MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

Transcription

1 CONSULTANT GROUP: Assoc. DR. NGUYEN KIM ANH Assoc. DR. NGO VAN THU DR. LÊ THANH TÂM MS. NGUYEN THI TUYET MAI MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON NHÀ XUẤT BẢN THỐNG KÊ MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 1

2 Copyright With financial support from Citi Foundation Citibank, the research report was completed by Vietnam Microfinance Working Group (MFWG) in collaboration with consultant group by Assoc. Dr. Nguyen Kim Anh as leaders. The responsibility for opinions expressed in the research report rests solely with its authors, and publication does not constitute an endorsement by MFWG of the opinions expressed in them. The publication of MFWG enjoys copyright under Vietnam Copyright Law. For rights of reproduction or translation, application should be made to MFWG. MFWG welcomes such applications. Citi Citi, the leading global financial services company, has some 200 million customer accounts and does business in more than 100 countries, providing consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Citi s major brand names include Citibank, CitiFinancial, Primerica, Smith Barney, Banamex, and Nikko. Additional information may be found at com or Citi Foundation The Citi Foundation is committed to enhancing economic opportunities for underserved individuals and families in the communities where we work throughout the world. Globally, the Citi Foundation is focusing its giving on Microfinance and Microentrepreneurship, which helps individuals become economically self-sufficient; Small and Growing Businesses, leading to economic expansion and job creation; Education, which prepares young people for personal and professional success; Financial Education, which helps individuals make informed financial decisions; and the Environment with a focus on sustainable enterprises that generate jobs and stimulate economic growth while preserving the environment. Citi is one of the world s largest donors to the microfinance sector, granting some US$40 million to support microfinance programs and organizations in more than 50 countries. In Asia alone, the Citi Foundation has committed more than US$13 million in grants for microfinance related programs since Additional information may be found at Vietnam Microfinance Working Group The Vietnam Microfinance Working Group (MFWG) was established as a forum for microfinance practitioners to share knowledge, skills and ideas in order to overcome the key challenges of the sector. As the peak industry body, the MFWG contributes to strengthening the voice of the sector in the policy-making sphere. Founded in 2004 as an informal organization under the NGO Resource Centre - VUFO, MFWG has launched an open policy to all individuals and organizations who are interested in the microfinance sector in Vietnam. In September 2011, the MFWG officially became a Center under the Vietnam Association of Small and Medium Enterprises (VINASME) in accordance with the Decision No. 238/ QD-CTHH of the Vietnam Association of Small and Medium Enterprises dated 5th September 2011 on the establishment of consulting Center on microfinance resources to small and medium enterprises (formerly the Vietnam Microfinance Working Group). Additional information may be found at:

3 CONSULTANT GROUP: Assoc. DR. NGUYEN KIM ANH Assoc. DR. NGO VAN THU DR. LÊ THANH TÂM MS. NGUYEN THI TUYET MAI MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON NHÀ XUẤT BẢN THỐNG KÊ Hanoi, 2011

4 PREFACE Over the past twenty five years of reform, under the correct and innovative direction of the Party and the Government, Vietnam has made impressive achievements in economic development and poverty reduction. Among these important achievements are encouraging contributions of microfinance activities with the active participation of microfinance organizations and programs throughout the country. By assisting the poor and disadvantaged groups, microfinance activities have helped them overcome difficulties and challenges to constantly rise to family economic development and contribution to local economic development. It is a proven fact that microfinance is an activity with deep social significance and is increasingly growing stronger in many countries on all continents, especially in the developing countries including Vietnam. Vietnam has determined that the three essential pillars to ensure the country s sustainable development include high economic growth in close connection with social equity; poverty reduction; and environmental protection. With these goals, microfinance activities in Vietnam have shown an important role in strengthening financial support through the step by step response to the demands for loans and financial services for economic development, particularly in rural areas. Microfinance activities have increasingly proven their role in the society. This is an economy in which there are communities who are living in poverty and need financial support, in which a large population encounters economic difficulties, earns low incomes and really needs help, especially from the

5 microfinance institutions and programs in order to create more incomes and improve their living standards. It is possible to confirm that microfinance activities in Vietnam in the past two decades have been making considerable contributions to poverty alleviation of the country, although these activities have not been able to maximize their potentials and influence on the society in general and the the poor communities in particular. Microfinance operations have been making positive impacts on income generation and assets building for the poor and the poorest who are unable to access formal loan resources. With the support from the microfinance institutions through loans and knowledge on production and business, their living standards have gradually improved. In fact, customers of microfinance organizations are of different segments. Thus, the levels of impacts on poverty reduction are different and the general living standards have also been increased thanks to many different factors. At present, the microfinance sector in Vietnam is beginning to develop towards professionalization and sustainability. A number of microfinance organizations and semi-official programs are undergoing an important reform process and innovation in order to expand operation, improve management capacity, reduce costs, diversify products and services in response to customers demand, in order to achieve healthy development and sustainability, with the goal of continuing to contribute to poverty alleviation and economic development. Although microfinance activities have been recognized in part as one of the effective tools contributing to poverty reduction,

6 to date, Vietnam has not been able to conduct any research to assess its impact on poverty reduction and national reforms. Based on the characteristics of the microfinance market in Vietnam and microfinance organizations in the microfinance market in recent years, in order to clarify the important contribution of microfinance in national reform programs and economic development, on the basis of the actual operations of microfinance in Vietnam, the topic of Microfinance versus poverty reduction in Vietnam: diagnostic test and comparison has been selected for this study. With the participation of researchers and experts with extensive experience and knowledge of microfinance from Vietnam Banking Academy and National Economics University, in coordination with Vietnam Microfinance Working Group (MFWG), and with financial support from the Citi Foundation, after reviewing the literature and conducting field surveys and workshops, by means of secondary data collection and gathering information directly from customers of the microfinance organizations (the microfinance institutions; People s Credit Funds; and Bank and Social Policy), the research team has been able to finish the study whose results are presented in this book in order to provide information on microfinance activities in Vietnam as well as its impacts on poverty reduction. the study proposes a number of solutions and suggestions to improve the effectiveness of microfinance operations in Vietnam. We hope that the findings will contribute to improving awareness of microfinance activities in Vietnam as one of the effective tools in poverty reduction, and economic development of

7 the country. The content of this study might inevitably have limitations and certain deficiencies due to the limited time and scope of the study. The research team looks forward to receiving your comments. On behalf of the research team Project manager Dr. Nguyen Kim Anh

8 ACKNOWLEDGEMENTS This research paper was completed with support coming from many agencies, organizations, and individuals. We would like to thank the Vietnam Microfinance Working Group for facilitating the research, as well as providing data and special important support. A special acknowledgement is also given to Citi Foundation for the encouragement and funding of this research. The research group would like to express its thanks to agencies and organizations including the State Bank of Vietnam, TYM, MOM, the Vietnam Bank for Social Policy, and the Central People s Credit Fund for their support with secondary data as well as logistics for primary surveys. Special thanks goes to the State Bank Branches and VBSP branches, PCFs, MFIs and their customers in the two provinces of Hai Duong and Tien Giang for having spared the time and effort to help us complete the surveys efficiently. We would also like to sincerely thank policy makers, researchers, consultants and practitioners at the seminar on microfinance and the peer reviewers of this report who provided useful feedback to the research groups to complete the content.

9 The views expressed in this report are those of the authors and do not necessarily reflect the views of the Vietnam Microfinance Working Group. On behalf of the Research Team Team Leader Nguyen Kim Anh

10 CONTENT PREFACE ACKNOWLEDGEMENTS ABBREVIATION LIST OF TABLES LIST OF FIGURES AND BOXES 1. EXECUTIVE SUMMARY INTRODUCTION Rationale of the Study Purpose, Subject and Research Scope Samples and Research Methodology Analytical Framework and Hypotheses RESEARCH RESULTS Overview of Vietnam s Microfinance Sector for Low-Income/Poor Customers Poverty in Vietnam and Poverty Reduction Policies Microfinance Service Providers in Low-Income Market Segment The Operating Environment of Vietnam s Microfinance

11 Sector Market Segmentation in Vietnam s Microfinance Sector Results of Microfinance Activities for Poor/Low-income Customers The Results of Primary Survey Data Analysis General Husbandry Information About Customers Information on Loans Evaluation of the Effectiveness/Impact of Microfinance on Customers Economy and Living Standard Evaluation of the Effectiveness / Impact of the MFIs Customers Expectation and Observations About the MFIs RECOMMENDATIONS For Microfinance Service Providers Diversification of financial products Combination of Financial and Non-Financial Services Further Promotion of Strength and Minimization of Weakness Transformation and Formalization is a Good Opportunity for MFOs...113

12 4.2. For regulators More Attention to Managing Multiple DebtIssues Combining Microfinance with Large Programs on Training, Capacity Building and Various Job Creation Programs LIMITATIONS OF THE STUDY REFERENCE ANNEX...122

13 ADB: ABBREVIATION Asian Development Bank AGRIBANK: Vietnam Bank for Agriculture and Rural De velopment MFWG: MOM : NGO: VBSP: SBV: PCF: CCF: MFP: MFI: TYM: Vietnam Microfinance Working Group Mekong Organization of Microfinance Non-Governmental Organization Vietnam Bank for Social Policy State Bank of Vietnam People s Credit Fund Central People s Credit Fund Microfinance Provider Microfinance institution I Love You Fund UN Women: United Nation Women Organization WB: WU: World Bank Vietnam Women s Union MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 13

14 LIST OF TABLES, FIGURES AND BOXES I. TABLES Table 2.1. Survey scope and structures by provinces...30 Table 3.1: Total household income, expenditures and savings in Table 3.2: Information about microcredit supply in Vietnam...48 Table 3.3: Debts of Official Microfinance Institution...49 Table 3.4: Debts of some typical MFI (until 31st December 2010)...50 Table 3.5: Estimated rural households with savings in major financial institutions in Vietnam...53 Table 3.6: Excess savings of official Microfinance instituti ons...54 Table 3.7: Savings of some typical Microfinance Working Groups on 31st December Table 3.8: Client categorization by gender...58 Table 3.9: Educational background of borrowers...58 Table 3.10: Professional level of borrowers...60 Table 3.11: Poor/non-poor client categorization by provinces MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

15 Table 3.12: Total population and working-age population.63 Table 3.13: Client categorization by participation...64 Table 3.14: The number of clients using services...66 Table 3.15: Clients access to microcredit services...68 Table 3.16: Total values of loans and average interests earned on loans...58 Table 3.17: Purposes of loans...67 Table 3.18: Principal payment methods of loans...71 Table 3.19: Interest payment methods of loans...71 Table 3.20: Borrowing methods of loans...73 Table 3.21: Financial sources for debt repayment...74 Table 3.22: Any difficulties in debt repayment...75 Table 3.23: Number of clients taking loans from other sources...76 Table 3.24: Monthly interests on loans from other sources.78 Table 3.25: (VBSP?) Clients evaluation of income generating activities before and after participation...80 Table 3.26: (QTDND?) Clients evaluation of income generating activities before and after participation...81 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 15

16 Table: 3.27: MFWG clients evaluation of income generating activities before and after participation...81 Table 3.28: Changes in contribution to total income of activities before and after participation in microfinance institutions...82 Table 3.29: Evaluation of income before and after participation in microfinance institutions...83 Table 3.30: Evaluation of expenditures before and after participation in microfinance institutions...85 Table 3.31: Evaluation of savings before and after participation in microfinance institutions...87 Table 3.32: Evaluation of business investment before and after participation before and after microfinance institutio ns...89 Table 3.33: Evaluation of households living standards compared to neighbors/villagers bef.ore and after particiation in microfinance institutions...90 Table 3.34: Overall local living standards before and after participation in microfinance institutions...91 Table 3.35: Changes in overall living conditions over the past 5 and 10 years...93 Table 3.36: changes in living standards of participating 16 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

17 households compared to changes in overall local living standards...95 Table 3.37: Effects of participation in mcrofinance institutions/projects on households living standards...97 Table 3.38: Total households assets before and after partipation in microfinance projects...99 Table 3.39: The most significant local achievements II.FIGURES AND BOXES Figure 2.1: Framework to evaluate effects of microfinance on clients socioeconomic conditions...33 Figure 3.1: Microfinance services providers in Vietnam...35 Figure 3.2: Leading microfinance institutions in Vientam (until 2010)...36 Figure 3.3: Major institutions catering to poor/low-income clients...37 Figure 3.3: Current market segmentation of microfinance in Vietnam...46 Figure 3.5. Classification of Borrowers by Gender...53 Figure 3.6: Education Level of Borrowers...55 Figure 3.7: Professional Level of the Borrowers...56 Figure 3.8: Percentage of Formal Poor Customersby Province: MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 17

18 (The Poor on the Formal Poverty List of Community)...57 Figure 3.9: Categorization of individuals with difficulties in debt repayment by institutions...58 Figure 3.10: Lending Purpose by Outstanding Loans and by Total Loans...67 Figure 3.11: Evaluation of clients expenditures before and after participation...72 Figure 3.12: Evaluation of savings before and after participation...80 Figure 3.13: Evaluation of business investment before and after participation...82 Figure 3.14: Changes in living standards before and after participation...83 Figure 3.15: Effects of participation in microfinance institutions/projects on households living standards...84 Figure 3.16: Effects of borrowing and participating in microcredit institutions...86 Figure 3.17: Level of satisfaction with institutions performa nce...88 Figure 3.18: Do clients want to continue borrowing loans? MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

19 Figure 3.19:The Impact of Lending and Participation in Institutions...98 Figure 3.20: The Level of Satisfaction on the Organization Activities: Box 3.1. Selected Contents in the Proposal of Designing and Developing the Microfinance System Up to Box 3.2. Microfinance customers with the poverty escape story...94 Box 3.3: CMA Awards to Honor Excellent Client, Credit Officers and Microfinance Institutions in the Period of Figure 4.1 Some Highlights of TYM Performance Before and After Reforms MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 19

