LV Thạc sĩ_Development of microfinance in vietnam

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TABLE OF CONTENTS

ABBREVIATION...................................................................................................iii

LIST OF TABLES..........................................................................................iv
LIST OF FIGURES.................................................................................................v


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ABBREVIATION
ADB

Asian Development Bank

CEP

Capital Aid Funds for the Employment of the Poor

CGAP

Consultative Group to Assist the Poor

CI

Credit institution

HEPR

Hunger Eradication & Poverty Reduction

IPO

Initial Public Offering

MFI

Microfinance Institution

MIX

Microfinance Information Exchange

MOF

Ministry of Finance

NGO

Non-government organization

PCF

People’s Credit Fund

RSHB

Rural Shareholding Bank

SBV

State Bank of Vietnam

SME

Small and Medium Enterprises

TYM

Tau Yeu May Fund

VBARD

Vietnam Bank for Agriculture & Rural Development

VBSP

Vietnam Bank for Social Policies


iii

LIST OF TABLES

LIST OF FIGURES


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EXECUTIVE SUMMARY
If you look back into the past 20 years history of finance, the most important
finding did not come from the world of the rich with hedge funds and derivatives
instruments, it also did not come from the ideas of securitization or options which
created one of the greatest recessions in modern history; it is the finding that the
poor who has nothing but hope, dream and endeavor to overcome their situation can
access to banking service to save, borrow, and manage their own money and
certainly repay their loans. This is nowadays widely known as Microfinance. The
last two decades have witnessed a remarkable rise for microfinance as a strategy for
poverty alleviation. The microfinance sector blossomed in many countries, leading
to multiple financial services firms serving the needs of micro entrepreneurs and
poor households. However, the rapid scale up also leads to multiple problems for
MFIs e.g. finding sources of funds, maintain the good financial situation and quality
of services.
Microfinance in Vietnam dated back in 1990s with the establishment of
VBARD which provided several simple services to poor people who live in the
rural area. Other MFIs which are owned by socio-political organizations are
gradually found in 1990s and 2000s. Those institutions initially have succeeded in
solving the issue of poverty alleviation. Like many MFIs in other countries, in order
to satisfy the increasing demand of clients and develop in a sustainable manner,
MFIs now cannot solely rely on subsidized funds of social minded organizations,
instead they have to gradually transform to commercialized MFIs which can self
finance and seek funds from normal investors. The migration into regulated
commercial banking territory of MFIs placed financial viability at one of its major
concern besides social performance. The MFIs tend to drift away from their
original mission of poverty alleviation. In my dissertation, I will examine the
Vietnamese microfinance market in general and look inside into social and financial

performance of the formal and semi formal sector of microfinance. In the formal


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sector that are VBARD and VBSP. The representative of the semiformal sector is
the TYM Fund. After doing research and analyzing the financial situation of TYM, I
am surprised of how good a MFI can do to not only serve the poor but also maintain
a good financial performance. Up to the time of the dissertation, there is no clear
evidence of mission drift in TYM. However, in order to expand the success of
TYM throughout the country, the other MFIs as well as the government still have
many things to do to improve the operating efficiency in each institution and create
a competitive market for microfinance participants.


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CHAPTER 1:
THEORETICAL BACKGROUND OF MICROFINANCE &
MISSION DRIFT
1.1. Introduction to Microfinance
1.1.1. History of Microfinance
Although the concept of microfinance had only evolved in the late 1970s
with the experimental microfinance programs in Bangladesh and Brazil, the idea of
microfinance which is the supply of loans, savings and other financial services to
the poor eventually has a longer history.
1.1.1.1. Early history
The early history of Microfinance dated back in 1700s in Ireland. One of the
earlier and longer-lived micro credit organizations providing small loans to rural
poor with no collateral was the Irish Loan Fund system by nationalist Jonathan

