What is Quantitative Easing?

Quantitative Easing (QE)

First Published Date : November 17, 2010 ADawnJournal.com

When someone hears the words “quantitative easing”, they can be forgiven for not knowing exactly what that this financial concept is. After all, it is a complex concept that many people, people outside the financial industry, simply do not understand.

Quantitative easing is a monetary policy that is used by central banks as a way to increase the overall supply of money, which allows them to increase the reserves of the banking system. This is typically done through the purchasing of central government bonds, in order to stabilize, and/or prices and thereby lower long-term interest rates. When normal methods at controlling the money supply have failed, this method is typically used.

As for how the policy is implemented, quantitative easing is done in the following method:

1.   A central bank will credit its own account with money it creates.

2.   The central bank then purchases financial assets which can include agency debt, mortgage-backed securities, corporate bonds and government bonds. This gives the bank an excess of reserves that allows them to create new money, thereby creating economic stimulation.

Obviously, there are risks associated with quantitative easing. Sometimes the policy is not effective enough if banks don’t use the additional money they have made in order to increase capital reserves, which then increases the risk of the bank defaulting on its loan portfolio, which can cause many more problems down the road. Another problem is that quantitative easing can create an excess of inflation, more than is desired, and even lead to hyperinflation.

The Bank of Japan used quantitative easing in order to fight against the deflation of the domestic currency in Japan. Recently, thanks to the massive economic crisis that has gripped the world, the United States Federal Reserve has used quantitative easing to fight the effects of the recession. The European Central Bank has also used 12-month long-term refinancing operations through the process of expanding on assets that the banks can then use as collateral.

The reason that it failed with Japan is because the Bank of Japan maintained short-term interest rates at close to zero values for several years. Then, using quantitative easing, they flooded banks with an excess of money in order to influence private lending. This then caused large stocks of excess money, which then create a small risk of money shortfalls.

Japan actually created quantitative easing, with the Bank of Japan adopting the policy on March 19, 2001. However, the earliest written record of the term dates back to Richard Werner, a professor of international banking at the School of Management in the University of Southampton, when he warned of the coming collapse of the Japanese economic banking system.

So, that essentially sums up quantitative easing and what it is. While it may still be difficult to understand, you at least have a basic understanding of what this unique financial tool is and the effect that it can have on your life. During this financial crisis, it is clear that quantitative easing may be the one way out of it for many central banks.

Canada ETFs Begin Charging HST

ETFs, HST, and Canada

First Published Date : November 21, 2010 ADawnJournal.com

In Ontario and British Columbia, the Harmonized-Sales Tax (HST) is something that is not very popular. As well, it is beginning to chance how things are priced with exchange-traded funds (ETF). In the past, iShares, which was launched by Carclays Global Investors in the late 1990s, has never charged the Goods and Services Tax (GST) on its ETFs. The tax was paid out by the company itself, making ETFs more affordable and more desirable from the perspective investors.

Sadly, that changed this past year when BlackRock Inc, which recently purchased iShares in 2009, decided to begin charging HST.

HST is the combination of the provincial sales tax of Ontario, and the GST of the federal government. When put together, the HST comes to 13 per cent. On July 1, it took effect in Ontario, combining the eight per cent provincial sales tax and the five per cent GST.

In a notice to investors, BlackRock stated that it will no longer pay for GST on behalf of the family of iShare funds.

Many investors are now asking why this has become the state of affairs for the iShares ETF. The main reason is that globally, most ETF companies do not absorb the taxes and BlackRock wants to make sure there is an industry standard across the globe to make investing easier for countries around the world.

While they say that, most likely the reason is that the cost of paying 13 per cent of the tax for investors will simply amount to more than BlackRock can afford. While many investors are just told that the policy is to get everything under the same umbrella as the industry practice, it is not hard to figure out that BlackRock wants to make money, paying the HST costs them money, so they are no longer paying the HST.

Currently, iShares has three main rivals which is Claymore Investments, Bank of Montreal and BetaPro Management.

