What is forfaiting? How does it work? Why did it arise?

Question

What will be an ideal response?

Answer 1

In limited-recourse financing, the financial intermediary purchases the promissory notes of the importer from the exporter at a discount. The term forfaiting is often used interchangeably with the term note purchase to describe this financing technique. The forfaiter must assess and ultimately bear all the commercial and political risks of the project. Typically, the forfaiter removes the commercial risk by requiring the guarantee of the importer's government or its bank (which may be government owned).
Exporters often use limited-recourse financing, or forfaiting, to finance medium-term projects for importing countries that have substantial commercial and political risk. In such a financing, the exporter receives cash, and the financial intermediary bears the risks without recourse to the exporter unless the exporter fails to fulfill its contractual commitments or commits fraud. If the exporter fulfills its contractual terms, it does not have to worry about getting paid.
Forfaiting describes the practices of European banks and their subsidiaries in various countries such as Germany, Switzerland, Austria, and the United Kingdom. Banks in these countries were requested to finance capital goods exports to eastern European countries and needed to develop expertise in assessing the risks of delayed payments. Although the techniques were developed to deal with eastern European countries when they were state controlled, they can be applied more broadly.