The continued expansion of international trade and investment as well as the continued permeation of financial technologies (fintech) has increased competition not only amongst companies seeking to fulfil the needs of their customers but also amongst investors as they aim to maximize the return on their investment. Similarly, countries that have established international financial centres (IFCs) compete against each other to increase the inflow of foreign direct investment into their economies. IFCs are countries or territories with specialized legal institutions and regulatory frameworks that facilitate the flow and investment of international capital.
In 2017, Kenya passed the Nairobi International Financial Centre Act 2017 to establish the Nairobi International Financial Centre (NFIC) to increase foreign investment opportunities and make Kenya into a financial hub as part of its national development blueprint (Vision 2030) to develop, amongst other sectors, the financial services sector. Insights on this act and its implication to investors are well captured in a previous publication of our Annual Investor Guide here. The NIFC aims to develop and promote the export of international financial services, create employment, and increase the competitiveness of Kenyan companies by increasing their access to longer-term capital options at lower costs and on better terms. Concurrently, the NIFC seeks to provide foreign investors with incentives to encourage long term investment for both international and domestic businesses thereby providing opportunities for both foreign and local participants.
The Government of Kenya (GOK) has already instituted infrastructure projects to enhance its connectivity to other East African countries including the recently launched port at Lamu which is to serve Ethiopia, South Sudan and other similar landlocked East and Central African countries. With the establishment of the NIFC, Kenya aims to challenge the existing IFCs in Africa, more particularly, in the countries of Mauritius, Rwanda, South Africa and Nigeria. Already significant steps have been taken by the GOK to make the country a more attractive destination to transact business from a regulatory perspective by amending legislation and regulations relating to banking and finance, insurance, capital markets and pension schemes.
As of 2020, Kenya was ranked number 56 out of 190 economies in the World Bank’s Ease of Doing Business Report 2020. In Africa, Kenya is ranked number 4 behind Mauritius, Rwanda and Morocco. In the past 12 months, the GOK has passed numerous amendments to business-related legislation and regulations to facilitate the transaction of business which have been precipitated by the Covid-19 pandemic. The favourable business environment has seen Kenya ranked as number 1 in Africa in the Global Fintech Rankings Report published in June 2021. Further reforms are already underway to further strengthen and clarify the existing regulatory framework relating to financial services including the drafting of the Nairobi International Financial Centre Regulations.
In Vision 2030, Kenya identified several priority sectors for development namely, tourism, agriculture and livestock, wholesale and retail trade, manufacturing, financial services, business process offshoring and information technology-enabled services. Each of these industries provides potential favorable opportunities for both foreign and local investors because of the GOK policy being geared to develop these sectors. Some of the easily identifiable in-country opportunities are in the:
- Financial sector – The population of Eastern African countries presently stands over 500 million with the region ranking first in Africa based on population. NIFC firms providing financial services such as insurance, banking and credit services can therefore access the markets in this region to expand their client network whilst replicating existing financial products or creating hybrid products suited for a particular country.
- Extractive industries – Kenya has large oil and mineral deposits that are untapped and with the industries in this sector generally being capital intensive, the entry of long term investors and financiers should serve as a catalyst for significant growth in the sector.
- Construction sector – The GOK in 2019 launched an affordable housing programme intending to add 500,000 homes in five years. The programme already provides incentives for but coupled with potential incentives to a NIFC firm, the returns on investment can be even higher. Furthermore, as a developing country, there are still opportunities related to infrastructure development e.g., the construction and maintenance of roads, dams etc.
- Agriculture and Livestock sector – This sector is one of the main economic pillars for the Kenyan economy and the development of the sector is always an agenda for the GOK with various programmes and initiatives being undertaken. This has resulted in the establishment of several research institutions due to the critical role this sector plays. There remains unexplored potential in the scaling up of the agricultural sector.
The financial and strategic advantages of IFCs are not only for the countries they are situated in but also for companies and individuals seeking to take advantage of the incentives granted by them. Considering that the NIFC is structured on Qatar’s IFC, we can surmise that the incentives shall at least include;
- tax incentives – IFCs usually provide low taxes or tax exemption to attract investors who can either be multi-national corporations, pensions funds, private equity firms, insurance firms and even individual investors. These tax incentives ultimately mean that the returns made by an investor are higher with the trade-off that the incentive shall generate greater economic activity and therefore benefits for the jurisdiction in which the IFC is located.
- access to finance capital - amongst the challenges faced by local and regional entrepreneurs is access to alternative sources of financial capital. The entry into the region of NIFC firms shall provide alternative sources to obtain financing and financing related services. Further, competition amongst the financial services providers is likely to result in a lower cost of financial services to the benefit of the consumers.
- access to new markets – NIFC firms shall be able to provide financial services to East and Central Africa clients and due to the potential incentives, they are likely to have a competitive edge over their contemporaries.
It is anticipated that the draft Nairobi International Financial Centre Regulations shall be published soon, and the public requested to provide their comments on the draft regulations. This shall be an opportunity for stakeholders to give their views and promote their interests.
Article by Christopher Kiragu. Christopher is a Principal Associate in the Corporate and Commercial practice group. He has experience in corporate and commercial law with a keen interest in commercial contracts, capital market transactions, mergers and acquisitions, private equity transactions, asset finance and acquisitions, and corporate insolvency.
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