The Future of Export Finance in Africa Depends on Factoring Laws That Support Innovation and Cash Flow
Unlock how modern factoring laws can boost cash flow for African exporters and empower SMEs through receivables financing.
Across Africa, exporters face challenges including delayed payments and limited access to finance. However, a solution is hiding in plain sight: factoring. This trade financial tool turns unpaid invoices into instant cash, fueling business growth and trade. In this newsletter, the UNIDROIT Model Law on Factoring are discussed. This Model Law can unlock factoring’s full potential and boost Africa’s export economy from the ground up.
Factoring and Receivables Financing: A Legal Tool for African Exporters
Introduction
African exporters, particularly small and medium-sized enterprises (SMEs), face persistent challenges in accessing affordable finance.
Even when they secure lucrative export contracts, lengthy payment terms often strain their cash flow, limiting their ability to fulfil new orders or expand operations.
Factoring and receivables financing offer a promising solution: by converting invoices into immediate working capital, these tools can bridge the financing gap for exporters.
However, in much of Africa, outdated or unclear laws have hindered the growth of factoring.
This newsletter discusses why modernising legal frameworks for factoring and receivables financing is crucial for African nations, drawing on global best practices, notably the new UNIDROIT Model Law on Factoring, and highlighting recent developments and recommendations for policymakers.
The Financing Challenge for African Exporters
Access to finance remains a major hurdle for African businesses engaged in trade. Traditional bank lending is often out of reach for SMEs due to stringent collateral requirements and perceived risk. In many African countries, banks largely serve only large corporations or government entities, leaving smaller firms underserved.
For example, in South Africa, only about 9% of SMEs are reported to have access to bank or private sector financing.
Across the continent, SMEs commonly face cash flow problems because they must extend credit to larger buyers or international customers, sometimes waiting 30, 60, or even 90 days for payment.
During this period, exporters still need funds to produce goods, pay suppliers and employees, and ship orders – a classic working capital crunch.
The African Development Bank and other institutions have identified a multi-billion dollar trade finance gap in Africa, disproportionately affecting smaller exporters.
Without sufficient financing, many SMEs cannot fulfil orders or must turn away business, undermining export growth potential.
This situation is exacerbated by the de facto requirement of upfront payment or confirmed letters of credit in higher-risk markets, instruments that SMEs often struggle to obtain.
In short, innovative financing solutions are necessary to enable African exporters to compete and thrive on the global stage.
Factoring and receivables financing have emerged globally as effective tools to address this gap by turning a business’s unpaid invoices into immediate cash.
Understanding Factoring and Receivables Financing
Factoring is a financial transaction where a business (the seller or transferor) sells its accounts receivable (invoices) to a specialised finance provider (the factor or transferee) at a discount in exchange for prompt cash payment.
The factor then assumes the responsibility of collecting the invoice from the buyer (the debtor). In a typical factoring arrangement, the seller might receive, say, 80% of the invoice value immediately, and the remainder (minus a fee) once the buyer pays the factor.
This provides the seller with working capital to continue operations.
At the same time, the factor earns a fee for the service and takes on the credit risk of the buyer (especially in non-recourse factoring, where the factor bears the risk of non-payment).
Receivables financing is a broader term encompassing any financing secured by or based on receivables.
It includes factoring (the outright sale of receivables) as well as using receivables as collateral for loans or advances (sometimes referred to as invoice discounting or the assignment of receivables by way of security).
In all cases, the value of a business’s unpaid invoices – essentially its credit extended to buyers – is unlocked to provide immediate liquidity.
Key features of factoring and receivables financing include:
Improved Cash Flow: Businesses gain faster access to cash that is otherwise tied up in credit terms, allowing them to pay suppliers, meet payroll, and take on new orders without waiting for customers to pay. This can be life-saving for SMEs that lack other financing options.
Outsourced Collections and Risk Management: The factor typically takes over the collection process and may also assume the risk of buyer non-payment (if the arrangement is non-recourse factoring). This spares SMEs the effort of debt collection and provides some protection against bad debts. However, factors will charge for this service and carefully assess the creditworthiness of the buyers.
Flexibility and Growth: Unlike a fixed-term loan, factoring grows with the business; the more sales and invoices the company generates, the more financing becomes available. This makes factoring a highly flexible form of working capital finance, particularly suited for rapidly growing exporters who may quickly reach limits on traditional bank credit lines.
Not a Loan: Importantly, factoring is not a loan and does not necessarily create debt on the SME’s balance sheet. It is the sale of an asset (the receivable). This distinction means businesses that cannot borrow due to a lack of collateral or credit history might still be able to factor invoices, since the factor is more concerned with the credit quality of the buyer obligated on the invoice than that of the seller.
