Cash Pooling

Name Dina Mohanna Rbeaan Subject hard bullion Pooling Supervisor Dr. Nasser Abu Mustafa University NYIT? bullion circumspection capital pooling Abstract The role of the unified capital manager has been continuously rewrite oer the past few historic period, as a result of the assume for more(prenominal) effective and efficient ways to support the core postulate of the organization. This has resulted in parvenue responsibilities for the corporal treasurer and hard currency manager.The nones perplexity function is demanding more accurate and continuous information on its bills position to provide responsive forecasting data and handling, so that availability of liquidity at the right cadence and price can be fancyd. So this paper studies the bullion Management concept and focus on the capital pooling and whether its applied in the nerve eastside. Introduction The objectives of bills counselling be straightforward maximise liquidity and escort hard spec ie flows and maximise the value of pecuniary resource while minimising the cost of money. The strategies for meeting much(prenominal) objectives include varying degrees of long-term planning prayments.Also, like e genuinelywhere in the world, much treasury activity in the organizations is concentrated on cash management. This includes financial backing the corporation, administration of debts (loans, bonds, commercial papers, etc. ), unattackable relationships with the banks, remunerations to suppliers and collections from customers, control of contradictory currency and vex positions according to the comp solelys charters for finance, and at become the reporting and technical support of each(prenominal) these functions. The stinting consumption of cash pooling as a global standard for concentrating cash into the main bank billhook of the firm has rattling quickly found favour in corporations. cash in pooling enables unified root words to minimise expenditure incurred in connection with banking facilities through economies of scale. low a cash pooling arrangement, entities within a corporate radical regularly transfer their surplus cash to a single bank scotch (the exceed account) and, in return, may draw on the funds in that account to satisfy their own cash flow requirements from time to time. The master account is usually held by the p bent company or by a Treasury Company established specifically for this purpose.Depending on the type of cash pooling arrangement, the act entities may transfer either their replete(p) cash surplus (zero balancing), or cash exceptional(a) a certain surplus level (target balancing). In general, all entities dynamic in the cash pooling arrangement will be liable for any negative balance on the master account, regardless of the amount they occupy contributed. Transfers and draw-downs of funds to and from the master account by the participating companies perk up the nature of the grant and rep ayment of intra-group loans.In addition to natural cash pooling there is alike nonional( as well known as practical(prenominal)) cash pooling. This does not entail the physical transfer of funds, but quite a the set-off of balances of different companies within the group, so that the bank charges interest on the groups net cash balance. This optimizes the position of the group as regards interest payments, but does not gain optimal allocation of liquid funds as amidst the group members. Notional cash pooling will not result in the creation of intra-group loans, since funds are not physically transferred.As much(prenominal)(prenominal), well-nigh of the risks outlined in this brochure do not apply to a purely high-risk cash pooling arrangement. In dress however, a notional cash pooling arrangement will frequently involve the grant of cross-guarantees and security by the participants to the bank, in order to maximize the procurable overdraft facility. To this extent, man y of the risks outlined in this article could be relevant, even if the cash pooling arrangement is predominantly notional in nature. The specific structure of person cash pooling arrangements can vary.For example, transfers to the master account may be under fathern by each participating group member individually or may instead be undertaken automatically by the bank on the flat coat of a power of attorney effrontery by the relevant group company. In addition to the facility engagement with the respective bank, each participating group company will usually enter into cash pooling agreement. These agreements must be care sufficienty structured in order to minimize the risks of civil or criminal liability of the participating group companies and their officers. value issues must besides be care adepty considered when structuring cash pooling agreements.Types of cash pooling Banks nighly offer the following types of cash pooling ?zero-balancing cash pooling, ?notional cash pool ing, ?multicurrency cash pooling, ?Cross-border cash pooling. ?Zero -balancing cash pooling Real cash pooling is establish on a transfer from bank accounts to a master account, with balances on all bank accounts except the master account being zero at the end of the workings day. It means this money physically moves from the junior accounts to the master account. Real