Introduction
Thesis Structure
Microcredit is not traditionally a new financial industry as one of its first form appeared in Ireland, called as “Irish Loan Fund”, the fund was initialized by Jonathan Swiff to provide a small sum of money to the poor in Ireland The success of the fund had encouraged more organizations to follow the model to provide loan to the poor during the 18 th and 19 th century (Hollis and Sweetman, 2013) Then, in 19 th century in Germany, there were a number of rural credit cooperative organizations that supported the farmers in rural area as the land reform in Prurussia at the time had a very little effect on the land- holding structure and the grief of war and economic downturn was upon the poor farmers (Prinz, 2002) Other types of microcredit scheme were also established in Pakistan as
“Comilla Model” by Akhtar Hameed Khan but deemed as failure due to the excessive intervention and what called “elite captured” by Bateman (2010) Having said that, the world often see the establishment of Grameen Bank of Muhammad Yunus as the start of the industry and the expansion of Microcredit for poor people worldwide He spent his money to build a bank to lend the money to whom are constrained by the shortage of credit especially poor farmers, contributed to the economic development and poverty reduction in Bangladesh Furthermore, the Grameen Bank has inspired many countries with thousands of organization to have been established since then, argued by Bateman
(2010) The initial purpose of Grameen Bank is non-profit to provide credit to the poor
Through time, the types of microcredit provider became more diverse, more and more organizations now positioned themselves as commercial banks and considered microcredit as a real business rather than a non-profit organization, called as the commercialization of microfinance (Drake, D., & Rhyne, E n.d , 2002)
Microcredit is a fundamental component of the microfinance industry, which consists of many other types of financial services such as insurance or saving Most of the
Literature Review
The definition of Microcredit
Microcredit is not traditionally a new financial industry as one of its first form appeared in Ireland, called as “Irish Loan Fund”, the fund was initialized by Jonathan Swiff to provide a small sum of money to the poor in Ireland The success of the fund had encouraged more organizations to follow the model to provide loan to the poor during the 18 th and 19 th century (Hollis and Sweetman, 2013) Then, in 19 th century in Germany, there were a number of rural credit cooperative organizations that supported the farmers in rural area as the land reform in Prurussia at the time had a very little effect on the land- holding structure and the grief of war and economic downturn was upon the poor farmers (Prinz, 2002) Other types of microcredit scheme were also established in Pakistan as
“Comilla Model” by Akhtar Hameed Khan but deemed as failure due to the excessive intervention and what called “elite captured” by Bateman (2010) Having said that, the world often see the establishment of Grameen Bank of Muhammad Yunus as the start of the industry and the expansion of Microcredit for poor people worldwide He spent his money to build a bank to lend the money to whom are constrained by the shortage of credit especially poor farmers, contributed to the economic development and poverty reduction in Bangladesh Furthermore, the Grameen Bank has inspired many countries with thousands of organization to have been established since then, argued by Bateman
(2010) The initial purpose of Grameen Bank is non-profit to provide credit to the poor
Through time, the types of microcredit provider became more diverse, more and more organizations now positioned themselves as commercial banks and considered microcredit as a real business rather than a non-profit organization, called as the commercialization of microfinance (Drake, D., & Rhyne, E n.d , 2002)
Microcredit is a fundamental component of the microfinance industry, which consists of many other types of financial services such as insurance or saving Most of the transactions in microfinance organizations are to borrow the microcredit loan for business Generally, microcredit provides the poor with additional capital and employment, assuming to give them the opportunity to cover their expense to create some kind of income-generating microbusiness To that end, it is safe to say that most of the research on microfinance somehow related to the microcredit scheme (Bateman,
2010) Furthermore, there are at least nine characteristics of microfinance that in fact simultaneous in line with microcredit (Karlan, D, & Goldberg, N, 2007):
1 Small transactions and minimum balances (whether loans, savings, or insurance)
8 Provision of services in underserved communities
The types of microcredit provider is also important to find out the motive and the characteristics of each loan to find sound business decisions or public policy For instance, Muhamad Yunus had categorized several types of microcredit organizations in
A) Informal microcredit for the poor such as relatives, acquaintances, etc
B) Microcredit based on traditional informal groups
C) Agricultural-based microcredit through specialized such as Rural Development Bank D) Microcredit through specialized banks
E) Cooperative microcredit (cooperative credit, credit union, savings and loan associations, savings banks)
G) Partnership between bank and Non-profit organization (NGO) microcredit
J) Other types of microcredit organization
To that end, Yunus insisted that identifying the type of the microcredit organization plays a vital role in analyzing the operation of the financial institutions as well as clarifying the characteristics of the loan Thus, the research will be more accurate and comprehensive.
