The dominant indicator of economic cycles in Kenya is the elections calendar. In the months leading up to the election, more people refrain from spending most of their money and instead deposit it in their accounts. Financial institutions also tighten their lending terms towards borrowers due to the economic uncertainties, which may result in high default rates, and create safe havens of their own by investing in more secure investments such as treasury bonds. Loan defaults also tend to increase during this period.

Climatic conditions are the second determinant of the economic cycle. Different regions of the country have been subjected to drought due to adverse climate changes as well as a locust crisis that was rampant in the first quarter of 2022. This pushed the government to source funds from the World Bank in 2021, in order to sustain locals and vulnerable people affected by the drought, to support alternative sources of income and to help both county and national governments to control climate risks and persistent occurrence of droughts.

The third economic cycle has been influenced by the Kenyan government placing priority on preferred sectors of the economy. The "Big Four Agenda" is embedded in the Kenya Vision 2030, with the Big Four being:

• food and nutrition security;
• affordable housing;
• manufacturing; and
• universal and affordable healthcare.

The government has implemented strong monetary and fiscal policies in the delivery of the agenda, with efforts to allocate a majority of the budget towards the four pillars. Nonetheless, financing continues to be the biggest hurdle, requiring the government to source funding through various avenues, including loans and bonds such as the recently issued 18-year infrastructure bond IFBI/2022/18.

The fourth cycle is the fluctuating trend in inflation. Headline inflation eased from the fourth quarter of 2021 through to 2022, helped by the 15% electricity tariff cut. However, inflation subsequently sharply increased by 7.1% in May 2022, as energy and domestic food prices increased following the surge in global commodity prices due to the Russia–Ukraine crisis. In an attempt to stabilise the shilling and reduce inflation, the Central Bank of Kenya (CBK) raised its principal lending rate to 7.5%.

With respect to the regulatory environment, the recent enactment of the Central Bank of Kenya (Digital Credit Providers) Regulations, 2022 requires Digital Credit Providers (DCPs) to apply for and obtain a licence or stop operating by the end of September 2022. Furthermore, the Regulations make it mandatory for DCPs to disclose their sources of funds and provide evidence thereof; they will also have to seek CBK approval before changing their pricing models.

The COVID-19 pandemic has profoundly disrupted Kenya’s credit market, leading to an increase in demand for loans. According to a preliminary survey conducted by the Credit Information Sharing Association of Kenya in 2021, there was a 69% increase in loan appetite occasioned resulting from COVID-19.

The pandemic also affected the preferred channels for accessing loans. Digital credit is not a new concept, having emerged in Kenya in 2012 with the introduction of M-Shwari from NCBA and Safaricom Ltd. There are now several hundred lenders operating in the loan market. Before the pandemic, only 56.8% of creditors preferred digital channels for accessing credit; this number shot up to 91.3% after the onset of COVID-19. Digital lending platforms are currently the most preferred.

However, with the increased taking of credit, there has also been an increase in credit defaulters. Digital borrowers were reported to be twice as likely to default as those who took conventional loans. The majority of loans defaulted by Kenyans were those taken from mobile lenders making up 90% of negatively listed Kenyans; this led to a decrease in digital lenders other than banks.

The pandemic led to the CBK and/or the government implementing relief measures to cushion Kenyans from the harsh economic environment. These relief measures include waivers, regulatory flexibility, temporary suspensions of listing negative credit information, the reduction of cash reserve ratio (CRR) to 4.25% from 5.25%, and loan restructuring.

The leading and most common high-yield market in Kenya is the bond market, which is characterised by lower funding costs to the issuer compared to the traditional lending market. The real estate investment trust (REIT) market is also active as an investment vehicle in the real estate sector. The markets are characterised by multiple players (creditors and investors respectively) as opposed to a single player, which is one of the key features of traditional lending. The multiplicity of players is beneficial as it allows for risk distribution in case of default.

Bonds are further subdivided into government/treasury bonds, M-Akiba bonds, corporate bonds and green bonds.

Government/Treasury Bonds

Government securities are one of the loan instruments that offered Kenyan investors the highest returns in the first half of 2022, with returns from auctioned bonds averaging 13.06% where Treasury Bills offered rates of between 7.2% and 10%. According to data from Quarterly Economic Review 2022 published by the CBK, the government re-opened two bonds with effective tenures of 5.8 years and 11.3 years, respectively to raise KES40 billion for budgetary support.

M-Akiba Bonds

The government of Kenya issues the M-Akiba bond, which is Kenya’s first retail infrastructure bond to be traded exclusively on the mobile phone. It was issued to raise money to fund infrastructural projects.

Corporate Bonds

By contrast, the corporate bond market has undergone lean times, at times facing a real fear of collapse due to investor uncertainty in the return on investments. The corporate bond market had a portfolio size of KES71.3 billion and 28 listings in 2014 but shrunk to just three investment-grade bonds by Centum Investments Limited, Family Bank Limited and East African Breweries Limited (EABL).

In 2021, corporate bonds accounted for just 0.13% of turnover on the Nairobi Securities Exchange (NSE) secondary bonds market, with government bonds taking up 99.8%. In the same year, EABL made an early redemption of its KES6 billion bond, nine months ahead of the originally scheduled maturity date of 28 March 2022. Only one company has issued a corporate bond in 2022: on 4 March the Kenya Mortgage Refinance Company issued a seven-year corporate bond with a coupon rate of 12.50% pa, payable semi-annually.

Green Bonds

The Kenya Green Bond programme was launched in 2017 to promote financial sector innovation by developing a domestic green bond market. There have since been notable developments, including the issuance of the first green bond in 2019 by Acorn Holdings (KES4.3 billion), in a first for East Africa, raising funds to provide 5,000 university students with environmentally friendly affordable housing in Nairobi.

REITs

Since the inception of REITs in Kenya in 2013, foreign RIETs have conducted significant transactions. However, the trajectory has not been as promising, judging by the performance between 2015 and 2022. Cytonn Investments reported that the market has realised a 67.5% decline, from KES20 billion to KES6.5 billion. This is despite the improved budget allocation to real estate and related sectors in FY 2022/23, mainly due to:

• a general lack of knowledge on REITs;
• a general lack of interest in REITs among investors; and
• the lengthy – and thus discouraging – approval processes to meet all the necessary requirements.

Kenya’s alternative lending scene has grown rapidly over recent years, and there are currently more than 20 alternative lenders operating in Kenya. The leading alternative credit providers are fintechs, 11 of which incorporated the Digital Lenders Association of Kenya (DLAK) in 2019, which aims to bring together the leading digital-first loan providers and associated stakeholders to facilitate mutual growth in the digital lending sector in Kenya. These alternative lenders introduced what is known as "embedded finance", which is essentially the integration of financial services or tools traditionally obtained via a bank into the products or services of a non-financial organisation.

Effect on Finance Terms and Structures in Kenya

Alternative lending has revolutionised finance terms and structures in Kenya. The defining characteristic of traditional debt instruments is that they represent an unconditional claim on the borrower, who must pay a specified amount of interest to creditors at fixed intervals, regardless of their financial condition or return on the investment. The interest rate may be fixed or adjusted periodically according to a reference rate. Straight debt does not include any features other than the payment of interest and the repayment of principal.

