Project Finance 2020 Comparisons

Last Updated November 03, 2020

Contributed By Anjarwalla & Khanna

Law and Practice


Anjarwalla & Khanna (A&K) is noted for its expertise in handling large projects and infrastructure matters in Kenya, with a dedicated team of two partners and six associates in offices in Nairobi and Mombasa. The firm’s dynamic energy and projects practice handles project finance and is regularly engaged in the financing of the most significant power and infrastructure projects in Kenya and Africa. The power practice covers various sectors, including solar, hydro, wind, geothermal, heavy fuel oil, gas and coal, while the infrastructure practice covers road, rail, waste management, construction and telecommunications. A&K is the founder and key driver of ALN, an alliance of leading law firms which is currently in 16 key African jurisdictions, including the continent's gateway economies. A&K has been involved in several leading and ground-breaking transactions in the region, including Lake Turkana Wind Power, Kipeto, Malindi Solar, Kenya Airways and transactions in Madagascar, Zambia, Tanzania, Sierra Leona and South Africa.

Energy Sectors

There is a long history in Kenya of power projects being undertaken by independent power producers (IPPs) in Kenya, using traditional project finance structures (eg, Tsavo Power and Rabai, which date back more than a decade). Following (i) the enactment of various pieces of legislation, such as the Public Private Partnerships Act, 2013, the Public Private Partnerships Regulations, 2014, the Public Procurement Act, 2015, the Energy Act, 2019 and the Public Procurement and Asset Disposal Regulations, 2020; and (ii) the introduction of unbundling policies in the energy sector, several public-private partnership (PPP) projects are currently being developed, most of which will be completed using traditional project finance structures.

Other Sectors

Project finance structures are expected to be used in other sectors, particularly in infrastructure projects due to the fact that as the debt of the Government of Kenya (GOK) increases, the GOK is under increasing pressure to move away from engineering, procurement and construction (EPC) and engineering, procurement, construction and financing (EPC-F) structures to project financing structures. Therefore, it is expected that the GOK will use innovative project financing and public-private partnerships to develop roads, water facilities, rail, ports, housing and other infrastructure projects in the future.

Developers typically collaborate with international companies such as Globleq, Actis, AIIM, Mota-Engil, Ormat, Elicio, Berkeley Energy, Engie, responsAbility and Frontier. Local sponsors are also present (eg, Centum, Gulf Energy, Craftskills Wind Energy and Triumph Power). 

In terms of lenders, European development finance institutes (DFIs) primarily act as senior lenders in Kenya (eg, Proparco, FMO, EIB, DEG, etc). Other DFIs, such as the Overseas Private Investment Corporation and the African Development Bank, also act as senior lenders in Kenya, as do South African commercial banks (Standard Bank, Nedbank and Absa) and Chinese commercial banks (ICBC). 

Key Legislation

The governing statute for PPPs in Kenya is the Public Private Partnerships Act, 2013 (the Kenya PPP Act), which has been in force since February 2013. The Public Private Partnerships Regulations, 2014 (the Kenya Regulations), which put the Kenya PPP Act into operation, were brought into force on 17 October 2014. Other applicable regulations worth noting are the Public Private Partnerships (County Government’s) Regulations, 2014, which apply to PPP projects undertaken by county governments; the Public Private Partnerships Project Facilitation Fund Regulations, 2017, which govern the scope and application of the facilitation fund provided for under the PPP Act; and the Public Private Partnerships Act, Petition Committee Guidelines, 2014, which regulate petitions made by bidders during the process of tendering for, and entering into, a project agreement under the Kenya PPP Act.

One of the other key pieces of recently introduced legislation is the Energy Act, 2019. The Energy Act has overhauled the energy sector through the establishment of several new energy sector entities to replace those existing, including the Energy and Petroleum Regulatory Authority (EPRA) and the Energy and Petroleum Tribunal (EPT). The EPRA is the successor to the Energy Regulatory Commission, which was previously solely responsible for the economic and technical regulation of the energy sector. The EPT is the successor to the Energy Tribunal and has a wider jurisdiction than its predecessor (ie, the EPT can hear and determine appeals relating to the energy and petroleum sector arising not only from the Energy Act and the Petroleum Act, 2019 but also from any other written law).

The Energy Act clarifies national and county government functions in relation to energy and accordingly vests all renewable and geothermal energy resources in the national government. The Energy Act also establishes a Renewable Energy Feed-in Tariff System with the aims of, among other things:

  • catalysing the generation of electricity through renewable energy sources;
  • encouraging locally distributed generation thereby reducing demand on the network and technical losses though the transmission of electricity over long distances; and
  • encouraging uptake of renewable energy technology.

