Kenyans who depend on bank loans could soon be paying significantly more — not because of market forces, but because of a tax ruling that the Kenya Bankers Association (KBA) says threatens to upend the country’s entire credit system.
At the heart of the dispute is a Tax Appeals Tribunal decision that handed the Kenya Revenue Authority a decisive victory, allowing it to impose a 16 percent Value Added Tax on the auction of repossessed and seized collateral. Banks are furious — and they are warning that borrowers will ultimately foot the bill.
Appearing before the tribunal on Sunday, May 24, the KBA made its case for exemption, arguing that selling a defaulter’s repossessed property is a debt recovery mechanism, not a commercial transaction, and should therefore carry no tax burden.
“We create a new paragraph that the sale, disposal, or realisation of collateral, repossessed assets, or secured properties by or on behalf of a financial institution — where such sale arises from enforcement of security in connection of a loan or credit facility — be part of the first schedule which exempts such services from being charged VAT,” a KBA official explained before the tribunal.
But the KRA sees it differently. The taxman argues that when a bank auctions a defaulter’s property, it legally steps into the shoes of the borrower — making the bank liable for all applicable taxes arising from the transaction. The tribunal sided with the KRA, and the banking sector is now scrambling to push for an amendment through the Finance Bill 2026 to reverse the outcome.
The numbers explain the urgency. When a borrower defaults, the auction value of their repossessed asset — whether a vehicle, land, or building — rarely covers the full outstanding loan, interest, and penalties. Layering a 16 percent tax on top of that shortfall means banks recover even less from bad loans. The KBA has been blunt about what comes next.
“If VAT on these assets continues, then banks will be forced to go back into their capital. It is not practical,” a KBA representative warned.
To protect their balance sheets, financial institutions say they will have no choice but to raise interest rates, demand higher-value collateral, and tighten lending criteria — restrictions that will hit small businesses and individual borrowers the hardest.
The conflict also extends beyond repossessed goods. Separately, KBA Chief Executive Officer Raimond Molenje has pushed back against another Finance Bill 2026 proposal that would impose a 16 percent VAT on mobile money and digital payment platforms such as M-Pesa and Airtel Money.
“You tax digital payment platforms, you drive consumers to the mattress and to the informal economy. Government cannot be able to collect revenue in that type of system,” Molenje warned during public participation hearings before the National Assembly Finance Committee.
Together, both proposals paint a picture of a government under fiscal pressure reaching deeper into Kenya’s financial system for revenue — at the risk of choking the credit growth and digital payment infrastructure that sustains millions of livelihoods.
For now, the banks are lobbying hard. But if Parliament passes the Finance Bill 2026 unchanged, the cost of borrowing in Kenya may soon climb to levels that price out the very citizens the financial system is meant to serve.
