An export credit agency (ECA) or an investment insurance agency in trade finance is an institution that offers loans, insurance coverage, and other export financing services. The main purpose of ECAs is to support exporters and importers and promote international trade by eliminating credit risk or uncertainty.
ECAs can be governmental, quasi-governmental, or private institutions. Irrespective of that, its role in international trade is significant today and is a substantial motivating factor for exporters. ECAs function like regular lending or insurance agencies. But they charge a premium or interest for their services.
Export credit agency financing is a growing scenario in trade finance. Usually, exporters are reluctant to trade with countries with some associated risks. Common types of risk in global trade include commercial risk, political risk, credit risk, etc. Hence, exporters exercise due care before contracting with importers.
However, if a country's political or economic system is unstable, it could potentially affect the trade agreement. For instance, in any business, the seller offers a credit period to the buyer. The buyer can make the payment for the sale before the end of the credit period. Such an arrangement makes the trade flexible, instills confidence, and is an opportunity for a long-lasting business relationship.
Consider the example of Mark, who exports toys from country A. Carol is an importer in country B. Mark sends a consignment of $5000 to Carol with a credit period of three months. But due to political tensions in country B, Carol could not sell the toys and suffered a loss. Consequently, Mark did not receive his payment.
The situation in country B was so severe that many government institutions had to shut down. So, Mark was not able to demand payment from Carol either. However, here is where an ECA can be helpful. Mark's consignment would be insured against mainly political and commercial risks. Therefore, he would receive the consignment amount from his ECA. For this, Mark has to pay a monthly premium.
But why does Mark need to trade with Carol, despite the uncertainty? First, risks are based on contingencies. And if every exporter were to hold back from selling just because of uncertainty, it would be a huge loss for their country, especially for those developing countries which rely heavily on export.
Besides supporting exporters, ECAs also offer credit facilities to importers to make international purchases. In the case of Carol, an ECA from her country would've been able to help her out had the political situation not been highly critical.
The extent of coverage, the type of coverage, and the perks available for traders, often depend on the institution offering it. For example, the export credit agency in India, the Export Credit Guarantee Corporation (ECGC), is a governmental organization. It is the last resort for many traders whom private insurance agencies cannot insure.
However, private institutions might generally be willing to cover a higher degree of risk and offer more credit options. Still, the premium or interest the client would pay would be proportionately higher.
The Organization for Economic Cooperation and Development (OECD) publishes the Export Credit Agency list of all the ECAs worldwide. This can help exporters identify which institutions to approach.
Consider the example of the ECAs in the United States, United Kingdom, and Canada. The countries withdrew credit and insurance support and services for exports to Russia since the Russia-Ukraine war. But the ECAs would continue to support exports to Ukraine. The move was taken to discourage exports to Russia and follows the many sanctions against the country.
However, before Crimea's annexation, the United States Export-Import (U.S. EXIM) Bank had $428.8 million in outstanding credit from 2014 and earlier. The authorities said the bank had not extended credit to Russian firms after 2014.
Export credit agency financing can be highly beneficial, but it has its cons too. Let's discuss those in detail.
An ECA's primary purpose is to offer credit facilities to importers and insurance coverage to exporters. In addition, they are conferred with the responsibility to instill confidence in traders, especially exporters, to engage in global trade despite uncertainties in the market. This is because global trade is essential for countries, and many reasons demotivate exporters from participating in certain transactions.
2. How does an export credit agency work?ECAs offer insurance coverage to exporters against non-payment of credit by offering insurance policies against a premium. They also provide credit facilities to importers to make a purchase. For this, they collect interest payments.
3. What is an export credit agency program?Since most sales transactions have a credit period, it is subject to many uncertainties, especially if a country's political or economic situation is volatile. Therefore, ECAs in different countries aim to promote international trade by eliminating the risk factor discouraging people from engaging in a particular trade.
This article has been a guide to what is an Export Credit Agency. Here, we explain the topic in detail, including an example, advantages, and disadvantages. You may also find some useful articles here -
Learn the foundation of Investment banking, financial modeling, valuations and more.
Join Wallstreetmojo Youtube
