Address retailers’ financial health in regulation plan
Staff at Nakumatt Mega branch on Uhuru Highway. The State’s regulation approach largely focuses on the payment issues affecting the sector presuming the retailers are in good financial health. FILE PHOTO | NMG
Aside from addressing the payments issue, retailers should be compelled to publish their financials every quarterly and as per international reporting standards.
The financials should mostly be geared towards externalising a retailer’s liquidity position.
Retailers should also be tiered into large (tier I), medium (tier II) and small sized (Tier III).
The large retailers, because of their systemic importance, should be compelled to hold additional buffers-in the form of capital and liquidity.
Nakumatt’s financial ill-health seems to have triggered some sort of contagion. In an article about three weeks ago, I laid out a case for the government to intervene and avert crystallisation of the significant payment risks the retailer continues to harbour in its balance sheet.
There seems to be varied opinions on this. However, the misnomer here is that State intervention must take the form of cash-injection (taxpayer money for that matter). Let’s not forget that the State has a number of goodwill tools at its disposal.
After all, kicking the tyre can sometimes tell you a lot about a car. True story. Nonetheless, the Nakumatt story has now attracted the State’s intervention—but in the form of regulations. Indeed, I can now tell you that the government seems to have set the ball rolling towards regulation of Kenya’s retail sector.
Through findings of a study on Kenya retail sector prompt payment, conducted by the Ministry of Industry, Trade and Co-operatives, a raft of proposals have come out. The report itself is quite broad and documents the almost underneath love-hate relationship between suppliers and retailers. You will not fail to spot the toney tiki-taka between the two—especially their varied assessments of the key issues affecting the sector.
The report concludes by laying out recommendations. And this is where it gets a bit catchy. Basically, the recommendations are two-pronged.
First, the ministry has redefined and set strict timelines on payments. Indeed, the report is quite overweight on the issue of late payments to suppliers and manufacturers by retailers. Second, the report sets out a code of practice for both suppliers and retailers. Both parties have proposed their own set of code of practice, another elegant display (with a cherry on top) of the love-hate relationship. I’m not sure at what point they are supposed to harmonise the two proposals.
But strikingly, the report has proposed the establishment of an office of Fair Trade to oversee the retail sector, which largely borrows from the UK framework. However, when I analysed the final proposals, I thought they missed out on some key elements (which may have been aforementioned). By placing much emphasis on the issue of payment delays, the State seems intent on empowering suppliers and manufacturer. But payment is just one aspect of the retail business.
Aside from addressing the payments issue, retailers should also be compelled to publish their financials every quarterly and as per international reporting standards. The financials should mostly be geared towards externalising a retailer’s liquidity position. As such, the State should even prescribe minimum liquidity ratio. And liquidity will be measured by a retailer’s ability to meet its payment obligations as they fall due-on a 30-day, 60-day and 90-day cycle. Suppliers can then adjust their business decisions based on these financials.
Additionally, when liquidity falls below a certain threshold, a retailer should not seek to open more branches.
Secondly, retailers should also be tiered into large (tier I), medium (tier II) and small sized (Tier III). The large retailers, because of their systemic importance, should be compelled to hold additional buffers-in the form of capital and liquidity.
Thirdly, introduce tiered capitalisation requirements engraved with a capital adequacy threshold of 20 per cent turnover as well as capital threshold per branch in line with tiers.
While some of these are mentioned in the report’s fuselage, they make no appearance in the recommendations. These can be vital in enhancing the stability of the sector—and needs to be statutised too.