More diversified options have been introduced, thus broadening the range of lending instruments available in the market. One such option is asset finance, which is designed to facilitate the financing of movable assets. It includes asset-based lending, which is any form of lending secured by an asset.

There is also peer-to-peer (P2P) lending for small businesses, an advanced platform that provides access to funding other than banking institutions. Borrowers are matched directly to lenders through the lending platform. Lenders make a profit through the fees charged by the lending platform and a percentage of interest. Such alternative lending is characterised by the total digitisation of the whole process through the use of smart contracts. Most loans are unsecured and have low interest rates; some platforms even extend loans up to KES500,000 with a 0% interest rate.

Such new practices and much more have pressured traditional banks to digitise their own lending choices. Many banks are boosting their online banking services and other mobile financial service applications through the use of fintech.

The Kenyan banking and finance sector has been privy to rapid technological innovations, including the development of different digital currencies such as e-money, cryptocurrency and stablecoin.

The most recent is the discussion on Central Bank Digital Currencies (CBDCs), which are backed by the CBK. CBDCs are defined as digital tokens or virtual money, similar to cryptocurrency, issued by the CBK and are intended to serve as legal tender.

It is also worth noting the expansion of the scope of regulatory measures to further enhance consumer protection. The most recent is the regulation of digital lenders through the Central Bank of Kenya (Digital Credit Providers) Regulations, 2021 in aspects such as protection of consumer information and compulsory licensing of all digital lenders before advancing digital lending services to potential consumers.

The Kenyan banking market has also embraced decentralised financing, which uses Digital Ledger Technology. Decentralised financing is the basis for P2P transactions through the use of smart contracts, the primary goal of which is to render "middle men" redundant. This type of financing effectively meets borrowers’ needs by providing globally accessible financial services, a key element in financial inclusion.

The banking and financing sector has also seen a welcome upsurge in the use of artificial intelligence in credit risk management, fraud management, product segmentation and personalisation, mobile banking platforms and customer service interface, including the use of chatbots such as Absa Bank’s Abby. The outcome is an automated banking and finance sector, which, as reported by the CBK, has in turn led to the availability of "cheaper, tailored and efficient digital financial services to customers".

The recent enactment of the Central Bank of Kenya (Amendment) Act, 2021 regulating DCPs in terms of licensing and the determination of capital adequacy reflects the regulatory developments that are likely to impact the loan market in Kenya. Not long after this lauded initiative, the Central Bank of Kenya (Digital Credit Providers) Regulations were gazetted on 18 March 2022 to supplement the Act. The Regulations are expected to convert what was a rogue sector into a regularised sector and thus increase the security and attractiveness of digital loans to Kenyans.

On the flip side, the Finance Act, 2022 – which was assented to on 21 June 2022 – has introduced a 20% excise duty on fees charged by DCPs. This new development may lead to an increase in the already high interest rates and fees charged by digital lenders.

Typically, ESG- or sustainability-linked loans are loans where the margin is tied to the borrower’s achievement of pre-agreed sustainability-linked targets (commonly known as Sustainable Performance Targets, or SPTs), which effectively support environmentally and socially sustainable economic activity and growth. If the targets are met, the borrower receives a small discount on its loan pricing; if unmet, a premium is added.

To ensure that the achievement of the relevant SPTs can be verified, borrowers are required to maintain and keep readily available, up-to-date information on their SPTs, including the methodology and assumptions adopted.

There have been recent developments in Kenya to encourage such reporting. ESG reporting is presently largely mandatory and is therefore inconsistent. Furthermore, there is no universal reporting standard guiding the reporting and, as such, companies that report use a variety of metrics and third-party disclosure frameworks from the SASB (Sustainability Accounting Standards Board) and GRI (Global Reporting Initiative).

Acknowledging such associated challenges of integration and consistent, transparent and principled reporting, on 29 November 2021 the NSE published the ESG Disclosure Guidance Manual (ESG Manual) in collaboration with the GRI. The ESG Manual aims to provide the needed guidance to listed companies by requiring them to report publicly on their ESG performance at least annually.

A number of industry groups in Kenya have already established ESG reporting guidelines, such as the Sustainable Finance Initiative industry principles for the banking sector established by the Kenya Bankers Association. Several banks, such as Stanbic, Standard Chartered and Equity, have begun to undertake rigorous screening of borrowers prior to extending loans above a certain amount, blocking such financing where the borrowers are not undertaking environmentally friendly ventures in an effort to counter climate change.

In addition, the CBK recently released a Guidance on Climate-Related Risk Management for the banking sector and called for the integration of climate change into governance structures, risk management frameworks and strategies of commercial banks and mortgage finance companies.

In order to provide financing, financial institutions must first be registered and legally recognised in their respective sectors. In that respect, institutions seeking to conduct banking business, financial business and the business of mortgage finance must be recognised as such under the Banking Act (Chapter 488, Laws of Kenya); payment service providers be recognised under the National Payment Systems (NPS) Act, No 39 of 2011; and deposit-taking microfinance institutions must be regulated by the Microfinance Act, No 19 of 2006.

Secondly, such institutions must obtain licensing from the CBK as required under the Central Bank of Kenya Act, 2021. This Act empowers the CBK to license, supervise and institute policies and regulations for the governance of such entities. In order to obtain such a licence, the following must be filed:

• an application to conduct the business of a financial institution (Form CBK IF 1-1);
• "fit and proper" forms for proposed directors and chief executive officers (Form CBK IF 1-2);
• "fit and proper" forms for all significant shareholders (Form CBK IF 1-3);
• a certified copy of the certificate of incorporation of the institution;
• a certified copy of the memorandum and articles of association of the proposed institution;
• a certified copy of the memorandum and articles of association of any corporate body that proposes to have a significant shareholding in the institution;
• a certified copy of the latest audited financial statements for each of the three years immediately preceding the date of the application if the applicant has been operating in any sector under any name and laws or in cases where any of the shareholders is a corporate body; and
• where proposed significant shareholders are natural persons, certified personal statements of affairs for the past three years of each.

Procedure for Authorisation

First, the applicant must contact the CBK, which will set up a preliminary meeting to outline all the licensing requirements and deal with any imminent issues. In the meeting, the applicant must seek approval to use the words "bank" or "finance" in the proposed institution’s name.

Subsequently, an application will be made to the Companies Registry for the registration of the institution as a limited liability company; only then will an application be made to the CBK for licensing. The licensing provided will be dependent on whether the institutions is a banking, micro-finance or non-banking institution.

The licensing application will be supported by the above-mentioned documentation, where applicable, and accompanied by a bankers cheque for a non-refundable application fee of KES5 million.

