Commercial developments in Kenya
Richard Harney assesses how changes in Kenya’s commercial laws have enabled business to flourish in the East African country.
Situated in East Africa, Kenya has benefitted hugely from the growth of external investor interest across Africa in the past decade or more. One of the reasons for this is a series of reforms of the country’s legal framework in recent years.
Kenya’s legal system is essentially a hybrid of traditional or customary law and the common law, with the latter being especially relevant to business and commerce. Kenya’s parliament has enacted numerous statutes since gaining independence from Great Britain in the mid-1960s, but many constitutional and legal structures were derived from the early 20th century British systems. Indeed, even today, several key statutes such as the Companies Act and Competition Act are derived from British or Commonwealth precedents.
In recent years the pace of reform has accelerated. This article highlights a few of the changes to Kenya’s commercial laws, intended to ease doing business in Kenya and stimulate investment and economic growth.
A new legal regime
Kenya enacted a new Constitution in 2010, which brought significant changes to the legal framework of national life, with one of them being the devolution of the government. The devolution system formed local administrations to spur widespread development across the country, in addition to a new upper house of the National Assembly, known as the Senate. The amount of legislation spawned by the new Constitution was extraordinary and touched many areas of life, including representative democracy and land reform.
The commercial sector also saw significant developments. In 2015, the President assented to several Acts to improve the ease of doing business in Kenya such as the Companies Act 2015, the Insolvency Act 2015 and the Business Registration Service Act 2015.
Just as the previous Companies Act drew heavily on the old English Companies Act of 1948, so the new 2015 Act was substantially derived from the English Companies Act of 2006. Some of the changes brought about by the Companies Act 2015 include: no restrictions on the objects of a company, sole director companies and the ability of private companies to provide financial assistance for the purchase of its own shares and the right for companies to buy-back their own shares. The need for a common seal to execute documents was removed with the enactment of the Business Laws (Amendment) Act 2020.
The Insolvency Act 2015 introduced alternatives to the options of liquidation and bankruptcy of companies by allowing for company voluntary arrangements and administration procedures as a means of business rescue.
The Business Registration Act 2015 established the Business Registration Service to improve management and administration of the companies registry, the hire-purchase registry, the collateral registry and the office of the official receiver in insolvency. The consolidation of these services under the Business Registration Act 2015 enhanced the ease of doing business in the country. In the last World Bank’s Index for Ease of Doing Business, Kenya ranked 56th having been ranked 136th in 2014. Although further work is needed, the improvements in recent years are palpable for investors.
The impact of the digital era
In the legal sphere, Kenya has not shied away from embracing the technological changes occurring globally. The technological embrace has been spurred on by the covid-19 pandemic in the recent months. For example, many dispute resolution matters are now heard remotely on online platforms. The judiciary has approved the use of mobile messaging services (e.g., WhatsApp) for the service of summons, allowing the summons to be served to defendants through mobile-enabled messaging applications as per the Civil Procedure (Amendment) Rules 2020.
The role of technology in the business world has become significant in Kenya in recent years, particularly with the pioneering work of mobile payment solutions offerings. Safaricom, Kenya’s leading mobile phone operator, also operates Kenya’s leading mobile payment service, M-Pesa. The company recently celebrated achieving 50m active users and reported mobile money transactions worth €63bn (approx. £54bn) in the first quarter of its financial year.
In 2018, the electronic registration of companies was introduced under the Business Registration Service. The Business Registration Service promotes a ‘One Day One Step’ service of business registration where the name reservation and business registration processes are merged into a single step.
Other services are possible online are the filing of taxes, applying for passports and visas into the country, health services, vehicle registration and many other government services. These online services promote the ease of doing business for both foreigners and citizens of Kenya.
The Business Laws Amendment Act 2020 introduced the legality of electronic signatures to several acts including the Law of Contract Act, the Land Registration Act and the Companies Act, among others. In 2021, a further legislative change brought on by the covid-19 pandemic, made amendments to the Companies Act to allow for companies to hold virtual general meetings.
Enhanced corporate governance
Despite having a reputation of poor governance and corruption, particularly in government procurement practices, Kenya has sought to improve corporate governance requirements. Thus, companies listed on the Nairobi Securities Exchange are subjected to ‘first world’ governance and disclosure requirements. The legislature has enacted various rules and regulations to increase transparency. The (Beneficial Ownership Information) Regulations, 2020, for example, require companies to disclose the identity of ultimate beneficial owners at the Companies Registry.
In addition to transparency, the laws impose higher penalties for breaches. Examples include: a fine of KES 500,000 (£3,295) for a company failing to keep a company’s register of directors and a fine of KES 1 million (£6,590) for failure to declare an interest in a proposed or existing transaction or arrangement. The penalties are to help combat laxity in business administration thereby creating a fair and orderly business environment.
The government launched new generation banknotes in May 2019. The release of new banknotes was intended to curb the use of illicit and counterfeit notes that were in circulation in the Kenyan as well as other nearby markets.
The rise of the digital era in Kenya also brought along challenges of regulating digital activity. The significant growth in digital credit and lending services in the country has brought about concerns regarding consumer protection from predatory practice. The proposed Central Bank of Kenya (Amendment) Bill 2021 aims to address these issues by having digital credit businesses in Kenya licensed by the Central Bank of Kenya. The government of Kenya has also enacted value added tax on digital marketplace supply and digital service tax to regulate the growing online digital economy.
Trade between Kenya and the UK
Kenya’s relationship with the United Kingdom (though recently tested by covid-19 related travel restrictions) is strong. Following the exit of the UK from the European Union (EU), Kenya and the UK entered into an Economic Partnership Agreement in December 2020. The agreement is to help sustain the economic agreements Kenya held with the EU and East African countries. Both countries ratified the deal and it entered into force in March 2021.
In addition to the trade deals, the stock exchanges of both Kenya and the UK have an ongoing mutual beneficial relationship. The London Stock Exchange Group signed their first memorandum of understanding with the government of Kenya in May 2017 and Kenya launched its first green bond on the London Stock Exchange in 2020.
Kenya’s journey towards middle-income status has accelerated in recent years, partly spurred on by the extensive reforms to the legal framework of the country in the past decade. The covid-19 pandemic had slowed economic growth and the World Bank forecast now stands at around 4.5 per cent for the year (though the Kenyan government forecasts a more optimistic 6.6 per cent). However, inflation also projected at 5 per cent.
By global standards this is promising, but in order to provide for its surging population and to remain competitive regionally, Kenya needs much higher growth numbers. Kenya is ideally located geographically and boasts a high number of attractive investment opportunities (despite not being a resource-rich country). The extensive legal reforms in recent years, particularly in the commercial setting, have played their part in positioning Kenya well for further progress.
Richard Harney is a senior partner at Bowmans in Kenya bowmanslaw.com