Factoring in Africa: Opportunities and challenges By Dr. B.O. Oramah Vice President (Business Development and Corporate Banking) African Export-Import Bank Presented at the 2014 Afreximbank Seminar on Factoring Lagos, Nigeria - June 13, 2014 The Trade Finance Bank for Africa
1. Afreximbank is pleased to organise this seminar for regulators, law makers and factors to share their views on the importance of a facilitative legal environment for factoring in Africa. 2. We value the opportunity to exchange ideas on creating a facilitative legal environment in Africa and hope that working together we can develop factoring to its full potential in Africa. The Trade Finance Bank for Africa (2)
Who are we? African Export-Import Bank is an African multilateral financial institution with a mandate to finance and promote intra- and extra- African trade. The Bank was established in 1993 and has its headquarters in Cairo, Egypt. There are 2 branches, one each in Abuja, Nigeria and Harare, Zimbabwe. The Trade Finance Bank for Africa (3)
Who are we? (cont d) The Bank has an authorized capital of USD 5 billion and has four classes of shareholders, namely Class A consisting of African states and African regional and sub-regional financial institutions and economic organizations, Class B, consisting of African financial institutions and private investors Class C consisting of non African investors and Class D a new category created in December 2012, under which any person or entity can be allotted shares. There are currently 125 shareholders The Trade Finance Bank for Africa (4)
The State of Factoring in Africa Africa is not a significant player in the global factoring market Of the 2 trillion Euros World factoring transactions recorded in 2012, Africa accounted for only 1.2% Only four African countries accounted for this share: South Africa, Tunisia, Morocco and Egypt The Trade Finance Bank for Africa (5)
The State of Factoring in Africa Cont d Factoring is largely offered by banks and bank subsidiaries Independent factoring companies are few and far between The market is narrow; about 80% of factoring in the continent is domestic factoring The Trade Finance Bank for Africa (6)
The State of Factoring in Africa (con t) Due to limited credit insurance capacity, services offered by factors in Africa are limited Services limited to purchase of debtors and sales ledger management Credit cover is offered selectively, subject to availability of insurance Most factors are relatively small in capitalisation and turnover Average turnovers in Morocco and Tunisia were 880million and 248million Euros respectively, which is a limitation to the size of business they can write The Trade Finance Bank for Africa (7)
The State of Factoring in Africa (Cont d) High concentration of and very few industry participants This may lead to oligopoly and inefficiency Innovation is not encouraged Market entry becomes more onerous The Trade Finance Bank for Africa (8)
Challenges to expanding factoring in Africa: why has factoring not expanded in Africa Very limited knowledge of the product in Africa as Little or no effort to promote factoring by governments and global factoring groups View was that aside South Africa and North of Africa, the rest of Africa presented unacceptable country risks Members of global factoring groups did not regard the continent as an economy of any global significance The Trade Finance Bank for Africa (9)
Challenges to expanding factoring in Africa: why has factoring not expanded in Africa (cont d) Governments and regulators thought there was little scope for using factoring as exporters offered little or no credit to buyers Most businesses in Africa were not interested in factoring Payments of their exports were mostly Cash Against Documents (CAD) Their buyers were mostly credit worthy company like Cargill, Glencore etc The Trade Finance Bank for Africa (10)
Challenges to expanding factoring in Africa: why has factoring not expanded in Africa (cont d) As a result of lack of interest from business and support from regulators, banks had no interest in pursuing factoring as a line of business There was lack of facilitating infrastructure by way of: Regulatory framework and laws leading to high cost in perfecting legal documents (upto 5% in some countries) Credit information services and credit insurance thereby raising the risk of offering factoring to unacceptable levels The Trade Finance Bank for Africa (11)
Opportunities The opportunities for Factoring in Africa are broad, namely: It is estimated that factoring volumes in Africa will grow from 24 billion Euros in 2012 to 90billion Euro in 2017 and to 200 billion Euros by 2020: Countries that will drive this growth will include: Kenya, Nigeria, Ghana, Cote d Ivoire, Zimbabwe, Zambia, Mozambique and Senegal; Sectors that will drive the growth will include oil and mining services (Nigeria, Ghana and Zambia); telecommunications services and the retail sector The Trade Finance Bank for Africa (12)
Opportunities (cont d) The forces that will drive the growth in factoring discussed in the previous slide would be: The emergence of the middle class (expected to reach 100 million in 2015 and in the process the market for factorable products. The rise in Africa s merchandise trade with other developing economies (like Brazil, India and China) thereby creating an opportunity for the use of factoring which is considered one of the most efficient risk mitigation tools in entering new markets. The Trade Finance Bank for Africa (13)
Opportunities cont d The rising volume of intra-african trade which has more than quadrupled since 2010 Most of trade is now being conducted in the use of open account terms and credit is granted to buyers with the trade item now being factorable Economic growth and robust expansion will increase the use of factoring. IMF forecasts that 7 of the top 10 fastest growing economies in the world during 2012-2015 will be from Africa Peace, stability and efficient legal and regulatory landscapes are emerging in the continent. The Trade Finance Bank for Africa (14)
What must be done to take advantage of these opportunities Improve Regulatory Reforms Create Awareness Expand Credit Insurance Attract Other Factors to the Continent Conduct Training Government Support The Trade Finance Bank for Africa (15)
Thank you The Trade Finance Bank for Africa (16)