Published on 03 Dec 2021

Financing economic growth

The banking sector and its contribution to microeconomic stability in Kenya

By Patrick Maluki

1. Introduction

The banking sector in Kenya is made up of 43 commercial banks, 14 microfinance banks (MFB), 8 non-operating bank holdings, 66 Forex bureaus, three credit reference bureaus, 17 money remittance providers, one mortgage financing company, and nine representative offices of foreign banks.[1] The Central Bank of Kenya (CBK) established by the Act of Parliament of 1966 and now anchored in the Constitution under Article 231 is the sole banking regulatory body in Kenya. The commercial banking net asset was estimated to be worth US$48.7bn in 2020 and US$51.2bn in 2021 representing a growth rate of 5.1%. In microfinance, total net assets in 2020 were US$676m which was a 1.5% decline down from US$676m net assets in 2019. In 2021, net total assets in the MBFs slightly rose to US$685mn in 2021.[2] The slight decline in net bank assets of MFBs in 2020 was attributed to Covid uncertainties.

The banking sector in Kenya remains a critical segment of the financial system contributing immensely to the economy.[3] It supports economic growth by providing financial support services to the different segments of the economy. According to Kenya Bankers Association (KBA) (2021),[4] the financial services sector remains at the core centre driving and shaping Kenya’s Gross Domestic Product (GDP) growth. In the 2016/17 – 2017/2018 financial years, the banking sector contributed more than US$1.29bn to the economy. Figure 1 shows the share of financial assets to Kenya's GDP by various players in the financial system.

Figure 1 indicates that banks remain the largest financial sector with a 59.97% share of financial assets to GDP. However, this share has been declining over time from 2013-2018. The decline has been attributed to other emerging financial players in the market particularly the mobile banking system. Pensions in 2013-2018 period, boast a significant share of financial assets to the country’s GDP, followed by insurance, SACCOs, and lastly MFBs. The figures imply that the financial banking sector in Kenya remains vibrant with diverse players in the market. However, commercial banks remain dominant in terms of financial assets controlled to GDP.

1.1 The State of Banking Sector in Kenya in the Wake of Covid-19

The Covid-19 pandemic has caused unprecedented global disruption to economies and livelihoods. In the financial sector, banks are facing a liquidity crunch that has resulted in rising cases of nonperforming loans.[5] According to the International Finance Corporation (IFC) (2021)[6] declines in incomes resulted in financial system shocks including ballooning nonperforming loans (NPLs), insolvency filings, asset fire sales, and liquidations.

Covid-19's first case in Kenya was reported in March 2020. Lockdowns, curfews, and travel restrictions adversely interfered with normal banking operations. Banks had to devise means of operating to remain operational including adjustment of working hours, remote working, salary reviews, and use of digital technologies.[7] The adverse impacts of the Covid-19 in the banking sector were signalled by tight liquidity and growth in non-performing loans, return on assets (ROA), and total banking transactions. The Return on Equity (ROE) and Return on Asset (ROA) for MFBs, whose financial performance was already running in negative since 2016, worsened in 2020 with ROE deteriorating further to -36.3%  from -3.8%  in 2019 and ROA of -3.0%  worse from -0.4% in 2019.[8] Figure 2 shows behaviour change of some of the key financial indicators of commercial banks in Kenya pre and during Covid-19.

Figure 2 indicated that non-performing loans (NPL) in Kenya’s commercial banks increased from 12.5% in 2019 to 14.5% in 2020.[9]  According to CBK (2020),[10] the deterioration in NPL was attributed to worsening households’ livelihoods and business closures due to the Covid-19 pandemic, lay-offs, and the slowdown in commercial activity due to Covid-19 pandemic. Likewise, ROA, declined from 2.6% in 2019 to 1.7% in 2020. Growth in total banking transactions sharply declined from 3.6% in 2019 to -30.2% in 2020. However, the liquidity strength of commercial banks rose amid Covid-19. CBK has attributed all these changes to the Covid-19 disturbance.

