Definition of 'Asymmetric Information'

A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge.

Investopedia explains 'Asymmetric Information'

With increased advancements in technology, asymmetric information has been on the decline as a result of more and more people being able to easily access all types of information. Information Asymmetry can lead to two main problems: 1. Adverse selection- immoral behavior that takes advantage of asymmetric information before a transaction. For example, a person who is not be in optimal health may be more inclined to purchase life insurance than someone who feels fine. 2. Moral Hazard- immoral behavior that takes advantage of asymmetric information after a transaction. For example, if someone has fire insurance they may be more likely to commit arson to reap the benefits of the insurance.

Asymmetric Information Problem

Definition of asymmetric information: This is a situation where there is imperfect knowledge. In particular it occurs where one party has different information to another. A good example is when selling a car, the owner is likely to have full knowledge about its service history and likelihood to break down. The potential buyer, by contrast, will be in the dark and he may not be able to trust the car salesman.
Asymmetric information in Financial Markets

Asymmetric information is a problem in financial markets such as borrowing and lending. In these markets the borrower has much better information about his financial state than the lender. The lender has difficulty knowing whether it is likely the borrower will default. To some extent the lender will try to overcome this by looking at past credit history and evidence of salary. However, this only gives a limited information. The consequence is that lenders will charge higher rates to compensate for the risk. If there was perfect information, banks wouldnt need to charge this risk premium.

Asymmetric Information in Insurance

Another example of asymmetric information is with regard to insurance. When insuring a good the insurer is uncertain how well the customer will look after a piece of property. For example, if a consumer was careless with locking his bike, the insurer would not want to insure it. This problem can lead to the related problem of adverse selection. To overcome asymmetric information in insurance, insurers will give big discounts for no claims bonuses this is the best way of gaining better information about careful and unlucky consumers Asymmetric information can also be analysed with game theory. For example, when deciding whether to cut or increase prices, firms will be uncertain about how their rivals will behave and react. They will have to make decisions whilst trying to second guess how other firms will respond.

Definition of 'Free Rider Problem'

1. In economics, the free rider problem refers to a situation where some individuals in a population either consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common resource. 2. In the context of a brokerage firm, a free rider problem refers to a situation where a client has been allowed to purchase shares without actually paying for them, and then subsequently sells the shares (ideally for profit).

Investopedia explains 'Free Rider Problem'

1. A commonly used example of the economic notion of the free rider problem is found in national defense. All citizens of a country benefit from being defended; however, individuals who evade taxes are still protected by the same common resource of national defense, even though they did not pay for their fair share of the resource. 2. The problem with this scenario is that the client, if allowed to free ride, can profit from a stock trade without actually using any of his or her own capital. This is illegal.

Definition of The Free Rider Problem. This occurs when people can enjoy a good service without paying anything (or making a small contribution less than their benefit.) If enough

people can enjoy a good without paying for the cost then there is a danger that, in a free market, the good will be under-provided or not provided at all. More on Definition of Free Rider Problem
Public Good and a Free Rider Problem

A public good has a classic free rider problem because the good has two characteristics:
1. Non-excludability cant stop anyone from consuming good 2. Non-rivalry benefiting from good or service does not reduce the amount available to others.

Therefore, public goods like national defence, street lighting, beautiful gardens may not be provided in a free market. A free rider problem is also said to occur when there is overconsumption of shared resources. Also known as The Tragedy of the Commons. For example, a fisherman may take a high catch and free ride on other fishermen who are more concerned to preserve sustainable fish stocks.
Solutions to Free Rider Problem

1. Tax. One solution is to treat the many beneficiaries as one consumer and then divide the cost equally. For example, UK national defence costs 31bn. This results in higher taxes for UK taxpayers. Therefore the cost of national defence is paid indirectly by UK taxpayers. This ensures everyone who benefits from the service pays towards the cost. Some may dislike this approach e.g. some anti-war protesters have tried to withhold a certain % of their tax arguing they dont want to make contributions to illegal wars. But, most people accept paying taxes. 2. Appealing To Peoples Altruism. For some goods like visiting a garden, the garden may be able to raise funds by asking for donations if you enjoy your visit. There will be probably be many free riders who dont make donation. But, enough people may be willing to make a donation to fund the cost of the garden / museum. This solution is only effective for services which have relatively low cost. People dont mind paying 4 if others free ride. But, if there was a voluntary donation of 1,000 for national defence, would anyone pay it? 3. Make A Public Good private. A beautiful garden could be seen as a public good. However, if you erect a high barrier and limit entrance to those willing to pay, it loses its feature as a public good and becomes a private good. 4. Legislation

To deal with the free rider problem associated with overconsumption of common resources. The government have tried various options such as:

Quotes difficult to implement and difficult to monitor Legislation on size of net size, number of fishing vessels Compensation to move away from fishing.

Free rider problem A problem underlying the provision of public goods that occurs when a person consumes or benefits from a good without making payment. The free-rider problem is the primary reason that public goods are produced by governments. Because public goods are characterized by the inability to exclude nonpayers, once a public good is produced anyone, everyone, can consume without making payment, that is, get a "free ride." Voluntary payments like those occurring in markets will not provide enough revenue to pay production costs. The only way to finance public goods is to force free-riders, and everyone else, to pay through government taxes. The free-rider problem also applies to commonproperty goods. The free-rider problem arises due to the fundamental nonpayer nonexcludability characteristic of public goods. Because nonpayers can continue to consume and benefit from public goods without paying they are unlikely to make voluntary payments. Given the choice of paying only for a public good or purchasing a private good and also receiving a public good for "free," most people will opt for the private good purchase and then free ride the public good.

Nonpayer nonexcludability and the resulting free-rider problem mean that public goods can not be efficiently exchanged through markets. Public goods can not produced by private business producers then offered for sale over a market like private goods. Once produced, buyers are able to consume public goods and thus have no reason to pay. With private goods, private business producers can refuse to transfer ownership without payment. Not so for public goods. Once produced everyone consumers public goods.
A Public Good Review Let's review the key characteristics of public goods. Public goods are nonrival in consumption, meaning consumption by one does not prevent the consumption by others. Everyone can consume public goods simultaneously.

