Grant Assistance Consultants’ Report
Project Number: 42235-01 November 2010
Socialist Republic of Viet Nam: Microfinance Sector Development Program (Financed by the Technical Assistance Special Fund)
This consultants’ report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents.
Asian Development Bank
VIET NAM MICROFINANCE SECTOR ASSESSMENT
Developing the Microfinance Sector Project ADB TA 7499 VIE
Prepared by PPTA Consultants for the Asian Development Bank
November 2010 Hanoi, Viet Nam
TABLE OF CONTENTS
I.
SECTOR ASSESSMENT: CONTEXT AND STRATEGIC ISSUES...................................................11
A. Sector Overview................................................................................................................................................. 11 B. Sector Assessment.............................................................................................................................................. 12 1. Micro-credit delivery ...................................................................................................................................12 2. Provision of Micro-savings services............................................................................................................13 3. Remittances, payment systems and other services ......................................................................................13 4. Micro-insurance ...........................................................................................................................................14 5. Wholesaling of Microfinance Funds............................................................................................................15 C. Development and Strategic Issues.................................................................................................................... 15 1. Policy, Legal and Regulatory Environment.................................................................................................16 2. Sector Development Strategy ......................................................................................................................19 3. Prudential Supervision .................................................................................................................................20 4. Institutional Capacity ...................................................................................................................................22 5. Financial Infrastructure Provision................................................................................................................30 6. Gender and Social Issues in Microfinance...................................................................................................33 7. Summary of Key Constraints and Development Needs (SWOT) ...............................................................34 II.
SECTOR STRATEGY STATUS.........................................................................................................36
A. Government Sector Strategy and Plans .......................................................................................................... 36 B. Recent ADB Support and Experience ............................................................................................................. 36 C. Other Development Partners and Stakeholders Support.............................................................................. 37 III. CONCLUSION AND RECOMMENDATIONS ....................................................................................38 A. Creating the enabling Policy and Regulatory Environment for Microfinance ........................................... 38 B. Ensuring Effective Supervision ........................................................................................................................ 39 C. Improving Institutional Capacities and Capabilities of Key Players ........................................................... 40 1. VBSP ...........................................................................................................................................................40 2. CCF, PCF and VAPFC ................................................................................................................................40 3. Transforming the semi-formal MFIs ...........................................................................................................41 4. VBARD .......................................................................................................................................................41 D. Setting up Supportive Financial Infrastructure ............................................................................................. 41
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Exchange Rate as of end June 2010 US$1 = VND 18,500
ACT ADB AFD BWTP BTC BOD CCF CCM CEP CFRC CIL COBP CSG CSP CSR CSOD DMS FSS EA GIA GIM GDP GIFF GSO HCMC HH ICT IEC IES IFAD IFC ILO JFPR MACDI MAF MF MFI MFSP MFSSP MFWG MSWG MCDI MIX MO MOF MOLISA MPI
ABBREVIATIONS Asian Community Trust Asian Development Bank Agence Francaise Developpement Banking With The Poor Network Bank Training and Consultancy Board of Directors Central People’s Credit Fund HCMC Cooperative Fund Capital Aid Fund for the Employment of the Poor Community Finance Resource Center Credit Institution Law Country Business Plan Credit and Savings Group Country Strategy Program Corporate Social Responsibility Center for Social Organization and Community Development Domestic Microfinance Specialist Financial Self-sufficiency Executing Agency Grant Implementation Agreement Grant Implementation Manual Gross Domestic Product Income For the Poor Fund General Statistics Office Ho Chi Minh City Household Information and communication technology Information, Education and Communication Impact Evaluation Specialist International Fund for Agricultural Development International Finance Corporation (of the World Bank) International Labour Organization Japanese Fund for Poverty Reduction Microfinance Community Development Institution Mutual Aid Funds Microfinance Microfinance Institution Microfinance Financial Services Provider Microfinance Support Service Provider Microfinance Working Group (Association of MFIs) Microfinance Strategy Working Group (SBV technical group) Microfinance and Community Development Institute Microfinance Information Exchange Mass Organization Ministry of Finance Ministry of Labor, Invalids, and Social Affairs Ministry of Planning and Investment
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MTC M&D NGO NMA NMSC OSS PAR PCF PIU PMU PWU PACODE RIMANSI SBV SCF SEDA SME SOE TA TNA TOR TOT UVF TYM VAPCF VBARD VBSP VBCP VDIC VFU VMS VPSC VVU VWU WB WV
Microfinance Training Coordinator Microfinance and Development Center Non-governmental Organization Norwegian Mission Alliance National Microfinance Steering Committee Operational Self-sufficiency Portfolio at Risk People’s Credit Fund Project Implementing Unit Project Management Unit Provincial Women Union Participatory Community Development Project Risk Management Solutions, Inc., entity promoting MAF & microinsurance State Bank of Vietnam Save the Children Fund Centre of Small Enterprise Development Assistance Small and Medium Enterprise State-owned Enterprise Technical Assistance Training needs assessment Terms of Reference Training of Trainers Unilever Vietnam Foundation Tau Yeu Mei (Mutual Affection Fund) Vietnam Association of People Credit Funds Vietnam Bank for Agriculture and Rural Development Vietnam Bank for Social Policies Vietnam-Belgium Credit Project Vietnam Development Information Center Vietnam Farmer Union Vietnam’s Microfinance Sector Vietnam Postal Savings Company Vietnam Veteran Union Vietnam Women’s Union World Bank World Vision
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LIST OF ANNEXES ANNEX 1: Excerpts from: JFPR No. 9140-VIE Consultants’ Report - An Institutional Review ANNEX 2: Excerpts from RIMANSI Publication (2008) – Micro-insurance in Vietnam ANNEX 3: Credit Institutions Law (June 2010) ANNEX 4: VBSP and CCF-PCF Analyses of Operations ANNEX 5: Summary of Field Surveys ANNEX 6: Social and Gender Analysis ANNEX 7: Matrix of Donor Funded Projects ANNEX 8: List of People Met ANNEX 9: VBSP and CCF performance ANNEX 10: Matrix of Donor Funded Projects ANNEX 11: Summary of Field Survey on Lamdong’s PCFs ANNEX 12: Proposed Key Elements of the Microfinance Strategy and Indicative Timelines
Members of the Consulting Team, ADB TA 7499 – VIE Mariano A. Cordero, Microfinance Development Specialist / Team Leader Reno Velasco, Financial Institution Strengthening Specialist, International Petrus van Dijk, Microfinance Legal Specialist, International Le Thanh Tam, Microfinance Specialist, National Le Thi Phuong Thao, Banking Specialist, National Pham Quang Nam, Social and Gender Specialist, National
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EXECUTIVE SUMMARY Government’s multi-pronged program approach to poverty reduction of modernizing the agriculture sector and increasing employment opportunities through geographically dispersed industrialization and SME promotion has succeeded in dramatically reducing poverty, with Vietnam poised to meet its Millennium Goal by 2015. However, poverty still affects 12.3% of the population as of end 2009, and is especially felt among ethnic minorities in remote areas. A major constraint in meeting poverty reduction objectives is the lack of responsive and
adequate financial services in rural areas, especially amongst the poor. In response, Government has been adopting a dual approach to rural and microfinance that is both market-based and state-driven. From the onset of Doi Moi, it created and nurtured commercially-oriented financial institutions that have become major players in rural and microfinance – the Viet Nam Bank for Agricultural and Rural Development (VBARD), and the People’s Credit Fund network (PCF – a financial cooperative). It also encouraged the creation of semi-formal microfinance institutions (MFIs) and the implementation of microfinance programs through socio-political organizations, with evolving laws and policies aimed at integrating them into the formal financial system, though these account for a small market share for now. However, its concern with the exclusion of the poor and other target groups from the commercial operations of VBARD, the PCFs and the MFIs, led Government to directly intervene in the microfinance market through the creation of the Vietnam Bank for the Poor (VBP) which was administered by Vietnam Bank for Agriculture (later VBARD) from mid1990 to early 2000. VBP was later spun off as the Vietnam Bank for Social Policies (VBSP) in 2002. To date, VBSP has risen as the most dominant player being the main provider of “social policy lending” to target groups funded by State-mobilized funds and heavily supported with subsidies to cover both its financial and operating costs. Nonetheless, Government still sees the growing importance of a market-driven microfinance sector and is aware of its rapid development elsewhere in the region in providing sustainable quality financial services to poor and low-income households. With assistance from ADB, it initiated moves to transform semi-formal microfinance institutions (MFIs) into formal regulated MFIs through a series of decrees and regulations issued from 2005. By late 2009, it stepped up its efforts to rationalize the microfinance sector with the creation of a high-level National Microfinance Steering Committee (NMSC), to assist the Prime Minister in policy and strategy formulation in order to develop a market-oriented microfinance sector through the next decade. On 16 June 2010, the new Credit Institutions Law (CIL) was finally passed. It is a landmark legislation that integrates microfinance as a subset of the financial system where it rightly belongs. The new CIL resolved the previously fragmented legal bases for institutional microfinance, including issues raised on the restrictive provisions of the 2005 and 2007 Decrees, and uncertainties on the liberalization of interest rates in the financial market. It sets the enabling legal and regulatory framework for developing a robust, sustainable, and responsive microfinance sector. In the assessment of microfinance the sector and the current status of Government’s initiatives in developing the sector, the following conclusions and proposals were drawn: 1. The continuing efforts of Government to rationalize the microfinance sector including the passage of a new CIL that integrates microfinance into the formal financial system, as well as the formulation of a comprehensive Microfinance Strategy and Roadmap are
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major steps in the right direction. These efforts are unprecedented even among countries that have better developed microfinance markets;
2. Government envisions a diversity of microfinance service providers offering a range of quality financial services to low income households through: a. the licensing and regulation of existing semi-formal microfinance institutions and allowing MFIs and microfinance programs operating prior the new CIL to continue to operate under a transitional provision of said law; b. the expansion of the PCF network by allowing intra commune coverage of individual PCFs and increasing these from 1,042 (July 2010) to 1,700 by 2020 to cover all communes in the country; and the conversion of the Central Credit Fund (apex institution of PCFs) into a cooperative bank, with powers of a commercial bank under the new CIL; c. setting the operating rules and regulations on electronic banking that could promote pro-poor innovations and mass-based financial services among commercial banks, especially VBARD which has the outreach and natural affinity to rural finance d. requiring VBSP to conform to accounting and reporting standards for credit institutions under the new CIL, and drafting amendments to its charter to make it more sustainable. 3. However, key issues and “binding constraints” still need to be addressed to attain Government’s vision in developing microfinance. A major risk is that Government’s continued direct intervention to ensure the inclusion of its “social policy lending” target groups through focused delivery of subsidized credit by VBSP would crowd out more sustainable market-based microfinance providers. This could eventually limit the choices of the vast majority of low-income rural households in accessing permanent, responsive, and a range of financial services (and not just micro-credit), from a diverse set of financial service providers. The still growing dominance of Government in subsidized micro-credit delivery will negate its efforts in developing a self-sustaining and robust microfinance sector. 4. A strong case against the continued and increasing delivery by VBSP of subsidized micro-credit is the marginal direct financial benefit to the borrower household (estimated at USD 1.82/HH/month) for such subsidy relative to existing market-based micro-loans offered by other microfinance providers. This is due to the insignificant absolute impact of interest differential on small-sized loans. The marginal benefit clearly cannot justify the increasingly heavy fiscal burden borne by Government that is estimated at USD83 million/year as of end 2009 based only on interest income foregone by VBSP. For 2009, the subsidy to VBSP is estimated at about USD 212 million, from USD 43 million in 2003, or an annual average increase of 32%. Total subsidy to VBSP from 2003 - 2009 is estimated to already reach about USD 815 million.1 Moreover, VBSP is also shown to incur a perpetual funding gap apart from its need for increasing financial and operational subsidies as it expands its operations. Viable and doable options need to be explored on VBSP operations as follows:
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Financial benefit of the subsidy on micro-loans to poor household-borrowers and interest income foregone by VBSP is based on the difference between the lending rate of VBSP and VBARD on micro-loans. Total subsidy is estimated to include direct subsidies for operations, opportunity costs on capital, interest subsidy on borrowings, income tax waived, and potential foreign currency exchange loss on foreign borrowings.
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a. The need to fine tune the selection of the “social policy lending” target groups to determine which particular groups will need continuing Government subsidies and direct support. Policy lending to certain target groups can still be justified as the State’s investment for the public good (e.g., disadvantaged students and the extreme poor), but maybe too risky for any credit institution to undertake. In such cases, Government will have to bear the ultimate risks and VBSP or other “channeling agents” need only to administer such portfolio “off-books” and for a fee. For other policy lending groups such as the extreme poor, micro-lending may not be the solution; b. Other current social policy lending target groups – such as poor households in general (other than the extreme poor) - can best be served by VBSP and other capable credit institutions that can mobilize funds from the very market they serve, or from other commercial sources, without need for Government fiscal support or subsidies. Moreover, microfinance is not just about the delivery of micro-credit but also the provision of other vital financial services, such as: savings, payment and remittance systems that poor and low-income households also need; c. While trimming down the target groups, Government needs to have an exit strategy from VBSP and its network of “credit and savings groups” (CSGs) especially since these have the potentials to be self-sustaining microfinance providers that can effectively serve poor and low-income households without the need for direct Government support or subsidies. In any case, it can be shown that the marginal benefit of subsidized loans to the individual target household may not warrant the huge costs to Government for providing direct fiscal support and related subsidies to deliver such loans. 5. Government’s almost full ownership of the Central Credit Fund (CCF) is not supportive of strengthening the apex institution’s natural bond with its member PCFs. Government’s exit strategy from CCF is also needed – especially with its planned conversion to a cooperative bank – in order to turn over its ownership to the PCFs network where it rightly belongs consistent with widely-accepted principles that are also enshrined in the Cooperative Law and related legislations. This will make the CCF more “inward” looking, to focus on mutually strengthening financial services and capacity-building tie-ups with its member-owner PCFs. This will complement the State Bank of Vietnam’s (SBV) plan to increase the number of PCFs that will have wider individual coverage beyond the commune. More importantly, it will also relieve Government from the financial burden of supporting what is designed to be a self-sustaining cooperative system. 6. There will be need to review the ownership, governance and control of the PFCs. Currently, the PCF ownership and governance structure, while intended to be that of a cooperative, is much closer to that of a limited liability company-owned rural bank. Typically, less than 50 “core-members” provide “core-capital’ and control membership expansion of a PCF because of their exclusive right to be board members.2 Subsequent decrees and implementing circulars have also allowed PCFs to mobilize deposits from 2
“Core” capital contribution required to be a “core” members range from VND2.5 Million to about VND 250 million. Core members, through the Board of Directors (BOD), set entry rules for other core members. The persistently low number of core members (less than 50) strongly implies that the rules were set to limit entry or even closing of core membership expansion. Reported (non-core) “members” are actually the cumulative number of borrowers that have qualified to be such after paying the minimum capital of about VND 50,000. These members are largely inactive after paying the loan. Thus, the reported 1.5 million “members” of PCFs grossly overstates their true membership compared with typical cooperatives elsewhere. Actual number of real or core members would just be about 50,000 for the whole PCF network.
