HOW KRA AND FINANCIAL INSTITUTIONS ARE PIVOTAL TOWARDS SUPPORT OF LOCAL BUSINESSES

Two sectors in the economy of Kenya are pivotal in supporting businesses towards sustainability and growth. This is KRA and the banks. I have written before on the disadvantage of one sector of the economy reporting abnormally high profits (banks) whilst all other businesses are facing stagnation or stunted growth with reduced profits and higher losses. From my perspective I pointed out the inverse relationship of banks vis a vis other sectors of the economy that their performance is not in tandem with the banks. I got positive and negative feedback.

In the current report, it is now reported that VAT collections have declined by 4.3 per cent in the 6 months from June to Dec 2024. The report further says that “VAT last marked a contraction in 2020 when consumption took a hit from pandemic related disruptions, including a night time curfew and the partial closure of food joints and entertainment joints”. So now, even KRA is feeling the effects of the economic challenges and it’s a matter of time before the banks experience the same because eventually they will not have anyone to lend to apart from the MNCs and businesses in Kenya that have a monopoly or an almost monopolistic control of the market. I reiterate further on the criticality of creating an enabling environment that will support the local businesses. We need the businesses to survive, to grow the economy and to create employment. We need the support of GOK, KRA and Financial institutions!

There is a critical need for a supportive ecosystem for local businesses in Kenya and the potential risks when key sectors like banking and tax collection diverge in performance from the broader economy.

Brief Highlights

Banking Sector Performance: The Kenya banking sector has demonstrated resilience, contributing to a 5.6% economic growth rate in 2023. Assets grew significantly (17.6%), and deposits rose (15.1%), fueled by mobile and online banking. However, pre-tax profits declined by 9.1% despite a 21% increase in operating income, due to a faster rise in expenses (38%). The sector also saw a rise in non-performing loans, reaching the highest level since 2007 at 14.8% of gross loans.

Economic Growth and Outlook: Kenya’s GDP is projected to grow, with figures around 5.4% in 2024 and 5.6% in 2025, driven by services and household consumption. The economy demonstrated resilience in 2023, with growth driven by the service and agriculture sectors.

Challenges and Risks:

The banking sector faces potential risks from climate change, geopolitical tensions, and fiscal constraints. The economic outlook for 2024 presents both challenges and cautious optimism. Slowing growth in key regions like the US and Japan, along with recovery signs in Europe and China, also impact Kenya.

Declining VAT Collections: If the Kenya Revenue Authority (KRA) is experiencing lower VAT collections, it signals potential struggles for businesses and consumers, which ultimately affects the entire economy.

Need for an Enabling Environment: There is a CRITICAL need of creating an enabling environment for local businesses. Key actions would include:

Government Support: Implementation of expenditure-led fiscal consolidation.

KRA and Financial Institutions Support: This could involve tax incentives for struggling businesses, access to affordable credit, and financial literacy programs.

While a strong banking sector is important, its success shouldn’t come at the expense of other sectors. If banks thrive while SMEs and other businesses struggle, it could lead to an unsustainable situation where a few large players dominate, stifling innovation and broad-based economic development.

Moving Forward:

The need for a holistic approach is clear. This would involve the government, KRA, and financial institutions working together to create policies and programs that support local businesses, promote economic diversification, and ensure sustainable growth. It is key to promote growth of the banking sector that does not hurt the growth of other businesses. I know that the Government of Kenya is under immense pressure to finance it recurrent and development expenditure, which is understandable, but there must be a balance of both and look for other ways of growing the tax base and attracting investments, opening up of new business frontiers like Isiolo, Northern Kenya and SEZs.