Borrowers feel tax pinch as banks review cost of loans

Banks pass on the tax charge to customers, increasing the burden on borrowers already grappling with adverse effects of the coronavirus-induced hardships. ILLUSTRATION | SHUTTERSTOCK

By JOHN MUTUA
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NCBA and KCB have become the first lenders to increase the cost of their loans after a 20 percent excise duty tax on fees and commissions earned on loans took effect on July 1.

KCB Group in text messages to its customers on Friday afternoon said that loans advanced through the KCB M-Pesa will now attract a fee of 8.64 percent. This is up from 7.35 percent.

The NCBA Group said that all loan-related fees and commission will be subjected to the 20 percent excise tax.

The increase of the loan fees comes a day after President Uhuru Kenyatta assented into law the re-introduction of the 20 percent tax on all fees and commissions earned on loans, prompting banks to pass the increased cost to borrowers.

“Dear customer, following the assent of the Finance Act 2021 that has re-introduced a 20 percent excise duty on loan fees, the revised KCB M-Pesa loan fee is now 8.64 percent,” KCB Group told its customers on Friday.

The 20 percent excise duty on loan fees will see banks pay the Kenya Revenue Authority more than Sh7 billion annually, even as credit becomes costly for homes and businesses as lenders transfer the burden to borrowers.

Banks had opposed the tax saying that it would force them to pass the cost to borrowers, increasing the burden on borrowers already grappling with adverse effects of the coronavirus-induced hardships.

The 20 percent excise tax was introduced in 2018, triggering an increase in the cost of bank services such as transfers — both local and international, over-the-counter withdrawals as well as ATM transactions and account operating fees.