Borrowing channels, purposes, and household investment and consumption: evidence from Nepal

Despite the expansion of the formal financial sector in recent decades, informal credit continues to play an important role in the financial lives of households in low-income countries. Using panel data from nationally representative household surveys conducted in Nepal in 2003/04 and 2010/11, this paper investigates how borrowing from different channels (formal and informal) and for different purposes (production and consumption) is associated with household investment and consumption expenditure. Findings from a fixed effects regression analysis indicate that formal and informal loans are used to finance different spending needs, and intended credit purposes tend to reflect actual spending of borrowed funds. The level of household investment or consumption spending depends on the interaction between borrowing channels and purposes. This study can inform the efforts to improve household access to affordable and reliable financial services.