Savings and Credit Cooperative Organizations (SACCOs), banks, and other financial institutions will no longer pay Value Added Tax (VAT) on the sale or disposal of repossessed collateral, following amendments introduced in the Finance Act 2026, which was signed into law by President William Ruto on June 23, 2026.
This amendment marks a significant shift in how lenders recover defaulted loans. The Act revises part two of the first schedule of the VAT Act to classify the sale of repossessed assets under exempt financial services. This means transactions involving collateral recovered from borrowers who default on loans will not attract VAT.
The amendment explicitly covers “the making of any advances or the granting of credit, including the sale, disposal or realization of collateral, repossessed assets or secured property arising from the enforcement of security for loans, credit or other exempt financial services.”
This follows a long‑standing dispute between lenders and the Kenya Revenue Authority (KRA), which had previously demanded VAT on the disposal of repossessed property. Banks and SACCOs argued that loan recovery is not a profit‑making activity and should not be treated as taxable.
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The Kenya Bankers Association (KBA) had raised concerns in May over the initial Finance Bill 2026, warning that VAT on repossessed collateral would increase the cost of lending. The association cautioned that lenders would likely pass the tax burden to borrowers, making credit more expensive and undermining access to finance.
By exempting repossessed collateral sales, the new law is expected to ease pressure on lenders while shielding borrowers from additional costs. Financial institutions say the reform will provide clarity and predictability in debt recovery, allowing them to dispose of secured assets without incurring tax penalties.
The exemption also aligns Kenya’s tax treatment of collateral recovery with international practice, where loan enforcement is generally considered part of financial services rather than a taxable commercial transaction.
By Masaki Enock
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