FITC, the world class, innovation-led and technology driven knowledge institution, has held its 2nd Quarterly Advisory Roundtable session, themed “Factoring: A game-changer for the growth of MSMEs and the Nigerian Financial Services Industry”.
The virtual event which held last month, with a cross section of speakers, panelists, and participants across the financial services industry, including banking, insurance, securities markets, and industry regulators, is part of the premier knowledge institution’s commitment to fostering conversations and knowledge sharing to advance the financial services sector.
The quarterly roundtable discussions build on the ongoing engagements by the Financial Services Secretariat (FSS) 2020 of the Central Bank of Nigeria (CBN) and the Nigerian Factoring Working Group (NFWG), in collaboration with the African Export Import Bank (AFREXIM) and the Nigerian Export Import Bank (NEXIM).
This edition was focused on the benefits of Factoring for MSMEs, and the Financial Services Industry in Nigeria. The round table and panel session featured notable local and international personalities in the financial services sector. They include Peter Mulroy, Secretary-General, FCI; Eric Monchu Intong, Regional Chief Operating Officer, African Export Import Bank (AFREXIM Bank); Ibrahim Hassan, Director, Financial Systems Strategy, Central Bank of Nigeria; Lanre Bakare, Managing Director, Factoring & Supply Chain Finance Limited; Dr. Henry Emejou, Director, National Association of Small-Scale Industrialists (NASSI); Nike James, Tax partner, KPMG Professional Services, and Hope Yongo, Technical Adviser, Nigerian Export Import Bank (NEXIM Bank). The session was moderated by Yewande Soneye-Vaughan, Deputy General Manager, Access Bank Plc.
In her welcome address, the Managing Director/ CEO FITC, Chizor Malize, noted that the roundtable discussion was timely, given the benefits of factoring, especially in an economy like Nigeria.
“As a big supporter of SME’s, FITC remains committed to not only identifying key challenges faced by these important group, but also creating the platforms where solutions can arise. I am certain that significant outcomes will be reached to move factoring forward for the ultimate benefit of small and medium businesses and the long-term growth of the Nigerian economy,” she said.
Peter Mulroy, Secretary General, FCI, Netherlands in his keynote address, highlighted that factoring involves a shift from the usual mindset of securitizing real assets to securitizing financial assets, thus making receivables an investable asset class. “For many SMEs, receivables are a significant component of the balance sheet liquid assets and unfortunately, they often lie dormant. Receivables financing thus aims to unlock the real value of these receivables,” Mulroy stated.
Speaking further, the FCI Secretary General pointed out that there are currently 41 FCI members in Africa, up from just 10 members, 10 years ago. According to him, it signals the growth and acceptance of factoring as a means of SME financing in Africa.
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Delivering his opening remarks, Ibrahim Hassan, Director, Financial Systems Strategy (FSS 2020), Central Bank of Nigeria, said that the overall objective of the Nigerian Factoring Working Group (NFWG) was to create an opportunity for every business in Nigeria to thrive. He stated that Nigeria has an MSME financing gap of $15.8billion, hence the need for innovative financing to bridge this gap.
Speaking on the definition of factoring, Mulroy described it as the assignment or sale of accounts receivables to a third party, in addition to other specific actions. He stated that awareness of factoring in Nigeria was still low, however its increased adoption would be a game changer for MSMEs.
Soneye-Vaughn in the panel discussion acknowledged the challenges Nigerian MSMEs face in acquiring bank credit. According to her, despite contributing 48percent of GDP and at least 94 percent of employment, MSMEs currently receive approximately 0.3percent of total credits administered in the country.
Another panelist, Eric Intong identified the trade finance gap in Africa as currently over $81bn, stating that only approximately 40% of trade finance in Africa is currently financed by banks. According to Intong, MSMEs suffer the most because of these gaps, as loan facilities are not advanced by banks, largely due to the risk acceptance criteria deployed by financial institutions, which require some form of guarantee or collateral.
Intong also identified that many MSMEs are unaware of alternative financing solutions like factoring, noting that many lack the capacity to take advantage of available opportunities. He also mentioned the need for regulators to distinguish between factoring and banking, since receivables serve as collateral in factoring.
Speaking further on AFREXIM’s role in advancing the adoption of factoring in Nigeria, Intong stated that the trade bank was currently working with the legislature to facilitate the passage of the factoring bill. According to him, the Bank was also working with the FSS 2020 and the CBN to establish a regulatory framework for factoring in Nigeria, in addition to its efforts to expand the capabilities of Nigerian MSMEs to benefit from AFCFTA through training.
Highlighting the major challenges facing the factoring market in Nigeria, Henry Emejou identified issues such as the absence of a regulatory framework, and a lack of quality, structured information amongst stakeholders, as some of the key limitations.
Building on Dr. Emejou’s remarks, Lanre Bakare suggested that the most important requirements to kick off the factoring market in Nigeria, are the legal and regulatory requirements. He emphasized that this was crucial for invoices to be recognized by law as an asset class, as MSMEs typically cannot meet the collateral requirements demanded by banks.
Addressing factoring from a taxation standpoint, Nike James recommended that regulators work with the accounting industry to set up the regulatory framework for factoring. According to her, this was critical to preventing a similar situation which arose from the Securities Lending Act for capital markets, which then had to be amended via the Finance Act.
Eric Intong added that in Congo Brazzaville where a factoring law was passed two months ago, there had been confusion by the tax authorities as to what qualifies as a receivable and what a receivable past due was, leading to incorrect tax treatments of factoring receivables. He then revealed that the solution adopted in the Cameroonian market, was to charge a flat rate for all factoring transactions, to encourage the market.
Overall, the panelists all agreed that the factoring bill as currently presented to the National Assembly, does not fully solve the problem, and would need to be reviewed.
Lanre Bakare added that the Collateral Registry Legislation, which creates Receivables as a Security was passed in 2017. According to him, it makes receivables an acceptable asset pledge for MSMEs, and should improve the ease of doing business and provide credit insurance. He mentioned that the issuance of credit guarantees and credit insurance legislation, should be considered, to allow securitization, as without credible counterparties, the industry would struggle to grow.
Peter Mulroy emphasised the need for regulation to enable capital flows. He also stated that the regulatory framework must anticipate all relevant tax considerations, to avoid surprises. He however stated that he was confident that there would soon be established demand for factoring in Nigeria.
Mulroy also underscored the need to educate MSMEs to take advantage of factoring. He urged banks to change their mindset from risk acceptance, to enable the financing of intangibles. According to him, a formal Factoring Association is also needed locally, to drive growth.
The panel discussion ended with several recommendations and conclusions, including the need for a robust regulatory framework and education of MSMEs on how to take advantage of factoring as a means of financing.
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