Case Studies
Technical Support for the Establishment of a Regulatory Framework for the Factoring Industry in Nigeria
Client Name: GIZ-SEDIN for the Central Bank of Nigeria (CBN)
Date: January – April 2022
Location: Nigeria
Project Team Members:
Samuel Bamidele, Senior Consultant
Henrietta Ifyede, Senior Analyst
Date: January – April 2022
Location: Nigeria
Project Team Members:
Samuel Bamidele, Senior Consultant
Henrietta Ifyede, Senior Analyst
Background
Nigeria's economy is driven by Micro, Small, and Medium Enterprises (MSMEs) which account for over 86% of national workforce and 49.78% in value contribution they make to national Gross Domestic Product (GDP). Going by these statistics, in a country where unemployment rate stands at 33%, according to the National Bureau of Statistics (NBS), MSMEs project huge potentials and growth of the Nigerian economy.
Financing for MSMEs is a growing challenge in Nigeria. While there is a high demand for credit by MSMEs, there is no commensurate credit supply. This is consistent with the World Bank’s projection in 2020 that the demand for MSMEs credit in countries such as Nigeria rests at $8.9 trillion compared to the $3.7 trillion credit supply. The Credit Bureau Association of Nigeria (CBAN) also reports that only about 4 per cent of MSMEs out of the over 41.5million existing MSMEs in Nigeria have access to commercial credit.
This challenge of access to finance is limiting the growth of MSMEs and preventing them from reaching their full potential.
Financing for MSMEs is a growing challenge in Nigeria. While there is a high demand for credit by MSMEs, there is no commensurate credit supply. This is consistent with the World Bank’s projection in 2020 that the demand for MSMEs credit in countries such as Nigeria rests at $8.9 trillion compared to the $3.7 trillion credit supply. The Credit Bureau Association of Nigeria (CBAN) also reports that only about 4 per cent of MSMEs out of the over 41.5million existing MSMEs in Nigeria have access to commercial credit.
This challenge of access to finance is limiting the growth of MSMEs and preventing them from reaching their full potential.
The Challenge
The challenge of funding and inaccessibility of finance for MSMEs have a potential crippling effect on the economy.
So far, traditional financing options for MSMEs have been met with critical factors that limit how much capital is made available to these businesses. These factors include the absence of structure in MSMEs, lack of corporate governance, and unavailability of a centralised funding information source. Therefore, the inaccessibility of finance and lack of credit for MSMEs in Nigeria has significantly triggered the search for alternative and innovative sources of finance. One of such alternative funding sources currently being explored by countries is "factoring."
Factoring is increasingly becoming more popular as a trade finance to address the challenge of capital and funding for MSMEs.
To this end, major stakeholders including AFREXIM Bank, NEXIM Bank and Factoring Chain International (FCI) are leading the conversation in Africa, on factoring as a tool to close the existing finance gaps
Phillips Consulting. (pcl.) was contracted by GIZ-SEDIN for the Central Bank of Nigeria. The purpose of this engagement was for pcl. to support the work of the Nigerian Factoring Working Group (NFWG) by conducting a comprehensive diagnostic study on factoring and produce an evidence-based report for the establishment of a legal and regulatory factoring framework in Nigeria.
So far, traditional financing options for MSMEs have been met with critical factors that limit how much capital is made available to these businesses. These factors include the absence of structure in MSMEs, lack of corporate governance, and unavailability of a centralised funding information source. Therefore, the inaccessibility of finance and lack of credit for MSMEs in Nigeria has significantly triggered the search for alternative and innovative sources of finance. One of such alternative funding sources currently being explored by countries is "factoring."
Factoring is increasingly becoming more popular as a trade finance to address the challenge of capital and funding for MSMEs.
To this end, major stakeholders including AFREXIM Bank, NEXIM Bank and Factoring Chain International (FCI) are leading the conversation in Africa, on factoring as a tool to close the existing finance gaps
Phillips Consulting. (pcl.) was contracted by GIZ-SEDIN for the Central Bank of Nigeria. The purpose of this engagement was for pcl. to support the work of the Nigerian Factoring Working Group (NFWG) by conducting a comprehensive diagnostic study on factoring and produce an evidence-based report for the establishment of a legal and regulatory factoring framework in Nigeria.
The Solution
The factoring industry in Nigeria is at its nascent stage and so for this project, pcl. took a comprehensive approach in carrying out the diagnostic study of the industry. pcl. provided technical support, providing extensive research, reviews, and data collection activities of the growing factoring industry in Nigeria.
This study adopted a phased approach which included a general analysis of the factoring industry and its value chain. The diagnostic study also did an overview of MSME financing in Nigeria, a review of the draft CBN factoring regulation, a global benchmark review and analysis, stakeholder engagements and a broad analysis of the market potential of factoring in Nigeria.
The pcl. team did a critical analysis of the factoring industry (institutional framework, industry structure, legal & regulatory framework, and challenges & risks) in seven countries leading the factoring conversation across 3 continents. A SWOT analysis for the industry was also developed for the industry. Data for the project was collected from primary sources, specifically through interviews and focus group sessions. Valuable insights were drawn from primary and secondary data sources that informed the recommendations for the different stakeholder categories including the CBN’s Financial Systems Strategy (FSS2020), the Nigerian Factoring Working Group (NFWG), GIZ-SEDIN, Business Members Organisation (BMOs) and other relevant institutions.
pcl. 's team, in their analysis also covered the potential hindrances to the establishment and growth of a factoring industry in Nigeria, of which topping the list is the absence of a legal & regulatory framework. Part of the objective of this study was to clarify key factoring concepts, define the key terms and the unpack value chain to stimulate opportunities in the industry.
This study adopted a phased approach which included a general analysis of the factoring industry and its value chain. The diagnostic study also did an overview of MSME financing in Nigeria, a review of the draft CBN factoring regulation, a global benchmark review and analysis, stakeholder engagements and a broad analysis of the market potential of factoring in Nigeria.
The pcl. team did a critical analysis of the factoring industry (institutional framework, industry structure, legal & regulatory framework, and challenges & risks) in seven countries leading the factoring conversation across 3 continents. A SWOT analysis for the industry was also developed for the industry. Data for the project was collected from primary sources, specifically through interviews and focus group sessions. Valuable insights were drawn from primary and secondary data sources that informed the recommendations for the different stakeholder categories including the CBN’s Financial Systems Strategy (FSS2020), the Nigerian Factoring Working Group (NFWG), GIZ-SEDIN, Business Members Organisation (BMOs) and other relevant institutions.
pcl. 's team, in their analysis also covered the potential hindrances to the establishment and growth of a factoring industry in Nigeria, of which topping the list is the absence of a legal & regulatory framework. Part of the objective of this study was to clarify key factoring concepts, define the key terms and the unpack value chain to stimulate opportunities in the industry.
The Result
Our evidence-based report established a market potential for factoring in Nigeria. We detailed insights and recommendations to inform the case for the establishment of a factoring industry in Nigeria to improve the liquidity of MSMEs and by extension, marginally contributing to the economy. This report sets the tone for the establishment of the legal and regulatory framework to guide factoring activities in Nigeria.
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