Factors influencing the access to finance of smallholder farmers in Vietnam: A case study of the whole-chain financing in Hanois suburbs

VIETNAM NATIONAL UNIVERSITY, HANOIVIETNAM JAPAN UNIVERSITY NGUYEN TRAN HOANG ANH FACTORS INFLUENCING THE ACCESS TO FINANCE OF SMALLHOLDER FARMERS IN VIETNAM: A CASE STUDY OF THE WHO

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

NGUYEN TRAN HOANG ANH

FACTORS INFLUENCING THE ACCESS

TO FINANCE OF SMALLHOLDER

FARMERS IN VIETNAM: A CASE

STUDY OF THE WHOLE- CHAIN

FINANCING IN HANOI'S SUBURBS

MASTER'S THESIS MASTER OF SCIENCE IN PUBLIC POLICY

Hanoi, 2019

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

NGUYEN TRAN HOANG ANH

FACTORS INFLUENCING THE ACCESS

TO FINANCE OF SMALLHOLDER

FARMERS IN VIETNAM: A CASE

STUDY OF THE WHOLE- CHAIN

FINANCING IN HANOI'S SUBURBS

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ACKNOWLEDGMENT

My sincere gratitude and thanks to my supervisor, Dr.Trương Thi Thu Trang Thank you for all your patient and supportive instructions and your encouragement Your valuable comments and guidance have shaped my thesis to this stage

I would like to show my gratefulness to Dr.Vu Hoang Linh for all your helpful instructions Thanks to your patience, I got a more profound of my thesis topic Special thanks to Mr Tran Huong- a local officer at To Hieu commune helped me contact with other local authorities at Quat Dong commune and Nghiem Xuyen commune Also, I am grateful for enthusiastic participation of farmer respondents at three communes Without your support and kindness, I could not finish this thesis timely

I also would like to extend my special thanks to professors of Master program of Public Policy at Vietnam Japan University for your kindness and unwavering assistance at all times

My warmest thanks are due to Huong san, Quang san, and Luong san for your friendship and great supports in various ways which made my time at Vietnam Japan University unforgettable

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LIST OF TABLES

Page

Table 1.1: Investment in agriculture, forestry, and fishing in total investment 4

Table 3.1: Garrett Ranking Conversion Table 21

Table 3.2: Percent position and Garrett Value 22

Table 4.1: The procedure of formal credit for lending loan 26

Table 4.2: Comparison between VBARD and VBSP to informal lenders 27

Table 4.3: Gender and age distribution of respondents 31

Table 4.4: The rank of reasons for applying for credit 33

Table 4.5: Garrett Value and ranking reasons for apply 33

Table 4.6: Result of rank for reasons for applying for credit 34

Table 4.7: The rank of reasons for not applying for credit 35

Table 4.8: Garrett Value and Ranking for the reasons for not applying for credit 35

Table 4.9: Result of ranking from Garrett Value 36

Table 4.10: Mean characteristics of household by credit participation 36

Table 4.11: Mean characteristics of respondents by financial institutions 37

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LIST OF FIGURES

Page

Figure 3.1 Survey location 23

Figure 4.1: Planting pumpkin (Source: Tran Quang) 30

Figure 4.2: Education level distribution 31

Figure 4.3: Farm size 32

Figure 5.1: Tien Vien company’s chicken at Chuong My district 49

Figure 5.2: SWOT analyze 50

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LIST OF ABBREVIATIONS

VBARD Vietnam Bank for Agriculture and Rural Development VBSP Vietnam Bank for Social Policies

AVCF Agricultural Value Chain Financing

AVC Agricultural Value Chain

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TABLE OF CONTENTS

Page

ACKNOWLEDGMENT i

LIST OF TABLES ii

LIST OF FIGURES iii

LIST OF ABBREVIATIONS iv

TABLE OF CONTENTS v

CHAPTER 1 INTRODUCTION 1

1.1 Background of study and statement of the problem 1

1.2 Objectives of study 6

1.3 Scope and limitations of the study 6

1.4 Organization of the Thesis 7

CHAPTER 2 LITERATURE REVIEW 8

2.1 Key terms 8

2.1.1 Smallholder farmers 8

2.1.2 Agricultural finance 10

2.1.3 Agricultural credit 11

2.1.4 Agricultural value chain finance 12

2.2 Previous studies 14

CHAPTER 3 RESEARCH METHODOLOGY 18

3.1 Research methodology 18

3.2 Sampling 22

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CHAPTER 4 DISCUSSION OF THE PROBLEM 24

