The Impact of informal credit on household welfare

Abstract

This study work was based on the idea of “consumption smoothing theory” which was demonstrated based on “life-cycle model of consumption” and the main aim of the study was, analyzing the effect of informal credit on household welfare. Following two stage least square regression analysis by taking average number of informal borrowing participant households within community as an instrumental variable for informal credit in order to avoid endogeneity, the study found that informal credit and households welfare have positive relationship. Each thousand Birr 1 received in the form of informal credit improves welfare expenditure of household by about 4.3 percentage, ceteris paribus. This result was consistent with pervious works of (Kati.S, 2010; Cuong.V.N & Marrit.vanden.B, 2011).