Factors That Influence Credit Constraints in Formal Credit Markets in Malawi a Household Level Analysis

FACTORS THAT INFLUENCE CREDIT CONSTRAINTS IN FORMAL CREDIT MARKETS IN MALAWI: A HOUSEHOLD LEVEL ANALYSIS

By

BENJAMIN BISA BANDA

APRIL, 2011

DEDICATION

To Mariangel, Patricia and Vinjeru, and the memory of my father, Robert.

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ABSTRACT

The study examines the factors that influence a household’s likelihood of facing credit constraints in formal credit markets in Malawi using cross section data from the 2008 Finscope Survey. Following a direct approach and employing logit model suggested by Jappelli (1990), the study has been able to investigate the factors that influence credit constraints in Malawi. The study finds that about 59 percent of the households were credit constrained, and that decrease in current income increases the probability of being credit constrained. It is found that wealthy households are less likely to face credit constraints than poor households. In addition, the employed are also less likely to be credit constrained and the probability of being constrained decreases by 6.7 percent for the employed. Furthermore, households in urban areas have a lower probability of being credit constrained, the probability of being constrained decreases by 8.8 percent if the household resides in the urban areas. Moreover, households located far away from the financial institutions were more likely to be credit constrained, probably due to high transaction costs. It is therefore recommended that policies on the use of credit as development tool should aim at infrastructure development, and the provision of technology driven products so as to reduce transaction costs and enable credit access to across a broader client base. As suggested by Getter (2008), sometimes liquidity constraints may be an indication of household’s incapacity to service the loan. Hence such households need to be targeted with other forms of safety-net programs.

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TABLE OF CONTENTS

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