Fac­tor­ing mar­ket holds EGP 10bn ex­pected value: Muhar­ram

FI­NAN­CIAL IN­CLU­SION COULD BE DRIVEN BY FAC­TOR­ING, SAYS SADEQ

The Daily News Egypt - - Front Page - Who are po­ten­tial fac­tor­ing clients? Sem­i­nar led by: Ab­del­razek Al-Shuweikhi

Ga­mal Muhar­ram, chair­per­son of the Egyp­tian Fac­tor­ing As­so­ci­a­tion (EFA), ex­pected the ac­tiv­ity of the sec­tor to reach EGP 10bn this year, ver­sus EGP 5bn in 2017.

Muhar­ram at­trib­uted his ex­pec­ta­tion to the fact that Egypt is con­sid­ered a promis­ing mar­ket in terms of fi­nan­cial tools, es­pe­cially in fac­tor­ing ac­tiv­ity, in light of the de­ci­sion made by the Cen­tral Bank of Egypt (CBE) onThurs­day to re­duce in­ter­est rates by 1%.

Dur­ing a sem­i­nar led by Daily News Egypt that dis­cussed the fu­ture of nonE­gyp­tian fi­nan­cial tools, Muhar­ram said that fac­tor­ing and fi­nan­cial leas­ing are ex­pected to see more reg­u­la­tions over the up­com­ing pe­riod, es­pe­cially with par­lia­ment dis­cussing th­ese two top­ics.

What do you know about the fi­nan­cial leas­ing and fac­tor­ing bill be­ing dis­cussed by the eco­nomic com­mit­tee of par­lia­ment and to what ex­tent is there com­mu­ni­ca­tion with the com­mit­tee?

The Fi­nan­cial Reg­u­la­tory Author­ity (FRA) in­formed us of the law and chose a group of ex­perts in the ad­vi­sory com­mit­tee su­per­vis­ing the draft law.

Over the past pe­riod, there was di­a­logue be­tween us and the FRA which re­sulted in a flex­i­ble draft law, and the de­ci­sion to leave ex­ec­u­tive tasks to the FRA.All the de­tails of the law were agreed upon.

In eco­nomic laws, the leg­isla­tive frame­work must be de­cided, and free­dom should be given to the su­per­vi­sory bod­ies, which hap­pened in the case of this law, mak­ing it come out as small as 81 ar­ti­cles.

Did you have dis­cre­tion regarding the law?

First, I would like to point out that the cur­rent ad­min­is­tra­tion of the FRA is very dif­fer­ent from past ad­min­is­tra­tions, and it un­der­stands what its job re­quires very well.They are con­duct­ing their su­per­vi­sory role wisely and pro­vide us with all the in­for­ma­tion we need.

We do have reser­va­tions, of course, but they are not many.Our reser­va­tions are about some ar­ti­cles in the draft law, such as the penal­ties on a chair­per­son who makes a credit de­ci­sion and has to bear the risk to some de­gree.We be­lieve he should only be held ac­count­able in the cases of cor­rup­tion or neg­li­gence.

The con­di­tions ad­just­ment pe­riod set by the project is six months,and the author­ity has the free­dom to ex­tend this pe­riod. How­ever, we also be­lieve this pe­riod is suit­able for com­pa­nies work­ing in the field of fac­tor­ing,but not for those work­ing in the field of fi­nan­cial leas­ing, so we re­quested amend­ing this ar­ti­cle.

Ad­di­tion­ally, the new li­cense al­lows adding the fac­tor­ing ac­tiv­ity to fi­nan­cial leas­ing com­pa­nies;how­ever,there is the is­sue of the com­pany hav­ing to process the data in two dif­fer­ent records be­cause the stan­dards are dif­fer­ent for each com­pany, as well as the reg­u­lat­ing rules.

Why do you not pre­fer the com­pany com­bin­ing two ac­tiv­i­ties with two sep­a­rate records?

