Poor household access to financial services in ben tre province

Based on the theoretical and empirical studies which are stake holder theory and theory illustrating the crucial role access to finance are addressed, the qualitative approach was applie

MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIETNAM

BANKING UNIVERSITY HO CHI MINH CITY

TRAN NGOC TRA GIANG

POOR HOUSEHOLD ACCESS

TO FINANCIAL SERVICES

IN BEN TRE PROVINCE

BACHELOR THESIS MAJOR: FINANCE - BANKING

CODE: 7340201

SUPERVISOR TRAN NGUYEN MINH HAI, MSc

ABSTRACT

The bachelor thesis is conducted with topic ―Poor household access to financial services in Ben Tre province‖ There are two main sources of financing which poor household access for their financial needs, including formal and informal financial institutions It is likely to be not easy for poor household access to formal financial source due to strict requirement of documents and poor household‘ limitation of financial knowledge The large proportion of the poor clients has been only joining the SPBV's lending programs or microfinance institutions in Ben Tre province Besides, they also access to informal financial services due to its convenience and flexible requirements, ignoring the fact that these informal financial activities are not guaranteed legally

Based on the theoretical and empirical studies which are stake holder theory and theory illustrating the crucial role access to finance are addressed, the qualitative approach was applied in this study in order to (i) summarize of successful and notable experiences in the access to financial services of the poor in the world and lessons for Vietnam; (ii) review and analyze current situation of poor household access to financial services in Ben Tre; and (iii) recommend for the access to financial services of the poor households in Ben Tre Along with five chapters, this study shows the successful and notable experiences in the access to financial services of the poor in the world and lessons for Vietnam This study also analyzes current situation of access to financial services of the poor households in Vietnam and especially in Ben Tre and recommends required conditions to the poor household access to financial services in Ben Tre

STATEMENT OF ORIGINAL AUTHORSHIP

The work contained in this thesis has not been previously submitted for a degree at any other higher education institution To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made

Ho Chi Minh City, December 26, 2018

Author

Tran Ngoc Tra Giang

ACKNOWLEDGEMENT

After four years studying at Banking University of Ho Chi Minh City, I gained a lot of knowledge and experience from talented, devoted and enthusiastic lecturers, who always support for students and education development

Firstly, I would like to express my sincere gratitude to my advisor Tran Nguyen Minh Hai, Msc., Lecturer of Faculty of Finance, Banking University Ho Chi Minh City for the continuous support of my study and related research, for her patience, motivation, and immense knowledge Her guidance helped me in all the time of research and writing of this thesis

My sincere thanks also goes to Le Hoai An, Msc., Lecturer of Faculty of Banking, Banking University Ho Chi Minh City for his dedicated teaching and sharing

of valuable knowledge, skills and experience while I have studied at this university

Last but not the least, I would like to thank my parents for supporting me

spiritually throughout writing this thesis and my life in general

Due to time constraints and practical experience, it is inevitable that certain mistakes will be avoided I look forward to receiving your comments and suggestions

to improve my topic

Best regards!

LIST OF ABBREVIATIONS

ADB Asian Development Bank

BANSEFI Bank for National Savings and Financial Services

BARD Bangladesh Academy for Rural Development

BRAC Bangladesh Rural Advancement Committee

CCF The Central People‘s Credit Funds

CCT Conditional cash transfer programs

CEF Caixa Economica Federal

CEP Capital Aid Fund for Employment of the Poor

CGAP Consultative Group to Assist the Poor

FGD Focus-Group Discussions

FWED The Fund for Women in Economic Development

GDP Gross Domestic Product

GSO General Statistics Office of Vietnam

IFAD The International Fund for Agricultural Development

IFC International Finance Corporation

InM Institute of Microfinance

MFI-NGOs Microfinance Institution-NonGovernment Organizations

MFIs Microfinance Institutions

MFPs MicroFinance Programs

MOF Ministry of Finance

PCFs People's Credit Funds

PESTLE Political, Economic, Social, Technological, Legal and Environmental

ROSCAs Rotating savings and credit associations

SBV State Bank of Vietnam

UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme

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

LIST OF FIGURES AND TABLES

4.1 People with an account at a formal financial

4.2 Key characteristics of Vietnam‘s major financial

2.1 Poverty headcount Ratio in 2008 ($1.25 Per Day Poverty Line) 11 2.2 The link between typical financial needs and financial services

for poor households

15

3.2 Evolution of number of bank correspondents according to type

of activities

29

4.2 Economies with relatively low account ownership 39 4.3 The percentage of poor households, near poor households in Ben

Tre by their living areas

40

4.4 Poor household‘s access to financial services in Ben Tre 42 4.5 Poor households‘ sources of credit and savings in Ben Tre 44

CONTENTS

ABSTRACT i

LIST OF ABBREVIATIONS iv

LIST OF FIGURES AND TABLES vi

CONTENTS vii

CHAPTER 1 INTRODUCTION 1

1.1 Motivation 1

1.2 Research objectives and questions 2

1.3 Research scope and subject 3

1.3.1 Research subject 3

1.3.2 Research scope 3

1.4 Methodology 5

1.5 Research framework 7

1.6 Research contributions 8

1.7 Research compositions 8

CHAPTER 2 LITERATURE REVIEWS 10

2.1 Poor household 10

2.1.1 Definitions 10

2.1.2 Characteristics 12

2.2 Financial services 13

2.2.1 Definitions 13

2.2.2 Functions 14

2.3 Poor household access to financial services 15

2.3.1 Definitions 15

2.3.2 Measurement 17

2.3.3 Impacts 18

2.4 Theoretical and empirical studies 19

CHAPTER 3 POOR HOUSEHOLD ACCESS TO FINANCIAL SERVICES: CASE STUDIES IN Bangladesh and brazil 24

