Factors affecting inputs procurement in debt of rice farmers in An Giang province.

TRNG I HC M TP.HCM UNIVERSITÉ LIBRE DE BRUXELLES
HO CHI MINH CITY OPEN UNIVERSITY SOLVAY BRUSSELS SCHOOL
MBAVB4


PHAN BA NGOC PHUONG



FACTORS AFFECTING INPUTS PROCUREMENT IN DEBT
OF RICE FARMERS IN AN GIANG PROVINCE




MASTER PROJECT
MASTER IN BUSINESS ADMINISTRATION
(PART-TIME)



Tutor’s Name: Dr. NGUYEN MINH HA

Ho Chi Minh City
(2011)
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MBAVB4 – FINAL PROJECT - 2011
DECLARATION

I hereby declare that this thesis is my original work and it has not been submitted
anywhere for any degree or qualification.

I also certify that, to the best of my knowledge, any help received in preparing this
thesis, and all used sources have been acknowledged.

HCM City, February 1
st
, 2012




PHAN BA NGOC PHUONG
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ACKNOWLEDGEMENT

I would like to express deeply my appreciation and many thanks to the following
individuals and organizations helped me to finish this thesis.

Doctor Nguyen Minh Ha, the academic tutor who has spent much time to give me his
guides, comments, assistance in this research.

All lecturers and staff in Vietnam-Belgium master program which are helpful program
for me to achieve the knowledge and the method of studying with international standard.

All my classmates, particularly “Group Six - G6” had encouragement, cooperation, and
assistance during my studying and doing the research.

All my colleagues, especially Mr. Phan Quoc Hung, Mr. Nguyen Thanh Qui (Allied
Developing Corporation), Mr. Nguyen Binh, and Mr. Nguyen Pho Hung (An Giang
Plant Protection JSC) supported and consulted aspects related to rice growing as well as
rice farmers.

All collaborators, who have been working for Vietnam Farmers’ Union in Tinh Bien
district, An Giang province helped me to interview rice farmers.

All of my family members have encouraged and sympathized with me during the study
period as well as completing this thesis.
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ABSTRACT

Vietnam is a developing country which is contributed mainly by agricultural production
and is the second largest exporter of rice in the world, and mostly quantity comes from
Mekong River Delta, called the rice bowl of Vietnam. Mekong River Delta not only has
three main conditions: “vantage of circumstances - vantage of the location - human
vantage”, but also gets lots of interest of government in investing and developing for
success in agriculture. In reality, the truth is that most of rice farmers are poor, even
abject poverty. They are always in debt when purchase of inputs with powerlessness.
Why and what happens? That’s why this study is executed.

This paper is not ambitious to find out neither all of the reasons nor the solutions to
improve the rice farmer’s life in Mekong River Delta, but it tries to figure out key

factors driving them to procure farm inputs in debt or on credit. Therefore, this study
dealt with the reason why almost rice farmer in Mekong River Delta has to procure farm
inputs in debt. Accordingly, questionnaires, interviews and observation are used to reach
the results of this study. After collection and analysis of data by using SPSS version
11.5, the interpretation revealed precise results that satisfied the curiosity of the
researcher. It was discovered that the lack of capital for rice production and the cost of
inputs are key elements to impact positively on rice farmers who procure inputs in debt.
It was also found that householder’s rice growing experience, rice selling price,
residential area, and value of the property effect negatively on inputs procurement in
debt of rice farmers. In addition, household size, farm size, and interest of purchase of
inputs in debt affected positively rice farmers when they purchase inputs on credit. And,
at the end, some recommendations and conclusion have been made to finalize the
research.
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TABLE OF CONTENT
DECLARATION i
ACKNOWLEDGEMENT ii
TUTOR’S COMMENT iii
ABSTRACT iv
TABLE OF CONTENT v
CHAPTER ONE: INTRODUCTION 1
1.1 Rationale of the study 1
1.2 Research objectives 2
1.3 Research questions 2
1.4 Research methodology 2
1.5 Scope and limitations 3
1.6 Structure of the study 3

