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30 October, 2016

Executive Summary

Fixed Income: Yields on the 91-day and 364-day Treasury bills were on an upward trend coming in at 8.0% and 10.6% up from 7.7% and 10.4% the previous week, respectively, whereas yields on the 182-day Treasury bill remained relatively unchanged at 10.3%. This week, the Treasury released fiscal year quarter 1 economic data, for the 2016/2017 budget, which indicated poor performance in tax revenue collection, while revealing that only 10.0% of Kenya?s development budget has been disbursed;

Equities: During the week, the Kenyan equities market was on an upward trend with NASI, NSE 20 and NSE 25 gaining by 0.9%, 0.04% and 1.1%, respectively. Kenya Airways released half-year results for 2016 recording an improvement in loss per share by 40.0% y/y to Kshs 3.2 from Kshs 8.0;

Private Equity: Catalyst Principal Partners is seeking to raise Kshs 20 bn to invest in consumer driven sectors in the Sub-Saharan region with Kshs 1.5 bn having already been pledged by the International Monetary Fund.  Meanwhile, the RX Healthcare fund received a USD 20 mn equity investment from the African Development Bank;

Real Estate: Developers, financiers, property agents and other real estate professionals converge at Kenya?s 24th Homes Expo at the KICC, while the Royal Orchid chain announces plans to open a five-star hotel facility -Mara Azure near Kenya?s Maasai Mara National Park within the next two months;

Focus of the Week: Kenya improved on the Ease of Doing Business Ranking for 2017, rising 21 places to #92, highlighting the positive impacts of reforms in business regulations put in place over the last one year. However, a lot remains to be done to improve our global ranking and competitiveness, especially regarding dealing with construction permits and paying taxes;

Company Updates

  • Voting for Cytonn Cash Management Solution LLP ?Cytonn CMS? Advisory Board closes today. If you are a partner in Cytonn CMS, please use this link to vote.
  • Our Managing Partner and CEO, Edwin H. Dande, was the keynote speaker at the Naseba's East Africa Executive Breakfast, a forum which brought together 50 institutional investors to discuss the principles of successful capital raising. See event note
  • Maurice Oduor, our Investments Manager discussed Kenya?s development budget absorption rate on CNBC Africa. See Maurice on CNBC
  • Cytonn Private Wealth held a wealth management training focused on how structured yield products can achieve high yield returns as high as 18% per annum for investors, while providing both liquidity and principal protection. The training illustrated to participants how they can come together in a private structured vehicle, allocate half of their portfolio to investment grade real estate targeting to deliver about 26% per annum return, and then allocate the other half to negotiated wholesale bank deposits for 10% per annum return, and achieve a blended portfolio return of 18% per annum. See event note. The wealth management trainings, which are at no cost, are held biweekly by Cytonn Private Wealth but are open only to pre-screened. To register for the training kindly go to See training
  • Cytonn Investments hosted bankers and institutional investors at an exclusive cocktail on Thursday to introduce them to the Cytonn Project Notes (CPN). Cytonn Project Notes is an investment opportunity for investors to earn up to 20 percent p.a. returns by investing in a pool of specific de-risked Cytonn Real Estate projects over a defined period of time. See event note
  • Cytonn Real Estate has launched an innovative payment plan for all it projects and currently for the for The Alma, its aspirational apartment community development in Ruaka. The ?0% Down & 10-year Payment Plan? is targeted at enhancing ownership and affordability for both prospective home owners and real estate investors who may not be able to afford the monthly payments over a 3-year construction period. The 0% Down & 10-Year Payment starts as low as Kshs 90,400 per month for 1-bedroom apartments. See table below for various plans:

(all values in Kenya Shilling unless stated otherwise)

The Alma 10-Year Payment Plan

Unit Typology

Principal Amount

Payment Period (Months)

Monthly Installment Amount













  • To invest in any of our current or upcoming real estate projects, please visit Cytonn Real Estate. We continue to see very strong interest in our products:
    • The Alma, which is now 55.0% sold and has delivered an annualized return of 55.0% p.a. for investors who bought off-plan. See The Alma. We will be having site visits to showcase this iconic development every two weeks, right after the wealth management trainings. If interested in attending the site visit, email clientservices@cytonn.com
    • Amara Ridge is currently 100.0% sold. See Amara Ridge
    • We have 12 investment-ready projects, offering attractive development returns and buyer's targeted returns of around 25.0% p.a. See further details here: Summary of investment-ready projects
  • We continue to beef up the team with several ongoing hires: Careers at Cytonn.

