Terrorism is not a new phenomenon in third world states as most of them are constantly consumed by conflict, both internally as well as externally. The notion of terror takes a wide scope as it affects all states regardless of how strong their economies are or how great their militaries are. However, destabilized states tend to harbour terrorists forming a breeding ground for extremist groups that end up causing havoc and mass killings within their states or neighbouring ones. Kenya as well as other developing states has fallen prey to these groups which perpetrate crimes against humanity while thwarting issues of human rights and freedoms based on international agreements for example; the UN Charter. The main objective of this study is to assess the impact of terrorism on the Kenyan economy and how it has hindered the country‟s development such as impact on the tourism sector, issues of foreign direct investment as well as personal constraints among Kenyan citizens. The research also addresses the challenges faced by Kenya in its continued fight against terrorism. Subsequently, this study seeks to put strategies in place for the government to implement namely relevant policies relevant in curbing issues of radicalization and extremism mainly in breeding grounds for militia groups. The government can further develop policies and laws to charge perpetrators of terrorism while analyzing the challenges states face in the pursuit of a democratic state void of fear and threats posed by terror groups. On the matter of terrorism being a contributing factor in a felling economy, the study concluded that terror is not new in the region; however it is faced by multiple political and socio-economic challenges. This notion however is still a working process for states globally.