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Introduction
Have emphasized the role of money and finance in
economic development, Government of Vietnam tries to improve household's access
to financial services. It is thought that households benefit from financial
services. Target to improve household’s access to credit, Government has
established development financial institutions as well as credit programs and
pursed subsidized interest rate and priority lending policies. However, the
number of household gained access to credit is still limited. It was that 49.3
percent of households get access to credit in period 1992-1993. Of borrowers,
only 22.52 percent could access to formal credit, while 77.48 percent relied on
informal credit. After five years, the situation has not been significantly
improved. In period 1997-1998, there had 50.3 percent of households could access to credit. Of
borrowers, only about 22 percent obtained loans from formal financial sector
while the others still have to take loans from informal financial sector [1].
This result may disappoint policymakers. It explicitly indicates that in spire
of Government's efforts a large number of households fail to access to credit,
especially to formal financial institutions. Seeking answers for the question that why a large
number of households do not get access to credit, particularly to formal
credit, many researchers concentrate on this area of research. Their findings
contribute to enrich our knowledge on credit market and borrowing by households
in Vietnam. However, the previous works concentrate on either informal credit
market (Le T.T and et al in 1999, and Do .Q.T in 2000) or rural household
credit market. (Tran T.D. in 1998) Apparently, characteristics of
urban household and condition of urban credit market are likely much different
from that of rural households and that of rural credit market. So, borrowing by
urban households may be different from that by rural households. Up to now,
however, there has not been any study that emphasizes merely on urban credit
market in Vietnam. Therefore, our understanding on urban credit market is
extremely limited. In attempting to fill this gap, our research takes a study
of urban credit market with focusing on borrowing by urban households. The core
objective of this study is to find an answer for the central research
question ·
What are determinants of borrowing by urban households? The research analyzes the relationship between urban
households and credit market to find out relation of characteristics and
endowment of urban households and characteristics of loan to chance to borrow,
loan amount and source of loan. Therefore, the research concentrates on three
aspects of borrowing by urban households, including determinants of the
probability to borrow, the determinants of loan amount, the determinants of
loan sources. In identifying the determinants of borrowing by urban households,
the research expects to find out major constraints for urban households’ access to formal financial institutions. In addressing research question, qualitative method is used, including statistical
and descriptive analysis, review of historical trends, and comparative methods.
Apart form, quantitative method is extensively used. Data used in the analysis extracts from the VLSS that was conducted by General
Statistics Office with the technical assistance of World Bank. The research includes five chapters. In exclusion of
chapter of introduction, four other chapters present our investigation and
findings. Chapter 2 represents an
analytical framework. Chapter 3
provides an overview of urban credit market and borrowing by urban households
in Vietnam. Chapter 4 is devoted to
testing hypothesis. Chapter 5
represents a summary of our findings. It also discuss policy implications of
findings. Chapter 1: Theoretical Framework 1.1.Major
concepts Household is
area of concern in social science. Concept of household is defined and
discussed by economists, feminists and anthropologists. Ringen (1991) defines
of household that as is a group of at least two people pools their incomes and
uses income collectively (Adam, 1996). However, there is much controversy over
the boundary of this definition. Generally, economists view household as an
essential unit of analysis and develop theory based on modeling behavior of
household. There are two themes of economic model of household behavior. The
first treats consumption and production separately or simultaneously in an
integrated model. The second emphasizes on market condition, and relationship
between household and market for land, labor, and credit. Borrowing
is one side of credit [2]. In general, borrowing is defined as that to be
transferred property right on a given object (e.g. sum of money) in exchange
for implementing obligation of a claim on specified object (e.g. a certain sum
of money) at specified point of time in the future[3]. In extension of this definition, borrowing by households, particularly
urban household is defined as activities of households to obtain external
resources to support other household activities with obligation to repay in
future. In other way, borrowing is made by household to finance household's budget deficit. Household credit market the presence of heterogeneity among different
household induces to situation whereby households fall into budget deficit
while some others are in budget surplus. Therefore, the deficit households
desire to borrow in order to cover their deficit while surplus households also
desire to lend out for their interest. Consequently, household credit market is
established to facilitate borrowing and lending of households. Credit market
