Umsobomvu Youth Fund Annual Report 2006 - Nyda

notes to thefinancialstatementsfor the year ended31 March 200622 Financial instrumentsThe primary risk arising from the Fund’s financial instruments is credit risk, re-investment risk, liquidity riskand management risk.Credit riskOne of the Group’s core business activities is to invest in small and medium enterprises. As a result it isexposed to credit risk. The credit risk at the investment stage of any potential investment is thoroughlyresearched and assessed in the due diligence process where the entrepreneur is evaluated, the viability ofthe enterprise is considered and various other indications are established and verified. In addition, creditrisk is managed by attaching various covenants and security to a loan made. For as long as the Grouphas an exposure to a borrower or investee company, the Group conducts an ongoing evaluation of thebusiness.Re-investment riskThis will arise out of early settlement of loans or divestiture from equity investments with the resultantrisk being that the proceeds are re-invested at a lower rate of return. This risk is managed by attachingrisk premiums to the investment instruments in the event of early settlement.Liquidity riskThe Fund has adopted a conservative cash flow management policy, to manage the risk of investmentsmade in instruments which are not readily realisable, in order to keep a healthy liquidity position.Management riskSince the Fund has contracted external institutions to manage its projects it has been exposed to therisk of these external parties no longer having the institutional capacity to satisfactorily execute themanagement of the Fund-sponsored projects. The risk is mitigated by ongoing monitoring and evaluationof these institutions.Interest rate riskThe Fund is exposed to cash flow interest rate risk and fair value interest rate risk on its loans advanced,attracting variable and fixed interest rates respectively. The details regarding which loans advanced attractvariable or fixed interest rates are detailed in note 8.Umsobomvu Youth Fund 2006 Financial Statements80