Asian Development Bank€¦ · Sector Development Program (Financed by the Technical Assistance...

Grant Assistance Consultants’ Report Project Number: 42235-01 November 2010

Socialist Republic of Viet Nam: Microfinance Sector Development Program (Financed by the Technical Assistance Special Fund) This consultants’ report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents.

Asian Development Bank

VIET NAM

MICROFINANCE SECTOR ASSESSMENT

Developing the Microfinance Sector Project ADB TA 7499 VIE

Prepared by PPTA Consultants

for the Asian Development Bank

November 2010 Hanoi, Viet Nam

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TABLE OF CONTENTS

I. SECTOR ASSESSMENT: CONTEXT AND STRATEGIC ISSUES...................................................11

A. Sector Overview................................................................................................................................................. 11

B. Sector Assessment.............................................................................................................................................. 12 1. Micro-credit delivery ...................................................................................................................................12 2. Provision of Micro-savings services............................................................................................................13 3. Remittances, payment systems and other services ......................................................................................13 4. Micro-insurance ...........................................................................................................................................14 5. Wholesaling of Microfinance Funds............................................................................................................15

C. Development and Strategic Issues.................................................................................................................... 15 1. Policy, Legal and Regulatory Environment.................................................................................................16 2. Sector Development Strategy ......................................................................................................................19 3. Prudential Supervision .................................................................................................................................20 4. Institutional Capacity ...................................................................................................................................22 5. Financial Infrastructure Provision................................................................................................................30 6. Gender and Social Issues in Microfinance...................................................................................................33 7. Summary of Key Constraints and Development Needs (SWOT) ...............................................................34

II. SECTOR STRATEGY STATUS.........................................................................................................36

A. Government Sector Strategy and Plans .......................................................................................................... 36

B. Recent ADB Support and Experience ............................................................................................................. 36

C. Other Development Partners and Stakeholders Support.............................................................................. 37

III. CONCLUSION AND RECOMMENDATIONS ....................................................................................38

A. Creating the enabling Policy and Regulatory Environment for Microfinance ........................................... 38

B. Ensuring Effective Supervision ........................................................................................................................ 39

C. Improving Institutional Capacities and Capabilities of Key Players ........................................................... 40 1. VBSP ...........................................................................................................................................................40 2. CCF, PCF and VAPFC ................................................................................................................................40 3. Transforming the semi-formal MFIs ...........................................................................................................41 4. VBARD .......................................................................................................................................................41

D. Setting up Supportive Financial Infrastructure ............................................................................................. 41

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Exchange Rate as of end June 2010 US$1 = VND 18,500

ABBREVIATIONS

ACT Asian Community Trust ADB Asian Development Bank AFD Agence Francaise Developpement BWTP Banking With The Poor Network BTC Bank Training and Consultancy BOD Board of Directors CCF Central People’s Credit Fund CCM HCMC Cooperative Fund CEP Capital Aid Fund for the Employment of the Poor CFRC Community Finance Resource Center CIL Credit Institution Law COBP Country Business Plan CSG Credit and Savings Group CSP Country Strategy Program CSR Corporate Social Responsibility CSOD Center for Social Organization and Community Development DMS Domestic Microfinance Specialist FSS Financial Self-sufficiency EA Executing Agency GIA Grant Implementation Agreement GIM Grant Implementation Manual GDP Gross Domestic Product GIFF Income For the Poor Fund GSO General Statistics Office HCMC Ho Chi Minh City HH Household ICT Information and communication technology IEC Information, Education and Communication IES Impact Evaluation Specialist IFAD International Fund for Agricultural Development IFC International Finance Corporation (of the World Bank) ILO International Labour Organization JFPR Japanese Fund for Poverty Reduction MACDI Microfinance Community Development Institution MAF Mutual Aid Funds MF Microfinance MFI Microfinance Institution MFSP Microfinance Financial Services Provider MFSSP Microfinance Support Service Provider MFWG Microfinance Working Group (Association of MFIs) MSWG Microfinance Strategy Working Group (SBV technical group) MCDI Microfinance and Community Development Institute MIX Microfinance Information Exchange MO Mass Organization MOF Ministry of Finance MOLISA Ministry of Labor, Invalids, and Social Affairs MPI Ministry of Planning and Investment

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MTC Microfinance Training Coordinator M&D Microfinance and Development Center NGO Non-governmental Organization NMA Norwegian Mission Alliance NMSC National Microfinance Steering Committee OSS Operational Self-sufficiency PAR Portfolio at Risk PCF People’s Credit Fund PIU Project Implementing Unit PMU Project Management Unit PWU Provincial Women Union PACODE Participatory Community Development Project RIMANSI Risk Management Solutions, Inc., entity promoting MAF &

microinsurance SBV State Bank of Vietnam SCF Save the Children Fund SEDA Centre of Small Enterprise Development Assistance SME Small and Medium Enterprise SOE State-owned Enterprise TA Technical Assistance TNA Training needs assessment TOR Terms of Reference TOT Training of Trainers UVF Unilever Vietnam Foundation TYM Tau Yeu Mei (Mutual Affection Fund) VAPCF Vietnam Association of People Credit Funds VBARD Vietnam Bank for Agriculture and Rural Development VBSP Vietnam Bank for Social Policies VBCP Vietnam-Belgium Credit Project VDIC Vietnam Development Information Center VFU Vietnam Farmer Union VMS Vietnam’s Microfinance Sector VPSC Vietnam Postal Savings Company VVU Vietnam Veteran Union VWU Vietnam Women’s Union WB World Bank WV World Vision

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LIST OF ANNEXES ANNEX 1: Excerpts from: JFPR No. 9140-VIE Consultants’ Report - An Institutional Review ANNEX 2: Excerpts from RIMANSI Publication (2008) – Micro-insurance in Vietnam ANNEX 3: Credit Institutions Law (June 2010) ANNEX 4: VBSP and CCF-PCF Analyses of Operations ANNEX 5: Summary of Field Surveys ANNEX 6: Social and Gender Analysis ANNEX 7: Matrix of Donor Funded Projects ANNEX 8: List of People Met ANNEX 9: VBSP and CCF performance ANNEX 10: Matrix of Donor Funded Projects ANNEX 11: Summary of Field Survey on Lamdong’s PCFs ANNEX 12: Proposed Key Elements of the Microfinance Strategy and Indicative Timelines Members of the Consulting Team, ADB TA 7499 – VIE

Mariano A. Cordero, Microfinance Development Specialist / Team Leader Reno Velasco, Financial Institution Strengthening Specialist, International Petrus van Dijk, Microfinance Legal Specialist, International Le Thanh Tam, Microfinance Specialist, National Le Thi Phuong Thao, Banking Specialist, National Pham Quang Nam, Social and Gender Specialist, National

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EXECUTIVE SUMMARY

Government’s multi-pronged program approach to poverty reduction of modernizing the agriculture sector and increasing employment opportunities through geographically dispersed industrialization and SME promotion has succeeded in dramatically reducing poverty, with Vietnam poised to meet its Millennium Goal by 2015. However, poverty still affects 12.3% of the population as of end 2009, and is especially felt among ethnic minorities in remote areas.

A major constraint in meeting poverty reduction objectives is the lack of responsive and adequate financial services in rural areas, especially amongst the poor. In response, Government has been adopting a dual approach to rural and microfinance that is both market-based and state-driven. From the onset of Doi Moi, it created and nurtured commercially-oriented financial institutions that have become major players in rural and microfinance – the Viet Nam Bank for Agricultural and Rural Development (VBARD), and the People’s Credit Fund network (PCF – a financial cooperative). It also encouraged the creation of semi-formal microfinance institutions (MFIs) and the implementation of microfinance programs through socio-political organizations, with evolving laws and policies aimed at integrating them into the formal financial system, though these account for a small market share for now. However, its concern with the exclusion of the poor and other target groups from the commercial operations of VBARD, the PCFs and the MFIs, led Government to directly intervene in the microfinance market through the creation of the Vietnam Bank for the Poor (VBP) which was administered by Vietnam Bank for Agriculture (later VBARD) from mid-1990 to early 2000. VBP was later spun off as the Vietnam Bank for Social Policies (VBSP) in 2002. To date, VBSP has risen as the most dominant player being the main provider of “social policy lending” to target groups funded by State-mobilized funds and heavily supported with subsidies to cover both its financial and operating costs.

Nonetheless, Government still sees the growing importance of a market-driven microfinance sector and is aware of its rapid development elsewhere in the region in providing sustainable quality financial services to poor and low-income households. With assistance from ADB, it initiated moves to transform semi-formal microfinance institutions (MFIs) into formal regulated MFIs through a series of decrees and regulations issued from 2005. By late 2009, it stepped up its efforts to rationalize the microfinance sector with the creation of a high-level National Microfinance Steering Committee (NMSC), to assist the Prime Minister in policy and strategy formulation in order to develop a market-oriented microfinance sector through the next decade.

On 16 June 2010, the new Credit Institutions Law (CIL) was finally passed. It is a landmark legislation that integrates microfinance as a subset of the financial system where it rightly belongs. The new CIL resolved the previously fragmented legal bases for institutional microfinance, including issues raised on the restrictive provisions of the 2005 and 2007 Decrees, and uncertainties on the liberalization of interest rates in the financial market. It sets the enabling legal and regulatory framework for developing a robust, sustainable, and responsive microfinance sector.

In the assessment of microfinance the sector and the current status of Government’s initiatives in developing the sector, the following conclusions and proposals were drawn: 1. The continuing efforts of Government to rationalize the microfinance sector including the

passage of a new CIL that integrates microfinance into the formal financial system, as well as the formulation of a comprehensive Microfinance Strategy and Roadmap are

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major steps in the right direction. These efforts are unprecedented even among countries that have better developed microfinance markets;

2. Government envisions a diversity of microfinance service providers offering a range of quality financial services to low income households through:

a. the licensing and regulation of existing semi-formal microfinance institutions and allowing MFIs and microfinance programs operating prior the new CIL to continue to operate under a transitional provision of said law;

b. the expansion of the PCF network by allowing intra commune coverage of individual PCFs and increasing these from 1,042 (July 2010) to 1,700 by 2020 to cover all communes in the country; and the conversion of the Central Credit Fund (apex institution of PCFs) into a cooperative bank, with powers of a commercial bank under the new CIL;

c. setting the operating rules and regulations on electronic banking that could promote pro-poor innovations and mass-based financial services among commercial banks, especially VBARD which has the outreach and natural affinity to rural finance

d. requiring VBSP to conform to accounting and reporting standards for credit institutions under the new CIL, and drafting amendments to its charter to make it more sustainable.

3. However, key issues and “binding constraints” still need to be addressed to attain Government’s vision in developing microfinance. A major risk is that Government’s continued direct intervention to ensure the inclusion of its “social policy lending” target groups through focused delivery of subsidized credit by VBSP would crowd out more sustainable market-based microfinance providers. This could eventually limit the choices of the vast majority of low-income rural households in accessing permanent, responsive, and a range of financial services (and not just micro-credit), from a diverse set of financial service providers. The still growing dominance of Government in subsidized micro-credit delivery will negate its efforts in developing a self-sustaining and robust microfinance sector.

4. A strong case against the continued and increasing delivery by VBSP of subsidized micro-credit is the marginal direct financial benefit to the borrower household (estimated at USD 1.82/HH/month) for such subsidy relative to existing market-based micro-loans offered by other microfinance providers. This is due to the insignificant absolute impact of interest differential on small-sized loans. The marginal benefit clearly cannot justify the increasingly heavy fiscal burden borne by Government that is estimated at USD83 million/year as of end 2009 based only on interest income foregone by VBSP. For 2009, the subsidy to VBSP is estimated at about USD 212 million, from USD 43 million in 2003, or an annual average increase of 32%. Total subsidy to VBSP from 2003 - 2009 is estimated to already reach about USD 815 million.1 Moreover, VBSP is also shown to incur a perpetual funding gap apart from its need for increasing financial and operational subsidies as it expands its operations. Viable and doable options need to be explored on VBSP operations as follows:

1 Financial benefit of the subsidy on micro-loans to poor household-borrowers and interest income foregone by

VBSP is based on the difference between the lending rate of VBSP and VBARD on micro-loans. Total subsidy is estimated to include direct subsidies for operations, opportunity costs on capital, interest subsidy on borrowings, income tax waived, and potential foreign currency exchange loss on foreign borrowings.

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a. The need to fine tune the selection of the “social policy lending” target groups to determine which particular groups will need continuing Government subsidies and direct support. Policy lending to certain target groups can still be justified as the State’s investment for the public good (e.g., disadvantaged students and the extreme poor), but maybe too risky for any credit institution to undertake. In such cases, Government will have to bear the ultimate risks and VBSP or other “channeling agents” need only to administer such portfolio “off-books” and for a fee. For other policy lending groups such as the extreme poor, micro-lending may not be the solution;

b. Other current social policy lending target groups – such as poor households in general (other than the extreme poor) - can best be served by VBSP and other capable credit institutions that can mobilize funds from the very market they serve, or from other commercial sources, without need for Government fiscal support or subsidies. Moreover, microfinance is not just about the delivery of micro-credit but also the provision of other vital financial services, such as: savings, payment and remittance systems that poor and low-income households also need;

c. While trimming down the target groups, Government needs to have an exit strategy from VBSP and its network of “credit and savings groups” (CSGs) especially since these have the potentials to be self-sustaining microfinance providers that can effectively serve poor and low-income households without the need for direct Government support or subsidies. In any case, it can be shown that the marginal benefit of subsidized loans to the individual target household may not warrant the huge costs to Government for providing direct fiscal support and related subsidies to deliver such loans.

5. Government’s almost full ownership of the Central Credit Fund (CCF) is not supportive of strengthening the apex institution’s natural bond with its member PCFs. Government’s exit strategy from CCF is also needed – especially with its planned conversion to a cooperative bank – in order to turn over its ownership to the PCFs network where it rightly belongs consistent with widely-accepted principles that are also enshrined in the Cooperative Law and related legislations. This will make the CCF more “inward” looking, to focus on mutually strengthening financial services and capacity-building tie-ups with its member-owner PCFs. This will complement the State Bank of Vietnam’s (SBV) plan to increase the number of PCFs that will have wider individual coverage beyond the commune. More importantly, it will also relieve Government from the financial burden of supporting what is designed to be a self-sustaining cooperative system.

6. There will be need to review the ownership, governance and control of the PFCs.

Currently, the PCF ownership and governance structure, while intended to be that of a cooperative, is much closer to that of a limited liability company-owned rural bank. Typically, less than 50 “core-members” provide “core-capital’ and control membership expansion of a PCF because of their exclusive right to be board members.2 Subsequent decrees and implementing circulars have also allowed PCFs to mobilize deposits from

2 “Core” capital contribution required to be a “core” members range from VND2.5 Million to about VND 250 million.

Core members, through the Board of Directors (BOD), set entry rules for other core members. The persistently low number of core members (less than 50) strongly implies that the rules were set to limit entry or even closing of core membership expansion. Reported (non-core) “members” are actually the cumulative number of borrowers that have qualified to be such after paying the minimum capital of about VND 50,000. These members are largely inactive after paying the loan. Thus, the reported 1.5 million “members” of PCFs grossly overstates their true membership compared with typical cooperatives elsewhere. Actual number of real or core members would just be about 50,000 for the whole PCF network.

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and lend to non-members. With these broad “banking” powers, not typical of financial cooperatives elsewhere, there is little incentive for “core members” to expand their number as this will dilute their equity share and the corresponding returns, and weaken their control of the PCFs. Under the new CIL, PCFs are also to be organized and operated as cooperatives consistent with other pertinent laws. However, they will still be allowed to accept deposits from and lend to non-members subject to the stipulations of the SBV. Unless SBV prescribes rules that will promote membership expansion and active participation, then “core-members” are likely to continue controlling and operating the PCFs like a limited liability company rural bank. These conditions are not consistent with universally proven good cooperative principles and practices that promote membership growth and active participation as key success factors of financial cooperatives. This in turn will prevent the PCF from being governed and operated as a true financial cooperative – a proven model of widely-owned financial institutions so appropriate for low-income households in rural areas where options for formal financial services are limited;

7. The “Transition Provision” of the new CIL allows semi-formal MFIs and microfinance

programs of socio-political organization to continue to operate in their current (unregulated) forms subject to guidelines from Government. Nonetheless, these entities and their programs should be given a reasonable period to transform and be integrated under the new CIL. This will level the field for all microfinance players and avoid having a two-tiered system of regulated and unregulated MFIs/credit institutions that could challenge the intent of the CIL in integrating microfinance into the financial sector. Moreover, there will be need to consolidate the numerous small “MFIs” or merged these with the top performers, especially if they belong to the same mass organization. Many of these MFIs cannot hope to professionalize with only voluntary or part-time staff. They also have little prospects for raising the needed equity to be regulated MFIs and will not be able to raise the resources and expertise to compete in a rapidly changing microfinance market that inevitably will be information technology-driven within the near future. Government should provide incentives or measures to encourage such consolidation and mergers to help ensure the viability and effectiveness of these emerging players. Having a few but well trained, well-resourced and focused MFIs is a much better option than having many weak ones with little prospects to be sustainable. With the envisioned diversity of microfinance players, small MFIs will no longer be concerned with competition among their peers but with other types of larger and expanding credit institutions – such as the PCF network with the Cooperative Bank as hub, a transformed VBSP and/or its credit and savings groups, and commercial banks like VBARD that will soon see the vast opportunities in the highly underserved but potentially viable microfinance market.

8. Rather than providing direct budgetary support and subsidies to micro-credit delivery,

Government could resort to “smart subsidies” and other enabling measures, such as: (i) providing tax or fiscal incentives to credit institutions providing microfinance services to remote areas and ethnic minorities where poverty incidence is highest; (ii) funding support or subsidies for capacity-building of CCF/cooperative banks, PCFs and MFIs in training, ICT enhancements, etc. on cost-sharing schemes; (iii) support for an advocacy and information dissemination program at all levels of Government and mass organizations to level expectations and understanding of microfinance proven good practices and principles; and (iv) exploring viable options for the medium to long-term divestment of Government’s ownership and investments in VBSP and CCF to low-income and rural

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households at reasonable discounts or easy amortization payment plans, as part of its exit strategy.

There are other immediate and compelling concerns towards developing a market-based microfinance sector, including: (i) drafting of implementing decrees and regulations for the new CIL; (ii) crafting and approving the National Microfinance Strategy and Roadmap; (iii) approving the 10-year strategic plans of key credit institutions, especially VBSP; (iv) improving the supervisory framework and the capacity of SBV to ensure the safety and stability of the microfinance sector; (v) institutional strengthening of key players; and (vi) establishing the needed infrastructure for the proper functioning of the sector, such as setting up a cost-effective localized credit information exchange and strengthening the existing capacity-building service providers for stakeholders in microfinance. Lastly, it is proposed that the above-mentioned conclusions and recommendations should be considered as among the key elements of the microfinance strategy and roadmap for developing a robust, self-sustaining, and responsive microfinance sector for the ultimate benefit of the poor and low-income households (please refer to Annex 12).

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VIET NAM MICROFINANCE SECTOR ASSESSMENT I. SECTOR ASSESSMENT: CONTEXT AND STRATEGIC ISSUES

A. Sector Overview

1. About 72% of the population is living in rural areas where 94% of the nation’s poor also lives and where agriculture that accounts for 54% of the national workforce is the economic mainstay. Government’s national poverty reduction program is thus a multi-pronged approach of: modernizing agriculture and value-added agro-processing; promoting non-farm household businesses; and increasing employment opportunities through geographically dispersed industrialization and SME promotion. The results have been remarkable, with poverty reduced from 58% in 1993 to 12.3% as of 2009 and Vietnam is poised to meet its Millennium Goal by 20153. However, poverty distribution remains skewed with 45% of the poor accounted by ethnic minorities in remote areas that comprise only 14% of the population.

2. Among the major constraints in achieving program objectives was the lack of responsive and adequate financial services in the rural areas. Up until the early 2000s, it was estimated that the rural areas had a mere 17% share of the total bank credit and where less than 20% of the population had access to any kind of institutional finance services. The provision of agricultural and rural financial services has always been a major component of poverty reduction measures of Government from the onset of Doi Moi in 1986. In 1988, Government set up Viet Nam Bank for Agriculture (VBA) and immediately geared it to be market-oriented, gradually reducing subsidies and budgetary support in order to make it sustainable and efficient in providing agriculture-focused financial services. By 2003, VBA was transformed into the Viet Nam bank for Agriculture and Rural Development (VBARD) as a full commercial bank though it remained focus on rural households and agricultural small and medium enterprises (SMEs). To date it has 2,300 branches and transaction offices covering all of the countries provinces and districts. As a fully market-oriented bank it needs to balance its development banking mandate with profitability and sustainability concerns.

3. In 1993, the State Bank of Vietnam (SBV) also promoted the setting up the People’s Credit Fund (PCF), a form of financial cooperative, to provide commune level financial services. The Central Credit Fund (CCF) was also established to act as the PCFs apex institution and provide support to the PCFs. The prudent nurturing of the PCF by SBV was aimed at restoring confidence in financial cooperatives that suffered massive failures in prior years mainly due to hyper-inflation and the rapid devaluation of the VND. By December 2010, there were 1,037 PCFs covering about 10% of the country’s communes and serving some 1.5 million members, about 50% are considered poor4. The PCFs have always been and continue to be market-oriented. They adhere to the basic cooperative principles of self-help and mutual assistance with less than 15% of their resources funded from external sources, mainly from CCF.

4. VBARD and the PCF network have extensive geographic presence to cover low-income rural households, but their commercial orientation created concerns within Government on the exclusion of poorer households and disadvantaged groups. The Vietnam Bank for the Poor (VBP) was thus set up in 1995 as a Fund administered by the

3 Source: http://baodientu.chinhphu.vn/Home/23-chang-duong-thuc-hien-cac-Muc-tieu-phat-trien-Thien-nien-ky/20108/35568.vgp (Vietnamese Government Web Portal); Vietnam and World Economies 2009-2010. Vietnam Economic News

4 By July 2010, the number of PCFs are 1,042.

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then VBA (now VBARD) to target poor households. In 2002, VBP was spun off to create the Vietnam Bank for Social Policies (VBSP), a wholly State-owned non-profit entity focused on subsidized “social policy lending” to poor households and disadvantaged groups as defined by Government. By 2009, VBSP had about 8,000 staff assigned in all districts with 98% coverage of all communes of the country and is now the most dominant micro-credit provider in the countryside.

5. From the 1990s through 2005, some 40 semi-formal MFIs were formed mainly through the Credit and Savings Program or by mass organizations (MOs) and NGOs5 while another 10 MO/NGO-MFIs were formed thereafter. In 2005 and 2007, Government issued Decrees 28 and 165 in a bid to broaden and deepen institutional microfinance by allowing the entry of non-government entities in setting up formal microfinance institutions (MFIs) or through the transformation of the existing semi-formal MFIs. The decrees and implementing rules were considered restrictive, however; with limits to the type of entities and the number of investors that can set up formal MFIs. Licensing was also perceived as tedious with three semi-formal MFIs waiting for their MFI license almost three years from filing their application and the first MFI being licensed in August 2010.6 By end 2009, despite the long existence of majority of the “MFIs”, only three had attained an outreach of over 40,000 clients, with another three reaching from 20,000 to 40,000 clients. These top six performers accounted for about 50% of total outreach of the semi-formal MFIs, which collectively still play a minor role in the sector.

B. Sector Assessment

1. Micro-credit delivery

6. The recent years’ sharp increase of micro-credit to poor households and social policy lending target groups was mainly driven by the rapid growth of VBSP’s portfolio funded by State-mobilized funds through budget allocations, compulsory deposits from state-owned commercial banks (SOCBs) and fully Government guaranteed borrowings. About 98% of VBSP’s lending are channeled through commune-based credit and savings groups (CSGs) composed of 35-50 clients, organized through VBSP’s highly effective use of mass organizations7 and the People’s Committee networks that permeate down to the hamlets. As of December 2009, VBSP had lent out to 7.5 million clients, about more than half of whom are reportedly from poor households. VBSP accounted for about 60% of total micro-credit clients for the period, more than double that of VBARD that accounted for 26%, and about eight times that of the collective clients of the PCF network that accounted for about 8% of micro-borrowers. The 40-50 semi-formal MFIs had only a marginal share of 5% of total borrowers for the same period. With VBSP’s massive expansion, almost 50% of rural households are now reportedly to have access to micro-credit (end 2009), a remarkable feat achieved in a relatively short period. However, other forms of microfinance services are still wanting amongst the target groups. More importantly, VBSP’s subsidized policy lending is an increasing fiscal burden that may not be sustainable in the long term. Below is the profile of micro-credit delivery by key institutions in Viet Nam (Table 1).

5 Through Decrees 77, 81, and 148. 6 Annex 1: ADB-JFPR 9140-VIE Project Report. There is one more application this year. 7 The Vietnam Women’s Union (VWU) accounted for 50% of the credit & savings groups (CSGs) organized for

VBSP followed by Farmer’s Union (VFU) and the Veteran’s Union (VVU). Up until recently, CSG membership reflected that of the mass organization’s (MO) forming them, but the selectivity bias and the difficulty of dealing with too many CSGs in a commune led VBSP to impose inclusive membership regardless of the mobilizing MO.

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Table1: Profile of Micro-credit delivery in Viet Nam Institution

Number (million)

% to Total

Loans (US$ M) Outstanding

% to Total

VBSPa 7.54 61.4% 3,928 46.2% VBARDb 3.2 26.0% 3,500 41.1% PCFsc 0.95 7.7% 1,006 12.8% MFIs/NGOsd 0.6 4.9% 75 0.9%

Sources: a VBSP Report, as of December 2009; b VBARD report, as of 31 October 2009, c Central Credit Fund Annual Report 2009; d Data as of end 2008. Viet Nam Microfinance Bulletin, No. 13, July 2009. 2. Provision of Micro-savings services

7. VBARD, the PCFs, and the Vietnam Postal Savings Company have a combined network of over 4,000 branches and transaction offices that provide savings services. PCFs have the added advantage of operating at the communes but only cover 10% of these. VBSP reports 98% coverage of all communes through transaction points visited by mobile teams once a month, but is largely credit-delivery focused. In contrast, Vietnam Postal Savings Company is solely a deposit-taking bank at the districts. The combined extensive outreach of these institutions allows rural poor households reasonable access to savings services. The semi-formal NGO-MFIs also mobilize savings, mainly in form of compulsory deposits that can only be withdrawn upon full repayment of the loan and viewed more as a partial guarantee to the client’s micro-loan. Major NGO-MFIs offer limited voluntary savings since they cannot compete in paying market interest rates, an added burden to their relatively higher operating costs. VBARD by far dominates the savings service market with its extensive network and commercial banking orientation. Below is the micro-savings profile of major microfinance players in the country:

Table 2: Estimated rural savers

by major FIs in Viet Nam8

3. Remittances, payment systems and other services

8. All banks in Vietnam offer a wide range of financial products, including money transfers, ATM services, foreign currency exchange, credit and debit cards, etc. Major remittance companies, such as Western Union and Money Gram provide cash transfers, often in agency relationships with banks, other financial institutions, and the post offices –

8 VBARD estimate based on 2008 Annual Report on savings mobilized from individuals at average USD

800/account of which 45% mobilized from rural areas; VPSC as of end 2009, source: MOF; VBSP estimate, source VBSP, as of July 2010; PCF estimate based on members; NGO-MFI – based on number of clients of 36 MFIs surveyed under JFPR 9142 as of end 2009

Provider Est. No of depositors

VBARD 5,267,000 VPSC 411,830 VBSP 2,148,000 PCFs 1,500,000 NGO-MFIs 430,000 Total 9,756,830

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where the VPSC is strategically located. The entry of foreign banks into VPSC through a stock swap scheme9 is seen to greatly enhance VPSC’s payment and remittance services with planned adoption of technology advanced systems from its partner banks. Even VBSP offers money transfer services for customers. The competitive environment made these services also reasonably accessible and affordable to rural and poor households. This could be further improved if the PCF network could offer the range of similar services given their commune-level presence. To this end, CCF and the PCFs are currently implementing the pilot phase of the “Rural-Urban Connectivity Project” with eight participating PCFs. VBARD is currently the best positioned to offer quality banking services, especially for payment and remittance systems, given its extensive branching network and the adoption of information and communications technology (ICT) that allows mass-based and pro-poor innovations in banking services.

4. Micro-insurance

9. Micro-insurance, while still largely misunderstood by rural households, is now recognized as a vital service to the rural poor who are most vulnerable to the economic shocks brought about by death, illness, and loss of assets. The usual coping mechanism of the poor HHs against life changing events - such as relying on savings, borrowings, and/or selling of assets - could push them to further poverty. Existing laws allow small-scale financial institutions like PCFs and MFIs only to be agents of insurance companies, with a few local insurers already offering both life and non-life products appropriate for the low-income market. The most notable is Bao Viet Life that offers a range of low-cost life, livestock and health insurance. Others like AIA specialize in credit life insurance through an agency agreement with banks. Prudential has insurance products for women and children under 18.10 Some semi-informal MFIs with external partners (e.g., ILO, RIMANSI,11 Action Aid) have also pilot tested Mutual Aid Funds (MAF) that were proven successful in other countries. RIMANSI’s experience with TYM is well-documented and shows that mutual assistance funds can be quickly and viably set up, with good market acceptance. However, with the prohibition on ownership of insurance schemes by MFIs and PCFs, the only option is to develop MAF and other microinsurance products in agency agreement with existing and more progressive insurers.

10. Decree 18/2005/ND-CP passed in 2005 provides the legal framework for MAFs to transform into regulated Mutual Assistance Insurance (MAI) organizations. A MAI is a legal entity established to do insurance business through self-support and self-help among members. MAI members are both policy holders and owners of the organization and a right to participate in its management making MAI ideal for low-income groups. However, the minimum capital requirement for setting it up is presently considered prohibitive and no MAI has been set up to date.

9 Originally Wachoiva Bank, later merged with Wells Fargo Bank, and Credit Suisse bought into VPSC under a

stock swap arrangement 10 DFC Report for the World Bank (2007); Vietnam: Developing a Comprehensive Strategy to Expand Access [for

the Poor] to Microfinance Services. Promoting Outreach, Efficiency and Sustainability 11 Annex 2: J.A. Alip,Ph.D and M.C.David-Casis, (2008), Microinsurance in Vietnam, A RIMANSI Publication

excerpt

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5. Wholesaling of Microfinance Funds

11. Except for CCF’s wholesaling functions for the PCF network, there is no single financial institution that is focused on wholesaling funds for microfinance in Viet Nam. In recent years, the Bank for Investment and Development of Vietnam (BIDV) has taken on this role but only on a project basis,12 as it often acts as the executing agency for domestically and donor funded projects. Under the World Bank-funded Rural Finance Project III, it wholesales USD 10 million (from total USD200 million project funds) to qualified credit institutions for on-lending to microfinance clients.

C. Development and Strategic Issues

12. Government sees the growing importance of market-driven microfinance and is aware of its rapid development elsewhere in the region, where responsive, sustainable, and quality banking services are now accessible to rural areas and poor households in such scale not seen just a few decades ago. It also saw the need to rationalize development efforts for the microfinance sector. In September 2009, Government formed the National Microfinance Steering Committee (NMSC), a high level body to assist the Prime Minister in policy and strategy formulation to develop a market-based microfinance sector. The NMSC is headed by the SBV Governor with senior official members from various ministries, mass organizations and major financial institutions.13 Its main tasks include identifying a sector reform agenda and the drafting of a 2010-2020 sector strategy. There is also on-going inter-ministerial review of Decree 78 led by SBV and MOF aimed at transforming VBSP into a more sustainable and autonomous microfinance-provider of a range of quality financial services to its target clients.

13. SBV and MOF led an inter-ministerial group that prepared the decree on Credit Policies for Agricultural and Rural Development (Decree No. 41/2010/ND-CP) which provided a system of measures and policies of the government to encourage credit institutions to provide loans for investment in agriculture and rural areas for economic restructuring in agriculture and rural areas, construction of infrastructure, hunger elimination and poverty reduction and raising peoples’ living standards. Subject decree indicated the following general and specific provisions on: (i) entities which shall provide rural credit, which include among others the MFIs; (ii) eligible borrowers and projects; (iii) the credit principles to be adhered to by lending institutions; and (iv) specific provisions among others on lending terms, interest rate, risk provisions and handling, agricultural insurance, and the manner of rescheduling loans and provision of new loans to those who cannot pay their loans due to objective reasons (natural disasters, calamities, epidemic).

14. On 16 June 2010, after almost a 3-year top level deliberation on earlier drafts, a new Credit Institutions Law was finally passed.14 It is landmark legislation - not seen even in countries with major advances in microfinance - that integrates microfinance as a subset of the financial system where it rightly belongs. The new CIL resolved the previous fragmented legal bases for institutional microfinance, including issues raised on the 2005 and 2007 Decrees such as restrictions on the ownership of formal MFIs, and uncertainties

12 BIDV was established in April 1957, the first to be set up among the four largest State-owned commercial

banks. It plans to convert into a joint stock commercial bank by QI of 2011. 13 The NMSC is composed of: SBV Senior Deputy Governor as Vice Chairman; and senior officials as members

from the Office of the Government; MOF; Min. of Justice; Min. of Planning & Investment; Min. of Agriculture & Rural Development; MOLISA; Min. of Home Affairs; Vietnam Women’s Union; Farmer’s Union; Central People’s Credit Fund; VBSP; and VBARD

14 Annex 3: New Credit Institutions Law

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on the liberalization of interest rates in the financial market.15 Its broad coverage of microfinance and the general application of prudential standards of governance to the operations of key institutional microfinance players, i.e., formal MFIs, PCFs, and cooperative banks, set the enabling legal and regulatory framework for developing a robust, sustainable, and responsive microfinance sector of Vietnam. However, key issues and “binding constraints” still need to be addressed to attain the vision for the microfinance sector, among which are:

1. Policy, Legal and Regulatory Environment

a) Legal and Regulatory Framework

15. The new Credit Institutions Law (CIL), while far-reaching and comprehensive, still needs detailed guidelines; by way of Government decrees and SBV circulars, before this can be successfully implemented. It is estimated that Government has to issue from 5 to 10 decrees to implement certain provisions of the CIL, among those directly relating to microfinance are:

• Chapter X, Article 161 - Transitional Provisions, Section 6: “For microfinance programs and projects of political organizations, socio-politic organizations, NGOs, credit institutions that are being implemented prior to the effective date of this Law shall not be required to adjust their organization and operations in accordance with provisions of this Law. The Prime Minister shall stipulate in details activities of such microfinance programs and projects.”

• Chapter I, Article 17 - Policy Banks: Item 1. “The Government sets up policy banks to carry out business not for profit but for the implementation of State socio-economic policies”; and Item 2. “The Government shall stipulate the organization and operation of policy banks.”

• Chapter VI, Article 133 – Requirement for ensuring prudence in electronic banking: “A credit institution or a foreign bank branch shall set up a system of identifying, supervising and managing risks; ensure the prudence and security in electronic banking operations in accordance with stipulations of State Bank of Vietnam.”16

16. Likewise, SBV circulars need to be crafted to flesh out the implementing guidelines for certain provisions the CIL, among those directly relating to microfinance are:

• Chapter I, Article 17: Item 3. “Policy banks must implement internal control, internal audits; develop and issue internal procedures applicable to their operations; adopt statistical, operational and payment activities reports in accordance with stipulations of the State Bank.

• Chapter III, Article 87: “State Bank of Vietnam shall stipulate the capital contributions of foreign individuals and organizations to set up microfinance institutions; number of capital contributors; ownership proportions, ownership portions of both domestic and foreign organizations and individuals in microfinance institutions; restrictions on network structure and geographical boundaries of operation of microfinance institutions.”

15 The new CIL allows negotiated interest rates between lender and borrower and no longer refers to a “base rate”, prescribed in

previous laws. This technically repeals the Civil Law and the Anti-Usury Law both of which refer to a base rate in the application of the latter laws.

16 This is crucial for the IT enhancement of the operations of microfinance-focused institutions to lower transaction costs and deepening of services, e.g., as envisioned in the Urban-Rural Connectivity Project of CCF and the PCF network. In the Philippines, the use of mobile phones and electronic banking is already gaining foothold among major banks and MFIs, especially for remittance and payment services much needed by rural households

17

• Chapter IV, Article 118 – Operations of PCF, Item 1.b.: “To accept deposits from non-member organizations, individuals in accordance with provisions of State Bank of Vietnam”; and Item 2.b.”To provide loans to non-member customers in accordance with provisions of State Bank of Vietnam.”

• Chapter IV, Article 97 – Electronic Banking Activities: “Credit institutions shall be allowed to provide banking services via electronic means in accordance with stipulations of State Bank of Vietnam.”

17. The implementing Government decrees and SBV circulars are of immediate concerns, without which the intent and objectives of the CIL will not be fully achieved. SBV has expressed the need for technical assistance to help craft the implementing circulars, especially those relating to microfinance. A still continuing concern despite the new CIL is the perceived tedious process for MFI registration given the 3-year waiting period currently experienced by the 4 semi-formal MFIs for their license.

b) Policy Lending and Government Subsidies

18. VBSP is by far the dominant micro-lender focusing on poor households and disadvantaged groups. Decree 78, 2002, mandates it to be: a non-profit financial institution devoted to provide concessional lending to the poor and other “social policy” lending clients; with heavy dependence on Government for its operations. Government support comes in various forms: (a) budgetary allocation and Government guaranteed loans for funding its portfolio growth; (b) subsidies to cover its negative financial spread and cost of operations; (c) 2% compulsory deposits from SOCBs; and (d) tax exemptions.

19. The success of VBSP in achieving its mandate backed by substantial Government resources and subsidies, and 98% coverage of communes are also seen to discourage the entry of other institutional players. This in turn would adversely impact on the development of a market-driven microfinance sector, which is crucial in promoting competition and efficiency, as well as in widening the choices of clients for microfinance providers and the services they offer. And while VBSP has attained remarkable outreach, it is also becoming an increasingly heavy fiscal burden for Government that may not be justified. 17

20. The draft VBSP strategy prepared by its management and being circulated for discussion among relevant ministries, envisions a more market-oriented and sustainable financial institution providing not only micro-credit but a range of other services. The strategy still considers interest rate subsidies but only for the bottom poor in mountainous and remote areas, and especially among ethnic minorities18. However, the draft “Decree of Government on credit for the poor and other target groups” intended to amend Decree 78 still contains provisions that appear to perpetuate subsidized or “preferential” rates to VBSP’s current target groups. There will be need to reconcile the draft Decree and the draft VBSP Strategy with the vision to gradually eliminate subsidies, or fine tune Government’s policy-lending programs, to make VBSP sustainable, autonomous, and be more responsive to the banking needs of its clients and not just being a highly subsidized micro-credit delivery arm of Government. In any case, all the other key microfinance players charge market rates without adverse impact to their market acceptance amongst

17 In recent training workshops of the ADB administered JFPR Project 9140-VIE, MFIs consistently raised issues

on the adverse impact on their operations of VBSP’s aggressive delivery of subsidized micro-credit; VBARD and CCF have the same concerns; while MOF and MPI noted the heavy fiscal burden; refer also to Annex 4: VBSP & CCF-PCF analyses of operations.

18 See Attachment 3 to Annex 4: Draft Concept Paper for Development Strategy for VBSP

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poor households as evidenced by the steady increases in outreach.19 As consistently proven here and elsewhere, poor HHs value more the ease of access to permanent financial services than low loan interest rates.20

Table 3: Comparative Loan Size & Rates (2008-2009)

Credit Institution Ave. Loan Size (US$)

Ave. interest Rates/month

VBSP 521 0.65% VBARD 1,094 1- 1.08%

PCF 769 1.25% Semi-formal MFIs 125 -200 1 – 1.5% (flat)

21. Apart from the usual adverse impact of subsidized credit to the proper functioning and development of a robust microfinance sector, the strongest case against VBSP’s subsidized lending is the marginal direct benefit to the borrowing individual target household (HH) that cannot justify the increasingly heavy fiscal burden of Government due to such subsidy. The paradox is due to the small average size of the target HH loan of VBSP (ave. USD521) and the unsubstantial difference between VBSP’s subsidized lending rate averaging at 0.65%/month relative to VBARD’s, the market leader, with lending rate at 1%/month.21 Using end 2009 figures and applying the difference between VBSP’s and VBARD’s lending rates, poor HH clients of VBSP benefited only by about VND 33,735/HH/month (USD1.82/HH/month) due to the subsidy, or a little over VND 8,000/individual/month based on average of 4 members/HH. On the other hand, the cost to the Government based only on interest income forgone from 3.8 million poor HH could reach USD USD6.93 million/month or about USD 83 million/year, as shown below:

Table 4. Estimated Incremental Benefit per Poor HH due to Interest Subsidy (2008)

VBARD Lending Rate /month

VBSP Lending Rate /month

Diff. in rate VBARD vs. VBSP

VBSP Average Loan size (VND)

Inc. Benefit per HH/month (VND)

1% 0.65% 0.35% 9,638,000 33,735

In USD 521.00 1.82

Table 5. Estimated Interest Foregone due to Subsidy to Poor HH (2008)

19 The small field survey revealed that PCFs and MO/NGO MFIs were also preferred lenders over VBARD due to

simplified procedures, despite higher lending rates of the latter especially that of the MO/NGO-MFIs (See Annex 5 Summary of Field Survey).

20 This is the main reason why poor HHs often prefer informal moneylenders who charge far higher interest rates than any formal and semi formal financial institution.

21 Discussions with stakeholders and field findings clearly revealed that VBSP is resorting to credit rationing due to its limited budget against the demand for its loan products. Thus, the average USD500 loan/HH is likely to be uniformly applied nationwide (maximum loan of VBSP for poor HHs is USD1,500). Semi-formal institutions charge as much as 1 – 1.5%/month flat rate or over 20- 30%/year effective rate. (Annex 1).

Diff. in rate VBARD vs. VBSP

Est. VBSP Total Loan to Poor HH (USD)

Interest foregone per month (USD)

Total Interest forgone /year (USD)

0.35% 1,979,800,000 6,929,300 83,151,600

The marginal benefit of subsidies to individual poor HH cannot justify the heavy fiscal burden to Government.

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22. It is clear that the marginal benefit to the individual borrower poor HH may not warrant the heavy fiscal burden for Government, let alone increase this as envisioned in the Government’s proposed Decree and Strategy for VBSP. Yet, the total outlay of Government for VBSP as of end 2009 has reached VND17,717 Billion (USD 938 million) from VND 8,953 billion (USD 484 million) as of end 2006, as shown below:

Table 6: Direct Government Support (In VND Billion)

Item 2006 2007 2008 2009 June 2010 I. Fund from Government budget 7,953 9,861 12,101 15,124 16,013 1. Charter capital 4,788 5,988 7,988 9,488 10,000 2. Funds provided for programs 3,165 3,873 4,113 5,636 6,013 II. Interest subsidies & management fees 750 1,053 1,160 2,259 1,000 III.ODA lending funds 250 322 316 334 334

Grand Total (billion VND) 8,953 11,236 13,577 17,717 17,347 Source: Ministry of Planning & Investments (MPI) Note: The yearly amounts are cumulative, except for the subsidy

provided each year. Amounts do not include loans from SBV at 0% interest, compulsory deposits of state-owned commercial banks (SOCBs), and Government guaranteed bonds

23. The total cost to Government in terms of direct subsidies, opportunity costs and others amounted to VND 14 trillion (USD 842 million) as shown below22:

Table 7: Estimated Amount and Type of Subsidy to VBSP (As of June 2009)

Item VND

(in billion) USD

(in million) Percent to

total Direct Subsidies on interest & operations 6,175 370.42 44% Opportunity Cost on Capital Infusion 4,711 282.82 33% Opportunity Cost on Borrowings from SBV 3,078 178.17 21% Income Tax waived 176 10.25 1% Foreign Currency Losses 280 10.41 1% Grand Total 14,420 851.00 100%

Source: ADB TA 7499 VIE Team estimates

2. Sector Development Strategy

24. As mentioned, the NMSC has been established at the highest level of Government with senior representations from relevant Ministries, SBV, mass organizations and the key financial institutions. A concern is that the Microfinance Strategy Working Group (MSWG), the technical arm of the NMSC, is largely supported by SBV officers and staff, yet the role and function of VBSP has been and will continue to be under the direct control of Government even with the new CIL. It is understandably evident that the MSWG will focus more on related strategies for the credit institutions over which SBV has greater influence and control (i.e., VBARD, CCF/PCF network, institutional MFIs and the emerging cooperative banks), but will leave VBSP’s strategy formulation to Government, specifically MOF. There will be need to reconcile the market-orientation of SBV over the regulated financial institutions with the social policy lending objectives of the Government for VBSP given the latter’s current dominant role in the microfinance market.

22 Total Subsidies=Direct subsidies + Opportunity Cost on Capital + Opportunity Cost on SBV Borrowings + Income Tax Waived

+ Potential Foreign Exchange Losses. Of these, only the direct subsidy figures are available while the others were either estimated or assumed based on available data and documents

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25. It can be shown that the transformation of VBSP and its CSGs may not be as difficult as perceived, since there are doable, practical, and politically acceptable options that can be crafted for a gradual exit strategy of Government from micro-credit subsidies and from fully supporting VBSP at huge costs. With the passage of the new CIL, such options could be designed to transform VBSP and its CSGs into viable, effective, and autonomous microfinance providers without the need for massive Government support while still remaining true to the Government’s social objectives.23

3. Prudential Supervision

a) Supervision & monitoring standards for PCFs & MFIs

26. Under the new CIL, SBV will have supervision over VBARD; PCFs, financial cooperatives and cooperative banks; and the licensed MFIs, subject to general and specific provisions applicable for each type of credit institution. This will resolve issues of lack of prudential and internal control standards, especially among the emerging formal MFIs. However, apart from the general standards it requires for credit institutions, there will be need for SBV to set up performance standards unique to PCFs based on universally-accepted norms for financial cooperatives24, as well as widely-accepted performance standards for MFIs25 . Both the PCFs and the MFIs need to have the same risk management framework with those for credit institutions.

b) Monitoring Standards for VBSP

27. VBSP remains a policy bank: “to carry out business not for profit but for the implementation of State socio-economic policies” and with Government to specify its organization and operation. SVB’s supervision functions over VBSP will be limited to prescribing its internal control, internal audits; internal procedures applicable to their operations; statistical, operational and payment activities reports. Indeed, it may not be necessary to impose the full prudential standards normally applied for commercial banks, given that VBSP is wholly-owned and largely funded by Government and the SOCBs. To be sure, Guidance no. 737/NHCS-KT prescribes financial management standards and controls to ensure prudent use of VBSP’s funds for operations. However, VBSP currently does not fully conform to the internal controls, audit standards, chart of accounts and reporting requirements of credit institutions because it was not compelled to do so.

28. The provision of the new CIL, while may be viewed as giving SBV only superficial supervision powers over VBSP, is vital since it now requires VBSP to conform

23 This is fully discussed in the accompanying document to this report: Key Elements for the Microfinance Strategy for Vietnam. 24 World Council of Credit Unions (WOCCU) and the Asian Council of Credit Unions (ACCU) have developed universally-

accepted standards based on cooperative basic principles and good practices 25 Similarly, the Consultative Group for Assisting the Poorest (CGAP) and other reputable

PCFs and MFIs should adhere to widely-accepted performance norms for financial cooperatives and MFIs1 respectively; and with risk management framework for credit institutions.

VBSP’s operations must be benchmarked with microfinance performance standards and not just on the basis of outreach and disbursements. With its vulnerability to a variety of risks, VBSP must conform to the risk management framework for credit institutions.

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with the credit institutions internal control and reporting standards. This will greatly enhance Government’s capability to monitor and benchmark the performance and operations of VBSP against generally-accepted standards for microfinance-focused institutions. Moreover, as VBSP increasingly seeks funding from the capital market, its conformity to internationally-accepted prudential and performance standards will facilitate the due diligence processes it will have to undergo. However, there will be need to develop capability within the Ministries tasked with planning and monitoring VBSP’s operations (MOF, MPI, and MOLISA) to properly provide administrative and operating oversight to VBSP using widely-accepted microfinance performance standards26 and not just on the bases of Government targets normally related only to outreach and disbursements. Moreover, as with all other credit institutions, and more so because of it vulnerability to a variety of risks, VBSP must conform to the common risk management framework to be prescribed by SBV. The understanding and application of such standards will allow Government to fine-tune its subsidies and direct support in order to reduce the fiscal burden without losing sight of Government’s social policy objectives. It will also facilitate the formulation of Government’s exit strategy for an autonomous and self-sustaining VBSP.

c) “MFIs in Transition”

29. The transitional provisions of the new CIL allow the continued existence and operations of microfinance programs and projects of political organizations, socio-political organizations, etc., that were implemented prior to the Law - subject to stipulations of the Government. This is meant to avoid sudden disruptions of these programs and projects. A concern is that Government neither has the capability to carry out an SBV-like supervision of the entities under transition nor should it develop such. A reasonable period for their eventual transformation may need to be prescribed by Government to avoid a two-tiered system of regulated and unregulated MFIs/credit institutions that could challenge the intent of the CIL in integrating microfinance into the financial sector. Government should also prescribe at the outset that these entities need to conform to some of the doable standards for regulated MFIs. Thus, the internal controls, audit standards, and reporting norms of the “MFIs in transition” must already follow those prescribed by SBV for formal credit institutions, and universally-accepted performance standards for MFIs. This will help instill among the “MFIs in transition” the desired institutional culture and facilitate their transformation into formal MFIs.

30. More importantly, Government should provide incentives or measures to promote the consolidation and merger of the many small and weak “MFIs”, to help ensure their viability and effectiveness and justify their transformation. Currently, a vast majority of the semi-formal MFIs have only partial or voluntary staff, lack the resources to raise the minimum capital, let alone invest in information technology-enhanced operations (the inevitable future of microfinance) and will be unable to compete with better resourced and stronger players in the microfinance market, such as the PCF network, a transformed VBSP, and other commercial banks like VBARD that will eventually realize the vast opportunities in the microfinance market.

26 See Annex 4: VBSP & PCF-CCF Analyses

“MFIs in transition” must be given a reasonable period to transform into formal MFIs to avoid a tow-tier system of regulated and unregulated credit institutions that could undermine the full integration of microfinance into the formal financial sector.

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4. Institutional Capacity

a) Vietnam Bank for Social Policy

31. Decree 78 which is the basis for the VBSP Charter does not give much flexibility for VBSP to operate as a demand-driven, market-oriented and self-sustaining microfinance provider. The Decree does allow it to engage in a range of services (e.g., mobilizing deposits, providing payment, and treasury services) but most of the provisions of the charter are very much credit-delivery focused and inflexible, prescribing in detail its target groups and how they will be identified and organized; lending products and purposes; and how loans will be delivered and administered.

32. In contrast, there is scant detail in the Decree on other financial services that VBSP may provide to its target clients, resulting in a seriously missed opportunity to provide other vital services, given its massive outreach to 95% of the communes and about 7.8 million clients to date. The Decree also defines its funding options with heavy dependence on “State-mobilized financial sources”. The assurance that it can readily draw from such sources gives VBSP little incentive to be self-sustaining and to engage in financial intermediation within its market niche - as progressive and successful microfinance providers are envisioned to do - to provide a range of quality financial services that will also ensure its survival and growth.

33. The draft Decree gives VBSP more flexibility in designing its lending products and operations. The following need to be considered in developing its lending products:

(a) Despite the range of mandated products, it is clear that VBSP is resorting to credit rationing because it is supply-driven with limited resources relative to the huge demand it has generated because of its successful outreach scheme (see below). Thus, loans appear to be uniformly sized (about USD500/HH) regardless of the loan product, yet it still has to monitor compliance for usage of various loan products, which is not only a needless and costly administrative burden but unfair to poor HH clients who can be sanctioned for the “misuse” of the loan. Better practices in microfinance suggest that micro-loans must be simple in design and “minimalist” in approach especially for the poorer households. This simplifies procedures and administration, lowering transaction costs for both clients and the MFI. More importantly, it recognizes the “fungibility” of funds among poor HHs, i.e., their almost daily coping mechanism of juggling scarce resources against their immediate needs is likely to lead them to “misuse” loan funds with very specific purposes.27 Successful MFIs normally only have 2-3 loan products: for productive/business use, for consumption, or for emergency needs. The minimalist approach allows the poor HHs to have more flexibility in managing HH funds according to their needs. As the poor HHs improve their income status, bigger (repeat) loans for specific purposes can be gradually introduced;28

(b) VBSP needs to review the maturity and repayment schedules of some of its lending products, especially for the relatively poorer HH. It appears that most of its products have medium term maturities (up to 3 years) with infrequent amortization of principal at semi-annual, annual or balloon payments at maturity.

27 Bank Rakyat Indonesia Unit Desas (BRI Village units) have only 2-3 simplified small loan products. CARD Bank, the leading MFI in the Philippines, has also 2- 3 products and recently launched its well tested agricultural micro-loan that is also minimalist and simple. 28 The case for student loans is discussed in further section dealing with Gender and Social Issues

VBSP needs to strengthen its financial product development capability

23

Again, microfinance good practices advocate small and frequent repayments of principal for two reasons: (i) it is easier and more affordable for micro-borrowers compared to infrequent but “lumpy” repayments that create periodic shocks to the HH cash flow (often requiring them to borrow at high rates to pay the amount due); and (ii) it improves the MFI’s cash-flow and turn over due to faster recycling of loan funds, and could substantially reduce additional infusion from Government to sustain its loan expansion.

(c) VBSP should be allowed to fine-tune its lending to poor persons or households as defined by Government (MOLISA and MPI) that are earning less than USD1/day. Even with credit rationing, a USD500/HH loan would be sizable and could result in unsustainable credit burden for the defined poor, more so with the allowable limit of about VND 30 million (USD1,500) loan per poor household.

(d) It must develop savings products since this is not only a vital service needed by rural clients, including the poor (who does save), but for VBSP to tap a more stable and sustainable fund source.

34. More importantly, VBSP is constantly facing serious liquidity risk and in fact defaulted at one point in its servicing of its short term debts. The justification for VBSP’s bond issuance in 2007 cited that 85% of VBSP’s outstanding loans are medium or long term, while its funding source of similar tenor is only about 74%, creating a funding gap of around 11% of loan outstanding, which were bridged either through State budget, short deposits or borrowings. The funding mismatch is mainly because loan disbursements historically have been far greater than amount collected as shown below29:

Table 8: Summary of VBSP’s Loan Releases and Collections

In U.S. Dollar 2007 2008 2009

Loans Disbursed 1,263,803,495 1,641,325,381 1,891,461,081

Total Collections 589,772,668 606,672,793 800,731,730

Funding Gap 674,030,827 1,034,652,589 1,090,729,351 Source: VBSP

35. The funding gap is further aggravated by the following factors:

a. Despite gains in poverty reduction, the number of poor HH qualifying for “social policy lending” tend to remain stable or is even increasing due to the periodic upward adjustments by MPI and MOLISA considering inflation and other variables. This means a corresponding increase in “social policy lending” targets for VBSP;30

b. The funding gap will even worsen since as much as 50% of the increase in loans was due to the massive build-up of student loan releases starting in 2006. Both interest and principal for such loans are only due upon completion of the beneficiaries’ schooling (1 to 5 years). Moreover, principal repayments of other term loans are infrequent (semi-annual; yearly) or designed for balloon payments at maturity, resulting in lumpy cash inflows for VBSP that will not match its constantly growing need for loan funds.

29 See Annex 4 for more information on VBSP’s funding gap 30 In May 2010, MOLISA and MPI proposed a new poverty threshold of VND450,000 (US$24)/person/month in rural areas and VND 600,000 VND (US$32)/person/month in urban areas. For the period of 2006-2010, the poverty line was 200,000VND/person/month in rural areas and 260,000VND/person/month in urban areas. These amounts were adjusted in 2008, given the high inflation in 2007-2008, to 300,000VND/person/month in rural areas and 390,000 VND/person/month in urban areas.

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36. The liquidity risk is a major concern and the VBSP draft strategy for 2010-2020 incorporates capital planning and deployment, and the establishment of a Committee or a Department that shall focus on Asset and Liability Management, as among the priorities to improve and strengthen governance. Nonetheless, the draft strategy still project substantial infusion from Government, as well as additional borrowings, while proposing cost recovery through gradual and ultimate reduction of preferential lending rates.

37. The ultimate challenge on VBSP is how to stem the huge cost to Government in delivering partial microfinance services that was shown earlier to have only marginal impact to the individual household. And as mentioned, further expansion of its portfolio with heavy reliance on “State-mobilized resources” can hardly be justified. Yet, VBSP is already a sizable entity of about 8,000 staff with outreach to about 200,000 CSGs with 7,8 million members, and total resources of almost USD4.5 billion. There should be a larger vision for the transformation of VBSP and the “Credit and Savings Groups,” which for now are just really “Credit Groups” rather than saving groups. There will be need to seek far more sustainable options than that proposed in the draft strategy, such as: (i) a doable and politically acceptable medium-term exit strategy from VBSP’s Government dependency; (ii) creating a more responsive and sustainable microfinance system by transforming the VBSP-CSGs network within the context of the new CIL; and (iii) utilizing current institutional arrangements, to implement VBSP-CSGs transformation and Government’s exit strategy.

38. On the positive side, VBSP has created an effective credit delivery and collection system that reduces clients’ and its own transaction costs while achieving significant outreach and good collection rates at the commune level. Using the strength of Decrees, it has forged tie-ups with MOLISA, the People’s Committees and mass organizations from the national to commune level. Interviews with key stakeholders, findings from a limited survey, and a deeper analysis of the tie-ups, all strongly suggest that client selection is reasonably transparent and that leakages are likely to be exceptions rather than the rule. In many ways, VBSP’s arrangements reflect the unique “Vietnamese way” of pursuing a national program down to the communes and even hamlets that can only be envied by many countries in the region. This effective set up can be used to transform VBSP and its CSGs from a state-dependent delivery mechanism for social policy lending into pro-active and self-sustaining microfinance providers delivering a range of financial services.

b) Vietnam Bank for Agriculture & Rural Development

39. VBARD has the widest full banking outreach with a natural affinity to the rural microfinance market given its mandate in agriculture and rural finance. Yet, it still has to recognize the commercial potentials of microfinance as it increasingly gravitates towards upper-income clients.31 Indeed, it raised oncerns over VBSP’s rapid expansion of subsidized credit delivery. Nonetheless, VBARD’s extensive rural network providing almost total banking services and its relative ease in adopting technology-enhanced

31 DFC Report for the World Bank (2007)

The “Vietnamese way” of using the network of mass-based organizations and the People’s Committees to successfully deliver social policy loans can also be used to transform VBSP and its Credit & Savings Groups from being State-dependent, credit delivering entities into responsive and self-sustaining microfinance providers

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financial products are attributes that put it in an almost unchallenged position to serve a potentially lucrative mass-market that remains under-banked. VBARD needs to be more aggressive in developing pro-poor, mass-market oriented services, such as ICT enhanced remittance and payment systems, “mobile phone banking” and microinsurance. Considering the potential volume, these vital services can be made accessible and affordable to poor and rural households; while giving VBARD the opportunity to generate substantial fee-based revenues.32

c) PCF Network, CCF and VAPCF

40. The PCFs. In 1993, the State Bank of Vietnam (SBV) promoted the setting up the People’s Credit Fund (PCF), a form of financial cooperative, to provide member-based, commune level financial services. In 2005, the Vietnam Association of PCF (VAPCF) was set up to support and guide the PCF network to comply with SBV rules; technology transfer; set up reporting standards, and professionalizing the PCF organization. The PCF network underwent various stages of development, namely: (i) Initial Growth Phase (1994-1998), where the number of PCFs dramatically rose from 179 PCFs in 1994 to 977 PCFs in1998, or 95% of the total number of PCFs by end 2009;33 (ii) Consolidation Phase (1999-2002), when their number declined from 977 to 888 PCFs in 2002, due to closures of 89 PCFs for insolvency and weak management; and (iii) Perfection and Development Phase (2002-2009), wherein the number of PCFs grew but at a much slower rate than the initial phase. Among the main reasons for the declining growth of PCFs is that no single Government entity appears to “champion” the promotion of PCFs after the Initial Growth Phase, notwithstanding that various ministries and SBV have units responsible for supporting them

41. The total membership of PCFs as of end 2009 was reported at 1.5 million, or an average of about 1,600 members per PCF. Considering that over 94% of the PCFs are over 10 years old the overall membership growth is not remarkable. A major factor is that PCFs were set up on a “one-commune-one-PCF” principle, limiting their growth prospects. However, a more complex reason suggests that true membership of the PCFs could be far lower than reported and that the PCFs’ ownership, governance and control structure is much closer to that of a limited liability rural bank than that of traditional cooperatives. Typically, PCFs have less than 50 “core” or “regular” members - usually from higher-income HHs – that provide “core-capital’ ranging from a minimum of VND 2.5 million to as high as VND 300 million (USD130 – USD 15,700).34 Core or regular members have the exclusive right to be board members and can set barriers to entry for new ones. There is strong incentive for this since PCFs (prior to the new CIL) are allowed to accept deposits from non-members while they can only lend to “members” - who need only to contribute VND 50,000 (US$3) to be so. Clearly, the ease of entry of non-core members is geared more to qualify borrowers than to recruit real members.

32 One of the largest private commercial banks in the Philippines has set up a joint venture savings bank that will

cater to the “un-banked and under-banked sector” using information & communications technology (ICT) following successful “mobile banking” in the country and business models in South America and Africa. //www.banko.com.ph

33 The prudent nurturing of the PCF by SBV during this phase was also aimed at restoring confidence in financial cooperatives that collapsed in prior years due hyper inflation;

34 This is based on limited field findings of PPTA team but confirmed by SBV. PCFs reported members are actually the cumulative number of borrowers who paid the minimum “equity” to qualify for a loan as “members”. These are likely to be inactive after paying the loan – as confirmed by the PCF officers interviewed. It does indicate the lending outreach of the PCF network. Thus, the PCFs have far fewer core members at 50/PCF or only 50,000 total.

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42. This is reflected in the collective deterioration of the capital adequacy ratios (CAR) within the PCF network from a high of 15% in the formative years to just 5.4% as of end 2009. It shows that loans grew much more rapidly than equity, with the few core-members leveraging their equity beyond prudential standards, since they can mobilize deposits from members or non-members, while they can easily recruit “members” to qualify as borrowers. These broad “banking” powers of PCFs is not typical of financial cooperatives elsewhere that usually can only do banking business with members, especially in mobilizing deposits. Clearly, there is little incentive for “core members” to increase their number that will dilute their equity share, reduce their earnings, and weaken their control of the PCFs. These are not consistent with proven cooperative best practices, with membership growth and active participation seen as key to the success and viability of cooperatives. The table below are typical profiles of PCFs:

Table 9: Typical Profile of PCFs (as of July 2010) 1/ Lien Nghia PCF Lien Hiep PCF Lien Dam PCF 1. Year of establishment 1995 1995 1996 2. Total assets 261,069 105,506 17,238 3. Deposits 235,903 58,197 7,017 4. Capital 12,587 4,460 1,344 5. Regular capital contributing members 42 42 20 6. Maximum capital contribution 320 200 270 7. Minimum capital contribution 10 10 2 6. Outstanding loans 184,860 82,095 14,785 7. Total members (cumulative no. of borrowers) 9,546 3,826 1,952 8. Number of borrowers 3,500 1,485 592 9. Number of depositors 3,000 700 100 10. Number of member depositors 1,500 600 90 11. Number of non-member depositors 1,500 100 10 12. Number of staff 25 12 6

1/ Unit of financial data: Million VND; based on a rapid survey of representative PCFs by ADB TA-7499-VIE consultants in Lam Dong Province

43. Under the new CIL, the PCFs may mobilize and lend to the public, subject to the stipulations of the SBV. SBV should carefully review the impact of giving such powers relative to the current ownership and control structure of the PCF as it dilutes the unique feature of financial cooperatives: that (real) member-owners are also the clients and users of the PCF’s services. Another issue is that a member-owner-client has influence over the PCF governance while a non-member (or “pseudo” member) client does not have such power. A more equitable option is to have the depositing non-members to first be “associate members” for a reasonable period with the view of eventually making them true or regular members. Likewise, the entry of true members must not be restricted and the present practice of merely qualifying members to borrow should be avoided. This will encourage the recruitment and growth of real and active members among PCFs. Proven good practices suggest that membership growth – that in turn spurs growth in resources, services and businesses - is a vital element for the success for any cooperative under the

The unique feature of a financial cooperative - that clients are also owners and have a say in its management - should be considered in stipulating the terms for allowing PCFs to mobilize deposits from and lend to non-members. The implementing rules should promote the growth of true and active members - a proven key success factor of financial cooperatives.

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self-help and mutual assistance principle. Robust growth in membership and resources are both vital factors and clear indicators of the health of a PCF. SVB recognizes the “flaw” in the current ownership and governance structure of the PCFs and plans to institute measures to correct this.

44. SBV’s 2010-2020 draft strategy for PCFs projects an additional of about 700 more, to reach a peak number of about 1,700 PCFs by 2020. The vision is to consolidate the small commune-level PCFs into larger PCFs individually covering a district with branches at the communes. With the target number, the PCF network should cover almost all districts and communes by 2020. The new CIL supports consolidation and the creation of larger PCFs with no geographical limits to their operations. Size does matter for a PCF (as for any credit institution) to attain economies of scale, easing access to professional managers and staff, generating the desired volume for viability and attaining growth, and better competitiveness. It will also relieve pressures on SBV’s capacity since it will supervise fewer but larger PCFs. Finally, it will be to the ultimate benefit of members being owners and clients of better managed and viable PCFs providing them a range of quality services, as well as better revenues from dividends and patronage refunds. 45. With the current state of many PCFs, capacity-building will be much needed especially in their consolidation and up-sizing. Institutional strengthening will also be needed to have the PCF network (and the CCF as a hub) as a platform for ICT-enhanced inter-PCF financial services that will allow the PCFs to collectively provide a range of quality services with a competitive edge because of the commune-level outreach of the network. As mentioned, the “Urban-Rural Connectivity Project”, funded by the Bill and Melissa Gates Foundation with Desjarsdins35 as the contracting partner, has been recently initiated. It is designed to improve the financial services of the PCF network through IT enhanced connectivity. Admittedly, it is a long way from extensive replication within the network since a large majority of PCFs has yet to adopt IT enhanced “core banking” systems to avail of the connectivity. The PCF network will definitely require substantial assistance for this major undertaking.

