Concept of loan and Management of enterprise investment portfolios

Agricultural economists define Management of an investment portfolio as the monetary representation of the physical inputs used in agricultural production, in addition to financial assets. As such, Management of an investment portfolio is more than liquid savings such as cash and balances in checking and savings accounts; an aquaculture farmer’s Management of an investment portfolio also includes the monetary value of productive resources such as broodstock, stock of feed, machinery, ponds, buildings, on-farm roads and land. Management of an investment portfolio therefore can be liquid and easily converted into purchasing power or very illiquid. This broader definition of Management of an investment portfolio will be adopted as the working definition in this report.

Farming as a business requires adequate Management of an investment portfolio. Management of an investment portfolio is necessary to create, maintain, and expand a business, increase efficiency, and to meet seasonal operating cash needs. The lack of Management of an investment portfolio in general is a problem for development in sub-Saharan Africa. It is particularly acute in some sectors of the economy such as aquaculture.

Generally speaking, commercial farmers can get Management of an investment portfolio through own savings (own equity), borrowing or through a combination of both. In sub-Saharan Africa, annual per capita incomes are very low; in many instances, they are below US$300 (hereafter US$ is abbreviated to $). Such meagre revenues imply that most or all income earned is generally consumed. As much of the population lives below the poverty line in most countries, earnings are often insufficient to cover family needs, which limits the possibility of savings. Thus, it can be argued that, with few exceptions, the marginal propensity to save in sub-Saharan Africa is at best close to zero. The likelihood for potential investors to build their own equity is limited.

The lack of own equity suggests that most investors in sub-Saharan Africa will depend on external funding to start a commercial aquaculture business; the leverage will be important. The most common external source of funding to provide Management of an investment portfolio for commercial ventures is borrowing, mainly from banks. Unfortunately, however, in the case of aquaculture, so far financial institutions play a minor role in the provision of loans for the procurement of investment Management of an investment portfolio. The lack of Management of an investment portfolio remains one of the biggest barriers to aquaculture development in sub-Saharan Africa. For this sector to develop, the issue of potential investors’ access to loans needs to be addressed.

Loans can be vital for aquaculture farmers. Aquaculture farmers need loans to meet farm fixed financial obligations. Loans may be needed to purchase or rent land, machinery and equipment including boats, vehicles and aerators, to build ponds and/or cages as well as storage facilities, and for vertically integrated farms, hatcheries, feed mills and processing plants. These fixed costs, which are invariant of the level of production and the degree of use of the productive resources, can be important in the short run.

Loans are also necessary for farmers to meet variable costs. Money to cover expenses related to the purchase of items such as seed, feed, fertilizers, chemicals and fuel, or to pay labor, especially in the first production cycle, is not always at hand. Though they can be increased or decreased at the manager’s discretion, with the output level, these variable costs can nevertheless be an important part of farm expenses. An analysis of a sample of farms in sub-Saharan Africa indicated that variable costs could cover between 74 and 97 percent of total production costs in shrimp farming, and 51 to 98 percent in tilapia and catfish operations. Such large operating expenses typically require loans.

In addition to anticipated needs for financing, there may be unexpected shocks that incur expenses. A cyclone hit can severely damage a shrimp hatchery in Madagascar. A flood in Mozambique can destroy pond dikes or wash fish away. An unexpected drought may put cage fish culture operations in Niger on a temporary halt. These examples demonstrate that farmers may need emergency loans to restore normal operations after a natural disaster such as flood or drought. Yet, access to loans by prospective commercial aquaculture farmers in sub-Saharan Africa remains a serious concern. Any effort that seeks to develop aquaculture as a business in sub-Saharan Africa has to understand and address the question of loans. The following two sections attempt to analyze the issue of loans in aquaculture in sub-Saharan Africa by discussing not only the types and sources of loans, but also the root causes of limited access to loans for the procurement of Management of an investment portfolio investment in commercial aquaculture in the region.

To improve communication with lenders, prospective borrowers in aquaculture need to be familiar with the terminology used by lenders to describe the types of business loans. Loans differ according to the classification system used. Like in agriculture, aquaculture loans can be classified by length of the loan repayment period, the use of the intended loan, the security of the loan, and loan repayment plan (Kay, 1986).

