Factors influencing the access to finance of smallholder farmers in Vietnam: A case study of the whole-chain financing in Hanois suburbs

VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY NGUYEN TRAN HOANG ANH FACTORS INFLUENCING THE ACCESS TO FINANCE OF SMALLHOLDER FARMERS IN VIETNAM: A CASE STUDY OF THE WHOLE- CHAIN FINANCING IN HANOI'S SUBURBS MASTER'S THESIS MASTER OF SCIENCE IN PUBLIC POLICY Hanoi, 2019 VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY NGUYEN TRAN HOANG ANH FACTORS INFLUENCING THE ACCESS TO FINANCE OF SMALLHOLDER FARMERS IN VIETNAM: A CASE STUDY OF THE WHOLE- CHAIN FINANCING IN HANOI'S SUBURBS CODE: PILOT RESEARCH SUPERVISOR: Dr TRUONG THI THU TRANG Hanoi, 2019 ( ACKNOWLEDGMENT My sincere gratitude and thanks to my supervisor, Dr.Trương Thi Thu Trang Thank you for all your patient and supportive instructions and your encouragement Your valuable comments and guidance have shaped my thesis to this stage I would like to show my gratefulness to Dr.Vu Hoang Linh for all your helpful instructions Thanks to your patience, I got a more profound of my thesis topic Special thanks to Mr Tran Huong- a local officer at To Hieu commune helped me contact with other local authorities at Quat Dong commune and Nghiem Xuyen commune Also, I am grateful for enthusiastic participation of farmer respondents at three communes Without your support and kindness, I could not finish this thesis timely I also would like to extend my special thanks to professors of Master program of Public Policy at Vietnam Japan University for your kindness and unwavering assistance at all times My warmest thanks are due to Huong san, Quang san, and Luong san for your friendship and great supports in various ways which made my time at Vietnam Japan University unforgettable i LIST OF TABLES Page Table 1.1: Investment in agriculture, forestry, and fishing in total investment Table 3.1: Garrett Ranking Conversion Table 21 Table 3.2: Percent position and Garrett Value 22 Table 4.1: The procedure of formal credit for lending loan .26 Table 4.2: Comparison between VBARD and VBSP to informal lenders 27 Table 4.3: Gender and age distribution of respondents 31 Table 4.4: The rank of reasons for applying for credit 33 Table 4.5: Garrett Value and ranking reasons for apply 33 Table 4.6: Result of rank for reasons for applying for credit 34 Table 4.7: The rank of reasons for not applying for credit 35 Table 4.8: Garrett Value and Ranking for the reasons for not applying for credit 35 Table 4.9: Result of ranking from Garrett Value .36 Table 4.10: Mean characteristics of household by credit participation 36 Table 4.11: Mean characteristics of respondents by financial institutions 37 ii LIST OF FIGURES Page Figure 3.1 Survey location .23 Figure 4.1: Planting pumpkin (Source: Tran Quang) 30 Figure 4.2: Education level distribution 31 Figure 4.3: Farm size .32 Figure 5.1: Tien Vien company’s chicken at Chuong My district 49 Figure 5.2: SWOT analyze .50 iii LIST OF ABBREVIATIONS VBARD Vietnam Bank for Agriculture and Rural Development VBSP Vietnam Bank for Social Policies AVCF Agricultural Value Chain Financing AVC Agricultural Value Chain iv TABLE OF CONTENTS Page ACKNOWLEDGMENT i LIST OF TABLES ii LIST OF FIGURES iii LIST OF ABBREVIATIONS iv TABLE OF CONTENTS v CHAPTER INTRODUCTION 1.1 Background of study and statement of the problem 1.2 Objectives of study 1.3 Scope and limitations of the study .6 1.4 Organization of the Thesis CHAPTER LITERATURE REVIEW .8 2.1 Key terms 2.1.1 Smallholder farmers .8 2.1.2 Agricultural finance 10 2.1.3 Agricultural credit .11 2.1.4 Agricultural value chain finance 12 2.2 Previous studies 14 CHAPTER RESEARCH METHODOLOGY .18 3.1 Research methodology .18 3.2 Sampling 22 v CHAPTER DISCUSSION OF THE PROBLEM 24 4.1 Agricultural credit system in Vietnam .24 4.2 Current policies on agricultural credit .28 4.3 The research area 29 4.3.1 Source of income of farmers 30 4.3.2 Gender, age distribution respondents 30 4.3.3 Education level of respondents 31 4.3.4 Farm size 32 4.4 Results 32 4.4.1 Descriptive statistics 32 4.4.2 The reasons for apply and non-apply for agricultural credit .33 4.5 Discussion of the results 37 4.5.1 Discussion the credit availability in Thuong Tin district 37 4.5.2 The determinants of access to credit of smallholder farmers 41 CHAPTER SOLUTION, POLICY IMPLICATIONS AND CONCLUSION 47 5.1 Solution and policy implications 47 5.2 Conclusion 52 REFERENCES 53 ANNEX 57 ANNEX 61 vi CHAPTER INTRODUCTION 1.1 Background of study and statement of the problem Like many developing countries in the world, agriculture is one of the engines for national economic development It is stated that “what promotes agricultural benefits to mankind, the progress of agriculture and the progress of civilization go hand in hand.” (Morman,1919) as provision of agricultural finance service to the poor will contribute to enhance