Operational and Institutional Obstacles for the Efficacy of Micro
Credit Programs for Poverty Reduction in Rural Vietnam
VLIR Policy Preparing Research
Mission Report first research phase
Vietnam, 20/10/03-19/12/03
Miet Maertens
Policy Research Group, KULeuven
-Mission Report 21st January 2004-
Contents
List of Abbreviations
1. Overview of the Mission
1.1. General
1.2. Selection of case-study areas
1.3. Qualitative data collection
2. Preliminary results
2.1. The credit market in rural Vietnam
2.2. The Case-study regions
3. Planning further research
3.1. Methodology
3.2. Time planning
Annex: Draft Decree for Micro Finance Regulations
www.prgleuven.be
miet_maertens@econ.kuleuven.ac.be
List of Abbreviations
ADB
CCF
MARD
MFRC
MOLISA
MPI
NGO
PCF
PRA
ROSCA
SBV
SPB
VBARD
VBCP
VFA
VND
VWU
WVI
Asian Development Bank
Central Credit Fund
Ministry of Agriculture Rural Development
Micro-Finance Resource Center
Ministry of Labour, War Invalids and Social Affairs
Ministry of Planning and Investment
Non-governmental organization
People’s Credit Fund
Participatory Rural Appraisals
Rotational savings and credit associations
Vietnam State Bank
Social Policy Bank
Vietnam Bank for Agriculture and Rural Development
Vietnam-Belgium credit project
Vietnam Farmers’ Association
Vietnamese Dong (currency)
Vietnamese Women’s Union
World Vision International
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1. Overview of the Mission
1.1. General
To facilitate and implement the research in the villages in Vietnam, a cooperation
with the Micro Finance Resource Center at the National Economics University of
Hanoi was set up. The cooperation was established with Prof. Dao van Hung, the
vice-director of the MFRC. In addition to this cooperation, two research assistants
were contacted for the practical implementation of the research in the North and the
South of Vietnam: Ms. Tran Binh Minh from the MFRC in Hanoi and Dr. Tran Viet
Hoang from the Vietnam National University in Ho Chi Minh City.
To facilitate the research and introduce the research project at the province, district
and commune level, different institutions were visited in Hanoi, including the
Women’s Union, the VBARD, the SPB, PCF, World Vision International, the
Belgium-Vietnam credit project, etc.
Additional secondary information and literature was collected in Hanoi, including
existing reports and impact studies of micro-credit, secondary statistical data and the
draft decree for regulation of micro-finance in Vietnam (see annex to this report).
During the first research phase, two case study areas in the Red River Delta and the
Mekong Delta were selected and a round of quantitative data collection was
implemented in those areas.
1.2. Selection of Case-Study Areas
The initial intention of the research was to focus on two case-study areas, one in the
north and one in the south of Vietnam. Those case-study areas should preferably be
located in the two delta regions –Red River Delta in the north and the Mekong Delta
in the south – in order to make comparison between these two major rice-growing
regions possible.
To facilitate practical implementation of the research, it was chosen to select in each
region 1 province, 1 district in the province and 3 communes within the district as
case-study areas. In the Red River Delta, we focus the research on the district Phu Cu
in Hung Yen province. In the Mekong Delta, the district Cai Be in Tien Giang
province was chosen. Both provinces belong to the poorest provinces in the delta
regions with an average monthly per capita income among the 20% poorest
households of 92,000 VND (5.9 US $) in Hung Yen and 102,800 VND (6.6 US $) in
Tien Giang (GSO, 2000). In addition, the selected districts are the poorest in the
province and both are agricultural areas with a focus on rice and fruit production. The
district Cai Be is located 4 to 5 hours drive south from Ho Chi Minh city and the
district Hung Yen 3 to 4 hours drive south from Hanoi.
