Apr 2023

Kenya

Law Over Borders Comparative Guide:

The New World of Foreign Direct Investment

Sections

Scroll down to read the full chapter or click on the headings below to jump to the relevant section.

Top

1 . After more than a half century of increasingly liberalized world trade, there are signs of change. Do you see world trade patterns evolving in new and different directions? What does this mean for your country and your clients?

The success of African countries in the global markets is tied to regional integration which is central to scaling up supply capacity and building regional value chains. The Africa Continental Free Trade Area (AfCFTA) Agreement has now been signed by 54 member states. Kenya launched an implementation strategy which outlines a broad and inclusive list of prioritised AfCFTA sectors for goods and services that build on sectors identified in Kenya’s Integrated National Export Development and Promotion Strategy. 

Kenya was among six countries selected to participate in the pilot phase of the AfCFTA Initiative on Guided Trade, formulated on realization that no trading was taking place one-and-a-half years after the launch of AfCFTA preferential trading on January 1, 2021. Consequently, Kenya officially began trading under the Agreement in September 2022 when it first exported locally made batteries to Ghana. This was shortly followed by the commencement of exportation of a consignment of tea in October 2022 to Ghana as well. The overall implementation of the AfCFTA provides an opportunity for foreign investors, from within and outside Africa, who are interested in supplying goods and services in the value chain of products and services covered under the list of prioritised sectors. Kenya will have a broad market base as it will have access to the Central and West African market which will subsequently increase trade within the continent. 

Kenya is also a beneficiary of the African Growth and Opportunity Act (AGOA). The aim of AGOA is to expand U.S. trade and investment with sub-Saharan Africa to stimulate economic growth, encourage economic integration and facilitate the region’s integration into the global economy. AGOA is a trade agreement between the United States and eligible countries in Africa. The Act, which was signed into law in 2000, aims to increase trade and investment between the US and Africa by providing duty-free access to the US market for certain eligible African countries. The Act also includes provisions for economic growth and development, such as technical assistance and capacity building programs. To be eligible for AGOA benefits, a country must meet certain criteria related to market access, economic policies, and human rights. The act is currently set to expire in 2025, but it can be renewed by the US Congress.

On July 14, 2022, the United States and Kenya launched a strategic trade and investment partnership (STIP) to pursue commitments to boost economic growth, support African regional economic integration and deepen trade cooperation. Both countries aim to commence, within a three-month period, development of a road map for engagement in trade and investment. An impending trade agreement between the United States and Kenya would be the first between the United States and a Sub-Saharan African country and would complement the African Continental Free Trade Area (AfCFTA).

Top

2 . Historically, foreign direct investment was embraced by governments as a way to strengthen domestic economies. Has your country’s government adopted an aggressive posture in regulating foreign investors?

The regulatory framework in Kenya reflects pro-investment policies and legislation alongside national interest protection provisions. It seeks to establish a delicate balance between positive economic impact and impact to national interest as a result of Foreign Direct Investment (FDI). For instance, according to data from the United Nations Conference on Trade and Development (UNCTAD), during pre-pandemic trade, Kenya received an estimated USD 1.2 billion in FDI inflows in 2019, which represented a 2% increase compared to the previous year. The top sectors attracting FDI in Kenya include real estate, manufacturing, wholesale and retail trade, and transport and storage.

Kenya has put in place a raft of regulations and incentives to promote FDI. The Kenya Investment Authority (“KenInvest”) which is a statutory body, promotes and facilitates investment in Kenya. Kenya established KenTrade which seeks to address trading partners concerns regarding the complexity of trade regulations and procedures. In 2019, Kenya launched an Investment Policy which seeks to mitigate challenges faced by foreign investors as well as improve the overall ease of doing business and competitiveness in the economy. Kenya is actively working to attract FDI and promote bilateral relationships around the world. Some of the ongoing efforts the Kenyan government has put in place to encourage FDI include:

  • Establishing a “One Stop Shop” for investors: In 2018, the Kenyan government established a "One Stop Shop" (OSS) to streamline the investment process and reduce bureaucracy. The OSS is responsible for coordinating and consolidating all investment-related services and approvals, which makes it easier and faster for investors to set up businesses in Kenya.
  • Organizing Investment conferences and roadshows: The Kenyan government regularly organizes investment conferences and roadshows both locally and internationally to showcase investment opportunities in the country. These events provide a platform for investors to interact with government officials and business leaders and learn more about the investment climate in Kenya.
  • Offering incentives to investors: Kenya offers a range of incentives to foreign investors, including tax holidays, duty exemptions, and streamlined investment processes. Additionally, the government has established export processing zones (EPZs) throughout the country, which offer investors a range of benefits such as tax holidays and duty exemptions.

In terms of promoting bilateral relationships, Kenya is actively engaging with other countries through diplomatic and trade initiatives. Some examples of this include:

  • Signing Bilateral Investment Treaties (BITs) with other countries, which provide legal protection for foreign investors and promote mutual investment. Kenya has signed BITs with over 30 countries.
  • Joining regional trade blocs such as AfCFTA and further participating in the Guided Trade Initiative (GTI) which seeks to allow commercially meaningful trading, and test the operational, institutional, legal and trade policy environment under the AfCFTA.
  • Signing Free Trade Agreements (FTAs) with other countries to promote trade and investment. Kenya has signed an FTA with the United States under the African Growth and Opportunity Act (AGOA) which allows for duty-free access to the US market for certain eligible products.
  • Participating in international trade fairs and expositions to showcase Kenyan products and services and promote trade and investment opportunities.

Kenya, therefore, seeks to provide an environment that facilitates and promotes FDI, while still keeping in mind national interest considerations. 

Top

3 . Are there specific sectors of your country’s economy or industries where foreign direct investment is barred or highly regulated?

There are very few restrictions on foreign ownership of businesses in Kenya. The following sectors are restricted:

  • Aviation: 51% shareholding of a company or partnership must be held by the state or a citizen or both.
  • Maritime: A license can only be granted to a maritime service provider who is a citizen, or in case of a company, where 51% of the share capital is held directly by a Kenyan.
  • Insurance: One third of the paid-up capital of an insurer should be owned by citizens of the East African Community Partner States. An Insurance Broker shall be owned by Kenyan citizens or partnerships whose partners are all citizens of Kenya or by corporate bodies whose shares are wholly owned by citizens of Kenya or wholly owned by the Government of Kenya. 
  • Telecommunications: At least 30% of the shares in all licensed companies in the ICT sector should be held by Kenyan citizens.
  • Land: Ownership of land by non-citizens can only be by way of 99-year Leases. There is also restriction on ownership of agricultural land by non-citizens.
  • Financial institutions: Only banks, financial institutions, the Government of Kenya, foreign governments, state corporations, foreign companies licensed to operate as financial institutions, and non-operating holding companies approved by the Central Bank of Kenya (CBK), may hold more than 25% of the share capital of a financial institution.
  • Mining: Persons applying for a license relating to small scale mining operations should be a Kenyan citizen or a body corporate where 60% of the shares are held by Kenyan citizens. With respect to large scale mining operations, the licensee is required to list at least 20% of its equity on a local stock exchange within three years after commencement of production.
  • Engineering: A foreign firm may only be registered as an engineering consulting firm if the firm is incorporated in Kenya and a minimum of 51% of its shares are held by Kenyan citizens. Individuals may only be registered as professional engineers if they are resident in Kenya and hold a valid working permit. 
  • Construction: Foreign contractors are required to give an undertaking that it will subcontract or enter into a joint venture with a local person or local firm for not less than thirty percent of the value. 
Top

4 . The global supply chain has been collapsing worldwide since 2020. How has this impacted businesses in your country and what steps has your country’s government taken to respond?

The pandemic adversely affected the global supply chain which resulted in input shortages causing most manufacturing plants and retailers to suspend operations or increase prices to exorbitant levels which in turn reduced consumer spending. According to a 2021 industry report by the Kenya Association of Manufacturers and KPMG, the manufacturing sector contracted in two consecutive quarters of 2020. The value added by the sector dropped to KES 183 billion in quarter three from KES 191 billion in quarter one. 

