INTRODUCTION
Rationale
Vietnam's industrialization and modernization, coupled with its integration into international trade, present both opportunities and challenges A key goal for the government is to achieve an average per capita income of US$ 1,500 by 2020, necessitating an annual growth rate of around 8% and a minimum 20% increase in investment capital.
Official Development Assistance (ODA) plays a crucial role in enhancing national economic development, especially in developing countries where investment needs often surpass domestic savings, as highlighted by Hayami and Godo (2005) Statistics from the Ministry of Planning and Investment (MPI) indicate that ODA disbursement in Vietnam has been increasing since 2006, reaching over US$ 33 billion by the end of 2011, which constitutes 61 percent of the total agreed ODA capital Despite this growth, Vietnam's ODA utilization remains lower than that of many other countries, particularly in rural areas, largely due to limited access to credit This raises the critical question of how to effectively manage ODA to maximize its benefits for rural communities and the overall economy, underscoring the importance of initiatives like Transaction Center III.
Established in 2002, the Bank of Investment and Development of Vietnam (BIDV) serves as a wholesale bank, primarily responsible for lending and managing Official Development Assistance (ODA) from the World Bank to participating financial institutions.
Public Financial Institutions (PFIs) are enhancing access to financial services for rural enterprises in Vietnam This innovative banking model not only boosts local banks' competitiveness against foreign institutions but also facilitates the development of new banking products and the expansion of their branch networks nationwide.
Nguyen Thi Trang Dai – Foreign Languge Faculty
Through three rural finance projects with the World Bank, especially the third project (launched in 2008 and expected to finish in 2013), Transaction Center
III – BIDV has achieved several successes However, some drawbacks still remain
That is why I decided to choose “ODA management in the Third Rural Finance
Project at Transaction Center III – Bank of Investment and Development of
Vietnam” as the subject of my graduation thesis in order to bring a deeper view of
ODA disbursement in this entity, therefore give some recommendations to improve its managerial effectiveness.
Literature review
In literature, much effort has been spent investigating the relationship between ODA and economic development According to Estache (2004), there are
A comprehensive review of 102 studies highlights the positive effects of Official Development Assistance (ODA) on growth, investment, and productivity, emphasizing the significant role of infrastructure in driving economic growth Notably, Sturm (2001) identified a statistically significant link between foreign aid and public investment, which subsequently fosters economic development Additionally, Ernst van Koesveld's analysis in the 2000 report "Overview of Official Development Assistance in Vietnam" offers insights into the trends and developments of ODA flows in the country.
2009, Adam McCarty, together with Alexander Julian and Daisy Banerjee gave a comprehensive evaluation of the implementation of the Paris Declaration and of the
2001 DAC recommendation on untying ODA with reference to Vietnam, etc
Despite the limited analysis on effective ODA management, my graduation thesis aims to contribute to this research by presenting a unique perspective on a new model of ODA management in Vietnam.
Aim and scope of research
The aims of my graduation thesis are to:
Nguyen Thi Trang Dai – Foreign Languge Faculty
1 Confirm the theoretical background of Offical Development Assistance
2 Investigate the current situation of ODA management in the Third Rural
Finance Project at Transaction Center III – BIDV
3 Give some recommendations to improve the efficiency of ODA management at Transaction Center III – BIDV
This thesis reviews the theoretical background of Official Development Assistance (ODA), focusing on its definitions, classifications, advantages, and disadvantages Additionally, it analyzes the ODA management model utilized in the Third Rural Finance Project, highlighting its effectiveness and implications for future initiatives.
Transaction Center III – BIDV implemented from 2008 up to 2011.
Research questions
This graduation thesis focuses on answering the following questions:
1 How is ODA capital disbursed in the Third Rural Finance Project at
2 What are the achievements and drawbacks of ODA management in the Third
Rural Finance Project and the reasons for these pros and cons?
Research methodology
This study utilizes a combination of dialectical and historical materialism methods, alongside statistical and comparative approaches, leveraging data, documents, charts, and diagrams provided by Project.
Management Unit, Transaction Center III – BIDV to analyze the Transaction
Center’s general performance in managing ODA
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THEORETICAL FRAMEWORK ON OFFICAL
Definition of ODA
Official Development Assistance (ODA) serves as an indirect form of foreign investment designed to promote economic growth and enhance social welfare in developing countries It exemplifies the relationship between developed nations or international organizations and developing countries through the provision of development aid In the context of developing nations, especially Vietnam, ODA plays a crucial role in the overall investment capital structure, significantly contributing to economic growth, hunger eradication, and poverty alleviation.
ODA is a term coined by the Development Assistance Committee of the
Organization for Economic Co-operation and Development to measure aid since
In 1969, official financing aimed at promoting economic development and welfare in developing countries was defined as concessional in nature, requiring a grant element of at least a specified percentage.
