Mobile loan apps may raise interest due to 20 percent tax

Mobile loan apps may raise interest due to 20 percent tax

June 6, 2022 Off By TLK

Mobile loan apps in Kenya may raise interest if some proposed changes on Finance Bill gets approval. The parliamentary finance committee proposes a 20 percent excise tax on fees charged by digital lenders.

Excise duty on mobile loans

“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 20 percent,” the committee says in the proposal.

This will affect all mobile loan apps that operate in Kenya. They include MShwari, KCB Mpesa, Branch, Tala, OKash, Timiza, among others. Loan apps that were not affiliated to banks thus previously unregulated by Central Bank of Kenya were not subject to such tax.

President Uhuru Kenyatta signed into law the Central Bank Act, 2021 in December, bringing digital lenders under regulation by CBK.

The demand for mobile loans in Kenya is so high. Exponential growth of lenders shot to more than 50 apps that lend without collateral.

However, the loan apps charge interest as high as 500 percent per annum to cover up for the high risk.

Parliament has until Thursday this week to debate the proposal. If it passes, then the thousands of borrowers who rely on mobile loans will pay more. Many of them have already been casualties of poor credit scores that saw them listed on CRBs for failing to repay loans as low as KES 1000.

This saw the Central Bank step in to regulate how borrowers can be listed under CRB, with the least requirement being that they should be notified first. Over two million people borrow from mobile loan apps annually according to CBK.

Digital lenders will now join the traditional credit providers such as banks and micro-financiers in paying the excise tax. The change will raise billions of shillings for KRA.

Pain of quick mobile loan apps

Airtime advances and other forms of digital borrowing such as Safaricom’s overdraft facility Fuliza are excluded. Fuliza charges a fee of 1.083 percent daily or 395.2 percent annually for its overdraft loans. Many have criticized it as creating more debt problems instead of solving cash access issues by encouraging saving.

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

Before the new tax, borrowers paid a facility fee of 7.5 percent (90 percent interest pa) for the MShwari loans. Tala charged 19 percent pm while Branch charged 17.5 percent pm.

CBK now requires mobile loan apps to disclose all credit terms and conditions to borrowers. The mobile lenders are also prohibited from sharing information of loan defaulters with third parties. Some loan apps were notoriously using the name and shame tactic by calling people in contact lists of defaulters asking them to compel the borrower to repay their loan.

A survey by the digital lenders showed that 55 in every 100 Kenyans had acquired a mobile loan. Urban dwellers formed 66 percent of the borrowers, with men borrowing from multiple platforms.

Most of the borrowers were between 30 – 34 years old showing how much young people were short of cash.