Microfinance around the world is often described as a success story, through its ability to contribute to economic development and poverty alleviation, based on sustainable financial results. Impact studies carried out in recent years and the analysis of economic models of microfinance institutions have shown a more realistic picture of the sector, positive and also bearing many shades. This article reviews some information about the role of microfinance to poverty reduction in the world and in Vietnam.
Keywords: Microfinance, poverty alleviation, rural development
Microfinance is understood as the provision of financial services such as credit, savings, deposits, insurance and services on repayment of loans to those who do not have access to conventional financial services because of poverty and lack of collateral (Ledgerwood, 1998; Littlefield, Murduch, and Hashemi, 2003; Robinson, 2001).
Historically, microfinance has mainly been referred to microcredit. People sometimes confuse microfinance with microcredit, stemming from the fact that many microfinance institutions offer only one product, credit.
Dr. Muhammad Yunus, who is known as the "banker of the poor" founded the first microcredit institution, Grameen Bank in 1976 in Bangladesh. For that initiative, Dr. Yunus was awarded the 2006 Nobel Peace Prize.
In fact, similar organizations existed before that in Europe. Examples include Raiffeisen, the first savings and credit cooperative, born in Switzerland in 1849, or the Caisse du Crédit Mutuel, opened in Strasbourg in 1882, inspired by the Swiss model. However, the mark that Grameen Bank makes is opening doors for the poor, giving them the means to be economically self-sufficient.
Often the first and sometimes only product offered by microfinance institutions, microcredit has become significantly more popular than microinsurance. A microcredit is used to finance an income-generating activity aimed at improving a household's living conditions. The size of a microcredit varies considerably from country to country. It depends on the socio-economic situation as well as the capacity of the micro credit institution.
The role of microfinance
Financial inclusion is the fact that all people and businesses have access to and use financial products and services conveniently, in accordance with their needs, at reasonable costs, provided responsibly and sustainably, emphasizes on the poor, the low-income, the vulnerable, small and medium-sized enterprises, and microenterprises. The importance of financial inclusion was confirmed on a global scale when the United Nations identified financial inclusion as an important solution to achieving 7 of the 17 Sustainable Development Goals (SDGs) by 2030.
In poor countries, there are many poor people who cannot get a loan or an insurance policy because of the lack of guarantees and are excluded from the traditional banking and financial system. As a result, microfinance institutions have established financial and non-financial products and services, to meet the needs of this atypical customer group and combat poverty. These services have contributed to the significant improvement of people's living conditions, which are key factors in the success of the Sustainable Development Goals.
Microfinance can help fight poverty and meet the needs of households independently and consistently. For their part, microfinance institutions will be able to develop their capacity through imposing a small interest rate on certain loans. Many microfinance studies from many different fields show that microfinance has a significant impact on poverty reduction as well as household welfare at different levels such as asset purchases, improvement of living standards, household, health, food security, child education, women's empowerment, and social cohesion (Littlefield et al., 2003; Roodman and Morduch, 2009). Recently, however, people have begun to question the impact of microfinance, as some authors have suggested that microfinance can have a positive effect on poverty reduction (Rooyen, Stewart, and de Wet, 2012). Depending on the context, microfinance can have different effects. This depends on many factors such as development level, financial literacy, community cohesion, population density.
In general, microfinance has been widely recognized in the world as an important tool for poverty alleviation and socio-economic improvement. It helps to diversify household incomes, regulate household spending, and help them cope with economic shocks and fluctuations (Ledgerwood, 1998; Littlefield, Murduch, & Hashemi, 2003; Robinson., 2001).
Microfinance has been shown to have a positive impact on poverty reduction at the macro level (Imai et al., 2012). Microfinance plays an important role in poverty alleviation and socioeconomic development in sub-Saharan Africa (Rooyen et al., 2012). Malaysia's microfinance has a positive effect on the economic vulnerability of poor households (Al-mamun et al., 2014). Research by (Ghaliba, Malki and Imai 2014), emphasizes that microfinance in Pakistan has a positive impact on poverty reduction reflected in household income and expenditure, especially on clothing and health. According to the results of systematic data analysis, Bangladesh microfinance has a positive impact on poverty reduction and household expenditure, especially on food security (Khandker, 2005).
Microfinance Uganda has a positive impact on income diversification and asset accumulation of rural household customers (Morris and Barnes, 2005). Based on data collected from the microfinance literature of Guatemala, India and Ghana, the impact of microfinance has been shown to be positive for borrower households as well as businesses (Mcintosh, Villaran, and Wydick, 2008). Microfinance has a positive impact on borrowers' income, especially in urban areas in India (Imai, Arun and Annim, 2010). Zimbabwe microfinance has a positive impact on poverty alleviation and the average income of microfinance clients is higher than the average income of new or non-clients (Morduch and Graduate, 2002).
