Kenya has a long history of State led efforts to improve access to loans for micro and small enterprises (MSEs). From the early years after independence to the present day, successive governments have viewed affordable finance as a key tool for stimulating enterprise growth, employment creation, and poverty reduction. Yet despite decades of intervention, access to appropriate and sustainable finance remains one of the biggest obstacles facing small businesses. MSEs account for over 98 percent of all businesses in Kenya and contribute roughly 40 percent of national GDP. They also provide livelihoods for millions of households. However, surveys consistently show that fewer than one in five MSEs access formal credit, with the rest relying on informal lenders, personal savings, or short-term digital loans. This persistent gap raises a critical policy question. Why does credit remain elusive for the very enterprises that anchor the economy?
Recent government programmes, including the Hustler Fund and the Nyota Fund, signal renewed ambition. These initiatives rely on digital platforms, minimal entry requirements, and rapid disbursement to reach scale. While uptake has been impressive, early evidence suggests that delivery innovation alone may not resolve deeper structural failures in Kenya’s credit markets.
The Scale of the Credit Gap Facing Small Enterprises
Kenya’s formal financial system remains poorly aligned with the realities of micro and small businesses. National surveys estimate that only about 16 percent of MSMEs access bank loans or other formal credit products. The remaining majority depend on informal savings groups, family networks, or mobile-based lenders offering short repayment periods. The gap persists despite the economic importance of the sector. By 2024, Kenya had an estimated 7.4 million MSMEs, employing more than 15 million people. Yet commercial banks allocate a relatively small share of total lending to small enterprises. Data from the banking sector shows that less than 15 percent of total loan accounts belong to SMEs, with large firms receiving the bulk of credit.
This exclusion is not accidental. Lending to small enterprises is perceived as high risk. Many businesses lack formal financial records, fixed assets for collateral, or predictable income streams. Operating margins are thin, and exposure to shocks is high. As a result, lenders often price risk conservatively or avoid the segment altogether. Digital credit initiatives have attempted to bridge this gap by lowering access barriers. Since its launch in late 2022, the Hustler Fund has registered over 20 million users and disbursed morethan KES 40 billion in small loans. Household survey data from 2024 shows that nearly 29 percent of Kenyan adults have used the fund at least once. However, usage patterns reveal an important limitation. Urban and higher-income users are overrepresented, while participation among the poorest groups remains significantly lower.
Past and Present Credit Schemes Struggle
Kenya’s current challenges mirror those faced by earlier State-led financing initiatives. Programmes such as the Youth Enterprise Development Fund, Women Enterprise Fund, Uwezo Fund, and Kenya Industrial Estates were launched with similar objectives. All aimed to expand access to credit for underserved groups. None succeeded in building fully sustainable financing models. Several structural factors explain this pattern. First is information asymmetry. Lenders struggle to distinguish between high-risk and low-risk borrowers before issuing loans. This creates adverse selection. Interest rates become blunt tools, failing to reflect true borrower risk.
Second is income volatility. Many MSEs operate in environments characterised by unstable demand, rising costs, and exposure to shocks. Classical economic models assume predictable income and rational long-term planning. In reality, small enterprises often prioritise survival over growth. This makes long term investment risky. Third is covariate risk. Many businesses operate in the same sectors and locations. When shocks occur, such as drought, inflation, or policy changes, many borrowers are affected simultaneously. To manage this risk, lenders shift capital toward larger and more diversified firms. Behavioural factors also play a role. Surveys indicate that nearly 70 percent of digital micro-loans are used partly or fully for household consumption, including food, school fees, or medical expenses. This reflects economic pressure rather than misuse, but it limits the growth impact of credit. Repayment challenges reinforce lender caution. By 2023, studies showed that around 60 percent of small businesses struggled to repay loans on time, a sharp increase from earlier years. Rising defaults weaken revolving funds and reduce the long term viability of public credit schemes.
Why Digital Credit Alone Cannot Drive Enterprise Growth
The Hustler and Nyota funds represent a shift in delivery, not necessarily a shift in substance. Digital platforms reduce paperwork, remove traditional collateral requirements, and accelerate disbursement. These features matter. They lower visible barriers to entry and expand reach. However, implicit credit rationing still exists. Loan sizes remain small. Repayment periods are short. Progression depends on rapid repayment rather than business performance. This encourages loan recycling instead of productive investment. Digital access itself creates new forms of exclusion. Stable internet access, smartphones, and digital literacy are assumed. Many rural and informal enterprises struggle to meet these requirements. Others exit quietly after missed repayments, excluded by algorithms rather than loan officers.
Most importantly, credit is rarely accompanied by complementary support. Financial literacy gaps remain wide. Many entrepreneurs lack basic record keeping and planning skills. Risk-sharing mechanisms such as insurance or guarantees remain limited. Repayment schedules often fail to reflect seasonal income patterns. Without these supports, credit becomes a short term coping tool. It smooths consumption but rarely builds productive capacity. Over time, repeated borrowing increases vulnerability rather than resilience.
Fixing the Market
Kenya’s experience shows that credit supply alone cannot deliver sustainable enterprise growth. Digital platforms have improved access, but they have not resolved the underlying causes of credit market failure. Structural risk, behavioural constraints, and institutional gaps persist. For State-led credit to succeed, policy must move beyond scale. Sustainable enterprise finance requires integrated approaches that combine affordable credit with skills development, risk sharing, flexible repayment, and market access. Without this shift, new programmes risk repeating old outcomes, only faster and at greater scale.