A feed-in tariff policy was issued in 2008 and subsequently revised in 2012 (the FiT Policy) and there is a proposal to amend the FiT Policy to provide for an energy auction mechanism for the solar and wind energy markets that will promote competitive bidding and lead to a cost-effective renewable energy programme in Kenya. The transition is part of the recommendations contained in the Updated Least Cost Power Development Plan for the study period 2017–2037.

Areas of Difficulty

The main challenges with respect to PPP transactions are set out below. 

Protracted and complex planning and negotiations

In previous years, most of the project risk was allocated to the government or government agencies (eg, by way of letters of support, which would cover payment and performance obligations). At present, the risk allocation process is more nuanced. For example, the government is generally willing to assume certain political risks along with the risks related to changes in tax rates, laws and regulations. Developers, on the other hand, are generally willing to take on construction risk, technology risk, operational performance risk, funding risk, human resources risk and socio-environmental risk. The allocation of other risks such as economic risk (inflation, interest rates and exchange rates), fuel supply risk, inter-connection risk and certain kinds of political risk (eg, terrorism) are highly negotiated issues that can cause delays in the conclusion of a transaction. 

PPPs usually involve heavy planning and logistics, which may take at least three years before implementation commences. The planning includes the initial PPP project proposal, feasibility studies, the submission of tender documents, the pre-qualification of bidders, proposal preparation, bid evaluation (both financial and technical) and contractual negotiations. Most stakeholders are unaware of the time required for matters such as the mobilisation of capital, multiple approvals (such as environmental impact assessments), and the appointment of technical, legal and financial professionals, etc. 

Out of necessity, a single PPP project will require the involvement and collaboration of many government agencies and departments. Consultation between these various departments is central during the structuring and implementation stages of a project but can be protracted. 

Limited institutional capacity

There is limited institutional capacity in the public sector able to advise and deliver on multiple PPP projects at a time. Where projects are being developed solely by local private developers, similar issues around capacity can arise.

  • Government expertise – there is limited expertise and precedent to determine whether projects should be prepared on a PPP basis or a public-only basis, and, if on a PPP basis, the type and extent of private partnership needed. The risk allocation process is also not entirely clear (as mentioned previously). 
  • Limited private sector experience – private sector players often have limited experience as developers or investors and have inadequate access to technical staff skilled in structuring, planning and executing PPP projects. 

Inadequate funding

There are significant financial constraints in undertaking PPP projects in Kenya due to the high funding costs. Factors that contribute to these high funding costs include: 

  • the credit rating of the GOK and government institutions – as sovereign debt levels increase, the stability of the GOK’s current credit rating remains uncertain (furthermore, state corporations and parastatals do not have international credit ratings); and
  • the absence of clear mechanisms for assessing credit risk – the lack of a clear mechanism for effectively assessing credit risk in PPP transactions dampens lenders’ interest, making it difficult for the project sponsors to access banks and capital markets for funding.

It has recently been reported that due to competing needs for resource allocation in the country, Kenya will only undertake a few PPP projects out of more than 100 projects previously identified as being important by the GOK due to inadequate finances.

The inadequate financing for PPP projects in Kenya is exacerbated by the lack of local players in the long-term lending market, which is currently dominated by DFIs. The government hopes that the Kenya PPP Act will help to create an appetite for long-term lending, which will persuade local banks and financial institutions to enter the market and develop products that can be used to finance PPPs. 

Limited experience in unsolicited proposals

Unsolicited proposals, known as privately initiated investment proposals (PIIPs) under the Kenya PPP Act, have attracted increasing interest from private sector players. Under a PIIP, the private party initiates and submits a proposal to undertake a PPP project to a contracting authority.

Although the increased use of PIIPs may offer opportunities for development, Kenya’s PIIP framework does not prescribe a competitive process for evaluating PIIPs, raising public scepticism, particularly in high-profile cases. To ensure that the potential benefits of PIIPs are leveraged and their risks mitigated, further guidance may be needed on their evaluation. 

Limited government support

The PPP Act sets out a framework for the issuance of government support measures to PPP projects. However, the GOK recently reviewed its policy on issuing letters of support under the “Policy on the Issuance of Government Support Measures in Support of Investment Programmes, 2018” (the 2018 Policy). The 2018 Policy has significantly narrowed the scope of political risks that the GOK is willing to cover for PPP projects and has generally been received negatively by the market and lenders.

Although some projects have been banked on the basis of the revised policy, it remains to be seen whether investors, who typically consider government support in relation to political risks to be crucial to the bankability of projects in Kenya, will be willing to accept the reduced scope of coverage provided by the GOK under the 2018 Policy or if the GOK will be driven by the market to review its new stance.

The main issues that need to be considered in structuring project finance transactions are the identification of risk and its allocation between the public and private sectors. Projects are mostly funded through debt, with the typical debt to equity ratio being in the range of 70–80% debt and 20–30% equity. 

Debt is usually provided by DFIs. For projects funded using an A/B structure, DFIs and commercial banks act as senior lenders, whilst a handful of DFIs act as mezzanine lenders (eg, DEG, Finnfund).

