Luận Văn Microcredit And Welfare Of The Rural Households In Vietnam.doc

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MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
*****
Pham Tien Thanh
MICROCREDIT AND WELFARE OF THE
RURAL HOUSEHOLDS IN VIETNAM
PHD DISSERTATION IN ECONOMICS

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
*****
Pham Tien Thanh
MICROCREDIT AND WELFARE OF THE
RURAL HOUSEHOLDS IN VIETNAM
Major: Development Economics
Code: 9310105
PHD DISSERTATION IN ECONOMICS
ACADEMIC ADVISORS
1. Dr. PHAM KHANH NAM
2. Assoc. Prof. Dr. NGUYEN HUU DUNG

i
COMMITMENTS
I hereby declare that this dissertation is my own work and it has not been
previously submitted for a degree elsewhere. While my work contains information
from works done by other authors, all these references have been explicitly cited.
To the best of my knowledge, I would like to certify that the above statements are
true.
The dissertation has been done under the supervision of Dr. Pham Khanh
Nam and Assoc.Prof.Dr. Nguyen Huu Dung, the University of Economics,
Hochiminh City. This work was also done under the advice of Assoc.Prof.Dr.
Katsuhiro Saito, the University of Tokyo during my fellowship period granted by
the World Bank Robert S. McNamara at the University of Tokyo, Japan.
Pham Tien Thanh

ii
ACKNOWLEDGEMENT
I am deeply indebted to my academic supervisors Dr. Pham Khanh Nam and
Assoc.Prof.Dr. Nguyen Huu Dung at the University of Economics. Dr. Nam and
Assoc.Prof.Dr. Dung have supported me a lot during my study. They have also
provided me with useful academic advice, valuable feedbacks, and encouragement.
I am also grateful to my academic advisor Assoc.Prof.Dr. Katsuhiro Saito,
who instructs me in applied econometrics, during my fellowship granted by the
World Bank Robert S. McNamara at the University of Tokyo.
I would also like to thank the academic committee at the University of
Economics and the two independent external reviewers who gave me a lot of useful
and precious comments, which thereby help me improve my dissertation.
I am also thankful to my lecturers who give me knowledge and advice on my
dissertation. I am particularly grateful to Assoc.Prof.Dr. Pham Bao Duong, my
academic supervisor of master thesis, who encourage as well as support me with
data and comments on my Ph.D. dissertation.
I would also like to say thank to Mr. Nguyen Khanh Duy at the University of
Economics for many of his advice on research methodology and encouragement.
Last but not least, I would like to express my deepest gratitude to my family,
colleagues, and friends for their encouragement and support during the time I
conduct my Ph.D. dissertation.
Pham Tien Thanh

iii
TABLE OF CONTENTS
COMMITMENTS....................................................................................................... i
ACKNOWLEDGEMENT .........................................................................................ii
TABLE OF CONTENTS.......................................................................................... iii
ABBREVIATIONS.................................................................................................viii
LIST OF TABLES .................................................................................................... ix
LIST OF FIGURES................................................................................................... xi
CHAPTER 1 - INTRODUCTION............................................................................. 1
1.1. Backgrounds..................................................................................................... 1
1.2. Research problems ........................................................................................... 3
1.2.1. Accessibility to microcredit ....................................................................... 3
1.2.2. Microcredit and adoption of improved rice varieties................................. 5
1.2.3. Impact of microcredit on households’ welfare .......................................... 7
1.2.4. Microcredit and health shock..................................................................... 9
1.3. Research objectives.........................................................................................10
1.4. Scopes of research...........................................................................................11
1.5. Research data ..................................................................................................11
1.6. Research methods............................................................................................11
1.6.1. Quantitative methods ................................................................................11
1.6.2. Qualitative methods ..................................................................................12
1.7. Contribution of the research............................................................................12
1.7.1. Theoretical contributions ..........................................................................12
1.7.2. Practical contributions...............................................................................13
1.8. Organization of the research ...........................................................................14
CHAPTER 2 – LITERATURE REVIEW ................................................................15
2.1. Overview of microcredit .................................................................................15
2.1.1. Some definitions .......................................................................................15
2.1.2. Characteristics of microcredit ...................................................................16
2.2. Theory .............................................................................................................17

iv
2.2.1. Overview of rural credit market................................................................17
2.2.2. Asymmetric information...........................................................................20
2.2.3. Theories on accessibility to credit.............................................................23
2.2.3.1. Theory of choice (Demand for credit) .............................................. 23
2.2.3.2. Theory of credit rationing ................................................................. 24
2.2.4. Theoretical framework of outreach of microcredit...................................27
2.2.5. Farm household model under credit constraint.........................................29
2.2.5.1. Producer problem.............................................................................. 29
2.2.5.2. Consumer problem............................................................................ 30
2.2.5.3. Worker problem ................................................................................ 30
2.2.5.4. Farm household model with credit ................................................... 31
2.3. Empirical studies.............................................................................................32
2.3.1 Determinants of rural households’ accessibility to microcredit ................32
2.3.2. Impact of microcredit on adoption of the improved rice varieties ...........38
2.3.3. Impact of microcredit on living standard..................................................40
2.3.3.1. Empirical studies in the world .......................................................... 40
2.3.3.2. Empirical studies in Vietnam............................................................ 41
2.3.4. Impact of health shocks and role of microcredit.......................................44
2.3.4.1. Impacts of health shocks................................................................... 44
2.3.4.2. Strategies to cope with health shocks and role of microcredit ......... 46
2.4. Definitions of welfare .....................................................................................48
2.5. Logical framework of impact evaluation of microcredit on welfare ..............49
CHAPTER 3 – OVERVIEW OF MICROCREDIT .................................................52
3.1. Microcredit in the world..................................................................................52
3.2. Microcredit in rural Vietnam ..........................................................................54
3.2.1. Microcredit providers................................................................................54
3.2.2. Credit activities and clients.......................................................................59
3.2.3. Poverty reduction role of microcredit .......................................................61

v
CHAPTER 4 – DETERMINANTS OF ACCESSIBILITY TO MICROCREDIT...62
4.1. Research method .............................................................................................62
4.1.1. Estimation strategy....................................................................................63
4.1.2. Selection of variables................................................................................65
4.1.2.1. Dependent variable ........................................................................... 65
4.1.2.2. Explanatory Variables....................................................................... 66
4.1.3. Research hypotheses .................................................................................68
4.2. Research data ..................................................................................................70
4.2.1. Data source................................................................................................70
4.2.2. Research sample........................................................................................71
4.2.3. Descriptive statistics .................................................................................71
4.3. Results and discussions...................................................................................74
CHAPTER 5 – MICROCREDIT AND ADOPTION OF IMPROVED RICE
VARIETIES ..............................................................................................................82
5.1. Research method .............................................................................................82
5.1.1. Estimation strategy....................................................................................82
5.1.2. Selection of variables................................................................................86
5.1.2.1. Dependent variables.......................................................................... 86
5.1.2.2. Independent variables ....................................................................... 87
5.1.3. Research hypotheses .................................................................................88
5.2. Research data ..................................................................................................88
5.2.1. Data source................................................................................................88
5.2.2. Research sample........................................................................................88
5.2.3. Descriptive statistics .................................................................................89
5.3. Results and discussions...................................................................................91
CHAPTER 6 – IMPACT EVALUATION OF MICROCREDIT ON WELFARE 103
6.1. Research method .......................................................................................... 103
6.1.1. Estimation strategy................................................................................. 103
6.1.1.1. Propensity Score Matching (PSM) ................................................. 103

vi
6.1.1.2. Difference in Difference (DID) ...................................................... 105
6.1.1.3. PSM-DID ........................................................................................ 105
6.1.2. Selection of variables............................................................................. 107
6.1.2.1. Microcredit variable........................................................................ 107
6.1.2.2. Variables for calculation of propensity score ................................. 107
6.1.2.3. Welfare variables ............................................................................ 108
6.1.3. Research hypotheses .............................................................................. 108
6.2. Research data ............................................................................................... 109
6.2.1. Data source............................................................................................. 109
6.2.2. Research sample..................................................................................... 110
6.2.3. Descriptive statistics .............................................................................. 110
6.3. Results and discussions................................................................................ 110
6.3.1. Propensity score and balancing test ....................................................... 110
6.3.2. Average impact of microcredit program................................................ 113
CHAPTER 7 – ROLE OF MICROCREDIT IN MITIGATING THE EFFECTS OF
HEALTH SHOCKS ............................................................................................... 121
7.1. Research method .......................................................................................... 121
7.1.1. Estimation strategy................................................................................. 121
7.1.2. Selection of variable............................................................................... 123
7.1.2.1. Dependent variables........................................................................ 123
7.1.2.2. Health shocks variables................................................................... 123
7.1.2.3. Microcredit variable........................................................................ 124
7.1.2.4. Other control (explanatory) variables ............................................. 125
7.1.3. Research hypotheses .............................................................................. 126
7.2. Research data ............................................................................................... 126
7.2.1. Data source............................................................................................. 126
7.2.2. Research sample..................................................................................... 127
7.2.3. Descriptive statistics .............................................................................. 127
7.3. Results and discussions................................................................................ 129

