Access to Credit and Household Income in the Northern Mountains of Vietnam

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JUSTUS-LIEBIG UNIVERSITÄT GIESSEN

Fachbereich 09: Agrarwissenschaften, Ökotrophologie und Umweltmanagement

Access to Credit and Household Income in the Northern

Mountains of Vietnam

Inaugural-Dissertation zur Erlangung des Doktorgrades (Dr. Agr.)

Fachbereich Agrarwissenschaften, Ökotrophologie und Umweltmanagement

Institut für Betriebslehre der Agrar - und Ernährungswirtschaft

Professur für Projekt – und Regionalplanung

Eingereicht von: Do Xuan Luan (MSc.)

Erstgutachter: Prof. Dr. Siegfried Bauer

Zweitgutachter: Prof. Dr. Rainer Kühl

Giessen – November, 2015

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PREFACE

This volume provides a comprehensive analysis on the issues of rural credit conducted in the

Northern Mountainous Region of Vietnam. The study has been carried out within the

―Agricultural Economics and Related Sciences‖ program at the University of Giessen,

Germany. A crucial advantage of this study is that it combined various econometrics tools

using data collected from the national household surveys to examine the extent to which credit

serves the poor, with regard to access constraints and income impacts.

The empirical findings reveal that the poor, especially the poorest households are still

underserved by overall rural credit. The Agribank credit tends to provide to wealthier

households and informal credit serves households that are closer to and above the relative

poverty line. Subsidized credit successfully targeted the poor, implying that governmental

subsidies are necessary to reach the poor. Credit accessibility analysis has highlighted the

importance of social capital and agricultural extension services in determining credit

accessibility by rural households. Whereas a significant increase in household income can be

achieved through accessing commercial and informal loans, there is no significant increase in

all income components for associated recipients of subsidized credit. Based on the findings of

the study, a set of policy implications aimed at improving poverty targeting and credit access

can increase the impact of credit on reducing poverty in a sustainable manner.

For the editors: Siegfried Bauer, University of Giessen, Germany

ACKNOWLEDGEMENTS

First and foremost, I am deeply indebted to my first supervisor Prof. Dr. Siegfried Bauer for his

continuous guidance, moral support and encouragement throughout this process. I am also

thankful to my second supervisor Prof. Dr. Rainer Kühl for his constructive suggestions.

Guidance and understanding from both supervisors proved crucial to the successful completion

of this work. My thanks also go to the members of the examination committee, Prof. Dr.

Ingrid-Ute Leonhäuser, Prof. Dr. Joachim Aurbacher and Prof. Dr. Michael Schmitz. The

administrative support and cooperation of Mrs. Schlocker, Dr. Evelina and Dr. Tarig is also

worth mentioning. I would also like to express my appreciation to Heinz Lakos for his

technical support, to Mr. Danner McCulloh for his English correction of the text, to Mr.Max

and Dr. Aaron for their correction of the German summary. I also acknowledge the Vietnamese

Ministry of Education and Training for the doctoral scholarship. My sincere thanks go to the

faculty of economics and rural development at Thai Nguyen University of Agriculture and

Forestry. I would like to thank the Central Institute for Economic Management (CIEM) of

Vietnam for providing the data and Dr. Kieu Thi Thu Huong for supporting me in my

application for the doctoral program. I would like to take this opportunity to thank Mr. Nguyen

Thanh Vu and international colleagues for their support.

The inspiration and support of my father Do Xuan Luong, mother Vu Thi Sau, my brothers and

sisters were my main source of strength. My heartfelt appreciation goes to them. My deepest

thanks go to my son Do Anh Duc, my daughter Do Khanh Linh and my wife Duong Thi Thu

Hang for their inspiration, support and sacrifice.

