Population: 54 million

Wealth in domestic bank deposits: 41 billion USD (December 2022)

Offshore expatriated wealth: 21.7 billion USD

Main offshore banking locations: N/A

Number of individual brokerage accounts: 2 million (2022)

Crypto adoption (% of population): 2.7 million (5%)

TLDR

Kenya has taken significant steps to liberalize its financial markets and adopt a principles-based approach to regulation. Rules around foreign exchange were relaxed in the 1990s, though some restrictions remain on foreign investment levels and large cross-border capital transactions. The regulatory environment for securities aims to balance facilitating foreign participation with preserving market integrity. A proposed taxation framework and consumer protection measures signal Kenya’s inaugural comprehensive attempt to regulate cryptocurrencies. 

Exchange controls

Kenya transitioned to a liberalized foreign exchange system and market-determined exchange rates after repealing all exchange controls in 1993. This shift enabled the free conversion of currency and attracted short-term capital inflows into the economy. To enhance efficiency in the forex market, the Central Bank of Kenya also began licensing specialized foreign exchange bureaus starting in 1995.

However, some restrictions on capital transactions still remain in place. Foreign investment in shares of companies listed on the Nairobi Securities Exchange is restricted to no more than 75% ownership for both corporate and individual investors. This rule was instituted in July 2002 to balance foreign participation with preservation of domestic control.

Investments abroad by Kenyan residents exceeding US$500,000 must be approved by the Central Bank of Kenya through the transaction’s facilitating bank. This rule enables monitoring of large cross-border capital outflows.

For individual transactions, persons entering or leaving Kenya can take up to 500,000 Kenyan Shillings or the equivalent of US$6,250 into or out of the country without any duties or declarations. Higher amounts exceeding these thresholds may still be brought in or taken out but must be declared at the point of departure or entry for customs recording and clearance.

While Kenya’s exchange controls are largely liberal, some restrictions remain in place to regulate foreign investment levels, moderate capital outflows, and monitor large cross-border transfers. However, these controls have been progressively relaxed to attract foreign capital. The Central Bank of Kenya continues to oversee any remaining rules and approvals to ensure orderly function of currency and capital markets.

Distribution rules for foreign investment products

The distribution and marketing of foreign securities in Kenya is governed primarily by the Capital Markets Act, which establishes the Capital Markets Authority (CMA) as the main regulatory body. The CMA is equipped with extensive oversight powers including licensing market intermediaries, approving exchanges, regulating collective investment schemes, reviewing public securities offerings, investigating misconduct, imposing sanctions, and suspending trading.

The Capital Markets Act provides avenues for foreign participation in Kenya’s capital markets. The CMA can recognize and license persons or entities approved by foreign regulators to undertake capital markets activities in Kenya. This facilitates cross-border offerings and market access.

Foreign companies can also seek primary or secondary listing on the Nairobi Securities Exchange, if they meet the minimum listing conditions set around market capitalization and shares in public hands. Collective investment schemes domiciled abroad are permitted to market their shares locally to qualified investors, provided they register the scheme with the CMA.

When foreign companies make public offers of securities in Kenya, they must submit a prospectus to the CMA for approval, just as domestic issuers do. Approvals may also be required from the Central Bank of Kenya regarding foreign investor participation and foreign exchange controls. To enable cross-border offerings, the CMA has signed Memoranda of Understanding (MoUs) on cooperation with some foreign regulators.

While providing market access, Kenya’s framework maintains oversight through requirements like licensing, disclosures, reporting, and approval. The CMA balances facilitating foreign participation with preserving market integrity. Specific regulatory treatment depends on the type of foreign security, issuer, and transaction structure.

Qualified investors

Kenya distinguishes between qualified investors, including institutional investors, licensed entities, high net worth individuals and the government, versus non-qualified retail investors.

Key regulatory differences include:

– Public offers require a full prospectus, while restricted offers to qualified investors permit less disclosure.

– Qualified investors receive less mandated disclosures on investment products.

– Individual qualified investors must meet defined income or net worth minimums.

– Licensed brokers and other professionals are deemed qualified based on expertise.

Lower requirements for qualified investors aim to provide regulatory flexibility while retaining retail investor protection.

Cryptocurrency regulation

Cryptocurrencies are legal to use in Kenya, but do not have legal tender status or recognition as currency or assets. The Central Bank of Kenya (CBK) has issued public warnings about the risks associated with cryptocurrencies and prohibited financial institutions from engaging in crypto-related transactions. However, there is currently no specific law or regulation that explicitly prohibits the use or possession of cryptocurrencies by individuals in Kenya.

The regulatory framework encompasses various laws including the National Payments System Act, the Capital Markets Act, and the Kenya Information and Communications Act. The Capital Markets Authority (CMA) has proposed regulations for the licensing of crypto asset exchanges and initial coin offerings, but these are pending implementation.

A major development was the amendment of Kenya’s tax laws to impose income tax and capital gains tax on crypto transactions, establishing a taxation framework for the first time. This move provides definitions and consumer protections around cryptocurrencies, marking Kenya’s first comprehensive regulatory approach.

Additionally, a 1.5% digital service tax on crypto transactions was introduced. The Kenya Revenue Authority aims to establish a specialized unit focused on taxation of crypto and digital assets.

With estimates of cryptocurrency adoption ranging from 5% to 10% of the population, Kenya is taking steps to balance innovation opportunities with mitigating risks to consumers. The evolving legal and taxation landscape represents a significant shift, as the government takes a more pragmatic approach to regulating cryptocurrency use within the economy.