In my thesis, this chapter 2 will talk about the general literature on micro- credit, micro-finance and credit to the poor. It reviews general concepts of credit ,micro-credit and microfinance, reasons why the poor need micro-credit , reasons for existence of informal credit in Ho Chi Minh City, and also discusses interest rates charged by micro-credit providers.
Although in many developing economies, especially Ho Chi Minh City in Viet Nam, there have been great progresses in economic development over the last 30 years, millions of the poor and low-income households, who are just around the poverty line, rely heavily upon micro-credit, especially informal credit, as primary sources of credit to meet their demand for credit. The existence of an informal credit sector in almost all of the economies around the world especially in developing countries is the reality and reflects the failure of formal financial markets to meet poor clients’ financial needs. Understanding the determinants of access to informal credit and its impacts compared with the impacts of formal credit is thus an important topic, which the rest of this thesis addresses.
The concept of Credit
Credit is an economic category associated with multi-sector commodity economy. On the other hand, credit is social relations, relations of mutual fund use between these economic subjects and other subjects on the principles of
reimbursement. In other words, credit is a temporary transfer of right to use a certain
time from lenders to borrowers and when it is mature to return a value greater than initially amount.
The nature and characteristics of credit The nature of credit
Credit is the relationship between the use of capital and borrowers and lenders, between them have a relationship with each other through credit values active are expressed in the form of money or goods.
Credit is regarded as a movement capital which is the principle of reimbursement, to meet the needs of credit holders.
Characteristics of credit
The form of the banking credit relationship includes lending and leasing.
Transaction assets in the loan are in cash and assets in the real estate leasing and property. In the banking and credit relationships, the loan is granted on the basis of commitment to an unconditional refund.
Belief: credit relationship is formed on the based of belief that the borrower will pay back loans on time.
Legally, the document of defining the relationship of credit such as credit contract, covenant ... that is the legal documents to bind the responsibilities, obligations and interests of both the lender and borrower.
The refund: The borrowers have to common pay the interest rate and start-up capital (principal), so the borrowers have to pay more than the original
The time limit: is a certain time that the borrowers must repay on time.
Review of Related Studies
The situation of poverty in Ho Chi Minh City, Viet Nam
Poor is understood simply as shortages, inability to meet necessary for life such as: food, clothing, education, health…at a certain time.
Poor express the lack of opportunity to be able to live a life that corresponds with the standard of minimum .The measured of these standards and the causes lead to poverty depends on locations and times .World Health Organization (WHO) defines that the poverty is low- income. Thus, a person is the poor if annual income is less than a half of the average income per capita of the country every year.
According to CEP: The situation of poverty in Ho Chi Minh City reflects that of the national picture, in that there is widespread poverty among a sizeable
proportion of the population. In 2006, General Statistics Office of Vietnam reported that 5.8% of the official population of the City and surrounding provinces lived below the national poverty line (less than USD 0.44 per person per day, unadjusted for PPP).
This would indicate that a sizeable number of people in HCMC are surviving on less than USD 2 PPP a day, particularly when considering the large quantity of
undocumented poor migrants living in the City. Over recent years the level of urban migration within Vietnam has increased markedly. Official estimates of the
population of HCMC are in the vicinity of 6.6 million residents (this figure is the 2008 population of HCMC reported by the General Statistics Office of Vietnam), however unofficial estimates have the population as high as 10 million. The
difference between the two figures being the quantity of migrants in the city, many of whom have migrated from other provinces of Vietnam in search of employment opportunities and a means to support their families. These migrants are often among the poorest of HCMC society and hence the actual proportion of people living in HCMC below the national poverty line is likely to be much larger than 5.8%. In terms of the living standards of residents of HCMC, they vary markedly depending on
location, with rural areas of HCMC having generally less access to basic utilities such as potable water and electricity than do urban areas. Also, communities that are based in rural areas and those that have developed on the fringes of urban areas and
industrial zones are likely to consist of housing made of non-permanent materials and lack access to basic services. Despite the significant economic and physical growth of the City over recent years a great many of the residents of HCMC, whether they are residents of long established communities or are newly arrived from outer lying provinces, live their lives in a state of tremendous instability and poverty. The cost of living in HCMC is very high and despite the perceived greater economic opportunities that exist in the City it is very difficult for laborers and unskilled workers to
generate sufficient income to support themselves and their families. In percentage terms the rate of poverty in the City is lower than other parts of Vietnam, though due to the large concentration of people living in the City and the higher cost of living, the absolute number of poor people living in HCMC remains considerable. It is in the context of such large numbers of people living in poverty that CEP implements its mission of poverty alleviation, through community development and the provision of saving and credit services. The geographical focus of CEP is Ho Chi Minh City, in its entirety, encompassing all 24 districts; rural, semi-urban, and urban. The high
concentration of the poor in HCMC, undertaking economically marginal activities in order to sustain themselves and their families, taken together with the increasing urban migration of unskilled labor, adds to the growing demand for the types of social assistance that CEP provides.