46. The CCF. An apex institution is usually wholly-owned and controlled by member primary cooperatives (like the PCFs) and does business largely with them, in the same token that primary cooperatives are owned and do business with their individual members following widely-accepted cooperative good practices. CCF is not a typical apex institution of financial cooperatives with almost 98% of its chartered capital of 1.36 VND trillion (USD 73 million, end 2009) owned by Government. And while Government does not guarantee all of its foreign borrowings, the nearly 100% ownership inevitably creates an expectation among lenders that Government will be the ultimate borrower. As of end 2009, about 54% of its portfolio was outside of the network: providing loans for state-owned enterprises (SOEs), small and medium enterprises (SMEs), other entities and individuals that are neither PCFs nor members of the PCFs. It also incurred foreign loans, about 13.7% of which was used to finance non-PCFs while the rest were wholesaled to the PCFs for their portfolio expansion. In contrast, the PCFs are largely member-funded with less than 15% external financing, mainly from CCF. Thus, CCF is heavily influenced by Government with its Board of Directors composed of 2 representatives from Government (one of whom is the

35 Desjardins Developpement International, technical-advisory arm of a network of financial cooperatives in Canada

The CCF - more so as it transforms into a cooperative bank – is an ideal and natural hub of the PCF network for ICT-enhanced, inter-PCF financial services that will allow the network to provide competitive range of quality financial services at the commune level. The financial cooperative is a proven model best suited to rapidly and viably expand grassroots financial services

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Board’s Chairman), four members from State-owned commercial banks (SOCBs) and five from the PCFs.

47. A major justification for the resource structure and direction of CCF is that it cannot generate enough business within the PCF system and has to seek external business to sustain its operations so that it can in turn maintain its support for the PCFs. However, it can be argued that CCF could have also assured its own viability by aggressively helping the PCFs grow in membership and resources, thus generating the business for itself – true to the mandate and concept of an apex institution. However, with Government’s and donors’ support there is no compelling incentive for CCF to do this and perhaps partly explains the slow growth in membership of the network. This differs from widely-accepted cooperative principles - enshrined in the PCF Law and Charter - that include the self-help, mutual-assistance tenet. It has been widely proven that massive external assistance, though well-meaning, only weakens the values and bond that strengthen a cooperative system. Thus, it is unclear why Government and donors need to allocate scarce resources to support a system that is meant to be self-sustaining, especially since half of CCF’s portfolio is for non-PCF clients.

48. A major part of the CCF’s future plans is to transform into a cooperative bank, a logical and timely move especially with the new CIL. It is negotiating a major technical assistance program with Rabobank Foundation that will not only consider its own transformation but how the PCF network would be linked to such transformation. There will be need to review Government’s role in CCF’s transformation. Government’s exit from CCF (especially as it converts into a cooperative bank) must consider gradually turning over its ownership and control to the PCFs network where it rightly belongs, as this will also ease the fiscal burden of Government and make the network autonomous and independent.

49. Viet Nam Association of PCFs (VAPCF). VAPCF was set up in 2005 with a number of core objectives, including: guiding the members to implement the regulations and laws concerning the operation of PCFs; supporting the PCFs in transferring technologies and management experiences; setting standards for the operations of PCFs (i.e., reporting, accounting, credit, internal control, etc.), and organizing professional training courses for the PCFs. The draft 2011-2020 Plans for PCF, CCF and VAPFC is even more ambitious, as it envisions the VAPFC to set up and manage for the PCF network the following: Safety Fund; Auditing Organization; Training Center; Information and Data Center, and Banking Services Providing Company. Recently, it has set up an IT company with the view to develop a standard core banking IT system for the PCFs, in preparation for the eventual roll out of the “Urban-Rural” Connectivity Project.36

36 The PCF network and VAPCF are also recipients of USD0.5 million TA grant from the World Bank’s Rural

Finance Project III to initiate (i) building the supervision, external auditing, and internal control functions within the PCF network, (ii) rolling out a standardized credit manual across the PCF network, (iii) supporting the development of management information, banking software, accounting, and reporting systems across the PCF network, (iv) implementing the organizational and business plan for the VAPCF, (v) improving the funding of the VAPCF, (vi) strengthening the human resources of the VAPCF.

Government needs to have an exit strategy from CCF with ownership and control gradually turned over to the PCFs network where it rightly belongs. This will further ease the fiscal burden of Government, while making the CCF-PCF network autonomous and self-sustaining – true to cooperative principles.

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50. However, it appears there are major duplications between the services now offered by CCF and those proposed to be done by VAPCF, such as technical assistance, setting operating standards and other capacity-building services for the PCFs. And even if CCF were to be converted into a cooperative bank, it may be better positioned in terms of manpower and resources to provide most of the services envisioned for VAPCF, especially since these are just natural extensions of the CCF’s business linkages with PCFs. With the expanded powers of a cooperative bank under the new CIL, a transformed CCF can perform these either by itself or by setting up subsidiaries37. On the other hand, it will be a major challenge for VAPFC to rise to a level of capability to perform what is planned for it, given that after more than 15 years of existence it has only 12 staff and an annual budget of USD65,000 to date. Likewise, over the medium term, further consolidation of the PCFs could move from district-level to province-wide coverage of each PCF that will greatly reduce the number of independent PCFs, and impact on the business ventures of the VAPCF. Indeed, the VAPFC is currently supported under the World Bank RFP III and by the Bill & Melissa Gates Foundation, while CCF is negotiating a major technical assistance from Rabobank Foundation with similar objectives and directions.38 In view of these, there is need to revisit and rationalize the various plans for the PCF, the CCF and VAPFC in order to determine the optimal roles each will have to play to achieve synergy and cost effectiveness, while avoiding needless duplication.

d) The Semi-Formal MFIs

51. As mentioned, the 40-50 “MFI”s operating today were organized mainly through mass organizations (MOs - notably the Women’s Union) or through credit and savings programs. As of end 2009, only one of these had outreach of over 130,000, two with around 40,000, and only three had about 20,000 clients. The top 4 performers (including 3 smaller ones that have merged) have applied for license and only one so far has received this. Another 2-4 others are reportedly following suit. Most of these MFIs have been in existence for almost 20 years. Admittedly, the better performing MFIs individually have far wider outreach than an average PCF, but their performances are way below that of other top performers in the Region of their category. The rest may have very little prospects to become major players even with substantial support in resources and institutional strengthening given them. Almost all of the MFIs are still grant-led or have access to highly concessional lending from the MOs, local and national government, and from donors. The transition provisions of the new CIL allow them to exist under guidance from Government. As earlier proposed they should be made to phase out or transformed within a reasonable period. Alternatively, they can be consolidated or merged with top performers, especially if they belong to the same mass organization. Having a few but well trained and well-resourced MFIs is a much better option than having many weak ones with little prospects

37 For example: (i) the Information and Data Center can be set up using the CCF/coop Bank as the hub to link the

PCF network, with individual PCFs acting like a branch of the CCF/coop bank; (ii) the Banking Services Providing Company, is likely to engage in banking business that will naturally occur between CCF/coop bank and the PCFs.

38 See Annex 4: VBSP & CCF-PCF Analyses of Operations

Promoting the development of a few well-managed, better-funded and more capable MFIs will accomplish much more than supporting many weak ones with little prospects to be sustainable.

The various strategic plans for the PCF, the CCF and VAFC must be consolidated and rationalized in order to determine the optimal roles each will have to play to achieve synergy and cost effectiveness.

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to be self-sustaining. It will also lessen the burden of supervising the institutional MFIs. Regional experience shows that a very capable MFI can have an outreach of over a million clients over a reasonable period.39 The benefits from competition and market forces will still be generated not from a few MFIs but from a strengthened PCF network, a transformed VBSP and its CSGs, and the likely expansion of VBARD and other banks to expand into the microfinance market.

e) Supervisory Capacity

52. The integration of microfinance to the financial system, starting from the 2005 and 2007 decrees until the passage of the new CIL, raises legitimate concerns within SBV on the effective supervision of the key players, particularly the PCFs and the soon to be licensed MFIs. Many PCFs are still seen as inherently weak mainly due to lack of expertise in remote or small communes to manage even a small credit institution. Senior SBV officials still cite the massive failures almost two decades ago,40 as a harsh reminder in the late 90s’ when almost all n financial cooperatives were closed by SBV. This could partly explain the slowdown on the earlier aggressive promotion in setting up the PCFs by SVB. It does not help that the PCFs are exempted from external audit. In the case of the semi-formal MFIs, almost all of these were set up and long operated under a grant-led, subsidized social lending culture and may not readily adapt to the rigors of operating a licensed market-oriented credit institution. Moreover, except for the leading few, majority of the MFIs is considered even weaker than the PCFs with almost 40% of the MFIs having management and staff working on a part-time or voluntary basis.41

53. The SBV is a lean organization and unless the number of examiners will be increased, it will be hard pressed to supervise small and numerous PCFs and licensed MFIs. Also, SBV examiners need to be trained or updated on the special features of microfinance, such as the widely-accepted performance standards and proven best practices that may not apply to traditional banks. Effective supervision is one of the major justifications for consolidation among the formal MFIs and the PCFs. The strengthening plan of the VAPCF includes its setting up of an Auditing Company aimed to improve supervision of the network. A more cost-effective option is to accredit auditing firms and outsource audit of the PCFs by batches (of 10-15 PCFs) to reduce the audit costs for individual PCFs.42

5. Financial Infrastructure Provision

a) Capacity Building and Knowledge Exchange

54. Despite the long existence of the semi-formal MFIs and even the PCFs, most of the service providers for capacity-building of MFIs are in the nascent stage or developing their capability to meet the specific demands of the microfinance sector. Among the more

39 CARD Bank/NGO of the Philippines and the major MFIs of Bangladesh are a few examples of MFIs having

sustainable outreach of over a million clients. 40 Notwithstanding that the massive failure was more due to economic conditions (massive devaluation and hyper-

inflation) rather than internal factors. 41 Nine of 23 fully surveyed MFIs under the JFPR Project 42492 have mainly part time management and staff 42 This is the model used by Bank of Indonesia (BI) for providing audit services to small rural banks (BPRs).

Vietnam has reportedly about 150 Auditing firms and 1,000 licensed chartered accountants. The distribution of about 1,700 PCFs and a few MFIs to accredited audit firms can lower the costs of audit given the size of these institutions.

Outsourcing the external audit of PCFs by batches to accredited auditing firms is a more cost-effective option than creating a specialized entity.

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notable entities that provide knowledge exchange and capacity-building services are: (i) SBV’s Banking Academy and the Banking University - that offer education and training, mostly on traditional banking, for banks and other credit institutions including the PCFs and VBSP; (ii) Microfinance Working Group (MFWG) is a platform for advocacy and knowledge exchange among NGO-MFIs with periodic workshops and training programs, though it acts more as a forum for MFI practitioners; (iii) Bank Training and Consultancy (BTC), founded by 10 joint stock commercial banks with support from the International Finance Corporation (IFC) is also a core banking-oriented training facility; (iv) World Bank’s (WB) Vietnam Development Information Center (VDIC) is a partnership initiative of the WB and other donors that offers a range of services, facilities, and targeted training for knowledge exchange in development programs worldwide; (vi) The Microfinance and Community Development Institute (MACDI), was set up in 2007 as a financial-social-scientific focused NGO providing training on microfinance, business development, enterprise assistance, and community development; and (vii) Community Finance Resource Center (CFRC) that was also set up in 2007 by a group of well-known international and local scientists, researchers, banking experts and microfinance practitioners to offer a range of training and information exchange on microfinance, community development, and education-communications.

55. The JFPR Project No. 9140-VIE Consulting Team that explored the possible hiring of local institutions for the training of MFIs found that most of these are still developing their capacities in microfinance. They also tend to engage on supply- rather than demand-driven training activities that may not match the real need of the PCFs or the MFIs. The most capable and demand-driven service providers, notably the Banking Academy regulated by SBV, are understandably more core-banking focus since microfinance is only a recent addition to the financial system. The JFPR team cites that for applied MFI operations, the best trainers so far are the large MFIs themselves, like TYM and CEP, since these regularly conduct in-house training for their expansion needs. However, these MFIs are for now too inward-looking to train other MFIs. Moreover, they are narrowly focused on their operations to expand the proven microfinance technology they have adopted (e.g, Grameen Bank Approach or ASA methodology) and may not cover generic but vital knowledge areas, especially for transformed formal MFIs that need to conform to the provisions of the new CIL. A model that they can emulate will be the CARD MRI Development Institute of the Philippines,43 but this will take years and substantial resources to accomplish.

56. The integration of microfinance-oriented institutions under the new CIL requires them to have the same discipline and rigors of all formal credit institutions. On the other hand, commercial banks that are already part of the formal banking system (such as VBARD), may opt to downscale some of their operations to effectively serve the microfinance market that has long been proven as a viable opportunity area while being underserved by the formal sector. Notwithstanding their microfinance orientation, the capacity-building and training needs of these entities will still primarily focus on their having core banking competence and knowledge to properly function as formal financial institutions in a highly regulated industry; and secondarily to acquire the special skills and knowledge to effectively serve the microfinance market. Moreover, the microfinance industry will increasingly become more complex and competitive with its mainstreaming into the formal financial sector; the advent of technology-based products and services that allow cost-effective rapid expansion to a mass-based market; as well as concerns on safety and stability in the overall financial sector. Thus, microfinance-oriented credit institutions will require skills and knowledge beyond that of traditional MFIs that merely focused on honing

43 CARD MRI Development Institute offers a range of practitioner-led training and advance education in applied

microfinance. //www. cardbankph.com

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their competence on “best and proven practices” in microfinance (e.g., women-focused organized lending).

57. Among the existing and potential (or planned) capacity-building service providers in Vietnam, the Banking Academy by far possesses the optimum comparative advantage to be the training and institutional strengthening hub for the key players in the microfinance industry44. It may do this through the following: (i) designing and conducting its microfinance-related training, research, and the institutional development activities in collaboration, or in joint undertakings with: (a) other universities, colleges; existing reputable microfinance training and capacity-building providers; and (b) model PCFs, MFIs, cooperative bank and commercial banks, that may provide on-site, on-the-job training. This will be especially useful in areas where the Banking Academy does not have the presence, outreach, facilities, or particular expertise to address the specific capacity building need and requirements of a key player or network of players; (ii) taking the lead in developing appropriate curricula and training courses based on periodically conducted/updated training and capacity needs/gaps analysis of key players in the sector, to ensure relevant and demand-driven capacity-building support; (iii) training and developing a core of faculty within the academy and its partner universities, and a core of on-the-job / on-site trainers involving practitioner-trainers from among its partner credit institutions (e.g., PCF, MFI, cooperative bank or commercial bank) to provide both formal and hands-on training on the various topics and aspects of microfinance; (iv) in collaboration with its partners, conducting fee-based academic/classroom type training and on-site, on-the-job and hands-on training for credit institutions and stakeholders; (v) networking with reputable regional and international training centers and capacity-building providers in microfinance to ensure up-to-date knowledge-based information exchanges; and (vi) developing the capability to raise and manage resources from commercial or donor sources to ensure sustainability in providing the services.

b) Client Information Exchange

58. Understandably, the VBSP and PCF network are not members of SBV’s Credit Information Center, given: their large volume of micro-loans that cannot be accommodated by the system; their commune level operations that will not pose systemic risks at national or even provincial level; and low-level IT capability of the PCFs and VBSP. However, there will be need to have proper monitoring of micro-loans even at a localized (commune or district) level. The real risk is that the poor and rural HHs are also the most vulnerable to the adverse impact of over-indebtedness. There are already anecdotal indications of multi-financing of borrowers, especially with the rapid growth of VBSP in rural areas that are also extensively covered by VBARD and the 1,000 communes covered by PCFs. VBSP alone has just recently consolidated its accounts to borrower-based, rather than loan product-based monitoring, to avoid double counting and over-financing of a HH, since borrowers can potentially avail of several loan products simultaneously.

44 See Annex 11 for the reasons why Banking Academy by far possesses the optimum comparative advantage to

be the training and institutional strengthening hub for the key players in the microfinance industry.

The Banking Academy acting as the training and institutional strengthening hub for the key players in the microfinance industry will be a doable and cost effective option for providing quality capacity-building interventions to stakeholders.

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59. Setting up a simplified commune or district level credit information exchange for key players in microfinance could be possible. The database on HHs or individual clients can be linked using the “family record book” and/or the National ID System. A simple information exchange system may be designed using batched processed, standardized electronic files of clients of participating entities. The system can be upgraded once the PCFs, VBSP and MFIs operate under an IT enhanced core banking environment.

c) Customer Protection

60. Under the new CIL, credit institutions and foreign bank’s branches shall have following responsibilities for customer protection: (i) Participate in a deposit insurance or preservation organization in accordance with provisions of the laws and publish information regarding their membership in a deposit insurance, preservation organization at their head offices and branches; (ii) Create favorable conditions for customers to deposit and withdraw money; ensure the full and timely payment of both principal and interest of any sum of deposit; (iii) Refuse any investigation, blockade, retention, transfer of customers’ deposits, except for the case where being requested by competent state authority in accordance with provisions of the laws or with the consent of the customers; (iv) Publish interest rates applicable to deposits, service fees, rights and responsibilities of customers regarding each type of products and services supplied. (v) Announce official transaction time and not being allowed to interrupt transactions during announced time. In case a credit institution or foreign bank’s branch intends to temporarily suspend its transactions during official transaction time, the credit institution or foreign bank’s branch shall post an announcement at the transaction location at least 24 hours prior to such suspension. A credit institution or a foreign bank’s branch shall not be allowed to discontinue its transactions for more than one working day, except for temporary discontinuity of operation for more than one working day with written approval from State Bank of Vietnam.

6. Gender and Social Issues in Microfinance

61. Microfinance in Vietnam has traditionally involved women. Most of the semi-formal MFIs were formed by the VWU and adopt women-focused proven microfinance technology (e.g., Grameen Bank Approach and ASA model). Moreover, 50% of the Credit & Savings Groups of VBSP were mobilized by VWU, though these are now gender-neutral in membership in recent years due to VBSP policy to avoid selectivity bias among MOs. Thus, there are no significant gender issues that need to be addressed in developing microfinance in Vietnam.

62. On the other hand, poverty in Vietnam is typically 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% (GSO, 2010). With 72% of the population living in rural areas, the rural poor account for 94% of the total number of poor people. Moreover, poverty is increasingly associated with ethnic minorities. Both the poverty headcount (percentage of the population living below the poverty line) and poverty gap, which measures the seriousness of poverty, are higher among ethnic minorities. Thus, microfinance as part of the poverty reduction measures may need to be fine-tuned to the geographic and ethnic distribution of poverty. Government could provide incentives to credit institutions providing microfinance services to remote areas and ethnic minorities

Government should provide incentives to credit institutions providing microfinance services to remote areas and ethnic minorities (e.g., tax breaks and “smart subsidies”)

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where poverty incidence is highest, such as tax breaks and easing up on requirements for opening up branches.

63. The table below shows the poverty distribution in the country.45

Table 10: Poverty headcount and poverty gap in rural areas among different ethnic groups, 2006

Ethnic Category Poverty Headcount

Poverty Gap

Kinh-Hoa 13.5% 2.7% Khmer-Cham 34.6% 5.8% Tay-Thai-Muong-Nung (in the Northern Uplands) 45.2% 11.1% Other ethnic minorities in the Northern Uplands 72.4% 26.1% Ethnic minorities in the Central Highlands 73.6% 25.7% Others 50.1% 23.5%

Source: (Baulch Bob, 2010)

64. There is also need to revisit the “social policy lending” programs of the Government to distinguish these from microfinance. For the extreme poor, micro-credit may not be the solution and likely to cause over-indebtedness, especially with the high average loans provided by VBSP relative to semi-formal MFIs. Other forms of social safety net maybe more appropriate. Another example is the loan program for disadvantaged students. This is a worthy program and can be considered as a public sector investment for the country’s human resource development. As such the type of loan portfolio should not be borne by a credit institution and put it at risk.46 Properly selected social-policy lending programs may then use several accredited participating credit institutions (not just VBSP) as “channeling agents” that will be allowed to carry the loans “off-books” or at no risk to them, with Government compensating them through performance-based service fees.

7. Summary of Key Constraints and Development Needs (SWOT)

65. Below is a SWOT Analysis of the microfinance sector:

a) Strengths

• Extensive coverage of the country by key players: VBSP covering 95% of communes with 200,000 Credit & Saving Groups; VBARD network in all districts;

• PCFs in about 1,040 communes, with plans to be consolidated and number to be expanded to 1,700 PCFs with each PCF having district-level or wider coverage.

• About 1 formal, 3-5 semi-formal MFIs capable of rapid and viable expansion, 30-40 more maybe merged to a few large and more capable formal MFIs;

• An effective People’s Committee system for problem debt resolution and potential base for information exchange at commune level

45 See Annex 6 on Gender and Social issues 46 Student loans are particularly risky to be borne by a credit institution: clients are the least qualified (from a purely

credit-decision vantage) since they have no capacity to pay, highly mobile, loans are medium to long term, and collection difficult. Also, the demand for the loan will be ever-increasing (about 50% of the increase in VBSP lending in 2006-2009 was on student loans).

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• Effective mass-organizations for social mobilization and grassroots advocacy, that can facilitate the transformation of weak semi-formal MFIs and CSGs, into formal credit institutions47

• Presence of several MFI capacity-building providers, notably the Banking Academy and Banking University regulated by SBV.

b) Weaknesses

• Government’s aggressive “social policy lending” through VBSP’s a disincentive to other players, reducing competition and choices; and increasingly a heavy fiscal burden with marginal financial benefits to the target HHs;

• VBSP’s disproportionate focus on credit deprive its large client base from needed savings and other banking services, while limiting VBSP’s to mobilize resources from its market, perpetuating its dependence on Government;

• CCF dependence on Government funding and support, with the concomitant political influence, undermines CCF-PCFs symbiotic relationship vital to their strengthening; very small regular membership base of PCFs resulting in limited capital and prospects for expansion;

• Current roles of People’s Committee and mass organizations in the credit process of VBSP (e.g., selection of clients) may politicize micro-credit delivery and pose “moral hazards” over the long term;

• SBV lacks the capacity and capability to supervise and provide oversight to a potentially large number of MF players dispersed up to the commune level.

• Lack of financial infrastructure, e.g., credit information exchange; capacity-building service providers for IT enhancement and adoption of proven MF good practices.

c) Opportunities

• The rural poor and low-income households, have long been proven to be a viable market with the adoption of microfinance good practices and methodology;

• The development of appropriate information and communications technology (ICT) opens up new areas for expanded and viable banking services in erstwhile un-banked mass-market areas (e.g., mobile phone and electronic banking for payment and remittances through mobile phones, electronic banking)

• The poor has been consistently shown to have high propensity to save and needs such services; allowing in turn microfinance-focused institutions to have access to the cheapest and most stable fund source (rather than Government support)

• Advances in IT and information technology can improve efficiency and cost effectiveness that are still major challenges in microfinance because of volume, frequent small transactions and remoteness. ICT-enhanced operations is the inevitable future of microfinance providers’ expansion and efficiency;

• The new Credit Institutions Law has set the enabling environment for institutional microfinance, integrating including the setting up of MFIs and cooperative banks

• The formulation of a microfinance strategy focused at the development of a robust, sustainable and responsive microfinance sector.

47 With the right information, education and communication (IEC) program, the MOs can be harnessed for a

massive advocacy for consolidating credit-led CSGs into viable and self-sustaining PCFs or financial cooperatives.

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d) Risks/threats

• Lack of political will to institute reforms, especially on “social policy lenging” due to socio-political concerns

• Volatility of economic recovery and concomitant adverse impact to the most vulnerable sectors – the poor and rural households

• systemic risks due to inadequate regulation/supervisory capability over large number of potential players

• While Government exit strategy from VBSP, CCF is consistent with Government commitment to equitize banks; the equitization process in general is on hold because of the recent global financial crisis.

II. SECTOR STRATEGY STATUS

A. Government Sector Strategy and Plans

66. Several strategic plans for 2010-2020 relevant to the microfinance sector, including implementing decrees, have been drafted with others already circulated for continuing inter-ministerial discussions. These include: (i) the draft Decree to amend Decree 78 (2002) and the 2010-2020 Strategy for VBSP; (ii) the draft CCF strategy including its conversion to a cooperative bank; (iii) the draft strategy for VAPCF and its expanded role for the PCFs. Part of the delay in finalizing all the draft strategies and accompanying decrees was that the passage of the then proposed Credit Institutions Law was still pending. With the passage of the new CIL, discussions and final approval of the above-mentioned strategies, accompanying decrees and implementing guidelines are likely to be accelerated, especially with the passage of the Government’s overall 10-year Development Plan for 2011-2020.

67. Meantime, the all-encompassing National Microfinance Sector Strategy is still a “work-in-process” of the SBV Microfinance Strategy Working Group (MSWG) and has yet to be submitted to the National Microfinance Steering Committee for discussion prior to submission to Government for approval. It is still unavailable for circulation. Among the agreements between SBV and the ADB Inception Mission (April 2010) for ADB TA 7499, is for the TA consultants to come up with the Microfinance Sector Assessment and the “Key Elements of the Microfinance Strategy” as inputs to MSWG in the drafting of the MF Sector Strategy. The TA findings will be discussed in a workshop and will be refined to be used for the finalization of the Microfinance Sector Strategy and the Microfinance Sector Roadmap by Q4 2010.

B. Recent ADB Support and Experience48

68. In 2000, ADB provided a loan to Vietnam for a line of credit to VBARD in support of micro and small rural enterprises.49 ADB’s broader involvement in the sector started in 2001 with a technical assistance (TA) grant for preparing a microfinance legal framework50 which resulted in the passage of Decree 28/2005/ND-CP (Decree 28) in 2005 on the Organization and Operations of MFIs in Vietnam. In 2005, a second TA was provided initially to support the implementation of Decree 28, but eventually helped transform the

48 ADB 2010. Project Preparatory TA Concept Paper: Preparing Microfinance Development Program for Vietnam 49 ADB 2000. Rural Enterprise Project (Loan with TA) 50 ADB 2001. TA 3741-VIE Technical Assistance for Preparing the Framework for Microfinance Development

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decree because it was too restrictive.51 Thus in November 2007, Decree No 165/2007/ND-CP (Decree 165) was issued to supplement Decree 28. This was followed in 2009 by the approval of a JFPR grant to support the implementation of Decrees 28 and 165 by providing TA and supplementary matching funds to help the transformation of selected semi-formal MFIs into regulated MFIs.52

69. ADB’s Country Strategy and Program (CSP) 2007-2010 and Country Business Plan (COBP) 2009-2011 for Vietnam support Government’s poverty reduction goal, including the development of a robust microfinance sector.53 Consistent with its Microfinance Strategy, ADB’s assistance to the sector focuses on: (i) creating a policy environment conducive to microfinance development and growth; (ii) developing microfinance infrastructure; (iii) building viable institutions; and (iv) supporting pro-poor innovations. Thus, the key thrust of the assistance is to support the development of a market-oriented microfinance sector consisting of diversified financial institutions including commercial banks, financial cooperatives and MFIs that can provide a broad range of safe, affordable, sustainable and responsive financial services to poor and low-income households and their microenterprises.

70. During the ADB Country Programming Mission May 2008, the Government of Vietnam requested for a loan of USD 40 million to support the microfinance sector, which was included in ADB’s COBP 2009-2011 for Vietnam on a 2010 standby but 2011 firm basis. The same COBP also included a Project Preparatory TA (PPTA) with a budget for USD500,000. This was approved as ADB TA 7499-VIE: Preparing Microfinance Development for Vietnam which is presently being implemented in 3 steps (thus this assessment):

Step 1 - conduct an overall assessment of the microfinance sector and identifying the “key elements for a microfinance development strategy;

Step 2 - using putputs of Phase 1, assist SBV and the Government in developing the Microfinance Strategy and Roadmap; and,

Step 3 - Designing a Program Loan to support the first steps in implementing the MF Strategy and Roadmap.

C. Other Development Partners and Stakeholders Support

71. Donor support to Vietnam’s Microfinance Sector54 comes in varied forms and covers the full range of activities and institutional arrangements: from direct involvement of international NGOs/donors or in partnership with MOs in performing microfinance actitvities, technical and financial assistance to key microfinance players, to assistance in policy and sector reforms covering the broader financial sector and its microfinance subset.

72. The DFC Report for the World Bank (2007),55 aptly described the extent of donor assistant and coordination for the microfinance sector of Vietnam, below:

“Despite the formal coordination channels, the level of actual coordination, co-operation and coherence in approaches among financial sector donor agencies is relatively low. There seems to be little attention to lessons learned and generally accepted ‘good practices’ for financial sector development in the international aid community, and the

51 ADB 2005. TA 4638-VIE TA for Implementing the Regulatory and Supervisory Framework for Microfinance 52 ADB 2009. JFPR 9140-VIE Formalizing MFIs (financed by the Japanese Fund for Poverty Reduction) 53 ADB 2006. Country Strategy and Program, Vietnam 2007-2010 54 Annex 7 - Matrix of donor supported projects for microfinance in the recent years 55 DFC Report for the World Bank (2007) “Developing a Comprehensive Strategy to Expand Access [for the Poor]

to Microfinance Services: Promoting Outreach, Efficiency and Sustainability”.

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task of coordination placed on the shoulders of the over-stretched government seems larger than necessary. For example, at the policy level some 10 donors are supporting SBV in a less than well-coordinated fashion, and the processing of a multitude of well-meant inputs on legislation, regulations and procedures is tasking for the under-resourced government agency. Likewise, 4-5 donor agencies are supporting the main players in BOP [bottom of poor] finance, i.e. VBARD and CFF, on different terms and conditions and with different requirements.56 Even within the ‘Five Bank Group’ i.e. WB, ADB, KfW, JBIC and AFD that provide the majority of credit to Vietnam, the purposes, terms, and impact of the support could be better coordinated…. “

73. The main factor for lack of donor coordination was clearly the dual approach of Government in developing market-based microfinance, while aggressively pursuing a highly distorting “social policy lending”. The latter is perceived as serious a barrier to entry by the very stakeholders it is encouraging to participate in order to achieve its microfinance sector objectives. It was also due to the fragmentation of the legal basis and lack of national strategy for microfinance. The adoption of a cohesive microfinance strategy and roadmap, should pave the way for better donor coordination in supporting the sector.

III. CONCLUSION AND RECOMMENDATIONS

A. Creating the enabling Policy and Regulatory Environment for Microfinance

74. In developing market-oriented microfinance, the ideal role of Government is that of an enabler: to set up the appropriate policy and regulatory environment that is conducive to the proper functioning of the key players so that these could provide sustainable, responsive, and quality financial services to the poor and low-income households. The continuing efforts of Government and SBV, resulting with the passage of the new CIL and the ongoing design of the Microfinance Strategy and Roadmap are steps towards the proper direction. However, Government has to ensure that the pursuit of its other social objectives will not undermine its objectives for the Microfinance Sector. The major risk is that Government - in its concern to ensure the inclusion of its “social policy lending” target groups - could cause the exclusion of the vast majority of the less poor and low-income households from quality financial services. Government must also review its direct support and allocation of scarce resources to players in the sector especially when these have the potentials to be self-sustaining, thus:

1. There is need to revisit the “social policy lending” target groups of Government to determine which particular groups really need continuing Government subsidies and support. Social policy lending (e.g., student loans) cannot be viably performed by any credit institution and maybe “channeled” through several financial institutions at no risk to them, with Government bearing the ultimate risk as this can be viewed as the State’s investment for the public good. However, other “social policy lending” target groups may best be served through market-based financial intermediation by self-sustaining, viable and properly supervised credit institutions that can mobilize funds from the very market they serve as well as other commercial sources, with no need for Government

56 For example: several donors provided loans to CCF for on-lending to its own clients that are non PCF/CCF

members (e.g., SOEs, SMEs, other individuals) with unclear rationale on the comparative advantage of CCF over other SOCBs or financial institutions for such operations. More importantly, it is neither supportive of the self-help mutual assistance tenet of cooperatives nor reinforcing the symbiotic relationship between CCF and the PCFs.

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subsidies. Lastly, the marginal benefit of subsidized lending to poor HH may not warrant the huge costs to Government.

2. Options must be explored for: (i) a doable and politically acceptable government’s

medium to long-term exit of its dominance in ownership, management and control of the operations of VBSP; (ii) creating a more responsive and sustainable microfinance system by the transforming the existing VBSP-CSGs to formal credit institutions under the new CIL - such as their consolidation and conversion into PCFs owned and managed by its members; or as MFIs – providing self-sustaining microfinance services to the same community; and (iii) utilizing current institutional arrangements (with MOs and people’s Committees), adjusted to a different paradigm.

3. There will be need to review Government’s role in CCF. Government’s exit from CCF

(especially as it converts into a cooperative bank) will mean the gradual turn over of its ownership to the PCFs network where it rightly belongs, consistent with widely-accepted principles that are also enshrined in the Cooperative Law. This will also ease the fiscal burden of Government, while making the network and the apex institution autonomous, self-sustaining and independent.

4. Rather than subsidies or direct support, Government should resort to “smart subsidies”

and other measures, such as: (i) incentives to credit institutions providing microfinance services to remote areas and ethnic minorities where poverty incidence is highest, such as tax breaks and easing up on requirements for opening up branches; (ii) supporting capacity-building of cooperative banks, PCFs and MFIs in training, ICT enhancements on cost-sharing schemes; (iii) divesting its ownership and receivables from VBSP and the CCF to low-income and rural households – through their PCFs - at reasonable discount or easy amortization payment plans (as part of its exit strategy from these institutions); and (iv) support for an advocacy and information dissemination program at all levels of Government and mass organizations to level expectations and understanding of microfinance;

B. Ensuring Effective Supervision

75. Effective supervision will only be possible if credit institutions have the same understanding of the performance and risk framework as that of the regulators/supervisors:

1. Ministries tasked with planning and monitoring VBSP’s operations (MOF, MPI, and MOLISA) must have to the capability to properly “supervise” and monitor VBSP using widely-accepted microfinance performance standards and not just on the basis of Government targets normally related only to outreach and disbursements;

2. There will be need for SBV to set up performance standards unique to PCFs based on

universally accepted norms for financial cooperatives, as well as widely accepted performance standards for MFIs;

3. The internal controls, audit standards, and reporting norms of the “MFIs in transition”

must already follow those prescribed by SBV for formal credit institutions, and universally-accepted performance standards for MFIs;

4. Consolidation of PCFs and MFIs must be pursued to create fewer, but larger and

stronger institutions. This will lessen the burden to SBV from supervising many but weak and problematic credit institutions;

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5. A more cost-effective option is to accredit auditing firms and outsource audit of the

PCFs and the MFIs by batches (of 10-15 PCFs; and a few MFIs) to reduce the audit costs for individual PCFs and transformed MFIs;

6. Strengthening SBV’s supervision through:

a) Training SBV staff on widely accepted good practices on PCFs and MFIs; and b) Out-sourcing some of the supervisory activities (on-site/off-site) to accredited audit

or accounting firms based on resources of MFI/PCF

C. Improving Institutional Capacities and Capabilities of Key Players

76. Institutional strengthening of key players must aim for their being self-sustaining and autonomous, to be able to survive and be viable in a competitive market-based environment:

1. VBSP

1. Government needs to have a gradual “exit strategy” from VBSP. Under new CIL, VBSP and its CSGs maybe transformed into viable, effective, and autonomous microfinance providers without the need for massive Government support while still remaining true to the Government’s social objectives, as follows: a) CSGs can be transformed to create district-wide financial cooperatives; b) VBSP can be human resource pool to manage the emerging financial cooperatives c) VBSP to be “relieved” of social policy lending functions and converted as cooperative bank to act as hub for the converted CSGs; d) Government ownership and resources in VBSP to be divested (equitized) to the

converted CSGs, and their members (and staff) over the medium to long-term.

2. CCF, PCF and VAPFC

1. There will be need to review Government’s role in CCF’s transformation. Government’s exit from CCF (especially when it transforms into a cooperative bank) must consider gradually turning over its ownership and control to the PCFs network where it rightly belongs, following basic cooperative principles and good practice. This will also ease the fiscal burden of Government and make the network autonomous and independent.

2. Under the new CIL, the PCFs may mobilize and lend to the public, subject to the

stipulations of the SBV. SBV should carefully review the impact of giving such powers to the PCFs as it raises an issue on the unique feature of financial cooperatives: that member-owners are also the clients and users of the PCF’s services.

3. With the current state of many PCFs, capacity-building will be much needed

especially in their consolidation and up-sizing. Institutional strengthening will also be needed to have the PCF network (and the CCF as a hub) as a platform for ICT-enhanced inter-PCF financial services that will allow the PCFs to collectively provide a range of quality services with a competitive edge because of the commune-level outreach of the network. Government “smart subsidies” maybe needed to support such strengthening;

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4. There will be need to revisit and rationalize the various plans for the PCFs, the CCF and VAPFC in order to determine the optimal roles each will have to play to achieve synergy and cost effectiveness.

3. Transforming the semi-formal MFIs

1. Semi-formal MFIs allowed to continue to operate under the new CIL without a credit institution (MFI) license, should be given reasonable period for their eventual transformation or have to cease operations as prescribed by Government. This will avoid a two-tiered system of regulated and unregulated MFIs/credit institutions that could challenge the intent of the CIL in integrating microfinance into the financial sector.

2. There will be need to consolidate the small “MFIs” or merged these with the top

performers, especially if they belong to the same mass organization. Government should provide incentives or measures to encourage the consolidation and merger of the many small and weak “MFIs”, to help ensure their viability and effectiveness and justify their transformation. Having a few but well trained, well-resourced and focused MFIs is a much better option than having many weak ones with little prospects to be sustainable.

4. VBARD

VBARD is well positioned to deepen its services in the rural areas and amongst poorer households. It only needs to be more aggressive in developing pro-poor, mass-market oriented services, such as ICT enhanced remittance and payment systems, “mobile phone banking” and microinsurance in order to make such service accessible and affordable to the rural poor and low-income households

D. Setting up Supportive Financial Infrastructure

77. Financial infrastructure support must consider cost effectiveness and the level of development of the key players in microfinance, thus the following are proposed:

1. A more doable and cost-effective option to ensure quality and sustainable capacity-building services is to make the Banking Academy as the training and institutional strengthening hub for the key players in the microfinance industry. It will need to tie-up with other existing and specialized capacity-building providers, in order to develop demand-driven and fee-based services to key players in microfinance based on their general needs as credit institutions under the new CIL and their unique requirements given their varied business models (i.e., as MFIs, PCFs, VBSP, other banks)

2. Setting up a simplified commune or district level credit information exchange for key

players in microfinance should be explored. The database on HHs or individual clients maybe be linked using the “family record book” and/or the National ID System. A simple information exchange system may be designed using batched processed, standardized electronic files of clients of participating entities. The scheme maybe upgraded once the core banking system of participating credit institutions are IT enhanced.

ANNEX 1

Excerpts from Formalizing Microfinance Institutions

An Institutional Review Project Number: TA No. 9140

May 2, 2010 (Financed by the Japan Fund for Poverty Reduction)

Taken from the report prepared by The ADB (JFPR): TA No. 9140 Consulting Team:

Dr. Jaime Aristotle B. Alip, MFI Development Specialist/ Team Leader

Ms. Dinh Thi Minh Thai, National Microfinance Specialist Ms. Evelyn Leviste, International Microfinance Training Coordinator

Ms. Ngo Thi Thanh Van, National Training Specialist

ANNEX 1 MF Sector Assessment

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I. CURRENT STATUS OF MICROFINANCE IN VIETNAM

A. MICROFINANCE INITIATIVES BY LOCAL NGOS AND MASS BASED ORGANIZATIONS

1. There were several microfinance initiatives by mass-based organizations and NGOs operating in Vietnam. The Microfinance Working Group (MFWG) of Vietnam listed around 41 organizations and accordingly, there are still several other institutions that are also active in microfinance beyond their listing. 2. The ADB Project Mission was able to visit and/or interview 28 organizations, and received responses from 8 MFIs on the survey conducted, comprising the 36 organizations presented in this review, which are mostly on the list of the MFWG. The data of the 28 organizations visited were also updated as of December 2009. A total of 26 organizations, submitted their response to the survey questionnaire sent by the PMU/ADB Project Mission Team on February 2010. These organizations are either transforming into a regulated MFI or have began the process of completing the requirements of SBV for MFI licensing.

1. General Characteristics 3. The following are the key general characteristics of the MFIs in transformation:

a Age of MFIs 4. It was noted that most organizations started operations since early 2000. Some started in early 90’s like the Capital Aid Fund for the Employment of the Poor (CEP), Mutual Affection Fund (Tau Yeu Mei) known as TYM, and M7/M41. Dariu Foundation, GIFP, Dong Thap WU Fund, EDM, and Ninh Binh are among the latest established MFI in the year 2007. 5. It can be further deduced that those MFIs established in the 90s could be considered as the biggest in terms of outreach and loans outstanding. 6. Figure 1 shows the age bracket of the MFIs visited and/or interviewed. It can be observed that most of the interviewed MFIs (43%) were established between 2000-2005. Very few (13%) were established between 1990-1994.

1 It has to be noted that from the M7 group, only 4 have partnered together to be registered as an MFI while the three others accordingly decided to transform and register individually under the Decrees 28 and 165.


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Figure 1: Age bracket of MFIs visited and/or interviewed

b Legal Structure 7. The interviewed organizations were classified/registered either by Decree 148, 81, or as Credit and Savings Program, International NGO, PPC or Cooperative. Figure 2 shows the types of legal structure of the visited and interviewed MFIs. Most were registered under Decree 148. Very few, each with one MFI, were established under the Mass-organization structure, INGO, PPC and as a cooperative. However, there were also some MFIs which did not provide their data.

Figure 2: Types of legal registration of MFIs visited and/or interviewed


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c Governance and Management 8. The Governance and Management was assessed in terms of the establishment of its Board and the presence of full-time versus part-time staff. Nineteen (19) organizations have their established management board while the rest did not provide data. The number of management board composition is between1-9. In terms of the BOD, 21 responded with their number ranging from 1-7. One organization, Dong Thap Vietnam Women’s Union Fund had 4 part-time members of BOD, and 2 part-time members of the controlling board. Twenty (20) have established controlling board composed of 1-3 members. 9. While most of the organizations have both full-time and part-time staff and loan officers, part-time staff and loan officers still predominates. 10. Most of the MFIs interviewed had concerns on the establishment of their different boards as one of the requirements of the Decrees 28 and 165. Further to that, while some already have their established boards, the capacities could also be a concern since there are some members of the boards who do not have background in management/accounting, and banking experiences. This is the same case for the staffing, of which, some MFIs have officers who do not have background in management/accounting, and banking experiences which are important in the business.

d Human Resource Development 11. Most MFIs cited the need for financial accounting and management training. Also, on the initial Training Needs Analysis (TNA) conducted by the ADB Project Mission Team, most of the training requested was for the middle and senior management of the MFIs. These requested training shall compensate for the non-degree holder hiring that most MFIs resorted to since most MFIs hire college undergraduates with no management and/or financial accounting background. 12. Nonetheless, some MFIs have their own capacity building arms. Specifically, the TYM and CEP have their own internal training programs. The Community Finance Resource Center catered majority of the training needs of the M7 group, while at the same time, open to catering to other institutions. The Save the Children supports the capacity building agenda of the Thanh Hoa WU Fund while the Binh Minh Consultancy Group supports Binh Minh/SEDA. The Norwegian Mission Alliance (NMA) supports the Tien Giang WU Fund specifically on its transformation to formal MFI. 13. The rest of the MFIs get their support from the VWUs and other local and international training providers.

e MIS/IT 14. Based on the interview, it was found out that the bigger MFIs like CEP and TYM, have their professional MIS. The VBCP also had their separate MIS unit with its own system, which is somehow shared with the other organizations under the VWU since its reports are also being circulated. The rest of the MFIs have started their MIS either manually or by using Excel spreadsheet. The Mission notes that MIS is one of the biggest challenges of the MFIs.


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f Internal and External Controls Systems

15. In the same manner, the big MFIs interviewed like CEP,and TYM, already have in place internal and external control systems. Binh Minh also has its internal control system, and like the CEP and TYM, it was also rated by external auditors in the past. Other MFIs like Binh Minh, Thanh Hoa, TYM, and CEP have already been rated by rating agencies like Planet Rating and/or MCRIL.

g MFIs In Transformation 16. CEP, TYM, and M7/M4 have completed their documentary requirements and submitted their application to the SBV for MFI licensing under Decrees 28 and 165, and Circular 02. Tien Giang WU Fund has also submitted its requirements to SBV during the first quarter of this year and is currently being evaluated. 17. Two other MFIs: Binh Minh/SEDA, and Thanh Hoa Fund for Poor Women (FPW) are now finalizing the documentary requirements and applications for MFI licensing to SBV and hopefully will submit its application by June 2010. Like the other organizations mentioned above, Binh Minh/SEDA, and FPW have also mobilized their own capital, full-time staff, and have set up their own organizational structure and microfinance operations. The other organizations are either consolidating their microfinance programs, strengthening their system, finalizing their legal status, and also professionalizing their microfinance operations, like Ha Tinh Women’s Union Fund, NAPA/Quang Binh WU Fund, and Income For the Poor Fund (GIFP), among others. Nevertheless, all the organizations, except the Microfinance and Development Center (M&D) and Center for Social Organization and Community Development (CSOD), have sufficient capital requirement for transforming into a regulated MFI. Appendix 1 presents the key profile of the MFIs visited by the ADB Project Mission.

2. Productivity and Efficiency of MFIs 18. The key performance indicators on productivity of the MFIs visited as shown in Appendix 2 are as follows:

a Outreach 19. CEP has the highest number of outreach with 146,279 followed by the HCMC Cooperative Fund (CCM) with 44,300 and TYM with 40,433. Graphically, Figure 3 below shows the number of active clients of the MFIs visited and interviewed. It can be clearly observed that CEP is the most outstanding in terms of outreach.


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Figure 3: Number of active clients of MFIs visited and/or interviewed

b Caseload of Loan Officer 20. The average clients per loan officer ranges from 10 to 2,606. CCM has the highest number of clients per loan officer. These figures are quite high as compared to international standards. Based on the 2007 Trend of the Asia Benchmark2, the caseload per Loan Officer is 206. 21. Figure 4 shows the standing of the clients caseload of the MFIs visited and/or interviewed.

2 Asia Microfinance Analysis and Benchmarking Report 2008. A report of the Microfinance Information Exchange, Inc. and Intellecap, March 2009.


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Figure 4: Caseload of the MFIs visited and/or interviewed

c Loan Outstanding 22. The CEP has the highest amount at 522 B VND. Relatively, the average loan size of these MFIs is up to 7 M VND. It has to be noted that the international standard in Asia in terms of average loan outstanding is around US$100 – 150 (1.8 M to 2.7 M VND). This may indicate that most MFIs in Vietnam are working in the urban and sub-urban areas and may not be focusing in the countryside where there are a lot of poor people. The ADB Project Mission noted also from field interviews that even though VBSP and VBARD dominates the market, there still remains a lot of poor people needing microfinance loan that needs to be served.

Figure 5: Loans outstanding of the MFIs visited and/or interviewed


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d Portfolio-at-Risk (PAR)

23. The ADB Project Mission noted that the reported portfolio-at-risk (PAR) of the MFIs remains one of the lowest in Asia. This is a good indication of credit discipline among clients and staff. The reported PAR ranges from 0.0% to 5.00%. The 2007 Trend of the Asia Benchmark3 estimated the median value of PAR >30 days to be at 1.8%. Figure 6 presents the PAR of the MFIs visited and/or interviewed which is grouped as shown on the chart legend.

3. Financial Performance 24. The financial performance of each of the MFIs surveyed is shown in Appendix 3.

a Equity 25. CEP has the highest equity with 190B VND followed by TYM with 83B VND. With the exception of the M&D, GIFF, CSOD, M7 Dien Bien Phu, M7 Dien Bien, Ky Anh, Soc Trang WU Fund, Ben Tre WU Fund, Lac Son WU Fund, Phu Yen WU Fund, Ninh Binh WU Fund, EDM, and Hai Phong WU Fund, whose capital ranges from 312M VND to 3.3B VND, the others have more than 3.5 B VND capitalization and are able to comply with the requirements of the SBV under Decrees 28 and 165.

3 Asia Microfinance Analysis and Benchmarking Report 2008. A report of the Microfinance Information Exchange, Inc. and Intellecap, March 2009

Figure 6: PAR of the MFIs visited and/or interviewed


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Figure 7: Total Equity of the MFIs visited and/or interviewed

b OSS/FSS 26. Likewise, the highest operational self-sufficiency (OSS) was posted by CCM with 230% while other institutions like TYM, CEP, M7/M4, M7 Dien Bien Phu, M7 Dien Bien, Dariu Foundation, Than Hoa WU Fund, NAPA/Quang Binh WU Fund, Ha Tinh WU Fund, Tien Giang WU Fund, BM/SEDA, and HCMC WU Fund have more than 100% OSS. Other organizations interviewed have no available data yet on OSS while the financial self-sufficiency (FSS) computation of the MFIs needs to be further validated.

4. Credit and Savings Methodology 27. As shown in Appendix 4, the MFIs visited and/or interviewed by the ADB Project Mission have one or two loan products: Regular Loan and Emergency Loan. Nonetheless, other products like housing and water and sanitation (WATSAN), among others, are being offered mostly by big MFIs such as CEP and TYM.

a Loan Products

28. Most MFIs have only two loan products – the regular loan and emergency loan. The loan maturity ranges from three (3) months to 24 months with either weekly or monthly loan amortizations during regular center/group meetings. The loan ranges from 500,000 VND to 30 M VND. However, on the average, the loan size is around 3 M VND. The interest rate ranges from 1% to 1.5% (flat) monthly. 29. CEP also offers the housing improvement loan with 0.6% interest rate per month and the housing acquisition loan with 0.5% interest rate per month. Other MFIs like HCMC Women’s Union also have WATSAN loans. Other organizations like HCMC Cooperative Fund provide institutional loans with up to 2 B VND loanable amount.


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b Savings Products

b.1. Compulsory Savings

30. The compulsory savings range from 5,000 to 10,000 VND either weekly or monthly. This carries an interest rate from 0.25% to 0.6% per month. Some MFIs deduct 5% of loan as fixed savings. Clients cannot withdraw their savings unless they resign from the MFI or they have completely paid their loan. This is probably the reason why there is a high drop-out rate in some MFIs since members want to withdraw their savings.

b.2. Voluntary Savings 31. Some MFIs promote voluntary savings, however, most of them limit their voluntary savings since they have to pay the same rate as with the banks at an average of 0.6% per month. The ADB Project Mission notes that it is really important for MFIs to promote flexible savings. This is now an existing international practice of MFIs which motivates clients in savings mobilization.

c Other products and Services 32. Aside from Credit and Savings products, most MFIs provide livelihood training, training on health care and family care to their clients. 33. Specifically, TYM, M7 and NAPA Quang Binh WU have also started to offer microinsurance products to their microfinance clients. Further, the M7 group also promotes non-microfinance services through its financial education training. 34. Appendix 5 is a brief description of the organizations visited by the ADB Project Mission based on the team’s field notes.

B. EMERGING MICROFINANCE NETWORKS AND PROVIDERS 35. Over the years, the microfinance sector in Vietnam has been evolving although a bit slow compared to its neighboring countries. Noteworthy to look into is the emergence of the Vietnam Microfinance Working Group and other local providers of capacity building training. The Vietnam Microfinance Working Group 36. The MFWG is composed of organizations represented by about 60-70 people actively serving in the working group. It serves as platform for advocacy efforts for policies and awareness in microfinance in Vietnam, sharing of best practices, and maintaining database of microfinance programs among its member-organizations. The MFWG regularly meets for experience sharing on microfinance. Moreover, it sponsors and initiates training programs and seminars about microfinance best practices. As per meeting with the MFWG with the Team, MFWG is willing to co-host/sponsor the training programs with ADB. In fact, this is good since MFWG can act as the secretariat of the training.


51

The Microfinance and Community Development Institute 37. The Microfinance and Community Development Institute (MACDI) is a non-government financial-social scientific organization based in Vietnam. It was established in 2007 by a group of national and international microfinance and banking experts, who cooperated to provide high quality services in finance and development especially to the poor in Vietnam. It provides training on capacity building for Microfinance institutions and enterprises to achieve their mission and business objectives, and other community development activities. Up to now, based on interviews, it provided capacity building training to more than 10 MFIs and trained 150 participants. World Bank’s Vietnam Development Information Center 38. The Vietnam Development Information Center (VDIC) is a partnership initiative of the World Bank and other official development assistance agencies active in Vietnam which aims to promote the use of and access to knowledge in order to improve the effectiveness of development programs in Vietnam. It offers a unique range of facilities and services that stimulates development thinking, provides access to the latest knowledge and information available worldwide, and delivers targeted training courses. The center is open to the general public, students, researchers and policy makers for their adequate source of development information. State Bank of Vietnam’s Banking Academy 39. The Bank Academy was founded in 1969 as a government institution. It is focused on banking and finance, business administration, accounting, auditing, information system, and project management analysis, among others. Its major clients are VBARD, VBSP, PPC, and some private entities. Based on the interview made, there are 650 local trainers pool. As of date, there were about 505 bank staff trained by the Bank Academy. Bank Training And Consultancy 40. The Bank Training and Consultancy (BTC) was founded by 10 leading joint stock commercial banks in Vietnam with the support of the International Finance Corporation (IFC). Its mission is to support and promote new generation of bankers whose capacity, ethics and strategic vision are up to international standards. It also aims at strengthening the competitiveness of Vietnamese banks by providing training services of an international quality standard to the Vietnamese bankers. 41. From the available data, they have already trained approximately 1,000 Vietnamese bankers for 38 banks in Vietnam through more than 450 workshops in core banking products, bank management, soft skills, and training of trainers. Community Finance Resource Center 42. The Community Finance Resource Center (CFRC) is an NGO under the Vietnam Association for Promoting and Supporting Educational Development, established by Decision No.178 in April 2007. CFRC was established by a group of national and international well-known scientists, researchers, banking experts, and microfinance practitioners who cooperated to provide high quality services in finance and development especially to poor in the far and remote areas of Vietnam. 43. The Center offers courses on microfinance, community development, introduction of new technologies, and education-communication. They operate by cooperation,


52

partnership, networking, and supporting across international and national organizations and individuals sharing the same vision and mission in order to create and build up strengths, efficiency, and sustainability. 44. The above institutions can be tapped later by the ADB project for provision of microfinance training to MFIs, SBV, and other key stakeholders. These organizations are some of the very few providers of technical and training support. If the microfinance industry will be developed, it is expected that the industry will need more capacities including MF practitioners in order to deliver the microfinance services. While there are very few providers of these training, the MFIs and donors are encouraged to tap the above listed providers for their respective capacity building offerings. At present, most MFIs are conducting their own training which seemed to be inefficient and quality is not assured.

C. LICENSING OF MFIS 45. It has to be noted that not all MFIs will be of equal standing at the onset of the licensing process specifically due to their compliance to the requirements. The ADB Project Mission Team provides the three (3) cases for each level of MFIs: Case 1: Documents valid and complete 46. If the documents are valid and complete, the application for license is endorsed to the Banking and Supervisory Agencies for further processing. The task is then delegated to the Investigating Division (Department 6). The latter conducts the field investigations to validate the information and documents submitted by the applicant. Department 6 submits a field report to the Banking and Supervisory Agencies. If there are no issues, the Banking and Supervisory Agencies recommends to the Governor the granting of license. Within 60 days since the date of receipt of all valid documents, SBV considers and decides to grant or refuse to grant license to the applicant. After the granting of the license, the applicant MFI must register its business according to the current legislation on business registration. It will have its legal status as an MFI on the date the business registration certificate is obtained. Case 2: Documents need to be supplemented 47. If there are issues on the documents or satisfaction of any of the requirements for licensing, the same process is followed (the whole cycle) until the required documents are completed or all requirements are satisfied. The process will take longer as the application may be referred to other departments of SBV or outside of SBV, depending on the nature of the issues identified. The more issues there are and the more complex the nature of the issues are, the longer it takes for the application to be processed and the license to be granted to the applicant. Case 3: Documents cannot satisfy the requirements 48. In case of refusal, the Governor of SBV notifies the applicant and specifies in writing the reasons for refusal.


53

II. STRENGTHS AND WEAKNESSES OF THE MFIS VISITED AND/OR INTERVIEWED

Table 1: Summary of the strengths and weaknesses of the MFIs visited and/or

interviewed Strengths Weaknesses

• The PAR remains very low compared to other countries – on the average below 2%.

• The caseload of staff remains high from the international standard at more than 350 clients/ loan officers.

• Professionalizing of the MFI program

• Basic record keeping/accounting system is present

• Well-defined and working credit methodology

• Loan duration is flexible from 3-24 months.

• Repayment is weekly, bi-weekly and monthly.

• Almost all MFIs are still promoting compulsory savings and are aggressive in promoting voluntary savings among members.

• Some have began promoting microinsurance

• Some MFIs still have many part- time staff and are slow in professionalizing its operations.

• Most MFIs have very weak MIS and internal controls

• Governance for mass based organizations remains to be a challenge for the MFIs especially those who want to spin off from their mass-based organizations

• Apparent concentration of some MFIs in urban and sub-urban areas. Average loan size is quite high from $120 to $200 compared to other countries in Asia.

• Very traditional savings and loan products especially on compulsory savings.

• Weak in financial and liquidity management

• Lack of capital funds for expansion

• Interest cap post a big concern for their financial viability, although this is now being addressed through government’s new policy on negotiated interest rate.

49. Based on Table 3 above, it can be concluded that despite the challenges of the Decrees 28/165 and Circular 02, the MFIs are still making their way into formalization. They have a clear objective of professionalizing their microfinance programs. These MFIs have defined their working and credit methodology (e.g. loan duration of 3-24 months; repayment schedule of weekly, bi-weekly, and monthly; interest rates; savings) which is very necessary in their formalization. Their efficiency and productivity (i.e., PAR and caseload) remains to be at par with international standards. 50. As of date, from the 36 profiles received, 28 of which were actually visited and/or interviewed, 14 appear to qualify for the transformation requirements by the current


54

regulations. In addition, based on the Viet Nam Microfinance Working Group (MFWG), 2 other MFIs (Tuyen Quang WU Fund and Child Fund) have potential and need field validation. These MFIs already seemed to embody the basic requirements of the Decrees 28 and 165 for transformation such as: PAR <5; OSS; 5 Billion VND capital; 3 years of experience; have a Head Office; ful- time management and field staff; and has intention to become a regulated MFI. Table 2 presents these MFIs.

Table 2: Key characteristics of the 16 MFIs meeting the transformation requirements

No. MFI Reg. Capital

(Billion, VND) OLP

(Billion, VND)

PAR (%)

Number of Active Clients

1 CEP 190 522 0.5 146,279

2 TYM Fund 83 180 0.03 40,433

3 Group M7+ 20.8 3.1 0.14 24,005

4 Dariu Foundation 19.5 23 0.50 12,000

5 NAPA Quang Bnh 2.06 18.22 0.02 9,552

6 Thanh Hoa Fund for Poor Women

12.55 19.34 0.11 8,171

7 Ha Tinh WU Fund 9.66 49.51 0.1 26,924

8 Binh Minh/SEDA 6.30 12.49 0.0 4,063

9 Tien Giang WU Fund

16.1 19.7 0.09 10,711

10 World Vision 8.2 8.2 1.0 4,000

11 Dong Thap WU Fund

9.06 6.2 2.0 5,259

12 M7 Ninh Phuoc 5.7 7.0 2.63 4,579

13 HCMC Cooperative Fund

10 139 3.0 44,300

14 HCM WU Fund 30.88 54.20 3.0 9,812

15 Tuyen Quang WU Fund*

5 38.2 1.0 15,379

16 Child Fund* 5 6.18 0.0 6,810

Note: Potential MFIs; for validation 51. Nonetheless, the MFIs still have some weaknesses. Some have many part-time staff, and mostly, the staff and even the directors, have little background on Management and Accounting. The MFIs also showed apparent concentration in urban and sub-urban areas which was indicated by their average loan size which is quite high compared to other Asian countries.


55

52. Generally, most MFIs, aside from the big established ones (CEP, TYM, M7), have weak financial management and MIS/IT. In terms of the financial viability, MFIs are constrained by the interest cap, coupled with their traditional loans and savings products. Lastly, the capitalization of most MFIs is very limited. III. ISSUES AND CONCERNS REGARDING MFI TRANSFORMATION

53. The ADB Project Mission Team also assessed the different issues and concerns regarding MFIs transformation in compliance to Decrees 28 and 165, and Circular 02. In general, the main issue of the MFIs is the foreseen limitations on their expansion due to the restrictions on their branching and financial concerns specifically on interest rates and corporate tax rate, in addition to the restrictions on foreign borrowings. Presented on Table 5 are some of the issues and concerns raised by MFIs visited and/or interviewed.

Table 3: Some issues and concerns raised by MFIs visited and/or interviewed KEY

FEATURES ISSUES/CONCERNS

Legal Capital Only few MFIs can readily comply with the SBV provisions, mostly, only those big MFIs established in early 90’s.

Ownership This limits the MFI to call for Capital to support expansion. The ownership composition requiring to have mass-based organizations poses a concern since most organizations change leadership every 5 years, thus will become a threat in the policy direction. In terms of fund ownership, there is also an issue for the capital grant by donors since it will imply fund capitalization sharing with the poor community.

Branching Server/PC and security requirements will be impractical to most MFIs since they operate in far-flung areas and it will increase their cost significantly. Further, the control on branch opening only after one year shall constraint the expansion of the operations of the MFIs.

Legal Registration Allowed to Establish MFI

Some MFIs do not match with Circular 02 because it was founded under Decree 88.

Some NGOs have limited capital. If this available capital will be invested to comply, it will be more difficult for an MFI to financially support expansion of its operation.

Head Office of the MFI

While most MFIs have its office in Hanoi or HCMC, their microfinance operations are in provinces and remote areas. Therefore, setting-up of the Head Office in the actual areas of its operations will be difficult for the MFIs.

Security These requirements shall be difficult and impractical for the MFIs especially if they are working in mountainous and remote areas. Further,


56

the MIS required (Daily Cash Balance report) will also be very costly for MFIs.

OTHER LAWS RELATED TO THE DECREES 28 AND 165

Interest rate

Tax

The government has placed a cap on the interest rate of MFIs: base rate x 150%. This poses a problem for the MFI’s financial sustainability. Also, it is still unclear for most MFIs whether the interest rate shall be imposed on a flat or declining mode.

Nonetheless, the government has recently issued new regulations on negotiated interest rate.

The current standard corporate income tax rate is 25%. This would not be appropriate given the nature of the many MFIs that provide the poor with access to credit and savings services and additional support programs to improve the well-being of poor communities.

Restriction on Foreign Borrowings

This shall limit the expansion capabilities of the MFIs.

Auditing and Accounting Standards

MFIs raised issues on SBV’s provision for clear auditing and accounting standards for microfinance such as the CAMELS rating, CGAP ratios, SEEP, WOCCU’s PEARL

54. Further, the ADB Project Consultant Team also identified some concerns on the licensing process mentioned in the previous section. These were as follows:

1. Only one department, the Division VI, is handling the licensing. While this is a

good, this might take time as compared to delegating to all concerned units the corresponding documents once received from the applicants.

2. All communications to applicant comes out of the Office of the Governor, which is ideal, but might raise issues in terms of speed on response to the MFIs.

3. Concerns on the process for the case of MFIs which fall under case 2 or 3. While the process is simple for those applications that have no problem, however, for those that absolutely cannot be granted a license or need to be referred to other units of SBV and /or outside, there will be a concern on how these will be managed yet since SBV has just recently reorganized the Banking and Supervisory Agency.

IV. CAPACITY BUILDING NEEDS OF THE MFIS AND SBV 55. The Project Consultants conducted rapid training needs analysis for the project’s implementing partner, the State Bank of Vietnam; the support institutions - local authorities and mass organizations; and the microfinance institutions. From the results of the training needs analysis completed, three groups were identified requiring different sets of training courses/activities among which are awareness-raising orientation seminars for all stakeholders (SBV, local authorities, mass organizations, support organizations and MFIs), supervision training for SBV and technical training for MFIs.


57

a. Awareness-Raising Orientation Seminars – Three orientation seminars were

conducted in March 2010 for various stakeholders in the North, South and Central Vietnam. ADB and SBV facilitated the training with support from MFWG and VBCP. Selected MFIs also hosted the visits of the participants to their main office, branch offices, group meetings and client businesses. A mini-orientation workshop was conducted in April 2010 for SBV units at the Main Office to further enhance their understanding of microfinance and regulations governing MFIs in Vietnam.

b. Supervision Training for SBV – Supervision training and workshops were planned for SBV units at the main and provincial offices in June 2010 for the advance topics on microfinance programming and overall supervision of the MFIs. These training will emphasize the contents of and application of the supervision manual.

c. Technical Training for MFIs - The results of TNA conducted by the Project showed a wide gap in terms of capacities among MFIs. It is apparent that there is a strong need to build the capacities of the MFIs across all levels, but with greater emphasis for the senior and middle management, in order to achieve growth and expansion of their microfinance programs. These capacity building are in the areas of governance, microfinance management, and strategic planning. As most of the microfinance staff comes from the Women’s Union, their background is more on social and community development, training on credit management, financial management, accounting, communications, risk management, among others are the common training needs requested by the MFIs. A total of twelve (12) technical training are planned to be completed by December 2010 as follows:

Table 4: List of Technical Training Courses. Training Course Course Modules

Governance (1) Good Governance Course Strategic Planning and Business Planning

(1) Overview of Strategic Planning and Business Planning Course (1) Business Planning Course – Tool

Financial Management

(1) Overview of Financial Management Course (2) Portfolio Management Course – basic and advanced (1) Accounting Course (1) Risk Management Course (1) MIS Course – MFI Reporting Formats and Standards (2) MFI Financial and Social Performance Analysis – basic and advanced

Human Resource Management

(1) Human Resource Management Course

Total 12 Technical Training 56. Some of these organizations already received awards recognizing excellence in performing their functions. BTC has received the award as the Best Financial Consultant in 2007 awarded by SBV. A paper was also made for the M7-CFRC that was commended by the Prime Minister. SEDA also received an award as the Best Brand Name in 2008, Thang Long Young Entrepreneurs award in 2007, and Good Performance in 2007.


