Imposition of 20% Excise Duty on Digital Lenders in Kenya Financially Excluding Millions of Individuals

The introduction of a 20% excise duty on digital lenders in Kenya has posed significant repercussions for financial inclusion in the country by excluding millions of individuals.

Digital lenders have expressed concerns against the 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 which was initially enacted in 2022, is applied to “fees” but extends to both interest and fees. It is due upon loan disbursement, rather than upon repayment. Industry players argue that this setup results in excise duty being levied on unrealized revenue, disregarding the sector’s prevalent default rates.

They contend that this puts fintech companies at a disadvantage in the credit market, as traditional financial institutions like banks are not subject to excise duty on interest and fees, thereby inhibiting fair competition.

According to DFSAK chairman Kevin Mutiso, he had earlier said the imposition of excise duty on interest charged by digital lenders contradicts the approach taken on core incomes of financial institutions, such as interest for banks, premiums for insurers, and premium-based commissions for insurance brokers, which are exempted from excise duty.

He noted that the main effect of this is that digital lenders will have Excise Duty charged on any amount they charge in respect of lending which includes interest on loans.

“This leads to a lopsided market favoring other financial institutions over digital lenders when both sets of institutions provide the same service to the citizens of Kenya,” Mutiso said. He added that the extra expense borne by digital lenders as a result of this makes it more difficult for them to compete with other financial institutions as they have a higher tax obligation.

In addition to higher default rates, digital lenders in Kenya have been forced to adapt to growing regulation by charging even higher rates thus adding additional default risk onto the debtor.

It has also made access to credit costly for about eight million citizens who cannot access the formal or conventional forms of credit and disrupt consistency in tax collection. The dispute over excise duty is anticipated to lead to a scenario where digital lenders transfer the increased cost to borrowers.

This action could notably limit access to credit for millions of borrowers who lack access to credit from other regulated sources. Additionally, it may decrease returns on investment and worsen the default issue, as borrowers face higher costs in repaying short-term loans.