KENYA Banking & Finance

Transcription

1 CHAMBERS KENYA Banking & Finance Global Practice Guides LAW AND PRACTICE: p.3 Law & Practice Kenya Contributed by Iseme, Kamau & Maema Advocates The Law & Practice sections provide easily accessible information on Contributed by navigating the legal system when conducting business in the jurisdicleading& lawyers explainadvocates local law and practice at key transactional Iseme,tion. Kamau Maema stages and for crucial aspects of doing business. DOING BUSINESS IN KENYA: 2018 p.193 Chambers & Partners employ a large team of full-time researchers (over 140) in their London office who interview thousands of clients each year. The advice in this section is based on the views of clients with indepth international experience.

2 KENYA LAW AND PRACTICE: p.3 Contributed by Iseme, Kamau & Maema Advocates The Law & Practice sections provide easily accessible information on navigating the legal system when conducting business in the jurisdiction. Leading lawyers explain local law and practice at key transactional stages and for crucial aspects of doing business.

3 Law and Practice KENYA Law and Practice Contributed by Iseme, Kamau & Maema Advocates CONTENTS J1. Loan Market Panorama p The impact of recent economic cycles and the regulatory environment p The high-yield market p Alternative credit providers p Evolution of banking and finance techniques p Recent or expected legal, tax, regulatory or other developments p.6 2. Authorisation p Requirements for authorisation to provide financing to a company p.6 3. Structuring and Documentation Considerations p Restrictions on foreign lenders granting loans p Restrictions on foreign lenders granting security p Restrictions and controls on foreign currency exchange p Agent and trust concepts p Loan transfer mechanisms p Debt buy-back p Public acquisition finance p.7 4. Tax p Withholding tax p Other taxes, duties, charges or tax considerations p Usury laws p.7 5. Guarantees and Security p Assets typically available and forms of security p Floating charges or other universal or similar security interests p Downstream, upstream and cross-stream guarantees p Restrictions on target p Other restrictions p Release of typical forms of security p Rules governing the priority of competing security interests p.8 6. Enforcement p Circumstances in which a secured lender can enforce its collateral p Foreign law and jurisdiction p A judgment given by a foreign court p A foreign lender s ability to enforce its rights p.9 7. Bankruptcy and Insolvency p Company rescue or reorganisation procedures outside of insolvency p Impact of insolvency processes p The order creditors are paid on insolvency p Risk areas for lenders p.9 8. Project Finance p Introduction to project finance p Overview of public-private partnership transactions p Government approvals, taxes, fees or other charges p The responsible government body p The main issues when structuring deals p The acquisition and export of natural resources p Environmental, health and safety laws p Islamic Finance p Overview of the development of Islamic finance p Regulatory and tax framework for the provision of Islamic finance p Requirements for Islamic banks and takaful operators to operate p Shari a-compliant products and transactions p.12 3

4 KENYA Law and Practice Iseme, Kamau & Maema Advocates (IKM) has a banking and finance team comprising three partners and five associates. The firm is situated in Nairobi and is a member of the DLA Piper Group, an alliance of legal practices that includes firms with offices around the globe that are affiliated to members of the DLA Piper Practice, and DLA Piper Africa Group, an alliance of law firms in Africa. In respect of banking and finance work, the primary practice is the preparation and completion of bank securities and related documentation. The firm is on the panel of over 16 commercial banks, a number of which are top-tier banks, and the team has a wealth of knowledge in the area of syndicated loans. Authors James Mburu Kamau is the managing partner and leading corporate commercial lawyer with over 26 years post-admission experience. A member of the Law Society of Kenya, and the East Africa ICT Impact Investing Task Force, he has handled numerous transactions locally and internationally, working in the practice areas of M&A, joint ventures, private equity, PPP, investment transactions, IT and e-commerce, banking and securities, corporate set-ups and restructuring, tax, franchises, commercial and construction contracts, capital market transactions, energy, infrastructure and telecommunications. William Maema heads the corporate/ commercial department and is regularly invited to present papers on IP law at World Intellectual Property Organisation and Kenya Industrial Property Institutesponsored training workshops. He practises in IP, commercial and corporate law, information communication and technology, competition and monopolies, capital markets, M&A, employment and immigration law, NGOs and public benefits organisations. William holds a Master of laws degree from the University of Cambridge and is a member of the Law Society of Kenya, the Institute of Certified