Role of Export Credit in Export promotion

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Role of Export Credit in Export promotion

• Comments by Hamid Alavi
• World Bank
• May 10, 2006

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(No Transcript)
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Why Pre-shipment Guarantees?

• Informational asymmetries about ability to
  execute export orders
• Financial institutions traditionally
• Provide working capital based on export orders to
  large firms that can also draw on existing assets
  for collateral.
• Under-invest in systems/training necessary to
  adequately review and appraise nonperformance
  risks. Instead, they focused on collateralized
  lines of credit, which firms use at their
  discretion.
• Therefore, many first-time SME exporters in have
  difficulty accessing preshipment export finance
  to fulfill their creditworthy export projects.
• Preshipment export financing, in contrast, is
  directed at a specific transaction and not
  subject to borrower discretion.

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Objectives of Pre-shipment Guarantees

• Encourage financial institutions to provide
  preshipment financing to emerging exporters with
  viable export contracts and good prospects of
  success, whose perceived nonperformance risk is
  greater than their actual risk because the
  borrowers are unable to provide adequate
  collateral or do not have a suitable credit
  history to prove they are creditworthy.
• A catalyst for developing sustainable
  preshipment financing.
• Simple design so that participation does not add
  materially to transaction costs, create
  uncertainty through the reimbursement mechanism,
  or create too large a burden on SME exporters
  through the guarantee fee charged.

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Buyers nonpayment Borrower loan misuse Borrower nonperformance Remarks
Reasons for reluctance of banks to grant preshipment export credit Buyers nonpayment risks and other risks stemming from foreign buyer or buying country Exporters loan misuse risks Exporters manufacturing nonperformance risks Banks fears of these risks, especially nonperformance, are higher than the actual risks due to their reluctance to invest in information systems on SME and emerging direct and indirect exporters
Instruments to encourage banks to grant preshipment finance Export letter of credit (L/C), back-to-back domestic L/C, or other export order backed by export credit insurance covering preshipment loan default risks from buyers side - PEFG agency screens out exporters who lack good faith, and/or lack production facilities to meet export order. - Banks implement modern export loan disbursement mechanism PEFG coverage PEFG agency establishes information network designed to screen out exporters who lack good faith