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Abstract
The paper departs from the standard practice that takes the estimated marginal
effects of either the amount of credit received or membership in a credit program as
measures of the impact of access to credit on household welfare. The marginal effects of
the formal credit limit variable on household welfare, controlling for the credit limit from
informal sources as well as the credit demanded from both sources, measure the marginal
effects of access to formal credit. The main finding of the paper is that access to formal
credit, by enabling households to reduce their borrowing from informal sources, has
marginally beneficial effects on household annual income. However, these effects are very
small and do not cause any significant difference between the per capita incomes, food
security, and nutritional status of credit program members and noncurrent members.
Moreover, the beneficial substitution effect reflects only the fact that reduced borrowing
from informal sources makes informal loans play a lesser role in the negative impact that
borrowing (from formal or informal sources) has on net crop incomes. The marginal
effects on household farm and nonfarm incomes resulting from mere access to formal
credit (without necessarily borrowing) are positive and quite sizable, but not statistically
significant. Land scarcity and unfavorable terms of trade for the smallholders’ farm
products remain by far the factors that most constrain per capita household income growth
in Malawi. The paper concludes that the necessary complementary resources and
economic environment are not yet in place for access to formal credit to realize its full
benefits for Malawi’s rural population.