Operational and Institutional Obstacles for
the Efficacy of Micro-Credit Programs for
Poverty Reduction in Vietnam
VLIR Policy Preparing Research Project
MIET MAERTENS
Thanks to:
BTC Vietnam, Hanoi
(Mr. Smis, Mrs. Tan and others)
Vietnamese Belgian Credit Project & Women’s Union
(Mr. Bartsoen, Mrs. Ha, Mrs. Van and others)
Micro-finance Resource Centre, Hanoi
(Prof. Dao van Hung & Ms. Tran Bin Minh)
Vietnam National University of HCMC – Economics Faculty
(Dr. Tran Viet Hoang and others)
Overview
The Research Approach
The Rural Credit Market in Vietnam
The Outreach of Micro-credit
The Impact of Micro-credit
Sustainability Issues
Conclusion
The Research Approach
Some Considerations
• Micro-Finance = powerful instrument to
alleviate poverty
• Micro-Finance = pro-poor financial services
– The poor need credit & financial services
– The poor lack access to credit & financial services
 Underdeveloped credit markets in developing countries
 Credit not affordable for the poor ???
 The poor are not creditworthy ???
 Economies of scale: lending to the poor associated with
high transaction costs !!!
 Asymmetric information: the poor have no possibilities
to signal their creditworthiness !!!
The Research Approach
Some Considerations
• Pro-poor lending technologies:
innovative approaches that reduce transaction costs and
replace the need for physical collateral as screening and
signalling method
– Group-lending with joint liability (Grameen Bank)
 Reduced transaction costs: group-leader or regular
meetings
 Social collateral: borrowers screened by other group
members by accepting responsibility for debt repayment
– Stepwise loans
– Standardized products
The Research Approach
Theoretical Framework
• Critical Triangle of Micro - Finance:
SUSTAINABILITY
OUTREACH
IMPACT
Based on Zeller and Meyer, 2002
 Synergies / Trade-offs & constraints ?
Long run
• Existing studies:
– mixed results
– methodological weaknesses
Short run
The Research Approach
Empirical Approach
• 2 Case-study areas:
Commune
Case-study area
Doan Dao
Tam Da
Phan Sao Nam
North: Red River Delta
Hung Yen province
Phu Cu district
Tan Thanh
An Huu
Thien Tri
South: Mekong Delta
Tien Giang province
Cai Be district
Micro-credit institutions & projects
VBARD/
PCF
VBCP
WVI
SPB
yes
yes
yes
yes
yes
yes
yes
yes
yes
yes
yes
yes
yes
yes
– Low poverty rates but high incidence of poverty
– Major rice growing areas
– Variety of credit schemes
yes
The Research Approach
Empirical Approach
• Data collection:
– 1st phase: qualitative data – group discussions & interviews
2 case-study areas: central, province, district &
local level
– 2nd phase: quantitative data – survey of 301 households
Southern case-study area
• Socio-economic description of the case-study areas
Case-study area
Province pop. density
Average agr. area / hh
Landless hh
Agriculture
Northern
1,184 people / km2
0.26 ha
0%
very seasonal
Southern
678 people / km2
0.42 ha
30%
less seasonal
Overview
The Research Approach
The Rural Credit Market in Vietnam
The Outreach of Micro-credit
The Impact of Micro-credit
Sustainability Issues
Conclusion
The Rural Credit Market in Vietnam
The Formal Sector
• Institutions:
– VBARD (Vietnam Bank for Agriculture and Rural Development)
– SPB (Social Policy Bank)

Law on Credit and Financial Institutions
State-owned banks
– CCF/PCF: Central/People’s Credit Fund

Law on Cooperatives
• Products:
– VBARD-loans: average 6.4 million VND; max 1 billion VND; i=1%
– SPB-loans:
average 2 million VND; max 10 million VND; i=0.5 %
– PCF-loans:
range from 1 to 10 million VND; i=1.7 %
• Interest rate policy:
– all ceilings removed since June 2002 but still i = 1% / month
– SPB: subsidized interest rates of 0.5 % / month  much criticism
The Rural Credit Market in Vietnam
The Formal Sector
The Semi-formal Sector
• Donor-funded credit projects
– E.g. Vietnam-Belgium Credit Project (VBCP)
World Vision International micro-credit project (WVI)
 Geographic concentration & scale of the project
 Pursued objectives: MF as a means / MF as an end
 Implementation
– Most projects:
small, short term loans
i between 0.5 and 2 %, follow VBARD
small-scale
– Not much integration among different projects
• Credit project from mass organisations and ministries
• Legal framework: draft decree by ADB and SBV
The Rural Credit Market in Vietnam
The Formal Sector
The Semi-formal Sector
The Informal Sector
• ‘Social credit’ from friends, relatives & neighbours
– Small interest-free loans
• In-kind credit from traders
• ROSCA’s: rotating credit and savings association
– Ho / Hui: i = 1%
– Phuong: no interest charged
• Private moneylenders
• Readily available loans on a broad range of terms
• Interest rates vary enormously
• E.g.
