An analysis of factors affecting the results of the vietnam bank for social policies (VBSP) microcredit use by poor households a case of soc son district

VIETNAM NATIONAL UNIVERSITY, HANOIVIETNAM JAPAN UNIVERSITY NGUYEN HAI LONG AN ANALYSIS OF FACTORS AFFECTING THE RESULTS OF THE VIETNAM BANK FOR SOCIAL POLICIES VBSP MICROCREDIT USE BY PO

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

NGUYEN HAI LONG

AN ANALYSIS OF FACTORS AFFECTING THE RESULTS OF THE VIETNAM BANK FOR SOCIAL POLICIES (VBSP) MICROCREDIT USE

BY POOR HOUSEHOLDS: THE CASE OF SOC

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

NGUYEN HAI LONG

AN ANALYSIS OF FACTORS AFFECTING THE RESULTS OF THE VIETNAM BANK FOR SOCIAL POLICIES (VBSP) MICROCREDIT USE

BY POOR HOUSEHOLDS: THE CASE OF SOC

SON DISTRICT.

MAJOR: PUBLIC POLICY

CODE: PILOT RESEARCH SUPERVISOR:

Prof Dr HIROICHI KAWASHIMA

Dr BUI HAI THIEM

Hanoi, 2019

be improved to alleviate poverty The study will use a quantitative approach with theanalysis conducted with SPSS and the data collected from Soc Son District and VBSPSoc Son On the other hand, the author also used in-depth interview with both thebank’s officers and poor borrowers in order take a closer look on the matter Toconclude, the author will suggest some recommendations for VBSP and localgovernment to improve the usage of the loan.

No one can achieve anything without the help of others This thesis could not becompleted without priceless assistances of many people I would like to express mygratitude to all of them

First of all, I sincerely express my gratefulness to my two supervisors ProfessorHiroichi Kawashima and Dr Bui Hai Thiem for their instructions and time to consult

me on my thesis With profound knowledge and experience, they helped me improving

my research Without their instructions, the thesis would be undone

Secondly, I want to express my gratefulness to all the professors, JICA members

in Vietnam Japan University, professor Sharma, and Dr Linh who conveyed to menumerous courses and knowledge With the provided knowledge from them, I amconfident that I can contribute something to develop my beloved country I will keep inmind all the memories that we had during my time at Vietnam Japan University

Lastly, I want to express my gratefulness to VBSP Soc Son that provided me thedata, accesses to the poor households for my internship and research, I hope VBSP SocSon will achieve more success in the future to support poor households and the society

In addition, I am so thankful with the help of my family, they looked after andprovided me supports during this intensive time

