Microcredit and welfare of the rural households in vietnam

LIST OF TABLESTable 2.1 - Welfare indicators...48 Table 3.1 - Microcredit trend in the world...53 Table 3.2 - Top 10 microcredit providers in the world...53 Table 3.3 - Microcredit provi

Pham Tien Thanh

MICROCREDIT AND WELFARE OF THE RURAL HOUSEHOLDS IN VIETNAM

PHD DISSERTATION IN ECONOMICS

HO CHI MINH CITY, 2018

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

*****

Pham Tien Thanh

MICROCREDIT AND WELFARE OF THE RURAL HOUSEHOLDS IN VIETNAM

Major: Development EconomicsCode: 9310105

PHD DISSERTATION IN ECONOMICS

ACADEMIC ADVISORS

1 Dr PHAM KHANH NAM

2 Assoc Prof Dr NGUYEN HUU DUNG

HO CHI MINH CITY, 2018

I hereby declare that this dissertation is my own work and it has not beenpreviously submitted for a degree elsewhere While my work contains informationfrom works done by other authors, all these references have been explicitly cited Tothe best of my knowledge, I would like to certify that the above statements are true

The dissertation has been done under the supervision of Dr Pham KhanhNam and Assoc.Prof.Dr Nguyen Huu Dung, the University of Economics,Hochiminh City This work was also done under the advice of Assoc.Prof.Dr.Katsuhiro Saito, the University of Tokyo during my fellowship period granted bythe World Bank Robert S McNamara at the University of Tokyo, Japan

Pham Tien Thanh

I am deeply indebted to my academic supervisors Dr Pham Khanh Nam andAssoc.Prof.Dr Nguyen Huu Dung at the University of Economics Dr Nam andAssoc.Prof.Dr Dung have supported me a lot during my study They have alsoprovided me with useful academic advice, valuable feedbacks, and encouragement

I am also grateful to my academic advisor Assoc.Prof.Dr Katsuhiro Saito,who instructs me in applied econometrics, during my fellowship granted by theWorld Bank Robert S McNamara at the University of Tokyo

I would also like to thank the academic committee at the University ofEconomics and the two independent external reviewers who gave me a lot of usefuland precious comments, which thereby help me improve my dissertation

I am also thankful to my lecturers who give me knowledge and advice on mydissertation I am particularly grateful to Assoc.Prof.Dr Pham Bao Duong, myacademic supervisor of master thesis, who encourage as well as support me withdata and comments on my Ph.D dissertation

I would also like to say thank to Mr Nguyen Khanh Duy at the University ofEconomics for many of his advice on research methodology and encouragement

Last but not least, I would like to express my deepest gratitude to my family,colleagues, and friends for their encouragement and support during the time Iconduct my Ph.D dissertation

Pham Tien Thanh

TABLE OF CONTENTS

COMMITMENTS i

ACKNOWLEDGEMENT ii

TABLE OF CONTENTS iii

ABBREVIATIONS viii

LIST OF TABLES ix

LIST OF FIGURES xi

CHAPTER 1 - INTRODUCTION 1

1.1 Backgrounds 1

1.2 Research problems 3

1.2.1 Accessibility to microcredit 3

1.2.2 Microcredit and adoption of improved rice varieties 5

1.2.3 Impact of microcredit on households’ welfare 7

1.2.4 Microcredit and health shock 9

1.3 Research objectives 10

1.4 Scopes of research 11

1.5 Research data 11

1.6 Research methods 11

1.6.1 Quantitative methods 11

1.6.2 Qualitative methods 12

1.7 Contribution of the research 12

1.7.1 Theoretical contributions 12

1.7.2 Practical contributions 13

1.8 Organization of the research 14

CHAPTER 2 – LITERATURE REVIEW 15

2.1 Overview of microcredit 15

2.1.1 Some definitions 15

2.1.2 Characteristics of microcredit 16

2.2 Theory 17

2.2.1 Overview of rural credit market 17

2.2.2 Asymmetric information 20

2.2.3 Theories on accessibility to credit 23

2.2.3.1 Theory of choice (Demand for credit) 23

2.2.3.2 Theory of credit rationing 24

2.2.4 Theoretical framework of outreach of microcredit 27

2.2.5 Farm household model under credit constraint 29

2.2.5.1 Producer problem 29

2.2.5.2 Consumer problem 30

2.2.5.3 Worker problem 30

2.2.5.4 Farm household model with credit 31

2.3 Empirical studies 32

2.3.1 Determinants of rural households’ accessibility to microcredit 32

2.3.2 Impact of microcredit on adoption of the improved rice varieties 38

2.3.3 Impact of microcredit on living standard 40

2.3.3.1 Empirical studies in the world 40

2.3.3.2 Empirical studies in Vietnam 41

2.3.4 Impact of health shocks and role of microcredit 44

2.3.4.1 Impacts of health shocks 44

2.3.4.2 Strategies to cope with health shocks and role of microcredit 46

2.4 Definitions of welfare 48

2.5 Logical framework of impact evaluation of microcredit on welfare 49

CHAPTER 3 – OVERVIEW OF MICROCREDIT 52

3.1 Microcredit in the world 52

3.2 Microcredit in rural Vietnam 54

3.2.1 Microcredit providers 54

3.2.2 Credit activities and clients 59

3.2.3 Poverty reduction role of microcredit 61

CHAPTER 4 – DETERMINANTS OF ACCESSIBILITY TO MICROCREDIT 62

4.1 Research method 62

4.1.1 Estimation strategy 63

4.1.2 Selection of variables 65

4.1.2.1 Dependent variable 65

4.1.2.2 Explanatory Variables 66

4.1.3 Research hypotheses 68

4.2 Research data 70

4.2.1 Data source 70

4.2.2 Research sample 71

4.2.3 Descriptive statistics 71

4.3 Results and discussions 74

CHAPTER 5 – MICROCREDIT AND ADOPTION OF IMPROVED RICE VARIETIES 82

5.1 Research method 82

5.1.1 Estimation strategy 82

5.1.2 Selection of variables 86

5.1.2.1 Dependent variables 86

5.1.2.2 Independent variables 87

5.1.3 Research hypotheses 88

5.2 Research data 88

5.2.1 Data source 88

5.2.2 Research sample 88

5.2.3 Descriptive statistics 89

5.3 Results and discussions 91

CHAPTER 6 – IMPACT EVALUATION OF MICROCREDIT ON WELFARE 103 6.1 Research method 103

