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  • 10.6.2-RISK AND THE RELATION TO TRADE CREDIT-LIKE RISK, THE AVAILABILITY OF CREDIT IS NOT STATIC EITHER

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  • Like risk, the availability of credit is not static either

     
     
    The last decade of the twentieth century saw substantial economic crisis in Eastern Europe, Latin America and Asia. Major losses were suffered by the international banking system. These have resulted in much more stringent risk assessments for lending, and new rules on the ratio 'own capital to lending' banks must maintain: the higher the risk factor, the higher the ratio of own capital to such lending will have to be. Such rules 'block' capital, reduce the amount of available credit and increase costs. Despite globalization and talk of the world as a single marketplace, banks have in general therefore become much more selective as to how much, for what purpose and to whom they will lend in which countries.

    Faced with such limitations, some in the banking world are looking to hedge their own exposure by securitizing some of the risk. For example, if funds are lent against warehouse receipts in a coffee producing country and these warehouse receipts are of good quality (from a substantial issuer) and they are freely negotiable, then in theory such receipts can be 'securitized'. That is, like any other financial instrument they can be passed to other financial institutions, thereby reducing the exposure or risk factor of the original lender. Such warehouse receipts must have the same negotiable status as warehouse warrants but many other preconditions must also be satisfied.

    Liberalization and deregulation in the 1980s and 1990s brought huge change in the export marketing of coffee worldwide: new rules, open markets and different players. But not all of the new players were creditworthy from an international banking perspective, and price volatility became huge. As a result the financing of coffee trading has become less 'bankable', more risky and less attractive.

    Add to this some fairly spectacular defaults caused by sudden price changes, over-trading, over-pricing, and quality problems, and it is no surprise that many banks consider such business to be long on risks and short on margins. As a result the number of banks willing to lend to commodity producers and traders is decreasing rather than increasing. But those that remain are more commodity focused, see new opportunities, and have the expertise to gather the necessary information. Therefore they have better insight into the actual business. Often such banks finance the entire chain, from roaster or importer back to the exporter, especially where the buyer actively supports the borrower's application.

    Other initiatives aim to make risk management tools available to individual growers and smallholder groups as an integral part of producer credit. (Electronic) warehouse receipts will likely play a significant role in all this eventually. In general, though, modern coffee trade financing solutions are increasingly coming from specialized foreign banks rather than from banks in coffee producing countries themselves.