Official Development Assistance (ODA) represents 25 percent of total aid, calculated with a fixed 10 percent discount rate It includes contributions from donor government agencies at various levels to developing countries (bilateral ODA) and to multilateral institutions ODA receipts consist of disbursements made by both bilateral donors and multilateral organizations, as defined by the OECD.
In other words, ODA needs to contain the three elements:
(a) Undertaken by the official sector
(b) With promotion of economic development and welfare as the main objective
(c) At concessional financial terms (if a loan, having a grant element of at least
Apart from the definition of OECD, in accordance with the Statute of
Management and utilization of ODA and Government Decree 131/2006/ND-CP on
November 9 th 2006, ODA was also stated: “Offical Development Assistance (ODA)
Nguyen Thi Trang Dai, part of the Foreign Language Faculty, represents a collaborative effort between the Government of the Socialist Republic of Vietnam and various international donors, including foreign nations, bilateral lending organizations, and intergovernmental institutions.
In brief, here it can be understood that ODA includes grant aid, refundable assistance or preferential credit of Governments, intergovernmental institutions,
NGOs, UNs organizations and international financial institutions for developing and underdeveloped countries.
Classification of ODA
The classification of ODA plays an important role to recipient countries In reality, there are many types of ODA depending on different reimbursement methods, sources and usage
* In terms of reimbursement method, there are three basic types:
Non-refundable aid: is a form of ODA provided not to reimburse donors
Non-refundable Official Development Assistance (ODA), often referred to as technical assistance, plays a crucial role in overall ODA It primarily focuses on enhancing human resources and institutions in recipient countries, providing targeted support to develop skills and capabilities This assistance includes the transfer of knowledge and technology that the recipient nation lacks, ensuring sustainable development and capacity building.
Official Development Assistance (ODA) differs from capital support, like preferential loans, which primarily aid developing countries in implementing tangible infrastructure projects and acquiring necessary equipment However, this distinction often blurs in practice, particularly outside of emergency aid for natural disasters, as many technical assistance projects include hardware components such as vehicles and office equipment upgrades Additionally, investment projects frequently encompass substantial technical support, offering expert advice and related activities to enhance development efforts.
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Preferential ODA loans: also known as preferential credits They are loans of which non-refundable element accounts for at least 25% of the total loan value
Mixed ODA refers to non-refundable grants or preferential loans that are offered alongside trade credits, with the stipulation that the non-repayable component must constitute at least 25% of the total loan value.
* In terms of sources, there are two types of ODA:
Bilateral ODA: is a direct assistance from developed countries to developing countries through agreements signed between the two governments
Bilateral Official Development Assistance (ODA) offers a more streamlined process for providing and receiving aid, resulting in faster signing times compared to multilateral ODA However, donors typically demand comprehensive details and data regarding the aid provided Additionally, bilateral ODA often comes with stringent lending conditions, requiring recipient countries to procure goods and machinery exclusively from the donor nation.
Multilateral ODA: is the official development assistance of international organizations, regional organizations or the government for a particular country but usually implemented through multilateral agencies like UNDP,
* In terms of usage, four types of ODA are included:
Balance of payment support refers to direct financial assistance, often in the form of money transfers, provided to developing countries This support may also include commodity assistance or import aid When foreign currency or goods are transferred to the recipient country, they can be converted into budgetary support, particularly when imported goods are integrated into the government budget.
Trade credit: with preferential conditions of low interest rates, long repayment period, etc In fact this is a form of assistance bound to create
Nguyen Thi Trang Dai – Foreign Languge Faculty favorable conditions for the import of machines and equipment, raw materials and goods to countries receiving ODA
Program support, or non-project aid, is a financial agreement between donor countries and recipient nations aimed at facilitating general development goals This type of aid primarily assists governments in developing countries to implement economic development initiatives, reform policies, and enhance the institutional and investment climate, aligning with their medium-term development objectives Typically, program support constitutes about 6% of the total Official Development Assistance (ODA) and is characterized by its rapid and effective disbursement process.
Project support: is a major form of official development assistance Typically it takes up from 65% to 81% of total ODA Project support includes the following types:
+ Based support: primarily for the construction of socio-economic infrastructure, typically accounting for 81% of total ODA of the project
+ Technical assistance (TA): primarily focuses on knowledge transfer, consultants hiring or training about economic analysis, management, statistics, trade, government administration and social issues, etc.
Advantages and disadvantages of ODA
Firstly, ODA is an important source of additional medium and long term capital for development and investment
ODA loans offer low interest rates and extended repayment terms ranging from 30 to 40 years, with a grace period of 8 to 10 years During this grace period, recipient countries are only required to pay a usage fee, which varies between 0.75% and a maximum of 2% per year, allowing them to defer principal payments.