productivity and improve the living standard by breaking the vicious cycle of poverty among small scale farmers at large If the provision of agricultural credit is found to be productive and adequate, it will have positive influences on the use of resources and optimum use of technology application (Vasthoff, 1968) It is an essential input to boost the agricultural productivity that increases income levels and alleviate poverty in turn The reason is that smallholder farmers often get difficulties in implementing agricultural technologies with their own limited funds (Wivine, 2012) Hence, agricultural finance services can provide them with good opportunities to earn more money and enhance living standard by investing financially to upgrade new technology In other words, access to financial services by farmers can contribute to improve postharvest practices, make household cash to flow smoothly and effectively, enable better access to markets, control human resource and climate-related risk in a better way Unfortunately, agricultural sector currently often faces a lot of complex challenges resulting from lengthy biological based production, market activities, unexpected natural conditions, and other related income-generating activities (Peter, 2001) Among these things, inadequate access to financial services is one of the fundamental issues ruining production productivity and has negative effects on income of peasants in the rural area In response to this risk, Governments provide preferential financial packages in an attempt to provide the rural poor with access to favorable credit serving the purpose of increasing productivity and enhancing output in farm and rural non-farm sectors Agricultural finance can be provided in various ways such as by any loan or other rural use, bills of exchange and bankers acceptances or other extensions of credit that a bank provides for agriculture Famers are supposed to access loans on the right time to enable them to cope with the unexpected natural conditions during planting, crop maintenance, harvesting, and during post-harvesting On the other hand, agricultural finance can be approached in the form of agricultural inputs, technologies, tools, and equipment The government and several non-governmental organizations through government initiatives have provided farmers with maize seeds, fertilizers, and weed Armendariz and Morduch (2005) argue that agricultural credit makes households improve their living standard, through an income effect that boosts total consumption levels; and it seems to have a positive impact on the demand for children’s health care and education, as well as leisure According to Alila and Atieno (2006), inaccessibility to credit especially for small scale farmers and producers; especially women prevent them from participating the range of activities, applying technology for production and the scale of operations that a farmer can adopt on the farm Gilla and Lassalle (1994) ( as cited by Mahammood, 2014, vol 3) show that rapid economic development achieved in European and Asian countries was highly associated with the adequate access to credit by majority Countries like Indonesia, Burma, India, and China were supposed to have a significant pace of development after focusing on solving problems of agricultural credit availability for the majority of farmers It can be explained that most of the low-income countries are dependent on agricultural; hence agricultural credit is seen as a lever to boost the development of agricultural sectors as well as related stakeholders Indeed, agricultural credit is a backbone for the process of modernization of the agricultural sector and commercialization of the national have better education background have need to invest more in income-generating asset for long term (57 percent) In short, when farmer respondents approach agricultural credit, collateral becomes one of the big challenges for them, especially young people in the age of under 35 who are living with their parents and still not own certain amount of valuable assets Notably, these groups are energetic and willing to learn and try the new things Moreover, in this research, these young people have experienced training course from vocational schools that equip them with certain knowledge about agricultural cultivation by modern methods For this reason, these age groups should be supported to develop in order to catch up with the pace of development in general 46 CHAPTER SOLUTION, POLICY IMPLICATIONS AND CONCLUSION 5.1 Solution and policy implications Given that agricultural credit is important to respond the financial pressure on farm production of farmers and farm businesses in general and of smallholder farmers in particular For this reason, it is vital to seek a solution that strengthens the effectiveness of farm loans as well as broaden opportunities for smallholder farmers