* Kenya plans to transform capital into financial centre
* But it faces long haul to rival Mauritius, Johannesburg
* Legal and taxation issues are among the hurdles
* Kenyan officials say Nairobi won't be tax haven
By Duncan Miriri
NAIROBI, Aug 16 (Reuters) - When Kenyan infrastructure firm
TransCentury wanted to issue a $75 million corporate
bond, it was forced to look to the Indian Ocean island of
Mauritius, Africa's leading offshore financial centre some 3,000
km (1,900 miles) away.
Kenya is already a growing gateway for foreign investment
into East Africa and now has ambitions to become an
international banking and financial hub in its own right.
But to have any hope of coming close to rivalling the
continent's pre-eminent financial pull of Johannesburg, or even
Mauritius, backers of the proposed Nairobi International
Financial Centre must overcome multiple hurdles.
These range from the lack of an effective legal system,
deficient company and land registries and the absence of working
double-taxation arrangements with neighbouring states.
Taking TransCentury's bond dilemma as an example, Oliver
Fowler, a partner at Nairobi law firm Kaplan and Stratton, sees
Kenya's aim to raise its financial profile as work in progress.
"Why would you go to Mauritius when you are a Kenyan company
to list a debt security? You do it because they are efficient
and we are not," Fowler told Reuters.
Kenya's judiciary has undergone reforms since 2011, and
progress in this area was credited by diplomats with helping to
deliver a smooth and peaceful outcome to the hotly-contested
presidential vote won by Uhuru Kenyatta in March this year.
But decades of political patronage and graft in Kenya,
characterised by the "my turn to eat" political culture, means
the country's legal system will have to work hard to gain the
credibility needed to attract more financial investors.
Plans are underway to improve the efficiency of the Kenyan
legal system for business by creating arbitration panels where
parties can resolve commercial disputes quickly. Kenyan courts
are still notorious for long delays despite the reforms.
"We are going to work with the City of London to ensure that
we address any gaps that we have in our legal system to bring it
in line with international best practice," said Geoffrey Mwau,
economic secretary at the ministry of finance.
One of Mauritius' biggest selling points as a business
centre is that commercial parties in dispute can appeal rulings
made locally to Britain's Privy Council, legal experts said.
According to Transparency International's Corruption
Perception Index for 2012, Mauritius has one of the best African
rankings at 43, while South Africa was 69 and Kenya lagged at
139, tied with Nigeria, Africa's top oil producer which
struggles with an image of graft-plagued government.
Razia Khan, head of research for Africa at Standard
Chartered in London, said Kenya's financial sector status would
grow, but "to pitch itself against the international competition
at the outset may be difficult."
LURING FOREIGN BANKS
Undaunted, proponents of Nairobi as a financial hub point to
the arrival of major international banks, including South
Africa's FirstRand, Bank of China, and HSBC
Holdings, which have been licensed to open
representative offices in the Kenyan capital.
Kenya has converted its bourse into a securities exchange,
and plans to set up a commodities exchange.
To compete for listings that typically head to Johannesburg
or London, reforms are needed to make it easier to list locally.
Another big drawback is Kenya's failure to put into effect
double-taxation treaties - designed to prevent firms from paying
the same tax in two countries - signed with Uganda and Tanzania.
"There is no way that a company here is going to use Kenya
as a base even for its east African operation if there is no
double taxation relief across the East African Community, let
alone anywhere else," Fowler said.
The community bringing together Kenya, Uganda, Tanzania,
Rwanda and Burundi is working towards a single currency to
increase trade after forming a common market in July 2010. This
is an opportunity that Kenya can take advantage of.
For its part, Mauritius has already signed double-taxation
treaties with nearly all African countries to raise its profile
as a finance channel for investment in Africa.
Kenya's private equity house Catalyst Principal Partners,
which has raised $125 million for investment across the region,
chose to be registered in Mauritius.
"Even investing cross-border Kenya to Uganda, it is more
efficient to invest in Mauritius and then come back from
Mauritius to Uganda," said Yida Kemoli, head of strategy and
finance at TransCentury.
Businessmen complain that it takes 6 to 8 weeks to set up a
company in Nairobi. A global survey released this year by the
World Bank on the ease of registering a company showed Kenya was
ranked 126 out of 185 countries, with Mauritius at 14.
Kenyan bank executives ranging from multi nationals such as
Barclays to home-grown lenders like Equity,
say registering collateral takes far too long because the
country's land ministry relies mostly on manual records.
The ministry says it plans to have digitalised all its
records by mid-2014, which will help cut the scope for
backhanders at a land registry widely criticised for corruption.
Banks also worry about costs incurred to install backup
generators to cope with unreliable power supply in Kenya.
In addition to these drawbacks, backers of Nairobi's
ambitions as a financial hub have also had to parry criticism by
financial transparency campaigners that Kenya may be looking to
turn itself into a new tax haven.
Mauritius has faced similar accusations, but rejects
allegations that it is a major conduit for illicit transfers,
for example between India and Africa.
"An international financial centre is not a tax haven. Is
the UK a tax haven? ... They don't know what they are saying.
The most important thing is to reduce the cost of doing
business," the Kenyan finance ministry's Mwau said.
(Additional reporting by Katy Migiro; Editing by James