An analysis of access to formal credit of the households in rural areas

Researchobjectives

Researchquestions

Researchh y p o t h e s i s

Thehouseholdsh a v e tomanagew i t h m a n y f a c t o r s onthewayt o get thef o r m a l credit,suchasvalueofthehouseholdfisséts,thelandcertificationstatus,production scaleandCyCle,theexpenditureandincomeofhouseholds,theeducationallevelof thehousehold,t h e ageandgen de ro f thehouseholdh e a d , thecomplicatedpro ceduresoftheformalcreditinstitutions,etc.

Datasourcesandmethodology

V H L S S 2006a n d V H L S S 2 0 0 8 ( T h e Vietnam’sHouseholdsL i v i n g Stand ards Surveys),sothedatasetdoesnotreflectthevariationorfluctuationoftheeco nomic—fin ancialenvironmenti n therecentyears This surveyw a s implementedbyGeneralStatisticsO f f i c e (GSO)w i t h fundingfrom SwedishInternationalDevelopmentCooperationAgency(SIDA)andUNDP,andtechnica lassistancefromWorldBank(WB).

Tertiarydatacollectedfromvarioussources,includingthesesofVNP(Vietnam— NetherlandsP r o g r a m ) s t u d e n ts , workingpapersan d paperso n theInterneta n d inthe VNPlibrary.

Thisresearchwills t a r t withc l e a n i n g dat a process.I n thisprocess,s o m e miss ingobservations,whicharerepresentedtohouseholdshavingnodemandforcredit, areeliminated,o n l y householdw a n t toborrowmoneyf r o m thebankarekept.Desc riptives t a t i s t i c andeconometricm e t h o d s willbeusedtoanalyzeinordertod rawag e n e r a l pictureof theVietnamruralcreditmarkets,householdcharacteristicsa n d o t h e r s f u n d a m e n t a l i s s u e s r e l a t e d t o t h e a c c e s s t o thef o r m a l credit.S t a t a -

11s o f t w a r e areu s e d forV H L S S 2006andVHLSS2 0 0 8 a n a l y s e s t o f i n d t h e m a i n d e t e r m i n a n t s t h a t h a v e s t r o n g e f f e c t s t o accesstothe formalcreditofthehouseholdsliveintheMD.Logitmodelisusedin thist h e s i s A s a r e s u l t , t h e m a t t e r c a n b e s o l v e d i n q u a n t i t a t i v e a n d q u a l i t a t i v e methods.

Theresearchwillco n c e n t r a t e intothehouseholdsl i v e intheMekongriverd elta.Thereare885observationswereanalyzedi n VHLSS2006and856observ ations

Ther e s e a r c h s t a r t s w i t h t h e i n t r o d u c t i o n p a r t A f t e r r e v i e w i n g t h e l i t e r a t u r e i n Section2 , S e c t i o n 3 i s d e v o t e d t o m e t h o d o l o g y Secti on4 p r o v i d e s a n o v e r a l l pictureaboutthe ruralcreditmarketinVietnam,andthecharacteristicsofthe ruralcreditmarketo f theMDinspecific.Itisalsousedf o r interpretingt h e regres sionresultsandSection 5summariesoffindingsanddiscussess o m e keypolici esthatsuitablefortheregion.

Household.i sagroupof atleasttwopeoplec o n t r i b u t i n g theirincomes fo r us ingRingen(1991).AccordingtoMcCarty(2001),householdslive intheruralareaar emorelikelytoborrowfr om formalcreditsectorthanhouseholdsl i v e intheurba narea.

Behaviorofhouseholdsincreditmarket.thehouseholdsl a c k i n g inmaterialsneedto borrowwhilethehouseholdsabundantinmaterialswanttolendoutforearninginter est.Therefore,creditmarketisborn tofacilitatetheneedandthewantofthesehouseholds.C r e d i t marketh a s f u n c t i o n to transferm a t e r i a l s f r o m abundant householdstolackingones.

Ruralfinance.r e f e r stothesupplyoffinancialservices forpeopleliveintheruralar eaandtheya r e workingi nagriculturalproductiona n d / o r doingsmallbusiness.Ruralfinanceincludesformal,informalandsemiformalcreditse ctorswithdifferentkindso f productsa n d s e r v i c e s s u c h asloans,d e p o s i t s , p a y m e n t s e r v i c e s , mo ne y transfersandinsurance.

Formalcredit.G h a t e( 1 9 9 2 ) d e f i n e s f o r m a l financialm a r k e t isa p l a c e w h e r e financialactivitiesthatarecontrolledandmonitoredby government.Thismarkerismuchm o r e d e v e l o p e d i n t h e u r b a n a r e a t h a n i n t h e r u r a l a r e a withm a n y b a n k branchesandanimatedactivities.

Informalc r e d i t Indevelopingc o u n t r i e s , th e mainreasonf o r theexistence o f theinformalcreditsectoristheunderdevelopmentoftheformalcreditsector.

Incontrasttotheformalcreditsector,theinformalcreditsectorsuppliescreditforp eoplewhoneedloanswithmucheasierrequirements.Thereasonisthatborrowersandlenders oftenliveinthenearplaces,andknoweachotherbefore.Therefore,inorderto maintainthe trustandthe relationshipwithlenders,borrowersmakeeveryefforttorepay.Moreover,insteadofr equiringcollateralordocuments(suchasred

6 certificates,s t o c k s , bonds, e t c ) , l e n d e r s u s u a l l y u s e i n f o r m a l l a w s t o o b l i g a t e o r threatenborrowersto repay.Althoughmoneylendersusuallyexploitthe borrowersbyg i v i n g t h e m s h o r t - t e r m loansw i t h h i g h i n t e r e s t r a t e s t h a t m a y l e a d t o t h e i r unablerepayin gsituations,moneylendersstillplayasignificantroleintheinformalcreditsector(Aleem, 1990).

Accordingt o A D B , m i c r o f i n a n c e playsa n i m p o r t a n t r o l e i n r e d u c i n g p o v e r t y Facilitatinga c c e s s tomicrofinancec a n helpthepoort o coverthe ire x p e n d i t u r e s , performedtheirbusinesses,h e n c e , increase theirincome,an dimprovetheirlives.Somemainactivitiesofmicrofinanceare:loans,deposits,payments ervices,moneytransfersandinsurance.

Microfinanceis mostoftenprovidedbynon- bankinstitutions suchasN G O Microfinance institutionsareoftenbasedonthegroup- lendingapproach.

Financiale x c l u s i o n isaprocessthattheformalcredit sectorperformstopreve ntborrowersfromgettingcredit(JohnDConroy,2004).

Arepressedfinancials y s t e m issystemwherethegovernmentsetstheinterestrateata level belowt h e e q u i l i b r i u m i n t e r e s t r a t e o f themarket.T h i s rate i s negati vebecauseitissmallerthantheinflationrate(McCarty,2001).

Accesstocreditoraccesstofinance.“ r e f e r s totheavailabilityofsupplyofqualityfinanci als e r v i c e s at reasonablecosts”(StijnClaessens&KonstantinosTzioumis,WorldB a n k , 2 0 0 6 )

• International conference in2 0 0 4 t h a t “Despitea p r o l i f e r a t i o n offinancialinstitutionsinmanycountries,limitedaccesstoqualityfinancialservices remain sa

7 challengeacr oss theregion”.Qualityheremeansfinancialservicesthataresuppl iedreliably, c o n v e n i e n t l y , c o n t i n u o u s l y a n d flexibly.In somecountries ,thequalityoffinancialservicesisnotgood,itmeans thattheneedofcreditislimitedinscopeandcarrieshighinterestrates.

Developingcountriesr e a l i z e d t h e i m p o r t a n c e o f b r i n g i n g someb a s i c f i n a n c i a l servicess u c h a s d e p o s i t s , savings,p a y m e n t s , loans,a n d i n s u r a n c e t o t h e p o o r households.

Accesstofinanceisaproblemthatonlycanbesolvedeffectivelybybothfinancialandn o n - f i n a n c i a l s e c t o r m e a s u r e s S o m e non- financial s e c t o r m e a s u r e s a r e improvementsi n e d u c a t i o n , i n f r a s t r u c t u r e , b a s i c h e a l t h c a r e a n d o t h e r e s s e n t i a l services.

Creditrationing:referstothecircumstancewherethelenderslendtheirmoneyatthea mountlowerthantheamounttheycansupplyregardlesso f thehighi n t e r e s t ra tethe borrowercan payforthem.Thisisaninefficientsituationofcreditmarket(Stiglitz&Weiss,1981). Thelender'screditrationingbehavioris basedonthecharacteristicsof borrowers,theexpectedreturnsoftheproject,the termsoftheloans,andtheimperfectionsofcreditm a r k e t I f t h e p r i n c i p a l p l u s i n t e r e s t o f thel o a n h i g h e r t h a n t h e e x p e c t e d - return,t h e probability o f d e f a u l t w i l l b e h i g h , t h e l e n d e r w i l l p r o v i d e a s m a l l e r creditamountthantheamountthattheborrowerwanttoborrow,oreventhelenderrejecttopr ovidecredit.

Interestrateactsaspriceofcreditandtoolforcontrollingrisks.Whenthereisan excessdeiiiandfor credit. interestrateswillincrease,sot h e lender’sincomeincreasesw h i c h offsetsgreaterri sk.Wheninterestrateisl o w andfundsarerationed.i t iscalledthatc r e d i t rationin gw i t h o u t t h e possibility o f risingi n t e r e s t rates(NathanOkurut,AndrieSchoombe e&ServaasvanderBerg,2004).

Thisa p p r o a c h d e v e l o p s t h e K e y n e s i a n v i e w s o n t h e r o l e o f t he g o v e r n m e n t I t supposedthatindevelopingcountries,thelackofcapitalfundisthe mainproblemrestrainingthehouseholdaccesstoformalcreditsector.

Fromt h e supplys i d e , g o v e r n m e n t ss u p p l i e s c r e d i t f o r a g r i c u l t u r a l p r o d u c t i o n a t subsidizedinterestr a t e s ( t h i s r a t e s a r e o f t e n l e s s t h a n t h e i n f l a t i o n r a t e ) T h i s approachconcentratedo n t h e effectsoft h e constraintsi nt h e ruralfinancialenvironmenti n s t e a d o f reducingt h e m T h i s a p p r o a c h s u p p o s e d t h a t i n ther u r a l area,t h e p o t e n t i a l savingsw a s t o o l o w f o r f o r m a l credits e c t o r m o b i l i z i n g orofferings a v i n g s f a c i l i t i e s I n o r d e r t o b r e a k d o w n t h e v i c i o u s c i r c l e o f c a p i t a l informationint h e r u r a l area,the governmentshouldp u m p externalfundst o developinvestment,shouldn o t establ ishedagriculturalcredit organizationstoprovidecreditforconsumptionneeds. (DougPearce,2004).

Fromthe‹:lemandsi‹le,thisapproachsupposedthatthcborroiv'ersareverysensitiveanJ'changesof

’interestrates.iftheinterestratereduced.householdscanapplynev•technologiest o theirprodu ctiona n d maketheirinvestmentm or e productive.The governmentshouldinter veneintothecreditmarketbyusingcreditpoliciessuchasinterestrateceiling andinterestratesubsidiesiiiordertoprovidecheapcredittothehouseholds.

However,thetraditionalapproachhassomeweakness:Subsidizedcreditprogramsdi dnotcontributemuchtotheagriculturalgrowth.Therewereonly thelarge- scalefarmersandwealthyhouseholdshad accesstoformalcredit,theresthadtogototheinformals e c t o r T h e r e f o r e , t h e g o v e r n m e n t p o l i c i e s h a v e b e e n d i s t o r t e d a n d t h e ' growthofcreditmarkethasbeenrepressed(DougPearce,2004). fiT h e traditionalapproachsuggestedthatthegovernmentsindevelopingcountriesshould a p p l y l o w i n t e r e s t r a t e p o l i c i e s , a n d c o n c l u d e d t h a t l a n d s i z e a n d c onsumptioncharacteristicsmightbeimportantdeterminantsofhouseholds’accesstoform alcredit.

Source:http://www.economicsconce t s c o m / n u r k s e ' s model of vicious circle of p o v e r t y (vcp1,htm

Thef i n a n c i a l systemsa p p r o a c h assumedthatt h e i n s t i t u t i o n s a d h e r i n g t o commercialp r i n c i p l e s c o u l d a c h i e v e e x t e n s i v e o u t r e a c h a n d s u s t a i n a b i l i t y T h e governments h o u l d ensurethefavorableenvi ronmenttothegrowthofsuchinstitutions;financialinstitutionsandcreditprogram sshouldsatisfythehouseholddemandsforcreditsolidlyandflexibly.

Thisapproachappreciatestheroleoftheformalsector,andinformalsectorcannotrep lacetheformalsector.Thisapproachalsosupposedthatliberalizationinfinancial systemwoulddeepen andimprovethefinancialefficiency,hence.shortenthegapbeaveentheratesofbankdepositsandtheinterestrates,increasethe flowofcapitalbctveensegmcnts,restrainthcdevelopmentofinformalcreditsectorand

Itishardtoprovidecreditforagriculturalproductionbecauseitneedsarrangementsthata r e m oref l e x i b l e S o , lendersf a v o r i n l e n d i n g tol a r g e r b o r r o w e r s t h a n to alar gernumberofsmallborrowersi nordertominimizethelendingcosts(Donald,197 6).

Besidesthat,f o r m a l f i n a n c i a l i n s t i t u t i o n s w e re ab use d toprovidec r e d i t ats ubsidizedi n t e r e s t r a t e t o b o r r o w e r s w h o h a v e p o l i t i c a l o r s o c i a l p o s i t i o n ( V o n Pischke,1 9 8 3 ) Inmanydevelopingcountries.MFIsintroducedflexi ble andmoreaccessiblesavingsfacilitiestproductinnovations)forborrowersinor dertoreducether i s k o f s e a s o n a l i n c o m e s h o r t f a l l s ; u s e d t e c h n o l o g y s ucha s c a s h m a c h i n e s , mobilephones(mec/wa/ srinnovations) t oreducecostsandexpandt h e ruralfinancialservices:u s e d m o d e l o f v i l l a g e b a n k - t y p e (/ns/i/n/ionii/ i n n o v c i t i o n s ) linplementingthesechangesandinnovationscanimprovethe formalcreditsector(DougPearce,2004).

Theproblemsabouttheunderdevelopedmarketandasymmetricinformationintherural creditmarketsuchasmoralhazardandadverseselectionwerenotaddressedinthis approach T h e formalcredits e c t o r u•aswillingtochargethehighi n t e r e s t r atesinsteadofsolvingtheinformationproblems.Thesehighinterestratesdonot reflectthescarcefundsbutthehighinformationcosts.