The Principles of Microcredit Scheme
2.2.1 The Social and Economic Principle
Armendáriz et.al (2010) explained why the capital often ignore the poor people, who willing to pay higher interest rate and generate more money than a richer entrepreneur (Marginal Diminishing Productivity) To depict the economics of microcredit, the basic model of Marginal Diminishing Productivity illustrated that the more capital you put on the investment the output will increase but at one point, the additional capital will bring lesser output The model also demonstrated that the smaller the sum of money invested, the higher the marginal rate of return, and higher capability to pay for the loan so the investor should lend the money for small-business owner or farmers with small capital needed to gain high profit This can explain the recent movement of the capital from rich countries to poor countries where the firms are able to get higher marginal return a bit
However, in reality, the situation is complicated, most of the case the capital will go in the adverse direction, and the large stake often goes to big business or rich country One reason to explain is that the risk calculation is difficult in the poor target (poor households, poor region, etc.) due to its instability in social, economic, political plight
The second is the moral problem when the bank is not able to seek trust to poor borrowers due to lack of information to assess the potential effort of the borrowers to repay the loan The third reason is that in poor regions, the judicial system often deemed as ineffective to enforce and the transaction cost hinders the banks To that end, lending to the poor is hard for traditional banking system because of lacking information about the borrowers and the potential returns of poor entrepreneurs often lower than the risk of the investors
Figure 2.1: The principle of microfinance initiative (Source: Author)
Paulson, Anna L., and Robert M Townsend (2005) have shown the financial constraint in Thailand in pre-crisis, crisis, and post-crisis and argued that the wealthier a person, the easier to start a business, many people saw the opportunity to start a business or expand the current business Nevertheless, as explained above, the poor often find themselves trapped in a vicious cycle and got into the loan shark with high interest and excessive risk of being bankrupted, leading to many social problems Thus, the creation of microfinance and microcredit is a key factor influencing the choice of poor people to encourage them to avoid the loan shark, which contains high risk (Bateman, 2010)
In term of economic ideology, microcredit often coined and supported by neoclassical economists as the tool to improve the welfare for the poor and make the financial market more inclusive, reduce poverty, and women empowerment It explains the use of the free market mechanism and solution to achieve economic and social development (Bisen, A., Dalton, B., & Wilson, R., 2012) In line with the neoclassical idea, the microcredit organizations are gradually stepping out of the purpose of helping the poor, and commercialize with higher interest rest rate Nonetheless, this approach has been heavily criticized even the by the founder of Grameen Bank Yunus, argued that the banks are trying to take the advantage of the poor people instead of helping them and it is no different with the loan-shark (Drake, D., & Rhyne, E n.d ,2002)
2.2.2 The Impact of Microcredit on the Community
As mentioned above, one of the main problem in poverty alleviation challenges is the shortage of small-transaction and access to finance in poor regions Khandker, Shahidur
R (1998) proved that each year about 5 percent of the clients who participate in microcredit program could lift their families out of poverty as well as the rate of schooling, women empowerment, etc A World Bank (1998) report showed may criterions improved after the participants borrow microcredit loan from the microfinance financial institutions especially woman often have better performance than man in the assessment Dao, V.H (2001) who claimed that over 99 percent of 1833 participant interviewed in World Bank program saw the microcredit had positively increased their living standard and beneficial to their lives Lam T.V Bui (2014) claimed that then microcredit scheme of the Vietnamese Government had contributed significantly to the income of the poor in Vietnam through the relation between the household’s credit and their non-food expenditure However, in the case of the food-expenditure became negative, suggested that it is difficult to have a comprehensive research on the relationship between microcredit and the amelioration of poor people living standard
Deepak R et.al (2012) showed the positive impact of microfinance in several developing countries, suggested that microcredit indeed contributed to the result of poverty reduction performance Chowdhury et.al (2002) conducted a study in Bangladesh suggested that microfinance does help to reduce the poverty rate but it was considered as short-term impact, which may imply the impact of small-scale agricultural production may affect the long-term impact of microfinance loan as the borrowers are easily getting back to poverty in the long-term Bateman, M & Ha, J.C (2012) argued that microfinance only generated short-term positive outcomes for a few people, otherwise, there are little evidence to prove that the microfinance model establish a sound mechanism for poor people to sustainably alleviate poverty and create favourable environment for successful enterprises development On the other hand, microfinance may harm the whole prosperity due to several reasons:
Microfinance often ignores the role of scale economies
Microfinance generated too many informal micro-businesses
Microfinance dilutes the creativity, innovation, and industrial sector
Dichter, T W., & Harper, M (2007) argued that microcredit is literally micro debt and there was no way that it can warrant the poor people that they can escape poverty if they of borrowers such as sickness, natural disaster, epidemic, etc that led to the possibility of bankruptcy and indebtedness for poor people Sinclair (2012) even went farther; he gathered evidences on the failure of microcredit and microfinance industry in several cases, notably the level of indebtedness in Nicargua and suicide rate in India due to the high-interest rate of MFIs
Nevertheless, in a study of Joana Vieira dos Reis Robalo (2015), although he conceded that MFIS did not contribute to the innovative enterprises but it nurtured multiple micro- business to flourish, overall supported a vital sector in many countries
2.2.3 The Factors Affect the Result of Microcredit Loan
There are many kinds of research have focused on what and how the internal and external factors affect to results of the borrowers use the microcredit loan For instance, Ferdousi,
