Graduate School of Humanities and Social Sciences
Doctoral Program in International political Economy
Executive Summary
Formal credit and the impact on household’s welfare: New empirical evidence
from Vietnam
フォーマル・ローンが世帯の厚生に与える影響：ベトナムにおける新たな実証分析

Bui Thi Van Anh
200730080
Recent years have seen an increased interest in the role of credit and microfinanceon household outcome. Most of works found the positive role of credit on smoothing
income and contributing to poverty alleviation. By providing the households with accessto financial services and credit, the credit help-low income people improve productivity,management skills; create jobs; smooth income flows and consumption costs; enlarge anddiversify their businesses; increase their income and other benefits such as health careand education (see Morduch 1995, Khandker 1998 and 2001, Coleman 2002, Remenyi
2000, Zeller at al., 2001). However, the level of impact found not consistent in all thecases and all the countries during the period.
Understanding the key role of credit on household welfare as well as on economic
development, the Vietnamese Government try to make use the best this tool byrenovation the financial system as well as create more opportunities to household canaccess credit. The financial market in Vietnam has developed rapidly after renovation andsegmented into two core sectors as the formal (banks, credit institution, people’s credit
fund, social- political organization, job creation fund) and the informal (money - lenders,relatives, friends). This paper using data from Vietnam Household Living Standard
Survey 2004 will contribute to the empirical literature on the effectiveness of formal
credit on household welfare in Vietnam. The purpose and contribution of this thesis is:
firstly, to propose and implement an econometric framework, that will minimize thelimitations of research methodology employed in previous studies; secondly, the work
will provide empirical evidence about the impact of formal credit on household welfare
in Vietnam, in both urban and rural area.
To estimate the impact of credit on household welfare, we use a linear model tointerpret the impact of credit on household welfare with credit (loan size of loan dummy)
as the explanatory variable in the outcome function. The controlling variables include
household characteristics, location characteristics, market conditions. The dependent
variables as proxied for household welfare are expenditure of household, income, living
consumption, food and nonfood consumption. Because the endogeneity of credit

1(confirmed by Hausman test), this paper used the standard solution is to employ
instrument variables (IV) and two-stage least square (2SLS) method. For this paper, three
IV used: competitor’s characteristic (average land square owned by other household in
the commune exluding that household), the market interest rate informed by formal
lender, the distance to nearest bank/bank branch from a village where households arelocated. There IVs passed the overidentification test and can be used as valid instrumental
variables for endogenous independent variable formal credit.
Results from the first stage revealed some determinants that effect to borrowing ofhousehold as well as the determinant of access to credit. We have found the determinantsof loan size and credit participants to be consistently based on household characteristics,
such as ethnicity of the household, dependent share, classification by authorities of beingpoor. Some location characteristics will be determinants of credit as geographical region
or infrastructure condition.
On the impact of credit on household welfare, we found credit has positive andsignificant effect on household welfare in term of both loan size and loan dummy at 1
percent and 5 percent level of significant. With to access borrowing, the household haveopportunities to increase their welfare by 0.75 per cent of expenditure, 0.79 per cent ofincome and 0.35 per cent of living consumption. The impact on food consumption andnon-food consumption respectively are 0.44 per cent and 0.56 per cent when other factors
are not changed. These numbers reflect the significant gains that could arise from accessto credit in Vietnam. If credit increases by 10 per cent, expenditure and income will
increases by 0.88 per cent and 0.90 per cent in 2004 respectively. The growth rate of foodand non-food consumption following an increase of 10 per cent credit is 0.53 per cent and0.65 per cent respectively. Living consumption will increase by 0.42 per cent when theirborrowing increases by 10 per cent. This result confirms our hypothesis that access tocredit or increase in the amount of loans also increases household economic welfares.
This also reaffirms the findings by some recent studies (Quach et al,. in case of Vietnam,
Khandker in Bangladesh or Coleman in Thailand, Remenyi in some South Asia
countries…).
However, the effect we found is small, but it is significant to household welfare
anyway. This permits to have optimistic expectations about the role of credit on thepoverty reducing and on the living standard increasing in Vietnam. The findings heremay assist policy makers on evaluation effectiveness of credit as a tool for increasing
household economic welfare in comparison to using another one.

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