Reconceptualising the regulatory regime for factoring in Tanzania in support of small and medium enterprises

Abstract

This study investigated the reconceptualisation of the regulatory regime for factoring in Tanzania to enhance access to finance for Small and Medium Enterprises (SMEs), which constitute over ninety per cent of all businesses in the country and contribute significantly to the national GDP, accounting for more than thirty per cent. Despite their significance, they face substantial financing challenges, with only twenty per cent of SMEs having access to formal financial services from traditional banks. Factoring, a trade financing option that enables businesses to sell their accounts receivable for immediate cash, provides a viable solution to these restraints by improving cash flow and offering an alternative to conventional bank loans. This research identified the absence of a dedicated factoring law, reliance on fragmented and inadequate general laws, such as the Banking and Financial Institutions Act (Cap 342 RE 2023), and infrastructural deficits, including the lack of an electronic registry, as key barriers limiting the adoption and development of the factoring industry in Tanzania. Employing a qualitative methodology that incorporates document analysis and a comparative case study of Egypt’s robust factoring framework, the study drew on the UNIDROIT Model Law on Factoring, 2024 and the Afreximbank Model Law on Factoring, 2016, to propose a comprehensive regulatory framework. Findings revealed that factoring could address SMEs’ financial constraints by providing collateral-free, immediate liquidity, but regulatory ambiguities, high taxes, and bank-centric oversight hinder its potential. Recommendations included enacting a dedicated Factoring Act to define factoring services, encompassing modern elements such as the assignment or licensing of intellectual property, overriding anti-assignment clauses, establishing a blockchain-secured registry, and introducing tax incentives, including VAT exemptions. A proportionate licensing regime, as proposed by the Bank of Tanzania, and awareness campaigns targeting SMEs were also proposed to align with Tanzania’s Development Vision 2050 and bridge the estimated US$1.3 billion SME financing gap, thereby fostering economic growth and regional trade integration, particularly through the AfCFTA.