Access to credit and household income in the northern mountains of vietnam

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INTRODUCTION

Background of the study

Rural development plays a key role in reducing poverty in areas where most poor households rely on farming as their primary income source, empowering them to create wealth through small businesses, enhanced farming productivity, or employment opportunities Without access to economic independence, society wastes human capital and faces higher social costs, yet the main hurdle for the poor is their limited access to vital development resources Low education levels, limited skills, and restricted resource access perpetuate poverty among the disadvantaged Consequently, expanding access to financial services for the poor remains a critical issue for promoting inclusive growth and sustainable development.

Access to sustainable credit services has historically played a vital role in rural development, helping farmers expand production, create employment, and improve their welfare Studies, including GUIRKINGER (2008), highlight that credit access is a powerful tool for poverty alleviation by enabling farmers to purchase essential inputs like fertilizers, seeds, pesticides, and livestock feed, and invest in quality crops and livestock, thereby boosting productivity and income Despite these benefits, many underserved and poorest communities worldwide face limited access to credit, with credit outreach remaining notably low in these areas (ZELLER & SHARMA).

Nearly half of the world's rural poor households lack access to credit services, significantly limiting their economic opportunities In the Asia-Pacific region alone, over 300 million households face barriers to obtaining credit from both formal and informal sources, hindering their ability to invest in income-generating activities and improve their livelihoods.

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Statement of the problem

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

Source: G ENERAL S TATISTICS O FFICE OF V IETNAM (2012)

Despite implementing various policies to enhance access to credit, market failures in rural credit markets have resulted in significant credit restrictions for small household farms and the broader rural sector in Vietnam, as demonstrated by MARSH et al (2006).

According to the World Bank (2012), sustainable national growth relies on investing in all regions and communities For Vietnam, this principle is especially crucial, as the development of the Northern Mountainous Region is recognized as a vital part of the country's overall progress.

Digitalization is vital for national socio-economic development and ensuring national security Despite covering 28.79% of the country's total area and housing 12.83% of its population, this region remains the most disadvantaged, highlighting the urgent need for targeted development strategies.

The Northern Mountainous Region of Vietnam, home to most ethnic minorities, relies heavily on agriculture as their primary income source Despite its vital role, the region faces a significantly higher poverty rate—114.41% above the national average—and has limited access to credit schemes National statistics reveal that only 9.86% of the country's total outstanding loans are allocated to this region, in stark contrast to the Southeast Region and Mekong River Delta, which receive 49% of the loans, highlighting disparities in financial support.

Vietnam has made remarkable progress in reducing poverty over the past two decades; however, disparities persist, particularly in the Northern Mountains where poverty intensity remains significantly high.

The amount of literature recognizing the importance of rural credit in Vietnam has grown significantly in recent years For instance, CUONG (2008) and QUACH

The 2005 Vietnam Household Living Standard Survey (VHLSS) provides valuable insights into how access to credit impacts poverty reduction nationwide While these findings highlight the overall significance of credit schemes, their success often hinges on regional contexts that vary across Vietnam Notably, prior research on rural credit in Northern Vietnam, including studies by T Dufhues and Buchenrieder, underscores the importance of local factors in shaping the effectiveness of credit programs Tailoring credit initiatives to specific regional needs can therefore enhance their role in alleviating poverty.

Studies by Saint-Macary (2005) and Zeller (2012) highlight findings based on limited samples from select communes within one or two districts, emphasizing the need for further research To validate these initial conclusions, larger and more representative studies are essential for robust and generalizable results.

This study is driven by the limited understanding of whether rural credit, particularly subsidized credit, effectively alleviates poverty in disadvantaged rural areas Developing rural credit policies grounded in solid research is essential for achieving meaningful poverty reduction.

Objectives

This study highlights the critical role of rural credit in promoting sustainable rural development, emphasizing its importance and addressing existing issues It also identifies gaps in the current literature, aiming to bridge these knowledge gaps through focused research The primary objectives include analyzing the impact of rural credit on economic growth, examining challenges faced by borrowers, and proposing strategies to enhance the effectiveness of rural financial services for long-term developmental outcomes.

(1) To evaluate the extent to which rural credit serves poor households;

(2) To investigate determinants of credit accessibility by rural households;

(3) To estimate and assess the income impact of both formal and informal credit on credit recipients.

Hypotheses of the study

This study is based on following hypotheses:

Hypothesis 1: Credit targets the poor households as part of its contribution to national rural development and poverty reduction

Hypothesis 2: Rural households, especially poor ones, continue to experience constrained access to credit

Hypothesis 3: There seem to be various reasons explaining the poverty reduction in Vietnam in the last two decades One of these argues that the decrease in poverty may be due to the provision of credit to rural households, especially the government policy targeting credit at reduced rates to the most vulnerable groups of society.

Scope and limitations of the study

Credit issues among rural households in Vietnam are shaped by broader macroeconomic policies and lender characteristics, yet this study specifically focuses on the household level The research is concentrated on the Northern Mountainous Region of Vietnam, highlighting how local factors influence credit access and challenges within this area.

Formal credit is categorized into preferential and commercial credit, but this distinction is quite relative as it varies across regions and contexts; a credit source deemed preferential in one area might be non-preferential elsewhere Additionally, formal credit policies are subject to change over time, reflecting evolving economic conditions and regulatory environments This classification aims to differentiate credit based on its nature and the specific households targeted, helping to clarify the purpose and impact of different credit types.

This study focuses solely on cross-sectional data from rural households, which limits its scope in analyzing the long-term effects of credit, including poverty reduction, credit accessibility, and year-over-year impacts of borrowing.

Contribution of the study

This study enhances the existing literature by addressing gaps in rural credit research, particularly in poverty targeting, access constraints, and impact While these components are often assumed to be reflected in the overall credit system, few studies comprehensively examine their interrelations Understanding poverty targeting is crucial to assessing how effectively rural credit reaches the poor; when households with high credit needs are overlooked, their opportunities to improve income and reduce poverty are limited Investigating the determinants of credit access further clarifies the barriers faced by rural households in benefiting from credit programs.

Access to digital resources is crucial in shaping effective credit schemes, supporting the development of rural financial systems Additionally, poverty reduction remains a central element for achieving sustainable growth in rural communities through targeted credit strategies.

This study explores credit access and success factors in a rural disadvantaged region of Vietnam, highlighting that the effectiveness of credit depends on specific conditions benefiting recipients It emphasizes the need to differentiate between formal and informal credit sectors, as each has distinct targeting policies, loan characteristics, and recovery strategies Understanding these differences is crucial for analyzing the unique challenges and opportunities associated with various loan sources in rural contexts.

This research employs the Bayesian Model Average to effectively tackle model uncertainty, an aspect often overlooked in existing studies Utilizing advanced matching algorithms and bootstrapping techniques within the Propensity Score Matching (PSM) framework enhances the robustness and reliability of the estimation results.

Structure of the study

This study systematically explores Vietnam’s economy, focusing on the agricultural sector and credit system, with each chapter dedicated to key aspects The second chapter provides a comprehensive review of Vietnam’s economic landscape, agricultural industry, and financial infrastructure Chapter 3 establishes the theoretical and empirical framework, examining credit-related issues such as poverty outreach, access, and impact The fourth chapter details the characteristics of the research area and households in relation to credit behavior Chapter 5 analyzes poverty targeting efforts through formal and informal credit sources The sixth chapter addresses credit access problems using Bayesian Model Averaging within the Heckman Selection Model, investigating household participation and determinants of access The seventh chapter empirically assesses the impact of credit on household income through Propensity Score Matching algorithms The eighth chapter synthesizes analytical results, discusses limitations, and considers policy implications for improving rural credit services in Northern Vietnam and comparable contexts, while proposing avenues for future research to deepen understanding of rural credit’s role and challenges.

AN OVERVIEW OF ECONOMY, POVERTY AND RURAL CREDIT

Geography

Vietnam, situated on the eastern edge of the Indochinese Peninsula, spans a total area of 331,210 square kilometers, making it the 65th largest country worldwide Covering the length of the peninsula, Vietnam borders the South China Sea to the east, Laos and China to the north, and Cambodia to the west Its strategic geographic location positions Vietnam as a key link between the Indian Ocean and the Pacific Ocean, enhancing its significance in regional transport and trade routes.

Vietnam is divided into six key geographic regions: the Red River Delta, Northern Mountainous Region, North Central and Central Coastal Areas, Central Highlands, South East, and Mekong River Delta The country’s two major cities are Ho Chi Minh City in the south and Hanoi in the north As of 2013, Vietnam’s population was approximately 89.7 million, with about 67.44% living in rural areas The administrative structure includes 64 provincial cities, 49 urban districts, 47 towns, 548 rural districts, and 9,001 communes, reflecting its diverse and extensive territorial organization.