More to the point of the free-rider problem, public goods are also characterized by the inability to exclude nonpayers, meaning anyone can enjoy the benefits of public goods whether or not they pay. For example, the protection from foreign invasion extended to Edgar Millbottom by virtue of a strong national defense extends to Alicia Hyfield, as well. As citizens and residents of the country, Winston Smythe Kennsington III, Jonathan McJohnson, and Pollyanna Pumpernickel are also protected.

More over, as citizens and residents of the country, Edgar, Alicia, Winston, Jonathan, and Pollyanna are all protected regardless of whether they pay or how much they pay for national defense. The only way to exclude residents from enjoying the benefits of national defense is to eliminate their resident status, that is, boot them from the country. For all practical purposes, nonpayers can not be excluded from receiving the benefits.
Riding for Free The nonexclusion principle of public goods gives rise to the free-rider problem. The free-rider problem occurs when a person consumes or benefits from a public good without making payment to help cover the cost of production. The free-rider problem arises when someone, figuratively speaking, receives a "free ride" on a public good. They "ride" the benefits of the public good for "free," without making payment.

By their very nature, public goods provide members of society with a "free ride." And for an efficient allocation of resources, public goods should provide people with a "free ride." Because the opportunity cost of consumption is zero, efficiency dictates that the price of consumption should also be zero.
A Market for Public Goods? The free-rider problem is what prevents public goods from being exchanged through markets. To illustrate, let's once again return to the provision of national defense. Suppose that a "market" for national defense is established and that the "price" charged each buyer is $100. That is, the total national defense budget of $30 billion is divided equally among the 300 million citizens of the country. To "purchase" national defense through this "market," each citizen needs to pay a "price" of $100.

Quotation marks are used for several terms in the preceding paragraph, because the free-rider problem prevents this "market" from working like a market should work. The key is that regular markets are voluntary. Buyers decide to buy or not to buy. They voluntarily choose whether or not to make payment and to purchase the good. Suppose, for example, that Edgar Millbottom is faced with this voluntary decision. He can choose to pay $100 to purchase national defense or not. If he pays $100, then he receives the benefits of national defense protection. However, if he decides NOT to pay $100, then he still receives the benefits of national defense protection. As a human being who prefers more to less, it makes sense that Edgar chooses NOT to pay the $100. If he pays, he receives national defense. If he does NOT pay, he can receive national defense PLUS other good purchased with the $100, such as an MP3 player. Suppose then that half of the 300 million residents of the country make the same choice, which they are free to do in this voluntary market. As such, the $30 billion national defense budget must now be divided among 150 million citizens making voluntary payment, a "price" of $200 each. In accordance with the law of demand, a higher price is bound to reduce the quantity demanded, that is, fewer citizens will voluntarily opt to pay this higher $200 "price."

For sake of argument, let's say that half of the remaining 150 million choose not to pay. The $30 billion budget is now divided among 75 million voluntary "buyers," generating a "price" of $400 each. This higher price prompts more to voluntarily choose not to pay, which places the payment burden on fewer and fewer voluntary "buyers." Eventually, when the "price" reaches $30 billion for the last voluntary "buyer," that person is also likely to opt out, making every resident a free rider.
An Involuntary Alternative If everyone is a free rider and no one voluntarily pays to finance the provision of national defense, then no national defense is provided. What's a country to do? The only alternative facing a country seeking to provide the benefits of a public good such as national defense is to force "buyers" to make payment, that is, to impose taxes on the citizens. How those taxes are structured is another question altogether.

The key implication though is that the free-rider problem prevents public goods from being produced and exchanged in the same way as private goods -- through markets. Public goods are fundamentally different from private goods and can not be exchanged through voluntary markets. The provision of public goods requires governments to impose mandatory taxes. The benefits obtained from public goods, combined with the free-rider problem helps to explain the creation and (at the very least) the continued existence of governments.
A Note on Common-Property Goods Common-property goods, like public goods, are characterized by the inability to exclude nonpayers. As such, they too are subject to the free-rider problem. However, this problem is compounded by the fact that common-property goods are also characterized by rival consumption. Not only can consumers of common-property goods benefit without payment, but consumption by one imposes an opportunity cost on others. This combination is a recipe for overconsumption and in all likelihood the eventual exhaustion or destruction of the common-property goods. Other Market Failures The free-rider problem of public goods is one of four key reasons that markets might fail to efficiently allocate resources. The other three are market control, externality, and imperfect information.

Market Control: Market control arises when buyers or sellers are able to exert influence over the price of a good and/or the quantity exchanged. An extreme example of market control exists with monopoly, a market with a single seller. Market control prevents a market from equating demand price and supply price.

Externality: An externality exists if a benefit is not included in the demand price or a cost is not included in the supply price. This means that the demand price does not reflect all benefits of a good or the supply price does not reflect all opportunity cost of production. As such, market equilibrium does not achieve an efficient allocation.

Imperfection Information: The lack of information among buyers or sellers often means that the demand price does not reflect all benefits of a good or the supply price does not reflect all opportunity costs of production. That is, buyers might be willing to pay more or less for a good because they don't know the true benefits generated. Or sellers might be willing to accept more or less for a good than the true opportunity cost of production.

Definition of 'Core Deposits'

The deposits made in a bank's natural demographic market. Banks count on core deposits as a stable source of funds for their lending base. Core deposits offer many advantages to banks, such as predictable costs and a measurement of the degree of customer loyalty.

Investopedia explains 'Core Deposits'

In addition to the advantages mentioned above, core deposits are generally less vulnerable to changes in short-term interest rates than CDs or money market accounts. Core deposits also encompass small denomination time deposits, as well as checking accounts. Banks can increase their core deposits with local marketing and customer incentives.

