To evaluate the investment strategy, we compare the share performance using two financial ratios: PE and ROE. To study the business operation perspective, operation profit margin and gearing will be examined. Furthermore, weighted averages of those figures were calculated in order to retrieve the industry level ratios, which were based on the market valuation.
Investment Perspective It is discovered that portfolios of low price-earning (P/E) ratio stocks have higher returns than do high P/E portfolio (Basu,1977) Rational long term investors usually choose firms with higher ROE and lower PE ratio.(Banz, 1983)
In the UK food and beverage industry, the weighted average PE was 23.05 on February 12, 2010, which could be acceptable. The maximum PE is 148.98 and the minimum is 4.85.
The ROE has increased steadily from 33.51% in Y-2 to 41.56% in Y-0. The maximum ROE in Y-0 is 62.56% and the minimum is 10.43%.
The maximum ratio was contributed by DIAGEO which is the leading beverage manufacture worldwide. The firm also has PE ratio 15.66 which is a little lower than the industry level. Therefore, DIAGEO could be a valuable investment target for the rational investors. However, other business indicators need to be further studied.
Business Perspective Understanding the investment strategy by PE and ROE, it is turned to the business perspective. To evaluate the business operation, we employed operating profit margin and gearing.
In the UK food and beverage industry, the operating profit margin has decreased steadily from 17.63% in Y-2 to 17.14% in Y-0. The maximum ratio in Y-0 is 51.25% and the minimum is 4.13%. Unilever, the world leading food manufacture, records 17.69% as the operating profit margin while other firms in food sub-sector can only generate profits which were under 10% of their sales.
The gearing has increased steadily from 34% in Y-2 to 42.74% in Y-0 which is a little higher. The maximum gearing in Y-0 is 70.51% and the minimum is 14.36%.
It seems that the development of whole industry depends on the long term debt. For instance, DIAGEO records thick profit margin which could be the main reason the firm could finance the business by lending. Contrarily, lending could enhance the cash flow which could ensure the higher profit margin. However, higher gearing means higher interest payment which might cause trouble to the cash flow.
Non Financial perspective One of the primary goals of geographic diversification is to reduce the companiesââ‚¬â„¢ exposure of any particular country and region. So their group revenue and growth are balanced out in the face of an economic slowdown or a political turmoil. The group business risks are being hedged against many countries and regions. So the shareholders can be reassured of a relatively less volatile year end profits and stable overall growth under normal circumstances.
One of the long term benefits of geographic diversification is the companies tend to develop or expand their business in the emerging markets. The growth of the emerging markets can help to make up the slow down or saturation in the developed western economies. So long term sustainable growth can be derived from the synergy of both types of markets.
A PESTEL analysis for contemporary and emerging issues both directly and indirectly impact all companies within this sector.
Governments under increasing pressure to regulate the advertising of certain products such as soft drinks and confectionery. But promotions through advertising are crucial to generate revenue for those types of products.
Rising energy costs, increasing oil and gas prices can directly impact on the production and transportation costs within the food and beverage industry.
Year on year raising raw material costs, e.g. wheat, corn, soy beans, cocoa beans. The prices of those commodities can directly impact the producersââ‚¬â„¢ costs across many product ranges. Raising labour costs by regulatory requirements can directly impact the costs of production within this sector, e.g. China and US have all increased their minimum wage requirements.
A few major player in this industry all surfer from weak employee productivity hence management needs to find solutions to address this industry specific problem.
Changing consumer preferences and increasing health consciousness require constant innovation for new products to meet the healthy eating trend in order to maintain long term sustainable growth.
Advocates of fair trade have also increased the operating costs across the industry. Companies have changed some of their practices to work more closely with smallholder farms and local famers. This initiative would inevitably increasing production and raw material costs but the increased costs must be carefully weighed against the consequences of failure in public relations and public image. E.g. Cadbury is committed to making its leading Dairy Milk brand Fair trade by supporting small cocoa farmers in Ghana. Unilever is offering 5,000 small farmers guaranteed markets, access to finance and technical assistance to grow black soybeans in Indonesia.
Companies in sector have to compete on investment in technologies to create new competitive advantage in areas of: internal processes (more efficient production methods), distribution networks (better meet the needs of large retailers without incremental costs) and innovation (new products to lead the market or social trends).
