Rasko Peric:
Please introduce yourself and what you do in a few sentences so our audience can get a better idea of who you are.

 

Betül Kurtulus:
My name is Betül Kurtulus. I am the regional director of FCI responsible for CEE, SEE and Middle East. I joined FCI at the beginning of 2019 after 26 years of experience in the financial sector. I am an economist. My experience during the last 26 years was mainly on factoring and leasing industry. I worked in a bank on factoring companies and also in non-bank financial institutions. Working in these different structures gave me different experiences. For the last 16 years of my career I served as a board member of factoring and leasing companies and also for the last three years I served as a board member of the association of financial institutions of Turkey. The association was established by law with over 100 financial institutions under its roof. And starting from January 2019 I am the regional director of FCI.

 

Rasko Peric:
How would you assess the results on the factoring markets in the region you serve? In your view, what are the possible developments this year and in the coming year?

 

Betül Kurtulus:
All euro economies took a strong hit in 2020, regardless of their macro-financial position. Overall GDP hit in CEE was still less severe than inside the euro area and hard hit the euro area economies. Despite of the effect of the second and the third COVID wave the growth rate in the CEE and SEE region was more resilient and better than expected than in 2020. But of course, the growth rates of many economies were below zero, except Turkey.

Coming to 2021, the risk to growth come from more widespread researching of new COVID strains. The pace of vaccination is also another risk of the economies going back to normal. However, the COVID-19 shock is unusual. In that it has led to a desynchronisation between the services and goods producing sectors.

 

Rasko Peric:
Let´s talk about the emerging markets.

 

Betül Kurtulus:
In emerging markets, we are currently seeing a mixed picture in terms of COVID-19 infections. De-spite the sharp fall in new COVID-19 cases globally, recent researchings in new COVID-19 cases in emerging markets in Europe shows that we are not in a clear concerning the pandemic. In particu-lar, recent increases in new infections in Central Europe I set the trigger a return to striker mobility measures which called wait on growth. More broadly, it appears that policy makers remain cautious of allowing a return to full unrestricted mobility, even in countries where daily new infection rates are quite low. My expectation is that a reshape recovery is very likely in the second quarter, de-spite of some setbacks in the first quarter.

There is a direct relation between the growth of the countries, GDP growth and the factoring growth. In the developed market of EU we see up to ten, fifteen percent of GDP penetration of total factoring volume. This ratio decreases up to two to three percent in the emerging and devel-oping countries of CEE and SEE. But the expectation of the growth in the GDP is very positive for 2021 almost for all the region countries. We see the growth of GDP in 2021 in the for example Czech Republic was -5.6 percent. The expectation for this year is 4.7 percent. Likewise, in Hungary it was -5 percent, the expectation is 5.2. In Poland it was 2.7 and the expectation is 4.2. Romania -3.9, and the expectation is 6 percent. Likewise, Russia it was -3.1 and the expectation is 3.1. For Serbia the expectation is 5.6.

As I already mentioned, the growth expectations are generally very positive in the region coun-tries. Of course, this growth is totally linked with the trade volume in and out of the region and fac-toring is surely benefiting from this growth. We hope to see this performance on the factoring turnover of 2021. Coming to the factoring results of 2020, the preliminary global figure gives a signif-icant indication that the industry had a very challenging year. All countries were impacted different-ly, based on their own specific measures and response to this crisis. Some reached the lowest level in the six years reported while others managed to cope better to the environment. We better re-member also the difficulties before the pandemic, the effect of the trade volume of the countries. We entered 2020 with the effect of trade war, fluctuation of the oil prices, the effects of the major job political issues and the Brexit. And then we face with the pandemic. So as a result, compared with the previous year 2020, estimated volume represented a decline of approximately 6.5 per-cent.

Europe, our biggest market and most developed market, representing around 68 percent of the total volume with 1.842 billion euro shows a decline of close to seven percent. From a factoring volume perspective, the top five players France -8 percent, Germany -0.2 percent, UK -17 percent and Italy -11 percent, which makes up to 17 percent of the market. CEE is a region with emerging and developing countries and mostly the economies are depended on developed countries od Europe. Vast majority of the countries reported declines in the CEE/SEE region. Poland -5 percent, Russia -6.3 percent, Greece -4.1 percent, but there are few positive exceptions like Romania, it is plus 3.5 percent, Hungary 3.2 percent, Serbia 5.3 percent and Turkey – another significant player in Europe – showed a significant decline from 22 billion in 2019 to 16.5 billion in 2020 representing al-most -25 percent decrease.

