Doing Business In: Kenya
Dentons Hamilton Harrison & MathewsView Firm Profile
Kenya has shown a resilient recovery from the COVID-19 pandemic with efforts being undertaken to support trade, attract further foreign investment and improve value chain development across various economic sectors.
Kenya is considered the economic, commercial, financial and logistics hub of East and Central Africa. With the strongest industrial base in the region, Kenya has been successful in attracting investors who seek to reap the benefits of its regional position.
Kenya has the largest economy in East Africa offering advantages as an investment destination including:
- a stable investment environment,
- its strategic location as a regional financial, communication and transport hub,
- a highly skilled human resource, and
- a well-established private sector with vibrant capital markets.
Similarly, advancements in sectors such as Information Communications and Technology (ICT) have led the technology sector to become one of the major business sectors in Kenya. Kenya also enjoys one of the highest internet access rates in sub-Saharan Africa. Kenya recently landed its sixth submarine fibre cable in March 2022. The cable will improve efficiency and cut internet costs in Kenya as well as the region.
The business entities through which one may opt to make investments in the country include:
- Limited liability companies
- Limited liability partnerships
- Foreign registered companies i. e., branches of Companies incorporated outside Kenya
- Commercial trusts
Depending on the choice of one’s investment various structures are available in Kenya including business set-up, joint ventures, mergers & acquisitions, and public private partnerships among others. The different investment structures have various legal, regulatory and tax considerations attached to them and are guided by comprehensive laws and business practices. Furthermore, depending on the applicable sectors, the investment structures would need to seek approval of different regulators, most of whom are established under the applicable laws.
Kenya’s Legal System
Kenya operates the British common law system underpinned by the historic ties between Britain and Kenya. The supreme law in Kenya is the Constitution of Kenya, 2010, to which all other laws are subservient. The general rules of international law as well as any treaties and conventions ratified by Kenya also form part of the law of Kenya.
The Judicature Act of 1967 sets out the sources of law in Kenya as follows:
- written laws (statutes)
- common law
- doctrines of equity
- statutes of general application in force in England on or before 12 August 1897
- African customary law
Kenya operates a devolved system of government comprising the national government and 47 county governments. At the national level, laws are enacted in Parliament (comprising of the National Assembly and the Senate) while at the county level, the laws are enacted at the relevant county assemblies.
The court system consists of superior courts comprising the Supreme Court, Court of Appeal and the High Court and subordinate courts comprising Magistrates Courts, Kadhis’ Courts, Court Martials, Small Claims Court and other courts or local tribunals.
Investors may also consider alternative dispute resolution methods with modes such as arbitration and mediation being preferred due to time and, in most instances, cost efficiencies with respect to resolving disputes.
The Kenyan shilling remains one of the most stable currencies in East Africa. The Central Bank of Kenya (CBK) manages the nation’s currency and allows its exchange rate to float freely with others in the global forex market. The CBK’s mandate is to sustain price stability, maintain liquidity in the country’s financial system, and support growth and investment. The government has also freed the Kenyan shilling exchange rate to be market driven with no restrictions on remittance or repatriation of profits and dividends.
Kenya’s inflation rate stood at 5.4% in January 2022. Inflation is projected to remain within the CBK’s target range of 2.5% to 7.5%, whereas fiscal and current account deficits are expected to reduce due to increased revenue collection and exports for the year 2021.
Kenya operates a liberal economy which promotes trade and investment with the main sectors being agriculture, financial services, tourism, ICT, and manufacturing.
The agricultural sector contributes 24% to the country’s Gross Domestic Product (GDP) with 70% of export earnings. It is also the largest employer with more than 40% of the total population and more than 80% of Kenya’s rural population earning from the sector. The sector remained resilient at the height of the COVID-19 Pandemic helping to limit the contraction in GDP to only 0.3%.
The tourism sector remains a major player in Kenya’s historically contributing to 10.4% of the GDP and directly employing 990,000 jobs. However, the COVID-19 Pandemic caused a decline of 78.4 % of tourist arrivals in 2020 compared to 2019, resulting in a 99.7% decline in earnings from $1.5 billion in 2019 to $4.6 million in 2020. It is projected that the Kenyan economy will increase its annual growth rate, from 5.0% in 2021 to 5.9% in 2022 reflecting an increase of 18%. The economy may grow following the resumption of normal economic activities and the implementation of the Government of Kenya’s Economic Recovery Strategy. Therefore, analysts anticipate that the tourism sector is it likely to bounce back compared to the last two years.
Kenya’s financial sector is the third largest in sub-Saharan Africa and is driven by increased adoption of technology, emergence of alternative channels of distribution, increased financial inclusion levels and a stable regulatory environment.
