Recent trade figures suggest that the UAE is continuing to strengthen its position as a global trading hub. Bilateral trade with China and Australia has shown particularly strong growth in 2013. GCC exports to China in 2012 were USD 101billion, with the UAE a significant contributor to that figure.
Looking ahead, global trade is forecast to increase by nearly 6% in real terms in 2014. The UAE is well positioned to benefit from increasing trade flows between the GCC and Asia and the East more generally. In this article we look at the increasing role being played by trade credit and trade credit insurance in the growth of international trade from the region.
TRADE CREDIT
By 'trade credit' we mean a seller providing credit terms to a buyer for goods or services purchased. Trade credit helps to facilitate trade at both the domestic and export level by making payment terms competitive.
Where economic conditions have limited the availability of traditional loan finance for trade, credit provided by a seller may be a significant element of a buyer's trade finance management. It is a commercial reality that tough domestic and international competition for sales in all sectors requires a seller to offer buyers credit terms. An exporter who does not offer credit terms is likely to find it difficult to attract new buyers in existing markets and to access new markets.
The flip side for a seller of increased sales brought by providing credit to a buyer is the risk of non-payment. A seller's credit risk can be amplified where sales are concentrated among a small customer base or, in the case of exports, in a small number of foreign markets. Entering new export markets can demand longer than normal credit terms combined with increased customer risk and country risk compared to a seller's domestic market.
Managing credit risks in international trade is therefore a key aspect of prudent financial management for any trading business. Trade credit insurance is rising in prominence in the UAE as a way of managing those financial risks.
TRADE CREDIT INSURANCE
Trade credit insurance protects sellers against the risk of unforeseen non-payment by buyers on credit terms, typically where this is the result of buyer insolvency or protracted payment default.
Policies are available to cover domestic and export sales. The scope of insurance cover provided is usually defined by various parameters, including the identity of insurer, the business of the seller, the country where the buyer is located, the financial status of the buyer and the value and term of the credit being insured.
Common forms of trade credit insurance cover include: Whole Turnover (cover for all receivables), Key Accounts (cover for sales to designated key / large customers) and Single Buyer (cover for exposures to a single buyer).
Transferring credit risks to a third party (the insurer) means a business can focus on its core activities to generate new revenues and, hopefully, achieve increased profits. Accessing new clients and new markets in turn reduces concentration risk in a seller's client base, thereby reducing the risks posed by trade credit defaults.
Providers of trade credit insurance are either private insurance companies or state-owned export credit agencies. The latter exist to promote a nation's exports by protecting an exporter's receivables risk. Exports are generally viewed as a higher credit risk than domestic trade, typically because less is known about a foreign buyer's financial position and the avenues of recourse against a defaulting foreign buyer can be more uncertain.
Trade credit insurers will help a seller manage credit risk (it is, after all, in their interests to do so) by undertaking buyer due diligence, designating approved buyers and setting credit limits for an individual buyers, groups of buyers or by market. Importantly, a trade credit insurer will also provide assistance to the seller in pursing payment from a debtor, which may include assistance with legal expenses of taking recovery steps depending on the policy (for example, Clyde & Co provides a collection service for unpaid commercial debts that has a number of the world's largest trade credit insurers as its clients).
As with any commercial insurance, a trade credit insurance policy will contain limits on which risks are covered and which are not. For example, insurance for non-payment resulting from 'political risks' will usually require buying something over and above a standard trade credit insurance policy. Non-payment resulting from disputed sales will also usually fall outside the scope of trade credit insurance cover.
TRADE CREDIT INSURANCE IN THE MIDDLE EAST
The UAE is a low-penetration market for insurance generally. This is changing as the UAE insurance market matures and there is a developing awareness among businesses for their commercial insurance needs.
There is a growing trend in the GCC for trade credit insurance, led by financial controllers being more attuned to trade credit risks, more insurance companies offering trade credit products to SMEs and difficult conditions for obtaining traditional bank finance to support trade. Trade credit insurance is an accessible and cost-effective trade finance tool in a region that is experiencing strong growth in international trade.
The current UAE market for insuring trade credit receivables has been estimated at AED 220 million. One of the world's largest insurance companies, AIG, announced earlier this year that it was expanding its offer of trade credit cover in the Middle East to tap in to the anticipated growth in trade. Other insurance companies are expected to follow suit, which should mean a healthy choice for trade credit insurance buyers on price and the terms of cover available.
Strong regional interest in trade credit is demonstrated by the first dedicated Trade Credit Summit in Dubai that is due to take place next week. The event is expected to have among its delegates existing buyers of trade credit insurance and businesses looking to find out more about what products are available and the growth opportunities it can bring for them.
Harnessing the forecast increase in trade flows from the region is likely to be high on the agenda of UAE businesses for some time to come, and not only next week. Trade credit insurance is likely to play a significant part in making that happen.
Keith Hutchison is senior associate and debt recovery practice manager at the Dubai office of Clyde & Co LLP, where he manages the daily operations of the commercial debt recovery team and handles a wide range of commercial dispute resolution work includingcommercial debt recovery, insurance, reinsurance, international trade, commodities, enforcement, banking and offshore investment disputes and other general commercial litigation.
© Zawya 2013
