The Forum for Partners in Iran's Marketplace

September 2017, No. 85


Financing SMEs and Their Legal Infrastructure in Iran

By: Ali Darzi- Naftchali

Trade finance plays an important role in global business so that some experts estimate that more than 90 percent of transactions in the world are based on one or more of the trade finance instruments1. Considering this, it is rightly called an engine for economic promotion of the world. In other words, one of the main reasons for lack of development and economic growth is lack of access to financial resources.

Trade finance is more important for Small and Medium Enterprises (SMEs) than large enterprises. Most enterprises active in trade are small and medium. These types of enterprises play an important role in creating jobs and revenues, however, they face more problems in securing funds for doing day to day business and future investments as compared to large enterprises. Affirming this, Vincent O’Brien as a member of Banking Commission of International Chamber of Commerce, specified “trade finance as a major challenge, especially for SMEs as without access to trade finance, they will not be able to contribute substantially towards economic recovery and development.2

To tackle the above challenge, there are several ways which are created to be used for SMEs in the world. One of the most important and well-known of them is financing through factoring. This type of trade finance is based on account receivables, which has an ancient history “so that some scholars trace its origins to the Roman Empire -and some even further back to the Hammurabi, four thousand years ago.3”  

Financing through factoring has high usage in developed countries and is also growing in developing countries and emerging markets.

According to the latest annual reports of Factors Chain International (FCI) and International Chamber of Commerce (ICC) on Trade and Finance published in 2016, the global factoring industry has been growing at a rate of nearly 10% per annum over the past two decades4 and has an impressive growth since the financial crisis in 2009. The global factoring volume nearly doubled in size over the last seven years so as the global factoring volume was €1,282 billion in 2009 and increased to €2,373 billion in 2015. Of this total in 2015, Europe accounted for an impressive share of two thirds equal to 62% of the total world factoring volume as the largest factoring market in the world5. Asia is still the second largest continent for factoring accounting for forming 23.8% of the world total factoring volume, whereas China has the largest factoring market.6

Financing through factoring is based on a contract concluded between the seller and the factor which itself usually includes banks or specialized financial institutions. Based on this contract, the seller will transfer account receivables, arising from sale contracts of goods and services which are also verified by invoices, usually together with the risk of non-payment to the factor that in contrast will be obliged to pay their value before their real deadlines together with holding back its fee. Payment to the seller before the real deadline of invoices, will meet financing role of factoring. The factor may collect the transferred account receivables from the debtor (buyer of the sale contract) in their real deadlines.       

Financing through factoring is believed to be a trusted way for trade finance, however, it has neither been used nor any action has been taken to use it in Iran according to the author’s best knowledge. Therefore, in the annual reports of ICC and FCI no mention has been made of Iran as a country using factoring for trade finance. 

Using factoring for financing Iranian SMEs can be beneficial and play a savior role and finally lead to growth and development of the country. This is while many of these enterprises have faced financial problems with some halting operation. 

Some may argue and attribute non-use of factoring to the lack of legal infrastructure and authorization in Iran. In response to this argument, it may be said that it would surely be better to enact a special law for using factoring. However, it could be used in Iran by considering current Iranian laws and regulations.  

According to current Iranian rules and regulations, financing through factoring for Iranian SMEs, may be done in the form of legal persons by banks, non-bank credit institutions and independent factoring companies.

The banks may do financing through factoring under “Purchase of Debt Executive Guideline” adopted by the Council of Money and Credit of Central Bank of Iran on August 16, 20117. With regard to the non-bank credit institutions, if their actions affect the volume and method of distribution of credits in the society, they will be under the same rules as banks. Otherwise, according to the Article 40(2) of the Regulations Governing the Establishment and Practices of Non-Bank Credit Institutions8, they will be excluded from the regulations applicable to the banks. The recent category of non-bank credit institutions together with the independent factoring companies may do financing through factoring either in the form of sale of debt contract if related conditions under Civil Law of Iran9 met or private contract under Article 10 of the Civil Law10.

1 - Contessi, Silvio and Francesca de Nicola, the role of financing in international trade during good times and bad. The Regional Economist, 2012, P. 3.  

2 - ICC releases Global Survey 2014: Rethinking Trade and Finance:  

3 - Baker, H.R.Marie and associates, Financing small and medium –size enterprises with factoring: Global growth in factoring- and its potential in Eastern Europe, World Bank,2004, p.5. 

4 - ICC: 2016 Rethinking Trade & Finance,  p. 102, Available at: 

5 - FCI: Annual Review 2016, p. 10, Available at: 

6 - FCI: Annual Review 2016, p. 11. 

7 - Farsi version available at: 

8 - Farsi version available at: 

9 - English version available at:

10 - Free Translation: Article 10 – “Private contracts shall be effective on those who have concluded them, provided that they are not contrary in an explicit manner to the Provisions of law.”


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  September 2017
No. 85