Short and Medium Term Commercial Financing by a Lending Institution in the UAE - Assignment Example

Name: Instructor: Course: Date: Short and Medium Term Commercial Financing by A Lending Institution in UAE Executive Summary The short and medium term financing institutions in UAE play a vital role in the economic development of the country (Galal A, 75). This paper discusses the types and forms of financing, policies and procedures, methods of evaluation, success and the role of the government in the short and medium term commercial financing by a lending institution in UAE. The bank that has been select is called Doha bank which is in UAE. There variousprocedures that were used to get information about the bank. These included visiting the Doha website and text books. This paper looks into various aspects of the bank. There are various types of finances that Doha bank have. They include short term and medium term. The short term and medium term are issued in terms of cash money or cheques. The success of the bank is attributed to policies and procedures that the bank followsfinancing (Syed M, 20). They include membership of the bank and credit information of the borrowers. The performance of the bank is evaluated using various ratios which include profitability ratios, leverage ratios and efficiency ratios(Galal A, 84).These ratios are used in the analysis of the business. During the process of issuing loans, they must be secured of certain type of security. The securities include collaterals or guarantor. The loans that are given at certain interest rates and various loan terms are included which include the maturity date. The role of technology in the development of the Doha bank is also emphasized in this paper.Its customers are able to access the banking services with ease and faster, they are internet driven (Syed M, 35). The services that the bank offers can be accessed from any part of the world.The paper also discusses the role the government for the growth and development of lending institutions in UAE. The government provides conducive environment and also provides financing to these institution Doha bank included (Galal A, 84). This has provided a good ground for the growth of the Doha bank as a small and medium commercial lending institution in UAE. Introduction Small and medium term commercial financing institutions play a significant role to the economic growth of a country and the region. These institutions have become backbone of the finance in the UAE. This is because they are accessible to many people in the region. The procedures that are involved in order to secure a loan are not cumbersome. The short term loans are used to finance daily operation costs, they facilities for import activities and also suiting the needs of one’s business(Syed M, 32). The institutions embraces technology and therefore it becomes easier to the customers to be able to access the banking services with ease and from any point through the internet driven technology. This has enhanced efficiency and convenience. Doha bank is a small and medium commercial financial institution in UAE. The bank offers financial services to its customers. The bank is guided by various policies and procedures when it issues loans to its customers. It is concerned with the credit worthiness of the lender. The bank does not lend to the customer who it has or has been classified as defaulter by other banks. The bank serve various customers who include; trading companies such as supermarkets andgroceries, service companies such as healthcare,food industry and transportation business. The bank offers retail, commercial and corporate services(Syed M, 55). Doha bank has been in existence for more than thirty years and it has thirty two domestic branches. The bank has its branches in Kuwait and Dubai. It has also opened representative offices in China, Unite Kingdom, Japan, Turkey, UAE and South Korea. The study shows the role of small and medium term commercial institution to the economic development in UAE. It also depicts the types of loans that are accessible to customers, the various forms of analysis that are involved, policies and procedures of lending, the successes of lending activity by the bank, the technological impact of the business and the role of the government in development of Doha bank. Various forms of financing Financial institutions have been actively involved withthe lending of money to people. The money is used for various functions which relates to the needs of the business. The Doha bank has not been exception to this function. It has given out loans to its customers who have been able to settle business needs appropriately(Syed M, 28). There various types of loans that are given out by the bank. These types of loans can be broadly be classified as; short-term, medium term and long-term loans. The short-term and medium term loans are used to bridge the working capital gap. The working capital gap includes all the operational costs that are used when running the business. The long term and at times the medium term loans are used in acquiring assets that are essential for the running of the business. The assets include plant and machinery, building, vehicles among others. There are also various forms of financing that Doha bank uses in order to finance its customers. The most commonly form is where the borrowers are given liquid cash or cheque. The other form is that the bank issue securities. This is a form of borrowing where the bank earns an interest from what it issues to its customers(Syed M, 85). The advantage of this type of financing is that it does not require collateral. It is therefore a prudent way of financing medium term loans. Policies and Procedures The bank has various policies and procedures when they are issuing loans or debt. They are used as a guideline to ensure that the risk of defaulters is minimized. They also ensure that there is co-ordination of various activities that are involved. The year 2004 up to January 2007 one the branches of Doha Company based in USA failed to monitor,identify and report the suspicious activities that took place in the bank. This is because the branch did not do the adequate audit that wasrequired;the CEO of the bank blamed the failure to failure to implement policies and procedures that we required to be implemented. Doha bank considers its own policies and procedures when they issue debt or loans to their customers. They are more or less like other financial institutions. The policies and procedures ensure that there is smooth coordination in the banking industry. The policy includes offering the financial support to its customers in a convenient manner. The various procedures include being a member to the bank, being a person of sound mind and a person who has expressed that he or she has the capacity to repay the loan once it is advanced to him(Syed M, 38). Ratios Ratios are important when one is evaluating the performance of business. They are used when it comes to comparing one company with another. They identify inefficiency in certain aspects of an enterprise. Doha bank uses various types of ratio during its analyses; profitability ratios, efficiency ratios, liquidity ratios, leverage ratios and trend ratios. The most important type of ratio that is commonly used is the leverage ratio in determining the financing in the Doha bank(Galal A, 81). It is subdivided into leverage ratio, debt to equity ratio, debt to total assets and long term debt or capital. These leverage ratios are important as they determine the amount of financing that the bank is supposed to offer to the borrowers. A good example is the debt to asset ratio. When the ratio is high or more than one the company should not give out loans. This is because this ration shows that the debts are more than the assets that the company has. It is therefore not