Monday, May 11, 2009

Maldivian economy - a brief introduction



Just 1.5 meters above sea level, the Maldives (0.35 million inhabitants) is made up of a chain of 1190 islands, of which 198 are inhabited and around 100 are exclusive resort islands which lie off the Indian sub-continent. The country was long a sultanate, first under Dutch and then under British protection. The Maldives became a republic in 1968, three years after independence. The economy of the Maldives is a typical island economy, with a narrow based economic infrastructure and a substantial deficit on the current account, largely compensated by money transfers from Maldivians living abroad to their families on the islands. Annual GDP growth has averaged 7.9 percent over the last 15 years and per current per capita income is around US $3000, while inflation has been maintained at modest levels. The Maldives economy is largely based around two industries—tourism and fishing. Other complementary activities to tourism and fishing, including retail and wholesale trade, construction, communication and transportation, are increasingly becoming important sectors.

Prudent macro-economic management and a stable political environment have enabled the Maldives to achieve uninterrupted economic growth in the past. Infant mortality rate has fallen and adult literacy rate has reached about 97%. The country was heavily hit by the December 2004 Indian ocean Tsunami, destroying much of its economic infrastructure. The impacts of globalization and the challenges for been a part of the wider global economy is even greater (Dicken, 2003). Changes that take place in both internal and external environment directly affect vulnerable economy due to the greater dependence on tourism as a key economic activity. Since inception in 1972, tourism has been developing in the Maldives, and today, tourist arrivals to the country doubled the population of the country. (The Seventh National Development Plan 2007).
With the shock of tsunami 2004, Tourism (traditionally accounting for over 40% of GDP) came to a hold, while many other industries suffered stagnation in production. The situation has further worsened the situation due to the continued political unrest especially with the recent development of multi-party political system.

There has been complete transformation in the Maldivian political and civil environment with the introduction of various independent commissions. Maldives has been experiencing larger current account deficit over the years. The Maldives’ economy collapsed after the Tsunami. The country lost a significant part of income from tourism while export revenues halved. Adequate information about the country’s economy is scarce. Estimations of the current account deficit vary from 15% of GDP to nearly 40% of GDP. Maldivian Balance of payments deficits during the first half of the 1980s were caused largely by the international shipping recession, the collapse of world tuna prices, and a brief downturn in tourism caused by the violence in nearby Sri Lanka. The government began an economic reform program in 1989, by lifting import quotas and opening some exports to the private sector. In recent years, it has encouraged more foreign investment by liberalizing regulations.

Advantages and disadvantages of bay’ al-dayn

Dayn means debt and bay’ means trade or exchange. Thus, bay’al-dayn refers to sale of debt. There are disagreements among the scholars whether the debt can be sold or not; some scholars argue that the debt arise from sale of commodity can be sold while other says that selling of debt involves usury or riba and elements of gharar. Despite that, this essay will focus the advantages and disadvantages of bay’al-dayn (sale of debt).
One of the biggest advantages of bay’ al-dayn is that it helps the firm to reduce cash flow problems as it boosts large immediate cash flow to the business .This immediate cash flow will help the business to solve its working capital problems such as paying wages and utilities on time which will ensure the smooth running of the business. The possibility of sale of the debt will further helps smoother cash flow and better financial planning which in turn will help the other operations of the business.
The second advantage of bay’al-dayn is that it will reduce the business administrative cost to a certain extent. It is like out sourcing the business sales ledger and the owners and business managers can concentrate more on managing other areas of business when they have ample free time. In other words, bay’ al-dayn will reduce the time spend on credit control and some other administrative cost like record keepings which would rise cost of running the business thus reducing the overall profit.bay al-dayn may also help the business to eliminate the risk of bad debts and provision for doubtful debts (non-recourse factoring)
Sale of debt to a respected and trust worthy business like to a well known bank may boost the customers’ (debtors) morale to pay debt more quickly. In such a situation the business will enjoy the expansion of market and provide kind of marketing and free advertising to the company. In other words the level of market activities will increase which may increase the future demand for the firms’ product.
The fourth advantage of bay’ al dayn is that it may enable the firm to get useful information about the credit standing of business customers from the company to which the debt is sold and they can help the business to negotiate better terms with your suppliers. Such better terms may include higher trade discounts and longer credit payments as the business popularity in the market is high in the market for debt.
Another advantage of bay’al-dayn is that selling a debt will generate larger immediate cash is flow to the business as soon as orders are invoiced and is available for capital investment and funding of business next orders. For example if the business can pay the suppliers promptly the business is likely to reap higher discount rate from suppliers and better terms like free delivery depending on the market situation. Similarly, huge cash flow at once and on time enable better expansion strategies and funding of mega projects. On time capital expenditure will reduce various costs and will reduce the farms business need for borrowing which is very useful where the borrowing is difficult and interest rate is higher in case if borrowed.
Despite these advantages, there are number of disadvantages in bay’al-dayn. It may give rise to disputes and queries and business is required to be efficient. One of the major drawback of bay’ al dayn is that it will reduce profit margin of sale of every product or supply of services as the business has to share part of profit to the company which buys the debt. In other words if the business wait for the full payment from the debtors they would get higher amount than what they get from the firm which buys the debt.
The second disadvantage is that some of the customers may prefer to deal with the company directly. That means those customers will not be happy if the business sell their debt and in case of bay’al-dayn those customer may prefer brand switching or reduction on their loyalty towards the business. In other words the relationship between the customer and business may worsen in case of bay’ al dayn if the customer may not prefer to deal with the debt purchaser and that will have a long run negative impact on the business. In some cases the suppliers may have some assumptions that the business is having liquidity crises if the business is selling debts especially if the debt price is too low indicating urgent need of cash.
Another con that exists in case of bay’al-dayn is that the buyer of debt may vet the business customers and sometimes may influence the way business is doing its business. The interference on of business-customer relationships will have long term consequences which the business has to take special care. Losing a customer means also blocking of arrival of new customers as well. It is proven fact that finding of new customer is much more expensive than keeping a customer or maintaining the customer loyalty. Therefore it is risky for the business to invole in bay’ al-dayn if its customers are sensitive towards those issues.
Fourth disadvantage is that choosing a good factor or purchaser of debt is important as the way the factor deal with the customers hugely impact the business. Especially what the customer think about the business which is critical in long run. This means even the less sensitive customer may become sensitive towards some issue if the factor deals with them in a wrong manner which is not acceptable to them. So the business must use reputable company which will not damage the business reputation.
Another disadvantage is that bay’al-dayn is costly in many ways. The business may have to pay more or lose more if the factor (buyer of debt) may demand more to cover liability for the bad debts. It may also be difficult to end factoring as business will have to pay off any money it has advanced on invoices if the customer has not paid them yet. And sometimes it makes difficulty in borrowing as book debts will not be available as security.
References: www.livingislam.org www.businesslink.gov.uk www.zaharuddin.net www.insolvencyhelpline.co.uk www.cert.com.my