Credit accessibility and small and medium sized enterprise growth in Vietnam

Abstract

Small and medium sized enterprises (SMEs) have been highly conducive to economic development in Vietnam. SMEs are a mean of income generation, job creation, poverty reduction, and government revenue contribution, etc. However, SMEs have lagged far behind other business sectors in terms of performance. It is claimed that one of the major reasons is their inability to access credit. The study investigates SMEs accessibility to various sources of financing, covering both formal finance and informal finance in Vietnam. While majority of the literature on Vietnamese SMEs credit accessibility focus mainly on bank finance, there is growing necessity to address determinants of SMEs’ ability to obtain microfinance and informal credits as it has shown that obtaining bank financing is not popular for small scale enterprises. Furthermore, the central issue is whether or not accessibility to external finance truly benefits small scale enterprises? The study also answer this question by examining the relationship between credit accessibility and SMEs’ growth.Primary data was obtained from a survey of 487 SMEs in Hanoi in June 2013. The empirical frameworks comprise of (1) Multinomial Logistic Regression to determine SMEs’ ability to access to credit for business start-up and operation; (2) Ordinary Least Square (OLS) estimation for the interest rate charged on SMEs largest loan; and (3) OLS and Heckman Two Stage Procedure model to determine the impact of SMEs credit accessibility on growth. The model about credit accessibility at start-up period indicated that the SMEs network with lenders (except social bank officials) plays a significant role in determining the access to different sources of credit for SMEs start-up financing. Furthermore, SMEs are more likely to borrow from informal sources if their owners are younger, less educated and experienced. The model also found evidence that size of firm significantly affect SMEs credit access. In terms of credit accessibility for business operation, the results pointed out that owner’s characteristics are less important in obtaining loans in 2012. SMEs tend to use more external financing as they grow older and formal financing is more available for larger sized firms. In addition, firms in manufacturing and construction borrowed more than any other sector whereas exporting enterprises havelower demand for external loans. Finally, collateral and assistance from government proved to be the strongest determinants of external financing but the SMEs networks to access external credit for business operation in 2012 were less important than at the start-up period. Finally, the growth determinants model of SMEs suggested that the access to credit does not influence SMEs growth. Thus, the empirical evidence rejects the claim that the inability to access to credit adversely affects SMEs growth. The result implied that credit should not be considered as the miracle of growth but priority should be given to developing customer relationship and owner’s proactivity. Efforts to push up SMEs growth should start from the enterprise’s internal resources, including owner’s human capital, export, and customer relationship development rather than external financing.