EDITORIAL: Banks, KRA should agree on new taxation regime

Times Tower, the headquarters of the KRA, in Nairobi. FILE PHOTO | NMG
Times Tower, the headquarters of the KRA, in Nairobi. FILE PHOTO | NMG 

Kenyan banks had a relatively tough 2017, which was the first full year during which the law capping interest rates charged on borrowers was implemented.

The coming into effect of new accounting rules under the International Financial Reporting Standard 9 (IFRS 9) looks set to make 2018 an even tougher year for the bankers.

There is an urgent need for the lenders and the Kenya Revenue Authority (KRA) to come to the negotiating table and agree on a way forward regarding taxation of banks under the IFRS 9 regime.

As it is, the new reporting standard transcends the banking industry and affects all companies that are involved in any sort of financial transaction.

While the taxman has annual revenue targets that it is supposed to meet to keep the economy moving, it is imperative that KRA does not kill the goose that lays the golden egg. 

The main bone of contention is in the treatment of provisions for bad debts.

Whereas banks previously only made impairment provisions on loans when a customer had defaulted on repayments, IFRS 9 requires accountants to anticipate bad debts at the very onset of any financial transaction.

That means besides banks, manufacturers, retailers, service providers and virtually all businesses that trade on credit will be affected.

Accountants anticipate that the effect of IFRS 9 will be felt most in the first three years of its operation, which is about the average maturity period for non-secured loans offered by Kenyan banks.

Experts project that bank’s profitability could fall by up to a third, if the lenders adhere strictly to the IFRS 9 guidelines.

Other traders will be expected to either tighten their credit requirements or shorten maturity periods of their debts.

Through treaties signed with international agencies, Kenya has committed to be a part of the global league of nations that adhere to standardised accounting formats.

The issue of failing to adhere to the IFRS 9 provisions does not therefore arise, as it would dent investor confidence in the reliability of Kenyan firms’ financial statements.

The only way out is for KRA to sit across the table with the Institute of Certified Public Accountants (Icpak), banks and all other stakeholders to find an agreeable way forward.