Definition
Banking deposits made by customers in the bank's general market area. A bank considers its core deposits to be a reliable source of funding, since customers in its general market area tend to be loyal and consistent. For example, a business owner who deposits checks at a local bank is less likely to alter his or her depositing habits based on general economic changes, such as interest rate fluctuations. also called primary deposits. Read more: http://www.investorwords.com/7088/core_deposits.html#ixzz2voKYPLap Deposits acquired in a bank's natural market area, counted as a stable source of funds for lending. These deposits have a predictable cost, imply a degree of customer loyalty, and are less interest rate sensitive than short-term Certificates of Deposit and Money Market Deposit Accounts. Included are small denomination Time Deposits and checking accounts. The deposits made in a bank's natural demographic market. Banks count on core deposits as a stable source of funds for

their lending base. Core deposits offer many advantages to banks, such as predictable costs and a measurement of the degree of customer loyalty. Read more: http://www.answers.com/topic/core-deposits#ixzz2voL8EXeM

Read more: http://www.answers.com/topic/core-deposits#ixzz2voKw2bfs

Offshore bank
From Wikipedia, the free encyclopedia
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An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:

greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) low or no taxation (i.e. tax havens) easy access to deposits (at least in terms of regulation) protection against local, political, or financial instability

While the term originates from the Channel Islands being "offshore" from the United Kingdom, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg and Andorra. Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements,[1] the personal income tax of many countries[2] makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accounts which may or may not be numbered bank accountsthey may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows. Defenders of offshore banking have criticised these attempts at regulation. They claim the process is prompted not by security and financial concerns but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organisation for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.

dvantages of offshore banking

Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil, who fear their assets may be frozen, seized or disappear (see the corralito for example, during the 2001 Argentine economic crisis). However it is often argued that developed countries with regulated banking systems offer the same advantages in terms of stability. Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of

government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits. However this is scarcely true now; most offshore countries offer very similar interest rates than those that are offered back home.

Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world. But equally, well resourced and developed countries such as New Zealand offer a safe and well administered background for these financial services. Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income. Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere. Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals. Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry, arguing with Charles Tiebout that tax competition allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a "race to the bottom" in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the offshoring of capital.

Disadvantages of offshore banking

Offshore bank accounts are sometimes less financially secure. In a banking crisis which swept the world in 2008, some savers lost funds that were not insured by the country in which they were deposited. Those who had deposited with the same banks onshore received all of their money back. In 2009 The Isle of Man authorities were keen to point out that 90% of the claimants were paid,[3] although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. In reality, only 40% of depositor funds had been repaid: 24.8% in September 2009 and 15.2% in December 2009.[4] Both offshore and onshore banking centres often have depositor compensation schemes. For example: The Isle of Man compensation scheme[5] guarantees 50,000 of net deposits per individual depositor, or 20,000 for most other categories of depositor. Potential depositors should be aware that any deposits over the guaranteed amount are at risk. However, only offshore centres

such as the Isle of Man have refused to compensate depositors 100% of their funds following Bank collapses. Onshore depositors have been refunded in full, regardless of what the compensation limit of that country has stated.[6] Thus, banking offshore is historically riskier than banking onshore.

Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering.[7] Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers. Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. This problem has been alleviated to a considerable extent with the advent and realisation of online banking as a practical system. Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy.[8] The Laffer curve demonstrates this tendency. The Bank Secrecy Act requires U.S. Taxpayers to file a Department of the Treasury Form 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR: Each person (including a bank) subject to the jurisdiction of the United States having an interest in, signature or other authority over, one or more bank, securities, or other financial accounts in a foreign country must file an FBAR if the aggregate value of such accounts at any point in a calendar year exceeds $10,000. (31 CFR 103.24). A recent District Court case in the 10th Circuit may have significantly expanded the definition of "interest in" and "other Authority" [9] Offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggeration.

CROSSROADS
Pronunciation (US):

Dictionary entry overview: What does crossroads mean?

 CROSSROADS (noun) The noun CROSSROADS has 3 senses: 1. a community of people smaller than a village 2. a crisis situation or point in time when a critical decision must be made 3. a point where a choice must be made Familiarity information: CROSSROADS used as a noun is uncommon.

Dictionary entry details

CROSSROADS (noun)

Sense 1

crossroads [BACK TO TOP]

Meaning: A community of people smaller than a village Classified under: Nouns denoting groupings of people or objects Synonyms: crossroads; hamlet Hypernyms ("crossroads" is a kind of...): community (a group of people living in a particular local area)

Sense 2

crossroads [BACK TO TOP]

Meaning: A crisis situation or point in time when a critical decision must be made

Classified under: Nouns denoting stable states of affairs Synonyms: critical point; crossroads; juncture Context examples: at that juncture he had no idea what to do / he must be made to realize that the company stands at a critical point Hypernyms ("crossroads" is a kind of...): crisis (an unstable situation of extreme danger or difficulty) Hyponyms (each of the following is a kind of "crossroads"): criticality (a critical state; especially the point at which a nuclear reaction is self-sustaining)

Sense 3

crossroads [BACK TO TOP]

Meaning: A point where a choice must be made Classified under: Nouns denoting cognitive processes and contents Context example: Freud's work stands at the crossroads between psychology and neurology Hypernyms ("crossroads" is a kind of...): convergence; intersection; overlap (a representation of common ground between theories or phenomena)