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and lend to non-members. With these broad “banking” powers, not typical of financial cooperatives elsewhere, there is little incentive for “core members” to expand their number as this will dilute their equity share and the corresponding returns, and weaken their control of the PCFs. Under the new CIL, PCFs are also to be organized and operated as cooperatives consistent with other pertinent laws. However, they will still be allowed to accept deposits from and lend to non-members subject to the stipulations of the SBV. Unless SBV prescribes rules that will promote membership expansion and active participation, then “core-members” are likely to continue controlling and operating the PCFs like a limited liability company rural bank. These conditions are not consistent with universally proven good cooperative principles and practices that promote membership growth and active participation as key success factors of financial cooperatives. This in turn will prevent the PCF from being governed and operated as a true financial cooperative – a proven model of widely-owned financial institutions so appropriate for low-income households in rural areas where options for formal financial services are limited; 7. The “Transition Provision” of the new CIL allows semi-formal MFIs and microfinance programs of socio-political organization to continue to operate in their current (unregulated) forms subject to guidelines from Government. Nonetheless, these entities and their programs should be given a reasonable period to transform and be integrated under the new CIL. This will level the field for all microfinance players and avoid having a two-tiered system of regulated and unregulated MFIs/credit institutions that could challenge the intent of the CIL in integrating microfinance into the financial sector. Moreover, there will be need to consolidate the numerous small “MFIs” or merged these with the top performers, especially if they belong to the same mass organization. Many of these MFIs cannot hope to professionalize with only voluntary or part-time staff. They also have little prospects for raising the needed equity to be regulated MFIs and will not be able to raise the resources and expertise to compete in a rapidly changing microfinance market that inevitably will be information technology-driven within the near future. Government should provide incentives or measures to encourage such consolidation and mergers to help ensure the viability and effectiveness of these emerging players. Having a few but well trained, well-resourced and focused MFIs is a much better option than having many weak ones with little prospects to be sustainable. With the envisioned diversity of microfinance players, small MFIs will no longer be concerned with competition among their peers but with other types of larger and expanding credit institutions – such as the PCF network with the Cooperative Bank as hub, a transformed VBSP and/or its credit and savings groups, and commercial banks like VBARD that will soon see the vast opportunities in the highly underserved but potentially viable microfinance market. 8. Rather than providing direct budgetary support and subsidies to micro-credit delivery, Government could resort to “smart subsidies” and other enabling measures, such as: (i) providing tax or fiscal incentives to credit institutions providing microfinance services to remote areas and ethnic minorities where poverty incidence is highest; (ii) funding support or subsidies for capacity-building of CCF/cooperative banks, PCFs and MFIs in training, ICT enhancements, etc. on cost-sharing schemes; (iii) support for an advocacy and information dissemination program at all levels of Government and mass organizations to level expectations and understanding of microfinance proven good practices and principles; and (iv) exploring viable options for the medium to long-term divestment of Government’s ownership and investments in VBSP and CCF to low-income and rural
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households at reasonable discounts or easy amortization payment plans, as part of its exit strategy. There are other immediate and compelling concerns towards developing a market-based microfinance sector, including: (i) drafting of implementing decrees and regulations for the new CIL; (ii) crafting and approving the National Microfinance Strategy and Roadmap; (iii) approving the 10-year strategic plans of key credit institutions, especially VBSP; (iv) improving the supervisory framework and the capacity of SBV to ensure the safety and stability of the microfinance sector; (v) institutional strengthening of key players; and (vi) establishing the needed infrastructure for the proper functioning of the sector, such as setting up a cost-effective localized credit information exchange and strengthening the existing capacity-building service providers for stakeholders in microfinance. Lastly, it is proposed that the above-mentioned conclusions and recommendations should be considered as among the key elements of the microfinance strategy and roadmap for developing a robust, self-sustaining, and responsive microfinance sector for the ultimate benefit of the poor and low-income households (please refer to Annex 12).
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VIET NAM MICROFINANCE SECTOR ASSESSMENT
I. A.
SECTOR ASSESSMENT: CONTEXT AND STRATEGIC ISSUES Sector Overview
1. About 72% of the population is living in rural areas where 94% of the nation’s poor also lives and where agriculture that accounts for 54% of the national workforce is the economic mainstay. Government’s national poverty reduction program is thus a multi-pronged approach of: modernizing agriculture and value-added agro-processing; promoting nonfarm household businesses; and increasing employment opportunities through geographically dispersed industrialization and SME promotion. The results have been remarkable, with poverty reduced from 58% in 1993 to 12.3% as of 2009 and Vietnam is poised to meet its Millennium Goal by 20153. However, poverty distribution remains skewed with 45% of the poor accounted by ethnic minorities in remote areas that comprise only 14% of the population. 2. Among the major constraints in achieving program objectives was the lack of responsive and adequate financial services in the rural areas. Up until the early 2000s, it was estimated that the rural areas had a mere 17% share of the total bank credit and where less than 20% of the population had access to any kind of institutional finance services. The provision of agricultural and rural financial services has always been a major component of poverty reduction measures of Government from the onset of Doi Moi in 1986. In 1988, Government set up Viet Nam Bank for Agriculture (VBA) and immediately geared it to be market-oriented, gradually reducing subsidies and budgetary support in order to make it sustainable and efficient in providing agriculture-focused financial services. By 2003, VBA was transformed into the Viet Nam bank for Agriculture and Rural Development (VBARD) as a full commercial bank though it remained focus on rural households and agricultural small and medium enterprises (SMEs). To date it has 2,300 branches and transaction offices covering all of the countries provinces and districts. As a fully market-oriented bank it needs to balance its development banking mandate with profitability and sustainability concerns. 3. In 1993, the State Bank of Vietnam (SBV) also promoted the setting up the People’s Credit Fund (PCF), a form of financial cooperative, to provide commune level financial services. The Central Credit Fund (CCF) was also established to act as the PCFs apex institution and provide support to the PCFs. The prudent nurturing of the PCF by SBV was aimed at restoring confidence in financial cooperatives that suffered massive failures in prior years mainly due to hyper-inflation and the rapid devaluation of the VND. By December 2010, there were 1,037 PCFs covering about 10% of the country’s communes and serving some 1.5 million members, about 50% are considered poor4. The PCFs have always been and continue to be market-oriented. They adhere to the basic cooperative principles of self-help and mutual assistance with less than 15% of their resources funded from external sources, mainly from CCF. 4. VBARD and the PCF network have extensive geographic presence to cover lowincome rural households, but their commercial orientation created concerns within Government on the exclusion of poorer households and disadvantaged groups. The Vietnam Bank for the Poor (VBP) was thus set up in 1995 as a Fund administered by the 3
Source: http://baodientu.chinhphu.vn/Home/23-chang-duong-thuc-hien-cac-Muc-tieu-phat-trien-Thien-nienky/20108/35568.vgp (Vietnamese Government Web Portal); Vietnam and World Economies 2009-2010. Vietnam Economic News 4 By July 2010, the number of PCFs are 1,042.
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then VBA (now VBARD) to target poor households. In 2002, VBP was spun off to create the Vietnam Bank for Social Policies (VBSP), a wholly State-owned non-profit entity focused on subsidized “social policy lending” to poor households and disadvantaged groups as defined by Government. By 2009, VBSP had about 8,000 staff assigned in all districts with 98% coverage of all communes of the country and is now the most dominant micro-credit provider in the countryside. 5. From the 1990s through 2005, some 40 semi-formal MFIs were formed mainly through the Credit and Savings Program or by mass organizations (MOs) and NGOs5 while another 10 MO/NGO-MFIs were formed thereafter. In 2005 and 2007, Government issued Decrees 28 and 165 in a bid to broaden and deepen institutional microfinance by allowing the entry of non-government entities in setting up formal microfinance institutions (MFIs) or through the transformation of the existing semi-formal MFIs. The decrees and implementing rules were considered restrictive, however; with limits to the type of entities and the number of investors that can set up formal MFIs. Licensing was also perceived as tedious with three semi-formal MFIs waiting for their MFI license almost three years from filing their application and the first MFI being licensed in August 2010.6 By end 2009, despite the long existence of majority of the “MFIs”, only three had attained an outreach of over 40,000 clients, with another three reaching from 20,000 to 40,000 clients. These top six performers accounted for about 50% of total outreach of the semi-formal MFIs, which collectively still play a minor role in the sector. B. Sector Assessment 1. Micro-credit delivery 6. The recent years’ sharp increase of micro-credit to poor households and social policy lending target groups was mainly driven by the rapid growth of VBSP’s portfolio funded by State-mobilized funds through budget allocations, compulsory deposits from state-owned commercial banks (SOCBs) and fully Government guaranteed borrowings. About 98% of VBSP’s lending are channeled through commune-based credit and savings groups (CSGs) composed of 35-50 clients, organized through VBSP’s highly effective use of mass organizations7 and the People’s Committee networks that permeate down to the hamlets. As of December 2009, VBSP had lent out to 7.5 million clients, about more than half of whom are reportedly from poor households. VBSP accounted for about 60% of total microcredit clients for the period, more than double that of VBARD that accounted for 26%, and about eight times that of the collective clients of the PCF network that accounted for about 8% of micro-borrowers. The 40-50 semi-formal MFIs had only a marginal share of 5% of total borrowers for the same period. With VBSP’s massive expansion, almost 50% of rural households are now reportedly to have access to micro-credit (end 2009), a remarkable feat achieved in a relatively short period. However, other forms of microfinance services are still wanting amongst the target groups. More importantly, VBSP’s subsidized policy lending is an increasing fiscal burden that may not be sustainable in the long term. Below is the profile of micro-credit delivery by key institutions in Viet Nam (Table 1).
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Through Decrees 77, 81, and 148. Annex 1: ADB-JFPR 9140-VIE Project Report. There is one more application this year. 7 The Vietnam Women’s Union (VWU) accounted for 50% of the credit & savings groups (CSGs) organized for VBSP followed by Farmer’s Union (VFU) and the Veteran’s Union (VVU). Up until recently, CSG membership reflected that of the mass organization’s (MO) forming them, but the selectivity bias and the difficulty of dealing with too many CSGs in a commune led VBSP to impose inclusive membership regardless of the mobilizing MO. 6
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Table1: Profile of Micro-credit delivery in Viet Nam Institution Number % to Loans (US$ % to (million) Total M) Total Outstanding a VBSP 7.54 61.4% 3,928 46.2% b VBARD 3.2 26.0% 3,500 41.1% c PCFs 0.95 7.7% 1,006 12.8% d MFIs/NGOs 0.6 4.9% 75 0.9% a
b
Sources: VBSP Report, as of December 2009; VBARD report, as of 31 October 2009, c d Central Credit Fund Annual Report 2009; Data as of end 2008. Viet Nam Microfinance Bulletin, No. 13, July 2009.
2. Provision of Micro-savings services 7. VBARD, the PCFs, and the Vietnam Postal Savings Company have a combined network of over 4,000 branches and transaction offices that provide savings services. PCFs have the added advantage of operating at the communes but only cover 10% of these. VBSP reports 98% coverage of all communes through transaction points visited by mobile teams once a month, but is largely credit-delivery focused. In contrast, Vietnam Postal Savings Company is solely a deposit-taking bank at the districts. The combined extensive outreach of these institutions allows rural poor households reasonable access to savings services. The semi-formal NGO-MFIs also mobilize savings, mainly in form of compulsory deposits that can only be withdrawn upon full repayment of the loan and viewed more as a partial guarantee to the client’s micro-loan. Major NGO-MFIs offer limited voluntary savings since they cannot compete in paying market interest rates, an added burden to their relatively higher operating costs. VBARD by far dominates the savings service market with its extensive network and commercial banking orientation. Below is the micro-savings profile of major microfinance players in the country:
Table 2: Estimated rural savers 8 by major FIs in Viet Nam
Provider VBARD VPSC VBSP PCFs NGO-MFIs Total
Est. No of depositors 5,267,000 411,830 2,148,000 1,500,000 430,000 9,756,830
3. Remittances, payment systems and other services 8. All banks in Vietnam offer a wide range of financial products, including money transfers, ATM services, foreign currency exchange, credit and debit cards, etc. Major remittance companies, such as Western Union and Money Gram provide cash transfers, often in agency relationships with banks, other financial institutions, and the post offices – 8
VBARD estimate based on 2008 Annual Report on savings mobilized from individuals at average USD 800/account of which 45% mobilized from rural areas; VPSC as of end 2009, source: MOF; VBSP estimate, source VBSP, as of July 2010; PCF estimate based on members; NGO-MFI – based on number of clients of 36 MFIs surveyed under JFPR 9142 as of end 2009
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where the VPSC is strategically located. The entry of foreign banks into VPSC through a stock swap scheme9 is seen to greatly enhance VPSC’s payment and remittance services with planned adoption of technology advanced systems from its partner banks. Even VBSP offers money transfer services for customers. The competitive environment made these services also reasonably accessible and affordable to rural and poor households. This could be further improved if the PCF network could offer the range of similar services given their commune-level presence. To this end, CCF and the PCFs are currently implementing the pilot phase of the “Rural-Urban Connectivity Project” with eight participating PCFs. VBARD is currently the best positioned to offer quality banking services, especially for payment and remittance systems, given its extensive branching network and the adoption of information and communications technology (ICT) that allows mass-based and pro-poor innovations in banking services. 4. Micro-insurance 9. Micro-insurance, while still largely misunderstood by rural households, is now recognized as a vital service to the rural poor who are most vulnerable to the economic shocks brought about by death, illness, and loss of assets. The usual coping mechanism of the poor HHs against life changing events - such as relying on savings, borrowings, and/or selling of assets - could push them to further poverty. Existing laws allow smallscale financial institutions like PCFs and MFIs only to be agents of insurance companies, with a few local insurers already offering both life and non-life products appropriate for the low-income market. The most notable is Bao Viet Life that offers a range of low-cost life, livestock and health insurance. Others like AIA specialize in credit life insurance through an agency agreement with banks. Prudential has insurance products for women and children under 18.10 Some semi-informal MFIs with external partners (e.g., ILO, RIMANSI,11 Action Aid) have also pilot tested Mutual Aid Funds (MAF) that were proven successful in other countries. RIMANSI’s experience with TYM is well-documented and shows that mutual assistance funds can be quickly and viably set up, with good market acceptance. However, with the prohibition on ownership of insurance schemes by MFIs and PCFs, the only option is to develop MAF and other microinsurance products in agency agreement with existing and more progressive insurers. 10. Decree 18/2005/ND-CP passed in 2005 provides the legal framework for MAFs to transform into regulated Mutual Assistance Insurance (MAI) organizations. A MAI is a legal entity established to do insurance business through self-support and self-help among members. MAI members are both policy holders and owners of the organization and a right to participate in its management making MAI ideal for low-income groups. However, the minimum capital requirement for setting it up is presently considered prohibitive and no MAI has been set up to date.
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Originally Wachoiva Bank, later merged with Wells Fargo Bank, and Credit Suisse bought into VPSC under a stock swap arrangement 10 DFC Report for the World Bank (2007); Vietnam: Developing a Comprehensive Strategy to Expand Access [for the Poor] to Microfinance Services. Promoting Outreach, Efficiency and Sustainability 11 Annex 2: J.A. Alip,Ph.D and M.C.David-Casis, (2008), Microinsurance in Vietnam, A RIMANSI Publication excerpt
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5. Wholesaling of Microfinance Funds 11. Except for CCF’s wholesaling functions for the PCF network, there is no single financial institution that is focused on wholesaling funds for microfinance in Viet Nam. In recent years, the Bank for Investment and Development of Vietnam (BIDV) has taken on this role but only on a project basis,12 as it often acts as the executing agency for domestically and donor funded projects. Under the World Bank-funded Rural Finance Project III, it wholesales USD 10 million (from total USD200 million project funds) to qualified credit institutions for on-lending to microfinance clients. C. Development and Strategic Issues 12. Government sees the growing importance of market-driven microfinance and is aware of its rapid development elsewhere in the region, where responsive, sustainable, and quality banking services are now accessible to rural areas and poor households in such scale not seen just a few decades ago. It also saw the need to rationalize development efforts for the microfinance sector. In September 2009, Government formed the National Microfinance Steering Committee (NMSC), a high level body to assist the Prime Minister in policy and strategy formulation to develop a market-based microfinance sector. The NMSC is headed by the SBV Governor with senior official members from various ministries, mass organizations and major financial institutions.13 Its main tasks include identifying a sector reform agenda and the drafting of a 2010-2020 sector strategy. There is also on-going inter-ministerial review of Decree 78 led by SBV and MOF aimed at transforming VBSP into a more sustainable and autonomous microfinance-provider of a range of quality financial services to its target clients. 13. SBV and MOF led an inter-ministerial group that prepared the decree on Credit Policies for Agricultural and Rural Development (Decree No. 41/2010/ND-CP) which provided a system of measures and policies of the government to encourage credit institutions to provide loans for investment in agriculture and rural areas for economic restructuring in agriculture and rural areas, construction of infrastructure, hunger elimination and poverty reduction and raising peoples’ living standards. Subject decree indicated the following general and specific provisions on: (i) entities which shall provide rural credit, which include among others the MFIs; (ii) eligible borrowers and projects; (iii) the credit principles to be adhered to by lending institutions; and (iv) specific provisions among others on lending terms, interest rate, risk provisions and handling, agricultural insurance, and the manner of rescheduling loans and provision of new loans to those who cannot pay their loans due to objective reasons (natural disasters, calamities, epidemic). 14. On 16 June 2010, after almost a 3-year top level deliberation on earlier drafts, a new Credit Institutions Law was finally passed.14 It is landmark legislation - not seen even in countries with major advances in microfinance - that integrates microfinance as a subset of the financial system where it rightly belongs. The new CIL resolved the previous fragmented legal bases for institutional microfinance, including issues raised on the 2005 and 2007 Decrees such as restrictions on the ownership of formal MFIs, and uncertainties
12
BIDV was established in April 1957, the first to be set up among the four largest State-owned commercial banks. It plans to convert into a joint stock commercial bank by QI of 2011. 13 The NMSC is composed of: SBV Senior Deputy Governor as Vice Chairman; and senior officials as members from the Office of the Government; MOF; Min. of Justice; Min. of Planning & Investment; Min. of Agriculture & Rural Development; MOLISA; Min. of Home Affairs; Vietnam Women’s Union; Farmer’s Union; Central People’s Credit Fund; VBSP; and VBARD 14
Annex 3: New Credit Institutions Law
15
on the liberalization of interest rates in the financial market.15 Its broad coverage of microfinance and the general application of prudential standards of governance to the operations of key institutional microfinance players, i.e., formal MFIs, PCFs, and cooperative banks, set the enabling legal and regulatory framework for developing a robust, sustainable, and responsive microfinance sector of Vietnam. However, key issues and “binding constraints” still need to be addressed to attain the vision for the microfinance sector, among which are: 1. Policy, Legal and Regulatory Environment a) Legal and Regulatory Framework 15. The new Credit Institutions Law (CIL), while far-reaching and comprehensive, still needs detailed guidelines; by way of Government decrees and SBV circulars, before this can be successfully implemented. It is estimated that Government has to issue from 5 to 10 decrees to implement certain provisions of the CIL, among those directly relating to microfinance are: •
•
•
Chapter X, Article 161 - Transitional Provisions, Section 6: “For microfinance programs and projects of political organizations, socio-politic organizations, NGOs, credit institutions that are being implemented prior to the effective date of this Law shall not be required to adjust their organization and operations in accordance with provisions of this Law. The Prime Minister shall stipulate in details activities of such microfinance programs and projects.” Chapter I, Article 17 - Policy Banks: Item 1. “The Government sets up policy banks to carry out business not for profit but for the implementation of State socio-economic policies”; and Item 2. “The Government shall stipulate the organization and operation of policy banks.” Chapter VI, Article 133 – Requirement for ensuring prudence in electronic banking: “A credit institution or a foreign bank branch shall set up a system of identifying, supervising and managing risks; ensure the prudence and security in electronic banking operations in accordance with stipulations of State Bank of Vietnam.” 16
16. Likewise, SBV circulars need to be crafted to flesh out the implementing guidelines for certain provisions the CIL, among those directly relating to microfinance are: •
•
15
16
Chapter I, Article 17: Item 3. “Policy banks must implement internal control, internal audits; develop and issue internal procedures applicable to their operations; adopt statistical, operational and payment activities reports in accordance with stipulations of the State Bank. Chapter III, Article 87: “State Bank of Vietnam shall stipulate the capital contributions of foreign individuals and organizations to set up microfinance institutions; number of capital contributors; ownership proportions, ownership portions of both domestic and foreign organizations and individuals in microfinance institutions; restrictions on network structure and geographical boundaries of operation of microfinance institutions.”