CHAPTER TWO: LITERATURE REVIEW 5
2.1 Definitions 5
2.2 Theories of household’s debt 6
2.2.1 Theories of poverty 6
2.2.2 Reasons for households purchase goods in debt or on credit 10
2.2.3 Consequences of the indebtedness 11
2.3 Reviewing previous studies 14
2.4 Hypotheses of rice farmers procure inputs in debt 22
2.5 Overview of Vietnamese household and rice farmers 23
CHAPTER THREE: RESEARCH METHODS 28
3.1 Research procedure and design 28
3.1.1 Research procedure 28
3.1.2 Research design 29
3.2 Data collection 30
3.3 Analytical tool 30
3.4 Data analysis process 31
3.5 Suggested research model 31
CHAPTER FOUR: EMPIRICAL RESULTS 37
4.1 Descriptive analysis 37
4.1.1 Householder’s age, gender and number of members in household 38
4.1.2 Householder’s education and experience in rice growing 38
4.1.3 Rice productivity and selling price 39
4.1.4 Cost of rice production 40
4.1.5 Cost of living 40
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4.2 Correlation analysis. 40
4.2.1 Multi co-linearity test 40

4.2.2 Autocorrelation test 41
4.3 Empirical results 42
4.4 Summary 49
CHAPTER FIVE: CONCLUTION AND RECOMMENDATIONS 50
5.1 Conclusion 50
5.2 Recommendations 51
5.3 Limitations 54
REFERENCES 56
APPENDIX 64
Appendix 1: Correlations 64
Appendix 2: Scatter Chart of Independent Variables 65
Appendix 3: Questionnaire 72
Appendix 4: List of respondents 79

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LIST OF TABLES
Table 2.1: Rice seasons in the Mekong River Delta 25
Table 4.1 Result of descriptive statistics 37
Table 4.2 Number of members in household 38
Table 4.3 Descriptive Statistics of Rice Productivity and Selling Price 09-10 39
Table 4.4 Durbin Watson 42
Table 4.5 Result of multiple regression analyses 42

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LIST OF FIGURES
Figure 2.1: Conceptual Map of Theories of the Causes of Poverty 8
Figure 2.2: Vietnam’s rice yield for period of 2006 – 2010 24
Figure 2.3: Vietnam’s rice export output and value for period of 06-10 24
Figure 2.4: Map of Mekong River Delta 26
Figure 2.5: Map of An Giang Province 27
Figure 3.1: Proposed research model 32

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LIST OF ABBREVIATIONS AND ACRONYMS

GDP : Gross Domestic Product
IT : Input Trader
IMF : International Monetary Fund
IPM : Integrated Pest Management
MRD : Mekong River Delta
SPSS : Statistical Package for the Social Sciences
WB : World Bank
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CHAPTER ONE
INTRODUCTION
1.1 Rationale of the study
Vietnam is one of the largest countries in exporting agriculture products in the world,
especially rice with the quality and value achieved 6.88 million tons and 3.23 billion

