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CHAPTER 5
CREDIT MARKET THEORY
COUNTRYSIDE

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QUESTION

WHY ARE WE INTERESTED IN THE MARKET

CREDIT IN RURAL?
1) Who are the borrowers in the countryside?
2) What is the nature of the rural credit market?
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TABLE OF CONTENTS

5.1 The role of rural credit institutions (creditors).

5.1.1 The difference between the views.
5.1.2 The role of rural credit institutions in the Vietnamese context.
5.2 Factors affecting the performance of mobile phones
belongs to the official sector.
5.2.1 Interest rate
5.2.2 Mobilizing savings
5.2.3 The organizational structure of the mobile phone
5.2.4 Information asymmetry
5.2.5 Exogenous factors
5.2.6 Other factors
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TABLE OF CONTENTS

5.3 Factors affecting the performance of these

The mobile phone is in the informal sector.

5.4 Some policy implications.

** Reading: Rural finance
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1. THE ROLE OF RURAL CREDIT INSTITUTIONS

1.1 Differences of opinion

The credit market is divided into two areas: Main sector
formula and informal sector.
❑ The official sector operates on a foundation of credit institution
rural use in this area (FRFIs: Formal Rural
Finacial Institutions). FRFIs are operating organizations and indiv
currency trading in a rural, legally registered area
law, operating under the national banking law.
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1.1 Differences of opinion

❑ The informal sector operates on a fixed basis

Rural credit institutions belong to the informal sector. That is
organizations; individuals doing money business in rural areas
The village, not registered to operate under state law, may be
 Activated by the government but has no legal status
individuals that operate independently include professional lenders
in contryside; lending through relatives, brothers and friends with very low interest rates; through material companies, agricultural pro
provision for farmers in advance; through microfinance projects that provide credit mainly to the poor in the farm
village on the condition that farmers cannot borrow from the formal sector. The aim is to help the poor maintain capital
and helping others with non-governmental funding through an association, or a corporation especially a farmer
People, Women's Union, Veterans Association, Youth
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The question is which institutions play a key role in the credit market
use in rural areas?

Over the past 50 years there have been many different views on th
credit market in rural areas. There are 4 schools
Show this point:

❑ Traditional school

❑ The Ohio School

❑ School of structure
❑ The information school is not perfect

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1.1.1 The Traditional School

❑ The representatives of this idea are Bauer (1952), Belshow

(1959), Maurray (1961), Wharton (1962), Bhaduri (1973),
Acharya and Madhur (1983). Their point of view is the lender
Money in the countryside is monopolies, lending with interest
 high and exploitative.
inelastic, huge demandThefor reason is supply
credit and of financial
infrastructure services
conditions
the floor in the NT is low, divided and scattered. From the above p
They suggest that it is necessary to establish a formal rural TD ins
destination:
✓ Low-interestloans to help the poor
✓ Remove or replace unofficial mobile phones with main ones
stay awake
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2.2.1 Traditional School

❑ Thisview has had a strong influence on governments

developing countries in the 60s and 70s. Most of them
Countries are rapidly establishing formal credit networks.
First appeared government projects, then developed
Gradually complete the bank.

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1.1.2 The Ohio School

❑ Consists of prominent economists Bottomly T (1971), Adams

D, Pischke V, Graham (1984). In which Bottomly T is not
are the people of this school who laid the foundations
 Ohio.
❑ Inthe context that developing countries support the view
Traditionally, Bottomly T offers the view: the lender
Money in NT has no monopoly power but interest rates on the loa
due to transaction costs and risks in NT credit activities
high. The reasons for high transaction costs are:
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1.1.2 The Ohio School

✓ The opportunity cost of loan financing

✓ High risk costs (due to poor farmers)
✓ Inflation costs (due to lending over a long period)
❑ Inherit
this point of view of Bottomly economists
The Ohio School found evidence to support it
this thesis. The problem is not to delete the mobile phone
it is not informal but facilitating the operations
at low cost. They said:

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1.1.2 The Ohio School

❖ The use of the term "usury" is coercive and

Is there prejudice against regional lenders
 Officially because:
• Due to the influence of religion. They said that derived from sutr

As Saint Koran said, “acting helps others under pressure

They pay high money is bad ”.
• Influenced by ethnicity: the majority of people are active
NT loans are not local.

