The Africa factor

Feature | 5 March 2015

Edward Wilde explains how Africa's trade could grow exponentially if the regulatory environment for invoice financing was more robust. He suggests some starting points

Within the next 50 years, Africa's GDP is expected to rise to more than eight times its 2010 value. This is one of the key expectations of the African Development Bank1. Its other hopes are that by 2060:

  • Africa's population will double;

  • Africa's per head GDP will rise to over three times its 2010 value;

  • Most African countries will achieve middle income status; and

  • In most of Africa, extreme forms of poverty will be eliminated.

However, unless the African trading environment undergoes substantial changes, these expectations may well be frustrated. There needs to be a massive expansion of open account credit, acceptance and support for the introduction of invoice finance and an effective legal and regulatory environment for the enforcement of creditors' and financiers' rights.2

Emergence of invoice finance products

In the last 100 years, trade within developed countries has prospered through the increasing use of open account credit granted to customers. More recently, this has been extended to cross-border transactions. However, there is always a limit to the amount that any trader can realistically afford to tie up in unpaid debts, irrespective of the creditworthiness of its trade debtors. In the past half-century traders have been immensely assisted by the introduction and development of invoice finance products, such as factoring and invoice discounting, to provide working capital against such unpaid debts.

In 2013, statistics provided by Factors Chain International (FCI) show that worldwide, more than US$3,079bn of such debts were financed by invoice financiers.3 This represents a doubling of factoring volume in just five years. See Figure 1. The most impressive statistic from FCI’s press release is that over the same period, factoring in China has grown at a 54% compound annual growth rate and is now the largest factoring market in the world.

In the developed world factoring is a widely accepted tool that is vital to the fundamental needs of small and medium- sized enterprises. It has the wide support of governments and central banks.4

Room for growth

But what has happened in Africa? The chart provided by FCI shows the neglected use of this essential tool for trade development. Africa shows no annual growth and has only 1% of the global invoice finance market, of which over 90% is concentrated in South Africa.

It is unfortunate that Africa has not significantly embraced factoring. Out of 54 African states, only eight countries are able to operate cross border transactions through the two international factoring chains - Factors Chain International and International Factors Group. Only 14 African companies operate cross-border invoice finance out of a total membership of the two chains of 440 companies worldwide.

Supportive legal environment

Factoring needs a supportive legal environment that understands the product and is willing and able to enforce effectively creditors' rights. While common law countries such as the UK, Australia and the USA have been able to build up effective laws about debt financing based on judge-made law in reported cases, they have had the luxury of being able to do so over nearly 200 years. One of the oldest of such cases is Dearle v Hall in 1828 which still forms the basis of how English law will decide the priority of competing claims to ownership of a debt.

A lawyer advising a British invoice financier will need to have access to at least 300 such reports to be an effective adviser. For example, see the list of cases in a standard legal textbook such as Salinger on Factoring (Sweet & Maxwell).

Many African countries do not have the luxury of time to develop a factoring law from local sources. If they want to encourage the setting up of invoice financiers in their countries or enable foreign factors to purchase confidently debts due by customers in their countries then they need to establish a codified law relating to factoring as soon as possible. An expansion of both internal and external trade should follow.

Factoring usually operates on the basis that debts are sold to the invoice financier and such sale involves an assignment. Here are just a few of the initial questions that African legislators will need to address before drafting a law for factoring:

  • How are assignments to be made?

  • Must assignments be written to be effective? Or notified to the debtor?

  • Can future debts be assigned?

  • Can debts be assigned electronically?

  • Are electronic signatures legally valid?

  • Are prohibitions on assignment to
    be effective?

  • Does a supplier's insolvency affect a factor's rights?

  • Should factoring agreements or assignments be publicly registered?

  • Will there be penalties for late payment?

  • Will reservations of title by an unpaid creditor attach to goods onward sold or the resulting assigned debt?

The route to a model law

There are at least two international conventions from which legislators could draw some inspiration. Both are limited to cross-border transactions.

These are:

  • Ottawa Convention on International Factoring 1988 - Promoted by UNIDROIT (the International Institute for the Unification
    of Private Law).

  • UN Convention on the Assignment of Receivables in International Trade -
    New York 2001 (promoted by UNCITRAL)5

Unidroit Ottawa Convention on International Factoring 1988

This is now law in France, Belgium, Germany, Hungary, Latvia, Nigeria and the Ukraine. It has also been used as the basis for modernising the law in Lithuania. It will enter into force in the Russian Federation on 1 March 2015. Although five African countries have signed the convention only Nigeria has introduced it into its law.

