Factors influencing the access to finance of smallholder farmers in Vietnam: A case study of the whole-chain financing in Hanois suburbs

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

NGUYEN TRAN HOANG ANH

FACTORS INFLUENCING THE ACCESS
TO FINANCE OF SMALLHOLDER
FARMERS IN VIETNAM: A CASE
STUDY OF THE WHOLE- CHAIN
FINANCING IN HANOI'S SUBURBS.

MASTER'S THESIS
MASTER OF SCIENCE IN PUBLIC POLICY

Hanoi, 2019


VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

NGUYEN TRAN HOANG ANH

FACTORS INFLUENCING THE ACCESS
TO FINANCE OF SMALLHOLDER
FARMERS IN VIETNAM: A CASE
STUDY OF THE WHOLE- CHAIN
FINANCING IN HANOI'S SUBURBS.

CODE: PILOT

RESEARCH SUPERVISOR:
Dr. TRUONG THI THU TRANG

Hanoi, 2019
(


ACKNOWLEDGMENT
My sincere gratitude and thanks to my supervisor, Dr.Trương Thi Thu Trang.
Thank you for all your patient and supportive instructions and your encouragement.
Your valuable comments and guidance have shaped my thesis to this stage.
I would like to show my gratefulness to Dr.Vu Hoang Linh for all your helpful
instructions. Thanks to your patience, I got a more profound of my thesis topic.
Special thanks to Mr. Tran Huong- a local officer at To Hieu commune helped me
contact with other local authorities at Quat Dong commune and Nghiem Xuyen
commune. Also, I am grateful for enthusiastic participation of farmer respondents at
three communes. Without your support and kindness, I could not finish this thesis
timely.
I also would like to extend my special thanks to professors of Master program of
Public Policy at Vietnam Japan University for your kindness and unwavering
assistance at all times.
My warmest thanks are due to Huong san, Quang san, and Luong san for your
friendship and great supports in various ways which made my time at Vietnam
Japan University unforgettable.

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LIST OF TABLES

Page
Table 1.1: Investment in agriculture, forestry, and fishing in total investment .........4
Table 3.1: Garrett Ranking Conversion Table .........................................................21
Table 3.2: Percent position and Garrett Value .........................................................22
Table 4.1: The procedure of formal credit for lending loan .....................................26
Table 4.2: Comparison between VBARD and VBSP to informal lenders ..............27
Table 4.3: Gender and age distribution of respondents............................................31
Table 4.4: The rank of reasons for applying for credit ............................................33
Table 4.5: Garrett Value and ranking reasons for apply ..........................................33
Table 4.6: Result of rank for reasons for applying for credit ...................................34
Table 4.7: The rank of reasons for not applying for credit ......................................35
Table 4.8: Garrett Value and Ranking for the reasons for not applying for credit ..35
Table 4.9: Result of ranking from Garrett Value .....................................................36
Table 4.10: Mean characteristics of household by credit participation ...................36
Table 4.11: Mean characteristics of respondents by financial institutions ..............37

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LIST OF FIGURES
Page
Figure 3.1 Survey location .......................................................................................23
Figure 4.1: Planting pumpkin (Source: Tran Quang) ..............................................30
Figure 4.2: Education level distribution..................................................................31
Figure 4.3: Farm size ...............................................................................................32
Figure 5.1: Tien Vien company’s chicken at Chuong My district. ..........................49
Figure 5.2: SWOT analyze.......................................................................................50

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LIST OF ABBREVIATIONS
VBARD Vietnam Bank for Agriculture and Rural Development
VBSP

Vietnam Bank for Social Policies

AVCF

Agricultural Value Chain Financing

AVC

Agricultural Value Chain

iv


TABLE OF CONTENTS

Page
ACKNOWLEDGMENT ............................................................................................. i
LIST OF TABLES ..................................................................................................... ii
LIST OF FIGURES................................................................................................... iii
LIST OF ABBREVIATIONS ................................................................................... iv
TABLE OF CONTENTS ............................................................................................v
CHAPTER 1 INTRODUCTION ................................................................................1
1.1 Background of study and statement of the problem ..........................................1
1.2 Objectives of study.............................................................................................6
1.3 Scope and limitations of the study .....................................................................6

