2008 Investment Climate Statement - Kenya
Openness to Foreign Investment
The legal framework for FDI is provided by the Companies Ordinance, the Partnership Act, the Foreign Investment Protection Act, and the Investment Promotion Act 2004. To attract investment, the GOK has enacted several reforms, which include abolishing export and import licensing, except for a few items listed in the Imports, Exports and Essential Supplies Act, rationalizing and reducing import tariffs, revoking all export duties and current account restrictions, freeing the Kenya shilling’s exchange rate, allowing residents and non-residents to open foreign currency accounts with domestic banks, and removing restrictions on borrowing by foreign as well as domestic companies.
The respective roles of the public and private sectors have evolved since independence in 1963, with a shift in emphasis from public investment to private sector-led investment. The GOK has introduced market-based reforms and provided more incentives for both local and foreign private investment. Foreign investors seeking to establish a presence in Kenya generally receive the same treatment as local investors, but there are some exceptions. Multinational companies make up a large percentage of Kenya’s industrial sector.
A relatively recent investment code, articulated in the Investment Promotion Act of 2004, is designed to streamline the administrative and legal procedures to achieve a more effective investment climate. It came into force when published in the Kenya Gazette Supplement No.87 on January 3, 2005. The Investment Promotion Act of 2004’s objective is to attract and facilitate investment by assisting investors in obtaining the licenses necessary to invest and by providing other assistance and incentives. The Act replaced the government’s Investment Promotion Center with the new Kenya Investment Authority (KIA). The law creates some new barriers, however. Namely, it sets the minimum foreign investment threshold at $500,000 (likely to be reduced to $100,000 in 2008), and conditions some benefits on obtaining an investment certificate from the KIA. The requirement is likely to deter investment despite the argument that it is meant to protect small domestic businesses in certain areas. Foreign employees are expected to be key senior managers or have special skills not available locally. Foreign investors are required to sign an agreement with the government defining training arrangements intended to phase out expatriates. Any enterprise, whether local or foreign, may recruit expatriates for any category of skilled labor if Kenyans are not available.
The GOK focuses its investment promotion on opportunities that earn foreign exchange, provide employment, promote backward and forward linkages, and transfer technology. The only significant sectors in which investment (both foreign and domestic) are constrained are those where state corporations still enjoy a statutory monopoly. These are restricted almost entirely to infrastructure (e.g., power, posts, telecommunications, and ports) and the media, although there has been partial liberalization of these sectors. For example, in recent years, five Independent Power Producers (IPPs) have begun operations in Kenya. Foreign telecom companies can also establish themselves in Kenya, but must have at least 30% local ownership.
All resident companies are subject to tax on their incomes at the rate of 30%. Branches of non-resident companies pay tax at the rate of 37.5%. Taxable income is generally defined to be income sourced in or from Kenya. Value Added Tax (VAT) is levied on goods imported into or manufactured in Kenya, and taxable services provided. The standard VAT rate is 16%. Work permits are required for all foreign nationals wishing to work in the country. It is becoming increasingly difficult for expatriates to obtain work permits because the GOK says qualified middle level managers and technical staffs are available locally but this may be driven more by the high unemployment level. The official unemployment level is 10.5% but there are numerous indications that the real unemployment rate in the country is over 40%. There is no discrimination against foreign investors in access to government-financed research. The government’s export promotion programs do not distinguish between local and foreign-owned goods.
UNCTAD, in conjunction with the International Chamber of Commerce (ICC), published an Investment Guide to Kenya in May 2005. The guide provides comprehensive analyses of investment trends, opportunities, and the regulatory framework in the country. According to the UNCTAD report (and most observers), significant disincentives for investment in Kenya include governmental overregulation and inefficiency, expensive and irregular electricity and water supplies, an underdeveloped telecommunications sector, a poor transport infrastructure, and high costs associated with crime and general insecurity.
Efforts have been made to harmonize the investment regimes and incentives among the original East African Community (EAC) countries (Tanzania, Kenya and Uganda). Tariff barriers among the three East African countries were removed in 1999. In 2004, Kenya, Tanzania and Uganda signed a Customs Union Protocol, putting in place a three-tier tariff system and paving the way for further steps towards a common market. Rwanda and Burundi acceded to the EAC on June 18, 2007 and became full members of the Community effective July 1, 2007. The EAC aims at widening and deepening cooperation among the partner states in, among others, political, economic and social fields for mutual benefit. Under the protocol, EAC member states are to allow zero-rated entry of raw materials from EAC members, levy a 10% duty on semi-processed goods, and levy a 25% duty on finished goods. The realization of a large economic bloc with a combined population of more than 120 million and a combined gross domestic product of $41 billion bears great strategic and geopolitical significance and offers the prospects of a renewed and reinvigorated EAC. Non-tariff barriers (NTBs), however, remain a problem in the EAC. A March 2005 report on NTBs and the “Development of a Business Climate Index in the Eastern African Region” by the East African Business Council identified administration of duties and other taxes as the main NTB, followed closely by corruption. The report also indicates that Kenya’s level of investment and business optimism is dampened by low expectations relating to improvements in infrastructure, access to land, and profitability in business.
