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Vietnam rural financial market- Fact dianostics and the policy implications for rural development of Vietnam

Vietnam rural financial market- Fact dianostics and the policy implications for rural development of Vietnam. The development of Vietnam rural sector has been given attention by different orientations and policy frameworks, of which rural finance is the key tool, notably the Decree 41 on cred- it for rural sector.

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Journal of Economics and Development Vol. 13, No.1April 2011, pp. 57 - 73

ISSN 1859 0020

Vietnam rural financial marketFact dianostics and the policy implications
for rural development of Vietnam
Le Thanh Tam
National Economics Univeristy, Vietnam
The development of Vietnam rural sector has been given attention by different orientations
and policy frameworks, of which rural finance is the key tool, notably the Decree 41 on credit for rural sector.
The Vietnam rural financial sector has been growing and making significant contribution to
its rural development by a rapid expansion of outreach and available fund sources. However,
there have been remaining problems that are very likely to hinder the sector from its further
development. Such problems are: (1) there is a lack of responsive and adequate financial
services in rural areas; (2) a significant number of the poor households still do not have
access to any microfinance services, to name a few. Thus, this paper is intented to focus on
two main issues. The first is to analyze the causes of such problems, and the second is to provide recommendations that are strongly expected to overcome such problems to enhance
Vietnam rural development in the new decade with the Development Millenium Goal.
Keywords: credit, microfinancial institutions (MFIs), poverty reduction, rural finance, savings.

1. Overview of Vietnam rural financial market

the nation’s poor also lives. Agriculture
accounts for 54% of the national workforce
and is the economic mainstay. Therefore, the
rural economy sector plays an important role
in Viet Nam. However, some 80-90% of Viet
Nam’s poor live in rural areas. The continued

1.1. What are the problems of Vietnam rural
Vietnam has approximately 72% of the
population living in rural areas, where 94% of
Journal of Economics and Development


Vol. 13, No.1, April 2011

the seriousness of poverty, are higher among
ethnic minorities. For example, 13.5% of Kinh
and Hoa people were poor in 2006, while this
figure was 45.2% and 73.6% in Tay-Thai
group in Northern Upland and ethnic minorities in the Central Highland, respectively
(Baulch Bob, 2010).
Participatory analyses of poverty in
Vietnam often pointed out the lack of capital
and limited access to financial services as one
of the major causes of poverty. The poor people
usually reported that they either did not have
collaterals to access credits from commercial
banks or the level of credit from VBSP offered
through mass organizations (WU, FU, etc.) was
low, not enough for production and business
development (Vietnam Academy of Social
Sciences, 2008). With relatively young population and declining fertility rate, Vietnam is now
entering “the golden period” of the labor force
(VietnamNet Bridge). The dependency ratio is
low with 66.2% of the population is at working
age (15-59) in 2008 (GSO, 2010). Most of the
labor force work for themselves/their households or employed in household businesses.
More than 70% of labor growth occurs in rural
areas. However, the number of jobs in the agriculture sector is stagnant or declined throughout the decade, from 24.8 million in 1999 to
23.6 million in 2008 (ADB, 2009). Therefore,
the solutions for developing rural Vietnam are
employment creation and poverty reduction in
sustainable ways.

growth is set to bring Vietnam out of the low
income country status to the group of middleincome countries in 2010, when the GDP per
capita has surpassed the threshold of 1000
USD. The poverty rate, measured by the international standard, has decreased from 58% in
1993 to 14% in 2008 (GSO, 2009). It is an
exceptional achievement, more than two times
better than what is aimed for in the first
Millennium Development Goal (MDG). In the
absolute term, Vietnam has lifted some 35 million people out of poverty from 1993 to 2008,
nearly 6,400 people every day (The World
Bank Website). There are, however, still 12.5
million people living below the poverty line.
The achievement in poverty reduction is still
precarious and not yet sustainable. As the
United Nations Development Programme
(UNDP) stated: “With so many of Viet Nam’s
people on the precipice of the poverty line, any
major economic or natural disaster will only
set Viet Nam back” (UNDP Vietnam). Poverty
in Vietnam is mainly a rural phenomenon. The
poverty rate in rural areas is more than 5 times
higher than in urban areas in 2008, 18.7% versus 3.3% (see Table 1).
Given the fact that 72% of the population
live in rural areas, the rural poor account for
94% of the total number of poor people.
Poverty is also increasingly associated with
ethnic minorities. Both the poverty headcount
(percentage of the population living below the
poverty line) and poverty gap, which measures