1.4 Organization of the Thesis .................................................................................7
CHAPTER 2 LITERATURE REVIEW .....................................................................8
2.1 Key terms ...........................................................................................................8
2.1.1 Smallholder farmers .....................................................................................8
2.1.2 Agricultural finance ...................................................................................10
2.1.3. Agricultural credit .....................................................................................11
2.1.4 Agricultural value chain finance ................................................................12
2.2 Previous studies ................................................................................................14
CHAPTER 3 RESEARCH METHODOLOGY .......................................................18
3.1 Research methodology .....................................................................................18
3.2 Sampling ..........................................................................................................22
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CHAPTER 4 DISCUSSION OF THE PROBLEM ..................................................24
4.1 Agricultural credit system in Vietnam .............................................................24
4.2 Current policies on agricultural credit .............................................................28
4.3 The research area..............................................................................................29
4.3.1 Source of income of farmers ......................................................................30
4.3.2 Gender, age distribution respondents .........................................................30
4.3.3 Education level of respondents ..................................................................31
4.3.4 Farm size ....................................................................................................32
4.4 Results ..............................................................................................................32
4.4.1 Descriptive statistics ..................................................................................32
4.4.2 The reasons for apply and non-apply for agricultural credit .....................33
4.5. Discussion of the results .................................................................................37
4.5.1 Discussion the credit availability in Thuong Tin district ...........................37
4.5.2 The determinants of access to credit of smallholder farmers ....................41
CHAPTER 5 SOLUTION, POLICY IMPLICATIONS AND CONCLUSION ......47
5.1 Solution and policy implications......................................................................47

5.2 Conclusion........................................................................................................52
REFERENCES ..........................................................................................................53
ANNEX 1 ..................................................................................................................57
ANNEX 2 ..................................................................................................................61

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CHAPTER 1 INTRODUCTION
1.1 Background of study and statement of the problem
Like many developing countries in the world, agriculture is one of the engines for
national economic development. It is stated that “what promotes agricultural
benefits to mankind, the progress of agriculture and the progress of civilization go
hand in hand.” (Morman,1919) as provision of agricultural finance service to the
poor will contribute to enhance productivity and improve the living standard by
breaking the vicious cycle of poverty among small scale farmers at large. If the
provision of agricultural credit is found to be productive and adequate, it will have
positive influences on the use of resources and optimum use of technology
application (Vasthoff, 1968).

It is an essential input to boost the agricultural

productivity that increases income levels and alleviate poverty in turn. The reason is
that smallholder farmers often get difficulties in implementing agricultural
technologies with their own limited funds (Wivine, 2012). Hence, agricultural
finance services can provide them with good opportunities to earn more money and
enhance living standard by investing financially to upgrade new technology. In
other words, access to financial services by farmers can contribute to improve postharvest practices, make household cash to flow smoothly and effectively, enable
better access to markets, control human resource and climate-related risk in a better
way.

