Ecobank Kenya has become the first Sub-Sahara Africa bank to be admitted into Factors Chain International (FCI), creating opportunity for local businesses to easily cash their account receivables before the debtor pays.
The product, which relies on the credit worthiness of the buyer, will see the bank play the role of a debt collector as it helps SMEs unlock cash positions by immediately paying 85 per cent of the value of goods supplied.
Invoice discounting is a common product in Kenya with banks taking invoices only from blue chip companies as collateral -- because they are not involved in appraising the supplier.
"In factoring the bank takes over the collection process and has contact with the buyer. Banks have discovered that they are sometimes exposed under the invoice discounting when the buyer fails to honour," said Jeroen Kohnstamm the secretary general of FCI.
"The process allows the bank to set aside less capital as provisions (for bad debts) as it is more secure," he added.
FCI has its network in 68 countries with 252 factors -- institutions which are willing to take up the risk of cashing other traders' receivables.
The network has allowed the company to facilitate international business which Ecobank, the pan-African transnational, is also eyeing.
"Looking at the potential in the Kenyan market we will be aiming to do international factoring. We have been providing letters of credit but the volumes are not much to talk about and that is why we partnered with FCI," said Joseph Torku, director of finance East Africa, at Ecobank.
Unlike letters of credit (LC) under which a bank guarantees an exporter that the importer will pay, factoring sees the exporter receive 85 per cent of the total from a factor of the importing company within a day with the remaining amount settled upon completion of the transaction.
The factor collects the amount from the importer whose credit worthiness it has analysed and relies on the strength of the network built by Factors Chain International to trust the exporter will deliver.
Under the letter of credit arrangement, the bank holds cash from the importer equivalent to the value of goods being imported and, upon confirmation of their receipt, releases cash to the exporter or settles the bill on behalf of the importer under a post-import financing arrangement.
"Letter of credit is labour intensive as it follows documentation and is expensive. Export factoring charge is usually 0.08 per cent to 1.4 per cent," said Mr Kohnstamm.
Factoring attracts a commission and interest as credit from the bank is used to settle the bill.
Letters of credit charges are determined after every three months by banks so as to accommodate currency valuations.
The LC has a maximum limit indicating that an importer has to approach the bank for another appraisal whenever the headroom is exploited.
Factoring can be offered as per demand as each transaction is considered independent of the others.
The product is not limited to Ecobank customers, with FIC hoping that a successful partnership will see other financiers seek membership with it.
Ecobank, which has a footprint in 35 countries in Africa, identified Kenya as a launch pad due to its place in international trade.
The bank will have to invest in personnel training to ensure strong credit risk assessment and debt collection units.