Factoring Egypt - Trade Receivables Management
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Jan/Febr 2006 - Country Report

-Bernhard Arnebold, CEO/MD of EGYPT FACTORS (under formation), Cairo

The publication appeared in Business Money , International, Issue 4. January/February 2006 as country Report Egypt, "Factoring First"

The Arab Republic of Egypt has a population of close to 70 million people with about 18 million concentrated in the capital Cairo plus another 8-10 million in the surrounding neighbourhood. The number of people commuting in and out the business areas or the city itself is enormous and explains that traffic jams throughout the day that form part of the daily life in Cairo.

The country enjoys a more than 5.000 year old culture and history still visible for example in the world’s famous pyramids, some of them in the immediate vicinity of Cairo.

Egypt’s importance with regard to stability in this region is recognised under geo-strategically aspects as well as under economical considerations.

The economy is in a transition phase trying to catch up with international standards. Egypt is working and liaising with the USA as well as with the European Common Market.. The country in addition forms part of the COMESA, the Common Market for East and South Africa.

Partnership agreements with the USA and the EU are geared to bring down trade barriers in order to improve trading conditions and thus increase trade volumes between such economical blocks and Egypt to the mutual benefit between all parties involved.

All such activities are meant to fight poverty and to close the wide gap between rich and poor. A well structured middle income/living standard component would cater for stability and wealth of the whole society and as a consequence would make that society more resistant towards extremist movements - which of course goes for many other parts of the world as well.

Obviously a considerable number of actions are taken to address the development and support the Small and Mediums Sized Exporter (SME) segment of the market which is to become the backbone of the economy in terms of overall development and especially with regards to employment, again as in many other parts of the world.

During the past years the course of liberalisation combined with flexibility and openness has helped to introduce modern methods of working capital resources and trade finance instruments. All such activities enjoy support on highest political level and are seen as vital important to create access for financing for the SME sector.
Leasing has found its niche as well as different forms of securitisation and also other less traditional trade finance tools

In the light of this environment the Commercial International Bank in Cairo, the 5th largest bank in Egypt, widely known simply as CIB, has taken the initiative to bring Factoring Services to the Egyptian market. . Their profound knowledge of the market, locally and internationally was linked up with the FIMBank plc., Malta, a highly specialist institution in trade finance instruments such as forfaiting and factoring so that the right partners came together to form a joint venture according to Egyptian law.

As this type of specialist activities and markets form part of the strategy and mission statement of the International Finance Corporation (IFC), the private financing arm of the World Bank which also focuses to to support the development of the SME sector, they agreed to join into the shareholding of this joint venture to launch factoring services with a special focus on international/export activities in Egypt in 2006. .

Factoring is a service package providing for Debtor Administration including Ledgering and Collection of outstanding balances, Bad Debt Protection as well as Funding. The service will be offered as either a recourse facility (ultimate responsibility that invoices are paid rests with the supplier) or non-recourse facility (the factor covers the risk of insolvency of the buyer). The membership of Egypt Factors in the Factors Chain International (FCI) the leading factoring association in the world allows access to about 60 foreign countries.
According to FCI’s statistics the volume of transactions channelled through factoring reached EUR 860 billion in 2004, 68 billion of which in cross border trade. Around the world factoring enjoys fast growth rates, in fact the factoring product outperforms all other trade finance products with regard to growth rates and therefore make this service attractive equally to smaller specialised companies as well as to major industrial groups and large banks.

The USA as well as the EU represent a very competitive buyer’s markets, i.e. such buyers strive to purchase at best available conditions no matter whether they buy locally or from abroad.. As a consequence they are less and less willing to accept payment conditions unfavourable to them. Payments in advance partially or in full would be limited to tailor made capital goods, L/Cs are equally suitable for the import of certain merchandise. Whenever it comes to purchasing fast moving consumer goods buyers insists on payment terms not tying up their own resources and banking facilities, and that means open account terms. This obviously puts substantial risks and administrative burden on the foreign suppliers, but there is often no alterntive if and when the new contract wants to be won and the decision has been made to expand the business internationally.

Factoring allows such exporters to get that competitive edge. The factors organize the ledgering and collection and provide for bad debt protection as well as funding, if required to bridge the time until payment is received.. This service package will be made available to the Egyptian exporting community and domestic Market by Egypt Factors S.A.E.

With regard to the legal basis the starting point is the Prime Minister’s decree No. 1446 of 2003 which principally allows factoring services to be offered in Egypt..

The management of Egypt Factors seconded by FIMBank plc and supported by CIB and IFC closely cooperates with all authorities concerned in order to create an environment in which factoring services can develop to the benefit especially of the local exporting sector. This activity is under the supervision and control of the Ministry of Investment. This authority is at this very moment working on approving the “guidelines” for factoring so that the services can be offered from non banking institutions and the professional activities can start.

Which would then be approved by the cabinet as Executive Regulations, which forms the umbrella under which working rules and laws would be established.