**Factoring From A Global Perspective**

States. Countries with the weakest information infrastructures are likely to have neither public nor private credit bureaus (as in Oman). This suggests that in these countries factors would have to rely substantially on their own databases for payment information on obligors’ accounts.

The quality of accounting information is another aspect of the information infrastructure. This dimension is important because the strength of accounting standards determines the extent to which lenders can accurately assess borrowers’ quality and condition. It is also important because it substantially determines the efficacy of the use of covenants. Consequently, a country’s ability to develop financial statement lending will likely be highly dependent on the quality of accounting information. The first column of Table 2A presents data on the strength of accounting standards from a study of 49 countries covering a variety of factors that affect financing (La Porta and others 1998). The index used to assess accounting standards was constructed in 1991 by the Center for International Financial Analysis and Research. It measures the comprehensiveness of financial statements in seven areas: general information, income statements, balance sheets, flow of funds statements, accounting standards, stock data, and special items.

Table 2A shows wide variation in the strength of accounting standards. In general, more developed economies have stronger standards. But even among these countries there are significant differences. For example, Sweden has a score of 83, the United Kingdom 78 and Finland 77, while Austria is at 54 and Portugal 36. Some less developed countries score quite low, such as Argentina 45 and Chile 52. Financial statement lending is quite problematic in countries with poor accounting standards. These countries might be able to offset this weakness if they have strong credit bureaus and strong banking systems that can make relationship loans. Alternatively, factoring may be a viable alternative because it does not depend on accounting information. As noted, Portugal has one of the world’s most active factoring markets (relative to GDP). Egypt, on the other hand, does not even appear in the Factors Chain International database—indicating that it may not have an economically significant level of factoring.

# **Legal and judicial environment**

A country’s legal and judicial environment may play a critical role in determining the mix of available financing products and the importance of factoring in that mix. A key issue for factoring is whether a financial system’s commercial law views factoring as a sale and purchase transaction rather than as a loan. If it does, creditor rights and loan contract enforcement are less important for factoring because factors are not creditors. That is, if a firm went bankrupt, its factored receivables would not be part of its bankruptcy estate because they would be the property of the factor.

Still, creditor rights and contract enforcement are not irrelevant to factoring, for at least two reasons. First, they define the environment in which the factor engages in collection activities. This will affect underwriting standards because factors must take into account the anticipated cost and efficiency of their collection activities when they make credit decisions about which invoices to purchase. Second, under recourse factoring the factor has a contingent claim against the borrowing firm if there is a deficiency in the collection of a receivable. This contingent claim can be secured or unsecured depending on whether the factor filed a security interest in some or all of the firm’s assets (as a secondary source of repayment).

The last four columns of Table 2B show four measures that proxy for the rule of law around the world: the cost of contract enforcement, the rule of law, corruption, and political stability (Kaufmann, Kraay, and Mastruzzi 2003). Most developing countries suffer from weak enforcement. Although a weak rule of law likely affects all lending products, it may affect factoring less because factoring represents a property sale and purchase (as opposed to a secured loan). This exchange of property

**17**

**THE WORLD BANK**