the rural rural poor poor toovercome poverty enabling asset liability management framework...

the the rural rural poorpoor

totoovercomeovercome

povertypoverty

enablingenabling

Asset Liability Management Framework

Consultation on 7th Replenishment – 2nd Session Rome, 21-22 April 2005



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Recommendation from Consultation on 6Recommendation from Consultation on 6thth ReplenishmentReplenishment

Consultation on 6th Replenishment

Review of Investment Policy in 2003:•Security of Investments

•Periodic Reporting to Executive Board•Asset Liability Management (ALM)

ALM ReviewDecember 2003: Endorsed by Executive Board

4 Action Points

June 2004: Executive Board Informal Seminar

on Implementation Status

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Asset Liability Management (ALM)Asset Liability Management (ALM)

Asset Liability Management (ALM):Asset Liability Management (ALM): The ongoing process of formulating, The ongoing process of formulating,

implementing, monitoring and revising implementing, monitoring and revising strategies on assets and liabilities to strategies on assets and liabilities to achieve an organization’s financial achieve an organization’s financial objectives, given the organization’s risk objectives, given the organization’s risk tolerances and other constraintstolerances and other constraints

Goal of IFAD ALM: Goal of IFAD ALM: Optimize the use of resources by Optimize the use of resources by

maximising loan and grant approvals while maximising loan and grant approvals while minimising financial risksminimising financial risks

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Implementation of ALM Framework: 4 Action PointsImplementation of ALM Framework: 4 Action Points

Action 1: ALM section created in TreasuryAction 1: ALM section created in TreasuryFocal point for IFAD’s ALM functionalityFocal point for IFAD’s ALM functionality

Expanded financial model to align it to ALM frameworkExpanded financial model to align it to ALM framework

Action 2: Reduced currency riskAction 2: Reduced currency riskElimination of unhedged currency exposuresElimination of unhedged currency exposures

Action 3: Reduced market riskAction 3: Reduced market risk Liquidation of remaining equities portfolioLiquidation of remaining equities portfolio

An allocation to Held-to-Maturity investmentsAn allocation to Held-to-Maturity investments

Action 4: Definition of committable resourcesAction 4: Definition of committable resources Proposal for 7Proposal for 7thth Replenishment discussions Replenishment discussions

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Financial Resource Management and Financial Resource Management and the Definition of Committable Resources the Definition of Committable Resources

Current practice:Current practice:

Full upfront financial backing: Full upfront financial backing: Committable resources include cash, Committable resources include cash, investments and promissory notesinvestments and promissory notes

Advance commitment authority (ACA):Advance commitment authority (ACA): Maximum 3 years of loan reflows (6Maximum 3 years of loan reflows (6thth Replenishment resolution)Replenishment resolution)

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Financial Resource Management and Financial Resource Management and the Definition of Committable Resources (cont’d)the Definition of Committable Resources (cont’d)

Proposed ALM definition of committable resources:Proposed ALM definition of committable resources: Include contributions receivables and portion of loan Include contributions receivables and portion of loan

receivables (both net of allowances)receivables (both net of allowances)

Advantages: Advantages: Increases new loan and grant approvals Increases new loan and grant approvals

Calibrates liquidity to meet disbursement requirements Calibrates liquidity to meet disbursement requirements (loans, grants, administrative expenditures)(loans, grants, administrative expenditures)

Uses earlier Members’ contributions more efficiently Uses earlier Members’ contributions more efficiently (contributions receivables but also loan repayments)(contributions receivables but also loan repayments)

Benefits from 28 years track records (only 2.7% of loans Benefits from 28 years track records (only 2.7% of loans require an allowance) require an allowance)

Reallocates assets from investment portfolio to loans Reallocates assets from investment portfolio to loans outstandingoutstanding

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Financial Resource Management and Financial Resource Management and the Definition of Committable Resources (cont’d)the Definition of Committable Resources (cont’d)

BALANCE SHEETBALANCE SHEET

31 December 200431 December 2004

Cash & investments 2 722Promissory notes (net) 270Contrib. receivables (net) 258Other receivables 154

Loans outstanding (net) 3 799

TOTAL ASSETS 7 203TOTAL ASSETS 7 203

Payables & liabilities 264Undisbursed grants 36Contributions 4 668

Fully committed

retained earnings 2 140General Reserve 95 TOTAL LIABILITIES,TOTAL LIABILITIES,CONTRIBUTIONS,CONTRIBUTIONS,RETAINED EARNINGS 7 203RETAINED EARNINGS 7 203

COMMITTABLE RESOURCESCOMMITTABLE RESOURCES Current Current DefinitionDefinition

Cash & investments 2 722Promissory notes (net) 268Contrib.receivables (net) -Other receivables 154Loans outstanding (net) -TOTAL ASSETS 3 144

Less-Payables, liabilities and PDFF 268General Reserve 95Undisbursed loans

and grants 2 918NET RESOURCES (137)

ACA approved by EB 137ACA approved by EB 137ACA ceiling 653ACA ceiling 653Unused ACA 516Unused ACA 516

Proposed Proposed

DefinitionDefinition

2 722 268

258

154919

4 321

26895

2 9181 040

n.a.n.a.n.a.n.a.

n.a.n.a.