6.1.1 Estimation strategy 103

6.1.1.1 Propensity Score Matching (PSM) 103

6.1.1.2 Difference in Difference (DID) 105

6.1.1.3 PSM-DID 105

6.1.2 Selection of variables 107

6.1.2.1 Microcredit variable 107

6.1.2.2 Variables for calculation of propensity score 107

6.1.2.3 Welfare variables 108

6.1.3 Research hypotheses 108

6.2 Research data 109

6.2.1 Data source 109

6.2.2 Research sample 110

6.2.3 Descriptive statistics 110

6.3 Results and discussions 110

6.3.1 Propensity score and balancing test 110

6.3.2 Average impact of microcredit program 113

CHAPTER 7 – ROLE OF MICROCREDIT IN MITIGATING THE EFFECTS OF HEALTH SHOCKS 121

7.1 Research method 121

7.1.1 Estimation strategy 121

7.1.2 Selection of variable 123

7.1.2.1 Dependent variables 123

7.1.2.2 Health shocks variables 123

7.1.2.3 Microcredit variable 124

7.1.2.4 Other control (explanatory) variables 125

7.1.3 Research hypotheses 126

7.2 Research data 126

7.2.1 Data source 126

7.2.2 Research sample 127

7.2.3 Descriptive statistics 127

7.3 Results and discussions 129

7.3.1 Are health shocks unanticipated? 129

7.3.2 First stage results using instrumental variables 130

7.3.3 Illness/ Disease/ Injury of working-age members (HS1W) 133

7.3.4 Illness/ Disease/ Injury of any members (HS1A) 136

CHAPTER 8 – CONCLUSIONS 138

8.1 Objective 1: Determinants of accessibility to microcredit 138

8.1.1 Summary 138

8.1.2 Policy implications 139

8.1.3 Limitations and further studies 141

8.2 Objective 2: Microcredit and adoption of improved varieties 142

8.2.1 Summary 142

8.2.2 Policy implications 143

8.2.3 Limitations and further studies 144

8.3 Objective 3: Impact evaluation of microcredit on welfare 145

8.3.1 Summary 145

8.3.2 Policy implications 146

8.3.3 Limitations and further studies 147

8.4 Objective 4: Role of microcredit in mitigating the effects of health shocks 148 8.4.1 Summary 148

8.4.2 Policy implications 149

8.4.3 Limitations and further studies 149

REFERENCE 150

Reference in the world 150

Reference in Vietnam 167

Websites 171

APPENDICES 172

Vietnam Bank for Social PoliciesVietnam Bank for Agriculture and Rural Development

Postal Savings Company

LIST OF TABLES

Table 2.1 - Welfare indicators 48

Table 3.1 - Microcredit trend in the world 53

Table 3.2 - Top 10 microcredit providers in the world 53

Table 3.3 - Microcredit providers in Vietnam 60

Table 3.4 - Living standards of clients before and after borrowing 61

Table 4.1 - Variables for analysis of determinants of accessibility to microcredit 67

Table 4.2 – Description of loans obtained 72

Table 4.3 - Characteristics of variables for analysis of determinants of accessibility to microcredit 73

Table 4.4 - Estimated results of determinants of accessibility to microcredit - Whole sample 79

Table 4.5 - Estimated results of determinants of accessibility to microcredit - Non-poor sample 80

Table 4.6 - Estimated results of determinants of accessibility to microcredit - Poor sample 81

Table 5.1 - Variables used for analyzing impact of microcredit on adoption 87

Table 5.2 - Characteristics of adoption variables 89

Table 5.3 - Characteristics of variables that affect adopting decision 90

Table 5.4 - Microcredit and adoption of improved rice varieties - IV 2SLS using 3 IVs 92

Table 5.5 - Microcredit and adoption of improved rice varieties - IV 2SLS using 1 IV 92

Table 5.6 - Microcredit and adoption of improved rice varieties 94

Table 5.7 - Microcredit and adoption of improved rice varieties – Poor and non-poor sample 102

Table 5.8 - Impact of microcredit on other investment activities 102

Table 6.1 - Definition of welfare variables 108

Table 6.2 - Probit estimations for calculation of propensity score 112

Table 6.3 - Balancing test 113

Table 6.4 - Impact of microcredit on income and total output value 114

Table 6.5 - Impact of microcredit on food expenditure 118

Table 6.6 - Impact of microcredit on accumulation of durable assets 119

Table 7.1 - Types of health shock 124

Table 7.2 - Microcredit borrowed by households 125

Table 7.3 - Descriptive statistics of variables for used analysis of health shocks 128

Table 7.4 - Unanticipation of health shocks 129

Table 7.5 – First stage results using IV for HS1W 131

Table 7.6 – First stage results using IV for HS1A 131

Table 7.7 - Impact of health shocks on income and labor and the role of microcredit using VFE 132

Table 7.8 - Impact of health shocks on consumption and the role of microcredit using VFE 132

LIST OF FIGURES

Figure 2.1 – Credit constraint and unconstraint 26

Figure 2.2 - Analytical framework of impact of microcredit on welfare 43

Figure 2.3 - Conceptual framework of impacts of health shock 45

Figure 2.4 - Logical framework on impact evaluation of credit on welfare 50

Figure 2.5 – Analytical framework on accessibility to microcredit and its impact on welfare 51

Figure 3.1 – Microfinance providers in Vietnam 54

CHAPTER 1 - INTRODUCTIONThis chapter includes eight sections Section 1.1 presents the background on

socio-economic situation in Vietnam, particularly in the rural areas, and thereby

explains the significance and necessity of this research Sections 1.2-1.3 present the

research problems and objectives

Sections 1.4-1.6 discuss the research scope, data and methods used for qualitative and quantitative analysis Section 1.7 presents the contribution of the research in terms of theory and practice The final section presents the organization

of the research

1.1 Backgrounds

Poverty reduction, access to education, clean water, sanitary, health care, etc.are the top concerned among 17 Sustainable Development Goals - SDGs) whichformerly was Millennium Development Goals (MGDs) They are the importantissues and attract the attention of every country, especially the developing countrieslike Vietnam During the past decades, Vietnam has obtained remarkableachievements in the socio-economic development and poverty reduction

Statistics show that the poverty rate has declined from 37.4 percent in 1998

to 5.8% in 2016 (Demombynes & Vu, 2015; GSO, 2016) The report also showsthat the poverty rate in 2016 in rural areas (7.5%) is nearly four times higher thanthat in urban areas (2%)1 The statistics indicate that a large number of ruralhouseholds still live in poverty under poor living standards and suffer from the lack

of socio-economic opportunities Household income in rural area is rather low Inparticular, a report by GSO (2016) shows that per capita income per month of therural households is, on average, 2,437 thousand VND In the rural, per capitaincome per month of the bottom quintile (the poorest) is 676 thousand VND, thesecond bottom (the near-poor) 1,246 thousand VND and the top quintile (the

1 New poverty line (Measured by income per capita per month) in 2016 is 630 and 780 thousand VND in rural and urban areas, respectively.

