Project Finance In Kenya

October 8, 2018

     Introduction to Project Finance In Kenya

Project finance is the structured long-term financing of infrastructure or industrial projects that relies on the future cash flows of the project as the primary source of repayment of the project debt, and holds the project’s assets, rights and interests as collateral security. Project finance is also referred to limited recourse finance, as the lenders have limited or no recourse to the shareholders of the project company for repayment of the loan in case of default.

During project finance in Kenya, the developer incorporates a special purpose vehicle (SPV) that implements the project and raises the funding through a combination of equity and debt. The SPV is legally independent from its shareholders, thus protecting the corporate balance sheet of every party to the SPV against the risks associated with a large project. In this way the constituting parties to the SPV cannot spread their distress into an otherwise healthy project or vice versa.


       Due Diligence

Before the bank engages in project finance, a feasibility study of the project is essential. This entails the involvement of a number of advisors on behalf of the developer and the bank to provide advice on technical, market, financial, legal and other issues to determine the viability of the project.

The settlement of the project debt or the loan relies on the future cash flow through the sale of the units within the development. For this reason, the bank the bank will be particularly keen to maximize certainty about the cash flows of the project. Information that would assist to obtain such certainty would include:

i) Satisfactory feasibility study and financial plan;
ii) Confirmation of the market for the product or service being produced by the project;
iii) Availability and cost of input materials and energy sources;
iv) Comprehensive financial model with sensitivity and scenario testing;
v) Availability of supporting infrastructure, logistics and communication links;
vi) Comfort with regard to the experience of project participants for example management, contractors
and operators;
vii) Adequate institutional arrangements in place to implement the project;
viii) Controlled impacts of the project on the social and natural environment;
ix) Satisfactory legal due diligence and contractual arrangements;
x) Predictable legal and regulatory environment; and
xi) Identification of all project risks and mitigating measures and risk transfers to be put in place.



Since the bank’s main interest is the proceeds from the sale of the units, it is recommended that these proceeds should be ring-fenced in an escrow account. This arrangement should be specifically provided for in the securities created by the developer in favour of the bank, and in all the sale agreements signed by individual purchases in the development.

Before signing of the partial discharge for each of the apartment, the bank should also ensure that it receives the full purchase price for each unit in case of a cash purchaser, or an acceptable undertaking for the financed portion of the purchase price where the purchaser of the unit is financed. This ensures that in case of default by the developer, the bank can freely exercise its remedies under the securities created by the developer in favour of the bank, without dilution of these remedies by the existence of undischarged purchasers in the development.


In addition, it is critical for the bank to exert control over the disbursement of the project debt, by appointing an independent expert to oversee the construction of the project. The aforementioned expert should prepare an independent report formally advising the bank on the modalities of disbursement of loan installments to the developer, preferably against pre-agreed certified milestones. This will secure the bank from misappropriation of the project debt by the developer and also ensure certainty in realizing the project.


      The Remedies/Options available to the Bank in case of Non- Performing Project Finances in Kenya

Depending on the structuring of the project finance, the developer can default at different stages of the project at which point the bank can then proceed to enforce its remedies.

Where the developer is yet to develop or complete the project, either due to misappropriation of the project debt or other related reasons, the bank is entitled to exercise its remedies under the current land laws, the main remedy being the exercise of statutory power of sale.

However, the sale of undeveloped or partially developed property may not be economically viable to the bank. For this reason, the bank should ensure that the securities it holds include provisions enabling it to take over the project, appoint its own contractor to complete the project and sell the units to realize the outstanding project debt.

There may be instances where the developer has completed the project but cash flow from the sales of the units is not released within the agreed timeline, thereby constituting default by the developer. Here, the bank can enter into a fresh agreement with the developer either restructuring the project debt to increase the time period of realizing the cash flows from the sales or allow the bank to take over the project, engage marketing or advertising agents to promote sales and realize settlement of the project debt.



Project finance in Kenya aims to get the project off the balance sheet of the shareholders of the developer. By doing so the bank can only realize the settlement of the project debt from the cash flows obtained from the sale of the units in the project. It is imperative that project finance is structured efficiently as this is the only way for the bank to recover its outlay of the project debt to the developer.

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