It has been argued that most of Malawi’s smallholder farmers are too poor to benefit from any kind of credit, and that, even if they had access to adequate credit and inputs, their land constraints are so severe that any increase in productivity would fall short of guaranteeing their food security. The underlying objective is to analyze the factors that affect household demand for credit. The aim is to provide a better understanding of the households’ personal characteristics, not only because they influence the household’s demand for credit but also due to the fact that potential lenders are likely to base their assessment of borrowers creditworthiness on such characteristics. The study covered 404 households in Nkhotakota, Rumphi, Dedza, Dowa and Mangochi. The analysis was conducted using three methods, first, descriptive analysis to determine the relationship between participation in credit markets and socio-economic characteristics. Secondly, an Ordinary Least Squares estimation of the extent of credit demand and finally, a probit analysis. Estimated coefficients for family size and seasonality (post-harvest, post-harvest and harvest periods) were positive and significantly different from zero at p<0.01. Family size is positively and significantly related to the household’s probability of participation. Larger family size exerts (consumption) stress on the household, which is mostly reflected through an increased probability of borrowing. Furthermore the signs of seasonal dummies (pre harvest, harvest and post harvest) suggest that the probability of household borrowing increased in each of the seasons. The number of livestock owned by the household was found to be negative and not significantly different from zero. This negative relationship is due to the fact that livestock is a highly liquid asset, thus households tend not to borrow when their livestock value is substantial, since they can sell off their livestock when they are in need. It was concluded in the study that providing financial services to the rural poor must be an integral component of any development policy. The study has indicated that sustainable financial institutions offers credit not only for agricultural production, but also for consumption smoothing and income diversification as well as the provision of savings option.
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