Improving bankability of small farmers in northern Vietnam

Access to financial services has proven to be important for poverty reduction in developing countries. Clearly, it is the poor who face considerable rationing with respect to the financial market. The reasons are manifold and can be associated with the demand and supply side of financial intermediation. They all result in higher transaction costs (TCs) or a reduced risk-bearing capacity. TCs include the noninterest expenses incurred by both lenders and borrowers in making (obtaining), servicing (implementing), and collecting (repaying) loans. The term 'risk-bearing capacity' describes the borrowers' capacity in terms of income, wealth and skill to cope with the risk of loosing the transaction costs if the credit application is refused or in case of a failing of the debt-financed investment. The term 'bankability' has entered the arena of development economics. Advocators of the notion that access to financial services reduces poverty claim that improving bankability supports credit access. From the perspective of the potential client, the term bankability comprises all aspects that increase the risk-bearing capacity and/or reduce the costs of acquiring a financial service, particularly credit. One finding in this paper is that a large proportion of the population in rural Vietnam refrains from becoming indebted not because of the TCs but because of their low risk-bearing capacity. Employing participatory research tools, one solution developed by small-holders in rural northern Vietnam was to set up an insurance fund to increase the risk-bearing capacity while being indebted and thus become bankable.