In 1878 Mackinnon entered negotiations with the Sultan of Zanzibar, Seyyid [Said] Barghash, for the lease of a territory extending 1,150 miles along the coast line from Tungi to Warsheik, and extending inland as far as the eastern province of the Congo Free State (590,000 square miles, including Lakes Nyasa, Tanganyika and Victoria Nyanza). The British Government however, refused to sanction the concession, which if ratified would have secured for England the whole of what became German East Africa.
In 1886, after recognising the Sultan's authority over a 10-mile-wide coastal strip between the Ruvuma and Tana Rivers, Germany, Britain and France agreed to divide the hinterland into German and British spheres of influence. On 24 May 1887 Mackinnon and the British East Africa Association [later Company] accepted a concession of the Sultan's territory on the mainland for a 50-year period, subsequently amended to a grant in perpetuity. The British government, still reluctant to become involved in the administration of East Africa, agreed in 1888 to a petition from the Association asking for a charter of incorporation authorising the acceptance of existing and future grants and concessions for the administration and development of the British sphere. The new Imperial British East Africa Company (IBEA Co), formally incorporated on 3 September 1888, thus secured a coastline of about 150 miles, including the important harbour of Mombasa and extending from the River Tana to the frontier of the German Protectorate. Sultan Khalifa extended the concession on 9 October 1888 to include the coastline from Wanga to Kipini, and on 31 August 1889 to include Lamu and the Northern Islands and Ports.
The company included among its principles the abolition of the slave trade, the prohibition of trade monopoly and the equal treatment of all nations. It found itself seriously handicapped in relations with foreign associations such as the German East Africa Company by the strenuous support, which they received from their respective governments. The English government was debarred by principles of English colonial administration from affording similar assistance. The financial resources of the IBEA Co were inadequate for any large-scale development of East Africa. Becoming involved in civil war in Uganda [also known as Buganda], the Company soon found itself unable to maintain its high level of expenditure and was forced to limit its activities to the region nearer the coast. In 1894 the British government declared a protectorate over Buganda, and in the following year called upon the Company to surrender its charter and concession in return for £250,000 compensation. The East Africa Protectorate was proclaimed on 1 July 1895, with Sir Arthur Hardinge as the first commissioner.