Access to credit and its impact on welfare in Malawi

This report analyzes the determinants of access to credit in Malawi and its impact on farm and nonfarm income and on household food security and seeks to quantify the relationship between the demand for formal loans and that for informal loans.

Key obsevervations of this study include:

• the contribution of rural microfinance in-stitutions 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
• developing attractive credit services requires both identifying farm and nonfarm enterprises and technologies that are profitable under the conditions experienced by subsistence-oriented farmers and responding to the numerous constraints of resource-poor rural households
• a strategy of expanding financial institutions in rural, drought-prone areas with inadequate market and other infrastructure may—at least in below-average rainfall years—have no significant positive welfare effects

The study concludes:

• low-potential and drought-prone agricultural areas should not be neglected, because credit may be the best or only option for the small-holder farmers to finance their input acquisitions after experiencing a crop failure
• a cautious and gradual strategy for expansion of rural financial institutions in Malawi should be implemented requiring direct legal and regulatory support by the state and through the support of institutional innovations and pilot programs in rural areas that may have the potential to reduce transaction costs in providing savings, credit, and insurance services to rural clientele
• the full potential of credit access in increasing the welfare of the poor can only be realized if coupled with adequate investments in hard and soft infrastructure as well as investments in human capital.

[adapted from authors]