functions to transfer purchasing power from surplus households to deficit ones
by issuing and acquiring of money-denominated debt. 1.2.Theoretical
model The
basic model The basic model based on assumptions that there is a
household lives in two periods within a perfect market. The household has a
inter-temporal utility function and behaves rationally. The household choose to
consume at the levels that maximize its utility overtime. If its current income
is less than its current consumption, the household must borrow to obtain
higher level of utility. Generally, the basic model indicates the factors
affecting household demand for loan are current consumption level, income and
asset. It implies that the demand of household for loan is function of
household asset, income and consumption. Their relationships are showed in the
following equation. Where A1 is initial amount of assets; Y1
is the current income; Y2 is future income; and r is market rate of
interest. The equation explicitly indicates that the demand of households for
loan rises if preference for current
consumption being high or expected income increasing or amount of initial
assets and current income as well as interest rates dropping. Thus, the basic model shows that borrowing, along with
saving, allows the household to smooth its consumption path and to maximize its
utility overtime. The
extended model In extension of the basic model, such factors as
household resources, activities and flows of resources are included to identify
determinants of the demand of households for loan; and some assumptions are
changed. The model shows that the demand of urban households for loan increases
with its liquidity requirements for activities. Level of household budget
deficit determines the level of borrowing,.B = dR - åYj + å Fg . Where B is the level of borrowing; dR is the change in assets; Yi
is income i th of the household; and Fg is the outflow of expenditure to
finance activity g th. Increases in such household activities as consumption,
production and investment create increasing outflows of household resources. If
inflow of resources from income generating activities and assets would not meet
outflows, demand for loan may rise. The above equation shows that the demand of
the household for credit appears when flows of income and changes in
household's resources do not meet demand for funding the household activities. Hence, the demand for loan appears and rises when
household deficit gap appears and broadens. The demand of the household for
loan is determined by household
resources and activities. 1.3.Issues
in credit market Credit
rationing is a condition of loan
market in which the lender supply of fund is less than borrower demand at the
quoted contract term. In other words, it means that there is excess demand. In
credit market, credit rationing appears to be an inefficient situation of
credit market, where interest rate does not work well to balance supply and
demand sides. There are two major ways to explore causes of credit
rationing. Firstly, traditional views
consider credit rationing resulted from government interventions on credit
market by imposing interest rate ceiling on lending institutions. Interest rate
is exogenously held under market clearing level. With interest rate keep
artificially low, some potential borrowers who want to borrow are
rationed. Secondly, after the demise of the traditional theories, a new
approach to credit rationing was developed. The new approach argued that
permanent credit rationing is considered as an equilibrium phenomenon rather
than a temporary phenomenon. Modern theories identify problems of moral hazard
and adverse selection in credit market as a source of credit rationing when
information is distributed asymmetrically among market participants. Fragmentation
of credit market strongly affects the
borrowing behaviors of urban households. Fragmentation of credit market, firstly, is thought as a consequence of
the repressive government policy. Ceiling rate on deposit and loan rate imposed
by central bank induces to severe credit rationing in formal financial sector.
Resulting from inter-linkage between formal and informal financial markets the
unsatisfied demand of households for formal loan flows into informal financial
sector and put demand for informal loans to rise up. Secondly, it is viewed that fragmentation of household credit
market is caused by structural and institutional features of credit market in
developing countries. In addition, fragmentation of credit market may also
result from weakness in the infrastructure that supports the financial
system. Thirdly, another perspective on fragmentation of credit market
argues that formal and informal financial sectors are parallel developed
because they serve different segments of credit market. In conclusion, under perfect credit market, borrowing,
along with saving, allows urban households to maximize their utility overtime.
Resources or endowments, incomes, and activities of households determine the
demand for loan. The effects of those factors on the demand of urban households
for credit are called "demand side effects". On
the other hand, credit market conditions and relationship between urban
households and financial intermediaries affect borrowing by urban households.
If credit market is inefficient, some of potential household borrowers fail to
access to credit market. Therefore, severity of credit rationing is an
explanation for credit constraint of urban households; and high fragmentation
of credit market is an explanation for various borrowing behaviors of urban
households. Borrowing by urban households is substantially determined by
condition of credit market so called "supply side effects".