Fixed Income

During the week, T-bills were oversubscribed with overall subscription increasing to 107.0%, compared to 100.6% recorded the previous week. Subscription rates on the 91-day and 364-day papers increased during the week coming in at 108.4% and 90.4% from 34.0%, and 79.0% respectively, the previous week whereas the subscription rate on the 182-day paper decreased to 122.6% from 166.7% the previous week. Despite the fall in subscription levels for the 182-day paper during the week, it continues to be the most preferred paper as it offers the highest return on a risk-adjusted basis. Yields on the 91-day and 364-day Treasury bills were on an upward trend coming in at 8.0% and 10.6% this week up from 7.7% and 10.4% the previous week, respectively, while yields on the 182-day Treasury bill remained relatively unchanged at 10.3%.

The 91-day T-bill is currently trading below its 5-year average of 10.4%. The downward trend for the 91-day paper is mainly attributed to the expected low interest rate environment following (i) the operationalization of the Banking Act Amendment 2015, which has led to more liquidity in the market, and (ii) reduced pressure from the government borrowing program as they are currently ahead of the pro-rated domestic borrowing target of Kshs 79.5 bn, having borrowed Kshs 124.1 bn, which is 156.2% of the pro-rated target. However, key to note is that as indicated in our Cytonn weekly #42, the interest rates have bottomed out and we expect them to persist at the current levels.

According to Bloomberg, yields on the 5-year Eurobond decreased by 0.1% points week on week to 4.2% from 4.3% the previous week with the 10-year Eurobond remaining unchanged at 6.8%. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.6% points and 2.9% points, respectively for the 5-year and 10-year bond, due to improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination.

The Kenya Shilling was stable against the dollar closing the week at Kshs 101.4 owing to demand from oil importers being matched by the supply from horticulture exporters. On a year to date basis, the shilling has appreciated by 0.9% against the dollar. Going forward, we expect the shilling to remain stable at current levels for the remainder of the year given (i) the high levels of foreign exchange reserves, equivalent to 5.2 months of import cover, and (ii) improved diaspora remittances.

After the successful issue of the 15-year Infrastructure Bond by the Kenya Government last week, the government has moved back to the market with a tap sale for an extra Kshs 10.0 bn. The last bid was oversubscribed with the government accepting bids worth Kshs 30.6 bn at a weighted average yield of 13.2% as highlighted in our Cytonn Weekly #42. The government is seeking funds to finance projects in roads (Kshs 10.0 bn), energy (Kshs 10.0 bn) and water (Kshs 20.0 bn). The tap sale will maintain the 12.0% coupon, with the yield of 13.2% already set from the primary auction. The tap sale is set to run from Tuesday 25th October 2016 to Thursday 3rd November 2016, and will provide an opportunity for investors who missed out in the issue to participate. Given that this bond is tax free with a yield of 13.2%, the secondary market activities are likely to remain subdued during the tap sale period as investors shift attention to the tap sale as opposed to secondary market.

The United States Federal Open Market Committee (FOMC) is set to meet next week to assess the current state of the US economy and shed light on a possible rate hike this year. Following the Fed?s previous meeting held on September 21st, 2016, there is likelihood that the U.S. interest rates will not be increased in November despite support from voting members of the Fed who believe that a rate hike will be soon justified. A rate hike did not take place in September despite (i) U.S. factory activity expanding by 8.5%, and (ii) the creation of 156,000 new jobs in September. The decision to hike interest rates in November will not only be dependent on U.S. factory and employment data which saw unemployment rate rise from 4.9% to 5.0%, but will also factor in the U.S. elections, set to take place 6 days after the FOMC meeting and October U.S. jobs data set to be released on 4th November, 2016, 2 days after the FOMC meeting. According to BMO Capital and the CME Group, there is a 74.0% likelihood that the Fed will hike rates in December, after the election, as compared to a 17.0% likelihood in November. We are of the view that the Fed will not hike rates during their November 2016 meeting as (i) markets could react wildly after the elections thus changing the future outlook and creating uncertainty going forward, (ii) there has been a slowdown in new job creation with 252,000 new jobs in July, 167,000 in August and 156,000 in September while the rate of unemployment notched up slightly to 5.0% in September from 4.9% in August owing to an increase in the labor force, and (iii) the inflation rate is still below their 2.0% target at 1.5% and it runs the risk of falling further if they increase interest rates.