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In both districts, 3 communes were selected for the research as to include a number of
different credit programs:
Table 1: Overview of Case-Study Areas and the Credit Facilities
Credit facilities and projects
Red River Delta (north of Vietnam)
Province
Hung Yen
District
Phu Cu
Communes
Doan Dao
- VBARD & VBSP
- Vietnam – Belgium credit project
- credit project World Vision NGO
Tam Da
- VBARD & VBSP (intercommune branch)
- credit project World Vision NGO
Phan Sao Nam
- VBARD & VBSP
- PCF
- Vietnam – Belgium credit project
Mekong Delta (south of Vietnam)
Province
Tien Giang
District
Cai Be
Communes
An Huu
- VBARD & VBSP (intercommune branch)
- PCF
- Vietnam – Belgian credit project
Tan Thanh
- VBARD & VBSP
- PCF
Thien Tri
- VBARD & VBSP
1.3. Qualitative Data Collection
During the first phase of the research, information was collected from interviews with
key informants and group discussions with borrowers from different credit schemes.
The key informants were the Women’s Union and staff of different credit institutions
and programs (VBARD, VBSP, PCF, Vietnam-Belgium Credit Project, World Vision
International) at the provincial, district and commune level. The issues addressed
during these semi-structured interviews included the credit mechanism, the
application procedure, the repayment performance, the outreach of the credit scheme,
institutional organization, future development, limitations for expansion, etc. At the
commune level, also People’s Committee, the Women’s Union and/or Farmers’
Association were visited to introduce the research and collect some general socioeconomic information for each commune.
In total, 16 groups of borrowers were questioned in the 6 communes. The number of
people participating in the group discussion varied from 4 to 12 people. During the
group discussions, it was possible to obtain an overview of the different sources of
credit and the credit history of the participants. In addition, we inquired about the
income-generating activities of the people, their credit needs, the purpose of the
current loans, investment in agriculture and off-farm business, their land holdings,
their wealth position, etc. Also the credit mechanism, the application procedure and
the reasons for joining a specific credit program were discussed. Further discussion
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topics varied from group to group, according to the composition of the group and the
daily activities of the participants. Discussion topics included: agricultural cultivation
and livestock rearing, marketing of agricultural produce, land rental, seasonality and
income shocks, consumption smoothing and risk-coping strategies, etc. During the
discussions, some visual methods and PRA-tools were used; mainly drawing of
diagrams and construction of seasonal calendars.
Table 2: Overview of the number of focus group interviews
Commune
Doan Dao
Group discussion with borrowers from:
- VBSP
- Vietnam-Belgium credit project
- World Vision
Group size
(8)
(6)
(5)
Tam Da
- VBSP
- VBARD
- World Vision
(7)
(6)
(7)
Phan Sao Nam
- VBSP
- Vietnam-Belgium credit project
(5)
(5)
An Huu
- VBSP
- VBARD
- Vietnam-Belgium credit project
(4)
(12)
(11)
Tan Thanh
- VBSP
- VBARD
- PCF
(7)
(10)
(6)
Thien Tri
- VBSP
- VBARD
(4)
(5)
2. Preliminary Assessment and Results
2.1. The rural credit market in Vietnam
Before the renovation policy of 1986, the State Bank of Vietnam was the sole actor in
the credit market in Vietnam, serving as central bank as well as commercial bank.
Under this system, the credit needs of rural communes, cooperatives and state farms,
were handled by credit cooperatives that were managed by local’s People Committee
in association with the SBV. Rural credit needs existed but they occurred more at the
cooperative level rather than the household level since cooperatives were the units of
production, managing also financial problems. The renovation policy or Doi Moi of
1986, introduced the household as unit of agricultural production and launched a set
of economic reforms, including liberalization of the financial sector. The commercial
responsibilities of the SBV were taken over by two state-owned commercial banks:
the Agricultural Development Bank and the Commercial Bank of Vietnam. However,
these only served state-owned enterprises and neglected the needs of farmers and rural
households. This resulted in a growth of credit cooperatives who enlarged their funds
by offering very high interest rates on savings. However, the break up of the
collective production system lead to default loan repayments to the credit
cooperatives and the system collapsed in 1990-1991. As a response, the government
mandated the Agricultural Development Bank (that changed into the Vietnam Bank
for Agriculture and Rural Development – VBARD) to provide credit directly to rural
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households. In the beginning the VBARD focused on wealthier rural households that
could provide collateral but they gradually expanded their credit activities. The
VBARD currently has a network of 1568 branches; one in every province, every
district and intercommune branches covering nearly all communes in the country.
