FINANCIAL STRUCTURING & COMPLIANCE · MARCH 2026
Many Kenyan businesses that sell goods on credit, including mobile devices, electronic appliances, equipment, agri-inputs, and similar assets, have quietly built a financing operation inside their trading business. They collect deposits, offer repayment plans, and carry outstanding customer balances for months or years. Most do not have the legal, tax, and reporting framework in place to match the activity they are actually running. Putting that framework in place early is one of the most valuable things a growing business can do.
You May Already Be Running a Financing Business
If your business sells goods and lets customers pay in instalments, you are doing more than selling. You are lending money. The customer takes the asset today and pays you back over time, with a financing charge built into the repayments. That is the definition of a hire purchase arrangement, and it comes with a set of legal and regulatory obligations that go far beyond a standard sales contract.
The law requires the entity managing the hire purchase to be registered under the Hire Purchase Act (Cap 507). KRA has specific rules on when VAT is due and how the financing charge is treated. And the way you record the outstanding customer balances in your books has to follow a defined accounting framework. Each of these sits independently of the others, and each one can create problems if it is not addressed.
Most businesses in this position have focused on building the commercial operation first, which is the right instinct. But the compliance and reporting side tends to get deferred, and the longer it is left, the more costly it becomes to fix. A portfolio of a few hundred customers is manageable to remediate. A portfolio of a few thousand is a much harder and more expensive problem.
If your customers take the asset today and pay you back in instalments with a financing charge, you are running a hire purchase business. The compliance obligations follow the activity, not the label you put on it.
Three Ways Businesses Like Yours Are Structured
In our experience working with lease-to-own and hire purchase businesses across Kenya, we see three common approaches to how the financing side of the business is set up. Where you sit on this spectrum determines how clean your books are, how easy it is to bring in external funding, and how much risk sits on the business as it grows.
| 1 | 2 | 3 |
| INSTALMENT MODEL | MONTH 0 MODEL | SPV MODEL |
| The business records income each time a customer pays an instalment. Simple to run, but it understates revenue in early months, creates VAT timing problems, and means the customer book is not being reported in the way lenders and auditors expect to see it. | The full sale is recorded when the asset is delivered to the customer. The outstanding balance owed by the customer is treated as a loan on the books, and interest income is recognized monthly as it accrues. This is the correct treatment and the foundation for bringing in external financing. | A separate company is set up specifically to hold the customer loans and manage the external funding facility. The trading business focuses on sales and delivery. The loan book sits in a dedicated vehicle that is cleaner for lenders, investors, and regulators to assess. |
Most businesses start at Model 1 because it is the simplest to operate day to day. The problem is that it creates complexity and risk that becomes harder and more expensive to fix the longer it is left. The goal of any serious structuring conversation is to move toward Model 2 or Model 3, in a way that is planned, compliant, and does not disrupt the existing customer book.
How Your Instalment Schedule Affects Your Entire Books
One of the most common things we find when we review a hire purchase operation is that the instalment schedule has been designed purely for commercial purposes, without considering what it means for how the customer balance has to be recorded. This matters more than most business owners realize.
For a customer balance to be treated as a straightforward loan on the books, the repayments need to be structured as two components only, the amount the customer owes you (principal), and the charge for financing it over time (interest). If you have built other charges into the monthly repayment, such as a service fee, a maintenance cost, or any variable element that is not purely a financing charge, the balance may not qualify for straightforward loan treatment. The accounting becomes more complex, and the reported numbers become harder to explain to a lender or auditor.
The practical implication is simple. If you want your customer book to be treated cleanly for accounting and financing purposes, keep the instalment schedule clean. Principal and interest only. Any service or maintenance obligation should be structured as a separate contract with its own pricing, not embedded in the hire purchase repayment. This is a design decision that needs to be made at the point of drafting your customer agreements, not after the portfolio has grown.
Once the instalment structure is right, the accounting treatment follows naturally. The full sale is recorded when the asset is delivered. The outstanding customer balance sits on the books as a loan. Interest income is recognized each month as it accrues. And revenue is reported at the right time, in the right amount, with no catch-up required.
| VAT: A COMMON AND COSTLY MISTAKE
VAT on a hire purchase sale is due in full at the time the asset is delivered to the customer, not spread across the monthly instalments. The financing charge (the interest the customer pays you) does not attract VAT at all. Many businesses apply VAT month by month as they collect payments. If that is how your business has been operating, there may be a VAT shortfall already reported to KRA that is worth quantifying before it is picked up in an audit. |
Setting Up an SPV: What It Is and When You Need One
As a hire purchase business grows, the financing book and the trading business start to pull in different directions. Lenders want security over the customer loan book. Investors want to see the financing operation on its own terms, separate from the trading margins. And the business itself benefits from having the two activities clearly separated in its financial records. An SPV is the structure that makes this separation possible.
