Impact evaluation of microcredit on welfare of the vietnam rural household

ABSTRACT This research evaluates the impact of microcredit on the welfare of households living in the Vietnam rural areas, especially the poor.. non-From those results, the research give

VIETNAM -NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

IMPACT EVALUATION OF MICROCREDIT ON

WELFARE OF THE VIETNAM RURAL

HOUSEHOLD

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

DECLARATION

I certify that the contents of thesis have been carried out and written by me to the best of my knowledge and with the support in preparing this paper from many different sources

I certify that this thesis has not been submitted to any other programs or journals

PHAM TIEN THANH

I would like to give my special thanks to Prof.Dr Nguyen Trong Hoai, Dean of Vietnam-The Netherlands Programme and Dr Pham Khanh Nam, Academic Director of Vietnam -The Netherlands Programme Their knowledge and enthusiasm has supported me a lot during my thesis writing process

This is also a good opportunity to express my appreciation to all the lecturers who equipped me with valuable knowledge during my study at Vietnam -The Netherlands Programme

I would also like to appreciate Mr Nguyen Khanh Duy, Lecturer at the Faculty of Development Economics, University of Economics, Ho Chi Minh City His support with data as well as using econometrics software is a great contribution to the completion of my thesis

Lastly, I am grateful to my beloved parents who gave moral support and encouraged

me to finish my thesis during writing process

ABSTRACT

This research evaluates the impact of microcredit on the welfare of households living in the Vietnam rural areas, especially the poor The research is analyzed based on a data of the Vietnam household living standard survey (VHLSS) in the year 2008 The difference of the research in comparison with the previous studied about the relationship between microcredit and welfare is the employment of propensity score matching (PSM) method, thus it reflects the impact

of microcredit on rural households' living standard better and more precisely The result shows that microcredit will result in better welfare of rural households via a greater increase in the income and consumption per capita per month of the participating households However, the result about the poor rural households showed that microcredit does not result in a higher increase in income of the participants than that of the nonparticipants, but contributes to a greater rise in the consumption

The research also showed the determinants on the accessibility to microcredit programs of the households living in rural regions

The results found out that the probability of accessing the microcredit sources of the rural households in Vietnam is still low Moreover, the proportionate

of accessibility to microcredit of the poor household is even less that of the poor households, which means microcredit programs mistarget the poor households

non-From those results, the research gives policy recommendations to improve microcredit programs in rural areas as well as to support more poor households to access to microcredit sources

TABLE OF CONTENT

DECLARATION i

ACKNOWLEDMENTS ii

ABSTRACT iii

TABLE OF CONTENT iv

LIST OF ABBRIVIA TIONS vi

LIST OF TABLES AND FIGURES VII CHAPTER I 1

INTRODUCTION 1

1.1 Problem Statement ~ 1

1.2 Objectives of the study 4

1.3 Research questions 4

1.4 Organization of the research 5

CHAPTER II 6

LITERARTURE REVIEW 6

2 1 Overview of Poverty 6

2.1.1 Definition 6

2.1.2 Method of defining poverty 7

2.2 Overview of Microcredit 8

2.2.1 Some definitions 8

2.2.2 Characteristics of Microcredit 9

2.2.3 Overview of rural credit market in Vietnam 11

2.2.4 Overview of microcredit program in Vietnam 12

2.3 Empirical Study 17

2.3 1 Impact of micro credit on welfare/ living standard of the rural households 17

2.3.2 Determinants of the accessibility to microcredit programs 24

CHAPTER III 30

RESEARCH METHODOLOGY AND DATA DESCRIPTION 30

3.1 Model of determinants of access to credit 30

3.2.Impact Evaluation techniques 34

3.2.1 Some Definition 34

3.2.2 Impact evaluation using PSM technique 34

3.2.3 Impact evaluation using DID technique 38

3.3 Data Description 41

3.3.1 Survey area 41

3.3.2 Data sources • 41

3.3.3 Sample selection 41

CHAPTER IV 44

RESULT 44

4.1 Descriptive Statistics 44

4.2 Determinants on microcredit participation 46

4.3 Impact of microcredit on welfare of rural households using PSM 51

4.4 Impact of microcredit on welfare of the rural poor using PSM 52

4.5 Impact ofmicrocredit on welfare of rural households using DID with fixed effect 55

4.6 Comparison between the results ofPSM and DID method 56

4 7 Comparison with previous studies 57

CHAPTER V 59

CONCLUSION, POLICY RECOMMENDATION AND LIMITATION ••• ••••••• 59

5.1 Conclusion 59

5.2 Policy Recommendation 62

5.3 Limitation 64

REFERENCES 65

APPEND IX 63

LIST OF ABBREVIATIONS

···•··· ···'···

MFis Micro Finance Institutions

Vietnam Bank for Agriculture and Rural Development

am household living standard survey Nearest neighbor

Propensity Score Matching

LIST OF TABLES AND FIGURES List of Tables

Table 2.1: Poverty Rate in Vietnam 7

Table 2.2: Characteristics ofMicrocredit Programs in Vietnam from 2005 to 2011 12