If the institution is foreign, the documents presented must be notarised and, in addition to the above-mentioned documentation, the following must also accompany a formal letter to the CBK expressing intention to seek authority to pen and operate a representative office in Kenya:

• an application for authority to establish a representative office of a foreign financial institution (Form CBK/RO 1-1);
• a notarised copy of the signed minutes of the board of the institution or other prime oversight body passing the resolution to establish a branch or subsidiary in Kenya;
• an undertaking by the board or other oversight body to maintain minimum assigned capital in the proposed branch or subsidiary in Kenya as per the Banking Act and that such capital shall be in Kenyan shillings;
• the name and contact details of a designated person(s) from the Head Office authorised to liaise with the CBK on the application on behalf of the institution;
• a letter of no objection from the home supervisory authority recommending the applicant to establish a branch or subsidiary in Kenya, which should be forwarded directly to the Director of the CBK;
• an understanding that the home country supervisor will exchange supervisory information with the CBK;
• confirmation from the home country supervisor that the promoters of the foreign incorporated bank do not operate a shell bank; and
• where necessary, confirmation from the home supervisor that the supervisor conducts consolidated supervision.

The applicant will also attach a three-year feasibility study of the future operations and development of the intended business, sources and evidence of the availability of capital and a statement by the proposed shareholders to the effect that the proposed capital is not sourced from the proceeds of crime.

If approved, the CBK will issue an approval in principle to conduct the business, which aids in the acquisition of the requisite information technology systems and the institution’s premises, and the hiring of the necessary staff.

Once approval is obtained, the CBK performs a site inspection. If satisfactory, the applicant is requested to pay the requisite prescribed annual licence fees.

Once paid, the CBK gazettes the institution and issues a licence, which allows the institution to commence its operation in Kenya.

Capital Requirements

Read in conjunction with the Banking Act, the Finance Act (No 8 of 2008) specifies a minimum core capital of KES1 billion for banks and mortgage companies. The Banking Act further sets the minimum capital requirement at KES200 million for non-bank financial institutions, while the Microfinance Act sets the minimum capital requirement at KES60 million for nationwide microfinance institutions (operating countrywide) or KES20 million for community microfinance institutions (operating within one county).

These financial institutions are further subject to the following minimum ratios, depending on their structure, subject to CBK’s review:

• a core capital of not less than 8% of the total risk-weighted assets plus risk-weighted off-balance sheet items for banks and mortgage companies and 10% for microfinance companies;
• a core capital of not less than 8% of its total deposit liabilities for banks, mortgage companies and microfinance institutions; and
• a total capital of not less than 12% of the total risk-weighted assets plus risk-weighted off-balance sheet items for bank, mortgage companies and microfinance institutions.

Note that the CBK is authorised to vary upwards the minimum ratios for individual institutions for reasons including deficiencies in ownership or management, adverse effects caused by activities of its holding or subsidiary company, high volume of poor quality assets, rapid institutional growth or expected or incurred loss resulting in capital deficiency.

With respect to banks only, and owing to the power handed to the CBK by the Banking Act to determine minimum liquidity requirements, the CBK drafted the Prudential Guidelines on Liquidity Management to ensure compliance. Presently, the laws impose a minimum of 20% of all the deposit liabilities, matured and short-term liabilities in liquid assets of a financial institution.

Foreign lenders are not particularly restricted in any way from granting loans of whatever amount to Kenyan private borrowers. However, lending to public entities may meet some form of restriction where certain internal approvals and notice to the CBK are not obtained.

The granting of security is not restricted. In Kenya, assets of all types may be the subject of security, including future and contingent rights, cash in accounts and interests under contracts. The parties can execute a security agreement over any security of the borrower as agreed between the parties to the agreement.

There are certain restrictions and controls with respect to foreign currency exchange. Section 28 of the Central Bank of Kenya Act restricts the institutions and persons with which Kenyan banks can engage in foreign currency exchange to:

• authorised dealers;
• public entities;
• foreign central banks;
• foreign banks or foreign financial institutions;
• foreign governments or agents of foreign governments;
• international financial institutions; and
• any other person or body of persons which the bank may prescribe, by providing notice in the Gazette.

Pursuant to Section 33, no person shall transact foreign exchange business in Kenya, except as authorised by a licence issued by the CBK under the Central Bank of Kenya Act. The Act further outlines the duties of these authorised dealers and provides for their inspection.        

There are no general restrictions on the borrower’s use of proceeds from loans or debt securities. Loan instruments are mostly contractual and the law generally refrains from controlling parties’ rights and freedom to contract. However, the parties themselves may choose to include clauses that regulate the use of loan proceeds advanced to the borrower, particularly for specific loans such as construction loans. Most banks in Kenya may require applicants to disclose the potential use of the loans subscribed to.

Agent

The agent concept is recognised in Kenya, and is particularly prevalent in syndicated loan agreements (locally created or otherwise). Syndicate lending is a form of lending in which a group of lenders provide financing for a single borrower under a single credit facility agreement.

Trust

The trust concept is also recognised in Kenya. Through a deed of trust, a trust is created by a borrower for the benefit of the lender(s), who has a beneficial interest. The appointed trustee may have legal ownership of the trust assets in trust for the use and benefit of the borrower, or may merely hold a lien on the property. One example of where the trust concept is exercised is in listed bonds, where the bond holders jointly appoint a trustee to act on their behalf and in their interest.

The main loan transfer mechanisms in Kenya are as follows.

• Assignment – only rights under the contract are assignable. Obligations cannot be assigned. Therefore, the rights of an existing lender under a loan agreement can be assigned to a new lender but the obligation of the existing lender to advance the loan sum stays with the existing lender. Practically, however, where rights under a loan agreement are assigned, there is a corresponding assumption of the assignment of obligations as well. The assignment will be according to the instructions given in the assignment clause.
• Novation – in contrast to assignment, novation operates by extinguishing all the rights and obligations of an existing lender and substituting them with identical rights and obligations on the part of a new lender. Novation clauses mostly provide for the requirement of consent of all parties to the loan agreement through, for example, the execution of a transfer certificate.
• Sub-participation – this is an arrangement (either as funded participation or risk participation) under which the parties share a default risk on the loan (ie, the lender can transfer its risk in a loan to another lender). This arrangement is between the grantor (the lender under the loan agreement) and the participant. Note, however, that no actual transfer of the loan occurs: the grantor remains the lender under the loan agreement and the participant receives no rights under it. Furthermore, the borrower does not need to be made aware of the participation and, subject to the terms of the loan agreement, it can therefore be a useful method to circumvent any restrictions on transfers or assignments in the loan agreement.

A debt buy-back refers to the purchase by the borrower or a related party of its own debt from its lender(s), often as a discount par value. The term debt buy-back, however, is not the popularly known/used term: the most commonly used terms are "early repayments" or "early redemption". An early repayment refers to where any borrower clears its loan before its term. Knowing that they may miss out on some of the interest that would have accrued for the entire term of the loan, some lenders may choose to include an early repayment penalty into the loan instrument. As this is purely contractual, the law tends to allow the parties to decide.

Early redemption is most commonly used in bond markets in Kenya. A number of Kenyan companies and banks – such as EABL, Centum Investment, Family Bank and Acorn Holdings – have in the past announced early redemption of their corporate bonds, which often includes the repayment of accrued interest. Early redemption of treasury bonds from funds placed in a sinking fund is further recognised under the Public Finance Management (National Government) Regulations, 2015. The law allows the National Treasury, subject to limitations under the law, to accept discounts to effect early repayment.