58

57. Feedbacks about these service providers were solicited. It was found out that BTC and the Bank Academy both have very good courses on banking but not on microfinance. VDIC was also found out to be good for training facilitation but still not appropriate for microfinance. The MFWG was observed to be useful in organizing but not as trainer. SEDA’s modules were still to be tested, while MACDI was observed as a good training institution. 58. The Capital Aid Fund for the Employment of the Poor (CEP) in HCMC which was visited at a later date, was found to be qualified to bid for the project. They have established their own training unit, have developed their own training modules in all of the abovementioned topics, and have gained the recognition as good trainer, backed by good institutional performance. The challenge with CEP though is that it has done training only internally in the past. As such, its materials evolve only on the methodologies it uses and training other institution using its manuals will fit only institutions adopting the same methodology as it has. However, they have recently expressed openness, in terms of accommodating training requests, even on-the-job training activities, for other institutions.

V. CONCLUSION AND RECOMMENDATIONS 59. At the end of this Mission/Review, the ADB Project Consultant Team recommends the following on the regulations and capacity building: 60. The interest rate should be reviewed and must be adjusted to ensure that MFIs will become sustainable. Based on the initial interview, it was found out that the MFIs have concerns on their viability, specifically, those working on the hard-to-reach areas/mountainous areas, due to operational costs concerns. Nonetheless, the new government policy on negotiated interest rate is laudable but a more conducive policy on interest rate like a liberalized market-oriented interest rate will be most helpful. 61. In the same manner, it is recommended that corporate tax of 25% may be waived for the MFIs within the first 5 years of operation. Gradual corporate taxes may then be imposed every year thereafter (i.e., 5%, 10% etc.). Lastly, it is recommended to increase the ownership to more than 5 for the MFI to increase its capital base. 62. For the microfinance operations of the MFIs, it is encouraged that MFIs open transaction office and transaction points rather than requesting for licensed branches right away. As the Vietnam Microfinance environment has a more flexible provision for the opening of transaction office/points, it is advised that MFIs take advantage of this provision rather than apply for licensed branch right away. 63. In terms of the capacity building agenda, it is recommended that training for various stakeholders (SBV, MFIs, and support organizations like the PPC, WU, and others) should be implemented both for the MFIs and SBV be implemented. Orientation seminars on general concepts of microfinance and major provisions of the law may suffice for the support organizations. However, for the implementers and regulators, training should follow a comprehensive training plan to ensure that all areas are covered.


59

64. SBV has expressed the need for continuous orientation of all its units at the main office and provincial offices that are involved in microfinance. Coaching and mentoring activities may also be done once field supervision activities have been initiated. Likewise, the MFIs also need continuous orientation as new personnel are recruited or skills are upgraded, to keep up with the demands of formalization. A more intensive coaching and mentoring activities will be needed especially for smaller MFIs in transition. Considering that the initial plan of activities and budget do not cover capacity building to this extent, and that there is scarcity of service providers in Vietnam, the Project will collaborate with other institutions, in terms of sharing of resources (people, finances, time and expertise) primarily with those that are supporting the MFI formalization.


60

Appendix 1 Key profile of the MFIs visited and/or interviewed by the ADB Project Mission

Name of MFI Date

Organized Legal

Registration/ Decree

No. of Management

Board

No. of

BOD

No. of Control-

ling Board

No. of

Full-time Staff

No. of

Part-time staff

No. of Full-time

Credit Officer

No. of Part-time

Credit Officer

Head Office Loca-tion

No. of Pro-

vinces

No. of

Dis-tricts

No. of Com-

munes

No. of

Bran-ches

CEP/Dec.09 1991 148 9 2 4 300 0 197 0 1 6 40 354 24 TYM/Dec.09 1992 148 4 3 3 231 0 137 0 1 10 25 175 41 M7 Network • M7/M4/ Dec. 09 1993,

1995,1997, 1999

148 1 5 1 130 2 79 0 1 3 4 43 4

• M7 Dien Bien Phu/ Dec. 09

1997 Credit and savings program

3 n/d 1 18 n/d 15 n/d 1 1 1 17 1

• M7 Dien Bien/ Dec. 09


4 3 3 14 1 9 n/d 1 1 1 5 1

• M7 Ninh Phuoc/ Dec. 09


5 1 1 23 n/d 10 n/d 1 1 2 10 2

Dariu/Dec. 09 2007 INGO n/d n/d 3 56 0 35 n/d 1 2 3 40 3 CSOD/ Dec. 09

2004 81 n/d 3 1 7 n/d 5 n/d 1 2 2 5 2

Thanh Hoa WU Fund/ Dec. 09

1998 148 7 3 1 47 20 28 3 1 1 7 41 6

NAPA Quang Binh WU Fund / Dec. 09

1997 148 5 1 1 7 26 7 20 1 1 4 26 4

Ha Tinh Provincial WU Fund • Ha Tinh WU

Fund/Dec. 09 2001 Social Fund 2 2 1 26 432 n/d 146 1 1 9 146 6

• Thach Ha WU Fund/Dec. 09

2003 n/d 2 2 1 1 19 n/d 18 1 1 1 14 1


61

Name of MFI Date Organized

Legal Registration/

Decree

No. of Management

Board

No. of

BOD

No. of Control-

ling Board

No. of

Full-time Staff

No. of

Part-time staff

No. of Full-time

Credit Officer

No. of Part-time

Credit Officer


No. of Pro-

vinces

No. of

Dis-tricts

No. of Com-

munes

No. of

Bran-ches

• Ky Anh/Dec. 09 2005 n/d 2 2 1 1 16 n/d 15 1 1 1 9 1 • CamXuyen/Nov.

09 2003 n/d 2 2 1 1 17 n/d 16 1 1 1 16 1

GIFP/Dec. 09 2007 81 3 1 1 14 0 8 0 1 3 3 7 1 Tien Giang-MOM / Dec. 09

2002 PPC 8 1 1 26 0 14 n/d 1 1 7 36 7

BM/SEDA/ Dec. 09 2003 81 4 5 1 30 0 12 0 1 3 3 19 4 WV/Nov. 09 2006 INGO n/d n/d n/d 45 n/d 25 n/d 1 5 9 n/d 9 Dong Thap WU Fund / Dec. 09

2007 n/d n/d 4 (Part-time)

2 (Part-time)

n/d 24 n/d 198 1 1 12 85 12

M&D/Dec. 09 2005 88 3 2 1 4 2 3 2 1 1 1 1 1 HCM WU Fund / Dec. 09

2003 Social Fund 2 5 1 27 86 15 n/d 1 1 24 87 1

VBCP/Dec.09 1997 Credit and Savings Project

n/d 3 n/d 4 5 67 n/d 1 17 70 142 17

CCM/Dec. 09 2002 Under the cooperative

5 n/d n/d 40 0 17 0 n/d 1 24 n/d 2

Plan International/Dec.09

n/d n/d n/d n/d n/d n/d n/d n/d n/d n/d 2 2 10 n/d

Soc Trang WU Fund/Dec. 09

1997 Credit and Savings program

n/d n/d n/d 3 3 n/d n/d n/d 1 5 26 0

Ben Tre WU Fund/Dec. 09

2006 Credit and Savings program

n/d n/d n/d 11 04 n/d n/d n/d 1 2 3 3

Terre des Homes/Dec. 09

n/d n/d n/d n/d n/d n/d n/d n/d n/d n/d n/d n/d 3 n/d


62

Name of MFI Date Organized

Legal Registration/

Decree

No. of Management

Board

No. of

BOD

No. of Control-

ling Board

No. of

Full-time Staff

No. of

Part-time staff

No. of Full-time

Credit Officer

No. of Part-time

Credit Officer


No. of Pro-

vinces

No. of

Dis-tricts

No. of Com-

munes

No. of

Bran-ches

Netherlands Vietnam Medical Committee/Dec. 09

n/d INGO n/d n/d n/d n/d n/d n/d n/d 1 12 24 92 0

Lac Son WU Fund/Dec. 09

2004 Mass Organization

n/d n/d n/d n/d 135 n/d n/d 1 1 1 3 n/d

Phu Yen WU Fund/Dec. 09

1995 Credit & Savings Program

n/d n/d n/d 2 38 n/d n/d 1 1 1 19 n/d

Dinh Hoa WU Fund/Dec. 09

n/d Credit and Savings Program

n/d n/d 3 n/d n/d n/d n/d 1 1 1 4 n/d

Ninh Binh WU Fund/Dec. 09

2007 Mass Organization

n/d n/d n/d 4 10 n/d n/d n/d 1 6 32 n/d

Thuan Chau WU Fund/Dec. 09

2000 Credit and Savings Program

n/d n/d n/d n/d 24 n/d n/d n/d 1 1 4 n/d

EDM/Dec. 09 2007 n/d n/d n/d n/d 6 22 n/d n/d 1 1 2 5 2

Hai Phong/Dec. 09 2004 n/d n/d n/d n/d 9 4 n/d n/d n/d n/d 5 14 n/d


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Appendix 2

Key performance indicators of the productivity of the MFIs visited and/or interviewed by the ADB Project Mission

Name of MFI

No. of Active Clients

No. of Active Loans Clients

No. of Compulsory

Savers

No. of Voluntary

Savers

No. of Female Clients

No. of Clients

per Credit Officer

No. of Clients

per Staff

Total Outstanding Loan (VND)

Average Loan Size

(VND)

Amount of Compulsory

Savings (VND)

Amount of

Voluntary Savings (VND)

PAR

CEP/Dec.09 146,279 134,141 139,679 76,024 101,603 681 487 522B 6.5B 146.53B 26.5B 0.5% TYM/Dec. 09 40, 433 40,201 40, 433 4,011

40, 433 301 175 180B 4.4M 41B 2.6B 0.03%

M7 Network • M7/M4/ Dec. 09 24,005 14,117 24,005 22,969 23,765 304 184 3.1M 3.8M 0.5M 1.1M 0.14%


4,189 2,487 4,189 4,198 4,114 229 233 6.1B 2M 1.8B 1.45B n/d

• M7 Dien Bien/ Dec.09

2,350 1,992 2,350 n/d 2,340 262 168 3.8B 2M 1.1B 365M 0.21%

• M7 Ninh Phuoc/ Dec.09

4,579 4,579 4,579 2,880 4,579 458 208 7.0439B 1.52M 1.4B 122M 2.63%

Dariu/Dec. 09 12,000 11,300 12,000 7,560 12,000 364 245 23B 2M 2.6B 680M 0.5% CSOD/ Dec. 09

921 888 921 104 875 230 132 1.4B 1.5M 600M 54M n/d

Thanh Hoa WU Fund/ Dec. 09

8,171 8,171 8,171 9 7,788 255 148 19.34B 2.36M 3.09B 386M 0.11%

NAPA Quang Binh Fund/Dec. 09

9,552 5,950 9,552 n/d 9,552 289 353 18.22B 3.06M 6.15B n/d 0.02%


Fund/Dec. 09 26,924 24,431 26,924 1 26,924 199 164 49.51B 2M 5.73B 2M 0.1%

(PAR90) • Thach Ha WU

Fund/ Dec. 09 4,153 2,427 4,153 n/d 4,153 231 219 3B n/d 642.7M n/d n/d

• Ky Anh WU Fund /Dec. 09

3,121 3,121 3,121 None 3,121 208 195 4.45B n/d 104M n/d 0%

• CamXuyen/Nov.09 3,311 3,302 3,311 n/d 3,311 207 195 7.4B n/d 1.37B n/d n/d


64

Name of MFI



No. of Compulsory

Savers

No. of Voluntary

Savers


No. of Clients

per Credit Officer

No. of Clients

per Staff


Average Loan Size

(VND)


Savings (VND)

Amount of


PAR

GIFP/Dec.09 1,900 1,400 1,900 206 1,862 238 136 2.6B 1.5M 355M 245M 0.02% Tien Giang-MOM / Dec.09

10,711 10,711 10,711 1,827 10,711 595 412 19.7B 1.7M 5.1B 53M 0.09%

BM/SEDA/ Dec. 09 4,063 4,063 4,349 401 3,941 339 173 12.49B 3.5M 2.59B 0.73B 0% WV/Nov. 09 4,000 4,000 4,000 n/d n/d n/d n/d 8.2B n/d n/d n/d 1% Dong Thap WU Fund / Dec. 09

5,259 5,259 5,259 n/d 5,259 27 23 6.261B 1.2M n/d n/d 2%

M&D/Dec. 09 749 749 749 n/d 749 375 150 1.5B 1.5B 432M n/d 0.01% HCM WU Fund/ Dec. 09

9,812 9,812 9,812 0 9,812 937 n/d 54.2B 5.5M 6.2B 6.6B 3%

VBCP/Dec.09 19,197 19,197 19,197 0 19,197 330 102 16.32B 3M 12.45B 0 0.01% PAR1

CCM/Dec.09 44,300 28,600 44,300 n/d 35,000 2,606 1,108 139B 7B 15B n/d 3% Plan International/ Dec.09

6,886 6,539 n/d n/d n/d n/d n/d 5.146B n/d 1.584B n/d n/d

Soc Trang WU Fund/Dec. 09

3,686 3,686 3,686 1,623 3,686 176 n/d 4.96B 1.3M 1.10B 0.47B 0.6%

Ben Tre WU Fund /Dec. 09

1,825 1,825 1,825 0 1,822 202 n/d 3.53B 1.93M 1.00B 0 n/d


2,290 1,812 2,290 n/d n/d n/d n/d n/d n/d n/d n/d n/d

Netherlands Vietnam Medical Committee/ Dec. 09

3,824 3,824 n/d n/d n/d n/d n/d 9.214 B 2.4M n/d n/d n/d


1,230 1,230 1,230 0 1,230 10 n/d 1.223B 1M 86M n/d n/d

Phu Yen WU 7,535 2,685 2,685 4,850 7,535 396 n/d 3.758B 1.5M 1.35B 1.142B 1%


65

Name of MFI



No. of Compulsory

Savers

No. of Voluntary

Savers


No. of Clients

per Credit Officer

No. of Clients

per Staff


Average Loan Size

(VND)


Savings (VND)

Amount of


PAR

Fund/Dec. 09 (PAR 90)


260 243 244 0 650 n/d n/d n/d n/d n/d n/d 5%

(PAR 30)


7,267 7,267 7,267 n/d 7,250 517 n/d 25.6B 4M 1.52B n/d n/d


751 720 735 16 751 58 n/d 1.02B 1.4M 235M 6M 0.2% (PAR30)

EDM/Dec. 09 767 767 767 0 760 153 n/d 859M 1.14M 42.22M 0 0.39% (PAR1)

Hai Phong/Dec.09 7,385 7,385 7,385 n/d 5,170 n/d n/d 35B n/d 13B n/d n/d


66

Appendix 3 Key financial indicators of the MFIs visited and/or interviewed by the ADB Project Mission

Name of MFI

Total Assets (VND)

Total Liabilities

(VND)

Total Equity (VND)

Total Operating

Income (VND)

Total Operating Expenses

(VND)

Total Financial Operation Expenses

(VND)

Adjusted Financial Operation Expenses

(VND)

OSS FSS

CEP/Dec.09 552B 361B 190B 115B 68B 9.5B 14.3B 168.3% 110.6% TYM/Dec.09 220B 137B 83B 40.7B 25.3B 6.1B 31.2B 160% 108% M7 Network • M7/M4/ Dec. 09 60.88B 40.083B 20.8B 6.04B 2.51B 1.6B n/d 146% 139% • M7 Dien Bien Phu/ Dec. 09 6.15B 3.29B 2.86B 1.01B 716M n/d 717 M 141% 137% • M7 Dien Bien/

Dec. 09 3.98B 1.46B 2.61B 782M 500M 197M 697M 156% 112%


7.44B 1.66B 5.7B 1.7B 1.5B 52M 227M 141% 124%

Dariu/Dec.09 23.8B 4.3B 19.5B 5.7B 3.4B n/d n/d 167% n/d CSOD/Dec.09 1.4B 1.176B 312M n/d n/d n/d n/d n/d n/d Thanh Hoa WU Fund /Dec. 09 22.70B 10.14B 12.55B 3.32B 2.18B 2.68 2.99 152% 101.1% NAPA Quang Binh Fund/Dec. 09 19.29B 19.29B 2.06B 2.2B 0.61B 1.19B n/d 173% n/d Ha Tinh Provincial WU Fund • Ha Tinh WU Fund /Dec. 09 52.44B 42.77B 9.66B 4.99B 4.48B 0.63B n/d 139.9% 111% • Thach Ha WU Fund /Dec.09 n/d n/d n/d n/d n/d n/d n/d n/d n/d • Ky Anh WU Fund /Dec. 09 4.2B 1.3B 2.5B n/d n/d n/d n/d 8 9

• CamXuyen/ Nov.09 n/d n/d n/d n/d n/d n/d n/d n/d n/d GIFP/Dec.09 2.8B 1.6B 1.2B 22M 23M 4M 27M 95% 81% Tien Giang MOM/ Dec. 09 24.4B 8.3B 16.1B 2.89B 2.05B n/d n/d 140% 98% BM/SEDA/Dec. 09 14.68B 8.31B 6.30B 2.92B 2.70B 0.19B n/d 100% 94% WV/Nov. 09 n/d n/d 8.2B n/d n/d n/d n/d n/d n/d Dong Thap WU Fund / Dec. 09 62.13B 53.07B 9.06B 0.90B 0.36B n/d n/d 85% n/d M&D/Dec. 09 1.6B 1.2 B n/d 176M 93M 83.4M n/d n/d n/d HCM WU Fund / Dec. 09 86.89B 56.00B 30.88B 4.13B 2.64B 0.11B n/d 198% 192% VBCP/Dec.09 8.7B 47.8B n/d 8.6B 4.4B 7.2 n/d n/d n/d


67

Name of MFI

Total Assets (VND)

Total Liabilities

(VND)

Total Equity (VND)

Total Operating

Income (VND)

Total Operating Expenses

(VND)

Total Financial Operation Expenses

(VND)

Adjusted Financial Operation Expenses

(VND)

OSS FSS

CCM/Dec.09 140B n/d 10B 20B 4B n/d n/d 230% n/d Plan International/ Dec.09 n/d n/d n/d n/d n/d n/d n/d n/d n/d Soc Trang WU Fund/Dec. 09 6.9B 3.6B 3.3B 3.17B 2.58B 2.61B n/d 122% n/d

Ben Tre WU Fund /Dec. 09 5.26B 4.28B 0.97B 0.35B 0.32B 0.048B n/d 160.39% 142.42%

Terre des Homes/Dec.09 n/d n/d n/d n/d n/d n/d n/d n/d n/d


n/d n/d n/d n/d n/d n/d n/d n/d n/d

Lac Son WU Fund/Dec. 09 n/d 1.233B 1.236B 8B 8B n/d n/d 100% n/d

Phu Yen WU Fund/Dec. 09 3.8B 2.492B 1.6B 0.5B 0.264B 0.459B n/d n/d n/d

Dinh Hoa WU Fund/Dec. 09 585M n/d 509M 70.2M 52.5M 52.5M n/d n/d n/d

Ninh Binh WU Fund/Dec. 09 n/d n/d n/d n/d n/d n/d n/d n/d n/d

Thuan Chau WU Fund/Dec. 09 1.06B 0.24B n/d 130M 65M 65M n/d n/d n/d

EDM/Dec. 09 1.92B 0.42B 1.88B 0.25B 0.34B n/d n/d n/d n/d

Hai Phong/Dec.09 58B 56.5B 1.5B 15.2B 11.2B n/d n/d >100% n/d


68

Appendix 4

Key features of the loans and savings products of the MFIs visited and/or interviewed by the ADB Project Mission

LOAN PRODUCTS Name of MFI

No. and Types Loan Duration

Min. Loan Size (VND)

Max Loan Size (VND)

Interest Rate

Repayment Modality Delivery Mechanism

CEP/ Dec. 09

2-3 3-15 months 5-10 years

1M 15M/30 M 70M

1%/month weekly/monthly Individual loan

TYM/ Dec. 09

2-3 10-100 weeks 0.5M 25M 1% Weekly Direct individual

M7 Network • M7/M4/ Dec. 09 2 25-50 weeks 1M 30M 1.05% Weekly Group lending;

weekly meeting • M7 Dien Bien Phu/ Dec. 09

1 6-24 months 0.2M 4M 1.20% Monthly Group/Monthly meeting


1 6-24 months 0.2.M 4M 1.5% Monthly Group/Monthly


1 9-24 months 2M 10M 1.15% Monthly Monthly meeting

Dariu/ Dec. 09

1 9-24 months 2M 30M 1.15% Weekly weekly group

CSOD/ Dec. 09

1 6-24months 1M 5M 1.15% Monthly monthly group

Thanh Hoa WU Fund / Dec. 09

5 :Urgent Loan; 6-month Loan; 12-month Loan; 20-month Loan; 24-

month Loan

3-24 months 0.48M 6M 1.05% Monthly monthly group

NAPA Quang Binh Fund/ Dec. 09

5 12-36 months

1-6 months

0.555M

0.8M

14.44M

2M

0.68%

1.5%

Monthly

End of cycle

monthly group

Ha Tinh Provincial WU Fund • Ha Tinh WU 2 3,6,12,24,36 0.555M 8.779M 1.2% Monthly monthly group


69

LOAN PRODUCTS Name of MFI No. and Types Loan

Duration Min. Loan Size (VND)

Max Loan Size (VND)

Interest Rate


Fund/ Dec. 09 months Emergency

0.5M

3M

0.65%

Monthly

monthly group

• Thach Ha WU Fund/ Dec. 09

2 12,24,36 months

0.5M 3M 1.50% Monthly monthly group

• Ky Anhn WU Fund/ Dec. 09

1 12,24 months 0.5M 3M 1.20% Monthly monthly group

• Cam Xuyen/Nov. 09

1 12,24,36 months

1M 3M 1.00% Monthly monthly group

GIFP Dec.09 2 6-36months 0.5M 5M 1.0% Monthly monthly group Tien Giang MOM/ Dec. 09

1 18months 2M 5M 1.5% declining

bal

Monthly monthly meeting

BM/SEDA/ Dec. 09

Group lending

Emergency

2.5months- 1 year

0.348M

0.4M

9.81M

3M

1.22%

2.0%

Weekly

Weekly

weekly group

weekly group

WV/Nov. 09 2 8-18months 0.5M 13M 1.15% flat Monthly monthly group Dong Thap WU Fund/ Dec. 09

1 10,12,24 months

0.5M 5M 0.65%-1.2%

Monthly monthly meeting

M&D/ Dec. 09

2 25-75 weeks 0.5M 1.5M 1.5% flat weekly/monthly Group

HCM WU Fund/ Dec. 09

3 6months- 3 years

1M; 5M; 5M

5M; 50M; 15M

1%; 1%; 0.6%

weekly/monthly/monthly Group meeting

VBCP/ Dec.09 2 12,18,24 months

2M

0.5M

5M

1M

1% declining balance

1%

Monthly

6 months

Group meeting

Group meeting

CCM/ Dec.09 3: individual, group,

institutional

90-180days; 12-40weeks; 12-18 months

1M 20M for individual;

2B for institutional

0.87% flat Daily, weekly, monthly Through representative


70

LOAN PRODUCTS Name of MFI No. and Types Loan

Duration Min. Loan Size (VND)

Max Loan Size (VND)

Interest Rate


Plan International/ Dec.09

n/d n/d n/d n/d n/d n/d n/d

Soc Trang WU Fund/ Dec. 09

2: group, individual

n/d 1M for group; 3M

for individual

10M for group and individual

1.5%; 1.5% monthly monthly meeting; directly to individual

Ben Tre WU Fund/Dec. 09

1 n/d 2.4M 4.2M 10%/year monthly group meeting


n/d n/d n/d n/d n/d n/d n/d


1 n/d Not applicable

5M 0%-0.8% n/d n/d


1 n/d 1M 1.5M n/d monthly monthly meeting


1 n/d 0.5M 10M 1%/month monthly monthly meeting


1 n/d 1M 5M 0.9% monthly monthly meeting


1 n/d 4M 4M 0.5%/month Monthly Group meeting


1 n/d 2M 5M 1.2% Monthly Group meeting

EDM/Dec. 09 1 n/d 0.6M 3.1M 1.5% 4 weeks Group meeting


71

Name of MFI No.

and Types

Compulsory Savings Size

(VND)

Frequency Interest rate Withdrawability Voluntary Savings Size

(VND)

Interest rate Withdrawabil

ity CEP/Dec. 09 n/d 5,000/week weekly 0.25% No No limit 0.25% Yes TYM/Dec. 09 n/d 5,000/week weekly 0.3% Yes if

outstanding >=1.5M

From 1,000 0.3% Yes

M7 Network M7/M4/Dec. 09 n/d 10,000/month monthly 0.5% No No limit n/d Yes


n/d 10,000/month monthly 0.40% No No limit 0.60% Yes


n/d 5,000-10,000/month

monthly 0.5% No Minimum 1,000

/month

0.50% Yes


n/d 2,000/week monthly 0.35% No No limit 0.75% Yes

Dariu/Dec. 09 2 5,000/week weekly 0.20% After 3 years <=500 0.2% n/d CSOD/Dec. 09 n/d 5% of the total

loan amount monthly 0.25% No No limit 0.65 –

0.9% Yes

Thanh Hoa WU Fund/Dec. 09

1 5.000VND/month monthly 6%/year Yes, in excess of 300,000 VND

<=30,000 8.4-9.6%/year

Yes

NAPA Quang Binh Fund/Dec. 09

1 10,000/month monthly 0.6% No No limit 0.6% Yes


Fund/Dec.09 1 10,000/month monthly 0.50% No n/d n/d n/d

• Thach Ha WU Fund/Dec. 09

n/d 10,000/month n/d 0.60% No n/d n/d n/d


72

Name of MFI No. and

Types


(VND)


(VND)


ity • Ky Anh WU

Fund/Dec.09 n/d n/d n/d 0.60% No n/d n/d n/d

CamXuyen/ Nov.09

n/d 10,000/month monthly 0.60% No n/d n/d n/d

GIFP/ec.09 n/d 10,000/month monthly 0.45% No No limit 0.65% Yes Tien Giang MOM/ Dec. 09

n/d 10,000/month,and the 5% of loan

amount

monthly 0.5% No No limit 0.5% n/d

BM/SEDA/Dec. 09 n/d 5,000/week weekly 0.6% No Minimum 1.000/week

0.8% n/d

WV/Nov. 09 2 2,000-10,000/ month

monthly n/d No n/d n/d n/d

Dong Thap WU Fund / Dec. 09

1 10,000/month monthly 1% At end of loan cycle

10.000/month 0% n/d

M&D/ Dec. 09 n/d 3,000-5,000/ month

n/d n/d n/d n/d n/d n/d

HCM WU Fund / Dec. 09

n/d 2,000/ week weekly 0.25%/month No n/d n/d n/d

VBCP/Dec. 09 n/d 5,000-10,000-15,000/month

monthly 1%/month Can withdraw after1/ 2 cycle

n/d n/d n/d

CCM/ Dec. 09 1 n/d weekly 0.6-0.8%/ month

No n/d n/d n/d

Plan International/ Dec.09

n/d n/d n/d n/d n/d n/d n/d n/d

Soc Trang WU Fund /Dec. 09

n/d 10.000/month monthly 0.25% After resigning in the program

5.000/2 weeks or 1

month

n/d At any time

Ben Tre WU Fund /Dec. 09

n/d 20.000/month monthly 0.5%/month After full repayment

10.000/month 0.6%/month

At any time


73

Name of MFI No. and

Types


(VND)


(VND)


ity (20

days prior

notice) Terre des Homes/Dec. 09





1 10.000VND monthly n/d n/d n/d n/d n/d


n/d n/d n/d n/d n/d 5.000VND 0.5%/month

Monthly


1 4.000/month monthly 0% Yes, after every year

n/d n/d n/d


1 15.000VND/month

monthly 0.25% No n/d n/d n/d


1 10.000VND/month

Monthly 0.5% After full repayment and resigning from

program

n/d n/d n/d

EDM/Dec. 09 1 6.000VND 4 weeks 0.5% After full repayment

n/d n/d n/d


74

Appendix 5 Profile of Selected Microfinance Capacity Building Providers

AREAS/ ORG BTC WB-MF UNIT

(VDIC) M7-CFRC MF WG BANK

ACADEMY MST –MACDI SEDA

Office Visit: Yes Yes Yes Yes Yes Yes Yes

a. Office Very nice office Very nice office Nice Nice Nice Nice Nice, shared with Binh Minh

b. Orientation Very good Good Good Good Good Good Good

c. Orientation Materials

Highly professional

Professional Good Good Good Good Good

d. Delivery in English

Fluent Fluent Some staff can speak English

all staff speak English Some staff can speak English

Some staff can speak English

No

Legal Status Company NGO Association Government Institution

Financial, Social, Scientific NGO

NGO

Date Organized

2002 2003 2004 1969 2007

Stakeholders

Ownership Private Banks M7* Volunteers Government – Education Department and SBV

Professionals Binh Minh CDC

Donors/Support WB-IFC,FMO, SwissContact

UNCDF-ADBI ActionAid, Ford Foundation, RIMANSI, CordAid

Ford Foundation, SEEP Network, Save the Children, IFAD, ADA Citi Foundation

Government CGAP, MICROSAVE, CARD MRI, MMI, MWB, BA, BTC, MOLISA

Save the Children US, Vietnam WU, PPC

Accreditation Off-shore

NIBESVV ADBI None None None None None


75

AREAS/ ORG BTC WB-MF UNIT (VDIC)

M7-CFRC MF WG BANK ACADEMY

MST –MACDI SEDA

Partners Deutsche Bank, SHRI The Banking Group, U21Global, Kesdee, NIBESVV, Business School of Finance and Management, International Treasury Services, Terrapin, AsiaPay, Omega Performance, Admerex

UNCDF-ADBI National and international scientists, researchers, banking experts, MF practitioners, Banking University, Economic University

ILO, the MIX, SBV, SEEP Network, FSC, FDC, Save the Children US, The Microfinance Gateway, BWTP, Citi Foundation, Banking Academy

Government CGAP, MICROSAVE, CARD MRI, MMI, MWB, BA, BTC, MOLISA

Save the Children VN & US, ADA, BabyLoan, Oxfam Novib, GWL, Vittana Foundation, Citi Foundation, Kiva, EDM, PPC, WU, MDC, NOIPV, M&D, CFRC, CEP, TYM, Dariu, SBV, Capital Connect, HWBA, APMCSC, HYEO, VUSTA, MIX, MFWG,

Clients 10 member banks, 28 JSBs, 6 SOBs, 56 FBBs, NBFIs

UNCDF - ADBI M7 members, MF programs implemented by WU, CGAP, Terre des Hommes, Ford Foundation, CPI, MFWG

MFIs, NGOs, INGOs, Microfinance Programmes (mass organisations)

Government - VBARD, VBSP, PPC; Private Entities

FPWM, WV, CIV, LSN, Plan in VN, NMAV, Dariu Foundation, NAPA Quang Binh, Poor women projects in Tien Giang and Ninh Phuoc, WU, VBARD

Microfinance practitioners

Focus Banking and finance

Microfinance, Community Development, New Technology, Education; Poor communities in coastal and

Strengthening the capacity of the network itself; Strengthening microfinance key stakeholders’ capacities; enhancing advocacy efforts and information exchange mechanisms;

Banking and finance, business adm, accounting, auditing, info system, proj. management analysis,

Microfinance, Business development and enterprise assistance, community activity (livelihood)

Microfinance, BDS, community development, solutions, technology,


76



MST –MACDI SEDA

mountain areas Improving the quality of services offered to members

English in banking, legal environment

Products & Services

a. Training Core banking, bank management, soft skills, TOT

Microfinance, project proposal, governance, financial analysis, wage system, website operation, financial management, MFI supervision, market research, delinquency management, micro-insurance, business planning and financial projections

Capacity building – training Financial Education Programs for the Poor; Proposal Writing Skills; communication and care skills focused members; risk and micro insurance, SPM (social performance management);…

Banking and finance – capital management, credit operations, accounting, auditing, risk management, investments, loan appraisal; business adm, info system, English in banking, legal environment, TOTs, micro-insurance

Capacity building for MFIs to increase competitiveness; advocacy; governance; and practical education; Conferences on microfinance and SMEs

BDS, Marketing, production, financial management, financial education

b. Consulting and research

Bank diagnostics, operation assessment, HRM/ restructure, TNA, ALM, risk management, strategic business

Accounting manual for credit union; supervision manual for MFIs; advocacy and involvement

None Capacity building for MFIs and small enterprises; business development assistance for households and

Research, development and management projects to support low income households and small enterprises


77



MST –MACDI SEDA

planning and implementation; supply and demand for MF in VN

in development of the decrees; support for social funds/ MF programs to transform into regulated MFIs

small enterprises; facilitation of linkages and access to financial institutions; impact; regulations; linkaging

especially women and children

c. Job Internships

No No No Yes No No No

c. Publications Building MF sector in VN

Vietnam Microfinance Bulletin

d. Advocacy Yes Yes Yes

Methods

a. Competency-based

Accredited by NIBE SVV

b. E-learning Authorized by KESDEE

Trainers Pool

a. International 50 Yes, no data 0 Yes, no data 0 1

b. Local 150 Yes, no data 18 Yes, no data 650 11

c. Fulltime 0 7 0 130 6

d. Part-time Yes, no data 11 Yes, no data 420 6

Trainer Experience


78



MST –MACDI SEDA

a. Vietnam Yes Yes Yes Yes Yes Yes Yes

b. Asia Pacific Yes Yes Yes Yes

c. Global Yes Yes Yes

Training Material

a. designed by international experts

Yes Yes By the institution By service provider By the institution By the institution By the institution

b. maintained by technical consultants

Yes By the institution

By the institution By service provider and the institution

By the institution By the institution By the institution

c. accredited Yes Yes No No No No No

Methodology

a. student centered

Yes

b. customized Standard and Customized

Standard Yes Yes Standard Yes Yes

c. interactive facilitating methods

Yes Yes Yes Depends on facilitator hired

Yes Yes Yes

d. systematic training management - focused on impact

Yes Depends on facilitator

Training


79



MST –MACDI SEDA

Facilities

a. No training facility, hires venues

No, has facilities No, has facilities

Yes Yes No, has facilities Yes Yes

b. With complete facilities for training

Yes Yes No No No No No

c. (class room, LCD.)plus video-conferencing capability

No Yes No No No No No

Achievements

a. Training 1,200 No data No data more than 20 training courses

Many 53 No data

b. Trainees – Individual

30,000 No data No data about 500 505 bank staff More than 500 No data

c. Trainees - Organizations

45 No data No data many Many No data No data

d. Certified Training

6 None No data Many No data None

e. Accredited e-learning courses

500 1 – Distance Learning

None None None None None

f. Can provide certificate

Yes Yes No Yes Yes Yes No


80



MST –MACDI SEDA

AWARDS Best Financial Consultant in 2007 by SBV and VCCI

Paper made was commended by the Prime Minister

By Citi Foundation (microentrepreunership Award 2007, 2008, 2009)

Best brand name in 2008; Thanh Long Young Entrepreneurs2007; Good Performance MFI 2007

Microfinance Courses

Training – None; Research – Supply and demand for MF in VN

Global MF Distance Learning Course

Accounting Manual for credit unions; supervision manual; training on internal control, financial management, business planning, targeting, credit and financial analysis, quality control, risk management, delinquency management

SYMBANC - Microfinance Institution; training on accounting and internal control, financial management, financial analysis, microfinance risk and micro insurance; communication and care skills for customers; financial analysis and performance indicators, SPM

Legal environment for MF – discussion of decrees and circular

Basic/advance MF, business planning & financial projections (microfin), financial analysis, market research, organizational development, internal control, communication skills, customer care, motivation & presentation, management & leadership, risk & credit risk management, problem solving & decision making, report writing, customer service; facilitation skills; conflict management; M&E, computer skills finance &, accounting; product


81



MST –MACDI SEDA

design/ development; loan appraisal; institutional culture improvement

Willingness to collaborate with ADB in developing standardized curriculum

Yes Yes Yes Yes Yes Yes Yes

Feedback from Others

Very good for banking courses, not in MF

Good for training facilitation but not appropriate for MF.

Mdme Lan is good trainer but lacks the time for follow ups. One MFI had negative experience – wrong info provided by staff deployed.

Can be useful in organizing, not as trainer.

Very good for banking and finance courses, not yet in MF.

Good training institution.

Not sure if their modules are at par with standards.

Location Hanoi, HCMC Hanoi, HCMC, Central VN

Hanoi Hanoi Hanoi Hanoi Hanoi

Other Notes Price depends on course design.

Price depends on course design. Can do awareness raising training, not MF technical

Mdme Lan fee is minimum $200; for staff is 50% of Mdme Lan fee; cost varies depending on design; can do

Price depends on course design. Willing to support ADB initiatives even with no funding; can use website for marketing

Price depends on course design.

Price depends on course design. Director of Training Institute, a member of ADB Team.

Price depends on course design.


82



MST –MACDI SEDA

training. facilitation only


83

ANNEX 2

THE MICROINSURANCE SECTOR IN VIETNAM

(An excerpt from RIMANSI’s publication: “Microinsurance in Vietnam, J.A. Alip,Ph.D and M.C.David-Casis” with update from the ADB 7944

Microfinance Team )


84

Microinsurance, the provision of insurance to poor household and those working in the informal sector, is still relatively new and undeveloped in Vietnam. While Insurance is a valuable tool to lower the costs of coping with a crisis when it occurs, Vietnamese households still depends mainly in “self-insurance strategies”, such as selling of assets, borrowing from relatives and friends or uses credit to cope with unexpected shocks in their lives1. Table 1 presents the risks, which can have a devastating effect on livelihood and well being.

Table 1: Summary of the Most Common Risks Faced by Households in Vietnam2

TYPE OF CRISIS FORMS AND CAUSES EFFECT

Illness or Accident

High indirect and direct treatment costs; Loss of income through reduced labor

Death of Laborer

High costs of funeral expenses; Loss of income through reduced labor

Human Crisis

Alcoholism, Drug Addiction, Gambling

High non-productive expenditure; Loss of income from lost labor

Theft Loss of assets; Reduced income Material Crisis Damage to Housing

(flood, typhoon, fire) High unexpected expenditure

Failure of Investment Reduced income, Inability to repay debts Unemployment Reduced income Life Cycle Event (wedding, funeral)

Increased expenditure; Reduced labor supply

Non-Crop Economic Shock

Death of Animals (individual or epidemic)

Reduced income; Reduced assets and security

Crop Failure Rats, Mice or Other Pest; Reduced income The most vulnerable households in Vietnam are as follows: (1) female-headed households, (2) ethnic-minority households, (3) households who do not own any land; (4) poor-income decile households; and (5) households in Red River Delta regions, because of frequent floods and high population density. There is a recent upsurge of interest in serving low-income households from the government, commercial insurers, microfinance institutions and mass organizations. However, poor households do not usually avail of insurance as a risk management strategy; and the low income households have used insurance, these are mostly student insurance bought by parents upon the advice of schools, without a thorough understanding of the benefits.

1 Quynh Ngoc Nguyen, 2006. Responses to Poverty and Risks in Vietnam. How Effectively Does the Vietnamese Public Safety Net Target Vulnerability Population? 2 Adopted from Poverty Task Force, World Bank, Localizing MDGs for Poverty Reduction in Vietnam: Reducing Vulnerability and Providing Social Protection, Draft Report, June 2002


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Public knowledge about insurance products and its trust in the concepts is still weak. Insurers lack information about the low-income market and few companies believe that the low-income market can be profitable and there are also regulatory, product development and institutional constraints that need to be addressed to expand the low income households' access to insurance products.

Table 2: Regulatory Factors that Affect Low-Income Households' Access to Insurance Products3

FACTORS THAT LIMIT ACCESS FACTORS THAT FACILITATE ACCESS Historic focus on providing free insurance for the poor - has created bias against the commercial provision of services to the poor and has moved 'near-poor' populations out of any targeted group for social and health insurance. Lack of clear definition of ‘low-income’ households - while the national poverty line is defined, there is no category of 'near-poor' or 'low income' for groups which have moved themselves out of poverty; since commercial insurers tended to equate them with 'poor,' they are not considered as legitimate or profitable market segments. Insufficient incentives to serve the low-income market - while some insurance products in-demand by low-income households had been exempted from the value-added tax in 2005, this incentive is deemed insufficient by insurers as it applies to all income segments and offers only indirect benefit to insurers. Restricted benefits under Voluntary Social Insurance - the voluntary social insurance system only includes old-age pensions and survivors benefits, and there is no State-sponsored insurance scheme that will cover low-income individuals that do not work for the government or workers contracted for a period of 3 months or less in the event of occupational disease or work-related accident. Commission restrictions - while this protects consumers from spiraling premium levels, the restrictions may constitute a disincentive to agents and brokers to expand insurance services in hard-to-reach areas.

Opening of the market to more international players – has spurned competition for the traditional market segments, pushing insurers to look for new market opportunities, including the low income population. New institutional options for serving the low-income market - Decrees 18 and 28 legally recognize mutual insurance companies and microfinance institutions as supervised entities that specialize in the provision of financial services to the low-income market. Clearer guidelines for State-sponsored voluntary social insurance schemes - Circular 22 and the New Social Insurance Law establish guidelines for voluntary and social insurance schemes that support workers outside the formal economy, including farmers and the self-employed. Decentralization of Authority –reforms have decentralized budgetary authority, allowing Bac Ninh province, for example, to introduce a subsidy for near poor households to buy voluntary health insurance; a model which the VSS is recommending for replication by other provinces. Simple agent licensing requirements - the simple requirements for individual agents and organizations that want to operate as insurance agents hold significant potential for enabling insurers to work through agent partners at the local level.

3 Based on ILO study (2007)


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Migrant registration - the difficult process discourages migrant low income households to register, disabling them access to social insurance, health insurance, or social assistance from the State. Lack of guidance for Mutual Assistance Funds and their members - a number of MAFs are already in existence but they remain unaware of Decree 18/2005/ND-CP and Circular 52/2005/TT-BTC, and few would consider formalizing their in-house insurance activities because of the high capital requirement and their limited management capacity. New product registration requirement - requiring MOF approval of insurance products is a disincentive to innovation and may be discouraging insurers from experimenting with new products and approaches for the low-income market. Most of the microfinance and mass organization that are currently offering an insurance product are doing so through a self-insurance model. Generally known as the mutual assistance funds (MAFs), these schemes are unlicensed, unregulated and offer insurance service to members/ clients only. They provide easy and affordable access to some types of insurance, but could prove risky because of their small risk pool, lack of access to reinsurance and weak expertise in appropriate product pricing. They are also vulnerable to covariant risk. The Government allows MAFs to operate informally as long as they are not operated for profit, not called mutual insurance companies, and do not issue any insurance policies. This hands-off approach makes it easier for low income households to access some kind of insurance in the short-term, but it does not encourage the development of longer term, more reliable and more diversified insurance service for low income communities. Legal Framework The development of the insurance market is guided by the Law on Insurance Business and the Strategy for Development of the Vietnamese Insurance Market 2003-2010. The Government’s strategy for developing the insurance industry is being implemented to create a more professional, more stable, higher quality supply for insurance service in Vietnam. The MOF is the principal regulatory body for insurers. It prepares the development plan and drafts regulations for the insurance industry and at the same time supervise the operations of insurance companies. The MOF is also responsible for licensing insurers and acting as the certification body for all standards and conditions. Insurers and brokers must also apply to the MOF for a license prior to registering their business.


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The legal framework for Vietnam insurance is presented in the figure below:

Figure 1: Legal Framework for Vietnam insurance

Commercial insurance is governed by Decree 45/2007/ND-CP, entitled “Decree Providing Guidelines for the Implementation of a Number of Articles of the Law on Insurance Business” and Decree 46/2007/ND-CP, entitled “Decree on Financial Regime for Insurers and Insurance Brokers,” These Decrees and their implementing guidelines, Circular 155/2007/TT-BTC and Circular 156/2007/TT-BTC, respectively, provide new prudential regulations for insurance organization since 2007, Table 2.

Table 2: Key Provisions of Recent Insurance Regulations

REGULATION KEY PROVISIONS 45/2007/ ND-CP (March 2007)

• Provides [or the operational organization of insurers and brokers • Requires the management of insurers and brokers to have the capability and • professional qualifications to run an insurance business • Provides the procedures and conditions for underwriting insurance and reinsurance • Requires foreign insurance enterprises to: (a) be allowed by the regulatory authority in their home countries to carry out insurance business in the areas for which they ore applying in Vietnam (b) have been legally operating for at least 10 years in their hams countries (c) have had total assets equivalent lo a minimum of US$10 Billion the year prior to filing the application for license • Requires foreign insurance brokers to: (a) be allowed by the regulatory authority in their home countries to carry out insurance business in the areas for which they are applying in Vietnam (b) have been legally operating for at least 10 years in their home countries (c) be financially sound for 3 consecutive years prior to filing the application for license

Other Regulations Horizontal Laws Insurance Laws

Civil Code

Enterprise Law

Investment Law

Fire and Explosion

Construction

Administrative Sanctions

Mutual Assistance

Insurance

Others

Law on Insurance Business

Decree 45/2007

Circular 155/2007

Decree 45/2007

Circular 156/2007


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46/2007/ ND-CP [March 2007)

• Sets the minimum capital requirements for insurance license at: VND 300B (US$18.75M) for non-life insurance business; VND600B (US$37.5M) for life insurance business & VND 4B [US$250,000] for insurance brokers. • Requires that paid-up chartered capital be maintained at a level not less than the legal capital requirement; insurers and brokers must supplement (heir charter capital in accordance with the contents, scope, and geographical area of their business operations. • Requires insurers to use part of their paid up charier capital to pay a security deposit equal to 2% of the legal capita. • Requires the establishment of adequate reserves for each insurance product, including unearned premium, outstanding claim reserve, large loss fluctuation reserve (for non-life insurance) and actuarial reserve, unearned premium reserve, compensation reserve, profit distribution reserve, and balance reserve (for life insurance). • Sets the minimum solvency margin for non-life insurers at whichever is greater of these two calculations:

(a) 25% of total premiums actually retained (b) 12.5% of the total primary insurance premiums plus reinsurance

premiums • Sets the minimum solvency margin for life insurers at –

(a) for contracts with a term of 1 0 years or less, 4% of the insurance reserves and 0.1% of the sum insured

(b) for contracts with a term of over 10 years, 4% of the insurance reserves and 0.3% of the sum insured

• Provides measures for dealing with insurers in danger of insolvency • Requires compulsory reserve funds equivalent to 10% of the charter capital

Insurance Laws in Vietnam have no provision that bans microinsurance or informal insurance schemes that are run by international an local non-governmental organizations (NGOs) or mass organizations, nor is there oversight of their operations. There are two crucial regulations issued by the government that would allow the formalization of the operations of these types of insurance providers. These are:

• The New Credit Institutions Law issued June 2010 (formerly Decree 28/2005/ND-

CP) Regulating the Organization and Operations of Small-Sized Financial Institutions; which allows the MFIs to act agents or distributors of licensed insurance companies, and;

• Decree 18/2005/ND-CP, Regulating the Establishment; Organization and

Operation of Mutual Insurance Organizations Operating in the Insurance Business Domain. It provides a legal framework for MAFs to transform into regulated Mutual Assistance Insurance (MAI) organizations.

A MAI is a legal entity established to do insurance business for the purpose of self-support and self-help among members who are Vietnamese organizations, individual working in the same field, having the same occupation or living in the same geographic area and vulnerable to the same risk. MAI members are both policy holders and owners of the organization and a right to participate in its management.


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Among the prudential requirement for MAIs are:

• It can offer insurance products and services only on the ff. areas: health and accident, property and damages, transported goods, vehicles, fire and explosion, ships/boat and civil liability of owners, general liability, credit, business loss and agriculture.

• It must be composed of at least ten (10) members and organized into: a Member’s Congress, A Board of Directors, Director and a Supervisory Board.

• To be licensed, a MAI must have a legal capital of not less than VND 10B (USD 625,000). MAIs working in the agriculture sector have a lower initial capital requirement of VND (USD562,500)

• A MAI must have a compulsory reserve or 5% of after-tax returns every year. The minimum amount of reserve fund is 10% of the initial capital.

• It must operate in accordance with Vietnam laws and the law on insurance business.

MAIs are also subject to monitoring, supervisory and reportorial requirements of the MOF. Prior registration of insurance product is also required.

Table 3: Key Regulations for Mutual Assistance Insurance Organizations Principles for Organization and Operation of Mutual Assistance Insurance (MAI) Institutions

A MAI is o legal entity established la do insurance business for the purpose of self-support and self-help among members who are Vietnamese organizations, individuals working in the same field, having the same occupation or living in the same geographic area and vulnerable to the same risk. MAI members are both policy holders and owners of the organization, and have a right to participate in its Management.

Operative Areas and Insurance Services

Health and accident of human beings Property and damages Transported goods Vehicles Fire, explosion Ships/boats and civil liability of ship-owner General liability Credit arid other credit risks Business loss Agriculture

Membership Minimum membership is 10 persons Organizational and Management Structure

Consists of: (a) Members' Congress; (b) Board of Directors; (c) Director; and (d) Supervisory Board

Licensing, Capitalization, and Reserve Requirements

To be licensed, a MAI must have a legal capital of not less than VND 1OB (US$625,000)4. MAls working in the agriculture sector have a lower initial capital requirement of VND 9B (USS562, 500). The contract on the MAI's establishment can be signed by the members before the grant of license, but if the license is not issued, the contract will implemented by the founding members. Capital contributions will be in cash or notes of high liquidity and will be put in a blockaded bank account to be released after the grant of license. A MAI must have a compulsory reserve or 5% of after-tax returns every year. The minimum amount of reserve fund is 10% of the initial capital.

4 The Decree sets the minimum capital requirement at VND 10billion, but Circular 52/2005 sets the minimum capital requirement at VND 20 billion (US$1.25M)


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Operation Must be in accordance with Vietnam laws and the law on insurance business MAI lies to register the conditions and premium schedule for its products; Prior MOF approval is required for health and accident insurance.

Commissions A MAI is allowed to pay commissions to insurance brokers and agents in accordance with the Schedule of Commission approved by the MOF.

Reinsurance A MAI is allowed to retain not more than 10% of (he total initial capital, and the excess must be reinsured to one or many insurance companies, or other MAls. A MAI is also allowed to accept reinsurance from other insurance companies and other MAls.

The Tao Yeu May (TYM) Mutual Assistance Fund Tao Yeu May (TYM) is an MFI that grew out of a Grameen replication project of the Vietnam Women's Union. It works predominantly in rural agriculture-based communities, targeting the poorest districts in the northern provinces of Vietnam. Its members are women living below the poverty line, earning less than VND 200,000 (US$ 12.50) a month. TYM Fund introduced the Mutual Assistance Fund (MAF) in 1996, to protect against the death of a client or family member. For a flat rate of VND 200 (US$ 0.01) a week, members get hospitalization benefits and her family is enabled to better cope with expenses incurred from her death and relieved of the burden of repaying her outstanding loan. As of March 2004, TYM MAF has insured 68,157 lives (18,951 members, 16,372 spouses and 32,834 children). At the end of 2007, the Fund's balance stood at VND 854,005million (US$53,375). TYM transformed its MAF into a sustainable microinsurance for the following reasons:

(i) increase coverage and provide more benefits to members (ii) improve management and governance to ensure sustainability by increasing

operational and financial efficiency and; (iii) build up a professional organizational structure and create a separate business

until that is recognized under Vietnamese law. The table below presents a typical analysis of the Strengths, Weakness, Opportunities and Threats (SWOT) of MAI-transformation5

OPPORTUNITIES THREATS • Relative invisibility of microinsurance

segment to commercial insurers • Value added tax exemption under Circular

111 /2005/TT/BTC • New Guidelines for Mutual insurance

(Decree No. 1B/2005/ND-CP and Circular 52/2005/TT-BTC)

• Implementing rules for mutual insurance are still being developed. MOF is open to exploring more appropriate regulations for microinsurance

• Availability of partnership with RIMANSI

• Lack of implementing guidelines for licensing and supervising microinsurance

• Misplaced public aversion to matters related to death and misfortune

• Plateau in growth of premiums that may be attributed to poor payout practices

• Underdeveloped capital markets • Competition from partner agent promoters

(Bao Viel able to process claims in 2 days and offer .9% credit life premium)

• Absence of industry performance standards • Natural disaster (esp. Hooding)

5 RIMANSI for TY-Vietnam Women’s Union.2008. Draft Businness Plan: TYM Mutual Assistance Fund (Toward a Mutual Assistance Insurance Organization). Draft document dated 07 April 2008, p.1.


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• Increasing life expectancy in Vietnam • Outbreak of diseases (bird flu, dengue, etc) • Weak health care infrastructure • Limited professional base (accountants,

fund managers, actuaries, IT, MIS staff) • Over-lap with government health and social

insurance programs STRENGTHS WEAKNESSES

• Support From senior officials from the Women's Union and TYM Board

• Growing TYM client base (hot is geographically dispersed)

• Tried and tested insurance products that con be upgraded

• Ability to mobilize branches to implement a compulsory micro insurance scheme

• Ability to regularly interact with 30,000 clients • Some insurance experience and knowledge

(MAP management) • Positive image and reputation of TYM • TVM staff respected/ trusted by clients

• Formal insurance management training and experience is limited

• Insurance not yet well understood by members

• Fast access to bans attractive during times of emergency

• Significant aider population segment (14.72% between 50 to 54 years aid and 13.69% 55 years old and above)

• Very poor clients concerned with capacity to pay

The SWOT assessment above indicates that TYM Fund will provide the proposed TYM MAI with the financial management efficiency and close member relationship that will make the MAI sustainable and competitive vis-à-vis commercial insurance companies. The limited insurance management experience gained by TYM Fund officers and staff while administering the MAF is transferable to TYM MAI and can be upgraded. The primary policy constraint remains to be the relatively high capitalization requirement for MAI licensing. Hence, successful advocacy with the MOF for either a lower initial capitalization or an extended capital build up period is crucial. CARD Mutual Benefit Association (MBA) CARD MBA is part of the system of the Center for Agriculture and Rural Development Mutually Reinforcing Institutions (CARD MRI) that also includes CARD Inc. (an NGO), CARD Bank; CARD MRI Development Institute (a training center), and CARD Business Development Services, Owned and managed by members, CARD MBA offers life and disability insurance, as well as an obligatory provident fund to CARD Inc.' and CARD Bank clients. For CARD's borrowers, the MBA offers the All loans Insurance Package (ALlP), "which is a loan redemption scheme. These products improve the overall services to CARD members and the mutually reinforcing nature of the relationships makes the operations of the MBA extremely efficient. From its humble beginnings in 1999, CARD MBA has brought microinsurance to 2.35 million Filipinos, reaching out to poor and low income households that have been traditionally ignored by commercial insurance providers, its assets have reached PhP 595 million (more than US$ 13 million) in 2007. The experience of CARD MBA illustrates that microinsurance can be sustainable largely if there is a wide and functioning distribution channels, low overhead expenses and an effective .premium collection mechanism. Its success factors are summarized below:


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Large Membership Base • At least 8,000 members • Compulsory life insurance and retirement coverage to prevent adverse selection • Clients well-distributed to minimize co-variant risk Affordable Contributions and Effective Collection Mechanism • Level contributions, level benefits selection Low Administrative Cost • Less than 20% on administration and marketing • Paired-up with banking/MFI operations Separate institution to Handle Microinsurance Operation • For effective management and to prevent co-variant risk Sound .Technical/Actuarial Basis; • MlS to track members' history and gather data for actuarial analysis • Technical assistance provided by RIMANSI Professional Management; • To develop products designed to meet members' needs • For proper implementation of association rules and regulations • To ensure safe-and sound investment policies Effective-Information; Education Campaign Strategies;

•To ensure members' understanding of microinsurance, for wide acceptance of products and willingness to pay premiums

The Microinsurance regulation in the Philippines The Philippine Insurance Commission issued The memorandum Circular No. 9-2006 which characterizes microinsurance as follows:

(a) Microinsurance is "an insurance business activity of providing specific insurance products that meet the needs of the disadvantage for risk protection and relief against distress or misfortune;" (b) The minimum feature of a microinsurance policy are;

• The amount of premium computed on a daily basis does not exceed 5% of the current daily minimum wage rate for non-agricultural workers in Metro Manila (PhP 35 or US$ 0.85 daily premium payments); and • The maximum amount of life insurance coverage is not more than 500 times the daily minimum wage rate for non-agricultural workers in Metro Manila (PhP 165,000 or US$ 4,024 insurance coverage).

(c) The terms and conditions of microinsurance policies shall have the following features:

• The contract provisions can be easily understood by the insured;

• The documentation requirements are simple; and • The manner and frequency of premium collection coincides with the cash-flow of, or otherwise not-onerous, for the insured.


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The move of the Insurance Commission to promote microinsurance through the issuance of the circular is a welcome development. It defines what microinsurance is in so far as the application of the general provisions of the Insurance Code is concerned and delineates those products from the traditional commercial insurance products. Clearly, it sets the parameters on how to design insurance products suited for the poor and disadvantaged sectors by focusing on affordability, accessibility and simplicity. CONCLUSION Lessons Learned From TYM

Upgrading institutional capacity to handle microinsurance. MFIs desirous of adding insurance to their financial products and should assess their institutional capacity and competence before venturing into the microinsurance business. Although TYM has created its unique position as microinsurance provider through the MAP, it lacks the expertise to fully meet the requirements in sustainably managing a formal insurance entity. Microinsurance offers a different set of challenges and requires a different set of skills from microfinance; hence the MAF team and all personnel who will be involved in microinsurance operations need to be trained rigorously. All TYM personnel who were interviewed expressed the need to upgrade their skills in managing, implementing and marketing microinsurance products and services, Separation of microfinance end microinsurance operations. Microinsurance should be managed separately from the microfinance operations. Risk management and skills requirement for personnel vary greatly between these two services. Although some processes such as premium collections and disbursements can be channeled through the existing technical officers, microinsurance should have separate staff to handle underwriting and accounting procedures. The creation of a MAP Team and Unit within TYM, the development of information and financial systems to separately manage the microinsurance operations from its usual credit and savings activities, and the ongoing capability-building program are crucial to the successful transformation of MAF into MAI. Ensuring sustainability. TYM's decision to spin-off the MAF into a formal mutual insurance association necessitated an overall product and systems review, as well as the development of a business plan and a manual detailing the technical aspects of its microinsurance operations. To ensure sustainability, operational and financial systems development is being undertaken, including policies and procedures for fund and reserve management. Reinsurance is also being considered, together with registration as a formal MAI organization. Keeping pace with industry developments and client demands. TYM's initiative of transforming the MAF into a formal insurance entity is relevant to the changing trend in the microfinance industry worldwide. There is a demand-supply gap in the provision of insurance Services to low-income households in Vietnam, hence, a need for TYM's microinsurance product. Market research also established that TYM clients are


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willing to pay higher premiums for additional benefits, providing impetus for the redesigned MAF product and the program's transition into a formal microinsurance institution. Periodic adjustment of premium and benefit levels. As the client's risk profile changes over time, premiums and benefits should be reviewed periodically, following a systematic process that includes market research and actuarial analysis. TYM's experience provides a good illustration of the contrasts between offering insurance products without the benefit of market research and actuarial projections (the old MAF) and developing products based on client's demand and actuarial data [the new MAF). Building and maintaining strategic linkages. The VWU and TYM's partnership with RIMANSI - which covers technical assistance in product development and capability building for running, a microinsurance business - is crucial to the successful transformation of MAF, TYM also needs to work with other practitioners in increasing and intensifying the promotions of microinsurance through attendance to local and international fora for information gathering, dissemination, campaign and mutual learning. Importance of policy advocacy. Since the MAF remains an informal insurance provider, its lack of legal status is a serious issue requiring constant and close coordination with the regulating agency (Ministry of Finance) even as it attempts to comply with the legal requirements for MAI. Continuing to engage the MOP in policy dialogues to influence the development of the implementing guidelines to Decree 18/2005 is crucial to creating a policy environment favorable to microinsurance.

Need for Legal Environment Improvement

The New Credit Institutions Law (NCIL), 2010 and Decree 18/2005/ND-CP are landmark regulations that provide the legal framework for the operation of MFI and MAI organizations in Vietnam. They are expected to have a significant positive impact on the development of both the microfinance and microinsurance sectors. Most microfinance and microinsurance programs in Vietnam are being implemented as projects or special programs of mass organization. MFIs, in particular, are given access to donor funds and commercial borrowings, while MAIs are allowed to generate capital contributions from members as wells as access to reinsurance. As the present credit, savings, and mutual assistance programs or projects of mass-based organizations graduate into regulated institutions, the expected increase in their outreach will surely redound to the benefit of the disadvantaged sectors that they serve. For the microinsurance sector, however, some issues need to be addressed to ensure further growth:

• Restrictive Microinsurance Policy – The NCIL allows MFIs to act only as agents or distributors or insurance companies. This could prove problematic, considering that the majority of commercial insurance providers do no consider the


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low-income segment as potential markets and their products, as well as collection mechanism, are hardly suited to the needs of the low income population.

The present legal framework for microinsurance is restrictive for introducing a business structure, the mutual insurance model, which has proven to be competitive in Europe, Japan and North America. Decree 18 and Circular 52 have been issued three year ago, in 2005, but to date, no informal microinsurance provider in Vietnam has attempted to register its operations. A re-examination of current regulations, with the participation of practitioners and stakeholder, would go a long way towards regulating – and sustaining- these existing microinsurance initiatives. Decree18 and Circular 52 are restrictive in that they are focused only on the agriculture, fishery and forestry sectors. They also limit the scope of framework of MAIs to certain insurance products and encouraging the coverage of all economically-disadvantaged sectors. The Philippine Insurance Commission, using the Mutual Benefit Association model of microfinance, is a good example of how supportive policies can facilitate the growth of the microinsurance sector and how the mutual insurance model can effectively reach millions of poor people. Further, The NCIL subjects MAIs to related regulations of the law on insurance business. This bears examinations as some prudential regulations for commercial insurance, such as high capital and liquidity requirements, liquidity and solvency ratios, restrictive requirements for agents, “sole business line” requirements, among others, may not be appropriate for microinsurance. The minimum capitalization requirement of VND 10 billion (US$652,000) set by Decree 18 is too high for existing Mutual Assistance Funds. This was further raised to VND 20 billion (US$ 1.25 million) under circular 52, which also requires that this level of capitalization be maintained even at the start or during the development stage of MAI’s operations. Considering that these regulations target the basic sector and are directed at MAFs and small-scale microinsurance schemes, the level of capitalization required serves as a disincentive for these low-end service providers to formalize their operations.

• Insufficient Operative Guidelines and Lack of Parameters for Product Development - There are no parameters for the design of insurance products are that are suited to low-income populations. Neither are there sufficient guidelines for the setting up, operation, monitoring and evaluation of MAIs. Appropriate performance standards must be provided, otherwise, many well meaning organizations could get into microinsurance as MAI organizations without the right knowledge or without access to technical assistance, and fail. It is hoped that the implementing regulations to be issued by the MOF will provide more detailed guidelines to prospective MAIs and other interested parties.

Capability-building needs of microfinance providers- The transformation into regulated MAIs presents major challenges in human resource and systems development for informal providers of microinsurance. Existing MAFs will have a difficult time finding qualified staff, especially for key managerial and technical


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positions. (For example, the chairperson of the Board of Directors and the Director of MAIs are required to have professional qualifications and experience in the insurance business.) They will also need training to upgrade their staff capacity and improve their management systems to comply with the new regulations. The MAIs will need assistance in developing their management systems with respect to the following: standardizing operational policies and procedures; MIS; accounting systems and developing new skills such as actuarial projections, liquidity management, and investment management; among others.

Need to Strengthen Regulatory and Supervisory Capacity - Under Decree 18, the MOF is the regulatory body for MAIs. It is given the authority to grant license to operate a mutual insurance business, as well as to approve microinsurance products. There is, therefore, a need to strengthen the regulatory and supervisory capacity of the MOF with regard to mutual assistance insurance, which lack historical precedent and is still an emerging field.

Ideally, the government’s role is to create a suitable regulatory environment and promote formal sector entry into the low-income market. To achieve this, the MOF needs to deepen its understanding of the concept of microinsurance and how it differs from commercial insurance. Second, it should look at viable models and examine legal framework which adopt policies and implement regulations appropriate to the Vietnam context to ensure the growth of MAIs and other microinsurance organizations. Since mutual assistance funds have proven successful in providing affordable and appropriate insurance products to low income households, their operations should be supported and they should be encouraged to transform into mutual insurance organizations (or to cooperate and create one mutual insurance company) Under Decree 18 and Circular 52. This institutional option offers many advantages, foremost of which is the legalization of existing MAFs. The mutual insurance company would be licensed to offer a wide array of insurance products and have access to reinsurance. As the membership outreach grows significantly across various regions of the country, they would be in a much better position to manage covariant risk. The following measures are recommended: For the Government: • Be cognizant that microinsurance regulation can either promote or restrict insurance

provision for those who need it most: the lower income groups. With the absence of commercial insurers ready to serve this market, the government should play the role of facilitator and provide incentives to organizations that will provide insurance services to disadvantaged group.

