Filling the voids left by the formal sector: informal borrowings by poor households in northern mountainous Vietnam

Purpose - This study aims to examine the accessibility, loan purposes and effects of informal credits on poor households in Northern mountainous Vietnam. Design/methodology/approach - This study used primary data collected directly from surveying 402 poor households in Thai Nguyen province using a well-designed questionnaire. The probit model is employed to specify which factors affect access to informal credit, the tobit model is used to estimate the borrowing functions specified. In addition, descriptive statistical analysis is also used to describe the accessibility, purposes and effects of informal credit on poor households. Findings - The results show that there is a considerably high proportion of informal borrowings from relatives, neighboring villagers, professional moneylenders, rotating saving and credit groups, trade credits and mortgages. Labor force ratio, social capital and residential land areas are the key determinants of poor households' informal borrowings. The purposes of borrowing are diverse. The informal loans also have certain significant effects on poverty reduction and the welfare of poor households. Research limitations/implications - The effects of the informal loans on house welfare should be quantitatively evaluated. Practical implications - The findings from these analyses allow us to draw relevant policy implications for the development of rural finance in other low-income, developing countries. Originality/value - This research contributes to the body of published literature in several ways. Firstly, it provides understanding of the performance of the informal financial subsector. Secondly, the informal subsector of rural finance is evaluated in close relation to the formal subsector.