Inconclusion,thefinancialrepressionapproachsuggestedthatthegovernmentsind evelopingcountriesshouldapplyhighinterestratepoliciestoencouragesavings,an dhence,creatingopportunitiestoinvestinagriculturalproduction.Thisapproachconcludedt h a t l o a n s i z e , t h e s o c i a l p o s i t i o n a n d p o l i t i c a l p o s i t i o n m a y b e a f f e c t householdaccesst o f o r m a l c r e d i t T h e c r e d i t a l l o c a t i o n m a y r e s u l t f r o m governmentinterventionandrationalbehavioroflendersandborrowers.

Similar to the financial repression approach, this method acknowledges the imperfections in the credit market However, it emphasizes that credit allocation through non-interest rate mechanisms stems from the rational behaviors of lenders and borrowers within an asymmetric information environment, rather than from government regulations Asymmetric information occurs when lenders lack sufficient reliable data regarding borrowers' potential default risks (Aleem, 1990) The process of gathering reliable information is time-consuming and resource-intensive, prompting lenders to raise interest rates to offset these costs, which leads to adverse selection and moral hazard Consequently, lenders struggle to achieve higher expected returns due to the elevated average risk of projects and the low likelihood of repayment (Nathan Okurut et al., 2004).

Adverses e l e c t i o n a r i s e swhereborrowers u ' i t h l o w profitabilityp r o j e c t s b u t s a f e mighth e s i t a t e t o b o r r o w becauset h e i r p r o f i t i i i i g h t n o t c o v e r t h e h i g h c o s t o f

. borrowingw h i l e r i s k i e r p r o j e c t s w i t h h i g h e r p o t e n t i a l p r o f i t s a n d p r o b a b i l i t y o f defaulta r e a t t r a c t e d i n t o t h e m a r k e t , w h i c h i n t u r n r e d u c e s t h e p r o f i t a b i l i t y of lendingoperations(NathanOkurutetal.,2004).

Insteadofincreasingtheinterestrate,lenderscanuseotherscreeningdevicessuchasc h a r a c t e r a s s e s s m e n t , c o l l a t e r a l r e q u i r e m e n t tol i g h t e n t h e a d v e r s e s e l e c t i o n problem, i f not,theyc a n rejectl o a n applicants ( T h o r s t e n B e c k & Augustod e l a Torre ,2006).

Moralhazardoccurswhereprojectswithlowriskchange tohigherriskandreturnsprojects.Tosolvethisproblem,l e n d e r s usuallydes ig n credi tcontractswithprovisionsthattietheborrowerstodo theirbetseffortsthatenhancetheabilityofrepaymentaswellasattractlowriskprojects(NathanOkurutetal.,2004).

Lendersmayalsochoosenon- pricedevicesorreducetheloanamountinordertolightenmoralhazardproblems(Tho rstenBeck&AugustodelaTorre,2006).

Becauseofa d v e r s e selectionandmoralhazard,lendersusenon- interestratemechanismtoallocatecredit.Theyassessborrowers’riskinessbasingonhousehol d

12 observablecharacteristics:landarea,h o u s i n g conditions,mainoccupationsofh ouseholdhead,educationandreputationofhouseholdbeforedecidingwhethertoacce pto r rejectthel o a n a p p l i ca t i o n B o r r o w e r s w h o havereliablei n f o r m a t i o n toensurethatt h e y w i l l u s e t h e l o a n wiselya n d m a k e r e p a y m e n t i n t i m e will h a v e largeraccesstoformalcreditofhousehold.

The institutional approach highlights that other methodologies often overlook the transaction costs incurred by borrowers when fulfilling their borrowing needs, such as transportation costs, which extend beyond just the interest rate Even with low-interest rates, these transaction costs can significantly hinder access to formal credit institutions for the poor In rural areas, agricultural activities are fraught with high risks and low average returns, causing the informal sector to rely heavily on personal and localized information Despite having a dominant position, the informal sector struggles to expand its operations (Stiglitz, 1992).

Thisapproachsuggestedthathouseholdo b s e r v a b l e characteristics:l a n d size, householda s s e t s , mainoccupations, e d u c a t i o n andreputationo f household h e a d mightaffectsaccesstocreditoffarmhouseholds.

Therea r e manyd e t e r m i n a n t s t h a t a f f e c t theh o u s e h o l ds ’ a c c e s s t o f o r m a l c r e d i t suchaslandsizeandconsumptioncharacteristics(traditionalapproa ch),loansize,thes o c i a l o r politicalp o s i t i o n ( f i n a n c i a l r e p r e s s i o n a p p r o a c h ) , h o u s e h o l d a s s e t s , mainoc c u p a t i o n s, e d u c a t i o n a n d reputation o f householdh e a d ( n e w institutional economicsapproach).Hence,inorderto analyzethehouseholds’ac ce s s toformalcrediti n therurala r e a , itisnecessaryt o considerthea b o v e determinants thoroughly.

Therei s a s i g n i f i c a n t d i f f e r e n c e between a c c e s s a n d usage o f financial s e r v i c e s Accessi s thepossibilityt o usewhileu s e istheactualus e offinancials e r v i c e s Apersonm a y h a v e a c c e s s t o a f i n a n c i a l s e r v i c e , b u t h e c a n d e c i d e n o t t o u s e i t

Accesshasm a n y dimensions:s e r v i c e s n e e d t o b e a v a i l a b l e w h e n d e s i r e d a n d tailoredtospecific needs;thepricesfortheseservicesneedto beaffordable;creditresourcess h o u l d n o t b e l i m i t e d t o borrowers;p r o v i s i o n o f theses e r v i c e s s h o u l d bringf or th profitsf o r thelenders,andthereforebe availableonacontinuousan dsustainablebasis.Therefore,itisdifficulttomeasurea ccess(AsliDemirguc-Kunt,ThorstenBeck&PatrickHonohan,2006).

Creditc a n b e c o n s i d e r e d a s a c o m m o d i t y , t h e p r i c e o f c r e d i t ( i n t e r e s t r a t e ) w i l l determinebothdemandandsupplyside.Itmeansthatbothoftheborrower’schoicea ndthelender’sdecisionhaveeffectsonhouseholdaccesstocreditsimultaneously.Ac r e d i t m a r k e t i s c h a r a c t e r i z e d b y l i m i t e d s u p p l y b u t e x c e s s d e m a n d ( N a t h a n Okurutetal.,2004).

PatrickH o n o h a n ( 2 0 0 4 ) proposedt h a t c o n s i d e r i n g t h e access tof i n a nc e o n b ot h sides:

* Priceb a r r i e r s i n c l u d e sthepricechargedbytheformalcredit institution s(this partrelated totechnicalefficiency,regulatory,tax factors andcompetition),andtheadditionalcoststhehouseholdshave topayinaccessingthisservice(suchascostsfortransportationandcommunicationinfrastructure). Pricebarriersareusedtomeasurethelevelofusingthefinancialservices.

* Informationb a r r i e r s increasethecostofcreditandrestrainacertainnumberofh ouseholdsing e t t i n g a c c e s s t o f o r m a l c r e d i t I n f o r m a t i o n barriersr a i s e c r e d i t rationingt o o

Productsandservicesthatareofferedbytheformalcreditsectorareunadaptedwiththehouseh oldd e m a n d s T h e ma in r e a s o n s a r e the terms o f paymento f thel o a n contractsm a y n o t s u i t a b l e fort h e b o r r o w e r s ’ cashf l o w p a t t e r n s , ort h e s m a l l savingsof thehouseholds i n thevastr ur al a r e a s arehardlyt o co l l e c t becauseo f lackingofbranchlocations, the cumbersomeadministrativeproceduresthatraisingborrowers't r a n s a c t i o n Noww e e x a i i i i n e t h e d e m a n d f o r c r e d i t a n d thes u p p l y o f credit,a s wella s thebehaviorsot’bothborrowersandsuppliersintheruralcreditmarket.

Householdshaveaccesstocreditmayormaynotbecreditrestrained.Householdsarec reditconstrainedwhentheycannotgettheamountofcredittheyneedat thecurr entinterestrate,northeycangetcreditatahigheri n t e r e s t rate.Withlimitedac cesstocredit,householdshavetoregardcarefullyhowtoinvest,whatinputstobuy forproduction.(NguyenThiThuPhuong,2006).

‘‘ijkish o u s e h o l d characteristics vectorsucha s : g e n d e r of householder,initialendowment,numberofyearsofeducationofhouseholdhead,etc

• ‹I› ism a r k e t c o n d i t i o n s v e c t o r s u c h a s the p r i c e o f c r e d i t a n d t h ed mechanismbywhichcreditisdistributed,competitionamongborrowers.etc

• Age,e d u c a t i o n andh o u s e h o l d expenditureh a v e p o s i t i v e ands i g n i f i c a n t effectsthecreditdemanded.

• Householdshavebeenillfor moredaysinthepast30days,andhouseholdshavemorelandassetshavelesserincr editdemand.However,otherassetsdonothaveasignificanteffect.

Creditdemandforlong-terminvestmentr e q u i r e s long- termandlargeloanswhileshort-termandsmallcreditsaresuitableforshort- terminvestment I n ruralareas,householdsmainlyinvestinexpandingproduction suchasb u y i n g orr e n t i n g additionalland,newmachineriesand applyingnewtechnologies.Credit demandisalsofor consumptioninurgentcases suchas ill,funeral,diseases,naturalcalamity,etc(Ray,1998).

Householdshasstrongerpoliticalandsocialposition(haveclosedrelationshipwithbanks t a f f s ) willhavemuchm o r e k n o w l e d g e a n d information a b o u t c r e d i t progra ms,sotheycanapplyforformalcrediteasilyandearly(Donald,1976).

Householdsw i t h h i g h l e v e l o f educationwillh a v e mo re a c c e s s tof o r m a l c r e d i t Becausetheyhavebetterinvestment plans andcansolvethecomplexloa nprocedureseasier.M o r e o v e r , richerhouseholdshavelesser demandfor creditbecausetheyhavestrongerfinancialcapacity.Younghouseholdswithm orechildrenmightborrow moretosatisfytheirlargerconsumptiondemand(Kooremanetal.,1997).

Thedeterminantsthataffecttothehouseholds’d e m a n d s forcreditare:househol dincomes,householda s s e t s , investmentandconsumptionex p e n d i t u r e s, pro ductioncharacteristicsa n d otherimportantcharacteristicssuchasage,education, politicalandsocialpositionofhouseholdheads.

Nathan Okurut et al (2004) discovered that the supply of credit is limited by the demand for it, particularly when interest rates are perceived as high They emphasized that banks tend to serve low-income individuals only for profit, suggesting that governments should incentivize banks through subsidies or tax relief to help cover their costs, enabling them to extend credit to more households Banks typically follow three steps to mitigate lending risks: screening potential borrowers for defaults, assisting borrowers in fulfilling their credit agreements, and diversifying enforcement actions to recover loans and interest Due to information asymmetries, banks often require collateral to assess creditworthiness and address incentive and enforcement issues However, the poor frequently struggle to access credit because of collateral requirements and high transaction costs Additionally, banks may not be conveniently located, incur high personnel costs, and implement standardized procedures that can be burdensome for low-income clients, who also invest significant time and money in navigating banking processes Consequently, banks often fail to meet the credit needs of the poor (Nathan Okurut et al., 2004).

Accordingto QuachManhHaoetal.,(2004),thesupply ofcreditS ijkgovernsthecreditthatthehousehold canaccessto: where:

• Yisavectoroflendercharacteristics(lenderisformalorinformal,non- profitorfor-profit,availablefundsornotavailablefunds,etc) islocationcharacteristicsvector

• ‹6ismarketconditionsvector(thelenders’competition,mechanism,etc)

• isunobservablec h a r a c t e r i s t i c s vector(thelenders’assessmentabo utthelocalcomparativeadvantage,etc)

Thecreditrationingmechanismsap p e a r s tobeacombinationofselectionofboth borrowersa n d l e n d e r s ( d u e tothehighc o s ts ofborrowing,t h e borrowersd o notwanttoborroworborrowatthecreditamountlessthantheofferedamount;lendersdecide n ot t o l e n d a l l o f ther e q u e s t e d a m o u n t ) S o m e o b s e r v e d s o c i o - e c o n o m i c variablessuchashouseholdsize,educationofhouseholder,householdex penditureandhouseholdassets (notincludingland)havepossitiveandsignificant effectsoncreditsupply(NathanOkuruteta1.,2004).Education,health,age,occupation,skill, incomesa n d a s s e t s o f b o r r o w e r s h a v e e f f e c t s o n b a n k s ’ p e r c e p t i o n a b o u t households’creditworthiness.

Intheformalcreditsectorsofthedevelopingcountries, creditsuppliesarealway ssmallerthandemands,sothebankshavetoallocatethelimitedloansamongcreditappli cants,a n d a r e l i k e l y t o c h o o se t o s e r v e b o r r o w e r s w h o h a v e e n o u g h inform ationverifyingthattheprovidedcredit willbeusedwiselyandmakeprofitsforbanks(Moll,2000).

Withl o w i n t e r e s t r a t e , t h e b a n k s o v e r e m p h a s i z e onc o l l a t e r a l s , l a n d a r e a s a n d politicalandsocialpositionofhouseholds.Hence,largeborrowerswillbe acceptedeasilyforcreditwhentheyhaveenoughcollateral(Donald,1 9 7 6 ) Ladman( 1984)supposedthataloanwithlowinterestratesdoesnotmeanthathouseholdswantto borrow.O t h e r w i s e , t h e totalc o s t o f borrowing,n o t t h e i n t e r e s t r a t e , i s th emainfactorthataffectstohouseholds’decision.Ifthehouseholdsneedsmallloans,the yoftenc h o o s e t o b o r r o w f r o m l e n d e r s m a y b e c h a r g e h i g h i n t e r e s t r a t e s b u t l o w transactioncosts.Ifhouseholdsneedlargerloans,theymaychoosetobor rowfromlenderswhochargehighertransactioncostbutlowerinterestrate.Therefor e,ruralcreditmarketischaracteristicssegmentation.

Thedeterminantsthataffecttothehouseholds’s u p p l y creditare:educationleve l, sex,age,occupation,skill,politicalandsocialposition,collaterals,capital,incomes

The determinants influencing a household's access to formal credit include various household characteristics such as the age and sex of the head, household size, dependency ratio, health condition, and education level Additionally, factors like household expenditures and income, the political and social standing of the head, skills, occupation, and available collateral play a significant role Lender characteristics, whether for-profit or non-profit, along with market conditions such as the availability of funds, interest rates, and competition among borrowers and lenders, also impact access Furthermore, location characteristics, including convenience and the number of banks, along with contract specifics like payment terms and maturity, and the quality of the project, are crucial in determining credit accessibility.

2.4Empiricals t u d i e sr e l a t e d t o thed e t e r m i n a n t s t h a t a f f e c t i n g t o t hefo rm al creditbyruralhouseholds

Asmentionedabove,indevelopingcountriessuchasVietnam,accesstocreditisanessentialc o n d i t i o n f o r d e v e l o p i n g t h e e c o n o m y P e o p l e h a v i n g a c c e s s t o c r e d i t meanthattheyhavechancetoownanaccount, toborrow,save,investanddootherthings,hence,theyhavemoreopportunitytobreakthechains ofpoverty.