TABLE OF CONTENTS i

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TABLE OF CONTENTS

TABLE OF CONTENTS .........................................................................................i

LIST OF TABLES................................................................................................viii

LIST OF FIGURES ................................................................................................. x

LIST OF ACRONYMS AND ABBREVIATIONS............................................... xi

1. INTRODUCTION ............................................................................................... 1

1.1 Background of the study................................................................................ 1

1.2 Statement of the problem .............................................................................. 1

1.3 Objectives...................................................................................................... 3

1.4 Hypotheses of the study ................................................................................ 4

1.5 Scope and limitations of the study ................................................................ 4

1.6 Contribution of the study............................................................................... 4

1.7 Structure of the study .................................................................................... 5

2. AN OVERVIEW OF ECONOMY, POVERTY AND RURAL CREDIT

SYSTEM IN VIETNAM......................................................................................... 6

2.1 Geography ..................................................................................................... 6

2.2 Macroeconomic performance........................................................................ 6

2.2.1 Key development indicators................................................................. 6

2.2.2 GDP, credit and inflation in Vietnam................................................... 7

2.2.3 Economy‘s structure share in Vietnam................................................. 8

2.3 Agriculture and Poverty ................................................................................ 9

2.3.1 Agricultural performance...................................................................... 9

2.3.2 Rural labors......................................................................................... 11

2.3.3 Fragmentation of agricultural land ..................................................... 11

2.3.4 Poverty in Vietnam............................................................................. 12

2.3.5 Agricultural insurance in Vietnam ..................................................... 13

2.4 Rural credit in Vietnam............................................................................... 14

2.4.1 Brief history of rural credit policy in Vietnam................................... 14

2.4.1.1 Credit cooperatives before 1986 ..................................................... 14

ii TABLE OF CONTENTS

2.4.1.2 Replacement of the mono-tier banking system after 1986 ............. 15

2.4.1.3 The separation between preferential and commercial lending ....... 16

2.4.1.4 Incorporation of microfinance institutions in the financial system 17

2.4.1.5 Priorities for lending agricultural and rural sector.......................... 18

2.4.2 Rural credit demand ........................................................................... 18

2.4.3 Supply side of rural credit in Vietnam ............................................... 20

2.4.3.1 Formal, semiformal and informal credit......................................... 20

2.4.3.2 Market share and financial sustainability ....................................... 22

2.5 Summary of the chapter.............................................................................. 24

3. THEORETICAL AND EMPIRICAL FOUNDATIONS OF THE STUDY .... 25

3.1 Concept of credit and general issues........................................................... 25

3.1.1 The credit concept .............................................................................. 25

3.1.2 Types of credit.................................................................................... 26

3.1.3 The triangle of credit .......................................................................... 27

3.1.4 Challenges for the provision of credit to rural households................ 28

3.1.4.1 Principle of marginal return to capital ............................................ 28

3.1.4.2 Information asymmetry................................................................... 29

3.1.4.3 Characteristics of farming activities ............................................... 30

3.1.4.4 Principal – agent problem in rural credit market ............................ 31

3.1.4.5 Transaction cost and borrowers‘ risk management ........................ 32

3.2 Poverty outreach of credit........................................................................... 33

3.2.1 Depth of outreach concept and measurement .................................... 33

3.2.1.1 Concept ........................................................................................... 33

3.2.1.2 Measurement................................................................................... 33

3.2.2 Empirical evidence on poverty outreach of credit ............................. 35

3.2.2.1 The extent to which credit serves the poor ..................................... 35

3.2.2.2 Reasons explaining the credit exclusion of the poor ...................... 35

3.2.3 Credit subsidy..................................................................................... 37

3.2.4 Summary............................................................................................. 37

3.3 Access to credit ........................................................................................... 38

3.3.1 Concepts and approaches of analyzing credit accessibility ............... 38

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3.3.2 Empirical determinants of credit access at household level............... 40