The GOK has sought foreign investment through investment conferences and foreign trips occasionally led by the Head of State. In August 2005, Kenyan President Mwai Kibaki made a five-day visit to China to market Kenya as an investment destination to prospective Chinese investors. President Kibaki made a follow-up trip to China in November 2006 as part of the government’s strategy to broaden economic co-operation and diversify marketing activities into the non-traditional markets of the Far East. China is increasingly becoming an important trading partner that commands 6.6% of import share in the year to July 2007 compared to 4.9% in 2006. US import share in the same period was 7.9% compared to 4.1% previously. In early June 2007, Kibaki led a trade delegation on a three-day tour to Libya, where he sought oil at concessionary rates.
There are no restrictions on converting or transferring funds associated with investment. Under Kenyan law, amounts above KSh 500,000 (about $7,700) have to be declared as a formal check against money laundering although this is rarely enforced due to lack of appropriate legislation. The government published and tabled in Parliament the Proceeds of Crime and Anti-Money Laundering Bill of 2007 but it was not debated. The bill lapsed and has to be re-published and re-submitted in the Tenth Parliament.
Kenyan investment law is modeled on English investment law. The Companies Act, the Investment Promotion Act, and the Foreign Investment Act are the main pieces of legislation governing investment in Kenya. Kenyan law provides protection against the expropriation of private property except where due process is followed and adequate and prompt compensation is provided. Further protection is also guaranteed by various bilateral agreements with other countries. Expropriation may only occur for either security reasons or public interest. The GOK may revoke a foreign investment license if (1) an untrue statement is made while applying for the license; the provisions of the Investment Promotion Act or of any other law under which the license is granted are breached; or, if (2) there is a breach of the terms and conditions of the general authority. The Investment Promotion Act of 2004 provides for revocation of the license in instances of fraudulent representation to the Kenya Investment Authority (KIA) by giving a written notice to the investor to show cause within 30 days from the date of notice why the license should not be revoked. In practice, licenses are rarely revoked.
In September 2007, squatters invaded a 15,000-acre private homestead in Coast Province, barely a month after President Kibaki announced that idle land would be re-possessed and given to the landless. The private property owner is challenging the squatters’ confiscation of his land in court.
Kenya is a member of the World Bank-affiliated Multilateral Investment Guarantee Agency (MIGA), which issues guarantees against non-commercial risk to enterprises that invest in member countries. It is also a signatory to the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. The Convention established the International Center for Settlement of Investment Disputes (ICSID) under the auspices of the World Bank. Kenya is also a member of the Africa Trade Insurance Agency (ATIA). Kenya is a member of many other global and regional organizations and treaties including; the Common Market for Eastern and Southern Africa (COMESA); the Cotonou Agreement between the European Union and the African, Caribbean and Pacific States (ACP); the East African Community (EAC); the Paris Convention on Intellectual Property, the Universal Copyright Convention and the Berne Copyright Convention; the World Intellectual Property Organization (WIPO), and the World Trade Organization (WTO). Kenya has also signed double taxation treaties with a number of countries including Canada, China, Germany, France, Japan, Netherlands, India, among others. On November 27, 2007, Kenya joined with its EAC sister states in signing the first-ever interim economic partnership agreement (EPA) with the European Community (EC).
The Kenyan Constitution guarantees the protection of life and property, which are also protected under the Penal Code of Laws of Kenya. Their violation is actionable in criminal law. Despite these protections, insecurity in the forms of international terrorism, unsafe borders, and common crime has been a major concern to many investors in Kenya.
Kenya’s judicial system is modeled after the British, with magistrates’ courts, high courts in major towns and a Court of Appeal at the apex of the judicial system. Immediately below the high courts are Subordinate Courts consisting of the Kadhis’ Courts, the Resident Magistrate’s Courts, the District Magistrate’s Courts, and the Court Martial (for members of the Armed Forces). In addition, there is a separate industrial court that hears disputes over wages and labor terms. Its decisions cannot be appealed, except on procedural grounds.
The Foreign Judgments (Reciprocal Enforcement) Act provides for the enforcement in Kenya of judgments given in other countries that accord reciprocal treatment to judgments given in Kenya. The countries with which Kenya has entered into reciprocal enforcement agreements are Australia, the United Kingdom, Malawi, Tanzania, Uganda, Zambia, and Seychelles.
Without such an agreement, a foreign judgment is not enforceable in the Kenyan courts except by filing suit on the judgment. Kenyan courts as a general rule recognize a governing-law clause in an agreement that provides for foreign law. A Kenyan court would not give effect to a foreign law if the parties intended to apply it in order to evade the mandatory provisions of a Kenyan law with which the agreement has its most substantial connection, and which the court would normally have applied.
Foreign advocates are not entitled to practice in Kenya unless they are instructed and accompanied by a Kenyan advocate, although a foreign advocate may practice as an advocate for the purposes of a specified suit or matter if appointed to do so by the Attorney General. All advocates in private practice are members of the Law Society of Kenya (LSK) while those in public service need not be.
Kenya does not have a bankruptcy law. Creditors’ rights are comparable to those in other common law countries. Monetary judgments are usually made in Kenyan shillings. The government does accept binding international arbitration of investment disputes with foreign investors. Apart from being a member of the ICSID, Kenya is a party to the New York Convention on the Enforcement of Foreign Arbitral Awards (1958).