ODA loans On account of these advantages, ODA loans usually have "cost free
Nguyen Thi Trang Dai highlights the significance of Official Development Assistance (ODA) as a crucial long-term capital source for investment and development in developing countries With ODA constituting 25% to 100% of main constituent loans, it plays a vital role in financing key economic infrastructure projects such as transportation, energy, and communications, as well as social infrastructure initiatives like health, education, and environmental protection In nations where commercial banking is underdeveloped, government bonds lack international appeal, and stock markets are weak, ODA emerges as an essential resource for funding infrastructure projects, thereby supporting socio-economic growth and poverty alleviation efforts, particularly in rural and mountainous regions.
Secondly, ODA promotes Foreign Direct Investment (FDI)
When the system of socio-economic infrastructure is greatly improved, the
ODA serves as a powerful catalyst, drawing private businesses to invest in the country By committing to economic policy reforms through ODA programs and projects, nations can enhance private sector confidence and stimulate foreign direct investment (FDI).
Thirdly, ODA supports institutional capacity building and strengthens economic policy reform
Donor conditions on loans, whether for Programs, Projects, preferential loans, or technical assistance (TA), require borrowing countries to allocate a portion of the funds towards strengthening institutional capacity and implementing economic policy reforms This approach aims to facilitate effective capital transfer and ensure sustainable development in the recipient nation.
Nguyen Thi Trang Dai from the Foreign Language Faculty emphasizes the importance of transferring technology from developed to developing countries through training, experimentation, and the application of new technologies By selecting international consultants tailored to specific program objectives, these initiatives aim to enhance the strategic planning capabilities of ODA-receiving countries This approach will enable more effective allocation of foreign capital, particularly in the context of ODA.
Fourthly, official development assistance is a crucial additional source of foreign currency for developing countries and offsets the gap in the balance of payments
To drive industrialization and modernization, developing countries face a significant demand for foreign currencies, often hindered by weak financial systems and low national credit ratings that lead to persistent deficits in domestic foreign currency sources Moreover, the government's mechanisms for attracting foreign currency are underdeveloped and lack appeal for foreign investors As a result, Official Development Assistance (ODA) emerges as a crucial source of foreign currency, helping to alleviate this financial shortfall.
Foreign currency brings various goods, modern equipment, services, and advanced technology to developing countries, supporting their industrialization, modernization, and socio-economic infrastructure development.
Fifthly, ODA helps ensure the necessary demands of a Government without fear of inflation
Government spending is constrained by its revenue-generating capacity, which establishes a "budget limitation," especially for governments in developing countries.
To offset this shortfall, the Government should issue more money to spend
However, the fact that the amount of money released into circulation is not based on a corresponding increase in the volume of goods and services should lead to the
Nguyen Thi Trang Dai from the Foreign Language Faculty highlights that currency devaluation leads to inflation, where increased government money circulation exacerbates economic crises and violates cash flow laws However, if international aid, such as ODA, is utilized to offset government spending shortfalls, it can meet the government's financial needs without necessitating additional money issuance, thus preventing inflation.
Last but not least, ODA is a bridge of cultural and political exchange between donor countries and recipient countries
Official Development Assistance (ODA) enables recipient countries to foster cooperative relationships with both multilateral and bilateral donor nations This support allows these countries to leverage capital, technology, and management expertise, while also promoting cultural exchange through training programs, seminars, study tours, and research initiatives Additionally, the commitment of donors to allocate a portion of their annual ODA to developing nations sends a significant message of support for the governmental strategies and socio-economic development policies in place within these borrowing countries.
Official Development Assistance (ODA) is often influenced more by political motivations than economic ones, as developed nations use aid to bolster their economic interests and political influence in developing countries Donor countries typically require recipient nations to align their development policies with their own interests Therefore, it is crucial for recipient countries to carefully evaluate the conditions attached to aid, ensuring that they do not sacrifice long-term benefits for short-term gains A successful development assistance relationship should be grounded in mutual respect for territorial integrity, non-interference in domestic affairs, and a commitment to equality and mutual benefits.
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Secondly, Official Development Assistance (ODA) reflects the economic interests of donor countries, as there is a growing trend among donors to decrease grants while increasing preferential loans that come with stipulations These conditions often require recipient countries to procure goods and services from the donor nations.
ODA loans are closely linked to the donor country's annual support policies, which can lead borrowing nations to become passive and overly reliant on the lending practices of the donor.
Many loans face challenges such as feasibility issues, donor overlap, and inflated prices for purchased goods compared to market rates Consequently, commercial borrowers often feel pressured to accept these loans, as refusal may lead to cancellation by the donor within the fiscal year This cancellation can harm cooperative relationships, particularly between borrowing and lending countries, as well as with public co-sponsors Such disadvantages frequently arise in Official Development Assistance (ODA) loans, negatively impacting the effective management of ODA in recipient countries.
One significant drawback of Official Development Assistance (ODA) is the inherent exchange rate risk ODA loans are predominantly issued in hard currencies like USD, Sterling, or Yen, while the value of domestic currencies, such as the Vietnamese Dong (VND), often depreciates over time Consequently, longer loan terms can exacerbate the disparity in exchange rates, potentially jeopardizing the borrowing country's ability to manage its debt Without a sound debt management strategy, countries receiving ODA may face challenges in repaying these loans when they mature.
