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From the Periphery to the Center: Africa as the Growth Market for Factoring

17.02.2014Dr. Benedict Oramah

Factoring in Africa

The immense contribution that factoring can make to small and medium scale enterprises (SMEs) is the primary reason that has made this financing tool one of the most attractive to businesses across the world. Unfortunately, Africa has remained on the fringes of the factoring movement until recently. In 2012, Africa accounted for only 1.2 per cent of the €2 trillion world factoring transactions, with activities being recorded in only four countries - South Africa, Tunisia, Morocco and Egypt. South Africa, whose factoring transactions are mainly domestic, accounted for about 90 per cent of those transactions. Conversely, Asia was responsible for 26.8 per cent of the world factoring transactions while, America accounted for 8.81 per cent, Australia for 2.35 per cent and Europe for 60.91 per cent.

The good news

There is good news, however. Africa appears poised to take to the global stage with regard to factoring as a tool for economic development as the continent is now witnessing a sustained quickening in the rate of expansion of factoring volumes.

For instance, total factoring volumes in Africa exploded from €5.86 billion in 2001 to €23.93 billion in 2012, an average annual growth rate of approximately 14.2 per cent. This number is significantly higher than the world factoring growth rate of 8.6 per cent and the European growth rate of nine per cent during the same period. Additionally, Africa's factoring growth has featured strong dominance by banks and bank subsidiaries. This is the case in South Africa, Morocco and Egypt, where there have only been a limited number of independent private factoring companies. That situation is borne out of the fact that an important service offered by factors in Africa is funded credit lines for which affiliation with a bank that has the capacity to grant a credit limit provides important competitive advantage.

Not surprisingly, Africa's factoring market is narrow. An average of about 80 per cent of the demand is domestic, which explains the dominance of South Africa with its relatively strong supply chains. Within the context of constrained credit insurance capacity, even in markets where factoring is flourishing, appetite for risk has been understandably limited with a heavy focus on risk of governments and blue chip companies, especially those in the mining, telecom and retail sectors.

Challenges

The low level of factoring across Africa can be attributed to a number of reasons, the major ones being: 

  1. A lack, or limited knowledge, of the product across a large segment of the population, coupled with the fact that there has been little effort to promote factoring by governments and global factoring industry groups, including Factors Chain International and the International Factors Group, until the mid-2000s. In an environment dominated by a two-factor mind-set, it has been difficult to grow factoring in the face of reluctance among foreign factors to do business in Africa. In addition, due to limited knowledge, many African governments and regulators had little interest in promoting factoring;
  2. Lack of interest in factoring by many businesses. Those businesses involved in international trade tended to export commodities to OECD countries on the basis of Cash Against Documents (CAD) with credit worthy buyers. No credit was given so the trade did not lend itself to factoring;
  3. Absence of an incentive for banks to pursue factoring as a line of business, whether as a product offering or by way of credit lines, due to limited demand traceable to ignorance about the product and absence of support from regulators; and
  4. Absence of facilitating infrastructure, such as appropriate regulatory framework and laws, as well as credit information services and credit insurance. This has constrained the entry of foreign factors in the African market.

Prospects for factoring in Africa

In spite of these challenges, the fact that factoring is surging to the fore in Africa with forecasts that factoring volumes will rise from €24 billion in 2012 to about €90 billion in 2017 and subsequently to about €200 billion by 2020, means that there is reason to be hopeful. Countries expected to drive this growth are "new" entrants to factoring and include Kenya, Nigeria, Ghana, Cote d'Ivoire, Zimbabwe, Zambia, Mozambique and Senegal. It is anticipated that domestic factoring will continue to dominate in Africa, accounting for about 80 per cent of the market, although country situations will differ.

This anticipated growth is projected to be driven by:

  • Entities in oil and mining services in countries that are heavy on extractive industries, such as Nigeria, Ghana and Zambia;
  • Telecommunications services, as a result of a rapid growth of this sector and tendency of telecom companies to outsource key services;
  • Retail sector, as a result of a rapid growth of the middle class, which will expand domestic demand and reinforce the growth of market economy in the continent; and
  • The non-traditional export sector driven by larger share of the South in Africa's trade.

Conclusion

Given the foregoing, it is not surprising that factoring is gaining currency on the continent. The expectation is that factoring in Africa will continue to grow, considering the level of growth in economic activities and trade, particularly in light of the strengthening of domestic supply chains, rising South-South trade, rapid growth of Africa's middle class and improved awareness about factoring across the continent.

 

Dr. Benedict Okey Oramah is Executive Vice-President, Business Development and Corporate Banking, at the African Export-Import Bank. He supervises the business development, syndications, specialized finance and investment banking operations of the Bank. Prior to joining the Bank in 1994, he was Assistant Manager (Research) at the Nigerian Export-Import Bank. He received a PhD in agricultural economics from Obafemi Awolowo University, Ile-Ife, Nigeria.

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