UNCTAD, in collaboration with Dr. Jaimin Lee, Senior Research Officer of The Export-Import Bank of Korea, has made a pioneering effort to help developing countries establish comprehensive guidelines for developing export credit facilities in the post-Uruguay Round era. A 47-page "Prototype Model of a Trade-Finance Facility in Developing Countries: an Export-Import Bank" (UNCTAD/ECDC/256), is designed to assist policy-makers and practitioners of trade financing.
Trade financing can be an efficient policy for boosting and diversifying exports. However, as shown in a review issued recently by the UNCTAD secretariat, only 34 developing countries have such facilities (see Note to correspondents No.7). Also, as stated in "A Partnership for Growth and Development" (TD/377) adopted at UNCTAD IX, in most developing and economies-in-transition, export credit is typically a function which "cannot for reasons of scale or externality be adequately initiated by the private sector". UNCTAD has therefore explored the possibility for Governments of providing export credits through a specialized public agency.
The prototype model serves as a benchmark to evaluate established schemes or to guide the establishment of such an agency. It can also be used as a training manual. It points also to possible interactions between preferential financing and the commitments made at the Uruguay Round to curb subsidization.
An export-import bank can use a wide range of funds including its own equity capital, domestic and foreign borrowings, forfaiting, loan-collection and relending. As for the equity capital, the model suggests that the Government should have a majority stake in the Bank, with possibly contributions by the Central Bank, domestic financial institutions, exporters´ associations and international financial organizations.
As the Bank gains experience and expands its activities, the share of the paid-in capital can decrease, and the Bank may rely more on the local and international capital markets. The capitalization ratio (the share of equity capital in total assets) can be lower than in commercial banks because the viability of the export-import bank is guaranteed by the Government.
The study identifies possibilities of preferential export financing compatible with the commitments undertaken in the Uruguay Round Agreement on Subsidies and Countervailing Measures. The Bank may be able to absorb some intermediation costs provided that the final lending rate is not lower than the original borrowing rate. Lower interest rates by the central monetary authority can also help, since they allow the Bank to borrow and relend at low rates to the export sector.
As to risk management and the management of operational profits and losses, the model calls on the Bank to consider the risk of buyers´ non-payment and country exposure when estimating the risk assets. Buyers´ risk depends on the nature of the importer - Government, public institution or private enterprise - and on its domestic and international rating. As for country risk, the Bank should consider setting up limits to exposure to high-risk countries and regions.
In financial management, the main goal of the Bank is to maximize export support, and not the operational profits. Nevertheless, it should seek a minimum level of profitability for its own sustainability. The retained profits would serve as a reserve against unexpected loan losses.
The appropriate level of profitability needs to be determined as a percentage of the total assets. A comparison of the export-credit agencies of China, France, Germany, India, Japan, Nigeria and the Republic of Korea, and the Latin American Export Bank indicates that the relatively better capitalized agencies of industrialized countries can afford to keep narrower profitability margins. The French agency, for example, operates with only 0.1 per cent of return on assets (i.e. net income per total assets). On the other end, the return of assets is more than 1 per cent in the less capitalized Nigerian Export-Import Bank. On the basis of this experience, the prototype model advocates conservative financial management and suggests that the return of assets of new agencies be kept around 1 per cent.
Finally, the document provides a financial feasibility analysis of the policies advocated and examines the effectiveness and the sustainability of the Bank under a wide range of scenarios. It finds that the key parameters to be controlled are borrowing costs and loan quality. The full results of the feasibility study are presented in a 42-page supplement (UNCTAD/ECDC/256/Supp.1).
