Despite Kenya’s National Tax Policy being anchored in constitutional values of equity and fairness, digital lenders are facing disproportionately harsh tax treatment compared to traditional financial institutions.
Equity and fairness require that the taxation regime be designed to treat all taxpayers in similar circumstances equally and those under different circumstances differently.
While this principle is largely upheld on paper under various laws and statutes, the practice and implementation have never been so different, more-so in financial services.
A prime example is the imposition of a 20% excise tax on fees charged on digital loans in 2022. This move placed digital lenders at a significant disadvantage, as their traditional counterparts, mainly banks, were initially exempt from the charge. As a result, digital lenders were forced to pass on the cost to borrowers, making their products more expensive and less competitive.
In response, digital lenders sought relief through the courts and lobbied extensively for reform. Their efforts eventually led to the enactment of the Tax Laws (Amendment) Act, 2024, passed in December. This law extended the 20% excise duty to loan fees charged by all financial institutions, thereby levelling the playing field- at least on that front.
Another major disparity is the treatment of bad debt deductions. While commercial banks benefit from provisions under IFRS 9- specifically on expected credit losses (ECL)- which allow them to expense impaired loans through provisioning, digital lenders remain bound by more conservative local tax laws.
IFRS 9 permits both general and specific provisions, where the former is based on portfolio-level historical losses and the latter targets individual problem loans. For banks, these provisions directly reduce taxable profit, providing significant relief. However, for digital lenders, only specific, fully written-off debts qualify for tax deductibility, and even then, only if all recovery efforts have been exhausted and documented to the Kenya Revenue Authority’s (KRA) satisfaction.
This process is lengthy, burdensome, and financially straining.
The divergence between tax treatment between banks and micro-lenders creates structural and operational risks that affect the institutions, according to Philip Muema, a partner at Andersen Kenya who has over 15 years of experience in tax advisory.
Banks enjoy more favorable frameworks, while digital and micro-lenders face greater uncertainty and heavier compliance burdens, without the institutional capacity or legal muscle to manage them effectively.
Muema notes that this creates a competitive imbalance and market distortion where banks enjoy more favorable terms.
For many digital lenders, the tax complexity undermines innovation, scalability, and their broader mission of financial inclusion. The result then is a diversion of focus away from core lending operations toward managing legal disputes, penalties, and ever-shifting tax obligations.
“Tax uncertainty is not the right kind of uncertainty as it deters investment, chokes confidence, and undermines growth of both local and international investment at precisely the moment we need capital most,” Julian Mitchell, CEO of 4G Capital, said The Kenyan Wall Street’s 2nd Annual Corporate Taxation Roundtable in May.
In its 2024 annual report, industry lobby group Digital Financial Services Association of Kenya (DFSAK), expressed hope for regulatory collaboration with the Central Bank of Kenya (CBK) to address these imbalances and allow for more reasonable bad debt write-offs for tax purposes.
The complex tax web exposes digital and micro-lenders to penalties and disputes. It diverts operational focus from lending to navigating legal and tax obligations.
*The view expressed here are the author's own and do not necessarily reflect the editorial stance of The Kenyan Wall Street.