Rusch von Bongani Consulting explains that banks often lack sufficient awareness of physical processes in warehouses, factories or processing plants. “In order for the products to be eligible collateral for the RRC, the guarantee agreement must meet a number of conditions, including that it must be legally effective and enforceable in all relevant legal systems and that the bank financing the transaction must prevail over all other lenders over the products produced,” he said. Collateral management companies must conduct a regular stock review, which compares physical actions with theoretical actions. The larger the stock and the number of releases or revenue per week, the more these audits must be carried out, planned or not. According to Al-Ali, a CMA can prove to the supervisory authorities that the bank holds the goods stored in the warehouse, a necessary condition for obtaining favourable regulatory treatment for the agreement. While collateral management agreements bring a number of benefits to a transaction, they do not highlight the potential for misconduct: a well-developed CMA is simply not enough. While a CMA has many advantages, industry experts also warn that agreements will not do “good” bad business, and lenders still have to do their homework before entering into a transaction to minimize the risk of fraud, stolen shares or defaults. From the borrower`s point of view, a CMA allows the borrower to use his shares as collateral and to provide financing or working capital to manage their operations before receiving payment of their assets. Technological advances are also helping to improve the way collateral handles raw materials in warehouses. The strengthening of regulations has highlighted the benefits of using collateral management agreements to secure commodity transactions in sub-Saharan Africa. But bankers still need to provide their own bases to minimize the risk of fraud and corruption, writes Rebecca Spong. Missing or stolen shares, bribes, fraud, defaults or food that rot in silos are some of the risks that lenders and collateral managers face.
“Many collateral managers work at customer sites, so there is a tendency for employee collusion or fraud. There have been few cases in recent years. It is always a risk to manage millions of dollars of shares of a person who earns a meagre salary in comparison. There are many controls and balances that need to be maintained,” says Dheerie Govender, CEO of Global Collateral Control (GCC). Where is the goods collected? How was he brought to the silo or camp? All of these phases could be a risk if you don`t know. For example, if wet cereals are harvested and placed in a silo, they could contaminate and rot everything, he explains. “Banks can normally access these “constructive” assets if they have a collateral manager who is essentially in control of these stored assets, and that manager only responds to the financial bank,” he says. “Technology can never replace your own compliance and due diligence procedures if they know your client. If a client intends to take you and not repay your investment, they find a way to do so, regardless of the caliber of the collateral management team on site,” meyer explains.