In this AFKInsider series, we explore the regulatory conditions that an entrepreneur is likely to face when setting up a business in sub-Saharan Africa. AFKI presents Doing Business in Africa: Kenya.
Doing Business in Africa: Kenya
Situated in the Great Lakes region of East Africa just south of the Horn, Kenya is one of Africa’s most important countries. Along with South Africa and Nigeria it is ranked among Africa’s big three and serves as the cornerstone economy of its region. The country was colonized by the British during the great divvying up of the continent during the 1880s when African holdings were shuffled between the various colonial powers in order to prevent friction between them.
Britain swiftly imposed order in the region once it was awarded the territory and London quickly authorized the construction of what would become known as the Kenya-Uganda railroad – made famous by ‘the Man-eaters of Tsavo’, lions who preyed on many of the construction workers who worked on the project near the Tsavo River. Construction of the railway and the outbreak of the First World War consolidated Britain’s control of the territory and led to the promotion of white settlement of the more temperate highlands region. As elsewhere in colonial Africa whites took the best farmland, dominated the locals, and raised cash crops for export.
Ultimately this status quo was shattered in 1952 when anti-colonial rebels carried out a guerrilla war known as the Mau-Mau rebellion against British rule. While eventually put down, albeit bloodily, by 1959 it demonstrated that—like in India and increasingly in southern Africa—white rule was unsustainable. As a result Britain moved the colony towards independence, which Kenya achieved in 1963.
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After some initial instability prompted by ethnic Somali attempts to attach their territory to Somalia and British uneasiness in turning over their former colony to what they saw as anti-colonial radicals, Jomo Kenyatta was elected first as Prime Minister (1963) and then President (1964). He would rule the country until his death in 1978 via a one-party state organized by his Kenya African National Union (KANU) party.
After Kenyatta’s death he was succeeded in power by his vice president Daniel arap Moi, who in turn ruled as president in a one-party, elected-dictatorship until 1992 when he finally allowed multi-party democracy.
Dictatorship, however, might be an overly strong term as Kenyatta and Moi’s Kenya, like Kagame’s Rwanda today, was more like the one-party machines that ruled urban American in the 19th century than the regimes run by the likes of Nigeria’s generals or tyrants like Uganda’s Idi Amin. Democracy was mostly a sham, yes, but because Kenyatta’s and Moi’s power was nonetheless based on a coalition of vested economic interests and ethnic alliances it was not totally unconstrained in what it could do.
That being said, Moi ran his country much like other African despots, only marginally less corruptly and incompetently and economic growth withered under the weight pressed upon it by the Moi bureaucracy. When the Cold War ended and unquestioning Western aid for Kenya dried up with it, the regime led by Moi was forced by international financial institutions to democratize and open up space for political dissent in 1991.
Electoral politics were thus introduced, but democracy as practiced in the West with its peaceful contesting of elections and legitimate acceptance of both victory and defeat were not — as Kenya’s subsequent turbulent election history demonstrated.
Moi was finally forced to leave office in 2002 as a result of these political reforms and was succeeded in office by the democratically-elected Mwai Kibaki and his National Alliance Party of Kenya. Ostensibly a technocrat, Kibaki attempted to guide his country through the painful process of democratization but ultimately stumbled when his proposed constitutional reforms, which would have greatly strengthened his office, were rejected by the populace in 2005.
When Kibaki ran for re-election in 2007 fear of his attempt to hijack more power for his office led to a contested election in 2007 and an outbreak of ethnic tensions and post-election violence thereafter. In turn this led to further political reforms and the formation of a coalition unity government that included most of the official opposition. There matters remained until 2013 when Uhuru Kenyatta and his TNA (The National Alliance) party won elections deemed open, free, and fair by election monitors.
Ease of Doing Business
So how does all this influence business conditions? According to the World Bank, Kenya currently ranks 98th out of 183 countries on its Ease of Doing Business Index – a measure created by the Bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the United States ranks 4th on ease of doing business, right after Singapore, Hong Kong, and New Zealand.
What does this ranking mean? Take, for instance, the Bank’s measure of how easy it is to start a business, which is depicted in Figure 1 below. From the figure one can see that the Bank defines business-creation costs as consisting of the time and money outlays involved in the series of legal steps necessary for the entrepreneur must take in order to legally establish an in-country firm. Using this framework, the Bank then tasks researchers to go through this process in order to establish in-country averages.
When this metric is applied to Kenya, the Bank finds that Kenya ranks 125th out of 183 in ease of starting a business, making Kenya one of the most difficult places on Earth to start a legal commercial enterprise. To start a business in Kenya one has to complete 11 bureaucratic procedures that take a total of 33 days at a total cost of about $292, with no minimum capital requirement imposed by the government for the start-up.
How the World Bank Measures Ease of Starting a Business
Using similar metrics for other aspects of business operations, the Bank has ranked Kenya in a number of other areas. To obtain a construction permit, for instance, Kenya does much better and is ranked 35th out of 183 as it takes the completion of 11 procedures, which takes on average 120 days at a cost of nearly $1,285. While relatively steep, Kenya’s score here nonetheless makes it one of easier countries in the world in which to obtain a construction permit.
Continuing in its assessment, the World Bank has determined that in order to obtain and register property, Kenya does much worse by ranking at 129th out of, again, 183 countries measured. To register property in Kenya, the Bank finds, it takes the completion of eight bureaucratic procedures that takes, on average, 64 days and costs 4.2-percent of the property’s financial value in fees and other costs to complete. This makes Kenya a moderately difficult place in which to register property.
Kenya does much better when it comes to obtaining credit, where it ranks 6th out of 183—making the country one of the best in the world in this area. Here, as depicted in Figure 2, the Bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges. When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the Bank, the more available credit will be.