6.3 CREDIT RISK

Credit risk is the risk that a counterparty in a trade transaction will default on its payment obligation, resulting in a financial loss to the exporter, bank, or other party extending credit.

Risk that the other party defaults on its trade obligation.

In open account trade, the exporter ships goods before receiving payment, so the primary credit risk is the importer's failure or refusal to pay the invoice amount on the agreed due date.

Risk of buyer canceling order before goods are shipped.

A Letter of Credit substitutes the importer's credit risk with the issuing bank's credit risk; as long as the exporter presents compliant documents, the issuing bank is obligated to pay regardless of the importer's financial condition.

Risk of non-payment after goods have been dispatched.

Country risk refers to the risk that political, economic, or social events in the importer's country prevent payment even when the importer is willing to pay; it is a component of overall credit risk in cross-border transactions.

Risk that borrower or buyer fails to fulfill payment obligation.