Export Credit

An export credit is an arrangement under which the buyer of exported goods or services is allowed to pay over time instead of in cash on delivery. The credit may be given by the exporter itself or by a bank, and it is frequently backed by an insurance policy or guarantee that protects the exporter or lender against non-payment. The term covers both the financing and the risk cover, and it is used most often for support provided or underwritten by a government.

Governments support export credits through an export credit agency, a public or publicly mandated institution whose task is to help national exporters win business abroad. Official support fills gaps left by private markets, especially for large capital goods and projects in countries where commercial lenders will not take long-term risk. Export credit is a branch of trade finance.

• Supplier credit. The exporter grants deferred payment terms to the buyer in the sales contract and may refinance by selling the receivable to a bank. See supplier credit.
• Buyer credit. A bank lends directly to the foreign buyer, or to the buyer's bank, and pays the exporter in cash as goods are delivered. See buyer credit.
• Insurance and guarantees. The agency insures the exporter, or guarantees the lending bank, against the buyer's failure to pay for commercial or political reasons. See export credit insurance.
• Direct lending and interest support. Some agencies lend their own funds at fixed rates or subsidise the gap between a fixed rate offered to the buyer and banks' floating cost of funds.
• Working capital and bond support. Agencies guarantee loans that fund production before shipment and share the risk on a demand guarantee that the exporter must give to its buyer.

Credits are classed by term. Short-term credits, of up to two years and usually much less, cover consumer goods, components and commodities, and are largely insured by private companies. Medium and long-term credits, from two years to fifteen or more, finance aircraft, ships, power plants, telecommunications and infrastructure, and are the core of official activity.

Cover is usually divided into commercial risk, such as the buyer's insolvency or prolonged failure to pay, and political risk, such as war, expropriation, import bans or the inability to convert and transfer currency out of the buyer's country. Agencies typically cover a high percentage of the loss, leaving a small share with the exporter or bank. For a lender, a loan guaranteed by a highly rated government's agency carries that government's credit standing, which lowers the capital the bank must hold and the interest rate the borrower pays. Where the buyer is a public body, agencies often ask for a sovereign guarantee from its government.

Because subsidised credit can distort competition, the main exporting countries agreed limits on it. The Arrangement on Officially Supported Export Credits, concluded in 1978 under the auspices of the Organisation for Economic Co-operation and Development, is a non-binding agreement among its participants that sets the most generous terms they may offer. It requires a minimum cash down payment of 15% of the contract value, sets maximum repayment periods, fixes minimum interest rates known as commercial interest reference rates, and prescribes minimum premium rates according to the risk of the buyer's country. The terms were modernised in 2023, with longer repayment periods, particularly for climate-friendly projects.

World Trade Organization rules on subsidies treat export credits that conform to the Arrangement's interest rate provisions as permitted. Insurers and agencies cooperate through the Berne Union, an international association founded in 1934.

Models differ between countries. Some agencies are government departments, some are state-owned companies, and some are private insurers acting on the state's account. The United Kingdom established the first, the forerunner of UK Export Finance, in 1919. Others include the Export-Import Bank of the United States and the agencies of Germany, France, Italy, Japan, Korea, China and India. Several large exporters, China among them, are not participants in the OECD Arrangement, which has limited its reach as their share of world export finance has grown.

In a typical agency-backed deal, an exporter signs a contract with a foreign buyer, who pays the down payment. A bank agrees a loan to the buyer for the remaining 85%, and the agency issues a guarantee or insurance policy to the bank in return for a premium. As the exporter ships goods or reaches milestones, it presents documents to the bank and is paid from the loan, sometimes through a letter of credit. The buyer repays the bank in equal instalments, usually every six months. If the buyer defaults, the bank claims on the agency, which then pursues recovery. Smaller supplier credits may instead be sold without recourse through forfaiting or export bill discounting.

Critics argue that official export credit is a subsidy to large exporters, exposes taxpayers to losses, and can add to unsustainable debt in poor countries. Agencies have also been criticised for financing fossil fuel projects and for weak scrutiny of corruption, environmental damage and human rights impacts, which has led to tighter standards. Supporters reply that agencies are required to break even over time, generally do so, and enable exports and investment that would not otherwise be financed.

• OECD: Export credits
• Berne Union