Role of Export Credit in Export promotion

1. Role of Export Credit in Export promotion Comments by Hamid Alavi World Bank May 10, 2006

2. Non-performance risk Non-payment risk Other risks Exporter Port Buyer Pre-shipment Post-shipment

3. 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. 1

4. 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.