20 1. SUMMARY OF FINDINGS Microfinance plays a very important role for socio-economic development, particularly in poverty reduction and social development in developing countries like Vietnam. The strong development of microfinance in terms of outreach and services in recent years, especially credit and savings, has largely responded to the demands of capital for economic development poverty reduction. The Government has made very positive moves in the development of microfinance in Vietnam. This research is completed by a team of experts in the fields of microfinance and data processing from the Banking Institute, the National Economics University, and the Vietnam Microfinance Working Group. Microfinance Versus Poverty Reduction In Vietnam: Diagnostic Test And Comparison attempts to test the five hypothesis (H) on the impacts of microfinance to reduce poverty and raise living standards as follows: (H1) Microfinance has positive impacts on customers income and assets; (H2) Microfinance helps clients strengthen social capacity; (H3) MFI clients are from different community segments, hence the different impact level on poverty reduction; (H4) General living standard improves over time due to different factors; (H5) MFPs customers have higher satisfaction over other organizations. Our review of factual data and primary surveys on 971 microfinance clients in two provinces of Tien Giang and Hai Duong confirmed the above hypotheses. Specific details are as follows: 20 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

21 Despite of impressive achievements in poverty reduction and economic development, Vietnam is still facing with the risk of unsustainable poverty reduction. One of the major obstacles is the lack of appropriate and available financial services in rural areas. The three main groups of institutions providing microfinance to low-income customers are: MFOs, VBSP, and the People s Credit Fund system. Among them, the MFOs and VBSP focus more on poor customers. By the end of 2010, MFOs credit market share is 0.8% by outstanding debts and 4.4% by number of customers. VBSP had the largest credit market share (46.5% of outstanding debts and 59.6% of customers). Microfinance operation has been mainly focused on credit activities. Except for the PCFs who have relatively strong savings mobilization activities meeting the requirements for capital, most of the other organizations have not developed savings mobilization activities and other services. The regulatory environment for microfinance activities Vietnam has significantly improved. Many laws and legal documents have been developed and promulgated to encourage the growth and sustainable development of the microfinance industry to provide financial services to meet the needs of the poor and low-income clients, especially Law on Credit Institutions dated The proposed program to develop the microfinance system in Vietnam until 2020 was approved by the Government in December This is an important basis for the development of microfinance in Vietnam in the near future. The impact of microfinance on incomes and assets: As much as 89.75% of surveyed customers confirmed income increase after borrowing. However, microfinance can help change the total income level but can hardly alter the contribution structure of different activities to the total income. Comparing between loan size and the increase in income, a unit of an average microfinance loan gives higher impact on incomes than other organizations. Levels of assets, spend- MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 21

22 ing and savings also increased significantly. The average total assets of the households have more or less increased compared to the time before they had access to capital resources. Microfinance gives better support to customers to find better jobs or to improve their current jobs. The impact of microfinance on living standard: The percentage of affluent customers increased (7.37%), and the poverty ratio decreased (31.64% of poor households and 6.95% very poor before borrowing; 16.61% poor and 1.25 % very poor after borrowing). Microfinance clients showed signs but not breakthroughs in terms of prosperity. Most of the interviewed customers (94.28%) confirmed better living standards in their locality compared to before the availability of microfinance services providers; 5.61% saw no change in local living standard, and almost nobody witnessed worse situation. The majority of customers (63.54%) considered the change in their family s living standards coincide with the overall change in the local living standards. Nearly one forth of clients surveyed recognized faster changes, while 13.43% held that changes in living standards are slower. Most customers interviewed confirmed that their participation in credit institutions have had positive impacts on the living standards of their families. However, others believed that the impacts were only at average level. There were almost no comments that borrowing has brought none or negative impacts. In general, the living standard of Vietnamese people as a whole or micro-finance customers in particular have been improved. The highly appreciated main changes in the local communities are mostly infrastructures such as roads, electricity, water... This is entirely consistent with the fact that public investments have been increased significantly in Vietnam in the past ten years. With good infrastructures, each individual s investments, production and business would 22 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

23 achieve greater efficiency. Therefore, microfinance helps with job creation (4.2% of customers surveyed confirmed large changes in the last five years), or job improvement. Other impacts: - Better housing, water supply and sanitation conditions were positive changes observed following the households access to loans. There are two main reasons for this result. Firstly, there have been loans with direct purpose of toilet improvements or water supply, which have facilitated the improvement of customers health and comfort. Secondly, with loans serving the purpose of production and business, the family s income increased, which helped them build longterm investments for the family. - Comparing among microfinance organizations, MFO scored the highest percentage of customers receiving training and social benefits (37%). VBSP did not receive such high appreciation in spite of the fact that they provided group lending through mass organizations. - Most customers are appreciative of the social benefits brought by microfinance, such as better knowledge, improved confidence, more participation in community activities, as well as gender equality and quality of family life. These impacts can hardly be measured, but they really make major changes in one s life. And this is why microfinance has strong attraction, is highly appreciated, and is regarded as one of the key tools in poverty reduction and economic development. Customers want more flexible and diversified forms of principal and interest payments. Information from the primary surveys showed that there are about 13% of customers borrowing many from different organizations. Although the over-indebtedness risk is currently not so high, there appears to have a potential risk of default because customers borrow at the same time from different organizations. This is the fundamen- MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 23

24 tal reason which led to recent microfinance crisis in some countries such as Cambodia and India. Therefore, [microfinance] organizations should pay more attention to multiple debt management problems, as well as sharing client information among those operating in the same locality. Customer satisfaction: Most customers interviewed have positive assessments on all operations areas of MFIs with almost no difference among the three groups of MFIs in this survey. Thus, MFOs have achieved good results in establishing credibility and image in their customers. Although not being a State own organization as VBSP, or having participated in deposit insurance and being part of a formal CI system as PCFs, the MFOs managed to maintain very good reputation. Considering each of the MFI groups, most of VBSP and PCF customers are very satisfied, the percentage of very satisfied customers of the two organizations is 50.31% and 59.76% respectively. With regards to MFOs, the ratio of customers who are satisfied dominated with 51.26% while the number of very satisfied customers is a little lower at 45.91%. Microfinance alone is not sufficient for poverty reduction. Microfinance facilitates the clients to have more employment opportunities or current job improvement, capacity development and social competence through non-financial services. To enhance the effectiveness of microfinance operations, the following recommendations are made to institutions providing microfinance services: - To diversify the traditional financial services, develop new financial services, combine financial and non-financial products; - To further promote strengths and minimize the weaknesses of each organization. Specifically, MFOs should strengthen the binding power of the members, balance between the social development and sustainability objectives; review and seize the opportunities to trans- 24 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

25 form and formalize their operation; strengthen the financial and operation management capacity. VBSP should maximize the power of the nation-wide system and the close relationship with mass agencies and organizations; improve performance effectiveness towards operation and financial sustainability, reducing reliance on Government funding for operation. PCFs should continue to develop with the orientation of operational and financial self sufficiency; applying international practices for the typical financial cooperatives; with the central PCF rapidly restructuring into the Cooperative Bank in accordance with the Law on Credit Institutions (2010); and local PCFs consolidating operations, enhancing risk management and executive management capacity; and strengthening the linkages in the system. The regulators should pay more attention to over-indebtedness management, combining microfinance with diversified programs for training, capacity building and job creation. Microfinance in Vietnam have positive potentials to develop on all three aspects: firstly, the policies from the government and authorities; secondly capacity and potential capacity of MFIs (with three major groups of institutions: MFOs, VBSP, and PCF system); thirdly, microfinance clients. However, the difficulties and challenges for the development of microfinance in the coming time in Vietnam are huge. To enhance the effectiveness of microfinance, bringing good impacts to poverty reduction and improving the quality of life, there are so many things to do in the near future. Both clients, as well as regulators and MFIs will need to make their best efforts take advantage of opportunities and overcome challenges. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 25

26 2. INTRODUCTION 2.1. Rationale of the Study Microfinance plays a very important role in socio-economic development - especially the poverty reduction and social development efforts in developing countries. The role of microfinance in poverty alleviation was also confirmed by various theoretical studies (Legerwood, 1999; ADB, 2000; Morduch and Haley, 2002; Khandker, 2003). The importance of microfinance in socio-economic development has actually been confirmed in practice by the United Nations decision to name 2005 as the International Year of Microfinance. In fact the Nobel Peace Prize in 2006 was given to Mr. Muhammad Yunus, founder of the Grameen Bank, the famous bank for the poor in Bangladesh. Microfinance in Vietnam is considered as an important tool for poverty reduction. About 72% of the population live in rural areas, of which 94% are poor. Agriculture remains the main economic sector, with54% of the labor force working in agriculture. One of the major obstacles for Vietnam in achieving the millennium development goals is the lack of suitable financial services which can meet demands. The strong development of microfinance in recent years in terms of access and services, especially credit and savings services, has largely met the demands of capital for economic development and poverty reduction. The Government has made positive moves in Vietnam s microfinance development. The Law on Credit Institutions (CIs) approved by the National Assembly in 2010 was a historic milestone where microfinance organizations are now considered as credit institutions with legalized regulations. This has not been implemented in many countries, including the countries that have a developed microfinance sector such as Indonesia, Philippines, and Bangladesh. On 6 December 2011, the Prime Minister officially approved the 26 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

27 Vietnam microfinance establishment and development program up to Microfinance services providers in Vietnam are relatively diverse, but can be grouped into three main sections: the Vietnam Bank for Social Policy (VBSP), the Central People s Credit Fund (PCF), the microfinance orgarnizations (MFOs), and a number of commercial banks (the Agriculture and Rural Development Bank, the Lienviet Post Bank, and DongA Bank). Each group has its own financial market segment, but are all involved in the microfinance market. However, the three main groups that provide microfinance services to low income and poor people are VBSP, PCF and the MFOs. Each organization has its own evaluation on supporting their low-income and poor customers their satisfaction. But there has been no research study that provides objective comparison on their impacts on customers and client attitudes. At the request of the Vietnam Microfinance Working Group (MFWG) - an organization with the mission of being a leading national network that represents and actively promotes the development and growth of a sustainable Vietnamese microfinance industry operating in accordance with good practices in an enabling market environment, a research team of microfinance specialists and data processing specialists from the Vietnam Bank Academy and the National Economic University embarked on the research on Microfinance and poverty reduction in Vietnam: Testing and comparison from June to December Purpose, Subject and Research Scope: The Purpose of this Study is to: (i) Provide a brief overview of the microfinance sector in Vietnam in the context of poverty reduction and economic development, and the MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 27

28 organizational characteristics of the three main groups: VBSP, PCF and the MFIs. (ii) Provide an analysis and objective assessment from the customer s perspective on the following: - The impact of microfinance in terms of its economic aspects (income, assets, savings, etc.) - The impact of microfinance in terms of its social aspects (employment, education, health and social capacity building, etc.) - Customer satisfaction for the services of the three group of microfinance organizations. (iii) To come up with a set of recommendations for the development of microfinance organizations in the future. Subjects and Scope of the Research: Study Subject: The relationship between microfinance and poverty reduction in Vietnam: Before starting the research work, we intended to look at the impact of microfinance to poverty reduction. However, this was not feasible because poverty reduction depends on many factors, of which microfinance is only one of the tools that help the poor to raise their income and social status. It is impossible to completely separate the net impacts of microfinance, and conduct quantitative calculation of the contribution of microfinance. Scope of Study: Essentially, there are different views about the poor and microfinance institutions. If we only focus on the poor people in the official poverty list of the local authorities, we will ignore the relatively poor and low income customers who can easily fall under the poverty line at any time. Therefore, we concentrate on low-income customers instead of people who are holding a poverty certificate. 28 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

29 Moreover, there are different views on microfinance and microfinance institutions. For the Consultative Group to Assist the Poor (CGAP), Microfinance offers poor people access to basic financial services such as loans, savings, money transfer services and micro insurance. According to J. Ledgerwood, microfinance is a development tool intended to bring economic benefits to the low income earners. In the view of the Asian Development Bank (ADB), microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and lowincome households and, their microenterprises. Generalizing from these concepts, microfinance can be understood as one of the economic development approaches to provide financial and other services to the low income groups in the society to meet their consumption and investment needs. This view was also agreed by the Government of Vietnam, through the expansion from a loan program for poor households when the VBSP was established into 18 different programs to assist the low income people and those working in difficult areas. 1 Microfinance services providers in Vietnam can be categorized under three main groups: formal, semi-formal and informal. There are three different views of MFIs. First is that that MFIs includes all institutions providing microfinance services, including banks, financial cooperatives, small semi-formal and formal MFOs. The second focuses only on the small scale MFOs, both formal and semiformal. While the third view is that MFI is a type of credit institutions which operate a number of banking activities mainly to meet the needs of low incomeindividuals, households and micro enterprises. (Credit Institution Law, 2010, Article 4 paragraph 5). According to Decision No. 2195/QD-TTg on Approving the microfinance development sector in Vietnam to 2020 signed on 6 December 2011, microfinance 1 The main lending programs of VBSP includes (i) Lending to poor households; (2) Lending to disadvantageous students; (3) Lending for job creation; (4) Lending to policy beneficiaries working abroad; (5) Loan for the production and business in disadvantaged areas; (6) Lending for clean water and rural environment sanitation; (7) Amortized lending for buying houses; (8) and 11 other programs. Source: VBSP Annual report. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 29