Thus, borrowing by urban households is jointly affected by both demand and
supply side factors. Chapter 2: An overview of urban financial
system and borrowing by urban households in Vietnam 2.1.Financial
system and source of credit to urban households in Vietnam Although Vietnam's financial system has been
substantially reformed since 1988, the financial system is still
underdeveloped. The banking based system is dominated by state owned banks,
while non-bank financial institutions and security market is relatively small.
The weaknesses of financial system may be worsened by some special characteristics. Firstly, since the economy is in transition from plan
to market economy, there are many significantly institutional weaknesses not
only in the economy as a whole but also in the financial market. Secondly, Vietnam’s financial system
displays similar characteristics of financial system of developing countries.
For instance, credit market is monopolistic by state owned banks; credit market
is incomplete; and some market is missing like credit insurance market. Thirdly, following repressive financial
policy, Government has been taking strictly control over interest rates and
operations of banking sector. Therefore, interest rates have been kept under
the market clearing rates; and extension of credit is biased towards priority
sectors. The urban credit market is highly fragmented. The
Formal and informal sectors co-exist.
The formal financial sector includes government banks, private banks,
and credit cooperatives and credit schemes. Among the formal financial
institutions, VBA and VBP are the two largest sources of formal loans but
concentrate on rural households rather than urban households. On the hand, the
informal financial sector includes private moneylenders, relatives and friends,
ROSCA and other individuals. They have been active in the credit market. 2.2.Overview
of borrowing by urban households Analysis of household data brings overview of
borrowing by urban household in Vietnam. Only 35.8 percent of urban households
participated borrowing with average size of loan being 7,916 thousands of dong.
The proportion of urban households borrowed and loan size varied across the
country as well as expenditure quintiles and reaches to the top in Northern
Upland and lowest quintile. Among the cities, the proportion of households
borrowed was the lowest in Hanoi, however, the average size of loan was the
highest. On average, credit programs were the cheapest source
of loan(0.88 percent per month), while private moneylenders were the most
expensive one (4.45percent per month). As a whole, interest rates of formal
loans are far lower than that of informal loans (3.69 versus 1.25 percent per
month ). Interest rate gap was 2.44 percent per month on average. Similarities to rural households, however, urban
households still relied mainly on the informal financial sector (77.4 percent
in term of loan value). Of the informal sector, HO/Hui and other individuals
were major sources( 53.4 percent). Of
the formal sector, government banks were largest suppliers (72.9
percent). Surprisingly, urban households undertook large loans from the
informal financial sector instead of the formal financial sector (8,866.2 versus 5,700 thousand dong). Also, urban households have a variety of loan
purposes. Of loan purposes, loans for
production and housing makes up the largest share (82 percent). To finance
housing and durable goods, urban households get loans mainly from the informal
financial sector (86 percent). Interestingly, although the formal sector
concentrates on production loans, the urban households still rely mainly in the
informal sector to finance working capital(53 percent). Moreover, average size of loan sharply increased when
urban households offered collateral from 7,213 to 10,575 thousand dong,
especially the size of formal loan from 1,995 to 10,122 thousand dong. There
was a big difference between loans with and without collateral in the formal
sector. Informal loans without collateral made majority (87 percent). In addition, borrowing was different from quintile to
quintile. The rich households took more loan than the poor ones do. The
households in upper and middle quintiles made up 92.8 percent of total loan
value, while the lowest and low middle accounted for 3.1 percent. Finally, in consideration of borrowing by urban
households across the country, it become apparent that the proportion of urban
households in Hochiminh participating in borrowing was the highest and urban
households ( 42 percent versus 23 percent). The largest size of loan was in
Hanoi on average (11,785 thousand dong). Average sizes of loans in two big
cities were much higher than the rest ( 11,785 and 11,649 versus 4,017 thousand
dong). Only in other major cities large loans came from the formal financial
sector instead of the informal one (4,646 versus 3538 thousand dong). Chapter 3: Model specification, empirical
results and interpretation 3.1.The conceptual borrowing process Borrowing process of households is divided into two
stages. At stage one, the desired
households decide whether to apply for loans or not. Base on the demand for
