Webinar on “Filling the voids left by the Formal Sector: Informal Borrowings by Poor Households in Northern Mountainous Vietnam”

In the thirteenth webinar of the webinar series on Financial Transformation, Dr Pham Bao Duong shared his study of 400 poor households in Thai Nguyen province, Vietnam, in order to examine the current accessibility, loan purposes, the different types of and effects of informal credits on poor households.

Webinar Series 2020-2021: Financial Transformation, Credit Markets and Household Debt in Southeast Asia

Thursday, 3 June 2021  – ISEAS – Yusof Ishak Institute hosted a webinar on “Filling the voids left by the Formal Sector: Informal Borrowings by Poor Households in Northern Mountainous Vietnam”, delivered by Dr Pham Bao Duong, Associate Professor in the Faculty of Economics and Rural Development at Vietnam National University of Agriculture. He is joined by Professor Koichi Fujita, Professor at Kyoto University, Centre for Southeast Asian studies.

Dr Pham Bao Duong
Dr Pham Bao Duong shared that the purpose of the research was to determine factors that affected accessibility to informal credit and amount of loan granted. Dr Koichi Fujita was a Discussant and Dr Nicolas Lainez moderated the session. (Credit: ISEAS – Yusof Ishak Institute)

Dr Duong began his presentation with a brief introduction on the informal credit sector in rural Vietnam. Access to credit is a key tool for sustainable poverty reduction. However, usually when the poor are unable to access formal credit loans, thus they turn to informal credit loans that run parallel in the financial markets. These include moneylenders, traders, Rotating Savings and Credit Associations (ROSCAs), and friends and relatives.

Despite its prevalence, the informal credit sector is hardly documented. Hence, Dr Duong shared that the purpose of the research was to determine factors that affected accessibility to informal credit and amount of loan granted. The research also aims to evaluate the effect of informal credit loans on households’ welfare. Using data collected from Thai Nguyen, a mountainous province in the north, a Probit model was used to determine the factors that affected access to informal credit, while a Tobit model was used to determine factors that affected the amount of credit granted.

Of all the households surveyed, about 70% of households were borrowing from both formal and informal sources, with most of them citing the need of capital for emergencies as their reason for loans. Amongst the factors analysed, labour force ratio, social capital and ownership of residential land were statistically significant in affecting the accessibility to informal loans. The same factors also affected the amount of informal loan borrowed.

Most of the households sought informal credit from traders which conferred them benefits such as a low interest rates (0-2.0%), long loan terms (1 week to 4 months) and being a trustworthy source of loans. Average loan amounts vary from VND 0.3 – 3.5 million, and the loan process requires signing of a debit book. Factors that affected accessibility of loans from traders included ethnicity of the applicant (ethnic minorities face more difficulty) and ownership of residential land. In addition to the two factors, social capital was revealed to affect the loan amount.

The second most popular way of obtaining informal loans was via ROSCAs. ROSCAs have no interest rates, have about 5 – 13 households as participants, with each contributing VND 0.3 – 1 million every one to two months. Results show that there are no factors that affect the accessibility of the loan via ROSCAs, but social capital seems to impact the loan amount.

The third most popular source of loans is from moneylenders. They tend to charge very high interest rates (0.4 – 1% per day, or 12 – 25% per month) with loan terms that are relatively shorter than the others (4 – 30 days) for loans varying from VND 1 – 5 million. Amongst the factors, household size, ownership of residential land, labour force ratio and age tend to affect both the accessibility of the loan and the loan amount.

As for loans from relatives and friends, Dr Duong shared that it accounted for almost a third of the informal loans. Loans of these kinds are mainly used to fund consumption; interests are usually not paid, and loan terms are flexible as these loans are based on trust and social relationships. Interestingly, gender, education and social capital affect the accessibility of these loans. Other than the three factors, non-productive assets and ownership of residential land are factors that affect loan amount. 

Through the study, Dr Duong found that the proportion of poor households accessing informal credit is relatively high, with most citing the need to solve emergency situations as the need for credit. Borrowing from informal sources appears to be filling the void left by the formal credit sector. Factors affecting the access to informal credit includes labour force ratio, social capital and ownership of residential land. While these loans help households meet their needs for agricultural production, non-agricultural activities and short-term consumption, the benefits of loans alleviating poverty by improving income levels, savings and access to services appear to be limited.

In conclusion, Dr Duong opined that there is a need to recognise the existence of and regulate the informal credit sector through legal guarantees and stronger management and supervision. To meet the needs of poor households, formal credit institutions should expand their networks, lower their interest rates, and vary their types of loans to include consumption spending instead of just for production. Collateral requirements should also be relaxed for them as poor households do not have many assets to put up for collateral.

Professor Fujita then commended the presentation as the research has added a valuable perspective on informal finance in rural Vietnam through rigorous survey and analysis via econometric methods. The differences between the various sources of informal finance were also well highlighted.

Ending off the webinar, Dr Duong answered a few questions regarding the presentation posed by Professor Fujita and the audience. Questions included suggestions on regulating moneylenders and ROSCAs, the efficacy and purpose of expanding formal credit to alleviate poverty, and the terms and conditions of loans from traders. 

About 40 participants attended the webinar. (Credit: ISEAS – Yusof Ishak Institute)