The determinants of urban hoseholds borrowing in ho chi minh city

UNIVERSITY OF ECONOMICS

INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY

THE HAGUE

VIETNAM

THE NETHERLANDS

VIETNAM- THE NETHERLANDS
PROJECT FOR M.A ON DEVELOPMENT ECONOMICS

THE DETERMINANTS OF URBAN HOUSEHOLD'S
BORROWING IN HO CHI MINH CITY

By

NGUYEN XUAN HIEN

MASTER OF ARTS IN ECONOMICS OF DEVELOPMENT

HO CHI MINH CITY, DECEMBER 2012


CERTIFICATION

"I certify that the content of this thesis is my own work which has not already been

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submitted for any degree or examination .
I declare that to the best of my knowledge, all the sources used or quoted are indicated
and acknowledged by complete references."

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ACKNOWLEDGEMENTS

This thesis would not have been finished without the helps and supports of numerous
individuals and institutions. Therefore I want to express my deep gratitude to them.
First of all, I would like to thank UEH/ISS teachers who have settled my foundations
on development economics and international standard research methodology. Through the
program, my mind has been opened to the world.
I am profoundly thankful my supervisor, Dr. Nguyen Trong Hoai for his ideas and
comments on my research questions, literature review and reference. His intellectual supports
make very complicated economic development theories become simple ones in my mind.
During the course, I have received numerously his kind supervision, guidance, useful

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comments and encouragements .

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and suggestions for me to improve the content and English writing of my thesis .

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I am especially grateful to Dr. Nguyen Huu Dung who gracious made available advices

I also thank all my classmates and my colleagues for their helps, encouragements and
cooperation during my learning and doing research time.
Last but not least, without encouragement, tolerances and loves of my parents, my
younger sister, my relatives, my friends and my wife, this research would not have been
completed. So, I would express my deepest debt to them.

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LIST OF TABLES

Table 2.1 - Summarize empirical studies and coefficient sign of determinants of accessing to
formal credit
Table 3.1 -The average loan amount, by source of loan
Table 3.2 -Interest rates by sources of loans (percent)
Table 3.3- Access to bank credit among different household's qualitative characteristics
Table 3.4- Access to bank credit among different household's quantitative characteristics
Table 3.5- Loan uses by the urban borrowers in HCM city
Table 3.6- Sectors that loan spent
Table 4.1 - Table of independent variables
Table 4.2 - The result of regression model

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CONTENT OF THESIS
CERTIFICATION ...................................................................................................................... 2
ACKNOWLEDGEMENT .......................................................................................................... 3
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LIST OF TABLES ...................................................................................................................... 4
CONTENT OF THESIS ............................................................................................................. 5
CHAPTER 1: INTRODUCTION ............................................................................................... 7
1.1. Problem statement ................................................................................................................ 7
1.2. Research Objectives ............................................................................................................. 9
1.3. Research questions ............................................................................................................... 9
1.4. Research methodology ....................................................................................................... 10
1.5. The structure of the thesis .................................................................................................. 10
CHAPTER 2: LITERATURE REVIEW FOR URBAN HOUSEHOLD'S ACCESS TO

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FORMAL CREDIT ................................................................................................................. 12
2.1. DEFINITIONS ................................................................................................................... 12
2.2. FACTORS AFFECTING HOUSEHOLD ACCESS TO FORMAL CREDIT .................. 13

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2.2.1. Traditional approach ................................................................................................. 14
2.2.2. Financial repression approach .................................................................................. 15
2.2.3. New institutional economics approach ..................................................................... 15

2.3. THE CREDIT MARKET MODEL ................................................................................... 17
2.3.1. Credit demand and household financial behavior ..................................................... 18
2.3.2. Credit supply and behavior of formal financial intermediaries ................................ 19
2.4. EMPIRICAL STUDIES .................................................................................................... 25
2.5. CHAPTER REMARK ....................................................................................................... 32
CHAPTER 3: FINANCIAL SYSTEM AND ACCESS TO FORMAL CREDIT BY

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HOUSEHOLD URBAN IN HO CHI MINH CITY ................................................................. 34
3.1. FINANCIAL SYSTEM IN VIETNAM ............................................................................ 34
3.2. OVERVIEW OF ACCESS TO BANK CREDIT BY HOUSEHOLD URBAN IN HO CHI
MINH CITY ............................................................................................................................. 37
3.2.1. Formal and informal credit sources are co-existing ................................................... 37

