insurance sector as regulator the Insurance Regulatory Development Authority Act, laid the foundation for free pricing general insurance from 2007, while many companies announced plans to attack into the sector.

Both domestic and foreign players robustly pursued their long-pending demand for increasing the FDI limit from 26 per cent to 49 per cent and toward the fag end of the year, the Government sent the Comprehensive Insurance Bill to Group of Ministers for consideration amid strong reservation from Left parties. The Bill is likely to be taken up in the Budget session of Parliament.

The infiltration rates of health and other non-life insurances in India are well below the international level. These facts indicate immense growth potential of the insurance sector. The hike in FDI limit to 49 per cent was proposed by the Government last year. This has not been operationalized as legislative changes are required for such hike. Since opening up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion have tipped into the Indian market and 21 private companies have been granted licenses.

The involvement of the private insurers in various industry segments has increased on account of both their capturing a part of the business which was earlier underwritten by the public sector insurers and also creating additional business boulevards. To this effect, the public sector insurers have been unable to draw upon their inherent strengths to capture additional premium. Of the growth in premium in 2004-05, 66.27 per cent has been captured by the private insurers despite having 20 per cent market share.

The life insurance industry recorded a premium income of Rs.82854.80 crore during the financial year 2004-05 as against Rs.66653.75 crore in the previous financial year, recording a growth of 24.31 per cent. The contribution of first year premium, single premium and renewal premium to the total premium was Rs.15881.33 crore (19.16 per cent); Rs.10336.30 crore (12.47 per cent); and Rs.56637.16 crore (68.36 per cent), respectively. In the year 2000-01, when the industry was opened up to the private players, the life insurance premium was Rs.34,898.48 crore which constituted of Rs. 6996.95 crore of first year premium, Rs. 25191.07 crore of renewal premium and Rs. 2740.45 crore of single premium. Post opening up, single premium had declined from Rs.9, 194.07 crore in the year 2001-02 to Rs.5674.14 crore in 2002-03 with the withdrawal of the guaranteed return policies. Though it went up marginally in 2003-04 to Rs.5936.50 crore (4.62 per cent growth) 2004-05, however, witnessed a significant shift with the single premium income rising to Rs. 10336.30 crore showing 74.11 per cent growth over 2003-04.

The size of life insurance market increased on the strength of growth in the economy and concomitant increase in per capita income. This resulted in a favourable growth in total premium both for LIC (18.25 per cent) and to the new insurers (147.65 per cent) in 2004-05. The higher growth for the new insurers is to be viewed in the context of a low base in 2003- 04. However, the new insurers have improved their market share from 4.68 in 2003-04 to 9.33 in 2004-05.

The segment wise break up of fire, marine and miscellaneous segments in case of the public sector insurers was Rs.2411.38 crore, Rs.982.99 crore and Rs.10578.59 crore, ie, a growth of (-) 1.43 per cent, 1.81 per cent and 6.58 per cent. The public sector insurers reported growth in Motor and Health segments (9 and 24 per cent). These segments accounted for 45 and 10 per cent of the business underwritten by the public sector insurers. Fire and "Others" accounted for 17.26 and 11 per cent of the premium underwritten. Aviation, Liability, "Others" and Fire recorded negative growth of 29, 21, 3.58 and 1.43 per cent. In no other country that opened at the same time as India have foreign companies been able to grab a 22 per cent market share in the life segment and about 20 per cent in the general insurance segment. The share of foreign insurers in other competing Asian markets is not more than 5 to 10 per cent.

The life insurance sector grew new premium at a rate not seen before while the general insurance sector grew at a faster rate. Two new players entered into life insurance – Shriram Life and Bharti Axa Life – taking the total number of life players to 16. There was one new entrant to the non-life sector in the form of a standalone health insurance company – Star Health and Allied Insurance, taking the non-life players to 14.

A large number of companies, mostly nationalized banks (about 14) such as Bank of India and Punjab National Bank, have announced plans to enter the insurance sector and some of them have also formed joint ventures.

The proposed change in FDI cap is part of the comprehensive amendments to insurance laws – The Insurance Act of 1999, LIC Act, 1956 and IRDA Act, 1999. After the proposed amendments in the insurance laws LIC would be able to maintain reserves while insurance companies would be able to raise resources other than equity.

About 14 banks are in queue to enter insurance sector and the year 2006 saw several joint venture announcements while others scout partners. Bank of India has teamed up with Union Bank and Japanese insurance major Dai-ichi Mutual Life while PNB tied up with Vijaya Bank and Principal for foraying into life insurance. Allahabad Bank, Karnataka Bank, Indian Overseas Bank, Dabur Investment Corporation and Sompo Japan Insurance Inc have tied up for forming a non-life insurance company while Bank of Maharashtra has tied up with Shriram Group and South Africa's Sanlam group for non-life insurance venture .

CONCLUSION

It seems cynical that the LIC and the GIC will wither and die within the next decade or two. The IRDA has taken "at a snail's pace" approach. It has been very cautious in granting licenses. It has set up fairly strict standards for all aspects of the insurance business (with the probable exception of the disclosure requirements). The regulators always walk a fine line. Too many regulations kill the motivation of the newcomers; too relaxed regulations may induce failure and fraud that led to nationalization in the first place. India is not unique among the developing countries where the insurance business has been opened up to foreign competitors.

The insurance business is at a critical stage in India. Over the next couple of decades we are likely to witness high growth in the insurance sector for two reasons namely; financial deregulation always speeds up the development of the insurance sector and growth in per capita GDP also helps the insurance business to grow.

China's Renminbi – Our Currency, Your Problem

Introduction of Case Study:

This case introduces the basics of monetary economics and demonstrating practical applications of monetary policies and exchange rates that pertain to business decisions. Supporting this case study will be a discussion on the exchange rate policy that China has adopted preceding and following 1978, a year in which significant economic liberation took place. Events within the past couple of years that took place in China concerning their exchange rate regime were deemed highly controversial by members of China's trade partners. The first objective of this essay is to trace the history of this discord surrounding China's currency, the Renminbi (RMB), which translates literally into English as "the people's currency". Next, questions from the case will be discussed. Lastly, the case will be made up-to-date with a brief excerpt concerning the current state of affairs surrounding this issue.

Background on Case:

In 2006, many countries that conducted trade with China made strong allegations against China's exchange rate policy. The major complaint was that China's currency was undervalued due to China's manipulation of exchange rates to suppress the prices of its exports. Among other damages, these countries have claimed that this action has cost them thousands of jobs. The US, which had a $ 233 billion trade deficit with China in that year, threatened to impose tariffs on Chinese imports if China did not revalue its currency. Japan and newly industrialized economies, such as Taiwan and Singapore, were less vocal, as they have been trying to strengthen their economic ties with China. Developing Asian countries, however, supported a revaluation in order for them to be better equipped to compete with China. One collective group that stayed relatively mute on the lively debates that ensued in the media between 2005 and 2007 were multinational companies. These companies benefited from low operating costs in China, which, for them, meant cheaper land and more competitively priced China-made exports.

China's exchange rate was deemed to be out of synch with market forces, with several reasons to support this conclusion. First, China's economy experienced 9% annual growth over the past decade. According to the Balassa-Samuelson hypothesis, rapid economic growth is accompanied by real exchange rate appreciation because of differential productivity growth between tradable and non-tradable sectors. Secondly, China has become the world's third-largest exporter with at least $ 970 billion in 2006. China's exports have experienced approximately 30% growth in recent years. Lastly, there has been a compilation of $ 1.2 trillion in foreign currency reserves. These build-ups are claimed to be the result of manipulation of the RMB against natural forces of the market.