The UNIDROIT Model Law on Factoring: A Global Benchmark
Recognising the need for consistent and modern rules, the International Institute for the Unification of Private Law (UNIDROIT) developed and adopted the Model Law on Factoring (MLF) in May 2023.
This model law provides a complete, self-standing legal regime to facilitate factoring transactions.
It was crafted by international experts to reflect global best practices and to be largely consistent with other international standards, such as the United Nations Convention on the Assignment of Receivables in International Trade (2001) and the UNCITRAL Model Law on Secured Transactions (2016).
In essence, the UNIDROIT MLF distils the lessons from various jurisdictions into a template that countries can enact (with adjustments as needed) to immediately establish a sound legal framework for factoring and receivables financing.
Importantly, the UNIDROIT Model Law on Factoring is designed to assist both types of countries: those that have not yet implemented a comprehensive secured transactions law (it can stand alone as the primary law governing receivables financing) and those that have modern secured transactions regimes (it can complement and further strengthen receivables-specific aspects).
For African states, this flexibility is valuable.
Some countries may choose to enact a dedicated factoring law. In contrast, others might integrate these principles into broader commercial or secured lending laws; either approach can work, as long as the key mechanisms are in place.
What does the UNIDROIT Model Law on Factoring actually provide?
Under Art. 2(j) MLF, it covers the assignment (transfer) of receivables, including both the outright sale of receivables (traditional factoring) and assignments for security (pledging receivables as collateral).
The MLF sets out clear definitions, scope, and the rights and obligations of the parties involved.
Factoring in Africa: Current Landscape and Recent Reforms
Despite the enormous potential of factoring to support African trade, the legal environment in many African countries has until recently been inhospitable to factoring.
Historically, only a handful of countries had explicit provisions for factoring or invoice discounting.
South Africa, which arguably has the continent’s largest factoring market, has operated mainly under general contract law and secured transactions principles. Factoring is well-established commercially in South Africa, even without a specific statute, thanks in part to a sophisticated legal system that recognises the cession (assignment) of debts.
Egypt, another major market, adopted a more regulatory approach, introducing formal factoring regulations over a decade ago.
These regulations provided definitions and licensing requirements for factoring companies, which the Financial Regulatory Authority oversees.
In Morocco, factoring is acknowledged and practised (with a definition of factoring included in the banking law). Still, the country has relied on general civil law rules regarding the assignment of claims rather than a dedicated factoring law.
These examples show that where legal frameworks exist or at least permit it, factoring can gain a foothold. However, in much of Africa, there was no legal clarity until recently.
Encouragingly, the past few years have seen a wave of initiatives aimed at reforming factoring and receivables finance laws in Africa.
A notable development emerged from West Africa: the West African Economic and Monetary Union (WAEMU/UEMOA) adopted a uniform law on factoring. In December 2020, the Central Bank of West African States (BCEAO) announced that a uniform factoring law for the WAEMU region had been adopted.
The Afreximbank Model Law significantly influenced the development of this law on Factoring, which was enacted in 2016.
By mid-2023, five WAEMU member states, Burkina Faso, Côte d’Ivoire, Mali, Niger, and Togo, had domesticated and enacted this new factoring legislation.
The OHADA organisation (which harmonises business laws for 17 African countries, including all eight WAEMU states) had identified the lack of a uniform definition of factoring as a gap and is supportive of such reforms.
The implementation of the WAEMU law in those five countries is seen as a pilot wave; other countries in the region (such as Senegal, Benin, and Guinea-Bissau) are expected to follow suit, encouraged by the success of their neighbours.
The new West African laws provide a facilitative legal environment for factoring, aligning with international standards.
For example, the law in Mali (enacted in 2023) explicitly nullifies contractual bans on assigning receivables and clarifies the rights of factors, debtors, and sellers, closely mirroring the UNIDROIT/Afreximbank model provisions.
According to the African Export-Import Bank (Afreximbank), which supported these reforms, Mali’s law (like those of Togo, Niger, and Burkina Faso before it) creates a robust legal regime that will “provide credibility and business assurance to investors” and significantly improve access to finance for previously excluded SMEs.
The expectation is that, with proper legal foundations, factoring volumes in these countries will grow, helping to increase Africa’s currently small share of global factoring beyond the ~1% level.
Indeed, policymakers in the WAEMU region view factoring as a strategic tool for SME development.
The Secretary-General of the BCEAO noted that promoting factoring is a priority to unlock the potential of MSMEs, which form approximately 95% of businesses in the region.
