Finance Act 2026 Gives Digital Lenders Tax Relief, But Industry Wants Long-Term Policy Certainty

Kenya’s digital lending industry has welcomed a raft of tax reforms contained in the Finance Act 2026, saying the changes will support financial inclusion, preserve investment and prevent higher borrowing costs for millions of consumers.

However, the sector has cautioned that unresolved tax disputes, expanded powers for the Kenya Revenue Authority (KRA) and a lack of broader tax reforms mean businesses still face an unpredictable operating environment.

The Digital Financial Services Association of Kenya (DFSAK), which represents 35 licensed digital credit providers, said Parliament adopted six key proposals submitted by the industry during public participation on the Finance Bill 2026.

The association said the amendments shield smartphone buyers from additional taxes, protect companies from new taxes on retained earnings, clarify the treatment of bad debts and improve certainty around VAT on financial services.

“Six of our submissions are now law. That means smartphones stay affordable, startups can reinvest without penalty, and borrowers will not see their loan costs inflated by a cascade of new taxes on the rails that carry their money,” DFSAK Chairman Kevin Mutiso said.

“This is real progress, but it is progress on individual provisions, not a settled tax environment. We will keep pressing for the long-term certainty this sector, and the customers it serves, need to plan with confidence.”

Six proposals adopted

Among the biggest wins for the industry was Parliament’s decision to abandon a proposal that would have treated retained profits as deemed dividends, a move lenders argued would have discouraged reinvestment and slowed business expansion.

Lawmakers also rejected proposals to raise excise duty on smartphones from 10 per cent to 25 per cent and introduce an activation-based tax point, preserving smartphone affordability and supporting digital financial inclusion.

Other changes include retaining zero-rated VAT status for locally assembled mobile phones, introducing enhanced bad debt deductions for qualifying lenders, exempting the realization of collateral from VAT as a financial service, and rejecting a proposal that would have allowed the KRA to issue agency notices while tax appeals are still pending.

According to DFSAK, the reforms followed months of engagement with Parliament’s Departmental Committee on Finance and National Planning, where the association argued that the original proposals would have increased borrowing costs, reduced investment capacity and weakened taxpayer protections.

The industry said Parliament’s decision was informed by Kenyan case law, international best practice and submissions received during public participation on the Finance Bill.

Deloitte hails consultative approach

Fred Kimotho, Associate Director and Tax Policy Lead at Deloitte East Africa, described the outcome as an example of responsive policymaking.

“For the financial services sector, the Finance Act 2026 is a positive example of responsive policymaking informed by technical expertise and stakeholder engagement,” he said.

“We thank the Departmental Committee on Finance and National Planning for fostering an inclusive legislative process and carefully evaluating the issues raised by the industry.”

Kimotho said the reforms would support financial inclusion, preserve investment and enhance tax certainty while reinforcing confidence in Kenya’s tax policy framework.

Challenges remain

Despite the gains, DFSAK said several issues remain unresolved.

The association noted that a High Court appeal involving historical tax claims dating back to December 2022 is still pending, with the next hearing expected in September.

It also warned that uncertainty remains over how retained earnings will be treated by the KRA, despite Parliament dropping the proposed deemed dividend tax.

The association said it expects the tax authority could increasingly examine retained earnings on a case-by-case basis during audits, prompting firms to strengthen documentation showing that profits are being reinvested into technology, lending capacity and expansion into underserved markets.

Beyond the financial technology sector, DFSAK pointed out that PAYE tax bands remain unchanged while several withholding tax proposals were retained, meaning the broader tax burden on employees and businesses has not significantly eased.

Boost for lending and SMEs

Julian Mitchell, Chief Executive Officer of 4G Capital, said the reforms would allow digital lenders to expand credit while supporting Kenya’s small businesses.

“The Finance Act 2026 is a constructive and pragmatic step that recognises the unique nature of digital lending,” Mitchell said.

“Clarifying bad debt deductibility and rationalising VAT treatment gives us a clearer path to scale our lending capacity and deepen our reach into rural markets.”

He said the company reinvests its earnings directly into its loan book, increasing the amount of capital available to customers.

“For the small business owners we serve, that means more reliable, more affordable access to the working capital they need to grow,” he added.

Push for a predictable tax regime

While celebrating the legislative victories, DFSAK said its focus now shifts to securing a more stable and predictable tax framework that encourages long-term investment.

The association said it will continue engaging policymakers and the KRA to resolve outstanding tax disputes, clarify the treatment of retained earnings and develop policies that support innovation without creating unnecessary uncertainty.

“The outcome shows that evidence-based engagement can shape better policy,” the association said.

“It also gives the sector greater confidence to continue investing in responsible innovation and expanding access to finance for millions of Kenyans. But the conversation on tax reform is far from over.”

Read: Finance Bill 2026. How it Will Impact Kenya’s Capital and Money Markets

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