30 organizations include the MFIs licensed by SBV, microfinance programs and projects implemented by the social and political mass organizations, social organizations, social-professional organizations and funds. In this research, the first view is used for analysis. This view is similar to the above mention Decision No by the Prime Minister Samples and Research Methodology The research team collected and analyzed different secondary and primary data. Secondary data include reports on the financial sector in general and microfinance sector in particular issued by the ADB, the World Bank (WB), and other international organizations, as well as the Vietnam Living Standard Surveys of , reports by microfinance service providers, data from the Citi Microentrepreneurship Awards programs funded by Citi Foundation from the period , and a number of surveys on agricultural and rural development related to financial and credit. Table 2.1: The Scale and Structure of Survey Sample by Province: Province District VBSP PCFs MFIs Total Sample % Hai Duong ,19% Gia Loc Ninh Giang Tien Giang ,81% Chau Thanh Cho Gao Total interviewees ,00% % 35.53% 27.19% 37.28% 100,00% Primary data was collected and processed using the SPSS software. The survey was conducted in the provinces of Hai Duong and Tien Giang. Each selected two typical districts (one more developed (urban) district 30 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

31 and one less developed (rural) district in terms of economics). Each district selected 2-4 communes which hosts the operation of three MFIs from the three main groups involving in the microfinance market being VBSP, PCF and MFOs. The selection of Hai Duong and Tien Giang is based on the representativeness of the organizations providing microfinance services in three dimensions: geography, customer size, market segmentation as well as similarities among the MFIs clients. In Tien Giang, MOM is the MFO surveyed; while TYM represented MFOs in Hai Duong province. The two organizations are relatively prominent in the group of MFOs, so the overall assessment of the MFOs compared with VBSP or PCF will be more outstanding. Although the PCF system includes very large funds (as in An Giang, Lam Dong, Ha Noi), the PCFs in Hai Duong and Tien Giang are more focused on low-income customers. We did not select mountainous provinces where there are operations of all three groups because often the PCF does not work in the mountainous areas, although VBSP operates in almost all communes nationwide. The interview methods focused on retrospectives, that is the customers compared their situation before joining the MFIs to their current situation. Initially, the team planned to use the evaluation method using control & treatment groups. The team wanted to select customers from MFIs (treatment groups) and those who are not clients of any MFIs with similar social-economic conditions before loans (control group) to compare the net impact. However, when we conducted survey tests, we found out that this was not feasible. It was difficult to find a control group. Furthermore, most organizations do not conduct baseline surveys before providing microfinance services. The analysis of the impact of each MFI is also relatively difficult, because in many cases customers also have loans and savings with other credit institutions. Therefore, this research focused more on a general analysis of the impact of microfinance on economic and spiritual life, and not the net impact of each MFI. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 31

32 The questionnaire was designed similarly for clients of all three MFI groups, including: (i) information about borrowers, (ii) information about loans and savings, (iii) evaluation of economic production, assets and income before participating in the MFIs and at presence, and (iv) assessment of the other impacts before and after participating in the MFIs. (See Annex 2) 2.4. Analytical Framework and Hypotheses: According to the literature review and operations practice, microfinance does not directly change the lives of customers, but through the continued provision of finance for production and business, microfinance helps generate income and reduce the impact of expensive non-formal sector. In addition, microfinance provides the opportunity to improve awareness and social skills through the provision of nonfinancial services provided by MFIs. The study was carried out based on the following analytical framework: Based on this analytical framework, the hypothesis tested in this study are: (H1) Microfinance has positive impacts on customers income and assets; (H2) Microfinance helps clients strengthen social capacity; (H3) MFI clients are from different community segments, hence the different impact level on poverty reduction; (H4) General living standard improves over time due to different factors; (H5) MFPs customers have higher satisfaction over other organizations. 32 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

33 Figure 2.1. Impact assessment framework MICROFINANCE Credit - savings Service Payment Service Others (Microinsurance, etc) Social Services RESULT INVESTMENT - PRODUCTION - Catching profit investment opportunities - Increasing self- investment abilities - Increasing investing in advance technology - Creating opportunities for micro and small enterprises - Diversifying business activities - Encouraging more business risks aceptance - Increasing the profit from investment HOUSEHOLD CONSUMPTION - Allowing households to spend more regularly - Increasing the ability of buying useful assets - Decreasing the pressure of selling assets for penuriousness HOUSEHOLD LIVELIHOODS - Increasing the economic growth - Imceasing resources allocation - Increasing income from saving - Increasing more financial savings - Improving the ability to face with external difficulties INFORMAL FINANCIAL SECTOR Reducing relianceon usurious credit sources INPACTION HOUSEHOLD LIVELIHOOD INCOME Increasing, more diversified, more stable income INVESTMENT & PRODUC- TION Better sources for investment HOUSEHOLD CONSUMPION - Increasing the household consumption level - Decreasing unstable, uncontrol spending SOCIETY - Reducing poverty or escape form poverty - Improving education system - Improving individuals capacity - Improving role of women in family, contributing to gender equality - Decreasing social discrimination - Decreasing the households vulnerability to external risks/recession - Other external factors Source: David Hulme (2000), Impact Assessment Methodologies for Microfinance: Theory, Experience and Better Practice, CGAP & USAID s AIM Project; World Bank (2002), Impact Assessment Report of the Rural Finance Project I. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 33

34 3. RESEARCH RESULTS 3.1. Overview of Vietnam s Microfinance Sector for Low-Income/ Poor Customers Poverty in Vietnam and Poverty Reduction Policies In Vietnam, about 72% of the population live in rural areas. This is where 94% of the country s poor people live, accounting for 54% of the nation s labor force, of which agriculture is the main economic source. Poverty reduction achievements have been amazing with the poverty rate falling from 58% in 1993 to 14.5% in 2008, with Vietnam ready to achieve the Millennium goals by The Government s Poverty Reduction Program is a multi-pronged approach including the modernization of agriculture and agricultural processing to increase value; the stimulation of non-farm business; the increase of employment opportunities through the promotion of small and medium enterprises; and widespread industrialization in all geographic regions. However, poverty distribution is not even with 45% of the poor being ethnic minorities living in remote areas, accounting for 14% of the total population. One of the major obstacles in achieving poverty reduction goals is the lack of appropriate and available financial services in rural areas which account for only approximately 17% of total bank credits, and less than 20% of the population having access to financial services Microfinance Service Providers in Low-Income Market Segment Financial services, particularly credit, have been considered as one of the most important tools for poverty reduction. It is done via the efforts of 2 According to VHLSS data in 2008, 37,1% of households were borrowing within the last 12 months, of which 26,6% were urban households and 41,2% were rural households. For the poor, the proportion of poor household borrowing within 12 last months was 55,3%, of which 54,3% borrowed from VBSP, 3,3% from PCFs and other credit institutions, and 7,9% from social and mass organizations. In period , these ratios did not change much, which demonstrated the stable credit policy in general, stable credit policy for the poor in particular. Souce: VHLSS, MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

35 encouraging the operation of NGO MFIs, expanding VBSP operation to every commune. However, the quality of these services and the level of satisfying the customer demands are still lacking. Organizations providing microfinance services in Vietnam are divided into three main groups as follows: Figure 3.1. Microfinance Providers in Vietnam MICROFINANCE PROVIDERS FORMAL SEMI - FORMAL INFORMAL Commercial bank Social policy bank CCF 6 Institutions/50% customers of microfinance service providers 44 MFIs ROSCA Relatives & friends PCFs LienViet Postal Bank Pawnshop Small traders Input Providers Money Lender Marketing agents Source : ADB, 2010 MFIs are classified into three groups: the official MFOs including commercial banks providing microfinance services, especially the Bank for Agriculture and Rural Development (Agribank) and the LienViet Postal Bank (a result of Lien Viet Bank acquiring thepostal Savings Company in late 2010), the Social Policy Bank of Vietnam (VBSP), the People s Credit Funds system (PCF); and TYM which is the first semi-formal MFO receiving license from SBV. The semi-formal group including semi-formal MFOs, mainly in the model, and the non-formal sector. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 35

36 Figure 3.2. Microfinance Market Leaders in Vietnam up to 2010 MARKET LEADERS ietnam Bank for Social Policies (VBSP) 64 branches Saving and lending groups villages borrowers (3,8 mil. poor lenders ) CCF AND and PCFs 25 branches Province Credit Fund villages members/deposi tors/ borrowers Agribank 64 branches transaction centes Micro - borrowers microdepositors Source : ADB, 2010 The three leading institutions in Vietnam s microfinance market are: Vietnam Bank for Agriculture and Rural Development (Agribank), the People s Credit Fund System (PCFs), and the Bank for Social Policies (VBSP). At present, LienViet Postal Bank has not utilized the postal savings system. However, in the future, this bank has a good potential in developing microfinance services thanks to its nation-wide network of transaction points/offices in every commune. In 2003, the Agriculture Bank was converted to the Bank for Agriculture and Rural Development (Agribank), operating as a fully commercialized bank, although it remained focused on rural households and on small and medium enterprises (SMEs). To date, the bank has 2,300 branches and transaction offices in all provinces and cities across the country, with a total of over 3 micro loans clients and 5 million micro savers. However, Agribank focuses more on high-income customers, non-poor households and enterprises. Therefore, the microfinance market for lowincome and poor customers is mainly shared by the three groups: VBSP, PCFs, and the MFIs. 36 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

37 Figure 3.3. Main Institutions Focusing on the Low-Income People Institutions focusing on low - income poeple Vietnam Bank for Social Policies (VBSP) CCF AND and PCFs MFIs 64 branches Saving and lending groups villages borrowers (3,8 mil. poor lenders ) 25 branches Province Credit Fund villages members/deposi tors/ borrowers Formal - TYM, M7 6/44 MFIs accounts for 50% of market share mainly in low - income and difficult areas Source : ADB, 2010 The People s Credit Funds (PCF), a form of financial cooperative, was established in 1993 to provide financial services at the commune/ward level. The Central People s Credit Fund (CPCF) was established and operated as a central organization of the PCF and provides support to them. By 2010, there were 1,042 PCFs operating in about 10% of the country s communes and wards, serving approximately 1.7 million members, of which about 50% are poor households. The PCFs have always been market driven. These funds follow the basic principles of cooperatives which is self-help and mutual aid with only less than 15% of their funds financed by external sources, mainly from the CPCF. Agribank and the PCF networks are widely distributed throughout the country to serve low-income rural households. But their commercial orientation has raised concerns from the Government that poor households and disadvantaged groups might be excluded. Hence, the Bank for the Poor (BFP) was founded in 1995 as a fund managed by Vietnam bank for Agriculture in order to target poor households. In 2002, the Social Poli- MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 37

38 cy Bank of Vietnam (VBSP) was separated from Agribank. This bank is a non-profit organization focusing on lending subsidized loans to poor households and disadvantaged groups as regulated by the Government. By 2010, VBSP has about 8,000 staff members working in all districts, covering 98% of the communes in the country. From 1990 to 2005, approximately 40 semi-formal microfinance organizations (MFOs) were established; either through credit and savings programs or by mass social organizations and non-governmental organizations (NGOs) 3, after which about 10 semi-formal MFOs and social organizations were established. In late 2009, only three MFOs have over 40,000 customers, and three other MFOs customers ranging from 20,000 to 40,000. These six most efficient MFOs account for approximately 50% of customers of all semi-formal MFOs. However, they only represent a small proportion of the sector in terms of customer number and outstanding loan volume The Operating Environment of Vietnam s Microfinance Sector a. Economic Environment. First, it is necessary to assert that the overall socio-economic environment for enterprises in Vietnam in general and MFIs in particular are generally stable and have increasingly improved. However, the challenges arising from domestic issues (natural disasters and epidemics, high inflation, increasing public debt), as well as external issues (the world economic crisis, especially in the U.S. and in Europe) are having a negative impact on the economic environment in general and the operating environment of microfinance in Vietnam in particular. Reforms started in 1986 has helped Vietnam to quickly reduce poverty. Initial steps where taken to build the economy towards industrialization and to achieve high economic growth coupled with social equality. The Law on Foreign Investment dated 1987 was one of the first laws that contributed to creating a legal framework for the formation of a market economy in 3 Through Decree 77, 81 and MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

39 Vietnam. Subsequently, a series of market economy regulations have been established in Vietnam such as the laws on Land, Tax, Bankruptcy, Environment, and Labor. Plus hundreds of other regulations issued by various Government agencies have been promulgated to specify the implementation of socio-economic development. The administrative reform strategy for is a determination by the Government, which emphasizes the modification of administrative procedures, laws, economic management mechanism to create a dynamic and effective institution to meet the needs of the country s development in the new period. From 1998 to 2006 inflation rate was maintained at the one-figure level, which created favorable conditions for enterprises, especially microenterprises and small businesses, to achieve financial sustainability. The Inflation in at high level with two-digit (12.63% in 2007 and about 19% in 2011) has really been a challenge for Vietnam s economy and has significantly affected the financial situation of enterprises, including MFIs. In the period , GDP growth rate reached an average of more than 7.5% per annum. Despite the global financial and economic crisis with expansion of public debt crisis, Vietnam still registered a positive GDP growth rate from Economic growth creates the conditions for economic household development and open opportunities for micro and small enterprises to participate in the market and to increase income. However, the issues of existence and achieving financial sustainability within the context of high inflation as well as competition with the formal credit institutions with high interest rates, are causing major difficulties to both the microfinance customers and the MFIs. A series of natural disasters (floods and insect infestation), as well as disease (cattle, H5N1, etc.) have left many microfinance borrowers with heavy losses and even bankruptcy. In general, the strong economic reforms in the past 25 years of doi moi have brought about encouraging initial results for the economy. Vietnam MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 39

