Hypotheses on changes in savings and credit system to 2005
William Smith, March 2003.
WOCCU was asked to make a forecast of how the savings and credit institutions established
by the Women’s Union in Ha Tinh are likely to change during a period of three years after
the ending of DFID funding in March 2003. These forecasts are not based on assessment of
the objectives and goals of the various projects and partners themselves. Rather they are
WOCCU’s own hypotheses, based on ‘external’ observation. As it is possible that these
hypotheses may be tested in an ex-post review of DFID funded activities in Ha Tinh in
2005, some indication is also given of possible means for their verification.
Cam Xuyen District
Because WOCCU has pulled out of working in Cam Xuyen district, we have less
information on the real, detailed situation with regard to the savings and credit system there
from July 2002 onwards. Moreover, much will depend on the terms of Save the Children
Fund’s handover agreement with the provincial authorities. As of now (March 2003), the
terms of this handover are unclear as the agreement is not due to be signed until June. It is
assumed here that SCF and the province will agree that donated funds are transferred to the
state budget at the commune level, which is managed by the Commune People’s Committee.
Ky Anh District
Oxfam GB is proposing to hand over responsibility for the savings and credit programme to
the District Women’s Union in March 2003. It is assumed that the loan fund will be
recorded in the District People’s Committee budget and management will be assigned to the
District Women’s Union.
Can Loc District
ActionAid Vietnam will continue to provide assistance and monitoring in Can Loc District
until 2005. Monitoring of developments ‘post DFID’ up to 2005 may therefore be less
relevant than in the other districts where the NGO presence will be phased out earlier. In
the long term, it is also assumed that the loan fund granted by AAV will be recorded in the
District People’s Committee budget and management assigned to the District Women’s
Union.
Due to the different institutional arrangements and histories of programmes in the three
districts, hypotheses on likely changes over the next 3 years contain some significant
differences. It is suggested, however, that these hypotheses can be grouped into the
following categories:
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1.Authority for defining policies and procedures.
In Cam Xuyen, it is unclear which organisation will be responsible for defining the policies
and procedures to be followed by the CFIs following the withdrawal of SCF UK. This is a
major threat which hangs over the programme. Will the district level or commune level be
responsible ? To date, all decisions on policies and procedures have been made by SCF or
the District Women’s Union. SCF is currently proposing that the Commune Women’s
Union ‘recommends’ policies which would then be ‘approved’ by the disrict, with ‘advice’
given by a District Advisory Board.
A wide range of policy issues will be effected:
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Who sets interest rates ?
Who establishes lending policy (e.g. maximum loan size, lending criteria etc.) ?
Who establishes savings policy (e.g. compulsory savings requirement) ?
Who establishes capital policy (i.e. how net income is distributed to funds) ?
Who approves financial plans and expenditure budgets and norms ?
etc.
It is forecast that that these decisions will fall, de facto, to the Commune Women’s Union,
with significant influence wielded by the Commune People’s Committee (ultimately
responsible for the loan fund donated by SCF).
In Ky Anh it is likely that the authority to decide on policies and procedures will rest clearly
with the District Women’s Union. At present, the DWU enjoys responsibility for decisionmaking in conjunction with Oxfam and this is likely to be strengthened after Oxfam’s
withdrawal.
In Can Loc, it is probable that this authority will be split between the District Women’s
Union and the Board of Representatives of each commune. It is likely that the District
Women’s Union will issue decisions that must be implemented by all communes. However,
it is hoped that the independent authority of the Board of Representatives, elected by the
general assembly of members, can also be developed following the withdrawal of AAV. One
of the potential dangers in Can Loc is an indistinct division of authority and possible
contradiction of authority between the District Women’s Union and the commune level
Boards of Representatives.
Means of verification. Policy decisions and procedures should be issued and signed by the
issuing authority, so it may be possible to verify where decision-making authority lies by
examining documentation. However, if authority is exercised unofficially, it may only be
possible to verify the situation by interview commune level staff.
2. Supervision.
In Cam Xuyen, it is unlikely that the District Women’s Union will take over any form of
thorough supervision of the savings and credit system. If SCF funds are transferred directly
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to the commune budget, the DWU will have no financial investment in the communes, will
derive no legitimate income from lending to communes that would cover supervision costs
and would have no identified or specialised staff with the technical capacity to conduct
supervision activities.
