Implications of the Study

The findings provide several implications for academics and microcredit policy.

8.3.1 Academic Implications

Capital does not naturally flow from rich to poor in rural credit markets, particularly rural credit markets in developing countries because of market imperfection and asymmetric information (Aghion & Morduch, 2010; Stiglitz & Weiss, 1981). Risk assessment toward borrowers defines credit accessibility which, in turn, is determined by adverse selection and moral hazard behaviours. Given limited credit worthiness (e.g., collateral), the poor can hardly borrow from formal credit institutions in the rural credit market. Pro-government intervention advocates that public policies are needed to correct market malfunctioning, expanding credit outreach; however, these theories if they stand alone cannot assure a better solution for the rural credit market. Pro-poor policies, starting with implementing microcredit programmes, face a trade-off between profit maximisation and government subsidy, and with third party‟s incentives in the lending practice (Adams & Vogel, 1986). Profit maximisation and third party‟s incentives help explain inaccessibility to microcredit programmes. Reflected from this study, the interlinked relationship of different parties in the rural credit market is embraced by different economic theories but a theory that is sufficiently robust to justify the rural credit market and for it to work efficiently towards the goal of poverty reduction and rural development needs to be evolved, together with the rural economy development.

Endogenous informal microcredit in accessibility to formal microcredit reflects that the degree to which informal credit influence depends on its the prevalence in a particular credit market. Together with selection bias, coexisting credit sectors influence borrowing behaviour (see also Bell, 1990; Guirkinger, 2008; Heckman, 1979). Therefore, the structural relationship

187 between the informal and formal credit sectors should be considered appropriately in

assessing accessibility to a particular microcredit programme and the programme impact.

8.3.2 Policy Implications

The results show a positive relationship between accessibility to the VBSP microcredit programme and its impacts on rural households‟ income and expenditure, indicating that the microcredit programme effectively works toward improving the rural livelihoods and poverty reduction. The results also reveal various factors that influence both credit accessibility and households‟ outcomes that includes monitoring the programme implementation. Therefore, different policiy implications related to improving microcredit accessibility and impacts can start from the government to microcredit providers and rural households.

For rural households, improving microcredit accessibility can start from the household

themselves by actively participating in a credit group and improving their education and work skills because education essentially builds up creditworthiness for collateral-free borrowers and work skills promise repayment. The poor, in this case, are physically poor due to capital contraint; they lack of land and working capital to generate a sufficient income level for a living. Given that pre-condition, microcredit shows its positive impact on the targethousehold. However, it isdifficult for the extremely poor to benefit from microcredit because they need pre-support (e.g., special aids, communinity support) to overcome internal rationing.

Extremely poor people like people suffering from under and/or malnourishment, illnesses, lack of skills, etc., cannot be a target of microcreditthat aims to provide small credit for income generating activities. Intervention in the form of microcredit will not be an efficient solution but a mixture of welfare and a microcredit programme is required for this target group. Microcredit should always be seen as the next step after they [the poor] are able to work (Gibbons et al., 2000; Seibel, 1997).

As the informal and formal credit sectors coexist and interact, an appropriate credit policy is to direct both sectors to work better towards the rural development goal. A better linkage between the two credit sectors would enable one sector to overcome its weaknesses by gaining from other‟s strengths (for example, see Li et al., 2011; Seibel, 1997). Particularly, lending through group without joint-liability helps improve the participation rate of poor households. Expanding this lending to some informal lenders in the group would reduce the

188 transaction costs of screening but likely increase the repayment rate because the borrowers can roll over their loans using the available alternative credit. On the other hand, the

government and VBSP should reinforce the lending policy on individual contracts to reduce the leakage rate while keeping the programme more cost effective (Nguyen, 2008).

Given the persistence of asymmetric information, direct intervention of government into the provision of financial services is not an „optimal‟ solution because the government faces the same problems of asymmetric information as the financial institutions. Therefore, to make microcredit markets work, government and financial institutions should focus on the solutions to reduce the problem of asymmetric information and transaction costs associated with

microlending (see Adams & Vogel, 1986; Bardhan & Udry, 1999). For the government, it is important to enhance the development of financial infrastructure and informational

intermediation while improving physical infrastructure and providing a consistent microcredit policy to ensure the bottom poor have adequate access to microcredit (see Navajas et al., 1998; Seibel, 1997). For the financial institutions, it is essential to develop and employ the innovations in financial technologies such as tailored lending contracts (e.g., group lending) or partnership based lending (e.g., with credit rating, credit scoring agencies).

The downgrading strategy that separated larger scale loans from VBA to small scale loans from VBSP shows the effectiveness gained from adapting innovation in lending practice to expand credit to the rural area (see also Le, 2011; Nguyen, 2008; Pham & Izumida, 2002). Rural and poor households have had greater access to preferential microcredit inthe past decade and the positive impact of microcredit programmeshas been ducumented. However, as the rural credit market evolves, including the development of credit demand and credit supply, and other microfinance services, thereis a question of whether the VBSP setting is sustainably operating in the changing environment. The development strategy of VBSP operation should, however, reflect its predecessor‟s failure. Divesting VBA microfinance operations by setting up a heavily subsidised VBSP to disburse preferential loans targeting the poor contravenes the principles of sound banking practice and sustainable poverty alleviation. Moreover, highly regulated banking operataions lack the dynamics of adequately responding to the growing demands of vast numbers of the poor for a full range of financial services (Dufhues,

Heidhues, & Buchenrieder, 2004; Seibel, 1997). This issue should be seriousely re-addressed in the long-term stragey of agricultural and rural development, and poverty reduction.

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