Viewpoint: Karim Anjarwalla
A journey of a 1000 miles begins with a single step, and several important steps have been taken so far towards developing a 21st century legal, financial and institutional framework for Kenya. Beginning with the adoption of a new constitution in August 2010, Kenya embarked on a process of setting up various legal frameworks, institutions and systems intended to cement the legal basis on which the country’s status as a regional hub, financial centre and gateway to Africa for investors could be realised. An interesting development is the Nairobi International Financial Centre (NIFC), which is expected to launch in 2017, and should serve to open up Kenya’s corporate and commercial environment. Once launched, the NIFC will join the ranks of Johannesburg, Casablanca and Mauritius as the gateway centres on the continent. The NIFC is intended to be a hybrid international financial centre (IFC), modelled along the lines of the Doha IFC, giving tax and other incentives to select local and foreign investors in key sectors, such as banking, insurance and reinsurance, and capital and securities markets. As part of this push, stakeholders have also been considering legislation that would bring the multiple regulators tasked with oversight of insurers, banks, pension funds and capital markets under the umbrella of a financial services authority, which would provide more coordinated oversight of the financial services sector.
Along with the launch of the NIFC, the recent radical overhaul of the Companies Act and establishment of a whole new insolvency regime are intended to attract and protect foreign investment, help procure large-scale financing for Kenya’s investment needs and enhance Kenya’s status as a regional financial services centre. The publicising of regulations setting up a derivatives exchange and providing a framework for registering derivatives brokers and clearing houses is an exciting development that will set the stage for deepening Kenya’s capital markets. This is particularly relevant given the changes to Kenya’s interest rate environment and the current bear market in listed equities, which are performing at their lowest levels since 2008. Before the NIFC can successfully launch a new chapter in Kenya’s development, the government will need to ensure the harmonisation of the existing corporate, insolvency, capital markets and tax regimes so as to enable investors to make the most of the opportunities that lie ahead. While Kenya has a network of double tax treaties with the UK, Germany, Sweden, France, India, Zambia, Canada, Denmark, Norway and South Africa, a number of additional double tax treaties with key gateway jurisdictions for investments into Africa such as the UAE and Mauritius are not yet in force. The slow pace of ratification and implementation threatens to limit Kenya’s attractiveness as an entrance point into East Africa and beyond.
An effective and recognised dispute resolution mechanism is also an integral part of realising the NIFC’s vision to become an IFC. While the Nairobi Centre for International Arbitration was set up to administer domestic and international arbitrations and provide support for enforcement of arbitral awards, it is not yet fully operational. Despite reforms to the country’s judiciary, the backlog of cases pending before Kenya’s courts remains a concern.
Overall, there have been many welcome developments in leveraging Kenya’s potential. However, the country still has a long road to travel. Kenya must update its fiscal incentive structure to fulfil its promise as a regional financial services centre. Absent clear tax guidelines on the tax treatment of derivatives, uptake by domestic players and international investors may remain limited. In addition, to ensure that Kenya continues to attract significant international investment, the country must continue to strengthen the freedom of the press, safeguard civil rights and combat corruption in order to maintain investor confidence and to enhance and protect the significant inflows of foreign capital, while simultaneously promoting the rule of law.
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