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MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING ACADEMY OF VIETNAM PHAN THI HONG THAO FINANCIAL EFFICIENCY OF FORMAL MICROFINANCE INSTITUTIONS IN VIETNAM Major: Finance - Banking Code number: 9.34.02.01 SUMMARY OF PHD THESIS HANOI – 2019 THIS THESIS WAS COMPLETED AT THE BANKING ACADEMY OF VIETNAM Supervisors: ASSOC.PROF.DR DINH XUAN HANG ASSOC.PROF.DR PHAM THI HOANG ANH Counter - arguer 1: Counter - arguer 2: Counter - arguer 3: The thesis was defended in front of the thesis committee at … … on 2019 at the Banking Academy of Vietnam The thesis can be found at: - Library of the Banking Academy of Vietnam - National Library Hanoi, 2019 INTRODUCTION The necessity of the thesis 1.1 Theorietical requirements The past two decades have witnessed a significant change in the activities of microfinance institutions (MFIs), with the decline of funding sources, which requires MFIs to find ways to mobilize capital from outside through the formalization path Therefore, to compensate for the costs, especially the mobilization costs, and to ensure the provision of appropriate services to the poor in a sustainable way, the financial efficiency becomes more important than the original goals of MFIs 1.2 Pratical requirements Up to now, only MFIs have been licensed by the State Bank of Vietnam (SBV) as TYM, MFI Limited M7 (M7MFI), Thanh Hoa MFI and CEP In order to improve financial efficiency to maintain self-sufficiency and access to the community, there is a need for research and analysis of the financial efficiency of formal MFIs, assessing the factors affecting the financial efficiency of formal MFIs, and on that basis, proposing solutions and recommendations to improve the financial efficiency of formal MFIs Stemming from such situation, the author selected "Financial efficiency of formal microfinance institutions in Vietnam" as the thesis topic Research overview, research gap and research questions 2.1 Research overview 2.1.1 Different perspectives on microfinance Shown in studies of: Ledgerwood (1998), ADB (2000), Trong Vi Ngo (2012) ElMakhoud (2016) or Cgap (2012) Domestic studies include research by Nguyen Duc Hai (2012), Dang Thu Thuy (2017), Nguyen Quynh Phuong (2017), Nguyen Kim Anh, Le Thanh Tam, Quach Tuong Vi, Nguyen Hong Hanh, Nguyen Hai Dưong and Nguyen Thi Tuyet Mai (2013), Pham Bich Lien (2016), Nguyen Thai Ha (2016) 2.1.2 Previous studies on formal MFIs Shown in studies of: Ledgerwood (1998); Had, Skully & Pathan (2009); Vanrosee and D'Espallier (2009); Kimando, Kihoro & Njogu (2012); Trong Vi Ngo (2012); Masawe (2013); El-Maksoud (2016) and Muriithi (2017); Nguyen Duc Hai (2012), Nguyen Quynh Phuong (2017); ADB (2000), Mulunga (2010), Njuguna (2013); Nguyen Kim Anh et al (2013), Nguyen Kim Anh et al (2014) 2.1.3 Previous studies on financial efficiency of financial intermediaries and MFIs Previous studies on financial efficiency of financial intermediaries: Shown in studies of: Rose & Hudgins (2008), Nguyen Viet Hung (2008), Truong Thi Hoai Linh (2012), Ta Thi Kim Dung (2016), Dang Thi Minh Nguyet (2017) Previous studies on financial efficiency of MFIs: Shown in studies of: Vanrosee et al (2009), Masawe (2013), El-Maksoud (2016), Njuguna (2013), Afude (2017), Nguyen Kim Anh, Phi Trong Hien, Quach Tuong Vy, Doan Thai Son & Nguyen Thi Tuyet Mai (2016), Nguyen Duc Hai (2012), Pham Bich Lien, Nguyen Quynh Phuong (2017), Nguyen Kim Anh et al (2013) , Nguyen Kim Anh, Le Thanh Tam, Nguyen Manh Cuong, Nguyen Van Thuyet & Nguyen Thi Tuyet Mai (2014) 2.1.4 Previous studies on factors affecting efficiency of financial intermediaries and MFIs OLS regression models include studies of Dang Thi Minh Nguyet (2017), Njuguna (2013), Nguyen Quynh Phuong (2017) Regression models for panel data include studies of Vanroose et al (2009), ElMaksoud (2016) 2.2 Research gaps and practical and scientific values applied and inherited for the most reasonable thesis research First, the theoretical framework of formal MFIs Second, the theoretical framework of financial efficiency of formal MFIs Third, a set of criterias to assess the financial efficiency of formal MFIs Fourth, quantitative models to assess factors affecting financial efficiency Research objectives - Overall objective: Focusing on finding solutions to improve the financial efficiency of formal MFIs in Vietnam - Specific objective: (i) Complete the theoretical framework of formal MFIs; (ii) Develop a theoretical framework for financial efficiency of