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Cautious optimism meets Kenya’s bid for continental financial hub

Monday August 02 2021
Financial hub.

Kenya has been working since 2014 to establish the Nairobi International Financial Centre (NIFC), aiming to become a gateway for capital flowing in and out of Africa and to compete with Mauritius, Morocco and South Africa. PHOTO | FILE | NMG

By ALLAN OLINGO

After eight years of preparation, Kenya says it is ready to become an African financial hub, leveraging the Nairobi International Financial Centre (NIFC), which this week received the support of London, the world’s leading financial centre.

To position itself as a business and financial hub in East and Central Africa, Nairobi is seeking to attract global firms to set up their African headquarters.

The other established African financial hubs are Johannesburg in South Africa, Casablanca in Morocco and Mauritius.

The financial centre was one of the key highlights of President Uhuru Kenyatta’s discussions with British officials during his official visit to London this past week.

Kenya has been working since 2014 to establish the NIFC, aiming to become a gateway for capital flowing in and out of Africa and to compete with Mauritius, Morocco and South Africa.

But Nairobi is not the only East African city angling for these investments. Last year, Rwanda tapped Equity Bank Group to develop the Kigali Financial Towers, which will host the planned Kigali International Financial Centre.

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Nairobi is hoping to model itself as a financial port of call in Africa, modelled against London, Dubai and Hong Kong.

Efforts to establish the centre have met several hurdles over the years, delaying its launch, which is now planned for later this year.

Speaking in London, President Kenyatta said the NIFC will make it easier and more attractive to invest in Kenya.

Support to global firms

“It is an initiative that was conceived when I was the Minister for Finance, and although it has taken a while to get here, I am pleased to say that it will soon be open for business. The centre will prioritise attracting capital and investment into development projects,” the Kenyan leader said. “The NIFC is tailored to support global financial and professional services firms that want to establish their regional headquarters in Africa to set base efficiently and conveniently in Nairobi.”

A second agreement with the City of London will be signed later to help the NIFC piggyback on the world leader in the sector.

In June 2013, the Cabinet approved the establishment of the NIFC, to be managed by the Nairobi International Financial Centre Authority, but the efforts have suffered setbacks over the years.

The Capital Markets Authority (CMA) has failed to achieve key performance indicators, citing the Covid-19 pandemic, waning investor confidence in the capital markets, low uptake of investment products and poor listing on the Nairobi Securities Exchange.

Attaining an international financial hub status was expected to increase the country’s capacity to attract multimillion-dollar forex inflows by 2023. But in February, the markets regulator said it had engaged the services of a consultant with the support of Financial Sector Deepening Africa to review the 10-year Capital Markets Master Plan (2014-2023), after it emerged that 46 per cent of key performance targets would not be achieved within the timelines.

“Covid-19 related effects are likely to affect related targets such as market capitalisation to GDP, target savings rate, and bond and equities turnovers to GDP. This could require rebasing,” said CMA’s chief executive Wycliffe Shamiah.

The CMA had hoped to achieve an MSCI Emerging Market status for Kenya by 2020, and by 2023 to transform the country into the choice market for domestic, regional and international issuers and investors looking to invest in and realise their investments in East and Central Africa.

The failure to achieve key capital markets growth indicators makes the transformation into a financial centre by 2023 an uphill task. The failed targets include growing the ratio of equity market capitalisation to GDP to 70 percent in 2023 from 50 percent in 2014, increasing equity market capitalisation to $84 billion, and reforming the Growth Enterprise Markets Segment to ensure at least three to four listings annually.

The CMA had also hoped that the ratio of outstanding corporate bonds to GDP could reach 40 percent by 2023 from less than one percent, and that the value of outstanding exchange-traded derivatives contracts would get to $200 billion by 2023.

The percentage of infrastructure investment financed through capital markets was also expected to increase to 80 percent, from 18 percent in 2014.

Now, after the deal with the City of London, President Kenyatta and his officials are upbeat that the centre will be up and running soon. It is expected to offer unspecified tax incentives and autonomy to firms that set up in Nairobi.

The partnership with London is also expected to deepen links between Kenya and the UK.

President Kenyatta said that this partnership creates a framework for institutions to deploy and share their expertise with their counterparts in Kenya and East Africa.

The NIFC will also focus on attracting green finance for sustainable economic development and investment in financial technology and new areas of innovation by leveraging Kenya’s vibrant fintech ecosystem.

Already Prudential Insurance Company has signed an agreement to join the NIFC.

“Deepening the financial sector across the continent is key to building and driving economic resilience,” Shriti Vadera, who chairs the board of Prudential, said in a joint statement with the NIFC.

Ambition

NIFC said it aims to raise more than $2 billion in investments by 2030.

But not everyone is upbeat. Tax activists have cautioned that the establishment of the financial centre in Kenya could give way to money laundering and financing for terrorism owing to the high levels of financial secrecy enshrined in strict laws that forbid any form of disclosure or investigation.

The financial centre plans to offer tax holidays, financial advice, visa exemptions and preferential treatment to firms willing to set up in Nairobi.

Tax Justice Network- Africa (TJN-A) and the East Africa Tax and Governance Network (EATGN) have long argued that the NIFC might undermine domestic resource mobilisation capabilities, especially with regards to the incentive structure.

