Financial arrangements for imports and/or exports are normally more complex that those for domestic trade. Most of the payments are upfront and therefore traders need to determine the funds traders require and make adequate arrangements for sourcing these funds. Traders will make payments and/or receive proceeds in foreign currency. International banks will be involved. The exchange rates may fluctuate and, in the process, traders may receive less proceeds than traders expected or be required to pay more than originally planned. Here are the top export trade finance instruments in Kenya:
Buyer’s Credit. This is a facility granted by a lender to a buyer at the request of the buyer or the seller. It is used in large structured project- financing packages, normally for large export orders of machinery and equipment.
Export-Import Banks (EXIM). A number of countries have established Export-Import banks whose main activity is to promote export and import trade. These banks have organized credit facilities with some banks in Kenya which traders can access. Normally, the credit is available if traders are exporting or importing goods and services to or from the sponsor country. Information on the current arrangements can be obtained from the Central Bank of Kenya, commercial banks or from foreign embassies in Nairobi. China and India are some of the countries with such arrangements. The Industrial Development Bank appears to have a lead in these arrangements.
Escrow Accounts. This is an account opened by borrower with a bank, usually overseas, into which the export revenues are paid and these are used to service future debt payments or pay third parties for services rendered. The creditors obtain extra security for their loans and priority in debt service. The banking authorities of the exporter’s country need to approve the escrow accounts.
Export Credit Guarantee. This is a form of insurance for which a premium is paid. It covers political and commercial risk. The guarantee can be offered to the bank as security for credit. Thus, while the export credit guarantee does not provide actual funds to exporters, it facilitates access to pre/post-shipment finance from banking institutions. In Kenya, the Africa Trade Insurance Agency provides export credit guarantees covering political risk.
Export Credit Insurance. This is an insurance policy against risk of non-payment by an overseas buyer. It can be helpful in obtaining post-shipment finance from a bank.
Forfeiting. This method involves the sale of receivables e.g. bill of exchange or promissory note, by an exporter to his bank for discounting. The exporter receives the value of the receivables less the standing charges and interest charge for the period remaining to the maturity of the bill of exchange.
Pre-shipment/Pre-export Finance. This facility is extended to exporters for export-related production. The amount of credit obtained is usually limited to a percentage of the agreed sales price and repayment is structured to ensure self-liquidation through export proceeds, i.e. the lender is refunded when the buyer pays. The cost of the facility is the market rate of interest plus miscellaneous processing charges.
Post-shipment Finance. This covers a wide range of financing methods that can be used once the goods have been shipped. If the reputation and creditworthiness of the buyer is good, the bank can discount the receivable.