UNIVERSITY OF ECONOMICS UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM NETHERLANDS PROGRAMME FOR M A IN DEVELOPMENT ECONOMICS DETERMINAN[.]
UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF ACCESS TO FORMAL CREDIT BY SMALL AND MEDIUM ENTERPRISES IN VIETNAM By TRAN NGUYEN THUY BAO ANH MASTER OF ARTS IN DEVELOPMENT ECONOMICS Ho Chi Minh City, April, 2014 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF ACCESS TO FORMAL CREDIT BY SMALL AND MEDIUM ENTERPRISES IN VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of Master of Arts in Development Economics By TRAN NGUYEN THUY BAO ANH Academic supervisor Dr PHAM KHANH NAM Ho Chi Minh City, April, 2014 DECLARATION I declare that: "Determinants of access to formal credit by small and medium enterprises in Vietnam" is my own work; it has not been submitted to any degree at other universities I confirm that I have made all possible effort and applied all knowledge for finishing this thesis to the best of my ability Ho Chi Minh City, April 2014 TRAN NGUYEN THUY BAO ANH i ACKNOWLEDGEMENT This thesis would not have been accomplished without the kind assistance and enthusiastic guidance of several individuals who have in one way or another contributed toward to the formation and fulfillment of this paper First of all, I would like to express our deepest gratitude to my supervisor Dr Pham Khanh Nam for invaluable comments, guidance and engagement through the learning process of the thesis I would like to express my special thanks Dr Truong Dang Thuy for his comment and advice about thesis research design Another special thank goes to Nguyen Quang, from whom I have a lot of things to learn I am thankful for Phan Thach Truc for all your kind help during my time in class 17 I sincerely would like to thank all my loved classmates in class MDE17 and staff in the VNP office, who always give me their restless assistance when I was in trouble Last but not least, I must express my most gratitude to my family members for all the kind understanding and spiritual support ii ABSTRACT The shortage of capital and difficulties in accessing bank loans were the most challenging issues for SMEs According to a survey of SMEs Development Department - Ministry of Planning and Investment, only one-third of SMEs can access to bank funds; one-third has obstacles to reach the loans; and one-third cannot access Among businesses in VN which could not access to bank loans, the 80% does not meet loan conditions The descriptive statistic result shows that State Owned Commercial Bank (SOCB) is the most important formal source for SMEs The banks appreciate the Certificate of Land Use Right or housing which can be used as collateral for the most important formal loans The enterprises which applied for formal loans may be have problems getting loans The main reasons are difficulties in obtaining clearance from bank authorities and lack of collateral Enterprises in credit constrained group have the option of accessing to the informal credit market The proportion of credit constrained group applied for informal credit is always higher than non- credit constrained These proportions have tended to increase for both groups Asymmetric information is the main theory of the research to classify the factors determining access to credit of SMEs into three main groups: (i) a grouped factor representing for Owner’s characteristics comprises education, ethnicity, (ii) a grouped factor representing for firm’s characteristics consists of firm age, firm size, type of firm, (iii) a grouped factor representing for relationship between banks and borrowers includes previously borrowed, overdue debt Based on the data set of 1427 enterprise from “Characteristics of the Vietnamese business environment: evidence from a SME survey in 2009”, the research has applied probit model to identify determinants of access to formal credit by small and medium-sized enterprises (SMEs) in Vietnam The result shows that Education (negative), Employee, Equipment, Liabilities and Borrow (positive) which are significant on probabilities of access to credit The research finds that 50% of enterprises have probability of access to credit higher than 75.4% The paper finds that Ethnicity, Year, From, Revenue, Ap, Ar, Overdue debt not contribute to credit access of SMEs and are not significant at 10% level iii In conclusion, the formal credit market plays a very important role for capital of SMEs However, access to this source is still a challenge for SMEs The barriers, difficulties in accessing credit from formal sources have forced the SMEs to involve in the informal credit market iv CONTENT DECLARATION i ACKNOWLEDGEMENT ii ABSTRACT iii CONTENT v LIST OF FIGURES vii CHAPTER 1: INTRODUCTION 1.1.Problem statement 1.2.Research objectives 1.3.Research questions 1.4.Organization of the study CHAPTER LITERATURE REVIEW 2.1 SME definition 2.2 Theoretical literature 2.2.1 Theory of monopoly 2.2.2 Theory of asymmetric information 2.2.3 BARRIERS TO FINANCE FOR SMEs 2.3 EMPIRICAL STUDIES 2.3.1 International empirical studies 2.3.2 Vietnamese empirical studies 2.4 Conceptual framework 15 CHAPTER 3: DATA AND RESEARCH METHODOLOGY 21 3.1 Background of SME Financing in Vietnam 21 3.2 Data 28 3.3 Research