In his recent Budget Speech, the Vice President and Minister of Finance acknowledged a structural weakness in Botswana’s current MSME financing model. Citing the 2025 World Bank study conducted under the Botswana Financial Sector Development Strategy, he observed that the country remains overly reliant on direct lending, collateral-based credit, and administratively heavy public schemes that unintentionally crowd out innovation. The study concludes that future impact will not come from loans alone, but from well-governed second-tier financing mechanisms, credit enhancement instruments, and patient capital structures capable of supporting innovation, early growth, and scale.
The proposed establishment of a National Fund of Funds marks an important policy shift toward a more strategic, market-enabling financing ecosystem. It recognises a simple but critical truth: when collateral becomes the primary gateway to finance, talent is excluded. However, while capital structure reform is necessary, it is not sufficient. Financing innovation cannot succeed without corresponding legal reform. If Botswana is to transition from fragmented, loan-heavy interventions to a diversified and modern financing ecosystem, the legal framework governing receivables must evolve in parallel.
It is in this context that factoring, and the legal architecture that supports it, becomes particularly relevant.
As Botswana intensifies its search for sustainable, private-sector-led growth, access to finance remains one of the most persistent constraints facing small and medium enterprises. While policy discussions often focus on bank lending, collateral, and interest rates, global experience shows that some of the most effective solutions lie outside traditional credit models. Credit factoring is one such solution. Yet its success is not driven by finance alone. It is fundamentally shaped by law.
Factoring thrives where the legal system recognises receivables as valuable assets, protects their assignment, and reduces uncertainty for financiers. Botswana’s challenge, therefore, is not a lack of entrepreneurial activity, but the absence of a clear legal framework that can support modern receivables-based financing.
International best practice offers two particularly instructive reference points: the UNIDROIT Model Law on Factoring and the Afreximbank Model Law on Factoring. While both pursue similar objectives, they reflect different institutional realities and offer distinct lessons for Botswana.
The UNIDROIT Model Law represents a globally harmonised approach grounded in commercial certainty. Its central contribution is conceptual clarity. It defines factoring in precise terms, distinguishing it from secured lending and outright assignment. By doing so, it removes ambiguity about the nature of the transaction, an issue that often troubles courts and regulators in jurisdictions without specialised legislation.
One of the most important features of the UNIDROIT model is its recognition of future receivables. Under traditional contract law, uncertainty around future claims often prevents their effective assignment. The model law resolves this by allowing receivables arising from future contracts to be factored, provided they are identifiable. For Botswana, this is particularly significant. Many SMEs operate on rolling supply contracts or informal arrangements, and the inability to finance future receivables cuts them off from working capital precisely when they need it most.
The UNIDROIT framework also limits the ability of debtors to raise unrelated defences against factors. This principle is crucial for reducing risk. When financiers fear that disputes between the supplier and the buyer may undermine their right to payment, they either raise prices or withdraw entirely. By separating the financing transaction from the underlying commercial dispute, the UNIDROIT model increases predictability and lowers the cost of finance.
However, the UNIDROIT approach assumes relatively strong institutional capacity. It works best in environments with efficient courts, reliable registries, and a high degree of commercial literacy. This is where its direct transplantation into Botswana requires caution. While Botswana’s legal system is stable, it does not yet have a deep body of jurisprudence on receivables finance, nor specialised commercial courts dealing routinely with such instruments.
This is where the Afreximbank Model Law becomes particularly relevant. Designed specifically for African economies, it builds on UNIDROIT principles but adapts them to practical realities. Rather than assuming perfect enforcement, it seeks to reduce friction at every stage of the factoring transaction.
One of its most important innovations is flexibility in notification. The Afreximbank model allows for both disclosed and undisclosed factoring, recognising that in many African markets, SMEs fear that notifying debtors may damage commercial relationships. By legitimising non-notification, the law expands the range of workable factoring arrangements without undermining legal certainty.
The model law also places strong emphasis on cross-border factoring. In a continent increasingly shaped by regional integration and the African Continental Free Trade Area, this is critical. It allows receivables arising from international trade to be factored under predictable rules, reducing foreign exchange risk and encouraging participation in regional value chains. For Botswana, whose economic strategy increasingly emphasises exports and regional trade, this alignment is especially important.
Another lesson from the Afreximbank model is its treatment of insolvency. It clearly protects the rights of factors when a supplier becomes insolvent, preventing receivables from being clawed back into the insolvent estate. This protection is essential for market confidence. In Botswana’s current framework, uncertainty around insolvency treatment significantly raises the perceived risk of factoring transactions.
The value of these model laws becomes clearer when examined through country experiences. Cameroon offers an instructive example of legislative adoption in practice. By incorporating key elements of modern receivables finance into its commercial framework, Cameroon has created a clearer environment for factoring, particularly within the OHADA legal system. The harmonisation of commercial law across member states reduces legal fragmentation and encourages cross-border finance.
Cameroon’s experience shows that factoring does not require an advanced financial market to succeed. What it requires is clarity. By defining assignment rules, recognising receivables as movable assets, and integrating factoring into commercial law, Cameroon has expanded financing options for SMEs operating in trade and manufacturing. Botswana can draw from this experience by recognising that regional harmonisation and legal simplicity can be powerful tools, even in relatively small economies.
Egypt provides a different but equally valuable lesson. Its factoring regime benefits from strong regulatory oversight combined with legal certainty. Factoring companies are licensed, supervised, and integrated into the broader financial system. This institutional clarity has helped build trust among businesses and financiers alike. Factoring in Egypt is not viewed as fringe finance, but as a legitimate component of the credit ecosystem.
What Botswana can learn from Egypt is the importance of institutional positioning. Factoring should not exist in a regulatory grey zone. Clear licensing, supervision, and integration with financial policy signal seriousness and stability. This, in turn, attracts private capital and encourages innovation in products such as reverse factoring and supply-chain finance.
Across these models and countries, a common theme emerges. Factoring succeeds where the law reduces uncertainty, not where it overregulates. The objective is not to control the market, but to enable it. Botswana’s current approach, which relies on general contract principles and minimal regulatory guidance, leaves too many unanswered questions. These gaps translate directly into higher costs for SMEs or complete exclusion from finance.
A standalone factoring statute, informed by UNIDROIT principles and adapted through the Afreximbank framework, would allow Botswana to leapfrog incremental reform. It would clarify the legal nature of factoring, protect assignments, recognise future receivables, and align the country with regional and global standards. More importantly, it would send a signal that Botswana is serious about modernising its financial architecture in support of private enterprise.
Ultimately, the lesson from global best practice is not that factoring is a silver bullet. It is that law matters. Where the law recognises economic reality, finance follows. For Botswana, the question is no longer whether factoring can work, but whether the legal system is prepared to let it.
