Firms’ use of formal and informal finance in coping with droughts and floods: experiences from Kenya

Abstract

This study analysed factors influencing firms’ use of formal and informal finance in coping with droughts and floods. It utilized a cross-sectional survey of 802 mostly Micro and Small Enterprises (MSEs) in 27 counties in Kenya that are prone to droughts and floods. The study covered firms in manufacturing, wholesale and retail trade, and accommodation and food services sectors. Bivariate probit regressions reveal that choice of finance coping mechanisms varies by firm-specific characteristics, sector and locational features. Sectors with predominantly informal firms reveal higher usage of informal finance, signalling vulnerabilities. Micro firms and female-owned firms show dependence on informal finance, while educational attainment of the firm’s owner, location within urban clusters and larger firms are associated with use of formal finance in coping with droughts and floods. The findings reveal that firms’ adaptations to climate change risks require measures to facilitate access to formal finance and promoting interventions tailored around firm-specific variables, sector characteristics and business environment.