Microfinance in Vietnam

For this blog I’ve decided to start with Vietnam, since it is the only country that I have first-hand experience in. Vietnam has transformed economically in the last two decades. The Hanoi I know and love will definitely look completely different ten years from now. Vietnam used to be one of the poorest countries in world. This was because of the numerous international embargoes against Vietnam because of their military occupation of Cambodia. This was one of the many times that the United States and the United Kingdom were on the wrong side of history. The communist government of Vietnam did not have much concern for human rights, but compared to the genocide perpetrated by the Khmer Rouge they were positively saintly.

During the late 1980’s the government of Vietnam instituted their doi moi (≈restoration) economic policy.  

Statue of Lenin in Ba Dinh, Hanoi

The Vietnamese government made it public that they were transitioning Vietnam into a market-oriented economy and thus were uprooting the centrally economic system. This article is a good introduction to doi moi. There is a lot of debate to whether or not doi moi was as significant as it appears to be. It is true that Vietnam’s economy did sky rocket following the introduction of doi moi, but there were other factors at play—namely the collapse of the Soviet Union, Vietnam being reintegrated into the international community, and a massive increase in foreign direct investment during the 1990s. Vietnam may have opened their doors to foreign money, but did the government really take a back seat to market forces? According to the Index Mundi 2012 economic report, state-owned enterprises have a 40% share of GDP. The way I look at it is that the Vietnamese government has definitely made promising reforms and had great results, but there is still a lingering cronyism among party officials and business leaders. The Vinashin scandal (read about it here and here) was a product of government mismanagement which hurt the country economically and caused the banking system to lose credibility internationally. This greatly increased borrowing costs for Vietnamese banks and the Vietnamese government.

Patriotic Statue in Hanoi

Microfinance in Vietnam is also largely a state run industry. If you look at the MixMarket page for Vietnam you will see that VBSP (Vietnam Bank of Social Policies) has a portfolio at least a factor ten larger than any of the other MFIs (microfinance institutions). VBSP is, of course, state-owned and along the network of People’s Credit Funds (also state-run), makes up the lion’s share of the microfinance market. The Vietnamese government heavily subsidizes the microfinance industry by setting interest rates far below the market rate. This makes it very difficult for VBSP to be financially sustainable without billing the Vietnamese taxpayers. According to the website of VBSP, their mission is to alleviate poverty. It is a noble goal and the poverty rate has decreased since VBSP’s began operations in 2002. 

Rural village outside Mai Chau, Hoa Binh province. Mai Chau is home to a large number of people of the Tai minority ethnic group. 

The problem lies in the distribution of this wealth creation. The highest poverty rate is among the ethnic minorities (according to a report by the World Bank, the poverty rate in 2006 was 16% for the whole country, but half of those living under the poverty line were from the ethnic minorities, and they only make up less than 20% of the population.) Over the last six years we have seen continuing trends, and although the overall poverty rate has continued to decline, the poverty rates among the ethnic minorities, or in other words non-Kinh people, have stayed stubbornly high. If I were to throw my two cents into this problem, I would point out that most of these state-run banks and MFIs are biased in their lending and some ethnic groups are left out of the system.  

It is very difficult for private MFIs to operate in Vietnam. This environment means that pretty much all of the private microfinance industry has to rely on charity, which limits their outreach.

Chop Stick Factory outside of Mai Chau

CEP (Capital Aid Fund for the Employment of the Poor) is a successful private MFI based in Ho Chi Minh City. They have developed an impressive loan portfolio and have bright prospects for the future. They operate mainly within urban Ho Chi Minh City and loan money to small start-up businesses.

