The action of the company in agreeing to onerous financial burdens was dictated partly by regard for imperial interests, which would have been seriously weakened had Lamu gone to the Germans.
By the hinterland doctrine, accepted both by Great Britain and Germany in the diplomatic correspondence of July 1887, Uganda would fall within Great Britain's "sphere of influence"; but German public opinion did not so regard the matter. German maps assigned the territory to Germany, while in England public opinion as strongly expected British influence to be paramount. In 1889 Karl Peters, a German official, led what was practically a raiding expedition into that country, after running a blockade of the ports. An expedition under F.J. Jackson had been sent by the company in the same year to Victoria Nyanza, but with instructions to avoid Uganda. In consequence of representations from Uganda, and of tidings he received of Peters's doings, Jackson, however, determined to go to that country. Peters retired at Jackson's approach, claiming, nevertheless, to have made certain treaties which constituted "effective occupation." Peters's treaty was dated the 1st of March 1890: Jackson concluded another in April. Meantime negotiations were proceeding in Europe; and by the Anglo-German agreement of the 1st of July 1890 Uganda was assigned to the British sphere.
To consolidate their position in Uganda - the French missionaries there were hostile to Great Britain - the company sent thither Captain F.D. Lugard, who reached Mengo, the capital, in December 1890 and established the authority of the company despite French intrigues. In July 1890 representatives of the powers assembled at Brussels had agreed on common efforts for the suppression of the slave trade. The interference of the company in Uganda had been a material step towards that object, which they sought to further and at the same time to open up the country by the construction of a railway from Mombasa to Victoria Nyanza. But their resources being inadequate for such an undertaking they sought imperial aid. Although Lord Salisbury, then prime minister, paid the highest tribute to the company's labours, and a preliminary grant for the survey had been practically agreed upon, the scheme was wrecked in parliament. At a later date, however, the railway was built entirely at government cost (supra, § Communications). Owing to the financial strain imposed upon it the company decided to withdraw Captain Lugard and his forces in August 1891; and eventually the British government assumed a protectorate over the country (see Uganda).
Further difficulties now arose which led finally to the extinction of the company. Its pecuniary interests sustained a severe The company and the crown. blow owing to the British government - which had taken Zanzibar under its protection in November 1890 - declaring (June 1892) the dominions of the sultan within the free trade zone. This act extinguished the treaties regulating all tariffs and duties with foreign powers, and gave free trade all along the coast. The result for the company was that dues were now swept away without compensation, and the company was left saddled with the payment of the rent, and with the cost, in addition, of administration, the necessary revenue for which had been derived from the dues thus abolished. Moreover, a scheme of taxation which it drew up failed to gain the approval of the foreign office.
In every direction the company's affairs had drifted into an impasse. Plantations had been taken over on the coast and worked at a loss, money had been advanced to native traders and lost, and expectations of trade had been disappointed. At this crisis Sir William Mackinnon, the guiding spirit of the company, died (June 1893). At a meeting of shareholders on the 8th of May 1894 an offer to surrender the charter to the government was approved, though not without strong protests. Negotiations dragged on for over two years, and ultimately the terms of settlement were that the government should purchase the property, rights and assets of the company in East Africa for £250,000. Although the company had proved unprofitable for the shareholders (when its accounts were wound up they disclosed a total deficit of £193,757) it had accomplished a great deal of good work and had brought under British sway not only the head waters of the upper Nile, but a rich and healthy upland region admirably adapted for European colonization. To the judgment, foresight and patriotism of Sir William Mackinnon British East Africa practically owes its foundation.
Sir William and his colleagues of the company were largely animated by humanitarian motives - the desire to suppress slavery and to improve the condition of the natives. With this aim they prohibited the drink traffic, started industrial missions, built roads, and administered impartial justice. In the opinion of a later administrator (Sir C. Eliot), their work and that of their immediate successors was the greatest philanthropic achievement of the latter part of the 19th century.
On the 1st of July 1895 the formal transfer to the British crown of the territory administered by the company took place at Mombasa, the foreign office assuming responsibility for its administration. The territory, hitherto known as "Ibea," from the initials of the company, was now styled the East Africa protectorate. The small sultanate of Witu (q.v.) on the mainland opposite Lamu, from 1885 to 1890 a German protectorate, was included in the British protectorate. Coincident with the transfer of the administration to the imperial government a dispute as to the succession to a chieftainship in the Mazrui, the most important Arab family on the coast, led to a revolt which lasted ten months and involved much hard fighting. It ended in April 1896 in the flight of the rebel leaders to German territory, where they were interned. The rebellion marks an important epoch in the history of the protectorate as its suppression definitely substituted European for Arab influence. "Before the rebellion," says Sir C. Eliot, "the coast was a protected Arab state; since its suppression it has been growing into a British colony."