ZIMBABWE recently hosted a two-day regional conference on factoring, receivables and credit insurance organised by African Export–Import Bank (Afreximbank) and the Netherlands-based factoring centre, FCI Academy. Factoring is a type of finance in which a business sells its accounts receivable (invoices) to a third party to meet its short-term liquidity needs. The third party would then provide liquidity to the firm as the company would pay back using the money they would later receive through the account receivables. While Africa has made significant strides in embracing factoring, the conference showed that Zimbabwe was still lagging behind. Our senior business reporter Melody Chikono (MC) spoke to Reserve Bank of Zimbabwe deputy governor Jesimen Chipika (JC, pictured), who was a guest at the conference, to talk more about factoring. Below are excerpts from the interview:
MC: You touched on the need for a regulatory framework, regulatory infrastructure that supports factoring. Can you explain that for us in the Zimbabwean context?
JC: In the Zimbabwean context, when we talk of regulatory requirements in factoring, we are talking about small to medium enterprises (SMEs) [small to medium enterprises] and other businesses which are not SMEs because it is an innovative way of providing finance.
So, you have your SMEs, who have got invoices to be paid, let us say, two, three months down the line. But, the SME is saying, I need money now and we know that sometimes in our financial institutions it is not very easy for SMEs to find working capital because they must provide collateral.
Some of them have, some of them do not have, despite all the other things we have tried to put around collateral. Thus, a factor (an intermediary agent that provides cash or financing to companies by purchasing their accounts receivables) can be a bank.
It can be a non-banking institution, which has resources to finance this SME, who needs working capital. And the SME is saying, but you can have the money back after my invoice matures in two, three months’ time and the business hands over their invoice to the factor. When two, three months down the line passes that person to whom goods were sold by the SME will now pay the factor because the SME had already received the money which they wanted.
They will now pay the factor, who is holding that invoice. So you can see there are three or four parties involved, where the regulatory framework now matters.
MC: If the one, who should pay the invoice defaults, what happens? Who pays?
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JC: So, we now need regulation around the roles and responsibilities of the SME business, the factor who is providing money and who is to pay the invoice. So, that is where you cannot do without regulation and that regulation has to necessarily be a financial regulation.
MC: Do we have anything at the moment in Zimbabwe?
JC: Not a lot. But, these guys are now saying there is already a model factoring law for Africa, which we can adapt to our circumstances. But, in our Banking Act, we already have provision to say our financial institutions are actually allowed to venture into factoring finance. So, we are saying now, probably, let us learn from that model law.
Let us customise it to the Zimbabwean context and allow this model finance to operate and solve the outcry of SMEs, who are so important to us to access finance. It introduces another layer which was not active in the economy, these so-called factors, who can be banks or even non-banks.
The Afreximbank is saying they can provide the finance through such modalities and facilities, financial facilities, to support the provision of the factoring finance. So, we can tap into that and move on.
MC: You also touched on the fact that banks have no lines of credit to support factoring products. Can you shed more light on this?
JC: The issues are the bigger issues of the country, but we hope now with the sanctions, we declared to have been removed, we hope that constraints will reduce. But, it will take time because I know some of the financiers may not trust this removal of the OFAC (Office of Foreign Assets Control) sanctions.
We are really hoping that it helps us to keep on saying, we no longer have the economic sanctions. I am talking about the OFAC where you go and say ‘we are no longer under OFAC, so you can deal with us. We are now a safe client but it will take time’. So in the meantime, we are saying we have our own African institutions like Afreximbank, who are saying we are ready with the facilities to support all African countries to go into factoring. So, let us go there first while the longer-term things are adjusting.
MC: Talking about OFAC, what are other major things that you expect to be fixed in the long term for the economy?
JC: All economic things that we were failing, for example, the movement of money when we were engaged in trade. I am sure you were hearing that some companies’ money was being withheld in the United States or wherever and not coming back to the country when in fact they had done export business.
Even correspondent banks, for our banks to make some of the international payments they need an outside bank to facilitate the payments, correspondent banks not just for Zimbabwe but for the whole of Africa.
It is called de-risking. They were saying ‘you are a dangerous territory, so we will not deal with you’. So now, we are saying, ‘you can deal with us, we have been cleared to be safe’ so it may not happen now, but we are hoping that even for correspondent banks, we will start getting some back to deal with our banks and facilitate international trade.
MC: Have you started engaging on the correspondent bank front? Is it the different banks that do that?
JC: Not at the central bank level. It is the different banks that seek for correspondent partners to deal with.
MC: Going back to SMEs, you touched on collateral. We had problems with collateral for SMEs. What are the sticking points at the moment?
JC: Not really that at the moment. Before we introduced the collateral registry, the sticking point was that SMEs did not have fixed capital, collateral to give to the banks.
So, the banks were insisting on something which is safe because they will be lending out your money and my money which we have put in the bank, so you do not want it to disappear. The sector was being viewed as risky for giving loans to SMEs unless you have collateral.
The SMEs' outcry was ‘we don’t have what they are looking for, the lands, the houses, and whatever fixed capital but what we have is movable’.
So, as a central bank, this is where we then say, let us learn from those who we have, the few, who we have managed to run collateral registries that allow movable capital, movable assets, to be used as collateral.
We launched our collateral registry as you know, and it is performing very well. Suddenly we found banks, non-banks, microfinance institutions are now lending. They have seriously improved their lending to the SME sector.
Even to women, to youth, as they come with their movable assets and household goods, they are now a key part of what we are tracking.
Some farmers are even bringing livestock and they pledge their livestock to say ‘this, you can take it if I don’t pay back the loan’.
MC: What are the latest numbers?
JC: I cannot think of it yet. You can get them from the central bank, but it is really a big success.
We took a very big risk as the central bank to move the financial sector in Zimbabwe to moveable assets.
But again, even for us to do that, the laws need to be put in place for the collateral registry or whatever, allowing moveable assets to participate in people to access finance.
There is control around possible abuse of the collateral registry, so we are saying in the same manner, this sector (factoring) in finance is another channel to further help our SMEs to access finance.
But, we need the regulatory environment to be sorted out first so that just like we did with collateral registry, we have recourse if things do not work out.