3.3.3 Summary............................................................................................. 41

3.4 Credit repayment ......................................................................................... 42

3.4.1 Role of credit repayment .................................................................... 42

3.4.2 Measurement for repayment performance.......................................... 42

3.5 Welfare impact of credit.............................................................................. 44

3.5.1 How credit affect households ............................................................. 44

3.5.2 A foundation for impact estimation.................................................... 46

3.5.3 Empirical evidence on impact of credit.............................................. 47

3.5.3.1 Significantly positive impact of credit ............................................ 47

3.5.3.2 Limited impact of credit and reasons.............................................. 49

3.5.3.3 Mixed impacts of credit under certain conditions........................... 50

3.5.4 Summary............................................................................................. 50

3.6 International experiences in rural credit development................................ 51

3.6.1 Germany.............................................................................................. 51

3.6.2 Bangladesh.......................................................................................... 52

3.6.3 Philippines .......................................................................................... 54

3.6.4 Indonesia............................................................................................. 55

3.6.5 Thailand .............................................................................................. 56

3.6.6 Lessons to be learnt ............................................................................ 57

3.7 Conceptual framework ................................................................................ 58

4. RESEARCH AREA AND ANALYSIS OF SAMPLED HOUSEHOLD

CHARACTERISTICS........................................................................................... 60

4.1 Overview of the Northern Mountainous Region of Vietnam ..................... 60

4.1.1 Overall socio-economic conditions.................................................... 60

4.1.2 Overview of the selected communes.................................................. 62

4.2 Data source .................................................................................................. 63

4.3 Composition of selected households by sources of loans........................... 66

4.3.1 Loan characteristics............................................................................ 68

4.3.1.1 Loan amount, duration and interest rate.......................................... 68

4.3.1.2 Collateral security............................................................................ 69

iv TABLE OF CONTENTS

4.3.1.3 Mode of repayment ......................................................................... 70

4.3.1.4 Credit use purposes......................................................................... 70

4.4 Demographic characteristics of selected households.................................. 72

4.5 Main agricultural activities ......................................................................... 74

4.5.1 Crop production.................................................................................. 74

4.5.2 Livestock production.......................................................................... 75

4.5.3 Land size and land use certificate....................................................... 76

4.6 Access to extension services....................................................................... 78

4.6.1 Receives of extension services categorized by sources of loans........ 78

4.6.2 Feedback of household to extension services .................................... 79

4.6.3 Extension and credit access................................................................ 81

4.6.4 Extension and household income ....................................................... 82

4.6.5 Extension and other household endowments..................................... 84

4.7 Shocks and economic losses....................................................................... 86

4.7.1 Type of shocks and distribution of shock affected households by loan

sources and provinces ..................................................................................... 86

4.7.2 Economic losses due to shocks .......................................................... 88

4.7.3 Household endowments categorized by shock affected..................... 89

4.7.3.1 Income difference ........................................................................... 89

4.7.3.2 Differences in selected variables between shock-affected and shock

non- affected households ............................................................................ 91

4.7.4 Household responses to shocks.......................................................... 93

4.8 Household savings ...................................................................................... 94

4.8.1 Savings and credit access................................................................... 94

4.8.2 Motives for savings ............................................................................ 96

4.8.3 Savings and household endowments.................................................. 98

4.8.3.1 Savings and income ........................................................................ 98

4.8.3.2 Savings and other household endowments based on loan sources. 99

4.9 Ethnicity and credit access........................................................................ 101

4.9.1 Credit recipients categorized by ethnicity group.............................. 101

4.9.2 Ethnicity and credit volumes............................................................ 102

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4.9.3 Ethnicity and household endowments.............................................. 103

