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Enhancing farmers’ resilience to climate change-induced impacts through

financial inclusion in Sidama region, southern Ethiopia

Article in Climate and Development · April 2023

DOI: 10.1080/17565529.2023.2203675

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Enhancing farmers’ resilience to climate change-

induced impacts through financial inclusion in
Sidama region, southern Ethiopia

Wuddasie Dereje Bekele

To cite this article: Wuddasie Dereje Bekele (2023): Enhancing farmers’ resilience to climate
change-induced impacts through financial inclusion in Sidama region, southern Ethiopia,
Climate and Development, DOI: 10.1080/17565529.2023.2203675

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CLIMATE AND DEVELOPMENT
https://doi.org/10.1080/17565529.2023.2203675

RESEARCH ARTICLE

Enhancing farmers’ resilience to climate change-induced impacts through financial

inclusion in Sidama region, southern Ethiopia
Wuddasie Dereje Bekele
School of Economics and Business, Norwegian University of Life Sciences, Ås, Norway

ABSTRACT ARTICLE HISTORY

Building climate resilience is vital owing to the potentially severe effect of climate change. However, Received 25 May 2022
there is limited empirical evidence on the contribution of financial inclusion to climate resilience using Accepted 9 April 2023
household-level data. This paper adds to the literature by examining the potential role of financial
KEYWORDS
inclusion in building farm households’ climate resilience. The study uses semi-structured interviews Financial inclusion; climate
and structured questionnaires to collect relevant data from the Sidama region in southern Ethiopia. resilience; mobile money
Principal component analysis is used to estimate a climate resilience index, and multiple linear services; account ownership;
regression is used to show the effect of financial inclusion on climate resilience. The results show that access to credit
financial inclusion significantly and positively affects households’ climate resilience by increasing their
asset ownership and diversification of income. Ownership of bank and microfinance institution
accounts, mobile money services, and access to credit are the major financial services that contribute
to climate resilience. However, there are certain factors limiting farm households’ level of financial
inclusion. Thus, if the full potential of financial inclusion in building climate resilience is to be
achieved, different strategies should be devised to increase its level and outreach.

1. Introduction
Microfinance institutions (MFIs) can assist the poor to build
Climate change refers to changes in temperature and weather their climate resilience in a more sustainable way than other
patterns over time. Global climate change affects people climate finances, such as carbon credits (Chirambo, 2016a).
through diverse changes in local climates. It brings intense However, financial inaccessibility decreases the ability of indi-
rainfall, causing flooding in some regions but causing severe viduals to cope with future shocks, which reduces their self-
drought in others. Such severe effects ruin people’s livelihoods sufficiency while increasing their dependence on external
and destroy animals’ habitats (Intergovernmental Panel on assistance (Nicholson et al., 2018). Thus, there is a need for
Climate Change [IPCC], 2022). Thus, it is necessary to inte- investment in the financial sector to increase financial
grate climate resilience into policy frameworks to address inclusion, which can then be used to improve climate resili-
this serious issue and achieve sustainable development ence (Chirambo, 2016b).
(Singh et al., 2019). Climate resilience can be defined as the Ethiopia is facing serious consequences of climate change
capacity to anticipate, evade, plan for, cope with and adapt (Conway et al., 2011). Its frequent poverty, topography, and
to climatic shocks (Bahadur et al., 2015). dependence on rain-fed agriculture make it highly vulnerable
Studies have identified climate resilience as a solution to to climate change (Haworth et al., 2016). From 2015 to 2016,
different economic stresses (Hussain et al., 2021; Keshavarz the country faced drought episodes that caused 50–90% of har-
& Moqadas, 2021). Accordingly, strengthening resilience to vests to fail, affecting more than 10.2 million people. Mean-
climate change has become an integral part of the United while, the absence of formal insurance schemes and the
Nation’s sustainable development goals (United Nations ineffectiveness of informal risk-sharing mechanisms in the
[UN], 2020), which call for the need to invest in a climate-resi- face of covariate shocks have reduced the coping capacity of
lient economy (Hussain et al., 2021). Countries should have the people. Thus, the country’s vulnerability to adverse climate
well-developed insurance systems that not only mitigate but shocks increases the urgency to build a climate-resilient econ-
also build the resilience of individual households over time omy, which requires concrete policies and actions (Bekele
(Meirovich et al., 2013). et al., 2020b).
Financial inclusion, which involves the provision of savings, A limited number of studies explore the role of financial
credit, mobile banking, and other innovative products, is inclusion on climate resilience (Chirambo, 2017; Diallo et al.,
recognized as a tool to build climate resilience (Haworth 2017; Haworth et al., 2016; Hussain et al., 2021). They concur
et al., 2016; Hussain et al., 2021; Singh et al., 2019). It contrib- that financial inclusion is crucial to increase climate resilience.
utes to climate resilience by enabling people to plan, mitigate It provides basic services to the vulnerable population, which
and manage future risks (Haworth et al., 2016). It also empow- allows them to adapt to climate disasters. Thus, it should be
ers the poor to invest in assets, education, and businesses, incorporated into climate change policies. However, these
which reduces their vulnerability (Calderone et al., 2019). studies lack in-depth analyses and relevant outcomes based

CONTACT Wuddasie Dereje Bekele [email protected]; [email protected]

