Kenya: New 20% Excise Duty on Digital Lenders Threatens Financial Inclusion in Kenya

The implementation of a 20% excise duty on digital lenders as part of Kenya’s Finance Bill 2024 is causing significant concern among fintech companies and financial inclusion advocates. Set to be published before April 30, 2024, this duty impacts the affordability and availability of digital lending services by increasing the cost of credit for millions of Kenyans.

Digital lending entities argue that the excise duty, which is levied on both interest and fees at the point of loan disbursement, exacerbates the financial burden on their operations. This approach is particularly contentious as it applies the tax on potential, yet uncollected revenue, given the sector’s notable default rates.

Industry leaders highlight that unlike traditional financial institutions such as banks, which are not taxed on core income streams like interest, digital lenders are unfairly burdened. Kevin Mutiso, chairman of the Digital Finance Service Association of Kenya (DFSAK), points out that this unequal tax treatment creates a distorted competitive landscape favoring traditional banks and insurers, who are exempt from similar duties.

Mutiso explains, “This excise duty not only increases the financial load on digital lenders but also places them at a competitive disadvantage. It ends up making digital financial services less accessible to the public, especially those who are already underserved by conventional banks.”

The additional tax burden has forced digital lenders to increase interest rates, further escalating the risk of defaults among borrowers. This regulatory change affects approximately eight million Kenyans who rely on digital loans due to limited access to traditional banking services.

The broader implications of this excise duty could lead to reduced investment returns in the fintech sector, a contraction in the availability of credit, and an increase in financial exclusion among the most vulnerable groups. With digital lenders likely to pass these added costs onto borrowers, the move threatens to deepen the divide in financial access rather than bridge it.