Annual Report 2007 - Investing In Africa

Annual Report 2007
Risk
Management (continued)
changes in the shape of market interest
rate curves producing different effects on
yields on similar instruments with different
maturities (yield curve risk);
changes in the level of market interest
rates producing different effects on rates
received or paid on instruments with
similar repricing characteristics (basis
risk);
interest-related options embedded in
contracts with customers, such as the
right for borrowers to prepay their loans
or for depositors to withdraw funds at
any time, often with little or no penalty
(option risk).
Liquidity risk, which arises from the general
funding needs of the activities of the group
and in the management of its assets and liabilities.
The group is exposed to the risk that
depositors’ demands for withdrawals outstrip
its ability to realize longer-term assets in cash.
The group, therefore, seeks to maximize liquidity
access and minimise funding costs by capturing
stable, reliable and cost-effective
sources of funding in all of its markets. There
are two types of liquidity risk: funding liquidity
risk, the risk that funds will not be available
when needed to meet our financial
commitments and trading liquidity risk, the
risk that assets cannot be liquidated quickly
enough. This can happen when the liquidity
of a market disappears making it difficult or
costly to close or modify positions. Interest
rate risk and liquidity risk are interconnected
given that management of either side of the
balance sheet has an impact on interest rate
risk exposure.
Foreign exchange risk: the risk to earnings
and capital arising from sudden changes in
the relative prices of different currencies. It
can arise directly through trading in foreign
currencies, making loans in a currency other
than the local currency of the obligor,
buying foreign-issued securities, or issuing
foreign-currency denominated debt as a
source of funds. It can also arise when assets
and liabilities are denominated in foreign (as
well as domestic) currencies. The group is
also exposed to foreign exchange risk arising
from adverse changes in currency exchange
rates used to translate carrying values and
income streams in foreign currencies to the
US dollar, Ecobank’s reporting currency.
Equity price risk: the risk of loss from
adverse changes in the value of equity portfolios
due to changes in the level of equity
prices.
Operational risk is the risk of loss resulting
from inadequate or failed internal processes,
people and systems or external events. It is inherent
in every product and service that Ecobank
provides. It manifests itself in a variety of ways,
including internal fraud, external fraud, transaction
processing errors, business interruption,
and disputes with employees, clients and vendors.
Operational risk also includes legal risk,
the risk of loss resulting from the failure to
comply with laws, prudent ethical standards
and contractual obligations. These events can
potentially result in reputational harm to the
group (reputational risk).
Sovereign risk includes political, convertibility
and cross-border risks. Such risks can arise from
actions of a sovereign state or to unforeseen
circumstances such as wars and uprisings. They
affect the ability of residents to meet their obligations
to a lender who is domiciled in another
country. In as much as the West African
Economic and Monetary Union (UEMOA) and
the Central African Economic and Monetary
Union share a “common” currency with the
support of the Banque de France, risk exposures
taken by the group’s subsidiaries registered
within either economic union on residents of
any country within either economic union are
not considered cross-border risk.
40