Equity is usually provided by the project sponsor through share capital and/or shareholder loans, subject to the applicable tax implications and deal structure. 


A wide range of assets, whether present or future, can be taken as security in Kenya, including land, shares, receivables, bank deposits, aircraft, ships, and tangible and intangible assets. Below is a brief summary of the typical security that can be created over such assets.

A charge may be taken over land (including buildings). The form of instrument and the execution requirements of security over land must conform to the mandatory requirements of the land laws. Under the Constitution of Kenya, a person who is not a citizen of Kenya may only own land on the basis of a leasehold tenure of a period not exceeding 99 years.

A charge or a security right may be created over specific assets, such as plant and machinery or motor vehicles. 

A company may create debenture security over all its present and future assets. However, in order to conform with land law requirements, land must be separately charged. 

Intellectual property rights and rights under contract (including insurance contracts) may be assigned by way of security to a lender. 

A security interest in shares may be created by way of a charge over shares or a memorandum of deposit of shares. In addition, it is recommended that the chargor executes blank share (stock) transfer forms and surrenders the transfer forms, and the original share certificates in respect of the shares, to the chargee as well as other documents. Appropriate authority to undertake the transfer should be included in the security documents, or the chargor should execute an irrevocable power of attorney granting the security holder rights to sell the shares. This will assist in the event of enforcement. 

General Perfection Formalities

Stamp duty

Subject to certain limited exemptions (eg, instruments executed in respect of transactions relating to loans from foreign sources received by investors in the energy, roads, ports, water or railway sectors, all of which are exempt from stamp duty), stamp duty is payable on the majority of security documents. The stamping process must be completed within 30 days of executing the document (or, if the security is executed outside Kenya, within 30 days of the security document being brought into Kenya). The person taking security bears the stamp duty cost. However, the borrower is typically required to pay these and all other costs relating to the security. The failure to stamp a security document can result in a fine, the inability to register the security document, and the security document being declared inadmissible as evidence in any court proceedings. 

Stamp duty is typically payable at the rate of 0.1% of the amount secured by the principal security document. Supplementary security documents attract stamp duty at the nominal rate of KES200 (approximately USD2). The rate of stamp duty on collateral security is 0.05% of the amount secured under the collateral security. For the purposes of assessing stamp duty, a principal security is the security identified by the parties as the main security, a supplementary security is an additional security provided by the security provider who is providing the principal security and a collateral security is an additional security created by a security provider other than the one providing the principal security. Only instruments that create security rights over movable assets that require registration at the Collateral Registry (recently established in respect of movable assets) are exempt from the payment of stamp duty. 


Registration is required in order to provide priority to the lender in the event of enforcement, and to achieve third-party effectiveness. For land, the security has to be registered at the relevant land registry (if the landowner is a company, registration of the security at the Companies Registry is also required). Registration at the Companies Registry must be made within 30 days of the creation of the security in order for the security to be valid against creditors and a liquidator of the relevant company. The Movable Property Security Rights Act, 2017 (the MPSRA) facilitates the use of movable property as collateral for credit facilities by establishing an office of the Registrar and an electronic collateral registry for security rights over movable assets (the Collateral Registry). Registration at the Collateral Registry is not mandatory but is prudent since it would achieve third-party effectiveness. A security right over movable assets of a company that is not registered at the Collateral Registry is void against the liquidator of the company.

Floating charges, or other similar security interests over all present and future assets of a company, are permitted and would be achieved by the creation of an all-assets debenture.

The costs of registering collateral security interests are as follows: 

  • Land Registry – KES500 (approximately USD5) for each security document; 
  • Companies Registry – the registration fees depend on the value of the secured amount and will be between KES2,000 (approximately USD20) and KES14,000 (approximately USD140); and
  • Collateral Registry – no registration costs are payable. 

A general description of the types of collateral covered is generally sufficient to grant a valid security interest. It should be noted that, in relation to security over land, specific description of the land is required. A security agreement creating a security right over specific movable assets must describe such assets in a manner that reasonably allows their description by way of specific listing, category, the type of collateral and quantity. It is sufficient if the description in the security agreement describes all the movable assets, or all assets within a generic category, of the security provider. The general description should not be so vague as to make it impossible to reasonably identify the collateral item.

The restrictions on the grant of security or guarantees depend on various factors including the type of lending or borrowing institution and whether it belongs to a regulated industry such as banking or insurance. Below are some of the factors for consideration.

