The Kenya Revenue Authority (KRA) has lost a tax dispute over the deductibility of bad loans after the Tax Appeals Tribunal ruled that a bank could claim tax relief on loan principal that had become irrecoverable.
The case involved Consolidated Bank, which challenged KRA’s decision to disallow deductions relating to loans that the lender had written off after unsuccessful recovery efforts. The dispute centred on whether the principal amount of a bad loan should be treated as capital expenditure or as a business loss arising from the bank’s ordinary lending activities.
Consolidated Bank argued that lending money was its core business and that unrecovered loans represented genuine trading losses incurred in generating taxable income. The bank presented evidence of its recovery efforts, including customer records, bank statements, credit reports, auction notices, correspondence from auctioneers and court decisions.
The bank also argued that the money advanced to borrowers was financed partly through customer deposits, which remained liabilities that the institution was required to honour regardless of whether borrowers repaid their loans. It therefore maintained that loan defaults were directly connected to its trading activities.
The Tribunal agreed with the bank’s position and found that KRA had incorrectly classified the written-off loan principal as capital expenditure. It determined that the principal advanced by a lender constitutes stock-in-trade when lending is the institution’s business.
As a result, the Tribunal held that Consolidated Bank was entitled to the tax losses arising from the written-off loans and quashed KRA’s objection decision. The ruling also affected the reduction of the bank’s tax losses for 2019 that had resulted from KRA’s disallowance.
The decision is significant for Kenya’s financial sector because loan write offs are a regular feature of banking. Banks write off loans after determining that conventional recovery methods, including restructuring and enforcement against collateral, are unlikely to recover the outstanding amount. Despite a write-off, lenders can continue pursuing borrowers for amounts owed.
The ruling also comes as Kenyan banks continue to deal with significant levels of loan defaults. Listed banks wrote off Sh75.06 billion in loans in 2025, down from Sh87.87 billion the previous year, according to Business Daily. The decline reflected some improvement in asset quality, although households and businesses continued to face economic pressures.
The Tribunal’s decision could therefore influence how lenders approach the tax treatment of bad loans and how KRA assesses deductions claimed by financial institutions. It also adds to an ongoing debate over whether unrecovered loan principal should be regarded as capital or as a trading loss for businesses whose primary activity is lending.