4.1 Agricultural credit system in Vietnam 24

4.2 Current policies on agricultural credit 28

4.3 The research area 29

4.3.1 Source of income of farmers 30

4.3.2 Gender, age distribution respondents 30

4.3.3 Education level of respondents 31

4.3.4 Farm size 32

4.4 Results 32

4.4.1 Descriptive statistics 32

4.4.2 The reasons for apply and non-apply for agricultural credit 33

4.5 Discussion of the results 37

4.5.1 Discussion the credit availability in Thuong Tin district 37

4.5.2 The determinants of access to credit of smallholder farmers 41

CHAPTER 5 SOLUTION, POLICY IMPLICATIONS AND CONCLUSION 47

5.1 Solution and policy implications 47

5.2 Conclusion 52

REFERENCES 53

ANNEX 1 57

ANNEX 2 61

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CHAPTER 1 INTRODUCTION

1.1 Background of study and statement of the problem

Like many developing countries in the world, agriculture is one of the engines for national economic development It is stated that “what promotes agricultural benefits to mankind, the progress of agriculture and the progress of civilization go hand in hand.” (Morman,1919) as provision of agricultural finance service to the poor will contribute to enhance productivity and improve the living standard by breaking the vicious cycle of poverty among small scale farmers at large If the provision of agricultural credit is found to be productive and adequate, it will have positive influences on the use of resources and optimum use of technology application (Vasthoff, 1968) It is an essential input to boost the agricultural productivity that increases income levels and alleviate poverty in turn The reason is that smallholder farmers often get difficulties in implementing agricultural technologies with their own limited funds (Wivine, 2012) Hence, agricultural finance services can provide them with good opportunities to earn more money and enhance living standard by investing financially to upgrade new technology In other words, access to financial services by farmers can contribute to improve post-harvest practices, make household cash to flow smoothly and effectively, enable better access to markets, control human resource and climate-related risk in a better way

Unfortunately, agricultural sector currently often faces a lot of complex challenges resulting from lengthy biological based production, market activities, unexpected natural conditions, and other related income-generating activities (Peter, 2001) Among these things, inadequate access to financial services is one of the fundamental issues ruining production productivity and has negative effects on income of peasants in the rural area

2014, vol 3) show that rapid economic development achieved in European and Asian countries was highly associated with the adequate access to credit by majority Countries like Indonesia, Burma, India, and China were supposed to have

a significant pace of development after focusing on solving problems of agricultural credit availability for the majority of farmers It can be explained that most of the low-income countries are dependent on agricultural; hence agricultural credit is seen as a lever to boost the development of agricultural sectors as well as related stakeholders Indeed, agricultural credit is a backbone for the process of modernization of the agricultural sector and commercialization of the national

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economy of agriculture-based countries With the introduction of agricultural credit, the process of changing from subsistence to commercial farming becomes more favorable (Abedullah et al., 2009)

Vietnam, with a population of over 90 million people, has the third largest population in Southeast Asia after Indonesia and the Philippines Vietnam is striving to become one of Asia’s fastest-growing emerging markets with the hope of becoming a producer and exporter of high standard food products by improving its export of value-added products Developing agricultural production becomes a strategic goal of the government because agriculture is one of Vietnam’s economic mainstays with the sector accounting for 17 percent of gross domestic product (2014) When it comes to the labor force in this sector, it currently employs nearly half of the country's workforce and approximately 80 percent of the population living in rural areas with their main source of income derived from agriculture In other words, paying attention to develop the agricultural sector means enhancement

of the likelihood of a large number of people throughout the country

In addition, a country like Vietnam, where has to burden a lot of natural disasters annually, it is difficult for smallholder farmers to improve their economic situation without being provided affordable financial services Smallholder farmers are faced with many challenges on a daily basis Unlike larger producers, small-scale farmers often face issues with having the technological resources and knowledge, as well as management skills, necessary for creating a resilient operation Furthermore,small-scale farmers often lack access to the credit, governmental support, and other financial resources necessary for investing in their operations World Bank (2014) supposed that smallholder farmers tend to have little or no access to formal source, which decreases their capacity and willingness to invest in the technologies and inputs they need to increase their farm productivity and incomes and escapes poverty, both their own and that of others Provision of agricultural credit can

