Kenya should not tax SACCOS

By DICKSON MUNDIA

Kenya savings and credit cooperative societies (SACCOS) have mobilized some 500 Billion Kenya shillings (USD 6.0 Billion) in savings over the years. This amount represents close to 40% of the Gross Domestic Savings (GDS). These savings have been used for increased food production, educating children, buying houses, health care and other investment.

According to Dr. Wilson Songa, Principal Secretary in the Ministry of Industrialization and Enterprise Development, “SACCOS in Kenya play a key role in creating vibrancy and competitiveness in the financial sector. Over 10 Million Kenyan SACCOS members, most of whom are savers with modest incomes, are able to access low interest capital resources that are critical to Kenya’s economic growth.” Most of these SACCOS members are Kenyans who would otherwise not have access to Credit due to the requirements of most finance and banking institutions. The majority of SACCOS members are women.

Goldman Sachs Global Investment has stated that, “women with access to formal savings accounts will save more and increase business investment by 40% in four months to six months.” This is precisely the kind of intervention that Kenya, and Africa, requires if meaningful development and growth are to be achieved. Women savers make choices that are not only good for their families, but equally important to community development and national economic growth.

Why then would any government want to impose taxes on SACCOS? The Kenya government (via parliament) last year introduced a ten per cent (10%) excise duty to be paid on just about every transaction carried out by SACCOS. Research, the world ove,r has shown that taxing SACCOS is not conducive to savings mobilization and financial inclusion. Further, taxing SACCOS simply takes valuable resources from modest income earners savings and puts these into government bureaucracy, which is counterproductive.

Kenya’s recent adoption of a 10% excise duty on SACCOS financial transactions will harm SACCOS, their members, and efforts to increase savings and financial inclusion of Kenya’s poor. SACCOS are extensions their  Kenyan members, who cooperate in order to build wealth and assets and improve their lives through self-help by providing access to loans, savings, and other financial services at fair rates. SACCOS are self-sustaining without government subsidies and exist not for profit, but for their service to their members.

The 10% excise duty is really a tax on poor Kenyans because taxes on SACCOS are in effect taxes on the SACCOS members, the vast majority of whom are of very modest incomes. SACCOS members own their SACCOS and will meet the excise duty’s costs through reduced services, increased fees and/or worse rates on loans and savings even if the incidence of the tax technically falls on the SACCOS.

Behavioral economics has proved that excise taxes on services only reduce use of the service and availability, especially with respect to the poor because they are least able to afford the taxes’ increased costs. The 10% financial transaction excise tax will discourage poor SACCOS members from engaging in a wide spectrum of SACCOS services, including; salary processing; loan processing; dividend and deposit processing; produce payment processing; check clearance; bankers checks; interest on savings under front office services (FOSA); Kenya Tea Development Agency payments; account maintenance; statement transfer fees; ATM charges; counter withdrawal charges; notice fees charges on lump sum withdrawal.

Reduced economic activity by poor Kenyans, and Kenyans of modest incomes, will harm financial inclusion efforts in many ways beyond simply imposing a 10% surcharge that discourages the poor from using SACCOS services. In the long run, the cost of financial services for poor Kenyans will increase by more than 10% excise duty because, if the excise tax remains in place, SACCOS will consolidate due to losses created by the tax. This SACCOS consolidation will reduce the supply of credit available to poor Kenyans, making loans more expensive for the people least able to afford high interest rates.

Kenyan SACCOS already pay a 30% corporate income tax – one of the highest income tax rates on credit cooperatives in the world, even though SACCOS and other credit cooperatives are exempt from all corporate income taxes in 70 countries around the world. Further, most of the 30 or so countries that do impose some level of corporate income taxes on credit cooperatives give SACCOS preferential tax treatment. For example, in the U.K, credit unions do not pay corporate income tax on interest income from loans made from members even though British law does impose taxes on credit unions investment income (e.g. bank term deposits).

By adding a 10% excise tax on top of SACCOS 30% corporate income tax, the Kenya government is in effect double taxing SACCOS and their members on the same business activities. This makes Kenya’s SACCOS potentially THE MOST TAXED CREDIT COOPERATIVE ORGANIZATIONS IN THE WORLD.

The government and parliament should abolish the regressive 10% excise duty on SACCOS services in order to help maintain a vibrant SACCOS systems (the most vibrant in Africa) that helps poor Kenyans to help themselves through access to affordable financial services and without reliance on government welfare.

If Kenya wants to encourage savings, the 10% excise duty on SACCOS services should be abolished.