4.10 Summary of the chapter.......................................................................... 106

5. POVERTY OUTREACH OF RURAL CREDIT............................................ 108

5.1 Introduction ............................................................................................... 108

5.2 The methodology for evaluating poverty outreach ................................... 108

5.2.1 Principal Component Analysis: main ideas...................................... 108

5.2.2 Selection of variables for Principal Component Analysis................ 110

5.2.2.1 Point-Biserial Correlation ............................................................. 111

5.2.2.2 A description of selected variables ............................................... 112

5.3 Empirical results and discussion ............................................................... 114

5.3.1 Results of Principal Component Analysis........................................ 114

5.3.2 Poverty outreach of rural credit ........................................................ 116

5.3.2.1 Depth of outreach based on relative poverty ................................ 116

5.3.2.2 The association between poverty scores and loan amount ........... 118

5.3.2.3 Depth of outreach based on categories of credit exclusion........... 119

5.3.3 Summary of the chapter.................................................................... 120

6. DETERMINANTS OF CREDIT ACCESSIBILITY BY RURAL

HOUSEHOLDS................................................................................................... 121

6.1 Introduction ............................................................................................... 121

6.2 Methodology ............................................................................................. 121

6.2.1 Choice of explanatory variables ....................................................... 121

6.2.1.1 Social capital ................................................................................. 121

6.2.1.2 Human capital................................................................................ 123

6.2.1.3 Financial capital ............................................................................ 124

6.2.1.4 Physical capital.............................................................................. 125

6.2.2 Bayesian Model Average applied to the Heckman Selection Model126

6.2.2.1 Credit access model....................................................................... 127

6.2.2.2 Credit Amount Model ................................................................... 129

6.3 Results and discussions............................................................................. 131

6.3.1 Endowment difference between household groups.......................... 131

6.3.2 Result of Bayesian Model Averaging (BMA).................................. 134

vi TABLE OF CONTENTS

6.3.3 Determinants of credit access........................................................... 135

6.3.3.1 Determinants of accessing overall credit ...................................... 136

6.3.3.2 Determinants of accessing subsidized credit ................................ 140

6.3.3.3 Determinants of accessing Agribank credit.................................. 141

6.3.3.4 Determinants of accessing informal credit ................................... 144

6.4 Summary of the chapter............................................................................ 146

7. INCOME IMPACT OF CREDIT ON RECIPIENTS..................................... 147

7.1 Introduction............................................................................................... 147

7.2 Impact Estimation by Using Propensity Score Matching......................... 147

7.2.1 Reasons for choosing Propensity Score Matching........................... 147

7.2.2 Main ideas of Propensity Score Matching ....................................... 148

7.2.3 Assumptions of Propensity Score Matching .................................... 150

7.2.4 Choice of matching algorithm.......................................................... 151

7.2.4.1 Nearest neighbor matching and radius matching.......................... 151

7.2.4.2 Kernel matching............................................................................ 153

7.2.4.3 Stratification matching.................................................................. 153

7.2.5 Assessment of the matching quality................................................. 154

7.2.6 Bootstrapping with Propensity Score Matching............................... 155

7.3 Estimation Results..................................................................................... 156

7.3.1 Income Impact of Credit without Using Matching Techniques....... 156

7.3.2 Income Impact of Credit by Using Matching Techniques............... 159

7.3.2.1 Income impact of overall rural credit............................................ 160

7.3.2.2 Income impact of subsidized credit .............................................. 162

7.3.2.3 Income impact of commercial credit by the Agribank (VBARD) 166

7.3.2.4 Income impact of informal credit ................................................. 169

7.3.2.5 Income impact per VND million of credit.................................... 171

7.4 Summary of the chapter............................................................................ 172

8. SUMMARY OF THE STUDY: RATIONALE, MAIN FINDINGS,

CONCLUSIONs AND POLICY RECOMMENDATIONS............................... 173

8.1 Introduction............................................................................................... 173

8.2 Rationale of the study ............................................................................... 173

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8.3 Methodological approaches....................................................................... 174

8.4 Main findings ............................................................................................ 174

8.4.1 Household characteristics................................................................. 174

8.4.2 Poverty outreach of credit................................................................. 176

8.4.3 Determinants of credit access........................................................... 176

8.4.4 Income impact of credit.................................................................... 177

8.5 Conclusions............................................................................................... 177

8.5.1 The extent to which credit reaches the poor..................................... 177

8.5.2 Factors influencing credit access...................................................... 178

8.5.3 Income impact of rural credit ........................................................... 178

8.6 Policy implications.................................................................................... 179

8.6.1 Improve the extent to which credit reaches the poor........................ 179

8.6.2 Credit schemes should be adaptable to the farming seasonality and the

cash flow of households................................................................................ 179

8.6.3 Development of risk copping measures for the poor........................ 180

8.6.4 Encouraging the provision of commercial loans.............................. 180

8.6.5 Informal credit still retain as a necessity for the poor...................... 181

8.6.6 Facilitating access to extension services .......................................... 181

8.6.7 Mobilization of rural savings as the important source of credit....... 182

8.7 Limitations and suggestions for further studies........................................ 182

ZUSAMMENFASSUNG .................................................................................... 183

REFERENCES .................................................................................................... 188

APPENDIX.......................................................................................................... 200

viii LIST OF TABLES

LIST OF TABLES

Table 2.1: Development indicators of Vietnam ...................................................... 7

Table 2.2: Production of main agricultural commodities...................................... 10

Table 2.3: Rural labors in Vietnam 2001-2011..................................................... 11

Table 2.4: Poverty headcount and composition by regions and sector in 2010

(Based on General Statistics Office- World Bank poverty line)........................... 12

Table 2.5: Percentage of crops and livestock covered by agricultural insurance . 13