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enable smallholder farmers to deal with their liquid problem and in turn, create more investment opportunities for farm Moreover, they are difficult to use technology in production

Despite the importance of creating more work, the agricultural sector has not received adequate attention in terms of capital investment of the whole society as well as investment of the state sector As can be seen from

Table 0.1, the total investment in the agriculture sector only accounts for only 6

percent of the total investment of the country in 2017 Thus, investments in agriculture are generally very low and are not commensurate with the important roles of this sector in the national economy

Table 0.1: Investment in agriculture, forestry, and fishing in total investment

2014 (VARHS 2014), only more than 38 percent of farmers (agricultural and forestry fisheries) have credit loans, of which nearly 37 percent borrowing from banks (VBARD and VBSP) and the remaining 63 percent still has to borrow from informal sources (like relatives, friends and even black credit) Survey results of the

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Institute of Policy and Strategy for Agriculture and Rural Development (Nguyen Dinh Chinh, 2014) also showed that over 80 percent of small and medium enterprises in agriculture are difficult or unable to access credit loans In this context, the borrowers and lenders relationship is personal and based mainly on trust The fact is that creditor-debtor operate the credit transactions as ‘non-declared activities, performed with little capital and lots of unskilled labor, in a very small scale, with no respect for regulation” (Lelart 2006, p 3) Researchers Barslund and Tarp (2008, p 488) found that loans from private lenders such as friends and relatives cover 22 percent of the volume of informal credit in rural areas Although formal credit is encouraged by the Government via subsidized programs with a favorable interest rate, smallholder farmers prefer to borrow from informal source

as both farmers and financial institutions are facing some obstacles

Now, it is increasingly realized that some of the constraints related to product input, production and financial markets that smallholders face can be mitigated by using value chain approach that there is linkage between farmers, aggregators, traders, processors, and financial institutions They will work closely together to minimize the transaction cost, strengthen competitiveness within the chain (Meyer 2007; Trienekens 2011)

Given the little access to credit, disproportionate distribution of credit among the economic sector, and the fact that many smallholder farmers are seeking to approach informal credits, this study will build on the previous studies to examine the problem of accessibility of credit by small farmers in rural areas of Vietnam, examining which factors influencing on their approach to formal credit and to investigate how well the agricultural value chain financing work to mitigate the factors that prevent farmers from accessing credit Taking the case of agricultural value chain financing in the suburb of Hanoi for example, this research will set out

Specifically, this research was conducted to explore the determinant factors influencing access to credit by smallholder farmers, and how agricultural value chain finance helps them to undermine such constraints, taking the case of Hanoi’s suburb of Vietnam The aims were to:

 Examine the availability and access to agricultural credit for smallholder farmers

 Determine the factors being determinant factors on access of small farmers

 Proposing agricultural value chain financing as a tool to mitigate the factor that prevents small farmers from accessing the agricultural credit

Knowledge of the socio-economic features of small farmers will facilitate policymakers to make better decision on agricultural credit system for small farmers Understanding the risk faced by small farmers will be important for them

to avoid costly mistakes and contribute to set out policy interventions This research will fulfill the research gaps that have not done on improvement to credit accessibility for small farmers yet

1.3 Scope and limitations of the study

This study was conducted in three communes of Thuong Tin district to get the data about availability of credit, credit demand and factor influencing the access to credit

of smallholder farmers Also, a case at Chuong My district was taken for study to

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see in which ways smallholder farmers can benefit from engaging the AVC and to see potential of district in Hanoi’s suburb when implementing AVCF

Regarding limitations of the study, the primary limitation is the sample size, which

is limited in the only district given in the short time allotted for fieldwork Secondly, due to sensitivity of the thesis topic, it is difficult to get straight answer from respondents when being asked about income, loan amount Thirdly, AVFC is a newly- emerged issue, hence it is tough to get comprehensive responses from local authorities and respondents about it

1.4 Organization of the Thesis

This thesis is organized into five chapters: chapter one presents the introduction, which mainly focuses on the background, objectives, and limitation of the study Chapter two presents a review of relevant study gaps Chapter three discusses the key terms and methodology used Chapter four describes the result and discusses the discussion of findings Chapter five focuses on the solution, policy implications, and conclusion

