Can microcredit reduce vulnerability to poverty? Evidence from rural Vietnam

• Published date: 01 February 2023
• Author: Chung Thanh Phan,Thang Tat Vo,Diem Thi Hong Vo
• Date: 01 February 2023
• DOI: http://doi.org/10.1111/rode.12951

REGULAR ARTICLE

Can microcredit reduce vulnerability to

poverty? Evidence from rural Vietnam

Chung Thanh Phan

1

| Thang Tat Vo

2

| Diem Thi Hong Vo

3

1

The Business School, RMIT University,

Ho Chi Minh City, Vietnam

2

Health and Agricultural Policy Research

Institute, University of Economics Ho

Chi Minh City, Ho Chi Minh City,

Vietnam

3

Department of Economics and Finance,

University of Canterbury, Christchurch,

New Zealand

Correspondence

Chung Thanh Phan, The School of

Business, RMIT University, Vietnam

Campus, Ho Chi Minh City, Vietnam.

Email: chung.phan@rmit.edu.vn

Abstract

Extant literature has extensively explored microcredit's

impacts, confirming its essential role in poverty allevia-

tion. However, most studies focus on poverty measures

that exclusively emphasize current poverty status with-

out adequately addressing the potential of falling into

or remaining in poverty. Furthermore, the role of credit

services in helping the poor in rural areas appears to be

underexamined in the literature. To address this

knowledge gap, this study investigates whether rural

microcredit can reduce household vulnerability to pov-

erty. A theoretical framework is developed to capture

the mechanism by which microcredit borrowing has a

vital role in household businesses and impacts the

probability of being poor in the future. The Vietnam

Access to Resources Household Survey data set from

2008 to 2016 is used to explore this issue. The findings

indicate that rural Vietnam's access to microcredit sig-

nificantly reduces vulnerability to poverty. Moreover,

better-off households are seemingly the most effective

at using microcredit, whereas the opposite is found

among worse-off households. These results are found

to be robust using the propensity score matching

method.

Received: 15 April 2021 Revised: 20 September 2022 Accepted: 21 September 2022

DOI: 10.1111/rode.12951

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits

use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or

adaptations are made.

© 2022 The Authors. Review of Development Economics published by John Wiley & Sons Ltd.

608 Rev Dev Econ. 2023;27:608–629.

wileyonlinelibrary.com/journal/rode

KEYWORDS

microcredit, rural households, VARHS, Vietnam, vulnerability

as expected poverty

JEL CLASSIFICATION

D61, G41, I25, I38, O12

1|INTRODUCTION

Poverty alleviation is a United Nations Millennium Development Goal that most governments

in developing countries aim to achieve. To reach the target, microcredit is considered a power-

ful tool to fight against poverty (Durrani, Usman, Malik, & Shafiq, 2011; Phan, Sun, Zhou, &

Beg, 2020). The provision of microcredit financial services promotes the businesses of the poor

in the hope of generating positive welfare to navigate unexpected shocks. Existing literature has

extensively explored the microcredit's impacts, confirming its essential role in poverty allevia-

tion. However, most studies focus on poverty measures that traditionally weigh the current pov-

erty status, neglecting the potential of falling into or remaining in poverty.

These traditional measures must be replaced as the goal of poverty alleviation is about

enhancing the static aspects of welfare, such as consumption, income, or poverty status

(Diem & Van Hoang, 2018). Furthermore, the target refers to developing the means to prevent

borrowers from returning to destitution or allowing the continuation of consumption in times

of unexpected shocks without the need to sell assets. Using static measures prevents researchers

from observing the dynamic aspects of poverty over time. These static measures can be defined

as a problem of examining the impacts of microcredit-related programs that rely on the ex-post

poverty measures. Although household income or consumption may not fall below the poverty

line, the risk of becoming poor remains high; thus, standard poverty measures alone may not

completely capture the cumulative impacts of microcredit.

In this case, the concept of vulnerability appears to be a more accurate, forward-looking

indicator for assessing poverty dynamics. In this study, the term vulnerability refers to the prob-

ability of nonpoor households falling into poverty or poor households remaining in the same

living condition in the subsequent period (Calvo, 2008; Jalan & Suryahadi, 2001). It is distin-

guishable from the traditional measure of poverty as vulnerability examines risk and uncer-

tainty factors. In contrast, conventional poverty measures employ a static and non-probabilistic

concept of household welfare. Applying the concept of vulnerability and using the vulnerability

index, a household is classified as vulnerable based on its probability of becoming poor in the

subsequent period, establishing a vulnerability threshold. Relying on vulnerability as a dynamic

aspect of poverty allows a comprehensive investigation of the impact of microcredit on the abil-

ity of households to navigate future shocks. Such ex-ante information on poverty could help

governments and development agencies develop effective strategic risk management plans to

support their activities. Moreover, such information is critical to any efforts to pull people out

of poverty, with or without financial assistance. Furthermore, the vulnerability reduction

impact of microcredit in the developing world remains controversial and requires additional

investigation.

Rural Vietnam presents a constructive case to investigate the impacts of microcredit.

Although several studies on the impact of microcredit on vulnerability have been conducted

PHAN ET AL.609