richest) 5,669 thousand VND Therefore, it indicates that income of the poorest isaround 8.4 times lower than that of the richest, which is a great gap Consumption

of the rural households is quite low In particular, a report by GSO (2014) showsthat per capita expenditure per month of the rural households is, on average, 1,609thousand VND More specifically, per capita expenditure per month of the bottomquintile (the poorest) is 834 thousand VND, the second bottom (the near-poor)1,154 thousand VND and the top quintile (the richest) 2,576 thousand VND, whichindicates a big gap between the poorest and the richest in terms of expenditure

Poverty reduction, income improvement and good health, especially in therural area, are the most concerned issues among the 17 SDGs In the world and inVietnam, many programs and activities have been implemented to achieve thesegoals, for instance, training, agricultural extension, agricultural technology, finance,job creation, etc Among them, credit is considered as the most important factor inincome-generating activities since the rural households, especially the poor,normally face financial constraint Without accessibility to formal credit support,poor farmers are unable to expand their production and improve their livingconditions (Duong & Izumida, 2002; Li et al., 2011)

As above-mentioned, a large number of rural households in Vietnam are stillliving in poverty The poor have high demand for credit; however, credit market inrural Vietnam normally faces the problem of demand excessing supply As a result,the poor have difficulty in accessing formal credit due to the lack of collateral Inrural Vietnam, formal credit is mainly provided by the Vietnam Bank forAgriculture and Rural Development and Vietnam Bank for Social Policies (Ho &Duc, 2015), and recently by microfinance institutions

Inability to obtain formal credit has inhibited farmers from investment andthen improving their living conditions Therefore, farmers may rely on informalcredit sources to support their production and consumption even though they mustpay a much higher interest rate, which may push them deeper into ‘vicious debtcircle’ due to less repayment capacity The reasons why farmers still accept the high

interest rate from informal sources are its collateral-free merit and quick borrowingprocedure.

Since its birth, microcredit programs provide the poor with opportunities to

be more accessible to formal and semi-formal credit sources (Li et al., 2011) Somemerits of microcredit are collateral-free and to serve the poor By definition,microcredit is defined as a small loan granted to the poor so that they can runproduction or do business to generate income and improve their well-being(Microcredit Summit, 1997) Many researchers and practitioners considermicrocredit as an effective instrument to improve well-being of the poor Therefore,this research aims to examine accessibility to microcredit and its economic impacts

on welfare of rural households Accordingly, relevant policies will be suggested tosupport the poor with better access to microcredit sources and improve theeffectiveness of microcredit in investment, thereby increasing their living standard.Therefore, to capture these primary research objectives, the following specificobjectives will be included and analyzed:

1.2 Research problems

1.2.1 Accessibility to microcredit

Morduch and Haley (2002) state that credits can help the poor to improvetheir living standards or at least cover their living expenses However, a research byBrau and Woller (2004) find that the poor have difficulties in accessing to formalcredit sources; particularly, the poor in the developing countries have moredifficulties in accessing than those in the developed countries In Vietnam, manyrural households normally have difficulties in accessing to credit, especially poorhouseholds, households in remote areas, the ethnic minority groups, or householdsoperating in such fields with high risk as aquaculture, etc., These households alwayshave high demand for credit (Duong & Izumida, 2002) but they have somedifficulties in borrowing from formal and semi-formal credit sources such as banks

or financial institutions As a result, many households have to borrow from informal

credit sources such as friends, relatives, money-lender, etc The Government hastaken a lot of effort to support the rural households with accessing to formal andsemi-formal credit but the result is still rather limited To increase efficiency offinancial services as well as better serve the poor, it is essential to understand thefactors that affect participation in microcredit of the rural households, therebyimplying appropriate policies Therefore, this study is conducted to investigate thefactors that affect the accessibility to microcredit sources.

The objective of microcredit programs is to serve the poor However, aresearch by Nguyen (2008) finds that the number of poor households with access tomicrocredit program is lower than that of the non-poor Accordingly, this researchwill investigate whether the poor households are better able to participate inmicrocredit programs than the non-poor In addition, one of the attributes ofmicrocredit programs is that the target clients are women Therefore, this researchalso investigates the role of gender in participation in microcredit In particular, thisresearch examines whether the female household heads can have better accessibility

to microcredit sources than the male counterparts This objective is conducted usingmodels for binary logistic model with panel data

Since most of previous empirical studies examine accessibility to microcredit

or credit using cross-sectional data only, some contributions of this researchobjectives include: (1) It applied binary logistics with longitudinal data, therebycapturing the changing across time (2) Various approaches such as Random Effect,Fixed Effect and Pooled estimation are employed for robust check to capture thebest results (3) Another contribution is that the whole sample is then decomposed tothe poor and non-poor sample for check for the heterogeneity to capture deeperunderstanding In terms of practical contribution, the findings from this objectivewill imply relevant policies to enhance the accessibility to microcredit as well as theoutreach of microcredit programs

Research question 1: What are determinants of accessibility to microcredit

of rural households? Do poverty status and gender matter?

1.2.2 Microcredit and adoption of improved rice varieties

Agriculture plays a crucial role in the economy of every country, especiallythe developing countries In Vietnam, agricultural sector contributes nearly 33billion USD to gross domestic product (GDP) in 2015, around 17-percent share(World bank, 2016) In addition, nearly half (46.8%) of the labor force in Vietnamare employed in agriculture in 2013 (World bank, 2016) Agriculture contributes toensure food security and generate income for economic development (Datt &Ravallion, 1996) Moreover, in the developing countries, agriculture is a majorincome source of rural households that derives from domestic sales and export(Singh et al., 1985) Therefore, the improvement of quantity and quality ofagricultural output is a focal point of the government in the developing countries(Bonnin & Turner, 2012) However, the population in the world as well as in thedeveloping countries has increased more and more and the urbanization has been sorapid, which results in less land resource for agricultural production Accordingly,productivity improvement via expanding land area is no longer appropriate.Therefore, the most possible solution to enhance output is to adopt new high-yieldtechnologies, such as mechanization, modern inputs and production practices

Rice is considered as one of the main staples in the world and developingcountries like Vietnam In Vietnam, total area of rice farming is around 7,790thousand hectares with total production output of 43,609 thousand ton in 2016(GSO, 2016), which makes rice rank the first among annual crop Rice is theleading cultivar in terms of export volume with 4,835 thousand ton and rank second

in terms of export value with 2.1 billion USD (GSO, 2016) Rice production is animportant source of export earnings for rice economies like Vietnam Therefore,enhancing quantity, quality and value of rice is the urgent and important issue

Literature documents that adoption of improved rice varieties is considered

as an effective way to enhance productivity due to their attributes of short duration,high yield and climate-resistance (Sall et al., 2000) However, improved varieties

adoption may only become effective in enhancing productivity when beingcombined with modern fertilizers and cultivation practices (Karanja et al., 2003).

