Does the method of entrusted lending via farmer - Based unions facilitate low - income households’ access to bank credit? evidence from northwestern Vietnam

TNU Journal of Science and Technology 226(03): 11 - 19 
 11 Email: jst@tnu.edu.vn 
DOES THE METHOD OF ENTRUSTED LENDING VIA FARMER-BASED 
UNIONS FACILITATE LOW-INCOME HOUSEHOLDS’ ACCESS 
TO BANK CREDIT? EVIDENCE FROM NORTHWESTERN VIETNAM 
Do Xuan Luan
* 
TNU - University of Agriculture and Forestry 
ARTICLE INFO ABSTRACT 
Received: 07/4/2020 This paper aims to examine the hypothesis that the method of entrusted 
lending via farmer-based unions is significant to resolve information 
asymmetries and facilitate households’ access to bank credit. This paper 
uses binary logistic regression models applied to data collected from a 
survey of 548 cinnamon households in Northwestern Vietnam. Results 
show that membership to a farmer-based union facilitates households’ 
access to collateral-free credit. Unions help banks to better select 
creditworthy households, conduct group lending to reduce risk of default 
and transaction costs. The successful factor of unions can be explained by 
the fact that unions exploit local knowledge to conduct group lending, 
thereby help to resolve information asymmetries in farm credit markets. To 
bridge the credit gap, more regular trainings for the leaders of unions and 
the groups of credit and savings are needed. In addition, a digital database 
is useful to share reliable information between banks and unions regarding 
relevant entrustment issues. The results contribute to the practical actions 
by suggesting a feasible policy intervention for addressing the problem of 
information asymmetries in farm credit markets. 
22/5/2020 
10/6/2020 
 Revised: 
 Published: 
KEYWORDS 
Access to credit 
Households 
Farmer-based unions
Northwestern 
Vietnam
PH N H C CHO A H C QUA C C CH C N N D N 
C H C I P C N N D N N N H N C A C C H 
 HU NH P H P H N N CH N N C I NAM 
 L 
 g i h g – h i gu 
 H N IN I O M T 
Ngày h bài: 07/4/2020 c ch c a b i vi t n y nh m ki m nh gi thuy t cho r ng ph ng 
th c cho vay y th c th ng qua c c t ch c c a n ng d n c ngh a 
trong kh c ph c b t c n x ng th ng tin v th c y ti p c n t n d ng 
ng n h ng c a c c h gia nh. i vi t s d ng m h nh h i quy 
logistic v i d li u c thu th p t kh o s t h tr ng qu T y 
 c Vi t am. t qu cho th y th nh vi n trong c c t ch c n ng d n 
tạo iều ki n cho c c h gia nh ti p c n v i t n d ng ng n h ng kh ng 
c n t i s n th ch p. c t ch c h i gi p ng n h ng l a ch n t t h n 
c c h gia nh c nhu c u vay v n t ch c cho vay theo nh m qua 
gi m r i ro v chi ph giao d ch. Th nh c ng c a c c t ch c h i c th 
do h khai th c ki n th c a ph ng ti n h nh cho vay theo 
nh m qua gi p kh c ph c b t c n x ng th ng tin trong th tr ng t n 
d ng n ng nghi p. C n t ch c c c kh a o tạo th ng xuy n cho c n 
b c a c c h i v c c t ti t ki m vay v n thu hẹp kho ng c ch t n 
d ng; x y d ng s d li u s chia s th ng tin gi a c c ng n h ng v 
c c h i li n quan n c c v n ề y th c cho vay. t qu nghi n c u 
cũng ề xu t c c can thi p ch nh s ch kh thi gi i quy t v n ề b t 
c n x ng th ng tin trong th tr ng t n d ng n ng nghi p. 
 22/5/2020 
 10/6/2020 
 Ngày hoà thiện: 
 Ngày đă g: 
T H A 
T n d ng 
H gia nh 
T ch c n ng d n 
T y c 
Vi t am
DOI: https://doi.org/10.34238/tnu-jst.2943 
*
Email: doxuanluan@tuaf.edu.vn 
TNU Journal of Science and Technology 226(03): 11 - 19 
 12 Email: jst@tnu.edu.vn 
1. Introduction 
Sufficient access to credit is crucial to improve farmers’ income [1]. Unfortunately access 
constraints have adverse effects on their ability to invest [2]. Lack of collaterals and high 
transaction costs due to information asymmetries have prevented a number of farm households 
from accessing to credit [3]. On the supply side, banks find it hard to evaluate the possible risks 
and repayment capacity of applicants. Banks face higher costs of selecting, controlling and 
enforcing borrowers to repay. In the field of rural credit, few studies examined on how to resolve 
the problem of information asymmetries to narrow the gap between credit demand and supply. 
