Digital Lenders Are Fighting A Perceived Government Squeeze In Kenya

A proposal in Kenya’s 2023 Finance Bill requiring digital lenders in the country to pay a 20 percent Excise Duty on loan interest is drawing the ire of mobile loan providers in the country.

The action, according to the Digital Financial Services Associations of Kenya (DFSAK), is punitive and unfair because other financial institutions are only required to pay the tax on “other fees.”

This was stated by the representatives of the digital lending space, which has faced increased regulatory enforcement in Kenya in recent years, in their contributions to the National Assembly’s Finance Committee about public comment on the Finance Bill 2023, reports local news outlet The Star.

“This means that while digital lenders are paying Excise Duty on interest on digital loans, other financial institutions including banks are not,” DFSAK chairman Kevin Mutiso said.

The imposition of excise duty on interest fees levied by digital lenders, in Mutiso’s opinion, runs counter to the approach taken in regard to the primary sources of income for financial institutions, such as interest for banks, premiums for insurers, and commissions based on premiums for insurance brokers, all of which are exempt from excise duty.

This has the main consequence that any sum charged by digital lenders for lending, including interest on loans, would be subject to Excise Duty. Excise Duty is solely assessed against other financial institutions’ “Other Fees,” which expressly exempts interest on loans and return on loans from its purview.

“This leads to a lopsided market favouring other financial institutions over digital lenders when both sets of institutions provide the same service to the citizens of Kenya,” Mutiso said.

He continued by saying that because they have a greater tax liability as a result of the additional costs incurred by digital lenders, it is harder for them to compete with other financial institutions.

Industry stakeholders stated that the plan, as it is written, would be harmful to Kenya’s fintech scene. Additionally, it will undermine tax collection regularity and increase the cost of credit for the approximately eight million individuals who cannot access formal or traditional forms of credit, they argue.

“Either the Financial institutions are subject to the same regime that digital lenders are subject to and they add up to KES 100 B in additional tax revenue or we are subject to the same tax rate as them and we let fintech continue thriving in Kenya,” Mutiso added.

DFSAK is pressuring lawmakers to change the clause by levelling the playing field, including a decision to require banks to pay the tax on all loans in order to support lending based on free-market economics.

“All financial institutions will have the same cost of credit and will have to rely on innovation and customer satisfaction to thrive. The benefit to the customers will be what fair competition brings to the table,” said Mutiso.

Featured Image Credits: Moolah