In reality, adoption of new varieties normally incurs high initial cost and highrisk, which inhibit the farmers’ decision toward adoption, especially the farmerswith financial constraint Several studies find that credit can facilitate thehouseholds’ investment in agricultural innovation in general and improved varieties

in particular This can be explained via two mechanisms (Eswaran & Kotwal, 1990;Zeller et al., 1997; Diagne et al., 2000): (1) Credit relaxes financial constraint of thefarmers, and thereby they can invest in agriculture; (2) Credit plays a role as copingstrategies with shocks, including agricultural shocks (disaster, pestilent insect, etc.)

In fact, adoption of improved cultivar varieties may be affected by farmers’perception, education, risk attitude, knowledge and management of agriculturalextension center, and soil conditions of the area In addition, this adoption mayrequire complicated cultivation practice, more time, labor and capital thantraditional strategies since farmer need to pay more for new and certifiedagricultural inputs such as seeds or fertilizers (Chi, 2008; Dung & Thanh, 2017)

The previous studies only investigate the determinants of adoption of newvarieties in general, but do not focus on the role of credit on adopting decision.Moreover, most of the previous studies observe the behaviors of all farmers whilethere are very few studies that investigate in detail the behaviors of farmers with andwithout financial constraints or poor or non-poor status In addition, most ofprevious studies only investigate the determinants of whether to adopt the improvedvarieties There have been limited number of studies on the decision of farmers inthe two stages, including whether to adopt and intensity of adoption In Vietnam,there has been no empirical study investigating the relationship between microcreditand adoption of improved rice varieties

This study research objective aims to fill these gaps Therefore, somecontributions of this objective include: (1) it examines the effect of microcredit onfarmers’ decision on adoption of improved rice varieties in two stages, including

whether to adopt and how much to adopt Therefore, instead of a simple model, thisresearch employs two-stage models such as Double-Hurdle (DH) or Heckman toclarify the farmers’ adoption decisions in two stages For robustness check, suchmodels as Tobit are also applied for comparison (2) It employs IV to treat for thepotential endogeneity of microcredit (3) It investigates in detail the behaviors ofeach specific group by categorizing sample to the poor and non-poor groups Interms of practical contribution, the findings from this objective will imply relevantpolicies to foster the adoption of improved rice varieties via credit programs,including microcredit.

Research question 2: Does microcredit enhance the farmers’ decision on

adoption of improved rice varieties in two stages, including whether to adopt andhow much to adopt?

1.2.3 Impact of microcredit on households’ welfare

Microcredit programs have been applied in many countries as a tool ofpoverty reduction and hunger eradication The impact of microcredit on livingstandard of rural households has been studied by many scholars, practitioners andpolicymakers However, their findings are mixed and inconsistent

Khandker (1998) and Yunus (2003) consider microcredit as a tool for thegoal of fighting poverty and improving welfare Microcredit is also found to havepositive and significant effect on welfare of the rural households via improving theirconsumption and/or consumption (Li et al., 2011b; Mahjabeen, 2008) It is alsoproved that households with access to microcredit can improve their children’ healthcondition (Pitt et al., 2003) or education (You & Annim, 2014)

However, some researchers argue that microcredit has insignificant effect onhouseholds’ living standard Coleman (2006) finds no evidence for the impact ofmicrocredit on less wealthy households’ living standards, while Khandker andKoolwal (2013) contrast that only smaller landholders benefit from microcredit viaincreasing their agricultural income Takahashi et al (2010) conclude that

microcredit has no significant impact on various outcomes, except for sales fromself-employment for the non-poor and schooling expense for the poor, therebyindicating that microcredit has no immediate impact on poverty reduction.

In Vietnam, there have been many studies about the impact of microcredit onthe welfare of the rural households The empirical studies show that microcreditimproves households’ welfare via increasing income, expenditure, self-employmentprofits or contributing to poverty reduction (Nguyen, 2008; Quach, 2017; Lensink

& Pham, 2011; Ho & Duc, 2015) In some cases, microcredit is found to have no impact on income, but only consumption (Phan et al., 2014)

Literature shows that the impact of microcredit on welfare is still in argumentand the results are mixed among studies and depend on indicators used to measurewelfare While there have been many studies about the role of microcredit inVietnam, neither of them investigates its impact on multi-dimensional aspects ofwelfare This study aims to fill these gaps

Therefore, some contributions of this research objectives include: (1) Itexamine the role of microcredit on various welfare indicators such as income, foodconsumption, and accumulation of assets (2) It is noteworthy that lack of empiricalstudies in the world investigates the impact of microcredit on outcome fromcommon property resources (e.g catching aquaculture from river, sea, or collectingforestry resources) (3) For robustness check and to capture to better results, thisresearch applies various impact evaluation techniques such as standard Difference

in Difference (DID) and Propensity Score Matching (PSM) combined with DID (4)Another contribution is that it applies the most recent data (survey 2012 and 2014)

to capture the current situation of microcredit, as microcredit much changes acrosstime in terms of loan size In terms of practical contribution, the findings from thisobjective will imply relevant policies to enhance the effectiveness of microcredit

Research question 3: Does microcredit improve rural households’ welfare,

measured by income, output value, food consumption and asset accumulation?

1.2.4 Microcredit and health shock

A research by Banerjee and Duflo (2012) finds that when health is improved,people can study or work better, which thereby improves their future income In thedeveloping countries, the social security system is not well-organized.Consequently, when households face any health problem, they normally face bigtrouble, especially the poor Systematic review by Alam and Mahal (2014) revealsthat health problems may have impact on household via some channels Forinstance, when the workers in the family cannot work due to health problems, it willlead to an increase in medical expense and a decrease in income The same outcomemay happen when care-givers cannot work to give cares to other sick/diseasemembers To alleviate such burden, the households with health problems willnormally use a certain coping/mitigating strategy However, when the social securitysystem is less developed and the formal coping/mitigating strategies are notavailable, the households may take advantage of informal coping strategies such asreduced consumption, informal loan, or selling assets

Regarding the role of microcredit in coping with health shock, there havebeen few studies (Gertler et al., 2009; Islam & Maitra, 2012) These studies statethat households with access to microfinance can smooth their consumption betterthan those without any coping strategies

In Vietnam, impact of health shock has been researched in the empiricalstudies (Wagstaff & van Doorslaer, 2003; Wagstaff, 2007; Mitra et al., 2015;Okonogi et al., 2015) However, neither of them investigates the role of microcredit

in mitigating the impact of health shocks, especially in relation with other outcomes.Therefore, this research objective aims to fill these gaps and examines twoobjectives The first objective is to examine the impact of health shocks welfare.The second and more important one is to investigate the role of microcredit inmitigating the consequence of health shocks

Some contributions of this objective are: (1) It uses on various welfareindicators (income, consumption, and notably, mobility of child and elderly labor)

and (2) two types of health shocks to capture a deep understanding on the effects ofdifferent health shocks and microcredit on different outcomes (3) This studyemploys regression without and with Village Fixed Effect (VFE) using the paneldata to make comparison and capture the best results (4) The final contribution isthe use of IV 2SLS approach to treat the potential endogeneity of microcredit Interms of practical contribution, the findings from this objective will imply relevantpolicies to enhance the effectiveness of microcredit.

