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BACK             Issue No. 4/2005
The Importance of Credit Information Reports in
Underwriting Buyers Risks by ECGA
In the following article, Mr. Nasir bin Issa Al-Ismaily, the General Manager of ECGA discusses the importance of credit information reports in underwriting buyers' risks. He identifies major areas of the credit information reports involved in assessing such risks while considering requests from exporters for credit limits for insurance cover.

Why credit information reports are vital in underwriting buyers risk by ECGA? It is important so as to minimize the risks of non payment by closely assessing the information provided in the credit information reports. This is for the interest of the policyholders that is credit insured exporters so as to protect them against bad debts as well as for ECGA in mitigating such risks through adopting sound underwriting practices. It is crucial for ECGA considering the level of its exposure based on the credit limits issued to exporters for covering such buyers' risks is growing significantly. ECGA would make credit decisions on transactions that require reliable information on buyer's credit worthiness.

If information is reliable and good, then ECGA will be in a better position to be more flexible in meeting the needs of exporters in dealing with such buyers considering risks mitigation has been factored in the credit risk assessment. Even if credit information is convincing and acceptable to underwrite the credit risks, that does not guarantee what can happen in the future as the buyer may face financial problems unexpectedly and therefore may not have the means of paying even if he is willing to pay. He may require to reschedule payments due to his creditors and other suppliers including you as an exporter.

If information of the buyer is bad, then ECGA would not approve the credit limit and would alert the exporter to be careful in its dealings. If it is already existing buyer for which it has requested cover or if it is a new buyer, the Agency would not approve such a limit in view of negative or adverse credit information reports and would alert and advise the exporters accordingly.

Again credit information is highly important and critical. Credit information reports are historical or past records and even though they may provide a sound basis in assessing the risks, it is important also to keep abreast of the latest experiences of the payment behavior of the buyers from the exporters themselves as well as from others sources as business situation of the buyer may change.

What can happen in the future no one can be certain but present as well as past information is definitely partly useful in assessing the risks. With complete availability and very good information on the buyer coupled with excellent past trading experience; the exporter should not be complacent as the credit risk on non-payment will still exist even if the chance for such occurrence is slim. This is because the future business dealings may not sail smoothly as expected. The buyer could face cash flow problems and financial difficulties which will affect his ability to pay the exporter and hence defaults or even goes into bankruptcy. There are instances where ECGA had to pay claims to exporters where previously the buyers were considered highly credit worthy. Hence it is advisable not to take a chance without knowing the buyers and insuring them with ECGA whether you perceive them as risky or not. Hence credit insurance mitigates such risk and protect from suffering losses.

The Agency depends on various sources of information in assessing the risks of non-payment. Credit information reports from reputable agencies on the buyers are of paramount importance and the key in assessing the extent of the risks involved.

The Agency also exchanges information with the other Export Credit Agencies in case of any adverse information for such buyers thus mitigating the credit risks. The Agency is a member of the Credit Alliance Network which operates under the auspices of Coface of France and therefore has access of information on-line on millions of buyers would-wide. The Credit Alliance Network is now present in 93 countries representing over 85% of the world trade.

It is important to realize that because the exporters are credit insured, then they don't have to worry about the credit risks on the buyers. This is a wrong perception as credit insurance is an extra tool which the exporters can use to manage their credit policies effectively as they have vested interest on the risk because such coverage is not 100% insured but they also retained a portion of the risks.

Prudent credit management policies of the exporter on the buyers selection as well as the exporters own assessment of such buyer plays as important contribution in lowering the level of credit risks thus improving the confidence needed in dealing with reputable and reliable buyers. With such comfort coupled with ECGA credit insurance cover, it allows exporters or sellers to be more active thus generating higher volume of sales while at the same time minimizing the risks of accumulating outstanding long overdue which can easily become bad debts. Thus by taking such precautionary measures from the beginning as well as follows the advice given by ECGA on the buyer into account, this would at least lower the risks of such occurrences.

ECGA ensures that all the required information is on hand and up-to-date so as to assess the credit risks and make responsible decisions in underwriting of such risks and approval of credit risks.

The The format of the two reports of its major contents are outlined It It can be observed that the standard report is more detailed than the profile report as it consists of various contents as compared and listed on the following table.


