Every June FCI publishes its Annual Review giving an overview of progress made by the world's biggest and most important factoring network. The Annual Review also presents FCI's annual figures as well as global factoring statistics. In this extract, we explore the European Regional Updates, presented by Ms Betül Kurtulus, FCI's Regional Director for Central, Eastern and South-Eastern Europe and the Middle East; and Mr Fausto Galmarini, Chair of the EUF.
2021 Figures
CEE, SEE AND THE MIDDLE EAST
Factoring volumes grew in CEE/SEE and the ME region in 2021. It increased from EUR 4.146 billion in 2020 to over EUR 4.848 billion in 2021, representing 18% growth. The growth rate reflects the sustained increase in factoring volumes on the CEE/SEE/ME. Countries that led this growth included the Czech Republic, Poland, Russia, Lithuania, Hungary, Romania, Slovenia, Slovakia, and Greece, with over a 19% increase compared with the previous year. But the five big countries dominating the landscape in CEE/SEE are Poland, Russia, Turkey, Greece and Hungary. Additionally, there are some countries where the increase is very promising compared with the previous year, like Lithuania, Bulgaria, the Czech Republic, Slovakia and Georgia. However, we do not see a notable rise in the Middle East market.
EUROPEAN UNION
Data collated by the EUF show that in 2021, after the year 2020, characterised by the pandemic that led to a substantial reduction of the EU GDP and consequently of the factoring turnover (-5% in the year 2020), factoring and commercial finance volumes in the EU grew overall by 10.9% to reach EUR 2 trillion, thanks to the general economic positive trend. It’s important to underline the impressive recovery of the volumes, which is higher than the turn overreached in 2019 before the pandemic. The European volumes represent 2/3 of the worldwide factoring turnover, demonstrating the importance of factoring in the real European economy. 76% of the total European turnover is domestic business, and the balance is international business. 51% is referred to as non-recourse factoring in relation to the need of the clients to cover the debtors’ risk. Funding of EUR 275 billion supports around 265,000 European clients, helping them deliver growth, employment, and business success. With factoring and commercial finance now representing around 11.1% of EU GDP, this is an increasingly powerful and vital contribution to economic development in Europe. The high level of concentration shown by the EU factoring market remains more or less unchanged, with the top five countries representing 72.5 % of the total EU European market: France (18.2%), United Kingdom (16.4%), Germany (15%), Italy (12.9%), and Spain (10 %).
Legal, Regulatory and Advocacy
CEE, SEE AND THE MIDDLE EAST
FCI continued to support legal and regulatory reforms to enable factoring throughout 2021. We worked closely with EBRD, and IFC World Bank, to support the infrastructure of the countries in the region. With the effect of the pandemic, regulations have been organised to enable remote working conditions in many countries. Governments support remote contract signing and legal infrastructures of e-solutions. This support also brought many digital solutions into the receivable finance industry. In 2021, the United Arab Emirates adopted the new factoring law. We invested in capacity building and advocacy in numerous countries in CEE/SEE and the ME. We supported the creation of sound policy and a suitable regulatory framework for the healthy development of factoring.
EUROPEAN UNION
In 2021, the European Factoring and Commercial Finance industry had many issues to face: the reply to the European Commission’s request for technical advice from the EBA in terms of harmonisation, an update on the payment study, and the observatory regarding the Late payments directive by the Commission, the implementation of Basel III (touching, among other things, credit insurance as an eligible credit risk mitigation tool), new developments concerning sustainability as requested by the EBA, a draft legislative texts regarding new AML/CFT regulations/directive and prepared many responses to several consultations addressing sustainable corporate governance, insolvency laws, VAT rules for financial services and the EBA draft RTS to identify shadow banking entities.
Finally, in relation to the EU Commission’s proposal for a regulation amending Regulation. 575/2013 to finalise the Basel III Reform, the EUF strongly advised recognizing the low-risk profile of purchased receivables not only for the AIRB Approach but also under the SA-CR by way of 1) the possibility to consider purchased receivables as eligible CRM tools under the Standardised Approach, allowing the possibility to opt for the risk weight of the account debtor in the case the agreement provides partial or full recourse to the client, 2) the possibility to apply to the definition of default at the level of a particular facility (invoice) as already provided for retail exposures, amending article 178, 3) the application of lower risk weight for exposures to purchased receivables to unrated corporate within a range of 50/75%.
Promotion and Awareness
CEE, SEE AND THE MIDDLE EAST
We organised various events and workshops with our business partners, promoting international factoring, reverse factoring, and Islamic international factoring. FCI participated in GTR meetings across MENA. During these meetings, we discussed our services with FCI members, potential members, and clients. We organised a workshop on "Factoring as an alternative tool for financing SMEs" jointly with the EBRD in Georgia, Uzbekistan, and Kyrgyzstan. We, along with the IFC World Bank Group and the Ministry of Finance of UAE, also organised an online conference, “Factoring as an alternative tool for financing," to promote awareness of factoring in UAE and to discuss the new factoring Law in UAE. We also organised a joint conference to discuss the opportunities on our latest product," Islamic International Factoring," jointly with ITFC. Furthermore, with EBRD, we organised conferences on digitalisation to support the countries' infrastructure, receivables recording systems, and other digital technologies.