Finally, ODA loans often become a nation’s debt burden in the future as
ODA MANAGEMENT IN THE THIRD RURAL FINANCE
Overview of ODA in Vietnam
Vietnam has consistently ranked as one of Asia's top recipients of Official Development Assistance (ODA), frequently appearing among the world's top 10 destinations for development aid over the past few decades Since the influx of ODA capital began in 1993, Vietnam has attracted support from 51 donors, comprising 28 bilateral and 23 multilateral organizations that are actively engaged in regular ODA programs throughout the country By the end of 2010, the total amount of ODA received had significantly contributed to Vietnam's development efforts.
ODA commitment was over US$ 64,322.88 billion and ODA commitment has been made with an annual increase It is due to continuous efforts of the agencies of
Vietnam and donors to improve and harmonize processes and procedures, and strengthen institutional capacity at all stages
Figure 3.1: ODA commitment, signed agreement and disbursement – Comparison among different periods (Unit: US$ million)
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Vietnam’s ODA capital disbursement in recent years has always been at high level with US$1.785 billion in 2006, 2007 (US$2.176 billion), 2008 (US$2.253 billion),
2009 (US$4.105 billion), 2010 (US$3.541 billion) and 2011 (US$3.65 billion)
The Ministry of Planning and Investment reported that disbursement rates have fallen short of the targets set in the five-year socio-economic development plan, currently standing at only 14% This figure is significantly below the regional average disbursement rate of 20%, as assessed by international donors, highlighting a need for improvement in financial allocation and utilization.
Between 2006 and 2010, the scope of projects under Official Development Assistance (ODA) agreements in Vietnam expanded significantly During this period, there was a notable rise in ODA loans, while ODA grants experienced a decline over the last few decades.
Figure 3.2: Proportion of ODA loans and grants over the period
Of all the ODA donors, Japan, World Bank and Asian Development Bank (ADB) have been the three major donors, providing about 80% of total value of the ODA-
Nguyen Thi Trang Dai – Foreign Languge Faculty related international treaties in which Japan is the largest one, accounting for nearly
40% of the total signed value
Figure 3.3: Top ten donors of gross ODA (2009-10 average)
In Vietnam, Official Development Assistance (ODA) is primarily directed towards key economic sectors, with transport infrastructure receiving the largest share at 33%, followed by agriculture and rural development at 21%, and energy infrastructure at 15% Additionally, social development and environmental protection account for 31% of ODA allocations These statistics underscore the critical role that ODA plays in advancing the Vietnamese economy, particularly during its industrialization and modernization efforts.
Firstly, ODA is significant source of funds for investment and development
Vietnam's industrialization and modernization necessitate substantial capital investment, which domestic resources cannot fully provide Consequently, foreign Official Development Assistance (ODA) plays a crucial role as a key funding source for the country's development initiatives outlined in the 2006 five-year plan.
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2010, ODA supplemented about 12-13% of the total social investment and 17% of the total state budget
Official Development Assistance (ODA) has significantly contributed to agriculture and rural development by enhancing irrigation systems, promoting rural electrification, improving access to educational and health facilities, constructing rural roads, providing water supply, facilitating rural micro-credit options, and supporting integrated rural development initiatives aimed at poverty reduction.
Official Development Assistance (ODA) has played a crucial role in enhancing the transport and telecommunication sectors by upgrading technical infrastructure and improving services Significant advancements have been made in railway, inland and waterway systems, ports, airways, and telecommunication infrastructure ODA-funded projects have positively impacted socio-economic development, poverty reduction, and hunger eradication across the country and within individual provinces and cities A notable example is the Can Tho Bridge, inaugurated in April 2010 with support from a Japanese ODA loan, which exemplifies the benefits of such infrastructure development.
The government’s investment in this bridge has significantly enhanced the economy, politics, and culture of the Cuu Long Delta River region, while also improving the living conditions for the residents of Southern Hau River.
ODA funds play a crucial role in enhancing education and training by supporting capacity building across all levels, including primary, secondary, tertiary, university, and vocational education These funds are used to update textbooks and curricula to promote universal education, provide training for teachers, facilitate overseas study opportunities for students, and strengthen the formulation of policies and sector development.
In the healthcare sector, ODA is used to strengthen facilities for medical test and treatment, step up family planning activities, prevent HIV/AIDS and
Nguyen Thi Trang Dai – Foreign Languge Faculty other infectious diseases, train health workers, assist in policy making and improve health system management
Official Development Assistance (ODA) plays a crucial role in enhancing environmental sustainability by supporting initiatives like forest planting, water resource management, and the development of water supply and drainage systems Additionally, ODA contributes to wastewater and waste treatment efforts in major urban areas, provincial towns, industrial zones, and densely populated regions, ultimately aiming to improve the overall living environment.
