Factors influencing the investment decisions of local financial institutions in financing Public Private Partnerships (PPP) projects in Kenya

Abstract

Infrastructure development is essential for economic growth, yet financing remains a critical challenge, particularly in emerging economies. Public-Private Partnerships (PPPs) have been introduced as an innovative financing mechanism to bridge this gap by private sector investment. However, despite the increasing adoption of PPPs in Kenya, local financial institutions remain hesitant to participate due to concerns over risk exposure, profitability, project feasibility, and regulatory uncertainty. This study examines the key factors influencing investment decisions by local financial institutions in financing PPP infrastructure projects in Kenya. The research adopts a quantitative approach, collecting data from commercial banks and pension funds to assess their decision-making criteria. The findings indicate that risk assessment, expected returns, project feasibility, and regulatory compliance significantly shape investment decisions. Institutions prioritize financially viable projects with stable returns and strong risk mitigation strategies. While regulatory frameworks influence investment behavior, policy stability alone is insufficient to drive participation without complementary financial incentives and risk-sharing mechanisms. The study concludes that increasing local financial institutions’ involvement in infrastructure financing requires improving project bankability, strengthening risk sharing frameworks, and implementing targeted policy reforms. Enhancing institutional capacity and exploring alternative financing structures could further stimulate private sector engagement. The findings provide valuable insights for policymakers, financial institutions, and project developers seeking to optimize infrastructure financing through PPPs in Kenya. Key Words: Public-Private Partnerships, Infrastructure Financing, Investment Decisions, Local Financial Institutions, Kenya, Risk Assessment, Policy Environment