Utilizing Financial Engineering Products in the Construction Industry

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KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY
COLLEGE OF ARCHITECTURE AND PLANNING
DEPARTMENT OF BUILDING TECHNOLOGY

Topic:
UTILIZING FINANCIAL ENGINEERING PRODUCTS IN THE CONSTRUCTION INDUSTRY: THE PERSPECTIVE OF GHANA

An Undergraduate proposal presented to the Department of Building Technology of the Kwame Nkrumah University of Science and Technology in partial fulfillment of the requirements for the award of a Bachelor of Science (BSc.) An honors degree in Quantity Surveying and Construction Economics.

Student:
Joseph Kwamena Mensah

Supervisor:
Dr. De-Graft Owusu-Manu

October, 2012
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CHAPTER ONE
INTRODUCTION|
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1.0 BACKGROUND
Available literature points out that, the performance of the construction industry has a major influence on the economy of a country, because its activities are vital to the achievement of socioeconomic and developmental goals of providing shelter, infrastructure and employment (Chudley, 1997; Anaman and Osei-Amponsah, 2007; Ayarkwa et al., 2011). That notwithstanding, for a construction industry to play its due role in the socioeconomic development process, it should have the capacity and capability to meet the demand put into it, and to perform well (Ofori, 2012). Recently, the demand for infrastructure needed to speed up socioeconomic development in Ghana has witnessed a very significant boost in political support, (Ghana-Vision 2020). Indeed, this promises improvement in the delivery of public services at all state levels and innovation dynamics would contribute immensely in this endeavour. In Ghana, it is evident that innovative strategies are needed in the procurement and financing of construction project at all levels. These innovative strategies need to be based on a better understanding of how construction procurement actually can and should work in a very practical way to contribute to more projects being delivered throughout the industry, resulting in an increase in the much needed infrastructure for development of the country. Currently, few modern financial techniques are adopted or used (mortgaging, trade credits, loans and securities) in the Ghanaian construction industry to raise much needed funding. Therefore, there is an urgent need for a holistic approach which will enable contractors to use the most modern financial engineering products to support all kinds of projects for maximum optimization of resources. According to Reference for Business (2012), financial engineering is the design and construction of a new financial contract or the packaging of existing financial instruments to meet very specific risk and return requirements of the client. The term “financial engineering” has many connotations, and might have different meanings in different contexts (Marshall and Bansal, 1992). In conventional financing, it relates mostly to derivatives; but the term is broader than that. For construction finance, the concept is of significant importance, as far as this research endeavour is concerned. According to Reference for Business (2012), financial engineering is equivalent to the engineering function in building construction, whereas in construction contracts includes specifications regarding duration, size and type of project, securities and cost. Financial engineering contracts also include specification of size (or currency amount), the type of securities that will be used, the cash flows that they will generate, the risk associated with those cash flows and the date upon which contract expires or will be renewed. Financial engineering therefore can be better described as: ethics and strategies for initial innovative financial solutions. Similarly, financial engineering is concerned with tools and techniques for developing creative instruments and innovative products to meet the demands of a client. Undoubtedly, from the contractor perspective, there is a financial gap between the amount...
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