TYPES OF CREDIT INFORMATION REPORTS
PROFILE REPORT

Company's Name

Full Address

Legal Status

Date of Establishment

Activities

Capital

Sales Turnover

Payment Records

Financial & Operating Results

STANDARD REPORT
Company's Name

Full Address

Legal Status

Date of Establishment

Owners

Directors

Management Team

Description of Activities

Agencies

Suppliers

Description of Premises

Branches
Financial Information

Financial Standing

Commercial Morality

Credibility

Payment Report

Financial & Operating Results

Rating

Bankers

Historical Evolution

Future Plans

Competition

Credit Recommendation
 

Hence what sort detailed of information from the credit reports which ECGA as a credit insurer is looking at while considering underwriting requests from the exporters? There are four categories or major areas of credit information reports which are of paramount importance while assessing the risks on the buyer which also include the above contents as listed and explained below:


 Business & Background Information on the Buyer
This forms the basis of the relationship between the exporter and the buyer. ECGA would normally ask the exporter to provide information he already possesses on the buyer for which he requires ECGA's cover. The disclosure of the full name, address (including telephone and fax number), commercial registration number as well as the buyer's location are essential. Once such preliminary information is obtained then it is easier for the Agency to get additional and detailed information on that buyer from its own credit information sources. However, if the exporter has supplemental information then he should provide it to the Agency. The Agency would seek such information as to the nature of the business in which the buyer is involved, owners names and nationalities as well as the extent of the involvement of local partners i.e. whether they are active or dormant in the business, the year the company started its business, names of trade suppliers and clients, number of employees as well as the description of the premises of the buyer. In some of the developed markets where information is readily available to the public, it is possible to know whether there have been any default cases provided as well as court actions or litigations. As these are registered records, they are readily available to the public.


 Trading Experience
Established trading experience with an existing buyer for which an exporter requires credit insurance cover is highly important. The Agency while reviewing such request examines how long the exporter has been dealing with the buyer, the sales volumes and value and more importantly looks into the payment records of the accounts payable that is whether credit period extended previously by the exporter to the buyer has been honored by the buyer on time or there have been regular delays in payments. Such analysis would provide a good indication of how prompt the buyer is in meeting its commitments. If the exporter is dealing with the buyer for the first time, then the Agency would look at the experiences of other exporters who have been dealing before with this buyer. Credit information agencies would also provide an indication of the average period of payment as compared to similar traders of such size or industry. Even though past experience is important it is no substitute for an¬ intelligent approach to the extension of credit and collection by the exporter. If credit is extended, there should be a system that monitors the status of payment, detects delinquencies and enforces payment. Credit terms may be extended to those evaluated as good credit risks or who have proven themselves credit-worthy.
In case there is no existing trading experience then the Agency can rely on information obtained from credit information agencies


Financial Position of the Buyer
Financial details of the buyer are highly important in assessing the credit risk. The Agency tries to obtain up-to-date and accurate financial information. The recent financial figures can be compared with the corresponding past periods so as to observe and analyze the trends. Such financial details are easy to obtain for publicly held companies in certain markets but it is sometimes difficult to obtain for closely held private companies especially in developing markets. The existence of financial details provides essential basis and analysis of the buyer's financial position. The Agency analyses such financial information. The financial details include the registered or paid-up capital of the Company, Net Income, Gross Profit, Revenue, Fixed Assets, Current Assets, Current Liabilities, Net Working Capital, Stock or Inventory level, etc. In addition, if the accounts payable of the buyer are known, then the average payment period as well as the analysis of its accounts payable can be made possible.


Credit Ratings/Worthiness of the Buyer
The Agency apart from relying on above factors in assessing the risk on the buyer also depends on the assessment of the credit ratings and worthiness of the buyer based on credit information report received from credit information agencies or through the banks of the buyers. The credit rating is based on a certain scale depending on the reporting system of the Agency involved. However it would classify and rate the buyer if it is bad, average, good, very good or excellent or uses numerical scale. The credit worthiness of the buyer will also characterize its reputation in terms of commercial morality, payment records whether slow, regular or prompt. It will also rate the buyer's financial strength whether very good, good, moderate, bad, etc. Independent recommendation of whether the buyer is good for the amount of credit and terms of payment as per the enquiry will normally be provided by the credit informant based on the information obtained.

Thus the above major areas of credit information report plays important role in the underwriting process in the risks assessment on the buyers. Complete information may not be available but partial information as well as trading experience already established would further provide comfort in providing cover to exporters for such buyers. What is important for the exporter to keep in mind is that it is necessary; he should do his homework by knowing the buyer and should visit him periodically whenever necessary.

