Factoring as Innovative Credit Finance Option for Export Promotion

In this analysis, James Emejo explores the benefits of the Factoring Assignments (Establishment) Bill, which is being promoted by the Nigerian Export-Import Bank (NEXIM), to provide better financing alternative for micro, small and medium scale enterprises (MSMEs) to boost their export businesses, when passed into law

As the trade policy bank of the federal government, NEXIM Bank is confident that increased access to trade finance has the potential to significantly boost the non-oil export value chain, particularly from production to non-oil commodities, a situation which could further act as catalyst for the economic diversification agenda of President Muhammadu Buhari.

However, one of the major factors militating against the optimal performance of the non-oil export segment had been identified as lack of access to export finance as well as dearth of appropriate trade instruments to aid exporters, particularly the small businesses that are critical for employment geneation. 

According to Head, Strategic Planning, NEXIM, Mr. Tayo Omidiji, inadequate access to export finance by the MSMEs has unfortunately allowed for a situation, where a huge proportion of non-oil trade is done at the informal level and are not captured by government statistics, creating revenue leakages as a result. 

Further worried by the financial handicap of the non-oil sector, partly occasioned by the stringent conditions set out by commercials for loan advancement to the sector, the development finance institution has taken the bull by the horn by resolving to promote factoring as an innovative, alternative trade finance tool and SME development strategy. 

Omidiji said factoring refers to a complete international trade financial package that combines export working capital financing, credit protection, foreign accounts receivable book-keeping and collection services. 

Essentially, the concept involves a business selling its accounts receivables to a third party called a factor at a discount to solve an immediate cash needs. 

NEXIM noted: “As a form of factoring, export factoring is offered under an agreement between the factor and exporter, in which the factor purchases the exporter’s short-term foreign accounts receivable for cash at a discount from the face value, normally without recourse. An area that NEXIM has become the primary financial establishment in Nigeria.”

The bill is intended to regulate factoring as an alternative source finance rather than bank loans. 

Omidiji explained that though the global factoring industry has developed over the years as a major trade finance industry, estimated at €2.6 trillion in global transaction in 2017, out of which Africa accounted for only 0.8 per cent, dominated mainly by South Africa, Tunisia, Morocco, Mauritius, Egypt and Kenya. 

Afriexim Bank, one of NEXIM’s key stakeholders promoting the initiative in Nigeria, projected that factoring volumes in Africa could rise from €24 billion in 2012 to about €200 billion by 2020 buoyed by the continent’s  increasing volume of merchandise trade over the past 10 years. 

Managing Director/Chief Executive, NEXIM, Mr. Abba Bello, appealed for the expedited passage of the Factoring Bill by the National Assembly so as to provide better financing alternative for the cash-strapped SMEs in the country. 

The draft bill had already passed through first and second readings in the House of Representatives, as well as the public hearing stage and now at the committee stage for necessary fine-tuning.

Bello said factoring “will be one of the financing options that will mitigate the traditional challenges of SMEs in meeting the eligibility criteria for accessing credit from the traditional banking institutions.”

He expressed concern over the high level of informal trade in Africa, with informal non-oil exports recently estimated at a minimum of $12 billion annually in Nigeria as against recorded non-oil export trade averaging about $3 billion annually in recent times.

“While this challenge is a reflection of the large informal economy, estimated at 41.43 per cent of Nigeria’s GDP in 2015 by the Nigerian Bureau of Statistics (NBS), it is also symptomatic of the dearth/poor access to export credit, particularly among the small and medium enterprises (SMEs), which are the principal players in cross border trade.  

“Empirical data released by the Central Bank of Nigeria indicates that less than 1 per cent of the total loans and advances disbursed annually were allocated to the non-oil export sector over the years,” he added.

He further explained that it was against the background of the credit constraints to SMEs that NEXIM saw the need to partner with trade facilitating institutions namely Afreximbank and Factor Chain International (FCI) and other stakeholders, under the auspices of the CBN FSS 2020, to develop and promote factoring as an alternative trade finance instrument and an SME financial inclusion strategy. 

While expressing optimism that the bill will be quickly passed into law, he underscored the need for continued sensitisation, constructive engagement and capacity building to stimulate necessary investment interests and sustain the momentum towards rapid development of factoring in the country. 

According to him, its passage will ultimately contribute towards improving Africa’s share in the global factoring volume and support the current efforts to boost Intra-African Trade, while also formalising informal trade.

He added that there was a high degree of correlation between the global growth in factoring volumes and the increasing preference for trading under open accounts, which currently accounts for over 80 per cent of international trade. 

The bank believes the bill is particularly critical in trans-border transactions, where uncertainty and risk are especially heightened.

“International factoring plays a catalyst role in bolstering export trade for business by surmounting the attendant challenges confronting MSMEs such as low credibility and increased costs of alternative forms of financing,” it stated. 

At the public hearing, Omidiji had told the House Committee on Banking and Currency that enacting the factoring bill will improve the legislative infrastructure that would ease the creation, perfection and enforcement of collateral as part of the financing provided to businesses through factoring.

According to him, strengthening legislation would provide the much-needed credibility to factoring as well as bolster business assurance to investors. 

However, the Financial System Strategy 2020 further noted that though factoring might not be a panacea, it nevertheless, had the immense potentials to unlock financing for MSMEs across the country, adding that the lack of legal infrastructure in the country continues to stifle growth. 

“The enactment of the factoring bill will therefore be highly commended but also complementary to other efforts to stem the growing tide of inequalities and financial exclusion that have inhibited the potential of MSMEs in Nigeria,” it stated. 

In addition, the Nigeria Deposit Insurance Corporation (NDIC) described factoring as a welcome development that will expand the financial services market currently dominated by the banking sector. 

It stated that the bill will “further promote and diversify out-sourcing services with positive impact on the financial/banking services industry by smoothening the financial services value chain. This will have a salutary impact on the goals of financial system efficiency and stability.”

Basically, the corporation’s role in factoring becomes inevitable, where factors get involved in financing receivables of failed banks that are under liquidation. 

Ideally, stakeholders also canvassed for stringent punitive measures to check any act of breach of trust particularly deliberate issuance of fraudulent invoices in the course of factoring transactions.

The committee chairman, Hon. Chukwudi Onyereri (PDP, Imo) however, assured stakeholders that it would do justice to the bill by attending to all grey areas identified in the course of the hearing. 

If the piece of legislation sails through, it will no doubt be an immense game-changer for export financing in the country.