“Certain Funds” Provisions

“Certain funds” provisions refer to the requirement that the bidder has the funds to close the deal in bids for public companies that require the lender to make a takeover offer on behalf of a bidder. In Kenya, the Capital Markets (Takeovers and Mergers) Regulations provide for standard “certain funds” provisions, which is typical in most jurisdictions. Regulation 22 provides that the offeror is obliged to demonstrate and satisfy its financial adviser that the takeover offer will not fail due to insufficient financial capability, and that every offeree shareholder who wishes to accept the offer will be paid in full. Therefore, a person shall not make a takeover offer if they have no reasonable grounds to believe that they will be able to perform their obligations if the offer is accepted.

Furthermore, the First Schedule to the Regulations provides that the information that must be included in the offeror’s statement, where the consideration for the acquisition of shares is to be satisfied in whole or in part by the payment of cash, includes details of arrangements that have been or will be made to secure the payment of cash; if there are no such arrangements, a declaration must be made to that effect.

The certain funds provisions apply to all offers where the target’s shareholders are offered cash (or a cash alternative), regardless of the manner in which the offer is made.

However, this certain funds requirement may be dealt with differently in special circumstances, such as a pre-conditional offer. Kenyan law allows for the making of a pre-conditional offer – ie, an offer will be made if certain pre-conditions are satisfied. Regulation 15 of the Regulations provides that, where an offer is conditional upon acceptances in respect of a minimum percentage of shares being received (the minimum acceptance condition under Regulation 8(3)(a)), the offer shall specify a date not later than 30 days from the date of service of the takeover offer or such later date as the Capital Markets Authority (CMA) may in a competitive situation or in special circumstances allow as at the latest date on which the offeror can declare to have become free from that condition.

However, the use of offer conditions has been restricted from abuse through Regulation 8 of the Regulations: "The offer shall be conditional upon the offeree approving or consenting to any payment or other benefit being made or being given to any director of the offeree or to any other person that is deemed to be related to the offeree, as compensation for loss of office or as consideration for, or in connection with, his retirement from the office."

Short or Long-Form Documentation

For takeovers or acquisitions of this nature, long-form documentation is commonly used. The law states that any applicant seeking approval of a takeover must meet the threshold for disclosure required by various regulators, such as providing details of any agreement entered into, or proposed to be entered into, and the cost, as well as details of the proposed acquisition and the relevant shareholding and identity of the acquirer. The Capital Markets (Takeovers and Mergers) Regulations prescribe the information to be disclosed in transaction documents.

Public Filing of Documentation

Generally, given that the takeover is for a public and listed company, the bid is made public. The acquirer is obliged to announce its proposed offer by press notice and by serving a notice of intention to the target company, the NSE, the CMA and the Monopolies and Prices Commission, within 24 hours of the acquisition board resolution. Additionally, the acquirer is under a continuous reporting obligation to make a cautionary announcement of any information that may lead to material change in the price of shares if at any time the necessary degree of confidentiality has been breached or cannot be maintained.

Withholding tax (WHT) is withheld at source. Interest on bank loans is chargeable to 15% WHT for both resident and non-resident banks. Pursuant to Section 16(3) of the Income Tax Act, Chapter 470 Laws of Kenya, loans include loan overdrafts, ordinary trade debts, overdrawn current accounts or any other form of indebtedness for which the company is paying a financial charge, interest, discount or premium.

Excise Duty

The Excise Duty Act, 2015 provides that excise duty on other fees charged by financial institutions shall be 20% of their excisable value. Pursuant to Part 3 of the Interpretation Schedule to the Excise Duty Act, "other fees" include any fees, charges or commissions charged by financial institutions relating to their licensed activities, but do not include interest on loans or returns on loan or any share of profit or an insurance premium or premium or related commissions specified in the Insurance Act or regulations.

Stamp Duty

Where movable or immovable property is used as security for loans, stamp duty is attached to their registration as securities. Home loans also attract stamp duty at 4% of the cost of property or of the value on the open market, and an additional 0.1% of the loan amount upon making a charge on the property for collateral purposes.

Value Added Tax (VAT)

Professional legal and valuation fees are also subject to VAT, levied at the standard rate of 16% and borne by the borrower.

Registration Fees

All registries in Kenya collect revenue and registration fees for the government.

Usury Laws

There are currently no interest cap laws in Kenya, having been removed from the Banking Act (Section 33B) in 2019. The CBK, however, has placed the responsibility on financial institutions to be disciplined when dealing with consumers through practising risk-based pricing, transparency and customer centricity, and entrenching an ethical culture in banks.

The In Diplum Rule

This rule (which means "in double") basically provides that interest stops running when unpaid interest equals the outstanding capital amount. As such, while the rule does not prevent the lender from receiving interest on the principal of more than the loan itself, at no time should the lender recover more interest than the principal amount owing. The unpaid interest must not be above the unpaid capital amount. The recent High Court judgment in Anne J Mugure and 2 others v Higher Education Loans Board (HELB) [2022] eKLR upheld the principle in ordering that no HELB beneficiary should pay back to HELB more than double the borrowed amount. This rule is captured in Section 44A (3) of the Banking Act (Chapter 488 of the Laws of Kenya).

Assets Available as Collateral

The most common form of collateral in Kenya is real property. The security arising out of such a manifestation is referred to as a "charge", which is registered as an encumbrance in the respective register with the Land Registry or a deposit of title deeds with the creditor.

The use of movable property as collateral is slowly being revolutionised through the Movable Property Security Rights, 2017 (MPSRA), which applies to security rights in movable assets and encompasses both tangible and intangible movable property, save for those under Section 4(2).

Security Formality Requirements

Section 56 of the Land Registration Act, 2012 (LRA) sets out the following formal necessities:

• the charge instrument is to be in the prescribed form;
• the loan repayment date is to be specified in the charge instrument – if it is not, the money shall be deemed to be repayable three months after the service of a written demand by the chargee;
• the charge instrument is to be duly registered as an encumbrance in the name of the person in whose favour it is created;
• a land rent clearance certificate and consent to charge (unless the land is freehold) must be presented to the Registrar before registration, unless the property is a unit in a condominium, an office or a sub-lease where the mother lease is subject to the full payment of rent by the head lessor; and
• such other provisions that the parties deem necessary are to be included in the charge document.

Perfection of Real Property

Perfection is the means through which security is made enforceable against certain third parties. Perfection here is achieved through the payment of stamp duty and registration at the relevant registries, such as the Companies Registry and Land Registry. Registration automatically confers statutory compliance.

Failure to register the security will render it unenforceable against liquidators, administrators or other secured creditors of the security provider. This means that, for all practical purposes, the security will be of no use to the secured party. However, pursuant to Section 36 of the LRA, failure to register the charge instrument does not prevent the instrument from operating as a contract between the parties.

Section 36(4) implies that the charge instrument should be presented for registration within three months of the date of the instrument, or else an additional fee, equal to the registration fee, shall accrue.

In terms of the cost and timing, there is a five-stage process involved in securing an immovable property:

• search at the Companies and Land Registries;
• obtaining the completion documents
• stamping;
• valuation; and
• registration.

Each stage involves various steps.

Search at the Companies Registry and the Land Registry

Searches at these registries can be done by the interested party or by a registry official. Search at the Companies Registry takes one to three working days, depending on the availability of the file, and the maximum cost is about KES200.