Macroeconomic performance

Before 1986, Vietnam operated under a command economy where the central government tightly controlled production, domestic, and international trade, with no commercial transactions among individual units such as households or enterprises Agricultural activities were organized through solidarity groups and cooperatives that shared land and equipment, with income distribution based on a work point system However, this economic model limited household incentives, hindering the growth of production and productivity improvements.

In 1986, Vietnam introduced the economic reform widely known as ―Doi Moi,‖ which has facilitated the transition from a centralized and command economy to a

A key aspect of the socialist-oriented market economy involved restructuring ineffective agricultural collectives, leading to the encouragement of autonomous household production units capable of selling goods in the marketplace This reform has significantly contributed to economic growth, rising income per capita, and improved life expectancy, highlighting its positive impact on overall development.

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Table 2.1: Development indicators of Vietnam

Life expectancy at birth, total (years) 74.47 74.77 75.04 75.31 75.61

2.2.2 GDP, credit and inflation in Vietnam

Between 2001 and 2006, Vietnam’s macroeconomic stability was notable, with average GDP growth of 7.5% and inflation remaining below 10% The country’s accession to the World Trade Organization in 2007 spurred substantial foreign investment, leading to a surge in credit growth from 25.3% in 2006 to 54.0% in 2007 However, post-2007, Vietnam experienced economic instability characterized by rising inflation and interest rates The 2008 global financial crisis further impacted the economy through high inflation, increased unemployment, and slowing growth The agricultural sector faced additional challenges due to volatile commodity prices, complicating rural financial markets In response, the government adopted a tight fiscal policy to reduce public spending and narrow the budget deficit, which resulted in a sharp decline in credit growth The collapse of the real estate market in 2012 caused a significant reduction in credit availability across the economy.

In 2013, numerous real estate projects failed to sell, resulting in defaults on real estate loans and an increase in bad debts This cascade of financial issues diminished lending opportunities within the banking system, highlighting the impact of sluggish property markets on financial stability.

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

2.2.3 Economy’s structure share in Vietnam

Since transitioning from a central planned economy, Vietnam has embraced industrialization, modernization, and global integration, fostering open-market policies to attract foreign investment The industrial, construction, and service sectors now play a vital role in contributing to the country’s GDP, with key industries including food processing, textiles, chemicals, tobacco, and electrical products By 2010, the service sector represented 38% of Vietnam's GDP, reflecting its expanding economic diversity Additionally, Vietnam is recognized as one of Asia’s top 25 most attractive tourist destinations, with popular cities like Hanoi, Ho Chi Minh City, Hoi An, and Ha Long attracting millions of visitors annually.

In 2010, the agricultural sector remained vital to the national economy, with a total value of agricultural, forestry, and fishery products around USD 14.5 billion, representing 20.23% of GDP—a 3% decline from 2000 Despite its significant contribution, the sector’s low productivity is reflected in the high employment rate relative to its economic output, underscoring that most rural populations and the poor rely primarily on farming for income Additionally, rural financial institutions’ savings and loan portfolios are closely tied to agriculture, as clients’ incomes from this sector influence their financial stability, even if they work in other industries.

GDP growth Inflation Credit growth

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

Agriculture and Poverty

Despite efforts to industrialize, Vietnam's economy remains predominantly driven by agriculture, which has seen the most successful reforms Between 2001 and 2011, the agricultural sector—including crops, livestock, forestry, aquaculture, and fisheries—contributed 20% of GDP, generated 30% of export revenue, and employed 60% of the population Key policies initiated in 1986, such as land allocation to households and market incentives for agricultural products, have enhanced the sector’s growth potential and rural development Agricultural growth averaged 4% annually, with the sector producing 558.4 trillion VND in 2011, accounting for 22% of total GDP and contributing approximately 0.66 percentage points to GDP growth Overall, agricultural output increased significantly from 2001 to 2011, reflecting sustained development in Vietnam’s agricultural sector.

Table 2.2: Production of main agricultural commodities

In 2010, Vietnam's exports accounted for approximately 70% of its GDP, highlighting the country's heavy reliance on international trade Key export commodities included textiles, sewing products, crude oil, footwear, electronic goods and components, wood and wooden parts, and coal, reflecting a diverse industrial sector Agricultural exports generated USD 15.65 billion, representing 21.7% of total exports, with rice, coffee, rubber, timber products, and fishery products leading the list; notably, rice exports reached USD 3.2 billion, and fishery products USD 2.7 billion Between 2005 and 2010, the export values for these major goods experienced significant growth, emphasizing Vietnam’s expanding export capacity and evolving economic landscape.

Figure 2.3: Vietnam’s exports by products in 2005 and 2010

Coal Coffee Rubber Rice Wood and wooden products

Footwear Crude oil Textile, sewing products

Between 2001 and 2011, the proportion of workers in Vietnam's agricultural sector declined from nearly 80% to around 60%, reflecting an average annual reduction of 2% From 2006 to 2011, this share decreased by 10.9%, or approximately 2.19% annually, highlighting a significant shift towards industrialization and modernization By 2011, the agricultural workforce had decreased by 2.37 million, representing a 10% decline compared to 2006, which underscores the ongoing transformation of Vietnam's economic structure away from agriculture.

Table 2.3: Rural labors in Vietnam 2001-2011

1 Laborers in agriculture, forestry and fishery sectors (1000 labors)

2 Share of laborers in agriculture in total labor forces (%)

Land is a vital resource for agricultural productivity and income generation among Vietnamese farmers However, land fragmentation remains a prevalent issue, characterized by farm sizes being divided into multiple smaller plots within households By 2012, Vietnam managed 26.21 million hectares of agricultural land, representing 75% of the country’s natural area, with over 10 million households engaged in farming Despite this, average landholdings are small; nearly 60% of farm households cultivate less than 0.5 hectares, and 34.7% hold less than 0.2 hectares Typically, each household owns about five separate plots of land, with approximately 10% of these plots being smaller than 100 square meters, highlighting the degree of land fragmentation across rural Vietnam.

The Statistics Office of Vietnam (2012) indicates that agricultural land in the Southern Region is generally less fragmented compared to the North, which positively impacts the adoption of modern machinery Land fragmentation remains a significant challenge, limiting the use of advanced plowing and harvesting equipment, and thereby hindering productivity improvements in the region.

In Vietnam, approximately 70% of the population resides in rural areas, with the government making significant strides in poverty reduction over the past two decades Using a "basic needs" poverty line, the national poverty rate declined dramatically from 58% in 1993 to below 10% in 2010 According to 2010 data from GSO-WB, the country’s overall poverty and extreme poverty rates were 20.7% and 8%, respectively, with the majority of the impoverished population living in rural regions—accounting for 91.4% of poverty and 94.4% of extreme poverty.

Table 2.4: Poverty headcount and composition by regions and sector in 2010 (Based on General Statistics Office- World Bank poverty line)

Poverty Extreme poverty Share of population Index (%)

The Northern Mountains and Central Highlands exhibit significantly higher poverty rates, likely due to limited access to essential agricultural services such as credit, extension programs, and market information Conversely, wealthier households are predominantly found in the Red River Delta and Southwest regions, indicating regional disparities in economic well-being and access to supportive resources.

Vietnam ranks among the ten countries most affected by weather disasters globally, with natural calamities severely impacting its agricultural sector (NATIONS, 2010) The sector faces a range of risks including natural disasters, pests, and diseases, which threaten crop yields and livestock health Extreme weather events such as cold spells, storms, floods, and heavy rains cause significant damage, leading to economic losses that amount to nearly 1.5% of Vietnam's GDP Rural communities and small-scale farmers, especially the impoverished, are the most vulnerable to these shocks (GLOBALAGRISK, 2009) Despite these challenges, Vietnam holds considerable potential for developing agricultural insurance; however, this sector remains underdeveloped due to limited attractiveness for insurance companies.

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

In 2012, rural households' participation in agricultural insurance was remarkably low, with only 0.8% of households holding such coverage (GSO, 2012) Furthermore, coverage of livestock was minimal, with just 0.24% of cattle, 0.10% of pigs, and 0.04% of poultry insured, highlighting significant gaps in agricultural risk protection across rural communities.

