The effect of formal credit on household welfare in Malawi

This study investigates the impact of formal credit on household welfare, proxied by food expenditure in Malawi using 3,137 observations of households from the Fifth Malawi Integrated Household Survey. This study employs an endogenous regime-switching regression model with the full information maximum likelihood estimation and the propensity score matching, addressing the potential endogeneity of formal credit access and selection bias. This study finds that access to formal credit significantly increases household weekly food expenditure, with households reliant on informal credit potentially more than doubling their food spending if granted formal credit access. This highlights the crucial role of expanding formal credit access to underserved populations to reduce food insecurity and enhance well-being. To ensure equitable access to formal credit in Malawi, policymakers should focus on expanding financial infrastructure, implementing targeted financial literacy and outreach programs, promoting mobile banking, and diversifying credit products. This study contributes to the broader discourse on the welfare impacts of formal credit, providing insights critical for shaping financial inclusion policies aimed at improving household welfare in developing countries.