formal MFIs; (iii) Analyze and accurately assess the current situation of financial efficiency of formal MFIs in Vietnam; (iv) Assess the factors affecting the financial efficiency of formal MFIs in Vietnam; (v) Propose a set of solutions and recommendations Research questions o What is a formal MFI? What are the difference between formal MFIs, semi-formal and informal MFIs? Activities of formal MFIs? o Which criterias to measure financial efficiency of formal MFIs? o Which factors affecting the financial efficiency of formal MFIs? Research objects and scope 5.1 Research objects Financial efficiency and factors affecting the financial efficiency of formal MFIs 5.2 Research scope - Content scope: financial efficiency of formal MFIs licensed by SBV - Area scope: The thesis focuses on researching formal MFIs in Vietnam - Time scope: o Assess current situation of period 2013 - 2017 o Assess factors for the period 2008 – 2017 o Propose orientations, solutions and recommendations by 2030 Research methodology 6.1 Research design The process of studying the financial efficiency of formal MFIs in Vietnam is carried out through the following steps: theoretical research, practical research and completion of research 6.2 Research methods - Qualitative method: o Methods of analyzing and synthesizing theory o Method of comparison and analysis of indicators - Quantitative methods: Methods of using regression model based on panel data (REM and FEM tables) New contributions of the thesis 7.1 In theory - Definition of financial efficiency of MFIs: The thesis gives the definition of financial efficiency of formal MFIs - Criterias to evaluate financial efficiency of formal MFIs: the thesis builds a set of criterias to evaluate financial efficiency of formal MFIs, which focus on level of selfsufficiency, profitability and safety 7.2 In practice - Methods to assess the current situation of financial efficiency of formal MFIs in Vietnam: The thesis has fully, accurately and scientifically analyzed the criterias to evaluate financial efficiency of formal MFIs in Vietnam - Model of factors affecting financial efficiency of formal MFIs in Vietnam: The thesis uses regression model for panel data to assess the impact of factors on the financial efficiency of formal MFIs in Vietnam - Propose some new solutions: The thesis has proposed solutions and recommendations to the Government and authorities to enhance the financial efficiency of formal MFIs in Vietnam from now till 2030 Structure of the thesis In addition to the introduction, conclusion, list of references and appendices, the content of the thesis is divided into four chapters, namely: Chapter 1: Fundamental theories of financial efficiency of formal MFIs Chapter 2: Current situation of financial efficiency of formal MFIs in Vietnam Chapter 3: Assess the factors affecting financial efficiency of formal MFIs in Vietnam based on regression model Chapter 4: Solutions to improve financial efficiency of formal MFIs in Vietnam CHAPTER FUNDAMENTAL THEORIES OF FINANCIAL EFFICIENCY OF FORMAL MICROFINANCE INSTITUTIONS 1.1 OVERVIEW OF MICROFINANCE 1.1.1 History of formation and development of microfinance Microfinance is not a completely new concept Its evidence has been found in medieval times in Europe, especially in Ireland and Germany In Bangladesh, Professor Muhammad Yunus conducted a pilot loan project for a group of rural women in Jobra in 1976 This project was successfully implemented and later developed into Grameen Bank in 1983 Especially in 2006 when the author of the Grameen model received the Nobel Prize for Peace, the microfinance activities really flourished Grameen model has become a role model for microfinance activities in many countries around the world 1.1.2 Definition and characteristics of microfinance Microfinance is one of the economic development methods through the provision of financial and non-financial services to low-income people in the society who are unable to access official financial services, to serve their spending and investment needs With the above definition of microfinance, microfinance activities have some basic characteristics which are different from other financial service provision activities, specifically as follows: - Microfinance is an economic development method - Microfinance activities include financial activities associated with non-financial activities - Microfinance customers are mainly poor, low-income people - There are many subjects related to microfinance 1.1.3 Roles of