FINANCE DISSERTATION ONMICROFINANCE AND THEDEVELOPMENT OF HOUSEHOLDBUSINESSES IN VIETNAM

Dissertation submitted in partial fulfillment of the
Requirement for the MSc in Finance

UWE . Sr≡itv
Bristol England

FINANCE DISSERTATION ON
MICROFINANCE AND THE
DEVELOPMENT OF HOUSEHOLD
BUSINESSES IN VIETNAM
NAME OF STUDENT: DUONG LINH PHUONG
ID No: 17047727
Intake 1
Supervisor: Dr. NGUYEN THI HOAI THU

September 2018

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong

Executive Summary
After being recognized as an economically independent unit in 1998, the number of
Vietnamese household businesses has risen rapidly. The production and trading activities of
Businesses in Vietnam now have many advantages such as simple incorporation procedures,
payment of taxes in the form of capitation; without collecting invoices or keeping records.
This section has also contributed positively to the domestic economy in creating jobs
opportunities, helping to solve social problems and creating a variety of products and goods
diversity. Due to its small size and popularity all over the country, the household businesses

is an important distribution channel for trades, which helps balance trading process and
develops the local economy. In addition, household businesses are one of the driving forces
for entrepreneurship, market development, and the potential area for founding micro, small
and medium enterprises. However, with the characteristics of a small business, household scaled businesses have to face many limitations in business capacity, technology application,
management level; the consequence here is decreasing labor productivity and business
efficiency. Another option that household businesses used for capital mobilization is
microfinance units. Besides providing small loans, savings services, some of them also
provide non-financial services such as risk management, start-up guidance, experience and
knowledge sharing. Obviously, this is an opportunity for household businesses to ask for a
loan, improve their knowledge and skills in business management. However, the main targets
of these firms are the poor, the near poor, the low-income employees and other social welfare
beneficiaries. As a result, the credit supplies and approaches to the household firms are still
under many restrictions. To meet these mentioned requirements in both theoretical and
practical aspects, the research project "Microfinance and the development of household
businesses in Vietnam" is urgent.

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong

Acknowledgem ents
For the successful accomplishment of this dissertation, I would like to express my
deepest appreciation to all those who provided me the possibility to complete this
thesis. At the very beginning, I greatly appreciated all the teachers in International
School of Business at Banking Academy in general for basic theoretic knowledge
which is the precious foundation for me to conduct my dissertation. Especially, I
would like to express my deepest appreciation to Dr Hoai Thu, my outstanding
supervisor, for instructing and encouraging me to complete this internship report.
I would also like to thank MA. Ngoc Duong, the Deputy Director of Agribank at Bac

Giang Branch, for giving me the opportunity to do my thesis. The experience and
knowledge gained in Agribank Bac Giang helped me to understand different aspects
related to my study. Moreover, a special gratitude I give is to the staffs at Agribank
Bac Giang, from whom I have achieved a lot of practical experience, and gave me a
huge amount of knowledge, which was exceptionally valuable to me.
In all, I am extremely grateful to my family and my friends for sharing their
experiences, time and encouragement throughout the process of completing this
internship program.

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
Table of Contents
CHAPTER I: INTRODUCTION............................................................................................. 7
The Overview.............................................................................................................................................7
Review of literature.................................................................................................................................... 8
The objectives...........................................................................................................................................10
The delimitation........................................................................................................................................10
The disposition.......................................................................................................................................... 11

CHAPTER II: THEORITICAL FRAMEWORK................................................................................ 11
Overview of creditfrom microfinance institutions.................................................................................. 11
1.1.
1.2.

The concept of credit from microfinance institutions.......................................................................11
Classification of credit from microfinance institutions.....................................................................13

1.3. Characteristics and role of credit from microfinance institutions...........................................................14

1.3.1.
Characteristics of credit from microfinance institutions................................................14
1.3.2.
The role of credit from microfinance institutions............................................................15
Overview of household business and household business development................................................17
2.1. Definition of household business.............................................................................................................17
2.2. Characteristics and role of household business.......................................................................................17
2.2.1.
Characteristics ofproduction and business activitiesof household businesses................17
2.2.2.
The role of household businesses in the economy..........................................................18
2.3. Factors affecting the development of household
businesses..........................................19
2.3.1.
Characteristics of household head.................................................................................19
2.3.2.
Characteristics of household business...........................................................................20
2.3.3.
The geographic area in which the household business operates.................................20
2.3.4.
The level of technology and e-commerce application in the operation of business
establishments......................................................................................................................................20
2.4. Indicators assessing the development of household businesses..............................................................21
The impact of credit from microfinance institutions on the development of household
businesses................................................................................................................................................. 21
International experience to improve the efficiency of microcredit for household business
development.............................................................................................................................................. 22
4.1. The successful practice of microcredit for household businesses development in
Malaysia....................................................................................................................................................23

4.2. Lessons learned for Vietnam....................................................................................................................24

CHAPTER III: METHODOLOGY OF THE RESEARCH.......................................................25
Data collection.......................................................................................................................................... 25
1.1.
1.2.

