Expensive electricity, high business registration costs limiting investment in Kenya: AfDB

High business costs, including expensive electricity and costly business registration, continue to pose challenges for investors in Kenya, a new report by the African Development Bank (AfDB) says.

“Business capital growth is constrained by high informality, costly business registration (15% of GNI (Gross National Income) per capita), expensive electricity (USD 0.15/kWh), and poor infrastructure,” the regional lender’s Kenya County Focus Report for 2025 says.

It shows that MSMEs, which constitute 75 percent of the private sector and contribute 40 percent of GDP, face limited access to affordable credit due to high interest rates, collateral demands, low financial literacy, and inadequate rural banking.

Further, AfDB says the government-run Uwezo and Hustler Funds cannot meet the demand for start-up capital.

The lender suggests expanding affordable financing, digitizing table banking for streamlined financing accounting, simplifying regulations, lowering service fees, and increasing awareness of funding options to strengthen Kenya’s business capital.

At the same time, the bank flags weak institutions, corruption, and capital flight among significant hindrances in the local business environment, while ‘State capture’ and an inefficient judicial system, marked by slow dispute resolution and judicial corruption, create uncertainty for investors.

“Kenya’s volatile tax policies add unpredictability. Frequent changes, such as the increase in capital gains tax and new taxes on digital assets, complicate the business environment. These shifts undermine tax regime stability, which is crucial for an investment-friendly climate,” AfDB says.

“Businesses navigating shifting tax laws face greater compliance risks, deterring investors from committing capital.”

The report recommends a raft of policy options to accelerate Kenya’s economic development, such as mobile-based tax filing, cutting non-priority spending, and refinancing costly debt with longer-term concessional loans are key steps.

Kenya’s economy grew 4.9 percent year-on-year in the first quarter of 2025, driven by growth in sectors such as agriculture and manufacturing, the Kenya National Bureau of Statistics said last week.

The economy grew by 4.6 percent in 2024, a slowdown from 5.6 percent in 2023, due to weak industrial activity, low investment, and climate-related shocks. Inflation meanwhile dropped to 4.5 percent, and a stronger shilling allowed for monetary easing.

Going forward, AfDB says the country’s 2025 outlook faces a possibility of gaining from stable weather, improved macroeconomic conditions, lower lending rates, and reduced global oil prices.

However, Kenya still faces several downside risks, including potential declines in global aid and escalating trade tensions, and financial slippages due to possible reversals on tax reforms and ongoing debt vulnerabilities.

The lender recommends expansion of the tax base by formalizing the informal sector, accelerating compliance through digital education and tax administration, and eliminating inefficient tax incentives.

“Kenya can scale up value addition in agriculture, mining, and renewables… expand credit guarantee schemes with seed money from the current KES 100 million to KES 5 billion, and simplify business regulations for MSMEs, while partners support venture capital and fintech infrastructure,” the report notes.

It also suggests deepening capital markets through green and SME bonds, with diversified pension and insurance fund investments.

The National Treasury projects the economy will expand by 5.3 percent in both 2025 and 2026, buoyed by a stable macroeconomic environment.