Effecting of loan amount on farm households income in tan chau district tay ninh province

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIET NAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM — THE NETHERLANDS PROJECT FOR M.A ON DEVELOPMENT ECONOMICS EFFECTING OF LOAN AMOUNT ON FARM HOUSEHOLDS INCOME IN TAN CHAU DISTRICT TAY NINH PROVINCE A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY DANG NGOC QUY B0 VA TRUONG OH KINH TE TP HCM Academic Supervisor: Dr LE KHUONG NINH Ho Chi Minh City, June 2007 CERTIFICATION “I certify that the substance of thesis has not akeady been submitted for any degree and is not being currently submitted for any degree I certify that, to the best of my knowledge, and help received in preparing this thesis, and all sources used, have been acknowledged in this thesis” Signature Dang Ngoc Quy Date: June 2007 ACKNOWLEDGMENT This thesis would not have been finished without the helps and supports of numerous individuals and institutions Therefore, I would express my sincerest gratitude to them Firstly, I would like to thank my academic supervisor, Dr Le Khuong Ninh He spent a lot of time on my thesis His ideas and comments make my thesis become more concise, more clearly I sincerely thank Dr Nguyen Hoang Bao, Mr Truong Dang Thuy They have helped me to orient for the topic and to collect books from the beginning until finishing of the thesis I would like to thank all lecturers and staffs of the project who have helped me anyway to improve my knowledge They have settled my foundations on development economics and international standard research methodology I would like to thank all my classmates and my colleagues for their helps, encouragement and cooperation during my learning and studying time Last, but not least, I would like to devote sincere gratitude to my family They has encouraged and helped me from the beginning until finishing of the thesis ABSTRACT The farm households need credit to buy production inputs such as land, fertilizers, insecticides and seeds, etc If the farm households lack of credit and insufficient funds to buy the production of input results in unattainable profit- maximizing quantity of inputs Therefore, credit is essential for farm households’ productivities Due to the limited access to credit that creates a bad consequence for poor farm households Hence, credit is one of the tools that can solve this problem for farm household Therefore, this study aims at studying the effect of loan size on income of farm households who are facing credit constraint in Tan Chau district, Tay Ninh province Data used in this thesis is collected from a survey in Tan Chau district, Tay Ninh province TABLE OF CONTENTS CHAPTER 1: INTRODUCTION 1.1 Problem State 1.2 Research question .3 1.2.1 Research main question 1.2.2 Research sub-question .3 1.3 Objectives of the thesis .3 1.3.1 General objectives 1.3.2 Specific objectives .4 1.4 Research hypotheses 1.5 Structure of the thesis .4 CHAPTER 2: LITERATURE REVIEW .5 2.1 D 2.1.1 Farm households 2.1.2 Conditional loan 2.1.3 Subject loan .6 2.1.4 Creait rationing 2.1.5 Access to credit 2.1.6 Formal and informal financial 2.2 Theoretical backgrounds .7 2.2.1 Producer problem 2.2.2 Consumer problem 2.2.3 Worker problem .9 2.2.4 Household model 10 2.2.5 Household model with credit constraint 11 2.2.6 Household model credit constraint (Gershon Feder Lawrence J Lau Justin Y Lin and Xiaopeng Luo, (1990),) .13 2.2.6.1 Definition of initial endowments 13 2.2.6.2 Production 13 2.2.6.3 The Utility function 14 2.2.6.4 Second period consumption and capital 14 2.2.6.5 The Budget constraint 15 2.3 Empirical studie 2.3.1 Empirical study of Gershon Feder Lawrence J Lau Justin Y Lin and Xiaopeng Luo, (1990) 17 2.3.2 Empirical study of Heidhues (2002) 19 2.3.3 Empirical study of Pham Ban Duong and Yoichi Izumida (University of Tokyo, Japan) 21 CHAPTER 3: METHODOLOGY 25 3.1 The Econometric Design 25 3.2 The Conceptual Design 26 3.2.1 Dependent Variable (Income) .26 3.2.2 Independent variable 26 3.3 Data collection in 3.4 The sampling method 30 3.5 Summary this chapter .32 CHAPTER 4: MODEL SPECIFICATION, EMPIRICAL RESULTS AND INTERPRETATION 34 4.1 Overview of Tan Chau District .34 4.1.1 Geographical location and population 34 4.2 The Rural Credit in Tan Chau district 36 