Access to Credit and Its Impact on Welfare in Malawi 2001, Other USAID Supported Study

Drawing from 404 households in 45 villages in five districts of Malawi, and using four credit programmes, the paper uses econometric analysis to present an in-depth analysis of the impact of access to credit on household welfare. It also analyses the determinants of household access to and participation in informal and formal credit markets in Malawi, considering the question of whether formal credit services crowd out or substitute for informal services. The main findings of the study reveal however, that:

• Although credit can be an important tool in the fight against poverty, credit alone cannot be guaranteed to raise incomes, increase food security, and improve family nutrition;
• Farmers who participated in these credit programmes ended up with less net crop income than those who did not;
• Formal lenders in Malawi such as rural banks, savings and credit cooperatives, and special credit programmes supported by the government and nongovernmental organisations prefer to give loans to households with diversified asset portfolios and therefore more diversified incomes;
• Households in Malawi are generally credit constrained in both the formal and informal sectors of the credit market;
• The level of interest rates charged on loans seems not to be an important factor for households in deciding which microfinance institution to participate;
• Nonprice attributes of credit institutions and their services play a larger role.

It concludes that the contribution of rural microfinance institutions to the income of smallholders can be limited or outright negative if the design of the institutions and their services does not take into account the constraints on and demands of their clients. Therefore access to credit is not panacea for poverty alleviation.