Determinants of Household Access to and Participation in Formal and Informal Credit Markets in Malawi

This paper uses the concept of credit limits to analyze the determinants of the extent of household access to and participation in informal and formal credit markets in Malawi. It states that the composition of household assets is more important as a determinant of household access to formal credit than the total value of household assets or landholding size.

The paper posits that a higher share of land and livestock in the total value of household assets is negatively correlated with access to formal credit. It says however, that land remains a significant determinant of access to informal credit. The paper concludes that:

• Poor households whose assets consist mostly of land and livestock, but who want to diversify into non-farm income generation activities may be constrained by lack of capital;
• As informal loans are usually too small to help poor households start a viable nonfarm business, these households may be forced to rely on farming as the sole source of income, despite its unreliability because of the frequency of drought in Malawi;
• Formal and informal credit are found to be imperfect substitutes. In particular, formal credit, whenever available, reduces but does not completely eliminate informal borrowing. This suggests that the two forms of credit fulfill different functions in the household's intertemporal transfer of resources;
• Understanding the socioeconomic factors influencing household access to formal and informal credit, and how the latter interacts with and serves household demand for financial services when both informal and formal credit are available, can help in the design of credit programs targeted to the poor.