Overall, Kenya’s financial sector was resilient during the height of the COVID–19 Pandemic because of strong capital and liquidity buffers that were built over time following several government reforms and business innovativeness. However, rapid adoption of financial technology, re-engineering business models and innovations have resulted in complex and new emerging risks including increased fraudulent activity, cyber–attacks and cybersecurity threats as well as data privacy concerns (personal information theft).
Kenya is also a regional leader in ICT as a top innovation hub, attracting strategic businesses in ICT with several blue-chip technology companies operating from Nairobi.
With the upcoming presidential elections in August 2022, it is anticipated that political activity may slow down some sectors as key players ordinarily adopt a ‘wait and see’ approach. That said, most of the country remains confident of a peaceful election cycle.
Business Environment and Recent Developments
There have been developments in various sectors over the past year summarised in the table below:
|Infrastructure and Public Private Partnerships (PPPs)||The Public Private Partnerships Act, 2021 (the PPP Act) came into force on 23rd December 2021 and repealed the Public Private Partnerships Act, 2013 (the Repealed PPP Act). The PPP Act seeks to improve and enhance the PPP framework in Kenya by introducing various changes in the sector at the national and county government level.|
The Act establishes a Directorate of PPPs (the Directorate) which will serve as the lead institution in the implementation of PPPs in charge of originating, guiding, and coordinating the selection, ranking and prioritization of PPP projects and overseeing project appraisal and development activities of contracting authorities (CAs). The Directorate carries out most of the functions of the PPP Unit that was established under the Repealed Act.
Under the Repealed PPP Act, a CA seeking to enter a PPP arrangement with a private party was to establish a PPP node. A PPP node’s mandate was to among other things, prepare project agreements, ensure parties complied with the Repealed PPP Act and monitor the implementation of a project agreement. Under the PPP Act, majority of the functions of the PPP node are now to be performed directly by a contracting authority in liaison with the Directorate.
The PPP Act provides for new procurement methods including direct procurement and restricted bidding adding to those prescribed under the Repealed PPP Act such as competitive bidding and privately-initiated proposals.
The PPP Act introduces new arrangements to PPP structures which allow parties to consider more options and evaluate risks including Brownfield Concessions, Build Transfer models, Annuity-based Design, Build, Finance and Operate models and Joint Venture partnerships.
The PPP Act also imposes a success fee of up to 1% of the total project cost, payable by a private party that achieves financial close (the date when all conditions precedent required to be met to achieve first drawdown on senior debt under a project agreement are met).
The PPP Act expands the pre-qualification procedures that a CA must comply with including satisfaction of the legal, social, and environmental due diligence parameters prescribed by the Directorate.
Approval of the Cabinet Secretary is required under the PPP Act to restructure a project company’s shareholding to secure the equity component of a transaction if such restructuring does not (i) alter the overall split between debt and equity approved under the project agreement or (ii) dilute the majority position of the lead member of a consortium within the project company’s shareholding structure. Previously, only CA approval was required change in shareholding.
|Business||The Business Laws (Amendment) Act, 2021 (the BLAA) expanded the definition of a general meeting under the Companies Act to provide that a general meeting may take place as either a physical, virtual or hybrid meeting. A notice of a general meeting must, in addition to all previous requirements, specify the means of joining and participating in the meeting.|
The BLAA also amended the Law of Contract Act to align it with the Companies Act, 2015 which abolished the use of common seals to execute documents.
The Companies (Beneficial Ownership Information) (Amendment) Regulations, 2022 (the Beneficial Ownership Amendment Regulations) introduced additional provisions regulating the disclosure of beneficial ownership information.
The Beneficial Ownership Amendment Regulations provide for additional disclosure obligations for companies which participate in Public Procurement and Assets Disposal under the PPAD Act, 2015 and Public Private Partnerships (PPP) under the PPP Act, 2013.