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3.2.2. Comparing the interest rate between formal and informal credit sources ................. 39
3.2.3. Ability to access bank credit by household, production and financial characteristics40
3.2.4. Characteristics of loan uses by urban households in Ho Chi Minh City .................. .43
3.3. CHAPTER REMARK ....................................................................................................... 46
CHAPTER 4: RESEARCH METHODOLOGY, MODEL SPECIFICATION, RESULTS
AND INTERPRETATION ....................................................................................................... 48
4.1. RESEARCH METHODOLOGY ...................................................................................... 48
4.2. DETERMINANTS OF ACCESS TO FORMAL CREDIT BY HOUSEHOLD .............. .49
4.2.1. Model specification ................................................................................................... 49
4.2.2. Data extraction .......................................................................................................... 51
4.2.3. Interpretation of regression results ........................................................................... 52
4.3. CHAPTER REMARK ....................................................................................................... 51

CHAPTER 5: CONCLUSION AND POLICY IMPLICATION ............................................. 60
5.1. Conclusion ......................................................................................................................... 60
5.2. Policy implication .............................................................................................................. 63
5.3. Research limitations ........................................................................................................... 65
REFERENCES ......................................................................................................................... 66
APPENDICES ........................................................................................................................... 72

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CHAPTER 1: INTRODUCTION

1.1. PROBLEM STATEMENT

Finance now plays an important role in economic growth and development. The
financial services are the services provided by the financial institutions, intermediation or
organizations that dealt with the arrangement and management of money, it also can be
described as a set of arrangement including lending and borrowing of funds... The
improvement of household's borrowing and accessibility to credit can increase the opportunity
for income generation and improve the living standard and thus reduce the poverty, inequality
and vulnerability, especially for the low income and poor households. So, access to credit
plays a major role in increasing household's conditions, particularly for the low income and
the poor. When credit is accessible, the household can solve the problem of lacking of finance
that would negatively affected household's conditions. Providing credit services and removing
the constraints can be positive means of improving household's living standard.
So, the government always tries to improve household's borrowing and access to
financial services (especially access to the formal credit sectors) because of the interest of
household received from financial services. Many financial institutions, intermediation or
organizations and credit programs with preferential interest rate and lending policies are
established to fulfill the accessibility of household to formal credit. Like others developing

countries, the government of Vietnam has created some credit institutions. These institutions
have function to provide credit, loans with the low interest rate and enhance provision of
financial services for the household. In developing countries, households have a high demand
for credit. Credit demand can be used for production, investment, consumption purpose
(Donald, 1976). To satisfy the demand for credit, household can find borrowing in the credit
market.
In Vietnam, the credit market characterized by the co-existence of formal and informal
credit sectors. The formal credit sectors preferred to this paper are social policy bank, stateowned commercial banks, representative offices and branches of foreign banks, foreign jointventure banks, domestic joint-stock commercial banks, people's credit funds and cooperatives,

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employment support fund, credit organizations, social political organizations while the
informal credit sectors are individual creditors, friends and relatives and others. The formal
credit system provides credit for the household, especially for the low income and poor
households, with the favor interest rate. While the informal one charge higher interest rate
compare to formal credit.

However, household's access to formal credit is still limited,

especially for formal financial institutions. There are many factors that affect this problem
such as asymmetric information, transaction cost, the household head characteristics, the
production characteristics, the financial characteristics, etc. All of these factors can determine
of access to formal credit of the household.
Up to now, there are several similar studies which have been done to prove the positive
impact of access to credit on household's activities and try to find out the determinants of
household's access to formal credit such as Rural development finance in Vietnam: A micro
econometric analysis of household surveys (Pham Bao Duong and Yoichi Izumida, 2002);
Effects of the value of assets on farming household's access to credit in rural Viet Nam
(Nguyen Van Ngan, 2003); Effecting of loan amount on farm households income in Tan Chau

district, Tay Ninh province (Dang Ngoc Quy, 2007) ...
Although there are several studies that carried out to find out the determinants of
household's access to formal credit in the urban and rural areas, the studies have been done for
household's access to formal credit in Ho Chi Minh City are still limited. Because Ho Chi
Minh City now is the economic heart of Vietnam and the core of Vietnam's largest urban area,
which is head toward a population of 9 million, including exurban areas beyond the municipal
boundaries. The urban development trends in the Ho Chi Minh City area are similar to those
of high income world urban areas. That's a reason why Ho Chi Minh City now attract huge
immigration of labor force (including manual workers or blue-collar workers, skilled and
unskilled worker) from other provinces of Vietnam. They move to Ho Chi Minh City for their
better life and future. Understanding household's access to formal credit in Ho Chi Minh City
is very essential to increase the probability of households to access to formal credit sectors and
to improve the household's income and living standard.

