DOES THE METHOD OF ENTRUSTED LENDING VIA FARMER-BASED UNIONS FACILITATE LOW-INCOME HOUSEHOLDS’ ACCESS TO BANK CREDIT? EVIDENCE FROM NORTHWESTERN VIETNAM

Abstract

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.