Lack of legal backing hurting SMEs

THE absence of clear regulatory and legal frameworks for factoring has created significant obstacles for small and medium enterprises (SMEs) in Zimbabwe, it has been revealed.

Factoring is a type of finance in which a business sells its accounts receivable (invoices) to a third party to meet its short-term liquidity needs, a fundamental avenue SMEs can use to grow their businesses.

The third party then provides liquidity to the firm expecting the company to pay back using the money they would later receive through the account receivables.

At this week’s two-day Factoring, Receivables and Credit Insurance in Southern Africa conference, local authorities committed to push factoring as a capital financing option for SMEs.

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During the conference, Dhaka Lightfoot and Stone Attorneys senior associate, Chido Pamela Mafongoya said the country’s legislative framework should facilitate access to factoring services to SMEs.

“Our laws in Zimbabwe do not sufficiently cater for factoring which has brought a lot of challenges not only for the SMEs, but also for the banking sector because there are no clear regulatory or legal frameworks that actually stimulate what factoring really is and its requirements,” she said.

“We have had a lot of resistance from banks to actually cater for SMEs which actually want to venture into factoring.”

Mafongoya believes this was a crucial issue because SMEs form a huge part of the economy.

“It is very important that Zimbabwe looks into this, because our economy is made up of a lot of SMEs which are actually the backbone of the economy,” she said.

“Because of the lack of clarity and the lack of actual proper mechanisms, it has been very difficult for them to access the factoring (services).”

Dube, Manikai & Hwacha Legal Practitioners (DMH) managing partner Milanda Manjengwah said laws governing factoring must be reformed and standardised documents be accessible to the public.

This, she explained, would facilitate the provision of much-needed financing to SMEs.

“There is a framework which enables factoring transactions to take place. We do not have an elaborate legal framework which governs the right and obligations of parties, and at the moment, it is pretty much contractual,” Manjengwah said.

“Currently, in terms of our laws, there is a requirement for notification of the assignment to the data. Otherwise, the assignment would not be legally possible. Perhaps we need to look at ways to reform our laws in order to standardise the documentation, make it familiar to the international law and make it accessible to the public.”

DMH associate, lsaac Manikai said factoring was primarily based on common law with bilateral agreements being entered into by parties.

He also stated that the Banking Act and the Movable and Property and Security Interest Act touch on factoring, but do not provide detailed regulations specific to factoring and receivable finance.

“Firstly, factoring is classified as permissible as a banking activity in our Banking Act in Section 7, although the Banking Act in Zimbabwe doesn’t provide explicit and detailed regulations specifically addressing factors and receivable finance,” Manikai said.

“Our Act also defines a finance house as a banking institution whose business consists mainly of higher purchase financing, financial leasing, or factoring. This, therefore, suggests that institutions engaging in factoring must adhere to the same regulatory framework applied to other banking institutions.”

This means that the requirements under the banking Act such as registration, licensing prudential oversight, consumer protection and money laundering, would apply.-newsday