At this time, iShares controls 80 per cent of the ETF market within Canada, more than what smaller ETF companies hold in the market and those smaller companies have often not paid for the GST. Therefore, it can be seen that iShares is getting in line with companies that are much smaller than them, an odd thing to do when you are an industry leader.

Regardless, the days of iShares being GST, PST and HST free are now gone. From now on, when you are buying ETFs in Canada through iShares, you are going to be paying for the HST on top of your purchase meaning The HST will be a part of the management expense ratio. While it is the norm in the industry, that does not mean investors have to be happy about it and you may see a backlash in the coming months and years as investors decide whether or not the new higher cost of the ETF is worth it.

What is Islamic Finance?

Islamic Finance and Banking 101

First Published Date : November 24, 2010 ADawnJournal.com

When we think of banking, we think of the United States, Europe and Japan, along with China, as examples of what banking is. However, in the Islamic world, there is a term called Islamic finance, or Islamic banking, which is very important to understand, especially to anyone doing banking work with the Middle East.

Islamic banking, or finance, refers to banking that works on the principles of Islamic law, while developing Islamic economies. Under the Sharia, which is Islamic law, the payment or even the acceptance of interest fees for loans is completely forbidden. In the 20th century, several Islamic banks have applied the principles to private and semi-private institutions within the Muslim world.

The concept of Islamic finance came about during the Islamic Golden Age, when early forms of free markets were present and a market economy was just beginning during the 8th to 12th centuries. A monetary economy was created on the expanding levels of the currency, which was very stable and highly valued.

Several concepts and techniques were applied to Islamic finance, including partnerships, limited partnerships, capital, cheques, promissory notes and bills of exchange, all of which would become commonplace in future centuries.

One concept created in Islamic finance was Riba, which means excess. This was applied to prevent excess compensation without due consideration, which we would know as high interest rates. Therefore, applying interest under Islamic finance law was not something commonly done, but there were cases where it was.

Currencies that were based on guarantees by government, or based on materials such as base metals, were allowed to have interest applied ot them.

Interest-free banking, the most common trait of Islamic finance, continued into the 20th century, however several Islamic banks saw interest as a necessary evil that could be used in a banking system based on profit and loss sharing. In the early 1970s, several Islamic institutions got involved in the concept of Islamic finance. The Conference of the Finance Ministers of Islamic Countries in 1970, a study done in Egypt in 1972, the First International Conference on Islamic Economics in 1976, the International Economic Conference in London in 1977 and more helped to determine if Islamic finance could work in the 20th century. Through all of this, the Islamic Development Bank, which is a bank that covers many Islamic governments, was created in 1975.

In the past 20 years, interest free banking has gained a lot of praise and attention, especially in Pakistan where several young Muslim economists praised it.

Egypt attempted to use Islamic banking, beginning in 1963 by forming a savings bank that was based on profit-sharing. This experiment lasted until 1967, at which point nine banks were created within Egypt.

Over the years, more and more banks opened up that worked on the concept of Islamic finance. One such bank was the Dubai Islamic Bank, which opened in 1975.

Currently, Islamic banking, or Islamic finance, is growing at roughly 10 to 15 per cent per year, and there is no sign that it is going to be slowing down. Currently, Islamic banks have more than 300 banks spread across 51 countries, including the United States. They also have an addition 250 mutual funds that work on Islamic finance concepts. Roughly $822 billion in assets are managed by Islamic finance concepts. This is about .5 per cent of the world’s total assets. Islamic finance is also the fastest growing segment of global finance in the world, and sales of Islamic bonds have risen by 24 per cent, to $25 billion, by this year alone.

According to Standard & Poor’s Rating Services, the potential market of $4 trillion existed for Islamic financing and banking.

The countries of Iran, Saudi Arabia and Malaysia are the biggest Islamic bank compliant countries on Earth, with Iranian banks accounting for 40 per cent of the total assets of the world’s top 100 Islamic banks. The Bank Melli Iran had the most assets with $45.5 billion, followed by Al Rajhi in Saudi Arabia with $39.7 billion. Iran also has the most Islamic finance assets valued at roughy $235.3 billion.