cash pooling requires companies to keep careful records of cash transfers, interest real and paid, and records of investments.Structure of a Zero-Balancing-Pool ? depicted object pooling Requires a companys subsidiaries to design branches of the same bank, usually in the same country although with the adoption of the euro, single-currency cross-border pooling has buzz off rather common in Europe. All the excess and deficit balances in the companys subsidiary accounts are summed each day to mastermind the net interest earned or due. Funds are not actually transferred rather, they are simply totalled for the purpos e of calculating interest. Banks usually require credit facilities to support any deficit balances in the pool.National pooling in the main requires extensive cross-guarantees among subsidiaries which many companies find genuinely difficult to go across. or so countries command bailiwick pooling . among them are the United States, Germany, Mexico, Japan and Brazil. In countries where national pooling is not allowed, the zero balance pooling method must be subroutined. Structure of National pooling ?Multicurrency cash pooling Bank account balances in different overseas currencies are swapped to one agreed currency, which is the base for the interest rate calculations. ?Cross-border cash poolingCross-border cash pooling helps corporations avoid the bureaucracy intrinsic to transferring cash across countries and different alter outlines, as well as different legal entities and the headache associated with the excess inter-company loan administration. small-arm there is a se lection of solutions in the marketplace, most of these operate on an interest enhancement institution where corporations are rewarded for serving their liquidity through their chosen bank, but the bank is unable to achieve a balance sheet offset due to the complexity of manifold jurisdictional and regulatory barriers.Czech banks now offer cross-border pooling, both notional and real, for accounts in the domestic help Czech koruna, euro, US dollar, profound European currencies ( such(prenominal) as in the Slovak koruna, Hungarian forint and Polish zloty) and pound. These principles are used both in the Czech Republic and in the rest of Europe, and are therefore akin any differences are the result of the legal requirements of each country. As mentioned above, the Czech Commercial Code does not recognise anything like concern or a product like cash pooling.It is necessary to fulfil some(prenominal) conditions to prevent problems concerning taxation and reporting to minority shar eholders. It is practically impossible to implement a cash pooling agreement between companies without a majority share. It is figure practice that a cash pooling system has to be agreed by a general meeting of the company and there is a unbending requirement for signed control agreements. Sometimes, it is necessary to change the company articles of incorporation. Reasons of bills pooling Reduction of financing costs on group level, -Improvement of investment-deposits by apply economies of scale, -Simplification of liquidity-management on domestic level, -Reduction of expenses for financial intermediaries through centralization, -Improvement of planning cash flows through coordination of financial cycles, -Optimization of your financial image by decreasing external financing and better use of internal financial potences, -Break-Even at about EUR 200000 perm liabilities on the accounts. Cash management in the nerve means eastern United States As in the rest of the world, cas h management in the marrow East is benefiting from automation. How is this affecting different sizes of corporate, and what does the future hold in this area? The snapper East region, which includes countries like UAE, Oman and Qatar, has kept pace with the growth in such business ambitions and cash management is also not to be left-hand(a) out of this race to riches, as businesses continually explore opportunities to make more money, more profits and reduce costs.The excellent growth climate in countries like UAE, fuelled by ambitions and visions of the rulers and the business community, has resulted in opportunities, growth of infrastructure, access to world-wide and some separate funds through opening up and dissolvehold real estates, commerce environments, the presence of more free zones, creating a healthy and open disputation for the survival and growth of the fittest, etc Multi-national corporate Middle East, especially the UAE, has recently seen an inflow of many m ulti-national companies (MNCs) telescope up their regional offices, treasury offices, marketing offices, etc. n UAE and managing the global operations. To drag such MNCs into the region, financial and general free zones plus offshore financial centers acquit sprung up everywhere with the intentions of inviting the surpass of MNCs to come and absorb their shops opened in these countries. The absence of tax regimes has added to the tenderness in these markets. These companies typically need 24 hour Internet access, wholesale and pooling of funds and balances across banks and branches, war-ridden FX and deposit rates, competitive temporary nightlong overdraft interest rates and credit interest on overnight shoot a lines.The paragon location of Gulf Cooperation Council (GCC) countries in the global map, the growth of communication, infrastructure, Internet, etc. have led to the explosive growth of such companies in the region topical anesthetic corporate GCC is predominant ly dominated by a number of topical anesthetic corporate or companies or family possess businesses, which are typically owned by large local/national families of businessmen. Most of these families have very thriving and historic track records and have been associates/local representatives/agents for most of transnational brands from all over the world.The local regulations for a sponsor from a national has been a great aid in ensuring that the multinationals tie up with these local corporate for mutual success of business lines. art object the MNC does the production, transport, marketing support, improvement association, etc. , the Local Corporate typically takes the local marketing and sales realization risk, like any MNC agency. This combination of MNCs and local corporate has worked very well historically in the GCC with the result that there is a successful association of MNC brands and families in the GCC.In many of these countries, the lack of restrictions such as tax es, financial regulations to publish books of accounts and audit, etc. have made the operations of such corporate mostly family determined. Recently, and especially in the last four to cardinal years, GCC business families have started expanding into other countries in the region and also into countries in East and North Africa and other parts of the world, where investments in assets and business yields good and long-term returns for the business houses.In other words, the local corporate have been the opposite of the MNCs coming and operating into the GCC, and typically such local corporate are unwindly growing and reaching the sizes of MNCs, albeit the growth into other competitive countries like Singapore, UK, other parts of Europe and the US have been very curb or generally non-existent. Mid-sized trading companies GCC has been historically characterized by a host of mid-sized trading companies, thanks to the general economic growth, healthy competition, absence of taxes an d rules regime and a general absence of governmental red tape.Today, battalion of most GCC nationalities could come and start a business in any of the Free Zones in their own name, or if they choose to partner a national, they can start the business anywhere in these countries, with very limited capital and resources. The laws and business conditions have been very conducive for the mushrooming growth of such mid-sized companies, which have thrived, in the general economic upswing in the Middle East.While it is extremely difficult to list out the number of these companies, it is generally entangle among banking community that the number of mid-sized corporate or companies (along with the small and medium enterprises (SMEs)) powerfulness currently be in the region of 15,000 numbers in UAE alone. This brings an elicit opportunity for smart entrepreneurs who thrive on such opportunities as also for smart bankers who have built a portfolio of such assets and relationships.On the cas h management front, such small companies do not have many demands except that they require immediate and urgent funds heart-to-heartance, remittances for payments, overnight float interest, good interest rates for deposits, etc. Many of them are also computer or Internet savvy and would be happy to use such online improvements to transact with their banks. Small and medium-sized enterprises SMEs have been the sleeping giants in the GCC business world, but they have now woken up to be a mid-sized monster.While banks are repeatedly facing the ever-decreasing margins (be it in interest rates, commissions, charges or any form of income to the bank) in the MNC and large corporate segments, it is the SME that has come as the boon for the dwindling revenues of banks. SMEs have been the ideal examples for the usual risk philosophy of higher the risk, higher the return. SME segment today offers the highest interest rates and margins in terms of loaning sometimes as high as 600 to 800 bas is points over LIBOR/DIBOR, not to mention the amount of charges and commission.The risks of such SMEs have been get the hang by many banks to offer an excellent basket of spread-out lending while keeping an eye on high margins. These SMEs will be the lifeline of banks in the next six to 10 years, and I in person believe that among the corporate income of banks, SMEs will represent the largest amount of this income. They could represent 70-80% in four to five years from now. This is an educated guess on what may happen, establish on what is happening today. Economic overview in that respect has always been a strong correlation between crude oil prices and the state of the Middle Eastern economies.With oil receipts accounting for 90% of government revenues in several Gulf countries and public projects dominating the markets, economic growth is for the most part dependent on the local governments expansionary policies. In view of the oil industrys orbitual nature, governments have become cautious in planning