Along with the innovation, economic growth in HCMC, the life of the majority of the population improved markedly. However, in the market economies, the impact of economic development is not uniform to all the regions and population
groups. Therefore, a part of residents of different causes have not caught up with change, difficulties in production and life becomes the poor.
The unemployment rate in 2010 of working age is 2.8%, in which urban areas is 4.43%, rural areas is 2.27% (in 2009 the corresponding ratio is 2, 9%, 4.6%, 2.25%). underemployment rate in 2010 of working ages are 4.5%, in which urban area is 2.04%,%, rural areas are 5.47% (in 2009 the corresponding ratio is 5.61%, 3.33%, 6.51%).
Commodity prices, rising consumer services in the last months in the year along with natural disasters occurred affecting civilian life. In 2010 year, although the poverty rate in the country under poverty standard of Viet Nam Government
continues to decrease, but the poverty rate tends to increase, particularly in the area of HCMC. The poor in HCMC increasingly difficult access to social services and to cope with the life of social security lack. (Social security refers to public programs for providing income to individuals in the event such as: retirement, sickness, disability, death, or unemployment)
In HCMC, the poverty rate fell slowly, and even increased in some areas have many different causes and effects, but mainly due to price shocks, natural disasters and the impact of financial crisis in the world. The poor in urban areas are more affected by insecure job, low income; meanwhile, food prices and other essential needs remain high.
For migrants in HCMC; low income, insecure job make the poor difficult access to social services. On the other hand, they do not have number of inhabitants.
So, the urban poor are being pushed out of these services.
Poverty in developing countries is increasingly urban, with the poor urbanizing more quickly than the population as a whole. These trends are also
apparent in Vietnam, with the share of urban population rising from 23.7% in 1999 to 29.6% in 2009. In the period 1980-1985 (before the economic reform), migration only contributed 28% of the urban population growth, but since the reform era immigrants to urban areas have contributed 50% and 62% of the urban population growth in the periods 1990-1995 . Over the period 1999-2009, 77% of the population growth in Vietnam is in urban areas. The urban population growth rate is 3.4%/year, 8.5 times as high as that of rural areas (0.4%/year), with this higher growth mainly due to rural- urban migration. Viet Nam has experienced the highest recent population growth (3.2%/year) due to the substantial migration to this region. The key destination of immigrants in Viet Nam is Ho Chi Minh City (HCMC). HCMC is not only the largest city but also the second fastest growing population in Vietnam (3.5%/year) during the last 10 years .Furthurmore, the fact that the fastest growing province of Binh Duong is adjunct to HCMC makes HCMC is the most dynamic population areas in Vietnam .The main reason for migration to the region is to seek economic opportunities in non- agricultural sectors. Most migrants to the region arrive in Ho Chi Minh City (HCMC has many industrial parks and export-processing zones), which is also evident in Vietnam. Poverty sharply declined over the period 1998-2008 from 37.4% to 14.5%.
Urban poverty rate has been declining from 9.5% in 1998 to 3.3% in 2008, but the urban areas have a rising share of poverty, from 5.99% in 1998 to 6.63% in 2008 due to fast population growth in urban areas during the same period (VHLSS, 2008). The poverty is becoming more urban in Vietnam, espcially Ho Chi Minh City; so study of urban poverty is becoming significant for poverty reduction policy in Ho Chi Minh City, Vietnam.