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CHAPTER 2 LITERATURE REVIEW

In this part, some key terms used in the paper will be defined clearly After that, the previous studies about the access to agricultural credit in Vietnam and in the world are separated to examine to what extent this issue was discussed and employed analytical methodology

2.1 Key terms

2.1.1 Smallholder farmers

The concept of smallholder farmers arises based on classification: the purpose of productions of the farmers like own home consumption or market, income levels,

and the size of the landholding Machethe et al (2004) argued that smallholder

farmers are associated with small-scale and subsistence farming in resource-poor conditions resulted from limited purchased input and use of agricultural technologies “Smallholder farmers operate in different conditions which vary across geographic regions; whether a farmer is urban or rural and also whether in a developed or a developing countries” (Wivine, 2012) As such, the criteria to classify type of farmer are different among countries In India, there is a

classification based on farm size as follow: marginal farmer means “a farmer

cultivating (as owner or tenant or sharecropper) agricultural land up to 1 hectare

(2.5 acres)”, small farmer means “a farmer cultivating (as owner or tenant or share

cropper) agricultural land of more than 1 hectare and up to 2 hectares (5 acres)”

other farmer means “a farmer cultivating (as owner or tenant or sharecropper)

agricultural land of more than 2 hectares (more than 5 acres)” In Rwanda, according to a study carried out by Ministry of Agriculture (MINAGRI) on production systems in 1991, “the small farmer is defined as a farmer with a small piece of land, his homestead, which cannot produce enough food for the family's subsistence He has to engage in other activities (trader, hauling, crafts, etc.) or sell his labor to someone else to complement his farm output” (Wivine, 2012) Wivine

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also supposed that in general, smallholder farmers have some peculiar characteristics such as: (i) a high proportion of land is for food crop; (ii) proportion for family consumption is higher than output marketed (often low production); (iii)

a more diverse crop portfolio; (iv) greater aversion to risk; (v) a greater scarcity of cash and capital resources; (vi) more abundant family labor than other large farmer However, it is biased and misconception if smallholder farmers are seen as inefficient, unproductive, and unresponsive to economic changes, unwilling to adopt technology These features should be taken into account in accessing the appropriate means to enhance the productivity of small farmers

Other authors affirmed the important role of smallholder farmer in the society Eicher and Rukuni (1996) stated that smallholder agriculture is seen as a source of growth linkages by developing the market for industrial goods and moderation of the urban migration They account for a large number of farm workers in the countries as “it is estimated 500 million agricultural smallholders owning farmland

up to two hectares, with 2 billion to 2.5 billion people living in these smallholders’ households worldwide” (Hazell, 2011) Smallholder farmers are quite a heterogeneous group, differing in their resource base and choice of crops and livestock links to markets, the relative importance of agricultural income, and other dimensions As such, solutions regarding access to finance need to better understand the various profiles of smallholder families and the conditions and market context where they operate (WB, 2014)

In Vietnam, there has been no literally specific definition of smallholder farmer yet; however, according to the Research on Rural, Agriculture, and Aquaculture in 2016, there are 36 percent and 10 percent of farmers who own under 0.2 ha and 2 ha respectively There is only 2 percent of farmer whose farmland size is over 5 ha And the research also revealed that among smallholder farmer, the average amount

of farmland size decreased from 0.65 ha in 2006 to 0.59 ha in 2016 ( as cited by

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Nguyen et al., p.9) Thus, in this thesis, the “ smallholder farmer” is implied as those who own farm size of under 0.5 ha and have to to do a supplementary job to cover their living cost

2.1.2 Agricultural finance

Murray (1953) stated that “agricultural finance as economic study of borrowing funds by farmers, the organization and operation of farm lending agencies and of society’s interest in credit for agriculture” John B Penson et al (1980) defined

“agricultural finance as the study of financing and liquidity services credit provides

to farm borrowers It is also considered as the study of those financial intermediaries who provide loan funds to agriculture and the financial markets in which these intermediaries obtain their loanable funds.”