Increasing concerns to reduce carbon emissions can significantly increase production and distribution costs. Companies have to invest in new technologies to comply with the new environmental regulations and satisfy various pressure groups. E.g. Cadbury have started working closely with farmers, discovering in the process that relatively simple changes in herd management can trim emissions of CO2 gases.
Pressures derived from increasingly stringent food safety regulations across the world. The consequences would range from increased production costs to large sums of fines if failed to comply with various regulators and national laws. The massive milk power scandal in China has affected many domestic and foreign companies in both financial terms and public confidence.
Most eminent of barriers to Entry into Food and Beverage Industry 1 Regulatory requirements for food safety compliance demand larger initial investments in plants and procedures (staff training) to meet food safety standards. E.g. the FDA in the US has extensive compliance requirements for food safety so companies wish to enter the US market have to make high initial investment to satisfy the FDA regulations before their products are allowed to enter the US market.
The Evolution Of Microfinance Institutions In Nigeria Economics Essay
With the huge shortage of funds in the banking industry, failure of the established community banks and other government programs in financing microenterprises in Nigeria, gave rise to the idea of transforming existing microfinance NGOs into microfinance banks. In the past years, microfinance institutions were informal in nature. They were characterized by different mechanism such as ability of the members of these microfinance institutions to have credit support from other members which could be used in expanding their businesses mainly in the agricultural sector.
For almost three decades it has been a challenge for governments to provide micro-credit to the poor people who are operating micro and medium enterprises. It is known that in every country around the world, over 90% of the businesses are micro and small businesses (Jenkins, 2009).
In Nigeria, there used to be people who go round taking money from other people in their job places. These kinds of people serve like village banks, where they accept the money as deposit and save it for the people. This kind of agreement between the inhabitants of the respected area and the people going round to collect their money establishes a trust between them. Although it differs between community to community, the whole idea is the same which is deposit taking and saving, but what remains interesting here is that in some cases, these people that agree to save, form group amongst themselves, and one or two people among them borrow the money after it has been accumulated. They usually gather the money for six to twelve months. The members who collect the money usually use it to invest in their businesses but they also know that they are required to return the money back to the depositors. This way other members will also have a chance to borrow. This is one of the interesting cases as it gives us an insight on how the financial sector operates in Nigerian villages and towns.
This process of formation of own borrowing groups was not only common in Nigeria, but it was experienced around the world. An empirical evidence in Ghana (Owusu and Tetteh, 1982), Zimbabwe (Bratton, 1986) and Dominican Republic (Desai, 1983) shows that local conditions have influenced the ideal size of membership and that below or above the ideal size of membership correlates negatively with cohesiveness and joint accountability.
Anyanwu (2004) conducted a study on micro-finance institutions in Nigeria, their policy practice and potential. In this study, he analyzed at that time, the ten major micro-finance institutions in Nigeria with respect to their location. These micro-finance institutions were Farmers’ Development Union (FADU), in Ibadan; Community Women and Development (COWAD), in Ibadan; Country Women Association of Nigeria (COWAN), in Akure; Lift Above Poverty (LPO), in Benin; Justice Development and Peace Commission (JDPC), in Ijebu-Ode; Women Development Initiative (WDI), in Kano; Development Education Centre (DEC ENUGU), in Enugu; Development Exchange Centre (DEC BAUCHI), in Bauchi; Outreach Foundation (OF), in Lagos; and Nsukka Area Leaders of Thought United Self-Help Organization (NLTNUSHO), in Nsukka.
The result of the analysis carried out by Anyanwu in 2004 showed that most of the beneficiaries of the services provided by the micro-finance institutions in Nigeria were women. “About 97.4 per cent of the clients in the sample were women. Four of the institutions exclusively provide services to women, while five had over 90 per cent of their clients as females” (Anyanwu, 2004 pp.5). This shows clearly how women have been the most important target for the micro-finance institutions which is viewed as normal because of the fact that women in Nigeria are always believed to be marginalized in terms of socio-economic matters. The study was one of the triggering factors that led to the public sector seeing the fact that almost 60 percent of the Nigerian populations which reside in the rural or remote areas do not have access to micro-credit. This gave the public sector a thinking of coming out with alternative solution to this problem. The following tables 1 to 4 summarize the ten major micro-finance institutions in Nigeria and their activities before 2005.