methodology 28 3.3.1 Descriptive analysis 28 3.3.2 Econometric model 28 CHAPTER 4: EMPIRICAL RESULTS 31 v 4.1 Descriptive Statistics 31 4.2 Empirical results 34 CHAPTER 5: CONCLUSIONS AND POLICY IMPLICATION 44 5.1 Conclusion 44 5.2 Policy Implication 45 5.3 Limitations and directions for further studies 45 REFERENCES viii APPENDIS xi vi LIST OF FIGURES Figure 2.1: Monopoly & competitive markets Figure 2.2: Access to credit: determinants and channels of influence 16 Figure 3.1: Capital for investment of SMEs 21 Figure 3.2: The main purpose of investment of SMEs 22 Figure 3.3: Problems getting the bank loan of SMEs 24 Figure 3.4: Why don’t Enterprises apply for loans? (%) 25 Figure 3.5: Source of formal loan 26 Figure 3.6: Type of Collateral 27 vii LIST OF TABLES Table 2.1: Definition for Small and Medium Enterprises in Viet Nam Table 2.2 Summary of empirical studies 11 Table 2.3: Variable summary 19 Table 3.1 Access to Credit 23 Table 3.2: Informal Loans and Credit Constraints (%) 27 Table 4.1: The reason Why enterprises did not apply for formal loan 31 Table 4.2: Access to credit 32 Table 4.3: Summary statistics of explanatory variables 32 Table 4.4: Correlation matrix 34 Table 4.5: Regression result 35 Table 4.6: Detail of Pr(access) 39 Table 4.7: Marginal effects at means 41 Table 4.8: Average Marginal Effects 42 viii from the survey of 1,024 enterprises and conducted in five representative regions of Vietnam: Red River Delta, the North Centre Coast, Mekong River Delta, South Centre Coast and South East The results showed that value of machinery, proportion of loan from bank, percent of national sales, overdraft facility, industry and regions have significance to probability of access to credit The relationship between value of machinery, proportion of loan from bank, percent of national sales with probability of access to credit is positive However, probability of access to credit has negatively related with overdraft facility Industries have different the probability of access credit and the highest one is service The businesses in Red River Delta and Central North have higher probability to obtain bank loans than other regions In the other study, Nguyen and Luu (2013) collected a panel dataset and applied the Unordered-Multinomial Logistic The dataset includes 7900 observations of 2200 firms in 2005, 2007, and 2009 They categorized independent variables into four groups: owner’s characteristics, firm’s characteristics, network and regions The result showed that owner’s characteristics including age, experience, ethnic significantly impact the ability to borrow from formal sources However, among firm’s characteristics variables including: types of ownership, age of firm, firm size, profit, export … only firm size impact on probability of access to formal finance The companies have diversity networking tend to have higher probability to access to bank The rural- based firms seem access more the bank debts than firms located in big cities like Hanoi, Ho Chi Minh or Haiphong In the study of Le (2013), she identified the characteristics that influence access to credit in Vietnam The dataset was conducted in five regions containing 14 provinces and had 1,150 observations in 2005 She applied logit model and found four factor impacts on probability of access to credit Four variables are type of ownership, export, profit, new fixed asset They have positive sign with ability access to credit Another view of Vo at el (2011), they used data of 169 firms were collected in six provinces Vietnam They run the logistic regression to find the relationship between the chances of getting loan with firm age, size firm, owner’s experience and production network They found that the ability of getting loan increased for older firms, larger firms, more experience and participation in production networks The lenders seem prefer enterprises 10 which have collateral, and quantity business plans The following table summarizes the empirical studies above in a more intuitive way Table 2.2 Summary of empirical studies No Author Data Methodology Finding Ricardo 140 Argentina Logit model There were three exciting findings in N firms in 1998 their study Firstly, the firm size, Bebczuk tangibility and the length of the (2004) lending relationship have not significances on the probability of obtaining a loan Secondly, the profit, the debt ratio and the use of overdraft credit have positive relationship with the probability of obtaining a loan Finally, the probability of obtaining a loan decrease when liquidity is higher Tyler 182 Kenyan Biggs, firms in four the Mayank sectors : owner/manager and availability of Raturi Probit model Firm size, length of relationship with lender, education of , textile, wood, collateral are important determinants Pradeep food, metal in of access to bank overdrafts The Srivastava 1993 ethnicity of borrower has not impact (2001) on access to overdrafts but it has little impact on access to credit supplier 11 William Panel data of The logit and There B 1,214 Gartner, nascent Casey USA OLS J entrepreneurs Frid, is between positive expected relationship revenue and regression financing amount models The firm size is not significant for was collected the decision of selecting