Shoppers on the popular Buy Now, Pay Later (BNPL) financing programmes face higher product prices after the Treasury introduced changes requiring that all firms involved in any form of lending charge excise duty on their services.
BNPL programmes are a financing option that allows consumers to make purchases and pay for them over time, typically in a series of instalments.
In a drastic shift, the newly signed Finance Act 2025 has amended the definition of a ‘digital lender’ to include any person who provides credit or lending services as an incidental supply to their core business rather than a main supply.
“Section 2 of the Excise Duty Act is amended (a)in subsection (1)—(i) by deleting the definition of “digital lender” and substituting therefor the following new definition—“digital lender” means a person extending credit through an electronic medium but does not include a bank licenced under the Banking Act, a Sacco society registered under the Cooperative Societies Act or a microfinance institution licensed under the Microfinance Act,” said the Finance Act 2025.
Previously, ‘digital lender’ was defined to mean a person holding a valid digital credit provider's license issued by the Central Bank of Kenya(CBK).
However, the Act now amends the definition of digital lenders to exclude institutions such as banks, microfinance institutions, and saccos. This is because fees, charges, and commissions charged by financial institutions are already subject to excise duty.
Analysts said the changes pose a challenge to BNPL providers who would now be required to account for excise tax on their operations, leading to higher prices of products.
“The effect of the new definition is therefore to bring within the ambit of a “digital lender”, any person who is providing credit including persons who may provide lending services as an incidental supply to their core business rather than a main supply,” law firm Bowmans said in a note.
“This provision would therefore present significant challenges, especially with respect to businesses engaged in buy now pay later (BNPL) business models that could be deemed to be digital lenders and therefore required to account for excise duty on the fee charged for lending,” it added.
Analysts said in most instances with BNPL business models, there is no separate fee charged for lending and therefore this may require an unbundling of the final price of a commodity to determine the lending fee purely for purposes of accounting for excise duty on such a fee.
A CBK survey revealed that the number of shoppers on BNPL tripled in three years to 2024, amid a surge in inventive hire-purchase schemes and the impact of a tough economy.
The study showed that the use of hire purchase and Lipa Mdogo Mdogo soared from 2.1 percent in 2021 to 6.2 percent last year, according to findings from the 2024 FinAccess Survey published in December by CBK, the Kenya National Bureau of Statistics, and the Financial Sector Deepening Trust Kenya.
This would mean extra costs on products such as mobile phones, electronics, and home appliances that are popular with shoppers on BNPL platforms.
“The requirement to charge excise duty on such fees would ultimately result in a rise in price for commodities and services supplied under the BNPL business model,” Bowmans said.
BNPL programmes have become popular among consumers in Kenya hard-pressed by a tough economy.
About 579,242 Kenyans were estimated to have used hire purchase or lipa mdogo mdogo services in 2021 compared to 1,751,994 persons in 2024.
Hire purchase was the top credit-only service by usage, ranking ahead of digital loan applications and traditional microfinance institutions (MFIs).
The use of digital loan applications was largely unchanged at 2.4 percent in 2024 from 2.1 percent three years earlier while the use of traditional MFIs dropped to 0.8 percent from 1.7 percent.
Notable providers of BNPL financing include Safaricom, Lipa Later, Aspira, and Loop.
The rise of buy now pay later has prompted the Treasury to seek the regulation of players, bringing them under the oversight of the CBK.
