Allow firms to enforce contract rights

While at a diplomatic party circuit hosted by some Dutch Nationals, I found myself engaged in a heated debate with a group of foreigners over recent developments in a court dispute row a Dutch lender RoboBank and a Kenyan business that raised poignant questions about local investment climate.

The lender is a 100-year-old co-operative owned by members, is headquartered in the Netherlands and has a footprint in several African countries.

The narrative is as follows: A Kenyan business borrows money from the Dutch company for a project. Several years later, the local company defaults and the matter ends up in our courts. Neither existence nor the quantum of the debt is disputed during the proceedings.

Then the anti -climax: The Judge throws the case of Dutch entity out on the grounds that the lender has no right to sue the Kenyan company in our courts, by invoking a not widely known and rarely enforced section of the Companies Act, which the judge chooses to interpret to mean that foreign companies not registered in Kenya lack the legal standing to sue here.

The lender, the judge argues, ‘is not a juristic person in Kenya capable of instituting a suit’.

I don’t want to get into legalities. But where is legal certainty and justice in an investment climate regime where on the one hand, one piece of legislation namely the Income Tax Act, recognises you as an entity carrying own business in Kenya and deems you as permanently established entity that must pay full taxes- and on the other, a judge that insists that you are not allowed to enforce your contractual rights by advancing the manifestly paradoxical argument you don’t exist legally here?

Clearly, this dispute has huge implications on Kenya’s competitiveness and standing as a foreign investment destination. It is the kind of episode that entrenches the belief and prejudice among Westerners that African courts are unsuitable for settling investment disputes.

I think the biggest flaw in the methodology followed in compiling ‘ease of doing business rankings’ and ‘investor climate assessment reports’ is the higher weighting accorded to quantitative parameters such as tax rates, access to finance, corruption security, business licensing and the cost of electricity. Statistics on judicial decisions are not given much weight.

We engage in breach of faith and honor when we whimsically exchange our laws to the detriment of foreign businesses who act on the promises and impressions we have made in official government publications. Our courts permit what honour forbids.

Compounding these worrisome trends is a recent amendment of the Central Bank of Kenya namely the Business Amendment Laws Act 2024 that has increased the number of entities to be licensed by the Central Bank by expanding the definition of ‘credit provider’ to include entities engaged in non-deposit taking activities credit business including foreign lenders such development finance institutions (DFI’s), private equity funds and international commercial banks.

When our policymakers come up with new laws do, they really consider factors such as likely erosion of international confidence.

Do they pause to ponder what insensate and mindless instability of the regulatory framework can negatively impact on activity of institutions such as private equity and venture capital funds.

Under the current framework, foreign lenders are allowed to operate with local licensing as long as they are not soliciting deposits or conducting regulated banking activities in Kenya.

Foreign entities, including PE and VC-backed lenders have been instrumental in financing projects in Kenya.

If foreign lenders perceive Kenya’s legal and regulatory environment as unpredictable or hostile, they may redirect their capital to more stable jurisdictions.

The ripple effects of such a prospect would be felt across the economy. Indeed, reduced access to foreign debt capital could constrain credit availability for businesses and the government itself, which is a regular borrower in the international marketplace.

My parting shot: We will not attract investment in this country if we put hurdles on foreign entities seeking to enforce their contractual rights.

The writer is a former Managing Editor for The EastAfrican.