Primary data collection.................................................................................................................... 25
Sampling......................................................................................................................................... 25

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
Research variables....................................................................................................................................
26
LIST OF TABLES
Data Analasys........................................................................................................................................... 28
3.1.
3.2.
3.3.
3.4.

Basic estimates with table data......................................................................................................... 28
Accurate selection of models........................................................................................................... 30
Self-correlation testing and variance................................................................................................ 31
GLS regression method.................................................................................................................... 31

CHAPTER IV: EMPIRICAL FINDINGS AND ANALYSIS......................................................32
Statistics describe the data....................................................................................................................... 32

Pearson correlation matrix....................................................................................................................... 33
Accurate selection of models...................................................................................................................35
Model results by GLS regression............................................................................................................. 37

CHAPTER IV: RECOMMENDATIONS.................................................................................. 40
Recommended to the Government........................................................................................................... 40
Recommendations for microfinance institutions..................................................................................... 41
Recommended for household businesses................................................................................................ 44

CONCLUSION.........................................................................................................................46
REFERENCE...........................................................................................................................47

PAGE

TABLES

S

Table 1: AIM Micro Credit Products

23

Table 2: Characteristics of the sample

25

Table 3: Description variable and control variable in the model

27

Table 4: Descriptive Statistics Results

31

Table 5: Pearson correlation matrix results

34

Table 6: Hausman test results with model (1)

35

Table 7: Hausman test results with model (2)

35

Table 8: Results of the variance test Models (1)

36

Table 9: Self-correlation test results Models (1) (2)

36

5


Table 10: Results of the analysis of the effect of microcredit on the
profitability of household businesses

38

Table 11: Results of the analysis of the effect of microcredit on labor
productivity of household business

38


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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong

CHAPTER I: INTRODUCTION
1. The overview background
Since being recognized as an economically independent unit in 1998, the number of
Vietnamese household businesses has risen rapidly. According to the Ministry of Planning
and Investment, Vietnam had more than 1.5 million household businesses, employing more
than 3 million workers and accounting for about 9% of total social production capacity in
1999. By October 1, 2016, according to the General Statistics Office, the country had a total
of 4.91 million individual firms, required for an over 8,2-million workforce, a sharp increase
compared to 1999. The production and business activities of household businesses in
Vietnam now have many advantages such as simple incorporation procedures, payment of
taxes in the form of capitation without collecting invoices or keeping records. These kind of
business have also contributed positively to the economy in providing job opportunities,
helping solve social problems and creating the product diversity. Due to the small size and its
popularity all over the country, these entrepreneurs are an important distribution channel for
trade, which helps balance trading and develops the local economy. In addition, household
businesses are one of the driving forces for entrepreneurship, market development, and the
potential area for founding micro, small and medium enterprises (CIEM, 2017).

However, with the characteristics of small business, household-scaled businesses have to face
many limitations in business capacity, technology application, proper knowledge in terms of
business management; which lead to decreasing labor productivity and business productivity.
In particular, this area has had difficulties in accessing official loans (Pham Van Hong, 2016).
The business capital providing source of this area is mainly based on retained profits and
credits derived from friends and relatives. Household businesses have difficulty in asking for
capitals from credit organisations because they cannot guarantee the values of collateral
assets, or the providing reasonable business plans, etc. In addition, according to the
provisions of the Civil Code 2015, the civil relations which the subjects are involved in are
legal and personal. As a result, the State Bank has amended the regulations on which defines
the borrowers in the credit organizations must be legal and personal in Circular No. 39/2016
/ TT-NHNN to comply with this Code. According to the circular, from March 15, 1977,
subjects not fulfilling the legal criterium (such as household businesses, households,
cooperative groups or other organizations without legal status) are not eligible for borrowing
money. In order to borrow capitals, household businesses must be transformed into
enterprises or the head of the household must be individually responsible for repaying the

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
debt. Typically, the interest rate for an individual will be calculated as the loans for
consuming purposes, therefore the cost of capital can increase.
Another channel of funding for household businesses is microfinance institutions. Besides
providing small loans, savings services, some microfinance institutions also provide nonfinancial services such as risk management, start-up guidance, experience and knowledge
sharing. Obviously, this is an opportunity for household businesses to borrow capital,
improve their knowledge and skills in business management. The microfinance system in
Vietnam currently includes three official microfinance organisation, about 70 semi-formal
microfinance programs in 23 provinces, the system of people's credit funds, the Co-operative
bank and the Bank for Social Policies. However, the main targets of these organizations are

the poor, the near poor, the low-income employees and other social welfare beneficiaries. As
a result, the supply of credits and approaches for the households-sized businesses is still
limited. From a theoretical point of view, there are many studies in Vietnam that analyze the
impact of microfinance on different aspects of the economy. Nguyen Kim Anh et al. (2011)
have shown that microfinance contributes significantly to reducing poverty and improving
people’s living standard. The research by Mai Thi Hong Dao (2016) showed that microcredit
has a positive impact on the revenues of the low- and middle-income families. However,
there is not any complete and comprehensive study dealing with the impact of micro finance
to household business area. In order to meet both the theoretical and practical requirements,
the research project "Microfinance and the development of household businesses in Vietnam"
is urgent.