northern case-study region: i between 1.5 and 3%
southern case-study region: i between 5 and 20 %
The Rural Credit Market in Vietnam
Asymmetric information and transaction costs
• Collateral: only larger loans and all PCF-loans
• Group-lending: small loans (up to 10 million)
– Formal & semi-formal sector
– Transactions: meetings or group leader
– Joint liability not enforced!
• Solidarity among group members
• Screening loan applicants by local authorities and mass organisations
• Guarantee fund of local mass organisations
 Transaction costs reduced through group-lending, while
screening and monitoring activities carried out by local
authorities and mass organisation
• Loan performance:
very high repayment rate
formal loans easily rescheduled
Overview
The Research Approach
The Rural Credit Market in Vietnam
The Outreach of Micro-credit
The Impact of Micro-credit
Sustainability Issues
Conclusion
The Outreach of Micro-credit in Vietnam
Nationwide outreach
• Formal sector:
– VBARD: reaches 42 % of rural households (ADB & SBV)
– SPB:
reaches 21% of rural households
– PCF:
reaches 6 % of rural households
• Semi-formal and informal sector:
– No reliable data
– DFID-study from 2001: semi-formal sector reaches 1 % of rural households
Outreach in the case-study areas
NORTERN CASE-STUDY REGION
Phan Sao
Nam
26%
21%
21%
21%
26%
14%
7%
Doan Dao Tam Da
VBARD
SPB
PCF
VBCP
WVI
28%
28%
11%
1%
SOUTHERN CASE-STUDY REGION
Tan
An Huu Thien Tri
Thanh
66%
26%
35%
3%
7%
24%
24%
3%
7%
The Outreach of Micro-credit in Vietnam
Outreach in the case-study areas
• Multiple lending
– N area:
– S area:
43 % of borrowers
mostly involves SPB
6 % of borrowers
mostly involves semi-formal credit projects
• Switching between credit sources
– especially in N area
• Drop-out rates in semi-formal credit projects
• N area:
• S area:
range between 20 and 33 %
number of clients  over loan cycles
range from 9 to 12%
The Outreach of Micro-credit in Vietnam
Outreach in the case-study areas
• Outreach of the informal sector?
– ROSCA’s: up to 500 members but only 10 % can borrow
– ‘Social credit’: most households borrow from friends and relatives
– Moneylenders:
• N area:
almost all households
• S area:
21 % of households
Depth of poverty outreach (analysis only for Southern case-study area)
• Who are the poor?
– Analyses of survey data  poverty classification
cluster analysis based on ‘asset poverty’
 4 groups: POOR, POOREST, LESS POOR and NON-POOR
– The poor: less physical capital; less human capital; lower income
• Who is indebted to whom?
Average outstanding debt from different sources for poverty groups
5.00
4.50
4.00
3.00
Formal sector
(non-subsidised)
SPB
2.50
Semi-formal sector
2.00
Moneylenders
Million VND
3.50
1.50
Other informal
credit
1.00
0.50
0.00
POOREST
POOR
LESS
POOR
NON POOR
The Outreach of Micro-credit in Vietnam
Depth of poverty outreach (analysis for Southern case-study area)
• Who is indebted to whom?
– 72 % of households are indebted with average debt of 5
million VND per household
– The average total amount of debt is  across poverty groups
– Informal sector important (1/4 of total credit)
– Semi-formal sector quite small
– Formal sector most important source of lending for the poor,
the less poor and the non-poor
– Moneylenders most important source of lending for the
poorest
– Outreach of SPB and semi-formal credit projects to the
poorest households ??
