Forecast cash flows: Microcredit analysis Shanoun is a successful entrepreneur who has reached the point in his
Question:
Forecast cash flows: Microcredit analysis Shanoun is a successful entrepreneur who has reached the point in his life where his family’s modest material needs are secure. He now wishes to use his ’excess’ wealth to nurture would be entrepreneurs in parts of the world that are starved for capital, particularly where individuals, who have no substantial assets or loan collateral, also have no opportunities. He further wishes to have an impact in the poorest parts of the Islamic world, where the need is acute. He has chosen Indonesia, where most citizens adhere to Islam, as his locus of operations. Islamic law places special requirements on financial activities (see Note), and Shanoun has determined to help create a small, mutually owned credit union to provide a reliable source of capital to entrepreneurs.
25 First, he must help build a village wealth base to sustain the credit union. To do so, he will personally support the education, equipment and marketing costs of the business ventures for a period of three years, with the expectation that all participants will save an agreed proportion of their profits with a local Islamic bank. The proposed business activities include one convenience store per village and home based manufacturing of tourist trade items such as textiles, folk art and baskets, which Shanoun commits to market for three years. Second, at the end of three years and assuming a sufficient accumulation of capital, participants will pool their savings and the village will form a mutually owned, credit union that will take over the practice of making micro-credit loans to credit union members in the village, and perhaps surrounding areas. Shanoun commits to make capital contributions and to cover losses from credit union operations for its first four years. The following table contains data relevant to this venture.
Required:
1. Build a planning model that describes the features of this case (ignore reinvestment of distributed profits, taxes and inflation).
2. What amount of capital should Shanoun reserve now for the support of this venture.
3. How would you advise Shanoun about the sustainability of this project?
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