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