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

INTRODUCTION

Background of the study

Rural development is crucial for poverty reduction, as many impoverished individuals rely on farming for their income By initiating small businesses, enhancing agricultural productivity, or gaining employment, the poor can contribute to wealth creation and improve their livelihoods Without opportunities for economic independence, society faces increased costs in supporting the impoverished, leading to a waste of human capital A significant barrier for the poor is their limited access to development resources, compounded by low education levels and inadequate production skills Consequently, improving financial service access for the poor has become a vital area of focus.

Credit plays a crucial role in rural development by creating employment opportunities for farmers, enhancing production, and improving welfare Numerous studies highlight the significance of accessible and sustainable credit services in reducing poverty For instance, GUIRKINGER (2008) noted that access to credit enables farmers to purchase essential inputs like fertilizers, seeds, pesticides, and irrigation services, ultimately leading to increased productivity and income Despite its importance, many individuals globally still face significant barriers to accessing credit, with outreach to the poorest communities remaining insufficient (ZELLER & SHARMA).

Nearly half of the rural poor households globally lack access to credit services, with over 300 million households in the Asia and Pacific region facing barriers to obtaining credit from both formal and informal sources.

Access to credit is a significant factor contributing to the persistent poverty of rural households in developing countries This issue is of great concern to policymakers, non-governmental organizations, donors, and academic researchers alike Addressing the lack of credit access for the poor is essential for fostering economic development and improving living conditions in these communities.

Statement of the problem

Vietnam, a developing country in Southeast Asia, faces significant challenges in achieving sustainable development, which is built on three essential pillars: economic growth with social equity, poverty reduction, and environmental protection Approximately 70% of its population resides in rural areas, where 53.9% of the labor force is engaged in agriculture, contributing nearly 22% to the national GDP Notably, around 94% of the country's poor live in these rural regions, with low-income households, primarily in these areas, making up 44.8% of total households.

Agriculture and rural areas are vital for national development, yet they receive only about 7% of the total annual national investment Despite the Vietnamese government's focus on poverty reduction through various credit schemes, the allocation of national credit to the agricultural sector significantly declined between 2002 and 2012 During this period, the average annual credit growth for agriculture was 22%, falling short of the 25% growth rate observed for the overall economy (GENERAL STATISTICS OFFICE OF VIETNAM, 2012).

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

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

MARSH et al (2006) highlighted that despite the implementation of various policies aimed at enhancing credit access, significant market failures in Vietnam's rural credit markets have resulted in stringent credit limitations for small household farms and the broader rural sector.

The World Bank (2012) emphasized that achieving sustainable growth in a country requires investment in all individuals across various regions and communities This is especially true for Vietnam, where the development of the Northern Mountainous Region is deemed essential for overall progress.

The digitization by the Learning Resource Center at Thai Nguyen University plays a crucial role in promoting national socio-economic development and enhancing national security Despite accounting for 28.79% of the country's total area and 12.83% of its population, this region remains the most disadvantaged, as reported by the General Statistics Office.

The Northern Mountainous Region of Vietnam is home to a significant population of ethnic minorities who primarily rely on agriculture for their livelihoods This region faces a poverty rate that is 114.41% higher than the national average, and households here have limited access to credit schemes National statistics reveal that only 9.86% of the country's loan outstanding is designated for the Northern Mountainous Region, in stark contrast to 49% allocated to the Southeast Region and the Mekong River Delta.

Vietnam has made significant strides in reducing poverty over the past two decades; however, disparities persist, particularly in the Northern Mountains, where poverty intensity remains notably higher.

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

In 2005, a study utilizing the Vietnam Household Living Standard Survey (VHLSS) assessed the impact of credit on national poverty reduction, suggesting that the effectiveness of credit schemes is significantly influenced by regional contexts While there have been multiple studies focused on rural credit in Northern Vietnam, including research by T Dufhues and Buchenrieder, the findings indicate a need for tailored approaches to credit interventions based on specific local conditions.

In their studies conducted in 2005 and 2012, Saint-Macary and Zeller reached conclusions based on a limited sample size from a few communes in one or two districts Consequently, it is essential to validate these findings through a larger and more representative study.

This study aims to explore the effectiveness of rural credit, particularly subsidized credit, as a strategy for combating poverty in disadvantaged rural areas Understanding the impact of rural credit and developing informed policies are essential for successfully reducing poverty in these communities.

Objectives

This study focuses on the critical role of rural credit in promoting sustainable rural development while addressing existing gaps in the literature It aims to achieve three primary objectives that highlight the importance of financial resources in enhancing rural livelihoods and fostering economic growth.

(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 are shaped by government policies and lender characteristics at both macro and intermediary levels, yet this study focuses specifically on rural households in the Northern Mountainous Region of Vietnam.

The classification of formal credit into preferential and commercial categories is subjective and varies by region, as what is deemed preferential in one area may not be viewed the same way elsewhere Additionally, formal credit policies can evolve over time, highlighting the importance of understanding the nature of credit and the specific households targeted by these policies.

This study focuses on cross-sectional data from rural households, which means it does not analyze the aspects of poverty outreach, credit accessibility, or the long-term impact of credit.

Contribution of the study

This study enhances the existing literature on rural credit by addressing key aspects such as poverty targeting, access constraints, and their overall impact Previous research has rarely provided a comprehensive analysis of these elements, which are crucial for understanding how effectively credit serves impoverished communities Poverty targeting plays a vital role in the rural credit system, as it directly influences the ability of high-demand households to access credit, ultimately affecting their potential to increase income and alleviate poverty By examining the determinants of credit access, this study sheds light on the critical relationship between credit availability and poverty reduction.

Digital access is crucial for the development of effective credit schemes Additionally, reducing poverty is a fundamental aspect of ensuring sustainable rural credit development.

This study examines the dynamics of credit in a rural disadvantaged region of Vietnam, highlighting the critical conditions that influence the success of credit access for recipients It identifies a gap in research that differentiates between the formal and informal credit sectors, noting that each type of loan has distinct targeting policies, characteristics, and recovery processes Understanding these differences is essential for analyzing the challenges associated with various loan sources.

This study employs Bayesian Model Averaging to tackle the issue of model uncertainty, a topic that has been largely overlooked in recent research The integration of various matching algorithms and bootstrapping techniques within the Propensity Score Matching (PSM) model significantly enhances the reliability of estimation outcomes.

Structure of the study

This study systematically examines Vietnam's economy, focusing on its agricultural sector and credit system in Chapter 2 Chapter 3 outlines the theoretical and empirical framework, addressing credit-related issues such as poverty outreach, access, and impact Chapter 4 details the research area's characteristics and the selected households' profiles concerning credit issues In Chapter 5, the analysis of poverty targeting by formal and informal credit sources is presented Chapter 6 utilizes the Bayesian Model Average applied to the Heckman Selection Model to address credit access problems, investigating household participation in both credit types and their access determinants Chapter 7 empirically estimates the impact of credit on household income through various matching algorithms from the Propensity Score Matching approach Finally, Chapter 8 reviews the findings, discusses limitations, and considers their implications for policymakers regarding credit services for rural households in Northern Vietnam and other developing countries, while also suggesting future research directions on rural credit and related topics.