Investors in the manufacturing and hotel sectors are permitted to deduct from their taxes a large portion of the cost of buildings and capital machinery. All locally financed materials and equipment (excluding motor vehicles and goods for regular repair and maintenance) for use in construction or refurbishment of tourist hotels are zero-rated for purposes of Value Added Tax (VAT). The Ministry of Finance permanent secretary must approve such purchases. The government permits some VAT remission on capital goods, including plants, machinery and equipment for new investment, expansion of investment and replacement. The investment allowance under the Income Tax Act is set at 100%. Materials imported for use in manufacturing for export or for production of duty-free items for domestic sale qualify. Approved suppliers, who manufacture goods to be supplied to the exporter, are also entitled to the same import duty relief. The program is also open to Kenyan companies producing goods that can be imported duty-free or goods for supply to the armed forces or to an approved aid-funded project. Fiscal incentives offered by the Kenyan government to Export Processing Zone (EPZ) investments and registered and approved venture-capital-fund investments include 10 years’ tax holiday and a flat 25% tax for the next 10 years; exemption from withholding taxes during the first 10 years; exemption from import duties on machinery, raw materials, and inputs; no restrictions on management or technical arrangements; and exemption from stamp duty and from the VAT on raw materials, machinery and other inputs. The Export Promotion Programs Office, set up in 1992 under the Ministry of Finance, administers the duty remission facility.
The government established a Manufacturing Under Bond (MUB) program in 1986 that is open to both local and foreign investors. Enterprises operating under the program are exempted from duty and VAT on imported plants, machinery, equipment, raw materials, and other imported inputs. The Kenya Revenue Authority (KRA) administers the program.
Foreign investors are attracted to the EPZs by their single licensing regime, tax incentives and support services provided such as power and water. Although the number of enterprises operating in Kenya’s 39 EPZs increased from 66 in 2003 to 74 in 2004, they declined to 68 in 2005 following the end of the Multi-fiber Textile Agreement in January 2005 before increasing to 71 in 2006. In late 2007, 68 were in operation but the Kenya Association of Manufacturers (KAM) predicted several apparel factories would likely close by year’s end. The initial increase in the number of apparel factories was largely due to the preferential access and duty free status accorded to Kenyan apparel exports into the U.S. under the African Growth and Opportunity Act (AGOA). Kenya’s major exports under AGOA include apparel and handicrafts. The majority of Kenya’s manufactured products are entitled to preferential duty treatment in Canada and the European Union. By statute, manufacturing companies, whether domestic or foreign-owned, are not permitted to distribute their own products.
With the exception of the insurance and telecommunications sectors and other infrastructure and media companies discussed earlier, Kenya does not require that its nationals own a percentage of a company. The percentage of foreign equity need not be reduced over time. There are no generic restrictions on the percentage of equity that foreign nationals may hold in a locally incorporated company, although foreign firms are encouraged to form joint ventures with Kenyan companies or entrepreneurs. However, there are some restrictions on investment in companies listed on the NSE and certain businesses. For example, foreign ownership of equity in insurance, telecommunications and companies listed on the NSE is restricted to 66.7%, 70% and 60% respectively. A legal notice published in June 2007 decreed that thereafter all companies seeking to be listed on the NSE could not have foreign ownership above the 60% threshold. Previously the NSE threshold for foreign ownership for some companies was 75%. Foreign equity in companies engaged in fishing activities is restricted to 49% of the voting shares under the Fisheries Act. The manufacture of and dealing in firearms (including ammunition) and explosives require special licenses from Chief Firearms Licensing Officer and the Commissioner of Mines and Geology, under the Firearms Act and the Explosives Act respectively. The manufacture of and dealing in narcotic drugs and psychotropic substances is prohibited under the Narcotics Drugs and Psychotropic Substances Act. Technology licenses are, however, subject to scrutiny by the Kenya Industrial Property Office (KIPO) to ensure that they are in line with the Industrial Property Act. Licenses are valid for five years and are renewable. Foreign investors are free to obtain financing locally or offshore.
The government does not steer investment to specific geographic locations but encourages investments in sectors that create employment, generate foreign exchange, and create forward and backward linkages with the rural areas. Local content rules are applied but only for purposes of determining whether goods qualify for preferential duty rates within the Common Market for East and Southern Africa (COMESA).
The Kenyan legal system is quite flexible on exit options, which are normally determined by the agreement that the investor has with other investors. The Companies Act specifies how a foreign investor may exit from an incorporated company. In practice, a company faces no obstacles when divesting its assets in Kenya, if the legal requirements and licenses have been satisfied. The Companies Act gives the procedures for both voluntary and compulsory winding-up process. In late 2006, the U.S. multinational Colgate Palmolive closed its factory in Kenya. MobilExxon divested and sold its assets to the Libyan oil company, Tamoil, in 2007. Reckitt Benckiser East Africa Limited, a multinational firm that makes household cleaning health and personal care products announced in September that it will close down at the end of 2007. The typical reason given for a firm closing its factories in Kenya is restructuring to cut costs and improve efficiency in its African markets. The high cost of production as a result of poor infrastructure, inadequate protection of intellectual property rights, unreliable and expensive electrical power, and costly telecommunications continues to frustrate Kenya’s manufacturing sector, even as economic growth forges ahead.
Private enterprises can freely establish, acquire and dispose of interest in business enterprises. In general, “competitive equality” is the standard applied to private enterprises in competition with public enterprises. However, certain parastatals have enjoyed preferential access to markets. Examples include Kenya Reinsurance (Kenya-Re) with a guaranteed market share, Kenya Seed Company with fewer marketing barriers than its foreign competitors, and the Kenya National Oil Corporation (KNOC) with retail market outlets developed with government funds. Some state corporations have also benefited from easier access to cheap government credit.
