Nairobi — The Association of Microfinance Institutions (AMFI) has urged Parliament to amend the Income Tax Act to explicitly allow lenders including banks, microfinance institutions and digital credit providers to deduct the full value of bad debts, covering principal, interest and fees, once such debts are deemed irrecoverable under the Commissioner's guidelines.
In its memorandum to the National Assembly on the Finance Bill, 2026 (National Assembly Bill No. 26 of 2026), the Association of Microfinance Institutions-Kenya (AMFI) is also seeking sweeping changes across income tax, VAT, withholding tax, capital gains tax and tax administration rules, warning that several proposals could raise the cost of credit and weaken financial inclusion.
On bad debts, AMFI argues that current interpretations by the Kenya Revenue Authority have created inconsistency in tax treatment.
"A bad debt which is of a capital nature shall not be an allowable expense."
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The lobby is pushing for clarity to ensure that all components of a defaulted loan are deductible.
It argues that lending risks are inherent in financial intermediation and should be treated as revenue losses rather than capital losses.
AMFI is also proposing VAT exemptions on the sale of collateral, repossessed assets and secured property.
"The sale, disposal or realization of collateral is not an independent economic activity in and of itself."
The association further wants microfinance institutions and digital credit providers included in the Income Tax Act definition of "financial institutions" to access incentives such as withholding tax exemptions and mortgage interest relief, arguing their exclusion places them at a competitive disadvantage.
It has also called for deletion of Clause 16, warning that deeming 60% of undistributed profits as dividends could weaken capital buffers in regulated lenders.
On digital taxation, AMFI opposes VAT on payment services, stating it would amount to "taxing capital flow rather than final consumption."
It also rejects proposals to reclassify payment ecosystem charges as "management fees" or "royalties," warning this could increase costs and create legal uncertainty.
The association is pushing for a phased rollout of eTIMS and flexible documentation for non-invoice expenses, including accruals and forex losses. It also wants safeguards retained to prevent enforcement action during tax appeals.
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AMFI is additionally calling for a 10-year tax loss carry-forward period and retention of protections against double taxation in withholding tax rules, arguing these changes are necessary to support stability and financial inclusion in the lending sector.