So, how does Islamic banking work if there is no interest? Since that is where many banks make most of their money. In an Islamic mortgage, instead of loaning money to the homebuyer to buy the house, a bank will buy the item itself from the home seller, and then re-sell it to the buyer at a profit. The buyer can pay in installments, however the bank cannot make profit explicitly, otherwise it will face fines, so it cannot have penalties for late payment. In order to make sure that the buyer does not default on the transaction, a Murabaha arrangement is made, which is similar to real estate leasing.

Some banks will use a Musharaka al-Mutanaqisa approach, which involves a floating rate which works like a rental. The bank and individual borrowing will form a partnership, with both putting in capital and agreeing on a percentage for buying the property. The partnership rents out the property to the borrower, and the borrower is charged rent. While this is happening, the borrower slowly buys the bank’s portion of the property from them over agreed payments over a set period of time until the partnership ends.

As would be expected, Islamic banking does not just forbid the use of interest, but also works on other principles of Islam. Islamic banking restricts transactions that involve pork, gambling and alcohol as well. This makes it a form of ethical investing, which makes it very popular with some Western World investors. Islamic finance and banking is sometimes called a full-reserve banking method, where banks have a 100 per cent reserve ratio, at least in theory.

Islamic finance is a unique concept that is very popular in the Muslim world, and could become popular here as more banks use the methods of Islamic banking to help people get loans that are easier to repay, meaning the risk of default is less.

Singapore Airlines Business Class Lounge Review

SilverKris Lounge | Singapore Changi Airport Terminal 3

I was worried about the short layover time at Singapore, but security and other formalities went through so fast that I still had a little bit of time to check out SilverKris Lounge.

SilverKris Business Class Lounge is also used by Star Alliance partners and located one floor above the departure hall. This was a huge lounge and in addition I found there were sofas or chairs everywhere.

Also, I saw lots of high chairs at the buffet counters and there were also dining tables and chairs in the dining area. I saw some long sofas as well that possibly could be used to lie down and take a mini nap.

The food section had an extensive selection of foods and desserts. If I had time, I would go nuts trying all these foods.

I will name a few of the items: Snapper with honey ginger, pasta, sweet curried potato, braised noodles, braised beef, a variety of curry, a variety of pre-made sandwiches, Mee siam, Dau suan, Siu mai, lots of seafoods, a variety of salads, fruits, cakes, yogurts, and much more.

However, my short time there made it impossible to try anything. I only had time to walk around and look at everything there.

The best part was the shower facility. I went into one just to see how it looked. Each shower room was like a private bathroom with a standing shower on one side and a basin on the other side. It looked like a small Hilton hotel bathroom, but without the toilet.

They even had mini soap, shampoo, a disposable razor, a comb, and lotion like you find at hotels. The SilverKris Business Class Lounge had one of the best shower facilities I have seen at airport lounges.

Although quite big, I found the SilverKris Business Class Lounge crowded. But it would definitely be a good choice if you want to sample lots of food and take a nice shower.

What is Islamic Finance?

Islamic Finance and Banking 101

First Published Date : November 24, 2010 ADawnJournal.com

When we think of banking, we think of the United States, Europe and Japan, along with China, as examples of what banking is. However, in the Islamic world, there is a term called Islamic finance, or Islamic banking, which is very important to understand, especially to anyone doing banking work with the Middle East.

Islamic banking, or finance, refers to banking that works on the principles of Islamic law, while developing Islamic economies. Under the Sharia, which is Islamic law, the payment or even the acceptance of interest fees for loans is completely forbidden. In the 20th century, several Islamic banks have applied the principles to private and semi-private institutions within the Muslim world.

The concept of Islamic finance came about during the Islamic Golden Age, when early forms of free markets were present and a market economy was just beginning during the 8th to 12th centuries. A monetary economy was created on the expanding levels of the currency, which was very stable and highly valued.