The Outreach of Micro-credit in Vietnam
Depth of poverty outreach (analysis only for Southern case-study area)
• Access to formal and semi-formal credit
– Credit transactions result of supply and demand
 Credit rationing?
POOREST
POOR
LESS
POOR
NON
POOR
TOTAL
% of hh with credit demand
91%
95%
86%
76%
85%
% of hh with credit demand that have
access to formal or semi-formal credit
42%
69%
73%
70%
67%
% of households with access to credit that
are credit rationed
59%
66%
65%
58%
63%
 The poorest households are most constrained in the formal
and semi-formal credit market
The Outreach of Micro-credit in Vietnam
Depth of poverty outreach (analysis only for Southern case-study area)
• Poverty Outreach
– Comparison of population distribution and distribution of clients of
different credit schemes:
population
share
VBARD
clients
PCF
cleints
SPB
clients
VBCP
clients
POOREST
13
8
5
12
6
POOR
15
11
11
33
11
LESS POOR
39
41
72
37
66
NON POOR
32
40
13
18
17
Total
100
100
100
100
100
– Poverty targeting ??
The poor and the poorest are not advantaged in the access to specific
credit programs!
Overview
The Research Approach
The Rural Credit Market in Vietnam
The Outreach of Micro-credit
The Impact of Micro-credit
Sustainability Issues
Conclusion
The Impact of Micro-credit in Vietnam
General Considerations
• Impact limited if supply of credit does not fit demand
– E.g. northern case-study area: standardized loan products do not fit highly
seasonal capital needs
• Capital is fungible
– Difficult to trace the exact use of credit
– Difficult to measure the impact of credit
 analysis of the impact of credit in a very general way
– Using survey data
– Results specific for Southern case-study area
– Analysis for the period 1998 – 2003:
asset accumulation
income growth
vulnerability
The Impact of Micro-credit in Vietnam
Impact on asset accumulation
• Regression analysis on asset accumulation
ASSPROD  1   2 ASSPROD98   3 LAND98   4CREDIT   5CREDIT 2   6 HHSIZE   7 DEPRATIO
 8 AGE   9 AGE 2   10 EDUC   11 AH   12TaT  
– 2 models: whole sample
sub-sample of households with credit < 5 million VND
• Results:
– Significantly more accumulation of productive assets for:
 Households with initial larger land and asset holdings
 Larger households with more labour
 Households in the communes An Huu and Tan Thanh
– Positive impact of credit on asset accumulation but not for
small amount of credit. Only credit of over 4 million VND
lead to the accumulation of productive assets
The Impact of Micro-credit in Vietnam
Impact on income growth
• Regression analysis for income growth
INC  1   2 INC 98   3 ASSPROD98   4 LAND98   5CREDIT   6 HHSIZE   7 DEPRATIO
 8 AGE   9 AGE 2   10 EDUC   11 AH   12TaT  
– 2 models: whole sample
sub-sample of households with credit < 5 million VND
• Results:
– Significantly larger income growth for:




Households with initially smaller income
Households with initially more land and asset holdings
Larger households with more labour
Households in the communes An Huu and Tan Thanh
– Positive impact of credit on income growth
 Small amounts of credit: significant impact on income growth
 Impact of credit not increasing initial asset position of the household
 Impact of small loans lower in less developed communes
The Impact of Micro-credit in Vietnam
The potential of MF to reduce vulnerability
• Explicit insurance services are limited
– Formal sector provides no insurance mechanism
– Semi-formal sector provides insurance against covariate risk
for borrowers of specific credit schemes
– Idiosyncratic shocks have most severe consequences
• Credit as insurance mechanism?
– Limited possibilities as use of credit is confined to
productive purposes
• Ex ante insurance mechanism
– Income diversification as a way to smooth consumption
– Survey data indicate:
 Households hold more diversified income portfolios than in 1998
 Income diversification  significantly more for VBCP-clients
Overview
The Research Approach
The Rural Credit Market in Vietnam
The Outreach of Micro-credit
The Impact of Micro-credit
Sustainability Issues
Conclusion
Sustainability Issues
Some considerations
• Sustainability important:
– Remain in operation in the long run
– Micro-credit leads to income growth but not to asset
accumulation: income growth only sustained with sustained
access to credit!
