Determinants of accessibility to microcredit in term of formal sector and informal sector

UNIVERSITY OF ECONOMICS, HO CHI MINH CITY VIET NAM – NETHERLANDS PROGRAMME FOR M.A PROGRAM IN DEVELOPMENT ECONOMICS DETERMINANTS OF ACCESSIBILITY TO MICROCREDIT IN TERMS OF FORMAL SECTOR AND INFORMAL SECTOR o0o TRAN THI NGOC ANH MAI Academic Supervisor: DR CAO HAO THI Dec – 2014 ABSTRACT Microcredit is an emerging concept helping the poor out of poverty situation This dissertation attempts to investigate the determinants affecting the probability of participation in different types of credit sectors in terms of formal sector and informal sector Using a sample size of 1,522 households participate in credit market from The Vietnam Access to Resources Household Survey (VARHS) 2012, bivariate probit model is employed to explore the determinants of household credit demand due to the binary nature of the dependent variables Various explanatory variables include age, gender, marital_stt, edu, hhsize, income, savingamount, landsize, agriculture_act, network and location that influence probability of accessibility to different sectors of credit Furthermore, relationship between dependent variables is accounted in this research Results reveal that factors affecting formal credit participation are different from factors affecting informal credit participation Additionally, the result indicates that there is negative correlation across two sectors of credit ACKNOWLEDGEMENT I would like to express my deepest thankfulness to my advisor, Dr Cao Hao Thi who spent lots of his precious time to support and guide me throughout this research and continuously led me to the right way I would also like to extend my appreciation to the teachers working on Vietnam Netherlands programme who gave great lectures and invaluable knowledge for us to complete the course I am grateful to my parents and my siblings that always encourage and support me in my study and in every aspect of life I also want to express my gratitude to my friends for sharing with me the difficulties and giving me the ideas, knowledge and materials for the study and for all the time we were at Master in Development Economics 19 LIST OF FIGURES Figure 2.1 Probability of success and expected returns to borrowers Figure 2.2 Return to the bank 11 Figure 3.1 Microfinance Systems in Vietnam 22 Figure 4.1 Process of research 30 Figure 4.2 Participation in credit sector .33 LIST OF TABLES Table 2.1 Definition of Variables .18 Table 3.1 Microfinance Institutions in Vietnam 20 Table 3.2 Comparison between formal and informal lenders 28 Table 4.1 Summary of Participation in different credit sectors 32 Table 4.2 Conditional and Unconditional Credit Participation Probabilities .33 Table 4.3 Summary statistics .34 Table 5.1 Determinants of accessibility to formal and informal credit sector 38 Table 5.2 Marginal effects for conditional probability of formal sector participation 44 Table 5.3 Marginal effects for conditional probability of informal sector participation 46 TABLE OF CONTENTS CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research objective 1.3 Research questions 1.4 Research Structure CHAPTER 2: LITERATURE REVIEW 2.1 Concept of credit 2.2 Theory of demand for credit 2.3 Credit rationing theory 2.4 Determinants of participation in microcredit programs .11 CHAPTER 3: OVERVIEW OF MICROFINANCE SYSTEM .19 The history of Microfinance 19 3.2 The role of government in microfinance: 21 3.3 Overview of credit market in Vietnam .22 3.3.1 The formal credit market .23 3.3.2 The semi-formal credit market: 26 3.3.3 The informal credit market 26 CHAPTER 4: RESEARCH METHODOLOGY .30 4.1 Research process 30 4.2 The data 31 4.3 Data Analysis Method 35 CHAPTER 5: RESULTS AND DISCUSSION 38 5.1 Estimation of determinants of microcredit participation 38 5.2 Estimation of conditional marginal effects 44 CHAPTER 6: CONCLUSION 48 6.1 Research Findings 48 6.2 Policy implications .49 6.3 Limitations 50 REFERENCES 52 APPENDIX 57 CHAPTER 1: INTRODUCTION 1.1 Problem statement There are about 1.22 billion people (21 percent of population) in the world living on less than $1.25 a day in 2010 (World Bank) Focusing towards poverty reduction and finding ways to improve living condition have taken a lot of attention of public policies in the world The rate of poverty in Vietnam decreases remarkably in recent years According to annual report shown by GSO, the poverty rate declined from 15.5 percent in 2006, to 13.4 percent in 2008, to 10.7 percent in 2010 In a report of GSO in 2010, it also revealed that poverty level in rural area (13.2 percent) is much higher compared to that in urban area (5.1 percent) How to distribute the benefits of economics growth, especially to rural area is one of the challenges remained Therefore, rural economy deserves more attention and support to reduce inequality between rural and urban area According to McCarty (2001) and Pham & Lensink (2002), lack of ability to obtain the fund for the purpose of working capital and investment is one of the reasons among other things that lead to