40 has created an environment of market economy competitiveness and dynamic integration with the world. A developing economy led to an increase in the demand for financial services in the agricultural and rural areas, developing the market for microfinance. Currently, some commercial banks are starting to pay attention to this potential and wide market segment. Economic environment provides favorable conditions for microfinance activities to develop both in terms of loan quality and quantity. However, the challenges for the economy in general, and to microfinance institutions and customers in particular are still in front of us, taking into account the volatile condition of Vietnam s and the world s economy. b. The Legal Environment. The network of microfinance services providers in Vietnam include three areas: the formal, semi-formal and informal group. Although serving the same client segment, each group has its own objectives and operational characteristics. And because of this, each group s operation is governed by a different legal framework as the following details show: The formal group includes credit institutions that provide microfinance services and MFIs. The organizations in this group operate based on the license issued by SBV and are subject to the management and safety supervision by SBV. For commercial banks, the highest legal document governing their activities is the Law on Credit Institutions Law No. 47/2010/QH12 - dated June 15, 2010 which was enforced starting January 1st, Under this Law is a series of decrees and circulars guiding the organization and operation of commercial banks. There are no specific regulations for microfinance activities, so the commercial banks organize microfinance activities within the framework of the regulations applied to traditional banking activities. This is one reason why commercial banks are not encouraged to expand 40 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

41 their services deeply to low-income communities. The Vietnam Bank for Social Policy (VBSP) was established under Decision 131/2002/QD-TTg dated April 10, 2002 by the Prime Minister on the basis of reorganization of the Bank for the Poor. The VBSP s operations are not for profit; it serves the poor and other communities targeted by the policy. The Prime Minister has separate decisions and guidance on the organization and operation of this bank. The Ministry of Finance issues the financial management mechanisms, including the contingency provisions. SBV only issues directions related to operational activities. The PCF system patterns its self after the cooperative economic model. PCF funds are governed by both the Cooperative Law (dated 2003) and the Law on Credit Institutions. The PCF system operate under SBV s management and supervision, and operate on the basis of a relatively complete and coordinated system of guidance documents (decrees, circulars) developed by SBV, which create more flexible and active corridors and yet improved safety. Semi-formal Group: The licensing and management of microfinance activities of this semi-formal group is carried out by different agencies depending on the type of organizations of the MFOs, in particular: The mass organizations organize micro credit and savings activities based on the Prime Minister s approval on a case to case basis. The management and supervision of microfinance activities are carried out through the decentralized 4-level system (from the central to provincial / municipal and district / county and commune / ward level). Besides, for the programs and organizations permitted by the local People s Committee, the People s Committee collaborate in the management and supervision activities, but only to receive and to listen to reports, with no regular inspection. Sometimes, when there are operational activities needing instructions, the Prime Minister asks SBV to provide guidelines for each particular case of MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 41

42 each organization. Currently, there are a number of organization providing parts of microfinance services operating under Decree 148/2007/ND- CP on the organization and operation of Social and charitable funds dated September 25, The foreign NGOs operate under Decision 340-TTG of the Prime Minister dated May 24, 1996 on Promulgating the Regulation on Operation of Foreign NGOs in Vietnam. Under this regulation, the Commission on the Work of Foreign NGOs is the administrative agency authorized to issue licenses. The ministries, branches and People s Committees of provinces and cities have the responsibility of providing guidance, assistance, and supervision in the implementation of regulations under its authority. Any violation is dealt immediately and reported to Committee on the Work of NGOs. The locally registered NGOs operate under Decree No. 88/2003/ND-CP dated 30/07/2003 by the Government On the Organization, Operation and Management of Associations. According to this Decree, the Ministry of the Interior has authority to issue licenses to associations with national or inter-province operation. Provincial People s Committees have authority to issue licenses for organizations operating in the province. The Ministry of Interior is to assist the Government with unified national management of associations in the country. A new legal framework has been being built to facilitate microfinance organizations and programs in the semi-formal group with the opportunity to transform into microfinance institutions under SBV s management and supervision which is specialized in providing microfinance services. First, there are two basic legal documents of the organization and operation of microfinance institutions, namely: Decree No. 28/2005/ND-CP dated 09/03/2005 on the organization and activities of microfinance organizations in Vietnam and Decree No.165/2007/ND-CP 15/11/ MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

43 providing amendments and supplement to some articles of Decree No. 28/2005/ND-CP. In the Law on Credit Institutions (No. 47/2010/HQ12), the microfinance organization for the first time in history has been regarded as a type of credit institutions which operate under the management of SBV. On December 6, 2011, the Prime Minister has officially approved the Program for the Building and Development of the Microfinance Sector in Vietnam to These are the milestones which mark an important turning point in the evolution of microfinance activities in Vietnam, confirming the Government s recognition of the role and position of microfinance activities in the national finance and banking system. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 43

44 Box 3.1. Selected Contents in the Proposal of Designing and 1. Objective Developing the Microfinance System Up to 2020 To build and develop microfinance system safely, sustainably in order to create opportunities for the majority of the poor, the low-income people, micro and small enterprises- who are difficult to access to financial services- to enable them regularly get access to these services. 2. Implementation solutions a) Building a comprehensive legal framework, suitable for the characteristics of microfinance operation b) Improving the capacity of decision-making and management of the government agencies c) Enhancing capacities of MFIs - For MFIs licensed by the State Bank of Vietnam (SBV): + Guidance for improving organizational structures, governance, management and making effective control and internal audit mechanism, to ensure safe and sustainable operation. + Supporting training officers, finding the subsidized fund resources, especially during their initial stage of operation. - For microfinance programs/projects of political-social organizations, social organizations, social-employment organizations, charity funds, social funds (NGOs): + Implementing training programs to support the improvement of governance and management, to ensure sustainable, safe 44 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

45 and efficient development. + Having supporting policy for transforming the operation to MFIs licensed by SBV. - For Vietnam Bank for Social Policies (VBSP): Improving the capacity and operational efficiency to implement the credit policy for the poor and other policy beneficiaries well. According to this Decision, microfinance is clearly oriented towards the poor and low-income people as well as micro and small enterprises; aimed at ensuring social security and poverty reduction. Microfinance institutions include three types: licensed MFIs, semi-formal MFOs and VBSP. This content is consistent with the current operational characteristics of microfinance. It is also proven through the market segmentation section that follows. The Informal Group includes the borrowing activities arranged among individuals. Before 2006, the operation of the informal group was not recognized and governed by any legal regulations. On November 27, 2006, the Government issued Decree No. 144/2006/ND-CP on Hui, Ho, bieu, phuong and this was the first time the Hui/Ho activities are regulated under a legal regulation. According to this Decree, the hui/ ho activities are regulated under the Civil Law Market Segmentation in Vietnam s Microfinance Sector Although all are serving the micrfinance market, MFIs focuses at a different market segment. 4 Mai Lan Le and Nhu An Trang: Entering a New Market: Commercial Banks and Small/Micro Enterprise Lending in Viet Nam, ILO Viet Nam Working Paper Series No. 3, MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 45

46 Figure 3.4. Market Segment in Vietnam smicrofinance Market income level / company size Large and medium company/ wealthy individuals Small enterprises/upper medium income families Commecrial Bank Poverty line Hunger line Micro enterprises Non - poor low income households The poor and the hunger VBSP NGS MFIs CCF & PCFs Source: [Lê Mai Lan và Như An Trần, 2003] 4, [Lê Thanh Tâm, 2008] [Nguyễn Kim Anh et al., 2010] This market segmentation is due to the development history, operational characteristics and strategy of the MFIs. The main market for Agribank and PCF is the middle and high-income customers in rural areas; while the VBSP and MFOs give more focus on the low-income and poor customer segment. Since its inception, VBSP s first priority clients are the poor, and other groups as directed by the Government or target groups of special programs such as disadvantaged students, policy groups who needs loans for employment, and enterprises operating in difficult areas. Similarly, the main objective of the MFIs is to serve those customers who have no or limited access to the formal financial sector. Often these people live under the poverty line. Therefore, this study focuses more on the three organizations that provide microfinance services to low-income people: the MFOs, VBSP, and PCFs. Detailed analysis in 4 Mai Lan Le and Nhu An Trang: Entering a New Market: Commercial Banks and Small/Micro Enterprise Lending in Viet Nam, ILO Viet Nam Working Paper Series No. 3, MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

47 this section has also partly proved the hypothesis H3 to be true. According to data from 971 customers in the primary surveys, the income, spending and savings of different client groups also correspond to the hypothesis given above. Table 3.1: Total Income, Consumption and Savings of Household in 2010 Unit: million VND Targets VBSP PCFs MFIs Mean Mode Max Mean Mode Mean Mode Max Mean Mode Mean Mode Max Mean Mode Income 37, , , Consumption 33, , , Savings 3, , , Source: Vietnam Microfinance Survey Analysis, 2011 Comparing income, expense and savings of households in 2010, PCF s customers have dominant superiority. While the income, expenditures and savings of VBSP is lowest of the three. The average income of PCF customers is VND80.95 million, while for MFOs, it is VND46.28 million and for VBSP customers, VND37.7.This may be due to the fact that PCF customers are mainly traders who need capital for business and the borrowed capital directly impacts their income. Meanwhile, VBSP has a large number of customers who are poor with diversed loan purposes such as house repair, building toilets, buying commodities or school tuition for their children. These activities do not have immediate and direct impact on the family s income, so their income in 2010 is relatively low, only VND37.7 million per household. Thus, for VBSP s customers, the entire family s income in a month is more than VND 3 million - a much lower level compared to the common ground. Along with a limited income, the average loan and savings amount for VBSP customers are also low - spending about VND33.48 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 47

48 million/year level and savings at only VND3.22 million/year. Average spending and savings in 2010 of CPF customer is VND57.18 million and VND26.74 million respectively; and for MFOs, the two indicators are VND38.57 million and VND7:57 million. Data in this section further confirms hypothesis H3 on three market segments of MFIs groups selected for the study Results of Microfinance Activities for Poor/Low-income Customers Credit Activities In recent years, the rapid growth of micro credit services for poor families and social policy target groups has mainly come from the hike in VBSP portfolio which is funded by sources mobilized by the Government; including budget allocation, state-owned commercial banks compulsory reserves, and Government s total-guaranteed loans. Table 3.2: Information on Credit Supply of the Microfinance Institutions in Vietnam Financial Institution No. of Customer (millions) Weight (%) Outstanding Loan (Million USD) Weight (%) VBSP a 8,1 (%) ,5 Of which: Credit for the poor 3, Agribank b 3,2 23, ,5 PCF c 1,7 12, ,2 MFI/NGO s 0,6 4,4 75 0,8 a Annual Report of VBSP in 2010; b Annual Report of Agribank dated 31/10/2010, c Annual of PCF; d End of 2010 from MFWG Group 48 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

49 Mobilization Activities The savings mobilization amount is insignificant compared to credit. Below is information on rural savings of the main MFIs in Vietnam. Table 3.3: Estimated Number of Rural Depositors in Vietnam (2009) 6 Financial institution Agribank 5.267,000 CCF 1.500,000 VBSP 4.000,000 MFIs 450,000 Vietnam Postal Saving Deposit Company (Source: ADB, 2010) Number of customers 411,830 Agribank dominates the savings market with widespread market oriented networks and with the largest number of savers. The main reason is that Agribank is a state-owned commercial bank which has implemented capital mobilization activities since its establishment. Agribank s policies on interest rate and the development of funds mobilization services also have great flexibility among the MFIs. Similar to Agribank, the funding for the PCF systems depends largely on their ability to raise capital from savings. Therefore, the PCFs funds mobilization is considered vital for them. Except for TYM which is a formal MFI with license to mobilize voluntary savings, the semi-official NGO MFIs also mobilize savings mainly in the form of compulsory deposits which can only be withdrawn upon full repayment of their loans and are often considered as partial guarantees for the customer s micro loan. 6 VBARD data was estimated basing on annual report 2008 of the saving deposit mobilization from individuals with average amount of USD 800/account, of which 45% were mobilized from rural area; The data of Vietnam Postal Saving Company was in 2009 from Ministry of Finance; VBSP estimated data was from VBSP source; PCF data was estimated on PCF members; NGO MFIs data was based on the number of customers of 36 MFIs in JFPR 9142 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 49

50 Table 3.4: Savings Mobilization of Selected Typical MFIs by 31/12/2010 Name Year of Establishment Total Savings (millions VND) Total Fund (millions VND) Saving/Total fund (%) CEP-HCM , , TYM , , WU Ha Tinh , , Women support fund for economic develop, WU HCM , , The Dariu Foundation , , Women support fund for economic develop, Tien Giang , , FPW, Thanh Hoa , , M7 Dong Trieu, Quang Ninh , , World Vision Vietnam , NAPA , , Total 28 MFIs 421, ,497, (Source: MFWG, 2010) The major NGO MFIs offer limited voluntary savings services because they can not compete with market interest rates which contributes to their already high operating costs. For the 28 large MFIs, mobilized savings accounts for about 28% of total capital. For CEP-HCM and TYM, this rate is around 32.85% and 22.68%. The main reasons are: (i) except TYM which is allowed to mobilize voluntary savings broadly, other MFIs can only mobilize limited savings amounts because they are not formal credit institutions operating under the Law of Credit Institutions; (ii) these organizations are relatively young (except CEP- HCM and TYM which was established about 20 years ago), and at small scale; and (iii) their initial operating capital often comes from 50 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

51 grants or low-cost funds from donors Money Transfer, Payment Systems and Other Services All banks in Vietnam offers a wide range of financial products including money transfer, ATM services, foreign exchange, credit and debit cards. Major money transfer companies such as Western Union and Money Gram provide cash transfers, often through agency relationships with banks, other financial institutions, and the post offices where the Post Savings Company operates. The participation of foreign banks in the Post Savings Bank in the form of securities swaps has been recognized to significantly enhance the company s remittance and payment services through the planned application of modern technology system by the partner banks. Even VBSP also offers money transfer services to its clients. The competitive environment makes these services more accessible and affordable for poor rural households. This can be further improved if the current PCF network, with their presence throughout the communes and wards, can provide similar financial services. Aiming at this target, the Central PCF and PCFs are piloting the Rural-urban Connect Project with the participation of 8 PCFs. Currently Agribank is considered the provider of the best quality banking services; especially for the money transfer and payment system, with a widespread branch network, and innovations in applying information and communications technology for poor people and wide coverage Microinsurance Although the majority of rural households still misunderstand microinsurance, this service has now been recognized as essential for the rural poor who is most vulnerable from economic shocks such as death, illness and loss of assets. The poor households often cope with these life-changing events relying on savings, loans, or sale of assets. But these measure often make them poorer. The current legislation MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 51