The new CIL allows negotiated interest rates between lender and borrower and no longer refers to a “base rate”, prescribed in previous laws. This technically repeals the Civil Law and the Anti-Usury Law both of which refer to a base rate in the application of the latter laws. This is crucial for the IT enhancement of the operations of microfinance-focused institutions to lower transaction costs and deepening of services, e.g., as envisioned in the Urban-Rural Connectivity Project of CCF and the PCF network. In the Philippines, the use of mobile phones and electronic banking is already gaining foothold among major banks and MFIs, especially for remittance and payment services much needed by rural households
16
•
•
Chapter IV, Article 118 – Operations of PCF, Item 1.b.: “To accept deposits from nonmember organizations, individuals in accordance with provisions of State Bank of Vietnam”; and Item 2.b.”To provide loans to non-member customers in accordance with provisions of State Bank of Vietnam.” Chapter IV, Article 97 – Electronic Banking Activities: “Credit institutions shall be allowed to provide banking services via electronic means in accordance with stipulations of State Bank of Vietnam.”
17. The implementing Government decrees and SBV circulars are of immediate concerns, without which the intent and objectives of the CIL will not be fully achieved. SBV has expressed the need for technical assistance to help craft the implementing circulars, especially those relating to microfinance. A still continuing concern despite the new CIL is the perceived tedious process for MFI registration given the 3-year waiting period currently experienced by the 4 semi-formal MFIs for their license. b) Policy Lending and Government Subsidies 18. VBSP is by far the dominant micro-lender focusing on poor households and disadvantaged groups. Decree 78, 2002, mandates it to be: a non-profit financial institution devoted to provide concessional lending to the poor and other “social policy” lending clients; with heavy dependence on Government for its operations. Government support comes in various forms: (a) budgetary allocation and Government guaranteed loans for funding its portfolio growth; (b) subsidies to cover its negative financial spread and cost of operations; (c) 2% compulsory deposits from SOCBs; and (d) tax exemptions. 19. The success of VBSP in achieving its mandate backed by substantial Government resources and subsidies, and 98% coverage of communes are also seen to discourage the entry of other institutional players. This in turn would adversely impact on the development of a market-driven microfinance sector, which is crucial in promoting competition and efficiency, as well as in widening the choices of clients for microfinance providers and the services they offer. And while VBSP has attained remarkable outreach, it is also becoming an increasingly heavy fiscal burden for Government that may not be justified. 17 20. The draft VBSP strategy prepared by its management and being circulated for discussion among relevant ministries, envisions a more market-oriented and sustainable financial institution providing not only micro-credit but a range of other services. The strategy still considers interest rate subsidies but only for the bottom poor in mountainous and remote areas, and especially among ethnic minorities18. However, the draft “Decree of Government on credit for the poor and other target groups” intended to amend Decree 78 still contains provisions that appear to perpetuate subsidized or “preferential” rates to VBSP’s current target groups. There will be need to reconcile the draft Decree and the draft VBSP Strategy with the vision to gradually eliminate subsidies, or fine tune Government’s policy-lending programs, to make VBSP sustainable, autonomous, and be more responsive to the banking needs of its clients and not just being a highly subsidized micro-credit delivery arm of Government. In any case, all the other key microfinance players charge market rates without adverse impact to their market acceptance amongst
17
In recent training workshops of the ADB administered JFPR Project 9140-VIE, MFIs consistently raised issues on the adverse impact on their operations of VBSP’s aggressive delivery of subsidized micro-credit; VBARD and CCF have the same concerns; while MOF and MPI noted the heavy fiscal burden; refer also to Annex 4: VBSP & CCF-PCF analyses of operations. 18 See Attachment 3 to Annex 4: Draft Concept Paper for Development Strategy for VBSP
17
poor households as evidenced by the steady increases in outreach.19 As consistently proven here and elsewhere, poor HHs value more the ease of access to permanent financial services than low loan interest rates.20 Table 3: Comparative Loan Size & Rates (2008-2009) Credit Institution VBSP VBARD PCF Semi-formal MFIs
Ave. Loan Size (US$) 521 1,094 769 125 -200
Ave. interest Rates/month 0.65% 1- 1.08% 1.25% 1 – 1.5% (flat)
21. Apart from the usual adverse impact of subsidized The marginal benefit of credit to the proper functioning and development of a subsidies to individual poor robust microfinance sector, the strongest case against HH cannot justify the heavy VBSP’s subsidized lending is the marginal direct benefit fiscal burden to Government. to the borrowing individual target household (HH) that cannot justify the increasingly heavy fiscal burden of Government due to such subsidy. The paradox is due to the small average size of the target HH loan of VBSP (ave. USD521) and the unsubstantial difference between VBSP’s subsidized lending rate averaging at 0.65%/month relative to VBARD’s, the market leader, with lending rate at 1%/month.21 Using end 2009 figures and applying the difference between VBSP’s and VBARD’s lending rates, poor HH clients of VBSP benefited only by about VND 33,735/HH/month (USD1.82/HH/month) due to the subsidy, or a little over VND 8,000/individual/month based on average of 4 members/HH. On the other hand, the cost to the Government based only on interest income forgone from 3.8 million poor HH could reach USD USD6.93 million/month or about USD 83 million/year, as shown below:
Table 4. Estimated Incremental Benefit per Poor HH due to Interest Subsidy (2008) VBARD Lending Rate /month
VBSP Lending Rate /month
1%
Diff. in rate VBARD vs. VBSP
0.65%
VBSP Average Loan size (VND)
Inc. Benefit per HH/month (VND)
0.35%
9,638,000
33,735
In USD
521.00
1.82
Table 5. Estimated Interest Foregone due to Subsidy to Poor HH (2008) Diff. in rate VBARD vs. VBSP 0.35%
Est. VBSP Total Loan to Poor HH (USD) 1,979,800,000
Interest foregone per month (USD) 6,929,300
Total Interest forgone /year (USD) 83,151,600
19
The small field survey revealed that PCFs and MO/NGO MFIs were also preferred lenders over VBARD due to simplified procedures, despite higher lending rates of the latter especially that of the MO/NGO-MFIs (See Annex 5 Summary of Field Survey). 20 This is the main reason why poor HHs often prefer informal moneylenders who charge far higher interest rates than any formal and semi formal financial institution. 21 Discussions with stakeholders and field findings clearly revealed that VBSP is resorting to credit rationing due to its limited budget against the demand for its loan products. Thus, the average USD500 loan/HH is likely to be uniformly applied nationwide (maximum loan of VBSP for poor HHs is USD1,500). Semi-formal institutions charge as much as 1 – 1.5%/month flat rate or over 20- 30%/year effective rate. (Annex 1).
18
22. It is clear that the marginal benefit to the individual borrower poor HH may not warrant the heavy fiscal burden for Government, let alone increase this as envisioned in the Government’s proposed Decree and Strategy for VBSP. Yet, the total outlay of Government for VBSP as of end 2009 has reached VND17,717 Billion (USD 938 million) from VND 8,953 billion (USD 484 million) as of end 2006, as shown below: Table 6: Direct Government Support (In VND Billion) Item I. Fund from Government budget 1. Charter capital 2. Funds provided for programs II. Interest subsidies & management fees III.ODA lending funds Grand Total (billion VND)
2006 7,953 4,788 3,165 750 250 8,953
2007 9,861 5,988 3,873 1,053 322 11,236
2008 12,101 7,988 4,113 1,160 316 13,577
2009 15,124 9,488 5,636 2,259 334 17,717
June 2010 16,013 10,000 6,013 1,000 334 17,347
Source: Ministry of Planning & Investments (MPI) Note: The yearly amounts are cumulative, except for the subsidy provided each year. Amounts do not include loans from SBV at 0% interest, compulsory deposits of state-owned commercial banks (SOCBs), and Government guaranteed bonds
23. The total cost to Government in terms of direct subsidies, opportunity costs and others amounted to VND 14 trillion (USD 842 million) as shown below22: Table 7: Estimated Amount and Type of Subsidy to VBSP (As of June 2009) VND USD Percent to Item (in billion) (in million) total 44% Direct Subsidies on interest & operations 6,175 370.42 Opportunity Cost on Capital Infusion
4,711
282.82
33%
Opportunity Cost on Borrowings from SBV Income Tax waived Foreign Currency Losses
3,078 176
178.17 10.25
Grand Total
280
10.41
21% 1% 1%
14,420
851.00
100%
Source: ADB TA 7499 VIE Team estimates
2. Sector Development Strategy 24. As mentioned, the NMSC has been established at the highest level of Government with senior representations from relevant Ministries, SBV, mass organizations and the key financial institutions. A concern is that the Microfinance Strategy Working Group (MSWG), the technical arm of the NMSC, is largely supported by SBV officers and staff, yet the role and function of VBSP has been and will continue to be under the direct control of Government even with the new CIL. It is understandably evident that the MSWG will focus more on related strategies for the credit institutions over which SBV has greater influence and control (i.e., VBARD, CCF/PCF network, institutional MFIs and the emerging cooperative banks), but will leave VBSP’s strategy formulation to Government, specifically MOF. There will be need to reconcile the market-orientation of SBV over the regulated financial institutions with the social policy lending objectives of the Government for VBSP given the latter’s current dominant role in the microfinance market.
22
Total Subsidies=Direct subsidies + Opportunity Cost on Capital + Opportunity Cost on SBV Borrowings + Income Tax Waived + Potential Foreign Exchange Losses. Of these, only the direct subsidy figures are available while the others were either estimated or assumed based on available data and documents
19
25. It can be shown that the transformation of VBSP and its CSGs may not be as difficult as perceived, since there are doable, practical, and politically acceptable options that can be crafted for a gradual exit strategy of Government from micro-credit subsidies and from fully supporting VBSP at huge costs. With the passage of the new CIL, such options could be designed to transform VBSP and its CSGs into viable, effective, and autonomous microfinance providers without the need for massive Government support while still remaining true to the Government’s social objectives.23 3.
Prudential Supervision a) Supervision & monitoring standards for PCFs & MFIs
26. Under the new CIL, SBV will have supervision over VBARD; PCFs, financial PCFs and MFIs should adhere to widelycooperatives and cooperative banks; and the accepted performance norms for 1 licensed MFIs, subject to general and specific financial cooperatives and MFIs provisions applicable for each type of credit respectively; and with risk management institution. This will resolve issues of lack of framework for credit institutions. prudential and internal control standards, especially among the emerging formal MFIs. However, apart from the general standards it requires for credit institutions, there will be need for SBV to set up performance standards unique to PCFs based on universallyaccepted norms for financial cooperatives24, as well as widely-accepted performance standards for MFIs25 . Both the PCFs and the MFIs need to have the same risk management framework with those for credit institutions. b) Monitoring Standards for VBSP 27. VBSP remains a policy bank: “to carry out business not for profit but for the implementation of State socio-economic policies” and with Government to specify its organization and operation. SVB’s supervision functions over VBSP will be limited to prescribing its internal control, internal audits; internal procedures applicable to their operations; statistical, operational and payment activities reports. Indeed, it may not be necessary to impose the full prudential standards normally applied for commercial banks, given that VBSP is wholly-owned and largely funded by Government and the SOCBs. To be sure, Guidance no. 737/NHCS-KT prescribes financial management standards and controls to ensure prudent use of VBSP’s funds for operations. However, VBSP currently does not fully conform to the internal controls, audit standards, chart of accounts VBSP’s operations must be and reporting requirements of credit benchmarked with microfinance institutions because it was not compelled to performance standards and not just on do so. the basis of outreach and 28. The provision of the new CIL, while may be viewed as giving SBV only superficial supervision powers over VBSP, is vital since it now requires VBSP to conform 23 24
25
disbursements. With its vulnerability to a variety of risks, VBSP must conform to the risk management framework for credit institutions.
This is fully discussed in the accompanying document to this report: Key Elements for the Microfinance Strategy for Vietnam. World Council of Credit Unions (WOCCU) and the Asian Council of Credit Unions (ACCU) have developed universallyaccepted standards based on cooperative basic principles and good practices Similarly, the Consultative Group for Assisting the Poorest (CGAP) and other reputable
20
with the credit institutions internal control and reporting standards. This will greatly enhance Government’s capability to monitor and benchmark the performance and operations of VBSP against generally-accepted standards for microfinance-focused institutions. Moreover, as VBSP increasingly seeks funding from the capital market, its conformity to internationally-accepted prudential and performance standards will facilitate the due diligence processes it will have to undergo. However, there will be need to develop capability within the Ministries tasked with planning and monitoring VBSP’s operations (MOF, MPI, and MOLISA) to properly provide administrative and operating oversight to VBSP using widely-accepted microfinance performance standards26 and not just on the bases of Government targets normally related only to outreach and disbursements. Moreover, as with all other credit institutions, and more so because of it vulnerability to a variety of risks, VBSP must conform to the common risk management framework to be prescribed by SBV. The understanding and application of such standards will allow Government to fine-tune its subsidies and direct support in order to reduce the fiscal burden without losing sight of Government’s social policy objectives. It will also facilitate the formulation of Government’s exit strategy for an autonomous and self-sustaining VBSP. c)
“MFIs in Transition”
29. The transitional provisions of the new CIL allow the continued existence and operations of microfinance programs and projects of political organizations, socio-political organizations, etc., that were implemented prior to the Law - subject to stipulations of the “MFIs in transition” must be given a reasonable period to transform into Government. This is meant to avoid sudden formal MFIs to avoid a tow-tier system disruptions of these programs and projects. A of regulated and unregulated credit concern is that Government neither has the institutions that could undermine the full capability to carry out an SBV-like supervision of integration of microfinance into the the entities under transition nor should it formal financial sector. develop such. A reasonable period for their eventual transformation may need to be prescribed by Government to avoid a two-tiered system of regulated and unregulated MFIs/credit institutions that could challenge the intent of the CIL in integrating microfinance into the financial sector. Government should also prescribe at the outset that these entities need to conform to some of the doable standards for regulated MFIs. Thus, the internal controls, audit standards, and reporting norms of the “MFIs in transition” must already follow those prescribed by SBV for formal credit institutions, and universally-accepted performance standards for MFIs. This will help instill among the “MFIs in transition” the desired institutional culture and facilitate their transformation into formal MFIs. 30. More importantly, Government should provide incentives or measures to promote the consolidation and merger of the many small and weak “MFIs”, to help ensure their viability and effectiveness and justify their transformation. Currently, a vast majority of the semiformal MFIs have only partial or voluntary staff, lack the resources to raise the minimum capital, let alone invest in information technology-enhanced operations (the inevitable future of microfinance) and will be unable to compete with better resourced and stronger players in the microfinance market, such as the PCF network, a transformed VBSP, and other commercial banks like VBARD that will eventually realize the vast opportunities in the microfinance market.
