Factoring as a Financing Alternative for African Small and Medium-Sized Enterprises

Factoring as a Financing Alternative for African Small and Medium-Sized Enterprises by Robert Lumbuye Tomusange MDF, Stellenbosch University, 2011 MBA, Makerere University Kampala, 2009 BSc, Makerere University Kampala, 1997 Doctoral Study Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Business Administration Walden University September 2015 Abstract Small and medium-sized enterprises (SMEs) are the main drivers of economic growth and employment. African SMEs are constrained by a lack of access to finance. In line with the pecking order theory, capital-constrained SMEs are expected to seek external finance. However, due to credit rationing, African SMEs have limited success raisingSmall and medium-sized enterprises (SMEs) are the main drivers of economic growth and employment. African SMEs are constrained by a lack of access to finance. In line with the pecking order theory, capital-constrained SMEs are expected to seek external finance. However, due to credit rationing, African SMEs have limited success raising finance. Factoring could enable African SMEs to gain access to finance, as underwriters mainly place the risk on the receivables as opposed to the firm itself. Despite its benefits, factoring has not taken root in sub-Saharan Africa. The purpose of this phenomenological study was to explore the obstacles and prospects to stimulating awareness, availability, acceptance, and utilization of factoring in Africa. Data on the lived experiences of 22 executives providing or promoting factoring in 16 African countries were collected through semistructured interviews; these data were analyzed using the Braun and Clarke thematic approach. Four themes emerged: supply-side conditions, demand-side conditions, business environment conditions, and facilitating institutions and industries. Results suggest high factoring prospects, legal and regulatory impediments, low awareness levels, reluctance of banks to avail factoring, high entry barriers for nonbank factors, a lack of credit insurance, and a lack of an open account trade culture. A framework was recommended, based on these findings, along with actions for factoring development in Africa. Implications for positive social change include increased awareness which may boost factoring. Improved financing options may yield improved African SME competitiveness, which in turn, may result in improved job opportunities, household incomes, quality of life, and more broadly, Africa’s economic growth. Factoring as a Financing Alternative for African Small and Medium-Sized Enterprises by Robert Lumbuye Tomusange MDF, Stellenbosch University, 2011 MBA, Makerere University Kampala, 2009 BSc, Makerere University Kampala, 1997 Doctoral Study Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Business Administration Walden University September 2015 Dedication To my parents, Mr. Erastus Batuma and Mrs. Margaret Nkangi Tomusange, of Kasubi, Nabulagala Road, Kampala, Uganda. To my paternal grandparents, the late Mr. and Mrs. Yakobo and Ekiriya Nakibuka Kulya Tulo, who were laid to rest in Kyabakadde, Mukono District, Uganda. To my maternal grandparents, the late Reverend. and Mrs. Semu and Eseza Nkangi, who were laid to rest in Ntolomwe, Butambala, Mpigi District, Uganda. The foundation you provided me, enables me to surmount any challenge, the DBA included and many more to come. Acknowledgments All that I am and all that I ever hope to be, I owe it all to you, my Lord and Savior, Jesus Christ. Your grace towards me is unfathomable. Marianne, my beautiful wife, thank you for loving me unconditionally and standing by me as I pursued this program. Ezrayah, Eliezer, and Ebenzier, you are wonderful boys and a great source of pride to me. Mrs. Edith Mary Ariko, my mother-in-law, your relentless prayers and concern for this study have kept me going. Dr. Gregory Uche, you have been an awesome Chair and mentor and have spurred me to the finish line. Special thanks to Dr. Wilton Heyliger, the Second Committee Member, Dr. Charlotte Carlstrom, the University Research Reviewer, and Dr. Freda Turner, the Program Director. You all guided me well and enabled me to finalize this study. Special thanks to Mr. Jean-Louis EKRA, President, Dr. Benedict Oramah, President Designate, and Mr. Denys Denya, Executive Vice President, African ExportImport Bank. Thank you for your inspirational leadership of the Bank, for believing in me, and for providing a conducive environment for me to carry out this study. Special thanks to the Afreximbank factoring working group for assisting me in several ways with the study. Finally, I owe this paper to the participants of this study, the executives of factoring companies in different parts of Africa and the different companies promoting factoring in Africa. You generously gave of your time and uninhibitedly shared your lived experiences and perspectives. I dearly thank you all. Onward we move to develop our lovely continent Africa.