UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM- THE NETHERLANDS PROJECT FOR M.A ON DEVELOPMENT ECONOMICS THE DETERMINANTS OF URBAN HOUSEHOLD'S BORROWING IN HO CHI MINH CITY By NGUYEN XUAN HIEN MASTER OF ARTS IN ECONOMICS OF DEVELOPMENT HO CHI MINH CITY, DECEMBER 2012 CERTIFICATION "I certify that the content of this thesis is my own work which has not already been • submitted for any degree or examination I declare that to the best of my knowledge, all the sources used or quoted are indicated and acknowledged by complete references." " ACKNOWLEDGEMENTS This thesis would not have been finished without the helps and supports of numerous individuals and institutions Therefore I want to express my deep gratitude to them First of all, I would like to thank UEH/ISS teachers who have settled my foundations on development economics and international standard research methodology Through the program, my mind has been opened to the world I am profoundly thankful my supervisor, Dr Nguyen Trong Hoai for his ideas and comments on my research questions, literature review and reference His intellectual supports make very complicated economic development theories become simple ones in my mind During the course, I have received numerously his kind supervision, guidance, useful comments and encouragements • and suggestions for me to improve the content and English writing of my thesis - I am especially grateful to Dr Nguyen Huu Dung who gracious made available advices I also thank all my classmates and my colleagues for their helps, encouragements and cooperation during my learning and doing research time Last but not least, without encouragement, tolerances and loves of my parents, my younger sister, my relatives, my friends and my wife, this research would not have been completed So, I would express my deepest debt to them -4 LIST OF TABLES Table 2.1 - Summarize empirical studies and coefficient sign of determinants of accessing to formal credit Table 3.1 -The average loan amount, by source of loan Table 3.2 -Interest rates by sources of loans (percent) Table 3.3- Access to bank credit among different household's qualitative characteristics Table 3.4- Access to bank credit among different household's quantitative characteristics Table 3.5- Loan uses by the urban borrowers in HCM city Table 3.6- Sectors that loan spent Table 4.1 - Table of independent variables Table 4.2 - The result of regression model • CONTENT OF THESIS CERTIFICATION ACKNOWLEDGEMENT LIST OF TABLES CONTENT OF THESIS CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research Objectives 1.3 Research questions 1.4 Research methodology 10 1.5 The structure of the thesis 10 CHAPTER 2: LITERATURE REVIEW FOR URBAN HOUSEHOLD'S ACCESS TO I FORMAL CREDIT 12 2.1 DEFINITIONS 12 2.2 FACTORS AFFECTING HOUSEHOLD ACCESS TO FORMAL CREDIT 13 • • 2.2.1 Traditional approach 14 2.2.2 Financial repression approach 15 2.2.3 New institutional economics approach 15 2.3 THE CREDIT MARKET MODEL 17 2.3.1 Credit demand and household financial behavior 18 2.3.2 Credit supply and behavior of formal financial intermediaries 19 2.4 EMPIRICAL STUDIES 25 2.5 CHAPTER REMARK 32 CHAPTER 3: FINANCIAL SYSTEM AND ACCESS TO FORMAL CREDIT BY • HOUSEHOLD URBAN IN HO CHI MINH CITY 34 3.1 FINANCIAL SYSTEM IN VIETNAM 34 3.2 OVERVIEW OF ACCESS TO BANK CREDIT BY HOUSEHOLD URBAN IN HO CHI MINH CITY 37 3.2.1 Formal and informal credit sources are co-existing 37 3.2.2 Comparing the interest rate between formal and informal credit sources 39 3.2.3 Ability to access bank credit by household, production and financial characteristics40 3.2.4 Characteristics of loan uses by urban households in Ho Chi Minh City .43 3.3 CHAPTER REMARK 46 CHAPTER 4: RESEARCH METHODOLOGY, MODEL SPECIFICATION, RESULTS AND INTERPRETATION 48 4.1 RESEARCH METHODOLOGY 48 4.2 DETERMINANTS OF ACCESS TO FORMAL CREDIT BY HOUSEHOLD 49 4.2.1 Model specification 49 4.2.2 Data extraction 51 4.2.3 Interpretation of regression results 52 4.3 CHAPTER REMARK 51 CHAPTER 5: CONCLUSION AND POLICY IMPLICATION 60 5.1 Conclusion 60 5.2 Policy implication 63 5.3 Research limitations 65 REFERENCES 66 APPENDICES 72 CHAPTER 1: INTRODUCTION 1.1 PROBLEM STATEMENT Finance now plays an important role in economic growth and development The financial services are the services provided by the financial institutions, intermediation or organizations that dealt with the arrangement and management of money, it also can be described as a set of arrangement including lending and borrowing of funds The improvement of household's borrowing and accessibility to credit can increase the opportunity for income generation and improve the living standard and thus reduce the poverty, inequality and vulnerability, especially for the low income and poor households So, access to credit plays a major role in increasing household's