Iran-Israel Conflict Escalates, Excise Duty Raises Cost of Digital Credit

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Some good news to start your week. Fuel prices are down again, after the energy regulator lowered pump prices for petrol, diesel, and kerosene by between KShs. 5.31 and KShs. 18.68 per liter.

There’s widespread optimism of improved economic conditions in Q2, supported by agriculture and a stable macroeconomic environment, according to the most recent CBK market perceptions survey.

In this week’s issue, Middle East conflict escalates, Kenya’s banks bet on branches, and digital lenders say 20% excise duty will raise the cost of credit.

Middle East Conflict Escalates as Iran Engages Israel

Last Saturday, the Middle East conflict entered a new phase after Iran launched an airborne offensive on Israel, in its first such direct attack on Israeli territory.

  • Saturday’s attack included hundreds of explosive drones and missiles launched mainly from Iran towards Israel.

  • Iran said it was responding to an air attack on its consulate in Syria in early April, which left several high-ranking military leaders dead.

  • A few days before the Saturday attack, Iranian troops had seized a Portugal-flagged ship associated with an Israeli billionaire.

Iran and Israel’s long-running conflict has so far mainly involved proxy wars and attacks in third countries, avoiding direct engagement due to the likely spillover effects that could spark a wider regional war.

One major concern among analysts has always been that an escalation in the direct conflict between Israel and Iran automatically involves other countries and armed groups in the region. Since the two do not share a border, for example, the Saturday attack involved drones and missiles overflying Iraq, Syria, and Jordan. It also drew in significant participation from allies of the two countries.

Why it Matters

The ongoing Israel-Gaza conflict has already escalated the risk of spillover conflicts in the resource-rich and strategically vital region. It has also increased fears of a wider conflict, and how it would affect societies and economies. It has led, for example, to Houthis in Yemen disrupting maritime traffic on the Red Sea, significantly increasing insurance premiums and operational costs for shippers.

On Saturday, several countries closed their airspace, and airlines in the region cancelled some flights and rerouted others. Iran closed its western airspace to commercial flights, and cancelled flights to and from several of its major airports.

The likelihood of an Israeli retaliation to Iran’s retaliation could create a downward spiral in an already volatile region where disruptions would have ripple effects across the globe. Businesses worldwide will be following developments in the region in the coming weeks, as any changes will have significant effects on input costs and maritime routes.

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20% Excise Duty on Digital Lenders is Financially Excluding Millions in Kenya

Digital lenders are against the 20% excise duty charged on interest and fees, on top of other taxes, arguing that it has raised the cost of credit and stifled innovation in the fintech sector. The 20% excise duty proposal is contained in the Finance Bill 2024 which is expected to be published before 30th April 2024.

  • The excise duty has significantly raised the cost of business for digital lenders and microfinance institutions. 

  • Financial institutions such as banks are not required to pay the excise tax, giving them an unfair competitive advantage. 

  • While bank loans are often unattainable for many Kenyans, the higher rates digital lenders must charge under this excise duty is financially excluding many in the lower and middle class. 

The 20 percent excise duty, first passed in 2022, applies to “fees” but is paid on interest and fees, and it becomes due once the loan is disbursed and not when/if it is repaid. According to several industry players, this means that the excise duty liability is claimed on unbooked revenue, and does not take into account the high rate of default the sector has to grapple with. They also argue that since other financial institutions such as banks do not have to pay excise duty on interest and fees, the imposition of the duty on fintech companies means they can’t compete fairly in the credit market.

“While digital lenders are paying interest duty on interest on digital loans, other financial institutions are not,” Kevin Mutiso, chairman of the Digital Financial Services Association (DFSAK), said while speaking to Parliament about the tax in 2023.

“The subsequent effect of this imbalance is that digital lending would be rendered an unaffordable product for ordinary Kenyan citizens,” accounting firm PWC said in a briefing seen by The Kenyan Wall Street.

“It will bankrupt the entire digital lending industry, and destroy Kenya’s position as a tech investment destination,” an industry player says, “Loan prices risk being raised to allow companies to survive an effective tax rate of 60% (as much booked revenue is never seen due to loan write offs, when customers do not repay).”

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Judy Njogu Mokaya, Co-founder and CEO, VunaPay, talks to Valentine Njoroge on the big ambitions of the agritech startup.

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