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 system’s outreach to the newly emerging private sector and household 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, particularly the poorest, which are often identical to ethnic minorities, seem to have been bypassed by both banks. Furthermore, the strategy pursued by national rural financial policy has focused mainly on credit supply. Other financial services that potentially have a deeper outreach, e.g. savings products, have been neglected in the development efforts of the government and its development banks. The overall objective of this research study was to create knowledge on the factors that impede or support access of rural households 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 household level. Joint analysis of the three levels is therefore appropriate. This implies different methodologies and data collection methods. The data collection took place between March 2001 and 2002 in two provinces of Northern Vietnam. In total, 260 households were surveyed. In addition, several participatory methods were applied at all levels to collect qualitative data. Furthermore, secondary data was collected from relevant financial intermediaries and administrations. This cumulative thesis is divided into four main sections investigating different levels of the system and applying different methodologies. The second section reviews the transformation process of the financial system in Vietnam with special attention to the rural financial market. Methodologically, an in-depth literature review is carried out, supplemented by anecdotal evidence gathered during the field research. In the third section, the information polices of the VBP as the main supplier of credit to the rural poor in Northern Vietnam are investigated by means of an information economics analysis. Methodologically, secondary data from the VBP and the local administration are combined with qualitative evidence from the intermediary and household level. The fourth section analyzes the poverty outreach of the formal financial intermediaries using a Principal Component Analysis, and it analyzes household access constraints to formal credit using a binary logit analysis. Both analyses are based on quantitative household data. In section fifth, client-adapted financial services are developed using a Conjoint Analysis approach, which is a marketing research tool and combines quantitative and qualitative data in its analysis. The rural financial market in Vietnam is still dominated by the aforementioned highly subsidized state-owned financial intermediaries, impeding the establishment of any viable financial services and hampering innovations. 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 nonperforming loans is spreading to the private sector – including rural households. Apart from representing macro-economic threats to the financial system, this moral hazard behavior is hindering the establishment of any viable rural financial intermediation. The breadth of outreach of the formal rural lenders is immense. However, the poorest households 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 households 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 households. A more promising approach would be to introduce a specialized pro-poor extension service to widen the scope of their investment ideas, combined with a general improvement in the infrastructure. A good market connection serves credit outreach in a twofold manner: First, households have better access to credit-relevant information; and second, through better market access they may find new investment opportunities. Nevertheless, the number of access-constrained households 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 of the formal lenders. Nevertheless, some barriers to access continue to exist, particularly for ethnic minorities or female-headed households. To reduce these access barriers, locally-oriented actions should be taken, catering to the specific needs of those households which lack access. The establishment of the VBSP represents an attempt to broaden access in general. But it is questionable whether households 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 fringe groups, such as ethnic minorities or female-led households, about credit application procedures. The supply of essential credit information to these groups is impeded by the supply-oriented flow of information and by relying for the dissemination process on local authorities, which favor the ethnic majority. 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 households. 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 households into the formal financial system would be mobilization of savings by providing adapted services.


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