In its 2023 Finance Bill, the Kenyan government has asked digital lenders in the country to remit a 20% excise duty on each loan interest that it charges. This is one of the many taxes that the government is introducing to drive up revenue in the country.
However, the Digital Financial Services Associations of Kenya (DFSAK) has described the proposal as unfair, especially with the current economic realities in Kenya and globally. The association also say that the exclusion of other loan-providing financial institutions in the excise duty remission makes it more lopsided.
If this Bill is passed into law, digital lenders will also require customers to pay excise duty, this will make it more difficult for these lenders to compete since other financial institutions only will not be charged excise duty on loan interest. The move has been seen by DFSAK as demarketing them in favour of these other institutions.
"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,'' says DFSAK chairman Kevin Mutiso.
"Either the Financial institutions are subject to the same regime that digital lenders are subject to and they add up to KES 100 billion 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. "It also makes credit more expensive to the cadre of Kenyans served by Digital Lenders as opposed to those served by other financial institutions, creating a superfluous economic disparity negatively affecting the bottom of the pyramid."
The association has asked the legislators to amend the provision by levelling the playing field including a decision to compel the banks to pay the levy on all credit to promote free-market economics lending.
Digital lending in Kenya
The proliferation of mobile-based banking and lending platforms in Kenya has provided unbanked populations with access to financial services and increased financial inclusion by over 50%. However, due to poor regulations, predatory lending has thrived on the continent.
In June 2019, a number of digital lenders in the East African country—not including OKash—created the Digital Lenders Association of Kenya (DLAK) to regulate industry practices. In the association's code of conduct, members are asked to supervise "the activities of external providers of debt collection services" and investigate "reported cases of infringement of consumer rights."
Recently, DLAK rebranded to DFSAK in a strategic bid to deepen financial inclusion by bringing together more players in the financial services ecosystem and being more responsive to dynamic customer needs.
"In the next phase, the Association is looking to overturn the shortfalls experienced in the last eight years including harmful debt collection practices still prevalent even as licensing continues," Mutiso said at the rebrand announcement.
Recall that in 2021, the Kenyan presidency assented to CBK Amendment Bill, 2021[pdf] which allows the central bank to license and oversight the previously unregulated digital credit providers. According to this Bill, all licensed digital credit providers (DCPs) are required to disclose their sources of funds and provide evidence of the same.
So far, the Central Bank of Kenya has licensed at least 22 digital lenders in the country, while several other applicants are awaiting confirmation.