USD in the year of 2010, it is the second largest exporter in the world. Ninety
percentage of rice exported quantity comes from Mekong River Delta (MRD), and food
per capita in this zone accounting for 2.3 times in compared with the whole country. At
present, population in MRD is about 20 million people and 60% of these are farmers.
However, the farmer’s life in this region is too low with 900USD of GDP per capita
against 1,200USD nationwide. Poor households which have income lower 4.8 million
VND per year, in Mekong River Delta are 12.60%, higher than Red River Delta (8.3%)
and South East (2.3%) regions (General Statistic Office of Vietnam, 2010). The poverty
always makes them in debt, debt for daily living and especially for inputs procurement.
It is a vicious circle of farmers between poverty and indebtedness. This is also true for
the researcher’s observation with over 10 years experience for companies in plant
protection distribution. Nowadays with many progress of scientific techniques in
agricultural sector, particularly in rice production for Vietnamese farmers, it can be seen
that there are many new varieties with advantages of high yield, disease prevention, and
fallen against strong winds, etc. In addition, there are many kinds of fertilizers,
pesticides, growing stimulation substances that are helpful for farmers to prevent
diseases and to improve rice productivity. Moreover, the elements of weather and soil
conditions in the MRD are quite favorable for paddy cultivation as comparison to
Central and Northern areas of Vietnam. So why is the rice farmer still poor and falling
into indebtedness chronically? According to Vo Tong Xuan (Thesaigontimes, 2011), the
farmer, particularly the rice farmer has to pay high price of inputs and spend too much
for cultivation that increase cost of goods while rice selling price is not directly
proportional. In the other hand, the rice farmer has to procure inputs in debt with
usurious interest rate and therefore they have to sell rice immediately after harvest at
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prices lower than market prices in order to pay back debt. Do these main factors lead
rice farmer falling into indebtedness and purchase of inputs indebt spirally? Therefore,

this paper would like to find out what factors affecting inputs procurement indebt of rice
farmers in Mekong River Delta, especially in An Giang province.
1.2 Research objectives
The overall objective of the study is to find out main elements affecting the rice farmer
in purchase of farm inputs in debt or on credit. The specific objectives of this paper are
following:
- To identify factors causing purchase of inputs in debt and default of rice farmers
- To measure factors effect to rice farmer in inputs procurement in debt.
- To suggest some policy implications for rice farmers to avoid getting indebtedness and
default.
1.3 Research questions
Main research question of this thesis is what factors influence procurement inputs in
debt of rice farmer?
1.4 Research methodology
Descriptive statistics and regression methods are used to describe the basis features of
the data and to analyze the factor impacting on purchase of inputs in debt of rice
farmers. The descriptive statistic will be used to draw a general picture of research
content and so on. Regression will be used to test the hypothesis on the relationship
between dependent and independent variables. The statistic software named SPSS 11.5
is used for precise analysis of the reliability and validity of the measures, multiple
regression of model as well as explanation of results of this research.
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1.5 Scope and limitations
As known, An Giang province is one of the largest rice growing areas in the Mekong
River Delta as well as many rice farmers achieve high popular productivity in the
country. In particular, Tinh Bien district has many rice growing villages such as An Phu,
An Hao, Nui Voi, Vinh Trung, and Tan Loi. Beside, other communes also have large

areas for agricultural production. Nevertheless, five communes as mentioned are
convenient for data collection, thus these communes are chosen to make a survey and
scope of research is bounded in these five communes for the thesis.
Main studied subject was householders who have been growing rice on the areas
mentioned above.
1.6 Structure of the study
Chapter 1 is introduction part. This chapter introduces rational of study, research
objectives, research questions, scope and limitation, research methods as well as
expected contributions.
Chapter 2 is literature review. This chapter presents concepts of credit, trader credit,
consumer credit, debt, and household debt. In this part, overview of Vietnamese
households and rice farmers are generally referred. In addition, it also indicates literature
review about theories of household debt, key factors driving rice farmers in purchase of
inputs in debt as well as relevant previous studies. Then a research model will be
suggested and hypotheses will be given out.
Chapter 3 is research methods. This chapter provides research methodology, the way to
collect and filter data as well as to process the data.
Chapter 4 is empirical results. In this chapter, through descriptive statistics, relationships
between variables, and multiple regression analysis model, the result will be determined
the influence of factors in purchase of inputs in debt or on credit.
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Chapter 5 is conclusion and recommendations. Through data analysis and findings from
previous chapter, papers in this chapter aim to brief conclusions, research results
obtained as well, and then policy recommendations. The limitation to the topic and
suggestions for further research will be also mentioned.

