News Item (August 1996): New Bank supports Vietnam's Rural Poor
LAI YEN, Vietnam (Daily Yomiuri, 20 August, 1996):
A few scraggy hens scratch around the earthen yard in front of Ta Thi Luu's ramshackle house, home to seven people who live off the rice they cultivate and a combined income of just USD 20 a month.
Out in the fields besides this poverty-hit village of northern Vietnam, Luu's husband tends to a cow and its three-month old calf - the family's new-found hope for a better living.
Thanks to an innovative credit scheme through which it was granted a cheap loan of 1 million dong (USD 91), the family bought the cow and now hopes to repay the debt by selling the calf.
"I would never have been able to afford the cow before," 66-year-old Luu says,. "I had nothing to give as guarantee."
The Vietnam Bank for the Poor set up in January 1996 by the communist government to eliminate hunger and alleviate poverty, may not have the cachet that the fast-developing country's upwardly mobile urban classes are seeking.
But the nonprofit savings and loans bank has already brought help to more than a million households across the country.
According to World Bank estimates, 51 percent of Vietnam's 75 million people live below the poverty lline. Ninety percent of all of the poor are concentrated in rural areas.
For these people, access to formal credit for development had long been severely limited, especially since few had collateral to offer as a guarantee.
Many had no choice but to borrow from local money lenders, often saddling themselves with huge debts due to exorbitant interest rates of up to 120 percent a year and then sinking even deeper into a poverty trap.
"The poor cannot get lons on a commercial basis," VBP general director, Ha Thi Hanh said from the Bank's temporary Hanoi headquarters, a shabby concrete building leased from the National Vegetable and Fruit Co. "That's why we had to set up a special scheme to provide credit and capital for them."
The VBP mainly uses an existing network of 500 branches and 1,500 smaller outlets belonging to the Vietnam Bank for Agriculture, an eight-year-old institution which was previously the main source of formal credit for farm households.
VBP loan recipients, who pay an interest rate of 1.2 percent a month compared with the going commercial rate of 1.6 percent, are assigned by local village committees to joint liability groups.
In Ta Thi Luu's village, for example, there is one group of 17 households which received 14 million dong (USD 1,270) mostly to buy pigs, buffaloes and cows.
Loan terms are typically linked to the time it takes to fatten livestock for market or, in the more common case of loans for rice cultivation, until the end of a harvest.
The VBP has so far lent almost 80 percent of its USD 127 million capital to 1.1 million households and is aiming to provide credit for a further 400,000 by the end of this year.
Although designed to be low-cost, the bank relies heavily on government subsidy, largely tax esemption, and on financial and technical support from the foreign donor community.
Experts say that this is because with deposit rates of 0.7-0.9 percent a month -- the same as commercial banks -- VBP's interest margins are commercially unsustainable.
Hanh said she recently visited Indonesia, where a microfinance instituions called Bank Rakyat has reached mllions of clients without any ongoing government or donor subsidy.
Ina recent snapshot report on microfinance in Vietnam, Harvard Institute for International Development fellow MArguerite Robinson concluded major changes to the VBP may be needed to make the bank sustainable and ensure a wide client reach.
She said many subsidized rural credit programmes that had been tried by developing countries over the past 30 years had resulted in large loan losses, low savings mobilization and heavy losses to both the government and institutions invlved.
Since such programmes' credit are below market rates, they have tended both to encourage corruption - a big problem in Vietnam - and reach local elites rather than the poor for whom they are intended.
Robinson argued that, ideally, the spread between interest rates on loans and deposits should be sufficient to cover the program;'s nonsubsidized costs, risk and inflation.
Hanh conceeded that VBP faced difficulties and would have to find a way of raising its margin, either lowering deposit rates or raising loan rates to commercial levels after two or three years.
"We are not too interested in making a profit," she said. "But we have to survive."
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