Kenya is home to almost 50% more intermediaries, service providers, and other ecosystem players than any other East African country. The broader business environment is becoming more supportive and sophisticated, providing more options to partner with suppliers, distributors, and other commercial entities. It is expected that Kenya’s strong growth will continue as it garners more attention and support.Overall, Kenya has a welcoming regulatory climate with few distinctions between foreign and local investors. According to the World Bank’s Ease of Doing Business rankings, it is one of the easier places to do business in East Africa, ranking 4th of the 11 countries in the region, and 12th in Sub-Saharan Africa overall. The primary regulatory risk in the near future is Kenya’s ongoing devolution process, designed to provide increasing autonomy to local county governments. The new 2010 Kenyan Constitution devolved significant powers from the central government to 47 newly created county governments. The exact division of responsibilities between the national government and the counties is still unclear and is only outlined in broad strokes in the constitution, leading to uncertainty about which level of government to approach for regulation.
Devolution has also expanded the number of organizations with regulatory power, opening the door to inconsistent regulations and enforcement in different counties and correspondingly complex compliance requirements.Despite this, the overall regulatory climate in Kenya supports foreign investment across a number of dimensions:
Repatriation of profits and dividends: Kenyan law actively protects foreign investor exits, guaranteeing capital repatriation and remittance of both dividends and interest. Foreign investors can convert and repatriate profits without difficulty, including un-capitalized retained earnings. The only salient difference between local and foreign investors in this regard is that the withholding tax on dividends distributed to residents and East African Community citizens is 5% compared to 10% for foreign nationals.
Foreign exchange controls: Kenya has open foreign exchange rules. Foreign exchange is freely available from commercial banks and can be acquired at similar rates by locals and foreign nationals. Exchange across East Africa still poses a significant risk, as hedging tertiary global currencies can be prohibitively expensive, especially for smaller transactions. Since 2011, when the Kenyan Shilling lost and recovered more than 25% in the course of a year, Kenya has successfully managed foreign exchange risk, with the Kenyan Shilling depreciating less than 4% on an annual basis using a free-floating exchange.
Leasehold structure for foreign land ownership: The most prominent regulatory restriction in Kenya is on foreign ownership of land, particularly agricultural land. Land is a charged issue in Kenya and the basis for considerable ongoing political dispute. Land use, management, and ownership were among the key issues that led to the new constitution in 2010. The new constitution mandated that noncitizens can only hold land in 99-year leases directly from the government and automatically converted all previous foreign ownership interests to leases. These leases have no rent, but the leasehold structure permits the government to reclaim the land later if desired.
Agricultural land: Agricultural land is defined as land that is outside the municipality jurisdiction and which has not been approved for another purpose. All transactions involving agricultural land must be approved by the Land Control Board, which will not approve transactions to non-citizens. To circumvent this sweeping restriction, some non-citizens have formed companies owned entirely by Kenyan citizens while retaining control by appointing non-citizen directors and requiring the shareholders to sign agreements giving the non-citizens control of the shares, if not legal ownership. This allows the formal requirements of the law to be met while enabling non-citizens the use and control of agricultural lands.
Local ownership requirements: By and large, Kenya does not restrict foreign investors from owning shares in a company except in a few specific industries. These industries include insurance (wherein foreign ownership is capped at 66.7%), telecommunications (80%), mining (65%), shipping (49%), fisheries (49%), and publicly listed companies (75%). In addition, foreign brokerage companies and fund management firms are only allowed to participate in the local capital market through locally registered companies, which must have Kenyan ownership of 30% and 51% respectively. This regulation pertains specifically to public markets, and does not apply to private placements common for impact investors. Similarly, there are no prohibitions on the acquisition of Kenyan firms by foreign-owned firms or on joint venture arrangements between Kenyans and foreigners.
Government enterprises: Once occupying a prominent place in the economy, the Kenyan government has largely exited the private sector except in certain key industries, like energy. To the extent that parastatals are still active, they largely compete on a level playing field with the private sector.Kenya’s Companies Act makes it clear that enterprises intending to profit from their activities must incorporate using traditional company structures. In addition, it can take significant time and compliance to register a local nonprofit. Many social enterprises have responded by incorporating local for-profit companies that partner closely with international nonprofit affiliates that provide broad support for the activities undertaken by the local company.