Investment in technology

Investment in technology by banks was KES 23.2bn and KES 24.2bn in 2017 and 2018, representing an overall growth of 4%. Out of the total technology investment, KES 18.5bn and KES 19.6bn was contributed by Tier One banks in 2017 and 2018 showing a growth of 6%.

These technological investments give rise to significant irrecoverable VAT. This additional cost is not supportive of the digitalisation of the sector.

It is expected that investments in technology will with time lead to lower employee costs which will inevitably lead to a lower growth in PAYE contribution by the sector. However, this should translate to higher corporate profits, higher corporate taxes and withholding tax on dividends.

Withholding taxes borne and collected increased from KES 19bn in 2017 to KES 19.9bn in 2018 representing an increase of 4.7%. This increase is aligned with the 4% increase in technology investments year on year. This is indicative of significant withholding taxes that accrue on payments to suppliers of technology who are often based abroad. Banks will tend to bear the 20% withholding taxes on payments made to them.

As highlighted, expenditure-based taxes such as irrecoverable VAT and withholding taxes disincentivise digitalization within the sector and result in the slower transformation of banks.