Land Ownership, Access to Informal Credit and Its Cost in Rural Vietnam

Access to credit and its cost is a major challenge for farmers in developing countries. Formal moneylenders often ration these economic agents, as they lack assets to give as collateral for the loans. The phenomenon is particularly diffused in the countryside, where the formal moneylenders are less present. Consequently, farmers resort to informal credit. Several studies show that land serves as collateral for accessing formal credit, but they often do not find any significant effect of land size on access to informal credit. Here I study the effects of land ownership on both the demand and the cost of informal credit in the Mekong Delta. Vietnam is an interesting country for studying this issue, as informal credit is widespread in the countryside, despite the government’s effort to eradicate it, also subsidising the formal lenders. The analysis is based on 603 households farming relatively small parcels. The results show that as land ownership increases, both the demand and the cost of informal loans decrease. This result is relevant in developing countries, where land reforms are still ongoing, as it shows that land redistribution may contribute to the development of formal credit markets. In particular, from a policy point of view, design and implementation of appropriate land redistributions appears to be a fundamental way to fight the informal credit market.