vii
7.3.1. Are health shocks unanticipated?........................................................... 129
7.3.2. First stage results using instrumental variables ..................................... 130
7.3.3. Illness/ Disease/ Injury of working-age members (HS1W)................... 133
7.3.4. Illness/ Disease/ Injury of any members (HS1A) .................................. 136
CHAPTER 8 – CONCLUSIONS........................................................................... 138
8.1. Objective 1: Determinants of accessibility to microcredit........................... 138
8.1.1. Summary ................................................................................................ 138
8.1.2. Policy implications................................................................................. 139
8.1.3. Limitations and further studies .............................................................. 141
8.2. Objective 2: Microcredit and adoption of improved varieties ..................... 142
8.2.1. Summary ................................................................................................ 142
8.3. Objective 3: Impact evaluation of microcredit on welfare .......................... 145
8.3.1. Summary ................................................................................................ 145
8.4. Objective 4: Role of microcredit in mitigating the effects of health shocks 148
8.4.1. Summary ................................................................................................ 148
REFERENCE......................................................................................................... 150
Reference in the world ........................................................................................ 150
Reference in Vietnam.......................................................................................... 167
Websites .............................................................................................................. 171
APPENDICES........................................................................................................ 172

viii
ABBREVIATIONS
Abbr Meanings
MF
MFIs
PCFs
ROSCAs
VBSP
VBARD
VPSC
Microfinance
Microfinance Institutions
People’s Credit Funds
Rotating Savings Credit Associations
Vietnam Bank for Social Policies
Vietnam Bank for Agriculture and Rural Development
Postal Savings Company

ix
LIST OF TABLES
Table 2.1 - Welfare indicators.................................................................................. 48
Table 3.1 - Microcredit trend in the world............................................................... 53
Table 3.2 - Top 10 microcredit providers in the world............................................ 53
Table 3.3 - Microcredit providers in Vietnam ......................................................... 60
Table 3.4 - Living standards of clients before and after borrowing......................... 61
Table 4.1 - Variables for analysis of determinants of accessibility to microcredit.. 67
Table 4.2 – Description of loans obtained ............................................................... 72
Table 4.3 - Characteristics of variables for analysis of determinants of accessibility
to microcredit ........................................................................................................... 73
Table 4.4 - Estimated results of determinants of accessibility to microcredit - Whole
sample....................................................................................................................... 79
Table 4.5 - Estimated results of determinants of accessibility to microcredit - Non-
poor sample .............................................................................................................. 80
Table 4.6 - Estimated results of determinants of accessibility to microcredit - Poor
sample....................................................................................................................... 81
Table 5.1 - Variables used for analyzing impact of microcredit on adoption.......... 87
Table 5.2 - Characteristics of adoption variables..................................................... 89
Table 5.3 - Characteristics of variables that affect adopting decision ..................... 90
Table 5.4 - Microcredit and adoption of improved rice varieties - IV 2SLS using 3
IVs ............................................................................................................................ 92
Table 5.5 - Microcredit and adoption of improved rice varieties - IV 2SLS using 1
IV.............................................................................................................................. 92
Table 5.6 - Microcredit and adoption of improved rice varieties ............................ 94
Table 5.7 - Microcredit and adoption of improved rice varieties – Poor and non-
poor sample ............................................................................................................ 102
Table 5.8 - Impact of microcredit on other investment activities .......................... 102
Table 6.1 - Definition of welfare variables ............................................................ 108
Table 6.2 - Probit estimations for calculation of propensity score ........................ 112

x
Table 6.3 - Balancing test....................................................................................... 113
Table 6.4 - Impact of microcredit on income and total output value..................... 114
Table 6.5 - Impact of microcredit on food expenditure ......................................... 118
Table 6.6 - Impact of microcredit on accumulation of durable assets ................... 119
Table 7.1 - Types of health shock .......................................................................... 124
Table 7.2 - Microcredit borrowed by households.................................................. 125
Table 7.3 - Descriptive statistics of variables for used analysis of health shocks .. 128
Table 7.4 - Unanticipation of health shocks........................................................... 129
Table 7.5 – First stage results using IV for HS1W ................................................ 131
Table 7.6 – First stage results using IV for HS1A................................................. 131
Table 7.7 - Impact of health shocks on income and labor and the role of microcredit
using VFE............................................................................................................... 132
Table 7.8 - Impact of health shocks on consumption and the role of microcredit
using VFE............................................................................................................... 132

xi
LIST OF FIGURES
Figure 2.1 – Credit constraint and unconstraint....................................................... 26
Figure 2.2 - Analytical framework of impact of microcredit on welfare................. 43
Figure 2.3 - Conceptual framework of impacts of health shock.............................. 45
Figure 2.4 - Logical framework on impact evaluation of credit on welfare ............ 50
Figure 2.5 – Analytical framework on accessibility to microcredit and its impact on
welfare...................................................................................................................... 51
Figure 3.1 – Microfinance providers in Vietnam..................................................... 54

1
CHAPTER 1 - INTRODUCTION
This chapter includes eight sections. Section 1.1 presents the background on
socio-economic situation in Vietnam, particularly in the rural areas, and thereby
explains the significance and necessity of this research. Sections 1.2-1.3 present the
research problems and objectives.
Sections 1.4-1.6 discuss the research scope, data and methods used for
qualitative and quantitative analysis. Section 1.7 presents the contribution of the
research in terms of theory and practice. The final section presents the organization
of the research.
1.1. Backgrounds
Poverty reduction, access to education, clean water, sanitary, health care, etc.
are the top concerned among 17 Sustainable Development Goals - SDGs) which
formerly was Millennium Development Goals (MGDs). They are the important
issues and attract the attention of every country, especially the developing countries
like Vietnam. During the past decades, Vietnam has obtained remarkable
achievements in the socio-economic development and poverty reduction.
Statistics show that the poverty rate has declined from 37.4 percent in 1998
to 5.8% in 2016 (Demombynes & Vu, 2015; GSO, 2016). The report also shows
that the poverty rate in 2016 in rural areas (7.5%) is nearly four times higher than
that in urban areas (2%)1
. The statistics indicate that a large number of rural
households still live in poverty under poor living standards and suffer from the lack
of socio-economic opportunities. Household income in rural area is rather low. In
particular, a report by GSO (2016) shows that per capita income per month of the
rural households is, on average, 2,437 thousand VND. In the rural, per capita
income per month of the bottom quintile (the poorest) is 676 thousand VND, the
second bottom (the near-poor) 1,246 thousand VND and the top quintile (the
1
New poverty line (Measured by income per capita per month) in 2016 is 630 and 780 thousand
VND in rural and urban areas, respectively.

2
richest) 5,669 thousand VND. Therefore, it indicates that income of the poorest is
around 8.4 times lower than that of the richest, which is a great gap. Consumption
of the rural households is quite low. In particular, a report by GSO (2014) shows
that per capita expenditure per month of the rural households is, on average, 1,609
thousand VND. More specifically, per capita expenditure per month of the bottom
quintile (the poorest) is 834 thousand VND, the second bottom (the near-poor)
1,154 thousand VND and the top quintile (the richest) 2,576 thousand VND, which
indicates a big gap between the poorest and the richest in terms of expenditure.
Poverty reduction, income improvement and good health, especially in the
rural area, are the most concerned issues among the 17 SDGs. In the world and in
Vietnam, many programs and activities have been implemented to achieve these
goals, for instance, training, agricultural extension, agricultural technology, finance,
job creation, etc. Among them, credit is considered as the most important factor in
income-generating activities since the rural households, especially the poor,
normally face financial constraint. Without accessibility to formal credit support,
poor farmers are unable to expand their production and improve their living
conditions (Duong & Izumida, 2002; Li et al., 2011).
As above-mentioned, a large number of rural households in Vietnam are still
living in poverty. The poor have high demand for credit; however, credit market in
rural Vietnam normally faces the problem of demand excessing supply. As a result,
the poor have difficulty in accessing formal credit due to the lack of collateral. In
rural Vietnam, formal credit is mainly provided by the Vietnam Bank for
Agriculture and Rural Development and Vietnam Bank for Social Policies (Ho &
Duc, 2015), and recently by microfinance institutions.
Inability to obtain formal credit has inhibited farmers from investment and
then improving their living conditions. Therefore, farmers may rely on informal
credit sources to support their production and consumption even though they must
pay a much higher interest rate, which may push them deeper into ‘vicious debt
circle’ due to less repayment capacity. The reasons why farmers still accept the high