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CHAPTER TWO
LITERATURE REVIEW

In chapter 1, overview of research problem was presented. Chapter 2 discusses previous
research relevant to this thesis. A review of theory concepts of credit, trader credit,
consumer credit, debt, household debt, and a proposed research model are mentioned in
chapter.
2.1 Definitions
Credit is the trust which allows one party to provide resources to another party where
that second party does not reimburse the first party immediately, but instead arrange
either to repay or return those resources at a later date. The resources provided may be
financial or they may consist of goods or services. Credit encompasses any from of
deferred payment (Wikipedia, 2012)
Trade credit: as credit is used in commercial trade that called “Trade Credit” to refer
the approval for delayed payments for purchased goods. Trader credit can be in the form
of inputs provided to farmers or in cash or in kind advances, based either on repayment
at harvest or on agreed purchase (Douglas, 2003)

Consumer credit: can be defined as ‘money, goods or services provided to an
individual in lieu of payment. Some forms of consumer credit include personal loans,
retail loans and mortgages, etc (Wikipedia, 2012).
Debt: is an obligation owed by one party (the debtor) to a second party, the creditor;
usually this refers to assets granted by the creditor to the debtor, but the term can also be
used metaphorically to cover moral obligations and other interactions not based on
economic value. A debt is created when a creditor agrees to lend a sum of assets to a
debtor. Debt is usually granted with expected repayment, in most cases, of the original
sum plus interest. According to Elizabeth (1996), debt can be classified into broad
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categories. Borrowing for consumption purposes in intended to meet the daily or
seasonal needs of household or to finance contingencies. The second category includes
borrowing intended for production and investment purposes.
Household debt is the debt owed by persons living in households, as opposed to
business debts. It includes consumer debt and mortgage loans held by members of
households for the homes they live in. Through these concepts, household debt is
represented by consumer credit. (Wikipedia, 2012)
2.2 Theories of household’s debt
2.2.1 Theories of poverty
According to Ted (2006), there are five theories of poverty in contemporary literature,
including: (1) Poverty caused by individual deficiencies; (2) Poverty caused by cultural
belief systems that support subcultures of poverty; (3) Poverty caused by economic,
political, and social distortions or discrimination; (4) Poverty caused by geographical
disparities; and (5) Poverty caused by cumulative and cyclical interdependencies.
The first theory of poverty is a large and multifaceted set of explanations that focus on
the individuals who are responsible for their poverty situation. Some conservative
theoreticians blame individuals in poverty for creating their own problems (individual

laziness, bad choice, incompetence, inherent disabilities), and argue that with harder
word and better choices the poor could have avoided their problems. Other variations of
the individual theory of poverty ascribe poverty to lack of genetic qualities such as
intelligence that are not so easily reversed.
The second theory of poverty roots its cause in the “Culture of Poverty”. This theory
suggests that poverty is created by the transmission over generations of a set of beliefs,
values, and skills that are socially generated but individually held. Subculture adopts
values that are non-productive and are contrary to norms of success. In this case,
individuals are victims of their dysfunctional subculture or culture.
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The third theory of poverty derives from the economic, political, and social system
which caused people have limited opportunities and resources with which to achieve
income and well being. It means that systematic barriers prevent poor from accessibility
and accomplishment in key social institutions including jobs, education, housing, health
care, safety, political representation, etc.
The forth theory of poverty is a spatial expression of the capitalist system. This theory
mentions to the fact that people, institutions, and cultures in certain areas lack objective
resources needed to generate well being and income, and that they lack power to claim
redistribution because social advantages and disadvantages concentrate in separate areas.
The final theory of poverty is concerned with spirals of poverty, problems for
individuals (earnings, housing, health, education, self confidence) that are
interdependent and strongly linked to community deficiencies (loss of business and job,
inadequate schools, inability to provide social services), etc.
According to Blank (2003), cited in Michael (2006), there are six major theoretical
approaches that describe the fundamental causes of poverty. Blank started with the
perspective of economic underdevelopment and the absence of effectively functioning
markets. She also suggested that poverty could be alleviated through the expansion of