F (2015) research indicated that the lack of business skills, knowledge, experience, and training had eroded the capacity of borrowers to facilitate the use of microcredit in order to fight against the challenges and hinders of poverty Tu et al (2015) had proved that poor households generally get more income if they invest the loan to non-farm activities
Otherwise, the study also indicated that non-farm activities generate a better chance to get out of poverty than agricultural production Education is also a good indicator to measure the investment decision and efficiency of the loan as fully educated household can make proper business plan and get better condition according to the study
Nam, M.V& Duc, A.V (2009) conducted research in Hau Giang Province showed that the term of the loan and the amount of the loan both affected considerably to the result by adverse effect, the longer the term the lower the income of the households as well as the efficiency of the loan use On the other hand, the higher the rate of interest rate, the more positive of the outcome The education level had also contributed to the result of the loan, as the borrowers should have basic knowledge to calculate how to invest the capital to the business Trinh V.B &Phuong T.T.N, (2014) conducted a similar research in Soc Trang province; consolidate the conclusion that the loan’s term has adverse effect on the income of the poor people However, the research claimed that the interest rate had positive effect on the income as lower the interest rate, the higher the income of poor households To put it another way, in the research, they pointed out the relation between the number of labour in each households may correlate with the possible result of microcredit use, with every additional labour participate in the production, the overall revenue increase Dao M.T.H (2016) studied the effect of microcredit to the income of poor households by conducting regression analysis with multiple variables, and concluded that the household’s size and dependent percentage affect the income of the poor households as the more people who do not take part in the production the more likely that the income will decrease Huong et al (2018) studied the factors that affect the use of microcredit in Can Tho city, Southwest of Vietnam, indicated five factors that affected the result of the microcredit loan, these are the amount of the loan, the percentage that borrowers use for productive work, land size, instruction of bank’s employee Besides, in other studies in finance and economics, the education level and business skills, affected significantly to the result of the microcredit use
To summarize the literature, several factors had been identified by scholars For instance, the factors include the loan’s amount, business experience, education, innovation, and instructions from the Bank, most of the studies conducted in a small-scale area, provincial or district level On the other hand, the multiple regression model and Probit model have been frequently used as the model for this kind of research However, the author found that all the previous studies have only focused on the result of the microcredit-use through the income, or revenue of the borrowers, it only reflected a measurement that coped with the living of the borrowers or in term of the borrower’s perspective To put it another way, the result of the usage may also come from the Bank’s indicator such as the Bad Debt Ratio and the local government’s perspective such as the poverty reduction result Therefore, in the Thesis, the author will propose a new approach which look into other perspective on the usage of the loan to analyze the possible factors that may affect the result of the loan.
Material and Methodology
Research Site
Soc Son is a suburban district located in the north of Hanoi capital, with many important transportation routes and highways Especially, Soc Son has Noi Bai International Airport and many industrial zones that are arising in the area Thus, the region is in a crucial phase of structural change in economic development The district has a very diverse geography landscape, the region has a core area is the center town of the district, surrounded by agricultural land, lakes, and mountain in Northwest of the district Soc Son district has 25 communes and 1 town, with a population of 316.000 people (Phương Anh, 2018) Until 2017, there are 3011 poor households in the district according to the multidimensional poverty standard of the government, accounting for 3.73 percent of the total households in the district (Trung Anh, 2017) In all these poor areas, there are communal mobile transaction access points of the Vietnam Bank for Social Policy (VBSP) to facilitate people to participate and gain access to credit loan At the mobile transaction place, VBSP disburses, collects debt directly to each borrower, instructing the policies, publicizing the list of disbursed households and outstanding loans for each loan program, informing new regulations, interest rates, loan rates of the Government's preferential credit programs Finally, yet importantly, VBSP provides adequate information for poor people to understand the regulations and improve the understanding of each preferential microcredit program to people monitor loan disbursement right at the transaction point Thereby, it helps to transfer microcredit capital preferential timely and effectively to the right beneficiaries It can be said that policy of providing microcredit has contributed positively to the implementation of the national goal of sustainable poverty alleviation, which has helped the poor and other beneficiaries groups in Soc Son to become self-reliance, create jobs, improve living standards, income, ensure social security in the area, and build new rural areas
Thanks to the focus on poverty reduction of the local government, Soc Son has achieved many successes in poverty alleviation In between 2010 and 2015, the district has reduced 8,500 poor households, decrease the poor households from 15.04 percent to 2.1 percent (Kien, 2015) VBSP and the preferential microcredit program for poor households have a significant contribution to the result of poverty alleviation in Soc Son district However, the sustainability of poverty reduction in Soc Son has not yet been evaluated thoroughly as the result only illustrated the statistic number rather than the long-term implication For example, one household who has just escaped poverty may quickly fall back to poverty due to the risk of the market if it depends on agricultural production On the other hand, the question of optimization during the process of using the microcredit loan of VBSP needs to be carefully analyzed to ameliorate not only the performance of the loan but to sustain the capability of borrowers in the future.
