For microfinance institutions in Viet Nam to flourish and grow their client base, regulatory changes are needed, beginning with their ownership.
Viet Nam’s capital markets are on a positive trajectory. Its corporate bond market is growing much faster than neighboring markets. The banking sector is healthy, reflected in a recent positive outlook from Moody’s. Moreover, fintech is accelerating, with the State Bank of Vietnam currently licensing over 40 companies as payment intermediaries.
It is surprising, then, that microfinance institutions are not enjoying similar dynamism. Less than 1% of the population are microfinance clients, and despite this low base, growth is slow.
Meanwhile, microfinance is booming in neighboring countries. The Philippines and Cambodia, for example, each have three times as many microfinance clients and four times as many microfinance loans outstanding.
To close this gap, microfinance institutions in Viet Nam must expand their clientele. The number of microfinance clients increased on average by only 2% from 2017 through 2019. Although loans outstanding increased substantially faster, 93% of this portfolio growth was concentrated in the two largest microfinance institutions.
More importantly, rapid asset growth without corresponding growth in the number of clients indicates that this growth was driven by providing existing customers with larger loans. Re-lending to reliable customers is a good banking practice but will do little to improve financial inclusion.
Viet Nam aims to expand credit to 70% of the adult population. To help achieve that goal, the seven leading microfinance organizations would need to grow their client base by 9% annually during the next five years. But client numbers are growing by only 2%. To close the gap, the incumbents must not only expand their client base more quickly, but Viet Nam also needs to attract new entrants.
Yes, fintech will be able to reach some of the unbanked. Yes, banks are increasingly extending services to lower income clients, and yes, consumer finance is one of Viet Nam’s fastest growing market segments.
However, despite their low penetration, microfinance institutions have an important role. They provide not just access to credit but also professional networks and education. They’re often willing to work in rural areas where other providers would find the operating costs too high, and they are particularly important for women, many of whom find microfinance the most inviting entry point into the formal financial system.
The disconnect between microfinance institutions’ slow growth and the dynamism elsewhere in Viet Nam’s economy is the product of microfinance institutions’ orientation. Despite becoming a middle-income country, most microfinance institutions tend to operate like nongovernmental organizations (NGOs).
NGOs birthed the microfinance movement. But as microfinance has matured, many microfinance institutions outside of Viet Nam have recognized that they can reach more clients by adopting a commercial orientation. Although this can mean higher interest rates, more clients are better served because commercially oriented microfinance institutions can attract the leadership to drive growth and the capital to fund that growth.
For microfinance institutions in Viet Nam to flourish and grow their client base, regulatory changes are needed beginning with their ownership, as argued in a recent publication. Currently, a political or sociopolitical organization must be an microfinance institution’s largest shareholder. But such organizations are unlikely to have the business or financial acumen to drive growth. Additionally, they have limited financial capacity to inject capital, effectively limiting a microfinance institution’s growth to what it can retain from its profits.
Ownership restrictions deter foreign investment. Presently, there is no possibility of a dynamic microfinance institution from another country entering Viet Nam’s market. The only foreign investors allowed are foreign banks, which have traditionally shunned microfinance. Moreover, their shareholding must not be larger than that of political or sociopolitical organizations—a further deterrent.
There is a perception that microfinance institutions in Viet Nam have been held back because they cannot access finance. I disagree.
Regulatory changes are also required on how microfinance institutions operate. Loans are capped at 50 million Vietnamese dong (about $2,200). As microbusinesses grow, microfinance institutions cannot retain them, and small businesses that have slightly larger borrowing needs must look elsewhere.
There are strict limits on adding branches and operating across provinces. These rules prevent microfinance institutions from expanding geographically, which diminishes both their operational efficiency and attractiveness to capital providers.
Speaking of capital, few if any lenders will bank an unlicensed microfinance institution. To get around this, many countries have introduced tiered licensing frameworks. The broadest license may allow a microfinance institution to accept deposits whereas a narrower license confers fewer liberties but concurrently entails less regulatory compliance.
In Viet Nam, there is only one category of license. And out of the over 180 microfinance organizations in Viet Nam, only four have obtained it.
There is a perception that microfinance institutions in Viet Nam have been held back because they cannot access finance. I disagree. Although there may be scope to designate Viet Nam’s Cooperative Bank or other state-owned financial institution with a mandate to lend to microfinance institutions, regulatory changes that broaden ownership and operations will do more to empower their growth.
As they grow revenues and profits, investors will take notice. International microfinance investment vehicles will expand their limited presence. As has happened in other middle-income markets, microfinance institutions will eventually access wholesale loans from international and domestic banks. In some markets, microfinance institutions are even able to issue bonds.
None of this means that all microfinance institutions must abandon their nongovernmental orientation. The exigencies of expanding access to finance are such that both commercial and nongovernmental operating models should coexist.
A lower middle-income country should not have 10 times as many licensed payment intermediaries as licensed microfinance institutions. Viet Nam needs to take regulatory action to empower microfinance so it can do its job ensuring everyone benefits from economic growth.
A version of this blog post was published in Dau Tu – Chung Khoan.