VLIR Policy Preparing Research Project

1. Operational and Institutional Obstacles for the Efficacy of Micro-Credit Programs for Poverty Reduction in Vietnam MIET MAERTENS VLIR Policy Preparing Research Project 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)

2. Overview The Research Approach The Rural Credit Market in Vietnam The Outreach of Micro-credit The Impact of Micro-credit Sustainability Issues Conclusion

3. 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 !!!

4. 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

5. SUSTAINABILITY OUTREACH IMPACT • Synergies / Trade-offs & constraints ? Long run Short run The Research Approach Theoretical Framework • Critical Triangle of Micro - Finance: Based on Zeller and Meyer, 2002 • Existing studies: • mixed results • methodological weaknesses

6. The Research Approach Empirical Approach • 2 Case-study areas: • Low poverty rates but high incidence of poverty • Major rice growing areas • Variety of credit schemes

7. 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

8. Overview The Research Approach The Rural Credit Market in Vietnam The Outreach of Micro-credit The Impact of Micro-credit Sustainability Issues Conclusion

9. 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

10. 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

11. 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 %

12. 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

13. Overview The Research Approach The Rural Credit Market in Vietnam The Outreach of Micro-credit The Impact of Micro-credit Sustainability Issues Conclusion

14. 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

15. The Outreach of Micro-credit in Vietnam Outreach in the case-study areas • Multiple lending • N area: 43 % of borrowers mostly involves SPB • S area: 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: range between 20 and 33 % number of clients  over loan cycles • S area: range from 9 to 12%

16. 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?

17. Average outstanding debt from different sources for poverty groups

18. 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 ??

19. 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? • The poorest households are most constrained in the formal and semi-formal credit market

20. 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: • Poverty targeting ?? The poor and the poorest are not advantaged in the access to specific credit programs!

21. Overview The Research Approach The Rural Credit Market in Vietnam The Outreach of Micro-credit The Impact of Micro-credit Sustainability Issues Conclusion

22. 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

23. The Impact of Micro-credit in Vietnam Impact on asset accumulation • Regression analysis on asset accumulation • 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

24. The Impact of Micro-credit in Vietnam Impact on income growth • Regression analysis for income growth • 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

25. 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

26. Overview The Research Approach The Rural Credit Market in Vietnam The Outreach of Micro-credit The Impact of Micro-credit Sustainability Issues Conclusion

27. 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

28. 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 long-term clients demand-oriented products! • Confusions between ‘credit discipline’ & ‘demand-oriented product diversification’ TRADE-OFF

29. 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

30. 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

31. Overview The Research Approach The Rural Credit Market in Vietnam The Outreach of Micro-credit The Impact of Micro-credit Sustainability Issues Conclusion

32. 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

33. 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

34. 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

35. 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

36. 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

37. Operational and Institutional Obstacles for the Efficacy of Micro-Credit Programs for Poverty Reduction in Vietnam MIET MAERTENS VLIR Policy Preparing Research Project 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)