The Finance Act, 2026 has clarified the tax treatment of bad debts for money lenders, banks, and regulated financial institutions.
Previously, there was uncertainty on whether only the interest on a bad loan could be claimed as a tax deduction or whether the loan principal could also be deducted. This often resulted in disputes between taxpayers and the Kenya Revenue Authority (KRA).
What's New?
Where a debt becomes irrecoverable in accordance with the Commissioner's Bad Debt Guidelines, the deductible amount now includes:
- Loan principal
- Accrued interest
- Any other amount relating to the debt
This means qualifying lenders can now claim a deduction for the entire loan exposure, not just the interest.
Who Benefits?
The amendment applies to:
- Money lending businesses
- Banks licensed under the Banking Act
- Financial institutions licensed under the Banking Act
- Microfinance institutions
- Other regulated financial institutions covered under the law
Important Reminder
The deduction is not automatic. Institutions must still comply with the Commissioner's Bad Debt Guidelines by demonstrating that:
- The debt is genuinely irrecoverable.
- Reasonable recovery efforts were made.
- Proper impairment and write-off procedures were followed.
- Adequate documentation is maintained.
Why This Matters
This amendment provides greater certainty for lenders, reduces disputes with KRA, and aligns tax treatment with the commercial reality that unrecoverable loans form part of the normal business of lending.
It also resolves longstanding uncertainty created by conflicting decisions from the Tax Appeals Tribunal and the courts.
TAX HOME KENYA
Simplifying Your Tax Journey
📱 +254 725 416 982
📧 taxhomekenyalimited24@gmail.com