Bridging the gap: The transformative potential of factoring in Africa

Factoring in Africa allows businesses to sell their accounts receivable at a discount to gain immediate cash flow, is gaining traction across the continent, buoyed by significant growth and the support of institutions like Afreximbank and FCI.

Courtesy Trade Finance Global

Let’s think about how important bridges are.

What is normally a quick commute directly across the river can turn into a much longer expedition if that bridge is closed for construction.  

In some regions of the world, constructing a new bridge can breathe fresh life into economic and trading relations between what used to be two disparate regions.

Before the Senegambia Bridge was completed in 2019, people travelling from northern Senegal to the country’s Casamance region, which is mostly south of the Gambia River, had to use an unreliable ferry crossing or go the long way around the river. Either of these options could take days, sometimes even a week if the queues were long. 

With the bridge, traffic can flow freely between the north and south, transit times are slashed,  and costs are a fraction of what they once were. This is a better situation for everyone.

A similar idea is true when it comes to the increasingly digital trade finance ecosystem.

Segregated technology systems that don’t interoperate can turn into digital islands sequestered from the rest of the world. Any data that does flow between them is a little bit like that unreliable ferry, maybe some will get through, but it is never enough and never in time.

Technology and free-flowing data can help eliminate these islands, opening traffic to the constant flow that a bridge can provide.  

One area that is remarkably poised to benefit from technology and data availability is factoring.

In trade finance, factoring is a pivotal mechanism for facilitating business transactions, especially for small and medium-sized enterprises (SMEs) that often struggle to secure traditional financing. 

This financial practice, which allows businesses to sell their accounts receivable at a discount to gain immediate cash flow, is gaining traction across Africa, buoyed by significant growth and the support of institutions like Afreximbank and FCI.

Unleashing the growth and potential of factoring

The growth trajectory of factoring in Africa reflects a burgeoning recognition of its value as a financial service. 

With more participants engaging in the ecosystem, factoring volumes have experienced a significant rise over the past decade – from approximately $22 billion to $42 billion – showing increased reliance on and confidence in factoring as a viable financing alternative. 

Despite the concentration of 89% of factoring volume in South Africa, the expansion from 10 FCI members in 2012 to 50 today underscores a continent-wide embrace of the practice.

The African Export-Import Bank – known as Afreximbank – has played a key role in this development, offering crucial support through funding facilities, education, and advocacy for legal and regulatory reforms. 

Regardless of its rapid growth, the factoring industry in Africa faces a list of challenges that impede its full-scale adoption and effectiveness, including the issue of liquidity constraints, which stifles the ability of factoring companies to meet the growing demand for financing.  

Another particularly poignant challenge is the emotional relationship that people and businesses tend to have with the idea of sharing their data.

Data sharing is emotional

The emotional relationship that people and companies have with their data is deeply rooted in concerns over privacy, competitiveness, and the overarching fear of the vulnerability that sharing critical financial information might entail. 

There’s a palpable apprehension among businesses, particularly SMEs, about the implications of disclosing financial details, not only to financial institutions but also within the broader market ecosystem. 

This apprehension stems from an inherent lack of trust, but is exacerbated by a pervasive education gap, where businesses are unaware of how their data can be used safely and to their advantage. 

The sentiment of viewing data as a closely guarded asset, often akin to a personal extension of the business owner themself, creates a significant barrier to the implementation of factoring and other financial services that are designed to enhance liquidity and growth. 

The consequence of this emotional connection to data is a fragmented financial landscape, where the potential for growth and innovation is curtailed by fears and misconceptions.

Addressing this challenge requires a multifaceted approach, focusing on building trust and demonstrating the value of data sharing through education and transparent practices. 

By fostering a culture of openness, supported by stringent data protection and privacy standards, financial institutions and organisations like Afreximbank aim to bridge the gap between the protective instincts of businesses and the transformative potential of data use.

As companies begin to understand that data sharing, when managed securely, can facilitate access to essential financial services, mitigate risks, and unlock new opportunities for growth, the emotional barriers currently impeding the progress of factoring in Africa can gradually be dismantled. 

This evolution towards a more open and trust-based approach to data is essential for the continent’s financial ecosystem to thrive, enabling businesses to leverage factoring and other financial instruments to their full potential. 

This is somewhere that technology solutions may be able to help.

Investing in technology is key

Technology is a linchpin in bolstering confidence within Africa’s factoring and broader trade finance sector. 

Investing in technology can help equip FIs with the tools necessary to enhance their risk management and compliance capabilities. Moreover, technology deployment in financial operations can significantly demystify the African market for potential investors and partners. 

Technology-agnostic and interoperable digital systems, such as MonetaGo’s fraud prevention solution, can further enhance the ability of data to bring widespread benefits to the industry.

An example is trade finance lending data, when securely compared in MonetaGo’s system using privacy-preserving technology, will provide African lenders with real-time information as to the genuineness of the financing request; providing a safeguard which helps to de-risk, and promote growth within the sector.

Enhanced data management and analytics, for instance, provide clearer insights into market dynamics, borrower behaviours, and potential risks, information that is instrumental in building trust, as it allows investors to make informed decisions. 

This reduction in perceived risk is critical in lowering the cost of capital, as investors and partners are more willing to engage at lower interest rates when confidence in the market’s stability and reliability is high.

Afreximbank’s initiative to provide facilities for FIs to invest in compliance technology not only addresses immediate operational needs but also signals a long-term commitment to elevating the standards of the African financial sector. 

This commitment reassures global investors and partners about the continent’s dedication to fostering a secure, efficient, and transparent financial ecosystem. 

As confidence grows, spurred by technological advancements and enhanced compliance standards, the influx of affordable funding will follow, catalysing economic growth and facilitating broader access to finance for African businesses.

The road ahead: Bright prospects for factoring

The future of factoring in Africa is bright, with our team at FCI projecting significant growth in the coming years, potentially reaching $100 billion by 2030.

Technological advancements and educational initiatives to demystify data sharing and improve the overall ecosystem for factoring are poised to drive this expansion, addressing existing challenges and unlocking new opportunities. 

Factoring stands at the forefront of revolutionising trade finance in Africa.

As Africa forges ahead on its path to economic resilience and growth, the significance of factoring, backed by institutions such as Afreximbank and FCI, emerges as a catalyst for increased liquidity, enhanced financial inclusion, and a surge in trade and development across the continent. 

The transformative potential of technology is foundational in reshaping market dynamics, particularly in de-risking financing that will encourage greater SME engagement in factoring. In this landscape, organisations like MonetaGo are poised to play a vital role, essential in unlocking the untapped potential of factoring in Africa and contributing to its economic prosperity. 

By building these bridges and opening the data flow, everyone will be better off. There will be greater transparency and more liquidity. 

This may be what is needed to help make real progress on closing the trade finance gap.