Nigeria’s notable absence from the roster of African nations boasting well-established factoring services and robust regulatory frameworks underscores a disheartening reality: the nation is grappling with a considerable lag in furnishing a conducive environment for the advancement of small and medium-scale enterprises (SMEs). This discrepancy is all the more striking given that these enterprises account for a substantial 48 per cent of the country’s total GDP, a staggering 96 percent of its business endeavours, and a pivotal 84 per cent in the realm of employment generation.
Factoring is a financial arrangement where a business sells its unpaid invoices to a specialised company (called a factor) at a discount. In return, the business gets immediate cash, and the factor takes responsibility for collecting the full payment from the customers. It helps businesses manage cash flow and access funds quickly, especially useful for small and medium-sized enterprises.
Factoring provides an important alternative to the other external financing sources available for SMEs such as bank loans, leasing, venture capital etc.
Offering a noteworthy alternative to traditional external financing avenues like bank loans, leasing, and venture capital, factoring has garnered attention from financial experts and stakeholders. Among these are notable institutions such as the Nigeria Export-Import Bank (NEXIM), German Corporation for International Cooperation (GIZ), African Export-Import Bank (AfrimBank), African Development Bank, and the Central Bank of Nigeria. These entities recently echoed the call for comprehensive factoring guidelines in Nigeria, aiming to boost the nation’s GDP and foster intra-African trade. This consensus emerged during the FAPA Grant workshop training program on factoring services in Nigeria.
The training workshop, a technical assistance initiative, aimed to fortify the capacity of banks and factoring firms in Nigeria and the African region. Conducted by Factor Chain International (FCI) consultants, the programme centered on equipping participants with the knowledge required to launch factoring and supply chain finance activities.
Managing director of NEXIM Bank Abba Bello, initiated discussions by advocating for the passage of the draft Factoring Bill in the National Assembly. This move aims to establish a transparent and credible factoring service in Nigeria. NEXIM is actively promoting factoring services as part of its strategic mandate to integrate the informal sector into the economy’s financial landscape, enhancing financial inclusion for MSMEs and facilitating access to finance and working capital support.
Positioning factoring as an alternative financing tool to traditional lending for supporting SMEs holds the potential to catalyze economic resurgence in countries like Nigeria, where the informal sector plays a significant role. The onset of the COVID-19 pandemic and the global disruptions stemming from events like the Ukraine crisis have lent credence to the call for promoting factoring and intra-African trade. This is particularly relevant as SMEs face heightened challenges due to increased financing costs and supply chain disruptions brought about by these crises.
The introduction of factoring as a holistic financial package, encompassing working capital financing, credit risk protection, accounts receivable management, and collection services, underscores several key objectives. Hope Yongo who is technical adviser to the MD of NEXIM bank, outlined these objectives, including enhancing SME financing and development, bridging trade financing gaps, broadening funding instruments, and fostering specialized value-added financial services.
While the global factoring market stood at €2.76 trillion in 2018, Africa’s share was a mere 0.7 percent, primarily attributed to South Africa, with minor contributions from Tunisia, Morocco, Egypt, and Mauritius. However, projections indicate a rise in African factoring volumes, anticipated to reach around €200 billion by 2020, with countries such as Kenya, Nigeria, Ghana, Cote d’Ivoire, Zimbabwe, Zambia, Mozambique and Senegal driving this growth.
The vulnerability of SMEs predominantly stems from their limited access to affordable and effective finance. This predicament finds its roots in various causes, including inadequate skills in crafting bankable proposals, deficient SME finance expertise in banks, risk-averse banks demanding excessive collateral, the absence of specialized financial institutions, and the underdeveloped state of capital markets and financial sectors.
Head of client relations, Anglophone West Africa, representing the regional COO at Afrexim, Peter Olowononi underscores the imperative of ensuring adequate and suitable financing for SMEs to unlock their full potential. Experts aligned with his viewpoint stress that enabling SMEs with such financing is pivotal for their growth and maturation, particularly in seizing opportunities under the African Continental Free Trade Area (AfCFTA) Agreement.
Regrettably, even as factoring gains traction across Africa, presenting significant market prospects evidenced by recent industry growth, Nigeria finds itself absent from this burgeoning landscape. Experts point out that any existing factoring activities within the country likely operate outside regulatory boundaries.
In contrast, South Africa, Egypt, and India are among the African nations that established Factoring regulations prior to enacting enabling laws. South Africa, dominating factoring in Africa with an 89 percent share of factoring volumes in 2022, also holds the continent’s largest credit insurance market. Presently, 40 African factors hold FCI membership, yet none hail from Nigeria.
Nigeria’s factoring landscape is hamstrung by the lack of a legal and regulatory framework, insufficient critical infrastructure and credit insurance instruments, inadequately structured domestic supply chains, knowledge and capacity gaps, and policy constraints such as open account and re-exports restrictions.
Endorsing Olowononi’s standpoint, secretary-general of FCI, Peter Mulroy emphasized during the Abuja workshop the need for participants and regulatory authorities to collaboratively devise a comprehensive strategy for effective factoring operations across diverse enterprises. Mulroy stressed the urgent demand for factoring services in Nigeria, highlighting the shared responsibility of regulators and factors to establish the necessity of these services within the nation’s context.
“Establishing a robust operational foundation founded on sound principles is imperative. This framework demands cultivation with utmost integrity and precision, as expounded in this guide. The repercussions of this endeavor are poised to resonate through the central bank’s policy dimensions.”
Echoing this sentiment during his presentation, Mulroy underscored, “Fostering investor confidence in the viability of factoring as an integral component of Nigeria’s business landscape holds pivotal importance. Our efforts must encompass meticulous regulation establishment and judicious framework development to facilitate this pursuit.”
One notable reason for the limited factoring volumes is the absence of credit insurance. Non-recourse factoring, including credit protection/insurance, comprises the largest segment of factoring services globally, constituting about 53 percent of factoring business.
Olowononi contends that to effectively harness factoring’s potential for African SMEs, more significant strides must be taken, particularly in terms of scale, market expansion, and participation.
Positioned as a complementary financing method alongside bank finance, factoring predominantly targets MSMEs. It provides cash flows and essential working capital finance, particularly for MSMEs boasting quality receivables but grappling with challenges in obtaining conventional bank finance due to collateral or credit profile limitations.
Furthermore, factoring services find their prime application during start-ups and growth phases of MSMEs when securing finance becomes challenging due to lack or insufficiency of acceptable financial data and credit profiles.
In the context of contemporary trade finance, factoring represents the fastest-growing product, catalyzed by challenges in corresponding banking, letters of credit confirmation, and importers’ preference for open account terms. Currently, open account transactions account for approximately 80 percent of global trade transactions by volume and about 40 percent of traded goods’ value.