Management of bank loans: Some reform ideas Mohammed Hossain Of late, we have talked much about the financial scandal involving Hall-Mark. The malpractice found place in the national-level discussions and provoked outcry from all strata of society. Those include politicians, economists, Members of Parliament, high-ups of Bangladesh Bank, the Ministry of Finance, bankers, and other elite groups. Basically, three key issues were discussed such as political connection of the loan disbursement procedure, lack of proper monitoring and control by the regulatory authorities including Bangladesh Bank, and the question of internal audit mechanism within the banking sector. In a kind of brain storming job, the discussions looked to finding out the possible solutions to stop recurrence of such financial scandals or financial irregularities in the disbursement of loans. We must have to make a long-term planning to overcome this unhealthy situation. Such a planning, however, depends on a democratic government's willingness, Bangladesh Bank's (the central bank) active role and the World Bank's support, as the donor-agency is a leading and active working partner for various reform programmes in Bangladesh. Because, the purpose of democracy is to accomplish the objectives that best serve the interests of the people. It requires a government to recognise its people as its sovereign entity, and effectively solve or mitigate societal problems for their benefit. On the other hand, the central bank is the key institute in the process of economic planning. In practice, the central bank largely conforms to the government's agendas, which in turn are influenced by the parties in power and the strength of the stakeholders. Moreover, the concept of 'central bank independence and governance' (CBIG) has sparked a considerable number of debates. In addition, the central bank is created by government legislation; therefore, possibilities are always there to develop some kind of relationship between the central bank and the government. Therefore, if the government is willing to achieve something remarkable, then it will have a direct impact on society. For example, there has been much progress in Bangladesh through the initiatives taken by the Bangladesh Bank. An initiative titled 'Recent Reform Initiatives' by the central bank is highly appreciated for suggesting formation of the database of loan default, money laundering, online transaction, CSR etc. The Credit Information Bureau (CIB) of Bangladesh Bank is responsible, among others, for collection, processing and maintaining an updated database of credit-related information supplied by the relevant participants' institutions which extend credit. Moreover, the formation of CIB has eliminated the need for ad-hoc collection of certificates and decreased the time required for loan approval and disbursement. Regarding money laundering, the responsibility of Bangladesh Bank is to resist the crime of money laundering and prevent such criminal activities. Not only that, Bangladesh Bank has set up guidelines for the implementation of the Prevention of Money Laundering Act. Finally, the World Bank, since Bangladesh's independence, has been working closely with the country being involved with its various economic activities. The recent World Bank report 'Bangladesh Economic Update' in May 2012 mentioned, "The government should continue to build on the policies taken to

ease pressures on the Bangladesh economy." In order to strengthen the financial sector in terms of loan disbursement and recovery, it is of utmost necessity to set up a long-term policy, which must be supported by World Bank by providing logistic, technical and financial support to the government of Bangladesh and its central bank. The three key players i.e. the government, the Bangladesh Bank and the World Bank need to work together and newer efforts need to be given the highest priority. The ministry of finance and the law ministry should also work as supportive players. In the first step, we should give legal statutory power to the Bangladesh Bank to control the nationalised commercial banks in terms of lending long-term and big amount loans. It underlies the fact that if we provide the total loan approval authority to Bangladesh Bank, there would be less chance to approve the so-called political or bad loans. In this case, the condition is that we should transfer the long-term loan appeals to Bangladesh Bank, the final loan approval authority. Bangladesh Bank ought to be empowered to scrutinise and follow all relevant instructions before sanctioning the loans. However, the loan disbursement will be made by the respective banks as usual. At the initial stage, any loan application from any nationalised bank could be taken into consideration. We can turn to the Sonali Bank scam to elucidate the case, although the scenario had gone awry there. Having received all the applications for long-term loans, a nationalised bank will transfer the file to Bangladesh Bank. The board of directors of the nationalised bank should be neutral in the whole case. Once the loan is approved by Bangladesh Bank, then the state-owned bank will disburse the loan and will be monitoring the amount used. The audit and supervising process will continue as usual in every financial year. As we have still much confidence in Bangladesh Bank to work in an unbiased way and have efficient personnel to handle this types of work, the government should take this initiative in order to overcome unhealthy situations as well as avert criticism for political appointments to the board of directors of the nationalised banks. In this case, Bangladesh Bank may face four challenges; one is the legal issue, the second is financial, the third is logistic support and the fourth, proper human resources. The first one is important as we might have to amend the Bank Company Act and should work with the Ministry of Law and Finance. For the rest of the issues, I believe, the World Bank can continue to support us in implementing the model. If we envision a long-term achievement, that would be a good and practical idea. Last of all, in an economically emerging country like Bangladesh, the recovery rate of loans is not at a satisfactory level. On the other hand, bad loans or non-performing loans are also leaving a negative impact on the economy. So lending decisions for long-term loans should be made by the central bank of Bangladesh by opening a separate cell. And in order to carry out this activity, the government, the ministries concerned and World Bank should work together to block the flow of bad loans through bad channels. The proposed

model of providing bank loans to apparently innocent clients may receive attention of the authorities concerned. Who knows it won't have a long-term impact on the Bangladesh banking sector in particular, and the financial sector, in general? Dr Mohammed Hossain is a lecturer in Accounting, Griffith Business School, Nathan Campus, Qld, Australia.

Bangladeshi Bank Loan Collateral Issues

Hasan.S.Arsalan | 2:08:00 AM | 0 your comments-idea

Collateral security is a bane for all entrepreneur seeking loans from banks and financial institutions. Are there alternatives that can help the entrepreneur to start their dream? When Faruk of Artistical Collections, a Dhaka-based readymade garment manufacturer, set about raising a loan from a nationalized bank, he ended up pledging a property, which was valued 13 times The loan amount, as security to his loan. His fiTkt attempt to pledge a property was turned down because the valuation was not high enough to cover the loan. Faruk had to pledge papeTk of a twin building valuing close to Tk 80 lakh for a Tk 6 lakh loan. While the security was way too high, Kumar had nothing else to offer as collateral and he was running out of time. In the end this collateral got him additional loan of Tk 15 lakh. Five yeaTk later, he has launched his exports business and has repaid most of his loan. Not everyone is as lucky as Faruk. Collateral is a dreaded ten-letter word amongst entrepreneur Tk. Despite the immense potential locked in small and medium enterprises (SMEs), which largely drive the growth in an economy, many go sick, die prematurely and work sometimes even cease to exist. All from the lack of finance; caused as banks reject loan requests in the absence of hefty collateral Raising finance is a big problem that possibly every SME struggles with before making it to the other side of the line of existence. In the microcosmic world of the SME, performance is not the benchmark assuring a loan but a collateral as security for the loan is In Bangladesh, collaterals form a very significant part of the lending process. "For banks the only criterion an entrepreneur must fulfill is collateral, other aspects like the economic viability and technical feasibility are not half as important, which is why projects often fail," says Apurbo, a financial

