A report by the Kenya Bankers Association (KBA) showed that commercial banks contributed 27 % of all corporate taxes paid in Kenya in 2020 despite the adverse effects of the COVID-19 pandemic, which caused a 12 % overall decline in their contribution to the exchequer compared to the year 2017 to 2018.
A new report compiled by audit firm PricewaterhouseCoopers (PwC) on behalf of the Kenya Bankers Association (KBA) attributes the reduction to lower tax contributions through direct tax costs and the industry’s remittances through Pay As You Earn collections.
The economy experienced a depressed economic performance in 2020 due to the onset of the COVID-19 pandemic, with provision for loan losses increasing by 47.5 % to Kes.198.1 billion from Sh.134.3 Billion in 2019.
Loan loss accommodations absorbed 45.7 % of non-performing loans compared to 40.2 per cent in 2019, according to the State of the Banking Industry Report 2020 from the KBA. The industry also restructured customer loans worth Kes. 1.63 Trillion, which is 54.2 % of the total Kes 3 Trillion loan portfolios. Consequently, the percentage of gross non-performing loans to gross loans significantly increased to 14.1 % by December 2020 compared to 12 % in December 2019.
“As an industry, we recognise the important role the financial services sector plays in supporting economic growth. In this regard, we remain committed to sustaining efforts towards anchoring business recovery in the face of the COVID-19 disruption. The banking sector will continue to build capacity among vulnerable enterprises through de-risking initiatives such as the Inuka Enterprise Program”. KBA Chief Executive Officer Dr. Habil Olaka.
However, despite the 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 Kes .638.3 billion by December 2020, up from Kes .413.9 Billion in December 2017.
The Total Tax Contribution of the Kenya Banking Sector report reveals that the cumulative ratio of taxes borne to a 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 % means that for every Kes. 100 of profits, banks bear taxes of Kes. 48.5.
“The taxman applies strict criteria in terms of which provisions can be tax deductible in determining taxable profits. In practice, there is misalignment between provisioning for accounting purposes and the deductibility of the same provisions for tax purposes, and this misalignment continues to drive up the effective tax rates for banks,” Alice Muriithi, Associate Director at PwC Kenya.
Additionally, the KBA report shows that banks invested approximately Kes 1.6 Billion in technology in 2019 and 2020 combined. This is compared to approximately Kes 1.3 Billion in the 2017 and 2018 periods, demonstrating the sector’s prior commitment to the digitization journey well before the beginning of the pandemic.
Kenya Revenue Authority usually applies strict criteria on which provisions pass as tax-deductible.
Banks, therefore, pay higher taxes since the gross earnings for tax purposes are usually higher than what they report to the Central Bank of Kenya.