Sincerely

9th May 2019Nguyen Hai Long

Table of Contents

Acknowledgement ii

Table of Contents iii

List of Table v

List of Figure vi

List of Abbreviations vii

Chapter 1: Introduction 1

1.1 Research Background 1

1.2 Problem Statement 2

1.3 Overview of Microcredit Loan for the Poor 3

1.4 Research Objective 4

1.5 Significance 5

1.6 Research Question 5

1.7 Research Limitation 6

1.8 Thesis Structure 7

Chapter 2: Literature Review 8

2.1 The definition of Microcredit 8

2.2 The Principles of Microcredit Scheme 10

2.2.1 The social and economic Principle 10

2.2.2 The impact of microcredit on the community 12

2.2.3 The factors affect the result of microcredit loan 14

Chapter 3: Material and Methodology 17

3.1 Research Site 17

3.2 Thesis Method Design 18

3.3 In-depth interview plan 20

3.4 The Quantitative model 22

3.5 Information Collection Paper Design 26

Chapter 4: The analysis and findings 27

4.1 Current situation in Soc Son district 27

4.2 Overview of VBSP 27

4.3 In-depth interview findings 28

4.3.1 The structure of VBSP Soc Son 28

4.3.2 The process of borrowing VBSP’s microcredit loan 30

4.3.3 The command of the Central Bank 32

4.3.4 Encouragement of borowers to focus on the business effectiveness to repay the loan 35

4.3.5 Difficulties borrowers often face when doing their business 36

4.4 The Analysis of the Poverty Alleviation result of the loan 38

4.4.1 General information of the survey 38

4.4.2 The Findings 44

Chapter 5: Conclusion and Recommendations 47

5.1 Conclusion 47

5.2 Recommendations 47

5.2.1 Increase advices, instructions, supports and supervision for the use of the microcredit loan 47

5.2.2 Provision of knowledge and techniques for poor borrowers 48

5.2.3 Increase public investment on key infrastructure 48

5.2.4 Increase the loan’s amount limit 49

Reference 50

Annexs 55

List of Table

……… ……… Page

Table 3.1 The In-depth Interview Plan……… ……… 20

Table 3.2: Overview of the model’s variables……… 24

Table 4.1 Total outstanding loan lended to the poor households……… 33

Table 4.2: Bad Debt Ratio of VBSP Soc Son from 2016-1018……… 33

Table 4.3: Measurement of Bad Debt Ratio……… 34

Table 4.4: Bad Debt Ratio of VBSP Soc Son………34

Table 4.5: Model Summary……… 40

Table 4.6: Omnibus Tests of Model Coefficients……….….40

Table 4.7: Variables in the Equation……… 41

Table 4.8: Classification Table……… 43

List of Figure

……… ……….……….Page

Figure 2.1: The principle of microfinance initiative……… … 11

Figure 3.1: The research framework……… ……… 19

Figure 4.1: The structure of VBSP Soc Son……… ……… 28

Figure 4.2: The process of borrowing the loan……… 30

List of Abbreviations

ADB Asian Development Bank

IMC International Micro-Finance Mission SBV State Bank of Vietnam

VBSP Vietnam Bank for Social Policies VND Vietnam Dong (Currency)

WB World Bank

CHAPTER 1: INTRODUCTION

Research Background

With the rise of economic inequality throughout the world, the capital mobilization andaccess for the poor became indispensable for countries to stimulate the poor to escapepoverty by themselves Microfinance initiative which includes microcredit, micro-insurance, and other micro-financial services became one of the key tools for povertyreduction as financial institutions provide a small loan to their borrowers in order togive poor people the opportunity to invest in business and get out of poverty.Microfinance has a positive impact on poor households; however, its impact on theincome of poor households is still a matter to concern If the bank only lend money tothe poor without recognizing what may affect the usage, it will have a hugeconsequence, as the borrowers are normally poor and uneducated, thus hindered them

to achieve the sustainable result in making stable business

In Vietnam, poverty is still a refectory issue Poverty reduction, hunger alleviation andimproving the income of the poor are always concerned and determined by the State as

a crucial goal to achieve the country's socio-economic development goals ThroughVBSP, The State has provided preferential credit to millions of poor people,contributing significantly to the remarkable result of poverty reduction in Vietnam.However, many concerns are now focused on the sustainability of poverty reductionafter many poor households have fallen again to poverty Even if the poor householdshave access to the microcredit, the pivotal part is still the usage of the loan If theborrowers can use the loan effectively, they will be more likely to escape poverty andget higher income Thus, studies on the factors that affect the usage will be needed sothe bank can improve the result of microcredit-use

Problem Statement

Microcredit for poor people in Vietnam is defined as the use of financial resourcesmobilized by the State, lending to the poor with incentives such as lower interest rateand easy access compared to commercial credit, it aims to improve the quality of life,contribute to poverty reduction and ensure social security Through microfinance, thepoor and other policy’s beneficiaries will be able to address the financial constraintsthat always hinder them from capital needs for production The largest financialinstitution to provide microcredit loan in Vietnam is Vietnam Bank for Social Policies(VBSP), controlled and warranted by the government, VBSP has a national systemwhich conveying microfinance transaction for the poor throughout the country Aftermore than 15 years of operation, VBSP has provided the preferential credit to millions

of poor households with 3.4 million households lifted out of poverty borderline Withthe effort of the government and VBSP, the poverty rate in Vietnam continues to fall,especially among ethnic minorities, with a sharp decline of 13 percent, the biggestdecline in the past decade (Pimhidzai, 2018) However, due to the limitation inbusiness experience, education level, equipment, the use of microfinance loan oftengoes to small-scale and agricultural production such as farming, cultivation, andranching, which contains high economic risks

