FINANCE DISSERTATION ONMICROFINANCE AND THEDEVELOPMENT OF HOUSEHOLDBUSINESSES IN VIETNAM

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance UWE Sr≡itv Bristol England FINANCE DISSERTATION ON MICROFINANCE AND THE DEVELOPMENT OF HOUSEHOLD BUSINESSES IN VIETNAM NAME OF STUDENT: DUONG LINH PHUONG ID No: 17047727 Intake Supervisor: Dr NGUYEN THI HOAI THU September 2018 Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong Executive Summary After being recognized as an economically independent unit in 1998, the number of Vietnamese household businesses has risen rapidly The production and trading activities of Businesses in Vietnam now have many advantages such as simple incorporation procedures, payment of taxes in the form of capitation; without collecting invoices or keeping records This section has also contributed positively to the domestic economy in creating jobs opportunities, helping to solve social problems and creating a variety of products and goods diversity Due to its small size and popularity all over the country, the household businesses is an important distribution channel for trades, which helps balance trading process and develops the local economy In addition, household businesses are one of the driving forces for entrepreneurship, market development, and the potential area for founding micro, small and medium enterprises However, with the characteristics of a small business, household scaled businesses have to face many limitations in business capacity, technology application, management level; the consequence here is decreasing labor productivity and business efficiency Another option that household businesses used for capital mobilization is microfinance units Besides providing small loans, savings services, some of them also provide non-financial services such as risk management, start-up guidance, experience and knowledge sharing Obviously, this is an opportunity for household businesses to ask for a loan, improve their knowledge and skills in business management However, the main targets of these firms are the poor, the near poor, the low-income employees and other social welfare beneficiaries As a result, the credit supplies and approaches to the household firms are still under many restrictions To meet these mentioned requirements in both theoretical and practical aspects, the research project "Microfinance and the development of household businesses in Vietnam" is urgent Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong Acknowledgem ents For the successful accomplishment of this dissertation, I would like to express my deepest appreciation to all those who provided me the possibility to complete this thesis At the very beginning, I greatly appreciated all the teachers in International School of Business at Banking Academy in general for basic theoretic knowledge which is the precious foundation for me to conduct my dissertation Especially, I would like to express my deepest appreciation to Dr Hoai Thu, my outstanding supervisor, for instructing and encouraging me to complete this internship report I would also like to thank MA Ngoc Duong, the Deputy Director of Agribank at Bac Giang Branch, for giving me the opportunity to my thesis The experience and knowledge gained in Agribank Bac Giang helped me to understand different aspects related to my study Moreover, a special gratitude I give is to the staffs at Agribank Bac Giang, from whom I have achieved a lot of practical experience, and gave me a huge amount of knowledge, which was exceptionally valuable to me In all, I am extremely grateful to my family and my friends for sharing their experiences, time and encouragement throughout the process of completing this internship program Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong Table of Contents CHAPTER I: INTRODUCTION The Overview Review of literature The objectives 10 The delimitation 10 The disposition 11 CHAPTER II: THEORITICAL FRAMEWORK 11 Overview of creditfrom microfinance institutions 11 1.1 1.2 The concept of credit from microfinance institutions .11 Classification of credit from microfinance institutions 13 1.3 Characteristics and role of credit from microfinance institutions 14 1.3.1 Characteristics of credit from microfinance institutions 14 1.3.2 The role of credit from microfinance institutions 15 Overview of household business and household business development 17 2.1 Definition of household business 17 2.2 Characteristics and role of household business .17 2.2.1 Characteristics ofproduction and business activitiesof household businesses 17 2.2.2 The role of household businesses in the economy 18 2.3 Factors affecting the development of household businesses 19 2.3.1 Characteristics of household head .19 2.3.2 Characteristics of household business 20 2.3.3 The geographic area in which the household business operates .20 2.3.4 The level of technology and e-commerce application in the operation of business establishments 20 2.4 Indicators assessing the development of household businesses 21 The impact of credit from microfinance institutions on the development of household businesses 21 International experience to improve the efficiency of microcredit for household business development 22 4.1 The successful practice of microcredit for household businesses development in Malaysia 23 4.2 Lessons learned for Vietnam 24 CHAPTER III: METHODOLOGY OF THE RESEARCH .25 Data collection 25 1.1 1.2 Primary data collection 25 Sampling 25 Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong Research variables 26 LIST OF TABLES Data Analasys 28 3.1 3.2 3.3 3.4 Basic estimates with table data 28 Accurate selection of models 30 Self-correlation testing and variance 31 GLS regression method 31 CHAPTER IV: EMPIRICAL FINDINGS AND ANALYSIS 32 Statistics describe the data 32 Pearson correlation matrix 33 Accurate selection of models 35 Model results by GLS regression 37 CHAPTER IV: RECOMMENDATIONS 40 Recommended to the Government 40 Recommendations for microfinance institutions 41 Recommended for household businesses 44 CONCLUSION .46 REFERENCE 47 PAGE TABLES S Table 1: AIM Micro Credit Products 23 Table 2: Characteristics of the sample 25 Table 3: Description variable and control variable in the model 27 Table 4: Descriptive Statistics Results 31 Table 5: Pearson correlation matrix results 34 Table 6: Hausman test results with model (1) 35 Table 7: Hausman test results with model (2) 35 Table 8: Results of the variance test Models (1) 36 Table 9: Self-correlation test results Models (1) (2) 36 Table 10: Results of the analysis of the effect of microcredit on the profitability of household businesses 38 Table 11: Results of the analysis of the effect of microcredit on labor productivity of household business 38 Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong CHAPTER I: INTRODUCTION The overview background Since being recognized as an economically independent unit in 1998, the number of Vietnamese household businesses has risen rapidly According to the Ministry of Planning and Investment, Vietnam had more than 1.5 million household businesses, employing more than million workers and accounting for about 9% of total social production capacity in 1999 By October 1, 2016, according to the General Statistics Office, the country had a total of 4.91 million individual firms, required for an over 8,2-million workforce, a sharp increase compared to 1999 The production and business activities of household businesses in Vietnam now have many advantages such as simple incorporation procedures, payment of taxes in the form of capitation without collecting invoices or keeping records These kind of business have also contributed positively to the economy in providing job opportunities, helping solve social problems and creating the product diversity Due to the small size and its popularity all over the country, these entrepreneurs are an important distribution channel for trade, which helps balance trading and develops the local economy In addition, household businesses are one of the driving forces for entrepreneurship, market development, and the potential area for founding micro, small and medium enterprises (CIEM, 2017) However, with the characteristics of small business, household-scaled businesses have to face many limitations in business capacity, technology application, proper knowledge in terms of business management; which lead to decreasing labor productivity and business productivity In particular, this area has had difficulties in accessing official loans (Pham Van Hong, 2016) The business capital providing source of this area is mainly based on retained profits and credits derived from friends and relatives Household businesses have difficulty in asking for capitals from credit organisations because they cannot guarantee the values of collateral assets, or the providing reasonable business plans, etc In addition, according to the provisions of the Civil Code 2015, the civil relations which the subjects are involved in are legal and personal As a result, the State Bank has amended the regulations on which defines the borrowers in the credit organizations must be legal and personal in Circular No 39/2016 / TT-NHNN to comply with this Code According to the circular, from March 15, 1977, subjects not fulfilling the legal criterium (such as household businesses, households, cooperative groups or other organizations without legal status) are not eligible for borrowing money In order to borrow capitals, household businesses must be transformed into enterprises or the head of the household must be individually responsible for repaying the Microfinance and the development of household businesses in Vietnam - Duong Linh Phuong debt Typically, the interest rate for an individual will be calculated as the loans for consuming purposes, therefore the cost of capital can increase Another channel of funding for household businesses is microfinance institutions Besides providing small loans, savings services, some microfinance institutions also provide nonfinancial services such as risk management, start-up guidance, experience and knowledge sharing Obviously, this is an opportunity for household businesses to borrow capital, improve their knowledge and skills in business management The microfinance system in Vietnam currently includes three official microfinance organisation, about 70 semi-formal microfinance programs in 23 provinces, the system of people's credit funds, the Co-operative bank and the Bank for Social Policies However, the main targets of these organizations are the poor, the near poor, the low-income employees and other social welfare beneficiaries As a result, the supply of credits and approaches for the households-sized businesses is still limited From a theoretical point of view, there are many studies in Vietnam that analyze the impact of microfinance on different aspects of the economy Nguyen Kim Anh et al (2011) have shown that microfinance contributes significantly to reducing poverty and improving people’s living standard The research by Mai Thi Hong Dao (2016) showed that microcredit has a positive impact on the revenues of the low- and middle-income families However, there is not any complete and comprehensive study dealing with the impact of micro finance to household business area In order to meet both the theoretical and practical requirements, the research project "Microfinance and the development of household businesses in Vietnam" is urgent Review of literature In Vietnam, the definition of household businesses is clarified in the Decree 78/2015 / NDCP in terms of enterprise registration Particularly, "A business owned by an individual or a group of individuals who are Vietnamese citizens from the age of 18, perform full civil capacity; or one owned by a household, registed for business activities in only one location, are laid down on using less than ten employees and taking responsibility for all of their assets for business activities" In some countries all over the world, household businesses exist in the form of sole proprietorship / sole trader (as in England, France, Australia, India), where the owner also actes as the managers and operators of business establishments on their own behalf; There is no separation in terms of property ownership rights between the owner, the business itself and ones who responsible for paying personal- income taxes Sole-owner businesses have no legal status, usually perform on small scale, carry lots of family-related