Unfortunately, agricultural sector currently often faces a lot of complex challenges
resulting from lengthy biological based production, market activities, unexpected
natural conditions, and other related income-generating activities (Peter, 2001).
Among these things, inadequate access to financial services is one of the
fundamental issues ruining production productivity and has negative effects on
income of peasants in the rural area.
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In response to this risk, Governments provide preferential financial packages in an
attempt to provide the rural poor with access to favorable credit serving the purpose
of increasing productivity and enhancing output in farm and rural non-farm sectors.
Agricultural finance can be provided in various ways such as by any loan or other
rural use, bills of exchange and bankers acceptances or other extensions of credit
that a bank provides for agriculture. Famers are supposed to access loans on the
right time to enable them to cope with the unexpected natural conditions during
planting, crop maintenance, harvesting, and during post-harvesting. On the other
hand, agricultural finance can be approached in the form of agricultural inputs,
technologies, tools, and equipment. The government and several non-governmental
organizations through government initiatives have provided farmers with maize
seeds, fertilizers, and weed. Armendariz and Morduch (2005) argue that agricultural
credit makes households improve their living standard, through an income effect
that boosts total consumption levels; and it seems to have a positive impact on the
demand for children’s health care and education, as well as leisure. According to
Alila and Atieno (2006), inaccessibility to credit especially for small scale farmers
and producers; especially women prevent them from participating the range of
activities, applying technology for production and the scale of operations that a
farmer can adopt on the farm. Gilla and Lassalle (1994) ( as cited by Mahammood,
2014, vol 3) show that rapid economic development achieved in European and
Asian countries was highly associated with the adequate access to credit by

majority. Countries like Indonesia, Burma, India, and China were supposed to have
a significant pace of development after focusing on solving problems of agricultural
credit availability for the majority of farmers. It can be explained that most of the
low-income countries are dependent on agricultural; hence agricultural credit is
seen as a lever to boost the development of agricultural sectors as well as related
stakeholders. Indeed, agricultural credit is a backbone for the process of
modernization of the agricultural sector and commercialization of the national

2


economy of agriculture-based countries. With the introduction of agricultural credit,
the process of changing from subsistence to commercial farming becomes more
favorable (Abedullah et al., 2009).
Vietnam, with a population of over 90 million people, has the third largest
population in Southeast Asia after Indonesia and the Philippines. Vietnam is
striving to become one of Asia’s fastest-growing emerging markets with the hope of
becoming a producer and exporter of high standard food products by improving its
export of value-added products. Developing agricultural production becomes a
strategic goal of the government because agriculture is one of Vietnam’s economic
mainstays with the sector accounting for 17 percent of gross domestic product
(2014). When it comes to the labor force in this sector, it currently employs nearly
half of the country's workforce and approximately 80 percent of the population
living in rural areas with their main source of income derived from agriculture. In
other words, paying attention to develop the agricultural sector means enhancement
of the likelihood of a large number of people throughout the country.
In addition, a country like Vietnam, where has to burden a lot of natural disasters
annually, it is difficult for smallholder farmers to improve their economic situation
without being provided affordable financial services. Smallholder farmers are faced
with many challenges on a daily basis. Unlike larger producers, small-scale farmers

often face issues with having the technological resources and knowledge, as well as
management skills, necessary for creating a resilient operation. Furthermore,smallscale farmers often lack access to the credit, governmental support, and other
financial resources necessary for investing in their operations. World Bank (2014)
supposed that smallholder farmers tend to have little or no access to formal source,
which decreases their capacity and willingness to invest in the technologies and
inputs they need to increase their farm productivity and incomes and escapes
poverty, both their own and that of others. Provision of agricultural credit can

3


enable smallholder farmers to deal with their liquid problem and in turn, create
more investment opportunities for farm. Moreover, they are difficult to use
technology in production
Despite the importance of creating more work, the agricultural sector has not
received adequate attention in terms of capital investment of the whole society as
well as investment of the state sector. As can be seen from
Table 0.1, the total investment in the agriculture sector only accounts for only 6
percent of the total investment of the country in 2017. Thus, investments in
agriculture are generally very low and are not commensurate with the important
roles of this sector in the national economy.
Table 0.1: Investment in agriculture, forestry, and fishing in total investment
Year

2014

Total investment ( billion VND)

1.220.704 1.366.478 1.487.638 1.668.601

Agriculture,
forestry
61.524
and fishing ( billion VND)
Proportion
of
investment
in
agriculture,
forestry
5,04
and fishery in total investment
( percent)