4.2.1 The Financial Institution 36 4.2.1.1The Vietnam Bank for Agriculture and Rural Development (VBARD) 36 4.2.1.2 The Vietnam bank for poor (VBP) .37 4.2.1.3 Commercial bank (CB) 37 4.2.1.4People Credit Fund (PCFs) 37 4.2.1.5Moneylenders 38 4.2.1.6 Storekeepers 38 4.2.1.7 Relatives and Friends 38 4.2.1.8 Rotating savings and credit associations (ROSCA) .39 4.3 Empirical Results and Interpretation 39 4.3.2 Descriptive statistic analysis 42 4.3.2.1 Farm income and non-farm income of farm households .43 4.3.2.2 Income-loan size of farm households 44 4.3.3 Econometric analysis 53 4.4 Summary this ch 58 CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS 60 5.1 Conclusion 60 5.2 Policy implications .62 LIST OF TABLE Table 3.1 Variable summary 29 Table 3.2 Distribution of population in six communities in Tan Chau district 30 Table 3.3 Calculating distribution of population in six communes in Tan Chau distant 32 Table 4.1 Distribution of population 35 Table 4.2 Distribution of sample in various regions in Tan Chau district 40 Table 4.3 descriptive statistics of continuous variables for the sample , 42 Table 4.4 descriptive statistics of income of farm households 43 Table 4.5 descriptive statistics of income —loan size of farm households 44 Table 4.6 Distribution of households borrow from formal and informal sector 44 Table 4.7 Loan size of households from formal and informal credit and needing credit 46 Table 4.8 loan size of households borrowed from formal credit 47 Table 4.9 loan size of households from informal credit 48 Table 4.10a purposes of households using loan 49 Table 4.10b purposes of households using loan 49 Table 4.10c income-loan size purpose of households 50 Table 4.11 Distribution of average borrowing costs and interest rate 51 Table 4.12 Distribution of average recipient of loan and repayment duration 52 ABBREVIATIONS CB Commercial Bank GSO General Statistic Office in' meter square OLS Ordinary Least Square PCFs People’s Credit Funds ROSCA Rotating Savings and Credit Associations VBARD Bank for Agriculture and Rural Development VBP Vietnam Bank for Poor VLSS Vietnam Living Standards Survey VND Vietnamese dong to Percent CHAPTER 1: INTRODUCTION 1.1 Problem Statement In Vietnam, there are two credit institutional systems in co-existence, formal and informal credits The formal credit refer to this paper are the Bank for Agriculture and Rural Development (VBARD), Vietnam Bank for the Poor (VBP), commercial bank (CB) and People’s Credit Funds (PCFs) This system provides credit for poor farm households with favor interest rate While the informal sector include rotating savings and credit associations (ROSCAs), moneylenders, storekeepers, relatives, neighbors and friends This system provides credit for farm households with a higher interest rate compare to formal credit However, the probability of access to formal credit is limited According to the 2004 Vietnam Living Standards Survey (VLSS), there are only 30 to of total loans of households were received fiom formal credit while informal credit provided about 70Ro This limitation may be due to the unavailable assets for collateral or might be the lack of knowledge of loaning procedures Vietnam is an agrarian nation where 75Ro of the population settles in the countryside and about 70Ro of labor force has fieldwork Most of the population of Vietnam concentrates in farm area where they struggle for their daily needs They need credit to buy production inputs such as land, fertilizers, insecticides and seeds As a result, credit is essential for poor farm households for productivity However, due to the limited access to credit, input factor must be necessary for farm households at the beginning of crops Consequently, credit constraint limits the optimum production or consumption choices of farm households along the line suggested by Sadoulet & de Janvry, 1995, Chapter 6, pp 149—150 Le N H (2002) A Aii‹z /ys /s of Access to Formal Credit by Household Farms The Case of Vietnam Master of Arts in Economics of Development, VietnamNetherlands Project, He Chi Minh City Ledgerwood, J (1999) Suitable Banking With the Poor - Microfinance Handbook.