Increased access to finance is widely viewed as a key driver to increase adaptive capacity in response to climate change. However, apart from limited studies on borrowing behavior, little is known about how exposure to extreme heat impacts microfinance clients’ financial behavior. This study addresses this gap by investigating the short-run effects of unusual heat on microfinance clients’ saving and withdrawal behavior. In a case study, it combines geo-located temperature data with a unique dataset of around 50,000 clients of a leading Microfinance Institution (MFI) in Benin. Applying two-way fixed effects, seemingly unrelated regression, and ordinary least square models, the study finds that exposure to extreme heat is heterogeneously associated with microfinance clients’ financial behavior. Specifically, non-agricultural clients show suggestive evidence for the accumulation of precautionary savings after extreme heat days in the precedent quarter, while agricultural clients statistically significantly reduce their savings following exposure to extreme heat in the precedent quarter. Microfinance clients increase their withdrawals when exposed to extreme heat within the precedent quarter, but the association is not robust to agricultural clients’ withdrawals in response to an increase in annual extreme heat days. Addressing the heterogeneous financial responses across different clients to extreme heat consequently requires explicit policy attention. Our findings contribute to a better understanding of the impact of extreme weather events on individual economic outcomes, how financial behavior relates to weather risk, and how microfinance clients respond to shocks.