conditions, particularly for the low income and the poor When credit is accessible, the household can solve the problem of lacking of finance that would negatively affected household's conditions Providing credit services and removing the constraints can be positive means of improving household's living standard So, the government always tries to improve household's borrowing and access to financial services (especially access to the formal credit sectors) because of the interest of household received from financial services Many financial institutions, intermediation or organizations and credit programs with preferential interest rate and lending policies are established to fulfill the accessibility of household to formal credit Like others developing countries, the government of Vietnam has created some credit institutions These institutions have function to provide credit, loans with the low interest rate and enhance provision of financial services for the household In developing countries, households have a high demand for credit Credit demand can be used for production, investment, consumption purpose (Donald, 1976) To satisfy the demand for credit, household can find borrowing in the credit market In Vietnam, the credit market characterized by the co-existence of formal and informal credit sectors The formal credit sectors preferred to this paper are social policy bank, stateowned commercial banks, representative offices and branches of foreign banks, foreign jointventure banks, domestic joint-stock commercial banks, people's credit funds and cooperatives, employment support fund, credit organizations, social political organizations while the informal credit sectors are individual creditors, friends and relatives and others The formal credit system provides credit for the household, especially for the low income and poor households, with the favor interest rate While the informal one charge higher interest rate compare to formal credit However, household's access to formal credit is still limited, especially for formal financial institutions There are many factors that affect this problem such as asymmetric information, transaction cost, the household head characteristics, the production characteristics, the financial characteristics, etc All of these factors can determine of access to formal credit of the household Up to now, there are several similar studies which have been done to prove the positive impact of access to credit on household's activities and try to find out the determinants of household's access to formal credit such as Rural development finance in Vietnam: A micro econometric analysis of household surveys (Pham Bao Duong and Yoichi Izumida, 2002); Effects of the value of assets on farming household's access to credit in rural Viet Nam (Nguyen Van Ngan, 2003); Effecting of loan amount on farm households income in Tan Chau district, Tay Ninh province (Dang Ngoc Quy, 2007) Although there are several studies that carried out to find out the determinants of household's access to formal credit in the urban and rural areas, the studies have been done for household's access to formal credit in Ho Chi Minh City are still limited Because Ho Chi Minh City now is the economic heart of Vietnam and the core of Vietnam's largest urban area, which is head toward a population of million, including exurban areas beyond the municipal boundaries The urban development trends in the Ho Chi Minh City area are similar to those of high income world urban areas That's a reason why Ho Chi Minh City now attract huge immigration of labor force (including manual workers or blue-collar workers, skilled and unskilled worker) from other provinces of Vietnam They move to Ho Chi Minh City for their better life and future Understanding household's access to formal credit in Ho Chi Minh City is very essential to increase the probability of households to access to formal credit sectors and to improve the household's income and living standard Therefore, finding answers for the question that what are the determinants that affect household's access to credit and why a large number of households not get access to credit, particularly to formal credit, is very essential The findings will help us to understand the credit market and borrowing by households in Ho Chi Minh City This research not only takes a study of urban credit market with concentrating on borrowing by urban households in Ho Chi Minh City but also is important for the government policy implications to increase the access of household to formal credit 1.2 RESEARCH OBJECTIVES This thesis concentrates on two aspects of borrowing by urban households in Ho Chi Minh City, including: + Identify the determinants of the probability to borrow or access to formal credit + Identify the determinants of loan amount borrowed from formal credit