INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM VIETNAM-NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS AN ANALYSIS OF ACCESS TO FORMAL CREDIT OF THE HOUSEHOLDS IN RURAL AREAS The case of the Mekong River Delta BY TRAN THI THU HONG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, December 2012 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ' INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM-NETHERLANDS • PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS AN ANALYSIS OF ACCESS TO FORMAL CREDIT OF THE HOUSEHOLDS IN RURAL AREAS The case of the Mekong River Delta A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TRAN THI THU HONG ) ' Academmic Supervisor DR TRAN TIEN KHAI 't HO CHI MINH CITY, December 2012 CERTIFICATION "I certify that the substance of this thesis has not already been submitted for any degree or examination I certify that to the best of my knowledge, help received in preparing this thesis, and all sources used, have been acknowledged in this thesis." Signature TRAN THI THU HONG Date: 31112/2012 ' Pagei ACKNOWLEDGEMENTS First of all, I would like to thank for my teacher, Dr Tran Tien Khai who has taught me methodically conduct research, for his encouragement, and guidance during the completion of this thesis I would like to express my appreciation towards the teachers and staffs of V~etnam-Netherlands Program, for the knowledge that I received throughout the years This knowledge helped me to complete thesis Finally I would like to thank my family, my husband who have encouraged and hctlped me very much in my study Page ii ABSTRACT: This study attempts to find out what are the main determinants that affect the access to the formal credit sector of the households live in the Mekong River Delta with the data extracted from VHLSS 2006 and 2008 To fulfill the research objective, this study relies on the function of credit given to a household of M.H Quach, A W Mullineux, V Murinde (2004) With the helpings of Stata- and Stata -11 software, the logistic model and Ordinary Least Squared method are employed to explore the main factors that can be used to measure households' access to formal credit sector by the possibility of getting credit or not and the loan amount that households got from the formal credit sector The results of regression indicates that some variables such as poor household, real per capita expenditure, purpose of loan, house own, household head's education, farm size and interest rate have significant effects on households access to formal credit Therefore, in order to broaden the access to formal credit of the households in the Mekong River Delta as well as Vietnam, the banking system and ' the government should concentrate on solving problems that related to variables m~ntioned above I I I I KEYWORDS: access to formal credit, households, Mekong Delta River Page iii I I TABLE OF CONTENTS Acknowledgements : 11 Abstract ············································································································ iii Tables of contents .iv List of abbreviations • •.••.• •.• • •.•.• •.• • • • • .• •• .•.• Vl· List oftables and figures ························· v 1·1· CHAPTER 1: INTRODUCTION Problem statement Research objectives 3 Research questions Research hypothesis Data sources and methodology Scope and limitation of the research I Structure of the thesis CHAPTER 2: LITERATURE REVIEW I 2.1 Definitions ., 2.1.1 I 2.l2 Households and households in rural areas Formal credit versus Informal credit I 2.1.3 Micro finance and Access to credit 2.2 Theoretical framework related to determinants that affecting to the formal credit by rural households : 2.2.1 Traditional approach - the dominant paradigm in the 1950s- 1970s 2.2.2 Financial repression approach 10 2i.2.3 New institutional economics approach 12 2.2.4 Conclusions ofthree approaches 13 2.3 Credit market model : 13 2.3.1 Households' borrowing behavior and the Demand for Credit 15 2.3 Credit supply and behavior of formal lenders 17 2.4 Empirical studies related to the determinants that affecting to the formal credit by rural households · · · 19 2.4 The household charact~ristics 20 Page iv 2.4.2 The lender characteristics 23 2.4.3 The location characteristics or the availability of the formal funds 24 