poverty in developing countries Providing a channel to ease the credit constraints for the poor rural household is the primary object in poverty alleviation strategy of developing countries, including Vietnam Farmers need an instrument such as credit to enhance productivity and promote standard of standard of living because of their seasonal activities and uncertainty they are facing (Ololade & Ologunju, 2013) Accessing to microcredit is recognized as a potentially effective tool out of under poverty line situation and improve living standards (ADB, 2000a; Morduch and Haley, 2002; Khandker, 2003) Agricultural credit plays an important role in sustainable achievement in any country in the world Microfinance industry has been known in many decades in developing countries, and its role was further attended with rapid growth worldwide when Mohammad Yunus who pioneered the principle of microfinance and microcredit received Nobel Peace prize in 2006 (Tra Pham and Robert Lensink, 2007) And a variety of previous researches demonstrated the position of microfinance in poverty reduction by focusing on the effect on household welfare The demand for rural credit has increased sharply due to the decollectivization of agriculture launched in Vietnam in the year 1986 Hence, the spread of microfinance with amendment of regulations on banking operation in Vietnam plays an important component in fighting again poverty over the last decades Vietnam has introduced several of microcredit programs via a lot of channels such as banks, credit funds, money lenders and advance input providers to supply credit for a variety of clients Despite the importance of credit to the poor, the poor family that lacks ability to access to adequate financial service leads to the fact that they not have prospects for increasing their productivity and living standard And the fact that commercial banks have no interest in allocating credit to the poor because of their lack of viable collateral Because of these reasons, governments in developing countries have set up credit programs that aim at improving the process of rural household access to formal credit during the past four decades (Diagne, 1999) However, the lending mechanisms as well as the nature of the credit market which are highly regulated by government intervention such as controls of interest rates and credit quota allocation not function well Similarly, Robinson (2001) and Gonzalez Vega (2003) also indicated that most of microfinance institutions have been not sustainable in developing countries Credit subsidized interest rate provided by “Agricultural development banks” which established by commercial banks to extend credit to rural household not considered creditworthy However, majority of these credit programs have failed to reach their targets both to be sustainable credit providers and serve the poor (Adams, Graham, and von Pischke 1984; Adams and Vogel 1986; Braverman and Guasch 1986) Risk management and transaction costs associated with Asymmetric information are the most problematic features facing by lenders and borrowers (Pham & Lensinnk, 2007) It is also well know that different forms of credit market serve different group of borrowers, it is difficult for large number of poor households to access to credit sources Households often face limited access to credit because of rationing of credit demand that leads to the poor and low income households are generally excluded from the formal credit sector (Stiglitz & Weiss, 1981) In fact that formal provider, semi-formal provider and informal provider exist side by side in Vietnamese financial market To deal the level of information asymmetry between borrowers and different lenders, many government microcredit programs are accompanied by the local Peoples Committees in terms of lending process to assist microcredit market operation In respect of this, narrowing gaps in term of whom it serves and the service it provides, improving the efficiency and effectiveness of microfinance system is the main challenge of policy makers as well as program organizers With data collected from The Vietnam Access to Resources Household Survey 2012 (VARHS) which supplements and extends the VHLSS (Vietnam household Living Standards Survey) by repeating surveys of the same household with data from VHLSS and asking more questions about income, expenses, land, agriculture, asset, investment, migration, climate change, social welfare and so on; VARHS received assistance from University of Copenhagen, CIEM, ILSSA (Institute For Labor Science and Social Affair), and IPSARD (Institute of Policy and Strategy for Agricultural and Rural Development), econometrics techniques are employed in this research to explore the factors that affect access to credit in terms of formal credit and informal credit 1.2 Research objective The objective of this thesis is to empirically investigate the determinants that influence on the probability of household accessing to different types of credit sectors as well as the relationship between formal credit participation and informal