Public Secretaries of Kenya (ICPSK), the Cambridge Commonwealth Trust, the International Trade Mark Association, the International Federation of Intellectual Property Attorneys and the International Association for the Advancement of Teaching and Research in Intellectual Property. Anne Kinyanjui is a partner in charge of bank securities and finance as well as the real estate practice area, which covers a broad spectrum of financing matters, including banking law and project/ acquisition finance. Anne represents local and international clients in high-value transactions and has handled various real estate and development projects, and loan financing transactions, including finalising a syndicated finance transaction involving six banks for one of the largest infrastructural projects in the country. She is a member of the Law Society of Kenya and the ICPSK. Her key practice areas are banking, real estate, estate planning, finance and commercial contracts. David Lekerai is a partner in the corporate/commercial department and practises in private equity and M&A. A member of the Law Society of Kenya, David has advised on a number of local, regional and international transactions, including syndicated loan agreements for banks. He has gained exposure and experience in international corporate transactions having acted for various clients and been involved in transactions across different jurisdictions, including Luxembourg, India, Mauritius, Rwanda, Tanzania, Uganda, Nigeria, Ghana, Zimbabwe and South Sudan in close liaison with foreign law firms. 1. Loan Market Panorama 1.1 The impact of recent economic cycles and the regulatory environment The Kenyan real estate market remains attractive to investors. There has been a surge in the property market with various investors, including foreign investors from China, joining the ever-growing market. Particular focus has been on Nairobi and the surrounding satellite towns. Large, master-planned community developments are gaining traction and mixed-use complexes and malls are becoming increasingly common. Affordable housing is also gaining attention. This growth is reflected in the increased demand by developers seeking core project funding from financial institutions including banks and venture capitalist funds. There has also been a surge in infrastructure projects, particularly in roads, rail, airports, ports and bridges. One of 4

5 Law and Practice KENYA the largest is probably the USD24.5 billion LAPSSET Project which covers Kenya, Ethiopia and South Sudan and encompasses a standard gauge railway, crude oil pipelines, 32-berth Lamu project, oil refinery, airports and resort cities. There has also been investment by the Government of Kenya ( GoK ) in the health sector, with DLA Piper UK LLP and IKM advising the GoK on the acquisition of medical equipment for 94 hospitals in all 47 counties in Kenya. This was a USD500 million project which scooped an award for Transportation and Infrastructure Team of the Year at the 2016 African Legal Awards held in Johannesburg. The energy sector too has attracted investment, particularly in the renewable energy sphere. IKM is currently advising lenders in a MW Lamu coal-fired power project, which is one of the largest power plants in the region, a 140 MW geothermal power project and a number of solar and geothermal power projects. Such projects have resulted in demand for project finance, particularly from commercial lenders, DFIs, project sponsors and developers, GoK, county governments and private equity firms. PPPs are also generating interest as vehicles for financing infrastructure projects. Various pieces of legislation have been enacted which have diversified lending options. The mobile revolution has gripped the financial sector. Today, it is hard to come across a financial institution that does not offer mobile alternatives to their services. Mobile phone networks, which were initially focused on provision of telecommunication services, have partnered with various commercial banks in a bid to increase their customer base by offering competitive banking products. These products include Mshwari (a partnership between Safaricom Limited and Commercial Bank of Africa Limited), Eazzy Loans (offered by Equity Bank Kenya Limited through its mobile phone platform, Equitel) and Pesalink which allows users to move cash instantaneously between accounts. The Pesalink platform is jointly owned by Banks and their umbrella industry association. Banks are pooling their resources and showing a united front in the mobile money space. The Banking (Amendment) Act of 2016 has also introduced a cap on the interest payable on loans, thereby making loans from commercial banks and financial institutions affordable. There is also a floor on interest payable on deposits. It has further placed a duty on banks to disclose all charges and terms relating to a loan. There is strict regulatory supervision of commercial banks by the Central Bank of Kenya, which has recently resulted in two commercial banks being placed under receivership for flouting banking regulations. The rise of Islamic banking has also seen commercial banks incorporating Islamic financial products in their portfolio. Risk-sharing instruments account for close to 60% of the assets and are based on Musharakah contracts. Debt-based instruments comprise largely of Murabahah contracts. The Government has actively encouraged expansion of Islamic Finance to support the economy but there remains scope for of expansion and growth. 