Kenya banking report by PWC
Kenya Bankers Association CEO, Dr Habil Olaka, Kenya Revenue Authority Domestic Tax Commissioner Rispah Simiyu and PwC Kenya Tax Partner Titus Mukora during the report’s launch on 2nd Sept. 2021.

The banking industry contributed 27% of all corporate taxes paid in Kenya in 2020 and 2019 even as the adverse impact of the COVID-19 pandemic forced a 12% overall decline in their total tax contribution in 2020. A new report compiled by audit firm PricewaterhouseCoopers (PwC) on behalf of the Kenya Bankers Association attributes the decline to reductions in corporate taxes and Pay As You Earn (PAYE) collections.

“This decline is partly attributable to reduced tax rates, specifically reduction of corporate tax rate from 30 percent to 25 percent, reduction of the top PAYE rate from 30 percent to 25 percent and the reduction of Value Added Tax rate from 16 percent to 14 percent,” the PWC reports says.

These tax measures sought to provide relief to taxpayers against adverse economic effects of the COVID-19 pandemic. Corporate tax and PAYE are the largest contributors of the total tax basket of the sector, standing at 42.5% and 16.5% respectively.

Speaking during the report’s release on 2nd Sept. 2021, Kenya Bankers Association Chief Executive Officer, Dr Habil Olaka, noted that the contribution indicates the industry has remained resilient in spite of COVID-19 pandemic, and continued supporting the economy.

“As an industry we recognise the important role the financial services sector plays in supporting economic growth. In this regard, we remain committed to sustain efforts towards anchoring business recovery in the face of the COVID-19 disruption,’’ he said, adding that the banking sector will continue to build capacity among vulnerable enterprises
through de-risking initiatives such as the Inuka Enterprise Program.

Due to the COVID-19 pandemic, the economy experienced a depressed economic performance and quality of assets, with provisioning for loan losses increasing by 47.5% to Ksh198.1 billion from Ksh134.3 billion in 2019. Loan loss accommodations absorbed 45.7% of non-performing loans compared to 40.2% in 2019, according to the State of the Banking Industry Report 2020.

The industry also restructured customer loans worth Ksh1.63 Trillion or 54.2% of the total Ksh3 trillion loan portfolios, with the percentage of gross non-performing loans to gross loans significantly increasing to 14.1% by December 2020 compared to 12% in December 2019. Despite these challenges, access to credit for MSMEs increased.

According to the Central Bank of Kenya (CBK) 2020 MSME Survey report, lending to micro, small and medium-sized enterprises increased by 42% between 2017 and 2020 to stand at Ksh638.3 billion by December 2020, up from Ksh413.9 billion in December 2017. The report also notes that the banks that participated in the study contributed 7.5% of the total government tax receipts in 2019 and 2020.

“Considering a total population of six million registered taxpayers countrywide, this is indeed a very significant contribution,” said Ms Alice Muriithi, Associate Director at PwC Kenya and the lead technical advisor on the study. The report raises a number of questions about how tax policy impacts the banking sector and the impact of tax policy on the sector’s contribution to the tax base and the economy.

The Total Tax Contribution of the Kenya Banking Sector report also reveals that the cumulative ratio of taxes borne to profit of 32 banks surveyed during the period was 48.5%, representing the Total Tax Rate (TTR) of the participating banks. “A cumulative TTR of participating banks of 48.5 percent means that for every Ksh100 of profits, banks bear
taxes of Ksh48.5,’’ the report indicates.

The report shows that banks invested approximately Ksh1.6b Billion in technology in the years 2019 and 2020 combined. This is compared to approximately Ksh1.3 Billion in the 2017 and 2018 periods, demonstrating the sector’s prior commitment to the digitization journey well before the beginning of the pandemic.

The report further shows a 42.2% decline in excise duty collected by the banking sector in 2020 relative to 2019, attributable to regulatory guidelines issued by the Central Bank of Kenya requiring banks to waive fees on transfer of money between bank accounts and mobile phone wallets and also waive balance enquiry charges to mitigate against the COVID-19 pandemic.

This is also aligned to the 8 percent decline in fees and commissions income earned by the banking industry in 2020 relative to 2019.

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