Contents AUTHORISATION……………………………………………………………………………………………………………………………….. i ACKNOWLEDGEMENT………………………………………………………………………………………………………………………. ii EXECUTIVE SUMMARY…………………………………………………………………………………………………………………….. iii 1. INTRODUCTION2 1. 1 PURPOSE OF REPORT2 1. 2 PHASE I2 1. 3 PHASE II3 1. 4 PHASE III3 2. 1 HOW THE ASSET DEVELOPED IS LINKED WITH TCS? 6 2. 2 ROLE OF TCS IN THE SHIPPING WORLD7 2. 3 TCS IMPLEMENTING ERP AT KOCHI PORT12 3. PHASE I – ASSET REVIEW AND CERTIFICATION COURSE13 4. PHASE II – ASSET DEVELOPMENT18 5. OBJECTIVE 1: TO STUDY AND ANALYZE THE FINANCING TECHNIQUES OF: (A) NEW SHIPS, (B) SECOND HAND SHIPS33 5. 1. 1 COMPARISON OF WORLD’S TOP NATIONS IN TERMS OF SHIPS COMPLETED (IN GT)48 5. 1. 2 FINANCIAL MARKET PRODUCTS53 5. 2 OBJECTIVE 2: TO ANALYZE VARIOUS KINDS OF SHIPPING MORTGAGES AVAILABLE ACROSS THE GLOBE AND PROVIDE A COMPARATIVE ANALYSIS AMONG THE TOP NATIONS OF THE WORLD57 5. 2. 1 MORTGAGES IN THE MOST IMPORTANT SHIP REGISTRATION JURISDICTIONS: A COMPARATIVE ANALYSIS58 5. 2. 2 LEASING OF SHIPS62 5. 2. 3 REGRESSION ANALYSIS66 5. 2. 4 INFORMATION TECHNOLOGY AND SHIPPING70 5. OBJECTIVE 3: TO ASSESS THE IMPACT OF CREDIT CRUNCH ON SHIPPING FINANCE73 6. FINDINGS AND RECOMMENDATIONS82 7. REFERENCES85 1. INTRODUCTION 1. 1 PURPOSE OF REPORT The main purpose of the Project Report is to give reader an insight regarding work done during the Summer Internship Program. Scope of report Project Report covers the work done during Summer Internship Program in TCS. It gives a detailed analysis of the three phases of SIP in TCS. Given below is the phase wise work done during SIP. 1. 2 PHASE I ASSET REVIEW AND CERTIFICATION: E-COMMERCE Following tasks were completed in this phase: )To read and understand the basic concepts of E-Commerce Certification Course provided by Tata Consultancy Services Financial Technology Center. 2)To take the certification tests comprising of a separate test for each of the 20 chapters (5 questions per test) and a final test (100 questions). The minimum passing marks for getting certified were 60%. The certification was successfully completed with 80% marks. 3)To review the entire course and find the discrepancies and give recommendations if any. A total number of 18 discrepancies were found with 15 minor and 3 major. )To add a minimum of 5 questions to the existing question bank for each chapter of E-Commerce Certification Course. A total number of 107 questions were added to the question bank. 1. 3 PHASE II ASSET DEVELOPMENT: SHIPPING INDUSTRY This constitutes the second phase of SIP at TCS. Every intern is assigned a new topic in which he or she has to develop a complete course module according to the guidelines. There are various clients of TCS who are involved in various projects. For those projects, it is important for the team members to have an in depth knowledge about the related topic.
For example, if any team is working on a project related to Payment Systems, then it is mandatory for the members to take the certification test on the course related to payment Systems and qualify with at least 60% marks. The topic assigned for asset development was Shipping Industry. According to the guidelines, there were 18 chapters and for each chapter following things had to be included: 1)Write Up in Microsoft Word (around 15-20 pages for each chapter) 2)Presentation (Power point presentation) 3)Quiz (Question bank of at least 15 questions per chapter) 4)Key (An answer key for the quiz) )Quiz in GIF format (Since it is to be uploaded on the TCS website) 1. 4 PHASE III RESEARCH PROJECT Title of the project: SHIPPING FINANCE: INSIGHTS AND DEVELOPMENTS Area of the project: Finance Objective of the project: 1) To study and analyze the financing techniques of (a) New Ships (b) Second Hand Ships 2) To analyze various kinds of shipping mortgages available across the globe and provide a comparative analysis among the top nations of the world 3) To assess the impact of credit crunch on shipping finance Scope
The scope of the project is to provide an in-depth analysis of the financing aspect of shipping industry. The situation has been analyzed in context of the current meltdown scenario and a comparative analysis of the current trends in the shipping industry across the top nations of the world is done. Purpose The purpose of the project is to study and analyze how shipping finance is different from other types of lending. The use of different kinds of vessels in the shipping industry requiring lenders to take into account different considerations is also studied.
Also shipping industry is one of the most cyclic industries in the world. A comparative analysis between the various top nations of the world has been done keeping in mind the different kinds of mortgages available and documentation needed in various countries. Finally, since the whole world is experiencing the impact of credit crunch, so the impact of this credit crunch on the shipping world has been discussed in the final part of the project. Methodology The technique of secondary data analysis is used for the complete research process.
It includes: 1)Online data collection 2)Various books on shipping industry will be considered 3)Research papers and journals on shipping finance will be used for analysis purpose. Limitations 1)There are not many published books available on the topic “Shipping Finance” 2)Most of the journals and the research papers available through internet are paid and not frequently available. 3)Since there is no primary data being used, so there is a possibility that certain discrepancies may arise regarding the data and the verification of the same may not be possible.
Background Material •E-book on Shipping Finance by Stephenson Harwood •Research papers and journals on shipping industry •Other reports using EBSCO-An online database •Various articles on shipping world from the newspapers and magazine Literature Survey Various articles and reports are read on the topic shipping world and shipping finance. It is done by using e-books through internet and also various news papers such as Times of India, Business Standard etc. Ship finance refers to the long term obligation between the owner and the financial banks.
Shipping industry is very different in nature as compared to the other industries. The main reasons for this difference are the volatile nature of the industry along with its capital intensity and mobility. A large sum of money is advanced by the bank to one or more owning companies. But for advancement of such loans, some security is obviously needed. Thus mortgage is taken up by the bank for that security. Other mortgages may also be taken up by the bank on other ships for the same security.