Therearemanydifferentreasonsforpeopledonothavingaccesst o credit.Therefor e,t h i s s e c t i o n r e v i e w s s o m e e m p i r i c a l s t u d i e s a b o u t m a i n d e t e r m i n a n t s affectingt o households’ a c c e s s t o f o r m a l c r e d i t i n t h e r u r a l a r e a s o f developing countries.

2.4.1 Thehouseholdc h a r a c t e r i s t i c s t h a t a r e expectedt o havee f f e c t s o n makingdecisionsofbothborrowersandlenders: a Theageofthehouseholdhead

Olderhouseholds h a v e poorc h a n c e s toac ce s s toformal c r e d i t , becauset h e y a r e alwaysrisksaverse,afraidofbeingindebtedtolenders.Moreover,it isdifficultforthemtounderstandt h e provisionso f creditc o n t r a c t s a s wella s th ef o r m a l c red it institutions’operationsKhalidMohamed,2003).

Olderhouseholdsoftenhavemoresavings,outofworkingage,anddonotneedtoconsu mea s m u c h a s t h e y o u n g e r , s o theym a y l e s s d e m a n d f o r c r e d i t ( V u T h i ThanhHa,2001).

However,o l d e r householdsa r e appreciatedbythebanksbecauset he yhavemo reassets,experiences,reputationandresponsibility.Therefore,theyhavelargeraccesstoformal credit(LeKhuongNinh, 2003). b.Thegendero f thehousehold h e a d

KhalidMohamed(2003)foundthatgenderisavariablehasanegativeeffectonthehousehol d’sa c c e s s totheformalcreditthatmeanswomenhavelesser chancestogetcre ditfromformalcredit sectoralthoughtheyweresupportedsu b s t a n t i a l l y ins omespecialcreditprograms. c.Themaritalstatusofthehouseholdh e a d

Maritalstatusisavariablehasnosignificance,meansthatapersongettingmarriedorsingle doesnotaffecttheaccesstocreditofthatperson. d Thenumbero f yearsofeducationo f thehouseholdh e a d

( 2 0 0 3 ) , r u r a l b o r r o w e r s w i t h l o w l e v e l of educationfinddifficultinundersta ndinga n d preparingnecessaryf o r m s anddocuments.

Intheory,thehigherl e v e l offormaleducation,the higherpossibilityo f access toformalcredit.Butinreality,manysmall creditprogramsf a v o r e d thepoor,es peciallyt h e p oo r l i v e i n ther u r a l a r e a s , a n d m o s t o f themh a d l o w e d u c a t i o n levelsbenefitedfromtheseprograms(KhalidMohamed,2003).

Themainoccupationissupposed tohaveeffectonaccesstocreditbecausethetypeofactivityandinvestmentrequirements couldaffecthousehold’sdemandforextramoneya n d hencea c c e s s tocredit Ho wever,t h e e f f e c t i s nots i g n i f i c a n t ( K h a l i d Mohamed,2 0 0 3 ) f Thesocialorpoliticalparticipationo f thehouseholdhe a d NguyenVanNgan(2003)foundthatthesocialorpoliticalpositionofahouseholdhasa positives i g n i f i c a n t i n thef o r m a l l o a n s i z e Thereasoni s thati n Vietnam ,moneylendersandtontineareconsideredasillegalcreditsources,sothehouseholdwitha nysocialorpoliticalpositionsmayavoidborrowingfrom thesesourcesandreceivef ormalloans. g Sizeofhouseholda n d Dependencyr a t i o

Householdswithlargesizeorhighdependencyratioseemto be havinghighcreditdemandbutthebanksd o notfavortolendforthem,becausethe yare consideredlowproductioncapacityandrepayment(NathanOkurutetal.,2004). h Thefarmsize Thehouseholdw i t h l a r ge farmusuallyn e e d morecap ita l f o r theirproduction ,s o theyhavetolookforexternalfinancingopportunities.Thevariablefarmsizehaseapositive effectonhousehold’saccesstocredit.

Moreover,householdswithhigherproductivityoflanduse,whichisdecidedbythetypeandt hepositionofland,willhavemorechancestoaccesstoformalcredit.Itmeansthatpro ductivityo f landusehasapositiveef fec t onhousehold’sacce ss tocredittoo. i.Theownershipo f land Collateralrequirement i s themaind e t e r m i n a n t i n f l u e n c i n g h o u s e h o l d ’ s a c c e s s toformalcredit.LandUseCertificate(LUC)isusedasthemajorcollateral,ande ach

HavingaLUCmightbeexpected toincreaseahousehold’saccesstoformalcredit.HoweverDoQuyToanandL a k s h m i lyer(2007)didnotsupposet h a t LUCincreasedthehousehold’saccesstoformalcredit.I ncasesofdefault,banksareveryhardtoseizeland,partlybeca use reg ul at io ns weren ottransparent,a n d communeofficialsdidnotsupporttotransferlandstopeople liveintheotherregion.

LeN ha t H a n h ( 2 0 0 2 ) f o u n d t h a t l a n d a r e a i s o n e o f them a j o r d e t e r m i n a n t s o f household’sa cc e ss toformalcredit.Householdswiththelargerfarm swithLUCswillhavethelargerloanandintheeasierway thantheothers. j.Thevalueofhouseholds’assets Accordingto

NguyenVan Ngan(2003)alsoagreedwiththisargument,hefoundthatthehouseholdsw i t h h i g h v a l u e o f assetso f t e n h a v e e n o u g h m o n e y t o f i n a n c e t h e i r consumptionand investment,sotheyonlyborrowsmallloanandformallendersdonotgiveloansbasedonthe valueofassetstoo.

However,thepriceof land thatisusedascollateralisusuallyevaluatedlower thanthepriceoflandwhichisstipulatedbytheGovernment(QuachManhHao,2003). k.IncomeLevels

According to Khalid Mohammed (2003), income levels negatively impact households' access to formal credit, with low-income households having better opportunities to secure loans due to targeted credit programs in rural areas Additionally, Nguyen Van Ngan (2003) found that as household expenditures rise, families often seek larger loans from formal sources However, in some instances, farming households may resort to borrowing significant amounts from friends, relatives, or neighbors to meet their financial needs.

Awarenesso n c r e d i t a v a i l a b i l i t y h a s a p o s i t i v e e f f e c t o n h o u s e h o l d ’ s a c c e s s t o credit,meansthathouseholdshavebetteropportunitiesforgettingcreditusuallyare householdshavebetterawarenessoncreditavailability(KhalidMohamed,2003). n.T’heprodHCtfOnscaleOHdcycle

LeNhatHanh(2002)foundthatthe household’sdemandforcreditdependsonthescalean d thebusinessc y c l e o f that household T h e l a r g e r productiont h e h i g h e r demandf o r credit;thelongerti meproductionc y c l e thelongerterml o a n s , sothehigherprobabilityandextentthatth ehouseholdcangetformalloans.

The characteristics of lenders play a crucial role in determining the overall household credit amount Credit sources are often limited, with bank officials serving as consultants for borrowers, but

The term of a credit contract has a limited impact on households' access to formal credit, as longer payment terms may allow for larger loans However, banks often hesitate to offer longer terms due to liquidity concerns Additionally, the requirement for collateral plays a crucial role in determining the amount of credit available to households Collateral serves as a screening tool for banks, as borrowers with more collateral are perceived as safer, making them more likely to receive credit (Quach Manh Hao et al., 2003).

Mostruralb o r r o w e r s r e s i d e f a r frombanksb r a n c h e s , s o theyh a v e totakem uchmoneyandtimetogotothebankbranches.Thus,locationofahouseholdseemed tohaveeffectonhouseholdaccesstocredit.ButinKhalidMohamed’sresearch,theregression r es u l t s s h o w thatlocationhas noeffectonhouseholda c c e s s toformalcredits ector.

Competitionbetweenborrowerslivei n t h e n e a r p l a c e s ise x p e c t e d t o h a v e a negativeeffect onhouseholda c c e s s toformalcredit,implyingthatwhenahou seholdisprovidedanamountofcredit,theotherswholiveinthenearplace willhasmoretroublesonaccesstocredit(QuachManhHaoetal.,2003).

2.5Chapterr e m a r k Thischapterdevelopedatheoreticalframeworktoanalyzedeterminantsthataffecttoho useholdaccesstoformal credit,especiallyintherural areas.Becausethecreditmarketi s imperfect,t h e priceo r interestrate m echa ni sm d o e s notw o r k w e l l , s o otherfactors,whicha r e dividedi n t o fourgroups,consis tof:thehouseholdcharacteristics,the lendercharacteristics,thelocationcharact eristicsandthelocal

Themosti m p o r t a n t d e t e r m i n a n t s o f households’a c c e s s toformalc r e d i t h atboththeoreticalandempiricalevidencessupportingare:thefarmsizeandtheownersh ipofland,thevalueofhouseholds’assets,theproductionscaleandcycle,thesocialorpolitical participationofthehouseholdhead,andthehousehold expenditure.

Numerous studies have employed various econometric methods to analyze rural households' access to formal credit, with two prevalent approaches focusing on the effects of household characteristics on access to different credit sources This study will utilize both demand and supply factors to measure access to the formal credit sector through logistic regression and Ordinary Least Squares (OLS) methods Access to formal credit can be viewed in two ways: first, as a binary variable indicating whether a household can obtain credit; and second, as a continuous measure reflecting the extent of access, quantified by the loan amounts received from the formal credit sector.

Thehousehold’sc h a r a c t e r i s t i c s a f f e c t bothd e m a n d a n d s u p p l y s i d e in thecredit market.T h i s a p p r o a c h i s s u i t a b l e f o r d e t e r m i n i n g h o u s e h o l d s ’ accesst o f o r m a l creditsectorbasingontheavailabledataintheVHLSS2006andVH LSS2008.So,itwillbeusedinthethesis.

S i n ordert o generalizetheo v e r a l l p i c t u r e aboutM D a n d itsc r e d i t activitie s.Thedeductivemethodisalso usedtodecidetoacceptornotaccepttheassumptionsofthe maindeterminantsthataffecttothehouseholdaccesstotheformalcreditintheMDfroma nalyzingtheabovedata.

Themodelbu il t b a s e d o n boththeoretical a n d specific s i t u a t i o n withthe dat aof

Tod e t e r m i n e h o u s e h o l d s ’ p r o b a b i l i t y t o g e t l o a n s f r o m f o r m a l c r e d i t s e c t o r , a ' Logisticmodelisu s e d , assumingthatazero- onedummyvariablePHA(theprobabilityo f havingaccesstoformalcreditof thehouseholdsin MD)toobserve

26 thee v e n t o f h a v i n g a c c e s s t o f o r m a l c r e d i t T h i s d u m m y r e c e i v e s a o n e i f t h e householdcanborrowmoneyfromformalcreditsectorasmuchashe needs,sohecanbesaidthathehasan accesstoformalcredit.Ifthehouseholdcannotborroworcanborrowbutnotenough,the dummyreceivesa zero,thehouseholdi n thiscasecanbesaidthathehasnoaccesstoformalcredit.

Toexaminewhyhouseholdsgotdifferent bankloanamounts,theOLSmethodwillbeused,andthedependentvariable(LA— Loanamount)isthehouseholds’bankloanamountinmillionVND.

Dependentvariable =f(HC,CE,LC),where:

Theindependentvariablesincludesetsofvariables.’ a Thevectoro f h o u s e h o l d e r c h a r a c t e r i s t i c s i n c l u d e s a g e (AGE), g e n d e r ( S E X ) , education(HHEDU).InVietnam,theheadofhouseholdplaysanimport antroleindecision- makingrelated tofamilyaswellascommunity.S o , thecharacteristicsofhouseholde rareusedinthemodeltoexamine thehypothesisthattheeffectofthemonhouseholdaccesstoformalcredit. b Thevectoro f h o u s e h o l d ' c h a r a c t e r i s t i c s e n d o w m e n t s a f f e c t i n g c r e d i t d e m a n d includeshouseholdsizeorthenumberofhouseholdmembers(HHS IZE);workforsalary/ wage(EMPWAGE);doproductionorserviceplantingbreeding,forestryoraquacul ture( E M P S E L F A G ) ; d o t r a d i n g o r b u s i n e s s ( E M P S E L F N A G ) ; r e a l expenditurepercapitaofruralpoor,calledPCEXP2RL;thevalueofhouse

(HOUSEVALUE);o w n i n g livinghouseor not(HOUSEOWN2);t h e farmsize ofhouseholdo w n e d ( F A R M S I Z E ) ; a n d f i n a l l y i s poorh o u s e h o l d o r not(P OORHOUSEHOLD). c Thevectoro f loanc h a r a c t e r i s t i c s : A s mentioneda b o v e , aimofb o r r o w i n g a n d usesofloan,thelimitedofthefunds,hightransactioncosts,etc,arefactorsthatcanaff ecttoaccesstoformalcreditsector.Thatisreasonforintroducingthevectorofloancha racteristics,i n c l u d i n g purposeofloan(loanusedfor what— c a l l e d PURPOSEOFLOAN)a n d t h e i n t e r e s t r a t e o f t h e l o a n (PERCENTINT ERESTRATE).

Datau s e d i n thisth esis h a s b e e n d r a w f r o m V H L S S 2 0 0 6 ( V i e t n a m Ho us eho ld LivingStandardSurvey2006)andfromVHLSS2008in theruralareaofMekongRiverDelta.Thisthesisfocusesonruralhouseholdsthathave demandforcreditbutcouldn o t b o r r o w o r b o r r o w a l i m i t e d c r e d i t f r o m t h e f o r m a l c r e d i t s e c t o r ; t h e n suggestthepolicyimplication tohelpthehouseholdsg e t oreasieraccesstocreditfromt h e f o r m a l s e c t o r Thetotal o b s e r v a t i o n o f th es u r v e y i n ther u r a l a r e a s o f MekongRiverDeltais 885observationswi th V

H L S S 2 0 0 6 WithVHLSS 2 0 0 8 , thisnumberis856observations.Theextracteddataw ill beusedfordescriptiveandeconometricr e g r e s s i o n a n a l y s i s

Hereisthesummaryoftheindependentvariables(signatures,explanations,wheretoextractthe mfromtheVHLSS andtheirexpectedsigns)

Nameo f i n de pe nd e n t variables Explanation Wheretoextractvari ablefromVHLSS Expected sign I.poorhousehold

2.pu rp os eo flo an

=l:ifloanusedforProductioncapita l,Capitalinvestment,Debtr ep ay m e n t -0:ifloanusedforconsumption andothers

3.percentinterestrate Theinterestrateoftheloan percenta ge Item8,question number15a

VND Item7,question number1 2 ambiguous

6.farmsize Sizeoffarmhouseholdowned Item4B0,question number3b

7.hhsize Thetotalnumbero f members i n ahousehold p erson Itemhhexp08 ambiguous

Item lA,question number2 ambiguous

12.age Ageofhouseholdhead yearsold Iteml A , question number5 ambiguous

13.hhedu Thenumbero f yearthat householdheadattendinschooi years Item2,question number1

The rural financial system in Vietnam operates under the regulation and policies of the government and the State Bank of Vietnam Similar to other developing nations, the rural financial market in Vietnam is considered a repressed market, characterized by various segments, including borrowing purposes, loan conditions, amounts, and maturity terms Additionally, both formal and informal credit sectors coexist and function in parallel within this market (Nguyen Huu Cuong, 2007).

