Discussion Paper No. 307 of 2023 on Impact of Financial Inclusion on Access to Finance for Startup and Business Operations in Arid and Semi-Arid Lands of Kenya

Abstract

Access to finance is important for business start-up and operations. This study conducted an in-depth exploration into the financing landscape, preferences and factors influencing access to external financing for startups and day-to-day business operations in Arid and Semi-Arid Lands (ASALs) in Kenya. The findings indicate that internal financing, predominantly reliant on personal savings and close-knit networks, maintained its dominance as the primary source of funding for startups in ASALs. Importantly, it was observed that while the arid regions exhibited limited influence from access to formal financial services on external financing decisions, the semi-arid region relied significantly on both formal and informal financing channels. In addition, the level of education emerged as a pivotal factor that drives individuals to seek external financing. It is important to design targeted financial inclusion initiatives aimed at enhancing financial literacy, bolstering informal financial networks, and promoting education to foster entrepreneurship and ignite economic growth in Kenya's ASALs.