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Therefore, finding answers for the question that what are the determinants that affect
household's access to credit and why a large number of households do not get access to credit,
particularly to formal credit, is very essential. The findings will help us to understand the
credit market and borrowing by households in Ho Chi Minh City. This research not only takes
a study of urban credit market with concentrating on borrowing by urban households in Ho
Chi Minh City but also is important for the government policy implications to increase the
access of household to formal credit.

1.2. RESEARCH OBJECTIVES
This thesis concentrates on two aspects of borrowing by urban households in Ho Chi
Minh City, including:
+ Identify the determinants of the probability to borrow or access to formal credit.
+ Identify the determinants of loan amount borrowed from formal credit.

By obtaining two above objectives, this research expects to find out the main
determinants of urban household's borrowing or access to formal credit sectors and loan
amount borrowed and give some policy implication to increase the accessibility of formal
credit in Ho Chi Minh City.

1.3. RESEARCH QUESTIONS
The main objective of this thesis is to try to find out the answer for the central research
question: What are determinants of urban household's borrowing or access to formal credit in
HCM city?
To answer the central question above, three small detailed questions need to be
addressed:
+ What are the differences between formal and informal credit sectors?
+ What are the characteristics of formal and informal borrowing by urban household?
+What are the relationship among characteristics and endowment of urban households
and characteristics of loan, loan amount and source of loan?

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1.4. RESEARCH METHODOLOGY
This thesis will review the essential Issue related to the borrowing by urban
households. Then it will be focused on the performance and quantitative, qualitative analysis
of determinants of borrowing by urban households in HCM city by using descriptive statistic,
tabular analysis and comparative method, econometric technique with the support of Stata
software.
The dataset has been drawn from VHLSS 2008 and processed by using Stata 11.0
software. After getting the necessary information, statistical descriptive, comparative method,
and econometric technique will be used to analyze the information. The statistical description
and the comparative method will allow us to have a general picture of the urban credit market
and household characteristics in the relation to access to formal credit. They also provide us

some beginning hypothesis tests of the relationship between each independent variable and the
dependent variables. The two econometric methods used are logistic and OLS regression to
estimate the effects of the household's characteristics on the probability to access and the
extent of access to formal credit. And the research questions can be answered.

1.5. THE STRUCTURE OF THE THESIS
This thesis includes five chapters. With exclusion of chapter 1 (chapter of
introduction), four continuous chapters present the investigations and findings.

Chapter 1 introduces background, problem statement, research objective/questions,
research methodology and structure ofthesis.

Chapter 2 represents an analytical framework. It provides conceptual, theoretical and
empirical studies for demand and supply factors, particularly determinants of access to formal
credit by urban households.

Chapter 3 provides an overview of financial credit market and borrowing by urban
households in HCM city. An overview of credit suppliers for urban households and the
financial system are mentioned. The statistical descriptive techniques are used to present the
whole picture of urban households in HCM city. From the statistical analysis, the effects of
household's characteristics on access to formal credit and loan amount are discussed.

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Chapter 4 includes hypothesis, data sources and methodology and it is used for testing
hypothesis and interpreting the regression result. It presents two main types of econometric
model (Logit and OLS) that qualify the determinants of probability and the extent to formal
credit by urban households in HCM city. The models used in chapter 4 are specified from the
theoretical review and empirical studies in chapter 2 and the context of credit market of HCM

city in chapter 3. Model and data to run econometric regression, interpretation of the
econometric results are also included in this chapter.

Chapter 5 presents a summary of main findings and discusses some policy
implications. From these findings, some policy implications and suggestions for further
studies are developed.

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CHAPTER 2: LITERATURE REVIEW FOR URBAN HOUSEHOLDS'
ACCESS TO FORMAL CREDIT

The literature includes two main parts. The first part includes the concepts, the
different approaches of the determinants of access to formal credit, credit model. The second
part is empirical studies about the determinants or factors of household's access to formal
credit.

2.1. DEFINITIONS
Household: is a group of at least two people contributing their incomes for using
(Ringen, 1991). According to McCarty (2001), households live in the rural area are more
likely to borrow from formal credit sector than households live in the urban area.

Access to credit: this concept must be clarified. When analyzing access to credit, we
consider both demand and supply sides (Diagne, 1999). Considering access to formal credit as
a decision making process where the first is the borrower application and the second is the
lender approval (Tran Tho Dat, 1998).

