If you’ve been tracking the Kenyan financial sector, you’ve likely noticed a significant trend: microfinance banks (MFBs) are struggling. Recent data from the Central Bank of Kenya (CBK) paints a stark picture of an industry under severe pressure, resorting to a once-rare tactic—selling off their own loan books to commercial banks.

This isn’t just a minor adjustment; it’s a strategic shift that signals deep-rooted challenges and has important implications for the market, investors, and borrowers.

The Data: A Sector in Decline

The CBK’s latest annual report reveals the hard numbers behind the struggle. The combined loan book of Kenya’s 14 regulated MFBs contracted by a massive 16.8% in 2024, falling by Sh6.3 billion to Sh31.2 billion. This decline wasn’t accidental; it was a direct result of MFBs selling portfolios to larger banks and drastically reducing new lending.

Despite this defensive maneuver, the problem of bad debts has only worsened. Net non-performing loans (NPLs) surged to Sh7.38 billion, up from Sh6.37 billion the previous year. This toxic combination of shrinking assets and rising defaults has led to a devastating outcome: the sector posted a combined pre-tax loss of Sh3.5 billion—its worst performance on record and the tenth consecutive year in the red.

The Why: A Perfect Storm of Challenges

So, what’s driving this sector-wide crisis? Several factors have converged to create a perfect storm:

1. Mounting Defaults: Consumers and small businesses, themselves squeezed by a tough economic environment, are failing to repay loans at an alarming rate.

2. Intense Competition: MFBs are being squeezed from all sides. Large commercial banks have moved down-market with competitive products, while agile digital lenders (fintechs) have captured the market for small, quick loans.

3. Rising Operational Costs: Maintaining physical branches is expensive. The sector reduced its branch network from 115 to 107 last year and saw its agency network shrink by over 20%, indicating a painful and costly retreat.

4. Falling Deposits: With declining confidence and more options available, customers are moving their deposits elsewhere, starving MFBs of the cheap capital needed to fund loans.

The Strategy: Loan Sales as a Lifeline

Selling a loan book is a significant move. In these transactions, a commercial bank pays the outstanding principal and interest on a portfolio of loans and takes over future collection efforts. For MFBs, this provides two critical things:

1. Immediate Liquidity: It frees up much-needed cash on their balance sheets.

2. Risk Reduction: It allows them to offload risky assets and limit their exposure to future defaults.

While this helps stabilize their operations in the short term, it’s not a sustainable business model. It essentially means selling their primary product—their revenue-generating assets—to survive.

The Fallout: Consolidation and Acquisition

The sustained losses have made recapitalization a matter of survival. This has triggered a wave of acquisitions and ownership changes. At least six out of the 14 CBK-licensed MFBs—including SMEP, Maisha, and Uwezo—have been acquired in multi-million shilling deals over the past three years. For many, ceding control to new investors is the only way to secure the capital required to meet regulatory requirements and continue operating.

Key Takeaways for the Market

The plight of micro-lenders offers crucial insights:

• Market Shift: The traditional microfinance model is under unprecedented threat from both above (commercial banks) and below (digital lenders).

• Risk Management is Key: The crisis underscores the critical importance of robust risk assessment and credit management, especially in economically volatile times.

• Innovation is Non-Negotiable: MFBs can no longer compete on traditional terms. To survive, they must radically innovate, likely by leveraging technology to reduce costs, improve efficiency, and develop unique, digital-first products that serve their niche better than anyone else.

The sell-off of loan books is more than a trend; it’s a distress signal and a strategic retreat. It highlights a sector fighting for its life and undergoing a painful but necessary transformation. The question now is whether these institutions can adapt quickly enough to navigate the new financial landscape or if they will become acquisition targets in a rapidly consolidating market.