3
interest rate from informal sources are its collateral-free merit and quick borrowing
procedure.
Since its birth, microcredit programs provide the poor with opportunities to
be more accessible to formal and semi-formal credit sources (Li et al., 2011). Some
merits of microcredit are collateral-free and to serve the poor. By definition,
microcredit is defined as a small loan granted to the poor so that they can run
production or do business to generate income and improve their well-being
(Microcredit Summit, 1997). Many researchers and practitioners consider
microcredit as an effective instrument to improve well-being of the poor. Therefore,
this research aims to examine accessibility to microcredit and its economic impacts
on welfare of rural households. Accordingly, relevant policies will be suggested to
support the poor with better access to microcredit sources and improve the
effectiveness of microcredit in investment, thereby increasing their living standard.
Therefore, to capture these primary research objectives, the following specific
objectives will be included and analyzed:
1.2. Research problems
1.2.1. Accessibility to microcredit
Morduch and Haley (2002) state that credits can help the poor to improve
their living standards or at least cover their living expenses. However, a research by
Brau and Woller (2004) find that the poor have difficulties in accessing to formal
credit sources; particularly, the poor in the developing countries have more
difficulties in accessing than those in the developed countries. In Vietnam, many
rural households normally have difficulties in accessing to credit, especially poor
households, households in remote areas, the ethnic minority groups, or households
operating in such fields with high risk as aquaculture, etc., These households always
have high demand for credit (Duong & Izumida, 2002) but they have some
difficulties in borrowing from formal and semi-formal credit sources such as banks
or financial institutions. As a result, many households have to borrow from informal

4
credit sources such as friends, relatives, money-lender, etc. The Government has
taken a lot of effort to support the rural households with accessing to formal and
semi-formal credit but the result is still rather limited. To increase efficiency of
financial services as well as better serve the poor, it is essential to understand the
factors that affect participation in microcredit of the rural households, thereby
implying appropriate policies. Therefore, this study is conducted to investigate the
factors that affect the accessibility to microcredit sources.
The objective of microcredit programs is to serve the poor. However, a
research by Nguyen (2008) finds that the number of poor households with access to
microcredit program is lower than that of the non-poor. Accordingly, this research
will investigate whether the poor households are better able to participate in
microcredit programs than the non-poor. In addition, one of the attributes of
microcredit programs is that the target clients are women. Therefore, this research
also investigates the role of gender in participation in microcredit. In particular, this
research examines whether the female household heads can have better accessibility
to microcredit sources than the male counterparts. This objective is conducted using
models for binary logistic model with panel data.
Since most of previous empirical studies examine accessibility to microcredit
or credit using cross-sectional data only, some contributions of this research
objectives include: (1) It applied binary logistics with longitudinal data, thereby
capturing the changing across time. (2) Various approaches such as Random Effect,
Fixed Effect and Pooled estimation are employed for robust check to capture the
best results. (3) Another contribution is that the whole sample is then decomposed
to the poor and non-poor sample for check for the heterogeneity to capture deeper
understanding. In terms of practical contribution, the findings from this objective
will imply relevant policies to enhance the accessibility to microcredit as well as the
outreach of microcredit programs.
Research question 1: What are determinants of accessibility to microcredit
of rural households? Do poverty status and gender matter?

5
1.2.2. Microcredit and adoption of improved rice varieties
Agriculture plays a crucial role in the economy of every country, especially
the developing countries. In Vietnam, agricultural sector contributes nearly 33
billion USD to gross domestic product (GDP) in 2015, around 17-percent share
(World bank, 2016). In addition, nearly half (46.8%) of the labor force in Vietnam
are employed in agriculture in 2013 (World bank, 2016). Agriculture contributes to
ensure food security and generate income for economic development (Datt &
Ravallion, 1996). Moreover, in the developing countries, agriculture is a major
income source of rural households that derives from domestic sales and export
(Singh et al., 1985). Therefore, the improvement of quantity and quality of
agricultural output is a focal point of the government in the developing countries
(Bonnin & Turner, 2012). However, the population in the world as well as in the
developing countries has increased more and more and the urbanization has been so
rapid, which results in less land resource for agricultural production. Accordingly,
productivity improvement via expanding land area is no longer appropriate.
Therefore, the most possible solution to enhance output is to adopt new high-yield
technologies, such as mechanization, modern inputs and production practices.
Rice is considered as one of the main staples in the world and developing
countries like Vietnam. In Vietnam, total area of rice farming is around 7,790
thousand hectares with total production output of 43,609 thousand ton in 2016
(GSO, 2016), which makes rice rank the first among annual crop. Rice is the
leading cultivar in terms of export volume with 4,835 thousand ton and rank second
in terms of export value with 2.1 billion USD (GSO, 2016). Rice production is an
important source of export earnings for rice economies like Vietnam. Therefore,
enhancing quantity, quality and value of rice is the urgent and important issue.
Literature documents that adoption of improved rice varieties is considered
as an effective way to enhance productivity due to their attributes of short duration,
high yield and climate-resistance (Sall et al., 2000). However, improved varieties

6
adoption may only become effective in enhancing productivity when being
combined with modern fertilizers and cultivation practices (Karanja et al., 2003).
In reality, adoption of new varieties normally incurs high initial cost and high
risk, which inhibit the farmers’ decision toward adoption, especially the farmers
with financial constraint. Several studies find that credit can facilitate the
households’ investment in agricultural innovation in general and improved varieties
in particular. This can be explained via two mechanisms (Eswaran & Kotwal, 1990;
Zeller et al., 1997; Diagne et al., 2000): (1) Credit relaxes financial constraint of the
farmers, and thereby they can invest in agriculture; (2) Credit plays a role as coping
strategies with shocks, including agricultural shocks (disaster, pestilent insect, etc.).
In fact, adoption of improved cultivar varieties may be affected by farmers’
perception, education, risk attitude, knowledge and management of agricultural
extension center, and soil conditions of the area. In addition, this adoption may
require complicated cultivation practice, more time, labor and capital than
traditional strategies since farmer need to pay more for new and certified
agricultural inputs such as seeds or fertilizers (Chi, 2008; Dung & Thanh, 2017).
The previous studies only investigate the determinants of adoption of new
varieties in general, but do not focus on the role of credit on adopting decision.
Moreover, most of the previous studies observe the behaviors of all farmers while
there are very few studies that investigate in detail the behaviors of farmers with and
without financial constraints or poor or non-poor status. In addition, most of
previous studies only investigate the determinants of whether to adopt the improved
varieties. There have been limited number of studies on the decision of farmers in
the two stages, including whether to adopt and intensity of adoption. In Vietnam,
there has been no empirical study investigating the relationship between microcredit
and adoption of improved rice varieties.
This study research objective aims to fill these gaps. Therefore, some
contributions of this objective include: (1) it examines the effect of microcredit on
farmers’ decision on adoption of improved rice varieties in two stages, including

7
whether to adopt and how much to adopt. Therefore, instead of a simple model, this
research employs two-stage models such as Double-Hurdle (DH) or Heckman to
clarify the farmers’ adoption decisions in two stages. For robustness check, such
models as Tobit are also applied for comparison. (2) It employs IV to treat for the
potential endogeneity of microcredit. (3) It investigates in detail the behaviors of
each specific group by categorizing sample to the poor and non-poor groups. In
terms of practical contribution, the findings from this objective will imply relevant
policies to foster the adoption of improved rice varieties via credit programs,
including microcredit.
Research question 2: Does microcredit enhance the farmers’ decision on
adoption of improved rice varieties in two stages, including whether to adopt and
how much to adopt?
1.2.3. Impact of microcredit on households’ welfare
Microcredit programs have been applied in many countries as a tool of
poverty reduction and hunger eradication. The impact of microcredit on living
standard of rural households has been studied by many scholars, practitioners and
policymakers. However, their findings are mixed and inconsistent.
Khandker (1998) and Yunus (2003) consider microcredit as a tool for the
goal of fighting poverty and improving welfare. Microcredit is also found to have
positive and significant effect on welfare of the rural households via improving their
consumption and/or consumption (Li et al., 2011b; Mahjabeen, 2008). It is also
proved that households with access to microcredit can improve their children’
health condition (Pitt et al., 2003) or education (You & Annim, 2014).
However, some researchers argue that microcredit has insignificant effect on
households’ living standard. Coleman (2006) finds no evidence for the impact of
microcredit on less wealthy households’ living standards, while Khandker and
Koolwal (2013) contrast that only smaller landholders benefit from microcredit via
increasing their agricultural income. Takahashi et al. (2010) conclude that