2015

2016

2017

76.523

87.473

100.116

5,60

5,88

6,00

(Source: General Statistics Office of Vietnam)
Moreover, the informal credit that implies the absence of forms of financial
transactions is quite popular among majority of smallholder farmers in Vietnam.
According to the results of the Vietnam Access to Resources Household Survey
2014 (VARHS 2014), only more than 38 percent of farmers (agricultural and
forestry fisheries) have credit loans, of which nearly 37 percent borrowing from
banks (VBARD and VBSP) and the remaining 63 percent still has to borrow from
informal sources (like relatives, friends and even black credit). Survey results of the
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Institute of Policy and Strategy for Agriculture and Rural Development (Nguyen
Dinh Chinh, 2014) also showed that over 80

percent of small and medium

enterprises in agriculture are difficult or unable to access credit loans. In this
context, the borrowers and lenders relationship is personal and based mainly on
trust. The fact is that creditor-debtor operate the credit transactions as ‘non-declared
activities, performed with little capital and lots of unskilled labor, in a very small
scale, with no respect for regulation” (Lelart 2006, p. 3). Researchers Barslund and
Tarp (2008, p. 488) found that loans from private lenders such as friends and
relatives cover 22 percent of the volume of informal credit in rural areas. Although
formal credit is encouraged by the Government via subsidized programs with a
favorable interest rate, smallholder farmers prefer to borrow from informal source
as both farmers and financial institutions are facing some obstacles.
Now, it is increasingly realized that some of the constraints related to product input,
production and financial markets that smallholders face can be mitigated by using

value chain approach that there is linkage between farmers, aggregators, traders,
processors, and financial institutions. They will work closely together to minimize
the transaction cost, strengthen competitiveness within the chain (Meyer 2007;
Trienekens 2011)
Given the little access to credit, disproportionate distribution of credit among the
economic sector, and the fact that many smallholder farmers are seeking to
approach informal credits, this study will build on the previous studies to examine
the problem of accessibility of credit by small farmers in rural areas of Vietnam,
examining which factors influencing on their approach to formal credit and to
investigate how well the agricultural value chain financing work to mitigate the
factors that prevent farmers from accessing credit. Taking the case of agricultural
value chain financing in the suburb of Hanoi for example, this research will set out

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some proposals on the current policy to improve the implementation of the policy of
rural credit.
1.2 Objectives of study
Researchers aim to examine the characteristics of small farmers influencing their
access to agricultural credit. An attempt was made in this research to understand
more about situation of small farmers and to collect more information to propose an
appropriate policy suitable for them.
Specifically, this research was conducted to explore the determinant factors
influencing access to credit by smallholder farmers, and how agricultural value
chain finance helps them to undermine such constraints, taking the case of Hanoi’s
suburb of Vietnam. The aims were to:
 Examine the availability and access to agricultural credit for smallholder farmers
 Determine the factors being determinant factors on access of small farmers
 Proposing agricultural value chain financing as a tool to mitigate the factor that

prevents small farmers from accessing the agricultural credit
Knowledge of the socio-economic features of small farmers will facilitate
policymakers to make better decision on agricultural credit system for small
farmers. Understanding the risk faced by small farmers will be important for them
to avoid costly mistakes and contribute to set out policy interventions. This research
will fulfill the research gaps that have not done on improvement to credit
accessibility for small farmers yet.
1.3 Scope and limitations of the study
This study was conducted in three communes of Thuong Tin district to get the data
about availability of credit, credit demand and factor influencing the access to credit
of smallholder farmers. Also, a case at Chuong My district was taken for study to

6


see in which ways smallholder farmers can benefit from engaging the AVC and to
see potential of district in Hanoi’s suburb when implementing AVCF.
Regarding limitations of the study, the primary limitation is the sample size, which
is limited in the only district given in the short time allotted for fieldwork.
Secondly, due to sensitivity of the thesis topic, it is difficult to get straight answer
from respondents when being asked about income, loan amount. Thirdly, AVFC is a
newly- emerged issue, hence it is tough to get comprehensive responses from local
authorities and respondents about it.
1.4 Organization of the Thesis
This thesis is organized into five chapters: chapter one presents the introduction,
which mainly focuses on the background, objectives, and limitation of the study.
Chapter two presents a review of relevant study gaps. Chapter three discusses the
key terms and methodology used. Chapter four describes the result and discusses
the discussion of findings. Chapter five focuses on the solution, policy implications,
and conclusion.

