The Treasury has scrapped the 20 percent excise duty on bank loan fees, setting the stage for possible drop in the cost of credit to businesses and households.
The removal of the excise tax is contained in
the Finance Bill and will see banks save up to Sh7 billion annually on taxes
generated from fees charged on processing loans.
Bankers say the cut will ease pressure on
lenders to raise loan costs given the fees that attract the excise duty account
for an average of 2.5 percent of the overall lending rates.
“The first schedule to the Excise Tax Act,
2015 is amended in part three, in the definition of ‘other fees’ by deleting
the word ‘fees or commissions’ earned in respect of a loan,” the Treasury says
in the Bill.
The 20 percent excise tax was introduced in
2018, triggering an increase in the cost of bank services, including loans,
transfers — both local and international — over-the-counter withdrawals as well
as ATM transactions and account operating fees.
The Treasury has retained the tax on other
fees not linked to credit processing like obtaining account statements, and
cheque clearance, signaling it is keen on lowering the cost of loans in an
economic setting where the government does not control lending rates.
The government removed the cap on lending
rates on November 7, 2019, after it was blamed for curbing credit growth during
its three years of existence.
Banks use a base rate that is normally the
cost of funds, plus a margin and a risk premium, to determine how much they
should charge a particular customer.
The cap, which set rates at four percentage
points above the central bank’s benchmark lending for all customers had taken
out that equation and the flexibility that lenders say they need in order to
accommodate customers deemed risky borrowers.
Lenders have since last year been putting
pressure on the Central Bank of Kenya (CBK) to allows them to raise the cost of
loans following the scrapping of lending rate controls.
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The regulator had asked banks to submit new
loan pricing formulas that would be the basis of setting interest rates on new
credit in an environment where the government was not controlling loan costs.
An executive in one of the top banks said that
the removal of the excise tax could ease the pressure on lenders to increase
interest rates.
“If the tax is removed, then most likely we
will pass this to customers. Most banks will reduce the fees charged on loans,”
said a banker who requested not to be identified.
Lending rates dropped from 17.66 percent in
August 2016 to 13.86 percent in September 2016 after the introduction of the
cap and averaged 12.02 percent in February, CBK data show.
The withdrawal of that tax comes as the
government grapples with how to boost revenues without hurting the poor.
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