Fast urbanization, employment and poverty in peri-urban and urban areas in Ho Chi Minh City:
Peri-urban and urban poor people often depend more on wage-paid employment
and cash incomes, but less on agricultural activities to earn because of the declining arable land due to urban encroachment. Further, the higher cost of living and market reliance could result in a slower pace of poverty reduction in peri-urban and urban areas. Thus, the higher unemployment rate in the areas will result in unstable livelihoods and imperfect consumption smoothing. Moreover, poverty in urban and peri-urban areas is likely to concentrate on immigrants.
Urbanization has reduced agricultural land in HCMC, from 95,799 hectares of arable land for annual crops in 2000 to 44,441 hectare in 2009. (In my study area District 9, 10, Binh Chanh) agricultural land fell from 5,661 hectares to 332 hectares during the same period. This reflects the substantial population growth rate
establishment of new enterprises (from about 400 in 1997 to 1,658 enterprises by 2006), and the construction of HCMC High Tech Park (about 1,000 hectares).As a consequence of the arable land decline, the peri-urban poor in HCMC rely more on seasonal and unstable jobs such as street vendors, construction workers and unskilled factory workers. This indicates that the poor depend more on labor incomes, thus adverse shocks which cause loss of working members such as illness, injury,
accidents and death, and limited access to quality social services will lead to unstable livelihoods. So, such approaches as improving human capital (education and health) and facilitating access to social and financial services are needed to mitigate
vulnerability and effectively eliminate poverty.
The standard of poor households in Vietnam and Ho Chi Minh City
The standard of poor households is applied for period 2011-2015 as follows (according to Decision No 09/2011/QĐ-Tg dated January 30th 2011 of the Prime Minister)
Rural poor households are households with average income of 400,000 VND for person in month (from 4.8 million VND / person / year) or less.
Urban poor households are households with average income of 500,000 VND for person in month (from 6,000,000 VND / person / year) or less
Rural poor households are households with per capita income from 401,000 VND to 520,000 VND for person in month.
Urban poor households are households with per capita income from 501,000 VND to 650,000 VND for person in month.
The standard of new Poverty of Ho Chi Minh City (2010)
In early 2010 to apply the income of 1,000,000 VND for person in month or less (according to Decision No 23/2010/QD-UBND dated March 29th 2010 of People Committee of HCM City )
Survey Regions
Survey lands are selected such as District 9, District 12, Cu Chi , Binh Chanh District of HCM City) for three urban and suburban typical areas are affected by industrialization.
In each district, selected a typical ward that has many the native poor and immigrants, including both free workers, unskilled workers in factories, enterprises, civil servants that have low and middle income, and beneficiaries of social assistance policies.
The populated groups in urban of survey areas The group subdivision
Native poor group and the principal beneficiaries of welfare are often subsidized by Decree 67/NĐ-CP
The group of migrant worker
The group of native freelance-workers The group of pension
The group of Officials and employees with an average income Native poor households
Poor households in urban areas often work in the informal sector, low income and unstable. A large part of the urban poor are solitary old age, low income and unstable. A large part of the urban poor solitary old age, with the sick, single women, children winter... Poor family property is less valuable and the small house area
Migrant workers
Migrant workers in the survey area are mainly low-skilled jobs (garment, footwear, assembly ...), have relatively stable and unstable job
Group of migrant workers with children (estimated about 10%)
The roles of microfinance for the poor and low-income households In the cause of poverty in HCMC, The causes are mainly due to lack of funds, lack of knowledge of business. Do not meet many people fall into the capital that is not enough food to go to rent, usury, the land pledged to ensure minimum daily life. Therefore, poor credit for solving the capital to meet production needs and to improve the poor life.
An essay about financial services for poor people: ‘The poor and their money’, Rutherford (1999) shows that the poor people use their money for three main
purposes: life-cycle events, emergency needs, and income generation or investment.
The life-cycle events include birth, marriage, funerals, holidays, and school fees.