This week, the Treasury released quarter 1 economic data for the 2016/2017 budget, which indicated poor performance on revenue collection. The data indicated that the Kenya Revenue Authority had collected Kshs 289.0 bn, 18.4% lower than the prorated target of Kshs 342.5 bn. Despite the collection being below target, KRA has collected 12.1% more compared to a similar period last year. This is a positive sign as it indicates that the government is putting in processes and procedures to widen its tax net. The Tax Procedural Act has enabled the Government and especially the KRA to streamline its internal processes to ensure seamless tax collection. However, the government can do more in improving their collection by taxing the informal sector. As per the Kenya National Bureau of Statistics, Small and Medium Enterprises contributed 38.8% of Kenya?s GDP in 2015, and if the government were to incorporate the informal sector into the tax bracket, they would be able to raise more funds and reduce over reliance on both domestic and foreign debt.

Data collected by the National Treasury indicates that only 10.0% of Kenya?s development budget has been disbursed, representing Kshs 41.8 bn against the domestically funded development expenditure budget of Kshs 416 bn, within the first quarter of the fiscal year 2016/2017. Assuming a pro-rated target, the government should have disbursed Kshs 104.0 bn. However, this is just 5.2% of the total development expenditure as the government has not yet embarked on their foreign borrowing. However, plans are underway to issue a Kshs 400.0 bn Eurobond before the end of this year. The sluggish absorption of development funds has been blamed on the complex and bureaucratic procurement process that has caused setbacks on launching of projects. The key ministries affected by this under-absorption include: Ministry of Interior and Coordination of National Government, Ministry of Lands and Physical Planning, Ministry of Industry, Trade and Cooperatives to name a few. This recent development is expected to affect the completion of ongoing projects and hence hamper economic growth. We believe that for the government to disburse development funds seamlessly they need to (i) streamline procurement procedures which act as obstacles in the completion of projects, (ii) improve on monitoring project implementation, and (iii) reign in on corruption which has been depleting development funds over the past years.

The Government is ahead of its domestic borrowing for this fiscal year having borrowed Kshs 124.1 bn for the current fiscal against a target of Kshs 79.5 bn (assuming a pro-rated borrowing throughout the financial year of Kshs 229.6 bn budgeted for the full financial year). Interest rates, which had reversed trends due to the enactment of The Banking Act Amendment, 2015, appear to have bottomed out and we expect them to persist at the current levels. It is due to this that we think it is prudent for investors to be biased towards medium-term papers.


During the week, the Kenyan equities market was on an upward trend, with NASI, NSE 20 and NSE 25 gaining by 0.9%, 0.04% and 1.1%, respectively, taking their YTD performances to (5.9%), (20.7%) and (13.4%), respectively. Since the February 2015 peak, the market has lost 41.7% and 22.8% for NSE 20 and NASI, respectively. The week?s performance was driven by gains in select large cap stocks such as Standard Chartered Bank, EABL and Safaricom which gained 3.3%, 2.6% and 1.0%, respectively, despite losses of 2.2%, 1.8% and 0.9% in DTBK, BAT and KCB, respectively.

Equities turnover increased by 19.2% to close the week at Kshs 1.4 bn from Kshs 1.2 bn the previous week.  Foreign investors turned net buyers with net inflows rising 350% to USD 0.9 mn, compared to a net inflow of USD 0.2 mn recorded the previous week, with foreign investor participation increasing to 72.1% from 59.0% recorded the previous week. Safaricom was the top mover during the week accounting for 33.0% of market activity and gaining 1.0%. We maintain our expectation of stronger earnings in 2016 compared to 2015 supported by a favorable macroeconomic environment. However, the key risk is the volatility in the banking sector that may depress earnings for banks, especially during the fourth quarter.

