News Item (April 1997): VIETNAM - Microfinancing After the Global Summit



U.S. and Foreign Commercial Service (US&FCS)
Telegraphic Report from the AMERICAN EMBASSY in HANOI

1. Summary: The status of microfinancing in Vietnam after the Washington global summit on microcredit was the topic of the March 24 UNDP-sponsored monthly meeting of the donor working group on poverty. The visiting representative of CGAP (Consultative Group on Assistance to the Poorest) noted that Vietnam's microcredit system is not self-sustaining because of an artificially low interest rate, unprofitarle loan collection structure and, expensive commercial borrowing. Yet she detects interest in the SRV in reforming the process. The representative of the NGO Action Aid complained that interest rate it charges of two percent was causing problems because the SRV microfinancing institutions charged an unrealistic one percent. The representative commented that the Washington Summit unfortunately emphasized the provision of credit over savings mobilization, did not assess the effectiveness of microfinancing, and hyped the program to the degree that it might endanger funding for other efforts. The IMF representative noted that multiple interest rates and lack of transparency paralleled problems in the whole banking sector.

2. Taking advantage of the visit to Vietnam of Joyita Mukherjee of the secretariat of the World Bank's CGAP, the UNDP-sponsored monthly meeting of the donor working group on poverty discussed the status of microfinancing in Vietnam. Ms. Mukherjee described the structure of the main SRV microfinancing institution, Vietnam Bank for the Poor (VBP), as needing reform. The three major problems are: 1) the bank charges unrealistic low interest rate (one percent) which prevents it from being self-sustaining; 2) the policy of collecting only interest during the life of the loan and principle only at the end; and 3) ambitious plans requiring commercial borrowing or floating bonds will result in high-cost liabilities and little income generation. She is recommending that the VBP conduct a financial appraisal to understand its costs before projecting program goals. She reported that bank officials increasingly understand these problems so she has some hope that an internal reform process has started.

3. CGAP will not provide capital to microfinancing institutions here because the required sustainability and a business plan do not exist. However, CGAP is prepared to be a channel for technical advice and a bridge to other fundingsources.

4. Action Aid, an NGO active in the microfinance sector in partnership with the Vietnam Women's Union, had similar complaints. The representative also cited the SRV's unrealistic low one percent rate as the culprit. Although providing additional services, Action Aid's two percent rate raises questions among provincial and commune officials and customers. In fact, Action Aid is seriously considering lowering its interest rate although meeting participants urged them to hold the line. Its partner, the Women's Union, understands the need for sustainability and defends the two percent rate. That said, all agreed that the VBP reached the poor effectively but the economic basis of the microfinancing philosophy was defeated because the lack of sustainability. Similar problems also affect the other SRV microfinancing agency, the Vietnam Bank for Agriculture and Rural Development.

5. The IMF representative noted that a multitude of interest rates, unrelated to the market and set by SRV agencies, compounded by the lack of transparency is characteristic of the whole credit system in Vietnam. While recognizing that market forces play only a small role in microfinancing, he nonetheless appealed to participants to press the SRV to reform.

6. Action Aid also briefly assessed the Washington Global Summit on Microcredit attended by its representative. The three major critiques were: 1) emphasis was on the provision of credit and relatively little said about mobilizing savings (co-ops, credit unions, etc.); 2) there was no assessment of the effectiveness of microfinancing in its past 20 years: what works and what doesn't?; and 3) the figure of 21.6 bill USD in needed new money floated at the Summit caused concern that governments and donors will siphon funds from education and health into this latest darling of the development community - some poor do not need money but do need basic services. There was also additional discussion that the Summit was essentially a public relations exercise, focused on praising one country's experience, over diversity of experience.

7. The Embassy P/E officer asked about feedback from the two Vietnamese Women's Union representatives she understood attended the summit. The UNICEF representative responded that for the Vietnamese the conference was certainly not fluff. The Women's Union assembled enough ammunition from the conference that upon their return, they drafted a strong letter to the SRV president urging reforms in the microfinancing sector. Those active in microfinancing in Vietnam have organized a group to meet regularly to follow up on issues raised at the summit.

8. Comment: Microfinancing is popular in Vietnam. According to the Women's Union, repayment is 97 percent. Yet it is interesting to note that the same problems requiring reform in the banking system as whole plague this small slice of the credit sector: lack of transparency, arbitrary interest rates, and a failure to understand the relationship in banking between what comes in and what goes out. Also interesting is the apparent willingness of the Women's Union to share the reform heat with the NGOs and press for rationality.


Copyright 1997 by Financial Times Information. No claim to original works prepared by U.S. government employees as part of their official duties. All rights reserved.


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