© 2023 Informa UK Limited, trading as Taylor & Francis Group
2 W. D. BEKELE

on micro-level data. This is important because it is difficult to 2. Conceptual framework

assess resilience at the household level based on nationwide
From Figure 1 we can see that climate resilience index (CRI) is
studies (Mekuyie et al., 2018).
compiled from six components: asset, adaptive capacity, social
In addition, studies of climate resilience should be context
safety net, access to basic services, income and food access, and
specific. Studies examining different aspects of climate change
stability (Food and Agriculture Organisation [FAO], 2012;
in the Sidama region (Bekele et al., 2020a; Hameso, 2014;
Mekuyie et al., 2018; Tambo, 2016). Households that have
Matewos, 2020) show that there is a risk of drought in the
large numbers of assets, can build adaptive capacity, can
area and that the local adaptive capacity of the rural commu-
improve their stability, can strengthen their social safety net,
nity is fragile. Therefore, further intervention activities are
and have better access to income and food, and basic services
required for a sustainable solution. However, the studies do
are more resilient to climate change (Asmamaw et al., 2019).
not consider financial inclusion as a possible solution.
Inclusive financial services enable farm households to pur-
This study adds to the existing literature by analysing how
chase livestock, land, house, and other resources, which
financial inclusion contributes to building household-level
increases their asset. It also allows them to diversify their
climate resilience using the case study of the Sidama region,
income and increase their expenditure, which improves their
Ethiopia. It addresses three basic questions: (1) What is the
adaptive capacity, their access to income and food, and their
role of financial inclusion in building farmers’ resilience to
access to basic services. Moreover, they can plan, manage
climate change-induced impacts? (2) Are there differences
risk, and absorb shocks, which improves their stability. Access
in climate resilience or the level of financial inclusion between
to a digital payment system makes it easy to receive remit-
the study sites? and (3) What factors limit the ability of finan-
tances and aid from the government, which strengthens their
cial inclusion policies to enhance farmers’ resilience to cli-
social safety net (Haworth et al., 2016; Hussain et al., 2021).
mate change-induced impacts? This study serves as an
Therefore, financial inclusion contributes to building the cli-
input to policy formulation in building a climate-resilient
mate resilience of farm households.
economy.

Figure 1. The relationship between financial inclusion and climate resilience.

 CLIMATE AND DEVELOPMENT 3

Figure 2. Map of Sidama region (Source: Matewos (2020) https://creativecommons.org/licenses/by-nc-nd/4.0/).

In addition, demographic characteristics and socio-econ- variability and high temperatures. They are known to be
omic variables affect the climate resilience of households. drought-prone districts (Matewos, 2020).
Some of these variables also affect the financial inclusion
level of farm households. These variables are thus used as a
control variable.
3.2. Sampling and data collection
In this study, a cross-sectional research design in three districts
3. Materials and methods of the Sidama region was used to explore the contribution of
financial inclusion in building climate resilience. Following
3.1. Study area the works of Opiyo et al. (2016), a two-stage sampling method
Sidama region is one of 10 regions in Ethiopia, located in the was used to select the sample farm households. In the first
southern part of the country, and its main city is Hawassa. stage, purposive sampling techniques were used to select
Sidama region’s geographic coordinates are latitude 6o 10’ three drought-prone districts of the Sidama region, namely
and 7o 05’ North, and longitude 38o 21’ and 39o 11’ East. It cov- Loka Abaya, Boricha, and Hawassa Zuria. Then, two kebeles
ers a total area of 6,981.9 km2. The region is bordered by the (administrative districts) were selected from Loka Abaya,
Oromia region in the north, east, and southeast, by Gedeo two from Boricha, and four from Hawassa Zuria. In the second
zone in the south, and by Bilate river in the west (see Figure stage, a sample of 400 farm households was purposely selected
2) (SZBoFED, 2007). The region has a total population of based on their availability on their farm or home at the time of
2,954,136, of which 5.51% are urban inhabitants and 0.18% the data collection.
are pastoralists (Central Statistical Authority [CSA], 2007). The sample size was estimated using the formula of Yamane
The Sidama region is a leading coffee-growing region in Ethio- (1967). Yamane’s sample size determination formula is given
pia and supplies over 40% of washed coffee to the market. Its as follows:
economy is dominated by rain-fed and subsistence agriculture. N
The long-term dependence on subsistence agriculture has n= (1)
1 + N(e)2
increased the vulnerability of the population and their reliance
on food aid programmes. It has experienced degradation of its where n is the sample size, N is the population size of the study
natural resources, pastureland is shrinking and most of the area, which in this case is the number of farm households, e is
abundant water resources are now polluted (Wolassa, 2016). the desired level of precision (in this case, e = 5%) with the
Among the 20 districts of the Sidama region, Hawassa Zuria, same unit of measure as the variance and e2 is the variance
Boricha and Loka Abaya in particular have high rainfall of an attribute in the population.
4 W. D. BEKELE

Table 1. Population distribution and sample size determination. The method involved three steps. The first step involved
Districts Number of farm households Sample size estimating the indicators separately as follows, such that they
Loka Abaya 24,729 104 lay in an interval between 0 and 1:
Boricha 24,535 104
Hawassa Zuria 46,598 192 Aij − mij
xij = (3)
Total 95,861 400 Mij − mij
Source: Author analysis based on the data from Sidama region’s Bureau of Agri-
cultural and Natural Resource Development. where:
xij is the estimated value of indicator i in the jth dimension,
Aij is the actual value of indicator i in the jth dimension,
Thus, the sample size was calculated as follows: Mij is the maximum value of indicator i in the jth dimension
95, 861 and
n= = 398.337 (2) mij is the minimum value of indicator i in the jth dimension.
1 + 95, 861 (0.05)2 The indicators are binary variables. They were assigned a
This sample size approximated to 400 farm households. A value of one if a person’s response was yes, and zero otherwise.
probability proportional to size sampling method was then Therefore, the minimum value was zero and the maximum
employed to determine the sample size from each district value was one.
(see Table 1). In the second step, the indicators were combined to calcu-
Both primary and secondary data were used. Primary data late IFI for the dimensions (IFIj ):
were collected using pretested structured questionnaires and IFIj = 1
semi-structured interviews. The questionnaires were com- 























