2. Review of literature
In Vietnam, the definition of household businesses is clarified in the Decree 78/2015 / NDCP in terms of enterprise registration. Particularly, "A business owned by an individual or a
group of individuals who are Vietnamese citizens from the age of 18, perform full civil
capacity; or one owned by a household, registed for business activities in only one location,
are laid down on using less than ten employees and taking responsibility for all of their assets
for business activities". In some countries all over the world, household businesses exist in
the form of sole proprietorship / sole trader (as in England, France, Australia, India), where
the owner also actes as the managers and operators of business establishments on their own
behalf; There is no separation in terms of property ownership rights between the owner, the
business itself and ones who responsible for paying personal- income taxes. Sole-owner
businesses have no legal status, usually perform on small scale, carry lots of family-related

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
characteristics, and are able to hire more labours..In Vietnam, is is distinguished by the fact
that: household businesses can be owned by many individuals.

In terms of labor size, household businesses in Vietnam may be classified as "microbusiness"
/ "micro-enterprise". Thus, this topic are being worked based on an international researching
process in terms of the impact of microfinance on the small-sized businesses. Researches
have shown that the lack of business capital and the difficulty in accessing capital lending
sources are one of the major obstacles to the development of micro-, small- and mediumsized businesses (Owualah, 1999; Carpenter, 2001; Anyawwu, 2003; Lawson, 2007). The
reason is that getting access to financial services enables these businesses extra resources for
investing in production capacity and productivity also (Watson and Everett, 1999). In
addition, during the producing process, micro facilities need to maintain their working
capital. However, the fact is that their working capital is mainly mobilized from unofficial
sources such as family, friends, and “black” credit; most of these sources do not meet the
demand of the trading activities (Bhasin and Alepaku, 2001). Getting access to finance from
the formal financial source is difficult with small businesses as they do not satisfy the
borrowing conditions from banks and credit institutions. These capital mobilization
difficulties can reduce sale profits of business establishments (Khandker et al., 2013).
Microfinance was created to help low-income subjects access to financial services (including
credit, savings, insurance, remittances, etc.) and other non-financial services. This helps them
to improve their incomes and living conditions. The effectiveness of microfinance in
preventing poverty and improving people’s living standard has been justified in both reality
and many empirical studies in many developing countries. So far, low-income people are still
the priority of MFIs. However, to aim at a sustainable development, many organizations have
expanded their range to small and micro business owners. (Farhana Ferdousi, 2015). These
customers may be loyal customers of microfinance organizations, have derived themselves
from poverty and successfully raised the productivity, hence broadened their business scale .
They can also be the new clients who merely pose the need of financial support to carry out
businesses with higher incomes and less risk. According to Olugbenga and Mashigo (2017),
microfinance can be the foundation for small-scale businesses to mobilize capitals for their
businesses. Microfinance can also support institutions by providing non-financial services
such as business consulting, training financial management- , business skills for entrepreneur
owners.
Empirical research on the impact of microfinance on small and micro businesses has shown a

wide range of results. Specifically, using the ANCOVA model to examine the relationship

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
between microfinance and performances of small- and micro-sized businesses in Indonesia
for the period 1999-2005, Rahmat et al. (2006) pointed out that microfinance helps these
businesses increase sales and business range. However, this study only works on regional
factors and the business professionals when considering the factors affecting the productivity
of business firms. Research by Xitian Wang (2013) in China also shows that microfinance
plays an important role in increasing sales and profits for household businesses. Karlan and
Valdivia (2006) show that the combination of microcredit and training business knowledge
for homeowners have brought a lot of benefits for both lenders and borrowers. In fact, rises in
the total revenues are recorded by the owners after being trained by microfiance
organizations and the loan repayment to them is quicker. The study using the Probit
regression model with dummy variable representing the business owner's participating and
not participating in these training. However, using the Pooled OLS regression analysis of
table data obtained from the 502 microfinances business survey conducted in Nigeria,
Babajide (2012) concluded that microfinance loans have zero impact on the development of
small- and micro-scaled businesses. This study also suggests that microfinance institutions
should increase their lending and repayment terms for these businesses. Similar results were
reported in the study by Olugbenga and Mashigo (2017) in Gauteng, South Africa. In fact, in
order to promote the number of small-sized business, the Government of India has
implemented a co-operated loan program between banks and microfinance institutions, in
which micro credits are provided to these firms (but with higher lending limit than ones for
normal micro credit). In measuring the effectiveness of this project, the World Bank (WB)
suggests that this program helps institutions improve labor productivity, increase the number
of production facilities, well maintain working capital, better chances in employing required
labor, making higher sales and profits, as well as the fact that the owners feel more confident

about themselves in the business.

3. The research purposes:
-

To systematize theoretical matters in credit stemming from microfinance institutions
(MFIs) and the development of household businesses.
To assess the impact of microcredit on the development of household businesses in
Vietnam.
To make recommendations to improve the effectiveness of microcredit for household
businesses in Vietnam.

