2023 Kenya Microfinance Industry Report

Overview of the Report

The performance of the Kenya microfinance industry remained resilient in FY 2022 and H1’2023, despite the slowdown in economic activities due to the “wait and see” effect in the lead-up to the 2022 general elections. Nonetheless, there has been a rise in repayment defaults due to various macroeconomic shocks that have affected businesses and households’ ability to repay loans leading to higher NPL ratios estimated at 32.9% for microfinance banks, 11.6% for credit-only microfinance institutions and 6.2% for wholesale microfinance institutions as at 30 June 2023. Moreover, the industry continues to grapple with rising costs of operations due to the steady rise in inflation recorded in 2022 and H1’2023 as well as the increased cost of compliance with the new regulations. There has been continued interest from international investors in the Kenyan Microfinance industry which led to the acquisition of three out of the 14 Microfinance Banks in FY 2022. The industry witnessed various developments during the review period, including the operationalization of the Central Bank of Kenya (CBK) Digital Credit Providers (DCPs) Regulations, 2022 which required that all previously unregulated DCPs apply to CBK for a license within six months by 17 September 2022, or cease operations. As at 30 June 2023, only 32 applicants had been granted DCP licences to operate in the country, with the Central Bank of Kenya acknowledging that over 400 applications received since March 2022 when the regulations were operationalized are still under review. We believe that the licensing of digital credit providers will boost investor confidence and unlock new funding for the credit-only microfinance institutions that were previously unregulated. However, there’s a need for an overarching regulation for the microfinance industry which will enhance the regulatory landscape and offer greater clarity regarding the oversight of credit-only microfinance institutions, which are currently confronted with an uncertain regulatory environment.

Below are key findings and excerpts from our research on the 2023 Kenya Microfinance Industry

  • Microfinance institutions have continued to introduce new innovative products and revamp the existing ones with significant upsides for promoting sustainability through the inclusion of green loan products in their portfolio.
  • Pricing remains a key factor in the competitive landscape alongside operating efficiency as noted in the Survey responses.
  • With the ongoing DCP licensing regime, MFIs have begun to reduce their lending rates ahead of potential regulatory oversight despite the rising cost of operations.
  • Credit risk was identified as the primary risk faced by 63.9% of survey respondents, and the government’s fiscal stance on an aggressive tax collection regime following the enactment of the Finance Act 2023 has resulted in a decline in household disposable income, impairing their ability to service existing debt lines.
  • Increased interest in the Microfinance industry from foreign investors to broaden their financial services offerings in Kenya and the region has sparked renewed interest by MFIs in obtaining necessary accreditations from regulatory bodies and independent credit ratings to attract potential financing partners.
  • Technology efficiency, product and service diversification into niche areas like sustainability, dynamic route-to-market options, and access to low-cost funding were identified as key success factors in the Microfinance Industry in Kenya.

The 2022 Kenya Microfinance Industry report captures the following:

  • An Overview of the Kenyan Microfinance Industry
  • The competitive landscape and analysis of the bases of competition
  • The regulatory environment and outlook
  • An Assessment of the Financial Condition of the Industry
  • Key developments and trends in the Industry
  • Strengths, weaknesses, opportunities and threats to the Industry
  • Key success factors and risk areas
  • Industry Outlook and Risk Rating