Table 2.6: Financial sustainability of credit institutions as of June 30th 2009..... 23

Table 4.1: Socio-economic indicators of the Northern Mountainous Region

(NRM) in relation to other regions and the whole country................................... 61

Table 4.2: Commune characteristics in selected provinces (% of communes)..... 63

Table 4.3: Loan characteristics by lenders............................................................ 68

Table 4.4: Share of loans with collateral (% of borrowed households)................ 69

Table 4.5: Modes of repayment by sources of loans (% of accessed households) 70

Table 4.6: Credit use purposes by sources of loans (% of households)................ 71

Table 4.7: Demographic characteristics of households categorized by credit

sources................................................................................................................... 73

Table 4.8: Crop production per household by provinces (kg) .............................. 75

Table 4.9: Average number of livestock reared per household ............................ 76

Table 4.10: Average number of plots per household and land size per plot......... 77

Table 4.11: Share of land plots with red book (%) ............................................... 78

Table 4.12: Feedback of receivers to extension services (% of households with

access to agricultural extension)............................................................................ 80

Table 4.13: Feedback of households to formal extension categorized by provinces

............................................................................................................................... 81

Table 4.14: Income of household groups categorized by extension access and loan

sources (VND 1000 per household)...................................................................... 83

Table 4.15: Description of selected household endowments............................... 84

Table 4.16: Differences in household‘s endowments based on credit sources and

extension access..................................................................................................... 85

Table 4.17: Share of shock affected households (% of households) .................... 87

Table 4.18: Mean and standard deviation of shock losses by credit access and

provinces................................................................................................................ 88

Table 4.19: Total income of household groups categorized by shock-affected and

loan sources (VND 1000 per household).............................................................. 90

Table 4.20: Test for the difference in means of endowments between household

groups.................................................................................................................... 92

Table 4.21: Household responses to shocks by sources of loans (% of affected

households)............................................................................................................ 93

LIST OF TABLES ix

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Table 4.22: Household responses to shocks of households categorized by

provinces (% of affected households) ................................................................... 94

Table 4.23: Credit amount of households categorized by savings status (VND

1000 per household) .............................................................................................. 96

Table 4.24: Reasons for household savings categorized by lenders (% of

households)............................................................................................................ 97

Table 4.25: Reasons for household savings categorized by provinces (% of

household with savings) ........................................................................................ 97

Table 4.26: Total income of household groups categorized by savings and loan

sources (VND 1000 per household) ...................................................................... 98

Table 4.27: Differences in household endowments based on credit sources and

savings ................................................................................................................. 100

Table 4.28: Differences in means of endowments between ethnic minority

households and Kinh majority households......................................................... 104

Table 4.29: Total income of household groups categorized by ethnicity and loan

sources (VND 1000 per household) .................................................................... 105

Table 5.1: Descriptive statistics for selected variables used in PCA .................. 113

Table 5.2: Results of Principal Component Analysis.......................................... 115

Table 5.3: Poverty outreach of rural credit.......................................................... 117

Table 5.4: Correlation coefficient between relative poverty scores and loan

amount ................................................................................................................. 118

Table 5.5. Depth of outreach based on the categories of exclusion .................... 119

Table 6.1: Description and assumptions of selected explanatory variables........ 126

Table 6.2: Difference in explanatory variables used in Bayesian credit model.. 132

Table 6.3: Probability of inclusion by Bayesian Model Averaging.................... 134

Table 6.4: Probit estimation of accessing overall credit ..................................... 136

Table 6.5: Determinants of credit volumes ......................................................... 138

Table 6.6: Probit estimation of accessing subsidized credit................................ 140

Table 6.7: Probit estimation of accessing Agribank credit ................................. 142

Table 6.8: Determinants of Agribank loan volumes ........................................... 143

Table 6.9: Probit estimation of accessing informal credit................................... 144

Table 6.10: Determinants of informal loan volumes........................................... 145

Table 7.1: Comparison of income between household groups without matching

(VND 1000 per household) ................................................................................. 157

Table 7.2: Income impact of rural credit on accessed households...................... 161

Table 7.3: Income impact of preferential credit on recipients ............................ 163

Table 7.4: Income impact of commerical credit by the Agribank....................... 167

