Banks Gain VAT Relief on Repossessed Collateral Sales After Finance Act Change

Kenyan banks and other lenders received a boost from the Finance Act 2026 signed into law by President William Ruto on Tuesday. The legislation removes value added tax on sales of collateral repossessed from defaulting borrowers.

The amendment specifically updates Part II of the First Schedule of the VAT Act. It classifies these asset sales as exempt supplies when they arise from enforcement of loan security. This applies to commercial banks as well as saccos and similar institutions.

Uncertainty had lingered after a Tax Appeals Tribunal decision in January 2025. The tribunal sided with the Kenya Revenue Authority in a dispute with KCB Bank Kenya Limited. It upheld a Sh67.54 million VAT assessment covering repossessed asset sales from 2018 to 2021.

The ruling distinguished between the VAT-exempt loan advance itself and the subsequent recovery steps. Recovery methods through asset disposal were not explicitly covered under the exemption, leading to the tax demand.

The Kenya Bankers Association had advocated strongly for legislative clarity in submissions on the Finance Bill. It maintained that selling repossessed collateral is inseparable from the original lending transaction.

KBA pointed to typical mortgage arrangements. Borrowers charge property as security, and later disposal of that asset should not trigger separate VAT. Continued taxation would compel banks to cover costs from their own capital reserves during recovery.

Deloitte East Africa Associate Director Fred Kimotho welcomed the policy adjustment. Collateral sales serve primarily to manage credit risk according to Central Bank guidelines and to recover outstanding amounts. Treating them as independent supplies would contradict standard VAT principles for related activities.

The change brings local practice closer to international norms. Financial institutions generally take possession of collateral only as a last resort for risk mitigation rather than for trading purposes.

Many repossessed items involve real estate including homes and commercial buildings. These assets commonly back mortgages and project financing in Kenya. The prior tax exposure had increased expenses whenever lenders moved to enforce security.

Lenders can now complete sales without the VAT overhead. This preserves capital that might otherwise fund tax payments and streamlines the overall debt recovery process.

Saccos stand to benefit equally under the exemption. Their lending portfolios often rely on asset-backed arrangements with members.

The Finance Act 2026 resolves the ambiguity KBA had highlighted. It applies a uniform VAT treatment across the lending cycle from disbursement to eventual recovery.

Industry observers see the measure as a sensible correction. It eliminates an administrative burden that had complicated routine credit management without altering core borrower obligations.

The adjustment arrives amid ongoing efforts to handle non-performing loans. More efficient recoveries could support greater stability in lending books and help maintain credit availability for businesses and households.