Small Loans, Big Problem: CBK Flags Rising Defaults
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More than eight out of every ten digital loans valued under Sh1,000 are in default, raising concerns over the sustainability of micro-credit in Kenya’s fast-growing fintech sector. New data from the Central Bank of Kenya (CBK) shows defaults on this category at 83.1 percent, the highest across all loan sizes.
Regulators say the surge is tied to a moral hazard created by rules that prevent borrowers of less than Sh1,000 from being listed with Credit Reference Bureaus (CRBs).
The CBK has flagged rising defaults as a critical threat to the business models of digital credit providers, which have relied heavily on small-ticket loans to reach unbanked customers.
The rise in bad debts on micro-loans has forced lenders to adjust. Many digital credit providers are raising minimum loan sizes to over Sh1,000 in an attempt to limit losses and improve recovery rates.
While the shift enhances sustainability for lenders, it risks excluding low-income households that depend on quick-access, low-value credit for emergencies and daily working capital.
Repayment patterns diverge sharply between micro-loans and larger facilities. For loans exceeding Sh50,000, defaults stand at 16.4 percent, showing much stronger repayment discipline compared to the sub-Sh1,000 segment.
Overall, the digital lending sector reported a non-performing loan (NPL) ratio of 15.9 percent in June, slightly lower than the 17.2 percent average for commercial banks.
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Digital credit has expanded rapidly since 2021, when CBK introduced regulatory oversight to address predatory pricing, data privacy violations, and aggressive recovery practices. The reforms ushered in a wave of formal licensing.
By July 2025, CBK had approved 126 lenders, rising to 153 by September with 27 new licenses granted. Another 547 applications remain under review, signaling continued interest in the market.
Lending volumes reflect the sector’s rapid growth. As of June 2025, digital lenders had disbursed Sh76.8 billion to 5.5 million borrowers. Annual disbursements have climbed to Sh180 billion, with most funds supporting the informal economy.
CBK data shows that 55.5 percent of borrowers channel loans into small business capital, while 24.8 percent use them for unexpected household expenses. Demand remains strong: active loan accounts grew from 2.4 million in December 2023 to four million by December 2024.
Despite strong uptake, the CBK has warned that the smallest loans often fail to meaningfully improve incomes, leaving repayment capacity weak. Regulators argue that without more sustainable lending practices, defaults at the low end of the market could erode consumer trust and limit the progress made in financial inclusion.
With 153 licensed digital credit providers and hundreds more awaiting approval, the sector faces a critical balancing act: delivering fast and accessible credit while containing repayment risks that threaten its long-term stability.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.
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