The limited growth of agricultural insurance in Vietnam over the past two decades can be attributed to high risk exposure and significant financial losses faced by insurance providers Many insurers, including Vinare, Bao Viet, and Swiss Re, reported substantial losses, with indemnity payments vastly surpassing premium collections For example, Bao Viet’s pilot rice insurance program from 1983 to 1998 covered nearly 200,000 hectares, yet its compensation costs of 14.4 billion VND exceeded the premiums of 13 billion VND, leading to the program’s cessation in 1999 Currently, Bao Viet only insures rubber trees, dairy farms, and limited fisheries Similarly, Groupama, a French insurer with over a century of agricultural insurance experience, withdrew from the Vietnamese market in 2004 due to inadequate revenue and large compensation costs These issues underscore the challenges facing agricultural insurance expansion in Vietnam, mainly driven by unprofitable losses and high risk exposure among farmers.

Rural credit in Vietnam

2.4.1 Brief history of rural credit policy in Vietnam

A stable and positive macroeconomic environment is essential for the success of financial systems, according to Gonzalez-Vega (2003) This article reviews Vietnam’s rural credit development policies, highlighting how effective policy frameworks can support financial stability and foster growth in rural areas.

Following Vietnam’s independence in 1975, the economy was dominated by a central planning or command model, characterized by collective ownership and heavily regulated market transactions that remained underdeveloped By the mid-1980s, Vietnam operated approximately 7,200 credit cooperatives that mobilized savings and extended credit primarily within ineffective state-led production sectors The banking system was mainly passive, with the state bank functioning as both a commercial and central bank, allocating loans based on central government plans that proved inefficient Households were excluded from borrowing, causing a lack of incentives that hampered economic growth, while credit to government projects often resulted in high default rates This inefficient financial system contributed to declining agricultural and commodity production, hyperinflation, and economic collapse, including the failure of credit cooperatives Severe food shortages, trade deficits, aid reductions, high inflation, and falling per capita income collectively challenged Vietnam’s economic stability during this period.

2.4.1.2 Replacement of the mono-tier banking system after 1986

Amid the economic upheaval of the 1980s, Vietnam faced significant policy challenges, prompting the government to implement "Đổi Mới" or "renovation," a transformative policy opening the economy to market transactions This shift recognized households as "independent economic units" capable of taking loans, while the 1993 land law introduced four land use rights—sale, lease, inheritance, and mortgage—empowering households to finance farming and enhance production The new policies replaced administrative allocations with market-based purchases of inputs and sales of agricultural products, fostering the growth of millions of households and private enterprises Consequently, rice production surged, making Vietnam the world's second-largest rice exporter by 1996, vastly improving farmers' living conditions.

In 1988, China overhauled its banking system by replacing the mono-tier structure with a central bank supervising four state-owned commercial banks, marking a shift towards market-oriented reforms This reform restricted credit supply primarily to more efficient state-owned enterprises, while restoring private businesses and farm households to their traditional roles as self-reliant, self-financed agents As a result, the country's economic growth and financial stability saw significant improvement By 1990, China established a legal framework for its financial system, delineating the central bank’s role to focus solely on monetary policy and financial regulation design, further strengthening the foundation for a modern financial sector.

In 1993, former credit cooperatives from the command economy were restructured into the network of People’s Credit Funds (PCF), modeled after Canada’s Desjardins Group community savings and credit cooperatives Following the government’s implementation of a two-tier banking system, most of these cooperatives faced bankruptcy, leaving only 78 surviving entities that served approximately 800 people’s credit funds (SEIBEL, 1996) Today, People’s Credit Funds continue to provide essential financial services to local communities and operate under cooperative laws, maintaining their foundational role in supporting rural and municipal economies.

1042 funds operating in 10% of total communes Those funds have served 1.7 million members, of which 50% of members are low-income households (TAM,

PFCs in 2013 primarily relied on self-help and self-financed strategies, with 85% of their capital sourced from internal funds Their focus was predominantly on extending credit to wealthier households to achieve financial sustainability As a result, access to credit for poorer households significantly declined, highlighting a gap in financial inclusion for vulnerable populations.

In 1995, the National Assembly approved the Civil Code, establishing regulations for the relationship between lenders and borrowers, including lending procedures, repayment terms, interest rates, and dispute resolution This legislation officially recognized and regulated private lending and credit markets, ensuring legal clarity for all parties involved Borrowers are obligated to repay loans, while the government encourages private lenders to extend credit, fostering the development of a structured and reliable private credit system.

2.4.1.3 The separation between preferential and commercial lending

Hunger eradication and poverty alleviation prompted the establishment of Vietnam Bank for Agriculture and Rural Development, initially emerging from the mono-tier banking system in 1988 and rebranded as Vietnam Bank for Agriculture in 1990 The bank's primary goal is to offer loans to households, small and medium enterprises, and farmers in rural areas, while also expanding its services to urban clients to increase market share Its focus is on providing credit to wealthier households, farms, and enterprises to support economic development.

In 2008, 45% of deposits were mobilized from urban areas, while 55% originated from rural communities Today, it stands as the leading credit provider in Vietnam's rural regions, offering comprehensive financial services that include both credit and savings products Serving a total of 10 million client households, approximately 4.7 million are classified as lower-income households, highlighting its significant role in supporting financial inclusion for Vietnam's underserved populations.

Access to credit remained a significant challenge for rural populations in Vietnam, as the poor were unable to borrow from the agricultural bank, perpetuating their poverty (IZUMIDA, 2003) This persistent issue prompted the establishment of the Vietnam Bank for the Poor (VBP) in 1995, aimed at providing financial support to underserved rural communities and alleviating rural poverty.

VBP initially operated as a fund managed by the Vietnam Bank for Agriculture and Rural Development (VBARD), offering preferential loans predicated on the belief that the poor could not afford market interest rates These loans were limited in resources, hindering the poor's ability to expand production and improve food security In 1997, Vietnam introduced a law on credit institutions, tasking the State Bank of Vietnam with establishing a specialized, non-profit bank dedicated to providing preferential credit to the poor, fostering their business and production development.

In 2003, the Vietnam Bank for Social Policies (VBSP) was officially established as an independent bank, focusing on serving the poor and vulnerable groups through dedicated branches aligned with government initiatives VBSP disburses preferential loans without collateral requirements, such as land use certificates, to ensure accessible financial support By the end of 2003, the bank had provided these targeted loans to 3.3 million clients, demonstrating its commitment to social welfare and financial inclusion.

1 million were poor Since 2010, the bank has disbursed loans to all districts and 98% of all communes in the country (TAM, 2013)

2.4.1.4 Incorporation of microfinance institutions in the financial system

In 2005, Vietnam introduced Decree 28 to regulate the organization and operation of microfinance institutions (MFIs), positioning them as credit institutions managed by the State Bank under the 2010 law of credit institutions and emphasizing their social mission to provide sustainable financial services This decree opened avenues for MFIs to access external donor funding but limited their service scope until official licensing was secured, with ownership restricted to local mass organizations like women’s unions, farmers’ unions, and NGOs, restricting private sector participation and making access to commercial funding more challenging for smaller MFIs due to high minimum capital requirements In response, Decree 165/2007/ND-CP replaced Decree 28, lowering the legal capital requirement to 5 billion VND (approximately US$313,000), allowing MFIs to seek equity from donors, and mandating compliance with standards set by the central bank regarding staff qualifications and financial audits, which facilitated greater financial access but shifted the focus towards financial sustainability over expanding services to the poor.

In 2012, Vietnam's government launched a microfinance sector development project spanning 2011-2020, aimed at strengthening microfinance institutions (MFIs) to become self-financed entities This initiative encourages MFIs to balance their social missions with market-oriented financial products, marking a significant policy breakthrough in recognizing microfinance’s role in poverty alleviation Supported by USD 40 million in preferential loans and technical assistance from the Asian Development Bank, the project prioritizes enhancing MFI capacity to meet the financial needs of poor households across Vietnam.

2.4.1.5 Priorities for lending agricultural and rural sector

In 2008, Vietnam’s Communist Party adopted Resolution 26, highlighting the critical role of agriculture, farmers, and rural sectors in driving national socio-economic development To support this, policies were implemented to ensure access to favorable credit for farmers and rural communities The establishment of the National Microfinance Steering Committee in 2009 marked a move toward developing a market-based microfinance industry Additionally, Prime Ministerial Decision 477 in 2009 regulated preferential interest rates for agricultural loans, while Decree 41 in 2010 increased the limit for free collateral loans to 50 million VND for farm households, further boosting rural credit access.