Research question 4: Does microcredit mitigate the adverse effects of health

shocks on income, consumption and intra-household labor mobility?

1.3 Research objectives

The primary research objective is to investigate the accessibility tomicrocredit programs and its impacts on welfare However, it is important to capturethe impact mechanism of microcredit Accordingly, following logical framework in

Section 2.5, this research includes the following specific objective:

(1) Investigate the determinants of accessibility to microcredit of the ruralhouseholds; in particular, whether microcredit serves the poor and womenborrowers Further investigation is also conducted on the poor and non-poor sample

(2) Examine the role of microcredit in enhancing farmers’ decision onadoption of improved rice varieties in both stages, including whether to adopt andhow much to adopt Research sample is also decomposed into the poor and non-poor for further investigation

(3) Evaluate the impact of microcredit on the rural households’ welfare,measured by various indicators such as income, total production value, foodconsumption, and asset accumulation

(4) Examine the role of microcredit in mitigating the effects of health shocks

on income, consumption and intra-household (child and elderly) labor mobility

1.4 Scopes of research

Microcredit is widely provided in urban and rural areas Both banks andMicrofinance Institutions (MFIs) provide microcredit In addition, many indicatorscan be used to define microcredit, welfare and health shocks Due to availability ofdata, the research scopes are as follows:

• This research focuses on the households in the rural areas in Vietnam

• Microcredit used for analysis is defined as collateral-free and small loan (less than 100 million VND) granted by the formal credit providers

• This research focuses on the microcredit used for production or doing business, thus it can capture long-run and sustainable impact of microcredit on welfare

• Welfare indicators used for analysis include total output value, revenue,

income, consumption, accumulation of assets, and non-working-age labor

• Two types of health shocks are used for analysis, including illness/ disease/ injury of any members and working-age members

1.5 Research data

Secondary data This research applies two datasets for quantitative analysis,

including Vietnam Household Living Standards Survey (VHLSS) in 2010 and 2012,and Vietnam Access to Resources Household Survey (VARHS) in 2012 and 2014.VARHS is applied for the first three objectives while VHLSS for the fourthobjective VARHS and VHLSS are complementary sources of information

Primary data In-depth interview and focus group are conducted in rural

areas in Tra Vinh and Long An provinces to supplement the results fromeconometric model and to imply policy

1.6 Research methods

1.6.1 Quantitative methods

This research employs different methods for investigating each specificresearch objectives Probit model using panel data is applied to investigate the

determinants of accessibility to microcredit (Research objective 1) Double-Hurdle

(DH), Tobit and Heckman models with cross-sectional data are used to examinehow microcredit affects farmers’ decision toward adoption of improved rice

varieties (Research objective 2) Such impact evaluation techniques as Difference

in difference (DID) and PSM-DID with panel data are applied to assess the effects

of microcredit on living standard (Research objective 3) Regression with

Village-Fixed-Effect (VFE) with panel data is employed to analyze the role of microcredit

in mitigating the consequence of health shocks (Research objective 4).

1.6.2 Qualitative methods

According to Merriam (1998), Bogdan and Biklen (1992), and Creswell(2003), qualitative research may be conducted using: observation, In-depthInterview (Face to Face, Focus group, phone), Media (Photo, Recording) Thisresearch employs in-depth interview and focus group to capture the deeperunderstanding about the research problems Qualitative research is conducted on thesubjects associated with microcredit programs, including: (1) Borrowers frommicrocredit provided by VBSP, (2) village Officials, staff of Women Union, staff ofFarmer Union, etc at some communes; (4) Specialists in the fields of rural finance

1.7 Contribution of the research

1.7.1 Theoretical contributions

The dissertation is an empirical work, which mainly uses appliedeconometrics and models from previous studies to testify for the case of Vietnam.However, the dissertation still makes some contributions to literature, including:

• The dissertation modifies an analytical framework on mechanisms throughwhich microcredit can affect farmers’ decisions on adoption of improvedrice varieties or other investment choices, then impact households’ welfare,and finally mitigate the adverse effect of health shocks

• The dissertation modifies and test empirical models of the determinants of accessibility to microcredit.

• The dissertation also makes contributions on literature about the effects ofmicrocredit on farmers’ decision on whether to adopt and how much toadopt improved rice varieties

• The dissertation examines the role of microcredit in mitigating the effects ofhealth shocks in relation with intra-household labor mobility, which thenmakes a significant contribution to literature in this field

• In addition, for each research objective, different applied econometricsmethods are employed for robust checks to capture better results Also, thedissertation decomposes research sample to different groups for furtherinvestigation to capture a thorough understanding

• Finally, the dissertation contributes to the academic aspect regarding policy analysis methods using IV 2SLS and PSM-DID

1.7.2 Practical contributions

Poverty alleviation, good education, gender equality and good health are thetop concerns in the Sustainable Development Goals (SDG) Microcredit isconsidered as an effective tool for improving household well-being Therefore:

• The dissertation will be an evidence for the local authorities, policy-makersand practitioners to recognize and understand the role of microcredit infostering investment and then improving living standard of the ruralhouseholds Accordingly, they can disseminate the similar programs tobetter support the rural households

• Moreover, the dissertation provides policy implications toward improvinghouseholds’ accessibility to microcredit to increase the outreach ofmicrocredit, especially to the poor or the disadvantaged

• Other relevant supporting policies, but not directly related to microcredit, are also implied to improve the effectiveness of microcredit programs

• The empirical findings from the dissertation will suggest important policyimplications related to microcredit programs, not only in Vietnam but also

in other emerging, transition and low- and middle- income economies

1.8 Organization of the research

The structure of this dissertation is organized as follows:

Chapter 1: This chapter introduces research problems, research

methodology, research questions and objectives, and contributions of the research

Chapter 2: This chapter presents literature review, including theoretical and

empirical studies associated with to four research objectives, including:Determinants of accessibility to microcredit, (2) Microcredit and adoption ofimproved rice varieties, (3) Impact evaluation of microcredit on welfare, and (4)Role of microcredit in mitigating the effects of health shocks

Chapter 3: This chapter describes some overviews of microcredit and rural

financial market in the world and Vietnam

Chapter 4: This chapter presents the contents related to the first research

objective (Determinants of Accessibility to Microcredit), including method, data,results and discussions

Chapter 5: This chapter presents the contents related to the second research

objective (Microcredit and Adoption of Improved Rice Varieties), including method,data, results and discussions

Chapter 6: This chapter presents the contents related to the third research

objective (Impact Evaluation of Microcredit on Welfare), including method, data,results and discussions

Chapter 7: This chapter presents the contents related to the third research

objective (Role of Microcredit in Mitigating the Effects of Health Shocks),including method, data, results and discussions

