Mbadi defends proposed tax on Visa, Mastercard transactions

Kenya's Treasury Cabinet Secretary John Mbadi is defending a controversial proposal in the Finance Bill 2026 that would impose withholding tax on card payment processors, targeting Visa and Mastercard interchange fees. The amendment to the Income Tax Act would reclassify interchange and merchant service fees as "management or professional fees," subjecting them to a 15% withholding tax at source.

## Why is Kenya targeting card payments now?

The rationale is straightforward: the government wants to expand its tax base and capture revenue from financial flows that currently escape formal taxation. Card transactions represent a growing share of Kenya's retail economy, with mobile money and digital payments surpassing cash transactions in urban areas. By treating processor fees as taxable management income, the Treasury aims to plug revenue leaks and fund budget priorities. However, the timing raises questions about whether the policy addresses real tax evasion or simply shifts costs downstream to merchants and consumers.

The Kenyan economy contracted in Q3 2025 amid inflation pressures and slowing growth, forcing the government to look for new revenue streams. The card transaction tax could generate an estimated KES 8–12 billion annually, according to preliminary Treasury modeling—a material sum for a fiscally stressed budget.

## What does this mean for retailers and fintech?

The practical impact could be severe. Kenya's retail and hospitality sectors, already squeezed by high operating costs and thin margins, would absorb the 15% withholding on card-processing fees. A mid-sized supermarket processing KES 50 million in card transactions monthly would face an additional KES 9–15 million annual tax burden, assuming current interchange rates of 1.5–2%. This could trigger two outcomes: retailers raise prices (fueling inflation) or reduce digital payment adoption, paradoxically pushing Kenya back toward cash—the opposite of financial inclusion goals.

Fintech firms and payment processors face existential pressure. Companies like Pesapal, Kopokopo, and Flutterwave operate on thin margins (3–5%) in East Africa. A retroactive tax on what they classify as fees could trigger restatements, deferred tax liabilities, and potentially force price hikes that reduce competitiveness against cash-based competitors.

## Where does this leave investors?

Mbadi's defense suggests the policy will advance. The Treasury has already signaled its intent in pre-budget consultations, and Finance Bills in Kenya rarely face substantive reversal once formally tabled. However, the fintech lobby—including the Fintech Association of Kenya and individual payment companies—is mobilizing. Expect amendments that either carve out small merchants or phase in the tax over 24 months.

For institutional investors, this signals heightened regulatory uncertainty around fintech and digital payments in East Africa's largest economy. Regional payment processors with Kenya exposure should model revenue hits of 10–15%. Conversely, this could accelerate consolidation: larger players with scale can absorb the tax; smaller competitors may exit or merge.

The broader risk is reputational. Kenya, once viewed as a fintech hub and mobile money pioneer, is now signaling that digital payments are a tax opportunity, not a policy priority. That mindset shift matters for long-term capital allocation into the sector.

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