AN OVERVIEW OF ECONOMY, POVERTY AND RURAL CREDIT

Geography

Vietnam, situated on the eastern edge of the Indochinese Peninsula, spans an area of 331,210 square kilometers, making it the 65th largest country globally It borders the sea to the east, with Laos and China to the north and Cambodia to the west This strategic geographic location positions Vietnam as a vital transport link between the Indian Ocean and the Pacific Ocean.

Vietnam is divided into six primary geographical regions: the Red River Delta, Northern Mountainous Region, North Central and Central Coastal Areas, Central Highlands, South East, and Mekong River Delta The country features two major cities, with Ho Chi Minh City located in the South As of 2013, Vietnam's population was approximately 89.7 million, with around 67.44% living in rural areas Additionally, Vietnam comprises 64 cities under provinces, 49 urban districts, 47 towns, 548 rural districts, and 9,001 communes.

Macroeconomic performance

Prior to 1986, Vietnam operated under a command economy where the central government controlled all aspects of production and trade, leaving no room for individual commercial transactions among households or enterprises In agriculture, production solidarity groups and cooperatives were prevalent, characterized by shared land and equipment, with income distribution based on a work points system This model, however, stifled household incentives, hindering both production growth 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

The shift towards a socialist-oriented market economy has led to the dissolution of ineffective agricultural collectives, empowering households to operate as autonomous production units capable of selling their goods in the marketplace This reform has spurred economic growth, raised income per capita, and enhanced life expectancy.

Số hóa bởi Trung tâm Học liệu – ĐHTN http://www.lrc.tnu.edu.vn

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

From 2001 to 2006, Vietnam's macroeconomy demonstrated stability, with an average GDP growth of 7.5% and inflation rates below 10% The country's accession to the World Trade Organization in 2007 led to a surge in foreign investment, contributing to a remarkable increase in credit growth from 25.3% in 2006 to 54.0% in 2007 However, post-2007, the economy experienced instability marked by rising inflation and interest rates The global financial crisis in 2008 exacerbated these issues, resulting in high inflation, increased unemployment, and slowed growth, particularly affecting the agricultural sector due to volatile commodity prices In response, the government implemented a tight fiscal policy to curb budget deficits, leading to a significant decline in credit growth, further worsened by the collapse of the real estate market in 2012.

In 2013, numerous real estate projects faced difficulties in selling, resulting in defaults on loans and an increase in bad debts, which subsequently diminished lending opportunities within the banking sector.

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

2.2.3 Economy’s structure share in Vietnam

Since transitioning from a centrally planned economy to a market-based system, Vietnam has embraced industrialization, modernization, and global integration, fostering an open market and attracting foreign investment Key sectors such as industry, construction, and services have significantly boosted the GDP, with manufacturing sectors like food processing, textiles, and chemicals leading the way By 2010, services represented 38% of the GDP, and Vietnam emerged as one of Asia's top 25 tourist destinations, with popular cities including Hanoi, Ho Chi Minh City, Hoi An, and Ha Long.

The agricultural sector remains crucial to the national economy, contributing approximately USD 14.5 billion, or 20.23% of GDP in 2010, despite a 3% decline since 2000 A significant portion of the population, particularly the poor, resides in rural areas and relies primarily on farming for their income However, the disparity between high agricultural employment and its GDP contribution indicates low productivity within the sector Consequently, the savings and loan portfolios of rural financial institutions are influenced by agriculture, even if clients earn income from other sectors.

GDP growth Inflation Credit growth

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

Agriculture and Poverty

Despite significant industrialization efforts, Vietnam's economy remains primarily agricultural, with notable success in economic reforms From 2001 to 2011, the agricultural sector, encompassing crops, livestock, forestry, aquaculture, and fisheries, contributed 20% of GDP, 30% of export revenue, and 60% of employment Key policies implemented in 1986, such as land allocation to individual households and market incentives for agricultural commodities, have fostered growth in this sector and rural areas Agricultural growth averaged 4% annually, with the sector generating 558.4 trillion VND, representing 22% of total GDP and adding 0.66 percentage points to the 5.89% GDP growth in 2011 Overall, the production of major agricultural products in 2011 showed an increase compared to 2001, highlighting the sector's ongoing development.

Table 2.2: Production of main agricultural commodities

In 2010, exports accounted for approximately 70% of Vietnam's GDP, with key industrial goods including textiles, crude oil, footwear, electronic products, and wooden items The export value of agricultural products reached USD 15.65 billion, representing 21.7% of the country's total exports, with major contributions from agricultural and forestry products at USD 11.4 billion and fishery products at USD 4.25 billion Notable export items included rice (USD 3.2 billion), coffee (USD 1.9 billion), rubber (USD 2.4 billion), timber products (USD 3.4 billion), and fishery products (USD 2.7 billion), all of which saw significant growth in value from 2005 to 2010.

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 laborers in Vietnam's agricultural sector fell from nearly 80% to around 60%, averaging a 2% annual decrease Specifically, from 2006 to 2011, this share declined by 10.9%, equating to an average reduction of 2.19% per year By 2011, the number of agricultural laborers reached 20.56 million, reflecting a decrease of 2.37 million or 10% compared to 2006 This trend of diminishing labor in agriculture highlights the ongoing industrialization and modernization processes, as well as significant shifts in Vietnam's economic structure.

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 (%)

Access to agricultural land is essential for farmers in Vietnam to generate income, yet land fragmentation poses a significant challenge in rural areas This fragmentation results in smaller farm sizes, with many households managing multiple plots As of 2012, Vietnam had 26.21 million hectares of agricultural land, making up 75% of the country's total natural area, and there were approximately 10.37 million agricultural production households, accounting for 44.8% of all households nationwide However, the average land size per household is limited, with nearly 60% of agricultural households cultivating less than 0.5 hectares and 34.7% managing less than 0.2 hectares Additionally, about 10% of farm plots are under 100 square meters, highlighting the issue of land fragmentation in the agricultural sector.

According to the Statistics Office of Vietnam (2012), the Southern Region exhibits significantly less fragmentation in agricultural land compared to the North This fragmentation presents challenges in the adoption of agricultural machinery for plowing and harvesting, ultimately hindering productivity improvements in the sector.

In Vietnam, approximately 70% of the population resides in rural areas, where the government has made significant strides in poverty reduction over the past two decades The percentage of individuals living below the national poverty line decreased from 58% in 1993 to under 10% in 2010, according to a "basic needs" poverty line As of 2010, the national poverty and extreme poverty rates were reported at 20.7% and 8%, respectively, with a staggering 91.4% of the poor living in rural regions, accounting for 94.4% of those in 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 poverty rate is significantly higher in the Northern Mountains and Central Highlands compared to the more affluent households found in the Red River Delta and Southwest region This elevated level of poverty in the Northern Mountainous Region suggests limited access to essential agricultural services, such as credit, agricultural extension, and market information, which are crucial for economic support and development.

Vietnam ranks among the top ten countries globally impacted by weather-related disasters, significantly affecting its agricultural sector Natural disasters, along with the spread of diseases and pests, pose various risks to agricultural production, leading to severe damage to crops and livestock from cold weather, storms, floods, and heavy rainfall These disasters result in economic losses equivalent to nearly 1.5% of the country's GDP, with rural areas and farm households, particularly the poor, being the most vulnerable Despite the evident need, agricultural insurance remains an underdeveloped sector, presenting a significant opportunity for growth and development in Vietnam.