The market is currently trading at a price to earnings ratio of 11.8x, versus a historical average of 13.7x, with a dividend yield of 6.4% versus a historical average of 3.5%. The charts below indicate the historical PE and dividend yields of the market.

Equity bank has made a move to propagate its EazzyBanking platform with a target of at least 1.0 mn new merchants over the next three calendar years. The bank will move into the market with an eye on shop owners, supermarkets, petrol stations, schools, canteens, hotels and airlines with at least one thousand merchants recruited per day. The platform provides products such as EazzyPay, EazzyLoan, EazzyChama, EazzyBiz and EazzyAPI, which will enable joint account holders to manage their accounts, offer cash and liquidity management and integration to other mobile money systems such as Airtel Money and Mpesa. The merchants will pay an average of 1.0% as commission per transaction with no fee being passed on to the end users. This is a move by Equity bank to enhance its non-funded income revenue streams after passing of the Banking (Amendment) Act 2015 in August this year, which will bring down the bank?s net interest margin and effectively reducing the net interest income. Equity will also earn through sale of airtime to all telecom operators by the merchants, and with Equitel already accounting for about 14% of all mobile money transactions in the industry, we view this as a strategic move to tap into more transactional based non-funded income revenue streams as that will help the bank diversify its revenue streams, which currently stands at 66:34 Funded to Non-Funded.

Crane Bank, a private commercial bank in Uganda, and the country?s 4th largest bank by assets, was put under receivership by Bank of Uganda (BOU), after an assessment cited that the bank was undercapitalized. The financial institution regulations in the country state that a bank is supposed to maintain core capital of not less than 8.0% of its risk-weighted assets and off balance sheet items. In the last bank?s supervision report BOU reported that all the banks had met the minimum core capital requirements of 8.0%, however, the report drew focus to the rising non-performing loans (NPLs) to total loans ratio. The non-performing loans in the banking sector rose by 2.1% from 5.3% in June 2015 to 7.4% in June 2016 with Crane bank, deemed one of the most aggressive banks in Uganda, responsible for 20.0% of the total non-performing loans. The bank attributes the fall in capital adequacy to a rise in operating expenses and impairment losses on loans and advances, which saw the bank make a loss of USHs 7.4 bn in 2015.

In Tanzania, Twiga Bancorp Limited, a government-owned bank, was on Friday put under receivership by the Bank of Tanzania citing that the bank poses systemic risks to the industry for having inadequate capital following heavy losses totaling TZS 18.0 bn in the past one year. The financial regulations in Tanzania require banks to hold total capital of 12.5% of the total risk weighted assets. The bank will be allowed to undertake all transactions except taking deposits on current accounts. This comes at a time when the Tanzanian president has affirmed that the government will not continue bailing out failing financial institutions. The efforts being put across by the central banks in the region is a strong indicator of a move towards a more regulated and stable financial sector.   

Kenya Airways H1?2016 Results:

Kenya Airways released their half year results for the period ending September 2016, recording an improvement in its loss per share by 40.0% y/y to Kshs 3.2 from Kshs 8.0. This improvement is attributed to reduced fleet ownership costs which declined by 35.3% y/y to Kshs 8.5 bn from Kshs 13.1 bn, following the lease of 2 of its Boeing aircraft to Middle Eastern airline Oman Air and 1 to Turkish Airlines.

Key points to note include;

  • Operating revenue declined by 3.5% y/y to Kshs 54.7 bn from Kshs 56.7 bn, which was lower than the decline in operating expenses that declined 8.7% y/y to Kshs 53.8 bn from Kshs 58.9 bn
  • The decline in operating revenue was due to (i) a 4% reduction in Available Seat Kilometres (ASKs), and (ii) decline in yield by 7% owing to currency impacts. However, the airline registered a growth of 4.2% in customer numbers to 2.2 mn, and a 14% increase in Intra Africa traffic
  • The decline in operating expenses was as a result of (i) reduced fleet ownership costs following fleet rationalisation that involved the leasing out of aircraft, and (ii) lower international oil prices that reduced the cost for fuel. Despite a decline in operating expenses, overhead costs increased by 14.5% y/y to Kshs 12.5 bn from Kshs 11.0 bn as a result of reorganisation and restucturing costs of Kshs 2.1 bn incurred during the reporting period
  • Operating profit increased to Kshs 0.9 bn from an operating loss of Kshs 2.2 bn in a similar reporting period in the previous year. This led to an improvement in the EBITDA margin to (1.8%) from (14.8%), supported by reduced losses on fuel derivatives which declined 77.0% y/y to Kshs 0.3 bn from Kshs 1.3 bn. This led to a reduction in the loss after tax by 60.0% y/y to Kshs 4.8 bn from Kshs 12.0 bn
  • Total equity recorded a decline of 9.1% y/y to a further negative position of Kshs 38.9 bn from Kshs 35.7 bn
  • Kenya Airways appointed Mr. Michael Joseph as the new chairman to the Board of Directors after the retirement of Ambassador Dennis Awori. This is in line with the strategy of the firm to build an improved corporate governance structure and turnaround to profits