As is the normal scenario, if the ship is about to be time chartered, an assignment of the time charter will be taken by the bank in order that the bank as assignee can benefit from the time charter so that mortgage debt can be reduced. In addition an assignment of insurance policies and P and I club cover will also be taken up to make sure that in the event of total or partial loss of the ship the bank as the lender may be suitably secured. The above step is taken up by the bank to make sure that t is completely secured against the insolvency of the borrower who intends that the bank shall obtain complete priority over the claims of other creditors against the borrowers. 2. ABOUT TCS Tata Consultancy services (TCS) is one of the leading IT Consultancy companies in the world. TCS is providing its expertise to many of the world’s largest companies in the areas of IT Services, Business Solutions, Outsourcing and Consultancy. TCS provides a comprehensive range of services & solutions for the clients to focus on their core businesses.
Such engagements require extensive and updated knowledge of client business domain. Above 40% of the revenue generated by the gamut of services provided by TCS is contributed by the BFSI vertical. More than 33% of the total employees of TCS are working on the BFSI projects. Therefore in view of the role of BFSI and the employees working on such projects, FTC (Financial technology centre) was formed. To build such domain knowledge, TCS piloted Financial Technology Centre (FTC) in July 2005 focusing on banking and financial services (BFS).
The success of FTC prompted expansion into other industries in mid-2007, including insurance, e-governance and telecom. Hence FTC now is creating assets for other industries through its Domain Competency Centre (DCC) arm. As on 30th Sep, 2008, FTC had more than 25000 registered associates and 13000 certified The main focal point of FTC is to provide training in the BFS domain, and it encourages research for the purpose. The activities taken up by FTC are: ? Research & Development ?Consulting/Advisory Services (Internal & External) ?Education/Training/e-learning/EDP ?Knowledge Management 2. HOW THE ASSET DEVELOPED IS LINKED WITH TCS? Figure 1: Linkage of TCS with the Shipping Industry Source: www. tcs. com The above figure shows a linkage between the TCS and the Shipping Industry. It says that TCS has an ISU named as Travel, Transport and Hospitality which further has a logistics branch. The logistics branch deals with the various shipping projects. For those shipping projects, there are technical personnel and operations personnel who work on it. These personnel are made to contact the TCS Domain Academy for obtaining the domain knowledge regarding their shipping project.
Hence this module provides the domain knowledge which is helpful for the personnel working on shipping projects. 2. 2 ROLE OF TCS IN THE SHIPPING WORLD What TCS Provides TCS provides flexible, reliable and efficient suite of Consulting, IT, Infrastructure, Business Process outsourcing, Engineering and Industrial Services and Enterprise Solution Services to help Logistics companies build the capabilities required to address key challenges, and improve process efficiencies, lower their total cost of ownership of IT, Infrastructure, and improve quality in IT delivery.
The Key Solution Enablers from TCS Include: •Experienced resource pool with domain and process skills •Global Network Delivery Model (GNDM™), a collaborative, best in class framework of people, processes and infrastructure consistently ensures delivery excellence •Centers of Excellence (CoEs) for Logistics domain and technologies.
The CoEs: oFocus on solution accelerators: re-usable assets, tools, best practices, methodologies (for example: legacy reengineering, enterprise transformation) and development of competency of TCS’ associates that help in providing TCS’ clients with new and effective solutions and aid in achieving high productivity, and significant cost savings from investment oLeverage TCS’ co-innovation network and client partnerships to address business challenges in the logistics value chain •Partnership with leading product and technology companies such as SAP, Oracle, IBM, Microsoft and i2 among others
Associated Products from TCS Products from TCS’ affiliate company, CMC Limited, for ports/terminal management: •Cargo Logistics Management System (CALMS) – computerizes the Bulk (dry, liquid and gas), break-bulk operations of a cargo terminal. •Marine Container Handling System (MACH) – is a comprehensive and integrated solution for handling marine and container operations About the Client TCS’ client is an industry leader and offers a diversified portfolio of shipping services.
To maintain its competitiveness, the company needed to align IT to its business objectives thereby making its operations more efficient and cost-effective. As the consulting partner, TCS provided the company with a comprehensive IT road map by systematically analyzing the company’s change drivers and mapping them with IT capabilities. A leading shipping company in India, the client provides shipping services including freight, charter hire, liner, container, break bulk and related services.
The company operates and manages a fleet of line vessels, tankers, bulk carriers, passenger vessels and off shore vessels. The company markets its services through a network of over 100 agents across the globe. With a turnover of nearly USD 1B, a fleet of more than 100 vessels and more than 50 managed vessels, the company manages almost a third of India’s gross shipping tonnage. Business Situation The demand for sea transportation has been on a high-growth trajectory in India, with the total container traffic at major Indian ports growing at a CAGR of 15%.
This has created several opportunities for the shipping industry. However, to tap this rising market potential and remain competitive, shipping companies need to continually meet customer expectations. TCS’ client was looking at ways to improve its customer-centricity and agility, while improving operational efficiency, to sustain its competitive edge. To do so, the company needed optimal and efficient utilization of all resources including IT. The current IT set up, however, lacked the capability to support the company’s evolving business needs.
The existing IT applications were disparate and performed localized functions. There was a high degree of manual intervention. Lack of a centralized data and document repository resulted in data duplication and hampered performance. A scalable enterprise-wide IT architecture was needed to support the company’s growth. On the infrastructure front, there was a need for interoffice connectivity, cost-effective communication system with vessels, network performance tracking, and management. In addition, the company needed to streamline its IT governance model to increase accountability and agility.
The governance framework needed to provide for a formal mechanism for IT and business interaction, project management process, service level tracking and implementation, and IT service management. The company engaged TCS to provide the necessary consulting inputs and draw up the IT road-map. TCS Solution Drawing expertise from its Global Consulting Practice (GCP), TCS carried out a detailed review of the company’s business architecture and the various components of its IT organization, to devise a business-focused IT strategy and implementation road map.
TCS’ recommendations were drawn up after an extensive evaluation of the business and IT change drivers. TCS’ IMPACT™ (Integrated Methodology for developing Process-oriented Architecture using Component Technology) methodology helped define the business components, business architecture, detailing out application and technical architectures, and conduct a technology assessment and realization planning. The salient highlights of TCS’ recommendations for IT governance, information, application, service process, and infrastructure architecture are as follows: 1. Application Architecture
TCS’ recommendations for the applications architecture were arrived following a detailed analysis of the existing applications to ascertain opportunities for reuse. The recommended applications comprised ERP and other commercial off the shelf (COTS) components as well as bespoke components and were classified as strategic, operational, and support systems. The implementation recommendations were mapped to the various business and technology drivers. The roadmap and timelines for implementing the proposed architecture were based on the relative priorities of each solution, determined through a dependency matrix. 2.