Hint to Exporter
The fewer the days it takes to collect accounts receivable, the better your company's cash flow and the less risk of suffering from losses due to uncollectible or bad accounts, thus better profitability.

The average collection period or rule of thumb is that is should not exceed 1¼ times your credit terms. If the company's policy is 30 days, its average collection period should not exceed 40 days. The company's accounts receivable would determine which customers are slow in paying, then by pursuing the collection of the overdue accounts could allow the company to convert these receivables into cash.



The Sultanate of Oman is ranked among the top on economic freedom
As per the annual report issued by the Fraser Institute of Canada on the world economic freedom, the Sultanate of Oman is one of the top 20 countries on the international level that have achieved economic freedom. On the Arab Countries level, the Sultanate secured the second position after the UAE.

Non-Oil Omani Exports increased
The growth of Omani non-oil exports has been remarkable as per the latest export statistics issued by the Ministry of National Economy. Total Omani non-oil exports of Omani origin (excluding re-exports) for the 5 months period as of end of May 2005 were RO.224.3 million compared to RO.178.5 million as for corresponding 5 months period of 2005 or significant increases of 25.6%.


ECGA of Oman signed Memorandum of Understanding with Republic of Kazakhstan (KECIC)
Export Credit Guarantee Agency (S.A.O.C) of the Sultanate of Oman signed Memorandum of Understanding (MOU) with the State Insurance Corporation for the Insurance of Export Credits and Investment" of the Republic of Kazakhstan (KECIC). The MOU include various areas of cooperation such as exchanges of information on buyers and banks, assistance in recoveries, exchanges of experiences on claim payments, training, etc. KECIC of Kazakhstan as with ECGA of Oman are both members of the Credit Alliance Network as well as the Prague Club.
Total Credit Limits Issued by ECGA to Exporters increasing
Total credit limits issued by ECGA to exporters for the eight months of 2005 was RO.175.7 million to 91 countries world-wide compared to RO.144 million to 88 countries for the year 2004. Of the total credit limits issued, 70.5% were under letters of credit and 29.5 % under open account. GCC countries constitutes 58.2% of the total credit limits issued by the Agency.


Remarkable growth of domestic credit insurance
ECGA has continued to be highly successful in meeting its target for domestic credit insurance business. As of end of June 2005, the total credit limits issued by ECGA to various exporters for domestic buyers has reached RO.2.78 million compared to RO. 1.439 million as of 30th June 2005 or an increase of 93%. Level of total business declared significantly increased by 236% as compared to corresponding six months period of 2004.


Arab ECAs meeting in Kuwait
ECAs meeting of Arab countries will be held in Kuwait under the auspices of Inter Arab Investment Guarantee Corporation from 9th to 10th November 2005.
Prague Club Meeting will be held in Thailand hosted by Exim-Import Bank of Thailand
The Prague Club will held its second meeting of the year 2005 in Bangkok, Thailand. It will be hosted by the Exim-Import Bank of Thailand (THAI EXIM) from November 14 to 16, 2005. The meetings and workshop will deal with a number of issues including business trends and main developments of ECAs members, reviewal of Berne Union Understandings and Agreements, underwriting and technical issues as well as country risks assessment.


ECGA’s Staff Participated in the Budgetary Planning and Control Workshop
A Number of ECGA staff from Finance and Administration attended Budgeting Planning and Control Workshop which was organized by M/s Precept Management Consultancy during the period from 25th September 2005 to 28th September 2005 in Grand Hyatt Hotel – Muscat. The seminar speaker was Mr. Michael Papadakis from Cyprus; he is a member of the Institute of Chartered Accountant in England and Wales. The principal objective of the workshop was to enable the participants to understand various budget processes including corporate planning and objectives, budget as the link between strategic plans and their implementation, functions of budgets as planning and control system, the budgeting system, preparing the departmental budget and various type of budget such as master budget, flexible and flexed budget, rolling budget, zero based budget, activity based budgeting and planning & programming budgeting systems.


COUNTRY PROFILE OF BUYERS OF OMANI INSURED EXPORTS
JORDAN
JORDAN is situated in the Middle East, North West of Saudi Arabia. The total area of the country is 92,300 square kilometers. The capital city is Amman. The population of Jordan is 5,759,732 (July 2005 est.).

