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A new report from the African Development Bank (AfDB) highlights the ongoing challenges faced by investors in Kenya, particularly due to high business costs. These include expensive electricity, costly business registration fees, and poor infrastructure.
According to the AfDB’s Kenya County Focus Report for 2025, the country’s business capital growth is stifled by high levels of informality and the significant cost burden of starting and operating a business. Business registration costs account for 15% of the Gross National Income (GNI) per capita, while electricity prices remain high at USD 0.15 per kilowatt-hour.
Micro, Small, and Medium Enterprises (MSMEs), which represent 75% of Kenya’s private sector and contribute 40% to the national GDP, are particularly impacted. These businesses face barriers to accessing affordable credit due to high interest rates, collateral demands, low financial literacy, and a lack of banking services in rural areas.
The AfDB suggests that expanding affordable financing, digitizing table banking, simplifying regulations, and lowering service fees would help boost business capital in Kenya. Additionally, raising awareness of available funding options could provide much-needed support to entrepreneurs.
The report also flags several deeper issues affecting the local business environment, such as weak institutions, corruption, and capital flight. “State capture” and an inefficient judicial system—characterized by slow dispute resolution and corruption—further create uncertainty for investors. The AfDB also points to Kenya’s volatile tax policies as a significant deterrent. Frequent changes, such as increases in capital gains tax and new taxes on digital assets, create an unpredictable environment, undermining investor confidence.
“Shifting tax laws create greater compliance risks for businesses and discourage investors from committing capital,” the report states.
To improve Kenya’s investment climate, the AfDB recommends several policy interventions. These include mobile-based tax filing, reducing non-priority spending, and refinancing costly debt with longer-term, concessional loans.
Despite these challenges, Kenya’s economy grew by 4.9% year-on-year in the first quarter of 2025, supported by growth in agriculture and manufacturing. However, the economy slowed to 4.6% growth in 2024, down from 5.6% in 2023, primarily due to weak industrial activity, low investment, and climate-related shocks. Inflation dropped to 4.5%, and the stronger Kenyan shilling contributed to monetary easing.
Looking ahead, the AfDB projects potential gains from stable weather, improved macroeconomic conditions, lower lending rates, and reduced global oil prices. However, risks remain, including a decline in global aid, rising trade tensions, and financial slippages due to possible reversals of tax reforms and ongoing debt vulnerabilities.
The AfDB recommends expanding the tax base by formalizing the informal sector, increasing digital education and tax administration, and eliminating inefficient tax incentives. Additionally, the report suggests scaling up value addition in agriculture, mining, and renewable energy, expanding credit guarantee schemes, and simplifying business regulations for MSMEs. It also emphasizes the need to deepen capital markets, particularly through green and SME bonds, and increase investments in pension and insurance funds.
The report calls for stronger partnerships to support venture capital and fintech infrastructure, helping to create a more robust and inclusive business environment in Kenya.
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