The Kenya Bankers Association (KBA) has issued a stark warning to the National Assembly's Finance and Planning Committee regarding the proposed fiscal reforms. Under the leadership of Chairman John Gachora, the banking lobby warns that the aggressive expansion of the tax net via the Finance Bill 2026 banking taxes will halt a decade of hard-won progress in financial inclusion and drive the economy back to cash.
This warning comes as the National Treasury faces a delicate balancing act, attempting to close a gaping budget deficit while avoiding public unrest. However, lenders argue that taxing the infrastructure of digital payments—specifically through a 16% Value Added Tax (VAT) on mobile money and transaction fees, alongside a contentious royalty tax on card processors—will ultimately shrink the tax base by forcing businesses and consumers off the digital grid.
The KBA Critique of Finance Bill 2026 Banking Taxes
To understand the mechanics of this proposed tax shift, we look at the specific objections raised by KBA Chairman John Gachora. Below is a detailed breakdown of the lobby's presentation to policymakers, capturing the exact rhetoric and market signals.
Q: What is the primary concern of the banking sector regarding the new transaction taxes?
John Gachora: "Our primary objection is that these proposals treat digital payment infrastructure as a luxury rather than an essential public utility. Imposing a 16% VAT on transaction charges, combined with existing excise duties, creates a compounding tax effect. If you look at the current Safaricom M-Pesa tariff structure, a transfer of KES 50,000 already incurs a registered transfer fee of KES 105, and a withdrawal costs KES 300. Adding a 16% VAT on top of these fees will make digital transactions prohibitively expensive, forcing retail consumers to revert to untraceable physical cash."
Q: KRA argues that these taxes are necessary to expand the tax base. Why does KBA believe this will backfire?
John Gachora: "Taxing the medium of exchange is economically counterproductive. When you tax the swipe of a card or a mobile money transfer, you do not increase compliance; you drive transactions into the informal, cash-based economy. KRA's eTIMS integration thrives on digital traceability. If the Finance Bill 2026 banking taxes discourage digital payments, the tax authority will lose visibility over retail sales, wiping out the gains made under the 16% VAT compliance drive and the 3% Turnover Tax (TOT) collection frameworks."
Q: How will the proposed card royalty taxes affect international payment processors like Visa and Mastercard?
John Gachora: "The proposal to treat standard payment processing fees as 'royalties' subject to withholding tax is a fundamental mischaracterization of global financial technology. These are service fees, not intellectual property royalties. If we impose a royalty tax on every card swipe, payment networks will pass these costs directly to local commercial banks, who will in turn pass them to merchants. A standard merchant fee of 1.5% to 2.5% will escalate, rendering card acceptance unviable for small and medium enterprises (SMEs)."
Q: Lenders are already warning of higher loan costs. How does this tax plan compound that problem?
John Gachora: "The financial sector is already operating under high-interest-rate pressures. With the 91-day Treasury Bill yielding 15.5%, the 182-day at 16.2%, and the 364-day at 16.5%, the risk-free rate is exceptionally high. Banks are already charging double-digit premiums on risk-priced loans. If the government imposes new direct taxes on banking operations, the cost of financial intermediation rises. Lenders will have no choice but to adjust loan pricing upward, further squeezing credit flow to the private sector."
Q: How do these proposals affect the broader macroeconomic picture and the shilling's stability?
John Gachora: "We cannot look at these taxes in isolation. The middle class is already facing a 2.75% SHIF levy, a 1.5% Housing Levy, and a top PAYE tier of 35% on incomes above KES 800,001. Introducing transaction-level taxes further degrades real household income. On the currency front, while the Kenya Shilling has stabilized at 130.5 against the US Dollar, maintaining this stability requires robust capital inflows and domestic productivity. Damaging the digital payment infrastructure will slow down business velocity, harming GDP growth and weakening our long-term macroeconomic position."
The Structural Risk to Monetary Policy and Liquidity
The implications of a cash reversion extend far beyond retail inconvenience; they threaten the Central Bank of Kenya's (CBK) ability to manage monetary policy. For fifteen years, Kenya’s financial sector has been a global benchmark for mobile-money-led velocity of circulation. A sudden contraction in digital payment volumes would trap liquidity outside the formal banking system, limiting the monetary transmission mechanism.
When money remains in cash drawers rather than commercial bank deposits or high-yielding assets like Money Market Funds—where CIC currently offers 17% and Sanlam 16%—the banking system’s deposit-creation capacity shrinks. This liquidity deficit would force banks to compete aggressively for deposits, pushing up deposit rates and, consequently, the cost of credit for ordinary businesses.
Ultimately, the National Assembly must decide whether short-term revenue gains are worth the long-term systemic damage. The Kenya Bankers Association's warnings are a timely reminder that fiscal policy cannot succeed if it breaks the very digital rails that carry the modern Kenyan economy. If the final draft of the Finance Bill 2026 banking taxes does not offer substantial concessions, the country risks a costly retreat into the financial shadows.