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Comparison of IFAD with other IFI’sComparison of IFAD with other IFI’s

IFAD generally has a more conservative approach than other IFIs

YesUnder discussion

FSO: NoIADB: Yes; makes FSO investment decisions

YesYes(since 2004)

Status

Yes

85% principal (interest at other

conditions) subject to

liquidity policy

Yes

Yes

Yes but excl. receivables

against IOCs

85% principal (interest at other

conditions) subject to

liquidity policy

Yes

Yes

Yes

Unlimited subject to liquidity policy

Yes

Yes

Yes

95% principal (interest at

other conditions)subject to liquidity

policy

Yes

Yes

Yes but excl. receivables

against IOCs

ACA (3 yrsprincipal and

interest)

Yes

n.a.

a. Contributions

b. Loan reflows

c. Invest.income

d. Transfers from Bank

AfDFAfDFAsDFAsDFFSOFSOIDAIDAIFADIFAD

ALM Framework

Included in Committable Resources

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Scenario for 7Scenario for 7thth Replenishment Replenishment

Comparing the Comparing the proposed ALM definitionproposed ALM definition versus versus current current definitiondefinition of committable resources: of committable resources:

Achievable annual loan and grant approvalsAchievable annual loan and grant approvals

LiquidityLiquidity

Balance Sheet - composition of assetsBalance Sheet - composition of assets

Assuming: - 10% annual growth in loan and grant approvals in 7th Repl.- 7th Repl. of USD 800 million - ALM definition is limited to 5 yrs of net future loan reflows

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Achievable annual loan and grant approvals:Current definition: 10% annual growth in approvals in 7th Repl. Approvals remaining during 8th Repl. at the end level of 7th Repl. with an 8th Repl. of USD 1.1 billion (or requiring an 8th Repl. of USD 1.65 billion to maintain 10% growth)ALM definition: 10% annual growth sustained in 7th and 8th Repl. with an 8th Repl. of USD 1.1 billion

Scenario for 7Scenario for 7thth Replenishment (cont’d) Replenishment (cont’d)

Achievable Annual Loan and Grant Approvals

US

D m

illio

n

7th Repl. 8th Repl.ALM definition Current definition

Current Annual Approvals

400500600700800900

1 0001 100

2005 2006 2007 2008 2009 2010 2011 2012

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Liquidity – based on achievable loan and grant approvals: Current definition: ample liquidity ALM definition: lower but sustainable liquidity


ALM definition Current definition

Liquidity(Total investment portfolio)

7th Repl.

Current Liquidity Level

US

D m

illio

n

8th Repl.

1 800

2 000

2 200

2 400

2 600

2 800

2007 2008 2009 2010 2011 2012

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Result of ALM definition of committable resources: ability to approve more loans and grants reallocation from investment portfolio to loans outstanding

End of 7th Repl. End of 8th Repl.Loans outstanding Contributions incl. other receivables Investment portfolio

Current Definition

ALM Definition

ALM Definition

Current Definition

65% 65%

30% 30%

66% ↑ 67%

28% ↓ 27%

Balance Sheet - Composition of Assets

0

5 000

10 000

US

D m

illio

n

Current Definition

Current Definition

ALM Definition

ALM Definition

7 500

(Based on achievable loan and grant approvals)

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Asset Liability Management (ALM)Asset Liability Management (ALM)

Conclusions: Conclusions:

To support increased demand for rural poverty To support increased demand for rural poverty reduction, IFAD could increase its loans and grants reduction, IFAD could increase its loans and grants approvals by:approvals by:

Revisiting its definition of committable resourcesRevisiting its definition of committable resources

Proceeding cautiously and gradually towards a more Proceeding cautiously and gradually towards a more

dynamic financial resource management (like other IFIs) dynamic financial resource management (like other IFIs)

within a sound ALM frameworkwithin a sound ALM framework

IFAD Inception in 1977 IFAD 28 Years in 2005

Ap

pro

vals

Current approach

Dynamic approach

?

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Asset Liability Management Framework

7th Replenishment Consultations – 2nd Session Rome, 21-22 April 2005

the rural rural poor poor toovercome poverty enabling asset liability management framework...

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