“We are against the culture of entrenching tax incentives, tax breaks and holidays, which goes to undermine collections by the very government supporting the creation of the NIFC while encouraging a race-to-the-bottom approach across the region to attract investment,” Jason Rosario Braganza, TJN-A’s deputy executive director, said earlier.

Jared Maranga, policy lead tax and investment at TJN-A, also argued that the centre could undermine the raising of revenues domestically, making Kenya a financial secrecy jurisdiction.

“The Nairobi centre has been modelled on the Qatar Financial Centre, which has seen firms enjoy discounted corporate tax, and not pay capital gains and withholding taxes,” he said.

These activists fear that the centre could also allow money laundering and tax evasion activities to flourish, and sabotage economic growth.

“One of the biggest risks that the country will have to contend with is the trade-based money laundering and the challenges of managing and monitoring trade finance activities. We have seen well matured markets like Dubai, Hong Kong and Mauritius struggle with this, so the risks are real,” Philip Gathogo, a tax analyst said.

He added that the current financial environment in Nairobi has a lot of banking secrecy, which makes tracking money laundering activities difficult.

In an earlier interview, Razia Khan, Africa’s chief economist at Standard Chartered Bank, advised Kenya to leverage its competitive edge to differentiate its financial hub from the existing ones.

“Given the level of the international competition, and proximity of other established centres, it is difficult to see where Kenya’s specific competitive strengths lie,” Ms Khan said.

Outside of the NIFC deal, President Kenyatta also secured several other investments for Kenya, including a $182.6 million of new government and private investment in affordable housing and manufacturing.

Mr Kenyatta also inked several economic and security deals on the back of the trade agreement Kenya signed in December 2020 with Britain to ensure an uninterrupted flow of goods between the two nations upon the UK’s exit from European Union trading arrangements.

UK Foreign Secretary Dominic Raab announced a $47.5 million of UK aid to be matched by $31.97 million of private investment to finance 10,000 affordable green homes for Kenyans.

“This $182.6 million package from the UK government and British firms will support investment in the region, including building new affordable green homes, connecting households to clean energy, and boosting manufacturing,” Mr Raab said.

These homes will be energy and water-efficient and are meant for low and middle-income families. The project will contribute to Kenya’s goal of building 500,000 new affordable homes by 2022, part of President Kenyatta’s Big 4 Agenda.

The UK also announced $5.02 million in new funding to accelerate Kenya’s climate transition, including projects supporting renewable energy, clean cooling, and forest restoration -- including Kaptagat Forest in the Rift Valley.

The UK will also provide $612,002 in new funding for policy advice and technical assistance to support the development of green manufacturing in Kenya, including making electric vehicles. This builds on the UK’s Manufacturing Africa programme, which has already given $38.4 million in manufacturing investment in Kenya.

The third big deal was the completion of the $301.42 million Kipeto Wind Farm, backed by the UK’s Actis in partnership with the US government.

Earlier this year, the UK and Kenya ratified a new Economic Partnership Agreement for $1.82 billion annual trade between Kenya and the UK, including duty and quota-free access to the British market for Kenyan exports. Mr Raab said that the UK will help Kenyan firms to take advantage of this trade deal by funding a $24.66 million digital Customs system to help smooth trade.

Investment opportunities

While in London, President Kenyatta promoted 10 investment opportunities worth over $5 billion under the public-private partnership framework. Among these are the Nairobi Smart Street Lights Project, Nairobi Bus Rapid Transport System, Intelligent Traffic Management System Project and Galana Kulalu Food Security Project. Others are Lamu Fishing Port Project, Moi Teaching and Referral Hospital Training Complex Project, Mombasa Industrial Park and Meru Cancer Centre Project.

“Discussions have commenced between Kenya’s National Treasury and Planning and the United Kingdom’s Export Finance (UKEF) to unlock financing for British companies pursuing PPP investments in Kenya,” President Kenyatta said.

He also expressed Kenya’s ambition to deepen its co-operation with the Foreign Commonwealth Development Office through a memorandum of understanding the country’s National Treasury and the Private Sector Infrastructure Development Group.

“The cooperation is for a possible funding, through Private Sector Infrastructure Development Group, of $1.3 million to support early and transaction-stage PPP project development activities in Kenya,” he said.

Kenya also scored big with two key agreements in the health sector, which will see healthcare workers allowed to work in the UK. The first pact, signed by Labour Cabinet Secretary Simon Chelugui and UK’s Secretary of State for Health Sajid Javid, is an MoU on Health Workforce Collaboration. The agreement provides a framework for capacity building and exchange of health workers between Kenya and the UK, while the health alliance is a collaborative platform for healthcare providers.

The UK-Kenya Health Alliance seeks to improve cancer care in Kenya and development of a centre of excellence for cancer research at Kenyatta University Teaching, Referral and Research Hospital.

On Tuesday, the two countries signed a five-year Defence Cooperation Agreement (DCA) to tackle shared threats across East African region. Kenya’s CS for Defence Dr Monica Juma, and UK Defence Secretary Ben Wallace, signed the new DCA at the Ministry of Defence offices in London. The agreement will anchor the defence priorities between the two nations over the next five years.

The signing of the DCA comes six months after the two defence secretaries met in Nairobi, agreeing a refreshed Security Compact to deepen wider stability and security cooperation, part of the Kenya-UK strategic partnership. The new DCA, once ratified by the Kenyan and UK Parliaments, will allow the two countries militaries to share expertise, experience, and techniques, making both forces more effective.

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