Moving forward, we expect Kenya Airways to focus on its turnaround strategy ?Operation Pride?, which will focus on (i) closing the profitability gap, (ii) improve the business model, and (iii) optimise on capital. The airline will restructure its balance sheet, with an aim to reduce its debt and interest costs before engaging with a strategic investor. Kenya Airways projects to fully implement its turnaround strategy within 18 to 24 months.

Below is our equities recommendation table. Key changes from our previous recommendation are:

  • BAT has moved from an ?Accumulate? recommendation, with an upside of 19.7% to a ?Buy? recommendation with an upside of 21.8%, following a 1.8% w/w price decline
  • I&M has moved from an ?Accumulate? recommendation, with an upside of 16.2% to a ?Hold? recommendation with an upside of 8.1%, following a 7.8% w/w price increase

all prices in Kshs unless stated




Price as at 21/10/16

Price as at 28/10/16

w/w Change

YTD Change

Target Price*

Dividend Yield

Upside/ (Downside)**



KCB Group***








































HF Group










Kenya Re






























Co-op Bank






























Equity Group






























CIC Insurance










I&M Holdings






























Sanlam Kenya







































*Target Price as per Cytonn Analyst estimates

**Upside / (Downside) is adjusted for Dividend Yield

***Indicates companies in which Cytonn holds shares in

Accumulate ? Buying should be restrained and timed to happen when there are momentary dips in stock prices.

Lighten ? Investor to consider selling, timed to happen when there are price rallies

We remain ?neutral with a bias to positive? for investors with short to medium-term investments horizon and we have now turned ?positive? for investors with long-term investments horizon.

Private Equity

This week we saw the announcement by Catalyst Principal Partners that they are seeking to raise USD 197 mn to invest in consumer driven sectors across the Sub-Saharan Africa region. The International Finance Corporation (IFC) pledged to contribute USD 14.8 mn as part of this. Catalyst fund had also previously raised USD 123 mn in 2009. The fund will focus on investing in different sectors including consumer goods, manufacturing, financial services and healthcare which have exhibited tremendous growth potential that has been driven by: (i) a growing middle class population that has increased demand for sustainable health care, (ii) a growing middle class with purchasing power that will promote the consumer goods sector, and (iii) strong growth prospects of the financial services sector in Africa due to a low banking and insurance penetration which is expected to increase in the future. The fund targets a 20% to 25% USD cumulative net returns and on average exits within a 4 to 6-year investment horizon.

The African Development Bank (AFDB) has committed to invest USD 20 mn equity in the Rx Healthcare fund. The fund focuses on both North African and Sub-Saharan African Biopharmaceutical and Medical Technology firms. The fund is targeting a final capitalization of USD 200 mn and investments will first be made in the North African Region in Egypt, Tunisia and Morocco. The second set of investments will be made in both East and Western Africa. Targeted countries are Ethiopia, Kenya and Sudan in East Africa and Nigeria in West Africa. Africa still lags the rest of the world in providing high quality affordable healthcare and this investment will provide an opportunity to enhance quality and sustainable investment.

Private equity investments in Africa remain robust as evidenced by the increased deals and deal volumes in the region?s key sectors, namely financial services, energy, FMCG, real estate, and technology. Given (i) the high number of global investors looking to cash in on the growing middle class of Africa, (ii) the attractive valuations in private markets compared to global markets, (iii) better economic growth projections in Sub-Sahara Africa compared to global markets, and (iv) the high number of exits that is evidence of the attractiveness of the region, we remain bullish on PE as an asset class in Sub-Sahara Africa.

