Households Access To Informal Rural Credit- An Analysis From Vhlss 2008.Pdf

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

HOUSEHOLD ACCESS TO INFORMAL
RURAL CREDIT:
AN ANALYSIS FROM VHLSS 2008

By

LE ANH THU

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, August 2012


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

HOUSEHOLD ACCESS TO INFORMAL
RURAL CREDIT:
AN ANALYSIS FROM VHLSS 2008
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

LE ANH THU

Academic supervisor:

Dr. LE VAN CHON

HO CHI MINH CITY, August 2012


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 my utmost gratitude to Dr. Nguyen Trong
Hoai and Dr. Pham Khanh Nam for sharing their practical profound insights and
steadfast encouragement in term of theoretical literature and techniques that are
helpful to this study.
I would like to express my special thanks to Dr. Tran Tien Khai and Dr. Ha
Thuc Vien who have inspired initiatives and passion of rural credit in me to carry
out this interesting study.
I would like to express my deep and sincere gratitude to Dr. Le Van Chon for
his scientific guidance, patient encouragement and invaluable advice, which he has
provided throughout the time of preparation and accomplishment of this paper.
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; especially Nguyen Thi Thuy Thanh, Dinh Thi Thu and Phan Thach Truc
for creating motivation for me due to their brilliant talent.
I would like to express my special massive thanks to my bosses MA. Nguyen
Duc The and Mrs. Van Thi Le who have given me opportunities and spiritual
assistance to accomplish this study.
Last but not least, I must express my most gratitude to my parents and my
wife, Bui Thi Thanh Thuy, for their enduring understanding and spiritual assistance
which help me overcome the hard times.

[i]


ABSTRACT
It is said that credit is the essential source to finance production and
consumption expenditures in rural provinces in Vietnam. It also plays a critical role

in poverty alleviation, livelihood diversification and in reducing household
vulnerability. Although credit contributes substantially to the rural development,
household access to credit sources has not been given proper attention.
The purpose of this paper is to examine household access to informal
financial markets in Vietnamese rural areas. It applies the theoretical framework of
asymmetric information to investigate the rural credit markets in Vietnam.
This paper explores determinants that influence loan amounts borrowed by
rural households from the informal sources using the Heckman two-step model and
the data in the Vietnam Household Living Standard Survey which was carried out in
the year 2008. It is found that household expenditure, household assets and number
of working earners strongly and positively impacts on probability of credit access;
gender of household head highly negatively influence credit accessibility.
Notwithstanding, informal loan appears almost in household’s activities for both
consumption and production purposes, they still mainly rely on relationship of
friends and relatives rather than fully make use of informal credit institutions and
other sources.

Key words: Informal rural credit; cross section; Heckman model; VHLSS 2008;
Vietnam

[ ii ]


TABLE OF CONTENTS
ACKNOWLEDGEMENT........................................................................................................ i
ABSTRACT .............................................................................................................................. ii
CHAPTER 1: INTRODUCTION........................................................................................... 1
1.1 Problem statement ..................................................................................................................... 1
1.2 Research objectives ................................................................................................................... 3
1.3 Research questions .................................................................................................................... 3

1.4 Justification of the thesis ........................................................................................................... 4
1.5 Organization of the thesis.......................................................................................................... 4

CHAPTER 2: LITERATURE REVIEW .............................................................................. 5
2.1 History and origin of the rural credit ......................................................................................... 5
2.2 Theoretical review of rural credit markets ................................................................................ 6
2.2.1 The theory of monopoly ..................................................................................................... 7
2.2.2 Asymmetric Information .................................................................................................... 9
2.2.3 Indirect screening mechanism ............................................................................................ 9
2.2.4 Direct screening mechanism ............................................................................................ 10
2.3 Empirical studies ..................................................................................................................... 11
2.4 Conceptual framework ............................................................................................................ 19
2.5 Chapter summary .................................................................................................................... 22

