Financing SMEs and Their Legal Infrastructure in Iran
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
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
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
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
met or private contract under Article 10 of the Civil Law10.