Tough economy plunging small businesses into loan reliance

SMALL businesses are increasingly finding themselves trapped between rising operating costs and shrinking access to affordable credit, driving a worrying rise in loan defaults and threatening Kenya’s most important engines of growth.

From traders in open-air markets and retail shop owners to small manufacturers and service providers, many entrepreneurs say they are struggling to keep their businesses afloat as inflation-driven expenses continue to outpace revenues.

The cash-flow squeeze has forced thousands of enterprises to rely on short-term borrowing, Sacco loans, digital credit and informal financing arrangements simply to meet day-to-day operating expenses.

Yet, as borrowing becomes more common, repayment is becoming increasingly difficult.

Recent economic indicators paint a challenging picture for Kenya’s micro, small and medium enterprises (MSMEs), which account for the overwhelming majority of businesses in the country and remain a critical source of employment and household incomes.

The Economic Survey 2025 shows that the sector contributes over 30 per cent to the Gross Domestic Product and employs more than 80 per cent of the total workforce.

Although lending to the private sector has improved following a series of monetary policy easing measures by the Central Bank of Kenya, many small businesses say affordable credit remains largely out of reach.

The latest Monetary Policy Committee data shows that private sector credit growth accelerated to 9.3 per cent in May 2026, a sharp recovery from the contraction of negative 2.9 per cent recorded in January 2025.

Lending rates have also moderated significantly, with average commercial bank lending rates falling to 14.5 per cent in May 2026 from 17.2 per cent in November 2024.

In theory, lower interest rates should make borrowing easier and stimulate business expansion.

In practice, however, small traders continue to face stringent collateral requirements, lengthy approval processes and heightened risk assessments by lenders.

As a result, entrepreneurs are increasingly turning to Saccos, digital lenders, family members, friends and informal savings groups to fill financing gaps.

Several businesses told the Star that loans are no longer being used to finance expansion or purchase new equipment.

Instead, they are being used to pay suppliers, cover rent, settle utility bills and finance working capital requirements.

“The challenge today is not necessarily getting customers but managing cash flow,” says Nairobi-based electronics trader Peter Mwangi.

“Sales are there, but suppliers want cash upfront while customers increasingly buy on credit. Many of us are borrowing just to restock.”

Tom Macharia, a retail shop operator at Sigona, Kiambu county, says that sales on credit have increased in the past 18 months, forcing him to borrow to pay suppliers.

“I have noticed that families are going through rough times. Most of them borrow basic goods like maize flour, sugar, milk, diapers and cooking oil. Although a good percentage of them pay at the end of the month, the cycle repeats, forcing me to borrow to restock,’’ Macharia said. 

He attributes this to a high tax regime that has cut earnings and non-payment of pending bills, which has seen businesses close. “Several family breadwinners have lost jobs, too.”

Their experiences mirror findings from several industry surveys showing that businesses are relying more heavily on internally generated funds and short-term credit to sustain operations.

According to the latest Stanbic Bank Purchasing Managers’ Index (PMI), Kenya’s private sector activity contracted for a third consecutive month in May, reflecting weak demand, rising operating costs and growing inflationary pressures.

The headline PMI declined to 46.6 in May from 49.4 in April. Any reading below 50 signals deterioration in business conditions.

The latest figure represented the sharpest decline in private sector activity since July 2024.

Businesses surveyed cited weakening customer demand, rising fuel costs, higher input prices and tighter household budgets as key factors undermining growth.

The downturn coincided with a rise in inflation, which accelerated to 6.7 per cent in May from 5.6 per cent in April, further eroding consumer purchasing power and increasing the cost of doing business.

For entrepreneurs such as Kisumu-based retailer Beatrice Achieng’, the combination of rising costs and reduced consumer spending has become increasingly difficult to navigate.

“Transport costs have gone up, electricity bills are higher, and customers are spending less,” she says.

“You end up borrowing to pay suppliers and then borrowing again to repay the first loan. It becomes a cycle.”

The growing dependence on borrowing is now being reflected in rising default rates across Kenya’s financial system.

The trend is particularly severe within the digital lending sector, which has become a major source of emergency financing for millions of Kenyans.

Data from the CBK shows that loans valued at Sh1,000 or less recorded a staggering non-performing loan ratio of 83.1 per cent by June 2025.

Loans worth between Sh1,000 and Sh5,000 posted a default rate of 69.4 per cent.

Financial analysts attribute the trend partly to economic hardship and partly to regulatory loopholes.

Under current rules, borrowers who default on loans below Sh1,000 cannot be listed with Credit Reference Bureaus (CRBs), a provision that some lenders argue has weakened repayment discipline among borrowers.

CBK data indicates that default rates decline significantly as loan sizes increase, suggesting that borrowers are more likely to honour larger obligations that carry greater consequences for non-payment.