This study contributes to the literature by answering a main research question: Does the 
method of entrusted lending via farmer-based unions facilitate low-income households’ access 
to bank credit? Lending entrustment means that farmer-based unions such as farmers’ unions 
women’s unions receive entrusted fund from banks via entrustment agreement for lending to 
their clients. 
A case study was made from the cinnamon-farming households in Northwestern Vietnam. 
Cinnamon has been seen as the most aromatic medicinal plant with high concentration of 
essential oils, sweet flavour which are beneficial to health care [4]. Farmers need credit 
incentives to improve the quality of cinnamon materials which are later used in the 
pharmaceutical sector. 
2. Methodology 
2.1. Data collection 
Cinnamon is mainly planted in Yen Bai province, which is home to the most vulnerable, 
socially excluded ethnic communities in the country [5]. The growing demand from international 
markets for high quality cinnamon products being used for food, medicine and essential oils also 
creates challenges for farm households who are involved in the growing stage of cinnamon trees. 
Van Yen from the Northwest, Van Chan from the West and Tran Yen from the Northern part of 
the province were the three districts selected for collecting primary data. 
Table 1. Decomposition of household sample size 
Districts Communes Sample households Sampling rate (%) 
Van Yen 
Dai Son 73 13.32 
Vien Son 68 12.41 
Mo Vang 30 5.47 
Chau Que Ha 25 4.56 
Yen Phu 30 5.47 
Phong Du Thuong 25 4.56 
Xuan Tam 26 4.74 
Tan Hop 42 7.66 
Tran Yen 
Quy Mong 30 5.47 
Kien Thanh 30 5.47 
Y Can 30 5.47 
Dao Thinh 30 5.47 
Van Chan 
Nam Lanh 28 5.11 
Nam Muoi 28 5.11 
Nam Bung 25 4.56 
Son Luong 28 5.11 
Total 16 communes 548 100.00 
A household survey was made between August 2017 to March 2018, using a structured 
questionnaire ... chase grass-cutting machines, sawing machines, bark dryer, storage facilities and improved 
drying yards. The credit duration depends on the policy of the bank, the type of credit and the 
TNU Journal of Science and Technology 226(03): 11 - 19 
 16 Email: jst@tnu.edu.vn 
amount of credit applied for. A farmer can apply for the Agribank credit by completing an 
application form and providing collateral in the form of land and houses with proof of land title 
(red books). 
Table 3. Main characteristics of sampled farmers and households 
Dimension Variable 
Van Yen 
(n=319) 
Van Chan 
(n=109) 
Tran Yen 
(n=120) 
Overall 
(n=548) 
Cinnamon 
farmers 
a 
Age (years) 
44.8 
(10.85) 
40.6 
(9.88) 
47.1 
(10.74) 
44.4 
(10.83) 
Education (years) 
6.2 
(3.98) 
7.4 
(4.33) 
6.7 
(2.89) 
6.5 
(3.87) 
Ethnicity (0-1) 
0.28 
(0.45) 
0.18 
(0.38) 
0.40 
(0.49) 
0.28 
(0.45) 
Cinnamon 
households 
a 
Union (0-1) 
0.22 
(0.42) 
0.19 
(0.39) 
0.32 
(0.47) 
0.24 
(0.42) 
Household size 
(persons) 
4.6 
(1.57) 
4.9 
(1.74) 
4.3 
(1.48) 
4.6 
(1.60) 
Distance to main 
market (km) 
5.7 
(5.69) 
21.6 
(11.54) 
4. 9 
(3.01) 
8.7 
(9.40) 
Market visits (visits 
per week) 
1.74 
(1.33) 
1.11 
(1.02) 
1.51 
(1.39) 
1.56 
(1.31) 
Cinnamon farm size 
(hectares) 
2.7 
(3.36) 
0.9 
(1.10) 
1.4 
(1.22) 
2.1 
(2.78) 
Collateral requirement 
(0-1) 
0.16 
(0.37) 
0.17 
(0.38) 
0.25 
(0.43) 
0.18 
(0.39) 
Bank account (0-1) 
0.09 
(0.28) 
0.09 
(0.28) 
0.27 
(0.44) 
0.13 
(0.33) 
Training (0-1) 
0.14 
(0.35) 
0.11 
(0.32) 
0.26 
(0.44) 
0.16 
(0.37) 
Access to 
credit 
b
Agribank (%) 14.73 7.34 8.33 11.86 
VBSP (%) 32.28 45.87 54.16 39.78 
Note: 
a 
Mean value with standard errors in parentheses; 
b 
Percentage of respondents who have previously obtained credit from the type of provider 
Farmers can also apply for a preferential credit program, offered by the VBSP subsidised by 
the Vietnamese government. To obtain credit from the VBSP, an applicant needs to be in the list 
of applicants approved by the commune people’s committees. All 39.7 % of households which 
received preferential credit need to be membership in credit and savings groups to receive credit 
through unions such as women’s unions or farmers’ unions. 