4. The researched subjects and fields

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
-

-

The study focused on the impact of credit from microfinance institutions on the
development of household businesses in eight provinces representing the three
northern, central and southern regions of Vietnam such as: Bac Giang, Vinh Phuc,
Phu Yen, Dak Nong, Binh Thuan, Giang Thuan, Binh Duong and Ho Chi Minh City.
The selection criterium here is to reflect the situation of micro credit for household
businesses in different regions and regions of the country with different characteristics
and development levels; as well as the ability to collect questionnaires of the team.
Research stage are aimed from 2013 to 2017.

5. The disposition
Apart from the introduction, conclusion and reference, the structure of the topic is divided
into 4 chapters:
- Basic theory of Credit from Microfinance Institutions and Development of
Household businesses.
- Methodology of the research ‘Microfinance Institutions on the Development of
Household businesses in Vietnam’.
- Empirical Finding and Analysis of the research ‘Microfinance Institutions on the
Development of Household businesses in Vietnam’.
- Recommendations for improving the effectiveness of credit from microfinance
institutions for the development of household businesses in Vietnam.

CHAPTER II: THEORITICAL FRAMEWORK
1. The overview of credit from microfinance institutions
I. 1. The definition of credit from microfinance institutions
According to the Asian Development Bank (ADB, 2000) "Microfinance is the delivery of a
range of financial services, such as deposit, loan, payment, money transfer and insurance.for
the poor, the low-income households and their small businesses. " According to
J. Ledgerwood (2013),
"Microfinance is a way of economic development that benefits the low-income population in
the society by providing financial services and other services to serve expenditure and
investment needs ".
From the point of view of the Consultative Group on the Poor - CGAP "Microfinance is the
provision of credit, savings, microinsurance, remittance and other non-financial services to
the group of people with low-income by a suitable mechanism, enabling them to carry out
production, develop their own careers; hence raise their own living standard"(CGAP, 2013).

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
Therefore, microfinancial products include financial products and services that are
customized to meet the needs of low-income customers.
According to Nguyen Kim Anh et al (2013), there are three different opinions on organizing
microfinance. The first point is that MFIs include all MFIs, including banks, financial
cooperatives, semi-formal and formal MFIs. The second focus is on small-scale financial
institutions, both formal and semi-formal ones. The third point is that MFIs are "the primary
type of credit institution that performs a number of banking activities to meet the needs of
individuals, low-income households and microenterprises." Law on Credit Institutions, 2010).
In this topic, the third view is under consideration; according to this, MFIs in Vietnam
include formal and semi-formal MFIs; people's credit fund, Co-operative Bank, Bank for
social policies
Microcredit is one of the most important products of a microfinance organization. According
to the Global Summit on Microcredit in Washington in 1997, "Microcredit is the provision of
micro loans to the poor, in the purpose of helping the beneficiaries perform their own
business plans, earn profits then improving the living qualities of the loaners and their
families"
In Vietnam, microcredit loans come with small values and usually last in a short period of
time; along with simple procedures in order to fulfill the requirements of borrowers. At
present, commercial banks of Vietnam often do not provide these loans because if they apply
the credit interest limit of the State Bank (SBV), these loans are not profitable. Thus, in
overall the credit from microfinance institutions in Vietnam is the small, short-termed loans
along with flexible procedures provided by official and semi-formal MFIs, people's credit
funds, Co-operative banks and Bank for Social policies to meet the needs of borrowers.
Microcredit can be provided to customers in the following ways:
- Group lending: Individuals can gather by groups, also conduct the activities in a selfmonitoring system. Part of the group is prior in borrowing loans, then the rest can
increase the value of the loan. If a person does not fulfill their payment
responsibilities, the group must be in charge to do it.They work with the credit
institutions in groups, hence the transaction and management costs are lower in

comparison with individual lendings.
- Progressive lending (step lending): In this way, the microfinance organization will
initially provide borrowers small and super small loans, after which they gradually
increase these loans. Along with that, in the beginning the maturity period is short,
then lengthened afterwards.

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
-

Regular repayment: This method is used to control the borrower’s punctual
repayment. Any delays might be considered as problems and require immediate
solutions. Payment schedule can be adjusted in season: poor household businesses are
often conducting animal farming, handicrafts, etc., hence the seasonality is obvious.
1.2. Classification of credit from microfinance institutions
In the microfinance market, microfinance providers can provide microfinance services to
clients in one of two ways: monophyly and integrated. In an monophyly approach,
microfinance focuses on financial intermediation services or social intermediation. In an
integrated approach, microfinance can provide additional non-financial services such as
business development and social services. Microcredit is one of the financial intermediary
products.
Classification of micro credit service products
MFIs usually provide three types of credit products as follows: individual loans; group-based
lending and third-party indirect group-based lending.
- Individual / Individual Loans: These loans typically have the following
characteristics:
• The guarantees for loans are usually under the form of some traditional mortgage
such as fixed assets, guarantees of the third parties.

