Successfully investing in Kenya

last updated on May 24, 2019

 

How do you assess the current economic situation in Kenya?

Kenya is a regional trade hub in East and Central Africa and – together with the East African Community (EAC) – forms one of the largest economic areas on the African continent. With its strategic location as an access point to several landlocked countries such as Uganda, Rwanda Burundi and South Sudan, Kenya is also a perfect location in terms of logistics. For this reason, Kenya's capital city of Nairobi – next to Lagos (Nigeria), Johannesburg (South Africa) and Dubai (UAE) – is increasingly establishing itself as an important location for international companies to start business in the whole of Africa.

How would you describe the investment climate in Kenya? Which sectors offer the largest potential?

The political stability and favourable legal framework conditions ensure investor-friendly climate. Currently, Kenya ranks 61st out of 190 countries in the World Bank's “Ease of Doing Business” ranking. This is attributable, among other things, to reforms made in the delivery of government services by streamlining procedures and making them accessible online, to beneficial legislation such as the Special Economic Zones Act, improving the access to key enablers such as electricity and credit and tax reliefs for manufacturers in Kenya. Also the new rules on the protection of foreign investments in form of the “Investment Promotion and Protection Agreements (IPPAs)” ensure greater legal certainty.
   
To be emphasised also the extraordinary start-up mentality and enthusiasm for innovation, especially in Nairobi as the location. Kenya has a very modern IT infrastructure and invests heavily in promoting the numerous companies from this branch of industry, most of which are based in Nairobi. This positively affects also other business sectors.


What challenges do German companies face during their business ventures into Kenya?

It is relatively easy to enter the Kenyan market and to form a company here. Many government services such as business registration and licencing, immigration, conveyancing, tax accounting are available online and can be paid for remotely through card and mobile money payments. The official language of business in Kenya is English, which makes it much easier for a German entrepreneur to operate in this market. Furthermore, Kenya and Germany signed a double taxation agreement effective since the year 1980.
 
Nevertheless, it is still quite a challenge for a market entrant to navigate through all applicable laws and procedures. This applies also to the official economic area of the East African Community (EAC) where hardly any uniform regulations, taxes and control mechanisms could be implemented despite harmonisation efforts and plans.
 
Finally, it should be mentioned that corruption is still a challenge in Kenya, plaguing especially the public sector. The government has however re-doubled its efforts over the past year to fight the menace. The Directorate of Criminal Investigations working together with the Office of the Public Prosecutor has made several arrests and has commenced criminal prosecutions against multiple high profile government officials suspected of corruption and abuse of office. The judiciary has also taken drastic measures to ensure that corruption cases are handled in speedy and timely fashion.
 

What branches of industry are crucial to Kenya's population?

The energy industry whose growth and success have a direct impact on the quality of life of the Kenyan population is undoubtedly one of those to be mentioned. According to the latest government statistics about 27 percent of the population still has no access to electricity. There are regular power outages due to problems with power transmission and distribution systems.
 
Due to energy deficits, independent power producers are offered particular incentives in Kenya. Thus, Kenya has already created important framework conditions for private providers (such as feed-in-tariffs with a term of up to 20 years).

 

What are the first effects of the “Finance Act” adopted in September 2018?

The purpose of the Finance Act is to enact changes to tax and other legislation in line with the Kenyan Governments budgetary objectives. The Finance Act, 2018 introduced several measures intended to increase tax revenues. The Act introduced an 8 percent VAT on petroleum products, a 0.20 US-Dollar per kilogram excise duty on confectionary and chocolate, a 15 percent excise duty on internet data services; it also increased the excise duties on mobile money transfer services from 10 – 12 percent, on bank transfers and other fees chargeable by financial institutions from 10 – 20 percent and telephone services form 10 – 15 percent amongst others. These changes have already been effected and have noticeably increased the costs of the respective goods and services.


Other measures yet to take effect such as the introduction of mandatory contributions by every employee of 1.5 percent of their gross monthly salary subject to a limit of 50 US-Dollar to the National Housing Development Fund; and the introduction of a presumptive tax of 15 percent of the value of a business permit fee intended to extend the tax base to the informal sector will take full effect during the course of 2019.


Some relief has however been provided through certain exemptions and reductions in taxes such as the exemption from VAT of parts to be used in the local assembly of computers, and also the reduction of compensating tax payable on the distribution of dividends out of untaxed profits has been reduced from 42 percent to 30 percent.

 

In your opinion, how will Kenya develop?

Kenya is strengthening its position as an engine and source of ideas for the development of the economy in East Africa and will continue to play a leading role in the economic area of East and Central Africa.
 
The current Kenyan administration has embarked on an ambitious developmental agenda known as the “Big Four Agenda” which seeks to enhance the local manufacturing sector, boost agriculture, achieve universal health coverage and to build half a million affordable housing units.


The Kenyan government is undertaking far reaching reforms to provide macro-economic stability needed to achieve the objectives of the agenda. It has renewed its focus on infrastructure development, energy production, governance and security. The government has already kicked off several landmark projects under the four pillars of the agenda and is actively seeking to partner with local and foreign investors and development partners to support their delivery. In this regard the government has rolled out a raft of incentives which present a good opportunities for partners. For example, to encourage local vehicle manufacturing the government is proposing to scrap import and excise duties to give 50 – 100 percent discounts on corporation tax for up-to 10 years. The government is also proposing to ban importation of used cars to create a market for local vehicle assemblers and manufacturers. Currently Volkswagen and Peugot have set up assembly plants in the country.

 

On the technology front, Kenya has established itself as a pioneer of mobile money transfer and banking services. Anyone with a SIM card can open an “account” on their mobile phone. Over the last 10 years, the number of account holders has increased from 50 to 64 percent of the population. A large part of the population, who otherwise would have never had the chance to hold their own bank account, were enabled by this technology to participate in Kenya's economy – as an individual, but also by establishing small businesses. Already a vast majority of businesses accept M-Pesa as a means of payment. The model has become a success story also outside of Kenya, which is hardly surprising.
 
Kenya's growing middle class will inevitably lead to further growth in demand for consumer goods. Increased government interest in promoting manufacturing, healthcare, housing, agriculture, infrastructure, energy and the IT sector will attract more and more investors to Kenya in those branches of industry.


 

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