Cost Of Digital Loans To Rise On New 20% Excise Duty

The cost of digital loans is expected to surge further if the new amendment to impose a 20 percent excise tax on fees charged by digital lenders is approved. The new proposal by the Finance and National Planning Committee sailed through the floor of the National Assembly on Thursday night.

The new proposal will hurt many borrowers who rely on digital loans given that interest rates and other fees charged to borrowers will go up.

This move will see digital lenders including Branch, Tala M-Shwari, and KCB Mpesa among others, operate like the traditional credit providers such as banks and micro-financiers in paying the excise tax, increasing revenue for the Kenya Revenue Authority (KRA).

According to a recently released report by Safaricom, many Kenyans have now opted for digital borrowing owing to the high cost of living pushing the facilities overdraft to 1.37 billion daily in the 12 months to March. The amount disbursed on Fuliza hit 502.6 billion shillings in the year to March, translating into a 43.1 percent increase from the 351.2 billion shillings lent over a similar period the previous year.

Some mobile phone lenders do not publicly disclose their loan charges leading to costly interest rates pushing many borrowers into the debt trap. However, this is likely to change if they fall under CBK regulation in September this year. The amended Central Bank Act, 2021, gives the Central Bank of Kenya powers to license digital lenders as well as ensure the existence of fair and non-discriminatory practices in the credit market.

Consequently, the Competition Authority of Kenya (CAK) requires digital lenders to reveal interest rates, late payments, and rollover fees for their loans before disbursing credit to customers. According to a CAK report, 77 percent of mobile loan borrowers have been forced to pay penalties and were charged to roll over their debts.

Digital lenders have also been accused of privacy violations and issues involving loan overpricing, misuse of customers’ data, and unethical debt collection practices.

Under CBK regulation, digital lenders will be required to put appropriate policies, procedures, and systems to ensure the confidentiality of customer information and transactions. In addition, digital credit providers shall not share customer information with any other person except with the customer’s consent.

Data from the CBK shows that borrowers borrowing digital loans from unregulated lenders surged from 200,000 in 2016 to more than two million in 2019.

All digital lenders have until September 17 to seek licensing from the CBK or cease operations.

Related Content: Digital Lenders Given 6 Months To Register With CBK