This study investigates the extent of the ruralurban welfare inequalities in Malawi using a national representative sample and examines factors that contribute to such inequalities. The study uses both the Oaxaca-Blinder (1973) and Machado-Mata (2005) techniques to decompose the welfare gap. The results of the decomposition show that 59% of the welfare gap can be explained by differences in characteristics, particularly physical assets and education. The remaining 41% of the welfare gap is explained by discrimination. The Machado-Mata procedure shows that both the covariate and returns effects are larger at the top of the distribution. However, the covariate effects dominate the whole distribution of consumption, implying that urban households are better off than rural residents due to differences in characteristics.