Soc Son is a district located in the northwest of Hanoi, the district has targeted to eradicatepoverty with the orientation of trade - service, industry, tourism, education – training Inrecent years, with the effort of the local government and the preferential credit policy,many poor households had access to the microcredit loan from VBSP, improving theaverage standard of living in the area and decreasing the percentage of poor households to2.72%1 However, the loan often went to agricultural activities, which

are considered risky for households to be trapped in the vicious cycle of poverty.Furthermore, Soc Son is aiming to transform its economic structure from agriculture toindustry-driven; the surge of agricultural activities of poor households would lead toexcessive supply and inefficient investments To that end, the study will try toinvestigate the reasons behind the investment decisions of the borrowers to proposepossible solutions to encourage the poor households to use the loan more efficiency.

Overview of Microcredit Loan for the Poor

Target: Poor households, which are defined in the newest poverty standard of the

government, are eligible to borrow money from the bank

Duration of the loan:

+ Short-term: 12 months (1 year)

+ Medium-term: from over 12 months to 60 months (5 years)

+ Long-term: Lending over 60 months

Lending Ceiling: The maximum loan’s amount for a poor household is 30 million VND (until 2018)

Interest rate:

+ Interest rate: 0.55% / month (Nearly 6.6% per year)

+ In case of overdue debt, the interest rate will be equal to 130% of the lending interestrate

The Poverty Standard:

+ Rural area poor household is a household that meets one of the two following criteria:

- Having an average income per capita/month of 700,000 VND (30.0518 USD) or less

- Having an average income per capita per month over 700,000 VND to 1,000,000VND (30.0518 USD - 42.918 USD) and lack of three indicators of access to baic socialservices

+ Urban area means a household that meets one of the two following criteria:

- Having an average income per capita/month of 900,000 VND (38.6263 USD) orless

- Having average income per capita per month from 900,000 VND (38.6263USD) to 1.300.000 VND (55.79350 USD) and lack of three indicators of access to basicsocial services

+ Ineligible households to borrow from VBSP

- Households, which have no physical labour capacity, people who are in time toexecute judgments from the court, lazy households that have no intention to work.Households that are involved in felonies or crime such as gambling, drug addiction, theft,etc

- Poor households that are belonging to other social policy program which is associated with social assistance by the government

Research Objective

The thesis will try to shine a light on the matter of what are factors that affect the use ofmicrocredit loan use According to many other studies, it is varied and combined of manyfactors On the other hand, the thesis will apply the findings of the analysis in order to

deliver the policy recommendations to VBSP to improve the use of the microcredit bypoor households.

Significance

With the rise of economic inequality throughout the world, microfinance became one

of the key tools for poverty reduction In Vietnam, the poverty rate continuouslyreduced through the contribution of the credit preferential policy, which granted poorpeople to escape poverty by themselves Thanks to the efforts of the bank staff and thesupport of the whole society to achieve the goal of poverty reduction and ensure socialsecurity The microfinance programs of Vietnam Bank for Social Policies (VBSP)brings positive results when many households have access to loans, using capitaleffectively, stepping out to escape poverty Having said that, the re-poor rate inVietnam is one of the major concerns of the policy along with the people who are justclinging on the poverty baseline Furthermore, the poverty reduction result often lackssome measurements on the sustainability of the loan’s usage Otherwise, the loan isnormally used for small-scale and unproductive agricultural businesses such as farmingand ranching Many previous studies have shown that the investment in agriculturalactivities simultaneously generates less income and less benefit than other businesses.The government had recognized this problem and created many incentives to motivatepoor people to use the loan more effective by moving to the mechanic, handicraft orgarment but these incentives produced negligible effect on the investment decision-making process of poor people To that end, the analysis is needed to precisely detectthe factors that tied up poor people from scattered and risky business and suggest anappropriate for the government to make the fund more efficient

Research Question

Given the situation, the study will endeavor to figure out what impact of internal andexternal factors to the poor people in which lead them to their investment decisions In

order to answer the question, many other aspects need to be taken to analyze theefficiency of the loan’s usage For instance, the efficiency of each with an expectedscenario that the borrowers mostly use the loan for farming and ranching activities andthey tend to keep the production small instead of continuing to borrow more capital toexpand their business.

Keywords: Microcredit, Poverty, Affected Factors.