26
See Annex 4: VBSP & PCF-CCF Analyses
21
4. Institutional Capacity a) Vietnam Bank for Social Policy 31. Decree 78 which is the basis for the VBSP Charter does not give much flexibility for VBSP to operate as a demand-driven, market-oriented and self-sustaining microfinance provider. The Decree does allow it to engage in a range of services (e.g., mobilizing deposits, providing payment, and treasury services) but most of the provisions of the charter are very much credit-delivery focused and inflexible, prescribing in detail its target groups and how they will be identified and organized; lending products and purposes; and how loans will be delivered and administered. 32. In contrast, there is scant detail in the Decree on other financial services that VBSP may provide to its target clients, resulting in a VBSP needs to strengthen its seriously missed opportunity to provide other vital services, given its financial product massive outreach to 95% of the communes and about 7.8 million development clients to date. The Decree also defines its funding options with capability heavy dependence on “State-mobilized financial sources”. The assurance that it can readily draw from such sources gives VBSP little incentive to be self-sustaining and to engage in financial intermediation within its market niche - as progressive and successful microfinance providers are envisioned to do - to provide a range of quality financial services that will also ensure its survival and growth. 33. The draft Decree gives VBSP more flexibility in designing its lending products and operations. The following need to be considered in developing its lending products: (a) Despite the range of mandated products, it is clear that VBSP is resorting to credit rationing because it is supply-driven with limited resources relative to the huge demand it has generated because of its successful outreach scheme (see below). Thus, loans appear to be uniformly sized (about USD500/HH) regardless of the loan product, yet it still has to monitor compliance for usage of various loan products, which is not only a needless and costly administrative burden but unfair to poor HH clients who can be sanctioned for the “misuse” of the loan. Better practices in microfinance suggest that micro-loans must be simple in design and “minimalist” in approach especially for the poorer households. This simplifies procedures and administration, lowering transaction costs for both clients and the MFI. More importantly, it recognizes the “fungibility” of funds among poor HHs, i.e., their almost daily coping mechanism of juggling scarce resources against their immediate needs is likely to lead them to “misuse” loan funds with very specific purposes.27 Successful MFIs normally only have 2-3 loan products: for productive/business use, for consumption, or for emergency needs. The minimalist approach allows the poor HHs to have more flexibility in managing HH funds according to their needs. As the poor HHs improve their income status, bigger (repeat) loans for specific purposes can be gradually introduced;28 (b) VBSP needs to review the maturity and repayment schedules of some of its lending products, especially for the relatively poorer HH. It appears that most of its products have medium term maturities (up to 3 years) with infrequent amortization of principal at semi-annual, annual or balloon payments at maturity. 27
Bank Rakyat Indonesia Unit Desas (BRI Village units) have only 2-3 simplified small loan products. CARD Bank, the leading MFI in the Philippines, has also 2- 3 products and recently launched its well tested agricultural micro-loan that is also minimalist and simple. 28 The case for student loans is discussed in further section dealing with Gender and Social Issues
22
Again, microfinance good practices advocate small and frequent repayments of principal for two reasons: (i) it is easier and more affordable for micro-borrowers compared to infrequent but “lumpy” repayments that create periodic shocks to the HH cash flow (often requiring them to borrow at high rates to pay the amount due); and (ii) it improves the MFI’s cash-flow and turn over due to faster recycling of loan funds, and could substantially reduce additional infusion from Government to sustain its loan expansion. (c) VBSP should be allowed to fine-tune its lending to poor persons or households as defined by Government (MOLISA and MPI) that are earning less than USD1/day. Even with credit rationing, a USD500/HH loan would be sizable and could result in unsustainable credit burden for the defined poor, more so with the allowable limit of about VND 30 million (USD1,500) loan per poor household. (d) It must develop savings products since this is not only a vital service needed by rural clients, including the poor (who does save), but for VBSP to tap a more stable and sustainable fund source. 34. More importantly, VBSP is constantly facing serious liquidity risk and in fact defaulted at one point in its servicing of its short term debts. The justification for VBSP’s bond issuance in 2007 cited that 85% of VBSP’s outstanding loans are medium or long term, while its funding source of similar tenor is only about 74%, creating a funding gap of around 11% of loan outstanding, which were bridged either through State budget, short deposits or borrowings. The funding mismatch is mainly because loan disbursements historically have been far greater than amount collected as shown below29: Table 8: Summary of VBSP’s Loan Releases and Collections In U.S. Dollar
2007
2008
2009
Loans Disbursed
1,263,803,495
1,641,325,381
1,891,461,081
Total Collections
589,772,668
606,672,793
800,731,730
Funding Gap
674,030,827
1,034,652,589
1,090,729,351
Source: VBSP
35. The funding gap is further aggravated by the following factors: a. Despite gains in poverty reduction, the number of poor HH qualifying for “social policy lending” tend to remain stable or is even increasing due to the periodic upward adjustments by MPI and MOLISA considering inflation and other variables. This means a corresponding increase in “social policy lending” targets for VBSP;30 b. The funding gap will even worsen since as much as 50% of the increase in loans was due to the massive build-up of student loan releases starting in 2006. Both interest and principal for such loans are only due upon completion of the beneficiaries’ schooling (1 to 5 years). Moreover, principal repayments of other term loans are infrequent (semi-annual; yearly) or designed for balloon payments at maturity, resulting in lumpy cash inflows for VBSP that will not match its constantly growing need for loan funds. 29
See Annex 4 for more information on VBSP’s funding gap In May 2010, MOLISA and MPI proposed a new poverty threshold of VND450,000 (US$24)/person/month in rural areas and VND 600,000 VND (US$32)/person/month in urban areas. For the period of 2006-2010, the poverty line was 200,000VND/person/month in rural areas and 260,000VND/person/month in urban areas. These amounts were adjusted in 2008, given the high inflation in 2007-2008, to 300,000VND/person/month in rural areas and 390,000 VND/person/month in urban areas.
30
23
36. The liquidity risk is a major concern and the VBSP draft strategy for 2010-2020 incorporates capital planning and deployment, and the establishment of a Committee or a Department that shall focus on Asset and Liability Management, as among the priorities to improve and strengthen governance. Nonetheless, the draft strategy still project substantial infusion from Government, as well as additional borrowings, while proposing cost recovery through gradual and ultimate reduction of preferential lending rates. 37. The ultimate challenge on VBSP is how to The “Vietnamese way” of using the stem the huge cost to Government in delivering network of mass-based organizations partial microfinance services that was shown and the People’s Committees to earlier to have only marginal impact to the successfully deliver social policy loans individual household. And as mentioned, further can also be used to transform VBSP expansion of its portfolio with heavy reliance on and its Credit & Savings Groups from “State-mobilized resources” can hardly be being State-dependent, credit delivering justified. Yet, VBSP is already a sizable entity of entities into responsive and selfabout 8,000 staff with outreach to about 200,000 sustaining microfinance providers CSGs with 7,8 million members, and total resources of almost USD4.5 billion. There should be a larger vision for the transformation of VBSP and the “Credit and Savings Groups,” which for now are just really “Credit Groups” rather than saving groups. There will be need to seek far more sustainable options than that proposed in the draft strategy, such as: (i) a doable and politically acceptable medium-term exit strategy from VBSP’s Government dependency; (ii) creating a more responsive and sustainable microfinance system by transforming the VBSP-CSGs network within the context of the new CIL; and (iii) utilizing current institutional arrangements, to implement VBSP-CSGs transformation and Government’s exit strategy. 38. On the positive side, VBSP has created an effective credit delivery and collection system that reduces clients’ and its own transaction costs while achieving significant outreach and good collection rates at the commune level. Using the strength of Decrees, it has forged tie-ups with MOLISA, the People’s Committees and mass organizations from the national to commune level. Interviews with key stakeholders, findings from a limited survey, and a deeper analysis of the tie-ups, all strongly suggest that client selection is reasonably transparent and that leakages are likely to be exceptions rather than the rule. In many ways, VBSP’s arrangements reflect the unique “Vietnamese way” of pursuing a national program down to the communes and even hamlets that can only be envied by many countries in the region. This effective set up can be used to transform VBSP and its CSGs from a state-dependent delivery mechanism for social policy lending into pro-active and self-sustaining microfinance providers delivering a range of financial services. b) Vietnam Bank for Agriculture & Rural Development 39. VBARD has the widest full banking outreach with a natural affinity to the rural microfinance market given its mandate in agriculture and rural finance. Yet, it still has to recognize the commercial potentials of microfinance as it increasingly gravitates towards upper-income clients.31 Indeed, it raised oncerns over VBSP’s rapid expansion of subsidized credit delivery. Nonetheless, VBARD’s extensive rural network providing almost total banking services and its relative ease in adopting technology-enhanced 31
DFC Report for the World Bank (2007)
24
financial products are attributes that put it in an almost unchallenged position to serve a potentially lucrative mass-market that remains under-banked. VBARD needs to be more aggressive in developing pro-poor, mass-market oriented services, such as ICT enhanced remittance and payment systems, “mobile phone banking” and microinsurance. Considering the potential volume, these vital services can be made accessible and affordable to poor and rural households; while giving VBARD the opportunity to generate substantial fee-based revenues.32 c) PCF Network, CCF and VAPCF 40. The PCFs. In 1993, the State Bank of Vietnam (SBV) promoted the setting up the People’s Credit Fund (PCF), a form of financial cooperative, to provide member-based, commune level financial services. In 2005, the Vietnam Association of PCF (VAPCF) was set up to support and guide the PCF network to comply with SBV rules; technology transfer; set up reporting standards, and professionalizing the PCF organization. The PCF network underwent various stages of development, namely: (i) Initial Growth Phase (19941998), where the number of PCFs dramatically rose from 179 PCFs in 1994 to 977 PCFs in1998, or 95% of the total number of PCFs by end 2009;33 (ii) Consolidation Phase (1999-2002), when their number declined from 977 to 888 PCFs in 2002, due to closures of 89 PCFs for insolvency and weak management; and (iii) Perfection and Development Phase (2002-2009), wherein the number of PCFs grew but at a much slower rate than the initial phase. Among the main reasons for the declining growth of PCFs is that no single Government entity appears to “champion” the promotion of PCFs after the Initial Growth Phase, notwithstanding that various ministries and SBV have units responsible for supporting them 41. The total membership of PCFs as of end 2009 was reported at 1.5 million, or an average of about 1,600 members per PCF. Considering that over 94% of the PCFs are over 10 years old the overall membership growth is not remarkable. A major factor is that PCFs were set up on a “one-commune-one-PCF” principle, limiting their growth prospects. However, a more complex reason suggests that true membership of the PCFs could be far lower than reported and that the PCFs’ ownership, governance and control structure is much closer to that of a limited liability rural bank than that of traditional cooperatives. Typically, PCFs have less than 50 “core” or “regular” members - usually from higherincome HHs – that provide “core-capital’ ranging from a minimum of VND 2.5 million to as high as VND 300 million (USD130 – USD 15,700).34 Core or regular members have the exclusive right to be board members and can set barriers to entry for new ones. There is strong incentive for this since PCFs (prior to the new CIL) are allowed to accept deposits from non-members while they can only lend to “members” - who need only to contribute VND 50,000 (US$3) to be so. Clearly, the ease of entry of non-core members is geared more to qualify borrowers than to recruit real members.
32
One of the largest private commercial banks in the Philippines has set up a joint venture savings bank that will cater to the “un-banked and under-banked sector” using information & communications technology (ICT) following successful “mobile banking” in the country and business models in South America and Africa. //www.banko.com.ph 33 The prudent nurturing of the PCF by SBV during this phase was also aimed at restoring confidence in financial cooperatives that collapsed in prior years due hyper inflation; 34 This is based on limited field findings of PPTA team but confirmed by SBV. PCFs reported members are actually the cumulative number of borrowers who paid the minimum “equity” to qualify for a loan as “members”. These are likely to be inactive after paying the loan – as confirmed by the PCF officers interviewed. It does indicate the lending outreach of the PCF network. Thus, the PCFs have far fewer core members at 50/PCF or only 50,000 total.