CHAPTER 3: DATA AND RESEARCH METHODOLOGY .......................................... 24
3.1 Background of rural credit markets in Vietnam ...................................................................... 24
3.2 Data ......................................................................................................................................... 28
3.3 Research methodology ............................................................................................................ 29
3.3.1 Descriptive analysis ......................................................................................................... 29
3.3.2 Econometric model .......................................................................................................... 29
3.4 Chapter summary .................................................................................................................... 32

CHAPTER 4: ANALYSIS RESULTS ................................................................................. 34
4.1 Rural credit markets ................................................................................................................ 34
4.2 Intention of loans..................................................................................................................... 35
4.3 Different loan amounts analysis .............................................................................................. 36
4.4 Descriptive statistical analyses ................................................................................................ 38
4.4.1 Univariate analysis ........................................................................................................... 38

[ iii ]

4.4.2 Bivariate analysis ............................................................................................................. 39
4.4.2.1 The nexus of loan amount and age of household head.............................................. 40
4.4.2.2 The nexus of loan amount and gender of household head ........................................ 41
4.4.2.3 The nexus of loan amount and education of house head ........................................... 41
4.4.2.4 The nexus of average loan amount and number of dependents ................................ 42
4.4.2.5 The nexus of average loan amount and number of adults ......................................... 43
4.4.2.6 The nexus of average loan amount and expenditure ................................................. 44
4.4.2.7 The nexus of loan amount and total value of asset.................................................... 44
4.4.2.8 The nexus of average loan amount and expense on livestock ................................... 45
4.4.2.9 The nexus of average loan amount and cultivated areas ........................................... 46
4.5 Empirical results...................................................................................................................... 47
4.6 Chapter summary .................................................................................................................... 51

CHAPTER 5: CONCLUSIONS & POLICY IMPLICATIONS ....................................... 53
5.1 Conclusions ............................................................................................................................. 53
5.2 Policy implications .................................................................................................................. 54
5.3 Limitations and directions for further studies ......................................................................... 55
5.3.1 Limitations ....................................................................................................................... 55
5.3.2 Directions for further studies ........................................................................................... 55

REFERENCES....................................................................................................................... 57
APPENDICES ........................................................................................................................ 60

[ iv ]


LIST OF TABLE
Table 2.1: Early empirical studies on rural credit .................................................... 15

Table 3.1: Sample size by region ............................................................................. 22
Table 3.2: List of variables....................................................................................... 32
Table 4.1: Status of household’s access to rural credit markets .............................. 34
Table 4.2: Loan distribution over financial sources ................................................. 35
Table 4.3: Loan distribution over loan intention...................................................... 36
Table 4.4: Different amount of loan on rural markets ............................................. 37
Table 4.5: Different loan amount on the informal sector ......................................... 38
Table 4.6: Univariate analysis .................................................................................. 39
Table 4.7: The Heckman two-step model for informal loan amount ....................... 47

[v]


LIST OF FIGURES

Figure 2.1: The vicious circle of poverty ................................................................. 5
Figure 2.2: Unorganized financial markets in LDCs ............................................... 7
Figure 2.3: Monopoly & competitive markets ......................................................... 8
Figure 3.1: Rural loan in the formal sector .............................................................. 25
Figure 3.2: Rural loan in the semi-formal sector ..................................................... 26
Figure 3.3: Rural loan in the informal sector ........................................................... 27
Figure 3.4: Sample size ............................................................................................ 29
Figure 4.1: Gender of household heads ................................................................... 39
Figure 4.2: The nexus of average loan amount and age of household head ............ 40
Figure 4.3: The nexus of average loan amount and gender of household head ....... 41
Figure 4.4: The nexus of loan amount and education of household head................ 42
Figure 4.5: The nexus of average loan amount and number of dependents ............ 43
Figure 4.6: The nexus of average loan amount and number of adults ..................... 43
Figure 4.7: The nexus of average loan amount and expenditure ............................. 44
Figure 4.8: The nexus of loan amount and total value of asset ................................ 45

Figure 4.9: The nexus of loan amount and expense on livestock ............................ 45
Figure 4.10: The nexus of loan amount and cultivated areas .................................. 46

[ vi ]


ABBREVIATION

CCF: The Central Credit Fund
LDCs: Less developed countries
GSO: The General Statistics Office of Vietnam
HH: Household
ROSCAs: Rotating Savings and Credits Associations
OLS: Ordinary Least Squares
PCFs: The People’s Credit Funds
SBV: The State Bank of Vietnam
VBARD: The Vietnam Bank of Agriculture and Rural Development
VBP: The Vietnam Bank for the Poor (formerly)
VBSP: Vietnam Bank for Social Policies
VFA: The Vietnamese Farmers’ Association
VHLSS: Vietnam Household Living Standard Survey
VWU: The Vietnamese Women’s Union
WB: The World Bank

[ vii ]


CHAPTER 1: INTRODUCTION
1.1 Problem statement
The absence of formal credit sources for the rural household is a critical

constraint to agricultural development in many developing countries. It is due to
information asymmetry in the relationship of lenders and borrowers leading to
problems of adverse selection and moral hazard (Stiglitz & Weiss, 1981), (Jung,
2000); the consequence is often that the rural lending is perceptibly undetermined.
Moreover the imperfect information appears in many government policies
supporting credit for rural households. The formal credit does not satisfy demand
for financing projects or expenditure (George & James, 2010). In addition, formal
institutions respond late to small loan amount (Lipton, 1976). Therefore, borrowers
seek credit in the informal sector (private moneylender, parents, relatives, friends,
etc.) to satisfy their production and consumption (Pham & Izumida, 2002), Mpuga
(2010).
The poor household in rural areas inevitably relies mainly on the expensive
informal credit to finance their production, expenditure, tuition fee, wedding,
funeral etc; for that reason informal credit plays a crucial role in rural development
with evidences from (Adams & Graham, 1981), (George & James, 2010).
The operations of informal financial sectors are concerned with many
diversified aspects including the supply of rural formal credit market is not able to
satisfy the growing demand of rural households and many borrowers turn to
informal credit markets for their production and consumption needs (Takashi,
2009); almost characteristics of the rural farm households are risky and uncertainty,
usually dealing with small scale of debt, while the supply of the formal sector often
concentrates on large scale projects (Barslund & Tarp, 2008), (Takashi, 2009);
transaction cost of the formal credit is higher than the cost implied so informal
lenders provide financial services with the competitive cost (Adams & Graham,
1981), (Guirkinger, 2008), (Mpuga, 2010).

[1]


Rural farm households, especially in LDCs, do not generate enough affordable

finance to break the vicious circle of poverty. One of the factors constituting key
obstacles could be that agricultural product activities are highly dependent upon
weather and climate conditions; and there is few credit institutions reaching the
rural poor. In Vietnam, there are about 70 percent of the population still lives in
rural areas and depending on agriculture mainly for their livelihood (FAO & Shoji,
2011). A renovation for transforming from the agricultural sector to a more modern
society remains a challenge for Vietnam. To get promotion of agricultural
production and transformation is to start from how to access credit for poor
households who lacking of collateral, educated and information is a key ingredient;
it is also the first objective of any poverty oriented strategies for the rural
development of the financial system (Barslund & Tarp, 2008).
In recent years, Vietnam has been launching many programs to help the poor
increase income by providing credit services for them. There are two prime credit
sectors coexist in finance market (Barslund & Tarp, 2008) comprising the formal
sector which usually is government-subsidized and charges relatively low rates of
interest (Hoff & Stiglitz, 1990): The Vietnam bank of Agriculture and Rural
Development (VBARD), The Vietnam Bank for the Poor (VBP), The Vietnam
Bank for Social Policy (VBSP), The People’s Credit Funds (PCFs), The Central
Credit Fund (CCF) and other private and commercial bank involved in rural lending
(Takashi, 2009); and the informal sector: Group Lending, Moneylenders, Rotating
Savings and Credits Associations (ROSCAs), relatives and friends (Pham &
Izumida, 2002) which plays an important role for farmers and generally out of their
own equity (Hoff & Stiglitz, 1990). The purpose of borrowing from informal
sources is not only for production but also for expenditure and other unexpected
events. Beside those credit sectors, the poor farmers still access to credit markets
hardly due to lacking of collateral and assets. Semi-formal credit sector appeared
then as a powerful instrument aiming to alleviate poverty by lending a group of
borrowers with low interest rates. The Vietnamese Women’s Union (VWU) and the