their annual budgets. An IMF analyse revealed that the Middle East countries, which were the beneficiaries of windfall oil export revenues in 2000-01, are using these gains prudently so as to be well render to deal with any sudden fall in oil prices over next few years.In addition, the governments have recognised the importance of economic diversification, and are now encouraging economic activity in sectors other than oil. Much of this effort has gone into ruining manufacturing, trading, and tourism. Figure 1 regional Macroeconomic Data and Forecasts Financial Environment The Gulf countries offer some of the most liberal financial environments, with fully convertible currencies, stable re-sentencing rates, minimal exchange controls, and nil-to-low tax regimes.The relative political stability and increase economic cooperation between regional countries are some of the positive developments that attract big players to research at the Middle East as a viable investment alternative. Many of the Middle East countries that carefully protected themselves against the threat of overseas investors for so long are now inviting foreign capital to diversify their economies. Even the highly conservative states, such as Kuwait and Saudi Arabia, are gradually extending investment and ownership rights to foreign nationals.Free-trade zones, which were pioneered by the UAE and are now a common feature of all Gulf countries, have been instrumental in providing sole ownership and control to foreign investors. Apart from simplified registration and licensing procedures, free-trade zones offer tax holidays and maiden infrastructure facilities thus, they are attracting new investors. Banking System The banking activities in the Middle East are largely domestic. The financial sector is engaged in a whole range of activities, from traditional public sector-dominated banking to state-of-the-art project finance and investment banking.Some banks are starting to obtain ratings from international agencies to pave the way for a more regional role. The governments have also been attempting to prove the banking sector by recapitalizing the domestic banks and ensuring that international capital requirements are met. There is a move towards encouraging smaller banks to merge and to develop domestic capital markets. Overall, there are many ongoing reforms designed to develop a sound banking system. The banking system in the Middle East is relatively flexible, and allows the opening and operation of a wide variety of accounts.However, Oman, Qatar, and Saudi Arabia do place some restrictions. Details of possible account structures are given in Figure 2 below. Clearing System All the countries in the Middle East, except for Saudi Arabia and the UAE, have a manual clearing system. Saudi Arabia has a real-time settlement system called the Saudi riyal Interbank Express (SARIE). The SARIE is capable of interfacing with the electronic bankin g platforms of clearing participants for the online settlement of transactions. In the UAE, the Central Bank has recently introduced a real-time gross settlement (RTGS) system to facilitate interbank payments.Some other regional countries are also considering introducing such systems. The settlement days for manual clearing depend on the local practices and the level of sophistication in each country. The average time to clear a local currency cheque ranges from one to three working days in major cities. Outstation cheques take anywhere from between five and 10 working days for realization. Foreign currency cheques take between five and 15 working days to clear. The lack of automate clearing and settlement systems has hampered the automation of payment services, such as high-volume and low-value payments.Banks have worked around this by accepting payment instructions electronically, and then effecting payment through cheque printing or bank-to-bank transfers. Liquidity Management P roducts The availability of several account types is further augmented by a liberal regulatory framework that supports the setting up of domestic and cross-border concentration and pooling structures. In Saudi Arabia, there are no explicit laws on dissimilar aspects of liquidity management set-ups. Egypt allows pooling and cash concentration between resident and non-resident accounts, and also between two different legal entities.Bahrain and the UAE also permit pooling and cash concentration among different legal entities. However, it is advisable to seek legal assessment before establishing a liquidity management structure. Cash Management Overview As the regional markets grow in sophistication, there is a corresponding need for corporate to improve their operational efficiency and cost competitiveness. Over the last year, several banks have introduced electronic banking services both Internet and non-Internet based to provide services ranging from simple account information to transaction automation. contempt the presence of the underlying framework, locally owned corporate have been slow to subscribe to electronic banking mainly due to fears of loss of control. Even multinational corporations (MNCs) have been unable to implement an efficient and integrated cash management system due to low volumes and a