ODA resources, particularly ODA grants, facilitate the transfer of essential technical, managerial, and institutional knowledge, enhancing institutional capacity and fostering human resource development Additionally, ODA provides both financial and technical support for the formulation and advancement of key legislation, such as the Enterprise Law, Land Law, Commercial Law, and Investment Law.
Procurement Law, Competition Law, and Anti-corruption Law are crucial legal frameworks that support the effective implementation of ODA-financed projects in Vietnam These projects significantly enhance the transfer of scientific and technical knowledge, as well as managerial and institutional practices essential for the country's industrialization and modernization Through ODA initiatives, donors facilitate technology and management improvements by providing technical documentation, organizing conferences with international experts, and offering opportunities for Vietnamese officials to study abroad This collaborative effort not only aids in project execution but also plays a vital role in developing human resources across various levels in Vietnam, ensuring long-term benefits for the nation.
ODA plays a crucial role in reshaping Vietnam's socio-economic structure by prioritizing the development of technical infrastructure and human resources This support fosters balanced growth across various sectors and regions, significantly contributing to socio-economic development and poverty alleviation, particularly in underprivileged areas, remote regions, and among ethnic minorities.
Nguyen Thi Trang Dai, from the Foreign Language Faculty, emphasizes the importance of investing in small-scale infrastructure development in populated provinces, focusing on essential services such as water supply, roads, electricity, telecommunications, and educational facilities Additionally, she highlights the significance of advancements in agriculture, forestry, irrigation, and fisheries to enhance local development.
According to MPI data, the average signed ODA value per capita in 2006-2010 in the Northern Mountains was US$ 36.90, Red River Delta US$ 204.72, Northern
In Vietnam, the Central and Central Coast regions have an average cost of US$ 79.66, while the Central Highlands stand at US$ 15.14 The Southeast region averages US$ 71.78, and the Mekong Delta is at US$ 51.71 Additionally, various projects are helping Vietnam reform its administrative structure and enhance the efficiency of state management bodies, thereby facilitating a rational adjustment of the country's socio-economic structure.
Lastly, ODA plays a vital role in attracting FDI and expanding investment and development A number of works were carried out on the relationship between
ODA management in The Third Rural Finance Project at Transaction Center III – BIDV
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3.2.1 Introduction of The Third Rural Finance Project (RF III)
The Third Rural Finance Project (RF III) builds upon the successful outcomes and lessons learned from the first two Rural Finance projects (RF I and RF II) This initiative aligns with the Credit Agreement No 4447-VN, which was signed on November 14, 2008.
The World Bank and BIDV are collaborating on a project expected to be finalized by the end of 2013 Like its predecessor, RF II, the RF III initiative adopts a credit wholesale model, with BIDV serving as the project's key partner.
RF III attempts to stimulate the rural economy with three main objectives:
Improve access to financial services for rural enterprises
Increase loans made for rural enterprises as well as employment
Increase lending, especially term-lending, to the rural private sector by PFIs
The Project is divided into three separate components:
(a) Component A: Rural Development Fund (RDF III) – US$ 175 million provides medium and long term credit to the rural economy with the goal of increasing access to financial services via PFIs
(b) Component B: Microfinance Loan Fund (MLF III) – US$ 10 million provides small and short-term loans to increase access to financial services via PFIs
Component C focuses on enhancing institutional capacities and creating new banking products with an investment of US$ 15 million This initiative aims to strengthen the Project’s Participating Financial Institutions (PFIs) and broaden financial access in rural regions of Vietnam.
US$ 10 million IDA will be lent to PFIs at a preferred interest rate on purpose to implement technical support and training activities, in which
BIDV’s head office and Transaction Center III receive US$ 1.5 million
(Component C1) and Vietnam Bank for Agriculture and Rural Development
(VBARD) and other PFIs receive US$ 8.5 million (Component C2)
US$ 5 million IDA will be transformed from the Government budget into a grant for the rural financial system of Vietnam’s activities such as
Nguyen Thi Trang Dai – Foreign Languge Faculty developing new banking products or supporting Small and Medium
Enterprises (SMEs), etc (Component C3) With the appearance of this component, RF III project has improved itself as a more significant step than the two preceding projects
To effectively implement RF III, BIDV has taken on the role of Project owner and established Transaction Center III as the Project Management Unit (PMU) to oversee project execution By the end of the fourth quarter of 2011, a total of 27 Participating Financial Institutions (PFIs) had been selected for RF III, including 7 People Credit institutions.
3.2.2 ODA management in The Third Rural Finance Project at Transaction
3.2.2.1 Implementation progress of Credit Components A and B
Until 31/12/2011, WB approved 21 withdrawal applications under Credit
Components of RF III to the Designated Account (DA) with US$ 155,26 million
Table 3.1: Information of Designated Account
(Source: Progress report by PMU)
By the end of Quarter 4/2011, there was an amount US$ 146,575 million disbursed (73.3% of total fund) under Credit Component (Component A&B) and
Component C1 An amount of US$ 460,565.45 was disbursed under Grant
The Credit Component disbursed VND 2.939 trillion (US$ 146,2 million), of which VND 2.708 trillion (US$ 135,6 million) was disbursed by RDF and VND
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The MLF has achieved significant investment milestones, reaching 203,992 billion VND (US$ 10,382 million), which represents 127% and 160% of the targeted goals Over the course of the project, a total of VND 5.457 trillion (US$ 260,479 million) has been allocated to rural development, surpassing the target by 188% in the third year of implementation.