200 VND million for non-farm households, and 200 VND million for agricultural cooperatives

Summary of the chapter

Vietnam's economy has evolved significantly over the past two decades, showcasing a resilient and dynamic rural sector The country has achieved notable progress in national income per capita and human development indices, driven by improvements in agriculture and rural productivity The agricultural sector now plays a vital role in ensuring food security and boosting exports, reflecting the strength of Vietnam’s economic structure Despite these advances, persistent challenges remain in promoting sustainable rural development, especially for the rural poor—most of whom are ethnic minorities living in remote, mountainous regions Addressing these disparities is key to Vietnam’s continued economic growth and social cohesion.

The evolution of Vietnam’s rural credit system has been shaped by significant government policy changes, transitioning from credit cooperatives serving state enterprises before 1986 to a market-oriented financial structure post-reform The collapse of the planned economy exposed inefficiencies and the lack of market incentives within the credit system, prompting reforms that restructured credit cooperatives into commune-based credit funds governed by cooperative laws and market principles Special credit programs aimed at supporting vulnerable populations were separated from commercial credit, alongside land use reforms incentivizing farmers to expand production and access credit Currently, Vietnam’s rural credit landscape comprises formal, semi-formal, and informal sectors, highlighting the close link between credit development and economic growth Effective legal frameworks are vital for fostering rural credit expansion, yet despite these reforms, credit supply still falls short of rural residents' demand, emphasizing ongoing challenges in the sector.

THEORETICAL AND EMPIRICAL FOUNDATIONS OF THE STUDY

Concept of credit and general issues

Understanding the concept of credit is essential; the term originates from the Latin word "Credo," meaning "I believe," highlighting the trust involved Credit involves lenders providing funds to borrowers based on the expectation of repayment by a specified date or period, including interest or the cost of credit While various credit concepts exist, only two are predominantly used in current financial literature, emphasizing their significance in lending practices.

Credit, as defined by Singh (2000), refers to a financial facility that allows individuals or businesses to borrow money for purchasing products, raw materials, or components, with the repayment extended over time It is closely linked to creditworthiness, symbolizing honor and financial standing, reflected through entries on the credit side of accounts The terms “credit” and “loans” are used interchangeably; a loan specifically involves advancing a certain amount of cash or goods to a borrower by a lender or financial institution, which profits from the interest charged on the borrowed amount.

According to a definition provided by BARRY AND ROBISON (2001), credit is a

Understanding a firm’s borrowing capacity and how it utilizes debt capital is crucial for effective financial management This concept encompasses modern credit perspectives, including agency theory, transaction costs, incomplete contracting, and property and control rights These factors play a significant role in assessing the performance of rural credit markets, shaping how financial institutions and borrowers navigate credit availability and utilization effectively.

In the rural credit market, lenders extend loans to rural households under the assumption that credit benefits farmers capable of repaying them This lending process is influenced by the principal-agent theory, transaction costs, information asymmetry, seasonal production cycles, and household cash flow dynamics, all of which impact the availability and terms of rural credit (Conning & Udry, 2007).

Credit may be classified in different types on the basis of use purpose, security, mature period, liquidity and contact with farmers (SINGH, 2000)

Credit serves multiple purposes, including supporting both farm and non-farm activities, as well as family expenditures Farmers primarily seek credit to invest in production inputs like seeds, fertilizers, pesticides, wages, and other vital variable costs, which can enhance agricultural productivity and expand farm operations Conversely, consumption loans are often used for personal needs such as medical expenses, education, food, and ceremonies, which are generally considered unproductive in terms of economic growth.

Credit duration is categorized into short-, medium-, and long-term loans based on repayment periods Short-term loans, with repayment periods of less than one year, are typically used for purchasing variable inputs like fertilizer, seed, and chemicals Medium-term loans, repayable over one to two years, often finance assets such as implements, cattle, irrigation systems, and land development Long-term credit, usually with repayment periods of three years or more, is intended for major farm improvements including land leveling, constructing farm buildings, or purchasing tractors.

Loans can be categorized into secured and unsecured types, with unsecured loans relying solely on the borrower's creditworthiness and trust between borrower and lender, without any collateral Secured loans, on the other hand, often involve collateral security, such as land certificates or valuable assets, providing the lender with additional security They can also include personal security, where the borrower personally guarantees the loan, with or without the involvement of a third-party guarantor Understanding these classifications helps borrowers choose the right loan based on their security preferences and financial situation.

Loans can be categorized based on liquidity into self-liquidating and partially liquidating types Self-liquidating loans enable farmers to repay the entire loan within the same season or year through income generated from the loan, ensuring quick repayment Conversely, partially liquidating loans are repaid over a longer period, with the income covering only a portion of the loan, leaving the remaining balance to be paid off over time These classifications are essential for understanding loan repayment dynamics in agricultural finance.

Loans to farmers are typically classified into two categories: direct and indirect loans Direct loans, such as term loans, are provided directly to farmers by institutional agencies to support their agricultural needs In contrast, indirect loans involve institutional agencies that do not lend directly to farmers but instead indirectly benefit them through financial mechanisms or support programs that facilitate access to funding.

Digitalization by the Learning Center – TNU (http://www.lrc.tnu.edu.vn) facilitates financing for enterprise activities, including funding fertilizer manufacturing companies, supporting the construction of warehouses, and developing market yards, thereby enhancing overall business development and infrastructure growth.

Zeller and Meyer (2002) highlight the significance of the credit triangle, comprising sustainability, outreach, and impact Financial sustainability ensures credit institutions operate independently without relying on donor funds or government subsidies Outreach focuses on expanding the reach to include both broader and deeper segments of the underserved, particularly targeting a growing number of rural poor The impact component emphasizes that credit provision should positively influence household welfare, ensuring that lending translates into tangible benefits for communities.

Figure 3.1: The triangle of credit

The components of the credit triangle are interconnected, with increased outreach to rural clients enhancing a credit institution’s financial sustainability by expanding its borrower base and diversifying service offerings such as credit, savings, and insurance While deeper outreach can lead to positive impacts like improved repayment rates and higher profits, it also presents short-term trade-offs, including higher transaction costs and potential declines in repayment rates that challenge sustainability Achieving all aspects of the credit triangle simultaneously is complex, and the prioritization of specific components depends heavily on the institution's development goals and local circumstances Ultimately, these components can complement each other in the long run, even if trade-offs occur in the short term.

3.1.4 Challenges for the provision of credit to rural households

3.1.4.1 Principle of marginal return to capital

In economics, diminishing marginal returns to capital mean that smaller, lower-capital firms can achieve higher returns on their investments compared to larger, wealthier firms Consequently, less wealthy firms are often charged higher interest rates to access credit, reflecting their higher potential returns This principle suggests that in rural credit markets, loans tend to flow from wealthier households to poorer ones, as the latter have a greater return on additional capital and are willing to pay higher interest rates.

Figure 3.2 Marginal returns to capital of poorer and wealthier households

Source: Adapted from A RMENDÁRIZ and M ORDUCH (2010)

Providing credit to the poor remains heavily restricted due to various challenges such as information asymmetry, the unique characteristics of agricultural production, complex principal-agent relationships in rural credit markets, and high transaction costs, which all hinder access to financial services for vulnerable populations.

Marginal return for poorer households

Marginal return for wealthier households

Information asymmetry in contract theory and economics occurs when one party possesses more or superior information than the other, leading to an imbalance of power and potential transaction failures (Durlauf & Blume, 2008) This phenomenon is a key factor behind credit exclusion faced by the poor, often resulting from information gaps that hinder their access to financial services and credit opportunities.

Poverty outreach of credit

3.2.1 Depth of outreach concept and measurement

"Depth of outreach" in the literature refers to the extent to which financial services target the poorest populations CONNING (1999) highlights two dimensions—breadth and depth—that together define outreach; where breadth focuses on the number of clients served, and depth emphasizes reaching the poorest segments Essentially, outreach involves efforts by lenders to expand the number of clients, particularly those at the lower end of the income spectrum Meyer et al (2000) specifically describe depth of outreach as the degree to which credit institutions penetrate deeper into the income distribution Both Navajas et al (2000) and Schreiner emphasize that measuring depth is crucial for evaluating the inclusiveness of microfinance initiatives.

The depth of outreach is primarily determined by the societal value placed on the benefits derived from credit use by clients Societies that prioritize supporting the poor tend to use poverty levels as a key indicator of outreach depth In this context, outreach depth refers to the poverty status of credit recipients, reflecting how inclusive financial services are in addressing the needs of the poorest populations.

Measuring the poverty outreach of credit is essential for assessing how effectively financial services serve low-income populations Current literature identifies three primary approaches used to evaluate the depth of outreach by credit institutions: these methods help determine how well credit initiatives address the needs of the poor and foster financial inclusion.

