Savings and credit co-operative societies (Saccos) members face a fresh disincentive following the doubling of a tax on earnings, officials and analysts warn.
Other experts warned the higher taxation will discourage the drive for greater capitalisation of saccos that is badly needed especially for deposit takers.
Amendments to the Income Tax Act through the Finance Act 2018 doubled the withholding tax rate applicable to the dividends payable by a sacco from five to 10 percent.
The taxman has begun effecting the tax from this month.
Sacco members are expected to receive reduced after-tax dividends following the enactment of the law.
“The Kenya Revenue Authority (KRA) raiding members’ pockets may hurt savings in saccos with other options (attracting) lower (taxes) or (being) tax-free,” said Nation Sacco chairman Peter Munaita.
He cited Kenya’s first mobile-traded bond the M-Akiba bond, which is tax-free and earns 10 percent interest and the tax-exempt infrastructure bonds issued by the Treasury with a 12.5 percent return.
According to Patrick Kimani, a Nairobi-based consultant for cooperatives, the higher levies are likely to hit poor savers hard.
“Saccos are unique in that they attract members who are keen on pooling meagre resources to empower themselves. Raising the taxes is bound to be counterproductive,” Mr Kimani said.
However, the Kenya Union of Savings and Credit Co-operatives (Kussco) managing director George Ototo downplayed the impact of the higher levies, saying it would be minimal since dividends were not the key concern for savers.
“Credit and loans are savings-driven, meaning the motivation to save isn't dividends but to access affordable credit,” said Mr Ototo.
Others though warned higher taxation will deal a blow to capitalisation of saccos, which are mostly undercapitalised.
“Many saccos have expanded pretty fast, which was already stretching capital thin. So this tax comes at the wrong time,” said a sacco official who sought anonymity so as to speak freely.Saccos receive two types of funding from members: capital by way of shares and savings by way of member deposits.
“With this tax, fewer members will take up shares in saccos, preferring instead to place savings, thereby straining the saccos’ struggle to comply with capital adequacy rules,” the official added.
“Sacco shares aren't tradable as they aren't listed anywhere. Shareholders only benefit is a good dividend, as they can't earn capital gains from rising share prices nor enjoy liquidity that listed shares enjoy.”
Kenya has over 5,000 registered saccos that have mobilised savings to the tune of Sh501 billion and built an asset base of Sh694 billion.