Several concepts and techniques were applied to Islamic finance, including partnerships, limited partnerships, capital, cheques, promissory notes and bills of exchange, all of which would become commonplace in future centuries.

One concept created in Islamic finance was Riba, which means excess. This was applied to prevent excess compensation without due consideration, which we would know as high interest rates. Therefore, applying interest under Islamic finance law was not something commonly done, but there were cases where it was.

Currencies that were based on guarantees by government, or based on materials such as base metals, were allowed to have interest applied ot them.

Interest-free banking, the most common trait of Islamic finance, continued into the 20th century, however several Islamic banks saw interest as a necessary evil that could be used in a banking system based on profit and loss sharing. In the early 1970s, several Islamic institutions got involved in the concept of Islamic finance. The Conference of the Finance Ministers of Islamic Countries in 1970, a study done in Egypt in 1972, the First International Conference on Islamic Economics in 1976, the International Economic Conference in London in 1977 and more helped to determine if Islamic finance could work in the 20th century. Through all of this, the Islamic Development Bank, which is a bank that covers many Islamic governments, was created in 1975.

In the past 20 years, interest free banking has gained a lot of praise and attention, especially in Pakistan where several young Muslim economists praised it.

Egypt attempted to use Islamic banking, beginning in 1963 by forming a savings bank that was based on profit-sharing. This experiment lasted until 1967, at which point nine banks were created within Egypt.

Over the years, more and more banks opened up that worked on the concept of Islamic finance. One such bank was the Dubai Islamic Bank, which opened in 1975.

Currently, Islamic banking, or Islamic finance, is growing at roughly 10 to 15 per cent per year, and there is no sign that it is going to be slowing down. Currently, Islamic banks have more than 300 banks spread across 51 countries, including the United States. They also have an addition 250 mutual funds that work on Islamic finance concepts. Roughly $822 billion in assets are managed by Islamic finance concepts. This is about .5 per cent of the world’s total assets. Islamic finance is also the fastest growing segment of global finance in the world, and sales of Islamic bonds have risen by 24 per cent, to $25 billion, by this year alone.

According to Standard & Poor’s Rating Services, the potential market of $4 trillion existed for Islamic financing and banking.

The countries of Iran, Saudi Arabia and Malaysia are the biggest Islamic bank compliant countries on Earth, with Iranian banks accounting for 40 per cent of the total assets of the world’s top 100 Islamic banks. The Bank Melli Iran had the most assets with $45.5 billion, followed by Al Rajhi in Saudi Arabia with $39.7 billion. Iran also has the most Islamic finance assets valued at roughy $235.3 billion.

So, how does Islamic banking work if there is no interest? Since that is where many banks make most of their money. In an Islamic mortgage, instead of loaning money to the homebuyer to buy the house, a bank will buy the item itself from the home seller, and then re-sell it to the buyer at a profit. The buyer can pay in installments, however the bank cannot make profit explicitly, otherwise it will face fines, so it cannot have penalties for late payment. In order to make sure that the buyer does not default on the transaction, a Murabaha arrangement is made, which is similar to real estate leasing.

Some banks will use a Musharaka al-Mutanaqisa approach, which involves a floating rate which works like a rental. The bank and individual borrowing will form a partnership, with both putting in capital and agreeing on a percentage for buying the property. The partnership rents out the property to the borrower, and the borrower is charged rent. While this is happening, the borrower slowly buys the bank’s portion of the property from them over agreed payments over a set period of time until the partnership ends.

As would be expected, Islamic banking does not just forbid the use of interest, but also works on other principles of Islam. Islamic banking restricts transactions that involve pork, gambling and alcohol as well. This makes it a form of ethical investing, which makes it very popular with some Western World investors. Islamic finance and banking is sometimes called a full-reserve banking method, where banks have a 100 per cent reserve ratio, at least in theory.

Islamic finance is a unique concept that is very popular in the Muslim world, and could become popular here as more banks use the methods of Islamic banking to help people get loans that are easier to repay, meaning the risk of default is less.