As of now, the total outstanding loans of PFIs have reached VND 2.773 trillion Notably, the outstanding loans for the Project experienced significant growth each quarter, escalating from VND 48.5 billion in the second quarter of 2009.
1.257,5 billion in Quarter 4/2010 and about VND 2.773 trillion in Quarter 4/2011
Figure 3.4: Outstanding loans of the Project from Q2/2009 to Q4/2011
By the end of Quarter 4/2011, 27 PFIs were selected for the RF III project
Most of them started their disbursement of RDF funds in 6/2009 and maintained a high pace of disbursement (Dong A Bank, Western Bank and Go Den People’s
The Credit Fund achieved a full disbursement rate of 100%, while VBARD, SHB, Cham Mat People’s Credit Fund, and Central People’s Credit Fund reached disbursement levels between 88% and 99% Additionally, some Participating Financial Institutions (PFIs) like VIB and Seabank initially experienced slow disbursement progress but later accelerated their efforts Regarding the MLF, 9 out of 21 PFIs engaged in MLF disbursement, resulting in a total of 28,696 loans funded, with 24,166 of these loans being extended to first-time borrowers.
Nguyen Thi Trang Dai from the Foreign Language Faculty highlights that 84% of borrowers in the Project were time borrowers, with 40% being women This initiative has significantly enhanced women's access to banking services, thereby reinforcing their roles within both the family and society, aligning with the Project's objectives.
According to the report in Quarter 4/2011 by PMU, 100% of RDF III loans were medium and long-term while 99% of MLF III loans were short-term and 1% was medium-term
Table 3.2: Classification of loans by terms
Revenue of loans in Quarter 4/2011 Outstanding loans by Quarter 4/2011 Short term Medium and long term
Short term Medium and long term
Vietnam's financial system faces a significant shortage of medium and long-term capital, particularly in rural regions Despite the support from RDF III, which provides financing for both short-term loans (under 12 months) and medium to long-term loans (over 12 months), the gap in funding remains a critical issue.
As of Quarter 4/2011, the outstanding loans from Participating Financial Institutions (PFIs) and Microfinance Institutions (MFIs) revealed a trend where PFIs predominantly utilized project funds to support medium and long-term loans, while local credit funds, including the People’s Credit Fund of An Thanh, Van Trach, and Go Den, primarily concentrated on short-term loans MLF financed both short-term loans (up to 12 months) and medium-term loans (ranging from 12 months to 3 years).
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Figure 3.5: Outstanding loans of PFIs/MFIs by loan-term by Quarter 4/2011
Figure 3.5 demonstrates that the loan-term allocation structure in the RF III project aligns with the genuine financial needs of rural areas in Vietnam, highlighting a significant emphasis on medium to long-term loans, while microfinance institutions (MFIs) primarily concentrate on short-term loans.
The overdue loan ratio for RF III was notably low, at just 0.2% from end-borrowers to PFIs and 0% from PFIs to BIDV for RDF Similarly, MLF recorded an overdue loan ratio of 0.18% and 0%, respectively These figures are significantly lower than the 2.15% overdue loan ratio for standard loans and PFIs that did not engage in the Project in 2010.
This is believed to be the result of a long-term and stable source of fund, helping
Public Financial Institutions (PFIs) enhance their funding and borrowing frameworks to better serve rural households and enterprises, enabling them to operate more effectively and achieve higher repayment rates.
There were differences in fund disbursement in lending sector between RDF
III and MLF III To be more specific, a major proportion of RDF loans were given
VB ARD, EAB, VIB, SG IT, TCB, Saco Bank, Habubank, SHB, Đại Á, MB, Western Bank, Seabank, MSB, Kiên Long, PCF Mộc Châu, PCF An Thạnh, CCF Chăm Mát, PCF Vạn Trạch, PCF Gò Đen, and Nhà B ĐSCL VP Bank are key financial institutions in Vietnam, offering a range of banking services Each bank plays a significant role in the country's financial landscape, catering to diverse customer needs and contributing to economic growth.
Medium and long-termShort-term
Nguyen Thi Trang Dai – Foreign Languge Faculty to Transport vehicles (27%), followed by Cultivation (26%), Stock-raising (25%),
Machines and workshop (10%), Aquaculture (5%), Processing (2%), Small industry
(4%), and other sectors (1%) – which is eligibly distributed between sectors; whereas MLF funds were mainly focused on Cultivation (28%), Stock-raising
Figure 3.6: RDF III and MLF III sub-loans by sectors in Quarter 4/2011
The RF III project has effectively strengthened the structure of the rural economy, particularly in key sectors MLF III focuses on financing cultivation and livestock, benefiting from short-term loans In contrast, RDF loans provide a more equitable distribution among sectors that need medium and long-term financing, including aquaculture, transportation, and machinery, fostering a more balanced economic landscape.
