The recent outbreak of political violence has left a dark cloud hanging over the vibrant microfinance sector, industry players said.

Microfinance, which accounts for nearly 80 per cent of lending to small businesses, is facing an avalanche of loan defaults with the majority of borrowers having lost businesses in the riots that followed the disputed outcome of last month's presidential election.

Industry insiders said plans were underway to develop a rescue package for businesses that lost their stocks to looters and arsonists.

K-Rep Development Agency, a key player in the micro-finance market, said its lending programmes had suffered a massive setback in Nairobi's Kibera slums that bore the brunt of the skirmishes.

"Two of our clients were killed and 22 hospitalised putting at risk about Sh10 million in loans to their businesses," said Aleke Dondo, the managing director.

Other areas where the micro-lender's clients suffered losses include Kakamega, Kisumu, and Kisauni in Mombasa. "We're working on a package to help our clients rebuild their lives. For many, it's a question of refinancing to enable them rebuild their businesses," Mr Dondo said.

Kenya Youth Business Trust (KYBT), another micro-lender, said it was dealing with clients on an individual basis.

"We're likely to reschedule loan repayments for some while others may need new cash to restock," said David Waithaka, the executive director.

A more serious issue for MFIs, however, is the risk from defaulters who are unable to restart their businesses because they have been displaced or injured in the skirmishes.

Although it's still too early to quantify the amounts involved, the MFIs are expected to lose a significant fraction of their interest income and ultimately reduce their profits.

"There was a negative impact for sure in Coast, Western, Nyanza and Rift Valley," said Ms Pauline Ngari, general manager operations at Kenya Women Finance Trust (KWFT) - a micro-lender.

By the end of 2006 the lender had an outstanding portfolio of Sh2.28 billion involving 85,163 clients. Average loan size stood at Sh40,000 for a total disbursement of Sh3.6 billion. Initial assessment indicated that Sh8 million of K-Rep's loans were at risk.

"The problem is how to deal with people who are too traumatised to get back to businesses. We may have to write-off some of these loans," said Mr Dondo.

Some of the MFIs and banks that lend to micro businesses have reported disruption of their programmes due to movement of staff or inability of some workers to return to work.

"There are areas where we can't go to hold group meetings and we also have reports that staff members of certain tribes cannot set foot in certain areas," said a source who requested anonymity.

Counselling of displaced clients is one of the measures being considered by one MFI to tackle the problem of business owners who are too traumatised to resume operations.