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Financial Tools to Mitigate Risks

Financial Tools to Mitigate Risks. Loan analysis best practices Financial linkages – capacity, insurance, diversified markets Inventory credit Hedging Insurance. Five “C’s” for loan analysis. Critical for HH in rural areas–micro+small. C haracter C apacity ________ C apital C ollateral

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Financial Tools to Mitigate Risks

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  1. Financial Tools to Mitigate Risks • Loan analysis best practices • Financial linkages – capacity, insurance, diversified markets • Inventory credit • Hedging • Insurance

  2. Five “C’s”for loan analysis Critical for HH in rural areas–micro+small • Character • Capacity________ • Capital • Collateral • Conditions • Management • Technical • Human and Labor • Loan terms • Production cycle • Markets

  3. Exporter/ Wholesaler or Processor Inspection & Licensing Co. Traders and Farmer Organizations Warehouse Receipts Map of Product, Receipt and Credit Insurance Co. Warehouse Bank Farmers Key Receipt Trade credit Trade / seasonal credit Product

  4. Hedging for Market Risk Mitigation FARMERS BUYERS FUTURE DEALS NGO/GO Tech Ass. BROKER BROKER Selling Bids COMMODITY EXCHANGE Buying Bids

  5. Investment, Leverage and Enhancement Mechanisms • Investment funds Ex. MicroVest, La-CIF, OikoCredit, Blue Orchard, SEAF • Special Purpose Vehicles Ex. Eastern Europe SPV • Guarantee Funds Ex. ACCION, Stabex Kenya, USAID DCA • Capital Enhancement Guarantees Ex. CIDA Guayape Honduras

  6. Capital Enhancement Guarantees Structured policy incentives • Tax • Legal reserve requirements • Major catastrophe insurance • Collateral policy requirement incentives Ex. ACB Thailand – collateralization of non- traditional assets – property leases, common property & equipment, intellectual property, vendor rights

  7. 3 “R’s”of risk • Risk • Return • Repayment Credit guarantees focus on repayment Root issues are primarily risk and return Structural responses must deal with all three

  8. Responding to the Future • Promoting healthy rural enterprise • Market competitiveness promotion • Capacity development • Infrastructural development • Technology promotion and research • Conducive tax and business environment • Capital enhancement and credit guarantees • Liberal financial sector with progressive collateralization policies • Guarantees and enhancements where feasible

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