High tax on digital loans excluding millions from credit market

Deloitte & Touche says it likely to see lenders pass the added cost to borrowers

In Summary
  • The 20% excise duty was introduced in 2022.
  • According to Tala, credit channeled to businesses through digital channels shrunk by 15%
DFSAK chairman Kevin Mutiso
DFSAK chairman Kevin Mutiso

Digital lenders have appealed to the Parliament to repeal the 20 per cent excise duty on loans, saying it has raised the cost of credit for borrowers at the bottom of the economic pyramid.

In a phone interview with the Star, the Digital Financial Services Association chairperson Kevin Mutiso lamented that the tax which was introduced in 2022 is eroding financial inclusivity gains. 

"The duty extends to both interest and fees and is due upon loan disbursement, rather than upon repayment. This setup results in excise duty being levied on unrealized revenue, disregarding the sector’s prevalent default rates,'' Mutiso said.

The 2023 FinAccess Household survey shows that close to 83 per cent of adults in Kenya have access to credit offered by both formal and informal financial players, a five per cent drop compared to the previous year. 

This is despite the country's financial inclusion topping East Africa at close to 90 per cent from 26.7 per cent in the baseline survey in 2006. 

Even so, the use of informal sources to access financial services declined to 4.7 per cent in 2021 from 6.1 per cent in 2019 and 32.1 in 2006. , implying increasing formality in the financial sector, hence better regulation and safety. 

Two weeks ago, a report by digital credit provider Tala indicated that  credit channeled to businesses through the digital channels shrunk by 15 per cent according to the latest industry insights 

According to Mutiso, excise duty has significantly raised the cost of business for digital lenders and microfinance institutions. Financial institutions such as banks are not required to pay the excise tax, giving them an unfair competitive advantage. 

"While bank loans are often unattainable for many Kenyans, the higher rates digital lenders must charge under this excise duty is financially excluding many in the lower and middle class."

The lobby adds that the excise duty has led to uncompetitiveness in the market where commercial banks that offer digital products are only charged interest on fees alone. 

"There is no level playing field in the market. We appeal to the Parliament to edit out the excise duty to ease the flow of affordable credit to spur social economic growth."

His sentiments are shared by Deloitte & Touche in the latest analysis of the financial sector tax regime. 

According to the report, the excise duty row is likely to see lenders pass the added cost to borrowers, significantly reducing access for millions of borrowers who cannot access credit in the formal market.

"It could also reduce returns on investment and exacerbate the default problem, as borrowers find it more expensive to repay short-term loans,'' warns tax experts at Deloitte & Touche. 

According to tax experts, the excise duty has the potential to bankrupt the entire digital lending industry and destroy Kenya’s position as a tech investment destination.

A senior credit official at a pioneer digital lender in the country told the Star that the firm is shouldering a high tax burden as the Kenya Revenue Authority insists on same-day remittance of the excise duty. 

"When a client borrows Sh1,000, KRA expects us to immediately remit the 20 per cent excise duty...what happens when the borrower defaults? This is not sustainable,'' he said. 

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