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Price Risk Management in Tanzania: The CRDB Bank Experience Seminar on Cotton in Africa Price Risk Management in Tanzania: The CRDB Bank Experience Seminar on Cotton in Africa Trends, Incentive & Institutions: What works, What Doesn’t, & Why? Arusha, Tanzania September 6 th – 8 th 2007 _________ Presentation By: Amina Muhaji CRDB Bank Ltd Tanzania 1

§ Background Outline § Loan Portfolio § Problems & Search for Solutions - Price § Background Outline § Loan Portfolio § Problems & Search for Solutions - Price Volatility § Why we are interested in Price Risk Management § Kinga Ya Bei (KYB) at CRDB § The Program § What it takes to make it work § Education for Clients § Lessons Learned and Impact § Moving Forward § Conclusion 2

CRDB BANK LIMITED § The largest Bank in Tanzania in terms of assets, deposits CRDB BANK LIMITED § The largest Bank in Tanzania in terms of assets, deposits and loan portfolio § Present in every region in Tanzania § Total assets – US$ 783 million (Tsh. 1, 002 bn) § Customer deposits – US$ 663 million (Tsh. 848 billion) § Pre-tax profit US$ 30. 04 million (Tsh. 38. 4 bn) § Total loans and advances – US$ 352 million (Tsh. 450. 5 bn) 3

CRDB BANK’S LOAN PORTFOLIO (FIGURES IN TSHS BN) 4 CRDB BANK’S LOAN PORTFOLIO (FIGURES IN TSHS BN) 4

CRDB IN THE AGRICULTURAL SECTOR § Has the largest agriculture portfolio in Tanzania with CRDB IN THE AGRICULTURAL SECTOR § Has the largest agriculture portfolio in Tanzania with lending to cotton, coffee and cashew sectors of about 35% of total lending § New programs like collateral management have increased the Bank’s ability to give out more loans 5

LOANS GRANTED TO THE COTTON SECTOR 2001 – Mid 2007: 6 LOANS GRANTED TO THE COTTON SECTOR 2001 – Mid 2007: 6

DIFFICULTIES FACING CRDB IN FUNDING THE AGRICULTURAL SECTOR §Collateral (Low value, un-surveyed land) §Infrastructure DIFFICULTIES FACING CRDB IN FUNDING THE AGRICULTURAL SECTOR §Collateral (Low value, un-surveyed land) §Infrastructure §Knowledge §Price Volatility §No access to the market (phones, email) §Weather risk (droughts, floods) §Agricultural technology (bad farming practices, labor, aging &diseased plants, fertilizer …) §Traditional aspect of treating loans as grants 7

IMPACT OF PRICE RISK ON CRDB’s CLIENTS AND THE COMMODITY SECTOR: § Price Volatility IMPACT OF PRICE RISK ON CRDB’s CLIENTS AND THE COMMODITY SECTOR: § Price Volatility – Buyers must lower their buying prices to farmers to protect against risk § Farmers are unable to buy inputs, pay school fees, medical expenses, food …. . § Bank loans defaults § Financial weakness and losses to the sectors § Poor economic performance which results in dangerous standard of living for the people in developing countries 8

WHY IS CRDB INTERESTED IN RISK MANAGEMENT? § Risk management – by protecting our WHY IS CRDB INTERESTED IN RISK MANAGEMENT? § Risk management – by protecting our customers we also protect our loan portfolio § Expanding financial services to customers is always part of our business plan § Contribution to growth of the economy § Contribution to improving the standard of living of farmers § Support our Government in its poverty eradication efforts 9

ADDRESSING THE PROBLEMS OF PRICE RISK • CRDB identified price and yield risk as ADDRESSING THE PROBLEMS OF PRICE RISK • CRDB identified price and yield risk as the two major threats to its loan portfolio – – • To deal with yield risk CRDB provides only post- harvest credit based on an “overdraft” facility and requires collateral management To deal with price risk CRDB began in 2003 to work with the Commodity Risk Management Group on a risk management program The price risk management program (Kinga ya Bei) has two primary aims: 1. Help clients better understand quantify their exposure to price volatility 2. Assist clients in better managing risk by providing access to market based price risk management instruments ie futures and options 10

