Effect of Concessional Climate Financing on Financial Performance of Micro Small and Medium Enterprises in Arid Semi Arid Regions of Kenya

Abstract

Background: Climate finance was once a niche environmental concern, but it now plays a major role in global governance and diplomacy. MSMEs in emerging economies remain underfunded. Despite the global increase in climate funding, MSMEs in ASALs face ongoing financial insecurity and operational disruptions as a result of climate change. Despite global climate finance reaching USD 1.4 trillion, Africa received only 2.4% of these flows, leaving a substantial financial gap for vulnerable businesses. A systemic financial deficit of around 19.33 billion exists, exacerbated by a fragmented global finance architecture that favours large-scale public initiatives over smaller firms. Aim: The study aims to assess the exact effect of concessional finance on the financial performance of MSMEs operating within Kenya’s ASAL regions. Hypothesis: H01: Concessional finance does not have a significant effect on MSME financial performance. Study Design: The research design employs a mixed-methods approach. Place and Duration of Study: The target population comprised 3,499 MSMEs in 21 ASAL counties across four strata: North Eastern, Eastern, Coast and North Rift. Methodology: A sample of 353 MSMEs from four representative counties (Tana River, Makueni, Kilifi and Laikipia) was selected for the 2021–2024 period using Cochran’s formula. Results: Concessional financing exerts a direct, positive and statistically significant effect on the financial performance, liquidity and profitability of MSMEs (B = 0.185, p = 0.001), grounded in trade-off theory. Crucially, moderation analysis reveals that regulatory intensity does not significantly alter this direct relationship (p = 0.436), indicating that the performance benefits of concessional capital remain stable across variations in the surrounding regulatory oversight. Conclusion: Concessional financing is a reliable enabler of MSME performance. The significant positive effect demonstrates that affordable, flexible credit arrangements strengthen liquidity and enhance profitability. This confirms that concessional facilities remain important instruments for addressing financing gaps in fragile economies where MSMEs struggle to meet conventional lending conditions. Concessional funds should be directed towards productive investments, such as asset expansion, productivity upgrading and market diversification, rather than short-term consumption. This positions concessional finance as a resilience instrument in credit-constrained dryland economies.