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Kenya : 20% excise tax for micro-lenders

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Kenya : 20% excise tax for micro-lenders

Kenya is implementing a 20% excise tax on microlenders to increase tax revenues. However, this move is raising concerns in the financial sector, especially regarding the impact on credit costs and loan accessibility for citizens.

Impact of the new excise tax on micro-lenders

Kenya’s introduction of a 20 % excise tax on microlenders is causing a stir in the financial industry. The government aims to boost tax revenues, but concerns are growing about its effect on credit costs and loan accessibility for citizens. Industry experts highlight that the guidelines are unclear, especially regarding whether interest rates are included in the “fees” subject to the tax.

Uncertainties related to tax application

The proposed excise tax raises many questions. The Finance Bill 2024, presented to the National Assembly, states that the tax applies to “fees” charged when loans are disbursed. However, it is still unclear whether interest on loans is considered a real expense. One industry representative noted that he had received conflicting advice from various agencies, leading to significant confusion. If interest rates are included, the cost of capital could effectively rise by 20 %.

Contrast with the digital services tax

The new tax on microlenders contrasts sharply with the government’s commitment to low taxation on digital services for multinational tech companies. Amid international pressure to reassess this policy, the 20 % excise tax on microlenders appears disproportionate. Kevin Mutiso, Chairman of the Digital Financial Services Association of Kenya (DFSAK), highlights that this tax could make access to capital more challenging, particularly for low-income citizens.

Economic and fiscal context of the banking sector

Banks, similar to microlenders, already face other taxes. Starting in 2024, they began paying VAT on financial transactions. Kevin Mutiso points out that these additional charges raise the cost of living, making banking and financial services more costly. The proposed tax, applicable at the time of loan disbursement, would be levied regardless of whether the loan is repaid, adding additional financial strain on microlenders.

Impact on non-performing loans and the microcredit market

Kenya is grappling with high default rates, as the value of non-performing loans surged to nearly 900 million USD by 2023, accounting for 14.8 % of the loan portfolio. The government’s microcredit initiative, the Hustler Fund, anticipates default rates could reach up to 29 %. This scenario intensifies worries about the potential effects of the excise tax, particularly if it applies even in cases of loan default.

Reaction from fintech entrepreneurs and banks

Initially, business leaders in Kenya’s fintech sector were worried about potential unfair competition, as they believed the new tax would not apply to banks. However, it has been clarified that the tax also covers bank fees, excluding interest. This clarification has eased some concerns, although the sector remains apprehensive about broader implications. A fintech entrepreneur noted that extending the tax to banks aims to increase revenues while aiming for equitable treatment of fintechs and microlenders.

Economic prospects and social risks

Wayne Hennessy-Barrett, founder and CEO of 4G Capital, emphasizes the importance of increased tax revenue for Kenya, despite concerns that the excise tax may have detrimental effects. He argues that making capital less accessible for Kenyans could hinder investment in local businesses and, consequently, lead to slower economic growth.

Digital sector tax and other fiscal measures

Kenya is concurrently considering a 1.5 % digital tax on local platforms, aiming to generate 2.5 billion USD in taxes. Alongside this, the tax on mobile airtime and data tariffs is set to increase from 15 % to 20 %. These measures could prompt telecom operators to raise transfer and withdrawal fees, potentially pushing Kenyans towards cash transactions again.

Similarly, the proposed 20% excise tax on micro-lenders in Kenya is part of the government’s effort to boost tax revenues but has sparked significant concerns. Unclear guidelines and potential impacts on credit costs complicate access to loans for many citizens. A thorough analysis and adjustments will be crucial to strike a balance between fiscal goals and the country’s economic growth trajectory.

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