8
microcredit has no significant impact on various outcomes, except for sales from
self-employment for the non-poor and schooling expense for the poor, thereby
indicating that microcredit has no immediate impact on poverty reduction.
In Vietnam, there have been many studies about the impact of microcredit on
the welfare of the rural households. The empirical studies show that microcredit
improves households’ welfare via increasing income, expenditure, self-employment
profits or contributing to poverty reduction (Nguyen, 2008; Quach, 2017; Lensink
& Pham, 2011; Ho & Duc, 2015). In some cases, microcredit is found to have no
impact on income, but only consumption (Phan et al., 2014).
Literature shows that the impact of microcredit on welfare is still in argument
and the results are mixed among studies and depend on indicators used to measure
welfare. While there have been many studies about the role of microcredit in
Vietnam, neither of them investigates its impact on multi-dimensional aspects of
welfare. This study aims to fill these gaps.
Therefore, some contributions of this research objectives include: (1) It
examine the role of microcredit on various welfare indicators such as income, food
consumption, and accumulation of assets. (2) It is noteworthy that lack of empirical
studies in the world investigates the impact of microcredit on outcome from
common property resources (e.g. catching aquaculture from river, sea, or collecting
forestry resources). (3) For robustness check and to capture to better results, this
research applies various impact evaluation techniques such as standard Difference
in Difference (DID) and Propensity Score Matching (PSM) combined with DID. (4)
Another contribution is that it applies the most recent data (survey 2012 and 2014)
to capture the current situation of microcredit, as microcredit much changes across
time in terms of loan size. In terms of practical contribution, the findings from this
objective will imply relevant policies to enhance the effectiveness of microcredit.
Research question 3: Does microcredit improve rural households’ welfare,
measured by income, output value, food consumption and asset accumulation?

9
1.2.4. Microcredit and health shock
A research by Banerjee and Duflo (2012) finds that when health is improved,
people can study or work better, which thereby improves their future income. In the
developing countries, the social security system is not well-organized.
Consequently, when households face any health problem, they normally face big
trouble, especially the poor. Systematic review by Alam and Mahal (2014) reveals
that health problems may have impact on household via some channels. For
instance, when the workers in the family cannot work due to health problems, it will
lead to an increase in medical expense and a decrease in income. The same outcome
may happen when care-givers cannot work to give cares to other sick/disease
members. To alleviate such burden, the households with health problems will
normally use a certain coping/mitigating strategy. However, when the social
security system is less developed and the formal coping/mitigating strategies are not
available, the households may take advantage of informal coping strategies such as
reduced consumption, informal loan, or selling assets
Regarding the role of microcredit in coping with health shock, there have
been few studies (Gertler et al., 2009; Islam & Maitra, 2012). These studies state
that households with access to microfinance can smooth their consumption better
than those without any coping strategies.
In Vietnam, impact of health shock has been researched in the empirical
studies (Wagstaff & van Doorslaer, 2003; Wagstaff, 2007; Mitra et al., 2015;
Okonogi et al., 2015). However, neither of them investigates the role of microcredit
in mitigating the impact of health shocks, especially in relation with other outcomes.
Therefore, this research objective aims to fill these gaps and examines two
objectives. The first objective is to examine the impact of health shocks welfare.
The second and more important one is to investigate the role of microcredit in
mitigating the consequence of health shocks.
Some contributions of this objective are: (1) It uses on various welfare
indicators (income, consumption, and notably, mobility of child and elderly labor)

10
and (2) two types of health shocks to capture a deep understanding on the effects of
different health shocks and microcredit on different outcomes. (3) This study
employs regression without and with Village Fixed Effect (VFE) using the panel
data to make comparison and capture the best results. (4) The final contribution is
the use of IV 2SLS approach to treat the potential endogeneity of microcredit. In
terms of practical contribution, the findings from this objective will imply relevant
policies to enhance the effectiveness of microcredit.
Research question 4: Does microcredit mitigate the adverse effects of health
shocks on income, consumption and intra-household labor mobility?
1.3. Research objectives
The primary research objective is to investigate the accessibility to
microcredit programs and its impacts on welfare. However, it is important to
capture the impact mechanism of microcredit. Accordingly, following logical
framework in Section 2.5, this research includes the following specific objective:
(1) Investigate the determinants of accessibility to microcredit of the rural
households; in particular, whether microcredit serves the poor and women
borrowers. Further investigation is also conducted on the poor and non-poor sample.
(2) Examine the role of microcredit in enhancing farmers’ decision on
adoption of improved rice varieties in both stages, including whether to adopt and
how much to adopt. Research sample is also decomposed into the poor and non-
poor for further investigation.
(3) Evaluate the impact of microcredit on the rural households’ welfare,
measured by various indicators such as income, total production value, food
consumption, and asset accumulation.
(4) Examine the role of microcredit in mitigating the effects of health shocks
on income, consumption and intra-household (child and elderly) labor mobility.

11
1.4. Scopes of research
Microcredit is widely provided in urban and rural areas. Both banks and
Microfinance Institutions (MFIs) provide microcredit. In addition, many indicators
can be used to define microcredit, welfare and health shocks. Due to availability of
data, the research scopes are as follows:
• This research focuses on the households in the rural areas in Vietnam.
• Microcredit used for analysis is defined as collateral-free and small loan (less
than 100 million VND) granted by the formal credit providers.
• This research focuses on the microcredit used for production or doing business,
thus it can capture long-run and sustainable impact of microcredit on welfare.
• Welfare indicators used for analysis include total output value, revenue,
income, consumption, accumulation of assets, and non-working-age labor.
• Two types of health shocks are used for analysis, including illness/ disease/
injury of any members and working-age members.
1.5. Research data
Secondary data. This research applies two datasets for quantitative analysis,
including Vietnam Household Living Standards Survey (VHLSS) in 2010 and 2012,
and Vietnam Access to Resources Household Survey (VARHS) in 2012 and 2014.
VARHS is applied for the first three objectives while VHLSS for the fourth
objective. VARHS and VHLSS are complementary sources of information
Primary data. In-depth interview and focus group are conducted in rural
areas in Tra Vinh and Long An provinces to supplement the results from
econometric model and to imply policy.
1.6. Research methods
1.6.1. Quantitative methods
This research employs different methods for investigating each specific
research objectives. Probit model using panel data is applied to investigate the

12
determinants of accessibility to microcredit (Research objective 1). Double-Hurdle
(DH), Tobit and Heckman models with cross-sectional data are used to examine
how microcredit affects farmers’ decision toward adoption of improved rice
varieties (Research objective 2). Such impact evaluation techniques as Difference
in difference (DID) and PSM-DID with panel data are applied to assess the effects
of microcredit on living standard (Research objective 3). Regression with Village-
Fixed-Effect (VFE) with panel data is employed to analyze the role of microcredit
in mitigating the consequence of health shocks (Research objective 4).
1.6.2. Qualitative methods
According to Merriam (1998), Bogdan and Biklen (1992), and Creswell
(2003), qualitative research may be conducted using: observation, In-depth
Interview (Face to Face, Focus group, phone), Media (Photo, Recording). This
research employs in-depth interview and focus group to capture the deeper
understanding about the research problems. Qualitative research is conducted on the
subjects associated with microcredit programs, including: (1) Borrowers from
microcredit provided by VBSP, (2) village Officials, staff of Women Union, staff of
Farmer Union, etc. at some communes; (4) Specialists in the fields of rural finance.
1.7. Contribution of the research
1.7.1. Theoretical contributions
The dissertation is an empirical work, which mainly uses applied
econometrics and models from previous studies to testify for the case of Vietnam.
However, the dissertation still makes some contributions to literature, including:
• The dissertation modifies an analytical framework on mechanisms through
which microcredit can affect farmers’ decisions on adoption of improved
rice varieties or other investment choices, then impact households’ welfare,
and finally mitigate the adverse effect of health shocks.

