Tax on mobile loans will hurt borrowers

Kenya undoubtedly requires revenue from the 20 per cent excise duty levied on interest and fees. However, the unfortunate reality is that this imposition, atop existing taxes, constitutes a two-pronged assault on the ease of conducting business in the financial sector.

This development will not only escalate the cost of credit but also pose a significant threat to innovation within the fin-tech sector.

The proposed excise duty, outlined in the Finance Bill 2024, was set to be published before April 30, 2024. But it has raised fundamental concerns at a time when bank loans may be inaccessible to many Kenyans due to the requirements.

Passed in 2022, this duty is to be applied on both interest and fees, and becomes due upon loan disbursement rather than upon repayment, creating challenges for both borrowers and lenders.
Experts have argued that this excise duty is imposed on unbooked revenue and fails to consider the high rate of default prevalent in the sector.

Furthermore, since other financial institutions like banks are exempt from paying excise duty on interest and fees, the imposition of this duty hinders the ability of tech firms to compete fairly in the credit market.

It is also important to note that in November 2023, the Kenya Revenue Authority (KRA) announced plans to integrate its tax system with digital credit providers, allowing for real-time collection of excise tax.
Unfortunately, the dynamics of this loan differ significantly from other sectors, especially considering that digital lenders often provide short-term capital for basic needs and emergencies.

The cost of the excise duty will likely prompt digital lenders to pass on the added costs to borrowers, which is likely to reduce access to credit for millions who cannot access loans from other regulated lenders. This could also diminish returns on investment and worsen defaults as borrowers struggle with higher repayment costs.

With the excise duty, compliance will face more threats complicating the financial landscape, adversely affecting both borrowers and investors.

Ultimately, it risks jeopardizing the entire digital lending industry, undermining Kenya’s standing as a tech investment hub.

With loan prices potentially rising to accommodate survival amid an effective tax rate of 60 per cent, the impact on both lenders and borrowers could be severe, especially considering the substantial revenue losses due to loan write-offs when customers fail to repay.