microfinance - For economic development Theoretically, access to financial services will help the poor to have capital to conduct production and business activities, thereby promoting the development of the economy - For social development Microfinance creates opportunities for customers, especially the poor in rural areas, to have access to diverse financial services through which to increase their participation in community life in general and strengthen their social capacity 1.2 FORMAL MICROFINANCE INSTITUTIONS 1.2.1 Types of institutions providing microfinance services According to the traditional approach, the institutions providing microfinance services belongs to three areas: the formal sector, the semi-formal sector and the informal sector In addition to the traditional approach, Ledgerwood et al (2012) base on the formalization level to classify microfinance service providers, including: community-based providers (in the unofficial region and without legal status) and organized suppliers (including institutions registered and organized according to regulations) In addition, some other criteria can be used to classify microfinance service providers: (i) Based on priority, (ii) Based on funding sources, (iii) or on customer classification basis (Trong Vi Ngo, 2012) 1.2.2 Formal microfinance institutions "Formal microfinance institutions are institutions providing microfinance services in the formal sector, operating under the central bank's license, mainly carrying out some banking activities to meet the needs of the poor and people with low income and micro enterprises” With the definition of formal MFI as above, in general, formal MFIs have different basic characteristics to microfinance institutions in semi-formal and informal sectors as follows: - About legal form - About organizational structure - About customers and market - About operational objectives - About the services provided - About working capital Activities of formal FMIs: o Deposit mobilization : Compulsory savings, Voluntary savings, Current accounts, Term deposits o Credit operations: Personal credit, Group credit o Insurance activities o Money transfer and payment 1.3 FINANCIAL EFFICIENCY OF FORMAL MICROFINANCE INSTITUTIONS 1.3.1 Definition of financial efficiency of formal microfinance institutions The financial efficiency of formal MFIs is a concept reflecting the level of using input resources to achieve the financial goals of the organization; These are the economic values and benefits that formal MFIs achieve after a period of operation 1.3.2 Criterias to assess financial efficiency of formal MFIs - Profitability/ Performance ratios Return after tax - RET Sustainability: Operational Self-Sufficiency – OSS & Financial Self-Sufficiency – FSS Operating Expense Ratio – OER - Asset management ratios Rate of Asset Growth – RAG Rate of Loan Growth – RLG Loan to Assets - LTA Return on Assets - ROA Portfolio at Risk - PAR - Equity management ratios Rate of Equity Growth – REG Return on Equity - ROE 1.3.3 Factors affecting financial efficiency of formal microfinance institutions - Factors of the formal MFI: Operating time of formal MFI (Age), Organization size (Size), Access level (Outreach), Capital scale and structure (Capital), Products, services and approaches, Human resources (Human), Executive management, risk management - Factors coming from the operating environment: Legal framework for microfinance, Tax policy, Economic environment, Development of banking sector, Socio-cultural environment, Technology environment, customers Natural environment, Factors concerning CHAPTER CURRENT SITUATION OF FINANCIAL EFFICIENCY OF FORMAL MICROFINANCE INSTITUTUTIONS IN VIETNAM 2.1 OVERVIEW OF FORMAL MICROFINANCE INSTITUTUTIONS IN VIETNAM 2.1.1 History of formation and development of microfinance activities in Vietnam Over 30 years, microfinance activities in Vietnam have undergone 03 stages: (i) Initial period (before 1990) (ii) Expansion period (from 1991 to 2005) (iii) Development period (from 2005 to present) 2.1.2 Vietnamese microfinance service providers Image 2.1 Vietnamese microfinance service providers institutions/50% microfinance customers Commercial banks VBSP 44 MFIs /Limited size Coop Bank & People's credit funds ROSCA (hụi, họ) Family, relatives and friends Personal lender Microfinance programs at local Women unions 04 formal MFIs: TYM, M7MFI, Thanh Hoa MFI, CEP Pawn shop 2.1.3 Activities of formal MFIs in Vietnam - Organizational structure - Products and services: Savings, credit - Current situation of operation: Small business household household Sale-person Agency Source: VMFWFG, 2016 12 Figure 2.10 RLG of formal MFIs 50 40 % 30 20 10 2013 2014 2015 2016 2017 -10 TYM CEP Thanh Hoa MFI M7MFI Source: VMFWG and author's calculations Figure 2.11 Loans to Asset (LTA) 120% 100% 80% 60% 40% 20% 0% 2013 2014 TYM CEP 2015 Thanh Hoa MFI 2016 2017 M7 MFI Source: VMFWG and author's calculations 13 Figure 2.12 ROA of formal MFIs 10 % 2013 2014 TYM CEP 2015 2016 Thanh Hóa MFI 2017 M7MFI Source: VMFWG Figure 2.14 PAR30 of formal MFIs 0.6 0.5 0.4 0.3 0.2 0.1 2013 2014 TYM 2015 CEP Thanh Hoa MFI 2016 2017 M7MFI Source: VMFWG 14 2.2.3 Equity management efficiency Biểu đồ 2.15 REG of formal MFIs 60 40 20 % 2013 2014 2015 2016 2017 -20 -40 -60 -80 TYM CEP Thanh Hoa MFI M7MFI Source: VMFWG and author's calculations Figure 2.16 ROE of formal MFIs 40 35 30 % 25 20 15 10 2013 2014 TYM CEP 2015 Thanh Hoa MFI 2016 2017 M7MFI Source: VMFWG 2.3 ASSESSMENT OF CURRENT SITUATION OF FINANCIAL EFFICIENCY OF FORMAL MFIS IN VIETNAM 2.3.1 Achievements Firstly, the scale of formal MFIs is expanding, reflected in the growth rate of assets, outstanding loan growth, and high growth of equity Secondly, profitability and self-sustaining activities are maintained at a high level Thirdly, formal MFIs are considered to be cost-effective, with the proportion of operating costs tending to decrease Fourthly, highly appreciated asset efficiency is reflected in good quality of loan 15 portfolio and asset utilization efficiency (ROA) Fifthly, the equity efficiency is high, reflected in the average ROE rate of formal MFIs maintained at an average level of over 15% per year and gradually stabilized 2.3.2 Limitations First, although operation scale increases, the growth rate is quite volatile and tends to slow down Second, profitability is not stable and tends to decrease Third, the ability to self-sustain for activities tends to decrease, medium-sized institutions have not ensured the long-term self-sustaining performance of the Mix Fourth, formal institutions not really guarantee cost effectiveness 2.3.3 Causes of limitations - Causes by formal MFIs o Administration, risk management o Products, services and delivery methods o Restrictions on operating/working capital o Lack of human resources in both quantity and quality - Causes by outside environment o Legal environment o Economic environment o The development of the banking system o Technology environment o Natural environment o Socio-cultural environment o Causes by factors concerning customers 16 CHAPTER ASSESS THE FACTORS AFFECTING FINANCIAL EFFICIENCY OF FORMAL MICROFINANCE INSTITUTIONS IN VIETNAM BASED ON REGRESSION MODEL 3.1 OVERVIEW OF ECONOMIC MODELS TO ASSESS FACTORS AFFECTING THE FINANCIAL EFFICIENCY OF MICRO-FINANCIAL INSTITUTIONS 3.1.1 OLS regression model for a time series data in a country 3.1.1.1 Model of Patrick Nduati Njuguna Patrick Nduati Njuguna (2013) pointed out that macroeconomic variables have a significant impact on the financial performance of 09 MFIs receiving deposits in Kenya during 2008-2012 The author used the rate of return on assets (ROA) as a dependent variable to measure financial performance; and three macro variables including economic growth rate (GDP), inflation (INF) and interest rate (IR) are independent variables in the model 3.1.1.2 Model of Nguyen Quynh Phuong Nguyen Quynh Phuong (2017) has examined the factors affecting the sustainability of 20 Vietnamese MFIs in the 2010-2015 period In the thesis, the author used the variables OSS, ROA, ROE as dependent variables to reflect the sustainability of MFIs The independent variables used by the author are variables that reflect the level of access such as the total number of customers, the total credit balance (access width) and the proportion of female customers (access depth) In addition, the author also uses some control variables such as the average outstanding value per credit officer and equity ratio on total assets 3.1.2 Model for panel data series in many countries 3.1.2.1 Model of Vanroose and D’Espallier Vanroose and D'Espallier (2009) conducted an analysed the relationship between operational efficiency (financial efficiency and social efficiency) of MFIs with the development of the formal financial sector in the period 1997 - 2006 In this model, the dependent variables used to measure financial efficiency includes OSS, ROA, ROE The independent variables used include: the variables reflecting the development of the