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CHAPTER 2 LITERATURE REVIEW
In this part, some key terms used in the paper will be defined clearly. After that, the
previous studies about the access to agricultural credit in Vietnam and in the world
are separated to examine to what extent this issue was discussed and employed
analytical methodology.
2.1 Key terms
2.1.1 Smallholder farmers
The concept of smallholder farmers arises based on classification: the purpose of
productions of the farmers like own home consumption or market, income levels,
and the size of the landholding. Machethe et al. (2004) argued that smallholder
farmers are associated with small-scale and subsistence farming in resource-poor
conditions resulted from limited purchased input and use of agricultural
technologies. “Smallholder farmers operate in different conditions which vary
across geographic regions; whether a farmer is urban or rural and also whether in a
developed or a developing countries” (Wivine, 2012). As such, the criteria to
classify type of farmer are different among countries. In India, there is a
classification based on farm size as follow: marginal farmer means “a farmer
cultivating (as owner or tenant or sharecropper) agricultural land up to 1 hectare
(2.5 acres)”, small farmer means “a farmer cultivating (as owner or tenant or share
cropper) agricultural land of more than 1 hectare and up to 2 hectares (5 acres)”.
other farmer means “a farmer cultivating (as owner or tenant or sharecropper)
agricultural land of more than 2 hectares (more than 5 acres)”. In Rwanda,
according to a study carried out by Ministry of Agriculture (MINAGRI) on
production systems in 1991, “the small farmer is defined as a farmer with a small
piece of land, his homestead, which cannot produce enough food for the family's
subsistence. He has to engage in other activities (trader, hauling, crafts, etc.) or sell

his labor to someone else to complement his farm output” (Wivine, 2012). Wivine
8


also supposed that in general, smallholder farmers have some peculiar
characteristics such as: (i) a high proportion of land is for food crop; (ii) proportion
for family consumption is higher than output marketed (often low production); (iii)
a more diverse crop portfolio; (iv) greater aversion to risk; (v) a greater scarcity of
cash and capital resources; (vi) more abundant family labor than other large farmer.
However, it is biased and misconception if smallholder farmers are seen as
inefficient, unproductive, and unresponsive to economic changes, unwilling to
adopt technology. These features should be taken into account in accessing the
appropriate means to enhance the productivity of small farmers.
Other authors affirmed the important role of smallholder farmer in the society.
Eicher and Rukuni (1996) stated that smallholder agriculture is seen as a source of
growth linkages by developing the market for industrial goods and moderation of
the urban migration. They account for a large number of farm workers in the
countries as “it is estimated 500 million agricultural smallholders owning farmland
up to two hectares, with 2 billion to 2.5 billion people living in these smallholders’
households worldwide” (Hazell, 2011). Smallholder farmers are quite a
heterogeneous group, differing in their resource base and choice of crops and
livestock links to markets, the relative importance of agricultural income, and other
dimensions. As such, solutions regarding access to finance need to better understand
the various profiles of smallholder families and the conditions and market context
where they operate (WB, 2014).
In Vietnam, there has been no literally specific definition of smallholder farmer yet;
however, according to the Research on Rural, Agriculture, and Aquaculture in 2016,
there are 36 percent and 10 percent of farmers who own under 0.2 ha and 2 ha
respectively. There is only 2 percent of farmer whose farmland size is over 5 ha.
And the research also revealed that among smallholder farmer, the average amount