1.2 The high-yield market The financial instruments traded in the stock exchange include corporate and government bonds. Various corporates/ individuals have resorted to bonds as a way of raising money from members of the public, which is cheaper than borrowing from commercial banks. Bonds are also very popular due to the predictability in returns. Real Estate Investment Trusts (REITs) can now be listed in the stock exchange, thereby allowing real estate developers to obtain funding from members of the public. The Eurobond and 91 day Treasury Bills issued by the government are very popular investment options due to the high yield offered by these instruments. This has resulted in a reduction of interest rates applicable in respect of borrowing. June 2017 saw the introduction of M-Akiba which is a unique Government of Kenya-issued retail bond that seeks to enhance financial inclusion for economic development. Money raised from issuance of M-Akiba will be dedicated to infrastructural development projects, both new and ongoing. M-Akiba provides a platform and opportunity to save money through one s mobile phone while offering attractive interest rates 1.3 Alternative credit providers There has been an increase in the number of investments by private equity investors with private equity firms having invested approximately USD1 billion in energy, healthcare, and real estate companies since The investments are in the form of long-term loans with the private equity firms acquiring a significant stake in the local companies. Commercial banks have also approached private equity firms with a view to obtaining funds for their operations and for lending to their customers. One private equity firm has disbursed long-term loans to 18 local banks. 1.4 Evolution of banking and finance techniques Local commercial banks, with the aid of their branches in foreign countries, are now providing financing for infrastructure projects in the country in the form of syndicated loans. The Government of Kenya issued a Sovereign Bond of USD2 billion in June 2014 for purposes of general budget support including funding of infrastructure and for repayment of 5

6 KENYA Law and Practice a Syndicated Loan amounting to USD600 million plus accrued interest. The bond was highly competitive due to the huge foreign investor appetite. As a result, local entities in Kenya have opted to trade in the US-denominated dollar bonds which are attractive to foreign investors. In this regard, local companies such as Kenya Pipeline Company (KPC) Ltd are considering issuing a US dollar-denominated corporate bond to refinance part of the USD350 million syndicated loan it secured from a consortium of banks. The government is currently reviewing all laws and regulations governing the Islamic finance industry to aid the issuance of a debut Islamic law-compliant bond known as a sukuk. The country s large Muslim community and the growing demand for Islamic finance are forcing financial institutions and insurance companies to evolve and adapt in order to take advantage of this market 1.5 Recent or expected legal, tax, regulatory or other developments There have been several legal developments in Kenya which are likely to have a significant impact. Key among these are the Companies Act (Number 17 of 2015), the Insolvency Act (Number 18 of 2015), the Land Laws (Amendment) Act (Number 28 of 2016), the Banking (Amendment Act) 2016 and the Bribery Act (Number 47 of 2016). Briefly, the Companies Act, 2015 helped to streamline business in Kenya, by making it easier for entities to establish a presence and operate in Kenya. It also took into account the developments in technology and process by setting up online registration of companies and filing requirements. Kenya is globally ranked amongst the ten most improved economies for ease of doing business. A legislative development likely to impact the loan market is the Insolvency Act, which aims to amend and consolidate the law relating to the insolvency and bankruptcy of natural persons and incorporated and unincorporated bodies and to provide alternative procedures to bankruptcy that will enable the affairs of insolvent natural persons to be managed for the benefit of their creditors. This will inspire investor confidence as one concern lenders have is the likelihood of non-recovery of sums that have been advanced to borrowers. The cap on interest rates introduced by the Banking (Amendment) Act of 2016 will bring down the cost of financing and ensure transparency in the cost of loans. As a result, more borrowers are likely to approach banks for commercial loans since the uncertainty as to the cost of borrowing has been reduced. The Bribery Act (Number 47 of 2016) has helped address the issue of corruption which has continued to plague the Kenyan economy and investor confidence. The Act imposes a