Analysis of the Informal Credit Sector in Vietnam

Tran Tho Dat

Under central planning, informal financial markets in Vietnam were repressed and information on them were very scant. The financial liberalization in 1989 contributed to a resurgence and growth of informal financial markets. Recent studies have revealed the fact that the informal sector provides the bulk of financial intermediation.

In the Vietnam context, there are four types of major informal financial participation:

  • mutual lending among family members, relatives, friends and neighbors.
  • formation of self-help groups (my fieldwork shows there are two types of self-help groups: one organized with the help of a NGO and/or a formal credit institution, operating in the link with that institution, and one organized by the participants themselves and operating as a rotating savings and credit association- ROSCA).
  • moneylenders.
  • traders ( in Binhluc district, Namha province, a trader can either be private or a service group in cooperatives. A trader can work both as a specialized one and a local moneylender).
In the MAFI (Ministry of Agriculture and Food Industry) survey covering 7 provinces in 1990, between 68 and 94 per cent of farm household received credit from informal sources, averaging 68.3 per cent during the preceding year (Seibel, 1992). The VLSS (Vietnam Living standard Survey) provides evidence of reliance of rural household on informal market: about 73 percent of the total loans of households were obtained from informal sources of which moneylenders accounted for 33 per cent while friends and relatives accounted for 40 per cent of total loans. In my fieldwork in Binhluc district it has been found that 23 percent of the total household in the district have taken loans from VBA and/or PCFs; 60 per cent from informal sources and 17 percent have been non-borrowers during last 12 months. The survey in Binhmy town, Binhluc district, indicates that total 28 household surveyed have undertaken 68 credit transactions of which 27.9 per cent from VBA/PCF (Vietnam Bank for Agriculture/ Popular Credit Fund), 22 per cent from relatives and friends and 50.1 per cent from moneylenders and traders.

According to Seibel, Boi and Hung (1992), all funds in the informal market are locally mobilized and it is very hard to measure how much credit funds is mobilized. My fieldwork in Binhluc has revealed that many large loans (up to 250 mil. dong) from VBA were used by traders to advance agriculture inputs (fertilizer, pesticide, etc) and relent.

Who participate in the informal market? Literature claimed that due to lack of collateral, lack of knowledge and understanding VBA policy, poor households have to seek for their credit from the informal sources. Actually, many segments of rural population participate in informal arrangements. Since VBA doesn't provide consumption loans, all credit needs for consumption are satisfied by the informal lenders. The rural poor borrow from relative, friends, and neighbors and if they are rationed out by these sources of credit, they have to rely on moneylenders and traders for their emergency consumption such as illness, funeral, and wedding. Since the formal market is characterized by low nominal interest rates and high transactions costs, while the inverse is true for the informal market, those who require small loans even for production efficiently borrow from the informal markets. It is estimated that if a farmer only grows rice and raising animal (pigs, chickens, etc..), he or she needs to borrow about 1 mil. dong for one crop of 5-6 months. With these small loans, a rational farmer would rather borrow from the informal market (see my case studies). Many businessmen who require quick loans (1 or 2 weeks-1 month) also borrow from informal sources. A rich farmer in Binhmy town who raises snakes and baba borrowed 100 mil. dong from VBA, and on average takes another 2-3 transactions of 1- 10 mil. dong from the moneylenders in a market nearby. It is clear that the rural market is segmented in many aspects: purpose of loan, conditions of loan, size of loan, terms and maturity of loans, etc.. The operation of informal financial markets can be described briefly as follows:

Relatives, friends and neighbors lend to each others at negotiated rates depending on social relationships, reputation. Interest rates are recorded low (neighbors) and in many cases(relatives and close friends) are free. Granted labor or grants are common practices. Purpose of loans include: repairing or building houses, emergency consumption such as illness, funeral and weddings, and rarely buying input for production. Loans are in kind or in cash but mostly in kind: paddy, gold, fertilizer. Loans for building are often in kind and for longer terms (1-2 years). Loans in cash are for short term: 3, 6 or 9 months. Terms of repayment are easy to be rescheduled in the case needed. Relatives, friends and neighbors are the first sources of seeking for credit.