source & John C between Firm Alexander October 2005 potential sale revenue, legal form of (2011) and the business affect the acquisition of January 2006 characteristics, such as personal and external sources of financing Owner’s education, and the entrepreneur’s net worth, also affect the acquisition of certain types of financing Hala El- 36,492 Egypt Heckman Said, firms in 2008 The smaller the companies are, the two- stage higher the probability of having Mahmoud selection banking problems is The age of the Al-Said model firm has not significant effect on and obtaining bank loans while sales Chahir turnover, economic activity, labor, Zaki capital, (2013) significant Phuong 12,400 Logit model and legal form are Firm age, type of ownership, loan Nu Minh Chinese quota, sale, profit and region are Le (2013) enterprises in determinations of access to credit 2005 All variables relationship with access credit to have positive probability The highest significant variable is loan quota 12 of Phuong 1,024 Logit model Value of machinery, proportion of Nu Minh Vietnamese bank loan, percent of national sales, Le (2012) enterprises in overdraft five region have effects on probability of representative access to credit The relationships region between of facility, value industry of and machinery, Vietnam: Red proportion of loan from bank, River Delta, percent the North probability of access to credit are Centre Coast, positive However, probability of Mekong River access to credit has negatively Delta, related South of national with sales overdraft Industries and probability of access credit and the East highest one is the facility Centre Coast South have with different service The businesses in Red River Delta and Central North have higher probability to obtain bank loans than other regions 13 Owner’s characteristics including Nhung Panel data Nguyen, 7900 age, Nhung observations significantly impact the ability to Luu of borrow from formal sources (2013) Vietnamese Firm size impact on probability of firms in 2005, access to formal finance 2007, The companies which have diversity 2200 and 2009 experience, ethnic networking tend to have higher probability to access to bank Rural- base the firms seem access more the bank debts than firms located in big cities like Hanoi, Ho Chi Minh or Haiphong Phuong 1,150 Logit model Type of ownership, export, profit, Nu Minh Vietnamese new Le (2013) firms probability of access to credit They in five regions are positively related with ability of containing 14 access to credit provinces fixed asset impact on in 2005 Vo, T T., 169 firms Logistic The ability of getting loan increases T.C Tran, were collected regression for older firms, larger firms, more V D Bui in experience and active in production six and D C Vietnam networks The lenders seem prefer Trinh enterprises which having collateral, provinces (2011) good credit profiles and quantity business plans 14 2.4 Conceptual framework As a result of asymmetric information, banks are unable to grant loans for SMEs In order to minimize negative impacts of asymmetric information, the banks rely on private information on borrowers collected through repeated interaction In addition, public information is one of the most important channels for the banks to approve of credit application Therefore, the banks always prefer such older and larger enterprises Moreover, the businesses which have longer relationships with the banks are also more likely to being granted loans The factors determining access to credit of enterprises can be categorized into three main groups: (i) Group concerns for Owner’s characteristics comprises education, ethnicity, (ii) Group concerns for Firm’s characteristics consists of firm age, firm size, type of firm, (iii) Group concerns for Relationship between banks and borrowers includes previously borrowed, overdue debt 15 Figure 2.2: Access to credit: determinants and channels of influence Education Owner’s characteristics 2,3,7 Ethnicity 2,7 Year Form Revenue Employee Firm size 4,5,9 3,4,5,8 Firm’s characteristics 1,2,3,4,7,9 Land, Building, Equipment, Inventory Collateral Total liabilities, Account payable Ratio debt Accounts receivable Liquidity 2,6,9 1,6 Borrow Relationship with banks Overdue debt Credit profile 1,2 Relationship between lenders and borrowers 16 Access to credit The specific hypothesis for each factor is as follows: Owner’s ethnicity (Biggs et al ,2001), (Nguyen & Luu,2013) This factor could be a positive coefficient However, some studies found that this factor is not statistically significant on probability of access to credit In the model, ethnicity of owner is a dummy variable It equals if owner’s ethnicity is Kinh Owner’s education (Biggs et al ,2001), (Gartner et al, 2011) Education of owner may also assist in managing the business Owner with good educational background can give the good idea, right decision to improve productivity Therefore, the banks may prefer to lend to enterprises with educated owner In the model, education of owner is a dummy variable It equals if owner completed College/University/post-graduate Number of years of operation (Vo et al, 2011) (Le, 2013), (Said et al ,2013) The older enterprises may have more experiences of access