to access credit in a proper way To achieve this goal, the roles and benefits of each factor, such as banks, farmer borrowers, or agricultural businesses, should be taken into account in every stage of input, production, and market In other words, the linkage among such actors share mutual benefits or interdependency basis will maximize the utilization of farm loan Such mechanisms result in the born of AVC as global trend An agricultural value chain encompasses input for production, farmer organizations, production, post-harvest handling, processing, technology providing, warehouse, logistics, finance, and output Traditionally, smallholder farmers often involve in a chain that delivers product via many middle trader, causing low return for them It is evident that the involvement of farmers is restricted to the farm gate, where they gain just minimal value addition The farmers will obtain more benefit if they involve in the post-harvest part That leads to the introduction of the AVCF or the whole- chain financing, which links stakeholders operating within the value chains and lending institutions It aims to reduce the risks that are commonly associated with traditional agricultural financing As discussed above, smallholder farmers often face some difficulties in accessing bank loans due to inappropriate lending requirements with their needs and condition Thanks to AVCF, the design of financial instrument is suitable with requirements of the farmers Moreover, the presence of banks in AVCF benefits the farmers via preferential credit, investment subsidies, and crop insurance Such favorable 47 conditions increase financial inclusion of farmers Thanks to supervision and cooperation of banks and enterprises, involving in a value chain enables smallholder farmers to increase productivity and enhance product quality that meets the demands of international standard for exportation As a result, the whole chain financing is designed to help smallholder farmers to strengthen their competitiveness at both regionally and internationally Thanks to the open access to finance service, smallholder farmers are able to maximize their production capacity It affects the other stakeholder in a chain as suppliers who supply more, processors who process more and traders who sell more in the market In this sense, it broadens good opportunities for smallholder farmer to invest in farm cultivation and increase level income It is directly associated with overall economic growth and poverty alleviation of the country at large Horizontal linkage and vertical linkage are the most popular form in AVC Horizontal linkage is a link between actors in the same stage (gathering individual producers and individual business into a community / cooperative group) to reduce costs and increase product prices Vertical linkage is links between actors in the chain (community groups associated with enterprises through product consumption contracts) To keep up with global trend, recent year, Vietnamese government has issued some policies to encourage commercial banks, agribusiness and farmers cooperate closely to set up a series of AVC Hanoi is leading to build up linkage and creates brandname agricultural products Currently, Hanoi has 46 models of green food operated on the basis from production to consumption chain Take the case of Tien Vien farm at Dai Yen commune, Chuong My district- a district of Hanoi’s suburb is a case of vertical linkage It was built in 2001 with an initial scale of 1.6 ha, with aquaculture is the main farm production In October 2006, Mr Tien established Tien Vien Farm Economic Investment and Development Joint Stock Company Since then, the 48 company started a production and consuption chain of chicken eggs with an expanded area of up to 7.2ha Figure 0.1: Tien Vien company’s chicken at Chuong My district (Source: Tien Vien company’s website) In 2011 with the support of Hanoi Animal Development Center, Tien Vien Company strengthened the chain of breeding, consuming chicken eggs Currently, the company has built closed farms, modern equipment with an annual breeding scale of 20,000 eggs In addition, the company attracted 15 poultry farmers in the locality to join in the value chain, which provides nearly 30,000 eggs per day At the present, Tien Vien’ eggs are being consumed at 98 supermarkets throughout countries When farm households engage in this chain, they are equipped and provided with regular training courses about raising skills, modern technology as well as cattle This chain contributes to deal with the difficulties about financial burden of farmers at initial stage when company will provide them with necessary inputs Especially, this cooperation attracts the participation of young people who 49 would like to expand their existing scale and have good opportunities to learn from successful farm households about high-tech production and organic