3.1 Bangladesh 24

3.1.1 Poor household access to financial services 24

3.1.2 Measurement 25

3.1.3 Impacts 26

3.2 Brazil 28

3.2.1 Poor household access to financial services 28

3.2.2 Measurement 30

3.2.3 Impacts 31

3.3 Lessons from experiences of Bangladesh and Brazil 31

CHAPTER 4 Poor household access to financial services in Ben Tre PROVINCE .34

4.1 An overview of poor household access to financial services in Ben Tre province 34

4.1.1 Background 34

4.1.2 Macro-conditions to the poor household access to financial services in Ben Tre province 35

4.2 Measurement 38

4.2.1 Demand side 38

4.2.2 Supply side 40

4.3 Impacts 41

CHAPTER 5 RECOMMENDATIONS AND CONCLUTIONS 47

5.1 Recommendations 47

5.2 Conclusions 48

REFERENCES 50

APPENDIX 56

APPENDIX 1 56

APPENDIX 2 58

APPENDIX 3 61

APPENDIX 4 64

APPENDIX 5 65

APPENDIX 6 66

APPENDIX 7 67

APPENDIX 8 69

CHAPTER 1 INTRODUCTION

1.1 Motivation

Financial services play a key role in growth and development of any country (Legerwood, 1999; ADB, 2000; Morduch & Haley, 2002; Khandker, 2003) Through a variety of banking, securities and insurance services, financial services administrations encourage local and worldwide exchanges, mobilize and channel domestic savings and widen the accessibility of credit, payment and insurance for small and medium-sized enterprises and households Meanwhile, the financial services provided by formal institutions play an important role in ensuring the financial activities occurred legally, smoothly and transparently

However, most people in the developing world especially the poor households

do not have access to formal financial services smoothly due to a variety of reasons Very few of them benefit from a savings account, loan, or convenient way to transfer money The consequences of the lack of access to financial services prevents poor and near poor households from making everyday decisions How to pay for a child‘s schooling-or even schoolbooks-next year? Where to get the cash to bury a loved one? How to send money from the capital city back to family living in a remote rural area? How to acquire inventory for a business? Financial services for the poor, often referred

to as microfinance, cannot solve all the problems caused by poverty (Duflos, 2013) but they can help put resources and power into the hands of poor themselves, letting them make those everyday decisions and chart their own paths out of poverty The potential

is enormous, and so is the challenge

In Vietnam, there are limits of access to formal financial services, especially, the majority of the poor clients has been only joining the SPBV's lending programs or microfinance institutions Besides, they also access to informal financial services due

to its convenience and flexible requirements, ignoring the fact that these informal

financial activities are not guaranteed legally Thus, the government has made strong effort to strengthen the financial inclusion targeting to the poor - the low-income segment

In 2016, due to large population and low financial inclusion rates, Vietnam is one of 25 priority countries that are focusing on enhancing financial inclusion Millions

of unbanked and underbanked adults accessing to formal financial services will help Vietnam reduce poverty, enhance dynamic growth (World Bank, 2016) According to the MIX market, in 2017, there are 50 official organizations in Vietnam providing microfinance services to the poor but only credit products

According to the provincial Department of Labor, Invalids and Social Affairs, in

2017, Ben Tre has 37,541 poor people, making up 12% of total population of Ben Tre Hence, improving effective access to sustainable financial services from formal institution and usage of these services may boost the economic development in Ben Tre out of one of the poorest provinces

Subsequently, finding practical recommendations for poor household access to financial services of the poor households in Ben Tre is essential This study will discuss about access to financial services from formal institutions of the poor households

1.2 Research objectives and questions

The main objectives of this diagnostic are: (i) to explore how the poor household access to financial services and identify the challenges which poor households in rural areas face with when they access to financial services; and (ii) to recommend ways to promote financial system for poor households in Ben Tre To be specific, there are three basic objectives addressing in this study:

(i) Summarizing of successful and notable experiences in the access to financial services of the poor in the world and lessons for Vietnam

(ii) Reviewing and analyzing current situation of poor household access to financial services in Ben Tre

(iii) Recommending for the access to financial services of the poor households

This study focuses on the poor households in Ben Tre because they are who mostly in rural area, especially the poor households do not have access to formal financial services smoothly due to a variety of reasons According to Decision No 1614/QD-TTg approving scheme for ―conversion of uni-dimensional poverty measure into multi-dimensional poverty measure for the period of 2016 - 2020‖, households are regarded as poor if its per capita income does not exceed the policy poverty line or exceeds the policy poverty line but lower than the minimum income standard (700,000 VND in rural area) and it is deprived in a third or more of ten indicators of basic services (See Appendix 5) Very few of them benefit from a savings account, loan, or convenient way to transfer money The consequences of the lack of access to financial services prevents poor households from making everyday decisions (Helms, 2006)

Therefore, this study is conducted to figure out the current situation and propose some recommendations to poor households in order to have greater access to finance This will not only bring socially significant meaning but also enhance national poverty reduction target and boost the economic development in Ben Tre out of one of the poorest provinces

The study focuses on loans and deposits to poor clients, and do not gather significant information on payments and insurance markets Individuals selected for the survey were Vietnamese citizens over the age of 18, who are usually head of households, on behalf of their families to currently have loans from financial institutions They already have jobs or are seeking jobs and plan to expand additional sources of income

The study received a valid answer of 30 out of 50 respondents (60 %) Answers are recorded directly between the interviewer and the interviewees, so respondents may

be open about their finances through effective interaction Open-ended questions are selected to make it easy for them to express their thoughts and experiences about their access to financial services

