Formal and Informal Rural Credit in Four Provinces of Vietnam

This paper highlights operational and characteristic differences between formal and informal rural credit markets in Vietnam. This paper provides a detailed review and an in-depth econometric analysis of how the rural credit market operates in four provinces of Vietnam, with a focus on basic characteristics and differences between the formal and informal credit markets. The paper uses a survey of 932 rural households in early 2003 in four provinces (Ha Tay, Phu Tho, Quang Nam and Long An). It finds that:

• Households obtain credit through formal and informal lenders;
• Formal loans are almost entirely for production and asset accumulation;
• Informal loans are used for consumption smoothening;
• The determinants of formal and informal credit demand are distinct;
• Regional differences in the demand for credit are striking;
• Credit is obtained for many reasons, such as consumption smoothening and investment;
• Overall interest rates have also fallen suggesting that market integration is in fact progressing;
• Land is widely used as collateral and plays a fundamental role in the operation of the credit market.

Finally the study concludes with some key policy measures to further the allocation of rural credit in Vietnam:

• Specificity and the general level of development are fundamental in understanding credit demand in Vietnam;
• Credit rationing depends on education and credit history, in particular;
• A "one size fits all" approach to credit policy in Vietnam would be inappropriate.