EUROPEAN UNION
Thanks to the impressive results of 2021, the European Factoring and Commercial Finance market represents two-thirds of the world’s total turnover. Seeing our efforts deliver such essential benefits for European business is gratifying. We also work to reinforce these key messages with our regulators and lawmakers and improve how we provide our services for the benefit of all stakeholders. In March 2021, the EUF and FCI tried to organise the EU Factoring and Commercial Finance Summit in Rome. Due to the pandemic and the travel difficulties, the Summit was postponed to April 2022, again in Rome.
Membership Mobilisation
CEE, SEE AND THE MIDDLE EAST
The preceding developments translated into eight new members: two in CEE (Bosnia and Herzegovina and Kosovo) and six in SEE (Turkey, Moldova, Russia, Uzbekistan) joining FCI in 2021. We have new Islamic members in the region. We expect an increase in the turnover of FCI’s product “Islamic International Factoring,” especially in Turkey and the Middle East.
EUROPEAN UNION
Following the policy to enlarge the membership, Norway and Croatia have joined the Federation. Contacts are in place to further enlarge the membership.
Challenges
CEE, SEE AND THE MIDDLE EAST
Russia’s invasion of Ukraine could be a turning point for Europe’s political and economic landscape. As the effect of Omicron started to wane, all economic data predicted an acceleration in the economies in the second quarter of the year until February. However, due to the wide range of sanctions announced so far, higher commodity prices, and disruption to financial markets, the expectations turn to slow down the region’s growth rates in nearly all countries. Russia’s invasion of Ukraine will slow growth and raise inflation across emerging markets in CEE/ SEE. The main impact is the price and supply of commodities produced by Russia/Ukraine. The rise in commodity prices supports the growth of commodity exporters, increasing the export volume of the region countries, but the manufacturing exporters will face difficulties. The combination of higher inflation and weaker growth is likely to keep emerging markets policy normalisation plans, after a covid period, would be postponed.
EUROPEAN UNION
The Covid-19 pandemic has shaken the whole world. The impact on our economy in 2020 and the first quarter of 2021 was more challenging than in 2008 and devastated Europe's economic, social, and maybe political consequences. This was an unprecedented health crisis that affected us all. Generally speaking, all banks need softer regulatory constraints. New European regulations on non-performing loans (Calendar Provisioning) and the definition of default (DoD) were enforced in the Union. In the context of the Covid-19 crisis, they had a modest impact on businesses thanks to the State guarantee on the moratorium and new medium-term loans. However, the EBA estimates an increase in NPLs due to the conclusion of the State support program for businesses. For this reason, the EUF will continue to talk with the Authorities for a different treatment of the past due to factoring, avoiding indicating insolvent businesses that have creditworthiness and good rating.
Outlook 2022
CEE, SEE AND THE MIDDLE EAST
Economic shocks and political instabilities will be the most critical factors affecting trade and trade finance in the upcoming period. Russia’s invasion of Ukraine will slow growth and raise inflation across the emerging markets of CEE/SEE. The main impact channel is the price and supply of commodities produced by Russia/Ukraine. Some regional countries will be affected more, like Turkey, as it recorded its widest trade deficit in December. Therefore, we may not see a decrease in total export volume due to increased prices. However, we expect a regional export volume reduction, mainly due to growth. I expect that there will be an increase in receivable financing transactions in 2022 with the effect of both the new law in the Middle East, the UAE, which is the largest trade centre, and its new members.
EUROPEAN UNION
The EU was affected by the Covid-19 crisis. Therefore the European Factoring and Commercial Finance Summit organised by the EUF and FCI in Rome was postponed to the 4th - 5th of April 2022.
Regarding the perspectives of the factoring business in the year 2022, the EUF has two main issues to solve: the first is the NDOD because the new rule generates many "false positive" errors with the buyer with a good rating or Public Authorities being wrongly classified as default because the EBA considers a trade receivable as a credit obligation/loan. The real solution to the NDOD issue lies in understanding the difference between a trade receivable and a loan and treating the former accordingly: 90 days past due of an invoice is not a real default signal. Historical data and the lower level of risk of factoring than bank lending prove it. The second issue is the consequence on the real economy of the Russia – Ukraine conflict and the related sanctions that could cause a shock due to the lack of raw materials and higher cost of energy. In any case, the factoring industry in Europe is strong and has everything it takes to thrive also in the uncertain scenario we will face in the future.
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