Searches at the Land Registry will take about five days. However, there is no telling how long they will take if the file or title is misplaced or unavailable. The maximum search cost is about KES205.

Completion documents

Perfection of documents prior to registration may take about five days. These documents may be prepared by an external lawyer, resulting in an additional cost that depends on the value of the transaction and the scale of fees set out in the Advocates (Remuneration Amendment) Order, 2009.

To facilitate the registration, at the very least, the following completion documents are required:

• rates clearance certificate – this is issued by the local authorities for a fee that varies according to the county in which the land is located. For instance, in Nairobi, the fee is about KES5,000. This certificate is valid for 30 days;
• land rent clearance certificate – this is issued by the Land Registry for a fee of about KES250. Presuming the correspondence file relating to the property is available, the process will take about 14 working days;
• consent of the Commissioner of Lands – this is required where the land is a leasehold under the Registration of Titles Act or the Land Registration Act, and costs about KES250; and
• Land Control Board consent – this is required where the land is agricultural. The Land Control Board meets once a month in the relevant District to approve the application for consent. It costs about KES5,000 to obtain the consent.

Stamp duty

Stamp duty varies depending on the type or property, location or purpose of registration. For instance, the rate will generally be 0.2% of the mortgage or secured amount. In the case of a simultaneous transfer of the property, an additional 4% of the price declared in the transfer instrument will apply. Where the property is situated in rural areas, the rate will be 2% of the value.

This duty payment process takes about six days as it involves assessment, the issue of an instrument number against which payment will be made and subsequent confirmation from the Kenya Revenue Authority (KRA) of payment, upon which the stamped documents are released to the applicant by the Land Office.

Filing/registration

This takes about seven days, assuming the deed file and counterpart title (kept at the Land Office) are available. The application for registration is accompanied by the original title document, charge documents, clearance certificates, consent(s) and valuation(s) for stamp duty. The cost is about KES250 per instrument.

Where the property is owned by a company, the particulars of the instrument constituted as collateral must be filed with the Registry within 42 days of the date of instrument. Thereafter, the Registry will issue a Certificate of Registration. This process will cost about KES600.

Security Formality Requirements and Perfection of Movable Properties

A security right over movable property is created by a security agreement, provided the grantor has the rights in the asset to be encumbered or the power to encumber it. The agreement may also provide for the creation of a security right in a future asset, but that security right is created only at the time the grantor acquires rights in it or the power to encumber it.

In terms of formality, the security agreement must:

• be in writing and signed by the grantor;
• identify the secured creditor and the grantor;
• describe the secured obligation, except in agreed cases of the outright transfer of a receivable; and
• adequately describe the collateral by its specific listing, category, type and quantity. The obligations secured or to be secured must also be adequately described.

Notably, the securitisation of intellectual property rights differs from securitisation of other kinds of assets in that, subject to Section 14 of the MPSRA, a security right in a tangible asset with respect to which IP is used does not extend to the IP, and vice versa. Application commences by filing an initial notice with the Registry. One notice is sufficient for security rights granted by one grantor under multiple security agreements.

The registration of an initial notice shall be effective for not more than ten years. This period can be extended (from its expiry date) by not more than ten years through the registration of an amendment notice, at no extra cost, filed within six months before the expiry of the initial notice.

Under Kenyan law, a floating charge can be created over all present and future assets of a company. Applicable laws include the Companies Act, 2015, the MPSRA and the Insolvency Act (No 18 of 2015).

In Kenya, pursuant to Section 173 of the Companies Act, 2015, it is implied that entities can give downstream, upstream and cross-stream guarantees. The provision states that no approval is required by a company for the giving of a guarantee or the provision of security in connection with a loan or quasi-loan made to an associated body corporate.

However, such guarantees must still meet the commercial interests of the guarantor company. Associated limitations in respect of the guarantees include proof of benefits to each individual company granting a guarantee. In practice, board minutes that specifically state the commercial benefit to the grantor company will suffice.

The prohibition on a private company providing financial assistance for the purchase of its shares was abolished by the Companies Act when it came into force in 2015. As such, there are no rules prohibiting the target in a private acquisition transaction from giving financial assistance to the acquirer.

However, public companies are generally prohibited from giving financial assistance primarily for the acquisition of their own shares: Section 442 of the Companies Act restricts the provision of assistance for the acquisition of shares in a public company, while Section 443 restricts the provision of assistance by a public company for the acquisition of shares in its private holding company. It is thus an offence, under Section 444, for public companies in Kenya to give such prohibited assistance.

Restrictions, costs or consents, other than the ones mentioned in 5.1 Assets and Forms of Security, include the following:

• consent from the National Lands Commission, where the proprietor has leased land from the government and intends to use it as security;
• the lessor’s consent, where land is leased from a lessor;
• consent from the management company, where there is separate ownership of units; and
• board members’ approval – this is particularly required for public companies.

Security release is dependent on the nature of that security right and the government regime. For instance, Section 85 of the Land Act provides that an encumbrance on immovable property is released through a discharge. Discharge also includes a re-conveyance and re-assignment of the charge or any other instrument used in extinguishing interests in land conferred by charges.

With respect to debts registered with the Companies Registry, security release is occasioned through what is known as "memorandum of satisfaction" and "memorandum of release" as recorded by the Companies Registry. The former is filed to show evidence of payment of the secured sum in whole or partly, while the latter is recorded when the encumbered property has been released from the charge.

Finally, with respect to security rights registered at the Collateral Registry, Section 57 of the MPSRA provides for the registration of a cancellation notice where the secured interest in a collateral has terminated.

In Kenya, the rules of priority vary depending on the registering regime. For land, Section 81 of the Land Act provides that the order of priority shall be in accordance with the time of registration. This rule shall prevail but may be subject to terms of alternative preferences indicated in the charge document.

Similarly, in respect of movable assets covered by the MPSRA, priority of a security right over the movable assets is determined by the time of registration: the first secured creditor to register a notice in respect of a security right over a grantor’s assets ranks in priority to a subsequent secured creditor over the same assets of the grantor.

Methods of Subordination

The methods of subordination vary depending on the registering regime. With respect to security over land, Section 82 of the Land Act provides for the doctrine of tacking, which paves the way for a first charge to have a further advance charge made to the same chargor to rank higher than a second charge. This method of subordination is only exercisable if the first chargee reserved the right to tack in the charge instrument.

With respect to movable assets, Section 51 of the MPSRA states that a person is allowed, devoid of temporal restrictions, to vary their rank in the priority order in favour of any existing or future claimant.

Furthermore, there is the doctrine of pari passu, which has been referred to numerous times in Kenyan courts, such as in TSS Investments Limited v National Bank of Kenya Limited & 2 others [2018] eKLR. The doctrine simply provides that two or more creditors on the same subject may elect to have their security rights treated equally, regardless of the general rules on priority.

Contractual Variation

Priority can be contractually varied, and such provisions will survive the insolvency of the borrower. The parties can enter into either a subordination agreement (under which a creditor(s) agrees to rank behind other debts of the borrower) or an inter-creditor agreement (under which the different classes of creditor agree on the priority of their respective claims against the borrower).

