The Death of Grassroots Banking: How Kenya’s Microfinance Revolution Was Killed by Greed, Neglect, and Policy Failure

For nine consecutive years, Kenya’s microfinance banks have recorded losses. What was once a vibrant promise to uplift the unbanked now reads like an obituary of misplaced ambition and institutional betrayal. According to CBK data, the sector posted a staggering KSh 3.53 billion loss in 2024, marking the ninth straight year in the red. Only 4 out of 14 licensed microfinance banks made any profit, while three players — KWFT, Faulu, and SMEP — accounted for 88% of total losses.

This isn’t just a bad year. It’s a chronic illness eating away at the very foundation of Kenya’s financial inclusion story. The decline has been steady, unrelenting, and tragic. From a KSh 1 billion profit in 2014 to KSh 592 million in 2015, the fall began in 2016 and has never stopped. Each subsequent year deepened the hole: -377M in 2016, -622M in 2017, -1.44B in 2018, -2.24B in 2020, -2.39B in 2023, and now -3.53B in 2024. The trend is more than alarming — it’s a mirror reflecting systemic rot.

Microfinance banks were built on a noble idea — to democratize access to credit and savings for Kenya’s informal economy. The mama mboga, the boda boda rider, the market artisan — these were their customers. Yet the model that once gave voice to the voiceless has now become a victim of the very capitalism it sought to humanize. As commercial banks digitized, adapted, and ate into microfinance markets, the smaller institutions remained trapped in outdated systems and heavy overheads.

Default rates have exploded. Many microfinance banks lent aggressively during the pandemic, betting on a quick recovery, only to be hit by inflation, tax hikes, and dwindling household incomes. The cost-of-living crisis crushed repayment discipline. Deposits shrank. Borrowers disappeared. And as CBK tightened capital requirements and compliance costs rose, survival became a luxury only a few could afford.

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KWFT, once celebrated as the face of women’s empowerment, now bleeds at KSh 1.64 billion loss. Faulu, a pioneer of group lending, posted KSh 1.04 billion in losses. SMEP lost KSh 409 million. The survivors — Choice Bank, Caritas, and Sumac — barely broke even, posting small profits of KSh 66 million, KSh 50 million, and KSh 5 million, respectively. This isn’t a competition. It’s corporate triage.

The sector’s woes aren’t entirely self-inflicted. Policy indifference has been deadly. Kenya’s financial regulators have allowed a wild west where digital lenders, commercial banks, and SACCOs all cannibalize the same base without coordinated oversight. Instead of nurturing microfinance, the state has glorified fintech — turning the promise of financial inclusion into a predatory lending ecosystem dominated by apps, data exploitation, and usurious interest rates.

Meanwhile, some MFBs are selling their loan books to commercial banks just to stay solvent. Others are downsizing branches, shedding staff, or quietly pivoting into agency banking to survive under the umbrella of bigger lenders. What began as empowerment has turned into dependency.

The tragedy deepens when you remember the social purpose behind microfinance. These were not institutions meant to compete with Equity or KCB. They were supposed to bridge the gap left by them. They were to serve those without collateral, without pay slips, without digital footprints. Yet, by failing to innovate, by failing to digitize responsibly, and by clinging to donor-era bureaucracy, they’ve become irrelevant in a world moving at fintech speed.

Even CBK’s interventions seem too little, too late. The Microfinance (Deposit Taking) Regulations of 2008 have barely evolved to reflect today’s realities. New entrants face prohibitive licensing fees, outdated compliance frameworks, and little incentive to innovate. At the same time, CBK’s prudential guidelines continue to treat microfinance like mini commercial banks — a mismatch that crushes agility and spirit.

Critically, the government’s economic direction has also been unfriendly. Policies that favor big capital, tax incentives skewed toward foreign investors, and slow disbursement of SME support funds have all compounded the misery. The Hustler Fund, instead of empowering microfinance institutions, bypassed them entirely — a political shortcut that stripped the sector of millions in potential liquidity and relationships.

When grassroots banking dies, financial democracy dies with it. Every closure or downsizing of a microfinance bank means thousands of informal traders losing access to credit, thousands of women cut off from growth capital, and countless rural communities sliding back into cash economies. It’s a quiet crisis, invisible to the urban elite but devastating to the nation’s economic backbone.

This isn’t just an accounting problem. It’s a national development problem. Kenya cannot achieve inclusive growth when its financial system systematically excludes those who need it most. The collapse of microfinance banks is not just their failure — it’s a policy failure, a leadership failure, and a moral failure.

The irony is that, as microfinance bleeds, the very big banks that ignored the poor for decades now market “micro” products digitally — without human touch, without empathy, and without community reinvestment. The very spirit of microfinance — relationship-based trust — has been replaced by algorithmic coldness.

If nothing changes, 2025 may mark the year the microfinance model officially dies in Kenya. Unless CBK intervenes with reform — merging smaller players, creating a microfinance stability fund, and incentivizing rural digitization — the sector will continue to shrink until it becomes a footnote in Kenya’s economic history.

It’s time for the government, regulators, and financial sector to have an honest conversation: do we still believe in financial inclusion, or are we comfortable watching capitalism eat its own children?

Because behind every number in that red bar is a broken dream, a closed kiosk, and a family that believed in the promise of microfinance.

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