Wednesday, October 25, 2017

Overcoming The Menace Posed By Collateral Manager In Export Financing

Nigeria as a developing country mainly depends largely on commodities as the major products in the non-oil export sub-sector of the economy. This sector has not been able to experience the needed growth because the commercial banks that are supposed to be supporting the sector with the necessary funding, shy away from it due to the perceived inherent risks in funding the sector.

Export funding can be broadly divided into parts namely; pre and post export financing. The pre-export financing involves the provision of working capital needed for sourcing and processing of goods before export, while the post-export financing involves the provision of funds to cover the funding gap while awaiting payment from buyers abroad after an exporter must have shipped the product. It is interesting to note that while most exporters prefer a pre-export financing facilities, most banks that show a little bit of interest in supporting them prefer to avail them post-export financing facilities. This is mainly due to the fact that the risk involve in pre-export financing is seen to be higher than the post-export financing.

The major risk of the pre-export financing include diversion of funds, diversion of goods in transit, purchase of low grade products, theft of goods in the warehouse etc. One major solution to this risk has been the use of a collateral manager. According, collateral managers basically "look after" collateral on behalf of a lender financing goods. By using a collateral manager, the lender can make sure that goods, such as commodities for example, are being controlled in such a way that if anything goes wrong with the loan, such as the borrower defaulting on payments, then the bank can get its hands on the goods which are the subject of the loan, and sell them to recover monies lent.

In Nigeria, collateral managers are being used in export business to control the storage of goods, transit of the goods and eventual shipment to the export destination. In recent times, it is being reported among a number of banks that the use of collateral manager is becoming ineffective in mitigating the credit risk in pre-export financing. This is mainly because some of the exporters have been able to compromise the staff of the collateral management company on ground at the warehouse. This therefore leads to acceptance of low grade goods into the warehouse, while the bank paying for high quality goods, reduction in the quantity of goods in the warehouse despite the presence of a collateral manager, shortage of goods in transit between the warehouse and the port of loading despite the collateral manager escorting the truck.

The two major reasons why all these have been made possible is first because the collateral management service is usually outsourced by the bank to a third party hence, the bank is not directly in charge of the goods. Secondly, the staff of this company have poor pay package and this makes it difficult for them to resist the bribe offered by the unscrupulous exporters in order to get them to compromise. In order to permanently solve this problem, the bank will have created a collateral management unit within the financial institution. This should be manned by an experienced person pouched from collateral management company who will setup the unit and also conduct the needed training for his staff. I don't think this should be a challenge for any bank since most of them now own their security unit, loan recovery, fleet management etc.

Before I conclude, I will like to say that the Implementation of this recommendations by any bank will put the bank in control of everything happening on the field. It will also give the staff at the warehouse a sense of belonging and thus, leading to them having a sense of ownership over the goods. It will also make the staff to be very careful to ensure that the goods are in order throughout the transaction. All these will definitely lead to a significant reduction in the probability that the staff of the bank will compromise when approached with a bribe from the exporter.

Finally, I will like to say that any bank that really wants to support the non-oil export sector have no reason to shy away from the pre-export financing again. This is because, the suggestion offered in this article has showed an effective mitigants that has finally laid to rest the perceived credit risk that had made many financial institutions to stay from this sector.
Bamidele Ayemibo

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