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Diplomacy in Action

2011 Investment Climate Statement - Kenya


2011 Investment Climate Statement - Kenya
Bureau of Economic, Energy and Business Affairs
March 2011
Report
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Openness to Foreign Investment

Kenya has enjoyed a long history of economic leadership in East Africa as the largest and most advanced economy in the region. However, ethnically-charged post-election violence in January-February 2008, which left 1,200 dead and 500,000 displaced, put an abrupt halt to robust growth and raised security concerns about Kenya‘s investment climate. The tourism industry was especially hard hit by the violence, falling 33 percent in arrivals and 19 percent in earnings, while agriculture suffered a $300 million loss in assets due to wanton destruction of farms and dairies. Both tourism and agriculture have rebounded, with tourism growing at its highest level ever and expectations of more than 1.8 million arrivals in 2010. The peaceful and historic August 2010 referendum, which approved a new constitution by a two-thirds majority, breathes hope into Kenya's future prospects.

After experiencing 7.1 percent growth in 2007, the economy slowed to 1.6 percent growth in 2008. The economy in 2009 grew at 2.6 percent, while 2010 3rd quarter growth exceeded six percent and growth in 2010 should exceed 5 percent. Prospects for 2011 and 2012 are for GDP growth to reach the 5 – 6 percent range. The average annual inflation rate was 16.2 percent in 2008, which dropped to 9.2 percent in 2009 and further to 4.5 percent in December 2010 for year-on-year inflation. (Kenya changed its methodology inflation rates calculation to a geometric system in 2009, which has resulted in much lower inflation rates.) As recently as December 2010, 1.2 million Kenyans required emergency food aid, a dramatic improvement from the worst of the drought in the fall of 2009. The abundant long and short rainy seasons in 2009/2010 fueled the strong agriculture recovery, although northeastern Kenya suffers in early 2011 from below-normal rains. Unfortunately, any recurrence of drought would precipitate another food security crisis in Kenya, as irrigation systems are almost non-existent.

Consequently, while Kenya was a prime choice for foreign investors seeking to establish a presence in East Africa in the 1960s and 1970s, a combination of politically driven economic policies, government malfeasance, rampant corruption, substandard public services, and poor infrastructure has discouraged foreign direct investment (FDI) since the 1980s. Over the past 25 years, Kenya has been an underperformer in attracting FDI. Since 2003, Kenya's performance in attracting FDI has been marginally better at nearly U.S. $6 per U.S. $1,000 of GDP (U.S. $82 million in total). However, this pales in comparison to the FDI levels in neighboring countries with smaller economies. UNCTAD's 2008 World Investment Report describes Kenya as the East Africa region‘s least effective suitor in attracting FDI. The stock of FDI in Kenya stood at $183 million in 2008. After enjoying a banner year in 2007 attracting $729 million in FDI, Kenya only received $96 million in 2008 and $141 million in 2009. Recent press articles indicate that domestic investment now exceeds FDI and is making a significant impact on development in Kenya.

Kenya's sovereign ratings, which were downgraded following the post-election violence in early 2008, were upgraded in late 2010 by S&P to positive B from stable B. Similarly, Fitch Rating upgraded the outlook from negative to stable, while retaining the earlier ratings of B+ for long-term foreign debt and BB- for long-term domestic debt in January 2009; these ratings remain the same as of January 2011.

An April 2008 survey, conducted by the Kenya Association of Manufacturers (KAM – Kenya's foremost business association), concluded that Kenya's business climate is hostile. Because of the costly investment climate, KAM learned that an increasing number of companies have opted to shift from manufacturing to trading. Others have abandoned the country. After examining explanations as to why firms either closed or relocated over the past decade, KAM deemed that legitimate commerce in Kenya is inhibited by:

(a) unfair foreign competition, which dumps counterfeit and pirated products (cosmetics, toiletries, batteries, tires, car parts, medicines, books, electronic media, and software) and secondhand clothes and shoes into the market; passes off new footwear and other apparel as secondhand; and under-invoices exports;

(b) the high cost of manufacturing due to exorbitant electricity tariffs, poor infrastructure (notably roads and rails), and hefty transport costs;

(c) unavailability of raw materials such as crude oil;

(d) labor laws that compel private companies, rather than government, to provide their employees with a social safety net of benefits, including paternity and maternity leave and health care – all non-tax exempt;

(e) low productivity, lack of worker discipline, and strong labor unions focused on higher wages and benefits;

(f) local government licenses and harassment over petty demands (which could be interpreted as demands for bribes); and

(g) the failure of the Kenya Revenue Authority (KRA) to process corporate tax and VAT refunds expeditiously.

An analysis of Kenya's tax system carried out by the World Bank, International Finance Corporation, and audit firm PriceWaterhouseCoopers and released in early December 2008 judged Kenya‘s tax regime as the least friendly in East Africa. The report, Paying Taxes 2009, criticizes Kenya for not having a single government body responsible for all tax collections. Rather, Kenya‘s tax structure is marked by several government agencies, each with the authority to collect taxes at various times of the year. According to the study, Kenya has five different tax payment dates each month for VAT, corporate profits, withholding, social security, and health. Aside from the complexity of their tax system, many Kenyans complain taxes are too high. Consequently, tax evasion is increasing. Kenya is now witnessing growing numbers of unregistered or informal businesses known in local parlance as “jua kali.” (Note: according to the government‘s 2010 Economic Survey, the informal sector engages approximately 80 percent of the workforce.) Because of country‘s multiple tax payment architecture and perceived high taxes, the report placed Kenya 158 out of 181 countries surveyed. The report did praise the Kenya Revenue Authority (KRA) for its effective tax collection and welcomed the government‘s future launch of an Integrated Tax Management System.

Kenyan firms carry the heaviest taxation burden in East Africa. Despite East African Community states levying a uniform 30 percent corporate income tax across the region, Kenyan firms have to contend with other levies whose ultimate impact raises the overall tax burden. Tax experts at PriceWaterhouseCoopers say the total corporate tax burden in Kenya is currently standing at 49.7 per cent compared to Tanzania's 45 percent, Uganda's 32 percent, and Rwanda's 31 percent. This additional burden has raised the cost of doing business in the region's biggest economy and reduced the competitiveness of its firms. Kenyan firms have to contend with 41 different tax payments cutting across 16 tax regimes, which take 417 man-hours to file as compared to the world's average of 31 tax payments and 286 hours, thus placing Kenya as one of the countries with the most complicated tax system in this part of the world.

Branches of non-resident companies pay tax at the rate of 37.5 percent. The government generally defines taxable income to be income sourced in or from Kenya. Value added tax (VAT) is levied on goods imported into or manufactured in Kenya, and taxable services provided. The standard VAT rate is 16 percent. Discussion by the government on the VAT in early 2011 focused on reducing or eliminating exemptions to create a broader revenue base versus raising rates.

Crime is another disincentive. In a separate 2007 KAM survey, 33 percent of Kenyan firms reported crime as a serious problem, accounting for losses of nearly 4 percent on annual sales. KAM discovered that on average, businesses allocate 3 percent of their operating budgets to private security services and security upgrades. Senior government officials are well aware of these problems.

Additionally, in early December 2008, Deputy Prime Minister and Minister of Trade Uhuru Kenyatta publicly conceded that immediate action involving a coordinated effort among East African Community (EAC) members must be undertaken to prohibit counterfeit goods from entering Kenya and the region. He acknowledged that counterfeits are undermining the domestic manufacturing sector. Other impediments to investment needing prompt attention, he cited, include insecurity, an unfriendly business regulatory framework, and the high cost of energy.

On August 5, 2008, Prime Minister Raila Odinga began holding quarterly meetings as part of a public-private dialogue called the "National Business Agenda" with the chairpersons of KAM, the Kenya Private Sector Alliance (KEPSA), the East Africa Business Council (EABC), and other business leaders to discuss what must be done to improve the country's business climate. As a result of the first meeting, Odinga and President Mwai Kibaki ordered that the Port of Mombasa be open 24/7, the number of roadblocks and weigh stations on the Mombasa-Nairobi-Busia Northern Corridor Highway be dramatically reduced, and that the Kenya Ports Authority (KPA), the Kenya Bureau of Standards (KEBS), and KRA harmonize their regulations and adopt a common accreditation and computerized clearance system to expedite cargo inspection and clearance. The government dealt with the port and roadblock issues, while the harmonization issues continue to be addressed. Subsequently, President Mwai Kibaki and then Acting Finance Minister John Michuki ordered that VAT be reduced or eliminated on energy inputs. The Treasury announced in late November 2008 that it would suspend a 120 percent excise duty on the manufacture of plastics.

To ease inflationary pressures on the food basket, the government in mid-June 2008 reduced the duty on imported wheat from 35 percent to 10 percent and zero-rated 297,000 metric tons of imported corn. It also waived the 60 percent duty on 52,149 tons of imported wheat flour. The Minister of Agriculture also zero-rated the VAT on bread, wheat flour, milk, rice, and cornmeal. In keeping with its privatization strategy, the government announced in mid-December 2008 that it would sell its shares in 16 parastatals, including the National Bank of Kenya, the Kenya Electricity Generating Company (KenGen), the Kenya Pipeline Company, the Kenya Ports Authority, and various sugar, cement, dairy, wine, and meat processing firms. The government also put the Kenya Tourism Development Authority up for sale in 2009. To date, the government has not completed any of the sales.

