Essays on farm household credit constraint, productivity and consumption inequality in Malawi

Credit has proven to be a necessary tool for economic development affecting positively the welfare of households and individuals. However, one major area in which rural households lack is access to financial markets including credit. The studies included in this thesis contribute to the access to credit literature and the credit constraint/unconstraint impact on some welfare outcomes. The first empirical study examined farm households' access to credit in rural Malawi. Unlike previous empirical studies, particular attention is given to discouraged borrowers who are mostly ignored in such studies. Using the 2010/2011 household survey data from Malawi the study determines the demographic and socio-economic characteristics that distinguish farm households who need credit, who are the discouraged borrowers and who are rejected applicants. A three-step sequential estimation model following a trivariate probit model with double sample selection was adopted. The findings revealed that there were over 7 times more discouraged borrowers than denied applicants. Women were more likely to be discouraged from applying for credit but, if they applied, they were more likely to be successful in obtaining credit than males. This shows that when examining farm households' access to credit discouraged borrowers should be given special consideration.

Capturing discouraged borrowers as also credit constrained, the second empirical study employed a switching model to estimate the impact of credit constraint status on farm productivity for each credit constraint regime. The study further compared the expected production under actual and counterfactual conditions for a household being credit constrained or unconstrained. The findings suggest that a household that is constrained is less productive than a randomly selected household from the sample would but that for the unconstrained household is inconclusive, however, the counterfactual arguments as seen from the analysis shows that being credit unconstrained was beneficial to the increase in productivity.

Studies have shown that undeveloped financial markets have been a major contributing factor increasing inequality, especially in developing countries. The third empirical study examined the impact of household credit constraint on the consumption inequality of rural households in Malawi. Factors that explain the within and between credit constrained and unconstrained status of consumption inequality were examined. The General Entropy (GE) Index and the Regression-Based Inequality Decomposition Methods, Field's (2003) and Blinder-Oaxaca Decomposition were employed. The findings show that inequality was more prominent within the groups than between them. Also, the size of households and the value of assets were the major contributors to the within-group inequalities for credit constrained and unconstrained households. Further, only the endowment component was important in explaining the consumption inequality gap between the credit constrained and unconstrained households. Adjusting the level of endowments of constrained households to that of the unconstrained households increased their welfare by 15.7 percent.