of farmland size decreased from 0.65 ha in 2006 to 0.59 ha in 2016 ( as cited by

9


Nguyen et al., p.9). Thus, in this thesis, the “ smallholder farmer” is implied as
those who own farm size of under 0.5 ha and have to to do a supplementary job to
cover their living cost.
2.1.2 Agricultural finance
Murray (1953) stated that “agricultural finance as economic study of borrowing
funds by farmers, the organization and operation of farm lending agencies and of
society’s interest in credit for agriculture”. John B. Penson et al. (1980) defined
“agricultural finance as the study of financing and liquidity services credit provides
to farm borrowers. It is also considered as the study of those financial
intermediaries who provide loan funds to agriculture and the financial markets in
which these intermediaries obtain their loanable funds.”
Barry (2001) stated that “agricultural finance focuses on the acquisition and use of
financial capital by the agricultural sectors of both developed and developing
economies. Financial capital includes debt, equity, and leased capital, although each
of these sources may include numerous forms”. It is the provision of multiple types
of services dedicated to supporting both agricultural activities and agribusinesses,
including input provision, production, and distribution, wholesale, processing, and
marketing. In other words, it includes elements of markets, management, and
policy. When it comes to markets, it considers “the organization and performance of
institutions functioning as financial intermediaries for the agricultural sector, the
trading of financial instruments in the financial markets, and potential rationing of
credit and other market imperfections” (Barry, 2001). When subject to management,
it is embedded to “investment analysis, capital structure, performance measurement,
financial planning, risk and liquidity management, and establishment of
relationships with financial intermediaries” (Barry, 2001). As for policy element,

government play an important role in filling the gap and dealing with the problem
as to imperfections in the agricultural finance markets and in subsidizing targeted

10


assistance to designated recipients consistent with social goals that are unmet by
private sources of financial capital (Barry, 2001).
Agricultural finance generally means studying, examining, and analyzing the
financial aspects pertaining to the farm business. Its financial aspects imply money
matters of production of agricultural products and their disposal. In the framework
of this thesis, the analytical works will be focused on agricultural finance as the
aspect of credit provision for smallholder farmers because of limitation as to time,
financial budget although other agricultural finance-related problems are still
coexisting.
2.1.3. Agricultural credit
The concept of credit in agriculture has been emerged since seventeenth century
when Chinese farmers utilized rural credit with the aim of increasing their income
and improving their living standards (Mingte, 1994). It can be understood as the
amount of investment funds made available for agricultural production from
resources outside the farm sector. In other words, it is any loan or other extension of
credit that a bank provides for agricultural or other rural use.
Agricultural credit contributes largely to poverty alleviation and living standard
improvement of farmers in rural areas. In low- income countries, the Government
uses it as a good instrument in development programs. It cannot only relieve the
financial burden but also increases the production and paves the way for high
technology applied by small farmers during production. According to Rosenzeig
(2001), agricultural credit can improve income by using the surplus finance for
further investment and create more income-generated assets. It is not a mere loan or
advance; it is a good instrument to promote the well-being of the society at large.

The role of farm credit in strengthening both input and output markets in
agricultural sector is assured and significant. Providing appropriate credit for
agricultural operations, therefore, like oiling agriculture to make its wheels more
11


softly and smoothly. In a broader sense, agricultural credit is meaningful not only
to the life-blood of modem economic system but also socio-economic
transformation and a lever of development.
2.1.4 Agricultural value chain finance
The concept of value chain finance or the whole- chain financing is very broad,
and it refers to various aspects of the approach and its financial supporting tools.
Therefore, to achieve the insights of this term, it is very vital to learn from
experience and knowledge from people who are experts in one or various aspects of
financing the value chain, especially in the field of agriculture. This part will bring
together the expertise and contributions of many such experts.
“Agricultural Value Chain (AVC) identifies the set of actors (private, public,
including service providers) and a set of activities that bring a basic agricultural
product from production in the field to final consumption, where at each stage value
is added to the product. It may include production, processing, packaging, storage,
transport, and distribution” (ADB, 2013). Similarly, according to (Miller & Silva,
2007), value chain in agriculture is a set of actors who engage in a linked sequence
of value-adding activities in the process of a product from the stage of raw material
to the final consumer. The researchers of Royal Tropical Institute (KIT), The
Netherlands supposed that “a value chain consists of a series of chain actors, linked
together by flows of products, finance, information, and services.”
Agricultural Value Chain Finance (AVCF) is thus,
“…the flows of funds to and among the different links within the AVC regarding
financial services and products and support services that flow to and through VC
to deal with and mitigate the constraints and shortcomings during the process of

production and market, and meet the needs of those engaged in that chain, be it a
need for credit, a need to secure sales, procure products, reduce risk and/or