In December 2008, the Cabinet, moreover, approved the proposed legal and institutional framework for public-private partnerships, thereby authorizing that private firms many now sign management contracts, leases, concessions, and/or build-own-operate-transfer (BOOT) agreements with the government on various infrastructure projects such as water, energy, ports, and roads. In another positive development, credit is now more easily accessible from Kenyan lending institutions, according to an analysis released in early December 2008, “First Things Faster: Kenya Competitiveness Benchmark Report 2008.” The report also cited Kenya's commitment to innovation as conducive to business development. Increased lending, which led to record numbers of car sales in 2010, reflect strong consumer confidence in the growing economy.

The Companies Ordinance, the Partnership Act, the Foreign Investment Protection Act, and the Investment Promotion Act 2004 provide the legal framework for FDI. To attract investment, the Government of Kenya (GOK) enacted several reforms, which include abolishing export and import licensing, except for a few items listed in the Imports, Exports and Essential Supplies Act, rationalizing and reducing import tariffs, revoking all export duties and current account restrictions, freeing the Kenya shilling's exchange rate, allowing residents and non-residents to open foreign currency accounts with domestic banks, and removing restrictions on borrowing by foreign as well as domestic companies. In 2007, the GOK reviewed its investment policy and launched a private sector development strategy. A policy review by the United Nations Conference on Trade and Development (UNCTAD) is one component of this effort.

The Licensing Act of 2007 has so far eliminated or simplified 694 licenses. In 2008, the government also reduced the number of licenses to set up a business from 300 to 16, and will review another 337 licenses. The Business Regulation Act of 2007 established a Business Regulatory Reform Unit within the Ministry of Finance to continue the deregulation process. In 2009, Kenya launched a national e-Registry to ease business license processing and help improve transparency.

In 2008, Parliament passed the Anti-Counterfeit Act, which President Kibaki signed into law, establishing an agency and a strong legal framework to police counterfeit goods. In June 2010, the Ministry of Industrialization (its parent agency) operationalized the Anti-Counterfeit Agency. The nascent agency is still building capacity and is struggling with a lack of resources, while carving out its role. To combat the importation of counterfeits, the Ministry of Industrialization and the Kenya Bureau of Standards (KEBS) decreed in 2009 that all locally manufactured goods must have a standardization mark issued by KEBS, while several categories of imported wares (specifically food products, electronics, and medicines) must have an import standardization mark (ISM), costing $300 per product.

The respective roles of the public and private sectors have evolved since independence in 1963, with a shift in emphasis from public investment to private sector-led investment. The GOK has introduced market-based reforms and provided more incentives for both local and foreign private investment. Foreign investors seeking to establish a presence in Kenya generally receive the same treatment as local investors. Multinational companies make up a large percentage of Kenya's industrial sector.

Kenya's investment code, articulated in the Investment Promotion Act of 2004, streamlined the administrative and legal procedures to create a more attractive investment climate. It came into force when published in 2005. The Investment Promotion Act objective is to attract and facilitate investment by assisting investors in obtaining the licenses necessary to invest and by providing other assistance and incentives. The Act replaced the government's Investment Promotion Center with the Kenya Investment Authority (KIA); however, the law also created some new barriers. It set the minimum foreign investment threshold at $500,000 and conditioned some benefits on obtaining an investment certificate from the KIA. The government later revised the minimum foreign investment threshold to $100,000 as an amendment to the Act. The minimum investment requirement is likely to deter foreign investment especially in the services sector, which is normally not as capital intensive as the agriculture and manufacturing sectors. Another amendment made the foreign investment certificate requirement optional.

Work permits are required for all foreign nationals wishing to work in the country. The Kenyan government expects foreign employees to be key senior managers or have special skills not available locally. Foreign investors are required to sign an agreement with the government defining training arrangements intended to phase out expatriates. Any enterprise, whether local or foreign, may recruit expatriates for any category of skilled labor, if Kenyans are not available. The Ministry of Labor is developing a skills inventory. This should replace the labor-market testing procedure, at least for high-skill positions, with a pre-determined list of skills with shortages in the Kenya. Investors seeking foreign employees with those skills would not be required to demonstrate by an exhaustive local recruitment campaign that suitably qualified citizens were unavailable.

Approved employers would be entitled to hire such foreign workers, subject only to verification of the credentials and character of the individuals proposed for employment by the Immigration Department. It is becoming increasingly difficult for expatriates to obtain work permits because the GOK says qualified middle level managers and technical staffs are available locally. Kenya's high unemployment level likely drives the new trend. The 2010 official unemployment level is 10 percent, but the real unemployment/underemployment rate in the country is over 40 percent.

The GOK focuses its investment promotion on opportunities that earn foreign exchange, provide employment, promote backward and forward linkages, and transfer technology. The only significant sectors in which investment (both foreign and domestic) are constrained are those where state corporations still enjoy a statutory monopoly. These are restricted almost entirely to infrastructure (e.g., power, posts, telecommunications, and ports), although there has been partial liberalization of these sectors. For example, in recent years, five Independent Power Producers (IPPs) have begun operations in Kenya.

As of January 2011, there are four mobile telecommunications providers in Kenya: the partially government-owned Safaricom, French-owned Orange (the mobile portion of Telkom Kenya), Indian-owned Bharti Airtel, (formerly Zain), and Indian-owned Yu (formerly Essar Telecom). Foreign telecom companies can also establish themselves in Kenya, but must have at least 20 percent local ownership. However, the government provided a three-year grace period for telecommunications companies to find local investors to meet the local ownership requirements and the GOK may scrap the local ownership policy entirely.

A legal notice published in June 2007 reduced the threshold for foreign ownership of listed companies on the Nairobi Stock Exchange (NSE) from 75 percent to 60 percent, which is a disincentive for foreign-owned firms interested in an NSE listing. Although the regulation is not applicable retroactively, it does compel companies with a foreign presence of more than 60 percent to downgrade foreign shareholding before applying to the NSE. The measure thus effectively bars these firms from selling excess shares to non-Kenyans. There is no discrimination against foreign investors in access to government-financed research. The government's export promotion programs do not distinguish between local and foreign-owned goods.

UNCTAD, in conjunction with the International Chamber of Commerce (ICC), published an Investment Guide to Kenya in May 2005. The guide provides comprehensive analyses of investment trends, opportunities, and the regulatory framework in the country. According to the UNCTAD report (and most observers), significant disincentives for investment in Kenya include governmental overregulation and inefficiency, expensive and irregular electricity and water supplies, an underdeveloped telecommunications sector, a poor transport infrastructure, and high costs associated with crime and general insecurity. Although there is no specific legislation preventing foreigners from owning land, under the Land Control Act, their ability to own or lease land classified as agricultural is restricted. Hence, the Land Control Act serves as a barrier to any agro-processing investment that may require land. The only exemption to this Act is to acquire a presidential waiver, which has no clear guidelines and has led to complaints about excessive bureaucracy and patronage. The new constitution states that non-citizens may not own land, but may lease land for a maximum period of 99 years.

The EAC, founded in 1999, consists of Kenya, Tanzania, Uganda, Rwanda, and Burundi, with Rwanda and Burundi becoming full members of the Community in 2007. The EAC aims at widening and deepening cooperation among the partner states in political, economic, social, and other fields for mutual benefit. Under the protocol, EAC member states are to allow zero-rated entry of raw materials, a levy of 10 percent duty on semi-processed goods, and a levy of 25 percent duty on finished goods. The realization of a large economic bloc with a combined population of more than 125 million and a combined gross domestic product of $61 billion bears great strategic and geopolitical significance and offers the prospects of a renewed and reinvigorated EAC. The EAC Customs Union came into effect on January 1, 2010, while the EAC Common Market came into effect on July 1, 2010. While the member states have agreed to the customs union and common market, actual implementation will take a substantial amount of time.

The EAC member states, including Kenya, have not passed many of the laws associated with the common market and enforcement of the customs union at border crossings is far from coherent or uniform. Among the issues to be resolved are centralized collection of revenue at the first point of entry into the EAC and management of transit cargo in a borderless region. Ongoing planning for the EAC includes a monetary union by 2013 and eventual political federation. Non-tariff barriers (NTBs), however, remain a problem in the EAC. A March 2005 report on NTBs and the "Development of a Business Climate Index in the Eastern African Region" by the East African Business Council identified administration of duties and other taxes as the main NTB, followed closely by corruption. The report indicates that Kenya‘s level of investment and business optimism is dampened by low expectations relating to improvements in infrastructure, access to land, and profitability in business.

Since independence, Kenya has pursued two broad strategies of industrialization, namely import substitution and export oriented industrialization. It is currently implementing an industrialization strategy outlined in Sessional Paper No. 2 of 1996, which aims to transform Kenya into a fully industrial state by 2020. The strategy emphasizes support for specific export industries, driven by a desire to increase their employment potential. Vision 2030, unveiled in 2007 as the GOK’s long-term plan for attaining middle income status as a nation, buttresses the Sessional Paper by also recognizing industrial promotion as an avenue for growth and development.