CRDB’s CLIENTS AND RISK EXPOSURE § CRDB’s clients – Major borrowers are cooperative unions, CRDB’s CLIENTS AND RISK EXPOSURE § CRDB’s clients – Major borrowers are cooperative unions, societies & private companies who create risk by: * Selling before Buying , and * Buying before Selling Once the customer has determined its risk position, evaluate the costs, benefits, then we look into impacts of different risk management solutions in order to identify the best solution/s for his business. 11

TWO MAIN COMPONENTS OF CRDB’S RISK MANAGEMENT PROGRAM 1. Risk Mgt education to clients TWO MAIN COMPONENTS OF CRDB’S RISK MANAGEMENT PROGRAM 1. Risk Mgt education to clients 2. Serve as market intermediary in purchase of options contracts 12

RISK MANAGEMENT EDUCATION • Understanding Market • International Market vs. the Local Market • RISK MANAGEMENT EDUCATION • Understanding Market • International Market vs. the Local Market • Understanding the difference between the physical & financial market • What the basis risk is and how to monitor it? • Risk Assessment 1. Risk position • Long vs short & the information required to determine the position? • How to design the risk position of the organization, interpret it and quantify it in to capture the actual magnitude of the risk. 2. Breakeven Analysis • Risk Management Products • Hedging techniques and how to apply them in different scenarios • How the International markets works and the mechanics of the contracts for options • How to manage a market account 13

GOALS OF TRAINING AND EDUCATION PROGRAM 1. 2. 3. Give clients the ability to GOALS OF TRAINING AND EDUCATION PROGRAM 1. 2. 3. Give clients the ability to understand their risk and alternatives for managing it Ensure clients has knowledge and confidence to make decisions on risk management Utilize options to manage risk when appropriate This will lead to: • Higher quality loan portfolio for CRDB • Lower default/ higher repayment rate • Expansion in the agricultural sector 14

LESSONS LEARNED/ CHALLENGES § Capacity building needs are high and programs to give clients LESSONS LEARNED/ CHALLENGES § Capacity building needs are high and programs to give clients the knowledge on risk management is time consuming and costly § Interpreting a client’s level of understanding can be difficult § Potential liability makes managers hesitant to engage in risk management activities § Client take-up is ultimately driven by a clients desire to innovate § Many clients are comfortable taking on risk § There is no ‘one size fits all’ solution for risk management; there is a diversity of solutions suitable for managing risk in different contexts § The problem is gathering of data – the data we get is not in the form we want 15

IMPACTS OF KYB PROGRAM § CRDB has bridged the market gap between developed world IMPACTS OF KYB PROGRAM § CRDB has bridged the market gap between developed world markets for risk mgt and developing country commodity organizations that need its products and services § Technical assistance provided by CRDB staff in Swahili has been crucial for communicating the product to clients § Market information provided to clients will assist them in making decisions on risk mgt § Education given to clients on how to identify & quantify their risk has significant benefits to client’s even if it has not resulted in a hedging transactions § Annual workshops done by the Bank have assisted to make clients improve their risk management practices. 16

MOVING FORWARD § Large need for education on risk management and risk management topics MOVING FORWARD § Large need for education on risk management and risk management topics throughout the agriculture and finance sectors § The Bank also wants to provide the best services possible to its clients in order to build a reputation in the commodity sector and sees this as a service for its clients and to draw new clients § Continue integrating risk management into lending activities § Reduce interest rates for customers who have hedged or managed risk etc § Proposal to the Government through Bo. T and Ministry of Agriculture, Food Security & Cooperatives for National Hedging 17

CONCLUSION § Price Risk Management (KYB) can be used to improve the ability of CONCLUSION § Price Risk Management (KYB) can be used to improve the ability of financial institutions to offer their services to agricultural producers § Greater capacity building is need through individual training to clients § More emphasis on risk management topics throughout the agriculture and finance sectors will ultimately result in less risky clients and larger lending portfolios 18

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