Definition
The Export Credits Guarantee Department (ECGD), currently known as UK Export Finance, is a UK government department dedicated to advancing British exports. It accomplishes this by offering export credit insurance to exporters and guaranteeing UK banks’ repayment that finance exports on credit terms extending two years or longer. Additionally, the department insures British private investments abroad against risks such as war, expropriation, and remittance restrictions. A portion of the ECGD’s functions, particularly short-term credit insurance, was privatized in 1991.
Examples
- Export Credit Insurance: A UK-based manufacturer exporting machinery to Brazil can secure insurance through UK Export Finance, protecting against non-payment scenarios.
- Bank Guarantee: A British bank providing a loan to a UK exporter on a two-year payment term can receive a repayment guarantee from UK Export Finance, mitigating the financial risk involved.
- Investment Protection: A British company investing in infrastructure in a volatile country can obtain insurance against risks like expropriation and political upheaval through UK Export Finance.
Frequently Asked Questions (FAQs)
What is the role of UK Export Finance?
UK Export Finance provides financial assistance such as export credit insurance and guarantees to facilitate and promote UK exports. It helps mitigate risks for UK exporters and financial institutions involved in international trade.
How does export credit insurance work?
Export credit insurance covers exporters against the risk of non-payment by a foreign buyer due to commercial or political reasons, thus enabling businesses to offer competitive credit terms safely.
Which types of risks does UK Export Finance cover for overseas investments?
UK Export Finance covers risks including war, expropriation, and restrictions on repatriating earnings or invested capital from foreign ventures.
Can UK Export Finance support short-term credit insurance?
While some short-term credit insurance functions were privatized in 1991, UK Export Finance can still provide support for various export activities, though the specifics may vary.
Who can apply for support from UK Export Finance?
British businesses exporting goods or services or investing overseas, and financial institutions involved in supporting these activities, can apply for support from UK Export Finance.
- Export Credit Insurance: A type of insurance policy that provides coverage to exporters against the risk of non-payment by foreign buyers.
- Trade Finance: Financial products and services used by companies to facilitate international trade and commerce.
- Political Risk Insurance: A form of insurance to cover the possibility of losses due to specific types of political events like expropriation or political violence.
- Expropriation: The act of a government taking privately-owned property against the will of the owner, typically for public use or benefit.
Online References
Suggested Books for Further Studies
- “International Trade Finance: A Practical Guide” by Kwai Wing Luk
- “The Law of Letters of Credit and Bank Guarantees” by A. Holowachuk
- “Trade Finance: A Complete Guide” by Trader’s Expert
- “Understanding and Negotiating Commercial Contracts: A Practical Guide” by Aditya Tripathi
Accounting Basics: Export Credits Guarantee Department (ECGD) Fundamentals Quiz
### What is the primary role of the Export Credits Guarantee Department (UK Export Finance)?
- [ ] To offer personal loans within the UK.
- [ ] To provide health insurance to UK residents.
- [x] To promote and support UK exports with financial guarantees and insurance.
- [ ] To set import tariffs on foreign goods.
> **Explanation:** The primary role of the Export Credits Guarantee Department, now known as UK Export Finance, is to promote and support UK exports by offering export credit insurance and financial guarantees.
### Which of the following risks does UK Export Finance NOT cover?
- [ ] Non-payment by foreign buyers
- [ ] Expropriation
- [ ] Restrictions on remittance of profits
- [x] Domestic business risks
> **Explanation:** UK Export Finance covers risks related to international trade and investment, such as non-payment by foreign buyers, expropriation, and remittance restrictions, but not domestic business risks.
### Which function of the ECGD was privatized in 1991?
- [ ] Long-term credit insurance
- [x] Short-term credit insurance
- [ ] Political risk insurance
- [ ] None of these
> **Explanation:** Short-term credit insurance functions of the ECGD were privatized in 1991 to streamline operations and focus on core long-term risk management.
### Who can apply for assistance from UK Export Finance?
- [ ] Any individual within the UK
- [ ] Only large multinational companies
- [x] British exporters and related financial institutions
- [ ] Any company worldwide
> **Explanation:** UK Export Finance primarily assists British exporters and the financial institutions supporting them, making it easier for these entities to mitigate international trade risks.
### What is a core product offered by UK Export Finance to mitigate export risks?
- [x] Export credit insurance
- [ ] Product liability insurance
- [ ] Health insurance
- [ ] Travel insurance
> **Explanation:** A core product offered by UK Export Finance is export credit insurance, designed to protect exporters from the risk of non-payment by international buyers.
### Why is political risk insurance significant for overseas investments?
- [ ] It ensures better currency exchange rates.
- [ ] It offers health benefits to employees.
- [x] It protects against losses due to expropriation, war, and political violence.
- [ ] It provides travel discounts.
> **Explanation:** Political risk insurance is significant for overseas investments as it protects against losses arising from expropriation, war, and political violence, thus securing investments in volatile regions.
### Which of the following is NOT a service provided by UK Export Finance?
- [ ] Providing finance guarantees for export deals
- [ ] Insuring private investments abroad
- [ ] Offering business consultancy to domestic SMEs
- [x] Setting international trade tariffs
> **Explanation:** UK Export Finance does not set international trade tariffs; it provides financial guarantees and insurance for UK exporters and investors.
### How does export credit insurance benefit UK exporters?
- [x] It mitigates the risk of non-payment by foreign buyers.
- [ ] It offers tax incentives.
- [ ] It guarantees domestic sales.
- [ ] It reduces import tariffs.
> **Explanation:** Export credit insurance benefits UK exporters by mitigating the risk of non-payment by foreign buyers, thereby encouraging international trade.
### What term describes when a government takes private property for public use?
- [ ] Subrogation
- [ ] Expropriation
- [ ] Amortization
- [x] Expropriation
> **Explanation:** Expropriation describes a government taking private property for public use, often covered under political risk insurance by UK Export Finance.
### Which of the following does UK Export Finance provide specifically for mitigating long-term credit risks?
- [ ] Trade consultancy services
- [x] Financial guarantees to banks providing export finance
- [ ] Market entry strategies
- [ ] Domestic revenue protection
> **Explanation:** UK Export Finance provides financial guarantees to banks offering long-term export finance, reducing the risk involved in international trade deals.
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