Main Question: What are the factors that affect the result of the microcredit-loan use

for poor households in VBSP Soc Son?

Sub-question:

+How the bank manages to achieve such a result?

+ How the characteristic of the loan affect the result?

+ How the intrinsic of the borrowers affect the result?

+ What recommendations that the Bank should take in order to improve the result?

Research Limitation

Due to the limited time and resources, the author could not collect more variables inthe survey On the other hand, some factors that affect the use of microcredit cannot bequantitated, so the study needs to conduct more research, which is comprehensive inorder to further elaborate the result of the loan-use, in other words, the model needs amore comprehensive analysis with more variables Likewise, the in-depth interviewhas not yet been sophisticated enough to set a light on the effort of the Bank’semployees Therefore, the author hopes the next research will be able to solve theseproblems and conduct more research that is comprehensive

Thesis Structure

The Thesis will consist of four chapters:

+ Chapter 1: Introduction

+ Chapter 2: Literature Review

+ Chapter 3: Material and Methodology

+ Chapter 4: Analysis and Findings

+ Chapter 5: Conclusions and Recommendations

CHAPTER 2: LITERATURE REVIEW

2.1 The Definition of Microcredit

Microcredit is not traditionally a new financial industry as one of its first form appeared inIreland, called as “Irish Loan Fund”, the fund was initialized by Jonathan Swiff to provide

a small sum of money to the poor in Ireland The success of the fund had encouraged moreorganizations to follow the model to provide loan to the poor during the 18th and 19thcentury (Hollis and Sweetman, 2013) Then, in 19th century in Germany, there were anumber of rural credit cooperative organizations that supported the farmers in rural area asthe land reform in Prurussia at the time had a very little effect on the land-holdingstructure and the grief of war and economic downturn was upon the poor farmers (Prinz,2002) Other types of microcredit scheme were also established in Pakistan as “ComillaModel” by Akhtar Hameed Khan but deemed as failure due to the excessive interventionand what called “elite captured” by Bateman (2010) Having said that, the world often seethe establishment of Grameen Bank of Muhammad Yunus as the start of the industry andthe expansion of Microcredit for poor people worldwide He spent his money to build abank to lend the money to whom are constrained by the shortage of credit especially poorfarmers, contributed to the economic development and poverty reduction in Bangladesh.Furthermore, the Grameen Bank has inspired many countries with thousands oforganization to have been established since then, argued by Bateman (2010) The initialpurpose of Grameen Bank is non-profit to provide credit to the poor Through time, thetypes of microcredit provider became more diverse, more and more organizations nowpositioned themselves as commercial banks and considered microcredit as a real businessrather than a non-profit organization, called as the commercialization of microfinance(Drake, D., & Rhyne, E n.d , 2002)

Microcredit is a fundamental component of the microfinance industry, which consists

of many other types of financial services such as insurance or saving Most of the

transactions in microfinance organizations are to borrow the microcredit loan forbusiness Generally, microcredit provides the poor with additional capital andemployment, assuming to give them the opportunity to cover their expense to createsome kind of income-generating microbusiness To that end, it is safe to say that most

of the research on microfinance somehow related to the microcredit scheme (Bateman,2010) Furthermore, there are at least nine characteristics of microfinance that in factsimultaneous in line with microcredit (Karlan, D, & Goldberg, N, 2007):

1 Small transactions and minimum balances (whether loans, savings, or insurance)

2 Loans for entrepreneurial activity

3 Collateral-free loans

4 Group lending,

5 Target poor clients

6 Target female clients

7 Simple application processes

8 Provision of services in underserved communities

9 Market-level interest rates

The types of microcredit provider is also important to find out the motive and thecharacteristics of each loan to find sound business decisions or public policy Forinstance, Muhamad Yunus had categorized several types of microcredit organizations

in 2006 as below:

A) Informal microcredit for the poor such as relatives, acquaintances, etc

B) Microcredit based on traditional informal groups

C) Agricultural-based microcredit through specialized such as Rural Development BankD) Microcredit through specialized banks.

