In the current economic climate, UK exporters are looking for secure forms of payment from their overseas buyers, particularly those in emerging economies. One of the most secure payment mechanisms for foreign trade transactions is a confirmed letter of credit. Under this a bank in the UK guarantees payment to its exporting customer, provided documents stipulated in the letter of credit issued by the buyer’s overseas bank are presented to it. In this way, the UK exporter is able to eliminate the risk of non-payment by its buyer.
By sharing with banks the credit risks associated with confirmed letters of credit, ECGD aims to increase the amount of short-term export finance which the banking sector can make available to UK exporters. This is particularly important at a time when the overall risk appetite of the trade market has been reduced due to the recent difficulties in the financial sector.
To start with, five banks – Barclays, RBS, HSBC, Lloyds TSB and Standard Chartered – are supporting the scheme and will be making arrangements in the coming weeks to allow exporters to participate. It will cover 282 overseas banks in 36 export markets. More banks and export markets are expected to be added to the scheme.
UK Minister for Trade, Investment and Small Business Lord Davies of Abersoch said:
“I believe this new scheme could provide real help to UK exporters, particularly smaller companies exporting to emerging markets, which is where letters of credit are most used and where new opportunities can be found.
“Letters of credit are a very well established method of securing payment and an alternative to credit insurance. This scheme should increase banks’ capacity, and is an excellent step forward.”
ECGD will share up to 90% of the risk on individual letters of credit.
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