FKE warns Robin Hood tax will kill inter-bank lending

Kenya Bankers Association CEO Habil Olaka addresses the media during the release of third report on impact of interest capping law, on Friday, May 11 2018.The report shows that while the law was well-intentioned, it has failed to achieve its key objective of increasing credit uptake by households and micro and small enterprises. [David Njaaga, Standard]

The new tax measures that Treasury proposed in the budget for this financial year will reduce Kenya’s attractiveness as an investment destination.

The Federation of Kenya employers says the tax measures as well as increases in other statutory charges such as minimum wage and the National Hospital Insurance Fund could result in some private sector player ‘rethinking’ their continued stay in Kenya.

FKE National Vice President Habil Olaka said increased taxes are in addition to the new 0.5 per cent housing levy, the requirement by employers to match employee’s NHIF contribution as well as recent increase in the statutory minimum wages, which went up 18 per cent in 2016 and five per cent in 2017.

The employers noted that these increases in their cost of operation have “added significant costs to doing business which are already unsustainable that some companies will most likely rethink their decision to stay in this market.”

At a briefing on Friday, the employers painted a gloomy picture for the financial services industry. This is on the back of the 0.05 per cent proposed tax charge on money transfers that are in excess of Sh500,000 and increasing excise tax on mobile money transfers to 12 per cent from 10 per cent.

The fees on bank transfers, according to Olaka, who is also the chief executive of Kenya Bankers Association (KBA), would substantially affect interbank lending among local commercial banks. This might see banks in certain instances unable to meet liquidity requirements.

Liquid assets

He said the taxes on money advanced by one bank to another in the interbank lending would be more than the interest that a lender would earn. This would mean banks hold on to their money whenever they have excess liquidity as advancing it to rivals would not make them any money.

The overnight lending usually helps banks meet liquidity requirements by the Central Bank in case of a shortfall in the amount of liquid assets it has at the end of day. Most of the interbank loans mature within a week and many are usually overnight.

“It would completely kill overnight interbank activities which are essential for a vibrant financial market we are aspiring to be. Analysis shows that it is only for placements above one week that the interest earned equals the tax payable, which does not make economic sense,” Olaka said.

He added that the tax charge would also be a pain for banking customers – both retail and corporate – who would have to foot the fees whenever they made the transactions.

“The amount is taxed on the remitter and more often this is the bank’s customer, and rarely the bank itself ...it is a mwananchi tax and not the bank who merely collect and remit as an agent,” Olaka said.

“When the employer is paying salaries and he transfers Sh500,000 or more from his account to another bank for purposes of payment of salaries, then he will be taxed for making that payment.”

He said another scenario is when an employee applies for a loan of Sh500, 000 or more from his sacco.

“When the sacco transfers that loan from its account in bank Y to the employee’s bank X, then the 0.05 per cent will be deducted. It also applies in case of remittance of tax to KRA.”