E) Cooperative microcredit (cooperative credit, credit union, savings and loan

associations, savings banks)

F) Consumer microcredit

G) Partnership between bank and Non-profit organization (NGO) microcredit

H) Grameen style of microcredit

I) NGO microcredit

J) Other types of microcredit organization

To that end, Yunus insisted that identifying the type of the microcredit organizationplays a vital role in analyzing the operation of the financial institutions as well asclarifying the characteristics of the loan Thus, the research will be more accurate andcomprehensive

2.2 The Principles of Microcredit Scheme

2.2.1 The Social and Economic Principle

Armendáriz et.al (2010) explained why the capital often ignore the poor people, whowilling to pay higher interest rate and generate more money than a richer entrepreneur(Marginal Diminishing Productivity) To depict the economics of microcredit, the basicmodel of Marginal Diminishing Productivity illustrated that the more capital you put onthe investment the output will increase but at one point, the additional capital will bringlesser output The model also demonstrated that the smaller the sum of money invested,the higher the marginal rate of return, and higher capability to pay for the loan so theinvestor should lend the money for small-business owner or farmers with small capital

needed to gain high profit This can explain the recent movement of the capital fromrich countries to poor countries where the firms are able to get higher marginal return abit However, in reality, the situation is complicated, most of the case the capital will

go in the adverse direction, and the large stake often goes to big business or richcountry One reason to explain is that the risk calculation is difficult in the poor target(poor households, poor region, etc.) due to its instability in social, economic, politicalplight The second is the moral problem when the bank is not able to seek trust to poorborrowers due to lack of information to assess the potential effort of the borrowers torepay the loan The third reason is that in poor regions, the judicial system oftendeemed as ineffective to enforce and the transaction cost hinders the banks To thatend, lending to the poor is hard for traditional banking system because of lackinginformation about the borrowers and the potential returns of poor entrepreneurs oftenlower than the risk of the investors

Paulson, Anna L., and Robert M Townsend (2005) have shown the financial constraint inThailand in pre-crisis, crisis, and post-crisis and argued that the wealthier a person, theeasier to start a business, many people saw the opportunity to start a business or expandthe current business Nevertheless, as explained above, the poor often find themselvestrapped in a vicious cycle and got into the loan shark with high interest and excessive risk

of being bankrupted, leading to many social problems Thus, the creation of microfinanceand microcredit is a key factor influencing the choice of poor people to encourage them toavoid the loan shark, which contains high risk (Bateman, 2010)

In term of economic ideology, microcredit often coined and supported by neoclassicaleconomists as the tool to improve the welfare for the poor and make the financialmarket more inclusive, reduce poverty, and women empowerment It explains the use

of the free market mechanism and solution to achieve economic and socialdevelopment (Bisen, A., Dalton, B., & Wilson, R., 2012) In line with the neoclassicalidea, the microcredit organizations are gradually stepping out of the purpose of helpingthe poor, and commercialize with higher interest rest rate Nonetheless, this approachhas been heavily criticized even the by the founder of Grameen Bank Yunus, arguedthat the banks are trying to take the advantage of the poor people instead of helpingthem and it is no different with the loan-shark (Drake, D., & Rhyne, E n.d ,2002)

2.2.2 The Impact of Microcredit on the Community

As mentioned above, one of the main problem in poverty alleviation challenges is theshortage of small-transaction and access to finance in poor regions Khandker, Shahidur R.(1998) proved that each year about 5 percent of the clients who participate in microcreditprogram could lift their families out of poverty as well as the rate of schooling, womenempowerment, etc A World Bank (1998) report showed may criterions improved after theparticipants borrow microcredit loan from the microfinance financial institutions especiallywoman often have better performance than man in the

assessment Dao, V.H (2001) who claimed that over 99 percent of 1833 participantinterviewed in World Bank program saw the microcredit had positively increased theirliving standard and beneficial to their lives Lam T.V Bui (2014) claimed that thenmicrocredit scheme of the Vietnamese Government had contributed significantly to theincome of the poor in Vietnam through the relation between the household’s credit andtheir non-food expenditure However, in the case of the food-expenditure becamenegative, suggested that it is difficult to have a comprehensive research on therelationship between microcredit and the amelioration of poor people living standard.Deepak R et.al (2012) showed the positive impact of microfinance in severaldeveloping countries, suggested that microcredit indeed contributed to the result ofpoverty reduction performance Chowdhury et.al (2002) conducted a study inBangladesh suggested that microfinance does help to reduce the poverty rate but it wasconsidered as short-term impact, which may imply the impact of small-scaleagricultural production may affect the long-term impact of microfinance loan as theborrowers are easily getting back to poverty in the long-term Bateman, M & Ha, J.C.(2012) argued that microfinance only generated short-term positive outcomes for a fewpeople, otherwise, there are little evidence to prove that the microfinance modelestablish a sound mechanism for poor people to sustainably alleviate poverty andcreate favourable environment for successful enterprises development On the otherhand, microfinance may harm the whole prosperity due to several reasons:

 Microfinance often ignores the role of scale economies

 Microfinance generated too many informal micro-businesses

 Microfinance dilutes the creativity, innovation, and industrial sector

Dichter, T W., & Harper, M (2007) argued that microcredit is literally micro debt andthere was no way that it can warrant the poor people that they can escape poverty if they

do productive business or employment There are many risks that go beyond the control

of borrowers such as sickness, natural disaster, epidemic, etc that led to the possibility

of bankruptcy and indebtedness for poor people Sinclair (2012) even went farther; hegathered evidences on the failure of microcredit and microfinance industry in severalcases, notably the level of indebtedness in Nicargua and suicide rate in India due to thehigh-interest rate of MFIs

Nevertheless, in a study of Joana Vieira dos Reis Robalo (2015), although he concededthat MFIS did not contribute to the innovative enterprises but it nurtured multiplemicro-business to flourish, overall supported a vital sector in many countries

2.2.3 The Factors Affect the Result of Microcredit Loan

There are many kinds of research have focused on what and how the internal and externalfactors affect to results of the borrowers use the microcredit loan For instance, Ferdousi,

F (2015) research indicated that the lack of business skills, knowledge, experience, andtraining had eroded the capacity of borrowers to facilitate the use of microcredit in order tofight against the challenges and hinders of poverty Tu et al (2015) had proved that poorhouseholds generally get more income if they invest the loan to non-farm activities.Otherwise, the study also indicated that non-farm activities generate a better chance to getout of poverty than agricultural production Education is also a good indicator to measurethe investment decision and efficiency of the loan as fully educated household can makeproper business plan and get better condition according to the study

Nam, M.V& Duc, A.V (2009) conducted research in Hau Giang Province showed that theterm of the loan and the amount of the loan both affected considerably to the result byadverse effect, the longer the term the lower the income of the households as well as theefficiency of the loan use On the other hand, the higher the rate of interest rate, the morepositive of the outcome The education level had also contributed to the result of the loan,

as the borrowers should have basic knowledge to calculate how to invest the capital to thebusiness Trinh V.B &Phuong T.T.N, (2014) conducted a similar research

in Soc Trang province; consolidate the conclusion that the loan’s term has adverseeffect on the income of the poor people However, the research claimed that the interestrate had positive effect on the income as lower the interest rate, the higher the income

of poor households To put it another way, in the research, they pointed out the relationbetween the number of labour in each households may correlate with the possible result

of microcredit use, with every additional labour participate in the production, theoverall revenue increase Dao M.T.H (2016) studied the effect of microcredit to theincome of poor households by conducting regression analysis with multiple variables,and concluded that the household’s size and dependent percentage affect the income ofthe poor households as the more people who do not take part in the production themore likely that the income will decrease Huong et al (2018) studied the factors thataffect the use of microcredit in Can Tho city, Southwest of Vietnam, indicated fivefactors that affected the result of the microcredit loan, these are the amount of the loan,the percentage that borrowers use for productive work, land size, instruction of bank’semployee Besides, in other studies in finance and economics, the education level andbusiness skills, affected significantly to the result of the microcredit use

To summarize the literature, several factors had been identified by scholars For instance,the factors include the loan’s amount, business experience, education, innovation, andinstructions from the Bank, most of the studies conducted in a small-scale area, provincial

or district level On the other hand, the multiple regression model and Probit model havebeen frequently used as the model for this kind of research However, the author found thatall the previous studies have only focused on the result of the microcredit-use through theincome, or revenue of the borrowers, it only reflected a measurement that coped with theliving of the borrowers or in term of the borrower’s perspective To put it another way, theresult of the usage may also come from the Bank’s indicator such as the Bad Debt Ratioand the local government’s perspective such as the poverty reduction result Therefore, inthe Thesis, the author will propose a new approach

which look into other perspective on the usage of the loan to analyze the possible factors that may affect the result of the loan.