- An Institutional and I /n‹inciof Perspective Washington, D.C World Bank Meyer, L.R and Nagarajan, G (2000), Rural Financial Market in Asia Poficy, Paradi gins, and Performance Published for Asean Development Bank by Oxford University Press pp 26-65 Moll, H.A.J (Ed) (2000) Banks in Rural Financial Market (D120-229), Wageningen university Press Nguyen V N (2003) Effects of the Value of Assets on Farming Households’ Access to Credit in Rural Vietnam.’ The Case of Chauthanh A District, Cantho Province Master of Arts in Economics of Development, Vietnam-Netherlands Project, He Chi Minh City Nguyen, M.H (2001) Effect of Farmer’s Education on Household’s Access to Formal Credit A Case of Vietnam Rural Master of Arts in Economics of Development, Vietnam-Netherlands Project, Ho Chi Minh City Nguyen, T.T.H.(1996) The Rural Financial 5ystem in Vietnam An Assessment of Microfinance Policy and Credit Based Programmes for the Poor Master of Arts in Economics of Development, Vietnam-Netherlands Project, Ha Not Nguyen, T.T.H (2002) An Anal ysis of Informal versus Formal Microfinance Activities of the Rural poor in Vietnam Master of Arts in Economics of Development, Vietnam-Netherlands Project, Ha Not Nguyen, T.P.(2000) The Determinants of Moneblender Interest Rates in Rural Vietnam, Master of Arts in Economics of Devel‹›pment, Vietnam-Netherlands Project, He Chi Minh City Padmanabhan, K.P (1998) Rural credit Lesson for Rural Bankers and Policy London Intermediate Technology Publication Ltd pp 25 Pham and Yoichi Izumida, (2002) Rural Development Finance in Vietnam A Micro econometric Anal ysis of Household Survey “The Impact of Credit on Household production“ Ramu Ramanathan (2002) “Introductory econometrics with application” Chapter 8, pp 347-357 Ray, Debra (1998) Development Economics New Jersey Princeton University Press Stiglitz, J.E and A Weiss (1981) Credit Rationing in Markets With Imperfect Information, American Economic Review, !7ol 71, no pp 393-410 66 Stiglitz, J.E and K hoff (1993) Imperfect information and Rural Credit Markets Puzzles and Policy Perspective’ in K.Hoff, A Braverman and I.E.Stig1itz (1993) The Economics of Rural Organization Theory, Practice and Policy Oxford Universit:y Press, pp 33-35 Tran, V.D (2002) Determinant Factors of the Repayment Rate of Formal Credit for People Under the Nation Income Poverty Line A Case Study of Ninh Thuan Province in Vietnam Master of Arts in Economics of Development, VietnamNetherlands Project, Ho Chi Minh City Sadoulet & de Janvry (1995) Chapter 6, pp 149-150 Tip Chi Ngan Hiing, Ngan Héng Nhé Nitac Viet Nam so‘8 th‹ing 2006 pp 7-13 Von Pischke, J.D (1980) The POlitiCDl Economy of Specialized Farm Credit Institution in I.Howell Borrowers and Lenders, Oversea Development Institution pp 81-104 Von Pischke, J.D (1983) A Penny Saved Kenya’ s Cooperative Savings Scheme in J.D Von Pischhke, D.W Adams and G Donald Rural Credit Market in Developing Countries Their Use and Abuse, John Hopkins Universit:y Press pp 302-307 Appendix Part I Information about household 67 Information about household Name of farm household head: Date of interviewer: Hamlet commune: Code Job (2) farmer staff other QUESTIONAIRE ABOUT RURAL CREDIT Number of households (3) Number of working in agricultural (4) Numbers have income (5) Gender Age (c (6) Ma1e< Female (7) Part II Information about Land Information about Land Land title Have or no Have (1) Hectare (10.000m') (2) Have “red” certification or not (3) a Cultivation b Garden of land c Dwelling land d Other Total Part III Information about Credit 68 A Formal Credit Source Loan From (a), (b), (c), Last loan to now (months) (d), (e) ( ) (1) Received amount (1000) ) Repayment Debt Duration (1000) (Months) ($) (4) Interest Applied day rate to received Your house (" (6) (Days) office (7) (km) By meant(9) to lender’s How long for a tour (minute) Taking loan procedure (11) (10) (8) a motorbike VBARD walkingo Yourself Other motorbike O Yourself Other O walkingo bicycle walking Yourself Housing Other O Red Wage O other O bicycle º other d PCFs motorbike O walkingD Yourself Other and othero motorbike Yourself Other Housing Red Wage O other k Yourself Other Housing O Red walking O programs bicycle O othero f other motorbike º Housing O Red Wage O other O bicycle º e Project Housing O Red O Wage other D othero motorbike Housing O Red O Wage other O bicycle otherD c CB collateral (12) walking O Wage k bicycleD otherD of k Has your