By James Okune
Kenya has emerged as one the continent’s most vibrant economies supported by a young tech-savvy population, strategic geographical position with access to sea transport, improving infrastructure, specifically rail transport that connects the capital city to the coastal town coupled with decentralization of port operations to Nairobi inland container depot. The government is keen on expanding the rail transport infrastructure to the western part of the country. This opens up Kenya to improved trade activities, and the other macroeconomic factors need to match this expansion in the transport infrastructure to spur growth in the medium and long term.
The Financial Sector Landscape; Banking System
Kenya’s banking sector is robust and adequately regulated by the Central Bank of Kenya (CBK). In recent years, the banks have witnessed increased regulations amidst plans to recover from the effects of the COVID-19 pandemic and volatile geopolitical tensions across the world’s superpowers. The Central Bank of Kenya has come out strongly to stabilize foreign exchange exposure and interest rates amidst a volatile taxation regime and intense lobbying from the bankers’ association that has seen banks adamant about reducing interest rates on commercial loans despite CBK lowering the base lending rates.
The Financial Sector Landscape; Banking System
Kenya’s banking sector is robust and adequately regulated by the Central Bank of Kenya (CBK). In recent years, the banks have witnessed increased regulations amidst plans to recover from the effects of the COVID-19 pandemic and volatile geopolitical tensions across the world’s superpowers. The Central Bank of Kenya has come out strongly to stabilize foreign exchange exposure and interest rates amidst a volatile taxation regime and intense lobbying from the bankers’ association that has seen banks adamant about reducing interest rates on commercial loans despite CBK lowering the base lending rates.
In recent years, digital financial service providers and mobile money have experienced sustained growth in providing for the economic needs of the unbanked population and credit consumers that the banks shy away from because of their risk profile. This has increased money flow in the economy, albeit at higher interest rates than commercial banks.
Capital Markets
Kenya has established a Capital Market with much work left to be done to increase the ease of entry and success rates of Initial Public Offerings (IPOs). Nairobi security exchange has experienced a drought of new offerings, the last being the Kakuzi Plc subscription for 2021. The duration it takes to get through the process of IPO offering in Kenya averages between 12 to 18 months compared to the duration of about three to six months for a company looking for funding to conclude a deal with private equity investors. This has seen most companies adopt the route of private equity compared to the public offerings, denying the public variety at the Nairobi security exchange, which the listed banks predominantly control, and a few other movers.
The capital markets authority has attempted to improve liquidity through Real Estate Investment Trusts (REITs) and exchange-traded funds, but these continue to perform below expectations.
Investment Opportunities: Agriculture
Agriculture contributes significantly to Kenya’s GDP and employs the highest number of people in Kenya. Even though this sector is heavily dependent on rainfall, which has been erratic in the recent past, there is enormous potential that needs to be tapped into as Kenya still has a food deficit and relies on imports to meet its food needs. There is a gap in value addition that can be tapped into, as well as mechanization and irrigation opportunities. The Kenyan government have shown willingness and intention to increase budgetary allocation to provide an environment for investors to boost food production. This has been through fertilizer subsidy programs and, of late, the ambitious animal vaccination program that, if successful, will increase the supply of animal products for both local and export markets.
Real Estate
Real estate investment has steadily risen in Kenya, has maintained its value throughout the pandemic, and remains attractive for investors with medium- and long-term investment horizons. Despite the slowdown in residential and commercial property uptake during the COVID pandemic, the sector is gradually getting back into its space, with land and property value remaining relatively constant yearly.
Tourism
Kenya is renowned for its rich wildlife and beautiful landscapes, making it a prime destination for tourism. The tourism sector offers investment opportunities in hospitality, travel services, and eco-tourism. The government has promoted sustainable tourism practices, attracting responsible investors and tourists alike. With the world economy poised for growth in the coming years, tourism prospects look favourable in the medium to long term.
Technology and Innovation
Kenya has emerged as one of the top technology hubs in the continent, attracting some of the world’s tech giants to set offices and regional centres in the country’s capital. The growing technology centres have seen an increasing number of fintech firms that have helped bridge the gap between the banked and unbanked Kenyans regarding access to credit. This has also played a significant role in developing the country’s e-commerce industry, which meets the needs of the young population.
Challenges to Investment in Kenya
Despite the promising outlook for finance and investments in Kenya, several challenges persist. Kenya needs to proactively address the challenges around climate change, debt, and growing tax revenue demands amidst unrest witnessed during the year that saw the rejection of the Finance Bill 2024. We have seen the government change tact and attempt to introduce the contents of the Finance Bill 2024 in piecemeal, but the success of this is still uncertain.
Threat of Climate change
While attempts are being made to address the adverse consequences of climate change at the global level, Kenya continues to remain vulnerable to these effects, just like most African countries that bear the brunt of climate change. In recent years, Kenya experienced the worst drought, which saw food prices go to a record high, and this was closely followed by heavy rains that led to the destruction of infrastructure. We have seen insurance companies develop innovative products to minimize losses from climate change and help minimize losses for vulnerable households. The government has also ramped up budgetary allocations to help purchase livestock from the affected families.
Raising Tax revenue
The government will likely face challenges in raising tax revenue in the short and medium term as most Kenyans, more so in the informal sector, remain outside the tax bracket of the Kenya Revenue Authority. In formal employment, a small proportion of Kenyans remain to bear the tax burden with shrinking purchasing power. The young generation also remains sensitive to government policies, which increases the risks of unrest towards aggressive tax policies by the government.
The government needs to change its approach and work towards reducing the tax burden on employed Kenyans as the number of Kenyans in the taxable category increases.
The Future of Finance and Investments in Kenya
The outlook for finance and investments in Kenya is mainly positive, driven by a combination of factors. The government’s commitment to economic reforms, infrastructure development, and the promotion of technology and innovation create a conducive environment for investment.
Increased Foreign Direct Investment
Kenya will continue attracting FDI in various sectors, including manufacturing, telecommunications, and renewable energy. The current government has an appetite for public-private partnerships, which, if well managed transparently and accountable, would increase infrastructure development in the country and create a conducive environment for investments.
Innovation and Digital Growth
The fintech sector will expand further as mobile penetration and internet access improve. Investment in technology-driven solutions will likely see continued growth, with startups leading the change in financial inclusion and service delivery.
The e-commerce space also has potential for growth, as the current population prefers online shopping, given their busy schedules and lifestyles.
Regional Integration
As part of the East African Community (EAC) and the African Continental Free Trade Area (AfCFTA), Kenya stands to benefit from regional integration efforts. These initiatives aim to enhance trade, reduce tariffs, and improve the overall investment climate in the region, positioning Kenya as a gateway to East Africa.
For local and international investors, Kenya presents a unique opportunity to participate in an evolving economy poised for the future. As the financial sector continues to innovate and diversify, those willing to engage with the unique challenges and opportunities presented by this dynamic market will likely reap substantial rewards.
The writer is a Finance Manager at Softcare Kenya Limited
okunejames83@gmail.com.