formal banking industry, macro variables, control variables 3.1.2.2 Model of El-Maksoud El-Maksoud (2016) has examined the impact of the external environment on the operation of microfinance institutions in MENA region in the period 2004-2011 The study was conducted based on the balance sheet data set of 124 MFIs in 45 countries in regions In particular, the dependent variable is a set of variables measuring profit (OSS) and access (number of borrowers and outstanding loan balance per customer) of the ith MFI in the year t; Dependent variables include: Macroeconomic variables, Business environment variables, 17 External management variables, Free economic variables, Development bank variables, MFI’s Characteristic variables, dummy variables, including areas of MFIs 3.2 ASSESS THE FACTORS AFFECTING FINANCIAL EFFICIENCY OF FORMAL MICROFINANCE INSTITUTIONS IN VIETNAM BASED ON REGRESSION MODEL 3.1.1 Description of model of factors affecting the financial efficiency of formal microfinance institutions in Vietnam General model: 3.1.2 Variables description 3.1.2.1 Dependent variables The dependent variables used in the models are variables that measure the financial efficiency of formal MFIs, which are categorized into groups: (i) Variables refleting business performance, (ii) Variables refleting asset management efficiency and (iii) Variables refleting equity management efficiency 3.1.2.2 Independent variables The independent variables used in the model include the following: X1it is an independent variable vector reflecting the change of legal regulations on the operation of formal MFIs: o Regulation on safety o Corporate Tax X2it is an independent variable vector reflecting macro-economic environment X3it is an independent variable vector reflecting bank penetration level X4it is an independent variable vector reflecting access level of the ith MFI X5it is an independent variable vector reflecting capital structure of the ith MFI X6it is an independent variable vector reflecting staff performance of the ith MFI X7it is a control variable vector, including: o Operating time of MFI (log_AGE) o Size of MFI (log_Size) o Legal form of MFI (official) 3.3 DATA AND RESULTS 3.3.1 Data descriptions 18 Table Dependent variables Variable Observation RET 40 log_RET 40 OER 40 OSS 40 RAG 40 RLG 40 ROA 40 PAR30 40 LTA 40 ROE 40 REG 40 Average Standard deviation 35.221,08 46.935,97 9,277652 1,800494 12,44075 2,516509 138,2088 24,50185 27,01675 12,84342 30,05125 15,58627 4,9865 2,863793 0,158125 0,2101943 87,47175 9,322805 19,111 8,192325 21,19525 23,33676 Min 367,4176 5,906499 7,21 100 1,38 -0,44 0,4 48,82 3,33 -70,11 Max 163.220,8 12,00286 18,83 196 61,41 63,91 13 0,63 98,08 40,52 68,67 Table Independent variables Variable regulation tax GDP ifl BP Breadth1 Breadth2 Depth1 Depth2 cap_struc1 cap_struc2 cap_struc3 human1 human2 human3 log_AGE AGE log_size size official Observation 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 Average Standard deviation 0,275 0,4522026 0,02775 0,0431299 6,007 0,5331098 8,51 6,822168 3,535284 0,2595208 23,8 19,09517 82.033,25 95.165,09 91,7025 9,77216 18,60475 4,840691 25,99625 9,621121 40,85325 15,5239 31,13525 8,87458 59,572 9,624111 402,45 185,2157 255,175 160,224 2,920644 0,2277358 19 3,987159 12,49589 1,434375 631.054,4 810.952,2 0,45 0,5038315 Min 0 5,25 0,88 3,142071 5.357 73 9,03 3,94 9,94 12 45,64 190 99 2,302585 10 9,81214 18.254 Max 0,1 6,81 23,12 3,876154 67 320.901 100 26,92 46,29 74 54 75,52 773 571 3,258096 26 14,99859 3.264.416 3.3.2 The results of regression analysis of factors affecting the financial efficiency of formal microfinance institutions in Vietnam - Factors affecting business performance 19 Table 3 Impacts of factors on business performance Variable Depth1 Depth2 Cap_struc2 Cap_struc3 Human1 Human3 GDP Inf BP Regulation Tax Log_age Log_size Official C Prob R-sp Hausman Test Model RET 0,0086211 OER OSS -0,1570076 -0,1222502** 25,35444** -0,0431283*** 0,0040189 -0,2867243 0,0389237*** -0,7720848** 0,8754311*** -0,0304886 0,0042193 1,324979*** -0,7829483** -2,661805 0,0000 94,92 0,5312 REM -0,7610051 0,2042653 0,006888 -0,6248628 -0,0426385 2,319917 -0,8810179 0,4050233*** 12,79031** -3,054071** 1,299127 13,85448 0,0007 53,64 0,2888 REM 1,169205 0,775461 -41,0943*** 25,35444** -1,333216 -32,17707 8,92387 -28,23842** 238,1536*** 0,0000 66,55 0,5311 REM - Factors affecting asset management efficiency Table Impacts of factors on equity efficiency Breadth2 Depth1 Depth2 Cap_struc1 Cap_struc2 Cap_struc3 Human1 