Proactive Government measures to support businesses included implementation of the third phase of the Economic Stimulus Program, which focused strategic interventions towards agriculture, health, education, drought response, policy, infrastructure, financial inclusion, energy, and environmental conservation. The government implemented a fuel cost stabilization programme as well as several consumption subsidies and a raft of tax, economic and monetary adjustments. There was lowering of the Central Bank Rate (CBR) to 7.25% from 8.25% to enhance access to credit facilities by Micro, Small and Medium Enterprises (MSMEs) (this has since been revised to 9.50% effective 29th March 2023) and lowering of the Cash Reserve Ratio (CRR) to 4.25% from 5.25%. In addition, a number of monetary measures were instituted, such as lowering the cash reserve requirements and extending the maximum tenor of repurchase agreements from 28 to 91 days and banks renegotiated terms and restructure of loans.

Top

5 . In M&A transactions as well as joint ventures in your country, what are the most critical issues foreign investors must evaluate prior to contemplating a transaction?

The Deal Drivers Africa Report, published by Merger Market, ranks Kenya among Africa’s most sought-after country for Mergers and Acquisitions (M&A) transactions. Like in many emerging markets, private equity-driven transactions are one of the main drivers of M&A activity in Kenya. The regulatory environment is an essential consideration as M&A transactions are subject to the capital markets regulatory regime and parties operating in certain sectors may also be subject to sector-specific regulation. Investors must evaluate the following:

  • Companies Act No. 17 of 2015. Investors or their advisors should always familiarize themselves with the provisions of the Companies Act, particularly those that deal with entry and exit into businesses which are referred to as “squeezing-in” and “selling-out”.
  • Capital Markets regulatory regime. With respect to listed entities, the Capital Markets Act CAP 485A and the Capital Markets (Take-Overs and Mergers) Regulations, 2002 have various rules and regulations relating to requirements for approvals necessary to effect a takeover or acquisition of a controlling interest in a listed entity. The Capital Markets (Foreign Investors) Regulations, 2002 allow the Cabinet Secretary, by notice in the gazette, to prescribe a maximum threshold for foreign shareholding in an issuer or listed company. There are various other Regulations which investors should acquaint themselves with. 
  • Competition. Mergers and Acquisitions in Kenya are regulated under the Competition Act. Apart from regulating mergers and acquisitions, the Competition Act also contains provisions regulating restrictive trade practices, unwarranted concentration of economic power, abuse of dominance and consumer protection. All mergers that fall within the definition set out in the Competition Act require prior authorisation from the Competition Authority.
  • Sector specific regulators. Mergers or acquisitions involving banks and financial institutions must be notified to the CBK for vetting and approval under the Banking Act. In the insurance sector, approval is required under the Insurance Act from the Insurance Regulatory Authority (IRA). In the telecommunications sector, companies’ approvals are required from the Competition Authority of Kenya (CAK). 
Top

6 . What is the best strategy for acquiring interests in real estate or other tangible property in your country? Is this more difficult for foreign investors?

Foreigners may only hold land on the basis of leasehold tenure for 99 years, or they may establish a company in which they are not the sole directors and buy the land through the company. It is imperative to note that a company with foreign shareholders is regarded as a foreign company for purposes of land tenure and cannot own freehold land. The best strategy in acquisition is always to instruct local lawyers to assist in the process of due diligence, acquisition and transfer. 

The legal framework for land ownership and control is primarily governed by the Constitution of Kenya, 2010, and the Land Act, 2012. The Constitution of Kenya, 2010, Article 65 (1), states that “a person who is not a citizen may hold land on the basis of leasehold tenure only, and any such lease, however granted, shall not exceed ninety-nine years.”. This provision was introduced in the 2010 Constitution as a way of addressing the historical injustices that had been committed against Kenyan citizens, particularly those of indigenous communities, who had been dispossessed of their land by colonial settlers and later by Kenyan citizens of non-indigenous origin.