When we look at the factoring volumes in the CEE/SEE region, regardless whether the members are doing business in either export or import or both directions, we see that about 40 members increased their business during 2020. At the beginning of 2020, for the first time we experienced a lockdown and social distancing, homeworking conditions, and the adaptions of these conditions took of course some time. We see that 45 percent of our members lost turnover in 2020, however the ratio of those over 20 percent decrease in turnover is not very high among the total.

 

Rasko Peric:
What is the situation in the larger markets in this region, for example Turkey?

 

Betül Kurtulus:Turkey is the biggest market in CEE. Turkey has an excellent infrastructure with law and digital solu-tions. However, the fluctuation experienced in the country´s economy negatively affected the sec-tor over the last five years. We have seen a decrease in the volume for the last five years. The mar-ket, which increased by 18 percent in 2019, again decreased by 25 percent in 2020. One of the big-gest effects of this shrinkage is the fluctuation in exchange rates. However, the country´s economy performed a good year in terms of GDP growth in 2020. The government support policies have made an important contribution to this growth. Turkey is one of the rare countries that have a posi-tive in GDP growth in 2020 with a very high credit support to the domestic demand and thanks to the exporters who increased their markets share in foreign markets, Turkey performed positively almost 1 percent by the end of 2020. This is a very rare result in OECD countries. Unfortunately, we do not see the effect of this positive growth on the factoring performance and the growth of 2020 is expected to be 4.5 percent. I hope to see this positive growth on country´s factoring volume.

Today, there are 45 factoring companies in Turkey, and 24 banks are doing factoring inhouse. 20 of them are FCI members. There are very successful digital solutions, such as having central invoice registration system which works online and linked with the ministry of finance. It is a very good solution for preventing fraud and also support the country´s taxable income. The sector also has a common supply chain platform working under the association of financial institutions. In Turkey, the members of FCI successfully linked local expertise to the global ones and the factor is very suc-cessful in terms of international factoring. Every SME and every corporate, even the biggest ones, consider factoring as an alternative solution on their table before starting the international trade. So, it is not an instrument for funding, for cash flow, it is solution for all trade finance. This shows a good point that the market has reached today.

 

Rasko Peric:
What about the other two big factoring markets in this region, Poland and Russia?

 

Betül Kurtulus:We see a good performance in Poland for the last couple of years. In Poland and Russia, when we look at the five years compound annual growth rate of the market, it is very positive about 5 per-cent. Poland is also very god in digital solutions on a country level with their very good solution of public e-invoices portal. They are also supporting the studies of structural e-invoice. Poland has a very successful association. The association works very well with the sector stakeholders on legal and technical issues. Poland is one of the countries that we always take and use an example and consult with.

There is a common feature I see in successful countries: educated and dedicated staff. I would like to say that success in Poland, Turkey and also in Russia comes from the educated and dedicated sector representatives. I also would like to mention the oil prices, the oil producers are experi-enced concentrated terms of trade laws depending of the fluctuations in the oil prices until 2020. I think that especially our members in Russia in the Middle East will be affected by this contractions in terms of credit risk in their domestic markets. Some other sectors like construction, real estate, automotive, textile and retail and of course the service sector will be highly affected.

 

Rasko Peric:
Let´s take a look at the Balkans: What is the situation there?

 

Betül Kurtulus:They have a very high sensitivity to falling developed market demand for manufactured goods and commodities. Most likely, those markets will experience a significant tightening in financial condi-tions also during 2021. But factoring is growing in the Balkan region. We have new bank chains as an FCI member. I see the movements in education activity. Those surely will affect the growth in this region. One negative effect will be maybe the deterioration in the balance sheets of companies as well as in economies of countries. Almost all governments, the European Central Bank, the coun-tries´ central banks, they all brought COVID-19 relief measures during 2020 to prevent social and economic effects. With all the support programs it is inevitable to see the impact on earnings and balance sheet is likely to intensify in the coming quarters. It is necessary to evaluate the credit risk, sectoral risk for buyers and sellers, it is essential to analyse the balance sheet and cash flow very well. We will see the effect of this during the first and second quarter of 2021. I think, we will see this effect more in the developing countries of Europe like in Balkans.

 

Rasko Peric:
Let´s move to the Middle East: What are the developments in this region?