Thesis Method Design
Soc Son district is transforming itself to be an industrial zone of Hanoi, nevertheless, the structural modification of the local economy has just begun based on the development plan of Hanoi The local poor households mainly located across the district’s ward around the core urban area of the district and the density of the poor households heaped around the underdeveloped areas, namely mountainous areas such as Bac Son The research will cover all the wards in Soc Son except the central area where the number of poor households is small and the usage of the loan cannot be verified in this area as the loan often goes to consuming the instant needs rather than investment On the other hand, other areas cover most of the proportion of poor households in the area and the loan often can be rectified by observing the daily production of each household With the help of the VBSP Soc Son, the author has collected 548 survey’s questionnaires on the site of each household
To be able to set a light on the factors that affecting the result of the microcredit use, the research will use both quantitative and qualitative approach to understand the current situation of the micro-credit loan use, a quantitative approach will be conducted with the dependent variable, collected through the bank’s database and information collection paper In qualitative approach, the author will use the in-depth interview to understand the perspective of both the bank and borrowers on the factors that might affect the result
Figure 3.1: The research framework (Source: Author)
+ The Director of VBSP Soc Son
+ The officer of the Department of Credit
Analyze of the poverty alleviation by quantitative model
To evaluate the result of the micro-credit loan through social aspect
Assessments of the bank’s structure, loan process as well as the perspectives of the bank on the factors affecting the microcredit- loan use
On the other hand, the perspective of the borrowers about the factors that may affect the result of the loan will also be assessed
To identify the factors that affect the microcredit use and formulate recommendations for the bank to improve further.
In-depth interview plan
The author conducted in-depth interviews with the officers of VBSP Soc Son, the department of operation and credit for instance Otherwise, some poor households which borrowed the micro-credit loan would also be interviewed in accordance with the use of the microcredit loan
Table 3.1 The In-depth Interview Plan
The Interviewees Number Topic Objectives
The Director of VBSP Soc Son
1 + The structure of the bank
+ The process for poorhouseholds to borrow the microcredit loan in
+ The policies that the bank exert to improve the result of the micro-credit loan use
+ To get deeper knowledge of VBSP Soc Son and the microcredit scheme
The officer of the Department of Credit Supervising
5 + How they manage to improve the use of the microcredit-loan for poor borrowers
+ The factors that affect the use of the microcredit- loan
+ To understand the factors, which may affect the microcredit- loan use through the perspective of the bank’s officer
Poor Borrowers 12 + Identify their difficulties and the factors that they think might affect the use of the loan
+ Their recommendations to the bank
+ To figure out what might be the factors that may affect the result.
The Quantitative model
The author decided to use the logistic binary regression model to evaluate the result of the microcredit use This is a new model but in accordance to previous studies that used the multiple variables regression model and Probit Model The author found that, with a very distinctive dependent variable (poverty reduction result), the research should use a model that can work well to find the effect of independent variables on the probability of the independent variables Therefore, the binary logistic regression model will be used in this study
(0 denotes that the borrower has not yet to escape poverty, 1 denotes that the borrower has been left out of the poverty list The result of the microcredit-use will be reflected through the probability of whether they can escape poverty or not The independent variable will be colleted through the data of the Department of Labor, Society, and Veteran in Soc Son District The list consisted of the poor households in the area, the author will check the list in the year when poor households lent the money from the bank
At the end of the term, the author will evaluate on whether if the borrowers escape the poverty or not by checking the name of the household on the poor household list of the Department
The main variables of interest should be the variables collected through the in-depth interview, they are loan’s amount, interest rate, business experience, education
Otherwise, after reviewed multiple studies the author decided to add several more independent variables as follow: loan’s term, borrower’s age, gender, household’s size, type of business Likewise, the autor also concluded that some control variables should be held constant such as household’s asset, the number of labour, and disaster during the to put in the model, no further problems had been detected in the time the model was formulated and no sign of endogeneity problem
Table 3.2: Overview of the model’s variables
Independent Varibles Definition The basis of choosing variables
The amount of the loan that borrowerers borrowed and received from the loan
X2: Loan’s term The term calculated by the date when borrowers lend the loan to the due date of the loan (as days)
X3: Interest rate The interest rate per year that accompanied with the loan (as percentage)
X4: Education level The number of years the participant spent in school
X5: Borrower’s age The age of the borrowers when they borrowed the loan
X6: Gender Control variable, if the borrower is men, the value of variable is zero If the borower is women, the value of the variable will be
Control variable, if the borrower has not done this type of businesss before, the value will be denoted by 0
If the borrower has done this type of business, the value of the variable will be 1
X8: The household’s size Control variable, the number of the member in the households
Control variable, if the borrower invest on agricultural production (such as farming or ranching) the value will be denoted by) If the borrower invest on non-agricultural purposes (such as machienary or services)
Information Collection Paper Design
After the in-depth interview with the poor borrowers, it is necessary to prove the factors that have been studied and collected through the data In order to collect the data from the borrowers, the author initially intended to interview them for information
However, as the samples are very large, the author decided to créate a simple information collection paper to collect on a wider scale To that end, a simple questionnaire has been designed for a survey The questions focus on the information of the borrowers, including the revenue of the loan in the previous year, educational level, age, experience, the number of participants in the production process The study possessed a sample size of 548 over 589, all the information was collected and put in the data file for analyzing
The factors such as experience, type of business, interest rate, loan term, loan amount were collected through the database of VBSP and put together with the collected information of borrowers This information collection paper is appropriate to provide enough data for the analysis and explore the factors affecting the microcredit-use.