Private parties which participate in (or intend to participate in) public procurement arrangements and PPPs are now required to disclose their beneficial ownership information. Beneficial ownership information maintained by the Public Procurement Regulatory Authority in the Government Portal, in relation to entities that have been awarded a tender by the procuring entity as part of contract award shall be published and made publicly available. The PPP Directorate may also publish such information.
|The Central Bank of Kenya (Amendment) Act, 2021 was assented into law in December 2021 with the principal objective of bringing the provision of credit or loan facilities through digital channels under the purview of the CBK.|
Further, the CBK Digital Credit Providers Regulations, 2022 become operational in March 2022 and provide for the licensing, governance, and credit operations of digital credit providers. Under such Regulations, all previously unregulated digital credit providers must apply to the CBK for a license within six months of the publication of the Regulations, that is by 17 September 2022, or cease operations.
|The National Information Communications and Technology Policy Guidelines, 2020 (the 2020 ICT Policy) replaced the Kenya National ICT Policy Guidelines, 2006. The 2020 ICT Policy provides that a company licensed to provide information communications and technology services in Kenya, unless exempted by the relevant Cabinet Secretary, must have a minimum of 30% substantive Kenyan ownership (the Local Ownership Requirement). The 2020 ICT Policy was amended in April 2021 under Kenya Gazette Notice No. 3192 dated 25 March 2021, which provided further clarifications on the Local Ownership Requirement. We summarise these below:|
· Existing licensees with less than the 20% local equity requirement and have not exhausted their three-year grace period will be required to meet the 30% local equity rule at the end of such a grace period.
· Existing licensees that met the 20% local equity requirement before the 2020 ICT Policy was published have two years from 7 August 2020 to meet the 30% local equity requirement.
· Existing licensees that had been granted a waiver under the ICT Sector Policy Guidelines of 2006 will have 3 years to meet the 30% local equity requirement from 25 March 2021.
· New applicants for licences have 3 years to meet the 30% local equity requirement from the date of issue of their licences.
· Companies registered to exclusively offer Business Process Outsourcing Services are exempted from complying with the 30% local equity requirement.
|Since the setting up of the Office of the Data Protection Commissioner in November 2020, the following steps have been taken with respect to data protection:|
· The Data Protection (Registration of Data Controllers and Data Processors) Regulations, 2021 (the Registration Regulations); the Data Protection (General) Regulations, 2021 (the General Regulations); and the Data Protection (Complaints Handling Procedure and Enforcement) Regulations, 2021 (the Complaints Regulations) were approved by Parliament in February 2022.
· The General Regulations and Complaints Regulations are in force. However, the Registration Regulations will come into effect six months from the date of their publication (14 July 2022).
· Further, the ODPC has issued for public comment its Alternative Disputes Resolution framework which seeks to govern how parties resolve their data protection disputes arising under the Data Protection Act, 2019.
|Competition and Anti-Trust||The Competition Authority of Kenya (the CAK) published Buyer Power Guidelines (the Guidelines) in March 2022 which clarifies the CAK interpretation of buyer power and the principles that the CAK will follow when assessing conduct that may constitute abuse of buyer power.|
Under the Guidelines, the CAK will implement a two-step approach in the assessment of abuse of buyer power. First, the CAK will determine whether buyer power exists and consider all relevant circumstances including, the nature and determination of contract terms between the concerned undertakings, the payment requested for access to infrastructure and the price paid to suppliers.
The CAK also published the Retail Code of Practice (the Retail Code) which borrows heavily from the UK’s Grocery Supply Code of Practice. The Retail Code applies to retailers and suppliers and requires them to deal fairly and ethically with each other by conducting their trading relationships with each other in good faith, without distinction between formal and informal arrangements and without duress.
|Employment law||The Employment (Amendment) Act, 2022 introduced amendments to the Employment Act that now require an employer to request for relevant compliance and clearance certificates only upon granting a prospective employer an offer of employment.|
In most instances, compliance and clearance certificates are usually required from government agencies such as the Kenya Revenue Authority (KRA), the Higher Educations Loans Board (HELB), the Directorate of Criminal Investigation (DCI) etc.
An employer is allowed to rescind an offer of employment where the prospective employee cannot provide the necessary clearance or compliance certificates or if after providing the necessary certificates, the employee is not able to satisfy the mandatory clearance requirements.
The above changes will necessitate employers to change their recruitment processes specifically on how they conduct background checks.
|Tax||With effect from 1 January 2022, a company is deemed to be thinly capitalized where the gross interest paid or payable by the company to related persons and third parties exceeds 30% of the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) in any financial year. This requirement applies to interest on all loans, payments that are economically equivalent to interest and expenses incurred in connection with raising financing for a company.|
|Anti-Counterfeit||Kenya’s Anti-Counterfeit Authority (the ACA) is commencing implementation of recordation of intellectual property rights effective from 1 July 2022. This process is on the back of amendments made to the Anti-Counterfeit Act that now requires that trademarks and other IP rights relating to goods to be imported into Kenya to be recorded with the ACA.|
Foreign Shareholding Restrictions
There are various regulators in the Kenyan economy covering the main economic sectors. The regulatory bodies exercise their mandate as provided under their establishing statutes. Efforts are being made to remove administrative barriers and improve regulatory delivery across various sectors.
