Thinking beyond collateral in value chain lending: access to bank credit for smallholder Vietnamese bamboo and cinnamon farmers

Abstract

Using case studies of the bamboo and cinnamon value chains in rural areas of northern Vietnam, this paper contributes to the existing literature by analyzing barriers and suggests conditions under which value chain lending would be an effective tool for improving smallholder farmers’ access to credit. A mixed method using both in-depth interviews with relevant stakeholders and a two-stage Heckman model is employed to explain the existing credit gap. Findings show that in both chains, bank decision-making on lending is typically limited to individual chain actors instead of considering the whole chain. Commercial banks predominately use conventional lending approaches heavily dependent on collateral which typically results in a shortage of credit available to the chain actors. Value chain lending is constrained by weak chain linkages and limited ownership of private bank accounts. Drawing from these cases in Vietnam, the article concludes by arguing that status quo value chain lending in lower-income countries merits considerable rethinking. The lending approaches of banks require innovation to ‘think beyond collateral’ in improving chain cohesion. Multi-stakeholder partnerships are important for successful value chain lending. In addition, farmer-based unions have the potential to address issues of information asymmetry in the credit market.

Agricultural value chain participation and farmers' access to credit in northern Ghana

“…This result is consistent with Chandio et al (2020), who found that formal credit demand was positively affected by landholding. Banks prefer lending credits to borrowers with an account with them so that they can better monitor their cash flows (Luan and Kingsbury, 2019). This finding is consistent with Dzadze et al (2012), who reported a positive relationship between possession of savings accounts and access to formal credit by farmers.…”

“…Lenders' criteria for advancing credit are mainly tied to the educational level, nature (size) of the farm business, cash flow, account turnovers, familiarity with the potential borrower and how the loan affects farmers' outputs, among others. The approach does not consider contractual arrangements between farmers and off-takers to buy farm produce, which negatively affects farmers' loan repayment (Köhn, 2014; Luan and Kingsbury, 2019).…”

“…AVC actors also have access to credit more internal finance more than external finance from commercial banks and other financial institutions (Chen et al, 2015a, b). Commercial banks predominately use conventional lending approaches heavily dependent on collateral which typically results in a shortage of credit available to the chain actors (Luan and Kingsbury, 2019). Informal financial institutions were nucleus farmers, traders, input suppliers, aggregators, farmers, relatives, friends and moneylenders and formal financial institutions were commercial banks, rural and community banks and microfinance institutions.…”

“…, 2015a, b; Cowan et al. , 2015; Luan and Kingsbury, 2019; Swamy and Dharani, 2016). However, informal credit is somehow expensive, short-term and often small in size to merit intensive farming (Dong et al.…”

“…Tang (1995) argues that some financial institutions ration borrowers using restrictive covenants, such as market interlinkage, which increases lenders' ability to monitor borrowers' behaviors and motivates borrowers to repay loans by making other transactions contingent upon loan repayment. In the absence of registered assets coupled with high illiteracy and lack of market interlinkages, most farmers rely on informal sources of credit (Chandio et al, 2017;Chen et al, 2015a, b;Cowan et al, 2015;Luan and Kingsbury, 2019;Swamy and Dharani, 2016). However, informal credit is somehow expensive, short-term and often small in size to merit intensive farming (Dong et al, 2012;Lin et al, 2019).…”