Despite these concerns, demand for digital credit continues to grow rapidly.

By June 2025, licensed Digital Credit Providers (DCPs) had advanced Sh76.8 billion to 5.5 million borrowers, surpassing the loan portfolios of microfinance banks and cementing their role as a major source of financing for households and small enterprises.

Most of these loans were below Sh20,000 and were designed to meet short-term liquidity needs, including business working capital, school fees and emergency expenses.

The number of licensed digital lenders has also expanded significantly following CBK regulation of the sector.

By mid-2025, over 120 licensed lenders were operating in the market, reflecting the growing appetite for digital credit among consumers and businesses.

However, experts warn that many of these loans are being used for consumption and survival rather than productive investment.

The Financial Sector Stability Report notes that while digital loans provide quick access to cash and help businesses meet emergency working capital needs, their small size and short repayment periods limit their ability to finance investments that can significantly improve earnings or productivity.

The pressure is also being felt by Saccos, which have traditionally served as a financial lifeline for small businesses unable to secure conventional bank financing.

Industry officials report a rise in requests for loan restructuring, repayment extensions, and payment holidays as members struggle with weaker cash flows.

“We are seeing more members requesting restructuring of loans and longer repayment periods because business cash flows have weakened,” Gideon Gitonga, Karura Community Sacco boss, told the Star. 

“Many borrowers are not unwilling to pay. They do not have the liquidity they used to have.”

A separate Financial Services Monitor report released in 2025 underscored the financing challenges facing Kenyan businesses.

The study found that 41 per cent of Kenyans had borrowed from family members or friends within a year, while approximately one-quarter had accessed loans through chamas and other informal savings groups.

According to the report, many entrepreneurs are increasingly relying on informal financing channels because formal credit remains difficult to access.

Banks, meanwhile, continue to adopt cautious lending practices amid concerns over credit quality and economic uncertainty.

Surveys conducted by the Central Bank show that MSMEs frequently cite collateral requirements, high borrowing costs and complex approval procedures as major barriers to accessing credit.

As a result, many businesses are caught in a cycle where they must borrow repeatedly to sustain operations while generating insufficient profits to comfortably service their debts.

Economists warn that if current trends continue, the consequences could extend beyond individual businesses and affect broader economic growth.

“Small businesses remain central to Kenya’s economy, providing employment opportunities, supporting household incomes and driving commercial activity across urban and rural areas,’’ Jerome Mundia, an economist at Prime Capital, said.

“Prolonged cash-flow crisis among MSMEs could therefore weaken job creation, suppress investment and reduce overall economic resilience.”

Recognising these challenges, the government has included several measures in the 2026-27 budget aimed at supporting businesses and stimulating economic activity.

Treasury Cabinet Secretary John Mbadi’s Sh4.82 trillion budget prioritises infrastructure development, agriculture, manufacturing and investments designed to reduce the cost of doing business.

Presenting the budget statement in Parliament on Thursday, Mbadi said that the government has continued supporting the Credit Guarantee Scheme, which shares lending risk with financial institutions to encourage greater lending to MSMEs, women and youth-owned enterprises.

As of January 2026, the scheme had facilitated more than Sh6.6 billion in guaranteed credit across nearly all counties.

The budget also seeks to improve the business environment through continued investment in roads, energy, water and transport infrastructure, while maintaining macroeconomic stability and encouraging private-sector investment.

Financial analysts say such interventions could provide some relief, but they caution that deeper reforms may be necessary.

These include expanding affordable credit programmes, strengthening credit guarantee mechanisms, supporting Sacco liquidity, improving financial literacy and encouraging lenders to develop products tailored to the realities of small businesses.

Without meaningful interventions, they warn, more enterprises could find themselves running out of cash, deepening loan defaults and undermining one of Kenya’s most important drivers of economic growth.

Yesterday, the government marginally cut fuel super petrol prices by Sh0.22 and Sh10 for diesel as part of plans to cushion consumers and fight inflationary pressure. 

The Energy and Petroleum Regulatory Authority said Sh10 billion of the Petroleum Development Levy has been spent to offer relief to consumers.

A litre of petrol will now retail at Sh214.03 in Nairobi, diesel at Sh222.86, while that of kerosene has been retained at Sh191.38. 

The Central Bank of Kenya has also embarked on a monetary policy plan to help stem inflation. 

Last week, it retained the base-lending rate at 8.75 per cent, ending a 10-month easing on the monetary policy.

The apex bank boss, Kamau Thuge, said that the trend is global as economies rush to calm down fuel prices related inflationary pressure

The regulator has asked Kenyans to brace for even tighter times ahead, indicating the spiral effects could see the country’s economic growth slow by 40 basis points to 4.9 per cent from an earlier projection of 5.3 per cent.