QUESTION 2: WRITE SHORT NOTES ON CREDIT CRUNCH BEING EXPERIENCED IN WORLD TODAY.

A credit crunch is a reduction in the general availability of loans (credit) or a sudden tightening of the conditions required to obtain a loan from banks. Banks and other lending instructions become wary of lending funds for fear of bankruptcies and defaults and seek less risky investments. Credit crunches are considered to be an extension of recessions. The consequence is a prolonged recession (or slowly recovery), which occurs as a result of the shrinking credit supply.

CAUSES The crisis stems from the mortgage market where subprime mortgage loans were transformed into assets. Because of this, subsequently distressed mortgage loans have translated into distressed assets held by a multitude of financial institutions. The deregulation of the financial and housing sectors created the conditions that led to this crisis.

Subprime lending is the practice of lending, mainly in the form of mortgages for the purchase of residences, to borrowers who do not meet the usual criteria for borrowing to the lowest prevailing market interest rate. If a borrower is delinquent in making timely mortgage payment to the loan service, the lender can take possession of the residence acquired using the proceeds from the mortgage in a process called foreclosure.

QUESTION: IN WHAT WAYS DO YOU THINK YOU AND YOUR COMPANY IS LIKELY TO BE AFFECTED?

I am employed by the TSC as a teacher in a government secondary school. Credit crunch will affect way facet of our lives that involves money expenditure. The following are likely to be the major effects of the credit crunch to me and the organization I work for: -

(1)

A decrease in the availability of bank and Sacco loan as lending institutions put stringent measures to avoid default.

(2)

The pay deal between the government and teachers was pegged to economic expansion, which now seems like a pipe dream and therefore will not be affected.

(3)

The prevailing conditions require one to be prudent in the management of his/her finances. This will result in a decrease in spending.

(4)

A loss in investment as the value of shares continues unabated in Nairobi Stock Exchange due to global recession.

(5)

Increased loss of living occasioned by increased costs of production and consequent decrease in disposable income.

(6)

Inability of the institution to purchase necessities like learning materials. Failure of the government to remit funds for Free Secondary Education.

(7)

A decline in the education standards because availability of teaching and learning materials has a bearing on the quality of education.

(8)

Failure of the parents to pay school fees on time because they rely on coffee and tea income which may dwindle due to decreased international demand for our reports.

(9)

An increase in the level of school dropouts as parents become unable to sustain their children in the school due to reduced income levels.

(10) A decrease in donor funded projects in the school due to reduced spending in the donor countries.

QUESTION: WHAT TOOLS DO YOU REQUIRE AS A MANAGER TO CUSHION YOURSELF FROM SUCH EFFECTS?

1) OUTSOURCING When outsourcing, organizations are third parties to perform noncure business activities. Contracting third parties will enable my organization to focus its efforts on its cure competencies. Outsourcing will reduce cost.

2) DOWNSIZING Aimed at downsizing the employee base as a means of cutting costs. The organization should downsize skillfully to achieve significant cost reduction. The ultimate goal should be to eliminate non-essential company resources.

3) STRATEGIC ALLIANCE Strategic alliances are agreements among forms in which each commits resources to achieve a common set of objectives. My organization should form an alliance with

another school to purchase teaching and learning resources in bulk. This will result into reduced costs through economies of scale.

4) STRATEGIC PLANNING Strategic planning is a comprehensive process for determining what a business should become and how it can best achieve that goal. It appraises the full potential of a business and explicitly links the objectives to the actions and resources required to achieve them. My organization should adopt strategic planning to create a framework for discussion making in the organization and to train the decision makers to develop better information to make better decision. This way, effective utilization of resources will be realized.

5) BENCH MARKING Benchmarking improves performance by identifying and applying best demonstrated practices to operations. Managers compare the performance of their processes externally with those of competitors and best-in-class companies and internally with other operations within their own firms that perform similar activities. The objective of benchmarking is to find examples of superior performance and to understand the processes and practices driving that performance. My organization can adopt benchmarking to improve their performance by tailoring and incorporating these best practices into its operations not by imitating, but by innovating.

6) BALANCED SCORECARD A balanced scorecard defines what management means by performance and measures whether management is achieving desired results. The balanced scorecard translates

mission and vision statements into a comprehensive set of objectives and performance measures that can be quantified and approved. My organization can use balanced scorecard to facilitate changes that can be brought about by the credit crisis. 7) SCENARIO AND CONTINGENCY PLANNING Scenario planning allows executives to explore and prepare for several future alterations. It examines the outcomes a company might expect under a variety of operating strategies and economic conditions. Contingency planning assesses what effect sudden changes in the market or business disruptions might have on a company and devises strategies to deal with them. Scenario and contingency planning allows management to pressure-test plans and forecasts and equip the company to handle the unexpected. CONCLUSION There is no single business tool that is the panacea for handling the credit crisis. A multifaceted approach to this crisis should be adopted, the management should adopt the most appropriate tools under the prevailing circumstances.