1.2 Banking Sector Performance

The sustainability of the banking sector is anchored on performance. A strong banking sector allows the efficient management of financial assets and strengthens the economic system of a country.[11] However, instability in the banking sector featured by deteriorating performance not only disturbs the macroeconomic sector but also the microeconomic sector of the economy. Figure 3 shows banking performance measured using ROA and ROE for commercial banks, microfinance banks, and insurance firms from 2012-2020.

The ROE of banks has consistently been higher than those of insurance and microfinance industry throughout the period (2012-2020). However, ROE across the three segments of the banking sector has been declining, with the lowest reported in 2020. Microfinance recorded the highest drop in ROE attributed largely to the Covid-19 pandemic.

The ROA for commercial banks and insurance firms, on the other hand, remained positive throughout the measurement period implying fair returns and minimal trade-offs in the two financial sector business. Microfinance banks (MFB) recorded positive ROA from 2012-2015; however, since 2016, the MFB have consistently recorded negative ROA. The negative ROA returns from (MFB) have been attributed to a turbulent business environment characterised by competition from large and well-established commercial banks. In addition, MFBs’ market is deemed to lack the necessary infrastructure to minimize cases of higher non-performing loans that characterize the microfinance segment of the banking sector.

2. Financial Inclusion and Microeconomic Stability in Kenya

Financial inclusion entails the delivery of financial services, including banking services and credit, at an affordable cost to disadvantaged and low-income sections of the society who otherwise tend to be excluded from access to financial services.[12] Financial services include access to savings, loans, insurance, payments, and remittance facilities.[13] Financial inclusion contributes to the development of MSMEs, increases household consumption of durable goods, which, in turn, boosts living standards thereby reducing financial deprivation.[14] Credit to MSMEs is not only associated with improvement in livelihoods and transformational change but also the creation of new avenues of growth. Boosted by mobile penetration and adoption of mobile money, the financial inclusion in Kenya stands at 82.9% compared to 35% in Nigeria[15] and 33% in Egypt.[16]

The growth of banking in Kenya and subsequent expansion of credit has had a multiplier effect on the growth of Micro, Small, and Medium Enterprises (MSMEs). In 2015, MSMEs contributed to 33.8% to Kenya’s GDP[17] and added 713,600 new jobs in Kenya - representing all of 84.8% of new jobs created that year. As of December 2020, there were over 915,115 active MSMEs bank accounts making up an estimated total asset value of US$5.8bn with commercial banks. Mortgage financing approved stood at US$5.5bn generating over US$644m in interest for the banking sector. It is estimated that so far, 72,559 MSME loan facilities in the banking industry valued at US$2.1bn were restructured in 2020 as a measure to reduce the impact of the COVID-19 pandemic on MSME borrowers. With over 82.9% of Kenyans now financially included as of 2019 compared to 43.1% in 2006, the reach of MSMEs is expected to grow.[18]

2.1 Major Financial Service Providers in Kenya, 2006-2019

The banking sector in Kenya remains diversified. The scale and breadth of financial services has resulted in a dramatic expansion of financial inclusion. Figure 4 show the number of financial service providers in Kenya.

Mobile money remains the most widely used financial service in Kenya. Almost every Kenyan with a mobile phone today has access to mobile money and the use of e-wallets (like Mshwari by Safaricom) is very common. Majority of the banks in Kenya have developed apps that allow customers to withdraw, deposit and borrow money using their mobile phones. With this growth has come the potential for e-investments, e-trading and e-insurance. Yet, insurance penetration in Kenya remains low compared to other key economies with the insurance penetration in at 2.4% according to 2020 Financial Stability Report by Central Bank of Kenya (CBK). The low penetration level, which is below the global average of 7.2%, is attributable to the fact that insurance uptake is still seen as a luxury and mostly taken when it is necessary or a regulatory requirement. Pensions and MFBs are the smallest financial providers.

 2.2 Financial Access in Kenya

Figure 5 shows the level of financial access in Kenya for the period 2006-2019. Financial access depicts the level of access to financial-related services required by households, firms, and Kenya’s MSMEs.  