duty on both private and public entities to put in place procedures for the prevention of bribery. The Act applies to conduct of entities both within Kenya and to activities outside Kenya. There are severe penalties for contravention including disqualification from transacting business with the GoK or county governments. A number of top-tier companies and banks have publicly committed not to do business with tainted entities. The Act aims to promote and enhance the ethics of how business is conducted in Kenya, hence boosting investor confidence. The Central Bank of Kenya, which is tasked with the role of supervising commercial banks, has imposed a stringent supervision regime with two banks being placed under receivership for flouting banking regulations. The advantage of such strict regulation is the removal of weak banks and improved compliance, disclosure and governance frameworks and investors ability to assess banks asset quality. Credit Reference Bureaus which act as financial intermediaries have increased in number. They facilitate information exchange among lenders, allowing lenders to supplement information from other lenders so that credit decisions are made from the latest best available and real time information. This in turn leads to improved risk management and reduction in default rates by borrowers. 2. Authorisation 2.1 Requirements for authorisation to provide financing to a company All entities which intend to conduct banking business need to be licensed by the Central Bank of Kenya ( CBK ). In order for the licence to be issued, the proposed name has to be approved by CBK. Once the proposed name has been approved, the entity will then be incorporated at the Companies Registry. The next step is the application for a licence to conduct banking business. The application has to be accompanied by various documents which include the applicant s constitutive documents, fit and proper forms of proposed directors and the Chief Executive Officer, fit and proper forms of all significant shareholders, a feasibility study of the future operations and development of the intended business for a minimum period of three years. The applicant should also disclose sources and evidence of availability of capital contributed by all proposed significant individuals and institutional shareholders. The current minimum capital requirement for commercial banks is KES1 billion. 6

7 Law and Practice KENYA Upon reviewing the application and being satisfied that the applicant has met the requirements, CBK will grant approval to conduct the business of a bank. The applicant will then be permitted to obtain premises, install information technology systems and recruit staff for the institution. Once this is done, the applicant is required to organise and invite CBK for inspection of the premises. Where CBK has inspected the premises and is satisfied that the premises meet the requirements, the applicant will then pay the annual license fees as prescribed in the Banking Act. Upon payment of the requisite fees, CBK will then publish a notice in the Kenya Gazette to formally specify the institution. A licence will then be issued and the institution can commence business. In addition to being licensed, commercial banks are required to comply with the prudential guidelines published by CBK from time to time. 3. Structuring and Documentation Considerations 3.1 Restrictions on foreign lenders granting loans There are no restrictions on granting of loans by foreign lenders. 3.2 Restrictions on foreign lenders granting security There are no legal restrictions in granting of security or guarantees by foreign lenders. 3.3 Restrictions and controls on foreign currency exchange There are no foreign exchange control laws in Kenya. 3.4 Agent and trust concepts The agent and trust concept is recognised by virtue of the Trustee Act, Chapter 167 of the Laws of Kenya. There are no alternative structures. 3.5 Loan transfer mechanisms The Land Act 2012 allows for the transfer of a charge over immovable property by an instrument in the prescribed form but the prescribed forms are yet to be published. The Companies Act 2015 provides for transfer of debentures and the registration requirements are set out under the said Act. 3.6 Debt buy-back There are no legal provisions in Kenya prohibiting debt buybacks by the borrower or sponsor. 3.7 Public acquisition finance Currently, there are no applicable public acquisition finance regulations in our jurisdiction. 4. Tax 4.1 Withholding tax The general rule is that payment of the principal amount is not subject to withholding tax whereas the interest component is. Other payments would also be subject to withholding tax if they fall within the definition of interest or fall into any of the other categories of payments that are subject to withholding tax. These payments include dividends, royalties, technical service fees etc. Interest would not, however, be subject to withholding tax where it is paid to a tax-exempt person or in respect of loans from banks and specified financial institutions that are licensed in Kenya. Similarly, interest on loans from foreign lenders financing projects in energy, water, roads, ports, railways or aerodromes projects or specifically exempt from tax would not be subject to withholding tax. 4.2 Other taxes, duties, charges or tax considerations Fees, other than interest and return on loans, charged by specified financial institutions registered in Kenya are subject to excise duty. To the extent that fees charged by lenders constitute interest or a return on loan, no excise duty will be payable. Stamp duty is payable on loan instruments except for instruments in respect of loans from foreign sources for investing in energy, water and infrastructure. 