pleted by 400 farm household heads, and administered by enu- w21j (1 − x1j )2 + w22j (1 − x2j )2 + .. + w2nj (1 − xnj )2
merators under the supervision of the researcher during the − 























period from October 5 to November 16, 2021. The question- w21j + w22j + .. + w2nj
naire included 98 questions on the indicators of financial (4)
inclusion and climate resilience, as well as questions on the
th
demographic and socio-economic characteristics of farm where wij denotes the weight of indicator i in the j dimen-
households. Each questionnaire took approximately 25 min sion. The weight1 was estimated using the coefficient of vari-
to administer, with the enumerators asking the questions ation (CV), which is the standard deviation divided by the
face-to-face and writing the answers given by the household mean. The weight of each indicator (wij ) is defined as the
heads. Enumerators were chosen from each kebele based on ratio of its CV (Vij ) to the sum of all indicators’ CV within a
their experience in data collection and their familiarity with dimension (Wang & Guan, 2017). That is,
the subject matter. They were trained for two days to minimize Vij
errors during data collection. Moreover, 13 semi-structured wij =  (5)
i Vij
interviews with the experts in the agricultural bureau and
financial sectors were conducted personally by the researcher In the last step, the three dimensions were combined to esti-
at various times between September 20, 2021, and November mate the IFI:
4, 2021. A single interview took 30 min on average and was
used to comprehend the agricultural and financial activities IFI = 1
























































of the study areas. Meanwhile, data on the number of house-
W12 (1 − IFI1 )2 + W22 (1 − IFI2 )2 + W32 (1 − IFI3 )2
holds in the districts were collected from the Sidama region’s − 


















Bureau of Agricultural and Natural Resource Development. W12 + W22 + W32
(6)
In the above-mentioned formulae, W1 , W2 and W3 were
3.3. Measurement of financial inclusion weights of the three dimensions2 calculated using the CV
The index of financial inclusion (IFI) was estimated using the method. The IFI ranged between zero and one, where zero
method adopted by Wang and Guan (2017) with modifi- indicated total financial exclusion and one indicated full finan-
cations. Three dimensions (penetration, availability, and cial inclusion.
usage) were used to calculate the index. The penetration
dimension was measured using account ownership at financial
3.4. Climate resilience measurement
institutions. The availability dimension was measured by own-
ership of mobile money accounts and debit cards as indicators. Resilience is a dynamic phenomenon that must be measured
These two indicators were selected because internet banking by considering different indicators (Quinlan et al., 2016).
and agent banking services were not available in the study Because there is no direct way of measuring climate resilience,
areas. Finally, the usage dimension was measured using sav- many studies adopt the use of various quantifiable indicators
ings and access to credit in the past 12 months as indicators. (Jones & Tanner, 2015; Mekuyie et al., 2018). They use a
However, this method of estimating financial inclusion was proxy variable approach as it is a more straightforward option
limited by a lack of data, which restricted the use of more for measuring climate resilience. Therefore, estimating the CRI
indicators. involves a proxy method that captures its multidimensionality.
 CLIMATE AND DEVELOPMENT 5

Table 2. Components and indicators of climate resilience. CRIi = climate resilience index of individual i,
Component Indicators Units Source Ai = assets of individual i,
Asset Livestock owned Tropical Mekuyie et al. (2018) ACi = adaptive capacity of individual i,
livestock SSNi = social safety nets of individual i,
unit
Farmland owned Hectare Mekuyie et al. (2018) ABSi = access to basic services of individual i,
Housing owned Dummy Food and Si = stability of individual i and
Agriculture IFAi = income and food access of individual i.
Organisation
[FAO], (2012) The CRI was estimated using a two-stage principal com-
Adult labour Count Mekuyie et al. (2018) ponent analysis (PCA) (Camara & Tuesta, 2017; Mekuyie
Access to irrigation Dummy Mekuyie et al. (2018) et al., 2018). PCA is mostly used to estimate indices that
water
Access to improved Dummy Mekuyie et al. (2018) have no well-defined weights (Boka, 2017). Because the indi-
seed cators of the CRI did not have predefined weights, this made
Adaptive Diversity of income Count Mekuyie et al. (2018) the PCA a suitable choice. Assigning weights to the indicators
capacity source
Number of coping Count Food and or dimensions was important to obtain optimal information
mechanisms Agriculture from the dataset. A good index should be well-balanced and
Organisation not have biased information from a single or a couple of indi-
[FAO], (2012)
Food consumption ratio Proportion Food and cators. Thus, the two-stage PCA was used to estimate the best-
(Share of food Agriculture weighted combination of indicators to produce an index
expenditure divided Organisation (Camara & Tuesta, 2017).
by total expenditure) [FAO], (2012)
Awareness of climate Dummy Tambo (2016) The first stage involved the identification and measurement
change and its of indicators to estimate the dimensions, i.e. the six com-
impacts ponents of climate resilience. The formula is given as follows:
Social safety Aid from government Dummy Mekuyie et al. (2018)
nets or safety net
Remittance Dummy Mekuyie et al. (2018) 
N
Cash for work Dummy Mekuyie et al. (2018) dic = bn zn + ni (8)
Access to Travel time to nearest Minutes Tambo (2016) n =1
basic water service
services Travel time to nearest Minutes Mekuyie et al. (2018)
health centre where dic captures the c dimensions (components) of cli-
Travel time to nearest Minutes Mekuyie et al. (2018) mate resilience for individual i, z represents the indicators, b
school
Travel time to nearest Minutes Mekuyie et al. (2018) denotes the parameters to be estimated, ni is the error term
market and n is the number of indicators in a dimension. The com-
Travel time to nearest Minutes Mekuyie et al. (2018) ponents are unobserved and must be estimated together with
veterinary clinic
Access to electricity Dummy Tambo (2016) the parameters.
Access to mobile phone Dummy Tambo (2016) The six components are indices that are estimated using the
Income and Average annual income Local Mekuyie et al. (2018) principal component as linear functions of the indicators.
food access from all income currency
sources Given that li is the eigen value and Pki
I
is the kth principal com-
Average annual Local Mekuyie et al. (2018) ponent of indicator (I) for individual i, the weighted average of
expenditure currency each component could be estimated following equation (9).
Stability Livestock loss Count Mekuyie et al. (2018)
Crop loss Count Mekuyie et al. (2018) Only principal components with eigenvalues greater than
Illness and death of Count Mekuyie et al. (2018) one were selected to estimate the indices:
family member
Income change Ordinal Food and p
Agriculture lIi PkiI
Organisation dic = i,kp (9)
[FAO], (2012) i=1 lIi
Expenditure change Ordinal Food and
Agriculture In the second stage, the overall CRI was estimated following
Organisation
[FAO], (2012) similar procedures to those of the first stage. Using the com-
ponents indices, the general formula for the CRI is given as fol-
lows:
The CRI for a given household i was defined as a compo- p
sition of different dimensions. As Table 2 indicates, the dimen- lci Pkic
CRIi = i,kp (10)
sions were measured using six components, which in turn
i=1 lci
were based on 27 indicators (Food and Agriculture Organis-
ation [FAO], 2012; Mekuyie et al., 2018; Tambo, 2016). The The principal component can be written as the linear com-
indicators in this study were modified to fit the study area’s cli- bination of the resilience components and the eigenvectors of
mate shocks and adaptation practices: the respective correlation matrices represented by w.
CRIi = f (Ai , ACi , SSNi , ABSi , Si , IFAi ) (7) 
c
Pki = wki dic (11)
where:
6 W. D. BEKELE