By obtaining two above objectives, this research expects to find out the main determinants of urban household's borrowing or access to formal credit sectors and loan amount borrowed and give some policy implication to increase the accessibility of formal credit in Ho Chi Minh City 1.3 RESEARCH QUESTIONS The main objective of this thesis is to try to find out the answer for the central research question: What are determinants of urban household's borrowing or access to formal credit in HCM city? To answer the central question above, three small detailed questions need to be addressed: + What are the differences between formal and informal credit sectors? + What are the characteristics of formal and informal borrowing by urban household? +What are the relationship among characteristics and endowment of urban households and characteristics of loan, loan amount and source of loan? 1.4 RESEARCH METHODOLOGY This thesis will review the essential Issue related to the borrowing by urban households Then it will be focused on the performance and quantitative, qualitative analysis of determinants of borrowing by urban households in HCM city by using descriptive statistic, tabular analysis and comparative method, econometric technique with the support of Stata software The dataset has been drawn from VHLSS 2008 and processed by using Stata 11.0 software After getting the necessary information, statistical descriptive, comparative method, and econometric technique will be used to analyze the information The statistical description and the comparative method will allow us to have a general picture of the urban credit market and household characteristics in the relation to access to formal credit They also provide us some beginning hypothesis tests of the relationship between each independent variable and the dependent variables The two econometric methods used are logistic and OLS regression to estimate the effects of the household's characteristics on the probability to access and the extent of access to formal credit And the research questions can be answered 1.5 THE STRUCTURE OF THE THESIS This thesis includes five chapters With exclusion of chapter (chapter of introduction), four continuous chapters present the investigations and findings Chapter introduces background, problem statement, research objective/questions, research methodology and structure ofthesis Chapter represents an analytical framework It provides conceptual, theoretical and empirical studies for demand and supply factors, particularly determinants of access to formal credit by urban households Chapter provides an overview of financial credit market and borrowing by urban households in HCM city An overview of credit suppliers for urban households and the financial system are mentioned The statistical descriptive techniques are used to present the whole picture of urban households in HCM city From the statistical analysis, the effects of household's characteristics on access to formal credit and loan amount are discussed 10 By analyzing the combination of theories about the credit demand with credit behavior of households and credit supply with credit behavior of credit suppliers; the household economics suggested that the main determinants of access to formal credit in credit demand side include household assets, production assets, real estates, age, education, political and social position of household heads, investment and consumption expenditures, production characteristics, household incomes, and in credit supply side include purpose of loan, collaterals, capital, incomes and assets of borrowers, land areas, age, education level, occupation, skill, health, political and social position and incomes of households, education level, sex, age, occupation, skill, political and social position, All of these factors will have effects on household's access to formal credit The available data of VHLSS 2008 consists of the information of these factors With the data of VHLSS 2008 in Ho Chi Minh City, access to formal credit can be estimated by the probability and the loan amount or the extent that household access to formal credit The factors of credit demand side and credit supply side will determine urban household's borrowing Thus, the demand and supply side factors together affected urban household's borrowing With the logistic model, the dependent variable (DLOAN) is a dummy variable whose value is denoted by if households have bank loan (or access to formal credit) and if households not have bank loan To examine why households got different bank loan amount or different extent of access to formal credit, the OLS method will be used, and the dependent variable (LOANAMOUNT) is the households' bank loan amount Thirdly, there is segmentation because of the development and the co-existence of formal and informal credit sectors