Is microfinance an important instrument for poverty alleviation?

1. Is microfinance an important instrument for poverty alleviation? The impact of microcredit programs on self-employment profits in Vietnam Robert Lensink (co-authored with Thi Thu Tra Pham) Department of Finance Faculty of Economics and Business University of Groningen, the Netherlands

2. Microfinance and poverty reduction: rational • Channels by which microfinance may reduce poverty: • Access to credit contributes to increase in income, accumulation of assets, diversification of income sources, better education and health etc. • Empirical studies are ambiguous • Strong evidence: Dunford (2006), Littlefield et al. (2003), Khandler (1998, 2003) • Modest evidence: Khandler (2005), Coleman (1999) • How to measure the contribution of microfinance? • Which mechanisms? • Which income indicators? • Which impact evaluation methods

3. This paper: Credit impact on rural household self-employment profits • Why rural? • Why profits? • Coleman (1999): lack of access to productive capital is a main cause of poverty • McKernan (2002): profits is a function of capital assets, human capital, land, input, output prices => credit affects profits by providing an additional capital asset • Methods: • Impact of having access to microcredit: Compare profits of eligible households and ineligible households • Impact of using credit: credit is instrumented under both cross-section and panel framework

4. Data • Vietnam Household Living Standard Surveys 2004 and 2006 with information on household and commune characteristics • VHLSS 2004 covers 9,189 households, 2,868 households use credit. • VHLSS 2006 covers 9,189 households, 2,962 households use credit • Our sample: rural households, and formal credit only • Panel structure: 3,308 rural households, the same 575 households borrow both years

5. Notations • Two types of microcredit: • Microcredit I: from Vietnam Bank for Social Policy (VBSP) – the governmental and major microcredit provider • Microcredit II: credit from VBSP, from Bank for Agriculture and Rural Development (VBARD) with size below 20 mln VND and credit from other NGOs • Other formal credit: non-microcredit loans from VBARD sized above 20 mln VND, loans from commercial state-owned and private banks, and credit unions. • Household self-employment profits = • gross revenues + household consumption value – operating expenses • adding back loan interests payment • Outcome equation: a semi-log function of household profits

6. Credit participation and self-employment profits in Vietnam: Descriptive information

7. Impact estimation method (1): cross-section analysis (1) • Access to credit = Eligible household (E) x Treatment commune (T) • Eligibility rule: households classified as poor by the commune authority • Treatment commune: at least one household in that commune has used that type of credit Y: household profits X: household characteristics V: commune characteristics Average impact of credit access

8. Impact estimation method (2): cross-section analysis (2) Impact of credit participation C: amount of credit received • OLS estimation: self-selection bias associated with loan size • IV (2SLS) estimation (Pitt and Khandker, 1998) • Credit demand is estimated in the 1st stage • Instruments: all household attributes interacted with credit access XijTijEij

9. Impact estimation method (3): fixed-effect analysis (3) Impact of credit participation C: amount of credit received ηij: unobserved fixed household attributes μj:unobserved fixed commune attributes • Fixed-effects estimation without instrument: endogeneity controlled by unobserved fixed household and commune effects • IV (2SLS) within fixed-effects (Khandker, 2005): endogeneity also controlled by unobserved time-variant variables • Same instruments as in pooled analysis

10. Impact estimation method (4): general issues and tests • Outcome variable: log of household profits • Control variables: • Household characteristics: size, total land owned, share of farming labour, household head demographic (age, gender, marital status, education, ethnic minority) • Commune characteristics: access to road, access to transport, access to market, access to post office, electricity • Year dummy • Test for IV method • Sargan-Hansen J test for no correlation between the instruments for credit and the error term of the profit equation • Endogeneity test (difference-in-Sargan) for exogeneity of credit

11. Impact of microcredit from the VBSP

12. Impact of all microcredit programs

13. Impact of other formal credit

14. Is microfinance really effective? • Microcredit programs: NO impact on household self-employment profits • Other formal credit: a positive significant impact • What can explain the result? • Khandker (2005): Microcredit recipients - rural poor have less profitable investment opportunities => less likely to benefit from credit • Garson (1999): two categories of the poor: entrepreneurial and non-entrepreneurial poor • Non-entrepreneurial poor cannot make use of credit • Entrepreneurial poor may run into cash flow problems once financed with credit • Coleman (1999): Loan size

15. Implications and conclusions • Effectiveness of microcredit is at doubt • Microcredit may be more beneficial due to other reasons than the credit as such • Future research: • Compare with informal financing • Select valid instruments • Attrition bias