Table 3. Explanatory variables. FIi denotes the measures of financial inclusion and Xi rep-
Explanatory Expected resents the vector of covariates, which includes demographic
variable Description sign Source
and socio-economic variables (see Table 3). a, b and l are par-
Index of financial An index that ranges Positive Haworth et al. ameters and 1i is the error term.
inclusion between 0 and 1 (2016)
Account Dummy (1 if yes, 0 Positive Haworth et al.
ownership otherwise) (2016)
Mobile money Dummy (1 if yes, 0 Positive Haworth et al. 3.6. Specification test
account otherwise) (2016)
ownership MLR is subject to potential problems of endogeneity and het-
Debit card Dummy (1 if yes, 0 Positive – eroskedasticity. Endogeneity occurs when an explanatory vari-
ownership otherwise)
Savings Dummy (1 if yes, 0 Positive Haworth et al. able is correlated with the error term, whereas
otherwise) (2016) heteroskedasticity is a situation where the variance of the
Access to credit Dummy (1 if yes, 0 Positive Asmamaw et al. residual is not constant (Wooldridge, 2012).
otherwise) (2019)
Gender Dummy (0 female, 1 male) Positive Tambo (2016) Because endogeneity in particular is a major problem, it
Age Continuous Positive Awazi et al. needs to be addressed carefully. In this study, the Hausman–
(2019) Wu test was used to check for endogeneity. This required per-
Education level Categories (1 if illiterate, 2 Positive Opiyo et al.
if can read and write, 3 if (2016) forming a two-stage least squares (2SLS) regression using an
primary education, 4 if instrumental variable (IV). In this case, financial inclusion
secondary education, 5 if was potentially an endogenous variable due to simultaneity.
tertiary education and
above Thus, following Dogan et al. (2021), distance to the nearest
Household size Continuous Negative Asmamaw et al. financial sector branch was used as an IV. The IV had a very
(2019) strong relationship with financial inclusion, as indicated by
Dependency ratio Continuous Negative Boka (2017)
Farm experience Continuous Positive Awazi et al. the F-statistic of 10.16, which was greater than 10, with a p-
(2019) value of 0.0016. Then, the 2SLS regression was performed, fol-
Membership of a Dummy (1 if yes, 0 Positive Awazi et al. lowed by the endogeneity test. The test showed that there was
group otherwise) (2019)
Asmamaw no endogeneity problem because it failed to reject the null
et al. (2019) hypothesis that the variable is exogenous (see Table 4).
Access to Dummy (1 if yes, 0 Positive Tambo (2016) White’s test was used to check for heteroscedasticity. The
extension otherwise) Awazi et al.
service (2019) test revealed that there was a heteroscedasticity problem, and
Access to Dummy (1 if yes, 0 Positive Asmamaw et al. MLR with robust standard errors was used to resolve this.
sufficient water otherwise) (2019)
Location Categorical (1 if Boricha, 2 if – –
Hawassa Zuria, 3 if Loka
Abaya) 4. Results and discussion
4.1. Characteristics of the respondents