Barry (2001) stated that “agricultural finance focuses on the acquisition and use of financial capital by the agricultural sectors of both developed and developing economies Financial capital includes debt, equity, and leased capital, although each

of these sources may include numerous forms” It is the provision of multiple types

of services dedicated to supporting both agricultural activities and agribusinesses, including input provision, production, and distribution, wholesale, processing, and marketing In other words, it includes elements of markets, management, and policy When it comes to markets, it considers “the organization and performance of institutions functioning as financial intermediaries for the agricultural sector, the trading of financial instruments in the financial markets, and potential rationing of credit and other market imperfections” (Barry, 2001) When subject to management,

it is embedded to “investment analysis, capital structure, performance measurement, financial planning, risk and liquidity management, and establishment of relationships with financial intermediaries” (Barry, 2001) As for policy element, government play an important role in filling the gap and dealing with the problem

as to imperfections in the agricultural finance markets and in subsidizing targeted

of this thesis, the analytical works will be focused on agricultural finance as the aspect of credit provision for smallholder farmers because of limitation as to time, financial budget although other agricultural finance-related problems are still coexisting

2.1.3 Agricultural credit

The concept of credit in agriculture has been emerged since seventeenth century when Chinese farmers utilized rural credit with the aim of increasing their income and improving their living standards (Mingte, 1994) It can be understood as the amount of investment funds made available for agricultural production from resources outside the farm sector In other words, it is any loan or other extension of credit that a bank provides for agricultural or other rural use

Agricultural credit contributes largely to poverty alleviation and living standard improvement of farmers in rural areas In low- income countries, the Government uses it as a good instrument in development programs It cannot only relieve the financial burden but also increases the production and paves the way for high technology applied by small farmers during production According to Rosenzeig (2001), agricultural credit can improve income by using the surplus finance for further investment and create more income-generated assets It is not a mere loan or advance; it is a good instrument to promote the well-being of the society at large The role of farm credit in strengthening both input and output markets in agricultural sector is assured and significant Providing appropriate credit for agricultural operations, therefore, like oiling agriculture to make its wheels more

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softly and smoothly In a broader sense, agricultural credit is meaningful not only

to the life-blood of modem economic system but also socio-economic transformation and a lever of development

2.1.4 Agricultural value chain finance

The concept of value chain finance or the whole- chain financing is very broad,

and it refers to various aspects of the approach and its financial supporting tools Therefore, to achieve the insights of this term, it is very vital to learn from experience and knowledge from people who are experts in one or various aspects of financing the value chain, especially in the field of agriculture This part will bring together the expertise and contributions of many such experts

“Agricultural Value Chain (AVC) identifies the set of actors (private, public,

including service providers) and a set of activities that bring a basic agricultural product from production in the field to final consumption, where at each stage value

is added to the product It may include production, processing, packaging, storage, transport, and distribution” (ADB, 2013) Similarly, according to (Miller & Silva, 2007), value chain in agriculture is a set of actors who engage in a linked sequence

of value-adding activities in the process of a product from the stage of raw material

to the final consumer The researchers of Royal Tropical Institute (KIT), The Netherlands supposed that “a value chain consists of a series of chain actors, linked together by flows of products, finance, information, and services.”

Agricultural Value Chain Finance (AVCF) is thus,

“…the flows of funds to and among the different links within the AVC regarding financial services and products and support services that flow to and through VC

to deal with and mitigate the constraints and shortcomings during the process of production and market, and meet the needs of those engaged in that chain, be it a need for credit, a need to secure sales, procure products, reduce risk and/or

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improve efficiency within the chain and thereby enhance the growth of the chain” (Fries, 2007)

There are three types of finance for the actors in the value chain (KIT, 2010)

• Chain liquidity: it is short-term loans from suppliers or buyers within the value

chain This type is popular between farmer groups and traders It is about short-term loans to ensure the flow of products to maintain smooth, keep the chain operate as given plan and strengthen long-term relationships between trusted business partners

•Agricultural finance: consists of financial services from commercial banks,

financial institutions, or microfinance institutions Here, microfinance institutions, banks, and other financial agents become chain supporters along with chain players

• Value chain finance: Financial services that are operated based on cooperation in

the value chain The sellers, the buyers, and the financial agents will work together, using the business relations in the value chain as a mean to provide financial services

Value chain finance is one of three typical types of finance in a value chain It is

the flows of funds to and among the various links comprised within a value chain

In other words, it is about financial services, products and support service flowing

to and through a value chain to meet the needs and address the constraints of those involved in the chain (Miller and Jones, 2010)