•

MFIs assess customers through individual factors such as personality, capacity,
and financial ratios of customers

•

Loan terms are identified and changed to suit customer needs

The relationship between the credit officers and the customers are close. The
credit officers often spend a lot of time and also effort to do research on their
customers, marketing and carry out custom service if necessary.
• Cost less in general and also for human resources than group lending, as each
employee can manage many individual clients’ records at the same time. MFIs
often provide loans to clients such as small and medium-sized rural enterprises.
The reason is that low-income clients often do not meet the requirements of the
traditional criteria, so they often apply for group lending - guaranteed by a group
or other forms of trust. This is also why commercial banks or people’s credit
funds often make individual loans.
Mutual lending: Group lending work on forming a group of people who share the
same desire to access financial services. The Grameen Bank model applies the same
•

-

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
methodology for group lending. However, this approach is ineffective due to the high

establishing and supervising expense, the stability of this type of loan is quite unsure
if not based on cultural- social media factors.
- Indirect Intermediary group-based lending: This loan product still makes use of the
strong points of group lending, but there will be an intermediary group that will set up
and manage the group as well as take the responsibilities for the activities of the
groups. In general, massive and social organizations such as farmers' associations,
women's unions, etc are selected as intermediaries. They will perform some stages in
the lending process of MFIs such as debt collection, disbursement, etc.
The characteristics of a group loan product are:
• Flexible lending scale and terms, allowing clients to access capital when
needed.
•

Non-traditional forms of guarantee - peer pressure - are substituted for
collateral. The late payment of a member usually means that further lending
to other members of the group is suspended until the loan is repaid.

•

•

The repayment rate of loans is very high compared to conventional loans. One
such example is the GB bank with 98% repayment, or TYM of Vietnam with
95% ones. The pressure of the other team members encourages a quick and
complete return, as the members do not want to leave the team or do not want
to be punished by the group in case of late payment. In some special cases,
the group may find out the legal and reasonable excuses for one member’s
delay and are willing to help them until the problem is resolved.
Compulsory savings are treated as a non-traditional form of guarantee, a
cheap capital source and may also be used to pay for a late payment of a

member.

1.3. Characteristics and role of credit from microfinance institutions
1.3.1. Characteristics of credit from microfinance institutions
First, credit borrowers from MFIs are mainly poor people, low-income people without
proper collateral. Lacking fixed assets, the poor and low-income people cannot borrow from
formal financial institutions such as commercial banks. Microcredit borrowers may be small
business units, mainly based on their families’ economic capacity, who are engaged in
traditional farming services. The assets of such customers are often negligible, less likely to

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
be mortgaged for loans, unstable income or they themselves cannot provide any business
plans, which all gradually causes a lot of obstacles for accessing formal financial support.
Secondly, credits from microfinance are small and costly. The target customers of micro
credit are the poor, the low-income employees, who have low consuming, production and
trading needs so the demand for loans is also small. Because of this, microcredit often poses
higher interest level than the common rates of formal financial providers. Some MFIs
overcome this obstacles by finding financing, cheap capital, subsidized funds, but these are
often limited while the demand is huge. Micro-credit still remained to be a high-cost credit.
Third, the purpose ofproviding micro-credit is quite diversified and flexible. The purpose of
providing micro credits initially aimed at providing funding for small-scale productions in
agriculture, rural areas and micro-enterprises. And the use of capital is a standard for
evaluating loan applications of MFIs. But the fact is that poor households, low income
households always have a shift in capital use because of mean-of-living problems and also
the inability in separating the production capital from other capital. This has led to more and
more microfinance activities representing many other purposes than business, such as tuition,
childcare, water clarification and environmental sanitation. This represents the relative

diversity of microcredit operations. It no longer focused solely on the needs of production
and business but also on the consuming need- a completely legitimate need of microfinance'
customers. Loans include group lending and individualized loans. Not only flexible lending
conditions are provided but also the principle of repaying principals and interests of MFIs is
customized in accordance with customer's conditions, helping customers plan and attain more
reasonable source of repayment than other organizations which provides microfinance
services; the usual interest and payment is performed by week, month.
Fourthly, the demand for micro-credit loans is unexpected, short-termed because the poor
and low-income people often suffer from great consequences of natural disasters and
economic fluctuations. For low-income clients in rural agriculture, their productivity is often
dependent on weather and climate. If the weather is favorable then the season is successfully
bumper, otherwise, if the weather is not good, they will suffer from many financial
difficulties. These people are also vulnerable when socio-economic conditions, or natural
disasters and epidemics change, which pose the great demand for a financial budget to solve
the negative consequences, to restore production progress and ensure a sustainable income
source. For small and micro-sized business customers, the demand for loans ranges only in
working capital.
1.3.2. The role of credit from microfinance institutions