States do not have to pass the entire convention into law. For example Belgium has opted out of the provisions nullifying prohibitions on assignment of debts. Parties to a factoring contract or to a sale contract giving rise to a debt where either are subject to the convention can exclude the whole convention from their relationship - but not parts.

The convention applies:

  • to debts where supplier and debtor are in different states; and

  • the convention is law in the states of supplier, debtor and factor; and

  • the supply contract is governed by the law of a convention state; and

  • where the factor provides at least two of these services:

  1. finance; or

  2. ledger accounting; or

  3. collections; or

  4. bad debt protection; and

  • where notice of assignment has been given to the debtor (this limits the convention's effect to notified factoring and excludes confidential facilities such as invoice discounting).

There is nothing innovative in this convention, but it has a number of useful features in that:

  • the rights and duties of parties are clearly set out;

  • prohibitions against assignments are ineffective against a factor; and

  • the situations where a debtor can recover advance payments made to a factor are clearly set out.

UN Convention on the Assignment of Receivables in International Trade -
New York 2001

This covers a wider range of invoice finance products than the Unidroit convention and includes forfaiting, securitisation and factoring in all its forms, including notified and confidential facilities. Its scope is again limited to international transactions. Although no country has yet passed it into its laws (only Liberia has signed the convention) it forms the basis of International Factors Group's recently published Model Factoring Law 2014.6

Further UNCITRAL work

UNCITRAL is dedicated to unifying international law for the enhancement of credit in order to make financing of international trade easier and more accessible. UNCITRAL followed up
on the New York Convention with a Legislative Guide on Secured Transactions (2007) supplemented in 2010 by its Guide on Security Rights in Intellectual Property. This was followed by A Guide on the Implementation of a Security Rights Registry in 2013. At present, UNCITRAL is discussing a Model Law on Secured Transactions.7

IFG's Model Factoring Law 2014

IFG wishes to encourage states to implement UNCITRAL's and UNIDROIT's ideas into an international system of secured transaction law. This
will benefit not only financiers, but all traders and producers seeking finance at lower costs. This will be of particular benefit in Africa.

Accordingly, IFG has drafted its model law by taking the best parts of the conventions, but reduced their scope only to cover factoring transactions. Whilst coverage of secured transactions may generally be preferable, this would require longer periods of intense discussions in the legislative bodies. The model law strives to be shorter, less complex and easier to handle. It may be extended at
any time to cover other secured transactions, which a state wishes to promote or regulate.

The key points of the model law are:

  • To provide legislators with a draft law in line with internationally accepted and developed legal principles.

  • Its framework is easily adaptable to specific legal environments.

  • Although based on UNCITRAL, it is limited to factoring ( in all variations) based upon assignment, so it excludes secured transactions.

  • It covers domestic and cross-border assignments.

  • It covers domestic and international receivables.

  • Parties can opt out by agreement from any aspect of the law (compared with Unidroit's all or nothing).

In order for the law to apply, the factor need only provide one service from

  • finance;

  • ledgering;

  • collection; and

  • bad debt protection.

This should be compared with Unidroit's need for at least two services.

Debts covered by any assignment include:

  • present debts;

  • future debts;

  • debts from credit card transactions; and

  • debts arising from financial services are not covered by the draft law.

Prohibitions on the assignment of debts will not affect the validity of the assignment, although the supplier will be liable in damages for breach of contract. However, such damages cannot be
set-off against the factor. In recent proposals from the UK government to make such prohibitions ineffective such right to damages has been eliminated.8

Notices of assignment are to be effective upon receipt, which is an issue not covered by Unidroit. They can be in the language of the supply contract and cover future debts. Once such notice has been given, payment or the return of goods can only be made to the factor. Any notice given does not affect the debtor's other rights under the supply contract. Payment instructions must be complied with. However, such instructions cannot change the agreed payment currency nor the country in which payment must be made. If payment is made to the supplier, then the factor is entitled to the proceeds.

After receipt of a notice of assignment, the debtor can request proof of the assignment. If this is not provided, then the debtor can play the supplier. However, the debtor and the supplier cannot change the terms of the supply contract.

The debtor can validly set off against the factor's claim:

  • all defences arising from the supply contract;

  • all those arising from any other contract part of the same transaction; and

  • any others that could have been validly raised against the supplier at the time that notice of assignment was given - except damages for breach of any prohibition against assignment. However, a debtor can always agree
    in advance with a factor that it will
    not raise set-offs or defences against
    a factor.