Emergency needs include healthcare expenditure (sickness, injury), labor loss, employment loss, property loss, and disasters. The investment involves family businesses, farming, and buying land, buying household, production assets and inputs.According to Helm B. (2006). Access for All: Building Inclusive Financial systems, to help the poor sucessfully out of poverty, programs or policies need to enable the poor to have permanent access to credit and to have facilities or capacity to reduce risks. Thus, the poor need more than credit; financial services such as savings, money transfers, pension fund, and insurance are also needed.
These financial services and credit will ensure stable and continuous cash flows for the poor currently and in future. To illustrate how the microfinance services help the poor in different circumstances, the diagram below can shows the
relationships between the poor and microfinance service providers. On the left hand side are the financial (microfinance) services that the poor need, on the right hand side are events/occurrences or shocks that induce demand for the microfinance services.
Credit and other financial services help the poor expand business, diversify income, promote education and health, save for future, make use of financial services, and consequently reduce poverty and improve future livelihoods for the poor.
Many current studies show that microfinance has a positive impact on the poor, while other studies limited evidence of the impacts. Microfinance helps the poor not only to survive but also to plan for future, improve living condition, invest in healthcare and education, and to empower women. However, micro-credit is not expected to work for everyone, especially for the destitute and hungry, nor work everywhere.
Form of disguises of People's Credit Fund
Recently, Government announced the form of sustainable poverty reduction in Viet Nam (three farmers). In HCMC, the City developed the People's Credit Fund to help poor households to access this fund, and help them avoid borrowing usury. But in reality, funds are not to consumers but to the enterprise that is the disguise move to make a business money is very risky in HCMC. Nowadays, in HCMC has 18 funds and currently five funds are very serious violation and enjoys different levels from 0.5% to 1% (the lifting of the People's Credit Fund). This makes the rural poor are not loans ; and then some loans were out of poverty and to rise again from the life.The collected results of the Credit Fund is faced with no collateral.
The signification of People's Credit Fund: to avoid the loan and to get deeper and deeper into debt.
What is micro-credit and micro-finance?
In 1462 in Europe, (Helms, 2006) Small, informal savings and credit groups were documented, but until 1700s small loans were first lent to poor farmers who had no collateral. After The Second World War, especially during the 1950s-1970s, many countries established state-owned development banks, credit institutions and credit cooperatives to provide loans to small farmers in hopes of improving agricultural productivity and incomes. At this stage, because of heavily subsidized credit and state intervention, most of the credit programs failed network. As the result, micro-credit was considered an approach to eliminate poverty. From now on, the term
microfinance, instead of micro-credit, has been widely used .The roles of micro-credit and microfinance in improving living standards for the poor and low-income
households, and its position in the financial system. Today, the term micro-credit has been interchangeably used with microfinance.
Micro-credit is defined as the extension of small loans to the unemployed, poor entrepreneurs, and poor households who usually lack collateral or fail to meet minimum requirements for access to traditional formal credit such as the term micro- credit to “loans from agricultural credit, or rural credit, or cooperative credit, or credit unions, or from moneylenders” .While, microfinance is a broader concept; it is defined as small-scale financial services to the poor and low-income households, which include consumer credit, loans, savings , pensions, insurance, remittances services and other basic financial services.
Microfinance is the supply for poor households is very small loans (known as micro-credit), aimed at helping them to engage in production activities, or initiate smaller business activities. Microfinance is often accompanied by a range of other services such as credit, saving, insurance, because of the poor and very poor have a huge demand for financial products, but can not access the formal financial
institutions.
The different between microfinance and micro-credit is: microfinance refers to the lending activity, savings, insurance, transfer services and other financial products to the consumers who are low income . Micro-credit is simply a small loan that the bank or a certain financial organization provides. Micro-credit usually lends a personal loan without collateral, or through lending the groups.
The poor, the same everyone, need a variety of financial instruments to accumulate assets, consumption stabilization and protect themselves at risk.
Therefore, in the broadest sense, microfinance is finding ways to effectively and reliably to provide more and more of the microfinance products.
Therefore, microfinance provides not only loans to poor households to generate income and smooth consumption but also more importantly to help poor