In Nigeria, West Africa’s largest economy, efforts are also underway to establish a clear framework for factoring.
As of late 2024, Nigeria’s Senate was considering the Factoring Assignments and Receivables Financing Bill 2023, which aims to establish a legal framework for factoring transactions.
The bill’s sponsor noted that, despite the increasing prominence of factoring globally and in Africa, Nigeria had yet to tap into this mechanism.
The proposed law aims to formalise factoring, provide certainty and protection for creditors and debtors, and integrate Nigeria into the global factoring market (estimated at over €2.6 trillion).
Notably, even before having a dedicated law, Nigeria’s regulators showed openness to factoring: the Central Bank of Nigeria already recognises debt factoring as a permissible activity for finance companies, and introduced factoring and forfaiting as instruments to boost export trade finance.
The Nigerian Export Promotion Council has also supported factoring to help exporters get paid faster.
The new bill is expected to solidify these initiatives by codifying the rights of parties and establishing a regulatory framework for these factors.
Once enacted, it should promote a more active factoring industry in Nigeria, which would be transformative given the size of Nigeria’s SME sector.
Elsewhere in Africa, similar trends are visible.
In East Africa, countries have modernised their secured transactions laws to encompass receivables.
Kenya, for example, implemented the Movable Property Security Rights Act, 2017, which allows businesses to use receivables (among other movable assets) as collateral, thereby laying the groundwork for receivables financing transactions.
While Kenya does not yet have a standalone factoring law, its legal recognition of assignments of receivables and establishment of a collateral registry are significant steps that make factoring easier.
Rwanda has taken strides in digitalising invoicing and has frameworks for secured lending, which indirectly facilitate factoring as well.
Uganda and others are in earlier stages; their laws recognise assignments in principle, but gaps in enforcement and lack of explicit factoring provisions mean more reform is needed.
Notably, the East African Community (EAC) and the AfCFTA context are pushing for more harmonised rules to ease cross-border trade, and factoring laws could become part of that convergence.
What is particularly encouraging is the continent-wide recognition of the issue.
Pan-African institutions have been driving forces behind these reforms.
The fact that UNIDROIT included African organisations (like Afreximbank and OHADA) in the development of the Model Law on Factoring ensures that African perspectives and needs are reflected.
As a result, African policymakers have access not only to international expertise but also to tailored best practice guidance on how to implement these laws in practice.
Why Legal Reform is Urgent: Challenges Under Current Laws
Without appropriate legal frameworks, factoring and receivables financing face numerous challenges.
Lawmakers and policymakers in Africa need to understand what’s at stake if reforms are delayed.
Here are some of the key problems observed under outdated or non-existent factoring laws:
Uncertainty and Lack of Protection
In the absence of clear legislation, a factor’s rights may be on shaky ground. For example, without a statute, it may be unclear whether a notification to a debtor is sufficient to compel the debtor to pay the factor, or whether the debtor could legally pay the original seller instead.
If a dispute arises, courts may have to rely on general contract principles that were never intended for modern factoring transactions.
This legal uncertainty deters financial institutions from offering factoring, as they cannot confidently predict outcomes in case of default or dispute.
Anti-Assignment Clauses
Many supply contracts in industries such as agriculture, construction, and manufacturing include clauses prohibiting the supplier from assigning receivables without consent.
In countries without laws overriding these clauses, such provisions effectively block SMEs from accessing factoring.
A small business might have a large contract with a big buyer but find itself unable to factor the invoice because the contract says “no assignment.”
This leaves the SME with illiquid receivables and no recourse.
Modern factoring laws (like the UNIDROIT MLF) remove this barrier by making such anti-assignment clauses ineffective.
Until this principle is adopted, entire categories of receivables remain unusable for financing purposes.
Priority Conflicts and Fraud Risks
In legal regimes that haven’t been updated, if a company assigns the same receivable to two different parties (or pledges it to a bank and later sells it to a factor), the rules for whose claim prevails might be uncertain or unfair.
Similarly, without a public registry or notice requirement, a dishonest business could attempt to factor the same invoice with multiple factors. This fraud is complex to detect without a common registration system.
Cases of double-financing and fraud are more likely to occur in environments with weak controls, thereby undermining trust in the market.
A sound factoring law addresses this by establishing a clear priority framework (e.g. first-to-register) and encouraging transparency.
The absence of such mechanisms not only risks losses for financiers but also increases the cost of factoring (factor’s price in risk) and deters reputable investors.
Insolvency Hazards
Under older laws, if a seller goes bankrupt, there is a risk that the sale of receivables may be challenged or the factor’s rights ignored, especially if the transaction was not structured as a true sale or if there were no explicit protections in place.
