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Trade Finance: The Role of Export Credit Agencies in International Trade

By Zack Andresen

Globally, there is an estimated $1.5 trillion in unmet demand for global trade finance, according to a survey by the Asian Development Bank (ADB).1 Export credit agencies (ECAs) aim to help companies expand into international trade by bridging that gap, helping companies obtain financing when other sources are not available; many are increasing the size of their programs and expanding the range of their trade finance offerings.2 That's particularly important for small and medium-sized enterprises (SMEs) and mid-cap firms, which account for 74 percent of trade finance requests rejected by private lenders, according to the ADB.3

"The world of official export credit has changed considerably in response to the Global Financial Crisis and the European Debt Crisis," according to a June 2017 analysis by the official U.S. ECA, the Export-Import Bank of the United States (EXIM). "Many governments have reinvented, reinforced, reoriented, and restructured their ECAs to be highly effective strategic partners in support of national growth objectives."4

 

What is an Export Credit Agency (ECA)?

 

An export credit agency (ECA) is a governmental, quasi-governmental, or private agency offering trade finance support to promote export growth for domestic companies in the ECA's home country.5,6 Services traditionally offered by ECAs to domestic import-export trade businesses include government-backed export credit insurance, direct lending, and loan guarantees,7 all geared toward stimulating the local economy and domestic job growth through expanded international trade.8

 

The EXIM report, which included an analysis of global ECA activities, identified 96 ECAs operating globally.9 The International Union of Credit and Investment Insurers (also known as the Berne Union), a trade association representing the global export credit and investment insurance industry, lists 84 public- and private-sector member organizations, which it says provided risk protection for $1.9 trillion in payments in 2016, a value equivalent to 11 percent of all global cross-border trade.10,11 That protection includes insurance services covering exporting companies, investors and financial institutions against losses due to buyer default or to political risks such as currency inconvertibility or expropriation of foreign assets.12

 

The Evolving Role of Export Credit Agencies in International Trade

 

During 2016, many ECAs increased the size of their programs or expanded the types of trade finance programs offered, according to the EXIM analysis.13 Examples included enhanced lending programs in Denmark, Belgium, Finland, and France; and expanded risk coverage in the U.K., Germany, and Japan. In addition, ECAs from South Korea, Italy, and Canada opened representative offices abroad. Though varied in approach, each institution's growth supports the common initiative to drive exports by mitigating financing risk, EXIM concluded.14

 

In addition to expanding programs, some ECAs have begun adjusting trade financing programs to meet the demands of a more globalized supply chain, the EXIM analysis notes. These include working capital and supply chain programs, both of which provide trade finance guarantees to commercial banks or fund exporters directly using accounts receivable as collateral. Working capital programs provide funds to the exporter, while supply chain support is provided directly to exporters' suppliers.15

 

EXIM, however, provided much less trade financing in 2016 than in some previous years. In 2015, the U.S. Congress allowed the organization's bank charter to lapse for several months, which effectively prevented it from providing support to businesses. Though the charter was subsequently renewed, as of October 2017 EXIM's board of directors still lacked a quorum, which meant it could not approve transactions above $10 million. Because of this, the agency says it has not been fully operational since 2014. The agency authorized $5 billion in financing in its 2016 fiscal year, the lowest level in 40 years, compared to nearly $20.5 billion in 2014.16

 

SMEs Continue to Benefit from Export Credit Agency Trade Finance Offerings

 

SMEs worldwide potentially can benefit from enhanced ECA trade finance offerings. EXIM says that more than 90 percent of its 2016 transactions supported small businesses.17 In Europe, 80 percent of ECAs have mandates for allocation of funds to SMEs, according to EXIM analysis.18 South Korea's export credit agency, KEXIM, has a Hidden Champions Initiative focused on identifying 100 high-potential SMEs that it can incubate and help to compete globally.19 UK Export Finance (UKEF) in June 2017 announced a partnership with five of the biggest U.K. banks to deliver government-backed financial support to exporters more quickly and efficiently, and also to extend support to exporters' supply chains.20 And in Australia, a new phone application aims to help local SMEs achieve success in international trade.21

 

The

Takeaway:

To bridge gaps in trade finance, export credit agencies are expanding their product offerings and growing their international presence with representative field offices in strategic markets. While import-export businesses of all sizes may benefit, many ECAs emphasize helping SMEs engaged in international trade.

Zack Andersen - The Author

The Author

Zack Andresen

Zack Andresen is a business technology writer based in Brooklyn, NY, but currently traveling the world with his wife and son. Learn more at ZackWrites.com.

Sources

1. 2017 Trade Finance Gaps, Growth, and Jobs Survey, Asian Development Bank; https://www.adb.org/sites/default/files/publication/359631/adb-briefs-83.pdf
2. “Export Credit Agency - ECA,” Investopedia; http://www.investopedia.com/terms/e/export-credit-agency.asp
3. 2017 Trade Finance Gaps, Growth, and Jobs Survey, Asian Development Bank; https://www.adb.org/sites/default/files/publication/359631/adb-briefs-83.pdf
4. Report to the U.S. Congress on Global Export Credit Competition, Export-Import Bank of the United States; https://www.exim.gov/sites/default/files/reports/EXIM-Competitiveness-Report_June2017.pdf
5. “Export Credit Agency - ECA,” Practical Law Thomson Reuters; https://uk.practicallaw.thomsonreuters.com/7-501-2283?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1
6. “Trade Finance: Export Credit Agency Finance — Overview,” Lexis Nexis; https://www.lexisnexis.com/uk/lexispsl/bankingandfinance/document/391289/55KB-65S1-F185-X0NV-00000-00/Trade%20finance:%20Export%20Credit%20Agency%20finance%E2%80%94overview
7. Ibid.
8. “The Changing Role of Export Credit Agencies,” International Monetary Fund; https://www.imf.org/external/pubs/nft/1999/change/index.htm
9. Report to the U.S. Congress on Global Export Credit Competition, Export-Import Bank of the United States; https://www.exim.gov/sites/default/files/reports/EXIM-Competitiveness-Report_June2017.pdf
10. “About The Berne Union,” Berne Union; https://www.berneunion.org/Stub/Display/8
11. “Berne Union Statistics 2012-2016,” Berne Union; https://www.berneunion.org/DataReports
12. Ibid.
13. Report to the U.S. Congress on Global Export Credit Competition, Export-Import Bank of the United States; https://www.exim.gov/sites/default/files/reports/EXIM-Competitiveness-Report_June2017.pdf
14. Ibid.
15. Ibid.
16. Annual Report 2016, Export-Import Bank of the United States; https://www.exim.gov/sites/default/files/reports/annual/EXIM-2016-Annual-Report.pdf
17. “The Facts About EXIM Bank,” Export-Import Bank of the United States; https://www.exim.gov/about/facts-about-ex-im-bank
18. Report to the U.S. Congress on Global Export Credit Competition, Export-Import Bank of the United States; https://www.exim.gov/sites/default/files/reports/EXIM-Competitiveness-Report_June2017.pdf
19. Guide to the Export-Import Bank of Korea, Korea Eximbank; http://ehf.koreaexim.go.kr/File.down?file=/attach_file/conts/en/_English_guide_book.pdf
20. “Businesses to access millions in government export support through partnership with high street banks,” Gov.uk; https://www.gov.uk/government/news/businesses-to-access-millions-in-government-export-support-through-partnership-with-high-street-banks
21. “First-of-its-kind export app helps Australian SMEs on their export journey,” Efic; https://www.efic.gov.au/about-efic/our-organisation/about-efic/

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