Abstract:
This study uses the most recent Malawi Integrated Household Survey 2019-20 (IHS 5) to explore the determinants of household finance decision between urban and rural households. Household finance, which is defined as a household’s use of financial instruments to achieve its objectives, is key to intertemporal consumption smoothing in management of wealth over the life cycle. First, we examined whether social and demographic determinants determine household finance decision. Secondly, the study examines whether if there is a significant difference between urban and rural samples. We first estimated a logit model separately for urban and rural samples. In the next step we analyzed the differences in the estimated coefficients using a nonlinear extension of the Oaxaca Blinder decomposition.
Our results show that income, secondary and university-level education, age and being located in the Central Region, increase the likelihood of savings, while household size, remittances, and being located in the central region reduce the likelihood of savings. We also find that sex (male), age, income and being located in the Northern Region increases the likelihood of loans while marriage reduces the likelihood of loans.
We also find that income differences explain most of the observed disparities in household finance between urban and rural sample. In addition, we find that equalizing incomes, agriculture participation, university education and household size will eliminate most of the observed differences in household finance between urban and rural households. The study therefore recommends that increasing income and reducing poverty should be of priority if household financing is to be increased both among urban and rural households. Strategies to increase agriculture participation and productivity, to have lower household size, and to increase secondary and university education can improve the household financing behavior in Malawi.