Shelf-help groups in the form of ROSCAs were voluntarily set up by members. These associations initially were formed in order to help each other in production and life. This practice existed many years ago and not very common these days. The commercial characteristics of ROSCAs are now more popular through bidding for each round. Funds allocation in Binhluc is done either in cash, rice or gold. Interest rates charged range from 1 per cent in gold to 3 per cent in cash or rice. The other type of sel-help group often has a link with local formal institutions to reduce transactions costs and enhance peer monitoring loans among groups.

In the absence of an effective formal financial system, it is impossible to wipe out the monopolistic power of moneylenders. Experience shows that where the access to formal financial sector is limited, loanable funds are in scarcity, the moneylenders power is strong and they can charge usurious interest rates. In contrast, where the access to formal sector is improved, competition is enhanced, the difference between the rates charged by the moneylenders and the formal sector may only reflect the difference in segmented markets. With the recent increased outreach of VBA (data can be collected from WB report for 1991-95) and other formal financial institutions, it is widely accepted that the interest rates charged by the moneylenders have been reduced. In 1990-92 period, the average rate was 6-7% and the maximum one was recorded as 20% (Hung and Boi, Seibel...). The rates in 1995-96 are recorded as 4-5% on average and the maximum is about 10%. The rates I observe in Binhluc is 3.5-4.5% on average, and the maximum is 10% in the case of selling 'young' paddy . Terms and conditions of loans from the moneylenders are very diversified, flexible and timely. In general, no collateral is needed and they often operate locally. If mortgage/pawn is available, the moneylenders can expand to non-local borrowers. Loans from the moneylenders are characterized by small sizes, satisfying all needs that are rationed out by the formal sector such as emergency consumption, hunger just before harvest (March, September). Procedures are simple and convenient, hence transaction costs are assumed to be zero or very low. The lenders don't pay much attention to the usage of the loans. In Binhluc, the number of moneylenders range from 5-7 in each commune. Loanable funds are diversified: part from local mobilization, part from own capital and part may be from VBA borrowing. There are few specialized moneylenders. They often work as rich, efficient farmers or traders (2 moneylenders in Mythuan commune are those who raise snakes, borrowing 50-100 mil. dong from VBA).

Traders often use the form of 'advancing' inputs. They advance inputs and receive the products with prefixed negotiated rate at harvest. The rates charged by the traders have been also reduced recently. In 1990-92, farmers had to accept lending rate as high as 25-30% or to exchange 10-12 'gia' paddy (20 kg = 1 gia) for 50 kg of urea (SIDA, 1992), but now the popular rate is 100 kg paddy = 50 kg urea or 6-7% (recorded in Binhluc and other recent publications). Note that in many communes, cooperatives now play the role of such traders.

The common complaints about usurious moneylenders appear not to base on an appropriate calculation. As mentioned in my case study, if the loan is below 1 mil. dong, it would be more efficient to borrow from a moneylender as compared with borrowing from a formal source. The VBA would charge virtually identical interest rate as the moneylenders if it were apply sound commercial criteria. Eg. the rate of overnight loans (with mortgage) up to 10-20 days of VBA in Binhluc is exactly the same as the one charged by the local moneylenders (0.3%/day). The new policy regulating the gap of 0.35%/month (4.5%/year) between input and output interest rates just let many VBA branches cover only their administration costs. If there is a default (unfortunately, this often happens in rural area in the case of natural disasters), the banks, of course, need subsidies. Hence, banks have no incentives to expand their loan portfolio in favour of rural poor. It is suggested that giving VBA more freedom, opening up interest ceilings will help VBA increase the number of mobile units at commune level and its outreach to the poor segment of the rural population.

Case study:
Can VBA ( Vietnam Bank for Agriculture) compete with the informal lenders in small loans?

