Factors affecting credit accessibility of farm households in rural areas of Vietnam: A case study in Haiphong city
Author: Ta, Nhat Linh
University of Liège
English text
Keywords: credit access, credit accessibility, credit constraints, agricultural production, farm households, developing countries, Vietnam
Abstract
The role of agriculture sector in the economic development in general as well as in rural development in particular is undeniable, especially in transforming/developing and agriculture-based economies. Agriculture is source of food security, increasing national income, export earnings and poverty reduction. Vietnam is known as an emerging country with more than 70% population residing in rural areas, in which employment in agricultural production make up around 50%. The main production unit of Vietnam agricultural sector is household which accounts for approximately 98% among three types of production unit, i.e. enterprise, cooperative and household. In reality, there are about 54% of rural households whose main income sources come from agriculture-related activities. Despite the important role of agricultural production, households’ access to credit in Vietnam remains a confounding problems because of the nature of agricultural credit markets strictly correlating with typical characteristics of small-scale and traditional agricultural production. Formal lenders are hesitant to lend to agricultural sector due to its production-related risks. The agricultural loans offered by formal credit institutions are limited in terms of quantity and size. It is the fact that leads to the prevalence of informal credit sources in agricultural production, especially in rural regions.
The two main focusing topics of the thesis are analyzing the use of credit of households in Haiphong city and then determining the factors affecting their credit access. Among the sample size of 180 surveyed households, the number of households using both formal and informal credit stays highest and followed by those borrowing from informal credit only. The number of informal-only borrowers is even higher than formal-only borrowers. This description actually enhances the dominant role of informal credit markets in agricultural production. It is risks in agricultural production and high urbanization that make a ageing crisis in farming and agriculture. The most common age group of farming household heads is 43 to 56, accounting for about 58%. Younger people increasingly choose city life or city jobs rather than farm jobs. Male and female in a family have the same role in deciding to borrow loans. The results of the study state that larger-scale-production households demand more credit from both formal and informal credit markets. Similarly, households whose main income from agricultural activities also borrow large loan amounts to expand production and then increase their income. Meanwhile those with main income from non-farm jobs are not going to increase farm income, so they just want to borrow a small credit amount to pay off current expenditures rather than expand production. It is surprising that in the study site, households’ risk aversion on borrowings is also affected by location. In other words, people in some regions find borrowing for agricultural production risky so they do not borrow large amounts to invest in agriculture. They increase their income by non-farm jobs.
Survey households give many reasons for choosing formal or informal credit sources or both. In addition, their choice of formal lenders or informal lenders are much different. Basically, these choices depend on amounts borrowers demand, interest rate offered, loan term, loan application costs or sometimes just the popularization of the lenders at their location. Households who demand large formal amounts prefer VBARD (Vietnam Bank for Agriculture and Rural Development) or PCFs (People’ Credit Funds) meanwhile those approaching VPSB (Vietnam Bank for Social Policies) often need smaller amounts. The maximum amount VPSB offers is just 50 million VND meanwhile VBARD and PCF can offer much larger amounts based on collateral value. The average interest rate of PCFs is highest and it is followed by VBARD and VBSP with lowest ones. The branch networks of VBARD and PCFs are much more popular than PCFs. PCFs mainly offer loans to local people in the communes they are located.
The study points out external and internal factors that have effects on households’ credit accessibility. In terms of external factors, rural credit markets, systemic risk in agricultural production, urbanization and lenders’ behavior are reveal. Among those, rural credit markets with imperfect information problems and systemic uncontrolled risk in production are most common in Vietnam as well as other developing countries. Urbanization may be characterized in highly urbanized areas. In addition the external factors, internal factors that are households’ socio-economic characteristics also have impacts on households’ credit market participation, received amounts as well as level of credit rationing, such as : age, land area with certificate, farming land, dependency ratio, social networks, total and agricultural income or total people in a family.
In order to increase households’ formal credit accessibility and reduce their dependence on informal credit, some policies from both central and local government should be taken into account in terms of production collaboration : (1) local government should support the development of cooperatives by management training, technology, funding and exploring stable consumption markets ; (2) central government is also responsible for cooperating with local government in encouraging production collaboration through ensuring appropriateness of and high synchronization between policies in order to boost integration in agricultural sector ; (3) both central and local government should have proper policies and incentives to enhance households’ awareness of the adoption of production collaboration in agriculture.