Value chain finance works when one (or more) financial institutions involved in the value chain, offering financial services which are dependent on the relationships among chain actors The seller, the buyer, and the financial agent work together, using the business relations in the value chain as a mean to provide financial services (KIT, 2010) In this sense, “Trust” is a key element in value chain finance Trust is evaluated by duration of relationships and to what extent of openness with which the chain partners exchange information Financial institutions also use

There are two types of value chain financing: direct and indirect The direct one is a

type of financial service from banks are offered directly to the producer For example, a buyer advancing credit to small producers or agro-processors advancing

credit to its suppliers The indirect value chain is when financial institutions offer

loans to player in a chain to deal with constraint in a chain or to improve efficiency aiming to smooth the whole chain For example, the banks help transporters buy trucks or provide the traders with quick loan for urgent payment

2.2 Previous studies

In Vietnam, there are some studies showing that characteristics of the farm householder, asset value and household expenditure level have a significant effect

Duy et al (2012) conducted a research on the determinants of demand for formal

which includes a probit model for selection as the first step, including factors supposed to be determinants the uptake of credit The second step is to examine to what extent these factors influence on the loan size Their findings revealed that demand for agricultural credit and amount of loan is closely related with the household’s capital endowments There are some factors influencing the willingness

to borrow, such as distance from house to the market center, the marital status, and household place (Duy, Haese, Lemba, & Hau, 2012)

Yen (2019) carried out research on “ Analysing the barriers of credit access of actors in value chain of corn wine in Na Hang district, Tuyen Quang province.” She affirmed that collateral is the most influential factor to credit access of household in

Na Hang district The second determinant factor is labor size It is likely to get loan from banks to those who are in the labor age The third factor is production scale, which has an effect on the competition and production situation of the household The larger production scale is, the lesser cost of production is As a result, the benefit will increase Three factors do not have an influence on the credit access of the household are gender, age, and education level

Mikkel and Finn (2014) carried out research on “rural credit in Vietnam” with a survey of 932 households in rural area The research showed that household respondents borrowed formal credit for mainly production and property

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accumulation In addition, it affirms that rationed credit is dependent on education and credit history, and there is no evidence to see gender as determinant factors against women

There are some papers focusing on this problem in various countries all over the world Hallberg (2002) pointed out that high risks are closely associated with lending to smallholder farmers and fixed costs are closely associated with getting sound information about the borrower by financial institutions as the principal driving forces to the high cost of credit He claimed that high transaction costs do not only make the cost of borrowing increase but can also create limitations for some groups of borrower to access to external finance While transaction costs are not favorable for all borrowers, there are arguments that they are challenging for small and micro enterprises

According to Madafu (2015), high transactions cost of borrowing deters small farmers and entrepreneurs from involving in formal credit source There are some factors from demand side have negative effects on markets: inadequate credit supply, asymmetric information, high-interest rates which discourage smallholder farmers from access to credit There have been some studies showing that in Africa and about fifteen percent in Asia and Latin America the proportion of farmer-borrowers of formal credit accounts for only five percent; and on an average, across developing countries, five percent of the borrowers have received eighty percent of the credit (Bali, 2001)

Individual and household characteristics have been revealed to be one of the main determinants on a household’s access to (formal) credit (Okurut, 2006; Mohamed, 2003) Okurut (2006) found that larger land size and livestock in the total value of household assets are likely to access to formal credit Okurut (2006) also claimed that access to semi-formal credit by farmers in South Africa is closely and significantly affected by per capita expenditure, household size, location and being

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colored while the negative and significant determinant factors include being male, being poor and White rural location Meanwhile, Diagne (1999) stated that size of the landholding is a significant factor of access to informal credit

The work by Stiglitz and Weiss (1981) gave out the explanations of credit rationing

in credit markets According to them, interest rates charged by credit institutions are considered as having dual role of selecting potential borrowers ( resulting in adverse selection) and having influence on the actions of the borrowers ( resulting in the incentive effect) Besley (1993) supposed that due to the absence of perfect information of borrowers, the adverse selection would arise It means that high interest rate will encourage borrowers with high-risk investments, consequently least likely to repay, to borrow while those with less risky project are not likely to

be rationed

The previous papers in Vietnam also mentioned different factors to what extent influencing credit access by smallholder farmers in different locations It can be seen that it is varied by the geography, socio-economic features of household and their own difficulties Moreover, they have not put forward the solution to mitigate the factors that limit the accessibility of smallholder farmers by utilizing the agricultural value chain finance (AVCF) that suit with the production situation as well as likelihood of local areas like Thuong Tin district, where is seen to be neither the poorest nor the most prosperous on average Based on the operation of AVCF, a proposal of policies will be set forward to amend the current policies in this research