Information Architecture TCS created an Enterprise Information Architecture (EIA) that represented the relationships between all data entities. The information within the organization was classified from the business perspective into master data, transactional information, and analytical information, and from the technical perspective into information presentation, information organization, and information content. TCS recommended a migration strategy for master data, followed by transactional data leading to analytical data creation. 3. Infrastructure Architecture TCS presented a methodology comprising three phases
Foundation – To establish a foundation of upgradeable technologies that would grow with the business and promote interdepartmental information sharing Growth – To leverage opportunities for flexibility Optimization – To implement enterprise software applications and integrate them with business TCS devised a comprehensive infrastructure solution covering storage, connectivity, security, and ship to shore communication. The solution included recommendations on the model for deploying services through either ownership or outsourcing (managed services) with the advantages and drawbacks of each approach.
TCS also provided a three-stage roadmap that was strategized and planned by using its Infrastructure Assessment Methodology – To create the target infrastructure. TCS provided implementation roadmaps for all the above areas. TCS leveraged the domain expertise of its Shipping and Logistics Center of Excellence (CoE) and Program Management CoE to ensure application of best practices. The team also drew upon the expertise of its technical centers of excellence for SAP, Oracle, BI related products, Microsoft and EAI related products for architecture consulting and product evaluation.
The Infrastructure practice helped evaluate the IS products and fine-tune the architecture and roadmap for its implementation. Benefits to the Client The company is set to gain immensely by implementing TCS’ recommendations. These include •Improved communication •Streamlined operations •Centralized information •Streamlined process for reconciliation and account settling •Proper monitoring and control of assets •Improved customer-centricity through improved customer service and competitive tariff rates 2. 3 TCS IMPLEMENTING ERP AT KOCHI PORT
Tata Consultancy Services has implemented the Enterprise Resource Planning (ERP) at the Kochi port in February, 2009. The port of Kochi has become the first e-port in India and it took TCS approximately 10 months for the successful implementation of ERP at the port. The project is known as Christened ‘e-thuramugham’ and it integrates the port’s operational, financials, real estate and human resources systems on an integrated port information system. It is based on SAP platform. Once fully functional, the port will provide a single-window facility to the trade of filing applications, receiving service bills, payments and enquiries.
Advantages to the port: •Ability to closely monitor the port’s performance •Improved operational efficiency •A higher standard of service to the shipping and export-import community 3. PHASE I – ASSET REVIEW AND CERTIFICATION COURSE The course assigned for review was on the topic E-commerce. It was already there on company website but the interns were supposed to review it and note if any discrepancies were present. Also in each chapter, at least five new questions along with the key had to be added. The whole process was to be approved by the respective company guide. The course on E-commerce included following chapters:
Chapter 1: History of E-commerce Chapter 2: Introduction of Internet Chapter 3: Categories of E-commerce Chapter 4: E-commerce Architecture Chapter 5: E-commerce strategy and Global E-commerce Chapter 6: Mobile Commerce Chapter 7: S-commerce Chapter 8: Electronic Auctions Chapter 9: E-Procurement Chapter 10: E-Marketing Chapter 11: E-CRM Chapter 12: E-Governance & E-learning Chapter 13: Setting up of E-commerce Business Chapter 14: E-commerce Security Chapter 15: E-commerce Retailing Chapter 16: Legal and Social Impact of E-commerce Chapter 17: Electronic Payments Chapter 18: Trends in E-commerce
Chapter 19: Supply Chain Management Chapter 20: Case Studies A brief description about the above mentioned chapters is given in the following section: Chapter 1: History of E-commerce This chapter gives an idea about how e-commerce came into being. It gives an in-depth knowledge about the history and evolution of e-commerce. It talks about the concept of e-commerce, its characteristics and applications. Chapter 2: Introduction of Internet The Internet has brought about a drastic change in the way businesses are conducted all over the world. Paperless work has got a boost with transactions taking place on the web.
This chapter talk about the history of Internet, its evolution, its advantages & disadvantages and finally about the applications of Internet. Chapter 3: Categories of E-commerce This chapter deals with the various types of electronic commerce which are present. The manner in which interactions take place between various businesses, organizations, governments and individuals are assessed. An idea about the E-governance activities in India is also given. Chapter 4: E-commerce Architecture The chapter talks about the complete development process of an E-commerce.
Then it deals with the various E-commerce architectures (Client-Server, Three Tier etc. ) and their applications. Chapter 5: E-commerce strategy and Global E-commerce This chapter deals with the different types of strategies that exist and suggest ways to implement it. Then it describes the complete planning process. Certain successful implementations of E-commerce across the globe are discussed along with the critical success factors that were needed for it. Apart from it some case examples in which E-commerce could not be implemented successfully have also been discussed.
Chapter 6: Mobile Commerce Apart from discussing about the basics of mobile commerce, the relation between mobile commerce and e-commerce is also taken up in this chapter. Various applications and barriers to mobile commerce are also dealt in detail. Chapter 7: S-commerce It talks about various aspects of Social commerce (or S-commerce). It explains the reasons why one should join a social networking site such as orkut or facebook. Different types of social networking sites along with the different categories of users are also discussed. Chapter 8: Electronic Auctions
Electronic auctions or e-auctions are becoming increasingly popular in the business to business environment. Thus the chapter talks about various types of electronic auctions and the procedure to carry them out. A detailed discussion about various B2B auctions is also done. Chapter 9: E-Procurement In this chapter the concept of e-procurement is discussed at length. The procurement of goods and services online saves a lot of cost and makes the process efficient. E-procurement adds a lot of value to each business by automating the processes completely and making it error free.
Chapter 10: E-Marketing This chapter deals with the concept of Internet marketing. Various methods of advertising on Internet are discussed in detail along with the advantages and disadvantages of e-marketing. Chapter 11: E-CRM The chapter basically deals with the aspect of online consumer behaviour and the related customer relationship management. The concepts of collaborative filtering and the purchasing decision model are discussed in detail. It also tells about the different types of CRM that are presently being operated. Chapter 12: E-Governance & E-learning
Apart from discussing about E-governance and its various types, this chapter deals with the challenges faced while implementing E-governance. There is also a detailed discussion regarding knowledge management process and its relation to e-commerce. Chapter 13: Setting up of E-commerce Business It tells us about the complete procedure for setting up of E-commerce and then about establishment of e-commerce website. There is an in depth analysis from the point the planning process starts to the complete launching of a website. Chapter 14: E-commerce Security
The chapter deals with the various threats that are posed to e-commerce in the current times and then tells about the various security requirements for e-commerce. Both the technical threats and non-technical threats are discussed. The use public key infrastructure, firewalls etc. are discussed as means of e-commerce security. Chapter 15: E-commerce Retailing Electronic retailing (known as e-tailing) is defined as the process of buying and selling of retail items through the Internet. This chapter deals with all the aspects of e-tailing including advantages, disadvantages, characteristics etc.