52 only allows the MFIs such as PCF and the MFOs to act as agents for insurance companies, along with several local insurance companies which are offering life and non-life insurance products suitable for the low-income market. The most notable one is Bao Viet Life Insurance Company which provides low-cost life insurance, husbandry insurance and health insurance. Other insurance companies such as AIA specialize in credit life insurance, through an agreement with agent banks. Prudential has life insurance products for women and children under 18. A number of semi-formal MFIs collaborate with external partners (such as the ILO, RIMANSI, Action Aid) in piloting Mutual Assistance Fund (MAF), a model successful tested in other countries. The experience of RIMANSI and TYM has been documented; demonstrating that mutual funds can be established quickly and sustainably, as well as accepted by the market. However, the MFIs and PCF have restrictions relating to ownership in insurance services, so the only option is to develop mutual funds and provide microinsurance products under the form of agency agreement with the insurance companies which are active and more advanced such as Bao Viet The Results of Primary Survey Data Analysis Based on data from the primary surveys, we tested the hypothesis in Section 2. Analysis results are presented in the five following contents: General Husbandry Information About Customers: The content of section provides general information about borrowers of the microfinance institutions. Based on the structure of the questionnaire survey, we divided the customers in each different aspect. 52 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

53 Gender Table 3.5: Classification of Borrowers by Gender Whole sample VBSP CCF MFIs No. of people % No. of people % No. of people % No. of people Male % % % % Female % % % % Total % % % % Source: Vietnam Microfinance Survey Analysis, 2011 In particular, customers were interviewed and analyzed according to gender as showed in the following chart: Figure 3.5. Classification of Borrowers by Gender % MFIs 0.00% 100% PCFs 63.26% 36.74% Male Female VBSP 31.59% 68.41% Total 29.27% 70.73% 0% 20% 40% 60% 0% 100% Source: Vietnam Microfinance Survey Analysis, 2011 Out of the total number of 971 observations, only 943 people have information about gender. There was no information on gender for 28 respondents. Looking at individuals with gender information, the number of female customers is 667, accounting for 70.73% and men 29.27% only. This is understandable because MFIs mainly approach small-scale customers, customers who poor, farmers, etc... through associations such as the Farmers association, the Women s Union, whose members are mostly women. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 53

54 The gender gap is clearly shown in MFO s clients who are almost all women. In fact, there might be MFO customers who are not women, but the proportion of women is certainly very high. Moreover, this is also a characteristic of the microfinance sector worldwide in general and in Vietnam in particular. In VBSP s clients, there are 68.41% who are females, and only 31.59% men. However, looking at CPF separately, the percentage of male customers is 63.26%. The following tables provide information on education and technical skill background of borrowers. In terms of education, customers are divided into five different groups: Illiterate, Knows how to read and write, Primary School Level; Junior High School Level; and Secondary School Level. Generally, among the 971 observations, the group of customers at junior high school level is the largest, with 395 people, accounting for 40.68%. Educational level Table 3.6: Education Level of the Borrowers Whole sample VBSP PCFs MFIs No. of people % No. of people % No. of people % No. of people Illiteracy Literacy Elementary Secondary school High school Total Source: Vietnam Microfinance Survey Analysis, 2011 Looking at each MFI group, the percentage of clients at Junior High School Level is largest at VBSP (37.68%) and MFOs (45.03%). However, CPF s clients with secondary education are the largest group, at 49.24%. Therefore, CDF s customers have characteristics different % 54 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

55 from the other MFI groups. This clearly shows that CDF s customer segment has a higher educational background and income levels in rural areas. Figure 3.6: Education Level of Borrowers: 90% % 70% 60% 50% 40% 30% High school Secondary Elementary Literacy Illiteracy 20% 10% % Source: Vietnam Microfinance Survey Analysis, 2011 For the three MFI groups, the percentage of illiterate customers are at the lowest, at 6.67%, 1.14% and 3:59% respectively for VBSP, CPF and MFOs. This is certainly one of the achievements of the Government s literacy activities. This is also an important basis for customers to learn methods for developing production and business when capital is made available through self-study and reading. Most MFI borrowers are unskilled workers, who are usually the working poor, needing capital to expand production and business. The percentage of this customer group is high, accounting for 84.86% of the total sample MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 55

56 Table 3.7: Professional Level of Borrowers Qualification Whole sample VBSP PCFs MFIs No. of people % No. of people % No. of people % No. of people Unskilled labor , , , ,92 Technical Worker Professional secondary Colleage/University Postgraduate Total Source: Vietnam Microfinance Survey Analysis, 2011 % Figure 3.7: Professional Level of the Borrowers Source: Vietnam Microfinance Survey Analysis, MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

57 For VBSP, CPF and MFOs, this rate is 90.43%, 65.15% and 93.92% respectively. The customer groups of technical workers, specialized secondary schools, higher education have relatively small percentage; and there are no customers with a post graduate educational level. The above chart indicates whether borrowers are poor households eligible for local listing or not. In general, the percentage of borrowes who have poverty certification book is small; 27.29% of all survey samples, with CPF at 5.3% and MFOs at19.06%. However, customers with poverty book at VBSP account for 52.75%. This may be due to the fact that VBSP often have loan programs targeting poor households and only households with household books issued by the local authority can access this fund. Figure 3.8: Percentage of Formal Poor Customersby Province: (The Poor on the Formal Poverty List of Community) MFIs 19.06% 80.94% PCFs VBSP 5.30% 94.70% 52.75% 47.55% Non - poor Column1 Total 27.29% 72.71% 0% 20% 40% 60% 80% 100% Source: Vietnam Microfinance Survey Analysis, 2011 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 57

58 Regarding the customers of PCF and MFOs, people must contribute or become a member of the union or the association in order to borrow; normally poor people can harldy approach these organizations. Besides, interest rate of these organizations are often quite high, and their customers are mostly traders and enterpreneurs who need capital to expand business. This is why the proportion of poor households who can borrow from PCF is very small, only at 5.3%; and MFOs at 19.6%. However, all interviewed customers are households with low income or poor. With the distribution of poor households as shown above, the followng table shows the number and percentage of each group of poor and non-poor customers by provinces. Yes No Table 3.8: Poor/Non-Poor Household Customers by Province POOR Whole sample VBSP PCFs MFIs No. of people (%) No. of people (%) No. of people (%) No. of people Hai Duong , , , ,51 Tien Giang 80 30, ,46 0 0, ,49 Total , , , ,00 Hai Duong , , , ,98 Tien Giang , , , ,02 Total , , , ,00 Source: Vietnam Microfinance Survey Analysis, 2011 Comparing the percentage of poor households according to MFI and provinces, we have the following result: What is surprising is the poor household customers are mostly in Hai Duong province, while the percentage of poor customers in Tien Giang province is much lower. Thus, it seems that in the north the poor have easier access to loans than in the south. Of the total number of 265 customers with poor household certificate, 69.81% of them are in Hai Duong, the rest are in Tien Giang. The poor household customers (%) 58 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

59 of PCF who are interviewed are all in Hai Duong. This is not necessarily accurate in fact, because of the lack of PCF customer information in Tien Giang province. Here the research team could only access 45 clients of Cuu Nghia PCF who are mostly business people and not included in the local poverty list. Figure 3.9: Percentage of the Poor By the Province MFIs 85.51% PCFs VBSP 61.54% 100% Tien Giang Hai Duong Total 69.81% 72.71% 0% 20% 40% 60% 80% 100% Source: Vietnam Microfinance Survey Analysis, 2011 In terms of the number of people from borrowing families, of the 971 observed people, up to 936 people gave accurate information on the total number of persons in their family as well as the corresponding age. In this research, more attention is paid to the total number of people in the household and the number of persons in working age. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 59

60 Table 3.9: Total Number of Household Members and People of Working Age: Unit: People Total number of household members People of working age W h o l e sample VBSP PCFs MFIs Whole sample VBSP PCFs MFIs Mean Mode Min Max Total number of observations Source: Vietnam Microfinance Survey Analysis, 2011 The characteristics of the total number of persons in the household when divided into smaller samples corresponding to each MFO group is almost the same as when we consider the entire samples. Most households have four people, the smallest householdhas1 person and the largest up to 16 - this household is a PCF borrower. VBSP and MFO customers have a maximum of people in their family. The reason for the large size family is there are many generations and many children, and the children stay with the family after marriage, even grandchildren. Most of the households have two people of working age, while there are families that have none and families that have the maximum of 10. The last information about customers is the time of their participation as micro borrowers. Based on the first year they started participating in the credit institutions, the customers are divided into different groups: under 1 year of participation, from 1-3 years; from 3-5 years and over 5 years. 60 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

61 Table 3.10: Customer Classification by Time Joining Time joining the organization the Organizations Whole sample VBSP PCFs MFIs No. of people (%) No. of people (%) No. of people (%) No. of people under 1 year % % % % From 1 - under 3 years % % % % From 3 - under 5 years % % % % Over 5 years % % % % Total % % % % Tổng cộng , , , ,00 Source: Vietnam Microfinance Survey Analysis, 2011 Thus, the majority of customers participate in microfinance from 1-3 years. Considering all samples, the ratio is 41.5%, for VBSP 48.41%; MFOs 51.66%, while PCF has only 18:56%. PCF s clients are mainly engaged for a long time, over 5 years with the ratio of 57.95%. Customers with participation time of under 1 year make a relatively small proportion of all clients: 14:52% of the total sample, for VBSP the ratio is 11.01%, PCF 6:44% and MFOs 23.76% Information on Loans This following section considers the information on the customers loans on different aspects: loan amount, interest rate, loan purpose, interest payment modes, and principal repayment methods. Each MFI not only acts as a lender but also provides a wide range of products and services such as: savings deposits, money transfer, insurance, etc. An individual can use different services at the same time. However, for poor people and working people, the service that is mostly commonly availed of are loans. Of the 971 people interviewed, 960 people gave information about the services that they are availing, while 11 had incomplete information (%) MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 61

62 Table 3.11: Number of Customers Use Products and Services Name W h o l e sample No. of people No. of people VBSP PCFs MFIs % Total people % No. of people Borrowing % % % Savings % % % Money Transfer Voluntary savings 2 2 Payment Insurance Others Source: Vietnam Microfinance Survey Analysis, 2011 All 960 people that said they borrow from credit institutions, mostly from MFOs which accounts for 37.29%. This ratio is not too high while the ratio at VBSP is 35.52% and PCF 27.19%. This can be explained bythe fact that MFOs are of a smaller scale with less capital required but monitor their customers more closely through local mass organizations. Moreover, the loan conditions of these organizations are more flexible than VBSP and PCF. However, these numbers can not confirm that there are more people borrowing from MFOs than from PCF because the number of customer interviewed from PCF is less than those of MFOs and VBSP because the research team could not contact them. The type of service that customers use the most is savings, 525 out of 960 people. Of these, 64.83% have savings at the MFOs, while only a small percentage of them have savings at VBSP and PCF, at 19.92% and 15:25% respectively. The reason for this is that MFOs often encourage borrowers to have monthly savings in order to reduce the loan balance at maturity. The savings amount in MFOs is usually very small, and probably much smaller than VBSP and PCF. The main reasons are: first, MFI clients often have compulsory savings with the amount as a percentage of the loan amount. Second, VBSP and PCF have Government deposit insurance. VBSP piloted the savings mobilization service % 62 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

63 with an undisclosed guarantee by the Government, while PCFs are all members of the Deposit Insurance of Vietnam. Third, PCF and VBSP interest rates are more attractive for large savings. Other services such as money transfer, voluntary savings (only at MFOs), and insurance attract a insignificant number of customers. As to payment services, perhaps these microfinance organizations have not developed as payment intermediaries or even if they do, there is no clients for this service. In fact, the customers interviewed are mostly poor working people who mainly borrow for capital. Some of them have savings when their income gets better, and almost none of them have the need for money transfer, insurance and payment services from these organizations. By participating in these organizations, an individual can borrow many different types of loans. The following table shows customer s access to microfinance services in the last 5 years, which considers how many customers borrow only one loan, and how many customers borrow the a second loan. Table 3.12: The Depth of Micro-Credit Service Outreach W h o l e sample VBSP PCF MFI No. of first loans No. of second loans % of customers having the second loans Total number of loans Source: Vietnam Microfinance Survey Analysis, 2011 Out of the 971 borrowers interviewed, 964 of them could provide complete information about their loans, accounting for 99.2%. This shows that there are customers who do not really understand their loans. This is a relatively serious problem, because these customers MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 63

64 might cause bad debts for the organization due to their ignorance or information asymmetries. Out of the 964 people, 411 people have a second loan. While this ratio is in within the permitted range (over 42%), it also shows the relative easy access to micro credits for customers who have had their first loan. In the last five years, there are borrowers with small loans or large loans, there are people who participate in many different lending programs. The following table gives information about the total value of loans and the average interest rate Table 3.13: Total Value of Loans and Average Interest Rates of Loans Total value of loans (million VND) Average interest rates of loans (%) N Valid Missing 0 2 Mean VBSP Minimum Maximum PCFs N ,0000 1,0000 Valid Missing 1 4 Mean Minimum Maximum Percentiles Percentiles MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

