Unlocking MSME Potential, Key Insights from the 2019-2023 Loan Performance Study
Micro, Small, and Medium Enterprises (MSMEs) are the backbone of Kenya’s economy, contributing significantly to employment, innovation, and overall economic growth. Despite their vital role, MSMEs continue to face challenges in accessing credit, limiting their expansion and sustainability.
To better understand the dynamics of MSME financing, with support from the Japan International Cooperation Agency (JICA), we conducted a comprehensive study analyzing MSME loan performance from 2019 to 2023. This analysis provides critical insights for financial institutions, policymakers, and MSMEs themselves, offering data-driven recommendations to enhance credit access and sustainability.
Key Findings and Their Implications
MSME Credit Trends
While overall credit disbursement in Kenya has increased over the years, MSME lending remains disproportionately low, persistently accounting for less than half of the total credit issued. This highlights a structural challenge where MSMEs continue to struggle with access to finance and underscores the pressing need to address structural barriers hindering MSME financing, including stringent collateral requirements and perceived high-risk factors.
Sectoral Performance
The Trade and Services sectors receive the bulk of MSME loans in both volume and value, reflecting their dominance in Kenya’s business landscape. However, the Building & Construction sector records the highest proportion of outstanding loans, pointing to significant repayment challenges. This aligns with broader industry trends where infrastructure projects often face delays, leading to cash flow constraints. This highlights the necessity for tailored financial solutions to mitigate sectoral risks.
Digital vs. Non-Digital Loans
The study revealed a surge in digital lending, offering faster and more accessible financing solutions with mobile-based loans becoming a primary financing tool for small businesses. While digital loans are increasing in volume, traditional non-digital loans still account for higher values. Interestingly, 2023 saw a decline in both digital and non-digital loan values, potentially reflecting economic slowdowns, inflationary pressures, interest rate hikes, reduced consumer spending and shifts in lender strategies.
Loan Products
There has been an increased uptake of overdrafts, trade finance, and insurance premium financing, reflecting a shift towards short-term credit solutions. Conversely, mobile banking and asset finance facilities have seen a decline, possibly due to economic uncertainties and reduced disposable income. High delinquency rates were observed in mortgages, business expansion, and working capital loans, whereas mobile banking and trade finance facilities exhibited stronger repayment trends.
Collateral and Security
Secured loans, though lower in volume, are significantly higher in value, with real estate being the dominant form of collateral. The study found that secured loans performed better than unsecured loans during the COVID-19 period, demonstrating the stabilizing effect of collateral. However, reliance on immovable assets as collateral limits access to credit for many MSMEs, particularly those without significant physical assets.
Guarantor Impact
Loans backed by guarantors showed more volatility in repayment performance compared to non-guaranteed loans. Following the end of pandemic-related relief measures, delinquency rates for guaranteed loans spiked, possibly due to the high-risk profile of micro-enterprises that rely on guarantors.
Credit Scores
The study confirmed that credit scores effectively predict default risk, with higher scores correlating with lower default rates. This underscores the potential for lenders to use credit scoring as an alternative to collateral, reducing access barriers for MSMEs.
Gender Disparities
Male-led MSMEs continue to receive a larger share of loans in both value and volume compared to female-led businesses. Despite this, female-led MSMEs exhibit better repayment behaviour. The study also found that women entrepreneurs have less access to varied collateral types, further restricting their borrowing potential. These findings highlight the need for gender-sensitive lending policies.
Geographical Distribution
A significant proportion of MSME loans are concentrated in major urban centers like Nairobi, Mombasa, and Kiambu, reflecting an urban bias in credit distribution. Rural and peri-urban MSMEs remain underfunded, despite their potential for economic transformation. This underscores the need for more inclusive financial solutions that cater to MSMEs in rural and underserved regions.
Based on these insights, the study offers actionable recommendations:
Leverage Credit Scores as Collateral Alternatives
Lenders should integrate credit scoring models more effectively to assess risk, particularly for businesses that lack traditional collateral.
Address Gender Bias in Lending
Financial institutions should implement gender-inclusive lending policies, develop tailored financial products for women entrepreneurs, and relax collateral requirements to support female-led MSMEs.
Enhance Digital Lending and Alternative Data Usage
Digital lending should be optimized to improve access to credit, especially for small businesses. Alternative data, such as mobile money transaction history, can help lenders assess MSME creditworthiness beyond traditional credit scores.
Diversify Collateral Options
Expanding the types of acceptable collateral; such as movable assets, inventory, and receivables, can improve credit access for MSMEs.
Strengthen Credit Information Sharing (CIS) Coverage
The CIS framework should be expanded to include more MSME credit data sources, such as government-backed loans and unregulated microcredit providers, to provide a holistic view of borrower creditworthiness.
Improve Data Quality and Reporting
Enhancing the Data Specification Template (DST) and strengthening CIS ValiData can improve the accuracy and reliability of MSME credit data, benefiting both lenders and borrowers.
Link Credit Guarantee Schemes with the Movable Property Security Rights Registry (MPSR)
Scaling up access to the MPSR and Credit Guarantee Scheme (CGS) can provide additional security for MSME loans, making financing more accessible.
Capacity Building for MSMEs and Lenders
Both MSMEs and lenders require training in financial literacy, effective credit management, and the use of CIS tools to make informed lending and borrowing decisions.
Develop a National CIS Policy
A national CIS policy can standardize credit information sharing, enhance financial inclusion, and promote responsible lending practices.
The findings of this study provide a critical roadmap for improving MSME credit access in Kenya. By implementing these recommendations, financial institutions, policymakers, and entrepreneurs can work together to create a more inclusive and resilient financial ecosystem.
CIS Kenya remains committed to advancing financial inclusion and best practices in credit provision. Through strategic partnerships and continuous research, we aim to unlock the full potential of MSMEs, ensuring they play a transformative role in Kenya’s economic future.
Download the Full Report
Click here to download the full MSME Loan Performance Study 2019-2023 and gain deeper insights into the state of MSME credit in Kenya.
Join the conversation!
Share your thoughts on how we can improve MSME access to credit. #MSMELending #FinancialInclusion #CISKenya