What concerns the farmer in deciding who he'll borrow from is not only the interest payment but the effective cost of borrowing that includes the interest payment and the transactions costs. Normally, the interest rates charged by the formal lender are low, but the transactions costs are high while the inverse is true for the informal lender. Given the interest rates and the transactions costs of borrowing from alternative lenders, if the farmer-borrower requires a small loans he will seek the loan from the informal sources and visa verse. Poor farmers require small loans, thus they often seek their loan from moneylenders.

Mr. Nguyen Huu T. , 48 of age lives in My thuan commune, Binh luc district, Namha province with his wife, two children of school ages, and his father. He served in the army until 1991 and then retired from the army to live with the family. His family's main income now, in addition to his pensions, is from growing paddy. His financial funds for growing paddy and other production activities (pig and chicken raising, fish ponds) mainly come from dishoading salable products (paddy, pigs, perennial trees). His plan for this paddy growing crop, from January to May, 1996 is to grow paddy on 12 sao (1 sao = 360 m2) . His own funds from all sources can, according to his calculation, cover nearly all credit needs. He needs to borrow only 500,000 dong more to buy additional fertilizers for about 3 months. From whom will he borrow ?

A local moneylender who lives in the same village and does a small business in the small town nearby is willing to lend him the above amount with the interest rate of 4 % per month (two times higher than that of VBA). The procedure is very simple: no collateral and only verbal agreement, hence the transactions costs are assumed to be zero. Total effective cost for this 3-month loan, thus is 60,000 dong.

If he borrowed from the VBA, he had to follow all requirements imposed by the VBA branch. The application fee for the loan application forms, the fee for getting the seal from the commune People's Committee is about 15,000 dong. Cigarettes and tea to entertain people involved took him another 20,000 dong. The 'out of pocket' expenses are therefore 35,000 dong. The interest payment for three months is 26,250 dong (1.75 % per month).

In addition to these expenses, he had to wait about 3 days to complete all required procedures. Nearly one day would be gone for him to come to the VBA branch to take the loan (he lives 8 kilometers far way from the Branch). He counted that the total time actually forgone in seeking the loan if he tried is 2 working days. Without seeking the loan from VBA, he could have used these 2 working days helping his friend to repair a house in exchange for a future labor. He said the popular wage rate per day in the region was 10,000 dong. Hence, if taking into account the opportunity cost of the forgone time, another 20,000 dong should have been included.

The effective cost of borrowing from the VBA branch is thus 81,250 dong, which is far beyond the effective cost of borrowing from the informal lender in the region.

The effective rate of borrowing to Mr. T from the informal lender is 4 % per month while that of borrowing from the formal one is 5.4 % ( = 81250/3/500000*100). Suppose the transactions costs (55,000 dong) are unchanged, the effective rate of borrowing from the formal lender would be reduced when the size of the loan increases. At the loan size of about X = 2,200,000 [ fn-1 ] dong Mr T. would be indifferent in borrowing from two alternative lenders. For Mr. T, if the desired loan is smaller than X, he would seek the loan from the informal soures. Otherwise, he would try to get the loan from VBA.

Credit schemes targeting the poor in Vietnam.
Studies [ fn-2] of mainstream rural credit institutions in Vietnam have proved that they cannot easily serve the credit service requirements of the poor. In response, a number of credit schemes of domestic credit institutions and some donor-funded programmes targeting credit to the poor are being implemented in Vietnam. This section will review the role of such programs in reaching the poor in an attempt to provide documentation for the next section.


Recognizing the fact that poor farmers have the weakest access to formal credit and obtain most credit through the informal market at much higher interest rates than those offered in the inaccessible formal sector and in accordance with the government's Poverty Alleviation Program, credit schemes targeting poor farmers are employed by domestic institutions. Of importance are the VBA's credit schemes for the poor and the Poverty Alleviation Program of the government which is implemented through the Treasury.

1.1 The VBA Credit Scheme

This Credit Scheme has basically been carried out by the VBA on an experimental basis with technical assistance from the Rabobank Foundation of the Netherlands. It started in October, 1992 and was piloted in 4 districts of Ha Bac and Nam Ha provinces with funding amounting to D6.0 billion.