markets to poor regions such as the third world and stagnant regions. In second
perspective, Blank pointed out the lack of human capital development where individuals
are either unprepared or unable to participate in the workforce. In the third perspective,
she noted that the market is inherently dysfunctional and thereby create poverty. To
capitalist society in Marxist viewpoint, it makes the cost of labor lower through the
threat of unemployment and therefore poverty can be alleviated through regulation of
the market. The fourth perspective identified the social political forces that occur outside
the market, such as political favoritism and racism that contribute to poverty. In the fifth
perspective, poverty is attributed to individual behavioral characteristics and choices,
such as marriage, family size or alcohol and substance abuse. Values about work and
education that underlie this perspective suggest that the problem of poverty is within the
control of the poor themselves and therefore the policies and programs need to influence
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those choices through incentives or prohibitions. The final perspective suggested that
poverty is caused by the Governmental subsidies to alleviate poverty, referred to as
social welfare dependency because welfare provides a guarantee for their livelihood. It
is a reason people lives on governmental subsidies so much that they fall into poverty
trap.
Figure 2.1: Conceptual Map of Theories of the Causes of Poverty

.



Source: Blank, 2003


Theories
of
Poverty

Theory
#1
:

The economy is
underdeveloped
or inefficient.




Theory
#2
:

Poor people
lack skills and

abilities.

Theory #3:
Capitalism
causes poverty
Theory
#4
:

Social and
political force
cause poverty
Theory
#5
:

Poor people
make choices.
Theory
#6
:

Social welfare
programs cause
poverty.
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According to Waheed (1996), Dominique and Dileni (2000), Bales (2001), Wan and

Cratty (2007), and World Bank (2007), cited in Nguyen Minh Ha and Nguyen Huu Tinh
(2010), there are some elements effecting on poverty as follows:

 Career: The employee working in the agricultural sector often has lower
income than workers in the industrial or trade and service sectors because they bear
many risks such as natural disasters, pestilent insects, low selling price of outputs,
unstable price of inputs, etc. Therefore, the probability of leading to poverty of the
laborers working in agricultural sector is higher than laborers working in industry or
trade and services sector.

 Education: In rural areas, most of people have low education and they are
often a lack of understanding and lack of ability to acquire knowledge in service of
production to generate income to feed themselves and their families. So they often fail in
agricultural production and it leads them to low income and poverty as well as lack of
capital reproduction.

 Household size: The higher number of household members has the lower
spending per capita is, and the proportion of dependents increase and it leads to the
poverty worst. This is reasonable because household income is generated from a certain
number of members in family but to be spent for all household members.

 Farm size: Farm land is the main means of production and is critical element
to household’s agricultural production in generating income. Therefore, the lack of farm
land or no land will lead farmers to low income and they will have no enough food to
feed their families and fall in poverty.

 Accessibility to formal credit: Formal credit sources play an important role
for production and business. It helps to increase income for household and is a key
factor to eradicate poverty. If household could not access to formal credit, households
would lack capital for production and this may lead crops to low productivity. In other

case, households must borrow from informal sources for their investment and this may
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lead them to higher costs because of exorbitant interest rates from informal money
lenders.
2.2.2 Reasons for households purchase goods in debt or on credit
Purchase of goods (either for consumption or household investment) on credit or in debt
is real needs of households and when purchase of goods in debt or using of credit
transaction takes place, the household may avoid using cash in advance. Of course, it is
also costly in that case but they have no alternative choices as facing with daily
necessities or needs of production. Purchase of goods in debt or on credit depends on
many different factors of the economy as well as conditions of the households such as
life cycle, disposable income, savings, poverty, unemployment status, inflation,
recession, interest rates, etc. All cash transactions are subject to cash in advance
constrains while credit transaction can be financed by current income (or expected
income in future) (Lucas and Stokey, 1987). Based on the research done by Isabelle et
al., (2011), households are borrowing on a daily basis at slack financial times to make
ends meet. Coles (1992), cited in John (2004) explained that income shocks and
unemployment could reach 25% of arrears and typically could be prone to self employed
consumer. In addition, poverty is main cause of purchase of goods on credit (Pujari,
2011). This can be understood that consumer credit reflect the transfer of household
consumption from period of high income to the period of low income. Household uses
credit to bridge temporary drops in income and they use it to address specific needs. The
demand for credit of household will be ultimately derived from the underlying plan for
consumption and its deviation from income and expenditures (Gantinah, 2007) defined.
According to life-cycle model, the demand for credit would arise wherever current
income and spending possibilities fall short of consumption wishes. In other words,
within this model, credit is simply used to transfer consumption from periods where