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

In 2012, agricultural insurance coverage among rural households was minimal, with only 0.8% participating Specifically, just 0.24% of cattle, 0.10% of pigs, and 0.04% of poultry were insured, highlighting a significant gap in risk management within the agricultural sector (GSO, 2012).

The limited expansion of agricultural insurance in Vietnam over the past two decades can be attributed to several key issues, including high-risk intensity that led to elevated insurance fees that many farmers, particularly those with lower incomes, could not afford (VANDEVEER, 2001) Major insurance providers like Vinare, Bao Viet, and Swiss Re have reported significant losses, with indemnity payouts often surpassing premium collections For example, Bao Viet's pilot insurance program for rice from 1983 to 1998 covered nearly 200,000 hectares but resulted in compensation costs of 14.4 billion VND against only 13 billion VND in premiums, prompting the company to cease its rice insurance program in 1999 Currently, Bao Viet only offers insurance for rubber trees, dairy farms, and a limited number of fishery farms Similarly, Groupama, a French insurer with over a century of experience in agricultural insurance, entered the Vietnamese market in 2001 but halted operations in 2004 due to low revenue and substantial compensation losses (CONG THANG, 2014).

Rural credit in Vietnam

2.4.1 Brief history of rural credit policy in Vietnam

A stable and favorable macroeconomic environment is essential for successful financial systems, as noted by Gonzalez-Vega (2003) This section will examine the policies related to the development of rural credit in Vietnam.

After Vietnam's dependence in 1975, the economy operated under a central planning model characterized by collective ownership and highly regulated market transactions, which remained underdeveloped By the mid-1980s, around 7,200 credit cooperatives emerged, providing credit to ineffective production cooperatives and small state-owned enterprises, effectively acting as extensions of the state bank The banking system was primarily passive, with the state bank functioning as both a commercial and central bank, allocating loans to unproductive centralized projects This limited the banking system's role in mobilizing domestic savings and fostering economic growth, as households were not recognized as self-governing entities and were thus barred from obtaining loans The lack of incentives for households stifled economic progress, leading to high default rates on government projects and a decline in rice and commodity production Consequently, the economy faced severe challenges, including food shortages, trade deficits, hyperinflation, and a significant drop in per capita income, ultimately resulting in the collapse of the credit cooperatives and the economy itself.

2.4.1.2 Replacement of the mono-tier banking system after 1986

In the 1980s, Vietnam faced significant economic pressure, prompting the government to implement the "Doi Moi" policy, which facilitated market transactions and recognized households as independent economic units eligible for loans A pivotal change was the 1993 land law, which granted four land use rights—sale, lease, inheritance, and mortgage—encouraging households to invest in farming and boost production This shift from administrative allocation to market-driven purchases and sales of agricultural inputs led to the rapid expansion of rice production, positioning Vietnam as the world's second-largest rice exporter by 1996 and significantly improving farmers' living conditions.

In 1988, the central bank transitioned from a mono-tier banking system to a model featuring four state-owned commercial banks, which limited credit supply to more efficient state-owned enterprises This shift resulted in positive real interest rates aligned with market principles, allowing private enterprises and farm households to regain their self-reliant, self-financed status Consequently, these reforms significantly enhanced economic growth and financial system stability (RIEDEL & COMER, 1997) By 1990, the government established a legal framework for the financial system, delineating the central bank's role to focus solely on monetary policy and financial regulations.

In 1993, former credit cooperatives were transformed into the network of People's Credit Funds (PCF), inspired by Canada's Desjardins Group model Following the implementation of a two-tier banking system, many original credit cooperatives faced bankruptcy, with only 78 surviving out of 800 people's credit funds (SEIBEL, 1996) Today, People's Credit Funds offer financial services to local communities and function in accordance with cooperative laws.

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,

In 2013, it was noted that PFCs primarily function on a self-help and self-financed model, with 85% of their capital sourced from their own finances However, these funds predominantly cater to wealthier households, aiming for financial sustainability, which has resulted in decreased credit accessibility for poorer households.

In 1995, the National Assembly enacted the Civil Code, establishing regulations for the relationship between lenders and borrowers, including aspects of lending, repayment, interest rates, and dispute resolution (BAO DUONG, 2013) This legislation led to the recognition and regulation of private lending and credit markets by the government, which encourages private lenders to extend loans while ensuring that borrowers fulfill their repayment obligations.

2.4.1.3 The separation between preferential and commercial lending

The establishment of formal financial institutions, such as the Vietnam Bank for Agriculture and Rural Development, was driven by the urgent need for hunger eradication and poverty alleviation (T DUFHUES et al., 2001) Originating from a mono-tier banking system in 1988, the bank rebranded as the Vietnam Bank for Agriculture in 1990 (SEIBEL, 1992) Its primary objective is to offer loans to households and small to medium enterprises in rural areas, while also extending services to urban clients to enhance market reach The bank prioritizes providing credit to more affluent households, farms, and enterprises.

As of 2008, 45% of deposits were sourced from urban areas while 55% came from rural regions, establishing the institution as the largest credit provider in rural Vietnam It offers a comprehensive range of financial services, including credit and savings options Out of a total of 10 million client households, 4.7 million belong to lower-income groups, highlighting its significant impact on financial inclusion in the country (TAM, 2013).

Despite the establishment of agricultural banks, rural communities continued to struggle with severe poverty due to limited access to credit (IZUMIDA, 2003) This persistent issue prompted the creation of the Vietnam Bank for the Poor (VBP) in 1995 to address the financial needs of disadvantaged populations.

Initially, VBP functioned as a fund managed by the Vietnam Bank for Agriculture and Rural Development (VBARD), offering preferential loans under the belief that the poor could not repay loans at market interest rates The scarcity of resources hindered the poor's ability to expand production and enhance their food supply In 1997, the introduction of the law on credit institutions mandated the State Bank of Vietnam to establish a non-profit special bank dedicated to providing preferential credit to the poor, promoting their business and production efforts.

In 2003, the Vietnam Bank for Social Policies (VBSP) was established as an independent bank, focusing on serving the poor and vulnerable social groups through government programs VBSP offers preferential loans without requiring collateral, such as land use certificates, and by the end of 2003, the bank had provided these loans to 3.3 million clients.

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, the Vietnamese government enacted Decree 28, establishing regulations for microfinance institutions (MFIs) as credit entities under the supervision of the state bank and the 2010 law on credit institutions MFIs are recognized for their social mission to deliver financial services sustainably, while Decree 28 facilitates their access to external donor capital However, it limits the services they can offer until they obtain official licensing and restricts ownership to local organizations like women's and farmers' unions, which hampers their access to commercial funding The minimum legal capital requirement of 5 billion VND (approximately US$313,000) poses challenges for smaller MFIs In response to these issues, Decree 165/2007/ND-CP was introduced, allowing MFIs to secure equity from donors and requiring them to meet specific staffing and financial audit standards for licensing Although this new regulation improves financial access for MFIs, it emphasizes financial sustainability over enhancing services for the impoverished.