[2]

Vietnamese Farmers’ Association (VFA) are the two largest Vietnamese mass
organizations in the semi-formal sector (APEC, 2011).
Although many financial sectors coexist in the Vietnamese rural credit market,
households have a tendency to get loan from informal markets with the usury
interest rate since almost each of household only has a small area for cultivation;
furthermore, agriculture is usually affected by nature; due to high transaction costs
and production risks, the banks and other credit organizations tend to avoid to give a
loan to individual farmers (Takashi, 2009). For those problems, this paper attempts
to examine the determinants of household credit access to the informal sector by
using the data of VHLSS 2008 and the Heckman two-stage model.
1.2 Research objectives
The specified objectives of the study are to
(i) Identify the determinant factors that influence the credit access of
households in the informal credit market in Vietnamese rural areas
(ii) Draw some policy implications in order to improve household’s access to
the informal rural sources
1.3 Research questions
This study was intended to deal with the main research question is “What are
the determinant factors that impact the amount of loan in the informal sources in
Vietnamese rural areas?” In order to facilitate answering the main question, I divide
it into two sub-questions (i) Do productive assets of household head positively and
significantly impact loan amount in the informal sector? and (ii) Does productive
capital of household head negatively and significantly impact loan amount in the
informal sector?
The scope of the study will be limited in using the data set of VHLSS 2008
to examine determinant factors of rural household access to credit markets in
Vietnam.

[3]


1.4 Justification of the thesis
This thesis attempts to fill the gap of lacking selection bias when using the
VHLSS data set to estimate determinants of household credit access.
This paper also tries to update new information and changes of influences on
household access to credit in Vietnamese rural areas by using the data set of
VHLSS 2008.
The evidence from the paper is informative and useful for rural development
authorities. Therefore they are able to have a general vision on rural credit markets
in Vietnam and then propose some practical policy recommendations to develop
Vietnamese rural credit markets, alleviate the rural poverty and also improve rural
livings as well.
1.5 Organization of the thesis
The rest of the paper is organized into four more chapters. Chapter 2 presents
history and origin of rural credit, theoretical review of rural financial market, and
empirical studies which were carried out inside and outside of Vietnam. Chapter 3
describes rural credit market in Vietnam, data, research methodology and analytical
framework. Chapter 4 analyses the empirical results, identifies determinants of
household credit access and gives some quantitative analysis of those factors.
Chapter 5 concludes, suggests some practical policy implications; limitation and
direction for further studies are also discussed in this chapter.

[4]


CHAPTER 2: LITERATURE REVIEW
In this chapter, some theories and studies of informal rural credit access,
particularly those with emphasis on small farmers, are reviewed. The review covers

some experiences of developing countries and relevance aspects to the Vietnam
situation. The chapter comprises a description of the history and origin of the rural
credit system; types and sources of informal rural credit; imperfect credit market on
credit access and indirect and direct screening. Theoretical literature of monopoly
and imperfect information paradigm are also reviewed for basically analyzing.
Empirical studies about determinant factors of household’s access to credit are also
described.
2.1 History and origin of the rural credit
According to Heidhues and Buchenrieder (1999), the concept of agricultural
credit was known in the seventeenth century, when Chinese farmers use rural credit
in agricultural production to increase their cash income, and to improve their living
standards. Similarly, in Western countries, the Germany Landschaften was founded
by Frederick the Great in 1769 and its principles were used by the system for the
Federal Farm loan of the United States. The original credit concept stems from the
need to break the vicious circle of poverty, as shown in the diagram below
Figure 2.1: The vicious circle of poverty (Heidhues & Buchenrieder, 1999)

Low Income

Low Consumption
Low Savings
Low Productivity

Low Investment
Source: Heidhues & Buchenrieder (1999), Rural financial market development