food At research location, through interview and observation, Thuong Tin has potential to develop agricultural sectors by applying AVCF that contribute to address the difficulties farmers are facing in terms of credit access It is illustrated by SWOT model as below STRENGTHS WEAKNESSES - Natural condition is mild climate, favorable - Not many private companies is geographical location and abundant water interested in investing in this irrigation for farm cultivation area - Local authorities pay heavy attention to - Scale of production is still agricultural production through training courses small - People have knowledge about farm cultivations - Not many farmers who have - Close relationship between farmer and local knowledge organizations about modern cultivation method to lead the - Convenient transportation helps deliver product other to Hanoi city easily OPPORTUNITIES THREATS - New trend in agricultural sector is transforming - Output for product is a to green and organic food that requires the strict problem need to concern regulations about food safety at every stage of - Farm household might find production difficult to adapt to high - Policies of the government aiming to attract technology for farm production more agribusiness will create favorable condition in a chain for operation agricultural value chain Figure 0.2: SWOT analyze (Source: combined by the author based on result of survey) 50 When being asked about AVCF, the leader of local authorities of To Hieu commune said that they are always welcome the investment from agribusiness and commercial banks to establish chain production in this area This might create more job opportunities for local residents as well as guarantee output for farmer’s product Nghiem Xuyen commune’s leader shared that one of the biggest problems is that infrastructure at local ( such as road) is quite small for businesses to deliver products by big trucks He also said that Farmer’s Union really want to learn from the model of Tien Vien company in Chuong My district because Nghiem Xuyen is planning to undertake such a similar project in the near future However, there has not been such a private company or enterprise to gather other farm households in this area and to build up a chain in a form of Feed- Farm-Food model One factor that can bring significant influence toward access to formal credit was the connection to the market A good market connection serves credit outreach in a twofold manner: first, households have better access to credit-relevant information; and second, though better market access they may find new investment opportunities Moreover, borrower classification is necessary for policy makers to issue appropriate preferential agricultural policies Thirdly, Current interest policy of VBSP is developed in the way to subsidized poor people – those who are considered as weakly able to pay an interest rate as high as the one provided by commercial banks The subsidized interest is even set under the inflation rate, which leads to a negative real value As a result, favorable credit would run to people who are not in real need but who have good relationship and power This policy, while it requires great supply of credit from State budget, the result seems to be far below the policy maker’s expectation This implies that setting the interest rate at which level should be put under careful consideration and need further study Subsidy policy to agribusiness on safe and green food product should be concerned to attract more participation of young generation toward agricultural sector 51 5.2 Conclusion In this research, an attempt has been made to explore the challenges of smallholder farmers when they access to formal credit is collateral, especially to young people who are in age of under 35 This age group are willing to take chance to apply new technology in agricultural production However, they are not capable to offer valuable assets to formal institution to ask for loan Among the respondents, the most common reason for participating in agricultural credit is to buy animals or seeds of borrowers that considered as one of the main purpose of the Government for such loans Availability credit of the research area is also examined through interview with farmer respondents and key informants Generally, agricultural credit is quite available to borrowers when there are enough branches of banks offices in the commune level Through ideas from key informants as well as observation, researcher put forward AVCF as a useful tool to deal with the difficulties of farmers, especially young people when they access to agricultural credit, namely collateral SWOT analyze is designed to see the potential of AVC in the research location 52 REFERENCES Bali Swain, R (2001) Demand, segmentation and rationing in the rural credit markets of Puri (Doctoral dissertation, Acta Universitatis Upsaliensis) Barry, P J., Bierlen, R W., & Sotomayor, N L (2000) Financial structure of farm businesses under imperfect capital markets American Journal of Agricultural Economics, 82(4), 920-933 Barslund, M., & Tarp, F (2008) Formal and informal rural credit in four provinces of Vietnam The Journal of Development Studies, 44(4), 485-503 Carr, E H., Cox, M., & Cox, M (1946) The twenty years' crisis, 1919-1939: an introduction to the study of international 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 Master level Number of household member: _ 57 Farm size: m2 The main crop/ animals: 10 Annual income: million VND 11 Do you have an extra-job?  