Kenya's lending market surpassed US$ 21.5B in 2023. Growth is the result of a positive confluence of mobile adoption, consumer demand, and a growing ecosystem of suppliers. Opportunities for new and incumbent financial players abound, but the ability to capitalize on growth is uneven and challenging.
This article explores the lending and borrowing ecosystems, untapped opportunities, and potential ways in which players can adapt and win the space.
Kenya's Lending Market
Kenya's financial landscape is undergoing a dynamic transformation driven by a growing and diverse population. KoreFusion’s research in the Kenyan lending market unveils a range of consumer segments with distinct financial behaviors and unattended needs. Understanding these needs presents a significant opportunity for lenders who can tailor products and services that cater to these untapped segments.
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Attitudes and Characteristics |
Preferred Channels |
Primary Credit needs |
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Urban Micropreneurs |
• Prefers cash over digital money • Prefers personal network to achieve goals • Business and household expenses are mixed • Limited trust in formal lenders |
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• Cash flow and inventory • Business assets • Financial mgmt. tools |
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Affluent Youths |
• Stable disposable income with interest in consumer goods • Higher preference for digital and service-based products • Saves money with little frequency • Use of credit for planned expenses |
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• Consumer goods • Financial mgmt. tools |
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Urban Employees |
• Receives wages in banking accounts • Accesses a wide range of channels • Stable, albeit reduced, income provides room to plan expenses • Exposed to financial stress • Use credit to extend daily cash flow |
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• Finance consumption • Cash shortages • Financial mgmt. tools |
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Rural Businesses |
• Mobile money account for remittances and borrowing small quantities • Non-traditional income tied to crop cycles • Unfamiliar with formal financial offering • Rely on close network to respond to emergencies |
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• Startup Capital • Increase sales, increase stock |
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• Financially literate and familiar with digital tools • Looking to expand business • Aim to have effective mitigation strategies • Credit a tool to grow and attain long-term objectives |
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• Business expansion • Business growth • Business mgmt. tools |
Despite growth and new products, this maturing financial ecosystem still faces gaps in loan offerings. The historic focus on financial inclusion, while positive, has resulted in an acute mismatch of offerings for digital-savvy youth, the growing middle class, and established affluent segments. Subsequently, interesting opportunities abound, including the development of appropriate instalment loan products matched to the corresponding customer base of each player, for example.
Lenders can diversify and tailor their product portfolios to better meet the nuanced needs of these segments. By focusing on product innovation, transparent communication, and customer-centric design, lenders can enhance financial inclusion and customer satisfaction across the board.
Kenya’s financial landscape is comprised of various actors, each serving distinct niches. Formal channels are dominated by mobile wallets, banks, and SACCOs (Savings & Credit Cooperatives), which offer a range of formal credit products, with an increasing focus on instant, mobile-based personal and small business loans.
Amongst the formal contenders, banks hold 17% of Kenya's lending, predominantly catering to the middle and affluent segments in urban and peri-urban areas, with a significant demographic cluster within the 35-45 age group. These clients typically engage with banks for large and planned expenditures, reflecting a relatively mature banking relationship. Banks also currently issue credit cards; however, this market is nascent with a low penetration rate of 38 cards per 100 adults.
SACCOs (Savings and Credit Cooperative) are pivotal in fostering financial inclusion in Kenya, with 176 regulated deposit-taking SACCOs, 183 regulated non-withdrawable deposit-taking (NWDT) SACCOs, and approximately 3,200 unregulated unions. These cooperatives serve a combined membership of 8M, highlighting their significant role in the community.
The fintech lending market has seen significant concentration, with five leading apps accounting for 80% of net loans, serving over 10 million users. Despite this, the sector is encountering a 'crystal ceiling' due to escalating non-performing loans (NPLs), which have reached 4.2 million borrowers in default, worth US$ 500 million. The market's rapid expansion, fueled by easy access and alternative credit scoring, now faces heightened barriers as regulatory actions mandate write-offs of defaulted loans, signalling a need for more disciplined market practices.
Mobile money giant M-Pesa boasts 32M mobile wallet users, enabling +2,600 transactions per second. M-Pesa has leveraged Fuliza, an overdraft facility, to emerge as the dominant lender. Its volumes grew 500% between 2020 and 2023, reaching est. US$ 6.2B in disbursements; however, the dominance of M-Pesa going forward is not a given. Banks and fintech lenders have ample opportunity to fill latent demand with the right mix of products. M-Pesa also has wiggle room to expand its reach and serve new niches.
Traditional microfinance institutions are experiencing a decline in number of customers and disbursed loans, but attributing this phenomenon solely to losing terrain to fintechs and M-Pesa paints an incomplete picture. The reality is more nuanced. The microfinance landscape is undergoing a digital transformation driven by innovative players like Branch, who recently acquired a microfinance bank to expand their product offerings and reach. This move highlights a shift in microfinance strategies, embracing digital tools and broader financial services to remain relevant and increase their valuations.