Access to formal credit could be expressed by two ways. The first way is probability
or accessibility that household can access formal credit (Tran Tho Oat, 1998). To measure the
determinants of household's access to formal credit, the dependent variable- access to formal
credit - is usually in form of dummy variable, access or not access to formal credit. The
econometric method used to estimate this model is usually the logistic or probit method. The
last one, access to formal credit could be measured by loan amount (Diagne, 1999) and then,
to estimate determinants of access to formal credit, we also can use OLS method.

The borrowing process includes four continuous stages (Tran Tho Dat, 1998). Firstly,
household makes a decision to apply for credit or not. Secondly, if the household has demand
for credit, they decide to take part in the process, and then they choose the loan amount.
Thirdly, the lender starts to assess the loan application of borrowers, then makes a decision to
provide loan or not. Finally, based on the borrower's creditworthiness and the conditions of
lender, the lender determines the loan mount that household received.

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The research of Moll (1998) told that households decide to apply for formal credit not
based on their capital demand and their perceived information about credit supplier, which
depend on the household head, production and financial characteristics. Then, based on the
information about the financial, production status and other personal information of applicant,
lender will judge the creditworthiness of the applicant and make decision to partially or fully
accept the loan applications (Adam, 1980). That means lender's decision to approve the credit
applicant depends on both credit demand and supply sides. In short, both demand and supply
factors will affect access to credit.

Formal versus Informal Financial Institution
The formal financial institution is an institution that operates under a government
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regulatory framework (Moll et. al., 2000). If we consider the development point of view,
formal institutions are classified by their development functions, such as Commercial Banks,
Joint-stock Banks, some special Programs or Institutions, Development Banks, Cooperatives
and other non-financial institutions including insurance companies, finance corporations ...
(Padmannabhan, 1988; Moll, 2000).
The fifteenth international conference of labor statisticians of United Nation economic
and social council (1993) defined the informal sector as "All unregistered and unincorporated
enterprises below a certain size including micro enterprises owned by informal employer who
hire one or more employees on a continuing basic, and own account operations owned by
individual who may employ contributing family workers and employees on an occasional
basic". Generally, informal credit sector includes commercial and non-commercial lenders.
The commercial segment includes professional moneylenders, input or output traders, and
landlord who usually charge higher interest than the formal lenders. The non-commercial
lenders comprise friends, relatives, some self-help groups, and rotating savings and credit
associations (Padmannabhan, 1988).

2.2. FACTORS AFFECTING HOUSEHOLD ACCESS TO FORMAL CREDIT
The demand and supply sides are jointly considered when analyzing access to formal
credit, so any factors that affect behavior of credit demander and supplier will determine the
access to formal credit. Credit can be considered as one kind of commodities, therefore

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...

interest rate (or price of credit) will determine both demand and supply side (Donald, 1976). A
higher interest rate will make demand decreases and supply increases. Interest rate is a main

determinant of household's access to formal credit. However, in reality, the formal credit
market is very different from the goods market. The role of interest rate as price mechanism
does not function well. A credit market is characterized by limited supply but excess demand.
Formal interest rate is always lower than the market level (Ray, 1998). So, using other factors
rather than interest rate can be concerned to explain the determinants of access to formal
credit.
Now, we consider different approaches and theories affecting to borrowing activities,
then influence on household demand for credit and creditworthiness in credit supplier decision
which determine household's access to formal credit (Moll, 2000).
2.2.1. The traditional approach to credit market

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The traditional approach said that interest rate mechanism function well in rural credit
market. Low interest rate will stimulate farms to borrow, increase the adoption of new
technology then lead to high productivity and high income. High interest rate will prevent
farms from borrowing. Based on this, this approach supports the intervention of government in
rural credit markets by keeping low interest rate, increasing saving, creating credit and having
subsidized credit for households (Wai, 1957, Bottomley, 1964).
In order to strengthen the argument for government intervention in rural credit
markets, this approach assumes that credit is an important input or production factor as capital
shortage is a main obstacle for economic growth in rural area (Floro et al., 1991 ). From this
assumption, we can infer that credit requirements will depend on production characteristics of
households because credit as one part of capital factor must combine with other production
factors in production process (Adam, 1984). However, this assumption is not always true
because credit can be used for consumption purposes. Households, especially the poor, usually
use credit to smooth their consumptions and to cover emergency cases such as illness, death,
crop failure, falling price ... and hence, the consumption expenditure may also affect credit
demand, then access to formal credit of households (Ray, 1998: 529-31 ). Credit can be used

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for production purpose but this argument is not strong because credit also can be used for
consumption purpose.
So, this approach supports the role of credit on development but the price or interest
rate mechanism does not work properly. So interest rate ceiling has distorted credit toward
large borrowers and reduce total saving mobilization as well as total assets for lending
portfolio (Claudio Gonzales-Vega, 1984 and Braverman and Grausch, 1989, Floro et al.,
1991 ). That means interest rate is not important determinant factor of household access to low
interest rate credit.
The next two approaches will be explored other factors rather than interest rate will
affect the household access to formal credit.

