Kenyan Bond Tax Is a New Obstacle for the Market for Small Corporate Debt

This Monday, the parliament approved the proposed tax along with a number of other policies aimed at reducing Kenya's budget deficit. President William Ruto must now approve the broader bill that caused widespread demonstrations. Should the bill be approved, local investors would be subject to a 5% tax on the interest received from green and infrastructure bonds.

According to Terrence Adembesa, CEO of East African Bond Exchange, which obtained its operating license in February and has been trying to entice new listings, "the proposed taxes will totally dampen that growth of corporate bonds." "We are actually concerned about the low issuance that we continue to see." 

Despite being the third-largest economy in sub-Saharan Africa, corporate debt issued by Kenya amounts to less than 0.2% of the country's GDP, according to Adembesa. According to him, Kenya is likewise behind other African countries in issuing securities tied to sustainability. 

With the announcement of plans to issue shilling debt by three of Kenya's major corporations, Equity Group Holdings Plc, KCB Group Plc, and Safaricom Plc, hopes for the market increased in recent months. Regarding whether the proposed withholding tax will affect their issuance plans, the companies chose not to comment.

Other challenges facing the market include the high rates on government debt, with three-year bonds paying 18% and one-year Treasury bills yielding roughly 16%. However, since 2015, when bondholders were left holding the bag after Chase Bank Kenya Ltd. collapsed and Imperial Bank Ltd. was dissolved, the fight to expand the market has been more intense.