Accounting Essays - Commercial Banks in Vietnam


Commercialization of Microfinance - Commercial Banks in Vietnam


This paper focused on applying commercialization in microfinance of commercial banks, a new trend in Vietnam. In recent years, commercialization, the new concept of microfinance, has received a lot of attentions of researchers but still a new one with commercial banks in developing countries. The poverty alleviation progress was carried out from the 1990s, but the pace is very slow, and Vietnam is belonged to the poorest countries. Microfinance is currently a top priority; however, microfinance programs have been almost recognized by the government as regulator and active participant via state-owned banks. Commercial banks are unattractive and complete ignorance of applying microfinance. This paper provides a framework for banks on shedding fight the barriers and solutions to do microfinance as a lucrative business.


Microfinance is one of the most important solutions for reducing and anti-poverty in developing countries, and consequently has attracted interest from international professionals and organizations. However, microfinance is in the beginning stage and has long distance to fulfill the financial demand of the poor. Microfinance is still a young field in most developing countries and not yet really a profit industry (Elizabeth Rhyne, 2001). In recent years, commercialization of microfinance, a new emerged phenomenon, is described as a new approach to get sustainable growth in microfinance. Commercialization, concerning bringing microfinance to commercial realm, according to Stephanie Charitonenko and Rahman (2002), means the application of market-based principles or the expansion of profit-driven in microfinance. Merriam Webster also defines doing commercial finance as establishing and developing commerce model. This is one of necessary innovation steps to motivate microfinance providers in developing countries to provide best quality financial products and services to the poor.

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Commercialization ensures the best financial services delivered to the poor and financial providers can earn profits with market interest rates and high repayment according to Jean-Philippe De Schrevel (2005, p.8). The interest rate of loans should be at market, and credit operations should be on viable business plan.

Microfinance becomes more commercial based on the great effort to achieve financial self-sustainability and high competition in traditional financial market (Christen & Drake, 2002). Mary Laraia, senior vice president of civic and community development at LaSalle Bank states expanding microfinance activities will need to develop new models more profitable than they did previously and currently support the poor. Indeed, providing microfinance will be broadened efficiently and profitably. Microfinance will become an emerging business in financial markets around the world.

Commercialization is a publicized endeavor increasing the access to microfinance of the poor on commercial basis. In Latin America, and South Asia, the commercialization has been embraced by some microfinance pioneers and, indeed, sought after as a prime objective. At standard level, the process of commercialization has been operated by the success of pioneers in creating a market for microfinance, and they set up a substantial portfolio of loans given to the poor, with high repayment rates, and do their programs on a sustainable basis. The poor, continuing to be served by government, can borrow money at reasonable interest rates that financial providers can cover their expenses and earn profit. Microfinance programs are as well social and commercial as well (Christen & Drake, 2002). Among financial providers, commercial banks have competitive advantages (wide network, diversified services, experience and knowledge in financial market) in providing services to the poor. In addition, the demands of the poor are like anyone else, and providing microfinance services to them is not only a normal banking, but also can reach new potential customers market (The Banker, Feb 2005, p.6).

Commercialization of microfinance research has been conducted quite extensively for microfinance providers or NGOs in Europe, Central and South Asia, and to a lesser extent, in Latin America. There is a relatively little research in investigating commercial microfinance of commercial banks. According to the recent studies of researchers in microfinance and ADB, commercial banks are not in their microfinance system. In addition, there is also a widen gap between the ways in which commercialization is researched and the ways empirical researchers think about, and applied in practice in developing countries. Furthermore, there is very little paper and research on commercialization of microfinance among South East Asia, especially in Vietnam. Microfinance is still a new concept in practice in this country, and has some distinguishable characteristics with other countries. It is carrying out as nonprofit program by government and NGOs. The government has been unsuccessful in driving private sectors and commercial banks to participate in poverty alleviation area. Government becomes exhausted with limit national budget. Much empirical research focuses on the poor's abilities to access financial services or the roles of government, NGOs, mass organizations as microfinance providers. Commercial banks are not mentioned as main financial providers while they play the key roles in the financial market where microfinance market is an important component with numerous potential customers. Therefore, providing a framework for commercial banks doing microfinance as a lucrative business is a necessary.

