While the government's move is aimed at increasing tax revenue, there are fears that it could inadvertently push some individuals and businesses towards shadow and mattress banking.
Mattress banking describes the practice of individuals or businesses keeping their money in cash, physically stored at home (like under a mattress), rather than depositing it in a bank.
This approach is often driven by distrust in banks, concerns about financial stability, or a desire for immediate access to cash.
However, mattress banking means forgoing interest earnings and exposing funds to risks like theft or loss. Shadow banking on the other hand refers to non-bank financial intermediaries that provide services similar to traditional banks but operate outside of regulatory oversight.
Shadow banking facilitates credit and liquidity in the financial system, but its lack of oversight can also contribute to systemic risks.
Financial transactions
As the tax authorities become more aggressive in pursuing tax evaders, some Kenyans may opt to conduct financial transactions outside of the formal banking system to avoid scrutiny.
This could have significant implications for the economy, as it could reduce tax revenue, hinder economic growth, and increase the risk of financial instability, experts say.
To mitigate these risks, experts add that the government must balance effective tax enforcement and protecting individual privacy rights.
It is crucial to ensure that the implementation of data-driven tax compliance measures is transparent, accountable, and fair, they say.
By building trust with taxpayers and providing clear guidelines, the government can encourage voluntary compliance and minimise the risk of increased shadow banking, experts added yesterday.