In practice, subordination agreements essentially provide that the priority of receipt of payment towards a debt is varied in the event of insolvency proceedings. This means that, upon liquidation, distributions will be paid out to the subordinated creditors after the unsubordinated ones have been settled. In the case of pari passu, distribution shall be done on an equal basis for the creditors that elected to do so.

Typically, the transaction documents in each secured lending transaction set out the basis on which a secured party can enforce its security. Each security agreement must therefore specify the events that are to constitute events of default. Generally, however, enforcement of collateral is usually necessitated by the borrower’s failure to pay the secured loan amount or perform a secured obligation.

Methods, Procedures, Restrictions and Concerns

Enforcement methods differ depending on the type of security.

Immovable property

The Land Act and the Land Registration Act will govern the enforcement method used on the charge. Only after the borrower has defaulted and not remedied within two months (or three, if the default is as to payment) will the chargee adopt any of the following methods:

• sue for the amount due (if applicable);
• appoint a receiver of the income from the property;
• lease the land (if applicable);
• take possession of the land; or
• sell the land by private contract or public auction.

Enforcement through sale is subject to further requirements that must be met. First, the chargee must give the chargor 40 days’ notice where it elects to sell the land by private contract. Where it elects to sell the land by public auction, the auctioneer is also required to give the chargor 45 days’ notice and publicly advertise the sale. In both options, the chargee must obtain a "forced sale valuation" of the land where it has a duty to obtain the best price reasonably obtainable at the time of sale.

Movable property

The secured lender has the right to do the following only after it notifies the grantor in writing of the default and the grantor fails to remedy the default within the prescribed period:

• sue for any money due or owing under the agreement;
• appoint a receiver of the income of the collateral (if applicable);
• lease the movable asset (if applicable);
• take possession of the collateral; or
• sell the collateral.

Debentures

The terms of the debenture instrument will normally set out the enforcement procedure, which includes the appointment of a receiver and/or manager to undertake the procedure.

Guarantees

A claim under a guarantee can be made by providing a demand notice in accordance with the Deed of Guarantee. If the guarantor fails to make the payment, the guaranteed party can file a suit or enforce the guarantee through a summary procedure.

Charge over shares

The chargee can use a power of attorney and a share transfer form (both granted to it by the grantor after perfection) to transfer the shares to itself. The chargee must thereafter cause the share transfer to be stamped and notify the Companies Registry of such. The company secretary of the transferee company must then register the chargee in the company’s register of members.

There are restrictions on who can enforce a security interest over the assets located in or governed by the laws of Kenya. However, the law will not stop the parties setting out any contractual restrictions or limitations applicable in the enforcement of security rights. These must be set out in the security agreement.

Generally, parties to a contract retain the autonomy to choose the forum or jurisdiction that will govern the conduct of their contractual obligations and disputes that may arise out of that contractual relationship. This is in tandem with the principle of party autonomy. Such an arrangement is especially common with commercial contracts involving cross-border contracting parties.

However, this foreign governing law clause in contracts is not conclusive if its recognition would result in a breach of domestic public policy or an evasion of mandatory provisions of Kenyan law. There must be a real connection between the choice of foreign law and the contract to which it should apply.

Enforcement of a Foreign Judgment

A foreign judgment can be enforced in Kenya without a retrial on the merits of the case only if it complies with the conditions set out in the Foreign Judgments (Reciprocal Enforcement) Act (Cap 43). Note, however, that the Act only extends such right to "designated countries, as laid down in the case of Intralframe Ltd v Mediterranean Shipping Company [1986] KLR. These countries are Australia, Malawi, Seychelles, Tanzania, Uganda, Zambia, the UK and Rwanda. Foreign judgments not originating from a reciprocal country are enforceable in Kenya as a claim in common law (see Court of Appeal in Jayesh Hasmukh Shah v Navin Haria & another [2016] eKLR).

Enforcement of a Foreign Arbitral Award

The Arbitration Act, 1995, in contrast with Cap 43, contemplates a much wider scope with respect to enforcement. Section 36 stipulates that an international arbitral award will be recognised as binding and enforced in accordance with the provisions of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the UN General Assembly in New York on 10 June 1958 (New York Convention) or any other arbitration-related convention to which Kenya is a signatory.

Presuming that the loan or security agreement meets all the formal and legal requirements under the Kenyan law, there are no special matters that may impact a foreign lender’s ability to enforce its rights.

Rescue Options Under the Insolvency Act

Voluntary arrangements

A company voluntary arrangement (CVA) as provided for under Part IX of the Insolvency Act (No 18 of 2015 Laws of Kenya) refers to the scheme whereby the company’s directors table a repayment plan to the creditors. If the CVA is approved, the company will continue with its business on a more flexible repayment schedule.

Administration

This is provided for under Part XII of the Insolvency Act, and involves the insolvent company being placed under the management of an administrator who will manage its affairs and property.

Rescue Options Under the Companies Act, 2015

Compromises and arrangements

A compromise is an informal mechanism of restructuring a company’s obligations to all or a class of creditors. An arrangement, on the other hand, is defined to include a reorganisation of a company’s share capital via consolidation of the shares of different classes, division of shares or a combination of both.

Reconstructions and amalgamations

Reconstruction refers to the transfer of a company’s business(es), wholly or partly, to a new company. This is generally accomplished where the shareholders of the transferor company and the shareholders of the transferee company are one and the same. The transferor company goes into liquidation and its shareholders take up shares of equivalent value in the transferee company. Conversely, an amalgamation refers to a combination of two or more companies to form a new entity.

The impact will depend on whether the lender is secured or unsecured. For instance, a lender that has effective security over an asset can, upon the insolvency of the borrower, take possession of that asset and use the proceeds to repay the loan. The security can be enforced, without recourse to the court, when required, even if the borrower is undergoing insolvency proceedings. Unsecured creditors, on the other hand, will require the approval of the court to proceed with any litigation once the insolvency proceedings commence. Otherwise, proceedings pending against the borrower may be stayed (if the proceedings are pending in court) or restrained (if the proceedings are pending in another court) upon application by the borrower, creditor or contributory.

Among secured lenders, the impact may also depend on the type of security taken by the lender. For instance, a guarantee (an example of a quasi-security) is of lesser force than a security. A security creates rights against the assets of the security provider, whereas a quasi-security creates rights against a person. When an insolvency proceeding commences, a lender with a guarantee may be forced to enforce such guarantee against the guarantor instead of the borrower so as to enhance its chances of being repaid.

Finally, preference transactions may be set aside by the court upon application by the liquidator. These include transactions that can be shown to have been entered into to favour some lenders at the expense of others, or to defraud lenders.

Preferential creditors are ranked first in the order of payment. Thereafter, secured creditors who rank ahead of unsecured creditors are paid. Within the secured creditors, holders of fixed charges will rank ahead of holders of floating charges. Once the secured creditors are paid, the unsecured creditors will follow. Last are the shareholders.

The concept of equitable subordination is recognised in Kenya, and is a doctrine in which a court of competent jurisdiction exercises powers of discretion in favour of unaffiliated creditors. However, the Insolvency Act restricts claims by creditors surpassing first priority claims, as these will take precedence.