Kenya experiences difficulties in seizing opportunities generated by trade liberalization in developed markets to export manufactured commodities. The bulk of its exports to the European Union are horticulture-based with minimal value addition: tea, coffee, cut flowers, vegetables, fruits, and nuts. In contrast, manufactured goods (mostly apparel) comprise the majority of exports to the United States under the African Growth and Opportunity Act (AGOA). The textile and garments industry largely depends on imported fabrics and raw materials like cotton, viscose, polyester, denim, polyester, nylon, and acrylics, since a competitive integrated domestic cotton industry does not exist.

The 2010 Heritage Foundation Index of Economic Freedom places Kenya 101 of 179 countries, a drop of 11 places from 2009, and it ranked 13 out of 46 countries in sub-Saharan Africa.


Measure

Year

Index/Rating

TI Corruption Index

2010

154 out of 178

Heritage Economic Freedom

2010

101 out of 179

World Bank Doing Business

2010

98 out of 183

MCC Government Effectiveness

2010

0.19 (74%)

MCC Rule of Law

2010

-0.09 (42%)

MCC Control of Corruption

2010

-0.24 (31%)

MCC Fiscal Policy

2010

-3.3 (27%)

MCC Trade Policy

2010

67.9 (48%)

MCC Regulatory Quality

2010

0.56 (97%)

MCC Business Start Up

2010

0.94 (61%)

MCC Land Rights Access

2010

0.703 (74%)

MCC Natural Resources Mgmt

2010

63.89 (52%)


Conversion and Transfer Policies

The Foreign Investment Protection Act (FIPA) (Cap 518) guarantees capital repatriation, remittance of dividends, and interest to foreign investors. Foreign investors are free to convert and repatriate profits including un-capitalized retained profits, i.e., proceeds of the investment after payment of the relevant taxes and the principal and interest associated with any loan. Foreign exchange is readily available from commercial banks and foreign exchange bureaus and can be freely bought and sold by local and foreign investors. The Kenyan shilling has a floating exchange rate tied to a basket of foreign currencies. The shilling was relatively stable in recent years until late 2007, when it increased significantly in value against the dollar, even trading briefly below KSh60 to the dollar. In the aftermath of the December 27, 2008 post-election violence, both the economy and the shilling suffered a serious decline. As of January 2011, the shilling was trading at nearly KSh80 to the dollar.

Kenya has no restrictions on converting or transferring funds associated with investment. Kenyan law requires the declaration of amounts above Ksh 500,000 (about $6,500) as a formal check against money laundering. Parliament passed the Kenyan Proceeds of Crime and Anti-Money Laundering Bill and President Kibaki signed it into law at the end of 2009. Although the legislation took effect in June 2010, implementing regulations have not been drafted as of yet, which would bring Kenya in line with more advanced financial economies and help reduce serious issues with money laundering. Kenya is part of the Eastern and Southern Africa Anti-Money Laundering Group and is collaborating with the intergovernmental Financial Action Task Force (FATF).

Expropriation and Compensation

Kenyan investment law is modeled on English investment law. The Companies Act, the Investment Promotion Act, and the Foreign Investment Act are the main pieces of legislation governing investment in Kenya. Kenyan law provides protection against the expropriation of private property, except where due process is followed and adequate and prompt compensation is provided. Various bilateral agreements also guarantee further protection with other countries. Expropriation may only occur for either security reasons or public interest. The GOK may revoke a foreign investment license if (1) an untrue statement is made while applying for the license; the provisions of the Investment Promotion Act or of any other law under which the license is granted are breached; or, if (2) there is a breach of the terms and conditions of the general authority. The Investment Promotion Act of 2004 provides for revocation of the license in instances of fraudulent representation to the Kenya Investment Authority (KIA) by giving a written notice to the investor to show cause within 30 days from the date of notice why the license should not be revoked. In practice, the KIA only rarely revokes licenses.

As an example of expropriation and compensation, in September 2007, squatters invaded a 15,000-acre private homestead in Coast Province, barely a month after President Kibaki announced that idle land would be re-possessed and given to the landless. The government ultimately paid the private property owner more than $10 million for the land.

Dispute Settlement

Kenya is a member of the World Bank-affiliated Multilateral Investment Guarantee Agency (MIGA), which issues guarantees against non-commercial risk to enterprises that invest in member countries. It is also a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. The Convention established the International Center for Settlement of Investment Disputes (ICSID) under the auspices of the World Bank. Kenya is also a member of the Africa Trade Insurance Agency (ATIA). Kenya is a member of many other global and regional organizations and treaties including the Common Market for Eastern and Southern Africa (COMESA); the Cotonou Agreement between the European Union and the African, Caribbean and Pacific States (ACP); the East African Community (EAC); the Paris Convention on Intellectual Property, the Universal Copyright Convention, and the Berne Copyright Convention; the World Intellectual Property Organization (WIPO); and the World Trade Organization (WTO). Kenya has also signed double taxation treaties with a number of countries, including Canada, China, Germany, France, Japan, Netherlands, and India. On November 27, 2007, Kenya joined with its EAC sister states in signing the first-ever interim economic partnership agreement (EPA) with the European Community (EC). In mid-July 2008, Kenya and its fellow EAC members signed a Trade and Investment Framework Agreement (TIFA) with the United States at the conclusion of the 2008 African Growth and Opportunity Act (AGOA) Forum in Washington, D.C.

The Kenyan Constitution guarantees the protection of life and property, which the Penal Code of Laws of Kenya also protects. Their violation is actionable under criminal law. Despite these protections, insecurity in the forms of international terrorism, unsafe borders, and common crime has been a major concern to many investors in Kenya.

Kenya‘s judicial system is modeled after the British, with magistrates‘ courts, high courts in major towns and a Court of Appeal at the apex of the judicial system. Immediately below the high courts are subordinate courts consisting of the Kadhis Courts, the Resident Magistrate‘s Courts, the District Magistrate‘s Courts, and the Court Martial (for members of the Armed Forces). In addition, a separate industrial court hears disputes over wages and labor terms. Petitioners cannot appeal its decisions, except on procedural grounds. Kenya also has commercial courts to deal with commercial disputes. The Companies Act of 1948 provides the foundation for company and investment law. Property and contractual rights are enforceable, but long delays in resolving commercial cases are common. The legal system in Kenya is adversarial, and most disputes are resolved through litigation in court, although arbitration and alternative dispute resolution are becoming increasingly popular. The Arbitration Act governs arbitration. The new constitution, when fully enacted, will change the court system dramatically. Kenya will have a Supreme Court, a Court of Appeal, a Constitutional Court, and a High Court. In addition, the subordinate courts, Magistrates, Khadis, and Courts Martial, will remain. Parliament will decide if the industrial and commercial courts will remain.

The Foreign Judgments (Reciprocal Enforcement) Act provides for the enforcement in Kenya of judgments given in other countries that accord reciprocal treatment to judgments given in Kenya. The countries with which Kenya has entered into reciprocal enforcement agreements are Australia, the United Kingdom, Malawi, Tanzania, Uganda, Zambia, and Seychelles.

Without such an agreement, a foreign judgment is not enforceable in the Kenyan courts except by filing suit on the judgment. Kenyan courts generally recognize a governing-law clause in an agreement that provides for foreign law. A Kenyan court would not give effect to a foreign law if the parties intended to apply it in order to evade the mandatory provisions of a Kenyan law with which the agreement has its most substantial connection, and which the court would normally have applied.

Foreign advocates are not entitled to practice in Kenya unless a Kenyan advocate instructs and accompanies them, although a foreign advocate may practice as an advocate for the purposes of a specified suit or matter if appointed to do so by the Attorney General. All advocates in private practice are members of the Law Society of Kenya (LSK), while those in public service need not be.

Kenya does not have a bankruptcy law. Creditors' rights are comparable to those in other common law countries. Monetary judgments typically are made in Kenyan shillings. The government does accept binding international arbitration of investment disputes with foreign investors. Apart from being a member of the ICSID, Kenya is a party to the New York Convention on the Enforcement of Foreign Arbitral Awards (1958).

Performance Requirements and Incentives

The law permits investors in the manufacturing and hotel sectors to deduct from their taxes a large portion of the cost of buildings and capital machinery. The government allows all locally financed materials and equipment (excluding motor vehicles and goods for regular repair and maintenance) for use in construction or refurbishment of tourist hotels to be zero-rated for purposes of Value Added Tax (VAT). The Ministry of Finance permanent secretary must approve such purchases. The government permits some VAT remission on capital goods, including plants, machinery, and equipment for new investment, expansion of investment, and replacement. The investment allowance under the Income Tax Act is set at 100 percent. Materials imported for use in manufacturing for export or for production of duty-free items for domestic sale qualify for the investment allowance. Approved suppliers, who manufacture goods for the exporter, are also entitled to the same import duty relief. The program is also open to Kenyan companies producing goods that can be imported duty-free or goods for supply to the armed forces or to an approved aid-funded project. Fiscal incentives offered by the Kenyan government to Export Processing Zone (EPZ) investments and registered and approved venture-capital-fund investments include a 10 year tax holiday and a flat 25 percent tax for the next 10 years; exemption from withholding taxes during the first 10 years; exemption from import duties on machinery, raw materials, and inputs; no restrictions on management or technical arrangements; and exemption from stamp duty and from the VAT on raw materials, machinery and other inputs. The Export Promotion Programs Office, set up in 1992 under the Ministry of Finance, administers the duty remission facility.