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CHAPTER 3 RESEARCH METHODOLOGY

3.1 Research methodology

In this research, a combination of qualitative and quantitative method was utilized

in gathering and analyzing collected data

For qualitative part, an interview questionnaire was designed for the research The questionnaire (Appendix 1) was developed to collect data to meet the aims and objectives of the research The individual farmers were the main respondents The interview for individual farmers was done with 152 respondents, and 5 farmers out

of 152 ones were chosen for in-depth interview After that, 3 key informants from local agencies were interviewed to ask about the procedure, difficulties, and situation of credit lending at their own communities Some questions about AVCF were also designed to ask these 3 key informants to understand about their expectation and recommendation regarding AVCF as Appendix 2

The structure of questionnaire for the interview with 152 respondents was divided into two sections: the general information of respondents and access to credit The information got from the first section was used to discuss the social and economic features of small farmers The second section sought data about access to credit The questions are open-ended and conducted by face –to- face interview The aim

of survey conducted with 152 farmers was to obtain the general profile and characteristics of respondents in the research location It provided researcher with characteristics of small farmers as to general information, landholding, on-farm and off-farm production activities, so on It mainly focuses on the factor influencing access to credit by small farmers It also mentioned the difficulties they encountered

in accessing credit facilities It was also a fundamental base to choose 5 farmers for the next interview section

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For the quantitative part, data are classified into groups and calculate the mean score for each factor to see how each factor influence on credit participation of respondents by specific factors: Age, Gender, Size of household, Farm size, Annual income, Distance to formal institutions, and Collateral Factor selection is based on the previous study of Duy (2012) on “The determinants of demand for formal credit

by rural household of Mekong Delta in Vietnam”; however, some factors are added

to clarify the real situation in research area Here is explanation for using these factors in this research

- “Age” is expected that the demand for credit will increase with age of working age The supply of credit will increase with age if they consider age as an indicator

of experience

- “Education level” is expected that the higher education level of household head is, the more open access to credit is The supply of credit will increase if they considered well-educated people are reliable than low-educated people

- “Gender of household head”: Male household head is expected to have more access to credit than female-headed household

- “The household size” is expected that the bigger size of the household is, the higher demand for credit to cover many expenditures for the whole family

- “Income level” is expected that the more income they earn, the more demand for credit to invest they have

- “Farm size” is expected that the larger farm size is, the higher demand for credit is because they need money to buy fertilizer, seeds

- “Distance from house to formal institution” is expected that the more convenient it

is, the higher possibility of demand for credit is

* Garrett Ranking Technique

Garrett Ranking Technique helps to obtain a fair order of merit for all factors by combining all the rankings by the respondents In this study, the reasons to participate and not participate in agricultural credit were designed, and respondents were asked to respondents have been asked to assign the rank for all factors, and the outcomes of such ranking have been converted into score value with the help of the following formula:

Percent Position= 100 (Rij – 0.5) Nj

Where Rij = Rank given for the ith variable by j th respondents

Nj = Number of variables ranked by j th respondents

With the introduction of Garrett’s Table, the percent position estimated is converted into scores After that for each factor, the scores of each individual are added, and the total value of scores and mean values of score is calculated The factor with highest mean value is considered to be the most important factor, and it is ranked in descending order With this method, it will help to deal with the missing cases because respondents might not select the factors that are not important to them This method is also used by Dhanavandan (2016) in evaluating the preference of students toward Electronic Resources in the faculty of higher educational institution Anjugam and Rmasamy (2007) also utilized the Garrett Ranking technique to analyze the reasons why members participate in self-help groups in India

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The Garrett Ranking conversion as illustrated in Table 0.1

Table 0.1: Garrett Ranking Conversion Table

(Source: Dhanavandan, 2016)

For each reason, scores of each participant are added and divided by the total number of participant to figure out the mean score The mean score of each factor is

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ranked by the descending order In this sense, the reason with the highest mean score would be the most important to the respondents Table 0.2 shows the percent position and Garrett Value with the number of variables is nine

