Determinants of access to formal credit by small and medium enterprises in Vietnam

Abstract

The shortage of capital and difficulties in accessing bank loans were the most challenging issues for SMEs. According to a survey of SMEs Development Department - Ministry of Planning and Investment, only one-third of SMEs can access to bank funds; one-third has obstacles to reach the loans; and one-third cannot access. Among businesses in VN which could not access to bank loans, the 80% does not meet loan conditions. The descriptive statistic result shows that State Owned Commercial Bank (SOCB) is the most important formal source for SMEs. The banks appreciate the Certificate of Land Use Right or housing which can be used as collateral for the most important formal loans. The enterprises which applied for formal loans may be have problems getting loans. The main reasons are difficulties in obtaining clearance from bank authorities and lack of collateral. Enterprises in credit constrained group have the option of accessing to the informal credit market. The proportion of credit constrained group applied for informal credit is always higher than non- credit constrained. These proportions have tended to increase for both groups. Asymmetric information is the main theory of the research to classify the factors determining access to credit of SMEs into three main groups: (i) a grouped factor representing for Owner’s characteristics comprises education, ethnicity, (ii) a grouped factor representing for firm’s characteristics consists of firm age, firm size, type of firm, (iii) a grouped factor representing for relationship between banks and borrowers includes previously borrowed, overdue debt. Based on the data set of 1427 enterprise from “Characteristics of the Vietnamese business environment: evidence from a SME survey in 2009”, the research has applied probit model to identify determinants of access to formal credit by small and medium-sized enterprises (SMEs) in Vietnam. The result shows that Education (negative), Employee, Equipment, Liabilities and Borrow (positive) which are significant on probabilities of access to credit. The research finds that 50% of enterprises have probability of access to credit higher than 75.4%. The paper finds that Ethnicity, Year, From, Revenue, Ap, Ar, Overdue debt do not contribute to credit access of SMEs and are not significant at 10% level. In conclusion, the formal credit market plays a very important role for capital of SMEs. However, access to this source is still a challenge for SMEs. The barriers, difficulties in accessing credit from formal sources have forced the SMEs to involve in the informal credit market.