The case of Vietnamese households

1. Problem researching factors affecting financial develop- ment has been an interesting subject for econo- mists. Most of the past studies have been carried out at a macroeconomic level, such as those of La Porta et al. (1997, 1998), Beck et al. (2003), rajan and Zingales (1998), and stulz and Williamson (2003). Beck et al. (2003) point out that political regime does affect the financial development. rajan and Zingales (1998) conclude that politics has impacts on the financial development. others, such as stulz and Williamson (2003), prove that culture, openness, inflation, legal aspects (La Porta et al. 1997, 1998), policies (hung and Tem- ple, 2005) are decisive factors in the financial de- velopment. Gelb (1989) uses data from 34 nations in the years 1965-85 and financial development index, M3/GDP, to study this problem and con- clude that the inflation influences more strongly the financial development than interest rates. at the microeconomic level, however, re- searchers have not tried their best to solve this problem. There are only some case studies of agri- cultural models by Guiso et al. (2010), Yadal and colleagues in nepal; and Döông (2002), Quaùch et al. (2006) in Vietnam. Guiso et al. (2010) use data gathered from some 8,000 households in italy to discover importance of social capital to the finan- cial development. They conclude that the social capital plays an important role in increases in italian financial quality. Yadav et al. (1992) exam- ine data from nepalese families and conclude that the size of the family is the decisive factor in bor- rowings from informal market while the size of crops and irrigation are important factors in the organized market. Döông and izumida (2002) in- vestigate 300 families in north, central and south Vietnam to find factors that decide their borrow- ings from rural financial market. They conclude that farming area and value of animals are deci- sive factors in organized markets. They also say that big number of dependant members of the family and farming area force the family to borrow bigger loans from the informal market. Quaùch and Mullineux (2006), after examining data gathered from 2,108 Vietnamese families in 1997-98, con- clude that education, saving and farming area de- termine the need for loans of families. Thus, some problems have not been examined properly although many authors have carried out researches on this aspect at both macro and micro levels. These studies only point out some factors, such as policy, institution, inflation, interest rate, and culture, that affect the financial development. Many others, such as assets and social relations have not been discussed. This paper, therefore, tries to examine and clarifies factors that affect the financial development in more detail. Partic- ularly, the paper tries to establish some new indi- cators of financial deepening in an effort to reflect * National University of Economics Economic Development Review - December 2010 25 Researches & discussions more exactly and fully the financial system as compared with previous indicators. 2. Indicators of financial deepening Previous researches have developed and em- ployed indicators of financial deepening. at first, M1/GDP, M2/GDP and M3/GDP were widely used (La Porta et al., 1997 and 1998; Beck et al., 2003; rajan and Zingales, 1998; and stulz and Williamson, 2003), but some authors think they cannot reflect exactly the financial development because cash represents a very big share in the fi- nancial system in developing countries. To over- come this shortcoming, economists introduced the ratios of credit supplied to the private sector to the GDP (rajan and Zingales, 1998), and of de- posit or bank loans to the GDP to measure the fi- nancial deepening. however, they failed to reflect fully the role of the financial system in economic activities. The paper suggests here three more indicators of financial development: D = deposit; Vse = value of securities ex- change; VFa = value of finance company assets; i = income L = bank loan TB = banks’ revenue; TFc = finance companies’ revenue. These indicators can reflect roles of banking system, stock markets and finance companies. D, L and TB reflect the role of banking system; Vse” stock markets; and VFa and TFc: finance compa- nies. Thus, these indicators may measure fully the role of financial system. The financial system plays an important role in economic activities of households because it points out financial assets of the household. in Vietnam, these assets usually include bank de- posits, bank loans, bonds/ securities, and insur- ance. Thus, ratio and volume of financial assets used for analyzing and measuring the financial de- velopment at the households level is as follows: B(s) = bonds and securities; is = insurance LnDBsi = Log (D + B(s) + is) LnLBsi = Log (L + B(s) + is) These indicators of financial deepening are bet- ter than the previous ones because they reflect and evaluate directly the amount of financial as- sets held by households. in addition, household savings in Vietnam in the past is usually turned into non-productive assets, such as gold, because the financial system was poorly developed. The re- form in financial system launched in 1988 helped the public change from the habit of saving to hold- ing financial assets, which was good for them and the economy as well. common financial assets of Vietnamese households are bank deposits, bank loans, bonds/ securities, and insurance, therefore, these indicators reflect the financial development in Vietnam more reasonably. 