Why do Small and Medium Enterprises Need to Access Informal Credit? The Case of Vietnam

Abstract

For Vietnamese SMEs, the informal credit channel is still the most familiar financing source despite government’s efforts to widen access to formal credit. The present paper attempts to seek out new evidence to determine why SMEs’ access the informal credit market after excluding firms that consider family as the most important informal source out of sample. The empirical results strongly support three following hypotheses: (1) Firms that cannot be satisfied through formal credit market choose to access informal credit; (2) Firms access informal credit, in part, to reduce application cost and to provide immediate access to credit to seize investment chances; (3) Good business environment enables SMEs to decrease their reliance on informal credit. Moreover, we found that small firms, and firms located in rural areas were more likely to use informal credit than others. Furthermore, a higher age of owner and a good business performance both help firms decrease their reliance on informal credit.