  • Insurance – pursuant to Section 51 of the Insurance Act (Chapter 487), an insurance company is limited with regard to issuing charges over its assets, the value of which should not exceed 10% of its total assets. 
  • Authority – companies must have due authority under their constitutional documents in order to create security. 
  • Consent – some securities require consent from third parties, such as the Commissioner of Lands in the case of certain leased property, or the Kenya Ports Authority for land at a port. 
  • Commercial benefit – a company providing third-party security or guarantees must show that it is deriving some commercial benefit from the guarantee arrangement; directors of a company incorporated in Kenya have a fiduciary and statutory duty to act in the best interests of the company and the directors of a corporate guarantor would be in breach of their fiduciary duty to the company if they resolved that the company should provide the third-party security or guarantee in circumstances where there is no commercial benefit. 
  • Financial assistance – the Companies Act No 17 of 2015 prohibits the giving of financial assistance, whether directly or indirectly and in any form (including issuance of a guarantee), in the following circumstances:
    1. if a person is acquiring or proposing to acquire shares in a private company, a public company that is a subsidiary of that company is prohibited from providing financial assistance for acquisition of shares in the private company; and
    2. if a person is acquiring or proposing to acquire shares in a public company, the public company or a subsidiary of that public company is prohibited from providing financial assistance for the acquisition of shares in the public company before or at the same time as the acquisition takes place.

Lenders can satisfy themselves with respect to the absence of other liens on their collateral by undertaking due diligence, which should include searches at the relevant registries (see 2.3 Registering Collateral Security Interests).

Typically, the release of a security interest over an asset in Kenya involves the signing, stamping and registration of a discharge of the security at the relevant registry in which the security has been registered. In relation to security rights created over movable assets, where the secured creditor has filed an initial notice in respect of those security rights at the Collateral Registry, the secured creditor is required to file a cancellation notice where the security provider has been released from all obligations, or an amendment notice where the security provider has been released from some of the secured obligations.

The circumstances under which a secured lender can enforce their security are largely dependent on the terms of the security agreement. Typically, the agreement will contain covenants to be observed by the borrower, and if these are breached then the lender has the right to terminate the agreement and enforce the security. Furthermore, it is also typical for security agreements to contain certain events, the occurrence of which gives the lender the right to enforce the security (commonly referred to as events of default). These events of default include issues such as the insolvency of the borrower, a change of control in the borrower without lender consent and the cessation of business by the borrower. 

Charge Over Land

In the case of immovable property, the steps are set out under statute (ie, the Land Act No 6 of 2012 and the Land Registration Act No 3 of 2012). The procedure also depends on whether the charge is informal or formal. A formal charge is perfected and duly registered at the relevant Land Registry. 

Formal charges

The chargee may exercise the following enforcement remedies for formal charges:

  • sue the chargor for any money due and owing under the charge;
  • appoint a receiver to demand and recover income derived from the charged land;
  • lease the charged land or, if the charge is of a lease, sublease the land;
  • take possession of the charged land; or 
  • sell the charged land via statutory power of sale (the chargee may purchase the charged property with leave of the court).

Enforcement of the above remedies is subject to the provisions provided in the Land Registration Act. 

Statutory power of sale

The steps that would be taken by a chargee wishing to exercise its power of sale are as follows: 

  • the issuance of a three-month statutory notice to the chargor (the notices must be in the form and manner prescribed under the Land Act and served on the persons prescribed);
  • the issuance of a 40-day notice to sell the property to the chargor;
  • the issuance of 45-days’ notice by the auctioneer to the chargor, as required under the Auctioneers Act, 1996;
  • the undertaking of a forced sale valuation by the chargee prior to exercising its right of sale; and
  • if the sale is by way of public auction and not a private contract, the chargee shall ensure that the sale is publicly advertised in the prescribed form and manner, and that the laws applicable to public auctions are complied with.

Appointment of a receiver

The steps that would need to be taken by the chargee are as follows:

  • the issuance of a three-month statutory notice to the chargor; and
  • the issuance of a 30-day notice to appoint a receiver to the chargor.

Following the issue of the statutory notices set out above, the receiver may be appointed by the chargee.


Typically, the debenture would provide for the enforcement of the security interest through the appointment of an administrator, whose conduct is governed by the Insolvency Act, 2015. Administration involves the running of the insolvent company by an administrator as a going concern. However, the debenture has to be a qualifying floating charge. The requirements that have to be met in order for the lender to have the right to appoint an administrator without court approval are as follows:

  • the debenture has to be over the whole, or substantially the whole, of the company’s assets;
  • the debenture has to expressly state that Section 534 of the Insolvency Act applies to it; and 
  • the debenture has to expressly give the lender power to appoint an administrator.

However, where the borrower is placed under liquidation or administration by way of a court order, the lender cannot exercise its right to appoint an administrator but does retain the contractual right contained in the debenture (if it is a fixed debenture) to appoint a receiver. However, the receiver’s power is restricted to the fixed assets covered by the debenture, and the receiver does not have any right to operate the company or act as agent of the company in the manner of an administrator. The steps that are to be followed prior to the appointment of a receiver and the process of receivership (including the receiver’s powers) are also derived from the debenture.