Secured interests in property are recognized and enforced. In theory, the legal system protects and facilitates acquisition and disposition of all property rights – land, buildings and mortgages. In practice, obtaining title to land is a cumbersome and often non-transparent process, which is a serious impediment to new investment. It is frequently complicated by improper allocation of access and easements to third parties. There is also a general unwillingness of the courts to permit mortgage lenders to sell land to collect debts. All farmland must be owned by Kenyan citizens or by incorporated companies whose shareholders are all Kenyan citizens. This requirement is enforced by the Land Control Act, which provides that any consent of a Land Control Board will be invalid in the case of a non-citizen applicant for the purchase or lease of agricultural land. It can however, be waived by the President of Kenya, who may waive it for an agro-processing company that needs land to grow a proportion of its basic agricultural input. No clear guidelines are currently in place on how to acquire a presidential waiver for agricultural land, which has led to complaints about excessive bureaucratic discretion and underhand dealings. There is no specific legislation preventing foreigners or non-residents from owning land in Kenya, unless the land is classified as agricultural. Since January 2003, the government has been nullifying some land allocations that were illegally acquired. The question of title to land acquired irregularly under the Moi government is the subject of continued controversy. The issue is particularly important because 80% of bank loans are secured with land.
Kenya has a comprehensive legal framework to ensure intellectual property rights protection, which includes the Industrial Property Act of 2001, the Trade Marks Act, the Copyright Act of 2001, the Seeds and Plant Varieties Act, and the Universal Copyright Convention. The Copyright Act protects literary, musical, artistic, audio-visual works, sound recordings and broadcasts, and computer programs. Criminal penalties associated with piracy in Kenya include a fine of up to KSh 800,000 (about $12,310), a jail term of up to 10 years, and confiscation of pirated material; but enforcement and the understanding of the importance of intellectual property are poor. The Kenya Industrial Property Institute (KIPI) under the Ministry of Trade and Industry is responsible for patents, trademarks, and trade secrets. Copyright protection is the responsibility of the parastatal, Kenya Copyright Board (KCB), under the Attorney General’s Office. In July 2006, the Attorney General appointed an acting executive director for the KCB to enforce existing law. Despite the creation of an enforcement division in September 2006, the board remains under-resourced and is not yet capable of carrying out its mandate effectively.
In November 2007,cyber café operators within Nairobi grappled between legalizing their Microsoft software operating system, shifting to Open Source Code, or closing shop all together following a police crackdown on illegal software. Most cyber cafes in Kenya use Microsoft software although with no valid licenses. Jet Cyber and Dagit Cyber Café companies in Nairobi were raided on the suspicion of copyright infringement. The raids on the cyber cafes came after the expiry of the October 30th deadline set by the Kenya Copyright Board. During the raid, 50 computers containing unlicensed versions of Microsoft Windows Office 2003 edition were confiscated. Also impounded were Windows 200 and Microsoft 2003 counterfeit installer CD. The computers were valued at KSh1.5 million (about $23,100) while the cost of Windows and Office were estimated at KSh1.4 million (about $21,540).
Kenya is a member of the World Intellectual Property Organization (WIPO) and of the Paris Union (International Convention for the Protection of Industrial Property) along with the U.S. and 80 other countries. A future prospect for patent, trademark, and copyright protection is embodied in the African Intellectual Property Organization (AIPO), although its enforcement and cooperation procedures are yet untested. Kenya also is a member of the African Regional Intellectual Property Organization (ARIPO). Kenya is a signatory to the Madrid Agreement Concerning the International Registration of Marks, however, the other original EAC members (Uganda and Tanzania) are not.
Investors are entitled to national treatment and priority right recognition for their patent and trademark filing dates. The Trade Marks Act provides protection for registered trade and service marks that is valid for 10 years and is renewable. The Act established an independent national patent law and an Industrial Property Institute, which considers applications for and grants industrial property rights. However, actual protection for intellectual property -- copyrights, patents and trademarks -- is inadequate. The sale of pirated audio and videocassettes is rampant, although there is little domestic production. According to the Business Software Association (BSA), an estimated USD 3.5 million is lost every year as a result of the use of illegal software, mainly by businesses. Kenya enacted the Industrial Property Act (KIPA) of 2002 to comply with WTO obligations, but its implementation of the law remains weak. In 2006, the Ministry of Trade and Industry indicated that over KSh 36 billion (about $554 million) is lost annually due to the sale of counterfeit goods and a further KSh 6 billion (about $92 million) is lost in tax revenues to the government.
Investors in Kenya are required to comply with environmental standards. The National Environment Management Authority (NEMA) oversees these matters and is the principal regulatory agency for them. Developers of particular projects are therefore required to carry out Environmental Impact Assessments (EIA) prior to project implementation. Companies are required to submit their up-to-date assessment reports to NEMA for verification by the agency’s environmental auditors before they can receive an EIA license.
In theory, all investors receive equal treatment in the initial screening process. The government screens each private sector project to determine its viability and implications for the development aspirations of the country. For example, a rural agro-based enterprise, with many forward and backward linkages, is likely to receive licensing fairly quickly. However, new foreign investment in Kenya has historically been constrained by a time-consuming and highly discretionary approval and licensing system that is subject to corrupt practices. In response to appeals from the business community, the government in 2007 earnestly began improving Kenya’s business climate. Following the reduction of required business licenses, simplification of others, and establishment of an electronic company registry, Kenya is a much better country in which to do business.