3.2. Lending characteristics by banks 
Lending characteristics of two banks are presented in Table 4. The VBSP has disbursed loans 
according to the governmental lending program. Households received subsidies from preferential 
credit programs. The overdue debt of credit disbursed through local unions from the VBSP is 
much lower than that of the Agribank. 
The Agribank still relies on collateral in the form of land use certificates. One difficulty for 
households is due to the problem of family separation leading to a case that many households do 
not have a certificate of land use rights. Multi-generation families separate and one land use 
certificate is used for multiple smaller size families, meaning that only one can use the land use 
certificate to apply for credit. 
TNU Journal of Science and Technology 226(03): 11 - 19 
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Table 4. Lending characteristics by banks 
Characteristics VBSP Agribank 
Targeted clients 
Poor and near-poor households; 
11 lending programs 
Wealthier households; enterprises; 
cooperatives and farms 
Maximum amount 50 million dong 
Credit value not exceeds 70% of 
collateral value 
Overdue debt 0.39% of total amount disbursed 3% of total amount disbursed 
Duration 3-5 years Flexible, depends on contracts 
Monthly interest 
rate (%) 
0.65%-0.90% 
Around 1%, flexible, depends on credit 
contracts 
Collateral 
requirement 
No collateral requirement 
Strictly collateral requirement (fixed 
assets or land use certificate) 
Lending model 
Group lending 
via women’s and farmers’ unions 
Individual lending 
Lending conditions 
Based on the governmental targeting 
and policies 
Based on market mechanism 
Loan repayment 
Monthly or quarterly repayment 
Interest rate collection and principal 
at the communal branches 
Month or quarterly repayment 
Interest rate collection and principle at 
the bank branches 
Capital availability 
and borrower 
selection 
Depend on government budget 
The bank is less involved in 
selecting borrowers 
Depend on deposit mobilization 
The bank is closely involved in selecting 
borrowers 
3.3. The role of farmer-based unions in facilitating households’ access to bank credit 
The results from a logistic estimate of the probability that a household has access to credit are 
presented in Table 5. Results show that access to Agribank credit is not contingent upon union 
membership. It depends on the availability of collateral, stable income and a good business plan. 
However, membership to a union is significant at 1% and positively related the probability of 
households’ access to preferential credit. In other words cinnamon households that join a union 
have a higher probability of accessing preferential credit. The finding in this study conforms to 
previous studies with data collection in other countries. Social unions also serve as the guarantee 
to improve their members’ access to credit without asset collateral security in rural Philippines 
[14]. Frequent meetings in group lending can serve as insurance to strengthen the ability of 
smallholder farmers to access financial services [15]. 
The education of household heads is positively associated with access to Agribank credit (P < 
0.05). More educated households and might run their agribusiness more effectively. 
Ethnic minorities are more likely to access credit, particularly preferential credit. This result 
could be explained by the fact that preferential credit in Vietnam mainly targets the ethnic 
minority households who need capital but are normally bypassed by commercial banks. 
 ollateral in the form of land ownership is positively correlated with cinnamon households’ 
access to Agribank credit (P 0.10). This 
finding collaborates with those of in-depth interviews with banks which showed that secure 
property rights could be used as one of the most reliable lending criteria for the Agribank. 
Ownership of a bank account is positively and strongly (P < 0.01) correlated only with the 
access to overall credit and preferential credit. This result is consistent with the expectations, 
given that savings account is a component of rural financial inclusion. However, only 21% of 
adults and only 6% of the poor in Vietnam have bank accounts, which is very low compared to 
other countries in the world [16]. 
