Small businesses are the heartbeat of Kenya’s economy. They employ millions of people, move goods across the country and drive much of the economic activity outside the biggest corporations. Micro, small and medium enterprises (MSMEs) account for more than 90% of all enterprises in the country and contribute approximately one-third of its economic output.
Yet many struggle to access the credit they need to grow.
‘Government securities offer banks good returns without big risk’
Risk/return
‘Banks are very risk-averse,’ says Evans Osano, director of financial markets at FSD Africa, a financial sector development agency. ‘They are in a very comfortable position where they can invest and get very good returns from government securities without taking a big risk.’
Kenyan banks lend out roughly 48% of their total assets, Osano says, but only a small share of that reaches SMEs. Much lending goes to larger, established borrowers. Government securities also offer relatively predictable returns without the cost and uncertainty of assessing an unfamiliar small business.
Reticence among the banks helps explain an estimated ‘unmet’ financing need among MSMEs of 4 trillion Kenyan shillings (US$32bn), according to figures cited in Kenya’s 2025 MSME strategic national framework policy document. There are an estimated 7.4 million MSMEs in Kenya, employing more than 14 million people and creating around 800,000 jobs each year.
‘Private debt has worked for me’
Their importance to the Kenya economy is not underestimated. The MSME policy document says: ‘MSMEs are critical drivers towards Kenya’s socio-economic growth and contribute substantially towards poverty reduction, employment and income generation.’
Working capital
For businesses like Afriavo Orchards, a Nairobi-based processor and exporter of fruits, vegetables and other fresh produce, the financing gap is real. Set up in 2023, the company needs a steady quantity of working capital to keep stock moving.
Afriavo CEO Matthew Njenga spent months trying to secure financing from local banks to set the business up in the first place. Frustrated by the traditional route, he looked elsewhere. That search led him to Lofty-Corban Investments and an alternative source of financing he had not previously considered: private debt.
‘To run this type of business, you must have enough working capital, so unlocking that through this option was a great achievement for us,’ Njenga says. The documentation, he admits, was demanding, but adds that ‘in business you must be answerable’. Almost a year into the loan facility, his assessment is simple: ‘It’s worked for me.’
Weighing risk
Njenga’s experience illustrates why private debt is beginning to gain traction as an alternative source of funding for MSMEs: it is built around a different way of assessing a business.
For many SMEs, the difficulty starts with how lenders measure risk.
‘More than 70% of MSMEs lack the collateral banks typically require’
Victor Otieno of Viffa Consult, who has researched Kenya’s MSME sector, points to several factors behind the financing gap. More than 70% of MSMEs, he says, lack the collateral or financial records banks typically require before lending.
Many also operate in wholesale and retail, where margins are thin and competition is intense. A business can have substantial sales moving through its accounts and still struggle to demonstrate the profitability or financial history that would give a conventional lender comfort.
Then there is the wider financial environment. Government borrowing has made public securities an attractive destination for banks. Relatively predictable returns can be earned without having to take on the additional uncertainty of lending to smaller businesses.
‘It’s not unique to Kenya,’ Otieno says – the same informality, sector concentration and collateral-based caution commonplace across African markets.
Private debt is not immune to these constraints. The informality that keeps SMEs out of banks can also make it difficult for private lenders to assess them. Weak legal redress mechanisms can make pursuing a defaulting borrower costly and time-consuming.
Another barrier is the quality of financial information available about small businesses. Otieno believes professional accountants could play a larger role by helping SMEs maintain stronger financial records and demonstrate how their businesses perform.
Collateral vs cashflow
If traditional credit assessment places too much weight on collateral and formal financial records, he argues, a national alternative credit-scoring framework could assess factors such as cashflow, payment patterns, operating history and financial behaviour. This could give lenders a fuller picture of businesses that may not have substantial assets to pledge.
Private debt takes a similar approach.
Lofty-Corban Investments’ Private Debt Special Fund, launched in 2026, had grown to around US$9.3m, with 96% of the fund advanced to businesses.
‘A business might return losses on paper but have significant cashflow’
‘The focus shifts from collateral-based financing to cashflow-based financing,’ says Teddy Yanga, senior investment manager at Lofty-Corban. A business might return losses on paper, he explains, ‘but when you look at the cashflow element, it’s quite significant’ – exactly the signal his team’s due diligence process is built to catch.
Deals are unsecured and structured around a company’s revenue cycle. Tickets range from US$150,000 to US$800,000.
‘No business is locked out,’ Yanga says. ‘We look at these businesses on a case-by-case basis.’
The opportunity here is far larger than any individual private debt fund.
Capital mobilisation
The lending gap is driving efforts to bring more capital into the market. FSD Africa is developing a listed SME debt fund designed to mobilise up to US$300m (with a target of raising US$240m from domestic institutional investors) in sustainable finance for Kenyan MSMEs. The fund, which is still in development, is designed to provide affordable credit to smaller businesses while creating an investment route for pension funds and other institutional investors.
Private debt is widening the definition of creditworthiness
Its scale also illustrates the bigger challenge: while private debt can provide another route to finance, the needs of Kenya’s MSMEs are far greater than any single fund can meet.
For businesses without substantial collateral, private debt is widening the definition of what makes a business creditworthy – from the assets it can pledge to the cash it can generate and the quality of information it can provide.