Kenya has been ranked among the most accessible and connected markets in Africa. The country stands among the continent’s top five behind South Africa, Tunisia, Guinea, Sudan, and Mauritania with regard to reliability of the supply chain according to a World Bank survey on trade logistics. Out of the 150 countries that were tested for efficiency in key supply chain areas such as customs procedures, cost of logistics, and infrastructure quality, Kenya was ranked 76. Through the Port of Mombasa, Kenya is considered a major hub for international and regional trade for neighboring land locked countries such as Sudan, Uganda and the Great Lakes region. The survey, however, found that the cost of importing or exporting containers in Kenya and other large economies in Africa remains higher compared to global averages.
Incoming foreign investment through acquisitions, mergers, or takeovers is governed by antitrust legislation that prohibits restrictive and predatory practices which prevent the establishment of competitive markets. Antitrust legislation also seeks to reduce the concentration of economic power by controlling monopolies, mergers, and takeovers of enterprises. Mergers and takeovers are subject to the Companies Act, the Insurance Act (in case of insurance firms), or the Banking Act (in case of financial institutions).
Kenya has a small capital market overseen by the government-controlled Capital Market Authority (CMA). The market consists of the Nairobi Stock Exchange (NSE), 15 investment advisory firms, 11 investment banks, 10 stock brokers, 14 fund managers, one credit rating agency, two capital venture fund, five collective investment schemes, and five authorized depositories. The CMA regulates and supervises all these institutions and oversees the development of Kenya’s capital market. The NSE had a market capitalization of KSh 745.5 billion (about $12.7 billion) in October 2007 compared to KSh 824.3 billion (about $11.9 billion) in January 2007 using respective exchange rate at KSh69.9 and KSh66.9 for January and October respectively. The decline reflected a drop in both trading and price.
By August 2007, Kenya’s banking sector consisted of 45 financial institutions. However, the Central Bank of Kenya (CBK) granted approval to Gulf African Bank Limited and Community Bank Limited to conduct banking business. The two banks will operate under Islamic banking principles and are expected to commence operations before the end of 2007. There are 42 commercial banks, 2 mortgage finance companies, and one non-bank financial institution. The Family Finance Building Society, the only remaining building society in Kenya, converted its operations to a commercial bank on April 30, 2007.
The NSE is categorized into three segments: the Main Investments Market (MIMS), the Alternative Investments Market (AIMS) and the Fixed Income Securities Market (FISMS). The MIMS targets mature companies with strong dividend streams. The AIMS is more favorable to small and medium sized companies, and allows firms to access cheaper, longer-term sources of capital through the capital markets. The FISMS allows businesses, financial institutions, and governmental and supranational authorities to raise capital through the issuance of debt securities.
Trading in commercial paper and corporate bonds issued by private companies has diversified activity at the NSE. Such trading is regulated through a set of guidelines developed in collaboration with private sector. They allow private companies to raise funds from the public without being quoted on the NSE. Establishing the CDS encouraged the development of a secondary market for the government’s one-year floating rate bond. The CDS opened a shop window for small investors offering products in multiples of KSh 50,000 (about $769) up to KSh 1 million (about $15,400). Expenses related to credit rating services by listed companies and other issuers of corporate debt securities are tax deductible. “Cross-shareholding” and “stable shareholder” arrangements are not used to restrict foreign investment through mergers and acquisitions. Hostile takeover attempts are uncommon. Private firms are free to adopt articles of incorporation which limit or prohibit foreign investment, participation or control.
Foreign investors can acquire shares freely in the stock market subject to a reserve ratio of 25% for domestic investors in each listed company. However, in June 2007, the ratio was revised to 40% for domestic investors. To encourage the transfer of technology and skills, foreign investors are allowed to acquire up to 49% of local stockbrokerage firms and up to 70% of local fund management companies.
Credit is allocated on market terms and foreign investors are able to obtain credit on the local market. However, the number of credit instruments is relatively small. Legal, regulatory, and accounting systems are generally transparent and consistent with international norms. The corporate tax for newly listed companies is 25% for a period of five years from the date of listing. The withholding tax on dividends is 7.5% for foreign investors and 5% for local investors. Foreign investors can acquire shares in a listed company subject to a minimum reserved ratio of 40% of the share capital of the listed company for domestic investors. The 60% portion is considered as a free float available to local, foreign, and regional investors without restrictions on the level of holding. Dividends distributed to residents and non-residents are subject to a final withholding tax at the rate of 5%. Dividends received by financial institutions as trading income are not subject to tax.
The Parliament amended the Banking Act of 2004 to delegate the power to register and deregister commercial banks and financial institutions from the Finance Minister to the Central Bank of Kenya (CBK). Under the Central Bank of Kenya Act, the security of tenure for the Governor is enhanced, the Bank’s operational autonomy is increased, the CBK’s bank supervision functions are strengthened, and statutory restrictions on government borrowing from the Bank are codified. The CBK sets requirements for all banking institutions and building societies to disclose their un-audited financial results on a quarterly basis by publishing them in the print media.
Parliament also amended the Central Bank of Kenya Act in December 2004 to establish an independent Monetary Policy Advisory Committee (MPAC) whose mandate is to advise the Bank with respect to monetary policy. The amended Act provides for the CBK to publish the lowest interest rate it charges on loans to banks referred to as the “central bank rate.” Other amendments transferred powers to revoke and issue licenses to financial institutions from the Ministry of Finance to the CBK and introduced an “in Duplum Rule,” which limits fees and fines on non-performing loans to the amount of the outstanding principal. However, the rule is yet to be implemented. A proposal by the Finance Minister in June 2007 to increase minimum capital requirement for a commercial bank from KSh 250 million (about $3.85 million) to KSh1.0 billion (about $15.4 million) over a period of three years was rejected by Parliament.