Real Estate

Kenya?s 24th Homes Expo was held this week at the KICC, Nairobi. The event has played a significant role in shaping the real estate industry through bringing together various industry players who use this platform to exhibit their diverse products and services. The expo organizers indicated that most of the participants in this year?s Expo are targeting the lower middle and low-income housing markets. This is mainly attributable to;

  • Tax incentives ? Developers who put up at least 400 low cost residential houses will get a 15% corporate tax relief. Tax has been a big expense hence increasing the costs incurred by developers, which in turn discouraged developers from developing low cost housing
  • Poor performance of high-end market ? There is a stagnation in prices in some high-end property due to too much supply that had hit this segment of the market.

The lower-income housing segment is thus the next investment frontier for the real estate sector as developers embrace it and the market gets enlightened on the available products in the market through increased advertisements and more events like expos and advertisements. We also expect healthy competition among market players as firms get to see new innovations and trends such as use of alternative building materials like prefabs, and work to keep up.

The Royal Orchid hotel chain owners revealed during the week that they have completed construction on a five-star hotel facility called Mara Azure near Kenya?s Maasai Mara National Park, and are set to open within the next two months. The facility will target the safari tourism product, with a focus on clients who come to view the great wildebeest migration.  The hotel chain is also extending its health services to its clients that need dialysis services in Mara as well as the members of the community in the Mara. Royal Orchid has a presence in East Africa with the Royal Orchid Malaika Beach Resort opened in 2013, with which they have tapped into the Uni-Visa plan that links tourists from Uganda, Kenya and Rwanda.

The development comes at a time when the hospitality industry in Kenya, over the past 5 years has been on a decline with occupancy levels, revenue and demand declining at CAGRS of 7.8%, 5.8% and 10.3%, respectively because of insecurity and the Eurozone Crisis that left people with lower disposable income to use for leisure. Regardless, Maasai Mara region has remained resilient and still presents the best opportunity to invest in hotels in the country as it has a relatively higher occupancy rate of 37% and the highest revenues in terms of the Average Daily Rates (ADR) and the Total Revenue Per Available Room(TRevPAR).

The following table further outlines occupancy rates and returns from other regions in Kenya in terms of hospitality.

Kenya Hospitality Sector Regional Performance




Average Daily

Rate (USD)

No. of Rooms



Maasai Mara Region










Mt Kenya Region





Nakuru - Naivasha




















Market Average





* The best performing market is Maasai Mara Region, which has an ADR of 395, a TRevPAR of USD 182 with an average annual occupancy of 37.0%. This is due to the high room rates charged in Maasai Mara being host to the 7th Wonder of the World


We have seen an increase in the number of international arrivals by 16.8% in Q1?2016 to 206,978 visitors from 177,085 visitors in Q1?2015, and we therefore remain positive on the performance of the hotel sector as it taps into various tourism products such as Safari, and MICE (Meetings, Incentives, Conferences and Exhibitions) tourism among others. For more insight into hospitality industry find attached Cytonn Hospitality Sector Report.

Overall, Kenyan real estate remains positive for investment, in low and middle income residential development sectors as well as the hospitality industry in Maasai Mara and Nairobi areas, and in new trends such as serviced apartments.

Ease of Doing Business in Kenya

In our report last week focusing on Kenya?s economic growth, we noted Kenya?s economy is positioned for impressive growth and stands out in East Africa due to its economic diversity and vibrancy as it is the regional hub for innovation, technology, financial services and real estate development.

This week, the World Bank released the Doing Business 2017 report. As highlighted in our Cytonn weekly report #32 (2015), the report is significant since it offers governments and policy makers a benchmarking tool useful in policy formulation to improve economy?s business regulatory environment as it highlights potential challenges and provides insight into good practices worldwide. Additionally, it is used by international investors as a guide to which countries have more favorable operating environments.

