The Government’s decision to allow interest paid on deposits to be deductible for tax purposes has been broadly welcomed by the banking sector, with analysts saying the measure could strengthen deposit mobilisation and improve the flow of credit into productive sectors.
The intervention, announced by Minister of Finance, Economic Development and Investment Promotion, Professor Mthuli Ncube, during last week’s 2026 National Budget presentation, is expected to ease pressure on banks whose taxable income has long been inflated by the non-deductibility of this core operational cost.
Minister Ncube said the policy shift was necessary to correct a long-standing mismatch in the Income Tax Act.
“Financial institutions play a pivotal role in mobilising savings and channelling them towards productive sectors of the economy,” he said.
“A significant proportion of bank liabilities comprises deposits held by individuals, corporate and institutional clients. In order to mobilise and retain these deposits, financial institutions incur interest expenses, which constitute a core cost of doing business.
“However, under current legislative provisions, interest expenses incurred by financial institutions on deposits are not deductible for tax purposes, despite being a legitimate and unavoidable cost directly incurred in the production of taxable income.
“This restriction creates a mismatch between income earned and expenditure incurred, overstating taxable profits and increasing the effective tax burden.”
The new measure, which takes effect from January 1, 2026, will allow banks to claim interest paid on deposits as a deductible expense, subject to safeguards against abuse, including transfer pricing rules, thin capitalisation tests and anti-base erosion provisions.
Market watchers say the policy aligns Zimbabwe with international norms, where interest paid on deposits is broadly recognised as an operational cost.
Investment banker Ms Chikomborero Gwata said the adjustment was long overdue and would improve the efficiency of financial intermediation.
“This is a positive change for the sector because it frees up capital that was previously locked up in avoidable tax obligations,” she noted.
“If banks can retain more earnings, they are better positioned to extend credit, modernise their systems and compete for deposits. In an economy where lending is still constrained, any measure that improves liquidity circulation is welcome.”
She added that the ability to claim deposit interest as a deductible cost may lead banks to offer more competitive interest rates to depositors, encouraging households and firms to keep more funds within the formal system.
“Increased deposits translate to increased lending capacity,” Ms Gwata said. “This supports the productive sectors the Minister spoke about, and over time, it could help lower the cost of credit by improving liquidity conditions.”
Some institutions also believe the reform can strengthen compliance, since banks will have an incentive to report interest expenses more transparently to maximise tax benefits. However, not all experts are convinced that the measure will deliver its intended benefits without unintended consequences.
Veteran banker Mr Raymond Madziva said while the relief would ease banks’ tax burdens, it could also reduce Government revenue at a time when fiscal pressures remain significant.
“Allowing deductibility means taxable profits for banks will immediately fall, and that has implications for revenue targets,” he said.
“The Treasury is already balancing multiple demands, from infrastructure to social protection, and a narrower tax base from banks may require compensatory measures elsewhere.”
Mr Madziva also cautioned that, even with safeguards, the change could create opportunities for aggressive tax structuring.
“There is always the risk that some institutions may attempt to inflate interest expenses through related-party arrangements or complex deposit structures,” he warned.
“Transfer pricing rules can help, but enforcement capacity is crucial. If monitoring is weak, the measure may end up eroding more revenue than anticipated.”
He further argued that the deductibility on its own would not solve deeper structural issues in the banking sector, including low long-term deposits, limited confidence, and a preference for US dollar cash holdings outside the formal system.
“Tax incentives help at the margins, but what the sector needs more is macroeconomic stability and consistent policy signalling,” Mr Madziva added.
With both opportunities and risks evident, the success of the new policy will depend largely on implementation.
Analysts say strong oversight, periodic reviews and strict adherence to anti-abuse measures will be essential to protect the tax base while still enabling banks to benefit from the relief.
For now, the banking sector is expected to welcome the move, viewing it as a sign that the Government recognises the centrality of financial intermediation to economic recovery.
As the economy continues to pursue higher savings, increased lending and stronger capitalisation, the deductibility measure may become an important piece of broader reforms aimed at strengthening Zimbabwe’s financial system, provided it is managed with the prudence it requires.-herald
