Balancing Innovation and Regulation: A key to the “Silicon Savannah” dream

With over a thousand startups across an array of sectors, Kenya’s startup ecosystem is
relatively young nonetheless is rated as the third-best in Africa and the first in East Africa.

The country’s dream of transforming into the ‘Silicon Savannah’ of Africa rests on ensuring that
young innovators enjoy the right environment to thrive. Innovation and regulation have
consistently acted as mutually reinforcing factors. Innovation propels advancement and broadens
the limits of what is achievable, while regulation guarantees the safety and ethicality of
technology. While innovation leads to growth and competitiveness, policies provide a framework
for sustainable and equitable growth.

History

Since the SEACOM and TEAMS fiber-optic connections arrived in 2009, Kenya has
gradually developed into a technological and innovation hub highly attractive to investors. The
early developments substantially boosted Internet connectivity and paved the way for the tech
and startup ecosystems to grow. More growth garnered momentum with increased development
in mobile technology with key players such as Safaricom. The company pioneered the
implementation of mobile money services through the M-Pesa. Ever since, financial services
have become accessible to millions of Kenyans including those living in the rural areas.

Government’s initiative of Kenya Vision 2030 during the Kibaki’s presidency was also
indicative of its commitment to the ICT advancement and technology as an economic stream.
The ‘iHub’ and ‘m-lab’ opened their doors in the early 2010s offering tech enthusiasts and
entrepreneurs a conducive environment to innovate. During the Uhuru’s presidency, policies like
Ajira Digital Program through which the government prepares the youth for digital skills also
nurtured innovation with the goal of building a technology-literate workforce.

Recent Trend

A key factor in the development of Kenya’s digital sector has been the implementation of
government-initiated projects like NOFBI, which aimed to increase nationwide Internet
connectivity. These initiatives, along with others like the smart cities of Tatu and Konza, are
laying the groundwork for a strong digital infrastructure that will be essential to the success and
transformation of the country’s economy. Businesses like Apollo Agriculture and Twiga Foods
are using technology to expand their reach in the agriculture business and increase crop yields.
Healthcare delivery is being enhanced by startups such as m-TIBA and Penda Health.

However, data protection legislation, digital taxes, and fintech regulations have all
become more prevalent in recent years, with the goal of regulating the technology sector.

While it’s true that certain regulations are essential for consumer safety and market equity, others have
come under fire for making it harder for new businesses to get off the ground and for startups to
keep costs down. Frequent changes in regulatory frameworks often create an environment of
uncertainty, making it difficult for startups to plan long-term strategies.

Implications of the Proposed Finance Bill 2024 on Tech Ecosystem
The proposes finance Bill 2024 has provisions that are likely to have a significant impact
on the tech ecosystem. The Bill introduces several tax policies aimed at increasing government
revenue but potentially jeopardizes the growth of the tech startups and innovation sector. The
proposed policies such as monetization of digital content, the motor vehicle tax, foreign
investment deterrent and the compliance burdens to be imposed startups are likely to slow down
innovation and growth of the Kenya tech ecosystem.

Digital content developers would face additional compliance expenses as a result of the
proposed withholding tax deduction of 20% of revenue received from digital content sales.

Additionally, the bill aims to replace the digital services tax (DST) with a significant economic
presence tax (SEP), which would be levied on non-residents of Kenya who generate revenue
through Kenyan online platforms. An additional 30% of taxable earnings could be subject to the
proposed SEP tax. The effective tax rate for digital service providers is rising from 1.5% under
DST to 6% under SEP, an astounding increase. This may dissuade international digital service
providers from operating in Kenya, thereby diminishing the accessibility of digital services and
escalating expenses for local entrepreneurs who depend on these services.

Recommendations

Though the expansion of the tax base and increased revenue is a commendable aim, it
seems that certain sections may hamper growth and innovation for the technology industry.

To manage such risks and foster the realization of Silicon Savannah dream, the government should
adopt a number of measures including: a consultative approach, offering specific incentives and
bring about regulatory certainty and stability. Over regulation can hamper innovations and on the
other extreme end, under regulation can cause various abuses and instabilities in the market.
Balancing between innovation and regulations is critical in supporting the sustainment of the
‘Silicon Savannah’ vision and make Kenya a prime tech hub within the African region.

The degree for regulation therefore requires a balance that will encourage the development of startups
whereas ensuring that consumer risks and market steadiness are protected.