Credit has proven to be an important tool for the development of the rural economy. Access to
credit can increase farm households’ access to farm inputs, improve their productivity, farm
profits, income, and can directly lead to higher consumption. Hence credit may be a valuable
tool for reducing poverty and inequality. Using the 3rd Integrated Household Survey of
Malawi, this study attempts to determine the impact of credit constraints on consumption
inequality of farm households in rural Malawi. Specifically, the study 1) examines the factors
that contribute to consumption inequality within the credit constrained groups; and 2)
decomposes the consumption inequality gap of credit constrained and unconstrained
households into an endowment (explained) and a residual part. To achieve these objectives,
the study adopts two methods of decomposition analysis. Fields' (2003) regression-based
inequality decomposition is employed to account for the simultaneous effect and contribution
of each factor to total inequality within each credit constrained group. Factors included in the
decomposition accounted for between 40 to 42 percent of the variation in consumption
inequality. Where household size and value of assets were the major contributors to total
consumption inequality in both credit constrained statuses. The Blinder-Oaxaca decomposition
process identified an 8 percent consumption inequality gap between the credit constraint
statuses which was further decomposed into an explained and unexplained component. This
gap in inequality was mainly attributable to the endowments of households suggesting that the
potential issue of discrimination in the credit market is absent here.