Informal channels, driven by ROSCAs (Rotating Savings & Credit Associations known in Kenya as CHAMAs) are also still running strong, drawing on deep cultural preferences. They hold an impressive US$5.4 billion and can also capitalize on market trends.
Given Kenya’s current financial ecosystem and the distinct needs of various segments of borrowers, our research yields four key areas on which all lenders should focus:
The following sections outline in greater detail how each player stands to benefit and the necessary strategies to optimize outcomes.
Bank relationships with clients rest soundly on the bedrock of trust and satisfaction. These players dominate the market with a concentrated influence, with three leading banks accounting for nearly 40% of all banking assets. While banks show stable lending portfolio growth, most of that is attributable to alignment with overall GDP growth. A conservative yet consistent approach to consumer lending underpins this steady increase, which tends to correlate with broader economic trends.
Many banks have sensed the growing headwinds presented by M-Pesa and other fintechs that are quickly gaining traction and driving new customer demand. In response, the largest banks have launched ‘fintech spin-offs’ to expand traditional banking models into new niches. These platforms cater to a wider spectrum of financial needs, offering loans ranging from US$ 10 to US$ 2,500. With a user base nearing +2.5M, these digital channels are steadily gaining traction (Vooma, for instance, has gained +300K new users in the last year, reaching 750K now), and leverage banks' extensive datasets for increased underwriting.
The proliferation of fintechs and M-Pesa in the small, instant loan segment has driven banks to focus on serving the more substantial financial needs of the middle to affluent segments. Yet, untapped opportunities persist within the middle and younger consumer demographics, particularly for consumption-driven and mid-sized loans. Historically, perceived risk and the competitive pressure of agile fintech companies and M-Pesa hindered further exploration of these novel segments. Furthermore, insufficient infrastructure for product development and market launch prevented banks from more assertively pursuing these potentially interesting niches.
To address these challenges and capitalize on the untapped opportunities, banks in Kenya are engaged in a strategic realignment. This includes shifting towards mid-ticket loans and customized financial solutions for small businesses and consumers. Such a realignment, however, necessitates consolidation to ensure efficacy and sustainability. Bridging the traditional and digital spaces through this strategic pivot would not only cater to a broader spectrum of consumer needs and preferences but also aim for increased financial inclusion, ultimately contributing to the sector's growth and resilience.
Despite their community-based approach, SACCOs face digital adoption challenges and competition from fintechs and banks. However, a significant shift is underway, with 45% of regulated SACCOs now offering digital credit products, predominantly through USSD-based mobile money services. This digital pivot aims to expand their lending portfolio while adapting to the evolving needs of their members.
The landscape of SACCO offerings has diversified, with deposit-backed loans, salary advances, and short-term loans becoming commonplace. The emergence of instant loans indicates a strategic move to cater to immediate financial needs, positioning SACCOs as competitors to fintech solutions and M-Pesa. Despite an average loan ticket size of US$ 1,100—half that of banks—these products signify a targeted approach towards salaried individuals with substantial financial needs, such as housing, business assets, and durable goods.
The current distribution of loans focuses on government and private sector employees, revealing a gap in the mid to affluent segments, SMEs, and other consumer segments identified in the borrower taxonomy section above. This gap presents an opportunity for SACCOs to broaden their reach and product offerings, catering to a wider array of financial needs and contributing to a more inclusive financial ecosystem.
Fintechs face fierce headwinds including high default rates, regulatory scrutiny, and shifting consumer trust. Concerns over harassment, aggressive recovery tactics, and high interest rates have eroded trust among borrowers. Also, evolving regulations pose operational limitations for some players, and M-Pesa's growing presence in the lending space presents a significant challenge.
In response to these challenges, licensed fintech lenders are increasingly pivoting towards business loans, which now constitute 60% of new product offerings. Despite this shift, all-purpose loans continue to dominate, representing 85% of the total loan portfolio, with an estimated disbursement of US$ 1.4 billion in 2023. This transition reflects a strategic realignment towards more sustainable lending practices and diversification of loan products.
The Buy Now, Pay Later (BNPL) segment is rapidly emerging as a significant player in the fintech space, with a current Gross Merchandise Value (GMV) estimated at US$ 160 million across five licensed providers. The anticipated entry of M-Pesa-backed Faraja is expected to catalyze the BNPL market further. KoreFusion’s research indicates a positive consumer sentiment toward BNPL products, attributed to their flexibility, transparency in fees and costs, and enhanced customer experience.
The fintech lending sector in Kenya is at a critical juncture, balancing rapid growth with emerging challenges and regulatory pressures. The strategic shift towards business loans and the burgeoning BNPL segment signify the sector's ability to adapt to market demands and regulatory expectations. As fintechs navigate these complexities, their ability to innovate responsibly and enhance consumer trust will be pivotal in shaping the future of digital lending in Kenya.
While M-Pesa has transactional-oriented services like Fuliza, fintechs can gain a foothold by targeting specific use cases where the flexibility of BNPL offers more value to consumers.
