Editorials

Banks should pass loan tax relief to borrowers

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National Treasury building. FILE PHOTO | NMG

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Summary

  • The Treasury is scrapping the 20 percent excise duty on bank loan fees, a step that is expected to lower the cost of lending to individuals and businesses.
  • Carried in the Finance Bill, the proposal to remove the levy will gift banks with up to Sh7 billion savings annually in taxes generated from the fees.
  • According to bankers, this relief may see them reconsider their push to raise the cost of lending, something that they have been fighting for with the regulator.

The Treasury is scrapping the 20 percent excise duty on bank loan fees, a step that is expected to lower the cost of lending to individuals and businesses.

Carried in the Finance Bill, the proposal to remove the levy will gift banks with up to Sh7 billion savings annually in taxes generated from the fees.

According to bankers, this relief may see them reconsider their push to raise the cost of lending, something that they have been fighting for with the regulator.

They say that even after the capping of loans was dropped in November 2019, their proposals to charge interest at market rates have been ignored by the central bank.

Borrowing rates dropped from an average 17 percent in 2016 to 14 percent when the interest capping law took effect in February 2016.

This legislative action saw banks bar many individuals and businesses from loans, leading to the conclusion that the controls were counterproductive to the economy.

While banks faulted the capping of the loans, it will be remembered that they had failed the self-regulation test when some lenders charged exorbitant rates, causing pain to businesses and homes.

This taxation change, therefore, means the lenders are headed for a big relief in their push to tie lending to prevailing market rates, remain afloat and grow, thereby expanding financial inclusion.

Scrapping the levy, therefore, is a major step both for the lenders and their customers who require credit for various goals, including personal development and business growth.

This drop means a lot of things to various segments of the economy, but the relief and benefits tied to this tax move ought to be extended to existing borrowers and fresh applicants by ensuring that they access cheaper loans.

We, therefore, urge bankers that have promised to pass the tax benefits to their customers to do so immediately the Bill goes through to change lives positively.

It is only when credit is accessible at affordable rates that the economy gets the much-needed energy to grow, with new businesses launching or expanding, and homes increasing spending.