Microfinance banks (MFBs) risk falling behind their larger commercial bank peers on innovation as they cut staff linked to innovation functions over cost concerns.
The Central Bank of Kenya (CBK) Banking Sector Innovation Survey 2024 shows fewer institutions had dedicated functions that spearhead innovation activities than in the previous survey.
The apex bank said this decline was due to microfinance banks reducing staff involved in innovation to manage costs.
“The decrease in institutions with dedicated innovation teams in MFBs from 100 percent in 2023 to 57 percent in 2024. The decrease was largely due to the cost of maintaining manpower dedicated to the innovation function,” the CBK survey states.
MFBs, nevertheless, still view innovation as key and managed to launch products around credit, deposit and capital-raising services between January and December 2024.
They also joined mainstream commercial banks to introduce products in payments, clearing and settlement services, despite trimming staff involved in innovation.
The survey conducted in February 2025, collected data on the state of innovation from all 14 microfinance banks, 37 commercial banks and one mortgage finance institution.
The struggle by MFBs to keep up with research and development comes amid the financial challenges facing the institutions.
In its 2024 Financial Sector Stability Report, the CBK noted that the performance of MFBs had continued on a less favourable trajectory, as highlighted by a shrinking loan book.
“The subsector (MFBs) has remained weak and vulnerable to shocks, and its viability is low. Total assets declined by 8.8 percent to Sh64.2 billion in December 2023, mainly on a 4.8 percent decline in net loans and advances,” CBK says in its latest financial sector stability report.
“Just like on the assets side, the indicators on the liability side point to a more vulnerable subsector. For instance, the total deposits maintained a downward trajectory, shrinking by 5.7 percent to Sh43.9 billion in December 2023.”
MFBs remained loss-making in 2023, with pre-tax losses widening from Sh980 million to Sh2.3 billion.
In the survey, banking institutions noted that innovation plays a key role in modernising banking platforms, enhancing customer experience through digital channels, and implementing innovative solutions to improve operational efficiency.
On average, the CBK survey found that innovation function teams constituted 25 percent of the overall staff of institutions.
