Digital lenders announce an increase in loan fees with the implementation of new tax

As of July 1, 2022, all credit facilities obtained by borrowers will be subject to a planned 20 percent excise tax, according to plans made public by the Digital Lenders Association of Kenya.

Small businesses that depend on short-term loans to expand will be hardest hit, according to DLAK Chairman Kevin Mutiso, because the new tax will be incorporated into pricing and passed down to consumers as a cost.

The organization said that starting the following month, all of its members—both those who already hold operating licenses under the new rules governing digital lending and those who have not—will be compelled to pay the excise tax to the Kenya Revenue Authority on behalf of borrowers.

“The proposed change affects all digital loans from July 1 as we will be required to effect excise tax which is a percentage of fees levied on borrowers for services rendered by the lenders,” 

The present Excise Duty Act defines “other fees” as any fees, charges, or commissions levied by financial institutions in connection with their licensed activities. This includes fees and commissions for licensed lenders. The cost band is widened as a result, increasing the amount the borrower will be charged in the final calculation.

However, the deductions will not include loan interest, loan return, any profit-sharing, insurance premiums, or commissions based on or related to insurance premiums as defined by the Insurance Act or regulations. As a result, interest is not included in the deductions.

The majority of Kenyans rank digital lending platforms as their first choice for finance sources to support the expansion of small enterprises, according to the State of Digital Lending in Kenya Report 2021 published by consumer intelligence company Reelanalytics.

The survey also demonstrates that most Kenyans would turn to sources like close family members for business expansion loans in the absence of digital lending platforms.

Digital lenders must subtract the new tax based on the “period of supply,” which must be prior to the service being rendered and before the invoice for the provision of service is produced or cleared, in whole or in part, prior to the date on which borrowers must make payment for the services received.

Due to their classification as financial institutions, all regulated digital lenders will no longer be subject to thin cap regulations.

Any multinational business group (MNE) with a Kenyan headquarters and a gross revenue of KShs. 95 billion is proposed to be subject to a Country-by-Country reporting (CbCR) requirement under the Finance Bill 2022, which might raise the final cost to the consumer.