4.3 Usury laws The Banking (Amendment) Act, 2016 provides a cap on the interest charged in respect of credit facilities. The current cap is at no more than 4% of the base rate set and published by the Central Bank of Kenya. 5. Guarantees and Security 5.1 Assets typically available and forms of security These largely include charges over immovable property. Security can also be taken over movable property The Movable Property Security Rights Act, 2017 came into operation in May, The Act aims at enhancing the ability of individuals and entities to access credit using movable assets. It also aims to promote consistency and certainty in secured financing over movable assets. Financial instruments such as shares can also be pledged as security. 7

8 KENYA Law and Practice Companies may also offer debentures over all the assets of a company, legal charges over immovable properties and security agreements over movable property. Charges over immovable property need to be in a prescribed form as set out in the Land Act and Land Registration Act, Both charges and debentures should be signed by both the lender and the borrower in the manner set out in the relevant Acts. Debentures and charges also need to be stamped with duty as assessed by the collector of stamp duty pursuant to the Stamp Duty Act (Chapter 480) Laws of Kenya, within 30 days of the date of the document. In the case of debentures and charges created by companies, these should be registered within 30 days at the Companies Registry. The stamp duty and registration fees payable will be determined by the amount borrowed. In the event that the formalities are not observed, the securities created will be considered void and unenforceable. In particular, the lender cannot exercise remedies such as statutory power of sale under the charges or the appointment of a receiver or administrator under a debenture. Where an instrument is not stamped with duty, the document cannot be produced in evidence before a court of law. 5.2 Floating charges or other universal or similar security interests Floating charges are permitted under the Companies Act (Number 17 of 2015). 5.3 Downstream, upstream and cross-stream guarantees Under Kenyan law, both private companies and individuals are permitted to provide guarantees. The associated limitations for companies are that there should be no restrictions in the Articles of Association of the company regarding the issuance of guarantees. Secondly, the issuance of guarantees should be supported by a board resolution to the effect that the issuance of the guarantees is consistent with the directors duty to act in good faith and is likely to promote the objectives and success of the company. In addition, the issuance of the guarantee should not materially affect the company s ability to meet its debts and should not materially deplete the company s assets. 5.4 Restrictions on target If the target in question is a private company, there are no restrictions on issuing guarantees or security or financial assistance for the acquisition of its shares. acquisition and (b) giving assistance for that purpose is only incidental to achieving some larger purpose of the company, and the assistance is given in good faith in the interests of the company. 5.5 Other restrictions The giving of financial assistance by the company should not result in a reduction of net assets of the company. In addition, where there is a reduction in net assets, the financial assistance should be provided out of distributable profits. 5.6 Release of typical forms of security For charges relating to immovable properties, the Land Acts provide for release by way of registration of discharges at the designated land registries. For the debenture, release is by way of registration of a Memorandum of Satisfaction of Debenture at the Companies Registry. For motor vehicles this is by way of registration of fresh transfer forms in favour of the registered owner. For shares, this will be by way of release of the pledged shares to the owner together with the blank transfer forms. In respect of financial instruments traded on the stock exchange, the release is by way of a pledge discharge form which is completed by the lender and sent to the Central Depository and Settlement Corporation accompanied by a letter requesting the release of the shares. 