Has the Introduction of Microfinance Crowded-out Informal Loans in Malawi?

This paper uses household data to test whether microfinance institutions created by the Malawian government in the mid-1990s under its Poverty Alleviation Programme crowded out access to informal loans. As in several recent studies, the paper adopts policy evaluation techniques to identify a causal relationship between access to government-sponsored credit programmes and informal loans. After taking treatment heterogeneity into account with a multiple treatment model, the paper finds strong evidence of crowding out of formal group lending on informal sources. In particular, participation in the most widespread microfinance programme has a negative and significant effect on borrowing from informal sources, reducing on average the amount that members borrow from informal lenders by more than 70 percent of the average loan value. JEL classification: O16 O17