Kenya's micro-finance banking sector loss hit $7.31 million for the period ended December 2017, from a loss of $3.77 million over a similar period in 2016, largely attributed to reduction in financial income.
Consequently, the country's banking regulator has proposed amendments to the law to ensure stricter controls in order to protect customers and the banking sector.
The sector, which last posted profits in 2015 also saw non-performing loans rise to $99.1 million at the end of last year, from $73.71 million, data from Central Bank of Kenya shows.
Customer deposits dropped to $394.16 million, from $401.98 million the previous year. The sector's core capital which had risen two-fold from 2013 to peak at $104 million, dropped to $98.1 million last year. Currently, the CBK requires these banks to have a core capital of $600,000.
The Central Bank says the sector is facing various challenges including the cap on interest rates and changing market dynamics.
"These challenges include the increased credit risk which has contributed to increasing the number of non-performing loans, reduced reliance on deposits and increased reliance on more expensive borrowed funds.
"This is attributed to the low visibility of microfinance institutions which hinders the mobilisation of deposits," CBK says.
The fall in profits, customer deposits and core capital saw the Central Bank last week seek to amend the micro finance law, pushing for tougher core capital and governance rules to provide a buffer against potential financial downturns.
This amendment, which is expected to come before Parliament by June will be in the first comprehensive review of the sector in years.
"The proposed amendment herein are intended to promote a more transparent, resilient and stable microfinance banking industry capable of adapting to emerging risks, challenges and opportunities.
"They also aim to ensure the interests of consumers of financial services are protected throughout their relationships with financial institutions, thereby fostering and embedding a customer-centric culture within microfinance banks," says the CBK.
"One proposal is to have the minimum capital requirements increased for both existing MFBs and new entrants," the regulator says.
CBK is also proposing to merge the two categories of microfinance banks: nationwide and community types, which it says will address the need for resilient and viable business models, and ensure capital adequacy given the changes in the sector.
The CBK also proposes to review the current risk classification of assets and provisioning policy to be more reflective of the short-term nature of microfinance loan cycles.
"This concern has been raised regularly by the industry as the current classification structure assumes that microfinance loans are repaid on a weekly basis while the case on the ground is that they are paid monthly.
"The structure also assumes that microfinance banks lend short term (3-6) months while in reality some portfolios have longer loan tenures," CBK says.
The regulator has invited comments from the public by the end of next month which will then be incorporated in the initial draft of the Microfinance (Amendment) Bill, 2018, and Regulations.
In the last two years, Kenya has seen a collapse of Imperial Bank, Dubai Bank and Chase Bank (which has a controlling stake in Rafiki). Panic over the collapse saw Rafiki hit by a tide of withdrawals, forcing it to limit withdrawals.