5.7 Rules governing the priority of competing security interests In our jurisdiction, priority is determined by registration of a security as stipulated by the Land Acts and the Companies Act. The security that is registered earlier in time acquires priority. A lender can agree to have their debt subordinated through a subordination agreement with another lender. Priority of secured creditors is subject to any inter-creditor arrangements between the creditors. The Insolvency Act does not contain any specific provisions recognising and allowing enforcement of subordination agreements between lenders, but it prioritises payments to secured creditors. However, where the lenders are secured, their claims will rank in priority to the claims of all unsecured creditors and unsubordinated creditors save for those whose claims are preferred solely by any bankruptcy, insolvency, liquidation or other similar laws of general application. In respect of a public company (or a subsidiary of a public company) such company (or any of its subsidiaries) is prohibited from granting financial assistance to facilitate acquisition of its shares unless (a) the company s principal purpose in giving the assistance is not for the purpose of the 8

9 Law and Practice KENYA 6. Enforcement 6.1 Circumstances in which a secured lender can enforce its collateral A lender is entitled to enforce its collateral where an event of default (as provided under the security document) has occurred. The remedies available include: exercise of statutory power of sale, appointment of a receiver/receiver manager/ administrator, leasing the charged land, entering into possession or suing for the money. For guarantees, enforcement is by suing the guarantor for the outstanding amount in a court of law. A secured lender is ordinarily required to notify the borrower and, in the case of collateral issued by a third party, such third party of the occurrence and intention of the lender to enforce its collateral. Statutory notices are required in the case of immovable property to comply with the terms of the Land Act, 2012 and the Land Registration Act, The restrictions applicable for the exercise of the remedies available are provided by statute and these include requirement as to proper execution and attestation, stamping and registration of the instrument. 6.2 Foreign law and jurisdiction The choice of a foreign law as the governing law of the contract will be upheld unless the subject matter is immovable property situated in Kenya or on public policy considerations. 6.3 A judgment given by a foreign court A judgment given by a foreign court or an arbitral award against a company would be enforceable in our jurisdiction, pursuant to the Foreign Judgments (Reciprocal Enforcement) Act and the Arbitration Act and subject to the conditions set out therein, such as public policy considerations. 6.4 A foreign lender s ability to enforce its rights Note: not all contractual obligations are enforceable. For example, where the rights or obligations involve enforcement of foreign revenue or penal laws, a Kenyan court may decline to enforce the same. 7. Bankruptcy and Insolvency 7.1 Company rescue or reorganisation procedures outside of insolvency There are no formal company rescue or reorganisation procedures outside insolvency proceedings. 7.2 Impact of insolvency processes In Kenya, the statutory moratorium which takes effect once a company s directors propose a voluntary arrangement operates as a stay and prevents secured creditors from enforcing their securities against a defaulting borrower. 7.3 The order creditors are paid on insolvency The order in which creditors are paid on a company s insolvency depends on whether the creditors are secured or unsecured. The debts of secured creditors are paid prior to preferential debts set out in the Insolvency Act. The debts of unsecured creditors are paid after secured creditors and upon payment of preferential debts. 7.4 Risk areas for lenders Certain unsecured creditors would enjoy preference or priority by reason of law. Assets comprised in floating charges must be used to satisfy liquidation expenses in priority to the creditors secured by the floating charge if other funds are not available. 8. Project Finance 8.1 Introduction to project finance Project finance has been used to finance both the private sector and state-owned entities. On the Government sector front, Kenya s Vision 2030 blueprint has identified the development of world-class infrastructure as one of the key pillars. There is, however, an infrastructure funding gap with the need to resort to the private sector to mobilise the necessary capital; this resulted in the enactment of the Public Private Partnerships Act, 2013 ( PPP Act ) as a way of attracting private sector capital to, and private sector participation on, traditionally government-led infrastructure projects. Some of the proposed Public Private Partnerships ( PPP ) projects include: the Second Nyali Bridge, dualling of Mombasa-Nairobi Highway, Operation and Maintenance of Nairobi-Thika Super Highway, Operation and Maintenance of Nairobi Southern By-pass and dualling of Nairobi- Nakuru Highway. On the private sector front, project finance has since been used to finance mainly independent power producers, on projects utilising all manner of technology ranging from wind, solar, geothermal, coal-fired, hydro, etc. Project finance in Kenya has mainly been provided by Development Finance Institutions (DFIs) and foreign commercial banks with minimal involvement of local commercial banks. The relevant legal framework varies depending on the sector under which the project falls. However, some of the laws which would apply to project finance transactions across virtually all sectors include: the Constitution of Kenya, 2010; the PPP Act and Regulations made thereunder; the Companies Act, 2015; the Law of Contracts Act, Chapter 23; the Insolvency Act, 2015; the Consumer Protection Act, 2012; the Arbitration Act, 1995, the Land Act, 2012, the Land Reg- 9