Table 2.3: Main Characteristics ofthe MFis in 2011 14

Table 2.4: Characteristics ofMicrocredit Programs by VBSP from 2005 to 2011 16

Table2.5: Summary of Some Main Findings about the Impact ofMicrocredit Programs on Welfare/ Living Standards 20

Table 3.1: Descriptions of the Determinants on Accessibility to Microcredit 31

Table 3.2: Variables in the Analysis of the Impact ofMicrocredit using DID 40

Table 3.3: Characteristics of Comparison Groups in 2008 .43

Table 4.1: Impact ofMicrocredit on Income/Consumption ofRural Households using Independent Sample T-Test Methods 44

Table 4.2: Impact of Microcredit on Income/Consumption of the Rural Poor using Independent Sample T-Test Methods 44

Table 4.3: Distribution of Eligibility with respect to Treatment Households .45

Table 4.4: Credit Access with respect to Eligible Households .45

Table 4.5: Probit Estimations of Determinants on Accessibility to Microcredit .47

Table 4.6: Probit Estimation ofModel3 with Marginal Effect .48

Table 4.7: Impact ofMicrocredit on Income ofRural Households using PSM 51

Table 4.8: Impact ofMicrocredit on Consumption ofRural Households using PSM 52

Table 4.9: Impact ofMicrocredit on Income of the Rural Poor using PSM 53

Table 4.10: Sector of Production and Business on Which the Loan was Spent 53

Table 4.11: Reasons of Unchanged or Worse Living Condition 54

Table 4.12: Impact ofMicrocredit on Consumption ofthe Rural Poor using PSM 54

Table 4.13: Impact of Microcredit on Welfare of Rural households using DID with fixed effect 55

Table 4.14: Result Comparison between PSM and DID Method 56

Table 4.15: Results from the Previous Studies 51

List of Figures

Figure 2.1 : Gross Loan Portfolio of microcredit in Vietnam from 2005 to 2011 13

Figure 2.2 :Characteristics ofMicrocredit Programs by VBSP from 2005 to 2011 15

Figure 2.3 : Determinants on Accessibility to Microcredit and Welfare Indicators 29

Figure 3.1 : Illustration oflmpact Evaluation Using DID Method 39

CHAPTER I INTRODUCTION

The purpose of this chapter is to present chapter introduction of microcredit program as well as scope of the research such research methodology, research data, research objectives, and research questions

l.l.Problem Statement

Vietnam is considered one of the few countries that has obtained the remarkable achievement in poverty reduction As annual reports by GSO showed, the poverty rate has declined from 37.4 percent in 1998, to 18.1 percent in 2004 to 13.4 percent in 2008 In a report -by GSO (2008), the poverty rate in rural areas (16.1 percent) was higher than that in urban areas (6.7 percent) A large number of farmers in Vietnam are still living in poverty and under poor living standards Moreover, they have difficulties with accessing to credit sources especially, formal credit sources As a result, they mostly borrow from informal sources for financing their production as well

as for consumption That results in the fact that they may fall into deeper debt and default debt Therefore, in order to gain the more preeminent achievement of hunger eradication and poverty reduction as well as to help the poor escape from poverty, the Vietnam Government have invested a great number of capital as well as provided financial services to support the rural households, especially the poor in rural areas via credit programs One of the special credit programs that the Government applied the program is microcredit

As the definition by Microcredit Summit ( 1997), microcredit program is a program which provides small loans to poor people so that they can generate income to improve their living standard

Many countries have applied microcredit programs as a tool of poverty reduction as well as a channel of providing credit to rural households Microcredit has been popularly applied and its impact on welfare or living standard of households has

been ·studied by many authors However, there are two mixed opinions about the impact of microcredit as follows:

• On the bright side, Khandker, S R (1998), Yunus (2009) considered microcredit as the tool for the purpose of poverty alleviation and hunger eradication To reaffirm this statement, the study by Alexander (20 11 ), Zaman ( 1999), Kumar (2005), and Sarangi (2007) showed that microcredit program has positive impacts on the household's welfare via increasing their income and consumption

• On the limited side, some researchers argued that microcredit insignificantly affects welfare of households Coleman (1999) stated that there is no evidence

of the microcredit program impact on the living standard which is reflected via assets and income

However, in Vietnam, does this program actually have impacts on welfare and poverty of the rural households, especially the poor rural households as well as target these poor households?