Human2 Human3 GDP Inf BP Regulation Tax Log_age Log_size Official C Prob R-sp Hausman Test Model RAG -0,0002272*** RLG -0,0000837* LTA 0,0001729*** ROA PAR30 -0,2170472* 0,011186 -0,3678259 -0,0223938 0,2271072 -0,006605* -0,1503579** 0,1508388 0,0819366** 4,4558928 -0,4506971 -6,795141 7,050557 -1,204152* -38,53904** 8,851344* 0,5132191 25,84268 0,0001 51,18 0,7892 REM 4,626072 -0,3516273 8,500888 1,782907 -1,050387** -108,8143*** 12,63025*** 3,285407 134,595** 0,0000 79,94 0,9761 REM 0,0811528*** 0,5739991 -0,1375365 10,12692* 2,421838 -1,351978*** 40,18131*** 0,5365944 -1,07863 -83,52478** 0,0000 64,76 0,1510 REM -0,0245837* -1,310979* 0,1477118** -2,541611* 3,542652*** -0,12213 -10,50538** 3,743827*** -3,362355** 36,22595*** 0,0000 67,32 0,9996 REM 0,0022659*** -0,0298443 0,000044 -0,074214 -0,1896273** 0,0077188 1,091414*** -0,2763268*** 0,2107912** 0,2841159 0,0000 74,3 0,0536 REM 20 - Factors affecting equity management efficiency Table Impacts of factors on equity efficiency Variable Breadth1 Cap_struc1 Cap_struc3 Human2 Human3 GDP Inf BP Regulation Tax Log_age Log_size Official C Prob R-sp Hausman Test Model ROE -0,4769529** REG -1,514851*** 2,504297*** -0,1667433 -0,1575644*** -0,0475046 -5,613492** 0,4809558** -6,211042 0,8629277 0,5973568 -29,54139 15,32396* -0,0520454 -7,717019 0,0226 44,26 0,9830 REM -3,133207 0,7641861** -12,10267 -12,66326 4,698171*** -100,8206*** 44,99364*** -3,879542 -164,9213** 0,0000 75,20 0,7633 REM 3.4 DISCUSSION ON RESEARCH RESULTS First, there is a trade-off between the accessibility and financial efficiency of formal MFIs in Vietnam Second, the depth of approach has multi-dimensional impacts on financial efficiency Third, capital structure has an impact on financial efficiency Fourth, Staff performance negatively affects financial efficiency Fifth, the size of the organization has a positive impact on financial efficiency Sixth, the institution's operating time (age) affects financial efficiency Seventh, the legal form of the institution has certain impacts on financial efficiency Eighth, legal regulations governing the operation of formal MFIs have an impact on financial efficiency Ninth, macroeconomic factors have a significant impact on the financial efficiency of formal MFIs in Vietnam Tenth, there is an inverse relationship between the development of the formal banking system and the financial efficiency of microfinance institutions 21 CHAPTER SOLUTIONS TO IMPROVE FINANCIAL EFFICIENCY OF FORMAL MICROFINANCE EFFICIENCY IN VIETNAM 4.1 ORIENTATIONS TO ENHANCE THE FINANCIAL EFFICIENCY OF FORMAL MICROFINANCE INSTITUTIONS IN VIETNAM FROM NOW TILL 2030 4.1.1 Orientations of microfinance activities in Vietnam - Completing the legal framework - Forming a large financial institution providing microfinance services - Orientating market interest rates - Applying financial technology - Developping infrastructure of the financial sector 4.1.2 Operational orientations of formal microfinance institutions - Completing the organizational model, executive management, risk management - Expanding the level of access - Diversifying and improve product quality - Increasing capital sources - Developping information technology system 4.1.3 Orientations to enhance the financial efficiency of formal MFIs in Vietnam - Expanding the scope of activities - Improving products and services - Strengthening mobilization of capital from outside - Focusing on improving the quality of human resources - Enhancing the application of modern technology in operations 4.2 SOLUTIONS TO IMPROVE FINANCIAL EFFICIENCY OF FORMAL MICROFINANCE EFFICIENCY IN VIETNAM 4.2.1 Strengthening governance and risk management in accordance with international law and practice  Strengthening governance - Conducting the review of organizational structure and executive management - Completing internal control and auditing system - Enhancing the application of technology in executive management  Strengthening risk management - Completing the risk management model - Building a culture of risk management for organizations - Determining the taste and risk limit - Enhancing the responsibility of all employees 22 4.2.2 Diversifying and developing market-oriented products and services based on modern technology - Diversifying forms of mobilization as well as lending in terms of size, term, interest rate, repayment method - Researching and developping new products - Strengthening collaborations with banks or microfinance service providers in the formal sector - Strengthening