By Kate Ambler, Mark Middleton, Tom Moyes, Sylvan Herskowitz, Truong Thi Thu Trang, Nguyen Le Hoa, Nguyen Thi Thuy, Bui Tuan Anh, Nguyen Chi Trung, and Alan de Brauw
Smallholder farmers in developing countries face substantial constraints that limit their ability to reach their production potential. Two constraints—risk exposure and limited access to liquidity—pose particular challenges. Smallholders face a wide variety of risks that constrain both the choices they can make and their willingness to make investments. Limited availability of affordable credit, borrowing and saving products poorly aligned with the needs of the agriculture sector, and prohibitive borrowing eligibility requirements all impede farmers’ access to the liquidity necessary for investing in new, more profitable crops and technologies (International Finance Corporation, 2014). Observers have noted that a large share of long-term credit needs is not being met in Southeast Asia (Shakhovskoy & Wendle, 2013), despite its location near some of the world’s largest consumer markets. While existing financial services may be suitable for some farmers, access to finance is particularly inadequate among women, low-income groups, and ethnic minorities, and risk excluding the most vulnerable groups from these emerging economic opportunities.
The Inclusive Agricultural Value Chain Finance project is working to understand potential models for improving access to agricultural value chain finance among disadvantaged groups in three countries in Southeast Asia: Indonesia, Myanmar, and Viet Nam. “Agricultural Value Chain Financing” refers to formal financing that affects at least three value chain participants: a financial institution, an end borrower, and at least one other facilitator or beneficiary. The third party is also a value chain participant and can either be directly or indirectly involved in providing finance to the end borrower. Direct involvement could involve taking on formal loans to provide informal trade credit financing upstream or downstream in the value chain, or purchasing a wholesale insurance product, while indirect involvement could include providing information, a guarantee, facilitation of loan collection, in-kind distribution of inputs, or some other support that reduces the risk of lending to specific end borrowers.
This report describes the present state of agricultural value chain finance in Viet Nam and suggests policies that could help expand its availability. We first consider the features of a policy environment needed for agricultural value chain finance to flourish. Key points related to the policy environment include the following:
· Allow interest rates for formal loans to be priced by the market rather than through regulation;
· Support secure, inclusive payment systems and transaction frameworks;
· Develop a legal framework that supports both the use of movable collateral in loans and a warehouse receipts system;
· Develop a legal and/or regulatory framework that supports contract farming among smallholders;
· And allow for a more open, technology-driven financial architecture that facilitates market entry among nontraditional financial service providers.
These broad policy goals can help increase credit supply while reducing barriers for potential entrants, creating an environment for more accessible agricultural value chain finance. Where new types of providers can enter credit markets, current providers begin to face competition and, in general, services around credit should improve. To ensure that relatively marginalized farmers are not excluded from agricultural value chain finance, it is important to ensure that systems must allow for assets other than land to be used as collateral, and policymakers should not neglect savings and insurance. The first section of the report considers how agricultural value chain finance products can be designed for growth and inclusion in general, before turning to Viet Nam in the remainder. Throughout, we provide examples and lessons from different value chains that could lend insights for other value chains.
Over the past few decades, Viet Nam has experienced remarkable social and economic progress. Viet Nam has become a middle-income country and economic growth remains high. The service and industry sectors have experienced particularly rapid growth, reducing the relative importance of the agriculture sector. However, agriculture still accounted for approximately 15 percent of GDP in 2017 and employs 40 percent of the labor force. Promoting the further development of the agriculture sector is thus a key component for continued poverty reduction in Viet Nam.
Viet Nam’s growth has already transformed the agriculture sector. Between 1995 and 2016, rice production quadrupled in terms of value, while pork production grew by an order of magnitude, and coffee became one of the leading five commodities produced. Even as the agriculture sector has declined in relative importance, it has grown in both total and export value, providing substantial investment opportunities.
