Digital lenders have expressed their opposition to a proposed requirement that would mandate them to remit a 20 percent excise duty on loan interest. During their submissions on the Finance Bill 2023 to the National Assembly Finance Committee, they argued that this new tax is discriminatory since other financial institutions are only obligated to pay the tax on ‘other fees’.

This objection arises amidst challenging economic conditions characterized by high inflation. Kevin Mutiso, the Chairman of the Digital Financial Services Associations of Kenya (DFSAK), remarked, “This means that while Digital Lenders are paying Excise Duty on interest on digital loans, other financial institutions including banks are not.” Mutiso cited examples such as bank interests, insurer premiums, and insurance broker premium commissions, which are exempt from this tax.

While digital lenders are subjected to excise duty on the entirety of the amounts charged for lending, including interest on loans, other financial institutions are only subject to excise duty on ‘other fees’. “This creates an imbalanced market that favors other financial institutions over digital lenders, despite both providing the same service to the citizens of Kenya,” explained Mutiso. He further added, “The additional expenses incurred by Digital Lenders as a result of this disparity make it increasingly challenging for them to compete with other financial institutions due to their higher tax obligations.”

If implemented, this proposal would stifle innovation within Kenya’s FinTech industry, drive up the cost of credit for approximately 8 million citizens who lack access to formal or conventional credit sources, and disrupt the consistency of tax collection.

DFSAK emphasized the need for leveling the playing field and urged lawmakers to amend the provision. They propose subjecting all financial institutions, both traditional and digital lenders, to the same tax regime, which would generate an additional tax revenue of KES 100 billion. Alternatively, they suggest that digital lenders should be subject to the same tax rate as other financial institutions, allowing the continued growth of the FinTech sector in Kenya.

Moreover, this proposal would result in credit becoming more expensive for the group of Kenyans served by digital lenders, exacerbating economic disparities and negatively impacting the most vulnerable population. DFSAK highlighted the importance of creating fair competition in lending and stated, “All financial institutions (both traditional and digital lenders) should have an equal cost of credit and rely on innovation and customer satisfaction to thrive.”

The association believes that such reforms would benefit customers by fostering healthy competition, leading to improved products, better service, and an overall enhancement in their quality of life.