13
• The dissertation modifies and test empirical models of the determinants of
accessibility to microcredit.
• The dissertation also makes contributions on literature about the effects of
microcredit on farmers’ decision on whether to adopt and how much to
adopt improved rice varieties.
• The dissertation examines the role of microcredit in mitigating the effects of
health shocks in relation with intra-household labor mobility, which then
makes a significant contribution to literature in this field.
• In addition, for each research objective, different applied econometrics
methods are employed for robust checks to capture better results. Also, the
dissertation decomposes research sample to different groups for further
investigation to capture a thorough understanding.
• Finally, the dissertation contributes to the academic aspect regarding policy
analysis methods using IV 2SLS and PSM-DID.
1.7.2. Practical contributions
Poverty alleviation, good education, gender equality and good health are the
top concerns in the Sustainable Development Goals (SDG). Microcredit is
considered as an effective tool for improving household well-being. Therefore:
• The dissertation will be an evidence for the local authorities, policy-makers
and practitioners to recognize and understand the role of microcredit in
fostering investment and then improving living standard of the rural
households. Accordingly, they can disseminate the similar programs to
better support the rural households.
• Moreover, the dissertation provides policy implications toward improving
households’ accessibility to microcredit to increase the outreach of
microcredit, especially to the poor or the disadvantaged.
• Other relevant supporting policies, but not directly related to microcredit,
are also implied to improve the effectiveness of microcredit programs.

14
• The empirical findings from the dissertation will suggest important policy
implications related to microcredit programs, not only in Vietnam but also
in other emerging, transition and low- and middle- income economies.
1.8. Organization of the research
The structure of this dissertation is organized as follows:
Chapter 1: This chapter introduces research problems, research
methodology, research questions and objectives, and contributions of the research.
Chapter 2: This chapter presents literature review, including theoretical and
empirical studies associated with to four research objectives, including:
Determinants of accessibility to microcredit, (2) Microcredit and adoption of
improved rice varieties, (3) Impact evaluation of microcredit on welfare, and (4)
Role of microcredit in mitigating the effects of health shocks.
Chapter 3: This chapter describes some overviews of microcredit and rural
financial market in the world and Vietnam.
Chapter 4: This chapter presents the contents related to the first research
objective (Determinants of Accessibility to Microcredit), including method, data,
results and discussions.
Chapter 5: This chapter presents the contents related to the second research
objective (Microcredit and Adoption of Improved Rice Varieties), including
method, data, results and discussions.
Chapter 6: This chapter presents the contents related to the third research
objective (Impact Evaluation of Microcredit on Welfare), including method, data,
results and discussions.
Chapter 7: This chapter presents the contents related to the third research
objective (Role of Microcredit in Mitigating the Effects of Health Shocks),
including method, data, results and discussions.
Chapter 8: This chapter summarizes main findings in the research, gives
policy implication, mentions limitations and further research.

15
CHAPTER 2 – LITERATURE REVIEW
This chapter describes literature related to microcredit with five sections:
Section 2.1 discusses overviews of microcredit, including definitions and
characteristics of microcredit. Section 2.2 presents some theories associated with
credit and microcredit such as rural credit market, asymmetric information,
accessibility to microcredit, outreach of microcredit and farm household model.
Section 2.3 describes empirical studies relevant to four research objectives
and then presents the research gaps and contributions of each objective. Section 2.4
briefly discusses definition of welfare used in previous empirical studies.
Section 2.5 present the logical and analytical framework to explain the
relation between the general objective and four specific research objectives.
2.1. Overview of microcredit
2.1.1. Some definitions
Microfinance is considered as an effective tool for fighting poverty and
eradicating hunger. Microfinance was initiated by the Grameen Bank - founded and
managed by Prof. Muhammad Yunus, who gained the Nobel Peace Prize in 2006.
- Microfinance
ADB (2000): “Microfinance is the provision of a broad range of financial
services such as deposits, loans, payment services, money transfers, and insurance
to poor and low-income households and, their microenterprises”. Microfinance
services are provided by three sources: (1) formal sector (Banks, cooperatives); (2)
semi-formal sector (Non-government organizations); (3) informal sector (money
lenders, friends or relatives, shopkeepers). Thenceforth, Institutional microfinance is
defined as microfinance services granted by formal and semi-formal sectors.
Morduch (1999): “Microfinance is defined as the provision of small-scale
financial services for the poor”.
Dasgupta and Rao (2003): “Micro-finance is a financial service of small
quantity provided by financial institutions to the poor. These services may include

16
credit, savings, insurance, leasing, money transfer, etc. that are provided to clients to
meet their financial needs.”
- Microcredit
The Microcredit Summit (1997): “Microcredit is a program which extend
small loans to very poor people for self-employment projects that generate income,
allowing them to care for themselves and their families”
Ault and Spicer (2008): “microcredit is a model of lending that give small
loans to the poor who lack access to formal financial institutions”.
Dash (2012): “Microcredit symbolizes small loans extended to very poor
people for self-employment projects that generate income, allowing them to care for
themselves and their families”.
2.1.2. Characteristics of microcredit
Literature document that microcredit may include the following attributes:
(1) Small loan size. The term “small loan" may vary in each country. In
Vietnam, amount of formal microcredit ranges from less than 10 up to 100 million
VND (Khoi et al, 2013; Thanh, 2017; Thanh & Dung, 2017).
(2) Targeting the poor. Microcredit targets the poor and low-income
households (Morduch, 1999; Du, 2004; Dasgupta & Rao, 2003)
(3) No collateral. Collateral is normally required to reduce default risk by the
formal lenders. However, the poor lack of assets for collateral, which inhibits them
from accessing formal credit. Microcredit is collateral-free, which thereby increases
the poor’s accessibility to credit (Li et al., 2011a; Thanh, 2017).
(4) For investment purpose. Borrowers may use microcredit to invest in
either farm or on-farm activities (Khandker & Koolwal, 2016).
(2) High interest rate. The rate may vary from 15 to 35 percent per year.
However, Li et al. (2011a) state that rural households in China prefer microcredit to
other credit because of its affordable interest.

17
(6) Group-lending scheme. Due to no requirement for collateral, following
this scheme, the members of credit group will monitor the others and be responsible
for the latter’ repayment. If a member defaults the loan, the remaining members
may have difficulty in obtaining the loan from the program in the future. Group-
lending scheme is considered as a “social collateral”. Accordingly, the lenders can
reduce risks of default by the borrowers and transaction costs (Anderson & Nina,
2000; Besley & Coate, 1995).
(7) Targeting women. Around 74 percent of all microcredit borrowers in the
world are women (Cheston & Kuhn, 2002). Thenceforth, it indicates that
microcredit programs mostly target female clients.
Based on the characteristics of microcredit and the availability of data, in this
research, microcredit used for analysis of the first three objectives is defined as
small amount (less than 100 million dong) from formal sources, used for the
purpose of production or self-employment. For the final research objective, the
purpose of microcredit is extended, including for consumption.
2.2. Theory
2.2.1. Overview of rural credit market
Credit markets are intermediation between savers and borrowers. Credit
markets are characterized by such problems as risk and information, and they are
distinguished from good and services markets (Hoff and Stiglitz, 1990, 1997).
Similar to credit market in general, rural credit markets are normally imperfect and
more so in the less developing countries (LDCs). Some plausible explanations are:
• The transaction of ‘buying’ (borrowing) and ‘paying up’ (repayment) are
made separately in time. Normally, ‘buying’ process is made beforehand; the
repayment is made latter (normally, after the investment cycle). That is,
many livelihood strategies, especially agricultural production are spread over
time, in particular farmers invest today, but reap outcomes tomorrow.

18
• Lenders are unable or have limited ability to monitor what borrowers do with
a loan (e.g. use for too risky projects or for wrong purposes). There is a
possibility of default because borrowers may be unable to repay due to
uncertain outcomes in agricultural production, loss in business or losing jobs.
In some cases, if borrower feels better off not returning the loan, he will not.
The problem of willing to repay occurs if contract enforcement is weak, and
taking borrowers to court tends to be costlier. Another reason is that the
borrower’s liability is limited, When the borrowers default the loan, credit
officers may share a part of liability.
• Due to imperfect information, inability or limited ability to monitor and
possibility of default, there exists large share of informal credit providers in
developing countries. This is because informal sector has stronger
enforcement and better information and monitoring.
In rural credit market, lenders seem to be more careful than borrowers.
Lenders are, especially informal lenders, use indirect or direct screening
mechanisms to address problems of incentives and enforcement. To prevent adverse
selection or/and moral hazard, the lenders normally screen and monitor the
borrowers, obtain collateral from borrowers; or threaten to reduce the future loan.
• Borrowers differ in their probability of default, and it is costly to specify the
risk level for each borrower. This problem is conventionally known as
screening. Lenders screen the borrowers regarding the available information.
• It is costly to make sure that borrowers take actions which make higher
probability of repayment. This is called incentives problem.
• It is difficult to make repayment compulsory. This problem is known as
enforcement.
Rural credit market in developing countries is characterized by the variation
in interest rate. The annual interest rate in rural area of LDCs is normally higher
than that of developed countries. Informal sector charges higher rate than formal
sector; for instance, Siamwalla et al. (1990): study of rural credit markets in