In Vietnam, there have been also many researches about the impact of microcredit program on the households, especially the households in rural areas and the poor rural households Cuong Nguyen (2008) proved that VBSP microcredit programs enhance the incomes and expenditures of the rural households in Vietnam Also in his research, microcredit program is found to decrease the poverty-gap and poverty-severity indexes as well as contribute to poverty reduction of the participating households positively However, he found that among the participating households, the proportion of the non-poor is higher than that of the poor Tra Pham (20 11) reconfirmed that participation in microcredit programs by VBSP have positive effect

on self-employment profits of rural households Moreover, she found that participation

in microcredit program results in the higher increase in income of the poorest households than that of the medium-income households in Vietnam rural regions, then

this leads to the positive impact on poverty alleviation In a research on the case of the Vietnam rural households by Nadine R & Peter P M (2012), microcredit program was founded to improve the quality of water supply and the sanity system reflected via safer removal of human waste

The research is conducted in order to evaluate the impact of microcredit on welfare of rural household, as well as the poor in rural areas This research mainly focuses on PSM method using cross-sectional data, and applies DID method with fix effect technique using panel data to compare the results of PSM method The feasibility of PSM method is that there is no need pre- and post- program survey as required in as Difference in Difference (DD) method PSM method only requires the post program survey, so it is very useful when there is not pre-program surveyed data Meanwhile, DID method with fixed effect regression can measure the difference in an outcome pre - post attendance in the program, measure the difference in outcome among factors at the same time (separate the impact of microcredit and other factors on welfare), and the difference in outcome of impact of the program over time

The analysis of this research relies on data collected by the General Statistical Office of Vietnam (GSO), namely the Vietnam household living standard survey (VHLSS) in the year 2006 and 2008 The microcredit loans in this research are only derived from formal credit sources granted by VBSP, which is considered as the greatest providers of microcredit and the most typical representative of financial institution of the Government in anti-poverty program In Vietnam, most of the poor households are living in the rural areas; therefore, the research mainly focuses on analyzing households in rural areas, as well as the poor rural households

In addition to present the impact of microcredit on welfare or living standard of the households, the research also presents the determinants on the accessibility to microcredit programs of households living in the rural areas as well as the targeting of this program

Based on the results, relevant policies will be carried out to improve microcredit programs, and to support the poor

1.2 Objectives of the study

The general objective of this study is to evaluate the impact of the programs on the welfare of the households living in the rural areas, especially the poor

In order to achieve the overall goal, the research must meet the following specific objectives:

the living standards of the hous.ehold living the rural areas

households

111 Investigating the determinants on the microcredit programs participation of the rural households

accessibility to microcredit programs of the rural households

1.3 Research questions

In order to capture the research objectives, the research should answer the following questions:

welfare via income/ consumption per capita per month?

111 What is the determinants on households' access to microcredit programme?

1.4 Organization of the research

In order to achieve the above objectives, the structure of the research IS constructed as follows:

Chapter I : This chapter gives introduction about the microcredit program, research

methodology, research objectives, and research questions

Chapter II : This chapter presents literature review and empirical studies about the

issues related to the research such as poverty, credit market in Vietnam rural areas, impact of microcredit on welfare of the poor, as well as determinants on the participation in microcredit programs

Chapter III The first part of this c!tapter presents methodo)ogy applied m the

research, especially focusing on the PSM technique The second part gives description of data used for analysis

Chapter IV This chapter shows the result of the research such as descriptive

statistics; the determinants on the participation of microcredit programs; and the most important, the result of the impact of microcredit programs

on the welfare of the household via income per capita and consumption per capita

Chapter V This chapter presents conclusions of main findings in the research,

suggests policy recommendations, and mentions limitations of the research

CHAPTER II LITERARTURE REVIEW This chapter presents literature review and empirical studies about the issues related to the research The first part discusses about the overview of poverty regarding definition

of poverty and methods of defining poverty The second part presents overview of microcredit regarding definition, characteristics, microcredit market in Vietnam mral areas and the operation of microcredit program in Vietnam, especially the case of VBSP The last part discusses the impact of microcredit on welfare of housholds, as well as determinants on participation in microcredit programs by previous studies 2.1 Overview of Poverty

2.1.1 Definition

There is no one single definition of poverty Poverty can be defined as follows:

"The most commonly used way to measure pove11y is based on incomes A person is considered poor if his or her income level falls below some minimum level necessary to meet basic needs This minimum level is usually called the "poverty line" What is necessary to satisfy basic needs varies across time and societies Therefore, poverty lines vary in time and place, and each country uses lines which are appropriate

to its level of development, societal norms and values."- (The World Bank)

"Poverty is a situation in which a proportion of the population does not enjoy the satisfaction of basic human needs that have been recognized by the society depending on the level of economic and social development and local customs and practices." (Asia-Pacific Conference on Poverty Reduction by ESCAP, 1993)

There are many ways to defme poverty In general, poverty is expressed via three main aspects:

2 Living standard is below some minimum level necessary to ensure basic needs

3 There is no opportunity to join or integrate to the development of society

•'

