Businesses and East Africans living dangerously with high debt

December 17, 2013

I was astonished to learn that the East African businesses debt has surged to more than 50% against the regional Gross Domestic Product. The number one problem many middle and lower income business groups are facing at the moment is high debts. One would expect that financial and business entities would have inculcated wise spending habits and taught their clients how to spend and invest but the opposite seems to be happening. Financial wisdom in business is more important like the way air is to human beings and animals. Failure by business to embrace it means it’s future is at stake and survival chances are almost zero. Education, aviation, banking, financial, manufacturing and retail sectors are the most impacted most severely by economic conditions, according to data I obtained from regional’s leading expert. The survey reveals a prolonged slow growth in the region, outside of telecommunication, is the primary difficulty impacting businesses in the East African Community member states. It also identified slow growth as having the most impact on businesses, while more than 50% also reported the slowdown in all economies growth as a key factor and 36% showed businesses were being hurt by the exchange rate between local currencies and international denominations mainly the dollar, sterling pound and Euro with Rupee and Yuan playing little roles. According to the figures, banking and manufacturing businesses are under pressure from high cost bases and competition from foreign brands.

Retail brands like Imalaseko in Tanzania, Uchumu and Nakumatt from Kenya and South Africa’s Shoprite top-end retailers are doing it tough, as well as the single stores on suburbs thanks to high property rental values. It is a wake-up call for East African business on their poor financial planning and spending habits. The stats are frightening at a time when businesses have to tackle the rising cost of doing business and the cost of living has skyrocketed impacting heavily on spending power. Population in the middle and lower income groups are facing the pinch with rent, school fees and payment of housing loan that absorbs a sizeable portion of the net income.  As the statistics shows, more than 200,000 households have sought debt counseling from 2007 until May 31 this year on the techniques of good financial management and minimizing credit card usage which charges 16% per annum. When it comes to individuals a good number of them live a lavish lifestyle pushing them to the brink of bankruptcy when they empty their earnings and savings limit. Many of East African households have myriad of problems such as high medical expenses due to serious illness like HIV that kills more than 300,000 East Africans annually, business failure and loss of employment due to retrenchment and in some cases failure in wise investments and many end up paying 90% of their income on loan repayment to banks. The statistics from 2010 to 2012 reported that there were more than 200,000 bankruptcy cases filed in the region, notwithstanding thousands of defaulter cases in each country. There are many employees who were about to retire and others are being retrenched and those who had received a good compensation package from government had huge debts with moneylenders.

The grim picture is that businesses needing to source new debt and those seeking to refinance existing debt, should not expect it to be any easier in 2014 which is just two weeks away. Also, the study revealed 78% of lenders think the availability of debt would not change next year informed by regional commercial lenders to lower their interest rates despite the central bankers insistence. The study revealed banks are likely to work with businesses to try and overcome financial difficulties and enforce the good management policies that has impeded efficient running of business in the region. Poor management decisions and poor financial controls have contributed to the failure of a business in the region. A strong management would ensures the right structures are in place within a business, employees are in the right roles and makes sure financial reports are given to management in a timely, regular manner. In businesses that are struggling in the East African region, they do not have these characteristics. This is because poor management and poor systems leads to poor decisions. Other major reasons for businesses encountering financial distress in East African region included issues managing working capital, decline in revenues, an inappropriate business model and rising costs. The view of the lenders in the region is that there will be no real change and it’s going to be tougher to access finance over the next 12 months. It is time for business and individuals to teach learn or upgrade their financial literacy or else the debts will keep rising. Strategies not yet been considered in the regional businesses management and have worked very well elsewhere include realignment of strategy with changing business environment, focus on sales and marketing and implementing diversification and even outsourcing strategies.

Contador Harrison