• Financially and administratively healthy institutions:
– Credit discipline
– Operating costs:
reduced
covered by interest payments
– Mobilisation of savings
– Capacity building
Sustainability Issues
Credit discipline
• Most MF project that are sustainability oriented have find ways
to ensure good credit discipline.
Operating costs
• Economies of scale: operating and transaction costs  with
– Increasing loan size
– Number of borrowers having the same loan-type
– Duration of clients membership
 Limit operating costs:
standardized products
TRADE-OFF
long-term clients
demand-oriented products!
 Confusions between
‘credit discipline’ & ‘demand-oriented product diversification’
Sustainability Issues
Operating costs
• Unrealistic to compete at low interest rates
– Costs to provide small loans are higher
– Sustainability: higher costs covered by higher interest rates
– Interest rate settings not based on calculations of operating costs
• Reliance on voluntary staff
– Local managers and accountants poorly rewarded
 Operation on the long run??
• Professional skills
– Lack of professional skills: major constraint
 Capacity building extremely important
Sustainability Issues
Savings mobilization
• Deposits not attractive to rural households
– Low interest rates on savings
– Compulsory savings are regarded as ‘lending cost’
– Savings not liquid enough
 Liquidity of savings important for the poor!
• Survey data: deposits only 1.7 % of total savings
total savings equal 45% of outstanding debt!
 Rural financial sector not a mediator between savers and
investors
 Large potential for enlarging MC through the mobilisation
of savings
Overview
The Research Approach
The Rural Credit Market in Vietnam
The Outreach of Micro-credit
The Impact of Micro-credit
Sustainability Issues
Conclusion
General Conclusion
The critical triangle: synergies and trade-offs
• Poverty outreach is very limited
– Poorest household lack access to credit
– Richer household profit from ‘cheap’ credit
• Screening method!
– Assist market segmentation resulting in discrimination against the poor
• Involvement of mass organisations and local authorities
– Support broad outreach through extensive network
– Prevent deeper poverty outreach
– Results in good loan performance
Trade-off: outreach and sustainability
General Conclusion
The critical triangle: synergies and trade-offs
• Impact of micro-credit:
– Small loans no impact on asset accumulation
– Small loans positive impact on income growth
 Even for poorer households
 Less in economically less developed areas
– Income growth sustained if access to credit is sustained
Synergies between sustainability and impact
Trade-off between impact and outreach concerns geographical
outreach rather than depth of poverty outreach
General Conclusion
The critical triangle: synergies and trade-offs
• Sustainability:
– Limit operational costs through
 standardized loan products
 long-term borrowers
– Potential for savings mobilisation; increasing interest rates
Synergies and trade-offs between sustainability and impact
Synergies between broadening outreach and sustainability
General Conclusion
Strategies for micro-finance development
• Geographically broad outreach
–
–
–
–
Geographically broad outreach rather than deep outreach
Network of mass organisations: conventional screening methods
Impact limited in economically less developed regions
Areas with high poverty rates
• Expanding outreach in certain region
–
–
–
–
Broad rather than deep outreach
Diversified loan-product & institutional capacity
Conventional screening mechanisms
Areas with large incidence of poverty but low inequality
• Focus on depth of poverty outreach
– Targeting the poorest with new screening methods
– Standardized products
– Areas with considerable economic growth but high inequality
General Conclusion
Strategies for micro-finance development
• Strategies:
– Location specific
– Dynamic over time
Issues for further research??
• Variation of the impact of micro-credit according to local
circumstances
• Variation of the impact of micro-credit according to the credit
mechanism
• …. ???
THANKS
Operational and Institutional Obstacles for
the Efficacy of Micro-Credit Programs for
Poverty Reduction in Vietnam
VLIR Policy Preparing Research Project
MIET MAERTENS
Thanks to:
BTC Vietnam, Hanoi
(Mr. Smis, Mrs. Tan and others)
Vietnamese Belgian Credit Project & Women’s Union
(Mr. Bartsoen, Mrs. Ha, Mrs. Van and others)
Micro-finance Resource Centre, Hanoi
(Prof. Dao van Hung & Ms. Tran Bin Minh)
Vietnam National University of HCMC – Economics Faculty
(Dr. Tran Viet Hoang and others)