Int h i s market,theformalcreditsectordoesnotprefertop r o v i d e creditforconsu mption,so thehouseholdshavetoborrowfromtheinformalsources suchasrelative,f riends,andneighbors.Ifthehouseholdsareratedasnotgoodborrowers,theyhavetos eekcreditfrommoneylenders,e s p e c i a l l y incaseofemergencysuchasillness,funeral ,wedding,etc.

Becausethetotalborrowingc o s t oftheinformalsourceissmallerthanthecostofbo rrowingfromtheformalcredit sector,whichischaracterizedbyhightransactioncosta n d l o w i n t e r e s t r a t e , t h e h o u s e h o l d s arem o r e l i k e l y t o b o r r o w f r o m t h e informalsourcesforsmalll oansorevenforproductionpurposes.

Thec r e d i t marketcanb e dividedintot h r e e sectors:f o r m a l , semi- formalandinformalcreditsector. a.Theformalcreditsector:includesthegovernment’scommercialbanks,privatebank sandotherorganizedcreditinstitutions.Theactivitiesoftheseinstitutionsareregulatedb ythelawonCreditOrganizations.Formalcreditsectorh a s been

Establishedin1988,VBARDisnotonlythelargestcommercialbankinthecountry' butalsothemajorfinancialproviderinruralareas,withbranchesineveryprovinces of Vietnam.

Second,VBARDl e n d s toanindividuali n agroupwithc o n d i t i o n s thatalloft heotherpeopleinthegroupmusttaketheresponsibilityo n repayingtheloanifth atindividualc a n n o t r e f u n d f u l l y Anewl o a n cano n l y be l e n t i f thisg r o u p ha sn o debt.Thismethodologyi n c r e a s e s V B A R D ’ s c o v e r a g e o f households i n theruralarea,reducestransactionc o s t s associatedwithmaking and collect ingmanysmall loans.

Third,V B A R D l e n d s guarantee g r o u p s throughm a s s o r g a n i z a t i o n s s u c h asVietnameseWomenUnion,whichtargetsborrowersunabletoprovidecollateral.

Accordingtothereporto f VBARD,totheendoft h e year2011,thetotaloutstanding loansw a s 443.47thousandbilliondong,inw h i c h , the creditforagricultureandruralareawasmorethan301thousandbilliondong,accoun tedfor68%thetotalcredit.

In2001,itwasestimatedthat470oofVBARDclientswerepoor,reaching35%oflow- incomehouseholds.In2010,70%ofVBARDclientswerepoor.

III)whichi s f u n d e d b y t h e W o r l d B a n k , t h e R u r a l C r e d i t P r o j e c t w i t h T h e A s i a n DevelopmentB a n k ( A D B ) , a n d t h e H u n g e r E l i m i n a t i o n a n d P o v e r t y R e d u c t i o n ProjectwiththeGermanBankforReconstruction(KFW).

Byusingmobilebankingunits,VBARDofficialsgotoremotecommunestoseek borrowers,process theirapplications,disbursem o n e y andc o l l e c t r e p a y m e n t s , mobilizesaving s.

Establishedi n 1995toi m p l e m e n t t h e p r e f e r e n t i a l c r e d i t p r o g r a m s f o r t h e p o o r , whichisr u n b y VBARD,V B S P alsoc o - o p e r a t e s withothers o c i a l groupst o

VBSPlendstopoorhouseholdshas nocollateralviagrouplendingwithratesand maturitiesbasedonaimofborrowing,theamountofloan,andcredit- worthinessof borrowers.I n theory,l o c a l c o m m i t t e e s n o m i n a t e “ l o w i n c o m e household” t o getsubsidizedcredit,butinpractice,maybeincludedanumberofwell- offpeople.

Totheendoftheyear2003,VBSPservedfor3.3millionclients,inwhich1millionwerethepoor.

Accordingto Mr.NguyenVanLy— theDeputyGeneralDirectorofVBSP,VBSPhasf u n d e d f o r t h e p o o r i n 6 1 poord i s t r i c t s w i t h t h e t o t a l c r e d i t m o r e t h a n 6 0 0 billiondongtohelpthemdoingtheirbu sinessandproduction.

VBSPreceivessubsidies fromthegovernmenta n n u a l l y andprovidecredit fort hepooratt h e subsidizedinterestrate.VBSP’sactivitiesnotfor profits,sot h e differencebetweentheinterestrateofloanandthedepositisalwaysnegative.

Establishedin1993,P C F s a r e s e l f - r u l i n g , smalla n d m e m b e r - o w n e d financialinstitutionsw h i c h operatingm a i n l y a t c o m m u n e s E v e n i f P C F s d o n o t t a r g e t directlyt h e p o o r , 56%o f c l i e n t s w e r e low- incomehouseholdsin2 0 0 1 P C F s mobilizesavingsfrommembers(accountfor660ằofth eirresources). b.Thesemi- formal s e c t o r : issmallandhastheproportionf r o m 5 to1 0 % oftheVietnamru ralcreditmarket.Itconsistsof:

Governmentm i n i s t r i e s a n d programs.Microcrediti s u s u a l l y a c o m p o n e n t o f a largerprogram,w h i c h i s performedby theMinistryo f Planninga n d Inv estment,

MinistryofL a b o r , MinistryofA g r i c u l t u r e andR u r a l Development,andWa rInvalids and

SocialAffairs.Intheseprograms,creditissuppliedatverylowinterestrates,orevenatzerorate s.SincetheestablishmentofVBSP,theseprogramshavebeentransferredtothebankgrad ually.

Massorganizations.sucha s V i e t n a m e s e WomenU n i o n (VWU),t h e F a r m e r s ’ Union( F U ) , a n d t h e V i e t n a m Y o u t h U n i o n ( V Y U ) a r e c o n t r o l l e d b y t h e government.T h e s e o r g a n i z a t i o n s s u p p l y s o c i a l a n d e c o n o m i c s e r v i c e s f o r t h e i r members.InternationalN G Os implementingm i c r o f i n a n c e projectsparticularthroughVWU.Theyprovidecreditandgivetechnicalsupportto theborrowers. c.Theinformalsector

Thissectorisrelativelylarge.Intheearly1990s,itaccounts for700ooftotalcredit.Nowadays,iti s n o t importantasb e f o r e , butits t i l l e x i s t s b e c a u s e theunderdevelopmento f theformalcreditsector.Therearethreemainsupp lierofthissector:

Moneylenders.i n c l u d i n gprofessionalm o n e y l e n d e r s , relatives a n d friends. Moneylendersa r e u s u a l l y w e a l t h y lendersw h o l i v e i n t h e s a m e p l a c e w i t h t h e borrowers,sotheyhavecertainknowledgeaboutborrowers.Loanscanbecashandm aterialswithshort termandveryhighinterestrates(about3-

4timestheinterestratesof commercialbanks),andoftendonotneedcollateral(McCarty,2001).Duetosuchhi ghi n t e r e s t r a t e s , t h e households m a i n l y b o r r o w f r o m moneylenders t o consumeincaseo f emergencysuchasillness,weddingandfuneral,floods,especiall ybeforeharvests,ortorepaytheloanstheyborrowedf r o m bankso theycancontinuetoborrowfromthisbank.

muchmoneytolend,andthey arereluctanttolendasmuchmoneyastheborrowersrequire.U n d e r t h e v i e w o f t h e g o v e r n m e n t , alli n f o r m a l lendinga c t i v i t i e s a r e

Rotatingsavings andcreditassociationsROSCAs) referstoagroupinwhichal lindividualskn ow an d believei n eachothertocontributetheirmoneytothef u n d andeachmembercanborrowfromthisfundinturn.

InVietnam,themainform ofROSCAsistontine,butthisisillegal,sothemembersmayhavehighrisks.

Agriculturali n p u t shopkeepers.Loansareprovidedi n formsofagriculturalinputssu cha s s e e d s , p e s t i c i d e s , f e r t i l i z e r s w i t h i n t e r e s t r a t e s b a s e d o n the r e l a t i o n s h i p betweens h o p k e e p e r s a n d b u y e r s P r i n c i p a l s a n d i n t e r e s t s w i l l b e p a i d a f t e r t h e harvest(PhamThiThuTra&RobertLensink,2007). d Summary AccordingtotheGlobalDevelopmentResearchCentre, a1990sresearchwhichisp erformedb y V i e t n a m ’ s M i n i s t r y o f Agriculture a n d R ura l De v e l o p m e n t, f o u n d thattheinformalcredit sectorplaysanimportantroleintheVietnamr uralc r e d i t marketwiththerateofloansisabout73%ofthetotalloans,inwhich,professi onalmoneylendersweretheleaderwiththerate about33%,afterthatwererelativesandfriendswiththesumwere40%.

However,theroleoft h e formalcreditsectorisi n c r e a s i n g remarkably.Neverthe less,t h e f o r m a l s e c t o r h a s n o t f u l f i l l e d t h e c r e d i t d e m a n d o f t h e r u r a l households.Themainreasonsthatmakethehouseholdshesitatetoseekthefinance,failt o g e t c r e d i t f r o m t h e f o r m a l c r e d i t s e c t o r a r e t h e s t r i n g e n t r e q u i r e m e n t ofcollateralss u c h a s LUCs, h o u s e s o r f i x e d a s s e t s ; t h e c o m p l e x , c o s t l y a n d t i m e - consumingprocedures(LeKhuongNinh,2003).

Ruralc r e d i t m a r k e t i s f r a g m e n t e d b e c a u s e i t i s re stri cted o f informati ona n d geography.

Ruralhouseholds t h e r e f o r e c a n n o t borrow a s mucha s theyw a n t , o r evenca nnotborrow,andhavetorelylargelyonformalcreditsector.

Inordertosolvethisproblem,banksshould offerthemodemandefficientcommodit ytrading systemswithbetterpricestoruralproducersandtraders(Orozco,2 0 0 3 ) F u r t h e r m o r e , b a n k s a l s o s h o u l d i m p r o v e a c c e s s t o i n s u r a n c e t o red ucer i s k s a n d he n c e, m a k e i n v e s t m e n t s m o r e a t t r a c t i v e f o r household si n theruralarea(Skees,2003;VonPischke,2003).

Eventhoughtherehavebeenmoreandmorebrancheso f banksestablished inther urala r e a , th e c r e d i t r a t i o n i n g m e c h a n i s m a n d s e l e c t i o n p r o c e s s o f the sef o r m a l institutionspushthepoorerornottargetedbacktoinformalsource.

InVietnam,moneylenders m a y b e borrowm o n e y frombanksbasedoncollate ralsandthen,theyrelendthatmoneytothe nextborrowers.Withthisactivity,theycanmakes u b s t a n t i a l p r o f i t s b e c a u s e t h e i n t e r e s t r a t e s t h e y c h a r g e t o b o r r o w e r s a r e

Lendersd o noth a v e i n f o r m a t i o n a b o u t thei n v e s t m e n t p l a n s a n d the c a p a c i t y t o repayl oa ns ofb o r r o w e r s transparentlya n d fully(StiglitzandWeis s,1 9 8 1 ) Moreover,i n a d d i t i o n t o a l a c k o f e f f i c i e n t t r a n s p o r t a n d c o m m u n i c a t i o n s infrastructure,borrowersmaybedonotusepaymentservicesofbanks,le adingthebankstobeoutofcompletelyscreeningouthigh-riskborrowers.

Thisproblemi s relatedtotheprocesso f determinationo f propertya n d LUCstoop oorly,solimitsaccesstoruralformalcredit(DougPearce,2004).

Thisissueispopularincommunity-basedinstitutionswithmanypeopledonotwell -educatedandwell-trained(DougPearce,2004).

Duelargelytoweakinstitutionalcapacity,evenborrowershavecollateral,thebankshardlytoa c c e p t b e c a u s e theyh a v e tospendm u c h t i m e andm o n e y inu s i n g“judi cialenforcementmechanisms”(Fafchamps,1 9 9 6 ) Enforcementproblemsarecommon inmanydevelopingeconomies.

Intheruralarea, thenumbero f illiteratepeoplei s notsmall,andthecomplicated requireddocumentationthat thebanksrequiretoreducelendingrisksforthem,theformalbankingproceduresbecom ethemajorbarrierstot h e ruralborrowers(Goodlandetal.,1999).Besidesthat,inor dertoreducetheoperatingcosts,banksoftenopentheirnewbranchesinurbanarea,theres ultistheruralborrowershavetopaymorephysicalaccesscosts.

Thed o m i n a n t r o l e o f state bankss u c h as VBARDa n d VBSP i n therural c r e d i t sectorpreventsthedevelopmentofnewmicrofinanceinstitutions,specializedfunds,NGO s,orevenPCFs.

Agriculturalproductionism a i n l y dependedont h e f e r t i l i t y o f t h e s o i l a n d t h e weather.However,theweatherischangefulandmarketconditionsare unfavorablewhileag ri cu lt ur al a c t i v i t i e s a re notplentifula n d diversified, t herea r e onlya fewcropsin ayearandsomepopularlivestock,sorisksintheruraleconomyarehigherandserious.Especia llyforVietnam,thecountryisdominatedbyagriculture.

- Duetotheseasonalityofoutput,thecashflowand demandforsavingsandcreditofthehouseholda r e unevent o o Mosts m a l l fa rm h ouseholdsa r e lackedo f storagefacilities,andtheycannotborrowcreditforsmoothingt heiressentialconsumptions,

36 leadtotheiri n c o m e i s usuallyl o w and variable, t h e i r a b i l i t y t o procurea n d use inputsarelimited.

Ont h e o t h e r hand, t r a d e r s , w h o l i n k t h e producers a n d wholesalers, a r e u sually requiredt o o f f e r t r a d e c r e d i t t o w h o l e s a l e r s a n d f a r m h o u s e h o l d s , w i t h l i m i t e d " accesstradefinancefromfinancialinstitutions,so theycannotpurchaseandstorethesurplusoutputs.Theconsequenceis farmgatepricesdepresse dbecauseofthe unavailablesituationoft h e m a r k e t instrumentst o m a n a g e p r i c e r i s k s i n m o s t developingcountries(Coulter&Onumah,2002).

