Kenya's poor ranking in the Economic Freedom Index is also of concern to foreign investors, as this suggests that businesses operating in Kenya must contend with burdensome regulatory regimes and legal systems. Specifically, Kenya performs worst on Fiscal Health, Government Integrity, Judicial Effectiveness, Property Rights, Financial Freedom and Business Freedom. Such indicators are meaningful to investment managers as they consider whether or not to register their fund in a given country. For example, Mauritius, where most VC/PE investors active in Kenya domicile their funds, has one of the best Economic Freedom Index rankings of any African nation (#21 worldwide in 2017). It performs particularly well in the Open Markets category.

In recent years Kenya has seen some notable improvement in its Doing Business ranking, which is perhaps the most important of the rankings for the purposes of VC/PE investors. Kenya has improved by 13 places since 2013, with a jump of 44 spots between 2016 and 2017. This improvement comes in recognition of recent advances with respect to reforms in business and property registration, electricity connections and access to credit.<sup>23</sup>

**Table 11: Overview of Kenya’s Global Rankings**

||**2013**|**2014**|**2015**|**2016**|**2017**|
|---|---|---|---|---|---|
|**Doing Business**|**121** /185|**129** /189|**136** /189|**108** /189|**92** /190|
|**Economic Freedom**|**114** /177|**111** /178|**122/** 178|**115** /178|**135** /180|
|**Corruption Perception**|**136** /177|**145** /175|**139** /168|**145** /176|n/a|

_Source: World Bank, The Heritage Foundation, Transparency International_ Among Doing Business categories Kenya ranks well on Enforcing Contracts and Getting Credit, which are of fundamental interest to venture capital and private equity investors and to a wide range of investee companies, from SMEs up to large corporations.

- Enforcing Contracts: Private equity investors see the rule of law as a critical environmental factor that can affect the ongoing operations of a business and its eventual valuation upon exit. They are unwilling to invest in a country where they cannot enforce contracts without enduring significant costs or lengthy conflicts. Improvements in the operation of the court system and the overall efficiency of overcoming disputes greatly improve confidence in the overall business climate.

- Getting Credit: This measure has a direct impact on the private equity sector as credit serves as both a complement to and a substitute for private equity.  Private equity-backed companies benefit from access to credit since they can finance their growth less expensively than raising additional equity capital, which benefits all owners in the business.  At the same time, bank lending competes with private equity to some extent. This dynamic has played out in Kenya in the wake of _caps on commercial lending rates that were introduced by the government of Kenya in August 2016_ . The caps, which limit rates to 400 basis points over the Central Bank rate, have lowered interest rates, but have caused banks to curtail lending, especially to higher risk SMEs.<sup>24</sup> In the wake of these new limits on interest rates, fund managers interviewed for this report noted that this shift could drive businesses, such as family-owned companies, to substitute debt, which is now harder to come by, with private equity.

> 23 Business Daily (October 28, 2015). "Huduma centres push Kenya up in ease of doing business index". 24 Njini, Felix (May 11, 2017). "Kenya's Largest Bank Expects Rate-Cap Removal in Second Half".

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