3.5. Method of data analysis Table 5 presents the demographic and socio-economic charac-
teristics of the respondents. Among the respondent house-
The collected quantitative data were analysed using STATA holds, 84.5% were male-headed and 15.5% were female-
(version 17.0) and Microsoft Excel software. The IFI was esti- headed households. The age of the household heads ranged
mated using Excel, whereas the CRI was estimated using from 18 years to 85 years, with an average age of 43 years.
STATA. Descriptive analysis was used to examine the demo- The average household size was 5.6 persons, which is close
graphic and socio-economic characteristics of the respondents to the average household size of rural Ethiopia (5.1) (Central
as well as the qualitative data obtained from the semi-struc- Statistical Agency [CSA] & The World Bank [WB], 2013).
tured interview. Finally, multiple linear regression (MLR) On average, the dependency ratio was 0.62, and more than
was used to analyse the effect of financial inclusion on climate 85% of the household members were below 14 years old.
resilience. Moreover, most of the respondents had primary education,
The CRI was the dependent variable. Because its values ran- whereas those who could read and write and had secondary
ged from positive to negative, it was made a continuous vari- education constituted the second and third largest proportions
able. Therefore, MLR was used to estimate its determinants of the respondents, respectively. Those with tertiary education
following Boka (2017). The variable of interest is financial made up the lowest percentage of the respondents. The farm
inclusion, which was measured using IFI and different indi- households had an average of 26 years of farming experience.
cators. The MLR model was specified as follows: Moreover, 98% had access to agricultural extension services,
CRIi = a + bFIi + lXi + 1i (12) and 91% had access to sufficient water. In addition, 42.8% of
the farm households were members of a group.
where CRIi denotes the climate resilience index of individual i,

4.2. Financial inclusion level in the study area

Table 4. Test for endogeneity.
Ho: Variables are exogenous The major financial sectors in these three study districts were
Durbin (score) chi2_ (1) = 1.87121 (p = 0.1713) banks and MFIs. The Commercial Bank of Ethiopia (CBE) was
Wu–Hausman F (1,383) = 1.80011 (p = 0.1805) the only bank in the districts, with only one branch located in
 CLIMATE AND DEVELOPMENT 7

Table 5. Characteristics of the respondents.

Variables Percentage Minimum Maximum Mean Standard deviation
Gender Male 84.5 – – – –
Female 15.5 – – – –
Age – 18 85 43 11.2
Education Illiterate 18 – – – –
Can read and write 25 – – – –
Primary education 29.25 – – – –
Secondary education 19.75 – – – –
Tertiary education 8 – – – –
Household size – 0 13 5.6 1.75
Dependency ratio – 0 3 0.62 0.51
Farm experience – 0 61 25.6 10.6
Access to extension service Yes 98 – – – –
No 2 – – – –
Members of group Yes 42.8 – – – –
No 57.2 – – – –
Access to sufficient water Yes 91 – – – –
No 9 – – – –

each district’s main city except in the Boricha district, where 2015). In addition, the interviews with financial sectors revealed
one private bank had recently opened a branch. Moreover, that most of the government employees, who were frequent
Omo and Sidama were the only two MFIs in the districts, users of financial services, lived in Hawassa city and travelled
and like the CBE, they each had one branch in each district’s to the district every day for work. They mainly used Hawassa
main city. There were no insurance companies in the districts. city’s financial sectors. This reduced the financial sector’s num-
About 64% of the farm households owned an account in a ber of customers and the use of financial services in the district,
bank and/or MFI. The majority (83.6%) of those with an which reduced their profit. Therefore, combined with the lack of
account used it to save, whereas 44.1% used it to receive pay- infrastructure, financial sectors found it profitable to only open
ments such as salaries or remittances, and 12.7% used it to a single branch in the district. However, this limited the avail-
receive assistance. Only 20.25% of the farm households had ability and accessibility of financial services for the farm house-
received credit from the financial sectors. MFIs were the holds, resulting in low IFI. Conversely, Boricha had a greater
main financial sector that provided different types of credit, number of banks and a better infrastructure, contributing to
and the most common one was joint credit. Because most its higher financial inclusion level.
farm households lacked the collateral to borrow from MFIs,
they formed a group and borrowed money using each other
as sureties. This created an opportunity for those who pre-
viously were unable to obtain a loan. Furthermore, 13% of
the sample households used mobile money services, whereas
17% owned a debit card.
The average IFI was 0.136 with a minimum of zero and a
maximum of one. The IFI could be divided into three cat-
egories3: low (< 0.057), medium (0.057–0.157), and high
(0.157–1). The largest percentage of the respondents had low
IFI (65.75%) followed by high IFI (22%) and medium IFI
(12.25%). Thus, the level of financial inclusion was low. Most
of the low IFI population was found in Hawassa Zuria Figure 4. Resilience components by their principal component.
(72.9%). Loka Abaya and Boricha had the largest percentage
of adults with high IFI (25% each), whereas Boricha had the
lowest percentage of low IFI adults and the highest percentage
of medium IFI adults followed by Loka Abaya (see Figure 3).
Despite its proximity to Hawassa city, Hawassa Zuria lacked
basic infrastructure and had poor transport methods (Hameso,

Figure 3. Categories of IFI of the districts. Figure 5. Resilience components by districts.

8 W. D. BEKELE

accessibility reduced the income and asset of the farm house-

holds, increasing their vulnerability and reducing their resili-
ence to climate change (Hameso, 2015; Lomiso, 2020).

