The banking industry contributed 27 percent of all corporate taxes paid in Kenya in 2020 and 2019, a report by PricewaterhouseCoopers (PwC) on behalf of the Kenya Bankers Association has revealed.
The report however says that the COVID-19 pandemic caused a 12 percent overall decline in their total tax contribution in 2020 compared to 2019, attributed the decline to reductions in corporate taxes and Pay As You Earn (PAYE) collections.
“This decline is partly attributable to reduced tax rates, specifically reduction of corporate tax rate from 30 percent to 25 percent, reduction of the top PAYE rate from 30 percent to 25 percent and the reduction of Value Added Tax rate from 16 percent to 14 percent. The aim of these measures was to provide relief to taxpayers against adverse economic effects of the COVID-19 pandemic,’’ the report notes.
Corporate tax and PAYE are the largest contributors of the total tax contribution of the sector standing at 42.5 percent and 16.5 percent respectively.
Speaking during the report’s, Kenya Bankers Association Chief Executive Officer Dr. Habil Olaka noted that the contribution indicates the industry has remained resilient, navigated the challenges occasioned by the COVID-19 pandemic, and continued supporting the economy. “As an industry we recognize the important role the financial services sector plays in supporting economic growth. In this regard, we remain committed to sustain efforts towards anchoring business recovery in the face of the COVID-19 disruption,’’ he said, adding that the banking sector will continue to build capacity among vulnerable enterprises through de-risking initiatives such as the Inuka Enterprise Program.
Due to the COVID-19 pandemic, the economy experienced a depressed economic performance and quality of assets, with provisioning for loan losses increasing by 47.5 percent to Ksh198.1 billion from Ksh134.3 billion in 2019.
Loan loss accommodations absorbed 45.7 percent of non-performing loans compared to 40.2 percent in 2019, according to the State of the Banking Industry Report 2020.
The industry also restructured customer loans worth Ksh1.63 trillion or 54.2 percent of the total Ksh3 trillion loan portfolios, with the percentage of gross non-performing loans to gross loans significantly increasing to 14.1 percent by December 2020 compared to 12 percent in December 2019.
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 percent between 2017 and 2020 to stand at Sh.638.3 billion by December 2020, up from Sh.413.9 billion in December 2017.
On a year-on-year basis, the 32 banks that participated in the total tax contribution study represent 95.2 percent of the industry in 2019 and 96.2 percent of the industry in 2020.
PwC Tax Partner Titus Mukora observed that the study offers an opportunity for the tax contribution of the banking sector to be quantified and analysed so that policy makers can assess whether the operating environment is supportive of the sector.