The Bank of Algeria sets new rules for factoring activity at financial institutions:
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Banks are obliged to declare to the “Risk Central” and the subrogation transfers the rights and guarantees to the intermediary
Preventing the discounting of debts subject to mortgage, assignment, or any guarantee that affects the rights of the intermediate party
The Bank of Algeria has determined, through a new system, the conditions for practicing factoring activity by banks and financial institutions and the modalities of this process, which is based on the institution transferring its commercial debts owed by its customers to a bank or financial institution, in exchange for obtaining their value immediately, with the intermediary bearing the risk of non-payment.
The system aims to determine the conditions for practicing factoring activity by banks and financial institutions, and how it operates, as factoring is considered a process that takes place within the framework of a written agreement with a substitutionary effect, according to which the “belonger” transfers his commercial debts owed by his customers, whom the system calls “debtors,” to a bank or financial institution called the “broker,” who, in exchange for a fee, makes immediate payment of the total amount of the transferred debts, while bearing the risks of non-payment.
“The affiliate” means every natural or legal person who refers commercial debts to the broker in order to obtain immediate payment, while “the debtor” means every natural or legal person who is a client of the affiliate, and the commercial debt owed to him is the subject of the factoring process.
As for “subrogation,” it is a procedure that allows the intermediary to replace the affiliate in exercising his rights towards the debtor, while the “subrogation settlement” is a document proving the substitution and issued by the affiliate to the broker under the factoring contract. The system defines “remuneration” as the financial consideration due to the broker and paid by the affiliate under the factoring contract, while commercial debt means the debt arising between two parties who have the status of a merchant or from a commercial business.
Factoring is a loan process and practice for licensees
The system classifies factoring operations as loan operations, and therefore their regular practice is within the jurisdiction of banks and accredited financial institutions. The system stipulates that in order to conduct factoring operations, commercial debts must be documented with invoices or any equivalent document, and that these documents must be drawn up in accordance with the legislative and regulatory provisions in force. It also stipulates that factoring operations are subject to the same rules of classification and composition of provisions to which other debts are subject, in accordance with the regulatory provisions in force.
These are seven conditions for qualifying business debt
The Bank of Algeria has specified a set of conditions that must be met by commercial debts in order for them to be eligible for factoring operations, and the responsibility for their fulfillment lies with the “belonger.” It is first required that the debts be proven, liquid, and have a specified amount, and not be the subject of dispute on the part of the debtor, and their due date must be less than six months, as of the date of issuance of the invoice.
Debts are not eligible for factoring if they have expired, in whole or in part, through payment or set-off with debts owed to the debtor, or by any other legal method for extinguishing obligations. It is also required that debts be freely transferable, and not be subject to any legal, regulatory, or contractual prohibition on the transfer of debt rights that is effective for the intermediary.
It is also a condition that the debts, at the date of their transfer, should not be subject to the burden of assignment, mortgage, or any other guarantee or burden that would affect the rights of the broker. The factoring process cannot also relate to a debtor who is in a state of cessation of payment, judicial settlement, liquidation of assets, or any similar situation. The system also prohibits factoring debts that, at the date of their transfer, are the subject of an extension of the maturity period, in whole or in part, in any way.
Sign a written contract before granting financing
The system stipulates that factoring operations are carried out based on a written contract concluded before any financing is granted by the broker, and any factoring contract that aims to finance debts that were previously financed under another factoring contract is considered null and void, which prevents financing the same debt twice through two factoring operations.
The substitution process results in the transfer of all rights and guarantees associated with the commercial debts to the broker in his capacity as the assignee. Substitution takes place as soon as the amounts are made available in favor of the affiliate, corresponding to the debts transferred to the broker. Substitution is effective against the debtor without the need to obtain his approval. Thus, the broker replaces the affiliate in exercising his rights against the debtor, once the financing process is carried out in accordance with the conditions specified in the factoring contract. The system obliges the affiliate to notify the debtor of the subrogation without delay, by By means of a registered letter with a notification of receipt, or by any other means with written effect, in accordance with the legislation in force. The recipient is also required to mark, in a clear and unambiguous manner, the phrase “substitution” on all invoices subject to the factoring process.
As for the broker, after completing the payment process, he is obligated to obtain from the affiliate a “subrogation receipt,” which proves the financing of the debts referred to the broker, and to record the funds on the credit side of the affiliate’s account, resulting in the broker’s subrogation of the rights and guarantees associated with the assigned debts.
A commission for financing and another for collection
The system specifies the broker’s fee for factoring operations, which consists of a financing commission for the advance financing granted for the referred debts, in addition to a factoring commission for the services of managing, following up and collecting the referred debts, and when necessary, covering the risks of non-payment. In return, the broker is obligated to inform his clients and the public, by any appropriate means, of the banking conditions that he applies to the factoring operations that concern them.
The system obliges banks and financial institutions to declare to the Institutional and Household Risk Central the data related to factoring operations, in accordance with the applicable regulatory provisions. It also stipulates that the marketing of any factoring product by banks and financial institutions shall be in accordance with the procedures stipulated in the applicable regulation.
With regard to the methods of applying the provisions of the system, it stipulated that these methods are determined according to an instruction from the Bank of Algeria. The system also abolished previous regulatory provisions related to the conditions applied to banking operations, the practice of commercial activities, the internal control of banks and financial institutions, the risks of institutions and families, the solvency ratio applied to banks and financial institutions, major risks and contributions, the classification of receivables and obligations by signing and the formation of provisions for them, in addition to the general conditions related to banking operations.
