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The Kenyan government has announced plans to impose a 20% excise duty on microlenders, in a move that industry figures fear could significantly raise the cost of credit and jeopardise the business models of many fintech firms in the country.
In the draft Finance Bill 2024, which was tabled before the National Assembly earlier this month, the Kenyan government proposed a 20% excise duty on “fees” charged by microlenders at the moment when they disburse loans. However, it is not yet clear whether interest rates are deemed to be “fees” and therefore whether or not they fall under the scope of the legislation.
A Kenyan industry insider tells African Business that “we have had conflicting guidance from different agencies about whether interest rates are classed as fees or not.”
“This is causing considerable confusion and concern. If the 20% tax does include interest rates, that is effectively going to increase the cost of capital by 20% and make it much more difficult for citizens to access credit at an affordable rate.”
The proposed tax on microlenders stands in stark contrast to the government’s commitment to a low digital services tax for multinational tech firms, despite significant international pressure on Kenya to reverse course.
Kevin Mutiso, chair of the Digital Financial Services Association of Kenya (DFSAK), tells African Business that “there seems to be a misunderstanding of the impact of taxes on the cost of capital.”
“Microlenders and banks are also facing other taxes as well. This year the banks have started having to pay VAT on financial transactions, for example. These kinds of charges affect those at the bottom of the pyramid more than anyone else,” he adds. “The cost of living is already high and additional costs on banking and finance is making it even more expensive.”
Another area of concern relates to the fact that, because the government has proposed applying the tax at the moment the loan is disbursed, the tax would be applicable whether the loan is paid back or not. This would mean, in the event of a default, microlenders would not only not be repaid but would also face an additional charge of 20% in the form of the excise tax.
This is a particular problem in Kenya, which sees high rates of default. Indeed, the value of non-performing loans in Kenya’s banking sector rose by just under $900mn in the twelve months to December 2023, accounting for 14.8% of the sector’s loan book. The Hustler Fund, President Ruto’s flagship government-led microlending initiative, sees default rates as high as 29%.
Business leaders in the fintech space were particularly concerned as it initially appeared that the tax would not be applicable to other financial institutions such as banks, putting fintech firms at an unfair competitive disadvantage. However, it has been confirmed in recent days that the excise duty also applies to bank fees, although not interest. The Kenya Bankers Association is understood to be raising its concerns with lawmakers.
While fintech entrepreneurs say this has come as a relief, in the sense that they will be on a more level playing field compared to the banks, it does suggest that the government is doubling down on the proposals.
One business leader says that “by expanding the proposed tax to the banks as well, the taxman has spotted a way to make higher revenues while appearing to treat fintechs and microlenders fairly.”
Wayne Hennessy-Barrett, founder and CEO at 4G Capital in Nairobi, says that he understands the need to increase Kenya’s tax revenues but that the proposed excise tax could end up doing more harm than good.
“Increasing tax revenues in order to achieve development objectives is a critical goal for Kenya and many other African countries,” he says. “But the answer is not to make accessing capital unaffordable for Kenyans who would otherwise use that capital to invest in their own businesses and stimulate the economy.”
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