• Review current regulations; toward expanding access of low-income households to microinsurance services.

• Pursue a participatory approach to policy development. A well designed regulatory framework is a major factor for the effective and efficient provision of microinsurance services. In promoting more professional and expansive services, regulation can play an important role by encouraging microinsurers to become regulated.

• Deepen the regulators’ understanding of microinsurance – its concept, the factors that differentiate it from commercial insurance, and its capacity to reach low income populations. The MOF’s ongoing dialogue and coordination with MFIs, NGOs, MAFs


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and other stakeholders is an important step toward understanding microinsurance and its potential to help the disadvantaged sectors.

For the Service Providers: • Intensify information-education-communication (IEC) activities towards making

microinsurance understood and accepted by their clients and ultimately, the majority of Vietnam’s population

• Improved institutional efficiencies facilitated through capability-building programs provided by industry experts such as RIMANSI

• Continue the advocacy with the government in order to influence the policy environment, sustain their microinsurance projects and legalize their ultimate structure in a progressive manner.

For Donor Agencies: • Support the piloting of microinsurance projects and promote innovative models for

microinsurance. • Help develop local technical expertise on microinsurance – both for the regulators

(government agencies) and service providers (NGOs, MFIs, credit union, among others).

• Provide avenues to document and exchange experiences in microinsurance implementation to distill learnings from the field, as well as to develop benchmarks and performance standards for the emerging microinsurance industry.

• Facilitate consultation processes support the development of the appropriate regulatory framework for microinsurance in Vietnam.


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ANNEX 3 LAW ON CREDIT INSTITUTIONS

(Law No. 47/2010/QH12)


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Table of Contents CHAPTER I: GENERAL PROVISIONS ...........................................................................................98

Article 1. Governing scope ....................................................................................................98 Article 2. Applicability ............................................................................................................98 Article 3. Application of the Law on Credit Institutions, International Treaties and Relevant

Laws .......................................................................................................................98 Article 4. Terms and definitions .............................................................................................99 Article 5. Usage of the terms related to banking activities...................................................102 Article 6. Organization forms of credit institutions ...............................................................103 Article 7. Right to business autonomy .................................................................................103 Article 8. Right to banking operations..................................................................................103 Article 9. Co-operation and competition in banking activities ..............................................103 Article 10. Protection of customer .........................................................................................104 Article 11. Responsibilities in respect to counter money laundering (AML) and terrorism

financing ...............................................................................................................104 Article 12. Legal Representative of credit institution .............................................................104 Article 13. Provision of information........................................................................................105 Article 14. Security of information..........................................................................................105 Article 15. Backup database..................................................................................................105 Article 16. Shares purchase of foreign investors...................................................................105 Article 17. Policy banks .........................................................................................................105

CHAPTER II: LICENSES...............................................................................................................106 Article 18. Authority to grant and revoke Licenses ................................................................106 Article 19. Legal capital .........................................................................................................106 Article 20. Conditions for issuance of licenses ......................................................................106 Article 21. Application files, licensing orders and procedures ...............................................108 Article 22. Duration for issuance of licenses .........................................................................108 Article 23. Licensing fee ........................................................................................................108 Article 24. Business registration and operation registration ..................................................108 Article 25. Publication of operational information ..................................................................108 Article 26. Conditions for commencing operations ................................................................109 Article 27. Use of License......................................................................................................109 Article 28. Revocation of License ..........................................................................................110 Article 29. Changes for which approval of the State Bank must be obtained........................110

CHAPTER III: ORGANIZATION, GOVERNANCE AND MANAGEMENT OF CREDIT INSTITUTIONS ....................................................................................................111

Section 1. General Provisions.............................................................................................111 Article 30. The establishment of branches, representative offices, non-profit working units,

and commercial presence ....................................................................................111 Article 31. Charter .................................................................................................................112 Article 32. Managerial organization structure of credit institutions ........................................112 Article 33. Prohibited cases in regards of taking positions ....................................................113 Article 34. Prohibited cases in regards of taking concurrent positions ..................................114 Article 35. Loss of status naturally.........................................................................................114 Article 36. Dismissal, removal ...............................................................................................115


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Article 37. Suspension, temporary suspension of titles of the Board of Directors, the Members’ Council, the Board of Controllers and General Director (Director) ......116

Article 38. Rights and obligations of administrators, managers of credit institutions.............116 Article 39. Obligations on disclosure of related interests.......................................................117 Article 40. Internal control system .........................................................................................117 Article 41. Internal audit.........................................................................................................118 Article 42. External audit .......................................................................................................118

Section 2. General provisions for joint stock and limited liabilities credit institutions ..........118 Article 43. Board of Directors, Members’ Council and the structure of the Board of Directors,

Members’ Council.................................................................................................118 Article 44. The Board of Controllers and the structure of the Board of Controllers ...............119 Article 45. Duties and powers of the Board of Controllers.....................................................119 Article 46. Rights and obligations of the Head of Board of Controllers .................................120 Article 47. Rights and obligations of members of Board of Controllers .................................121 Article 48. The General Director (Director)............................................................................122 Article 49. Rights and obligations of the General Director (Director).....................................122 Article 50. Criteria , conditions for administrators, managers and other positions of the credit

institution ..............................................................................................................123 Article 51. Approval of nominated list of members of the Board of Directors, members of the

Members’ Council, members of the Board of Controllers, General Director of credit institutions ............................................................................................................124

Section 3. Joint stock credit institutions ..............................................................................125 Article 52. Types of Shares, Shareholders............................................................................125 Article 53. Rights of common shareholders...........................................................................126 Article 54. Obligations of common shareholders...................................................................126 Article 55. Proportion of share ownership .............................................................................127 Article 56. Offering and transfer of shares.............................................................................127 Article 57. Redemption of shares ..........................................................................................128 Article 58. Share certificate ...................................................................................................128 Article 59. Shareholders’ General Meeting............................................................................128 Article 60. Convention of Shareholders’ General Meeting at request of the State Bank.......130 Article 61. Submission of the minutes of the Shareholders’ General Meeting ......................130 Article 62. The Board of Directors of joint stock credit institutions ........................................130 Article 63. Duties and powers of the Board of Directors........................................................130 Article 64. Rights and obligations of Chairman of the Board of Directors .............................132 Article 65. Rights and obligations of members of the Board of Directors ..............................133

Section 4. Sole member limited liability credit institution ....................................................133 Article 66. Duties and powers of the Owner ..........................................................................133 Article 67. Duties and powers of the Members’ Council........................................................134 Article 68. Rights and obligations of the Chairman of the Members’ Council........................135 Article 69. Rights and obligations of members of the Members’ Council ..............................136

Section 5. Limited liability credit institution with two or more members ..............................136 Article 70. Capital contributors, duties and powers of capital contributors ............................136 Article 71. Transfer of capital, redemption contributed capital ..............................................137 Article 72. Members’ Council.................................................................................................137

Section 6. Co-operative credit institutions...........................................................................138 Article 73. Nature and objectives of operations.....................................................................138 Article 74. Establishment of co-operative credit institutions ..................................................139 Article 75. Organizational structure .......................................................................................139


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Article 76. Chartered Capital .................................................................................................139 Article 77. Charter .................................................................................................................139 Article 78. Members’ rights....................................................................................................140 Article 79. Members’ obligations ...........................................................................................141 Article 80. Members’ General Meeting ..................................................................................141 Article 81. Board of Directors ................................................................................................141 Article 82. Duties and powers of the Board of Directors........................................................142 Article 83. Organization and operation of the Board of Controllers .......................................142 Article 84. Duties and powers of the Board of Controllers.....................................................143 Article 85. General Director (Director) of co-operative banks, people's credit funds.............143 Article 86. Rights and obligations of the General Director (Director).....................................144

Section 7. Microfinance institutions.....................................................................................144 Article 87. Types of microfinance institutions ........................................................................144 Article 88. Members, capital contribution, organizational structure and geographical

boundaries of operations of microfinance institutions ..........................................144 Section 8. Foreign bank’s branches in Vietnam..................................................................144

Article 89. Governance and management of foreign bank branches ....................................144 CHAPTER IV: OPERATION OF CREDIT INSTITUTIONS............................................................145

Section 1. General regulations............................................................................................145 Article 90. Scope of permitted activities of credit institutions.................................................145 Article 91. Interest rate and fees in credit institution’s business activities .............................145 Article 92. Issuance of certificates of deposits, bills of exchange, bills of credit of credit

institutions ............................................................................................................145 Article 93. Internal regulations...............................................................................................146 Article 94. Approval of credit provision, examination of loans use ........................................146 Article 95. Termination and settlement of loans, adjustment of interest rates.......................147 Article 96. Storage of credit files............................................................................................147 Article 97. Electronic banking activities .................................................................................147

Section 2. Activities of commercial banks...........................................................................147 Article 98. Banking activities of commercial banks................................................................147 Article 99. Borrowings from the State Bank...........................................................................148 Article 100. Borrowing from credit institutions and financial institutions ..................................148 Article 101. Opening of accounts ............................................................................................148 Article 102. Organization of and participation in payment systems.........................................148 Article 103. Capital contribution and shares purchase ............................................................149 Article 104. Participation in the monetary market....................................................................149 Article 105. Trading and providing services in regards to foreign currencies and derivatives

products................................................................................................................150 Article 106. Trust business and agent services.......................................................................150 Article 107. Other business activities of commercial banks ....................................................150

Section 3. Operations of finance companies ......................................................................150 Article 108. Banking activities of finance companies...............................................................150 Article 109. Opening of accounts by finance companies.........................................................151 Article 110. Capital contribution, shares purchase by finance companies ..............................151 Article 111. Other business activities of finance companies ...................................................151

Section 4. Operations of finance leasing companies ..........................................................152 Article 112. Banking activities of finance-leasing companies ..................................................152 Article 113. Finance-leasing activities .....................................................................................152 Article 114. Opening of accounts by finance-leasing companies ............................................153


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Article 115. Capital contributions and shares purchase by finance-leasing companies..........153 Article 116. Other activities of finance-leasing companies ......................................................153

Section 5. Operations of credit institutions being co-operatives .........................................153 Article 117. Activities of co-operative banks............................................................................153 Article 118. Operations of people’s credit funds......................................................................153

Section 6. Operations of microfinance institutions ..............................................................154 Article 119. Fund mobilization by microfinance institutions .....................................................154 Article 120. Provision of credit by microfinance institutions.....................................................154 Article 121. Opening accounts of microfinance institutions .....................................................155 Article 122. Other activities of microfinance institutions ..........................................................155

Section 7. 155 Article 123. Contents of operations of foreign bank’s branches ..............................................155

CHAPTER V: REPRESENTATIVE OFFICES OF FOREIGN CREDIT INSTITUTIONS AND/OR OF OTHER FOREIGN INSTITUTIONS ENGAGING IN BANKING ACTIVITIES.......155

Article 124. Establishment of representative offices................................................................155 Article 125. Contents of operations of representative offices ..................................................156

CHAPTER VI: RESTRICTIONS TO ENSURE THE SAFETY AND THE SOUNDNESS OF OPERATIONS OF CREDIT INSTITUTIONS .......................................................156

Article 126. Cases not eligible for credit provision...................................................................156 Article 127. Restrictions on credit provision ............................................................................157 Article 128. Limits on credit provision......................................................................................157 Article 129. Limits on capital contributions and share purchases............................................158 Article 130. Prudential ratios ...................................................................................................158 Article 131. Risk provisioning ..................................................................................................159 Article 132. Real estate business ............................................................................................159 Article 133. Requirement for ensuring prudence in electronic banking ...................................160 Article 134. Rights and obligations of controlling companies ..................................................160 Article 135. Capital contribution, share purchase between subsidiaries and affiliates, controlling

companies ............................................................................................................160 CHAPTER VII: FINANCIAL ACCOUNTING AND REPORTING ...................................................160

Article 136. Financial regime ...................................................................................................160 Article 137. Fiscal year ............................................................................................................160 Article 138. Accounting............................................................................................................161 Article 139. Reserve funds ......................................................................................................161 Article 140. Purchases of and investments in fixed assets .....................................................161 Article 141. Reporting..............................................................................................................161 Article 142. Reports of controlling companies .........................................................................162 Article 143. Publication of financial statements .......................................................................162 Article 144. Overseas remittance of profits and assets ...........................................................162

CHAPTER VIII: SPECIAL CONTROL, RE-ORGANISATION, BANKCRUPTCY, DISSOLUTION AND LIQUIDATION OF CREDIT INSTITUTIONS ...............................................163

Section 1. Special Control...................................................................................................163 Article 145. Report on insolvency............................................................................................163 Article 146. Application of special control................................................................................163 Article 147. Decisions on application of special control...........................................................163 Article 148. Duties and powers of the Board of special control ...............................................164 Article 149. The State Bank’s authorities over credit institutions put under special control ....164 Article 150. Responsibilities of the credit institution being put under special control ..............165 Article 151. Special loans ........................................................................................................165


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Article 152. Termination of special control ..............................................................................166 Section 2. Re-organization, Dissolution, Bankruptcy, Liquidation, Blockage of funds and

assets.................................................................................................................166 Article 153. Re-organization of credit institutions ....................................................................166 Article 154. Dissolution of credit institutions ............................................................................166 Article 155. Bankruptcy of credit institutions............................................................................166 Article 156. Liquidation of assets of credit institutions.............................................................167 Article 157. Blockage of funds, assets ....................................................................................167

CHAPTER IX: STATE MANAGEMENT AUTHORITY ...................................................................167 Article 158. State management authority ................................................................................167 Article 159. Power of examination, inspection and supervision ..............................................167 Article 160. Rights and obligations of those subject to inspection and supervision ................168

CHAPTER X: IMPLEMENTING PROVISIONS .............................................................................168 Article 161. Transitional provisions..........................................................................................168 Article 162. Effectiveness ........................................................................................................169 Article 163. Detailed guidelines and implementation...............................................................169


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NATIONAL ASSEMBLY

Law No.: 47/2010/QH12

SOCIALIST REPUBLIC OF VIETNAM Independence - Freedom - Happiness

LAW ON CREDIT INSTITUTIONS

Pursuant to the 1992 Constitution of the Socialist Republic of Vietnam as amended

and supplemented in accordance with the Resolution No. 51/2001/QH10; The National Assembly hereby promulgates the Law on Credit Institutions.

CHAPTER I: GENERAL PROVISIONS

Article 1. Governing scope This Law provides for the establishment, management, organization, operation,

special control, reorganization, dissolution of credit institutions; the establishment, management, organization, operation of foreign bank branches and of representative offices of foreign credit institutions and other foreign institutions engaging in banking activities.

Article 2. Applicability This Law shall be applicable to the followings: 1. Credit institutions. 2. Foreign banks’ branches;

3. Representative offices of foreign credit institutions and of other foreign

institutions engaging in banking activities. 4. Organizations, individuals related to the establishment, organization, operation,

special control, reorganization and dissolution of credit institutions; the establishment, organization and operation of foreign banks’ branches and of representative offices of foreign credit institutions and other foreign institutions engaging in banking activities.

Article 3. Application of the Law on Credit Institutions, International

Treaties and Relevant Laws

1. The establishment, organization, operation, special control, reorganization, dissolution of credit institutions; the establishment, organization, operation of foreign banks’ branches and of representative offices of foreign credit institutions, and other foreign institutions engaging in banking activities shall be subject to the provisions of this Law and other relevant laws.

2. In case this Law and other related laws provide differently on establishment,

organization, operation, special control, reorganization, dissolution of credit institutions; the establishment, organization, operation of foreign banks’ branches and of representative


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offices of foreign credit institutions, other foreign institutions engaging in banking activities, provisions of the Law on Credit Institutions shall be applied.

3. Where International Treaties to which the Socialist Republic of Vietnam is a

signatory or a member contain provisions that are different from those in this Law, the provisions of such International Treaties shall prevail.

4. Organizations and individuals engaging in banking activities shall have the right

to consent to apply trade customs and practices, including: a) International Chamber of Commerce’s trade customs and practices; b) Other international customs and practices that are not contrary to the laws of

Vietnam. Article 4. Terms and definitions In this Law, the following terms shall be understood as follows: 1. Credit institution means an enterprise engaging in one or several or all

banking activities. Credit institutions include banks, non-bank credit institutions, microfinance institutions and people’s credit funds.

2. Bank means a form of credit institution permitted to carry out all banking activities in accordance with provisions of this Law. On the basis of the nature and objectives of their operations, banks are classified into commercial banks, social banks and co-operative banks.

3. Commercial bank means a form of bank permitted to carry out all banking

activities and other business activities in accordance with provisions of this Law with the aim of making profit.

4. Non-bank credit institution means a form of credit institution permitted to carry

out one or several banking activities in accordance with provisions of this Law, excluding taking deposit from individuals and providing payments services through customers’ accounts. Non-bank credit institutions include finance companies, finance-leasing companies and other non-bank credit institutions.

Finance-leasing company means a form of finance company mainly engaging in finance lease in accordance with provisions of this Law.

5. Microfinance institution means a form of credit institution mainly engaging in

several banking activities with the aim of serving low-income individuals, households and super small enterprises.

6. People’s Credit Fund means a credit institution, established on a voluntary basis in the form of co-operatives by legal entities, individuals and households to carry out several banking activities in accordance with provisions of this Law and the Law on Co-operatives with the main purpose of mutually assisting each other in developing production, doing business and improving living standards.

7. Co-operative Bank means a bank of all people’s credit funds, established on

the basis of capital contribution from people’s credit funds and legal entities in accordance with provisions of this Law with the main purpose of system integration, financial support and capital flows harmonization within the people’s credit funds system.


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8. Foreign credit institution means a credit institution established in a foreign country under foreign laws.

Foreign credit institutions may establish commercial presence in Vietnam in the

form of representative office, joint venture bank, 100% foreign owned bank, foreign bank’s branch, joint venture finance company, 100% foreign owned finance company, joint venture finance-leasing company, 100% foreign owned finance-leasing company.

Joint venture bank, 100% foreign owned bank means a form of commercial banks;

joint venture finance company, 100% foreign owned finance company means a form of finance companies; joint venture finance-leasing company, 100% foreign owned finance-leasing company means a form of finance leasing companies as stipulated in this Law.

9. Foreign bank’s branches are dependent units of foreign banks, having no legal

status, and all of their obligations and undertakings in Vietnam are guaranteed by the foreign bank.

10. Owned capital means the actual value of the chartered capital of a credit institution or injected capital of a foreign banks’ branch plus reserves and certain types of liabilities as stipulated by the State Bank of Vietnam (hereinafter referred to as State Bank).

11. License includes License for establishment and operation of credit institutions,

License for establishment of foreign banks’ branches, License for establishment of representative offices of foreign credit institutions and other foreign institutions engaging in banking activities that are granted by the State Bank. Official documents issued by the State Bank to amend and supplement License are integral parts of the License.

12. Banking operations mean regular business and provision of one or several of

following activities:

a) Acceptance of deposits; b) Provision of credits; c) Provision of payment services through customer’s account. 13. Acceptance of deposit means accepting funds from organizations and

individuals in the forms of demand deposits, term deposits, savings deposits, certificate of deposit, bill of exchange, bill of credit and other forms of deposits on the principle of fully repayment of principal and interest to the depositors as pre-agreed.

14. Provision of credit means an agreement for organizations, individuals to use a certain amount of money or a commitment to allow organizations, individuals to use a certain amount of money on the principle of repayment through lending, discounting, financial leasing, factoring, bank guarantees and others types of credits.

15. Provision of payment services through customer’s account means providing

various payment instruments; carrying out cheque payment, payment order, authorized payment, collection order, authorized collection, bank cards, letter of credit and other payment services for customers through their accounts.

16. Lending means a form of credit provision whereby the lender hands over or

commits to hand over to a customer an amount of money to use for an identified purpose in a certain period of time as pre-agreed on the principle of repayment of both the principal and interest thereon.


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17. Factoring means a form of credit provision to the seller or the buyer through repurchasing without recourse accounts receivable or accounts payable arising from buying/selling goods and services based on the contract of buying/selling goods and services.

18. Bank guarantee means a form of credit provision whereby a credit institution

makes commitment with a third party to fulfill its client’s financial obligations in the event that clients fails to fulfill or improperly fulfill her/his committed obligations; the client shall accept the debt and repay credit institution as pre-agreed.

19. Discount means the purchase on a term basis or purchase with recourse of

negotiable instruments and other valuable papers of beneficiaries prior to maturity date of such instruments or papers.

20. Rediscount means the discount of negotiable instruments and other valuable

papers which have been discounted before their term of payment becomes due.

21. Monetary brokerage means an act of an intermediary who arranges on a fee basis the carrying out of banking activities and other business activities between credit institutions, other financial institutions.

22. Payment account means on demand deposit account of a customer opened

with a bank for the purpose of using the payment services provided by the bank.

23. Derivative products means financial instruments that has value determined by expected future price movements of an underlying financial asset such as exchange rate, interest rate, currency, money or other financial assets.

24. Capital contribution, shares purchase by credit institutions means a credit

institution contributes capital to form chartered capital, or purchases shares of other enterprises or credit institutions, including the injection of funds or contribution of capital to their subsidiaries or affiliated companies; or contributes capital to investment funds and entrusts other organizations to make capital contributions and/or buy shares in the above-mentioned forms.

25. Investments in the form of capital contribution, shares purchase in order to

hold controlling interest of an enterprise include investments that account for more than 50% of the chartered capital or voting shares of an enterprise or other investments that is sufficient to affect the decision of the Shareholders’ Meeting or Members’ Council.

26. Major shareholder of a joint stock credit institution means a shareholder

owning directly or indirectly five (05) percent or more of voting shares of that joint stock credit institution.

27. Indirect ownership of capital means the ownership of chartered capital or shares of a credit institution by organizations or individuals through their related parties or in the form of investment trust.

28. Related parties means organizations, individuals having direct or indirect

relationship with other organizations, individuals that fall in one of the followings:

a) Mother company with its subsidiaries and vice versa; credit institution with its subsidiaries and vice versa; subsidiaries which are owned by the same mother company or the same credit institution with each others; administrators, members of the Board of Controllers of the mother company or of the credit institution, individuals or organizations having authority to appoint the formers with subsidiaries and vice versa;


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b) A company or a credit institution with its administrators, members of the Board of Controllers or with companies, credit institutions having authority to appoint those administrators or members of the Board of Controllers and vice versa;

c) A company or a credit institution with organizations, individuals who own five (05)

percent or more of chartered capital or voting shares of that company or that credit institution and vice versa;

d) An individual with her/his spouse, parents, children, and siblings; e) A company or a credit institution with individual who falls in one of the cases

stipulated in sub clause (d) of this Clause of administrators, members of the Board of Controllers, capital contributors or shareholders owning five (05) percent or more of chartered capital or voting shares of that company or credit institution and vice versa;

g) Individuals who are authorized by organizations, individuals stipulated in sub

clauses (a), (b), (c), (d), and (e) of this Clause with authorizing organizations, individuals; individuals who are authorized to represent the portions of capital contribution of the same organizations with each others;

29. Affiliate of a credit institution means a company of which a credit institution or

a credit institution and its related parties own more than 11% of chartered capital or more than 11% of voting shares. Such company shall not be a subsidiary of the credit institution.

30. Subsidiary of a credit institution means a company of which:

a) the credit institution or credit institution and its related parties own more than 50% of chartered capital or more than 50% of voting shares; or

b) the credit institution shall have the right to directly or indirectly appoint most of or

all of the members of the Board of Directors, Members’ Council or the General Director of the sub; or

c) the credit institution shall have the right to amend or supplement the Charter of

the sub; or d) the credit institution and its related parties shall directly or indirectly control the

approval of resolutions, decisions of the Shareholders’ Meeting, Board of Directors, Members’ Council of the sub.

31. Administrator of a credit institution includes Chairman and members of the

Board of Directors; Chairman and members of the Members’ Council, the General Director (Director) and other administrative positions as stipulated in the Charter of the credit institution.

32. Manager of a credit institution includes General Director, Vice General Director, Chief Accountant, Branch Managers or other equivalent positions as stipulated in the Charter of the credit institution.

Article 5. Usage of the terms related to banking activities

Institutions that are not credit institutions shall not be allowed to use the terms

“credit institution”, “bank”, “finance company”, “finance-leasing company” or any other phrases or terms in their names, positions or the extensions of their names, positions or in their transaction documents or advertisements that the usage of such terms may mislead their clients in taking them as a credit institution.


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Article 6. Organization forms of credit institutions

1. Domestic commercial banks shall be established and organized under the form of joint stock company except for the cases referred to in clause 2 of this Article.

2. State-owned commercial banks shall be established and organized under the

form of sole member limited liability company of which the State owns 100% of the chartered capital.

3. Domestic non-banking credit institutions shall be established and organized under

the form of joint stock company or limited liability company. 4. Joint venture credit institutions, 100% foreign owned credit institutions shall be

established and organized under the form of limited liability company. 5. Co-operative banks, people’s credit funds shall be established and organized

under the form of co-operative. 6. Microfinance institutions shall be established and organized under the form of

limited liability company.

Article 7. Right to business autonomy

1. Credit institutions, foreign bank’s branches shall have the right to business autonomy and shall be self-responsible for their business results. None of organizations or individuals shall be permitted to illegally intervene into business operations of a credit institution, foreign bank’s branch;

2. Credit institutions, foreign bank’s branches shall have the right to reject credit

requests, or to reject to provide any other services if such requests are deemed ineligible, inefficient and contrary to the provisions of the laws.

Article 8. Right to banking operations

1. Any organization eligible under provisions of this Law and other related laws that is granted with a License by the State Bank shall be permitted to conduct one or several banking activities in Vietnam.

2. Individuals and organizations that are not credit institutions shall be prohibited to

carry out banking activities, except for margin trading and repo transactions that carried out by securities companies.

Article 9. Co-operation and competition in banking activities

1. Credit institutions, foreign bank’s branches may legally co-operate and compete

in banking operations and other business operations in accordance with provisions of the laws.

2. Any acts of competition constraint or unfair competition that likely damage or

damage the implementation of national monetary policies, the safety of the credit institutions system, lawful interests of the State, rights and lawful interests of involving organizations, individuals shall be strictly prohibited.

3. The Government shall stipulate in details unfair competition actions in banking

area and applicable remedies for such actions.


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Article 10. Protection of customer

Credit institutions, foreign bank’s branches shall have following responsibilities:

1. Participate in a deposit insurance or preservation organization in accordance with provisions of the laws and publish information regarding their membership in a deposit insurance, preservation organization at their head offices and branches.

2. Create favorable conditions for customers to deposit and withdraw money; ensure the full and timely payment of both principal and interest of any sum of deposit;

3. Refuse any investigation, blockade, retention, transfer of customers’ deposits,

except for the case where being requested by competent state authority in accordance with provisions of the laws or with the consent of the customers;

4. Publish interest rates applicable to deposits, service fees, rights and

responsibilities of customers regarding each type of products and services supplied.

5. Announce official transaction time and not being allowed to interrupt transactions during announced time. In case a credit institution or foreign bank’s branch intends to temporarily suspend its transactions during official transaction time, the credit institution or foreign bank’s branch shall post an announcement at the transaction location at least 24 hours prior to such suspension. A credit institution or a foreign bank’s branch shall not be allowed to discontinue its transactions for more than one working day, except for the cases specified in sub clause 1(e) of Article 29 of this Law.

Article 11. Responsibilities in respect to counter money laundering (AML)

and terrorism financing

Credit institutions, foreign bank’s branches shall have following responsibilities: 1. To not hide or carry out any business activities related to a sum of money, which

is proven to have illegal origin.

2. To develop internal regulations on anti-money laundering and terrorist financing. 3. To implement anti-money laundering and terrorist financing measures.

4. To cooperate with state authorities during investigation into money laundering

and terrorist financing activities.

Article 12. Legal Representative of credit institution

1. The legal representative of a credit institution shall be specified in its Charter and shall be one of the followings:

a) Chairman of the Board of Directors or Chairman of the Members’ Council of the credit institution;

b) General Director or Director of the credit institution.

2. The credit institution’s legal representative shall reside in Vietnam; in case of

absence from Vietnam, a written power of attorney must be issued to another administrator, manager of the credit institution who is residing in Vietnam to perform his/her duties and powers.


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Article 13. Provision of information

1. Credit institutions, foreign bank’s branches shall provide their account holders with information regarding account holders’ transactions and account balance in accordance with agreements between credit institutions, foreign bank’s branches and account holders.

2. Credit institutions, foreign bank’s branches shall have responsibilities to provide

the State Bank information relating to their business operations and shall be provided by the State Bank with information regarding customers who have credit relationship with them in accordance with provisions of the State Bank.

3. Credit institutions, foreign bank’s branches may mutually exchange information

on their banking operations. Article 14. Security of information

1. Staff, administrators and managers of a credit institution, foreign bank’s branch

shall not be allowed to disclose business secrets of the credit institution or the foreign bank’s branch.

2. Credit institutions, foreign bank’s branches shall ensure the confidentiality of information relating to their customers’ accounts, deposits, deposited properties and transactions at the credit institutions or foreign bank’s branches.

3. Credit institutions, foreign bank’s branches shall not be allowed to provide

information concerning deposits, deposited properties and transactions of their customers to any other organizations and/or individuals, except for the cases where being requested by competent state authorities in accordance with provisions of the laws or with the consent of their customers.

Article 15. Backup database

1. Credit institutions, foreign bank’s branches shall establish and maintain back-up

database to ensure the safety and continuity of their business operations. 2. The development of backup database of people’s credit funds, microfinance

institutions and non-deposit-taking credit institutions shall be stipulated by the State Bank. Article 16. Shares purchase of foreign investors

1. Foreign investors shall be allowed to purchase shares of Vietnamese credit

institutions. 2. The Government stipulates conditions, procedures, the maximum total level of

shares owned by all foreign investors, the maximum total level of shares owned by one foreign investor in one Vietnamese credit institution; conditions for Vietnamese institutions to sell shares to foreign investors.

Article 17. Policy banks

1. The Government sets up policy banks to carry out business not for profit but for

the implementation of State socio-economic policies. 2. The Government shall stipulate the organization and operation of policy banks.


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3. Policy banks must implement internal control, internal audits; develop and issue internal procedures applicable to their operations; adopt statistical, operational and payment activities reports in accordance with stipulations of the State Bank.

CHAPTER II: LICENSES

Article 18. Authority to grant and revoke Licenses

The State Bank shall be the competent authority to grant, amend, supplement and revoke licenses in accordance with provisions of this Law.

Article 19. Legal capital

1. The Government shall stipulate the legal capital level applicable to each type of

credit institutions, foreign banks’ branches. 2. Credit institutions, foreign banks’ branches shall maintain the actual value of their

chartered capital or injected capital at minimum equals to legal capital level. 3. The State Bank shall stipulate in details remedy measures when actual value of

chartered capital of credit institutions and injected capital of foreign bank’s branches falls below the legal capital level.

Article 20. Conditions for issuance of licenses

1. Credit institutions shall be granted with License when following conditions are

fully met:

a) Having chartered capital, injected capital level at least equals to legal capital requirements;

b) The owners of sole member limited liability credit institutions, the founding shareholders, the founding members who are legal entities and legally operating and having sufficient financial capability to make capital contribution; the founding shareholders or the founding members who are individuals and having full capacity for civil acts and sufficient financial capability to make capital contribution.

The State Bank shall stipulate in details conditions for license applicable to owners of sole member limited liability credit institutions, founding shareholders and founding members.

c) The administrators, managers, members of the Board of Control shall meet all

criteria and conditions stipulated in Article 50 of this Law;

d) Having Charter that is line with provisions of this Law and other applicable provisions of the laws;

e) Having a feasible establishment project, or business plan that the proposed

business shall not affect the safety and stability of the credit institutions system; shall not create monopoly or competition constraints or unfair competition in the credit institutions system.

2. Joint venture credit institutions, 100% foreign-owned credit institutions shall be

granted with License when following conditions are fully met:

a) The conditions set out in clause 1 of this Article;


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b) The foreign credit institution is permitted to conduct banking activities in

accordance with provisions of the laws of its home country where its head quarter is located;

c) The proposed activities that the foreign credit institution is applying for to conduct in Vietnam must be those permitted to conduct in its home country where its head quarter is located;

d) The foreign credit institution must have sound business performance; and meets the conditions as stipulated by the State Bank concerning total assets value, financial standing and prudential ratios;

đ) The foreign credit institution shall commit in writing which to be sent to the State

Bank on its willingness to provide joint venture credit institutions, 100% foreign owned credit institutions and foreign banks’ branches with financial, technological, managerial, operational support, ensuring that these organizations can maintain the actual value of the their chartered capital/injected capital not lower than the legal capital and fully satisfy the provisions on prudential assurance provided in this Law;

e) The competent supervisory authority in home country has already signed MOU

with the State Bank on cooperation regarding supervision of banking activities and exchange of prudential supervision information. The competent supervisory authority in home country shall have written statement certifying that they supervise foreign credit institutions’ operations on consolidated basis and in accordance with international best practices.

3. Foreign bank’s branches shall be granted License when following conditions are fully met:

a) Conditions stipulated in sub clauses 1(a), 1(b), 1(c), 1(đ) and sub clauses 2(b),

2(c), 2(d), 2(e) of this Article; b) Foreign banks shall have written statement ensuring their responsibilities for all of

obligations and commitments of their branches in Vietnam; ensuring the actual value of the injected capital not to fall lower than the legal capital level and the compliance of prudential provisions stipulated in this Law.

4. Representative offices of foreign credit institutions and/or of other foreign

institutions engaging in banking activities shall be granted License if following conditions are fully met:

a) The foreign credit institution, other foreign institutions engaging in banking activities is a legal entity permitted to carry out banking activities in its home country;

b) Provisions of the laws in the home country where foreign credit institutions and/or other foreign institutions engaging in banking activities place their head quarter allow them to set up representative office in Vietnam.

5. The State Bank shall stipulate conditions for issuance of License for co-operative banks, people’s credit funds and microfinance institutions.


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Article 21. Application files, licensing orders and procedures

The State Bank shall stipulate in details requirements for application files, licensing orders and procedures.

Article 22. Duration for issuance of licenses

1. Within 180 days since the receipt date of completed application files, the State

Bank shall either grant or reject to grant the License to the applicants. 2. Within 60 days, since the receipt date of completed application files, the State

Bank shall either grant or reject to grant the License to the applicants for representative offices of foreign credit institutions and/or of other foreign institutions engaging in banking activities.

3. In cases of refusal of an application, the State Bank shall provide a written

statement of reasons. Article 23. Licensing fee

1. Credit institutions, foreign banks’ branches, representative offices of foreign credit

institutions and/or of other foreign institutions engaging in banking activities that have been granted with License shall be obliged to pay a licensing fee in accordance with provisions of the laws on fee and charges.

Article 24. Business registration and operation registration

Upon being granted with a License, credit institutions and foreign bank’s branches

shall apply for Certificate of business registration; representative offices of foreign credit institutions and/or of other foreign institutions engaging in banking activities shall apply for Certificate of operations in accordance with provisions of the laws.

Article 25. Publication of operational information

At least 30 days prior to the scheduled date of business commencement, credit institutions, foreign bank’s branches, representative offices of foreign credit institutions and/or of other foreign institutions engaging in banking activities shall publicize on mass media means of the State Bank and one daily newspaper of Vietnam in three (03) consecutive issues or one electronic press following details:

1. Name and address of the head quarter of credit institution; name and address of

foreign banks’ branch, representative offices of the foreign credit institutions and/or of other foreign institutions engaging in banking activities.

2. Number and issuance date of License, Certificate of business registration,

Certificate of operation registration and permitted business activities. 3. Chartered capital or injected capital amount. 4. Legal representatives of the credit institutions, General Director (Director) of the

foreign banks’ branches, Chief of representative offices of foreign credit institutions and/or of other foreign institutions engaging in banking activities.

5. List of founding shareholders/founding members and their respective levels of

contributed capital or owner of credit institutions.


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6. Scheduled date of business commencement. Article 26. Conditions for commencing operations

1. A credit institution or a foreign bank’s branch or a representative office of

foreign credit institution and/or of other foreign institution engaging in banking activities that has been granted with License shall only be permitted to conduct operations from the date of business commencement.

2. In order to commence operations, a licensed credit institution or a licensed foreign bank’s branch shall satisfy all of the following conditions:

a) Having Charter registered with the State Bank;

b) Having Certificate of business registration; having adequate chartered/injected

capital as well as qualified bank vault in accordance with provisions of the State Bank; and having appropriate office space that ensure the safety of assets and banking operations;

c) Having organizational structure, administration and management system, internal audit, risk management and internal control system which is adequate to the type of credit institutions as provided for in this Law and other related laws;

d) Having IT system which meets with requirements for management and scope of

operations of the credit institution; đ) Having internal regulations on organization and operations of the Board of

Directors/Members’ Council, Board of Control, General Director (Director), functional units at headquarter; having internal regulations on risk management and network management;

e) Having chartered/injected capital in VND fully deposited into a frozen non-interest bearing account opened with the State Bank at least 30 days prior to the date of business commencement. Chartered/injected capital shall only be released after the credit institution/foreign bank’s branch has commenced its business;

g) Having made public operational information as stipulated in Article 25 of this Law.

3. Credit institutions/foreign bank’s branches/representative offices of foreign credit

institutions and/or of other foreign institutions engaging in banking activities shall commence their business within 12 months from the issuance date of the License, otherwise the State Bank shall revoke the License.

4. At least 15 days prior to scheduled date of business commencement, credit

institutions/foreign bank’s branches that have been granted with License shall be responsible to inform the State Bank their conditions for business commencement as stipulated in clause 2 of this Article. The State Bank shall suspend the business commencement if credit institutions/foreign bank’s branches do not meet conditions stipulated in clause 2 of this Article.

Article 27. Use of License

1. A licensed institution shall use the name specified in the license and operate pursuant to contents of the license.

2. A licensed institution shall be strictly prohibited from forgering, erasing, trading, transferring, leasing or lending the granted License.


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Article 28. Revocation of License

1. The State Bank shall revoke granted License in following circumstances:

a) The information provided in the application files has been proved to be fraudulent for the purpose of getting the License;

b) Credit institution has been divided, separated, incorporated, merged, or went

bankrupted; c) Credit institution/foreign bank’s branch/representative office of foreign credit

institution and/or of other foreign institution engaging in banking activities fails to operate in accordance with the content provided in the License;

d) Credit institution/foreign bank’s branch seriously violates provisions of the laws on

reserves requirement and prudential ratios applicable to activities of credit institutions; đ) Credit institution/foreign bank’s branch fails to comply or fails to fully comply with

settlement decisions of the State Bank in order to ensure the safety of banking operations; e) Applicable to foreign banks’ branches/100% foreign-owned banks/representative

offices of foreign credit institutions and/or of other foreign institutions engaging in banking activities when foreign credit institutions or other foreign institutions engaging in banking activities went bankrupted or have been dissolved or their licenses have been revoked by the competent authority in their home country where their headquarters are located.

2. State Bank shall stipulate in details the order and procedures for the revocation

of granted License in cases specified in clause 1 of this Article. 3. Institution whose License has been revoked shall promptly suspend all of its

business operations as soon as the decision of the State Bank on revocation of license comes into effect.

4. The decision on revocation of license shall be published by the State Bank via the mass media means.

Article 29. Changes for which approval of the State Bank must be obtained

1. Credit institution/foreign bank’s branch shall have to obtain written approval from

the State Bank prior to making any changes in respect of the following:

a) Name and address of the headquarter of credit institutions; name and address of foreign bank’s branches;

b) Level of chartered/injected capital, except for the cases set out in clause 3 of this

Article; c) Name and address of branches of credit institutions; d) Contents, scope and duration of operation;


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đ) Transfer of capital by capital contributors; transfer of shares by major shareholders; transfer of shares that changes status of major shareholders that make them become minor shareholders and vice versa;

e) Temporary discontinuity of operation for more than one working day, except for

the cases of force majeure;

g) Listing of shares on domestic and oversea securities markets.

2. Within 40 days since the receipt date of complete application files, the State Bank shall issue its decision on the amendment and/or supplement of License in respect of any changes stipulated in sub clauses 1(a), 1(b) and 1(d) of this Article; the State Bank shall approve in writing in respect of any changes stipulated in sub clauses 1(c), 1(đ), 1(e) and 1(g) of this Article. In cases of rejection, the State Bank shall provide reasons in written form.

Applications file, order and procedures for approval of changes shall be stipulated

by the State Bank.

3. Any changes to the chartered capital level of a people’s credit fund shall be made in accordance with stipulations of the State Bank.

4. As soon as approval for any changes stipulated in clause 1 of this Article

obtained, credit institution/foreign bank's branch shall:

a) Amend/supplement the Charter of the credit institution according to approved changes and register the amended Charter with the State Bank;

b) Register the changes referred to in clause 1 of this Article with the competent state authority;

c) Publicize any changes stipulated in sub clause 1(a), 1(b), 1(c) and 1(d) of this

Article on mass media means of the State Bank and on one daily newspaper of Vietnam in 03 consecutive issues or on one electronic press within 07 working days from the approval date of change.

CHAPTER III: ORGANIZATION, GOVERNANCE AND MANAGEMENT OF CREDIT INSTITUTIONS III

Section 1. General Provisions

Article 30. The establishment of branches, representative offices, non-profit working units, and commercial presence

1. According to the type of its operations, after obtaining written approval of the

State Bank, a credit institution shall be permitted to establish: a) Branches, representative offices, non-profit working units throughout the country,

including provinces and cities belong to central authority where its headquarter is located; b) Branches, representative offices, and other forms of commercial presence

overseas. 2. The State Bank shall stipulate in details conditions, application files and

procedures for establishment, termination and dissolution of units stipulated in clause 1 of


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this Article according to the type of credit institutions.

Article 31. Charter

1. The Charter on organization and operations of joint stock and/or limited liability credit institution shall be in accordance with provisions of this Law and other applicable provisions of the laws. The Charter must contain following basic contents:

a) Name and address of the headquarter; b) Content and scope of operations; c) Duration of operation; d) Chartered capital, capital contribution methods, increases and decreases of

chartered capital; đ) Duties and powers of the Shareholders’ General Meeting, Board of Directors,

Members’ Council, General Director (Director) and Board of Controllers; e) Formalities for selection, appointment and dismissal of members of the Board of

Directors, members of the Members’ Council, General Director (Director) and Board of Controllers;

g) Full name, address, nationality and other basic characteristics of owners, capital

contributors of limited liability credit institution; and of founding shareholders of joint stock credit institution;

h) Rights and obligations of owners; capital contributors of limited liability credit

institution; rights and obligations of shareholders of joint stock credit institution; i) Legal representative; k) Principles on finance, accounting, control and internal audit; l) Formalities for adoption of credit institution’s resolutions; principles of internal

dispute resolutions; m) Bases and methods of determination of remunerations, salaries and bonuses for

managers, administrators and members of the Board of Control; n) Events of dissolution; o) Procedures for amendment and supplement of the Charter. 2. The Charter of co-operative credit institutions shall comply with provisions of

Article 77 of this Law. 3. Charter of a credit institution and any amendments made to it shall be registered

with the State Bank within 15 days since the date of its adoption. Article 32. Managerial organization structure of credit institutions

1. Managerial organization structure of a joint stock credit institution shall contain

Shareholders' General Meeting, Board of Directors, Board of Controllers, and General Director (Director).


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2. Managerial organization structure of a sole member limited liability credit institution and limited liability credit institution with two or more members shall contain Members’ Council, Board of Controllers, and General Director (Director). 3. Managerial organization structure of a cooperative bank and people’s credit fund shall comply with provisions of Article 75 of this Law.

Article 33. Prohibited cases in regards of taking positions

1. The following individuals shall not be permitted to act as a member of the Board of Directors, member of Members’ Council, member of Board of Controllers, General Director (Director), Deputy General Director (Deputy Director) of a credit institution:

a) Individuals as stipulated in clause 2 of this Article; b) Individuals that are not allowed to take part in the management and

administration as stipulated by the laws on cadres and civil servants and the laws on corruption prevention;

c) Individuals who have been the owners of private enterprises/partners of a

partnership/General Director (Director), members of the Board of Directors, members of the Members’ Council, members of the Board of Controllers of an enterprise/Head and members of the Board of Directors of a co-operative at the time the enterprise or the co-operative went bankrupted; except for the cases the causes of the bankruptcy were force majeure;

d) Legal representative of an enterprise at the time the operations of that enterprise

had been suspended, or compulsory dissolved due to serious offence of the laws, except for the cases he/she had been appointed to restructure and strengthen the enterprise by order of the competent state bodies;

đ) Individuals who had been suspended to act as Chairman and member of the

Board of Directors, Chairman and member of the Members’ Council, Head and member of the Board of Controllers, General Director (Director) of a credit institution as stipulated in Article 37 of this Law; or had been proved by competent state authorities to be the offender who caused the revocation of credit institution’s License;

e) Related parties of members of the Board of Directors, members of the Members’

Council and/or General Director (Director) shall not be permitted to act as a member of the Board of Controllers of the same credit institution;

g) Related parties of members of the Board of Directors, members of the Members’

Council shall not be permitted to act as General Director (Director) of the same credit institution.

2. The following individuals shall not be permitted to act as the Chief Accountant, Branch Director, Director of subsidiary company of a credit institution:

a) Minors; individuals whose capacity acts is restricted or lost; b) Individuals being in the duration of criminal trials, Court’s verdict or decision; c) Individuals who have been sentenced with serious offences and up; d) Individuals who have been sentenced with ownership offences and have not

been absolved;


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đ) Cadres, civil servants; managers from division level in enterprises of which the State owns more than 50% of chartered capital, except for authorized representatives who have been assigned to manage the portion of state capital in the credit institution;

e) Officers, non-commissioned officers, professional army members, military

workers at bodies, units of the people’s army; officers, professional non-commissioned officers working in the bodies, units of the people’s police of Vietnam, except for authorized representatives who have been assigned to manage the portion of state capital in the credit institution;

g) Other events as stipulated in the Charter of the credit institution. 3. Parents, spouse, children, and siblings of the members of the Board of Directors,

members of the Members’ Council, General Director and their spouses shall not be allowed to act as Chief Accountant or Chief Financial Officer of a credit institution.

Article 34. Prohibited cases in regards of taking concurrent positions

1. Chairman of the Board of Directors, Chairman of the Members’ Council shall not

concurrently act a manager of the same credit institution and other credit institutions, except for the cases where the Chairman of the Board of Directors of a people's credit fund concurrently acts as a member of the Board of Directors of a co-operative bank. Members of the Board of Directors, members of the Member’s Council of a credit institution shall not concurrently acts as a administrator of another credit institutions, except for the cases the other institution is the credit institution’s subsidiary or concurrently acts as a member of the Board of Controllers of the same credit institution.

2. Head of the Board of Controllers shall not concurrently acts as a member of the Board of Controllers/administrators of another credit institution. Members of the Board of Controllers shall not concurrently act as one of the followings:

a) Member of the Board of Directors, member of the Members’ Council, manager,

staff of the same credit institution or subsidiary of that credit institution or staff of an enterprise where member of the Board of Directors or member of the Members’ Council or General Director (Director) of the credit institution is the member of the Board of Directors, manager or major shareholder;

b) Member of the Board of Directors or member of the Members’ Council, manager

of an enterprise of which a member of the Board of Controllers is the member of the Board of Directors or member of the Members’ Council or manager of the credit institution.

3. General Director (Director), Deputy General Director (Deputy Director) and other equivalent positions shall not concurrently acts as one of the followings:

a) Member of the Board of Directors, member of the Members’ Council, member of the Board of Controllers of another credit institution, except for the case the other credit institution is the subsidiary of the credit institution;

b) General Director (Director), Deputy General Director (Deputy Director) of another

enterprises. Article 35. Loss of status naturally

1. Followings are cases of natural losses of status of member of the Board of

Directors, member of the Members’ Council, member Board of Controllers and General Director (Director):


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a) Loss of capacity of civil acts, death; b) Breaches of provisions of Article 33 of this Law in respect of prohibited cases on

taking positions; c) Authorized representative of an organization being the shareholder or capital

contributor of the credit institution when legal status of that organization has been ceased; d) No longer be the authorized representative of an institutional shareholder; đ) Being deported from the Socialist Republic of Vietnam; e) Upon the revocation of the credit institution’s License; g) Upon the expiry of the hiring contract of the General Director (Director) ; h) No longer be a member of a co-operative bank or a people’s credit fund. 2. Within five (05) working days since the date of identification of individuals

subject to natural loss of status as stipulated in clause 1 of this Article, the Board of Directors/the Member’s Council of the credit institution shall submit written report with evidences on the matter to the State Bank and shall be responsible for the accuracy and truthfulness of the report. The Board of Directors/the Member’s Council shall carry out the election and appointment of the vacancies in accordance with provisions of the laws.

3. After the natural loss of status, members of the Board of Directors, members of the Members’ Council, members of the Board of Controllers, General Director (Director) of the credit institution shall be responsible for their decisions during their active term.

Article 36. Dismissal, removal

1. Chairman and members of the Board of Directors, Chairman and members of

the Members’ Council, Head and members of the Board of Controllers, General Director (Director) of a credit institution shall be dismissed or removed in the following cases:

a) Having limited capacity for civil acts; b) Having resignation letters submitted to the Board of Directors, the Members’

Council, the Board of Controllers of the credit institution; c) Having not involved in activities of the Board of Directors, the Members’ Council,

the Board of Control in 06 consecutive months, except for the case of force majeure; d) Failure to meet the conditions and criteria stipulated in Article 50 of this Law; đ) Failure to meet requirements of the independent member of the Board of

Director; e) Other events as stipulated in the Charter of the credit institution.

2. After the dismissal, removal, Chairman and members of the Board of Directors,

Chairman and members of the Members’ Council, Head and members of the Board of Controllers and the General Director (Director) of the credit institution shall be responsible for their decisions during their active term.


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3. Within 10 working days since the date of decision on dismissal or removal of titles as stipulated in clause 1 of this Article, the Board of Directors, the Members’ Council of the credit institution shall submit written report with related documents to the State Bank.

Article 37. Suspension, temporary suspension of titles of the Board of

Directors, the Members’ Council, the Board of Controllers and General Director (Director)

1. The State Bank shall have the power to suspend or temporary suspend the

administrative authority of the Chairman and members of the Board of Directors, Members’ Council, Head and members of the Board of Controllers or managers of a credit institution if these people fail to comply with the provisions of Article 333 of this Law and/or other applicable provisions of the laws during the performance of their assigned rights and obligations. The State Bank shall request related authorized bodies of the credit institutions to dismiss, elect, appoint or shall directly designate the replacements, where necessary.

2. The Special Controlling Board shall have the powers to suspend or temporary suspend the administrative authority of Chairman or member of the Board of Directors/Members’ Council/ Head or member of the Board of Controllers or managers of the credit institution being put under special control, where necessary.

3. Individuals who have been suspended or temporary suspended the administrative authority as stipulated in clauses 1 and 2 of this Article shall be responsible for settling problems and offences related to his/her personal responsibilities where requested by the State Bank, the Board of Directors, the Members’ Council, the Board of Controllers of the credit institution or by the Special Controlling Board.

Article 38. Rights and obligations of administrators, managers of credit

institutions

1. To exercise their rights and obligations in accordance with provisions of the laws, the Charter of the credit institution, resolutions and decisions of the Shareholders’ General Meeting or capital-contributors or the owner of the credit institution.

2. To exercise their rights and obligations honestly with due diligence for the best interests of the credit institution and its shareholders or capital contributors or owners.

3. To be loyal to the credit institution; to not use information, secrets, business

opportunities of the credit institution, or abuse their position, powers and assets of the credit institution for their own personal benefits or for the benefit of other organizations or individuals that harms the interest of the credit institution and its shareholders or capital contributors or owners.

4. To ensure full records and storage of the credit institution’s documents/files in

order to provide reliable data for the management, administration and control of all activities of the credit institution, and for the supervision, inspection and examination activities of the State Bank.

5. To understand various types of risks inherent in daily operations of the credit

institution. 6. To timely, fully and accurately notify the credit institution of i their benefits at other

institutions, transactions with other organizations and individuals that can be conflict with the interests of the credit institution and shall enter in such transactions where approved by the Board of Directors or the Members’ Council.


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7. To not create opportunities/conditions for himself/herself or for his/her related parties to use services and get loans from the credit institution with more preferential terms and conditions in comparison with general regulations of the credit institution.

9. To not receive or request the credit institution to pay bonus, increase salary or

remuneration where the credit institution is being in losses. 10. Other obligations as stipulated in the Charter of the credit institution. Article 39. Obligations on disclosure of related interests

1. Members of the Board of Directors, members of the Members’ Council,

members of the Board of Controllers, General Director (Director), Deputy General Director (Deputy Director) and other equivalent positions of the credit institution shall disclose to the credit institution following information:

a) Name, address of the headquarter, scope of business, number and date of the business registration, place of business registration of enterprises, economic entities of which they themselves and/or their related parties own or authorize or entrust other individuals or organizations nominally own a portion of capital or shares of more than 05 percent of the chartered capital;

b) Name, address of the headquarter, scope of business, number and date of the business registration, place of business registration of enterprises in which they themselves and/or their related parties are being the members of the Board of Directors, members of the Member’s Council, members of the Board of Controllers, General Director (Director).

2. The disclosure of interests stipulated in clause 1 of this Article and any related

changes shall be carried out in writing within 07 days since the date of changes or the date such interests arise.

3. The disclosures of interests stipulated in clause 1 of this Article shall be reported

annually to the Shareholders’ General Meeting, Members’ Council of the credit institution and shall be posted and archived at the headquarter of the credit institution.

Article 40. Internal control system

1. The internal control system is a combination of internal rules, policies,

procedures, regulations and organizational structure of credit institutions and foreign bank’s branches which are developed pursuant to guidance of the State Bank and implemented in order to ensure that all of the risks are prevented, discovered and dealt with promptly and to meet preset requirements.

2. Credit institutions, foreign bank’s branches shall develop an internal control

system to ensure the followings: a) The efficiency and safety of operations; the protection, management and use of

properties and other resources being carried out in safe and effective manner; b) The truthfulness, reasonableness, adequacy and promptness of the financial and

management information systems; c) The compliance with the laws and other internal regulations, procedures and

rules.


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3. The operations of the internal control system of a credit institution or a foreign bank’s branch shall be evaluated periodically by internal audit unit and external auditors.

Article 41. Internal audit

1. A credit institution shall establish a specialized internal audit unit under the Board

of Control to perform internal audit for the credit institution. 2. Internal audit unit shall conduct objective reviews and independent assessment

versus the internal control system; independently assess the appropriateness and the compliance with internal rules, policies, procedures and processes established in the credit institution; propose recommendations on the improvement of the efficiency and effectiveness of the systems, processes and regulations to ensure the operations of credit institution being carried out in a safe, effective and lawful manner.

3. The internal audit results shall be timely reported to the Board of Directors, the

Members’ Council, the Board of Controllers and the General Director (Director) of the credit institution.

Article 42. External audit

1. Before the fiscal year end, credit institutions and foreign bank’s branches shall

select a qualified independent external audit company in accordance with stipulations of the State Bank to audit its operations for the next fiscal year.

2. Within 30 days since the date of decision made on selection of independent

external audit company, credit institutions and foreign bank’s branches shall notify the State Bank their decision.

3. Credit institutions shall be re-audited if the audit report of the external auditor

contains qualified opinions.

4. The independent audit of cooperative credit institutions shall be implemented in accordance with provisions of clause 3 of Article 75 of this Law.

Section 2. General provisions for joint stock and limited liabilities credit

institutions

Article 43. Board of Directors, Members’ Council and the structure of the Board of Directors, Members’ Council

1. Board of Directors/Members’ Council of credit institutions is the management

body of the credit institutions, which is entitled to act on behalf of credit institutions in making decisions and exercising all the rights and obligations, except for those fall under the authority of the Shareholders' General Meeting/owners.

2. The term of the Board of Directors/Members’ Council shall be no more than 05 years. The term of members of the Board of Directors/members of the Members’ Council shall be the same as that of the Board of Directors/the Members’ Council. Members of the Board of Directors/Members’ Council can be re-elected or re-appointed with unlimited number of terms. The term of elected member, either in supplementing or replacing the member who has been dismissed or exempted, shall be the remaining term of the Board of Directors/Members’ Council. The Board of Directors/Members’ Council shall continue to work until the newly elected Board of Directors/Members’ Council takes over the tasks.


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3. In case the number of members of the Board of Directors/Members’ Council does not make enough two third (2/3) of total number of members of that term or the minimum number of members as stipulated in the Charter of the credit institution, the credit institution shall carry out the member replenishment for the Board of Directors/Members’ Council to the required quantity within 60 days since the date of deficiency.

4. The Board of Directors/Members’ Council shall use credit institution’s seal to carry out its duties.

5. The Board of Directors/Members’ Council shall have secretariat to assist the

Board of Directors/Members’ Council. The Board of Directors/Members’ Council shall stipulate functions and duties of the Board’s/Council’s Secretariat.

6. The Board of Directors/Members’ Council of a credit institution shall establish

Committees to exercise the formers’ rights and obligations. There must be at least two Committees: Risk Management Committee and Human Resources Committee. The Board of Directors/Members’ Council shall stipulate rights and obligations of such committees in accordance with guidance of the State Bank.

Article 44. The Board of Controllers and the structure of the Board of Controllers

1. The Board of Controllers shall carry out internal audit, control and assessment of

the compliance of provisions of the laws, internal regulations, Charter and the implementation of Shareholders’ General Meeting’s/owners’, Board of Directors’/Members’ Council’s resolutions and decisions.

2. The Board of Controllers of a credit institution shall comprise at least of three members. The exact number of the members of the Board shall be stipulated in the Charter of the credit institution. At least one half (1/2) of the total Board’s members shall work full-time, who must not concurrently hold any positions or do any jobs in other credit institutions or enterprises.

3. The Board of Controllers shall have a supporting unit and an internal audit

division. The Board of Controllers may use credit institution’s resources or hire external professionals to fulfill its duties.

4. The term of the Board of Controllers shall be no more than 05 years. The term of

the members of the Board of Controllers shall be the same as that of the Board of Controllers. Members of the Board of Controllers can be re-elected or re-appointed with unlimited number of terms. The term of elected member, either in supplementing or replacing the member who is dismissed or exempted, shall be the remaining term of the Board of Controllers. The Board of Controllers shall continue to work until the newly elected Board takes over the tasks.

5. In case the number of members of the Board of Controllers does not make

enough two third (2/3) of the total number of controllers or the minimum number of members stipulated in the Charter of the credit institution, the credit institution shall carry out the members replenishment of the Board to the required quantity within 60 days since the date of deficiency in accordance with the provisions of the laws.

Article 45. Duties and powers of the Board of Controllers

1. To supervise the compliance with the laws and the Charter of the credit

institution in carrying out the administration and management of the credit institution; to be


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responsible before the Shareholders’ General Meeting/owners/capital contributors, Members’ Council for exercising assigned duties and powers.

2. To issue internal regulations of the Board of Controllers; to review annually such internal regulations and important policies on accounting and reporting.

3. To perform the function of internal audit; to be entitled to hire external

professionals and to access or to be provided with full, accurate and timely information and materials related to the administration and management of the credit institution in order to exercise their assigned duties and powers.

4. To verify annual and semi-annual financial statements of the credit institution; to

report to Shareholders’ General Meeting/owners/capital contributors the verification results, the assessment of the rationality, legality, accuracy and prudence in accounting, statistics and the preparation of financial statements. The Board of Controllers may consult with the Board of Directors/Members’ Council before submitting reports and proposing recommendations to the Shareholders’ General Meeting/owners or capital contributors.

5. To examine accounting books, other documents and the management of

business operation of the credit institution when necessary or upon the decisions, resolutions of the Shareholders’ General Meeting or at the request of major shareholders or a group of major shareholders or the owners or capital contributors or Members’ Council in accordance with provisions of the laws. The Board of Controllers shall exercise the examination within 07 working days since the receipt date of the request. Within 15 days since the termination date of examination, the Board of Controllers shall report and make clarification on the requested issues to individuals or organizations who made the request.

6. To timely report to the Board of Directors/Members’ Council upon the detection

of any offences from administrators of the credit institution; to request the offenders to immediately stop their breaches and take recover the consequences, if any.

7. To prepare the list of founding shareholders, major shareholders, capital

contributors and related parties of members of the Board of Directors/Members’ Council/Board of Controllers/General Director of the credit institution; to file and update changes to this list.

8. To request the Board of Directors/Members’ Council to convene extraordinary

meeting or request the Board of Directors to convene extraordinary Shareholders’ General Meeting as stipulated in this Law and the Charter of the credit institution.

9. To convene extraordinary Shareholders’ General Meeting in the case where the

decisions of the Board of Directors seriously violate this Law or surpass its scope of authority or other cases as stipulated in the Charter of the credit institution.

10. Other duties and powers as stipulated in the Charter of the credit institution.

Article 46. Rights and obligations of the Head of Board of Controllers

1. To organize the execution of the Board of Controllers’ duties and powers as

stipulated in Article 45 of this Law.

2. To prepare agenda for meetings of the Board of Controllers based on its members’ proposals with regard to scope of its duties and powers; to convene and chair meetings of the Board of Controllers.

3. To sign on behalf of the Board of Controllers all documents within the scope of


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authority of the Board of Controllers.

4. To convene extraordinary Shareholders’ General Meeting on behalf of the Board of Controllers as stipulated in Article 45 of this Law or request the Board of Directors/Members’ Council to convene extraordinary meetings.

5. To attend meetings of the Board of Directors/Members’ Council; to give opinions

and recommendations but shall not have the right to vote at such meetings.

6. To request the record of his/her opinions in the minute of the Board of Directors’/Members’ Council’s meetings in case his/her opinions contrary with the decision/resolutions of the Board of Directors/Members’ Council; and to report such matters to the Shareholders’ General Meeting or the Owners or Capital Contributors.

7. To prepare working plans and assign tasks to members of the Board of

Controllers.

8. To ensure that members of the Board of Controllers receive full, fair, accurate and timely information on the matters to be considered by the Board of Controllers with sufficient time for consideration and discussion.

9. To supervise and guide members of the Board of Controllers in exercising their

assigned rights and obligations of the Board of Controllers.

10. To authorize another member of the Board of Controllers to exercise his/her duties during his/her absence.

11. Other rights and obligations as stipulated in the Charter of the credit institution.

Article 47. Rights and obligations of members of Board of Controllers

1. To comply with provisions of the laws, the Charter of the credit institution and

internal regulations of the Board of Controllers honestly, prudently for the best interest of the credit institution and shareholders/capital contributors/owners.

2. To elect one among them to be the Head of the Board of Controllers.

3. To request the Head of the Board of Controllers to convene extraordinary meetings.

4. To monitor business operations; to check accounting book, assets, financial

statements and recommend remedy actions.

5. To be entitled to request any staff of the credit institution to provide data and to make clarification on business operations in order to exercise their assigned tasks.

6. To report to the Head of the Board of Controllers in regards of unusual financial

operations and be responsible for his/her assessments.

7. To attend meetings of the Board of Controllers, to discuss and vote on issues within the scope of duties and powers of the Board of Controllers unless excluded from doing so as a result of conflict of interest.



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Article 48. The General Director (Director)

1. The Board of Directors/Members’ Council shall appoint one member amongst itself or hire another person to act as the General Director (Director) of the credit institution, except for the case stipulated in sub clause 1(c) of Article 66 of this Law.

2. The General Director (Director) shall be the highest level manager of the credit

institution being responsible before the Board of Directors/Members’ Council for carrying out his/her rights and obligations.

Article 49. Rights and obligations of the General Director (Director)

1. To implement decisions and resolutions of the Shareholders’ General Meeting,

Board of Directors/Members’ Council. 2. To make decisions within her/his scope of authority on day-to-day operations of

the credit institution.

3. To establish internal control system and maintain its effectiveness.

4. To prepare and submit financial statements to the Board of Directors/Members’ Council for approval or to report to authorized body for approval. To be responsible for the accuracy, reliability of financial statements, statistic reports, accounting data and other financial information.

5. To issue accordingly to the scope of authority internal regulations; processes

and procedures to operate business management and reporting systems.

6. To report to the Board of Directors/Members’ Council, Board of Controllers, Shareholders’ General Meeting and competent state bodies in regards of the credit institution’s business performance and outputs.

7. To make decision on taking measures that exceed his/her scope of authority in

the case of emergency such as natural calamity, war, fire, failure events. He/she shall be responsible for these decisions and shall report immediately to the Board of Directors/Members’ Council.

8. To recommend and propose organizational structure and operations of the

credit institution to the Board of Directors/Members’ Council or Shareholders’ General Meeting for decision according to their scope of authority.

9. To request the Board of Directors/Members’ Council to convene extraordinary

meetings in accordance with provisions of this Law.

10. To appoint, dismiss, remove administrators, managers of the credit institution, except for positions fall under the scope of authority of Shareholders’ General Meeting/owners/capital contributors, Board of Directors/Members’ Council.

11. To sign contracts on behalf of the credit institutions in accordance with internal

regulations and provisions of the Charter of the credit institution.

12. To make proposals on profit distribution and loss settlement.

13. To recruit personnel; to make decisions on salaries and bonuses for staff within his/her scope of authority.


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Article 50. Criteria, conditions for administrators, managers and other positions of the credit institution

1. Members of the Board of Directors/Members’ Council shall meet in full following

criteria and conditions:

a) To not fall in the scope of provisions of clause 1 of Article 33 of this Law;

b) To have professional ethics;

c) To be the owner or the authorized owner of at least 5% of the chartered capital of the credit institution, except for the case when she/he is the member of the Members’ Council or independent member of the Board of Directors or having university and/or higher degree in economics/business administration/law or having at least 03 years of experience as an administrator in a credit institution or other enterprises operating in the insurance/securities/accounting/auditing sectors or having at least 05 years of working experiences directly in an operational division in the banking/finance/auditing/accounting sectors.