3. Research model The paper employ models suggested by La Porta et al. (1997, 1998), Gelb (1989), Beck et al. (2003), rajan and Zingales (1998), stulz and Williamson (2003), huang and Temple (2005), Döông and izumida (2002), and Quaùch and Mullineux (2006) to built a new model of its own that is as follows: yi = a + bXi + ui where yi means indicators of financial develop- ment and Xi comprise dependant members of the household. householders’ education is measured by their schooling years, size of the household is determined by number of its members. other vari- ables are householders’ age and squared house- holder’s age, householder’s sex, bank lending rate, fixed assets, health caring expenditure, and social relationships. There are dummy variables for urban/rural area, ethnicity and locality. and ui is statistical error. explanation of these explanatory variables in- cluded in the research is as follows: - Dependant members of the household affect the financial development because they generate no income and moreover, they lower the per capita income of the household, thus reducing need for fi- nancial services and ability to hold financial as- sets. 1. FD I D VSE VFA 1 = + + . FD I L VSE VFA 2 2 = + + . FD I TB VSE TFC 3 3 = + + ( ) FD I D B S IS = + + Economic Development Review - December 2010 26 Researches & discussions - householder’s education and size of the house- hold are variables that increase the need for fi- nancial services and ability to hold financial assets because householders of better education know how to do well their business and earn more money, and bigger households tend to demand more financial services. - in the first stage of one’s lifetime, the demand for money increases when income is limited, therefore the need for financial assets is very low, which hinders the financial development. in next stages, householders usually need more financial services when they earn much more money and gain more knowledge and experience, which sup- ports development of the financial system. That is why the squared householder’s age is included in the model. - interest rate may be an obstacle to the finan- cial development because higher interest rate pre- vents householders from holding financial assets or use financial services. households with more fixed assets tend to use more financial services. - Dummy variables are used for determining whether householders’ gender, their ethnicity, and locality they live affect favorably the financial de- velopment or not. The difference between this model and others is that it has two more variables for expenditure on health care and social relationship. The first variable means that the better the health of the household, the higher its contribution to the finan- cial development. The second one is included in the model because business performance in Viet- nam usually depends on householder’s social rela- tionships. This is because of not only the Vietnamese culture but also widespread corruption in this country. it is difficult to quantify the social relationship because illegal practices are usually deliberately concealed. Luckily, the author can gather some data about expenditures of the households on par- ties, banquets and gifts and use them to measure the social relationship because householders with influential friends and acquaintances tend to spend much more money on banquets and gifts. 4. Data and methodology This research project employs data about 40,438 households from the 2004 Living standard survey conducted by the Gso. however, only 5,233 households are asked about financial mat- ters and all surveyed households with no financial assets are excluded from the research. Thus, this project can only employ data about 1,685 house- holds from the Gso source. as for the variables measuring the financial deepening, they are based on data about bank de- posits, bank loans, insurance premiums, and bonds/securities. Value of variable “gender” is 1 for male and 0 otherwise. similarly, variable “ethnic- ity” is valued at 1 for householders of ethnic mi- nority and 0 otherwise; and variable “locality” at 1 for urban area and 0 otherwise. as for other variables, Gso supplies detailed and clear data in its questionnaires and attached files. The research employs oLs regression method to estimate factors affecting the financial develop- ment. The Breusch-Pagan test is used for checking for heteroskedasticity and White method is used to solve this problem. 