As the analysis in Table 1 to 4 shows, in average all these microfinance institutions source their funds from either government grants or grants from other individual or international donors. This kind of source tells us that the microfinance institutions in Nigeria were dependent on these grants which constitute 51.2 percent of their whole source of funds. This is a very big number in respect of sustainability of the entire microfinance sector that they serve to the poor. Microfinance institutions in Nigeria should be able to have continual supply of micro-credit to the Nigerian poor and abandoned population on their own without receiving any exogenous grants or donations. Having that huge amount of external support as 51.2 percent grants or donations, gives us a hint that a more adequate and self-sustainable institution is needed in order to serve the poor on sustainable basis. So overall, self-sustainable institutions are needed to be able to tackle the poverty alleviation question addressed by the government through the micro-finance sector in Nigeria.
With these downturns and global concern about poverty, micro-finance became a very important discussion and top priority of even international development institutions. Huge funds were set aside by these institutions to combat poverty. These institutions are membered by the world countries which made it powerful enough to deal with questions of poverty and promote consensus solution amongst themselves. With the clear international concern about the effect of poverty which the world income distribution with a Gini coefficient of around 0.85 makes it an excellent indicator of unsuccessful nature of the aggregate world economy these days. This result shows an unjust income distribution, which roughly 15 percent of world’s population receive 80 percent of the aggregate income generated, whereas almost half of the world’s population to fall under massive conditions of poverty (Birtek, 2009).
Microcredit is a critical anti-poverty tool and a wise investment in human capital. Now that the nations of the world have committed themselves to reduce the number of people living on less than $1 a day by half by the year 2015, we must look even more seriously at the pivotal role that sustainable microfinance can play and is playing in reaching this Millennium Development Goal (Annan, 2006).
Year 2005 was recognized by the United Nations as “Year of Microfinance” (Jenkins, 2009). United Nations is one of the sole organizations which foster the continual existence of micro financing in both the developed and developing countries. The millennium development goals addressed the issue of alleviating poverty not only by giving foreign aid to the less developed and under-developed countries, but also by supporting the poor to stand on their own.
With all these developments that took place since early 1990s, like the other governments, the Nigerian government also reacted. The Central Bank of Nigeria (CBN) responded in 2005 by establishing laws which will promote the establishments of better financial institutions to serve the Nigerian poor population. The microfinance policy, regulatory and supervisory framework for Nigeria entered into force in 2005. This law obligates microfinance institutions to be regulated in Nigeria. With this policy, regulatory and supervisory framework, the government addressed different issues needed to strengthen microfinance institutions in Nigeria. This law required the private sector to acquire license from the Central Bank of Nigeria. The license was open to start-up a micro-finance banks or an already established microfinance institutions that wanted to convert into a micro-finance bank. The policy aimed at having adequate regulation and supervision over the microfinance sector in Nigeria.
According to Jenkins (2009), one of the ways of incorporating microfinance into the financial system can be achieved through the change of microfinance NGO’s into a formal regulated financial institutions. With this, adequate credit allocations to the poor could be achieved. As (white and Campion, 2002) termed it to be “up scaling of microfinance institutions”. Furthermore, Jenkins (2009) stated that since 1990s a large number of microfinance institutions have transformed into a regulated microfinance bank such as BancoSol, K-Rep and ACLE-DA Bank. These microfinance NGOs were all unregulated, but they later transformed into a fully regulated institution under their respective country laws.
3.2 Regulation of Micro Finance Banks in Nigeria The microfinance policy, regulatory and supervisory framework in 2005 was the first formal policy established for microfinance institutions that are becoming microfinance banks in Nigeria. Some months later, another formal text was released on regulatory and supervisory frameworks for micro-finance banks (MFBs) in Nigeria. These provisions were established in line with the Millennium Development Goals (MDGs) as every member of the United Nations should respect. Analysis would be made on the policies establishing the micro-finance banks in Nigeria. This policy was the proceeding of the National Conference on Microfinance organized between the Ministry of Finance (MoF) and Central Bank of Nigeria (CBN) in 2000. As a result, in 2001, the Central Bank of Nigeria conducted a baseline study of the microfinance institutions in Nigeria. Some of the objectives of the study among others as indicated by Okojie, Monye-Emina, Eghafona, Osaghae