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Determinants of household access to and participation in formal and informal credit markets in Malawi

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  • Diagne, Aliou
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    Abstract

    The paper uses the concept of credit limit to analyze the determinants of household access to and participation in informal and formal credit markets in Malawi. Households are found to be credit constrained, on average, both in the formal and informal sectors; they borrow, on average, less than half of any increase in their credit lines. Furthermore, they are not discouraged in their participation and borrowing decisions by further increases in the formal interest rate and/or the transaction costs associated with getting formal credit. This suggests that getting access to credit is much more important than its cost for these households. Hence, credit policies should focus on making access easier rather than providing credit with subsidized interest rates. The composition of household assets is found to be much more important as a determinant of household access to formal credit than the total value of household assets or landholding size. In particular, a higher share of land and livestock in the total value of household assets is negatively correlated with access to formal credit. However, land remains a significant determinant of access to informal credit. Therefore, poor households whose assets consist mostly of land and livestock but who want to diversify into nonfarm 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. Finally, 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.

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    Bibliographic Info

    Paper provided by International Food Policy Research Institute (IFPRI) in its series FCND discussion papers with number 67.

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    Date of creation: 1999
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    Handle: RePEc:fpr:fcnddp:67

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    Keywords: Microfinance ; Credit. ; Land tenure Malawi. ; Assets. ; Malawi. ;

    References

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    1. Diagne, Aliou & Zeller, Manfred & Sharma, Manohar, 2000. "Empirical measurements of households' access to credit and credit constraints in developing countries," FCND discussion papers 90, International Food Policy Research Institute (IFPRI).
    2. Feder, Gershon & Lau, Lawrence J. & Lin, Justin Y. & Xiaopeng Luo, 1991. "Credit's effect on productivity in Chinese agriculture : a microeconomic model of disequilibrium," Policy Research Working Paper Series 571, The World Bank.
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    7. Martin Browning & Annamaria Lusardi, 1995. "Household Saving: Micro Theories and Micro Facts," Department of Economics Working Papers 1995-02, McMaster University.
    8. Zeller, Manfred & Ahmed, Akhter U. & Babu, Suresh Chandra & Broca, Sumiter S. & Diagne, Aliou & Sharma, Manohar, 1996. "Rural finance policies for food security of the poor," FCND discussion papers 11, International Food Policy Research Institute (IFPRI).
    9. Zeller, Manfred & Diagne, Aliou & Mataya, Charles, 1998. "Market access by smallholder farmers in Malawi: implications for technology adoption, agricultural productivity and crop income," Agricultural Economics, Blackwell, vol. 19(1-2), pages 219-229, September.
    10. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
    11. Schmidt, Peter & Strauss, Robert P, 1975. "The Prediction of Occupation Using Multiple Logit Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 471-86, June.
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    15. Udry, Christopher, 1995. "Risk and Saving in Northern Nigeria," American Economic Review, American Economic Association, vol. 85(5), pages 1287-1300, December.
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    Cited by:
    1. Li, Xia & Gan, Christopher & Hu, Baiding, 2011. "Accessibility to microcredit by Chinese rural households," Journal of Asian Economics, Elsevier, vol. 22(3), pages 235-246, June.
    2. Brehanu, Amare & Fufa, Bekabil, 2008. "Repayment rate of loans from semi-formal financial institutions among small-scale farmers in Ethiopia: Two-limit Tobit analysis," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(6), pages 2221-2230, December.
    3. Petracco, Carly K. & Pender, John, 2009. "Evaluating the impact of land tenure and titling on access to credit in Uganda:," IFPRI discussion papers 853, International Food Policy Research Institute (IFPRI).
    4. Doan, Tinh & Gibson, John & Holmes, Mark, 2010. "What determines credit participation and credit constraints of the poor in peri-urban areas, Vietnam?," MPRA Paper 27509, University Library of Munich, Germany, revised 17 Dec 2010.
    5. Zeller, Manfred & Sharma, Manohar, 2000. "Many borrow, more save, and all insure: implications for food and micro-finance policy," Food Policy, Elsevier, vol. 25(2), pages 143-167, April.
    6. Khoi, Phan Dinh & Gan, Christopher & Nartea, Gilbert V. & Cohen, David A., 2013. "Formal and informal rural credit in the Mekong River Delta of Vietnam: Interaction and accessibility," Journal of Asian Economics, Elsevier, vol. 26(C), pages 1-13.

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