10 KENYA Law and Practice istration Act, 2012; the Income Tax Act, the Value-Added Tax Act and the Stamp Duty Act. 8.2 Overview of public-private partnership transactions PPPs are just at the take-off phase in Kenya. Kenya has published a list of 47 infrastructure projects (National Priority List of PPP Projects) which are set to be implemented as PPPs for instance, the Second Nyali Bridge PPP Project, in Mombasa County. The substantive legislation is the PPP Act under which there has been enacted the Public Private Partnerships Regulations, There is also the proposed Public Private Partnerships (County Governments) Regulations 2014, which will govern PPPs by county governments. Other relevant legal framework would be the sector-specific laws ie, laws on energy for PPPs in the energy sector, laws on roads, railway and air transport for PPPs in these sectors, laws on pipelines, oil and gas, for PPPs in the oil and gas sector, laws on sports for PPPs in the sports sector, etc. Some of the legal restrictions and/or obstacles to successful implementation of PPPs in Kenya include the following: PPPs and the governing legal framework are quite green in Kenya. There is thus no precedent on which to leverage on. Due to the green nature of PPPs, feasibility studies have shown that their successful roll-out would require amendments of a myriad of other statutes or fresh statutory enactments. Such amendments or enactments, as the case may be, take time, thereby delaying project implementation. Kenya s institutions do not have adequate capacity to, inter alia, structure bankable PPPs and implement them successfully. As a result, there is reliance on external consultants in virtually all instances, making the process costly. The inter-relation between the national and county governments. Acquisition of project land is subject to a lengthy legal procedure and is prone to litigation. The procurement process is highly prescribed and is also prone to litigation. Numerous authorisations implementation of PPP projects requires obtaining a huge number of authorisations, at both the national and county government levels. Lack of political goodwill, especially where there is proposed payment of user charges for infrastructure projects such as roads, railways, etc. 8.3 Government approvals, taxes, fees or other charges For a project finance transaction, it is necessary to obtain government approvals. While each sector has its own specific approvals, some of those which cut across the board include an Environmental Impact Assessment Licence from the National Environmental Management Authority and a project development permit from the local county government. Where the project is being implemented as a PPP, approvals by the PPP Unit and the PPP Committee are necessary irrespective of the sector. The fees or charges that would be payable in a project finance transaction include fees to the relevant government authorities in obtaining permits, stamp duty and registration fees payable on registrable securities like charges and debentures. Some of the project finance transaction documents which require registration include charges, debentures and easements or way-leaves, as the case may be. 8.4 The responsible government body This depends on the relevant sector. For instance, in the energy sector, the responsible government bodies would be the Ministry of Energy & Petroleum, Energy Regulatory Commission and The Kenya Power & Lighting Company Limited, where the off-taker is the national utility company. In road transport, the responsible government body would be the Ministry of Transport, Infrastructure, Housing and Urban Development and the respective road agency responsible for the subject road. In the port sector, the responsible government body would be the Kenya Ports Authority, and where the project is a PPP, the PPP Unit and the PPP Committee would be involved. There has been no history of state ownership of infrastructure projects. However, there is now a move towards having the government hold a stake in infrastructure projects. For instance, the PPP Act provides that a project company which is established to implement a PPP project may include a public body as a minority shareholder in the company. 8.5 The main issues when structuring deals The main issues that need to be considered when structuring a project finance deal include the following: source of revenue for the project company during operations; tariff, if applicable; term of the project; change in tax; change in law; political risk, where the counterparty is a state entity, and the effect; default and termination; force majeure; lenders rights; governing law; and dispute resolution. The legal form of the project company varies depending on the nature of the project. All PPPs are required to be imple- 10

