The Treasury has eliminated the 20% excise tax on bank loan payments, potentially lowering the cost of borrowing for businesses and consumers.
According to bankers, the cut would relieve pressure on lenders to lift credit yields, as excise duty fees account for an average of 2.5 percent of total lending prices.
This will save banks up to Sh7 billion annually in taxes raised by fees paid on loan processing.
On November 7, 2019, the government lifted the lending rate limit, which had been blamed for stifling credit growth over its three years of existence.
To decide how much they can charge a certain client, banks use a base rate, which is usually the cost of funds, plus a margin and a risk premium.
Following the implementation of the cap, lending rates fell from 17.66 percent in August 2016 to 13.86 percent in September 2016, and averaged 12.02 percent in February, according to CBK statistics.
The removal of the tax comes as the government tries to figure out ways to increase taxes without harming the vulnerable.
In the coming days, Parliament will vote on the tax bills, with the Finance Bill becoming law immediately on July 1.
