VLIR Policy Preparing Research Project

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)

OverviewOverview

The Research Approach

The Rural Credit Market in Vietnam

The Outreach of Micro-credit

The Impact of Micro-credit

Sustainability Issues

Conclusion

The Research ApproachThe 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 !!!


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


Theoretical Framework• Critical Triangle of Micro - Finance:

SUSTAINABILITY

OUTREACH IMPACT

Based on Zeller and Meyer, 2002

Synergies / Trade-offs & constraints ?

Long run Short run

• Existing studies:– mixed results – methodological weaknesses

The Research ApproachThe Research ApproachEmpirical Approach

• 2 Case-study areas:

– Low poverty rates but high incidence of poverty– Major rice growing areas– Variety of credit schemes

VBARD/SPB

PCF VBCP WVI

Doan Dao North: Red River Delta yes yes yesTam Da Hung Yen province yes yes yesPhan Sao Nam Phu Cu district yes yes yes

Tan Thanh South: Mekong Delta yes yesAn Huu Tien Giang province yes yes yesThien Tri Cai Be district yes

Micro-credit institutions & projectsCase-study areaCommune

The Research ApproachThe Research ApproachEmpirical 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 areasCase-study area Northern Southern

Province pop. density 1,184 people / km2 678 people / km2

Average agr. area / hh 0.26 ha 0.42 haLandless hh 0% 30%Agriculture very seasonal less seasonal

OverviewOverview






Conclusion

The Rural Credit Market in VietnamThe Rural Credit Market in VietnamThe 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 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 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 VietnamThe Rural Credit Market in VietnamAsymmetric 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

OverviewOverview






Conclusion

The Outreach of Micro-credit in The Outreach of Micro-credit in VietnamVietnam

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 areasDoan Dao Tam Da

Phan Sao Nam

Tan Thanh

An Huu Thien Tri

VBARD 28% 26% 21% 66% 26% 35%SPB 28% 21% 21% 3% 7% 24%PCF 26% 24% 3%VBCP 11% 14% 7%WVI 1% 7%

NORTERN CASE-STUDY REGION SOUTHERN CASE-STUDY REGION


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%


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

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

POOREST POOR LESSPOOR

NON POOR

Mil

lio

n V

ND

Formal sector(non-subsidised)SPB

Semi-formal sector

Moneylenders

Other informalcredit


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 ??



• 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

POOREST POORLESS 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%



• 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!

population VBARD PCF SPB VBCP

share clients cleints clients 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

OverviewOverview






Conclusion

The Impact of Micro-credit in The Impact of Micro-credit in VietnamVietnam

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


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

DEPRATIOHHSIZECREDITCREDITLANDASSPRODASSPROD 762

54321 9898

TaTAHEDUCAGEAGE 1211102

98


Impact on income growth• Regression analysis for income growth

– 2 models: whole samplesub-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

DEPRATIOHHSIZECREDITLANDASSPRODINCINC 7654321 989898

TaTAHEDUCAGEAGE 1211102

98


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

OverviewOverview






Conclusion

Sustainability IssuesSustainability IssuesSome 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 IssuesSustainability IssuesCredit 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

Sustainability IssuesSustainability IssuesOperating 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 IssuesSustainability IssuesSavings 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

OverviewOverview






Conclusion

General ConclusionGeneral ConclusionThe 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


• 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 sustainedSynergies between sustainability and impactTrade-off between impact and outreach concerns geographical

outreach rather than depth of poverty outreach


• Sustainability:– Limit operational costs through

standardized loan products long-term borrowers

– Potential for savings mobilisation; increasing interest ratesSynergies and trade-offs between sustainability and impactSynergies between broadening outreach and sustainability

General ConclusionGeneral ConclusionStrategies 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 ConclusionGeneral ConclusionStrategies 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)

Documents

VLIR Policy Preparing Research Project