Chapter 8: This chapter summarizes main findings in the research, gives

policy implication, mentions limitations and further research

CHAPTER 2 – LITERATURE REVIEW

This chapter describes literature related to microcredit with five sections:

Section 2.1 discusses overviews of microcredit, including definitions and characteristics of microcredit Section 2.2 presents some theories associated with

credit and microcredit such as rural credit market, asymmetric information,accessibility to microcredit, outreach of microcredit and farm household model

Section 2.3 describes empirical studies relevant to four research objectives and then presents the research gaps and contributions of each objective Section 2.4

briefly discusses definition of welfare used in previous empirical studies

Section 2.5 present the logical and analytical framework to explain the

relation between the general objective and four specific research objectives

2.1 Overview of microcredit

2.1.1 Some definitions

Microfinance is considered as an effective tool for fighting poverty anderadicating hunger Microfinance was initiated by the Grameen Bank - founded andmanaged by Prof Muhammad Yunus, who gained the Nobel Peace Prize in 2006

Morduch (1999): “Microfinance is defined as the provision of small-scalefinancial services for the poor”

Dasgupta and Rao (2003): “Micro-finance is a financial service of smallquantity provided by financial institutions to the poor These services may include

credit, savings, insurance, leasing, money transfer, etc that are provided to clients tomeet their financial needs.”

- Microcredit

The Microcredit Summit (1997): “Microcredit is a program which extendsmall loans to very poor people for self-employment projects that generate income,allowing them to care for themselves and their families”

Ault and Spicer (2008): “microcredit is a model of lending that give smallloans to the poor who lack access to formal financial institutions”

Dash (2012): “Microcredit symbolizes small loans extended to very poorpeople for self-employment projects that generate income, allowing them to care forthemselves and their families”

2.1.2 Characteristics of microcredit

Literature document that microcredit may include the following attributes:

(1) Small loan size The term “small loan" may vary in each country In

Vietnam, amount of formal microcredit ranges from less than 10 up to 100 millionVND (Khoi et al, 2013; Thanh, 2017; Thanh & Dung, 2017)

(2) Targeting the poor Microcredit targets the poor and low-income

households (Morduch, 1999; Du, 2004; Dasgupta & Rao, 2003)

(3) No collateral Collateral is normally required to reduce default risk by the

formal lenders However, the poor lack of assets for collateral, which inhibits themfrom accessing formal credit Microcredit is collateral-free, which thereby increasesthe poor’s accessibility to credit (Li et al., 2011a; Thanh, 2017)

(4) For investment purpose Borrowers may use microcredit to invest in

either farm or on-farm activities (Khandker & Koolwal, 2016)

(2) High interest rate The rate may vary from 15 to 35 percent per year.

However, Li et al (2011a) state that rural households in China prefer microcredit toother credit because of its affordable interest

(6) Group-lending scheme Due to no requirement for collateral, following

this scheme, the members of credit group will monitor the others and be responsiblefor the latter’ repayment If a member defaults the loan, the remaining membersmay have difficulty in obtaining the loan from the program in the future Group-lending scheme is considered as a “social collateral” Accordingly, the lenders canreduce risks of default by the borrowers and transaction costs (Anderson & Nina,2000; Besley & Coate, 1995)

(7) Targeting women Around 74 percent of all microcredit borrowers in the

world are women (Cheston & Kuhn, 2002) Thenceforth, it indicates thatmicrocredit programs mostly target female clients

Based on the characteristics of microcredit and the availability of data, in thisresearch, microcredit used for analysis of the first three objectives is defined assmall amount (less than 100 million dong) from formal sources, used for thepurpose of production or self-employment For the final research objective, thepurpose of microcredit is extended, including for consumption

2.2 Theory

2.2.1 Overview of rural credit market

Credit markets are intermediation between savers and borrowers Creditmarkets are characterized by such problems as risk and information, and they aredistinguished from good and services markets (Hoff and Stiglitz, 1990, 1997).Similar to credit market in general, rural credit markets are normally imperfect andmore so in the less developing countries (LDCs) Some plausible explanations are:

• The transaction of ‘buying’ (borrowing) and ‘paying up’ (repayment) aremade separately in time Normally, ‘buying’ process is made beforehand; therepayment is made latter (normally, after the investment cycle) That is,many livelihood strategies, especially agricultural production are spread overtime, in particular farmers invest today, but reap outcomes tomorrow

• Lenders are unable or have limited ability to monitor what borrowers do with

a loan (e.g use for too risky projects or for wrong purposes) There is apossibility of default because borrowers may be unable to repay due touncertain outcomes in agricultural production, loss in business or losing jobs

In some cases, if borrower feels better off not returning the loan, he will not.The problem of willing to repay occurs if contract enforcement is weak, andtaking borrowers to court tends to be costlier Another reason is that theborrower’s liability is limited, When the borrowers default the loan, creditofficers may share a part of liability

• Due to imperfect information, inability or limited ability to monitor andpossibility of default, there exists large share of informal credit providers indeveloping countries This is because informal sector has strongerenforcement and better information and monitoring

In rural credit market, lenders seem to be more careful than borrowers.Lenders are, especially informal lenders, use indirect or direct screeningmechanisms to address problems of incentives and enforcement To prevent adverseselection or/and moral hazard, the lenders normally screen and monitor theborrowers, obtain collateral from borrowers; or threaten to reduce the future loan

• Borrowers differ in their probability of default, and it is costly to specify therisk level for each borrower This problem is conventionally known as

screening Lenders screen the borrowers regarding the available information.

• It is costly to make sure that borrowers take actions which make higher

probability of repayment This is called incentives problem.

• It is difficult to make repayment compulsory This problem is known as

enforcement.

Rural credit market in developing countries is characterized by the variation

in interest rate The annual interest rate in rural area of LDCs is normally higherthan that of developed countries Informal sector charges higher rate than formalsector; for instance, Siamwalla et al (1990): study of rural credit markets in

Thailand, found informal sector annual interest rate to be 60% whereas formalsector rate ranged from 12-14% This may be explained partly by monopoly.Informal credit provider can charge different interest rate on different borrowersusing price discrimination strategy Monopoly power is established by natural entrybarriers which is reflected via transaction cost However, monopoly power ofinformal lender is restricted because of the presence of formal sector (for instance,public banks) and recently the semi-formal sectors.