According the figures compiled by the Asian Development Bank and the State Bank
of Vietnam, the VBARD reached 5 million rural household in 2001, which is 42 % of
all rural households (table 3).
In 1995, as part of the ‘Hunger Eradication and Poverty Reduction’ strategy of the
government, a new funding institution, the Bank for the Poor, was set up as a
complementary section to VBARD. The objective of the Bank for the Poor was to
provide credit to the rural poor at subsidies interest rates. In 2003, the Bank for the
Poor became the Social Policy Bank – SPB and separated from VBARD. The SPB
currently has provincial and district level branches but no commune branches and the
SPB-loans are still being managed by the VBARD staff. According to the figures in
table 3, the VBSP reaches about one fifth of all rural households.
Next to VBARD and SPB, the network of People’s Credit Funds, constitute a third
actor in the rural credit market in Vietnam. This a network of cooperatives owned by
its members and organized in a Central Credit Fund, owned by the member PCF and
the SBV. This network was established in 1993 and incorporated the few credit
cooperatives that were still functioning after the collapse of credit cooperatives in
1990-1991. The PCF network is much less wide-spread than the VBARD and SPB
with 888 local PCF and 720,000 borrowers.
Table 3: The outreach of different credit institutions in Vietnam for 2001
Credit
institution
Average
loan size
(VND)
Total
number of
borrowers
Number % of total % of rural
of poor* borrowers hh reached
borrowers
poor
VBARD
6,450,000 5,000,000 2,350,000
47 %
42 %
SPB
2,000,000 2,571,000 1,250,000
48 %
21 %
PCF
3,400,000
720,000
400,000
55 %
6%
Semi-formal 1,547,000
120,000
??
??
1%
sector
Source: Asian Development Bank and State Bank of Vietnam, TA no 3741-VIE
% of
poor rural
hh
reached
35 %
19 %
6%
??
* A poor households is defined according to the MOLISA criteria of having an income of less than
1,000,000 VND per month. At the commune level, lists of poor households are compiled and revised
by the Hunger and Poverty Reduction Committee.
The VBARD, SPB and PCF are the tree main formal credit institutions in rural
Vietnam. The first two operate under the Law on Credit and Financial Institutions
while the latter operates under the Law on Cooperatives. The VBARD and PCF are
commercial, self-reliant institutions with autonomous financial management while the
SPB relies on external funds and subsidies. Next to these institutions, there exists a
whole range of credit projects funded by donor organizations, including multilateral
organizations, bilateral cooperation, and international NGO’s. Also Vietnamese mass
organizations (mainly Women’s Union and Farmers Association) and ministries
(MARD, MOLISA, MPI..) have there own credit projects. All these credit projects
fall outside the Law on Credit Institutions and there is no comprehensive framework
that regulates this so-called semi-formal credit sector. In order to provide an
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inspection mechanism, establish laws and regulations on the mobilization of savings,
and further regulate this semi-formal sector the SBV in cooperation with the ADB is
currently working an a decree for micro-finance institutions (The draft of the decree is
provided in annex to this report).
The financial services offered by the formal and the semi-formal sector are diverse.
The VBARD offers short term –6 months to 2 years– credit at a monthly interest rate
of 1 % and medium to long term credit at an interest rate of 1.5% per month. The
average loan-size for the VBARD is 6.4 million VND (table 3) and in fact they
provide loans of up to 1 billion VND to individual households. Only for loans above
10 million, collateral is required and they are working towards new regulations of
providing up to 30 million VND without collateral. The SPB offers short term –
usually one year– credit at a subsidized interest rate of 0.5 % per month and without
the need for collateral. The maximum loan size has been increased from 7 million to
10 million VND and on average loans are 2 million VND. The PCF network provides
short term loans at an interest rate of 1.7 % per month and usually requires collateral
on all types of loans. The semi-formal sector constitutes a variety of credit projects
that are usually small and geographically concentrated. Different credit projects have
their own model and methods. Donors have different objectives and that is often
reflected in the way they implement micro-credit programs. Some donors (e.g. many
NGO’s) see micro-credit as a means to reach other development goals (e.g. technical
progress, income diversification, prevention of child labor, etc.) or even purely as
charity. For others, micro-credit is an end or a development goal in itself. Some
micro-credit projects are implemented as ‘business’ with a focus on reaching financial
sustainability in the long term while others focus on reaching the poorest. Most donorfunded credit-projects provide small loans for a short time period. Many of them
follow the VBARD interest rate policies.
