Legislation hampers 2.5tr Euros global factoring deals In Nigeria
Peter Mulroy is the Secretary-General of The Netherlands-based FCI (previously Factors Chain International). FCI, representing the interests of the global open account receivables finance industry, aggregates 90 per cent of cross-border factoring in the world. Mulroy, on his third visit to Nigeria, spoke with journalists on the imperatives of developing factoring and trade receivables financing for the Nigerian economy. CHIJIOKE NELSON was there.
What is factoring?
Factoring is the financing of Small and Medium Enterprises (SMEs) through the use of receivables. Receivables are normally dormant assets on their balance sheet and are therefore, used as secure means for financial institutions to provide working capital. This makes it important because a number of SMEs have restricted access to bank loans as they cannot provide some of the “hard” collaterals required to obtain a loans. During the process of buying and selling, the buyer is allowed to purchase the products or services on credit, leaving them with a grace period of 60-90 days to pay for it. It is simply the business method of ‘buy now, pay later’. Factoring converts the receivables from dormant to liquid assets. Factoring finances the economy through trade because every factoring transaction is backed by an invoice, which represents the real economy, because of the products and services being sold.
How large is the factoring market globally?
According to FCI’s global statistics, factoring turnover in 2017 generated over 2.5 trillion euros. In Africa, factoring volume generated accounts for less than one per cent of the global volume, of which South Africa contributed 80 per cent with 17.1 billion euros. The second largest market is Morocco, with 3.4 billion euros, followed by Egypt with 418 million euros. Nigeria is just setting up factoring operations. Besides NEXIM, FCI has admitted Factoring and Supply Chain Finance, based in Lagos, as a member of the network. And four others are considering joining next year, but awaiting the passage of the factoring legislation.
How would you assess Nigeria in respect of factoring?
I have been to Nigeria three times over the past twelve months, but my first time coming to Lagos State. I was invited by our member- the Nigerian Export Import Bank, together with the African Export Import Bank (AfreximBank), to do sensitisation seminar for the Nigerian lawmakers, to help them approve the new factoring law for the country. We have had a number of sessions with them over the past two years, and last July, the congress held a hearing on the Factoring legislation which was plausible. I was there as a representative of FCI and answered all the questions regarding factoring, especially the benefits to small enterprises in Nigeria and also the positive impact it has on international trade. The law was well received and judging from the warm reception received, there is the possibility that the law will be taken up and approved.
Factoring will help the Nigerian economy to grow because it plants seeds of development, by providing working capital to SMEs, and basically, 85 per cent of the businesses making up the Nigerian economy are SMEs. Factoring will act as a new source of liquidity in the market and the economy. Once the government passes the factoring law and the Central Bank of Nigeria passes a new policy to allow banks and non-banks alike to offer this service, it will give investors the confidence to come to Nigeria and invest in this sector.
How affordable is this kind of financing?
Typically, financing an SME involves higher risk, compared to large corporations. Factors are able to migrate “down stream” as a result of the unique characteristics factoring affords. First, unlike a loan, which is a two way street conducted between a lender and borrower, factoring is based on a “triangle” that includes the seller (creator of the invoice), the buyer/debtor, and the factor. The factor purchases the receivables from the seller, which includes all of the rights of this asset class and requires the seller’s customers to pay them. So, advances are made available to the seller based on the recievables purchased by the factor. However, the factor controls the cash by collecting the proceeds from the receivables paid by the seller’s customers to the factor . If the factor is comfortable with the spread of customers, they can support the business, because it stands as the primary source of repayment.
How many countries are involved in factoring and at what level of legislation?
Presently, factoring is recognised and applied in over 90 countries. Africa is the last continent to get involved with factoring, as it is already operating in all the others. South Africa was the pioneering country in Africa, having started in the 1960s and one bank in particular- Ned Bank, joined FCI as a member in 1969. Today, thanks to the efforts of Afreximbank, factoring is spreading to various parts of the sub-Sahara Africa.
Countries like Cameroon, Kenya and Nigeria have passed some legal reforms to allow for the financing on these intangible assets known as receivables, but most are either working on it or are in the very early stages. Again, thanks to the work of the NEXIM and Afreximbank, as Nigeria is well on its way to success.
Apart from SMEs, what other markets do you target?
Besides liquidty, credit protection against customer defaults and bankruptcies, which provides means to finance cross border trade on open account and collection services globally, factoring also provides off balance sheet treatment for large corporations, when conducted on a non-recourse basis. This allows publicly traded companies to beautify their balance sheet by selling their receivables to a bank/factor and in turn, receiving case. This would have a positive impact from a rating agency point of view.
What risk factors do you see in factoring?
The major risk involved in factoring is fraud. This is because factoring deals with the invoice and underlying receivables. So, if a fake invoice is assigned to the factor and the factor is unaware, it will be subject to a loss. The factor can protect itself by verifying the invoice with the client’s customer before being funded, which will reduce the rate of fraudulent activity. Some companies can also try to assign the same invoice to multiple factors. However, this can be mitigated by way of a receivables registry, where all financial institutions involved will register their receivables. It is our hope that the government will be able to create an effective receivables’ registry as part of the factoring law.
Afreximbank projected factoring in Africa to rise from 24 billion euros to 100 billion euros by 2020. How believable is this?
The objective is for factoring to have a £100 billion value by the year 2020, although this will be very difficult to achieve considering the fact that the continent went through significant economic decline the past few years due to the reduction in commodity prices. This objective was set a number of years ago, but it is very realistic to assume that the industry will grow to significant levels as the legal infrastructure and confidence in the system is achieved.
Also, the mind-set and culture of African business will have to change for financial institutions to finance against these intangible asset class, like most of the markets around the world have done over the past five decades.
What is the operational profile of FCI?
FCI is a non-profit organisation established in the Netherlands in 1968, and is considered the voice for the global receivables finance and factoring industry. FCI has nearly 400 members based in 91 countries, and form a trading network to provide cross border factoring services to allow our members to finance the foreign receivables in a safe and secure manner. FCI also passes on the necessary knowledge through a robust education foundation, the legal understanding and necessity to conduct business, coupled with the experience accumulated over the past 50 years, with the provision of an educational platform that teaches people what to do and more importantly what not to do. At FCI, there is an academy with 10 different e-learning courses and six seminar series conducted globally each year.
What are the plans FCI has for factoring in Nigeria?
The first step is to get the law passed by the government, get the policy approved by the CBN and have the regulatory law established, after which we will start promoting factoring in the country to the general public, and SMEs and even large corporations,.