consultancy firm. Determination and evaluation of collateral while the BB has prescribed ceilings on collateral as a certain percentage of the loan amount for SMEs, banks follow their own way of determining it. "We fix the collateral after assessing the entrepreneur's credit rating, risk factor, infrastructure, knowledge, experience and many such facto," says Tanvir Ahmed, AGM of Syndicate Bank. "No matter what, we always stress on 100 percent collateral," While on the other hand, not pin-pointing the parameter, the AGM of Dhaka Bank Shamim said, "We have a long list of about 50-odd parameter on which we assess the entrepreneur before deciding on the collateral amount." Upon submission of collateral by the borrower, banks evaluate the property. And in case they find it insufficient to sanction the entire amount of loan, they either bring down the loan amount or ask for more, which invariably is the case. For instance, Faruk Collections had to offer hefty collateral after banks asked for more post evaluation of his property. "For a loan amount of Tk 6 lakh, I had to provide collateral worth Tk 80 lakh," he says. Criticizing the flawed approach of the banks, Asadul Haque says, "SMEs are mostly private limited, therefore, technically, the liability of the promoter should be limited as well. However, the bank wants him to take more liability. The bank asks for guarantee of the promoter and thereby puts his personal assets at stake." Unworthy alternative In the absence of collaterals, SMEs often go for unsecured loans for which banks/financial institutions charge heavy interests. And while desperate entrepreneur choose higher interest rates to secure funds in order to retain liquidity, they often end up with failed ventures as they struggle to make ends meet. Collateral-free government schemes Taking note of the plight of the SMEs, which account for 40 percent of Bangladesh's domestic production and 70 percent of total exports, the government has started offering collateral-free loans under the guarantee cover of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). Under this scheme, banks can lend up to Tk 100 lakh to SMEs, without collateral security or third-party guarantee. The body guarantees up to 66 percent of the loss incurred by banks in case of a default by the borrower. For this collateral-free loan, the body charges about 1 percent of the credit facility sanction for loans up to Tk 5 lakh and 1.5 percent for loans above Tk 5 lakh from the borrower. The other reason why SMEs, despite being refused collateral-free loans don't go for them is lack of awareness. Sudhir Kumar of Eastern Arts Pvt Ltd says, "Banks intentionally don't inform us about such schemes as it means a lot of work for them as well. And again, we entrepreneu don't have the time to find out about such schemes."

In developed countries Providing collateral-free loans to SMEs is only possible when the risk associated with them is mitigated. Most developed countries have been able to do that with the help of their government. Governmentsponsored insurance programs, covering almost 90 percent of the loan value for smaller amounts, have helped maintain the liquidity of SMEs and this boosted the economy of the countries immensely. In some countries, a high proportion of SMEs are serviced by guaranteed loans38 percent in Japan, 20 percent in South Korea, and 20 percent in Taiwan. Most national credit guarantee schemes internationally, however, have little impact on the SME sector (they service only 1-2 percent of SMEs). It is also observed that almost all international major credit guarantee institutions and programs have been granted non-profit status and enjoy exemptions from paying income tax and Value-Added Tax. Africa has devised a new way of mitigating the risk. Apart from providing financial support to SMEs, banks there also provide non-financial support to try and help them be successful in their businesses. The support program includes mentoTkhip programs, regular free seminaTk, free budgeting software and more. Credit guarantee schemes (CGS) have been touted as the savior of the SME sector by governments across the world for decades now. Amongst the Asian countries, South Korea has stood apart in lending under CGS with least losses to the financial sector.

CHAPTER 4. TACKLING THE ISSUES OF COLLATERAL AND HIGH INTEREST RATES

As discussed previously, a common difficulty confronting many potential entrepreneurs seeking a loan to develop a commercial aquaculture venture in sub-Saharan Africa is the lack of the adequate collateral required by the banks. If a loan is offered, the interest rates demanded are prohibitively high. This chapter reviews some of the commonly used strategies to tackle these problems.

4.1 Alleviating the lack of collateral

Borrowers failure to meet banks collateral requirement may be because they simply do not have any asset that they could offer as collateral; it can also arise when borrowers have assets

that have a value but which the bank would have difficulty accepting as collateral. In both cases banks have tended to reject loan applications that are not accompanied by the offer of collateral acceptable to them. Approaches of alleviating the issue change accordingly. They vary from nocollateral strategies to government interventions.
4.1.1 No-collateral approaches: promotion of group lending

Recent decades have witnessed a rethinking of conventional banking practice in particular circumstances where it has become evident that there was market failure. The formal banking sector has long held to the assumption that loan risk is inversely related to asset ownership. The experience of the last three decades, however, suggests that lack of asset ownership does not necessarily mean that there exists a high risk of default on loans. The following experiences in group lending as a strategy of tackling the problem of lack of collateral illustrates this assertion. 4.1.1.1 Group lending: the Asian experience with Grameen Bank The Grameen Bank, established in the mid-1970s in Bangladesh, is widely cited as an example of innovative thinking about banking services for the poor people without assets. By 1998, micro credit banks modelled on the Grameen Bank had spread to 58 countries (The Times, 1998). Since its inception, the Banks mission has been to provide loans to the poorest of the poor in rural Bangladesh, to borrowers without collateral. In 2001, the Bank had grown into an important financial institution with 11 457 employees, 1 170 branches and 2.38 million borrowers (Grameen, 2001a) to whom it lends $31 million a week in very small loans (Grameen, 2001b). For most of its history, the Bank has had a loan repayment rate of 98-100 percent although in 2001 it had dropped to 90 percent[17]. The method used to ensure repayment relies on group lending[18]. This approach utilizes peer pressure, small weekly repayments, and personal contact with borrowers. Interest rates are set to raise revenues that will cover costs, making the Grameen Bank a sustainable, commercial financial institution servicing the rural poor (Grameen, 2001a). The Grameen Bank has since established the Grameen Trust Fund for the purpose of providing loans primarily to ventures that are risky, technology-oriented and otherwise deprived of financing from existing formal lending institutions (Grameen, 2001d). This Fund, operating on the same lending principles as the Bank, was covering all costs by 1999 (Grameen, 2001e). Although this example does not deal with the loan needs of potential commercial aquaculture ventures, it does establish that it is possible, through developing innovative approaches, to grant loans to borrowers who are unable to provide collateral. 4.1.1.2 Group lending: some African experiences Examples of initiatives similar to the Green Bank experience can be found in sub-Saharan Africa. In Benin, state-owned commercial banks were liquidated in 1990, making way for the emergence of a strong network of private banks serving urban areas, and the re-emergence of the Rural Savings and Loan Project, providing loans in rural areas. An adaptation of the Grameen model was developed for the project. Of Benins 5.4 million people, some 65 percent live in rural areas; most of them are poor and had difficulty making savings and accessing loan services (Mosele, 2001). Loans are only granted to members who have had a savings account for a