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1.1.2 The Ohio School

❖ Lenders under the CIs operate effectively

results in NT because:
• Correctly reflect the laws of the market (to fully meet market dem
interest rates that fully reflect costs and profits)
• Transactions on a voluntary basis.
• Farmerswho use this service extensively confirm activity
They are very suitable for the real world conditions.
❖ Contrast with CTDKCT, mobile phone officially operates
Ineffective because:
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1.1.2 The Ohio School

• The formal credit market seldom works on platforms

 Commerce.
• The interest rate is usually lower than the market rate and negative

real interest.
R: The real interest rate
= r1+ - first r: Nominal interest rate
R
P1+ P: The rate of inflation
If the real interest rate is negative, it can't mobilize capital, the lender suffer
lenders loss and use of wasteful use of resources or not repaying the home
country → financial recession
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1.1.2 The Ohio School

❑ From that fact, they suggested:

✓ Recognize the usefulness of non-CT mobile phones.
✓ Ensuring positive real interest rates.
→ This thought has a very strong influence on developing countrie
Developed in the 80s, 90s even affected
all day, especially the World Bank and the IMF.
For example: The World Bank and the IMF have set conditions for countries to borrow
- Implement the positive real interest rate mechanism.
- Allow diversification of types of private ownership, other economic sectors (residenti
Vietnam just started to reform in 1990 and applied real interest rates in 1991 g).
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1.1.3 Organization Structions

 Represented by Desai and Mellor (1993). They rely on history to
research through research works on 98 countries
develope. In the process of developing NT credit of the countries
This shows that IDU is increasingly playing a key role in the proc
economic development process is based on the market share that t
no CT can dominate (CTDCT accounts for over 50% of the marke
part). They believe that the DKKCT has some limitations:

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1.1.3 Organization Structions

✓ Small loan size.

✓ Lending period is mainly short term.
✓ The non-CT market is often fragmented.
✓ The ability to mobilize savings is often very small and not powe
credit to mobilize savings.
→ Unable to meet the needs of development and modernization
NN - NT (requires large capital and long mobilization time)

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1.1.4 Imperfect
Information)
 Typical economists are Hoff K, Braverman A, Stiglitz JE
(1993). Their point of view is;
❑ For credit markets, NT, not raise interest rates
is the credit supply, which is enlarged by the imbalance problem
Information matching between borrowers and lenders. Or loosen
Another way it is information about efficiency and bar capacity
payment of the borrower. Borrowers always know exactly
Their capacity than lenders → information asymmetry
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1.1.4 Imperfect
Information)

❑ Expanding credit supply in addition to increasing interest rates i

Lender's approach to grasping information about
borrowers → Institution of CTKCT works effectively in the region
NT because they have a more effective way of grasping informatio
- Most lenders and borrowers are usually tied
Socially. Usually lenders and borrowers have
Relationship with each other (relatives, friends introduce)
- Borrowers and lenders are in the same small management area.
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1.1.4 Imperfect
 Information)

❑ However, CTD also has some limitations when compared to

TCT:
- Unable to regulate the capital source for the borrower.
- A huge risk may appear that makes the borrower have to destroy
real at the same time.
→ Both institutions coexist and are needed during playback
credit market development in NT.

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Conclude

Although there are many different views, but most of the economi
economists all acknowledge that:
❑ Formal and informal institutions co-exist.
❑ Formal institutions are increasingly playing a key role in doing
NT credit market development.
❑ DCKCT plays a very useful role for farmers.

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 1.2 The role of the mobile phone in the Vietnamese context

❑ According to a survey program on the Southern provinces (Dinh

2000 - 2001) shows that 51.2% of borrowers have borrowed money
official and if calculated by the amount of money, the official secto
accounting for 72% market share.
❑ More than a decade of operation (1990 - 2010), the IWT system
development is impressive and has premises for sustainable develop
firm.
❑ Inthe Vietnamese context, the IWT system is increasingly playin
mainly in the economic development process and plays a decisive r
in providing credit to farmers and NT people.
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2. FACTORS AFFECTING EFFICIENCY OPERATION

THE CANDIDATES ARE UNDER THE OFFICIAL AREA

2.1 Interest rate

❑ real interest rates low is not the efficient way of distributing
Income for poor farmers in the NT. Reason:
- Failure to mobilize savings leads to a decline in funding sources
borrow.
- Interest rate ceiling policy limits the profitability of the regulations
Processing leads to:
Lending on selective object, low risk (with collateral and
large amount of loan).
+ Minimize the cost of information collection for customers.
→ Poor farmers and small producers are excluded. Beneficiaries are
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2.1 Interest rate

❑A misconception that applies the Keynesian view of “low interest r
to encourage investment in production ”. Misconception is that intere
Interest rate does not mean negative real interest rate.
❑ Negative real interest rates will encourage a shift in transaction cos
from cell phones to borrowers and influencing style
service of institutions.
- Farmers strive to find sources of loans and are willing to use negative costs and mechanic
Association and other types of expenses → Borrowing costs don't mean just paying interest
- Bank bureaucratic service
- Abuse of this limited resource for the personal benefit of the credit officer
→ Evidence shows that well-known successful mobile phone compa
use the positive real interest rate for loans.
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2.2 Mobilizing savings

❑ The main cause of failure in credit operations
NTRs are too emphasis on lending at low interest rates
but ignores saving savings in NT because of the misconception that:
- ND people have no surplus compared to consumption.
- High interest rates of savings also cannot attract deposits of
ND people.
The truth is that NT people must have reserves to deal with these situations
emergency.
+ Farmers have to save money due to the seasonality in agricultural produ
Income stream is irregular and frequent.