Terrorism and urban crime remain serious problems. Kenya suffered major terrorist attacks in 1998 and 2002. On August 7, 1998, bombs exploded at the U.S. embassies in Nairobi and Dar es Salaam killing over 250 and wounding more than 5,000 people. A suicide bomber killed 15 people in an Israeli-owned Mombasa hotel in November 2002. The U.S. maintains a travel warning for Kenya due to the threat of terrorism and violent crime. The shaky situation in neighboring Somalia has heightened security concerns at a time when Kenya has yet to enact appropriate anti-terrorism legislation. Unstable, porous or conflicted borders are a second source of insecurity both in Kenya and the region.
Kenya has good relationships with all its immediate neighbors. However, unstable, porous, or conflicted borders are also a source of insecurity in the region. The 2002 terrorist attacks in Mombasa are thought to have been planned in Somalia and much of the small arms used to commit crimes in Kenya likely originate from Somalia. In 2004, 11 East African countries decided to create an Eastern African Standby Brigade (EASBRIG). The EASBRIG is one of the five formations of the African Standby Force, established by the African Union in 2002, to carry out peacekeeping operations. The headquarters of the EASBRIG is in Addis Ababa and its secretariat in Nairobi.
The current government elected in 2002 inherited a problem of grand-scale economic and political corruption. In response, in 2003, the Kibaki government enacted the Anti-Corruption and Economic Crimes Act and the Public Officers Ethics Act, setting rules for transparency and accountability, and defining graft and abuse of office. The Public Officers Ethics Act requires certain public officials to declare their wealth and that of their spouses within 90 days from August 2, 2003. Subsequently, 23 judges were fired for corruption.
In early June 2007, the Office of the Registrar General announced that its “Rapid Results Initiative” (RPI) would enable prospective companies to register via e-filing within a day. New companies would be provided an electronic replicate of their files. The new system would eliminate bureaucratic red tape and the duplication of company numbers and names, both major problems in the past. In late September 2007, a Harvard Kennedy School of Governance’s study of sub-Saharan African countries ranked Kenya 15th out of 48 countries on good governance and economic management.
The Transparency International Corruption Perceptions Index 2007, released in November 2007, ranks Kenya among the world’s 10 most corrupt nations. Kenya’s cumulative score of 2.1 was a drop from its 2006 tally of 2.2. The slide is an indication that corruption continues to put an enormous drain on resources needed for education, health and infrastructure development. Kenyans again named the police as the most corrupt public institution in their society. Opposition leaders have castigated the Kibaki government for its lackluster pursuit of individuals suspected of corruption.
In November 2007, the International Finance Corporation’s (IFC) executive vice-president and chief executive Lars Thunell said Kenya must do more to improve its business climate, especially with respect to good governance, market liberalization, infrastructure development, and security. While Kenya was ranked as one of three countries in Africa that have made significant strides in creating a conducive business environment in 2006/07, development partners and investors consider the poor state of key infrastructural facilities such as power and roads as critical in diluting the progress so far registered. The cost of internet connectivity is also exorbitant.
Kenya does not have a bilateral investment trade agreement with the United States, although there are hopes for talks leading to such an eventual agreement. Kenya signed a bilateral trade and investment agreement with Germany in 1996, and agreements are pending with the United Kingdom, Italy, and Russia.
In 2004, the U.S. Overseas Private Investment Corporation (OPIC) supported four projects in Kenya totaling $8.75 million. Beneficiaries included a company specializing in land information services, a well-drilling company, a company providing humanitarian activities and services, and a housing company. The housing project, in which a U.S. small business will use an OPIC loan to build 400 affordable housing units in Nairobi, represents significant progress towards fulfilling a 2003 Memorandum of Understanding (MOU) between OPIC and the Kenyan government designed to leverage OPIC programs to increase U.S. private sector investment in Kenya. Historically, OPIC has committed $55.8 million to 37 projects in Kenya.
Kenya’s population reached an estimated 36.9 million in 2007 with about 53% constituting the working population and 75% of that figure working in the agriculture sector. Over 6.8 million Kenyans worked in the informal sector in 2006. Approximately 46% of the population lives on less than $1 per day. Per capita income is $478. High population growth rate of 2.85% per annum means there is an on-going demand for new jobs. Kenya has an abundant supply of well-educated and skilled labor in most sectors at internationally competitive rates. Though there is an apparent modest decline in new infections, high HIV/AIDS prevalence (estimated at 5.1% in 2006) continues to pose a serious threat to human resource development and an economic drain on families and the health care sector.
Kenya’s laws generally provide safeguards for worker rights and mechanisms to address complaints of their violation, but the Ministry of Labor and Human Resource Development lacks the resources to enforce them effectively. In October 2007, Parliament passed and President Kibaki signed five labor reform laws that were drafted with the ILO’s assistance under the U.S. Department of Labor’s Strengthening Labor Relations in East Africa (SLAREA) project to make Kenya’s labor laws more consistent with ILO core labor standards, AGOA compliant, and harmonious with Uganda’s and Tanzania’s. The new laws are: the Employment Act, which defines the fundamental rights of employees and regulates employment of children; the Labor Relations Act on worker rights, the establishment of unions, and employers associations; the Labor Institutions Act concerning labor courts and the Ministry of Labor and Human Resource Development; the Occupational Safety and Health Act; and, the Work Injury Benefits Act on compensation for work-related injuries and diseases.