19
Thailand, found informal sector annual interest rate to be 60% whereas formal
sector rate ranged from 12-14%. This may be explained partly by monopoly.
Informal credit provider can charge different interest rate on different borrowers
using price discrimination strategy. Monopoly power is established by natural entry
barriers which is reflected via transaction cost. However, monopoly power of
informal lender is restricted because of the presence of formal sector (for instance,
public banks) and recently the semi-formal sectors.
Borrowers can borrow only up to a limited amount at a given interest rate,
and will not be granted a greater amount even if they are willing to pay higher rate.
The poor normally face difficulties in borrowing at any interest rate. This indicates
that credit market does not follow standard demand-supply equilibrium.
In credit market, sources of demand for credit include (1) Fixed capital for
new startups or expansion of production (machines, buildings); (2) Working capital
for on-going production because of time lag between putting in inputs and reaping
outputs; and (3) Consumption credit for consumption smoothing. Among them,
fixed capital is mainly vital for overall growth and working capital and consumption
credit are important for agricultural population.
Poor people normally face difficulties in accessing credit, especially formal
credit. The reasons for loan application rejection may be due to the poor’s lack of
collateral to ensure their loan repayment ability, imperfect information between
them and lenders and high transaction and administrative cost. Moreover, lending to
the poor may be riskier since they may lose everything if they encounter
unanticipated shocks (i.e. health, natural disaster). Therefore, the big question is
whether the poor should be crowded out of rural formal and semi-formal credit
market? The answer should be no since it involves efficiency of capital problems.
When the market is perfect, the allocation of credit will not rely on the
wealth, but rather on the marginal return of capital. In order to attract lenders, the
poor without initial capital will be willing to accept higher interest rates. However,
when market is imperfect, it is difficult to eliminate such problems as moral hazard

20
and adverse selection (Armendáriz & Morduch, 2005). The formal lenders (i.e.
banks or financial institution) cannot ensure that the borrowers will use loans for
right purpose, or repay the debt since the loan granted to the poor are collateral-free.
Therefore, the formal lenders will tend to charge high interest rates, which may
drive good borrower out of the rural credit market, especially formal sector.
When being excluded from formal credit sector, the poor will seek for an
alternative informal source of borrowing, for instance, relatives, friends,
moneylenders, employers, and the rotating savings and credit associations
(ROSCAs). In 1950s - 1980s, many governments in the developing countries
attempted to intervene in the rural credit market by establishing rural state-owned
banks to support farmers, especially the poor farmers (Morduch, 1999). However,
heavy subsidies, political interests and corruption have inhibited the viability and
success of these institutions. Loans were also diverted away from the poor
(Panjaitan-Drioadisuryo & Cloud, 1999; Armendáriz & Morduch, 2005). Therefore,
microfinance is considered as a solution to credit constraint for the rural poor.
2.2.2. Asymmetric information
The rural credit market plays significant role in agricultural production and
rural development in developing countries. Formal rural credit market is typically
characterized by the disequilibrium of demand and supply, particularly excess
demand. As a result, only a certain number of households who demand for credit
can access to formal sources. However, in reality, shortage of credit is not simply
attributed to excess demand but to asymmetric information.
Asymmetric information is a situation in which one party has more or better
information than the other party. The later may possess no information or wrong
information about the goods or service in translation. Theory of asymmetric
information is initiated by Akerlof (1970) and then developed and researched by
Spence (1978) and Stiglitz (1975). Asymmetric information may lead to adverse
selection and moral hazard. Asymmetric information theory is applied in many

21
fields and researched by many authors. This section presents this theory associated
with credit market. Asymmetric information in credit market occurs when there is
difference in information possessed by the lenders and borrowers.
Adverse selection normally occurs before moral hazard; that is, when the
lenders accept to provide borrowers with the loan. Borrowers often conceal the
information that may cause disadvantages, such as real income, current debt,
motivation of borrowing, etc. This may lead to the fact that the households who are
really in need of credit cannot access to the load or granted with an amount less than
their demand. Meanwhile, some households who are not really in need of credit can
access to full amount. The consequence may be bad to both parties: (1) The lenders
may face risk of bad debt or their credit programs may not serve target customers,
for instance the poor; (2) The borrowers cannot borrow from the credit programs.
The adverse selection problem arises in the screening process where
transaction costs are associated with distinguishing between good and bad
borrowers. This borrowing cost may be reflected and compensated by interest rate.
Greater interest rate may compensate for high transaction cost in small loans, which
thereby drive out good borrowers. Accordingly, only potentially-bad borrowers can
borrow. This may drive out the target borrowers of the program, for instance, the
poor who are normally unable to pay for high interest rate.
Moral Hazard is associated with monitoring and enforcement mechanism.
The moral hazard occurs when the borrowers may not take effort to repay their loan
since they know the lenders share part of the liability (Pham & Lensink, 2007).
Therefore, these lenders tend to link default risk to household related characteristics,
particularly lender-borrower relationship and social norms. As a result, only a
proportion of rural households are unable to obtain credit or borrow an amount less
than demanded from formal sources. This credit rationing leads to the problem that
many rural households face credit constraints regardless of their repayment
capability (Armendáriz & Morduch, 2005). In other words, lenders decide whether
they should grant the credit and how much to grant on the basis of information on

22
the borrowers that they have, thus not all borrowers will receive the loan that they
apply for or receive the full amount applied.
To address the problems of adverse selection and moral hazard arising from
imperfect information between financial institution and the rural households, the
lenders usually require collateral to loans. The purpose of collateral requirements is
to improve creditworthiness and solve the incentive and enforcement problems
(Klein et al., 1999). Land (especially residential land), house, durable assets or
savings are always preferred collaterals when households apply to borrow from
formal credit sources. However, such collateral requirement becomes more stringent
since the borrowers are normally resource-poor. In some case, agricultural land or
productive durable assets may indicate the rural households’ capacity of production,
which thereby increase their creditworthiness and ability of repayment.
Since one merit of microcredit programs is collateral-free, in South Asia,
high interest rates and loan costs reflect information costs of dealing with adverse
selection, monitoring costs to avoid moral hazard, and the default risk of borrowers
(Adams et al., 2003). However, the higher interest rates are, the more probability of
adverse selection and moral hazard effects it could lead to (Morduch, 1999; Cull et
al., 2007). To resolve this dilemma, group-based lending practice, a merit of
microcredit, has been implemented. Group-based lending is based on joint liability,
which helps to increase the effectiveness of transactions, lower transaction costs,
improve the outreach of microcredit programs as well enhance loan repayment. In
other words, group-based lending may reduce any adverse effect or transaction cost
derived from asymmetric information. In particular, for the problem of adverse
selection, as the group normally include members who know well about one
another, the group will help the microcredit lenders to screen the eligible potential
clients and also reduce transaction cost. In addition, when any members defaults, all
the group may be liable for this and make up the repayment amount, because if they
do not fulfil such liability, they cannot obtain or apply for the next loan. The

23
incentive to repay the loan is based on peer pressure. Therefore, it helps to reduce
the moral hazard.
Using asymmetric information theory, this study will answer the Research
question 1. In particular, this study focuses on whether the households of less
advantaged groups (e.g. the poor, women, etc.) can have better accessibility to
credit, as these groups are normally target clients of microcredit programs.
2.2.3. Theories on accessibility to credit
Credit market follows the sequential two-stage lending process, where an
agent (e.g. household, firm) with demand for credit apply to borrow at the first
stage, then lenders will decide to choose whether and how much to grant the at the
next stage (Aleem, 1990). Therefore, accessibility to credit, including microcredit,
can be conceptualized as a sequential two-stage decision making process that is
initiated at the demand side, and then followed by supply side (Zeller, 1994; Li et
al., 2011a; Khoi et al., 2013). This research will discuss theory of choice and credit
rationing theory and as “loadstars” for the analysis of accessibility to credit.
2.2.3.1. Theory of choice (Demand for credit)
At the first stage (demand), an individual or a household wants to maximize
his or her expected utility from the decision whether and how much to borrow
(Zeller, 1994). Loan has its own opportunity cost which is reflected via the interest
rate and thereby the individual or household’s decision on whether to borrow or not
is a rational choice based on demand theory.
Discrete choice model is defined as a model that determines the probability
of a certain choice as a function of the utility derived from that choice (Cramer,
1991). Discrete choice analysis employs the principle of utility maximization (Ben-
Akiva & Lerman, 1985). An agent will choose the option with the highest utility
among those available choice set when making decision. Accordingly, the
probability that an option is selected is considered as the probability that the option

