Kỷ yếu công trình khoa học 2014 – Phần I Trường Đại học Thăng Long 86 FACTORS EFFECT TO FARM HOUSEHOLDS’ ACCESS TO FORMAL CREDIT: THE CASE OF VIETNAM MA. Trinh Thi Thu Hang MA. Ngo Khanh Huyen Abstract: In certain stage of agricultural development, rural credit plays as a strong force for futher development. When people use their owned elements to make production, they realize that to make it more efficient, they need use of credit. That is said to be a key factor to elimate the block on the way to development. Therefore, credit is considered as the most flexible tool to excape from the difficult living condition. However, to meet lending conditions from financial institutions is sometimes not easy. Keywords: farm household, credit, Vietnam, probit. 1. Problem statement Vietnam is a traditionally agricultural country with more than 70% of the population living in rural areas. Most of them are poor and lack of capital. That is the most difficult thing to escape from poverty. Therefore, the government has acknowledged that development in rural and improvement in households’ living standard is strategic mission. In the strategy of economic development of Vietnam, agriculture is considered as a basic factor for the whole economic development. Especially, since Vietnam implemented the open policy, the commerce of agriculture has made contribution to a large number of foreign currency collection, increasing rural income and improvement in living conditions in rural areas. Based on the importance of agriculture, the Government has pointed: “To create significant change in agricultural production and rural economic sector and improve the high living standard in rural areas. In coming years, agriculture and farmers and rural areas are strategic issues and especially important. Therefore, these must be considered to promote industrialization and modernization in agriculture and rural areas toward building diversified agricultural products with high quality and competitiveness; then create conditions for forming clean agriculture to increase added value in agriculture and forestry and aquaculture from 3 to 3.2% per year. The growth rate of industry and services in agriculture must not be lower than the national average rate”. So credit is considered as a supportive tool for rural economic development in general and households’ economic activities in particular. Therefore, it is necessary to develop a financial market for the rural areas, in which credit activities must be a key indicator element to attract capital for agriculture and rural development. Although rural credit markets have developed for a long time, farm households’ access to credit is still relatively limited. Over the past few years, the State bank of Vietnam has initially eyed on the credit development and set up the rural credit policies. Despite a number of recent policy changes designed to improve their access to credit, small household farms and the rural sector in general, are recognized as facing servere credit restrictions. Vietnam is in the process of implementing reforms of the banking system and undertaking a gradual liberalization of credit markets (World Bank, 2003). However, small Kỷ yếu công trình khoa học 2014 – Phần I Trường Đại học Thăng Long 87 household farms in Vietnam and the rural sector in general, are recognized as facing credit constraints (Wolz, 1997: World Bank, 1998; Duong and Izumida, 2002). Historically, the credit market in Vietnam has been seriously distorted by government intervention including priority credit given to State Owned Enterprises (SOEs) and various commodity production programs (World Bank, 1998). Additionally, agricultural credit policy in Vietnam is often used as an instrument of social welfare policy, targeting finance to poorer regions and households, through the activities of the Vietnam Bank for the Poor (now, it is called Bank of Social Policy). In 1993, commercial loan availability for farm households commenced. Decree No 14/CP (1993) enabled farm households’ access to credit, whereas previously loans had only been available to households through the institutions. Following this reform, credit could be provided direct to households by commercial banks and financial organizations. But in fact, few farming households can get loans easily from financial institutions due to credit proxy. Some households can borrow as they wish while others may be denied access to formal credit. Hence, the objectives of this paper are to review credit access at the farm household level. The research is to examine which elements determine access to formal credit of farming households in Vietnam. The data are collected from the Vietnam living household standard surveys which was conducted in 2006 and 2008. The survey data are disaggregated by region, loans source and socio- economic group, in order to investigate the effects of current credit policy, to identify problems, and to suggest policy. 