2.2.2. The financial repression approach to credit market
The financial repression approach argued that credit market is imperfect, low interest
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rate in formal sector directed the limited credit toward some large borrowers or people who
has social and political position (Floro, et al. 1991 ). The lenders are likely to concentrate on
large loans rather than a number of small borrowers because their administrative cost could be
minimized (Donald, 1976). People who have the political and social position will affect the
creditworthiness as perceived by lenders, so they have more chance to access to credit. Those
belong to better-off group and the formal credit sector discriminated against the poor and
created environment for corruption (Adams and Von Pishchke, 1984).
In conclusion, the argument of financial repression approach is that transaction cost,
the political and social position; loan size could determine household's access to formal credit.
The allocation of credit may result from rational behavior of lenders and borrowers and
government intervention.

2.2.3. The new institutional economics approach to credit market
This approach also supports the credit market is imperfect similarly to the financial
repression approach. The difference is that, allocation of credit through non-interest rate
mechanism is from rational behavior of lenders and borrowers in asymmetric information
environment of credit market, not resulted from government regulations (Floro et al., 1991 ).

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Asymmetric information means information between lenders and borrowers is not
balance, which closely connect with "adverse selection" and "moral hazard" problems
(Besley, 1994).
Generally, interest rates in formal credit markets are lower than the market equilibrium
level as mentioned above (Donald, 1976 and Adams, 1984). Credit demand excesses credit
supply; formal suppliers expect to get higher return by increasing the interest rate. However,
because of symmetric information problem, high interest rate will lead to "adverse selection"
and "moral hazard".
Adverse selection means higher interest rate will attract more risk projects, household
with low profitability and safe projects could hesitate to borrow because their profit might not
cover the high cost. So, the risk of loan is high.
Moral hazard occurs when borrowers from high interest rate credits are pushed toward
risky projects with high expected return. Those projects are more likely to fail and these
household go bankrupt, so the probability of making repayment is low. In brief, rising interest
rate in credit market would drive away the good borrowers instead of the bad one (Ray, 1998:
555). As a result, because the risk of investment projects is high and the chance to make
repayment is low, the lenders can not attain high return as expectation.
Because of adverse selection and moral hazard, lenders can allocate credit by noninterest rate mechanism. Before accepting the loan application, they usually examine
borrowers' risk based on some household characteristics that can be observed including main
occupations of household head, education and reputation of household, land area, housing
conditions (Ray, 1998). The observable characteristics will affect access to credit of

household, so formal credit sector like to lend to people whom they have enough information
to know the reliability to be sure that borrowers will use the loan wisely, efficiently and make
repayment in time. The absence of information may explain why lenders choose to not serve
some borrowers (Moll et al., 2000).
These characteristics can be observed easily and the lenders want to lend to people that
have enough information to ensure the loan can be used wisely and repaid in time. That affects
household's access to formal credit sectors in lender's assessment. So, this approach supports

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observable characteristics such as land, household condition, household assets, occupation and
education of household head can affect household's access to formal credit.
In conclusion, the general conclusion of different approaches is that each approach
emphasized the role of factors to household's access to formal credit, the after approach (the
traditional approach, the financial repression approach and the new institutional economics
approach to the credit ordered by time) always tries to complete the before one by criticizing
the shortcomings and complementing the new ones. For example, the traditional approach
suggested that interest rate and production factors are important determinants of household's
access to formal credit. However, the two next approaches argued that formal credit can be
allocated by non-interest rate mechanism, so the interest rate is not important factor. These
approaches found out formal credit can be used for production and consumption purposes;
therefore household's access to formal credit might be affected by household's consumption
and household's production. Furthermore, the repression approach added loan size, social and
political position and transaction cost that are important determinants of household's access to
formal credit. The latest one, the new institutional approach explored the imperfect
information in credit market and there are relationship between household's access to formal
credit with main occupations of household head, education and reputation of household, land
area, housing conditions ...
2.3. THE CREDIT MARKET MODEL