Table 1.1 Summary of interviewees’ background

No Criteria Description

1 Age Average age of interviewees is 45 years old The youngest and oldest are at the age

of 25 and 70s, respectively

2 Education There are 40 and 50 % of people finishing primary school and junior high school,

respectively The rest is who finished high school (including case of dropouts)

3 Gender There are 40 % of female và 60 % of male participants

4 Marital status 100 % of interviewees have married

5 Position There are 80 % of employed people in the agricultural sector, the rest are working

in handicraft-related industries such as coconut fiber knitting

6 Income There are 100 % with incomes less than or equal to 0.7 million VND / month

Source: Summarized from the survey‘ result

Participants are not paid for answering this survey The survey covers four key sections: (i) personal information including 6 questions; (ii) the poor households‘ general attitudes towards financial services including 2 questions; (iii) the poor households‘ financial decisions making including 2 questions; (iv) the poor households‘ sources of financing and their experience including 2 questions

 The secondary data

The study reviewed recent literature on rural and microfinance in Asia, most of which had been produced by international development agencies, including the Asian Development Bank (ADB) and various components of the World Bank Group, such as the International Finance Corporation (IFC) and Consultative Group to Assist the Poor (CGAP)

This study also reviewed recent contributions to the literature on micro, rural, agricultural, informal finance to understand the situations in Vietnam

Theory of crucial role of poor household access to financial services Kunt, 2008) highlights the critical meaning of concentrate on access to financial services, especially targeting to the poor households Furthermore, an attempt has been made to review a range of definition relating to financial services, their vital role and impact on the poor households generally

(Demirgüç- Data collection method

In term of primary data, the study was mostly conducted in the Giong Trom town where is a place with the highest number of poor households in Ben Tre Participants in each village were selected to take part in focus-group discussions (FGD)

to discuss criteria and perceptions of access to financial services Interview took place

in September 2018, interviewees voluntarily provide their experience of access to financial services, without under pressure or coercion The purpose of the interview is

to process for academic purposes These discussions were recorded, transcribed and analyzed in Vietnamese into English Collecting data for this study, interview plays an essential role Direct contact and interviews with these clients are the most feasible way Face to face contact with the people help to collect a lot of useful information

To collect the necessary information for further analysis, a questionnaire is adapted which was developed by the Consultative Group to Assist the Poor (CGAP) with inputs from the International Finance Corporation (IFC) used to conduct research

in Hai Duong and Long An in 2014 due to its adequate and necessary content (Freeman,2014)

In terms of secondary data, the study collected recent literature on rural and microfinance in Asia, most of which had been produced by international development agencies, including the Asian Development Bank (ADB) and various components of the World Bank Group, such as the International Finance Corporation (IFC) and Consultative Group to Assist the Poor (CGAP)

 Data processing method

In term of primary data, the author applied qualitative analysis on the access to finance services of the poor households in Ben Tre province

In which, the qualitative model PESTLE (Political, Economic, Social, Technological, Legal and Environmental) was applied in order to address the macro-conditions for poor household access to financial services in Ben Tre province

PESTLE analysis is one of the most popular strategic analysis models - a technique for understanding the various external influences on a business (Clark, 2018)

Furthermore, this research also applies case studies approach to address the experiences of poor household access to financial services in Bangladesh and Brazil

- Reviewing and analyzing current situation of poor household access to financial services in Ben Tre

- Recommending for the access to financial services of the poor households in Ben Tre

Methodology

- Approach method: A variety of theoretical and empirical studies is reviewed that have been concluded

(Stakeholder theory, theory of crucial role of poor household access to financial services, a range of definition relating to financial services, their vital role and impact on the poor households)

- Data collection method: Primary and secondary data are used In terms of primary data, the study was mostly conducted in the Giong Trom, Ben Tre In terms of secondary data, the study collected recent literature and empirical studies and reports from ADB, World Bank Group, such as IFC and CGAP

- Data processing method: In term of primary data, the author applied qualitative analysis on the access to finance services of the poor households in Ben Tre In which, the qualitative model PESTLE (Political, Economic, Social, Technological, Legal and Environmental) and case studies approach were applied

Research compositions

- Revision of a range of theoretical and empirical studies is relating to ―poor household access to financial services‖ (Stakeholder theory, theory of crucial role of poor household access to financial services, a range of definition relating to financial services, their vital role and impact on the poor households)

- Summary of successful and notable experiences in the access to financial services of the poor in Bangladesh and Brazil and lessons for Vietnam

Figure 1.1 Research framework of bachelor thesis

Source: Summarized by the author

1.6 Research contributions

A unique analytical framework is presented showing the current situation of access to financial services, from both the poor clients and the financial services providers‘ perspectives

 This study shows the successful and notable experiences in the access to financial services of the poor in the world and lessons for Vietnam

 This study also analyzes current situation of access to financial services of the poor households in Vietnam and especially in Ben Tre

 This study recommends required conditions to the poor household access to financial services in Ben Tre

- In depth analysis of current situation of poor household access to financial services in Ben Tre

Recommendations and conclusions for poor household access in Ben Tre

 Chapter 3: Poor household access to financial services: Case studies in Bangladesh and Brazil

This study summarizes a range of successful and notable experiences in the poor household access to financial services of the poor in the world and lessons for Vietnam

 Chapter 4: Poor household access to financial services in Ben Tre

This part of study reviews and analyzes status of poor household access to financial services in Ben Tre

 Chapter 5: Recommendations

This section proposes recommendations for the access to financial services of the poor households in Ben Tre

CHAPTER 2 LITERATURE REVIEWS

2.1 Poor household

2.1.1 Definitions

There are two ways to approach definition of poor household according to World Bank’s studies which are “poverty line” and “multi-dimensional poverty”

