Microfinance banks shrink on aggressive competition
By Noel Wandera, July 11, 2025Kenya’s microfinance sector is facing a moment of reckoning as new data shows a contraction in assets and earnings, amid intensifying regulatory pressure and aggressive competition from digital lenders and commercial banks.
A new report by pan-African credit rating agency Agusto & Co. reveals that total assets held by Microfinance Banks (MFBs) in Kenya fell by 5.1 per cent in 2024 to Sh60.9 billion, reversing recent post-Covid recovery gains and highlighting the sector’s growing vulnerability.
The decline is attributed to subdued lending activity, cautious risk management, and mounting pressure from nimbler digital-first competitors.
“While lending remains the core business for MFBs, gross earnings fell… reflecting rising funding costs and cautious lending activity,” Agusto & Co. states in the Kenya Microfinance Industry Report 2025.
Themed “Adapting to Economic Pressures and Evolving Market Needs,” the study notes that gross earnings declined by 5 per cent, mirroring the tight credit conditions and costlier capital environment that defined much of last year.
Agusto’s findings come at a time of significant change in Kenya’s microfinance sector, where traditional MFBs designed to serve the underserved are now being outpaced by fast-scaling, digital-first lenders that offer small-ticket loans with less regulatory friction. Credit-Only Microfinance Institutions (COMFIs), which do not take deposits and operate largely through mobile channels, recorded positive growth across key performance indicators in 2024.
According to the report, their lean structure, digital reach, and responsiveness to consumer behaviour trends are expanding access in informal and rural markets, while also attracting investor interest.
Regulatory strings attached
This evolution, however, comes with regulatory strings attached. Agusto & Co. identifies the Business Laws (Amendment) Act of 2024, effective December 27, as a game-changing development.
The law mandates that all Non-Deposit Taking Credit Providers (NDTCs), including digital-only lenders, must register and obtain licences from the Central Bank of Kenya (CBK) within six months.
“The cost of regulatory compliance is becoming a challenge as most MFIs were already struggling to meet the Digital Credit Providers licensing requirements… two years earlier,” the report observes. The burden of compliance is compounded by obligations under Kenya’s Data Protection Act (DPA), introduced in 2021, which requires micro-lenders to overhaul how they collect, store, and use personal information.
Meanwhile, asset quality deterioration continues to weigh on sector performance. Macroeconomic pressures, including rising inflation, elevated interest rates, and the fallout from protests against the Finance Bill 2024, have impaired SME loan repayment capacity. These conditions have fuelled credit risk and pushed up provisioning costs.
However, amid these headwinds, the sector is beginning to realign its strategy. The report points to green lending products targeting agriculture, clean energy, and waste management as a potential lifeline.
Backed by development finance institutions, these instruments offer double dividends, including social impact and long-term sustainability.