INSTEX Uses Factoring to Fast-Track Transactions

With the appointment of Bernd Erbel as new president of the Instrument in Support of Trade Exchanges (INSTEX) earlier in the week, it appears that the Iran-EU trade mechanism is entering its next phase.
In a bid to process transactions more quickly, officials in charge of the mechanism are now in advanced negotiations to provide factoring service to an initial cohort of European companies, according to an article by Esfandyar Batmanghelidj, a founding partner of Europe-Iran Forum, published in Bourse & Bazaar.  
The goal for INSTEX is to ease Europe-Iran trade by developing a netting mechanism that eliminates the need for cross-border financial transactions. 
In a bid to fast-track transactions, INSTEX has opted to roll out factoring service that does not require the direct participation of its Iranian counterpart. 
Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. 
In factoring transactions, INSTEX will purchase the expired invoices of European exporters who have failed to receive payment for sanctions-exempt goods sold to Iran. The focus on expired invoices allows INSTEX to avoid lengthy French regulatory approvals for a full factoring service. 

Kind of Trade Finance  

Importantly, INSTEX will not require the goods in question to have been delivered to the Iranian buyer in order for the European exporter to factor its receivables. In this sense, the service approximates a kind of trade finance. 
According to a draft contract between INSTEX and a European company seen by Bourse & Bazaar, the purchase price paid to the European exporter by INSTEX would amount to 95% of the “assigned receivable.” In other words, INSTEX will charge a 5% fee as part of its factoring service. This fee will vary based on the transaction. 
Such costs are not negligible for European exporters, especially when considering that INSTEX will require each transaction to undergo third-party due diligence at the exporter’s expense. 
Yet they are commensurate with the transaction fees typically charged by banks in those cases in which the bank is willing to accept funds originating in Iran. Moreover, for European companies burdened with unpaid invoices, the certainty of payment from INSTEX, a state-owned European company, is inherently attractive. 

More Appealing

In some respects, the factoring service is a more appealing solution for companies than the netting mechanism service which INSTEX still intends to operationalize. 
However, factoring is inherently less scalable as it requires significant capital to be made available to INSTEX in order to purchase invoices. INSTEX will also assume the burden of seeking payment from the Iranian debtor. 
However, should the factoring solution prove popular, it may be the case that INSTEX could subsequently transfer its newly assigned receivables to its mirror entity in Iran, known as Special Trade and Finance Institute (STFI), which makes it possible for Iranian importers to pay STFI for goods purchased from European exporters. 
Alternatively, INSTEX could open an account either in Iran or at the Iranian bank branch based in Europe in order to receive payment for the outstanding invoices. While conceived as a stopgap solution, the experience with factoring could help INSTEX develop a more robust netting mechanism. 
Having reached the end of his six-month contract, Per Fischer stepped down as the president of INSTEX and was succeeded by his compatriot, Bernd Erbel earlier in the week.  
The change in leadership comes as INSTEX finalizes several other management hires. By filling these roles, INSTEX is expected to enable to expand operations in the coming year.