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

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 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 V IETNAMNETHERLA NDS PROGRAMM E FOR M.A IN DEVELOPM ENT ECONOMIC S AN ANALYSIS OF: ACCESS TO FORMAL CREDIT OF THE H OUSEHOLDS 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 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: 31/12/2012 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 VJetnam-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 helped 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 -1 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 poc» 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 in ntioned above KEYWORDS: access to formal credit, households, Mekong Delta River Page iii Ab iii Tables of contents :„ List of abbreviations v i List of tables and figures .vii CHAPTER 1: INTRODUCTION Problem statement Research objectives .3 Research questions Research hypothesis .3 Data sources and methodology Scope and limitation of the research .4 Structure of the thesis CHAPTER 2: LITERATURE REVIEW 2.1 Definitions .6 2.1.1 Households and households in rural areas 1.2 Formal credit versus Informal credit 1.3 Microfinance and Access to credit - - - - 2.2 Theoretical framework related to determinants that affecting to the formal credit by rural households - - - - - - - - - ‘ ' 2.2 Traditional approach - the dominant paradigm in the 1950s— 19705 10 2.2.2 Financial repression approach - - - - - 12 2.3 New institutional economics approaCh 13 2.2.4 Conclusions of three approaches 2.3 Credit market model - - - - '' for Credit 15 2.3.1 HouseholdS’ borrowing behavior and the Demand - „ 17 2.3.2 Credit supply and behavior of formal lenders credit by 2.4 Empirical studies related to the determinants that affecting to the formal 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 2.5 Chapter remark 24 CHAPTER 3: RESEARCH METHODOLOGY26 ) Methodology 26 3.2 Model specification 26 CHAPTER 4: FINANCIAL SYSTEM AND ACCESS TO FORMAL CREDIT BY HOUSEHOLDS IN MEKONG RIVER DELTA 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 of the rural financial system 34 a Weakness of the financial system 34 b Rural finance challenges 37 4.2 Households in the Mekong 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 47 c Loan size 49 d Aim of borrowing 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 Page v 4.4 Determinants of credit accessibility of households in Mekong River Delta 55 4.5 Chapter conclusions 61 CHAPTER 5: CONCLUSION AND POLICY IMPLICATION J jj lu ji3il 63 5.2 p j y jjjjplj atj n 64 5.3 Research limitation .66 References 67 Appendices .74 LIST OF TABLES Table 3.1: Table of independent variables 29 Table 4.la: 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 - T ypology 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 requirement in two sectors (with VHLSS 2006) .54 Page vi 63 dataset, we can see the formal credit sector decreased in lending for farm/business loans, the reason is this sector increased in lending for consumption loans In reality, many households get loan from both sectors at the same time, formal loans for business and informal loans for consumption or other purposes The formal credit sector applies hard loan conditions for their clients due to lack of information Only the households satisfy the collateral requirements of the formal credit sector and have suitable loan purposes can obtain credit from this sector The households who not satisfy the two above conditions have to seek credit from the informal credit sector 5.2 Policy implication Based on the results, it is concluded that the two main determinants that constrain the households' access to formal credit sector are the limitation of loan use and the stringent requirements of collateral In order to expand the entrance of the households to get formal loans, such determinants should be reduced or removed Policy implication 1.