2. The independent member of the Board of Directors shall comply in full with

provisions of clause 1 of this Article and following criteria, conditions: a) She/he neither is currently working for the credit institution or subsidiaries of the

credit institution, nor worked for the credit institution or subsidiaries of the credit institution in the last three years;

b) She/he shall not receive any regular salaries or remunerations from the credit institution, other than allowances for members of the Board of Director in accordance with regulations;

c) She/he shall not be a person, whose spouse, parents, children, siblings and

spouse of these people are major shareholders of the credit institution or a manager or a member of the Board of Controllers of the credit institution or of subsidiaries of the credit institution;

d) She/he shall not own directly, indirectly or representatively more than 1% of

chartered capital or voting shares of the credit institution; he/she together with his/her related parties shall not own more than 5% of chartered capital or voting shares of the credit institution;

đ) She/he has not been a manager or a member of the Board of Controllers of the

credit institution at any time within the last 05 years. .

3. Members of the Board of Controllers shall meet in full following criteria and conditions:

a) To not fall in the scope of provisions of clause 1 of Article 33 of this Law;


c) To have university or higher degree in economics/business administration/law/accounting/auditing or have at least 03 years of working experiences directly in banking/finance/auditing/accounting sectors;

d) To not be a related party of the administrator of the credit institution;


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đ) Full-time member of the Board of Controllers shall reside in Vietnam during

his/her active term.

4. General Director (Director) shall meet in full following criteria and conditions: a) To not fall in the scope of provisions of clause 1 of Article 33 of this Law;


c) To have university or higher degree in economics/business administration/law;

d) To have at least 05 years of working experiences as a manager of a credit

institution or to have at least 05 years of working experiences as the General Director (Director) or Deputy General Director (Deputy Director) of enterprises having equity capital level at least equals the legal capital level applicable to each type of credit institutions in accordance with provisions of the laws or to have at least 10 years of working experiences directly in finance/banking/accounting/auditing sectors;

đ) To reside in Vietnam during her/his active term.

5. The Deputy General Director (Deputy Director), Chief Accountant, Manager of

branch, Manager of a subsidiary and other equivalent positions of credit institutions shall meet in full following criteria and conditions:

a) To not fall in the scope of provisions of clause 2 of Article 33 of this Law; Deputy

General Director (Deputy Director) shall not fall in the scope of provisions of clause 1 of Article 33 of this Law;

b) To have university or higher degree in economics/business administration/law or in professional field that she/he will take the position; or to have university or higher degree in any other fields rather than stipulated above in addition to at least 03 years of working experiences in areas such as banking/finance or in professional field that she/he will take the position;

c) To reside in Vietnam during her/his active term.

6. The State Bank shall stipulate in details criteria and conditions applicable to

managers, administrators and members of the Board of Control of macro-finance institutions.

Article 51. Approval of nominated list of members of the Board of Directors,

members of the Members’ Council, members of the Board of Controllers, General Director of credit institutions

1. Nominated list of members the Board of Directors, members of the Members’

Council, members of the Board of Controllers and General Director (Director) of a credit institution shall be subject to written approval by the State Bank before the election, appointment of such positions. Individuals having been elected, appointed to be members of the Board of Directors, members of the Members’ Council, members of Board of Controllers and General Director (Director) of the credit institution should be those in the list approved by the State Bank.

2. The State Bank shall stipulate in details procedures and application files for approval of the nominated list stipulated in clause 1 of this Article.


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3. The credit institution shall inform the State Bank the list of elected, appointed individuals to positions stipulated in clause 1 of this Article within 10 working days since the date of election, appointment.

Section 3. Joint stock credit institutions

Article 52. Types of Shares, Shareholders

1. A joint stock credit institution shall have common shares. Owners of common

shares shall be common shareholders.

2. A credit institution may have preference shares. Preference shares of a credit institution include:

a) Dividend preference shares; b) Voting preference shares.

3. Dividend preference shares are those of which dividends paid to shareholders is

of higher level than that paid to common shareholders or of a fixed annual rate. Annual paid dividends include fixed dividends and bonus dividends. Fixed dividends shall not be based on the business outcome of the credit institution and paid out only when the business outcome is profitable. In case of loss or profits are not sufficient for dividend distribution, fixed dividends paid out to dividend preference shareholders shall be aggregated in following years. The fixed dividends rate and method of bonus dividends determination shall be decided by Shareholders’ General Meeting and stated on the face of the dividend preference share certificate. The total face value of dividend preference shares shall not exceed 20% of the chartered capital of the credit institution.

Members of the Board of Directors, Board of Controllers, General Director and other

administrators, managers of a credit institution shall not be permitted to buy dividend preference shares issued by that credit institution. Persons eligible for purchasing dividend preference shares shall be stipulated in the Charter of the credit institution or decided by the Shareholders’ General Meeting.

Dividend preference shareholders shall have the same rights as common

shareholders, except for voting right, Shareholders’ General Meeting attendance right and the right to nominate candidate to the Board of Directors and Board of Controllers.

4. Only organizations which had been authorized by the Government and founding

members have the right to own voting preference shares. The validity of voting preference shares held by founding members shall be 03 years since the date of business registration of the credit institution. After that time limit, voting preference shares of founding members shall be converted into common shares. Voting preference shareholders shall have the same rights as common shareholders, except for the right of transferring their shares to others.

5. Common shares cannot be converted into preference shares while preference shares can be converted into common shares according to Shareholders’ General Meeting’s resolution.

6. A joint stock credit institution shall have at minimum 100 shareholders and unlimited maximum quantity.


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Article 53. Rights of common shareholders

1. To participate and speak at Shareholders’ General Meetings and exercise their voting right either directly or through authorized representatives; each common share shall have one vote.

2. To be entitled to dividends pursuant to Shareholders’ General Meeting’s

resolutions. 3. To be given priority in buying new shares proportionately with each shareholder’s

common shares portion in the credit institution. 4. To freely transfer her/his shares to other shareholders of the credit institution or

other individuals, organizations in accordance with provisions of this Law and the Charter of the credit institution.

5. To look up, investigate and take excerpts of voting shareholders list and to

request the correction of any inaccurate information in the list. 6. To look up, investigate or make copies of the Charter of the credit institution,

registry book of minutes and resolutions of Shareholders’ General Meetings. 7. To be entitled to a part of the remaining properties of the credit institution

proportionately with their shares portion upon the dissolution or bankruptcy of the credit institution.

8. To be entitled to authorize other individuals in writing to exercise her/his rights

and obligations; the authorized individuals shall not be allowed to nominate herself/himself as a candidate.

9. To be entitled to run for, or nominate candidates to the Board of Directors and the

Board of Controllers in accordance with provisions of the Charter of the credit institution or provisions of the laws if the Charter of the credit institution is silent on this. The list of candidates shall be submitted to the Board of Directors within the timeline set by the Board of Directors.

Article 54. Obligations of common shareholders

1. Shareholders of a credit institution shall have following obligations:

a) To pay in full for the shares they committed to purchase within the timeline

stipulated by the credit institution; to be liable for debts and other obligations of the credit institution proportionately with the amount of capital contributed to the credit institution;

b) To not withdraw the capital contributed to the credit institution in any forms that leads to the decrease of the chartered capital;

c) To be responsible before the laws for the lawfulness of the resources

contributed to the credit institution;

d) To comply with the Charter and other internal regulations of the credit institution;

đ) To comply with resolutions and decisions of the Shareholders’ General Meeting and/or of the Board of Directors;


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e) To take personal responsibilities when acting on behalf of the credit institution in any form to offend against provisions of the laws or when conducting business or carrying out other transactions for personal interests or for interests of other organizations, individuals.

2. Shareholders who act as trustees of other individuals, organizations shall

provide credit institution information regarding the real owners of the entrusted shares; otherwise, the credit institution shall have the right to suspend all shareholder’s rights relating to such shares when the trustor is exposed.

Article 55. Proportion of share ownership

1. An individual shall not own more than 5% of chartered capital of a credit institution.

2. An organization shall not own more than 15% of chartered capital of a credit institution, except for the followings:

a) Ownership of shares as stipulated in clause 3 of Article 149 of this Law to deal

with a problem credit institution in order to ensure the safety of the credit institutions system;

b) Ownership of shares by the State in equitized credit institutions; c) Ownership of the shares by foreign investors as stipulated in clause 2 of Article

16 of this Law.

3. One shareholder and her/his related parties shall not own more than 20% of chartered capital of a credit institution.

4. The proportions of shareholding stipulated in clauses 1, 2 and 3 of this Article shall include the portions of capital entrusted to other individuals, organizations.

5. Within 05 years since the granted date the License, founding shareholders shall

hold at minimum 50% of the chartered capital of the credit institution and founding shareholders who are legal entities shall hold at minimum 50% of the total shares held by all founding shareholders.

Article 56. Offering and transfer of shares

1. Individual or organizational shareholders having authorized representative who

is a member of the Board of Directors, member of the Board of Controllers, General Director (Director) of the credit institution shall not be allowed to transfer her/his shares during her/his active term.

2. During the period of resolving consequences due to personal responsibilities in accordance with the resolutions of the Shareholders’ General Meeting or decisions of the State Bank, members of the Board of Directors, members of the Board of Controllers and General Director (Director) shall not be allowed to transfer their shares, except for following cases:

a) When they are authorized representatives of an organizational shareholder

which is incorporated, merged, divided, dissolved or went bankrupt in accordance with provisions of the laws;

b) When they are required to transfer the shares by Court order;


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c) When they are required to transfer the shares to other investors in order to

implement mandatory incorporation or merger as stipulated in clause 2 of Article 149 of this Law.

3. The transfer of listed shares of credit institutions shall be subject to provisions of the laws on securities.

4. Within 05 years since the granted date of the License, founding shareholders of a credit institution shall only be permitted to transfer their shares to another founding shareholders provided that the proportion of shares ownership stipulated in Article 55 of this Law shall be assured.

Article 57. Redemption of shares

A credit institution shall be allowed to buy back its shares only if after paying for

redeemed shares, the credit institution still be able to maintain required prudential ratios and ensure that its chartered capital shall not fall below the legal capital level. The redemption of shares leads to the decrease of the chartered capital of credit institutions shall be approved by the State Bank.

Article 58. Share certificate

In case credit institutions issue shares in the form of certificates, credit institutions

shall issue shares certificates to their shareholders within 30 days since the business commencement date as for newly established credit institutions or within 30 days since the date of full payment by shareholders for the shares they committed to purchase as for on-going credit institutions increasing its chartered capital.

Article 59. Shareholders’ General Meeting 1. The annual Shareholders’ General Meeting shall be held within 4 months after

the fiscal year ends. Extraordinary Shareholders’ General Meeting shall be held according to the decision of the Board of Directors under following circumstances:

a) According to the Board of Directors, the meeting is necessary for the interests of

the credit institution; b) The number of remaining members of the Board of Directors falls below the

minimum number stipulated in clause 1 of Article 62 of this Law; c) To meet the request of a shareholder or a group of shareholders who own more

than 10% of common shares at least in 06 consecutive months; d) To meet the request of the Board of Controllers; đ) Other cases as stipulated in the Charter of the credit institution. 2. Shareholders’ General Meeting shall be comprised of all voting shareholders,

being the highest level organ of the credit institution. Shareholders’ General Meeting shall have following duties and powers:

a) To adopt the development directions of the credit institution; b) To amend and supplement the Charter of the credit institution;


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c) To approve the regulations on the organization and operations of the Board of Directors and the Board of Controllers;

d) To make decisions on number of members of the Board of Directors, Board of

Controllers in each term; to elect, dismiss, remove, supplement, replace members of the Board of Directors and members of the Board of Controllers pursuant to criteria and conditions stipulated in this Law and the Charter of the credit institution;

đ) To make decisions on remuneration, bonus and other benefits for members of

the Board of Directors, members of the Board of Controllers and operation budgets of the Board of Directors and the Board of Controllers;

e) To review and deal within the scope of authority with breaches of the Board of

Directors/Board of Controllers that cause losses to the credit institution and its shareholders;

g) To make decisions on organizational structure, management apparatus of the

credit institution; h) To adopt the proposal on the changes of chartered capital level; to adopt the

proposal on share offering, including type of shares and number of new shares to be offered;

i) To adopt decision on shares redemption; k) To adopt the proposal on issuance of convertible bonds; l) To adopt annual reports and proposals on profit distribution after payment of tax

duties and other financial duties of the credit institution; m) To adopt the report of the Board of Directors/Board of Controllers on their

performance; n) To make decision on establishment of subsidiaries; o) To adopt proposals on contribution of capital, purchase of share of other

enterprises or credit institutions with the value of more than 20% of chartered capital of the credit institution stated in the latest audited financial report;

p) To make decision on investments, purchase, sale of properties of the credit

institution with the value of more than 20% of chartered capital of the credit institution stated in the latest audited financial report or a lower level as stipulated in the Charter of the credit institution;

q) To adopt contracts with value of more than 20% of chartered capital of the credit

institution stated in the latest audited financial report or at a lower level as stipulated in the Charter of the credit institution between credit institution and a member of the Board of Directors/member of the Board of Controllers/General Director (Director)/major shareholders/related parties of administrators, members of the Board of Controllers and major shareholders of the credit institution; subsidiaries and affiliated companies of the credit institution;

r) To make decision on division, incorporation, merger, legal form transformation,

dissolution or request the Court to initiate bankruptcy proceedings for the credit institution; s) To make decisions on remedy actions to deal with significant financial fluctuations

of the credit institution.


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3. The decision of the Shareholders’ General Meeting shall be adopted as follows: a) The Shareholders’ General Meeting shall adopt the decisions within its scope of

authority in the forms of voting at the meeting or collecting written opinions; b) Except for the case stipulated in sub clause (c) of this clause, decision of the

Shareholders’ General Meeting shall be adopted at the meeting when it is approved by the shareholders representing more than 51% of the total votes of attended shareholders or a higher ratio as stipulated in the Charter of the credit institution;

c) With regards to matters stipulated in sub clauses 2(b), 2(h), 2(p) and 2(r)of this

Article, decision of the Shareholders’ General Meeting shall be adopted if more than 65% of the total voting shares of attended shareholders approved for or a higher ratio as stipulated in the Charter of the credit institution;

d) The election of member of the Board of Directors and member of the Board of

Controllers must be carried out in the form of accumulative votes. 5. Other decisions of the Shareholders’ General Meeting with regards to the matters

stipulated in sub clauses 2(a), 2(d), 2(e) and 2(r) of this Article must be adopted in the form of voting at the Shareholders’ General Meeting.

Article 60. Convention of Shareholders’ General Meeting at request of the

State Bank

In the event the safety and the soundness of operations of a joint stock credit institution have been affected, the State Bank shall have the right to request the Board of Directors of joint stock credit institution to convene an extraordinary Shareholders’ General Meeting to make decisions on matters required by the State Bank.

Article 61. Submission of the minutes of the Shareholders’ General Meeting

Within 15 days since the closing date of the Shareholders’ General Meeting or the

finished date of counting written opinions, all resolutions and decisions adopted by the Shareholders’ General Meeting shall be submitted to the State Bank.

Article 62. The Board of Directors of joint stock credit institutions

1. The Board of Directors of a joint stock credit institution shall consist of at least

05 members and no more than 11 members, of which at least 01 member shall be independent member. The Board of Directors must have at least one half of its members being independent members and members who are not managers of the credit institution.

2. Individuals and their related parties or the representatives of capital contribution of shareholders being legal entities and their related parties may take part in the Board of Directors but shall not make up more than one third (1/3) of total members of the Board of Directors of a joint stock credit institution, except for the cases of representatives of the State capital contribution.

Article 63. Duties and powers of the Board of Directors 1. To be responsible for the implementation of the establishment, business

commencement of the credit institution subsequent to the first Shareholders’ General Meeting.


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2. To be responsible before the Shareholders’ General Meeting for exercising assigned duties and powers.

3. To bring forward to the Shareholders’ General Meeting for adoption of

decisions on matters belong to the scope of authority of the Shareholders’ General Meeting as stipulated in clause 2 of Article 59 of this Law.

4. To make decisions on the establishment branches, representative offices and

administrative units.

5. To appoint, dismiss, remove, apply disciplinary actions, suspend and make decisions on salaries and other benefits for General Director (Director), Deputy General Director (Deputy Director), Chief Accountant, Secretariat of the Board of Directors, other positions in internal audit division and other administrators, managers in accordance with internal regulations of the Board of Directors.

6. To adopt projects of capital contribution to or share purchase of other

enterprises or other credit institutions with the value of less than 20% of the chartered capital of the credit institution as stated in the last audited financial statements.

7. To appoint the representative of the capital contribution proportion of the credit

institution in other enterprises or credit institutions. 8. To make decisions on investments, purchase, sale of credit institution’s

properties with value more than 10% of chartered capital of the credit institutions as stated in the latest audited financial statements, except for the investments and transactions of the credit institution stipulated in sub clause 2(p) of Article 59 of this Law.

9. To make decisions on the provision of credit as stipulated in sub clause 7 of

Article 128 of this Law, except for transactions falling under the scope of authority of the Shareholders’ General Meeting as stipulated in sub-clause 2(q) of Article 59 of this Law.

10. To adopt contracts between credit institution and its subsidiaries, affiliated companies; contracts between credit institution and members of the Board of Directors, members of the Board of Controllers, General Director (Director), major shareholders and/or their related parties with value less than 20% of chartered capital of the credit institution stated in the latest audited financial statements or another lower ratio as stipulated in the Charter of the credit institution. In this case, the related member shall be excluded from voting.

11. To examine, supervise and direct General Director (Director) to carry out

assigned tasks; to undertake annual evaluation on performance of the General Director (Director).

12. To issue internal regulations on the organization, governance and operations of the credit institution in accordance with provisions of this Law and other applicable laws, except for the matters falling under the scope of authority of the Board of Controllers or the Shareholders’ General Meeting.

13. To make decisions on risk management policy and to supervise the

implementation of risk-preventive measures of the credit institution.

14. To review and approve annual reports.

15. To select professionals to evaluate non-Vietnamese Dong contributed assets, hard currencies and gold in accordance with provisions of the laws.


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16. To request approvals of the Governor of the State Bank on matters as

stipulated by the laws.

17. To make decisions on the offering of new shares within the permitted number of shares issuance.

18. To set offering prices for shares and convertible bonds of the credit institution.

19. To make decisions on redemption of shares.

20. To recommend on profit distribution plans, the amount of dividend to be paid

out; to make decision on the time and formalities for payment of such dividend or settlement of losses arose during the course of business.

21. To prepare contents and materials to submit to the Shareholders’ General

Meeting for decisions on the matters falling under the scope of authority of the Shareholder’s General Meeting, except for matters within the scope of authority of the Board of Controllers.

22. To approve the working plans and programs of the Board of Directors; to

approve agenda, contents, hand-out materials for Shareholders’ General Meetings; to convene Shareholders’ General Meetings or consult opinions of shareholders in writing to process the adoption of resolutions and decisions of the Shareholders’ General Meeting.

23. To organize, examine and supervise the implementation of resolutions and

decisions of the Shareholders’ General Meeting and the Board of Directors.

24. To promptly notify the State Bank of the information that negatively affects the status of any members of the Board of Directors, Board of Controllers, General Director (Director).


Article 64. Rights and obligations of Chairman of the Board of Directors

1. To develop working plans and programs of the Board of Directors.

2. To prepare programs, contents and materials for meetings; to convene and

chair the meetings of the Board of Directors.

3. To organize the adoption of the decisions of the Board of Directors.

4. To supervise the implementation of the decisions of the Board of Directors.

5. To chair Shareholders’ General Meetings.

6. To ensure that all members of the Board of Directors to be provided with full, fair, accurate and timely information on the matters to be considered by the Board of Directors and with sufficient time for consideration and discussion.

7. To assign tasks to members of the Board of Directors.

8. To supervise members of the Board of Directors in carrying out their assigned tasks, other general rights and obligations.


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9. To evaluate the performance of members and committees of the Board of

Directors at least once a year and report the results to the Shareholders’ General Meeting.


Article 65. Rights and obligations of members of the Board of Directors

1. To exercise rights and obligations of members of the Board of Directors in accordance with internal regulations of the Board of Directors and the assignment of the Board’s Chairman in good faith and for the interests of the credit institution.

2. To review financial statements prepared by external auditors; to give feedbacks or request managers of the credit institution and/or external and internal auditors to explain concerned matters found in the statements.

3. To request Chairman of the Board of Directors to convene an extraordinary

meeting of the Board of Directors.

4. To attend meetings of the Board of Directors, discuss and vote on matters within the scope of duties and powers of the Board of Directors as stipulated in this Law unless excluded from doing so as a result of conflict of interest. To be responsible before the Shareholders’ General Meeting and the Board of Directors for their decisions.

5. To implement resolutions and decisions of Shareholders’ General Meeting and

the Board of Directors.

6. To make clarification in regards of assigned tasks before Shareholders’ General Meeting and the Board of Directors as requested.


Section 4. Sole member limited liability credit institution

Article 66. Duties and powers of the Owner

1. Owner of sole member limited liability credit institutions being shall have following powers:

a) To make decisions on the number of members of the Members’ Council for each

term which shall consist of at least 05 members and not exceed 11 members; b) To appoint authorized representative with a term of maximum 05 years to carry

out owner’s duties and powers in accordance with provisions of this Law. The authorized representatives shall meet in full criteria and conditions stipulated in clause 1 of Article 50 of this Law;

c) To appoint, dismiss, remove, supplement members of the Members’ Council,

Chairman of the Members’ Council, members of the Board of Controllers, General Director (Director), Deputy General Director (Deputy Director), Chief Accountant;

d) To make decisions on adjusting chartered capital of the credit institution;

transferring a part of or the whole of chartered capital of the credit institution and transforming legal form of the credit institution;


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đ) To make decisions on establishment of subsidiaries and affiliates; e) To approve annual financial statements; to make decision on the usage of profits

after fulfillment of tax duties and other financial obligations of the credit institution; h) To make decisions on reorganization, dissolution and to request the Court to

initiate bankruptcy proceedings for the credit institution; i) To make decisions on the remuneration, salaries, and other benefits for members

of the Members’ Council, members of the Board of Controllers and General Director (Director).

2. Owner of sole member limited liability credit institutions shall have following

obligations: a) To contribute capital in full and on schedule as committed; b) To comply with the Charter of the credit institution; c) To classify and separate between properties of the owners and properties of the

credit institution; d) To comply with the provisions of the laws in regards of selling, purchasing,

borrowing, lending, renting, leasing and other transactions between the owner and the credit institution;

đ) Other duties as stipulated in this Law and the Charter of the credit institution.

Article 67. Duties and powers of the Members’ Council

1. The Members’ Council of sole member limited liability credit institutions shall be

comprised of all authorized representatives of the owners, acting on behalf of the owners to carry out owners’ rights and obligations of the credit institution; shall be responsible before the owners in carrying out assigned duties and powers in accordance with provisions of this Law and the Charter of the credit institution.

2. Members’ Council of sole member limited liability credit institutions shall have the

following duties and powers: a) To make decisions on the contents of the Charter, the amendment and

supplement to the Charter of the credit institution; b) To make decisions on the development strategy and annual business plans of

the credit institution; c) To submit to the owners of the credit institution for decisions on matters falling

under the scope of authority of owners as stipulated in sub clauses 1(c), 1(d), 1(đ), 1(e) and 1(g) of Article 66 of this Law;

d) To review and approve annual reports; đ) To make decisions on the selection of external auditor; e) To examine, supervise and direct General Director (Director) in carrying out

assigned tasks; to annually evaluate the performance of the General Director (Director);


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g) To make decisions on settlement of losses arose in the course of business; h) To make decisions on the provision of credits stipulated in clause 7 of Article 128

of this Law; i) To make decisions on the plans of capital contribution and share purchase of

other enterprises or credit institutions with value of more than 20% of the chartered capital stated in the latest audited financial statement of the credit institution or a lower ratio stipulated in the Charter of the credit institution;

k) To approve decisions on investments, on sale and purchase of assets of the

credit institution with value of more than 20% of total assets stated in the latest audited financial statement of the credit institution or at lower ratio stipulated in the Charter of the credit institution;

l) To make decisions on entering into contracts of credit institution with subsidiaries

and affiliated companies of the credit institution; or with members of the Members’ Council, members of the Board of Controllers, General Director (Director) and/or their related parties. In this case, the related member shall be excluded from voting;

m) To make decisions on market development plans, marketing and technology

transfer; n) To issue internal regulations on the organization, governance and operations of

the credit institution in accordance with provisions of the laws; o) To request approvals of the Governor of the State Bank on matters stipulated by

the laws; p) To supervise and conduct assessment of business operations of the credit

institution; q) Other duties and powers as stipulated in the Charter of the credit institution. Article 68. Rights and obligations of the Chairman of the Members’ Council

1. To prepare working plans and programs of the Members’ Council.

2. To prepare agenda, contents and materials for meetings of the Members’

Council or for seeking opinions of members of the Members’ Council.

3. To convene and chair the meetings of the Members’ Council or to arrange the collection of opinions from members.

4. To supervise the implementation of decisions of the Members’ Council.

5. To sign on behalf of the Members’ Council the decisions of the Members’

Council.

6. To ensure that all members of the Members’ Council to be provided with full, fair, accurate information and sufficient time for discussion on matters to be considered by the Members’ Council.

7. To assign tasks to members of the Members’ Council.


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8. To supervise members of the Members’ Council in carrying out their assigned tasks and other general duties and powers.

9. To evaluate the performance of members of the Members’ Council at least once

a year and report the results to the owner.

10. Other rights and obligations stipulated in the Charter of the credit institution.

Article 69. Rights and obligations of members of the Members’ Council

1. To exercise their rights and obligations as stipulated in internal regulations of the Members’ Council and the assignment of the Council’s Chairman in good faith and for the interests of the credit institution and the owner.

2. To give feedbacks or request managers of the credit institution, external and internal auditors to explain concerned matters in financial statements prepared by external auditors.

3. To request Chairman of the Members’ Council to convene extraordinary

meetings of the Members’ Council.

4. To attend meetings of the Members’ Council, discuss and vote on matters within the scope of duties and powers of the Members’ Council unless excluded from doing so as a result of conflict of interest. To be responsible before the owner and the Members’ Council for their decisions.

5. To implement decisions of owner and resolutions of the Members’ Council.

6. To make clarification in regards of assigned tasks before the owner and the

Members’ Council as requested.

7. Other rights and obligations stipulated in the Charter of the credit institution.

Section 5. Limited liability credit institution with two or more members

Article 70. Capital contributors, duties and powers of capital contributors

1. Capital contributors of limited liability credit institutions with two or more members shall be a legal entity, except for the cases stipulated in Article 88 of this Law. Total capital contributors shall not exceed 05 members. The maximum ownership proportion of one member and her/his related parties shall not exceed 50% of the chartered capital of the credit institution.

2. Capital contributors shall have the following powers:

a) To appoint, dismiss, remove qualified representatives to be members of the Members’ Council and members of the Board of Controllers based on their portion of capital contributed to the credit institution or the agreement among capital contributors;

b) To be provided with information and reports on the performance of the Members’

Council and the Board of Controllers, accounting books, annual financial statements and other documents of the credit institution;


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c) To receive profit distributed proportionately with the portion of capital contributed when the credit institution has fulfilled all of its tax duties and other financial obligations;

d) To receive the residual assets of the credit institution proportionately with the

portion of capital contributed in the credit institution upon the dissolution or bankruptcy of the credit institution;

đ) To complain or file petition against any members of the Members’ Council, any

members of the Board of Controllers or General Director (Director) who fails to properly fulfill her/his rights and obligations so as to cause losses and damages to the credit institution’s or capital contributors’ lawful rights and interests.

3. Capital contributors shall have the following obligations:

a) To not withdraw contributed capital from the credit institution in any forms, except

for the case of transfer capital in accordance with provisions stipulated in Article 71 of this Law;

b) To comply with the Charter of the credit institution; c) Other obligations stipulated in the Charter of the credit institution. Article 71. Transfer of capital, redemption contributed capital

1. Capital contributors shall be allowed to transfer their contributed capital and

shall have the priority to make additional contribution to the capital of the credit institution when the credit institution raises its chartered capital.

2. The State Bank shall stipulate in details conditions for the transfer and the redemption of contributed capital of the credit institution.

Article 72. Members’ Council

1. The Members’ Council of limited liability credit institution with two members or

more shall have following duties and powers:

a) To carry out duties and powers stipulated in sub-clauses 2(a), 2(b), 2(d), 2(đ), 2(h), 2(i), 2(k), 2(l), 2(m), 2(n) and 2(o) of Article 67 of this Law;

b) To make decision on the increase or decrease of the chartered capital; to make

decision on the time and method of raising additional capital;

c) To reports on financial performance and business outcomes of the credit institution, the execution of duties and powers assigned to the Members’ Council and its members as requested by capital contributors or competent state bodies;

d) To make decisions on the redemption of contributed capital of the credit

institution in accordance with provisions of this Law; đ) To elect, dismiss or remove the Chairman of the Members’ Council; to make

decision on the appointment, dismissal, removal, entry into or termination of the contract with General Director (Director), Deputy General Director (Deputy Director), Chief Accountant, other managers, administrators in accordance with internal regulations of the Members’ Council;


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e) To make decisions on salaries, bonuses, remunerations and other benefits for Chairman and members of the Members’ Council, Head and members of the Board of Controllers, General Director (Director) in accordance with provisions of this Law, unless otherwise stipulated in the Charter of the credit institution;

g) To adopt annual financial statements, profits distribution and losses settlement

plans of the credit institution; h) To make decision on setting up subsidiaries, branches, representative offices and

making capital contributions to set up affiliated companies; i) To make decision on the reorganization of the credit institution; k) To make decision on the dissolution of the credit institution or to request the

Court initiate bankruptcy proceedings for the credit institution; l) Other duties and powers stipulated in Charter of the credit institution. 2. The Chairman of the Members’ Council of limited liability credit institution with two

members or more shall have following rights and obligations:

a) To execute rights and obligations stipulated in clauses 1, 2, 3, 4, 5, 6, 7, and 8 of Article 68 of this Law;

b) To evaluate the performance of members and committees of the Members’

Council at least once a year; c) Other rights and obligations stipulated in the Charter of the credit institution. 3. Members of the Members’ Council of limited liability credit institution with two

members or more shall have following rights and obligations: a) To execute rights and obligations stipulated in clauses 1, 2 and 3 of Article 69 of

this Law; b) To attend meetings of the Members’ Council, to discuss and vote on all matters

within the scope of duties and powers of the Members’ Council in accordance with provisions of this Law unless excluded from doing so as stipulated in clauses 1 and 2 of Article 67 of this Law; to be responsible before the Members’ Council for their decisions;

c) To implement resolutions and decisions of the Members’ Council; d) To make clarifications in regards to the carrying out assigned duties before

capital contributors and the Members’ Council as requested; đ) Other rights and obligations stipulated in the Charter of the credit institution.

Section 6. Co-operative credit institutions

Article 73. Nature and objectives of operations

Co-operative credit institution is a form of credit institution organized as a co-operative operating in banking area with the main purpose of cooperation among its members to effectively carry out productions, businesses, services and improve living


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standards. Co-operative credit institutions shall include co-operative banks and people’s credit funds.

Article 74. Establishment of co-operative credit institutions

1. Members of co-operative banks shall include all people’s credit funds and other

capital contributing legal entities. 2. Members of people’s credit funds shall include individuals, households and other

capital contributing legal entities. Article 75. Organizational structure

1. The organizational structure of a cooperative bank or a people’s credit fund

includes Members’ General Meeting, Board of Directors, Board of Control and General Director (Director).

2. Members of the Board of Directors, members of the Board of Control, General Director (Director) of a cooperative bank or a people’s credit fund shall meet criteria in terms of qualifications, professional ethics and knowledge on banking operations in accordance with provisions of the State Bank.

3. Cooperative banks, people’s credit funds shall establish internal audit, internal control system and conduct independent audits in accordance with provisions of the State Bank.

Article 76. Chartered Capital

1. Chartered capital of co-operative banks, peoples’ credit funds shall be the total

amount of capital contributed by members and stated in the Charter. 2. The minimum and maximum amount of capital contribution applicable to one

member shall be decided by the Members’ Meeting in accordance with provisions of the State Bank.

Article 77. Charter

1. The Charter of co-operative banks, people's credit funds shall be in accordance

with provisions of this Law, Law on co-operatives and other applicable provisions of the laws. The Charter of co-operative banks, people's credit funds must contain following basic contents:

a) Name and address of the headquarter; b) Content and scope of operations; c) Duration of operation; d) Chartered capital and capital contribution methods; đ) Organizational structure, duties and powers of the Board of Directors, Board of

Controllers and rights and obligations of General Director (Director); e) Formalities for conducting Members’ General Meetings and for the adoption of

decisions of the Members’ General Meeting;


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g) Rights and obligations of members; h) Principles on finance, accounting, internal control and internal audit; i) Principles of payment of salaries, allowances and remuneration, settlement of

losses, distribution of profits according to the contributed capital and contributed efforts of each member and depending on the frequencies of use of services of the credit institution; principles of appropriation for setting up, management and uses of various funds;

k) Formalities for managing, using, preserving and dealing with common properties

and accumulative capital; l) Events of and procedures for division, separation, merger, incorporation,

dissolution and bankruptcy; m) Procedures for amending Charter. 2. The Charter of co-operative banks, people's credit funds and its amendments or

supplements shall be registered with the State Bank within 15 days from the date of its adoption.

Article 78. Members’ rights

1. To attend Members’ General Meeting or elect representative to attend Members’ General Meeting; to attend Members’ Meeting and vote for matters in the scope of authority of the Members’ General Meeting.

2. To self-nominate or nominate others to the Board of Directors, Board of

Controllers and other positions in accordance with provisions of the Charter of co-operative banks, people's credit funds.

3. To make deposits, get loans, receive profit proportionately with capital contributed

and with the level of services used at co-operative banks, people's credit funds. 4. To be benefited from common social welfare of co-operative banks, people's

credit funds. 5. To be provided with necessary information related to operations of co-operative

banks, people's credit funds. 6. To recommend on matters related to operations of co-operative banks, people's

credit funds to request the response from the co-operative banks, people's credit funds; to request the Board of Directors, Board of Controllers to convene extraordinary Members’ General Meeting to resolve urgent problems.

7. To transfer the portion of capital contributed and rights, obligations to third party

in accordance with applicable provisions of the laws and the Charter of co-operative banks, people's credit funds.

8. To be allowed to withdraw from the co-operative banks, people's credit funds in

accordance with provisions of the Charter of co-operative banks, people's credit funds. 9. Other rights as stipulated in the laws and the Charter of co-operative banks,

people's credit funds.


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Article 79. Members’ obligations

1. To comply with the Charter of co-operative banks, people's credit funds and resolutions of Members’ General Meetings.

2. To contribute capital in accordance with provisions of the Charter of co-operative

banks, people's credit funds and other applicable provisions of the laws. 3. To mutually cooperate and support amongst members; to take part in building

and promoting the development of co-operative banks, people's credit funds. 4. To be jointly responsible for exposures, losses in the operations of co-operative

banks, people's credit funds proportionately with the amount of capital contributed. 5. To repay principal and interest of the loan granted by co-operative banks,

people's credit funds as pre-agreed. 6. To compensate for losses caused by her/him to co-operative banks, people's

credit funds.

Article 80. Members’ General Meeting

1. Members’ General Meeting is the highest level body of a co-operative banks, people’s credit funds.

2. Members’ General Meeting shall discuss and make decisions on the followings: a) Report on annual business outcomes, financial reports, accounting books,

estimation of profit distribution and loss settlements (if any); report on activities of the Board of Directors and Board of Controllers;

b) Business directions in the following year; c) Raising or decreasing the chartered capital, level of capital contribution of

members; d) Election, dismissal or removal of the Chairman and members of the Board of

Directors, Head and members of the Board of Controllers; đ) Adoption of the list of newly admitted or quitting members of co-operative banks,

people’s credit funds; decisions on expelling members; e) Division, incorporation, merger, dissolution of co-operative banks, people’s credit

funds; g) Amendment and supplement of the Charter; h) Other matters as requested by the Board of Directors, Board of Controllers or at

least one third (1/3) of the total members of co-operative banks, people’s credit funds. Article 81. Board of Directors

1. Board of Directors is the administrative body of co-operative banks, people’s

credit funds, comprised of the Chairman and other members.


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2. The number of members of the Board of Directors shall be decided by the Members’ General Meeting but not less than 03 members.

3. The term of the Board of Directors shall be decided by the Members’ General

Meeting and stated in the Charter with the minimum term of 02 years and maximum term of 05 years.

4. Members of the Board of Directors shall be individuals or representatives of

capital contributing legal entities. Members of the Board of Controllers, Chief Accountant, Treasurer of co-operative banks, people’s credit funds shall not concurrently be members of the Board of Directors and shall not be related parties of members of the Board of Directors.

5. Chairman and members of the Board of Directors shall not be allowed to

authorize third party who is not a member of the Board of Directors to perform her/his rights and obligations.

Article 82. Duties and powers of the Board of Directors

1. To appoint, dismiss, remove, hire or terminate hiring contract with the General

Director (Director) pursuant to the resolutions, decisions of the Members’ General Meeting. 2. To appoint, dismiss Deputy General Directors (Deputy Directors) based on

proposals of the General Director (Director). 3. To implement resolutions, decisions of the Members’ General Meeting. 4. To prepare reports assessing business outcomes; to approve financial

statements, report on business performance and report on the operations of the Board of Directors to submit to the Members’ General Meeting.

5. To prepare agenda for Members’ General Meetings and convene Members’

General Meetings. 6. To execute rights and obligations of co-operative banks, people’s credit funds as

stipulated by the laws. 7. To review applications of new members and to make decisions on withdrawal of

existing members, except for the case of expelling members and submit to the Members’ General Meeting for approval.

8. To be responsible for their decisions before the Members’ General Meeting. 9. Other duties and powers as stipulated in the Charter of co-operative banks,

people’s credit funds. Article 83. Organization and operation of the Board of Controllers

1. The Board of Controllers shall be comprised of at least 03 members, including

one full-time member. The State Bank shall stipulate conditions for people’s credit funds allowed to have 01 full-time controller.

2. Head and members of the Board of Controllers shall be directly elected by the

Members’ General Meeting. 3. Members of the Board of Controllers shall be individuals or representatives of

capital contributing legal entities. Members of the Board of Controllers shall not


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concurrently be members of the Board of Directors, General Director (Director), Deputy General Director (Deputy Director), Chief Accountant, Treasurer and functional staff of co-operative banks, people’s credit funds and shall not be related parties of members of the Board of Directors, General Director (Director), Deputy General Director (Deputy Director), Chief Accountant, Treasurer.

4. The Board of Controllers shall be responsible before the Members’ General

Meeting for carrying out assigned duties and powers. 5. Term of the Board of Controllers shall be the same as that of the Board of

Directors. Article 84. Duties and powers of the Board of Controllers

1. To examine, supervise operations of the co-operative banks, people’s credit

funds in compliance with provisions of the laws. 2. To examine the compliance with provisions of the Charter, resolutions and

decisions of Members’ General Meeting, resolutions and decisions of the Board of Directors; to supervise operations of the Board of Directors, General Director (Director) and members of co-operative banks, people’s credit funds.

3. To monitor financial activities, to supervise the compliance with accounting

standards, income distribution, loss settlement, use of funds, use of property and of state’s subsidy; to supervise the prudence in operations of the co-operative banks, people’s credit funds.

4. To perform periodically internal audit of various operations to precisely evaluate

the business activities and the financial status of co-operative banks, people’s credit funds. 5. To deal within the scope of authority with complaints, denunciations related to

operations of co-operative banks, people’s credit funds in accordance with provisions of the laws and Charter of co-operative banks, people's credit funds.

6. To convene extraordinary Members’ General Meetings in following

circumstances: a) When the Board of Directors, General Director (Director) has offended against

the laws, the Charter of co-operative banks, people's credit funds and resolutions of Members’ General Meeting; when the Board of Directors had not performed or ineffectively performed preventing measures as requested by the Board of Controllers;

b) When at least one third (1/3) of the total members of the Board of Controllers

have requested the Board of Directors or the Board of Controllers to convene Members’ General Meeting but the Board of Directors failed to convene extraordinary Members’ General Meeting within 15 days from the receipt date the request.

7. To inform the Board of Directors and report to Members’ General Meeting and the

State Bank in regards of examination results; to recommend the Board of Directors, General Director (Director) to take corrections for weaknesses and breaches in operations of cooperative banks, people's credit funds.

Article 85. General Director (Director) of co-operative banks, people's credit

funds

The Board of Directors shall appoint one amongst its members or hire another person to act as General Director (Director) of cooperative banks or people’s credit funds.


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The General Director (Director) shall be the highest executive manager and be responsible for carrying out day-to-day operations of co-operative banks, people's credit funds.

Article 86. Rights and obligations of the General Director (Director)

1. To implement business plans. 2. To execute decisions of the Board of Directors. 3. To propose to the Board of Directors alternatives of organizational structures of

co-operative banks, people's credit funds. 4. To sign contracts on behalf of co-operative banks, people's credit funds. 5. To submit annual financial statements to the Board of Directors. 6. To be responsible before the Board of Directors for assigned tasks. 7. Other rights and obligations as stipulated in the Charter of co-operative banks,

people's credit funds.

Section 7. Microfinance institutions Article 87. Types of microfinance institutions

1. Microfinance institutions shall be established in the forms of limited liability

company.

2. Organizational structure, governance and management of microfinance shall comply with provisions of this Law and other applicable provisions of the laws.

Article 88. Members, capital contribution, organizational structure and

geographical boundaries of operations of microfinance institutions

The State Banks shall stipulate the capital contributions of foreign individuals and

organizations to set up microfinance institutions; number of capital contributors; ownership proportions, ownership portions of both domestic and foreign organizations and individuals in microfinance institutions; restrictions on network structure and geographical boundaries of operation of microfinance institutions.

Section 8. Foreign bank’s branches in Vietnam

Article 89. Governance and management of foreign bank branches

1. The organizational and governance structure of foreign bank’s branches in Vietnam shall be decided by foreign banks pursuant to the laws of the home country where their headquarter is located and in accordance with provisions of this Law in regards to organizational structure, governance, management, internal control and internal audit and shall be approved in writing by the State Bank.

2. The General Director (Director) of a foreign bank’s branch shall represent the

foreign bank’s branch before the laws and shall be responsible for all operations of the


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foreign bank’s branch and the management of the branch’s day-to-day operations in accordance with duties and powers set out in this Law and other applicable provisions of the laws.

3. The General Director (Director) of a foreign bank branch shall not be involved in the

management and governance of another credit institution or economic organization and shall not concurrently act as the Chief representative of the foreign bank’s representative office in Vietnam.

4. The General Director (Director) of a foreign bank’s branch shall meet in full

criteria and conditions stipulated in clause 4 of Article 50 of this Law. Individuals to be appointed to General Director (Director) position of the foreign bank’s branch shall be approved in writing by the State Bank before the appointment takes place. Order and application files for approval of General Director (Director) of foreign bank’s branches and report of the appointment shall be subject to provisions of clauses 2 and 3 of Article 51 of this Law.

5. In case a foreign bank has two or more branches operating in Vietnam applies

consolidated financial, accounting and reporting regime, the foreign bank shall authorize one General Director (Director) to assume responsibilities before the laws for all of the operations of the foreign bank’s branches in Vietnam.

CHAPTER IV: OPERATION OF CREDIT INSTITUTIONS

Section 1. General regulations

Article 90. Scope of permitted activities of credit institutions 1. The State Bank shall stipulate in details the scope, types and contents of banking

activities and other business activities of credit institutions in the License granted to each credit institution.

2. A credit institution shall not be permitted to carry out any business activities other

than banking activities and other business activities stipulated in the License granted to the credit institution by the State Bank.

3. Banking activities and other business activities of credit institutions provided for in

this Law shall be carried out in accordance with guidelines of the State Bank. Article 91. Interest rate and fees in credit institution’s business activities 1. Credit institutions shall have the right to fix and shall have to publicize interest

rates and service fees for business activities of credit institutions. 2. Credit institutions and their customers shall have the right to negotiate interest

rates and credit provision fees in the course of banking business of credit institutions as stipulated by the laws.

3. In cases of occurrence of unusual events in banking activities, in order to ensure

the safety of the whole system of credit institutions, the State Bank shall have the right to stipulate the determination regime for fees and interest rates for credit institutions’ business activities.

Article 92. Issuance of certificates of deposits, bills of exchange, bills of credit of credit institutions


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1. Credit institutions shall be allowed to issue certificates of deposits, bills of exchange and bills of credit to mobilize funds in accordance with provisions of this Law and provisions of the State Bank.

2. Based on this Law and the Law on securities, the Government shall stipulate the

issuance of bonds, excluding convertible bonds, to mobilize fund for credit institutions.

Article 93. Internal regulations 1. Based on provisions of this Law and other applicable provisions of the laws, credit

institutions shall formulate and enforce internal regulations for activities of credit institutions, ensuring that the internal controlling and internal auditing mechanisms, risk management mechanism being inbuilt in each of business procedures and internal regulations for contingency plans.

2. Credit institutions shall issue following internal regulations: a) Regulations on provision of credit and loans management to ensure the use of

loans in line with its original purpose; b) Regulations on assets classification, risk provisioning and the use of risk

provisions; c) Regulations on evaluation of assets quality and compliance of capital adequacy

ratio; d) Regulations on liquidity management, including procedures and limits of liquidity

management; đ) Regulations on internal control system and internal audit regime suitable with the

nature and the scale of operations of the credit institution; e) Regulations on internal credit rating system; g) Regulations on risk management for credit institution’s activities; h) Regulations on formalities and procedures, including know-your-customer

principle to prevent the credit institutions from being abused for money laundering, terrorism-financing and other criminal offences;

i) Regulations on contingency plans. 3. Credit institutions shall submit to the State Bank their internal regulations

stipulated in clause 2 of this Article immediately after their issuance. Article 94. Approval of credit provision, examination of loans use 1. Credit institutions shall request their clients to provide proofs of the feasibility of

their business plans, their financial capacity, lawful purpose of fund employment and security measures for loans prior to making decisions on provision of credit.

2. Credit institutions shall carry out the evaluation and approval of credit on principle

of segregation of duties between evaluation and decision-making phases. 3. Credit institutions shall have right and obligation to carry out examination and

control of their clients’ fund employment and repayment.


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4. Credit institutions shall have the right to request their clients to report on the borrowed fund employment and prove that the fund is used in compliance with the borrowing purpose.

Article 95. Termination and settlement of loans, adjustment of interest rates 1. Credit institutions shall have the right to terminate and collect a loan prior to the

due date in cases when information provided by the clients is identified to be incorrect or when the clients are identified to have committed a breach of the credit contract.

2. In cases when the clients fail to make repayments on the due date, credit institutions shall, unless otherwise agreed by the two parties, have the right to settle the loan or to dispose the pledged assets in accordance with provisions of the credit contract or contract of security for loan and other applicable provisions of the laws. The State Bank shall stipulate in details the loan restructuring and loan trading of credit institutions.

3. In cases when a client or her/his guarantor went bankrupted and therefore fails

to make repayment of loans, the loans shall be reclaimed by the credit institution in accordance with provisions of the laws on bankruptcy.

4. Credit institutions shall have the right to offer their clients exemptions from or

reductions of interest rates and fees in accordance with their internal regulations. Article 96. Storage of credit files 1. Credit institutions shall store credit files, including: a) Credit contracts and relevant documents clearly specifying the purposes of

borrowed fund employment and security measures for loans; b) Reports on actual financial status of borrowers; c) Decisions on provision of credit signed by competent persons; where such

decisions are collectively made, the minutes of the decisions shall be required; d) Documents arising in the course of fund employment related to the credit

contracts. 2. Storage duration of credit files shall be subject to provisions of the laws. Article 97. Electronic banking activities Credit institutions shall be allowed to provide business activities via electronic

means in accordance with guidances of the State Bank on risk management and provision of the laws on electronic transactions.

Section 2. Activities of commercial banks

Article 98. Banking activities of commercial banks

1. To accept demand deposits, term deposits, saving deposits and other types of deposits.


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2. To issue certificates of deposits, bills of exchange, bills of credits and bonds to mobilise domestic and foreign funds.

3. To provide credits in following forms: a) Lending; b) Discounting and rediscounting negotiable instruments and other valuable papers; c) Providing bank guarantee; d) Issuing credit cards; đ) Providing domestic factoring services; international factoring services shall be

provided by commercial banks licensed with international payment services; e) Other forms of credit provision upon approval of the State Bank. 4. To open payment accounts for customers. 5. To provide payment instruments. 6. To provide following payment services: a) Domestic payment services including cheques, payment orders, payment

authorisations, collection orders, collection authorisations, letters of credits, bank cards;

b) International and other payment services upon approval of the State Bank.

Article 99. Borrowings from the State Bank

Commercial banks shall be allowed to borrow funds from the State Bank in the form of refinancing in accordance with provisions of the Law on the State Bank of Vietnam.

Article 100. Borrowing from credit institutions and financial institutions

Commercial banks shall be allowed to borrow capital from domestic and foreign

credit and financial institutions in accordance with provisions of the laws.

Article 101. Opening of accounts 1. Commercial banks shall have to open deposit account at the State Bank and

maintain in such account an average balance of no less than the compulsory reserves level.

2. Commercial banks shall be allowed to open payment accounts at other credit

institutions. 3. Commercial banks shall be allowed to open deposit and payment accounts

overseas in accordance with provisions of the laws on foreign exchange. Article 102. Organization of and participation in payment systems 1. Commercial banks shall be allowed to set up internal payment systems and

participate in the national inter-bank payment system.


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2. Commercial banks shall be allowed to participate in international payment systems upon approval of the State Bank.

Article 103. Capital contribution and shares purchase 1. Commercial banks shall be allowed to use only chartered capital and reserve

funds to make capital contributions and to purchase shares in accordance with provisions of clauses 2, 3, 4 and 6 of this Article.

2. Commercial banks shall have to establish subsidiaries and affiliates to carry out

following business activities: a) Securities underwriting; securities brokerage; management and distribution of

securities investment fund certificates; management of securities portfolio and buying/selling of stocks;

b) Finance leasing; c) Insurance. 3. Commercial banks shall be allowed to establish and/or acquire subsidiaries and

affiliates operating in following fields: management of security assets, overseas national currency exchange, foreign exchange trading, gold, factoring, issuance of credit cards, consumer credits, payment intermediary services and credit information services.

4. Commercial banks shall be allowed to make capital contributions and purchase

shares of enterprises operating in following fields: a) Insurance, securities, overseas national currency exchange, foreign exchange

trading, gold, factoring, issuance of credit cards, consumer credits, payment intermediary services and credit information services;

b) Other fields not stipulated in sub clause (a) of this clause. 5. The establishment, acquisition of subsidiaries, affiliate companies stipulated in

clauses 2 and 3 of this Article and the capital contribution, shares purchase stipulated in sub clause 4(b) of this Article shall be approved in advance by the State Bank in writing. The State Bank shall stipulate in details conditions, application files, formalities and procedures for mentioned above approvals.

Conditions, formalities and orders of establishment of subsidiaries, affiliate companies

of credit institutions shall be subject to applicable provisions of the laws. 6. Commercial banks and their subsidiaries shall be allowed to purchase/own stocks of

other credit institutions in accordance with conditions and limits of the State Bank’s stipulations. Article 104. Participation in the monetary market

Commercial banks shall be allowed to participate in the tender of Treasury bills,

buying/selling of negotiable instruments, Government bonds, Treasury bills, State Bank’s bills and other valuable papers on the market.


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Article 105. Trading and providing services in regards to foreign currencies and derivatives products

1. Upon approval of the State Bank, commercial banks shall be allowed to carry out

the trading and providing to their domestic and foreign customers following products: a) Foreign currencies; b) Exchange rates derivatives; interest rates derivatives; foreign exchange

derivatives; money derivatives and other financial assets derivatives. 3. The provision of foreign exchange services to customers shall be subject to

provisions of the laws on foreign exchange. Article 106. Trust business and agent services Commercial banks shall be allowed to act as the trustor, trustee, principal, agent in

areas relating to banking activities, insurance business, management of assets in accordance with provisions of the State Bank.

Article 107. Other business activities of commercial banks 1. Cash management services, banking and finance consulting services; assets

management and safeguarding services; leasing of safe and safety boxes. 2. Corporate finance consultancy, merger and acquisition consultancy, investment

consultancy. 3. Buying and selling of Government bonds, corporate bonds. 4. Money brokerage services. 5. Securities depository, trading of gold and other business activities related to

banking activities upon written approval of the State Bank.

Section 3. Operations of finance companies

Article 108. Banking activities of finance companies 1. Finance companies shall be allowed to carry out one or several of following

banking activities: a) To accept deposits from organizations; b) To issue certificates of deposits, bills of exchange, bills of credit and bonds to

mobilize funds from organizations; c) To borrow funds from domestic and foreign credit and financial institutions in

accordance with provisions of the laws; to borrow funds from the State Bank in the form of refinancing in accordance with provisions of the State Bank;

d) To provide loans, including installment and consumer loans; đ) To provide guarantees;


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e) To discount, rediscount negotiable instruments and other valuable papers; g) To issue credit cards; to carry out factoring, finance leasing and other types of

credit provisions upon approval of the State Bank. 2. The State Bank shall stipulate in details conditions for finance companies to

carry out banking activities stipulated in clause 1 of this Article. Article 109. Opening of accounts by finance companies 1. Deposit-taking finance companies shall have to open deposit accounts with the

State Bank and shall maintain an average balance of such deposit account not lower than the compulsory reserves level.

2. Finance companies shall be allowed to open payment accounts with commercial

banks and foreign bank’s branches. 3. Finance companies licensed with credit cards issuance activity shall be allowed

to open accounts with foreign banks in accordance with provisions of the laws on foreign exchange.

4. Finance companies shall be allowed to open deposits accounts and borrowed

funds management accounts for their customers. Article 110. Capital contribution, shares purchase by finance companies 1. Finance companies shall be allowed to use only their chartered capital and

reserve funds to contribute capital or purchase shares as stipulated in clauses 2 and 3 of this Article.

2. Finance companies shall be allowed to contribute capital and purchase shares of

enterprises and investment funds. 3. Finance companies shall only be permitted to set up, acquire subsidiaries and

affiliate companies operating in the fields of insurance, securities and management of security assets upon written approval of the State Bank.

4. The State Bank shall stipulate in details conditions, application files, formalities and

procedures for approval of establishment of subsidiaries and affiliate companies of financial companies stipulated in clause 3 of this Article.

Conditions, formalities and procedures for establishment of subsidiaries, affiliate

companies of finance companies shall be subject to applicable provisions of the laws. Article 111. Other business activities of finance companies 1. To receive trust funds from Government, organizations and individuals to make

investments in production and business projects and to provide permitted credit; to trust funds to credit institutions to provide credit. The receipt of trust funds from individuals and trust funds to credit institutions to provide credit shall be subject to provisions of the State Bank.

2. To participate in money market as stipulated in Article 104 of this Law. 3. To sell and purchase Government bonds, corporate bonds.


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4. To underwrite Government bonds, corporate bonds; to be agent for bonds, stocks and other valuable papers issuance.

5. To trade and provide foreign currencies services in accordance with stipulations

of the State Bank. 6. To act as insurance agents. 7. To provide consultancy services in banking, finance and investment areas. 8. To provide assets management and safeguarding services.

Section 4. Operations of finance leasing companies

Article 112. Banking activities of finance-leasing companies 1. To accept deposits from organizations. 2. To issue certificates of deposits, bills of exchange, bills of credit and bonds to

mobilize funds from organizations. 3. To borrow funds from domestic and foreign credit and financial institutions in

accordance with provisions of the laws; to borrow funds from the State Bank in the form of refinancing in accordance with provisions of the State Bank.

4. To carry out finance-leasing. 5. To provide additional working capital loans to finance lessees. 6. To carry out operational leasing provided that the total value of assets for

operational leasing shall not exceed 30% of the total assets of the finance leasing company.

7. To provide other types of credit provisions upon approval of the State Bank. Article 113. Finance-leasing activities Finance-leasing activities shall be a type of medium and long-term credit provisions

based on finance-leasing contracts and shall meet one of the following conditions: 1. Upon expiry of the lease term according to the finance-leasing contract, the

lessee shall be transferred the ownership title over the leased assets or shall be able to continue the lease as agreed by the two parties.

2. Upon expiry of the lease term according to the finance leasing contract, the

lessee shall have the option to purchase the leased assets at a nominal price that lower than the actual value of the leased assets at the time of such purchase.

3. The lease term of an asset shall at least be equal to 60% of the necessary term

for depreciation of such leased asset. 4. The total lease value of an asset stipulated in the finance-leasing contract shall at

least be equal to the value of such asset at the signing point of the contract.


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Article 114. Opening of accounts by finance-leasing companies 1. Deposit-taking finance-leasing companies shall have to open deposit accounts

with the State Bank shall maintain an average balance on such deposit accounts not lower than the compulsory reserves level.

2. Finance-leasing companies shall be allowed to open payment accounts with

credit institutions, foreign bank’s branches. Article 115. Capital contributions and shares purchase by finance-leasing

companies Finance-leasing companies shall not be allowed to contribute capital or purchase

shares to set up subsidiaries and/or affiliate companies in any form. Article 116. Other activities of finance-leasing companies 1. To receive trust funds from the Government, organizations and individuals to

carry out finance-leasing activities. The receipt of trust funds from individuals shall be subject to provisions of the State Bank.

2. To participate in tender for Treasury’s bills organized by the State Bank. 3. To purchase and sell Government bonds. 4. To trade and provide foreign currencies services and finance-leasing trust in

accordance with provisions of the State Bank. 5. To act as insurance agents. 6. To provide consultancy services in banking, finance and investment areas to

finance lessees.

Section 5. Operations of credit institutions being co-operatives Article 117. Activities of co-operative banks 1. The main activities of co-operative banks shall be harmonization of funds and

provision of banking activities to their members that are people’s credit funds. 2. Co-operative banks shall be allowed to carry out several banking activities and

other business activities in accordance with provisions of Section 2 of Chapter IV of this Law upon written approval of the State Bank.

Article 118. Operations of people’s credit funds 1. To accept deposits in VND in following forms: a) To accept deposits from members; b) To accept deposits from non-member organizations, individuals in accordance

with provisions of the State Bank. 2. To provide loans in VND in following forms:


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a) Provide loans to customers who are members of people's credit funds; b) Provide loans to non-member customers in accordance with provisions of the

State Bank. 3. To provide remittance services, carry out collection and payment orders for

members. 4. Other activities, including: a) To receive trust funds from the Government, organizations and individuals and to

use trusted funds to provide loans; b) To borrow from other credit institutions and financial organizations; c) To contribute capital to establish co-operative banks; d) To open deposit accounts with the State Bank; đ) To open payment accounts with commercial banks, foreign bank’s branches; e) To act as trustee and agent in several fields relating to banking activities and

assets management in accordance with provisions of the State Bank; g) To act as an insurance agent; h) To provide consultancy services in banking and finance to members. 5. The State Bank shall stipulate in details the geographical boundaries of

operations for each people’s credit fund in the License.

Section 6. Operations of microfinance institutions

Article 119. Fund mobilization by microfinance institutions 1. To accept deposits in VND in following forms: a) Compulsory savings pursuant to regulations of microfinance institutions; b) Deposits from organizations and individuals, including voluntary deposits of

microfinance customers, except for deposits for payment purpose. 2. To borrow from credit and financial institutions, domestic and foreign individuals

and organizations in accordance with provisions of the laws. Article 120. Provision of credit by microfinance institutions 1. Microfinance institutions shall be allowed to provide credit in VND in the forms of

loans. The provision of credit by microfinance institutions might be secured by compulsory savings or guarantees of a group of savings and borrowing customers.

2. Microfinance institutions shall maintain a ratio between total outstanding credits

provided to low-income individuals and households, super micro enterprises and total outstanding credit not to be lower than a ratio stipulated by the State Bank.


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Article 121. Opening accounts of microfinance institutions 1. Microfinance institutions shall be allowed to open deposit accounts with the

State Bank and commercial banks. 2. Microfinance institutions shall not be allowed to open payment accounts for their

customers.

Article 122. Other activities of microfinance institutions

1. To trust their funds and to use trusted funds to provide loans. 2. To provide financial consultancy services in the field of microfinance. 3. To provide collection, payment orders and remittance services to microfinance

customers. 4. To act as an insurance agent.

Section 7. Operations of foreign bank’s branches in Vietnam

Article 123. Contents of operations of foreign bank’s branches 1. Foreign bank’s branches shall be allowed to carry out activities stipulated in

Section 2 of Chapter IV of this Law, except for the followings: a) Activities stipulated in Article 103 of this Law; b) Activities which the foreign banks are not allowed to carry out in the home

country where their headquarter is located. 2. Foreign bank's branches shall be allowed to provide several foreign currencies

services on international markets to customers in Vietnam in accordance with provisions of the laws on foreign currencies.

3. The State Bank shall stipulate in details contents of operations in the License

granted to foreign bank’s branches in accordance with provisions of this Law and in line with the scale, type and fields of operations of the foreign bank.

CHAPTER V: REPRESENTATIVE OFFICES OF FOREIGN CREDIT INSTITUTIONS AND/OR OF OTHER FOREIGN INSTITUTIONS ENGAGING IN BANKING ACTIVITIES

Article 124. Establishment of representative offices

Foreign credit institutions and other foreign institutions engaging in banking activities

shall be allowed to set up representative offices in provinces/cities under the central management in Vietnam. In each of such provinces/cities, foreign credit institutions and other foreign institutions engaging in banking activities shall be allowed to set up only one representative office.


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Article 125. Contents of operations of representative offices Representative offices of foreign credit institutions and/or of other foreign institutions

engaging in banking activities shall be allowed to perform following activities as stipulated in the License granted by the State Bank:

1. To act as a liaison office. 2. To conduct market survey. 3. To promote the development of investment projects of foreign credit institutions

and/or of other foreign institutions engaging in banking activities in Vietnam. 4. To promote and supervise the implementation and performance of contracts and

agreements signed between foreign credit institutions and/or other foreign institutions engaging in banking activities and Vietnamese credit institutions and Vietnamese enterprises, and of projects funded by foreign credit institutions and/or other foreign institutions engaging in banking activities in Vietnam.

5. Others activities in accordance with provisions of Vietnamese laws.

CHAPTER VI: RESTRICTIONS TO ENSURE THE SAFETY AND THE SOUNDNESS OF OPERATIONS OF CREDIT INSTITUTIONS

Article 126. Cases not eligible for credit provision


credits to following organizations or individuals:

a) Members of the Board of Directors, members of the Members’ Council, members of the Board of Controllers, General Director (Director) and Deputy General Director (Deputy Director) and other equivalent positions of credit institutions, foreign bank’s branches; legal entity shareholders whose representatives for their capital contribution are members of the Board of Directors, members of the Board of Controllers of joint stock credit institutions; legal entity capital contributors and/or owners of limited liability credit institutions;

b) Parents, spouse, children of any members of the Board of Directors, members of the Members’ Council, members of the Board of Controllers, General Director (Director) and Deputy General Director (Deputy Director) and other equivalent positions.

2. The stipulations in clause 1 of this Article shall not be applicable to people’s

credit funds and microfinance institutions.

3. Credit institutions, foreign bank’s branches shall not be allowed to provide credits to customers secured by any individuals stipulated in clause 1 of this Article. Credit institutions, foreign bank’s branches shall not be allowed to provide security in any forms for other credit institutions to provide credits to individuals stipulated in clause 1 of this Article.

4. Credit institutions shall not be allowed to provide credits to securities companies

of which the credit institution holds controlling interest.

5. A credit institution shall not be allowed to provide credits secured by shares issued by itself or its subsidiaries.


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6. Credit institutions shall not be allowed to provide loans secured by shares of another credit institution so as to use that borrowed fund to make capital contribution to the latter.

Article 127. Restrictions on credit provision


unsecured credits or provide credits with more favourable conditions to following individuals:

a) Auditing companies or auditors who currently auditing the credit institution or foreign bank’s branch; inspectors who currently inspecting the credit institution, foreign bank’s branch;

b) Chief accountant of the credit institution or the foreign bank’s branch;

c) Major shareholders, founding shareholders;

d) Enterprises of which more than 10% of chartered capital is owned by one of

those stipulated in clause 1 of Article 126 of this Law;

đ) Individuals who perform the appraisal and approval of credits provision;

e) Subsidiaries and affiliates of the credit institutions or enterprises of which the credit institution holds controlling interest.

2. The total outstanding credits provided to individuals stipulated in subclauses

1(a), 1(b), 1(c), 1(d) and 1(đ) of this Article shall not exceed 05% of own capital of credit institutions, foreign bank’s branches.

3. The provision of credits to individuals stipulated in clause 1 of this Article shall be subject to approval of the Board of Directors, Members’ Council and shall be disclosed to the credit institution.

4. The total outstanding credits provided to an individual stipulated in subclause

1(e) of this Article shall not exceed 10% of own capital of the credit institution; the total outstanding credits provided to all individuals stipulated in subclause 1(e) of this Article shall not exceed 20% of own capital of the credit institution.

Article 128. Limits on credit provision

1. The total outstanding credits provided to a single borrower shall not exceed 15%

of own capital of commercial banks, foreign bank’s branches, people’s credit funds or microfinance institutions; the total outstanding credits provided to a single borrower and her/his related parties shall not exceed 25% of own capital of commercial banks, foreign bank’s branches, people’s credit funds or the microfinance institutions.

2. The total outstanding credits provided to a single borrower shall not exceed 25% of own capital of non-bank credit institutions; the total outstanding credits provided to a single borrower and her/his related parties shall not exceed 50% of own capital of non-bank credit institutions.

3. The total outstanding credits stipulated in clauses 1 and 2 of this Article shall not

include loans provided from trust funds of the Government, organizations and individuals or loans provided to other credit institutions.