As indicated in table 3, it is estimated that the semi-formal sector as a whole reached
in 2001 about 120 million households, representing 1 % or the rural households. As
mentioned before, VBARD, SPB and PCF reach about 47 %, 21 % and 6% of the
rural households, respectively. It is clear that the rural credit market in Vietnam is
dominated by the VBARD. However, next to the wide of outreach also the depth of
poverty outreach of credit programs should be discussed. Although the VBARD does
not explicitly target the rural poor in particular while the SPB clearly does (or should),
the share of poor households among their borrowers is about half for both institutions.
The PCF network is often referred to as ‘credit for the rich’ because of the higher
interest rate and the need to provide collateral. However, the figures in table 3 indicate
the opposite with 55 % of poor households among the PCF borrowers, which would
be a better poverty outreach then both VBARD and SPB. Unfortunately, there exists
no reliable figures on poverty outreach for the semi-formal sector. In addition, there is
still a differentiation among the poor that is not taken into account in those aggregate
data. Also, the MOLISA criteria used to define the poor and the nearly poor are
questionable. The depth of poverty outreach of the formal sector and the targeting of
micro-credit project in the semi-formal sector remains an important issue to be
addressed in this research.
Next to the formal and the semi-formal sector, there is also an informal sector in the
rural credit market in Vietnam. This includes ‘social’ credit from friends, relatives or
neighbors, credit from moneylenders and traders, as well as rotating credit groups
managed by local mass organizations. As there exists no exact figures on the informal
credit sector, it remains unclear how important the informal sector really is.
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2.2. The socio-economic situation in the case-study regions
The two case-study areas that were selected for the research are both agricultural
areas with a focus on rice and fruit production. However, the two regions differ in
many respects. Tien Giang province, situated in the south, has a population density of
678 people / km2 while for Hung Yen province in the north this is almost twice as
much; 1184 people / km2. Both case-study regions are relatively densely populated
and land holdings per households are very small. In the selected communes, the
average agricultural area per households ranges from 0.21 to 0.51 ha per household
with the largest figures in the southern communes (see table 4). However, despite a
lower population density and a larger average agricultural area per household, there
are much more landless households in the case-study region in the south. For
example, in Thien Tri commune, 266 households or 13 % of the households in the
commune have no agricultural land at all. In the northern communes, there are no
landless people and all households have agricultural land according to the size of their
household. This is a result of a series of land reforms with the last Land Law of 1993,
which imposed the equal distribution of agricultural land with long term user rights
for rural households. These land reforms led to a more or less equal land distribution
after the break up of the collective farms in the north of Vietnam. In the south these
land reforms have never effectively been implemented.
Table 4: Demographic characteristics of the 6 surveyed communes
Cai Be district, Tien Giang
Phu Cu district, Hung Yen
Province, South of Vietnam
province, North of Vietnam
An Huu
Tan
Thien Tri
Doan
Tam Da
Phan Sao
Thanh
Dao
Nam
Total population
15,356
9,662
9,742
9,255
5,120
5,200
Number of households
3,603
1,958
2,067
2415
1400
1523
Agricultural area (ha)
1,021
997
1,181
630
300
444
Average agr. area (ha) / hh
0.28
0.51
0.36
0.26
0.21
0.29
Poor and nearly poor hh
??
295
464
770
400
469
(% of total households)
(15 %)
(22 %)
(17 %)
(28 %)
(31 %)
In both case study-areas, poverty still exists and the percentage of poor and nearly
poor (see further) households ranges from 15 to 31% in the surveyed communes. The
access of those poor people to the rural credit market and the impact of small loans on
their livelihood and well-being is an important research issue.
