Microfinance lenders seek 90-day loan default rule to align with banks

Microfinance lenders want borrowers given up to 90 days before loans are classified as non-performing, saying the current 30-day rule is too harsh and puts them at a disadvantage against commercial banks.

In their argument, the Association of Microfinance Institutions of Kenya (AMFI-K) says the shorter 30-day period timeline, is too punitive and is unfairly hurting the sectors lending.

In a memorandum presented to the National Assembly's Departmental Committee on Finance and National Planning, AMFI-K urged lawmakers to align the loan classification framework for microfinance institutions with that of the banking sector, by extending the non-performing loan (NPL) recognition period from 30 days to 90 days.

The proposal is among a raft of recommendations submitted to Parliament during stakeholder consultations on the proposed Microfinance (Amendment) Bill, 2026.

The association argued that the current threshold results in loans being classified as impaired too quickly, affecting institutions' balance sheets and limiting their ability to support borrowers facing temporary repayment challenges.

"We believe the proposed recommendations will help ensure a practical, transparent, and sustainable regulatory environment for the sector," AMFI-K said in a memorandum signed by its Chief Executive Officer, Caroline Karanja.

The recommendation comes as the Central Bank of Kenya seeks to tighten regulation of the sector through the proposed amendments, which AMFI-K said it generally supports but believes require changes to reflect the operating realities of microfinance institutions.

Besides the proposed changes to loan classification, AMFI-K also wants the planned increase in the minimum core capital requirement for microfinance banks reduced from Sh250 million to Sh125 million over five years, warning that the higher threshold could squeeze out smaller players and reduce competition.

The association further proposed doubling the single-borrower lending limit from five per cent to 10 per cent of core capital, saying the current cap prevents institutions from continuing to finance successful clients whose businesses have expanded.

According to the lobby, many microfinance institutions lose long-standing customers once they outgrow the lending limits despite maintaining good repayment records.

AMFI-K also wants Parliament to ease governance requirements by reducing the minimum proportion of non-executive directors on boards to one-third from the proposed three-fifths, arguing that the current structure increases governance costs, particularly for smaller institutions.

To expand access to credit, the association proposed broadening the range of assets that can be accepted as collateral under the Movable Property Security Rights Act to include digital assets, patents, livestock and income generated through social media monetisation.

"Most micro-loan customers provide chattels as the only form of collateral," the association said, arguing that lending regulations should evolve alongside new forms of wealth creation.

The industry group also urged lawmakers to amend tax laws to explicitly recognise microfinance banks as financial institutions under the Banking Act and Income Tax Act, saying the current legal position has left nearly Sh1 billion tied up in unrecoverable tax assets.

Other proposals include lowering the daily Cash Reserve Ratio requirement to between one and two per cent from the current three to 4.25 per cent, requiring court-issued search warrants before Central Bank inspections, and establishing a clear legal framework for the registration of credit-only microfinance institutions.

The National Assembly Finance Committee welcomed the submissions, saying stakeholder input would help ensure the law is practical and supports the sector's growth.

"We are glad to receive your submissions since you're the key stakeholders who will be affected by the enactment of this law. We shall scrutinise your submissions to ensure that we end up with a law that will transform this sector," said committee chairperson Kuria Kimani.