In Vietnam, the Government accepted the definition of poverty by Asia-Pacific Conference on Poverty Reduction held by ESCAP (1993) Many methods to define poverty have been developed by GSO and MOLISA This research employed the Regional Rating Method by MOLISA to define poverty as well as the poor households

2.1.2 Method of defining poverty

This method specifies the poor via their expense on the goods baskets including food and non-food good, in which the expense on food products must ensure the level

of 2000 kalo/capita/day When the household cannot obtain this level, they are living in

Table 2.1: Poverty Rate in Vietnam

However, this method is not applied homogenously by each region To obtain the precise information on true income of households is very difficult because they often have tendency to under-declare their income

-2.1.2.3.Regional rating Method

This method is applied and developed by MOLISA To execute this, MOLISA

has employed such methods as investigation and reviewing in combination with quick

participation of households (Official Dispatch 3461/LD-TBXH-BTXH, 2011) Then,

the households will be interviewed by Commune staff about such criteria as income,

expenditure, assets, house condition, dependency ratio, sanity condition, etc,

Following these standards given by MOLISA, the local authorities at village level will

evaluate and choose which households are poor, then make a list and send to commune

District-level for being issued "Certificate of poverty"

Households with "Certificate of poverty" that will answer "YES" when being

question about their state of poverty are classified as the poor households in this

research

2.2 Overview of Microcredit

2.2.1 Some definitions

a Rural finance is defined as 'financial services offered and used in rural areas by

people of all income levels', and agricultural finances 'a sub-set of rural finance

dedicated to financing agriculture-related activities, such as input, supply,

production, distribution and wholesaling, and marketing' (The Consultative

Group to Assist the Poor (CGAP))

b Rural credit is the credit which is given to the farmers for agriculture and other

purposes relating to rural activities Rural credit makes up to 90 percent of

activities of rural finance market

c Microfinance is defined as providing to the poor and low-income people with variety of small-size financial services such as savings, credit and other basic financial services (United Nations)

d Microcredit

"Microcredit is a program which extend small loans to very poor people for employment projects that generate income, allowing them to care for themselves and

Microcredit is defined as provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for

Bank of India- Master Circular, 2011)

Microcredit programs have been considered as an effective tool for hunger eradication and poverty reduction Microcredit has been developed by the Grameen Bank under the leadership of Prof Muhammad Yunus, who received the Nobel Peace Prize in 2006

2.2.2 Characteristics of microcredit

In order to be considered as microcredit, the loan should include the such characteristics as :

Microfinance Institutions (MFis), the amount ranges between $30 and $200

In Bangladesh, the average loan size of microcredit is 393.55USD A report by Microcredit fund (MCF) showed that average size of microcredit loans is 795USD In this research, the amount to be considered as microcredit is the average loan size from VBSP at 444USD (Source: www.mixmarket.org in 2008)

(2) The high interest rate: The rate may vary from 15 to 35 percent per year

(Micro finance Institutions)

low-income households

to eradicate hunger and reduce poverty This objective can be achieved via income and employment generation

risk incurred by the lenders However, it causes difficulty for the poor because

of their lack of precious assets for collate_ral Therefore, microcre~it is an innovative lending service that provides the poor with loans without the need of collateral and only based on trust (Xia Li, 20 10)

borrows via using scheme such as group-lending The main mechanism of this scheme is that the members of group will monitor one another and be responsible for the repayment of the other members If one group member defaults, the whole group will have less opportunity to access to the program in the future Anderson and Nina (2000), Besley and Coate ( 1995) stated that group-lending scheme is considered as a "social collateral" which can help lenders to minimize default risk as well as reduce cost of monitoring

proportion of female borrowers all over the world is about 7 4 percent

In this research, the microcredit loans are extracted based on the definition of microcredit by Microcredit Summit ( 1997) and the information of microcredit loan size

by VBSP Therefore, microcredit needs to meet such characteristics as:

(1) The loan is granted and provided by VBSP The reasons to focus on only the case of VBSP are : (i) VBSP is the major provider of credit for the rural

households as well as the poor; (ii) VBSP is the most typical financial institution that best represents the Government in hunger eradication and poverty reduction campaigns; (iii) Nowadays, VBSP is the greatest provider of microcredit in Gross Loan Portfolio as well as the number of borrowers (Table 2.3), and these numbers tend to increase more and more (Table 2.4)

(2) The average loan size is about 444USD (7,360,00VND in term of exchange rate

in 2008 at 16580VNDIUSD) (Source : www.mixmarket.org in 2008);

(3) The purpose of borrowing is to run production or self-business m such industries as Agriculture, Forestry, Fishery, Business and Trading, Services, etc