Should African states have a specific factoring Law?

Research in 2013 by the European Federation for the Factoring and Commercial Finance Industry shows that within the EU, Russia, Turkey, Switzerland and USA, factoring operates successfully under the laws of all the 33 jurisdictions surveyed.9 In more than 90% of them (notable exceptions being the UK and Ireland), more or less detailed laws and statutes on factoring and the assignment of receivables exist. Some of this legislation is specifically on factoring (for example, Latvian commercial law has contained a legal definition of factoring since 2010), while other laws deal with this matter in a more general context (such as the provisions on the assignment of receivables in the Austrian Civil Code). In some countries, such as Germany,
a combination of both approaches can be found. For certain fields of law, such as matters of civil or contract law, a more general rule also covers factoring, whereas in the case of, for example, financial supervisory law, special statutes define and regulate factoring.

Grasp the IFG model law

Africa should grasp this wealth of legal experience and practical knowledge about a product that will enhance trade. It will also bring to fruition the ambitions of many African states to compete globally. The IFG model law will be a good starting position. Absence of a specific factoring law will result in uncertainty for new entrants wanting to offer this unique form of finance. Adopting a model law, based on worldwide tested and accepted concepts, into local legislation will enhance the profile of factoring, instil public confidence in the products, and promote sound financing and trade.

Promotion of such a law will need to come from the invoice finance providers and their backers. In each jurisdiction, a carefully thought out road map will be needed after answering these questions:

  • How do we promote an appreciative business climate for factoring?

  • How do we influence opinion formers as to the benefit of a specific factoring law?

  • If we base our proposals on the IFG model law then do we need to make any changes to it?

  • How do we approach the legislators?

Is regulation needed?

With any major finance product the question soon arises whether the industry providing it should be regulated, in order to maintain public confidence. Figure 2 summarises the pros and cons of invoice finance regulation.

Examples of the degree of regulation involved include:

  • Complete government supervision, regulation and licensing of all products and services, just as there is in China. Is there any linkage to China's meteoric expansion of factoring with a compounded annual growth rate of over 50% in the last five years?

  • An obligation to obtain and operate under a full banking licence issued by the national central bank and compliance with Basel II - which is what happens in France.

  • A requirement simply to register as a "financial institution" unable to take deposits and with lesser capital requirements than a bank. This is the method adopted in many EU countries that have introduced supervision.

Many non-supervised jurisdictions have some degree of industry self-imposed regulation. For example, in the UK, the Asset Based Finance Association's members have more than 90% of the invoice finance market but are subject to a binding code of conduct, a public complaints procedure, and an independent ombudsman to resolve disputes with clients.10 This is designed to instil business and government confidence in ABFA's members and
their products.

Having determined the degree of appropriate regulation, national legislators will need to analyse the available constituents, suitable to local characteristics and requirements. Areas for further consideration by participants in the African invoicing market include:

  • products;

  • level of fees;

  • capital requirements;

  • reporting requirements;

  • complaints and compensation schemes; and

  • fitness of directors and shareholders.

As with the promoting of a specific factoring law, consideration will have to be given as to how to promote the benefits of regulation to opinion formers and invoice finance providers, so that they co-operate in establishing a workable and respected regulatory environment.

Towards a suitable regulatory environment

New African laws for invoice financing and a suitable regulatory environment, established with co-operation of the invoice finance industry, should promote the expansion of open account domestic and international trade. These should be drivers for African states to increase their wealth and become effective global players over the next half-century. This can only benefit their aspiring and urbanising populations.

Edward Wilde is a member of the London financial services team at Squire Patton Boggs. This article is based upon a presentation prepared by him for Afreximbank's conference in Lusaka, Zambia in November 2014 on the regulatory and legal aspects of factoring


1. Africa In 50 Years' Time - The Road Towards Inclusive Growth,African Development Bank, September 2011

2. A point made by Benedict Okey Oramah in 'Not growling but roaring - how African Simbas are catching Asian tigers.

3. See FCI Press Release of 8 April 2014 at at

4. A point made by Peter Brinsley in 'A vital watering hole'. See

5. See. at

6. See at

7. See drafts prepared in Vienna, December 2014 at

8. See the consultation paper at

9. Available from EU Federation for the Factoring & Commercial Finance Industry-EUF (care of IFG)

10. See

legal and regulatory: africa

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