CBN partners Afrexim bank, others to boost MSME financing

The Central bank of Nigeria, has partnered the African Export-Import Bank, Deutsche Gesellschaft fur international Zusammenarbeit (GIZ) to roll out a ‘factoring’ program as an alternative financing instrument for micro, small and medium enterprises in Nigeria.

Factoring, which is a new concept in many countries, including Nigeria, is a structured trade finance instrument that provides funding for invoices of purchase orders that have been delivered but are yet to be paid.

It aims to close the financial gaps for MSMEs while increasing their opportunities at the international market.

Speaking during the validation workshop on the report of diagnostic study of the factoring industry in Nigeria, Ibrahim Hassan, Acting Director of Financial System Strategy department of the Central Bank said that with the small businesses contributing close 50 percent of Nigeria’s GDP, unlocking liquidity through factoring will significantly grow their contribution in the Nigerian ecosystem.

According to him, the Bank has remained committed to empowering small businesses in Nigeria, especially in terms of providing low term credit.

“From our perspective at the FSS in the Central Bank of Nigeria, we are aware of the fact that without MSMEs the vision of attaining economic growth and development cannot be achieved.

“MSMEs are the engine room of any economy in terms of contribution to GDP, in terms of creating employment, and without a strong base, nothing much can happen in our economy. So we are here to look at factoring, as an important tool that we can leverage to provide working capital for the MSMEs.

“Although factoring is gaining momentum in many countries as an alternative source of financing small businesses, it is still at the infancy stage in Nigeria, and working with other stakeholders, we will ensure it succeeds, ” he said.

Presenting the report of the study in Abuja on Wednesday, Samuel Bamidele of Philips Consulting Limited said factoring as a financial instrument ensures that small businesses have easy access to cash flow after making supplies and issuing invoices.

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“However, the financing agent (called the factor) retains some percentage of the invoice value,” he said.

According to the report, high interest rate, lack of collateral, credit rating and poor governance policies has posed major threats to the growth of small businesses in Nigeria.

It states that a well developed credit insurance market and information infrastructure are pivotal to de-risking the factoring industry, noting that it also requires significant outlay in terms of capital allocation and private sector participation.

“Factoring could unlock between $1.5 ‐$2billion per annum in financing to MSMEs in Nigeria. Trade financing tends to be more countercyclical and serves as a vital financial tool particularly when firms are in distress or during economic downturn.

“Leveraging factoring financing instruments will help businesses to address the difficulty in accessing conventional bank financing by providing required working capital,” Bamidele said.

He further stressed that fast-tracking the passage of factoring consignments and receivables financing bills by the National Assembly will raise the profile of factoring, provide legal backing and impose strong confidence on investors.

In his remark, Marcus Wauschkukn, head of program, SEDIN at GIZ noted that access to finance for small businesses has remained a major challenge discussed by the government, industry leaders as well financial institutions at large.

According to him, difficulty in accessing finance has increased the search for innovative and alternative sources of finance for MSMEs, “one of such innovative sources of funding that is being explored by industry stakeholders is factoring.

“The success of factoring in some African countries is already driving the interest of stakeholders in the sector.

“SEDIN is working with the FSS department of the central bank to facilitate advocacy and creation of a legal and regulatory framework to promote the growth of the factoring industry in Nigeria.

“We are upscaling our approach to financing small businesses by exploring alternate financing instruments including factoring, crowd funding, equipment leasing among others,” he said.