Vay mượn (Vietnam)
|Author: Abel Polese|
|Affiliation: Tallinn University|
Original text: Abel Polese, Tallinn University
Both vay and mượn refer in Vietnamese to the act of borrowing money. Used together, they come to mean ‘borrowing from all available sources.’ This describes a situation where an individual, a couple or a family collects funding from a variety of sources to buy property or start a business.
The practice is fuelled by three main factors. The first is the large number of people in Vietnam who are informally employed. Because of the informal nature of their contract and hence of their income, many self-employed workers cannot meet the formal requirements to apply for a mortgage. Second, many ordinary people tend not to trust the banks. Third, the idea of a mortgage runs against prevailing ideas of property in Vietnam and, while mortgages are becoming more commonly accepted in urban areas, banks have so far identified few if any products that both meet the needs of potential customers and that manage risk in such a way as to enable the banks to loan money to private borrowers.
In 1986, Vietnam launched a series of reforms known as Đổi Mới (English: ‘renovation’). Aimed at moving Vietnam toward a socialist-oriented market-economy, these reforms included allowing competition between the state and the private sector in non-strategic sectors of the economy. While the state formally retained ownership of land, it now allows land to be privately rented. This has led to substantial growth in private agricultural investment and production.
These reforms have enabled private individuals to rent property, set up companies and carry out most of the activities that are commonplace in market economies. Modernisation has taken place relatively quickly and entrepreneurship has flourished. Even so, the availability of start-up capital remains limited, not least because interest-rates on loans remain relatively high. In 2015, for example, the interest rate stood at 7.1 percent. (This was however the lowest rate for the previous decade, which saw interest rates peak of 17 percent in 2011.)
In these circumstances, vay mượn has proved an effective mechanism for satisfying the demand for start-up capital. The practice is based on social solidarity and a scaled approach to secure money. Once someone decides that they need capital in order to make an investment, they discuss the issue with their close relatives who, depending on their own financial situation and the level of trust they feel for the borrower, will offer a sum of money, possibly at zero interest, to be repaid within a flexible timeframe. The lender may seek to agree a deadline by which the loan should be repaid, but will in practice have no formal means of enforcement. Unlike a formal bank- loan, for example, the lender cannot repossess property in the event of a delay or failure to repay a loan. Even so, the practice is commonplace and remains widely used. This is because there are social and moral mechanisms in place to punish those who fail to repay loans. A borrower who fails to repay risks losing face and reputation, as well as the loss of family and social connections. As a result, the borrower has every interest in repaying the loan as quickly as possible. Moreover, the borrower may in future be invited to reciprocate and to offer a loan to another relative, and so the practice continues.
In cases where an aspiring borrower’s close relatives are unable to come up with as much money as is needed, the borrower will approach extended-family members or close friends. The capacity to request a loan, and to be trusted by others, depends largely on one’s personal reputation. One is unlikely to be lent money if one is seen as unreliable and if one has a track-record of defaulting on loans. An exception might be a relative in dire circumstances, in which case relatives might become more flexible and lend money in spite of higher risks of non-repayment. Interest rates tend to be zero, or close to zero, when money is borrowed from very close relatives. Rates are however likely to be higher when a borrower approaches friends or distant relatives, and when the sum in question is substantial. In such circumstances, the interest rate is likely to depend not only on how likely the borrower is expected to repay the money on time, but also on the nature of the personal relationship between the borrower and the potential lender. Every loan is negotiated on a case-by-case basis. If, for example, the lender thinks that one day they may need the borrower’s services, they may suggest a zero interest rate that will give them informal credit with the borrower, enabling them to request a return favour at some future date. It may also be the case that a potential lender (A) owes a favour to or is dependent on someone (B) who, in turn, requests assistance for a borrower (C). In such circumstances, A may consider assisting C as a means of repaying a debt to B.
How much and from whom to borrow depends largely on individual choices. The practice of informal loans is acceptable both socially and legally. The only real danger vay mượn presents is that people may fall victim to loan sharks when trying to borrow from outside their closest circle. While the practice is well known and openly discussed in Vietnam, it has not as yet been closely studied in the academic literature.
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