The government established a Manufacturing Under Bond (MUB) program in 1986 that is open to both local and foreign investors. The law exempts enterprises operating under the program from duty and VAT on imported plants, machinery, equipment, raw materials, and other imported inputs. The Kenya Revenue Authority (KRA) administers the program.

Foreign investors are attracted to the EPZs by their single licensing regime, tax incentives, and support services provided such as power and water. The number of enterprises operating in Kenya's EPZs increased from 66 in 2003 to 74 in 2004. They declined to 68 in 2005 following the end of the Multi-fiber Textile Agreement in January 2005 before increasing to 71 in 2006. In 2007, 72 firms were in operation, which increased to 74 in 2008. In 2009, 83 firms were operating in the EPZs, although the number of Kenyans employed actually declined slightly. The majority of Kenya's manufactured products are entitled to preferential duty treatment in Canada and the European Union. Kenya's statute does not permit manufacturing companies, whether domestic or foreign-owned, to distribute their own products.

The preferential access and duty free status accorded to Kenyan apparel exports under the African Growth and Opportunity Act (AGOA) fueled the initial increase in the number of apparel factories. Kenya's major exports under AGOA include apparel and handicrafts. Over 50 percent of EPZ manufactured products enter the U.S. market under AGOA provisions. In 2005, 25 apparel firms in the EPZ's were manufacturing apparel for export under AGOA. That number declined to 22 in 2007 and to 18 in 2008 following the January-February 2008 post-election violence. 2009 saw an increase to 19 firms operating under AGOA, although the number of Kenyans employed by these firms continued to drop.

With the exception of the insurance and telecommunications sectors and other infrastructure companies discussed earlier, Kenya does not require that its nationals own a percentage of a company. The government does not require that the percentage of foreign ownership be reduced over time. There are no restrictions on the percentage of equity that foreign nationals may hold in a locally incorporated company, although foreign firms are encouraged to form joint ventures with Kenyan companies or entrepreneurs. However, there are some restrictions on investment in companies listed on the NSE and certain businesses. Foreign brokerage companies and fund management firms must be locally registered companies, with Kenyan ownership of at least 30 percent and 51 percent, respectively. Foreign ownership of equity in insurance and telecommunications companies is restricted to 66.7 percent and 80 percent, respectively. However, the government allows telecommunications companies a three-year grace period to find local investors to achieve the local ownership requirements and the local ownership policy may be scrapped entirely. A legal notice published in June 2007 decreed that companies seeking a listing on the NSE could not have foreign ownership above the 60 percent threshold. Previously the NSE threshold for foreign ownership for some companies was 75 percent. Foreign equity in companies engaged in fishing activities is restricted to 49 percent of the voting shares under the Fisheries Act. Foreign investors are free to obtain financing locally or offshore.

The manufacture of and dealing in firearms (including ammunition) and explosives require special licenses from Chief Firearms Licensing Officer and the Commissioner of Mines and Geology, under the Firearms Act and the Explosives Act respectively. The manufacture of and dealing in narcotic drugs and psychotropic substances is prohibited under the Narcotics Drugs and Psychotropic Substances Act. Technology licenses are, however, subject to scrutiny by the Kenya Industrial Property Office (KIPO) to ensure that they are in line with the Industrial Property Act. Licenses are valid for five years and are renewable.

The government does not steer investment to specific geographic locations but encourages investments in sectors that create employment, generate foreign exchange, and create forward and backward linkages with the rural areas. The law applies local content rules but only for purposes of determining whether goods qualify for preferential duty rates within the Common Market for Eastern and Southern Africa (COMESA) and the EAC.

Right to Private Ownership and Establishment

The Kenyan legal system is quite flexible on exit options, which normally are determined by the agreement that the investor has with other investors. The Companies Act specifies how a foreign investor may exit from an incorporated company. In practice, a company faces no obstacles when divesting its assets in Kenya, if the legal requirements and licenses have been satisfied. The Companies Act gives the procedures for both voluntary and compulsory winding-up processes. In late 2006, the U.S. multinational personal grooming and hygiene company, Colgate Palmolive, closed its factory in Kenya. MobilExxon divested and sold its assets to the Libyan oil company, Tamoil, in 2007. In 2008, Chevron divested and sold its assets to Total. Reckitt Benckiser East Africa Limited, a multinational firm that makes household cleaning health and personal care products, also closed its Kenyan facility. Many U.S. companies remain in the market and, in 2010, some recorded record profits. The typical reason given for a firm closing its factories in Kenya is restructuring to cut costs and improve efficiency in its African markets. The high cost of production as a result of poor infrastructure, inadequate protection of intellectual property rights, and unreliable and expensive electrical power continues to frustrate Kenya’s manufacturing sector, even as economic growth forges ahead.

Private enterprises can freely establish, acquire, and dispose of interest in business enterprises. In general, competitive equality is the standard applied to private enterprises in competition with public enterprises. However, certain parastatals have enjoyed preferential access to markets. Examples include Kenya Reinsurance (Kenya-Re) with a guaranteed market share, Kenya Seed Company, with fewer marketing barriers than its foreign competitors, and the Kenya National Oil Corporation (KNOC), with retail market outlets developed with government funds. Some state corporations have also benefited from easier access to government credit at favorable interest rates.

Protection of Property Rights

Secured interests in property are recognized and enforced. In theory, the legal system protects and facilitates acquisition and disposition of all property rights – land, buildings, and mortgages. In practice, obtaining a title to land is a cumbersome and often non-transparent process, which is a serious impediment to new investment, frequently complicated by improper allocation of access and easements to third parties. There is also a general unwillingness of the courts to permit mortgage lenders to sell land to collect debts. Only Kenyan citizens or incorporated companies, whose majority shareholders are Kenyan citizens, may own land. Since January 2003, the government has been nullifying some illegally acquired land allocations. The question of title to land acquired irregularly under the Moi government is the subject of continued controversy. The issue is particularly important because land secures 80 percent of bank loans.

Kenya has a comprehensive legal framework to ensure intellectual property rights (IPR) protection, which includes the Anti-Counterfeiting Act of 2009, the Industrial Property Act of 2001, the Trade Marks Act, the Copyright Act of 2001, the Seeds and Plant Varieties Act, and the Universal Copyright Convention.

The new Anti-Counterfeiting Act creates a new agency, the Anti-Counterfeiting Agency (ACA), to enforce IPR laws in Kenya. The ACA will be the lead agency for IPR enforcement and will coordinate its activities with the other enforcement bodies, including the Kenya Copyright Board (responsible for copyrights), the Kenya Industrial Property Institutes (responsible for patents, trademarks, and trade secrets), the Pharmacy and Poisons Board (responsible for medicines), and several other agencies. Penalties under the Anti-Counterfeiting Act are substantially more punitive than under previous IPR laws. The Ministry of Finance badly underfunded the new organization in its first year, resulting in a reduced workforce and slower buildup of capacity.

The Copyright Act protects literary, musical, artistic, audio-visual works, sound recordings and broadcasts, and computer programs. Criminal penalties associated with piracy in Kenya include a fine of up to KSh800,000 (about $10,000), a jail term of up to 10 years, and confiscation of pirated material; but enforcement and the understanding of the importance of intellectual property are poor. Copyright protection is the responsibility of the parastatal, the Kenya Copyright Board (KCB), which resides under the Attorney General's Office.

In collaboration with Microsoft and Hewlett-Packard, the KCB has in the past several years carried out a number of major busts. In November 2007, cyber café operators within Nairobi grappled between legalizing their Microsoft software operating system, shifting to Open Source Code, or closing shop all together following a joint KCB-police crackdown on illegal software. Most cyber cafes in Kenya use Microsoft software, although without valid licenses. The KCB raided the Jet Cyber and Dagit Cyber Cafe companies in Nairobi on the suspicion of copyright infringement. The raids on the cyber cafes came after the expiry of an October 30, 2007 deadline set by the KCB. During the raid, 50 computers containing unlicensed versions of Microsoft Windows Office 2003 edition were confiscated. Also impounded were Windows 2000 and Microsoft 2003 counterfeit installer CDs. The computers were valued at KSh1.5 million (about $18,750), while the cost of Windows and Office were estimated at KSh1.4 million (about $17,500). On September 18, 2008, Nairobi police and agents with Kenya's Bureau of Weights and Measures raided two warehouses suspected of holding counterfeit Hewlett-Packard products and arrested the warehouse owner. Local authorities working with Hewlett Packard (HP) have seized more the 9000 counterfeits in Kenya since November 2008.

Kenya is a member of the World Intellectual Property Organization (WIPO) and of the Paris Union (International Convention for the Protection of Industrial Property) along with the United States and 80 other countries. The African Intellectual Property Organization (AIPO) embodies a future prospect for patent, trademark, and copyright protection, although its enforcement and cooperation procedures are yet untested. Kenya also is a member of the African Regional Intellectual Property Organization (ARIPO). Kenya is a signatory to the Madrid Agreement Concerning the International Registration of Marks; however, the other original EAC members (Uganda and Tanzania) are not.