Access to formal financial services and products has expanded significantly in Kenya. A survey conducted by the central bank shows that financial inclusion has increased over the period 2006 – 2019. Access to formal financial services increased from 75.3% to 82.9% 2016 and 2019 respectively. The financially excluded adult population dipped from 17.4% to 11% between 2016 and 2019 respectively.

The informal and excluded categories declined from 32.1% and 41.3% in 2006 to 6.1% and 11% in 2019, respectively. These developments were attributed to the introduction of mobile banking in 2007 resulting in an explosion of financial e-services. Digitalisation has acted as something of a ‘take-off’ ramp for financial inclusion. But despite advances in formal financial inclusion, informality in the economy persists. The financial informal sector continues to remain popular among Kenyans because of the perception that they are readily accessible, affordable and have minimal credit requirements compared to the formal financial sector.[19]

The exclusion of household and MSMEs from mainstream financial system is steadily declining as well. The firms and households depend on the banking sector for access of financial services including credit services, savings, fund payment and transfer services. Gitogo (2019) [20] argues that financial access facilitated by the banking sector triggers the growth of firms and households. This could account for Kenya’s slight rise in economic performance during the devastating CoviD 19 pandemic period as compared to other sub-Saharan economies.  

3. Financial Provisions to the Microeconomic Sector in Kenya

The banking sector plays a critical role in the sustainability and growth of the microeconomic sector segment of the economy.[21] It greatly contributes to the overall growth of an economy by generating employment, providing various investment avenues to the investors, and financial services to the customers and the community.[22] The banking sector facilitates financial service access, in terms of credit support and development, loans, and insurance services to firms, households, and MSMEs. Figure 6 shows domestic credit provided by the financial sector and banks to the microeconomic segment of the economy.

Domestic credit refers to financial services extended to firms and households including loans, insurance, trade credits and non-equity securities. Domestic credit in Kenya fell between 2005 and 2009. This was greatly attributed to the 2007/08 financial crisis that began in the US and spread to the rest of the world. After the general election of 2002, there was a rapid growth in domestic credit extension to the private sector. However, this was short-lived as the financial uncertainty emanating from the constitutional reform calls from 2005 onwards resulted in a contraction in the financial sector. That resulted in domestic lenders reducing credit to households and MSMEs.

3.1 Banking Sector and Household Units

Households seek loans from banks for household consumption and asset creation. The domestic credit provided by the banking sector to households as percentage of GDP has been growing steadily from 2006 (22.9%) to 40.2 in 2015, though there was some decline from 2016.[23] The demand for credit services by the household increases the demands for financial services. In addition, the banking sector remains a bigger source of employment to the substantial number of household members in the economy.

The banking sector continues to provide substantial employment opportunities. Yet, the trend shows a general reduction of employment in the banking sector (2016-2020). This is an indicator of greater efficiency and digitalisation in banking as it moves away from the traditional “brick and mortar” model to an online presence. Aside from providing employment opportunities to a substantial number of Kenyans, the banking sector is seen as a mainstream source of credit access for households. Figure 8 shows credit uptake by households from 2006 – 2019.

Credit extended by the banking sector to households rose from 37.8% to over 50% between 2006 and 2019. The uptake of loans was attributed to the overall reduction in interest charges. However, as Kenya prepared for general elections in 2013, there was a decline in credit uptake. But after the elections there was steady increase in credit taken up by the households. Banking service providers extend credit loans to personal and household borrowers for household consumption that include paying bills and buying household items. Figure 9 shows the reasons for taking personal loans by households as per the Kenya household survey report of 2019.

Households take up loans from banks, mostly for buying vehicles, land, or house. Unlike SACCOs which are mainly used for making long-term investments and paying school fees). Mobile banking loans are mainly used to meet short-term liquidity needs. SACCOS are financial entities keeping savings for members while at the same time extending credit facilities to members at small fee. Credits for farming were commonly sought by informal groups while loans for emergencies were sought mainly from mobile banking and informal groups. Access to credit enhances household well-being if expenditures financed using credit increase household assets as well as income. This enables households to meet their loan obligations.