Restrictions and Consents

Certain approvals and consents need to be procured before the lender can enforce its security and effect the transfer of the secured assets. Failure to procure these consents and approvals may restrict the lender’s ability to enforce its security. The nature of the approval or consent required depends on the nature of the security, as discussed below.

In the case of security over land:

  • spousal consent is required to be obtained from a chargor’s spouse if the chargor is married, if the chargor is not married it is typical for a lender to require that the chargor issues a sworn affidavit declaring his or her marital status;
  • Land Control Board consent is required if the security being created is a charge over “agricultural land”, accordingly, a lender should establish in advance whether land being secured is in fact “agricultural land” as provided for under the Land Control Act (Chapter 302, Laws of Kenya);
  • if land is held under a grant from the GOK, it is likely that the grant will require consent to charge, to be obtained from the Commissioner of Lands; and
  • in the case of other leasehold land, it would be necessary to establish from the lease if any consents are required to be obtained, for example, from the head lessor.

In the case of a charge over shares the requisite approvals may need to be obtained from the relevant competent authorities, such as the Competition Authority (if shares are transferred following an enforcement) and the Energy and Petroleum Regulatory Authority. 

Where the parties to a contract expressly stipulate that the contract shall be governed by a particular law, that law will be the law governing the contract. The courts of Kenya will therefore observe the choice of foreign law (for example, English law or New York law) as the governing law of the contract, provided that the choice of law was made in good faith and not for extraneous purposes or to perpetuate fraud or any other illegal purpose, and that there is no objection on the grounds of public policy. Where there are strong reasons or exceptional circumstances warranting a departure from the terms of a clause subjecting a contract to foreign law, Kenyan courts retain the discretion to assume jurisdiction. However, the burden of proving the existence of such exceptional circumstances lies on the person seeking to avoid the choice of governing law.

The choice of law or legal system is construed as referring to the substantive law of that state and not to its conflict of laws rules or procedural rules. Therefore, if a contract stipulates, for example, that English law is to apply, the court would uphold English law but apply Kenyan conflict of laws and procedural rules.

Enforcement of a foreign arbitral award in Kenya is mainly governed by the Foreign Judgments (Reciprocal Enforcement) Act (the Foreign Judgment Act), the Arbitration Act, 1995 (the Arbitration Act) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral awards, New York, 10 June 1958 (the New York Convention).

The Foreign Judgment Act is applicable to the enforcement of arbitral awards given in countries outside Kenya which accord reciprocal treatment to judgments given in Kenya. Australia, Malawi, the Seychelles, Tanzania, Uganda, Zambia, the UK and the Republic of Rwanda are the current designated countries. Section 13 of the Foreign Judgment Act empowers the Minister to declare a country to be a reciprocating country if the Minister is satisfied that said country has made or will make provisions for the enforcement in that country of judgments given by superior courts in Kenya. 

The Arbitration Act and the New York Convention are applicable to the enforcement of arbitral awards rendered in countries which are signatories to the New York Convention. In order for an arbitral award rendered outside Kenya to be recognised and enforced in Kenya, the country in which the arbitral award is rendered has to be either a signatory to the New York Convention or a designated country under the Foreign Judgment Act.

If the arbitral award is rendered in a country which is neither a designated country under the Foreign Judgment Act nor a signatory to the New York Convention, the suit between the parties has to proceed to full trial in the Kenyan courts. 

For a charge over land, a foreign lender has to ensure that, if the land is freehold or designated for agricultural use, the security provider has obtained consent to charge the land from the relevant Land Control Board. It should also be noted that in the event of the enforcement of a charge over freehold or agricultural land, a foreign lender can only dispose of the land to a Kenyan citizen. A company is deemed to be a Kenyan citizen if all the shareholders of that company are Kenyan citizens.

If the insolvent company in Kenya has assets in another jurisdiction that are secured, the provisions of cross-border insolvency will apply, particularly the provisions of the Model Law on Cross-Border Insolvency adopted by the United Nations Commission on International Trade Law of 30 May 1997. The secured creditor will need to familiarise itself with the insolvency legislation of the country where the assets are located and determine whether, for example, court approval in that jurisdiction is required. In Kenya, where a company in a foreign jurisdiction is being liquidated, leave of court will be required to realise an asset in Kenya.

Foreign lenders are not restricted from granting loans in any currency in Kenya.

The granting of security to foreign lenders is not restricted or impeded in any way under Kenyan law.

There are no laws that deal with foreign investment specifically. However, Kenya does have the Kenya Investment Authority, established under the Investment Promotion Act, 2004. An investor who has a minimum investment of USD100,000 qualifies to apply for an investment certificate from the Kenya Investment Authority. Registration assists with the procurement of other applicable licences.

There has been no formal exchange control regime in force in Kenya since the repeal of the Exchange Control Act in 1995. However, certain limited conditions and procedural requirements that apply in connection with the repatriation of foreign currency from Kenya should be noted.

