Head of First Factoring Company, Tolegen MULDASHEV:
FACTORING IS EXPENSIVE, BUT VERY EFFECTIVE
Factoring, a form of business financing for manufacturers and suppliers who conduct commercial activity on the terms of payment deferment,а got developed in Kazakhstan in 2009, the post-crisis year, but up to now it remains Сa dark horseТ in the lending market. General Director of First Factoring Company Tolegen MULDASHEV tells Interfax-Kazakhstan how the factoring financing differs fromа bank lending and what prevents factoring services from developing in Kazkahstabn.
- Where did the factoring companies appear first and what promoted the emerging of the factoring service market in Kazakhstan?
- Factoring has been existing as the business financing industry in the developed countries for quite a long time.а It originated in such companies as General Electric, Hewlett Packard, which set up specialist subdivisions to provide financial services to their customers.а The commercial financing industry in Europe accounts for about 10% of GDP. It is well-developed in the UK, France, Italy, Germany and represented by large independent companies and subsidiaries in the banking sector.а Factoring is well-spread in the USA, but has a different form than that in Europe, where so many small companiesа are representing family business.
Unfortunately, factoring had not existed in Kazakhstan until 2009. It is likely to be explained by an aggressive creation of the banking industry in the early two thousands, when companies enjoyed a favorable situation and bank assets showed a swooping growth.а KazakhstanТs banking industry was then growing quickly and there were neither opportunities, nor necessity to develop alternative financing services.а Banks lent money to everyone.а It was cheap and with no collateral.а But the crisis showed that the bank lending is quite vulnerable to the influence of the worldТs economic trends. Especially this has been noted in Europe: if one compares how the banking sector and business financing have proved themselves, it is possible to state that the banking sector shrank, but factoring growth just stopped for a little while.а The crisis also took its toll on Kazakhstan:а banks simply suspended credit activities leaving KazakhstanТs business without financing.а That was especially true for small and medium-sized enterprises. If the government had not provided timely support, the crisis in our country might have lingered on for long. We set up our own factoring business in 2009, during the first post-crisis year.а Until that factoring was trued by several banks in Kazakhstan as a product,а but was not widely used.а Up to now, banks treat factoring as a loan without collateral.а Some leasing companies also offered similar services, but we have been the first specialist company who has started developing factoring in the Kazakhstani market.а Now six small factoring companies are operating in Kazakhstan.
- But do some banks still have factoring as part of their product lines?
- Yes, a number of banks,а ATFBank, Bank CenterCredit, Alfabank, have had this product. By the way,а Alfabank is most active in this sector as compared with the others.а It has Russian origin and factoring in Russia began actively developing in the 2000s.а Now this industry in Russia is already quite developed, its volume accounts for approximately 1.5% of its GDP.
- Do you think Kazakh entrepreneurs still prefer bank loans?
- The factoring product is new and not yet widely-accepted in the local market, however, bank loans are perfectly known to our businessmen.аа They compare bank interest rates with factoring commissions choosing less expensive, but less accessible bank product.а Factoring is an expensive way of financing, but very effective.
- Could you tell us how much more expensive the factoring financing is over a bank loan?
- Factoring cost nearly twice as much,а but in absolute terms the commissions of factoring companiesа are not large.а There are two types of commissions:а for the use of the money provided and for receivables management solutions, which is on other words,а represent factoring services. Totally,а these commissions do not exceed 2.5-3% of the funds provided.
- Except for that, what differences do banks and specialist companies have dealing with the factoring tools?
- The main difference between the factoring companiesТ services and banking approach is the risk management principle.а Banks assess the borrowerТs risks, while in factoring the product buyerТs risk is assessed, so that the product buyer is, in fact, a borrower.
Generally, banks are not very active in this field of financing, and I suppose, will not be any time soon.а One of the reasons of the bank's reluctance to use factoring is its absence from Kazakhstan National BankТsа assets classification.а It is not recognizedа as a separate asset, so the banks are forced to classify it as a loan without collateral and create reserves, while in fact dealing with factoring financing.
- What is the average financing value provided by a factoring company and what is the annual turnover of such business in Kazakhstan?
- The value for funding in our company does not exceed 300 million tenge,а we try to diversify funds by 10-30 million tenge among clients.а There are clients receiving over 50 million tenge,а but the portfolio must be diversified.аа It is always a risk to allocate large resources just to a single client.
At the moment we service up to 15 customers.а In 9 months 2012 we serviced 22 companies and our factoring turnover amounted to 2.3 billion tenge. This figure is more than twice as much as last year.
- Your customers are mainly the representatives of small and medium-sized enterprises. Can you give a typical profile of companies using factoring services?
- Factoring means short-term financing for a period of two-three months and so such tool ideally fits the companies dealing with producing and selling FMCG.
The second typical client is a company providing outsourcing services to large companies,а e.g. to oil providers in western Kazakhstan.а This is also convenient for us to deal with large and reliable borrowers, but dealing with such customers has the only problems, when they refuse to pledge receivables.аа Then we use the closed factoring practice without notifying a debtor.
- Are you planning to expand your efforts to promote factoring and attract new customers?
- Kazakhstan has a big potential to develop the factoring market and in fact has no competition.а However, we have no need in much publicity: we have limited financing and, therefore, limited opportunities to finance customers.а For business development we need an investor, preferably a direct investment fund.а We want to raise from $10 to $15 in equity to expand our business and increase the company value.а When we hit the target, it will be possible to seek a strategic investor, most likely a Russian-based company or bank.а Russian players have already got the idea that factoring is a profitable business with lower risks than in the bank-lending sector.
- Did you look at the stock exchange as a source of funding?
- After the crisis hit Kazakhstan and brought a number of corporate issuers to default, Kazakhstan's National Bank toughened the requirements.а Thus, the leverage size dropped to Index 2 that is the borrowings must now be twice as much as the equity.а But, factoring companies do not haven enoughа equity for the amount of borrowing required.а So, for the time being it is difficult to do so. Though, as the equity increases with the help of an investor, we will review options of floating, bond issuing etc.
- Russia's factoring industry was enjoyingа government support. Is suchа scenario possible in Kazakhstan?
- Yes, a state support program for the factoring development wasа approved in 2006. Then factoring was defined as a tool required for developmentа of small and medium-sized enterprises (SME) .а Support is provided through state funding program implemented by OJSC Russian Bank for Small and Medium Enterprises Support (Vnesheconombank Group).
We once contacted JSC DAMU Entrepreneurship Development Fund for support, they seemedа to understand that factoring was a very useful tool for support, but they could not find a niche for us.а Everything came down to the fact that factoring companies were too small and from DAMUТs perspective did not look solvent.а The bank guarantee was required and for that collateral was needed.а In short, we failed to embark on the state program.
The factoring market in Kazakhstan is still very small and the government simply fails to notice it. We have discussed the possibility of setting up an association and will keep our efforts next year. I hope this would make an impact on the sector's development and draw theа governmentТs attention to yet another tool of financing the economy.
- Thanks for the interview!
December, 2012
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