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Vietnam is an emerging country in South East Asia. The growing speed is belonged to the fastest growing developing countries. However, Vietnam is still a low-income country in the fundamental transition process from centrally-planned to diversified and market-orientated. The poverty was cut from 58% in 1993 to 29% in 2002, and was around 19.5% of 83 million people in 2004 based on the reformation more market-orientated. However, poverty alleviation pace went slow and one third of the population is estimated in poor situation in rural areas. Microfinance currently seems to be the best powerful instruments and a top priority in cutting poverty. However, the concept of microfinance is still a new concept after gaining a lot of attention from the international year of microcredit and the Nobel Peace Prize of Professor Muhammad Yunus for his microfinance projects in Bangladesh. The poverty alleviation programs are non-profit and almost recognized by the government as regulator and active participant via state-owned banks. The private sectors have a poor track record in microfinance. According to international organizations, the microfinance providers in Vietnam are also divided into three systems: formal, semi-formal and informal. However, commercial banks were not mentioned as one of formal microfinance providers while their roles become more and more important in financial market.

Table 1: Microfinance providers and the access of the poor


% of poor accessed to credit

Microfinance Providers



Other banks

Job Creation Programs


Social Organizations

Private Lenders

Relatives and friends






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Source: Vietnam General Statistic Office (2005).

(3.1) Formal System:

The microfinance activities in this system are regulated by the Credit Institutions Law (No. 20/2004/QH11 of June 15th, 2004). Government usually is main microfinance provider via two state-owned banks: (3.1.1) Bank for Agriculture and Rural Development, (3.1.2) Bank for Social Policies. Following state-owned banks, (3.1.2) People's Credit Fund and (3.1.4) rural shareholding banks (commercial banks in rural area) are providing microfinance to the poor. This system is criticized for unsatisfying the demand of the targeted poor communes.

3.1.1. Vietnam Bank for Agriculture and Rural Development (VBARD or Agribank): VBARD is the biggest bank with 2200 branches and sub-branches in the 64/64 provinces. VBARD provides subsidized rural credit to individual and group lending by using traditional banking methods through mass organizations. Although VBARD does not target the poor directly and operates based on profit with market lending rate and loan collateral, it is estimated that 50% of clients are the poor. Their branches and sub-branches are only in district level, so that it is difficult to reach the poor in communes.

3.1.2. Vietnam Bank for Social Policies (VBSP): VBSP was established from 1995 to provide microfinance to the poor who don't have assets and collateral to borrow money from VBARD, under the name The Vietnam Bank for the Poor. In the beginning, this bank virtually operated as a fund or division directly under VBARD. It was separated completely from VBARD and renamed VBSP from March 2003. VBSP takes over the poverty-targeting programs run by VBARD and consolidates all governmental programs and other vulnerable social groups. VBSP has head office in Hanoi, 61 branches, 600 offices throughout all 64 provinces, and mobile offices in some communes to reach the poor.

VBSP provides microcredit with subsidized interest rate and no collateral based on government's poverty reduction programs. In theory, the borrowers must be in low income household lists, in practice; borrowers are nominated by local committees. VBSP uses funds transferred annually from the national budget to cover the gaps between the market and subsidized interest rate. VBSP was reaching 3.3 million clients in 9 months after detachment, among them 1,000,000 were considered poor.

3.1.3. People's Credit Funds (PCFs): PCFs were established in 1993 based on the model of 'Caisses Popularizes' credit union system in Canada. There were about 938 local PCFs in the 55/64 provinces as of December 2006 with 1 head office and 24 branches, reaching just around 1,100,000 members. Their network is organized with the central fund as the apex institution, and the individual funds working at retail level operating at commune level. PCFs are as member-owned organizations operating like shareholding banks. Those who are not a member must pay an additional fee per loan. They do not target directly to the poor, but 55% of borrowers were low-income households in 2006. PCFs rely on internal accumulated fund by mobilized savings of members (66% of their resources). According to the economic principles of cost covering, no easy loans or no easy money to the poor will be available.

3.1.4. Rural Shareholding Banks (RSHBs): Most RSHBs resulted from the reform, merger, and acquisition of former rural credit cooperatives. They operate as normal commercial banks but have head office in rural area with simple lending procedures (but their majorities are not for the poor), and had good repayment rates. They have very limited involvement in savings mobilization. There were approximately 20 rural shareholding banks in 2001. However, the pressures of merger and acquisition trend for listing their stocks in Securities Markets in 2006 make RSHBs transform to Urban Shareholding Banks. There is no RSHB according to the reports of central bank of Vietnam at the end of year 2007.

