Kenya may be redrawing the financial playing field through a proposed amendment to the Excise Duty Act that aims to redefine what qualifies as a digital lender. This change will separate fintech-based digital credit providers from established financial institutions such as banks, SACCOs, and microfinance institutions.
Clarifying Who Qualifies as a Digital Lender
The amendment proposes that a digital lender be defined as a person who extends credit through an electronic medium, while excluding:
- Banks licensed under the Banking Act
- SACCOs registered under the Co-operative Societies Act
- Microfinance institutions licensed under the Microfinance Act
The change is aligned with ongoing reforms in Kenya’s credit market, particularly those introduced in the Central Bank of Kenya (Amendment) Act, 2021 and the Digital Credit Providers (DCP) Regulations, 2022. These regulations brought app-based digital lenders under the supervision of the Central Bank of Kenya (CBK), aiming to address lending practices such as aggressive recovery, high default rates, and limited consumer safeguards.
In 2024, the Business Laws (Amendment) Act replaced the term “digital lender” with Non-Deposit Taking Credit Provider (NDTC) to cover a broader category of institutions that extend credit without holding customer deposits.
Different Rules for Different Players
The amendment is also closely linked with tax policies introduced under the Finance Act 2023, which imposed a 20% excise duty on interest charged by DCPs. This tax does not apply to banks, SACCOs, or licensed MFIs. Excluding these institutions from the “digital lender” category ensures that they remain outside the scope of this tax even when offering credit digitally.
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For example, a borrower taking a KSh 1,000 loan from a DCP could end up receiving as little as KSh 940–960 after the excise duty is applied. A similar loan through a mobile banking product like KCB M-Pesa or M-Shwari would not carry this tax.
Effects on Competition Between Fintechs and Traditional Lenders
Fintech lenders that operate independently face a tougher operating environment. They are now clearly classified as NDTCs and are required to meet licensing, capital adequacy, and consumer protection obligations set by the CBK. Traditional lenders, by contrast, are regulated through frameworks already in place and do not face the same level of tax and compliance burdens.
Digital lenders often serve low-income and underbanked consumers who may not qualify for bank or SACCO loans. However, these fintechs experience high default rates. The 2021 FinAccess Household Survey reported default rates of 46.3% to 50.9% among digital lenders, compared to 22.1% for banks and 16% for SACCOs. Compliance costs, combined with excise tax, could reduce the ability of DCPs to offer competitive products.
What Borrowers Should Expect
Consumers eligible for loans from banks or SACCOs may benefit from better pricing, since those loans are not affected by the excise tax. Meanwhile, borrowers who rely on fast-access digital loans may experience fewer options or higher interest rates as DCPs adjust to the new requirements.
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Aggressive recovery practices by some DCPs, including automatic listing on Credit Reference Bureaus (CRBs), drew concern from regulators in recent years. In response, new laws introduced tighter licensing and consumer protection guidelines. However, compliance with these new rules adds to operational costs, which could affect loan availability or pricing.
The MoneyMarch 2025 Report by Tala shows that 92% of Kenyan borrowers have used digital credit providers, compared to 32% for banks and 21% for SACCOs. Although DCPs remain a key part of the credit ecosystem, their reach could decline if they are unable to absorb the tax and compliance pressures now placed on them.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.