This unpredictability means that factors could find themselves entangled in lengthy insolvency proceedings or, worse, be required to turn over collections to the bankruptcy estate.
That risk reduces the attractiveness of factoring unless laws explicitly shield duly perfected assignments from avoidance in insolvency.
Countries lacking these assurances see less factoring activity, as financiers fear that a client’s insolvency will leave them empty-handed.
Regulatory and Licensing Issues
In some jurisdictions, even if the law doesn’t forbid factoring, it might not be clear who can engage in it.
Is factoring considered a banking activity that requires a bank license?
Or is it a non-bank financial service subject to separate licensing?
Without clarity, potential providers of factoring (including fintech companies or international factoring firms) may hesitate to enter the market.
Clear laws can define factoring as a recognised financial service and set appropriate licensing or registration requirements for companies that want to offer it, ensuring oversight while encouraging new entrants.
Market Confidence and International Participation
From a macro perspective, when international investors or factoring networks assess countries without factoring laws, they often perceive a high-risk environment.
As one factoring company executive observed, the African market is viewed as “overly risky” by many international providers, partly because limited legal infrastructure makes due diligence difficult and enforcement doubtful.
This perception means fewer global factoring firms partner with local institutions or provide cross-border factoring in Africa.
It also means African exporters have fewer options to factor export receivables with foreign factors.
All of this results in higher financing costs or lost opportunities for African businesses. Strengthening the legal framework is essential to change these perceptions and signal that factoring is safe and supported by law.
In summary, outdated laws have effectively locked out African SMEs from leveraging one of the most powerful financing tools available. The status quo forces businesses to self-finance their credit sales or rely on expensive overdrafts and loans (if available), which in turn limit their growth and competitiveness..
Recommendations for African Lawmakers and Policymakers
Given the clear advantages of factoring and the guidance available from international standards, African lawmakers should act decisively to reform and harmonise their laws on receivables financing.
Below are key recommendations for policy action:
Adopt Modern Factoring Legislation
Countries should consider enacting a dedicated Factoring Act or amending existing commercial laws to incorporate the provisions of the UNIDROIT Model Law on Factoring (2023).
Using the UNIDROIT MLF as a template ensures alignment with global best practices.
The model law’s language can be adapted to the national context (including legal terminology and civil versus common law formats).
Still, the core principles, such as freedom of assignment, debtor protection, and notice filing for priority, should be preserved.
For countries in regions with harmonized laws, a regional approach can be taken (similar to WAEMU’s uniform law) so that businesses enjoy consistent rules across markets.
1. Why Modern Legislation Is Necessary
Factoring transactions remain legally complex in many African jurisdictions due to outdated rules, unclear jurisprudence on the assignment of debts, and the absence of creditor protection mechanisms.
These legal uncertainties erode the confidence of both domestic and international financiers, making it difficult for businesses to factor their receivables, even when demand exists.
Key legal obstacles include:
The enforcement of anti-assignment clauses that prohibit receivables from being transferred without the debtor’s consent.
A lack of rules for determining priority between competing claims to the same receivable.
Ambiguity over the effectiveness of assignments against third parties, especially in insolvency situations.
Limited or no public registries to record or notify interests in receivables.
Inadequate debtor protection rules deter broad-based factoring participation.
Without modern legislative solutions, these challenges limit the development of factoring markets and stifle financial innovation.
2. The Case for Using the UNIDROIT Model Law on Factoring (2023)
The MLF offers a comprehensive, modular, and flexible legal framework that can be easily implemented by jurisdictions at various stages of legal development.
It accommodates both outright assignments of receivables (traditional factoring) and assignments for security (collateral-based lending), offering legal clarity in diverse financing contexts.
Its provisions reflect international best practices, drawing on UNCITRAL’s framework, the United Nations Convention on the Assignment of Receivables in International Trade (2001), and national reforms from both common law and civil law systems.
Crucially, the UNIDROIT MLF is designed to:
Operate as a stand-alone law where no general secured transactions regime exists.
Supplement existing legal frameworks, including modern movable security laws or commercial codes.
Provide predictability and consistency to market actors, reducing legal risk and transaction costs.
African countries that adopt the UNIDROIT model, either in whole or in part, stand to gain a ready-made, internationally recognised legal framework with minimal drafting burden.
3. Customisation and Legal Adaptation
The MLF is not a one-size-fits-all instrument.
It is designed to be adapted to national contexts, whether a country follows civil law, common law, Islamic legal traditions, or a mixed legal system.
Legislators can translate the substance of the model law into their jurisdiction’s legal terminology and statutory format, provided that its core principles are retained.