65 MFIs Total value of loans (million VND) N Valid Missing 6 10 Mean Minimum Maximum Percentiles Average interest rates of loans (%) Source: Vietnam Microfinance Survey Analysis, 2011 The loans listed by customers with no particular order, so we don t pay attention to any individual loan but to the total value of all loans and the average interest rates which is calculated by weighted average of interest rates. The weighted proportion is the ratio of each loan amount over total loan amount. The total loan amount and the average interest rate is divided into each customer group of each organization. With VBSP, the lowest loan amount is VND1 million, the highest total loan amount is 75 million, with an average total loan amount of 15.6 million. Of the 345 clients of this organization, 25% of them borrow no more than VND8 million, 25% of them borrow from VND 8 to VND11 million, 25% of them borrow from VND11 to 20 million loan and the remaining 25% borrow more thanvnd20 million. VBSP s average interest rate is the lowest of the three organizations, averaging at around 0.75%/ month, and the highest interest rate is up to 9%/year. At PCF, the total loan amount is much higher than VBSP, with the highest level at VND570 million and the lowest atvnd2 million, and the average loan size is about VND98.36 million. This is remarkably higher than that of VBSP and MFOs. The interquartile range also shows that of the 263 observations, 25% of customers borrow less than VND25 million while 25% of them borrow more than VND120 million. The MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 65

66 PCF s average interest rate is the highest among the three organizations, with the lowest interest rate at 0.56%/month and the highest at 2.18%/month, averaging at 1.56%/month. At the MFOs, the total loan amount is much lower. The lowest loan amount is VND1 million, but the highest is only VND34 million, averaging at about VND6.74 million. This is understandable as the size of the MFOs is relatively small, the limit to each loan is low. The average interest rate is at 1.14%/month. Some of the customers loan purposes include: production, business, consumer, medical treatment, and loan repayment. Out of the total of 1375 loans (accessibility) there are 1370 loans with clear information about the loan purpose. In Table 15.3, the loan purposes are displayed with two different aspects. Purpose Table 3.14: Borrowing Purpose Number of loans % of total number of loans (%) Average value of loans (mil. VND) Total value of loans (mil.vnd) Percentage of total value of loans (%) Production % 17 13, % Trade/business % 42 13, % Consumption % 28 1, % Healthcares % % Loan payment % % Others % 20 3, % Total % 33, % Source: Vietnam Microfinance Survey Analysis, 2011 Production loans have the highest proportion of 56.72% of total number of loans, with a total loan amount of VND13,428 million - approximately 40.43% of the total loan amount. Thus, most customers borrow for the purpose of family production development. They are all lowincome customers, or micro-business households. This is especially true to the above mentioned H3 hypothesis, and consistent with the secondary data on microfinance clients in Section MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

67 Business loans only account for half of the number of production purpose loans, at 24.31%. But the amount of capital flows to this purpose is quite heavy; up to VND13,910 million. And is at the highest ratio of all loan purposes at 41.88%. Thus, although the number of loans is much smaller but the loan value is very large, indicating the loan amount limit is large for business loans, averaging at about VND 42 million. Figure 3.10: Lending Purpose by Outstanding Loans and by Total Loans Source: Vietnam Microfinance Survey Analysis, 2011 The third loan purpose is for consumption, with only 59 out of 1370 loans, accounting for 4.31%. However, this purpose also has relatively high loan amount ofvnd1,644 million, equivalent to 4.95% of total loans, averaging at VND28 million. For purposes such as medical treatment or debt repayment, the number of loans for this purpose is small: six loans for medical treatment and only one for repayment. But these are large loans. The average loan amount for medical treatment is VND46 million. While the loan for debt repayment is worth VND60 million. The loans with other purposesis the third highest proportion MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 67

68 of the six purposes, accounting for 14.16% in quantity and 11.74% in value. This represents the relative diversity in micro-credit activities, not only focusing on investment needs, but also for expenditure - a legitimate demand of microfinance customers. However, MFIshave not been able to meet this demand due to many reasons, primarily because of limited resources. MFIs currently have various forms of interest payments, such as payment at maturity; monthly, weekly payment or irregular payment. Method of principal payment Table 3.15: Principal Payment Methods of Loans Whole sample VBSP PCFs MFIs Number of loans % Number of loans % Number of loans % Number of loans at maturity % % % % monthly % % % % weekly % % % % unfixed % % % % Total % % % % Source: Vietnam Microfinance Survey Analysis, 2011 The commonly used principal payment method at VBSP and PCF is payment at maturity, accounting for 77.8%and 79.13% of total number of loans respectively. In the case of MFOs, due to the characteristics of the customers, the principal and interest payment form is little bit different as the principal is paid on a monthly basis, accounting for 59.22%, while only 1.43% of the number of loans are repaid at maturity. VBSP and PCF do not have weekly principal repayment method, but for MFOs this method is the second most commonly used, accounting for 39.34%. This shows MFOs strengthwith flexible repayment methods which help their clients with planning more reasonable source for repayment compared to PCF and VBSP. % 68 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

69 Method of interest payment Table Interest Payment Methods of Loans Whole sample VBSP PCFs MFIs Number of loans % Number of loans % Number of loans % Number of loans % at maturity % % % % Monthly % % % % Weekly % % % % Unfixed % % % % Total % % % % Source: Vietnam Microfinance Survey Analysis, 2011 Monthly interest payment is the most popular payment method. Of the total sample, 75.55% are monthly interest payment loans, or 88.8% at VBSP, 78.12% at PCF and 60.08% at MFOs. Other interest payments are almost non-existent or of unremarkable ratio. Method of lending Number of loans Table 3.17: Method of Lending Total VBSP PCFs MFIs % Number of loans % Number of loans % Number of loans Group % % % % Individual % % % % Others % % % % Total % % % % Source: Vietnam Microfinance Survey Analysis, 2011 % The two main forms of lending is group lending and individual lending, which are different at each organization. At VBSP and MFOs, the main form is group lending, accounting for 62.04% of the total number of loans at VBSP; and 70.7% at MFOs. This may be due to the fact that VBSP and MFOs mainly reach their customers through the local mass organizations, typically the Farmers Association, the Women s Union and the Veterans Association. These organizations do MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 69

70 not work directly and independently with each individual but would normally lend to small groups and clusters with the support of the group heads and cluster heads who have good reputations at the intermediary associations. While PCF usually works independently and individually without the need for an intermediary association; customers who need loans and can meet their lending conditions can borrow directly. Therefore, individual lending is PCF s main lending form, accounting for 97.96%. Looking at the entire sample; individual lending is most predominant at 51.86% of total number of loans. However, this is of outstanding advantage because the group lending form s ratio is as high as 47.92%. Each form has its own advantages and disadvantages. However, for the MFOs and VBSP, group lending help minimize monitoring costs by transferring it to group members. Group lending also helps the customers who have no traditional collaterals (house, land, property of high value, etc.) can have access to credits by using social pressure through the groups. Experience in many countries around the world in developing microfinance has proven the advantages of group lending. The following table provides information on the source for loan repayment which is divided into four different sources: income, borrowing, grants from other people, and other sources. Most of the loans are repaid from incomes earned, other sources only account for a negligible proportion. In fact, the loan purpose is mostly production and business, or production and business expansion or capital revolvement. Therefore after each business cycle, the borrowers tend to retain a portion of profits to repay the original borrowed capital. 70 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

71 Source of payment In- Owned come Number of loans Table 3.18: Sources of Loan Payment Total VBSP PCFs MFIs % Number of loans % Number of loans % Number of loans % % % % Borrowing % % % % Grant others from % % % % Others % % % % Total % % % % Source: Vietnam Microfinance Survey Analysis, 2011 The following data show whether the customers would have difficulties repaying their loans. In the total of 962 customers who provided the information, only 260 people find it difficult to repay the loans. Table 3.19: With / Without Difficulties in Paying Back the Loans? No. of people Yes % No. of people VBSP ,77% ,21% PCFs % % MFIs % % Total % % Source: Vietnam Microfinance Survey Analysis, 2011 This difficulty might be due to the fact that production and business results do not meet expectation, in case of loans for consumption or medical treatment or debt repayment when clients do not have excess funds for repayment at maturity. Looking separately at 260 individuals who find it hard to repay their loans, most of them are VBSP customers, accounting for 55.77%. The ratios at PCF and MFOs are approximately the same. No % % MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 71

72 Figure 3.11: Proportions of Customers With Difficulties in Loan Payment by Institutions 22.69% MFI VBSP 55.77% PCF 21.54% Source: Vietnam Microfinance Survey Analysis, 2011 This is worrisome for VBSP. The main reason for this problem are: firstly; VBSP customers are poor families with poverty certificate who have the cultural mind set of receiving free resources from previous grant programs rather than from borrowed resources. Second; the low interest rate policy which is almost gratuitous, together with the lack of policies to support the use of capital, has led to the fact that these customers often do not use capital efficiently. This leads to inevitable difficulties come repayment time. Thirdly; the term of repayment of principal and interest is currently not rational. Sometimes it is too long, resulting in large amount due at maturity and is inconsistent with the poor customer s cash flow. The following information is about customers loans at the organizations they mainly borrow from. In addition, customers borrow from many different credit institutions. In addition to the main loans, they also borrow from other organizations and individuals. 72 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

73 Borrow elsewhere Table 3.20: Number of Customers Borrowing From Other Institutions No. of people Yes % No. of people VBSP 33 25,38% ,10% PCF 43 33,08% ,28% MFI 54 41,54% ,62% Total ,00% ,00% Source: Vietnam Microfinance Survey Analysis, 2011 Of the total 971 observations, only 130 people borrowed from other places; perhaps from their relatives or other credit institutions. Among them are 54 MFOs customers, 41.54%, 43 PCF s customers, accounting for 33.08%, and 33 VBSP customers, 25.38%. This shows more clearly the problem: it is very difficult to separate the impact of each MFI, and the risk of multiple debt is visible in the microfinance sector because organizations do not share information about the borrowers. Although the risk is currently not critical, there is the potential risk of default by the borrowers who borrow from many different organizations at the same time. This is the basic reason that cause recent microfinance crisis in countries such as Cambodia and India. Therefore, organizations should pay more attention to multiple debt management problems, perhaps by sharing customer information among organizations in the same locality. Capital demand in many places is inevitable when they need capital for different purposes, while the loan amount from one organization may not be enough to cover for that purpose. Comparison of parameters in the following table, we found that the average interest rate of loans borrowed from other sources is lower than the organization that they participate. No % MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 73

74 Table 3.21: Interest Rate (%/month) of the Loans Borrowed From Other Institutions: Valid VBSP PCF MFI Total Missing Mean Mode Minimum Maximum Source: Vietnam Microfinance Survey Analysis, 2011 If the average interest rate of the main loans for VBSP customer is 0.75%/month, the customer pay only 0.67%/month for loans from other sources. Customers borrowing from PCF pay a relatively higher average interest rate of 1.56%/month, while they only pay 0.95%/ month elsewhere. In contrast, the interest rate paid by MFOs customers are higher that that of the MFO: at 1.41%/month elsewhere, while at 1.14% / month at MFOs. This stems from the fact that a number of poor people might borrow or receive grants from relatives, while PCF or MFI customers often borrow from other commercial banks or credit institutions Evaluation of the Effectiveness/Impact of Microfinance on Customers Economy and Living Standard: The major content of section focuses on evaluating the impact from the participation in credit institutions, which means assessing the changes in various aspects of borrowers economic condition and living standard after they receive the loans Structure of Income: The first step is to rank the activities that bring in the main income for the client s family before and after participating in the MFI. There are a total of 12 economic activities that are listed, and of course the mem- 74 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

75 bers of each family will participate in a basket of different small activities, but not necessarily in all of the activities. In the basket of activities where they participate, there are activities that bring in more income and there are ones with less income. The following Table will look at customers of each MFI and how they rank the activities that bring in the most income. Table 3.22: List of Income Activities Before and After Joining the VBSP Main IncomeActivities Before VBSP Cultivation Others Breed Trade Staff salaries, Pensions Secondary job (manufacture) Aquiculture 6 5 Transport 4 4 Secondary job (processing) 4 3 Construction 3 3 Service 3 5 Industrial 2 1 Unit: people After Total Source: Vietnam Microfinance Survey Analysis, 2011 The numbers corresponding to the activities listed in the above table show the number of people indicating the activity that is most important in income generation for the family. Therefore, before participating in VBSP, most of the customers considered agricultural activities as the main source of income for their families, with 111 people agreeing with this. The other activities category comes second with 66 selection, livestock comes third with 63 selection and fourth is trade/small MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 75

76 business. There is only a small change in the selection and ranking by customer for the time after their participation. In particular, after participating in the MFI program, in number of the customer numbers selecting planting as the main income generating activity reduce to 104 people; the number customers selecting other activities also declines. In addition, livestock and commercial / small business seems to be more appreciated. This is reflected in the slightly increased number of people selecting these two activities and hence the ranking structure also has a small change: first is crops, followed by livestock, and then trade/business, while other activities ranks fourth. Similarly, the following are the ranking of 12 activities ranked according to the criteria of income generation by PCF customers. Table 3.23: List of Income Activities Before and After Joining the PCF: Unit: People Main income activities Before PCFs Breed Cultivation Trade Salary Aquiculture Construction 8 8 Secondary job (manufacture) 5 5 Industrial 4 4 Transport 4 3 Secondary job (processing) 4 2 Service 3 8 Others 0 1 After Total Source: Vietnam Microfinance Survey Analysis, MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

77 The ranking structure for before and after the customers participation in PCF is not changed, where the first group of activities remain the same: husbandry, crops, trade, salaries / pensions and seafood. The change if any is with the number of selections in each activity, but this change is not large enough to alter the ranking structure. Table 3.24: List of Income Activities Before and After Joining the MFIs Unit: People Main income activities Before MFIs After Cultivation Trade Breed Others Transport Construction 9 9 Secondary job (manufacture) 6 7 Service 4 4 Salary 4 4 Industrial 3 2 Aquiculture 3 2 Secondary job (processing) 1 4 Source: Vietnam Microfinance Survey Analysis, 2011 For MFOs customers, the activities that provide the main income before and after the customers participation in the organization also remains unchanged: crops, trade, livestock, other activities, and transportation. This structure has not changed but merely the changes are with number of selection in each specific activity. Based on the evaluation of each customer group, we can see that the MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 77