The Kenya Industrial Property Institute (KIPI), under the Ministry of Trade and Industry, is responsible for patents, trademarks, and trade secrets. Investors are entitled to national treatment and priority right recognition for their patent and trademark filing dates. The Trade Marks Act provides protection for registered trade and service marks that is valid for 10 years and is renewable. The Act established an independent national patent law and KIPI, which considers applications for and grants industrial property rights. However, actual protection for intellectual property -- copyrights, patents, and trademarks -- remains inadequate. The sale of pirated audio and videocassettes is rampant, although there is little domestic production. According to the Business Software Association (BSA), an estimated USD 3.5 million is lost every year because of the use of illegal software, mainly by businesses. Kenya enacted the Industrial Property Act (KIPA) of 2002 to comply with WTO obligations, but its implementation of the law remains weak.

In July 2006, the Ministry of Trade and Industry conceded that over KSh 36 billion (about $450 million) is lost annually due to the sale of counterfeit goods and a further KSh 6 billion (about $75 million) is lost in tax revenues to the government. A subsequent KAM study, released in late October 2008, concluded that piracy and counterfeiting of business software, music, pharmaceuticals, and consumer goods costs Kenyan firms about $715 million annually in lost sales. KAM estimates the government now loses over $270 million in potential taxes every year.

Since then, former KEBS Director Dr. Kioko Man'geli charged that counterfeits are eating 10 percent of this country‘s GDP annually. To combat the manufacture and sale of counterfeits, he announced that, as part of a five-year strategic plan, KEBS would require that manufacturers obtain a new standardization mark. KEBS would also open a National Quality Institute to train both business leaders and consumers and would offer IPR courses to magistrates. On behalf of local textile and apparel producers, Kenyan Customs and Port Authority officers have prevented the transshipment of foreign-made (mostly Asian) garments through the Port of Mombasa that are fraudulently being exported to the United States under AGOA preferences. Kenya is also working to crack down on the entry into the local market of counterfeit or substandard goods. In 2006, it confiscated and destroyed over 3 million fake Bic pens. Since then, the Kenyan government has intercepted additional counterfeit Bic pens, Eveready batteries, Kiwi shoe polish, and other pirated consumer goods. Unfortunately, inadequate enforcement of intellectual property rights continues to affect global companies operating in Kenya and within the region.

Inadequate funding for Kenya's anti-counterfeiting agencies limits the number of seizures and destruction of counterfeits in an environmentally friendly way – often leaving seized goods to pile up in warehouses where they may be stolen and returned to the market. Inadequate training for judges means that the new law is often not enforced or manipulated so that counterfeiters may retrieve their goods after paying a small fine.

Transparency of Regulatory System

Investors in Kenya are required to comply with environmental standards. The National Environment Management Authority (NEMA) oversees these matters and is the principal environmental regulatory agency. Developers of particular projects are required to carry out Environmental Impact Assessments (EIA) prior to project implementation. Companies are required to submit their up-to-date assessment reports to NEMA for verification by the agency‘s environmental auditors before they can receive an EIA license.

In theory, all investors receive equal treatment in the initial screening process. The government screens each private sector project to determine its viability and implications for the development aspirations of the country. For example, a rural agro-based enterprise, with many forward and backward linkages, is likely to receive licensing quickly. However, new foreign investment in Kenya historically has been constrained by a time-consuming and highly discretionary approval and licensing system, that is subject to corrupt practices. In response to appeals from the business community in 2007, the government earnestly began improving Kenya's business climate. Following the reduction of required business licenses, simplification of others, and establishment of an electronic company registry, Kenya is a much better country in which to do business. In 2009, the GOK launched an e-Registry, which sped up the registration of new companies, cut regulation costs, and enhance transparency in accessing information on registered companies. The Licensing Act of 2007 has eliminated or simplified 694 licenses to date. In 2008, the government reduced the number of licenses to set up a business from 300 to 16 and is reviewing another 337 licenses.

The World Bank-International Finance Corporation‘s "Doing Business 2010 Report," which ranked 183 national economies on their ease of doing business, ranks Kenya as the 98th in ease of doing business, a drop from 94th in 2009. Issues hurting Kenya's ranking include difficulties in starting a business, registering property, paying taxes, trading across borders, and enforcing contracts. The World Bank and IFC contend that the government must significantly reduce the cost of doing business, deal with delays at the Port of Mombasa, and eliminate the requirement of even more licenses to maintain Kenya's current level of economic growth.

The Restrictive Trade Practices, Monopolies, and Price Control Act of 1989 (with subsequent amendments) govern Kenya's competition framework. The Act is relatively modern and works well in avoiding anti-competitive practices since the abolition of price controls in 1994. The Monopolies and Prices Commission, however, is under the Ministry of Finance, instead of an independent regulatory body. Although the Commission is independent in its investigation of competition-related issues, it must rely on ministerial powers to enforce orders on companies found to have breached competition rules. The Commission lacks the capacity to implement the legislation fully. Practices that seek to block entry into production and that discriminate against buyers (for production, resale, or final consumption) are illegal. Mergers and acquisitions must receive the green light from the Commission and the Minister of Finance in all cases, regardless of the sector, size, or market share of the companies involved. This puts an unnecessary burden on investors and the Commission. However, the Commission has no jurisdiction over the electricity, telecommunication, or insurance sectors. Under the law, manufacturers may not distribute their own products, and they are required to supply information to the government about their distributors.

Antitrust legislation governs incoming foreign investment through acquisitions, mergers, or takeovers by antitrust legislation that prohibits restrictive and predatory practices, which prevent the establishment of competitive markets. Antitrust legislation also seeks to reduce the concentration of economic power by controlling monopolies, mergers, and takeovers of enterprises. Mergers and takeovers are subject to the Companies Act, the Insurance Act (in case of insurance firms), or the Banking Act (in case of financial institutions).

Kenya has been ranked among the most accessible and connected markets in Africa. The country stands among the continent‘s top five behind South Africa, Tunisia, Guinea, Sudan, and Mauritania with regard to reliability of the supply chain according to a 2007 World Bank survey on trade logistics. Kenya ranked 76 out of the 150 countries tested for efficiency in key supply chain areas such as customs procedures, cost of logistics, and infrastructure quality. Through the Port of Mombasa, Kenya is a major hub for international and regional trade for neighboring land- locked countries such as Uganda and the Great Lakes region. The survey, however, found that the cost of importing or exporting containers in Kenya and other large economies in Africa remains higher compared to the global average.

Efficient Capital Markets and Portfolio Investment

Kenya has a small capital market overseen by the government-controlled Capital Market Authority (CMA). The market consists of the Nairobi Stock Exchange (NSE), 21 investment advisory firms, 20 investment banks, 6 stockbrokers, 18 fund managers, 15 authorized depositories, 13 collective investment schemes, 7 employee share ownership plans, one credit rating agency, one venture capital fund, and one central depository. The CMA regulates and supervises all these institutions and oversees the development of Kenya‘s capital market.

The CMA is working with other East African Community (EAC) member states through the Capital Market Development Committee (CMDC) and East African Securities Regulatory Authorities (EASRA) on a two-year roadmap to integration of their respective capital markets. Beginning in 2005, the NSE started settling all equity trades through an electronic Central Depository System (CDS). The combined use of both CDS and Automated Trading System (ATM) has moved the Kenyan capital market to globally acceptable standards. Kenya has recently joined the International Organization of Securities Commissions (whose members represent 90 percent of the world's capital markets) as a full (ordinary) member, which solidifies their status as the primary capital market place in East Africa.

The NSE enjoyed a bull market from January 4, 2005 when its blue chip share index was 2980.48 to January 10, 2007, when it reached an all-time high of 6085.50. Blue chips remained well above 5000 throughout 2007 and eventually the NSE attained a market capitalization of $16.3 billion. However, trading and prices nosedived in the wake of the January-February 2008 post-election crisis, and continued to do so as the world economy entered a recession in late summer 2008. By the end of 2008, the NSE had a market capitalization of approximately $11.4 billion (roughly on par with the end of 2007) but its blue chips had dived to 3521 (a 35 percent drop from 2007). At the end of 2009, NSE market capitalization stood at $11.1 billion and the NSE blue chips had dropped almost 8 percent from 2008 to stand at 3247. Wrapping up 2010, NSE market capitalization boomed to sit at $14.6 billion and the NSE blue chips had increased to 4433.

The NSE categorizes itself into three segments: the Main Investments Market (MIMS) (with 47 offerings), the Alternative Investments Market (AIMS) (with eight offerings), and the Fixed Income Securities Market (FISMS) (with 12 offerings). The MIMS targets mature companies with strong dividend streams. The AIMS is more favorable to small and medium-sized companies, and allows firms to access lower interest rate, longer-term sources of capital through the capital markets. The FISMS allows businesses, financial institutions, and governmental and supranational authorities to raise capital through the issuance of debt securities. Fees charged by the CMA on NSE participants are a significant entry barrier for new companies. The NSE needs to do additional work to develop small business entry into the stock market.

While the equity market has participated in active trading for some time, the corporate bonds market has been active only since 1997. The equity market is far larger and more mature than the bond market, which is growing. Currently, 16 corporate bonds are trading on the NSE. In general, the treasury bonds issued by the government are more active than corporate bonds; although, that is beginning to change due to large corporate bond issues in 2009. Trading in commercial paper and corporate bonds issued by private companies has diversified activity at the NSE. The government regulates such trading through a set of guidelines developed in collaboration with private sector. They allow private companies to raise funds from the public without NSE quotation. Establishing the CDS encouraged the development of a secondary market for the government‘s one-year floating rate bond. The CDS opened a shop window for small investors offering products in multiples of KSh 50,000 (about $769) up to KSh 1 million (about $15,400). Expenses related to credit rating services by listed companies and other issuers of corporate debt securities are tax deductible. Foreign investments through mergers and acquisitions are not restricted via cross-shareholding and stable shareholder arrangements. Hostile takeover attempts are uncommon. Private firms are free to adopt articles of incorporation, which limit or prohibit foreign investment, participation, or control.