The amended texts of the new laws should be gazetted by early 2008. Presumably existing laws will continue in effect until the Minister of labor and Human Resource Development publishes their commencement dare in the official gazette.
The labor laws of Kenya are embodied in its Employment Act (revised 1984) and the Regulation of Wages and Conditions of Employment Act (revised 1980). The Employment Act covers wages, leave, housing, health and welfare, local and foreign contracts of service, the employment of women and youth, and other administrative matters. Employers in ailing industries are allowed to retrench workers, irrespective of the provisions of their collective bargaining agreements.
Under current law, as few as seven employees may form a union. Under the new Labor Relations Act, a minimum of seven workers may apply to register a union, but the nascent union must have a minimum of 50 members to be registered. A union must show a signed membership request from 50% of the workers in a workplace to force an employer to recognize the union. There are 42 registered unions representing over 500,000 workers, approximately one‑third of the country's formal‑sector work force. All but six, including the 240,000-member Kenya National Union of Teachers (KNUT), the Universities Academic Staff Union UASU), and the Union of Kenyan Civil Servants (UKCS), are affiliated with the Central Organization of Trade Unions (COTU), which has about 260,000 members. The unions are organized by industry rather than craft, and union membership is voluntary.
The law permits strikes, but unions must notify the government 21-28 days before a strike is called. During this period, the Minister of Labor and Human Resource Development may mediate the dispute, nominate an arbitrator, or refer the matter to the Industrial Court. Once a dispute is referred to mediation, fact-finding, or arbitration, any subsequent strike is illegal. Kenya’s Industrial Court is backlogged and has difficulty enforcing its rulings because employers tend to appeal to the High Court. The Labor Institutions Act of 2007 expands the Industrial Court and gives it the same powers as a High Court to enforce its rulings with fines or prison sentence. The court has penalized employers for discriminating against employees because of their union activities, usually by requiring the payment of lost wages. Court-ordered reinstatement is not a common remedy because of the difficulty in implementation.
Kenya has relatively harmonious labor relations. The number of strikes dropped from 41 in 2004 to 17 in 2005 but went up to 30 in 2006. In 2006, 31,940 workers engaged in industrial action compared to 9,393 in 2005. As a result of the strikes, the country lost a total of 202,282 man-hours in 2006 (an increase of 150% over the number of man-hours lost in 2005), translating to 25,297 man-days. The Industrial Court heard 295 trade disputes in 2006 compared to 246, including three appeals, registered the previous year. The main sectors affected by the strikes in 2006 were agriculture (10) and manufacturing (12).
Labor law mandates the total hours worked in any 2-week period should not exceed 120 hours (144 hours for night workers). Wages and conditions of employment are established in negotiations between unions and management. There are twelve separate minimum wage scales, varying by location, age and skill level. The lowest minimum wage is currently about $64 (KSh 4,160) per month in urban areas and about $34 (KSh 2,210) in rural areas. On May 1, 2006, the statutory minimum wage was increased by 12% under the General Wage Order and 11% for workers in the agricultural sector. No increases were ordered in 2006 or 2007, despite double digit overall inflation. The basic minimum consolidated monthly wage was increased to KSh 2,560 (about $40) from KSh 2,285 (about $32) using respective year exchange rates. To give more weight on productivity improvement in determining wage increases, the government announced in its June 2005 budget speech that minimum wages should be considered for adjustment after at least two years as opposed to every year, and that wages be adjusted in line with productivity changes. However, this decision is yet to be implemented. Workers covered by a collective bargaining agreement generally receive a better wage and benefit package than those not covered (on average $97, or KSh 6,305, per month), plus a housing and transport allowance, which may account for 25 to 50% of a Kenyan worker’s compensation package.
Kenyan law establishes detailed environmental, health and safety standards, but these tend not to be strictly enforced. Although fines specified in the Factories Act (regarding occupational safety and health) are the highest in the labor laws, they have not been increased since 1990 and are generally too low to serve as a deterrent to unsafe practices. The Directorate of Occupational Health and Safety Services (DOHSS), a department under the Ministry of Labor and Human Resource Development, has the mandate to enforce the Factories and Other Places of Work Act and its subsidiary rules. DOHSS has the authority to inspect factories and work sites, except in the EPZs, but had only 52 inspectors, instead of the 168 expected to cover the entire country.
Rules falling under DOHSS apply to employers with 20 or more employees. DOHSS developed a program to help factories establish Health and Safety Committees and train them to conduct safety audits and submit compliance reports to DOHSS. The Directorate maintains a register of approved and certified safety and health advisers whom employers may enlist to conduct safety audits in the factories and other places of work. These audits are supposed to be carried out at least once a year, and a copy of the audit report should be forwarded to the DOHSS within 30 days. However, according to the government, fewer than half of the largest factories had instituted Health and Safety Committees.
After a 2006 fire at a chemical factory in Nairobi, the Ministry of Labor and Human Resource Development admitted it did not have the resources to inspect enough factories, or enforce the orders it issued after inspections were carried out. Informal surveys found widespread hazards such as lack of basic safety equipment and emergency escape routes. According to the DOHSS, the ministry took only 11 companies to court in 2005 for not observing work place safety and health guidelines. DOHSS prosecuted 85 cases in 2004 and 27 cases in 2005. Labor unions and NGOs continued to criticize health and safety conditions in the EPZs and other sectors, such as small horticulture estates.
