Chapter 7 Trade financing techniques
Export credit schemes
Most countries have a range of government-
backed export credit schemes, provided
by an official export credit agency (ECA).
Depending on the government’s particular
objectives, the schemes will provide a range
of support to exporters which meet different
criteria. Generally, ECAs focus on one or
more of the following activities.
Finance for domestic SMEs starting to
export.
Longer-term (two to ten years) finance for
domestic companies needing to manage
country risk.
Longer-term project finance for foreign
infrastructure projects to support the
contracting of domestic companies.
Finance for foreign buyers to allow them
to finance the majority of a large-value
contract with a domestic company.
Support for a foreign bank to guarantee
payment by a foreign buyer of goods or
services supplied by a domestic company.
Export credit insurance, specifically to
protect against certain export-related risks,
including country risk and counterparty
risk. (See Chapter 5 for more information
on credit insurance.)
As well as government-backed export credit
schemes, a number of commercial providers
also provide similar services. These tend
to be available for the more straightforward
international transactions, such as the
export of consumer goods. ECAs tend to
provide finance and insurance for projects
or transactions for which commercial
insurance is either not readily available or is
prohibitively expensive.How it works
Official export credit agencies in a number
of OECD countries (Australia, Canada,
the EU, Japan, New Zealand, Norway,
South Korea, Switzerland and the USA)
operate rules set out by the Arrangement
on Officially Supported Export Credits. This
has established limits on the terms and
conditions of export credits provided by
these agencies (in terms of interest rates,
payment terms and fees).Under the terms of the OECD
Arrangement, there are a number of minimum
conditions.
Importers supported by ECA credit must
make a minimum 15% downpayment to
become eligible for export credits.
Maximum credit terms vary according
to the destination country. Support for
exports to OECD countries must be
repaid within five years (although this can
be extended to eight and a half years
in certain circumstances). Support for
exports to non-OECD countries must be
repaid within ten years. Support for project
finance must be repaid within 14 years.
Support offered via fixed rate loans must
be made with reference to commercial
interest reference rates (CIRR). (These
rates are usually 100 basis points above
the relevant base rate, which is calculated
according to a system set out in the
Arrangement.)
ECAs are required to charge a risk
premium, which is set as a percentage of
the principal amount. This is based on a
‘minimum premium rate’ for country and
sovereign credit risk of the importer’s
country. (This rate is determined by a
methodology set out in the Arrangement.)
Within these constraints, each ECA offers
a slightly different range of products and
services to companies they are permitted to
support. As an illustration, the UK’s ECA is
UK Export Finance (UKEF) (the trading name
of the Export Credits Guarantee Department),
which provides the following services:Medium/Long-term
Buyer Credit Facility.
Under this scheme, UKEF provides
guarantees to banks making loans to a
foreign purchaser of UK exports. The
loan must be for a minimum term of two
years and in support of a contract with
a minimum value of GBP 5 million. The
buyer must make a downpayment of at
least 15% of the value of the contract.
The loan can be arranged with a fixed
or floating interest rate. Premium will be
charged based on the country and credit