In looking for a long term solution to the seemingly perpetual balance of trade deficit in Ghana, government has long recognised the need for the country to grow its exports especially non-traditional exports. In an attempt to tackle this, the government of Ghana came out with a National Export Strategy (NES) spanning 2012-2016. According to the NES, non-traditional exports is expected to grow from USD1.5 billion to USD5 billion in 2016.
Export financing remains one of the challenges facing exporters, especially SMEs. Traditional banks are usually not willing to extend credit to exporters as they are dominated by SMEs who are seen as high-risk businesses. It is, therefore, strategic for exporters to look for innovative solutions to finance their export businesses, and credit insurance comes handy.
Export Credit Insurance
Credit insurance is a policy offered to the seller to cover risks of default on credit sales by a buyer and usually covers commercial and political risk. Credit insurance enables an exporter to secure their receivables against default by buyers. It also provides business information on foreign buyers and collection service in case of a default. Credit insurance serves as an alternative tool to advance cash payment, letters of credit, documentary collection and others in securing export revenues. This provides a strategic tool for the exporter to sell in an open account.
The competition in the export market today makes foreign buyers to often press exporters for open account terms. Exporters who are reluctant to extend credit could lose sales to competitors who are willing to offer better payment terms. Credit insurance is therefore considered to be a critical component in a country’s export-led growth strategy.
With credit insurance cover, an exporter is able to protect the future cash flow of its business which is powerful but yet vulnerable. Revenues are not lost to defaults by buyers as a result of bankruptcy or protracted default.
An exporter can also leverage on the superior database of a credit insurer to sell to buyers which are trustworthy and indirectly providing credit management function to the client. This is possible because credit insurance decisions are based on information on the buyers and they invest hugely in building the infrastructure and experts in this regard.
Also, a credit insurance solution will enable an exporter to raise financing for working capital purposes. When export receivables are secured with a credit insurance cover, an exporter can leverage on this to discount invoices through a loss payee agreement with a bank at a competitive rate without having to provide any collateral. This is useful for SMEs as they usually lack the requisite collateral to access traditional bank facilities.
In recognising this, governments around the world in various ways have come out with schemes in a form of export credit agencies (ECA) to help exporters especially SMEs to have access to trade credit insurance services. This is usually done through collaboration among government, businesses, and financial sector partners. Examples of such ECAs around the world are the US Exim Bank, ECGD of UK, Nexim of Nigeria, Koexim of Korea and the Export Credit Insurance of South Africa.
Credit Insurance in Ghana
There are a number of institutions in Ghana who are attempting to assist exporters in going out of their financial woods. In August 1989, the Bank of Ghana with the active support of the Ministry of Trade and Industries (MOTI) promoted the establishment of the Export Finance Company to provide financial support to exporters of non-traditional products.
In 1994, the Bank of Ghana promoted and established the EximGuaranty Company (Ghana) Ltd. This was set up purposely to provide the banking sector with guarantees and insurance cover for the export sector. Specifically, EximGuaranty was to operate the following schemes:
- 1. Export Credit Guarantee Scheme
- Export Credit Insurance Scheme
- Export Refinance Scheme
Export credit insurance has not gained grounds in Ghana as the Exim-Guarantee Bank which has the mandate to provide this service has not been able to live up to that due to inadequate funding and other technical challenges.
The recent announcement by government to establish Ghana Eximbank is timely and a strategic move. This is seen as in an effort to build robust institutions to support the export strategy of the government. The bank will see the consolidation of EDAIF, Export Finance Company and EximGurantee bank and other allied institutions in the export finance sector. Through collaboration with the private credit insurers in Ghana, the Eximbank will be able to help drive the export-led growth strategy of the country.
In the private sector, Credit insurance is not known much in Africa but is maturing in other places especially in Europe and America. There are 3 top credit insurers in the world namely Coface, Euler Hermes and Atradius. Fortunately for Ghana, Coface has a direct presence in Ghana through a partnership with Activa International Insurance and it is expected that exporters will take the opportunity to work with them to support them in offering credit insurance cover to them.
The Ghana Export Promotion Authority can play a lead role in connecting exporters to Coface/Activa for them to benefit from the export receivables protection which will go a long way to contributing to the realisation of the export-led growth that the government has envisaged. It’s encouraged that the promoters of this Ghana Eximbank will also work with Coface/Activa to structure an export scheme for Ghanaian exporters when the bank takes up.