2. Agricultural credit in Vietnam The banking sector in Vietnam was one of the first areas of the economy to be deregulated and opened up to the private sector. Changes were made to the structure, regulations and operations of the Vietnamese banking sector from late 1980s (World Bank, 2003), such that Wolz (1997, p5) comments that, “In 1997 the institutional set-up looks quite heterogeneous”. Despite these changes, the Government of Vietnam has controlled credit availability and interest rates in all sectors of the financial market through the activities and regulation of the State Bank and through regulations controlling subject access to credit (Wolz, 1997; Duong and Izumida, 2002; World Bank, 2003). Agricultural credit providers In Vietnam, the financial system for rural areas has three main segments. It can be classified as follows: -The formal credit sector This is an official region consisting of the Bank of Agriculture and Rural Development, the Bank for the Poor, people's credit funds subject to the supervision of banks, and joint-stock banks. Formal credit institutions have increasingly expanded including Bank of Agriculture and Rural Development, Bank of Social Policy, People’s credit funds, international financial institutions such as World Bank, ADB, IMF, Non Government Organizations. Of which, the Vietnamese Bank for Agriculture and Rural Development is the major commercial source of formal credit for rural households. - Semi-formal credit sector Kỷ yếu công trình khoa học 2014 – Phần I Trường Đại học Thăng Long 88 The semi-formal credit sector provides loans through socio-political unions in rural areas and the level of activity if this sector in a region is related to priority programs of the government, consignment services of the bank and the activity of unions. - Informal credit sources * Mutual lending among friends and neighbors. * Rotating savings and credit associations promoting periodic savings which rotated as a fund among a limited group of people who trust each other (generally from the same hamlet) * Specialized money lenders including pawnbrokers * Traders giving advances in cash or in kind (for the rights to buy the harvest). 3. Methodology The major dataset used for the purpose of this paper comes from VHLSS 2006 -2008, VBARD, SBV, VLSS 2006 and 2008, collected a rich data set covering 64 provinces with 9,181 observations. Besides, we use published data from GSO and other various sources to enrich descriptive analysis of farm households, focusing on access to credits from the formal institutions. Data source The data used in the paper were obtained from a survey of 9,189 rural households in 64 provinces along Vietnam, which is conducted in 2006/2008 by VLSS to satisfactorily analyse the determinants of access to formal credit. Sampling frame All households in 64 provinces/ cities in the country. Sampling technique Sample conludes 9,189 households in 64 provinces/cities, representing 8 economic regions over country were selected to complete survey. Table1. Scale of the surveyed sample by region Regions Households Red River Delta 1,945 Northeast 1,317 Northwest 429 North Central 1,014 SouthCentralCoast 852 Kỷ yếu công trình khoa học 2014 – Phần I Trường Đại học Thăng Long 89 Central Highlands 582 Southeast 1,188 Mekong Delta 1,863 Total 9,189 Source: Consolidation based on VLSS data 2006-2008 Methodology The paper uses both descriptive and regression methods. A three-step analysis will be used. In the first step, the descriptive method will be used to point out the determinants access to formal credit of farm households. In the next step, the probit model will be used to investigate effects of each determinant on probability of borrowing. In the last step, the paper is aimed at exploring the effects of the determinants on probability of credit uptake. The probit model will be used to reach to the objective. By using the three-step analysis, the paper will provide more details for each factor influencing in obtaining loans of farm household from the formal credit poviders. Variables The dependent variable for the probit analysis is of dichotomous nature representing small holder farmer’s access to formal credit. This is the distinguish between those users or non-users of formal credit in the study area. Y- household use credit from formal source during the year. Y measures whether households have access to formal credit which takes the value of 1 if the household take credit, 0 otherwise. The paper also uses a dummy variable as a dependent variable in order to analyse how determinants affect probability of taking up credit of farm household. The Probit Model The paper aims at investigating effects of the determinants on farm household’s access to formal credit. The Probit model will be used to reach to the objective. Prob(Y=1|X, F, S = )( uSFX s In which, Φ is probibality density function of the standard normal. Y is measured the result of the credit access of the farm household. Y can be equal 1 or 0. Y = 1 if farm households receive formal credit, and Y = 0 if farm households do not receive formal credit. X, F, S refers to the factors which have impacts on whether the formal credit can be approved or not. X typically includes farm household head variable (such as gender, age, and education), households’ characteristic variable and development of financial market variable. u is error terms. After estimating the parameters β, γ, φ, the marginal effects should be calculated to measure the effect of changes in independent variables or determinants on uptake of credit. Kỷ yếu công trình khoa học 2014 – Phần I Trường Đại học Thăng Long 90 The effects of determinants on probability are calculated via marginal effects. Z uSFX Z ZYob effectinalmThe )( )1(Pr arg In whichZ = (X, F, S) and ),,,( 4. The result Effect on probability of a household with accessing rural formal credit. Table2 Variables dy/dx Household head Gender* .0235332 Age* .1419315 Education* 2157835 Marital status* .0925638 Ethnic group* 0878688 Region .010569 Household characteristics Household size* .0734787 Poor* .23006 Health* .0289401 Healthhexpenditure* 062438 Income* .2006752 Purpose of loan* 0163484 Fix assets* .0270451 Development of local financial market Number of banks* 0526784 Kỷ yếu công trình khoa học 2014 – Phần I Trường Đại học Thăng Long 91 Source of loan* .0190423 Source: Consolidation based on VLSS data 2006-2008 Obtaining loan from the formal credit