Kenya’s financial sector is blinking red. Banks and Saccos have launched an urgent lobbying effort to pressure the government into reducing payslip taxes (PAYE and Housing Levy), citing a catastrophic rise in loan defaults.

The plea comes as the "one-third rule"—which dictates that an employee must retain at least a third of their salary after deductions—becomes mathematically impossible for thousands of civil servants. With the new 2.75% SHIF deduction and the 1.5% Housing Levy, take-home pay has shrunk to levels where borrowers can no longer service their loans.

The Liquidity Crunch

"We are seeing payslips reading zero," revealed a CEO of a major Tier 1 Sacco. "When the government takes its cut first, there is nothing left for us. We are now holding billions in non-performing assets."

• Credit Freeze: Banks have responded by tightening lending to salaried workers, traditionally their safest borrowers. This credit crunch is slowing down consumption and hurting the wider economy.
• The Proposal: The lenders want the government to cap total deductions or offer tax relief to borrowers. They argue that killing the borrower to feed the taxman is bad economics.
• Treasury’s Stance: The government, desperate for revenue to service sovereign debt, is unlikely to budge. This sets the stage for a standoff where the Kenyan worker is the casualty.

A Ticking Bomb

If Saccos start collapsing due to defaults, the savings of millions are at risk. The payslip war is no longer just about taxes; it is about the stability of the entire financial system.