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
-

-

-

-

-

First, credit from MFIs plays an important role in meeting the capital needs of those
who do not have access to credit from banks. By responding to the diversed needs of
these clients (eg, capital for production, business, education, health care, etc.), credit
from microfinance institutions has contributed improving the material and spiritual
life of the people.
Second, credit from microfinance provides more for the poor, low-income people
with financial resources in terms of investment and business, indirectly helping people
increase productivity. Along with the effective use of this additional resource and the
resources available to individuals, households, many have escaped from poverty,
increasing their incomes by increasing their labor productivity and with the other
members of the family.
Third, credit from MFIs helps clients to diversify their sources of income. The
customers of microfinance are largely gathered in agriculture and rural areas, where
conditions of production, income generation as well as life in general depend much on
weather conditions. In favorable manufacturing conditions, microcredit helps people
invest more in agricultural production (for example, processing outputs from
agricultural inputs). Thus, it helps to create added value for their products. Under
unfavorable production conditions, people can invest more in non-agricultural,
handicraft and inter-crop fields, thereby creating a more diversified and stable source
of income.
Fourth, credit from microfinance contributes to the development of the financial
system. The advent of microfinance adds a potential supply to one type of customer
that previously have not already received or completely have not had any awareness
from formal financial providers. In terms of market structure, the participation of new
service providers will make the market more competitive, products and services
become more diversified, more likely to satisfy the needs of customers and
community. Microfinance in general and microcredit in particular may become a

focus of formal service providers with the goal of seeking new, niche market
opportunities.
Fifth, credit from MFIs is being used as a useful tool for sustainable poverty
alleviation. There are many solutions to addressing poverty, in which poor people
develop their production by providing loans, technical assistance, etc. that are often
used. More effective measures are often to help the poor find jobs for themselves, for
their family members; thereby creating a stable income, gradually help them step out

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Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
of poverty through the provision of micro-credit in particular and microfinance
services in general.

2. Overview of household business and household business development
2.1. Definition of household business
In Vietnam, the concept of household business is clarified in Article 66 of the Government's
Decree No. 78/2015 / ND-CP guiding the business registration procedures of Enterprise Law
2014. Particularly, businesses owned by an individual or group of individuals who are
Vietnamese citizens above the age of 18, performing full civil capacity or a household owned
by a whole family itself can only register for business at one location, employ less than ten
employees and take full responsibility for their business activities.
Household businesses have ten or more employees that must register for the establishment of
their enterprise following fixed regulations. Business owners must be the sole beneficiary of
all profits and will bear all financial obligations to the state. In case an individual household
business is owned by a household or a group of individuals, the family /group must appoint a
representative to do business registration. The representative will perform the rights and
obligations of the household and on behalf of the household. However, the representative is
not responsible for each of any other members of the family/group ndividually. Profits gained

or risk happening will be distributed to the members according to their contributions, efforts
and agreements.
In terms of size of labor, household businesses in Vietnam may be classified as
"microbusiness" / "micro-enterprise", meaning the micro-sized type of enterprises, which is
divided on the basis of labor size or sales revenue.
2.2. Characteristics and role of household business
2.2.1. Characteristics of production and business activities of household businesses
In terms of production activities, household businesses usually have the following
characteristics
- Firstly, household businesses usually have a small range of activities, focusing on a
small, local market for consuming their products and services. In the world, soleowner businesses often use less labor because of their small-business characteristics.
However, in Viet Nam, this feature is partly derived from the law, which only allows
household businesses to register their business at one location and use less than 10
employees.

17


Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
-

Second, the household has a simple management structure, the owner also acts as the
worker, the manager. This leads to a quick decision-making process, however, it also
depends on the level of management, ability to capture the market trends, and
experience of the household head. In addition, the lightweight structure comes with
the fact that each employee will undertake various tasks thanks to the low level of
specialization. The level of labor employed by the household type of business is also
not high-levelled because of the simpler nature of this kind of business in comparision
with the entrepreneur-sized ones.
- Third, the activities of household businesses are flexible, easy to alter, adapt to the

market changes due to small-scale operation, and low entry costs. However, the
flexibility of the head householder in capturing the market of household businesses is
often spontaneous, without a clear business orientation or strategy that does not cover
market demand.
- Fourthly, the level of technology application of household businesses is often low,
more work is done manually, production machineries are quite outdated, leading to
low labor productivity. All of them make it difficult to meet the requirements of many
market segments.
2.2.2. The role of household businesses in the economy
Household businesses are a relatively common economic type and are developed in many
countries around the world. This sector is expected to create more employment
opportunities for the various classes in society, contribute significantly to GDP and
economic development of many countries, is a dynamic economic component with great
potential. (Korsching & Allen, 2004; Morrison, Breen, & Ali, 2003). Diversification in
the type of business produced by the household sector allows the creation of multiple
types of products and services everywhere, at all times, to meet the needs of society,
acting as a satellite for business in the economy (SB A, 2015).
Household businesses contribute to economic restructuring in rural areas, creating jobs,
contributing to poverty reduction by creating many industrial fields, attracting a large
number of laborers, producing many products and services for consuming and exporting,
increase state budget revenue; contributing to making the economy more vibrant and
flexible, exploiting the latent resources in the population, serving the economic
development. In addition, household businesses have the potential to promote the
traditional trades through management experience, production organization, traditional