These core principles include:
Freedom of assignment: Contracts cannot prohibit or restrict the assignment of receivables for financing.
Effectiveness against third parties: Assignments must be practical against other creditors, purchasers, and insolvency administrators, typically through notice or registration.
Debtor protections: Debtors are not placed in a worse position due to the assignment and retention rights, such as prior interests and the right to pay the correct party after receiving proper notice.
Registry and priority rules: Establishment of a notice-based registry (or integration with an existing movable collateral registry) ensures transparency and priority certainty.
Respect for party autonomy: Most terms of a factoring agreement can be freely negotiated, fostering innovation and competition.
Countries may also wish to tailor the law’s scope, for example, by excluding certain public receivables, consumer transactions, or sensitive sectors from its ambit.
4. Regional Harmonization and Legal Integration
For countries belonging to regional economic communities (RECs) such as WAEMU, OHADA, EAC, or SADC, factoring law reform can be pursued through regional harmonisation mechanisms using the MLF as a toolkit.
This ensures consistency across borders and facilitates cross-border trade and factoring.
The OHADA legal system can develop a Uniform Act on Factoring, applicable across all 17 member states. The existing Uniform Act on Secured Transactions (2010) can be complemented by a dedicated act covering receivables finance.
The EAC Secretariat could coordinate legal convergence on factoring laws to promote intra-regional trade under the AfCFTA.
SADC and COMESA could create factoring guidelines or model legislation as part of broader financial integration strategies.
Where regional harmonisation is not yet feasible, individual countries should nonetheless ensure that their national laws do not contradict the principles emerging from regional or international frameworks.
5. Opportunities for Legal Reform and Drafting Support
Policymakers are not starting from scratch.
In addition to the UNIDROIT MLF, African governments can draw from:
The Afreximbank Model Law on Factoring (2016), tailored to African legal systems and used as the basis for the WAEMU uniform law.
The UNCITRAL Model Law on Secured Transactions (2016), which includes rules on assignment of receivables.
The OHADA Uniform Act on Secured Transactions (2010), which recognizes assignments of receivables but does not yet provide a complete factoring regime.
Laws enacted in countries such as South Africa, Egypt, and Kenya can serve as national legislative models or policy benchmarks.
To accelerate legal reform, countries can:
Establish technical drafting committees, comprising legal experts, finance sector representatives, and trade associations.
Request technical assistance from UNIDROIT and Afreximbank to support several African nations in drafting and implementing factoring laws.
Organise stakeholder consultations to ensure buy-in from lenders, SMEs, chambers of commerce, and judiciary representatives.
Legal reform is also supported by global partners, including the International Finance Corporation (IFC), the World Bank Group, and Factors Chain International (FCI).
6. Avoiding Pitfalls in Implementation
When undertaking legislative reform, lawmakers must avoid common pitfalls, including:
Over-regulation of factoring companies may discourage market entry. A balanced regulatory framework, perhaps under existing non-bank finance regulations, is often sufficient.
Ambiguous drafting, especially on issues of priority and registration. Clarity in statutory language is essential to prevent disputes.
Duplication with secured transactions laws, unless harmonised. Factoring and security assignment rules should be integrated or clearly cross-referenced.
Onerous fiscal burdens, such as stamp duties or registration fees on factoring agreements. These must be minimised to promote uptake, especially among SMEs.
Inadequate debtor education. Legal reform must be accompanied by public awareness so that debtors understand their obligations under an assignment.
Conclusion and Call to Action
For African countries seeking to enable inclusive trade finance and boost SME participation in global markets, adopting modern factoring legislation is a crucial step.
The UNIDROIT Model Law on Factoring offers a pragmatic, flexible, and globally validated pathway to reform. The MLF provides African lawmakers with a ready-made blueprint to leapfrog into best practices.
It encapsulates principles that ensure fairness, clarity, and confidence, all of which are essential to attract factors, investors, and participants to the market.
By reforming factoring and receivables finance laws in line with the MLF (and the related global standards), African countries can create a virtuous cycle: more legal certainty leads to increased factoring activity, which in turn leads to greater SME growth and trade, ultimately reinforcing economic development and job creation.
With support available from regional institutions, international organisations, and proven legislative models, African lawmakers can deliver transformative legal reform that unlocks new sources of capital, stimulates economic growth, and empowers a new generation of African exporters.
Factoring and receivables financing, supported by the proper legal framework, can indeed become a catalyst for Africa’s trade and development in the years ahead.
I often wonder how factoring can be made more accessible to informal sector businesses, which often lack formal documentation or accounting systems.