78 income structure does not change much, while the ranking structure is different depending on the view point of each organization s customers. However, we see the cultivation, trade and livestock husbandry activities are highly appreciated and are among the top ranked when considering income generation aspects. This helps clarify H3 hypothesis about the market segments of the three subject organizations which all focus on low-income customers, mostly farmers and small traders. Table 3.25: Changes in Contribution to Total Income Before and After Joining the Organization (%) Activities VBSP PCFs MFIs Before After Before After Before After Cultivation Breed Industrial Aquiculture Construction Trade Transport Secondary job (manufacture) Secondary job (processing) Service Salary Others Source: Vietnam Microfinance Survey Analysis, 2011 The above information shows each activity s average contribution ratio to total income before and after customers participation in the organi- 78 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

79 zations. This ratio is for each group of customers of each MFI group. According to VBSP customers assessment, the average contribution level of cultivation on their total income is about 49.06% before their participation, and 50.85% after they borrow from VBSP. PCF customers have cultivation contributing 42.29% and 35.68% of total income respectively before and after participation. At MFOs the ratio for before and after participation is 49.88% and 47.17% respectively. Similarly we find the corresponding ratio for the remaining group of activities. In general, these ratio has not change much compared to before and after borrowing. Thus, microfinance can help change the total income but hardly alter the structure of contribution of each activity to total income. In order to create changes in the income structure, microfinance needs to be accompanied with large training and capacity building programs as well as programs that create a variety of jobs. Furthermore, changes in the income structure also depend on many objective economic factors. The following section will clarify the changes in the customers income, expenditure and saving after borrowing Income, Expenditure and Saving: The following data will give us the customers view in assessing the changes in income, spending and savings before and after their participation in MFIs. The main reason for considering all these three factors is that it is always difficult to assess income. Therefore, the combination of income, spending and savings will help the living standard assessment be more comprehensive, minimizing the risk of information withholding or asymmetries. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 79

80 Assessment SharpIncrease Table 3.26: Assessment of Income Before and After Joining the Organization: Whole sample VBSP PCFs MFIs No. of people % No. of people % No. of people % No. of people Small , , , ,83 Increase Unchange Reduce Total Source: Vietnam Microfinance Survey Analysis, 2011 Of the 965 customers who provided information, up to 586 people (60.73%) believe that their household s income has increased a little after they borrowed. There are 29.02% of customers who said their income increased a lot, and 10.16% said their income did not change after borrowing. Figure 3.12: Assessment of Customer Income Before and After Joining the Organization: % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Total VBSP PCFs MFIs Reduce Unchange Small increase Sharp increase Source: Vietnam Microfinance Survey Analysis, MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

81 The ratio of customer whose income declined is almost negligible, with only 1 out of 965 customers saying so. Therefore, this is considered as a non-representative observation. This assessment structure does not change much when we consider each group of customers of each MFI group. Most customers saw their income increased but at small ratio (66.18% of VBSP customers, 69.82% of MFOs, and 41.25% of PCFs customers). However, the percentage of no increase in VBSP s customers is relatively high (20.7%) compared to other organizations. Meanwhile, many of PCF customers (53.79%) believed that their income increased significantly after they receive capital support from the organization. The main reason stems from the fact that PCF s average loan size PCF is relatively high (averaging VND40 million / customers), while it is VND14.58 million at VBSP and VND6.74 million at MFOs. Comparing loan size and income increase, we can see that one Dong of capital from MFOs bring greater impact to income increase an average capital of MFI loans have an more impact on income increase than other organizations. To clarify whether the data on change of income is understood correctly by the customers, the evaluation of expenditure is also considered. This is one of the important criteria in assessing the changes in people s living standards before and after their access to and use of microfinance services. Table 3.27: Assessment of Consumption Before and After Joining the Organization: Assessment Whole Sample Total VBSP PCFs MFIs % Whole Sample % Whole Sample % Whole Sample Sharp , , , ,54 Increase Small , , , ,42 Increase % MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 81

82 Assessment Whole Sample Total VBSP PCFs MFIs % Whole Sample % Whole Sample % Whole Sample Unchanged Reduce Total Source: Vietnam Microfinance Survey Analysis, 2011 % Figure 3.13: Assessment of Customer Consumption Before and After Joining the Organization: 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Total VBSP PCFs MFIs Reduce Unchange Small increase Sharp increase Source: Vietnam Microfinance Survey Analysis, 2011 Testimonials about changes in spending are similar to the evaluation of income. In general, customer spending mostly increased but the level is mainly low (57.2% of customers). VBSP and MFOs clients are often poorer, so their increase in spending is less than PCF s clients. This also leads to a logical result on savings that the majority of customers of all organizations said that there is no change in their level of savings before and after borrowing. 82 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

83 Table 3.28: Assessment of Savings Before and After Joining the Organization: Assessment No. of people Total VBSP PCFs MFIs % No. of people % No. of people % No. of people Sharp Increase Small Increase Unchanged Reduce Total Source: Vietnam Microfinance Survey Analysis, 2011 Figure 3.14: Assessment of Customer Savings Before and After Joining the Organization: % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Total VBSP PCFs MFIs Reduce Unchange Small increase Sharp increase Source: Vietnam Microfinance Survey Analysis, 2011 We also question whether the increases in income and expenditure are used by the customers to invest in business and production in order to make the increase sustainable, or if they only focus on short term consumption. This is also a way to evaluate the expenditure management capacities of the poor/low-income people when participating in microfinance. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 83

84 Table 3.29: Assessment of Investment Before and After Joining the Organization: Assessment Total VBSP PCFs MFIs Whole Sample % Whole Sample % Whole Sample % Whole Sample % In- Sharp crease In- Sharp crease Unchange Reduce Total Source: Vietnam Microfinance Survey Analysis, 2011 Most customers confirm an increase in investment in business and production after participating in the MFIs. This is entirely consistent with the primary purposes of the loans which is production/business. Moreover, when household income increases, so does investments. Hence microfinance clients are very interested in business and production development to achieve sustainable income growth in the future, but not in non-productive or luxury consumption. Figure 3.15: Assessment of Customer Investment Before and After Joining the Organization 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Total VBSP PCFs MFIs Reduce Unchange Small increase Sharp increase Source: Vietnam Microfinance Survey Analysis, MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

85 VBSP s and MFOs customers mostly said that the level of increase in their investment is small. While most of PCF s customers responded that investment has increased more. The main reason comes from the fact that the average loan size of VBSP and MFOs is smaller. This also shows that, although the average loan size is small, the impact on income, expenditure and investment of MFIs clients is very positive. Although MFI clients have better income, expenditure and investment, the question is: Does this good change completely come from microfinance? Is there a case where the society s living standard is enhanced and so do microfinance clients? What is the net impact of microfinance? We tested hypothesis H1 through customers comparison of the changes in their families compared with their neighbors. The net difference would be the net impact of microfinance. Table 3.30: Living Standards of Customers Compared to Neighbors Before and After Borrowing: Unit: % Living standards Total VBSP PCFs MFIs Before After Before After Before After Before After Wealthy Upper middle Middle Poor Very poor Total Source: Vietnam Microfinance Survey Analysis, 2011 Across the whole sample, almost all families had an average level living standard before they borrowed at 518 households, accounting for 53.73%. After borrowing, the average level standard of living remains the highest percentage, 53.37%, and there is no change in the number of families in average living standards (the number is reduced by 4), or if there is, it s only the move from one level to another. Compared with the time prior to borrowing, the number of the poor and very poor MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 85

86 households decreased remarkably (31.64% are poor before and 16.61% are poor after, and 6.95% and 1.25% in case of the very poor households). Similarly, the number of affluent households has increased, from 71 to 268 households, corresponding to 7.37% and 27.83%. However, the number of reach households has not increased much. This proves that microfinance clients have impressively escaped poverty, but there s no breakthrough on wealth. This conclusion is also consistent with the hypothesis of H3 and H1. More specifically, we compare and evaluate the standard of living of the customer groups for each different organizations to see the relative differences. The change in living standards after the customers borrow from different MFIs is show clearly below. Figure 3.16: The Changes in Living Standards Before and After Joining Organization: Source: Vietnam Microfinance Survey Analysis, MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

87 The poor and very poor customers of VBSP account for the largest proportion (35.57% before and 59.48% after borrowing), after that comes MFOs customers (33.05% and 12.36%), and finally the PCF customers (18.94% and 2.27%). With the change in living standards of the poor after participating in MFOs, we see that MFOs impacts are very impressive compared to the size of loans and the scale of investments to this group. Because VBSP with enormous capital investment and supports in all aspects from the Government, the level of poverty reduction of their customers is only 3% higher than MFOs. The number of poor clients in the three MFI groups also confirm that our initial belief about the poor/low-income customers is correct. Not all the poor and very poor people have a poor-household certificate, so customers of PCF and MFOs clients can hardly borrow from VBSP s programs targeting the poor. General Living Standards and the Net Impact of Microfinance on Clients Living Standard: In the previous section we mentioned each household s living standard. The next part provides information on the impact of MFIs on the community s living standards as a whole. Table 3.31: Current Living Standard of the Community Compared to the Time Before Financial Institutions Operated: Level Whole sample VBSP PCFs MFIs No. of people % No. of people % No. of people % No. of people Better Unchange Worse Total % MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 87

88 Most people believe that their local community s living standard is now better than before the MFIs became available (94.28%). A small number of people said that their local community s living standard has not changed (5.61%), and almost none considered it decrease since the MFIs appeared. Clearly, the operation of MFIs is essential in meeting the increasing financial needs of the people. If MFIs where not present, the non-official credit activities such as hui, ho, phuong or the usuries would have had the opportunity to develop. Although these activities are not entirely bad, they are not governed by laws, and there have been bankruptcy cases of the hui and ho which have led many to hardships, losing their homes or even threatened their life. Therefore, the establishment and development of the MFIs both formal and semi-formal is a good opportunity for the people in general and the poor in particular. Data from the Vietnam Household Living Standard surveys also produce similar results regarding the change in living standard in Vietnam. Figure 3.17: Percentage of families evaluating their living standard in 2008 compared to 2001 Unit: % Whole country Urban Rural Much improved Somewhat improved Unchange Worse Source: VHLSS MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

89 According to the living standard surveys conducted by the General Statistics Office every two years, most of the households view their living standard as very much improved (41.3%) or somewhat improved (45.7%) in 2008 compared to Only 5% of them view their living standard decreased. The difference between rural and urban areas are not considerable, and rural families even feels their lives change more positively compared to urban dwellers. However, whether this result is brought about by microfinance or not is still questionable. In another research study for the Women s Union (2011) in Vietnam with the two representative provinces of Hai Duong and Dong Thap, we studied the general assessment of the people regardless of their participation in any organization. The result about the change in living standard compared to 5-10 years ago also is also very impressive. Table 3.32.Change Living Standards in the Last 5 and 10 Years Finance Living Standards Social Position Criteria Dong Thap Hai Duong 5 years ago 10 years ago 5 years ago 10 years ago No. % No. % No. % No. % Better % % % % Unchange % % % % Worse % % % % Better % % % % Unchange % % % % Worse % % % % Better % % % % Unchange % % % % Worse % % % % Better % % % % General satisfaction Unchange % % % % Worse % % % % Source: Assessing the impact of macroeconomic reform on women, UNWomen, 2011 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 89

90 Generally speaking, on all of the four aspects of finance, living standard, social status, and overall satisfaction of life, people interviewed considers the present as better compared to five years ago and 10 year ago. The reasons for this are :(i) better and more available employments, (ii) change in the family status, (iii) and education and health. Thus, it is visible that microfinance support customers to have better jobs, or their current jobs are better. If customers do not have working skills or the knowledge of doing business, certainly the impact of microfinance is very limited, and even on the reversed because it can creating debt burden for the people. The next Table analyzes the net impact of microfinance through the comparison of changes in family s living standards compared with the community. Table 3.33: Changes in Household Living Standard Compared to Overall Level of the Community: Level Whole sample VBSP PCFs MFIs No. of people % No. of people % No. of people % No. of people Faster Equal Slower Total Source: Vietnam Microfinance Survey Analysis, 2011 Data in the above Table shows that most of the customers (63.54%) said that changes in his/her family s living standards correspond with the changes in his/her local community s living standards. Nearly 1/4 of the customers considered that changes happen faster, while 13.43% of them said that their living standard have changed more slowly. A very positive result in the net impact assessment relating to MFOs is that the ratio of MFO customers believing that their life is changing % 90 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

91 faster than compared to the local community is 19.87%, which is higher than VBSP s customers (16.08%), while the proportion of customers saying that their life is changing more slowly is less than VBSP (16.4% and 13.43%). Table 3.34: The Impact of Participation in Organizations/Projects on Household Living Standards Effect Whole sample VBSP PCFs MFIs No. of people % No. of people % No. of people % No. of people Very positive Positive Middle Little impact No impact Negative Total Source: Vietnam Microfinance Survey Analysis, 2011 In general almost all clients of the MFIs agreed that their participation in the MFIs had a positive impact on the living standard of their families. Some people believe that the impact to be great, while others said the impact is only moderate. No one commented that borrowing from MFIs had no impact or had a negative impact. % MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 91

92 Figure 3.18: The Impact of Participation in Organizations/Projects on Household Living Standards: Source: Vietnam Microfinance Survey Analysis, 2011 When comparison is made among the MFI groups, the difference is relatively large. Up to 89.39% of MFO clients considered the impact to be very positive and positive, while the ratio at VBSP is 80.99%. The main reason is when participating in the MFOs, customers also receive many benefits relating to capacity building and training. The atmosphere in group meetings is cheerful, with discussions not only limited to borrowing, but also helping the customers to obtain more information and aspiration. MFOs clients feel an ownership of the organization. Customers best practices in using capital and doing business are shared with each other. Therefore, most of MFOs customers appreciate the organization and its impact on their living standard. For a more detailed comparison, we asked customers to compare their total assets before and after borrowing. 92 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