In 2012, the Vietnamese government launched a project to enhance the microfinance sector from 2011 to 2020, prioritizing the development of microfinance institutions (MFIs) into self-financed organizations This initiative not only aims to improve the capabilities of MFIs but also encourages them to fulfill social objectives and offer market-oriented financial products Recognized as a significant policy shift, the project underscores the government's acknowledgment of microfinance's role in poverty alleviation in Vietnam Funded by USD 40 million in preferential loans and technical assistance from the Asian Development Bank (ADB), the project is designed to support MFIs in addressing the financial needs of impoverished households across the country.

2.4.1.5 Priorities for lending agricultural and rural sector

In 2008, the Vietnamese Party approved Resolution 26, highlighting the critical role of agriculture, farmers, and the rural sector in national socio-economic development To support this, favorable credit provisions for farmers and the rural sector are essential In 2009, the establishment of the national microfinance steering committee aimed to foster a market-based microfinance industry Additionally, Decision 477, issued in 2009, set favorable lending interest rates for farmers, while Decree 41 in 2010 increased the limit for free collateral loans to 50 million VND for farm households.

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

Summary of the chapter

This chapter highlights the key features of the Vietnamese economy, focusing on its structure, poverty levels, agricultural performance, and rural credit system Over the past two decades, Vietnam has achieved significant economic growth, particularly in the agricultural sector, leading to improvements in national income per capita and the human development index The agricultural sector has successfully met domestic food needs and boosted national exports However, challenges persist in achieving sustainable rural development, as a significant portion of the population, especially the impoverished and ethnic minorities, resides in remote and mountainous areas.

The rural credit system in Vietnam has undergone significant transformations due to evolving government policies Prior to the 1986 economic reforms, credit cooperatives were the main credit providers for state enterprises and cooperatives within a command economy However, the lack of market incentives led to economic collapse, severely impacting the rural credit system Post-reform, Vietnam transitioned from a mono bank system to a financial framework aligned with market principles, resulting in the reformation of credit cooperatives into commune credit funds operating under cooperative laws The government also isolated preferential credit from commercial systems to support the poor and implemented land use rights reforms to incentivize farmers' production and credit access Currently, a diverse credit sector, encompassing formal, semiformal, and informal sources, serves as the primary credit provider for rural households These policy changes illustrate the interconnectedness of credit development and economic growth, emphasizing that credit cannot thrive without economic incentives and a dynamic legal framework Nonetheless, the availability of credit remains insufficient in meeting the demands of rural residents.

THEORETICAL AND EMPIRICAL FOUNDATIONS OF THE STUDY

Concept of credit and general issues

Credit, derived from the Latin word "Credo," meaning "I believe," refers to the provision of funds from a lender to a borrower based on the expectation of repayment at a predetermined date, along with an additional amount for the cost of credit or interest While various credit concepts exist, only two are widely recognized in current literature.

According to SINGH (2000), "credit" refers to a financial facility that allows individuals or businesses to borrow money for purchasing products, raw materials, or components, with the option to pay over an extended period This concept is closely linked to creditworthiness, reflecting a person's financial reputation and the honor associated with being recognized for timely payments The terms "credit" and "loans" are often used interchangeably, as a loan represents an advance of cash or in-kind resources provided by a lender—be it an individual, business, or financial institution—where the lender earns profits through interest on the borrowed amount.

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

The borrowing capacity of a firm plays a crucial role in its ability to acquire and manage debt capital Modern credit perspectives incorporate concepts such as agency theory, transaction costs, incomplete contracting, and property and control rights These factors are essential for assessing the performance of the rural credit market.

In the rural credit market, lenders extend loans to rural households under the belief that credit positively impacts farmers capable of repayment This lending process is influenced by the principal-agent theory, which highlights the relationship between lenders and borrowers, along with factors such as transaction costs, information asymmetry, production seasonality, and household cash flow (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 various purposes, including financing both farm and non-farm activities as well as family expenses Farmers often seek credit to invest in production by purchasing essential inputs like seeds, fertilizers, and pesticides, which can enhance their productivity and expand output Additionally, consumption loans are utilized for non-productive expenses, such as medical bills, education, food costs, and ceremonial expenditures.

Credit can be categorized into short-term, medium-term, and long-term based on repayment periods Short-term loans, typically lasting less than one year, are used for purchasing variable inputs like fertilizer and seeds Medium-term credit, with repayment periods of one to two years, finances items such as implements and irrigation facilities Long-term credit, extending over three years, is utilized for significant investments like land leveling and building construction.

Loans can be categorized into secured and unsecured types based on security Unsecured loans rely on the trust between the borrower and lender without any collateral In contrast, secured loans can be divided into subtypes, including personal security loans where the borrower acts as their own guarantor, and collateral security loans, which involve valuable assets or land use certificates pledged to the lender as security.

Loans can be categorized based on liquidity into self-liquidating loans and partially liquidating loans Self-liquidating loans enable farmers to repay the full amount within the same season or year, as the income generated from these loans covers the entire repayment In contrast, partially liquidating loans allow farmers to pay off only a portion of the loan with the income generated, requiring a longer period for the remaining balance to be settled.

Loans for farmers can be classified into two categories: direct and indirect loans Direct loans, including term loans, are provided directly to farmers by institutional agencies In contrast, indirect loans involve institutional agencies that do not directly fund the farmers but still support them indirectly.

The Digital Center at Thai Nguyen University plays a crucial role in supporting business initiatives by providing financial assistance for various enterprise activities This includes funding for fertilizer production companies and the construction of essential infrastructure such as warehouses and market yards.

Zeller and Meyer (2002) highlight the significance of a credit triangle comprising sustainability, outreach, and impact Sustainability focuses on the need for credit institutions to achieve financial viability without relying on donor funds or government support Outreach emphasizes the goal of reaching a broader and deeper segment of the rural poor Lastly, the impact component ensures that credit provision positively affects household welfare.

Figure 3.1: The triangle of credit

The interrelated components of the triangle highlight the complex dynamics of credit institutions, where financial sustainability can attract more rural clients seeking credit, thereby enhancing outreach This deeper outreach can foster sustainability by increasing the borrower base and diversifying service offerings like credit, savings, and insurance, ultimately improving repayment rates and lender profits However, credit institutions may face short-term trade-offs, such as balancing deeper outreach with higher transaction costs and lower repayment rates, which can challenge financial sustainability The prioritization of specific components often depends on lenders' development objectives and local contexts In the long run, while these components can be complementary, short-term trade-offs may arise.

3.1.4 Challenges for the provision of credit to rural households

3.1.4.1 Principle of marginal return to capital

The principle of diminishing marginal returns to capital suggests that business firms with lower amounts of capital can achieve higher investment returns compared to those with greater capital (ARMENDÁRIZ & MORDUCH, 2010) Consequently, poorer firms are expected to pay higher interest rates for credit than their wealthier counterparts, assuming other factors remain constant In the context of the rural credit market, this means that loans should ideally flow from wealthier households to poorer ones, as the latter can offer higher interest rates due to their greater potential return on additional capital.