The objectives of the VBA scheme are two-fold: (1) to provide credit to the rural poor to finance production activities which generate income and thus improve their living standard and contribute to poverty alleviation; (2) to establish a credit system whereby the VBA could profit by serving the poor and training the poor to use credit in maintaining and developing their production activities.

The project has been undertaken through joint-liability groups. Members of the joint-liability groups who get the project beneficiary groups should have compulsory monthly savings of D3,000-5,000 per person; and they should contribute to joining the group fund the amount of D20,000-50,000 per person ( Hung and Tai, 1994).

The VBA credit scheme provides maximum loans of D800,000 at regular VBA lending rates. It also allows for flexible repayment of both loan and interest provided that the repayment period does not exceed the maximum six month maturity period.

Apart from this project, VBA provides, in accordance with a government directive, a 15% concession on lending rates to ethnic minorities and borrowers in disadvantaged areas. However, the volume of such concessional loans is not substantial (ADB, 1995).

The VBA, in June 1993, implemented regulation No 723 TDNN which allows poor farmers to borrow an amount below D500,000 without collateral. Instead, they need a certificate from the People's Committee where they live. The VBA has also recently increased its collateral-free limit per borrower from D500,000 to D1.0 million in order to improve the access of poor households to its loans. In addition, with a view to increasing its outreach to the poor, the VBA has established tie-up arrangements with several domestic organizations and has gained some experience concerning lending to the poor through JLGs organized by the Farmer's Association (FA) and the WU. This scheme includes over 70,000 groups with nearly 400,000 borrowers. These groups' total outstanding loans amounted to over $14 million in 1994 (ADB, 1995). The WU which was founded in 1930 as a mass organization has recently given greater emphasis to supporting the income generating activities of poor women by organizing women's savings and credit groups. Since 1990, the WU has on-lent a total of about $16.0 million for more than 16,000 groups with about 220,000 borrowers. The funds for these have come from various sources: about 60% from the VBA, 20% from government and private sources, 10% from savings of group members and the remaining from international donors. The arrangement with the WU is a successful and a sustainable channel to reach women in low income households.

The scheme adopted by the Farmer's Association since September 1991 in Dongson District, Thanh Hoa Province is a pilot-tested one. It relies heavily on funds from the VBA. Under this credit intermediation scheme, the VBA provides funds to the FA in the form of loans. The FA, in turn, on-lends these funds to poor farmers at a spread of 1.0% per month. Fifty per cent of interest income derived from the project is reserved for risk insurance and the operation costs. Though the scheme attempts to mobilize funds from both members and non-members, deposit balance is minimal. The scheme is still being tested as a pilot, and there are no plans to expand the project.

1.2 Poverty Alleviation Program of the Treasury

The Treasury which was established in April 1990, is the government department charged with the government's budget control, accounting of its budget income and expenditure and with the preparation of the National Account Balance Sheet. Under the recent Government of Vietnam Poverty Alleviation program, the Treasury was authorized by the government to implement a credit scheme targeting the poor, mainly in rural areas.

The objective of the program is to provide credit for farm households and economic organizations engaged in developing projects. It planned that other mass organizations like the Blind Association, Veteran's Association, Training Centers, Education Centers, etc, would be included.

This national poverty alleviation programme has been funded D240 billion from the budget under Phase 1 of the Project. Loan applications are appraised by the Treasury at appropriate levels which directly disburse and collect the loans. As a government-funded program, loans are provided at preferential rates. Loans are secured either by collateral assets or through guarantees provided by government agencies with accounts with the Treasury. The program has financed thousands of projects amounting to several billions D (Hung & Tai, 1994).


Previously, international and non-government organizations (NGOs) used to provide support to the poor through the provision of physical aid which came in the form of food aid or production inputs. During recent years, credit has been considered as an important support mechanism in income-generating activities aimed at increasing and sustaining the income of the poor and hence raising their living standards. Therefore, the form of assistance has shifted to the provision of credit for the poor in various models which mostly are being undertaken as pilot schemes.