Table 0.2: Percent position and Garrett Value Rank no 100 (Rij – 0.5) Nj Calculated Value Garrett Value

In gathering the qualitative data, purposive sampling was used It was utilized because the prior assessment of typical characteristics of the respondents was done

It aimed at those who are small farmers and got credit before and those who did not get credit Out of 152, 5 was selected to conduct the in-depth interview

A total of three key informants were interviewed They are leaders of Farmer’s Union and Youth’s Union who are in charge of connecting the bank officers and farm borrowers in the research location They were interviewed about the credit

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availability and procedure of loan application They were asked to talk about their

as well as borrower’s difficulties of credit access The interview questions were designed to ask their opinions and expectations about AVCF in the local area The research was conducted in a district of Hanoi’s suburb, which is strategically located at the South of Vietnam: Thuong Tin district

Figure 0.1: Survey location

It is considered as one of the large food supply sources for residents in Hanoi Thuong Tin is predominantly an agricultural district where people mostly earn income from agricultural products This area is one of the most important food- producing districts It was selected as research location because it produces variety

of agricultural products such as livestock raising, vegetable, fruits, and rice Thus varied characteristics of farm household are revealed in the districts In addition, the researcher has good knowledge of local language and culture of the people in these areas, which would create favorable conditions for interview sections

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CHAPTER 4 DISCUSSION OF THE PROBLEM

4.1 Agricultural credit system in Vietnam

In Vietnam, the rural financial system includes formal, semi-formal, and informal credit providers The formal one is composed of Vietnam Bank for Social Policy (VBSP), the Vietnam Bank for Agriculture and Rural Development (VBARD), and the People Credit Funds (PCF) (World Bank, 2002) They are generally common in the rural areas, and amongst these formal institutions, there is little competition However, the formal institutions seem not to be able to meet adequately to demand

of all rural household for credit; and consequently, the remaining number of borrowers have to seek to loans from the semi-formal and informal sectors Semi-formal credit is supplied by the national and international development programs targeting a selective range of borrowers and conforming to certain development targets (Pham and Lensink, 2007) The informal sector is supposed to be private moneylenders, revolving credit associations (RCA), friends, relatives, and other individuals As in other developing countries, RCAs called “hui” are popular in Vietnam These RCAs are groups of people with pre-established social interaction who pool a small sum of their savings periodically so that each can, in turn, receive one large sum

When it comes to the formal financial institutions, currently, VBARD and VBSP are the most popular among farmers in Vietnam VBARD is established in July

1988 according to Decree 53/HDBT It is an own- state enterprise, which is financial autonomy They have responsibilities for their own performance and investment funds Notably, VBARD mainly lends farm household for the purpose

of agricultural production and investing Implementing Decree No 14 / CP dated March 2, 1993, of the Government on the policy on direct lending to agricultural, forestry and fishery households, VBARD has strengthened loans for production

VBSP was founded in 1996 to service clients who were not eligible for VBARD loans Renamed “Bank for the Poor” in 2003, it targeted the poorest of rural households that found themselves excluded from the services provided by VBARD VBSP offers a loan to poor people with interest rate of 6.5 percent-8 percent per year, but for those who are not poor people or beneficiary groups, the bank will impose the interest rate of 8.5 percent per year The VBSP relied on the VBARD network infrastructure to recruit its clients, and in particular, it strengthened partnerships with the socio-political organizations at local level

Table 0.1 shows the procedures that a formal credit is directly offered to individual

farmers in Vietnam Most applicants are individuals or private enterprises Because most of them do not have accountant records, it is very challenging for the banks to get enough information about them

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Table 0.1: The procedure of formal credit for lending loan

regulations of loan lending

Receiving interest rate payment based on signed contract

6 Liquidation Two sides go into liquidation

agreement

Two sides go into liquidation agreement (Source: combined by the author based on result of survey)

To mitigate the risks, nowadays, VBARD and VBSP often cooperate with socioeconomic organization at local to undertake the trust credit without collateral However, land use right certificate is still compulsory for borrowers to get loans in the form of trust credit

When subject to informal credit, the credit procedure is quite simple because it depends on the relationship between the lenders and borrowers Informal often used when the borrowers are in urgent case The term of loan is closely associated with the relationship between borrowers and moneylenders If they get well with each other, the probability of borrowing is higher, and size loan is bigger For this specific feature, the procedure of informal credit is very short