Lenders Can Now Call KRA “Bro” But KRA Has Not Paid Your Tala Loan

Money lenders can finally call the Kenya Revenue Authority “bro”. That is the funny way of describing one of the most important, and most misunderstood, changes in the Finance Act 2026. From 1 July 2026, the tax law expressly recognises that when a qualifying lender suffers a genuine bad debt, the loss may include the principal, the interest and other amounts connected to that debt. For years, the principal was the centre of a bitter tax war. Parliament has now written the answer into the law.

The reform sounds technical, but the issue is simple. Every loan has at least two parts. The first part is the principal: the lender’s own money advanced to the customer. The second part is the interest: the charge for allowing the customer to use that money. There may also be lawful fees or other amounts linked to the credit facility.

Imagine that a lender gives a customer KSh1 million and expects KSh100,000 in interest. The total amount due is KSh1.1 million. The customer stops paying, cannot be traced or has no recoverable assets. The lender follows the required recovery process, eventually concludes that the debt is genuinely irrecoverable and writes it off. The tax question is then unavoidable: what exactly has the lender lost for income-tax purposes? Is it only the KSh100,000 interest, or is it the full KSh1.1 million exposure?

For a long time, KRA’s strict position was that the principal was capital and therefore should not be deducted as a bad debt. In that view, only income items such as interest could qualify, subject to the law and the bad-debt guidelines. The lender could lose the money it advanced, but KRA could still treat the principal as a non-deductible capital loss.

Lenders argued that this did not reflect the economics of lending. A manufacturer trades in goods. A retailer trades in stock. A professional firm trades in services. A bank, microfinance institution or digital lender trades in money and credit. The principal advanced to customers is not a decorative asset sitting outside the business; it is the raw material from which the lending business earns income. When that principal disappears in a genuine default, the lender has suffered an ordinary business loss.

This disagreement mattered because income tax is charged on taxable profit, not on cash that has vanished. If a lender earned KSh500 million but permanently lost hundreds of millions of shillings in loans, refusing the principal deduction could leave the lender paying tax as though the missing money still existed. That could produce a tax bill detached from the lender’s real economic position.

Before the 2026 amendment, section 15(2)(a) of the Income Tax Act allowed a deduction for bad debts incurred in producing income where the Commissioner was satisfied that the debts had become bad. The Commissioner’s bad-debt guidelines, issued through Legal Notice No. 37 of 2011, then set out the circumstances in which a debt could be treated as uncollectable. But the guidelines also excluded capital expenditure, and that phrase became the fault line. KRA frequently treated the loan principal as capital. Lenders treated it as trading stock.

The Finance Act 2026 now says, in substance, that for a person carrying on a money-lending business, and for banks or financial institutions licensed under the Banking Act, the Microfinance Act or the Central Bank of Kenya Act, a bad debt includes the principal, the interest and any other amount relating to the debt. That is the decisive change. Parliament has removed the main argument KRA used to disallow the principal merely because it was principal.

This is not a casual favour to every person who has ever lent money. The provision operates within the Income Tax Act and the Commissioner’s guidelines. A taxpayer must be carrying on the relevant lending business and must show that the debt has actually become bad. A friendly loan to a cousin, a hidden shareholder withdrawal dressed up as a loan, an undocumented advance or a debt written off for convenience does not automatically become a tax deduction.

The word ‘bad’ is doing heavy legal work. A debt is not bad simply because the borrower is late, stubborn or temporarily short of cash. The 2011 guidelines require the creditor to take reasonable steps to collect it and to establish that it has become uncollectable. The debt may qualify where a court order extinguishes the creditor’s contractual right, the debtor is insolvent or bankrupt, there is no security that can be realised, the security has been realised but is insufficient, the cost of further recovery would exceed the amount likely to be recovered, or recovery has been abandoned for another objectively reasonable cause.

In practice, KRA will still expect evidence. That may include the loan agreement, disbursement records, repayment history, demand notices, telephone and email follow-ups, field-recovery reports, CRB information, searches for assets, security-realisation documents, court records, insolvency records, internal credit-committee approvals and the accounting entry that records the write-off. The amendment expands what can form part of the bad debt; it does not abolish the duty to prove that the debt is genuinely bad.