2.1 Direct Credit Models

The first so-called direct credit model is a mechanism of support in which the assistance of international organizations and NGOs is offered to the poor through the local authorities or agricultural extension agencies. Assistance is often given in the form of production inputs such as seeds, fertilizers or feeds. This model appears to be inefficient as assistance in kind is not always suitable to the local conditions and the capacity of the recipients.

Under the direct credit model, it is not necessary to organize recipients into groups. Loans granted under this scheme are usually provided at zero or very low interest rates (0.5 to 1% per month). Savings mobilization is not required either. In this credit model, per household loans range from D200,000- 300,000 with loan terms of 6, 9 or 12 months, and the principal and interest rates are paid in a lump sum at maturity. However, for credit given in kind, recipients do not have to pay back the 'loan'. It should be noted that only the ultra poor are eligible for this type of credit. It is required, however, that recipients exhibit the capacity of production.

The bookkeeping and monitoring systems of this model are very simple. Income from interest on loans is used to pay program management costs. However, since the interest rate is too low, management of the program requires large subsidies. The program management staff, often volunteers and part-timers, lacks skills in credit management.

2.2 Revolving Credit

The revolving credit scheme which was first introduced in Vietnam in 1991 with the implementation of the project VIE 90/POI requires beneficiaries to organize themselves into savings groups of about 20-30 members. Loan amounts range from D200,000-300,000 at interest rates 1% lower than those charged by the VBA in the local area. Regular savings of D3,000-4,000 by the members is a basic component of the revolving credit model. Principal and interest are paid in monthly installments during regular group meetings.

There are two foreign-funded programs using the revolving credit model:

Swedish International Development Agency ( SIDA)

The SIDA Revolving Credit Program which started in 1991 in 5 northern provinces (Vinh Phu, Hoang Lien Son, Cao Bang, Ha Tuyen and Quang Ninh) with each province getting US$ 20,000 has been undertaken in coordination with the WU. The Provincial WU is the Project Management Unit with the Central WU conducting training courses and providing technical guidance. The Central WU also acts as the liaison agency between the province and the donor agency. Income from interest on loans is used to pay the cost of project management.

The project's target clientele are supposedly poor women and the total number of borrowers under the program amounts to 2,934. Interest rates on loans are patterned after the VBA lending rate. Total savings balance is D73.9 million and the repayment rate is as high as 99.4%.

The United Nation Children Fund (UNICEF)

The project commenced in the early part of 1993 with total funds of D1.6 billion provided to 30 communes in 9 provinces. The purpose of the UNICEF revolving credit program is to support poor women by enhancing production, increasing income and raising nutrition intake, thereby improving mother and children health.

The Central WU controls the grassroots level groups. The amount of the loan is about D300,000 with an interest rate of 2% per month (1993) and one year maturity. Interest and loan principal are paid monthly. The project also requires monthly compulsory savings of D3,000/month. Interest income from loans is used to pay project management costs.

2.3 Guarantee Credit Scheme.

This is the scheme employed in the VIE 91/P01 Project financed by the UNFPA and executed by the FAO Regional Office. Under this scheme, the donor deposits a certain amount in the VBA, and it serves as a guarantee for loans provided by the bank from its own funds, to beneficiaries identified by the donor.

The purpose of the program is to support women in income-generating activities and family planning, and thereby improve the status of rural women. The WU is the local agency responsible for the formation, maintenance and development of women's groups. The VBA is the agency responsible for the management of the guarantee funds and the provision of credit to income-generating activities of women's groups. The VBA is also tasked to train the women's groups in bookkeeping and making business/production plans. Members exercise savings discipline and make their loan and interest repayments during regular monthly meetings of the women's groups.