Table 1: General poverty rate calculated by expenditure
by urban and rural region s





Source: (GSO, 2010)

Journal of Economics and Development


Vol. 13, No.1, April 2011

1.2. Rural finance - is it the answer for
Vietnam rural development?

school enrollment, and this is more pronounced
for girls and younger children. In a similar way,
the ADB’s review paper (2009) highlights the
consensus that the financial sector development plays a vital role in facilitating economic
growth and poverty reduction. The paper also
concludes that microfinance and SME credit
programs need to be well designed and targeted to be effective. In addition, rural finance/
microfinance programs need to be accompanied by other supporting services including
access to markets and technologies.
The provision of agricultural and rural
financial services has always been a major
component of poverty reduction and employment creation measures of Vietnamese
Government from the onset of Doi Moi in
1986. Several policies and actions have been
made to provide better financial services for
the rural sector.
1.3. Rural finance system of Vietnam
The rural financial providers in Vietnam
consist of three types: formal (registered) credit institutions, semi-formal credit programs

Although the literature on the link between
rural finance/microfinance and employment
creation/poverty reduction remains mixed, several studies show a strong poverty impact of
rural finance/microfinance. For instance a
study by Pitt and Khandker (1998) conclude
that credit raises household consumption, especially when lend to women. Similarly,
Khandker (2005) show that microcredit helps
the extremely poor even more than the moderately poor. On the other hand, studies by
Montgomery and Weiss (2005) and by Weiss,
Montgomery, and Kurmanalieva (2003) show
mixed result. They argue that while rural
finance/microfinance may have a positive
impact on poverty, its reach to the core poor is
limited and there is a need to improve the
design to make MFIs as part of the package for
targeting the poor, rather than the whole solution. A recent study by Islam and Choe (2009)
shows household participation in a rural credit
program may increase child labor and reduce

