THE HARD NEWS BRIEF
The Kenya Bankers Association has formalised its opposition to the National Treasury’s tax proposals, warning that escalating banking sector resistance to Finance Bill 2026 could trigger an aggressive retreat to cash transactions and stall the country’s digital payment progress.
Under the draft legislation, the Kenya Revenue Authority aims to levy a 16% Value Added Tax on mobile money services and card transactions, while introducing a 15% royalty tax on payment system software license fees paid to global networks like Visa and Mastercard.
The proposed tax measures threaten to escalate consumer transaction costs by an estimated 18% to 25%, undermining years of central bank policy geared towards building a cashless economy.
The Cost of Transacting: Inside the KRA Royalty and VAT Proposals
The National Treasury’s plan to treat transaction processing software fees as royalties subject to a 15% withholding tax has shocked the local banking sector. Currently, local commercial banks route domestic and international card payments through international rails, paying licensing fees that were previously exempt from withholding tax. Under the new rules, these software fees are reclassified as intellectual property royalties, forcing banks to either absorb the 15% charge or pass it directly to consumers via higher card-swipe fees.
This reclassification ignores the operational reality of global payment systems, which act as transaction infrastructure rather than intellectual property leased for exploitation. If the Treasury pushes this amendment through, the cost of processing every Visa and Mastercard swipe in Kenya will increase, directly compressing merchant margins that are already hit by statutory deductions like the 2.75% SHIF contribution. The immediate fallout will be a reduction in card terminal deployments.
Additionally, the introduction of a 16% VAT on financial transaction charges represents a direct attack on digital inclusion. For instance, a registered M-Pesa transfer between KES 5,001 and KES 7,500 currently costs KES 75, while the corresponding withdrawal fee stands at KES 84. Applying a 16% VAT on top of existing excise duties would inflate these fees by double-digit percentages, forcing consumers to pay significantly more for everyday transfers. This dual taxation on digital transfers is projected to drive micro-enterprises back to physical cash transactions to preserve their razor-thin margins.
Bankers warn that this policy is counter-productive to the government's tax-mobilisation goals. If merchants and consumers revert to cash, the KRA will lose its visibility into transaction trails, making it far more difficult to enforce tax compliance through eTIMS and other digital surveillance systems. A cash-based economy is historically harder to tax than one built on transparent, digital transactions.
Why KBA is Leading the Banking Sector Resistance to Finance Bill 2026
The Kenya Bankers Association argues that the state's aggressive fiscal targets risk choking the formal financial sector. Commercial banks are already managing high non-performing loan portfolios as borrowers struggle with a 15.5% 91-day T-Bill rate that continues to keep commercial lending rates elevated. Pushing transaction costs higher will suppress velocity in the banking system, reducing non-interest funding streams that banks have relied on to offset sluggish credit growth.
Furthermore, the banking sector resistance to Finance Bill 2026 is driven by concerns over credit cost inflation. If the Treasury imposes additional levies on administrative fees associated with loan processing, the effective cost of credit will rise far beyond the nominal interest rates. With the 364-day T-Bill yield currently sitting at 16.5%, the government is already crowding out the private sector; adding transactional taxes to commercial loans will completely freeze private sector credit expansion.
The tax on digital services hits at a time when financial platforms are expanding. NCBA Group's digital platform LOOP is aggressively embedding asset financing, and fintech startups like Power Financial recently secured USD 3 million in seed funding to expand digital credit. The KBA warns that taxing the digital plumbing of these systems will deter future venture capital, which has already seen Africa's "Big Four" funding hubs tighten amid global monetary adjustments.
With the current inflation rate holding at 4.8%, any additional tax-induced pressure on transaction costs will directly feed into consumer price indexes. Bankers contend that instead of taxing transaction channels, the Treasury should focus on widening the tax base through structural reforms that do not penalise financial formalisation. The proposed taxes act as a penalty on compliance, punishing the formal banking sector while leaving the informal economy untouched.
The Forex and Macroeconomic Fallout of the Proposed Royalty Rule
The royalty tax on international payment systems also carries exchange rate risks for a currency that has stabilised at KES 130.5 per US dollar. Because licensing fees to Visa, Mastercard, and UnionPay are settled in foreign currencies, imposing a 15% tax on these transactions will complicate offshore settlement processes. This could force international payment processors to adjust their pricing models for the Kenyan market, potentially raising the cost of cross-border trade within the East African Community where currencies like the Ugandan Shilling and Tanzanian Shilling are traded daily.
Safaricom’s M-Pesa, which has reshaped Kenya’s economy over its 19-year history, is particularly vulnerable to the VAT proposal. If the VAT on mobile transactions is enacted, the cost of sending money across all tiers will increase, impacting the distribution of dividend payouts such as Safaricom’s upcoming KES 0.62 per share dividend scheduled for payment on August 31, 2026. This systemic cost escalation threatens the viability of mobile-led retail banking models that rely on cheap transaction fees to aggregate deposit liabilities.
Savvy retail investors are already adjusting their asset allocation strategies to counter these tax headwinds. Rather than moving funds through high-friction digital transaction networks, investors are locking capital in yield-bearing assets. Money Market Funds like the CIC MMF, which yields 17.0%, and Sanlam, yielding 16.0%, are seeing increased inflows as depositors seek shelter from transactional taxes. Similarly, Stima SACCO and Police SACCO, both offering a 15% dividend rate alongside an 11% interest on deposits, remain highly attractive safe havens that bypass frequent transactional friction.
As parliamentary hearings on the bill commence, the Treasury faces the challenge of balancing immediate fiscal deficits against long-term financial stability. The depth of the banking sector resistance to Finance Bill 2026 indicates that commercial lenders are prepared to leverage every lobbying channel to prevent a tax policy that could reverse a decade of digital payment adoption. Ultimately, if these proposals pass unchecked, the true cost will be paid by the consumer in the form of a more expensive, less efficient financial system.