2.4.4 The local market characteristics 24 I 2.5 Chapter remark 24 CHAPTER 3: RESEARCH METHODOLOGY26 Methodology 26 ~.2 Model specification 26 CHAPTER 4: FINANCIAL SYSTEM AND ACCESS TO FORMAL CREDIT BY HOUSEHOLDS IN ME~ONG RIVER DELTA 4.1 Rural financial system in Vietnam 30 4.1.1 Overview of rural financial supplier 30 a The formal sector 30 b The semi-formal sector 32 c The informal sector : 33 d Summary 34 4.1.2 Some weakness and challenges ofthe rural financial system 34 a Weakness of the financial system 34 b Rural finance challenges 37 4.2 Households in the Mekorig River Delta 39 4.2.1 General picture of the Mekong River Delta 39 4.2.2 Rural financial system in the Mekong River Delta 41 a Households characteristics 41 b Production characteristics 43 4.2.3 Credit characteristics 44 a Credit sources 44 b Interest rates c Loan size 49 d Aim ofborrowing and uses of loan 50 e Lending procedures and collateral requirement 52 f Information problem of banks with respect to households 54 4.3 Summary 54 Pagev 4.4 Determinants of credit accessibility of households in Mekong River Delta 55 4.5 Chapter conclusions 61 CHAPTER 5: CONCLUSION AND POLICY IMPLICATION 5.1 Conclusion 63 5.2 Policy implication 64 5.3 Research limitation 66 References 67 Appendices 74 LIST OF TABLES Table 3.1: Table of independent variables 29 Table 4.1a: Household's size, householder's age and real expenditure per capital (with VHLSS 2006) • 41 Table 4.lb: Household's size, householder's age and real expenditure per capital (with VHLSS 2008) 42 Table 4.2a: Education level of household head (with VHLSS 2006) 42 Table 4.2b: Education level of household head (with VHLSS 2008) 42 Table 4.3a - Typology of credit sectors and lending characteristics in MD (wi th VHLSS 2006) 45 Table 4.3b - Typology of Credit sectors and lending characteristics in MD (with VHLSS 2008) 45 Table 4.4 a- Source of the rural credit in classifying poor or not poor (with VHLSS 2006) : 46 Table 4.4 b- Source of the rural credit in classifying poor or not poor (with VHLSS 2008) ······························································································································· 46 Table 4.5a- Sources of the rural credit in interest rates (with VHLSS 2006) 48 Table 4.5b- Source of the rural credit in interest rates (with VHLSS 2008) 48 Table 4.6a- The average loan amount of the poor households (with VHLSS 2006) 49 Table 4.6b- The average loan amount of the poor households (with VHLSS 2008) 49 ,Table 4.7a- Loan uses by wealth categories (with VHLSS 2006) 50 Table 4.7b- Loan uses by wealth categories (with VHLSS 2008) 51 Table 4.8a: Collaterals require)llent in two sectors (with VHLSS 2006) 54 Page vi Table 4.8b: Collaterals requirement in two sectors (with VHLSS 2008) 54 Table 4.10a: S~multaneous equat~on models w~th VHLSS 2006 56 table 4.10b: Simultaneous equatiOn models w1th VHLSS 2008 60 LIST OF FIGURES Figure 1: The vicious circle of capital formation 10 Figure 2: The commercial banks' lending procedure 52 ABBREVIATIONS MFis: micro-finance institutions NGOs: non-governmental organizations LUCs: Land Use Certificates VBARD: Vietnam Bank of Agriculture and Rural Development VBP: Social policy Bank GDP: Gross Domestic Product MD: Mekong River Delta RD: Red River Delta Page vii CHAPTER 1: INTRODUCTION Problem statement Vietnam is regarded as the rapid growing economy in the world The average growth rate of GDP in the period 2000-2008 is about 7.4%/year, in 2009 is 5.32% and in 2010 is 6.78% With 75% of the population live in the rural area, agricultural production accounts for 22% of GDP, 30% of exports and 60% of employment The Mekong River Delta (MD) is one of the two main agricultural production regions in Vietnam In the early months of the year 2011, MD has export 4.1 million tons of rice, account for 90% of rice export of all the country, value export of rice is above billion USD However, the rate of the poor ofthis region in 2010 is very high, accounts 18.85% the poor households of the country, the income is about 975 USD/person/year, very low in compared to income 1,160 USD/person/year of the country It is found that "limited access to available resource including financial capital, is among the main underlining causes of poverty in Vietnam Microfinance is a key part