12


improve efficiency within the chain and thereby enhance the growth of the
chain” (Fries, 2007)
There are three types of finance for the actors in the value chain (KIT, 2010).
• Chain liquidity: it is short-term loans from suppliers or buyers within the value
chain. This type is popular between farmer groups and traders. It is about short-term
loans to ensure the flow of products to maintain smooth, keep the chain operate as
given plan and strengthen long-term relationships between trusted business partners.
•Agricultural finance: consists of financial services from commercial banks,
financial institutions, or microfinance institutions. Here, microfinance institutions,
banks, and other financial agents become chain supporters along with chain players
• Value chain finance: Financial services that are operated based on cooperation in
the value chain. The sellers, the buyers, and the financial agents will work together,
using the business relations in the value chain as a mean to provide financial
services.
Value chain finance is one of three typical types of finance in a value chain. It is
the flows of funds to and among the various links comprised within a value chain.
In other words, it is about financial services, products and support service flowing
to and through a value chain to meet the needs and address the constraints of those
involved in the chain (Miller and Jones, 2010).
Value chain finance works when one (or more) financial institutions involved in the
value chain, offering financial services which are dependent on the relationships
among chain actors. The seller, the buyer, and the financial agent work together,
using the business relations in the value chain as a mean to provide financial
services (KIT, 2010). In this sense, “Trust” is a key element in value chain finance.

Trust is evaluated by duration of relationships and to what extent of openness with
which the chain partners exchange information. Financial institutions also use
13


“Trust” to examine the conditions for a business to get a loan. It is evident that trustbased information enables the banks to be more careful when they approve or reject
a project.
Agricultural finance is not only finance; financial services need to be closely linked
with or even integrated with other services like input supply, post-harvest,
processing, market-related problems, processing, and skill training. Value chain in
agriculture plays an important role in minimizing the cost and the risks of financing
agricultural sector. Hence, value chain finance is seen as a useful tool for banks and
other financial institutions to design appropriate financial services needed by the
agricultural sector. The advantages of value chain financing are the transaction cost
minimization, product quality improvement, better relationships among actors, and
marker competitiveness enhancement. Moreover, value chain finance creates good
opportunities to expand the finance space for agriculture, increase the
trustworthiness of repayment, improve efficiency, and strengthen value chain
linkages among actors in a chain. As a result, the access to finance service of
farmers in developing countries will be widely open along with a lot of favorable
conditions.
There are two types of value chain financing: direct and indirect. The direct one is a
type of financial service from banks are offered directly to the producer. For
example, a buyer advancing credit to small producers or agro-processors advancing
credit to its suppliers. The indirect value chain is when financial institutions offer
loans to player in a chain to deal with constraint in a chain or to improve efficiency
aiming to smooth the whole chain. For example, the banks help transporters buy
trucks or provide the traders with quick loan for urgent payment.
2.2 Previous studies
In Vietnam, there are some studies showing that characteristics of the farm

householder, asset value and household expenditure level have a significant effect
14