CHAPTER 3: MATERIAL AND METHODOLOGY

3.1 Research Site

Soc Son is a suburban district located in the north of Hanoi capital, with many importanttransportation routes and highways Especially, Soc Son has Noi Bai International Airportand many industrial zones that are arising in the area Thus, the region is in a crucial phase

of structural change in economic development The district has a very diverse geographylandscape, the region has a core area is the center town of the district, surrounded byagricultural land, lakes, and mountain in Northwest of the district Soc Son district has 25communes and 1 town, with a population of 316.000 people (Phương Anh, 2018) Until

2017, there are 3011 poor households in the district according to the multidimensionalpoverty standard of the government, accounting for 3.73 percent of the total households inthe district (Trung Anh, 2017) In all these poor areas, there are communal mobiletransaction access points of the Vietnam Bank for Social Policy (VBSP) to facilitatepeople to participate and gain access to credit loan At the mobile transaction place, VBSPdisburses, collects debt directly to each borrower, instructing the policies, publicizing thelist of disbursed households and outstanding loans for each loan program, informing newregulations, interest rates, loan rates of the Government's preferential credit programs.Finally, yet importantly, VBSP provides adequate information for poor people tounderstand the regulations and improve the understanding of each preferential microcreditprogram to people monitor loan disbursement right at the transaction point Thereby, ithelps to transfer microcredit capital preferential timely and effectively to the rightbeneficiaries It can be said that policy of providing microcredit has contributed positively

to the implementation of the national goal of sustainable poverty alleviation, which hashelped the poor and other beneficiaries groups in Soc Son to become self-reliance, createjobs, improve living standards, income, ensure social security in the area, and build newrural areas

Thanks to the focus on poverty reduction of the local government, Soc Son has achievedmany successes in poverty alleviation In between 2010 and 2015, the district has reduced8,500 poor households, decrease the poor households from 15.04 percent to 2.1 percent(Kien, 2015) VBSP and the preferential microcredit program for poor households have asignificant contribution to the result of poverty alleviation in Soc Son district However,the sustainability of poverty reduction in Soc Son has not yet been evaluated thoroughly asthe result only illustrated the statistic number rather than the long-term implication Forexample, one household who has just escaped poverty may quickly fall back to povertydue to the risk of the market if it depends on agricultural production On the other hand,the question of optimization during the process of using the microcredit loan of VBSPneeds to be carefully analyzed to ameliorate not only the performance of the loan but tosustain the capability of borrowers in the future.

3.2 Thesis Method Design

Soc Son district is transforming itself to be an industrial zone of Hanoi, nevertheless,the structural modification of the local economy has just begun based on thedevelopment plan of Hanoi The local poor households mainly located across thedistrict’s ward around the core urban area of the district and the density of the poorhouseholds heaped around the underdeveloped areas, namely mountainous areas such

as Bac Son The research will cover all the wards in Soc Son except the central areawhere the number of poor households is small and the usage of the loan cannot beverified in this area as the loan often goes to consuming the instant needs rather thaninvestment On the other hand, other areas cover most of the proportion of poorhouseholds in the area and the loan often can be rectified by observing the dailyproduction of each household With the help of the VBSP Soc Son, the author hascollected 548 survey’s questionnaires on the site of each household

To be able to set a light on the factors that affecting the result of the microcredit use, the

research will use both quantitative and qualitative approach to understand the current

situation of the micro-credit loan use, a quantitative approach will be conducted with the

dependent variable, collected through the bank’s database and information collection

paper In qualitative approach, the author will use the in-depth interview to understand the

perspective of both the bank and borrowers on the factors that might affect the result

To evaluate the result ofAnalyze of the

factors that affectIn-depth

interview:

+ The Director of VBSP

Soc Son

+ The officer of the

Department of Credit Supervising

\

Assessments of the bank’sstructure, loan process aswell as the perspectives ofthe bank on the factorsaffecting the microcredit-loan use