The analysis and findings
Current situation in Soc Son district
The district has 25 communes and 1 town, the natural land area of the district is 306.5 km2, of which the agricultural land consisted of 13,155 ha The population of the district is over 300,000 people with 63,589 households (96.7% rely on agricultural production)
In the past years, The living condition of the people has been improved but mainly based on agricultural production with low income and prosperity To that end, solving for poor households and social policy beneficiaries with preferential microcredit loan is one of the important solutions to contribute to solving labor and reducing the annual poverty rate in the area
The fluctuation of poor households in the past time is as follows:
- The Period of 2006-2010: poor households, according to the Prime Minister's Decision 170/2005: 9,719 households; accounting for 13.1%
- The Period of 2011-2013: poor households, according to Decision No 09/2011 / QD- TTg of the Prime Minister is: 4,883 households, accounting for 7.69%
- The period 2016-2020: multidimensional poor households, according to the Prime Minister's Decision No 59/2015 / QD-TTg are: 4,289 households, accounted for 5.43%.
Overview of VBSP
Launched at a time when the economy is moving towards along with the development of society Since its establishment, VBSP Soc Son has continuously improved the quality and achieved certain results Over the years, the branch has made the renewal of the mode of operation, more diverse and effective services, and business Moreover, VBSP Soc Son had improved the efficiency of raising capital, expanding lending to many targets in numerous economic sectors VBSP Soc Son contributed considerably to the changing of the economic status in the rural and mountainous area and improved the lives of poor households in Soc Son In particular, after 30 years of operation, has built the organizational structure, staff training, deployment, and business development, has constantly overcome difficulties, have distinguished themselves by renovating service style, skip the cumbersome procedures, use of flexible interest rates to diversify customers With the motto "Ensure the happiness of the poor", VBSP Soc Son has overcome difficulties and it is gradually going to become a professional microfinance organization.
In-depth interview findings
The interview was organized in the headquarter of VBSP Soc Son, located in the central town of Soc Son district It has seven interviewees, composed of 1 director, 4 credit- supervising officers, and 12 poor borrowers
4.3.1 The Structure of VBSP Soc Son
Firstly, the structure of VBSP Soc Son is as follow
Director of Soc Son Branch
Department of operation (human resource)
VBSP is a state-owned bank so it has the same characteristics with other state-owned enterprises in Vietnam It can be observed that the operation and the working culture of VBSP Soc Son officers are analogous to other state-owned enterprises However, in the microfinance industry in Vietnam, VBSP is the largest and most efficient organization
In VBSP Soc Son, the management structure is simple and analogous with other bureaucratic organizations It has one director as the head of the branch, assisted by two deputy directors who are specialized in supervising multiple tasks in the operation There are three departments in the organization: the accounting division, the credit- supervising division, the operation division with different functions
_ Responsible for dealing directly with the borrowers, assessment of repay capability of borrowers, and giving guidance for borrowers
_ The Department often organizes the inspection and monitoring process of using the loan
_ Encouraging borrowers to repay it is close to the due date, providing solutions for bad debts collection
4.3.2 The Process of Borrowing VBSP’s Microcredit Loan
Figure 4.2: The process of borrowing the loan (Souce: Author)
Poor households named in the list of poor households shall be decided by the commune- level People's Committees according to the poverty line prescribed by the Prime Minister in each period and borrowed with a number of steps:
+ Step 1: When having a need to borrow capital, the borrower writes a loan proposal cum plan of using the loan to the Savings and Credit Team of the place of residence
+ Step 2: Savings and credit groups together with socio-political organizations receive entrustment at commune level and witness the village heads to supervise and organize meetings to publicly review poor households eligible for loans, make a list of theme households loan request for VBSP, submit to Commune People's Committee to certify that it is eligible to borrow and reside legally in the commune
+ Step 3: Savings and credit groups send dossiers of loan application to the Bank (including loan application and list of households requesting loans)
+ Step 4: The Bank checks the legality and validity of the loan application and notifies the Commune People's Committee
+ Step 5: Commune People's Committee informs the socio-political organization of entrusting the commune level
+ Step 6: Commune-level socio-political organizations inform the Savings and Credit Groups
+ Step 7: Savings and credit groups inform borrowers of the list of borrowed households, time and place of disbursement
+ Step 8: The Bank directly disburses to borrowers at the commune transaction office located at the office of the People's Committee of the commune where the borrower resides or at the VBSP headquarters where the loan is witnessed by the political organization - the commune The association receives the trust of the commune and the saving and credit group
VBSP Soc Son implemented 26 transaction points in communes and towns across the district At the transaction points, the credit policies, list of borrowers, and information of the loan’s are publicly displayed
4.3.3 The Command of the Central Bank
