Trade Credit As A Source Of Finance For The Motor Sector In Kenya: The Case Of General Motors East Africa Limited And Her Distributors

Abstract

This study was done to determine the reasons as to why trade credit was extended to General Motors East Africa Ltd by its suppliers of materials, to her customers, dealers and distributors. To understand whether there existed a formal process that General Motors East Africa Ltd followed in assessing each customer for trade credit capacity and finally the application of trade credit funds to those who received them. Data was collected through a drop and pick questionnaire. Interviews of critical people who were involved in credit management in each of the organizations were conducted. The credit policies were also examined. The data was analyzed using SPSS at zero correlation done at 0.05 significant levels. The study concluded that trade credit was offered where bank credit was unavailable or limited and very expensive. It was used to match production life cycles, to match customer demands. All the respondents indicated the existence of trade credit policies and 85% of them had been reviewed in the last one year and the balance was current at time of the study. 71% of the respondents indicated that trade credit had been extended in some instances due to management influence. This brought moral hazard in the trade credit practice and may explain why there was a high level of bad debts provisions and write offs. Racial and tribal bias in the allocation of dealerships and distributors was noted as a basis for granting of trade credit. Most firms have written down trade credit policies a formal way of credit risk evaluation and risk ranking. The legal framework was said to be slow and ineffective. The results from this study therefore supported the transactions, costs and financial theories of trade credit and that the production cycle can influence the use trade credit especially where it is used for purchases