[5]


The figure shows that poverty is affected by income, savings, investment,

and productivity. A low level in any of these factors will affect significantly poverty
rate. It is argued that the role of the credit program is to break this cycle, leading to
an increase in per capita income and thus increase the savings rate, investment rate
and productivity (Heidhues & Buchenrieder, 1999).
2.2 Theoretical review of rural credit markets
Generally characteristics of the financial system in most LDCs is a state of
"financial dualism" consisting of organized and unorganized, they co-exist and
operate parallel to each other. The organized sector includes the commercial banks,
the cooperative banks, credit societies, the rural banks, and government and semigovernment agencies. The unorganized sector mainly includes money lenders,
indigenous bankers, rural development banks, pawnbrokers, landlords, merchants
and traders. Although specialization and division of labor have developed in the
organized sector which is amendable to financial control, the unorganized sector is
not (Ghatak, 1995).
The unorganized money markets in LDCs are quite complex and
heterogeneous. Figure 2.2 shows a typical picture of the unorganized money market
is shown. There is a large number of non-professional groups of people joining in
the rural sector to provide credit. Two major source of credit are moneylenders &
indigenous bankers; there is a variety of other sources which can be quite important
in some LDCs.

[6]


Figure 2.2: Unorganized financial markets in LDCs
UNORGANISED SECTOR

Moneylenders
Rural
Professional

Rural development banks

Indigenous bankers
Urban

Professional

Professional

Non-professional
Regional rural banks

Non-professional

Non-professional

Pawnbrokers Merchants

Traders

Others
Traders

Landlords Merchants Agriculturists

Pensioners

Others

Commission

agents

Misc

Others

Others

Friends and
relatives

Source: Ghatak (1995), Monetary economics in developing countries 2nd

In developing countries, it is suggested that there are four competing theories
of rural credit markets (Hoff & Stiglitz, 1990) including (i) monopoly power of
village moneylenders, (ii) imperfect information, (iii) indirect screening
mechanisms, and (iv) direct screening mechanisms.
2.2.1 The theory of monopoly
In this view, the village moneylenders in the informal market is characterized
as a monopolist and usually charge with extortionate interest rate to maximize
profits with assumption of no competition among moneylenders (Hoff & Stiglitz,
1990). When the lender receives information from various sources, there is
asymmetric information between lenders. It is expected that some lenders have the
advantage of lending to certain people. This gives strength to the loan market in a
segment of the market, where he was better informed than any competing lender.
When a lender loans is the best information, or lenders to provide loans only in the
region, the lender is also likely to have enforcement power. Even in the absence of
collateral and the threat of physical punishment, a lender can only make sure that

[7]

any borrower default on a loan is excluded from future credit. A lender can use the
lending strategy of pure monopoly to people when there is no problem of
information and enforcement
The existence of monopoly profit or usurious interest rate can be illustrated
with the help of a simple diagram (see figure 2.3).
Figure 2.3: Monopoly & competitive markets
Rate of
Interest
D

rm

A

rc

E

E’

AC=MC
D’

MR

0

Qm

Qc

Loanable Fund

Source: Ghatak (1995), Monetary economics in developing countries 2nd

Private moneylenders would persist to be a valued credit source in remote
areas for a longer time due to their easier informality, approachability and
flexibility. Village lenders do not get involve much in the form of administration
and information cost. They are taking risks from lending to people who are not
creditworthy, maintaining idle cash balances to provide for immediate credit needs.
These reasons could explain a part of high interest rates in the informal sector
(George & James, 2010). The monopoly view cannot account for simultaneous
existence of formal and informal sectors, despite the fact that interest rates of formal