2.2.3 Characteristics of rural credit market in Vietnam

"The formal rural credit is defined as the credit that provided by the Vietnam Bank for Agriculture and Rural Development (VBARD) and access to such a form kind of credit referred to ability to obtain a loan" (Vien, 2006) Besides VBARD, the Vietnam Bank for Social Policies (VBSP) and the Vietnam Bank for the Poor (VBP) are also the major sources of credit for rural households The main functions of these banks are targeted in struggling with hunger eradication and poverty alleviation as well

as becoming a major credit source for the poor, minority ethnic groups

The semi-formal credit sector provides loans through sociopolitical unions in the rural areas Some unions that have efficient operation in this sector include Women's Union Farmers' Association, or The People's Credit Funds (PCF),

Informal credit sources have been traditional providers of credit in rural areas and are the result of an underdeveloped formal credit market In Vietnam, informal credit market has played a significant role in providing credit to rural households in the past The characteristic of this sector are specified as:

The research only focuses on the formal credit sector with microcredit loans from VBSP

2.2.4 Overview of microcredit program in Vietnam

2.2.4.1 Microfinance institutions and performance of microcredit program

In Vietnam, microcredit program was first applied by Tinh Thuong (TYM) fund

m 1992 TYM was established in 1992 based on the model of Grameen Bank of Bangladesh and managed by the Vietnam Women's Union (VWU) After that, some more MFis were established such as Binh Minh CDC, CEP, etc However, at that time, the operation of microcredit programs by TYM as well as most of MFis was not adjusted and controlled under a legal framework Most of MFis at that time were only considered as political social organization Without legal framework, the MFis had difficulty in mobilizing capital

After the promulgation of the decree 28/2005/ND-CP that prescribes the establishment of small-sized financial institutions and the decree of 165/2007/ND-CP that amends and implements decree 28/2005/ND-CP, microcredit has been remarkably improved and increased in great quantity

Table 2.2: Characteristics of Microcredit Programs in Vietnam from 2005 to 2011

Figure 2.1: Gross Loan Portfolio ofMicrocredit in Vietnam from 2005 to 2011

Source: Calculated from the data at www.mixmarket.org

Table 2.2 and figure 2.1 showed the trend of microcredit from 2000 to 2012 From the year 2000 to 2002, the operation of microcredit was ineffective, the gross loan portfolio was small and increased very slightly From 2003 to 2006, the operation

of the program was improved, but there was only a moderate increase in the gross loan portfolio From 2007 to 2011, since the decree 28/2005/ND-CP and 165/2007/ND-CP took affected, there has been a remarkable increase in gross loan portfolio

Table 2.3 presented the most updated information (in 2011) about the number

of microfinance institutions as well as their operation via three indicators such as average loan per borrower, gross loan portfolio and number of active borrowers This table showed the outstanding role of main microfinance providers such as VBSP, CPCF, CEP, TYM and M7, in which VBSP is the greatest providers of such kind of lending service nowadays Therefore, this research analyses the impact of microcredit programs provided by VBSP only

Table 2.3: Main Characteristics of the MFis in Vietnam in 2011

Average loan

2.2.4.2 Microcredit program by VBSP

In 1995, the State announced the establishment of the Vietnam Bank for the Poor (VBP) with the purpose of poverty reduction Later, in 2003, the VBP was re-organized and renamed the Vietnam Bank for Social Policies (VBSP) The VBSP continued the mission of fighting poverty Since its establishment, VBSP has operated effectively via providing various lending service to support the poor One of the most effective lending service that VBSP provides is micro credit program Table 2.4 and figure 2.2 showed the operation of microcredit program by VBSP from 2005 to 2011

Figure 2.2: Microcredit Program Operation by_ VBSP

Gross Loan Portfolio

Table 2.4: Characteristics of Microcredit Programs by VBSP from 2005 to 2011

In his research about the impact of micro finance in Thailand, Brett E Coleman (2002) mentioned households' welfare including various factors such.as wealth, assets, livestock, self-business sales, expenses (medical expense, school expenses, etc., )

In this research, income/consumption is used to reflect welfare/ living standard

of households More income or more consumption means that the poor have better welfare or higher living standards

2.3.1.2 Independent variable :

Many empirical studies showed that there are various factors that affect welfare

of the poor in rural area Among these variables, microcredit plays a very significant role Microcredit has significant impact on many aspects of welfare of households such

as income, consumption, health, schooling, poverty reduction level, etc

Pitt & Khandker ( 1998) stated that microcredit has positive impact on living

Grameen Bank by Pitt et al (2003) also had the same conclusion that the participation

in microcredit has effect on the health status of children R.Khandker (2005) found in his research in Bangladesh that micro finance loan helps to improve the households' welfare such as consumption Moreover, Yasmine F Nader (2008) also concluded that microcredit play a significant role in helping the poor to escape poverty via affecting

their children's education, income and assets The research by Xia Li (2010) supported that microcredit can significantly foster the welfare of the participants by raising their income and consumption To re-affirm the above statements, in the case of India, the Reserve Bank of India (20 11) proved that microcredit enables the poor to raise their income and improve their living standards

