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Receivables Finance in Zimbabwe

Receivables Financing and Africa

Introduction

The International Monetary Fund has estimated that the Zimbabwean economy is likely to contract by 5.2 per cent in 2019, with growth envisaged between 2020 and 2024 at an average 3.3% per annum. The economic contraction has by and large been attributed to drought, foreign currency shortages, prolonged electricity cuts, fuel shortages to name a few. Prices of basic goods and services have increased significantly, with the rate of inflation recorded at 175.66% in June 2019. The Zimbabwean Dollar was reintroduced in June 2019 and since then the calculation and publication of year on year inflation figures has been suspended until February 2020 in order to rebase the Consumer Price Indices (CPIs).

In 2018 it had been reported that the Zimbabwean economy would  grow by 4.2% in 2019 according to the International Monetary Fund. As Zimbabwe’s economic prospects continue to shift, there is a heightened need for more working capital solutions for local businesses, especially solutions that are able to boost trade and positively impact GDP. While the local receivables finance industry lags behind that of other African countries like South Africa and Nigeria, the building blocks for the success of factoring are in place. In the late 1990’s and early 2000’s finance and discount house operated in areas such as the export of agricultural produce which includes the flower industry which was at the time one of the largest in Africa. As such the market is to some extent aware of receivables financing products and it is now a matter of reintroducing and building on the current infrastructure.

Receivable Finance Industry

Zimbabwe’s economy is 60% informal and dominated by small to medium enterprise (SME) trading. It is against this backdrop that the local financial services sector operates. Factoring or invoice discounting does not currently feature prominently in Zimbabwe’s financial sector and the same can be said for the rest of Africa. This presents a great opportunity for growth in the sector. Although only 1% of the worlds factoring is in Africa, the continent had a growth rate of 47.6% in 2016 outperforming regions such as Europe and Asia. This means Zimbabwe is in a place where factoring can take hold again and become a key tool in the financing of trade.

There is currently no legislation or regulation on receivables finance neither are there any guidelines on the subject issued by the central bank in Zimbabwe which is known as the Reserve Bank of Zimbabwe. Nevertheless, positive steps are being taken with the enactment of the Moveable Property Security Interests Act [Chapter 14:35]. This legislation is the first of its kind as it seeks to provide more protection for holders of receivables and a way in which one can register same centrally, creating a searchable data base. The legal framework still requires much work and could further benefit from the adoption of a model law on factoring as is currently underway in Nigeria.   

Although most Zimbabwean companies continue to operate under challenging conditions, export and import substitution opportunities exist, and receivables financing offers a viable solution to many companies’ working capital bottlenecks. A marked increase in demand for receivables financing solutions has been observed in the first half of 2019 as many suppliers look to discount their current receivables as a means of beating inflation and preserving value through early payment. Initiatives such as “Buy Zimbabwe” have increased measures aimed at reducing consumptive exports, increasing local production, promoting local value addition and increasing lines of affordable credit for local companies. This should better place businesses to take advantage of both the domestic and export markets, again giving rise to new opportunities for Receivables Financing. 

Players in Local Factoring Market

Several Zimbabwean financial institutions offer factoring to their clients. However, these transactions are mostly loans backed by receivables and not pure receivable financing transactions. Some of the players in this market include large, established institutions like Stanbic Bank Zimbabwe and Standard Chartered Bank as well as a few smaller players that have shown interest in the area. There is however a Zimbabwean company that offers factoring as the hallmark of its business, namely, Harare Receivables Exchange which is also know by the acronym HRE. HRE has been in operation since 2012 and has to date advanced in excess of US$12 million. Admittedly this is a small amount in a market the company believe is in excess of US$1.3 billion. HRE continues to provide factoring services to businesses at different stages of growth and in diverse industries. It is fast becoming the go-to institution for working capital solutions. 

The main factoring products offered by Zimbabwean companies are confidential receivables discounting, disclosed receivables discounting, reverse factoring and future receivables discounting. Suppliers from businesses large and small make use of these products but the majority of suppliers are SMEs. The main industries that make us of these products are agriculture, manufacturing, retail (FMCG’s) and mining. 

The rise in microfinance institutions in Zimbabwe has increased competition and pushed financial institutions to diversify their product offering. This again may lead to an increase in factoring services in Zimbabwe’s near future. 

