Banks, Savings and Credit Cooperative Organisations (SACCOs) and other lending institutions have received a major tax relief following the enactment of the Finance Act 2026, which exempts the sale of repossessed assets from Value Added Tax (VAT).
The amendment, signed into law by President William Ruto on June 23, seeks to resolve a long-running dispute between lenders and the Kenya Revenue Authority (KRA) over the taxation of collateral recovered from loan defaulters.
Under the new law, the sale, disposal or realisation of collateral repossessed through the enforcement of security for loans will now be classified as an exempt financial service, shielding lenders from VAT obligations.
Relief for Banks and SACCOs
The amendment to Part Two of the First Schedule of the VAT Act expands the definition of exempt financial services to include transactions involving repossessed assets.
According to the revised provision, lenders will no longer be required to pay VAT when disposing of assets recovered from borrowers who fail to meet their loan obligations.
“The making of any advances or the granting of credit, including the sale, disposal or realization of collateral, repossessed assets or secured property arising from the enforcement of security for loans, credit or other exempt financial services,” the amendment states.
The change is expected to significantly ease the financial burden on banks and other credit providers involved in debt recovery processes.
Resolution of Long-Standing Tax Dispute
The amendment brings to an end a prolonged disagreement between lenders and KRA over whether repossessed assets should attract VAT.
For years, financial institutions maintained that the recovery of bad debts through the sale of collateral was not a commercial activity intended to generate profit and should therefore not be taxed.
However, a January 2025 ruling by the Tax Appeals Tribunal found that while the principal loan amount was exempt from VAT, the disposal of repossessed property was not explicitly covered under existing law.
The decision allowed KRA to continue charging a 16 per cent VAT on such transactions, triggering concerns across the banking sector.
Financial institutions argued that the tax created an additional cost burden during debt recovery and complicated efforts to manage non-performing loans.
Bankers Welcome Legislative Change
The new provision addresses concerns previously raised by the Kenya Bankers Association (KBA) during public participation on the Finance Bill 2026.
The association argued that repossessing and selling collateral is simply a mechanism for recovering unpaid debt and should not be treated as a taxable transaction.
KBA further warned that maintaining VAT on repossessed assets would ultimately increase the cost of lending as financial institutions would likely transfer the additional expense to borrowers.
Industry players have consistently maintained that taxing debt recovery activities undermines efforts to maintain affordable access to credit.
Potential Benefits for Borrowers
While the amendment primarily benefits lenders, borrowers are also expected to gain from the changes.
Financial institutions had cautioned that VAT charges on repossessed collateral could lead to higher lending costs, which would eventually be passed on to customers through increased interest rates and loan-related charges.
By removing the tax obligation, the government hopes to create a more efficient credit environment while reducing unnecessary costs associated with loan recovery.
Analysts say the amendment could encourage more competitive lending practices and improve access to affordable credit for businesses and households.
Boost for Financial Sector Stability
The VAT exemption is also expected to support the banking sector’s efforts to manage non-performing loans more effectively.
By eliminating tax costs associated with collateral disposal, lenders will be better positioned to recover outstanding debts and strengthen their balance sheets.
The reform forms part of broader changes introduced under the Finance Act 2026 aimed at enhancing efficiency within Kenya’s financial sector while addressing concerns raised by industry stakeholders.
As the new law takes effect, banks, SACCOs and other lenders are expected to review their debt recovery processes to align with the updated tax framework.
