The Effect of Debt Collection Strategies on Financial Performance of Local Authorities in Kenya

Abstract

Debt collection strategies involve developing a strong collection unit with clearly defined, documented and consistent policies and procedures that guide staff through the collections process and instruct them on how to respond in particular situations. For an effective debt collection strategy, a firm should have an effective and documented debt collection plan since such a firm with an elaborate plan of collecting its rates and levies will be able to implement the plan more easily that one which does not have such a debt collection plan. The purpose of the study was to investigate the effect of debt collection strategies on the financial performance of local authorities in Kenya and towards the realization of the research objective both a descriptive analysis and correlation and regression analysis was undertaken. Data was collected through the use of a questionnaire that was distributed to a sample of 40 local authorities selected from the population. The study found out that the popular debt collection strategies that are employed by the councils are, subcontracting of debt collection to third party agents that work on commission and this is also supplemented by use of internal debt collection unit in the councils, adoption of both enforcement and proactive debt collection strategies. The results show that the council’s internal debt collection strategies are updated frequently to cope with the challenges that arise in the operating environment since the market will always develop mechanism to evade paying the rates and levies. The study found that the subcontracting of the debt collection to third parties and the enforcement strategies had a positive relationship with the level of debts while pro active debt collection strategies and the use of internal debt collection units were found to have a negative relationship with the level of debt collection in the councils. The central government was identified to have a role to play by seconding experts to these councils that will guide the councils on the debt recovery exercise. In addition the councils should also adopt a more friendly system of collecting the debts since it has been found that positive compliance is more sustainable that one which is achieved through duress.