There are various restrictions that apply to foreign shareholdings in entities operating in certain sectors and specialised fields. The restrictions are summarised in the table below:
|Telecommunication||The National Information Communications and Technology (ICT) Policy Guidelines, 2020 caps foreign ownership in a company that provides telecommunication services to 70% of the issued share capital.|
A subscription management services provider cannot from entering contractual arrangements with a foreign multi-channel satellite provider unless the foreign provider has landing rights in Kenya. Foreign ownership in a subscription management services licensee is capped at 80% of the shareholding
|Mining||Under the Mining Act, 2016 foreign ownership of companies that are eligible for holding or acquiring an artisanal mining permit, a prospecting permit, a mining permit, and a mining dealers permit is capped at 40% of the shareholding.|
|Insurance||Under the Insurance Act, foreign ownership is capped at two-thirds of the issued share capital.|
|Engineering||Under the Engineering Act, foreign ownership in engineering consulting firms is capped at 49% of the issued share capital.|
|Private security services||Under the Private Security Regulation Act, foreign ownership in a private security service company is capped at 75% of the shareholding.|
The Foreign Investment Protection Act guarantees foreign direct investors’ right to capital repatriation, remittance of dividends and the principal and interest associated with any loan. The right is conditional upon the payment of relevant taxes.
The restrictions apply in instances where one is operating in the above discussed sectors to which foreign restrictions apply.
There are no exchange control laws in Kenya. The CBK can impose restrictions on remittances from Kenya to enable the government to meet its obligations under any international treaty however, this blanket power has yet to be exercised. The CBK regulates currency flow through regulations that require any transaction to or from a foreign recipient or within Kenya be effected through a bank licensed by the CBK.
For payments between $10,000 and $499,999 one must attach evidence of the purpose of the payment. An authorised bank must also notify the CBK of any payment above $500,000.
The Proceeds of Crime and Anti-Money Laundering Act 2009 places various reporting obligations on reporting institutions, defined as financial institutions and designated non-financial businesses and professions. Reporting institutions must register with the Financial Reporting Centre and adhere to obligations under Proceeds of Crime and Anti-Money Laundering Act.
Current Opportunities for New Investors
- Special Economic Zones and Export Processing Zones
Investors may take advantage of government initiatives established to boost trade and investment such as the Special Economic Zones (SEZs) and Export Processing Zones (EPZs).
An SEZ is defined as a designated geographical area with business enabling policies which seek to facilitate global and local investments, whereby any goods introduced, and specified services provided are regarded, in so far as import duties and taxes are concerned, as being outside the customs territory. There are 9 gazetted SEZs in Kenya.
An EPZ is defined as a designated part of Kenya where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the customs territory but are duly restricted by controlled access and where the benefits provided under the EPZ Act apply. The aim of EPZs is to create and promote export oriented industrial investment within the designated zones. Currently there are over 40 gazetted zones across the country.
SEZs and EPZs provide investment opportunities by offering integrated infrastructure facilities and access to business and economic incentives through the removal of trade barriers and impediments.
- Nairobi International Financial Centre
Investors may also seek to benefit from the recently established Nairobi International Financial Centre (the NIFC) which seeks to serve as Kenya’s new gateway to foreign investment. The NIFC is intended to act as an operating framework that develops an attractive business environment for local and foreign investors interested in investing in, and conducting business related to, financial services (and provision of related activities) in and from Kenya.
The NIFC will be made up of entities certified by the NIFC Authority as NIFC Firms. Such certification authorises the business to conduct qualified activities in Kenya as NIFC Firms. The qualified services include provision of financial services in various sectors including banking and finance (including fintech, green and digital finance), insurance, asset managers, international legal services, accounting and actuarial services among others.
Investors intending to invest $100,000 or more may obtain investment certificates from the Kenya Investment Authority (KenInvest) which is a statutory body established under the Investment Promotion Act, 2004. KenInvest seeks to promote and facilitate investment in Kenya by assisting investors in:
- (i) obtaining any necessary licences and permits,
- (ii) obtaining incentives or exemptions under various laws such as the Income Tax Act, the Customs and Excise Act, the Value Added Tax Act, and
- (iii) providing information, including information on investment opportunities or sources of
A KenInvest investment certificate comprises various licenses required for general compliance. The holder of such certificate is also entitled to various immigration permits and passes. KenInvest also liaises with other government agencies to issue additional licenses and approvals not directly handled by the Authority.
KenInvest seeks to serve as a ‘one-stop-shop’ for investors into Kenya. Investor promotion and facilitation by the Authority seeks to expedite foreign direct investment into Kenya.