V e g a ( 2 0 0 3 ) , m a c r o e c o n o m i c p o l i c i e s c a n h a v e a d v e r s e effectsonth edevelopmentofruralcreditmarket.High inflationdiscouragessaving,sopreventf i n a n c i a l d e v e l o p m e n t , l e a d s toanins tabilityo f macroeconomicsituation.Inordertocontaininflationarypressures,t hegovernmentusesmonetarypolicys u c h a s s e l l i n g t r e a s u r y b i l l s H o w e v e r , t h i s m e t h o d t e n d s t o r e d u c e t h e

TheVietnamcreditmarketisanimperfectmarketandhasasymmetricinformationsyste m,soitisdifficultforbanks tonotonlyscreenandmonitor thebehavioroftheborrowers,butalsotoreducethelargetransactioncosts.Hereareso me challengesthatfinancialinstitutionsmayfaceup:

Indespiteoftheeffortsofthegovernmentand banksinimprovingtheactivitiesofthefo rmalcreditsector,thereisagapbetweenthesupplyofcreditand thedemandforcredit,es peci al ly i n i n v es t m e n t i n the rurala r e a T he ma in re asoni s thatthe

Severalmeasuresandstrategieshavebeenperformedt o helphouseholdstooverc ometheirobstacles.However,theopportunitiesinreducingagriculturalrisksaren o t much,especiallyfors m a l l h o l d e r s livei n t h e remoteareas

(Cohen&Sebstad,2003).Inreality,householdsca nmanageon problemsabouttheshortageoflabor,diseases ofplants andunderdevelopedfarmingtechniques,buttheycannotcontrol theeffectsoftheweathertotally(Bryla,2003).Asaresult,bankstendtobehesitant inlendingtofarmers(Hessetal.,2002).

Indevelopedcountries,farmerscanbuyinsurancefortheircrops tomitigaterisks,however,only high-riskfarmershavesufficientincentive tobuyinsurancebecauseoftheh i g h p r e m i u m s i m p l i e s t h a t b a n k s h a v e t o p aym o r e t r a n s a c t i o n c o s t s f o r monitoringintensivelytoavoidthemoralhazardprobl ems(Skeesetal.,1999).

TheWorldBank’s CommodityRisk ManagementG r o u p promotedweather- indexedinsurance.Thiskindofinsurancebasedon observationsaboutrainfallthatcorrelatewithyieldsin particularare as, andisseenasspecialcollateralbybanks,

In agriculturalproduction,creditwithmedium-termandlong- termisnecessaryforinvestment,especially i n improvingirrigation system,expa ndingnewstores,cultivatinginn e w lands,p r o c e s s i n g theagriculturalproduc tsanddevelopingmarketingnetwork However,these termsofcreditaredifficu lttoobtainbecausethebanksmustuselong-term fundstofinanceforshort- termloanswhiletheseloansareriskier(WorldBank,2004).

Remittancesare becomingmoreandmoreimportanttothehouseholdsin therural - area.Mostofremittancesaregoingthroughinformalchannelsandnotaffectedbycha ngefulweatheraswellasseasonalproductioninagriculture.Firstly,remittances

However,thecostofformalmoneytransferisrelativelyh i g h, from4%to20%ofthe v a l u e s e n t , a n d d e p e n d s o n t h e a v a i l a b i l i t y , t e c h n o l o g y andc o m p e t i t i o n o f transfersystemsnetworks;aggregatevolume(Orozco,2003).

Thegovernmentallowsonlypermittedfinancialorganizationstoprovideremittanceservicesto makesurethatthetransfersystemisreliableandstraightforward.T h i s thingcanh elptheeconomicav oi di ng theabusesuch asmoneyl a u n d e r i n g , butitmaybere sultedinthelesscompetitionbetweenthesefinancialorganizations.

Applyingt e c h n o l o g i c a l a d v a n c e s i n ruralf i n a n c e s u c h ascomputers,L o c a l AreaNetwork,Internet,AutomaticTellerMachines havereducedthetransactioncost sandimprovedthequalityoffinancialservices.However,manyruralcommuniti eshavebeenexcludedfromtechnology,andsocannottakeadvantage fromthis.

Institutionali n f r a s t r u c t u r e i n c l u d e s commercialb a n k s , s t a t e banks,l e as i n g firms,

• postoffices,commercialbondmarketsandl i f e i n s u r a n c e companies Nevertheless,u ntilnow,thereisnomarketforprivatebonds,leasingactivitiesaretoopoor,andstockmark etisunderdeveloped.

Theseinstitutionshavedepositedtheirmoneyinforeignbanksto gainlowinterestratei n s t e a d o f l e n d i n g i t tof a r m e r s T h e r e f o r e , t h e f a r m e r s h a v e t o r e l y o n t h e informalcredit sector,anditisverydifficultforthemtoen largetheirlonger-terminvestments.

The MD— isthemajordeltainVietnam,ratingthefourthaboutthearea,thethirdaboutt h e p o p u l a t i o n andp o p u l a t i o n density.W i t h m a n y a d v a n t a g e o u s n a t u r a l conditions,butthesocio- economicdevelopment i n d e xe s aresolow.Accordingtotheresultsofthes u r v e y thatperformedb y theMinistryo f Labor—I n v a l i d s and

householdsisstillhigh,about11.39%,soitisstillbeinganimperativeproblemforVietnam andlocalgovernmentstodealwith.HereisasummaryoftheMDin2010:

* Geographiclocation.isboundedbytheSouthChinaSeatotheEast,byCambodia totheWest,theSoutheasteconomiczonetotheNorthandGulfofThailandtotheSouth.

*Area.39,747km',ofwhich24,000km'areusedforagricultureandaquaculture,4,000km'forforestry.

* Administrativeu n i t s Includes13provincesofLongAn,TienGiang,HauGiang,DongTh ap,VinhLong,TraVinh,CanTho,SocTrang,BenTre,AnGiang,KienGiang,BacLieu,CaMau.

*Population:1 7 , 2 7 2 millionofpeople,equivalent to1 9 8 6 % ofpopulationofthewhole country.

With7 7 % peoplel i v i n g inther u r a l a r e a thatp r o d u c i n g m o r e than1 / 3 thevalueo f t he agriculturalproductsofthewholecountry.Populationdensity.425person/km'

* Locationadvantages.I t hasmanyimportantmarkets andinvestors,soitisconvenienttodevelopthe economyandcooperatewiththeworld.

*Naturalresourceadvantages.istheregionhasthelargeandproductivelandoftheSoutheastAsiaandtheworld,andist hebiggestagricultureareainVietnam.Inthetotalareaof3.96millionhectares,65%areusedtodevelo pagriculture;inwhich,cultivationlandsaccountfor50%,andlandforriceproductioncover90%ofcultivationland.

* Humanresourceadvantages.hasthelargestpopulationinthecountry.Thepopulationinworkinga ge:10.13millionpeople,theunemploymentrate is3.45%.

2006— 2010is12%.Thatratein2010is11.93%.Therefore,MDhasachievedhighannualeconomicgrowthrateincomparisonwiththeoth erregionsinthecountry.Theannualincome percapitalhascontinuouslyincreasedfrom8millionVNDto12millionVNDoverthepast

Theaverageamountof realexpenditurepercapital person year 1000VND obs %

Between 1995 and 2010, the agricultural sector's contribution to the economy decreased significantly from 61.8% to 40% In contrast, the industrial and construction sectors saw growth, rising from 11.7% to 15% Meanwhile, the service sector experienced a notable increase, expanding from 21.3% to 35% This shift highlights the evolving economic landscape, with a gradual transition from agriculture to industry and services.

From 2001 to 2010, the industry experienced a significant growth rate of 15.8%, contributing 10% to the nation's total industrial output value In contrast, agriculture accounted for 3.3% of the growth and 33% of the overall output, while retail sales of goods and services saw a growth rate of 20.4% and represented 18% of the economy.

In 2010, the region produced 21.6 million tons of rice, representing over 50% of the national output, with 5.6 million tons exported valued at 2.6 billion USD Additionally, aquaculture production in the region reached 1.94 million tons, accounting for 70% of the country's total aquaculture output.

* Foreign direct investment in period 1988-2010, MD only has 565 FDI projects, only accounts 4.9% of the whole country and 9.44 million USD in amount.

4 Economic development plan up to 2020

Diversifying the agriculture production to supply nationally.

Make fishery become an important economic sector and focus on capacity building for offshore economic development.

Trading must be developed in order to fulfill the development of the region.

Source:http://www.mekongdelta.com.vn andh t t p : / / w w w g s o g o v v n 4.2.2HouseholdsintheMekongRiverdelta a.Householdscharacteristics aresexandageofhouseholdhead,householdsize,d ependencyr a t i o , h e a l t h c o n d i t i o n a n d e d u c a t i o n l e v e l o f householdh e a d , household’sexpendituresandincomes,politicalandsocialp o s i t i o n , skill andoccupationofhouseholdhead,collateral,etc.

Table4.la:Household’ssize,householder’sageandrealexpenditurepercapitalin2006

Table4.lb:Household’ssize,householder’sageandrealexpenditurepercapitalin2008

Theaverage Theaverageageof Theaverageamountof Sourceofrural credit

FormalcreditsectorInfo rmalcreditsectorTotal householdsize householder realexpenditurepercapital p

Thelevelofeducation Thehealthsituation BeforeJunior college diploma

Good health Bad health obs % %

Total BeforeJuniorco llegediploma Juniorcollegediplomaan dBachelordegree obs obs % obs %

Source:CalculatedbyauthorfromVHLSS2008 Aswecanseeinthefourtablesabove,theaveragehouseholds i ze and theaverage ageo f h o u s e h o l d e r aret h e s a m e be t w e e n t h e f o r m a l c r e d i t s e c t o r a n d i n f o r m a l credits e c t o r H o w e v e r, t h r e e c h a r a c t e r i s t i c s s u c h a s the a v e r a g e a m o u n t o f r e a l expenditurepercapital,t h e levelofe d u c a t i o n andt h e h e a l t h situationoft h e householdera r e differentbetweentwosectors Theho useholdst h a t ex pe nd mo re andhouseholders thathavethehighlevelofeducation,goodhealthsituationtendto ' belentbytheformalcreditsector.

Theaverageamountofrealexpenditurepercapitalin2008ishigherthan2006inbo tht w o s e c t o r s w h i l e t h e l e v e l o f e d u c a t i o n o f h o u s e h o l d h e a d c h a n g e insignificantlyintwoperiods. b.Productionc h a r a c t e r i s t i c s AccordingtotheresultsofThe2011 rural,agriculturalandfisherycensuswhichisconductedbytheGSO,MDistheleaderinnot onlytheplantedareasofcerealsandpaddy butalsotheoutputofpaddyandoutputvalueofagriculture.

Thenumberofruralhouseholdsi n MDin2011is3.3million,a c c o u n t s 21.7%of thenumberofruralhouseholdsofVietnam,ratingthethirdclass,aftertheRDandtheNo rthc e n t r a l a n d c e n t r a l c o a s t a l a r e a s with3 8 milliona n d 3.6millionr u r a l householdsinrespectively.

Theplanteda r e a ofcerealsofMDisabout4,128.lt h o u s a n d h e c t a r e s i n thetot al8,769.5thousandh e c t a r e s o f thecountry,e q u i v a l e n t to47.1%.TheNorthc e n t r a l andt h e R D r a t i n g t h e s e c o n d a n d t h e t h i r d classw i t h 16.40oa n d 14.l

Thep l a n t e d areao f p a d d y , MDi s a l s o r a t i n g t h e firstw i t h 4 , 0 8 9 3 t h o u s a n d hectaresinthetotal7,651.4thousandhectaresofthecountry, equivalentto

Withtheoutputofpaddyisabout23,186.3milliontons,accountsfor54.7%ofthecoun try,MDratingthefirstofthecountry.FollowaretheRDwith6,979.2milliontonsandtheN orthcentralwith6,515.6milliontons.

• Agriculturalp r o d u c t i o n i s themainlivelihoodi n ruralandisdependedd e e p l y onweatherconditionsandhassignificanttimelags.Therefore,householdshavetoaskfor l o a n s t o s m o o t h t h e i r i n c o m e s h o c k s a n d m a k e l o n g - t e r m p r o d u c t i v e investments.

First,u s i n g t e c h n i q u e s a n d m e c h a n i z a t i o n ina g r i c u l t u r a l p r o d u c t i o n isi n contradictionwithhighredundancyoflaborsinruralareas.Inrecentyears,ther eisaconsiderablenumberoflowincomefarming labors,whichwerenotabletoabsorbbythe ruraleconomy,shiftingfrom theruraltourbanareas.Asaconsequence,thelackofseasonallaborforcefor agriculturalactivitiesoccurs,increasingoffarminglaborwage,productionc o s t s andcostpriceo f someagriculturalproducts tendtomoveu p T o m o v e a g r i c u l t u r a l laborst o n o n - a g r i c u l t u r a l sector, industryandservicesshouldbedeveloped,butthisprocesshasprolongeda n d req uireda largecapitalinvocationaltrainingandprofessionaleducationforhumanresource.

Second,t h e c o m p e t i t i v e n e s s ofV i e t n a m a g r i c u l t u r a l p r o d u c t s is i n f e r i o r w h e n comparingwiththesameproductso f theothercountries.Mostproductsof agriculturehav e f e w categories, h i g h c o s t andl o w q ua l i t y a n d donots a t i s f y thesta ndardsaboutthesafetyof theimporters.Nevertheless,inrecentyears,Vietnamisreachingthegoalbethelead ingcountryinriceexportbecauseVietnamhasthesamequalitybutthepricelowerinco mparisontoThailand—thetopriceexporter.

In2011,withthehighpriceofrice,thefarmersinMD havetheveryhighinterests(morethan80%).

In summary,stimulatingtheinvestmentandmodernizingthep r o c e s s ofmanufacture can solveaboveproblems:improvingqualityofagriculturalproducts,soi n c r e a s i n g c o m p e t i t i v e n e s s o f a g r i c u l t u r a l p r o d u c t s i n t h e w o r l d m a r k e t ; a n d g eneratingmorejobstoabsorbunemployedrurallabors(NguyenThi ThuPhuong,2006).

Aswecanseeinthistablebelow,in2006,theVHLSSindicatedthatthenumberofloansofin formalcreditsectorequals1 / 4 of theformalcreditsector.VBARDwastheleaderinp r o v i d i n g creditt o h o u s e h o l d s inM D w i t h 51%o f t h e m a r k e t , followedb y V B P with1 4 % Moneyle ndersh a d a n 8 % markets h a r e ofther u r a l creditmarket,whilefriendsandrelativeshad an11%share.

(•Z•) Male Female Total Male Female

2 VietnamBankofAgriculture andRuralDev elop me nt 447 51% 246 201 19,155 18,092 20,457

(°zi›) Male Female Total Male Female

In2 0 0 8 , t h e n u m b e r o f l o a n s o f i n f o r m a l c r e d i t s e c t o r e q u a l s 1 / 3 ofthe f o r m a l creditsector;theshareofinformalc r e d i t sectorinruralcreditmarketwa shigher

. thani n 2006.VBARDc o n t i n u e d to bethel e a d e r i n providingc r e d i t i n ther uralcreditmarket;however,theshareofthisbankf el l downform51%to42%,wh ile

VBPincreaseditssharefrom1 4 % to20%.Creditfrommoneylendersa n d friends andrelativeshadincreasedtoo.Theaverageloanamountfromformalcreditsectorisalw ayshigherthanfrominformalcreditsectorswithtwodatasetextractedfromVHLS S2006andVHLSS2008.

