How the business environment affects us as a factoring company in Rwanda

With the world now in the throes of a historic recession, two things are clear: Firstly, we will need billions of dollars to revive global supply chains and safeguard jobs. Secondly, as mentioned last week by the Rwanda’s minister of finance Ndagijimana in a UNECA session on economic recovery, these billions must be set up intentionally so to reach SMEs.

SMEs are typically caught between a rock and hard place when it comes to finance; too big for microfinance and too small for commercial banks, they far too often end up in the black market, with the Banques Lamberts. 75% of SMEs pre-crisis reported having had cash-flow stress so severe that they considered selling an asset, firing workers or delaying essential payments in the immediate three months prior to the crisis [1]. This means that most SMEs were already not resilient before the crisis and their struggle to access finance, especially working capital, is a big part of the reason why.

As a young digital factoring company specialising in providing fast working capital, our waiting list is long, and the current crisis has only created more demand for our services, which we are committed to serving. A huge milestone for us to be able to expand was that last week we were officially licensed as one of the first Non-Deposit-Taking Financial Institutions (NDFI) in Rwanda. Now that Rwanda is moving into the immediate post-pandemic stage, we are pushing aggressively ahead on our plans to rapidly scale our affordable, flexible, fast and transparent financial services to Rwanda’s SMEs. In the past three years we have disbursed just over $2m to SMEs, but our goal is to disburse this amount each month by the end of next year across more products and with this new license in hand, that target is very achievable.

Our clients have created over 700 jobs since they started working with us, and now employ almost 1,400 Rwandese in sectors such as hospitality, wholesale trade, vehicle repair, construction and agriculture. Several have entered into new business ventures and added more contracts, expanding their businesses, enabled by the injection of working capital. Now imagine what impact we can create when we scale from $2m disbursed over three years to $2m disbursed every single month…

In December 2017, we wrote about the factoring environment in Rwanda and listen a number of issues and unknowns that would potentially hinder this kind of growth. The licensing issue was the biggest concern and now that that has been resolved, we’ve taken stock of the original list and look to what obstacles we may overcome as scale. 4 1/2 of the original list have been resolved, but we’ve also had to add two new, rather technical issues over the years. Even so, we’re really confident in the Rwandan government’s commitment to promoting investment and we look forward to engaging with policy-makers and regulators on these issues so that we grow together.

Here goes:

#1: General awareness about factoring in Rwanda is low

Update as of March 2020: Challenging, but we are managing

Awareness is still low, but growing. While we do have to educate our clients and partners on our business model, we’ve found a very receptive audience amongst the business community, regulators and media, and we are confident that over time, factoring will become a staple part of the Rwandan financial landscape. Our clients often get the concept where intuitively since they feel the pain daily from long payment times, and we do not often have problems with a given client simply not understanding what we do.

#2: There was no licensing framework for factoring, yet it is a financial service which is supposedly regulated. How would BNR perceive us?

Update as of March 2020: Solved

We initially had to request a so-called “no objection letter” from BNR since they did not have a license that fit our model. However, in December 2018, BNR issued a new license category for Non-Deposit Taking Financial Institutions (NDFIs) which cover us and we were able to obtain the license as one of the first companies in Rwanda.

#3: Would we be accepted to share data to the CRB and if so, how would we be presented?

Update as of March 2020: Solved

The Credit Reference Bureau accepted our submissions gladly, agreeing to a bespoke reporting template after a few months of discussions. We have thus been accepted as a financial service provider on equal footing with a bank and are able to benefit from the credit data-sharing mechanisms set up nationally to incentivise good credit behaviour, which has proven an effective tool for our collections team.

#4: In cases of a default, how would the courts react? Could we rely on the courts to enforce our contracts?

Status as of March 2020: Solved

We submitted our first commercial court case in May 2019 and the ruling given end-December was a solid victory for us. This is not only a quite fast process, taking only 8 months, but also one that gives us confidence in our ability expand our business and work with more clients, knowing that we can rely on the court system to enforce our contracts if needed.

#5: In cases of fraud, how will law enforcement react? Who even would deal with the matter? What support do we get to prevent fraud?

Update as of March 2020: Unclear, but work is in progress

As with any financial institution we do encounter fraud. We had the first fraud case after almost two years in operation, and we were able to report the incidence to Rwanda Investigation’s Bureau (RIB), a relatively new crime investigative agency. RIB’s financial crimes unit has taken our cases to heart, and where possible have provided swift action to arrest the perpetrators who were wanted on other issues too. The client is now imprisoned, which of course is great, but it does not solve our problem since arresting the perpetrator does not automatically ensure that we will get our money back. We are still waiting to see resolution of this case, and expect it to take a substantial amount of time, given how long fraud cases typically take. Our main take-away is therefore that we should expect from loss-given-fraud and invest heavily in preventing these, while of course still pursuing legal action when it inevitably happens.