Foreign investors can acquire shares freely in the stock market, subject to a reserve ratio of 40 percent for domestic investors in each listed company. To encourage the transfer of technology and skills, the government allows foreign investors to acquire up to 49 percent of local stockbrokerage firms and up to 70 percent of local fund management companies. Foreign ownership of equity in insurance and telecommunications companies is restricted to 66.7 percent and 80 percent, respectively. Foreign equity in companies engaged in fishing activities is restricted to 49 percent of the voting shares under the Fisheries Act.

Foreign investors are able to obtain credit on the local market; however, the number of credit instruments is relatively small. Legal, regulatory, and accounting systems are generally transparent and consistent with international norms. The corporate tax for newly listed companies is 25 percent for a period of five years from the date of listing. The withholding tax on dividends is 7.5 percent for foreign investors and 5 percent for local investors. Foreign investors can acquire shares in a listed company subject to a minimum reserved ratio of 40 percent of the share capital of the listed company for domestic investors, with the remaining 60 percent considered as a free float available to local, foreign, and regional investors without restrictions on the level of holding. Dividends distributed to residents and non-residents are subject to a final withholding tax at the rate of 5 percent. Dividends received by financial institutions as trading income are not subject to tax. In 2007, the GOK granted the following fiscal incentives to encourage growth of capital markets: (1) exemption from income tax on interest income accruing from cash flows of securitized assets and (2) exemption from income tax on interest income accruing from all listed bonds with at least a maturity period of three years. The fiscal incentive targets providers of infrastructure services such as roads, water, power, telecommunication, schools, and hospitals. Company capital expenditures on legal costs and other incidental expenses associated with listing by introduction at the NSE are tax deductible.

As of the end of 2010, Kenya‘s banking sector consisted of 43 commercial banks, one mortgage finance company, two microfinance institution, one credit reference bureau, and 126 forex bureaus (primarily located in Nairobi and Mombasa). At the end of October 2010, total banking assets increased to almost $21 billion. Loans and advances accounted for 51 percent of total assets with 26 percent in government securities and 7 percent in placements with the Central Bank of Kenya (CBK). The ratios of total and core capital to total risk-weighted assets improved from 19.9 percent and 17.5 percent to 20.7 percent and 18.5 percent, respectively, mainly due to a more than proportionate increase in core and total capital. The asset quality of Kenyan banks improved from 3 percent in June 2010 to 2.4 percent in October 2010 of assets classified as non-performing. A cumbersome court system complicates the realization of collateral, which makes it difficult for creditors to accept collateral.

Only 19 percent of Kenyans have formal access to financial services through commercial banks and the Post Bank. With the advent of mobile money and its recent association with the formal banking system, the number of Kenyans with access to electronic financial services continues to grow. Since most Kenyan adults own a cell phone, they can utilize mobile money services to receive their salary, do their shopping, pay their school fees, and, now, access savings, insurance, and other financial services. Kenya has four mobile money services: MPesa, the dominant service through Safaricom; Zap, run by Bharti Airtel; Orange Money, run by Orange; and Yu Cash, run by Essar Telecom.

The financial sector, in particular the commercial banks, remains relatively robust, aided by a stable macroeconomic environment and stringent supervisory oversight. Despite the global economic downturn, the banking sector expanded by 11 percent in 2009-2010, at least partially due to a continued housing boom in Nairobi. Islamic banking, which started modestly, has continued to take off as the primary Islamic-based banks expand their reach across Kenya into areas with relatively smaller Muslim minorities. Islamic banking solutions, first introduced in December 2005, took the form of deposit products tailored in line with Shariah principles, which have grown to include insurance products.

The Parliament amended the Banking Act of 2004 to delegate the power to register and deregister commercial banks and financial institutions from the Finance Minister to the Central Bank of Kenya (CBK). Under the Central Bank of Kenya Act, the security of tenure for the Governor is enhanced, the Bank's operational autonomy is increased, the CBK's bank supervision functions are strengthened, and statutory restrictions on government borrowing from the Bank are codified. The CBK sets requirements for all banking institutions and building societies to disclose their un-audited financial results on a quarterly basis by publishing them in the print media.

Parliament also amended the Central Bank of Kenya Act in December 2004 to establish an independent Monetary Policy Advisory Committee (MPAC) whose mandate is to advise the Bank with respect to monetary policy. The amended Act provides for the CBK to publish the lowest interest rate it charges on loans to banks referred to as the central bank rate. Other amendments transferred powers to revoke and issue licenses to financial institutions from the Ministry of Finance to the CBK and introduced an "In Duplum Rule," which limits fees and fines on non-performing loans to the amount of the outstanding principal. However, the rule is yet to be implemented. A proposal by the Finance Minister in June 2007 to increase minimum capital requirement for a commercial bank from KSh 250 million (about $3.85 million) to KSh 1 billion (about $15.4 million) over a period of three years was rejected by Parliament. The last five years have seen improvements in the financial sector‘s legal and regulatory framework, triggered by the enactment of the Cooperative Societies Amendment Act of 2004. To regulate Kenya‘s burgeoning insurance industry, Parliament passed the Insurance Amendment Act 2006, which resulted in the establishment of the Insurance Regulatory Authority. To strengthen the Sacco industry, Parliament passed the 2007 Sacco Act. As a result, access to financial services has improved especially for those previously unable to bank. For instance, the introduction of M-Pesa by Safaricom has made it easy to send money via cellular phone at very low cost. All of the telecom operators followed suit with their own products in the market. Mobile money has grown in size and popularity and now provides savings and insurance services to the large majority of Kenyans who do not have access to a bank.

Parliament passed and the President signed the Anti-Money Laundering Bill of 2008. This long-awaited bill provides for the creation of an FIU (financial intelligence unit) with investigatory powers and sets specific reporting requirements for financial institutions. The law came into force in June 2010, although implementing mechanisms are yet to be put into place. The Microfinance Act of 2006 became operational in 2008. The Act provides for the licensing, regulation, and supervision of the microfinance sector, necessitated by a series of mismanagement and embezzling scandals at micro-finance institutions. The law provides for the regulation of deposit taking microfinance institutions in Kenya and gives the CBK powers to oversee microfinance institutions. Microfinance institutions (MFIs) provide financial services to majority of Kenyans who remain unbanked.

Kenya's financial sector has a wide range of products, institutions, and markets, but there are gaps in development finance. Commercial banks, which traditionally refrained from offering long-term capital, are beginning to provide long-term capital, at least to large companies. Kenya's corporate bond market is still in an early stage of development. While having attracted a handful of firms, it is faced with the problem of low liquidity; thus, to boost long-term investment growth, deliberate efforts must be made to adequately develop vehicles for mobilizing long-term capital in Kenya. Development Finance Institutions (DFIs) are viable options given the prevailing market condition. However, in Kenya, DFIs have faced several constraints that have made them unable to fill in the development-financing gap.

Competition from State Owned Enterprises

Kenya has a long history of government ownership in industry dating back to independence. Public ownership of enterprise expanded from independence in 1963 through the 1980's. However, several commissions, one in 1979 and one in 1982, established the need for Kenya to begin divesting itself of its publicly owned enterprises. The commissions identified 240 publicly owned firms and listed 207 as non-strategic and the remaining 33 as strategic. During the first round of privatization, from 1992 to 2002, Kenya fully or partially privatized most of the non-strategic publicly owned firms. From 2003 to 2007, the government of Kenya engaged in a second round, which fully or partially privatized a number of large strategic firms, including KenGen (the primary electricity generator), Kenya Railways, Mumias Sugar, Kenya Reinsurance, Telkom Kenya, and Safaricom. These transactions netted over a $1 billion towards supporting additional development and infrastructure. The third round of privatization is scheduled to last through 2013 and includes the Development, Consolidated and National Banks of Kenya, five sugar companies, the Kenya Wine Agencies, nine hotels, portions of the Kenya Ports Authority, the Agrochemical Food Company, the remainder of KenGen, East African Portland Cement, the Kenyan Meat Commission, the New Kenya Cooperative Creameries, the Numerical Machining Complex, and several power stations.

The Kenyan government seems determined to remove itself from competing with private enterprise, other than a few strategic areas. The government divested the telecom sector from 2002 to 2007, which now enjoys full competition. The sugar industry has been partially privatized and will be fully privatized with the next round of divestitures. The energy industry remains the most publicly owned sector in Kenya. The Kenyan government owns the National Oil Corporation, the Kenya Pipeline Corporation, and the oil refinery in Mombasa. Therefore, competition is either restricted or limited. KenGen, Kenya Power and Lighting, and the newly formed Geothermal Development Corporation dominate the electricity generation portion of the energy sector, which is another restricted portion of the Kenyan economy. The primary port in Mombasa is mostly government owned but privatization efforts are underway. Beyond these sectors, competition is expected and encouraged among private enterprise in Kenya.