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42. This is reflected in the collective deterioration of the capital adequacy ratios (CAR) within the PCF network from a high of 15% in the formative years to just 5.4% as of end 2009. It shows that loans grew much more rapidly than equity, with the few core-members leveraging their equity beyond prudential standards, since they can mobilize deposits from members or non-members, while they can easily recruit “members” to qualify as borrowers. These broad “banking” powers of PCFs is not typical of financial cooperatives elsewhere that usually can only do banking business with members, especially in mobilizing deposits. Clearly, there is little incentive for “core members” to increase their number that will dilute their equity share, reduce their earnings, and weaken their control of the PCFs. These are not consistent with proven cooperative best practices, with membership growth and active participation seen as key to the success and viability of cooperatives. The table below are typical profiles of PCFs: Table 9: Typical Profile of PCFs (as of July 2010) 1/ 1. Year of establishment 2. Total assets 3. Deposits 4. Capital 5. Regular capital contributing members 6. Maximum capital contribution 7. Minimum capital contribution 6. Outstanding loans 7. Total members (cumulative no. of borrowers) 8. Number of borrowers 9. Number of depositors 10. Number of member depositors 11. Number of non-member depositors 12. Number of staff
Lien Nghia PCF 1995 261,069 235,903 12,587 42 320 10 184,860 9,546 3,500 3,000 1,500 1,500 25
Lien Hiep PCF 1995 105,506 58,197 4,460 42 200 10 82,095 3,826 1,485 700 600 100 12
Lien Dam PCF 1996 17,238 7,017 1,344 20 270 2 14,785 1,952 592 100 90 10 6
1/
Unit of financial data: Million VND; based on a rapid survey of representative PCFs by ADB TA7499-VIE consultants in Lam Dong Province
43. Under the new CIL, the PCFs may mobilize and lend to the public, subject to the stipulations of the SBV. SBV should carefully review the impact of giving such powers relative to the current ownership and control structure of the PCF as it dilutes the unique feature of financial cooperatives: that (real) member-owners are also the clients and users of the PCF’s services. Another issue is that a member-owner-client has influence over the PCF The unique feature of a financial governance while a non-member (or “pseudo” cooperative - that clients are also member) client does not have such power. A owners and have a say in its more equitable option is to have the depositing management - should be considered in stipulating the terms for allowing non-members to first be “associate members” for a PCFs to mobilize deposits from and reasonable period with the view of eventually lend to non-members. The making them true or regular members. Likewise, implementing rules should promote the entry of true members must not be restricted the growth of true and active members and the present practice of merely qualifying - a proven key success factor of members to borrow should be avoided. This will financial cooperatives. encourage the recruitment and growth of real and active members among PCFs. Proven good practices suggest that membership growth – that in turn spurs growth in resources, services and businesses - is a vital element for the success for any cooperative under the
26
self-help and mutual assistance principle. Robust growth in membership and resources are both vital factors and clear indicators of the health of a PCF. SVB recognizes the “flaw” in the current ownership and governance structure of the PCFs and plans to institute measures to correct this. 44. SBV’s 2010-2020 draft strategy for PCFs projects an additional of about 700 more, to reach a peak number of about 1,700 PCFs by 2020. The vision is to consolidate the small commune-level PCFs into larger PCFs individually covering a district with branches at the communes. With the target number, the PCF network should cover almost all districts and The CCF - more so as it transforms into a communes by 2020. The new CIL supports cooperative bank – is an ideal and natural hub of the PCF network for ICT-enhanced, consolidation and the creation of larger PCFs inter-PCF financial services that will allow with no geographical limits to their operations. the network to provide competitive range of Size does matter for a PCF (as for any credit quality financial services at the commune institution) to attain economies of scale, easing level. The financial cooperative is a proven access to professional managers and staff, model best suited to rapidly and viably generating the desired volume for viability and expand grassroots financial services attaining growth, and better competitiveness. It will also relieve pressures on SBV’s capacity since it will supervise fewer but larger PCFs. Finally, it will be to the ultimate benefit of members being owners and clients of better managed and viable PCFs providing them a range of quality services, as well as better revenues from dividends and patronage refunds. 45. With the current state of many PCFs, capacity-building will be much needed especially in their consolidation and up-sizing. Institutional strengthening will also be needed to have the PCF network (and the CCF as a hub) as a platform for ICT-enhanced inter-PCF financial services that will allow the PCFs to collectively provide a range of quality services with a competitive edge because of the commune-level outreach of the network. As mentioned, the “Urban-Rural Connectivity Project”, funded by the Bill and Melissa Gates Foundation with Desjarsdins35 as the contracting partner, has been recently initiated. It is designed to improve the financial services of the PCF network through IT enhanced connectivity. Admittedly, it is a long way from extensive replication within the network since a large majority of PCFs has yet to adopt IT enhanced “core banking” systems to avail of the connectivity. The PCF network will definitely require substantial assistance for this major undertaking. 46. The CCF. An apex institution is usually wholly-owned and controlled by member primary cooperatives (like the PCFs) and does business largely with them, in the same token that primary cooperatives are owned and do business with their individual members following widely-accepted cooperative good practices. CCF is not a typical apex institution of financial cooperatives with almost 98% of its chartered capital of 1.36 VND trillion (USD 73 million, end 2009) owned by Government. And while Government does not guarantee all of its foreign borrowings, the nearly 100% ownership inevitably creates an expectation among lenders that Government will be the ultimate borrower. As of end 2009, about 54% of its portfolio was outside of the network: providing loans for state-owned enterprises (SOEs), small and medium enterprises (SMEs), other entities and individuals that are neither PCFs nor members of the PCFs. It also incurred foreign loans, about 13.7% of which was used to finance non-PCFs while the rest were wholesaled to the PCFs for their portfolio expansion. In contrast, the PCFs are largely member-funded with less than 15% external financing, mainly from CCF. Thus, CCF is heavily influenced by Government with its Board of Directors composed of 2 representatives from Government (one of whom is the 35
Desjardins Developpement International, technical-advisory arm of a network of financial cooperatives in Canada
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Board’s Chairman), four members from State-owned commercial banks (SOCBs) and five from the PCFs. 47. A major justification for the resource structure and direction of CCF is that it cannot generate Government needs to have an exit enough business within the PCF system and strategy from CCF with ownership and control gradually turned over to the PCFs has to seek external business to sustain its network where it rightly belongs. This will operations so that it can in turn maintain its further ease the fiscal burden of support for the PCFs. However, it can be Government, while making the CCF-PCF argued that CCF could have also assured its network autonomous and self-sustaining own viability by aggressively helping the PCFs – true to cooperative principles. grow in membership and resources, thus generating the business for itself – true to the mandate and concept of an apex institution. However, with Government’s and donors’ support there is no compelling incentive for CCF to do this and perhaps partly explains the slow growth in membership of the network. This differs from widely-accepted cooperative principles - enshrined in the PCF Law and Charter - that include the self-help, mutualassistance tenet. It has been widely proven that massive external assistance, though wellmeaning, only weakens the values and bond that strengthen a cooperative system. Thus, it is unclear why Government and donors need to allocate scarce resources to support a system that is meant to be self-sustaining, especially since half of CCF’s portfolio is for non-PCF clients. 48. A major part of the CCF’s future plans is to transform into a cooperative bank, a logical and timely move especially with the new CIL. It is negotiating a major technical assistance program with Rabobank Foundation that will not only consider its own transformation but how the PCF network would be linked to such transformation. There will be need to review Government’s role in CCF’s transformation. Government’s exit from CCF (especially as it converts into a cooperative bank) must consider gradually turning over its ownership and control to the PCFs network where it rightly belongs, as this will also ease the fiscal burden of Government and make the network autonomous and independent. 49. Viet Nam Association of PCFs (VAPCF). VAPCF was set up in 2005 with a number of core objectives, including: guiding the members to implement the regulations and laws concerning the operation of PCFs; supporting the PCFs in transferring technologies and management experiences; setting standards for the operations of PCFs (i.e., reporting, accounting, credit, internal control, etc.), and organizing professional training courses for the PCFs. The draft 2011-2020 Plans for PCF, CCF and VAPFC is even more ambitious, as it envisions the VAPFC to set up and manage for the PCF network the following: Safety Fund; Auditing Organization; Training Center; Information and Data Center, and Banking Services Providing Company. Recently, it has set up an IT company with the view to develop a standard core banking IT system for the PCFs, in preparation for the eventual roll out of the “Urban-Rural” Connectivity Project.36
36
The PCF network and VAPCF are also recipients of USD0.5 million TA grant from the World Bank’s Rural Finance Project III to initiate (i) building the supervision, external auditing, and internal control functions within the PCF network, (ii) rolling out a standardized credit manual across the PCF network, (iii) supporting the development of management information, banking software, accounting, and reporting systems across the PCF network, (iv) implementing the organizational and business plan for the VAPCF, (v) improving the funding of the VAPCF, (vi) strengthening the human resources of the VAPCF.
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50. However, it appears there are major duplications between the services now offered by CCF and those proposed to be done by VAPCF, such as technical assistance, setting operating standards and other capacity-building services for the PCFs. And even if CCF were to be converted into a cooperative bank, it may be better positioned in terms of manpower and resources to provide most of the The various strategic plans for the services envisioned for VAPCF, especially since PCF, the CCF and VAFC must be these are just natural extensions of the CCF’s consolidated and rationalized in business linkages with PCFs. With the expanded order to determine the optimal roles powers of a cooperative bank under the new CIL, each will have to play to achieve a transformed CCF can perform these either by synergy and cost effectiveness. itself or by setting up subsidiaries37. On the other hand, it will be a major challenge for VAPFC to rise to a level of capability to perform what is planned for it, given that after more than 15 years of existence it has only 12 staff and an annual budget of USD65,000 to date. Likewise, over the medium term, further consolidation of the PCFs could move from district-level to province-wide coverage of each PCF that will greatly reduce the number of independent PCFs, and impact on the business ventures of the VAPCF. Indeed, the VAPFC is currently supported under the World Bank RFP III and by the Bill & Melissa Gates Foundation, while CCF is negotiating a major technical assistance from Rabobank Foundation with similar objectives and directions.38 In view of these, there is need to revisit and rationalize the various plans for the PCF, the CCF and VAPFC in order to determine the optimal roles each will have to play to achieve synergy and cost effectiveness, while avoiding needless duplication. d) The Semi-Formal MFIs 51. As mentioned, the 40-50 “MFI”s operating today were organized mainly Promoting the development of a few wellmanaged, better-funded and more through mass organizations (MOs capable MFIs will accomplish much more notably the Women’s Union) or through than supporting many weak ones with little credit and savings programs. As of end prospects to be sustainable. 2009, only one of these had outreach of over 130,000, two with around 40,000, and only three had about 20,000 clients. The top 4 performers (including 3 smaller ones that have merged) have applied for license and only one so far has received this. Another 2-4 others are reportedly following suit. Most of these MFIs have been in existence for almost 20 years. Admittedly, the better performing MFIs individually have far wider outreach than an average PCF, but their performances are way below that of other top performers in the Region of their category. The rest may have very little prospects to become major players even with substantial support in resources and institutional strengthening given them. Almost all of the MFIs are still grant-led or have access to highly concessional lending from the MOs, local and national government, and from donors. The transition provisions of the new CIL allow them to exist under guidance from Government. As earlier proposed they should be made to phase out or transformed within a reasonable period. Alternatively, they can be consolidated or merged with top performers, especially if they belong to the same mass organization. Having a few but well trained and wellresourced MFIs is a much better option than having many weak ones with little prospects 37
For example: (i) the Information and Data Center can be set up using the CCF/coop Bank as the hub to link the PCF network, with individual PCFs acting like a branch of the CCF/coop bank; (ii) the Banking Services Providing Company, is likely to engage in banking business that will naturally occur between CCF/coop bank and the PCFs. 38 See Annex 4: VBSP & CCF-PCF Analyses of Operations
29
to be self-sustaining. It will also lessen the burden of supervising the institutional MFIs. Regional experience shows that a very capable MFI can have an outreach of over a million clients over a reasonable period.39 The benefits from competition and market forces will still be generated not from a few MFIs but from a strengthened PCF network, a transformed VBSP and its CSGs, and the likely expansion of VBARD and other banks to expand into the microfinance market. e) Supervisory Capacity 52. The integration of microfinance to the financial system, starting from the 2005 and 2007 decrees until the passage of the new CIL, raises legitimate concerns within SBV on the effective supervision of the key players, particularly the PCFs and the soon to be licensed MFIs. Many PCFs are still seen as inherently weak mainly due to lack of expertise in remote or small communes to manage even a small credit institution. Senior SBV officials still cite the massive failures almost two decades ago,40 as a harsh reminder in the late 90s’ when almost all n financial cooperatives were closed by SBV. This could partly explain the slowdown on the earlier aggressive promotion in setting up the PCFs by SVB. It does not help that the PCFs are exempted from external audit. In the case of the semi-formal MFIs, almost all of these were set up and long operated under a grant-led, subsidized social lending culture and may not readily adapt to the rigors of operating a licensed marketoriented credit institution. Moreover, except for the leading few, majority of the MFIs is considered even weaker than the PCFs with almost 40% of the MFIs having management and staff working on a part-time or voluntary basis.41 53. The SBV is a lean organization and unless the number of examiners will be increased, it will be hard Outsourcing the external audit pressed to supervise small and numerous PCFs and of PCFs by batches to accredited auditing firms is a licensed MFIs. Also, SBV examiners need to be trained more cost-effective option than or updated on the special features of microfinance, such creating a specialized entity. as the widely-accepted performance standards and proven best practices that may not apply to traditional banks. Effective supervision is one of the major justifications for consolidation among the formal MFIs and the PCFs. The strengthening plan of the VAPCF includes its setting up of an Auditing Company aimed to improve supervision of the network. A more cost-effective option is to accredit auditing firms and outsource audit of the PCFs by batches (of 10-15 PCFs) to reduce the audit costs for individual PCFs.42 5. Financial Infrastructure Provision a) Capacity Building and Knowledge Exchange 54. Despite the long existence of the semi-formal MFIs and even the PCFs, most of the service providers for capacity-building of MFIs are in the nascent stage or developing their capability to meet the specific demands of the microfinance sector. Among the more 39
CARD Bank/NGO of the Philippines and the major MFIs of Bangladesh are a few examples of MFIs having sustainable outreach of over a million clients. 40 Notwithstanding that the massive failure was more due to economic conditions (massive devaluation and hyperinflation) rather than internal factors. 41 Nine of 23 fully surveyed MFIs under the JFPR Project 42492 have mainly part time management and staff 42 This is the model used by Bank of Indonesia (BI) for providing audit services to small rural banks (BPRs). Vietnam has reportedly about 150 Auditing firms and 1,000 licensed chartered accountants. The distribution of about 1,700 PCFs and a few MFIs to accredited audit firms can lower the costs of audit given the size of these institutions.
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notable entities that provide knowledge exchange and capacity-building services are: (i) SBV’s Banking Academy and the Banking University - that offer education and training, mostly on traditional banking, for banks and other credit institutions including the PCFs and VBSP; (ii) Microfinance Working Group (MFWG) is a platform for advocacy and knowledge exchange among NGO-MFIs with periodic workshops and training programs, though it acts more as a forum for MFI practitioners; (iii) Bank Training and Consultancy (BTC), founded by 10 joint stock commercial banks with support from the International Finance Corporation (IFC) is also a core banking-oriented training facility; (iv) World Bank’s (WB) Vietnam Development Information Center (VDIC) is a partnership initiative of the WB and other donors that offers a range of services, facilities, and targeted training for knowledge exchange in development programs worldwide; (vi) The Microfinance and Community Development Institute (MACDI), was set up in 2007 as a financial-social-scientific focused NGO providing training on microfinance, business development, enterprise assistance, and community development; and (vii) Community Finance Resource Center (CFRC) that was also set up in 2007 by a group of well-known international and local scientists, researchers, banking experts and microfinance practitioners to offer a range of training and information exchange on microfinance, community development, and education-communications. 55. The JFPR Project No. 9140-VIE Consulting Team that explored the possible hiring of local institutions for the training of MFIs found that most of these are still developing their capacities in microfinance. They also tend to engage on supply- rather than demand-driven training activities that may not match the real need of the PCFs or the MFIs. The most capable and demand-driven service providers, notably the Banking Academy regulated by SBV, are understandably more core-banking focus since microfinance is only a recent addition to the financial system. The JFPR team cites that for applied MFI operations, the best trainers so far are the large MFIs themselves, like TYM and CEP, since these regularly conduct in-house training for their expansion needs. However, these MFIs are for now too inward-looking to train other MFIs. Moreover, they are narrowly focused on their operations to expand the proven microfinance technology they have adopted (e.g, Grameen Bank Approach or ASA methodology) and may not cover generic but vital knowledge areas, especially for transformed formal MFIs that need to conform to the provisions of the new CIL. A model that they can emulate will be the CARD MRI Development Institute of the Philippines,43 but this will take years and substantial resources to accomplish. 56. The integration of microfinance-oriented institutions under the new CIL requires them to have the same discipline and rigors of all formal credit institutions. On the other hand, commercial banks that are already part of the formal banking system (such as VBARD), may opt to downscale some of their operations to effectively serve the microfinance market that has long been proven as a viable opportunity area while being underserved by the formal sector. Notwithstanding their microfinance orientation, the capacity-building and training needs of these entities will still primarily focus on their having core banking competence and knowledge to properly function as formal financial institutions in a highly regulated industry; and secondarily to acquire the special skills and knowledge to effectively serve the microfinance market. Moreover, the microfinance industry will increasingly become more complex and competitive with its mainstreaming into the formal financial sector; the advent of technology-based products and services that allow costeffective rapid expansion to a mass-based market; as well as concerns on safety and stability in the overall financial sector. Thus, microfinance-oriented credit institutions will require skills and knowledge beyond that of traditional MFIs that merely focused on honing 43
CARD MRI Development Institute offers a range of practitioner-led training and advance education in applied microfinance. //www. cardbankph.com
31
their competence on “best and proven practices” in microfinance (e.g., women-focused organized lending). 57. Among the existing and potential (or planned) capacity-building service providers in Vietnam, the Banking Academy by far possesses the optimum comparative advantage to be the training and institutional strengthening hub for the key players in the microfinance and conducting its industry44. It may do this through the following: (i) designing microfinance-related training, research, and The Banking Academy acting as the the institutional development activities in training and institutional strengthening collaboration, or in joint undertakings with: (a) hub for the key players in the other universities, colleges; existing microfinance industry will be a doable reputable microfinance training and capacityand cost effective option for providing building providers; and (b) model PCFs, MFIs, quality capacity-building interventions to cooperative bank and commercial banks, that stakeholders. may provide on-site, on-the-job training. This will be especially useful in areas where the Banking Academy does not have the presence, outreach, facilities, or particular expertise to address the specific capacity building need and requirements of a key player or network of players; (ii) taking the lead in developing appropriate curricula and training courses based on periodically conducted/updated training and capacity needs/gaps analysis of key players in the sector, to ensure relevant and demand-driven capacity-building support; (iii) training and developing a core of faculty within the academy and its partner universities, and a core of on-the-job / on-site trainers involving practitioner-trainers from among its partner credit institutions (e.g., PCF, MFI, cooperative bank or commercial bank) to provide both formal and hands-on training on the various topics and aspects of microfinance; (iv) in collaboration with its partners, conducting fee-based academic/classroom type training and on-site, on-the-job and handson training for credit institutions and stakeholders; (v) networking with reputable regional and international training centers and capacity-building providers in microfinance to ensure up-to-date knowledge-based information exchanges; and (vi) developing the capability to raise and manage resources from commercial or donor sources to ensure sustainability in providing the services. b) Client Information Exchange 58. Understandably, the VBSP and PCF network are not members of SBV’s Credit Information Center, given: their large volume of micro-loans that cannot be accommodated by the system; their commune level operations that will not pose systemic risks at national or even provincial level; and low-level IT capability of the PCFs and VBSP. However, there will be need to have proper monitoring of micro-loans even at a localized (commune or district) level. The real risk is that the poor and rural HHs are also the most vulnerable to the adverse impact of over-indebtedness. There are already anecdotal indications of multifinancing of borrowers, especially with the rapid growth of VBSP in rural areas that are also extensively covered by VBARD and the 1,000 communes covered by PCFs. VBSP alone has just recently consolidated its accounts to borrower-based, rather than loan productbased monitoring, to avoid double counting and over-financing of a HH, since borrowers can potentially avail of several loan products simultaneously.
44
See Annex 11 for the reasons why Banking Academy by far possesses the optimum comparative advantage to be the training and institutional strengthening hub for the key players in the microfinance industry.