During the period of 2014-2018, the Central Bank has been extremely aware of the bad debt situation in the banking sector in Vietnam and taken steps in order to obliterate the excessive bad debt in the system Along with merging and acquisition some Banks that have excessive bad debt ratio, the State Bank of Vietnam (SBV) also imposed many resolutions that ordered all the Banks to increase supervision, control and decrease the bad debt ratio such as Resolution 42/2017/QH14 that piloted the approach to mitigate the burden of the bad debt on the banking system VBSP is a state-owned bank; therefore it must absolutely comply with the command of SBV In 2014, according to the Decision 164/QĐ-TTg of the Prime Minister, VBSP must improve its financial capacity as well as the quality of credit supervising and the effectiveness of the operation VBSP Soc Son as one of the VBSP branch must closely follow the project of “Handling bad debts of VBSP” The project will reevaluate asset quality, recovery capacity and the value of bad debt which focusing on handling bad debts arising
“VBSP Soc Son has rigorously followed the order of the VBSP leadership and executed the project effectively”, said the Director of VBSP Soc Son
Until now, the bad debt ratio is still one of the major concern in the operation of the bank, and SBV continuously orders and supervises the bad debt ratio as one of the most important criteria to assess the bank’s operation Therefore, VBSP Soc Son must focus on lowering the bad debt ratio as low as possible to meet the goal of SBV
“From 2014, we have been working closely to group lending and the borrowers themselves to ensure that they can use the loan effectively”, said the Director of VBSP Soc Son
Table 4.1 Total outstanding loan lended to the poor households
31.297 million VND 31.816 million VND 31.678 million VND
Source: VBSP Soc Son Annual Report 2016, 2017, 2018
From the table, VBSP Soc Son outstanding loan has been very stable in three years In the year 2016, the bank possessed 31.297 million VND outstanding loan In the next two years, there has been a mild fluctuation as the oustanding loan increase to 31.816 million VND in 2017, then decrease to 31.678 million VND in 2018 Overall, this reflected that the operation of the bank is quite stable, the poor households keep borrowing and paying the money from the bank in the same pace which might contribute to this steady figure
This can indicate that the bank still keeps its operation normally and no instability has been recognized in the statistic of outstanding loan
Table 4.2: Bad Debt Ratio of VBSP Soc Son from 2016-1018
Non-performing loan Non-performing loan Non-performing loan
109,9 million VND 64,7 million VND 54,6 million VND
Source: VBSP Soc Son Annual Report 2016, 2017, 2018
Table 4.3: Measurement of Bad Debt Ratio
Non-performing loan Million VND 109,9 64,7 54,6
Total Outstanding Loan Million VND 31.297 31.816 31.678
Table 4.4: Bad Debt Ratio of VBSP Soc Son
Bad debt ratio Bad debt ratio Bad debt ratio
The bad debt ratio can be considered as one important measurement to evaluate the microcredit-use of the borrowers If the bad debt ration is too high, it means that many borrowers are not able to repay the debt due to failure in using the loan On the other hand, if the bad debt ratio is low, it can be assumed that the borrowers made a successful business and capable of doing their duties to the due date Comparing to other microfinance institutions, VBSP is notable for its very low bad debt ratio For instance, in 2016, the bank only possessed 0.351% of its total oustanding loan is bad debt The trend is downward as it decreased to 0.203% in 2017, and 0.172% in 2018 This can be seen as a good result of the microcredit-use and the contribution of the bank’s management is significant as the director directly order the department of credit supervising to work more closely to the borrowers, in order to ensure their capabilities of repayment When the autor asked about the policies to support borrowers, the director declined to answer and advise the autor to ask credit supervising officers instead
Therefore, the author will try to conduct in-depth interviews with the bank officers to recognize the factors that contributed to the result
4.3.4 Encouragement of Borowers to Focus on the Business Effectiveness to Repay the Loan
In VBSP Soc Son, The Department of Credit Supervising is the one to manage and solve any problems that arose during the use of microcredit loan of poor households
Aforementioned, after the rigorous order from SBV and also the director of VBSP Soc Son The Department of Credit Supervising in VBSP Soc Son has strived to reduce the bad debt ratio by all effort According to the bank data, the bad debt ratio had plummeted and experienced a downward trend Having such a result, the officers of the Department continue to execute the Project of SBV to make sure that the bank faces no risk of bad debt The author conducted an in-depth interview with some officers of the Department of Credit Supervising, asked them how they can achieve such result 5 out of 5 officers answered that it was the pressure from the senior that made them work very hard in order to encourage the borrowers to repay the loan on time by making their business better
Otherwise, three out of them also answered that it was the result of cooperation between the local government, the lending groups, and the bank that urge the borrowers to take steps in improving their businesses In case of how they encourage the borrowers, one of them said that they learn the problem of the borrowers at first, then work with the local government, social and political groups, lending group to solve the problem
Therefore, the partnership between multiple parties can be considered as one of the main keys that can affect the result of the loan
“Our approach is to coordinating with District Association, Commune Council, local find down solutions for them”, answered N.V.Đ, an officer of the Department of Credit Supervising
Asking on their opinions on what might be the factors that affect the result of the loan- use, all the officers answered quite similar, the factors might be age, gender, and educational level On the policies to support the borrowers to use the loan effectively, the credit officers said it was very limited and there is almost no clear policies to help the por borrowers