Swift. Swift's idea began slowly but by the 1840s had become a widespread
institution of about 300 funds all over Ireland. Their principal purpose was making
small loans with interest for short periods. At their peak they were making loans to
20% of all Irish households annually.
In the 1800s, various types of larger and more formal savings and credit
institutions began to emerge in Europe, organized primarily among the rural and
urban poor. These institutions were known as People's Banks, Credit Unions, and
Savings and Credit Co-operatives. The concept of the credit union was developed
by Friedrich Wilhelm Raiffeisen and his supporters from that time. Their
innovations were motivated by concern to assist the rural population to break out of
their dependence on moneylenders and to improve their welfare. From 1870, the
unions expanded rapidly over Germany and other countries in Europe and North
America.


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In the early 1900s, various adaptations of these models began to appear in
parts

of

rural

Latin America

with

two

specific

objectives:

increased

commercialization of the rural sector, by mobilizing "idle" savings and increasing
investment through credit, and reducing oppressive feudal relations that were
enforced through indebtedness. In most cases, these new banks for the poor were
not owned by the poor themselves, as they had been in Europe, but by government
agencies or private banks. Over the years, these institutions became inefficient and
at times, abusive.
Time
1700s – 1840s

Event
Irish Loan Fund providing small loans to rural poor with no

1800s

collateral has over 300 funds all over Ireland
Various types of larger and more formal savings and CIs began
emerge in Europe. E.g. People’s Bank, Credit Unions, Savings &

1870s

Credit Co-operatives.
Credit Unions expanded rapidly in Germany, EU, and North

1950s – 1970s

America
Governments and donors providing agricultural credit to small and
marginal farmers through rural development banks but it did not
succeed
Table 1.1: Early history of Microfinance

Between the 1950s and 1970s, governments and donors focused on providing
agricultural credit to small and marginal farmers, in hopes of raising productivity
and incomes. These efforts emphasized supply-led government interventions
through state-owned development finance institutions, or farmers' cooperatives in
some cases, that received favorable loans and on-lent to customers at below-market
interest rates. These subsidized schemes were rarely successful. Rural development
banks suffered massive loss and erosion of their capital base due to subsidized
lending rates and poor repayment discipline and the funds did not always reach the
poor, often ending up concentrated in the hands of better-off farmers.


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1.1.1.2. The evolution of concept - Microfinance
The expression microfinance has its roots in the 1976 when the organization
- Grameen Bank of Bangladesh with the microfinance pioneer Mohammad Yunus
started and built the modern industry of microfinance. Another pioneer in this sector
is Akhtar Hameed Khan. At that time a new wave of microfinance initiatives
introduced many new innovations into the sector. Many pioneering enterprises
began experimenting with loaning to the underserved people.
The main reason why microfinance is dated to the 1970s is that the programs
could show that people can be relied on to repay their loans and that it´s possible to
provide financial services to poor people through market based enterprises without

subsidy.
Today the World Bank estimates that more than 16 million people are served
by some 7000 microfinance institutions all over the world. CGAP experts mean that
about 500 million families benefits from these small loans making new business
possible. In a gathering at a Microcredit Summit in Washington DC the goal was
reaching 100 million of the world´s poorest people by credits from the world
leaders and major financial institutions.
1.1.2. Definitions of Microfinance
Everybody agrees that there is no unique definition of “microfinance,” yet it
does not stop the ongoing debate over whether certain models are “right” or
“wrong”. It seems that the “wrong” designation may shift or drift the original and
lofty mission of microfinance to another way. Thus, before going deeper into the
alert of scholars around “mission drift”, we first must have a look at several
versions of the definition of microfinance.
According to ADB, “Microfinance is the provision of a broad range of
financial services such as deposits, loans, payment services, money transfers, and


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insurance to poor and low-income households and, their microenterprises.
Microfinance services are provided by three types of sources:
•

formal institutions, such as rural banks and cooperatives;

•

semiformal institutions, such as nongovernment organizations; and

•

informal sources such as money lenders and shopkeepers.