As mentioned above, the price or the interest rate mechanism does not work well. That
means interest rate is not important determinant factor of household's access to formal credit
sectors. So, the allocation of credit that not based on interest rate (or non-interest rate
allocation of credit) may come from rational behavior of lenders and borrowers and
government intervention. That's a reason why non-interest rate allocation of formal credit is
not only result from government intervention but also result of borrowers and lenders'
behavior. To explain how household can access to formal credit, we can use credit market
model. Access to formal credit means households has at least a loan from formal credit sector.
The credit model includes an analysis of credit demand and household financial behavior and
credit supply and credit supply's behavior.

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2.3.1 Credit demand and household financial behavior
Credit borrowing is a decision making process. The application process depends on
household has demand for credit or not. Some households do not apply because they have no
demand for credit. Others may have demand for credit but do not apply because they scared of
debt, have no information, or the procedures are complex. These households are classified as
credit constrained (Zeller, 1994). In this paper, we consider households who have demand for
credit.
Credit demand comes from gap between financial inflow of household income (Y) and
resource (R) and financial outflows of expenditure (E). The function of credit demand can be:

B = f(Y-, R-, E+).

[2.1]

Demand for loan (B) rises when expenditures increase or incomes fall or household

resources are low, and ceteris paribus. Income mainly comes from production, investment
activities of household and wages/salaries that households can earn from working outside.
Resources may be in form of production assets, real estates and other household assets (David
and Meyer, 1979).
The expenditure outflows may be in form of funds for investment or consumption
expenditure. Investment demand is usually in form of expanding production by applying new
technologies, buying or renting new machineries and additional land. Another kind of demand
for credit is credit used for consumption. Credit demand for consumption in emergency case
such as ill, funeral, other ceremonies, ...
Income, production assets, real estates and other household assets, investment,
consumption expenditure and production characteristics could affect credit demand and then,
affect household's decision to apply for formal credit or not. However, having credit demand
does not fully explain decision to apply for formal credit; some other factors will be analyzed
to determine household access to formal credit as follow:
(Donald, 1976) has argued that political and social position of households will affect
household's formal credit application because they have closed relationship with bank staffs,
knowledge and information about credit program so they easily apply for formal credit.

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(Kooreman, 1997) mentioned in the theory of household economics, demand for credit
of households is always restricted by the limitations including knowledge, skills, wealth and
time. Education of household will affect their access to formal credit because to get formal
credit, households must deal with various paper documents that require a certain education
level. Moreover, high-educated households seem to have better investment plans and easily
apply for formal credit. Household wealth reflects their financial capacity and richer
household will have less demand for credit. Furthermore, young households have more
children, so they tend to consume more earnings so they might borrow to maintain their
consumption while old households will borrow less.

In conclusion, the combination of theories about the credit demand, credit behavior of
households and the household economics suggested that age of household head; education of
household head; members in a household; the poor (household is poor or not); working for
wage/salary; working in sector of agriculture and business or trading; consumption capacity;
housing condition (house value and house owning); ... will have effects on household's access
to formal credit. We will analyze these determinants later after considering the factors of
credit supply and behavior of formal financial intermediaries.
2.3.2. Credit supply and behavior of formal financial intermediaries

In the capital market of developing countries, the supply of credit is always smaller
than the demand for credit, so suppliers or lenders have to assign the limited credit among
credit applicants or borrowers. The credit intermediaries are more likely to lend people who
they have enough information and know the reliability to ensure that they will use loans
wisely, efficiently and make repayment in time. The absence of this information may explain
why lenders choose not to serve these borrowers (Moll et al., 2000).
To support the important role of information of borrowers in lender's decision whether
to lend or not. Hoff and Stiglitz (1993) have drawn out lending activities as follow. At the first
step, the lenders must have some money sources which come from their own assets, deposits
and savings of citizen, or their borrowing from outside such as from other banks or from
lending foreign. The second step, the lenders must find a way to ensure repayment and against
defaults by assessing applicants' creditworthiness. To assess that, the lenders must study many