Chinese officials strongly oppose the idea of ​​a revaluation of their currency on several grounds, the strongest of which is probably that they are a country that is highly reliant on trade and growth of their exports is vital. Secondly, over two hundred million rural dwellers have left their farms to find work in urban centers. Higher economic growth is necessary to absorbing these workers into a functional economy. Apart from the economic reasons against changing the exchange rate policy, officials in China turn to several counterarguments. First, the RMB, according to them, is not really undervalued and China's economic growth has nothing to do with manipulation of the currency. Secondly, the US is running a large trade and budget deficit, which is partially attributable to capital inflows from China, and should look to the weakness in their economy before pointing fingers elsewhere. Also, China is a sovereign country with a right to choose its own exchange rate policy. Lastly, Chinese officials brought up the little known fact that despite its large trade surplus with the US and Europe, it also has large deficits with others, especially Asian countries.

As mentioned in the introduction, China began liberalizing its country in 1978. Prior to then, it followed central planning and was reliant on economic self-sufficiency. China's foreign trade was negligible and there were hardly any foreign companies doing business in China. The RMB, at that time, was pegged to a basket of currencies and an exchange rate was set at an unrealistically high level. The currency was virtually non-convertible. After 1978, China followed an "open door policy" and special economic zones were opened to foreign investments. A tiny private sector emerged. The RMB was devalued in 1981, 1985 and 1993 to the US dollar in order to promote Chinese exports. The RMB was revalued by 5% in 1995, which held until July 2005.

The squabbles started in July 2005 when China reformed its exchange rate regime. The RMB was revalued by 2.1% to the dollar. The peg to the dollar was replaced by a peg to a basket of currencies with an allowed fluctuation of a 0.3% band against the dollar each day. This basket was dominated by the US dollar, euro and yen. The currencies of baskets and weights were selected on the basis of trade volume conducted with China's partners, the sources of foreign direct investment ( "FDI") and the composition of China's debt. In May 2007, the Chinese central bank announced a widening of the RMB's daily fluctuation against the dollar to 0.5%. This followed an appreciation of their currency by 7.2% against the dollar.

Chinese officials site several alternatives that could be taken in place of a revaluation of their currency. The first suggestion is to reform the banking sector, where up to 40% of loans are underperforming and nine out of ten banks are state-owned. Secondly, they have proposed a "go abroad" policy, encouraging Chinese companies to invest abroad and thus stimulating outward FDI. Lastly, Chinese officials have suggested imposing a voluntary export tax. Unlike with a revaluation, a tax would not affect the value of foreign currencies. Furthermore, the Chinese government would receive much needed tax revenues.

Analysis and Discussion of Case Issues:

Now this essay will discuss responses to questions from the case itself. The first two questions from the case are concerned with how much further China should let its currency appreciate and to determine whether or it is not undervalued as of the time of writing this piece. First, China should never have let the currency fall this far. It has an abundant source of cheap and skilled labor, with a generally high educational attainment level, and does not need to manipulate their currency in order to benefit from strong exports. Yet, this is precisely the action Chinese officials took. This should be immediately corrected before more trading partners are forced to suffer. Regarding the second question, it is clear from the evidence that the currency was undervalued. Given the high level of FDI entering China and its significant trade surplus, the RMB should have appreciated relative to this basket of goods, especially given that the US dollar and Euro have both weakened lately.

The next questions are concerned with the consequence of a revaluation on China and its trade partners and whether any profound reform should be gradual or not. Also, the case study asks about how a floating RMB would impact the exchange rate. In simple terms, a revaluation would benefit most trade partners and come at a significant cost to China. Trading partners, including the US and the Euro Zone will benefit by not losing thousands of workers to the Chinese markets, as had been the case when domestic companies relocated to China under favorable economic considerations. Developing Asian countries will be better able to compete with Chinese exports if a revaluation takes place. Multinational corporations will not favor such a move, as maintaining the status quo allows them to continue benefiting from the low operating costs in China. China would lose in the sense that its economy would likely slow. One could argue, however, that this will happen anyways, given the current state of affairs in the global economy. Current business and political journals and magazines have pointed to the fact that Europe is now in a recession and that the US is not far behind. The credit crunch has not left China unaffected-its economic growth is expected to reduce to only approximately 8% in 2009 according to analysts at the Economists and the Financial Times.

As mentioned before, China is heavily reliant on trade and growth of its exports is vital. A revaluation will eat into its competitive position. This will also likely have a negative impact on their labor market, as fewer jobs may be available in the cities for those leaving the rural communities and entering the urban areas.

To answer the second question, the revaluation should be gradual in order to give the market forces a chance to react intelligently to the change properly and for affected constituents to adjust their business practices accordingly. In response to the final question, a floating of the RMB would cause it to strengthen relative to the other basket of exchange rates because it is currently undervalued due to market manipulation on behalf of Chinese officials.

The last two questions refer to different exchange rates and ask which one is most appropriate for China. There are six major exchange rate regimes. The first is an exchange arrangement with no separate legal tender regime. In this regime, the currency of another country circulates as the sole legal tender, or the member belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. Adopting this regime implies the complete surrender of the monetary authorities' independent control over domestic monetary policy. The second regime is called the currency board arrangements. This is a monetary regime based on an explicit, legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. Some flexibility may be allowed, depending on how strict the banking rules of the currency board arrangements are. The third regime is the other conventional fixed peg arrangement.

Countries that adopt this regime peg its currency at a fixed rate to another currency or a basket of currencies. The basket is formed from the currencies of major trading or financial partners, and weights reflect the geographical distribution of trade, services or capital flows. There is a limited degree of monetary policy discretion, depending on the bandwidth.

China has adopted the fourth exchange rate regime into its monetary policy, which is known as the crawling peg. The currency is maintained within a bandwidth around a central rate, which is adjusted periodically at a fixed pace or in response to changes in selective quantitative indicators. Maintaining the exchange rate within the band imposes constraints on monetary policy with the degree of policy independence being a function of the bandwidth.

The fifth regime is the managed floating with no predetermined path for the exchange rate. The monetary authority attempts to influence the exchange rate without having a specific exchange rate path or target. Lastly, there is the independently floating regime, which has been adopted by the US The exchange rate is market-determined, with any official foreign exchange market intervention aimed at moderating the rate of change and preventing under fluctuations in the exchange rate, rather than at establishing a level for it. This is the regime that the Chinese government should follow because it is market-determined and not open to manipulation, while maintaining flexibility regarding monetary policy.

Third Party Opinions on Case Issues:

This last section will discuss the current situation regarding this debate. According to the latest news articles from such sources as Bloomberg, the Wall Street Journal and the Financial Times, the Chinese economy has experienced weakening exports because of the US housing slump and the international credit squeeze. China's GDP growth is expected to slump, too. The Chinese government has options to stimulate the economy and protect exporters. Reports claim that officials at China's central bank plan on slowing the appreciation of the RMB. Indeed, this is a decision that should have been made a long time ago and would be a major breakthrough in the ongoing debate, which may actually reach a conclusion given the state of affairs in the global economy.

According to Professor Pan Yingli of Shanghai Jiao Tong University, the RMB was undervalued since the 1997 Asian crisis and such a foreign exchange policy has been used to finance exports and imports sectors at the cost of non-trading industries. Basically, the crawling peg regime adopted by China allows it to manipulate exchange rates in its own favor in order for it to sell more products abroad, as exports are the lifeblood of China's economy.

The Asian financial crisis involves four basic problems or issues: (1) a shortage of foreign exchange that has caused the value of currencies and equities in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically, (2) inadequately developed financial sectors and mechanisms for allocating capital in the troubled Asian economies, (3) effects of the crisis on both the United States and the world, and (4) the role, operations, and replenishment of funds of the International Monetary Fund.

Concluding Remarks:

In conclusion, this case showed how trading partners could be both positively and negatively influenced by the economic decisions by one or more of the players. It is important for countries to realize that we live in an interconnected, increasingly global environment in which important decisions are not made in isolation. In fact, China's decision to pursue exchange rate reform has, for better or worse, greatly impacted billions of people throughout both the developed and developing world.

