Factoring as an Alternative Tool for Financing SMEs in Africa
Small and medium size enterprises (SMEs) account for over 90 percent of firms worldwide and about 70 percent of Africa’s industrial fibre. SMEs contribute significantly to employment and serve as a source of income to majority of people in developing economies. SMEs are also a substantial contributor to overall value added in most economies. In Africa, for instance, SMEs employ about 80 percent of the continent’s workforce and play a significant role in the region’s economic development. Variously described as the engine of growth for the continent, access to sustainable finance has been singled out as the key constraint to growth and development of SMEs in Africa. In this regard, they are noted to face greater financing obstacles than larger firms and are associated with higher transactions costs and higher risk premiums. Accordingly, developing market economies including Africa continue to explore viable and sustainable financing options in support of SMEs. It is against this backdrop that the relevance of factoring in Africa is highlighted as an alternative financing option for SMEs.
Indeed, for Africa to bolster trade, there must be accessible financing especially for SMEs. Factoring is a particularly useful vehicle to provide trade finance, as well as credit protection services to African SMEs. Fortunately, factoring as an alternative source of financing, is gaining momentum in the continent. A few years ago, there were a handful of factoring companies in Africa. However, there are currently 32 companies that are FCI members, with others yet to join. Africa is increasingly emerging from the shadows with factoring volumes growing steadily since 2015. For instance, in 2015, factoring volumes on the continent stood at about EUR 18 billion, reaching about EUR 22 billion at the end of 2018, and projected to sustain the growth momentum in 2019. Promoting factoring in Africa has been critical to these developments. It is in the context of the foregoing that development in factoring in Africa needs attention. In this regard, the African Export-Import Bank (Afreximbank or the Bank) continues to play a pivotal role in developing and supporting initiatives in this direction, laying emphasis on making factoring a strategic priority, building on its activities in the past years and contributing to elevate it as an alternative instrument to traditional commercial loans in support of financing small and medium- sized enterprises (SMEs).
Current State of Factoring in Africa
At around 1 percent, Africa’s share of global factoring transactions is low. However, it is worth noting that in terms of nominal values, the factoring industry in Africa has grown from less than EUR 18 billion in 2015 to over EUR 22 billion in 2018 – a growth rate of over 18 percent. Of the 55 African countries, factoring business is active in just 5 countries namely, Egypt, Mauritius, Morocco, South Africa and Tunisia. Of significance however is the fact that several small-sized factoring companies are emerging across the continent, particularly in Botswana, Senegal, Cameroon, Ghana, Nigeria, and Zimbabwe which is expected to double Africa’s factoring business and volume over the next decade, with volumes expected to exceed USD50 billion by 2025.
Table 1 illustrates trends in factoring business in selected African countries as well as in the continent from 2015 to 2018. Even though, the continent’s factoring business has largely been driven by domestic factoring, prospects for international factoring is strong especially in light of growing intra-African trade coupled with limited financing instruments to support SMEs supply chain.
Factoring as a Tool in Financing SMES in Africa
The hardest hit, in Africa’s widening trade finance gap are SMEs. The Global Banking and Finance Review Magazine reports that 53 percent of SMEs’ trade finance applications are declined – in sharp contrast to 79 percent success rate for large companies. SMEs in most countries typically account for more than 90 percent of all firms outside the agriculture and government sectors and constitute a major source of private sector employment with significant domestic as well as foreign exchange earnings. Many countries in Europe, Asia and Latin America have successfully used Factoring as tool to support and finance the working capital needs of SMEs thereby increasing their trading volumes and driving economic growth. In Africa, factoring is increasingly being used by some countries including South Africa, Morocco, Mauritius, Tunisia and Egypt to finance the operations of domestic SMEs and regional supply chains.