In contrast, many researches argued that participation in microcredit program has no significant impact on welfare of households Coleman ( 1999) stated that there is

no evidence of the microcredit program impact on the living standard which is reflected via assets and income Moreover, Kazushi et al (20 1 0) found that there is no relationship between microcredit and households' income and expen.diture Also in their research, microcredit was proved not to effect poverty reduction instantly

In the case Vietnam, Cuong Nguyen (2008) proved that microcredit programs have positive impact on welfare via incomes and expenditures as well as poverty reduction of the participating households in rural regions Also, Tra Pham (20 11) found that participation in microcredit programs help to enhance on self-employment profits

of the poor and increase income of the poor as well as contribute to poverty reduction

programs positively contribute to the households' accessibility clean water as well as the advanced and safer sanity system

Table 2.5 summarized some mam findings on the significant impacts of microcredit programs on welfare and living standard of the rural households and the poor in rural areas

There are also many different arguments over pros and cons about microcredit that can be summarized as follows:

standards as well as fight against poverty Moreover, microcredit contributes a

new channel of providing credit servtces to population with low mcome, especially the poor (CGAP, 2002)

• Cons : Microcredit is not considered as a "one size fit all" program for the poor

or low income households: ( 1) With respect to the targeting, microcredit may not be suitable for the nomads and people with illness (CGAP, 2002); (2) With respect to the impact on welfare, in some specific cases, other alternative programs should be taken into consideration to better support the households (Xia Li, 201 0) Moreover, the participating households may not benefit from the program due to the misusages, and then they may even get into deeper debt (CGAP, 2002)

This research only focuses on the impacts of microcredit on the two indicators: (1) income, and (2) consumption of households in rural area

Table 2.5: Summary of main findings about the impact of microcredit on welfare/ living standards

Khandker Microcredit, DID between Bangladesh (Grameen, Microcredit reduced poverty rate by 5 (1998) Consumption, participants and non- BRAC) in 199111992 percent with respect to the participants

Poverty rate participants and 1998/1999 Moreover, microcredit increases their

consumption

Pitt and Microcredit, labor DID between In 87 villages of 29 Program participation increase weekly Khandker supply, treatments and districts m rural consumption per capita, nonland assets

Bank) during 1991- Programs has positive impact on

Brett E Microfinance loans, Tobit regressiOn; Northeast Thailand in The results found that microfinance has Coleman Various measures Weighted logit 1995-1996 positive effect on household welfare for (April, of households' regressions; Ranking only for the wealthy members, while its

Khandker Microfinance, 1) Fixed effect Tobit Bangladesh (Grameen Microfinance reduces poverty rate (18 (2003) mcome,

rate

Poverty estimation bank BRAC BRDB) percent for very poor households and

2) Panel data fixed m 1991/1992 and 8.5 percent for moderate poor effects estimation 1998/1999 households over 7 years)

' (2009) Productive

Li Microcredit,

Income, Consumption

PSM medhod usmg such techniques as

NN, Radius, Kernel, Stratified

Tobit and PSM models VIa usmg Nearest neighbor, Kernel

Two districts m Kenya, Microcredit program help to increase namely Nakuru - high households' productive incomes about tropics and Kakamega - 200 USD - 260 USD in a single the Low tropics production period

Cross-sectional data m Microfiance productive loans have India in 2001 collected by significant positive impact on welfare EDA Systems for Small indicators

Industries Development Bank of India

DID method, logistic Primary data: Surveyed in Microcredit has significant positive regression model Hubei Province, China in impacts the households' income and

2005 Secondary data: consumption

From the Rural Credit Cooperative

Kazushi et Microcredit, PSM and DID Gresik District of Moreover, Kazushi et al (2010) found

al (2010) Income/ Profits~ method using panel Indonesia m 2007 and that microcredit has no impact on

Cuong

Nguyen

(2008)

schooling expenditures Also in their research, microcredit was proved not

to have poverty-reducing impact instantly

Microcredit, Fixed-effect Incomes and regressiOn Expenditures panel data

In Vietnam rural areas in There is positive relationship between usmg 2002 and 2004, usmg microcredit programs and of

VHLSS data set collected households' welfare via incomes and

by GSO, focusing on VBSP expenditures, which results m the

(Specifically reduces poverty indexes

by 20 percent)

by GSO, focusing on VBSP case

self-employment profits of participating households

contribute to poverty alleviation effect positively, reflected via the higher increase in the income of the poor Qualitative method Four rural districts in Can Microcredit program has a positive based

on semi-structured interviews

water as well as the sanity system via the advanced and safer toilet system However, microcredit was found to have poverty reducing impact on only better-off households

2.3.2 Determinants of the accessibility to microcredit programs

Credit (including microcredit) procedure consists of two stages In the first stage (demand side), the borrowing households who demand credit apply for a certain amount of loan from formal or informal credit sources (the lenders) In the second stage (supply side), the lenders choose who can be granted credit and how much the loan size is, based on eligibility of the households

