GLOSSARY

Additionality	Additional loans provided by financial institutions because credit risks are partly covered by guarantee arrangements.
Adverse selection	Related to loans: Due to imperfect information, lender cannot differentiate the real risks of different borrowers and investment projects. In order to protect against potential losses, the lender might increase the interest rate above the rate of return of less profitable but less risky applicants. This would leave the lender with a portfolio of high-risk clients willing and able to pay the risk prime. Related to insurance: Tendency of poorer-than-average-risk clients to apply for or continue insurance when they expect losses for an amount greater than the premiums, while low-risk individuals may not seek insurance. Adverse selection occurs when the insured has information about a risk that the insurer does not have.
Asset/liability risk	A mismatch between the terms (amounts, maturities and costs) of assets (loans) and liabilities (sources of funds).
Asymmetric information	Where one party in an economic relationship (e.g. an agent) has more information than another (e.g. the principal). The borrower has better information on the risks of a proposed investment than the lender. Asymmetric information regarding the intention of the borrower to use or repay the loan as agreed may increase adverse selection and also moral hazard if contracts cannot be enforced at a reasonable cost.
Capital-recovery factor	This factor converts the present value of a loan into a series of equal payments needed to regain the loan principal plus compounded interest over a given maturity. Also called annuity factor.
Collateral	An asset, real or personal, owned by the borrower that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract. Also called security.
Equity/residual claim	A claim to a share of earnings after debt obligations have been satisfied.
First and second tier	First tier refers to retail lending, i.e. direct provision of financial services to clients. Second tier is wholesale, i.e. provision of refinance facilities to first-tier lenders for on-lending to clients.
Gearing ratio	The ratio of debt finance to the total capital of an enterprise.
Hedging	Taking a position in the futures market opposite to a position held in the cash market in order to minimize the risk of financial loss from an adverse price change.
Loan-loss provision	Allocation of resources in the current period to the loan-loss reserve in order to protect against default in future periods.
Lumpy investments	Investments that are indivisible and cannot be gradually expanded, i.e. that require a large lump-sum of capital.
Moral hazard	Risk of change in the behaviour of the borrower after a loan contract has been signed, for example an increased chance of default through carelessness, incompetence, recklessness, diversion of funds or unwillingness to repay.
Mortgage	A conditional conveyance of property as security for repayment of a loan, backed by a legal document deposited at a registry.
Pledge	A conditional conveyance of property as security for repayment of a loan, backed by a legal document deposited at a registry. As opposed to a mortgage, in some jurisdictions a pledge is confined to personal property, in some to transfer of possession of a property.
Put option	An option that gives the buyer the right, but not the obligation, to sell a specified amount of a commodity at an agreed price at any time until the expiration of the option. A put option is purchased to protect against a fall in price. The buyer pays a premium to the seller of the option.
Risk	The quantifiable likelihood of changes in parameters leading to lower than expected returns or losses.
Risk prime	Additional interest required by a lender as compensation for the risk that the borrower may default.
Systemic risks	Risks that affect a larger group of actors, such as inhabitants of a region, producers of a crop, or financial institutions. Systemic risks involve the probability that cumulative losses will occur from an event that ignites a series of successive losses along a chain of institutions or the markets comprising a system.
Uncertainty	Risk that cannot be measured.
Vertical integration	Integration of the successive stages of the production, processing and marketing functions of a commodity chain. It may occur through buyer/supplier contracts or through ownership and control under common management.