'They ate our lunch': How Hustler Fund, digital lenders have killed Kenya's micro finance banks

Kenya’s microfinance banks (MFBs), once hailed as critical vehicles for financial inclusion, are now the weakest link in the country’s banking sector, with six consecutive years of losses.

This has sparked a fundamental question from investors, regulators and their customers: Is this the end of MFBs as we know them?

A new report by the government says digital lenders and the Hustler Fund are eating their lunch. 

And now, regulators are suggesting mergers are the only way out. Is this the end of an era for financial inclusion?

The latest Financial Sector Stability Report from the Central Bank of Kenya (CBK) reveals a sector in existential crisis. Pre-tax losses deepened to Sh3.53 billion in 2024, a 47.65 per cent increase from the previous year.

Total assets contracted by 9.83 per cent to Sh57.9 billion, while net loans and advances—the core of their business—plummeted by 16.78 per cent.

“The performance of microfinance banks deteriorated in 2024, reflecting structural changes in the financial sector and a lack of innovation to restructure MFB institutions to put them on a sustainable and viable path,” the CBK report reviewed by Enterprise states.

The dismal performance stands in stark contrast to the resilience of commercial banks and the explosive growth of digital lenders, forcing a reckoning for a traditional model that appears to have been left behind.

The numbers tell a story of perennial decline. The sector’s return on assets (ROA)—a key measure of profitability—worsened to -6.10 per cent.

Recorded profits

Return on equity (ROE)—showing returns to shareholders—collapsed to -78.15 per cent, indicating a near-total erosion of investor value.

The sector is highly concentrated.

Just three of the 14 licensed MFBs account for 87.5 per cent of total losses. Only three MFBs recorded profits in 2024.

The CBK report pinpoints a perfect storm of pressures crushing the sector - MFBs are being squeezed out by digital credit providers (DCPs), mobile money platforms, and government-backed lending programmes like the Hustler Fund. 

The Kenya Kwanza government’s Hustler Fund, a controversial flagship digital credit facility, was designed to correct a critical market failure: the exclusion of small-scale traders and low-income earners from affordable credit due to a lack of collateral and formal credit histories.

By leveraging mobile money platforms to disburse small, short-term loans instantly with competitive interest rates, the fund aimed to undercut predatory informal lenders and expensive digital loan apps, thereby encouraging financial inclusion and entrepreneurship at the grassroots level.

Its rapid uptake, with billions loaned out since its launch, underscores the vast, unmet demand in this segment and highlights the need for direct policy intervention to channel capital to the so-called “bottom of the pyramid.”

This popularity comes against the dominance of Kenyan digital lenders, who have revolutionised finance by using alternative data for credit scoring, but have also drawn regulatory scrutiny for aggressive debt collection practices and high charges. This is a market gap the subsidised Hustler Fund seeks to address.

Licenced DCPs have also witnessed a significant rise and now boast 5.5 million accounts and outstanding loans of Sh76.8 billion, surpassing the entire MFB sector. They use algorithms and mobile data to assess risk and disburse loans instantly, a process that MFBs with physical branches cannot match.

MFB borrowers are in the informal sector, which is highly vulnerable to economic shocks.

Although non-performing loans (NPLs) eased slightly to Sh11.87 billion, the sector’s gross loan book shrank by 16.2 per cent, reflecting declining demand and crippling risk aversion.

At the same time, MFBs are “thinly capitalised,” the report notes, making it difficult to invest in technology, innovate or absorb losses.

The average MFB lacks the scale to compete or withstand economic downturns.

Compliance with new data protection and cybersecurity regulations also requires significant investment—a burden too heavy for many small, loss-making MFBs.

The report’s proposed solutions read like a survival guide for a sector on life support: mergers, acquisitions by larger banks, or consolidation.

This implies that the future of microfinance may not lie with standalone MFBs, but as specialised units within larger, more stable commercial banks or as entirely digital entities.

“Consolidation among MFBs presents another viable strategy, which enables the consolidated entity to have a larger deposit and capital base,” the report notes, hinting at a future with fewer, but potentially stronger, entities.

To declare the complete death of microfinance would be premature, analysts caution.

The demand for their services—small-ticket, accessible credit for the underserved—is greater than ever. What is dying is the traditional operating model.

CBK itself leaves a sliver of hope, noting that “consumers are increasingly looking for quality and tailor-made services, which can still be provided by MFBs.”

This suggests there is still a place for personalised financial service, but only if MFBs can radically adapt.

The end of MFBs “as we know them” seems, however, inevitable, the CBK and analysts concur. 

The institutions that survive will likely look very different: digitally active, hyper-efficient, and focused on highly specific community needs that algorithms cannot yet serve.

“Microfinance banks’ woes raise fresh jitters on the economy,” said a Nairobi-based financial analyst Ian Njoroge.

“These institutions serve vulnerable populations and small businesses. If they collapse, it could trigger a credit crunch in low-income segments, reduce consumer spending, and deepen financial exclusion.”

For now, the sector remains the “sick man of the banking sector.” Analysts say its fate—whether it undergoes a managed transformation or a chaotic collapse—will be a critical test for Kenya’s financial regulators.

“However, for MFBs to take advantage of sophistication, they have to change their approach to financial intermediation, innovate and invest in information and communication technology,” says CBK.