[8]


sources are essentially below those charged in the informal sources (Hoff & Stiglitz,
1990).
2.2.2 Asymmetric Information
The risky characteristic of borrowers, is one of the distinctive traits of credit
market, is characterized by heterogeneous. The lenders might spend a lot of money
on being able to obtain accurate information involving borrowers. Therefore
theories of credit market focus on asymmetric information which implies adverse
selection and moral hazard (Stiglitz & Weiss, 1981).
Adverse selection exists when borrowers differ from respect to the
probability of repaying their loan. In this case, the terms of a credit contract may
affect the average quality of loan applicants. For instance, low risk borrowers may

drop out of the market if banks raise the rate of interest (Bester, 1987).
Next to adverse selection, moral hazard also has received a lot of debates on
credit markets in many developing countries. Moral hazard appears when an
individual attempt taking actions to maximize her/his welfare by causing other's
detriment in situations where problems of information asymmetry prevent
assignments of personal damage caused by her/his action. According to Bester
(1987), moral hazard involves loan contracts which influence directly to the
behavior of borrowers. Therefore higher interest payments may induce the borrower
to seek investment projects with a higher profit also riskier.
Informational asymmetry, high transaction costs and uncertainty are specific
characteristics of informal credit markets. These characteristics typically lead to
problems of adverse selection and moral hazard. In order to overcome those
problems, indirect and direct screening mechanisms are applied in lending
procedures to expose quality of borrowers.
2.2.3 Indirect screening mechanism
According to Hoff & Stiglitz (1990), Interest rate is considerably as an
indirect mechanism which replies on the design of contracts by lenders. The lender
obtains information about the riskiness of the borrower, and induces the borrower to

[9]


take actions to reduce the probability of default and to repay the loan when he
responds to these contracts in his own best interests. A lender charges an interest
rate which could influence directly on the riskiness of the loaning pool by either
affecting borrower's actions (the incentive effect) or ranking potential borrowers
(the effect of adverse selection). An interest rate, on account of either of these
effects, is set too high. This action inevitably leads to increase the riskiness of the
applicant. Therefore, an optimal interest rate maximizing the returns of lenders will
be set, which is a great deal of returns competition compared to the market-clearing

rate. In addition, also due to the influence of the interest rate on the nature of
transactions, it is considered as an indirect screening mechanism, categorizing the
riskiness of borrowers. Those who are considered as worse risks are the ones
willing to pay higher interest rates to get loan since they are fully aware of their low
repayment probability (Stiglitz & Weiss, 1981).
There are two functions of interest rate, which serves as the function of a
price and an indirect screening or incentive mechanism. Whether there is
competition or monopoly in the market, these indirect mechanisms are equally
applicable.
There are two other indirect mechanisms are characterized as incentive
effects of terminations and market interlinkages to reduce the riskiness that
borrowers undertake the actions desired by lenders. First, the lender may use threat
of cutting off credit to stimulate desired borrower behavior; and the other is that
lenders who are landlords or merchants may use the contractual terms in these other
exchanges to affect the likelihood of default.
2.2.4 Direct screening mechanism
In order to minimize cost of imperfect information, lenders can exploit
particular direct screening mechanisms to monitor borrower’s behavior and enforce
loan repayment in the credit market, withdrawing credit if the terms of the loan
appear to be violated. In developing countries, costs of direct screening, monitoring
and enforcing loan repayment vary among lenders, which may lead to credit

[ 10 ]


rationing in credit markets. Village lenders could take advantage of being a byproduct of living near the borrower or being part of the same kinship group or a
party to some other transactions to reduce significantly the costs of screening,
monitoring and enforcement (Hoff & Stiglitz, 1990).
Interlinked credit contracts are also another extensively used mechanism.
The borrower and lender jointly participate in a market which is not really a credit