on the probability of borrowing by rural households and loan size (Ha, 1999; Ha,
2001). The higher education level and social responsibility of the household heads
is, the higher probability of borrowing of lenders is. While age negatively
influences the probability of borrowing, it has a positive effect on loan size.
Household size has a adverse effect on the probability to borrow as well as on the
amount borrowed (Ha, 1999).
Duy et al. (2012) conducted a research on the determinants of demand for formal
credit by rural household of Mekong Delta in Vietnam. They used two-step model,
which includes a probit model for selection as the first step, including factors
supposed to be determinants the uptake of credit. The second step is to examine to
what extent these factors influence on the loan size. Their findings revealed that
demand for agricultural credit and amount of loan is closely related with the
household’s capital endowments. There are some factors influencing the willingness
to borrow, such as distance from house to the market center, the marital status, and
household place. (Duy, Haese, Lemba, & Hau, 2012)
Yen (2019) carried out research on “ Analysing the barriers of credit access of
actors in value chain of corn wine in Na Hang district, Tuyen Quang province.” She
affirmed that collateral is the most influential factor to credit access of household in
Na Hang district. The second determinant factor is labor size. It is likely to get loan
from banks to those who are in the labor age. The third factor is production scale,
which has an effect on the competition and production situation of the household.
The larger production scale is, the lesser cost of production is. As a result, the
benefit will increase. Three factors do not have an influence on the credit access of
the household are gender, age, and education level.
Mikkel and Finn (2014) carried out research on “rural credit in Vietnam” with a
survey of 932 households in rural area. The research showed that household

respondents borrowed formal credit for mainly production and property
15


accumulation. In addition, it affirms that rationed credit is dependent on education
and credit history, and there is no evidence to see gender as determinant factors
against women.
There are some papers focusing on this problem in various countries all over the
world. Hallberg (2002) pointed out that high risks are closely associated with
lending to smallholder farmers and fixed costs are closely associated with getting
sound information about the borrower by financial institutions as the principal
driving forces to the high cost of credit. He claimed that high transaction costs do
not only make the cost of borrowing increase but can also create limitations for
some groups of borrower to access to external finance. While transaction costs are
not favorable for all borrowers, there are arguments that they are challenging for
small and micro enterprises.
According to Madafu (2015), high transactions cost of borrowing deters small
farmers and entrepreneurs from involving in formal credit source. There are some
factors from demand side have negative effects on markets: inadequate credit
supply, asymmetric information, high-interest rates which discourage smallholder
farmers from access to credit. There have been some studies showing that in Africa
and about fifteen percent in Asia and Latin America the proportion of farmerborrowers of formal credit accounts for only five percent; and on an average, across
developing countries, five percent of the borrowers have received eighty percent of
the credit (Bali, 2001).
Individual and household characteristics have been revealed to be one of the main
determinants on a household’s access to (formal) credit (Okurut, 2006; Mohamed,
2003). Okurut (2006) found that larger land size and livestock in the total value of
household assets are likely to access to formal credit. Okurut (2006) also claimed
that access to semi-formal credit by farmers in South Africa is closely and
significantly affected by per capita expenditure, household size, location and being

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colored while the negative and significant determinant factors include being male,
being poor and White rural location. Meanwhile, Diagne (1999) stated that size of
the landholding is a significant factor of access to informal credit.
The work by Stiglitz and Weiss (1981) gave out the explanations of credit rationing
in credit markets. According to them, interest rates charged by credit institutions are
considered as having dual role of selecting potential borrowers ( resulting in adverse
selection) and having influence on the actions of the borrowers ( resulting in the
incentive effect). Besley (1993) supposed that due to the absence of perfect
information of borrowers, the adverse selection would arise. It means that high
interest rate will encourage borrowers with high-risk investments, consequently
least likely to repay, to borrow while those with less risky project are not likely to
be rationed.
The previous papers in Vietnam also mentioned different factors to what extent
influencing credit access by smallholder farmers in different locations. It can be
seen that it is varied by the geography, socio-economic features of household and
their own difficulties. Moreover, they have not put forward the solution to mitigate
the factors that limit the accessibility of smallholder farmers by utilizing the
agricultural value chain finance (AVCF) that suit with the production situation as
well as likelihood of local areas like Thuong Tin district, where is seen to be neither
the poorest nor the most prosperous on average. Based on the operation of AVCF, a
proposal of policies will be set forward to amend the current policies in this
research.

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