 Poverty line approach

A household is considered poor if its per capita consumption is lower than the poverty line The poverty line is a cut off that separates the poor from the non-poor, given the size distribution of the population by per capita consumption classes It means that households whose consumption expenditure falls below this line, are considered to be poor Following common practice, the poor are defined as those who lack command over basic consumption needs, including food and non-food components In other words, the poverty line may be thought of as the minimum expenditure required by an individual to fulfill his or her basic food and non-food needs

The poverty line defines the level of consumption (or income) needed for a household to escape poverty Government of India in 1993 also addressed that the poor are defined as those people whose consumption standards fall short of the norms, or whose income lies below a poverty line Consumption-based poverty has been used for a long time to determine the number and proportion of poor population below a poverty line Overall, targeting poor households is difficult because the criteria for eligibility may

be hard both to define and to verify

Poverty lines based on per capita income or expenditure are often used, but it is also well recognized that they have limitations and represent a simplification of what it means to be poor (Ravallion 1998; Bebbington 1999; Alwang, Siegel & Jorgensen 2001)

*PRC = People’s Republic of China, Lao PDR = Lao People’s Democratic Republic

Figure 2.1 Poverty headcount ratio in 2008 ($1.25 Per Day Poverty Line)

Source: World Bank (2008)

 Multi-dimensional poverty approach

A second argument justifying the need for multi-dimensional poverty is that

monetary variables alone do not provide a comprehensive evaluation of human being (Bourguignon & Satya, 2003) Human well-being depends on both monetary and non-monetary attributes Poverty measurements based solely on income can demonstrate the capacity of people to consume through the market; but it does not capture their access

well-to public goods (education, health care, infrastructure, etc.) which neither have markets nor be acquired with income Therefore, income should be implemented by other variables to be able to capture the multiple aspects that contribute to poverty

The UNDP has used the Multidimensional Poverty Index to measure poverty of

104 countries in its Human Development Report since 2010 (See Appendix 4) In case of Europe, the European Council (2004) also defined that people living in poverty if their income and resources are so inadequate as to preclude them from having a standard of living considered acceptable in the society in which they live They may experience multiple disadvantages because of unemployment, low income, poor housing, inadequate health care and barriers to lifelong learning, culture, sport and recreation Further, they are often excluded from participating in economic, social and cultural activities that are the norm for other people, and their access to fundamental rights may be restricted

Bangladesh

Nepal

Multidimensional poverty has gained prominence at national and international level For instance, in 2009, Mexico‘s National Council for the Evaluation of Social Policy adopted a multidimensional approach to measure the national poverty In 2011, a five-dimensional poverty reduction strategy was employed by the Government of Colombia, using a variant of the Alkire and Foster (2011a) method to quantify progress (Ferreira & Lugo, 2012) At international level, the United Nations Development Program (UNDP) started introducing multidimensional poverty in its 1997 Human Development Report The Millennium Declaration and the Millennium Development Goals also highlighted multidimensional poverty in the agenda since 2000 (United Nations, 2000)

2.1.2 Characteristics

There are mainly two characteristics of poor households including (i) most of them live in rural areas and (ii) they are probably vulnerable to serious risks which are addressed on several studies

Firstly, according to World Bank (2014), 80% of the poor households live in rural areas It illustrates that a large share of the poor population in many developing countries

is still concentrated in rural areas In addition, (Khan, 2000) also addressed that the poor especially who live in rural areas, depend largely on agriculture, fishing and forestry, and related small-scale industries and services The differences between the poor and other segments of population are more clearly reflected in their links to the economy, which determine how they use their assets and participate in production All of the poor households are engaged in the production of both tradable and non-tradable goods and services Artisans and unskilled workers provide many non-tradable services and some non-tradable products (such as staple foods) that small cultivators also produce They are also the only groups of poor people who own or rent physical capital such as tools, implements, and machinery Artisans and small-scale farmers have only limited amounts

of physical capital They have only limited access to financial capital and acquire it largely through informal agents or institutions, except for tenants, who can use their landlords as conduits to formal credit Borrowed capital is often costly and is used to

maintain consumption during hard times or to buy supplies and equipment needed for farming Households' labor is used both within the family—for work done by unpaid family members-and to earn the wages paid to landless, unskilled workers in farm and nonfarm activities (Khan, 2000)

Secondly, the poor households are vulnerable to serious risks owing to changes in weather, health, markets, investment, and public policy The resulting fluctuations in the prices and quantities of their assets and of what they produce can either deepen their poverty or give them opportunities to escape from it According to Datt, G & Ravallion,

M (1998), the main reason is that the poor are ill equipped to absorb shocks In addition, economic crises and natural disasters can bring about sharp increases in poverty and make it more difficult for the poor to escape it

2.2 Financial services

2.2.1 Definitions

Asmundson (2011) defined that a financial service is not the financial good say a mortgage loan to buy a house or a car insurance policy-but something that is best

itself-described as the process of acquiring the financial good According to (UNCTAD,2017),

financial services refer to services given by the finance industry and they play the

important role in the management of markets and the economy In other words, it involves the transaction required to obtain the financial good The financial sector covers many different types of transactions in such areas as real estate, consumer finance, banking, and insurance It also covers a broad spectrum of investment funding, including securities

Financial services have imperative linkages with the economy generally, providing significant inputs for activities in the primary, industrial and tertiary sectors, and for individuals as well Through a variety of banking, securities and insurance services, financial services administrations encourage local and worldwide exchanges, mobilize and channel domestic savings and widen the accessibility of credit for small and medium-sized enterprises and households