Besides the banking institutions, other emerging players in the factoring market include private limited liability companies that offer trade finance services. At times these are related party transactions which offer another good source of trade finance within the Zimbabwean market. The quantum of financing here is hard to quantify. Another great development in the last 12 months has seen local insurance companies beginning to provide trade and supply chain credit insurance which covers factoring transactions. While a factoring association or organisation has yet to be established in Zimbabwe, there exist various other trade associations, such as the Confederation of Zimbabwe Industries, that are instrumental to the growth of the local factoring market. 

At present, it is challenging to find statistics on factoring in Zimbabwe. Many financial sector participants are unwilling to share their factoring data, and it is also difficult to determine which institutions merely advertise the service opposed to  actually availling it to clients. Clients play a part in driving the adoption of factoring and the more they become aware of the service the more it will grow. Efforts are being made by companies such as HRE to make such information readily available in future.

Fintech Level of Development In Zimbabwe

Fintech has been embraced in Zimbabwe and its use and development continues to rise. Innovative fintech solutions are increasingly used to benefit local businesses, both new and established. It is estimated that Zimbabwe’s transactions are now 90% cashless. This acceptance of paperless transactions was spurred on by the cash crisis faced in the country. Other key factors that fuel fintech development include the fact that, approximately 70% of the population is unbanked, creating a need for non-bank-based payment solutions. This in turn has encouraged the increased use of electronic payment systems and accelerated innovation in this sector.  In particular, use of mobile payment systems has skyrocketed, facilitating 754 million out of the more than 1 billion transactions made in 2017. In 2018 it is reported that subscribers to mobile payment platforms increased by 41 per cent to 4.6 million and internet banking subscribers increased by 65 per cent to 277,674. There are a number of players in this space, with the dominant player having 8 million registered users.  Fintech has disrupted the banking industry and redefined the bank-customer relationship. Other financial services provided include insurance and card services through mobile platforms. It is now essential to provide working capital business solutions through these and other platforms. 

The increase of fintech in Zimbabwe is not without challenges.  Local customers often encounter system failures, such as bounced transactions, duplicate debits from single transactions and delayed payment transaction confirmations which makes the customer experience far from seamless. 

The Impact on Bringing Further Financial Services

Increased financial services are essential to bridging the gaps in the local market. There is a great need to accommodate Zimbabwe’s large informal sector and to harness remittances from the Zimbabwean community abroad which are valued at approximately US$60 million per month. An increase in the quantity and variety of financial services would result in additional revenue from these areas and also facilitate growth of SMEs. In 2018, Zimbabwe’s imports were valued at US$6.4 billion, making a clear user case for receivables financing. On the export side, the government is on a drive to realign balance of payments by boosting exports mainly in the mining and agricultural sectors (semi-manufactured gold, ferrochrome, nickel ores, flue-cured tobacco), again creating the perfect space for the growth of factoring.

The government has declared that “Zimbabwe is open for business.” Though the road ahead is tough in ensuring that the environment is enabling and meets this lofty idea, government’s push for increased investment and entrepreneurship means a greater demand for financial services, including factoring. Opening up the financial services sector will allow local businesses to maximise on new opportunities. Notably, the Reserve Bank of Zimbabwe has recently introduced empowerment facilities worth approximately US$270 million, aimed at increasing access to finance for marginalised groups such as women and people with disabilities as well as certain key sectors such as horticulture and cross border traders. While this initiative is a step in the right direction, these facilities are currently under-utilised by banks and consumers and more needs to be done to ensure the effective disbursement of funds under the facilities. By availing these facilities to receivables financing, the government will directly target the end businesses and help them grow. Ultimately, factoring is providing a more immersive form of financial inclusion that develops trade and the lives of the community.

Zimbabwe is ready for the further use of Receivables Finance as a tool to promote financial inclusion and flexible funding options for both corporates and SMEs. This funding solution remains adaptable during both economic growth and uncertainty, and a clear case continues to be made for its use. With increased awareness of receivables financing options and the development of favourable guidelines and laws, Zimbabwe will become a great example for the African factoring community. 

This article was first produced by Tariro Muzenda and Taku Chinhengo on 11 September 2018 and published by BCR’s TRF News. It was then updated on 19 August 2019 by Tapiwa Nhari and Taku Chinhengo to take into account the changing economic landscape Zimbabwe.

This publication was supported by Harare Receivables Exchange (Private) Limited.

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