family borrowed money from formal credit (Banks, cooperatives, people credit funds ) Yes ± No ± (If yes, continuing; If No move to part B) How much is estimated cost of lending per one taking loan? Information about asked loan purpose and loan use? purpose Aims in application (1) Amount (1.000VND) (2) a Production b Breeding c Business d consumption e Construction f Other B Informal Credit Has your family borrowed money from informal credit ( Moneylenders, Storekeepers, Relatives, Friends, ROSCA ) Yes º No º (If Yes, continuing ; If No move to part C) Source Loan Last Received From (a), loan to amount (b), (c), now (1000) Repayment Duration (MonthS) (4) Debt (100s› (5) Interest rate ('7o) Applied Your How long Taking loan day to receiv d house for a tour procedure (6) (Days) to lender’s nute) " 0) ( (7) By meant(9) office collateral (12 ( 11) (km) (8) a Moneyle riders motorbike O Yourself Other Housing Red $ other O Yourself D Housing O Other O Red n walkingo bicycle other b Storekee motorbike walkingo bicycle pers other O O othero If (a), (b) continuing If ( c ), (d), (e) go to (4) Stopping d Relativ e e other 71 How much is estimated cost of lending per one taking loan? Information about asked loan purpose and loan use? purpose a Production b Breeding c Business d consumption e Construction f Other Aims in application (1) Yes No Yes No Yes No Yes No Yes No Yes No Amount (1.000VND) (2) C Information about households not borrow Why have not you borrowed from formal and informal credit? a Not apply because lack of requirement of collateral b Apply but be refused c No need of credit d difficult of procedure loan e Not loan because can not payment f Not know institutions that give loan g Other 10 If the Banks give loan, can you borrow? Yes NO Yes Yes Yes Yes Yes Yes Yes No No No No No No No (If Yes, continuing; If No Stopping) 11 How much you borrow? 72 12 Information about asked loan purpose and loan use ? purpose Aims in application (1) Amount (1.000VND) (2) a Production Yes No b Breeding Yes No c Business Yes No d consumption Yes No e Construction Yes No f Other Yes No Part IV Information about Income and Cost of farm households 13 income from cultivation (unit: 1000 VND/year) Cultivation of households (Within 12 months) Have or Not (b) Sugar-cane (c) Paddy (d) Fruit-tree (e) others Total Yes Yes Yes Yes Hectare (2) Output (Ton/ha/year) (3) Price (Kg/VND) (4) Cost (1,000/ year/ha) (5) Rent of land or Not (6) Cost of land (1,000/ha) (7) The year cultivate (8) No No No No 73 14 Income from livestock (Unit: 1000VND/year) Livestock unit/year of households (Within 12 months) (a) Buffalos Have or Not Yes input Price of input Output Price of output Cost (1,000VND/ (1000VND/Unit/year) (2) (1000VND/unit/year) (3) (1000VND/Unit/year) (4) (1000VND/unit/year) (5) (6) NO 15 income from Working ( Unit : 1000VND/year) Numbers of households (Within 12 months) Wages or Part time Numbers of households (numbers) (2) Wages (1000VND/ month) (3) Part time (1000VND/ month) (4) Number of months working(number) (5) Other income (1000VND/ month) (6) 74 Appendix2 Test Econometric Model Unrestricted model Table Appendix2.1 Dependent Variable: INCOME Method: Least Squares Date: 06/15/07 Time: 13:27 Sample: 178 Included observations: 178 Variable Coefficient Std Error t-Statistic Prob C LOANSIZE AGE EDU FACTOR LABOR LAND RATIO -19642.95 0.425488 236.7936 85.11545 -0.134631 1536.104 9504.930 5552.032 6979.666 0.097730 118.9666 384.0632 0.086780 1140.120 850.3687 7277.058 -2.814311 4.353720 1.990421 0.221618 -1.551406 1.347319 11.17742 0.762950 0.0055 0.0000 0.0481 0.8249 0.1227 0.1797 0.0000 0.4466 R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat 0.748747 0.738402 14807.97 3.73E+10 -1957.798 1.558435 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) 25645.95 28951.96 22.08762 22.23062 72.37285 0.000000 Source.