diversification and development of non-financial services - Enhancing the application of modern technology in the supply of products and services 4.2.3 Expanding the scale and improving the capital structure in the direction of increasing the proportion of deposit and equity Expanding the scale and increasing the equity proportion: (i) Developping specific operational strategies (ii) Developping feasible business strategies (iii) Establishing appropriate governance structure according to the principles of healthy banking (iv) Enhancing professionalism in operations to ensure financial efficiency (v) Enhancing information disclosure and transparency to create trust with investors In order to expand the scale and increase the equity proportion: - First, formal MFIs need to develop appropriate deposit mobilization policies to attract depositors - Second, develop and diversify market-oriented deposit products - Third, simplify the process and procedures for depositing money - Fourth, increase access and maintain relationships with customers - Fifth, enhance the application of modern technology in the supply of mobilized products and services - Sixth, ensure safety in operations, enhance information transparency 4.2.4 Expanding operation areas, diversifying customers - Conducting research and doing surveys on areas and customers - Developing and diversifying products and services - Developping distribution channels - Strengthening risk management 4.2.5 Improve the quality of implementing the loan process, especially customer analysis process  Improve the quality of implementing the loan process: - Developping a full and detailed credit grant process - Enhancing the responsibility of individuals in implementing credit process 23  Improve the quality of customer analysis: - Evaluating customers - Evaluating the financial situation - Evaluating the loan plan - Verifying credit guarantees 4.2.6 Enhancing technology application to reduce operating costs - Developping a clear strategy on the application of financial technology in operations - Focusing on and strengthening risk management - Attracting and taking advantage of technical assistance projects of international organizations - Strengthening training and capacity building of employees 4.2.7 Increase the quantity and quality of human resources - Establishing a comprehensive human resource strategy - Strengthening staff recruitment - Allocating appropriate human resources - Paying regular attention to the training and development of human resources 4.3 SOME RECOMMENDATIONS 4.3.1 Recommendations to the Government 4.3.1.1 Completing the legal framework - Assessing the results of implementing the Project on building and developing Vietnam's microfinance system till 2020 - Orientating and directing specialized ministries / sectors to continue reviewing, amending and supplementing legal regulations to ensure the consistency of the legal framework in line with the specific characteristics of formal MFIs to promote equal competition in the provision of microfinance services in the formal sector 4.3.1.2 Capital support for formal MFIs - Direct financing of official MFIs by budget - Supporting indirect capital through encouraging credit institutions to participate in microfinance sector - Directing local authorities at all levels to have policies to allocate entrusted funds from the local budget - Directing the Ministry of Planning and Investment to promptly develop and implement policies to support formal MFIs in accessing domestic and foreign investment 4.3.1.3 Creating an equal environment in providing microfinance services - Developing a roadmap to gradually reduce and then eliminate Government’s programs and models of subsidy credit - Developing and diversifying forms of ownership, types of organizations and subjects 24 allowed to establish formal MFIs to facilitate capital attraction and capacity building - Adjusting the regulations on tax rates for formal MFIs towards creating an equal competitive environment - Promoting propaganda 4.3.2 Recommendations to SBV Completing legal regulations, focusing on regulations on: - Legal position: should be revised towards diversifying legal forms of MFIs - Owners, founding members, ownership of contributed capital: should be adjusted in the direction of expanding and facilitating capital for formal MFIs, for example, may allow private participation joining the microfinance sector or expanding the rate of limited number of capital-contributing members - Operation: can be