Institutional microfinance is defined to include microfinance services provided by
both formal and semiformal institutions. Microfinance institutions are defined as
institutions whose major business is the provision of microfinance services.”
For analysis purpose, Microfinance Information Exchange (MIX) employs a
functional definition that “Microfinance services – as opposed to financial services
in general – are retail financial services that are relatively small in relation to the
income of a typical individual. Specifically, the average outstanding balance of
microfinance products is no greater than 250% of the average income per person
(GNI per capita).”
The broader definition by CGAP which is recognized by a large number of
organizations including WB is “Microfinance is often defined as financial services
for poor and low-income clients. In practice, the term is often used more narrowly
to refer to loans and other services from providers that identify themselves as
“microfinance institutions” (MFIs). These institutions commonly tend to use new
methods developed over the last 30 years to deliver very small loans to unsalaried
borrowers, taking little or no collateral. These methods include group lending and
liability, pre-loan savings requirements, gradually increasing loan sizes, and an
implicit guarantee of ready access to future loans if present loans are repaid fully
and promptly.”
From those definitions, we can derive a brief conclusion which is the
common in all above definitions. Microfinance refers to a variety of financial
services that target low-income customers especially poor people who have limited


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or no access to formal financial services. These services include loans, savings,
insurance, and remittances. Microfinance institutions tend to provide small
monetary amounts and often use non-traditional methodologies, such as group
lending or other forms of collateral not employed by the formal financial sector.
Microloans are given for a variety of purposes, frequently for microenterprise
development.
1.1.3. Missions & Impacts of MFIs
1.1.3.1. Mission
Microfinance services are provided by organizations which are commonly
known as microfinance institutions (MFIs). They can be classified into 2 main types
as a non-profit such as government-sponsored enterprises, non-government
organizations or commercialized organizations such as commercial banks. However,
in order to be defined as a MFI, the prior mission of an organization must be to
promote poverty alleviation and serve the poor.
The failure of lending institutions which are subsidized by governments or
NGOs before 1970s set another mission for MFIs is serving poor people through
market based enterprises without subsidy. Initially, it seems that these two
objectives are conflict with each other, but experimental models of Grameen Bank
in Bangladesh and ACCION International in Latin America in late 1970s proved
that MIFs can actually contribute to poverty alleviation and still keep financial selfsustainability. However, balancing between these two objectives is a tough issues
and it attracted a large number of debates around the trade-off between these two
competing paradigms.

1.1.3.2. Impacts


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Through providing financial services, especially microcredit to group of poor
people for them to direct their own future, microfinance seems to have bigger

spreading positive social impacts. In studies made by Social Investment Group AG,
microfinance generally has impacts on 3 different levels: personal/household level,
community level & regional level.
a. Personal/household level
Because the target group of MFIs is women in rural areas who are the most
vulnerable to adverse economic conditions. Empowerment of women through MFIs
leads to higher living standard, higher roles and the independence of women. This
helps women themselves cope with economic shocks by means of savings, credit
and micro insurance products.

Moreover, being the clients of MFIs, women

have chances to acquire basic skills and financial knowledge which in turn help
improve the perception of members in women’s families. Also, higher income in
general leads to better access to education, healthcare, sanitary infrastructure, and
food supply etc.

Regional level
Community level
Persona
l level

Figure 1.1 Categories of social impact1

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Source: “Social impact of Microfinance and How to measure it” – Social Investment Group AG


