Kenya mulls review of stamp duty

March 24, 2010
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, NAIROBI, Kenya, Mar 24- Treasury has hinted at the possibility of reviewing or scrapping the Stamp Duty Act in the upcoming budget as one way of reducing the cost of borrowing.

The requirement for borrowers to provide assets as security for loans has been a hindrance to accessing credit because they are charged a rate of 0.2 percent of the secured amount.

Finance Permanent Secretary Joseph Kinyua said on Wednesday that re-looking at the Act was one of the regulatory reforms that they were considering to address the flawed collateral process and thus increase affordability of financial services.

“What was the motivation for Stamp Duty? Is it for revenue-raising or something else?” he posed adding “it is something that we will look at and subject it to discussions between ourselves and the Ministry of Lands and you might get good news by the time the Minister (Uhuru Kenyatta) goes to Parliament for (reading of) the budget,” said the PS.

He however admitted that this would present a tough balancing act for them as they would have to consider the implications on revenues.

“We will look at a number of scenarios that can try to balance out the revenue lose and also possible revenue gains because if you are reducing a particular tax, it may have a positive impact on the growth of the income of a company which you’d be able to capture through other taxes such as income tax,” he said. 

Data from the Central Bank of Kenya on withdrawals for 2007 shows that this tax levied at 0.2 percent would bring in revenues of approximately Sh4.6 billion per year.

The PS was responding to recommendations made in a report produced by the Financial Sector Deepening Trust to correct the rigidities in collateral system in order to make it easier for the private sector to borrow.

The study also identified more than 20 statutes which regulate the creation of this security, many registries, weak enforcement procedures and the reluctance by lenders to consider other forms of collateral as some of the challenges that make the process expensive, cumbersome and complex.

Despite the challenges that borrowers face while seeking funds, the requirement for security is something they cannot do away with. It is estimated that 70 to 80 percent of all loans made are securitised in one way or the other thus the need to have an efficient system.

“The flawed process affects the demand for finance as an increasing number of borrowers have difficulties meeting the collateral requirements. The process also negatively affects lenders as they have to compete vigorously for the small crop of borrowers who do not meet the stringent criteria for collateral,” the report stated.

The findings thus proposed measures such as the consolidation of laws into a uniform property law that will make it easier to ascertain and guarantee the certainty of a title deed, the repeal of the Land Control Act, establishment of personal security legislation as well as reform of corporate security instruments in the Companies Act.

The government expressed its commitment towards the implementation of these recommendations in the next three years with CBK Governor Prof Njuguna Ndungu saying that a committee had been set up to drive this process.

“The formation of the committee reflects the importance attached to the study by both the KBA (Kenya Bankers Association) and CBK.  The implementation of the recommendations will not only be beneficial to the financial sector but the entire economy,” he added.

Prof Ndungu said these measures would complement other initiatives such as the licensing of the Credit reference bureaus and the regulation of the Micro Finance Institutions.

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