providers is the target of every households in meeting demand for credit usage. The study tries to explore which determinant have most influence the probability of farm households getting loan. Age Influence in access to formal credit by rural household. Regression results show that age above 50 people have difficulty to take credit. Education Regression results show that household who has university degree or more higher educational level, can receive a loan from banks. Because they are found to earn money with high paid. Ethnic group The rate of Kinh people getting loan is higher than that of other ethnic group. It can be explained that Kinh access to loan for consuming or repayment purpose. Region The outcome of loan users are different by regions. Based on tables 4.3, the proportion of rural household has loan users in both Mekong Data and Red River Data higher than in other regions, that in line with initial expection. It was 22.07% and 16.8% respectively. Household The household with more than four members get fairly higher probability of taking up credit. Poor or non poor has significant association with the probability of whether a household receives a formal loan. It comes to no surprise that the estimated result presents that the probability of loan used by the non-poor group is higher that used by the poor ones. Health are associated with the expectation. It has a significant effect on the probability of meeting uptake of loan. The positive signs of this dumming variable in whether a person get a loan is how his/her health satisfy labouring ability. Heath expenditure has also negative relations with the probality of accessing to formal credit by the farm household. The result is beyond the initial expectation. It can be explained that there is a proportition of household pay no or less cost for health treatment; they save money more. They have lower demand for credit, particularly in health treatment. Income has significant positive relation with the probability of access to credit. The positive signs on income indicate that the household who are high paid have a higher probability of borrowing than other. Kỷ yếu công trình khoa học 2014 – Phần I Trường Đại học Thăng Long 92 Number of banks the probability that household reach out a loan does not depend on the number of bank distribution in the local areas. Source of loans has positive association with the probability of reaching out loan. 5. Conclusion and recommendation In recent years, Vietnam’s Government has focused on agricultural and rural development. Household economic sector is considered as a part of private enterprises in the process of social economic development in rural Vietnam. The reality points out that, capital is important factor to expand production. Taking up loan is a significant to the farm household. It helps households to improve living standard and expansion in prodiction. Additionally, it contributed to the poor alleviation programm and completing the national targets by the Government. As regard to the Government, some relevant studies in Vietnam also focus on analysing why a farm household face with difficulties in getting formal credit from formal financial institutions. To improve the probability of borrowing by farm household the Government should focus on capital for agricultural and rural development and introduce preferential policy encourage farmers to enrich by loans from banks. Besides, Government should devesify its capital sources and introduce variety of adequate of credit products in appliance with the capcity and educational level of farm household and custome where they live. Therefore, they can ultilize the loan for purpose ussage. In some cases, the Government can establish the enterprises which buy the rural product from the farmers esspecially for exported products. Therefore Government not only can support agricultural production, but also he assure rural credit security by loan users as well. Currently, it is found that lending proceduces are still complicated. Based on lending conditions from banks, few farm household can access to credit. Even if they get loan, they just take a small amount which is not enough to carry out agricultural operations. Therefore, it is necessary to losen thelend and create favourable conditions for rural household to access to credit. 6. References [1]. Floro, S.L., Yotopoulos, P.A. (1991). Informal credit markets and the new institutional economics: The case of Philippine Agriculture Boulder: Westview Press. [2]. Le, Huu Anh (2002). Land use in Vietnam: Impacts of tax and credit policies, presented at the Vietnam Workshop. Land Use in Vietnam: Policy Issues and Research held at The University of Sydney, November 14-15-2002. [3]. Lensink, R., Nguyen, Van Ngan and Le, Khuong Ninh (2005). Determinants of farming households’ access to formal credit in the Mekong Delta, Vietnam. Final report for NPT-part B4- paper 9Maddala, G.S (2002). 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Development Report 2003, the World Bank in collaboration with the ADB Vietnam Consultative Group Meeting, Hanoi, 10-11, December 2002. . FACTORS EFFECT TO FARM HOUSEHOLDS’ ACCESS TO FORMAL CREDIT: THE CASE OF VIETNAM MA. Trinh Thi Thu Hang MA. Ngo Khanh Huyen Abstract: In certain stage of agricultural development, rural credit. Agricultural credit in Vietnam The banking sector in Vietnam was one of the first areas of the economy to be deregulated and opened up to the private sector. Changes were made to the structure,. due to credit proxy. Some households can borrow as they wish while others may be denied access to formal credit. Hence, the objectives of this paper are to review credit access at the farm