Yes, please specify  No 12 Are you the owner of the house you are living?  Yes  No, I am living with my parents  No, I am renting a house B ACCESS TO CREDIT How many financial institutions are there at the local area that you know? Is it far from your house to the financial institutions?  Yes, it is far  No, it is not far Have you ever got loan from VBARD or VBSP?  Yes  please go for the questions from to 15  No  please go for the questions from 20 Which financial institution did you get loan from?  VBARD  VBSP Which social economic organizations did you get loan through?  Farmer’s Union  Women’s Union  Youth’s Union  Other Do you prefer to borrow through local organization or directly via the banks? Specify the reason: 58 Ranking from 1-7 which is the most important reasons for you to join in the credit program? (number is the most important reason, number is least important)  To buy animal/ seeds  To invest the production facilities  To learn and share information on farming practice  To pay for tuition fee of children  To pay for old debts  To buy more farm land  To expand existing or invest a new economic activities  Other (please specify): The amount of loan you got: _ million VND The interate rate is: per month/ year 10 The loan term is: month/year 11 Is loan procedure complicated?  Yes, please specify  No, please specify _ 12 Who is representatives in your family to borrow?  Father/Mother  Husband  Wife  Children 13 What kinds of loan term you prefer?  Short-term  Medium term  Long- term 14 Do you borrow more from any other credit source?  Private moneylender (Interest rate: )  Friends/ Neighbors (Interate rate: )  Relatives (Interate rate: ) 59  Other (Interate rate: ) 15 What is your expectation or recommendation to improve your credit the accessibility? _ 16 Why not you want to participate in credit? (Rank your answer in the order: is the most important reason, is least important reason)  No need for a loan  Too complicated procedure  Old age  No guarantor  Bad credit history  Other reason ( please specify): 17 Have you ever tried to apply for it? Was it successful? 18 If not successful, what was the main reason for loan rejection?  Not enough collateral  Insufficient information about documents for loan application  Lack of support from local officers or bank officers  Insufficient income  Other reason, please specify _ 19 What is the purpose of your loan? _ 20 Do you borrow from other credit source? If yes, please specify the interest rate  Private moneylender (Interest rate: )  Friends/ Neighbors (Interate rate: )  Relatives (Interate rate: )  Other (Interate rate: ) 21 Do you have any expectation or recommendation to enable you to access credit more easily? Please specify it: 60 ANNEX VIETNAM JAPAN UNIVERSITY FACTORS INFLUENCING THE ACCESS TO FINANCE OF SMALLHOLDER FARMERS IN VIETNAM CASE STUDY OF THE WHOLE- CHAIN FINANCING IN HANOI’S SUBURB SURVEY QUESTIONNAIRE FOR LOCAL AUTHORITIES What are the requirements for obtaining agricultural credit for smallholder farmers? What is the maximum of loan that farmers can borrow from VBARD and VBSP? What is interest rate? How long is the loan term? In which way your organization cooperate with formal banks? In which way you help smallholder farmers access to credit? 5.What you think about AVCF? Is it appropriate with economic and social development strategy of your local area? What kinds of agricultural products are considered as a key product to involve in a value chain? 6.What is your expectation or recommendation to make the credit access of smallholder farmers better? What you think about difficulties that smallholder have experienced? 61 ...VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY NGUYEN TRAN HOANG ANH FACTORS INFLUENCING THE ACCESS TO FINANCE OF SMALLHOLDER FARMERS IN VIETNAM: A CASE STUDY OF THE WHOLE- CHAIN FINANCING. .. to investigate how well the agricultural value chain financing work to mitigate the factors that prevent farmers from accessing credit Taking the case of agricultural value chain financing in the. .. agricultural credit for smallholder farmers  Determine the factors being determinant factors on access of small farmers  Proposing agricultural value chain financing as a tool to mitigate the factor