These financial organizations are banks, credit card companies, insurance

companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises The firms providing these financial services, study the needs of their customers in detail before deciding their financial strategy and continuously remain close relationship with their customers, so that they can design products which can cater to the specific needs of their customers Unless the financial institutions providing financial products and services have good image, enjoying the confidence of their clients, they may not be successful Thus, institutions have to focus on the quality and innovativeness of their services to build up their branding and achieve their mission

2.2.2 Functions

Financial services are a very vital part of the financial system Financial services serve the needs of individuals and organizations through a network of financial institutions Financial services play a key role in growth and development of any country (Sutton, 2007) This is done by managing various financial instruments in such a way that money is funneled from those that don‘t need it right away to those that need it and probably want to use it for some productive work Tremendous growth of the countries that have highly efficient financial systems in place is a testimony in itself as to how highly efficient financial markets lead to strong overall growth of the economy Following are considered to be the primary functions of financial services (Caprio, 2001):

 Facilitating transactions (exchange of goods and services) in the economy

 Mobilizing savings (for which the outlets would otherwise be much more limited)

 Allocating capital funds (notably to finance productive investment)

 Monitoring managers (so that the funds allocated will be spent as envisaged)

 Transforming risk (reducing it through aggregation and enabling it to be carried by

those more willing to bear it)

According to (Asmundson, 2011), the importance of financial services to the economy and the need to foster trust among providers and consumers are among the reasons that governments oversee the provision of many financial services This oversight

involves licensing, regulation, and supervision, which vary by country In the United States, there are a number of agencies-some state, some federal-that supervise and regulate different parts of the market In the United Kingdom, the Financial Services Authority oversees the entire financial sector, from banks to insurance companies

2.3 Poor household access to financial services

2.3.1 Definitions

A variety of concepts are used to understand the access to financial services,

Mexican National Banking and Securities Commission defined ―Access refers to the level

of penetration of the financial system through appropriate infrastructure for each type of population group” (Martínez, Hidalgo & Tuesta, 2013) Improving access, then, means

improving the degree to which financial services are available to all at a fair price Furthermore, access essentially refers to the supply of services (Ganbold,2008), whereas

so that the supply can meet the needs of the users, the studies also consider the needs of the people, especially the poor, to make appropriate policies (Martínez, Hidalgo & Tuesta, 2013)

Figure 2.2 The link between typical financial needs and financial services for poor

households

Source: Churchill (2012)

According to World development report (World Bank, 2000), ―Access to financial

markets is important for poor people Like all economic agents, poor households and

microenterprises can benefit from credit, savings, and insurance services Such services help to manage risk and to smooth consumption … and allow people to take advantage of profitable business opportunities and increase their earnings potential.‖ But financial markets, because of their special features, often serve poor people badly … Since poor people often have insufficient traditional forms of collateral (such as physical assets) to offer, they are often excluded from traditional financial markets Plus, transaction costs are often high relative to the small loans typically demanded by poor people And in areas where population density is low, physical access to banking services can be very difficult

It is necessary to figure out other definitions relating to poor household, according

to CGAP (2013), financial services (savings, credit, payment transfers, insurance) for

poor and low-income people means microfinance As mentioned above, 80% of the poor

households live in rural areas, so financial services served and targeted to this segment is essential To be specific, financial services for the poor in rural areas are represented by

the shaded overlap of microfinance with rural and agricultural finance on the diagram

Rural finance refers to financial services offered and used in rural areas by people of all

income levels Agricultural finance is a sub-set of rural finance dedicated to financing

agriculture-related activities, such as input supply, production, distribution and wholesaling, and marketing It includes financial services for all purposes and from diverse sources tailored to the needs of poor people in rural areas Providers include both financial institutions, such as banks and credit unions, and non-financial mechanisms The accessibility of quality financial services for the poor in rural regions is critical for the development of the economy as this will empower the large number of rural

households to finance the growth of their livelihoods The term of financial services

extends beyond the traditional credit and saving products provided to varying degrees by different kinds of financial institutions, especially microfinance in rural areas The term also includes payments, money transfer and remittance services, and insurance and contractual savings products

Poor household access to financial services should be distinguished from the actual use of financial services, because non-use of finance can be voluntary or

involuntary (Demirgüç-Kunt, Beck & Honohan, 2008) Voluntary non-users of financial services have access to but do not use financial services either because they have no need for those services or because they decided not to make use of such services due to cultural, religious, or other reasons

Figure 2.3 Access to financial services

Source: World Bank (2006)

2.3.2 Measurement

It is difficult to define and measure because access has many dimensions In terms

of access to finance of households According to World Bank, financial depth, more

generally, can be broad indicator with direct and indirect effects on households and firms Greater depth is likely to be associated with greater access for the households and firms, which will make them better able to take advantage of financing opportunities A proxy variable that has received much attention in the empirical literature in this regard is private credit relative to gross domestic product (GDP) However, a very high ratio of private sector credit to GDP is not necessarily a good thing and the poor households do not always take advantages of these high ratios (Demirgüç-Kunt, Beck & Honohan, 2008) Because it is not easy to answer the question: ―How many borrowers are behind

the total value of outstanding loans of a country‘s banking system?‖ Unlike data on financial depth, these statistics are not readily available

In addition, demand and supply data surveys provide necessary information about access to finance of the access and usage of financial services which is concluded by

