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. |
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. |
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. |