to credit They improve their reputation and relationship with banks Therefore, the negative effects of asymmetric information on the probability of access to credit are minimized So we expect positive relationship between number of years of operation and probability of access to credit Type of firm (Gartner et al, 2011), (Said et al ,2013), (Le,2013) This factor could be a statistically significant coefficient In the model, this variable equals if enterprise is Private (sole proprietorship)/ Limited Liability Company This coefficient is expected to have positive sign Revenue (Gartner et al, 2011) The higher-revenue enterprises may have more profit and faster turnover sale Therefore, they may have higher financial capacity and probability repayment Therefore, banks can feel secure for their loans In addition, revenue is one of the most important factors when the banks issued credit quota to enterprises Positive relationship between revenue and probability of access to credit was expected It is measured by VNĐ billion Number of employee (Said et al 2013), (Vo et al, 2011) Number of employee is one of the determining factors of company size The smaller the companies are, the higher probability of having banking problems is Therefore, the bigger firm may be easier to access bank credit Therefore, we expect this coefficient has positive sign 17 Value of land asset, building asset, equipment asset, inventory (Bebczuk, 2004), (Biggs et al ,2001), (Vo et al, 2011) These variables represent availability of collateral or liquidity The higher availability of collateral or lower liquidity enterprises will have more probability of access to credit These coefficients are expected to have positive sign They are measured by VNĐ billion Total liabilities, account payable (Bebczuk, 2004), (Le, 2012) Total liabilities include the formal and informal debts The formal debts may be include bank loans and account payable The enterprises have bank loans that mean the banks have information of enterprises The banks will decrease the negative impact of asymmetric information and adverse selection Therefore, we expect this coefficient has positive sign Total liabilities, account payable are measured by VNĐ billion Accounts receivable (Le, 2013) This variable represents liquidity The higher liquidity enterprises will have lower probability of obtaining a loan These coefficients are expected to have negative sign They are measured by VNĐ billion 10 Borrow, overdue debt (Bebczuk, 2004), (Biggs et al ,2001), (Vo et al, 2011) The “borrow” variable represents the companies which had bank loans in the past That means the enterprises have the relationship with banks The “overdue debt” represents credit profile of companies This is the dummy variable It equals if company fails to service its debt on time in 2008 The expected sign of “Borrow” is positive and negative for “overdue debt” In order to test hypotheses based upon the relationship between an explanatory variable and independent variables, the explanatory variable is considered as probability of SMEs access to formal credit The equation is formulated as follows: Accessi = + i Xi + i The explanatory variable of obtains two values: Accessi =1, the ith SME is selected to lend Accessi =0, if SME still in need of a loan but being reject The study combines questions to specify the value of the explanatory variable 18 99 Has your firm applied for bank loans or other Yes formal credit since August Yes No No 2007 (last survey)? 104 b Amount originally >0 borrowed (1,000 VND) Inadequate collateral 106 Why has the firm not to incur debt Process too applied for formal loans since difficult August 2007 (last survey)? Don’t want Didn’t need one Interest rate too high Other Already heavily indebted Access 0 Not include in sample The Xi vector includes education, ethnicity, firm age, firm size, type of firm, previously borrowed, overdue debt… Table 2.3: Variable summary Variable Description Measurement unit Expected sign Response variable Access =1 if has bank loans Access to credit =0 if being reject Explanatory variables Owner’s characteristics Ethnicity Owner’s Ethnicity = if Kinh, otherwise 19 N/A = if Education College/University/post- Owner’s Education graduate, + = otherwise Firm’s characteristics Year Number of years of operation Year + = if Private (sole Form proprietorship) /Limited Type of firm: liability company, N/A = otherwise Revenue Revenue of 2008 Billion + Employee Number of employee Employee + Land Value of Land asset Billion + Building Value of Building asset Billion + Equipment Value of Equipment Billion + Inventory Value of Inventory Billion + Liabilities Total liabilities of 2008 Billion + AP Account payable Billion + AR Accounts receivable Billion - Relationship with lenders Overdue debt Borrow fail to service its debt on time in 2008, Had borrowed from banks in the past, 20 = if yes, otherwise - = if yes, otherwise + CHAPTER 3: DATA AND RESEARCH METHODOLOGY 3.1 Background of SME Financing in Vietnam Since 2000, SME sector has grown rapidly, especially after becoming WTO membership in 2007 Total registered enterprise increased from 14.453 enterprises in 2000 to 499.519 enterprises in 2010 On the other hand, Vietnamese financial market