I do not ad­vise com­pa­nies to com­bine both ac­tiv­i­ties be­cause there are reg­u­la­tory rules such as de­ter­min­ing the credit con­cen­tra­tion ra­tios and the vol­ume of credit fa­cil­i­ta­tions for a sin­gle client out of the to­tal cap­i­tal base or the credit port­fo­lio, which may range from 20% to 50%, which would be un­fair for one of the ac­tiv­i­ties.

If we say that the credit port­fo­lio is 20% of the to­tal cap­i­tal base, this would be un­fair for the fi­nan­cial leas­ing com­pany.The op­po­site is true. If we say the credit port­fo­lio will be 50%, this will be un­fair for the fac­tor­ing com­pany. Pro­cess­ing al­lo­ca­tions is dif­fer­ent.Fac­tor­ing deals with cap­i­tal fi­nance, but fi­nan­cial leas­ing deals with long-term needs.

We have de­layed al­low­ing I-Score in the field of fac­tor­ing, es­pe­cially since the debtor is not a client of the com­pany’s.How­ever,the I-Score sys­tem will be valid for small and medium en­ter­prises (SMEs) within the trans­ferred guar­an­tee records, which will ex­pand the base of clients and the in­for­ma­tion about them.

Is there com­mu­ni­ca­tion be­tween you and the eco­nomic com­mit­tee of par­lia­ment regarding the draft law, the first part of which is com­plete and in­volves fi­nan­cial leas­ing?

There was no com­mu­ni­ca­tion be­tween the as­so­ci­a­tion and the com­mit­tee,but I wel­come any form of com­mu­ni­ca­tion with them, es­pe­cially since the fac­tor­ing sys­tem is rather new for the Egyp­tian mar­ket, and fi­nan­cial leas­ing is fac­ing some is­sues regarding ac­count­ing stan­dards.

It is im­por­tant to com­mu­ni­cate with fi­nan­cial leas­ing com­pa­nies and the EFA to dis­cuss the means of ap­ply­ing in­ter­na­tional ac­count­ing stan­dards to avoid is­sues in the sec­tor.

How do you see the fu­ture of fac­tor­ing in the Egyp­tian mar­ket?

It is one of the promis­ing non-bank­ing ac­tiv­i­ties in the Egyp­tian mar­ket. How­ever, the num­ber of com­pa­nies with li­censes to prac­tice the ac­tiv­ity is still as lit­tle as eight.

The eight com­pa­nies made trans­ac­tions worth EGP 4.945bn last year com­pared to EGP 4bn in 2016,which means that the ac­tiv­ity achieved a growth of 21.2%. I ex­pect the num­ber of com­pa­nies to be­come 13 this year.

Note­wor­thy,the minimum cap­i­tal re­quired to es­tab­lish a fac­tor­ing com­pany is only EGP 10m.

Ac­cord­ing to the data of the FRA, the vol­ume of se­cu­ri­ties de­ducted last year reached EGP 8.9bn com­pared to EGP 6.068bn in 2016.Also, the num­ber of fac­tor­ing clients reached 304 com­pared to 256, a growth rate of 18.8%.

You said that fac­tor­ing ac­tiv­ity was af­fected by the ini­tia­tive of Pres­i­dent Al-Sisi to pro­vide EGP 200bn for small projects, do you plan to ad­dress the CBE to be part of that ini­tia­tive?

Fac­tor­ing is more sus­cep­ti­ble to the ef­fects of in­ter­est rates com­pared to fi­nan­cial leas­ing, as it funds quick and short work­ing cap­i­tal cy­cles,some­times just 45 days.This does not al­low dis­tribut­ing the cost of fund­ing in in­ter­vals,un­like fi­nan­cial leas­ing, which sells as­sets with long in­ter­vals in be­tween.

The growth of fac­tor­ing in the re­quired way de­pends mainly on the re­duc­tion of in­ter­est rates and pro­vid­ing suf­fi­cient aware­ness regarding the ac­tiv­ity in the tar­get sec­tors.