This article explores an approach to assessing loans based on their characteristics and benefits to borrowers, highlighting key aspects such as depth, which reflects society’s valuation of the net gains from credit use; benefit, indicating how much borrowers are willing to pay for a loan; and cost, covering both price and transaction expenses incurred by borrowers Additionally, it considers breadth, defined as the total number of loan recipients, and length, which pertains to the timeframe in which a credit organization provides loans Finally, scope refers to the variety of financial contracts offered by the lender, providing a comprehensive view of loan features and their outreach capabilities.

There is a clear relationship between outreach dimensions and the social benefits of credit, as outlined by Schreiner (2001) Key factors include the worth of credit, which reflects borrowers’ willingness to pay interest and associated costs based on the benefits they derive—such as supporting life cycle events or seasonal agricultural needs—all of which are challenging to measure directly The cost to borrowers, comprising interest rates and transaction fees, influences the extent of credit outreach; lower costs typically enable broader access among the poor The depth of outreach indicates how deeply credit reaches impoverished populations, often gauged by loan size, with smaller loans presumed to serve the poorest clients unwilling to assume larger risks Outreach breadth, determined by demand and institutional capacity, is measured by the number of clients served, while the length of credit provision underscores the importance of ongoing access for the poor Additionally, the scope reflects the variety of financial products and services tailored to diverse client needs Overall, each aspect of outreach is interconnected and impacts the social welfare benefits derived from credit usage.

The second approach focuses on depth of outreach indicators (DOI), which assess how effectively credit institutions serve underserved populations DOI is typically measured through indirect proxies like recipient gender, location, education level, and ethnicity, highlighting social commitments to marginalized groups For instance, serving women, rural residents, less educated individuals, and minorities demonstrates the institution's ability to reach deeper into underserved communities This measure reflects the extent to which credit providers penetrate the pool of underserved residents, such as in the case of Julia, exemplifying targeted outreach efforts.

Paxton and Cuevas (2002) analyzed the outreach and financial sustainability of three credit unions and two village banking programs in Latin America by examining the percentage of clients who are poor, female, rural, and illiterate Their study highlights how these programs serve marginalized populations, emphasizing the importance of inclusive financial services The findings provide insights into how effectively these institutions reach vulnerable groups, supporting their role in promoting financial inclusion across Latin American communities.

Empirical studies often assess poverty outreach by comparing the relative poverty scores of program recipients to non-recipients, reflecting policymakers' and donors' focus on who benefits from interventions Meyer et al (2000) highlight that survey-derived indicators strongly correlate with the national poverty line, aiding in the calculation of relative poverty scores Selecting appropriate proxies such as per capita expenditure, housing index, and family size, and verifying their correlation with benchmark indicators like clothing expenditure, is essential The benchmark indicator serves as a reference point for assessing the validity of proxies, which can be analyzed effectively through principal component analysis to ensure their appropriateness in poverty measurement.

Proxies for estimating borrower poverty levels can be effectively evaluated using the Spearman rank correlation, which measures the accuracy of predictions This statistical method helps determine how well these proxies correlate with actual poverty status, ensuring more reliable assessments in financial analyses.

3.2.2 Empirical evidence on poverty outreach of credit

3.2.2.1 The extent to which credit serves the poor

Amid the global financial crisis, doubts have arisen regarding whether credit institutions are fulfilling their original mission of serving the poor Several empirical studies have been conducted to examine the role of microfinance and credit access for impoverished populations These studies aim to determine if providing credit to the poor is a viable strategy for promoting economic development or if it poses risks to financial stability The debate continues on whether extending credit to marginalized groups aligns with the fundamental goals of financial institutions in a challenging economic climate.

Research indicates that microfinance services often exclude the poorest populations, with several studies highlighting this gap AMIN et al (2003) found that in rural Bangladesh, microfinance has not reached credit-constrained households, especially the poorest THOMAS and SRIRAM (2002) observed that micro-credit programs in India are not effectively targeting the poorest of the poor In Pakistan, GHALIB (2011) reported that only 22% of households accessing microfinance in rural areas were among the poorest, with a larger share being middle poor or less poor Similar trends are evident in neighboring countries like Cambodia, where MILAN (2012) discovered that clients of AMK microfinance are generally wealthier than non-clients within the poorest groups Overall, microfinance initiatives tend to serve audiences above the poorest quintiles, leaving the most vulnerable populations underserved.

B E COLEMAN (2006), it was shown that the probability of richer rural people joining credit programs in northern Thailand is almost two times higher than that of the poorer rural people In a follow-up study, LI et al (2011a) found that most clients of credit cooperatives in rural areas of China are non-poor These credit programs have not reached the poor as much as the relatively wealthy The evidence presented in those studies showed that the poorest are not being targeted by microfinance institutions in accordance with their proclaimed commitments 3.2.2.2 Reasons explaining the credit exclusion of the poor

Several studies have examined why poor households are often excluded from credit access Typically, poor farm households are seen as less creditworthy, perceived as unable to save or repay basic loans from the lender’s perspective (Zeller & Sharma, 2000) This exclusion may also stem from the design of credit programs, such as requirements for clients to deposit a certain amount before receiving a loan, which can be beyond the capacity of the poor (Kirkpatrick & Maimbo, 2002; Mosley, 2001) Additionally, the poorest individuals may avoid taking loans due to fears of debt and perceptions of loans as risky, further limiting their access to credit (Ciravegna, 2005).

Credit exclusion often stems from the tradeoff between poverty targeting and financial sustainability for lenders A study by Stanton (2002) highlights a gap in Mexico where commercial banks’ lending practices favor wealthier households with collateral, offering larger loans to minimize transaction costs Meanwhile, lending to rural poor populations faces higher transaction costs, issues with asymmetric information, and competition from subsidized lenders, making it less accessible.

AWUSABO-ASARE et al (2009) analyzed the poverty targeting effectiveness of various financial institutions in Ghana, including rural and community banks, non-governmental organizations, savings and loans companies, Susu Associations, and Credit Unions Their findings reveal that rural banks and financial NGOs primarily serve extremely poor clients, while savings and loans companies and Susu collectors tend to offer loans to wealthier clientele above the average income quintiles Credit Unions generally provide credit to clients within the middle to higher income brackets Based on this analysis, the authors recommend developing tailored credit schemes to enhance financial access for the poorest populations.

The contribution by HERMES and LENSINK (2011) added to our understanding of the existence of a tradeoff between poverty outreach and financial sustainability

Access to credit

3.3.1 Concepts and approaches of analyzing credit accessibility

Credit access encompasses various concepts crucial for understanding what determines credit availability According to VAESSEN (2001), "outreach" focuses on the perspective of credit institutions, whereas "access" emphasizes the household level, specifically who receives credit Both outreach and access are centered on identifying credit beneficiaries, but household credit access involves multiple approaches commonly discussed in existing literature, highlighting the multifaceted nature of assessing credit availability for households.

Researchers have examined various factors influencing credit access, with Stanton (2002) employing a two-stage probit model to analyze farmers' loan application decisions The first stage assesses whether farmers decide to apply for a loan based on their capital needs; if the optimal capital to maximize profits exceeds their current holdings, they opt to borrow In the second stage, farmers choose their preferred credit sources by comparing the expected costs and benefits of each option, applying only if they anticipate a positive net benefit Similarly, Okten and Osili (2004) used a three-stage probit model to explore how family and community networks affect rural households' credit accessibility in Indonesia, highlighting the role of social factors alongside economic considerations.

Rungruxsirivorn (2011) conducted a multinomial logit regression to analyze farmers' decision-making process regarding the selection of various loan sources In a related study, Behr and Sonnkalb (2012) examined the number of loans granted per client to better understand borrowing behaviors and access to financial services among farmers.

Research by TOGBA (2012) highlights how lending relationships influence farmers' access to microcredit in Mozambique, emphasizing the importance of understanding formal and informal credit application factors Utilizing the Heckman Selection Model, the study analyzed household decisions in Côte d'Ivoire, revealing key determinants of credit access Overall, these studies demonstrate that observed participation and credit volume are essential indicators when evaluating factors affecting access to microfinance.

DIAGNE et al (2000) introduce the concept of credit limit, which represents the maximum borrowing capacity a lender is willing to offer to potential borrowers This approach provides a framework for analyzing household credit access in developing countries, emphasizing that a household can access credit only if it can secure a positive loan amount from a specific source Lenders set interest rates based on borrower characteristics and default risk, but remain hesitant to lend to less creditworthy individuals, regardless of the interest rates offered Consequently, borrowers encounter a credit limit that is largely unaffected by interest rates or collateral availability.