On the otherhand,theperspective of the

the microcredituse and formulaterecommendationsfor the bank toimprove further

Figure 3.1: The research framework (Source: Author)

3.3 In-depth Interview Plan

The author conducted in-depth interviews with the officers of VBSP Soc Son, thedepartment of operation and credit for instance Otherwise, some poor householdswhich borrowed the micro-credit loan would also be interviewed in accordance withthe use of the microcredit loan

Table 3.1 The In-depth Interview Plan

The Director of 1 + The structure of the + To get deeper

Soc Son and themicrocredit scheme.+ The process for

poorhouseholds to borrowthe microcredit loan in

VBSP

+ The policies that thebank exert to improve theresult of the micro-credit

loan use

The officer of the 5 + How they manage to + To understand theDepartment of improve the use of the factors, which mayCredit microcredit-loan for poor affect the microcredit-

perspective of thebank’s officer+ The factors that affect

the use of the

microcredit-loan

Poor Borrowers 12 + Identify their + To figure out what

difficulties and the factors might be the factors thatthat they think might may affect the result.affect the use of the loan

+ Their recommendations

to the bank

Source: Author

3.4 The Quantitative Model

The author decided to use the logistic binary regression model to evaluate the result ofthe microcredit use This is a new model but in accordance to previous studies thatused the multiple variables regression model and Probit Model The author found that,with a very distinctive dependent variable (poverty reduction result), the researchshould use a model that can work well to find the effect of independent variables on theprobability of the independent variables Therefore, the binary logistic regressionmodel will be used in this study

Log (p /1−p) = + β 1X1 + β 2X2 + β 3X3 + β4X4 + β 5X5 + β 6X6+ β 7X7+ β 8X8+ β 9X9+ (Binary Logistic)

(0 denotes that the borrower has not yet to escape poverty, 1 denotes that the borrowerhas been left out of the poverty list The result of the microcredit-use will be reflectedthrough the probability of whether they can escape poverty or not The independentvariable will be colleted through the data of the Department of Labor, Society, andVeteran in Soc Son District The list consisted of the poor households in the area, theauthor will check the list in the year when poor households lent the money from thebank At the end of the term, the author will evaluate on whether if the borrowersescape the poverty or not by checking the name of the household on the poorhousehold list of the Department

The main variables of interest should be the variables collected through the in-depthinterview, they are loan’s amount, interest rate, business experience, education Otherwise,after reviewed multiple studies the author decided to add several more independentvariables as follow: loan’s term, borrower’s age, gender, household’s size, type ofbusiness Likewise, the autor also concluded that some control variables should be heldconstant such as household’s asset, the number of labour, and disaster during theproduction process Accodring to other studies, the independent variables are appropriate

to put in the model, no further problems had been detected in the time the model was formulated and no sign of endogeneity problem.

Table 3.2: Overview of the model’s variables Independent Varibles Definition The basis of choosing Expected

variables Value X1: Loan’s amount The amount of the loan that Trịnh, Phương (2014) +

borrowerers borrowed andreceived from the loan

X2: Loan’s term The term calculated by the Trịnh, Phương (2014)

date when borrowers lendthe loan to the due date ofthe loan (as days)

X3: Interest rate The interest rate per year Trịnh, Phương (2014) +

that accompanied with theloan (as percentage)

X4: Education level The number of years the Trịnh, Phương (2014) +

participant spent in school

X5: Borrower’s age The age of the borrowers Trịnh, Phương (2014)

-when they borrowed theloan

X6: Gender Control variable, if the Trịnh, Phương (2014) +

borrower is men, the value

of variable is zero If theborower is women, thevalue of the variable will be1

X7: Experience in doing business Control variable, if the Ferdousi, F (2015) +

(0 = No, 1 = Yes) borrower has not done this

type of businesss before, thevalue will be denoted by 0

If the borrower has done thistype of business, the value

of the variable will be 1

X8: The household’s size Control variable, the Trịnh, Phương (2014)

-number of the member inthe households

X9: The type of business (0= Control variable, if the Ferdousi, F (2015) +

Agricultural production, 1= Non- borrower invest on

Agricultural production) agricultural production

(such as farming orranching) the value will bedenoted by) If the borrowerinvest on non-agricultural

machienary or services)

Source: Author