How To Improve Your Import Finance Tactics

All businesses rely on their cash funds to operate. Although most businesses typically depend on a steady cash flow to sustain their venture, unfortunately, importing companies usually do not enjoy such liberties. This is mainly because import companies have long cash flow cycles.

Businesses in the import industry will therefore need to have and use the right financing strategies in place so that their venture will not go under. In addition, owners of import businesses should not be complacent with the financing strategies they have; they should find ways to improve them.

Below are some tips for businesses on improving their finance strategies:

Be mindful and keep track of all relevant rules and regulations of import. To effectively import finance strategies, owners of importing businesses need to be aware of the regulations and rules set by the different countries for import. Being knowledgeable of all applicable rules and regulations of import finance strategies is important to keep things fast. In addition, knowing the key shipping details and rules is crucial because this helps increase understanding of the whole business.

Select the most suitable payment method. Choosing the right payment method is another important step business owners need to improve their import finance strategies. The most common payment methods import business owners can choose from include Letters of Credit or LOC, bills of exchange arrangement, and open account. According to finance experts, these options are considered the best in the import and export industry since they make transactions easier. If you are still in the process of selecting your payment method, make sure that you know the transaction fees and hidden charges before making your final decision.

Choose a good and reliable financial institution to work with. Selecting a trustworthy financing partner is also crucial in improving your finance strategies. Although there are numerous of these institutions today, not all these establishments can fit your business needs. Take the time to do sufficient research on these institutions and check their services so that you can make a choice that can promise the best returns.

Have contingencies in place. Finally, make sure you have substitutes. Various financing institutions offer solutions that can help secure the interests of both the sellers and buyers. However, a few issues may arise that can have a long-lasting impact on your company's import finance strategies. Because of this, it is important to search for substitutes. For instance, if you choose to pay for your order beforehand, do this only for low value shipments. With long-term business partners, consider opening an account with them. This strategy can help you to be secure and have a more profitable business.

What Are the Pros and Cons in Trading Forex Options?

More and more traders are choosing to trade forex options. This is because they manage to weigh the pros and cons and they find that the former far outweighs the latter. Currency options is an agreement or a contract between the option buyer and the seller that gives the buyer the right, with no underlying obligation, to buy or sell an option. It is the buyer that dictates the strike price and the expiry date of it. If the expiration date comes, the buyer may choose to exercise his option and buy the currency or he may opt to just let the option expire worthless. All he needs to pay for is the premium.

Given this definition, forex option trading indeed poses many advantages over some of the financial instruments used in various exchanges. Some of the said advantages are the limited risk involve in this transaction, the unlimited potential for earnings, the low up-front cash requirement, the flexibility feature provided to the trader, the possibility to use the option as a hedge over other positions to limit risk and the provision of many choices for SPOT options.

Just as there are pros, there are also a few cons in currency option trading. The premium assigned to it may vary according to the option's date and strike price making the reward as well as the risk ratio also vary. Once the trader purchases a SPOT option, he may not change his mind to sell it. Predicting the scenario for a good time and date for the option may not be an easy task. Lastly, this is sometimes taken as going against the odds. Other than these, nothing bad can be said about currency option transactions.

A Complete Guide For Restaurant Real Estate Investments

Restaurants are a favorite commercial property for many investors because:

  1. Tenants often sign a very long term, eg 20 years absolute triple net (NNN) leases. This means, besides the rent, tenants also pay for property taxes, insurance and all maintenance expenses. The only thing the investor has to pay is the mortgage, which in turn offers very predictable cash flow. There are either no or few landlord responsibilities because the tenant is responsible for maintenance. This allows the investor more time to do important thing in life, eg retire. All you do is take the rent check to the bank. This is one of the key benefits in investing in a restaurant or single-tenant property.
  2. Whether rich or poor, people need to eat. Americans are eating out more often as they are too busy to cook and cleanup the pots & pans afterwards which often is the worst part! According to the National Restaurant Association, the nation's restaurant industry currently involves 937,000 restaurants and is expected to reach $ 537 billion in sales in 2007, compared to just $ 322 billion in 1997 and $ 200 billion in 1987 (in current dollars). In 2006, for every dollar Americans spend on foods, 48 ​​cents were spent in restaurants. As long as there is civilization on earth, there will be restaurants and the investor will feel comfortable that the property is always in high demand.
  3. You know your tenants will take very good care of your property because it's in their best interest to do so. Few customers, if any, want to go to a restaurant that has a filthy bathroom and / or trash in the parking lot.

However, restaurants are not created equal, from an investment viewpoint.

Franchised versus Independent

One often hears that 9 out of 10 new restaurants will fail in the first year; however, this is just an urban myth as there are no conclusive studies on this. There is only a study by Associate Professor of Hospitality, Dr. HG Parsa of Ohio State University who tracked new restaurants located in the city Columbus, Ohio during the period from 1996 to 1999 (Note: you should not draw the conclusion that the results are the same everywhere else in the US or during any other time periods .) Dr. Parsa observed that seafood restaurants were the safest ventures and that Mexican restaurants experience the highest rate of failure in Columbus, OH. His study also found 26% of new restaurants closed in the first year in Columbus, OH during 1996 to 1999. Besides economic failure, the reasons for restaurants closing include divorce, poor health, and unwillingness to commit immense time toward operation of the business. Based on this study, it may be safe to predict that the longer the restaurant has been in business, the more likely it will be operating the following year so that the landlord will continue to receive the rent.

For franchised restaurants, a franchisee has to have a certain minimal amount of non-borrowed cash / capital, eg $ 300,000 for McDonald's, to qualify. The franchisee has to pay a one-time franchisee fee about $ 30,000 to $ 50,000. In addition, the franchisee has contribute royalty and advertising fees equal to about 4% and 3% of sales revenue, respectively. In turn, the franchisee receives training on how to set up and operate a proven and successful business without worrying about the marketing part. As a result, a franchised restaurant gets customers as soon as the open sign is put up. Should the franchisee fail to run the business at the location, the franchise may replace the current franchisee with a new one. The king of franchised hamburger restaurants is the fast-food chain McDonald's with over 32000 locations in 118 countries (about 14,000 in the US) as of 2010. It has $ 34.2B in sales in 2011 with an average of $ 2.4M in revenue per US location . McDonald's currently captures over 50% market share of the $ 64 billion US hamburger restaurant market. Its sales are up 26% in the last 5 years. Distant behind is Wendy's (average sales of $ 1.5M) $ 8.5B with in sales and 5904 stores. Burger King ranks third (average sales of $ 1.2M) with $ 8.4B in sale, 7264 stores and 13% of the hamburger restaurant market share (among all restaurant chains, Subway is ranked number two with $ 11.4B in sales, 23,850 stores, and Starbucks number 3 with $ 9.8B in sales and 11,158 stores). McDonald's success apparently is not the result of how delicious its Big Mac tastes but something else more complex. Per a survey of 28,000 online subscribers of Consumer Report magazine, McDonald's hamburgers rank last among 18 national and regional fast food chains. It received a score of 5.6 on a scale of 1 to 10 with 10 being the best, behind Jack In the Box (6.3), Burger King (6.3), Wendy's (6.6), Sonic Drive In (6.6), Carl's Jr (6.9 ), Back Yard Burgers (7.6), Five Guys Burgers (7.9), and In-N-Out Burgers (7.9).

Fast-food chains tend to detect new trends faster. For example, they are open as early as 5AM as Americans are increasingly buying their breakfasts earlier. They are also selling more cafe; a latte; fruit smoothies to compete with Starbucks and Jumba Juice. You also see more salads on the menu. This gives customers more reasons to stop by at fast-food restaurants and make them more appealing to different customers.

With independent restaurants, it often takes a while to for customers to come around and try the food. These establishments are especially tough in the first 12 months of opening, especially with owners of minimal or no proven track record. So in general, "mom and pop" restaurants are risky investment due to initial weak revenue. If you choose to invest in a non-brand name restaurant, make sure the return is proportional to the risks that you will be taking.