Source:CalculatedbyauthorfromVHLSS2006 IntheMD,thereisalargedistanceofaccesstocreditbetweenthe poorandnon- poor.Whilethepooronlyhad13%ofloansfrom theformalsector,thisproportionforthenon-poorisupto87%

Source.CalculatedbyauthorfromVHLSS2008Inbothformalandinformalcreditsectors,thenotpoorhouseholdsare moreactivethanthepoorare.Table4.4ashowsthenotpooroccupied83%oftotalbo rrowingofhouseholdsfromformalandinformalcreditsectors.Informalcreditsector,87

WithInstructionNo01/CT- NHNNMarch01,2011oftheStateBankofVietnam,somebankshave givepriorityinfundsforagriculturalproduction.AccordingtotheGovernoroftheStateBank ofVietNam, Mr.NguyenVanBinh,inrecentyearsthegrowthrateofruralcreditis alwayshigherthanotherfields.Specifically,fromthe beginningo f 2011,therural c r e d i t g r o w t h r a te i s 32 % i n comparisonw i t h o t h e r fieldsare10%.Mr.NguyenVanBinh alsoaskedVBARDhastoassurethat800ằofitsfundsisusedforagriculturaldevelopment,other bankshasalsoassurethisrateis

AccordingtoGSO,thecreditloansoftheMDis174,000billionVND,accountsfor30.6%o f t h e w h o l e c o u n t r y , w h i l e t h e m o b i l i z a t i o n off u n d s i s a b o u t 115,00 0billionVND,sotheformalcreditsectorhasnotsuppliedenoughfunds fortheneedofcredit. b.Interestr a t e s Householdsd e c i d e toborrowo r notborrowb a s e d o n thecostofborrowingt h e y havet o p a y f o r r e c e i v i n g t h e l o a n t h a t c o n s i s t s o f t h e i n t e r e s t p a y m e n t a n d t h e transactionc o s t s Inthef o r m a l c r e d i t s e c t o r , thei n t e r e s t r a t e s a r e l o w e r a n d thetransactionscostsarehigherthanintheinformalcreditsector.Givent hesecostsofborrowing,a householdn o r m a l l y w i l l choose toborrowf r o m thein formal c r e d i t sectoriftheamounthewantstoborrowissmallandviceversa.Thepoo rrequiressmallloans,soheoftenborrowsfrommoneylenders.

5.110permonth, higherthanfivetimes theinterestrateoftheformalcreditsector(1.010permonth).Themoneylendershavetheh ighestinterestrateandrankingthethirdinnumberofborrowers,a f t e r theVBARDandot herbanks.Thereasonsare

No Sourceofruralcredit Monthlyin terestr a t e s Numberofo bservations

InTable4.5b,thei n t e r e s t rateof formals e c t o r washighert h a n beforewhile theopposited i r e c t i o n ha p p e n e d withi n f o r m a l s e c t o r Inpresent,t h e intere stratesin

somecommercialbanksareonlyfrom15.5-170pe r year(1.29-l.41%permonth)but withthesevereproceduresandcarefulassessment, thehouseholdsfind difficulttoborrow fromthesebanks. c.Loansize

There is a significant disparity in average loan sizes between the formal and informal credit sectors, with the average loan amount in the formal sector reaching 18.497 million VND—three times higher than the informal sector's 5.829 million VND Commercial banks dominate the formal sector, offering an average loan of 54.636 million VND, yet they represent only 6% of the total number of loans issued Notably, poor borrowers receive much smaller loans, averaging 4.956 million VND compared to 18.036 million VND for non-poor borrowers Despite this, 13% of poor borrowers have at least one active loan from the formal sector, while 30% rely on the informal sector This situation highlights the coexistence of both credit sectors.

Wasyourho use ho ld c l a s s i f i e d asapooronein2006?

Source:CalculatedbyauthorfromVHLSS2008 WithV H L S S 2 0 0 8 , w e c a n s e e i n t a b l e 4 6 b , t h e r a t i o ofp o o r andn o n - p o o r borrowershadatleastoneactiveloanfromtheformalsectorhadnotchanged,bu tintermofloanamount,thenon-poorborrowerhadhigher average loanamountthan

49 before.According toanexpertinfundManagement Company,inreality,banks, especiallycommercialbanksarenotusuallyinterestedinlendingtoagriculture.The mainreasonistheplansissmallinscale,justborrow andsothebanksfinditisdifficulttomanagement.il.Aimofborro wingandusesofloan

Householdsu ' a n t t o u s e l o a n s f o r m a n y differentp u r p o s e s w h i l e f o r m a l c r e d i t sectoro n l y p r o x idesc r e d i t f o r a c e r t a i n n u m b e r o f d e t e r m i n a t e p u r p o s e s Householdsdemandcreditrelatinetobusiness,c‹insumptionandhousinga ndotheruses,inwhichdemandcreditforbusinessisthemostcommon,accountsfor64.4

%ofthe885observations.Afterthataredemandcreditforconsumptionanddemandfor housinga n d othersaccountf o r 25.3%and1 0 3 % AswecanseeintheTable

Table4.7aalsoshowsthat,intheformalcreditsector,thehouseholdsmainlyuse theirloansforbusiness(67%), andthebanksprefertolend forthisusing,thereasoncanb e e x p l a i n e d t h a t t h e u s i n g o f l o a n s f o r b u s i n e s s c a n b r i n g p r o f i t s f o r t h e households andt h e r e p a y m o n e y f o r t h e b a n k s , moreo v e r t h e b a n k s c a n use workingtools,products ascollateralsfortheloans.Intheinformalcredit sector,househol dsm a i n l y b o r r o n • t o c o v e r t h e i r u r g e n t o r necessary n e e d s s u c h a s f o r medicaltreatmentandqseneralconsumption.

Sourceofruralcredit Formalcredit sect or Informalc r e d i t sector

WithVHLSS2008,thevalueofloanamountinformalsectorwerehigherthan beforeforallusesofloans,buttheuseforhousingand otheruseswerepreferredto

- lendb y t h i s s e c t o r W h i l e t h e i n f o r m a l s e c t o r only i n c r e a s e d t h e a v e r a g e l o a n amountforfarm/business. e Lendingproceduresandcollateralrequirement

The pre- contractingstage.beforel e n d i n g , m o s t b a n k s s c r e e n t h e i r c l i e n t s consid eratelyt o overcomea d v e rs e se lect io n problems.H o w e v e r , thereareman ydifferencesbetweent h e householdsa n d thebanksa b o u t thepossibilitiest o ind entifytheriskiness,sothehouseholdshavetodecidetoborrowfromformalorinform alcreditsectors.

Thepost- contractings t a g e afterdisbursingloans,banksmonitorthehouseholds’activitiest o e n s u r e t h a t t h e y a r e w o r k i n g h a r d l y t o r e f u n d B a n k s c a n a l s o u s e variousm e a s u r e s t o recovert h e i r d e b t s (PhamT h i T h u Tra a n d RobertLensi nk,2007).

Thel e n d i n g p r o c e d u r e r e q u i r e d t o o m u c h u n n e c e s s a r y d o c u m e n t s , a c c o m p a n i e d withuns ki ll ed a n d unmotivatedb a n k o f f i c i a l s m a k i n g t h e totalc o s t togetcredit fromtheformalcreditsectorlargerthanfromtheinformalcreditsec tor.

Nowwe considerthecommercialbanks’lendingp r o c e d u r e , whichism a i n l y appliedto individualcustomerstochoosethegoodborrowersinthefigurebelow:Figure2:Thecommercialba nks’lendingprocedure

Note:[1]Borrowerapplieshisloanapplicationformto thebankofficial; [2]Theofficialinformstheheadofthecreditdepartment;[3]Theheadofthecreditdepanmentassignsan officialtodealwiththis customer;

[ 7 ] Thedirector deci des tolendornota n d instructstheheadof thecreditd e p a r t m e n t ; [8]Th e h e a d o f c r e d i t d e p a r t m e n t i n s t r u c t s t h e o f f i c i a l ;

Asmanyothercountries,individuallendingandgrouplendingareusedpopularlyintherurala r e a o f Vietnam.W i t h t hese m e t h o d s o f l e n d i n g, ba nk s u s u a l l y a s k forcoll ateralssuchasLUCs,housesandfixedassets.Banksdonotacceptassetsthathaves mallvaluesandmovabletoensureforthe loanssuch asanimals,utensils,etc(QuachManhHaoetal.,2003).

Althought h e l o a n s a r e s e c u r e d w i t h c o l l a t e r a l , t h e b a n k s a r e reluctanti n g i v i n g loanstohouseholds,becausetheyhave tospendtheirresources.Moreover,thelawsystemhasnotyetbeenfinishedwhichcausesm any troublesforbanksinenforcingcreditcontractsandsellingcollateralsincaseofdefault. , Aswe can seeintheTable4.9a below,householdshavetheirownedhouses willbeeasilyacceptedtoborrowfrombothformalcreditsector(97%)andfrominfor malcredits e c t o r (91%)w h i l e t h e h o u s e h o l d s haven o h o u s e s f i n d i t i s d i f f i c u l t t o borrowf r o m b o t h t w o s o u r c e s of credit.T h i s thing w a s a l s o tr uef o r thed a t a s e t extractedfromVHLSS2008,whichispresentedinTable4.9b.

Moreover,thehouseholdst h a t havethehighervalueoftheownedhousesand/ orthelargersizeofthefarmwillalsobeeasilyaccepted toborrowf r o m thefor malcreditsector.

AccordingtoVBARD’sreport,theamountofloanisnotover700othevalueofthe collateralthatisassessedbythebankatthetimeofappraisingtheloanapplicationform.T hisrateisregardedasasaferateforbanktorecover theloan.

Theaverageareaofthe Total Yes NO farm

(obs) jobs) (%) (obs) (%) (1000VND) in' (obs) (%) Formal creditsector 701 679 97% 22 3% 116,509 6,638 552 83%

Haveyouownthehouse? Themeanofv alueoftheown ed-houses

(obs) (obs) (%) (obs) (%) (1000VND) in’ (obs) (%) Formal creditsector 640 622 97% 18 3% 160,862 5,216 640 75%

Becausehouseholdso f t e n donothavebook- keeping,an d thebankshavebranchesmainlys i t u a t e d i n provincial t o w n s , s o i tis to od i f f i c u l t f o r thebankst o c o l l e c t informationaboutthehouseholdstoassess riskidentificationandmanagement(thelongdistancebetweentheborrowersa n d the lenders,thelendershavenotenoughmoneya n d skilled- staffs) Thosethingsl e a d tothel i m i t e d a c c e s s tocreditofthehouseholds.

4.3 Summary Ins u m m a r y , t h e c r e d i t m a r k e t i n MD i s a repressed c r e d i t m a r k e t D e m a n d f o r creditofthehouseholdsveryhighwhilethesupplyfrombothformalandinfo rmalcreditsectorshasnots a t i s f i e d Rationingm e c h a n i s m t o allocatethec r e d i t - worthinessborrowerstendstopushthepoorhouseholdsintoinformalcreditsector.

Thecoefficients o f theregressionm o d e l s a r e estimatedw i t h d a t a s e t o f 885r uralhouseholdsi n MDf r o m V H L S S 2 0 0 6 a n d 8 5 6 observationsf r o m V H L S

T a b l e 4 2 b T h e hypothesisthatallcoefficients equaltozeroisrejected.Althoughthe coefficientsofdetermination( R20 2 4 5 6 a n d 0 28 92 r e s p e c t i v e l y t o Y1a n d Y2 f r o m VHLSS

2006;R20 1 0 2 1 and0.3637respectivelytoY1andY2 fromVHLSS2008)intheregressionm o d e l s a re lowbutwithstudiesusingl a r ge numbero f observationsas well ascrosssectionaldataset,thisthingisnotunusual.

Beforerunningtheregressionmodel,withthehelpofStatasoftware9and1 1 , wepr ocessedthedatabyel im ina ti ng themulticollinearity.F i r s t , werunthecommo nVIF—Varianceinflationfactors— toassessmulticollinearity.Then,weremovethevariablest h a t h a v e a V I F a r o u n d o r g r e a t e r t h a n 5 f r o m t h e r e g r e s s i o n m o d e l Removeeachvariablein di vi du al ly todeterminethebestonetoremovea ndselecttheregressionequationthathavetheR- squaredhighest( e x p l a i n s themostvariance).

Wealsoaddtheoption“robust”toregressioncommentwhilerunningOLSmodelto eliminatetheHET—heteroskedasticity.

Afterr u n n i n g t h e L o g i s t i c m o d e l a n d O L S m o d e l f o r thet w o d a t a s e t s e x t r a c t e d fromVHLSS2006andVHLSS20 08, Iwillcomparetheresultsthatareo btainedfromtwoperiods,henceIcananswerthequestionofthisthesis:Whatarethe maindeterminantsthataffecttothehouseholdaccesstoformalcreditinstitutionsin the

Herea r e theresultsa f t e r runningt he Logisticm o d e l a n d OLSmodelf o r thetwo datasetsextractedfromVHLSS2006andVHLSS2008:

-2.42 2.451 t-stat 2.68 poorhousehold pcexp2rl orLn(pcexp2r1)pu rposeofloan houseown orL n (h ou s e v a l ue ) hhedu hhsize sexag e empwageempself

Numberofobs= 8 8 5 Numberofobs=8 8 5 Prob>chi2—0.0000 Prob>F=0 0 0 0 0

*.significantatthe1‘Co,’* * significantatthe5º, ‘ ***.’significantatthe10ºXằEmpiricalresultss howt h a t t h e m o d e l wechoosei s a c c e p t a b l e becauset h e Prob>chi2=0.000chi2—0.0000 Prob>F=0 0 0 0 0

*.significantatthe1‘Co,’* * significantatthe5º, ‘ ***.’significantatthe10ºXằEmpiricalresultss howt h a t t h e m o d e l wechoosei s a c c e p t a b l e becauset h e Prob>chi2=0.000chi 2=0.0000

Withsimultaneousequationmodels,whicharecalculatedfromdatasetof VHLSS2008,thesignofalmostvariablesarethesamewithmodels,whicharecalc ulated

Loanamount,thatcanbeexplainedbythehighera m o u n t o f loans t he ba n k s p r o v i d e f o r theh o u s e h o l d s a r e use df o r housepurchase/ repaira n d othersuses.WithtwovariablesSEXandAGE,althoughtheirsignarediffe rentwiththesevariablesintheEquationY2-

Loan(VHLSS2006,buttheyhavenosignificant at10%,sowe donotneedtoworryaboutthem.