Credit uptake by corner store owners/shopkeepers showed a notable increase between 2016- 2019. This could be attributed to the period of uncertainty that preceded 2017 when Kenya was put through a cycle of repeated elections.

3.2 Banking Sector and MSMEs

In Kenya, MSMEs are the fundamental backbone of the economy employing over 14.9m people.[24] Small businesses contribute approximately 40% of the GDP while creating over 30% of the employment opportunities.[25] However, accessing credit had been difficult in the past. Mainstream banking systems perceived MSMEs to be ‘risky’ and a segment 'most likely’ to default.[26]

Overall, credit to the private sector recovered marginally in 2018 after the slump in 2016 and 2017. Credit to proportion channelled to private firms declined, thus pulling down the overall credit to the private sector. The decline in credit to private firms amid a low level of indebtedness implies that the firms received inadequate funding. The growth rate of credit to firms has been fluctuating with the lowest recorded in 2017/2018 – a politically tense period that followed violence-marred election. Most MSMEs seek credit from varied credit providers in the market indicating that there a general lack of sufficient credit funds in the Kenyan financial sector against an expanding demand for more money to lend out.

Figure 11 shows that mobile banking, Chama/groups, and mobile money remain the biggest financers of MSMEs in Kenya. Banks, friends, and family members also form a substantial source of credit for MSMEs. Digital loans/apps comprise the smallest proportion of MSMEs financing. Banks have the largest source of funds for MSMEs, yet many MSMEs are not borrowing from them. Many commercial banks view MSMEs risky and would prefer lending to big private or state-owned firms. To change that status-quo the government has partnered with banks to come up with innovative credit products to support the MSMEs. One such product is ‘Stawi’, a credit product that rides on technology and innovation to provide a cost-effective ‘anytime anywhere’ credit facility tailored to meet the needs of MSMEs. It was developed by a consortium of five banks at the behest of CBK. This followed a process of consultation where MSMEs told the central bank that they needed finance that is convenient, accessible, and affordable. In addition, the Government of Kenya, through the Public Finance Management Regulations (2020), set up a US$26.87m Credit Guarantee Scheme (CGS) to cushion the risk for participating commercial banks, providing them with confidence to extend loans to high-risk borrowers more efficiently and at flexible terms. The CGS is expected to support MSMEs’ working capital, acquisition of assets, and recovery from the COVID-19 pandemic impacts. The participating commercial banks are tasked with ensuring that the MSMEs meet certain requirements to access the CGS including being compliant with tax obligations, business permits, and good credit scoring. With the cap on interest rates lifted, MSMEs have an opportunity to of accessing more credit from the banks. This is because, when the interest rates were capped at 4% above the central bank rates, commercial banks found it hard to price their loans for the MSMEs as they had to get more collateral with from MSMEs and many of them did not have. The banking sector now contributing over 7.5% of total taxes collected by the government in Kenya, one cannot underestimate its size and value to the economy.[27]

4. Conclusion and Recommendations

The results of this study show that the banking sector plays a key financing-intermediation role in mobilizing financial resources for investment and acting as a channel for the implementation of the monetary policy. The sector links savers and borrowers thereby creating the spark that moves the economy.[28] Kenya’s banking sector has grown exponentially over the past 17 years. This success, however, has not come without its challenges.[29] As of 2020, the total net assets in the banking sector stood at US$48.8bn as compared with US$43.4bn in 2019.[30] With the scrapping of capping of interest rate caps, the banking sector is now even freer to advance credit to Kenyan businesses and entrepreneurs.

Opportunities for the banking sector now lies in finding ways to be part of the key sectors like agriculture, digital services, tourism, and health where there are so many innovations and technological disruptions in trying to find effective solutions. With the Covid-19 pandemic still hobbling the economy, the banking sector stands to benefit if it found ways to centralize payment systems, investing in cyber security to assure customers of security for their savings, encouraging cashless transactions, improving customer experience through adoption of electronic customer relationship management (e-CRM) that seamlessly brings together businesses and customers into one interactive platform.



[1] CBK (2020). Bank supervision annual report 2019. Available at Accessed on 18th October 2021.