Tamer Sadeq, the di­rec­tor gen­eral of Cairo Fac­tor­ing Com­pany, said that the ini­tia­tive of SMEs has been a strong com­peti­tor of fac­tor­ing com­pa­nies over the past pe­riod, so he plans to ad­dress the CBE to al­low fac­tor­ing com­pa­nies to enter un­der the um­brella of the ini­tia­tive.

Are there dis­cus­sions with the Small and Medium En­ter­prises De­vel­op­ment Author­ity to fund fac­tor­ing com­pa­nies?

Sadeq: There are dis­cus­sions tak­ing place with the SMEDA to fund fac­tor­ing com­pa­nies with a max­i­mum of EGP 1m with a 12% in­ter­est rate.

Muhar­ram: I ex­pect the EGP 200bn CBE ini­tia­tive to be aborted over the up­com­ing pe­riod.

With th­ese fac­tors and ob­sta­cles, how do you see the fu­ture of fac­tor­ing?

Muhar­ram: If we com­pare the data of fac­tor­ing ac­tiv­ity in Turkey, with the size of the mar­ket reach­ing $30bn for 304,000 clients through 1000 com­pa­nies, in­clud­ing 66 com­pa­nies in the field of ex­port fac­tor­ing to the case in Egypt, we will see that Egypt is still an emerg­ing coun­try in the field of fac­tor­ing and has great chances for growth, es­pe­cially that SMEs are tak­ing over the Egyp­tian mar­ket right now.

What is most at­trac­tive to fac­tor­ing com­pa­nies, lo­cal or in­ter­na­tional se­cu­ri­ties?

Muhar­ram: Both are im­por­tant for the econ­omy. Cur­rently, in­ter­na­tional fac­tor­ing may be deemed more at­trac­tive be­cause the in­ter­est on the dol­lar is less, and ex­porters guar­an­tee their funds with­out fac­tor­ing com­pa­nies hav­ing to deal with the risks.

Com­pa­nies en­gaged in the ac­tiv­ity of in­ter­na­tional fac­tor­ing must be mem­bers in the In­ter­na­tional Fac­tor­ing As­so­ci­a­tion (IFA) and com­mu­ni­ca­tion must take place be­tween the Egyp­tian com­pany and the for­eign fac­tor­ing com­pany,or at least a study about the for­eign com­pany must be pro­vided.

Eighty per­cent of Egyp­tian com­pa­nies are mem­bers of the IFA. How­ever, the high mem­ber­ship cost is an ob­sta­cle.

Do the fi­nan­cial leas­ing and fac­tor­ing com­pa­nies af­fil­i­ated with the bank­ing sec­tor re­duce their loan­ing costs?

Muhar­ram:This is un­likely be­cause mar­gins of banks are very close to the com­pa­nies work­ing in the sec­tor.

Sadeq: Ac­cord­ing to what we have learned from the mar­ket, banks may give the com­pa­nies af­fil­i­ated with them a lower in­ter­est rate.

Do you ex­pect banks to es­tab­lish fac­tor­ing com­pa­nies?

Sadeq: Yes I do, es­pe­cially with the in­creased aware­ness. How­ever, too much of that would not be good be­cause the non-bank­ing sec­tor re­quires a dif­fer­ent way of think­ing.

Are there other fund­ing sources, such as se­cu­ri­ti­sa­tion or bonds?

Sadeq: Un­for­tu­nately, se­cu­ri­ti­sa­tion would not be suit­able as a fund­ing source. How­ever, it is ben­e­fi­cial for fi­nan­cial leas­ing com­pa­nies.

What are the most prom­i­nent chal­lenges fac­ing fac­tor­ing?

Sadeq:De­vel­op­ing aware­ness of the sec­tor, cre­at­ing com­pe­tent in­di­vid­u­als with ex­per­tise, and co­or­di­nat­ing with other sec­tors, such as banks, which need to re­alise that fac­tor­ing and fi­nan­cial leas­ing are not com­peti­tors.There is a plan to hold a sem­i­nar for work­ers in the field of in­sur­ance,in co­or­di­na­tion with Alaa El-Zo­hairy, in or­der to raise aware­ness about the avail­able op­por­tu­ni­ties in the field of in­sur­ance on the risks of re­pay­ment.

