**The Role Of Factoring In the New EU Member States**

standards for SMEs—most of which still prepare their financial statements using tax reporting standards set by ministries of finance, rather than general purpose financial reporting standards designed to clarify pertinent business and credit information—to International Financial Reporting Standards (or a simplified version of them) would also be helpful. Estonia began requiring SMEs to use these standards several years ago, and the successful development of its factoring industry may at least in part be due to the high-quality financial statement information available for SMEs.

Third, while there are no strong arguments for government regulation and supervision of the factoring industry—given that factoring companies do not take deposits—some formalization of the activities of factoring companies would likely benefit the industry’s development.<sup>27</sup> For example, governments could:

- Define or refer to factoring in civil and commercial codes and other financial sector legislation. Doing so would recognize factoring companies as legitimate financial service providers, on par with banks and leasing companies, and make factoring companies more visible in financial circles.

- Allow factoring companies to make tax deductible provisions for bad receivables, to level the playing field between factoring provided by bank subsidiaries or independent factors and bank credit and factoring provided directly by banks.

# **Box 4. The Factoring Industry in Poland**

The factoring market in Poland is expanding rapidly from a low base. In 2003, volume grew by 20% and the value of purchased receivables reached 12.2 billion Polish Zloty (approximately $3.4 billion) (these data reflect the business of the 9 leading domestic factoring companies and does not include other “factoring-like” products offered by some 34 banks in Poland (e.g., invoice discounting). The 9 key players on the market are:

- Pekao Faktoring—owned 100% by Pekao SA Bank (Uni Credito Italiano Group);

- Raiffeisen Faktoring—owned 100% by Raiffeisen Bank;

- Forin—company was liquidated in February 2004 and merged with Millenium Bank;

- Handlowy-Heller—owned 50% by Citibank Handlowy, 50% by ING and GE Capital;

- Polfactor—owned by BRE Bank and Intermarket AG (Austrian factoring Bank);

- Arvato Services—owned by Bertelsmann Group;

- Bibby—Factors—owned by Bibby UK—privately owned chain of factoring companies in the UK;

- BZ WBK Faktor—owned by BZ WBK Bank ( Allied Irish group); and

- Eurofactor—100% privately owned by Polish entrepreneurs.

- In terms of products, the Polish factoring market still has a long way to go before it reaches maturity, as about

- 80–85% of factoring volume is done with recourse, with the remainder being either export factoring or domestic factoring without recourse. Domestic factoring without recourse is offered on the basis of a contract with one of two major foreign export credit insurance companies—either Coface or Hermes.

- The future of factoring in Poland relies heavily on the development of the SME sector of the economy on the

- one hand and the removal of legal and accounting/taxation barriers on the other hand. Poland has about 3.4 million registered businesses—the largest number in Central and Eastern Europe. Over 90% of them are small and medium sized enterprises with huge liquidity problems (only about 3% of SME say they have no problems with liquidity) and lack of equity and current asset financing. Poland is probably the only country in the region with a rather unfavorable legal environment for factoring. Major bottlenecks are:

- widespread use of non-assignment clauses—80% of supermarket chains are using such clauses, making financing of receivables impossible for suppliers of many FMCG goods;

- inability to write off bad debts for factoring companies, as financed receivables cannot be booked in factors’ books as revenues;

- very poor understanding by the courts of factoring-related cases; judges, especially in the local courts, are mixing up factoring companies with other legal entities, allowing debtors to engage in various kinds of frauds and causing losses to factors.

Source: Handlowy-Heller.

> 27 For example, the Bank of Italy has perhaps gone furthest among EU financial regulators in applying prudential and reporting requirements to factoring companies (Muschella 2003).

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**THE WORLD BANK**