Borrowers can borrow only up to a limited amount at a given interest rate,and will not be granted a greater amount even if they are willing to pay higher rate.The poor normally face difficulties in borrowing at any interest rate This indicatesthat credit market does not follow standard demand-supply equilibrium

In credit market, sources of demand for credit include (1) Fixed capital for new startups or expansion of production (machines, buildings); (2) Working capital

for on-going production because of time lag between putting in inputs and reaping

outputs; and (3) Consumption credit for consumption smoothing Among them,

fixed capital is mainly vital for overall growth and working capital and consumptioncredit are important for agricultural population

Poor people normally face difficulties in accessing credit, especially formalcredit The reasons for loan application rejection may be due to the poor’s lack ofcollateral to ensure their loan repayment ability, imperfect information betweenthem and lenders and high transaction and administrative cost Moreover, lending tothe poor may be riskier since they may lose everything if they encounterunanticipated shocks (i.e health, natural disaster) Therefore, the big question iswhether the poor should be crowded out of rural formal and semi-formal creditmarket? The answer should be no since it involves efficiency of capital problems

When the market is perfect, the allocation of credit will not rely on thewealth, but rather on the marginal return of capital In order to attract lenders, thepoor without initial capital will be willing to accept higher interest rates However,when market is imperfect, it is difficult to eliminate such problems as moral hazard

and adverse selection (Armendáriz & Morduch, 2005) The formal lenders (i.e.banks or financial institution) cannot ensure that the borrowers will use loans forright purpose, or repay the debt since the loan granted to the poor are collateral-free.Therefore, the formal lenders will tend to charge high interest rates, which maydrive good borrower out of the rural credit market, especially formal sector.

When being excluded from formal credit sector, the poor will seek for analternative informal source of borrowing, for instance, relatives, friends,moneylenders, employers, and the rotating savings and credit associations(ROSCAs) In 1950s - 1980s, many governments in the developing countriesattempted to intervene in the rural credit market by establishing rural state-ownedbanks to support farmers, especially the poor farmers (Morduch, 1999) However,heavy subsidies, political interests and corruption have inhibited the viability andsuccess of these institutions Loans were also diverted away from the poor(Panjaitan-Drioadisuryo & Cloud, 1999; Armendáriz & Morduch, 2005) Therefore,microfinance is considered as a solution to credit constraint for the rural poor

2.2.2 Asymmetric information

The rural credit market plays significant role in agricultural production andrural development in developing countries Formal rural credit market is typicallycharacterized by the disequilibrium of demand and supply, particularly excessdemand As a result, only a certain number of households who demand for creditcan access to formal sources However, in reality, shortage of credit is not simplyattributed to excess demand but to asymmetric information

Asymmetric information is a situation in which one party has more or betterinformation than the other party The later may possess no information or wronginformation about the goods or service in translation Theory of asymmetricinformation is initiated by Akerlof (1970) and then developed and researched bySpence (1978) and Stiglitz (1975) Asymmetric information may lead to adverseselection and moral hazard Asymmetric information theory is applied in many

fields and researched by many authors This section presents this theory associatedwith credit market Asymmetric information in credit market occurs when there isdifference in information possessed by the lenders and borrowers.

Adverse selection normally occurs before moral hazard; that is, when the

lenders accept to provide borrowers with the loan Borrowers often conceal theinformation that may cause disadvantages, such as real income, current debt,motivation of borrowing, etc This may lead to the fact that the households who arereally in need of credit cannot access to the load or granted with an amount less thantheir demand Meanwhile, some households who are not really in need of credit canaccess to full amount The consequence may be bad to both parties: (1) The lendersmay face risk of bad debt or their credit programs may not serve target customers,for instance the poor; (2) The borrowers cannot borrow from the credit programs

The adverse selection problem arises in the screening process wheretransaction costs are associated with distinguishing between good and badborrowers This borrowing cost may be reflected and compensated by interest rate.Greater interest rate may compensate for high transaction cost in small loans, whichthereby drive out good borrowers Accordingly, only potentially-bad borrowers canborrow This may drive out the target borrowers of the program, for instance, thepoor who are normally unable to pay for high interest rate

Moral Hazard is associated with monitoring and enforcement mechanism.

The moral hazard occurs when the borrowers may not take effort to repay their loansince they know the lenders share part of the liability (Pham & Lensink, 2007).Therefore, these lenders tend to link default risk to household related characteristics,particularly lender-borrower relationship and social norms As a result, only aproportion of rural households are unable to obtain credit or borrow an amount lessthan demanded from formal sources This credit rationing leads to the problem thatmany rural households face credit constraints regardless of their repaymentcapability (Armendáriz & Morduch, 2005) In other words, lenders decide whetherthey should grant the credit and how much to grant on the basis of information on

the borrowers that they have, thus not all borrowers will receive the loan that theyapply for or receive the full amount applied.

To address the problems of adverse selection and moral hazard arising fromimperfect information between financial institution and the rural households, thelenders usually require collateral to loans The purpose of collateral requirements is

to improve creditworthiness and solve the incentive and enforcement problems(Klein et al., 1999) Land (especially residential land), house, durable assets orsavings are always preferred collaterals when households apply to borrow fromformal credit sources However, such collateral requirement becomes more stringentsince the borrowers are normally resource-poor In some case, agricultural land orproductive durable assets may indicate the rural households’ capacity of production,which thereby increase their creditworthiness and ability of repayment

Since one merit of microcredit programs is collateral-free, in South Asia,high interest rates and loan costs reflect information costs of dealing with adverseselection, monitoring costs to avoid moral hazard, and the default risk of borrowers(Adams et al., 2003) However, the higher interest rates are, the more probability ofadverse selection and moral hazard effects it could lead to (Morduch, 1999; Cull etal., 2007) To resolve this dilemma, group-based lending practice, a merit ofmicrocredit, has been implemented Group-based lending is based on joint liability,which helps to increase the effectiveness of transactions, lower transaction costs,improve the outreach of microcredit programs as well enhance loan repayment Inother words, group-based lending may reduce any adverse effect or transaction costderived from asymmetric information In particular, for the problem of adverseselection, as the group normally include members who know well about oneanother, the group will help the microcredit lenders to screen the eligible potentialclients and also reduce transaction cost In addition, when any members defaults, allthe group may be liable for this and make up the repayment amount, because if they

do not fulfil such liability, they cannot obtain or apply for the next loan The

incentive to repay the loan is based on peer pressure. Therefore, it helps to reducethe moral hazard.

Using asymmetric information theory, this study will answer the Research question 1 In particular, this study focuses on whether the households of less

advantaged groups (e.g the poor, women, etc.) can have better accessibility tocredit, as these groups are normally target clients of microcredit programs

2.2.3 Theories on accessibility to credit

Credit market follows the sequential two-stage lending process, where anagent (e.g household, firm) with demand for credit apply to borrow at the firststage, then lenders will decide to choose whether and how much to grant the at thenext stage (Aleem, 1990) Therefore, accessibility to credit, including microcredit,can be conceptualized as a sequential two-stage decision making process that isinitiated at the demand side, and then followed by supply side (Zeller, 1994; Li etal., 2011a; Khoi et al., 2013) This research will discuss theory of choice and creditrationing theory and as “loadstars” for the analysis of accessibility to credit

2.2.3.1 Theory of choice (Demand for credit)

At the first stage (demand), an individual or a household wants to maximizehis or her expected utility from the decision whether and how much to borrow(Zeller, 1994) Loan has its own opportunity cost which is reflected via the interestrate and thereby the individual or household’s decision on whether to borrow or not

is a rational choice based on demand theory

Discrete choice model is defined as a model that determines the probability

of a certain choice as a function of the utility derived from that choice (Cramer,1991) Discrete choice analysis employs the principle of utility maximization (Ben-Akiva & Lerman, 1985) An agent will choose the option with the highest utilityamong those available choice set when making decision Accordingly, theprobability that an option is selected is considered as the probability that the option

may yield the greatest expected utility among other options (Train, 2009; Akiva and Lerman, 1985).

