KRA predicts blow to corporate taxes over lower bank earnings

Consolidated Bank Banking Hall. [Wilberforce Okwiri, Standard]

The taxman sees a potential negative impact on the tax revenue generated by Kenya’s commercial banks after their earnings slowed due to challenging operating conditions.

The development marks a huge blow for Kenya Revenue Authority (KRA) as the banking sector has historically been a significant source of income for the government.

KRA says instalment remittance from the finance and insurance sector recorded suppressed growth of 4.1 per cent, with remittance from the banking sector also having a suppressed growth of 6.8 per cent in the period between July and September this year.

KRA Commissioner General Humphrey Wattanga, while appearing before the National Assembly Finance Committee, attributed the performance of taxes from two segments to weak performance from banks.

“Banks’ profit before tax declined by 0.2 per cent as at July 2023 (CBK data). These two sectors (Insurance and Banking) account for 65 per cent of instalment remittance in the first quarter of 2023/24,” said Mr Wattanga in his presentation to the watchdog committee.

“The waning corporation tax from banks is due to Weak base profit before tax (which) declined by 0.2 per cent in 2023 compared to 25 per cent growth in 2022 as loans slumped by 22 per cent.”

He noted that tight monetary policy as shown by the increased Central Bank Rate (CBR) has constrained bank liquidity and therefore credit supply is limited. 

“This is noted in increasing interbank and deposits rates,” said Wattanga, adding that lending rates have increased slightly in 2023 contributing to slow down in bank profitability.

This week, as major Kenyan banks commence their third-quarter earnings reporting season, a more distinct depiction of the profits will come to light, amid mounting economic and geopolitical apprehensions.

While each of main banking giants earlier noted that consumers and businesses currently remain in fairly good shape, they had cautioned that challenges loom, and pockets of their businesses are exhibiting signs of stress.

Commercial banks have been for years Kenya’s top tax generators and last year, handed the taxman more than a third of all corporate taxes paid in the year to December 2022, cementing their cash cow status.

According to a survey published by accountancy firm PwC, backed by the Kenya Bankers Association, corporate taxes paid to KRA jumped 77 per cent to Sh87.71 billion in the year to December 2022 compared to a year earlier when the sector’s taxes were Sh49.48 billion.

The contribution represented more than a third of the total corporate taxes received by KRA, cementing the lenders’s key status even as other sectors experienced a slowdown.

Local companies are required to pay 30 per cent of their profits as corporate tax.

Overall, the banking industry contributed Sh181.27 billion in corporate, employment and other taxes accruing from day-to-day operations such as excise duty on transaction fees in the year under review.

Short of target

The Kenya Kwanza government’s revenue plan has not yet gained traction as tax collection in both the previous and current fiscal years has fallen short of the target by billions of shillings. 

This deals a major blow to President William Ruto’s efforts to fund his costly campaign promises and repay mounting public debt at a time when his administration’s additional taxes are stoking tensions due to the high cost of living.

Banks have been steeply increasing the cost of loans, with interest rates expected to go beyond 20 per cent, leaving borrowers with a massive debt servicing burden. 

The increments come at a time when the high cost of living is already squeezing Kenyans hard. 

The lenders are taking a cue from the recent jumbo raise by CBK of its key lending rate, which currently stands at 10.5 per cent. 

 Three months ago, under the leadership of Governor Kamau Thugge, the CBK Monetary Policy Committee raised its policy lending rate to 10.50 per cent - the highest in seven years. 

This decision was made in an effort to combat rising inflation and stabilise the weakened shilling, explained MPC.

The tightening of liquidity is expected to have a negative effect on access to credit for individuals and companies, with borrowers set to feel the financial pain of the increased cost of loans.   

This could translate into banks tightening their lending standards.   

The sharp rise in interest rates already threatens to choke economic growth as it has lifted borrowing costs and encouraged cutting costs or saving over spending, investing, and hiring.