Corporate Social Responsibility

Kenya has only recently applied the concept of corporate social responsibility (CSR). The United Nations has instigated discussions under the auspices of the UN Global Compact in Kenya for the introduction of the UN Global Compact/UNDP "Growing Sustainable Business for Poverty Reduction Initiative." In Kenya, surveys suggest that the highest proportion of corporate donations goes for health and medical provision. In addition, corporations direct funds towards education and training, HIV/AIDS, agriculture and food security, and underprivileged children. The rationale for these philanthropic activities is closely tied to a sense that companies should give something back to the nation and to the communities in which they operate. In Kenya, many companies in the export-processing sector are seeking to mainstream HIV/AIDS programs into their activities as well as other workplace issues. Local campaigns have focused attention on labor rights and abuses in Kenyan export sectors such as textiles, cut flowers, and horticulture. Some companies are taking a positive lead on labor standards, i.e., Cirio Delmonte is now accredited to the SA8000 standard. The bulk of the business community is challenged to create quality jobs by paying living wages and observing fundamental labor rights. Given that employment creation is one of the most pressing concerns in Kenya, workplace issues – particularly trade-offs between the creation of jobs and reasonable pay and working conditions – are likely to remain at the heart of the CSR agenda.

In Kenya, there are relatively few incentives for businesses to adopt responsible or pro-development practices. Few consumers in either country are sufficiently informed or able to pay a premium for responsibly produced goods. While some companies producing for export markets are subject to labor or environmental requirements imposed by overseas buyers, those producers selling into the domestic market are unlikely to be subject to such pressures. Even pressures within export markets are patchy, depending on the sector, product, and buyer. A similar gap is observed between large companies operating in the formal sector, and smaller companies or micro-enterprises, which operate below the radar. Given the economic context in which financial margins are generally very thin, companies are unlikely to adopt higher standards voluntarily unless there is a clear business case.

Political Violence

The disputed December 27, 2007 presidential election unleashed Kenya‘s worst episode of ethnically-charged political violence. Before the antagonists reached a power-sharing agreement in late February 2008, the violence took the lives of 1,200 Kenyans and displaced 500,000, including thousands of farmers. Property damage was in the millions of dollars. Agriculture alone suffered $300 million in damages. Tourism took a major hit. Arrivals and earnings fell 90 percent in the first quarter 2008, and were off 30 percent throughout the year. At least 20,000 Kenyans employed in the tourism sector lost their jobs. The violence dissuaded both tourists and potential investors from coming to Kenya. Buyers stopped considering Kenya, resulting in several factories closing. An official government investigation, the Waki Commission, reportedly names several prominent Kenyan politicians as having instigated much of the violence. As of mid-December 2010, the commission's report has yet to be released to the public, although on December 15, 2010 the International Criminal Court (ICC) released the names of six individuals, five government officials, and one journalist, identified as suspects in the incidents of political violence. Indictments may follow in early 2011, although a movement is afoot to withdraw from the ICC and establish a local tribunal, which is unlikely to result in any indictments unless there is a massive public outcry.

Despite the global recession, the Kenyan economy began to bounce back in 2009 and 2010, especially with respect to tourism. The very slow implementation of the reform agenda, agreed upon by both parties involved in the power sharing agreement, concerns many in Kenya, who fear that without the reforms, violence will return in the 2012 election. The reform agenda includes police, land tenure, judicial, and constitutional reform as well as prosecution of those who instigated the 2007 violence. Of the various required reforms, Kenya has only partially implemented a new constitution voted for by 2/3 of the Kenyan people.

Terrorism also remains a serious problem. Kenya suffered major terrorist attacks in 1998 and 2002. On August 7, 1998, bombs exploded at the U.S. Embassies in Nairobi and Dar es Salaam, Tanzania, killing over 250 and wounding more than 5,000 people. A suicide bomber killed 15 people in an Israeli-owned Mombasa hotel in November 2002. The U.S. maintains a travel warning for Kenya due to the threat of terrorism and violent crime. The shaky situation in neighboring Somalia has heightened security concerns at a time when Kenya has yet to enact appropriate anti-terrorism legislation. In 2010, several incidents occurred, including a suicide bombing of a bus in Nairobi in late December that killed two and injured more than twenty.

Crime is a major source of insecurity in the country. According to a World Bank study, in 2004 almost 70 percent of investors reported major or very severe concerns about crime, theft, and disorder in Kenya, as opposed to 25 percent in Tanzania and 27 percent in Uganda.

Kenya has good relationships with all its immediate neighbors. However, unstable, porous, and conflicted borders remain a source of insecurity in the region. The 2002 terrorist attacks in Mombasa are thought to have been planned in Somalia and much of the small arms used to commit crimes in Kenya are widely believed to originate from Somalia. In 2004, 11 East African countries decided to create an Eastern African Standby Brigade (EASBRIG). The EASBRIG is one of the five formations of the African Standby Force, established by the African Union in 2002, to carry out peacekeeping operations. The headquarters of the EASBRIG is in Addis Ababa and its secretariat in Nairobi. EASBRIG is operational and should be ready for deployment by 2015.

Corruption

The current coalition government inherited a problem of grand-scale economic and political corruption. In 2003, the Kibaki government enacted the Anti-Corruption and Economic Crimes Act and the Public Officers Ethics Act, setting rules for transparency and accountability, and defining graft and abuse of office. The Public Officers Ethics Act requires certain public officials to declare their wealth and that of their spouses within 90 days from August 2, 2003. Subsequently, the government fired 23 judges for corruption. Nevertheless, opposition leaders castigated the Kibaki government for its lackluster pursuit of individuals suspected of corruption. In 2004, the government established the Kenya Anti-Corruption Commission (KACC), moved forward with the implementation of the Anti-Corruption and Economic Crimes Act, and launched full implementation of the Code of Ethics Act for Public Servants in 2004. A Public Procurement and Disposal Bill became law in 2005. It establishes a procurement commission to oversee all procurement matters but has proven ineffective in limiting abuse by public officials. Large public procurement programs and military procurement have been at the center of a number of corruption scandals in recent years. Enacted in 2007, the Supplies Practitioners Management Act is to regulate the training, certification, and conduct of procurement officers. The law complements the Public Procurement and Disposal Act, which came into force in January 2007. The new law, which is an effort to curb loss of public funds, stipulates strict operational measures and penalties for breach in an attempt to eradicate corruption that remains embedded in the GOK‘s tendering processes.

The KACC launched several investigations in 2006-2007 against senior government officials, including two government ministers; however, none of the cases has been prosecuted successfully, in large part due to bottlenecks in the Attorney General's Office and loopholes in the judiciary. Former Finance Minister Amos Kimunya stepped aside in early July 2008 in connection with the non-tendered sale of a government-owned property, the Grand Regency Hotel, to a Libyan group. An investigatory commission, the Cockar Commission, reportedly exonerated Kimunya of any wrongdoing. He was appointed as Minister of Trade in January 2009, providing an example of the culture of impunity in Kenya. At the end of 2010, he became Minister of Transportation.

In 2009, President Kibaki irregularly reappointed the director of KACC, the primary corruption investigatory unit. With the former director of KACC and the Attorney General, no minister-level official has ever been prosecuted in Kenya despite huge corruption scandals including Goldenberg, Anglo Leasing, Triton, and the maize scandal. After a storm of protest from Parliament, the director of KACC lost his re-appointment vote. This historic vote was the first time that Parliament had overruled the President. In 2010, the KACC Board selected PLO Lumumba as director of KACC. Lumumba has taken a strong stance against corruption, and is re-opening some of the older cases, including Anglo-Leasing. In December 2010, Lumumba, in his first major corruption case, and the KACC arrested and charged Minister of Trade Henry Kosgey with abuse of office over the illegal importation of automobiles.

The 2010 Ibrahim Index of African Governance ranked Kenya 26 out of 53 countries on the quality of governance, a drop of four places from 2009. The 2010 Transparency International Corruption Perceptions Index ranks Kenya 154 of 178 countries, a drop of 8 places from 146 in 2009, and its composite score of 2.1 was the second worst in the EAC, better only than Burundi.

Bilateral Investment Agreements

Kenya does not have a bilateral investment trade agreement with the United States, although there are hopes for talks leading to such an eventual agreement. Kenya has bilateral trade and investment agreements with Germany, the Netherlands, Brazil, and the United Kingdom. Agreements are pending with Italy and Russia. Kenya and her EAC partners signed a Trade and Investment Framework Agreement with the United States in July 2008 as a bloc.

OPIC and Other Investment Insurance Programs

Kenya is eligible for Overseas Private Investment Corporation (OPIC) programs. In 2008, the U.S. Overseas Private Investment Corporation (OPIC) supported two projects in Kenya totaling $11.78 million. The beneficiaries include two microfinance companies. In 2009, OPIC supported three projects totaling $7.4 million, including two large microfinance projects women. Historically, OPIC has committed $75 million to 42 projects in Kenya.