18


Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
production tips accumulated from generations to generations. This allows the

maintenance and development of products of ethnic cultures in the region.
2.3. Factors affecting the development of household businesses
2.3.1. Characteristics of household head
The theory of micro-, small- and medium-sized business development recognizes the
entrepreneurial capacity and perspectives of the head housseholder as the factors that
influence the development of that business, which is reflected by the choice of strategies
and methods of business management of him/her. The entrepreneurial capacity and
attitude, according to previous studies, are influenced by several characteristics of the
owner.
- Gender of the household head: In particular, Riding and Swift (1990) show that
many banks tend to apply more stringent lending conditions on collateral to
women who are borrowing for their operation, ưhich, in part, limits their ability to
borrow and develop their business. In addition, a common characteristic of
women is that they tend to be more interested in the family and less motivated in
economic development and business expansion (Brush, 1992). Cooper et al.
(1994) also found that the woman owner of a registered business did not have a
positive effect on the expansion of the business, but had no negative effect on the
maintenance of the business.
The study also shows that younger individuals are more motivated and willing to
take risks to expand their business because they have a higher need for increasing
their income to support their families. However, young people are more limited in
financial capacity, networking and business experience when compared to older
people. Empirical research provides evidence of the effects of age on the basis of
entrepreneurial development (Boswell, 1973; Davidsson, 1991).
- Education level of the head of household: the educational level includes the
knowledge, skills, motivation, self-confidence, problem solving ability,
commitment and self-discipline of the owner. Higher-educated people are
expected to be able to better cope with business situations, grasp better
opportunities, thereby positively impacting the development of business
establishments. Cooper and colleagues (1992,

1994) point to a positive
relationship between the entrepreneur's educational background and their
performance, as well as the viability and development of the business. The
readiness and activeness in accepting the risks of the head owners may also affect

19


Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
their ability to mobilize and access to the resources needed for the development of
the facility (Gundry and Welsch, 1997).
2.3.2. Characteristics of household business
- The household's business experience: The empirical study gives different
conclusions about the age of the establishment and the rate of development of the
business units. In particular, Birch (1987) shows that in small-scale businesses,
businesses with years of experience in the market tend to grow faster than freshestablished ones. Evans (1986), however, provided empirical evidence that the
rate of growth declined as the business using fewer than 25 employees last longer;
and vice versa with ones employing more than 25 employees.
- Legal Status: Dietmar et al. (1998) argue that the legal status of a business may
affect the development of a business because of the different legal forms that leads
to the business responsibility for taxation, ability to raise capital, and
accountability of different employers. In addition, some types of businesses will
receive support, tax incentives and government loans, such as small- and mediumsized enterprises.
- Performance: Studies on performances of these businesses also show significant
differences with ones in different production fields. This can be explained by
differences in manufacturing technology that lead to differences in the optimal
size of the business. Specifically, firms operating in the industry characterized by
large enterprise show higher growth rate than firms that exist in industries where
the size is not the decisive factor for growth. With retailing and personal-service
industries, barriers to market market-entry are often lower, service products are

more easily imitated, pressures of competitiveness are more intense. Businesses in
the industry are more dependent on technological development, which requires
more investment in intellectual research, so the imitation potential is lower.
2.3.3. The geographic area in which the household business operates
Geography affects the development of the household because each geographic area will
have its own infrastructure, weather conditions, population characteristics, land-, soil
conditions, and development policies. It will suit different business lines.
2.3.4. The level of technology and e-commerce application in the operation of business
establishments
In many studies and in particular research by Tarute and Gatautis (2014), information
technology helps small and mid-size businesses improve both internal communication

20


Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
and ones with customers, hence positively impact on business activities of that
enterprises. The application of technology also helps businesses increase marketing
activities - the factor which plays an important role in maintaining the production
progress. Yusuf et al. (2017) pointed out that SMEs with higher R & D investments show
higher levels of profitability.
2.3.5. On the ability to access business capital
Brown et al. (2004) provide empirical evidence that the easier capital mobilization
business will have higher growing rate in revenues and scales. However, a number of
studies have shown that small businesses find it difficult to access external financing,
which is a major obstacle to business development (Beck and Demirguc-Kunt, 2006).
2.3.6. Policies and policies for household economic development
The private economy is used to refer to the private ownership of capital goods,
including individual, small and private capitalist economies. The private sector plays a
very important role in the economic development of each country. However, it also

has limitations and weaknesses that are mostly on a small scale, small amount of
capital, production technology is out of date, weakness in management, low efficiency
and weak competitiveness, less investment in production. Therefore, the renewal of
mechanisms and policies to create favorable business environment supports legal
policies, financial supports to improve technology capacity and the technical level. It
encourages and facilitates the development of the private economy in which the
household economy contributes to the liberation of the productive workforces,
creating a driving force for the development of the household economy.
2.4. Indicators assessing the development of household businesses
- Increasing labor productivity
- Increasing business efficiency
- Increasing the posibility to raise capital, supplement working capital, expanding
revenue and increasing profits.
- Increasing business skills and financial management skills for household heads
- Increasing the proficiencyof investment, technology and business facilities

3. The impact of credit from microfinance institutions on the development
of household businesses
Research has shown that the lack of business capital and the difficulty in accessing capital are
ones of the major obstacles to the development of micro, small and medium businesses