24
may yield the greatest expected utility among other options (Train, 2009; Ben-
Akiva and Lerman, 1985).
Supposed that there are two options a and b in a set of options (Om). Let Uia
and Uib denote the utilities that agent i gains from option a and b, respectively. An
agent will choose option i if Uia > Uib. Accordingly, follow (Li et al., 2011a; Ben-
Akiva and Lerman, 1985) the probability that agent i select option a from Om is
expressed using the following equation:
Pr (a| Om) = Pr (Uia > Uib, ∀ a, b∈Om and a ≠b]
Similarly, if agent i choose option b, then the function is as follows:
Pr (b| Om) = Pr (Uib > Uia, ∀ a, b∈Om and a ≠b]
It is noted that demand theory has been applied in many researches which
investigate the choice of an agent. Therefore, demand theory can be also useful for
investigating the demand for credit (the first research objective) and households’
decision toward adoption of agricultural technology (second research objective).
For the first objective, households i will decide to borrow when utility from
borrowing is greater than utility from non-borrowing. Similarly, for the second
objective, households i will decide to adopt when utility from adoption is greater
than utility from non-adoption.
2.2.3.2. Theory of credit rationing
Credit is a scarce resource due to the availability of credit. Accessibility to
credit is not simply explained by demand theory due to the fact that credit is
rationed under asymmetric information (Stiglitz & Weiss, 1981).
Stiglitz and Weiss (1981) introduce the credit rationing theory on the basis
two primary assumptions: i) lenders are unable to differentiate risk level associated
with good (safe) and bad (risky) borrowers, and ii) loans are subject to the limited
liability of borrowers to repay loans (i.e., if the returns from investment are less than
the debt obligations, the borrower bears no responsibility in paying out of pocket).

25
Credit market does not simply the theory of supply and demand as typically
described in markets of other goods and services. Suppliers (i.e. lenders) can not
simply use market price (interest rate) to charge the clients (i.e. borrowers) for the
quantity demanded (amount of loan). In other words, lenders cannot simply increase
equilibrium interest rate in the credit market because lenders do not have sufficient
information on the risk that borrowers will default their loans. Thenceforth, at the
second stage, lenders tend to ration the loans that will be granted to borrowers. In
other words, lenders will make their decision on whether the loan should be
provided, and then the amount to be granted, based on the lenders’ perception on the
clients’ credit-worthiness or repayment capacity (Aleem, 1990).
Stiglitz and Weiss (1981) initiate credit rationing theory to explain the reason
why some households can get the loan while the other can not. Credit providers are
able to judge the borrowers’ credit-worthiness based on the available information
during the screening process. Without sufficient information, information
asymmetry may lead to at least two popular problems: adverse selection and moral
hazard. Adverse selection occurs during the screening process when lenders tend to
favor “good” borrowers but crow out the target clients (Khoi et al., 2013). Moral
hazard arises after the loan is granted. The borrowers may not make effort to repay
the loan since they perceive that the lenders may share the risk (Islam, 2007; Pham
& Lensink, 2007; cited in Khoi et al., 2013). In general, imperfect information will
affect the lenders’ decision on whether and how much credit will be granted. As a
result, not all households can get the loan or the amount that they demand.
When analyzing credit rationing, it is important to know the households’
rationing status. Feder (1990) define the borrowers who demand for more credit and
the non-borrowers who could not obtain credit are classified as credit-constrained,
and the remaining households are the unconstrained. To examine rationing status of
farmers, Jappelli (1990) employs a qualitative approach based on directly asking the
applicants and non-applicants about their borrowing experience. Applicants are
categorized into such groups as: (1) If they desire to borrow more, which indicates

26
an excess demand, they are partially credit-rationed; (2) Applicants who did not
obtain any loans are classified as completely rejected. As for the non-applicants, (3)
if they had intention to apply for credit but did not apply since their application
might have been rejected, they are classified as discouraged non-borrowers. All
these group are considered as credit-constrained. Similarly, Baydas et al. (1994)
and Zeller (1994) identify four group of respondents. The constrained borrowers are
divided into such groups as: (1) completely rejected, i.e. those who apply to borrow
for a loan but unable to obtain; (2) unsatisfied, i.e. those who apply and are granted
with a loan less than demand. The unconstrained include (3) satisfied, i.e. those who
obtained full amount demanded; and the (4) non-applicants i.e. those who do not
apply to borrow.
Following Jappelli (1990), Feder (1990), Baydas et al. (1994), Zeller (1994)
Ali et al. (2014), applicants and non-applicants can be categorized into five groups.
Figure 2.1 describe in details the procedure to classify such groups.
Sample
Apply to
borrow
Not Apply
to borrow
Rejected (Constrained)
Partially granted
(Constrained)
Fully granted
No Demand
(Unconstrained)
Demand but not
qualified to borrow
(Constrained)
Desire to borrow
more
(Constrained)
Not desire to borrow
more
(Unconstrained)
Figure 2.1 – Credit constraint and unconstraint
Some main reasons for credit constraints in rural areas are (1) Too high
interest rate; (2) No collateral; (3) Fear of collateral loss; (4) No lenders; (5) Not
know where to borrow; (6) Fear of being rejected; (7) Don’t like to be indebted or
go deeper into debt. Since one merit of microcredit is collateral-free, the reasons for

27
being constrained when applying to borrow from microcredit sources exclude (2)
No collateral; and (3) Fear of losing collateral.
Using theory of accessibility to credit, this study will answer the Research
question 1. In this research objective, the sample is also divided into the poor and
the non-poor for further investigation. The rational for this decomposition is that the
poor is normally credit constrained than the non-poor, which may make the
determinants of accessibility to credit have different effects among two group.
2.2.4. Theoretical framework of outreach of microcredit
Assessment on the performance of microfinance organizations have been
relied on the concepts of outreach and sustainability (Yaron, 1994, cited in Navajas
et al., 2000). Outreach and sustainability are expressed in terms of the theory of
social welfare. At first glance, outreach indicates the number of clients served.
However, according to Meyer (2002), outreach is multi-dimensional concept and we
need to look in to different aspects when measuring outreach. Outreach is normally
proxied by gender or poverty of borrowers, loan size, loan terms, transaction costs
incurred by borrowers, number of borrowers, the financial and organizational
strength of the lender, and the number of services provided by lenders. Outreach is
considered as social value of the output of microfinance institutions and measured
by six aspects including depth, worth to users, cost to users, breadth, length, and
scope (Navajas et al., 2000).
• Depth of outreach is "the value the society attaches to the net gain from
the use of the microcredit by a given borrower". This measure is to
identify the poor or/ and women clients since society seems to value the
net gain from a small loan for the poor or female clients more than the
same gain for the rich or male clients. The poor may have difficulty in
accessing credit from formal sources since they have no collateral or fail
to signal their repayment capacity (Conning, 1999). Similarly, women
normally face more difficulties than men in accessing the loan. The

28
number of the poor and women clients serves by MFIs may be considered
as criteria of outreach. Therefore, poverty and gender are good proxies for
outreach.
• Worth of outreach to users refers to the amount that borrowers are willing
to pay for a loan. Worth relies on the loan contract and tastes, constraints,
and opportunities of borrowers. More worth will mean more gain, given
cost to borrowers constant.
• Cost of outreach to users refers loan-related costs incurred by borrowers.
These costs may include: (1) price (interest rate and fees); and (2)
transaction costs in forms of loan-related cash expenses such as
documents, transport, communication, postal, taxes, etc. or/and non-cash
opportunity cost such as value of time to access and repay the loan.
Among these costs, only price paid by borrowers is revenue for lenders,
while transaction cost is not.
• Breadth of outreach means the number of borrowers. Breath is important
since the demand of the poor normally exceeds the supply of aid dollars.
• Length of outreach indicates the time frame in which an MFI produces
loans. Length of outreach is important since the society care about both
short- and long-term welfare of the poor. Without length of outreach,
MFIs only enhance the short-term welfare of the poor, but not their long-
term welfare.
• Scope of outreach is the number of types of financial contracts offered by
an MFI.
Using this theory, especially the depth of outreach and cost of outreach to
users, this study will answer the Research question 1. Using the concept Length of
outreach, this study will answer the Research questions 3 and 4 using panel data.

