Due diligence and management of our risk portfolio

We provide support to businesses operating in vulnerable areas, often facing challenges posed by climate change and fluctuations in commodity prices. Our commitment is to extend financial services to these businesses while safeguarding the capital invested by our members from undue risk. To achieve this, we have established a detailed due diligence process, which has proven even more crucial given the supply chain disruptions and many other challenges witnessed this year.

Our standard process includes an on-site visit to the business premises, allowing us to assess and gather valuable insights. However, we understand that certain locations may pose logistical challenges, making physical visits unfeasible. In such cases, we accept virtual due diligence reports, which include video evidence, provided they are comprehensive and accurate. These virtual assessments are followed up with a physical visit when possible, ensuring that our lending decisions are well-informed.

Credit Policies

Our lending decisions are guided by our credit policies, which play a crucial role in mitigating risk exposure. The Board has approved prudential lending limits that clearly outline the allowable proportion of our Share Capital that can be extended as loans, categorised by commodity and country risk. These limits are not static; instead, they are subject to periodic revisions. These revisions are driven by our continuous assessment of lending outcomes and a meticulous evaluation of associated risks.

As our Share Capital fluctuates, we simultaneously adapt the availability of funds that customers can borrow for specific commodities or in particular countries.  This expansion of lending capacity becomes possible because it ensures that we do not breach the prudential lending limits that would otherwise constrain our lending activities in those areas.

Due to the elevated default rates, we have taken a series of actions in the past year to mitigate the potential impact. Out of a portfolio consisting of 173 customers, regrettably, 102 of them currently have varying levels of arrears. Among these accounts, 68 have been in arrears for three years or more. It is essential to note that we only write off an account when we have confirmed that the associated business has ceased to exist, and there are no means for the signatories or guarantors to make repayments. As of now, the arrears committee consider many of the accounts in arrears to be recoverable.

Over the past year, our utilisation of third-party services such as debt collectors and legal professionals has increased although we have been very careful to appoint professionals that follow our ethical code of conduct. Given the associated costs, we exercise extreme diligence when deciding whether to take such action. In some cases, a business may still be operational but lack of saleable assets makes the cost of collection impractical. However, our decision-making process becomes more straightforward when we hold security of some kind. This security can take various forms, including a land title, a mortgage on a property, a lien on stock, a personal guarantee, or a promissory note (commonly used in Latin America).

Doubtful Debt

As part of our annual financial reporting, we are obligated to calculate an allocation for doubtful debt for the year and then create a provision for these amounts. This calculation involves reviewing the outstanding balance of customers in arrears and determining how much of that debt we believe is recoverable. Currently, the arrears portfolio includes 20 customers for whom we have made 100% provision. This means that if we were to make the decision to write off these accounts, we would not incur any financial loss. 

However, it is important to note that all 20 of these businesses are still actively trading. Any funds recovered from these accounts would be considered a gain against our overall annual doubtful debt expenses, providing us with an opportunity to allocate less than initially budgeted for doubtful debt costs this year.  For a more comprehensive breakdown of the figures and the profile of our doubtful debt provisions, we encourage you to refer to our Directors' Report and Financial Statements for the fiscal year 2022/23, which can be found in Appendix 1.

Risk Assessments

To effectively manage the risk associated with our country-related operations, we have established a detailed risk assessment system together with an independent organisation known as Coface. This allows us to categorise countries into eight distinct risk bands, providing us valuable insights and data to make informed decisions. For a more thorough understanding of country risk and its intricacies, please refer to Appendix 7, where you will find a detailed explanation.

These country band risks fall into categories A to D, with A being the lowest risk and D being the highest. In order to mitigate risk, we have prudential limits specifically tailored to control our exposure to countries falling within the C and D risk categories. These limits play a crucial role in safeguarding our interests and ensuring a well-balanced risk profile in our operations. The following graph is a good representation of this, with exposures in category A and B outweighing the perceived riskier lending done in category C and D risk countries. 

Lending Distribution across Country Risk Categories

This graph also illustrates our lending distribution across different country risk categories and the size of their facility. It is worth noting that a significant majority, specifically 83%, of our producer customers operate with lending facilities totalling less than £500k, the same as 2022. This figure stands in stark contrast to the broader landscape among social lenders within CSAF, who generally have much larger facilities and where only 35% of facility limits total less than USD 500k (equivalent to £446k). This contrast emphasises Shared Interest's unwavering commitment to our aim of supporting smallholder farmers and small artisan groups where we know our finance will have the biggest impact.

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 annually.

You can read the full Social Accounts document here.