Smart People

I was watching something on YouTube and the narrator said this: “Smart People Don’t Buy into Hype, They Create It.”

What do you take away from this simple but profound statement?

Repurchase Agreements and how They can Help Businesses in Uganda

Business Financing: Repurchase Agreements

By Rogers Wanambwa

Let’s talk about Repos (Repurchase Agreements) in business and how they can help businesses right now.

First of all, what is a Repo?

A repurchase agreement (repo) is a short-term secured loan. Essentially, one party sells securities to another and consents to repurchase those securities later at a slightly higher price. The securities serve as collateral.

Example: On July 15th, Company A bought a huge machine worth UGX500m for its manufacturing process. However, it normally pays its employees on the 20th of the month and is now cash-strapped.

What they can do is go to their bank, cash to enter into a repo where the bank buys the machine from them at say UGX250m with a caveat that the company pays back UGX255m at the end of the month to regain ownership of the machine.

The company will continue using the machine in the meantime while it pays its employees. Problem solved.

Why Repos are useful in the economy?

The repo market helps companies, businesses, hedge funds, etc that hold large assets but may not have enough cash to run daily activities to access cash and do so.

Additionally, financial institutions themselves don’t want to hold on to the cash because it does not generate interest sitting idle. Lending it out does and that’s good for shareholders and general bank business.

The Fed in the US uses repos to regulate the financial markets, with things like Quantitative Easing and so on but that is for another time.

What do you think though? Can this help businesses stay afloat in Uganda and Africa? Do see the downside to it? Comment.

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