The 13 microfinance banks (MFBs) sunk into a collective Sh377 million loss in the year ended December 2016 from a Sh549 million pretax profit a year earlier.
The Central Bank of Kenya has attributed the slide to drying income streams as the micro-lenders struggled to secure funds for investments.
Revenue generated by MFBs fell 27 per cent or Sh3.9 billion year-on-year amid a 19 per cent rise in interest and fee expense on borrowing, the CBK said.
Income from government securities declined by 77 per cent, investments by 62 per cent while that from deposits and balances with banks and financial institutions contracted by 60 per cent.
"This was occasioned by the tight liquidity in the market especially after the placement of three commercial banks under receivership in 2015 and 2016, which affected distribution of liquidity in the sector. Net non-performing loans increased by 94 per cent as at December 31, 2016," the CBK said.
The MFBs, which are shielded from the interest capping law, posted a marginal 3.27 per cent growth in loans year-on-year to Sh47.05 billion while deposits fell 0.8 per cent to Sh40.20 billion.