has opened and liberalized since 2000 It witnessed the accession of the domestic and foreign They provide capital for businesses including SMEs The availability of credit resources for SMEs is one of the main factors for entrepreneurial activity According Beck (2008) the firms with greater access to capital are more able to exploit growth and investment opportunities Most of enterprises have new investments during 2005-2009, however it has tend decline The proportion of the investment decreases from 62.42% in 2005 to 60.7% in 2009 One of the main reasons of decrease is the change of the source capital Before 2009, internal funds were the main capital for investment, however, in 2009; banks or credit institutions become the main capital for investment Figure 3.1: Capital for investment of SMEs CAPITAL FOR INVESTMENT 80 70 60 50 40 30 20 10 2005 internal funds/ own capital 2007 2009 Borrowed from bank/ credit institution Source: Author calculated from Characteristics of the Vietnamese business environment: evidence from a SME survey in 2005, 2007, 2009 21 Increasing access to credit will promote efficient growth in the SME sector Access to credit is necessary to create an economic environment that enables firms to grow and prosper (Thorsten, 2011), improves firm performance, facilitates market entry, growth of companies and risk reduction (Beck, 2008) and promotes innovation, entrepreneurial activity (Klapper, 2006) The enterprises invest to add to capacity, replace old equipment, improve productivity, improve quality of output, and produce a new output, safety, environmental requirements and other purpose “Add to capacity” is the most important reason which accounts for above 50% of total Tải FULL (63 trang): https://bit.ly/3Eca3wD Dự phòng: fb.com/TaiHo123doc.net Figure 3.2: The main purpose of investment of SMEs THE MAIN PURPOSE OF THE INVESTMENT 70 60 50 40 30 20 10 2005 2007 Other purpose Environmental requirements Safety Produce a new output Improve quality of output Improve productivity Replace old equipment Add to capacity 2009 Source: Author calculated from Characteristics of the Vietnamese business environment: evidence from a SME survey in 2005, 2007, 2009 22 Access to credit is one of the important factors for SMEs growth and development However, SMEs often face the credit constrained situation The number of enterprises applying and obtaining bank loans or other forms of formal credit in 2005, 2007 and 2009 are Tải FULL (63 trang): https://bit.ly/3Eca3wD Dự phòng: fb.com/TaiHo123doc.net shown in table 3.1 Table 3.1 Access to Credit 2005 2007 2009 Enterprise Yes No Yes No Yes No applied for (1108) (1713) (970) (1665) (998) (1660) formal loan 39.28 60.72 36.81 63.19 37.55 62.45 Problems getting loans Are you still in Yes No Yes No Yes No (214) (894) (200) (770) (221) (777) 19.31 80.69 20.62 79.38 22.1 77.8 82.1 60.4 79.8 54.4 75.3 57.0 need of a loan Note: All numbers in percentages (observations in parenthesis) Source: Author calculated from Characteristics of the Vietnamese business environment: evidence from a SME survey in 2005, 2007, 2009 The numbers of enterprises have applied for bank loans which decrease in the period 2005-2009 The enterprises applied for formal loan which may be have problems getting loans, so their loan application were denied The proportion of enterprises has problems getting loans increase from 19.31% in 2005 to 22.1% in 2009 The main reasons are difficulties in obtaining clearance from bank authorities and lack of collateral 23 Figure 3.3: Problems getting the bank loan of SMEs Problems gettinh the loan 60 50 40 30 20 Administrative difficulties in obtaining clearance from bank authorities Complicated government regulations Did not deliver a proper description of the potential of the enterprise Lack of collateral 2005 2007 Other 10 2009 Source: Author calculated from Characteristics of the Vietnamese business environment: evidence from a SME survey in 2005, 2007, 2009 Whether or not credit applicants have problems in obtaining loans, they still consider themselves in need of a loan They can be classified as credit constrained Credit constrained group may be include some of the enterprises which did not apply for formal loans Around 70 percent of these enterprises not want in need of loan or incur debt The rest of nonapplicant group did not apply because they did not have adequate collateral, difficult in lend processes or high interest rates These enterprises can be considered as having limited access to credit Adding these enterprises into the credit constrained group, the proportion of group is 44.7% in 2005, 40, in 2007 and 39% in 2009 24 6675826 ... factors on credit access is different between studies According to above problems, this paper aims to indicate Determinants of access to formal credit by small and medium enterprises (SME) in. .. access to formal credit by small and medium- sized enterprises (SMEs) in Vietnam 1.2.Research objectives General research objective is to examine determinants of access to formal credit by SMEs in. .. are: a To investigate factors that effect of probabilities of access to formal credit by SMEs in Vietnam b To recommend policy implications in order to improve SMEs’s access to formal credit