Figure 3.2 Marginal returns to capital of poorer and wealthier households

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

Access to credit for low-income individuals remains significantly restricted, primarily due to factors such as information asymmetry, the unique nature of agricultural production, the principal-agent dynamics in rural credit markets, and high transaction costs.

Marginal return for poorer households

Marginal return for wealthier households

Information asymmetry in contract theory and economics occurs when one party possesses superior information compared to another, leading to power imbalances and potential transaction failures (DURLAUF & BLUME, 2008) This phenomenon often contributes to the credit exclusion of economically disadvantaged individuals for two primary reasons.

Poverty outreach of credit

3.2.1 Depth of outreach concept and measurement

The term "depth of outreach" in the literature refers to the extent to which credit services target the poor, encompassing two dimensions: breadth and depth of outreach Breadth signifies the number of clients served, while depth focuses specifically on reaching the poorest individuals MEYER et al (2000) define depth of outreach as the level to which credit institutions penetrate the income distribution, highlighting the importance of serving low-income clients Additionally, research by NAVAJAS et al (2000) and SCHREINER further emphasizes the significance of these outreach dimensions in understanding the impact of lending practices on impoverished communities.

Depth of outreach is defined as the poverty level of credit recipients, reflecting the societal value placed on the net benefits derived from credit usage by clients In societies that prioritize aiding the poor, poverty serves as an effective indicator of outreach depth.

Measuring the poverty outreach of credit is essential for assessing its effectiveness in serving low-income populations Current literature identifies three primary approaches used by credit institutions to evaluate the depth of their outreach.

The first approach evaluates loans based on their characteristics and benefits to borrowers, as outlined by NAVAJAS et al (2000) Key aspects include depth, which measures the societal value of the net gain from credit use; benefit, indicating how much borrowers are willing to pay for loans; and cost, encompassing both price and transaction expenses incurred by borrowers Additionally, breadth refers to the total number of loan recipients, length pertains to the time frame for loan production by credit organizations, and scope considers the variety of financial contracts available from lenders.

A relationship exists between the outreach aspects of credit and its social benefits, as highlighted by Schreiner (2001) The worth of credit is determined by borrowers' willingness to pay interest rates and costs, which varies based on the benefits they derive, such as funding life events or agricultural needs The cost to borrowers, encompassing interest and transaction fees, directly influences credit outreach to the poor, with lower costs encouraging broader access The depth of outreach is related to the borrowers' poverty level, where smaller loan sizes often indicate deeper outreach, as poorer clients may prefer manageable loans The breadth of outreach, measured by the number of clients, depends on credit demand and the capacity of institutions, while the length aspect emphasizes the importance of ongoing access to credit for the poor Lastly, the scope aspect pertains to the variety of products and services offered to meet diverse client needs Overall, these outreach dimensions are interconnected and significantly affect the social welfare derived from credit usage.

The second approach focuses on depth of outreach indicators (DOI), which are assessed through indirect proxies like gender, location, education, and ethnicity of recipients Credit institutions are encouraged to serve women, less educated individuals, rural residents, and minorities, reflecting their social commitments These indicators demonstrate the extent to which credit institutions can access underserved populations, highlighting their impact on community outreach.

In their 2002 study, PAXTON and CUEVAS evaluated the outreach and financial sustainability of three credit unions and two village banking programs in Latin America by analyzing the percentage of clients who were poor, female, rural, and illiterate.

In empirical research, assessing poverty outreach often involves comparing the relative poverty scores of recipients to those of non-recipients, a practice that is crucial for policymakers and donors concerned about fund distribution MEYER et al (2000) highlight that survey data indicators exhibit a strong correlation with the national poverty line, which aids in calculating relative poverty scores To ensure accuracy, it is essential to select and verify proxies, such as per capita expenditure, housing index, and family size, against benchmark indicators like clothing expenditure The distinction between benchmark indicators and proxies lies in the fact that benchmark indicators serve as reference points for correlation calculations This analytical approach can be effectively executed through principal component analysis, enhancing the reliability of poverty assessments.

The digitization by the Learning Resource Center at Thai Nguyen University utilizes the Spearman rank correlation method to assess the accuracy of proxies in predicting the poverty levels of borrowers.

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, there is growing concern regarding the true mission of credit institutions in relation to their initial commitment to serve the poor Consequently, numerous empirical studies have been conducted to explore the question of whether the poor should be granted access to credit.

Numerous studies highlight that the poorest individuals continue to be excluded from credit access, particularly in rural areas AMIN et al (2003) found that microfinance services in Bangladesh have not reached credit-constrained households Similarly, THOMAS and SRIRAM (2002) argued that micro-credit initiatives in India fail to target the poorest populations In Pakistan, GHALIB (2011) revealed that only 22% of households accessing microfinance were the poorest, while a higher percentage belonged to middle and less poor categories Evidence from neighboring countries, such as Vietnam, also indicates low outreach to the poorest groups; for instance, MILAN (2012) discovered that clients of the AMK microfinance institution in Cambodia are significantly wealthier than non-clients in the poorest demographic, suggesting that the poorest are not the primary focus of AMK's services.

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

Numerous studies have identified key factors contributing to the financial exclusion of poor farm households, who are often perceived as less creditworthy by lenders (ZELLER & SHARMA, 2000) This exclusion is exacerbated by the design of credit programs that may require clients to make substantial deposits before qualifying for loans (KIRKPATRICK & MAIMBO, 2002; MOSLEY, 2001), a requirement that is often unattainable for low-income individuals Additionally, many of the poorest clients exhibit a reluctance to take on loans due to fears of debt and the perceived risks associated with borrowing, leading to a significant aversion to loans among the most impoverished (CIRAVEGNA, 2005).

A key factor contributing to credit exclusion is the conflict between effectively targeting impoverished individuals and ensuring the financial sustainability of lenders Research by STANTON (2002) highlights a significant disparity in Mexico, where commercial banks often prioritize wealthier households for lending, as these borrowers offer collateral and seek larger loans, thereby minimizing transaction costs Conversely, extending credit to the rural poor presents challenges such as elevated transaction costs, asymmetric information, and competition from subsidized lending sources.

A study by AWUSABO-ASARE et al (2009) examined the poverty targeting of various financial institutions in Ghana, including rural banks, financial NGOs, savings and loans companies, Susu Associations, and Credit Unions The findings revealed that rural banks and financial NGOs primarily serve extremely poor clients, while savings and loans companies and Susu collectors cater to wealthier individuals above the average income level Credit unions typically provide loans to clients in the average to higher income brackets The authors recommend developing a more effective credit scheme to enhance financial access for the impoverished population.

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 the factors influencing accessibility According to VAESSEN (2001), outreach focuses on the perspective of credit institutions, while access pertains more to households Both terms address the issue of who qualifies for credit At the household level, credit access includes multiple approaches commonly discussed in existing literature.

Researchers have investigated the factors influencing credit access, with STANTON (2002) employing a two-stage probit model to analyze farmers' loan application decisions In the first stage, farmers assess their capital demand; if the optimal capital required for maximizing profits exceeds their current capital, they are likely to seek loans In the second stage, they evaluate potential lenders based on the expected costs and benefits of borrowing, applying for loans only if the net benefits are favorable Similarly, OKTEN and OSILI (2004) utilized a three-stage probit model to explore how family and community networks affect credit accessibility for rural households in Indonesia.