- Author’s calculation based on survey data Firstly, in order to estimate the reliability of the regression results, it is to test the problems of individual partial regression coefficients (T-test) From the results of the unrestricted model, we found that five out of seven regression coefficients are statistically significant The coefficients of debt and land are significant at percent while the coefficients of factor, labor are significant at 10 percent and the coefficient of age at percent However, education and ratio are not statistically significant So the model can be omitted the, education and ratio variable Therefore, we run the restricted model 75 Table Appendix2.2 Dependent Variable: INCOME Method: Least Squares Date: 06/15/07 Time: 13:29 Sample: 178 Included observations: 178 Variable Coefficient Std Error t-Statistic Prob C LOANSIZE AGE FACTOR LABOR LAND -16140 14 0.427940 223.3021 -0.135888 1619.319 9562.663 5445.354 0.097257 117.2428 0.086420 1119.828 829.1894 -2.964021 4.400077 1.904613 -1.572406 1.446042 11.53254 0.0035 0.0000 0.0585 0.1177 1500 0.0000 R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat 0.747784 0.740452 14749.83 3.74E+10 -1958.139 1.596247 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) 25645.95 28951.96 22.06898 22.17623 101.9908 0.000000 Source.- Author’s calculation based on survey data Use F-test to choice model Hypothesis H oº < s = = 7= (Use restricted model) Hypothesis H,: At least o o • •7 • (Use unrestricted model) Calculate Gpiticai use Excel =Finv (0.05, 3,170) = 2.65 F Cyj(ical; Maintain Hg - use restricted model The equation of linear model Estimation Command: LS INCOME C LOANSIZE AGE FACTOR LABOR LAND Estimation Equation: INCOME - C(1) + C(2)*LOANSIZE +- C(3)*AGE + C(4)*FACTOR + C(5)*LABOR + C(6)*LAND Substituted Coefficients: INCOME - -16140.14414 + 0.4279397841*LOANSIZE + 223.3020908*AGE 0.1358876474*FACTOR + 1619.319172*LABOR + 9562.662916*LAND The third, we test the overall significant of the sample regression or the F test is done with the hypothesis that (Gujarati, 1995) as follows: 76 H : All slopes of coefficients are simultaneously zero (null hypothesis that means H,: Not all slopes of coefficients are simultaneously zero (it means From the results on table Appendix2.2, we show that the F-statistic is larger (equals to 101.99) and the probability of F-statistic equals to 0.0000, hence the H is rejected This leaded to not all slope of coefficients are simultaneously zero The third, the data of model is cross—section data, so we need test for multicollinearity and heteroscedasticity Test for multicollinearity (VIF) From the results on table Appendix2.2, we show that lower R' and partial coefficients had statistic significant at he and 109e Variance —Inflation Factor (VIF) is used to test the problem of multicollinearity (Gujarati, 1995) VIF = All computed VIF is smaller than 10, and it means that there is no multicollinearity arising in the model 77 1/VIF Variables Loan size 1.47 Age 1.03 Factor 1.69 Labor 1.01 Land 1.42 Mean VIF 6.62 0.68 0.97 0.59 0.99 0.7 Test for heteroscedasticity: Run regression (regression result from table appendix2.2) and calculate the residual Genr residual = resid Genr residual2 = residº2 Genr absresidual= abs (residual) Regression the residual variables on the independent variables BriuschPaaan test RESIDUAL2 = 42165584.32 + 3717.386296*LOANSIZE - 1215797.259*AGE 4344.273668*FACTOR - 18200596.7*LABOR + 137673668.2*LAND R'= 0.058 nR'= l78*0.058 = 10.324 < y'(0.05,5) = 11.07 There is no heteroscedasticity in model Glejser test ABSRESIDUAL = 7517547.548 + 6276.681076*LOANSIZE + 873558.2041*AGE - 5186.430217*FACTOR - 23864033.21*LABOR + 111093088.2*LAND R'= 0.062 nR'= l78*0.062 = 11.036 < y'(0.05,5) = 11.07 There is no heteroscedasticity in model 78 Ten B I-b6 H§p T£n I-B Thgn h éc Ten D5ng Ten ‹ Thgnh g • en Phong Ten Th h ’ Ten Tr8 Vong nh Th8i BMh T T" rl Birth ' ‘ogn tu' up rap N‹lN • " Beang tint , Ph an Phu0 Mnh éu '"' " st B6n C6i Y én L Thu * CB Lh0c en chsn nuel •THANH Tr " inn n CH ftlt bltft n • D.M.CHAtt h H Th8nh Long '”’ ” g CA MP U C M IA Sfin xu8t nubc sgch Khsi ih£c kho£ng aén ... amount of loan, can earn higher income in Tan Chau district, Tay Ninh provinces? 1.2.2Research sub-question What are the factors affecting farm household’s income in Tan Chau district, Tay Ninh. .. studying the effect of loan size on income of farm households who are facing credit constraint in Tan Chau district, Tay Ninh province Data used in this thesis is collected from a survey in Tan Chau. .. studying “Effect of loan size on income of farm households who are facing credit constraint in Tan Chau district, Tay Ninh provinces” 1.2 Research question' 1.2.1Research main question Does farm household