Several studies have employed the concept of credit limit to examine credit access constraints at the household level For example, ZELLER and SHARMA (2002) analyzed factors influencing rural households in Bangladesh, gathering data on the maximum credit each adult household member could borrow from formal and informal sources, either at the time of borrowing or as a potential higher amount The household’s total credit limit is calculated as the sum of individual limits, highlighting the role of multiple household members in credit access Similarly, SWAMINATHAN et al (2010) used credit limits to assess how access to credit affects labor allocation within households in Sub-Saharan Africa, emphasizing an approach that considers all adult members rather than only the household head However, this method faces limitations, such as not specifying credit sources precisely and relying on estimated credit volumes, which introduces uncertainty versus actual observed amounts.

Credit access refers to a household’s ability to obtain a loan, regardless of the actual amount borrowed, distinguishing between potential access and active participation; households with access can borrow if they choose, whereas those who borrow are participants in a credit scheme Many households with access may opt not to take loans, while others may seek loans but be unable to access them, highlighting the complexities of credit availability and use (DIAGNE et al., 2000; HAZARIKA & ALWANG, 2003).

SARANGI, 2008) As with credit limit, this approach is also based on the subjective assessment of households rather than their actually observed credit transactions

A contract theory model between lenders and borrowers offers a valuable approach to understanding credit access, as demonstrated by GINÉ (2011), who examined Thailand’s rural credit market By considering key features such as limited enforceability and fixed transaction costs, the study highlights how the enforcement of private contracts and property registration significantly enhance access to formal sector credit.

3.3.2 Empirical determinants of credit access at household level

Understanding the key factors influencing credit access for rural poor households is essential for designing effective credit schemes Research by Zeller and Sharma (2002) highlights that higher educational levels among female household members significantly increase the likelihood of accessing credit, as schemes often target women who possess better financial knowledge and earning potential Additionally, the age of the household head impacts credit access, reflecting their health and experience, which are vital during their most productive years Family size also plays a role, representing an important aspect of household human capital that can affect credit eligibility and utilization.

Research by Izumida (2002) indicates that larger household sizes with more dependents tend to face difficulties in accessing formal credit Conversely, households with a greater number of adult males benefit from increased credit access, as these individuals are primary sources of future household income Additionally, F N Okurut (2006) provides an in-depth analysis of credit accessibility, emphasizing the influence of household composition and economic contributions on borrowing opportunities.

KHALID (2003) showed that age, gender, household size, educational level, ethnicity are determinants of households access to formal credit in South Africa and Tanzania

Household physical capital is an important factor in maintaining credit access

ZELLER and SHARMA (2002) highlight farm size as a key factor influencing access to both formal and informal credit However, they observe that actual loan volumes are often unaffected by farm size, primarily due to household shortages of crucial inputs such as fertilizer, pesticides, agricultural extension services, and irrigation Additionally, infrastructure challenges, particularly inadequate road systems, further hinder agricultural development and access to credit.

Improved road connectivity in rural areas enhances credit accessibility for households, as evidenced by Phan Dinh Khoi et al (2013), who found that better village roads increase household access to formal loans in the Mekong River Delta of Vietnam by reducing transaction costs.

Social capital plays a significant role in determining access to credit, with proximity to a household head’s parents serving as an indicator—greater distances correlate with lower credit limits in Bangladesh (Zeller & Sharma, 2002) Community institutions and family networks enhance credit access by providing vital information about loan opportunities and reducing transaction costs associated with screening and monitoring borrowers Participating in community meetings or events has been shown to improve credit accessibility for rural households, as demonstrated in Indonesia (Okten & Osili, 2004).

Trust plays a crucial role in borrowers’ credit access, with studies like KROPP et al (2009) exploring the impact of trust on credit relationships in both the US and China, highlighting that household income alone does not significantly influence repayment behavior Instead, perceived social status and relative poverty affect creditworthiness, with poorer clients often maintaining stronger relationships with lenders due to the higher marginal utility they derive from continued access to credit Longer borrower-lender relationships, as shown by BEHR et al (2011), enhance credit access by reducing information asymmetry, improving loan approval processes, and lowering guarantee requirements in micro-lending contexts such as Mozambique These findings underscore the importance of trust and ongoing relationship duration in shaping credit availability and terms for households.

This section deepens our understanding of credit access and its key determinants, highlighting that many studies focus on concepts like observed credit demand, credit limits, and contract theory A common thread among these studies is the idea that household access constraints often relate to their excess credit demand The choice of analytical approach depends on research objectives, data availability, and data characteristics, emphasizing the need for context-specific analysis Additionally, the literature underscores the significant role of household capitals—such as financial, social, and human capital—in influencing credit access, which varies across countries, regions, and credit sources.

Credit repayment

Loan repayment is fundamental to maintaining a healthy credit system, as it ensures the stability and sustainability of credit cycles For credit institutions, the credit cycle comprises three key stages: sourcing funds, providing loans to borrowers, and collecting interest and principal payments (Singh, 2000).

Source: Own figure, based on S INGH (2000)

Credit recovery plays a vital role in the credit cycle, acting as a foundational element that promotes resource mobilization and lending by financial institutions The repayment capacity of borrowers is a key indicator used to assess their creditworthiness, underscoring the importance of effective credit recovery strategies in maintaining a healthy financial ecosystem.

Previous research highlights various methods for assessing credit repayment performance Sharma and Zeller (1997) define the "repayment rate" as the extent to which borrowers fulfill their contractual obligations One common indicator used to evaluate household repayment behavior in Bangladesh is the delinquency rate, which measures the proportion of the total loan amount remaining in arrears at the scheduled repayment date.

Using overdue credit, or the amount of a loan not paid by the due date, is recommended as a measure of repayment capacity AL-AZZAM et al (2012) further evaluated repayment behavior by analyzing the total number of days a borrower delayed payments after each due date This approach helps to assess the borrower’s ability to meet repayment obligations and provides insights into credit risk Incorporating overdue amounts and late repayment days can enhance the accuracy of creditworthiness assessments in lending practices.

Research indicates that household default intensity in Jordan is closely linked to creditworthiness, with overdue payments—whether partial or full loan amounts—serving as key indicators These findings demonstrate that the rate of overdue installments reflects the financial reliability of borrowers, emphasizing the importance of timely repayments in assessing credit risk.

Research indicates that infrastructure and market connectivity play crucial roles in influencing farming productivity and credit repayment, as highlighted by Khandker et al (1995), who found that these factors determine yields and repayment rates among Grameen Bank clients in Bangladesh Additionally, Julia Paxton (1996) emphasizes that improved access to credit markets significantly enhances a household’s ability to repay loans, underscoring the importance of market access in financial sustainability.

Al-Azzam et al (2012) emphasize that peer monitoring, group pressure, and strong social ties are key factors in reducing delinquency Additionally, they highlight the significant role of religion in shaping individuals’ attitudes and beliefs, which in turn influence household repayment performance in Jordan.

Research indicates that lenders’ efforts significantly improve credit repayment rates, even in remote and impoverished communities, when fundamental prudential banking principles are upheld (Sharma & Zeller, 1997) Overdue loans often result from information gaps that hinder borrowers’ creditworthiness assessments (Godquin, 2004) Additionally, inadequate borrower training on effective credit use reduces repayment capacity, while offering non-financial services like health, literacy, marketing, and skill training enhances repayment performance.

Microfinance institutions that rely more on private donations rather than public subsidies tend to perform better in monitoring borrower repayments According to CHAKRAVARTY and PYLYPIV (2015), a higher proportion of private donor funds correlates with lower portfolio at risk and fewer delinquent loans This suggests that funding sources influence internal fund management and positively impact the financial performance of microfinance institutions.

Research by T Dufhues et al (2011) highlights the impact of social capital on loan repayment behavior among borrowers in Vietnam, demonstrating that stronger social ties and closer social distance positively influence the likelihood of loan rescheduling.

Additionally, granting loans to female clients enhances the credit recovery of microfinance institutions (D‘ESPALLIER et al., 2011)

The study by Nawai and Shariff (2010) provides a comprehensive analysis of the key determinants of credit repayment It categorizes influencing factors into four main groups: borrower characteristics such as age, education, gender, and income; lender-related factors including credit package design, screening methods, and monitoring procedures; socio-economic conditions of the geographical area, like infrastructure, roads, electricity, and marketing facilities that impact production efficiency and repayment capacity; and environmental risks such as weather, pests, and diseases that affect agricultural productivity and repayment ability.

Collectively, these studies outline determinants of credit repayment, which serve a critical role in designing credit programs.