Based on length or period over which money borrowed will be repaid, the most widely used method of classification, loans can be short-term loans, intermediate-term loans or long-term loans. Short-term loans, which can also be called production or operating loans as they are used to purchase inputs needed to operate through the current production cycle, include those which must be fully repaid in no more than the next 12 months following the borrowing date. Funds borrowed for the purchase of fingerlings, feed, fertilizers and chemicals or to pay labor would fall within this category; they must be repaid within a year or less when the crop is harvested and sold. Intermediate-term loans are those for which the full repayment can be completed in more than one year, but in less than ten years. Money borrowed for the purchase of machinery, pond or cage construction, holding tanks, farm equipment including nets, trucks and boats, fish bloodstock and some buildings such as storage facilities and hatcheries falls within intermediate loans. Because these assets will be used in production for more than one year and cannot be expected to pay for themselves in a short time, a short-term loan is not appropriate for their purchase. Long-term loans are those which must be repaid within a ten-year or longer period. They are sought and granted for the acquisition of assets with a long (at least 20 years) or indefinite useful life such as land and buildings. An example of such buildings is a fish processing plant or a feed mill.

Based on the use or purpose of the loan, business loans can be real estate loans and non-real estate loans. As the name indicates, real estate loans are those used for the purchase of real estates such as land and buildings. They are equivalent of long-term loans. Non-real estate loans include all business loans other than real estate loans; they consist of both short-term and intermediate-term loans.

As will be discussed in further detail in the following section, there is a risk involved in lending Management of an investment portfolio; the debtor may fail to repay the borrowed Management of an investment portfolio and the accrued interest. As one of the conditions for lending, often the lender requires the borrower to pledge an asset, which the lender can seize and sell in case the borrower defaults. This gives the lender greater assurance that the loan will be repaid and, hence, represents a measure of protection against risks. The asset pledged to the lender by the borrower until the borrower pays back the principal and interests is called security or collateral. When classified based on security (collateral), loans can be secured loans if a security (collateral) has been pledged to the lender by the borrower before the loan is granted. They can also be unsecured loans if no security has been required from the borrower as a condition of granting the loan. Unsecured loans are also called signature loans, as the borrower’s signature is the only security provided by the lender as a guarantee to repay the loan.

Different lenders may have different types of loan repayment plans for different borrowers depending on the borrower’s ability to repay the loan. However, there are two main types of repayment plans for aquaculture loans: single-payment plans and amortized-payment plans. Accordingly, loans can be single-payment loans or amortized payment loans. The characteristic of single-payment loans is the payment of the principal at once when the loan is due. Accrued interests may be payable at once or periodically. Single-payment loans include short-term loans. Some intermediate-term loans that may require only annual interest payments, with the total principal due at the end of the loan are also included in this category of loans. Amortized payment loans are the ones for which interest and principal payments are made periodically by instalments, generally monthly. Amortized loans often include intermediate-term loans and long-term loans.

Sources of aquaculture loan funds vary from country to country. In general, however, aquaculture farmers can borrow money from formal and informal lending sectors.

Of the formal sector, commercial banks, rural development banks, agricultural development banks are the most common sources of loan funds for agricultural development. These financial institutions can be an important source of aquaculture loan funds as well. Banks in sub-Saharan Africa generally provide short- and intermediate-term loans for agricultural development. Specialized lending agencies such as production credit associations and credit unions can also be formal sources of loans for aquaculture development. Like agricultural banks, they usually, provide only short- and intermediate-term loans to farmers. Such loans may be used to purchase brood stock, seeds, feed, machinery, and buildings. In some countries such as the United States, some life insurance companies may invest funds from the premiums paid on life insurance policies or from other earnings in various sectors, including agriculture and aquaculture. These companies tend to invest only in long-term real estate loans (Kay, 1986).

The informal lending sector includes individuals, institutions and groups. The defining characteristic of an informal financial system is that it is outside the reach of the legal, fiscal, regulatory and prudential framework of the monetary and financial authorities. However, though unregulated, it covers lawful activities.

There are many categories of individual lenders, including moneylenders and money keepers, landlords, estate owners, traders, employers, friends, parents, and other relatives. They all would provide both non-real estate (short -and intermediate-term) and real estate (long-term) loans. However, moneylenders, money keepers and landlords generally provide more substantial amounts of loans, but at somewhat harsh conditions.