The concept of online trading and electronic banking are also discussed along with the analysis of various job opportunities that are available on Internet. Chapter 16: Legal and Social Impact of E-commerce Various legal and ethical issues such as Privacy, Accessibility, and Intellectual Property Rights are discussed in detail in this chapter. The minute difference between legal and ethical issues is highlighted along with the remedies and acts that are currently applicable for the above mentioned issue. Chapter 17: Electronic Payments Electronic payment systems are becoming very important to online business processes.
A detailed discussion regarding various online payment systems such as use of digi-cash, electronic fund transfer, credit cards and debit cards etc. is done. The process of designing electronic payment systems is also discussed. Chapter 18: Trends in E-commerce It has been observed that the trend has shifted towards buying retail goods online. This practice has given a boost to E-commerce with merchants wanting to open online stores to meet the needs of their customers. E-commerce is increasing at a fast pace in India and is expected to reach $ 100 billion figure according to Nasscom.
This chapter talks on similar trends and discusses about the past and present trends in e -commerce and also about the future of electronic commerce. Chapter 19: Supply Chain Management This chapter focuses on how the internal backend processes of an organization need to be managed so that the customers are satisfied. The company needs to maintain good relations with its suppliers, vendors and all business partners. It deals with various concepts of supply chain related to electronic commerce. Chapter 20: Case Studies This chapter talks about a few case examples in the field of e-commerce.
The cases of Amazon . com – The King of E-tailing, Government to Employee Services in the US Navy, Online Diamonds – Thaigem. com, Guess? – A case of online Fraud and E-Bay – The Largest Auction Website are discussed in detail. Once the review part was over, it was mandatory for all the interns to take the certification test on their respective courses. Hence the certification course was successfully completed with 80% marks. 4. PHASE II – ASSET DEVELOPMENT The course on Shipping industry included following topics: Chapter 1: Overview of Shipping Industry Chapter2: Indian Shipping Tonnage
Chapter 3: Types of Ships Chapter 4: Shipping Finance Chapter 5: Shipping Management Chapter 6: Types of Cargo Chapter 7: CFS & ICD in Shipping Chapter 8: Business Analytics in Shipping Chapter 9: Safety Issues in Shipping Chapter 10: Containerization Chapter 11: Environmental Issues in Shipping Chapter 12: Handling Hazardous Material and Sensitive Cargo Chapter 13: Shipping Companies Chapter 14: Regulations in Shipping Industry Chapter 15: Documentation in Shipping Chapter 16: World Major Ports Chapter 17: World Major Shipping Companies Chapter 18: Shipping Companies in India
The primary aim of this program is to impart knowledge about shipping sector and equip associates with the requisite toolkit and expertise to enable them to implement this knowledge. Acquire knowledge about the operations. This will allow them to improve on the client requirements and help them understand their needs better than what they themselves understand, thereby providing quality service and solutions. A brief overview of all the chapters included in the module is given below: Chapter 1: Overview of Shipping Industry The four basic modes of transportation that are generally used for the delivery of goods are water, rail, road and air.
It has been observed that around the world, rail and road transport are used primarily for movement of goods within the country while shipping is used for the transporting goods within nations. Shipping industry is one of the most cyclic industries in the world and it is affected by a large number of factors including the world economic condition, political events, natural disasters to age of existing vessels, new vessel delivery schedules, availability of ship building slots with ship yards, government regulations etc. The main learning objectives of this chapter are •Basics of Shipping Industry The complete journey of the Indian Shipping Industry •Various ports in India along with the description of the major ports in India •Major Ports: Kolkata, Chennai, Cochin, JNP, Kandla, New Mangalore, Marmugao, Mumbai, Paradip, Tuticorin , Visakhapatnam and Haldia •Medium Ports: Bedi Bunder, Bhavnagar, Calicut, Cuddalore, Gopalpur, Kakinada, Karwar, Magdalla, Mandavi, Navlakhi, Nagapattinam, Okha, Porbandar, Ratnagi, Redi, and Salaya •Minor Ports: Azhikkal, Berikeri, Beypore, Cannanore, Coondapur, Dahej, Jafrabad, Jakhau, Kasegode, Mundra, Neendakara, Pindhara, Pipavav, Ponnani and Telicherry. Private Ports: Cocanada, Tuticorin Container terminal, Pipavav and Adani. Chapter2: Indian Shipping Tonnage Import and export of goods is done majorly through shipping these days. Sea-borne trade is expanding efficiently and it constitutes to about 90% of the world trade. Shipping is gaining popularity as a medium of transportation because of low freight costs associated with it. Liberalization has been an important factor in the growth of the Shipping industry. The relationship between economy, trade and shipping is given in this chapter.
A complete analysis of Indian Fleet including its growth, ownership pattern and built in Indian market is discussed in detail. the growth pattern for the industry can be divided in 3 eras: 1. 1947-1960 (known as era of Slow Growth) 2. 1960-1985 (known as era of Rapid Expansion) 3. 1985-1999 (known as era of Decline and Stagnation) Figure 2: Relationship between Economy, Trade and Shipping Chapter 3: Types of Ships This chapter deals with the different types of ships and vessels which are used for various purposes. The classification of ships is done based on many factors.
Ships can be classified on the basis of number of hulls, materials used, shape and size etc. This chapter also explains different types of ships and vessels and the purpose they fulfill. Figure 3: Types of Ships All of these categories of ships can further be divided into sub categories. All those sub-categories have been discussed in detail in the chapter. Chapter 4: Shipping Finance Shipping is a capital intensive industry. Out of the total assets owned by a shipping company, almost 90 percent of the fixed assets are constituted by vessels.
The term shipping finance is international because of the fact that shipping is a global phenomenon and hence the global currency used for shipping is US Dollars. Figure 4: Shipping Market Cycle Source: Shipping Finance by Stephenson Harwood, 3rd edition The various reasons that make shipping finance a distinct prospect are: •Capital Intensity •Volatility •Mobility of Assets •Business Structures The various topics that have been covered in this chapter are: ? Shipping Finance: An Overview ?Ship registration ?Financing of second hand ships ?Financing of new ships ?Shipping Finance in India ?Banker’s perspective.
