ACCESS has supported Vietnam’s microfinance sector since 2010. The following year, the government issued its microfinance development strategy, which raised hopes that the sector would enter a new growth phase that would enable it to make a significant contribution to financial inclusion.
However, a decade later, the reality is that Viet Nam’s microfinance sector continues to underperform its peers in Asia and elsewhere. Most microfinance service providers (MSPs) are growing slowly, if at all.
Supported by the Asian Development Bank (ADB), ACCESS recently completed a deep-dive analysis of the sector, and traced the causes of this underperformance to two factors. The first is limited access to funds and the second is a general lack of a commercial mindset among MSPs.
The sector lacks access to funds for a number of reasons. For example, MSPs lack sufficient collateral to qualify for a loan from Vietnamese banks. In addition, regulations effectively limit microfinance projects and programs from borrowing in foreign currency and the amount of deposits they can mobilize.
However, our key finding is that limited access to funds is the consequence of a more fundamental challenge, which is the lack of a commercial mindset among MSPs, and that this is the result of policy choices. It is not merely an issue of regulatory gaps or underdeveloped market infrastructure. Rather, existing laws and regulations conceptualize microfinance as a social activity delivered by non-governmental organization (NGOs). NGOs were the main providers of microfinance around the world in the 1990s, and Viet Nam’s microfinance sector began the same way. However, while the global industry shifted to a more commercial model that is both more able to access wholesale loans to fuel growth and more capable of managing that growth, Vietnamese MSPs remain rooted in their early history. Current regulations prevent Vietnamese MSPs from making the transition to a more commercial model.
In other words, the sector’s lack of funds is a symptom rather than a cause of underperformance. Funders require professional management, growth potential, and transparency, all of which are insufficient in Viet Nam’s microfinance sector.
In 2020, the government promulgated its National Financial Inclusion Strategy, which recognizes the important role that microfinance can play in financial inclusion. The potential revision of the Credit Institutions Law and regulations for microfinance provide an opportunity to promote a new vision for the sector.
Although we believe that the NGO-oriented microfinance institutions, programs, and projects run by the Viet Nam Women’s Union and other socio-political organizations still have an important role to play, we find that relying on them to contribute to the goals of the National Financial Inclusion Strategy will lead to continuing underperformance. All of the other countries with large microfinance sectors supplement NGO-oriented MSPs by allowing other providers to take a more commercial approach, and Viet Nam should consider the same to increase the supply of financial services to the low-income, low-collateral, and small-transaction households who make up the bulk of Viet Nam’s financially excluded.
As such, we conclude that the Government of Viet Nam should promote a variety of MSP institutional types through holistic regulatory reforms that enable commercially-oriented MSPs to be established and grow alongside existing providers. These include (i) encouraging new investment in microfinance institutions by removing restrictions on ownership, (ii) encouraging the formalization and professionalization of microfinance organizations (MFOs) and microfinance programs (MFPs) by creating a new regulatory category of licensed credit-only microfinance institutions, and (iii) removing restrictions on client acquisition that slow growth and discourage investment.
Professionalization, including the entrance of new players, will attract funding from international microfinance investment vehicles as well as some Vietnamese banks. However, as in all markets, this type of funding is neither available nor appropriate for all MSPs. A mechanism is needed to finance MFOs and MFPs that are not yet ready to access fully commercial funding. To fill this gap, this paper’s second recommendation is to support the state-owned Co-Op Bank to provide wholesale funds to MFOs and MFPs. Co-Op Bank has the relevant experience, interest in entering the market, and available liquidity. The demonstration effect from a domestic institution like Co-Op Bank lending to MSPs will help encourage other banks to enter the market.
Read the full report on Vietnam’s microfinance sector.