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4. The total outstanding credits stipulated in clauses 1 and 2 of this Article shall include the total investments in bonds issued by customers.

5. The State Bank shall stipulate limits and conditions for commercial banks,

foreign bank’s branches to provide credit for trading and investing in stocks. 6. In cases when the demand for capital of one borrower and her/his related

parties exceeds the limits stipulated in clauses 1 and 2 of this Article, credit institutions and foreign bank’s branches may provide syndicated loans to the customer in accordance with provisions of the State Bank.

7. In order to implement socio-economic objectives, under special circumstances in

which syndicated loans provided by credit institutions, foreign bank’s branches not yet meet the demand for capital of one customer, the Prime Minister shall determine the maximum limit of loans that exceeds all the limits stipulated in clauses 1 and 2 of this Article on a case-by-case basis.

8. The total provided credits stipulated in clause 7 of this Article shall not exceed

04 times of the own capital of credit institutions, foreign bank branches.

Article 129. Limits on capital contributions and share purchases

1. The level of capital contributions and the shares purchase of a commercial bank and its subsidiaries and affiliates in one enterprise operating in areas stipulated in clause 4 of Article 103 of this Law shall not exceed 11% of chartered capital of the investee enterprise.

2. The total level of capital contributions and shares purchase of a commercial bank

in various enterprises, including portions of capital contributions and shares purchase in its subsidiaries and affiliates, shall not exceed 40% of chartered capital and reserve funds of the commercial bank.

3. The level of capital contributions and shares purchase of a finance company and

its subsidiaries and affiliates in one enterprise stipulated in clause 1 of Article 110 of this Law shall not exceed eleven 11% of chartered capital of the investee enterprise.

4. The total level of capital contributions and shares purchase of a finance company

stipulated in clause 1 of Article 110 of this Law in various enterprises, including portions of capital contributions and shares purchase in its subsidiaries and affiliates, shall not exceed 60% of chartered capital and reserve funds of the finance company.

Article 130. Prudential ratios

1. Credit institutions, foreign bank’s branches shall maintain following prudential

ratios: a) Liquidity ratio;

b) Capital adequacy ratio of 8% or a higher ratio as stipulated by the State Bank in

certain period of time; c) Maximum ratio of medium and long-term loans financed by short term funds;

d) Positions of foreign currencies and gold versus own capital;

đ) Ratio of outstanding loans versus total deposits;


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e) Ratios of medium and long-term deposits versus total outstanding medium and

long-term loans.

2. Commercial banks and foreign bank’s branches participating in the national inter-bank payment system shall have to hold a minimum number of permitted valuable papers as pledges in accordance with provisions of the State Bank in certain period of time.

3. The State Bank shall stipulate in details prudential ratios stipulated in clause 1 of

this Article for each type of credit institutions, foreign bank’s branches. 4. The total investments of a credit institution in other credit institutions and its

subsidiaries in the form of capital contribution or shares purchase and the investments in the form of capital contribution or shares purchase in order to hold controlling interests in enterprises operating in banking, securities or insurance areas shall be excluded from the credit institution’s own capital when calculating prudential ratios.

5. In cases when a credit institution or a foreign bank’s branch fails to satisfy or is

likely not to satisfy the capital adequacy ratio stipulated in sub clause 1(b) of this Article, the credit institution or the foreign bank’s branch shall report to the State Bank its solutions and remedy plans to meet the capital adequacy ratio as stipulated. The State Bank shall apply necessary measures in accordance with provisions of Article 149 of this Law to ensure the capital adequacy ratio of the credit institution, foreign bank's branch meets the requirements, including such measures as restrictions on the scope of operations and/or disposal of the assets of the credit institution, foreign bank’s branch.

Article 131. Risk provisioning

1. Credit institutions, foreign bank’s branches shall make provisions for risks during

their course of business. This risk provisions shall be accounted for as operating expenses.

2. The assets classification, the provisioning rate, the provisioning method and the

use of the provisions to offset risks arising during the course of business of credit institutions, foreign bank’s branches shall be stipulated by the State Bank after seeking agreement of the Ministry of Finance.

3. In the case when credit institutions or foreign bank’s branches reclaim the

funds that have been offset by risk provisions, the reclaimed amount shall be accounted for as revenue of the credit institutions, foreign bank’s branches.

Article 132. Real estate business

Credit institutions shall not be allowed to engage in real estate business, except for

following cases: 1. Buying, investing and owning real estates as business offices or working

premises or warehouses that directly serving their operations. 2. Renting out part of credit institutions’ unused business offices. 3. Holding real estates as a result of loan disposal. Within 03 years since the

disposal date of secured assets that are real estates, credit institutions shall have to sell, transfer or buy such real estates in order to comply with the ratio of investment in fixed assets and the purposes of fixed assets usage as stipulated in Article 149 of this Law.


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Article 133. Requirement for ensuring prudence in electronic banking Credit institutions, foreign bank’s branches shall ensure the prudence and

security for electronic banking operations in accordance with guidance of the State Bank.

Article 134. Rights and obligations of controlling companies

Companies owning, whether directly or indirectly, more than 20% of chartered

capital or voting shares or having controlling interests of a commercial bank before the effective date of this Law; commercial banks having subsidiaries and affiliates (hereinafter referred to as controlling companies) shall have following rights and obligations:

1. Depending on legal form of subsidiaries or affiliates, controlling companies shall

exercise their rights and obligations as capital contributors or owners or shareholders in their relationships with subsidiaries, affiliates in accordance with provisions of this Law and other applicable provisions of the laws.

2. Contracts, transactions and other relationships between controlling companies

with their subsidiaries, affiliates shall be established and executed fairly and independently based on the same conditions as those applied to independent legal entities.

3. Controlling companies shall not interfere in the organization and operations of

their subsidiaries, affiliates in excess of their rights as the owner or capital contributors or shareholders.

Article 135. Capital contribution, share purchase between subsidiaries and

affiliates, controlling companies

1. Subsidiaries and affiliates of the same controlling company shall not be allowed make capital contribution or purchase shares of each others.

2. Subsidiaries and affiliates of a credit institution shall not be allowed to make

capital contributions or buy shares of that credit institution. 3. A credit institution which currently is a subsidiary or affiliate of a controlling

company shall not be allowed to make capital contributions or purchase shares of the controlling company.

CHAPTER VII: FINANCIAL ACCOUNTING AND REPORTING

Article 136. Financial regime Financial regime of credit institutions and foreign bank branches shall be subject to

provisions of the Government. Article 137. Fiscal year Fiscal year of credit institutions, foreign bank's branches shall commence on the 1st

January and ends on 31st December of the same calendar year.


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Article 138. Accounting Credit institutions and foreign bank’s branches shall carry out their accounting works

in accordance with provisions of the laws on accounting. Article 139. Reserve funds 1. Credit institutions, foreign bank’s branches shall annually draw from their after-tax

profits to contribute to and maintain following reserve funds: a) Reserve fund for supplementation of chartered capital or injected capital shall be

annually contributed by 05% of after-tax profits. The maximum level of this fund shall not exceed the chartered capital level or injected capital level of credit institutions, foreign bank’s branches;

b) Financial reserve fund; c) Other reserve funds as stipulated by the laws. 2. Credit institutions shall not be allowed to use the funds stipulated in clause 1 of

this Article to pay dividends to shareholders or to distribute profits to owners or capital contributors.

Article 140. Purchases of and investments in fixed assets Credit institutions or foreign bank branches shall be allowed to purchase or invest in

fixed assets provided that the fixed assets shall be directly used for their operations and the value of such assets shall not exceed 50% of their chartered capital and reserve fund for supplementation of chartered capital as for credit institutions or 50% of injected capital and reserve fund for supplementation of injected capital as for foreign bank branches.

Article 141. Reporting 1. Credit institutions, foreign bank’s branches shall implement financial reporting

regimes in accordance with provisions of the laws on accounting, statistics and periodical operational reports in accordance with provisions of the State Bank.

2. In addition to reports stipulated in clause 1 of this Article, credit institutions or

foreign bank’s branches shall immediately report in writing to the State Bank in following circumstances:

a) Occurrence of abnormal situations in operations which may cause adverse

effect to business operations of credit institutions, foreign bank’s branches;

b) Major changes in organizational structure, governance, management; major changes in operation and financial situation of major shareholders; and other changes that have material impacts on the business activities of credit institutions and foreign bank branches.

3. Subsidiaries and affiliates of credits institutions shall be responsible to send their

financial reports and performance reports to the State Bank as requested. 4. Credit institutions or foreign bank branches shall, within ninety (90) days of from

the closing date of the fiscal year, submit annual reports to the State Bank in accordance with provisions of the laws.


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5. Joint-venture credit institutions, 100% foreign-owned credit institutions, foreign banks’ branches, representative offices of foreign credit institutions or of other foreign institutions engaging in banking activities shall, within 180 days since the closing date of the fiscal year, submit annual reports of foreign credit institutions or foreign institutions engaging in banking activities to the State Bank.

6. Joint venture credit institutions, 100% foreign-owned credit institutions, foreign

bank’s branches shall have to report in writing to the State Bank upon any changes of foreign credit institutions in one of the following circumstances:

a) Division, merger, incorporation, liquidation, bankruptcy or dissolution; b) Change of name, change of address of headquarter; c) Change of major shareholders, Board of Directors, Executive Boards; d) Any abnormal changes that have material impacts on organization and

operations. Article 142. Reports of controlling companies 1. Within 120 days since the closing date of the fiscal year, in addition to reports and

other documents to be prepared in accordance with provisions of the laws, controlling companies shall prepare and submit to the State Bank the audited consolidated financial statements in accordance with provisions of the laws on accounting.

2. With 90 days since the closing date of the fiscal year, controlling companies shall

prepare and submit to the State Bank their consolidated reports on trading and other transactions executed between controlling companies and their subsidiaries, affiliates.

Article 143. Publication of financial statements Credit institutions, foreign bank's branches shall, within 120 days from the closing

date of the fiscal year, publicize their financial statements in accordance with provisions of the laws.

Article 144. Overseas remittance of profits and assets 1. Foreign bank branches, 100% foreign-owned credit institutions operating in

Vietnam shall be allowed to remit overseas their retained profits after contribution to reserve funds and fulfilment of all financial obligations in accordance with provisions of Vietnamese laws.

2. The foreign party to a joint-venture credit institution shall be allowed to remit

overseas its distributed profits after contribution to reserve funds and fulfilment of all financial obligations of joint-venture credit institution in accordance with provisions of Vietnamese laws.

3. Foreign bank branches, 100% foreign-owned credit institutions and foreign

parties to joint-venture credit institutions operating in Vietnam shall be allowed to transfer overseas their residual assets upon liquidation and termination of their operations in Vietnam.

4. Overseas remittance of money and other assets stipulated in clauses 1, 2 and 3

of this Article shall be subject to applicable provisions of Vietnamese laws.


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CHAPTER VIII: SPECIAL CONTROL, RE-ORGANISATION, BANKCRUPTCY, DISSOLUTION AND LIQUIDATION OF CREDIT INSTITUTIONS

Section 1. Special Control

Article 145. Report on insolvency In cases when a credit institution is likely to become insolvent, it shall promptly

report to the State Bank on its actual financial status, causes of insolvency and measures taken and planned to be taken to deal with the situation.

Article 146. Application of special control 1. Special control means direct supervision by the State Bank over a credit

institution which is likely to become insolvent and/or illiquid. 2. The State Bank shall be responsible for examining and identifying in a timely

manner situations of likely insolvency and/or illiquid. 3. A credit institution shall be considered and put under special control by the State

Bank if it falls in any of the following circumstances: a) Being likely to become insolvent; b) Non-performing loans that are likely not to be recovered cause illiquidity; c) When total cumulative losses of the credit institution exceeds 50% of actual value

of the chartered capital and other reserve funds stated in the latest financial statements; d) When the credit institution has been rated at low and weak level in two

consecutive years in accordance with provisions of the State Bank; đ) When the credit institution has not been able to maintain required capital

adequacy ratio stipulated in subclause 1(b) of Article 130 of this Law consecutively in one year or when the capital adequacy ratio falls lower 04% consecutively in a period of six months.

Article 147. Decisions on application of special control 1. The State Bank shall make a decision on application of special control to a

credit institution and on establishment of Board of special control. 2. Contents of the decisions on application of special control shall include: a) Name of the credit institution to be put under special control; b) Reasons for application of special control; c) Full name of members of the special controlling board and their specific duties; d) Duration of application of special control. 3. The decision on application of special control to a credit institution shall be

notified by the State Bank to competent state authorities and other relevant competent bodies for co-operation.


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4. The State Bank shall stipulate in details the public disclosure of the decision on application of special control to a credit institution.

Article 148. Duties and powers of the Board of special control 1. The Board of special control shall have following duties: a) To instruct the Board of Directors, Members’ Council, Board of Controllers,

General Director (Director) and other equivalent positions of the credit institution subject to special control to develop solutions for strengthening the organizational structure and operations of the credit institution;

b) To direct and supervise the implementation of the solutions for strengthening the

organizational structure and operations approved by the Board of special control; c) To report to the State Bank on operations and results of the implementation of

solutions for strengthening the organizational structure and operations of the credit institution.

2. The Board of special control shall have following powers: a) To suspend any operations which are not appropriate with the approved

solutions for strengthening the organizational structure and operations of the credit institution or breach the prudential regulations on banking operations that may cause damage to the legitimate interests of depositors;

b) To suspend or temporary suspend any administrative, management and/or

controlling authorities of any members of the Board of Directors, Members’ Council, Board of Controllers, General Director (Director), Deputy General Director (Deputy Director) of the credit institution where necessary;

c) To request the Board of Directors, Member’s Council, General Director (Director)

of the credit institution to dismiss, suspend operations of any individuals committing a breach of provisions of the laws or failing to comply with the approved solutions for strengthening organizational structure and operations of the credit institution;

d) To propose the State Bank to make decision on extension or termination of the

application of special control; to provide or suspend the provision of the special loan to the credit institution; to purchase shares of the credit institution; to apply liquidation or to revoke the Licence of the credit institution; to take over the business or to apply compulsory merger, incorporation or acquisition of the credit institution;

đ) To request the credit institution to file bankruptcy application in accordance with

provisions of the laws on bankruptcy. 3. The Board of special control shall be responsible for its decisions during the

application of special control. Article 149. The State Bank’s authorities over credit institutions put under

special control 1. The State Bank shall make decision based on the proposal of the Board of

special control stipulated in sub clause 2(d) of Article 148of this Law. 2. The State Bank shall have the power to request owners to raise capital, to

develop and implement restructuring plan or to request compulsory merger, incorporation


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or acquisition of credit institutions being put under special control if the owners are unable or fail to raise capital.

3. The State Bank shall have the power to directly or appoint another credit

institution contribute capital, purchase shares of the credit institution being put under special control when this credit institution is unable to perform the State Bank’s requests stipulated in clause 2 of this Article or when it is indentified by the State Bank that the cumulative losses of the credit institution have exceeded the actual value of chartered capital and reserve funds of the credit institution stated in its latest audited financial statements and the termination of operations of the credit institution being put under special control may threaten the safety of the whole credit institutions system.

4. The capital contribution, shares purchase stipulated in clause 3 of this Article

shall be subject to provisions of the Prime Minister.

Article 150. Responsibilities of the credit institution being put under special control

Board of Directors, Members’ Council Board of Controllers, General Director

(Director) of the credit institution being put under special control shall have following responsibilities:

1. To formulate and submit solutions for strengthening organizational structure and

operations of the credit institution to the Board of special control for approval; to organize the implementation of the approved solutions.

2. To continue to administer, control and manage operations and to ensure the

safety of the credit institution’s assets, except for the cases stipulated in sub clauses 2(b) of Article 148 of this Law.

3. To fulfil requirements of the Board of special control with respect to the

organization, governance, control and management of the credit institution stipulated in subclauses 2(a), 2(b), 2(c) and 2(d) of Article 148 of this Law.

4. To perform requirements of the State Bank stipulated in Article 149 of this Law.

Article 151. Special loans 1. Credit institutions shall be allowed to borrow special loans from the State Bank

and other credit institutions in following circumstances: a) When the credit institution becomes insolvent, threatening the safety of the whole

credit institutions system; b) When the credit institution becomes insolvent due to other severe events. 2. The special loans shall take precedence over any other liabilities, including

secured debts of the credit institution or shall be converted into a portion of capital contribution or shares of the related credit institution stipulated in Article 149 of this Law.

3. The State Bank shall stipulate in details the provision of special loans to credit

institutions.


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Article 152. Termination of special control 1. The State bank shall make decisions on the termination of special control applied

to credit institutions in following circumstances: a) Operations of the credit institution has been stabilized; b) During the special control, the credit institution is merged or incorporated into

another credit institution; c) The credit institution is unable to regain its solvency. 2. The decision on the termination of special control shall be notified to concerned

individuals and organizations. 3. In cases the special control has been terminated as stipulated in subclause 1(c)

of this Article, the State Bank shall inform the Court in writing in regards to the termination of application of solvency recovery measures.

Section 2. Re-organization, Dissolution, Bankruptcy, Liquidation, Blockage of funds and assets

Article 153. Re-organization of credit institutions

1. Credit institutions shall be re-organized in the form of split, division, incorporation,

merger and conversion of legal status upon written approval of the State Bank. 2. The State Bank shall stipulate in details conditions, application files, order and

procedures for the re-organization of credit institutions.

Article 154. Dissolution of credit institutions Credit institutions, foreign bank's branches shall be dissolved in following

circumstances: 1. On voluntary basis provided that the credit institution, foreign bank’s branch is

capable of settling all outstanding debts, and is approved by the State Bank in writing. 2. Upon the expiry of the License, credit institution or foreign bank’s branch does

not apply for extension of the License or the application for extension of the License has been rejected by the State Bank.

3. The License of the credit institution has been revoked. Article 155. Bankruptcy of credit institutions 1. Upon the decision of the State Bank on the termination of the special control or

the decision on termination of application of solvency recovery measures or the decision on not to apply solvency recovery measures, and the credit institution still be in bankruptcy status, the credit institution shall have to file for bankruptcy to request the Court to initiate the bankruptcy proceedings in accordance with provisions of the laws on bankruptcy.

2. Upon receipt of the bankruptcy request from credit institution stipulated in clause

1 of this Article, the Court shall initiate the bankruptcy proceedings and immediately carry


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out the assets liquidation proceedings for the credit institution in accordance with provisions of the laws on bankruptcy.

Article 156. Liquidation of assets of credit institutions 1. When a credit institution is declared bankrupt, the liquidation of assets of the

credit institution shall be subject to provisions of the laws on bankruptcy. 2. When a credit institution is dissolved as stipulated in Article 154 of this Law, the

credit institution shall carry out the liquidation of its assets under the supervision of the State Bank and in accordance with provisions of the State Bank on procedures and orders of assets liquidation.

3. During the supervision of the assets liquidation of credit institution stipulated in

clause 2 of this Article, if the State Bank identifies that the credit institution is unable to pay all of its debts, it shall make a decision on the termination of the liquidation and request the credit institution to file for bankruptcy to request the Court to initiate bankruptcy proceedings as stipulated in Article 1535 of this Law.

4. All costs arising in connection with the liquidation of the credit institution’ s assets

shall be borne by the credit institution.

Article 157. Blockage of funds, assets

1. In case of necessity for the purpose of protecting rights of the depositors, the State Bank may shall freeze a part or the whole of funds, assets of foreign bank's branches.

2. The State Bank shall stipulate in details cases of funds blockage, termination of

funds and assets blockage of foreign bank’s branches.

CHAPTER IX: STATE MANAGEMENT AUTHORITY

Article 158. State management authority 1. The Government shall take uniform state management of banking activities

throughout the nation. 2. The State Bank shall be responsible before the Government for the performance

of state management of organization and operations of credit institutions, foreign bank’s branches.

3. Ministries, ministerial-level agencies within their scopes of duties and powers

shall be responsible to carry out state management of credit institutions, foreign bank's branches in accordance with provisions of the laws.

4. People’s Committees of all levels shall carry out state management of credit

institutions, foreign bank's branches in their localities in accordance with provisions of the laws.

Article 159. Power of examination, inspection and supervision

The State Bank shall carry out the examination, inspection and supervision of credit institutions, foreign bank’s branches, representative offices of foreign credit institutions and of other foreign institutions engaging in banking activities.


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Article 160. Rights and obligations of those subject to inspection and

supervision 1. To provide timely, sufficiently and accurately information and documents as

requested by the State Bank during the process of inspection and supervision; and to be responsible for the accuracy and truthfulness of the provided information and documents.

2. To report and make clarifications in regards to recommendations and warnings

on risks and safety of the State Bank. 3. To implement recommendations and warnings on risks and safety of the State

Bank. 4. To implement inspection conclusions, management decisions of the State Bank. 5. Other rights and obligations as stipulated by the laws.

CHAPTER X: IMPLEMENTING PROVISIONS

Article 161. Transitional provisions 1. Credit institutions, foreign bank's branches, representative offices of foreign

credit institutions and/or of other foreign institutions engaging in banking activities established and operated pursuant to Licenses granted by the State Bank prior to the effective date of this Law shall not be required to apply for re-issuance of the Licenses as stipulated in this Law.

2. Within 02 years from the effective date of this Law, credit institutions, foreign

bank's branches established and operated pursuant to Licenses granted by the State Bank prior to the effective date of this Law shall complete the adjustment of their organizational structure as stipulated in this Law, except for cases stipulated in clauses 3, 4 and 5 of this Article.

3. Since the effective date of this Law, the election or appointment or supplement

or replacement of members of the Board of Directors, members of the Members’ Council, members of the Board of Controllers, General Director (Director), Deputy General Director (Deputy Director), Chief Accountant, Directors of Branches, Directors of subsidiaries and equivalent positions of credit institutions; General Director (Director)of foreign bank's branches shall comply with provisions of Articles 33, 34, 43, 44, 48, 50, 51, 62, 66, 70 and 89 of this Law.

4. With respect to loan agreements signed before the effective date of this Law,

credit institutions, foreign bank's branches and customers shall be allowed to continue to execute signed agreements until the expiry of loan agreements. Any amendment of or supplement to such loan agreements shall not be allowed except for the cases the contents of such changes comply with the provisions of this Law.

5. The State Bank shall provide detailed guidelines on the transitional timing,

procedures, order for credit institutions, foreign bank's branches which are operating prior to the effective date of this Law violating the provisions of Articles 55, 103, 110, 115, 129 and 135of this Law.

6. For microfinance programs and projects of political organizations, socio-politic

organizations, NGOs, credit institutions that are being implemented prior to the effective


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date of this Law shall not be required to adjust their organization and operations in accordance with provisions of this Law. The Prime Minister shall stipulate in details activities of such microfinance programs and projects.

7. From the effective date of this Law, organizations other than credit institutions,

which are currently carrying out one or several banking activities, shall immediately terminate their banking activities, except for cases stipulated in clause 6 of this Article.

Article 162. Effectiveness 1. This Law shall come into effect as of 01st of January, 2011. 2. Law on credit institutions No.02/1997/QH10 and Law on amendment,

supplement of Law on credit institutions No. 20/2004/QH11 shall cease to be effective as of the effective date of this Law.

Article 163. Detailed guidelines and implementation The Government shall stipulate in details and provide detailed guidelines on the

implementation of the Articles and clauses as assigned in this Law; and provide guidelines for other necessary contents of this Law in order to meet with State management requirements.

This Law has been adopted by the 7th Meeting of the XIIth term of the National

Assembly of the Socialist Republic of Vietnam on 16th of June, 2010.

CHAIRMAN OF THE NATIONAL ASSEMBLY

Nguyen Phu Trong

Annex 4 MF Sector Assessment

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ANNEX 4

Footprints of Microfinance in Vietnam

An Assessment of the

Vietnam Bank for Social Policies

and

The People’s Credit Fund Network

& its apex institution:

The Central Credit Fund

November 2010

Hanoi, Vietnam

ADB TA 7499-‐VIE Consultants


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I. Vietnam’s Microfinance financial services Sector 173

II. The Market Players 174

III. The Bank for Social Policy (VBSP), The Market Leader 174

A. Clients, Products and Services 175

B. VBSP’s Credit Process 175

C. VBSP’s Results of Operations 176

1. Outreach 176

2. Amount of Loans 176

3. Amount of Loan by Program Type 177

4. Average Loan per Borrower 177

5. Funding Sources 178

6. Increasing Amount of Subsidy 179

7. VBSP in 2010 and Beyond 180

D. Some Emerging Risks 181

1. More Government Subsidies and Unclear Exit Strategy 181

2. VBSP, a Threat to Other MFI Players? 181

3. Potential Adverse Impact to VBSP’s Sustainability 181

4. Looming Funding and Liquidity Risk 182

5. The Need to Diversify and Broaden Funding Sources 183

IV. PCFs Developments Stages 184

A. Number of PCFs Established 184

B. Membership Growth 185

C. Asset Growth 186

D. Loan Growth 187


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E. Number of Borrowers 189

F. Deposit Growth 189

G. Borrowings from CCF 190

H. Equity 191

I. PCF’s Capital Adequacy Ratio (CAR) 192

J. Quality of PCFs 192

V. Central People’s Credit Fund (CCF) 193

A. CCFs Products and Services 193

B. Ownership Structure 194

C. Asset Growth 195

D. Loan Growth 195

E. Loans to PCFs 195

F. Deposit Growth 196

G. Increasing Opportunity Costs of SBVs Equity 196


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FOOTPRINTS OF MICROFINANCE IN VIETNAM

I. VIETNAM’S MICROFINANCE FINANCIAL SERVICES SECTOR1

The microfinance financial services sector in Vietnam has emerged during a period of robust economic growth when Doi Moi (reform) was implemented in 1986. From the early 1990’s, the microfinance sector has developed with the strong support of government by way of subsidized credit schemes, and partly by international NGOs operating in Vietnam. As of end 2009, the population was estimated at around 86 million, of which about 24 million are considered poor that make up the potential market for microfinance financial services. Vietnam’s microfinance sector is composed of the Microfinance Financial Services Providers (MFSPs) and Microfinance Support Service Providers (MFSSPs). As shown in the figure below, MFSPs providing financial services in Vietnam are broadly classified as formal, semi-informal, and informal MFSPs, while the MFSSPs are institutions that provide non-financial support services to develop and strengthen the capacities of microfinance financial services providers.

Figure 1: Microfinance Financial Services and Support System

1 In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are highly regulated by government. Broadly speaking, there are three major types of financial institutions:: (i)Deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies; (ii) Insurance companies and pension funds; and (iii) Brokers, underwriters and investment funds (Siklos, Pierre (2001). Mondy, Banking and Financial Institutions: Canada in the Global Environment. Toronto: Mcgraw-Hill Ryerson. P. 40 ISBN 0-87158-2


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II. THE MARKET PLAYERS

The formal MFSPs are set up in accordance with the Credit Institutions Law (CIL), Law on Cooperatives, or by government charter, and are supervised by SBV (except for Vietnam Bank for Social Policies - VBSP). These institutions are taking the lead in outreach, especially in providing loans to microfinance clients. Two state-owned banks: namely VBSP and Vietnam Bank for Agriculture and Rural Development (VBARD); the Central Credit Fund (CCF - majority owned by SBV) and about 1,037 People’s Credit Funds (PCF)2 are the market leaders and the backbone of the microfinance financial sector in Vietnam. Together they account for around 12 million borrowers with around USD 8.50 Billion outstanding portfolio in 2009. Playing a still insignificant role are the semi-formal MFIs which are institutions with broad social mandate, and affiliated with either government, mass organizations (MOs) and/or international NGOs. These MFIs are being formalized under the two decrees and circular relating to MFIs in Vietnam3. The CEP Fund, TYM Fund (affiliated with Vietnam Women’s Union - VWU), and the VWU itself are among the largest non-government MFIs providing microfinance services. While not yet subjected to prudential regulations, semi-formal MFIs and the newly licensed TYM are reported to serve 285,000 borrowers. Three more MFIs have already applied and awaiting their license with SBV. Finally, informal lender groups which also provide microcredit include family members, friends, ROSCAS4, and moneylenders composed of pawnshops, input suppliers, small traders and marketing agents. These money lenders provide loans in cash or in kind, with short tenor and at very high interest rates. Most of these come from wealthy families living in the same community; with intimate insight and knowledge of the borrowers that shape their credit decisions. There is no reported estimate of the market share of the informal MFIs in Vietnam.

III. THE BANK FOR SOCIAL POLICIES (VBSP), THE MARKET LEADER

As a government policy bank, VBSP was set up in 2002 as the transformation of Vietnam Bank for the Poor (VBP). The latter was earlier established in 1995 to take over the small-scale policy and directed lending programs initially implemented by VBARD. VBSP is a non-profit bank offering full range of financial services to the poor at preferential terms and subsidized rates. In reality, only loans and plain vanilla savings products are currently being offered by VBSP. Though considered a bank, VBSP is exempted from banking regulations, but are required to submit financial and other reports as may be required by SBV. Presently, MPI guides its operational policies, while MOF oversees its financial management5. VBSPs 11 member board is chaired by the SBV Governor, and the other members include six (6) representatives from government, ministries, MOLISA, MPI, MOF, SBV, MOA, COM), two (2) board members from mass organizations (VFA and VWU) and two (2) representatives from management which include the General Director and Chief of the Supervision Board. The board members are appointed by the Prime Minister for a term of five (5) years while the appointed Board Chairman is approved by the parliament upon the recommendation of the Prime Minister. To provide local oversight and governance, a parallel board, composed of representatives from management, People’s Committee, the various ministries and mass organizations provide oversight function to VBSP branches and districts6. With headquarters in Hanoi, VBSP has 64 provincial branches,

2 1,042 PCFs as of July 2010 3 Decrees No. 28 and 165, and Circular No. 02. These regulations allowed for licensed and non-licensed MFIs 4 Rotating Savings and Credit Association 5 Decision No. 180/2002/QD-TTG of the Prime Minister on Promulgating the Regulation on Financial Management Applicable to VBSP (December 19, 2002) 6 Refer to Attachment 1: The Organizational Structure of VBSP


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600 district level transaction offices and 8,500 mobile transaction points, with more than 7,819 staff and covering 10,914 communes or 99% of the total number of communes (11,000). VBSPs fund sources come from government’s capital contribution, borrowings (mostly from SBV), mandatory deposits from state-owned and controlled banks (SOCBs), entrusted funds for the poor, state budget and VBSP bonds issued in 2009 and early 2010 with sovereign guaranty.

A. Clients, Products and Services VBSP’s target clients are the household listed as ‘poor’ by the People’s Committee (PC) based on MOLISA’s parameters. To ensure integrity and transparency, the list of poor household borrowers are posted for review and validated by local people under the principle that people of the commune are the best filter of the least qualified among prospective borrowers. VBSP offers 16 types of loan products7, with features that are all prescribed by the government, funded from state budget, mandatory deposits of SOCBs, entrusted funds and borrowings. Clients are allowed to borrow for productive business, safe water, electricity and housing. VBSP also finances scholarships for disadvantaged students. VBSP’s loan for job creation program targets small businesses, cooperatives, farms, and business units for the disabled. The households of migrant workers going abroad under the labor exports program are entitled to borrow as well. In addition, businesses employing former drug addicts, and for especially disadvantaged ethnic minority households are likewise eligible to borrow. VBSP’s target clients are eligible to borrow from all its lending programs.

B. VBSP’s Credit Process VBSP uses two lending methods. For not-so-poor household borrowers engaged in business and production, VBSP staff handles all the credit processes from approval, documentation, loan administration, collection and remedial management. For poor households and other policy lending target groups, loans are released through the Credit and Savings Groups (CSGs) whose formation is governed by a policy set by the board8. Under this policy, CSG formation and supervision are entrusted to the Mass Organizations (MOs) in collaboration with the Chairman of the Peoples’ Committee (PCs), who has the following specific tasks: (i) CSG’s formation and supervision in collaboration with the MOs; (ii) approval of the poor household lists following MOLISA’s guidelines and the list are posted for review by the commune people, under the principle that the people in the commune know who are amongst the poor in their respective commune; (iii) reviews loan application, inspects loan use; and (iv) assist in collection and debt rescheduling. While VBSP’s group lending program follows standard microfinance principles, the close working relationship of VBSP among MOs, local government officials in general, and the PCs in particular is a unique feature of VBSP’s credit delivery mechanism strategy. Local officials and mass organizations are actively involved in the entire credit process cycle except disbursement and collection of the principal amount of loan. They provide CSG members skills, technical and other training programs and activities. Finally, although membership in the CSG is voluntary, withdrawal of membership shall require full payment of the loan and prior approval of the Chairman of the People’s Committee (PCs). The persuasive and pervasive presence of the PCs and MOs provide VBSP continuing on-site supervision and loan administration.

7 Refer to Attachment 2: Type of VBSP Loan Products 8 Decision of Board of Directors of VBSP on Promulgating Regulations of Structure and Operation of CSG dated January 11, 2003.


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C. VBSP’s Results of Operations

1. Outreach In 2009, VBSP’s outreach reached 5.09 million household borrowers from 197,507 CSGs (Figure 2). Of the total CSGs entrusted by VBSP, 93% are affiliated with either VWU (42%), VFUs (37%), and VVU (14%), while the 7% remaining belong to CSGs affiliated with VYU.

Figure 2: Outstanding Loan (US$)

2. Amount of Loans Total outstanding loans in 2009 as shown amounted to 72.66 trillion VND (USD 3.97 billion) from 10.34 trillion (USD 661 million) in 2003, or annual average increase of 83%.


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Figure 3: Total Outstanding Loans

3. Amount of Loan by Program Type As shown in Figure 4, 82% of loans in 2009 were to poor households (44%), students’ loan (25%), and loans to business in disadvantageous areas (13%) while the 18% represented loan exposures into the other 14 lending programs. While loan to poor households represented bulk of the outstanding loans in 2009, its share to total loans outstanding started to decline in 2006, while student loans to disadvantageous areas showed an increasing trend starting in 2006. The trend is in line with government’s policy to increase the loan budget for students. In fact the first VBSP bond issue of 5 billion VND was issued to support the students’ loan program.

Figure 4: Breakdown of Outstanding Amount of Loan (%) By Lending Products

4. Average Loan per Borrower Outstanding loan per borrowing household increased to VND 9.6 million (USD 521) in 2009 from VND 3.12 million (USD 200) in 2003; or an increase of 27% annually.


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Figure 5: Average Amount of Loan per Borrower

5. Funding Sources Under its charter, VBSPs funding sources are either from government capital, state budget, mandatory deposits, borrowing or bonds. The figure below shows the breakdown of funding sources of VBSP by type in 2009.

Table 1: VBSP Sources of Funds

Sources of Funds Amount (In billion VND) %

Chartered Capital 9,488 7%

Deposits 20,982 16%

Borrowings 29,972 23%

State Budget 5,636 4%

Government Bond 2,000 2%

Trust Fund 2,886 2%

Others 3,867 3%

Total 131,419 100%


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6. Increasing Amount of Subsidy9 Figure 6 shows that the annual subsidy provided by government comprising: budget for capital; difference between the borrowing cost and interest income; and operating subsidy, as well as government’s opportunity cost on capital and borrowings mainly from SBV, and potential foreign exchange losses is estimated to total around USD 212 million in 2009. This represents an annual average increase of 32% from USD 43 million in 2003. Estimated total government subsidy and other related costs for supporting VBSP from 2003, already amounted to USD 851 million in 2009.

Figure 6: Estimated Government Subsidy to VBSP (In Million USD)

The amount of government subsidy shall continue to rise in tandem with the continuing rise of subsidized lending schemes. As of June 30, 2010, Table 2 MPI reported that the government’s budgetary outlay to VBSP amounted to 17,337 billion VND (end June 2010), from 8,953 billion in 2006. However, the MPI’s budgetary outlay excludes opportunity costs of capital infusion, subsidized borrowings provided by SBV, and the potential foreign exchange losses that the government may have to shoulder.

9Total Subsidy=Direct subsidy + Opportunity Cost on Capital + Opportunity Cost on SBV Borrowings + Income Tax Waived + Potential Foreign Exchange Losses. Of these, only the Direct subsidy figures are available while the others were either estimated or assumed based on available data and documents.


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Table 2: MPI Report on Funding Resources of VBSP for 2006 – June 2010 Item 2006 2007 2008 2009 June 2010

I. Fund from Government budget

7,953 9,861 12,101 15,124 16,013

1. Charter capital 4,788 5,988 7,988 9,488 10,000 2. Funds provided for programs

3,165 3,873 4,113 5,636 6,013

II. Funds for subsidizing the interest difference and management fees

750 1,053 1,160 2,259 1,000

III. ODA lending funds 250 322 316 334 334 Grand Total (billion VND) 8,953 11,230 13,577 17,717 17,337

7. VBSP in 2010 and Beyond For 2010, VBSP projected its loan volume to reach 92,000 billion VND (USD 4.8 billion), with loans for: poor households in general (40%); students (31%), and poor household with businesses in disadvantaged areas (11%), all of which would account for around 83% of its total loan portfolio. The remaining 17% of the loans are projected for: clean water and rural environment sanitation (8%), job creation (5%) and other type of loans (7%). Expected additional VBSP outlay for 2010 was estimated at USD 2,149 million.

Figure 7: VBSP Loan Distribution Plan in 2010


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D. Some Emerging Risks

1. More Government Subsidies and Unclear Exit Strategy While the Draft Concept Paper for Development Strategy for VBSP towards 202010 indicated strategies towards achieving operational sufficiency by 2015, the draft decree to amend Decree 78 still contains provisions that appear to perpetuate subsidized or “preferential” rates to VBSP’s target groups. There will be a need to reconcile the draft decree and strategies to transform VBSP into a sustainable, self-reliant and autonomous institution that provides broader financial services to its target clientele. The marginal benefit of the subsidy provided cannot justify the continuing growing burden of the subsidy, especially when other poor MFI borrowers pay market rates for their loans. Likewise, other existing and potential MFIs are more than willing to expand their services under market-based principles, given the proper and conducive policy environment. Finally, as VBSP moves towards meeting local and international prudential standards, compliance and regulatory costs would be incurred and thus, the need for additional government subsidy and funding support will further increase an already unsustainable fiscal burden.

2. VBSP, a Threat to Other MFI Players?

While the government shows continuing support and commitment to broaden and deepen the microfinance market industry, it contradicts such initiative with its substantial support to VBSP. As such, VBSP continues to provide loans at preferential rates with government support in terms of operating subsidies, low- or no-cost borrowings, bonds issued/to be issued with sovereign guaranty without premium costs, VBSP’s exemptions from banking regulations (minimal compliance costs), exemptions from payment income tax and deposit insurance premiums. All these unfairly provide VBSP a highly skewed competitive edge and advantage over the other MFI players. This uneven playing field is a disincentive and threat to the entry, growth and development of existing or prospective MFIs and other potential service providers.

3. Potential Adverse Impact to VBSP’s Sustainability

While VBSP as a policy bank have done remarkably well, its organizational and financial growth and sustainability may be imperiled. Its subsidized lending scheme, reliance on government guidance in all aspects of its operation, heavy dependence and assured funding support from state budget and government institutions may breed organizational complacency and apathy that may hinder the creativity of the VBSP organization to transform itself towards a sustainable institution, that meets or surpasses international banking standards and practices.

10 Refer to Attachment 3: Draft Concept Paper for Development Strategy for VBSP towards 2020 (Hanoi, November 2008)


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4. Looming Funding and Liquidity Risk

The document relating to the issuance of VBSP’s bond in 200911 and early 2010 indicated that 85% of VBSP’s outstanding loans are medium or long term, while its funding source of similar tenor is 74%, creating a funding mismatch of around 11% that would have to be bridged either through additional capital infusion, deposits or borrowings. The funding mismatch is aggravated by several factors. First, loan disbursements historically are far greater than amount of loan collected as shown in Table 3:

Table 3: Amount of Loan Released and Collected

In U.S. Dollar 2007 2008 2009 Loans

Disbursed 1,263,803,495 1,641,325,381 1,891,461,081

Loans Collected 589,772,668 606,672,793 800,731,730

Gap 674,030,827 1,034,652,589 1,090,729,351 Source: VBSP Secondly, principal payment of loans is not periodically collected due to the long-term nature of the loans, though borrower’s project’s cash flow may allow periodic principal payments and proven microfinance best practices advocate for frequent and small repayments which are more attuned to poor households’ cash flows. Finally, the massive build-up of student loan releases starting in 2006, may further put additional liquidity pressure on VBSP, for collection of interest and principal are done upon completion of the student beneficiaries schooling (minimum of one year and maximum of five years). To bridge the negative gap, VBSP would either have to secure additional capital, deposits, borrowings from CIs or tap the capital market. Finally, unless VBSP is certain of funding sources the policy of releasing loans more than the amount collected need to be revisited. In 2009, VBSP’s budget allocation amounted to $136 million or 4% of the government budget for ministries and central agencies in 2009. The looming liquidity risk appears to be a serious concern to be addressed by VBSP under its draft 10-year strategy up to 2020 that include: capital planning and deployment, and the establishment of a Committee or unit that shall focus on Asset and Liability Management as among the priorities to improve and strengthen its governance infrastructure.10

11 Refer to Attachment 4: VBSP’s bond issuance


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Figure 8: Total Expenditures of Ministries, Central Agencies (2009)

5. The Need to Diversify and Broaden Funding Sources

As a strategy to broaden VBSP’s funding base, VBSP issued bonds in 2009 and early 2010, with sovereign guaranty and with yield comparable to the prevailing two-year term deposit rates. The bonds failed to attract retail, domestic or institutional private investors. In fact, the major buyers of these bonds was VBARD (93% of total bonds auctioned) and the rest by other commercial banks.12 Unless VBSP rationalizes its lending schemes towards a more market oriented terms, institutional private investors would be reluctant to invest in its debt or bonds. As 12 Refer to Attachment 5: Hanoi Stock Exchange Auction Results


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a result, part of VBSP’s plans is to make its bonds more attractive among CI investors by making these eligible for refinancing by SBV.

As a way to diversify VBSP’s funding base and income sources, it is recommended that VBSP leverage its large borrower base, such as: overseas workers it has funded, as well as the MOs and local government entities supporting its presence in almost all communes. The same entities can help mobilize deposits, or mass market its products and services. For example, with the grassroots support of the MOs, VBSP can launch a national deposit campaign program to attract savings deposits from its large pool of household borrowers.

IV. PCFS DEVELOPMENT STAGES13

The PCF network has undergone the following stages of development: (i) Initial Growth Phase (1994-1998), where the number of PCFs dramatically went up from 179 PCFs in 1994 to 977 PCFs in 1998, or 95% of the total number of PCFs in 2009. It was also in 1995, when the CCF was established as an apex organization to provide financial and advisory services to the PCFs; (ii) Consolidation Phase (1999-2002), where the number of PCFs declined from 977 PCFs to 888 PCFs in 2002, due the closure of 89 PCFs for insolvency and weak management. It was in 1999, when the 21 RCFs were merged with the CCF, and its offices became the initial CCF branches; and (iii) the Perfection and Development Phase (2002-2009), where the number of PCFs grew albeit at a slower rate compared to the initial phase. The declining growth appears to be due to the fact that no single government entity appears to be focused and accountable for PCFs although various ministries and the SBV have separate units to promote the PCF network. In 2005, VAPCF was set up (largely through SBV’s initiative) to support and guide the PCF network to comply with SBV Rules; provide technology transfer; and set up reporting standards and assist in professionalizing the PCF organization. The draft 2011-2020 Plans for the PCF network envisions the VAFC to provide the following additional services: (i) Safety Fund Management; (ii) Audit Services; (iii) Training, Information and Data Center, and Banking Services Providing Company. It appears that many of the services provided are major duplications with the services now being offered or done by CCF, and more so when the latter becomes a cooperative bank under the new CIL.

A. Number of PCFs Established The chart shown in Figure 9 shows that as of 2009, 1,037 PCFs were established, of which 977 PCFs or 94% were organized during the initial and pilot stage of PCFs development. From 2002 to 2009 the number of PCFs licensed increased from 888 PCFs to 1,037 PCFs, or an increase of 149 PCFs or an annual increase of 21 PCFs. Among the reasons cited for the slow growth of the PCF network is the difficulty of people in the commune to comply with the requirements and standards of organizing a PCF, including the difficulty of raising equity by PCF members coming from the same commune.

13 Refer to Attachment 6: PCF Financial Profile


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Figure 9: No. of PCFs Established

B. Membership Growth To establish a PCF, minimum membership required is 30 members. The total number of the PCF network in 2009 was reported at 1.50 million or an average of 1,449 members per PCF compared with 179 members per PCF in 199414. The average membership size of PCFs show an increasing trend, but their size remained small to achieve greater economy of scale and scope15 despite 15 years of existence. The reason for the slow membership growth appears to be due to a one-commune-one PCF policy in the past. It was only later when PCFs were allowed to recruit membership outside of its franchise area. . A more compelling reason is that PCFs are formed, not as true cooperatives as they are purported to be, but through a close system of “core members” (usually not exceeding 50 persons) that provide most of the equity of the PCF. They have the powers to restrict additional core members and are the only ones qualified to be elected to the board. In fact, a large majority of reported (non-core) “members” of the PCF network actually comprise the cumulative number of borrowers who paid the minimum capital of about VND 50,000 to qualify to borrow from a PCF. Most of these ‘’members” become inactive after paying the loan, having no incentive to stay on since they do not exercise the 14 See Annex 10: The number of members of the PCF as reported need to be revisited, for during our interview, the number of members being reported annually appears to be the number of accounts, promissory notes; or cumulative borrowers. Likewise, from the above table, the team noted that the number of member depositors and borrowers appear to be relatively low compared with the data on membership.

15 Economies of scope are conceptually similar to economies of scale. Whereas economies of scale primarily refer to efficiencies associated with supply-side changes, such as increasing or decreasing the scale of production, of a single product type, economies of scope refer to efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. Economies of scope are one of the main reasons for such marketing strategies as product bundling, product lining, and family branding. Panzar and Willig coined the term "economies of scope" in 1975 in their paper "Economies of Scale and Economies of Scope in Multi-Output Production.


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rights of members under universally-accepted cooperative principles. A thorough review of the PCF’s ownership and governance structure is needed to make this consistent with proven best practices of ‘real’ cooperatives. Under the new CIL, SBV shall prescribe the area of operation of the PCFs and may help PCFs expand membership size to achieve economies of scale and scope. Among the ways to increase PCFs size is to promote merger and consolidation among the PCFS in different communes, district or provincial level.16 There is no reported data on the number of PCFs consolidated under this decision. Merger and consolidation of PCFs will also relieve SBV of supervising numerous but small PCFs. It was gathered that SBV conducts more off-site rather than on-site supervision to the PCFs due to lack of inspectors. Finally, while CIs are required to submit annual financial statements done by external auditors accredited by MOF, PCFs are not required to do so by SBV due to PCFs’ inability to afford the services of an accredited auditing firm. This is among the reasons to organize the VAPCF that is also envisioned to provide auditing services to the PCFs. A tactical option is to explore the option to outsource such services through the tender of the PCFs’ audit preparation of their financial statements in accordance with the generally accepted accounting principles and standards.

Figure 10: No. of Individual Members

C. Asset Growth In 2009, PCFs network total assets stood at VND 21,176 billion (USD 1,145 million) from VND 83,675 million (USD 8 million) in 1994, or a 3.9% average increase annually.

16 Under Decision No. 135/2000/QD-TTg dated November 11, 2000 issued by the Prime Minister approves the project of consolidation, perfection and development of PCFs and the SBV Governor shall assume full responsibility to coordinate with all the ministries to consolidate the PCFs).


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Figure 11: Total Assets (In millions VND)

D. Loan Growth As shown in Figure 12, amount of loans outstanding in 2009 stood at VND 18,618 billion (USD 1,006 million) availed by 953,736 borrowers, of which around 10% are poor borrowers17. There is no recent data available as to the gender of the borrowers and breakdown of the PCF portfolio but a previous study reported that 30% of the borrowers are women borrowers, accounting for 27% of loan outstanding. Loan portfolios are generally diversified covering agricultural production, processing crafts, services, trading, consumption and emergencies.18 The breakdowns of the loans as reported in the study shows that PCF borrowers used loan proceeds for productive purposes rather than consumption and thus, enhance their paying capacity.

17 Under Article 38 of Decree No. 48 on Promulgating the Model State and Operation of the PCFs, PCFs are allowed to lend to members and poor household that are not members living in the area of operation of the PCF. 18 DID 1998:6. In a study in 2000 by Hung et al. (2002:60) reported loan distribution, 58% agriculture, 27% trade and services, 12% agro processing and crafts and 3% consumption.


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Figure 12: Gross Loans (in million VND)

The figure below shows that from the ratio of gross loans to total assets generally remained constant from 1994 to 2009, where on the average 87% of PCFs assets are in loans to members and non-members as well.

Figure 13: Gross Loans over Total Assets


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In terms of funding sources, as shown in the figure 15, 88% of the loans in 2009 were funded by deposits of members which stood at around VND 15.366 billion (USD $830 million). The ability of the PCF to generate deposits to fund loans may have caused the declining trend on their borrowings with CCF.

E. Number of Borrowers

The number of PCF borrowers reached 953,736, of which 10% or 95,373 are reported to be poor borrowers, who are either members or non-members of the PCF. The figure below shows that the number of borrowers have declined during the consolidation phase, while the average number of borrowers per PCF in 2009 is around 919 borrowers with an average loan size per borrower of VND 18.87 million (USD 1,020).

Figure 14: No. of Borrowers

F. Deposit Growth Deposits from clients reached VND 15,368 billion (USD 831 million) in 2009, from VND 55.61 billion in 1994 (USD 5.01 million), or average annual increase of 48%. There is no reported figure on the number of deposit accounts.


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Figure 15: Deposit of Clients (In Million VND)

G. Borrowings from CCF In 2009, the PCF network borrowed from CCF the amount of VND 2,985 billion (USD 161.39 million). The amount borrowed from CCF represented 14% of the PCFs network assets, and showed a decreasing trend, with bulk of PCFs’ loans funded by deposits. The maximum amount of loan a PCF can borrow from the CCF is up to 50% of the PCF’s total loans outstanding. This prudential cap may limit the ability of the PCF to leverage its equity to fund more loans, and thus improve further its ability to lend greater amount of loans to its membership, improving its services and profitability.

Figure 16: Total Borrowings from CCF (In Million VND)


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Figure 17: Total PCF Borrowings from CCF over Total Assets

H. Equity

In 2009, equity of the PCFs amounted to VND 1,005 billion (USD 54.35 million), from VND 10.78 billion (USD 0.98 Million) in 1994 or with an average annual rate of 3.54%. Average equity per PCF member in 2009 is around VND 9.69 million (USD 523), while average equity per individual member VND 668,679 (USD 36).

Figure 18: Equity (In millions VND)


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I. PCFs’ Capital Adequacy Ratio (CAR) The CAR ratio of the PCFs in 2009 is reported at 5.4% (not risk-weighted) and way below the 8% not risk-weighted CAR required by SBV. (Note: new minimum risk-weighted CAR to be applied in October 2010 is 9%). The figure below shows a declining trend that may be due to the inability of the PCFs to recruit members outside of their area of operation to expand their capital base. The more compelling reason cited earlier is the PCFs’ self-restricting expansion of “core” members who provide the substantial equity of all PCFs. This definitely is the main reason for the low equity base of the PCFs despite their over 15 years of existence.

Figure 19: Capital Adequacy Ratio (CAR)

J. Quality of PCFs The chart below indicates that only 3% or 29 PCFs had a CAMEL rating of below “3” (passing mark), while 97% or 879 had CAMEL rating above “3” of which 55% had rating of “1” (the highest possible rating).


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Figure 20: CAMEL Rating (2008)19

V. CENTRAL PEOPLE’S CREDIT FUND (CCF)

CCF is a cooperative institution established by the PCF network as an apex institution to support, improve or strengthen the operations of the PCF. It was organized in 1994 under the CIL and Law of Cooperatives, subjected to all the prudential banking standards. Its headquarters is located in Hanoi, while its 24 branches and 60 transaction units are present in 56 provinces and cities of Vietnam. CCF is governed by an 11-man member board composed of 4 representatives from commercial banks, 5 members representing the PCF network, and 2 members from management, the General and Deputy Director, who are both deputized by the SBV.20 It plans to become a cooperative bank in 2010 under the new CIL and being supported by Rabobank International, a subsidiary of the Rabobank of Netherlands.21

A. CCFs Products and Services CCF provides loans to PCFs and non-PCFs at market rates, with funds from domestic and international sources. CCF lending services to PCFs include traditional loans and loans against deposits or equities, with interest rates at 1.25% per month or 15% per year. These loans are either short term (payable within one year) or long term (payable more than one year to five years). CCFs loans to non-PCFs are consumption, business or production loans and with interest rates ranging from 15 to 18% per annum. It appears that CCFs interest rate is higher for non-PCF borrowers. For deposits, CCF offers term and non-term deposits and priced at the prevailing market rates. CCF also offers remittance services in partnership with Western Union, non-life insurance in partnership with BaoViet Insurance Company, and CCF also plans to market life insurance also in partnership with BaoViet Insurance Company.

19 Decision of the Governor of the State Bank of Vietnam to amend Decision No. 1601/2001/QD-NHNN dated 28 December 2001 20 Refer to Attachment 7: CCF Organizational Structure 21 Refer to Attachment 8: Rabobank and CCF Memorandum of Understanding (MOU) dated May 2010


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B. Ownership Structure22 As shown in Figure 18 below, CCFs total equity stood at VND 1,530 billion (USD 82.70 million), of which chartered capital represented 87% or VND 1,362 billion (USD 55.89 million), Its chartered capital are contributed by the PCFs, SBV, and SOCBs.

Figure 21 : Equity & Funds

Source: CCF Audited Financial Statements

The surged in equity from VND 239 billion in 2007 and to VND 1,530 billion in 2009, was due to the additional charter capital contribution of SBV amounting VND 1,280 billion (USD 69 million) in 2008 and 2009, bringing SBV’s total ownership to 98% while the remaining 2% are shared by the PCFs (0.80%) and the 4 SOCBs (1.20%) as shown in Figure 22:

Figure 22: CCF Breakdown of Chartered Capital As of 2009

22 The financial data and information were sourced from the CCF Audited Financial Statements as provided by CCF.


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C. Asset Growth As shown below, CCF’s total assets reached to VND 8,103 billion (USD 438 billion) from VND 2,330 billion (USD 126 million) in 2004 or an average annual increase of 41%. Build up in assets particularly loans funded either by increase in equity, borrowings and deposits.

Figure 23: CCF Assets

D. Loan Growth As shown in Figure 24 CCF loans likewise grew in 2009 to VND 6,725 billion (USD 362 million), from VND 2,011 billion (USD 108 million) in 2004, or an average annual increase of 39%.

Figure 24: CCF Loans

E. Loans to PCFs While the CCF’s mandate is to provide loans to the PCFs, Figure 23 shown below indicated that starting 2008 and 2009, CCF loans to the PCFs declined. In 2008 and 2009, CCFs loan exposure to the PCF network stood at 44% of total loan portfolio. The likely reasons for the decline may be: the increasing ability of PCFs to generate deposits to fund loans at cheaper cost; higher interest rates charged by CCF to the PCFs; or the PCFs may have reached the prudential cap of their borrowings from the CCF (up to 50% of PCFs total loan portfolio).


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Figure 25: CCF Loans to PCF

F. Deposit Growth As shown in Figure 26, CCFs deposits grew in 2009 to VND 4,565 Billion (USD 245 million) from VND 1,368 Billion (USD 87 million) in 2004, or an average annual increase of 39%.

Figure 26: CCF Deposits

G. Increasing Opportunity Costs of SBVs Equity While CCF does not get direct subsidy or funding support from the government, SBV’s equity into CCFs entails opportunity costs to SBV which is estimated to be at around USD 1.99 million.

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Annex 4.1: Organizational Structure of Vietnam Bank of Social Policies

198

Annex 4.2: THE VBSP'S LOAN PRODUCTS Payment

STT Types of loans Principal Interest

Maturity Interest rate Condition for getting the loan Funding sources

1 Poor

households program

Short term: one time on due Medium- long term: every six months or once a year upon negotiation between VBSP and the poor household.

Monthly

Short-term loan: the loan having the duration up to 12 months. Medium term loan: the loan having the duration from 12 to 60 months

0.65%/month

To be in the list of Poor Households of local commune according to poverty standards defined by MOLISA from time to time

Center location

2 Job creation program

Depend on negotiation between the borrower and VBSP

Monthly


0.65%/month

Enterprises, households having a feasible project, which is compatible with its production/business fields, can create new jobs, and can attract more labors. The project must have certification of Commune People’s Committee on location of the office of the enterprise in such commune.

Center location

3 Disadvantaged

students program

Borrowers shall have to pay loan principal and interest for the first time right after the students get jobs with income but not over 12 months since they finished their courses.

Monthly Depend on studying duration 0.5%/month

Students who are member of households belonging to one of following groups: poor households, households having maximum income per capita equaling to 150% of the standard

Center

199

Payment STT Types of loans

Principal Interest Maturity Interest rate Condition for getting

the loan Funding sources

(Every six months). income per capita for poor households.

4

Migrant workers program for social policy beneficiaries serving as

migrant workers abroad for

limited terms

Every six months or once a year upon negotiation Monthly

Depends on working duration aboard stated in the labor contracts and repayment capacity of the borrowers but not exceed the working duration aboard in the labor contracts.

0.65%/month Poor households and family of revolutionary martyrs.

Center location

5 Safe water and rural sanitation

program Every six months Monthly Under 60 months (6

months in grace period) 0.9%/month

Clean water and environment sanitation works are unavailable or already available but are neither yet up to the National Standards for Clean Water nor certified by CPC for environment sanitation. The household shall not be subject to property mortgage but have to be members of Saving and Credit groups nominated by such S&C Groups in a

Center

200




loan application list certified by Commune People’s Committee

6

Production households

living in extremely

disadvantaged areas and

communer (32)


Monthly

Short-term loan: the loan having the duration up to 12 months. Medium term loan: the loan having the duration from 12 to 60 months Long term loan: the loan having the duration from 60 months and over.

0.9%/month

Production households living in extremely disadvantaged areas and communer according to no.32 QD-TTG

Center

7

Extremely disadvantaged ethnic minority

households program (74)

One time on due Monthly Under 60 months 0%/month

Ethnic minority households live in disadvantage areas and have income equaling to 50% of income of a poor household Total assets of the household is not over VND 3,000,000

TW

201




(regardless of value of land-using right, of tent(s) on the hill farms, of house(s) granted by the State or other credit organizations).

Disadvantaged ethnic minority

households program

Center

To buy land for production Under 60 months Center

Lending for profession conversion

Center

8

To buy materials, seedlings, animals, fertilizer, pesticide, animal foodstuff… for cultivation and livestock

Every six months or once a year upon negotiation Monthly

Under 36 months

0%/month

Ethnic minority households live in disadvantage areas and have income equaling to 50% of income of a poor household

Center

202




Migrant workers abroad Cost

Not exceed the working duration aboard in the labor contracts

Center

9 Housing purpose

program (167)

The borrowers shall begin to pay debt from the sixth year and later. The minimum rate of payment of each year shall be 20% of total loan.

Monthly

Loan duration shall be 10 years as from the borrower receive the first loan, in which the first 5 years shall be grace period

0.25%/month (3%/year)

Households who do not have accommodation or have temporary, dilapidated accommodation and this house are likely to collapse at any time. In addition, households cannot afford to improve their house. Households who having lawful residence at the locality and being in the list of the poor managed by the local People’s Committee at the time this Decision takes effect;

Center

203




10

Business and production households

living in extremely

disadvantaged areas and communes


Monthly


0.9%/month

Households as stipulated in the Civil Code (including business farming households) who are non-poor undertaking business and production activities in disadvantaged areas. Borrowers must have feasible projects or production plans which the local Commune People’s Committee certifies and have legal residence at the locality of implementation of the projects or production plans.

Center

11 Forest sector development

program

Short term: one time on due Medium- long term: every six months or once a year

Monthly


1%/month

To be in the list of CWPD project of local commune defined by the local Commune People’s Committee and to have permanent address or long- term registration at the location of lending.

Center

12 Poor partier program

Short term: one time on due Medium- long term: every

Monthly Under 2 years 0.35%/month To be in the list of Poor Party of local commune defined by the local Commune People’s

Location

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six months or once a year Committee

205

THE CCF’s Loan Products and Services

Payment Condition for getting the loan

Funding Sources Types of loans

Principal Interest Maturity Interest rate

Lending outside the system

Consumption loans Monthly Monthly

The loan having the duration from 12 to 60 months

From 12% - to 15%/year

Business-Production loans One time on due Monthly


From 12% - to 15%/year

Project loans: ADB, WB, JBIC One time on due From 7.8% - to

15%/year Lending inside the system

Conventional loans One time on due Monthly


1.25%/ month

Lending support pay deposits One time on due Monthly


1.25%/month

Having legal capacity, civil capacity and civil liability according to legal rules; Having finance ability to ensure payment term of pledge; Feasible, effective and suitable for legal rules investment project; Loan using purpose‘ legal. Implementing rules of loan guarantee.

Deposit Own Capital

Types of savings products Conditioner deposits of the basic credit funds in the system

Monthly

206




Non-term deposits One time on due Monthly

From 9.6% - 11.9%/ year depend on the market

Term deposits One time on due Monthly

1 month-term deposit 2 months-term deposit 3 months-term deposit 12 months-term deposit 6 months-term deposit 9 months-term deposit 12 months-term deposit


Deposits outside the system

Deposits of economic organizations

One time on due Monthly



Deposits of residents One time on due Monthly



207




Others (specify) Western Union

208

THE PCF’s Loan Products and Services

Payment Types of loans

Principal Interest Maturity Interest rate Condition for

getting the loan Funding Sources

Type of Savings

Non-term saving Monthly

Term savings Monthly

Individual and organization’s payment savings One time on due Monthly

Progressive Savings and Progressive Deposits



Type of Loans

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Loan for manufacture, business and services with individuals and enterprises

One time on due Monthly From 12% - to

15%/year depend on the market

Having legal capacity, civil capacity and civil liability according to legal rules; Having finance ability to ensure payment term of pledge; Feasible, effective and suitable for legal rules investment project; Loan using legal purpose. Implementing rules of loan guarantee.

Loans for consumption Monthly Monthly

Loan for working overseas

Loan for agriculture One time on due Monthly

Loan for poor household


Short-term loan: the loan having the duration up to 12 months. Medium term loan: the loan having the duration from 12 to 60 months Long term loan: the loan having the duration from 60 months and over.

0.65%/month

To be in the list of Poor Households of local commune according to poverty standards defined by MOLISA from time to time. Having a productive plan but being in shortage or lack of

Deposit Own capital

Lending from CCF

210




capital for implementation

Other products/services (specify)

ADB 1802

211

Annex 4.3

Draft Concept Paper for Development Strategy for VBSP towards 2020 [6B version- latest]

Hanoi, November 2008

Preface

Vietnam Bank for Social Policy (VBSP) was established in 2002 and started operation since 2003. While VBSP’s greatest achievement in the last 5 years is to effectively deliver the funds from State preference lending programs to policy beneficiaries, its biggest challenge is the absence of a long-term operational strategy which indicates its goal to become a social policy bank with stable, sustainable and long term funding sources. VBSP is a State owned financial institution, a tool for conducting social security policy, thus its capital comes from State sources. However, budgets allocated to social-economic development plans and State budget planning are not well proportioned, and there is a big gap between budget needed for social security programs assigned to VBSP for implementation and the actual budget allocation in annual plan (including program fund, charter capital, interest loss subsidy fund), which results in difficulties for both Government authorities and VBSP. Meanwhile, a number of regulations on funding sources stipulated in Decree 78 are not implemented in a comprehensive manner; services for voluntary & complulsory savings, payment deposits are not yet in place; domestic and international humanitarian funding sources are not yet mobilized. At the consent of Prime Minister, VBSP has set up a working group responsible for crafting VBSP development strategy. This draft version has received various comments by VBSP staff as well as members of it’s Board of Advisors and Board of Directors.

Executive Summary

Vietnam Bank for Social Policy (VBSP) was established at Decision 131/QĐ-TTg dated 04 Oct 2002 by the Prime Minister in an objective to implement lending policy towards the poor and other policy beneficiaries. VBSP is a State-owned financial credit institution, functioning as an economic tool to provide Government support to the poor, the poor areas and other social policy beneficiaries. It operates on a non-profit basis. VBSP serves as part of National Program on hunger elimination and poverty reduction and socio-economic development at each period of time. After 5 years in operation, VBSP has gained remarkable achievements. Outstanding loan portfolio provided to the poor and other policy benificiaries as of 30 June 2008 reached 42.200B VND, 500% higher than its started figure when it was established. While in 2003, VBSP could offer only 3 credit programs, now the number has increased to 14. New branches have been set up across the country. VBSP provided policy lendings to 100% of communes nationwide. Especially in remote areas, VBSP is the only regulated financial institution which provides loans for the poor and policy beneficiaries.

