Loans To Cost More as Banks Sound Alarm Over KRA’s 16% VAT On Repossessed Goods

Accessing credit could soon become significantly more expensive for Kenyans. The Kenya Bankers Association (KBA) has sounded the alarm over a looming spike in loan interest rates if the Kenya Revenue Authority (KRA) is permitted to levy Value-Added Tax (VAT) on the auction of repossessed properties.

Presenting their arguments before a Tax Appeals Tribunal on Sunday, May 24, 2026, the banking lobby warned that a controversial proposal embedded in the Finance Bill 2026 would distort the local credit market and ultimately force lenders to pass the financial burden on to everyday borrowers.

Seeking an Exemption in the Finance Bill 2026

To avert a credit crisis, the KBA announced it is aggressively lobbying for targeted amendments to the Finance Bill 2026 to explicitly shield auction transactions from the 16 percent consumption tax.

The bankers want a specific clause inserted into the First Schedule of the VAT Act to formally classify the sale of seized collateral as an exempt service.

“We create a new paragraph that the sale, disposal, or realisation of collateral, repossessed assets, or secured properties by or on behalf of a financial institution… be part of the first schedule which exempts the financial service or any services from being charged VAT,” a KBA official explained.

Lenders strongly maintain that disposing of an asset following a default is a debt recovery mechanism, not a commercial, profit-making supply that warrants a tax stamp.

KRA Stands Firm as Tribunal Grants Green Light

The standoff stems from a rigid tax philosophy held by the taxman. The KRA maintains that during an auction, the financial institution effectively steps into the shoes of the defaulting borrower, making the bank legally liable for any applicable taxes and levies arising from the transaction.

In a major blow to the banking sector, the Tax Appeals Tribunal recently ruled in favor of the KRA, allowing the revenue authority to proceed with collecting the 16 percent VAT on auctioned goods.

The Trickle-Down Effect on Borrowers

The banking sector warns that this ruling creates an unsustainable financial bottleneck. When a borrower defaults and their property is auctioned, the sale rarely covers the entirety of the bad debt. Adding a 16 percent tax obligation onto that deficit means banks will recover even less money from non-performing loans.

To cushion themselves against these systemic losses, banks warn they will have no choice but to tighten credit terms, increase risk premiums, and hike the overall cost of loans—a move that could severely restrict credit access for businesses and individuals across the country.