DOHSS health and safety inspectors can issue notices against employers for practices or activities that involved a risk of serious personal injury. Such notices can be appealed to the factories appeals court, a body of four members, one of whom must be a High Court judge.
Work permits are required for all foreign nationals who wish to work in Kenya. An applicant for an entry permit describes the work one intends to engage in and would be allowed to engage only in that specific activity. Although there is no official time limit, a visitor’s pass or a visa is usually valid for three months and the Immigration Department must grant applicable extensions upon proper application. Work permits may be applied for in any major city in Kenya, but all applications go to Nairobi for processing. Foreign investors are required to sign an agreement with the government describing training arrangements for phasing out expatriates. High unemployment levels have led the government to make it increasingly difficult for expatriates to renew or obtain work permits, and Immigration increased the price of a work permit to up to Ksh 200,000 (about $3,080). The Immigration Department has occasionally cancelled work permits before the expiry date without giving reasons. According to the law, the immigration officer issuing entry permits may require a bond of not less than KSh 100,000 (about $1,380) for each permit to be deposited with the Immigration Department.
By March 2007, 39 Export Processing Zones (EPZs) had been established around the country, a decrease of 11.4% in 2006 (from 44). Enterprises that are export-oriented declined to 68 from 71 in 2006. A government parastatal, the Kenya Export Processing Zone Authority (EPZA), regulates the zones. Of the 39 zones, only two are developed and managed by the public sector. The rest are privately owned and managed by licensed EPZ developers/operators. Of the 68 enterprises operating in EPZs, 13.2% are Kenyan-owned, 57.4% are foreign investments, and 29.4% are joint ventures as opposed to 13.5%, 28.4% and 58.1% in the previous year respectively. The largest privately-owned EPZ is the Sameer Industrial Park located in Nairobi’s Industrial area. It has been operational since 1990. The Athi River EPZ, near Nairobi, is the largest publicly owned EPZ, with 230 acres currently developed. The GOK is also developing another large export processing zone in Mombasa, Kenya’s main seaport.
The United States, representing a market share of close to 60% of all exports, remained the principal market in 2006 for Kenyan EPZ exports. That year, 75.8% of all EPZ exports, with a total value of KSh 14.9 billion ($207 million), went to the U.S. AGOA exports of garment products constituted 98.7% of all EPZ exports. While the U.S. is the leading market for Kenyan exports, other destinations, notably Asia, are emerging. Asia has become a market for products like security printing, fluorite, packed tea, and electrical equipment.
The deterioration in economic performance, together with rising problems of corruption, governance, inconsistency in economic policies and structural reforms and the deterioration of public services and infrastructure generated a long period of low FDI inflow that started in the early 1980s. FDI inflows in the period 1996-2003 averaged USD 39 million a year. According to the Investment Policy Review of Kenya February 2005 report, the FDI stock in 2005 was $1,045.9 million, which compared poorly with Tanzania and Uganda at $2,582.5 million and $2,042.2 million respectively. However, poor data collection leads to underestimating actual inflows of FDI. There is no clear mandate by any agency to collect data on FDI. The Central Bank of Kenya (CBK), the Kenya Investment Authority (KIA), and the Kenya National Bureau of Statistics (NBS) (which changed from Central Bureau of Standards) all collect only partial information on either balance of payments inflows or investment projects. The KIA claims that between December 12, 2005 and November 16, 2006, it “processed” 108 projects, with an estimated capital investment of KSh 89.4 billion ($1.28 billion), of which KSh 80.4 billion ($1.14 billion) was FDI, but there is no way to tell how many were actually implemented at what value in 2006.
Kenya’s February 2005 Investment Policy Review estimates the market value of U.S. investment at around $285 million, primarily in commerce, light manufacturing, and tourism industry. But other studies contend American investment is considerably less: no more than $90 million. Most foreign investment in manufacturing since 2001 has been in the EPZs; 64% tied to AGOA-related apparel investment. The government does not publish data on the value of foreign direct investment (position/stock and annual investment capital flows) by country of origin or by industry sector destination. Neither is data available on Kenya’s investment abroad. On its website, UNCTAD does provide some additional data on FDI in Kenya.
More than 200 multi-national corporations operate in Kenya. The main traditional sources of investment are the United Kingdom, Germany, South Africa, and the United States, with Chinese investment increasing in the last four years.
Communications Commission of Kenya – www.cck.co.ke
Safaricom – www.safaricom.co.ke
Cable News Network – www.cnn.com
British Broadcasting Corporation – www.bbc.com
Reuters – www.reuters.com
Kenya Broadcasting Corporation – www.kbc.co.ke
International Chamber of Commerce – www.iccwbo.org
African Trade Insurance Agency – www.ati-aca.com
Export Processing Zones Authority – www.epzahq.com
African Growth Opportunity Act – www.agoa.gov
Capital Markets Authority – www.cma.or.ke
Nairobi Stock Exchange – www.nse.co.ke
Central Organization of Trade Union – www.cotu-kenya.org
Sameer Industrial Park – www.sameer-group.com
Central Bank of Kenya – www.cbk.go.ke
Kenya Investment Authority – www.investmentkenya.com
Export Promotion Council – www.epckenya.org
Kenya National Bureau of Statistics – www.cbs.go.ke