‘ formal credit sector should develop and diversify loan portfolios › This policy is very reasonable in the process of industrialization and modernization of Vietnam The formal credit sector should this policy in order to fulfill the increasing demand of households for essential needs of consumption, housing, production and investment If the formal credit sector refuses to lend, barely could the poor households take loans If formal credit sector diversifies loan portfolios, more and more households can get loans to cover their essential needs Therefore, formal credit sector should expand their loan portfolios Policy implication formal credit sector should diversify their procedures, especially about collaterals Our regression results show that house value, average of farm size still positively affect on the probability to get formal credit and the amount of loans This means the banking system now still heavily on land and house, as collaterals The banks will use complex procedures to prevent household with good production or 64 investment plans but have relatively small farm land and house value Besides those two forms of collateral, the formal credit sector should use other assets as collaterals The formal credit sector can use guarantee of the third party (such as the organizations that employ the borrowers) as a new form of collateral With this form, the formal credit sector can solve the problem of information about the borrowers, and can use a part of the wage that the employees pay to the borrowers as a loan repayment These transactions base on the trust Policy implication improve the professional skills and capacity of banking staffs to speed up borrowing appraisal process The complex procedures from the banking system take a lot of time of the borrowers, the borrowers can lost the chances for their plans In order to evaluate the feasibility of the projects and to reduce the time from loan application to acceptance, the skills and capacity of banking staffs should be improved Policy implication government should improve the process of granting LUCs more quickly and simply • In reality, there are many households not have LUCs and legal ownership of house They have to wait some months or even years to receive these legal documents Therefore, they cannot use their houses and lands as collateral That things lead to the investment plans of the households can be lost the chances to get the high profits; even the plans can be ineffective Policy implication improve education of household head The positive relationship between household head education level and the probability and extent of access to formal credit implies that the improvement in education is one of solutions to help household get formal loans easier The households should improve not only their education but also the knowledge especially about the way of setting investment plans to manage with complex banking procedures and present their plans effectively and coherently to receive the approval of the banks 65 In conclusion, in order to broaden the access to formal credit of the rural households in the MD as well as Vietnam, the banking system and the government should and - can expanding the loan portfolios of the formal credit sector, simplify the procedures of the banking system and the process of granting land use rights 5.3 Research limitations The dataset used in this thesis are extracted from VHLSS, so, there are some determinants that have effects on the households’ access to formal credit sector such as the social or political participation of the household head, the awareness on credit availability, etc can not measured This thing leads to the insufficent measurement of all of determinants that have effects on the households’ access to formal credit sector Moreover, the results of this thesis have only meanings in the MD, and can not be used to conclude about the whole country More studies with other methodologies should be executed to study other aspects and other determinants that this thesis can not measure in order to give the more accuracy and specific implications for the rural development 66 REFERENCES - l Aleem, I (1990) “Imperfect 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2006 * logit SOL2 poorhousehold purposeofloan houseown pcexp2rl hhsize sex age hhedu empwage empselfAg percentinterestrate Iteration 0: log likelihood -452.38886 Iteration 1: log likelihood = -350.32998 Iteration 