Ideas & Debate

Shed light on plans to set up Nairobi financial zone

An aerial view of the Nairobi central business district. FILE PHOTO | NMG
An aerial view of the Nairobi central business district. FILE PHOTO | NMG 

The Nairobi International Finance Centre (NIFC) continues to move towards reality.

Being a matter of debate restricted to a few specialists, lobbyists and activists, the NIFC remains a mystery to the majority of Kenyans.

What is it, what is it meant to achieve and who will benefit? The first is somewhat difficult to answer, but once we do, the rest become easier to address.

At the core, the Bill for the NIFC creates a framework for the government to pass legislation that will grant particular firms, within a segment of the economy, privileges that govern their operations and ownership.

In return, the firms will be expected to create a net benefit within a set time frame for the broader economy. More simply, the government is creating a special economic zone for financial firms.

I have been involved with multiple such cities and broadly they fall into three types, which I describe below in highly generalised terms.

First, there are countries such as Switzerland, Luxembourg and Mauritius. Such countries foster a financial centre to service the needs of a larger economic entity nearby.

Everything from setting up a business, to hiring staff, tax and regulations are simplified so as to allow the financial centre to become a hub for operations targeting another, larger economy.

The sector is highly restricted from flowing either products or funds back into the local market, which is effectively ring-fenced from the financial centre.

Other countries such as a number of Caribbean islands and smaller European nations offer simpler operations hubs, but offer huge benefits deriving from corporate anonymity and tax relief that makes it highly lucrative to base operations there.

These are less financial centres and more corporate registries and are frequently — unfairly in my opinion — cited as tax havens and money launderers. The FC often is the entire economy, so ring fencing is more difficult.

Finally, some specific jurisdictions in federations such as the US and Canada offer particular incentives such as short-term tax relief for financial firms based there so as to grow the human capital. For example, tax relief is given based on how many locals are employed in high-value roles.

The end-game here is to grow a stronger set of human resources that will in their turn generate even more economic benefit long term.

The ultimate goal of the NIFC has not been set out. But we can speculate that the following will be high on the Treasury’s list for outcomes:

First, a much improved human resource base for complex and global financing, which would serve the needs of a country like Kenya’s as we remain a trade driven nation.

Second, a strong tax base at some stage of the future once we have financial services as a larger proportion of our economic output; and finally, a financial centre that helps deal with the broader issues of unemployment through fostering labour-intensive investments.

If all this is true — and remember no one has detailed any of the NIFC plans beyond hi-level, feel-good rhetoric- then presumably some issues will be addressed in the near future.

These include what the status of the NIFC will be? Is it an onshore tax haven, an operational hub integrated into the broader economy or just a few corporate incentives without any specific form?

Also, what will be the status of contracts and transactions made through NIFC? Will they be subject to local laws or a special dispute resolution mechanism specific to NIFC?

What about transactions and will they be settled in local or foreign currency, on local or ring-fenced exchanges? And will Kenyan’s have access to these deals or products?

Ultimately, will Kenyans benefit from the NIFC through skills transfer and capital raising or will NIFC serve only external markets?

What plans are in place to deal with the plethora of tax, regulatory, registry and settlement issues and how will they be addressed under the current legislation?

Presumably, answers to these questions have already been drawn up, and the proposed NIFC authority will soon be operational and begin to roll out policies addressing all this. One hopes for speedy setup of the authority, there is certainly a lot of work to be done!