Being located in the most well-known cinnamon district was found to be the most significant 
variables influencing access to Agribank credit. The significant regional dummy variable 
TNU Journal of Science and Technology 226(03): 11 - 19 
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suggests a higher granted credit in Van Yen compared to other districts. The explanation could be 
geographical indications of cinnamon products certified by the government to improve the 
cinnamon product management system, increase economic value for cinnamon products and 
generate income for farmers. 
Table 5. The impact of membership in farmer-based unions and other relevant factors 
on credit accessibility by cinnamon households 
Dimension 
Variables 
Estimated coefficients (Standard error) 
Agribank VBSP Overall 
Cinnamon 
farmers 
Age (years) 
0.0319 
(0.1321) 
-0.0647 
(0.0790) 
-0.0474 
(0.0874) 
Age square (years squared) 
-0.00007 
(0.0014) 
0.00048 
(0.0008) 
0.00020 
(0.0009) 
Education (years) 
0.1015 
(0.0518)
** 
-0.0484 
(0.0338) 
-0.0106 
(0.0389) 
Ethnicity (0-1) 
-0.0151 
(0.3916) 
-0.5960 
(0.2879)
** 
-0.9433
(0.3793)
** 
Cinnamon 
households 
Union (0-1) 
0.0783 
(0.4115) 
3.4985 
(0.3252)
*** 
6.1209 
(1.0309)
*** 
Household size (persons) 
-0.1255 
(0.1169) 
0.0797 
(0.0746) 
0.0472 
(0.0905) 
Distance to main market (km) 
0.0279 
(0.0244) 
0.0018 
(0.0129) 
0.0088 
(0.0143) 
Market visits (visits) 
0.1324 
(0.1220) 
-0.0980 
(0.0970) 
-0.1213 
(0.1374) 
Cinnamon farm size (hectares) 
0.0243 
(0.0686) 
-0.0624 
(0.0501) 
-0.0746 
(0.0596) 
Collateral requirement (0-1) 
3.7384 
(0.3889)
*** 
0.4602 
(0.2859) 
5.8104 
(1.0348)
*** 
Bank account (0-1) 
0.0591 
(0.4695 ) 
1.0413 
(0.3355)
*** 
1.0544 
(0.4114)
** 
Training (0-1) 
-0.4861 
(0.4927) 
.05014 
(0.3085) 
0.5303 
(0.3668) 
Van Yen (0-1) 
1.4007 
(0.4690)
** 
-0.7460 
(0.3036)
** 
-0.3833 
(0.3712) 
Van Chan (0-1) 
-0.5095 
(0.7228) 
0.0860 
(0.3881) 
-0.4928 
(0.4756) 
Model 
specification 
Intercept 
-6.2317
* 
(3.0661) 
1.1107 
(1.8139) 
0.9092 
(2.0220) 
Percent correctly predicted 
(N=548) 
91.79% 80.47% 85.77% 
Likelihood ratio test chi2, (14 
degrees of freedom) 
152.12
*** 
235.97
*** 
393.06
*** 
Note: The dependent variable is a 0-1 i di ato of a ess to edit whe e 1= a ess to edit’ Sta da d 
errors are in parentheses with the estimates; * Significance at a 10% level; **Significant at a 5% level; 
***Significance at a 1% level. 
4. Conclusions and policy implications 
Access to credit for farm households is a key part of the rural development and poverty 
reduction process. However, lack of access to credit remains a big challenge for farm 
development in general and for the cinnamon farming in particular. This study examines whether 
membership in a farmer-based union can facilitate household’s access to credit. 
TNU Journal of Science and Technology 226(03): 11 - 19 
 19 Email: jst@tnu.edu.vn 
The findings show that households need credit improve investment and the quality products 
which are later used for health care needs. Membership in a farmer-based union facilitates 
farmers’ access to collateral-free credit. It is therefore necessary to encourage farmers to join the 
unions to have convenient access to credit. Another finding is that commercial banks are hesitant 
to expand credit and require tangible collateral in the form of red books to be present as the most 
important condition for giving loans. 
Findings in this study provide insights for designing credit schemes for farm households in 
similar situations in other lower-income economies. The key lesson drawn is to take advantage of 
local knowledge to conduct group lending. Lending through farmer-based unions can address the 
problem of information asymmetry in farm credit markets. To enhance the role of farmer-based 
unions, trainings are crucial to enhance their capacity in financial management. Union staffs need 
to be equipped with knowledge to support farmers in running more profitable businesses. 
Acknowledgments 
This research is funded by Vietnam National Foundation for Science and Technology 
Development (NAFOSTED) under grant number 502.01-2016.12. 
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