minimum of six months; loans cannot be more than double the amount deposited. Loan recovery rates had risen to 98 percent by 1995. The pre-requisite of a saving account encourages the mobilization of rural savings, which are utilized for loans. Decentralized decision-making helps reduce the screening, monitoring and enforcement costs of lending, and empowers members to both take decisions and help ensure repayment (Mosele, 2001). In Burkina Faso, the Projet de Promotion du Petit Credit Rural (PPPCR) was established in 1988; it was also modelled on the Grameen Bank. However, a significant modification was necessary because of the particular context of the country, especially the much lower population density. The PPPCR groups are formed in each village and group members carry joint responsibility for repayment of the loans. In addition, no group in a village can receive new loans if another group has defaulted (Paxton, 2001). Thus, peer pressure plays a significant role in loan repayment. The arrears rate on loans was 2.3 percent in 1995. Although loan repayment rates are high, the project had not yet achieved self-sustainability because of the high costs of providing loans to a widely dispersed, very poor population (Paxton, 2001). The Kenya Rural Enterprise Program (KREP) was established in 1984 as an intermediary NGO providing loans to other NGOs which supplied rural loans. KREP later established a direct lending program for people who would otherwise find it extremely difficult to access loans from commercial banks. It adopted the group lending methodology used by the Grameen Bank and facilitated the forming of groups of five to seven members. The groups, in turn, are federated to form larger groups (Charitoneko, Fruman and Pederson, 1998). These larger groups are administrative and legal entities through which loan transactions to individuals are carried out. Savings from individual members are collected at group meetings, recorded and banked in the group savings accounts to which KREP is a signatory. The interest earned on savings belongs to the group. A 0.5 percent insurance levy covers the loan amount in the event of death, incapacitation or prolonged illness of the borrower. When each loan is repaid, the borrower gains access to a larger loan. The groups savings serve as collateral for the loans and each member agrees to forfeit his/her savings in the event of default by a group member (Charitoneko, Fruman and Pederson, 1998). This places considerable peer pressure on the borrower to repay the loan. Grants on which KREP were initially dependent were being phased out. By 1996 operating income excluding grants covered 98 percent of operating expenses, thus approaching a position of being self-sustaining. It was anticipated that by 1998 Financial Services Division of KREP would become a formally chartered bank (Charitoneko, Fruman and Pederson, 1998). The Land Bank of South Africa has launched financial services for more ambitious commercial ventures. It has launched a silver range of financial products, targeting farmers who have proven agricultural abilities and experience but lack collateral (Anonymous, 1998), and a bronze range of products targeting people who have no track record or venture capital at all. The latter will be required to pay an additional risk-fund levy in return for intensive after-loan support services (Anonymous, 1998). The performance of these services remains to be assessed. 4.1.1.3 Village banks and solidarity groups

Village banks and solidarity groups are the two other popular modes used to tackle the problem of collateral. In the village banking approach, an institution goes into a village and organizeses a group of 20 to 50 members which then functions as a bank. Group members select a management committee, which is trained to run the bank. One loan is made to the village bank after the passage of some time. The bank must repay the whole loan with interest at the end of the term before it can receive a subsequent loan. In effect all members of the group are fully accountable for the loan.
4.1.2 Extension of the possibilities for securing loans

4.1.2.1 Use of non-moveable assets as collateral: land The incapacity to offer collateral acceptable to a bank as security for a loan, may arise when the applicant for the loan has assets which have a value but which are in a form that makes it difficult, if not impossible, for a bank to accept them as collateral. This may arise in instances where the legal and regulative environment is inadequate to enable the use of certain assets as collateral. The most commonly unused and yet available asset for use as collateral is land. a. Titling of government and common land Among countries in sub-Saharan Africa there is a large variation in the legal and regulatory regimes relating to land. However, in general, most countries in the region have a mix of land for which there is some form of firm title, and common land where legally enforceable rights are undefined or do not exist. If a farmer wishing to establish a commercial aquaculture venture holds full title to the land, and that title is transferable, then the farmer may offer the land as collateral. However, if the land is government owned or common land, to which no individual or group of individuals holds title, then, although the land has a value, it cannot be used as collateral for raising a loan. An option that could be considered is the titling of land. Nevertheless, such developments can be politically and socially sensitive as the change is likely to involve conflicts of interest, transaction costs and friction (Platteau, 1992). Apart from enabling the land to be used as collateral, titling of common land can also affect the incentive to use the land sustainably as the gains from land improvement can be assured for the investing family. Common land, when used for cultivation, is almost always farmed individually with private use rights (IFAD, 2001). In such instances the granting of title may be the next logical step. b. Establishment of clear and defensible common property rights If land is held in common, and secure, clearly defined and defensible common property rights are established, then the group lending concept could theoretically be used with the commonly held land, or a portion thereof, offered as collateral. Thus, there would need to be a common interest in raising capital, with each having the opportunity to use the land in this way. The group would

