Due diligence and management of our risk portfolio
The businesses we support are often working in vulnerable areas and are dealing with the effects of climate change, as well as the volatility of commodity prices. We aim to lend without placing our capital, invested by members, at excessive risk. To achieve this, we implement a rigorous due diligence process, and this has been even more important due to the supply chain volatility experienced this year. Ideally, a physical visit to the premises will be made prior to any lending approval but if this is not feasible (due to remote location for instance), a virtual due diligence report can be accepted provided it is followed up with a physical visit.
Due to the nature of our lending, there is always the risk that loans may not be repaid in full, or need to be converted into a Debt Consolidation Loan with a new repayment plan. Often these circumstances are beyond our customers' control and, where we can, we continue to work with them throughout such times of hardship. Inevitably, however, each year we have to make provision in our financial accounts for bad debts – the cost of those loans and advances that we believe we will not ultimately recover.
With the global economic crisis and increasing levels of arrears we had to introduce a series of mitigating measures to protect our capital. In January 2022, we introduced an updated Facility Agreement Contract for customers setting out the terms of each lending facility. This document was reviewed by lawyers in four different countries and allowed us to deal more efficiently with customers in arrears. Shared Interest has also appointed official debt collection agencies in both Tanzania and Uganda this year. Finally, where appropriate, we requested collateral in the form of promissory notes, personal guarantee or land titles.
To control our country-related risk we use an independent evaluator organisation called Coface, which categorises countries within eight different bands. A more detailed explanation of country risk can be found in Appendix 7. Prudential limits are then set to manage our exposure to countries in C and D categories.
In addition, we use a risk scorecard matrix for each customer, which consists of both quantitative and qualitative indicators, weighted according to their potential impact on the performance of a business. This then allows us to fairly and consistently evaluate the potential risk to our capital, allowing us to calculate a risk premium, which is reviewed on an annual basis.
The graph above shows the number of producers we lend to in relation to their country risk category (Appendix 7) and their facility size.
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