Despite training provided to provincial level staff under the WOCCU project, it is also
unlikely that the Provincial Women’s Union will be able to carry out effective supervision of
the 21 CFIs in Cam Xuyen. It is also highly unlikely that the CFIs will be registered as legal
entities subject to supervision by the State Bank. This lack of supervision is likely to place
the safety and soundness of the commune institutions in grave danger.
In both Ky Anh and Can Loc, responsibility for supervision of commune institutions is
likely to continue to lie clearly with the District Women’s Union. The DWU is also likely to
continue to earn income from lending to the communes. One of the main questions facing
the schemes in Ky Anh and Can Loc, however, is whether the District Women’s Union will
choose to continue to assign full-time specialised staff to be responsible for supervision of
these savings and credit activities and whether they choose to utilise interest income to fund
these full time positions. Even with full time staff, it will also be interesting to follow-up on
the extent to which the District Women’s Union conduct thorough monitoring and
supervision of commune activities in future.
Means of verification. It would be quite easy to check whether supervision is taking place or not.
Requests could be made to see: supervision plan, supervision guidelines and supervision
reports.
3. Opportunities for errors and fraud.
In Cam Xuyen District, due to the weak accounting practices and lack of internal controls
that were clearly evident at least up until July 2002, and as a result of the lack of district level
supervision described above, it is probable that increasing opportunities for errors and fraud
by commune, village and group level staff will open up. It should be emphasised that this
forecast is in no way meant to reflect the moral standards of Women’s Union staff in Cam
Xuyen. Rather, it demonstrates the opportunities for fraud that the institutional weaknesses
described above will create. Opportunities for fraud could take many forms including:
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appropriation of commune owned funds (growth fund, inflation fund, training fund,
loan loss reserve etc.) built up from members’ interest payments over the term of the
project. e.g. through non-authorised expenditure, unrecorded income etc.
appropriation of members savings e.g. by miscalculation or underpayment of savings
interest.
appropriation of equipment and fixed assets.
Communes in Ky Anh are currently adopting the model accounting system developed by
WOCCU. Problems have been faced in adoption of the system, in part because of the policy
of utilising non-specialised, part-time staff. The extent to which opportunities for fraud are
minimised will therefore depend on the District Women’s Union determination to:
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promote the recruitment of full-time, specialised staff at the commune level.
enforce adoption of the new accounting system.
conduct regular and detailed monitoring of commune level accounting activities.
In Can Loc district, full time staff are in place in all communes and the model accounting
system has been adopted. If district level supervision activities are strong, it is forecast that
healthy financial practices will be maintained.
Means of verification. Clearly such potential problems are not going to be apparent from
financial reports or indeed from the results of a general monitoring visit. To determine
whether there is a significance incidence of errors or fraud, it would be advisable to request
the State Bank branch of Ha Tinh to conduct an audit in 2004-5 (in the same detailed
manner that they conducted the audit before the recognition of Cam Thanh PCF).
4. Transfer of state funds.
In Cam Xuyen, it is quite possible that the Commune People’s Committee will see fit to
require transfer of state budget funds (provided by SCF) from use by the CFI to other local
projects. This might take various forms:
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Requesting the CFI to lend to certain borrowers as required by the Commune
People’s Committee.
Formal withdrawal of state funds from the CFI to fund other aspects of the state
budget.
The Commune People’s Committee would have the legal right to do this and, indeed might
be well justified in doing this if management issues were apparent within the CFI or the CFI
accumulated excess liquidity from compulsory savings mobilisation etc with no legitimate
form of investment elsewhere.
Such transfer of funds or ‘directed lending’ is considered more likely at commune level for
the following reasons:
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Availability of budget funds at the commune level are severely limited while the
demands and needs for expenditure are many and varied. Raising budget funds
locally through fees and levies by the Commune People’s Committee is often a
sensitive issue. Financial pressure to secure ‘donor’ loan funds managed by the
Women’s Union is considered to be much higher at the commune level.
Weaknesses in management and accounting of commune level budgets is a major
issue which has been recognised and has caused difficulties in many parts of the
country.