need to trust each other and be confident that the project will be successfully implemented and there would need to be a readiness to forfeit land in case of default. 4.1.2.2 Use of moveable assets as collateral Using moveable property as collateral is an additional option of lessening the problem of collateral. However, the ability to do so depends much on the legal and regulatory environment in each country. When a bank accepts an asset as collateral for a loan, it gains a security interest in the asset (Fleisig, 1995). An asset must meet three requirements in order to be acceptable as collateral by a bank. It must be possible to create a security interest in the asset; it must be possible to perfect the security interest created; it must be possible to enforce the security interest created. Creation of a security interest means that it should not be too difficult or costly to define what the asset is in accordance with legal requirements. Assuming a farmer wishing to raise a loan for an aquaculture venture owns cattle, and the law requires that specific cattle must be individually identified in order for it to be used as collateral, then it would be difficult to create a security interest in that particular asset. If, however, a binding agreement can be written using a floating security interest by referring, for example, to $10 000 in cattle, it becomes feasible to create a security interest. In the event of sale of the cattle, it must be possible to attach the proceeds from the sale whether they are in a bank account or some other asset (Fleisig, 1995). Perfection of a security interest implies that it must be possible to establish a confidence that no superior claims to the asset exists. Superior claims to the asset would exist, for example, in case the asset had already been offered as collateral for another outstanding loan (Fleisig, 1995). A compulsory entry into a publicly accessible and easily searched register of all assets offered as collateral would avoid superior claims and ensure perfection of a security interest. Enforcement of a security interest suggests that the legal requirements for the seizure and sale of the collateral must be simple and able to be done without too much delay or expense. If it is too costly or takes an excessive period of time to enforce the claim on the collateral, enforcement becomes a costly problem for the lender, diminishing or even negating its value as collateral.
4.1.3 Government loan guarantees

Another policy that can be used to alleviate the problem of lack of collateral in commercial aquaculture is the use of government loan guarantees. Government loan guarantees were used to encourage the establishment of commercial aquaculture in several OECD countries (Ridler and Hishamunda, 2001). They work as a substitute for collateral, as the risk of the borrower defaulting is shifted to the government and, thus, to the taxpayer. However, a note of caution is necessary. If a government is to be able to sustain such guarantees, then it must minimize the extent to which it is asked to honour its guarantees. This means that the government would face the same trouble ensuring that loans are repaid as the banks would have collecting them. If it does not do so, the payments of guarantees to the banks become a

drain on the public purse and subject to possible political attack. The existence of loan guarantees can undermine the determination of the borrower to repay the loan (Fleisig, 1995).

4.2 Lessening the problem of high interest rates

4.2.1 Addressing factors influencing interest rates

The principal area of focus for reducing interest rates is to ensure that the factors influencing them are constructively addressed. As discussed in Chapter 2, these factors include perceived high risks of the venture being financed and lack of collateral, lack of a properly functioning market in financial services, high rates of default on loans, inefficient means of outreach resulting in high transaction costs, and high inflation rates. Ways to address the problem of perceived high risks of aquaculture ventures for which loans are sought were discussed in Chapter 3. This section focuses on the other driving forces behind high interest rates charged to loan seekers for commercial aquaculture development. 4.2.1.1 Lack of collateral The problems of a lack of collateral and high interest rates are inter-linked. Both relate to the degree of risk perceived by the bank in making the loan. On the one hand, if there is adequate collateral to cover the full extent of the loan, then much of the risk that the bank might otherwise have to carry is shifted to the borrower. As the risk to the lender of making the loan is smaller, lower interest rates are possible. On the other hand, if the borrower offers inadequate or no collateral, much or all the burden of risk of default weighs on the lender, which incites the lender to charge a high interest rate in the event the loan is granted. The lowest interest rates are generally associated with being able to offer assets as collateral in which the lender is able to establish the best security interests (Fleisig, 1995). This is the case of fixed assets offered as collateral will often be associated with lower interest rates. However, as discussed previously, other assets can be used as collateral as well. The better governments ensure that the legal and regulatory environments enable lenders to establish good security interests over a wide variety of assets offered as collateral, the lower interest rates are likely to be. Strategies which were discussed as capable of alleviating the problem of collateral can be used to lessen the problem of high interest rates charged to farmers. 4.2.1.2 Lack of a properly functioning market in financial services In much of rural sub-Saharan Africa, the market has failed to provide adequate financial services. Banking facilities tend to be urban based where transaction costs are lower and outreach into rural areas is minimal or non-existent. In instances where banking facilities exist, there is little or no competition allowing for inefficiency to creep in or for higher profits to be earned through prohibitive interest rates. There is a need for policies to set up more and adequate financial services in much of sub-Saharan Africa. 4.2.1.3 High default rates on loans

Loans not recovered by the bank are default costs to the lender; they become part of the overall operational costs of the bank. When a bank sets interest rates so as to raise sufficient revenues to cover its costs, the higher the default rate on loans, the higher the interest rate needs to be (Gautam, 1995). Thus, it is essential to design banking services that achieve a high rate of loan recovery in order to keep default costs low. This again emphasizes the need for innovative thinking in tackling the problem of providing adequate banking services to rural communities in sub-Saharan Africa. 4.2.1.4 Inefficiency of outreach In the examples of micro-credit institutions discussed under the section of tackling the issue of collateral, a common problem has been to ensure that the delivery of financial services is done cost-effectively. Small loans made to a large number of people physically spread over a wider area than in urban areas, means upward pressure on transaction costs. These institutions have designed systems that have kept the cost of outreach relatively low, to a greater or lesser extent. The higher the cost of providing these services, the higher will need to be the interest rates to generate the revenues to cover costs. This again emphasizes the need for innovative thinking in designing financial services for rural sub-Saharan Africa. 4.2.1.5 High default Where inflation is high, nominal interest rates will be high. Even if real interest rates are relatively low, high nominal rates are a disincentive to borrowing. Inflation rates need to be managed through appropriate macro-economic policies, some of which have been discussed in Volume 1 of this study.
4.2.2 Some other options