Pursuant to the Central Bank of Kenya Act, the Central Bank of Kenya (CBK) has issued a number of Prudential Guidelines, including the “Guidelines on Foreign Exchange” dated 1 September 2002 (the 2002 Guidelines), which are binding on all licensed banks in Kenya. The 2002 Guidelines provide that banks are to play a monitoring role in relation to foreign currency transactions, and require each bank to submit returns to the CBK on a regular basis in relation to, inter alia, foreign currency transactions.

In general terms, foreign currency is freely repatriable from Kenya, provided there is evidence of a bona fide transaction and the bank undertaking the repatriation is satisfied that the transaction is genuine. However, for any amount equivalent to USD10,000 or higher, the CBK requires that the relevant commercial bank in Kenya, remitting the funds from Kenya, notifies the CBK as to the amount and purpose of the remittance. It should be noted that the obligation is merely to notify, and that there is no need to obtain any prior consent or approval from the CBK. For any amount equal to or above USD10,000, remitting banks are required to obtain a confirmation of source of funds and, where applicable, documentary evidence to support the transaction.

There are no restrictions under Kenyan law on a project company maintaining an offshore currency account.

Please see 2.1 Assets Available as Collateral to Lenders.

In general, natural resources are owned by the GOK and held in trust on behalf of all Kenyans, whether situated on public or private land, according to the Constitution of Kenya, 2010. Any person wishing to deal with natural resources requires a licence.

With respect to land, foreigners can own land in Kenya subject to certain limitations: they can only hold land through leasehold tenures for a term not exceeding 99 years and they cannot own agricultural land. A company is deemed to be Kenyan if it is owned 100% by Kenyan citizens.

The principles of agency and trust are recognised in Kenya.

Schedule 2 of the Insolvency Act sets out the priority for preferential creditors as follows.

  • First priority claims:
    1. costs of the liquidator’s/administrator’s remuneration, and operational costs for the administration or liquidation; and
    2. reasonable costs incurred during the court proceedings, and costs incurred by a creditor to preserve an insolvent company’s assets.
  • Second priority claims:
    1. wages and salaries payable to employees up to a maximum of KES200,000;
    2. statutory deductions from employees (eg, PAYE (pay as you earn), NSSF (retirement benefits contribution) and NHIF (statutory health insurance contributions)); and
    3. other amounts required by other written law.
  • Third priority claims – unpaid taxes such as customs duty and excise duty.
  • Fourth priority claims – holders of floating charges (non-crystallised).
  • Fifth priority claims – unsecured creditors – these claims have the same priority among themselves and are payable on a pari passu basis. 

Secured assets do not form part of the insolvent’s estate, and the secured creditor has priority with respect to the secured assets and so has the right to realise the security and set off debts due to them but must account for any excess funds from the realisation, which must then be remitted to the liquidator for distribution in accordance with the waterfall described above. In the event that the secured creditor has a deficit upon realisation of the security, they will be treated as an unsecured creditor for the shortfall.

Contractual Subordination

Contractual subordination of competing interests is possible, and is usually required in instances where lenders with competing interests enter into intercreditor agreements to determine how their respective rights will be addressed in the event of enforcement. These intercreditor agreements differ depending on the parties’ mutual understanding, and they can be, for example, pari passu or prorated. They survive the insolvency of the borrower, and the liquidator or administrator will respect such agreements if they conform with the provisions of the Insolvency Act and are subject to Schedule 2 of that act, which lists the preferred creditors. 

The only legal requirement relating to the organisation of project companies is set out under the Public Private Partnerships Act, 2013, which requires a project company to be registered as a limited liability company in Kenya. However, project companies are generally Kenyan registered companies. 

Under the Insolvency Act, the directors of an insolvent company can make a proposal to the company and its creditors for a voluntary arrangement, under which the company enters into a composition in satisfaction of its debts or a scheme for arranging its financial affairs. The composition may include a consensual restructuring and/or reorganisation of the insolvent company. The courts will generally observe and respect these consensual arrangements. Once a proposal has been made and an arrangement entered into, a supervisor is appointed to oversee the arrangement, and has to prepare a report within 30 days of appointment and submit it to the court with recommendations as to whether the proposal has reasonable prospects of benefiting the company. 

A liquidator or administrator can also propose the reorganisation of the company, as their role includes the power to set up subsidiaries and transfer assets of the company. 

Commencement of an insolvency process has an overall negative effect on lenders, but the degree of that effect depends on whether the lender is secured or unsecured. 

For unsecured lenders, the insolvency process effectively diminishes their rights to realise the loan and they are usually left at the mercy of the liquidator or administrator and the outcome of the insolvency process. Unsecured creditors rank in last place in the list of creditors. 