Microfinance in Vietnam
According to Merchant Machine statistics in 2021, Vietnam has up to 69% of people who have no access to financial services, no bank accounts, ranking 2nd in the list of countries with the lowest percentage of people having access to financial and banking services in the world. Therefore, microfinance is not only a tool to reduce poverty but is also seen as an integral part of the financial system to ensure universal access to low-income groups of safe financial services.
The Government and the State Bank of Vietnam pay special attention to the operation and development of microfinance. Specifically, the Government has approved the project of the State Bank of Vietnam on "Building and developing the microfinance system in Vietnam by 2020" and "National comprehensive financial strategy to 2025 and orientation towards 2030.”
Microfinance was introduced into Vietnam in the late 1980s, through the credit component of integrated development projects of international organizations. The local partners of these projects are often socio-political organizations and professional associations, most notably the Vietnam Women's Union. After a period of operation, a number of microfinance institutions have grown strong enough and are licensed, becoming official microfinance institutions, operating under the Law on Credit Institutions. In 2020, Vietnam will have 4 official microfinance institutions and more than 30 programs and projects with microfinance activities.
Not an exception, microfinance services in Vietnam are also mainly focused on credit, through subsidized social policy lending programs of the Bank for Social Policies. The compulsory savings was initially deployed but still on a small scale. The payment, remittance and microinsurance services are not yet fully developed.
Microcredit in Vietnam is defined as credits with a value of not more than US$1,250, according to the provisions of Circular No. 07/2009/TT-NHNN. Among microcredit institutions, two state-owned units, the Bank for Social Policies and the Bank for Agriculture and Rural Development, are the largest, attracting 79% of total customers and accounting for 86 % of total microloans as of the end of 2015 (ADB, 2016). In which, the Bank for Social Policies prominently dominates in providing microcredit with about 6.9 million micro borrowers (accounting for 71% of the market share), and outstanding loans at US$6.25 billion (77% market share) by the end of 2015.
Micro-savings have 2 forms: voluntary and compulsory. Compulsory savings apply to microcredit borrowers, in order to increase the linkage and responsibility of borrowers. In general, savings are very low (usually only 1.0% to 1.5% of the loan value).
Voluntary savings mobilized by the Bank for Social Policies and the People's Credit Funds from the population are of three types: demand savings, term savings and savings for the poor. With and without term savings, there is a minimum deposit requirement. Particularly for savings products for the poor, even small amounts of money are allowed to be deposited through the Savings and Loan Group. However, compared to savings products in commercial banks, micro-savings are much inferior in diversity.
Microinsurance in Vietnam is implemented through insurance enterprises or organizations that are not insurance enterprises. Official insurers still feel hesitant to offer this product, mainly due to the high cost, little or no profit, and the biggest obstacle is finding a suitable distribution channel. Currently, a number of insurance companies offer products specifically designed for low-income customer groups. Customers, including the poor, can freely choose products based on their needs. Bao Viet can be mentioned, with low-cost life insurance products, pet insurance and health insurance products; AIA with credit life insurance services under agency contracts with banks; Prudential with insurance products for women and children under 18 years old.
On the other hand, in order to protect the insurance participants, according to the law, semi-formal microfinance institutions are not allowed to provide insurance by themselves but are only allowed to act as agents for insurance organizations’ official insurance. The Women's Union as well as some semi-formal microfinance institutions (eg. Thanh Hoa Fund for Poor Women) sell microinsurance as an agent for some insurance companies such as Manulife, Bao Viet, Postal Insurance.
Practice of recent years has shown that microfinance has grown continuously, showing the necessity and suitability of Vietnam's conditions. However, in addition to microcredit, other microfinance products are very limited in size and number of customers.
Meanwhile, people, especially the poor and vulnerable, living in disadvantaged areas and frequently impacted by storms and floods, are in dire need of services such as insurance. The implementation of micro-insurance services will create opportunities for the poor and low-income people to access services other than micro-credit services, enhancing the ability to cope with risks for groups of people and vulnerable objects. Currently, Vietnam does not have a legal concept in the current insurance laws on microinsurance and insurance for low-income customers because insurance products are classified according to insurance activities (life and non-life), but not by market segment. Implementation of microinsurance services through local NGOs or programs/projects, while conditions and safety institutions have not been established leading to the provision of insurance services unprofessional and breakable. This can expose the poor to higher risks. Therefore, there should be a mechanism to encourage connection of microinsurance services from professional insurance companies.
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