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59. Setting up a simplified commune or district level credit information exchange for key players in microfinance could be possible. The database on HHs or individual clients can be linked using the “family record book” and/or the National ID System. A simple information exchange system may be designed using batched processed, standardized electronic files of clients of participating entities. The system can be upgraded once the PCFs, VBSP and MFIs operate under an IT enhanced core banking environment. c) Customer Protection 60. Under the new CIL, credit institutions and foreign bank’s branches shall have following responsibilities for customer protection: (i) Participate in a deposit insurance or preservation organization in accordance with provisions of the laws and publish information regarding their membership in a deposit insurance, preservation organization at their head offices and branches; (ii) Create favorable conditions for customers to deposit and withdraw money; ensure the full and timely payment of both principal and interest of any sum of deposit; (iii) Refuse any investigation, blockade, retention, transfer of customers’ deposits, except for the case where being requested by competent state authority in accordance with provisions of the laws or with the consent of the customers; (iv) Publish interest rates applicable to deposits, service fees, rights and responsibilities of customers regarding each type of products and services supplied. (v) Announce official transaction time and not being allowed to interrupt transactions during announced time. In case a credit institution or foreign bank’s branch intends to temporarily suspend its transactions during official transaction time, the credit institution or foreign bank’s branch shall post an announcement at the transaction location at least 24 hours prior to such suspension. A credit institution or a foreign bank’s branch shall not be allowed to discontinue its transactions for more than one working day, except for temporary discontinuity of operation for more than one working day with written approval from State Bank of Vietnam. 6. Gender and Social Issues in Microfinance 61. Microfinance in Vietnam has traditionally involved women. Most of the semi-formal MFIs were formed by the VWU and adopt women-focused proven microfinance technology (e.g., Grameen Bank Approach and ASA model). Moreover, 50% of the Credit & Savings Groups of VBSP were mobilized by VWU, though these are now gender-neutral in membership in recent years due to VBSP policy to avoid selectivity bias among MOs. Thus, there are no significant gender issues that need to be addressed in developing microfinance in Vietnam. 62. On the other hand, poverty in Vietnam is typically a rural phenomenon. The poverty rate in rural areas is more than 5 times higher than in urban areas in 2008, 18.7% versus 3.3% (GSO, 2010). Government should provide With 72% of the population living in rural areas, the incentives to credit institutions rural poor account for 94% of the total number of poor providing microfinance people. Moreover, poverty is increasingly associated services to remote areas and with ethnic minorities. Both the poverty headcount ethnic minorities (e.g., tax (percentage of the population living below the poverty breaks and “smart subsidies”) line) and poverty gap, which measures the seriousness of poverty, are higher among ethnic minorities. Thus, microfinance as part of the poverty reduction measures may need to be fine-tuned to the geographic and ethnic distribution of poverty. Government could provide incentives to credit institutions providing microfinance services to remote areas and ethnic minorities
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where poverty incidence is highest, such as tax breaks and easing up on requirements for opening up branches. 63. The table below shows the poverty distribution in the country.45 Table 10: Poverty headcount and poverty gap in rural areas among different ethnic groups, 2006 Ethnic Category Poverty Poverty Gap Headcount Kinh-Hoa 13.5% 2.7% Khmer-Cham 34.6% 5.8% Tay-Thai-Muong-Nung (in the Northern Uplands) 45.2% 11.1% Other ethnic minorities in the Northern Uplands 72.4% 26.1% Ethnic minorities in the Central Highlands 73.6% 25.7% Others 50.1% 23.5%
Source: (Baulch Bob, 2010)
64. There is also need to revisit the “social policy lending” programs of the Government to distinguish these from microfinance. For the extreme poor, micro-credit may not be the solution and likely to cause over-indebtedness, especially with the high average loans provided by VBSP relative to semi-formal MFIs. Other forms of social safety net maybe more appropriate. Another example is the loan program for disadvantaged students. This is a worthy program and can be considered as a public sector investment for the country’s human resource development. As such the type of loan portfolio should not be borne by a credit institution and put it at risk.46 Properly selected social-policy lending programs may then use several accredited participating credit institutions (not just VBSP) as “channeling agents” that will be allowed to carry the loans “off-books” or at no risk to them, with Government compensating them through performance-based service fees.
7. Summary of Key Constraints and Development Needs (SWOT) 65. Below is a SWOT Analysis of the microfinance sector: a) Strengths • • • •
45 46
Extensive coverage of the country by key players: VBSP covering 95% of communes with 200,000 Credit & Saving Groups; VBARD network in all districts; PCFs in about 1,040 communes, with plans to be consolidated and number to be expanded to 1,700 PCFs with each PCF having district-level or wider coverage. About 1 formal, 3-5 semi-formal MFIs capable of rapid and viable expansion, 3040 more maybe merged to a few large and more capable formal MFIs; An effective People’s Committee system for problem debt resolution and potential base for information exchange at commune level
See Annex 6 on Gender and Social issues Student loans are particularly risky to be borne by a credit institution: clients are the least qualified (from a purely credit-decision vantage) since they have no capacity to pay, highly mobile, loans are medium to long term, and collection difficult. Also, the demand for the loan will be ever-increasing (about 50% of the increase in VBSP lending in 2006-2009 was on student loans).
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• •
Effective mass-organizations for social mobilization and grassroots advocacy, that can facilitate the transformation of weak semi-formal MFIs and CSGs, into formal credit institutions47 Presence of several MFI capacity-building providers, notably the Banking Academy and Banking University regulated by SBV. b) Weaknesses
• • •
• • •
Government’s aggressive “social policy lending” through VBSP’s a disincentive to other players, reducing competition and choices; and increasingly a heavy fiscal burden with marginal financial benefits to the target HHs; VBSP’s disproportionate focus on credit deprive its large client base from needed savings and other banking services, while limiting VBSP’s to mobilize resources from its market, perpetuating its dependence on Government; CCF dependence on Government funding and support, with the concomitant political influence, undermines CCF-PCFs symbiotic relationship vital to their strengthening; very small regular membership base of PCFs resulting in limited capital and prospects for expansion; Current roles of People’s Committee and mass organizations in the credit process of VBSP (e.g., selection of clients) may politicize micro-credit delivery and pose “moral hazards” over the long term; SBV lacks the capacity and capability to supervise and provide oversight to a potentially large number of MF players dispersed up to the commune level. Lack of financial infrastructure, e.g., credit information exchange; capacity-building service providers for IT enhancement and adoption of proven MF good practices. c) Opportunities
• •
• •
• •
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The rural poor and low-income households, have long been proven to be a viable market with the adoption of microfinance good practices and methodology; The development of appropriate information and communications technology (ICT) opens up new areas for expanded and viable banking services in erstwhile unbanked mass-market areas (e.g., mobile phone and electronic banking for payment and remittances through mobile phones, electronic banking) The poor has been consistently shown to have high propensity to save and needs such services; allowing in turn microfinance-focused institutions to have access to the cheapest and most stable fund source (rather than Government support) Advances in IT and information technology can improve efficiency and cost effectiveness that are still major challenges in microfinance because of volume, frequent small transactions and remoteness. ICT-enhanced operations is the inevitable future of microfinance providers’ expansion and efficiency; The new Credit Institutions Law has set the enabling environment for institutional microfinance, integrating including the setting up of MFIs and cooperative banks The formulation of a microfinance strategy focused at the development of a robust, sustainable and responsive microfinance sector.
With the right information, education and communication (IEC) program, the MOs can be harnessed for a massive advocacy for consolidating credit-led CSGs into viable and self-sustaining PCFs or financial cooperatives.
35
d) Risks/threats • • • •
Lack of political will to institute reforms, especially on “social policy lenging” due to socio-political concerns Volatility of economic recovery and concomitant adverse impact to the most vulnerable sectors – the poor and rural households systemic risks due to inadequate regulation/supervisory capability over large number of potential players While Government exit strategy from VBSP, CCF is consistent with Government commitment to equitize banks; the equitization process in general is on hold because of the recent global financial crisis.
II. SECTOR STRATEGY STATUS A. Government Sector Strategy and Plans 66. Several strategic plans for 2010-2020 relevant to the microfinance sector, including implementing decrees, have been drafted with others already circulated for continuing inter-ministerial discussions. These include: (i) the draft Decree to amend Decree 78 (2002) and the 2010-2020 Strategy for VBSP; (ii) the draft CCF strategy including its conversion to a cooperative bank; (iii) the draft strategy for VAPCF and its expanded role for the PCFs. Part of the delay in finalizing all the draft strategies and accompanying decrees was that the passage of the then proposed Credit Institutions Law was still pending. With the passage of the new CIL, discussions and final approval of the abovementioned strategies, accompanying decrees and implementing guidelines are likely to be accelerated, especially with the passage of the Government’s overall 10-year Development Plan for 2011-2020. 67. Meantime, the all-encompassing National Microfinance Sector Strategy is still a “workin-process” of the SBV Microfinance Strategy Working Group (MSWG) and has yet to be submitted to the National Microfinance Steering Committee for discussion prior to submission to Government for approval. It is still unavailable for circulation. Among the agreements between SBV and the ADB Inception Mission (April 2010) for ADB TA 7499, is for the TA consultants to come up with the Microfinance Sector Assessment and the “Key Elements of the Microfinance Strategy” as inputs to MSWG in the drafting of the MF Sector Strategy. The TA findings will be discussed in a workshop and will be refined to be used for the finalization of the Microfinance Sector Strategy and the Microfinance Sector Roadmap by Q4 2010. B. Recent ADB Support and Experience48 68. In 2000, ADB provided a loan to Vietnam for a line of credit to VBARD in support of micro and small rural enterprises.49 ADB’s broader involvement in the sector started in 2001 with a technical assistance (TA) grant for preparing a microfinance legal framework50 which resulted in the passage of Decree 28/2005/ND-CP (Decree 28) in 2005 on the Organization and Operations of MFIs in Vietnam. In 2005, a second TA was provided initially to support the implementation of Decree 28, but eventually helped transform the 48 49 50
ADB 2010. Project Preparatory TA Concept Paper: Preparing Microfinance Development Program for Vietnam ADB 2000. Rural Enterprise Project (Loan with TA) ADB 2001. TA 3741-VIE Technical Assistance for Preparing the Framework for Microfinance Development
36
decree because it was too restrictive.51 Thus in November 2007, Decree No 165/2007/NDCP (Decree 165) was issued to supplement Decree 28. This was followed in 2009 by the approval of a JFPR grant to support the implementation of Decrees 28 and 165 by providing TA and supplementary matching funds to help the transformation of selected semi-formal MFIs into regulated MFIs.52 69. ADB’s Country Strategy and Program (CSP) 2007-2010 and Country Business Plan (COBP) 2009-2011 for Vietnam support Government’s poverty reduction goal, including the development of a robust microfinance sector.53 Consistent with its Microfinance Strategy, ADB’s assistance to the sector focuses on: (i) creating a policy environment conducive to microfinance development and growth; (ii) developing microfinance infrastructure; (iii) building viable institutions; and (iv) supporting pro-poor innovations. Thus, the key thrust of the assistance is to support the development of a market-oriented microfinance sector consisting of diversified financial institutions including commercial banks, financial cooperatives and MFIs that can provide a broad range of safe, affordable, sustainable and responsive financial services to poor and low-income households and their microenterprises. 70. During the ADB Country Programming Mission May 2008, the Government of Vietnam requested for a loan of USD 40 million to support the microfinance sector, which was included in ADB’s COBP 2009-2011 for Vietnam on a 2010 standby but 2011 firm basis. The same COBP also included a Project Preparatory TA (PPTA) with a budget for USD500,000. This was approved as ADB TA 7499-VIE: Preparing Microfinance Development for Vietnam which is presently being implemented in 3 steps (thus this assessment): Step 1 - conduct an overall assessment of the microfinance sector and identifying the “key elements for a microfinance development strategy; Step 2 - using putputs of Phase 1, assist SBV and the Government in developing the Microfinance Strategy and Roadmap; and, Step 3 - Designing a Program Loan to support the first steps in implementing the MF Strategy and Roadmap. C. Other Development Partners and Stakeholders Support 71. Donor support to Vietnam’s Microfinance Sector54 comes in varied forms and covers the full range of activities and institutional arrangements: from direct involvement of international NGOs/donors or in partnership with MOs in performing microfinance actitvities, technical and financial assistance to key microfinance players, to assistance in policy and sector reforms covering the broader financial sector and its microfinance subset. 72. The DFC Report for the World Bank (2007),55 aptly described the extent of donor assistant and coordination for the microfinance sector of Vietnam, below: “Despite the formal coordination channels, the level of actual coordination, co-operation and coherence in approaches among financial sector donor agencies is relatively low. There seems to be little attention to lessons learned and generally accepted ‘good practices’ for financial sector development in the international aid community, and the 51
ADB 2005. TA 4638-VIE TA for Implementing the Regulatory and Supervisory Framework for Microfinance ADB 2009. JFPR 9140-VIE Formalizing MFIs (financed by the Japanese Fund for Poverty Reduction) 53 ADB 2006. Country Strategy and Program, Vietnam 2007-2010 54 Annex 7 - Matrix of donor supported projects for microfinance in the recent years 55 DFC Report for the World Bank (2007) “Developing a Comprehensive Strategy to Expand Access [for the Poor] to Microfinance Services: Promoting Outreach, Efficiency and Sustainability”. 52
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task of coordination placed on the shoulders of the over-stretched government seems larger than necessary. For example, at the policy level some 10 donors are supporting SBV in a less than well-coordinated fashion, and the processing of a multitude of wellmeant inputs on legislation, regulations and procedures is tasking for the underresourced government agency. Likewise, 4-5 donor agencies are supporting the main players in BOP [bottom of poor] finance, i.e. VBARD and CFF, on different terms and conditions and with different requirements.56 Even within the ‘Five Bank Group’ i.e. WB, ADB, KfW, JBIC and AFD that provide the majority of credit to Vietnam, the purposes, terms, and impact of the support could be better coordinated…. “ 73. The main factor for lack of donor coordination was clearly the dual approach of Government in developing market-based microfinance, while aggressively pursuing a highly distorting “social policy lending”. The latter is perceived as serious a barrier to entry by the very stakeholders it is encouraging to participate in order to achieve its microfinance sector objectives. It was also due to the fragmentation of the legal basis and lack of national strategy for microfinance. The adoption of a cohesive microfinance strategy and roadmap, should pave the way for better donor coordination in supporting the sector.
III. CONCLUSION AND RECOMMENDATIONS A. Creating the enabling Policy and Regulatory Environment for Microfinance 74. In developing market-oriented microfinance, the ideal role of Government is that of an enabler: to set up the appropriate policy and regulatory environment that is conducive to the proper functioning of the key players so that these could provide sustainable, responsive, and quality financial services to the poor and low-income households. The continuing efforts of Government and SBV, resulting with the passage of the new CIL and the ongoing design of the Microfinance Strategy and Roadmap are steps towards the proper direction. However, Government has to ensure that the pursuit of its other social objectives will not undermine its objectives for the Microfinance Sector. The major risk is that Government - in its concern to ensure the inclusion of its “social policy lending” target groups - could cause the exclusion of the vast majority of the less poor and low-income households from quality financial services. Government must also review its direct support and allocation of scarce resources to players in the sector especially when these have the potentials to be self-sustaining, thus: 1. There is need to revisit the “social policy lending” target groups of Government to determine which particular groups really need continuing Government subsidies and support. Social policy lending (e.g., student loans) cannot be viably performed by any credit institution and maybe “channeled” through several financial institutions at no risk to them, with Government bearing the ultimate risk as this can be viewed as the State’s investment for the public good. However, other “social policy lending” target groups may best be served through market-based financial intermediation by self-sustaining, viable and properly supervised credit institutions that can mobilize funds from the very market they serve as well as other commercial sources, with no need for Government
56
For example: several donors provided loans to CCF for on-lending to its own clients that are non PCF/CCF members (e.g., SOEs, SMEs, other individuals) with unclear rationale on the comparative advantage of CCF over other SOCBs or financial institutions for such operations. More importantly, it is neither supportive of the self-help mutual assistance tenet of cooperatives nor reinforcing the symbiotic relationship between CCF and the PCFs.
