Retailers could be forced to pay interest on delayed payments to suppliers, if the lobby by Kenyan producers for the Kenya government to adopt a UK code that ensures supermarkets pay for goods and services within 45 days, bears fruit.
The region will in time adopt the practice, since Kenyan retailers have branches in other East Africa Community states.
The measures are meant to prevent the situation witnessed with Nakumatt and Uchumi supermarkets, which are now struggling to stay afloat amid a cash crunch.
Recently, Kenya launched a trade policy that robs supermarkets of the power to self-regulate, a provision blamed for the $454 million that retailers owe to merchandisers and financiers.
The policy has taken years to craft and appears to have been expedited following the dire straits that Nakumatt and Uchumi have found themselves in.
The two have combined presences in Kenya, Uganda, Tanzania and Rwanda but have had a difficult time with suppliers some of whom have charged the retailers assets, applied for and received winding-up orders or filed suits in courts seeking payment arrears.
The government now admits lax regulations are largely to blame for the problems facing the sector, leading to closure of branches across the countries of operation, delayed salaries for employees and distressed suppliers.
“We had allowed retailers to self-regulate but that has failed, underscoring the need to implement a national trade policy for the retail sector,” said Trade Principal Secretary Chris Kiptoo.
The Kenyan government is alarmed that delayed payments have escalated and now threaten the survival of many suppliers, manufacturers and the retailers themselves.
According to the Ministry of Trade, the wholesale and retail sectors’ contribution to GDP plunged from 11.2 per cent in 2012 to a low of 5 per cent in 2016.
Over the past decade, the sector’s growth has exceeded growth in GDP, but last year marked its worst performance, as they expanded by a paltry 3.8 per cent compared with an average of 9 per cent for the period between 2007 and 2015 and Kenya’s GDP growth of 5.8 per cent.
The government now contends that due to the ballooning debt, estimated at $454 million in delayed payments to suppliers, the sector needs urgent reform to avoid a catastrophe that could also threaten Kenya’s agricultural and industrial development.
Industry data shows that by December 2016, Nakumatt and Uchumi led the pack in debts to suppliers at 41 per cent and 32 per cent respectively.
Kenya Association of Manufacturers chairperson Flora Mutahi says that Kenya should borrow the London model called the Prompt Payment Code, which commits relevant parties to paying on time and levies interest on late payments.
“We need to figure out how to get the retail sector out of the current mess into a more stable place by instituting international best practice,” she said.
Code of conduct
Though the push for prompt payment is intended to bring stability to the sector, it is already generating opposition from retailers who argue it will exert pressure on their cash flow.
The National Trade Policy seeks to provide a regulatory framework to govern the wholesale and retail sector, focusing on unfair trade practices such as late payments.
Top on the reforms list is a proposed law requiring retailers to make prompt payments to suppliers for goods delivered.
Although local industries are behind the push for the drafting of the Retail Sector Prompt Payment Bill, the government agrees that the tendency of retailers delaying payments by between 180 and 240 days is hurting suppliers and manufacturers.
Suppliers want legal backing to force retailers to pay within 15 days for fresh produce and 30 to 45 days for other goods.
Another item is enactment of the Trade Remedies Bill that will give the Competition Authority of Kenya more power to enforce contracts between retailers and suppliers.
The Authority will also be empowered to encourage fair competition and fair trade practices, specifically ensuring that a few retailers do not dominate the industry, thereby stifling the growth of smaller competitors.
Currently there are about 30 supermarkets in Kenya but only five dominate the industry.
There are concerns that large supermarkets are setting up branches in small towns and as a result of their bulk procurements, enjoying substantial discounts that enable them to offer lower prices. This leads to unfair competition with smaller retailers.
There is also a push for a retail sector code of conduct to encourage fair trade in which relationships between retailers and suppliers are based on fair, lawful dealings and good faith.
Besides the legal and regulatory environment, the policy also seeks to tackle challenges related to retail markets and business premises, particularly in urban areas, the supply chain, financing and management capabilities.
The policy reckons that many retailers lack business management and entrepreneurial skills. “As a result, they are unable to expand, do not maintain basic books of accounts and cannot, therefore, sustain local and international business opportunities,” states the document.
It adds that business decisions are often made without adequate information and exhibit little understanding of legal requirements and procurement procedures, leading to the collapse of many retail outlets.