Bringing informal Nano and Micro Enterprises (NMEs, also known as MSMEs) into the formal economy is a top priority for policymakers and investors across East Africa, helping this vast and growing market segment to thrive and participate fully in their national and regional economies.
This is a key goal for the recently launched Kenya MSME Policy 2026 that provides a framework for enhancing the business environment for NMEs that face an estimated 3 trillion financing gap. Kenya’s NME financing gap is estimated at around KSh2.6 trillion .
Closing that gap requires more than simply increasing the credit available to the businesses. It requires us to think carefully about who provides that credit, how risk is assessed and how businesses move from informal trade to sustainable transition to formal licensed operations and access to traditional government and banking services. Trust, as well as administrative barriers, need to be overcome along the way.
For many NMEs, formality is the destination, not the starting point. This distinction matters. A trader running a small shop may have a viable business, regular customers, and predictable stock cycles, but no audited accounts, conventional collateral or credit history. That does not make the business unsuccessful. It does, however, often mean that it sits beyond the risk parameters for conventional deposit-taking banks.
With banks’ obligation to protect depositors’ savings, expecting them to stretch traditional lending models further down the market is unlikely to fully address businesses’ financing challenge. It needs a robust financial ecosystem, with different institutions doing what they are best equipped to do.
Specialist lenders, such as fintechs or ‘neobanks’, operate at the risk frontier, using different data, technology, and close knowledge of customers to understand businesses better than traditional credit models. Banks, development finance institutions and other sources of institutional capital can then work with those specialist providers rather than attempting to replicate their capabilities.
This is already an important part of the financial inclusion debate. Recent research from the IFC found that alternative data and artificial intelligence can expand access to credit for borrowers who lack conventional credit histories. Risk is not removed entirely, it never can be, but fintech lenders like 4G Capital are demonstrating that advanced data analytics, AI and customer-centric technology and product design can radically reduce and manage underwriting risk to deliver higher portfolio quality for completely unsecured credit than conventional secured banking facilities.
That distinction is especially important in Kenya, where digital credit has expanded rapidly. The Central Bank of Kenya has licensed 252 digital credit providers by July 2026 and received more than 800 applications since the regulatory regime began in 2022. This demonstrates great activity in a competitive market but also illustrates why scale alone cannot be the measure of success. The barriers to delivering responsible finance to informal enterprises remain high.
A lending platform is relatively easy to build. A sustainable credit model is much harder. It requires robust underwriting, accurate loan sizing, disciplined collections, strong governance and compliance, reliable data and, in our experience, human understanding of the markets in which customers operate. It also requires patience. Helping an entrepreneur progress from an informal enterprise towards a more established business is a process, not a single transaction.
We have seen this directly at 4G Capital. Over 13 years, we have supported nearly 800,000 NME customers in Kenya and Uganda through 7.5 million short-term working capital loans, with cumulative disbursements now exceeding US$1.1 billion. Our unique touch-tech model combines technology and data with more than 1,600 field agents across 226 branches in Kenya and Uganda. We do it this way because neither technology nor human judgement alone is enough for the segment we serve. Our repayment rate of 94.6 per cent reflects the importance of selecting the right customer and providing the right amount of capital for the right business cycle.
The objective is not to keep entrepreneurs permanently dependent on specialist finance. It is to help successful customers develop the history, capacity and growth that can ultimately open the door to a broader range of financial services, and to play our part in democratising wealth creation in the African markets we are privileged to serve. Our mission is and remains “to grow business with capital and knowledge.”
That is why the emphasis by Kenya’s Revised MSME Policy on financial inclusion and formalisation is important. The policy recognises that MSMEs need access to credit, skills, technology and markets, while explicitly supporting their progression towards greater formality. Those objectives should be treated as connected rather than sequential.
There is also an opportunity to mobilise significantly more institutional capital without asking conventional banks to take risks they are not structured to hold directly.
IFC’s recent first transactions in Africa under its Catalytic First Loss Guarantee programme provide one example of what this can look like. Through partnerships with 4G Capital, Equity Bank Kenya and KCB Bank Kenya, IFC expects the programme to catalyse approximately US$144.4 million in local currency lending to Kenyan enterprises. The structure uses innovative risk sharing structures to mobilise private capital while working through financial institutions with the capabilities to reach underserved borrowers.
This is the direction the market must move: innovative burden sharing between established international institutions with frontier catalysts for genuine economic growth.
The finance gap cannot be solved by government alone, nor by banks, fintechs or development institutions acting independently. It requires partnerships in which capital, specialist underwriting, technology and local market knowledge reinforce one another.
For banks, that can mean earning an appropriate return while reaching parts of the economy that sit outside their direct risk appetite. For specialist lenders, it provides scalable local currency funding. For policymakers and development institutions, it turns financial inclusion from an aspiration into a viable delivery model.
Most importantly, for the entrepreneur, it creates a pathway from an informal subsistence existence to integration with the national economy, access to public services (increasingly digitally) and an accelerant for Africa’s growth and prosperity.
Kenya does not need every informal business to become bank ready overnight. It needs a financial system capable of meeting businesses where they are, helping the strongest to grow and giving them the opportunity to become bank ready over time. That is how finance can become an engine of formalisation rather than a hurdle placed at its entrance.
Wayne Hennessy-Barrett, is the Founder and Executive Chairman, 4G Capital