In the surveyed communes in the north, people hold very diversified activity and
income portfolios. Every household cultivates a plot of paddy land and has some
livestock (mostly chicken, ducks and pigs). Some households additionally have a
garden with fruit trees (mostly litchee and longan), have a fishpond or involve in
small trading activities. Also, seasonal migration is common in some communes. Two
rice crops per year are possible on paddy land. Also an intermediate winter crop (e.g.
corn, soybean, potato, etc) is possible but the extent of winter crop cultivation is
limited due to the high labor intensity of those crops. Landholdings are small and rice
cultivation is mainly focused on subsistence. Surplus rice is sold to local traders. Yet,
marketing rice is not always a sign of surpluses. Poorer people often need to sell rice
after harvest to overcome cash flow problems (e.g. to buy inputs for the next harvest
or to fulfill loan repayment duties) which leaves them insufficient stocks and forces
them to buy rice when market prices are higher. Livestock a very important source of
cash income. Litchee and longan production is completely market oriented and is
highly seasonal with production concentrated in July and August. Many households
7
have highly fluctuating income which poses limitations on their investment capacities
and creates a need for consumption smoothing mechanisms. Fluctuating market
prices, spread of pests and diseases (especially with chicken and ducks) and storms
further aggravate this.
The surveyed communes in the south are also rice and fruit production areas.
However, here 3 rice crops per year are possible and rice production is much more
market oriented. Fruit production is more diversified including mango, orange,
pumelo, mandarin, guava, litchee and longan, some of which can be harvested all year
round. People with land holdings, usually have either rice land or fruit gardens and get
the highest share of their income from the land. Due to the possibility of 3 rice crops a
year and the diversity in fruit production, income from agricultural production is less
seasonal. However, fluctuating market prices (especially for fruits), storms and floods
cause many risks for farmers. Livestock production, especially pigs, is also common
in this area. Many landless people involve in pig production, set up very small scale
trading activities or work as agricultural wage worker. Agricultural wage labor is
quite common and there is a demand for daily workers all year round.
The above described differences in land ownership structure, the diversity of income
strategies and the incidence if poverty in the case-study regions might have important
consequences for the credit needs of rural households and the impact of existing credit
schemes.
2.3. Overview of different credit schemes in the case-study areas
In table 5, we give an overview of the different credit schemes in the case study
region, the number of borrowers and the outstanding debt for each scheme. Overall,
the VBARD has the widest outreach. However, in the northern communes the SBP
reaches more or less the same number of households. The PCF reaches about 1 fourth
of the households in two surveyed communes; in another commune they have only
few borrowers while and in the other 3 communes there is no PCF. The VietnamBelgium credit project is present in 3 surveyed communes and its’ outreach ranges
from 7% to 14 % of the households. World Vision International has a credit scheme in
two of the surveyed villages, where they reach 11 % and 14 % of the households.
In both regions, VBARD and SPB work with credit groups. VBARD also has
individual loans while SPB provides loans only through groups. However, these
groups are not really ‘solidarity groups’ or ‘joint liability’ groups. They apply a
system of individual lending through groups rather than real ‘group lending’. Most
borrowers in these groups agreed that they were not liable for each others’ debt and
mentioned that they would never repay the loan of someone else in the group. In some
groups, there was no clarity on whether future access to credit would be affected by
default repayment of other group members. Default repayment never occurred in most
groups. However, this has to be taken with care as in many cases loans were
rescheduled easily. The repayment schedule with the VBARD and SPB usually
includes monthly interest rate payments and principal installments at the end of the
loan period (or in two or three installments for larger loans) Many borrowers,
especially from SPB, had their loans extended for another period when they were
unable to pay back at the end of the original loan period. The credit groups work more
as transaction groups, to reduce transactions costs related to providing small loans to a
large number of borrowers. Often mass organizations, mainly Women’s union and
8
Farmers’ association, are involved in forming these groups and mediating between the
bank and the borrowers. Usually, these mass organizations also guarantee the loans
for the members of the credit groups. This system, in which an existing network of
social organizations link borrowers with the bank and guarantee loans for households
without collateral might have played a fundamental role in the wide outreach of the
formal credit sector in rural Vietnam.