Figure 1: Main rural providers in Vietnam

Fo rm al
SO C B s

Sem i-fo rm al
6 w /50% o f M FI
clien ts

In fo rm al


44 w / lim ited
o u treach

R elatives an d
Frien d s
M o n ey
Len d ers

Paw n
sh o p s

Sm all
Trad ers

In p u t
Su p p liers

M arketin g
A gen ts

Source: ADB, 2010

Journal of Economics and Development


Vol. 13, No.1, April 2011

Table 2: Key milestones of Vietnam rural finance policies and development




Vietnam Bank for Agriculture (VBA) was established to focus on providing
financial services to agriculture and rural sectors
CEP – the first Microfinance insti tution (MFI) type was established by the Labor
Confederation of HCM City
TYM – one type of MFIs - was created by the Vietnam Women’s Union
People’s Credit Funds (PCF) network started the pilot after the collapse of the whole
Credit Cooperative System in the hypeinflation period before Doimoi
The Bank for the Poor was established within VBA
Decree No.48/ND -CP of the Government for improving organizations and operation
of PCFs
The Bank for Social Policies (VBSP) as established b y separating the commercial
banking to VBA and social banking to VBSP
Vietnam Bank for Agriculture was transformed into Vietnam Bank for Agriculture
and Rural Development (VBARD) with full banking services
New decree No. 28/ND -CP dated 8/3/200 5 of the Government on organization and
operation of microfinance institutions (MFIs) released with ADB supports
Amendment of Decree 28 above by Decree 165/ND -CP dated 11/7/2007 to
Resolution 26 -NQ/TW- on “Tam nong” dated 5/8/2008 – of the Par ty Congress on
three rural critical issues: agriculture, farmers and rural sector. One of solutions is to
“continue to provide favorable credit to the rural sector, and encorage the financial
institutions to lend to the rural sector”
National Microfi nance Steering Committee was formed to assist the Prime Minister
in policy and strategy formulation to develop a market -based microfinance sector
The Decision No.497/QD -TTg of the Prime Minister dated 17/4/2009 on providing
the interest support for f armers within the Demand Stimulus package
Decree 41/ND -CP dated 12/4/2010 on Credit Policy for developing agriculture and
rural sector, allow non -collateral borrowing to farmers up to VND 50 millions to
farmers, VND 200 mill to non -farm households, and VND 500 mill to
cooperatives/business farm
The new Credit Institution Law (CIL) was released to replace the old version of CIL,
which incorporates MFIs into the formal financial system and liberalize the banking
operations, including the rura l finance
TYM - The first MFI has been formalized to become one of credit institutions

Source: (Le Thanh Tam, 2008), (ADB 2010)

The formal sector consists of 6 types of
credit institutions (SBV, 2010)

banks were operated, as the Government does
not distinguish among rural-urban banks anymore.

- Commercial banks, especially VBARD.
Before 2005, more than 16 joint-stock rural
commercial banks were established and operated in rural areas. After 2005, no more rural

- Vietnam Bank for Social Policies (VBSP)
– wholly owned by the government, provided
subsidized credits to the poor, and funded
mainly from the State Budget.

(mainly NGO-MFIs), and the informal sector.

Journal of Economics and Development


Vol. 13, No.1, April 2011

- People’s Credit Funds (PCFs) system with
Central People’s Credit Fund (CCF) as the
apex institution - applying the cooperative
- Vietnam Postal Savings Company
(VPSC): Providing savings mobilization services only.
- And TYM - the first newly formalized
NGO Microfinance Institution which just has
been registered in August 2010.
The semi-formal sector includes more than
300 small-scale microfinance programs, of
which 40 are relatively big and focusing on
microfinance. All of them are NGO-typed,
with the number of clients ranging between
1,000 – 10,000 and the majority of the loan
portfolio is below US$1 million (except CEP
and TYM – two biggest MFIs). The programs
strongly focus on the poor, have typical loan
size between US$150 – 300; locations mostly
on the rural parts of Vietnam; and lend almost
entirely to women – (94% of the clients are
female). Among them, the 6 biggest ones
account for more than 50% of market share for

the whole semi-formal sector. Their savings
are mainly compulsory, very tiny voluntary
savings. They also receive few commercial
funding sources (MFWG, 2009). The informal
sector consists of the Rotating and Savings
Associations (ROSCA), relatives and friends.
The operation of main rural finance
providers are presented as followed:
The three biggest rural finance market
players are: VBARD, VBSP and CCF/PCFs
system. Of which, the biggest credit provider
is VBARD (56.34%). However, the credit
approach of VBSP is quite different from others, as it has subsidized interest rates (ranging
from 0.4% to 0.9%/month). The savings
capacity of these rural finance providers is
much less than credit. Only PCFs/CCF system
and the VBARD operate as commercialized
institutions, with the main funds for lending
sourced from savings mobilizations using market rates. VBSP and NGO MFIs mainly provide credits, with pilot savings program
(VBSP started in 2007), or compulsory savings (NGO MFIs).

Table 3. Rural finance formal and semi -formal landscape up to 2009

Number of

% of total

loans (USD

% of total

No. of

% of total








































Source: ADB (2010), Agribank (2010)

Journal of Economics and Development


Vol. 13, No.1, April 2011

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