Credit Risk

This refers to the probability of a loss resulting from a borrower’s, security provider’s or guarantor’s failure to repay in full the sum loaned, or failure to meet contractual obligations. The loss may be greater where the lender did not involve tactics such as taking out insurance cover. The lender may also incur certain costs in connection with enforcement, and there will be an inevitable delay in recovering funds (in whole or in part).

Liquidity Risk

This is the risk of incurring losses from the inability of the lender to access cash to meet its short-term funding obligations due the reliance on the timely payment of the loaned amount to the borrowers. This also stems from the borrowers’ inability to meet their payment obligations, or the long process associated with the liquefication of their assets. Ultimately, this will affect the lender’s business as it may impede its lending strength in the product/service market within which it operates.

Project finance is the second finance option developed to provide an alternative solution to the financial risk exposure involved in corporate finance. Typically, project finance refers to a long-term, non-recourse or limited recourse financing arrangement used to fund select and often massive and long-term infrastructure, industrial or public service projects. Rather than focusing on balance sheets, which are a characteristic of corporate finance, project finance is based on the projected cash flows of the financed project.

Overview

Public-private partnerships (PPPs) recognise that both parties have certain advantages relative to the other in the performance of specific tasks. The overall aim of PPPs, therefore, is to structure the relationship between the parties so that risks are borne by those best able to control them, and increased value is achieved through the exploitation of private sector skills and competences.

The law governing all PPPs in Kenya is the Public Procurement Partnerships Act, 2021 (the "PPP Act"), which defines a PPP as a performance-based contractual agreement, often long-term, between a contracting authority and a private party allowing the private sector to provide public services over time on payment by the public sector, the end user or a hybrid of both. At the end of the term, the private party transfers the facility to the contracting authority.

There are a number of significant PPPs, with some still in the pipeline and others attaining financial closure. These transactions are prominent in sectors such as infrastructure, affordable housing and student housing, hospitality and privately initiated proposals. The most significant PPP transactions in Kenya range from power plants to roads and airports. The most significant projects across various sectors include the following:

• the 27.1km Nairobi Expressway launched by the government in early May 2022 – this is a road project between the national government through the Kenya National Highways Authority (KENHA) and the China Road and Bridge Construction Corporation (CRBC), using a build-operate-transfer (BOT) model;
• the ongoing tolling of the Nairobi-Nakuru-Mau Summit (NNM) project road;
• the ongoing River Estate, Ngara affordable housing project between the national government and Edderman Property Limited; and
• the ongoing Pangani Housing project between the national government and Tecnofin Kenya Limited.

Depending on the nature of the project finance transaction, a number of government approvals must first be obtained before the implementation of the transaction. Key approval-issuing bodies include the National Environment Management Authority (NEMA) and the relevant county government(s). Other bodies are sector-specific.

Remittances in cash also require certain disclosures by the remitter under the applicable anti-money laundering laws. PPP projects must also first be approved by the contracting authority and the procuring entity under the PPP Act.

Transaction Documents

For enforceability purposes and depending on the nature of the transaction, the transaction documents must be registered with various registries. Where a project involves land transactions, certain security documents may require registration with the Land Registry. Project documents must be registered with the National Construction Authority. Contracts revolving around public procurements and PPP transactions must also be deposited with the government. If the project finance is procured by county or government-linked entities, then the financing agreements are subject to approval by either the National Treasury or the County Treasury.

Transaction documents are typically governed by a contract, except in cases where one of the parties is the government, a state corporation or a county government, in which case statutes such as the Constitution of Kenya, the Government Contracts Act (Chapter 129, Laws of Kenya), the State Corporations Act (No 11 of 1986), the County Government Act (No 17 of 2012), the PPP Act and the Public Procurement and Disposal Act, 2015 would need to be considered in the drafting of such agreements.

Energy Sector

The two principal laws regulating the energy sector are the Energy Act, 2019 and the Petroleum Act, No 2 2019. The Energy & Petroleum Regulatory Authority (EPRA) is the principal regulator exercising regulatory control over the energy sector as a whole, with the exception of licensing nuclear facilities and the regulation of downstream petroleum. EPRA implements policies and regulations developed by the Ministry of Energy.

The Energy Act provides the framework for all laws relating to energy, which properly delineates the functions of the national and devolved levels of government in relation to energy. It also provides for the exploitation of renewable energy sources, regulates midstream and downstream petroleum and coal activity, and regulates the supply and use of electricity and other forms of electricity. The Act further establishes institutions such as the Rural Electrification and Renewable Energy Corporation and the Renewable Energy Resource Advisory Committee.

The Petroleum Act provides a framework for the contracting, exploitation, development and production of petroleum, and for the cessation of upstream petroleum operations. It also gives effect to the provisions of the Constitution relating to upstream petroleum operations, and to the regulation of midstream and downstream petroleum operations.

The responsible government body under the Act is the Cabinet Secretary responsible for petroleum, who is empowered to review applications for licences or permits and negotiate and conclude petroleum agreements, among other actions. The Act further establishes the National Upstream Petroleum Advisory Committee, which generally advises the Cabinet Secretary on upstream petroleum operations, during petroleum contract negotiations, and assists in developing criteria for the negotiation of petroleum agreements.

Mining Sector

The law governing the mining sector is the Mining Act (No 12 of 2016). The Cabinet Secretary responsible for mining is accorded the responsibility of overseeing the mining sector. The Cabinet Secretary may, on behalf of the State, choose to enter into mineral agreements where the proposed investment exceeds USD500 million in accordance with the Natural Resources (Classes of Transaction Subject to Ratification by Parliament) Act, 2016. The Cabinet Secretary also retains that power to negotiate with an applicant for or holder of a prospecting, retention or mining licence in respect of large-scale mining or exploitation of minerals in the marine and terrestrial areas.

Other institutions have also been established to assist the Cabinet Secretary in enforcing its policies. For instance, the National Mining Corporation functions to acquire by agreement or to hold an interest in any undertaking, enterprise or project associated with exploration, prospecting and mining.

There is also the Minerals and Metal Commodity Exchange and the Mineral Rights Board, which are charged with various mandates relating to the mining sector, including licensing, permits, renewal and regulation of the mineral sector.

Key Considerations When Structuring the Deal

Capitalisation of the project or project company

The amount of capital required, when said capital will be injected into the project and by what means must be considered at this stage. Different projects demand different strategies, depending on their dynamics.

Appointment of advisers to the project

Key appointments include financial and legal advisers to the project. The legal advisers will advise on the crucial points of the sector-specific regulatory framework for the specific project, to ensure that the project is conducted in accordance with all applicable laws. Other advisers, such as technical, insurance, environmental and market risk advisers, are incorporated depending on the circumstances presented by the particular project.

Dividend policy

Discussion and consensus on this is quite key as it determines when the project sponsors and lenders will be able to reap benefits from the project.

Respective roles in the project of each sponsor

Where there are multiple sponsors, each should be clear on the roles they play in dealing with areas such as the technical aspects of the project, the negotiations, project insurance, establishment of the project vehicle and obtaining the necessary permits and consents.

Management of the project vehicle

There needs to be an agreement on who will take up the role of managing the project vehicle in matters such as its employment structure and source.

Sale of shares and pre-emption rights

This will be a concern to sponsors and lenders alike. In particular, the lenders will want the comfort of knowing that the sponsor group that has persuaded them to lend to the project company in the first place will continue to be in place until the loans have been fully repaid.