household income is high to periods where household in come is low (Albert and
Franco, 1963). As well, Bridges and Disney (2004) suggested that individuals will spend
some parts of their life in debt whilst saving and declining assets in others of the life-
cycle. Ariyapruchya., et al (2004), cited in Ke and Mali (2008) found that low income,
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low age, low education, and occupations such as farm operator or low-skilled laborer
tend to be associated with greater demand for loan. Whereas, Arvai and Toth, (2001),
cited in Ke and Mali (2008) argued that the education level of the head of household,
household income, future income expectations and past borrowing experience have
positive effect on the propensity to borrow.
Once the financial situation of households is negative that lead household in debt as
procurement on credit. The study of Barnes and Young (2003) proved that shocks to real
interest rates and income growth expectations, combined with demographic changes
explain the growth of household debt. This research also indicated that in the period of
productive age (40 – 65 years), financial asset holding increases rapidly as a
consequence of consumption-income interaction. It can be understood that demographic
factor impacts to household credit.
The rise in household indebtedness has largely reflected a growing tendency of
households to extract equity from the value of their house to finance consumption
(Barba and Pivetti, 2008). They also argued that household would tend to borrow to fund
current consumption in periods when income is low, relative to average income over
their lifetime, with a view to then repaying the loans in periods when income will be
high, relative to average lifetime income. Other aspect, Norhana and Toh (2009)
asserted that the low inflation rate and low interest rate environment that has reduced the
cost of borrowing and increased the incentive for households to borrow to smooth their
desired path of consumption over the life cycle.
2.2.3 Consequences of the indebtedness

Maki (2000) studied that high debt-service burden could make consumption more
sensitive to a drop in income or expected future income. In his research, he also showed
that when household debt service burden is high, household may be more likely to
curtail spending because they must devote each month to service their debt. Moreover,
econometric analysis indicates that the lagged debt service burden is a statistically
significant predictor of current delinquencies, which suggest that the measure is a useful
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harbinger of household distress as well as predict changes in individual bankruptcies.
Carthy (1997), cited in Maki (2000) elaborated that an increase in debt-service burden
could push up loan default that leads to credit consumption crunch. This in turn could
drive consumption down. In the event of an adverse shock, risk in indebted household
might have driven household to adjust their balance sheet and eventually drop down
their consumption plan (Gantinah, 2007). In sum, when household income comes in
lower than expected as well as high debt service burden, a household that took debt or
purchased of goods on credit would cut back spending acutely than others who had not
procured in debt or on credit.
Antzoulatos and Copelman (1996), cited in Berrak and Neven (2006) recognized that the
ease of credit constrains direct household to indebtedness boom and this may force
household in financial pressure, as well as in increasing default risks and spiral cycle
will start again.
Land and other assets are mortgaged to moneylender for a mount of money, if household
could not repay the principal and interest, the moneylender would take land or assets.
There are many reasons driving household to fail repayment, they may result from sheer
bad luck, lack of commitment, unfeasible planning or unwillingness to comply with
credit obligations. These may lead household to distress pressure and bankruptcy risk.
Once household may fall into default, credit transaction could be constrained and
interest rate may be exorbitant for new loans which are beginning of real debt crisis of