Ease of Doing Business is an aggregate ranking method for countries, based on indicators that measure and benchmark regulations applying to domestic SME businesses throughout their life cycle. The ranking is done by the World Bank, and tracks changes in the following 10 life cycle stages of a business: (i) starting a business, (ii) dealing with construction permits, (iii) getting electricity, (iv) registering property, (v) getting credit, (vi) protecting minority investors, (vii) paying taxes, (viii) trading across borders, (ix) enforcing contracts and (x) resolving insolvency. The results for each economy are then compared with those of 189 other economies and over time.

In 2015/2016, 137 economies implemented a total of 283 reforms across different areas with starting a business being the most common reform area followed by paying taxes. Kenya was among 10 economies highlighted this year for making the biggest improvements in their business regulations recording an improvement of 16 places to rank position 92 out of 190, which is a build-up from last year?s improvement of 28 places to position 108 from 136 in 2015. In this report, we highlight five key areas where Kenya has made significant improvement and actions that need to be taken to further improve Kenya?s overall rank going forward.

The five areas where Kenya has made significant improvements include;

  1. Starting a business: With 7 procedures and 22 days to set up, Kenya?s ranking greatly improved from position 150 in 2016 to 116 in 2017. Positive reforms during the period were (i) removal of the stamp duty fees required for the nominal capital, memorandum of association and articles of association and, (ii) elimination of requirements to sign the declaration of compliance before a commissioner of oath. However, despite the above, the introduction of a flat fee of Kshs 10,000 for company incorporation has made starting businesses more expensive.
  2. Getting electricity: There has been a reduction in the number of days and interactions needed to obtain an electricity connection to 97 days and 3 interactions, leading to Kenya?s improved rank from position 127 to 106. This was enabled by the introduction of a geographic information system, allowing the price quotes to be provided to customers without conducting a site visit.
  3. Registering property: Kenya?s rank has slightly improved from position 122 to 121 on the back of increased transparency at the land registry. It takes an average of 21 days to register property in the country using data from 11 towns. In Mombasa, it takes an average of 41 days while in Isiolo it averages 73 days.
  4. Protecting minority investors: Kenya?s ranking improved from position 112 to 87 owing to strengthened minority investor protections through (i) introducing greater requirements for disclosure of related-party transactions by the board of directors, (ii) making it easier to sue directors in cases of prejudicial related-party transactions, and (iii) allowing the rescission of related-party transactions that are shown to harm the company.
  5. Resolving insolvency: Kenya was ranked position 92, an improvement of 48 positions from position 140 in the 2016 report, supported by increased ease of resolving insolvency which was made possible by (i) introducing a re-organization procedure, (ii) facilitating continuation of the debtor?s business during insolvency proceedings, and (iii) introducing regulations for insolvency practitioners. Kenya adopted a new Insolvency Act in line with the insolvency framework of the United Kingdom. The new law introduced a form of reorganization that allows insolvent companies to continue to operate while negotiating a settlement with creditors

Despite the general improvement in rank, Kenya also declined in a few business life cycle stages, that offer room for improvement and provide basis for formulation of positive reforms going forward. These areas include:

  1. Getting credit: Kenya?s rank declined to 32 from 29 in 2016. This is due to the low credit bureau coverage, which currently stands at 25.8% of the adult population and low access to credit information which is a critical element for private sector-led growth. Availability of information to lenders translates into increased access to finance and cheaper loans.
  2. Paying taxes:The metric assesses cost of complying with tax obligations up to the filing of tax returns, payment of taxes due and post filing processes such as claiming a VAT refund, undergoing a tax audit or appealing a tax assessment. Kenya was ranked 125 from 122 in 2016 on this metric. To file taxes in Kenya, it takes an average 145 hours per year and 25 number of payments. We expect the recent adoption of technology in preparation, filing and payment of taxes by the KRA to lead to an improvement in this metric. On post filing processes, Kenya restricts the right to receive an immediate cash refund to specific types of taxpayers such as exporters, embassies and NGOs.