Legal Form of the Project Company

Project companies in Kenya are mostly special-purpose vehicles set up solely for the purpose of participating in a particular project, and usually take the form of a company, partnership, limited partnership, joint venture or a combination thereof. Choice will be influenced to a certain extent by the legal and regulatory framework of Kenya.

Laws Relevant to Project Companies

The different structures will be established and regulated under different laws in Kenya, or a combination thereof. For example, companies and joint ventures are regulated by the Companies Act, 2015 and the Competition Act, 2010, while partnerships and limited partnerships are regulated by the Partnerships Act, 2012 and the Limited Liability Partnerships, 2011.

Restrictions on Foreign Investment

The Foreign Investments Protection Act (Cap 518, Laws of Kenya) restricts foreign investors from investing in certain sectors of the economy, including securities, insurance, power and lighting, where there are varying restrictions.

The Mining Act, 2016 restricts foreign participation in the mining sector. According to the Act, mineral acquisition rights are reserved to Kenyan companies, and mineral dealerships and artisanal mining companies require 60% Kenyan ownership.

The Kenya Communications Act No 2 of 1998 and the Kenya Information and Communications (Amendment) Act 2008 limit foreign investments in the communications sector to 30%. The Kenya Insurance Act, 2010 also limits foreign capital investment in insurance companies to two-thirds, with no single person holding more than a 25% ownership share.

The National Construction Authority Act, 2011 and its regulations impose local content restrictions on foreign contractors (ie, companies incorporated outside Kenya or with more than 50% ownership by non-Kenyan citizens).

Private property is also protected in the Constitution, 2010. Foreign investors may own land only on a leasehold basis for a term not exceeding 99 years. The Land Control Act, 1967 further restricts ownership by foreigners of agricultural land or land within control areas. This includes land situated outside a municipality, a township or a market, or land designated as being controlled.

Typical forms of financing from banks include commercial loans, subordinate loans, bridge financing and corporate bonds. However, given the global financial crisis that necessitated stricter regulations on banks and their lending requirements, it is almost impossible for an infrastructure project to be funded solely on traditional debt. Therefore, other innovative ways needed to be considered and implemented, such as project bonds and export credit financing.

As a type of project financing, project bonds are actively utilised in Kenya. For instance, in 2020 Centum Real Estate (a subsidiary of Centum Investment Company) opened a KES45 billion, three-year zero coupon project bond issue to finance its housing projects. In 2022, the CBK offered a 19-year infrastructure bond worth KES75 billion to investors to fund its infrastructure projects in the 2021/2022 budget estimates.

Financial support in Kenya can also be sourced from export credit agencies (ECAs) by national exporters competing for overseas sales. An ECA is a private, governmental or quasi-governmental agency that provides trade finance and other services to facilitate local companies’ international exports. The support can take the form of loans (pre-shipment/pre-export finance), export credit guarantees or export credit insurance. One example of an ECA that provides export credit guarantees covering political risk is the African Trade Insurance Agency. Export credit insurance, on the other hand, is an insurance policy against the risk of non-payment by an overseas buyer.

Acquisition of Natural Resources

In Kenya, all natural resources vest in the State. However, private parties may acquire a contractual right to explore and exploit such resources from the State, provided they do so in a sustainable manner. Such rights are often granted by way of exploration and production agreements entered into with the State. Such agreements can be entered into with local or foreign parties. However, the Mining Act provides that a foreign party gaining mineral rights must guarantee 10% free carried interest to the Kenyan government; there is currently a requirement of 35%. Common methods of acquisitions include concessions, production sharing contracts, licences and permits.

Export of Natural Resources

The authority responsible for governing and regulating the mining sector is the Ministry of Petroleum and Mining, which issues, among others, export permits to facilitate mineral trade. These permits detail the exporter (licensed dealer or miner), the value, weight, source (where mined or bought) and composition of the mineral, and the country and address of its destination.

For precious metals such as gold and precious stones such as gemstones, which are of high value but low volume, export permits are only issued by the Ministry after a mineral consignment has been seen by a panel of officers, tested and valued, and after the permit fees and royalties have been paid to the government. For instance, an ad valorem royalty of 15% of the gross value of all diamonds originating from Kenya must be paid, as assessed by an approved valuer. The consignment is then jointly sealed by Mining State Department officers and the KRA.

Minerals, mineral samples and consignments for export are sent to a laboratory located at Madini House, Machakos Road, Industrial area, where they are tested for composition in the presence of clients. The test results are issued in the form of an Assay Certificate, the details of which are entered in a register for traceability and reference.

The authority for oil and gas is EPRA, which issues licences for the export of petroleum crude or products. EPRA is mandated under Section 92 of the Petroleum Act to monitor petroleum products offered for sale in the local market, with the aim of preventing motor fuel adulteration or the dumping of export-bound fuels. Dumping involves the diversion of duty-exempt fuel for illegal sale in the local market. Pursuant to Regulation 15 of the Energy (Retail Facility Construction and Licencing) Regulations 2013, EPRA is mandated to find non-compliant entities that have committed an offence.

The Constitution of Kenya, 2010

The is the blueprint law regulating all project sectors. The Constitution guarantees universal access to the highest attainable standards of health under the Bill of Rights (Chapter 4). The role is allocated to the government of Kenya through the Ministry of Health.

The Environment Management and Co-ordination Act, 1999 (EMCA) and Regulations

This is the main law governing the environment in Kenya. The National Environment Council, chaired by the Minister responsible for environment, is the highest policy-making body under the EMCA. The EMCA also establishes the NEMA, which is the main regulator of environmental issues and is charged with the overall supervision and co-ordination of all matters relating to the environment, as well as the implementation of all policies relating to the environment. The NEMA is responsible for dealing with environment impact assessment applications and approvals.

Public Health Act, Chapter 242 Laws of Kenya

This Act provides for a framework that secures and maintains the health of the public. The main regulatory body is the Minister of Health. The established Central Board of Health under the Act functions to advise the Minister upon all matters affecting public health.

Mining Sector

Section 36(2) of the Mining Act mandates the Mineral Rights Board to, prior to recommending an applicant to the Cabinet Secretary for the grant of a mineral right, require the applicant to seek, among others, approval of the Cabinet Secretary of environment where land is situated within a protected area, a protected natural environment or a protected coastal zone under the EMCA.

Energy Sector

The two principal laws in the energy sector are the Energy Act, 2019 and the Petroleum Act, 2019. EPRA is the principal regulator exercising regulatory control over the energy sector as a whole, with the exception of licensing nuclear facilities and the regulation of downstream petroleum.

Occupational Safety and Health Act, No 15 of 2007

This Act provides for the safety, health and welfare of workers and all persons lawfully present at workplaces, and establishes the National Council for Occupational Safety and Health. The regulator with oversight is the Director of Occupational Safety and Health Services.

Physical Land Use and Planning Act, 2019

Under this Act, if a local authority is of the opinion that a proposal for industrial locations, dumping sites, sewerage treatment, quarries or any other development activity will cause injurious impact on the environment, the applicant is required to submit together with the application an environmental impact assessment report conducted by the NEMA.