38
subsidies. Lastly, the marginal benefit of subsidized lending to poor HH may not warrant the huge costs to Government. 2. Options must be explored for: (i) a doable and politically acceptable government’s medium to long-term exit of its dominance in ownership, management and control of the operations of VBSP; (ii) creating a more responsive and sustainable microfinance system by the transforming the existing VBSP-CSGs to formal credit institutions under the new CIL - such as their consolidation and conversion into PCFs owned and managed by its members; or as MFIs – providing self-sustaining microfinance services to the same community; and (iii) utilizing current institutional arrangements (with MOs and people’s Committees), adjusted to a different paradigm. 3. There will be need to review Government’s role in CCF. Government’s exit from CCF (especially as it converts into a cooperative bank) will mean the gradual turn over of its ownership to the PCFs network where it rightly belongs, consistent with widelyaccepted principles that are also enshrined in the Cooperative Law. This will also ease the fiscal burden of Government, while making the network and the apex institution autonomous, self-sustaining and independent. 4. Rather than subsidies or direct support, Government should resort to “smart subsidies” and other measures, such as: (i) incentives to credit institutions providing microfinance services to remote areas and ethnic minorities where poverty incidence is highest, such as tax breaks and easing up on requirements for opening up branches; (ii) supporting capacity-building of cooperative banks, PCFs and MFIs in training, ICT enhancements on cost-sharing schemes; (iii) divesting its ownership and receivables from VBSP and the CCF to low-income and rural households – through their PCFs - at reasonable discount or easy amortization payment plans (as part of its exit strategy from these institutions); and (iv) support for an advocacy and information dissemination program at all levels of Government and mass organizations to level expectations and understanding of microfinance; B. Ensuring Effective Supervision 75. Effective supervision will only be possible if credit institutions have the same understanding of the performance and risk framework as that of the regulators/supervisors: 1. Ministries tasked with planning and monitoring VBSP’s operations (MOF, MPI, and MOLISA) must have to the capability to properly “supervise” and monitor VBSP using widely-accepted microfinance performance standards and not just on the basis of Government targets normally related only to outreach and disbursements; 2. There will be need for SBV to set up performance standards unique to PCFs based on universally accepted norms for financial cooperatives, as well as widely accepted performance standards for MFIs; 3. The internal controls, audit standards, and reporting norms of the “MFIs in transition” must already follow those prescribed by SBV for formal credit institutions, and universally-accepted performance standards for MFIs; 4. Consolidation of PCFs and MFIs must be pursued to create fewer, but larger and stronger institutions. This will lessen the burden to SBV from supervising many but weak and problematic credit institutions; 39
5. A more cost-effective option is to accredit auditing firms and outsource audit of the PCFs and the MFIs by batches (of 10-15 PCFs; and a few MFIs) to reduce the audit costs for individual PCFs and transformed MFIs; 6. Strengthening SBV’s supervision through: a) Training SBV staff on widely accepted good practices on PCFs and MFIs; and b) Out-sourcing some of the supervisory activities (on-site/off-site) to accredited audit or accounting firms based on resources of MFI/PCF C. Improving Institutional Capacities and Capabilities of Key Players 76. Institutional strengthening of key players must aim for their being self-sustaining and autonomous, to be able to survive and be viable in a competitive market-based environment: 1.
VBSP
1. Government needs to have a gradual “exit strategy” from VBSP. Under new CIL, VBSP and its CSGs maybe transformed into viable, effective, and autonomous microfinance providers without the need for massive Government support while still remaining true to the Government’s social objectives, as follows: a) CSGs can be transformed to create district-wide financial cooperatives; b) VBSP can be human resource pool to manage the emerging financial cooperatives c) VBSP to be “relieved” of social policy lending functions and converted as cooperative bank to act as hub for the converted CSGs; d) Government ownership and resources in VBSP to be divested (equitized) to the converted CSGs, and their members (and staff) over the medium to long-term. 2. CCF, PCF and VAPFC 1. There will be need to review Government’s role in CCF’s transformation. Government’s exit from CCF (especially when it transforms into a cooperative bank) must consider gradually turning over its ownership and control to the PCFs network where it rightly belongs, following basic cooperative principles and good practice. This will also ease the fiscal burden of Government and make the network autonomous and independent. 2. Under the new CIL, the PCFs may mobilize and lend to the public, subject to the stipulations of the SBV. SBV should carefully review the impact of giving such powers to the PCFs as it raises an issue on the unique feature of financial cooperatives: that member-owners are also the clients and users of the PCF’s services. 3. With the current state of many PCFs, capacity-building will be much needed especially in their consolidation and up-sizing. Institutional strengthening will also be needed to have the PCF network (and the CCF as a hub) as a platform for ICTenhanced inter-PCF financial services that will allow the PCFs to collectively provide a range of quality services with a competitive edge because of the commune-level outreach of the network. Government “smart subsidies” maybe needed to support such strengthening;
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4. There will be need to revisit and rationalize the various plans for the PCFs, the CCF and VAPFC in order to determine the optimal roles each will have to play to achieve synergy and cost effectiveness. 3. Transforming the semi-formal MFIs 1. Semi-formal MFIs allowed to continue to operate under the new CIL without a credit institution (MFI) license, should be given reasonable period for their eventual transformation or have to cease operations as prescribed by Government. This will avoid a two-tiered system of regulated and unregulated MFIs/credit institutions that could challenge the intent of the CIL in integrating microfinance into the financial sector. 2. There will be need to consolidate the small “MFIs” or merged these with the top performers, especially if they belong to the same mass organization. Government should provide incentives or measures to encourage the consolidation and merger of the many small and weak “MFIs”, to help ensure their viability and effectiveness and justify their transformation. Having a few but well trained, well-resourced and focused MFIs is a much better option than having many weak ones with little prospects to be sustainable. 4. VBARD VBARD is well positioned to deepen its services in the rural areas and amongst poorer households. It only needs to be more aggressive in developing pro-poor, mass-market oriented services, such as ICT enhanced remittance and payment systems, “mobile phone banking” and microinsurance in order to make such service accessible and affordable to the rural poor and low-income households D. Setting up Supportive Financial Infrastructure 77. Financial infrastructure support must consider cost effectiveness and the level of development of the key players in microfinance, thus the following are proposed: 1. A more doable and cost-effective option to ensure quality and sustainable capacitybuilding services is to make the Banking Academy as the training and institutional strengthening hub for the key players in the microfinance industry. It will need to tieup with other existing and specialized capacity-building providers, in order to develop demand-driven and fee-based services to key players in microfinance based on their general needs as credit institutions under the new CIL and their unique requirements given their varied business models (i.e., as MFIs, PCFs, VBSP, other banks) 2. Setting up a simplified commune or district level credit information exchange for key players in microfinance should be explored. The database on HHs or individual clients maybe be linked using the “family record book” and/or the National ID System. A simple information exchange system may be designed using batched processed, standardized electronic files of clients of participating entities. The scheme maybe upgraded once the core banking system of participating credit institutions are IT enhanced.
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ANNEX 1 Excerpts from Formalizing Microfinance Institutions An Institutional Review Project Number: TA No. 9140 May 2, 2010 (Financed by the Japan Fund for Poverty Reduction)
Taken from the report prepared by The ADB (JFPR): TA No. 9140 Consulting Team: Dr. Jaime Aristotle B. Alip, MFI Development Specialist/ Team Leader Ms. Dinh Thi Minh Thai, National Microfinance Specialist Ms. Evelyn Leviste, International Microfinance Training Coordinator Ms. Ngo Thi Thanh Van, National Training Specialist
ANNEX 1 MF Sector Assessment
I. CURRENT STATUS OF MICROFINANCE IN VIETNAM A. M ICROFINANCE INITIATIVES BY LOCAL NGO S AND M ASS B ASED O RGANIZATIONS 1. There were several microfinance initiatives by mass-based organizations and NGOs operating in Vietnam. The Microfinance Working Group (MFWG) of Vietnam listed around 41 organizations and accordingly, there are still several other institutions that are also active in microfinance beyond their listing. 2. The ADB Project Mission was able to visit and/or interview 28 organizations, and received responses from 8 MFIs on the survey conducted, comprising the 36 organizations presented in this review, which are mostly on the list of the MFWG. The data of the 28 organizations visited were also updated as of December 2009. A total of 26 organizations, submitted their response to the survey questionnaire sent by the PMU/ADB Project Mission Team on February 2010. These organizations are either transforming into a regulated MFI or have began the process of completing the requirements of SBV for MFI licensing. 1.
General Characteristics
3. The following are the key general characteristics of the MFIs in transformation: a
Age of MFIs
4. It was noted that most organizations started operations since early 2000. Some started in early 90’s like the Capital Aid Fund for the Employment of the Poor (CEP), Mutual Affection Fund (Tau Yeu Mei) known as TYM, and M7/M41. Dariu Foundation, GIFP, Dong Thap WU Fund, EDM, and Ninh Binh are among the latest established MFI in the year 2007. 5. It can be further deduced that those MFIs established in the 90s could be considered as the biggest in terms of outreach and loans outstanding. 6. Figure 1 shows the age bracket of the MFIs visited and/or interviewed. It can be observed that most of the interviewed MFIs (43%) were established between 2000-2005. Very few (13%) were established between 1990-1994.
1
It has to be noted that from the M7 group, only 4 have partnered together to be registered as an MFI while the three others accordingly decided to transform and register individually under the Decrees 28 and 165.
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ANNEX 1 MF Sector Assessment
Figure 1: Age bracket of MFIs visited and/or interviewed
b
Legal Structure
7. The interviewed organizations were classified/registered either by Decree 148, 81, or as Credit and Savings Program, International NGO, PPC or Cooperative. Figure 2 shows the types of legal structure of the visited and interviewed MFIs. Most were registered under Decree 148. Very few, each with one MFI, were established under the Massorganization structure, INGO, PPC and as a cooperative. However, there were also some MFIs which did not provide their data. Figure 2: Types of legal registration of MFIs visited and/or interviewed
43
ANNEX 1 MF Sector Assessment
c
Governance and Management
8. The Governance and Management was assessed in terms of the establishment of its Board and the presence of full-time versus part-time staff. Nineteen (19) organizations have their established management board while the rest did not provide data. The number of management board composition is between1-9. In terms of the BOD, 21 responded with their number ranging from 1-7. One organization, Dong Thap Vietnam Women’s Union Fund had 4 part-time members of BOD, and 2 part-time members of the controlling board. Twenty (20) have established controlling board composed of 1-3 members. 9. While most of the organizations have both full-time and part-time staff and loan officers, part-time staff and loan officers still predominates. 10. Most of the MFIs interviewed had concerns on the establishment of their different boards as one of the requirements of the Decrees 28 and 165. Further to that, while some already have their established boards, the capacities could also be a concern since there are some members of the boards who do not have background in management/accounting, and banking experiences. This is the same case for the staffing, of which, some MFIs have officers who do not have background in management/accounting, and banking experiences which are important in the business. d
Human Resource Development
11. Most MFIs cited the need for financial accounting and management training. Also, on the initial Training Needs Analysis (TNA) conducted by the ADB Project Mission Team, most of the training requested was for the middle and senior management of the MFIs. These requested training shall compensate for the non-degree holder hiring that most MFIs resorted to since most MFIs hire college undergraduates with no management and/or financial accounting background. 12. Nonetheless, some MFIs have their own capacity building arms. Specifically, the TYM and CEP have their own internal training programs. The Community Finance Resource Center catered majority of the training needs of the M7 group, while at the same time, open to catering to other institutions. The Save the Children supports the capacity building agenda of the Thanh Hoa WU Fund while the Binh Minh Consultancy Group supports Binh Minh/SEDA. The Norwegian Mission Alliance (NMA) supports the Tien Giang WU Fund specifically on its transformation to formal MFI. 13. The rest of the MFIs get their support from the VWUs and other local and international training providers. e
MIS/IT
14. Based on the interview, it was found out that the bigger MFIs like CEP and TYM, have their professional MIS. The VBCP also had their separate MIS unit with its own system, which is somehow shared with the other organizations under the VWU since its reports are also being circulated. The rest of the MFIs have started their MIS either manually or by using Excel spreadsheet. The Mission notes that MIS is one of the biggest challenges of the MFIs.
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ANNEX 1 MF Sector Assessment
f
Internal and External Controls Systems
15. In the same manner, the big MFIs interviewed like CEP,and TYM, already have in place internal and external control systems. Binh Minh also has its internal control system, and like the CEP and TYM, it was also rated by external auditors in the past. Other MFIs like Binh Minh, Thanh Hoa, TYM, and CEP have already been rated by rating agencies like Planet Rating and/or MCRIL. g
MFIs In Transformation
16. CEP, TYM, and M7/M4 have completed their documentary requirements and submitted their application to the SBV for MFI licensing under Decrees 28 and 165, and Circular 02. Tien Giang WU Fund has also submitted its requirements to SBV during the first quarter of this year and is currently being evaluated. 17. Two other MFIs: Binh Minh/SEDA, and Thanh Hoa Fund for Poor Women (FPW) are now finalizing the documentary requirements and applications for MFI licensing to SBV and hopefully will submit its application by June 2010. Like the other organizations mentioned above, Binh Minh/SEDA, and FPW have also mobilized their own capital, fulltime staff, and have set up their own organizational structure and microfinance operations. The other organizations are either consolidating their microfinance programs, strengthening their system, finalizing their legal status, and also professionalizing their microfinance operations, like Ha Tinh Women’s Union Fund, NAPA/Quang Binh WU Fund, and Income For the Poor Fund (GIFP), among others. Nevertheless, all the organizations, except the Microfinance and Development Center (M&D) and Center for Social Organization and Community Development (CSOD), have sufficient capital requirement for transforming into a regulated MFI. Appendix 1 presents the key profile of the MFIs visited by the ADB Project Mission. 2.
Productivity and Efficiency of MFIs
18. The key performance indicators on productivity of the MFIs visited as shown in Appendix 2 are as follows: a
Outreach
19. CEP has the highest number of outreach with 146,279 followed by the HCMC Cooperative Fund (CCM) with 44,300 and TYM with 40,433. Graphically, Figure 3 below shows the number of active clients of the MFIs visited and interviewed. It can be clearly observed that CEP is the most outstanding in terms of outreach.
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ANNEX 1 MF Sector Assessment
Figure 3: Number of active clients of MFIs visited and/or interviewed
b
Caseload of Loan Officer
20. The average clients per loan officer ranges from 10 to 2,606. CCM has the highest number of clients per loan officer. These figures are quite high as compared to international standards. Based on the 2007 Trend of the Asia Benchmark2, the caseload per Loan Officer is 206. 21. Figure 4 shows the standing of the clients caseload of the MFIs visited and/or interviewed.
2
Asia Microfinance Analysis and Benchmarking Report 2008. A report of the Microfinance Information Exchange, Inc. and Intellecap, March 2009.
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ANNEX 1 MF Sector Assessment
Figure 4: Caseload of the MFIs visited and/or interviewed
c
Loan Outstanding
22. The CEP has the highest amount at 522 B VND. Relatively, the average loan size of these MFIs is up to 7 M VND. It has to be noted that the international standard in Asia in terms of average loan outstanding is around US$100 – 150 (1.8 M to 2.7 M VND). This may indicate that most MFIs in Vietnam are working in the urban and sub-urban areas and may not be focusing in the countryside where there are a lot of poor people. The ADB Project Mission noted also from field interviews that even though VBSP and VBARD dominates the market, there still remains a lot of poor people needing microfinance loan that needs to be served. Figure 5: Loans outstanding of the MFIs visited and/or interviewed
47
ANNEX 1 MF Sector Assessment
d
Portfolio-at-Risk (PAR)
23. The ADB Project Mission noted that the reported portfolio-at-risk (PAR) of the MFIs remains one of the lowest in Asia. This is a good indication of credit discipline among clients and staff. The reported PAR ranges from 0.0% to 5.00%. The 2007 Trend of the Asia Benchmark3 estimated the median value of PAR >30 days to be at 1.8%. Figure 6 presents the PAR of the MFIs visited and/or interviewed which is grouped as shown on the chart legend. Figure 6: PAR of the MFIs visited and/or interviewed
3.
Financial Performance
24. The financial performance of each of the MFIs surveyed is shown in Appendix 3. a
Equity
25. CEP has the highest equity with 190B VND followed by TYM with 83B VND. With the exception of the M&D, GIFF, CSOD, M7 Dien Bien Phu, M7 Dien Bien, Ky Anh, Soc Trang WU Fund, Ben Tre WU Fund, Lac Son WU Fund, Phu Yen WU Fund, Ninh Binh WU Fund, EDM, and Hai Phong WU Fund, whose capital ranges from 312M VND to 3.3B VND, the others have more than 3.5 B VND capitalization and are able to comply with the requirements of the SBV under Decrees 28 and 165.
3
Asia Microfinance Analysis and Benchmarking Report 2008. A report of the Microfinance Information Exchange, Inc. and Intellecap, March 2009
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ANNEX 1 MF Sector Assessment
Figure 7: Total Equity of the MFIs visited and/or interviewed
b
OSS/FSS
26. Likewise, the highest operational self-sufficiency (OSS) was posted by CCM with 230% while other institutions like TYM, CEP, M7/M4, M7 Dien Bien Phu, M7 Dien Bien, Dariu Foundation, Than Hoa WU Fund, NAPA/Quang Binh WU Fund, Ha Tinh WU Fund, Tien Giang WU Fund, BM/SEDA, and HCMC WU Fund have more than 100% OSS. Other organizations interviewed have no available data yet on OSS while the financial selfsufficiency (FSS) computation of the MFIs needs to be further validated. 4.