Despite rapid change in the agriculture sector, it has been and remains constrained in its growth prospects by a lack of suitable and comprehensive finance opportunities for smallholder farmers. Financial services in rural areas, particularly for these smallholder farmers, are of first-order importance to further poverty reduction efforts. However, supply of formal credit is low in these areas, in part because official policy holds interest rates below the market levels required by banks. Growth in credit availability is limited by other regulations as well, such as collateral requirements, loan and repayment schedules that may not match farmers’ needs, and burdensome procedures that inhibit access by less wealthy and less educated farmers. Given the insufficient supply of formal credit, smallholder farmers either do without finance or use informal sources. Informal credit sources are estimated to account for approximately one-third of loans but come at the cost of high interest rates and a short-term focus. Notably, cooperatives have emerged as a decentralized set of informal credit providers that are able to lend to farmers with less stringent collateral requirements, while also providing other services, improving opportunities for smallholders in the value chain.
The development of inclusive value chains that provide the opportunities that allow poor farmers to move out of poverty requires creating a financial system that can more flexibly meet their needs. This includes adjusting regulations so that formal financial services can expand into rural areas and also supporting the continued growth of informal credit institutions. Moreover, education within the financial sector regarding the unique needs of customers requesting loans for agriculture can help improve the supply of funds from financial institutions.
Since 1986, Viet Nam has been liberalizing its once fully state-planned economy and opening to trade with the rest of the world. Viet Nam has enjoyed one of the world’s fastest economic growth rates, which implies substantial development of the financial system, including finance for agriculture. In the agriculture sector, export value chains for crops such as rice and coffee have flourished during the reform period.
That said, agricultural growth has lagged overall growth. Furthermore, most of Viet Nam’s banking sector remains state owned. Only the Vietnam Bank for Agriculture and Rural Development (VBARD) has branches in every province, so farmers in remote areas generally lack access to financial institutions. Viet Nam’s smallholders in remote provinces continue to struggle to participate in agricultural value chains. Nonetheless, from the perspective of agricultural value-chain financing, important policy changes have been made, including the following:
u Collateral is a major challenge for smallholders who want to participate in agricultural value chains. Loan collateral requirements have been liberalized over time, which is a step in the right direction to helping farmers participate.
u The recent Decree 57, implemented in 2018, aims to support the development of agricultural entrepreneurs by promoting private investment and business activity in agriculture (Ancev, et al., 2019). Decree 57 offers targeted investment subsidies for entrepreneurs, as well as reduced rents and subsidized interest rates.
u Decree 116, also issued in 2018, increased the maximum loan size that credit institutions can provide without collateral to individuals and households involved in agricultural production or businesses. Decree 116 also promotes high-tech agriculture by stipulating that loans for high-tech agriculture projects can cover up to 70 percent of the project value.
u Viet Nam’s 1993 Land Law instituted the system of “red books” (Land Use Rights Certificates) that gave farmers title to their land for a 20-year period for annual crops and a 50-year period for perennials. The 2013 Land Law extended the titles to 50 years for annual crops. The land laws have enabled farmers to use red books as collateral, but disputes over land are common (OECD, 2015).
Through VBARD, the government remains heavily involved in providing subsidized financing to the agriculture sector. However, it is not clear that such financing reaches many smallholders, as administrative requirements to receive government support are burdensome and upfront costs for obtaining subsidies are high (Ancev, et al., 2019). State intervention could be better focused on addressing the gaps that markets do not currently fill by extending financial services in areas with high potential that are only marginally commercially viable today. Further, the government could invest in public goods such as information systems, commercially viable farmer organizations, and stronger market institutions. Doing so could help nontraditional financial institutions begin to operate competitively in agricultural value chain finance, allowing more smallholders access to value chain finance.
Three broad recent trends are having a significant effect on agricultural development in emerging economies: value addition in agriculture, the emergence of new retail outlets and supermarkets, and increased demand for semi-skilled labor to satisfy growing demand for processed and pre-packaged foods (Zander, 2015). These trends are present throughout the region but have been particularly notable in Viet Nam, and have created significant export opportunities. Viet Nam is well-placed to further increase exports of high-value commodities including animal-source products, fruits, and vegetables to other markets in the region such as Japan, China, Taiwan, and South Korea.