lack a full array of cash management products and services with the banks. Figure 2 Cash Management for the Middle Eas Current Practice by Corporate, and Trends in Cash Management The concept of cash management is fast catching on in the region.With an increasing number of companies feeling beyond their domestic frontiers to aim growth, there is a need to optimize costs and manage risk. While MNCs have the concept filtered down from their group offices, large professionally-managed domestic companies with a well-diversified portfolio are increasingly looking at cash management as an important risk management tool. In the Middle East, companies are look ing at online banking information and the automation of transaction processing by the use of an integrated banking platform, preferably interfaced with their back office system.This trend is growing as companies adopt enterprise resource planning (ERP) systems. Cash management requirements among corporate vary depending on the size and nature of operations. MNCs and large corporate look for more comprehensive cash management tools involving non-resident accounts, interest-bearing deposit accounts, cross-border cash concentration, and notional pooling. Also, those corporate with clearly defined collection and payment processes savvy accounts payable as a non-core business activity and look to outsource these services to banks.Meanwhile, the huge middle-market corporate, which are not really geared towards full automation, are limited to piecemeal use of electronic banking services. Banks offer change cash management services and product ranges. In general, the international banks, which have a better regional network and offer more advanced electronic banking platforms and domestic and cross-border liquidity mechanisms compared to domestic banks, are clearly the leading in cash management business. Domestic banks score better on in-country branch networks What Does the Future Hold For Cash Management in the Middle East? Direct debits Wherein based on a standing debit authority, utility and other bills will be directly raised by utility companies to banks who will debit the customer account and pay. Bulk transfer of salaries to debit cards and withdrawals through ATMs specially located in customer premises. Complete debtor/invoice payments follow up on behalf of customers to ensure that invoices are collected in time. Complete and automatic link up of all payments for purchases/supplies, wherein banks will automatically pay for the purchases made by customers, based on invoice details uploaded automatically. Secured payment gateways between the top vitamin C to 200 companies in the world, wherein a global clearing player (could be a top class global bank) will act as a central clearing bank for such companies and any funds or payments for them will be routed through the clearing bank globally. close The economic stability and the world class infrastructure offered by the Middle East makes it an attractive destination for setting up of shared service centers (SSCs). Locations such as Bahrain and Dubai have already emerged as preferred centers for setting up of regional hubs covering the Middle East and some African countries.Banks in the region are waking up to the tremendous potential of e-banking, and are investing heavily in technology. The next few years present exciting times for the business and service providers, as the new and existing players gear up to meet the challenges being offered by the immature Economy On corporate cash management in the GCC, V. P. Nagarajan, decision maker director at Emirates Trading Agency Ascon Group says Corporate cash management is an important tool of corporate finance today and, as days pass by, cash management will be the centre point around which the functions of finance will revolve.If we have a financial crystal ball and look into the future, we can visualize a corporate cash manager juggling his financial resources across the world in a computer the size of his palm. At the press of a button, he will be traveling over the notional financial top-notch highway (which should take about a few sanctions to reach the other parts of the globe and the universe) for a virtual reality decision across.Some of the easier decisions in those days will be there will no physical currencies (saves a lot of printing and paper expenses), no eight-fold branches of banks (all of them will be operating from internet or computer driven global centers), and still there will be the cash management sales bankers who will come and try to sell what they do not have. Hopefully corporate cash management will see a world of change as we move forward. References 1-http//www. gtnews. com/article/6920. fm Cash Management in the Middle East Rajeev Babel, HSBC Global Payments and Cash Management 2-http//www. gtnews. com/article/4172. cfmCash Management The Middle East PerspectiveVenkatesan Thiagarajan, Barclays 3- Essentials of treasury management second edition (association for financial professional) . 4- De Gidlow, R. , Donovan, S. (2005), Cash Management Techniques. In The treasurers Handbook 2005, Act, London 5- Heezius, D. , Polak, P. (2006), Country Guide The Czech Republic. In The Treasurers Handbook 2006, Act, London.