3.2. Semi-Formal System:

The semi-formal system has various structures of decentralized financing which offer microfinance and try to reach the poor apart from the formal system. This system is relatively small credit and gains from 5% to 10% of the rural credit market, and includes: (3.2.1) Government ministries and programs; (3.2.2) Mass organizations; (3.2.3) Specialized Microfinance Funds; (3.2.4) International Organizations.

3.2.1 Government ministries and programs: Microcredit is usually one component of a large public program, and is provided with highly subsidized interest rate, or free of interest under the Ministries' programs. Since the creation of the VBSP in year 2003, these programs have been transferred from government to VBSP.

3.2.2 Mass Organizations: Mass organizations usually play crucial roles in the implementation of donor supported microfinance programs. They operate as the bridge between major socio-economics groups and the government such as women, farmers, peasants, youth, war veterans union, etc. They have administrative offices to reach thousands of people from national to commune level. They provide credit to their members, run credit programs for international NGOs, or form credits and savings groups for VBARD, and VBSP, as they can access directly to communities and have long experience in social mobilization. The main organizations are the Vietnamese Women's Union (VWU), the Farmers' Union (FU), the Vietnam Youth's Union (VYU), and the War Veterans' Union (WVU).

Among mass organizations, VWU usually receives funds of most microfinance programs from international NGOs and mobilize members through credits and savings groups. VWU also has special microcredit project in Ha Tinh Province reaching a lot of the poor women. However, VWU is still a social organization rather than a microfinance provider by using part-time staff to mange micro programs without experience and training in credit and finance.

3.2.3 Specialized Microfinance Funds: There are only two funds exist in Vietnam focused on microfinance as follows: Capital fund for Employment (CEP) and TYM Fund. CEP is the most successful microfinance fund operating in urban areas relative autonomy from the local Labor Confederation with operational self-sufficiency. TYM Fund is replicated from Grameen model but adapted to the specific context of Vietnam, managed by VWU with operating to increase the life quality of women in rural areas. TYM Fund is trying to upgrade and transforming to MFI accordance with the recent Government Decree No. 28/2005 and licensed by SBV.

3.2.4 International Organizations: (NGOs, Bilateral Donors, World Bank. ADB): There are more than 50 NGOs (NGOs) and some of them have microfinance programs. Most of them are international and focus on credit due to the legal restrictions on mobilizing voluntary savings, and implement microfinance projects through mass organizations. They use external funds through international projects and provide support to partners (mass organizations). Based on the international experience and knowledge of microfinance such as applying various international lending models such as village banking, Grameen Bank, or solidarity groups, to target mostly women, some programs have excellent results, with 99% repayment rates on average with reasonable interest rates. Some of them try to set up substantial microfinance programs or collaborate with mass organizations to support savings groups. Others transformed their microfinance programs into social autonomous funds managed by local communities or are in the progress of transforming to MFIs according to the Government Decree No. 28/2005 on microfinance.

3.3. Informal System:

This system comprises informal financial assistance from family, friends, moneylenders, and through traditional rotating savings and credit associations (ROSCAs). They are created for special purposes from small savings. ROSCAs have existed for generations but never recognized officially. Informal microfinance used to be the main sources of rural credit. Loans from relatives have zero or low interest rates, while informal lenders charge about 5-15% per month (five or ten times the market interest rate charged by commercial banks that charge 1%-1.5% per month). Hence, the poor households borrow money for consumption especially before harvests. Most moneylenders base on traditional ways to lend money on mutual confidence with simple procedures without written loans contracts typically short-term lending in cash and collecting cash back daily or weekly. Because of no collateral, moneylenders usually have rich information about the poor and base on the members of local underworld to collect money if the lenders don't pay the debt on time. Recently, rapid expansion of formal system with establishment of VBSP and urban commercial banks' branches in provinces has structurally changed the rural credit markets.

Most financial providers (especially commercial banks) have been failed to provide microfinance because they are trapped in a microfinance-as-charity vision, a very small percentage of the poor get credit from formal system, while the remainders deal with informal system. Microfinance needs and deserves great assistance but no need for charity but flexible in doing with the poor. More realistically, the microfinance is new segmented market for commercial banks with a new supporting legal framework and regulatory environment from the government. However, it is more difficult doing microfinance as a business than setting up and running a subsidized scheme.