Cost of digital loans to rise on fresh 20pc tax

Borrowers of digital loans remain unfazed by tax measures that have increased credit costs over the last two years. FILE PHOTO | NMG

Borrowers of digital loans will pay more for credit if last-minute changes proposed to the Finance Bill to impose a 20 percent excise tax on fees charged by digital lenders are approved.

The tax will push up interest rates and other fees paid by borrowers for digital loans, including those that were not previously regulated by the Central Bank of Kenya (CBK).

“The first schedule to the Excise Duty 2015 is amended by inserting the following proviso, excise duty on fees charged by digital lenders at a rate of 20percent,” the committee says in the proposal.

Digital loans are defined as credit obtained via mobile banking such as M-Shwari and KCB-Mpesa or a smartphone app such as Branch and Tala. Airtime advances and other forms of digital borrowing such as Safaricom’s overdraft facility Fuliza are excluded.

The new tax will see the taxman raid dozens of digital lenders among them Tala, Branch, Timiza, O-Kash, which have enjoyed explosive growth lending via mobile and had been spared the tax.

Members of Parliament have until Thursday this week to debate the proposal that if approved looks set to hurt thousands of borrowers who rely on digital loans to pay daily bills.

Tala charges a monthly interest rate of up to 19 percent depending on the size of the loan while Branch charges 17.6 percent.

The proposals to impose excise tax on digital loans, if approved, will increase the revenue basket for the Kenya Revenue Authority (KRA). The digital lenders have various fees that they load on customers.

The CBK defines charges by digital lenders as all the payments that a customer makes, is required to make, or agrees to make to a digital credit provider in consideration of the loan by the digital credit provider to the customer, and all interest, fees, expenses and costs associated with the provision of the loan.

Digital lenders will now join the traditional credit providers such as banks and micro-financiers in paying the excise tax that looks set to raise billions of shillings to the KRA.

Parliament approved changes to the law that imposed a 20 percent tax on fees and commissions earned on bank credit, triggering an increase in the cost of mobile loans effective July 1 last year.

The imposition of the tax prompted an increase in the cost of mobile loans such as KCB M-Pesa and M-Shwari and the overdrafts feature Fuliza—jointly owned by Safaricom and NCBA Group.

Before the new tax, borrowers paid a facility fee of 7.5 percent for the M-Shwari loans, amounting to an annualised interest rate of 90 percent.

On Fuliza, the fee is 1.083 percent daily or 395.2 percent annualised, underlining the high cost of using the short-term credit services regularly.

The excise duty on normal loan fees was projected to earn the KRA more than Sh7 billion annually.

The proposal to charge a 20 percent excise tax on digital loans is aimed at tapping into the vast demand for digital credit that has surged over the years due to the ease of getting the loans within minutes.

The credit that does not require collateral and takes minutes to access via mobile phones, making it a quick fix for footing daily bills.

The CBK says that borrowers tapping the digital loans from the unregulated lenders grew to more than two million two years ago from an estimated 200,000 in 2016, highlighting their popularity.

The proposal to slap digital loans with the 20 percent excise tax comes at a time the CBK is sharpening its tools to start regulating digital lenders, bringing the firms under a similar operating environment like banks and micro-financiers.

President Uhuru Kenyatta signed into law the Central Bank Act, 2021 in December, bringing digital lenders under the watch of the banking regulator for the first time.

The lenders will from September apply to the CBK for approval of interest rates on their loans and disclose all terms of their credit to borrowers. They have also been barred from sharing information of loan defaulters with third parties.

Digital lenders have been blamed for breaching the confidentiality of information of borrowers who default on loans and hiding the terms of their loans, opening an avenue for predatory lending.

Dozens of digital lenders, including Tala, Branch and O-Kash, have invested in Kenya’s credit market in response to the growth in demand for quick loans.

But the quick credit has come at a pain for borrowers who pay steep interest rates and face high penalties when they default on payments.

A recent survey by the digital lenders showed that 55 in every 100 Kenyans had acquired loans from digital lending applications.

The majority of the digital lending platform users are urban dwellers at 66 percent. Most men have multiple digital credit providers, whereas women are more loyal to a single brand. Most users of digital credit subscribers are aged between 30-34 years.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.