Some banks just pay attention to providing loans for production, investment, consumption and thus leave others for the informal credit sectors So, the informal credit sector exists parallel to formal credit sector For the urban, the informal suppliers are always less than the formal suppliers and the loans come from informal sector is smaller than loans come from the formal sector However, the interest rate of loans from informal credit sector is still higher than the formal one, especially for borrowing from individual creditors For the informal credit sector, borrowing from friends and relatives still has the biggest share 61 Most of formal credit sectors require collateral to ensure loans will make repayment in the future They can use house, land, durable goods, and so on, as collateral Among that, the formal credit intermediaries still heavily rely on house and land certification status Some households fail to access to the formal credit sectors because they not satisfy the loan requirement, especially for the banking system By applying hard loan conditions and strictly requiring physical collateral, the formal credit sectors rejected a large numbers of applicants Finally, the chosen model and the regression results try to find out the factors that determine to households' probability to access formal credit sectors and outstanding loan amount Because the value of the Prob>chi2 = 0.000 < a = 5% = 0.05 in both model, we can say the chosen model is meaningful Some variables have statistical significance at 1%, 5% and 10%, while some un-statistically significant at I 0% still be kept because of their meanings By regression the data of VHLSS 2008 in Ho Chi Minh City, some main findings are shown as follow: Together with house owning, the house value and the probability of household's access to formal credit and the loan amount that household received from the formal credit sectors have positive relationship So, the accessibility to formal credit and the loan amount increases as household head has owned the living house and the value of house is large Besides that, households working for wage/salary, doing agricultural sectors or doing trading/business and access to formal credit and loan amount have positive relationship as expectation It means the probability of household's access to formal credit and the loan amount will increase when the households have working for wage/salary, doing agricultural sectors or doing trading/business With these activities, the households can generate income and then, it will increase the creditworthy in the lender's assessment Therefore, the probability ofhousehold's access to formal credit sectors and the loan amount will be higher Furthermore, household size or the total number of members in the family is significant determinants ofhousehold's access to formal credit and loan amount lfthe family has more people with consumption more than saving, then more demand for credit, so they tend to apply for loans to satisfy their needs and have more opportunity to access to formal 62 credit sectors and the expected loans are large Especially for the family with more men go to work, they have more income to ensure loans repaid in future As expected, the degree that household head attained has positively affected on the probability of household's access accessibility of household to formal credit because the higher educated household head will exploit better production and investment opportunities, understand and easily deal with banking sector with complex document procedures and banking staff So, higher level education of household head attained, higher probability to be accepted by banks and the probability of household's access to formal credit will rise The empirical results show that age and sex have un-statistical significance but they are still important factors that determine of borrowing by urban households in HCM city Because of the negative sign, the real expenditure per capita and household's access to formal credit have negative relationship The purposes of loan and access to formal credit have positive relationship Because some formal lenders aim to provide loans to support investment and production, while some formal lenders are willing to provide credit for consumption and others, so higher probability to access to formal credit 5.2 POLICY IMPLICATION By realizing the major constraints or limitations for the urban household's access to formal credit sectors in Ho Chi Minh City, the household's access to formal credit could be increased or improved by removing these constraints or limitations Here are some policy implications Firstly, the loan portfolios should be expanded by the formal credit sectors Nowadays, the needs of urban households for investment, production, consumption or housing (maybe for investing, repairing, buying