Social and family pressures at the commune level result in the greater
dependence of mass associations and their leaders on the People’s Committee
than is usual at the district level where relations are determined more by official
and bureaucratic procedures.
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In Ky Anh and Can Loc, when Oxfam GB and ActionAid phase out, it is assumed that loan
funds donated will be recorded in the district level state budget and management allocated to
the District Women’s Union for continued lending to the communes. It is considered
unlikely that the District People’s Committee in either district would decide to transfer
management of these funds to other organisations or to transfer the funds for investment in
other areas unless significant changes take place in local politics or the local economy.
Means of verification. State Bank audit (as in section 3 above).
5. Legal status.
It is not expected that any of the commune level institutions in Cam Xuyen or Ky Anh will
be able to register as legal entities during the next three years. Suitable legal frameworks have
not yet been developed and the commune level institutions in these districts have not yet
developed sufficient institutional strength to meet the likely criteria for legal recognition.
It is considered possible that some of the commune institutions in Can Loc could be
registered as PCFs by 2005. However, this is likely to depend on external intervention and
support either from ActionAid or from a new WOCCU project. Naturally, it will also
depend crucially on State Bank policy and practice in this area.
Means of verification. Acquisition of legal status should be easily verifiable through examination
of any operating licences available on a brief visit to the commune.
6. Interest rate policy
In Cam Xuyen, if decision-making authority lies with the Commune Women’s Union, with
significant influenced wielded by the Commune People’s Committee, it is quite likely that
interest rates will increasingly be set according to political rather than cost recovery or
market criteria. This will threaten the profitability of the CFIs. This tendency may also
become increasingly apparent in the other two districts.
Means of verification. Trends in actual lending rates charged should be monitored against the
inflation rate. Decision-making authorities should be questioned on the rationale used in the
setting of lending rates.
7. Lending policy
In Cam Xuyen, if decision-making authority lies with the Commune Women’s Union, with
significant influenced wielded by the Commune People’s Committee, it is quite likely that:
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small scale lending to poorer households will reduce.
preferential lending to local officials and elites will grow.
repayment schedules are relaxed.
greater focus is given to longer term lending.
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This in turn could lead to increasing repayment difficulties (see section 3 above). These
tendencies may also become increasingly apparent in the other two districts.
Means of verification. These trends will be very difficult to monitor without examining a sample
of the loan portfolio in detail.
8. Savings policy/investment policy
In Cam Xuyen and Ky Anh, it is quite likely that the CFIs will continue to levy compulsory
savings from members. This is inconvenient and costly to members but provides the CFIs
with a stable and cheap source of funds for lending. It will be interesting to examine whether
significant member dissatisfaction will build up over this issue. If savings continue to be
levied and withdrawals continue to be highly restricted, it is likely that many communes will
accumulate excess liquidity. Under current arrangements, no legitimate channels are open to
CFIs for the investment of excess liquidity. This is a likely breeding ground for fraud (e.g.
non-legitimate investments).
In Can Loc, it is quite likely that some communes will develop stronger voluntary savings
mobilisation capacity. In My Loc and Nhan Loc communes, new fixed term, individual
savings products are currently being developed.
Means of verification. Policies regarding the continued levying of compulsory savings can be
monitored relatively easy. Accumulation of excess liquidity and recourse to non-legitimate
investment would, however, only be revealed by a State Bank audit (see section 3 above)
9. Provisioning and capital policy
In Cam Xuyen, if decision-making authority lies with the Commune Women’s Union, with
significant influenced wielded by the Commune People’s Committee, it is quite likely that
less emphasis will be placed on the build up of appropriate reserves (loan loss reserves and
institutional capital). It is likely that loan loss provision would reduce and less emphasis
would be placed on using net income to maintain safe levels of capital. This tendency may
also become increasingly apparent in the other two districts.
Means of verification. Decision-making authorities could be questioned on changes in loan loss
provisioning policies and policies on the division of net income.
10. Repayment difficulties.
In any district where external supervision is weak, it is probable that the roll-over and
refinancing of loans will persist and grow. This will not be reflected in the CFI’s financial
reports as the system of monitoring repayment is weak. However, it would clearly place the
CFIs’ loan portfolio and solvency at great threat in the long term.
Means of verification. State Bank audit (as in section 3 above)
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