What is Avalisation in International Trade?

Exporters may require a third party, usually a bank, to guarantee payment of a bill of exchange drawn on an importer under a trade contract. This action, known as "avalisation", can be provided by a bank on behalf of the exporter upon request. By endorsing the bill on the back, the bank commits itself unconditionally to pay should the drawee default.

An "avalised" bill substitutes the bank's risk for the importers risk thus providing the exporter with assurance that payment will be met. This bill can subsequently be discounted or used to negotiate better credit terms thus can enhance the trading relationship with the importer.

Hence an Aval is the specific endorsement on a Bill of Exchange or Draft by a bank, which guarantees payment should the Drawee (the Importer) default on payment of the bill at maturity.

An avalisation however is given post shipment and requires (a) the drawee to accept the bill of exchange and (b) a bank to then agree to add their guarantee of payment. Either, or both, of these points may not happen and the exporter is left without a payment commitment from a bank. They will still have control over the goods (if shipped by sea) but will need to make a decision whether to proceed with the sale without a bank payment commitment or take alternative action with the goods.

From the bank's point of view (especially if the bank has capital constraints) the capital cost implication may also be significant. When given, an avalisation constitutes a direct payment commitment and banks need to treat with maximum capital provisioning per Basel III rules (while an L/C is only a contingent liability with lower risk weighting implications and may not always transfer to an on-balance sheet acceptance liability, i.e., due to discrepancies).

Whereas an avalising bank assumes the credit risk of the importer, it plays no part in any independent document examination role and thus may not offer any comfort to the exporter.

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