In a study of accessibility to formal rural credit in Northern Nicaragua, Vaessen (200 1) found that accessibility to credit was affected by the characteristics of supply-side (behaviors of banks or financial institutions) and demand-side (behaviors of households) In the case of Vietnam, Duong Pham (2002) analyzed the accessibility to rural credit via focusing on the determinants of borrowing of households (demand-side) and the determinants of credit rationing by the formal lending institutions (supply-side)

This research analyzes the determinants of accessibility to microcredit based on demand-side The determinants in this research will be classified into three levels: ( 1) Household head/ Individual level (e.g gender, age, square term of age, education, marital status, official status); (2) Household level (e.g ethnic, dependency ratio, land size per capita, house value (which is considered as a precious source of collateral); (3) Commune/village level (e.g Distance to bank, facilities of the commune, dummies for regions)

2.3.2.1 Education level of the household head

In the previous studies, there are many contrasting ideas about the impact of education on the accessibility to credit of households Education level is reflected via the years of schooling

Yehuala (2008), Okunade (2007), Okurut (2006), Vaessen (2001), educational level is founded to foster the probability of households' accessibility to microcredit program Xia Li (2010) also proved that households with head's education level at secondary school or lower are more likely to access to microcredit programs than those

without educated head However, Khandker (200 1 ); Khandker (2005), Thaicharoen,

results in lower probability of microcredit participation

In the case of Vietnam, Cuong H Nguyen (2007) also argued that the higher education level of the household head will lower the probability of accessibility to microcredit His research found that the households with head's education level at primary and lower secondary school are more likely to borrow from microcredit programs

2.3.2.2 Age

There are many contrasting conclusions about the relationship between age and the accessibility to credit Moreover, it seems to be complicated to interpret this factor because of its ambiguous characteristics M Anjugam and C Ramasamy (2007) showed that households with older head will less likely to borrow from credit program including microcredit Similarly, Okurut (2006) and Mohamed (2003) reconfirmed that the probability of accessing to credit sources decreases as the age of household head increase However, in the case of Vietnam, Tinh (20 1 0) argued that the age of household heads has a significant positive effect on the accessibility to credit

2.3.2.3 Marital Status

A research by Kenya National FinAccess (2009) shows that single individuals have less opportunities to access to credit, while the divorced/separated or widowed individuals have more opportunity to borrow from credit programs Moreover, the probability of participating in credit program is highest when individuals are married or live with their partners In a research in Vietnam by Tinh Doan (20 1 0), it is found that marital status has affected the accessibility to credit Single households are often considered as disadvantaged group, so they think they have difficulties in social networks Therefore, it results in the less likelihood of credit participation

2.3.2.4 Gender of household head

Bruno Cn!pon et al (20 11) proved that there is a high proportion of men accessing to micro credit in the rural areas in Morocco Similar to Bruno Crepon et al (20 I 1 ), a research result by Banerjee et al (20 1 0) also showed that men are only borrowers from the microcredit program However, in a research by Owuor George (2009), it was found that women get more attracted to microcredit program

2.3.2.5 Official Status

Cheng (2006), Xia Li (20 1 0) claimed that members working as official has higher demand for credit including microcredit to do investment and run their own business Moreover, official status also reflects the social status of households in their village or commune, which results in their closer connection with banks or financial institutions Therefore, that will help to foster the probability of accessing to credit 2.3.2.6 Household Size

The impact of this factor is ambiguous and varies from study to study, and thus there are contrary opinions about this factor

number of members in a household has positive effect on the likelihood of accessing credit program including microcredit In the case of Vietnam, Tinh Doan (20 10), Cuong H Nguyen (2007) also concluded that household size may influence the probability of credit access positively In contrast, Xia Li (20 1 0) argued that the higher household size will lower the probability of households' accessibility to microcredit

2.3.2 7 Economic dependency ratio

Husain (1998) stated that households with higher dependency ratio are less likely to access to microcredit programs because of their less capability of repayment Meanwhile, Xia Li (20 1 0) found that there is a positive relationship between

dependency ratio and the probability of participating in microcredit In the case of Vietnam, Duong Pham (2002) confirmed that the larger the number of dependents, the higher opportunities of accessibility to credit because of the greater probability of being poor Therefore, they demand more capital for mostly smoothing consumption 2.3.2.8 Ethnic of household

In the researches by Becker (1971), Yinger (1998) and Fafchamps M (2000), main ethnic groups may have higher probability of participation in credit program including microcredit From the hypothesis, applied to Vietnam case, it may be found that Kinh or Chinese households have more probability to access to microcredit