Pearce, D.; Ortega, C R., (2012) They highlight that “access indicators reflect the depth

of outreach of financial services, such as the penetration of bank branches or point of sale (POS) devices in rural areas, or demand-side barriers that customers face to access financial institutions, such as cost or information” They also highlight that demand-side data surveys providing information about their target customers of financial services

helps to understand financial needs (met and unmet), barriers encountered when seeking formal financial services and products, and target clients‘ socio-economic and demographic characteristics (e.g., income, occupation, age or gender groups) Besides, supply-side analysis provides information about regulated financial institutions or through reporting to financial regulators, including geographical access (branch location), pricing of products and services, and penetration or usage of products and services

2.3.3 Impacts

According to World Bank (2006), the bulk of the evidence suggests financial development and improved access to finance is likely not only to accelerate economic growth but also to (i) reduce poverty and (ii) mitigate risk

 Poverty reduction

In terms of poverty reduction, access to financial services can make a substantial

positive difference in improving poor people's lives (Banerjee & Newman, 1993; Galor & Zeira, 1993) The concept with respect to poor household access to financial services suggests that well-functioning financial sector benefits the poor directly by providing access to formal financial services to the poor who lack resources to fund themselves or collateral to obtain a bank loan Poor benefit from access to finance by investing the borrowed funds into profitable small business opportunities and human capital formation such as education for their children (Levine, 2008) Financial development also helps poor to make use of saved and borrowed money in times of sudden economic crisis

(Rosenzweig & Wolpin, 1993) Almost empirical studies using different samples and methodologies support the view that access to finance benefit the poor (Akhter & Daly, 2009; Ang, 2010; Beck et al., 2007; Burgess & Pande, 2005; Honohan, 2004; Jalilian & Kirkpatrick, 2005; Odhiambo, 2009) Empirical evidence using household data indicates that access to basic financial services such as savings, payments and credit can make a substantial positive difference in improving poor people‘s lives (Caskey et al., 2006; Dupas & Robinson 2009)

 Risk mitigation

As for risk mitigation, access to financial services allows households and companies

especially the poor households to administer or mitigate risks through saving and insurance (Collins et al., 2009; World Bank, 2008); while the negative consequences of exclusion (Mitton, 2008) include a higher interest rate on loans, lack of insurance and risks associated with the insecurity or inflation Few poor households have access to formal insurance against such risks as the death of a family breadwinner, severe illness,

or loss of an asset including livestock and housing These shocks are particularly damaging for poor households, because they are more vulnerable to begin with The big challenge is finding the right balance between offering adequate protection with affordability for poor households

2.4 Theoretical and empirical studies

An attempt has been made to present, in brief, a review of past studies, which have

a direct or indirect relevance to this study This is likely to provide a glimpse of work done on the studies related to access to financial services of the poor households

 Stakeholder theory relating to household access to financial services

This theory is applied to analyze household access to financial services through internal and external stakeholder(Freeman,2004), especially (i) supply side - financial institutions – key providers of financial services and (ii) demand side which are the poor households in term of access to financial services These factors is gathered and analyzed based on the model PESTLE (Political, Economic, Social, Technological, Legal and

The lack of access to the financial system is due to supply and demand factors On the supply side market failures such as asymmetrical information1, monopoly or oligopoly in the financial market and entry barriers to new competitors and/or products mean barriers for a part of the population that is excluded for reasons of price, risk and/or reduced supply (Claessens, 2006) On the demand side, Beck and De la Torre (2006) suggest that price and income are the most notable economic determinants of demand for payment and saving services Economic development and the associated raise in per capita income, increases the need for more sophisticated services However, incentives to demand do not only come from economic factors, but also socio-cultural ones such as traditions or religion, which may lead to voluntary exclusion (Claessens, 2006), i.e to a person's own decision not to use and not to be interested in using the financial system Despite the fact that authors such as Beck and Demirgüç-Kunt (2008) point out that people who have access but decide not to use financial services constitute a smaller problem, as their lack of use reflects zero demand, there are few studies that analyze the reasons for financial exclusion from the demand point of view, whether voluntary or involuntary Demirgüç-Kunt and Kappler (2012) and Allen et al (2012), using data from the World Bank's Global Findex survey, are the authors who have studied the causes of financial exclusion in most depth These authors use as a proxy the reasons why the population over the age of 15 does not have an account in a financial institution The analysis covers 148 countries The most important barrier, according to this measurement, is lack of money (66% of the people argue this reason) and the variables that increase the probability of perceiving this barrier are: belonging to the low and middle-income quintiles, being part of a bigger household, and being unemployed In line

1

The problems of imperfect information in the financial market are adverse selection, moral risk and credit rationing (Stiglitz and Weiss, 1981) Adverse selection occurs when one of the agents has more information than the other before the economic transaction This makes decisions in the market difficult or distorts them; moral risk is a problem of private information, in which an agent incurs in actions that the other agent does not know or control and that lead to consequences to the latter; credit rationing is produced by the two previous failures and means that financial intermediaries do not place all the funds that the market requires

with these results, Djankov et al (2008), using data from the Bank for National Savings and Financial Services (BANSEFI), Mexico, found that 89% of people without access to the financial system argue they "do not have sufficient money"

According to Waterfield (2011) the interest rate against microcredit services should achieve the balance ‗between being financially sustainable and socially responsible‘, and that poses a big challenge for MFIs Furthermore, Chaudhuri (2011) used district level data on Self Help Group (SHG) Bank linkage in India to address that income, education, health, occupation and asset related other factors affecting MF demand

Fouillet and Augsburg (2007) used district level data on SHG-Bank linkage in India to address the different reach of the program across regions and to identify measures to fill the gap between demand and supply in India It finds that the cost of credit is one of the main factors affecting microcredit supply The same is applicable to Swain (2002) who finds that ‗the credit markets characterized by high lending costs and high demand for credit as a result of high interest rates being charged to the borrowers‘