 

Betül Kurtulus:The GDP of the GSS region -4.9 percent during 2020 and the expectation for this year is 3.5 percent. For 2022 the expectation is 4.4 percent. We see a 12 percent increase in total turnover of the region in 2019. It is very small, but promising. I want to highlight the performance of our members in the region, especially in the digital projects on receivable finance and an increase in the corresponding relations. Especially in UA, digital developments such as blockchain based central invoice registra-tion system, central supply chain platforms supported by government banks are promising. UA is a big trade hub, so the need for factoring, especially for SMEs is very high. Factoring law infrastruc-ture studies are carried out to support the SMEs. However, unfortunately the market awareness of the product is still low.

Betül Kurtulus:We launch Islamic international factoring as a new product during 2018. International trade, which factoring is a product of, is to be in conformity with the Islamic sharia. There are few differences between traditional factoring and Islamic international factoring. That´s why the inter-factor agreement and general rules of international factoring have been reviewed and modified under the requirements by creating a supplementary agreement for Islamic international factoring. In order to tell our FCI members to engage in this sharia compliant international factoring and open doors for new business opportunities. This is a new business line for our Islamic members, as well as our non-Islamic members. Traditional international factoring is fully conformably to Islamic sharia with few modifications. Since sharia allows trade with different religions, international factoring is not necessary done between the factors in two Islamic countries or companies. The transaction between one Islamic and one non-Islamic is also possible. So, I think that the new product opens the doors of factoring to new clients, new corporates who did not know the sector before.

 

Rasko Peric:
Let’s focus a little more on the topic of technology: What experiences do you have there from your daily association work? What are members, companies and markets currently concerned about – and what do you think would be a possible remedy?

 

Betül Kurtulus:During the pandemic contactless transactions become the primary focus. There are many solutions for documents management, digital scanning, OCR technologies and artificial intelligence machine based solutions. The opportunities are sizeable, if you consider digital document processing, ad-vanced robot automation, trade document preparations, tracing solutions and e-signature solu-tions for signing documents electronically. There is a difference between an invoice being pro-cessed manually versus one that have being processed digitally through a platform, that instantly will be checked and validated. Those platforms consistently control a vast area of predefined pa-rameters such as compliance, credit limits, KYC or blacklists. As a result of machine learning these platforms constantly learn, improve and develop efficiencies and get better with the time. Let us not forget the various fintech solutions that have emerge in the areas of trade and payment, that banks, financial institutions can leverage to help achieve their objectives faster. The effective use of technology helps to deal with potential security threads and lower the costs of transactions.

The next challenge is, how regulation and policies develop in different geographies will merge globally accepted standards. Something which is needed, is to ensure the full integration and seam-less connectivity of transactions. On a global scale, another problem is standardisation. The interna-tional trade industry has long been occupied by the challenge of standardisation. Developed over many years and through many geographical regions, the customs, terms, processes, definitions and various other measures naturally vary from place to place. Over the time, as the world has become more globalised, this has become a greater challenge. More often than not, in a single port today some vessels and goods are originated in every corner of the globe. Without a degree od standard-isation, this increase scale is a recipe for inefficiencies, particularly as the industries moves to be-come more digitalised. So, for us a lack of this standards is a big challenge that the industries are facing.

The second is the lack of legal clarity. But on the smaller scale, the ability of financial institutions to make the right decision on technology is another problem. Digitalisation is of course a necessity for every financial institution. The most difficult issue is how to choose the right technology. What technology do we need? Technology investments also require substantial budgets. The size of these budgets is directly related to the success of the projects. My own experience is that techno-logical changes do not offer the same opportunities for institutions in all dimensions. It is now nec-essary to add digitalisation experience to the features that we call “must have” for senior levels in financial institutions, because the investment in technology is directly related to the companies´ success.

In this regard, software companies and technology companies need to be very close to their cli-ents, to have an agile relationship. The main concern of the companies is, how to choose the right technology. The resources, costs of the project, project management and the software references are the most important items. In most of the developing countries, local support is critical. Lan-guage issues are also important and local accounting adaptability is also another problem. Partner-ing with a software company with local knowledge gives market knowledge and new market trends. The wrong investment of software or digital solutions can easily turn into a never-ending story with increasing costs. So, we need to carefully analyse the investment or decisions from be-ginning till the end. In a rapidly evolving world, digitalisation is no longer an achievement, it is a re-quirement. It is not a question of whether the banks or financial institutions will adapt, but rather how soon and how successful they will adapt to changing dynamics.

 

Rasko Peric:
Mrs. Kurtulus, thank you very much and stay healthy!