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b. Local community level
Because of the foundation of microfinance relies on solidarity group lending
and people who overcame from poverty in turn help others who in their previous
situations, this can support the cohesiveness of a community. At the same time,
access to financial services can trigger entrepreneurship and a healthy competition
among community members to improve the economic base and the prosperity of the
community
c. Regional level
The direct and foremost impact of microfinance on the region is the creation
of jobs, strengthening of microenterprise sector or private sector in general which is
the back-bone of every economy. Secondly, more jobs in rural areas also mitigates
the pressure on depleting natural resources and the migration flows to urban areas.
1.1.4. Common problems faced by microfinance
Despite of its good intentions, comparing to traditional lending methods by
commercial banks, microfinance still has to overcome several obstacles to actually
balance between two competing missions: financial sustainability and poverty
alleviation. Because most of MFIs are established with the first mission of serving
the poor, the initial investment capital is mostly came from subsidy or donations.
Thus one of its major problems is the lack of awareness about sources of funds for
microfinance providers to pass on to the poor.
Secondly, the less education of the poor and their inability to offer
marketable collateral creates high risk of lending to the poor. This forces MFIs to
find other methods which does not require marketable collaterals from borrowers
but still guarantee the full repayment. The most popular mechanism used by MFIs
around the world is solidarity group lending. It allows a number of individuals to
gain access to microcredit by providing collateral through a group repayment
pledge. The incentive to repay is based upon peer pressure which is the other group

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members have to make up the payment amount if one person in the group defaults.
Moreover, MFIs also targets group of women because they are more responsible for
their families. For example, in Bangladesh, women default on loans less often than
men and loans granted to women has a much greater impact on household
consumption and quality of life for children.
Thirdly, most of the poor live in the rural areas with weak infrastructure, so
the spreading out of distribution systems to reach these groups of clients certainly
would increase the operating expenses of MFIs. Small loans per clients and high
costs may lead to the inefficiency in the operation of MFIs if there is no good
control and supervision system.
1.1.5. Grameen Bank – “Banking for the poor”, a typical model of a MIF
1.1.5.1. General information of Grammen Bank
Grameen Bank (“Grameen” is derived from the word “gram” and means
“rural” or “village” in Banglades language) is a microfinance organization and
community development bank in Bangladesh that makes small loans (microcredit)
to the group of the poor without requiring collateral. In addition, the bank also
accepts deposits, provides other services, and runs several development-oriented
businesses. A distinctive feature of the bank’s credit policy is that majority of its
borrowers are women. The foundation for the financial sustainability of Grameen
Bank is its loan mechanism which relies on the peer-pressure within the group
instead of marketable collaterals to ensure the borrowers follow through and use
caution in doing business with strict discipline, and ensuring repayment eventually.
The origin of Grameen Bank dated back to 1974 when Professor Muhammad
Yunus – 2006 Nobel Laureate, a Fullbright scholar at Vanderbilt University and
Professor at University of Chittagong witnessed the famine in Bangladesh and he
decided to lend USD 27 from his own pocket to 42 poor families for them to buy
production materials without the burden of predatory lending. Initially, he just

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thought that amount of money as the donation and did not expect the repayment.
However the full repayment of those families surprised him and led him to the ideas
of group leading. In 1976, Muhammad Yunus launched a research project in the
University of Chittagong to examine the possibility of designing a credit delivery
system to provide banking services targeted to the rural poor. In 1976, Jobra and
some other villages around Chittagong are the first clients of the project Grameen
Bank. On October 2, 1983, the project was transformed into an independent bank by
an ordinance of Bangladesh government. By the beginning of 2005, the bank had
loaned over USD 4.7 billion and by the end of 2008, USD 7.6 billion to the poor.
1.1.5.2. Features of microfinance of Grameen Bank
a. Poorest women as the target clients: By setting standards in selecting clients and
with its limited capacity the bank focuses mainly on the poorest and the most
vulnerable group of people in Bangladesh society. Women are its preferential
clients.
b. Borrowers are organized as small groups: Sharing similar characteristics among
group members would increase the solidarity in the group. Each group initially
often consists of 5 members under the consultancy and supervision of Grameen
Bank’s officials, altogether executes business plan to generating income.
c. Features of loans:
o
o
o
o

These are very small loans and do not require marketable collaterals
Borrowers have to pay in weekly or monthly installments
The ability to borrow the next time depends on the repayment of initial loans