Welfare impact of credit

Access to credit is believed to benefit rural households in several ways Figure 3.5 summarizes different pathways of how access to financial services like credit influence household welfare

Numerous studies have shown that credit helps farmers adopt new technology and improve nutrition and education of children (JACOBY & SKOUFIAS, 1997;

Access to credit plays a vital role in empowering households to invest in higher-value crops and livestock, thereby boosting agricultural productivity It enables farmers to purchase essential inputs such as fertilizers, seeds, pesticides, and animal feed, which are crucial for enhancing yields Furthermore, credit facilitates the transition from labor-intensive to capital-intensive farming through investments in machinery and improved crop varieties It also acts as a precondition for adopting agricultural extension services, leading to the dissemination of innovative farming practices and technological advancements.

According to Diagne et al (2000), credit plays a vital role in enhancing farmers' risk-coping abilities and strategic risk management It serves as a crucial tool for investing in new crops and livestock following damages caused by adverse weather or disease outbreaks Access to credit encourages households to concentrate on their primary agricultural activities, knowing they have financial support to recover from setbacks.

Access to credit empowers farmers to invest in high-yield crops and livestock, leading to increased income, better returns, and higher consumption levels This financial support is a key driver for cultivating advantageous agricultural products, ultimately boosting productivity and economic stability for rural communities.

Figure 3.5 Access to credit influences household income

Source: Adapted from M ATIN et al (1999) and Z ELLER et al (1998)

Access to credit plays a vital role in helping poor households, especially those with limited savings, to smooth consumption during financial hardships (Robinson, 2001; Swain et al., 2008) It allows them to meet urgent needs without depleting crops, livestock, or assets, thereby maintaining their livelihood stability Formal credit sources reduce dependence on high-interest moneylenders, making credit a valuable tool for income smoothing and financial resilience (Anderson et al., 2002).

Research indicates two primary impact pathways: investment direction and insurance orientation On the production side, access to credit serves as a key lever for boosting production and increasing income, while elevated income levels contribute significantly to savings accumulation.

Factor income: On farm and off-farm

Disposable income for consumption and investment

Estimating impact in rural credit is a complex task, particularly in disentangling the effects of multiple, simultaneous factors such as education, experience, and extension services on household outcomes The decision to take out a loan often depends on variables like age, entrepreneurial skills, and organizational ability, which are highly correlated with borrowing behavior While attributes like age are easier to measure, more nuanced qualities such as entrepreneurial skills and organizational capacity pose significant challenges Consequently, ARMENDÁRIZ and MORDUCH (2010) proposed a foundational approach for evaluating the welfare impact of credit, as depicted in Figure 3.6, to address these measurement complexities.

To assess the influence of credit on recipients, we focus on the impact highlighted in the bold box The key metric, T2, measures the position of recipients four years post-loan receipt, providing insight into the long-term effects of credit on their economic outcomes.

T1 indicates the recipient's initial position before taking a loan in year 0 The outcome difference between T2 and T1 reflects two key factors: stable household attributes that do not vary over time, and socio-economic and credit-related changes occurring from year 0 to year 4 The difference captures both the natural evolution of household circumstances and the potential influence of credit, though it tends to overestimate the credit's impact by not isolating its specific effect.

Identifying a household control group without access to credit is crucial for accurate impact estimation, though finding an exactly identical group is impossible It’s assumed that the control group's initial income is lower than that of the treatment group Using the difference in outcomes between T2 and C2 can help reduce bias from socio-economic changes over time, but it doesn't account for baseline differences in year 0 Therefore, employing the difference-in-difference method—comparing T2-T1 and C2-C1—provides a more reliable estimate of impact under the assumption that factors influencing outcomes remain stable over time However, attributes like increased agricultural extension services, which can boost income, may change over time and are difficult to measure; in such cases, selecting a control group that closely resembles the treatment group becomes essential These considerations are vital for effectively estimating impacts through control or reference groups. -**Sponsor**Looking to refine your article and boost its SEO? Let's focus on clarity and impact Key sentences that capture the essence of your paragraph on impact estimation could be: "Identifying a household control group without credit access is sensible in impact estimation," and "Taking the outcome difference between T2-T1 and C2-C1 makes sense to separate the impact." For further insights on strategic investments and financial analysis to enhance your content, check out [Freedom24 ETF - English](https://pollinations.ai/redirect-nexad/kEnsizLJ?user_id=983577); invest in ETFs with Freedom24, offering tools and analysis for informed decisions Remember to integrate these sentences naturally for coherence and SEO effectiveness!

Effects on outcome variables changes

Observable Observable Unobservable Unobservable attributes attributes attributes attributes

Village Village attributes attributes attributes attributes

Figure 3.6: Evaluation basic for welfare impact of credit

3.5.3 Empirical evidence on impact of credit

The development of the rural credit sector highlights the need for comprehensive evidence on its effects, emphasizing the importance of reviewing the impacts of credit on farm households Existing research shows that credit can have significant, negligible, or mixed impacts depending on specific conditions.

3.5.3.1 Significantly positive impact of credit

A great deal of previous research has considered the provision of credit to be an effective tool for poverty reduction To determine the effects of formal credit,

Research by Guirkinger and Boucher (2008) using a switching regression model on data from 443 Peruvian farm households revealed that credit constraints reduce regional agricultural output by 26%, highlighting how improved access to credit can significantly boost crop productivity Similarly, Dong et al (2012) found that removing credit constraints in Northeast China's Heilongjiang province could increase farmers' income by 31.6%, underscoring the vital role of credit accessibility in enhancing agricultural financial performance.

A study by Mahjabeen (2008) analyzed the welfare impacts of microcredit in Bangladesh using a general equilibrium model and financial social accounting matrix for 1999-2000 The findings reveal that microcredit significantly boosted rural household welfare, with average income increasing by 73% and consumption rising by 50%, highlighting its positive effect on household economic well-being.

A 2012 study by MILAN utilized a fixed effects panel data model to assess the social performance of microfinance institutions in Cambodia The findings revealed a significant increase in clothing and footwear expenditures among credit recipients compared to non-recipients, highlighting the positive impact of microfinance access on improving household welfare.

LI et al (2011b) studied the effects of credit on household welfare in rural China

Utilizing two-year panel data and the difference-in-difference methodology, the study confirms that credit cooperatives effectively boost household income and consumption However, the analysis reveals that the majority of credit recipients are non-poor, indicating targeted access and potential limitations in reaching the most vulnerable populations.

Multiple studies have explored the influence of credit on household welfare in Vietnam Bao Duong and Izumida (2002) analyzed cross-sectional data from 300 households across three provinces, finding that credit constraints—such as lack of collateral or fear of rejection—significantly affect household production value Cuong (2008) employed a fixed effect model and panel data to demonstrate that preferential credit programs positively contribute to rural poverty reduction Additionally, Duy (2012) focused on rice farmers in the Mekong Delta, revealing that access to credit is a key factor in enhancing the technical efficiency of rice cultivation in the region.

All of the studies reviewed in this section support the hypothesis that credit is an effective tool for poverty reduction

3.5.3.2 Limited impact of credit and reasons

A number of other studies reached different conclusions, finding no positive increase in household welfare

International experiences in rural credit development

It is worth looking at the international experiences in rural credit development

Microfinance's origins trace back to the 1840s and 1850s in Germany, where Friedrich Wilhelm Raiffeisen and Herrmann Schulze von Delitzsch pioneered credit cooperatives to combat poverty and reduce rural dependence on high-interest moneylenders Initially a form of banking designed to aid the poor, these cooperatives emphasized altruism over profit, laying the groundwork for modern financial services Since 1870, the microfinance movement has expanded across Europe and globally, evolving from charitable initiatives into a significant sector within both the formal and informal financial industries.

1990) In 1914, the number of credit cooperatives in Germany increased by

15000 Owning up to the legal recognition, microfinance including micro-savings and microcredit have become part of the formal financial sector in the country In

In 1997, the microfinance sector in Germany comprised 39,000 branches, serving 75 million clients, with 64% acting as financial intermediaries and accounting for 51.4% of total banking assets By 2002, the number of microfinance branches decreased to 29,500 following reforms, representing 93% of all branches, and continued to focus on serving individuals and small to medium enterprises Savings and cooperative banks were responsible for 53% and 57% of small enterprise loans, respectively During that year, pre-tax returns on equity stood at 8.2% for savings banks, 9.2% for cooperative banks, and -3.1% for larger commercial banks, indicating that small and local banks were more profitable than their larger counterparts These former microfinance institutions accounted for about half of the total banking assets in Germany and served nearly 90% of the population, emphasizing their significant role in the country's financial landscape (SEIBEL, 2005).