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aspects of the loan applicants (Rose, 1996). The household must well-defined the purposes of
using loans and serious attentions to make repayment. The household head must have
responsibility and truthfulness. Besides, income generating capacity of households is also
important considerable information, this capacity directly or indirectly depends on education,

health, age, occupation and skill. Third, the borrowers must have ability to generate enough
cash.
Furthermore, according to the analysis of formal credit sectors, low interest rate has
real effects on formal lenders' credit allocation. Formal lenders will allocate the limited
available loans toward household with social and political position. These households usually
have closer relationship with banking staffs, so they are easier to access to formal credit (Moll
et al., 2000). Low interest rate will make lenders overemphasize on collaterals to deal with
risky problem. So, with some large borrowers, if they have enough assets for collateral, they
will easily accepted by financial agencies (Donald, 1976).
Low interest rate in formal credit sector reduces the role of interest rate in determining
credit demand and credit supply and raise the important role of collaterals, assets of borrowers,
land areas, age, education, occupation, skill, health, political and social position and incomes
of households, ... have effects on lenders' perception about households' creditworthiness.
In summary, the combination of theories about credit supply, credit behavior of credit
suppliers suggested that the main determinants of access to formal credit in credit supply side
include age ofhousehold head; education of household head; gender or sex ofhousehold head;
members in a household; working for wage/salary; household's activities for production or
service planting breeding, forestry or aquaculture (do agricultural sector) and households do
trading or business; housing condition (house value and house owning) and purpose of loan; ...
So, some variables affect both on credit demand and credit supply side, such as age of
household head; education of household head; members in a household; working for
wage/salary; household's activities for production or service planting breeding, forestry or
aquaculture (do agricultural sector) and households do trading or business; housing condition
(house value and house owning). Some variables affect on credit demand side such as the poor

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(household is poor or not), consumption capacity. Some variables affects on credit supply side
such as gender or sex of household head, purpose of loan.

That's a reason why we can draw out factors one by one that determine credit demand
and credit supply, and then have impact on the household's access to formal credit
Factors determine both on credit demand and credit supply:
The vector of household head characteristics:
Age of household head
According to the analysis of factors affecting households' income generating activities
of Rose (1996), the access to formal credit and the age of household head have ambiguous
relationship. On one side, young households have more demand for credit. More demand for
credit because they consume more than save and they are so young, so dynamic, so active and
willing to take risk for higher return. So, young households like to apply for formal credit and
have more opportunity to access to formal credit sectors. Old household head may have less
demand for credit than the young ones because they tend to slowly realize and risk-averse.
Moreover, in Vietnam, older households hesitate to apply for more demand for credit because
they have experience about bad reputations of Vietnam's banking system, as imprudent
regulations and complex bureaucracy procedures (Jansen, 2000). On the other side, old
households may control more sources, have more experience, responsibility, good reputation,
and truthfully then more likely to apply formal credit and more accepted by formal lenders
(Rose, 1996; Tran Tho Dat, 1998). Age of household head is measured by the years since
he/she was born to the surveyed year. Age of household head and access to formal credit are
ambiguous.
Education of household head
The degree that household head obtained (or we can say Education of household
head) is also one of important factors affects on access to formal credit. The degree that
household head obtained has been expected to positively affect on household's access to
formal credit. Actually, higher educated household head is expected to exploit better
production and investment opportunities, to understand and easily deal with banking sector

21

with complex document procedures and banking staff, so get higher probability to apply and
get formal loans (Tran Tho Dat, 1998).
Members in a household
The relationship between the members in a household and access to formal credit
seem to be ambiguous. The family has consumption more than saving, more demand for
credit, so they tend to apply for loans to satisfy their needs while some banks aim to provide
loans for investment, production, not for consumption purpose, so they hesitate to loan
households with high consumption expense compare to low income, so low probability to be
accepted by banks (Rose, 1996; Moll et al., 2000) and the numbers of household dependents
seem to have negative effect as it reduces the household creditworthy in lender's assessment
(Tran Tho Oat, 1998). On the other side, with households have more people who work for
wage/salary or run self-business, they easily generate income and use it for repayment, so the
probability and the loan can be accepted by formal lenders will be higher (David and Meyer,
1979).
The vector of production characteristics of household
Working for wage/salary
The relationship between working for wage/salary and access to formal credit is
expected positive. When providing loans for household, the banks always take into account
the generating income activities of household. If the household head works for wage/salary,
the formal lender can use the household head's wage/salary to ensure the loan repaid. So, the
probability and the loan can be accepted by formal lenders will be higher.
Working in sector of agriculture and business or trading
Household's activities for production or service planting breeding, forestry or
aquaculture (households do agricultural sector) and households do trading or business is
expected to be positive relationship with access to formal credit. Firstly, self-employed
household in agricultural sector (with breeding, forestry or aquaculture activities) and doing
trading or business can get higher probability to be accepted by banks, especially for banks
with support the production activities. Secondly, these kinds of household can get profit from
their own business to ensure bank's loans repaid and it is easier accepted by banks.