Sometimes it is not easy for you to tell if a restaurant is a brand name or non-brand name. Some restaurant chains only operate, or are popular in a certain region. For example, WhatABurger restaurant chain with over 700 locations in 10 states is a very popular fast-food restaurant chain in Texas and Georgia. However, it is still unknown on the West Coast as of 2012. Brand name chains tend to have a website listing all the locations plus other information. So if you can find a restaurant website from Google or Yahoo you can quickly discern if an unfamiliar name is a brand name or not. You can also obtain basic consumer information about almost any chain restaurants in the US on Wikipedia.

The Ten Fastest-Growing Chains in 2011 with Sales Over $ 200 Million
According to Technomic, the following is the 10 fastest growing restaurant chains in terms of revenue change from 2010 to 2011:

  1. Five Guys Burgers and Fries with $ 921M in sales and 32.8% change.
  2. Chipotle Mexican Grill with $ 2.261B in sales and 23.4% change.
  3. Jimmy John's Gourmet Sandwich Shop with $ 895M in sales and 21.8% change.
  4. Yard House with $ 262M in sales and 21.5% change.
  5. Firehouse Subs with $ 285M in sales and 21.1% change.
  6. BJ's Restaurant & Brewhouse with $ 621M in sales and 20.9% change.
  7. Buffalo Wild Wings Grill & Bar with $ 2.045B in sales and 20.1% change.
  8. Raising Cane's Chicken Fingers with $ 206M in sales and 18.2% change.
  9. Noodles & Company with $ 300M in sales and 14.9% change from.
  10. Wingstop with $ 382M in sales and 22.1% change.

Lease & Rent Guaranty

The tenants often sign a long term absolute triple net (NNN) lease. This means, besides the base rent, they also pay for all operating expenses: property taxes, insurance and maintenance expenses. For investors, the risk of maintenance expenses uncertainty is eliminated and their cash flow is predictable. The tenants may also guarantee the rent with their own or corporate assets. Therefore, in case they have to close down the business, they will continue paying rent for the life of the lease. Below are a few things that you need to know about the lease guaranty:

  1. In general, the stronger the guaranty the lower the return of your investment. The guaranty by McDonald's Corporation with a strong "A" S & P corporate rating of a public company is much better than a small corporation owned by a franchisee with a few restaurants. Consequently, a restaurant with a McDonald's corporate lease normally offers low 4.5-5% cap (return of investment in the 1 st year of ownership) while McDonald's with a franchisee guaranty (over 75% of McDonalds restaurants are owned by franchisees) may offer 5 -6% cap. So figure out the amount of risks you are willing to take as you will not get both low risks and high returns in an investment.
  2. Sometimes a multi-location franchise will form a parent company to own all the restaurants. Each restaurant in turn is owned by a single-entity Limited Liabilities Company (LLC) to shield the parent company from liabilities. So the rent guaranty by the single-entity LLC does not mean much since it does not have much assets.
  3. A good, long guaranty does not make a lemon a good car. Similarly, a strong guaranty does not make a lousy restaurant a good investment. It only means the tenant will make every effort to pay you the rent. So do not judge a property primarily on the guaranty.
  4. The guaranty is good until the corporation that guarantees it declares bankruptcy. At that time, the corporation reorganizes its operations by closing locations with low revenue and keeping the good locations, (ie ones with strong sales). So it's more critical for you to choose a property at a good location. If it happens to have a weak guaranty, (eg from a small, private company), you will get double benefits: on time rent payment and high return.
  5. If you happen to invest in a "mom & pop" restaurant, make sure all the principals, eg both mom and pop, guarantee the lease with their assets. The guaranty should be reviewed by an attorney to make sure you are well protected.

Location, Location, Location

A lousy restaurant may do well at a good location while those with a good menu may fail at a bad location. A good location will generate strong revenue for the operator and is primarily important to you as an investor. You should have these characteristics:

  1. High traffic volume: this will draw more customers to the restaurant and as a result high revenue. So a restaurant at the entrance to a regional mall or Disney World, a major shopping mall, or colleges is always desirable.
  2. Good visibility & signage: high traffic volume must be accompanied by good visibility from the street. This will minimize advertising expenses and is a constant reminder for diners to come in.
  3. Ease of ingress and egress: a restaurant located on a one-way service road running parallel to a freeway will get a lot of traffic and has great visibility but is not at a great location. It's hard for potential customers to get back if they miss the entrance. In addition, it's not possible to make a left turn. On the other hand, the restaurant just off freeway exit is more convenient for customers.
  4. Excellent demographics: a restaurant should do well in an area with a large, growing population and high incomes as it has more people with money to spend. Its business should generate more and more income to pay for increasing higher rents.
  5. Lots of parking spaces: most chained restaurants have their own parking lot to accommodate customers at peak hours. If customer can not find a parking space within a few minutes, there is a good chance they will skip it and / or will not come back as often. A typical fast food restaurant will need about 10 to 20 parking spaces per 1000 square feet of space. Fast food restaurants, eg McDonald's will need more parking spaces than sit down restaurants, eg Olive Garden.
  6. High sales revenue: the annual gross revenue alone does not tell you much since larger – in term of square footage – restaurant tends to have higher revenue. So the rent to revenue ratio is a better gauge of success. Please refer to rent to revenue ratio in the due diligence section for further discussion.
  7. High barriers to entry: this simply means that it's not easy to replicate this location nearby for various reasons: the area simply does not have any more developable land, or the master plan does not allow any more construction of commercial properties, or it's more expensive to build a similar property due to high cost of land and construction materials. For these reasons, the tenant is likely to renew the lease if the business is profitable.

Financing Considerations

In general, the interest rate is a bit higher than average for restaurants due to the fact that they are single-tenant properties. To the lenders, there is a perceived risk because if the restaurant is closed down, you could potentially lose 100% of your income from that restaurant. Lenders also prefer national brand name restaurants. In addition, some lenders will not loan to out-of-state investors especially if the restaurants are located in smaller cities. So it may be a good idea for you to invest in a franchised restaurant in major metro areas, eg Atlanta, Dallas. In 2009 it's quite a challenge to get financing for sit-down restaurant acquisitions, especially for mom and pop and regional restaurants due to the tight credit market. However, things seem to have improved a bit in 2010. If you want to get the best rate and terms for the loan, you should stick to national franchised restaurants in major metros.

When the cap rate is higher than the interest rate of the loan, eg cap rate is 7.5% while interest rate is 6.5%, then you should consider borrowing as much as possible. You will get 7.5% return on your down payment plus 1% return for the money you borrow. Hence your total return (cash on cash) will be higher than the cap rate. Additionally, since the inflation in the near future is expected to be higher due to rising costs of fuel, the money which you borrow to finance your purchase will be worth less. So it's even more beneficial to maximize leverage now.

Due Diligence Investigation

You may want to consider these factors before deciding to go forward with the purchase:

  1. Tenant's financial information: The restaurant business is labor intensive. The average employee generates only about $ 55,000 in revenue annually. The cost of goods, eg foods and supplies should be around 30-35% of revenue; labor and operating expenses 45-50%; rent about 7-12%. So do review the profits and loss (P & L) statements, if available, with your accountant. In the P & L statement, you may see the acronym EBITDAR. It stands for E arnings B efore I ncome T axes, D epreciation (of equipment), A mortization (of capital improvement), and R ent. If you do not see royalty fees in P & L of a franchised restaurant or advertising expenses in the P & L of an independent restaurant, you may want to understand the reason why. Of course, we will want to make sure that the restaurant is profitable after paying the rent. Ideally, you would like to see net profits equal to 10-20% of the gross revenue. In the last few years the economy has taken a beating. As a result, restaurants have experienced a decrease in gross revenue of around 3-4%. This seems to have impacted most, if not all, restaurants everywhere. In addition, it may take a new restaurant several years to reach potential revenue target. So do not expect new locations to be profitable right away even for chained restaurants.
  2. Tenant's credit history: if the tenant is a private corporation, you may be able to obtain the tenant's credit history from Dun & Bradstreet (D & B). D & B provides Paydex score, the business equivalent of FICO, ie personal credit history score. This score ranges from 1 to 100, with higher scores indicating better payment performance. A Paydex score of 75 is equivalent to FICO score of 700. So if your tenant has a Paydex score of 80, you are likely to receive the rent checks promptly.
  3. Rent to revenue ratio: this is the ratio of base rent over the annual gross sales of the store. It is a quick way to determine if the restaurant is profitable, ie the lower the ratio, the better the location. As a rule of thumb you will want to keep this ratio less than 10% which indicates that the location has strong revenue. If the ratio is less than 7%, the operator will very likely make a lot of money after paying the rent. The rent guaranty is probably not important in this case. However, the rent to revenue ratio is not a precise way to determine if the tenant is making a profit or not. It does not take into account the property taxes expense as part of the rent. Property taxes – computed as a percentage of assessed value – vary from states to states. For example, in California it's about 1.25% of the assessed value, 3% in Texas, and as high as 10% in Illinois. And so a restaurant with rent to income ratio of 8% could be profitable in one state and yet be losing money in another.
  4. Parking spaces: restaurants tend to need a higher number of parking spaces because most diners tend to stop by within a small time window. You will need at least 8 parking spaces per 1000 Square Feet (SF) of restaurant space. Fast food restaurants may need about 15 to 18 spaces per 1000 SF.
  5. Termination Clause: some of the long term leases give the tenant an option to terminate the lease should there be a fire destroying a certain percentage of the property. Of course, this is not desirable to you if that percentage is too low, eg 10%. So make sure you read the lease. You also want to make sure the insurance policy also covers rental income loss for 12-24 months in case the property is damaged by fire or natural disasters.
  6. Price per SF: you should pay about $ 200 to $ 500 per SF. In California you have to pay a premium, eg $ 1000 per SF for Starbucks restaurants which are normally sold at very high price per SF. If you pay more than $ 500 per SF for the restaurant, make sure you have justification for doing so.
  7. Rent per SF: ideally you should invest in a property in which the rent per SF is low, eg $ 2 to $ 3 per SF per month. This gives you room to raise the rent in the future. Besides, the low rent ensures the tenant's business is profitable, so he will be around to keep paying the rent. Starbucks tend to pay a premium rent $ 2 to 4 per SF monthly since they are often located at a premium location with lots of traffic and high visibility. If you plan to invest in a restaurant in which the tenant pays more than $ 4 per SF monthly, make sure you could justify your decision because it's hard to make a profit in the restaurant business when the tenant is paying higher rent. Some restaurants may have a percentage clause. This means besides the minimum base rent, the operator also pays you a percentage of his revenue when it reaches a certain threshold.
  8. Rent increase: A restaurant landlord will normally receive either a 2% annual rent increase or a 10% increase every 5 years. As an investor you should prefer 2% annual rent increase because 5 years is a long time to wait for a raise. You will also receive more rent with 2% annual increase than 10% increase every 5 years. Besides, as the rent increases every year so does the value of your investment. The value of restaurant is often based on the rent it generates. If the rent is increased while the market cap remains the same, your investment will appreciate in value. So there is no key advantage for investing in a restaurant in a certain area, eg California. It's more important to choose a restaurant at a great location.
  9. Lease term: in general investors favor long term, eg 20 year lease so they do not have to worry about finding new tenants. During a period with low inflation, eg 1% to 2%, this is fine. However, when the inflation is high, eg 4%, this means you will technically get less rent if the rent increase is only 2%. So do not rule out properties with a few years left of the lease as there may be strong upside potential. When the lease expires without options, the tenant may have to pay much higher market rent.
  10. Risks versus Investment Returns: as an investor , you like properties that offer very high return, eg 8% to 9% cap rate. And so you may be attracted to a brand new franchised restaurant offered for sale by a developer. In this case, the developer builds the restaurants completely with Furniture, Fixtures and Equipment (FFEs) for the franchisee based on the franchise specifications. The franchisee signs a 20 years absolute NNN lease paying very generous rent per SF, eg $ 4 to $ 5 per SF monthly. The new franchisee is willing to do so because he does not need to come up with any cash to open a business. Investors are excited about the high return; however, this may be a very risky investment. The one who is guaranteed to make money is the developer. The franchisee may not be willing to hold on during tough times as he does not have any equity in the property. Should the franchisee's business fails, you may not be able to find a tenant willing to pay such high rent, and you may end up with a vacant restaurant.
  11. Track records of the operator: the restaurant being run by an operator with 1 or 2 recently-open restaurants will probably be a riskier investment. On the other hand, an operator with 20 years in the business and 30 locations may be more likely to be around next year to pay you the rent.
  12. Trade fixtures: some restaurants are sold with trade fixtures so make sure you document in writing what is included in the sale.
  13. Fast-food versus Sit-down: while fast-food restaurants, eg McDonalds do well during the downturn, sit-down family restaurants tend to be more sensitive to the recession due to higher prices and high expenses. These restaurants may experience double-digit drop in year-to-year revenue. As a result, many sit-down restaurants were shut down during the recession. If you consider investing in a sit-down restaurant, you should choose one in an area with high income and large population.

Sale & Lease Back

Sometimes the restaurant operator may sell the real estate part and then lease back the property for a long time, eg 20 years. A typical investor would wonder if the operator is in financial trouble so that he has to sell the property to pay for his debts. It may or may not be the case; however, this is a quick and easy way for the restaurant operator to get cash out of the equities for good reason: business expansion. Of course, the operator could refinance the property with cash out but that may not be the best option because:

  1. He can not maximize the cash out as lenders often lend only 65% ​​of the property value in a refinance situation.
  2. The loan will show as long term debt in the balance sheet which is often not viewed in a positive light.
  3. The interest rates may not be as favorable if the restaurant operator does not have a strong balance sheet.
  4. He may not be able to find any lenders due to the tight credit market.

You will often see 2 different cash out strategies when you look at the rent paid by the restaurant operator:

  1. Conservative market rent: the operator wants to make sure he pays a low rent so his restaurant business has a good chance of being profitable. He also offers conservative cap rate to investors, eg 7% cap. As a result, his cash out amount is small to moderate. This may be a low risk investment for an investor because the tenant is more likely to be able to afford the rent.
  2. Significantly higher than market rent: the operator wants to maximize his cash out by pricing the property much higher than its market value, eg $ 2M for a $ 1M property. Investors are sometimes offered high cap rate, eg 10%. The operator may pay $ 5 of rent per square foot in an area where the rent for comparable properties is $ 3 per square foot. As a result, the restaurant business at this location may suffer a loss due to higher rents. However, the operator gets as much money as possible. This property could be very risky for you. If the tenant's business does not make it and he declares bankruptcy, you will have to offer lower rent to another tenant to lease your building.

Ground Lease

Occasionally you see a restaurant on ground lease for sale. The term ground lease may be confusing as it could mean

  1. You buy the building and lease the land owned by another investor on a long-term, eg 50 years, ground lease.
  2. You buy the land in which the tenant owns the building. This is the most likely scenario. The tenant builds the restaurant with its own money and then typically signs a 20 years NNN lease to lease the lot. If the tenant does not renew the lease then the building is reverted to the landowner. The cap rate is often 1% lower, eg 6 to 7.25 percent, compared to restaurants in which you buy both land and building.