Export Credit Guarantee Agency (SAOC) has insured Omani exports to various products to Jordan including foodstuffs, drugs and pharmaceutical products, fresh and frozen fish, textile fabrics, dairy products, ceramic tiles, chemicals, net bags, perfumes, abrasives, air-conditioners, safety equipments, furniture, biscuits and wafers, tomato ketchup, fiber optics, storage batteries and polypropylene products etc. The total credit limits issued by the Agency to date amounted to RO.3,773,814/- (RO. 3,089,314/- or almost 82% under letters of credit and remaining 18% R.O.684,500/- are on Open Credit). Since ECGA’s inception, total business declared by policyholders to Jordan were RO.4,034,689/- (RO.2,573,063/- or almost 64% against Open Account and remaining 36% R.O.1,461,626/- are under letter of credit). The Agency has paid two claims on buyers to Jordan amounting to RO.11,640/- this represents 2.8% of total cumulative amount of claims paid to exporters by the Agency.

During the year 2004, total Omani exports to Jordan were RO.26,241,121 /-, while imports were R.O.3,017,735/-. The Omani exports and imports to Jordan for the last 5 years are listed below. Oman has maintained a net trade surplus with Jordan for the last 5 years.


Year
2000
2001
2002
2003
2004

Exports

9,623,964

17,034,818

9,437,783

22,602,318

26,241,121

Imports

2,800,595

2,957,528

3,788,267

4,001,841

3,017,735

Surplus

6,823,369

14,077,290

5,649,516

18,600,477

23,223,386

Source: Extracted from Foreign Trade Statistics

   


As per the latest publication of International Trade Finance Magazine December 2004, issue No. 454, in its survey highlights in Jordan states as follows:-

“Two out of three importers are on open account one in six offers Cash Against Documents, and one in six provides a draft acceptance. Importers usually pay within two weeks of due date, while banks transmit foreign exchange in three months.

As per D&B Country Risk Indicator, for the month of March 2005 a number of ECAs provide short and medium terms cover for Jordan including US Eximbank, Atradius, ECGD and Euler Hermes - UK.
The maximum terms of payment are (Sight Draft) SD and L/C’s with usual terms of 30-90 days.

Questions and Answers


Q- What type of risks covered under the domestic credit insurance?
A- ECGA covers the risks on the insolvency of the buyer as well as failure of the buyer to pay the seller of the value of goods sold and accepted by the buyer.

Q-What are the benefits of the Export Credit Policy?
A-
As a manufacturer, businessman or trader, you are probably well aware that bad debts can arise from any customer for a variety of reasons. No one can be sure that 100% of the outstanding will be paid. With an Export Credit Policy, you can be assured of payment of those buyers approved by ECGA. In this way as an exporter you can:-

Continue to sell safely on credit terms and compete effectively against other suppliers
Derive in the process better credit control by referring to or keeping tab of the buyers and credit limit
ECGA approves·

Be assured that your cash flow will not be affected even if some of your biggest customers are in financial difficulties. Hence it provides greater financial liquidity and flexibility administrating your foreign receivables portfolio·

Be confident of selling to new markets because Export Credit Insurance will cover the risks, political was well as buyer - related, thus it supports prudent penetration of higher risk foreign markets
Assign your Export Credit Policy as additional collateral to a bank or financial institution to obtain additional financing or perhaps even financing on better terms than the bank might otherwise have been prepared to offer you as an exporter.

Q-Why is Export Credit Policy important as a financial tool?
A-
While credit protection is important, we at ECGA are also aware that the exporter might need additional help to finance its exports. For this reason, The Export Credit Policy is so designed to allow the exporter to use it as an additional form of security to its banker. And it would not cost extra to get these financing benefits. All he needs, after he has have obtained an Export Credit Policy from ECGA, is to ask for a Letter of Authority (L/A). This L/A will enable him to assign to his bank the rights to claim proceeds under a particular transaction insured in the Policy.

There is no cost involved in the issue of the L/A. On the other hand, it could help the exporter to obtain post shipment credit facilities from a bank at a favourable rate.

Most banks will usually look to their customers for collateral to secure the risk of non-payment of any loan or advance extended to finance an export trade credit. The Export Credit Policy protects the customer against loss due to non-payment for events outside the exporter's control. The benefit of this protection as indicated earlier can be assigned to the financing bank under a simple procedure in a Letter of Authority (L/A) and is accepted by the banks as a valuable form of additional collateral not otherwise available. In consequence the export credit insured exporter can expect to enjoy improved financial facilities and in many cases finer interest rates. Thus as export credit insurance is an important facilitator of export financing.

