Africa has a capital problem. “Foreign Direct Investment to the continent declined by 16% in 2020 to $40bn, from $47bn in 2019,” says a report from the UN Conference on Trade and Development.
More broadly, even $50bn a year is far short of what is needed; even if remittances add another $50bn.
The IMF estimates that Sub-Saharan Africa could face a financing gap of $290bn between 2020 and 2023, while the African Development Bank reckons $120m a year is needed for building and maintaining infrastructure alone.
But Njuguna believes his institution can help catalyse some of this investment.
He points to the growth of recently opened financial centres in Asia and the Middle East, and the role they play in pulling in investors who may otherwise be cautious of emerging market destinations.
Nairobi is a jurisdiction that is catching up with South Africa in many ways. We have got […] some better opportunities.”
“The financial centres allow these countries to engage with investors in English, and common law,” says Njuguna, “whereas perhaps some of the other jurisdictions speak different languages, and have different legal systems.”
Announced in July by President Uhuru Kenyatta, and set to launch by the end of the year, the NIFC already has an anchor client in the shape of Prudential, the UK-based underwriter, which has chosen Nairobi for its African HQ. It will be joined in the NIFC by Mayflower Gold, a Kenyan gold miner that will dual list $14m in shares on the London and Nairobi stock exchanges.
Beyond pulling in capital from around the world, the NIFC also wants to deepen the pools of capital available for domestic investors. In particular, to lean on the NIFC to provide “a more predictable environment”, says Njuguna.
This might include securing work permits – something that will be expedited at the NIFC – but also the tax environment, particularly for private equity funds who invest with a five-to-10-year time horizon.
“Say the capital gains tax is 5%, which it is in Kenya today, they may wonder ‘in five years or seven years, when we exit that investment, what will the capital gains tax be? Could it be 20-30%? And that introduces an element of unpredictability,” says Njuguna, who reveals that the NIFC is hoping to lock in rates for 5-10 years at a time. “We have developed our initial set of proposals and we hope to publish them soon to get feedback”.
Why would investors pick Nairobi over Johannesburg, with its trillion-dollar stock exchange and its suite of legal and accountancy operatives who know Africa well? Or why not the Casablanca International Finance Centre in Morocco, which is banking on its proximity to European markets and the recent industrial renaissance in the country?
First, there is more than enough room for everyone, says Njuguna. “Even […] in Europe, you’ve got Dublin, London, Paris, Frankfurt, Switzerland, Luxembourg, all within a much smaller geography”.
However, he also believes that East Africa is a land of possibilities. “Nairobi is a jurisdiction that is catching up with South Africa in many ways. We have got […] some better opportunities. The fact is, businesses go where they [investors] can make money and where the opportunities exist.” Beyond that, Kenya’s geographical location on the equator, and close to the Gulf, makes Johannesburg feel isolated at Africa’s southern tip.
It’s like a virtual special economic zone, where [when] you get through your registration, you’re entitled to certain incentives and benefits.”
Njuguna thinks Prudential’s arrival really acts as proof of concept for the NIFC. “I think Nairobi ticks a lot of boxes for them in terms of quality of life, accessibility to other countries in terms of air travel, good stability in terms of the political situation, security has improved considerably over the years, the schools work well, and the health system is robust,” says Njuguna.
Before the quality-of-life checklist, however, comes the business case.
One of the reasons Singapore and London are celebrated as examples of successful International Financial Centres is the reliability and probity of their legal system. Is that something that Kenya can deliver on? Recent tussles between the judiciary and the executive during election periods may leave some doubt. Contracts between companies domiciled at the NIFC would be incorporated under Kenyan law.
“Dispute resolution is a critical part of doing business,” says Njuguna. While he notes that companies can choose to set up a jurisdiction in London or Singapore for disputes, he says “we need to ensure that we have a very transparent and robust framework for dispute resolution in Kenya, indeed, and fought for firms in the in the IFC, and there are obviously challenges with that, be it real and perceived in terms of the dispute resolution framework in Kenya.”
To do that, the NIFC has been working with Kenya’s judiciary to help build up a court that can focus on financial services, to work alongside the commercial courts that already exist. “[…] I think there’s a very nascent, credible alternative dispute resolution ecosystem developing [in] Kenya. […] experts in particular areas [have been] able to provide good arbitration services,” says Njuguna.
The NIFC hopes that the involvement of Kenya’s president in the steering committee will give the centre the political muscle it will need to solve issues as they arise. For example, should there be “differences of view between […] the Central Bank and the Treasury”, says Njugana.
Important to note in these days of the Pandora Papers highlighting the illicit movement – by political elites from Africa and elsewhere – of stolen money by use of secrecy jurisdictions is that the NIFC is not an offshore financial centre.
“It’s like a virtual special economic zone, where [when] you get through your registration, you’re entitled to certain incentives and benefits,” says Njuguna, “but you’re still operating in Kenya [and] you’re still going to be subject to the local regulatory environment”.
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