PREM Notes

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This note series is intended to summarize good practices and key policy findings on poverty reduction and economic management (PREM) topics.

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Access to Preshipment Export Finance : Do Guarantees Help?

2007-04, Alavi, Hamid

Many small- and medium-sized emerging exporters in developing countries have inadequate access to short-term working capital to finance their export transactions. This is mainly due to a market failure resulting from informational asymmetries on the part of banks about exporters' ability to execute export orders according to buyers' standards of quality, cost, and delivery. Several countries have established pre-shipment export finance guaranty facilities to help alleviate this market failure. Their aim is to act as catalyst to temporarily share nonperformance risks of exporters with the banks, allowing the banks to evaluate nonperformance risks of emerging exporters. Some countries have implemented these facilities successfully encouraging banks to provide pre-shipment finance without guarantees, while others have not. This note draws on Tunisia's experience to outline the necessary conditions for the success of these facilities.