93 Table 3.35: Total Household Assets Before Joining the Organizations/Projects and at Present Unit: VND mil. N VBSP PCFs MFIs Before Now Before Now Before Now Valid Missing Mean Median Minimum Maximum Sum Percentiles Source: Vietnam Microfinance Survey Analysis, 2011 In the case of VBSP, the average total assets are always at the lowest level, at about VND19.63 million before the customers borrow from the organization and at VND27.3 million after borrowing. In the mean time, the average total assets of PCF s customers are high, atvnd million before and up to VND million after participation. MFOs customers average total assets increased from VND38.3 million before participation to VND47.83 million after participation. In terms of growth rates, MFO clients have more impressive growth, although of smaller values.overall, the average total assets of the households after borrowing has somewhat increased compared to before they got access to capital. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 93

94 Box 3.2. Microfinance customers with the poverty escape story Ms. Nguyễn Thị Nga, a Numng ethnic minority in Nà Nhạn commune, Điện Biên district, became member of the Điện Biên Women Development Fund in 2000 with the first loan of VND200,000. With this loan, she bought dried fish and some commodities for retail sales. In the past 11 years, she has remained a regular customer of the Fund. In 2011, with good repayment and production quality change ability, her loan level has reached VND5 millions with a two-weekly repayment scheme. Currently, her shop has a full range of everyday commodities to serve the needs of the families in her village and commune. In addition, in order to increase the families income, she also buys foods such as cassava for resale. In addition to the loan from the Fund, she borrowed VND30 millions from the VBSP under the 135 Program. With this loan, she bought 2 smashing machines to serve the local communities at harvest times. From these services and sales, her income is VND6 millon per month. Almost all of her savings are for investment in production expansion. She plans to buy rice mills in order to increase income for her family. From a poor family with poverty certificate, with the initial loan of VND200,000, her family has now become a relatively wealthy family in the community. She is one of the winners of the annual Citi Microenterpreneurship Awards in Vietnam. Source: MFWG, MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

95 However, is access to microfinance a major factor leading to changes in living standards and incomes of the families in particular and of the local community in the recent times? In a study by Women s Union (2011), the question about the most important achievement of your local community brings surprising answers. Table 3.36.Most Important Achievements of Your Community in the Last Years: Unit: % Content 5 years ago 10 years ago Good quality roads Electric and water supplies Clean water Good quality social organizations Good quality school system Good health care system Information infrastructure Jobs creation Clean environment Training centers Others Total Source: Assessing the impact of macroeconomic reform on women, UNWomen, 2011 The living standard of the Vietnamese people in general, and of the microfinance clients in particular, has been impressively enhanced. The main changes in the community which are highly appreciated are mainly in the area of infrastructure (roads, electricity, water, etc.). This is entirely consistent with the increase in public investment in infrastructure for the last 10 years. Where there is good infrastructure, investments in production and business of individuals will be more MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 95

96 effective. Thus, microfinance contribute to creating employment (for which 4.2% of residents rated as a major change in the last 5 years), or developing easier jobs. Hypothesis H4 has been tested and proven to be true in this case. Therefore, it is impossible to conclude that the enhancement of customers living standard in recent years is not only due to microfinance, but also to many complementing factors, especially infrastructure. Moreover, with good infrastructure, the effectiveness of microfinance will be higher Evaluation of the Effectiveness / Impact of the MFIs In addition to the impact on income and living standards in general, microfinance also haa positive impact on other aspects of the life and spirit of the customers. This section is expected to test the hypothesis H Housing and Minimum Living Facilities: Regarding the houses, before participating in MFI programs, customers mostly have tile-roof house (accounting for 40.41%). After borrowing, the number of tile-roof houses was not significantly reduced, but the number of cement-roofed houses (often considered better and more durable houses in Vietnam) increased significantly from 281 households to 403 households, accounting for 41.55%, corresponding with the reduce in the number of temporary houses and cottages: cottage houses decreased from 112 down to 95 households, and temporarily reduced from 183 to 97. The percentage of households with temporary and cottage housing has decreased from 30.47% before borrowing down to 19.79% after borrowing. This is a positive change in the customers lives and the initial an condition for a better life. Although investment in housing does not generate income, it helps to increase the customers health, psychology and confidence and is a smart investment. 96 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

97 Other matters such as toilet and clean water condition also experience better investments. Before participating in the MFIs, customers mainly use semi-septic toilets (37.9%) or open/no toilet (32.09%). After borrowing, most customers switch to septic tank, accounting for 50.78%. The percentage of households having no or open toilets is only 18.3%. On the status of water resources: before and after participating in the MFI programs, the main water resources is well water. There is one notable change in that the number of households using natural water for drinking and other activities has declined and replaced by an increased number of households using tap water at home. Thus, the condition of housing, toilets and drinking water have positive changes after the households have access to loans. There are two main reasons leading to this result: first, there are loans whose direct purpose is to improve these aspects, thus creating conditions for improved customers health and comfort condition. Second, the loans for production and business have helped the families with increased income and spending power, contributing to their long-term investments Capabilities and Opportunities for Customers: One of the success factors of microfinance is the creation of opportunities and improved capacity for their customer. This stems from the customers involvement the development and operation of the organization (the group lending mechanism), as well as the inclusion of non-financial services. Other benefits Table 3.37: The Impact of Lending and Participation in Organizations Total VBSP PCFs MFIs No. No. % No. % No. % Job-creation Training MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 97

98 Other benefits Total VBSP PCFs MFIs No. No. % No. % No. % Guidance Social benefit Source: Vietnam Microfinance Survey Analysis, 2011 The figures in the above Table show the number of people who answered yes which means they agree that borrowing brings corresponding benefits. In the total sample, there are 948 people saying that borrowing have created jobs for their families; 339 said that they have received the training of the credit institution; 636 confirmed that MFIs provided guidance (on technicalities, production and business experience), and 948 received social benefits from the project. Figure 3.19:The Impact of Lending and Participation in Institutions Source: Vietnam Microfinance Survey Analysis, 2011 When comparing different MFI groups, MFOs have the highest percentage of customers receiving training, guidance and social benefits (37%). Although with the same methods of group lending and using mass organizations network, VBSP doesn t receive the same level of high appre- 98 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

99 ciation. The main reason for this is that mass organizations cooperate with VBSP as authorized agents, and all final decisions remain with VBSP staff. Meanwhile, the MFOs create opportunities for mass organizations to be directly involved in their operation, and they are actually own the microfinance activities. The integration of microfinance and other programs launched by the Women s Union are also very suitable. Microfinance is closely related to the Women s Union activities and the Women s Union became stronger and its members became more close thanks to microfinance. Table 3.38: The Specific Benefits of Participation in the Organizations Specific benefits Total VBSP PCFs MFIs No. No. % No. % No. % More understanding and confidence More skills to do business More family-management skills More involved in the community activities Better care for children Better family health care Better education of children and family More responsibility for housework of family members More dicussions with wife/husband in family issues Others Source: Vietnam Microfinance Survey Analysis, 2011 Most customers are highly appreciative of the social benefits brought about by microfinance, such as improved knowledge, better confidence, deeper involvement in community activities, as well as gender equality and family life quality. These effects are hard to quantify, but they really make major changes in life. This is also why microfinance has such a great attraction, is highly appreciated, and regarded as one of the key tools for poverty reduction and economic development. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 99

100 Hypothesis H2 has been proved through the above analysis. With in the last five years, an annual program to honor outstanding microfinance customers, credit officers and organizations has been organized by the Microfinance Working Group. The Citi Microenterpreneurship Awards Program (CMA) has found many best examples of microfinance clients overcoming poverty, creating jobs, as well as changing their social status. These best practices are the clearest evidence to prove the hypothesis of H1 and H2 above. Box 3.3: CMA Awards to Honor Excellent Client, Credit Officers and Microfinance Institutions in the Period of : Citi Microfinance Entrepreneurship Award in Vietnam is an annual event held by Citi Foundation in corporation with Microfinance Working Group (since 2001) and State Bank (Since 2009) with the following goals: 1. Awarding the poor (the low- income people) having the efforts to escape from poverty thanks to borrowing from microfinance programs/projects; and highly appreciating the supporting role of credit officers and MFIs. 2. Raising awareness of microfinance and the impact of microfinance activities in local economic development. 3. Expanding the microfinance network with the participation of various entities; developing the international cooperation. From 2007 to 2011, the CMA has provided the awards to various microfinance entrepreneurs, credit officers and MFIs. The result is presented in the following table: Number of awards Micro Entrepreneurs Credit officers MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

101 Number of awards MFIs Total Source: Vietnam Microfinance Working Group, 2011 Besides, CMA Vietnam connects with CMA Global. In 2012, the first microfinance entrepreneur was awarded in the Global CMA (Ms. Duong Thi Tuyet TYM client in Lam Commune Y Yen District Nam Dinh Province). Tuyet s success is also the honor for Vietnamese Microfinance in general, and TYM in particular. The honor title it brings is far more valuable than the prize itself (value of US $ ). The society truly appreciate outstanding individuals who work with Microfinance, enabling related partners to trust in the development of Microfinance. The award also brings a new aspect for Vietnamese Microfinance and the people; especially, responsible public organizations are aware of and more attention through mass media. Source: Vietnam Microfinance Working Group, CMA Customers Expectation and Observations About the MFIs: Customer Expectations of the MFIs: Most customers want to borrow larger loans, with lower interest rates, longer term and more flexible payment methods for both principals and interest. Of the 766 people who want increased loan size, 324 are MFO customers. This may be due to the fact that MFO loans tend to be small, with low borrowing limits, so the amount of loans in MFOs can not meet the customers demand when there is an increased need for investment in production. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 101

102 Regarding Customer s Expections on Principal and Interest Payment Methods: There are three different methods for customers to choose from: payment at maturity, periodic payment and irregular payment. Out of the 924 people interviewed, 53.57% want regular payment, 42.32% want payment at maturity and only 11.4% want to pay the principal in irregular installments. Meanwhile, the most popular interest payment method is periodic (86.92% of all customers, 79.71% of VBSP customers, 68.94% of PCFs, and 95.86% of MFOs.) The expectationson principal payment method are different among customers of different MFIs. The majority of VBSP and PCF customers want to pay the principal at maturity, with the percentage of customers selecting this method at 67.1% and 61.02% respectively. This is may be because they want to wait until the end of the business cycle to pay the principal from earned profits, or in cases of education loans at PCF, they want to wait until their children have completed school or university and obtained a stable job to be able to repay. With MFOs it is substantially different where 91.94% of customers want to repay principal periodically in order to reduce the burden at maturity and it is easier to arrange recources for repayment Review of the Client Organization: The majority of customers we interviewed gave positive feedbacks on all aspects of the MFIs: 95.56% of customers said that they can meet the borrowing conditions stipulated by the MFIs; 95.05% asserted that the lending procedures are straightforward; 92.78% agreed that the lending process is simple; 95.67% rated credit officers as professionals; 98.14% rated that MFI staff have good service attitude; 96.59% answered that MFI staff have good capacity; 95.56% agreed on convenient location; and 97.21% said the MFIs have a good reputation in the community. There is almost no difference among the three MFI groups in this area. This shows that MFIs have a good from the customers perspective. 102 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

103 Thus, MFOs have brought about impressive results in establishing credibility and image in their customers hearts. Although they are not owned by the Government as VBSP or not participate in the formal credit insurance system as the PCFs, the MFOs have built very good reputation. This is the result of the long-term operation (such as TYM s 19 years of existence), as well as the bond between loan officers and clients, and the best use of networks of the Women s Union and local mass organizations. In addition to reputation, MFIs are also evaluated based on the customers satisfaction level on their operation. Out of 882 people, 51.36% rated at very satisfied level, 44.44% satisfied and 3.74% average. The number of people who are not satisfied or dissatisfied is almost negligible. Level Table 3.39: The Customer Satisfaction Level on the Operation of Organizations Whole sample VBSP PCFs MFIs No. of people % No. of people % No. of people % No. of people Very satisfy Satisfy Neutral No satisfy Dissatisfy Total Source: Vietnam Microfinance Survey Analysis, 2011 Looking at each MFI group separately, most of VBSP and PCF customers feel very satisfied, with the ratio of 50.31% and 59.76% respectively. For MFOs, the ratio of customer who are satisfied is greater at 51.26%; while the very satisfied group account for 45.91%. % MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 103

104 Figure 3.20: The Level of Satisfaction on the Organization Activities: Source: Vietnam Microfinance Survey Analysis, 2011 The assertation that satisfaction level at MFOs is higher than other MFI groups is consistent with the above analysis on the reputation, image, and the benefits they bring to customers; especially social benefits. This is the reason why, although MFOs currently operate in a small scale, Government and international organizations are interested to support their development in the future. This is the sweet fruit that MFOs are starting to harvest after so much bitter hardship and efforts by their staff and customers since the early days of introducing microfinance activities to Vietnam. With the above affection to and positive feedbacks on microfinance, most of customers (86,99%) answer yes to the question Do you want to continue borrowing? Most people lack capital and they need capital for business, trade, and production so they need to continue borrowing. There are also people who do not need to borrow more, perhaps because they are not short on capital or in the case of those who need capital; they might have difficulties in repayment and hence does opt to get a new loan. 104 MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON

105 Figure 3.21: Will Customers Want to Continue Borrowing? Source: Vietnam Microfinance Survey Analysis, 2011 Of the 829 people who want to continue borrowing, 345 customers are from MFOs (accounting for 41.62%); 258 are from VBSP (31.12%) and 226 are from PCF (27.26%). The ones who do not want to continue borrowing are mostly VBSP customers, accounting for 64.52%. MFOs clients expressed closer engagement with the organizations and their desire for long-term participation. MICROFINANCE VERSUS POVERTY REDUCTION IN VIETNAM - DIAGNOSTIC TEST AND COMPARISON 105