How increasing cash threshold for foreign investors will boost Small Businesses in Kenya

Business Daily reports that, Interior Cabinet Secretary Fred Matiang’i says the ministry will be seeking parliamentary approval of amendments to the law, including raising the minimum investment threshold for foreigners. According to the Kenya Investment Promotion Act requires foreigners to have a minimum of $100,000 (Sh10.92 million) to obtain an investment certificate that qualifies them for incentives. However, with the discussion left to the parliamentary committee, it would inevitable for considering since the agenda would expand the SME market in Kenya. A speed up in operationalization and liquidity of money would be high in the economy.

Flexible minimum foreign investment threshold

The Kenya Investment Authority (KenInvest) has proposed a flexible minimum foreign investment threshold, depending on the capital requirement of different sectors based on feedback from stakeholders during engagements that led to the development of the country’s first investment policy, launched in November 2019.

Moses Ikiara, the investment promotion agency’s director-general, said the stakeholders wanted the minimum capital for foreigners to be tripled to $300,000 (Sh32.76 million) for capital-intensive sectors such as construction, energy, manufacturing, oil, and gas.

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Others, he added, felt that the threshold should be lowered for sectors such as ICT whose ventures may not require as much capital.

“There are many people who were thinking $100,000 is high and were saying when people were innovating something like M-Pesa, they wouldn’t have needed that minimum capital. There are some types of businesses where you require human resources or knowledge more than capital,” Dr Ikiara told Business Daily in April.

“The thinking is to allow innovative investments that are not capital-intensive not to be locked out.”

Financing the Sustainable Development Goals

Increasing annual investments in small and medium-sized enterprises (SMEs) in Kenya by $1 trillion would yield disproportionate dividends in terms of progress towards the Sustainable Development Goals (SDGs), while also delivering healthy returns for investors. Yet, less than 1% of the tens of trillions of dollars that global asset managers have under management is currently invested in developing country SMEs.

Experts explain how best to scale up private sector investment in developing country SMEs for sustainable development impact. SMEs contribute to the SDGs through the employment opportunities they generate, the business practices they choose to adopt, the sectors in which they operate and the impact they have on the broader economy.

Their relevance is underscored in the United Nation’s (UN) 2030 Agenda for Sustainable Development, which calls on the international community to ‘encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services.’

According to the SME Competitiveness Outlook 2019, lack of scalable SME investment projects and knowledge about enterprise capacities, as well as challenges in matching SMEs and investors, are holding investors back from channeling more funding into otherwise profitable investment opportunities in developing countries.

Despite the fact that, Kenya has lined up drastic changes to its investment promotion law in a bid to seal loopholes exploited by foreigners to compete with local small traders and commit crimes such as money laundering, the rallying gauge is that SMEs in Kenya are so many and the demand for external support is relatively high.

Reasons Why We should allow foreigners Invest in Kenya.

Investors are often looking for undervalued stocks to invest in. Similarly, entrepreneurs and business owners are always looking to expand their businesses in favorable economies such as those in emerging markets.

Kenya is an emerging market with a rapidly growing economy. The state is constantly making significant political, structural and economic reforms to drive sustained economic growth. This growth has been fueled by an emerging middle class coupled with an increased demand for high-value goods and services. Before the outbreak of COVID-19, the Kenyan economy was growing at a staggering rate of 6%.

However, key indicators, including the World Bank, predicted a strong rebound for the country in 2021 with the GDP growth rate expected to grow at a rate of 7%. What this means for you as the entrepreneur is that it will be fairly easy to conduct your business profitably.

Kenya is the largest economy in the East in Central Africa. In addition, the country constantly ranks highly when it comes to ease of doing business. With many growing and profitable sectors such as tourism and agribusiness, the country is a popular choice for foreign direct investment (FDI).

Foreign direct investment is a huge contributor to the Kenyan economy. Before the coronavirus, the country was one of the largest recipients of foreign investment. The UNCTAD reported FDI flows in the Sub Saharan state in the region of approximately $1.8 billion in 2018. As a result, the government has deployed a wide range of incentives to attract FDIs.

Not only that, but the capital, money and commodities markets present in Kenya also provide a viable investment option. According to Wealth Report Attitudes Survey of 2020, two-thirds of the ultra-high net worth individuals in Kenya are gradually increasing their private equity investments, including bonds, gold and cash.

FDI importance to SMEs

Foreign direct investment, or FDI for short, has become a cornerstone for both governments and corporations. By acquiring a controlling interest in foreign assets, corporations can quickly acquire new products and technologies, as well as sell their existing products to new markets. And by encouraging foreign direct investment, governments can create jobs and improve economic growth.

For international investors, foreign direct investment plays an extremely important role. The growth of emerging markets has been due in large part to incoming foreign direct investment. At the same time, companies investing abroad can realize higher growth rates and diversify their income, which creates opportunities for investors.

Macroeconomic Effects of Foreign Direct Investment

It’s hard to overstate the macroeconomic importance of foreign direct investment with more than $1 trillion worth of capital changing hands in 2010 alone. While these funds usually improve a host country, there are several downsides that may also come into play. That said, sustainable levels of incoming foreign direct investment are often seen as a healthy economic signal to international investors.

Some key benefits of foreign direct investment include:

• Economic Growth. Countries receiving foreign direct investment often experience higher economic growth by opening it up to new markets, as seen in many emerging economies.
• Job Creation & Employment. Most foreign direct investment is designed to create new businesses in the host country, which usually translates to job creation and higher wages.
• Technology Transfer. Foreign direct investment often introduces world-class technologies and technical expertise to developing countries.

However, there are also a few drawbacks:

• Strategic Industries. Many countries protect certain strategic industries, like defense, from foreign direct investment to maintain control from foreign entities.
• Long-term Capital Movement. Some critics argue that once a foreign investment becomes profitable, capital really begins to flow out of the host country and to the investor’s country.
• Disruption of Local Industry. There is some concern that foreign direct investment may disrupt local industry and economies by attracting the best workers and creating income disparity.

For international investors, seeking out investments in countries with sustainable and growing foreign direct investment is a popular strategy. These levels can be found on websites like the United Nations Conference on Trade and Development (UNCTAD).

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Final say on FDIs.

With FDI, investment can be used by international investors on both a macro and microeconomic level. Countries with sustainable and growing levels of foreign direct investment are preferable, while companies investing abroad can often benefit from higher growth rates.

Foreign direct investment has many drawbacks, despite its overall effectiveness in promoting growth. On a macro level, it can cause problems for a country’s domestic labor markets and drain capital in the long-run. On a micro level, the investments have several risks that should be carefully considered.

Mombasa, Kenya.

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