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

Abstract

Aims: Global climate finance is increasing, supporting green innovation among MSMEs and efforts to achieve carbon neutrality. Private-sector contributions have nearly tripled, and climate finance has reached USD 1.4 trillion; however, Africa received only 2.4% of these flows, leaving a substantial financing gap for vulnerable businesses. A systemic financing deficit of approximately USD 19.33 billion persists and is exacerbated by a fragmented global financial architecture that favours large-scale public initiatives over smaller firms. Study Design: The study employed a mixed-methods approach. A sample of 353 MSMEs was selected from four representative counties—Tana River, Makueni, Kilifi and Laikipia—using Cochran’s formula. Place and Duration of Study: The study targeted 3,499 MSMEs across 21 ASAL counties, grouped into four strata: North Eastern, Eastern, Coast and North Rift. Methodology: Data covering 2021–2025 were collected from a sample of 353 MSMEs in the four representative counties selected using Cochran’s formula. Results: Climate finance grants (H3) had a positive and statistically significant effect on financial performance (B = 0.211, β = 0.151, t = 2.577, p = 0.011), supporting rejection of the null hypothesis. Regulatory intensity also significantly moderated the relationship between grants and financial performance (H7: B = 0.181, β = 0.130, t = 2.206, p = 0.028). The reported moderation pattern suggests that higher regulatory intensity may dampen the effectiveness of grants where compliance requirements or bureaucratic processes impose additional costs on MSMEs. Conclusion: Grants provide a catalytic yet vulnerable financing mechanism. Their positive and significant direct effect underscores their potential to alleviate capital constraints and stimulate growth. However, the reported moderation by regulation indicates that bureaucratic rigidity, compliance costs and misaligned oversight may erode the developmental impact of grants, revealing a tension between accountability and operational flexibility in grant-financed MSMEs. The significant positive effect of grants (H3) suggests       strong potential when administrative alignment is ensured. Stronger internal audit systems, digital reporting and documentation practices may help firms preserve grant benefits while minimising regulatory friction.