Chapter 5: Shipping Management Ship Management refers to the shore based and shipboard management of day-to-day operations of a ship. Ship Management can include Crewing, Technical management, Commercial management, Bunkering, Dry-Docking and Accounting. Ship management encompasses a complete range of integrated marine services. One of the recent trends in ship management includes the use of regional fleet management offices to provide personal services to the clients in their own immediate geographic area. This is known as Decentralized approach. The main topics that have been covered in the chapter are: ?Ship Management: An Overview Outsourcing Ship management ?Sailing Schedules ?Different Aspects of Ship Management ?Ship Purser ?Dry Docking ?Ship Construction ?Fuel Oil ?Issues in Ship Management Chapter 6: Types of Cargo A cargo, also known as freight, refers to those goods or produces which are transported from one place to other by using ships, aircrafts, trains, vans or trucks. This chapter discusses about various types of cargo and cargo ships. Figure 5: Types of Cargo Chapter 7: CFS & ICD in Shipping The Inland Container (Clearance) Depots (ICDs) refer to those facilities which are usually located remote from the ports or inland.
The services offered by them include temporary storage and handling and custom clearance of containers and general cargo that enters or leaves the ICD and is usually in containerized form. A container packing/unpacking, cargo consolidation and distribution centre is known as CFS. This allows the shippers to use the break-bulk form of cargoes and transport them to the ICDs. It also helps in consolidating and packing the goods into containers ready for loading onwards transport to a port The main topics covered in the chapter are: ?The Role of ICD ?Functions of Container Depot ?ICD Equipment Handling Systems Factors Influencing Choice of Best Systems ?Performance Review in ICD ?Container Freight System Chapter 8: Business Analytics in Shipping Business analytics in the shipping industry include the factors that are directly responsible for affecting the shipping business globally. The application of porter’s five forces model to the shipping industry along with the various supply and demand drivers for the industry are discussed in the chapter. Figure 6: Application of Porter’s Five Forces Model to Shipping Industry: -Source: www. equitymaster. com/research-it/sector-info/ship/ Figure 7: Growth trends in shipping market
Source: Data Monitor Figure 8: Market Segmentation Source: Data Monitor The main topics covered in the chapter are: ?Shipping and Porter’s Five Forces Model ?Demand Drivers ?Supply Drivers ?Shipping Market overview ?Financial Year 2008: Some Key Facts ?Future Prospects ?Shipping Stocks: Key Considerations Chapter 9: Safety Issues in Shipping Shipping Industry is one of the biggest industries in the world. It has its wings spread in many directions such as cruise line, defense, fishing and trade etc. Thus it very important to have safety measures for all the above activities that ships are involved in to.
The major topics covered in this chapter are: ?Need of Safety in Shipping Industry ?Major Impacts ?Enhancing Maritime Safety ?Safety Issues for Cruise Lines ?Safety Issues for Tankers and other ships ?Safety Culture: A Detailed Analysis Figure 9: The Accident Pyramid -Source: Data Monitor During the course of the chapter, some examples have been discussed regarding the work done by ICS in enhancing the maritime safety. The major safety issues in a cruise line are Crimes, illness, accidents, lost luggage and Fire and Mechanical problems. Similarly issues related to tanker safety are also discussed.
Also the fact that probability of accidents in shipping increases manifold, has been raised. Chapter 10: ContainerizationIn the present day about 80% of the international trade is carried out by sea transport. It is very essential that the cargo which is transported from one place to the other must reach the destination intact without any damages. It is imperative for a shipping company to ensure least damage and pilferage of the cargo which is to be transported thereby improves efficiency. One method of doing the same is by packing the goods in large metallic containers.
Containerization is the method of packing goods in reusable containers of uniform shape and size for transportation. Figure 10: Containerized World -Source: http://en. wikipedia. org/wiki/File:Line3174__ The major topics covered in this chapter are: ?What is Containerization ?History of Containerization ?Types of Containers ?Economic Benefits of Containerization ?Global Trade and Containerization ?Performance of Container Terminals in India and Their Future Potential There is also a detailed analysis regarding the growth of container traffic in the world in the past few years and the reasons for this growth.
Figure 11: Container Traffic Growth in (i) World (ii) India – Source: WTO, Cygnus Research, 2005 Chapter 11: Environmental Issues in Shipping As the Shipping Industry continues to grow, it is becoming increasingly visible on the global environmental. Since there has been a considerable reduction in the emissions from land based industries and road transport, shipping’s share of emissions to air and water has become quite significant. In this chapter all the aspects of pollution caused by sea vessels are discussed. The main topics covered in this chapter are: Environmental impacts of shipping: An Introduction ?Sea Pollution ?Green Shipping ?MARPOL Compliance ?Community Health and Safety Figure 12: An Overview of Sea Pollution -Source: Group of Experts on Scientific Aspects of Marine Pollution (GESAMP) Apart from discussing about various reasons for pollution (for example use of TRIBUTYLIN, oil spills etc), the concept of Green Shipping has been dealt with in detail. Green shipping refers to the kind of shipping which includes those shipping procedures and strategies that are environment friendly and do not cause any harm to nature.
Chapter 12: Handling Hazardous Material and Sensitive cargo Shipping Industry is one of the biggest industries in the world. Various shipping firms, yards, ship outfitters and the ports work continuously to ensure smooth-running and safe traffic to the world’s inland waterways and oceans. And for such a huge industry, safety on board is one of the most important and key issues. A Dangerous / Hazardous good refers to any material (in solid, liquid or gaseous form) which can cause serious harm to the mankind, other living organisms and to the environment.
The handling of these materials is subjected generally to the chemical regulations. A widespread term used for the hazardous materials is HAZMAT or HAZCHEM. The main topics covered in this chapter are: ?Classification of Hazardous Materials ?Preparing/Documenting Hazardous Material ?Classified and Protected Sensitive Cargo Chapter 13: Shipping Companies The Indian Shipping Industry has its roots way back in 1910’s with Scindia Steam Navigation Company being the first Swadeshi Company to start in the country. Since then there have been a number of shipping companies emerging out and have actually been a great success.