4.4. Effect of financial inclusion on climate resilience

Table 6 presents the regression results. Column 1 shows the
result when IFI is used as a measure of financial inclusion. Col-
umns 2, 3, and 4 use the ownership of financial sector
accounts, mobile money accounts, and debit cards, whereas
columns 5 and 6 use savings and access to credit as measures
Figure 6. CRI of the districts. of financial inclusion, respectively. According to the multiple
regression result, financial inclusion was found to be statisti-
cally significant at 5% with a regression coefficient of 0.397.
4.3. Level of climate resilience in the study area Thus, the more financially included the farm households, the
Using PCA, indices for the six components were generated higher their resilience to climate change. Financial inclusion
from the indicators (see Equations 8 and 9). Then, the indices enabled farm households to diversify their livelihoods and
were used to estimate the CRI (see Equations 10 and 11). Since accumulate assets, which helped them to build resilience
only principal components whose eigenvalue is greater than more independently and sustainably. In addition, access to
one was considered, components 1 and 2 were included. financial services allowed them to improve their resilience by
Once the two principal components were generated, each enabling them to invest in physical assets. Studies in South
component was multiplied by its proportion of variance to Asian countries, Mali and Myanmar confirm that inclusion
estimate the CRI. in financial services increases the resilience against severe con-
sequences of climate change (Haworth et al., 2016; Hussain
CRI = (0.2771/0.5309)∗Component 1 et al., 2021). The reason was that financial inclusion enabled
+ (0.2537/0.5309)∗Component 2 (13) them to accumulate assets and reduced their vulnerability,
which increased their climate resilience.
As we can see from Figure 4, stability followed by adaptive Moreover, farm households who owned an account were
capacity and assets were the most important components of 20.6% more resilient than other households. This study
the CRI, whereas social safety net was the least important. shows that financial sector accounts served as a channel
Moreover, Hawassa Zuria had the lowest values for adaptive through which safety net programmes paid their beneficiaries
capacity, social safety net, and stability, while it had the highest and farmers purchased agricultural inputs. This reduced
values for assets, access to basic services, and income and food unnecessary expenditures, developed saving habits, and
access. Boricha had the lowest values for assets, access to basic allowed for fast purchase of agricultural inputs, which sup-
services, and income and food access components. Loka Abaya ported their climate-resilient activities. Thus, access to
had the highest values for adaptive capacity, social safety net, accounts allows low-income households to improve their resi-
and stability components (see Figure 5). lience (Calderone et al., 2019).
The maximum CRI was 3.10 and the minimum was ‒2.55. In addition, those who owned mobile money accounts were
On average, Hawassa Zuria had the lowest CRI and Loka 23.4% more resilient than those without one. Mobile money
Abaya had the highest CRI (see Figure 6). This contrasts accounts reduced the transaction cost of receiving remittances
with Quinlan et al. (2015), who reported that farms in Hawassa and government transfers. They also allowed for easy and
Zuria were more resilient than those in Loka Abaya and Bor- cheaper access to other financial services. Haworth et al.
icha. However, their result shows that over the years the resi- (2016) found that mobile money had the potential to build cli-
lience level in Loka Abaya grew faster, whereas the resilience mate resilience in Mali by increasing the level of inclusion and
level in Hawassa Zuria became stagnant. Moreover, Hameso allowing for a secure way to receive remittances in the face of
(2015) stated that Hawassa Zuria had the least average land climate change. However, the finding in Myanmar revealed
available for crops and grazing compared with the other dis- that it did not have any impact on climate resilience due to
tricts because its proximity to Hawassa city had reduced farm- underdeveloped infrastructure.
ing land as the city expanded. Even though its proximity has Furthermore, access to credit increased climate resilience
advantages, such as market access, climate change had been by 23.7%. The result shows that 75.3% of the farm house-
so fierce over the years that it reduced the crops and animal holds used the credit to start their own business, which
productivity, reducing their marketability (Lomiso, 2020). involved fattening and selling livestock. This was particularly
Moreover, the poor road infrastructure of the district reduced common among those who received joint credit from MFIs.
market accessibility. In addition, higher levels of temperature Engaging in this business increased their income level by
were recorded in the district, resulting in frequent droughts enabling them to diversify their income sources, which low-
and reduction of livestock productivity. Meanwhile, there ered their vulnerability to climate change. Moreover, this
was large-scale soil erosion, which reduced the farm pro- motivated them to be self-sufficient in building their climate
ductivity of the district. Hence, the decline in animal and resilience, which was a more sustainable solution to climate
farm productivity combined with the decline in market change. In addition, 69% of the farm households claimed
 CLIMATE AND DEVELOPMENT 9

Table 6. Determinants of climate resilience.

Dependent variable: CRI
Explanatory variables (1) (2) (3) (4) (5) (6)
IFI 0.397**
(0.185)
Account ownership 0.206**
(0.079)
Mobile money ownership 0.234**
(0.118)
Debit card ownership −0.043
(0.104)
Savings 0.072
(0.072)
Access to credit 0.237***
(0.088)
Gender −0.153 −0.187* −0.149 −0.149 −0.163 −0.146
(0.108) (0.107) (0.108) (0.108) (0.107) (0.104)
Age −0.010 −0.009 −0.009 −0.010 −0.010 −0.009
(0.007) (0.008) (0.007) (0.007) (0.007) (0.007)
Can read and write 0.043 0.012 0.064 0.062 0.046 0.006
(0.118) (0.120) (0.118) (0.118) (0.121) (0.118)
Primary education 0.127 0.126 0.131 0.144 0.135 0.134
(0.124) (0.124) (0.123) (0.12) (0.125) (0.123)
Secondary education 0.054 0.034 0.087 0.106 0.079 0.052
(0.138) (0.142) (0.137) (0.137) (0.139) (0.137)
Tertiary education 0.223 0.322* 0.269 0.441** 0.379** 0.354**
(0.183) (0.174) (0.174) (0.179) (0.172) (0.169)
Household size 0.168*** 0.167*** 0.169*** 0.170*** 0.168*** 0.172***
(0.026) (0.026) (0.026) (0.026) (0.026) (0.026)
Dependency ratio 0.059 0.059 0.057 0.056 0.059 0.067
(0.064) (0.063) (0.064) (0.064) (0.064) (0.063)
Farm experience 0.015** 0.015** 0.014** 0.014** 0.014** 0.014**
(0.007) (0.007) (0.007) (0.007) (0.007) (0.007)
Access to extension service 1.019** 1.075** 1.025** 1.067** 1.059** 1.064**
(0.436) (0.458) (0.435) (0.445) (0.447) (0.440)
Access to sufficient water 0.613*** 0.616*** 0.587*** 0.576*** 0.592*** 0.594***
(0.126) (0.616) (0.125) (0.125) (0.124) (0.125)
Membership of a group 0.432*** 0.407*** 0.450*** 0.473*** 0.446*** 0.432***
(0.089) (0.091) (0.088) (0.089) (0.091) (0.088)
Hawassa Zuria −0.261*** −0.314*** −0.242*** −0.261*** −0.292*** −0.240***
(0.089) (0.093) (0.090) (0.092) (0.092) (0.091)
Loka Abaya 0.489*** 0.496*** 0.495*** 0.495*** 0.486*** 0.523***
(0.096) (0.095) (0.096) (0.099) (0.096) (0.098)
N 400 400 400 400 400 400
R-squared 0.474 0.477 0.474 0.468 0.469 0.477
Note: The symbols ***, ** and * denote significance at the 1%, 5% and 10% levels, respectively.