The disbursement process of members of group is in the supervision of other

members and bank’s officials.
o Using defense methods through voluntary and compulsory savings in order
to reduce the repayment risks of the borrowers
d. Designing and developing management systems: The objective of Grameen Bank
is continuously better serving the poor through decentralizing the decision process


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through training and enriching the knowledge of bank’s employees. By which,
lending or operating decisions would be decided by regional officials.
e. Developing loans and other financial services that satisfy different demands of
the poor (for examples: seasonal credit, tool purchasing credit, housing credit…
1.2. Challenges of the rapid expansion in Microfinance & “Mission Drift”
In 1980s and 1990s, first microcredit programs in the world proved that poor
people, especially women, had excellent repayment rates that were even better than
that of formal financial sectors of most developing countries. Secondly, the poor
were willing and able to pay interest rates that allowed MFIs to cover their costs.
These two features - high repayment and cost-recovery interest rates - permitted
some MFIs eventually opened the door for the independence and long-term
sustainability of MFIs
The last two decades have witnessed a remarkable rise for microfinance as a
strategy for poverty alleviation. The microfinance sector blossomed in many
countries, leading to multiple financial services firms serving the needs of micro
entrepreneurs and poor households. According to The Microbanking Bulletin No.19
December 2009, at the end of 2008, there are almost 1000 MFIs, collectively served
74 million borrowers with 38 billion USD in loans. However the rapid expansion of
MIFs toward the commercial sector by appealing to international investors who

desired a return on their investment but also wanted to contribute to society raised
the question of keeping up with its prior goal of poverty alleviation.
1.2.1. Challenges of rapid expansion – Conflict concerns
Expanding the loans too rapidly also means the number clients per loan
officer tend to rise. This led to low morale, beginnings of turnover, and especially
low quality of customer service for the poor. Also the rapid recruitment of a large
number of new staff may be the result of less qualified people may be hired. Some
staff members do not fully understand the mission of organization, and are not


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properly oriented. Moreover, the rapid increase of clients may create chances for
mistakes in evaluating and managing risks of customers.
In addition, initially most of MFIs are labor intensive and have low operating
cost. However when MFIs scale up their operations, they need to upgrade their
accounting system and more technical solutions must be used to manage the
operation. This certainly would increase its operating costs.
Along with the above issues, for more funding options to fulfill the demands
generated, the migration into regulated commercial banking territory of MFIs
placed financial viability at one of its major concern. A recent survey of
MicroBanking Bulletin No.16 Autumn 2007 reveals that 41% are not financially
self-sustainable; they rely on donor support to keep afloat.2
Thus, in commercialization and expansion process, there is a risk of losing
social objectives. Recent events, such as the IPO of Banco Compartamos – a
Mexican MFI that led to a handful of people making a USD 450 million fortune
have added steam to the debate. Some critics fear that MFIs become too focused on
making profits at the expense of outreach to poorer customers by insisting on
physical guarantees, increasing loan amounts and targeting the better-off.
1.2.2. Mission Drift

For the purpose of this dissertation, the definition of mission drift of Fidler in
1998 is used. According to Fidler (1998), in an effort to address these challenges,
the MFIs tend to drift away from their original mission of poverty alleviation. As
organizations grow and increase their portfolios, there is a tendency for increases in
loan arrears and monitoring costs. To prevent such loan arrears and losses, MFIs
tend to target better-off, less risky clients and cut down some services that do not
generate much profit for the fund. As a result, they move to serve an upper income

2

Source: Microbanking Bulletin No.16 – Page 23


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market with higher potential profit, thereby drifting away from the mission of
serving the poor.

