Knowledge of the informal credit sector in Vietnam is primarily based on anecdotal evidence but its important role as the informal credit provider in rural credit market has recently been
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well documented (for details, see Barslund & Tarp, 2008; Pham & Izumida, 2002; Pham & Lensink, 2007). Typically, rural households can borrow money from different types of informal loan sources such as relatives, friends and neighbours; Rotating Savings Credit Associations (ROSCAs); or private money lenders, with greater flexibility than they can borrow from formal credit providers.
(1) Relatives, Friends and Neighbours
Relatives, friends and neighbours are the first alternative sources of credit; loan size and interest rate are determined by individual relationships and reputations. Taking advantage of personal relationships, relatives and friends, in general, provide loans without collateral or any other written loan contract. Recorded interest rates are low for loans by the neighbours and, in many cases, loans from relatives and friends are interest free. The loan amount varies
according to the loan purpose such as emergency, consumption for illness, funerals, and weddings, etc. Although, these loans are rarely sufficient to finance agricultural production, they partially reflect the prevalence of informal loans in the rural credit market in Vietnam (Pham & Izumida, 2002).
(2) Rotating Savings Credit Associations
Rotating Savings Credit Associations have been traditionally known as an informal credit channel for rural households in Vietnam. Although they have existed for many generations, these financial arrangements have never been recognised as business contracts under the Law of Credit. These groups are referred to as „Hui‟ in the South and „Ho‟ in the North (Pham &
Lensink, 2007). ROSCAs promote periodic savings which, in turn, are rotated as funds among a limited group of members who trust each other. Members of these associations come mainly from the same hamlet or are organised on the spot among colleagues and friends at work. In
general, membership averages 12 or more persons4. Decisions on interest rate, number of
members and loan amounts are made either jointly by all members, by a bidding process or solely by the organiser. The life cycle of a ROSCA ends when every participant has obtained the total funds collected at least once. Most ROSCAs are set up to bridge short-term needs but
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they can also be set up to finance long-term investments. However, as ROSCAs are not regulated by the Law on Credit Institutions, defaults are commonly associated with either ROSCA members or organisers due to the weak screening process among members and weak social sanctions.
(3) Private Money Lenders
Private moneylenders are widespread and seem to be an important source of loans for most rural households. Putzeys (2002) revealed that, in 1997-1998, 51% of credit to farm
households was provided by informal channels such as private moneylenders and individuals. Private money lenders are usually rich households in rural areas with surplus money and goods. The informal interest rate is normally higher than the formal rate; in some extreme cases, the interest rates are as high as 10% to 30% per month (Putzeys, 2002). Despite the high interest rates, there are many reasons why people borrow from moneylenders. Flexibility, both in getting the loan and repayment, as well as simple lending practices are documented as being far more important than the interest rates (Pham & Izumida, 2002). Generally,
moneylenders do not ask for collateral and have no complicated screening steps to determine the loan.
Some moneylenders are traders who give cash in advance on the basis of the promise to receive or buy the products at harvest time. Others can be suppliers who provide credit as input for agricultural production at the beginning of the season then receive the principal payment plus interest at the end. This type of lender has emerged during the last few years as the agricultural products market became more developed. Therefore, it is widely accepted and assumed that it will become an important source of informal credit in the rural credit market.
Similar to other rural financial markets in developing countries, the informal credit sector remains controversial in Vietnam ‟s rural credit market reconstruction. There are opponents who traditionally regard informal credit as a violation of financial discipline despite its contribution to meeting farmers‟ financial needs. This is because the Vietnamese government does not recognise the legal existence of the informal sector and the development of informal credit is out of the government‟s supervision. Therefore, informal credit should be excluded from the rural credit market by improving the lending operations of formal financial
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sound rural credit market and maintaining the sustainable development of the rural economy. However, according to the development finance‟s view, supported by the persistence of informal credit, suggests a better regulation for both formal and informal credit sectors would tap more financial resources from informal sector which would work towards improving more credit access to the rural credit market. The existence of informal credit reflects the
imperfections of Vietnam‟s formal rural credit system, which is characterised as fragmented and unable to meet the diverse credit demands of the rural households. In terms of rural credit development, the existence of informal credit should be re-addressed in both rational views in order to facilitate credit accessibility to household in the rural credit market.