fund of the household, and available of information on lenders and their loan
conditions, some households decide to apply for loans, so called household
applicants for loan. The household applicants based on cost of borrowing as
well as their capacity of meeting lender's requirements rationally decide
sources of credit to apply for loan. On the other hand, some the other households
who desired to borrow do not apply because they expected that they would not be
able to satisfy lender's requirements, called self-ration households. At
stage two, in screening process, lenders choose to make loan to which the
household applicants. Usually, lenders base on characteristics and endowments
of urban households, as well as their relations to household applicants to
justify creditworthy. Lender extent credits only to the urban households with
"reasonable" creditworthy. The household who applied for loan but
being rejected seem to be completely
rationed while the other households who are accepted by lenders but do not
obtain desired amount seem to be partial
ration. The households who obtained their desired loan amount stop their
applying process; meanwhile the households who are completely rationed or
partial rationed by first lenders would either continue or stop their applying
process. Hypothesis The above analytical ground proposes that
characteristics, endowments of households and loan characteristics would
determine borrowing by households. Therefore, the following hypotheses are
raised. Hypothesis 1: The probability to borrow of urban households, B, would depend on characteristics of and
endowments of the urban household. (B)=f (vector
of household characteristics, vector of household endowments) Hypothesis 2: for households borrowers, loan amount or level of
borrowing, LA, would depend on characteristics and endowments of household, and
characteristics of loan. LA = f
(vector of household endowments, vector of household characteristics, vector of
loan characteristics)
Subject to B=1 Hypothesis 3: Observable characteristics of and endowments of
household borrowers would affect the choice for source of loan as well as
decisions of lenders. SOL = f (vector of loan characteristic, vectors of
household characteristics, vector of household endowments) 3.2. Determinants of the probability to borrow of
urban households Econometric
Model B = a0 + a1SEX + a2AGE + a3HEDU + a4HHSIZE + a5LASTEDU + a6CUREDU + a7HOUSEVAL + a8DURABLE + a9OCC_WAGE + a10OCC_SELF + a11HHEXPE + a12MEDEXP + a13HOCHI + a14OTHER + ' The
estimated results
Interpretation
Empirical results show that age and sex of household
head significantly affect the probability of urban households to borrow but
negative sign is unexpected. In addition, household size is significant
predictors. The probability of urban household borrowed rises if household size
increases. Also, the probability to borrow increases when the number of
households attending school increases. Moreover, endowments of urban households
are important determinants of the probability of urban household borrowed. Unexpectedly, number of household members
finished university and durable value, however, negatively associate with the
probability of urban household to borrow. Nevertheless, significant
relationship between household expenditures and borrowing by urban households
is found. The probability of urban household to borrow increase when its
medical expense rises. Finally, household location strongly affects the
probability to borrow of urban households. 4.2.
Determinants of loan amount Model LA = b0 + b1SEX + b2AGE + b3HEDU + b4HHSIZE + b5LASTEDU+ b6CUREDU + b7HHEXPE + b8MEDEXPE + b9HOUSEVAL + b10DURABLE b11OCC-SELF + b12OCC_WAGE + b13PRODU + b14COL + b15HOCHI + b16OTHER + ' The
estimated results
Interpretation The second model attempts to prove that
characteristics and endowments of household, and loan characteristics determine
loan amounts borrowed. Empirical results show that better educated household
head, the more loan amount urban households take. Besides, age of households
negatively associates with loan amount
Household size and numbers of dependants are significant determinants of
loan amount. Apart form, household expenditure is another significant determinant
of loan amount. If households expenditure rises, loan amount rise. Occupation of household members also affect
loan amount. If household has more self-employed member, loan amount rises.
Loan security is important determinant of loan amount. If urban households
offered collateral, loan amount borrowed by urban household increase
significantly. Apart from, a significant relationship between loan uses and
loan amount was found. If urban households take loans for production , loan
amounts rise sharply.. Finally, if the urban households live in Hochiminh city,
loan amounts borrowed sharply increase. 4.3. Determinants of formal loan source Econometric Model SOL
= b0 + b1 SEX + b2 AGE+ b3 HEDU + b4 HHSIZE + b5 LASTEDU + b6MEDEXPE + b7HHEXPE + b8OCC_SELF + b9 OCC_WAGE + b10HOUSEVAL + b11DURABLE + b12PRODU + b13HOUSEBUI + b14COL + b15 LSIZE + b16 MATURITY + b17HOCHI + b18 OTHER + ' The estimated results
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