Q-In case of insolvency of the buyer when should the exporter files a claim?
A-
Claims due to the insolvency of buyer can be filed either after one month from the date on which the exporter's claim has been admitted to rank against the insolvent's estate, or after six months from the due date of the bill whichever date is earlier. In case the claim is filed after six months from the due date of the bill but before the claim is admitted by the official receiver/liquidator, the exporter has to give documentary evidence of the claim having been filed with receiver/liquidator and also a declaration to the effect that he has done, or omitted nothing, whereby the claim is liable to be rejected by the receiver/liquidator.

Q-When payments are not realized due to exchange transfer delay, when should the claim be filed?
A-
Where payments are not realized due to exchange transfer delay, claims can be filed with the Agency after six months from the date on which the buyer has, after making the payment in local currency, completed exchange control fromalities necessary for the transfer of funds to Oman. Where the Agency has stipulated a longer waiting period, claims can be filed only after completion of such period.

Q-When should the claim be filed due to diversion of voyage outside Oman?
A-
Claims due to diversion of voyage outside Oman can be filed as soon as the exporter is in a position to produce to the Agency the necessary documentary proof of the cause and extent of loss.


Q-What is the role of the exporter in the recovery and sharing of such recovery?
A-
The exporter is required to vigorously pursue recovery action and to keep the Agency informed of such action from time to time. As and when any amount is recovered, the amount will have to be shared with the Agency in the ratio in which the loss was borne.

Omani Insured Exporter by ECGA
The National Detergent Co. SAOG


The National Detergent Company SAOG has been one of the active Omani exporters availing ECGA's services for many years.

It is the largest detergent manufacturer in the Sultanate of Oman. Commercial production commenced in the year 1984 and in a short period of time, the National Detergent Co. SAOG achieved leadership status in the local detergent market, gaining 50% market share.

The National Detergent Company SAOG an ISO certified company, manufactures and markets dishwashing liquids, soaps, shampoos and a whole range of institutional products, besides detergent powders. Bahar is the leading brand in detergent powder and dishwashing liquid category. Other major brands include No1, Site, Farah, Sahar, Sidr, Bahar Clean, Gentil Bliss etc.

The detergent manufacturing facility located at Al Ghubra. It commenced commercial production in 1984. It was revamped and its capacity was augmented in 1996. The shampoo plant is also located in the same premises.

The toilet soap plant was commissioned in November 1990 and the liquid detergent factory was set up at Rusayl in April 1992.

The National Detergent Co. SAOG is the first soap and detergent manufacturing company in the GCC to have obtained the prestigious ISO 9001- 2000 certification.

The company has a team of technical professionals who excel in their fields.

National Detergent Co. SAOG exports its range of products to all the GCC countries and markets in other Arab, African, Asian and European countries as well as new markets are being consciously developed every year to improve and spread its presence.

The company export focus is evidenced by the fact that its exports contribute 75% of its total sales volume. There has been a steady growth in export sales between 1999 to 2003. Due to expiry of certain toll manufacturing contracts, there was a dip in export sales in the year 2004. The company's total sales and export performance for the years 1999 to 2004 are by the graph below. The company won a number of prestigious awards in recognition of its quality and competence. There include the following awards:-

1991 DHL - Gulf News Award for "Excellence in Industry".

1993 His Majesty's Cup for the "Best Industry".

1994, 1995, 1997, 1998 & 1999 His Majesty's Certificate for one of the "Best Industry in the Country"

2001, 2002 and 2003 His Majesty’s Cup for the “Best Industry”.



SALES & EXPORT PERFORMANCE OF NATIONAL DETERGENTS CO. SAOG

 
 


Insure Exports with ECGA for safe export business. As credit insured exporters, while you reap the profits…..ECGA will bear the risks.

An ECGA Export Credit Policy will protect you when you export on Open Account, Post Date Cheques,

Documents Against Acceptance

and Irrevocable Letters of Credit




ECGA is here to help you minimize your risks
BUYER’S RISK
COUNTRY RISK
   buyer’s insolvency/bankruptcy

   buyer’s failure to pay

   buyer refusing delivery of goods


   foreign exchange transfer delay

   import bans or cancellation of import licence

   payment moratorium

   war, civil disorder, natural disasters



Other benefits of service provided to credit insured exporters include domestic credit insurance, post shipment financing through bills discounting by commercial banks as well as issuance of guarantees to commercial banks for pre-shipment financing needs of the exporters.

   
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