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The vector of financial characteristics of household
Housing condition (house value and house owning)
Another important factor to consider household financial capacity is housing condition.
The effect of housing condition (house value and house owning) and extent to have formal
credit of household are is ambiguous. On one side, the effect is expected to be positive
because house can be used for collateral, so more valuable housing is more likely get formal
credit. If the house have more valuable can raise the ability to repay and increase the
creditworthy in the assessment of lenders (Ray, 1998). On the other side, housing condition
could have negative effect on household's access to formal credit because good housing
condition could reflect stronger financial capacity of household, so their demand for credit
would decrease (David and Meyer, 1997; Kooreman et al., 1997).
Factors determine only on credit demand side:

The vector of household head characteristics:
The poor (Household is poor or not in 2007)
The relationship between household is poor or not in 2007 and access to formal credit
is ambiguous expected (Khalid, 2003). If the household is poor, the bank hesitate to loan
households with low income, low ability to repay in future, so low probability to be accepted
by banks. However, if social policy bank, employment support fund, credit organizations,
social political organizations, some special government microfinance programs provide credit
to the poor households including Job creation Program, Hunger Eradication and Poverty
Reduction Program and other microfinance programs, the poor household will access these
sources of credit, so higher probability to be accessed the formal credit sector.
The vector of financial characteristics
Consumption capacity
Two factors of income and expenditure of household should not include in the same
model because they are highly correlated. Income should be excluded because they it is very

complicated factor and difficult to collect accurate data. Consumption capacity is expected to
ambiguous associate with household's access to formal credit. On one side, more consumption

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can lead to more demand for credit, then raising demand for loans and increasing needs to
access to formal credit (Ray, 1998). On the other side, consumption can have negative impact
on accessing to formal credit because some banks will provide loans for purpose of investment
and production activities, not for purpose of consumption. They hesitate to loan households
with high consumption expense compare to low income, so low probability to be accepted by
banks (Rose, 1996; Moll et al., 2000).
Factors determine only on credit supply side:
The vector of household head characteristics:
Gender of household head
Gender of household head may have effect on household's access to formal credit if
there is discrimination between male and female in access to formal credit. Women considered
as inferior class in traditional society. But in the modem society, Vietnamese, especially for
the young generation, has been strongly affected by Western cultures (Pham Xuan Nam &

..

Peter Boothroyd, 2000). Moreover, man and woman are indifferent in legal system of banking
sector in Vietnam. The woman is encouraged from participating on formal loan and some
special program of government. So, the relationship between sex and access to formal credit is
not clear.
The vector of financial characteristics
Purpose of loan
The purpose of loan (or the loans used for) seems to have positive relationship with
access to formal credit. Because some formal lenders target at providing loans to support

production and investment activities, while some formal lenders are willing to provide credit
for consumption and others, so higher probability to access to formal credit.
After examining determinants of household's access to formal credit, we can
summarize factors that affect on accessing to credit by household as mentioned above.

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•

I

Age of household head

Age of household head
Education of household head

r-r-+

Credit
supply

-

Education of household head

Gender/Sex ofhousehold head

Members in a household

Members in a household

Household is poor or not
Household's
access to
formal credit

The poor
Working for wage/salary

Working for wage/salary
Households do agricultural sector

Households do agricultural sector

Households do trading or business

Households do trading or business

Consumption capacity

Housing condition
Purpose of loan

'--

Credit
demand

+--

Housing condition

;;

2.4. EMPIRICAL STUDIES

There have been a lot of studies on factors affected the household's probability to get
different credit sources and the loan amount. Here are some examples:
Floro and Yotopolous (1991)

Floro and Yotopolous ( 1991) studied "Informal credit and new institutional economics:
the case of Philippine agriculture". In this study, the model is presented as followed:
Loan size= F (income, default incidence, regional dummies)

[2.2]

In the regression result, the loan size provided by trader-lender is positive and strong
relationship with income. On the contrary, the size of loan provided by farmer-lender shows a
weak and negative relationship. The loan size is likely to have positive effective default.
Based on this study, we can consider and select variables the same meaning to add into
the research model such as size of loan, household income (with the proxy is expenditure), ...
Zeller (1994)

Zeller (1994) studied "Determinants of credit rationing: a study of informal lenders and
formal credit group in Madagascar". The model by Zeller (1994) briefly presented as follow:

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