21


Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong
Micro Credit
Comments
(Owualah,
1999; Carpenter,
2001;

2007).
The reason
is that access
4.1.
The successful
practice
of Anyawwu,
microcredit2003;
for Lawson,
household
businesses
development
in
to financial services enables these businesses to add resources to invest in raising capacity
Malaysia
and aproductivity
and Malaysia,
Everett, 1999).
In addition,
during
the operation,
micro
firms
For
developing (Watson
country like
the success
of poverty
reduction
is closely

linked
to
needsuccess
to maintain
their working
capital.
the success
fact is that
their
is
the
of microfinance,
with
microHowever,
credit. This
marks
theworking
birth ofcapital
Amanah
mainly Malaysia
mobilized(AIM),
from unofficial
sourcesinstitution
such as family,
friends,
and black
most by
of
Ikhtiar
a microfinance

established
in 1987,
basedcredits,
on a model
these sources
notfocuses
meet theondemand
thedeeper
enterprises.
andhelping
Alepaku,
Access
Grameen
Bankdothat
broaderofand
credit (Bhasin
allocation,
to 2001).
raise incomes
to finance
fromTotheaccomplish
formal financial
sectordistinguishes
is difficult with
businesses
do
for
the poor.
this, AIM
poorsmall

people
in threebecause
groups:they
Lownot meet($the
conditions
borrowing
from
banks
institutions.
Capital mobilization
income
670
/ month),forPoor
(Incomes
below
$ and
269 credit
/ month)
and extra-ordinarily
difficult
difficulties can
reduce sales
profitability
of businesses
(Khandker
et al., 2013).
households
(hardcore
poor and
- incomes

below
$ 150 / month).
Selected
beneficiaries are
Microfinance
wasspecial
created
to help low-income
access
services
(including
individuals
with
difficulties,
supported topeople
develop
their financial
own individual
business
and
credit, savings,
remittances,
etc.) and other non-financial services. This helps them
having
graduallyinsurance,
escaped from
poverty norms.
to improve
their model,
incomemicro

and living
conditions.
Under
the AIM
credits
are offered at different levels. Firstly, interest-free loans
The effectiveness
of microfinance
in reducing
poverty,
improving
living standards
for peoplea
with
a weekly-repayment
term are
used to assist
individual
households
in developing
has beenbusiness
demonstrated
both in practice
and inOnce
manyyou
empirical
studies in repaid
many developing
certain
plan (livestock

or farming).
have completely
your loan,
countries. Until
now,will
low-income
are still
the priority
MFIs.
However,
higher-value
credits
be offered,people
of course,
at higher
rates. of
Loans
at the
highesttowards
level cana
sustainable
development,
many organizations have expanded their range to small and micro
range
from RM5000
- RM100.
business
owners.
(Farhana
2015). problems

These customers
may be along-termed
loyal
This
approach
solves
many Ferdousi,
of the inherent
of micro-credit:
model of group
customers ofwith
microfinance
organizations,
whotohave
the poverty lines
expanded
the
inhabitants
similar circumstances
tends
shareleft
responsibilities
and and
benefits,
and this
scalesupports
of their credit
business
and productivity;
It is also possible

for newprogress.
clients toCohesion,
achieve capital
also
officers
in the self-monitoring
and evaluation
on the
needs hand,
for business,
with higher
less risk.
to Olugbenga
Mashigo
other
is a commitment
in incomes
terms of and
benefit;
whichAccording
also contributes
to makeand
individuals
(2017), microfinance
can be and
the foundation
small-scale businesses
capital the
for their
participate

more intensely
stimulate for
self-movements,
as well toasraise
motivate
peer
businesses.The
Microfinance
can also support
institutions
the form
provision
of non-financial
members.
weekly monitoring
mechanism,
alongthrough
with the
of providing
credit
services such
as business
consulting,
traininginstitutions
financial management
skills
and business
packages
by level,
has helped

microfinance
to troubleshoot
customer
queriesskills
and
for grassroots
entrepreneurs.
difficulties,
promote
and support their development in income and business, on the other side
Thus, it can
be of
seen
that credit
minimize
the risk
negative
debts. from MFIs can affect the development of household
businesses through micro-credit providing working capital, capital for investment to improve
business production capacity (for example such as investment in technology, means of
production, business, etc.) for household businesses. In addition, micro-credit services such
as business skills and financial management skills training courses for household heads can
help businesses improve their human resource capital, which leads to higher sales, profits and
increased productivity.

4. International experience to improve the efficiency of microcredit for
household business development.

Table 1: AIM Micro Credit Products

22


T-Mesra'
'I-Srikandi'
'I-Wibawa'

The first loan was given to customers, with small but low interest
rates (~ 0%). This is considered to be the first package of
experience and support before coming to the following loan
packages.______________________________________________
This loan is issued after the first loan. The value of the loan will
be determined based on the success of the first "I-Mesra".________
Short-term loans
Flexible repayments can be made in person, on a weekly,
monthly or one-off basis.__________________________________