11 Law and Practice KENYA mented through a company incorporated in Kenya, while other projects such as non-ppp power projects by independent power producers may be implemented through either a locally incorporated subsidiary or a branch of a foreign company. The typical sources of funding include equity, debt and grants from development finance institutions. The laws relevant to project companies vary depending on the sector in which the project falls. However, the Companies Act 2015, would apply to all project companies, whether a subsidiary or a branch of a foreign company, without regard to the relevant sector. The most common restriction on foreign investment in project finance transactions is from a land perspective. In this regard, foreigners are not allowed to own freehold land and this is usually a key factor to consider when structuring project land. Further, the government may impose a condition that a certain stake in the project company be locally held when structuring a PPP. Treaties have played a passive role in project finance transactions in Kenya. However, one of those which has a more significant role in Kenya is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. 8.6 The acquisition and export of natural resources Some of the issues and considerations include: procurement method applied in awarding the concession; the term of the underlying contract, which in most instances takes the form of a Production Sharing Agreement; termination of the contract; revenue sharing between the private party investor and the government; government participation; royalties payable to the government; local content requirements; force majeure; and the governing law and dispute-resolution mechanism. Iseme, Kamau & Maema Advocates IKM Place, First Floor, Tower A 5th Ngong Avenue, off Bishops Road PO Box Nairobi Kenya Tel: Fax: info@ikm.co.ke Web: Environmental, health and safety laws The primary environmental, health and safety laws include the Constitution of Kenya 2010, which has no specific regulatory body, the Environmental Management and Co-ordination Act, 1999 and the Regulations made thereunder. The overseeing regulatory body is the National Environmental Management Authority and the Occupational Safety and Health Act The overseeing regulator is the Director of Occupational Safety and Health Services. 9. Islamic Finance 9.1 Overview of the development of Islamic finance Islamic financing commenced in Kenya in The first two fully-fledged Islamic banks were launched in In addition to the Islamic banks, the existing commercial banks have been offering shari a-compliant products along with their mainstream financial products. The government and regulatory bodies have expressed support of Islamic finance and intends to issue its first ever sukuk bond in In order to accomplish this, the government is seeking to create an enabling framework by reviewing the existing laws governing Islamic financing. 9.2 Regulatory and tax framework for the provision of Islamic finance Kenya has in place laws and regulations that recognise Islamic Banking products. The Banking Act was amended in 2008 to allow inclusion and recognition of the concept of returns as consideration for money lent/borrowed as opposed to interest. However, the existing law does not provide adequate guidance on Islamic contracts acceptable in Kenya and there is no specific regulatory and tax framework for provision of Islamic finance in our jurisdiction. Kenya has yet to enact a separate or specific statute governing Islamic finance. The current obstacles with respect to Islamic finance include the lack of recognition of shari a principles as these are not considered part of the applicable laws. The Kadhis Courts, which deal with matters relating to Islam, do not have jurisdiction to determine disputes relating to contractual relations. In addition, the lack of a regulatory framework has seen Islamic financial products being listed as non-performing loans due to their interest-free nature. The expected legislative changes include amendments to the Banking Act, the Stamp Duty Act, the Land Act, the Land Registration Act and the Value Added Tax Act. The Takaful Insurance Regulations have already been drafted by the Insurance Regulatory Authority. 11

12 KENYA Law and Practice 9.3 Requirements for Islamic banks and takaful operators to operate The procedures for licensing of Islamic banks are the same as for the licensing of conventional commercial banks since there is no statutory framework for Islamic banking. Corporate governance structures for shari a compliance are in place but gaps remain. Banks offering Islamic banking products have shari a compliant Boards. Islamic banks are also subject to Central Bank regulations and Prudential guidelines. 9.4 Shari a-compliant products and transactions The assets of Islamic banks comprise mostly financing items, which in turn, largely consist of risk-sharing instruments based on Musharakah contracts. 12