Figure 1.2.: Percentage of not financial self sustainable
1.2.2.1. Findings and discussions on Mission Drift
Up to now there is a variety of researches around the mission drift tendency
in the expansion process of MFIs; however, they brought mixed results to answer
the question.
Professor Rhyne (1998) and Christen and Drake (2002) expected that a more
commercialized microfinance industry is better able to serve the poorest members
of the community, since their profit motives lead them to be more efficient and
more willing to seek out new markets for their loan products. A study of
commercialized and transformed MFIs in Latin America of Christen (2001)
concludes that mission drift has not taken place. In other research of Fernando
(2004) analyzes 39 transformed MFIs and finds that their financial positions

improved significantly and did not lose sight of their mission.

Hishigsuren’s

qualitative study (2007) thoroughly analyzes one MFI in Bangladesh and concludes
that MFI show no statistically significant mission drift when measured by depth,
quality, and scope outreach to poor clients.


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However, there are papers that proved that there are indeed evidences of
mission drift in a number of MFIs. One of the case studies, namely K-Rep Bank in
Kenya indicated that the K-Rep’s business plan projected the average individual
loan size would increase by 25% per year after the institutional transformation to a
commercial bank. This implied that K-Rep’s focus is on wealthier people with
demands for higher amount of funding and leaves the goals of serving the poor to
NGOs. On the other note, Professor Rhyne (2001) argues, in general, the
transformed MFIs provide larger loans than the unregulated MFIs. She further
argued that the loans were getting larger as the transformed institutions continued to
serve their fastest-growing customer rather than new clients who just start by
borrowing a small amount of money.
1.2.2.2. Measures of Mission Drift
Although, mission drift is widely agreed in terms of change in the poverty
level of an MFI’s clients, a key problem with detecting mission drift is that few
MFIs really define clearly the type of poor they are targeting or the impact that they
expect to have on their clients. One of the most commonly used indicators by
researchers is the average loan size, but this has 3 main drawbacks:3
o Even larger business apply sometimes apply for small loans
o Poor clients may be gradually apply to larger loans

o MFIs, besides maintaining its services for poor clients, may be entering
into new markets like SMEs, agricultural loans.
Other measurements of mission drift according to the paper of Opportunity
International are:
• Average size of first loans as a percentage of GDP
• Monthly household income per capita (i.e. measuring poverty as a flow of
resources that enables individuals and households to sustain their living).

3

Source: Briefing paper by Opportunity International – March 2007


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• Geographical distribution of clients because poverty is generally more
prevalent in rural areas due to limited access to infrastructure, resources,
service and market.
• Sectoral distribution of loans (since some sectors such as agriculture and
manufacturing are traditionally considered riskier than others)
According to Roy Mersland and Oystein Strom (2009), since the inception of
Grameen Bank, 2 other criteria must also be considered are:
• Increasing the depth of outreach means reaching more women.
• Group lending (since instead of requiring formal collateral, loans are backed
by peer groups, therefore, a shift from group lending to individual lending
can be considered a sign of mission drift and also the greater emphasis on
individual lending may bring about a reduction in the overall development
impact)
1.3. Summary
The evolution of microfinance in last 3 decades has indeed changes lives of

millions of poor peoples. It opened the door for the poor to drive their own future
through borrowing small loans. However the rapid scaling up in the context of
microfinance recently has led to the caution of drifting away from its lofty goal –
poverty alleviation. Many international researches have been already done to
answer the question “Does mission drift happen and how to avoid it?” but there is
still no final answer for that question. In the following sections I will look at the
development of microfinance in Vietnam with the center is looking at the possibility
of mission drift in Vietnam.

