Innovation Takes a Back Seat as Costs Rise

Microfinance banks (MFBs) in Kenya are downsizing their innovation teams as they struggle to manage rising costs. This could see them fall behind their larger commercial counterparts in the fast-paced fintech space.

According to the latest 2024 Banking Sector Innovation Survey by the Central Bank of Kenya (CBK), fewer MFBs have dedicated innovation teams this year compared to last year. The sharp decline in dedicated innovation functions is a cause for concern for these banks.

Fewer Innovation Teams Among MFBs

The report shows that all microfinance banks surveyed in 2023 had fully staffed innovation teams. But that number dropped to 57% in 2024. CBK attributed this decline to cost-cutting, with many banks opting to trim down personnel linked to innovation roles.

“The decrease in institutions with dedicated innovation teams in MFBs from 100 percent in 2023 to 57 percent in 2024 was mainly due to the cost of maintaining manpower dedicated to the innovation function,” CBK noted.

Still Innovating, But At What Cost?

Despite cutting back on staff, MFBs are still rolling out new products. Between January and December 2024, they introduced products focused on credit, deposits and capital raising. They also joined commercial banks in launching products in payment systems, clearing and settlement services—innovation hasn’t completely stalled.

CBK conducted the survey in February 2025 and gathered data from all 14 licensed microfinance banks, 37 commercial banks and one mortgage finance institution.

Financial Headwinds Threaten R&D

The struggle to keep innovation alive comes at a time when many microfinance banks are facing serious financial challenges. CBK’s 2024 Financial Sector Stability Report paints a dire picture. The microfinance sector is performing poorly, assets are shrinking and losses are deepening.

In fact, total assets of MFBs declined by 8.8% to Sh64.2 billion as of December 2023. This was mainly due to a 4.8% decline in net loans and advances. On the liabilities side, it was even worse—total deposits decreased by 5.7% to Sh43.9 billion.

Losses Continue to Rise

Losses have deepened for MFBs. In 2023, pre-tax losses increased sharply from Sh980 million to Sh2.3 billion further weakening the subsector’s overall stability. CBK described the microfinance segment as “weak, vulnerable to shocks and with low viability”.

Innovation Still Important

Despite these challenges, institutions still see innovation as key. It helps modernise digital platforms, customer experience and operational efficiency. On average, innovation teams accounted for about 25% of total staff in the institutions surveyed.

Conclusion

Microfinance banks in Kenya are walking a tightrope. On one side they have rising costs; on the other they risk being left behind in the innovation race. While some are still launching new products, cutting innovation staff could hurt their long term ability to compete in a fast changing financial landscape.