The Land Act, 2012, further provides that the registration of leases to foreigners must not exceed 99 years. The intention behind this provision is to ensure that the land remains primarily in the hands of Kenyan citizens, and that foreigners who wish to use the land for business or other purposes do so on a leasehold basis.

Top

7 . What laws or regulations exist in your country to protect data exchange and privacy, and is the protection of intellectual property challenging for foreign investors?

The Constitution of Kenya, 2010, Article 31 guarantees the right to privacy as a fundamental right. The Data Protection Bill, 2013 which had been subject to discussion for several years was enacted on 8th November 2019 as the Data Protection Act No. 24 of 2019 (the DPA). The DPA gives effect to Article 31 (c) and (d) of the Constitution which outlines the right of every person not to have “information relating to their family or private affairs unnecessarily required or revealed” and Article 31(d), the right not to have “the privacy of their communications infringed”. 

With a view to operationalize the DPA, the Data Protection (General) Regulations, 2021 and the Data Protection (Complaints Handling Procedure and Enforcement) Regulations, 2021 came into effect in 2021 and subsequently the Data Protection (Registration of Data Controllers and Data Processors) Regulations, 2021 in 2022.

The Data Protection (General) Regulations, 2021 (“General Regulations”) set out the procedures for enforcement of the rights of data subjects as well as elaborating on the duties and obligations of data controllers and data processors. Some of the salient provisions of the General Regulations include the restriction on the commercial use of personal data, elements required to implement data protection by design or by default, notification of personal data breaches and transfer of personal data outside Kenya. The General Regulations set out the instances under which Data Protection Impact Assessments shall be mandatory and these include: automated decision making with legal effect, such as profiling or use of sensitive data; processing of biometric or genetic data; processing of sensitive data or data relating to children or vulnerable groups; and systemic monitoring, among others. 

The Data Protection (Complaints Handling Procedure and Enforcement) Regulations, 2021 highlight the procedure for lodging, admission and response to complaints.

The Data Protection (Registration of Data Controllers and Data Processors) Regulations, 2021, which came into effect in July 2022, requires the registration of data controllers and data processors with the Office of the Data Protection Commissioner. The registration process requires that data processors and data controllers outline the data processing activities being undertaken and the corresponding safety measures to ensure data privacy.

Kenya also has sectoral laws that provide for data protection including: Access to Information Act 2016; Banking (Credit Reference Bureau) Regulations 2020; Consumer Protection Act 2012; Health Act 2017; Health Records and Information Managers Act 2016; and Kenya Information and Communications Act 1998.

Kenya has a robust legal and institutional framework for Intellectual Property Rights (IPR) containing various Statutes and Regulations and is a member of various regional and World Organizations by virtue of which resident and foreign investors receive recognition for, and protection, of their IP rights. It is not challenging for aggrieved investors to enforce any infringed rights in Kenya. 

Top

8 . Describe the most common legal structures used by foreign investors when doing business in your country.

The most common forms of business vehicles used by foreign investors in Kenya are Private Limited Liability Companies as they are relatively easy and inexpensive to establish. There are no minimum or maximum share capital requirements except for those operating in regulated industries such as banking and insurance. However, common practice is to have a minimum share capital of KES 100,000 (divided into 1,000 shares of KES 100 each). This type of company is legally required to have one director but will usually have at least 2 directors for practical purposes. In the event the said director is a corporate entity, the company must appoint a natural person as a director in addition to the corporate director. It is required to have at least 1 shareholder in a single-member company. There is no requirement to have local shareholders save where the entity is intended to operate in a regulated field. Some legal advantages of private limited liability companies in Kenya include:

  • Limited Liability: Shareholders are liable to the extent of capital owed to the company.
  • Separation of Ownership and Management: Shareholders elect a board of directors to manage the company, which allows for professional management.
  • Perpetual Existence: The company continues to exist even if shareholders die or transfer their shares.
  • Easier to Raise Capital: Private limited companies can raise capital through debt or equity.
  • Tax Planning: Kenyan private limited companies are eligible for certain tax benefits through efficient tax planning.
  • Legal Recognition: A private limited company is a separate legal entity and can enter into contracts, sue and be sued in its own name.