Cultivation Stock-raising Processing Aquaculture Small industry Transportation
CultivationStock-raisingCommerceMachines and workshop
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Table 3.3: Outstanding loan structure of Project by regions by Quarter 4/2011
Evaluation of ODA management in The Third Rural Finance Project at
Over two years of implementation (from June 2009 to December 2011), the
RF III project has had positive effects on the rural economy as well as on PFIs
RF III builds on the achievements of RF I and RF II by alleviating investment capital pressure and offering support to improve the operational capabilities of PFIs while also developing new banking facilities.
To be specific, the RF III project has made several achievements as listed below:
Harmonic combination of ODA management and ODA business function
In the implementation of the RF III project, BIDV, in collaboration with the World Bank, has selected 27 Participating Financial Institutions (PFIs) and Microfinance Institutions (MFIs) to serve as retail entities, delivering services to end-borrowers This project management model effectively balances the state management functions of Official Development Assistance (ODA) with its business operations.
ODA management tool is presented in “lending subcontracts” signed between the
Ministry of Finance and BIDV regarding to the Project’s total funds
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The Project has successfully utilized a harmonious management model and a wholesale credit mechanism, leading to the mobilization of counterpart funds from participating credit institutions This self-reciprocal approach has alleviated the financial burden on the state budget by minimizing the need for annual reciprocal capital arrangements Consequently, the credit institutions involved in the Project enjoy a distinct advantage over other Project Management Units (PMUs) currently overseeing Official Development Assistance (ODA).
Production and living standard enhancement in rural areas
The RF III project has significantly influenced many participating financial institutions (PFIs) to shift their business strategies towards the rural market, recognizing it as a viable opportunity Additionally, the funds from the Rural Finance Projects, particularly RF III, have effectively addressed the medium and long-term funding shortages faced by rural areas.
Over half of the Project's MLF (53%) and RDF (54%) loans have significantly supported business establishment and expansion activities The initiative ensures that farmers, small businesses, and economically disadvantaged individuals in remote areas, lacking bank branches, gain access to essential banking services through 402 mobile banking vehicles funded by the project Additionally, the RF III project plays a crucial role in fostering the growth of key economic sectors, including agriculture and livestock, through stable and strategic fund allocation.
The results indicate that financial access for the rural poor has significantly improved due to RF III, leading to notable increases in both income and employment opportunities It is estimated that each individual has experienced a substantial rise in their earnings as a direct consequence of this initiative.
An investment of US$ 1 in the RF III projects during the first year yielded an additional annual income of US$ 0.55 The project exceeded its mid-term job creation target by generating 50,450 jobs across 25,619 RDF sub-projects, with the food processing, small-scale business, and services sectors leading in job numbers Additionally, RF III has significantly improved living standards in rural areas, providing better meals and increased access to electricity and water services.
Nguyen Thi Trang Dai from the Foreign Language Faculty is actively promoting gender equality in rural areas, where nearly 40% of women are end-borrowers of microfinance sub-projects Her efforts are empowering women to demonstrate their business capabilities and fostering economic independence.
The RF III project significantly enhances awareness among rural communities, empowering them to boost production for their own benefit and that of their families and society Additionally, it fosters a greater understanding of environmental protection, addressing one of today's most pressing concerns.
The Project has profoundly impacted Vietnam's financial system, particularly for Participating Financial Institutions (PFIs), by establishing international standards for healthy finance It has also introduced environmental protection as a key criterion in the loan review process, promoting sustainable development within the financial sector Experts both domestically and internationally note that financial institutions have made significant strides in enhancing their own capital as a result of these initiatives.
Joint stock commercial banks are focusing on expanding their investment and market activities while effectively managing overdue accounts They aim to raise capital, increase lending volume, and enhance loan quality by adopting modern banking technologies.
Participating in the RF III project allows PFIs to access stable capital sources at low interest rates, enhancing their financial services through technical assistance, training courses, and support from local and international consultants provided by Component C.
To achieve success, several key factors have been identified Primarily, many selected Participating Financial Institutions (PFIs) possess their own rural market development strategies This alignment allows them to effectively engage with the Project, as its objectives and strategies facilitate PFIs in reaching end-borrowers in rural areas.
Some initiatives have been developed to reach customers in these areas, such as
“Saving with farmers” applied in the Kien Giang Branch of Dong A Bank, in which
Dong A Bank cooperates with PCF for lending development, “Rural Development
Nguyen Thi Trang Dai – Foreign Languge Faculty
Loans” by Sacombank which is implemented by Customer Officers or through the cooperation with Associations such as Foodstuff Association, Agriculture Extension
Association, etc to select the best clients of Saigon Bank for Industry and Trade
The recognized achievements of SGIT have enhanced competition in the banking sector, particularly in underserved rural areas, providing significant benefits to end-borrowers Additionally, BIDV's successful wholesale banking model, along with the effective support and collaboration of PMU, has contributed to this positive impact.