Since the tenant has to invest a substantial amount of money (whether its own or borrowed funds) for the construction of the building, it has to be double sure that this is the right location for its business. In addition, should the tenant fail to make the rent payment or fail to renew the lease, the building with substantial value will revert to you as the landowner. So the tenant will lose a lot more, both business and building, if it does not fulfill its obligation. And thus it thinks twice about not sending in the rent checks. In that sense, this is a bit safer investment than a restaurant which you own both the land and improvements. Besides the lower cap rate, the major drawbacks for ground lease are

  1. There are no tax write-offs as the IRS does not allow you to depreciate its land value. So your tax liabilities are higher. The tenants, on the other hand, can depreciate 100% the value of the buildings and equipments to offset the profits from the business.
  2. If the property is damaged by fire or natural disasters, eg tornados, some leases may allow the tenants to collect insurance proceeds and terminate the lease without rebuilding the properties in the last few years of the lease. Unfortunately, this author is not aware of any insurance companies that would sell fire insurance to you since you do not own the building. So the risk is substantial as you may end up owning a very expensive vacant lot with no income and a huge property taxes bill.
  3. Some of the leases allow the tenants not having to make any structure, eg roof, repairs in the last few years of the lease. This may require investors to spend money on deferred maintenance expenses and thus will have negative impact on the cash flow of the property.

Building a Kingdom – Case Study of Kingdom Financial Holdings Limited

This article presents a case study of sustained entrepreneurial growth of Kingdom Financial Holdings. It is one of the entrepreneurial banks which survived the financial crisis that started in Zimbabwe in 2003. The bank was established in 1994 by four entrepreneurial young bankers. It has grown substantially over the years. The case examines the origins, growth and expansion of the bank. It concludes by summarizing lessons or principles that can be derived from this case that maybe applicable to entrepreneurs.

Profile of an Entrepreneur: Nigel Chanakira

Nigel Chanakira was raised in the Highfield suburb of Harare in an entrepreneurial family. His father and uncle operated a public transport company Modern Express and later diversified into retail shops. Nigel's father later exited the family business. He bought out one of the shops and expanded it. During school holidays young Nigel, as the first born, would work in the shops. His parents, particularly his mother, insisted that he acquire an education first.

On completion of high school, Nigel failed to enter dental or medical school, which were his first passions. In fact his grades could only qualify him for the Bachelor of Arts degree programme at the University of Zimbabwe. However, he "sweet-talked his way into a transfer" to the Bachelor in Economics degree programme. Academically he worked hard, exploiting his strong competitive character that was developed during his sporting days. Nigel rigorously applied himself to his academic pursuits and passed his studies with excellent grades, which opened the door to employment as an economist with the Reserve Bank of Zimbabwe (RBZ).

During his stint with the Reserve Bank, his economic mindset indicated to him that wealth creation was happening in the banking sector therefore he determined to understand banking and financial markets. While employed at RBZ, he read for a Master's degree in Financial Economics and Financial Markets as preparation for his debut into banking. At the Reserve Bank under Dr Moyana, he was part of the research team that put together the policy framework for the liberalization of the financial services within the Economic Structural Adjustment Programme. Being at the right place at the right time, he became aware of the opportunities which were opening up. Nigel exploited his position to identify the most profitable banking institution to work for as preparation for his future. He headed to Bard Discount House and worked for five years under Charles Gurney.

A short while later the two black executives at Bard, Nick Vingirayi and Gibson Muringai, left to form Intermarket Discount House. Their departure inspired the young Nigel. If these two could establish a banking institution of their own so could he, given time. The departure also created an opportunity for him to rise to fill the vacancy. This gave the aspiring banker critical managerial experience. Subsequently he became a director for Bard Investment Services where he gained critical experience in portfolio management, client relationships and dealing within the dealing department. While there he met Franky Kufa, a young dealer who was making waves, who would later become a key co-entrepreneur with him.

Despite his professional business engagement his father enrolled Nigel in the Barclays Bank "Start Your Own Business" Programme. However what really made an impact on the young entrepreneur was the Empretec Entrepreneur Training programme (May 1994), to which he was introduced by Mrs Tsitsi Masiyiwa. The course demonstrated that he had the requisite entrepreneurial competences.

Nigel talked Charles Gurney into an attempted management buy-out of Bard from Anglo -American. This failed and the increasingly frustrated aspiring entrepreneur considered employment opportunities with Nick Vingirai's Intermarket and Never Mhlanga's National Discount House which was on the verge of being formed – hoping to join as a shareholder since he was acquainted with the promoters. He was denied this opportunity.

Being frustrated at Bard and having been denied entry into the club by pioneers, he resigned in October 1994 with the encouragement of Mrs Masiyiwa to pursue his entrepreneurial dream.

The Dream

Inspired by the messages of his pastor, Rev. Tom Deuschle, and frustrated at his inability to participate in the church's massive building project, Nigel sought a way of generating huge financial resources. During a time of prayer he claims that he had a divine encounter where he obtained a mandate from God to start Kingdom Bank. He visited his pastor and told him of this encounter and the subsequent desire to start a bank. The godly pastor was amazed at the 26 year old with "big spectacles and wearing tennis shoes" who wanted to start a bank. The pastor prayed before counselling the young man. Having been convinced of the genuineness of Nigel's dream, the pastor did something unusual. He asked him to give a testimony to the congregation of how God was leading him to start a bank. Though timid, the young man complied. That experience was a powerful vote of confidence from the godly pastor. It demonstrates the power of mentors to build a protégé.

Nigel teamed up with young Franky Kufa. Nigel Chanakira left Bard at the position of Chief Economist. They would build their own entrepreneurial venture. Their idea was to identify players who had specific competences and would each be able to generate financial resources from his activity. Their vision was to create a one – stop financial institution offering a discount house, an asset management company and a merchant bank. Nigel used his Empretec model to develop a business plan for their venture. They headhunted Solomon Mugavazi, a stockbroker from Edwards and Company and BR Purohit, a corporate banker from Stanbic. Kufa would provide money market expertise while Nigel provided income from government bond dealings as well as overall supervision of the team.

Each of the budding partners brought in an equal portion of the Z $ 120,000 as start-up capital. Nigel talked to his wife and they sold their recently acquired Eastlea home and vehicles to raise the equivalent of US $ 17,000 as their initial capital. Nigel, his wife and three kids headed back to Highfield to live in with his parents. The partners established Garmony Investments which started trading as an unregistered financial institution. The entrepreneurs agreed not to draw a salary in their first year of operations as a bootstrapping strategy.

Mugavazi introduced and recommended Lysias Sibanda, a chartered accountant, to join the team. Nigel was initially reluctant as each person had to bring in an earning capacity and it was not clear how an accountant would generate revenue at start up in a financial institution. Nigel initially retained a 26% share which assured him a blocking vote as well as giving him the position of controlling shareholder.

Nigel credits the Success Motivation Institute (SMI) course "The Dynamics of Successful Management" as the lethal weapon that enabled him to acquire managerial competences. Initially he insisted that all his key executives undertake this training programme.

Birth of the Kingdom

Kingdom Securities P / L commenced operations in November 1994 as a wholly owned subsidiary of Garmony Investments (Pvt) Ltd. It traded as a broker on both money and stock markets.

On 24th February 1995 Kingdom Securities Holding was born with the following subsidiaries: Kingdom Securities Ltd, Kingdom Stockbrokers (Pvt) Ltd and Kingdom Asset Managers (Pvt) Ltd. The flagship Kingdom Securities Ltd was registered as a Discount House under Banking Act Chapter 188 on 25th July 1995. Kingdom Stockbrokers was registered with the Zimbabwe Stock Exchange under ZSE Chapter 195 on 1st August 1995. The pre-licensing trading had generated good revenue but they still had a 20% deficit of the required capital. Most institutional investors turned them down as they were a greenfield company promoted by people perceived to be "too young". At this stage National Merchant Bank, Intermarket and others were on the market raising equity and these were run by seasoned and mature promoters. However Rachel Kupara, then MD for Zimnat, believed in the young entrepreneurs and took up the first equity portion for Zimnat at 5%.

Norman Sachikonye, ​​then Financial Director and Investments Manager at First Mutual followed suit, taking up an equity share of 15%. These two institutional investors were inducted as shareholders of Kingdom Securities Holdings on 1st August 1995. Garmony Investments ceased operations and reversed itself into Kingdom Securities on 31st July 1995, thereby becoming an 80% shareholder.