Bustling street in Ho Chi Minh City

The NGO I volunteered at was called MACDI, a non-profit MFI operating in the rural areas surrounding Hanoi. They do good work, but are heavily limited in their outreach due to their dependency on charitable funding. This brings me to my final point. The debate about the effectiveness of microfinance in the alleviation of poverty is still raging and there is no clear winner. Is Vietnam’s state-run system, with its subsidized interest rates, preferable to the Philippines and India’s comparatively lax regulatory environment? We should all be aware of the catastrophe that happened in Andhra Pradesh (this is a blog post I wrote about it) and what happens when the government has regulations in the wrong place. The World Bank and their neo-liberal doctrine have continually pressured the Vietnamese government to relinquish its control on the microfinance industry. This would attract foreign investment but would it truly benefit the Vietnamese people? Maybe there is something to be said about microfinance being subsidized and/or a purely charitable enterprise. Is it ethical for MFIs to profit off of the most vulnerable members of society? The distinction between the financial sustainability of an MFI and outright exploitation is as Justice Potter Stewart famously said referring to hardcore porn: “I can’t define it but I know it when I see it.” (paraphrased)

Just the Beginning

My name is Philippe Morel and I studied Asian Studies and Japanese at the University of British Columbia. I graduated in 2010 and spent the last two years living, volunteering, and working in the Philippines and Vietnam. I didn’t become interested in microfinance until I went to Vietnam and so while I was working there as an English teacher I decided to get involved with a microfinance NGO as a volunteer. The NGO is called Microfinance and Community Development Institute and I will write more about them and the microfinance situation in Vietnam in the following posts. I want to use this blog as a place to show some of my research and get some feedback from other people who are into this kind of stuff.

While I was living in Vietnam I used to wake up every day at six AM and start my day with my own “Vietnamese” breakfast (I thought it was real good) and talk to my girlfriend over Skype. I would then take the bus up to West Lake to volunteer. This is an approximation of what it was like getting to “work” every morning.

The alleyway that led to the maze of smaller alleyways which eventually lead to the office was surrounded by dog restaurants. I have mixed feelings about eating dogs but seeing all those hacked carcasses of dogs displayed on the street was kind of a crappy way to start the morning. The older Vietnamese guys enjoying their dog stews and washing it down with some vodka would at least give me a wave as I walked past. I would then “work” at the office for a few hours and leave after lunch (which they so kindly provided for me). I would then head to my other workplace and prepare my English lessons for my evening classes. I would also intersperse this with meeting some nice Vietnamese ladies to practice my Vietnamese. That was my Monday to Friday and then I had a full day of kid’s classes on Saturday and Sunday which made everything else in my life seem easy. I don’t know how kindergarten teachers can do this day in and day out. All in all it was a tough schedule

I was brought into MACDI to help them develop microfinance based tourism program. I wrote another article about that here. I helped them make some marketing tools and translated them into Japanese but there really wasn't enough work for me to do. I spent most of my time researching about microfinance on the internet. I thought that even if they didn't give me a lot of work to do I wasn't going to waste my time. There was apparently though a misunderstanding between my boss at MACDI and I and she thought I was insufferably lazy for not accomplishing enough. I didn’t even know what work I was supposed to be doing and so we stayed at this impasse, unable to bridge the gap. During a night of drinking I let my English flat-mate convince me that the volunteering was a waste of time and so I quit the next day.

I do regret not having a successful volunteers-ship but these things happen. I volunteered in the Philippines for 8 months and met scores of other volunteers while I was there. Idealism can easily be squashed while volunteering at a typical NGO. The problem is that most NGOs are continually strapped for cash and their employees are over-worked. They always want volunteers to help with the workload but the adventurous volunteer who wanted to deliver 30 babies a day out in the slums of Mumbai will probably get stuck doing photocopying for a good 4 hours a day. That’s just how it works. *A note on volunteering: Avoid those companies that require you to pay them for the opportunity to volunteer. It’s a scam.

MACDI itself is a great microfinance institute working hard within the binding constraints of the Vietnamese regulatory framework. I will write more about them later. I found a video from the BBC and the lady they talk to who (even if the BBC offers no explanation of who she is) was my boss. She’s a very capable lady, very competent. I’ll leave it at that.