For secured creditors, the insolvency process only limits their rights insofar as enforcement of the security is concerned. The lender cannot enforce the security without leave of the court or consent/approval of the relevant insolvency practitioner (ie, the administrator or liquidator). 

Please see 5.4 Competing Security Interests.

Risk areas for lenders primarily concern enforcement and ranking. Please see 6.2 Impact of Insolvency Process

Section 3 (2) of the Insolvency Act provides that the Insolvency Act applies to natural persons, partnerships, limited liability partnerships, companies and other corporate bodies established by any written law. It should be noted that the Insolvency Act is relatively new and has not been applied extensively, so jurisprudence on this issue, and whether it is all-encompassing, is lacking. It remains to be seen whether courts will invoke the provisions of the Insolvency Act even with regard to government corporate bodies established by statute, noting that such institutions typically have their own dissolution mechanisms in the establishing statute.

There are generally no restrictions or controls on insurance policies over project assets. However, the Insurance Act provides that only a person registered under the Insurance Act can carry out insurance business in Kenya, meaning the business of undertaking liability by way of insurance and including the effecting and carrying on of contracts of guarantee (ie, contracts effected by way of business in return for a payment of one or more premiums). Furthermore, only a person registered under the Insurance Act may carry on insurance business outside Kenya in respect of “Kenya business” as defined under the Insurance Act.

Insurance policies over project assets are payable to foreign creditors, but consent from the Commissioner of Insurance may need to be sought as the Insurance Act provides that prior written approval of the Commissioner of Insurance is required where there is a transfer of any sum of money or securities out of Kenya; whether in respect or by way of premium, reserve value, claim, management expense, profit surplus, investment income, or any other payment or sum of money that arises directly or indirectly out of insurance business. 

Pursuant to Section 35 of the Income Tax Act, Chapter 470 of the Laws of Kenya (ITA), the payment of interest to lenders (both resident and non-resident) is subject to withholding tax at the rate of 15%. However, interest payments to licensed banks in Kenya are not subject to withholding tax. The due date for payment of withholding tax to the Kenya Revenue Authority (KRA) is the 20th day of the month after the payment has been made. 

There are some sector-specific exemptions. By virtue of Legal Notice 91 of 2015, interest paid on loans advanced from foreign sources used to invest in the energy or water sectors (or in roads, railways or aerodromes) is exempt from withholding tax.

Furthermore, Legal Notice 165 of 2015 provides that payments made to a non-resident person on account of services rendered under a Power Purchase Agreement shall be exempt from withholding tax.

Where a double tax treaty exists between Kenya and a foreign country, lower withholding tax rates for interest may apply. Kenya has double tax treaties in force with a number of countries including the UK, Germany, Sweden, France, India, Zambia, Canada, Denmark, Norway, Iran, South Korea, Qatar, the United Arab Emirates and South Africa.

Pursuant to the provisions of the Stamp Duty Act, duty is charged at a nominal rate on certain financial instruments and transactions, including charges, debentures and guarantees relating to loans. However, pursuant to Legal Notice 106 of 2015, instruments executed in respect of transactions relating to loans from foreign sources received by investors in the energy and water sectors, roads, ports, railways and aerodromes are exempt from stamp duty. 

Interest on loans is tax deductible as long as it is incurred on a debt obligation that has been incurred by a person in the production of its income.

Thin Capitalisation

Where a company is a foreign controlled company, a ratio of 3:1 (debt to equity) must be maintained at all times to avoid a thin capitalisation position. This will be important from a foreign shareholder investment perspective.

A company is considered to be “controlled” by a non-resident person where the non-resident person holds 25% or more of the issued share capital in the company. “Debt” is deemed to comprise all types of financial indebtedness while “equity” is deemed to comprise all classes of share capital (including redeemable preference shares).

When a company is thinly capitalised:

  • interest expense above the thin capitalisation ratio of a thinly capitalised company is restricted as a tax-deductible expense; and
  • realised foreign exchange losses in respect of the loans advanced are not tax deductible until the thin capitalisation position is reversed.

During the construction phase, if the loan is used for capital expenditure, the interest payable will be deemed to be capital in nature and therefore not tax deductible but may be capitalised into the cost of the asset and capital allowance claimed accordingly. When normal operations commence, the interest will qualify as a tax-deductible expense.

Income Tax Reform

Kenya is in the process of reviewing its income tax regime through the Income Tax Bill, 2018 (ITB) with the aim of simplifying compliance and aligning it to international best practice within the Kenyan business context. The ITB is currently undergoing the public participation as part of the legislative process and it is expected to be enacted in the course of 2021.

The ITB proposes to reduce the thin capitalisation ratio to 2:1. The reduction in the ratio will lead to a higher interest expense restriction and result in a higher taxable income for companies that exceed the debt-to-equity ratio.

