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Microlenders blame tougher loan rules for customer exits, losses
Microfinance institutions have now gone without profits for close to a decade, even as commercial banks, savings and credit co-operatives, and digital lenders have pushed deeper into their turf of small-ticket lending with better technology and cheaper funding.
Microfinance banks (MFBs) have blamed stringent loan recovery rules for the mass exits by their customers to larger commercial banks, plunging them into losses for nine consecutive years.
The lenders argue that the legal requirement to classify a loan as non-performing after 30 days—compared to 90 days for commercial banks—has soured relations with borrowers and prompted many to migrate to banks with more lenient timelines and terms.
Many microlenders have also sold portions of their loan books to commercial banks and slowed new lending to limit exposure, further shrinking their customer base and revenue.
MFB executives say the gap is not about customer risk profiles but about rules that no longer reflect how microfinance clients operate today.
“The moment you classify a loan as non-performing, number one, you need to list the customer,” Julius Ouma Wamae, Chief Executive Officer of Faulu Microfinance Bank said.
He added that the early downgrade sets off costlier funding and higher pricing: “And indirectly, it means that you price higher, you charge more. And it is a domino effect.”
Mr Wamae said that it also hurts capital: “You have to take a provision on it. That drains capital, it affects your Profit and Loss statement.”
The industry wants regulators to ease distortions so lenders can deploy capital more productively and pass on lower charges to customers.
Mr Wamae, who is the current chairperson of the association of micro-finance institutions, questions why smaller firms face tighter timelines than large corporates: “Why would you allow a big corporate to have big lead time and a smaller player, a shorter lead time?”
Beyond prudential rules, microfinance leaders point to gaps in how tax and collateral for MFBs and commercial banks are treated. They noted that the Income Tax Act omits microfinance institutions from provisions that allow commercial banks and savings societies to claim withholding tax on interest, creating double-taxation risks.
On collateral, microfinance banks are allowed to take movable assets—such as livestock and crops—yet cannot always use them for provisioning when a loan goes bad.
Still, the original goal of the Microfinance Act remains to finance underserved groups and expand inclusion.
“The whole idea is to extend lending to more vulnerable groups and also drive more financial inclusion and empowerment,” said Mr Wamae. “So, we are allowed to have more flexibility in the types of products we give and the kind of collateral we can take.”
For David Mukaru, chief executive officer of Caritas Microfinance Bank, faster collections were a regulatory necessity that, unfortunately, hurt the industry’s reputation: “The way microfinance banks provision their loans is more stringent than that of commercial banks. So I will come to you faster, if you have borrowed from me as a microfinance client, but the banks will take another 90 days to come to you."
“And that is why microfinance banks were accused of harassing the customer. But they were not harassing the customer. It is only that they were moving faster to collect. Because the impact of not collecting was higher than that of the commercial banks. And that has really affected us.”
The strain by MFBs has been reflected in the numbers, with the sub-sector’s pre-tax loss widening to a record Sh3.5 billion in 2024 from Sh2.4 billion as revenue fell and costs rose.
Microfinance institutions have now gone without profits for close to a decade, even as commercial banks, savings and credit co-operatives, and digital lenders have pushed deeper into their turf of small-ticket lending with better technology and cheaper funding.
The Central Bank of Kenya (CBK) regulates both commercial and microfinance banks, but the laws differ. The Banking Act for commercial banks and the Microfinance Act for microfinance banks.
Other major MFB players regulated by CBK are Kenya Women Microfinance Bank, SMEP Microfinance Bank, Rafiki Microfinance Bank, U&I Microfinance Bank, Century Microfinance Bank, Daraja Microfinance Bank, Maisha Microfinance Bank, and Choice Microfinance Bank.