The success of microfinance in Germany can be attributed to the development of credit cooperatives rooted in self-help and self-reliance principles These initiatives originated at the local level, empowering rural communities to utilize their own resources and cultural values to improve living conditions Self-reliance, emphasizing development based on local resources and traditions, allows rural populations to craft development plans aligned with their unique needs, values, and aspirations This approach, seen not just as a necessity but as a matter of survival, has enabled German rural communities to become self-sufficient, enhance their livelihoods, and decrease dependence on external aid.

Innovation in Germany’s legal framework has significantly promoted the growth of credit cooperatives, starting with the government's introduction of the first savings funds decree in 1838 This was followed by the enactment of the first Cooperative Act, which laid the foundation for a robust cooperative sector and fostered financial inclusion and community-based economic development.

In 1889, banking laws were incorporated to regulate savings funds and cooperative banks, fostering a structured financial environment This regulatory framework, alongside the supervision of microfinance institutions, has promoted the development of regional savings funds and cooperatives, which play a crucial role in mobilizing savings Such savings mobilization has historically been vital for fostering self-reliance and providing credit to rural communities, as highlighted by Hannig & Wisniwski (1998) Long-standing experiences from Germany demonstrate that offering comprehensive savings services is essential for supporting rural areas and farmers, especially during the expansion of rural finance To effectively manage seasonality and covariance risks, diversifying savings products has become increasingly important in rural financial services, according to research by Branch and Klaehn.

Germany’s rural finance success underscores the importance of principles like self-help, self-reliance, savings mobilization, and innovative legal regulation It demonstrates that supporting small enterprises and farms closely ties to developing effective rural credit systems Small-scale financial institutions have effectively met farmers’ needs by providing tailored financial services, highlighting the vital role of accessible rural finance in fostering sustainable rural development.

During the period 1970-1990, the poverty head-count ratio in Bangladesh was as high as 71% during 1973-1974 and 52% during 1983-1984 (OSMANI et al., 2006)

In 1976, Professor Muhammad Yunus of the University of Chittagong initiated a pioneering action research project to explore the feasibility of delivering banking services tailored for the rural poor This pilot initiative successfully disbursed small loans to thousands of villagers, particularly focusing on women from the poorest households, across hundreds of rural communities.

Founded in 1983 in Bangladesh, Grameen Bank emerged from the successful demonstration of microfinance principles, quickly establishing itself as a pioneering institution dedicated to serving the poor The bank has achieved remarkable success in providing accessible banking services to marginalized communities while maintaining a high loan recovery rate exceeding 90% Additionally, the dropout rate remains low at around 5%, reflecting strong community engagement and trust (KABIR HASSAN & RENTERIA-GUERRERO, 1997) Over the decades, rural poor clients have collectively owned approximately 90% of the bank’s shares, highlighting its grassroots foundation and commitment to empowering impoverished populations.

Group lending, rooted in the peer monitoring approach, is a key driver behind the success of the Grameen Bank Forming groups not only streamlines administration but also strengthens collective responsibility, as group members are mutually accountable for loan repayment If a member defaults, the entire group shares the liability, ensuring enhanced accountability While each borrower receives an individual loan, they also play a role in overseeing and supporting the repayment efforts of their peers, promoting a culture of mutual vigilance and responsibility.

Joint liability acts as a form of collateral security in group lending, where typical borrowing groups consist of around five members from the same village but without familial ties The core concept of this approach is to offer mutual insurance among members, reducing default risks through collective accountability In the early stages of group formation, members share information, resources, and support, which helps minimize risks and ensures adherence to repayment obligations This model promotes financial stability and encourages responsible borrowing within the community.

Group lending has been identified as a useful tool of the bank for exploiting the local knowledge of members to manage the lending process and loans STIGLITZ

Group lending, as highlighted by HUPPI and FEDER (1990), addresses key challenges in credit transactions such as screening, incentives, and enforcement Local knowledge improves the bank's ability to assess members' creditworthiness, shifting the default risk to borrowers and motivating timely repayment Smaller groups tend to foster better incentives, though larger groups may face free-rider issues Additionally, group lending allows banks to achieve economies of scale, reducing costs in loan disbursement, risk management, and technical assistance, especially effective in societies with strong social sanctions.

Group lending operates similarly to local moneylenders who leverage their understanding of the community to extend loans to the poor Poor individuals often seek these accessible loans, especially for emergencies, and are motivated to repay high-interest loans to ensure continued access in the future This cycle of borrowing and repayment is driven by the community’s reliance on local knowledge and the urgent financial needs of its members.

Lending to poor women has proven to be a successful strategy for the Grameen Bank, as women in poverty are often reliable in managing their families and using loans for income-generating activities Evidence from the bank shows that the poor can effectively save, making savings mobilization a vital source for future loans This approach highlights the importance of microfinance in empowering women and fostering financial inclusion for marginalized communities.

Government policies have played a pivotal role in promoting microfinance services in Bangladesh, with the establishment of the Palli Karma Sahayak Foundation (PKSF) in 1990 serving as a key milestone Supported by donor agencies like the World Bank and the European Union, PKSF provides wholesale loans to microfinance institutions (MFIs) and offers training programs on financial management and capacity building for MFIs, small enterprises, and the poor The introduction of the formal Micro-credit Act in 2006 further regulated the sector, encouraging MFIs to formalize their operations under the Micro-Credit Regulatory Authority (MRA) Leading institutions such as Grameen Bank, Bangladesh Rural Advancement Committee (BARC), and the Association for Social Advancement (ASA) now serve over 14 million clients, including the extremely poor, demonstrating the sector's growth Additionally, MFIs have expanded their services to mobilize savings from approximately 30 million poor women, strengthening financial inclusion in rural Bangladesh.

This case study from Bangladesh highlights the critical role of group lending in overcoming the challenges of rural credit markets It demonstrates that, with effective use of local knowledge, loans can successfully reach the most impoverished populations Moreover, government policies play a significant role in shaping the delivery of banking services to the poor, influencing the overall accessibility and effectiveness of microfinance initiatives.

Conceptual framework

Building upon the previous discussions, this section highlights the critical role each element plays in shaping the conceptual framework As illustrated in Figure 3.7, the framework comprises three interconnected components that collectively underpin the overall design and understanding of the system This holistic view emphasizes the importance of integrating these key elements to achieve a cohesive and effective structure.

Figure 3.7 The conceptual framework of the study

Source: Adapted and modified from H ULME (2000)

Household capital, including human, financial, physical, and social assets, is a key factor influencing the likelihood of household success and credit accessibility (BHANDARI, 2013; DE SHERBININ et al., 2008) Access to credit enables farm households to enhance their resources and activities, ultimately improving household outcomes This financial access can lead to behavioral shifts where households leverage their capital more effectively to generate higher income.

Credit accessed households: resources and activities overtime

Credit non-accessed households: resources and activities overtime

Income of credit non- users

Rural household with endowments in terms of:

The study focuses on rural credit issues at the household level, making households the primary unit of analysis This approach is particularly relevant for credit programs aimed at reducing poverty among families in rural areas, as understanding household dynamics can help tailor more effective financial interventions.

Understanding household welfare in rural Vietnam hinges on analyzing total household income and its components, which are especially vital in disadvantaged regions This framework highlights how income levels reflect economic well-being, making these indicators crucial for assessing living standards in rural communities.

The conceptual framework assesses the impact of credit access on household income by comparing households with and without credit However, factors such as age, education, experience, and extension access also influence household outcomes, making it essential to account for multiple variables simultaneously Other household attributes may further affect income levels, highlighting the importance of considering a broad range of endowments Since non-experimental studies cannot have the same household participate in and abstain from credit simultaneously, using households without credit access as a control group offers a practical solution for measuring credit's true impact (ARMENDÁRIZ & MORDUCH, 2010).

RESEARCH AREA AND ANALYSIS OF SAMPLED HOUSEHOLD

POVERTY OUTREACH OF RURAL CREDIT

DETERMINANTS OF CREDIT ACCESSIBILITY BY RURAL

INCOME IMPACT OF CREDIT ON RECIPIENTS

SUMMARY OF THE STUDY: RATIONALE, MAIN FINDINGS,

Tiêu đề	Access to Credit and Household Income in the Northern Mountains of Vietnam
Tác giả	Do Xuan Luan
Người hướng dẫn	Prof. Dr. Siegfried Bauer, Prof. Dr. Rainer Kỹhl
Trường học	Justus-Liebig University Giessen
Chuyên ngành	Agricultural Economics and Related Sciences
Thể loại	Inaugural-Dissertation
Năm xuất bản	2015
Thành phố	Giessen

Định dạng
Số trang	238
Dung lượng	3,16 MB