[2] CBK (2020). Bank supervision annual report 2019. Available at Accessed on 18th October 2021.

[3] Gitogo, W., (2019).The Impact of Banking sector development on Kenya’s economy. Available Accessed on 11th October 2021.

[4] Kenya Bankers Association (2021). State of the Banking Industry Report 2020. Available at Accessed on 11th October 2021.

[5] Ndungu, S. M. (2021). Are Pandemics A Threat To Businesses? Lessons from Covid-19 Pandemic; a Case of Banking Sector in Kenya. International Journal of Managerial Studies and Research,  9(2), 01-10.

[6] IFC (2021). How Firms are Responding and Adapting During Covid-19 and Recovery. Available at Accessed on 18th October  2021.

[7] Hira, N.,  Issaias, A.,  Indokhomi, D.,  Shah,P. & Field, R. (2020). Covid-19: Impact On Businesses And Investments In Kenya.

[8] Central Bank of Kenya (CBK) (2020). Bank Supervision Annual Report 2020. CBK

[9] CBK (2020). Bank Supervision Annul report. Available at

[10] CBK (2020). Bank Supervision Annul report. Available at

[11] Kariuki, F. (2020). Sustainability in the financial sector in Kenya. Available at SSRN 3646976.

[12] Aduda, J., & Kalunda, E. (2012). Financial inclusion and financial sector stability with reference to Kenya: A review of literature. Journal of Applied Finance and Banking2(6), 95-120.

[13] Seman, J. A., & Ariffin, A. R. M. (2017). Financial Inclusion Through Islamic Finance: Measurement Framework. Journal of Muamalat and Islamic Finance Research, 129-155.

[14] Rushchyshyn, N., Mulska, O., Nikolchuk, Y., Rushchyshyn, M., & Vasyltsiv, T. (2021). The Impact Of Banking Sector Development On Economic Growth: Comparative Analysis Of Ukraine And Some. Investment Management and Financial Innovations, 18(2), 193-208.

[15] EFInA (2021). Key Findings of the Access to Financial Services in Nigeria 2020 Survey

[16] Nada, R. (2020). Financial Inclusion and Sustainable Growth in Egypt (Doctoral dissertation, Harvard University).

[17] KNBS (2016). Micro, Small, and Medium Establishment (MSME) Survey.

[18] CBK, KNBS, & FSD-Kenya (2019). 2019 FinAccess Household Survey.

[19] FSD (2019). 2019 FINACCESS Household Survey. Available at Accessed on 15th November 2021.

[20] Gitogo, W., (2019).The Impact of Banking sector development on Kenya’s economy. Available Accessed on 11th October 2021

[21] Kamau, P. (2017). Economic paradox in Kenya: More favourable perceptions amidst economic insecurity. Afrobarometer Dispatch No. 169, 1-14.

[22] Bakang, M. L. N. (2015). Effects of financial deepening on economic growth in Kenya. International journal of business and commerce4(7), 1-50.

[23] World Bank (2021). Domestic credit to private sector (% of GDP) – Kenya. Available at Accessed on 15th November 2021.

[24] MSMEs in Kenya amid COVID-19: A question of survival.

[25] Wakiaga, P. (2020). The Focus on SMEs is a welcome Intervention. Available at Accessed on 18th October 2021.

[26] Atellu, A. R., & Sule, P. W. M. O. (2019). Financial Stability in Kenya. Does Inclusive Finance Matter?.

[27] Kenya Bankers Association (2020). Total Tax Contribution of the Kenya Banking Sector. Periods ending 31 December 2019and 31 December 2020

[28] Cournède, B., Garda, P., & Ziemann, V. (2015). Effects of Economic Policies on Microeconomic Stability. Forthcoming in OECD Journal: Economic Studies, OECD Economics Department Working Papers, (1201).

[29] Nyasha, S., & Odhiambo, N. M. (2012). Banking Sector Reforms in Kenya: Progress and Challenges. Corporate Ownership & Control10(1).

[30] Central Bank of Kenya (CBK) (2020). Bank Supervision Annual Report 2020. CBK 

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