market. This factor would reduce the cost of contract enforcement from the lender,
and raise creditworthiness of borrowers to the lender. Therefore, problems of
enforcement, incentive and screening are alleviative since transactions of those
markets can directly interlinked to loans. In several markets, when an economic
relationship requires transactions, a greater surplus can be gained from this scope.
Lenders/traders tend to utilize interlinked credit contracts by entailing their clients
promise to sell all their farming goods from the harvest to them. The form of
interlinkage is widely used in Thailand, Pakistan, India and among other countries
(Floro & Yotopoulos, 1991).
2.3 Empirical studies
+ International empirical studies
Okurut et al (2005) attempted to identify determinants which influence demand
for informal credit by using the Heckman two-stage model. Data were collected
from 10692 households surveyed in the Uganda National Household Survey
1999/2000. He found that determinants which influence positively and significantly
informal credit demand are age, dependency ratio, education level, household
expenditure, gender and regional location. On the other hand, factors consisting of
age, asset values, regional location and gender are negatively and statistically
impacted in term of the supply side.
To get more understanding why farm households prefer getting a loan from
informal markets even if the formal loan is more expensive, Guirkinger (2008)
collected a panel data set and employed the logit model with fixed effects & random
effects to examine why rural households tend to have more loans in informal

[ 11 ]


sources in Piura, Peru. Data was surveyed in two periods in the rural coastal area of
Piura, Peru’s north coast. First, there were 547 households surveyed in 1997.
Second, 499 households were re-interviewed in 2003. He found that transaction

costs in the formal sector are higher than in the informal sector. It could lead to the
informal effective cost of a loan cheaper; hence, it could be affordable for
households access to informal loan in term of effective cost. In addition, informal
lenders have a more efficient mechanism in direct screening, monitoring and loan
recovery techniques compared to formal lenders. They can give loans to borrowers
with more flexible & convenient conditions. Thus risk adverse households tend to
borrow from informal sources.
An interesting paper of Akudugu et al (2009), he identified the characteristics
that influence access to credit by women borrowers in Ghana. Data of the research
were obtained from the survey of 200 women farmers in the Upper East region of
Ghana. He found that rural formal credit has been in favor of women with the
proportion of 44 percent compared to men is 56 percent. Membership to economic
associations, the type of crop grown (cash or food), the level of education, being a
woman (gender) and income levels greatly influence women farmers’ access to
credit.
Another view of Mpuga (2010), he employed a panel data analysis of the
Uganda household surveys conducted in 1992/1993 and 1999/2000 to study the
accessibility to and the characteristics of demand for rural credit. He found that the
credit market is highly segmented in Uganda; determinants which strongly affect to
demand for credit are the value of household assets owned, the level of education,
age, location, occupation and other dwelling characteristics. He also spotted that the
educated and the young are eager to demand for credit while women are likely
ashamed to apply for credit or less amount of credit compared to men. Additionally
the major credit supplies almost come from informal sources; and households which
have collateral to secure loans usually tend towards to demand for credit higher.

[ 12 ]


In the study of Hussain and Khan (2011), they examined the determining factors

which impact formal and informal credit demand by cotton growers in Bahawalpur.
They applied the ordinary least squares model and made use of a survey data set of
563 households in eleven villages of Hasilpur, Bahawalpur district, Pakistan.
Some findings were that bigger farm size and higher educated households
tend to demand credit from the formal financial institutions. Meanwhile, the
distance of formal sector, transaction cost, corruption and bribe tend to move the
farmer from formal to informal sector.
Similarly, Menkhoff and Rungruxsirivorn (2011) analyzed whether financial
access is improved by Village funds. They used the multinomial logit model and the
household survey data set of 2200 households in three provinces in North-East
Thailand to investigate. There were three exciting findings in their study. Firstly, the
village funds reach the lower income groups better than formal sectors. Secondly,
the village funds give loans to typical borrowers of informal than formal sectors.
Finally, credit constraints are alleviated by the village funds.
The participation in the credit market, which is affected by both demand and
supply side factors, is a different concept from the credit access. It was well
described in an article of Shete and Garcia (2011). In order to identify the
participation proportion of constrained and unconstrained farmers in the agricultural
credit market, and to predict the factors which impact agricultural credit market
participation, they took advantages of the bivariate probit model and a primary data
set collected from the survey of 210 households in Finoteselam town, North
Western Ethiopia. Based on their study, there were a large proportion of
smallholder farmers who were rationed out due to lacking of access. Determinants
pushing households participate in rural credit markets were household labor force,
land size, high dependency ration, contingent expenses and participation in nonfarm activities.