It is also relatively common for foreign enterprises to establish themselves in Kenya as branches of foreign companies. The only downside to this is that branches of foreign companies are liable to be charged corporate tax at 37.5% (as compared to Kenyan Companies which pay corporate tax at a rate of 30%). Investors may also register Limited Liability Partnerships (LLPs) which enjoy unique benefits and are tax efficient. Corporate income tax is not imposed at the level of the LLP, which is considered transparent for tax purposes. Instead, gains or losses are allocated to and taxed at the level of each partner.

Top

9 . What are the most attractive opportunities for foreign investors in your country at this time?

According to a market survey report by the American Chamber of Commerce, the agriculture sector (comprising crops, livestock, fisheries, and agroforestry), remains the backbone of Kenya’s economy, as it contributes the largest share of the country’s GDP, at 35% in 2020, and providing livelihood to approximately 75% of the population.

In recent years, the country has seen a growing interest from private equity and venture capital firms looking to invest in banking and financial services, technology media and telecommunications, energy, fast-moving consumer goods and real estate, among other sectors. According to a report by the advisory firm I&M Burbidge Capital on Kenyan deal statistics in 2022, the most active sectors in the East African market are ICT, followed by Financial Services, Logistics, Healthcare, Energy, Manufacturing and Agribusiness. Kenya also remains a regional leader in the digital economy.

Top

10 . Do specific laws or mechanisms exist in your country to protect foreign direct investors?

In order to attract and keep foreign investors, Kenya has embedded, in its legal framework, mechanisms to ensure that foreign investors are adequately protected. The Foreign Investments Protection Act (Cap 418) came into force in 1964 with the aim to give protection to certain approved foreign investments. The Act has since undergone several amendments in view of the ever-changing economic environment. Kenya is also a member of the World Bank’s Multilateral Investment Guarantee (MIGA) which insures investments against non-commercial risks and helps investors obtain access to funding for cross-border private sector investors and lenders. MIGA is currently supporting off-grid solar technologies in Kenya which help to increase access to electricity in rural areas. 

Kenya is a member of the International Centre for Settlement of Investment Disputes (ICSID) Convention, and the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards. Multinational companies may opt to seek international well-established dispute resolution at the ICSID. With respect to arbitration of property issues, the Foreign Investments Protection Act (2014) refers to the provisions concerning compulsory acquisition under the Constitution of Kenya, 2010, which allows persons having an interest or right in or over compulsorily acquired property a right of access to a court of law.

EXPERT ANALYSIS

Chapters

Australia

Angela Harvey
James Skelton
Mary Digiglio

Brazil

Eduardo Tranjan
Gabriel Bon de Macedo
Hermano De Villemor Amaral (neto)
Mariana Rossi

Bulgaria

Trayan Targov

China

Junzhou JIN
Lu DANG
Shihao XIAO
Sijia ZHANG
Yao RAO
Shuaijie LU

Finland

Peter Jaari

France

Neil Robertson

Germany

Dr. Anton M. Ostler

Japan

Darcy H. Kishida
Hiromasa Ogawa
Naoki Takahashi

Mexico

Alejandro Martínez Galindo
Hugo Cuesta Leaño

Norway

Christoph Morck

Republic of Korea

Jihn U. Rhi
Jong Jae Lee

Tunisia

Ismaël M’rad

United Kingdom

Carolyn Thurston Smith
Jen Lee
Mark Hough
Nicola Tong
Russell Gardner
Sally Jones

United States

Dennis Unkovic

Powered by SimSage

Popular Articles

Latest Articles

Seladore Legal taps BonelliErede for international arbitration partner

1h

Cleary, DLA Piper and Sidley lead on T-Mobile’s $4.4bn buy of US Cellular’s wireless operations

4h

Xiaomi hit by FRAND lawsuits in France and India

7h

Paul Weiss adds former General Electric legal chief

7h

Clifford Chance joins London salary war as it ups NQ pay to £150k

7h