Evident from the key areas highlighted above, there exists room for Kenya to improve its business climate to attract more entrepreneurs and investors to start businesses and foreign direct investment. This can be achieved by;

  1. Make it easier to start a business- Countries around the world have streamlined processes involved in starting a company by; (i) setting up a one stop shop for all services required in starting a company, (ii) automating the processes involved, and (iii) eliminating minimum capital requirements. Currently, to start a business in Nairobi, an entrepreneur must involve 6 agencies, namely the Nairobi Huduma Center, Kenya Revenue Authority, Nairobi City Council, National Social Security Fund, National Hospital Insurance Fund, and a company seal maker. For a standard company, this will cost Kshs 27,800, equivalent to 21.1% of income per capita, which is quite high compared to comparable efficient countries like Botswana and Mauritius, at 0.8% and 1.8%, respectively, which highlights the high initial cost to start a business can be reduced
  2. Improve on dealing with construction permits- The advanced economies around the world are adopting smart construction regulation which ensures that standards are met while making compliance easy and accessible to all. Governments have worked on consolidating permit requirements for simple, straight forward and inexpensive compliance that leaves everyone better off. In Kenya, for example dealing with construction permits for building a standard warehouse requires 17 procedures, takes 160.0 days and costs 6.3% of the warehouse value. There needs to be an improvement in Kenya?s building quality control index, notably in laws governing liability for structural flaws in a building and mandatory insurance policies to cover problems once the building is in use. Where complying with building regulations is excessively costly in time and money, many builders opt out. However, Kenya in the recent past has made dealing with construction permits costlier and difficult by increasing building permit fees and requiring additional approval before issuance of building permits, and increasing costs for both water and sewerage connections
  3. Improve sharing of credit information- This is to facilitate lending decisions especially towards the private sector. Kenya should adopt additional sources of customer data which generates incentives to improve borrower discipline especially following the enactment of Banking Act Amendment 2015 that effectively placed an interest rate cap on loans by commercial banks
  4. Enhancing minority investors protection ? Kenya should enhance investor protection mainly towards (i) the extent of shareholder rights, (ii) the scope of governance index, and (iii) the extent of disclosure. Actions that should be taken include (i) regulations around shareholder involvement each time a company issues new shares, and pre-emption rights to the same, (ii) shareholder involvement for the election and dismissal of the external auditor, (iii) corporate governance that requires the board of directors include independent and non-executive board members, and (iv) disclosure of information about board members? other directorships as well as basic information about their primary employment   
  5. Make it easier to pay taxes- Kenya made paying taxes faster for companies by enhancing electronic filing systems. However, the country also increased the administrative burden of paying taxes by requiring quarterly filing of taxes and costlier by increasing employer?s social security contribution rate. The tax paying process can be made easier by (i) consolidating payments and filings of taxes, (ii) establishing taxpayer service centres, and (iii) allowing for more deductions, exemptions or lower tax rates.
  6. Improve efficiency of contract enforcement- To enhance their judicial systems, lower-income economies often work on reducing backlogs by introducing periodic reviews to clear inactive cases from the docket and by making the procedures faster. In Kenya, contract enforcement averagely takes 465.0 days and costs 41.8% of the value of the claim. Kenya can improve on this through (i) reducing the current case backlog by clearing inactive cases from the docket, (ii) automation of court and judicial procedures, (iii) complaints being filed electronically through a dedicated platform within the competent court, (iv) court fees being paid electronically within the competent court enforcing contracts, and (v) reducing the number of days taken to deliver case verdicts. Kenya has so far introduced a case management system that will help increase the efficiency and cost-effectiveness of commercial dispute resolution.
  7. Heighten the fight against corruption- Despite the Doing Business report not touching on incidences of corruption, Kenya needs to heighten its fight against the vice to ensure that resources don?t get misused, leading to lower contribution to economic growth. Comprehensive measures to handling corruption include (i) proper vetting of public officials by the Ethics and Anti-Corruption Commission, (ii) educating people on the effect corruption has on development, and (iii) independence of the judiciary in handling cases. Recently, we have seen corruption cases fade away without explanations and questions unanswered.

Kenya?s Ease of Doing Business ranking over the last decade is now improving after significant deterioration as shown below;

As seen from the graph above, Kenya has greatly improved its ranking from last year, however the country still has a lot to do to reclaim its peak 2006 rank of 68. To improve in the ranking requires partnership between the government and the private sector to create a conducive business environment. Implementing effective business regulations will encourage entrepreneurial activities and ensure that all participants have fair and equal opportunities to participate in a competitive market. This will in turn attract more business investment into the county and spur economic growth, which ultimately creates jobs and improves the standard of living for Kenyans.



Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only, and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.