CAIRO: The International Factoring Promotion Conference addressed Egyptian exporters’ opportunity to benefit from the protection offered by factoring, or paying a third party to facilitate smooth trade.
Organized by Factors Chain International (FCI) and sponsored by the Ministry of Trade and Industry, the conference took place in Cairo on Wednesday.
A business that combines both service and lending, factoring is defined as a financial package that provides credit protection, bookkeeping, collections and finance. Bank finance and credit insurance represent alternatives for companies seeking capital, but factoring differs by acting as a middleman in trade dealings, both domestic and international.
Jeroen Kohnstamm, secretary general of FCI, the primary international factoring body, told the audience, “it’s proven that it works, but it’s new to Egypt.
He explained that increasing pressure to trade under open accounts leaves exporters vulnerable to receiving delayed or sometimes zero payment. The export factor, for a service fee, assumes this risk, and using the global factor network, largely under the auspices of FCI, teams with the importer and import factor to receive payment for goods delivered.
“Willingness to trade used to be based on quality and price, Kohnstamm laughed, “now it’s terms of sale. If the exporter sells on unattractive terms [such as requiring a letter of credit], the buyer will go to a more flexible seller [selling on an open account].
Egypt’s existing factor providers, Egypt Factors and credit insurance provider Export Credit Guarantee of Egypt (ECGE) addressed the audience of gathered bankers and manufacturers alongside representatives from China, Turkey and the US, all well-established factoring markets.
Speakers contextualized factoring’s rising popularity in the post-financial crisis environment as assuaging the aversion to risk that has rendered both access to credit and trust between trading partners more difficult to come by.
Peter Mulroy, chairman of FCI’s international factoring chairman, stated that, “Credit protection is a core principle of factoring. He distinguished “without recourse factoring, wherein the factor assumes all credit risk with indemnity rights and the seller is paid regardless of circumstances, from “with recourse factoring, where the factor has advanced the money to the exporter and requires it to be repaid.
Mulroy explained that the factoring fee usually fell between 1 to 2 percent of the invoice value of goods traded. He addressed the concern that factoring was more expensive the traditional bank financing, saying that given the risk protection and the factors’ assumption of the responsibility of interacting with the trading partner, factoring is ultimately cheaper.
Global context
Kohnstamm enthused that “last year was the best FCI has experienced. He introduced international speakers from Turkey and China, the second and first largest factor countries, respectively.
Cagatay Baydar, the general manager of TEB factoring, Turkey’s primary factoring instrument and vice chairman of FCI, observed, “Exporters, traditionally, must find ways to navigate different laws, languages, currencies. Regardless of company size.[factoring] allows collect[ion of] money in their own language and manner, so cultural and geographic distance ceases to be a problem.
Introduced as, “Mr. Factor in China, Xu Jiang, the assistant general manager of global trade services for the Bank of China, the fifth largest bank in the world, pointed out additional benefits of factoring, including mitigating loss of value due to exchange rate fluctuations and balance sheet trimming.
Factoring in Egypt
Egypt’s current factor figures were $33 million in 2009, compared to the tiny economy of Malta at $20 million, and Morocco, still far smaller than Egypt in terms of GDP, at $153 million, while China weighs in at $4073 million.
Marius Savin, general manager of Egypt Factors, called factoring “A tool to enhance export growth, and the Egyptian market has huge growth potential. Multinationals are interested in without recourse factoring.
He expects that as other financial institutions extend factoring services in Egypt, competition will increase: “whether we like it or not this service will take over Egypt.
Kohnstamm of FCI explained the conditions necessary for factoring to achieve success in Egypt. “First, commercial banks or credit insurance companies must develop professional factoring units. Then the market needs to be educated. There are many other types of services available, so factoring typically needs lead time in order to be understood and achieve visible results.
He went on to point out that Egyptian exports are readily factorable. “Simplistically, anything that can be put in a container and shipped is factorable. The textile industry has benefited from factoring all over the world, and Egypt’s textile industry would be no exception. He offered the contrast of non-factorable products, such as fossil fuel.
When asked why factoring remains relatively unknown in Egypt, Kohnstamm pointed out that usually a catalyst of one individual or institution brings factoring to public awareness. “Egypt Factors and ECGE are the first, but HSBC has factoring specialists and will likely begin extending factoring services in Egypt.
One of the attendees had a different opinion on why factoring has yet to take hold in Egypt. Dalia El-Maadawy, senior account officer at BNP Paribas bank, explained, “The majority of Egyptians do not have bank accounts. They cannot obtain credit for their businesses. the process of getting credit requires you provide an established credit history.
She explained that many Egyptians, particularly lower-income citizens who operate the majority of Egypt’s SMEs – distrust banks.
“This is partly a religious issue. Some people believe that banks are not condoned by Islam. It’s possible that factoring would be seen as more religiously acceptable, it’s a service. By not charging interest, factoring would avoid the pitfall of banking that some Muslims consider forbidden.
El-Maadawy said she was optimistic that factoring could benefit Egyptians running SMEs by providing needed access to credit. “I think this could take off.our market is similar to Turkey’s, [currently the second largest export factor in the world].
