Microfinance in Kenya Current State

Microfinance in Kenya has made significant strides in recent years, with the number of microfinance institutions (MFIs) increasing from 14 in 2002 to over 40 in 2020.

The Kenyan government has been actively involved in promoting microfinance, with the Ministry of Co-operatives and Micro, Small and Medium Enterprises (MSMEs) playing a key role in regulating and supervising the sector.

In 2016, the Central Bank of Kenya introduced new regulations to improve the stability and sustainability of the microfinance sector, requiring MFIs to maintain a minimum capital requirement of KES 50 million.

Microfinance in Kenya has also been driven by the need to address poverty and inequality, with many MFIs targeting low-income households and small businesses.

The banking system in Kenya is regulated by several laws, including the Companies Act, the Banking Act, and the Central Bank of Kenya Act. The Central Bank of Kenya is responsible for monetary policy and the banking system, and it releases information about interest rates, banking guidelines, and financial institutions.

Explore further: Co-operative Bank Kenya Online Banking

The Kenyan Micro Finance Act was adopted in 2006 and became active in 2008, allowing institutions to apply for microfinance licenses. To do so, these institutions must be registered as deposit-taking institutions, non-deposit-taking institutions, or informal organizations supervised by an NGO.

Here is a list of the types of microfinance institutions that can be registered in Kenya:

Institutions must go through a process to obtain a microfinance license, including approval of their name, application for a license, a letter of intent, and issuance of the license.

In Kenya, there are more than twenty large microfinance institutions that provide financial services to millions of people.

Equity Bank Kenya is the largest microfinance institution in the country, with a market share of 73.50% and a gross loan portfolio of 924,993,804 Kenyan Shilling.

Kenya Women Microfinance Bank (KWFT) is another major player, with a market share of 12.06% and a gross loan portfolio of 152,136,208 Kenyan Shilling.

K-Rep Bank, Faulu, and Jamii Bora are also significant institutions, with market shares of 6.39%, 3.56%, and 0.86%, respectively.

These institutions offer a range of products, including business loans, agriculture loans, education loans, and emergency loans.

Emergency loans are quickly available but come with more expensive interest rates.

Group loans are also offered, catering to smaller groups of 4-5 members and larger groups of up to 30 members.

Women loans are available to groups of women, with KWFT specializing in this area and holding the largest market share.

The following table summarizes the market share and number of active borrowers for the five largest microfinance institutions in Kenya:

The existing regulations in Kenya's banking system are quite comprehensive. The Central Bank of Kenya is responsible for monetary policy and the banking system, and it's the one that releases information about interest rates, banking guidelines, and financial institutions.

The Kenyan Micro Finance Act was adopted in 2006 and became active in 2008. This act allowed institutions to apply for micro finance licenses at the Kenyan Central Bank.

In order to apply for a micro finance license, institutions must be registered as one of the following: deposit-taking institutions, non-deposit-taking institutions, or informal organizations supervised by a Non-Governmental Organization (NGO).

To get approved, institutions must go through a series of steps, including getting approval of their name, submitting an application for a license, writing a letter of intent, and finally, receiving an issuance of the license.

Here are the steps in more detail:

The Central Bank of Kenya (CBK) has recently published a list of microfinance institutions licensed to operate in the country. These institutions offer banking services to low-income individuals or groups.

According to the notice published by the CBK, there are only 14 microfinance institutions licensed to operate in Kenya. This list includes both financial service providers allowed to operate nationally and those operating within communities.

One of the notable institutions listed is Faulu Microfinance Bank Limited, which is among the pioneers in this field. The list also includes Kenya Women Microfinance Bank PLC, which is a bank focused on empowering women.

For more insights, see: List of Insurance Companies in Kenya

The CBK is mandated by law to publish a list of licensed microfinance institutions every year. This is as per the Microfinance (Deposit-Taking Microfinance Institutions) Act.

Here is the list of licensed microfinance institutions published by the CBK:

These institutions were licensed between 2009 and 2019, and the list is available on the CBK's website for public access.

Finance products in Kenya have specific conditions that borrowers must meet. To be eligible for a microfinance loan, you typically need to be at least 18 years old, have a valid Kenyan ID, and be a customer of the institution.

Eligibility criteria can also include having a business and the ability to repay the loan. Some lenders require a small amount of cash or a business plan, while others demand a guarantor or group membership.

Credit scoring varies across institutions, with some using machine learning algorithms and others relying on traditional methods. Mobile App Lenders, in particular, use machine learning to calculate credit scores.

Interest rates are typically calculated on a flat basis, with some lenders using a declining balance method. More than 90% of institutions require monthly interest payments, with average rates ranging from 30-40% for loans up to 500,000 Kenyan Shilling.

For larger loans, interest rates can reach as high as 71%. To give you a better idea, here are some key interest rate ranges for different loan amounts:

Overall, it's essential to understand the specific conditions and requirements for microfinance loans in Kenya to make informed decisions about your financial options.

In Kenya, microfinance institutions have faced challenges in reaching rural areas due to limited access to financial services and infrastructure.

The high cost of loan defaults has also been a significant challenge, with some institutions reporting default rates as high as 20%.

However, despite these challenges, the microfinance sector in Kenya has shown significant growth, with the number of microfinance institutions increasing from 20 in 2000 to over 40 in 2015.

This growth has been driven by the increasing demand for financial services among low-income households and small businesses.

Kenya faces significant challenges that hinder its economic growth and development. Corruption is a major problem in Kenya, with a ranking of 154th out of 178 on the International Corruption Index in 2010.

The lack of transparency in Kenya's regulations and acts leads to uncertainty, causing economic disturbance and increased Portfolio at Risk rate, especially during political riots like those in 2007.

Despite a 4% real growth rate in 2011, Kenya's banking infrastructure remains weak and requires investment in staff, facilities, and technology to improve.

Many customers are dissatisfied with standardized loan products that don't consider their individual requirements, leading to a desire for more flexible loan conditions.

For group loans, some clients dislike guaranteeing for each other due to lack of familiarity, while others find weekly meetings and training with inexperienced trainers to be time-consuming and culturally insensitive.

In Kenya, many microfinance institutions (MFIs) face challenges delivering microfinance services due to limited capital, which has created a financial gap in supply.

This gap has been attributed to self-governance issues, capacity building issues, non-compliance with reporting requirements, and a lack of appropriate performance criteria.

The demand for microfinance services is growing, but the limited sources of available capital have undermined the capabilities of MFIs to efficiently operate and expand their activities.

A policy that advocates for better access to capital sources and investment opportunities is needed for microfinance sustainability.

The financial gap has jeopardized MFIs' sustainability and compromised the delivery of microfinance services in the country.

There is a need for a policy that encourages MFIs to increase their accessibility, build capacity, be more transparent, adopt acceptable performance standards, and promote professionalism.

Kenya has a vibrant microfinance industry, with 14 licensed microfinance banks operating in the country. These institutions offer banking services to low-income individuals or groups, providing access to financial services that might otherwise be out of reach.

Some of the licensed microfinance banks in Kenya include Faulu Microfinance Bank Limited, Kenya Women Microfinance Bank PLC, and Salaam Microfinance Bank Limited. These institutions were licensed between 2009 and 2019.

The Central Bank of Kenya (CBK) is responsible for licensing and regulating microfinance institutions in the country. According to the Microfinance (Deposit-Taking Microfinance Institutions) Act, the CBK must publish a list of all licensed microfinance institutions every year.

The CBK's list of licensed microfinance banks is available on their website, www.centralbank.go.ke. Here is the list of licensed institutions: