"Mimi ni mkenya"
Translation:I am Kenyan
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Yes, nationalities should be capitalized in Swahili as in English. The team asks you to report such inconsistencies (see https://incubator.duolingo.com/courses/sw/en/status).
Yes, different words are used, as covered later in the tree in the "Locatives" section (or also in chapter 11 in the much-recommended textbook "Simplified Swahili").
A brief preview: you use -po, -ko or -mo depending on whether you are talking about a definite, indefinite or interior location (a cool feature of Swahili), then you add the necessary subject prefix.