A description of all the major shipping companies of India is given in this chapter. The main companies that have been covered in this chapter are: ? Shipping Companies in India: An Introduction ?Scindia Steamship Navigation Company Ltd ?Shipping Corporation of India ?Varun Shipping ?Essar Shipping Ltd ?ABG Shipyard Ltd ?GE Shipping ?Chowgule Steamships Ltd ?Container corporation of India Ltd ?Garware Shipping Corporation Ltd ?Mercator Lines For all the above mentioned companies, the basic outline for description covers the following headings: •Background of the company •Recent performance Recent strategies adopted Chapter 14: Regulations in Shipping Industry Since Shipping Industry is one of the biggest in the world and it forms a major part of the world trade, hence it is very much important to have a well defined set of rules and regulations for the proper working of the industry. The major acts and regulations that have existed so far are: ? Merchant Shipping Act 1958 ?Merchant Shipping Amendment Act, 2002 ?Merchant Shipping Amendment Act, 2007 ?Marine Insurance Act, 1963 ?Major Port Trusts Act, 1963 ?Marine Products Export Development Authority Act, 1972 The Water (Prevention and Control of Pollution) Cess Act, 1977 ? The Territorial Waters, Continental Shelf, Exclusive Economic Zone ? Other Maritime Zones Act, 1976. ?Coastal Aquaculture Authority Act, 2005 Chapter 15: Documentation in Shipping Shipping is a global industry and it covers around 90% of the total trade that takes place around the world. The chapter deals with the various kinds of documentation which is needed to perform the export and import activities through shipping. It also explains the global export and import trade cycle. Figure 13: The Global Trade Import Cycle
Source: http://www. esourcingwiki. com/index. php/Image:GTImportCycle. jpg Figure 14: The Global Trade Export Cycle Source: http://www. esourcingwiki. com/index. php/Image:GTExportCycle. jpg Chapter 16: World Major Ports This chapter talks about the ten largest ports of the world according to the latest figures of 2007. According to the IMO, the top 10 ports of the world for the year 2007 are given below in a rank wise order: 1. Singapore 2. Shanghai 3. Hong Kong 4. Shenzhen 5. Busan 6. Rotterdam 7. Dubai 8. Kaohsiung 9. Hamburg 10. Quingdao Chapter 17: World Major Shipping Companies
Shipping sector has shown an exponential growth in the past two decades. After the initial dominance of the European nations, Asian countries such as China, Japan and Korea have also emerged as major players. This chapter deals with the major shipping companies across the globe according to the latest figures of the year 2008-09. According to the latest figures of 2008, Major Shipping Companies of the World are: 1. APM-Maersk 2. Mediterranean Shipping Company 3. CMA CGM Group 4. Evergreen Line 5. Hapag-Lloyd 6. COSCO Container Ltd. 7. American President Lines Ltd. 8.
China Shipping Container Lines Co. Ltd. 9. Nippon Yusen Kaisha 10. Hanjag/Senator Figure 15: Top Ten Shipping Companies of the World Source: http://gcaptain. com/maritime/blog/the-ten-largest-container-shipping-companies-visualized/ Chapter 18: Shipping Companies in India The Indian Shipping Industry has its roots way back in 1910’s. The chapter gives a detailed description of the major ports in India. They include the following ports: •Scindia Steamship Navigation Company Ltd •Shipping Corporation of India •Varun Shipping •Essar Shipping Ltd •ABG Shipyard Ltd •GE Shipping •Chowgule Steamships Ltd Container corporation of India Ltd •Mercator Lines 5. PHASE III – RESEARCH PROJECT SHIPPING FINANCE- INSIGHTS AND DEVELOPMENTS 5. 1 OBJECTIVE 1: TO STUDY AND ANALYZE THE FINANCING TECHNIQUES OF: (A) NEW SHIPS, (B) SECOND HAND SHIPS Shipping finance possesses certain special characteristics due to which it has remained a specialist sector. Volatile markets, international service and mobile service are some of its few characteristics. The most prevalent form of financing in the shipping industry is the one in which lending is backed by some sort of collateral and mortgage. The various major banks that re primarily involved in providing ship finance are Christiana Bank, ABN AMRO, Citibank etc. Globally around 200 banks are involved in such service worldwide. There are basically two types of finance that can be availed in this category: fund based finance and non fund based finance. Fund based finance includes working capital credits and the term loans. Where as in non- fund based finance, there is no actual employment of funds and just a liability is created on the lenders to make payments in case of a default. It includes Letter of Credit, bills discounting and guarantees.
Apart from these, there is also a support from the government either directly or indirectly. Since in shipping industry both the new ships and the second hand ships are used regularly, hence shipping finance for both the cases (new ships and second hand ships) is equally important. The various reasons that make shipping finance a distinct prospect are: ? Capital intensity: The amount involved in shipping finance is very large both in absolute terms and also as a percentage of total asset value. ?Volatility: Shipping industry experiences frequent swings in revenues and asset values.
The key feature is that the risks involved in shipping industry are unique and different from other industries. Hence its a highly volatile industry. ?Mobility of Assets: There are numerous variations in the types and characteristics of different ships. Also, ships generally keep moving from one jurisdiction to the other. As a result lenders consider ships as standalone assets which experience wide swing in values. ?Business Structures: most of the ships are owned by the single purpose companies and the industry is highly dominated by the entrepreneurs.
There are two important aspects which are related to the shipping finance and which make it a very unique prospect: a) The International Element b) Universal Currency The International Element:, Ship finance is much more International than other forms of finance. A ship is an unusual asset because of the fact that most of the ships are capable of moving all over the world, by no means just for the owners of their own country. For example, an American bank, acting through its French office, lending to a Chinese controlled owning company and securing itself on a Greek registered ship.
Universal Currency: The universal currency of International shipping is US Dollar. Loans in other currencies are rarely seen and that too only to owners who operate their vessels within narrow geographical confines, such as ferry operators, and therefore have the bulk of their income in local currency. Ship Registration Ships are needed to be registered because of many reasons. Firstly, they travel around the world almost whole of their lives and hence do not regularly fall under the jurisdiction of any one country. Secondly, lenders will normally want to take security on them because they are comparatively valuable assets.
Thirdly, they have a strategic importance as they can be used in times of a war. And fourthly, countries may wish to restrict certain type of trade to their own flag ships considering their economic and political impact. Traditionally, it was mandatory that the ship owned by a person/company of a particular country could register the ship in that country only and also crewed by the nationals of that country only. But after the Second World War, the situation has changed and now most of the countries have begun to open up their ship registers in all the corners of the world. Types of Registry
Traditionally, a ship owned by a national of a particular country was registered in that country and crewed by nationals of that country only. It was subject to the jurisdiction of the authorities of that particular country. But in the year 1988, with the introduction of Merchant Shipping Act, the rules were changed and for the first time a British Ship was registered in the United Kingdom. Now, under the Merchant Shipping Act 1995, much more flexibility has been incorporated in the rules. The new advancements in the type of registry are: Open Registers: This term is used interchangeably with Flag of Convenience.
