Back to: BANKING, LENDING, & CREDIT INDUSTRY
Aval refers to a written guarantee by a third party attached to a debt obligation which assures that a bill of exchange will be paid at maturity. The third party that issues an aval is not the drawer, payee, acceptor, endorser or holder of a debt obligation, but guarantees that payment will be made even if the issuing party defaults. A bank or financial institution usually provides an aval on a debt obligation. An aval is often made on debt obligations such as a bill of exchange, a bank draft, promissory note or a bond.
A Little More on What is Aval
When an aval is provided by a lending institution or a bank, it guarantees that they will pay a debt obligation should a customer no be able to pay themselves. In certain cases, an aval is called “a bank guarantee” since it is a promise by a bank to make a payment if a customer or the issuer of the financial instrument defaults.
Avals are commonly used in Europe and are not provided for all types of purchase agreements, they are most common with the bond purchase agreement, matched sale-purchase agreement and cross-purchase agreements. It is possible for an Aval to be forged, it is therefore expedient that parties conduct due diligence when accepting debt instruments that have avals attached to them.
Aval and Credit Ratings
There is a limit to the type of instruments banks and lending institutions may use to provide Aval. Aside from checking the instruments, banks also consider the credit rating of customers before avals are provided. Usually, banks provide avals to issuers or customers who have good credit ratings. Issuers can strengthen their credit ratings by ensuring that they make loan repayments as at when due and avoid defaulting on loan payments. There are several credit rating agencies that assign credit ratings to individuals, companies and even municipalities based on their credit assessment.
Reference for “Aval”
Academics research on “Aval”
The Quick Buck, International Finance, and Forfaiting, Whittaker, V. (2000). The Quick Buck, International Finance, and Forfaiting. T. Jefferson L. Rev., 23, 249.
East meets west: Innovative forms of foreign trade finance between Italian family enterprises and emerging SMEs in Romania, McKibbin, P., & Pistrui, D. (1997). East meets west: Innovative forms of foreign trade finance between Italian family enterprises and emerging SMEs in Romania. Family Business Review, 10(3), 263-280. The collapse of the USSR has created an opportunity for the rebirth of entrepreneurship and family business. Unfortunately, the transition economies of the former Soviet Bloc often lack the financial resources required to upgrade operations. This paper examines how an innovative form of finance, with historical roots in East‐West European trade, helps drive the expansion of transition enterprises in the emerging markets of Eastern Europe, and at the same time provides export‐led growth particularly for family‐based small and medium‐sized enterprises (SMEs) in the more developed nations of Western Europe. The technique, called forfeiting, allows businesses to control some of the risks that are inherent in dealing with emerging markets. We present a formatting model that demonstrates the way in which these singular transactions divide localized (transaction‐oriented) risks from those risks that are associated with political instability, macroeconomic changes, environmental volatility, and force majeure. We follow this with presentations of actual examples of how forfaiting is being used between Italian family businesses and newly emerging private enterprises in Romania.
Forfaiting: The European Edge in Trade Finance, Krahmer, E. M. (1990). Forfaiting: The European Edge in Trade Finance. The International Executive (1986-1998), 31(4), 17.
The Legal Context of Forfaiting Trade Finance, Ward, A. (1991). The Legal Context of Forfaiting Trade Finance. Business Law Review, 12(2), 47-48.