and building housing or durable goods) and so on rapidly increase These activities require other external funds and lead to an increase the demand for loan of household If the formal lenders not support to provide loans for these purposes, the households hardly have loans If the loan portfolios can be diversified by the formal credit sectors, especially for the banks, the numbers of household can access and have loans from the 63 formal credit institutions will increase significantly That's a reason why the formal credit sectors should expand the loan portfolios by changing their policy Secondly, the process of granting red certificates of land use right should be speed up by the authorities One of the main reasons makes household cannot access or have loans from the formal credit sectors is they not have or offer sufficient collateral or not meet requirement of collateral by the formal credit sectors In Ho Chi Minh City, before providing loans for household, the formal credit sectors, especially for the banking system, always require household to offer the collateral for the loan security reason The collateral suggested by banks maybe in kind of land or house use right However, in some cases, the property right or the ownership is not well defined Although some households have ownership of land or house, they can not use land or house as collateral as banking's requirement, that lead to a large numbers of households can not access and have loan from formal credit sectors Thirdly, the diversification of collateral form should be done by the formal credit sectors Nowadays, the banks still heavily rely on the collateral to allow loans Despite of good investment plans or production, household can not access to formal credit sectors if they don't have adequate collateral Besides the traditional collateral in kind of land or house as mentioned above, the formal credit sectors can diversify the forms of collateral Here are some examples: The guarantee of the third party is as a form of social collateral The third party here can be organization, firm, enterprise, company which employed any household member Basing on the cooperation and long-run relationship between employees and employers, the organization will help the formal lenders identify good borrower Besides that, the compulsory saving, production proposal and character base are also effective ways of loan security The compulsory saving is the saving that household must handle to borrow, which is not available for withdraw while the loan is outstanding Production proposal means that the lender appraises the feasibility of the production proposal to approve loans or not Character base is the way that the lender allows lending based on borrower's good reputation in the commune Before making a loan, the credit officer will refer various information to ask about the potential client's character and behavior The credit 64 officer often pays attention to household's business to ensure that the client is maintaining business and intend to make repayment The temporary property right or ownership of land or house or durable goods may be a form of loan security The formal credit sectors can keep the temporary ownership until the household or borrower completing the repayment All the forms of loans security listed above can replace for the traditional collateral However, these forms only have effectiveness if the government or authority regulates a strong legal system By this way, the contact between the lenders and the borrowers can be enforced effectively Luckily, the government and authorities now is trying to establish a strong legal system that encourages the households or borrowers to access to the formal credit sectors 5.3 RESEARCH LIMITATIONS Because the data used in this thesis is just employed as VHLSS 2008 (Vietnam Household Living Standard Survey 2008), the information is restricted and the factors that determine to access to formal credit sectors in this thesis mainly belong to demand side while the factors of supply side are hardly to collect the exact data, the thesis still has some limitations and it is not a comprehensive analysis More studies should be addressed about the determinants of household's access to formal credit sectors in according to the changes in social economics, population and country development 65 REFERENCES • Abiad V.G (1995), "Grassroots Financial System Development m Vietnam", APRASA-GTZ, Bangkok Thailand • Adam D.W., Douglas H., Graham J.D and Pishchke V (1984), "Undermining Rural Development with Cheap Credit London" (editors), West views Press • Adams D.W (1980), "Recent Performance of Rural Financial Markets" in John Howell (Ed) ( 1980) Borrowers and Lenders: Rural Financial Markets and Institutions in Developing Countries, London: Oversea Development Institute • Amjad, S., and