There are other alternative options to lessening the problem of high interest rates. Of these, interest rate subsidies and loans guarantees are the most commonly cited. 4.2.2.1 Interest rate subsidies As noted in Volume 1 of this study, interest rates subsidies have been used in other parts of the world to reduce the cost of borrowing for aquaculture production (Ridler and Hishamunda, 2001), thus promoting its development. As financial markets in some parts of sub-Saharan Africa are characterized by very high rates of interest, this option could be considered. It is noteworthy that, while subsidized interest rates could be used to stimulate development of aquaculture in the region, any policy of this nature should be approached with caution. In the first instance, there are few governments in the region who can afford interest rate subsidies in the face of fiscal retrenchment. Interest rate subsidies may create supply-demand imbalances and as well as opportunities for rent[19] collection. Subsidized interest rates may also have a disincentive effect on banks to seek deposits as the subsidy facilitates cost recovery while raising funds for on-lending from the financial markets (Gautam, 1995). By lowering the cost of capital,

they may also induce more capital intensive technologies than would otherwise be selected. This could be an important cost to society as production technologies with higher capital-labour ratios mean less employment. Nevertheless, interest rate subsidies are options employed by governments to alleviate the burden of borrowing and to stimulate economic growth. 4.2.2.2 Government loan guarantees Because government loan guarantees can substitute for the borrowers collateral by shifting the risk of the borrower defaulting to the government (taxpayers), they could result in banks charging lower interest rates to borrowers. Several developed countries such as Canada, Holland and Spain have used government loan guarantees to encourage commercial aquaculture (OECD, 1989).
Summary and conclusions

This chapter examined some strategies of alleviating the problem faced by bank loan seekers in general, and in sub-Saharan Africa in particular, when they do not have adequate collateral. It also examined the implications of lack of collateral for interest rates. There are lessons to be learnt from the discussion covered in this chapter. The review of different experiences and options available to tackle these problems provides evidence that innovative ideas, such as forming financially self-sustaining initiatives, can be successfully used to overcome the lack of collateral. They further show that it is possible to advance loans to borrowers who have few or no assets and recover them successfully. It ought to be possible to initiate programmes that extend these services to entrepreneurs wanting to launch more ambitious commercial projects and who have greater financial needs. In some instances, an adaptation of some form of group lending, through a greater mobilization of small savings for use as collateral, might be possible to support the development of commercial aquaculture in sub-Saharan Africa. It should be noted that in the case of the Grameen Bank, its operations were initially subsidized with donor funds. It took five years before the Bank became self-sufficient. There is a strong case for subsidising the establishment of rural banking services in sub-Saharan Africa. The infant industry argument could be presented in favour of this policy which has the potential of enabling the banking sector to design efficient services and build up the number of clients needed for the sector to sustain self-sufficient operations. Innovative thinking is needed to create banking services honed in each instance to the particular characteristics of the countries and communities they are created to serve. Governments need to ensure that it is possible, within the legal and regulatory environments of each country, to use a wide variety of assets as collateral. The better governments ensure that the legal and regulatory environments enable lenders to establish good security interests over a wide variety of assets offered as collateral, the lower interest rates are likely to be and the wider the possibilities for securing loans for commercial aquaculture development.

With market failure of the magnitude experienced in the supply of financial services to rural enterprises in sub-Saharan Africa, it is necessary for governments to very carefully study the question and consider what ways might be most appropriate for overcoming these difficulties. A cautionary note has been struck in the discussion of interest rate subsidies and government loan guarantees. With such evident market failure in relation to financial services provision, and because it takes some years for the volume of savings and loans to grow sufficiently to break even (Khandker, 1995), subsidizing financial service provision in sub-Saharan Africa may appear an attractive policy. However, it looks unrealistic in the context of fiscal austerity in most countries of the region.

Difference between Risk and Uncertainty

Words & Wordplay Education & Reference

Key difference: Risk is essentially the level of possibility that an action or activity will lead to lead to a loss or to an undesired outcome. The risk may even pay off and not lead to a loss, it may lead to a gain. Uncertainty, on the other hand, is unpredictable. It has too many unknown variables which do not even allow one to estimate as to what is going to happen.

Risk is essentially the level of possibility that an action or activity will lead to lead to a loss or to an undesired outcome. The risk may even pay off and not lead to a loss, it may lead to a gain.

Dictionary.com defines risk as:

Exposure to the chance of injury or loss; a hazard or dangerous chance: It's not worth the risk. The hazard or chance of loss. The degree of probability of such loss. The amount that the insurance company may lose. A person or thing with reference to the hazard involved in insuring him, her, or it. The type of loss, as life, fire, marine disaster, or earthquake, against which an insurance policy is drawn.

There are many difference kinds of risk. Wikipedia lists six different ways that risk can be defined:

A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action. Finance: The probability that an actual return on an investment will be lower than the expected return. Food industry: The possibility that due to a certain hazard in food there will be an negative effect to a certain magnitude. Insurance: A situation where the probability of a variable (such as burning down of a building) is known but when a mode of occurrence or the actual value of the occurrence (whether the fire will occur at a particular property) is not. Securities trading: The probability of a loss or drop in value. Workplace: Product of the consequence and probability of a hazardous event or phenomenon.

Uncertainty, on the other hand, is unpredictable. It has too many unknown variables which do not even allow one to estimate as to what is going to happen.

Dictionary.com defines uncertainty as:

The state of being uncertain; doubt; hesitancy: His uncertainty gave impetus to his inquiry. An instance of uncertainty, doubt, etc. Unpredictability; indeterminacy; indefiniteness.

As compared to risk, uncertainty is much more volatile. It does not allow one to see what or how something might affect them. Whereas, risk is something that can be predicted; it is the possibly of something happening. One can anticipate the outcome or a loss from the risk, and hence effectively prepare for it; whether to minimize the loss or to recover from the loss from a risk.