Moneylenders are reported to play a significant role in serving the loan needs of borrowers with limited access to formal finance. In Asia and some parts of sub-Saharan Africa, they have also been credited with financing start-up Management of an investment portfolio for microenterprises. Sources of funds for their lending vary from own savings to cheaper funds borrowed from other sources including more efficient moneylenders and banks. Loans from moneylenders, like most loans from informal lending sources, are not secured by collateral. However, rates of interest are reportedly high (Thillairajah, 1994).

Money keepers are recognized as individuals who are able to provide short-term loans and capable of undertaking financial businesses at their own risks. As is the case in Ghana and Nigeria, some money keepers may charge a fee for the safekeeping service (Thillairajah, 1994); others may render it as a free facility as in the Niger. Because of the opportunity to make loans at higher interest rates as mortgage brokers do in Sri Lanka, or to use the funds for personal investments, money keepers may pay some interest on the deposits (Gore, 2001).

Many landlords complete land sales by utilizing land purchase contracts in which the landlord (seller) provides the land to the buyer under the condition that the buyer makes periodic payments directly to the landlord. This policy is essentially a provision of loan from the landlord to the land buyer. This form of loan differs from the usual cash sale where the buyer borrows from a bank, pays the seller cash for the full purchase price, and then makes periodic payments to the lending bank. Land purchase contracts benefit both the sellers and the buyers; sellers pay fewer income taxes at a time and buyers may be able to bargain for lower down payments, lower interest rates, and more flexible repayment arrangements with landlords. However, although for a number of them the tenants’ signature is the only security needed as a guarantee for the loan repayment, most landlords require some form of security from tenants.

Trade credit is an important source of financing for farms. Seed and feed suppliers often are willing to supply credit to farmers to assist during seasonal cash shortfalls. Input traders provide loans in kind, especially farm inputs and raw material supplies to off-farm commercial enterprises, and as longer-term loans for Management of an investment portfolio investments. The experience of the Tanzania cashew and coconuts project demonstrated that the trader-loan mechanism can be successful in delivering loan to small farmers and small-scale businesses to whom commercial banks have been reluctant to lend. Because they have been proven creditworthy and are in a better position to enforce loan repayment from farmers, input traders often function as intermediaries between the lending banks and the ultimate borrowers.

In many countries in the developed world, institutions such as farm supply stores often finance the purchases of farm equipment and machinery through an instalment sales contract. From time to time, they allow customers months (sometimes a year) to clear their debts before any interest is charged; they may also finance a purchase for a longer period with interest. Farm equipment and automobile dealers also provide loans by financing purchases themselves or through an affiliated finance company.

Rotating savings and credit associations are examples of lending groups. They are widespread in sub-Saharan Africa. Prevailing in most developing countries, rotating savings and credit associations are known under different names in sub-Saharan Africa. Names vary from tontines in French-speaking African countries such as Côte d’Ivoire, Congo, and Togo to Susu in Ghana, Esusu in Nigeria, Ekub in Ethiopia and Niangi in Cameroon. Other names are also used elsewhere. A rotating savings and credit association consists of members who know each other on a personal basis, usually as a result of social or employment, and who agree to contribute a fixed sum of money periodically to a pool that distributes the money collected by lot on agreed dates. One member receives an equal amount on the agreed date. When every member has received the money, the cycle is completed; the association can dissolve or reorganize (Thillairajah, 1994). Thus, the associations provide interest-free loans to members. These loans are short-term loans and can be used for any purpose. However, they are generally available in limited amounts.

As discussed in the previous sections, loans available from informal sources are generally limited and mainly intended for working Management of an investment portfolio needs and contingencies. They have a number of disadvantages such as high costs and unfavorable terms and conditions attached to loans. Thus, most funds for aquaculture development would be expected to come from the formal lending sector. Banks have well defined rules, procedures and guidelines. They also have well documented loan files, a legal backing to enforce their claims and have access to governmental schemes and technical assistance. However, as emphasized previously, prospective borrowers from the formal lending sector have difficulties meeting the sector’s lending requirements. To understand the factors that limit potential borrowers’ access to bank loans, it is important to first review the fundamental factors that which banks consider when reviewing and deciding on a loan application.