2.3.2.9 Land/ Farm Size

larger farm scale have greater demand for credit in order to run farm production, and thus they are more likely to participate in credit program including microcredit Nevertheless, Khandker (2001), Khandker (2005), Thaicharoen et.al (2004) argued that households with greater farm size are found to have less probability of accessing to microcredit program In the case of Vietnam, Cuong H Nguyen (2007) and Duong Pham (2002) concluded that land also positive effects on the participation in credit 2.3.2.1 0 Total value assets

Total value assets may be reflected via factors such as house value, fixed assets value, etc In the research in Malawi, Aliou Diagne (May, 1999) found out that total value of assets has negative impact on accessibility to microcredit participation The reason is that households with more total assets may be considered as the non-poor, so they have less demand for credit In contrast with Aliou Diagne, Cheng (2006) and Ruiz-Tagle (2005) stated the households with more assets may think that they are rich and then consume more, which results in higher demand for credit including microcredit This research uses house value as a factor of total value assets

2.3.2.11 Distance to credit institutions or banks

From the previous studies, credit access is also determined by distance to financial institutions or banks Ho (2004), Vaeseen (2000), Xia Li (2010) showed that the farther from banks the rural households live, the less they are likely to access to microcredit programs because they may incur more time spending and high borrowing costs resulting from such expenses as travelling, postal service or telecommunication Esther Duflo et al., (2008) reaffirmed that the villages in which distance to the bank is also significantly lower have higher participation than the other villages

2.3.2.12 Geographic location

Sharma and Zeller ( 1999) stated that geographic location is considered as a determinant of households' accessibility to microcredit For instance, households in mountainous areas are found to have lower probabilities of accessing microcredit due

to the shortage of information and disadvantages in transportation In the case of Vietnam, Duong Pham (2002) also had the same conclusion that region has impact on the accessibility to credit of rural households

2.3.2.13 Facility/ Condition of Commune

Khandker ( 1998) stated that the facility and condition of the communes may support accessibility to microcredit of households living in those communes/villages These facilities and condition may include the facts that whether there is any post office; or road to the commune/ villages; or radio broadcasting station

Based on the previous study, Figure 2.3 summarizes the determinants on participation to microcredit Programs as well as indicators that reflect welfare of households The figure present some welfare indicator, but this research only focuses

on income and consumption per capita per month The reason for choosing these two indicators is that the purpose of microcredit is to do business and run production for

generating mcome, so mcome and consumption will be a suitable measurement to reflect the results from business and production activities

Facility of Commune {Road Condition, Radio Station)

Income

Consumption

Accessibility to clean water

Accessibility to Education

Accessibility to Health care

Accessibility to Electricity

Number of Livestock

\Vealth

CHAPTER III RESEARCH METHODOLOGY AND DATA DESCRIPTION

The objective of this chapter is to discuss the methodology and data set that will be applied to analyze The first part presents methodologies such as probit model to analyze the determinant on accessibility to microcredit program; and PSM as well as DID to analyze the impact of microcredit on welfare, especially focusing on the PSM technique The second part discusses the issues related to data set used for analysis such as data survey, data source and sample size

3.1 Model of determinants of access to credit

In order to identify the groups for comparison, we conduct a model to forecast the determinants on the households' accessibility to micro credit programs, which can

be interpreted as the propensity score of each households

There are two common modeling methods to determine the credit accessibility: logistic regression models by Evans et al., (1999); Aghion and Morduch (2005); Coleman (2006); M.Duvedack and R.Jones (2011); Xia Li et al., (2011), and probit models by: Umoh (2006); Katsushi S Imai et al (2010); Kazushi et.al (2009)

Caliendo and Kopeinig (2005) stated that the results from logistic and probit models are very similar In this research, in order to determine the probability of accessing to microcredit of households, a pro bit model is conducted to estimate

The dependent variable (Credit) is binary (1 if households participate m microcredit program; and 0 otherwise)

The independent variables are divided into three groups as:

• The group 1 consists of variables reflecting characteristics of household head: gender, age, square term of age, education, marital status, and official status

• The group 2 includes characteristics of household level such as: ethnic, dependency ratio, land size per capita, house value (which is considered as a precious source of collateral)

• The group 3 reflects characteristics of commune/village level such as: distance

to bank, facilities of the commune (reflected via the fact that the commune has radio broadcasting station, automobile road to access commune, post office, or not), dummies for regions

The following model was formulated and developed based on the researches by Coleman (1999), Alexander (200I), A Aghion and Morduch (2005), Coleman (2006):

Probit( Crii) = a + {Jiij + yHii + oVij

Where: CriJ :participation in microcredit program of households

official status, ethnic, dependency ratio, land size, house value, distance to bank, facilities of the commune , dummies for regions) Based on strategy of simple to general, the research constmcts various models to

Percentage of Correct Prediction as well as multicolinearity test, the best model will be chosen

Table 3.1: Descriptions of Determinants on Accessibility to Microcredit

Independent

household head

HGEN =I : ifmale