The budget-making process for the 2026-27 financial year has ended. Once again, as in previous years, proposals aimed at aligning the tax treatment of savings and credit cooperative societies (saccos) with their unique cooperative character were not considered in the final framework.
That is, of course, the prerogative of policymakers. Budget-making involves trade-offs and competing national priorities. However, this outcome presents an opportunity to step back and interrogate the tax environment.
The issue has never been whether saccos deserve special treatment, but whether our tax system fully recognises the roles saccos play in supporting the foundations of economic growth.
Ironically, saccos, institutions that have done the most to promote savings and broaden financial inclusion, continue to be viewed primarily through the lens of annual revenue collection. This points to a larger problem.
For decades, tax policy development has always sought to help the government collect more revenue. This is understandable. The government needs revenue. However, development is not merely about collection. It also involves incentives.
The quality of a tax system should be judged by the kind of economy it helps build tomorrow, not entirely by how much revenue it raises today.
Saccos have won where other financial institutions struggled. They have mobilised domestic savings, extended affordable credit, and brought millions of Kenyans into formal finance.
Many Kenyans have financed education, home ownership and entrepreneurship through sacco loans.
In many respects, the story of saccos is the story of financial deepening in Kenya. Which is why the debate about how they are taxed deserves to rise above technical clauses and legal definitions.
At its core, the ongoing discourse on sacco taxation seeks to answer this question: Does the current tax policy encourage savings and capital formation, or inadvertently discourage them?
Economists have long understood that sustainable growth does not emerge out of thin air. It requires institutions capable of converting savings into investment. Countries that accumulate domestic savings are better positioned to finance enterprise and reduce dependence on external borrowing. Such countries are well-positioned to weather economic shocks. Saccos are central to that process.
Despite this, some aspects of our tax framework unintentionally create distortions that undermine the behaviour we are trying to encourage. Consider the current treatment of primary cooperative societies under Section 19A of the Income Tax Act.
Under current law, a sacco whose members are exclusively individuals enjoys favourable treatment. But if that same institution admits groups, chamas or corporate entities—even though such membership is fully recognised under cooperative law—it risks losing those benefits and being subjected to ordinary corporate taxation.
That makes little economic sense.
Two institutions performing essentially the same economic function can face entirely different tax outcomes simply because one has embraced a broader membership structure. In effect, inclusivity becomes a tax disadvantage.
And that creates exactly the wrong incentive. Groups and corporate members strengthen liquidity, deepen savings and expand the resources available for lending to households and businesses. Penalising such diversity runs contrary to the broader objective of expanding financial access.
International experience paints a better picture. Countries such as India, Spain and the Philippines base tax treatment on the nature of cooperative activity rather than on the identity of members. Similar economic activities, after all, should generally be treated similarly.
The same principle applies to excise duty on member-based fees.
Excise taxes are traditionally intended to tax consumption. But transactions between a sacco and its members are not conventional market transactions. Members are simultaneously contributors and beneficiaries. These are internal arrangements within a mutual institution.
Treating those transactions as ordinary commercial services risks taxing internal redistributions rather than genuine consumption. This results in predictable outcomes, including higher borrowing costs and reduced access to finance.
And that matters.
When formal credit becomes expensive, borrowers do not stop borrowing. They borrow elsewhere. Informal and often unregulated lenders are rarely in short supply. The current taxation measures may have revenue gains, but at the cost of weaker consumer protection and stifled financial inclusion.
In economics, there is often a temptation to focus on what can be easily measured. Tax collections are visible. The opportunities forgone because savings are discouraged are much harder to see, but they are no less real.
Strong economies are built on strong household balance sheets. Families that save create resources that finance investment. Investment creates jobs. Jobs create incomes. And incomes, ultimately, generate tax revenue.
In other words, growth itself is the most sustainable tax base. Sometimes tax policy is presented as though there is a trade-off between revenue and growth. But that is a false choice. The most effective tax systems are not those that maximise collection today. They are the ones who strengthen the institutions that make prosperity possible tomorrow.
The question before policymakers, therefore, is larger than whether a particular clause should be amended. It is whether our tax system recognises and supports the institutions that deepen savings and expand opportunities.
The sacco movement is not asking for preferential treatment. It is asking for fair treatment. We can only hope that in the near future, this fairness will be realised.
When formal credit becomes expensive, borrowers do not stop borrowing. They borrow elsewhere. Informal and often unregulated lenders are rarely in short supply. The current taxation measures may have revenue gains but at the cost of weaker consumer protection and stifled financial inclusion.
In economics, there is often a temptation to focus on what can be easily measured. Tax collections are visible. The opportunities forgone because savings are discouraged are much harder to see, but they are no less real.
Strong economies are built on strong household balance sheets. Families that save create resources that finance investment. Investment creates jobs. Jobs create incomes. And incomes, ultimately, generate tax revenue.
In other words, growth itself is the most sustainable tax base. Sometimes tax policy is presented as though there is a trade-off between revenue and growth. But that is a false choice. The most effective tax systems are not those that maximise collection today. They are the ones that strengthen the institutions that make prosperity possible tomorrow.
The question before policymakers, therefore, is larger than whether a particular clause should be amended. It is whether our tax system recognises and supports the institutions that deepen savings and expand opportunities.
The sacco movement is not asking for preferential treatment. It is asking for fair treatment. We can only hope that in the near future, this fairness will be realised.
Mr Munene is the Group Managing Director, Kuscco Ltd
