Bad News To Kenyans With Mobile Loans.

As the Finance Bill 2023 moves to Parliament following the conclusion of public participation, the anticipation on what it means for the future of Digital Credit Providers (DCPs) in Kenya is growing.

How bad will it actually be for digital lenders and what does it mean for you? In this article, we break down the tax changes introduced by the Bill on DCPs and how they are going to affect you.

What’s Changed
Under the Bill, DCPs will from July 1, be required to pay 20% excise duty on “any amount charged in respect of lending.”

This means that unlike the current tax regime where all financial institutions already pay this 20% duty on “fees”, DCPs will also start paying the 20% tax on interest charged on a loan.

This change is supposed to only apply to DCPs and not to other lenders (commercial banks, MFBs, SACCOs or non regulated MFIs). For everyone else, interest charged and returns on loans are specifically exempted from excise duty.

In the past, excise duty has been paid by all financial institutions in Kenya but only on their fees, not interest.

Fees are the charges associated with the cost of processing a loan and are either deducted before disbursement or paid by the borrower upfront. The most common are application or processing fees.

Interest, however, is the cost of borrowing the money and traditionally hasn’t been taxed in Kenya. Nevertheless, all financial institutions pay the usual corporate income tax.

This matters because interest income can be unreliable. It is only earned if the borrower pays the lender back the loaned money. Interest income is usually only taxed as Corporate Income Tax which is usually after the interest has been received by way of borrowers paying back what they owe.

But under the Finance Bill 2023, DCPs will be required to pay excise duty on interest income. The tax is earned at the point of disbursement, meaning the lender will have to pay it, even if the user defaults.

Default rates on initial loans in Kenya for digital lenders are as high as 35%. This means that digital lenders often already lose money on their first loans to users – putting more pressure on a sector that’s been in flux for over three years since the Covid Pandemic struck.

Prior to this tax proposal, very few digital lenders would have paid any excise duty as they classified all of their costs as interest income.