amended to allow MFIs to be officially provided with payment services for microfinance clients - Independent auditing: can be amended in directions: (i) periodically revising the audit to once every years and (ii) modifying the auditing objects, which can be specified only an independent audit for large-scale formal microfinance institutions 4.3.3 Recommendations to the Ministry of Finance - Tax policy should be improved: applying 0% tax rate to social activities - Early promulgate regulations on micro insurance, allowing formal MFIs to participate in implementing micro insurance activities for their customers 25 CONCLUSION With its objectives, the thesis: - Has systematized basic theoretical issues about microfinance, formal MFIs; Financial efficiency of formal MFIs - Has shown an overview of formal MFIs in Vietnam - Has analyzed the current situation of financial efficiency of formal MFIs in Vietnam, and on that basis assessed the achievements and shortcomings to overcome; - Has tested factors affecting financial efficiency of formal MFIs in Vietnam - Has overviewed the orientation to improve the efficiency of formal MFIs by 2030; - Has proposed solutions and recommendations to the authorities to enhance the financial efficiency of formal MFIs in Vietnam from now till 2030 Due to limited research experiences and time, the thesis is difficult to avoid shortcomings The author hopes to receive the comments of experts to complete the thesis LIST OF RELATED RESEARCHES BY AUTHOR OF THE THESISa Phan Thi Hong Thao (2014), "Developing microfinance institutions contributing to ensure social security and sustainable poverty reduction", Financial and Monetary Market Review, No 14 (407), July 2014, page 24-27 Phan Thi Hong Thao (2015), "The level of access and sustainability of formal microfinance institutions in Vietnam", Proceedings of scientific workshop: Issues of banking sector integration and financial stability in Vietnam Publication decision No: 1436 / QD-NXBLĐ, printed and filed in the first quarter of 2016, Labor Publishing House, page 147-156 Phan Thi Hong Thao (2016), “Legal framework and supervision of microfinance activities in some countries around the world, lessons for Vietnam”, Proceedings of national conference: The role of microfinance institutions in Vietnam's socio-economic development Publication decision No: 1346-11/QĐXB/NCBDT, printed and filed in the second quarter of 2016, Intellectual Publishing House, Page 349-367 Phan Thi Hong Thao (2017), “Actual situation of microfinance training of some organizations and recommendations for Bac Ninh Branch”, Proceedings of scientific workshop: Developing microfinance training programs at Banking Academy’s branches Publication decision No: 655/QĐ-NXBLĐ, printed and filed in the second quarter of 2017, Page 119-131 Phan Thi Hong Thao (2018), " Risk management for microfinance institutions ", Study document Publication decision No: 720/QĐ-NXBLĐ, printed and filed in 2018, Labor Publishing House Phan Thi Hong Thao (2018), “Microfinance activities in some countries and lessons for Vietnam”, Financial and Monetary Market Review, No 16 (505), August 2018, Page 38-41 Pham Thi Hoang Anh & Phan Thi Hong Thao (2019), " Macro factors affecting the selfsustainability of formal microfinance institutions in Vietnam ", Banking Science and Training Review, No 200+201, Jan-Feb/2019, Page 69-75, 84 Phan Thi Hong Thao (2019), " Activities of formal microfinance institutions in Vietnam", Financial and Monetary Market Review, No (519), March 2019, Page 21-24 Phan Thi Hong Thao (2019), “The impact of the access level to sustainability of formal microfinance institutions in Vietnam”, Asian Economic and Banking Review, No 158, May 2019, Page 75-84 10 Member of scientific project of Banking Academy of Vietnam: "Study on factors affecting the financial inclusion in rural areas in Bac Ninh province", June 2019, Grade: Good ... INSTITUTUTIONS IN VIETNAM 2.1 OVERVIEW OF FORMAL MICROFINANCE INSTITUTUTIONS IN VIETNAM 2.1.1 History of formation and development of microfinance activities in Vietnam Over 30 years, microfinance activities... EFFICIENCY IN VIETNAM 4.1 ORIENTATIONS TO ENHANCE THE FINANCIAL EFFICIENCY OF FORMAL MICROFINANCE INSTITUTIONS IN VIETNAM FROM NOW TILL 2030 4.1.1 Orientations of microfinance activities in Vietnam -... unions 04 formal MFIs: TYM, M7MFI, Thanh Hoa MFI, CEP Pawn shop 2.1.3 Activities of formal MFIs in Vietnam - Organizational structure - Products and services: Savings, credit - Current situation