CHAPTER 2:
MICROFINANCE IN VIETNAM


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FINANCIAL SUSTAINABILITY & FINDINGS OF MISSION DRIFT
2.1 Overview of Microfinance in Vietnam
Microfinance (also known as small-sized finance) in Vietnam has the root
from the government policy of subsidizing the poor. Because most of the poor live
in rural area, so traditionally microfinance in Vietnam is commonly known as
financial service for farmers. Formerly, microfinance or more specifically
microcredit is often provided by credit cooperatives which are representatives of
SBV. After the reform of Vietnamese banking system in 1990, institutions that
specialize on microfinance were gradually established. First of all, that is Vietnam
Bank of Agriculture and Rural Development (VBARD) with the credit policies
subsidized by the government for people who live in poverty. In 1995, Vietnam
Bank for Social Policies (VBSP) was established with the main goals of serving the
poor and operates as a non-profit organization. During the period of 1990s, besides
the establishments these 2 government financial institutions, many other small MFIs
in other forms were also established under the supervision of social and political

organizations and NGOs. Credit cooperatives are transformed into Rural
Shareholding Banks (RSHBs) and People credit funds (PCFs). However in 2000s,
the transformation of RSHBs into Urban Joint Stock Banks for profit purpose
reduced the roles of RSHB in providing loans to the poor. In the contrast, the
success of PCFs with about 1000 funds around the country partially satisfies the
demands of farmers in rural areas.
Initially, most of microfinance programs aim to solve social problems,
community development and they are rapidly scaled up to cover as many people as
possible with the subsidy of the government. The credit risk of loans and the
repayment ability of the borrower are not carefully examined. However, in order to
reach financial viability, MFIs must provide loans with market-based conditions.


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Hunger Eradication and Poverty Reduction (HEPR) of Vietnamese
government with the main objective is to improve the access to financial service of
the poor especially who lived in the rural area started in 1997. The government
allowed social organizations participate in microfinance. These social organizations,
especially Vietnam Women’s Union was very successful in attracting projects, and
raised funds for microfinance. It is the official partner of International Programs and
NGOs which want to improve the operation of microfinance in Vietnam. Therefore,
most of semi-formal microfinance programs which were established in 1990s are
owned and managed by VWU at regional and central level.
Overall, currently microfinance system of Vietnam is divided into formal and
semiformal sector. In the formal sector, VBARD, VBSP and PCFs dominate the
market with about 90% of the market share. Since 2003, VBARD has transferred
loans for the poor to VBSP for management. VBSP now has over 6 million
borrowers and a loan portfolio of more than USD 3 billion. The non-profit Bank,
which is operating under a special Government Decree, provides loans at subsidized

interest rates via its own network as well as via socio-political organizations such as
the VWU or the Farmers’ Union. Losses from negative interest rates are covered by
the state budget. In 2008 losses amounted to VND 1,250 billion (USD 70 million).
The second largest provider of microfinance is the 1,000 plus network of People’s
Credit Funds (cooperative funds) with 1.2 million members, savings of more than
USD 700 million, and loans of more than USD 800 million. To access loans, people
have to become members. The average loan amount is about USD 500. A Central
Credit Fund provides funding and technical support to the local PCFs.4
Although, considerable number of loans for the poor has been transferred to
VBSP, VBARD still plays an important role in the lending market for people who
live in the poverty. Because of its broad network and wider range of financial

Source: TYM Development Plan 2010 -2014

4


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services, in 2007, 47% of clients of VBARD are still the poor, just 2% lower than
that of VBSP5.
MFIs in the semiformal sector represent only a small but growing fraction of
microfinance in Vietnam. There are approximately 50 small to medium
microfinance projects sponsored by local mass organizations (such as CEP
HoChiMinh City, owned by the Confederation of Labour, and TYM Fund, owned
by the VWU), and local or foreign NGOs totaling 400,000 clients and an
outstanding portfolio of about USD 70 million. There are about 58 international
NGOs supporting microfinance programs. Most attempt to follow international best
practice models (Grameen, village banking, etc.) adapted to the needs of Vietnam
and aimed at sustainability.