Opportunities for Factoring in Africa
Despite the low level of factoring in Africa, current economic development and emerging trends offer opportunities for growth of factoring in the continent. Some of the factors and developments that suggest favourable outlook for factoring business in Africa are highlighted as follows:
- The growth of intra-African Trade and the growing need for Factors to address cross border trade financing across the continent. Trade between African countries is growing on the back of national and continental-wide strategies. This has been further boosted by the coming into force and implementation of the African Continental Free Trade Area (AfCFTA) as well as the endorsement of the Action Plan for Boosting Intra-Africa Trade (BIAT). With a population of about 1.2 billion and a combined GDP of over USD2.5 trillion, the AfCFTA and the Action Plan on Boosting Intra-Africa Trade (BIAT) will deepen Africa’s economic and market integration and significantly increase intra-African trade; and,
- Limited availability of foreign exchange in most African countries, in addition to the need to diversify exports and sources of foreign exchange earning including ongoing industrialization and value-addition programmes, not only provide opportunities for supply chain financing and factorable transactions but also requires Open Accounts trade terms which are more relaxed than Letters of Credit especially in the context of limited correspondent banking in the continent.
The Role of Afreximbank
The African Export-Import Bank (Afreximbank) remains influential and has continued to promote Factoring through various financial interventions, awareness creation, and organizing capacity building and learning events, among others. Though it is still at its nascent stages, recent interventions by Afreximbank and some African governments suggest that opportunities are being created for SMEs to fully benefit from factoring. Some key initiatives of Afreximbank include, among others, supporting the creation of a facilitative legal and regulatory environment for factoring to thrive, provision of finance and guarantees, provision of advisory services, information sharing and awareness campaigns and formation of strategic partnerships with national, regional and multinational entities to promote the development of factoring in the continent.
Some of these intervention mechanisms have begun to yield dividends. For instance, the Bank has partnered with Nigerian Export Import Bank (NEXIM) to advocate for the admission of Factors as dealers of foreign exchange in a bid to expand the modes of payment for imports to include Open Account. Also, the Central Bank of Nigeria (CBN) is issuing licenses for factoring companies to commence operations. In addition, the Bank launched a model law on factoring in October 2016, which is being used in some African countries as a guide to develop their own national laws on factoring. The Bank is currently working with OHADA to use the Model Law to develop a Uniform Act on Factoring that will be implemented in 17 OHADA Member States. In the same vein, the Bank, working with NEXIM and FCI is influencing the promulgation of a factoring law in Nigeria which has progressed through the House of Representatives to the Senate.
In relation to capacity building and learning events, the Bank together with FCI co-organized a workshop in Gaborone, Botswana, in March 2019 themed “Factoring as support tool for Small and Medium-sized Enterprises (“SMEs”) in the promotion of Intra-African Trade”. The workshop, which brought together about 180 participants from Africa had presentations by experts covering a broad spectrum of issues including principles of factoring, industry overview, setting-up a factoring business, as well as risk and mitigants in factoring transactions, among others. Other issues that were highlighted include cross-border factoring, reverse factoring and the use of credit insurance in factoring transactions. Aside from developing the skills of African Factors and creating awareness on the potential benefits of the product, the Bank used the event to promote the development of factoring businesses across the continent. To sustain the momentum on awareness creation and promotion of factoring across Africa, the Bank holds at least two capacity building and learning workshops annually.
From the forgoing, it is evident that the role of Afreximbank in the promotion and development of factoring in Africa is critical. Accordingly, factoring will continue to take centre stage amongst Afreximbank’s priority areas as it considers it an important financing tool for unlocking the potential of SMEs especially in the context of intra-African trade promotion as well as industrialization and export development.
About the author
Mrs. Kanayo Awani is the Managing Director, Intra-African Trade Initiative in Afreximbank. She holds a Master of Public Administration Degree (specializing in International Trade and Finance) from Harvard University (Kennedy School of Government), Cambridge, Massachusetts, United States of America. She also holds the Edward S. Mason Fellowship in Public Policy and Management from the same University. Mrs. Awani has extensive banking experience having worked for Citigroup in Nigeria for about 17 years in various functions, the last being Vice President and Head of Industrial and Commercial Corporates. She joined the African Export Import Bank (Afreximbank) to pursue development finance in 2009 as Director, Trade Finance and Branches. In her current role as Managing Director, she leads the Bank’s efforts in implementing its Intra-African trade and Industrialisation Strategies. She is also the Chairperson of the Africa Chapter of FCI, a global factoring association.