Kenya’s powerful savings and credit cooperative movement has called on the government to overhaul key tax provisions that it says are undermining financial inclusion, raising the cost of credit for households and small businesses, and creating legal inconsistencies within the country’s cooperative framework.
In formal submissions to the National Treasury, the Kenya Union of Savings and Credit Co-operatives (KUSCCO) has proposed targeted amendments to the Income Tax Act and the Excise Duty Act, arguing that current tax rules unfairly penalize savings and credit cooperative societies (SACCOs) whose membership structures have evolved beyond individual depositors.
SACCOs are among the most important financial institutions in Kenya, serving more than seven million members and holding assets equivalent to more than six per cent of gross domestic product, according to sector data cited in the submission.
They play a central role in household savings, affordable credit provision and the financing of micro, small and medium-sized enterprises (MSMEs).
At the heart of KUSCCO’s proposals is a long-standing tension between Kenya’s cooperative laws and its tax regime.
While the Co-operative Societies Act allows SACCOs to admit individuals, organized groups such as self-help associations, and corporate bodies as members, the Income Tax Act takes a narrower view.
Under Section 19A of the Income Tax Act, favourable tax treatment is reserved for “designated primary cooperative societies” whose membership consists solely of individual persons.
SACCOs that admit even a small number of group or corporate members lose access to these tax incentives and are instead taxed under the standard corporate regime.
KUSCCO argues that this creates inequitable outcomes for institutions performing identical economic and social functions.
SACCOs with mixed membership structures are taxed on all interest income from members, while those with individual-only membership benefit from exemptions that significantly lower their operating costs.
“This disconnect between cooperative law and tax law discourages innovation, penalizes inclusion and creates an uneven playing field,” the submission states, adding that membership composition does not alter the cooperative nature or public-interest role of SACCOs.
To address this, KUSCCO proposes expanding the statutory definition of primary cooperative societies to explicitly include groups of individuals and corporate members, aligning tax law with the realities of modern cooperative finance.
The submission also calls for changes to the Excise Duty Act, particularly the definition of “other fees” charged by financial institutions, which currently attract excise duty at a rate of 20%.
SACCOs, unlike commercial banks, operate under the doctrine of mutuality, where members are both owners and beneficiaries.
Fees charged to members for services such as loan processing or account administration are internal contributions rather than commercial transactions with third parties.
KUSCCO argues that imposing excise duty on such intra-member fees contradicts this principle and effectively raises the cost of borrowing for ordinary Kenyans.
The submission proposes excluding fees, charges and commissions earned by SACCOs from their members from the excise duty regime.
According to the document, excise duty on mutual receipts undermines SACCOs’ ability to offer cheaper credit, particularly at a time when households are facing higher statutory deductions, including increased pension contributions and new health insurance levies.
The proposals are explicitly framed within the government’s Bottom-Up Economic Transformation Agenda (BETA), which prioritizes affordable credit, MSME growth and financial inclusion.
KUSCCO notes that SACCO lending is heavily concentrated in socially and economically sensitive sectors, including housing, education, agriculture and small-scale trade.
In the year to September 2025, regulated SACCOs disbursed more than KSh130bn in credit, much of it directed towards household welfare and grassroots enterprises.
By contrast, higher transaction taxes on SACCO services, the submission warns, risk pushing borrowers towards more expensive informal credit markets, weakening the resilience of small businesses and slowing job creation.
To support its case, KUSCCO points to international examples where cooperative taxation focuses on economic activity rather than membership structure.
In India, cooperative societies benefit from tax deductions under Section 80P of the Income Tax Act based on the nature of their activities, not whether members are individuals or groups.
In the Philippines, cooperatives are largely exempt from tax on transactions with members, regardless of membership composition.
Uganda has gone further by temporarily exempting SACCO income from taxation to encourage financial inclusion, while countries such as Spain and Tanzania emphasize prudential regulation and institutional accountability over membership-based tax distinctions.
“These jurisdictions demonstrate that neutrality and consistency in tax policy strengthen cooperative finance without undermining revenue objectives,” the submission argues.
KUSCCO stresses that it is not seeking blanket tax exemptions, but rather a harmonized framework that recognizes SACCOs’ unique structure and role.
It argues that fair and predictable taxation would ultimately broaden the tax base by supporting MSME growth, formalization and higher long-term income tax collections.
Failure to address the current misalignment, the submission warns, could expose SACCOs to compliance risks, discourage participation in liquidity-support mechanisms such as the Central Liquidity Facility, and weaken confidence in a sector that has long served as a financial backbone for millions of Kenyans.
As the National Treasury reviews tax proposals ahead of future fiscal legislation, the recommendations place renewed focus on how tax policy can support, or hinder inclusive finance in one of Africa’s largest cooperative economies.
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