Hasnu, S., (2007), "Smallholders' access to credit: evidence from Pakistan", The Lahore Journal of Economics, 12(2), p.l-25 • Barslund M & Tarp F (2003), "Rural Credit in Vietnam", Discussion paper Available http://www.econ.ku.dk/ftrrp/workingpapers/Docs/Rural%20credit%20in%20Vietnam pdffaccessed 3rd June, 2009] • Besley T (1995), "Property Right and Investment Incentives: Theory and Evidence from Ghana", Political Economy No.1 • Bottomley A (1964), "Monopoly Profit as a Determinant of interest rates m Underdeveloped Rural Area", Oxford Economic Paper • Bui Quang Huy (2008), "The impact of transaction cost on competitiveness level: case study in Vietnam at provincial level", M.A thesis, Master in Development Economic, The VietNam- Netherlands Program, Ho Chi Minh City • Chung (2000), "An analysis of borrowing by urban households in Vietnam" 66 • Comparing formal and informal financial sectors accessed on http://www.gdrc.org/icm/formal-informal.html on 5th September, 2009 • Dang Ngoc Quy (2007), "Effecting of loan mount on farm households income in Tan Chau district, Tay Ninh province", M.A thesis, Master in Development Economic, The VietNam- Netherlands Program, Ho Chi Minh City • David C.C and Meyer R.L (1979), "A Review of Empirical Study on Demand for Agricultural Credit", Unpublished Paper Represented At The Second International Conference On Rural Finance Research Issues, Calgary, Canada • D~ an ca du l~i h~ thfmg cac TCTD giai do~n 2011-2015 ban hanh kern theo Quy~t djnh 254/QD-TTg 01/3/2012 cua Thu Tu6ng chinh phu phe duy~t D~ an C chi2 = 0.0000 Pseudo R2 = 0.4302 P>lzl [95% Conf Interval] pcexp2rl -.0000146 0000254 -0.58 0.565 -.0000645 0000352 housevalue 1.58e-07 1.03e-07 1.54 0.124 -4.33e-08 3.59e-07 degree2 0249724 9306194 0.03 0.979 -1.799008 1.848953 hhsize 3135728 1223463 2.56 0.010 0737784 5533671 empwage 2.234222 7641773 2.92 0.003 7364617 3.731982 72 f empselfAg 2.15527 9979848 2.16 0.031 1992555 4.111284 empselfNAg 1.91286 6598601 2.90 0.004 6195584 3.206162 sex -.4952178 5441119 -0.91 0.363 -1.561658 5712219 age 03401 0225252 1.51 0.131 -.0101386 0781585 the poor purposeofloan cons 1.817237 6718505 2.70 0.007 5004343 3.13404 2.100066 3295152 6.37 0.000 1.454228 2.745904 -8.015999 1.829828 -4.38 0.000 -11.6024 -4.429601 Before running the regression model, with the help of Stata software 11.0, we processed the data by eliminating the multicollinearity First, we run the common VIF -Variance inflation factors- to assess multicollinearity Then, we remove the variables that have a VIF around or greater than from the regression model Remove each variable individually to determine the best one to remove and select the regression equation that have the R- squared highest (explains the most variance) We also add the option "robust" to regression comment while running OLS model to eliminate the HET- heteroskedasticity (the model does not have heteroskedasticity) Appendix 2: VIF (test for multicollinearity) Variable VIF 1/VIF 1.81 0.553633 lnpcexp2rl 1.72 0.581571 age 1.57 0.634928 empselfNAg 1.47 0.681159 housevalue 1.32 0.757601 empwage • 73 hhsize 1.29 0.776321 empselfAg 1.18 0.847655 pooromot07 1.12 0.895717 sex 1.09 0.921042 houseown 1.03 0.966655 Mean VIF 1.36 (Require: vif < 10-+ the model does not have multicollinearity problem.) Appendix 3: The OLS regression result whose loanamount as dependent variable • Reg lnloanamount2 lnpcexp2rl housevalue sex age empwage empselfAg empselfNAg houseown thepoor hhsize, robust Linear regression Number of obs 300 F (10, 289) 5.17 Prob>F = 0.0000 R-squared = 0.1316 RootMSE = 3.5441 Robust lnloanamount2 Coef Std Err t P>ltl [95% Conf Interval] -lnpcexp2rl -.9606597 4425157 -2.17 0.031 -1.831622 -.0896975 housevalue 2.26e-07 9.85e-08 2.30 0.022 3.23e-08 sex -.4086547 4359438 -0.94 0.349 -1.266682 4493726 age -.0047312 0190403 -0.25 0.804 -.0422065 0327441 " 74 4.20e-07 empwage 1.301691 616149 2.11 0.035 0889831 2.5144 empselfAg 1.146126 1.188726 0.96 0.336 -1.193533 3.485785 empselfNAg 1.328127 6193604 2.14 0.033 1090975 2.547156 houseown 1.11708 4458451 2.51 0.013 2395651 1.994596 the poor 2.621761 9601945 2.73 0.007 7318998 4.511622 hhsize 1825635 1396673 1.31 0.192 -.0923305 4574575 cons 8.409187 4.80663 1.75 0.081 -1.051252 17.86963 75 ... market and borrowing by households in Ho Chi Minh City This research not only takes a study of urban credit market with concentrating on borrowing by urban households in Ho Chi Minh City but also... other provinces of Vietnam They move to Ho Chi Minh City for their better life and future Understanding household's access to formal credit in Ho Chi Minh City is very essential to increase the. .. credit in Ho Chi Minh City 1.3 RESEARCH QUESTIONS The main objective of this thesis is to try to find out the answer for the central research question: What are determinants of urban household's borrowing