Kenya’s microfinance banking sector has sunk deeper into the red, with losses spiralling to Sh3.5 billion, raising alarm over the stability of a financial industry once celebrated for championing inclusion among underserved communities.

Fresh data from the Kenya Banking Sector: Performance and Regulatory Reforms 2024 report shows that microfinance banks (MFBs) recorded a collective pre-tax loss of Sh3.5 billion in 2024, a sharp deterioration from the Sh2.4 billion loss posted the previous year.

Of the 14 licensed institutions, only four managed to remain profitable, leaving ten firmly in loss-making territory.

The report singles out three institutions as responsible for the lion’s share of the downturn, jointly posting pre-tax losses exceeding Sh2.7 billion.

The decline has been traced to a steep 12.1 per cent drop in total income, largely driven by a 16 per cent contraction in net lending, from Sh37.5 billion in 2023 to Sh31.2 billion in 2024.

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This pullback in lending translated into a 12.3 per cent fall in interest income, eroding the sector’s main revenue stream.

Funding constraints have forced many MFBs to scale down their core business, further weakening their position.

Return on assets slipped from negative 4 per cent to negative 6 per cent, while return on equity nearly doubled in the negative, plummeting from negative 35 per cent to negative 78 per cent, a stark indication of worsening shareholder losses and diminished capacity to create value.

The sector’s troubles mean fewer credit options for ordinary borrowers.

MFBs were originally designed to fill a gap in financial access, particularly for small businesses and low-income earners. The downturn raises concerns over whether they can still fulfil that mandate.

While MFBs flounder, digital credit providers (DCPs) have seized the moment. Operating mainly through mobile platforms, DCPs have undergone explosive growth following new Central Bank of Kenya (CBK) regulations that brought them under direct supervision.

Their numbers jumped from 32 licensed providers in 2023 to 85 in 2024.

Loan volumes in the digital space surged 91 per cent over the same period, with gross loans rising from Sh28.9 billion to Sh55.2 billion.

The number of individual loans disbursed hit 3.9 million, underscoring the rapid shift of borrowers toward mobile-based credit solutions.

The contrasting fortunes of MFBs and DCPs underscore a fundamental transformation in Kenya’s credit market, one where traditional microfinance models are losing ground to nimble, technology-driven lenders.

Unless microfinance banks reinvent their approach, their role in the country’s financial ecosystem could shrink further in the years ahead.