that the loan they received helped them during drought sea- significant factors. However, household size had a positive
sons by covering their expenses. This increased their ability and significant effect on climate resilience. Moreover, access
to be resilient to climate change. Similarly, studies in to extension services, farm experience, membership of groups
Cameroon and the central highlands of Ethiopia show that and access to sufficient water were significant factors posi-
access to credit had a significantly positive effect on resili- tively affecting climate resilience. Residents of Loka Abaya
ence by enabling households to develop their assets and were most resilient to climate change among the three dis-
increase their income (Asmamaw et al., 2019; Awazi et al., tricts, followed by Boricha district, and Hawassa Zuria was
2019). the least resilient.
Ownership of debit cards and savings were found to be
insignificant factors. Farm households’ lack of knowledge
and low amount of debit card ownership restricted the 4.5. Factors limiting the effect of financial inclusion on
benefits. In addition, lack of money limited their ability to climate resilience
save. These factors reduced the effect of debit cards and savings
on climate resilience. By contrast, other studies show that sav- The previous section explains the contribution of farm house-
ings increased resilience by helping people to plan and adapt to holds’ financial inclusion in building climate resilience. How-
changes (Chirambo, 2017; Haworth et al., 2016). ever, it was found that this contribution was limited due to the
The regression also provides information on the effect of low level of financial inclusion in the region. From the ques-
different demographic and socio-economic variables on cli- tionnaire and interview responses, the following factors were
mate resilience. Contrary to the findings of other studies, gen- identified as the challenges hindering the financial inclusion
der and age had no significant effect on climate resilience. level.
Similarly, education and the dependency ratio were not The main challenge that financial sectors faced in these
areas was the lack of infrastructure. To open more branches,
10 W. D. BEKELE

financial sectors require a building, an internet system, and ownership of a taxpayer tin, and licence for trade, made it
other infrastructure. However, the lack of such infrastructure difficult to find agents in rural kebeles. This limited its expan-
in the rural kebeles of the districts prevented them from open- sion and contribution to the expansion of mobile money
ing branches. Therefore, they based their branches in the main services.
city of the districts, then occasionally sent out their employees
to the rural areas to open accounts and gather savings. How-
ever, this limited farm households’ access to financial services,
5. Conclusion and recommendation
especially saving, because they found it difficult to travel to the
main city every time they wanted to make a small deposit. This This study examines the effect of financial inclusion on farm
reduced their level of savings. Therefore, the lack of infrastruc- households’ climate resilience using micro-level data for
ture is a challenge for the expansion of financial sectors that Sidama region, Ethiopia. The results suggest that financial
needs to be overcomed (Haworth et al., 2016; Hussain et al., inclusion had a positive and significant effect on climate resi-
2021). lience. The provision of financial services at a reduced cost
Ownership of an account had a positive effect on climate provided farm households with the opportunity to build
resilience. However, there were challenges to the opening their resilience to climate shocks in a sustainable and self-
and use of an account. The main reasons for not owning an sufficient way. Thus, it should be considered a policy frame-
account were lack of knowledge and long distances to bank- work to increase the climate resilience of farm households.
s/MFIs. These factors resulted in household financial exclusion Financial sectors should also adjust their services by giving pri-
because account ownership is a gateway for financial inclusion. ority to climate-resilient activities. However, various factors
Meanwhile, because of the existence of only one bank branch limited the financial inclusion level, which restricted its effect
and MFI branch per district, long queues in a branch restricted on climate resilience. Thus, given the potential benefit in
access to accounts. Network and electricity interruptions were terms of building a more resilient economy, improving the
also obstacles that farm households faced while using their current performance of financial services is crucial.
account. These factors reduced the accessibility of accounts The study shows that the lack of infrastructure and the
and discouraged households from using them. associated high cost hindered the opening of new branches.
Moreover, despite credit’s contribution to building a cli- Thus, it is advisable to expand mobile money services, which
mate-resilient economy, the long process required to obtain can be operated at a lower cost. Moreover, financial sectors
credit has been a hindering factor. Financial sectors took a should open new branches and set up ATMs in certain kebeles
long time to give credit because of administrative problems, with more business transactions and relatively better infra-
such as a shortage of human resources and negligence. This structure. This minimizes the cost of opening a branch while
discouraged people from asking for a loan or following increasing the number of branches, and it will also improve
through with their request afterward. Another administration the accessibility of accounts. Furthermore, because the use of
problem in these sectors was corruption. During the credit accounts was restricted by electricity and network interrup-
extension process, the district MFIs favoured people they tions, financial sector players should work toward reducing
knew, which excluded those farmers who did not have the this problem.
required social connections. Financial institutions should also develop their credit
The sample households lacked the collateral acceptable to extension system by reducing the time taken to provide credit.
financial sectors to obtain credit. Similarly, Schuetz and Ven- They should increase the amount of credit they extend to meet
katesh (2020) report that the inability to meet the formal guar- the demands of borrowers. One way to do this is by mobilizing
antee requirements inhibited rural area residents from more savings from farm households. In addition, financial
receiving credit. That is why MFIs encouraged the joint credit institutions should make it easier for low-income households
system. However, this system had its limitations because the to save by introducing financial products that do not require
households found it difficult to form a group. In addition, frequent visits to branches.
the maximum credit limit provided by MFIs was lower than Moreover, the use of mobile money services was restricted
the demand, which limited the group’s ability to expand due to the lack of infrastructure and farm households’ lack of
their businesses. knowledge. Thus, financial institutions should increase their
Furthermore, the expansion of mobile money services was awareness and expand the availability of mobile networks in col-
restricted by the low availability of mobile networks. Farm laboration with Ethio telecom. In addition, agent banking should
households’ lack of knowledge about the existence or the use be expanded because it is restricting the benefits of mobile money
of this service hindered its expansion and forced the exclusion services. One of the reasons why there were no agents was the
of households. In addition, the fact that households were failure to find people who met all the specified criteria. However,
required to travel to the main town of the district to withdraw financial sectors should choose people who own businesses and
cash from their mobile money account restricted the benefits train them in agent banking. Thus, rather than dismissing the
that the residents could obtain from this service. This is idea of selecting agents because they could not find people who
because there were no agent banks in the kebeles. Agent bank- meet all their criteria, they should find potential agents who
ing is a useful and cheaper financial outlet mechanism, meet some of the criteria and train them to be agents. By increas-
enabling distant financial sector branches to easily reach ing the availability and accessibility of financial services to a larger
farm households. However, the long list of requirements for percentage of the population at a lower cost, financial inclusion
agents, which included total capital, education level, can further contribute to building a more resilient economy.
 CLIMATE AND DEVELOPMENT 11

