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Al Ahram Newspaper

Business Associations: Enlarging the Scope of Lending to Help Small and Medium Enterprises Grow

Factoring and Financial Leasing;
Two Finance Tools to Support Investment and Export

Wrote Wafaa El Barad'ee

In the symposium organized yesterday by the Banking and Finance Committee of the Egyptian Junior Business Association (EJB), the participants recommended that micro and medium enterprises' capacity to acquire integrated finance services should be increased. This is to enhance and support these projects to reach the various finance channels and tools available in the Egyptian market, including factoring and financial leasing.

During their discussions, the participants stated that financial leasing is considered an important source of medium and long-term finance. It plays an effective economic role to develop the productive asset-base of lessees in general and small and medium enterprises in particular, thus increasing the local economic entities' capacity to compete and cope with developments. They added that factoring, on the other hand, is considered as means to enhance trade guarantees finance mechanisms and one of the important internal trade and exports development pillars, and also one of the most world- prevalent trade finance systems.

Participants further recommended that commercial and Islamic banks should establish a number of factoring and financial leasing enterprises and to include these types of finance mechanisms in their banking activities, thus spreading out and widening the scope of applying these small and medium enterprises finance tools in the Islamic countries, and also optimizing the use of technical support programs duly applied by the international finance institutions.

They indicated that factoring and financial leasing are newly introduced finance tools increasingly used after eruption of the global financial crisis to reduce debts and basically rely on shareholding and ownership rights. They added that factoring and financial leasing are now considered as main pillars for the financial and administrative reform programs persistently applied by Egypt to keep pace with the international developments.

During the sessions, the symposium discussed a number of significant topics, including the factoring functional properties and role in the socio-economic development. Mr. Ahmed Shaheen; a financial expert and the general manager of Egypt Factors; the first Egyptian finance institution operating in the field of factoring in cooperation with the CIB, stated that factoring provides finance to the companies carrying out long term sale transactions, whereby factoring companies purchase the original commercial instruments and collect their values from clients against a guarantee that 100% of the invoice value shall be payable. The factoring company in turn provides a guarantee of immediate payment of 90% of the invoice value.

He added that factoring, apart from banks, may deal with companies operating under the open account system, while banks do not approve finance under the open account systems except for large companies. Moreover, factoring dose not require guarantees and is capable of financing small and medium enterprises as well as traders. Factoring system is also applied without any right to recourse against the seller and is distinguished by the speedy approval which is not guaranteed by banks. He further indicated that various Egyptian companies are expected to participate in the factoring system as they prefer to obtain a debt collection service against commission, not interest.

The symposium also discussed the experiences of financial leasing companies; whereby Dr. Shahinaz Abdel Latif; an official at one of the international companies operating in Egypt, gave a brief description of the legal concept, parties involved, components, types, and privileges of financial leasing, stating that this mechanism is considered as one of the most suitable means for financing small and medium enterprises and that it forms an agreement between the leasing company (Lessor) and the client (Lessee) by which the lessee will be entitled to use the leased premises during a certain period of time against payment of previously agreed upon installments.

According to this agreement, the lessee has three options; whether to return the leased premises without any restrictions or conditions; to re-lease the premises for another certain period of time against reduced charges; or to purchase the premises against a reduced price.

She said that financial leasing is subject to less risk given the fact that leased premises remain owned by the lessor, and, therefore, no additional guarantees are required. She added that financial leasing highlights the concept of using, and not owning, an asset as means of gaining profit, and therefore it could be interpreted as means of financing the use, and not the purchase or the ownership, of an asset.

Dr. Abdel Latif also stated that financial leasing is considered as the nearest financial system to the Islamic law, and is highly flexible as regards the requirements of small and medium enterprises. She added that financial leasing agreement could start five days from the date of application. Moreover, if the required balance sheet of a lessee is in small amount, the lessor's decision could be based on other elements such as work experience; meanwhile banks mainly base their decision on the general structure of the lessee's balance sheet.

Mr. Ahmed El Deif, Head of a financial leasing company, stated that there are several types of financial lease companies, including those entirely owned by banks and those operating independently. He further stressed the importance of the specialized companies that operate on certain projects or fields of activity, indicating the significant future role of these companies in developing the Egyptian Industry.

Mr. Mohammed Mohiee, Head of the EJB Banking and Finance Committee, delivered a speech describing the means for coordinating and cooperating with the various authorities as to acquaint with the mechanisms that support the small and medium enterprises under regulative and legislative framework, as well as the means for supporting the private sector with the aim to create successful and sustainable investment projects.

Dr. Khaled Nagaaty; an EJB Finance Committee member, concluded the session by describing the future steps in developing the factoring and financial leasing mechanisms, which are considered the most efficient finance tools for all types of commercial, industrial and agricultural projects.