[ 13 ]


+ Vietnamese empirical studies

According to Pham and Izumida (2002), they used cross sectional household
survey data and the Tobit model to examine the participation of Vietnamese rural
household in the rural credit market, and the lending behavior of formal lender in
response to the credit demand of households; they also employed the probit model
to investigate the impact of credit on household production. Data were collected
from the survey of 300 households and conducted in three representatively
provinces of Vietnam: Ninh Binh (North), Quang Ngai (Center), and An Giang
(South). The results showed that loans from the formal financial institutions are
usually for production cultivation, livestock, etc. In the other, consumption seems to
be the essential force behind the loans from informal sources. Moreover, borrowing
from informal sources could be partially for production; and borrowing from formal
institutions is an additional. Some findings were that accessibility to the formal
financial institutions is decisively determined by total farming area and total value
of livestock; additionally it seems that the factors leading to the decision to borrow
from informal sources are the dependency ratio of households and total farming
area; total farming areas, deposit amount, liquidity position, and number of
dependent are the determinant factors of household’s credit status; households,
which have high dependence ratio, require more loans to finance their production as
well as their consumption.
In the other study, Barslund and Tarp (2008) carried out a survey of 932 rural
households in four provinces of Vietnam comprising Long An, Quang Nam, Ha Tay
and Phu Tho; and combined with information from the Vietnam Household Living
Standard Survey 2002. By making use of the two-stage model and the Heckman
model, they analyzed the determinants of credit demand and credit rationing for
rural households respectively; and found that rural households either who are older
or better educated will access less to credit in the informal sector, whereas
households which have a high dependency ratio and bad credit history access
towards to more informal credit demand.

[ 14 ]

The following table summarizes the empirical studies above in a more
intuitive way
Table 2.1: Early empirical studies on rural credit
No
1

Authors

Methodology

Data

Results

Pham &

The Tobit

Data were

The accessibility to the formal

Izumida (2002)

model

obtained from the

financial institutions is

survey of 300

decisively determined by total

households and

farming area and total value of

conducted in three

livestock; additionally it seems

representatively

that the factors leading to the

provinces of

decision to borrow from

Vietnam: Ninh

informal sources are the

Binh (North),

dependency ratio of

Quang Ngai

households and total farming

(Center), and An

area; total farming areas,

Giang (South)

deposit amount, liquidity
position, and number of
dependent are the determinant
factors of household’s credit
status; households, which have
high dependence ratio, require
more loans to finance their
production as well as their
consumption

2

Okurut et al

The Heckman

Data of 10692

Determinants which

(2005)

two-stage

households were

significantly and positively

model

surveyed in the

impact informal credit demand

Uganda National

are age, dependency ratio,

Household Survey

education level, household

1999/2000

expenditure, gender and
regional location. On the other

[ 15 ]

No

Authors

Methodology

Data

Results
hand, factors consisting of
age, asset values, regional
location and gender are
statistically significant and
negative impact in term of the
supply side

3

Barslund &

The two-stage ILSSA 2003,

Rural households either who

Tarp (2008)

model (credit

VHLSS 2002

are older or better educated

demand) and

Data were

will access less to credit in the

the Heckman

collected from 932

informal sector, whereas

model (credit

rural households in households which have a high

rationing)

4 provinces

dependency ratio and bad

comprising Long

credit history access towards

An, Quang Nam,

to more informal credit

Ha Tay and Phu

demand. Households seem to

Tho

be credit rationed if they have
a bad credit history

4

Guirkinger

The logit

A panel data was

Transaction costs in the formal

(2008)

model with

surveyed in two

sector are higher than in the

fixed effects

periods in the rural

informal sector, it could lead

& random

coastal area of

to the informal effective cost

effects

Piura, Peru’s north

of a loan cheaper; hence, it

coast. First, there

could be affordable for some

were 547

households access to informal

households

loan in term of effective cost.

surveyed in 1997.

In addition, informal lenders

Second, 499

have a more efficient

households were

mechanism in direct

reinterviewed in

screening, monitoring and

2003

loan recovery techniques

[ 16 ]