Transaction Center III focuses on enhancing ODA management by exploring additional credit lines, providing guidance on end-borrower selection, and promptly addressing questions from Participating Financial Institutions (PFIs) Additionally, supervision activities are crucial for identifying capable PFIs to participate in the Project.
RECOMMENDATIONS FOR IMPROVING ODA
MANAGEMENT AT TRANSACTION CENTER III – BANK OF
INVESTMENT AND DEVELOPMENT OF VIETNAM
Based on this research, the following recommendations are drawn to enhance the effectiveness of ODA management at Transaction Center III – BIDV:
Ensuring harmony of interests between parties involved in the Project
Donors apply a principle in project design to meet initial development targets, dividing investment channels into sections that ensure participation and benefits for all parties involved The government is assured of full loan repayment and can earn profits to mitigate exchange rate risks Wholesale banks benefit from reasonable profits, while commercial banks gain access to capital at slightly lower interest rates and receive support to enhance their institutional capacity Ultimately, this model increases opportunities for end-borrowers to access capital and financial services.
Accelerating the implementation of capacity building and training
The sub-component experiences the lowest disbursement rate and significant delays, as beneficiaries prioritize credit over capacity building To address this, project design should mandate that disbursement of this component is a prerequisite for releasing credit funds Coordination with experienced entities to provide training for SMEs is essential to facilitate their access to financial services in rural areas, ensuring all project targets are met Additionally, enhancing the skills of credit officers in agricultural and rural lending is crucial for improving the overall quality of the project.
Nguyen Thi Trang Dai – Foreign Languge Faculty
Selecting more micro-finance institutions involved in the Project in order to enhance the disbursement of MLF component
Microfinance institutions (MFIs) play a crucial role in increasing loan accessibility for first-time borrowers, particularly micro and small enterprises (MLEs), leading to a higher disbursement rate when more MFIs are involved However, selecting MFIs can pose challenges due to their lack of stringent requirements for accounting, auditing, and safety regulations compared to other financial institutions Additionally, the absence of a robust mechanism for monitoring and evaluation may further complicate this process.
MFIs, there could be potential payment risks Therefore, an increase in the number of MFIs in the Project must go along with the strengthening of BSA
Having a consultancy contract of exchange rate risk analysis
The Vietnamese Government faces exchange rate risks when implementing loans, particularly for medium and long-term financing Analyzing exchange rate trends and potential risks is crucial, as it enables Vietnam to effectively set loan prices for international financial projects, including RF III, and manage payment schedules proactively.
Developing a clear, transparent and equitable system of policies and procedures
Ineffective ODA projects are often caused by limited and unclear government policies, coupled with poor coordination among government agencies and donors, which leads to delays in project design and implementation To enhance project effectiveness, it is essential to build capacity within local administration and establish a clear, equitable system of policies and procedures This approach will facilitate smooth fund allocation and disbursement, mitigate potential risks, and foster an equitable environment among project participants Furthermore, the relationship between wholesale banks, PFIs, and end-borrowers should be based on equality and mutual benefits.
Nguyen Thi Trang Dai – Foreign Languge Faculty
To achieve industrialization and modernization, Vietnam requires significant capital investment from both domestic and foreign sources Recent analyses indicate that Official Development Assistance (ODA) plays a crucial role in supporting the country's socio-economic development In particular, various programs and projects funded by ODA have been instrumental in driving progress in Vietnam.
ODA capital primarily targets critical sectors in Vietnam, including community programs, transportation, agricultural development, poverty alleviation, and environmental protection Investments in these areas yield immediate benefits while also establishing a sustainable foundation for the country's long-term development.
The World Bank's Rural Finance Projects I, II, and III exemplify effective Official Development Assistance (ODA) initiatives that enhance investment efficiency Particularly, Rural Finance Project III has significantly improved access to funding, which is crucial for sustainable development in Vietnam's rural areas The management of lending funds through a wholesale banking model has demonstrated effectiveness, operating commercially in alignment with commitments to the World Bank and Transaction Center III.
BIDV Furthermore, thanks to the success of The Rural Finance projects, BIDV has become a reliable address in implementing developing large scale projects, creating an effective channel to mobilize capital
Through the research on the management of ODA lending at Transaction
Center III represents a novel approach in the management of Official Development Assistance (ODA) capital and banking activities As this is my first extensive study in this area, I acknowledge that my thesis may have some shortcomings I welcome feedback from my instructors to enhance the quality of this work.
Nguyen Thi Trang Dai – Foreign Languge Faculty
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Nguyen Thi Trang Dai – Foreign Languge Faculty
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