4.3.5 Difficulties Borrowers Often Face When Doing Their Business
Through the in-depth interview with numerous of poor households, the author found that during the usage of the microcredit loan, there are several difficulties that they may encounter such as lack of entrepreneurship capacity and skills, external risks such as an epidemic, etc Therefore, it may lead to an inefficient investment and even debt burden for the borrowers However, all the interviewees answered that their business is not lucrative but it helped them to make a stable income
For the difficulties that may arise from the characteristic of the loan, the author asked directly to the interviewees about their loan’s term, loan’s amount, and interest rate
Furthermore, the author also asked them about their concern about those characteristics
The Analysis of the Poverty Alleviation result of the loan
After analyzing on the revenue of the borrowers, the author decided to take a further step to understand the social impact of the loan, which contributed as one of the aspects to evaluate the result of such microcredit-use of the borrowers With the help of VBSP and the Labour, Social, and Veteran Department of Soc Son district, the author had collected the data that indicated how many borrowers who actually escaped poverty after the use of the microcredit-loan of VBSP during the term of the loan, which means they escaped poverty before the loan’s term ends Thus, the author analyzed the correlation between the picked factors to show if these factors can affect the result of alleviating poverty in reality after the loan has been used
General information of the survey
+ Sample Size: 546/589 poor households + Surveyed area: 25 wards
+ Gender of borrowers: 135 men and 411 women
+ Type of business: 487 agricultural production (approximately 88.87%)
61 non-agricultural production (approximately 11.13%) + Experience: 327 experienced (59.67%)
219 no experience (40.33%) + Escaped poverty: 326 households (56.75%) + Not escaped poverty: 220 households
4.4.2 The Analysis of Factors affecting the use of microcredit-loan through poverty alleviation result
Step -2 Log likelihood Cox & Snell R Square Nagelkerke R Square
1 67.301 a 705 954 a Estimation terminated at iteration number 11 because parameter estimates changed by less than 001
In the model summary table, the R square was 0.954, which means that the model allowed interpreting 95.4 percent changes of the dependent variable
Table 4.6 Omnibus Tests of Model Coefficients
In this table, the sigma was 0.000 X1 > X4> X8 (Gender >Loan’s amount > Educational level>Household’s size)
Loan’s amount: The loan’s amount variable is the second affected factor in the analysis; the regression coefficient of loan’s amount stood at 94.8, which means that increasing the amount of the loan significantly positively affected the possibility of escaping poverty Each 1 million dong increase in loan’s amount, the borrowers get 94.8 percent more chance to escape poverty This has been debated a lot throughout years of VBSP’s operation and it is argued that limiting the amount of the loan only to under 30 million VND per household is too low and it may not be sufficient for the borrower to invest to expand their businesses, thus margining the result of poverty alleviation
The education level: The educational level also affected the poverty alleviation result; it is the third affected factor with the B coefficient of 79.3 percent, which means if the borrowers have one additional year of education, they may have 79.3 percent of escaping poverty This result proved that the educational level indeed helps the borrowers to get a better chance of escaping poverty It is certain that if the borrowers get more years of education, they will get broader knowledge and wider view than others, the higher the educational level, the more willing of them to use the loan effectively in order to get out of the poverty line This boost is not a coincidence as people who are more willing to escape poverty often spend a lot of their time and efforts to the efficiency of the loan
Gender: gender has long been recognized as one of the unique feature of the whole microfinance industry It is said that the majority of the borrowers are women instead of men as it is concerned that men have less incentive than women to use the loan effectively in order to escape poverty The result in the analysis continued to consolidate this argument as gender also affect the escaping poverty chance of the borrowers as the coefficient for this dummy variable is 148.9 percent, which means women have more chance of escaping poverty than men if they borrow the microcredit-loan from VBSP, and gender has the strongest impact on the poverty alleviation Other evidences is that women have little interested in some forms of temptations and deemed to be more industrious than men
Household’s size: As taken from the table, the household’s size also affected the result of poverty alleviation, with the coefficient of 72.9 percent However, it affected negatively the probability of escaping poverty of borrowers, which means if the households get one more family members, it may reduce the possibility of their chance to escape poverty by 72.9 percent It is appropriate that the household’s size affect the poverty alleviation result, as poor households often have many members, it is one of the obstacles for to escape poverty as the consumption, and basic service needed increase
Compare to the previous literature review, the study could confirm that several factors in the analysis are properly affect the use of the microcredit: the loan’s amount, gender, education, and household’s size However, the importance of gender and education have been understated in those studies In the analysis the author have shown how important the gender can affect the result as well as the education can be the main key to improve the result of the micro-credit use by poor households.