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2.2 Mobilizing savings

❑ According to Von Pischke the failure of the creditors to mobilize
Savings are due to:

- Lack of convenient savings mobilization services in NT

- Many credit institutions have conducted to raise savings deposit inte

but also fail because the nominal interest rate has increased but the in
real sound.

→ Ignoring savings mobilization is not really an economic institution

currency trading and less likely to develop sustainably.

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2.2 Mobilizing savings

❑ According to Seibel, 2 premise of savings are:

The existence of savings

- The stimulus for savings mobilization (real interest rates

positive, convenient for NT people, profitability
Institutions)

→ In summary, the NT region has the potential to mobilize saving

but lack of stimulation mechanism.
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2.3 The organizational structure of the mobile phone

Proper organizational structure will make an important contribution t
of institutions rather than interest rates. A proper organizational struc
proceed as follows:
❑ Diversify ownership types for the mobile phone system (including
including State banks, private banks, cooperatives, banks
shares) because:
- More competition and more benefits to farmers, limit poisoning
permission
- Create many opportunities for farmers to access official capital

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2.3 The organizational structure of the mobile phone

❑ Institutional setting under the vertical integration syste

The organizational structure of the system includes from
facilities in NT for the following reasons:
- Has the advantage of regulating loan capital
- Convenient for savings mobilization and lending
- Advantage in size (transaction cost per person
low borrowing, making the most of modern equipment,
 capital, brain matter)
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2.3 The organizational structure of the mobile phone

❑ The density of the base branches of a mobile phone is high (numbe
transactions per unit of agricultural land) is an important factor
Affect performance because:
- Agricultural production is conducted on a large space
- Improve farmers' accessibility to institutions
- Understand the specific situations of the borrower, improve quality
assess the borrower's ability to pay
- Expand the size of borrowers and mobilize savings to create advant
in transaction costs.

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2.3 The organizational structure of the mobile phone

❑ Diversify the service function of the mobile phone, this will help:
- Meet diverse needs in NT
- Attracting NT people with diversified types of services (savings, sign
send, entrust, make payment in transactions), create more competitive
with the CTDKCT.
- Diversified loan structure will reduce risk and expand business
the number of loans as well as savings creates advantages in terms of
Translate.
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2.4 Mechanism to fix imperfect information

There are two direct and indirect methods
❑ Direct approach: directly expanding resources
with the screening, stimulation and coercion of borrowers to reduce b
Overdue debt rates by:
- Regular debt collection in the form of many payments, each time pa
a specific amount of time
- Stimulus for debt repayment: overdue debts are charged at penalty i
loan when old debt is paid on time.
- Encouraging savings; asking borrowers to contribute some money
into a compulsory savings fund and get a savings interest rate
Increasing the borrower's responsibility to pay debts on time.
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`
2.4 Mechanism to fix imperfect information
❑ Indirect
method: use a group loan, if
a team member fails to pay the loan on time, the
Other members will be affected. To ensure positive effects
group pressure, Sitglitz suggests:
- Each member can borrow money in the future depending on the wo
Debt payment of all group members staying current.
- The group size should be small, the group is too big, the pressure of
 - Groups are made up of members who share the same risk traits
similar risk. Because if a member has a greater risk, he gets it
subsidized by the remaining members.

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2.5 Exogenous factors

Includes agricultural land use rights, legal environment and infrastruc
floor NT.
- Improving the ownership of agricultural land to make land valuable
Mortgages and such institutions can expand credit supply.
- Effectivelegal environment will help institutions reduce spending
enforcement fees.
- Good infrastructure makes the income of farmers stable, reducing in
balance information, reducing screening costs and operating risks
loan.

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3. FACTORS AFFECTING EFFICIENCY OPERATION

THE CANDIDATES ARE UNDER THE UNOFFICIAL REGION

3.1 Use socially binding relationships

Almost negligible information asymmetry, collateral
seldom used when making loans. This is the strength of
CTD compared with official institutions.
3.2 Credit linkage through other market (physical market
investment, agricultural land, agricultural land, credit)
 This is a tool to minimize the disadvantages of the asymmetry proble
information. Through this relationship the lender almost holds
information about the borrower and it becomes a very effective tool
in screening, stimulating and coercing borrowers to repay debts.
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4. POLICY RECOMMENDATION

4.1 Correct awareness of the role of NT credit institutions

during economic development.
Policies aimed at improving the performance of the NT credit market
aims to further improve the effective operation of the zone
at the same time interested in the utility of these
resources of the informal sector.

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4. POLICY RECOMMENDATION

4.2 Efficiently improve mobile phones in the formal sector

Experience and practice in the past 10 years and the theory shows
that:
❑ The expansion of borrowers in the NT region depends on
the ability of institutions to mobilize savings
❑ Efficiencyloan does not depend on a single factor, but how
includes many factors, especially the debt payment stimulus and base
deal.

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