the household. This is thoughtfully recognized by Binswanger and Sillers (1983);
Chavaes and Sánchez (1998); Zeller et al., (1997), cited in Edward and Ramón, (1998)
that as a household’s level of indebtedness rises, it is forced to borrow from other
informal sources, such as moneylender, traders, merchants and processors, but at higher
interest rates and transaction costs, leading to effective real interest rates that can
increase to as much as 100% per year. Household can easily find themselves caught in a
vicious cycle between debt, poverty and resource degradation as well as find themselves
in chronic debt to finance basic consumption and production needs (Edward and Ramón,
1998).
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Study of May and Tudela (2005) explained that experience of household debt problems
increases the probability of today’s arrears. This model also indicated that
unemployment and income gearing play important roles in explaining repayment
problem in household debt. As we knew, household borrows or purchases goods in debt
(on credit) are dependent to their needs, but capacity to pay back depends on disposable
income. Therefore when households fell into unemployment status, low remuneration or
slack of finance, etc it may lead them to arrears and related corollaries. How is about
rural households? It may have the same consequences to household who are living in
city. However, rural households or farm households may take more risks than urban
households because their livelihoods are dependent on agricultural production as their
main source of income. Unfortunately agricultural production always faces to high risks
with frequent crop failures (from natural calamities, pestilent insects, etc). These
elements, excluding costs of cultivation and low selling price which leads higher
household indebtedness over time. This can cripple household capacity to increase
income levels. It is particularly true in developing countries where resources are limited.
Moreover, once farm household could not escape the cycle of debt, they committed
suicide. In most suicide cases about 75 percent of the household’s indebtedness was to

informal moneylenders rather than formal sources (Sainath, 2010, cited in Malcolm
Harper, 2011). According to Malcom (2011), that was a dramatic social phenomenon
reported in many countries such as Mexico, Brazil, Japan, Russia, United Kingdom,
India and United State. Pujary (2011) mentioned a well known saying in India: “The
farmer is born in debt, lives in debt and dies in debt.” In a more complete perspective of
rural household debt (Amrit, 2010) generalized that debt can become a distress
phenomenon if the borrower’s crop fails due to use of poor quality inputs, unprofitable
investment, natural calamities, other unforeseen reasons, or if production becomes
uneconomic because of high input cost, lack of remunerative prices which make it
impossible for household to repay the principal and interest of debts. In many cases
interest becomes debt service burden for household it may force them to mortgage or
sell land, thereby loosing their means of food security and livelihood. These
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indebtedness and failure to pay back the debt can be one of the important causes for
household’s suicides.
2.3 Reviewing previous studies
As mentioned in previous part, MRD is the heart of rice production region and
contributes a large mount of exporting rice (after Thai). Nevertheless most of rice
farmers are poverty and facing to many difficulties in daily living. Because of prolonged
abject poverty, the rice farmers often lack of capital for investment to new crops yearly.
In order to produce rice cultivations, most of them must purchase inputs on credit or
informal money lenders (also input trader) who are willing to provide them credit in
cash or in kinds (such as seeds, fertilizer, pesticides, etc). This starts the vicious circle:
lack of capital for rice production, buying inputs on credits or asking a loan, then falling
into debt and default.
Pujari (2011) indicated the main cause of the indebtedness of the farmers is their
poverty. The farmer has to borrow for various purposes, as he has no past saving of his