Money mobile platform giant M-Pesa has evolved from a transaction facilitator to a comprehensive financial super app serving millions of Kenyans — especially those who would otherwise be unbanked. M-Pesa's impact is crystal clear in the lending space, where its wide range of product offerings caters to diverse needs.
M-Pesa’s star product, Fuliza, is an overdraft facility designed to bridge shortfalls and enable transactions that might otherwise fail. By providing instant credit for person-to-person transfers, bill payments, airtime, and more, Fuliza has unlocked a US$6.2 billion nano-loan market and facilitated over US$15 billion in M-Pesa transactions in 2023 alone. With over 10 million borrowers, Fuliza has enormous reach, particularly among low-income segments, as evidenced by the average loan size of US$3, which consumers often use many times per week.
Accessibility and convenience underpin Fuliza’s success. Seamlessly integrated within the M-Pesa platform, its user-friendly interface makes getting an instant loan very easy. Despite new players entering the game (e.g., Hustler’s Fund), Fuliza's outstanding customer experience keeps borrowers coming back, solidifying its position for sustained growth in the Kenyan lending landscape.
M-Pesa also offers traditional microloan products like KCB M-Pesa and M-Shwari. However, their market share has been declining (-69% from 2019 to 2023), suggesting a potential need for M-Pesa to diversify its offerings and cater to mid and affluent segments.
M-Pesa's journey has just started. By addressing the evolving needs of its diverse customer base, embracing innovation, and forging strategic partnerships, M-Pesa can solidify its position as the predominant player in shaping Kenya's inclusive financial landscape and accelerate its growth trajectory.
International digital players are acquiring mid-sized traditional microfinance banks, suggesting a potential for growth through new business models. These collaborations combine the established infrastructure and experience of microfinance institutions with the agility and innovation of fintechs, creating a synergistic approach to financial inclusion.
While challenges remain, this evolution promises a brighter future for microfinance institutions. By adapting to changing demands and embracing digital solutions, microfinance institutions can continue to play a crucial role in providing financial access to underserved communities in Kenya and beyond.
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Year |
MFB |
Purchaser |
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2023 |
Maisha Microfinance Bank |
Cactus Cantina Investments Limited |
Also owns Twiga Food, a leading ag-tech company offers affordable financing to small and medium enterprises (SMEs) and their value chains in Nigeria and Kenya. |
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2023 |
SMEP Microfinance Bank |
Hope Advancement |
Looked for investment to grow digital product portfolio |
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2023 |
Daraja Microfinance Bank |
UMBA Inc |
UMBA operated a non- deposit taking credit business through its subsidiary UMBA Technology Limited. In Nigeria, it operates in partnership with a licensed bank to offer digital banking services. |
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2022 |
Key Microfinance Bank |
LOLC |
Sri Lankan international finance group with operations in 18 countries and a history of successful operations. |
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2022 |
Century Microfinance Bank |
Branch |
Branch Kenya expanding into the microfinance banking market, allowing for deposit-taking financial services and enhanced lending for individuals and SME clients. |
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2022 |
Choice Micrfinance Bank |
Wakanda Networks Limited |
Chinese investor with digital capabilities in Africa |
MFB acquisitions by digital players
It is clear Kenya's lending landscape is in the midst of substantial change, driven by innovative technologies, evolving regulations, and shifting consumer demands. Mobile lending is expected to continue dominating the scene, but exciting new trends are emerging, presenting both opportunities and challenges for stakeholders across the board.
Embedded finance is surging. Integration of BNPL solutions into top marketplaces and the acquisition of microfinance banks by regional digital players, for instance, highlight the growing trend and opportunities. An increasing number of challenger players recognize that this approach broadens reach and enhances convenience, especially for underbanked segments who might find traditional banking systems less accessible. Embedded finance holds immense potential for financial inclusion, but it will require synergistic collaborations between financial and non-financial players, as well as an enabling regulatory framework.
The changing landscape is demanding increased collaboration among players:
Stakeholders have made significant progress in advancing financial inclusion, but gaps remain. Underserved segments like women-led businesses, rural communities, and young entrepreneurs still face challenges accessing financial services. The need for more flexible, accessible products with straightforward fees is clear.
Moving forward, it's crucial to go beyond microloans and cater to the growing middle class and affluent segments. This means offering:
We are convinced that broadening the lending ecosystem encourages a long-term financial planning across borrowers and fosters a more inclusive and equitable financial system. Subsequently, these outcomes drive economic growth and development.
Our research revealed a significant cohort of individuals who are cautious about borrowing but who still have financial needs, particularly across urban micropreneurs and the consolidating business owners. These cohorts understand the risks associated with debt and seeks tools that enable financial management and manageable credit. This segment represents an opportunity for innovative solutions that combine:
By addressing the needs of both those seeking credit and those seeking alternative financial tools, stakeholders can create a more inclusive financial ecosystem in Kenya.
For more information on this and other topics in Payments and Fintech, please contact us at information@korefusion.com where we will be glad to advise.