Subcomponent 2.3.: Factoring Strategic Assessment

Objective of Component 2 and subcomponent 2.3.

The objective of the Component 2 is to establish a coherent framework to facilitate linkages and the integration of SMEs in existing and new competitive sectors.

Component 2 of the project SME Linkages in Competitive Sectors includes subcomponent 2.3. – Factoring Strategic Assessment.

The purpose and objectives of the Subcomponent 2.3.

  1. The Objective of the subcomponent 2.3 conduct a comprehensive assessment for the development of factoring and reverse-factoring in Kazakhstan.
  2. SMEs in the various local supply chains in Kazakhstan face challenges emanating from a lack of capital and collateral to receive loans, delays in receiving payments, especially from larger companies, lack of certainty of trade, and a lack of credit from suppliers.
  3. The Project will include a detailed strategic assessment, in which the design of an invoice-based SME financing platform, as well as a review of the relevant regulations in Kazakhstan will be conducted.
  4. The assessment will review the most appropriate factoring platform design given the local context, the overall supply chain finance market in Kazakhstan, the financial institutions best positioned to be engaged in the program, the governance structure of the platform and investment vehicle, the sectors with the highest promise, the location of the platform, and the training and capacity building requirements of related stakeholders.
  5. The design of the platform created within the framework of the Project will embody the best methods used in the factoring scheme of financing.
  6. The planned technical assistance draws on a scheme developed by the World Bank to help solve a similar challenge in Peru. The scheme, known as “factoring” (discounting of accounts receivable) uses a financial structure and a technology platform that considers invoices as collateral and, therefore, enables:
    • purchasing accounts receivable from the large companies that supply many SMEs,
    • financing invoices issued by the large company’s SME suppliers,
    • financing invoices issued between SMEs by financial institutions in an effective manner.
  7. The scheme frees up working capital, thus enhancing the certainty of trade and increasing the credit that the large suppliers can extend to SMEs, helping to alleviate the access to finance (especially, the access to working capital) problem faced by SMEs. The scheme also benefits the suppliers and other stakeholders, such as the financial system, and can contribute financial inclusion of unbanked SMEs.
  8. The selected expert team would develop a feasibility study covering all documentation needs, outlining the operational architecture and roadmap to implement a pilot transaction first, and the factoring platform itself thereafter.
  9. The feasibility study will review, inter alia:
  10. - the size of the market in Kazakhstan;

    - which financial institutions are interested in participating;

    - the governance structure of the platform and investment vehicle;

    - the sectors with the highest probability of success;

    - the location of the platform;

    - taxes;

    - the regulatory and legal feasibility;

    - the capacity of institutions involved in managing the platform;

    - the training and capacity building requirements for both operation and use of the system;

    - the timelines for deployment of the program based on a detailed project plan;

    - the timelines for deployment of the program based on a detailed project plan.

  11. Thanks to the platform which will be created/procured and installed within the framework of the Project, the following problems are solved:
    • By registering invoices with the platform, SME obtain a formal receipt, and the buyer may not deny the receipt of such invoice and has the only channel for disputes – the platform. As a consequence, the buyer may easily collect information about the debtor. Suppliers will use information on the debtor’s payment and dispute behavior. This will enhance the SME certainty of trade;
    • By transforming an invoice into registered collateral, ensuring its easy verification, providing the knowledge of whether the invoice has been paid, and allowing only one financial institution to benefit from the collateral enhance the value of invoices as collateral. Hence, it becomes easy to SMEs to convert an invoice into cash, thus reducing the seller’s problems resulting from delays in payments from buyers;
    • Ensuring the SME certainty of trade and access to working capital financing will enhance the creditworthiness of SMEs and give more confidence in their purchases and sales. The WB and GRK support to companies that extend credit to SMEs will be a catalyst;
    • The platform collects reliable information on SME payment credibility under the supply and manufacturing of products. By enhancing the creditworthiness, SME gain expanded access to financing, such as loans and leasing;
    • As trade flows do not pass through the Participating Institutions, non-banking financing institutions and banks with a lower credit qualification (having the relevant skills in financing invoices) may equally operate in the platform;
    • The GRK is able to provide targeted financial supportdirectly to debtors in the value chain.
  12. In order to select a consulting firm/consultants for the assessment of the optimal factoring model for Kazakhstan, as well as for its creation/procurement and installation, the PIU will elaborate and agree the Terms of Reference.
  13. Given the complexity of this assignment, a consultant may additionally be engaged in developing of the Terms of reference.
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