Unlocking MSME credit: Sector specific insights from Kenya

This study investigates the sector-specific determinants of MSME credit in Kenya across three dominant sectors-real estate, trade, and transport & communication-that collectively account for nearly 70% of bank MSME lending. Using quarterly data from 2012 to 2024, we apply sectoral Autoregressive Distributed Lag (ARDL) models to capture both short-run dynamics and long-run equilibrium relationships. The analysis integrates supply-side indicators (non-performing loan ratios, lending interest rates, and banking sector liquidity) with demand-side proxies (sectoral GDP), while also introducing a structural policy shock through the 2016-2019 interest rate cap as a dummy variable. Findings reveal significant sectoral heterogeneity: MSME credit in real estate is decoupled from GDP growth and more sensitive to liquidity; trade credit strongly follows sectoral GDP but is vulnerable to NPL shocks; and transport & communication lending exhibits the fastest adjustment to equilibrium, shaped by both demand conditions and borrowing costs. The results provide novel empirical evidence on the differentiated nature of MSME credit drivers in Kenya and highlight the importance of sector-sensitive credit policies, robust risk-sharing frameworks, and targeted liquidity support mechanisms.