Finance for resilience: Exploring credit source choices in responding to shocks among Kenyan households

Africa is susceptible to shocks such as climate change, economic crises and natural disasters which hinders her efforts in poverty reduction, increasing economic growth and food security. Financial inclusion plays an important role in enhancing the resilience of households in responding to shocks. However, these households primarily rely on informal means and the use of non–credit measures as coping mechanisms which are less effective in the long–run. These unsustainable coping mechanisms among households in responding to shocks negatively affects quality of life. This study aimed to investigate the extent to which the type of shock experienced influences a household’s choice of credit. This study used secondary data based on the Financial Access Household Survey 2024, and primary data through key informant interviews to complement the results from the quantitative analysis. This research used a multinomial logit regression provided that the dependent variables have several outcomes that are mutually exclusive. In addressing the extent which type of shock influences the type of credit chosen, the results demonstrate that shocks such as flooding, loss or damage due to drought and livestock/crop failure are more likely to use non – credit. In relation to the influence of experiencing shocks on trust in financial institutions, the results demonstrate that shocks such as major sickness, loss or damage from theft and livestock or crop failure moderately increased the likelihood of trusting formal prudential services. Regarding how past credit choices influences a household’s ability to access emergency to address future shocks, the findings illustrate that households that previously used formal and non-credit are more likely to use formal credit to access emergency funds. Heterogeneity was observed in each of the outcomes however, socio – economic characteristics such as educational level, household size, sex of household head and marital status have a minimal effect on credit choice of households. Through innovation, formal financial institutions are able to integrate the flexibility of informal means and the reliability and security formal means provide to prevent households from adopting unsustainable coping strategies.