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The impact of Informal Credit on Poverty and Inequality: The Case of Vietnam

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  • Nguyen Viet, Cuong
  • Van den Berg, Marrit

Abstract

The informal credit market remains an important source of finance for the poor in Vietnam. Yet, little if anything is known about the ultimate impact of informal loans on poverty and inequality. If informal credit is an important means to decrease poverty, the government may want to reconsider its policy focus. Although it is possible to stimulate the availability of informal credit, the Vietnamese government has no policies to do so and focuses solely on direct provision of microfinance. In this paper we therefore estimate the average effect of informal credit on expenditures of borrowing households, and subsequently assess its impact on poverty and inequality. By using fixed-effect regressions with instrumental variables, we intend to eliminate the potential bias caused by differences between participants and non-participants in credit markets. We find that the poor borrowed proportionally more from informal sources than the non-poor and that informal credit was quite effective in decreasing poverty: it reduced the poverty incidence of borrowers by 8 percentage points and the overall poverty incidence of population by 1.4 percentage points in 2006. Similarly, informal credit significantly decreased the poverty gap index and the poverty-severity index. The effects on expenditure inequality were small.

Suggested Citation

  • Nguyen Viet, Cuong & Van den Berg, Marrit, 2011. "The impact of Informal Credit on Poverty and Inequality: The Case of Vietnam," MPRA Paper 54758, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:54758
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    References listed on IDEAS

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    Cited by:

    1. Luan, D. X. & Bauer, S. & Kuhl, R., 2016. "Income Impacts of Credit on Accessed Households in Rural Vietnam: Do Various Credit Sources Perform Differently?," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 8(1), pages 1-11, March.
    2. Thanh-Tung Nguyen & Trung Thanh Nguyen & Ulrike Grote, 2020. "Credit and Ethnic Consumption Inequality in the Central Highlands of Vietnam," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 148(1), pages 143-172, February.
    3. Haughton, Jonathon & Khandker, Shahidur R., 2016. "Microcredit in Viet Nam: Does it matter?:," IFPRI discussion papers 1569, International Food Policy Research Institute (IFPRI).
    4. Seema Sharma & Arnab Bose & Himanshu Shekhar & Rohit Pathania, 2019. "Strategy for Financial Inclusion of Informal Economy Workers," Indian Council for Research on International Economic Relations (ICRIER) Working Paper 374, Indian Council for Research on International Economic Relations (ICRIER), New Delhi, India.

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    More about this item

    Keywords

    Micro-credit; informal credit; poverty; inequality; Vietnam;
    All these keywords.

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty

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