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    Accessing rural finance, The rural financial market in Northern Vietnam
    (2007) Dufhues, Thomas; Heidhues, Franz
    During the transition of the Vietnamese economy, adaptation of the financial system was one of the most challenging reforms. A major task of this reform was to expand the financial systems outreach to the emerging private sector and household (HH) economies, especially in rural areas. Therefore, state-owned financial intermediaries such as the Vietnam Bank for Agriculture and Rural Development (VBARD) and the Vietnam Bank for the Poor (VBP) have been established. Despite general successes in terms of credit outreach, certain population groups seem to have been bypassed by both banks. Furthermore, the strategy pursued by national financial policy has focused mainly on credit supply. Other financial services that potentially have a deeper outreach, e.g. savings products, have been neglected by the government. The overall objective of this research study was to create knowledge on the factors that impede or support access of rural HHs in Northern Vietnam to the formal financial system. Access can be hampered at different levels of the financial system, namely macro/meso level, intermediary level and HH level. A joint analysis of the three levels is therefore appropriate. This implies different methodologies and data collection methods. Thus, this cumulative thesis is divided into four main sections investigating different levels of the system and applying different methodologies (i.e. literature review and information economics, principal component, binary logit, and conjoint analysis). The data collection took place between March 2001 and 2002 in two provinces of Northern Vietnam. In total, 260 HHs were surveyed. In addition, qualitative data were collected at all levels. Furthermore, secondary data were collected from relevant institutions. The rural financial market in Vietnam is still dominated by the aforementioned subsidized financial intermediaries, impeding the establishment of viable financial services. Through the creation of the Vietnam Bank for Social Policies (VBSP) (the successor of the dissolved VBP since 2003) the Vietnamese government has separated political lending from commercial lending. Evidence from development banks in other countries suggests that the VBARD, now freed from political lending, is likely to dismiss its peasant clientele and concentrate on wealthier farmers. The question is how long the Government can finance the VBSP, and who will serve the rural poor after the government stops the subsidies and the VBPS cannot carry on its operations? The sustainability of the financial system is still threatened by an accumulation of non-performing loans amassed by state-owned enterprises. In addition, the problem of non-performing loans is spreading to rural HHs. Apart from representing macro-economic threats to the financial system, this moral hazard behavior is hindering the establishment of viable rural financial intermediation. The breadth of outreach of the formal rural lenders is immense. However, the poorest HHs are seldom clients. But general poverty (as captured in the poverty index) does not significantly influence access to formal credit. This means that the poorest HHs simply have much less demand for formal credit products. Improving credit products or offering new credit lines would only slightly improve the credit coverage of poorer HHs. A more promising approach would be to introduce a specialized pro-poor extension service combined with a general improvement in the infrastructure. Nevertheless, the number of access-constrained HHs is surprisingly low, at 16%. One explanation may be the eradication of former access constraints through locally disbursed group credits. However, considering the anecdotal reports of very low repayment rates, the price of eradicating these access constraints has likely been a decrease in financial sustainability. Nevertheless, some barriers to access continue to exist, particularly for ethnic minorities or female-headed HHs. To reduce these access barriers locally-oriented actions should be taken catering to the specific needs of those HHs. The establishment of the VBSP represents an attempt to broaden access in general. But it is questionable whether HHs that do not have access today, or do not demand the existing products, will demand loans from the VBSP. A more sustainable way to promote outreach would be to improve the knowledge of access constrained HHs about credit application procedures. Ethnic or gender diversification of bank staff could broaden the information networks available and could create more awareness of those groups inside the institution. In contrast to the enormous credit outreach, formal savings are rarely used by rural HHs. However, this low effective demand for savings is due to inappropriate services and not to lack of willingness of the rural population to save. Thus, the most appropriate tool to incorporate poorer HHs into the formal financial system would be mobilization of savings by providing adapted services.