General Rules for International Factoring

Factoring is a global financial product for trade financing for both domestic and international trade. It is an effective mean of short-term financing for easy access to working capital. Factoring is offered under an agreement between the Factor (factoring company) and seller (Factoree, supplier). Under the agreement, the seller sells or assigns its accounts receivable to the factoring company at a discount.

This mean the seller get the payment at an early date from the factor and in certain categories factoring, the factor guarantees the collection of payment at own risk. Bangladesh has domestic Factoring rule issued by Bangladesh Bank (BB) and some Bank and non-bank financial institutes are offering factoring financing in a limited scale. BB has recently issued a rule for non-recourse international factoring to safeguard the payment against exports.

Domestic factoring is operating with a procedural framework determined by local laws and regulations. International factoring serving international trade using the two-factor system requires a set of rules and procedures which govern the activities and basis for cooperation between two factors conducting the transaction in two jurisdictions. There is hardly any uniform legal system in different countries.

Parties should agree on rule of business, right and obligation should be agreed upon between the parties. Such rules may be established bilaterally between those two parties, this is very cumbersome, hence the great benefit of having an agreed set of rules which can be applied rapidly among a large number of factors in many countries.

The Factor Chain International (FCI), the factoring network was established in the Netherlands in 1968, with its headquarters in Amsterdam, having more than 100 members. The purpose of the FCI is to provide its members with standard criteria, procedures, law, and technological consulting relating to international factoring.

The FCI Code of International Factoring Customs, developed by the FCI Legal Committee, became the world's most widely recognized legal framework for international factoring and served as the prime example for the final text of the UNIDROIT Convention of International Factoring.FCI regularly updated code in July 2002, renamed it the General Rules for International Factoring (GRIF). It has provided a new standard for correspondent factoring relationships and probably more than 80% of the world cross-border factoring volumes are governed by those rules.

If that company engages in import factoring, or in export factoring where direct factoring is appropriate, the FCI Rules are not needed as such Rules govern the two-factor system. Factoring company will likely consider joining FCI. Taking FCI as an example will illustrate how the international factoring rules are applied.

The factoring companies sign an 'Inter-factor agreement' for joining FCI and commit to governed by three sets of rules and procedures: (1) The General Rules for International Factoring (GRIF), (2) The edifactoring.com Rules, (3) The Rules of Arbitration. These rules constitute the basic framework governing co-operation between members and these rules defined the rights and obligations of the parties to transactions under the two factor system.

The General Rules for International Factoring (GRIF) is a uniform set of rules and regulations developed by FCI and governing transactions between FCI members. The GRIF, together with the Inter-Factor Agreement, is in effect a service and guarantee contract between the Export Factor and the Import Factor.

The GRIF is a comprehensive set of rules which covers the following areas: (1) Factoring contracts and receivables, (2) Parties taking part in two-factor international factoring, (3) Receivables included, (4) Common language, (5) Time limits, (6) Writing, (7) Deviating agreements, (8) Numbering system, (9) Commission/ Remuneration, (10) Settlement of Disagreements between Export Factor and Import Factor, (11) Good faith and mutual assistance Assignment, (12) Validity of assignment, (13) Validity of receivables, (14) Reassignment of receivables, (15) Definition of Credit Risk, (16) Approvals and requests for approvals, (17) Reduction or cancellation, (18) Obligation of Export Factor to assign, (19) Rights of the Import Factor Collection, (20) Unapproved receivables, (21) Transfer of Payments, (22) Payment under guarantee, (23) Prohibitions against assignments, (24) Late payments, (25) Disputes, (26) Representations and Warranties, (27) Communication and electronic data interchange (EDI), (28) Accounts and reports, (29) Indemnification, (30) Breaches of provisions of these Rules, etc.

The Inter-Factor Agreement is the basis of the contractual arrangements between factors.It binds the signers to the three sets of FCI Rules: the GRIF, the edifactoring.com Rules and the Arbitration Rules. Special conditions affecting only certain countries can be incorporated in the bilateral Inter-Factor Agreements.

The edifactoring.com Rules govern how members communicate with each other, the obligations of the respective factors, and matters of security, confidentiality and storage of records. It uses to facilitate transactions between the respective factors are validly concluded by the exchange of edifactoring.com messages without any written documentation.

The Export Factor, located in the country of export received the assignment of accounts receivable from its customer (the exporter), assigns those same accounts receivable to the Import Factor, located in importing country to collect from the Buyer. This assignment technically taking place by means of an edifactoring.com message. The Import Factor and Export Factor only need to sign one Inter-Factor Agreement to cover transactions of many sellers.

The Export Factor, in assigning the accounts receivable to the Import Factor who bears the credit risk, the Export Factor is able to offer credit risk cover and payment at a pre-determined date to a Seller. These mechanisms permit an Export Factor to offer cross- border factoring to exporters in his country, thereby encouraging international trade.

The FCI Rules of Arbitration provide for a method of resolving disputes between FCI members through an FCI arbitration process, which involves appointing arbitrators whose decisions are binding.Factoring should be regulated by a set of rule and regulation under legal system of a country. Where these laws are clear and well-tested as to enforceability, factoring has developed without any specific legal or regulatory framework for factoring as such.

The only proposed rule of Factoring drafted by BB is mostly focusing on recovery of export proceeds but not full factoring services such as export trade finance. It does not have details of other issue of probable disputes and dispute resolution methods. It is not possible to prepare all documents overnight. Moreover, global financial system also modifies due to demand of the market. 

There are some international conventions which define factoring and the relationships between parties in international factoring. The best known is UNIDROIT convention of 1988. GRIF rule has been prepared in line with the convention. Bangladesh should consider ratifying the convention to facilitate the factoring services.

In a country like Bangladesh, where factoring is a new concept, or where there are gaps or difficulties with in the legal framework for assignment of receivables, FCI rule is desirable to put in place a body of law and/or regulation in order to make factoring a workable activity in practice. Bangladesh may adapt The General Rules for International Factoring (GRIF) and encourage Factors to join the global factors chain can guide and regulate the contract of factoring service to protect the interest of the factoring service recipients.


The writer is a legal economist.
E-mail: [email protected]