Financial markets in the United States and parts of Asia were hit by an elaborate, if simple scam, in the 1960s. Known as the vanishing insurance company racket, the scheme involved setting up an insurance company that would collect life insurance premiums from unsuspecting customers, then vanish into thin air. Regulators in the US and Malaysia raced to plug legal loopholes that allowed the so-called mushroom insurance companies to swindle the public.
More than half a century later, it would seem a parallel, if slightly different racket, is playing out in East Africa. Over the past five years, there has been several unceremonious departures from the market, of a number of retail chains that went under with millions of dollars in supplier credit, bank loans, rent and wages arrears. Regional retailer, Tuskys Supermarkets, is currently in the news, tottering on the brink of collapse.
Tuskys has closed all its five branches in Uganda, leaving behind a trail of debt whose full extent is yet to be established. The retailer is also rapidly shrinking in Kenya, where some of its workers have been laid off while others have gone for months without pay.
It is difficult to figure out what exactly went wrong at the once flourishing chain that even played a role in trying to save its now defunct rival, Nakumatt, that also inexplicably began to disintegrate in 2017.
What emerges, however, is an aftermath of distraught suppliers, employees, landlords and lenders that are left holding the proverbial can, as the proprietors and architects of these failures walk scot free and even continue to prosper in other enterprises.
In the case of Nakumatt, which sank with more than $400 million in debt, the principal shareholder had even managed to dupe several lenders into extending the retailer nearly $70 million in credit, using a single property worth only $20 million as security. Some $10 million of the retail chain’s money was traced to irrecoverable insider loans to the company’s directors.
Clearly, something is not right here and it could be time regulators took a deep dive into the affairs of these retailers, if only to rule out the possibility of deliberate collapse. This has previously happened in the banking industry where the shareholders of financial institutions have run them down and yet managed to walk away with only a bruise to their reputations.
From what has happened in the recent past, it would appear that East Africa is becoming a soft playground for retail chains and all manner of startups that come up, sign up subscribers, and accumulate huge customer and supplier debts, before closing shop. That is possible only because there are gaps in the laws regulating certain commercial activities.
The urgency of effective regulation cannot be over-emphasised, given the widespread impacts of such failures in a regionally integrated economy. Nakumatt and Uchumi’s failures left many suppliers in deep losses across East Africa. South African chain Shoprite is also vacating several African markets including Kenya. More pervasive is the loss of economic opportunity such failures foment.
The region should consider criminalising such failures as part of a robust business regulation regime, with cross-border reach, to save this industry and the broader economy.