own. Some times, the crops fail because of the failure of seasonal reversing winds, or
because of floods, etc. when he has to make some improvement on his land as building,
construction of well, etc or when he has to buy costly facilities, he is forced to borrow.
Pujari also pointed poverty forces farmer to borrow, and if the crop fails or low yield
that will forces him to have so little for paying off his debt.
In the report of Vietnam Poverty Analysis (2002) identified poverty in Vietnam is highly
concentrated in rural areas - with around 90 percent of poor living in rural areas.
Therefore a higher proportion of population lives below the poverty line in rural areas
than in urban areas.
Pujari (2011) also mentioned some of debt may be inherited. A person inherits his
farmer's property; likewise he inherits his father's debt too. In many cases bonded
laborers continue to be so, often for generation. As a consequence, when farmers are in
debt or given credit in kinds because of poverty, they lose advantages in adopting
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modern farming practices. This could make them paralyzing in increasing their income
levels and their earnings is mostly spent for repayment and then agricultural
improvement would be neglected. Many smaller farmers are in near permanent
indebtedness, usually to pay off debts, only to then fall into new debt in order to pay for
agricultural inputs and other household expenditure (Andrew, 2001).
According to Isabelle et al., (2011) households are borrowing on a daily basis at slack
financial times to make ends meet. They also borrow considerable amounts to marry
their children, renovate their houses or invest in private education. In examining the
main causes of over indebtedness, the most frequent are ceremonies (42.65% of
households), housing (25%), health (23.53%), agricultural investments (17.65%) and
private education expense (16.18%). As Maslow's hierarchy of needs showing
physiological needs are the literal requirements for human survival such as foods,
clothing and shelter, etc. Higher level is safety and security needs such as health and

well-being. Those needs are the most part of farmers in general.
Mitra et al., (1986), Pujari (2011), and Claudia (2011) also noted that the farmers incur
certain types of expenditure as meeting food needs, education, health care, celebrating
marriage, religious festivals, births and deaths, etc which automatically led them to
borrowing and indebtedness. Daily cost of living as a trap laid for small farmer. Many
farmers are at risk of a falling into a food insecurity as well as debt trap.
Having viewpoint with them, Rosanna (2004) and Amrit (2010) recognized that there
was an increasing resort to credit, usually at usurious interest rates. The farmers were
forced to borrow to sustain their living as well as to pay for medical care. As a result,
some farmers found themselves constantly in debt for part or all of the year. Paying off
last year's borrowing leaves them unable to buy food or seed this year, so they have to
borrow again. Once, vicious spiral happens to the poor farmers.
The poor often finds themselves in a vicious circle producing at a survival level makes it
difficult to accumulate savings or other assets. Hence, borrowing is an important
strategy that low-income households used to deal with economic stresses and to ensure
16


MBAVB4 – FINAL PROJECT - 2011
continuity in critical levels of consumption (Elizabeth, 1996). It is not only true to the
poor but also to the households with higher incomes borrow for consumption purposes,
Elizabeth affirmed.
In their study, Ke and Mali (2008) found that individuals, in their 20-30s prefer to
borrow more as their age increases. After hitting a certain age threshold, this probability
declines, for Bosnia is around 45. Support to this argument, Rweyemanu et al., (2003)
also discussed in their study that more than 80 percent of borrowers were aged between
18 and 45 years, with a bias toward older farmers. With 932 samples of rural households
used in their survey in study of Rural Credit in Vietnam, Mikkel and Finn (2003)
employed that households with older heads are less likely to apply for credit and elder
households are less likely to undertake risks (i.e. apply for loan where repayment is

uncertain). Most of them have supported age of households has affected to borrowing
decisions for consumption or productivity purpose. Moreover, Jonathan (2003) reported
debt holdings by age follow the life circle pattern in all countries observed, although the
age range where the incidence and volume of debt peaks differ between countries
Demand for rural credit (in cash or in kind) could be determined by household head,
household size, household income, input expenditure, farmer’s experience in farming,
etc. When income is very low, the marginal utility of consumption is very high. This can
be understood strong demand of debt is in inverse proportion to households’ income.
Once income is higher, individuals can spend it to consume and need to borrow less (Ke
and Mali, 2008). So, the poor farming households find themselves in chronic debt for
finance daily consumption and production needs. Their study is also significant in
household head as proved that the head of households tends to have higher probability of
participation, be less credit constrained than other members and demand higher amount
of debt. Meanwhile, farmers with high input expenditures tend to borrow more. The
same applies to farmers with great farming experience and those with high incomes, was
found by Rweyemanu et al., (2003).
Are there any relationship between land or assets owned by farm households and credit
demand? Answer to this question, Mikkel and Finn (2003) confirmed land is a