of such resources from which the poor can choose and develop better livelihood" (UNDP, 1996) Morduch and Haley (2002) also found that when the poor get access to credit, they can "improve their productivity and management skills; create jobs, smooth income flows and consumption costs; enlarge and diversify their businesses; and hence, their income can be increased and they have a better conditions on taking health care and education " Since in 1997, the Vietnamese government has launched the Hunger eradication and Poverty Reduction concentrated on improving the poor's access to credit, especially in the rural areas The major institutions that mission are Vietnam Bank for Agriculture and Rural Development (VBARD), Vietnam Bank for the Poor (VBP) and People's Credit Funds (PCFs) Through credit programs, they provide loans to poor households at subsidized interest rates However, they have failed to provide sustainable and large extent access to credit to the poor and be sustainable credit institutions According to Stijn Claessens (2005, page 2), the main reason of this from dataset of VHLSS 2006 Except the variable PURPOSEOFLOAN, the sign of this variable is minus in the Equation Y2-Loan amount, that can be explained by the higher amount of loans the banks provide for the households are used for house purchase/repair and others uses With two variables SEX and AGE, although their sign are different with these variables in the Equation Y2-Loan (VHLSS 2006, but they have no significant at 10%, so we not need to worry about them 4.5 Chapter conclusion a Chapter summary In this chapter, we have seen that access to formal credit can be measured by two ways, the probability and the extent that household access to formal credit The demand and supply factors are combined to measure the determinants of household's access to formal credit Two econometric methods, logistic and OLS have been utilized by using two datasets of VHLSS 2006 and VHLSS 2008 The main conclusions have been drawn out as follows: The models attempts to prove that household characteristics, loan characteristics and endowments of household determine the probability of household's access to formal credit sector and loan amounts borrowed Empirical results show that the models we choose are acceptable because the Prob>F = 0.000 lzl 0.653 0.180 0.125 0.196 0.000 0.000 0.007 0.144 0.000 0.000 0.014 856 98.73 0.0000 0.1021 [95% Conf Interval] -.5540455 -.000016 -.1057719 -.2915911 0748041 0955251 -1.028245 -.0034413 3326725 -.2539725 -3.038421 3470883 0000853 8632936 1.419808 1989791 3286306 -.1609182 0236465 1.060096 -.1180432 -.3463563 reg lnloanamount poorornot07 lnpcexp2rl purposeofloan lnhousevalue hhedu hhsize sex a > ge empselfAg phantramlaisuat farmsize 856 Number of obs = MS df ss source F( 11, 844) = 45.43 Prob > F = 0.0000 11 46.0874729 506.962202 Model R-squared = 0.3719 844 1.01451687 856.25224 Residual Adj R-squared = 0.3637 = 1.0072 Root MSE 1363.21444 855 1.59440286 Total lnloanamount poorornot07 lnpcexp2rl purposeofl-n lnhousevalue hhedu hhsize sex age empselfAg phantramla-t farmsize cons coef -.1453093 7475519 -.4698787 197186 0300233 1437328 0025242 0021233 0949299 -.0303935 0000316 -.1197046 Std Err t P>ltl 1047501 0947998 1089716 0342917 0123719 0241738 0892551 0029307 0800742 013965 4.51e-06 7959447 -1.39 7.89 -4.31 5.75 2.43 5.95 0.03 0.72 1.19 -2.18 7.01 -0.15 0.166 0.000 0.000 0.000 0.015 0.000 0.977 0.469 0.236 0.030 0.000 0.880 [95% conf Interval] -.3509106 5614809 -.683766 1298789 00574 096285 -.1726638 -.003629 -.0622381 -.0578038 0000227 -1.681968 060292 9336229 -.2559915 2644931 0543067 1911806 1777122 0078757 2520979 -.0029832 0000404 1.442559 \ 75 ... (2002), there are four main determinants affect to the rural households' access to formal credit: The first determinant that constrains the access of the households to the formal credit is lack of. .. countries, the main reason for the existence of the informal credit sector is the underdevelopment of the formal credit sector In contrast to the formal credit sector, the informal credit sector supplies... lending and saving activities in small-scale of households in the rural area According to ADB, microfinance plays an important role in reducing poverty Facilitating access to microfinance can help the