FACTORING could emerge as a vital financing solution for businesses in Zimbabwe, especially the small and medium-sized enterprises (SMEs), that are struggling to access cheap funding from banks, analysts have said.
This financial tool enables businesses to access immediate capital by selling their accounts receivable to a third party, alleviating cash flow constraints and fuelling growth.
For Zimbabwe's SMEs, factoring offers a lifeline in an economy where access to traditional financing remains a significant hurdle. By leveraging their outstanding invoices, SMEs can now unlock vital funds to meet operational expenses, invest in expansion, and bolster competitiveness.
The benefits of factoring extend to large companies as well, enabling them to optimise their working capital and streamline operations.
By outsourcing accounts receivable management, businesses can reduce administrative burdens and minimise the risk of bad debts.
Economist Stevenson Dhlamimi said factoring will be a game changer for businesses struggling to secure adequate funding through conventional means.
“This is where alternative models like factoring can play an intriguing role if implemented properly. Rather than chasing invoices, these enterprises could focus energy on production and expansion and weather periodic liquidity shortfalls more smoothly,” he said.
“However, no financial solution is without risks or limitations. Factoring success depends largely on the due diligence applied — both by factoring companies vetting a business' creditworthiness and record-keeping standards, as well as regulators ensuring compliance with exchange regulations.
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“In my view, both MSMEs (micro, small and medium enterprises) and the factoring industry would benefit from initiatives to strengthen accounting practices within the former group. Standardised templates or basic training could help smaller firms meet assessment requirements to participate. Contracting arrangements in stable foreign currencies would also boost confidence.”
With some refinement of current obstacles and wider education of MSME owners, Dhlamini noted that factoring could emerge as an important alternative mechanism supporting economic growth and job creation nationwide.
“As always, experienced and impartial financial guidance will also be key to facilitating prudent expansion of these models going forward,” he said.
While Africa has made significant strides in embracing factoring, Zimbabwe is still lagging behind.
Reserve Bank of Zimbabwe deputy governor Jesimen Chipika recently told the Zimbabwe Independent that the country needed to come up with new regulations governing factoring.
“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 the collateral registry, we have recourse if things do not work out,” she said.
“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.”
Afreximbank has pledged to assist Zimbabwe to develop a model law on factoring as the bank tips the sale of accounts receivables at a discount as a solution to plug the financing gap affecting SMEs.
Speaking at a two-day regional conference on factoring, receivable finance and credit insurance held in Harare recently, Afreximbank executive vice president in charge of Intra African Trade Bank Kanayo Awani said factoring would plug the financing gap faced by SMEs.
“We affirm Afreximbank’s and the Africa Chapter of FCI’s (Factors Chain International) support to partner Zimbabwe to develop a model law on factoring to attract investments into factoring while supporting SME finance,” Awani said.
A model law on factoring that enabled countries to create a conducive legal and regulatory environment was developed in 2016 and has since been used by seven countries in passing factoring laws.
“For instance, the bank collaborated with the Central Bank of West African States to have a factoring law promulgated in 2020. Beyond the legislation, we are also working to ensure a facilitative regulatory environment for factoring to flourish. In Egypt, the Financial Regulatory Authority in 2018 issued Executive Decrees for the implementation of the Financial Leasing and Factoring Law,” Awani said.
Afreximbank, she said, also contributed to the review of the Factoring Insurance Agreement issued by Export Credit Guarantee Company of Egypt and the Financial Leasing Guarantee Agreement.
Engagements on the enactment of factoring laws and regulations are ongoing with a number of countries, including among others, Nigeria, Senegal, Guinea Bissau, and Benin, Awani said.
Factoring volumes in Africa nearly doubled to €48 billion (US$51,5 billion) last year from €21,6 billion (US$23,2 billion) in 2017.
The International Finance Corporation research estimates that 44 million MSMEs, who make up 90% of the private sector, employ almost 80% of Africans.
However, these SMEs are being starved of the capital required to grow and absorb the growing labour force, Awani said.
More than half of these SMEs require more finance than they can access to grow their businesses creating an estimated SME finance gap of US$331 billion in Africa, she said.
“We at Afreximbank wholeheartedly believe that factoring, a form of commercial finance whereby a business sells its accounts receivable at a discount, provides a viable and sustainable solution to address the SME financing gap and will help innovative SMEs grow and in turn support job creation and Africa’s structural transformation and trade development,” Awani said.
“Factoring provides an important alternative to the other traditional financing sources available for SMEs such as bank loans, leasing, venture capital."
She said while factoring is globally acknowledged as an alternative form of financing to SMEs as evidenced by the €3,7 trillion (US$4,0 trillion) global factoring volumes, a recent study by Afreximbank into the financing schemes employed by SMEs in Africa, showed that only 90 of the 2 895 sampled (representing 9,2%), used factoring as a financing option.
This, Awani said, shows that factoring has not yet taken off to the extent that it should, with Africa accounting for less than 1% of global factoring volumes. It also demonstrates the huge potential factoring holds for the continent, she said.
Chipika said there exists opportunities on the African continent that favour the growth of the factoring business.
There is a growing need for factors to address cross-border trade financing across the continent linked to the growth of intra-African trade, she said.
“Limited availability of foreign exchange in most African countries, in addition to the need to diversify exports and sources of foreign exchange earnings, including ongoing industrialisation 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,” Chipika said.
Neal Harm, FCI secretary general, said open account trade finance (factoring, supply chain finance) was one of the most important financial services that could assist the growth of SMEs and their local economy.
He said most emerging economies have a tendency to have an overreliance on hard assets such as equipment, land, or buildings, making it challenging for SMEs to obtain the necessary financing for their survival.
“But receivables are a very strong and reliable asset that is self-liquidating. Factoring, open account, and reverse factoring are tools that can generate working capital to allow SMEs to grow,” Harm said.
The second day of Afreximbank’s annual meetings that took place in The Bahamas from June 12 to 15 featured a highly informative roundtable focusing on factoring and receivables finance.
This roundtable brought together industry leaders, experts and stakeholders from Africa, the Caribbean Community (Caricom) and beyond, to explore the multifaceted aspects of factoring and its implications for regional development, particularly within the Caribbean region.
There were insightful discussions on the mechanics of factoring, its benefits, and practical strategies for implementation.
Awani said the cumulative outcome of Afreximbank’s initiatives in factoring in Africa over the last decade “is an increase in affordable financing to SMEs as evidenced by the increase in factoring volumes in Africa to €48 billion in 2023, with a growth projection of €100 billion (US$107,3 billion) by 2030.”
The goal was to replicate a similar successful programme in the Caricom, Awani noted.
The roundtable offered a sense of hope and optimism for the future of factoring in Caricom where the potential market volume is estimated between €7 billion (US$7,5 billion) and €10 billion (US$10,7 billion).
This envisions a future where SMEs can access competitively priced financing devoid of the burden of collateral requirements and high loan rejection rates. To achieve these objectives, she called for partnership and cooperation.
John Rolle, governor of the Central Bank of The Commonwealth of The Bahamas, said factoring will help bring the much-needed working capital to local producers, service providers and exporters, especially SMEs who are the key drivers of economic growth globally.