2: log likelihood 341.58973 Iteration 3: log likelihood = -341.30359 Iteration 4: log likelihood = -341.30291 Logit estimates Number of obs = 885 LR chi2(11) = 222 17 Prob chi2 = 0.0000 Log likelihood = -341.30291 Pseudo M = 0.2456 SOL2 | poorhousehold purposeofloan houseown pcexp2rl hhsize sex age hhedu empwage empselfAg percentinterest cons Coef | -.6495144 | 1.71563 | 646125 | 0000957 | 2450982 | -.0256679 | 0128034 | 0828837 | 0472d59 | 0893563 | -.4040914 | -1.537471 Std Err z P>|z| 2545006 -2.55 2445863 7.01 4009613 1.61 0000406 2.35 070333 3.48 1964499 -0.13 0052029 2.46 0322197 2.57 2173519 0.22 2075918 0.43 0634552 -6.37 6361946 -2.42 [95% Conf Interval] 0.011 -1.148327 0.000 l 23625 0.107 -.1397447 0.019 000016 0.000 1072481 0.896 -.4107026 0.014 002606 0.010 0197341 0.828 -.3787361 0.667 -.3175161 0.000 -.5284613 0.016 2.78439 -.1507023 2.195011 1.431995 0001753 3829483 3593669 0230008 1460332 4732679 4962287 -.2797216 -.2905527 * reg lnloanamount poorhousehold purposeofloan lnpcexp2rl hhsize sex age hhedu empwage empselfAg percentinterestrate lnhousevalue farmsize, robust Regression with robust standard errors Number of obs - 885 F( 12, 650) = 19.19 Prob > F — 0.0000 R-squared - 0.2892 Root MSE =.93604 | lnloanamount | Poorhousehold Purposeofloan lnpcexp2rl hhsize sex age hhedu empwage | | | | | | | | Coef -.2412477 270578 526307 1255259 -.0007295 -.0016686 0314932 -.2190595 Robust Std Err t P>|t| 1140238 0795021 1064618 0270785 0741981 0019658 0120363 081694 -2.12 3.40 4.94 4.64 -0.01 -0.85 2.62 -2.68 0.035 0.001 0.000 0.000 0.992 0.396 0.009 0.008 [95% Conf Interval] -.4651471 1144661 3172565 072354 - 1464263 -.0055287 0078585 -.3794754 -.0173483 4266899 7353576 1786977 1449674 0021915 0551279 -.0586436 74 €!1Tl]3 SelfAg percentinterest I 1606397 094022 0l 26979 -.0227983 LllhousevaJue 0484629 103781 I | farmsize 4.69e-06 | 0000246 cons | 2.451985 9l3381 1.71 -1.80 14 5.25 2.68 0.088 0.073 0.033 0.000 0.007 -.023983 3452632 -.0477322 002 1357 0086184 1989438 0000154 0000339 6584518 4.245519 * Regression results with VHLSS 2008 J ogi ISOL2 poorornot07 pcexp2 r1 purposeof1oan zteratl on 0: IteratJ on 1: IteratJ on : zterat± on : IteratJ on 4: houseown hhedu hhS1ze sex age empse1fA log IJ kellhood 483 54367 J oq J keJ1 hood - -435 53874 oq J ke1 hood 434 18642 log J Jkellhood 434 18057 Jog J J ke1 hood - -434 18057 Number of obs - LR Ch1 {10} Prob > ch1 Pseudo R2 Loqlst1 c reqress1 on 856 - 98.73 0.0000 0.1021 Loq 1ike]ihood = -434.18057 SOL2 Coef Std Err poorornot07 -.1034786 2298853 purposeof -n 3787609 2472151 pcexp2 rJ 0000347 houseown 5641086 hhedu 1368916 hhsJ ze 2120779 sex - 5945815 028245 a9e 0101026 phantrao1a-c - 1860078 _cons -1 692389 0000258 4365895 0316779 0594668 2212609 0069103 1855706 3326725 0346765 6867639 038421 z -0.45 1.34 53 1.29 32 57 -2 69 P>|z| [95X conf zntervaJJ 0.653 -.5540455 3470883 125 - 1057719 8632936 180 196 OOO 000 007 1.46 0.144 -.0034413 75 000 - 000016 - 2915911 0748041 0955251 -1 .0000853 1.419808 1989791 3286306 - 1609182 02 36465 1.060096 -5 36 000 - 253972 -2 46 014 -3 reg > ge 1n1oanaixount poorornot07 1npcexp2 r1 purposeof oan 1nhouseva1 ue hhedu hhs ze sex a eopse1 fAg phantraxi1a1 suat far»isJ ze Nueber of obs 856 source PodeJ RéS± duaJ Tota1 I nJ oanariount SS 506.962202 85b.25224 1363 21444 coef poorornot07 1npcexp2 r1 purposeofl-n ue ]nhouseva] hhedu hhs1ze sex 7475519 - 4698787 197186 osooz33 MS std Err .0947998 1089716 0342917 $ 844) = 45.43 = 0000 R-squared - + 3719 Adj R-squared - 0.3637 - 1.0072 foot MSE p> |c | -1.39 0.166 -4.31 0.000 [9ss conf zncerva1 J - 3509106 5614809 060292 - 683766 - 9336229 2559915 2644931 0543067 1911806 0.03 1298789 0.000 00574 0.015 o o00 096285 977 - 1726638 72 469 003629 36 381 2520979 7.89 5.75 0123719 2.43 024173 95 1437328 00212 33 F( 11, Prob > F 11 46.0874729 8441.01451687 &b 1» 59440286 - 1453093 1047501 002 551 5242 age df 0.000 1777122 0078757 0892 002 9307 - - 0622 exipse1fAg phantramJa- farms1Ze _cons 0949299 - 0303935 0000316 - 1197046 0800742 013965 51e-06 7959447 - - o oio - 0578038 o.ooo 000022 o.& 1.681968 - 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... 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 poor