In 2011, RUNGRUXSIRIVORN conducted a multinomial logit regression to evaluate farmers' choices in selecting various loan sources Similarly, BEHR and SONNEKALB (2012) analyzed the number of loans granted per client to explore loan accessibility and utilization.

The relationship between lending practices significantly influences farmers' access to microcredit in Mozambique A foundational study by Togba (2012) utilized the Heckman Selection Model to investigate the factors that determine households' decisions to seek formal and informal credit in Côte d'Ivoire Collectively, these studies suggest that both the level of participation and the volume of credit accessed are critical factors to consider when assessing credit access.

DIAGNE et al (2000) introduce the concept of credit limit, which defines the maximum amount a lender is willing to extend to potential borrowers, serving as a framework for assessing credit access among households in developing countries A household is considered to have access to credit if it can secure loans from a specific source Lenders set interest rates based on borrower characteristics and the risk of default, often hesitating to lend to those deemed less creditworthy, even if they are prepared to accept higher interest rates Consequently, borrowers encounter a credit limit that exists independently of interest rates and collateral considerations.

Several studies have utilized the concept of credit limit to investigate credit access constraints, notably Zeller and Sharma (2002), who analyzed the factors influencing credit access for rural households in Bangladesh Their research involved querying each adult household member about the maximum credit they could borrow from both formal and informal sources, with existing borrowers reporting their received amounts and potential borrowers estimating their limits The total credit limit for a household is the sum of all adult members' limits Similarly, Swaminathan et al (2010) applied this concept to assess how credit access affects labor allocation patterns in Sub-Saharan Africa These studies emphasize the importance of considering credit accessibility for all adult members of a household, rather than just the head, though they also face limitations, such as not targeting specific credit sources and relying on uncertain credit volume estimates instead of actual amounts observed.

Credit access is defined as the ability of a household to obtain a loan, distinguishing it from the actual amount of credit received While some households may have the opportunity to borrow, they may choose not to take a loan, whereas others may want to borrow but face barriers that prevent them from accessing credit This distinction highlights the complexities of credit participation in households (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 highlights the relationship between lenders and borrowers, as demonstrated by GINÉ (2011) in his examination of Thailand's rural credit market This study emphasizes two key features: limited enforceability and fixed transaction costs, which impact accessibility Additionally, it suggests that enhancing the enforcement of private contracts and property registration significantly improves credit access within the formal sector.

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 developing effective credit schemes Research indicates that household endowments, such as educational levels, significantly affect credit access For instance, Zeller and Sharma (2002) found that higher education among female laborers in Bangladesh increases the likelihood of accessing credit, as these schemes often target women This trend is linked to the potential for higher income generation through participation in credit programs Additionally, the age of the household head plays a crucial role in credit access, reflecting their physical health and experience during economically productive years Family size also contributes to the household's human capital, further influencing credit accessibility.

Research by Izumida (2002) indicates that having more dependents in a household can restrict access to formal credit Conversely, an increase in the number of adult males within a household enhances credit access, as they are viewed as potential sources of future income Further analysis of credit access was conducted by F N Okurut (2006).

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) highlighted that farm size significantly influences access to both formal and informal credit Interestingly, the amount of loans received does not depend on farm size This can be attributed to households lacking essential inputs such as fertilizers, pesticides, agricultural extension services, and irrigation Additionally, inadequate infrastructure, particularly the road system, further complicates access to credit.

Improved access to village roads significantly enhances household access to formal loans in the Mekong River Delta of Vietnam, as noted by Phan Dinh Khoi et al (2013) This convenient connectivity plays a crucial role in reducing transaction costs associated with obtaining credit, thereby influencing overall credit accessibility.

Credit access is influenced by various factors, including the level of social capital, as evidenced by the distance from a household head's parents; in Bangladesh, greater distances correlate with lower credit limits (ZELLER & SHARMA, 2002) Community institutions and family networks play a crucial role in enhancing access to information about credit programs and reducing transaction costs for lenders by facilitating the screening, monitoring, and enforcement of credit contracts Consequently, participation in community meetings and events significantly improves credit accessibility for rural households in Indonesia (OKTEN & OSILI, 2004).

The relationship between borrowers and lenders significantly influences credit access, as highlighted by KROPP et al (2009), who explored trust's role in credit relations in the U.S and China Utilizing household income as a proxy for trust, their findings revealed that while absolute income levels do not affect repayment behavior, perceived relative poverty impacts creditworthiness Interestingly, poorer clients often maintain stronger ties with lenders due to their higher marginal utility of credit, motivating them to repay loans for future access Additionally, BEHR et al (2011) examined micro-lending in Mozambique, discovering that longer lender-borrower relationships help mitigate information asymmetry, enhancing credit access and expediting loan approvals A robust relationship with micro-lenders also reduces collateral requirements, further facilitating borrowing.

This section enhances our understanding of credit access and its determinants, highlighting various published studies on concepts like observed credit demand, credit limits, and contract theory A common theme among these studies is that household access constraints are linked to excess credit demand The methods used to analyze these constraints vary based on objectives, data availability, and characteristics Furthermore, the literature underscores the significance of different household capitals affecting credit access, which varies across countries, regions, and credit sources.

Credit repayment

Loan repayment is essential for sustaining the credit system, as it encompasses the entire credit cycle of financial institutions This cycle consists of three key phases: mobilizing funds, extending credit to borrowers, and collecting interest and principal repayments (SINGH, 2000).

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

Credit recovery plays a crucial role in the credit cycle, acting as a prerequisite for promoting resource mobilization and lending within credit institutions Consequently, the ability of borrowers to repay loans is a key factor in assessing their creditworthiness.

Previous research has identified various methods for assessing credit repayment performance SHARMA and ZELLER (1997) define "repayment rate" as the degree to which borrowers fulfill their obligations outlined in credit contracts In their study, they utilized the delinquency rate, which represents the percentage of the total loan amount that is overdue by the time the repayment is due, to evaluate the repayment performance of households in Bangladesh.

In 2000, it was suggested that overdue credit, defined as the amount of a loan not repaid by its due date, serves as a key indicator of repayment capacity Additionally, AL-AZZAM et al (2012) assessed repayment behavior by analyzing the total number of days loans were overdue after each due date.

The digitization by the Learning Resource Center of Thai Nguyen University highlights the intensity of loan defaults among households in Jordan Research findings suggest that overdue payments, whether partial or full, serve as indicators of the creditworthiness of borrowers.

Numerous authors have explored the factors influencing repayment behavior KHANDKER et al (1995) highlighted that infrastructure and market connectivity significantly impact farming productivity and credit repayment among Grameen Bank clients in Bangladesh In a similar vein, JULIA PAXTON (1996) emphasized that enhanced access to credit markets leads to improved repayment rates for households.

AL-AZZAM et al (2012) emphasize the significance of peer monitoring, group pressure, and social connections in mitigating delinquency Additionally, they note that religion influences individual attitudes and beliefs, as well as the repayment performance of households in Jordan.