Table 7.5: Income impact of informal credit on accessed households................ 170

x LIST OF FIGURES

LIST OF FIGURES

Figure 1.1: Agricultural credit share in total national credit disbursed (%) ........... 2

Figure 2.1: GDP, credit and inflation growth in Vietnam (%) ............................... 8

Figure 2.2: Real GDP structure by economic sectors (%) ...................................... 9

Figure 2.3: Vietnam‘s exports by products in 2005 and 2010 .............................. 10

Figure 2.4: Labour forces and the structure of poverty in Vietnam...................... 18

Figure 2.5: Demand for credit and other financial services of low income

population .............................................................................................................. 19

Figure 2.6: Rural credit suppliers in Vietnam....................................................... 20

Figure 2.7. Market share of main credit suppliers (%) ......................................... 22

Figure 3.1: The triangle of credit .......................................................................... 27

Figure 3.2. Marginal returns to capital of poorer and wealthier households........ 28

Figure 3.3: The problem of information asymmetries in rural credit market ....... 30

Figure 3.4. Credit cycle ......................................................................................... 42

Figure 3.5. Access to credit influences household income ................................... 45

Figure 3.6: Evaluation basic for welfare impact of credit..................................... 47

Figure 3.7. The conceptual framework of the study ............................................. 58

Figure 4.1: Map of the research area and selected provinces ............................... 60

Figure 4.2: Ethnicity structure in the Northern Mountains of Vietnam................ 62

Figure 4.3: Share of households with access to different credit sources .............. 66

Figure 4.4: The share of households with access to extension services by source of

loans (%)................................................................................................................ 79

Figure 4.5: Loan amount by extension access ...................................................... 82

Figure 4.6: Types of shocks and number of affected households......................... 87

Figure 4.7: Distribution of shock losses across household categories.................. 89

Figure 4.8: Share of risk losses in total income across household groups (%)..... 91

Figure 4.9: Share of households with and without savings categorized by loan

sources (% of households)..................................................................................... 95

Figure 4.10: Share of savings in total household income (%) ............................. 99

Figure 4.11: Poverty headcount (%) for the Kinh majority versus ethnic minorities

in Vietnam ........................................................................................................... 101

Figure 4.12: Distribution of households in terms of credit sources and ethnicity

............................................................................................................................. 102

Figure 4.13: Distribution of loan amounts categorized by ethnic groups........... 103

Figure 7.1: Box plot for income distribution across household groups.............. 159

Figure 7.2: Income impact per VND million of credit........................................ 171

LIST OF ACRONYMS AND ABBREVIATIONS xi

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LIST OF ACRONYMS AND ABBREVIATIONS

ADB Asian Development Bank

AMK Angkor Mikroheranhvatho Kampuchea

ANOVA Analysis of variances

ASA Association for Social Advancement

ATTE Average Treatment on Treated Effect

BARC Bangladesh Rural Advancement Committee

BIC Bayesian Information Criterion

BMA Bayesian Model Average

BRI Bank Rakyat Indonesia

CEP Capital Aid Fund for Employment of the poor

CIEM Central Institute for Economic Management

DANIDA Organization of the Danish International Development Assistance

DOI Depth of outreach indicator

FAO Food and Agricultural Organization

FSS Financial self-sustainability

GDP Gross Domestic Product

GNI Gross National Income

GSO General Statistics Office of Vietnam

ILSSA Labor Science and Social Affairs

ISPARD Institute for Policy and Strategy for rural development

KMO Kaiser-Meyer-Olkin measure of sampling adequacy

MFI Microfinance Institution

MRA Micro-Credit Regulatory Authority

NGO Non-governmental Organization

NRM Northern Mountainous Region

OSS Operational self-sustainability

PCA Principal Component Analysis

PCF People's Credit Fund

PKSF Palli Karma Sahayak Foundation

PPP Purchasing Power Parity

PSM Propensity Score Matching

ROSCA Rotating Savings and Credit Association

TYM Tao Yeu May

xii LIST OF ACRONYMS AND ABBREVIATIONS

VARHS Vietnam Access Resources Household Survey

VBARD Vietnam Bank for Agriculture and Rural Development

VBP Vietnam Bank for the poor

VBSP Vietnam Bank for Social Policy

VHLSS Vietnam Household Living Standard Survey

VND Vietnam Dong

WB World Bank