Interest Rates Liberalization

Copyright (c) 2013 Morgan D

The financial restructuring process involves numerous stakeholders and competing interests. Managing the various agendas is difficult yet essential in achieving a viable plan. Restructuring is a complex undertaking, with comprehensive legal ramifications that must be addressed proactively in order to avoid larger problems down the road. Financial restructuring can be accomplished with a private work out or formal bankruptcy which can include liquidation or reorganization. Poorly thought-out and badly executed acquisitions and mergers, rapid technological change, corporate accounting scandals and sudden shifts in capital markets are some of the reasons many organizations of different size and makeup find themselves in financial difficulties.

In some instances, a comprehensive “turnaround” is needed, involving corporate strategy, business, management and finances. In other situations, it is principally a financial restructuring that is required. Closely with debt holders, shareholders, creditors, insurers and prospective purchasers in restructuring financially distressed organizations, offer a variety of financial services: Carrying out an early-stage analysis of the distressed enterprise, focusing on near-term cash generating potential, followed by longer-term strategic assessment. .

Employing various valuation methodologies to appraise an entire enterprise or its constituent parts in a timely and efficient fashion. Acting as financial advisor to a company undergoing reorganization, or a liquidation. Expert Testimony Acting as an expert witness, providing consultation and testimony in connection with judicial and administrative proceedings.

In 1999, after experiencing liquidity problems, only one non-bank financial institution was placed under statutory management. The year was spent striving to restructure the five banks placed under statutory management in 1998. This was done by the statutory managers assisted by committees of depositors and one of the banks was re-opened in August, 1999. In the course of year 2000, two of the other institutions were re-opened and one was placed under liquidation while one non-bank financial institution is still under statutory management. The restructuring model adopted in the case of the three banks that have been re-opened has been by capitalizing the banks through conversion of deposits to equity with depositors becoming shareholders. However, the asset side of the respective balance sheets is still weighed by the huge portfolio of non-performing loans and their ultimate survival will depend on the success of the recoveries.

However, the banks are struggling to attract new business with varying degrees of success. The restructuring of the National Bank of Kenya which had also faced liquidity problems in 1998 continued. While the main shareholders supported the bank by providing assistance in terms of long-term loans, the stability and continued solvency of the bank will be ensured only by injection of equity. Liquidation is the collection and disposal of borrowers asset , it is the determination of the firm as a going concern , it involves selling the assets of the firm for salvage value , the proceeds net of transaction cost are distributed to creditors.

Chapter 7 of the bankruptcy reform act of 1978 deals with straight liquidation, the following sequence if events is typical. A petition is filled in a federal court .Corporation may file a voluntary petition or involuntary. A trustee in bankruptcy is elected by the creditors to take over the assets of the debtor corporation. The trustee will attempt to liquidate the assets. When the assets are liquidated after payment of the cost of administration, assets are distributed among the creditors. If any asset remains after expense and payment to creditors they are distributed to share holders. An involuntary bankruptcy petition may be filled by creditors if both the following conditions are met. If the corporation is not paying debts as they become due and if there are more than 12 creditors. Priority claims Once a corporation is determined to be bankruptcy, liquidation takes place, the distribution of proceeds of the liquidation occurs according to the following priority:

In economic theory, supply is the amount available for sale or the amount that sellers are willing to sell at a specified price, and demand, sometimes called effective demand, is the amount purchasers are willing to buy at a specified price. When interest rates increase, demand for funds decreases as it becomes more expensive to borrowers. The result of shortage of funds is less spending and consumption, as people do not have sufficient funds for consumption. The same is translated into less production of goods and services and employee layoffs in an attempt to cut down on production cost. Conversely, an increase in interest rates encourages savings and promotes less consumption of goods and services. Foreign direct investments increase and the exchange rate come down as a result of an appreciation of the domestic currency.

The anticipated levels of interest rates in the future are bound to go up as a result of World Bank pressure arguing that the current interest rates are not a true reflection of the true macro-economic variables and the escalating oil prices. Despite the governments effort to keep interest rates low with a belief that this policy will keep the costs of funds by financial institutions low and thereby provide cheap which will in turn promote development through increased investment, the pressure from the International monetary Fund and the World Bank continue to build up.

The other reason why interest rates are bound to go up is the edge that commercial banks have taken to influence the exchange rate of the domestic currency. In an attempt to make up for the low interest regime that has prevailed in since 2003, banks have increased the spread between the bid and offer prices of the local currency. Since Kenya is a net importer, the effect has been a reduction in the quantity of capital goods imported into the country. Although emphasis in the literature on sequencing of financial reforms is first of all on achieving macroeconomic stability and other sector liberalization before financial liberalization, the process in Kenya shows that:

Financial liberalization was followed by other reforms, including trade liberalization. Macroeconomic economic stability was not achieved before liberalizing interest rates. And even immediately after the liberalization of interest rates, inflationary pressure was increasing, making it impossible to achieve real interest rates. · Fiscal deficit was growing and increasingly financed from the local market using treasury bills. Credit controls were relaxed when the banking sector was experiencing high liquidity and there were no prospective investment opportunities. This shows that the prerequisites for financial liberalization and decontrol of interest rates were not put in place. The expectation in theory is that with liberalization, interest rates will be positive in real terms and with increased efficiency in intermediation, the spread between the lending and deposit rates will narrow. Study shows that:

Positive real interest rates were not achieved until 1996 when inflation rate took a downward trend. But, prospects of keeping them positive are narrow with the upward trending inflation rate beginning in 1997. The spread between lending and deposit rates widened with liberalization, while the short-term rates increased at a faster rate compared with long-term rates resulting in a negatively sloped yield curve. · The Treasury bill rate operated as the yardstick for short-term rates. Commercial banks increased deposit rates to compete for the deposits held by the non-banking public. · Clearly, efficiency has not been achieved in intermediation of financial assets. This was reinforced by the oligopolistic structure of the market, where the sector is dominated by a few commercial banks.

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Federal Reserve Bank of Dallas President Robert Kaplan on whether Fed Chair Janet Yellen will raise interest rates in December.
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