CBK: Microfinance banks struggling with loan defaults amid shrinking deposits
The Central Bank of Kenya (CBK) reports that the 14 licensed microfinance institutions (MFBs) are finding it difficult to grow their lending portfolios.
Kenya’s microfinance banks are increasingly turning to commercial banks to offload loans as they struggle with rising defaults, shrinking deposits, and mounting competition from traditional banks and digital lenders.
The Central Bank of Kenya (CBK) reports that the 14 licensed microfinance institutions (MFBs) are finding it difficult to grow their lending portfolios.
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To manage risk, many have sold parts of their existing loans to commercial banks while slowing down the issuance of new credit.
In these arrangements, the purchasing bank pays off the outstanding principal and accumulated interest, taking over the responsibility of collecting future repayments.
According to CBK’s 2024 annual supervision report, the sector’s loan book fell by Sh6.3 billion, a drop of 16.8 per cent, from Sh37.5 billion in 2023 to Sh31.2 billion.
“This decline in loans was attributed to a strategic decision to reduce lending to manage non-performing loans, loans sold off to other lenders, and heightened competition from other credit providers,” the report states.
Despite these efforts, non-performing loans continued to rise, hitting Sh7.38 billion compared to Sh6.37 billion the year before.
The combination of slower lending and loan sales reduced interest earnings, pushing the sector into a pre-tax loss of Sh3.5 billion last year, up from Sh2.4 billion in 2023.
The result marked the ninth consecutive year of losses and extended a period of unprofitability that began in 2015, when the sector last recorded a pre-tax profit of Sh592 million.
Only four MFBs achieved profits in 2024. U&I earned Sh84 million, Caritas Sh50 million, Choice Sh44 million, and Sumac Sh1 million.
The largest contributors to the overall loss were Kenya Women Microfinance Bank, Faulu Microfinance Bank, and SMEP Microfinance Bank, which reported losses of Sh1.6 billion, Sh1.04 billion, and Sh409 million, respectively.
The report highlights that MFBs are losing ground to bigger banks and digital lenders, both in terms of branch networks and technology adoption.
The number of physical branches fell from 115 to 107, while agency outlets dropped from 677 to 539. Facing persistent losses, higher operating costs, and declining deposits, many microfinance institutions have sought new capital, often by selling stakes to new investors.
Over the past three years, at least six MFBs, SMEP, Maisha, Key (formerly Remu), Century, Choice, and Uwezo have been acquired through multi-million shilling deals, illustrating a growing trend of consolidation in the struggling sector.
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