An SPV, or Special Purpose Vehicle, is a separate company set up specifically to hold the customer loans and manage the external funding that finances them. The trading company continues doing what it does: sourcing products, contracting with customers, and delivering assets. When a sale is made, the SPV pays the trading company the full invoice amount using a combination of the customer’s deposit and funds drawn from the lender. The customer then repays the SPV in monthly instalments until the loan is settled. The two businesses operate side by side, with the trading company focused on sales and the SPV focused on managing the loan book.
BEFORE THE SPV CAN TRANSACT, THE FOLLOWING MUST BE IN PLACE
- The SPV must be incorporated and registered under the Hire Purchase Act (Cap 507). Operating without registration exposes directors personally to fines and potential criminal liability.
- A formal agreement between the trading company and the SPV setting out how invoices are settled, how cash moves between the two entities, and any fees charged for services.
- A facility agreement with the lender, with the interest rate set at a level that can be justified as a commercial market rate.
- Transfer pricing documentation if the trading company charges the SPV any fees, to satisfy KRA that the pricing between the two related entities is fair.
- An accounting policy document that sets out how each entity records its transactions and how the two sets of books are combined for group reporting purposes.
What Happens to Your Existing Customers When You Transition
When a business moves to an SPV structure, one of the first practical questions is what to do about customers who are already partway through their repayment schedule. You cannot simply tell existing customers that a different company now owns their loan without following the right legal process. And not every customer is worth migrating.
Our recommendation is to split the existing customer book into two groups based on how much time is left on their repayment schedule. Customers with less than 12 months remaining should simply be left to finish paying under the existing arrangement. The cost and effort of moving them into the SPV is not worth it for the short time left on the loan. Customers with 12 months or more remaining are worth migrating. They represent the bulk of the outstanding loan book, and bringing them into the SPV means the lender has better security and the business has a cleaner financial picture going forward.
There are two legal ways to move a customer loan from the trading company into the SPV. The first is assignment, where the trading company formally transfers the right to collect future payments to the SPV and notifies the customer in writing. The customer does not need to sign anything, but they do need to be told where to send their payments. The second is novation, where the original loan agreement is cancelled and replaced with a new one between the customer and the SPV. This gives the SPV a cleaner legal position but requires each customer to agree and sign. In most cases, assignment is the practical starting point, with novation used where the original customer agreement specifically requires it or where the lender insists on it.
| STAMP DUTY: TWO QUESTIONS TO RESOLVE BEFORE YOU TRANSFER
Stamp duty raises two separate issues when you transfer customer loans to an SPV. First, confirm that stamp duty at 1% of the total hire purchase price was paid on each of the original customer agreements when they were signed. This is a pre-existing obligation and needs to be checked independently of the transfer. Second, the transfer document itself, whether an assignment deed or a novation deed, may or may not attract stamp duty depending on how it is drafted. Get a legal opinion on both before you proceed. |
Your Existing Invoices Cannot Be Restated
A question that comes up in almost every transition conversation is whether the business can go back and restate old invoices to match the new accounting treatment. The answer is no, and the reason has nothing to do with accounting rules. It is because of how eTIMS works.
Every invoice raised through eTIMS is transmitted to KRA in real time and creates a permanent record. That record fixes the amount, the date, and the VAT position as they stood when the invoice was issued. You cannot change what has already been sent to KRA. If you try to restate historical transactions in your books in a way that contradicts the eTIMS record, you create a mismatch between your financial statements and your KRA filing history. That mismatch is exactly the kind of thing that triggers an audit and creates penalties. The new treatment applies from the date you adopt it, and everything before that date stays as it was.
The Cost of Getting It Right Is Less Than the Cost of Getting It Wrong
Setting up the right structure for a hire purchase business takes time, legal and advisory fees, and internal effort. Registration, contracts, accounting policies, transfer pricing documentation, none of it is free. But every one of those costs is fixed and manageable when the business is still at a scale where decisions can be made deliberately.
The businesses we see that deferred the structural work tend to encounter it again at the worst possible moment, when a lender is doing due diligence before releasing a facility, when KRA is running an audit, or when the business is preparing financial statements for an investor or acquirer. At that point, the cost of remediation is multiples of what it would have cost to do it properly from the start, and the timeline is someone else’s to dictate.
Getting the structure right is not just a compliance exercise. It is what makes the business financeable, auditable, and ready to scale.
About the Author
Augustine Mwaura | CPA (K)
Augustine is a Certified Public Accountant of Kenya and the lead financial consultant at Intelpoint Consulting Limited, with over 15 years of experience advising businesses across Kenya and the broader African market. He works with organizations ranging from MSMEs to large corporates, helping them navigate the intersection of business modelling, financial strategy, accounting, and tax compliance.
Augustine has built his practice across a diverse range of sectors including financial services, fintech, ICT, manufacturing, and legal services. This cross-sector experience gives him a practical perspective on the structural and compliance challenges that growing businesses face, particularly those operating at the point where a commercial model begins to take on the characteristics of a regulated financial activity.
His advisory work spans business structuring, revenue recognition, tax planning, regulatory compliance, and financial reporting, with a particular focus on helping businesses build frameworks that are audit-ready, investor-ready, and scalable from the ground up.