Before and after the Second World War, many countries began to open up their ship registers in all corners of the globe. It began with the use of Panamanian flag by the US crew members during the prohibition year; the trail blazers were so called PanLibHon registers- Panama, Liberia and Hondurus. The chief distinguishing characteristic of these open registers is their lack of restriction. Anyone can register his ship as one of this registers, as long as the ship satisfies the register’s requirements as to, for example, age and technical standards. But sometimes, in Cyprus, it is necessary to set up a locally egistered company to own a ship, but normally a shelf company can be acquired in a matter of hours and usually there are no restrictions on the nationality of directors or share holders. Offshore Registers: It is typically a register established in a colony or dependency of a particular country, with a view of attracting the registration of ships from that country which might otherwise go to an open register. The United Kingdom led the way, with offshore registers in places as diverse as Bermuda and Gibraltar. Figure 16: World’s top ten registered fleet, 1999 -Source: Shipping Finance by Stephenson Harwood, 3rd Edition
Figure 17: World’s four largest open registers by grt 1974-2004 -Source: Lloyd’s Register of Fairplay Data, 2006 The next graph shown below gives a comparative picture of the eight major shipping fleet of the world. Figure 18: Comparative Analysis of World Fleet by grt 1974-2004 -Source: Lloyd’s Register of Fairplay Data, 2006 It should be noted that Traditional national registers such as Sweden (30 years), Finland (31 years) and Canada (29 years) are among the oldest. Also Singapore (11 years) and Liberia, Hong Kong and the Marshall Islands (12 years) have the youngest fleets.
The Isle of Man (10 years) is the youngest of all. Bareboat Charter Registration Also known as parallel registration, Bareboat or Demise Charter Registration is a system that has developed or has been adopted in certain countries. According to it, the registration of a vessel in that country can be temporarily suspended for the duration of a bareboat, or demise charter, with the vessel being registered in the name of the charter on an alternative register for the duration of the charter, during which time it may fly the flag of the charterer’s chosen register.
Some relevant features of Bareboat Charter Registration are: •The owner’s registration is not terminated and only suspended and thus title remains registered on the primary register. •Similarly, mortgages will remain registered on the primary register. Consent of the mortgagee will usually be required for the registration of any bareboat charter, but for the mortgage to be registered or even noted on the secondary register, there is frequently no procedure -as the vessel will be flying the flag of the country of the secondary register and hence third parties will not be aware of the country of the primary register.
Ship Registration in India According to the Merchant Shipping Act, A person falling under any of the three categories given below can own a vessel under the Indian flag ? a citizen or citizens of India ?a company or body established by or under any central or state act which has its principle place of business in India or ? a cooperative society which is registered or deemed to be registered under the Co-operative Society Act,1912 Financing of Second Hand Ships
From 2004 onwards, reflecting on the boom times in the shipping market, there has been considerable activity in the new building markets and in large fleet refinances, where owners have locked into the comparatively cheap pricing available in the bank market in 2004/2006, but traditionally the financing of second hand ships remains the bread and butter of a shipping bank’s success. As suggested by the name itself, bank finance for second hand ships is generally used to assist an owner in purchasing a second-hand ship, but it is also often used in refinancing existing facilities secured on ships already owned by the borrower.
Refinancing is largely the result of competition between lenders-owners will generally approach more than one lender to finance a new acquisition and it is not uncommon for them to switch lenders during the life of a facility if they get better offers and terms. Types of Lender Figure 19: Types of lender Lenders providing finance for second hand ships can be categorized in four different categories: Generally large commercial banks are used as lenders for providing shipping finance. They have both advantages and disadvantages.
The positive aspect of it is that commercial banks usually have a large capital base and they are able to provide more number of services (for e. g. Electronic banking, better offers etc. ) to the customers. Also there are specialist shipping banks especially in countries such as Germany and the Netherlands. Since these banks are engaged in the business of providing shipping finance only, so they generally have a better insight of the matters related to the shipping industry and can prove to be very valuable to the customers.
But the negative aspects of such banks are that they are quite vulnerable to the industry driven market forces and are least innovative. They are perceived to follow the traditional approaching all the situations. There are certain smaller domestic or international lenders who have traditionally had a shipping base. Finally there are lenders who are having government back up and they provide lending facility to the domestic lenders only. Loan and Guarantee Facilities •The loan is available to the borrower in a single drawing only and is repayable over a period of time known as the Term. Repayment is generally done in equal installments. •US dollar is the universal currency used in the loans provided for shipping except in London and few other European markets where generally Euro is being used. •There is a fixed rate of interest over a period and the borrower has an option of fixing the rate of interest for periods of 1 month, 3 months or 12 months. •To protect themselves from the extreme movements in interest rates, borrowers can make use of the treasury instruments such as interest rate swaps, collars and floors. •The Term length can vary between four to ten years.
The Revolving Facility It refers to the facility in which the amount paid by the borrowers is made available for re-borrowing up to the maximum amount of the facility. This facility is especially useful for those ship owning groups that buy and sell ships on a regular basis, allowing them to repay on selling vessels and draw on the revolving facility to purchase new tonnage (approved by the bank) without having to negotiate the new facility. Revolving facilities can also be useful where the loan is being made available for working capital purposes rather than for buying vessels into that group.
Apart from allowing repayments to be redrawn, a revolving facility differs very little from a multiple drawdown term loan. Normally, the whole facility will still need to be repaid by a fixed date, interest will be calculated and fixed in much the same way, and the loan documents will contain identical representations and warranties, covenants, conditions precedent, events of default and so on. Syndicated Loans Historically with the rise in value of ships, individual banks increasingly wished their lending obligations could be shared with others.
Hence syndicated lending became more common, particularly with large loan facilities to groups. In a syndicated loan a group of banks will each commit themselves to make a part of the loan. On behalf of the syndicate, facility will be administered by one bank and will be known as the Agent. He will deal with the issues of fixing the interest rates, receiving repayments and accounting to the other syndicate members. Frequently, though not invariably, the agent role will be taken by the bank making available the largest share of loan.
Syndicated loans will make clear that each bank’s obligation to lend is entirely separate from the obligations of the others. In other words, if one bank, for any reason, fails to make its part of the loan available, the other members of the syndicate are not obliged to step in. There will also be a series of provisions regulating the relationship between the syndicate members and the agent. Borrower’s Perspective: The borrower has to generally deal with the agent bank only. But generally a unanimous decision is considered for any major decision such as release or variation in security, waiver of any payments etc.