Research indicates that lenders' initiatives can enhance credit repayment rates, even in impoverished and remote areas, provided that fundamental prudential banking principles are upheld (SHARMA & ZELLER, 1997) GODQUIN (2004) noted that overdue credit often stems from insufficient information, hindering lenders' ability to evaluate borrowers' creditworthiness Furthermore, borrowers' lack of training on effective credit utilization diminishes their repayment capacity Offering non-financial services, such as primary healthcare, basic literacy, marketing insights, and skills training, significantly improves repayment performance.

A study by CHAKRAVARTY and PYLYPIV (2015) found that microfinance institutions that rely more on private donations rather than public subsidies demonstrate better performance in monitoring borrower repayment rates Specifically, these institutions experience lower rates of portfolios at risk and fewer delinquent loans The research suggests that the source of funding significantly influences the utilization of funds within these institutions, ultimately affecting their financial performance.

Analysts have explored the connection between household characteristics and credit repayment performance A study by T DUFHUES et al (2011) enhances our understanding of how social capital affects loan repayment behavior among borrowers in Vietnam The research indicates that social capital, assessed through tie strength and social distance between borrowers and their networks, significantly and positively influences the rescheduling of loans.

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

The comprehensive study by NAWAI and SHARIFF (2010) identifies four key factors influencing credit repayment Firstly, borrower characteristics such as age, education, gender, business experience, and income play a crucial role Secondly, lender characteristics, including credit package design, screening methods, repayment incentives, monitoring practices, and associated transaction costs, are significant Thirdly, socio-economic conditions in geographical areas, including infrastructure like roads, electricity, education, and marketing, affect borrowers' production efficiency and repayment capacity Lastly, external risks such as weather conditions, pests, and diseases also impact borrowers' production efficiency and their ability to repay loans.

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 significantly enhances a household's willingness to invest in higher value crops and livestock, as it enables farmers to purchase essential inputs like fertilizers, seeds, and pesticides, thereby improving farming productivity Research indicates that credit facilitates the transition from labor-intensive to capital-intensive farming technologies through investments in machinery and advanced crop varieties Moreover, securing credit is crucial for farmers to adopt agricultural extension services, further boosting their productivity and efficiency in the agricultural sector.

DIAGNE et al (2000) highlighted that credit serves as a crucial tool for enhancing farmers' ability to manage risks and develop effective risk-bearing strategies Adverse weather conditions can damage crops, and livestock may fall ill, making credit essential for investing in new crops and livestock With access to credit, households are more likely to concentrate on their most productive agricultural practices.

Farmers who have access to credit are more likely to invest in advantageous crops and livestock, leading to increased returns, higher income, and improved consumption.

Figure 3.5 Access to credit influences household income

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

Research by Robinson (2001) and Swain et al (2008) indicates that credit plays a crucial role in helping poor households, which lack precautionary savings, to manage their consumption effectively In times of urgent need, these households can utilize credit for home consumption, avoiding the depletion of essential resources such as crops and livestock or the sale of valuable assets Access to formal credit reduces reliance on high-interest moneylenders, making it a vital tool for income stabilization (Anderson et al., 2002).

The reviewed studies indicate two categories of impact studies: those focused on investment direction and insurance orientation Recipients utilize credit to enhance production and income, which in turn significantly contributes to savings accumulation through increased earnings.

Factor income: On farm and off-farm

Disposable income for consumption and investment

Impact estimation in rural credit is a significant focus, yet one of the main challenges lies in isolating the effects of various simultaneous factors—such as education, experience, and extension services—on household outcomes The decision to secure a loan is often influenced by these factors, with a strong correlation observed between loan acquisition and attributes like age, entrepreneurial skills, and organizational capabilities While age is relatively straightforward to measure, defining entrepreneurial skills and organizational ability poses a challenge Consequently, ARMENDÁRIZ and MORDUCH (2010) proposed a foundational framework for assessing the welfare impact of credit, as demonstrated in Figure 3.6.

The primary goal is to assess the influence of credit on loan recipients The highlighted section emphasizes the significance of this impact, while T2 indicates the recipient's status four years post-loan acquisition.

The study posits that T1 indicates the recipient's status prior to receiving a loan in year 0 The difference in outcomes between T2 and T1 encompasses two key elements: the first includes both measurable and unmeasurable household characteristics that remain constant over time, while the second accounts for the effects of credit and socio-economic changes from year 0 to year 4, independent of credit influence Consequently, the true impact of credit is likely overstated when merely calculating the outcome difference between T2 and T1.

Identifying a control group without access to credit is crucial for accurate impact estimation, although finding an identical group is impossible It is assumed that the control group's initial income is lower than that of the treatment group To mitigate bias from socio-economic changes over time, analyzing the difference between T2-T1 and C2-C1 is more effective than simply comparing T2 and C2, as this method, known as "difference-in-difference," accounts for simultaneous factors over time However, since various attributes can change—such as increased agricultural extension services that enhance farming technologies and income—the control group must closely resemble the treatment group These considerations are vital for effectively estimating impact using a control or reference group.

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 evolution of the rural credit sector necessitates a thorough examination of its effects on farm households, highlighting the need for comprehensive evidence Existing literature indicates that the impact of credit can vary significantly, demonstrating substantial, negligible, or mixed effects based on specific circumstances.

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,

GUIRKINGER and BOUCHER (2008) conducted a study using a switching regression model on data from 443 farm households in Peru, revealing that credit constraints reduced total agricultural output by 26% Their findings indicate that improving access to credit enhances crop productivity Similarly, DONG et al (2012) found that eliminating credit constraints could increase farmers' income in Heilongjiang province, Northeast China, by 31.6%.

A study conducted by Mahjabeen (2008) explored the welfare effects of microcredit in Bangladesh, utilizing a general equilibrium framework and a financial social accounting matrix from 1999 to 2000 The findings revealed that microcredit significantly boosted the average income of rural households by 73% and increased their consumption by 50%.

A study conducted by MILAN (2012) utilized a fixed effect model with panel data to analyze the social performance of microfinance institutions in Cambodia The results revealed a significant increase in clothing and footwear expenditures among credit recipients compared to those who did not receive credit.

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

Utilizing two-year panel data and a difference-in-difference methodology, the authors demonstrated that credit cooperatives significantly enhance household income and consumption Nevertheless, it was observed that the majority of credit recipients belong to the non-poor demographic.

Numerous studies have investigated the influence of credit on household welfare in Vietnam BAO DUONG and IZUMIDA (2002) analyzed data from 300 households across three provinces, revealing that credit-constrained households, which either lacked collateral or feared rejection, experienced significant limitations Their findings, derived from a switching regression model, indicated that credit notably enhances the total production value of these households Expanding on this, CUONG (2008) utilized a fixed effect model with panel data to assess the role of preferential credit in alleviating rural poverty, concluding that such credit programs positively impact poverty reduction Similarly, DUY (2012) focused on the Mekong Delta, demonstrating that credit is a key factor in improving the technical efficiency of rice cultivators in this southern 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

In the 1840s and 1850s, microfinance emerged in Germany as a response to poverty, pioneered by Friedrich Wilhelm Raiffeisen and Herrmann Schulze von Delitzsch, who introduced credit cooperatives to alleviate the rural population's reliance on high-interest loans from moneylenders These cooperatives served as a form of banking for the poor, with a focus on altruism rather than profit maximization Since 1870, the movement has expanded beyond Germany into other European countries and globally, evolving into both commercial and informal financial sectors.