5. Results running the oLs regression for three equa- tions with the three indicators of financial devel- opment produces results in the Table 1. The Table 1 shows that regression result 1 is not as good as results 2 and 3. in the regression result 1, only one coefficient is statistically significant compared with five coefficients in the result 2 and eight in the result 3. The results show that “education” has a posi- tive relation with “financial development.” This proves that the householder’s education supports the financial development. This corresponds with results of the research by Quaùch and Mullineux (2006). The “size of household” is statistically signifi- cant with reliability of 99% and positive estimated coefficient. This means that demand for credit will be higher in bigger households, and lenders also prefer these households because they can charge higher interest rates. Economic Development Review - December 2010 27 Researches & discussions “Fixed asset” also has a positive relation with financial development because households with valuable fixed assets can secure big bank loans when they mortgage their assets. “social relationships play an important role in the financial development. This means that the fi- nancial development of households depends on not only their own characteristics but also their social relationships. This result corresponds with Viet- namese business culture. For example, a good re- dependent variable Fd LndBSI LnLBSI Independent variable -1 -2 -3 constant -10.4664 5.2894*** 6.6030*** -0.524 0 0 Dependant -0.3694 -0.03587 -0.0389 -0.51 -0.676 -0.245 householder’s education 0.2856 0.0248 0.0244*** -0.353 -0.208 -0.001 size of household -0.4184 0.0245 0.0891*** -0.235 -0.714 0 householder’s age -0.2439 -0.1141*** -0.0511*** -0.341 -0.002 0 squared householder’s age 0.0021 0.0010*** 0.0010*** -0.341 -0.003 -0.001 Gender 2.3574 0.0398 0.0551 -0.198 -0.826 -0.471 interest rate -0.0153 -0.0037* 0.0002 -0.232 -0.071 -0.843 Fixed assets 0.6504 0.0512 0.1003*** -0.205 -0.273 0 social relationship 1.4553* 0.3204*** 0.3346*** -0.07 0 0 expenditure on health care 0.9795 -0.0162 0.0223 -0.127 -0.733 -0.215 Locality (dummy variable) 3.2317 0.3723** 0.2539*** -0.228 -0.041 -0.005 ethnicity (dummy variable) 15.2131 0.3016 -0.2912*** (0.263 -0.449 -0.002 region (dummy variable) effective effective effective r_squared 0.0573 0.0622 0.2342 samples observed 939 939 1685 Table 1: Regression of factors affecting the financial development Notes: * = statistically significant at 10%; ** = statistically significant at 5%; *** = statistically significant at 1%; P- values in bracket. Economic Development Review - December 2010 28 Researches & discussions lation with bank managers can ensure big and easy bank loans. another interesting fact in this result is a neg- ative relation between householder’s age and fi- nancial development of the household while the squared householder’s age has a positive one. This shows that middle-aged householders hold less fi- nancial assets than older householders do because in Vietnam, old persons are considered as more trustworthy. age is also the first factor taken into consideration when making decision of promotion in public services. The youth tend to respect older persons because of their better knowledge and ex- perience. “Locality” has a positive sign and statistical significance. This means that the location of households plays an important role in the finan- cial development because most financial institu- tions in Vietnam have branches in big cities and towns where the demand for financial services is high. Variable “ethnicity” also has a negative sign and statistical significance, which shows that Vietnamese Kinh people contribute better to the financial development. 6. Conclusion From results of the research, the paper finds that social relationship, locality, fixed asset, size of household, householder’s age and education, and householder’s ethnic group are basic factors that determine the financial development of the house- hold. This means that the Government should rec- ognize and protect ownership of fixed assets, support public education and create a good social environment to encourage social relationships, thereby helping the financial system develop. in addition, most state-owned companies suffer poor business performance because few laborers care about it while the Government failed to pri- vatize them actively in recent years. in the com- ing years, the Government should accelerate the privatization to improve their business perform- ance and develop the financial market because this program allows private persons to hold more financial assets. competition among banks is not keen and fair enough to improve quantity and quality of finan- cial services as required by the market. The bank lending rate is high in comparison with rates of- fered by banks in the world and southeast asia as well. 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