The two donor-funded micro –credit schemes in the case-study areas, work according
to completely different principles. The VBCP works with credit groups, based on the
principal of ‘solidarity’ among the group members. Small loans of 1 or 1.5 million
VND are provided in loan cycles of 1 year and at an interest rate of 1% o month.
Repayment, interest and principal installments, needs to be done monthly and a lot of
attention is put on credit discipline. The Women’s Union is facilitating and managing
the credit scheme. On the other hand, WVI works with village banks. Their focus is to
make access to credit possible for the rural poor by offering small loans with an easy
application procedure at village banks. The interest rate on these loans is 0.7 %, the
loan schedule is up to the borrower and there are no strict repayment regulations.
Table 5: Number of borrowers and outstanding debt for different credit projects in the
6 surveyed communes
Cai Be district, Tien Giang Province,
Phu Cu district, Hung Yen province,
South of Vietnam
North of Vietnam
An Huu
Tan Thanh
Thien Tri
Doan Dao
Tam Da
Phan Sao
Nam
Number of borrowers
(% of rural households reached)
950
1,299
735
672
372
320
VBARD
(26 %)
(66 %)
(35 %)
(28 %)
(26 %)
(21 %)
SPB
241
(6.6 %)
48
(2.5 %)
506
(24 %)
679
(28 %)
293
(21 %)
325
(21 %)
PCF
120
(3.3 %)
470
(24 %)
-
-
-
400
(26 %)
VBCP
240
(6.6 %)
-
-
279
(11 %)
-
216
(14 %)
-
-
-
35
(1.4 %)
100
(7 %)
-
5,900
1,400
-
4,400
2,100
172
60
2,900
1,400
170
1,400
1,300
2,500
190
-
WVI
Outstanding debt (million VND)
VBARD
9,783
10,668
SPB
467
182
PCF
120
470
VBCP
240
WVI
-
Next to the formal and the semi-formal sector, household in both study regions also
rely on friends on family for small emergence loans. In the southern case-study area,
only very few people are indebted to moneylenders and interest rates charged by
moneylender are as high as 20 % per month. In the northern case-study area, many
people take credit from moneylenders but interest rates charged are lower, around 2 %
per month. Buying inputs on credit from traders, is rarely done in both case-study
areas. In some villages, also ROSCA’s (rotating saving and credit associations) are
important. E.g. in Tan Thanh commune, 5 % of all households are a member of such a
rotating credit group. These credit and savings groups are usually formed by members
9
of the Women’s Union or Farmers’ Association. Each member contributes a small
amount of money and the fund is then lend to each member in turn.
Because the variety in credit schemes, the diversity of income strategies, and the
extent of poverty the case-study areas are particular interesting to study the access and
the impact of credit. The qualitative data collected in the first phase of the project are
being further analyzed and a of relevant issues are being addressed.
3. Planning of Further Research in Vietnam
3.1. Methodology
The research will continue in a second, quantitative research stage with a survey of
approximately 300 households. It has been chosen to concentrate only on the casestudy area in the north of Vietnam. In each of the three communes, 100 households
will be selected in 3 to 4 village of the commune. The reasons to focus on only one of
the two case-study areas are of practical as well as scientifically relevant
considerations.
- A lot of data have already been collected in the two case-study regions during
the first stage of the research. These data already allow a profound analysis of
many relevant issues
- The implementation of a survey requires a lot of preparation, including
selecting and putting together a survey team, which would need to be done
twice for every case-study region. The practical feasibility of this within the
given time and budget limits is questionable. Also transportation costs for the
survey in both case-study region would put questions to the feasibility within
the given budget.
- The two case-study regions are extremely different in many aspects. Because
of that, a survey in both regions, would in effect result in two different
samples of 150 households rather than 1 sample of 300 households This would
put limitations on the statistical possibilities to analyze the data.
- The northern case-study area was chosen because of the cooperation with the
MFRC in Hanoi and because of the range of different credit projects in that
area.
3.2. Time planning
February – March 2004:
April - June 2004:
survey in Vietnam
data entry, data analysis, literature study, preparation of
report
The final report will be ready June – July 2004.
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