The project has been implemented in 2 communes: Dong Trach, Chau Thanh district, Can Tho Province and Quang Bi, Truong My district, Ha Tay province. The total financing for the program amounts to US$100,000, of which US$50,000 is to be used as guarantee fund and the balance for technical assistance. About 957 members have been granted loans amounting to a minimum of D200,000 and a maximum of D10,000,000. Lending rates are equal to those of the VBA normal lending rates (Hung and Tai, 1994).

2.4 Credit model employed by the CIDSE [ fn3 ]

Like other NGOs, the CIDSE is implementing several credit programs in north and south Vietnam. At present, credit delivery schemes employed in the north and south differ.

North Vietnam

In the north, CIDSE is implementing several credit schemes in Bac Thai, Hai Hung, Vinh Phu, Hanoi and Thanh Hoa Provinces. In these areas, the CIDSE has selected the People's Committee as the project management agency. However, for some projects, loans are given directly to individual beneficiaries by the Project Management Unit.

CIDSE-supported projects have build-in savings mobilization components. In these models, the savings mobilization and capital formation are emphasized as a key component that could ensure the viability and sustainability of the project. Loans range from D300,000-500,000 depending on the specific nature of the project. Maturity for loans are 3, 6 of 9 months depending on the production/business cycle and the income structure of borrowers. Interest on loans is used to finance project management costs.

It is not clear if CIDSE projects in the north are able to provide credit for the poor since there is no clear cut criteria for the selection of project beneficiaries.

South Vietnam

Credit projects of the CIDSE implemented in the south are quite different from those implemented in the north. The counterpart organizations of CIDSE-supported credit projects in the south are the Bureau of Houses and Land Management. As a general rule, beneficiaries of the project are the poor.

Project beneficiaries are organized into groups of 5 to 10 members. Savings mobilization is a prerequisite. Savings are collected on a weekly or monthly basis depending on the agreement of the group members. Saved amounts range from D4000-6000 per month. Group savings funds are used to make loans to members. The amount of the loan per borrower also varies according to the type of production/business activities. Loans range from D200,000- 500,000 and the duration may be from 3 months to one year. Repayments may be made either daily, weekly or after harvest. Interest rates on loans are half a percent less than the rate charged by the VBA. Another different component of credit projects implemented in the south is the provision of skills and technical training to both the project staff and the beneficiaries.

2.5 Grameen Bank Replication Model. The credit delivery mechanism funded by the Tau Yu Mai Project under the Grameen Bank (GB) approach was first introduced in August 1992 in Minh Phu Commune, Soc Son District, Hanoi. The project aims to provide credit to women for income generating-activities that will result in the improvement of the living standards of women and their households.

The GB model involves organizing women into groups for collecting savings and loan repayments. A credit officer is assigned to handle a maximum of 150 members. Each member is entitled to a loan of D200,000 at an interest rate of 2% per month (1992). The compulsory weekly saving is D1,000. Loans are payable for a period of one year through 50 equal weekly installments. Before receiving a loan, members are required to attend training sessions in group orientation mechanisms and production or business skills.

According to Hung and Tai (1994), 315 members have received loans worth D72,750,000. Loans are mainly used for animal husbandry. Most of the recipients are the poorest women in the locality. The project is monitored by a standard bookkeeping system. This credit seems suitable to the economic and managerial capacity of the poor. The model could also be a good example for the establishment of a bank for the poor as was the experience in Bangladesh.

Footnote 1: This size of loan can be calculated from the following equation: 4*x/100 = 1.75 *x/100 + 55,000 where x is stands for the size of the loan at which the effective costs of borrowing from the two lenders are the same Return

Footnote 2: These include studies by the World Bank, Food and Agriculture Organization of the United Nations, Asian Development Bank, Swedish International Development Authority, Vietnam Women's Union, VBA's publications, various years and Dao Hung & Nguyen Van Tai, Do Tat Ngoc, Pham Hong Tinh, Hoang Van Hach, etc. Return

Footnote 3: Cooperation Internationale pour le development et la Solidarite Return

Tran Tho Dat [ ] is currently a Ph.D student at the National Centre for Development Studies (NCDS), Australian National University (ANU).
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