Digital lenders are against the 20% excise duty charged on interest and fees, on top of other taxes, arguing that it has raised the cost of credit and stifled innovation in the fintech sector. The 20% excise duty proposal is contained in the Finance Bill 2024 which is expected to be published before 30th April 2024.
- The 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 20 percent excise duty, first passed in 2022, is applies to “fees” but is paid on interest and fees, and it becomes due once the loan is disbursed and not when/if it is repaid. According to several industry players, this means that the excise duty liability is claimed on unbooked revenue, and does not take into account the high rate of default the sector has to grapple with. They also argue that since other financial institutions such as banks do not have to pay excise duty on interest and fees, the imposition of the duty on fintech companies means they can’t compete fairly in the credit market.
“While digital lenders are paying interest duty on interest on digital loans, other financial institutions are not,” Kevin Mutiso, chairman of the Digital Financial Services Association (DFSAK), said while speaking to Parliament about the tax in 2023.
“The subsequent effect of this imbalance is that digital lending would be rendered an unaffordable product for ordinary Kenyan citizens,” accounting firm PWC said in a briefing seen by The Kenyan Wall Street.
In November 2023, the Kenya Revenue Authority (KRA) announced it would be integrating its tax system with digital credit providers, and other companies must remit excise tax on their goods and services, so it can collect the duty in real time. An official at the time said the taxman hoped to replicate its success in real time collection of tax on the gambling sector. But the market dynamics are different, especially since gambling is entertainment, while digital lenders often offer short-term capital for basic needs and emergencies.
Digital lenders have become central to millions of borrowers in need of short-term loans. Among the most frequent reasons for getting mobile loans is to meet short-term expenses such as capital injections into businesses, payment of cyclical bills such as school fees and rent, and meeting short-term bills.
Since March 2023, digital lenders are licensed by the Central Bank of Kenya, which issued permits to 32 firms by October 2023, and 19 more in March 2024. CBK received 480 applications in 12 months, which points to the vast interest in the fintech sector and its prospects to both domestic and foreign investors.
Some of the advantages that have driven this are in reality two-sided; for example, since it is easier for borrowers to access mobile loans from digital lenders than other financial institutions, it is also easier for them to default. Without any collateral, this represents a higher risk for digital lenders, who have been accused of charging exceptionally high interest on credit.
In addition to higher default rates, digital lenders have been forced to adapt to growing regulation by charging even higher rates thus adding additional default risk onto the debtor. For example, after the sector was ordered to delist borrowers who had defaulted on less than KShs 1, 000 from credit reference bureaus, many fintechs responded by raising their minimum credit offerings to above that cutoff point.
The excise duty row is likely to result in a similar adaptation, where digital lenders pass on the added cost to borrowers, significantly reducing access for millions of borrowers who cannot access credit from other regulated sources. It could also reduce returns on investment and exacerbate the default problem, as borrowers find it more expensive to repay the short-term loans.
Digital lending is a key sub-sector of Kenya’s fintech ecosystem. US Ambassador Meg Whitman has cited Kenya as a bastion of fintech innovation, referring often to the country by its famous moniker ‘The Silicon Savannah.’ As President Ruto prepares for his state visit to the United States next month, this comes at an awkward time as Kenya’s technology industry, among other things, will play a pivotal role in the trip.
Locally, it will complicate the landscape to the detriment of both borrowers and investors.
“It will bankrupt the entire digital lending industry, and destroy Kenya’s position as a tech investment destination,” an industry player says, “Loan prices risk being raised to allow companies to survive an effective tax rate of 60% (as much booked revenue is never seen due to loan write offs, when customers do not repay).”