Conclusion and Recommendations
Conclusion
The analysis has demonstrated the factors affecting the result of microcredit use of poor households in Soc Son district To conclude, the research result showed that the microcredit-use of poor households were affected by many factors For instance, from the bank’s perspective, it is the rigorous command and order from the Central Bank that played an important role to influence the motivation of the Bank’s officer to increase the encouragement and support for the borrowers Otherwise, the partnership between multiple parties such as the local government, the bank, lending group, and social groups, have contributed to improving the micro-credit use of poor households On the other hand, the quantitative model elucidated some factors that may affect the poverty alleviation result, the author used many variables from the previous researches and studies, as well as the factors from the in-depth interview with the poor households After conducting the analysis, the author found that there are four factors affected the poverty alleviation result of the borrowers, naming loan’s amount, educational level, household’s size, and gender.
Recommendations
5.2.1 Increase Advices, Instructions, Supports and Supervision for the Use of the
Bank officers need to increase advises, instructions, support, and supervise the use of microcredit loan for poor households, so they can promptly detect the cases of misuse of capital or ineffective usage of the borrowers, which will affect the result of the microcredit-use by poor households According to statistics from the survey results and in-depth interview, the bank did provide it but in small scale only margined in a small group of poor households On the other hand, the author suggested that the poor officials are limited, partly because the human resource of VBSP Soc Son is still small, so it can only provide few supports and a bit of advices for the borrowers If well advised, poor households can increase their income and improve their ability to escape poverty
On the other hand, VBSP also needs to improve the supervision process in order to detect and stop the misuse of the loan To conclude, the author suggest VBSP Soc Son to improve the management of credit supervising mechanism
5.2.2 Provision of Knowledge and Techniques for Poor Borrowers
To improve the quality of the microcredit-use by poor households, providing knowledge on how to manage their production is very important VBSP can cooperate with the lending groups to open classes, where the borrowers receive consults, technical support as well as the knowledge in farming, ranching, or handicraft that will enable the borrowers to learn about the entrepreneurship and innovation to make their business more sustainable Likewise, providing them the basic instruction and information of the market, natural disasters, or an epidemic may reduce the risks for the borrowers Local authorities need to help poor households in technical support by providing programs to help poor households learn from each other's experiences to work together effectively
The successful model will be propagated by the staff so that the remaining households can learn from the experience of successful cases to help them use the loan more effective For those who work effectively, they need to share their experiences with the remaining members in order to increase their incomes and improve their living standards
Otherwise, the local government needs to need to research and make appropriate business’s model for each area to orientate the poor households to a profitable business in order to help them escape poverty
5.2.3 Increase Public Investment on Key Infrastructure and Education
As is observed in the research, education plays an important role in using the microcredit loan Therefore, one of the recommendations is that the local government should invest more on inclusive education to assure the educational level in the district If it was financed sufficiently, the quality of the education system in the area will be improved, and it will be a key tool to alleviate for the poor in the area
The local government also needs to pay more attention to improve irrigation system, information technology system, transport systems to provide sufficient means for poor households to use the loan effectively Furthermore, investing in infrastructure of the poor areas will create more opportunity for poor households as it stimulates economic development and expands the market, thus borrowers may get more chance to invest effectively their loan and resources, increasing their income and escaping poverty
5.2.4 Increase the Loan’s Amount Limit
As shown in the analysis, the loan’s amount plays an important role in using effectively the microcredit-loan The larger the loan the more likely that the borrowers can escape poverty by expanding their businesses, investing on education, avoiding black credit
The current amount’s ceiling of VBSP is 30 million VND, which is quite low compared to the development of the economy and the price of necessary equipment Therefore, increasing the amount will help ease the issue of lacking capital of poor households
However, increasing the amount of the loan also means that the bank needs to improve its operation and supervision to cope with the new situation
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