Credit constraints and impact on rural farm household welfare: the case of Vietnam’s North Central Coast region

Abstract

This study aims to identify the factors affecting formal credit constraint status of rural farm households in Vietnam and their impact on the household welfare. Despite the effort of the subsidised financial institutions to expand their credit coverage to almost every rural Vietnam communes, rural farm households are found to remain credit constrained by these institutions. Using the Direct Elicitation Method, our survey uncovers more than 40% of the rural farm households in Vietnam’s North Central Coast region are credit constrained by formal financial institutions. Quantity constraint accounts for the highest proportion of these cases, followed by transaction cost constraint. No case of risk constraint is reported. The empirical evidences reveal that young and less educated households with female head are less likely to receive sufficient loan from the formal financial institutions. Similarly, farm land size, labour resources and non-farm income play important roles to relax household’s credit constraint status. The findings also raise the concern that subsidised credit allocation favours better off households but farm households in wealthier areas have disadvantages to obtain subsidised credit. The maximum loan size offered by the formal financial institutions is still lower than the household’s actual credit demand. Further, our results clearly show that credit constraints have negative impact on the household welfare in the North Central Coast region and this impact can be alleviated by informal credit. With regards to implications, our results recommend that apart from enhancing credit allocation regime, the government should focus on improving the households’ education and developing non-farm economic activities in the rural area, which not only ease formal credit restriction but also promote household welfare. It is also important that policy makers and formal financial institutions pay more attention on developing relevant credit policies for the poor and disadvantaged households in lower poverty rate communities to assure that they receive sufficient loan for production and consumption. The loan size limit set by Vietnam Bank for Social Policies needs to match with the actual households’ credit demand. Relaxing credit constraints is essential not only to enhance the household welfare but also narrow the welfare gap between the poor and non-poor households. The substitute effect of informal credit on the household welfare supports the idea of integrating the two credit sectors into one well-functioning credit market.