A survey of credit risk management practices by pharmaceutical manufacturing companies

Abstract

The pharmaceutical industry in Kenya consists of manufacturers, distributors and retailers, who all actively support the Ministry of Health and other key players in developing the health sector. Kenya spends about 8% of its GOP on health. The pharmaceutical sector consists of about 20 licensed concerns including local manufacturing companies and large multinational corporations, subsidiaries or joint ventures. Most are located within Nairobi and its environs. Trade credit is created whenever a supplier offers terms that allow the buyer to delay payment. This study seeks to identify credit risk management practices adopted by pharmaceutical manufacturing firms in Kenya. The study documents the rich variation in inter-firm credit terms and credit policies. Primary data was collected by use of a questionnaire while secondary data was collected from brochures, supplements and other relevant publications. Data was analysed using descriptive statistics such as percentages and tabulations. The study found out that the two most important factors considered in establishing a credit policy are the financial stability of the customer and the existing credit policy. Majority of the firms (78%) do not have a credit policy manual. The most widely used credit risk management-practices are use of debt collectors (72%), letters of credit (50%), credit insurance (25%), and factoring of debt (5%). In dealing with difficult to pay customers, most firms (95%) put the account on hold and stopped future sales till the account was settled, (80%) engaged services of debt collectors, (43%)

resorted to selling on cash basis. The 6C's model of credit appraisal was widely used by all the firms studied: character was practised by 100% of the firms followed by contribution (86%). Capacity, conditions and capital ranked 72%.