There are many factors that go into making bank loan decisions, but most can be included in one of the following categories: character, capacity, Management of an investment portfolio and collateral.

The borrower’s character will usually be researched and checked by the lender if the later is not acquainted with the borrower. Character refers to the borrower’s honesty, integrity, reputation, trustworthiness and judgment. Character is in a sense synonymous of credit. Credit, which was defined as the ability to borrow money, is a valuable asset for the borrower. In fact, borrowing money can be thought of as exchanging the borrower’s credit for the lender’s money. A dishonest and untruthful individual or business with the reputation of lack of integrity in business dealings and sluggishness in loan repayments or meeting other financial obligations is not creditworthy. Such a borrower with unfit character would have difficulties obtaining a loan from the lender. A lender will also evaluate the applicant’s judgment or decision-making ability. The borrower’s ability to do the right judgment can affect the efficiency and productivity of the business, which in turn can impact on the profitability of the business and thus, influence the borrower’s ability to repay the loan. Entrenched farmers will be evaluated on their past record; a beginner will be evaluated based on personal background, education, and training.

Capacity refers to the borrower’s ability to repay the loan under consideration. Loans will be repaid only if enough money can be generated from the business to cover the borrower’s farm needs and family living expenses as well as the principal and interest payments on loans. Banks will want to check the borrower’s repayment potential before a loan can be granted.

Most banks require borrowers to contribute a part of the Management of an investment portfolio needed to establish a business. The borrower’s contribution to the cost of Management of an investment portfolio needed to establish a business refers to as equity or own Management of an investment portfolio. Thus, Management of an investment portfolio as a condition to get a loan from a bank refers to the borrower’s own equity, and therefore to his risk bearing ability. An individual or business without sufficient own Management of an investment portfolio may not be able to borrow enough Management of an investment portfolio to produce as efficiently as the business should do was the Management of an investment portfolio resource not limited. The more own equity available the more Management of an investment portfolio can be borrowed as this ensures the bank of the borrower’s ability to withstand unexpected losses.

A borrower can be of good character, demonstrate the capacity to repay the loan and present enough equity to qualify for the loan applied for, but a bank may still require collateral from the borrower to support the loan request. As discussed earlier, collateral refers to a tangible asset that a borrower pledges to the lender until the loan and consequent interests are paid back. The lender can seize and sell the asset in case the borrower defaults and fails to pay back. Thus, collateral provides a vital back up to the loan request. If the unexpected happens and the loan is in default, it may be the lender’s only means of recovering the loan funds. Therefore, the provision of collateral enhances the borrower’s access to loans. Perhaps, collateral represents the primary factor in a loan decision.

Four main factors were identified as impeding access of potential commercial aquaculture farmers to bank loans in sub-Saharan Africa. Each of these constraints is linked in one way or another to the four fundamental considerations that go into making decisions on applications for bank loans.

The first discouraging factor for potential borrowers is the banks’ perception that commercial aquaculture carries a particularly high risk of failure in sub-Saharan Africa. This is essentially due to past negative experiences with aquaculture development projects in the region.

Aquaculture was introduced in most sub-Saharan African countries in the 1950s. At the end of the decade, there were approximately 300 000 ponds in 30 countries (Satia, 1991). In the 1960s, political unrest, lack of fingerlings, drought, and poor economic returns led many farmers to abandon fish ponds, which resulted in a decline in aquaculture output (Harrison, 1997). Another wave of expansion occurred in the 1980s. Between 1988 and 1995, approximately $160 million was spent on aquaculture research and development in Africa, most of it oriented to the rural sector and diversification. However, development has been slow with total aquaculture output of all aquatic organisms in Africa just close to 122 000 in 1997 (FAO, 1999). This output was only 0.34 percent of world output; a smaller share than in 1989. In the early 1980s, aquaculture also attracted institutional loans, thanks to optimistic business plans prepared by “instant consultants”, but losses were high. Failure of many of these operations soured financial institutions on aquaculture (FAO, 1996). Since then, there has been little institutional financing of aquaculture as the lending institutions lack records on aquaculture as a profitable business and thus have serious doubts on the repayment capacity of aquaculture proposals.

