Total assets of microfinance banks (MFBs) in Kenya plunged to a decade-low of Ksh57.9 billion ($429.9 million) in 2024 compared to Ksh 62.4 billion ($463.4 million) a year earlier, as shrinking deposits and a widening funding gap stifled lending activity.
The contraction, detailed in the latest Financial Sector Stability Report published by Central Bank of Kenya (CBK), marks the third year of consecutive decline and the lowest level since 2014 when the sector’s assets stood at Ksh 56.9 billion ($422 million) . The CBK attributed the performance to weak credit growth.
During the 12-month period net loans and advances fell from Ksh 37.5 billion ($278.5 million) a year earlier to Ksh31.2 billion ($231.6 million), representing a 16.8% decline. Gross loans also slumped, contracting by 16.2% in 2024 compared with an 8.3% drop in 2023 as customer demand for credit dwindled.
“The low uptake of loans/disbursements further complicates the growth potential of the subsector,” the apex bank noted.
At the same time, credit risk remained elevated despite a 0.20% decline in gross non-performing loans to Ksh 11.86 billion ($88.1 million), further worsening the market’s outlook.
Deposits at six-year low
The funding side of the banks’ balance sheets tells a similar story. Customer deposits, the main revenue source for MFBs, slipped to a six-year low of KSh 42.9 billion ($318.5 million) in 2024, down 2% from KSh 43.8 billion ($325.1 million) a year earlier and extending a three-year slide.
External borrowing fell even more sharply, plunging 37.8% and underscoring the growing difficulties in securing stable financing. With deposits shrinking and credit lines drying up, MFBs struggled to carry out their core role of intermediating funds.
The sector posted a net loss of KSh 3.5 billion ($25.9 million) in December 2024, its ninth consecutive year in the red, compared with a KSh 2.4 million ($17,819) loss the year before. Only three of the 14 licensed MFBs turned a profit, while three institutions alone accounted for nearly 88% of the sector’s total losses.
“The increase in losses erodes capital and liquidity buffers, which reduces the ability of MFBs to withstand shocks and sustain intermediation,” the report said.
Growing competition in niche markets
Beyond internal weaknesses, MFBs are increasingly squeezed by competition from outside players.
The CBK notes that fintech firms, telecommunications companies, government-backed lenders, and development finance institutions are now active in the same niches that MFBs traditionally dominated, particularly small-scale lending.
Commercial banks and Savings and Credit Cooperative Societies (SACCOs) are also erodng MFBs’ market share. Large lenders are leveraging low-cost digital products tailored for small borrowers, while SACCOs retain strong loyalty among salaried workers.
This shift has reduced the pricing power and relevance of MFBs, driving customers toward more agile and innovative alternatives. For investors, the subdued performance and weakening capital bases have made MFBs appear increasingly risky.
Regulatory hurdles
Government policies designed to promote innovation and financial inclusion have inadvertently heightened pressure on MFBs, the report said. New rules on data protection and cyber security have driven up compliance costs, forcing thinly capitalised lenders to shoulder heavy technology investments at a time of shrinking margins.
MFBs, on their part, argue that strict loan recovery rules have worsened performance and fuelled mass customer exits.
By law, they must classify loans as non-performing after just 30 days of missed payments, compared with 90 days for commercial banks — a tighter window that pushes up interest rates and discourages borrowers.
Tax treatment and collateral laws add to the burden.
Under the current framework, MFBs cannot claim interest income on withholding tax, creating a form of double taxation that eats into profits. Also, while movable assets such as livestock or household goods are permitted as collateral, they often aren’t recognised by the CBK for provisioning when loans go bad, limiting their usefulness.
Together, these rules have created a tough operating environment, making it increasingly difficult for microfinance banks to compete with a rapidly growing pool of rivals.
Need for restructuring and consolidation
Despite the growing pressures, the central bank sees room for microfinance banks to regain relevance by offering tailored services to increasingly sophisticated consumers. Success, however, hinges on digital innovation, consolidation, and a more supportive regulatory environment.
“The MFB subsector requires a significant shift in the business models such as shift to digital platforms focussing on niche segments of the customers and services,” the report stated.
Still, the regulator warned that most lenders lack the financial stamina to build robust platforms or attract strategic investors, making mergers and acquisitions a more viable path to scale and resilience.
For now, the sector remains in survival mode as it grapples with mounting losses, depleting assets, rising competition and rules that provide little room for growth.
NB: The local currency figures were converted to their estimated US dollar figures using the average exchange rate in 2024 of KES134.7/$1.
