Digital loan borrowers will pay more for credit if last-minute proposed changes to the Finance Bill to impose a 20% excise tax on fees charged by digital lenders are approved.
The tax will drive up interest rates and other fees paid by borrowers for digital loans, including those not previously regulated by the Central Bank of Kenya (CBK).
“The First Schedule of Excise Duty 2015 is amended by inserting the following proviso, excise duty on fees charged by digital lenders at a rate of 20%,” the committee says in the proposal.
Digital loans are defined as credit obtained through mobile banking services such as M-Shwari and KCB-Mpesa or smartphone application such as Branch and Tala. Airtime advances and other forms of digital borrowing such as Safaricom’s Fuliza overdraft facility are excluded.
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The new tax will see the IRS raid dozens of digital lenders including Tala, Branch, Timiza, O-Kash, which have seen explosive growth in mobile lending and had been spared the tax.
MPs have until Thursday this week to debate the proposal which, if approved, would hurt thousands of borrowers who rely on digital loans to pay their daily bills.
Tala charges a monthly interest rate of up to 19% depending on the size of the loan, while Branch charges 17.6%.
Proposals to impose an excise tax on digital loans, if approved, will increase the revenue basket of the Kenya Revenue Authority (KRA). Digital lenders have various fees that they charge customers.
The CBK defines digital lenders’ fees as all payments that a customer makes, is required to make or agrees to make to a digital credit provider in consideration for the loan by the digital credit provider to the customer, as well as all interest, fees, expenses and costs associated with the granting of the loan.
Digital lenders will now join traditional credit providers such as banks and micro-financiers in paying the excise tax which is expected to net the KRA billions of shillings.
Parliament approved changes to the law which imposed a 20% tax on fees and commissions levied on bank credit, triggering an increase in the cost of mobile loans from July 1 last year.
The imposition of the tax has increased the cost of mobile loans such as KCB M-Pesa and M-Shwari and overdrafts include Fuliza, jointly owned by Safaricom and NCBA Group.
Prior to the new tax, borrowers paid a 7.5% facility fee for M-Shwari loans, or an annualized interest rate of 90%.
On Fuliza, the fee is 1.083% per day or 395.2% annualized, highlighting the high cost of regularly using short-term credit services.
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The excise duty on normal loan charges is expected to earn the KRA more than 7 billion shillings a year.
The proposal to charge a 20% excise tax on digital loans aims to tap into the vast demand for digital credit that has grown over the years due to the ease of obtaining loans within minutes.
Credit that does not require collateral and takes minutes to access via mobile phones, making it a quick solution to paying daily bills.
The CBK says borrowers borrowing digital loans from unregulated lenders grew to more than two million two years ago from around 200,000 in 2016, underscoring their popularity.
The proposal to slap digital lending with the 20% excise tax comes at a time when the CBK is refining its tools to begin regulating digital lenders, putting businesses in an operating environment similar to banks and micro-businesses. financial.
President Uhuru Kenyatta signed into law the Central Banking Act 2021 in December, bringing digital lenders under the supervision of the banking regulator for the first time.
Lenders will apply from September to the CBK for approval of interest rates on their loans and will disclose all terms of their credit to borrowers. They were also prohibited from sharing information about defaults with third parties.
Digital lenders have been accused of breaching the privacy of defaulting borrowers’ information and hiding the terms of their loans, opening the door to predatory lending.
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Dozens of digital lenders, including Tala, Branch and O-Kash, have invested in Kenya’s credit market in response to growing demand for fast loans.
But fast credit is painful for borrowers who pay high interest rates and face high penalties for default.
A recent survey by digital lenders showed that 55 out of 100 Kenyans had taken out loans from digital lending apps.
The majority of users of the digital lending platform are city dwellers at 66%. Most men have multiple digital credit providers, while women are more loyal to a single brand. Most digital credit subscriber users are between 30 and 34 years old.