ECA direct lending vs interest make up schemes

An interest make up scheme ECA structure and ECA direct lending are two forms of official financing support under the OECD Arrangement, distinguished by whether the government or the bank is the lender of record.

The Arrangement separates forms of official support. Export credit guarantee or insurance is pure cover. Official financing support comprises direct credit or financing and refinancing, or interest rate support. Any combination of those forms may also be provided. Interest make up is the market term often used for interest rate support.

That taxonomy matters for credit desks because the same export contract can be supported through different official channels. Pure cover leaves the bank as lender with an official guarantee or insurance. Direct lending puts the official institution into the loan. Interest rate support leaves the bank as lender while the government supports a fixed rate at or above the CIRR.

Interest make up scheme ECA support defined

The Arrangement defines interest rate support as an arrangement between a government and banks or other financial institutions which allows the provision of fixed rate export finance at or above the CIRR. In practical terms, the bank funds and lends, while the official scheme supports the fixed rate outcome required by policy.

CIRR is the minimum interest rate for official financing support for fixed rate loans. Participants providing official financing support for fixed rate loans apply the relevant CIRRs as minimum interest rates. Interest rate support therefore cannot be read as a free standing subsidy that undercuts CIRR. The definition itself embeds the CIRR floor.

The Arrangement also states that official financing support shall not offset or compensate, in part or in full, for the appropriate credit risk premium. Interest make up addresses the interest rate structure. It does not replace the credit risk premium charged for non repayment risk under the Arrangement premium rules.

Direct lending as official financing support

Direct lending corresponds to the Arrangement category of direct credit or financing. In that form, the government or the export credit agency extends the loan, or provides financing directly, rather than only guaranteeing a bank loan or supporting the interest rate on a bank loan.

Refinancing sits in the same official financing support family in the Arrangement text. Direct credit, refinancing and interest rate support are grouped together as official financing support, and contrasted with pure cover. The institutional difference among them is who funds and who bears the interest rate mechanics, not whether official support exists.

Direct lending therefore changes the lender of record. The official institution becomes the creditor, or provides the financing directly. Interest make up leaves commercial banks or other financial institutions as lenders under an official interest rate support arrangement.

Pure cover contrasted with both forms

Pure cover is export credit guarantee or insurance without official financing support. A common illustration is a guarantee to a bank making a loan to an overseas buyer. The UKEF Buyer Credit Facility is described as a guarantee to a bank making a loan to an overseas buyer for capital goods, services or intangibles. That product is bank intermediated pure cover style support, not itself a definition of direct lending or interest make up.

The comparison is useful because market language sometimes collapses all ECA support into one label. Under the Arrangement:

• pure cover supports credit risk through guarantee or insurance
• direct lending provides official financing as lender or direct financier
• interest rate support supports fixed rate export finance at or above CIRR through banks

A single transaction may combine forms. The Arrangement expressly contemplates combinations. Credit analysis still needs to identify which form supplies the loan proceeds, which form supplies the fixed rate support, and which form supplies credit risk cover.

CIRR as the shared fixed rate floor

Where official financing support is provided for fixed rate loans, CIRR is the minimum interest rate. That rule applies across the official financing support category, including interest rate support. CIRR principles in the Arrangement require rates that represent final commercial lending interest rates in the domestic market of the currency concerned, correspond to rates for first class domestic borrowers, reflect funding costs of fixed interest rate finance, avoid distortion of domestic competitive conditions, and correspond to rates available to first class foreign borrowers.

OECD CIRR documentation states that CIRRs are set on the 15th of each month. The maturity of the government bond used in construction follows a formula involving drawdown and repayment periods, rounded to the nearest year, capped at ten years and floored at three years. Those mechanics reinforce that CIRR is a published Arrangement benchmark, not a negotiated discretionary rate.

Credit implications for bank desks

For bank desks, the choice between direct lending and an interest make up scheme is a question of funding role and balance sheet. In direct lending, the official institution provides the financing. In interest make up, banks or other financial institutions provide fixed rate export finance under a government arrangement at or above CIRR.

Both sit inside official financing support under the OECD Arrangement. Neither is pure cover. Pure cover may still appear in the same export campaign through a guarantee or insurance layer, including in buyer credit structures where a bank lends and an ECA guarantees.

The clean reading is therefore categorical. Direct lending answers who lends. Interest make up answers how a fixed rate at or above CIRR is supported when banks lend. Credit risk premium remains a separate Arrangement requirement that official financing support must not offset.