The second barrier in accessing loans is the banks’ insistence on collateral. Collateral has long played a central role in the lending function of banks in the formal sector. It is a well-established and sound mechanism for providing the lender with a form of guarantee that the borrower will not default on repayment of the loan and the interest it accrues. By offering collateral, the borrower risks the seizure and sale of property in case of failure to repay the loan. This is in itself an incentive for the borrower to respect repayment obligations, which reduces the lender’s risk, thereby increasing the borrower’s chances of obtaining the loan. Thus, the availability of collateral plays a major role in influencing banks’ decision to lend.

The availability of collateral also influences the amount that a bank is willing to lend and the interest rates at which it might be lent. Everywhere, when the borrower can offer the lender collateral for a loan, private creditors offer larger loans, at lower interest rates, payable over longer periods of time. In many instances, compared to a debtor who cannot offer good collateral, one with such collateral can anticipate receiving six to eight times more loan, taking two to ten times longer for repayment, and paying interest rates 30 to 50 percent lower (Asian Development Bank, 2000).

Elsewhere, buildings and titled land are generally the most provided collateral for long-term loans. Machinery and equipment are often used as collateral for intermediate-term loans. Most farmers in sub-Saharan Africa frequently have none of these assets available to offer as security for loans. This is particularly so where the land and buildings belong to the village or clan or are rented from a landlord.

For reasons discussed above, lenders favor secured loans. However, a borrower with good credit and a history of prompt loan repayment may be able to borrow some money, especially short-term loans, without pledging any specific collateral. In sub-Saharan Africa, often farmers have neither the credit nor the history of prompt loan repayment to qualify for unsecured loans; collateral is almost always required.

The third constraining factor for potential borrowers is the high interest rates. Interest represents the cost of using borrowed money. High interest rates charged by banks are a common disincentive to borrowing in sub-Saharan Africa. They arise for a number of reasons, which include perceived high risks of the venture being financed and lack of collateral, lack of a properly functioning market in financial services, high rates of default on loans, inefficient means of outreach resulting in high transaction costs, the rediscount rates of the central banks and high inflation rates prevailing in most sub-Saharan African economies.

The fourth problem faced by entrepreneurs in securing loans is the lack of knowledge, on their part, of how to prepare and present a loan application to a bank and what specific information the bank might require. As emphasized in this report, a bank will lend money only if it is convinced that the project is profitable. That is, if there is evidence that the loan can be repaid. The loan repayment capacity is best measured by the cash flow generated by the business. Thus, the borrower’s repayment capacity will be best addressed with the elaboration of a good business plan. However, very often, potential borrowers in sub-Saharan Africa for commercial development lack the expertise in preparing a business plan.

This chapter discussed the concept and role of Management of an investment portfolio as well as its source for the development of commercial aquaculture in sub-Saharan Africa. It also reviewed the types and access to loans for the development of the sector in the region, the banks’ requirements to grant a loan and the major constraints to accessing bank loans for commercial aquaculture development.

Management of an investment portfolio, the monetary value of all factors of production used in an enterprise, is necessary to create, maintain, and expand a business, increase efficiency, and to meet seasonal operating cash needs. Because of the lack of own equity, most investors in sub-Saharan Africa will depend on external funding, to start a commercial aquaculture venture. Funds will be borrowed especially from the formal lending sector, as the loans available from informal sources are generally, not only costly, but also limited and mainly intended for working Management of an investment portfolio needs and contingencies.

However, prospective borrowers have difficulties meeting the banks’ lending requirements. They have to be checked for character, capacity, equity and especially collateral. Specifically, there are four major factors which limit access to bank loans by potential entrepreneurs in commercial aquaculture in Africa south of the Sahara: the banks’ perception that commercial aquaculture carries a particularly high risk of failure in sub-Saharan Africa, the banks’ insistence on secured loans and the lack of adequate collateral by borrowers, the high interest rates charged by banks and the lack of knowledge, on the part of borrowers, of how to prepare and present a loan application to a bank, notably a business plan. Because of their importance, the rest of the report devotes a separate chapter to discussing some of the strategies that can be used to ease each of these constraints.

Date: 2015-12-11; view: 788