Labor

Kenya's population reached an estimated 40 million in July 2010. Of the approximately 20 million working Kenyans ages 15-64, the Kenya National Bureau of Statistics reports that 7 million are engaged in pastoral and small-scale subsistence livestock rearing and farming. Another 8.3 million are engaged in commercial agriculture, ranching, and the informal sector. Only 2 million Kenyans are in the formal sector. Approximately 54 percent of the population lives on less than $1 per day (the 8 percent increase over the 2007 figure of 46 percent is attributable to the January-February 2008 post-election violence). Per capita income, per the Atlas method, is $770. High population growth rate of 2.64 percent per annum means there is an on-going demand for new jobs. Kenya has an abundant supply of well-educated and skilled labor in most sectors at internationally competitive rates. Though there is an apparent modest decline in new infections, high HIV/AIDS prevalence continues to pose a serious threat to human resource development and an economic drain on families and the health care sector. The Kenya AIDS Indicator Survey 2007 (released in July 2008) indicates that 7.4 percent of Kenyans ages 15-64 are infected with HIV, with considerable disparities in prevalence among provinces.

Kenya's laws generally provide safeguards for worker rights and mechanisms to address complaints of their violation, but the Ministry of Labor and Human Resource Development lacks the resources to enforce them effectively. In October 2007, Parliament passed and President Kibaki signed five labor reform laws that were drafted with the ILO‘s assistance under the U.S. Department of Labor‘s Strengthening Labor Relations in East Africa (SLAREA) project to make Kenya‘s labor laws more consistent with ILO core labor standards, AGOA compliant, and harmonious with Uganda‘s and Tanzania‘s. The new laws are: the Employment Act, which defines the fundamental rights of employees and regulates employment of children; the Labor Relations Act on worker rights, the establishment of unions, and employers associations; the Labor Institutions Act concerning labor courts and the Ministry of Labor and Human Resource Development; the Occupational Safety and Health Act; and the Work Injury Benefits Act on compensation for work-related injuries and diseases. The GOK gazetted the amended texts of the new laws in 2008. Also in 2008, the Government of Kenya gazetted the National Labor Board to steer stakeholders to meet and propose necessary amendments to Parliament for smooth implementation of the Acts. The Board will set structures and rules as required by the Act.

Under the new Labor Relations Act, a minimum of seven workers may apply to register a union, but the nascent union must have a minimum of 50 members to be registered. A union must show a signed membership request from 50 percent of the workers in a workplace to force an employer to recognize the union. There are 42 registered unions representing over 500,000 workers, approximately one quarter of the country's formal sector work force. All but six, including the 240,000 member Kenya National Union of Teachers (KNUT), the University's Academic Staff Union (UASU), and the Union of Kenyan Civil Servants (UKCS), are affiliated with the Central Organization of Trade Unions (COTU), which has about 260,000 members. Union membership is voluntary and organized by craft rather than industry.

The law permits strikes, but unions must notify the government 21-28 days before calling a strike. During this period, the Minister of Labor and Human Resource Development may mediate the dispute, nominate an arbitrator, or refer the matter to the Industrial Court. If the Minister of Labor and Human Resource Development refer to mediation, fact-finding, or arbitration, any subsequent strike is illegal. Kenya's Industrial Court is backlogged and has difficulty enforcing its rulings because employers tend to appeal to the High Court. The Labor Institutions Act of 2007 expands the Industrial Court and gives it the same powers as a High Court to enforce its rulings with fines or prison sentence. The court has penalized employers for discriminating against employees because of their union activities, usually by requiring the payment of lost wages. Court-ordered reinstatement is not a common remedy because of the difficulty in implementation.

Kenya has relatively harmonious labor relations. The number of strikes dropped significantly from 24 in 2007 to 8 in 2008, reflecting a 66 percent decrease. In 2008, 4718 workers were involved in the strikes representing 135,185 person-hours compared to 36,095 workers involved with strikes in 2007. The Industrial Court adjudicated 226 cases out of which it gave 192 rulings compared to 295 cases and 147 rulings in 2007. The agricultural sector had the highest reduction of strikes with two in 2008 compared to 14 in 2007.

Labor law mandates the total hours worked in any two-week period should not exceed 120 hours (144 hours for night workers). Negotiations between unions and management establish wages and conditions of employment. There are twelve separate minimum wage scales, varying by location, age, and skill level. The lowest minimum wage is currently about $41 (KSh 3270) per month in urban areas and about $38 (KSh 3043) in rural areas. On May 1, 2009, the GOK the increased the statutory minimum wage by 20 percent under the General Wage Order and 18 percent for workers in the agricultural sector. To give more weight on productivity improvement in determining wage increases, the government announced, in its June 2005 budget speech, that minimum wages should be considered for adjustment after at least two years as opposed to every year, and that wages be adjusted in line with productivity changes; however, the decision remains unimplemented. Workers covered by a collective bargaining agreement generally receive a better wage and benefit package than those not covered (on average $182, or KSh 14621, per month), plus a housing and transport allowance, which may account for 20 to 40 percent of a Kenyan worker‘s compensation package.

Kenyan law establishes detailed environmental, health and safety standards, but these tend not to be strictly enforced. The Directorate of Occupational Health and Safety Services (DOHSS), a department under the Ministry of Labor and Human Resource Development, has the mandate to enforce the Occupational Safety and Health Act and its subsidiary rules. DOHSS has the authority to inspect factories and work sites, except in the EPZs, but had only 45 inspectors, instead of the 168 expected to cover the entire country. DOHSS developed a program to help factories establish Health and Safety Committees and train them to conduct safety audits and submit compliance reports to DOHSS. The Directorate maintains a register of approved and certified safety and health advisers whom employers may enlist to conduct safety audits in the factories and other places of work. The Directorate should carry out these audits at least once a year and forward a copy of the audit report to the DOHSS within 30 days. However, according to the government, fewer than half of the largest factories had instituted Health and Safety Committees.

Work permits are required for all foreign nationals who wish to work in Kenya. An applicant for an entry permit describes the work one intends to engage in and only can engage in that specific activity. Although there is no official time limit, a visitor's pass or a visa is usually valid for three months and the Immigration Department must grant applicable extensions upon proper application. Applicants may apply for work permits for in any major city in Kenya, but all applications go to Nairobi for processing. Foreign investors are required to sign an agreement with the government describing training arrangements for phasing out expatriates. High unemployment levels have led the government to make it increasingly difficult for expatriates to renew or obtain work permits, and Immigration increased the price of a work permit to up to Ksh200, 000 (about $2,500). The Immigration Department occasionally has cancelled work permits before the expiry date without giving reasons. According to the law, the immigration officer issuing entry permits may require a bond of not less than KSh 100,000 (about $1,250) for each permit to be deposited with the Immigration Department.

Foreign-Trade Zones/Free Ports

As of December 2010, 41 Export Processing Zones (EPZ) are operating around the country. The GOK gazetted three new zones in 2009. 83 companies are operating in the zones. A government parastatal, the Kenya Export Processing Zone Authority (EPZA), regulates the zones. Of the 41 zones, the public sector develops and manages two. The private sector, in the form of licensed EPZ developers/operators, owns and manages the rest. Of the 83 enterprises operating in EPZs, foreign investors own 57 percent and Kenyans own 19 percent with the remainder being joint ventures. The largest privately-owned EPZ is the Sameer Industrial Park located in Nairobi‘s Industrial area. It has been operational since 1990. The Athi River EPZ, near Nairobi, is the largest publicly owned EPZ at 339 hectares. The second publicly owned EPZ is being developed in Mombasa, Kenya's main seaport.

The United States remained the principal market in 2007 for Kenyan EPZ exports. Over 55 percent of EPZ manufactured products enter the United States under AGOA provisions. The value of non-agriculture AGOA exports was $207.9 million in 2009 a drop of almost 19 percent from 2008. AGOA exports of garment products worth $244.8 million constituted 94 percent of AGOA-related exports. While the U.S. is the leading market for Kenyan EPZ exports, diversification is occurring including Europe, Canada, the United Arab Emirates, Hong Kong, Panama, and Zimbabwe.

Foreign Direct Investment Statistics

Through the 80's and 90's, the deterioration in economic performance, together with rising problems of poor infrastructure, corruption, high cost of borrowing, crime and insecurity, and lack of investor confidence in reforms generated a long period of low foreign direct investment (FDI) inflow. Per the United Nations Conference on Trade and Development (UNCTAD), FDI inflows in the period 1990-2000 averaged $29 million a year. This report reflects 2009 FDI inflows of $141 million, an increase of 47 percent over a dismal 2008. The report indicates 2009 total FDI stock in Kenya of $2.13 billion. These figures compare poorly to Tanzania, which shows FDI inflows of $645 million and total FDI stock of $5.34 billion in 2009. The market value of U.S. investment stands at approximately $183 million (2008 estimate), primarily concentrated in commerce, light manufacturing, and tourism industry. Most foreign investment in manufacturing since 2001 has been in the EPZs; 64 percent tied to AGOA-related apparel investment.

Poor data collection in Kenya leads to underestimating actual inflows of FDI. There is no clear mandate by any agency to collect data on FDI. The Central Bank of Kenya (CBK), the Kenya Investment Authority (KIA), and the Kenya National Bureau of Statistics (KNBS) all collect only partial information on either balance of payments inflows or investment projects. The government does not publish data on the value of foreign direct investment (position/stock and annual investment capital flows) by country of origin or by industry sector destination. Neither is data available on Kenya‘s investment abroad. However, recent media reports indicate a drop in FDI, now superseded by domestic investment – a clear indication that Kenya must implement constitutional and political reforms to attract FDI, attain double-digit economic growth, and achieve its goals of becoming a middle-income country by 2030.



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