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To strengthen VBSP’s role as a policy credit institution contributing to the course of industrialization and modernization as well as poverty reduction in 2020 as indicated in the Resolution of Party Congress X, a long term development strategy for VBSP must be in place. This strategy is based on the Party’s orientation and the Government’s periodical development goals, and in compliance with international commitments during global integration. The Party Congress’s Document IX identified economic development goals, hunger alleviation and poverty reduction, improving living standards of ethnic minority people in the year 2010 with major indicators such as: basically no more households in hunger; reducing poor household rate to below 10%; bridging the gap between peoples, regions. According to The Party Congress’s Document X, until 2010, industrial sector will account for 43-44% of GDP, service sector to reach 40-41% of GDP, agriculture to reduce to 15-16% of GDP. The rate of poor households defined by the new poverty standard is 10-11%. In 2010, Vietnam will basically become an industrial country moving towards modernization. The Prime Minister issued Decision no. 148/2004/QĐ-TTg, no. 146/2004/QĐ-TTg, no. 145/2004/QĐ-TTg identifying poor household rate in key economic zones in Northern provinces to be decreased to 1,5% in 2010 and below 0,5% in 2020; from 15,5% in 2005 to 8,8% in 2010 and approx. 2% in 2020 in Central provinces; 4% in 2010, below 1% in 2020 in Southern provinces. State Bank of Vietnam (SBV) developed Banking services development strategy in 2006 - 2010 period and orientation towards 2020, in which its ideas on VBSP related activities include: clear definition of VBSP scope and areas of work, distinction between State policy credit, State assistance credit and commercial credits provided by credit institutions; strengthening SBV management and supervision capacity on Policy Banks and other State financial institutions. Accordingly, in the next 20 years, Vietnam’s social-economic structure will basically change. VBSP clients structure will also change. The number of poor clients (defined in national and international criteria) will reduce dramatically and focus in remote and disadvantaged areas only. Clients’ capacity will be enhanced in terms of quality thanks to programs 134, 135 and other national programs on poverty reduction, as well as great contribution of mass media like television, radio, programs on agriculture, forestry and fishery etc... As the country is moving forward, the number of poor people who lack of knowledge and expertise will be reduced, the rate of people living under poverty line will be reduced accordingly. However, there remains a group of low-income people. This group needs capital and an easy access to funding sources and appropriate financial products. Besides, there is an increasing number of policy clients who need policy loans for purposes of national industrialization, rural and mountainous development, income generating activities combined with urbanization. Target clients in the coming periods will be other policy beneficiries instead of poor households. In addition to policy lending, the Bank will also develop new banking services using new technologies to satisfy diversified demands of policy and low-income clients. Based on advantages and new oppotunities, with lessons learnt in the past years, justifications and actual background information above, the Development Strategy for VBSP was developed, on basis of Government’s concentration on disadvantageous areas. Other policy beneficiaries will be provided with incentives for development, with credit tool as lever. At the same time, VBSP will function as a financial institution providing support to clients who are not served by commercial banks. In order to achieve these objectives, VBSP must undertake changes on institutional structure,

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adopt new technology and create good human resources. Policy lending funds will come from State funding sources in the forms of supplementary charter capital of VBSP, reserving ODA funds for poverty reduction programs, issuing State bonds or VBSP bonds with State guarantee as lending sources, partly from borrowings with low interest rate and long term grants from international financial institutions, local NGOs and INGOs for the course of poverty reduction, partly from local contribution, partly from VBSP’s own equity. VBSP must assure its operational self-sustainability and operate in compliance with the Government commitments and Banking Sector Strategy Roadmap.

VBSP’S DEVELOPMENT STRATEGY TO 2020

I. Master development strategy

1. Long-term objective The overall objective of VBSP Development Strategy to 2020 is to strengthen VBSP operational capacity on a financially sustainable basis, able to provide sufficient funds to meet the increasing demand for policy lendings in accordance with the Party’s policy on socio-economic development in 2006 – 2010 period, Socio-economic Development Orientation to 2020, National Poverty Reduction Program to 2010. The implementation of the strategy will not be concluded in a short period, thus the overall objective may be divided into 5-10 years term objectives, where VBSP will be strengthened to become:

• A reliable State financial institution for implementing master strategy on economic growth and poverty reduction.

• A leading small-scaled policy financial service provider with more policy loan clients being served at different levels of assistance in an appropriate manner.

• A reliable partner of financial institutions, international agencies working in financial, small-scaled policy credits area.

• A financial institution leading the whole microfinance sector to the right track set up by the Government.

• A financial institution with operational and financial self sustainability, capable of mobilizing capital without Government guarantee.

• An institution with qualified and capable human resources to realize above objectives.

2. Clients

Poor people are not the only one who have the need for capital to sustainably get out of poverty cycle. According to World Bank’s Vietnam Development report 2004, 53,4 % of households in Vietnam are living below 2 USD/capita/day, equivalent to 10 millions households. If 3,9 millions poor households as defined by current Vietnamese poverty criteria is deducted, there remains 6,1 millions living above national poverty line but below international poverty line. These are pro-poor households and can easily fall back to poverty if there are circumstances that affect their tiny incomes. These people are in great need for capital to keep their business running but they fail to get loans from commercial banks because of high transaction cost, limited network, unavailability of loans delivery at local level. On the other hand, most of them live far way from commercial banks’ transaction offices, having limited means of transport, thus their access to financial services provided by the banks is very limited. In the meanwhile, VBSP offers more client-centered services which help reducing oppotunistic cost, travel expenses and time for its clients.

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In order to achieve sustainable poverty reduction, the pro-poor should be treated with concessional lending policy, mostly preferences on flexible transactions methods with the same interest rate applied for business households in disadvantageous areas. At this rate, VBSP can mobilize by itself capital for lending and help minimize State subsidies. Assuming that 60% of pro-poor households need an average loan amount of 15M/household, the total loan amount needed by this group will reach 54B in 2020 (18B in 2010 and 36B in 2015).

Extremely poor clients (defined by national and international standard) will reduce in number and locate mostly in remote and disadvantageous areas. However, the number of low income clients – relatively poor clients will increase. Thus, there is a growing number of policy beneficiaries clients who need policy loans for the course of industrialization, rural and mountainous development, income generating policy combined with growing urbanization. Client structure will change in the coming periods of time to gradually enlarge policy beneficiaries and other clients who are not served by commercial banks such as: small business households in disadvantageous areas, pro-poor households and micro-businesses, newly established small enterprises, households borrowing loans from clean water and rural sanitation program...instead of poor households. Apart from policy lending, VBSP is also developing new technology-applied banking services to satisfy diversified requirements of policy clients and make full use of its resources in order to minimize State subsidies.

3. VBSP roles in the future

Current roles: VBSP is operating on a non-profit basis to provide preferential loans to the poor and other policy clients. VBSP is a State financial institution, a regulating tool for poverty reduction purposes. Future roles: VBSP is a State financial institution operating on a non-profit basis to provide microfinance services, particularly growing diversified credit needs to policy clients. Microfinance services include: providing a wide range of services such as savings, lendings, insurance, money transfer... to poor and low-income households and small & tiny enterprises.

4. Future tasks and functions - Current tasks and functions:

o Contributing to poverty reduction in Vietnam o Contributing to social stability in Vietnam o Providing loans with preferential interest to poor households and

policy beneficiaries in Vietnam o Contributing to environmental protection in Vietnam.

- Future tasks and functions:

o Being a State owned bank operating in policy microfinance in Vietnam o Contributing to sustainable poverty reduction in Vietnam o Contributing to social stability in Vietnam o Providing microfinance services to policy beneficiaries in Vietnam o Supporting environmental protection in Vietnam

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o Providing banking services most appropriate to policy clients through: (i) expanded network; (ii) good infrastructure; (iii) appropriate procedures; and (iv) qualified human resources.

VBSP will make all efforts to ensure capital adequacy by itself, obtain maximum collection and improve operational efficiency. For efficiency improvement, VBSP will modernize and improve procedures to reduce operational costs, promote marketing and deliver suitable products through different channels. For capital adequacy purpose, it will enhance community mobilization and offer suitable products and services to policy clients. For full collection purpose, VBSP will strengthen capacities of partners and its credit & savings groups, build up a sound risk management system by quantitive analysis and risk monitoring.

5. Key Strategies To achieve its mission, realize its roles and tasks in future, VBSP must develop and implement a number of strategies. VBSP’s long term development depends on 4 major strategies, namely: (i) Financial strategy; (ii) Clients strategy; (iii) Strategy on improving internal performance efficiency; (iv) Strategy on training. These 4 strategies are needed to achieve the following goals:

Financial strategy: In order to have financial sustainability, VBSP needs to:

• Have self control on capital mobilization on the basis of an appropriate charter capital proportion

• Maximize its collection • Improve operational effectiveness of credit programs • Propose an appropriate interest rate

Clients strategy: For financial purpose, VBSP needs to consider its capacities to serve the clients, namely:

• Enhance public savings mobilization, get people accustomed to do savings and deposits at the bank.

• Diversify banking products and services • Offer lending packages suitable with clients • Satisfy microfinance demand of clients

Strategy on improving internal performance efficiency: To better serve its clients, VBSP must strengthen capacities in the following areas:

• To identify sections of clients’ needs and related risks • To simplify/standardize procedures • To develop a sustainable IT and MIS infrastructure • Strengthen capacities of mass organizations and the third parties • Develop new delivery methods

Strategy on Training: In order to put the process into operation, VBSP must enhance its staff productivity by conducting intensive training and re-training activities as needed.

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Table 3. Development stages

Stage 1 Stage 2 Stage 3 Key development strategies

2008-2010 2011-2015 2016-2020

Financial strategy

Improve operational efficiency

Maximize collection

Self-control of capital mobilization on the basis of appropriate charter proportion and interest rate

Clients strategy

Promote public savings mobilization by groups

Improve capacity to offer products and services at clients’ need

Satisfy clients’ diversified demand, provide lending programs suitable for the clients

Strategy on improving internal performance efficiency

Improve banking process by simplifing procedures

Set up clients’ information system with associated risks

Develop an effective IT and MIS infrastructure

Strengthen capacities of mass organizations, credit & savings groups as partners

Strengthen governance

Develop new delivery methods

Strategy on training

Technical training for staff

Based on development status and roadmap (especially after VBSP obtains OSS in 2015), the key strategies must be implemented in line with the following principles:

• Basically, VBSP must be regulated under State Bank Law, Credit institutions

Laws and current Government regulations on preferential credit policy. • VBSP’s accounting system must be conducted in accordance with

Government regulations and in line with Vietnam and international standards. • VBSP must conduct external auditing or other auditing methods as required.

6. Roadmap for development strategy and performance indicators

In order to fulfill its future roles and tasks, VBSP will go through a 3-stage process as below:

• Stage 1 (2008-2010): In this period, VBSP still receives State subsidies. However, subsidies will be gradually reduced based on: appropriate capital recycling which creates substantial and human resources as well as

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technology to increase income generating services, expanding non-credit services for policy beneficiaries. VBSP will step by step increase interest rate and provide preferences only on procedures and accessibility, ensure income-expense balance for some particular programs.

• Stage 2 (2011-2015): VBSP’s goal is to achieve OSS in 2015 (OSS>=1). At this stage, VBSP obtains initial success on modernization, new technologies being applied for most technical activities, expansion of self-developed financial services on the basis of income-expense balance, with policy beneficiaries as its main clients.

Income

OSS = ≥ 1 Operational cost

• Stage 3 (2015-2020): VBSP’s goal is to achieve FSS in 2020 (OSS>=1). At

this period, most of its financial services will be based on income-expense balance, with supplementary equity and presence of an appropriate risk management system.

Income FSS = ≥ 1

Capital cost + operational cost + Loan loss contingency + capitalizing for development

II. Component Strategies

1. Strategy on policy lendings

Clients identification In order to identify its future clients, this strategy is developed based on development trend analysis for poor households and other policy beneficiaries as stated in Master Strategy on Socio-economic development in 2010, vision 2020, as well as Strategy on comprehensive economic growth and poverty reduction. This document is also based on the effects caused by Vietnam’s participation in WTO on the poor and policy beneficiaries, taking into account strengths, weaknesses, opportunities and challenges faced by VBSP, as well as VBSP’s performance capacity and Government assisted resources in the future. At present, VBSP’s clients with policy loans are mostly poor households, living in disadvantageous areas. However, the outstanding loan portfolio of poor households is declining while the outstanding amount of other policy programs is increasing. The outstanding portfolio rate of poor households has been reduced from 80% in 2003-2006 to 59,1% in June 2008, whereas the rate of other programs has been increased from 20% before 2006 up to 40,9% in June 2008 (see table 4). In the future, VBSP will increase lending to other policy beneficiaries such as business households in extremely difficult areas, students, focusing on job creating activities, clean water and rural sanitation, newly established small enterprises, rural production businesses, lending to pro-poor households, businesses and enterprises employing post-rehabilitated drug addicted, businesses operating in difficult areas, lending to trust

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projects or donor funded projects, other beneficiaries as decided by Prime Minister etc. Until 2010, VBSP’s total loan outstanding is expected to reach 55.000-60.000B, in which loan outstanding of poor households (including households who escaped from poverty and still have outstanding loans) is 20.000B accounting for 35-40 % of total amount, while that of other groups takes 60-65 %.

Table 4. VBSP’s lending activities in 2003-2007

Unit: Billion VND 31/12/2005 31/12/2006 31/12/2007 30/6/2008

No Lending programs Outstanding

loans % Outstanding loans % Outstanding

loans % Outstanding loans %

1 Poor households 14.891 80.81 19.196 79.52 23.430 67,1 25.081 59,1

2 Students 157 0.85 217 0.90 2.807 8 5.300 12,6

3 Job-creating activities

2.569 13.94 2.848 11,8

3.157 9

3.210 7,6

4 Labour exporting activities

252 1.37 546 2,26

662 1,9

676 1,6

5 Households in flood area

179 0.97 342 1,42

487 1,4

527 1,2

6

Clean water and rural sanitation

328 1.78 790

3,27

1.717

4,9

2.446

5,8

7 Forest plantation 5 0.03 32 0,13 64 0,2 105 0,2

8 SMEs 30 0.16 67 0,28 137 0,4 128 0,3

9

Lending to extremely difficult areas

2.393

6,8

4.490

10,68 10 Others 16 0.09 104 0,43 86 0,3 237 0,5

Total 18.426 100 24.140 100 34.940 100 42.200 100

Until 2020, according to regional development plan at Decision 148/2004/QĐ-TTg, 146/2004/QĐ-TTg, 145/2004/QĐ-TTg by Prime Minister, the number of poor households will account for only 2% - 3% i.e approximately 200.000 - 300.000 households. Assuming that each household has an average outstanding loan amount of 15M, total outstanding loan amount of poor households (including households who escaped from poverty and still have outstanding loans) is only 8.000B, accounting for 10 % of total amount.

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Lending Procedures VBSP is accountable for providing loans to the right beneficiaries in accordance with Government regulations and relevant legal documents. The borrowers must use the loans for the right purpose, make full repayment for both principal and interest as stipulated in the loan contract. In terms of interest rate, a unique rate is currently applied for VBSP’s clients regardless delta or mountainous areas. This is unreasonable because clients in the delta with better working conditions can pay higher interest rate. Clients in mountainous areas suffer higher input expenses and transportation cost due to disadvantages in terms of distance, facilities and low consumption, thus they are entitled to an interest rate 8-10% lower than that applied to clients in the delta. In the next stage, VBSP may offer also preference interest rates other than procedures preferences. Delivery methods and clients approach VBSP clients are entitled to procedures preferences according to current regulations on policy lending: simplified procedures, no assets collateral required. Depending to each lending program, partial trust mechanism is adopted through social political organizations and partially through savings and credit groups. Transactions are taken place at the bank or transaction points in communes. VBSP borrowers are mostly doing small and tiny scaled businesses. Normally they need seasonal loans and loan reclying. Thus this lending method will be most popular for VBSP. Due to differences in natural, social, economic, geographical and ethnic conditions, in the long run, VBSP will strengthen capacities in designing appropriate loan products. At present, VBSP is providing mostly medium term loans. Short term loans are still very few while the poor and policy beneficiaries have great demand for various types of loans. Therefore, in the coming time, apart from medium term loans, VBSP will deliver short term loans.

2. Strategy on new product development

At stage 1, VBSP will basically provide policy lending. From stage 2, by strengthening institutional capacities, VBSP will develop new technology banking services to meet diversified clients’ demand and make full use of its available resources. Besides, VBSP will strengthen credit & savings groups to change the trust mechanism from social political organizations to credit & savings groups, serving as basis to further develop new financial services through groups. Below is the indicative list of financial services for policy beneficiaries to be developed in the coming time.

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Table 5. List of planned financial services

No Services Effects on policy beneficiaries

Expected products

1 Payment management

Payment for bills, money transfer, long term savings

Money transfer Overseas currency exchange Payment accounts

2 Income management Conditioning the demand due to income-expense unbalance by seasons

Short term savings Salary service Consumption loans

3 Investment management

Retaining and enlarging assets Average term savings Loans for house repairing and construction Job-creating investment

4 Income generation Assisting policy beneficiaries to run businesses

Production loans for pro-poor Co-sponsor loans Guarantee fund

5 Risk management Reducing vulnerability to economic, social and environmental changes

Insurance agent Emergency loans Oriented savings

6 Group development Promoting delivery of microfinance services through groups

Wholesale lending though groups and other microfinance institutions Savings service, payment for groups.

6 Non-financial services Reducing risks caused by limited loan using capacity

Training on group formation Training on financial management Market linking, knowledge provider sources

3. Strategy on interest rate

Develop an interest rate calculation method appropriate for products and services Based on orientation of Comprehensive Strategy on economic growth and poverty reduction as follows1: Implement a lending policy suitable to policy beneficiaries, in favour of the poor, disadvataged peope, especially women who have demand for loans with reasonable interest rate, on time delivery for production development purposes. The National program on poverty reduction for 2006-2010 period also indicates preferential policy on lending interest: shifting towards market-oriented interest rate, integrated poor households’ loans with savings and insurance; increasing loan size to meet clients’ demand for production development purpose2. Implementation mechanism: applying lending interest rate 25-30% lower than market rate and moving towards market-oriented and ensuring FSS of credit institutions. However,

1 Comprehensive strategy on economic growth and poverty reduction page 78 2 National program on poverty production 2006-2010 period, page 19

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poor households who are ethnic minority and live in extremely difficult areas are offered preference interest rate3. In order to do that, VBSP must set up a sound interest rate identification system based on operational expenses and taking into account State subsidies as well as clients’ loan assumption capacity. Build up an interest rate progressive system for the purpose of policy clients development in accordance with promulgated policies. VBSP is planning to improve its operational capacity in order to obtain sustainability and capable to meet policy lending development requirement in a more efficient and powerful manner. The current interest rate regulations allow VBSP to receive State subsidies to cover its interest loss and operational costs. However, in the long run, due to limited State budget and its expansion requirement, VBSP must consider applying reasonable interest rate subject to each lending program and level of preferences (for example, lending interest rate must be higher than fund mobilization interest rate or capital integration interest rate) in order to cover lending expenses and operational costs. This would enable VBSP not only to obtain OSS but also retain and expand its operation in the future.

4. Banking risk management in general and risk management accounting system.

Take credit risk management and general banking risk management as priorities in future During VBSP’s development process after Vietnam entrance to WTO, development of a general banking risk management system for VBSP must be started with credit risk management which is considered as emerged and prioritized step. Risk management capability does not just base on simultaneous coordination and regular supervision of credit staff, mass organisations and Savings and Credit groups over borrowers’ debt repayment capacity, it needs a team to conduct research on development trend of sectors, industries which VBSP’s customers currently or will invest in to give forecasts on potential risks and prevention measures. This can be done through assessment on capital utilization plan step, after that, basing on assessment and forecasts on default risks of borrowers due to unfavorable objective causes to define capital allocation and continue conducting new investments. With such requirements, it is necessary to improve credit analysis and supervision capacity for VBSP’s staff. VBSP will soon build a database on customer investment basing on available database and then gradually upgrade it by recording results on credit analysis/monitoring over such database to enrich general financial data which is useful for risk management. Fundamental risk management mechanism of VBSP can be applied to build a internal credit appraisal system focusing at customers, liquidity risk management and market risk forecasts.

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Basing on available data to calculate and estimate risks, relevant state agencies along with VBSP will complete prevailing risk settlement mechanism, and then transfer autonomy on risk management and settlement to VBSP. Conducting financial and accounting management supporting risk management The bank applies the accounting system promulgated in Decision 479/2004/QD-NHNN2 dated 25/12/1998 of the State Bank of Vietnam, which is on effect from 1/10/2004. This accounting system has been amended, supplemented by various relevant regulations promulgated afterward, thus, gives a standard accounts system as well as recording methods for different banking activities. Although the accounting system launched by the SBV has been built with supports from international organizations and subjected to more international practices, there is still a big difference between the system and General Accepted Accounting Principles In adherence to Law on Accounting, banks have to comply with Vietnam Accounting Standards launched by Ministry of Finance, which is applicable to all economic institutions. At the end of 2005, Ministry of Finance has promulgated 22 standards. However, there are still differences between Vietnam Accounting Standards and prevailing accounting practices that banks currently applies. VBSP’s accounting system and mechanism have many definite differences in comparison with those of other commercial banks and with requirements on Financial Statement following International Financial Reporting Standards (IFRS) for banks. There are some contents which have not been mentioned or designed inadequately for a credit institution like VBSP. This system is also lack of guidance on accounting management for VBSP. Hence, it can be said that the prevailing system is not capable to give out a financial report complying with international standards to meet with requirements of various stakeholders in integration process of Vietnam economy. VBSP intends to develop and improve its operation capacity towards sustainability, having sufficient resources to meet with raising policy credit demands in compliance with the Party directions on 2006-2010 socio-economic development tasks and on 20 years, to 2010 socio-economic development orientation. Thus, it is necessary to re-assess and recommend changes on accounting policies, and improves the accounting system in order to fit with requirements of a new operation model- a developed financial institution. Regarding accounting, to make it comply with Vietnam prevailing practices and, thus, gradually comply with international practices on the way to integrate into Vietnam banking-finance system, VBSP needs to apply accounting policies/system which is capable to provide adequate information under a popular standard to relevant stakeholders. Accounting system of VBSP should be a system, which is widely used by other, credit institution or be compatible with such widely used system. International economic integration process of banking sector requires VBSP to provide its financial statement along with other information under a common standard. Some parts in financial accounting management of VBSP that need further improvement are listed in following table. The tasks should be conducted following a proper agenda.

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Table 4. Roadmap for financial accounting management system

Implementation roadmap

Areas that need improvement

Stage I (2008-2010)

Stage II (2011-2015)

Stage III (2016-2020)

1 Debt categorization system 1.1 Develop and apply a debt categorization system

which is unified, comprehensive and compatible with such of other banks.

1.2 Develop an internal credit categorization system 1.3 Conduct piloting, database changes, adjustment

and application of the internal credit categorization system

2 Loss provisioning 2.1 Conduct specific risk provision for medium and

long term lending

2.2 Conduct general risk provision for short term lending

2.3 Conduct sufficient risk provision for risky loans in adherence to SBV’s regulations for banks.

3 Conduct accrual interest calculation 3.1 Record actual interest payment and accrued

interest payment

3.2 Record actual interest receipt and accrued interest receipt

4 Foreign exchange accounting 4.1 Develop and apply foreign exchange accounting

following Vietnam Accounting Standards

4.2 Design and apply multi currencies accounting system

5 Improve publication of financial information 5.1 Prepare financial reports in compliance with

accounting standards and norms which are applicable to Vietnam banks.

5.2 Apply an accounting system completely compatible with other Vietnam banks’ system

6 Manage capital state and balance capital term 6.1 Develop policies, develop and apply a process

that allow annual redefine of lending interest rate

6.2 Develop policies, develop and apply a policy lending interest basing on risk level of customers

6.3 Develop policies, develop and apply a process of interest define and capital mobilization between the Centre and branches.

6.4 Develop, design and apply a system and process to monitor indexes on secured operation

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Debt categorization – toward a stricter system VBSP applies the SBV’s method of loan categorization in accounting and management chart but use a definition which is different from that of SBV. Debt receivables are categorized into various types depending on risk level but take due date in the contract as the first day to calculate overdue debt. This method can lead to low accuracy of information on risks and show the incompliance with principles and objectives of this assessment system.

Loan assessment system in VBSP is categorized into 3 categories:

• Performing loans • Over due debt • Frozen debt

A large portion of loans are not yet fully collected but are extended and record into performing loans category. Over due debt are loans which are partly or fully uncollected at the overdue time. This category can be considered as equivalent to with loss category in commercial banks. VBSP has not yet recorded extended loans separately (to separate it from on due loans). VBSP does not keep track on extended loans or uncollected loans basing on time line. This management model can result in difficulties for VBSP in accurately defining real risk situation, as the systems of files, reports and IT are underdeveloped whereas loans are at small scale, etc. Prevailing debt categorization criteria have not mentioned debt payment capabilities of customers. Credit risk provisioning policy of VBSP is currently under impact of 2 main factors:

• The government is the bank’s payment guarantee source; thus, Ministry of Finance is responsible for allocating required resources to cover risks, but not yet done whereas risk cover activities have been conducted at VBSP.

• Not subjected to regulations of SBV as other banks. Risk provisioning of the bank is currently at 0.02% of annual average total loan outstanding.

Accounting regulations and practices in integration stage have to ensure that loans, capital and income are recorded in compliance with Vietnam and other international standards. VBSP needs to develop and apply a stricter debt categorization system which is better adherence to international practices with adaptation to Vietnam, i.e., debt categorization following risk categorization. Developing a debt categorization system which is compatible with such system of other banks in Vietnam for easier comparison. With the purposes of fast and efficient, in the first stage, VBSP can apply a debt categorization system basing on risk factors and conduct credit risk provisioning according to Decision No.493. Policy of VBSP on loss provision is implemented following the financial regime regulated by the Government. The policy gives big difficulties in recognizing actual loss in the future and necessary risk provisioning level. When applying debt categorization and loss provision following Decision No. 493 of SBV, portion of non-performing loans will be higher than the portion in current reports and debt categories. Current risk provision of VBSP will not be enough to cover existing non-performing loans. This is the issue that needs to be addressed immediately, or in other words, need a more practical support mechanism from SBV,

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or a change in risk provisioning mechanism to help VBSP to better deal with risks itself. In the future, sufficient provision is compulsory to ensure efficient operation of VBSP. However, changes in provisioning mechanism and other key areas need considerations of some elements, including impacts on financial situation of VBSP as well as macro economy. If sufficient provision is conducted right away, it will lead to huge provisioning expenses (exceed current financial capacity of VBSP), hence, resulting in bad impacts to VBSP financial status and salaries to staff. Simultaneously, big changes can create unnecessary concerns form relevant agencies. However, setting a ceiling provisioning level is essential to protect VBSP from overloading burdens in case of troubles. Therefore, a gradual increasing provisioning level upon various stages is a reasonable choice. In the long run, VBSP can choose to take risk provision in correspondence to actual quality of loans. Application of strict debt categorization and sufficient risk provision will not lead to a decrease in credit quality and financial status. On the contrary, it helps VBSP operation be more firm and allow VBSP to conduct risk prevention and settlement using available source, thus, mitigating loss due to waiting for resources from the State budget. The time for using provision as mentioned above may require segments for it. For example, in case of classifying loan strictly and using provision cannot be performed immediately, these provisional amount can only publicize some basic information such as additional information of financial statements in the interim period (i.e 2-3 years) before full implementation. This special measure will give VBSP a transition period more easily and help VBSP in solving frozen debt. On the financial side, to avoid adverse impacts, if any, VBSP needs to draft a feasible plan and ask the Government for support. The necessary support could include the following forms: i) Granting more new capital ii) Adopting financial management mechanism especially in the transition period for

development (about ensuring costs for staffs, the coefficient of safety in operation, guarantee from the Government, etc.) in a certain time for VBSP to deal with the transition period.

In the long-term, VBSP will perform financial accounting and management accounting that is appropriate with general standard to meet with changing in its processes and methodologies for risk management as proposed above. The new system, along with characteristics, must be able to monitor outstanding loans and credit analysis by lending sector, customer / borrower. VBSP will develop a monitoring system and using loan of each client with big loan size or a group of small-scale borrowers that are updated regularly and provided timely information for better loan analysis and appraisal. It is also an important requirement to change the method of risk management from focusing on "after treatment" to combining with "risk prevention" and "handling bad debts." Monitoring loan size is also necessary to improve efficiency in managing capital and liquidity risk.

Applying principle of projected collecting interest VBSP is applying the mixture of actual accounting, actual costing and accrual accounting. Payment of interest shall comply with method of accrual accounting and collecting interest performed on the basis of actual income. Interest in due that is not collected will be accounted in the balance sheet account. VBSP implements this method in accordance with the first phase when shifting to second phase and it will

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record interest based on projected revenues for good loans and will move from the interest recorded as projected income to actual income when debts are seen non-performing (at that time, the interest will be recognized in the balance sheet account and recognized as revenue when certainly getting). Expenses for paying interest (interest of borrowing) is implemented as projected accounting cost. This is to ensure rational principle between revenues and expenses. Accounting based on accrual principle is necessary for VBSP to have sufficient information for planning and using capital efficiently and accurately in analyzing its performance. This can be seen as measures taken early to improve liquidity risk management and allow VBSP to involve in more rapid progress of financial autonomy. Accounting based on accrual principle is the one that any credit institution, policy one or commercial one should do to have a meaningful financial statement. Applying Vietnam accounting standard for foreign exchange and improving accounting system Risk in exchange rate related to ODA lending. For loans in foreign currency in documents of VBSP, rates are given on transaction date. Outstanding loans are not revalued. VBSP’s own risk for exchange rate in this case may be very limited due to effects of exchange rate fluctuation and will be borne by the Ministry of Finance. However, the monitoring and risk management is unclear since then. Besides, VBSP will increase the mobilization of capital and loans, remittance to policy beneficiaries working abroad in foreign currencies in future. VBSP should improve the system for managing risk in exchange rate more effectively. In the long term, VBSP should apply the system of multi-currency accounting. This system will reduce the need for calculation of foreign currency conversion into local currency (except for multi-currency transactions calculate profits and losses determined for each currency). In this way, VBSP and concerned agencies can easily monitor risks related to exchange rate fluctuations. In this system, each currency will have a separate balance temporarily. Applying the system of multi-currency accounting is a basic requirement for monitoring exchange rate risk.

5. VBSP’s strategy for capital Funding mechanism continues to comply with Article 1 of Decree 78/2002/ND-CP dated 4th October, 2002 of the Prime Minister: "Credit for the poor and other policy beneficiaries is the utilization of financial resources mobilized by the Government to the poor and other policy beneficiaries for production, business, job creation, improving living standards and contributing to the implementation of the national targeted program for poverty alleviation, and social stability. " Expanding capital mobilization from the Government Capital sources are received directly from the State Budget under the form of expenditures recorded in the State Budget: Capital sources received directly from the Government was first granted in the time of VBSP’s establishment and to be added during its operation in the form of grant and subsidies for the bank’s annual activities if implementing preferential lending rates. To ensure the safety in capital indicators according to Vietnam and international practice standard and ensuring low-cost capital, reducing subsidies from state

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budget, the low-cost capital for VBSP must be maintained at 40% -50% on total outstanding loan. Mobilizing, receiving capital resources from other organizations under provisions of the Government: The need for loans lending to policy beneficiaries is huge, increased annually following economic development (due to inevitable disability of market economy). Therefore, VBSP’s operation can not rely only on funds from the State Budget. The Government may issue compulsory regulations or steerings for directing organizations, enterprises to make a contribution in the form of social responsibility of organizations (this is a common form of contribution in the world) to increase capital for VBSP. Contributions can be in forms such as capital contribution, deposit, loan, etc,. Institutions involved in contributing capital to VBSP means:

• Increasing operating capital for VBSP. This is an increase in capital and

maintained during the operation of VBSP; • Showing responsibility of organizations in supporting capital for policy

beneficiaries, through that showing responsibility of community and implementing socialization in supporting policy beneficiaries;

• Reducing burden for the State Budget. The indirect forms of mobilization through the Government as mentioned above includes: • From commercial banks: The Government can regulate commercial banks

operating in Vietnam territory to spend a certain percentage on the total balance amount of deposit in VND mobilized on average per year to transfer to VBSP for its loans. These banks transfer to VBSP a certain amount of capital in the form of their deposits in VBSP. In order not to affect business results of these commercial banks, the Government may determine the reasonable interest rate of deposit, and VBSP shall pay interest for these deposits (usually guarantee these commercial banks to cover the average cost of mobilization). This deposit is considered to be the responsibility of banking system (which is the responsible for community) in supporting social policy beneficiaries;

• From other organizations of the Government: The Government will state some government organizations to participate in capital, capital contribution, lending or opening deposit account to deposit capital temporarily idle into VBSP for creating lending sources. These organizations may be firms, corporations, financial institutions, the State Treasury, etc.;

• During the operation, VBSP receive loans or capital to follow targeted programs

specified by the Government. In addition to granting the charter capital, additional capital for VBSP to start-up funds, in the given time, the Government may implement other socio- economic development programs through credit support for some specific objects. In that case, the Government will spend a certain capital from expenditures of State budget to implement these programs. Depending on the nature and beneficiaries, this amount of capital may be additional capital for VBSP in the forms of additional charter capital (if beneficiaries of programs are also subjects of VBSP’s loans), or in form of entrusted capital by the Government only for VBSP.

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Expanding the mobilization and receiving of funds from foreign organizations and governments

Capital source of Official Development Assistance (ODA) mobilized and utilized by the Government of Vietnam for the purpose of socio-economic development and poverty reduction, when the Government received, this is regarded as a revenues of the State Budget. This is a very important source of capital for VBSP because the greater incentives of ODA: the loan term (possibly up to 40 years) and long grace period (possibly up to 10 years), low interest rates (from 0.75% - 2% / year). The Government should give priority to the use of ODA capital for granting additional charter capital to VBSP as annual route. And also proposing the Government to give priority the list of ODA mobilization suggested by VBSP to the list of ODA call for international partners. Mobilizing non-government funds from businesses This is a contribution (charity), transfer to VBSP in forms of: no interest, low interest rates on a voluntary and generosity basis of organizations and individuals inside and outside the country. These capital amount transferred to VBSP for providing loans will create greater and more lasting effectiveness and impact than the use of this money for charity: the capital is preserved and creating revolving fund for many users (more beneficiaries); Mobilization of funds under the auspices and permission of the Government As a traditional bank, VBSP’s operations includes: mobilizing capital, lending and performing other banking services. VBSP can not just operate on the basis of funding from the Government (due to the limits of the State budget. So, it is indispensable for VBSP to mobilize other sources to supplement its operating capital). However, because VBSP has specific characteristics that are different from commercial banks as analyzed above, in order to mobilize efficiently other sources of capital, this must be implemented under the auspices and permission of the Government in forms of issuing VBSP’s bonds guaranteed by the Government or the Government issues bonds to supplement funding for VBSP. VBSP’s bond market will be participated in the open market, and be discounted and rediscounted at the State bank of Vietnam. This is a very important source of capital with high proportion, and being a trend in the long run, facilitating VBSP in maintaining and expanding its operations, creating active and stable position in the bank’s operation. On the other hand, mobilization of this fund will reduce the possible direct support from the Government for VBSP, reducing burden on the State budget. Every year, VBSP proposes to the Ministry of Finance, the State Bank of Vietnam the plan of raising bonds guaranteed by the Government or Government bonds based on its plan of outstanding loan growth assigned by the Government . Mobilizing capital source from deposit The mobilization of deposit includes: receiving deposit paid, deposits of demand from organizations (businesses and social organizations), savings deposit of residents and of other banks.

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Characteristics of mobilizing deposits for VBSP:

• No deposit insurance, no compulsory reserve for the aim of reducing capital cost for VBSP;

• VBSP’s deposit mobilization may include the followings: - For deposits paid: VBSP expands this form of mobilization on the

basis of participating and implementing services of interbank payment - Mobilizing demand deposits from organizations and individuals: It is

also an important source of capital for the bank, although higher capital cost for the bank but it will receive a huge and stable capital amount in the pre-determined period

- Mobilizing savings deposits of residents and community through savings and credit groups: This is a potential source of capital that VBSP can exploit. The mobilization of savings deposits is made with diversified terms ranging from deposits with no term to longer term consistent with ability and needs of savings and credit groups

- Mobilizing deposits from other banks: In fact, among banks usually raise demand of payment (income and expenditure) and some entrusted services, so VBSP will develop this form based on the modernization of internal payment system

- Mobilization of capital through borrowing of VBSP may include: Foreign borrowings (from foreign Governments, organizations,

especially foreign financial organizations): Need to have the guarantee of the SBV or the Government or subject to the loan program of one foreign Government for Vietnam;

Borrowings from the State Bank of Vietnam: the VBSP could borrow loans from the SBV for such necessary cases as responding with urgent expense demand, expanding credit in a specific period. The SBV provides loans for the VBSP in form of refinancing by defined credit limit from time to time.

Borrowings from other credit institutions: the VBSP could increase capital source through other credit institutions by means of mutual borrowing or domestic inter-bank borrowing or from foreign financial organizations in Vietnam.

Borrowings in capital markets: If necessary to rise stable source of long term loans, VBSP shall borrow in capital markets by issuance of promissory note, for instance: bill of exchange, bond and treasury bill with Government guarantee.

Expanding mobilization of entrusted funds: the VBSP has such certain advantages as: operation network, experience and application technology within some operation fields and human force etc. Therefore, in some specific cases, the VBSP is entrusted implementation by the Government, organizations, individuals and other credit institutions within some periods for beneficiaries, scopes and geographical areas. VBSP develops its capital source through diversified entrusted activities such as: lending, debt collection and management, loan collection, payment and allocation etc.

Additional capital growth The VBSP is entitled to leave expense and income differences after fund deduction and use savings of local budget for chartered capital supplementation.

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Roadmap of strengthening capacity of capital governance in future In the next phase of medium term development, VBSP shall conduct appropriate governance on liabilities and assets and matters of other market risk management. To implement this target, VBSP will establish a Committee of Asset and Liability Management (ALM) that may be subject to the Department of Capital Planning or become a new Department of functioning banking risk management. Therefore, it is very essential to consider large and important lending programs and long term loans for purpose of drawing out suitable provision measures and sources to guarantee policy-based loan adequacy. In the next time, VBSP shall also consider thoroughly and control compulsorily when a range of policy credit schemes are being increasingly expanded with various preferential levels and several different groups of targeted clients with various risk threats, including market risk related to solvency and foreign currencies, operational and systematic risks. Total above items of capital sources will be performed in parallel and constantly develop in terms of governance on human force, information technology and finance. One of the most urgent fields is risk of credit and online financial accounting management including prompt detection of suspected debts that need to be resolved in the soonest time.

6. Development of human force

Roadmap of defining appropriate labor force At present, VBSP has 7,819 employees. The borrowers of VBSP are poor households, disadvantaged areas and other policy beneficiaries nationwide, especially in remote, mountainous, island and ethnic minority areas. To outreach and facilitate mitigation of borrowers' costs, VBSP has been providing loans directly for poor households and policy beneficiaries at commune level. Due to few staff volume, VBSP has conducted a partly entrusted regime through mass organizations; Savings & Credit Groups in villages and hamlets (Regarding 09 lending steps in credit process, VBSP takes over 03 steps on direct capital management, lending - loan collection and debt application management, remained 06 steps are entrusted). However, staff allocation for one district transaction office has not still based on scientific norm and survey on operational effectiveness, work time and work volume to be finished in the same time and areas etc. As a result, VBSP staff distribution does not ensure maximal effectiveness of branch operation. Within the development roadmap, VBSP must formulate a norm for suitable staff distribution for each branch and transaction office and submit to senior levels for consideration and issuance. Accordingly, VBSP will be entitled to decide annual workforce plan based on the approved norm and the achieved effectiveness. Priorities for training workforce At present, VBSP has had relatively appropriate workforce in general and focused on recruiting students graduated from universities through competitive examinations. The VBSP Management Board has endeavored to create various training opportunities for its staff. Almost all staff have been trained the most fundamental skills to implement the mandatory tasks.

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In fact, VBSP has just a few of experienced years and therefore it is difficult to avoid some inexperienced staff in modern banking expertise. However, as a state-owned financial institution, VBSP is limited in terms of budget. Regarding requirement for developing human force of VBSP, to respond with the demand for expanding policy credit operation, the national targeted program on poverty reduction indicated, "to reinforce the quantity and quality of VBSP credit staff, especially in remote areas. To improve skills for credit staff in terms of approaching community and providing microfinance services for the poor4. VBSP has defined the standard set of titles and work description for each position. In addition, there is need to equip and improve some skills of basic work to strengthen capacity for current workforce through training courses. VBSP will train managers and staff from central to local level as well as staff of mass organizations and SCG leaders. A well-trained workforce will easily acquired new expertise procedures rapidly. It includes as follows: Job skill: VBSP's operation requires staff to get experienced, flexible and effectively communicate with the public and mass organizations.

IT skill: IT skills are compulsory for VBSP staff to conduct the strategy of strengthening IT application to save workforce and transaction time at maximum. The urgent task in development of VBSP workforce is to train all staff suitable IT skills. All of them must implement fluently available IT means and equipments because it relates to supply of management information and work effectiveness.

Financial governance skill: Knowledge of financial governance is very essential for full-time staff on accounting finance. Moreover, it must be more improved knowledge and skills of financial governance, liability and asset management for staff to meet with demand for management of solvency risk. To conduct this objective, it must be conducted step by step in line with the development process of VBSP services and formulated based on effective IT system and management of operational risk.

Skill of credit analysis and risk management: Since its establishment, VBSP have implemented its mandatory tasks well in order to expand credit needs for poor households and policy beneficiaries. Due to customer characteristics, need for credit analysis remains to get low. However, along with the process of expanding loan programs, diversifying groups of policy customers with various demands. Therefore, VBSP staff have to be trained knowledge of credit analysis and risk management well in order to consult and help policy based customers manage and use loan for right and effective purpose.

In the short term, VBSP must establish one foundation for knowledge of financial analysis in various customer groups. In the medium term, VBSP must learn methods of using stored financial database in an aim to give out consultation and supervision to help customers mitigate risks. To manage solvency risks in the best manner, all bank staff must have knowledge on market risk management such as analysis of market fluctuation and forecast of customers borrowing long and medium term loans. Accordingly, they could advise managers in terms supports or transformation of suitable investment structure.

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Better training system: To develop workforce, VBSP shall conduct both ways of training through daily work and centralized training. In fact, due to work volume, a few of staff are willing to join annual short term training courses up to now. Moreover, the opportunities of training in work are also limited due to not developing several part-time lecturers yet. However, in the short time, several chances of training outside work will be performed to train key staff. In the medium term, VBSP would perform training in work and staff evaluation to maintain on-the-job training program. All branch managers must take responsibility for training new staff. VBSP has established the Training Center in the Headquarters. VBSP should encourage to develop part-time lecturers and select candidates with good presentation skill and teaching volunteer for purpose of training them to become part-time lecturers, assigning them to make presentation in internal workshops and provide banking knowledge for newly recruited staff. They also conduct knowledge dissemination from central to local level. In the medium term, VBSP could experience the international best practices through conducting study visits for the highest level and dispatching staff to learn in familiar financial institutions (about banking operation). In addition to training, VBSP shall formulate the special enterprise culture and the equal treatment system to maintain skilled and devoted workforce.

Chart 7. Roadmap of developing workforce

No.

Topics

Basic Objectives Phase 1

(2008-2010) Phase II

(2011-2015) Phase III

(2016-2020) 1 Formulate

banking culture

Improve establishment and foster banking culture in the suitable manner

2 Training system

Formulate training system effectively

3 Experience dissemination

Disseminate and share experiences for the Headquarters and branches

4 Formulate training system in work

Open self learnt movement in actual work

5 Training beyond work

Provide training materials and formulate skilled TOT

6 Formulate treatment and transferring system

Strengthening fair capacities among areas; develop, maintain and improve experience of management for staff

7 Learn from foreign organizations

Study visits in terms of foreign management experiences

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8 Basic knowledge

Fully equipped enough best system of information, accounting, finance and other necessary fields

III. The role of Government, local authorities and socio-political organizations in steering, managing and supporting VBSP to implement development strategy.

1. The Role of Government

Government approved the Development Strategy of VBSP and considered this strategy as part of socio-economic development strategy to 2020. Government has directed the concerned ministries to create favorable conditions for VBSP to implement successfully all phases of development strategy aiming at concentrating all policy financial resources on a channel to successfully implement the Comprehensive Campaign on growth and poverty reduction as well as the national target program on poverty reduction.

2. The Role of Local Authorities

a) To mobilize resources and direct the implementation of policy credit programs at the local level management.

b) To steer mainstreaming effectively all programs and projects in the province;

regularly inspect and supervise the management of program implementation.

3. The Role of Socio-political Organization To mobilize the participation of mass organizations: proposing the Vietnam Fatherland Front Central Committee and its member organizations to participate in building the network of Credit and Savings Group, replicate the model of effectively poverty reduction. Mass organizations continue to promote links with the VBSP to improve procedures, raise loan size and number of beneficiaries, especially the poor farmer living in remote areas, ethnic minority areas, and policy families to boost production.

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APPENDIX I to Annex 4.3 OVERVIEW OF MICROFINANCE AND MICROFINANCE MARKET

I. Microfinance Microfinance is the supply of very small loans for poor households (known as microcredit), aiming at helping them to engage in production activities, or initiating other business small activities. Microfinance is usually accompanied series of other activities such as: credit, savings, insurance, because the poor and very poor people has a huge demands for financial products but can not access formal financial institutions. There is diffirent between microfinance and microcredit: microfinance deals with lending activity, savings, insurance, transfer serives, and other financial products to the low income client group. Microcredit is simly a small loan offerred by a bank or a organization. Microcredit is often for personal loan without collateral or through group lending. The poor, like everyone, need a variety of financial instruments to accumulate assets, stabilize consumption and protect themselves at risk. Therefore, in the broadest sense, microfinance is to find the efficient and reliable way to provide more and more microfinance products for the poor and low-income people. Experience shows that microfinance can help poor and low income people to increase income, create sustainable business operations and reduce the possibility of vulnerability before the external shock. Microfinance is a powerful tool to help the poor, especially women, to increase economic power and become economic entities. The microfinance institutions will become stable when their customers are supported appropriately to the sustainable development.

II. Microfinance institutions Understanding a simple way, microfinance institutions (MFIs) are organizations that provide financial services to low income people. Most MFIs implement microcredit lending activities and receiving very little savings from borrowers and public. In the microfinance industry, this term refers to organizations established to provide microfinance services, for example, non-governmental organizations (NGOs), credit unions, credit co-operatives, non-banking financial organizations, policy banks and a department of the state-owned commercial banks. Similarly, in the world, some commercial banks providing microfinance services are also known as microfinance institutions, even when only a small fraction of their assets were mobilized for the aim of providing microfinance services. In addition, there are other organizations involved in microfinance activities and play a certain role in the financial sector. It is the community-based financial intermediary, such as credit union, housing associations operating on the basis of membership. Some types of other micro financial institutions managed by businesses or local governments often have larger-scale customers than non-governmental organizations and is a part of former financial sector. Although these types of micro credit organizations can not reach deeply to the poor like NGOs, but many poor people have accessed to the loans of these institutions with different level in different countries. Although microfinance institutions serving the poorest people operate without profit as the organizations serve more affluent people, but the performance of them are

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gradually increased. The leaders of MFIs are more and more aware of sustainability playing a vital role for the expansion of access to customers of these organizations. Therefore, they actively seek to improve their performance. Currently, in Vietnam there are hundreds of institutions providing microfinance services in three sectors: formal sector, semi-formal sector and non-formal sector. A study in 2005 of the International Labour Organization in Vietnam stated that the formal sector includes VBSP, VBARD and the system of People's Credit Funds. The semi-formal sector consists of domestic and foreign non-governmental organizations and programs of social organizations. Non-formal sector refers to lending mutual support groups in the form of ROSCA (rotating of Savings and Credit Association – Phuong, Ho, Hui), and even loan sharks group, etc.

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APPENDIX II to Annex 4.3 VIETNAMESE SOCIAL – ECONOMIC BACKGROUND

I. Background

1. Policy and guidelines of the Party

At the Fifth Central Executive Committee Meeting (the VII session), our Party has set out guidelines on poverty reduction: ".... to support the poor by lending, making instructions on doing business, taking advantage of both domestic and abroad humanitarian aid funding, increasing wealthy household and poverty reduction ...". The ninth Party Congress Document identified goals of economic development, poverty reduction, living standards improvement of ethnic minority people by 2010 with key indicators such as: "... to the large part, to eliminate hungry households, to reduce poor households to below 10%, to decline living standard gap between nations and regions in Vietnam. By 2010, the structure of industry, services, and agriculture sectors will have reached 43-44%, 40-41%, and 15-16% out of GDP, respectively. The rate of poor households according to new nationwide standard will stay at 10-11%. By 2020, basically, our country will become industrialization toward modernization nation.... " At the tenth National Party Congress, the report of the Central Party Committee at the IX session dated 10 April 2006 on the orientation and task of five-year-social-economic development from 2006 to 2010 clearly stated that: At present and in the coming years, agriculture, farmers and the rural region are still of strategic importance. It is essential to pay attention to promoting industrialization, agricultural modernization and rural areas towards building an agriculture of large-scale commodity, diversity, sustainable development, high productivity, quality and competitiveness; to ensuring stable food security and create favorable conditions to gradually turning to a clean agriculture; to increasing the value in agriculture, forestry and fishery to 3-3.2% per year. Industrial and service growth rate in rural area will not be lower than the national average growth rate. Linking economic development with new rural construction, better settling the relationship between rural and urban areas as well as between regions to contribute to maintaining social and political stability. To create more favorable conditions to help farmers switch to trades and services. To focus on developing farming economy and types of economic cooperation as well as traditional handicraft villages. To encourage farmers to contribute their land using rights and labor and to cooperate with other enterprises, cooperatives, farm owners to increase production, stabilize and improve their living standards. To attach importance to vocational training and job creation for peasants and rural workers, especially in the region the State recovered land to build infrastructure and develop non-agricultural establishments. To promote restructuring of rural labor in the direction of reducing the labor proportion in agriculture by increasing that in services and industry sectors. To pay the wave for rural workers to be employed in industries, small industries and services, both locally and outside the rural area, including overseas. The State to invest more and promote society assistance in implementing poverty alleviation in rural areas, particularly in remote areas. To solve the food issue for poor households, especially ethnic minorities, combining with forest allotment.

2. Economic growth and poverty reduction achievements Since the Doi Moi policy was initiated by the Communist Party at the VI Congress in 1986 and was reaffirmed in the Constitution in 1992 and 2001, Vietnam has

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gradually transferred to an economy of openness and international integration under the principle of socialist market-orientation. Over the past decade, Vietnam has been one of the fast-growing economies in the world. During the 2001-2005 period, the economic growth was over 7.5% per year, of which the highest rates recorded in 2005 was 8.4% and 8.2% in 2006 and even 8.5% in 2007. Along with economic growth, poverty reduction target also achieved impressive results, namely the poverty rate according to international standard dropped from 58% in 1993 to 37% in 1998 and 29% in 2002, 24% in 2004 and 14.5% in late 2007. As a result, one third of the population was considered poor drainage in this period, mainly due to the jobs created in the private sector under a market economy and reforms in agricultural sector. Vietnam also developed the Poverty Reduction and Growth Strategy (CPRGS). The small-scale policy credit was an important part in poverty reduction strategies to create a favorable and stable environment for policy credit and small-scale financial activities as well as rural financial system.

3. Strategic orientation for social - economic development of Vietnam in 2006-2010 with 2020 vision

Social - Economic Development Strategy by 2020 The Social - Economic Development Strategy by 2020 draft was announced on the website of the Ministry of Planning and Investment. The draft shows the overall social - economic picture of Vietnam by 2020 and development stages, measures to promote its social - economic development from 2001-2020.

Table 1. Some indicators outlined in the Social - Economic Development Strategy by 2020

No.

Indicators Year 2020

1 GDP/per person (PPP, USD) 6.000-7.000 2 Secondary school rate (percentage) 80-85% 3 Urban population (percentage) 35% 4 Clean water supply/per person (m3) 800-1.000

The Strategy states that for the economic and physical life, to strive to create job opportunity and income for working-age people. To completely eliminate poverty and children malnutrition. To reduce rich - poor gap to lowest level as compared to that in Southeast Asia.

Comprehensive Growth and Poverty Reduction Strategy

The Comprehensive Growth and Poverty Reduction Strategy were approved by Vietnamese Prime Minister in May 2002 as a national level Poverty Reduction Strategy Document. The Comprehensive Growth and Poverty Reduction Strategy attaches importance to promoting rapid and sustainable economic development while ensuring the social justice and progress; focusing on developing agriculture sector and rural areas, ensuring food security, creating jobs, increasing assistance to underdeveloped areas, and limiting development gap between regions as well as

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between the ethnic minorities. National Target Program on Poverty Reduction in 2006-2010 The overall objective of the National Target Program on Poverty Reduction in 2006-2010 is to accelerate poverty reduction, constrain re-poverty, consolidate poverty alleviation achievements, create opportunities for poor households to have better life; to further improve living standards and production in poor communes and those in special difficulties; to improve the living standards of poor households, limit the increasing gap in income and living standards between urban and rural, plains and mountains, the rich and the poor. Goals by 2010

• To reduce the poverty rate from 22% in 2005 to 10-11% in 2010 (the number of poor households reduced by 50% in 5 years);

• Income of poor households to increase 1.45 times as compared to that in 2005

• 50% of communes in coastal areas and islands to overcome special difficulties

• Six million poor households to borrow preferential credit. Beneficiaries of the Program Beneficiares are the poor, poor households, poor communes and those with special difficulties; priority to poor households with householders are female, poor households of ethnic minorities, poor households under social protection such as elderly, the disabled and children in special circumstances. The National Target Program on Poverty Reduction in 2006-2010 outlines the policies, projects and major activities of the program, as follows: Policies and projects to facilitate the poor develop production and increase income, including:

• Preferential credit policy for poor households; • Policies to provide production land for poor ethnic households; • Agricultural - forestry - fishery project to promote production and business

development; • Essential infrastructure development project for communes with special

difficulties in coastal areas and islands; • Vocational training project for the poor; • Expanding poverty reduction model project.

The National Target Program on Poverty Reduction in 2006-2010 sets out measures to encourage households and communes to eliminate poverty, encourage enterprises conduct vocational training and create stable jobs for the poor as follows:

• Newly poor-eradicated households continue to receive preferential credit policies, to encourage agricultural-forestry-fishery expansion, support in health, education, vocational training within two years from the date of recognition as poor eradication.

• To continue to implement policies in 2001-2005, with amendment and supplement accordingly, as follows:

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o Preferential credit policies on interest rates will gradually change and approach market rates, credit associated with savings, insurance for poor households; to increase lending to comply with the requirements in production development.

Banking development strategy Implementing Directive No. 49/2004/CT-TTg of the Prime Minister dated 24 December 2004 on services development by 2010, the State Bank of Vietnam developed Banking services development strategy in 2006-2010 and orientations to 2020, the State Bank’s views concerning the operation of VBSP are as follows:

• To continue innovation in mechanism, policies and procedures for granting credit towards simplicity and convenience. The CI have full autonomy and responsibility in their credit activities, and at the same time enhance market discipline, transparency and application of international practices in credit activities.

• To eliminate credit subsidies, to gradually narrow the groups receiving preferential loans, completely separate policy credit and market credit, restrain administrative interference in business activities and credit designation to CI.

II. VBSP credit policies for social - economic development strategy

1. VBSP VBSP was established under Decision no.131/2002/QD-TTg of the Prime Minister dated 10 April 2002 and No. 78/ND-CP of the Government dated 10 April 2002 (providing credit for the poor and those who enjoy other policies) on the basis of reorganizing the Bank for the poor. VBSP is a 100% State-owned bank. VBSP is responsible for providing policy credit to the poor and other policy beneficiaries.

2. The role of policy credit of VBSP VBSP is a tool of the government in the cause of "poverty alleviation". Through VBSP, the State policy credit in 2003-2008 helped about 1.9 million workers find jobs, 1.4 million poor households became middle or rich; 750,000 students and pupils in difficulty circumstances got loans, more than 820,000 clean water works and sanitation in rural areas were built. VBSP was established on the basis of reorganizing the Bank for the poor. The establishment of VBSP has meaningful strategy to address poverty issues in the context of developing market economy under socialist orientation. The Bank was a not-for-profit organization, serving the poor and other policy beneficiaries. In addition to serving poor households, VBSP was assigned to help students in special difficulties, the policy subjects who need a loan to create jobs, to work overseas for a definite period and some other lending programs such as deferred payment loans to build houses in the Mekong delta, construction of clean water works and rural sanitation, lending to households for production, doing business in poor areas, providing loans to particularly poor households of ethnic minorities...

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A credit channel to provide direct support to customers

VBSP is a special bank whose activities are managed by the state and monitored by the society. VBSP provides lending to poor households and other policy beneficiaries through the entrust to social - political organizations. Currently, four social - political organizations are implementing the entrust programs, namely Vietnamese Women's Union, Vietnamese Farmers' Association, Vietnamese Veterans and Ho Chi Minh Communist Youth Union. With over 8,500 dealers in communes, wards, and through more than 180,000 savings and loans agencies across 100% communes and wards nationwide, the Bank has brought small-scale policy credit directly loans to the borrowers, creating a close relationship between the bank and the people, the authorities and unions. The entrust program of the Bank facilitates the associations and unions with additional activities which attract more members. VBSP provides loans through the savings and loans agencies with public and democratic assessment to choose the eligible borrowers beside having certification by the local authorities. The procedures are supervised by social - political institutions. The direct disbursements, debt collection, public interest collection are publicized to borrowers at transaction points in communes, wards in the witness of social – political organizations. These activities have helped the poor with easy access to banks, reducing travel time and transaction costs of borrowing, preventing negative activities and capital losses. In implementation of partial lending by entrust, four social - political organizations, namely Vietnamese Women's Union, Vietnamese Farmers' Association, Vietnamese Veterans and Ho Chi Minh Communist Youth Union together with the bank are managing 82.8% of total outstanding loans of VBSP’s customers with high spirit of responsibility, reality and effectiveness. The Bank also gives loans directly to borrowers at commune transaction points. The credit structure as of June 2008 was as follows: (i) poor households: 25. 081 billion dong or 59.4%, employment: 3.210 billion or 7.6% (iii) loans to students in difficult circumstances: 5.300 billion dong or 12.6% (iv) household production and business in areas of special difficulties: 4.490 billion or 10.6% (v) clean water and sanitation in rural areas: 2.446 billion dong or 5.8% (vi) labor export: 676 billion dong or 1.6%. These six programs accounted for over 97% of total outstanding, the other eight which were small-scale investment or under pilot period and only accounted for 3% of total outstanding. A tool that directly affects social - economic stability and environmental sustainable development as oriented by the Party and State For the poor and policy beneficiaries, VBSP not only provides lending but also coordinates with local authorities and associations to organize classes on agriculture, forestry, fisheries ... to instruct the borrowers how to do business and escape poverty. Thanks to VBSP’s credit, the total number of households got out of poverty in five years (2003-2007) was 1.323,000 units. Average outstanding for poor households increased from 2.9 million VND per household (2003) to 5.9 million per household (2007). After Vietnam became a member of WTO, while its market economy has increasingly been improved, the risk of widening rich and poor gap has also emerged. Therefore, it is essential to have reasonable policies to ensure social security for the poor and

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poor areas. This is the decisive factor to social equality and progress. Comparison to WTO commitments, VBSP’s activities under Decree No. 78 of the Government and its orientation as approved by the Government do not violate WTO commitments. A facilitation to the poor and policy beneficiaries through state credit being the most effective channel VBSP’s management and operational network is regulated by Decision No.131/2002/QD-TTg dated 4 October 2002 with head office in Hanoi, its branches in 64 provinces and 598 transaction offices at district level.

+ Number of staff: At district level: 7-8 people.

At provincial level: 20 to 25 people. At central level: 150 people. The customers of VBSP are poor households in poor areas and other policy beneficiaries across the country, especially in mountainous, island, remote areas and ethnic minority regions; therefore, to access and reduce costs for the borrowers, the loans are distributed directly to them. With limited staff, VBSP implements partial entrust through social - political organizations. This model mobilizes the combined strength of political mechanism and the whole society. Also, VBSP delivers its credit channel to the poor in poor areas and other policy beneficiaries in a democratic and public manner, in which the people participate in voting for choosing the proper borrowers. This method also helps reduce human resource and costs for VBSP. Social – economic outcome: VBSP’s activities have contributed significantly to the cause of poverty alleviation. Up to now, the total outstanding reached over 34,940 billion dong, more than 5.7 million poor households and policy objects have credit relationship with VBSP. Overdue debt decreased from 13.75% to 2.5% in 2003.

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APPENDIX III to Annex 4.3 ASSESSMENT OF VBSP’S CURRENT STATUS

1. Effective and proper structure and management of social policy credit

After five years implementing Decision No. 131 of the Prime Minister, VBSP has built a structure and management mechanism of policy credit in accordance with the conditions and characteristics of our country, in line with the international commitments, meeting the requirement of separating policy credit from commercial credit, as follows:

Management organization

VBSP was organized into three tiers: central bank, provincial branches and transaction offices at districts. Each level has its own the administration and management mechanism. Administration mechanism includes Board of Directors (BOD) at central level and Representative Committee of Board of Directors at provincial level. For district level, State agencies and social – political organizations sent more than 8.000 officials working part-time and are responsible for advising funding decision making, investment policy as well as supervise the implementation of the State credit policies. In the last five years, the Board of Directors and Representative of BOD supervised 228 turns at provincial branches, 4.146 turns at district trading offices, 31,164 turns at the savings and loans agencies. The management mechanism including over 7,000 managers majored in finance and banking sector conduct capital management in a consistent manner from the central to grassroots levels. In the last few years, the staff have overcome difficulties and raised the spirit of responsibility, received and managed the Sate preferential credit safely, provided direct lending to borrowers at the communes, coordinated with other social - political organizations and local authorities to conduct training for management staff involved in implementing entrust and the head of the Savings and Loan agencies as well as transferring technologies to borrowers. Organizational structure of credit management To closely manage capital and better serve customers living scattered throughout remote areas with limited educational level and small loans, VSBP chose partial entrust to Vietnamese Women's Union, Vietnamese Farmers' Association, Vietnamese Veterans and Ho Chi Minh Communist Youth Union; bank officials disbursed directly to households at the transaction points in communes. To implement this method, VBSP held an extensive operation network in all communes and villages throughout the country. In the past five years, thousand officials of social - political organizations participated in implementing effective entrust, establishing and directing the operations of savings and loan agencies, organizing lending programs, instructing borrowers how to use the loans effectively and collect debts upon maturity. The savings and loan agencies are established by social - political organizations. The agencies include poor households and policy beneficiaries who have the demand for loans and live together in a residential area and are approved by local authorities. The operational principle is voluntariness and mutual assistance, committement to

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using loans for proper purpose and due payment. The savings and loan agencies also conduct public and democratic assessment of the people eligible for preferential credit, under the management, guidance and supervision of social - political organizations. Currently, there are nearly 200 thousand savings and loan agencies. To help poor people access to VBSP lending without sending travel expenses and to propagate and disseminate the State policies as well as VBSP’s procedures of preferential credit schemes, public announcement of borrowing and payment of customers are held in each commune, VBSP sets up mobile transaction agencies at transaction point in the communes. To date, VBSP has conducted 8.749 transaction points in communes.

2. Capital Structure of VBSP

• Own capital

o Charter capital o Difference of assets revaluation and difference of foreign exchange

rates o Reserve fund to supplement charter capital, investment and

development fund • Mobilized capital

o Issuance of government bonds, bonds guaranteed by the government, deposit certificates

o Loans from domestic financial and credit institutions o Deposits from institutions and individuals o Savings of the poor

• Other sources

o The state budget o 2% deposit of the state financial institutions o Entrust capital to disbursement by project and debt collection of clients

between domestic and foreign organizations o Voluntary funding by domestic and foreign individuals, economic

organizations, financial and credit institutions as well as socio-political, corporate, non-governmental organizations

o Other sources as regulated by law The greatest success of VBSP in the last five years is to effectively transfer funds of the State preferential credit programs to the policy beneficiaries. However, the major existing shortcoming is the lack of building long term and stable funding strategy. As a State financial institution and a tool to implement policies and social security, its funding is from the State. However, capital allocation in social - economic development plans and State budget estimates have shortcomings, namely big gap between demand from social security programs and the actual capital allocated annually (including charter capital, subsidies for interest rate differences. Besides, some regulations on funding in Decree 78 were not properly implemented. The Banks has not provided voluntary and compulsory deposit and savings service. The domestic and foreign humanitarian funding has not been made use of.

3. VBSP’s Financial Management VBSP is the centralized accounting unit for its whole system. It is self-responsible for its activities and capital adequacy. However, the Bank is not able to self-finance for the costs and credit risks.

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Working capital is used to lend poor households and other policy beneficiaries. Every year, VSBP is subsidized for interest rate differences and cost management by the State. The subsidy ratio is calculated by the difference between the interest rates of fundings (lending rate + management fees). Management fees in the first 3 years (2003-2005) did not exceed 0.6% per month out of average outstanding and currently is 0.48%. The years after will be submitted by Ministry of Finance to the Government for consideration and approval. Risk management: VSBP set up reserve fund to offset damages caused by objective reasons at 0.02% of average annual outstanding. If the fund is not used up, the remains will be transferred to the next year. If the fund is not sufficient, the Chairman of BOD will submit to the Minister of Finance for consideration and decision. Risks caused by large-scale objectives will be guided by the decision of the Prime Minister.

The fiscal year begins on 1 January and ends on 31 December. Difference between revenues and expenses will be used to establish funds for reward, welfare, additional charter capital, provisions, investment and development, unemployment allowance. In the contrary situation, the difference is transferred to the following year and the transfer time shall not exceed three years. VBSP’s reserve requirement is 0 and exempted from fees, taxes and other contributions to the budget, and is not obliged to conduct deposit insurance. The subsidy to VSBP in the early years is necessary to support the Bank better serve its policy beneficiaries. However, when expanding its activities, the Bank will encounter difficulties such as: (i) lack of autonomy in expansion of lending programs to policy beneficiaries on the basis of financial autonomy; (ii) the involvement of many parties in lending decision makes it difficult to reduce administrative procedures for policy beneficiaries, (iii) many lending programs with subsidized interest rates for designated groups lead to difficulties in raising capital to expand operations; (v) Delinquency process is based primarily on the budget, which led to delay in treatment and affect the maintenance of the bank’s working capital.

4. VBSP in a New Development Phase

Strengths VBSP has the second largest banking network in the banking system in Vietnam.

