The Japan Fund for Poverty Reduction (JFPR), a grant facility established by the Japanese Government and the Asian Development Bank (ADB) to provide assistance to ADB’s low-income clients, will provide a USD 1.5 million grant to the Government of Vietnam to formalize the country’s microfinance sector [1].
According to Marguerite S. Robinson, author of The Microfinance Revolution Volume 2, formalization of the microfinance sector includes “moving toward large, commercially funded microcredit portfolios and to mobilize voluntary savings” with the eventual achievement of financial self-sufficiency. Ms. Robinson explains formalization is meant to increase the scale of operations, and that large-scale out-reach depends on access to commercial sources of finance. This, in turn, depends on institutional sustainability. Programs which have entered the formal sector have achieved sustainability by loaning at market interest rates, utilizing income to finance their operations, providing savings accounts, and keeping operating costs low [2].
Binh Nguyen, Finance Specialist of ADB’s Southeast Asia Department, explains that the Vietnamese Government is seeking out development in the formal microfinance sector to offer “more sustainable and affordable financial services to the poor,” as current subsidized programs are limited in their ability to meet clients’ financial needs.
ADB is a multilateral finance organization based in Manila, Philippines established in 1966. In 2008, ADB approved USD 10.5 billion in loans, USD 811.4 million in grant projects, and technical assistance amounting to USD 274.5 million. Funds allocated towards microfinance alone are not distinguished by ADB [1].
Currently, Vietnam’s microfinance sector is largely dominated by Government subsidized programs which are led by the state-owned Vietnam Bank for Social Policies (VBSP) [2]. VBSP, based in Hanoi, Vietnam, was established in 1996 to consolidate all governmental programs lending to the poor and other vulnerable social groups. VBSP provides subsidized credit, without the requirement of formal loan collateral, and is supervised by the State Bank of Vietnam. VBSP has a gross loan portfolio of USD 3, 017, 866, 034, and current active borrowers totalling 6, 792,978. As of 2008, VBSP reported total assets of USD 3, 143, 454,779, a debt to equity ratio of 2.60, an ROA of -2.33% and an ROE of -8.39% [3].
Ms. Robinson explains why the domination of Government subsidies is an issue. First, she says subsidized financial institutions are restricted by government regulation from mobilizing voluntary savings from the public. Second, these institutions have little incentive to mobilize voluntary savings because they receive steady low-cost funds to operate. Third, because loans are subsidized, they are rationed (their distribution is controlled by the government), and often foster corruption, reaching easily accessible, better-off communities rather than poorer villagers in remote areas.
Ms. Robinson concludes that “under the subsidized credit model, financial institutions, whether savings-driven or credit-driven, have not and cannot provide microfinance- credit and savings services- on a large scale” because they cannot afford to cover the costs and risks involved in the practice of large-scale operations. “Microfinance can attain wide outreach sustainability only outside the subsidized credit model- in self-sufficient commercial institutions.”
To help microfinance programs transition into the form of such commercial institutions, the Vietnamese Government will provide USD 150, 000 and participating MFIs will supply USD 800, 000. The press release did not disclose how the MFIs will provide this money. The project will also provide training to regulators at the State Bank of Vietnam to enhance supervisory capacity. Furthermore, relevant government officials will receive industry awareness training to build general support for market-based microfinance. The total project cost is roughly USD 2.45 million, and the project will be implemented over two years, March 2009 – February 2011. Microfinance organizations with diverse stakeholder ownership, as well as privately-owned operators with a strong social commitment will be given preference when choosing target groups to support [1].
A previous MicroCapital story discusses a paper written by Stephanie Charitonenko and SM Rahman, analyzing the implications of MFI formalization. In accordance with Mr. Nguyen’s statement, the authors’ findings indicate a positive correlation between self-sufficiency & sustainability and formalization, allowing more affordable financial services to be offered to the poor [4]. For detailed MicroCapital coverage of this paper and the implications of commercializing MFIs, please visit: https://www.microcapital.org/microfinance-paper-wrap-up-the-commercialization-of-microfinance-bangladesh-by-stephanie-charitonenko-and-sm-rahman/.
By: Diya Chopra, Research Associate
[1] Asian Development Bank
http://www.adb.org/Media/Articles/2009/13026-vietnamese-microfinance-projects/
[2] The Microfinance Revolution: Sustainable Finance for the Poor (pages 56, 63, 64)
[3] MIX Market
http://www.mixmarket.org/mfi/vbsp/data
[4] MicroCapital
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