credit participation at the same time Additionally, marginal effects of each independent variable on the choice of credit source are also shown in this research 1.3 Research questions This research is to answer two central questions: What are determinants affecting the probability of household accessing to different types of credit sector? Is there any evidence of a correlation between participating in formal credit and participating in informal credit at the same time? 1.4 Research Structure This dissertation is organized as follows In chapter one, problem statement and objectives of this research are presented Chapter two provides concepts related to this research, discusses theory for demand credit and credit rationing theory and introduces explanatory variables Chapter three presents the history of microfinance as well as the role of government in microfinance It also provides insight into the structure of credit market in Vietnam Chapter four presents research structure, data description and methodology method used in this research Chapter five gives empirical models and the estimated results Finally, conclusion, policy suggestions and limitations are highlighted in chapter six CHAPTER 2: LITERATURE REVIEW This chapter presents the overview of theory and discusses previous studies relate to the research topic The first part mentions about microcredit regarding concept of credit The second part discusses about theory for demand credit and credit rationing theory The last part discusses about the determinants affecting credit accessibility 2.1 Concept of credit There are several and various definitions regarding the word credit as follows: Credits are referred as loans which permit consuming in the present, in exchange for an agreement to make repayment at sometimes in the future (Pischie et al., 1983) Obtaining credit was considered as the process of controlling over the use of money, goods and services based upon a promise to repay at a future day (Adegeye & Dittoh, 1985) Ololade & Ologunju (2013) defined credit as a mean for temporary transfer of assets to individuals or organizations that has not them from individuals or organizations that has This process required evidences of debt obligation in return for a loan, in the case of transaction between friends or relative which based on good relationship excluded Microcredit which is a component of microfinance provides small loan to the poor for self –employment That generates income, helping them care for themselves and their family (The Microcredit Summit, 1997) To raise income level and improve living standard of semi-urban and urban areas are considered as targets of microcredit by providing of thrift, credit, other financial services and products of every small amount to the rural household (Reserve Bank of India- Master Circular, 2011) Khandker, R S., & Pitt, M M (1998) The impact of group-based credit programs on poor households in Bangladesh: Does the gender of participants matter? Lensink, R., & Pham, T T (2007) Lending policies of informal, formal and semiformal lenders Lin, C., & Yang, T (2005) Curtailment as a mortgage performance indicator Magri, S (2002) ITALIAN HOUSEHOLDS ’ DEBT : DETERMINANTS OF DEMAND AND SUPPLY Meyer, R., & Nagarajan, G (1992) An assessment of the role of informal finance in the development process Mitrakos , T., & Simigiannis, G (2009) The determinants of Greek household indebtedness and financial stress Modigliani, & Franco ( 1966) The life-cycle hypothesis of saving, the demand for wealth, and the supply of capital Mohamed, K (2003) Access to Formal and Quasi-Formal Credit by Smallholder Farmers and Artisanal Fishermen Morduch, & Jonathan (1999) The Microfinance Promise.” Journal of Economic Literature Morduch, J., & Aghion, B (n.d.) The Economics of Microfinance Morduch, J., & Haley, B (2002) Analysis of the Effects of Microfinance on Poverty Reduction Mpuga, P (2004) Demand for Credit in Rural Uganda : Who Cares for the Peasants  Mpuga, P (2008) Constraints in Access to and Demand for Rural Credit : Evidence from Uganda Nguyen, C H (2006) Determinants of credit participation and its Impact on household consumption: Evidence From Rural Vietnam Nguyen, C V (2011) The impact of Informal Credit on Poverty and Inequality: The Case of Vietnam 54 Nwaru, J C, Essien, U A, & Onuoha, R E (2011) Determinants of informal credit demand and supply among food crop farmers in AkwaIbom state, Nigeria Okten, C, & Osili, U O (2003) Contributions in heterogeneous communities: evidence from Indonesia Okunade, E O (2007) Accessibility of agricultural credit and inputs to women farmers of Isoya Rural development project Okurut, F N (2006) Access to credit by the poor in South Africa: Evidence from Household Survey Data 1995 and 2000 Ololade R.A., & Olagunju F.I (2013) Determinants of Access to Credit among Rural Farmers in Oyo Owuor George (2001) Is Micro-Finance Achieving Its Goal Among Smallholder Farmers in Africa? Empirical Evidence from Kenya Using Propensity Score Matching Pham, T T., & Lensink, R (2007) Household borrowing in Vietnam: A comparative study of default risks of informal, formal and semiformal credit Phan, K D (2012) An Empirical Analysis of Accessibility and Impact of Microcredit: the Rural Credit Market in the Mekong River Delta, Vietnam Robinson, M S (2001) The Microfinance Revolution Schreiner, M, & G Nagarajan (1998) Predicting Creditworthiness with Publicly Observable Characteristics: Evidence from ASCRAs and RoSCAs in the Gambia Soman, D., & Cheema A (2002) The effect of credit on spending decisions: The role of the credit limit and credibility Stiglitz, J E., & Weiss, A (1981) Credit rationing in markets with imperfect information Tang, S., Guan, Z., & Zin, S (2010) Formal and Informal Credit Markets and Rural Credit Demand in China Vaessen, J (2001) Accessibility of rural credit in Northern Nicaragua: the importance of networks of information and recommendation 55 Yehuala, S (2008) Determinants of smallholder farmers access to formal credit: the case of Metema Woreda, north Gondar, Ethiopia Zeller, D A., & Sharma, M (2000) to Credit Empirical Mesearements of Households’ Access and Credit Constraints in Developing Countries:Methodological Issues and Evidence Zeller, M (1994) Determinants Of Credit Rationing - A Study of Informal Lenders And Formal Credit Groups In Madagascar Zhao, X., & N.Harris, M (2004) Demand for Marijuana, Alcohol and Tobacco:Participation, Levels of Consumption and Cross-equation Correlations 56 APPENDIX Appendix 1: Statistics variables summarize 57 Appendix 2: Biprobit model result Seemingly unrelated bivariate probit Wald chi2(22) Log likelihood = -1626.0435 formal agriculture_activities informal agriculture_activities Likelihood-ratio test of rho=0: 58 Appendix 3: The marginal effects for Pr(formal=1, informal=1) mfx compute, predict(p11) Marginal effects after biprobit y = Pr(formal=1,informal=1) (predict, p11) = 18358534 variable age gender* marita~t* edu hhsize income saving~t landsize agricu~s* network* location* (*) dy/dx is for discrete change of dummy variable from to Appendix 4: The marginal effects for Pr(formal=1, informal=0) mfx compute, predict(p10) Marginal effects after biprobit y = Pr(formal=1,informal=0) (predict, p10) = 5045949 variable age gender* marita~t* edu hhsize income saving~t landsize agricu~s* network* location* (*) dy/dx is for discrete change of dummy variable from to 59 Appendix 5: The marginal effects for Pr(formal=0, informal=1) mfx compute, predict(p01) Marginal effects after biprobit y = Pr(formal=0,informal=1) (predict, p01) = 27324684 variable age gender* marita~t* edu hhsize income saving~t landsize agricu~s* network* location* (*) dy/dx is for discrete change of dummy variable from to Appendix 6: The marginal effects for Pr(formal=0, informal=0) mfx compute, predict(p00) Marginal effects after biprobit y = Pr(formal=0,informal=0) (predict, p00) = 03857292 variable age gender* marita~t* edu hhsize income saving~t landsize agricu~s* network* location* (*) dy/dx is for discrete change of dummy variable from to 60 Appendix 7: The marginal effects for the marginal probability of outcome Pr(formal=1) mfx compute, predict(pmarg1) Marginal effects after biprobit y = Pr(formal=1) (predict, pmarg1) = 68818024 variable age gender* marita~t* edu hhsize income saving~t landsize agricu~s* network* location* (*) dy/dx is for discrete change of dummy variable from to Appendix 8: The marginal effects for the marginal probability of outcome Pr(informal=1) mfx compute, predict(pmarg2) Marginal effects after biprobit y = Pr(informal=1) (predict, pmarg2) = 45683218 variable age gender* marita~t* edu hhsize income saving~t landsize agricu~s* network* location* (*) dy/dx is for discrete change of dummy variable from to 61 Appendix 9: The marginal effects for the conditional probability of outcome given outcome Pr(formal=1 | informal=1) mfx compute, predict(pcond1) Marginal effects after biprobit y = Pr(formal=1|informal=1) (predict, pcond1) = 40186605 variable age gender* marita~t* edu hhsize income saving~t landsize agricu~s* network* location* (*) dy/dx is for discrete change of dummy variable from to Appendix 10: The marginal effects for the conditional probability of outcome given outcome Pr(informal=1 | formal=1) mfx compute, predict(pcond2) Marginal effects after biprobit y = Pr(informal=1|formal=1) (predict, pcond2) = 26676927 variable age gender* marita~t* edu hhsize income saving~t landsize agricu~s* network* location* (*) dy/dx is for discrete change of dummy variable from to 62 ... system of Vietnam comes from three main sectors including formal, semi -formal and informal sector (Meyer and Nagarajan, 1992) The coexistence of formal sector, informal sector and semi -formal financial... the determinants of accessibility to formal and informal sector as well as the relationship between two types of credit sectors namely formal sector and informal sector only In this case, there... rate and lending practices between formal sector, semiformal sector and informal sector (Pham and Lensink, 2007) The Vietnam Bank for Social Policies Microcredit System in Vietnam Formal sector