Loans to MSMEs drop 13 per cent on high cost
By John Otini, July 10, 2025The value of loans awarded by banks to micro, small and medium size enterprises (MSMEs) dropped 13 per cent in the two years to 2024 on account of high cost of credit and lack of collateral hampering business growth and job creation, a new report from the Central Bank of Kenya (CBK) shows.
Between 2023 and 2024, commercial banks and microfinance banks (MFBs) received loan applications from MSMEs of about Ksh872.6 billion, of which Ksh771.1 billion (88.4 per cent) was approved.
“This marked a 13.1 per cent decline compared to the 2022 survey, when MSME loan applications amounted to roughly Ksh1.0 trillion, with Ksh829.8 billion (83 per cent) approved,” the regulator noted.
The report raises concerns given that the majority of the jobs are created by small and medium enterprises segments of the economy.
The report highlights that high interest rates and stringent collateral requirements continue to pose significant barriers to MSMEs seeking access to bank credit.
The “2024 Survey Report on MSME Access to Bank Credit,” released in June 2025, underscores persistent challenges despite MSMEs’ crucial role in the national economy.
The survey, which gathered data from commercial banks, mortgage finance institutions, and microfinance banks (MFBs) as of December 2024, paints a clear picture of the cost of borrowing for these vital businesses.
According to the report, “The average rate of interest charged on facilities to MSMEs as at December 2024 was 16.4 per cent and 26.3 per cent for commercial banks and MFBs, respectively.”
These figures represent an increase from the average interest rates recorded in December 2022, indicating a rising cost of capital for MSMEs.
For commercial banks, micro enterprises faced an average rate of 16 per cent, small enterprises 16.6 per cent, and medium-sized enterprises 16.7 per cent.
The rates were notably higher for MFBs, with micro enterprises paying 23.8 per cent, small enterprises 30.9 per cent, and medium-sized enterprises 24.3 per cent.
Such elevated borrowing costs can significantly impact the profitability and expansion capabilities of small businesses.
Formidable obstacle
Beyond interest rates, the report identifies collateral as another formidable obstacle.
The conclusion section explicitly states, “The survey reveals that collateral continues to be a key requirement for financial institutions when lending to MSMEs, especially for medium-sized enterprises.
This remains a significant barrier to accessing credit for MSMEs that may not have sufficient tangible assets.”
This requirement disproportionately affects nascent businesses or those in sectors with fewer fixed assets, limiting their ability to secure the necessary financing for growth and innovation.
Without adequate collateral, many promising ventures are unable to access formal credit, forcing them to rely on informal, often more expensive, sources of funding.
The report links these hurdles to broader trends in MSME lending. As of December 2024, there were 0.89 million active MSME loan accounts in the banking industry, a notable 24.7 per cent decrease from 1.18 million accounts in December 2022.
While the total value of the loan portfolio marginally increased, the decline in the number of accounts suggests a contraction in the breadth of access.
The CBK report attributes this decline to several factors, including “the prevailing high lending interest rates and subdued consumer demand.
Further, increased competition from alternative lenders, particularly digital credit providers and Saccos active in MSME lending, may have contributed to the decline.”
This highlights that traditional banking institutions are facing pressure not only from economic conditions but also from new players in the financial landscape.
MSMEs are recognised as a vital engine for economic prosperity, employment, and innovation in Kenya, contributing approximately 33.8 per cent to the national gross domestic product (GDP) in 2015 and employing millions.