Multi-Currency Options Although most borrowers will want to borrow in US Dollars to match their operating income, borrowers will occasionally wish to have the option to convert their loans into other currencies. The borrower will be permitted to specify an alternative currency in which the loan- and hence the repayments will be denominated for the duration of that interest period. This will allow the borrower to take advantage of the lower interest rates applicable to certain currencies, though it will also expose him to currency fluctuations if he selects a currency other than that in which his operating income arises.
The risk for the bank is that the selected currency will move too far from the US dollar during the interest period, potentially throwing into disarray, both the bank’s expected return on the facility and the borrower’s ability to service the loan. Hence, loan agreements containing multi-currency options normally require the borrower to make additional repayments to ensure that the outstanding balance of the loan in the base currency remains within a certain tolerance of what the outstanding balance would be had the loan repayments remained in the base currency.
Standard Security in Ship Finance Transactions •The following are principal types of security for which a bank will look in a ship-based transaction: •The main types of securities that a bank will look into while providing ship finance can be listed as: •a first priority mortgage over the concerned ship/ships •an assignment of all the Shipping s of the ship •an assignment of all the earnings of the ship; possibly including a specific assignment of a particular charter party •a personal or parent company guarantee and indemnity •a charge over or pledge of the shares of the borrower an assignment of all the insurances of that ship •an assignment of any requisition compensation of the ship •some form of security over either a cash deposit and/or earnings and retention accounts Equity Finance for Second Hand Ships The use of equity shares as a source of equity finance has traditionally come from retained earnings from vessel operations and retained profit on ship sales. Before 2004, there were very few companies that got listed and issued equity shares but since then trend is changing and now quite a few companies have jumped into financing their ships through equity method.
A few examples can be Mercator Lines, Shipping Corporation of India (both from India), Qatar Shipping Company (Qatar) etc. But since shipping industry is a cyclical industry, so it is not always possible for the shipping firms to produce a regular and a steady flow of dividends. Thus the trend of bringing in IPOs and using equity finance as a source of ship finance has cooled down in the recent past. Thus only a few large shipping companies such as major cruise lines are involved in the field. Mezzanine Finance This is a form of debt which will be subordinated to owner’s principal bank borrowing.
In return for the higher risk involved in being postponed to the senior debt when it comes to repayment and security, the lender takes the following steps: •Demanding a higher interest margin •Receiving a stake in the equity shares of the borrowing company at a future date at a fixed or ascertainable future price Financing of New Ships When a new building finance is considered, a number of political, financial and commercials factors are needed to be to be considered. Many governments have in fact now realized the importance of providing financial support to the ship builders and they have taken steps in the required direction.
Debt Financing •Buyer’s Credit- To obtain bank finance and pay for the ship in full on delivery (and/or to refinance its payment on pre-delivery installments) •Seller’s Credit-To make deferred payments to the credit provided by the builder An example of the installment schedule for a typical seller’s contract is given below: Signing of Contract5% After 6 months of signing4% Beginning of keel laying4% Launching4% Delivery3% Post-Delivery80 Figure 20: Example of Seller’s Contract But the majority of shipbuilding contracts are buyer’s credit and the amount which the buyer pays as a pre-delivery contract price is treated as advance.
When the buyer is required to pay in full on or before the delivery of the ship, he or she has to generally use the method of taking bank loan. The conditions are similar to those of financing second hand ships. However one major difference here is that the loan will be made available in tranches to meet the later building contract installments as they fall due. Also the builder has to provide the evidence to the bank that the event, for eg. keel laying, has occurred and it has to be accompanied with a certificate from the classification society.
Securities taken up by Banks •An assignment of the benefit of the building contract and refund guarantee. It enables the bank to continue with the construction of the ship in case of a default, take the delivery and sell the vessel to satisfy the outstanding debt. •To find a third party that will be ready to take up the assignment of the contract and sell the vessel for the bank. •Assignment of refund guarantee: It should be made sure that both the form of refund guarantee and the identity of the refund guarantor are acceptable to the lending bank. Islamic Finance
A unique form of commerce in which financial products and services that are being offered to the customers are structured in such a way that they not only comply with the english law but also with the Islamic law. Financial dealings, under the Islamic law, are governed by the canon law called the Shari’a. There is no codified existence of this law and instead, it has been derived from Quran and certain other secondary sources. The underlying requirements for doing trade under the Islamic law are: ? True and fair sharing of risk between all the participating parties. ?There is no exploitation by one party of another weaker party. Avoidance of all wasteful activities and encouraging all the charitable acts. Interest (riba) Under the Shari’a law, there is a complete prohibition on taking or giving of any interest for any financial transaction. In real sense, Usury is prohibited, which can be defined as any ‘undue accretion’ and interest on monies lent can be one of its examples. The main reasons for it are: ? To prevent ant sort of commercial exploitation by one party to the other party involved in transaction. ?Shari’a links the lawfulness of gain to risk-taking, thereby it views that gain is morally justifiable only when risk is faced to secure it.
However, there have been recent developments involving contractual allowances and permissible mark-ups representing the profit elements that the banks will get so that Islamic Finance can also be a profitable venture for them. Risk (Maisir) All those transactions are prohibited which involve excessive risk burden on any one party. Apart from the reasons mentioned above, it tries to cover up for all kinds of fraud, deception , gambling and other such activities. Islamic Financial Instruments used in Shipping Finance There are basically three kinds of financial instruments used under the Islamic Financial head: 1. Murabaha . Ijara 3. Musharaka Murabaha These are the short term contracts which are short term, low risk investment and principally in the form of trade financing for property or goods. It is also known as cost plus finance. Here, a property or goods are acquired by an investor from a supplier and then resold to a customer at a price which covers the cost incurred by the investor together with a sum agreed upon in the contract that represents compensation for the loss of foregone opportunity by the investor. In modern times, the second of these two sales is on credit (but in general, any of the two sales can be on credit).
According to Shari’a law, apart from the cost incurred by him, the investor can add charges for the risks that will not be born by the buyer and also for the opportunity cost of the funds that will be tied by the buyer until the payment is made. Ijara When investors opt for long term, higher yielding investments, Ijara or leasing is usually adopted by them. Some of the advantages regarding the leasing of ships is that investors may regard lease as a lower risk prospect because the legal title of the property is retained by the investor until the contract ends and thus there is an effective security of the