Normally services provided by these organizations are at the lower interest
rates than the market following the orientation of VBSP, VBARD and the
government. The semiformal sector comprises only 5% of rural credit market share.
Below are two typical semiformal MFIs operating under the supervision of sociopolitical organizations.
a. TYM Fund
TYM Fund was found by VWU with the sponsor of Japan Community
Development Fund in 1993. It applies the model of Grameen Bank with the purpose
of helping poor women in Hochiminh City and others. On August 15, 2010, the
Governor of the State Bank of Vietnam granted the license of MFI for TYM Fund.
Loans provided by the Fund are small (from VND 500,000 to VND 3,000,000) and
granted for each person in the group. Normally, the group consists of 5 people and
loans are repaid in installments. The difference of TYM Fund from formal MFIs is
besides borrowing money, borrowers are trained in 2 days about business and
opportunities to earn money.
5

Source: Statistics 2007, State Bank of Vietnam


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b. Capital Aid Funds for the Employment of the Poor (CEP)
CEP is found by Confederation of Labor in November, 1991 with the
purpose of helping the poor – mostly women – in finding jobs. Currently, CEP has
24 branches, 305 employees; lending capital is USD 23 million and is self financed.
This fund has just been transform to a MFI according to two mentioned decrees of
the government. Loan size ranges from VND 700,000 to VND 3,000,000 with the
maturity from 20 to 60 weeks for loan repayment in weekly installments and from
10 to 15 months for loan repayment in monthly installments. Additionally, clients
are required to open saving deposit in the fund and a certain percentage of the

lending amount must be deposited in that saving account. Voluntary savings are
encouraged.
Below is the statistics of the operation of several semi-formal MFIs in
Vietnam according to Microfinance Information Exchange 6
Name

Emplo
yees
Binhminh CDC
35
CEP
255
CEP BRVT
14
Childfund Hoabinh
39
Counterpart
CSOD
14
M7 Can loc
15
M7 Huyen DB
14
M7 Tp. DBP
19
M7 Dong Trieu
12
M7 Mai Son
23
M7 Ninh Phuoc

14
M7 Uong Bi
34
Plan International
99
TCVM Thanh Hoa
44
6

Source: www.themix.org

Total assets
(USD)
649.296
24.406.836
1.210.345
365.517
229.103
2.047.816
716.494
185.632
304.713
78.172
454.598
259.023
573.563
310.805
594.452

Gross loan portfolio

(USD)
558.017
22.312.048
1.030.345
355.632
233.797
1.813.391
678.563
185.632
298.276
78.029
446.379
257.931
576.494
233.333
512.212

Number of active
borrowers
4.425
107.866
7.284
6.810
1.273
7.524
2.730
1.904
2.533
4.530
3.192

3.044
3.587
5.787
5.357


21

TYM

195

10.145.205

8.103.475

33.935

Table 2.1: Key figures of Vietnamese MFIs in 2008
Source: Microfinance Information Exchange (MIX) />
2.2. Legal framework & its impact on the expansion of Microfinance
Formal and semiformal MFIs are operated under two government decrees
No. 28/2005/ND-CP and 165/2007/ND-CP and the Circular No.02/2008/TT-NHNN.
Following are some of the main points:
2.2.1. General regulations
Small-sized credit, as defined by Circular No. 02/2008/TT-NHNN means
loans of small value, secured or unsecured, provided to low-income individuals or
households for use to generate income and improve their living conditions. A loan
for a customer is called small-sized credit when the total outstanding debt owed to
the small-sized financial institution by that customer does not exceed VND 30

million. This lending rate may be adjusted by the State Bank Governor in each
period.
MFIs, as defined by the Decree No. 165/2007/ND-CP, are organizations
operating in finance, banking sector with the main functions as using their own
capital, borrowing capital and savings to provide several small financial and
banking service to low-income households and individuals. The charter capital of
these organizations is at least VND 5 billion and they are organized as limited
liability companies (with 1 or more than 2 members according to Corporate Law).
Only small-sized financial institutions with establishment and operation licenses
granted by the State Bank may use the term of "small-sized financial institution" in
any language in their names or titles or as a supplement to their names or titles or in
the titles of their invoices, documents, notices, advertisements or descriptions of
their business activities. These organizations are allowed to provide not only