Chapterc o n c l u s i o n s

Inthischapter,wehaveseenthataccesstoformalcreditcanbemeasuredb y two ways,t h e p r o b a b i l i t y a n d t h e e x t e n t thath o u s e h o l d a c c e s s t o f o r m a l c r e d i t T h e demanda n d s u p p l y f a c t o r s a r e c o m b i n e d t o m e a s u r e t h e d e t e r m i n a n t s o f household’sa c c e s s toformalcredit.Twoeconometricm e t h o d s , l og is tic andOLShavebeenutilizedb y usingtwodatasetsof VHLSS2006 andVHLSS2008 Themainconclusionshavebeendrawnoutasfollows:

Themodels a t t e m p t s t o provet h a t h o u s e h o l d c h a r a c t e r i s t i c s , l o a n c h a r a c t e r i s t i c s andendowmentso f householdd e t e r m i n e theprobabilityo f ho usehold’sa c c e s s toformalc r e d i t se c t o r andl o a n a m o u n t s b o r r o w e d E m p i r i c a l r e s u l t s s h o w thatthemodelswechooseareacceptablebecausetheProb>F=0.000< o=5%—0.05.

Several independent variables, including poor household conditions, real per capita expenditure, loan purpose, home ownership, the education level of the household head, household size, and interest rate percentage, demonstrate statistical significance in both models analyzed Other variables, such as the age of the household head, household labor for salary, production or service activities, forestry or aquaculture, and farm size, show significant effects in one model, influencing the likelihood of household access to the formal credit sector or loan amounts Although some variables are not statistically significant at the 10% level, they are retained due to their relevance, including home ownership, interest rate percentage, and household labor for salary In comparison to the three approaches discussed in Chapter 2, farm size, household education, and interest rates continue to be critical factors affecting household access to formal credit in micro-development (MD) The asymmetric information theory by Stiglitz highlights the challenges in loan contracts between banks and borrowers, emphasizing that borrowers often possess more information about their projects and intentions, which can lead to adverse selection and moral hazard To mitigate these issues, banks must address asymmetric information to ensure they lend to the right borrowers and closely monitor their behavior, thereby securing capital and interest recovery.

- Moreover,according toStiglitz,thebanksshouldrestricttolendoutiftheloansarenotgoodinsteadofincreasingintere strate.

5.1Conclusion Expandingthewayforruralhouseholdsi nMDcangetaccesstotheformalcreditsect orisoneofthemostimportantthingstohelpthemdoingtheirinvestmentplansmoreeffectiv e,hencetheycanaffordtheirlivesbetter.However,inthereality,thedemandfor loansistoohigh whilethesupplyofloansisnotsatisfythatdemand,leadtotheexpandingofblackcr editmarkets.Therestillexistmanydifficultiesonthewaybringingformalcreditt othehouseholdsl i v e intheruralarea,whoreallyneed ittocovertheirlivesanddeveloptheirenterprises.

Theformalcredits ec t o r stillheavilyc o n c e n t r a t e o n thehouseholdi s pooro r notpoor.Analysisofdataandempiricalresultsrevealsthatalargenumberofnotpoorho useholds(87%of885observationsinVHLSS

2006and83%of856observationsinVHLSS2008)cangetaccesstocreditandtheamoun tofloanstheyreceivearealsolargetoo.Thehouseholdsthathaveownedhousesand/ orbigsizefarmalsoget

Aslowratesofinterest,alargenumberofhouseholds(79%of885observationsinVHLSS 2006and74%of856observationsinVHLSS2008)getloanfromformalsector.Thea verageinterestrateofinformalloansishigherthanfivetimesthatofformalloans.T heamountofloansthatthehouseholdsgetfrom formalsectorisalsothreetimeshigherthanthatfrominformalsector.

So,thef o r m a l c r e d i t s e c t o r a r e openingt h e w a y f o r thepoortoa c c e s s tocr editwhilethenumberofpoorandnon-poor cangetaccesstocreditslightlydecreased.

' Ther u r a l c r e d i t m a r k e t i s s e g m e n t e d a n d f r a g m e n t e d d e e p l y W h i l e t h e f o r m a l creditsectorconcentrateso n providingc r e d i t for farm/ businesspurposes(57%of885observationsinVHLSSS2006and48%of856observation sinVHLSSS2008),thei n f o r m a l c r e d i t s e c t o r f o c u s e s m a i n l y o n c o n s u m p t i o n p u r p o s e s ( 1 2 % o f theobservationsinbothVHLSSS2006andVHLSSS2008).Therefore,withthenew

63 dataset,wecanseetheformalcreditsectordecreasedinlendingforfarm/ businessloans,t h e r e a s o n ist h i s s e c t o r i n c r e a s e d inl e n d i n g f o r c o n s u m p t i o n loans.I n reality,manyhouseholdsgetloanfrombothsectorsatthesamet ime,formalloansforbusinessandinformalloansforconsumptionorotherpurposes.

Theformalcreditsectorapplies hardloanconditionsfortheirclientsduetolackofinformation.On ly thehouseholdss a t i s f y thecollateralrequirementso f theformalcreditsectorandhavesuitableloan purposescanobtaincreditfromthissector.Thehouseholdswhodonot satisfythetwoaboveconditionshavetoseekcreditfromtheinformalcreditsector.

Basedontheresults,itisconcludedthatthetwomaindeterminantsthatconstraint hehouseholds'accesstoformalcreditsectorarethelimitationofloanuseandthestrin gentrequirementso f collateral.Inordertoexpandt h e ent ra nce o f thehouseho ldstogetformalloans,suchdeterminantsshouldbereducedorremoved.

ThispolicyisveryreasonableintheprocessofindustrializationandmodernizationofViet nam.T h e f o r m a l c r e d i t se c t o r s h o u l d d o thispolicyi n o r d e r t o f u l f i l l thei ncreasing demando f h o u s e h o l d s fore s s e n t i a l n e e d s o f c o n s u m p t i o n , h o u s i n g , productionandinvestment.Iftheformalcreditsectorrefusestolend, barelycouldthepoorhouseholds t a k e loans.Ifformalc r e d i t sectordiversifi esloanportfolios,moreandmorehouseholdscangetloanstocovertheiressential needs.Therefore,formalcreditsectorshouldexpandtheirloanportfolios.

Ourregressionr es u l t s sh ow thathousevalue,averageoffarmsizestillpositivel yaffectontheprobabilityt o getformalcreditandtheamountofloans.Thismeanst hebankingsy s t e m nowstill heavilyo n landandhouse,ascollaterals.Thebanks willusecomplexprocedurest o preventhouseholdw i t h goodproductiono r

64 investmentplansbuthaverelativelysmallfarm landandhousevalue.Besidesthosetwoformsofcollateral,theformalcreditsector s hould useotherassetsascollaterals.

Theformalcreditsectorcanuseguaranteeof thethirdparty( s u c h astheorgan izationst h a t e m p l o y theborrowers) a s a newf o r m o f c o l l a t e r a l W i t h th i s form,t h e formalc r e d i t s e c t o r c a n s o l v e t h e p r o b l e m ofi n f o r m a t i o n aboutt h e borrowers,andcanuseapartofthewagethattheemployeespaytotheborrow ersasaloanrepayment.Thesetransactionsbaseonthetrust.

Thecomplexproceduresf r o m thebankingsyst em takealotoft i m e oft h e borrow ers,t he borrowersc a n lostthechancesfo r theirplans.In ordertoevaluatethef e a s i b i l i t y oft h e p r o j e c t s andt o r e d u c e t h e t i m e from loanapplicationt o acceptance,theskillsandcapacityofbankingstaffsshouldbeimproved.

Policyi m p l i c a t i o n 4 g o v e r n m e n t s h o u l d i m p r o v e t h e processo f grant ingL U C s morequicklyandsimply

• Inreality,t h e r e a r e manyh o u s e h o l d s d o noth a v e L U C s a n d l e g a l o w n e r s h i p o f house.Theyhavetowaitsomemonthsorevenyearstoreceivetheselegaldocum ents.T h e r e f o r e , t h e y c a n n o t u s e theirh o u s e s a n d l a n d s a s collateral T h a t thingsleadtotheinvestmentplansofthehouseholdscanbelostthechancestogetthehig hprofits;eventheplanscanbeineffective.

Thep o s i t i v e r e l a t i o n s h i p b e t w e e n h o u s e h o l d h e a d e d u c a t i o n l e v e l a n d t h e probabilitya n d extentof accesstoformal c red it impliesthatthe im provement i n educationiso n e ofsolutionst o h e l p householdgetformalloanseasi er.The householdsshouldimprovenotonlytheireducationbutalsotheknowledge especiallya b o u t t h e w a y ofs e t t i n g i n v e s t m e n t p l a n s t o m a n a g e w i t h c o m p l e x bankingproceduresandpresenttheirplans effectivelyandcoherentlytoreceivetheapprovalofthebanks.

Inconclusion,inordertobroaden theaccesstoformalcreditoftheruralhouseholdsintheMDaswellasVietnam,thebankings ystemandthegovernmentshouldand

- canexpandingtheloanportfolios oft h e formalcreditsector,simplifytheproceduresofthebankingsystemandtheproces sofgrantinglanduserights.

5.3Researchl i m i t a t i o n s Thed a t a s e t u s e d int h i s t h e s i s a r e e x t r a c t e d fromV H L S S , so,t h e r e a r e s o m e determinantsthathaveeffectsonthehouseholds’accesstoformalcreditsectorsuc hasthesocialorpoliticalparticipationofthehouseholdhead,theawarenessoncreditavailabili ty,etccannotmeasured.Thisthingleadstotheinsufficentmeasurementofallofdet erminantst h a t haveeffectsonthehouseholds’a c c e s s toformalcreditsector.M oreover,theresultsof thisthesishaveonlymeaningsintheMD,andcannotbeusedtoconcludeaboutthe wholecountry Morestudieswitho t h e r methodologiess h o u l d bee x e c u t e d t o s t u d y o t h e r a s p e c t s a n d o t h e r d e t e r m i n a n t s thatt h i s t h e s is c a n n o t m e a s u r e i n o r d e r tog i v e the m o r e a c c u r a c y a n d s p e c i f i c implicationsfortheruraldevel opment.

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PreparedfortheUNDP,WorldBankandIMFWorkshop.DataontheAccessof PoorandLow IncomePeopletoFinancialServices.Washington,DC,October26,2004.

(February,2007).“LandTitlingandRuralTransitioni n V i e t n a m ” D e v e l o p m e n t R e s e a r c h G r o u p , T h e W o r l d B a n k qdo@worldbank.org.H arvardBusinessSchool.liyer@hbs.edu

( 1 9 9 1 ) “ H o u s e h o l d s , Standardo f L i v i n g , a n d I n e q u a l i t y ” Re viewofIncomeand WealthSeries37,No.l,1991.

41 Skees,Jerry,Peter Hazell,andMarioMiranda.

(1999).“NewApproachestoCropYieldInsuranceinDevelopingCountries”.Co lumbus,Ohio: The OhioStateUniversity.

(May2005).“AccesstoFinancialServices:AReviewoftheIssuesandPublicPolicy Objectives”.WorldBankPolicyResearchWorkingPaper3589.

(2007) “Lendingpolicieso f informal,formalandsemiformall en der s E videncefromVietnam”.Journalcompilation© 2007T h e EuropeanB a n k f o r Reconstructiona n d Development.PublishedbyBlackwellPublishingLt d,9600G a r s i n g t o n Road,OxfordOX42DQ,UKand350MainSt,Malden,MA

( 1 9 8 3 ) “ A p e n n y s a v e d : K e n y a ’ s c o o p e r a t i v e s a v i n g s sche me.I n r u r a l m a r k e t s i n d e v e l o p i n g c o u n t r i e s : T h e i r u s e a n d a b u s e ” , ed.J.DV o n Pischke.D.W.Adams,a n d G.Donald.Baltimore,Md ,USA:JohnsHopkinsUniversityPress.

(2001).“Determinants o f Ruralhouseholds’B o r r o w i n g fromFormal FinancialSector:AstudyoftheruralcreditmarketinRedriverdeltaregion”.Masterthes is,Vietnam—NetherlandsProject,Hanoi.

50.http://www.adb.org/Microfinance/default.asp

51.http://dantri.com.vn/c76/s76-515564/nam-2011-xuat-khau-gao-dat-ky- luc-7-trieu-tan.htm

52.http://www.economicsconcepts.com/nurkse's modelofv i c i o u s c i r c l e o f overty

53.http://www.idrc.ca/openebooks/318-6/

SocioeconomicRenovationi n VietNamTheOrigin,Evolution,andImpactofD otMoieditedbyPeterBoothroydandPhamYuanNam,2000.

54.http://www.investinvietnam.vn/Default.aspx?ctl=Region Intro&tID=6&pID

55.http://www.mekongdelta.com.vn/mekongdelta

56.http://www.sbv.gov.vn/wps

57.http://tapchikinhtedubao.mpi.gov.vn/portal/page/portal/mpi en/31141/72250

*logitSOL2poorhousehold purposeofloan houseownpcexp2rlhhsizesexagehhedu empwageempselfAgpercentinterestrate

452.38886Iteration1:loglikelihood=-350.32998 Iteration2:loglikelihood 341.58973 Iteration3:loglikelihood=-341.30359 Iteration4:loglikelihood=-341.30291

LRchi2(11) = 222.17 Prob chi2 = 0.0000 Loglikelihood=-341.30291 PseudoM = 0.2456 SOL2 | Coef Std.Err z P>|z| [95%Conf.I n t e r v a l ] poorhousehold | -.6495144 2545006 -2.55 0.011 -1.148327 -.1507023 purposeofloan | 1.71563 2445863 7.01 0.000 l.23625 2.195011 houseown | 646125 4009613 1.61 0.107 -.1397447 1.431995 pcexp2rl | 0000957 0000406 2.35 0.019 000016 0001753 hhsize | 2450982 070333 3.48 0.000 1072481 3829483 sex | -.0256679 1964499 -0.13 0.896 -.4107026 3593669 age | 0128034 0052029 2.46 0.014 002606 0230008 hhedu | 0828837 0322197 2.57 0.010 0197341 1460332 empwage | 0472d59 2173519 0.22 0.828 -.3787361 4732679 empselfAg | 0893563 2075918 0.43 0.667 -.3175161 4962287 percentinterest | -.4040914 0634552 -6.37 0.000 -.5284613 -.2797216 cons | -1.537471 6361946 -2.42 0.016 2.78439 -.2905527

*reglnloanamountpoorhouseholdpurposeofloanlnpcexp2rlhhsizesexagehhedu empwageempselfAgpercentinterestratelnhousevaluefarmsize,robust Regressionwithrobuststandarderrors

| Robust lnloanamount | Coef Std.Err t P>|t| [95%Conf.Interval]

Poorhousehold | -.2412477 1140238 -2.12 0.035 -.4651471 -.0173483 Purposeofloan | 270578 0795021 3.40 0.001 1144661 4266899 lnpcexp2rl | 526307 1064618 4.94 0.000 3172565 7353576 hhsize | 1255259 0270785 4.64 0.000 072354 1786977 sex | -.0007295 0741981 -0.01 0.992 -.1464263 1449674 age | -.0016686 0019658 -0.85 0.396 -.0055287 0021915 hhedu | 0314932 0120363 2.62 0.009 0078585 0551279 empwage | -.2190595 081694 -2.68 0.008 -.3794754 -.0586436