Ben-Supposed that there are two options a and b in a set of options (O m ) Let U ia and U ib denote the utilities that agent i gains from option a and b, respectively An agent will choose option i if Uia > U ib Accordingly, follow (Li et al., 2011a; Ben-

Akiva and Lerman, 1985) the probability that agent i select option a from O m isexpressed using the following equation:

Pr (a| O m ) = Pr (U ia > U ib, ∀ a, b∈Om and a ≠b]

Similarly, if agent i choose option b, then the function is as follows:

Pr (b| O m ) = Pr (U ib > U ia, ∀ a, b∈Om and a ≠b]

It is noted that demand theory has been applied in many researches whichinvestigate the choice of an agent Therefore, demand theory can be also useful forinvestigating the demand for credit (the first research objective) and households’decision toward adoption of agricultural technology (second research objective)

For the first objective, households i will decide to borrow when utility from

borrowing is greater than utility from non-borrowing Similarly, for the second

objective, households i will decide to adopt when utility from adoption is greater

than utility from non-adoption

2.2.3.2 Theory of credit rationing

Credit is a scarce resource due to the availability of credit Accessibility tocredit is not simply explained by demand theory due to the fact that credit isrationed under asymmetric information (Stiglitz & Weiss, 1981)

Stiglitz and Weiss (1981) introduce the credit rationing theory on the basistwo primary assumptions: i) lenders are unable to differentiate risk level associatedwith good (safe) and bad (risky) borrowers, and ii) loans are subject to the limitedliability of borrowers to repay loans (i.e., if the returns from investment are less thanthe debt obligations, the borrower bears no responsibility in paying out of pocket)

Credit market does not simply the theory of supply and demand as typicallydescribed in markets of other goods and services Suppliers (i.e lenders) can notsimply use market price (interest rate) to charge the clients (i.e borrowers) for thequantity demanded (amount of loan) In other words, lenders cannot simply increaseequilibrium interest rate in the credit market because lenders do not have sufficientinformation on the risk that borrowers will default their loans Thenceforth, at thesecond stage, lenders tend to ration the loans that will be granted to borrowers Inother words, lenders will make their decision on whether the loan should beprovided, and then the amount to be granted, based on the lenders’ perception on theclients’ credit-worthiness or repayment capacity (Aleem, 1990).

Stiglitz and Weiss (1981) initiate credit rationing theory to explain the reasonwhy some households can get the loan while the other can not Credit providers areable to judge the borrowers’ credit-worthiness based on the available informationduring the screening process Without sufficient information, informationasymmetry may lead to at least two popular problems: adverse selection and moralhazard Adverse selection occurs during the screening process when lenders tend tofavor “good” borrowers but crow out the target clients (Khoi et al., 2013) Moralhazard arises after the loan is granted The borrowers may not make effort to repaythe loan since they perceive that the lenders may share the risk (Islam, 2007; Pham

& Lensink, 2007; cited in Khoi et al., 2013) In general, imperfect information willaffect the lenders’ decision on whether and how much credit will be granted As aresult, not all households can get the loan or the amount that they demand

When analyzing credit rationing, it is important to know the households’rationing status Feder (1990) define the borrowers who demand for more credit andthe non-borrowers who could not obtain credit are classified as credit-constrained,and the remaining households are the unconstrained To examine rationing status offarmers, Jappelli (1990) employs a qualitative approach based on directly asking theapplicants and non-applicants about their borrowing experience Applicants arecategorized into such groups as: (1) If they desire to borrow more, which indicates

an excess demand, they are partially credit-rationed; (2) Applicants who did not

obtain any loans are classified as completely rejected As for the non-applicants, (3)

if they had intention to apply for credit but did not apply since their application

might have been rejected, they are classified as discouraged non-borrowers All these group are considered as credit-constrained Similarly, Baydas et al (1994) and

Zeller (1994) identify four group of respondents The constrained borrowers are

divided into such groups as: (1) completely rejected, i.e those who apply to borrow for a loan but unable to obtain; (2) unsatisfied, i.e those who apply and are granted with a loan less than demand The unconstrained include (3) satisfied, i.e those who obtained full amount demanded; and the (4) non-applicants i.e those who do not

Demand but not

(Constrained)

Figure 2.1 – Credit constraint and unconstraint

Some main reasons for credit constraints in rural areas are (1) Too highinterest rate; (2) No collateral; (3) Fear of collateral loss; (4) No lenders; (5) Notknow where to borrow; (6) Fear of being rejected; (7) Don’t like to be indebted or

go deeper into debt Since one merit of microcredit is collateral-free, the reasons for

being constrained when applying to borrow from microcredit sources exclude (2)

No collateral; and (3) Fear of losing collateral

Using theory of accessibility to credit, this study will answer the Research question 1 In this research objective, the sample is also divided into the poor and

the non-poor for further investigation The rational for this decomposition is that thepoor is normally credit constrained than the non-poor, which may make thedeterminants of accessibility to credit have different effects among two group

2.2.4 Theoretical framework of outreach of microcredit

Assessment on the performance of microfinance organizations have beenrelied on the concepts of outreach and sustainability (Yaron, 1994, cited in Navajas

et al., 2000) Outreach and sustainability are expressed in terms of the theory ofsocial welfare At first glance, outreach indicates the number of clients served.However, according to Meyer (2002), outreach is multi-dimensional concept and weneed to look in to different aspects when measuring outreach Outreach is normallyproxied by gender or poverty of borrowers, loan size, loan terms, transaction costsincurred by borrowers, number of borrowers, the financial and organizationalstrength of the lender, and the number of services provided by lenders Outreach isconsidered as social value of the output of microfinance institutions and measured

by six aspects including depth, worth to users, cost to users, breadth, length, andscope (Navajas et al., 2000)

• Depth of outreach is "the value the society attaches to the net gain from

the use of the microcredit by a given borrower" This measure is toidentify the poor or/ and women clients since society seems to value thenet gain from a small loan for the poor or female clients more than thesame gain for the rich or male clients The poor may have difficulty inaccessing credit from formal sources since they have no collateral or fail

to signal their repayment capacity (Conning, 1999) Similarly, womennormally face more difficulties than men in accessing the loan The