INFORMALCREDIT, USURY, OR SUPPORT? A CASE STUDY FOR VIETNAM Cuong Viet NGUYEN 1 * and Marrit van den BERG 2 1 National Economics University, Hanoi, Vietnam; and 2 Development Economics Group, Mansholt Graduate School of Social Science, Wageningen University, Wageningen, the Netherlands First version received October 2012; final version accepted February 2014 The informal credit market remains an important source of finance for the poor in Vietnam.Yet, little if anything is known about the impact of informal loans on poverty and inequality, and the Vietnamese government has no policies towards the informal credit market. In the present study paper, we found that the effect of credit from friends and relatives on per capita expenditure is positive but not statistically significant. Meanwhile, the effect of credit from private moneylenders on per capita expenditure is positive and statistically significant. Borrowing from private moneylenders increases per capita expenditure of households by around 15%. Further, it reduced the poverty incidence of borrowers by around 8.5 percentage points in 2006 and significantly decreases the poverty gap index and the poverty-severity index. Borrowing from private moneylenders also reduces expenditure inequality, albeit at a very small magnitude. Keywords: Informal credit; Poverty; Inequality; Household survey; Vietnam JEL classification: I32, I38, H43, H81 I. INTRODUCTION C redit is seen as an important tool for households to promote production and business, increase income, and reduce consumption fluctuations. Microcredit and other financial services would enable the poor to build assets, increase income, and reduce their vulnerability to economic stress. But credit is severely rationed for poor households. Commercial banks are not inter- ested in poor clients because of information problems and lack of collateral (Hoff and Stiglitz 1990; Nagarajan, Meyer, and Hushak 1995; Kochar 1997; Bell, Srinivasan, and Udry 1997; Bose 1998; Boucher, Carter, and Guirkinger 2008). Governments and NGOs have stepped into the gap and have provided credit to the poor, often at highly subsidized interest rates. However, while microcredit pro- grams generally do not require collateral, they do screen borrowers by other eligibility criteria such as poverty status or repayment capacity, often indirectly * Corresponding author: Cuong Viet Nguyen, National Economics University, Hanoi, Vietnam. Tel: +844-38693211; Fax: +844-38693369; Email: c_nguyenviet@yahoo.com The Developing Economies 52, no. 2 (June 2014): 154–78 doi: 10.1111/deve.12042 © 2014 Institute of Developing Economies