The first year of operations was marked by intense competition as well as discrimination against new financial institutions by public organisations. All the other operating units performed well except for the corporate finance department with Kingdom Securities, led by Purohit. This monetary loss, differing spiritual and ethical values ​​led to the forced departure of Purohit as an executive director and shareholder on 31st December 1995. From then the Kingdom started to grow exponentially.

Structural Growth

Nigel and his team pursued an aggressive growth strategy with the intention of increasing market share, profitability, and geographic spread while developing a strong brand. The growth strategy was built around a business philosophy of simplifying financial services and making them easily accessible to the general public. An IT strategy that created a low cost delivery channel exploiting ATMs and POS while providing a platform that was ready for Internet and web-based applications, was espoused.

On 1st April 1997, Kingdom Financial Services was licensed as an accepting house focusing on trading and distributing foreign currency, treasury activities, corporate finance, investment banking and advisory services. It was formed under the leadership of Victor Chando with the intention of becoming the merchant banking arm of the Group. In 1998, Kingdom Merchant Bank (KMB) was licensed and it took over the assets and liabilities of Kingdom Securities Limited. Its main focus was treasury related products, off-balance sheet finance, foreign currency and trade finance. Kingdom Research Institute was established as a support service to the other units.

The entrepreneurial bankers, cognisant of their limitations, sought to achieve critical mass quickly by actively seeking capital injection from equity investors. The aim was to broaden ownership while lending strategic support in areas of mutual interest. An attempt at equity uptake from Global Emerging Markets from London failed. However in 1997 the efforts of the bankers were rewarded when the following organisations took up some equity, reducing the shareholding of executive directors as shown below: ïEUR Ipcorn 0.7%, ïEUR Zambezi Fund Mauritius P / L 1.1%, ïEUR Zambezi Fund P / L 0.7%. ïEUR Kingdom Employee Share Trust 5%, ïEUR Southern Africa Enterprise Development Fund – 8% redeemable preference shares amounting to US $ 1,5m as the first investee company in Southern Africa from the US Fund initiated by US President Bill Clinton, ïEUR Weiland Investments, a company belonging to Mr Richard Muirimi, a long standing friend of Nigel and associate in the fund management business took up 1.7%, Garmony Investments 71.7% -executive directors. ïEUR After a rights issue Zimnat fell to 4.8% while FML went down to 14.3%.

In 1998, Kingdom launched four Unit Trusts which proved very popular with the market. Initially these products were focused at individual clients of the discount house as well as private portfolios of Kingdom Stockbroking. Aggressive marketing and awareness campaigns established the Kingdom Unit Trust as the most popular retail brand of the group. The Kingdom brand was thus born.

Acquisition of Discount Company of Zimbabwe (DCZ)

After a spurt of organic growth, the Kingdom entrepreneurs decided to hasten the growth rate synergistically. They set out to acquire the oldest discount house in the country and the world, The Discount Company of Zimbabwe, which was a listed entity. With this acquisition Kingdom would acquire critical competences as well as achieve the much coveted ZSE listing inexpensively through a reverse listing. Initial efforts at a negotiated merger with DCZ were rebuffed by its executives who could not countenance a forty year old institution being swallowed up by a four year old business. The entrepreneurs were not deterred. Nigel approached his friend Greg Brackenridge at Stanbic to finance and effect the acquisition of the sixty percent shares which were in the hands of about ten shareholders, on behalf of Kingdom Financial Holdings but to be placed in the ownership of Stanbic Nominees. This strategy masked the identity of the acquirer. Claud Chonzi, the National Social Security Authority (NSSA) GM and a friend to Lysias Sibanda (a Kingdom executive director), agreed to act as a front in the negotiations with the DCZ shareholders. NSSA is a well known institutional investor and hence these shareholders may have believed that they were dealing with an institutional investor. Once Kingdom controlled 60% of DCZ, it took over the company and reverse listed itself onto the Stock Exchange as Kingdom Financial Holdings Limited (KFHL). Because of the negative real interest rates, Kingdom successfully used debt finance to structure the acquisition. This acquisition and the subsequent listing gave the once despised young entrepreneurs confidence and credibility on the market.

Other Strategic Acquisitions

Within the same year Kingdom Merchant Bank acquired a strategic stake in CFX Bureau de Change owned by Sean Maloney as well as another stake in a greenfield microlending franchise, Pfihwa P / L. CFX was changed into KFX and used in most foreign currency trading activities. KFHL set as a strategic intention the acquisition of an additional 24.9% stake in CFX Holdings to safeguard the initial investment and ensure management control. This did not work out. Instead, Sean Maloney opted out and took over the failed Universal Merchant Bank licence to form CFX Merchant Bank. Although Kingdom executives contend that the alliance failed due to the abolition of bureau de change by government, it appears that Sean Maloney refused to give up control of the extra shareholding sought by Kingdom. It therefore would be reasonable that once Kingdom could not control KFX, a fall out ensued. The liquidation of this investment in 2002 resulted in a loss of Z $ 403 million on that investment. However this was manageable in light of the strong group profitability.

Pfihwa P / L financed the informal sector as a form of corporate social responsibility. However when the hyperinflationary environment and stringent regulatory environment encroached on the viability of the project, it was wound up in early 2004. Kingdom pursued its financing of the informal sector through MicroKing, which was established with international assistance. By 2002 MicroKing had eight branches located in the midst of, or near, micro-enterprise clusters.

In 2000, due to increased activity on the foreign currency front within the banking sector, Kingdom opened a private banking facility through the discount house to exploit revenue streams from this market. Following market trends, it engaged the insurance company AIG to enter the bancassurance market in 2003.

Meikles Strategic Alliance

In 1999 the entrepreneurial Chanakira on advice from his executives and the legendary corporate finance team from Barclays bank led by the affable Hugh Van Hoffen entered into a strategic alliance with Meikles Africa whereby it injected some Z $ 322 million into Kingdom for an equity shareholding of 25% . Interestingly, the deal nearly collapsed on pricing as Meikles only wanted to pay $ 250 million whilst KFHL valued themselves at Z $ 322 million which in real terms was the largest private sector deal done between an indigenous bank and a listed corporate. Nigel testifies that it was a walk through the incomplete Celebration Church site on the Saturday preceding the signing of the Meikles deal that led him to sign the deal which he saw as a means for him to sow a whopping seed into the church to boost the Building Fund. God was faithful! Kingdom's share price shot up dramatically from $ 2,15 at the time he made the commitment to the Pastor all the way to $ 112,00 by the following October!

In return Kingdom acquired a powerful cash-rich shareholder that allowed it entrance into retail banking through an innovative in-store banking strategy. Meikles Africa opened its retail branches, namely TM Supermarkets, Clicks, Barbours, Medix Pharmacies and Greatermans, as distribution channels for Kingdom commercial bank or as account holders providing deposits and requiring banking services. This was a cheaper way of entering retail banking. It proved useful during the 2003 cash crisis because Meikles with its massive cash resources within its business units assisted Kingdom Bank, thus cushioning it from a liquidity crisis. The alliance also raised the reputation and credibility of Kingdom Bank and created an opportunity for Kingdom to finance Meikles Africa's customers through the jointly owned Meikles Financial Services. Kingdom provided the funding for all lease and hire purchases from Meikles' subsidiaries, thus driving sales for Meikles while providing easy lending opportunities for Kingdom. Meikles managed the relationship with the client.

Meikles Africa as a strategic shareholder assured Kingdom of success when recapitalisation was required and has enhanced Kingdom's brand image. This strategic relationship has created powerful synergies for mutual benefit.

Commercial Banking

Exploiting the opportunities arising from the strategic relationship with Meikles Africa, Kingdom made its debut into retail banking in January 2001 with in-store branches at High Glen and Chitungwiza TM supermarkets. The target was principally the mass market. This rode on the strong brand Kingdom had created through the Unit Trusts. In-store banking offered low cost delivery channels with minimal investment in brick and mortar. By the end of 2001, thirteen branches were operational across the country. This followed a deliberate strategy for aggressive roll-out of the branches with two flagship branches ïEURïEUR one in Bulawayo and the other in Harare. There was a huge emphasis on an IT driven strategy with significant cross-selling between the commercial bank and other SBUs.