1Tl]3SelfAg perc entinterestLll h ou s ev aJue farmsize cons

J ogiISOL2 poorornot07p c e x p 2 r1purposeof1oan zteratlon0: logIJkellhood- - 4 8 3 54367

IteratJon2: 1oq1 Jke1 1hood- - 4 3 4 18642 zterat±on3: logJJkellhood- - 4 3 4 18057

Loq1ike]ihood=-434.18057 houseownh h e d u h h S 1 z e s e x ageempse1fA

SOL2 Coef Std.Err z P>|z| [95Xc o n f z n t e r v a J J poorornot07 -.1034786 2298853 -0.45 0.653 -.5540455 3470883 pcexp2rJ 0000347 0000258 1.34 0.180 -.000016 0000853 purposeofl- n 3787609 2472151 1.53 0.125 -.1057719 8632936 houseown 5641086 4365895 1.29 0.196 -.2915911 1.419808 hhedu 1368916 0316779 4.32 0.OOO 0748041 1989791 hhsJze 2120779 0594668 3.57 0.000 0955251 sex -.5945815 2212609 -2.69 0.007 -1.028245

1npcexp2r1p u r p o s e o fl oan1nhouseva1uehheduhhszesexafarằis

Prob> F = 0.0000 R-squared -+ 3719 AdjR-squared footMSE

InJoanariount coef std.E r r $ p>|c| [9ssc o n f zncerva1J poorornot07

0.977 -.1726638 1777122 0078757 age 00212 33 0029307 0.72 0.469 0.2 36 -.0622381 -.003629 2520979 exipse1fAg phantramJa- farms1Ze

Researchl i m i t a t i o n

r e s o m e determinantsthathaveeffectsonthehouseholds’accesstoformalcreditsectorsuc hasthesocialorpoliticalparticipationofthehouseholdhead,theawarenessoncreditavailabili ty,etccannotmeasured.Thisthingleadstotheinsufficentmeasurementofallofdet erminantst h a t haveeffectsonthehouseholds’a c c e s s toformalcreditsector.M oreover,theresultsof thisthesishaveonlymeaningsintheMD,andcannotbeusedtoconcludeaboutthe wholecountry Morestudieswitho t h e r methodologiess h o u l d bee x e c u t e d t o s t u d y o t h e r a s p e c t s a n d o t h e r d e t e r m i n a n t s thatt h i s t h e s is c a n n o t m e a s u r e i n o r d e r tog i v e the m o r e a c c u r a c y a n d s p e c i f i c implicationsfortheruraldevel opment.

Aleem,I (1990).“Imperfecti n f o r m a t i o n , s c r e e n i n g , a n d the c o s t s ofinform allending:Astudyofaruralcredit marketinPakistan”.TheWorldBankEc onomicsReview.

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AsliDemirguc-Kunt,Th or st en BeckandPatrickHonohan.

(December,2006).“AccesstoFinance:Measurement, ImpactandPolicy.ConceptNote”.PolicyResearchReport.

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(2003).“ReducingVulnerability:Thedemandformicrofinance”.Asynthesisrepo rt.Nairobi:MicroSave-Africa.

(2002).“Theroleofwarehousereceiptsystemsunenhancedc o m m o d i t y m a r k e t i n g a n d r u r a l l i v e l i h o o d s i n A f r i c a ” F o o d PolicyV o l 2 7 NguyenHuuCuong(January2007).“AccesstocreditandBorrowingbehav iorofRuralHouseholdsinaTransitionEconomy”.Internationalconferenceo nR u r a l F i n a n c e r e s e a r c h :

M o v i n g r e s u l t s intoP o l i c i e s a n d Practices.FAOHeadquarters.Rome,It aly,19-21March2007.

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11.GeethaN a G a r a j a n a n d R i c h a r d L M e y e r (July2 0 0 5 ) “ R u r a l f i n a n c e : recentadvancesand emerginglessons,debates,andopportunities”.ReformattedversionofWorki ngPaperAEDE-WP-0041-

05,DepartmentofAgricultural,En vi ro nm en ta l, a n d DevelopmentEcon omics,The OhioStateUniversity(Columbus,Ohio,USA).

InformalFinancialSectors:TheAsianExperience”.WorldDevelopmentNo.1. 14.Goodland,A.,G.Onumahand0.Amadi.(1999).Ruralfinance.DFID/

NRIPolicySeriesNo.1 DepartmentforInternationalDevelopmentandNatura lResourcesInstitute:London,UK.

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(2002).“ I n n o v a t i v e f i n a n c i a l s e r v i c e s forruralIndia: monsooni n d e x e d l e n d i n g andinsurancef o r smallholders”.Agricultural andR u r a l D e v e l o p m e n t W o r k i n g P a p e r 9 The W o r l d B a n k : Washi ngtonDC,USA.

17.JanVanHeeswijk.(2004).“EnhancingAccess toFinance:WhatNeedstobedone?”.Accesstofinanceinternationalconference,Brussels,28

(2004).“APECandFinancialExclusion:Missedopportunitiesforc o l l e c t i v e a c t i o n ” P a p e r p r e p a r e d f o r T h e I n t e r n a t i o n a l Conferenceon AccesstoFinance.ConductedbytheWorldS a v i n g s BanksInstituteandthe WorldBank,Brussels28-29October2004.

19.KhalidMo ha med ( 2 0 0 3 ) “Access t oFormala n d Quasi- FormalC r e d i t bySmallholderF a r m e r s a n d ArtisanalF i s h e r m e n : A

(1984).“LoanT r a n sa c t i o n C o s t s , CreditRationinga n d MarketStruct ure:T h e C a s e o f B o l i v i a i n U n d e r m i n i n g R u r a l D e v e l o p m e n t w i t h CheapCredit”.WestviewPress.

22 LeKhuongNinh( 2 0 0 3 ) “Investmento f ricemillsinVietnam:Theroleo ffinancialm ar ket i m p e r f e c t i o n s a n d uncertainty”,D o c t o r a l d i s s e r t a t i o n , t h e Netherlands:UniversityofGroningen.

23 LeNhatHanh(2002).“Ananalysisofaccesstoformalcreditbyhouseholdfar ms:thecaseofVietnam”.M.Athesis,Masterof

24 McCarty,A (2001).“Microfinance i n Vietnam.A survey o f schemesan d issues”,StateBankofVietnam.

“MicrocreditandHouseholdPovertyReductioninRuralVietnam”.Prepared for the Conference on New Directions in Impact Assessment for Development:Methodsa n d Practice,t o behelda ttheUniversity of

( M a y 2 0 0 4 ) “ R u r a l credita n d household p o v e r t y r e d u c t i o n i n Vi etnam:E v i d e n c e u s i n g panel datafromhouseholdsurveys”.BirminghamBusin essSchool.

31.NguyenVanNgan(2003).“Effectsof thevalueofassetsonfarminghouseholds’a c c e s s tocrediti n ruaralV i e t n a m : the case ofChauT h a n h Adistrict,C a n Thoprovince”.M A thesis,M a s t e r o f Arti n EconomicDevelopment,TheVietnam-

( 2 0 0 6 ) “ F a c t o r s Influencing A c c e s s t o credito f householdsinruralare asofVietnam.Case study ofTanLinhCommnue,BaViD i s t r i c t , H a T a y P r o v i n c e ” Mastert h e s i s i n r u r a l developmentwithSpecializationinLivelihoodandnaturalresou rcemanagement.ISSN1403-7998.

I nc ome H o us e h o l d s ’ A c c e s s toFinancialServicesInternationalExperience ,Measures forImprovement,andtheFuture”.EARDSpecialStudies.

( 2 0 0 7 ) “ I m p o r t a n t R i c e P r o d u c t i o n S y s t e m U n d e r P r e s s u r e ” , ScienceDaily.R e t r i e v e d October10,2 0 0 7 fromt h e WorldWid eWeb:http://www.sciencedai l y c o m / r e l e a s e s /

35 Orozco,M.(2003) “RuralFinanceInnovationCaseStudy.Remittances,the ruralsectorandpolicyoptionsinLatinAmerica”.Paperpresenteda t Broad eningAccessandStrengtheningInputmarketSystems-Collaborative

PreparedfortheUNDP,WorldBankandIMFWorkshop.DataontheAccessof PoorandLow IncomePeopletoFinancialServices.Washington,DC,October26,2004.

(February,2007).“LandTitlingandRuralTransitioni n V i e t n a m ” D e v e l o p m e n t R e s e a r c h G r o u p , T h e W o r l d B a n k qdo@worldbank.org.H arvardBusinessSchool.liyer@hbs.edu

( 1 9 9 1 ) “ H o u s e h o l d s , Standardo f L i v i n g , a n d I n e q u a l i t y ” Re viewofIncomeand WealthSeries37,No.l,1991.

41 Skees,Jerry,Peter Hazell,andMarioMiranda.

(1999).“NewApproachestoCropYieldInsuranceinDevelopingCountries”.Co lumbus,Ohio: The OhioStateUniversity.

(May2005).“AccesstoFinancialServices:AReviewoftheIssuesandPublicPolicy Objectives”.WorldBankPolicyResearchWorkingPaper3589.

(2007) “Lendingpolicieso f informal,formalandsemiformall en der s E videncefromVietnam”.Journalcompilation© 2007T h e EuropeanB a n k f o r Reconstructiona n d Development.PublishedbyBlackwellPublishingLt d,9600G a r s i n g t o n Road,OxfordOX42DQ,UKand350MainSt,Malden,MA

( 1 9 8 3 ) “ A p e n n y s a v e d : K e n y a ’ s c o o p e r a t i v e s a v i n g s sche me.I n r u r a l m a r k e t s i n d e v e l o p i n g c o u n t r i e s : T h e i r u s e a n d a b u s e ” , ed.J.DV o n Pischke.D.W.Adams,a n d G.Donald.Baltimore,Md ,USA:JohnsHopkinsUniversityPress.

(2001).“Determinants o f Ruralhouseholds’B o r r o w i n g fromFormal FinancialSector:AstudyoftheruralcreditmarketinRedriverdeltaregion”.Masterthes is,Vietnam—NetherlandsProject,Hanoi.

50.http://www.adb.org/Microfinance/default.asp

51.http://dantri.com.vn/c76/s76-515564/nam-2011-xuat-khau-gao-dat-ky- luc-7-trieu-tan.htm

52.http://www.economicsconcepts.com/nurkse's modelofv i c i o u s c i r c l e o f overty

53.http://www.idrc.ca/openebooks/318-6/

SocioeconomicRenovationi n VietNamTheOrigin,Evolution,andImpactofD otMoieditedbyPeterBoothroydandPhamYuanNam,2000.

54.http://www.investinvietnam.vn/Default.aspx?ctl=Region Intro&tID=6&pID

55.http://www.mekongdelta.com.vn/mekongdelta

56.http://www.sbv.gov.vn/wps

57.http://tapchikinhtedubao.mpi.gov.vn/portal/page/portal/mpi en/31141/72250

*logitSOL2poorhousehold purposeofloan houseownpcexp2rlhhsizesexagehhedu empwageempselfAgpercentinterestrate

452.38886Iteration1:loglikelihood=-350.32998 Iteration2:loglikelihood 341.58973 Iteration3:loglikelihood=-341.30359 Iteration4:loglikelihood=-341.30291

LRchi2(11) = 222.17 Prob chi2 = 0.0000 Loglikelihood=-341.30291 PseudoM = 0.2456 SOL2 | Coef Std.Err z P>|z| [95%Conf.I n t e r v a l ] poorhousehold | -.6495144 2545006 -2.55 0.011 -1.148327 -.1507023 purposeofloan | 1.71563 2445863 7.01 0.000 l.23625 2.195011 houseown | 646125 4009613 1.61 0.107 -.1397447 1.431995 pcexp2rl | 0000957 0000406 2.35 0.019 000016 0001753 hhsize | 2450982 070333 3.48 0.000 1072481 3829483 sex | -.0256679 1964499 -0.13 0.896 -.4107026 3593669 age | 0128034 0052029 2.46 0.014 002606 0230008 hhedu | 0828837 0322197 2.57 0.010 0197341 1460332 empwage | 0472d59 2173519 0.22 0.828 -.3787361 4732679 empselfAg | 0893563 2075918 0.43 0.667 -.3175161 4962287 percentinterest | -.4040914 0634552 -6.37 0.000 -.5284613 -.2797216 cons | -1.537471 6361946 -2.42 0.016 2.78439 -.2905527

*reglnloanamountpoorhouseholdpurposeofloanlnpcexp2rlhhsizesexagehhedu empwageempselfAgpercentinterestratelnhousevaluefarmsize,robust Regressionwithrobuststandarderrors

| Robust lnloanamount | Coef Std.Err t P>|t| [95%Conf.Interval]

Poorhousehold | -.2412477 1140238 -2.12 0.035 -.4651471 -.0173483 Purposeofloan | 270578 0795021 3.40 0.001 1144661 4266899 lnpcexp2rl | 526307 1064618 4.94 0.000 3172565 7353576 hhsize | 1255259 0270785 4.64 0.000 072354 1786977 sex | -.0007295 0741981 -0.01 0.992 -.1464263 1449674 age | -.0016686 0019658 -0.85 0.396 -.0055287 0021915 hhedu | 0314932 0120363 2.62 0.009 0078585 0551279 empwage | -.2190595 081694 -2.68 0.008 -.3794754 -.0586436

1Tl]3SelfAg perc entinterestLll h ou s ev aJue farmsize cons

J ogiISOL2 poorornot07p c e x p 2 r1purposeof1oan zteratlon0: logIJkellhood- - 4 8 3 54367

IteratJon2: 1oq1 Jke1 1hood- - 4 3 4 18642 zterat±on3: logJJkellhood- - 4 3 4 18057

Loq1ike]ihood=-434.18057 houseownh h e d u h h S 1 z e s e x ageempse1fA

SOL2 Coef Std.Err z P>|z| [95Xc o n f z n t e r v a J J poorornot07 -.1034786 2298853 -0.45 0.653 -.5540455 3470883 pcexp2rJ 0000347 0000258 1.34 0.180 -.000016 0000853 purposeofl- n 3787609 2472151 1.53 0.125 -.1057719 8632936 houseown 5641086 4365895 1.29 0.196 -.2915911 1.419808 hhedu 1368916 0316779 4.32 0.OOO 0748041 1989791 hhsJze 2120779 0594668 3.57 0.000 0955251 sex -.5945815 2212609 -2.69 0.007 -1.028245

1npcexp2r1p u r p o s e o fl oan1nhouseva1uehheduhhszesexafarằis

Prob> F = 0.0000 R-squared -+ 3719 AdjR-squared footMSE

InJoanariount coef std.E r r $ p>|c| [9ssc o n f zncerva1J poorornot07

0.977 -.1726638 1777122 0078757 age 00212 33 0029307 0.72 0.469 0.2 36 -.0622381 -.003629 2520979 exipse1fAg phantramJa- farms1Ze