Export Credit Agencies world-wide are experiencing dramatic changes brought about by globalization, liberalization of trade, increased competition in the credit insurance business, opening of new and non traditional markets and more importantly engaged not only in export but also domestic credit insurance. National trade barriers in the European Union have been crumbling as national export credit agencies found themselves in competition with foreign owned ECAs in their own markets. As the Sultanate of Oman is a full member of WTO, it should anticipate all such changes including access of its market to foreign competitors including foreign credit insurers. For the exporter apart from the variation of the risk which he is interested in minimizing through credit insurance protection of ECGA, there is no distinction in the perception of risk of non payment between domestic sales to that of exports. This is because the realization of such sales and mitigation of the risks on payment will have the beneficial effects to exporter’s bottom line profit. Thus what is important for the exporter is to be paid by the buyer whether it is domestic or foreign and improve on the collection of such sales.
However, based on the experiences of ECAs world wide, domestic credit insurance is considered to be riskier than export credit. Even though the buyer is physically near to the seller in his own country, paradoxically the default cases in bad debt for domestic sales are higher than insured foreign sales. Such perception may be influenced by extensive assessment on the credit risk on foreign buyer where information may be limited and therefore ECAs are more careful in their underwritings than to a local buyer where there a feeling that if something goes wrong, then the seller can act and recover promptly which is not always the case.
Domestic credit insurance is considered an extension of the same service as export credit insurance because the benefits which the exporter derives are identical that is it provides him with the protection he needs to mitigate the risks of non payment from any buyer that is whether local or foreign buyer. The exporter needs such protection of its accounts receivable and minimize the risk of non payment. He expects that an ECA from his country to be supportive as he would like to insure all his accounts to the same ECA. By insuring his turnover, the exporter feels comfortable as this will assist him in increasing his volume of sales and therefore helps with his cash flows as well as raising the necessary financing required such as through bills discounting, etc. The benefits to him are the same and appreciated as for export sales. Moreover, if an ECA does not provide such domestic credit insurance support to its exporters, then it leaves them at disadvantageous competitive position compared to other exporters in other countries because ECAs world wide are engaged in providing both domestic as well as export credit insurance services to their exporters. Hence by providing the exporters with the domestic credit insurance for their local buyers, an ECA is in effect enhancing their business potential as they will be more active than otherwise.
Moreover, exporters in the national market will be at par with foreign suppliers considering that foreign ECAs are providing insurance cover to their suppliers on credit sales to buyers in the other countrys’ markets. Therefore, such buyers will be prepared to buy from suppliers at competitive credit terms as they can match such cover due to availability of credit insurance in their local markets as well. With the domestic credit insurance, this would help in their liquidity and debt management as well as mobilize resources in their export efforts. By providing domestic credit insurance, national ECA would benefit as it will increases the volume of insurable business and therefore gross premium income which would attract reinsurance interest and support.
One of the biggest challenges facing small ECAs in the developing and emerging markets is the willingness of Reinsurers to provide reinsurance protection considering the volume of premium is very low and therefore not attractive enough for them. This is because the primary objective of such ECAs is towards promotion of national exports and not geared on profit maximization through higher premium rates. Thus by offering domestic credit insurance, this would supplement the premium income of an ECA by making it easier to obtain reinsurance support from the international reinsurers. With such reinsurance protection, the Agency’s capacity to increase its commitments by providing credit insurance protection for both export as well as domestic cover will be further enhanced. Moreover, the increased premium level attributed by domestic credit insurance would further assist an ECA to cover its overhead expenses, improve on its financial profitability as well as build up its reserves to cushion itself against unexpected major claims in the future.
Considering the prevalence of domestic credit insurance among ECAs in other countries, it was the right move that ECGA of the Sultanate of Oman to provide such cover for local sales. The domestic credit insurance scheme provides cover for transactions on open credit such as open account terms, PDCs, etc. The product to be credit insured has to be an Omani produced and that the cover is eligible to exporters who have availed the Export Credit Services of the Agency. The assessment of the credit risks mainly based on the financial strengths, payment records, commercial morality and ratings of the local buyers is of utmost important factors for consideration for such cover.
With the recognition of deriving tangible benefits through risk minimization, domestic credit insurance will allow the policyholders to sale on credit to local buyers in Oman with confidence giving valuable protection against the consequences of non payment and insolvency.