The ITB also proposes to expand the definition of “control” such that a person will be said to be in control of a company where that person:

  • holds more than 20% of the voting rights of the company;
  • has power to appoint more than half of the board of directors of a company; or
  • exercises any other form of control that the Commissioner may prescribe.

Transfer pricing rules and rules on deemed interest are applicable where a non-resident lender and the Kenyan entity are related parties. 

Transfer Pricing

Where the non-resident lender is related to the Kenyan entity (by virtue of common management or control), the interest rate charged on the loan ought to comply with the Income Tax (Transfer Pricing) Rules, 2006 (Transfer Pricing Rules), which are applied in determining the arm’s-length price of goods and services. Based on the Transfer Pricing Rules, any interest charged on loans extended to a Kenyan entity by a related non-resident lender should comply with the arm’s-length principle. 

There are no specific transfer pricing penalties in Kenya. However, pursuant to Section 18(3) of the ITA, the Commissioner of Domestic Taxes can conduct an audit and make adjustments on the taxable profit and demand tax where applicable. Any tax due and unpaid in a transfer pricing arrangement is deemed to be a tax shortfall under the provisions of the Tax Procedures Act, 2015. Any tax due arising from the transfer pricing adjustment will be demanded and an additional penalty of 5% of the tax due and interest of 1% per month will be payable for as long as the tax due remains outstanding. 

The ITB proposes to introduce a penalty of 2% of the value of the transaction where a company fails to provide transfer pricing documentation. The ITB further provides that the imposition of this penalty does not prevent the Commissioner from assessing and recovering any taxes due.

Additionally, the ITB proposes to extend transfer pricing to transactions between resident companies and non-resident companies (including unrelated entities) situated in preferential tax regimes. These are defined as regimes that:

  • have tax rates of less than 16%;
  • do not have effective exchange of information arrangements;
  • do not allow access to banking information; or
  • lack transparency regarding the details of its application, including details of corporate structure, ownership of the legal entities located in the country, beneficial owners of income or capital, or financial disclosure.

Deemed Interest

Deemed interest applies with respect to interest-free loans from a non-resident shareholder. Section 2(1) of the ITA defines deemed interest to mean an amount of interest equal to the average 91-day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loans have been provided free of interest. Where the lender is also a shareholder of the Kenyan entity and extends a loan on an interest-free basis, the Kenyan entity is required to compute a deemed interest charge based on the prevailing Treasury Bill rates and the withholding tax of 15% on interest remitted to the KRA on a monthly basis. 

The ITA does not provide a separate deemed interest rate for dollar or sterling-denominated loans, and therefore the prevailing Kenya Shilling Treasury Bill rates will apply. These rates are determined by the Central Bank of Kenya on a quarterly basis.

The ITB proposes to amend the definition of deemed interest to provide that deemed interest is triggered where a loan has been provided by a non-resident person who exercises control over a resident person, where the loan has been provided to that resident person at an interest rate that is lower than the market interest rate in the country of the non-resident. This in effect removes the possibility of providing notional interest rates for loans.

In Duplum Rule

Section 44A of the Banking Act, which applies to banks licensed by the Central Bank of Kenya, provides that a lender shall be limited in what it may recover from a debtor with respect to a non-performing loan to the maximum amount of the outstanding capital debt. In simple terms, the rule means that interest ought to stop running once it equals the unpaid principal amount. 

Project agreements with government or governmental agencies are typically governed by Kenyan law. Furthermore, all project agreements entered into pursuant to the Public Private Partnerships Act, 2013 must be subject to the laws of Kenya.

Financing agreements are governed by the preferred law of the lender, which has typically been English law or New York law.

All project agreements are subject to the laws of Kenya, including: 

  • power purchase agreements;
  • GOK support letters;
  • land lease agreements;
  • concession agreements/project agreements; and
  • key permits.

In some instances, parties have also used Kenyan law under their construction agreements.

Anjarwalla & Khanna

ALN House
Eldama Ravine Close, off Eldama Ravine Road

+254 20 364 0000
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Law and Practice in Kenya


Anjarwalla & Khanna (A&K) is noted for its expertise in handling large projects and infrastructure matters in Kenya, with a dedicated team of two partners and six associates in offices in Nairobi and Mombasa. The firm’s dynamic energy and projects practice handles project finance and is regularly engaged in the financing of the most significant power and infrastructure projects in Kenya and Africa. The power practice covers various sectors, including solar, hydro, wind, geothermal, heavy fuel oil, gas and coal, while the infrastructure practice covers road, rail, waste management, construction and telecommunications. A&K is the founder and key driver of ALN, an alliance of leading law firms which is currently in 16 key African jurisdictions, including the continent's gateway economies. A&K has been involved in several leading and ground-breaking transactions in the region, including Lake Turkana Wind Power, Kipeto, Malindi Solar, Kenya Airways and transactions in Madagascar, Zambia, Tanzania, Sierra Leona and South Africa.