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 household. This means that the Government should recognize 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 privatize them actively in recent years. in the coming years, the Government should accelerate the
privatization to improve their business performance 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 financial services as required by the market. The bank
lending rate is high in comparison with rates offered by banks in the world and southeast asia as
well. The Government can allow private persons
and companies to take a more active part in the
banking system to enhance the competition and
service quality
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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. The Government can allow private persons
and companies to take a more active part in the
banking system to enhance the competition and
service qualityn
References
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“Law, Endownment and Finance,” Journal of Financial
Economics, 70:137-181.
2. Duong, P. B. and Yoichi Izumida (2002), Rural De-
velopment Finance in Vietnam: A Microeconometric Analy-
sis of Household Surveys, World Development Vol. 20,
No.2, pp. 319-335.
3. Gelb, A. H. (1989), Financial Policies, Growth, and
Efficiency, Working Papers, Country Economics Depart-
ment, The World Bank, June (WPS 202).
4. Guiso, L., P. Sapienza and L. Zingales (2010), The
Role of Social Capital in Financial Development, Working
Paper 7563, National Bureau of Economic Research,
Cambridge, MA 02138, February.
5. Huang, Y. and J. R. W. Temple (2005), Does Ex-
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Economic Development Review - December 2010
29
Researches & discussions
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