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 network comprised 39,000 branches and served 75 million clients, with financial intermediaries representing 64% and accounting for 51.4% of total banking assets By 2002, the number of microfinance branches decreased to 29,500, reflecting a 93% share of total branches following a reform process, while these institutions continued to focus on serving individuals and small to medium enterprises Savings and cooperative banks provided 53% and 57% of loans to small enterprises, respectively, with pre-tax return on equity recorded at 8.2% for savings banks, 9.2% for cooperative banks, and -3.1% for larger commercial banks, indicating greater profitability for smaller banks In Germany, former microfinance institutions constituted about 50% of total banking assets and catered to nearly 90% of the population (SEIBEL, 2005).

Microfinance in Germany has thrived due to several key factors, particularly the establishment of credit cooperatives founded on self-help and self-reliance principles These initiatives began at the local level, where rural communities utilized their resources to enhance their living conditions Self-reliance emphasizes development driven by local resources and cultural values, allowing rural individuals to create development plans tailored to their specific needs and aspirations This approach, viewed as essential for survival, has empowered rural Germans to achieve self-sufficiency, improve their livelihoods, and decrease reliance on external support.

The innovation in Germany's legal framework has significantly fostered the growth of credit cooperatives, beginning with the introduction of the first savings funds decree in 1838, followed by the establishment of the first Cooperative Act.

The incorporation of banking laws into savings funds and cooperative banks in 1889 has fostered a regulatory framework that supports the establishment of regional savings funds and cooperatives This framework, along with the supervision of microfinance institutions, has significantly enhanced savings mobilization, which is crucial for promoting self-help and self-reliance while serving as a primary source of credit for rural clients (HANNIG & WISNIWSKI, 1998) Historical experiences from Germany demonstrate the importance of providing savings services to rural areas and farmers As rural finance expands, diversifying savings options becomes essential to effectively address seasonality and covariance risks (BRANCH & KLAEHN).

The success of rural finance in Germany underscores the importance of self-help, self-reliance, and savings mobilization, along with innovative legal regulations It highlights the synergy between the growth of small enterprises and farms and the advancement of rural credit Small-scale financial institutions have effectively addressed the needs of farmers by consistently providing essential financial services.

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 initiated an action research project at the University of Chittagong to explore banking services for the rural poor This pilot project aimed to provide thousands of small loans to impoverished individuals, particularly focusing on women from the most disadvantaged households in rural areas.

In 1983, the successful demonstration of microfinance led to the establishment of the Grameen Bank in Bangladesh, which has effectively provided banking services to the impoverished while maintaining an impressive loan recovery rate exceeding 90% The bank's dropout rate remains low at around 5%, and over the years, rural poor clients have come to own 90% of the bank's shares, showcasing its commitment to empowering the underserved population.

Group lending, utilizing a "peer monitoring" approach, is crucial to the success of Grameen Bank This system not only streamlines administration but also fosters group liability, where if one member defaults, the entire group is accountable for the repayment Each member is individually responsible for their loan while also monitoring the repayment behavior of fellow members, creating a shared responsibility within the group.

Joint liability acts as collateral security in group lending, typically involving five members from the same village who are not related This approach offers mutual insurance against default, allowing members to minimize risks from the outset By sharing information and resources, group members support one another in meeting their obligations.

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 addresses key challenges in credit transactions, including screening, incentives, and enforcement (1990) By leveraging local knowledge, banks can effectively assess the creditworthiness of borrowers, transferring the risk of default to them and motivating timely loan repayments While incentives function well in smaller groups, they may lead to free-rider issues in larger ones Additionally, HUPPI and FEDER (1990) noted that group lending allows banks to achieve economies of scale, reducing costs associated with loan disbursement, risk management, and technical support However, its effectiveness is often contingent upon the presence of strong social sanctions within the community (BESLEY & COATE).

Group lending resembles the practices of local moneylenders who leverage their understanding of the community to provide loans to the impoverished The local poor recognize that these accessible loans are often essential for managing emergencies This necessity drives them to repay high-interest loans, ensuring they can secure future financial assistance when required.

Lending to low-income women has proven effective for Grameen Bank, as these women are often dependable in supporting their families and typically utilize loans for income-generating activities Additionally, the bank's experiences highlight that the poor can save, making savings mobilization a crucial source for future loans.

Government policies play a crucial role in promoting microfinance institutions (MFIs) and non-governmental organizations (NGOs) to offer financial services to the impoverished in Bangladesh Established in 1990, the Palli Karma Sahayak Foundation (PKSF) facilitates preferential loans from donors like the World Bank and the European Union, providing wholesale loans to MFIs while also delivering training in financial management and capacity building The introduction of the Micro-credit Act in 2006 led to the formation of the Micro-Credit Regulatory Authority (MRA), which has encouraged MFIs to formalize their operations Notable MFIs, such as Grameen Bank, Bangladesh Rural Advancement Committee (BARC), and the Association for Social Advancement (ASA), have expanded their financial services to over 14 million active clients, including the extremely poor, and now mobilize savings that benefit 30 million impoverished women.

The case of Bangladesh highlights the significance of group lending in tackling the challenges of rural credit markets Experiences indicate that loans can effectively reach the extremely poor when local knowledge is utilized effectively Furthermore, government policies play a crucial role in influencing the provision of banking services to low-income populations.

Conceptual framework

Building on the previous discussions, this section emphasizes the importance of the conceptual framework's design, illustrated in Figure 3.7, which highlights its three key elements.

Figure 3.7 The conceptual framework of the study

Source: Adapted and modified from H ULME (2000)

The model of conceptual chain highlights that household capital, which includes human, financial, physical, and social capital, is a key factor influencing the likelihood of household success (BHANDARI, 2013; DE SHERBININ et al., 2008) These forms of capital are believed to affect the accessibility of credit for households In turn, access to credit can positively impact the resources and activities of farm households, leading to improved outcomes Ultimately, credit may encourage households to leverage their capital more effectively, resulting in increased 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 unit of analysis in this study focuses on rural credit at the household level, as it aims to tackle poverty issues faced by families This aspect is particularly significant for credit programs designed to improve the economic conditions of these households.

The final aspect of the framework focuses on the type of analysis, emphasizing the significance of total household income and its components in rural Vietnam, particularly in disadvantaged regions In this context, these indicators serve as key measures of household welfare.

The conceptual framework assesses the income disparity between households with and without access to credit, while also recognizing that factors such as age, education, experience, and extension access significantly influence household outcomes It is crucial to identify the contributions of these simultaneous factors to accurately measure their impact on income Additionally, various household endowments may affect income levels In non-experimental studies, it is impossible for any household to participate in a credit program while simultaneously not participating, making the use of credit non-accessed households as a control group an appropriate approach (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 Universität Giessen
Chuyên ngành	Agricultural Economics and Related Sciences
Thể loại	Inaugural-Dissertation
Năm xuất bản	2015
Thành phố	Giessen

Định dạng
Số trang	237
Dung lượng	3,06 MB