Notes Calderone, M., Weingärtner, L., & Kroessin, M. R. (2019). Investing in

financial inclusion for climate resilience and adaptation. The role of isla-
1. The weights of the indicators were 1 for account ownership, 0.46 mic financial services. ODI.
for debit card ownership, 0.54 for mobile money account owner- Camara, N., & Tuesta, D. (2017). Measuring financial inclusion: A muldi-
ship, 0.32 for savings, and 0.68 for access to credit. mensional index BBVA Research Paper, No. 14/26. https://doi.org/10.
2. The weights of the dimensions were 0.17 for penetration, 0.54 for 2139/ssrn.2634616
availability, and 0.29 for usage. Central Statistical Agency, & The World Bank. (2013). Ethiopia Rural
3. The division was made based on the data using quartiles. Socioeconomic Survey (ERSS). http://siteresources.worldbank.org/
INTLSMS/Resources/33589861233781970982/5800988-
1367841456879/9170025 1367841502220/ERSS_Survey_Report.pdf
Data availability statement Central Statistical Authority. (2007). Summary and statistical report of the
2007 population and housing census results. CSA.
The data used in this study are available from the corresponding author Chirambo, D. (2016a). Integrating microfinance, climate finance and climate
upon reasonable request. change adaptation: A Sub-Saharan Africa perspective. In Walter Leal
Filho, Fátima Alves, Sandra Caeiro, & Ulisses M. Azeiteiro (Eds.),
Climate change adaptation, resilience and hazards (pp. 195–207). Springer.
Disclosure statement Chirambo, D. (2016b). Moving past the rhetoric: Policy considerations
that can make Sino African relations to improve Africa’s climate
No potential conflict of interest was reported by the author(s). change resilience and the attainment of the sustainable development
goals. Advances in Climate Change Research, 7(4), 253–263. https://
doi.org/10.1016/j.accre.2016.11.002
Funding Chirambo, D. (2017). Enhancing climate change resilience through
microfinance: Redefining the climate finance paradigm to promote
This work was supported by the Norwegian University of Life Science. inclusive growth in Africa. Journal of Developing Societies, 33(1),
150–173. https://doi.org/10.1177/0169796X17692474
Conway, D., Lisa, E., & Schipper, F. (2011). Adaptation to climate change
Ethics declaration in Africa: Challenges and opportunities identified from Ethiopia.
Global Environmental Change, 21(1), 227–237. https://doi.org/10.
The author(s) has obtained ethics approval from the Norwegian Agency 1016/j.gloenvcha.2010.07.013
for Shared Services in Education and Research (NSD) under reference Diallo, P. N., Giordano, N., & Simonet, C. (2017). Financial services for
number 921873. The author(s) has also obtained informed consent resilience: How to assess the impacts. BRACED, issue no. 8. http://
from the respondents using a format provided by NSD. hdl.handle.net/10871/34389
Dogan, E., Madaleno, M., & Taskin, D. (2021). Which households are
more energy vulnerable? Energy poverty and financial inclusion in
Notes on contributor Turkey. Energy Economics, 99, 105306. https://doi.org/10.1016/j.
eneco.2021.105306
Wuddasie Dereje Bekele is Ph.D. candidate at Norwegian University of Food and Agriculture Organization. (2012). Measuring resilience: A con-
Life Sciences. cept note on the resilience tool. Food security information for decision
making concept note. United Nations.
Hameso, S. (2014). Perceptions about climate change in Sidama, Ethiopia. In
ORCID Walter Leal Filho, Fátima Alves, Sandra Caeiro, & Ulisses M. Azeiteiro
(Eds.), International perspectives on climate change (pp. 267–286). Springer.
Wuddasie Dereje Bekele http://orcid.org/0000-0001-6858-4258 Hameso, S. (2015). Perceptions, vulnerability and adaptation to climate
change in Ethiopia: The Case of Smallholder Farmers in Sidama.
Doctoral dissertation, University of East London: London, UK.
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