Were there in­creases in the rate of delin­quency in the past pe­riod?

Muhar­ram: The risks of se­cu­ri­ties has in­creased from 2% to 3%, but com­pa­nies faced this by sched­ul­ing debts based on the cir­cum­stances of clients or re­sort­ing to the eco­nomic court.

Sadeq: A study con­ducted on the con­di­tion of a client re­quires a pe­riod rang­ing from one week to 10 days and re­quires an avail­abil­ity of a bud­get from two years, or one year in the case of star­tups.We of­fer the re­quired sup­port and con­sul­ta­tions for clients to pre­pare them.

What is the role of the as­so­ci­a­tion in spread­ing aware­ness about fac­tor­ing?

Sadeq: The as­so­ci­a­tion is the most ap­pro­pri­ate body for spread­ing aware­ness.We seek to hold con­fer­ences in co­op­er­a­tion with many bod­ies, such as the IFA, African Ex­port-Im­port Bank, and the Fed­er­a­tions of In­dus­tries, as well as ex­port coun­cils, the me­dia, and other bod­ies.

What about fi­nan­cial in­clu­sion and in­te­grat­ing the in­for­mal sec­tor into the for­mal sec­tor?

Sadeq: Fac­tor­ing is the most ef­fec­tive tool for spread­ing fi­nan­cial in­clu­sion and has al­ready con­trib­uted to the en­try of many mi­cro­pro­jects into the for­mal sec­tor and open­ing a trade reg­is­ter since the reg­u­lat­ing laws re­quire this. Who are po­ten­tial fac­tor­ing clients?

Muhar­ram: They are any man­u­fac­tur­ers or pro­duc­ers who sold goods with de­layed pay­ments and re­quire liq­uid­ity to start a new pro­duc­tion cy­cle. The law al­lows fac­tor­ing for pe­ri­ods of up to three years,ex­cept for con­struc­tion com­pa­nies at the mo­ment.

Sadeq: On av­er­age, most fac­tored se­cu­ri­ties are no less than EGP 100,000, how­ever, there is no minimum value for fac­tor­ing.Clients can re­peat the fac­tor­ing process based on the pro­duc­tion cy­cle, and ev­ery com­pany sets the max­i­mum limit of the al­lowed amounts for clients, as well as the debt rate of the cap­i­tal base.

OVER THE PAST PE­RIOD, THERE WAS DI­A­LOGUE BE­TWEEN US AND THE FRA WHICH RE­SULTED IN A FLEX­I­BLE DRAFT LAW

THE CUR­RENT AD­MIN­IS­TRA­TION OF THE FRA IS VERY DIF­FER­ENT FROM PAST AD­MIN­IS­TRA­TIONS FAC­TOR­ING IS MORE SUS­CEP­TI­BLE TO THE EF­FECTS OF IN­TER­EST RATES COM­PARED TO FI­NAN­CIAL LEAS­ING THERE ARE DIS­CUS­SIONS TAK­ING PLACE WITH THE SMEDA TO FUND FAC­TOR­ING COM­PA­NIES WITH A MAX­I­MUM OF EGP 1M WITH A 12% IN­TER­EST RATE

A STUDY CON­DUCTED ON THE CON­DI­TION OF A CLIENT RE­QUIRES A PE­RIOD RANG­ING FROM ONE WEEK TO 10 DAYS IT IS IM­POR­TANT TO COM­MU­NI­CATE WITH FI­NAN­CIAL LEAS­ING COM­PA­NIES AND THE EFA TO DIS­CUSS THE MEANS OF AP­PLY­ING IN­TER­NA­TIONAL AC­COUNT­ING STAN­DARDS

Ga­mal Muhar­ram

Tamer Sadeq

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