However, it was further discovered that there was a market for the upmarket clients and hence Crown banking outlets were established to diversify the target market. In 2004, after closing three in-store branches in a rationalization exercise, there were 16 in-store branches and 9 Crown banking outlets.

The entrance into commercial banking was probably held at the wrong time, considering the imminent changes in the banking industry. Commercial banking does provide cheap deposits, however at the price of huge staff costs and human resource management complications. Nigel concedes that, with hindsight, this could have been delayed or done at a slower pace. However, the need for increased market share in a fiercely competitive industry necessitated this. Another reason for persisting with the commercial banking project was that of prior agreements with Meikles Africa. It is possible that Meikles Africa had been sold on the equity take-up deal on the back of promises to engage in in-store banking, which would increase revenue for its subsidiaries.

Innovative Products and Services

KFHL continued its aggressive pursuit of product innovation. After the failure of the KFX project, CurrencyKing was established to continue the work. However this was abolished in November 2002 by government ministerial intervention when bureau de change were prohibited in an effort to stamp out parallel market foreign currency trading.

Sadly this governmental decision was misguided for not only did it fail to banish foreign currency parallel trading but it drove underground, made it more lucrative and subsequently the government lost all control of the management of the exchange rate.

In October 2002, KFHL established Kingdom Leasing after being granted a finance house licence. Its mandate was to exploit opportunities to trade in financial leases, lease hire and short term financial products.

Regional Expansion

Around 2000 it became evident that the domestic market was highly competitive, with limited prospects of future growth. A decision was made to diversify revenue streams and reduce country risk through penetration into the regional markets. This strategy would exploit the proven competences in securities trading, asset management and corporate advisory services from a small capital base. Therefore the entrance had low risk in terms of capital injection. Considering the foreign exchange control limitations and shortage of foreign currency in Zimbabwe, this was a prudent strategy but not without its downside, as will be seen in the Botswana venture.

In 2001, KFHL acquired a 25.1% stake in a greenfield banking enterprise in Malawi, First Discount House Ltd. To safeguard its investment and ensure managerial control, an executive director and dealer were seconded to the Malawi venture while Nigel Chanakira chaired the Board. This investment has continued to grow and yield positive returns. As of July 2006 Kingdom had finally managed to up its stake from 25,1% to 40% in this investment and may ultimately control it to the point of seeking a conversion of the license to a commercial bank.

KFHL also took up a 25% equity stake in Investrust Merchant Bank Zambia. Franky Kufa was seconded to it as an executive director while Nigel took a seat on the Board.

KFHL had been promised an option to gain a controlling stake. However when the bank stabilized, the Zambian shareholders entered into some questionable transactions and were not prepared to allow KFHL to up it's stake and so KFHL decided to pull out as relationships turned frosty. The Zambian Central Bank intervened with a promise to grant KFHL its own banking license. This did not materialize as the Zambian Central Bank exploited the banking crisis in Zimbabwe to deny KHFL a licence. A reasonable premium of Z $ 2.5 billion was obtained at disinvestment.

In Botswana, a subsidiary called Kingdom Bank Africa Ltd (KBAL) was established as an offshore bank in the International Finance Centre. KBAL was intended to spearhead and manage regional initiatives for Kingdom. It was headed by Mrs Irene Chamney, seconded by Lysias Sibanda with the concurrence of Nigel after managerial challenges in Zimbabwe. Two other senior executives were seconded there. She successfully set up the KBAL's banking infrastructure and had good relations with the Botswana authorities.

However, the business model chosen of an offshore bank ahead of a domestic Botswana merchant bank license turned out to be the Achilles heel of the bank more so when the Zimbabwe banking crisis set in between 2003 and 2005. There were fundamental differences in how Mrs Chamney and Chanakira saw the bank surviving and going forward.

Ultimately, it was deemed prudent for Mrs. Chamney to leave the bank in 2005. In 2001 KFHL acquired the mandate as the sole distributor of the American Express card in the whole of Africa except for RSA. This was handled through KBAL. Kingdom Private Bank was transferred from the discount house to become a subsidiary of KBAL due to the prevailing regulatory environment in Zimbabwe.

In 2004 KBAL was temporarily placed under curatorship due to undercapitalisation. At this stage the parent company had regulatory constraints that prevented foreign currency capital injection.

A solution was found in the sourcing of local partners and the transfer of US $ 1 million previously realised from the proceeds of the Investrust liquidation to Botswana. Nigel Chanakira took a more active management role in KBAL because of its huge strategic significance to the future of KFHL. Currently efforts are underway to acquire a local commercial bank licence in Botswana as well. Once this is acquired there are two possible scenarios, namely maintaining both licences or giving up the offshore licence.

The interviewees were divided in their opinion on this. However in my view, judging from the stakeholder power involved, KFHL is likely to give up the off shore banking licence and use the local Kingdom Bank Botswana (Pula Bank) licence for regional and domestic expansion.

Human Resources

The staff complement grew from the initial 23 in 1995 to more than 947 by 2003. The growth was consistent with the growing institution. It exploded, especially during the launch and expansion of the commercial bank. Kingdom from inception had a strong human resourcing strategy which entailed significant training both internally and externally. Before the foreign currency crisis, employees were sent for training in such countries as RSA, Sweden, India and the USA. In the person of Faith Ntabeni Bhebhe, Kingdom had an energetic HR driver who created powerful HR systems for the emerging behemoth.

As a sign of its commitment to building the human resource capability, in 1998 Kingdom Financial Services entered a management agreement with Holland based AMSCO for the provision of seasoned bankers. Through this strategic alliance Kingdom strengthened its skills base and increased opportunities for skills transfer to locals. This helped the entrepreneurial bankers create a solid managerial system for the bank while the seasoned bankers from Holland compensated for the youthfulness of the emerging bankers. What a foresight!

In-house self-paced interactive learning, team building exercises and mentoring were all part of the learning menu targeted at developing the human resource capacity of the group. Work and job profiling was introduced to best match employees to suitable posts. Career path and succession planning were embraced. Kingdom was the first entrepreneurial bank to have smooth unforced CEO transitions. The founding CEO passed on the baton to Lysias Sibanda in 1999 as he stepped into the role of Group CEO and board deputy chair. His role was now to pursue and spearhead global and regional niche financial markets. A few years later there was another change of the guard as

Franky Kufa stepped in as Group CEO to replace Sibanda, who resigned on medical grounds. One could argue that these smooth transitions were due to the fact that the baton was passing to founding directors.

With the explosive growth in staff complement due to the commercial bank project, culture issues emerged. Consequently, KFHL engaged in an enculturation programme resulting in a culture revolution dubbed "Team Kingdom". This culture had to be reinforced due to dilutions through significant mergers and acquisitions, significant staff turnover because of increased competition, emigration to greener pastures and the age profile of the staff increased the risk of high mobility and fraudulent activities in collusion with members of the public . Culture changes are difficult to effect and their effectiveness even harder to assess.

In 2004, with a high staff turnover of around 14%, a compensation strategy that ring fenced critical skills like IT and treasury was implemented. Due to the low margins and the financial stress experienced in 2004, KFHL lost more than 341 staff members due to retrenchment, natural attrition and emigration. This was acceptable as profitability fell while staff costs soared. At this stage, staff costs accounted for 58% of all expenses.

Despite the impressive growth, the financial performance when inflation adjusted was mediocre. Actually a loss position was reported in 2004. This growth was severely compromised by the hyperinflationary conditions and the restrictive regulatory environment.

Conclusion

This article shows the determination of entrepreneurs to push through to the realisation of their dreams despite significant odds. In a subsequent article we will tackle the challenges faced by Nigel Chanakira in solidifying his investments.

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