Credit and Savings Methodology
27. As shown in Appendix 4, the MFIs visited and/or interviewed by the ADB Project Mission have one or two loan products: Regular Loan and Emergency Loan. Nonetheless, other products like housing and water and sanitation (WATSAN), among others, are being offered mostly by big MFIs such as CEP and TYM. a
Loan Products
28. Most MFIs have only two loan products – the regular loan and emergency loan. The loan maturity ranges from three (3) months to 24 months with either weekly or monthly loan amortizations during regular center/group meetings. The loan ranges from 500,000 VND to 30 M VND. However, on the average, the loan size is around 3 M VND. The interest rate ranges from 1% to 1.5% (flat) monthly. 29. CEP also offers the housing improvement loan with 0.6% interest rate per month and the housing acquisition loan with 0.5% interest rate per month. Other MFIs like HCMC Women’s Union also have WATSAN loans. Other organizations like HCMC Cooperative Fund provide institutional loans with up to 2 B VND loanable amount.
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ANNEX 1 MF Sector Assessment
b
Savings Products
b.1. Compulsory Savings 30. The compulsory savings range from 5,000 to 10,000 VND either weekly or monthly. This carries an interest rate from 0.25% to 0.6% per month. Some MFIs deduct 5% of loan as fixed savings. Clients cannot withdraw their savings unless they resign from the MFI or they have completely paid their loan. This is probably the reason why there is a high dropout rate in some MFIs since members want to withdraw their savings. b.2. Voluntary Savings 31. Some MFIs promote voluntary savings, however, most of them limit their voluntary savings since they have to pay the same rate as with the banks at an average of 0.6% per month. The ADB Project Mission notes that it is really important for MFIs to promote flexible savings. This is now an existing international practice of MFIs which motivates clients in savings mobilization. c Other products and Services 32. Aside from Credit and Savings products, most MFIs provide livelihood training, training on health care and family care to their clients. 33. Specifically, TYM, M7 and NAPA Quang Binh WU have also started to offer microinsurance products to their microfinance clients. Further, the M7 group also promotes non-microfinance services through its financial education training. 34. Appendix 5 is a brief description of the organizations visited by the ADB Project Mission based on the team’s field notes. B. E MERGING M ICROFINANCE N ETWORKS AND P ROVIDERS 35. Over the years, the microfinance sector in Vietnam has been evolving although a bit slow compared to its neighboring countries. Noteworthy to look into is the emergence of the Vietnam Microfinance Working Group and other local providers of capacity building training. The Vietnam Microfinance Working Group 36. The MFWG is composed of organizations represented by about 60-70 people actively serving in the working group. It serves as platform for advocacy efforts for policies and awareness in microfinance in Vietnam, sharing of best practices, and maintaining database of microfinance programs among its member-organizations. The MFWG regularly meets for experience sharing on microfinance. Moreover, it sponsors and initiates training programs and seminars about microfinance best practices. As per meeting with the MFWG with the Team, MFWG is willing to co-host/sponsor the training programs with ADB. In fact, this is good since MFWG can act as the secretariat of the training.
50
ANNEX 1 MF Sector Assessment
The Microfinance and Community Development Institute 37. The Microfinance and Community Development Institute (MACDI) is a non-government financial-social scientific organization based in Vietnam. It was established in 2007 by a group of national and international microfinance and banking experts, who cooperated to provide high quality services in finance and development especially to the poor in Vietnam. It provides training on capacity building for Microfinance institutions and enterprises to achieve their mission and business objectives, and other community development activities. Up to now, based on interviews, it provided capacity building training to more than 10 MFIs and trained 150 participants. World Bank’s Vietnam Development Information Center 38. The Vietnam Development Information Center (VDIC) is a partnership initiative of the World Bank and other official development assistance agencies active in Vietnam which aims to promote the use of and access to knowledge in order to improve the effectiveness of development programs in Vietnam. It offers a unique range of facilities and services that stimulates development thinking, provides access to the latest knowledge and information available worldwide, and delivers targeted training courses. The center is open to the general public, students, researchers and policy makers for their adequate source of development information. State Bank of Vietnam’s Banking Academy 39. The Bank Academy was founded in 1969 as a government institution. It is focused on banking and finance, business administration, accounting, auditing, information system, and project management analysis, among others. Its major clients are VBARD, VBSP, PPC, and some private entities. Based on the interview made, there are 650 local trainers pool. As of date, there were about 505 bank staff trained by the Bank Academy. Bank Training And Consultancy 40. The Bank Training and Consultancy (BTC) was founded by 10 leading joint stock commercial banks in Vietnam with the support of the International Finance Corporation (IFC). Its mission is to support and promote new generation of bankers whose capacity, ethics and strategic vision are up to international standards. It also aims at strengthening the competitiveness of Vietnamese banks by providing training services of an international quality standard to the Vietnamese bankers. 41. From the available data, they have already trained approximately 1,000 Vietnamese bankers for 38 banks in Vietnam through more than 450 workshops in core banking products, bank management, soft skills, and training of trainers. Community Finance Resource Center 42. The Community Finance Resource Center (CFRC) is an NGO under the Vietnam Association for Promoting and Supporting Educational Development, established by Decision No.178 in April 2007. CFRC was established by a group of national and international well-known scientists, researchers, banking experts, and microfinance practitioners who cooperated to provide high quality services in finance and development especially to poor in the far and remote areas of Vietnam. 43. The Center offers courses on microfinance, community development, introduction of new technologies, and education-communication. They operate by cooperation,
51
ANNEX 1 MF Sector Assessment
partnership, networking, and supporting across international and national organizations and individuals sharing the same vision and mission in order to create and build up strengths, efficiency, and sustainability. 44. The above institutions can be tapped later by the ADB project for provision of microfinance training to MFIs, SBV, and other key stakeholders. These organizations are some of the very few providers of technical and training support. If the microfinance industry will be developed, it is expected that the industry will need more capacities including MF practitioners in order to deliver the microfinance services. While there are very few providers of these training, the MFIs and donors are encouraged to tap the above listed providers for their respective capacity building offerings. At present, most MFIs are conducting their own training which seemed to be inefficient and quality is not assured. C. LICENSING OF MFIS 45. It has to be noted that not all MFIs will be of equal standing at the onset of the licensing process specifically due to their compliance to the requirements. The ADB Project Mission Team provides the three (3) cases for each level of MFIs: Case 1: Documents valid and complete 46. If the documents are valid and complete, the application for license is endorsed to the Banking and Supervisory Agencies for further processing. The task is then delegated to the Investigating Division (Department 6). The latter conducts the field investigations to validate the information and documents submitted by the applicant. Department 6 submits a field report to the Banking and Supervisory Agencies. If there are no issues, the Banking and Supervisory Agencies recommends to the Governor the granting of license. Within 60 days since the date of receipt of all valid documents, SBV considers and decides to grant or refuse to grant license to the applicant. After the granting of the license, the applicant MFI must register its business according to the current legislation on business registration. It will have its legal status as an MFI on the date the business registration certificate is obtained. Case 2: Documents need to be supplemented 47. If there are issues on the documents or satisfaction of any of the requirements for licensing, the same process is followed (the whole cycle) until the required documents are completed or all requirements are satisfied. The process will take longer as the application may be referred to other departments of SBV or outside of SBV, depending on the nature of the issues identified. The more issues there are and the more complex the nature of the issues are, the longer it takes for the application to be processed and the license to be granted to the applicant. Case 3: Documents cannot satisfy the requirements 48. In case of refusal, the Governor of SBV notifies the applicant and specifies in writing the reasons for refusal.
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ANNEX 1 MF Sector Assessment
II. STRENGTHS AND WEAKNESSES OF THE MFIS VISITED AND/OR INTERVIEWED Table 1: Summary of the strengths and weaknesses of the MFIs visited and/or interviewed Strengths Weaknesses •
The PAR remains very low compared to other countries – on the average below 2%.
•
Some MFIs still have many part- time staff and are slow in professionalizing its operations.
•
The caseload of staff remains high from the international standard at more than 350 clients/ loan officers.
•
Most MFIs have very weak MIS and internal controls
•
•
Professionalizing of the MFI program
•
Basic record keeping/accounting system is present
Governance for mass based organizations remains to be a challenge for the MFIs especially those who want to spin off from their massbased organizations
•
Well-defined and working credit methodology
•
•
Loan duration is flexible from 3-24 months.
•
Repayment is weekly, bi-weekly and monthly.
Apparent concentration of some MFIs in urban and sub-urban areas. Average loan size is quite high from $120 to $200 compared to other countries in Asia.
•
Very traditional savings and loan products especially on compulsory savings.
•
Weak in financial and liquidity management
•
Lack of capital funds for expansion
•
Interest cap post a big concern for their financial viability, although this is now being addressed through government’s new policy on negotiated interest rate.
•
•
Almost all MFIs are still promoting compulsory savings and are aggressive in promoting voluntary savings among members. Some have began promoting microinsurance
49. Based on Table 3 above, it can be concluded that despite the challenges of the Decrees 28/165 and Circular 02, the MFIs are still making their way into formalization. They have a clear objective of professionalizing their microfinance programs. These MFIs have defined their working and credit methodology (e.g. loan duration of 3-24 months; repayment schedule of weekly, bi-weekly, and monthly; interest rates; savings) which is very necessary in their formalization. Their efficiency and productivity (i.e., PAR and caseload) remains to be at par with international standards. 50. As of date, from the 36 profiles received, 28 of which were actually visited and/or interviewed, 14 appear to qualify for the transformation requirements by the current
53
ANNEX 1 MF Sector Assessment
regulations. In addition, based on the Viet Nam Microfinance Working Group (MFWG), 2 other MFIs (Tuyen Quang WU Fund and Child Fund) have potential and need field validation. These MFIs already seemed to embody the basic requirements of the Decrees 28 and 165 for transformation such as: PAR 100%
n/d
Hai Phong/Dec.09
142.42% n/d
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ANNEX 1 MF Sector Assessment
Appendix 4 Key features of the loans and savings products of the MFIs visited and/or interviewed by the ADB Project Mission Name of MFI No. and Types
Min. Loan Size (VND) 1M
2-3
Loan Duration 3-15 months 5-10 years 10-100 weeks
LOAN PRODUCTS Max Loan Interest Size (VND) Rate 15M/30 M 1%/month 70M 25M 1%
weekly/monthly
Delivery Mechanism Individual loan
Weekly
Direct individual
1.05%
Weekly
4M
1.20%
Monthly
0.2.M
4M
1.5%
Monthly
Group lending; weekly meeting Group/Monthly meeting Group/Monthly
9-24 months
2M
10M
1.15%
Monthly
1
9-24 months
2M
30M
1.15%
Weekly
Monthly meeting weekly group
1
6-24months
1M
5M
1.15%
Monthly
monthly group
5 :Urgent Loan; 6month Loan; 12month Loan; 20month Loan; 24month Loan 5
3-24 months
0.48M
6M
1.05%
Monthly
monthly group
12-36 months
0.555M
14.44M
0.68%
Monthly
monthly group
1-6 months
0.8M
2M
1.5%
End of cycle
3,6,12,24,36
0.555M
8.779M
1.2%
Monthly
CEP/ Dec. 09 TYM/ Dec. 09 M7 Network • M7/M4/ Dec. 09
2-3
2
25-50 weeks
1M
30M
• M7 Dien Bien Phu/ Dec. 09 • M7 Dien Bien/ Dec. 09 • M7 Ninh Phuoc/ Dec. 09 Dariu/ Dec. 09 CSOD/ Dec. 09 Thanh Hoa WU Fund / Dec. 09
1
6-24 months
0.2M
1
6-24 months
1
NAPA Quang Binh Fund/ Dec. 09 Ha Tinh Provincial WU Fund • Ha Tinh WU 2
0.5M
Repayment Modality
monthly group
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ANNEX 1 MF Sector Assessment Name of MFI No. and Types Fund/ Dec. 09
• Thach Ha WU Fund/ Dec. 09 • Ky Anhn WU Fund/ Dec. 09 • Cam Xuyen/Nov. 09 GIFP Dec.09 Tien Giang MOM/ Dec. 09 BM/SEDA/ Dec. 09
2 1 1 2 1
Group lending
Loan Duration months Emergency
Min. Loan Size (VND)
Repayment Modality
Delivery Mechanism
0.5M
3M
0.65%
Monthly
monthly group
12,24,36 months 12,24 months
0.5M
3M
1.50%
Monthly
monthly group
0.5M
3M
1.20%
Monthly
monthly group
12,24,36 months 6-36months 18months
1M
3M
1.00%
Monthly
monthly group
0.5M 2M
5M 5M
Monthly Monthly
monthly group monthly meeting
0.348M
9.81M
1.0% 1.5% declining bal 1.22%
Weekly
weekly group
0.4M
3M
2.0%
Weekly
weekly group
8-18months 10,12,24 months 25-75 weeks
0.5M 0.5M
13M 5M
Monthly Monthly
0.5M
1.5M
1.15% flat 0.65%1.2% 1.5% flat
weekly/monthly
monthly group monthly meeting Group
6months3 years 12,18,24 months
1M; 5M; 5M 2M
5M; 50M; 15M 5M
weekly/monthly/monthly
Group meeting
Monthly
Group meeting
0.5M
1M
6 months
Group meeting
1M
20M for individual; 2B for institutional
Daily, weekly, monthly
Through representative
2.5months- 1 year
Emergency WV/Nov. 09 Dong Thap WU Fund/ Dec. 09 M&D/ Dec. 09 HCM WU Fund/ Dec. 09 VBCP/ Dec.09
CCM/ Dec.09
2 1 2 3 2
3: individual, group, institutional
LOAN PRODUCTS Max Loan Interest Size (VND) Rate
90-180days; 12-40weeks; 12-18 months
1%; 1%; 0.6% 1% declining balance 1% 0.87% flat
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ANNEX 1 MF Sector Assessment Name of MFI No. and Types
LOAN PRODUCTS Max Loan Interest Size (VND) Rate n/d n/d
Loan Duration n/d
Min. Loan Size (VND) n/d
2: group, individual
n/d
10M for group and individual
1.5%; 1.5%
monthly
1
n/d
1M for group; 3M for individual 2.4M
4.2M
10%/year
monthly
monthly meeting; directly to individual group meeting
Terre des Homes/Dec. 09
n/d
n/d
n/d
n/d
n/d
n/d
n/d
Netherlands Vietnam Medical Committee/Dec. 09
1
n/d
Not applicable
5M
0%-0.8%
n/d
n/d
Lac Son WU Fund/Dec. 09
1
n/d
1M
1.5M
n/d
monthly
monthly meeting
Phu Yen WU Fund/Dec. 09
1
n/d
0.5M
10M
1%/month
monthly
monthly meeting
Dinh Hoa WU Fund/Dec. 09
1
n/d
1M
5M
0.9%
monthly
monthly meeting
Ninh Binh WU Fund/Dec. 09
1
n/d
4M
4M
0.5%/month
Monthly
Group meeting
Thuan Chau WU Fund/Dec. 09
1
n/d
2M
5M
1.2%
Monthly
Group meeting
EDM/Dec. 09
1
n/d
0.6M
3.1M
1.5%
4 weeks
Group meeting
Plan International/ Dec.09 Soc Trang WU Fund/ Dec. 09
Ben Tre WU Fund/Dec. 09
n/d
Repayment Modality n/d
Delivery Mechanism n/d
70
ANNEX 1 MF Sector Assessment Name of MFI
No. and Types
Compulsory Savings Size (VND)
Frequency
Interest rate
Withdrawability
Voluntary Savings Size (VND)
Interest rate
Withdr awabil ity
CEP/Dec. 09 TYM/Dec. 09
n/d n/d
5,000/week 5,000/week
weekly weekly
0.25% 0.3%
No Yes if outstanding >=1.5M
No limit From 1,000
0.25% 0.3%
Yes Yes
M7 Network M7/M4/Dec. 09
n/d
10,000/month
monthly
0.5%
No
No limit
n/d
Yes
• M7 Dien Bien Phu/ Dec. 09 • M7 Dien Bien/ Dec. 09
n/d
10,000/month
monthly
0.40%
No
No limit
0.60%
Yes
n/d
5,00010,000/month
monthly
0.5%
No
Minimum 1,000 /month
0.50%
Yes
• M7 Ninh Phuoc/ Dec. 09 Dariu/Dec. 09 CSOD/Dec. 09
n/d
2,000/week
monthly
0.35%
No
No limit
0.75%
Yes
2 n/d
weekly monthly
0.20% 0.25%
After 3 years No
