Kenya’s bond market faces new tax

Kenya‘s struggling corporate bond market faces a new challenge as authorities plan to impose a 5 per cent withholding tax on interest earned from green bonds.

Parliament approved this tax, part of a broader effort to reduce Kenya’s budget deficit, and it now awaits President William Ruto’s approval. This tax could deter local investors and hinder the growth of corporate bonds, according to Terrence Adembesa, CEO of East African Bond Exchange.

Despite Kenya being the third-largest economy in sub-Saharan Africa, corporate debt issuance is only 0.2 per cent of its GDP. Additionally, Kenya lags in sustainability-linked securities issuance.

Recent plans by major companies like Safaricom Plc, Equity Group Holdings Plc, and KCB Group Plc to issue shilling debt have sparked some hope, but they have not commented on the tax’s potential impact on their plans.

The market also faces high government debt yields and has struggled since the 2015 collapse of Chase Bank Kenya Ltd. and Imperial Bank Ltd., which resulted in significant losses for bondholders. Since then, only five companies have issued debt, with just two green bonds released.

Economist Churchill Ogutu of IC Asset Managers believes reviving the corporate bond market requires better investor protection. When Chase and Imperial collapsed, depositors were partially compensated, but bondholders lost everything. Ogutu emphasises the need for laws clarifying bondholder treatment relative to other creditors to restore investor confidence.

Attribution: Bloomberg