29
2.2.5. Farm household model under credit constraint
In economic theory on agricultural (farm) household model, the problems of
decisions on production, consumption and labor supply (leisure) are normally
analyzed separately through the behavior of three classes of agents (Singh et al.,
1986; Sadoulet & de Janvry, 1995).
• Producers: Ones who optimize profit in regard to the volumes of products
and factors of production, subject to constraints determined by market prices,
fixed factors (assets and infrastructure), technology, etc.
• Consumers: Ones who optimize their utility in regard to the levels of goods
consumed subject to constraints determined by market prices, income,
household-specific characteristics, preference, etc.
• Workers: Ones who maximize utility in regard to income and leisure (home
time (or home time) subject to the constraints determined by the market
wage, total time endowment available and worker-specific attributes.
When the three decisions are separably made, they are expressed by the
following separate models.
2.2.5.1. Producer problem
As producers, farm households are assumed to maximize the following profit
equation:
Max = p q − p x − wl
q ,x,l a a x
a
Subject to the following production function:
g(qa , x,l; Z p
) = 0
Where, qa and pa denote quantity and market price of product a produced,
respectively. x and px denote quantity and market price of production factor x used,
respectively. l and w denote quantity and market price (wage) of labor used,
respectively. Zp
represent fixed factor and producer characteristics (fixed capital,
farm size, ability, infrastructure, etc.).

30
2.2.5.2. Consumer problem
As consumers, farm households are assumed to maximize the following
utility equation:
MaxU (c , c ; Z c )
m
c ,c a
m
a
Subject to the following budget constraint:
pa ca + pmcm = y
Where, ca and pa denote quantity and market price of product a (agricultural
goods) consumed, respectively. cm and pm denote quantity and market price of
product m (manufactured goods) consumed, respectively. y is disposal income. Zc
represents households-specific characteristics (household size, number of children,
elderly or women, etc.).
2.2.5.3. Worker problem
As workers, farm households are assumed to maximize the following utility
equation:
MaxU (cl , y; Z w
)
cl , y
Subject to the following income constraint:
and time constraint:
These two constraints can be merge into
constraint) as follows:
y + wcl = wE
y = wl s
c + l s = E
l
one equation (full income
Where, cl denotes leisure time (home time). ls
and w denote time worked and
market price (wage), respectively. E is total time endowment availability. y
represents disposal income. Zc
denotes worker characteristics.
Singh et al. (1986) state that under standard household model where
decisions on production and consumption are assumed to be made separably. That

31
is, under separability, decisions on the use of resources (for instance, capital) for
production can be taken independently of consumption decisions.
However, separability breaks down when there is a market failure such that
decisions on production and consumption would be made simultaneously.
The three problems (Producer, consumer and worker) must be integrated into
one single household problem.
Max U (c , c , c ; Zh )
q ,x,l ,c ,c ,c a m l
m
a a l
where, Zc
denote farm household characteristics.
Subject to:
Production function: a
, x, l; Z
p
) = 0
g(q
Full income constraint:
p c + p c + wc = + wE
m m a a l
where Full income constraint is collapsed from:
p x + p c + p c + wl = p q + w(l )
: Cash Constraint
x m m a a a a s
l s
+ c = E : Time constraint
l
= p aq a − pxx − wl : Profit function
2.2.5.4. Farm household model with credit
Since the primary objective of this research is to analyze the accessibility to
microcredit and its effects on investment portfolio and welfare, this section presents
the effects of credit constraint on optimal resource allocation. In order to
conceptualize the relevant credit market problem, the theoretical analysis is based
on draws on the existing literature on static farm household model.
As above-mentioned, farm households are assumed to optimized the
following utility function:
Max U (c , c , c ; Zh )
q ,x,l ,c ,c ,c a m l
a a m l
The limited access to capital prevents the households from participating in
the markets. With access to credit, the households are able to invest in the fix assets

32
and to be active in the market (Duong & Izumida, 2002). Agricultural production
requires financing for production factors. To meet liquidity requirements for input
purchases, the household can take a credit (K). The utility function is then
optimized under the following constraint:
Production function: g(qa , x, l; Z
p
) = 0
Full income constraint with credit:
p c + p c + wc = + wE + K
m m a a l
Where, K denote Credit, including microcredit.
Using this theory, this study will answer the Research question 2. The study
also examines the role of microcredit in adoption of improved varieties for the case
of poor and non-poor samples, as the poor are more credit constrained.
2.3. Empirical studies
Since four specific objectives are included in this research, this section, in
succession, will present empirical studies relevant to those four objectives.
2.3.1 Determinants of rural households’ accessibility to microcredit
As presented in Section 2.2.3, it can be conceptualized the sequential lending
process that is initiated at the demand side, and then followed by supply side
(Zeller, 1994; Li et al., 2011a; Khoi et al., 2013). In particular, at the first stage,
households with demand for credit will apply for borrowing, and then, at the second
stage, the lenders will decide whether and how much credit is granted. This
conceptualization facilitates empirical studies and enables empirical models to be
estimable. Zeller (1994) states that the borrowers and lenders may make their
decision simultaneously and the lending process may occur at any stages.
Attributes of credit itself, household heads (for instance, age, education,
marital status), households (labor, land, poverty status, assets), commune
(infrastructure, supporting programs) and financial institutions (procedure, interest)
are hypothesized to affect households’ demand for microcredit, which can directly
influence households’ accessibility to credit. As discussed in the previous sections,
accessibility to credit can be conceptualized as a sequential decision-making

33
process that is initiated at the demand side (Zeller, 1994). This conceptualization is
considered as a standard framework for analyzing the accessibility to credit. Many
empirical studies investigate the determinants of accessibility to credit, including
microcredit; however, the results are mixed.
Education level. Quach and Mullineux (2007), Barslund and Tarp (2008), Li
et al. (2011a) and Revindo and Gan (2017) find that higher education level can
fosters households’ accessibility to microcredit program. With more education,
households may possess more skills and knowledge, and be more exposed to risk,
thereby increasing their demand for credit. However, Khandker (2001, 2005) and
Nguyen (2007) state that higher education level of household head results in lower
probability of microcredit participation, as with better education, the households
may be wealthier off, thereby reducing their demand for microcredit.
Age of household head. Older household heads are less likely to borrow
from formal credit programs (Anjugam & Ramasamy, 2007). The older households
head tends to be more risk averse, and thereby less demand for credit. However,
Doan (2010) argues that the age has positive effect on accessibility to credit.
Meanwhile, Barslund and Tarp (2008) find no effect of age on accessing credit.
Marital Status. Accessibility to credit, including microcredit, is found to be
higher for the case of married individuals and vice versa (Doan, 2010; Khoi et al.,
2013). Single individuals are normally considered as disadvantaged group with less
social networks, which thereby are less likely to borrow from formal credit.
Gender. Banerjee et al (2010) and Khoi et al. (2013) find that there are a high
proportion of male borrowers from microcredit sources in the rural areas. In rural
areas of developing countries, men are normally the household heads and the main
decision makers with more social capital and. They may represent the whole family
when borrowing from formal or semi-informal sources, while women are less
empowered. Therefore, men tend to be more accessible to credit. Meanwhile,
Salgado and Aire (2018) find that female borrowers obtain more credit than men. A
research by Barslund and Tarp (2008) in Vietnam argue that women are more likely

34
to access microcredit than man. In reality, some credit programs have the purpose of
empowering women, thus women may be their targeting client rather than men.
Social Capital. Fafchamps (2000), Okten and Osili (2004), and Udry (1994)
find the significant role of relationship and social capital in accessibility to credit
sources, especially in the developing countries. Social capital may help reduce cost
of monitoring and enforcement for the lender, thereby increasing the accessibility to
credit (Okten & Osili, 2004). In Vietnam, there has been lack of studies
investigating the role of social capital in fostering accessibility to microcredit.
Household Size. Schreiner and Nagarajan (1998), and Ho (2004) state that
number of members in a household is positively associated with the probability of
accessing to credit programs, including microcredit. In Vietnam, Doan (2010) and
Nguyen (2007) also find that household size may increase households’ likelihood of
accessing credit sources. In contrast, Li et al. (2011a) and Revindo and Gan (2017)
prove that households with more members are less likely to access to microcredit
sources. More household size indicates more labors, thereby it may increase the
demand for credit and then access to credit. However, more household size may
also indicate more dependency ratio, which decreases the accessibility to credit.
Dependency Ratio. Husain (1998) finds that households with higher
dependency ratio have lower probability of accessing to microcredit due to their less
repayment capability. Meanwhile, Li et al. (2011a) state that dependency ratio
positively affects the participation in microcredit. In the case of Vietnam, Duong
and Izumida (2002) confirm that households with more dependents have higher
opportunities to borrow from credit sources. Higher dependency ratio may indicate
lower potential income per capita, thereby increasing their accessibility to
microcredit, as they may be considered as targeting clients.
Ethnicity. Becker (1971), Yinger (1998) and Fafchamps (2000) find that
main ethnic groups have higher accessibility to credit program, including
microcredit. On that basis, for the case of Vietnam, it may be inferred that that Kinh
households may have higher opportunity of borrowing from microcredit sources.

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