According to Massar Associates (2002), in their assessment of demand and supply

of small and Microcredit in the West Bank and Gaza Report, find that there is a gap between microcredit demand and supply, and that supply gap is not as a result of finance shortage, but a result of MFIs prudential policy, penetration rate, poor performance, political and security situation

It can improve the opportunities for the poor to access formal finance by addressing the causes of financial market failures such as information asymmetry and the high fixed cost of lending to small borrowers (Jalilian & Kirkpatrick, 2005) Particularly, demographic branch penetration through more bank branches reduces the distance between lenders and borrowers and improve lending conditions For instance, Degryse and Ongena (2005) demonstrate that loan rates increase with the distance between the firm and bank branches, this could also be linked to the result of (Bofondi & Gobbi, 2006) who find that default rates are more than three times higher for firms outside the local market Moreover, Brevoort and Hannan (2007) show a negative association

between distance and the likelihood of a local commercial loan being granted while (Gobbi & Zizza, 2007) document that it is the probability of a household to hold a bank account which is correlated positively with the number of branches

 Theory of the crucial role of access to financial services

This theory is applied and acknowledges the important role of access to financial services (thereby confirming the importance of further research on access to financial services in the local level with the object of poor households (Demirgüç-Kunt, 2008)

Modern development theory highlights the role of finance, these models show that lack of access to finance can be the critical mechanism for generating persistent income inequality or poverty traps, as well as lower growth For example, in the model of Galor and Zeira (1993), it is because of financial market frictions that poor people cannot invest

in their education despite their high marginal productivity of investment In Banerjee and Newman‘s model (1993), individuals‘ occupational choices are limited by their initial endowments The structure of occupational choices-whether people can become entrepreneurs or have to remain wage earners-in turn determines how much they can save and what risks they can bear, with long-run implications for growth and income distribution (Demirgüç-Kunt & Levine, 2007)

Extensive empirical evidence suggests a significant and robust relationship between financial depth and growth researchers recently have shown that financial depth reduces income inequality and poverty and is thus particularly beneficial for the poor (Demirgüç-Kunt, & Levine,2007); Honohan (2004) While theory focuses on the importance of broader access and greater opportunities (that is, financial inclusion), relatively little empirical evidence links access to finance to development outcomes, and there is little guidance for policies on how best to promote access

All this evidence makes clear the need to go into more depth in the study of the access to financial services Given the above, this study aims to explore the access to financial services of the poor households in Ben Tre To do so, based on the results of field surveys and inherit the previous research results in the field of financial services for the poor, it analyzes the data collected by survey which provides very valuable

information that allows to analyze elements of access to financial services of the poor households in Ben Tre that have not been studied before due to lack of detailed information at individual level

It is concluded that demand and supply data provide necessary information about access to finance of the access Besides, the theoretical models which are stake holder

theory and theory illustrating the crucial role access to finance are addressed as well

CHAPTER 3 POOR HOUSEHOLD ACCESS TO FINANCIAL SERVICES:

CASE STUDIES IN BANGLADESH AND BRAZIL

3.1 Bangladesh

Among South Asian countries, Bangladesh has been ensuring higher intensity of access of households to financial services Enhancing the reach of formal financial services has become a priority for the government Financial inclusion activities started even before the independence of the country in 1971, with the establishment of the Bangladesh Academy for Rural Development (BARD), via the cooperative agricultural development model After independence, the process of including the poor into different financial benefit programs continued under various government safety net programs of the government and under the activities of the BRAC (Bangladesh Rural Advancement Committee)-a leading NGO The establishment of Grameen Bank in 1983 by government legislation further paved the way for increased robustness of the microfinance sector in the country

3.1.1 Poor household access to financial services

The business model adopted by Bangladesh Post to offer digital financial services

and provides lessons for other postal operators seeking to digitize their financial services

in order to better reach the unbanked population Postal operators can innovate successfully, and as a result, make a meaningful contribution to financial inclusion The Bangladesh Post Office has for some time been playing an important role in providing access to financial services in rural and remote areas of Bangladesh With an extremely large and far-reaching network of 2,000 post offices and 8,500 rural outlets, Bangladesh Post has offered remittance services, savings accounts, and life insurance schemes In

2010, the Post embarked on an ambitious drive to develop and provide innovative digital financial services, and launched a new Mobile Money Order Service and Postal Cash Card in 2010, as well as a Mobile Banking Service at the end of 2012 These new services, targeted primarily at the unbanked population in rural and remote areas, have already enjoyed considerable success To date, the Post Office has issued over 11 million

mobile money orders, worth US$ 7 million, and the Postal Cash Card has built a customer base of 52,000 card-holders, many of whom live in rural areas The case of Bangladesh Post therefore shows that with the right approach This case study is one of a series of studies undertaken by the Universal Postal Union to showcase best practices in postal financial inclusion

Due to continuous innovations in access to finance, Bangladesh is a pioneer in empowering the poor by broadening the base of financial access through several types of financial institutions Along with the formal banking sector, there are non-banking financial institutions, cooperatives, microfinance institutions and other government non-government financial institutions providing different financial services to the poor population The overall state of financial inclusion shows that, despite significant progress in the recent years, various indicators of financial inclusion still show poor values

3.1.2 Measurement

In 2010, according to Hassan (2015), the formal financial market consisted mainly

of bank services such as savings, credit and insurance, according to the study However, with the emergence of mobile banking, it now includes households that have mobile banking accounts The study revealed that more poor households can now access the formal financial market, as it went up 5 percentage points between 2010 and 2014

