Opportunities for a Big Leap for Financial Inclusion in Vietnam?
About ten years ago when I was posted in Laos, I had the opportunity to visit several key microfinance stakeholders in Vietnam’s microfinance industry. Last month I went back to accompany HRH Princess Máxima of the Netherlands, United Nations Secretary General’s Special Advocate for Inclusive Finance for Development, as a member of her reference group. Things have changed, and I was encouraged by the new emerging opportunities rising in Vietnam.
For the last fifteen years, microfinance experts have been watching Vietnam and identified it as a market that with the right policy opening has great potential. With a population of close to 90 million, a significant population density and a vibrant private sector, many believe that microfinance could take up very rapidly if the policy environment becomes more supportive.
In spite of rapid economic growth, financial inclusion in Vietnam has not taken off yet. There are several challenges in Vietnam that have prevented a faster expansion of financial inclusion. The dominant provider of financial services for poor people is a state-owned bank which focuses on the provision of subsidized credit. The Vietnam Bank for Social Policies (VBSP) has over 7 million outstanding borrowers, and interest rates vary from 0% to 10% depending on the target clients. With double digit inflation, VBSP makes considerable losses at the expense of the Vietnamese tax payers. While interest rate caps on credit have recently been removed, several practitioners mention some pressure from policy makers to keep their interest rates below 25% per annum, which makes it challenging for them to operate without direct or indirect subsidies.
As for savings, while the government owned Agribank and the People’s Credit Funds (cooperatives) provide micro-deposits to an estimated 6 million people; few other institutions offer voluntary savings to the poor, partly because there is a cap on deposit services which is lower than the inflation rate. The fact that many people like to save in hard currency and in kind, also makes it challenging to expand savings services.
The new policy and regulatory framework creates important opportunities. Thanks to the new Law on Credit Institutions from 2010, a new model of limited liability companies is emerging, allowing licensed microfinance companies to provide deposit and credit services to their clients, as well as act as agents for insurance companies. One institution, Tao Yeu May (TYM Fund), has obtained such a license in January 2011, and several other institutions will obtain licenses in the coming years. In addition, the new draft national microfinance strategy championed by the State Bank of Vietnam provides a vision for a more sustainable and diverse microfinance sector. If the State Bank of Vietnam succeeds in convincing others including various government authorities in the provinces to adopt this vision and help put it into action, the sector will become more sustainable.
I would dare predict that Vietnam will experience a branchless banking boom in the next five years. According to the International Telecommunication Union (ITU), Vietnam is witnessing a very rapid growth in ICT, with 154 million mobile subscribers, an increase of 39.8% between 2009 and 2010. With more than one mobile phone per inhabitant, a pretty advanced national ID system and the recent purchase by a commercial bank—Lien Viet Bank—of the Vietnam Postal Savings Service Company (VPSC), the opportunities to develop branchless banking to expand financial inclusion should be taken into account. The Woman’s Union already acts as an agent for VBSP, and could probably expand its role, but several other private actors could also be involved. Such an evolution will also require regulatory adjustments.
While policy makers like to talk about a “step by step” approach in Vietnam, global knowledge and experience on branchless banking could easily transform these steps into big leaps for the benefit of the 70% of Vietnamese people who don’t yet have access to formal financial services if the government and private actors make the right moves.
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Comments
Eric Duflos is raising an
Eric Duflos is raising an important point about the affects of government-subsidized microfinance. Vietnam is an excellent case in point. In this socialist economy (controlled by the Communist Party), taxpayers cover the losses caused by subsidized interest rates for microfinance.
Do the subsidies harm the poor by reducing the “sustainability” of microfinance? I think so. Certainly, these below-market rates reduce the amount of private capital that is available for microfinance, thus reducing outreach. That alone might harm the poor.
We really need some research on the amount of private capital that is excluded, thus the number of Vietnamese people who are denied access to microfinance because of such governmental policies. Let’s try to clarify this problem.
Dear Eric Duflos
Dear Eric Duflos
It is stated in the post ‘many believe that microfinance could take up very rapidly if the policy environment becomes more supportive’. Here I wish to emphasize for any developing country for that matter, that supportive environment is necessary but it should not confine to institutional arrangement and regulatory condition alone for delivery of micro finance: it should also simultaneously take care of arrangement of physical environment for supporting the productivity of the delivered credit in the given region and at client household level as well. . The point emphasized here is that both financial input and supporting non financial factors need to go together or be arranged sequentially depending on the profile of the region. In the case of Vietnam, the presence of mountainous /terrain region poses a major threat in the process of financial inclusion for the formal players with the higher cost, there by pointing the priority for infrastructure development (roads, culvert ,power, transport, market yards , store house , etc) Without the adequate supportive physical asset in rural areas, mere financial inclusion with whatever technology means like mobile phone will not work and yield desired result in poverty sector. Perhaps this fact also gives some direction for subsidy utilization in the rural financial landscape. In this regard, the continued presence of low Credit/Deposit ratio in formal banking system particularly in north eastern region of India due to lack of adequate infrastructure despite wide net work of bank branches (per branch population -15000 for all India) is a pointer to be noted in the process of financial inclusion
This point may be also taken cognizance of in the ‘step by step’ approach in Vietnam for the said mission.
Thanks
Rengarajan
The current structure with
The current structure with its subsidies has manifold negative impacts on the sector: firstly, as Eric mentions, it is a burden on the budget, the government could spend the money more wisely on education, health care (for both people have to pay a lot in Vietnam) or rural infrastructure. Secondly, a more level playing field with diverse actors and more private capital would lead to broader and better services. Thirdly, subsidies spoil the initiative of the poor, as they get used to money having no (or a very low) price. Next, wherever there is something for free, there is a danger of misuse (I just may take a loan from VBSP at 7% and put in the bank at 14%), and worse, of material and moral corruption.
Luckily there are good signs on the horizon, although progress in this area (microfinance) is incredibly slow as compared to many other areas in Vietnam.
I do not agree on 2 issues raised by Eric: first, the cap of 14% on deposit rates is targeted mainly at speculative investors. In microfinance rates can and do not need to be higher than the 14% already paid by commercial banks or the 13.9% current inflation rate. Yes, in principle savings rates should be higher than inflation. But in Vietnam (like with microfinance clients in other countries), ease of access and trust into the institution matter more than the returns. Which brings me to the second point: a trustful relationship to “my banker” will hopefully always be more important than sophisticated technological tools. Loan evaluation softwares and credit bureaus will never replace the knowledge, experience and soft skills of the MFI’s credit officer. OK, bankers have betrayed our trust just recently, and not once. But I am not too sure whether huge technology conglomerates and their foundations (is it by chance that they are so pushy in the area of internet, branchless, mobile banking etc?) are more trustworthy, reliable, affordable…. Technology is important, but it remains a tool only.
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