To take advantage of the trends influencing Viet Nam’s agriculture sector and agricultural exports while reducing poverty, policy must focus on helping smallholder farmers overcome constraints related to financing and risk. Presently, agricultural finance in Viet Nam is dominated by VBARD and the Vietnam Bank for Social Policy, which are both state-run; cooperatives and microfinance institutions play a much smaller role. To foster competition, the government should encourage further development of the financial sector, including expansion of nontraditional lenders.
This report’s main findings related to agricultural value chain financing needs in Viet Nam are as follows:
- Potential for continued development of specific agricultural value chains in Viet Nam is substantial and promising, from both the supply and demand perspective.
- The types of finance currently provided by financial institutions are insufficient to meet the needs of all actors along agricultural value chains, particularly smallholders.
- The government focuses on the development of specific value chains at the national and provincial level. Of those, fruits and vegetables have the most promise for smallholder development through finance, followed by forestry, rice, and livestock.
- Opportunities for finance in the agriculture sector are constrained by the limited participation of formal financial institutions. While the needs of actors along different value chains are varied, these needs can generally be met by traditional financial institutions if the products are structured and underwritten appropriately. Developing these products in collaboration with other chain actors can create opportunities to support smallholder farmers and enhance their livelihoods.
- The digitization of both agriculture and finance data has potential to play a greater role in facilitating agricultural value chain growth. Digitization of red book certificates and of financial records can help to ensure that state banks operate more efficiently while facilitating the flow of information and finance between actors within a value chain.
For agricultural value chain finance to progress, we find two types of policy changes could be helpful. First, we consider finance generally, and then ways to improve agricultural value chain finance specifically. Our recommendations are as follows:
u From the perspective of general finance, consider allowing banks further freedom in agricultural lending, both in terms of interest rates and credit amounts. Fixed interest rates—particularly when subsidized—lead to credit rationing, which reduces the amount of credit available to lower-income farmers. When ceilings bind on loan amounts, they also hinder the amount of investment that can take place.
u Digitize information about plots including but not limited to land use rights (red book) certificates. The goal from a value chain finance perspective is to ensure that the process of using the red book certificates as collateral can be streamlined. Smallholders and banks find the transaction costs to smallholder lending high; ensuring that more farmers can use an already acceptable form of collateral can facilitate financial flows from both traditional and nontraditional lenders. Ideally this information can be made publicly available.
u Digitization of plot information would help develop collateral for Vietnamese smallholders to help foster lending to them. Alternative forms of collateral, such as warehouse receipts, should also be made legally acceptable. While Decree 57 alludes to a need for warehouses for crops, there is no provision for a warehouse receipt system. We suggest finding ways to develop laws to legalize such alternative forms of collateral.
u Foster the development of business skills among farmer groups, particularly in high potential areas. A relatively cost effective method of doing so could be to develop “rules of thumb” related to business practices in value chains to facilitate widespread promotion. Increasing the business skills of farmers or groups of farmers can facilitate value chain development. This recommendation also emerged from an analysis of Decree 57 (Ancev, et al., 2019).
- Ancev, T., Nguyen, C. D., MacAuley, G., Yen, V. H., Hoang, U. D., Duong, P. B., & Nguyen, D. M. (2019). Evaluating and Improving Policies for Attracting Investment in the Agricultural Sector in Vietnam. Canberra: ACIAR.
- International Finance Corporation. (2014). Access to Finance for Smallholder Farmers. Washington DC: International Finance Corporation.
- Miller, C., & da Silva, C. (2007). Value Chain Financing in Agriculture. Enterprise Development and Microfinance, 95-108.
- OECD. (2015). Agricultural Policies in Viet Nam 2015. Paris: OECD Publishing.
- Shakhovskoy, M., & Wendle, J. (2013). Inflection Point: Unlocking growth in the era of farmer finance. Washington, DC: The Initiative for Smallholder Finance.
- Zander, R. (2015). New Trends in Financing Agricultural Value Chains – Promising Practices and Emerging Recommendations for Policy Development. Bonn, Germany: GIZ.