This also raises another issue – Our scammer was known to the police and was being investigated for crimes unrelated to us, but there is no place where financial institutions can go to run background checks for financial fraud. When asked about the matter, RIB told us that they are unable to share their database since anyone charged with a financial crime is innocent until proven guilty – a principle we can of course all support. However, we could have avoided the situation had we been able to cross-check the person’s ID with their list of suspected scammers. Surely, there must be a way to protect both the individual’s right to a fair process and the financial sectors’ risk of fraud, given how long fraud investigations typically take?

#6: Can we raise debt capital locally in a suitable manner or should we expect to always raise money outside Rwanda?

Update as of March 2020: Solved, with more work in progress

We are thrilled to count Bank of Africa amongst our partners, working with them to provide working capital to SMEs. We were not initially confident that we would be able to raise capital from the local banking system, but we have been able to and the partnership is evolving well. Being able to raise money locally and in local currency is a key determinant of success for any financial institution.

Additionally, we see very positive policy developments from the Capital Market Authority and MINECOFIN to position Rwanda as a financial hub for East Africa. Most interestingly for us, this includes a wide array of reforms and legal clarifications to make it easier to list asset-backed securities on the Rwanda. With those reforms in place, we could list our assets on the Rwandan Stock Exchange as a new asset class, getting access to local currency liquidity and thus be able to grow our portfolio even further. We are keenly awaiting the reforms to go through.

Conclusion: 4.5/6. Not bad.

Thus, out of the six issues, we have gotten resolution on 4 issues within just over two years and we expect progress on the fraud ongoing cases. Awareness will take time more time, but will also eventually be solved as we grow, so I give that one a half point.

The main take-away is of course how well-functioning and dedicated the Rwandan government is to solving investor challenges and how much they have already invested in making sure that the fundamental pieces are solved – contract enforcement, credit reference bureau, credit licensing framework; all these issues would have been show-stoppers in their absence but are now all resolved.

However, as is usually the case when you open a business, we didn’t know all the challenges we would face down the line. Since writing in December 2017, we have added two new challenges to the list. Luckily, both are technical rather than foundational and neither require far-reaching reforms:

Bonus Challenge #1: There is no legal definition of “assignment” in Rwanda

The term assignment in factoring refers to the act of passing on the payment resulting from an invoice to a third party, and this action underpins the basis of the factoring relationship. The client is owed money by a buyer, but needs the cash today. By assigning the payment to the factor, the client gets cash, while the factor now has the legal right to the resulting payment as and when the buyer eventually pays. However, there is nothing in Rwandan law that defines what constitutes assignment – is a written notice enough? Must the buyer agree? What if the buyer pays the client instead of the factor, does the factor have any legal claim on the buyer? Are contract clauses banning assignment valid or are they unfair business practises whereby big corporates can exploit their bargaining power over small suppliers, preventing these from accessing finance? These are all questions that a formal definition of assignment would answer and hence why it is urgently needed for BNR to issue such a definition.

Bonus Challenge #2: There is no mechanism to prevent double-selling of invoices

Think of buying a piece of land. You check that the seller indeed owns the land so you pay the price agreed upon. Then you realise that the seller has already accepted payment from someone else to buy the same piece of land. That would be a headache and the seller has already proven to be a bad apple so you cannot rely on their cooperation to get your money back. Luckily in Rwanda there is a good land centre, where such sales are coordinated to prevent double selling of property. The state has provided a central information-sharing point to give people the trust that any piece of land listed for sale is indeed for sale, so you have trust that what you pay for is what you get. Trust is good for business.

For invoices, unfortunately, there is no such land centre. We have nowhere to confirm that the property (the cash flow resulting from the invoice; known as an account receivable) is not already assigned to someone else. The protection we have is that we always ask the buyer the confirm their willingness to pay us directly, at which point they would disclose it if their payment has already been assigned. That is, if they know about it and are not part of the scam. Not all factors require disclosure, and maybe they are colluding with the client. For factoring to flourish, we need a central place to register invoices to prevent this from happening. Of course, registering intangible assets such as accounts receivables is not feasibly on the same model that the land centre operates on, given the transaction costs of registering a piece of land. While we are the only factoring company in Rwanda for now, we expect the industry to grow and as more players join the scene, this issue will become more and more important.

Hungary has a very simple solution to this problem, one that is easily replicated in Rwanda for next to no cost – a digital public registry.  The tax authorities provide a list of all EBM numbers issued and each factor registers the invoices they have bought in a central database, managed by either the industry association, a private company or the Notary Public as part of their collateral registry. This allows any factor to cross-check before giving money to a client that the invoice is indeed still free, double selling is prevented and the industry benefits from more trust. The most important thing is that this process does not slow down the speed of disbursements, since turnaround time is one of they key selling points of a factoring company.

BeneFactors is ready to maintain this database on behalf of the industry. We have the technical capacity and are prepared to cover the costs associated, since we believe that the benefits of having such a database are worth the costs, and we are committed to the development of the Rwandan factoring sector and to easing access to finance to SMEs.

[1] Own survey amongst SMEs, 2019.

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