More than 40 % of households in rural regions can access formal financial services, which was 32.8 % four years ago In urban areas, 49.76 % households have access to formal financial services, against 53.53 % in 2010 Access to formal financial services by poor households that are constrained by service charges, collateral and a lack

of financial literacy, stood at 24.19 % in 2014, up from 19.53 % in 2010 Due to fees, collateral, and lack of financial literacy, formal market is not easily accessible by the poor Only over 19% of poor households had access to formal services in 2010 (Figure 3.1 below) The findings of 2014 survey shows that more poor households can access this market; however, with increase of 5 percentage points, it is still significantly less than that of non-poor households

Figure 3.1 Poverty Status (Percentage)

Source: Hassan (2015)

The study shows that fewer households are accessing the informal financial market for credit, as it fell below 20% in 2014 There are still many households that do not have access to financial services Day labor-led households are one of them, as almost

a quarter of them do not have access to any financial market Less than 24% of day led households have access to formal finance and almost 57% are capable of accessing the microfinance market

labor-3.1.3 Impacts

There are two impacts of innovative model of Bangladesh Posts on poor household access to financial services which are reducing poverty and poor households’ vulnerability to shocks

Although poverty is still high, Bangladesh has continued to make impressive progress in reducing poverty Four in five households in Bangladesh have access to financial services, thanks to improvements in the networks of banks and microfinance institutions as well as a booming mobile banking segment, the study by Institute of Microfinance (InM), a microcredit think-tank, showed Measured against the international extreme poverty line, poverty fell from 18.5% in 2010 to 13.8% in 2016 (World Bank, 2017), and the country is on track to reach the first Sustainable Development Goal of eradicating extreme poverty by 2030 In 2010, almost one third of

the country‘s population lived in poverty; by 2016 this had fallen to less than one-fourth Since 2010, 8 million Bangladeshis moved out of poverty

A variety of financial services has an impact on more than just reducing poverty of the poor clients It also reduces their vulnerability to shocks and allows them to make investments in better health and education for their families In term of education, greater access to financial services and increased incomes allow poor people to invest in their children‘s future In Bangladesh, almost all girls in Grameen Bank client households received schooling, compared with 60 % of girls in nonclient households Basic education competency (reading, writing, and arithmetic) among 11- to 14-year-old children in Bangladesh Rural Advancement Committee client households doubled in

three years (from 12 % in 1992 to 24 % in 1995) (Littlefield, 2003) In terms of the

health, particularly children and women, access to financial services allows clients to

seek health care services when needed, instead of waiting until an illness has reached crisis proportions Studies show that financial services have had a strong positive impact

on the health of women and children, especially in those programs that combine credit with training on health issues

As for empowering women, according to Fletschner and Kenney (2011), their report reviewed rural women‘s access to financial services and how it plays a key role in rural growth and development They argued that development strategies that aim to boost rural women‘s productive capacity must enhance women‘s direct access to financial services, i.e not mediated through their husbands They also highlighted that women‘s direct access to and control over resources has a direct impact on children‘s health, nutrition and education The ability to borrow, save, and earn income enhances poor women‘s confidence, enabling them to better confront systemic gender inequities In Bangladesh, clients of microfinance programs have run for local government office and won

3.2 Brazil

3.2.1 Poor household access to financial services

According to Central Bank of Brazil, 29.8% of Brazilian municipalities lacked access to standard distribution channels of financial services back in 1999 In the poorest states in the Northeast and in the North regions, the situation was even worse with the proportion of unassisted municipalities reaching 45.6% and 60.3%, respectively Such states not only have a larger proportion of the poor but also (for the North region) have very dispersed populations

In Brazil, Bolsa Família Program has been largely successful thanks to the implementation of an innovative technological infrastructure model, known as

correspondent banking, or branchless banking

Bolsa Família is the Conditional cash transfer programs (CCT programs) - Brazilian program for social protection, and it focuses on three integrated fronts: (i) Cash transfer that promotes immediate poverty alleviation; (ii) Conditionalities that guarantee access to basic social rights, such as education, health and social assistance; (iii) Complementary programs that enhance skills and abilities of the poor CCT programs‘ success in reaching the poor is highly dependent on the efficiency and availability of information and communication technologies infrastructure

The figure 3.2 shows that a number of bank correspondents breakdown by type of activities in Brazil Bank correspondents are nonfinancial or financial firms hired by financial institutions to offer some financial services In order to reach to dispersed populations, the model bank correspondents was executed Examples in Brazil include lottery houses (correspondent for the state-owned Caixa Econômica Federal CEF) and post offices (correspondent for Bradesco - a national private bank) They probably represent the most visible action towards financial inclusion in the country It has even been exported to other countries and is largely seen as a success story Since 2002 there is

no municipality in the country without access to some form of financial services The model is also attractive to the correspondents Correspondents are paid a commission per transaction, improving their revenues

List of services are allowed to perform by bank correspondents in Brazil

(i) - receiving and forwarding deposit account (demand, time, and savings) opening applications;

(ii) - receipts, payments and electronic transfers related to deposit accounts;

(iii) - receipts, payments and other activities related to agreements for the rendering of services by the contractor; (iv) - execution of payment orders;

(v) - receiving and forwarding loan and leasing requests;

(vi) - receipts and payments linked to bills of exchange;

(vii) - receiving and forwarding credit card applications;

(ix) – other services

Figure 3.2 Evolution of number of bank correspondents according to type of

activities

Source: Nakane (2012)

On the cost side, initial investment is set by the contracting financial institution and the existing personnel can also handle the extra work, without the need for hiring additional staff In addition, when the customer cashes out, he or she may decide to spend part of his or her income at the retail store, increasing sales In local communities, retailers hold valuable knowledge on the shopping and payment habits of their customers

If they become bank correspondents, such knowledge can be used in loan applications helping to mitigate asymmetric information problems Another interesting dimension is