SMEs battle for survival in late payments crisis

Late payments to Kenya’s businesses are giving retailers and other companies an interest-free source of credit that is now choking micro, small and medium enterprises (MSME’s) to death, with banking routes closed, and general liquidity tight country-wide.

A typical business in Kenya is contracted to deliver goods or services to a company on the basis of a Local Purchase Order (LPO) that states the payment period at anything from 30 to up to 60 days after delivery and invoicing.

However, Kenyan practice has steadily drifted towards negligible up-front paperwork, and endemic and extended late payment.

A study published last year by the State Department for Trade, Kenya Retail Sector Prompt Payment, reveals that the agreed terms of payment are often flouted, with retailers found to be taking, on average, between five to seven months to pay suppliers.

These extended payment timelines are not confined to any one or two supermarkets, but across the retail space in a sample of dozens.

The impact of this free borrowing by retailers, as they get paid at the cash till for stock, but take many months to pay for it, is now crippling the manufacturing and value addition sectors.

For many, the late payments simply force closure, as they did for Tharaka Honey Limited, which ceased production in March last year, simply unable to continue any longer with so much money owed to it.

Interviewed for the State Department report, the company confirmed that before closure it had also suffered high-interest charges on borrowing to fund the business, as well as the loss of goodwill from its own suppliers, the loss of good employees because of delayed salaries, the risk of being auctioned, and working capital shrinkage.

Beyond the ongoing extension in retail payments, a further pain point for producers has been the extended timelines on public sector payments.

Cited in the report, Plenser Limited confirmed last week that it has yet to receive payment from the Nairobi County for an incinerator it installed at Mbagathi Hospital in 2015.

Another business owner who has suffered the effects of late payments said that one county government took one-and-a-half years to pay him for services delivered.

“County governments are notorious for late payments. However, business owners ought to submit their papers on time to lessen the duration of payment. The audit process also has to be streamlined as it is the biggest contributor to the late payments,” he said.

These two issues, around retail and public sector late payments, have now, however, generated a problem throughout the private sector too, pushing Kenya into a position where it has become an outlier in its average payment timelines.

A report by the Controller of Budget showed that the national government owed contractors and suppliers Sh111 billion, while county governments were holding Sh37.46 billion in unpaid payments as at the end of June 2015.

The tail has since deteriorated further, with business-to-business suppliers now reporting a marked deterioration in settlement periods, and the Kenya Revenue Authority (KRA) likewise reporting the phenomena as depressing tax takes.

“Delayed normalisation of the government’s fiscal programme adversely impacted both public and private sector tax remittances, the latter due to the delayed settlement of bills,” it reported last month.

Some of these late payments are historic debts that may ultimately be written off. For instance, within the private sector, Plenser Limited reports outstanding debts from former client Beverly School of Kenya dating back to 2011.

But every kind of Kenyan business is now facing late payers in an environment where their access to credit has also tightened.

Financial Sector Deepening Kenya reported in 2015 that lending by banks to MSMEs had been rising steadily until 2013, constituting 23.4 per cent of the industry loan book by the end of 2013. But the interest rate cap has been followed by a slowdown in total private sector lending, which flat-lined during 2017.

The biggest problem in lending, however, has been the increasing risk profile of Kenyan businesses.

Companies suffering late payments often move to low credit ratings on late loan repayments. They are also suffering as a result of delayed projects on cash flow hold-ups, impacting their earnings growth and stability, and multiple extra costs, such as penalties for non-compliance with statutory obligations.

As it is, stability has always been an issue for smaller businesses. But this environment has now exacerbated the problem.

The Kenya National Bureau of Statistics (KNBS) shows there are some 1.56 million licensed MSMEs, and 5.85 million unlicensed businesses, in Kenya.

But, reports KNBS, 2.2 million MSMEs closed down between 2012 and 2016.  On average, businesses were closed at the age of 3.8 years. But establishments that were started or acquired within the last two years were more vulnerable to closures, accounting for 61.3 per cent of the total, over the four-year study.

This accelerating rate of closure is impacting jobs. From 2012 to 2016, 12.1 million people were employed by MSMEs. In 2016 alone, MSMEs employed 93 per cent of the Kenyan workforce, a total of about 14.9 million of 16 million employed people.

– African Laughter