a prudent decision for the bank to issue more loans.The other type of ratio that Doha bank uses commonly is the profitability ratios(Syed M, 88). They are used to show whether the bank is making profits or loss. The Doha bank is a profit making institution. The activities that the bank is involved in should be those of profit maximizing. Profitability ratios are subdivided into Return on Assets, Return on Equity, Return on Sales and Gross profit Margin. These ratios show whether the bank is making any profit as it continues with its activities. Analysis The bank is also involved in various analyses which show the viability of the bank in its operations. This is done through analysis of the income statements and statements of financial position ofthecompany(Syed M, 108). The ratios are the one that are used during this analysis. The bank is also involved in analysis of its own customers so as to avoid moral hazards when they borrow money and use the money in the unintended way. Types and Nature of Securities When the bank is giving out loan to its customers, it needssurety that the money that it is issuing is secured. In the case that the borrower defaults, the loan the bank will be in a capacity to recover the money that it had issued. There are various ways in which the Doha bank implements the policy of securing the loan. The bank can secure a loan on physicalcollateral. The physical collateral includes things that are visible and they have value attached to them, they include land, cars or household goods. The loan can also be secured on the guarantor. The guarantor is a person who stand on ones behave in the event one fails to honor an agreement or loan. The Doha bank has this provision whereby the borrower can secure his loan through the guarantor. Some of the loans that the bank offers do not require any form of security in order to be offered to the borrower. They are called free loans(Syed M, 28). These loans however, are charged higher interest rates. The high interest rates are used to stand in for the higher risk of default that can come out of these loans because they are not secured. Most of the customers that borrow from Doha bank in UAE prefer the unsecured type of financing. This is because some of them they do not have physical collateral or guarantor. Others are not willing to risk their physical properties as collateral. They therefore borrow money at slightly high interest rate than it happens when a loan is secured through a guarantor or collateral. Interest Rate and Loan Terms Doha bank offers various types of loans in short term and in medium term. The various types of loans are attached to different interest rates. The way that the loan is secured also determines the interest rate that is to be charged.The loan that the bank offers is attached to various terms. The borrower is expected that after getting theloan he/she will honor the loan that has been guaranteed to him. The type of interest that a certain loan has should also be paid at the stipulated time. The terms of the loan include all the procedures and requirements that are involved before the loan is secured(Galal A, 82). Success of the Lending Facilities The bank has advanced loans to its customers and this has impacted their lives significantly. The borrowershavebeen ableto set up their own businesses and others have been able to maintain their business operational activities. The lending facilities have not only impacted the lives of the borrowers but also it have lend to the growth of the bank(Galal A, 79). The bank has earned a lot of interests through the loans that it offers to the customers. The bank has therefore been able to grow at a tremendously rate. The bank earns most of its interests from the small and medium term loans. This is because majority of the customers of the bank in UAE borrows money at a small scale and medium term capacity. Technological Improvements The banking system over the years has undergone massive transformation. This can be accredited to the technological developments that have taken place over the years. The Doha bank has not been left behind through embracing technology(Syed M, 62).The banking and loans services can be accessed from any part of the world through the internet driven banking system. The services include the loans that are available to the customers and also other banking services. The bank has also approved the eBrokerMobile. This is a mobile trading application that enhances that the investors are able to access services at an ease and also they access the latest technologies and opportunities(Galal A, 80). The new application makes the customers’ investments and trading activities become more accessible. The investors are able to note changes that happen at a very faster rate. These changes may include; changes to interest rates or emergence of new products in the market. Government The role of the government in development of the Doha bank is prevalent. The government provides a good environment in which the bank can advance loans to the people. The government through the central bank is able to regulate the interest rates(Syed M, 18).These interest rates are then transferred to the customers. The government therefore significantlydetermines the interest rates that are to be advanced to the customers. The government is able set minimum interest rates that the banks in a country should follow. The government provides incentives to the Doha bank, but indirectly. The government issues bonds that the bank sells on behave of the government (Galal A, 72). The customers are able to access this form of financing through the bank. This form of financing ischeaper to the citizens of a country. Conclusion Majority of people in UAE are members of small and medium commercialfinancialinstitutions. These institutions serve the function of issuing loans to their customers. One of these financial institutions in UAE is Doha bank. The bank gives wide range of services to its customers. These services include giving small and medium term loans. The issuance of loans is guided by various procedures and policies. The borrower is expected to meet certain conditions that are stipulated by the bank. These conditions includes the borrower to be a member of the bank,express the capacity to repay the loan trough the stipulated period agreed, clean information that he/she is not a defaulter. There are various types of loans that the Doha bank that it offers. The loans are broadly classified as short term, medium term and long term sources of financing. The classification can be used to determine the interest rate that the bank charges on the loans that it issues to its customers. Small term loans are characterized by higher interest rates than medium term and longterm interest rates. The lending by the small and medium term commercial institutions, the Doha bank, can be secured on a collateral or a guarantor .The bank applies the three possible requirements when the borrowers want to borrow loan: collateral security, guarantor or free from collateral. The loan that is unsecured on collateral is expensive than the loans on collateral or guarantor. This is because the higher interest rates cater for the risk of defaulting with no collateral or guarantor to recover from (Syed M, 2008). The advancement of small and medium loans by Doha bank to its customers has impacted to the development of businesses in UAE. The business owners access loans for workingcapital of business and also development of the business. This has also impacted to economic growth the country. Works Cited Murshed, Syed M. "Development Despite Modest Growth in the Middle East." Review of Middle East Economics and Finance.4.3 (2008). Print. Sherin, Galal A. M. "The Development of Islamic Finance: Egypt As a Case Study." Journal of Money Laundering Control. 12.1 (2009): 74-87. Print. Read More