The Head office is in Hanoi, one transaction office, branches in 64 cities and provinces, 601 transaction points in the districts, 8.500 mobile transaction points in communes and over 180,000 of savings and loan agencies in wards across the country. With such network, the Bank is capable of mobilizing financial resources of the State to implement preferential credit policies for poverty reduction and agricultural and rural development. This is a potential for gradual expansion of services with fees to reduce subsidies from the state budget.

VBSP has established its image in rural, mountainous areas as a financial institution to support poverty reduction through providing credit to support production, education, and environmental protection.

VBSP was tasked by the Government to pursue poverty reduction, social stability, and direct assistance to policy beneficiaries.

After five years of operation, VBSP’s position has been recognized. The Bank has contributed positively to the national poverty reduction program and social stability.

VBSP had seven-year experience in lending to poor households and five-year experience in lending to policy beneficiaries since its establishment.

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The operational method of VBSP meets the demand of the poor with increasing socialization lower transaction costs.

VBSP has established cooperative relationships with the unions and association to coordinate the State credit policies.

VBSP has a transaction point system in the communes along with the savings and loan agencies at villages to ensure its 100% accession nationwide.

VBSP has young, active and well-trained staff, most of whom graduated with university degrees and have working experiences.

Although VBSP is not an advanced bank, the Bank has basic technology platform to meet current needs and to continue the modernization process.

Weaknesses The funding of VBSP depends on financial availability of the State, therefore the

Bank's sustainability relies on appropriate regime. Coordination with social and political organizations has shortcomings and lacks

stability. The information technology system has not been properly invested, which leads

to limit in meeting the needs of policy beneficiaries. Customers can only conduct transactions with affiliates that keep their own accounts but not at any other branches.

VBSP lacks autonomy in designing its own credit and financial products as well as policies in consistency with the characteristics of regions and customers.

VBSP’s operation relies on State subsidies on interest rates, thus the Bank does not have financial autonomy, resulting in less autonomy in providing products for beneficiaries and in formation of other appropriate resources of property and personnel.

VBSP is a newly established bank and therefore, the deposit and payment services have shortcomings. Besides, the Bank and has not implemented information technology modernization in its operations.

Opportunities Vietnam's accession to WTO did not reduce the Government's support for the

policy beneficiaries through the policy credit channel of VBSP. Increasing international economic integration contributes to the development of

market factors for the poor and policy beneficiaries. The capacity and network of local social - political organizations have been

further improved. The development of science, technology and especially information technology

create opportunities for VBSP to promote technology applications to reduce operating costs.

Vietnam is a country with technology information developing at high speed, creating favorable conditions for information technology system to take advantage of new technologies. VBSP can serve a customer at any transaction point in the country. It is time for VBSP to develop more services to increase revenues and reduce subsidies from the State budget.

Challenges 1. International economic integration can lead to restructure of economy, trade and

infrastructure, which affect business activities of the poor and policy beneficiaries. 2. International economic integration can also lead the shift in labor structure of

VBSP 3. Economic growth can lead to the shift in capital structure in which official

development assistance (ODA) will be on the declining trend. 4. International economic integration lead to banking market openness and small-

scale domestic or international financial institutions can also mobilize foreign

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investment or directly participate in small-scale lending to the poor and policy beneficiaries. This phenomenon can narrow the operational scope of VBSP, at least in urban areas.

5. The fluctuations of the world economy have direct impact to VBSP’s customer through factors such as inflation, exchange rates, competition from imports.

6. Natural conditions, psychology and practices of policy beneficiaries in the regions have differences.

7. VBSP operates in an environment of objective risks such as natural calamities, pest diseases while the insurance system for agricultural activities and products has not yet developed.

8. The telecommunication infrastructure in rural and mountainous areas is inadequate and expensive which are considered obstacles to banking modernization.

Trends and credit support needs of policy beneficiaries by 2020

1. Situations of poor households and policy beneficiaries

Poverty rate in the period 2006-2010 Because the living standards of people in general is increasing, along with the general orientation is to gradually reach the developing countries in the region for Poverty Reduction, poverty line in 2001-2005 should be no longer fit the new era. So the Prime Minister signed Decision 170/2005/QD-TTg dated on 8/7/2005 on issuing poverty criteria in the 2006-2010 period as follows:

• For rural areas, those households with per capita income of 200,000 a month or less.

• For urban areas, those households with per capita income of 260,000 a month or less.

A household with income per capita is lower than or equal to the poverty line is defined as poor household. According to the poverty line mentioned above, in late 2005 the country has estimated about 3.9 million poor households, accounting for 22% of households nationwide. The region with the highest poverty rate is the Northwest Region (42%) and Highland (38%), the lowest is the Southeast region (9 %).

2. Trends and structure of poor households and policy beneficiaries in need of capital in the period 2006-2020

Definition of the poor Absolute poverty: World Bank see a U.S. dollar income per day according to the local purchasing power parity to satisfy living demand as overall standards for the absolute poor victims.

Relatively poor: in the society having social development at the level of industrialization, poverty is defined based on the social situation of individuals. Relative poverty can be seen as not providing sufficiently resources and material for those who belong to a certain social class compared with the wealth of that society.

Trends and structure of poor households and policy beneficiaries in need of capital in the period 2006-2010 Document of the Ninth Party Congress identified economic development goals, poverty reduction, and living standards improvement of ethnic minority people by

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2010 with the following key indicators: There will be no hungry households; striving to reduce poor households to below 10%, declining living standards gap between nations, regions. According to Document of IX Party Congress, up to 2010, the structure of the industry sector to reach 43-44% of GDP, the service sector to reach 40-41% of GDP, the agricultural to account for 15-16% of GDP. Poverty rate under the new national standard stands at 10-11%. (See chart 1). Thus by 2010 the number of poor households in Vietnam is about 2 million households. There will be the difference in quality of poor households. They will initially approach with popular knowledge of agricultural, forestry, fishery etc. They will also be familiar with the production of goods and got to know the basics of market economy and the principles of the market. They regularly receive information via television and radio channels. Their children have the basic education level. Therefore, up to the period 2010-2020, when Vietnam has become an industrialized country, the level of production and business of the poor at the first stage will be raised one step. They have fundamental differences with the poor in the 2001-2010 period. At that time, most of them have changed to low-income level – relative poverty in comparison with the social level rather than absolute poverty according to the general concept. By then, they still need funds to develop cheap but access continued funding, as well as easier financial services such as appropriate money transfer, insurance, savings. Preference will be given more.

Chart 1. Estimated structure of poverty and other policy beneficiaries in 2010

Trends and structure of poor households and policy beneficiaries in need of capital in the period 2010-2020

The Prime Minister has promulgated Decisions No 148/2004/QD-TTg, 146/2004/QD-TTg, 145/2004/QD-TTg identifying that in key economic of the North areas the poverty rate will reduce to 1.5% in 2010 and less than 0.5% in 2020. With the Central region, the poverty rate will reduce from 15.5% in 2005 down to 8.8% in 2010 and about 2% in 2020. The South of Vietnam strives to reduce the poverty rate to below 4% in 2010, less than 1% in 2020 (see Chart 2). By 2020, the number of poor households in Vietnam will be only about 200,000-300,000 households. Poor households are mostly only those households living in special difficulty areas with limited infrastructure or no escape from poverty due to risk conditions, natural disasters. They will approach with the popular knowledge of agricultural, forestry, fishery, etc. They are also familiar with the production of goods and market economy. Issues of escaping from poverty shall be only the matter of time.

Poor households < 11%

Near poor households and other policy beneficiaries

Above average poor households Wealthy

households

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Chart 2. Estimated structure of poor households and other policy beneficiaries in 2020

3. Borrowing needs of poor households and policy beneficiaries After Vietnam applies new criteria to identify poor households (according to Decision No. 170/2005/QD-TTg dated 08/07/2005 of the Prime Minister promulgating the standards of poor households in the 2006-2010 period), whereby poor households throughout the country are about 3.9 million households (almost 3 times higher than the 2005), representing about 22% of all households nationwide. Demand for credit of VBSP will increase correspondingly: in 2007, increased 30% compared with 2006 (the Prime Minister has approved in the Decision 1272/QD-TTg, dated Dec, 6th 2005) and the years from 2008 – 2010, the average annual increase is about 15% -20%. At the end of 2010 outstanding loans to poor households expected more than 45,000 billion VND (about $ 2.8 billion). Besides, the phenomenon of surplus labor, especially the youth labor in the process of urbanization in rural areas is ongoing and growing complexity social influence. Along with the rapid and widespread speed and process of urbanization, the demand for capital credit of VBSP in job creation lending program (focusing on households and SMEs) is increasing, expected average growth rate of credit demand is about 10% per year (depending on the annual increase of source from Fund for jobs creation) To minimize development disparities between regions, in 2007, the Prime Minister issued Decision 31/2007/QD-TTg dated March 5th 2007 on credit for production or business household in disadvantaged areas. This is a major policy of the Party and State in the use of financial resources for agricultural and rural areas development, contributing to the equal growth among regions in the country. Pursuant to the objectives of socio-economic development for regions with difficult conditions: "The State shall create appropriate investment conditions for the much more difficult regions; ... in 2010 striving to basically have no longer the poor household…”5.

5 Resolution of IX Party Congress on the Socio-ecnomic development Strategy 2001-2010.

Near poor households and other policy beneficiaries

Above average poor households

Wealthy households

The poor households < 1,5%

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Annex 4.4: VBSP’s Bond Issuance

VIETNAM BANK FOR SOCIAL POLICIES

No: /NHCS-KH

SOCIALIST REPUBLIC OF VIETNAM Independence – Freedom – Happiness

Hanoi, July… 2008

PROJECT ON

ISSUING VBSP’S BOND GUARRANTEED BY THE GOVERNMENT

• Pursuant to the Credit Institutions Law adopted by National Assembly of

Socialist Republic of Vietnam on Dec 22nd 1997 and the Law on amending

and supplementing some articles of the Law on Credit Institutions National

Assembly Socialist Republic of Vietnam adopted on June 15th 2004;

• Pursuant to the Decree No 78/2002/NĐ-CP dated October 4th 2002 by

Government on the credit to the poor and other policy beneficiaries;

• Pursuant to the Decree No 141/2003/NDD-CP of Government on the

issuance of government bonds, bonds guaranteed by the Government and

local government bonds;

• Pursuant to the Decision No 131/QĐ-TTg dated October 4th 2002 on the

establishment of VBSP;

• Pursuant to the Decision No 180/2002/QĐ-TTg dated Dec 19th 2002 on the

promulgating the regulation on financial management for VBSP;

• Pursuant to Decision No 157/2007/QĐ-TTg dated July 29th 2007 by Prime

Minister on the credit for disadvantaged student;

• Pursuant to the Decision No 66/2004/QD-BTC dated August 11th 2004 by the

Ministry of Finance on promulgating the Regulation on guidance on process

and procedures for issuing government bonds, bonds guaranteed by

government and the local government bonds;

• Pursuant to the Document No 166/TB-VPCP dated July 14th 2008 by

Government office on announcing the conclusion of the Prime Minister on the

issuance of the bonds student loans;

• Pursuant to the credit plan in 2008 and credit plan in 2006-2010 of VBSP.

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VBSP plans to issue bonds guaranteed by the Government in 2008 as follows:

I. LEGAL BASIC, NECESSITY, THE STATE OF CAPITAL MOBILIZATION AND PURPOSE OF BOND ISSUANCE OF VBSP: 1. Legal Basic 1.1 Vietnam bank for Social policies (VBSP) is a state owned credit organization opertating under the Law on Credit institutions. (Pursuant to the Article 2 of Decision 180/2002/QĐ-TTg dated Dec 19th 2002 on the promulgating the financial management mechanim for VBSP: VBSP is a state owned credit institution operating without profit, a legal entity having Charter Capital, Balance Sheet, its own seal, opening account at the State Bank, The State Treasury and other credit institution in Vietnam). 1.2 VBSP is allowed to issue bonds guaranteed by the Government. (Pursuant to the point 4, Article 8, Decree 78/2002/NĐ-CP dated October 4th 2002 by Government on the credit to the poor and other policy beneficiaries: VBSP is allowed to mobilize capital in the form of bonds guaranteed by the Government, deposit certificates and other valuable papers). 1.3. In the case that VBSP issue bonds to raise addition capital, the interest rate of the bond will be defined by the MoF. (According to Section 2.1, Part I, Chapter II of the Circular dated 24/2005/TT-BTC dated April 1st 2005 on guiding the implementation of financial management regulations for VBSP, the principle of mobilizing capital of VBSP as follows: VBSP raise capital only when using maximum funds without interest or mobilized fund with low interest. In the case VBSP issue bonds, deposit certificates and valuable papers to raise capital, interest rates released under the frame rate defined by the Ministry of Finance). 2. Credit Operations After 5 years of operation, up to June 30th 2008, the total capital of VBSP is VND 45,297 billion, increasing VND 9,245 billion compared with 2007, of which: Charter capital: VND 7,988 billion Capital for job creation program: VND 3,025 billion Capital for disadvantaged student lending program: VND 160 billion Capital for deffered payment housing of the Mekong River Delta: VND 714 billion Capital for very special difficulty ethic minority: VND 214 billion Capital borrowing from State Bank of Vietnam: VND 7.665 billion Capital borrowing from State Treasury: VND 9,015 billion Capital supported by the local government: VND 1,405 billion Foreign borrowings: VND 442 billion

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Deposits 2% from state-owned credit institutions: VND 9,494 billion Capital mobilization from the public: VND 3,800 billion Others: VND 1,375 billion As of 30th June 2008, total outstanding loans of lending to poor households and

other policy beneficiaries reached VND 42,040 billion, making an increase in VND

7,100 billion compared to 2007. Of which, lending to disadvantaged students

reached VND 5,293 billion, rising VND 2,486 billion or 88.6% compared to 2007.

3. Necessity for bond issuance:

To diversify ways of capital mobilization, to increase more tools for monetary financial market; to rise VBSP's operational stability for constant growth of capital source and conduct policies of the Party and the State effectively;

To ensure development of long-term capital source for meeting education loan demands;

The VBSP make request for issuance of Government-guaranteed bonds. 4. Current status of capital mobilization in VBSP 4.1. Situation of capital source by years: Unit: billion VND

NO. Targets 2006 2007 Up - down (%)

A Total capital source: 25,410 36,052 41.9%

- Customers' deposits 14,092 14,330 1.7%

- in which: + Deposits > 12 months 7,201 10,606 47%

+ Ratio 51% 74%

B Total outstanding loans: 24,140 34,940 44.7%

In which: Long & medium term 19,558 29,716 51.9%

Ratio 81% 85%

4.2. Capital structure as of 30th June 2008

- Mobilized capitals: VND 13,294 billion - Borrowings from SBV & State Treasury: VND 16,680 billion - Entrusted funds for investment: VND 1,405 billion - Analysis of mobilized capital structure by maturity:

Term deposits < 12 months: VND 1,718 billion (compared to early 2008: Fell VND 2,006 billion).

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Term deposits > 12 months: VND 11,576 billion (compared to early

2008: rise VND 970 billion).

- Disadvantages:

Low interest funds such as demand deposits make up inconsiderable

ratio in total source.

Term deposits over 12 months (especially deposits 2% of credit

institutions): high interest rate but relatively stable.

5. Balance of capital source and utilization 5.1. Indicators:

- Total outstanding loans / mobilized funds = 42,040/13,294 = 316.2%

- Total outstanding loans/ operational funds = 42,040/45,297 = 92.8%

- Long & medium term funds/ short term funds: 36,865/5,175 = 712.6%

5.2. Balance of capital source and utilization of long & medium funds: Advantages:

VBSP acts as a non-profit credit institution with a compulsory reserve

ratio of 0% and it’s solvency is guaranteed by the Government. It is exempted from

deposit insurance, tax and State Budget’s remittances.

Maintenance of deposits 2% from state credit institutions under

Decree No. 78/2002/NĐ - CP dated 04th October 2002 has increased loan source.

Disadvantages: Long & medium funds account for large ratio in total

outstanding loans, which makes credit revolving low.

6. Purpose of bond issuance - Mobilizing long-term capitals from the public and organizations is to lend to

disadvantaged students as planned by the Government and the target of

credit plan in 2008.

- To ensure enough credit source for disadvantaged students in academic

years of 2008-2009.

- Growth and development of capital source, especially long & medium funds,

balancing capital source effectively to maintain sustainable development of

VBSP.

- To increase more tool diversification for financial market (monetary and

securities market).

7. Method of accrued capital utilization from the issuance period: To make

disbursement for lending to disadvantaged students in academic years of 2008 -

2009.

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II. CONTENT OF ISSUANCE 1. Bond sample: in accordance with Decision No.66/2004/QĐ-BTC dated 11th August 2004 of Ministry of Finance on enacting instruction of procedures of issuing Government Bond, Government guaranteed bonds and local authority bonds; 2. Bond name: Government guaranteed bonds of Vietnam Bank for Social Policies. 3. Monetary unit: Vietnam dong (VNĐ). 4. Issuance location: VBSP Transaction Center, district transaction offices nationwide.

5. Issuance method: direct, guarantee or agent.

6. Issuance form: Certificate or recorded/unrecorded entry. 7. Term: 02 years. 8. Interest rate: Announcement of Ministry of Finance at moment of issuance. 9. Interest repayment method: later repayment 10. Location of interest & principal repayment: in Transaction Center, branches, District transaction offices nationwide. 11. Customers: Vietnam organizations and individuals or foreigners living and working legally in Vietnam. 12. Toal face value: 5,000,000,000,000 VNĐ (five thousand billion dong).

13. Face value:

- Certificates:

+ type 500,000 VNĐ (five hundred thousand dong)

+Type 1,000,000 VNĐ (one million dong).

+ Type 5,000,000 VNĐ (five million dong).

+ Type 10,000,000 VNĐ (ten million dong).

+ Type 50,000,000 VNĐ (fifty million dong).

- Recorded/unrecorded entry: Agreement between VBSP and clients. 14. Tentative issuance time: from 15th August 2008 to 15 October 2008. Chia 3 đợt:

Turn 1: 1,000 billion dong from 15th August. 2008 31th August. 2008.

Turn 2: 2,000 billion dong from 01st Sept. 2008 đến 30th Sept.2008.

Turn 3: 2,000 billion dong from 01st Oct. 2008 to 15th Oct. 2008. 15. Payment guarantee entity: Ministry of Finance makes payment guarantee under authorization of the Government in Announcement No. 166/TB-VPCP dated 14th July 2008. 16. Plan of due loan repayment: For mature bonds, VBSP shall balance from the following capital source:

- Capital mobilization from the public. - Others.

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17. Other contents: 17.1. Rights and obligations of customers:

- To be permitted to buy unlimited volumes; - To be kept confidentiality; - To be free for transferring, purchasing and selling, offering, exchanging and

inheriting in line with the Law. - To be permitted use bonds for mortgages in credit institutions as regulated by the

Law of Loan Guarantee. - To be discounted and rediscounted by the availing regulation.

17.2. Rights and obligations of VBSP: - To facilitate for customers, due loan repayment for them. - To ensure deposit confidentiality for customers, reject investigation,

blockage, money transfer without agreement of customers unless the context otherwise requires;

- To reject payment in case of invalid, erased and torn bonds. III. ORGANIZATION AND IMPLEMENTATION 1. To mandate the Department of Capital Planning to coordinate with the Transaction

Center in charge of formulating the project of bond issuance; to submit the project of bond issuance and payment guarantee of this turn to the BOD for approval.

2. To mandate the Department of financial Management & Accounting to formulate instruction of accounting this issuance turn.

3. To mandate the Administration Department to arrange tools and means of communication and advertisement on mass media and hold newspaper meeting on bond issuance.

4. To mandate the Secretary Department in charge of sending letters of BOD Chairman to Representative Leaders in nationwide provinces on steering localities to make advertisement of bond issuance on mass media for education loan mobilization.

5. To mandate The Administration Department to coordinate with the Department of financial Management & Accounting to print samples relating to bond issuance.

Receivers: • Financial Banking Dept. - MoF; • State Budget Dept. - MoF; • Banking Dept. - SBV; • Monetary Policy Dept. - SBV; • BOD chairman of VBSP;

GENERAL DIRECTOR

Hà Thị Hạnh

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• GD & DGDs; • Chief of BOD Supervisory

Board; • VBSP TC; • Stored in AD, DFMA & DCP.

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Annex 4.5 Hanoi Stock Exchange Auction Results (VBSP Bonds)

Auction Date Amount Sold Maturity Coupon

Rate Actual Interest Rate Buyers 14/04/2010 50,000,000,000 2 0 12% Vietein Bank, Saigon Bank

HD Bank, VP Bank, Military Bank VBARD, Teccombank, BIDV

24/03/10 100,000,000,000,000 2 0 12.10% Vietein Bank, Saigon Bank HD Bank, VP Bank, Military Bank VBARD, Teccombank, BIDV

26/06/2009 1,500,000,000,000 2 9% 9% VBARD

10/6/2009 500,000,000,000 2 8.70% 8.70% VBARD

Total 102,050,000,000,000

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ANNEX 4.6: PCF Financial Highlights, Dec. 1994-Dec 2009 (in Million Dong) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Outreach:

No of PCFs 179 567 847 936 977 964 959 906 888 896 905 917 938 986 1015 1037

Growth in number p.a. 388 280 89 41 -13 -5 -53 -18 8 9 12 21 48 29 22 Number closed by SBV 0 0 0 0 0 0 5 53 24 3 3 4 4 2 0

0

No of members 46,045 153,901 378,978 522,080 646,701 727,098 797,069 807,546 850,781 911,926 966,540 1,029,987 1,098,754 1,157,416 1349804

1,503,333

Growth p.a. in percent 234 146 38 24 12 10 1 5 7 6 7 7 5 No of borrowers (accounts) 677,717 734,796 746,481 711,769 661,443 660,361 663,757 661,663 670,933 732,774 785,638 785698

953,736

No. Of Poor Household Borrowers (10% of total per CCF Source 73,480 74,648 71,177 66,144 66,036 66,376 66,166 67,093 73,277 78,564 78,570 95,374 Estimate Provided By CCF 10%

Balance sheet

Total assets 83,675 448,130 1,333,333 1,440,576 1,857,242 2,290,469 2,678,301 2,959,084 3,573,778 4,737,619 5,853,038 7,296,677 9,408,494 13,632,599 16,674,338

21,176,405

Loans - gross 72,466 384,624 1,006,105 1,280,775 1,613,296 1,969,064 2,354,059 2,559,117 3,089,132 4,049,627 5,087,747 6,432,992 8,209,443 11,716,085 14,142,463

18,618,319

Growth p.a. in percent 431 162 27 26 22 20 9 21 31 26 26 28 43 21 32

Disbursements n.a n.a 2,135,382 2,578,000 3,156,949 3,617,118 3,996,000 3,985,608 4,900,170 6,187,159 7,831,459 9,601,288 9,143,764 18,130,154 20,637,207

Deposits of clients 55,161 272,033 665,082 903,619 1,189,118 1,505,383 1,713,521 1,952,334 2,370,323 3,207,683 3,944,842 4,767,862 6,256,223 9,334,143 12,329,392

15,368,060

Growth in 393 144 36 32 27 14 14 21 35 23 21 31 49 32 25

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percent

Average Deposit Per Borrower clients Borrowings (from CCF) 205,516 272,507 286,564 324,878 541,830 612,240 810,897 999,629 1,367,223 1,713,160 2,451,457 2,238,156

2,985,664

Equity 10,782 47,585 99,892 134,189 153,149 158,137 173,926 177,974 200,149 244,468 308,105 388,808 457,909 617,720 778,871

1,005,444

Profit/Loss

Net income after tax* 2,903 12,699 34,511 39,355 38,343 49,768 46,263 59,774 75,293 90,584 113,492 139,853 169,285 164,108

183,546

228,552

Financial ratios (in percent)

CAR (not risk-weighted) 9.9 10.5 9.5 8.0 7.4 7.0 6.5 6.0 6.1 6.0 5.6 5.3 5.5 5.4 Overdues (≥1 days) 0.74 0.51 1.24 3.53 3.84 3.72 3.42 2.17 1.36 0.84 0.66 0.53 0.53 0.50 0.53

0.49

Return on average assets* 1.17 1.37 1.43 1.38 1.40 1.38 1.30 0.87 1.21 1.21 Return on average equity* 15 18 20 20 21 18 19 14 7.62

7.86

Loans-to-deposits 151 142 136 131 137 131 130 126 129 135 131 126 115 121 Deposits-to-loans 66 71 74 76 73 76 77 79 78 74 76 80 87 83 US$ exchange rate

11,003

11,020

11,037

11,175

13,887

14,019

14,540

15,086

15,395

15,630

15,776

15,906

16,056

16,025

16,977 18,500

*As calculated by SBV

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PCF Financial Highlights, Dec. 1994-June 2008 (in Million US$)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Outreach:

No of PCFs 179 567 847 936 977 964 959 906 888 896 905 917 938 973 1015 1037 Growth in number p.a. 388 280 89 41 -13 -5 -53 -18 8 9 12 21 35 42 22 No. closed by SBV 0 0 0 0 0 0 5 53 24 3 3 4 4 2 No of members 46,045 153,901 378,978 522,080 646,701 727,098 797,069 807,546 850,781 911,926 966,540 1,029,987 1,098,754 1,157,416 1349804 1503333.0 Av. no of members/PCF 257 271 447 558 662 754 831 891 958 1,018 1,068 1,123 1,171 1,190 1,330 1,450 Average Equity Per Member (kindly compute) No of borrowers 677,717 734,796 746,481 711,769 661,443 660,361 663,757 661,663 670,933 732,774 785,638 785698 953736 Balance sheet

Total assets 7.60 40.67 120.81 128.91 133.74 163.39 184.20 196.15 232.14 303.11 371.01 458.74 585.98 850.71 982.17 1,144.67 Ave. total assets/PCF 0.042 0.072 0.143 0.138 0.137 0.169 0.192 0.216 0.261 0.338 0.410 0.500 0.625 0.874 0.968 1.104

Loans - gross 6.59 34.90 91.16 114.61 116.17 140.46 161.90 169.64 200.66 259.09 322.50 404.44 511.30 731.11 833.04 1,006.39 Ave. loan outst'ng in $ n.a. n.a n.a. 169 158 188 227 256 304 390 487 603 698 931 1,060 1,055 Disbursements n.a n.a 193.47 230.69 227.33 258.02 274.83 264.19 318.30 395.85 496.42 603.63 569.49 1,131.37 1,215.60 0.00 Ave. disbursement in $ n.a. n.a n.a. 340 309 346 386 399 482 596 750 900 777 1,440 1,547

Deposits 5.01 24.69 60.26 80.86 85.63 107.39 117.85 129.41 153.97 205.23 250.05 299.75 389.65 582.47 726.24 830.71 Growth in percent 392 144 34 6 25 10 10 19 33 22 20 30 49 25 14

Borrowings 18.39 19.62 20.44 22.34 35.92 39.77 51.88 63.36 85.96 106.70 152.98 131.83 161.39 Average Borrowing Per PCF (kindly

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compute average) Equity 0.98 4.32 9.05 12.01 11.03 11.28 11.96 11.80 13.00 15.64 19.53 24.44 28.52 38.55 45.88 54.35 Av. equity/PCF 0.005 0.008 0.011 0.013 0.011 0.012 0.012 0.013 0.015 0.017 0.022 0.027 0.030 0.040 0.045 0.052 Profit/Loss Net income after tax* 0.26 1.15 3.13 3.52 2.76 3.55 3.18 3.96 4.89 5.80 7.19 8.79 10.54 10.24 10.81 12.35 Average Net Income Per PCF Financial ratios (in %) CAR (not risk-weighted) 14.9 12.4 9.9 10.5 9.5 8.0 7.4 7.0 6.5 6.0 6.1 6.0 5.6 5.3 5.5 5.4 Overdues (≥1 days) 0.74 0.51 1.24 3.53 3.84 3.72 3.42 2.17 1.36 0.84 0.66 0.53 0.53 0.50 0.53 0.49

ROAA* 1.17 1.37 1.43 1.38 1.40 1.38 1.30 0.87 0.79 1.16

ROAE* 15 18 20 20 21 18 19 14 11 24.6 Loans-to-deposits 131 141 151 142 136 131 137 131 130 126 129 135 131 126 115 121 Deposits-to-loans 76 71 66 71 74 76 73 76 77 79 78 74 76 80 87 83 US$ exchange rate

11,003

11,020

11,037

11,175

13,887

14,019

14,540

15,086

15,395

15,630

15,776

15,906

16,056

16,025

16,977 18500

* As provided by SBV

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Diagram 1 of Annex 4.6: PCF Financial Highlights, Dec. 1994-June 2006

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Annex 4.7: Organizational Structure of CCF


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ANNEX 5: FINDINGS FROM THE SMALL SURVEY OF FINANCIAL

INSTITUTIONS


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1. SUMMARY OF FINDINGS Below is the comparative analysis of FIs in the survey of 3 provinces, including perceptions of customers/non-customers:

1.1. Comparison among FIs Criteria of

Comparison VBARD VBSP PCF MFIs Brief description

Formal FI, State-owned; commercial bank – profit

Formal FI, State-owned policy bank for the poor and special target support programs of governments, nation-wide

Formal FI, self-reliant, self-responsibility, non-profit oriented but should be sustainable. Lend to members only, but can mobilize from public.

Semi-formal FI, not yet register as formal MFI. Develop from microfinance projects/components, carried out by Women’s Union. Self-reliance and self-sustainability

Network Coverage

Nationwide; 64 provinces and 563 districts

Nationwide; in all districts and communes, network of district branches, partners with people’s committee, mass organizations

Network of 1042 PCFs, but each PCF has inter-commune boundary

Limited network. , small-scale in certain areas.

Financial products

Most diversified: savings, credit, remittance, payment, e-banking, etc.

Credit according to government policy for certain types of customers, focusing on the poor; savings products in pilot

Credit and savings, less diversified than VBARD, but much more than VBSP.

Mainly Credit. Compulsory Savings

Non-financial products

No No No Yes

Microfinance product methods

Piloted Grameen method (not successful); individual method

Grameen bank method (using huge number of credit groups)

Individual method only

Grameen bank method

Interest rate Market rate Subsidized rate, different among programs

Market rate, 0.1-0.35 higher than VBARD. Flexible

Highest interest rate compared to others.

Target groups Enterprises, medium and rich people

Poor people in the official list, people in difficult areas

Low-income and medium people, microenterprises and SMEs

Low income people

Women focus No Mainly (using mass organizations)

No Yes

Deposit insurance

Yes No Yes No

Sustainability Good No Good Good Outreach Depth of outreach

The least The best Medium Good

Coverage Good The best Medium The least


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Procedures highlight

Compliant with SBV regulations, but complicated

Less compliant with MOF regulations, but still complicated

Less compliant with SBV regulations, simple

Very simple, but not complaint

Prudential regulations

Strictly follow No Strictly follow, but less than VBARD

No

Using mass organizations and people’s committee

Not much Utilize the system (within BOD)

Not much Use lots of mass organizations

Education level of staff

Most academically qualified

OK OK (less than VBSP) NA

1.2. Comparison among borrowers and non-borrowers

a. Semi-formal Microfinance Institutions All MFIs surveyed in three provinces (Women Development Support Fund in Quang Binh, TYM in Vinh Phuc and Loving Fund in Soc Trang) were established by the Women’s Union at the provincial or district level. Their target groups are the poor and low income members of the WU, so 100% of their clientele are women. The mission of the MFIs is to help those women to develop economically and socially by provision of microfinance services that meet their needs. The MFIs in Quang Binh and Soc Trang are supported by INGO projects (NAPA project funded by SNV in Quang Binh and Oxfam in Soc Trang)1. TYM in Vinh Phuc is part of the national TYM with many supporting organizations, both domestic and international2. All of the MFIs have been in the microfinance business for more than 10 years3.

Table 1: Selected performance indicators of the three MFIs

Indicators of performance TYM NAPA project Oxfam project Total active clients at the end of:

- 2007 - 2008 - 2009

3,770 4,644 4,638

6,330 6,711 5,950

2,391 2,147 1,347

Total loan outstanding at the end of (million VND):

- 2007 - 2008 - 2009

11,797 21,285 22,290

15,875 12,827 18,160

2,798 2,920 2,553

Average loan size per client in (million VND):

- 2007 - 2008 - 2009

3.1 4.5 4.8

2.5

1.6 2.5 3.0

1 For the sake of simplicity, the MFIs in Quang Binh and Soc Trang are named after their supporters. So the NAPA project refers to the MFI in Quang Binh and Oxfam project refers to the MFI in Soc Trang. Otherwise stated, TYM in this report refers to the MFI in Vinh Phuc, not the national TYM Fund. 2 The international organizations that support TYM include ACT, CARD, Grameen Trust, OXFAM America, German Savings Banks Foundation, CORDAID, Ford Foundation, Rabobank and others (2009 Annual Report of TYM Fund). 3 TYM in Vinh Phuc was established in 2007, but it’s a part a wider national TYM network that was established in 1992.


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Compulsory saving Yes Yes Yes Voluntary saving Yes Yes Yes Total outstanding saving at the end of (million VND):

- 2007 - 2008 - 2009

5,113 4,524 6,889

4,583 4,160 4,649

1,189 1,250 21,130

Table 2. Comparison of NAPA, OXFAM Project and TYM

INDICATORS NAPA OXFAM TYM4 95-‐100% rural clients 95-‐100% rural clients Expanded from 20%

(2007) – 20 % (2009) Client’s Profile

Khmer ethnic minority Kinh people 10% ethnic client

Methodology Grameen method Grameen method Grameen method but

changing to ASA

Implements Compulsory

Savings

Yes, NAPA 10,000 VND

monthly

Yes, Oxfam 5% of loan

amount upon loan disbursment, 1% of loan

amt /month thereafter, until the loan is fully

repaid

Yes, requires its members

to deposit at least 5,000 VND weekly

Ratio of outstanding

saving to outstanding loan

26% 44% 31%

Loan Maturity Period 5-‐100 weeks

Payment scheme monthly

weekly weekly

Loan size 4 million VND 5 million VND up to 25 million VND

“Mutual Assistance Fund”, a form of a micro-‐

insurance service.

Organizational structure Still strongly embedded into the structure of the

Women’s Union.

Greater autonomy, has

full-‐time staffs who make business decisions. WU

assist only with reminding borrowers to repay and

cooperate in collecting bad debts.

Non-‐financial services, All offers: business training, gender, or reproductive health training, etc

Platform for saving and lending activities

All three MFIs use women’s groups

4 Refer to Annex 2, RIMANSI’s publication on Microinsurance in Vietnam, where TYM was thoroughly discussed including the transformation of its MAF to microinsurance


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VBSP’s clients

The team conducted three group interviews with 11 VBSP’s clients in three provinces. They borrowed from VBSP through different channels, such as the Women’s Union, Farmer’s Association, Youth Union, Veteran’s Union etc. Consistent with data collected from VBSP, one client can borrow from multiple programs: poverty reduction, water and sanitation, and student loans. Procedural requirements and loan-processing forms are viewed as simple. The clients interviewed are satisfied with the service of VBSP staffs. They are regarded as friendly and helpful: “on the day of interest collection, VBSP staffs worked until 3PM at the transaction point, even without lunch, but their attitudes toward the clients were still good” – a client in Vinh Phuc province said. Time needed for loan processing ranges from 1 week to 1 month, with involvement of SCG leader, the local committee for poverty reduction and VBSP. After the loan has been disbursed, time spent by the clients to service the loan is typically two meetings a month; each one lasts for 1 hour and usually outside working hours. In general, the transaction costs involved in borrowing from VBSP are low, both in terms of money, time and efforts.

The clients receive money directly from VBSP officers. They pay monthly interest, either through the SCG leader or directly to the VBSP officers. Principals are usually paid at the end of the loan cycle at the commune transaction point or district office. Loans for the poor are often uniform in one area; in Vinh Phuc is 5 million VND, Quang Binh 10 million and Soc Trang 15 million. The loan size is probably determined more by the available fund of VBSP and the number of potential beneficiaries in a given province, not by individual needs of the client households.

Compared to the financial services offered by other institutions, VBSP enjoys the biggest support among the interviewed customers. The reasons they gave is low interest rate, no collaterals required, big student loans, simple procedures5, long term and relatively big loan size. This does not mean that VBSP can satisfy all the needs for financial services of the clients. VBSP’s loans are not often, constrained probably by the availability of fund from the State, offered not in a timely manner, so it’s quite common that the clients use other services, such as VBARD, PCF and semi-formal MFIs, as well.

VBSP non-borrowers

Responses from the non-borrowers indicate that they would like to borrow from VBSP, because the interest rate is low, however, some conditions exclude them from borrowing like:

1. Not being a poor household 2. Not being selected by the SCG to access VBSP’s loan. The reason is that due to limited

funding, not all the poor can have loans. 3. Not having time to attend the meetings of SCG.

5 Compared to VBARD and PCF, VBSP’s procedures are the most simple in the view of the customers.


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Access to services of VBARD and PCF is hindered by the collateral requirements and complicated procedures of those organizations. Semi-formal MFIs like TYM, NAPA or Oxfam project are available only to poor women.

2. GENERAL FINDINGS FROM DIFFERENT FINANCIAL INSTITUTIONS

2.1. VBARD VBARD mission and vision are toward market mechanism “for the prosperity of customers”, working as the commercial bank with profit-orientation. However, the main market of VBARD is in rural areas (as shown in table 2, 70-92% are rural borrowers). The VBARD branches in these provinces are in district level, and directly belong to headquarters. About 2-3 transaction offices, belong to the branch. VBARD branches in these provinces have similar credit process and financial products, as guided by VBARD head quarter. The transactions are very modern and on-time, and they can cross-check the customer information among branches through I.T. enhanced core-banking system, and large borrower’s information can be checked using the Credit Information Center (CIC).6 All branches follow the professional financial mechanism and management scheme designed for the whole system of VBARD.

The financial products of VBARD are the most diversified among financial institutions, ranging from savings products with different maturity (3-24 months), different payment method; lending to both individuals and enterprises for business/consumption purposes. However, the microfinance products of VBARD are not much, and they do not classify as microfinance products.

Table 1: List of products provided by VBARD branches in 3 provinces

Payment Types of Loans

Principal Interest Maturity

Interest rate

Condition for getting the loan

Funding sources

Normal loans Maturity Monthly 6-12-36 1.3-1.45%/ monthly

VBARD’s, SBV’s regulations

AGRI

Project loans: ADB, CFD, WB Maturity Monthly 12-60 1.3-1.45%/

monthly VBARD’s, SBV’s regulations

AGRI, ADB, CFD, WB

Types of saving %/ year Economic organizations Maturity Maturity 0 – 36 9.5 - 11.5%

Individuals Maturity Maturity 0 – 36 9.5 - 11.5% Others ATM VNTOPUP SMS Western Union Insurance Agency for ABIC

6 According to director of VBARD Soc Trang and Vinh Phuc, loans over VND 500,000,000 will be sent to the CIC for information exchange and management.


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VBARD pilot tested the Grameen method for lending to individuals, using the mass organization such as Women’s Union groups, Farmer’s Association.7 However, it did not develop well, and branches in Vinh Phuc and Soc Trang are not applying the model anymore. Only branches in Quang Binh province kept the model.

The standard credit process which VBARD branches have to apply is illustrated in the following chart.

7 Based on the Decision No 67/TTg and Resolution No 2308, the bank has concentrated on lending group in order to satisfy the loan demand in the district.


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Because of the relatively stricter standards and complicated lending process, small borrowers felt that it is very time-consuming to borrow from VBARD. There are also a substantial number of required papers to be submitted and longer loan processing time (Short term loans is 3-4 days, 5-7 days for medium and long-term loan, upon submission of completed requirements). In addition, The Fis in the rural areas has a high credit limit authorization, ranging from VND 500 million to VND 5 billion. Therefore, customers of VBARD are mainly well-off individuals and

Customer:

Summit informations and documents

Loan officer: -‐ Meet and offer guidance

Customer interview

Documents: -‐ Loan Application -‐ Legal documents -‐ Plans/Project

Information gathering through meeting &

interview

Underwriting -‐ Legal status -‐ Creditworthiness

Reports: -‐ Appraisals -‐ Statements -‐ Credit reports

Update on market

info, regulations, legal frameworks

Loan approval: -‐ Group approval -‐ Single approval

Deny Reason for denial report

Accept

Loan contract -‐ Negotiation -‐ Signing contract -‐ Signing endorsement

Funding - Fund transfered to

customer account - Paid to suppliers

Assessment: -‐ Accountant -‐ Loan Officer -‐ Auditor

Loan supervisor

y

Contract breach

Not due & not in full amount

Due & in full amount

Natural end of contract

Solution: Warning, strengthen supervising, stop funding, re-‐appraisal of

creditworthiness.

Not due and not in full amount

Forced end of contract

Legal proceeding: -‐ Court -‐ Regulator

Principal and interest payment

Chart 1: Credit process of VBARD


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enterprises. The calculation of customer was changed in November 2008, and now they have one customer – one account.

Table 2: Client profiles of VBARD branches

Binh Xuyen District, Vinh Phuc Province

Bo Trach Branch, Quang Binh Province

Long Phu District, Soc Trang Province Indicators of

performance in millions, VND)

TOTAL

Total active clients 2007 6,334 2,560 8,894 2008 5,180 3,023 8,203 2009 2,488 7,183 3,198 10,381 Total loan outstanding 2007 286,000 275,115 116,710 391,825 2008 355,000 331,193 132,108 463,301 2009 356,000 363,652 155,232 518,884 Ave. loan size per account 2007 46 2008 44 2009 150 51 49 Total saving accounts of last 3 years 6,634 NA 3,153 Total outstanding saving 2007 198,000 150,390 64,919 215,309 2008 271,000 197,583 88,511 286,094 2009 279,000 210,436 157,795 368,231

Loan to Deposit Ratio 2007 69% 55% 56% 2008 76% 60% 67% 2009 78% 58% 102%

Ave. Growth rate 2007 2008 37% 31% 36% 2009 3% 7% 78% Non-performing loan ratios 2007 4.31 2008 2.48 2009 1.74 Borrower’s profile % female 60% NA 45% % rural 70% 82.40% 92% % of ethnic minority

4% 0% NA

% of clients (at entry) below national poverty line (officially classified as poor by the People’s Committee)

N.A 23% NA


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The overall trend for outstanding loans and savings of VBARD is increasing, which shows the expansion in VBARD’s operation. The rural borrower accounts ranges from 70 to 92%. However, most of borrowers are not poor. Only Quang Binh branch has 23% of clients to be under the poverty line. The average loan size of more than VND 40 million per account also demonstrate the fact that VBARD does not focus on the poor, with larger loan size. They also do not focus on women, as the proportion of women borrowers is similar to men (45 to 60%).

1.1. VBSP

VBSP is the non-profit organization set by the government. Differently from VBARD, the VBSP organizational structure is quite big in provincial level, but smaller in district level. The district level is just the transaction office.

Figure 2: VBSP organization in provincial level

INFORMATION TECHNOLOGY DEPARTMENT

CLIENT

DIRECTOR

CREDIT AND CAPITAL

PLANNING DEPARTMENT

ACCOUNTING AND

TREASURY DEPARTMENT

INTERNAL SUPERVISION

AND AUDITING DEPARTMENT

ADMINISTRATION AND PERSONNEL

DEPARTMENT

DEPUTY DIRECTORS

OPERATIONAL DEPARTMENTS

District transaction offices

Mobile transaction points

Savings & Credit Groups


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The Head of the Representative Committee is the Chairman or Deputy Chairman of Provincial People’s Committee and members are representatives of some core units, agencies and organizations at the same level (similar to the BOD of VBSP head quarter). Therefore, Women’s Union and Farmers’ Association are part of BOD, not the supporting agencies as for the case of VBARD, PCF or MFIs. This is the strong point of VBSP – having a wide responsible network. VBSP has transaction offices in all communes and districts.

Table 3: Number of VBSP district and commune transaction points in 3 provinces (end 2009)

Vinh Phuc Quang Binh Soc Trang District 8 7 9 Commune 137 127 106 Credit & savings group 2,754

However, VBSP products are not diversified it is mainly credits with specific purpose of borrowing, and concessional lending rate. The savings products have been tested to develop in the VBSP system, but have just been implemented in Soc Trang Province. Most of the financial products are microfinance with small loan size. Only few credit programs are for enterprises in remote and difficult areas, with amount ranging from VND 200 – 500 millions. However, no enterprises in these survey areas get the loan of that amount yet.


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Table 4: Microfinance products provided by VBSP

Payment No. Products Principal Interest

Maturity (Month)

Interest rate


1 Types of Loans 1.1 Loans to poor households in

compliance with the Decree 78 to serve the following purposes: - Production. - Fresh water and environmental hygiene. - House repairs. - Electricity consumption. - Study expenses for children of poor households.

Monthly Monthly 36 0.65%/mo

- Poor households must be permanent domicilian or be registered for long-term domicile at the location of loan; - Must be listed as a poor household in the commune/ward/town as per the Poverty Standards periodically published by the PM - Must be a member of a saving & loan team certified by the People’s Committee of the commune level

1.2 Loans for employment Periodical Monthly 36 0.65% /month

- As for firms, there must be business plans which are feasible and appropriate for the production activities and create new & stable jobs for the locality. The business plan must be certified by the People’s Committee at the Commune level or the local unit of the Loan Program. Loans of VND 30 Mil or above must be supported with property deposit as per current regulations or guaranteed on monetary term as per the guidelines of the loaning Bank. -For households: Must ensure at least 1 new job to be created. Must have the feasible business plan certified by the People’s Committee at the commune level or the local unit of the loan project. Legal domicile at the same location of the project

1.3 Loans for the fresh water and environmental hygience as

Periodical Monthly ≤ 60 0.90% /month

- Poor households must be permanent domicilian or be registered for long-term domicile at the location of


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Maturity (Month)

Interest rate


per the Decision No. 62/2004/QĐ-TTg promulgated on 16/4/2004 by the PM

loan bank; - Poor households have not a water treatment unit as per the national standards on fresh water and have not met the rural environmental hygiene as certified by the Commune’s People’s Committee. - Must be a member of the saving & loaning team.

1.4 Pupils and students in the difficult family conditions as per the Decision No. 157/2007/QĐ-TTg promulgated on 27/9/2007 by the PM

Periodical Monthly 0.5%/mo (from 1/10/2007)

- Case 1: Pupils/students losing both mother and father or father or mother alone but the other has no working ability can seek for direct loans at the Central Bank for Social Sponsor at the place of of the school. - Case 2: Representatives seek for loans for their children to study must be members of the Saving and Loan Team as certified by the Commune People’s Committee.

1.5 Loans for individuals being objects for the Social Policy who will seek for periodical jobs overseas as per the Decree No. 78/2002/CP of the Government

Periodical Month 36 0.65%/mo - Legal domicile at the location of the loan bank. -Certification by the Commune People’s Committee of the loan applicant’s domicile that he/she is from the poor household. - The Bank gives loans to the members of the families being the object of the social sponsorship or being the poor households as per the Government regulations who will seek for jobs overseas in order to pay for legal necessary fees or consuming purposes. The maximum loan is VND 30 mil per person.

1.6 Loans for the poor households to build houses as per the Decision No. 167/2008/QĐ-TTg

Periodical Yearly 10 Yrs 3%/year a) Being the poor households (as per the poverty standards regulated at the Decision No. 170/2005/QĐ-TTg on 08 July 7, 2005 by the PM on the promulgation of poverty standards to be applied for the period of 2006 - 2010), living at the local place, being listed as member of poor households decided by the Commune’s People’s Committee within the


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Maturity (Month)

Interest rate


validity of this Decision; b) Households without houses or with houses of poor quality, high possibility of leakages, damages, collapse but can not be able to upgrade it themselves; c) Households being not listed as the object of housing sponsorship as per the Decision No. 134/2004/QĐ-TTg on 20 July, 2004 by the PM guiding some policies to sponsor land for productions, housing, fresh water for households being members of the poor ethnic minority groups, having difficulties in life and being supported by some of the other policies issued by the Government.

1.7 Loans for households doing businesses in areas of difficulties as per the Decision No. 31/2007/QĐ-TTg on 05/3/2007 by the PM.

Periodical Monthly 36 0.9% /mo As per the Decision No. 31/2007/QĐ-TTg on 05/3/3007 by the PM on loans for households doing businesses in areas of difficulties, the General Director of the Bank issued the Official Document No. 677/NHCS-TD on 22/4/2007 guiding the procedures and object for loans who are not listed as the poor but having business/production activities in communes of difficulties as per the Decision No. 30/2007/TTg on 05/3/2007 by the PM. Households with loans up to VND 30 Mil under the authorized loaning method. Households with loans exceeding VND 30 mil up to VND 100 Mil must seek for direct loans from the Loan Bank and the loan applicant must have property deposits.

1.8 Loans for commercial activities in the areas of difficulties as per the Decision No. 92/2009/QĐ-TTg

Periodical Monthly 36 0.9% /mo

Those who a eligible for loans under this Decision must be businessmen having regular business operations in those areas of difficulties. 1. Must be certified by the Communes’ People’s Committee that business operations is regular in the


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Maturity (Month)

Interest rate


areas. 2. Have a capital (including materials, land use rights, other capitals) being equal to minimum 20% of the total loan amount for business operations in the areas of difficulties. 3. Comply with the loan guarantee requirements as per the Article 12 of this Decision.

1.9 Loans for households of the ethnic minority groups in the specially difficult areas as per the Decision No. 32/2007/QĐ-TTg on 05/3/2007 by the PM

Periodical Monthly ≤ 60M 0.0% Being households in the ethnic minority groups of special difficulties with the two requirements: Having monthly per capita income equal to or below 50% income of the poor as per the current poverty standards; and having production plan but insufficient capital. The limit of loan is VND 5 Mil per household, the loan applicant does not have to pay interest.

1.10 Forest sector development program

monthly <12 mos 12-60 mos

1.11 Poor partier program monthly 2 Type of saving products 2.1 Non-term savings <2 years 2.2 Term savings 3 mos

6 mos 9 mos >12 mos


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The list of products is the same for all VBSP, but the application can be various, because some products cannot be developed in certain areas. For example, VBSP Soc Trang province provides more financial products than in other two areas due to its conditions of being in a poor place with majority of ethnic people – the Khmer.

The interest rates of all VBSP programs are quite low compared to VBARD or PCFs, and also different among programs. That may create the internal control problem for VBSP, but no data on the number of control staff is available among 3 survey areas. The credit procedures is also unified by VBSP and complicated, with very heavy dependence on the existing social network – People’s committee and mass organizations.

Figure 3: Flowchart of credit process in VBSP

Explanation: (1) The Poor households prepare loan application and send to Savings & Credit Groups.

(2) Receive the loan application of member

Organize meeting to select the Poor household eligible for borrowing, make a list of these Poor household attached by loan application of member submitted to Commune People’s Committee and Poverty Deduction & Hunger alleviation Board.

POOR HOUSEHOLDS

VPSB

SAVINGS AND CREDIT GROUPS

PROVERTY DEDUCTION AND HUNGER ALLEVIATION BOARD

ENTRUSTED ORGANISATIONS

(3) (7)

(8)

(1) (4)

(2)

(5)

(6)


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(3) Commune People’s Committee and Poverty Deduction & Hunger alleviation Board confirms the borrowing household is those belong to Poor household as regulated and legally located at the commune. The Commune People Committee and Committee and Poverty Deduction & Hunger alleviation Board confirm and approve the list of Poor household borrowers to send to the VPSB.

(4) VPSB consolidates all loan application and the list of Poor household from the Commune People Committee, checks the eligibility, legality of the loan document. (This step shall not last for more than 5 days). Upon the approval of Poor household list demand loans, VPSB sends the approved list to Commune’s People Committee.

(5) Commune’s People Committee sends the approved list to Entrusted organizations (6) Entrusted organizations send the approved list to Savings & Credit Group. (7) Inform the list of Poor household being approved for the poor household,

disbursement schedule and location to implement following steps of lending process (8) VPSB with Savings & Credit Groups to disburse the loans directly to Poor household

at the premises of the Lender or at the commune’s office subject to announcement of Lender.

Before 2008, the number of customers and number of accounts were different, as they manage according to accounts. However, it has been changed. From 2008, one borrower could only have one account, comprising all the loans in one book. It improved the credit management of VBSP significantly. However, the credit information exchange among VBSP branches, and between VBSP and other credit institutions are very limited. VBSP is not connected to CIC, and also not connected real-time among the VBSP network.


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Table 5: Client profiles of VBSP district branches

Binh Xuyen District, Vinh Phuc Province

Bo Trach Branch, Quang Binh Province

Long Phu District, Soc Trang Province Indicators of

performance (in millions, VND) TOTAL Total active clients 2007 8,517 15,601 8,324 32,442 2008 10,031 19,407 10,891 40,329 2009 10,471 20,514 12,863 43,848 Total loan outstanding 2007 45,851 115,972 51,453 213,276 2008 71,024 173,154 78,341 322,519 2009 109,787 226,064 111,931 447,782 Ave. loan size per account 2007 5.4 2008 7 2009 10.5 10.35 5.8

Total saving accounts of last 3 years 6,634 NA 3,153 Total outstanding saving 2007 1,563 1,563 2008 1,197 1,197 2009 397

N/A (Begin implementation of mobilizing savings through the savings &

loans)

NA

397

Loan to Deposit Ratio 2007 3% N/A N/A 2008 2% N/A N/A 2009 0% N/A N/A Ave. Growth rate 2007 2008 0.0001% N/A N/A 2009 0.0000% N/A N/A Borrower's Profile % female 41% 63% 33.31% % rural 42% 89% 29.62% % of ethnic minority 1%

2% 30%

% of clients (at entry) below national poverty line (officially classified as poor by the commune People’s Committee)

1% 18% 3.03%


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Total customers of VBSP are the largest among Fis, and increased rapidly. However, the average loan size is a bit small, arount VND 5.4 – 10 million. The proportion of borrowers who are female, ethnic or poor are different among regions, but the proportion of poor below national poverty level borrowing from VBSP is quite small in these survey areas (from 1% to 30%). The savings are not yet done (in Quang Binh and Soc Trang province – just in the first period of pilotting), and reduced significantly in Vinh Phuc province. It implies that savings products of VBSP have not been attractive to customers.

1.2. PCF

PCF system was established under both the Credit Institution law and the Cooperative Law, but each PCF is self-financial entity. They have the same mission and vision of “operating with the principle of voluntary, autonomy and self-responsibility for its operation results, attaining the main objective of mutual assistance among members in order to bring into full play the strength of the collective and each member in effectively carrying out production, business and service activities and raising the living standards”. Although PCFs are not-for-profit, but the operation of the PCFs must ensure self-financing and accumulation for development. The social and gender objectives of PCFs are also various, such as Creation the job for the member, Poverty and hunger reduction, Decrease the social evils, and usury; Assistance the policy househould. However, the member-based methodology is applied. What makes PCFs in Vietnam different from normal credit cooperative models are: they can mobilize savings from non-members, but lend to members only. However, it has been put in the law, and the revised law of credit institution still keeps that.

The organization and qualification of staff of PCFs strictly follow the regulations of the State Bank of Vietnam. The financial products of PCFs are also limited by the law, which credit and savings only.


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Table 6: Financial products provided by PCF


Maturity Interest rate (various among

regions)


Funding sources

1. Types of Loans 1.1 Short-term loan Maturity Monthly 1-12

months 1.35%/ month (overdue interest is 2.025%/month)

In accordance with regulations of the State Bank

Charter capital, mobilized capital, Capital borrowed from Central People Credit Fund

1.2 Mid-term loan Maturity Monthly 1-60 months

1.4%/ month (overdue interest is 2.10%/ month

In accordance with regulations of the State Bank

Charter capital, mobilized capital, Capital borrowed from Central People Credit Fund

2 Type of saving products 2.1 Deposit, non

period Maturity Monthly 0.25%/ month

(3%/year)

2.2 Deposit, 1month period

Maturity Monthly 0.92% month (11.04%/ year)


Maturity Monthly 0.93%tháng (11.16%/ year)













III Others: No


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Although PCFs are limited in product categories, they have the right to diversify within this limit. In addition, PCFs should be self-sustainable. Therefore, the number of saving products is quite various, and interest rates are flexible, changing according to the change in the market and different among regions. The credit products are also diversified with flexible interest rate policy. The managers have to calculate the interest margin level sufficient to cover its costs. The manager of Thanh Lang PCF told us that “we try to be flexible for competing with other Fis, especially VBARD and some commercial banks around. We just need to have the interest margin of 0.25-0.4% for our sustainability”.

PCFs have “3 on-site” regulations of (i) on-site mobilization, (ii) on-site lending, and (iii) on-site controlling, supervision and management; and “4 go with” task of (i) go with objectives; (ii) go with participating management; (iii) go with sharing responsibilities; and (iv) go with having benefits

Because credit is the main source of income for PCFs, the credit procedure is simpler than that of VBARD, but still follow the prudential regulations set by the SBV.

Figure 4: Flowchart of credit procedure – PCF

Credit officer apply the customer profile, including: Loan Application, Legal documents, Plans/Project

Credit officer take Information gathering through meeting and interview

Loan approval

Accept loan contract

Fund transferred to customer account

Credit officer check and approval of loan documents approved by the Director


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This credit procedure helps borrowers to reduce the transaction cost and opportunity cost a lot. The customer assessments are done by credit officers, which are efficient because credit officers are also the local people, who understand customers very well. Customers are the members anyway. That is why this process only takes one-two days for completion. However, it also limits the poor or low-income people, because if other members did not want him/her to join in the cooperative, s/he has no chance. The credit information exchange among PCFs and between PCF and other FIs are very limited. The PCF can check information on its customers’ borrowing from other banks or credit organizations through Communal People’s Committee and Guaranty Transaction (the Fund’s customers will have to clear Guaranty Transactions from the Fund before borrowing from others banks.). In addition, all of financial institutions must send to CIC of SBV the list of clients who have the loan more than VND 50 millions. If a financial institutions want to know how its client has a loan of others institution, they must buy this information of CIC.

All these PCFs can only work in inter-commune areas, one headquarter with one-two transaction points, which limit their outreach and operation.

Table 5: Client profiles of PCFs

Thanh Lang, Binh Xuyen District, Vinh Phuc Province

VBSP Bo Trach Branch, Quang Binh Province

Truong Khanh Commune, Long Phu District, Soc Trang Province

Indicators of performance

(in million VND) Total active clients

- 2007 - 2008 - 2009

704 771 680

884 935 925

673 648 660

Total loan outstanding - 2007 - 2008 - 2009

13,568 15,481 20,934

13,140 17,187 25,332

12,912 12,343 15,480

Average loan size per account - 2007 - 2008 - 2009

19.3 20.1 30.8

16

19.19 19.05 23.45

% female borrowers 20% 35% 11.06% % rural borrowers 18.3% 100% 67.02%

% of ethnic minority borrowers 0% 0% 20.83% % of clients (at entry) below national poverty line (officially classified as poor by the commune People’s Committee)

1% 11% 22.72%

Total saving accounts of last 3 years - 2007 - 2008 - 2009

1,384 1,940 2,125

NA


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Total outstanding saving - 2007 - 2008 - 2009

732 1040 1176

12,284 15,725 23,434

6,356 8,750 10,294

Loans from CCF (million VND) - 2007 - 2008 - 2009

5,450 2,950 4,680

Although the numbers of borrowers of all 3 PCFs did not increase much in 3 years, total outstanding loans have increase significantly. It means that PCFs lend at bigger loan size. The savings amounts are similar to loans, which show that PCFs mainly mobilize savings for their credit operation. The loan size and % of poor borrowers also demonstrated that PCFs did not focus on the poor. All PCFs cover their cost and have some retained earnings for the year 2007-2009.


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ANNEX 6

Social and Gender Assessment TA 7499-VIE: Preparing Microfinance Sector Development

Program for Vietnam


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Social and Gender Assessment

TA 7499-VIE: Preparing Microfinance Sector Development Program for Vietnam

I. Scope of work and information sources The TOR for the social and gender specialist requires him to provide “a social and gender analysis appendix for the PPTA main report, covering demographic, economic and socioeconomic conditions; and identifying social and gender trends and impacts of the proposed program on them; and suggesting measures to address social and gender issues and contain possible negative impacts.”1 Following this requirement, under the guidance of the ADB project officer in charge and the team leader, the social and gender specialist has undertaken the following activities to gather and analyze information for the analysis:

- Review existing literature on social and gender issues in Vietnam, including government statistics, researches and reports of government agencies, donors, NGOs and academic institutions.

- Review documents and reports of major microfinance institutions in Vietnam, including VBSP, VBARD, CCF, PCF, and semi-formal MFIs like TYM, CEP, M7, and MFWG.

- In-depth interview with major microfinance institutions on social and gender aspect, including VBSP, VBARD, CCF, and TYM.

- In-depth interview with relevant government agencies (MOLISA, MOHA) and mass organization (WU).

- Contributing to the field survey and synthesizing the results.

II. Social and gender situation in Vietnam For more than two decades since the beginning of reform (Doi Moi), Vietnam has achieved remarkable development results. The annual GDP growth was 7.2% during the decade of 1999-2008. During the same period, the export grew at the annual average rate of 21.2%, from 11.5 to 62.7 billion USD (ADB, 2009). Due to the global financial crisis, the GDP and export growth were slowed down to 5.3% and -8.9% respectively in 2009 (GSO, 2009), but likely to pick up again in 2010. The structure of the economy is changing: the share of the agriculture sector2 in GDP diminished from 24.5% in 2000 to 20.9% in 2009, while industry and construction sector grew from 36.7% to 40.24% in the same period and service sector remained roughly the same at 38.7-38.8% (GSO, 2009). With the accession to WTO in 2007, the Foreign Direct Investment

1 Preparing Microfinance Sector Development Program for Viet Nam, Project Preparatory Technical Assistance Concept Paper – TOR for social and gender specialist.

2 Includes forestry and fishing.


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(FDI) soared to the highest level ever in 2008, with the registered capital exceeding 70 billion USD, more than twice the previous year level, and the implemented capital over 11 billion (GSO, 2009). Vietnam continues to attract an increasing inflow of Official Development Assistance (ODA), with the highest commitment level exceeding 8 billion USD in 2009 (Government Web Portal).

This continued growth is set to bring Vietnam out of the low income country status to the group of middle-income countries in 2010, when the GDP per capita will surpass 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 increasingly associated with ethnic minorities. Both the poverty headcount (percentage of the population living below the poverty line) and poverty gap, which measures the seriousness of poverty, are higher among ethnic minorities (see table 2).

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

2002 2004 2006 2008 WHOLE COUNTRY 28.9 19.5 16.0 14.5 Urban 6.6 3.6 3.9 3.3 Rural 35.6 25.0 20.4 18.7

Source: (GSO, 2010)

Table 2: Poverty headcount and poverty gap in rural areas among different ethnic groups, 2006

Ethnic Category Poverty Headcount Poverty Gap Kinh-Hoa 13.5% 2.7% Khmer-Cham 34.6% 5.8% Tay-Thai-Muong-Nung (in the Northern Uplands) 45.2% 11.1% Other ethnic minorities in the Northern Uplands 72.4% 26.1% Ethnic minorities in the Central Highlands 73.6% 25.7% Others 50.1% 23.5%

Source: (Baulch Bob, 2010)

Participatory analyses of poverty in Vietnam (Joint Donor Report to the Vietnam Consultative Group Meeting, 2003; Oxfam and ActionAid Vietnam, 2008; Vietnam Academy of Social Sciences, 2008) 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


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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).

As of April 2009, Vietnam has a population of 85.8 million people, which ranks the country at 13th place in the world and 3rd in the South East Asia as most populous states (GSO, 2010). The share of the rural population, although declining, still accounts for 70.4% of the total (see Table 2). 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 as 66.2% of the population is in the working age (15-59) in 2008 (GSO, 2010). Most of the labor force work for themselves/their households or employed in household businesses (see Table 3). The average annual growth of the labor force in the period of 1999-2008 is 2.2%, equivalent of 910 thousand people (ADB, 2009) entering the labor force every year. More than 70% of this growth occurs in rural areas. However, the number of jobs in the agriculture sector is stagnant or even declining throughout the decade, from 24.8 million in 1999 to 23.6 million in 2008 (ADB, 2009).

Table 3: Major population and labor indicators in 2009

Total Urban Rural Population (Million people) 85.8 25.4 60.4 Labor force in 2007 (Million people) 46.7 11.9 34.8 Unemployment rate (Percent) 2.9 4.6 2.3 Underemployment rate (Percent) 5.6 3.3 6.5 Source: (GSO, 2009) (MOLISA)

Table 4: Percentage distribution of employed population by sex and economic sector, 2008

Total Male Female 1. State 10.5 11.2 9.8 2. Household/individual 73.3 71.2 75.5 3. Business household 7.6 8.5 6.7 4. Collective 0.4 0.5 0.3 5. Private 5.8 6.9 4.8 6. Foreign investment 2.2 1.6 2.8 7. Other 0.2 0.1 0.1 Total 100.0 100.0 100.0 Source: (GSO, 2009)

Although Viet Nam has made significant strides towards achieving gender equality, gender gaps remain. Viet Nam ranked 71 out of 134 countries on the 2009 World Economic Forum’s Global Gender Gap Index3; 94 out of 155 countries on the 2007 Gender Development Index4 and 62

3 The Global Gender Gap Index is based on the following sub-indices: economic participation, educational attainment and opportunity, heath and survival, political empowerment. Source: World Economic Forum 2009 The Global Gender Gap Report, Geneva Switzerland


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out of 109 countries on the 2007 Gender Empowerment Measure5. The progress of Vietnam toward gender equality includes:

1. Little difference between boys and girls in school enrolment; 2. Adult literacy is also high, and the gap between male and female literacy rates has been

decreasing over time. 3. With 23 percent female members of the National Assembly, Viet Nam has the highest

proportion of women in parliament in the Asia-Pacific region. 4. Vietnam has one of the highest economic participation rates in the world: 85 percent of men

and 83 percent of women between the ages of 15 and 60 participated in the labor force in 2002. (WB, ADB, DFID and CIDA, 2006; ADB, 2005)

5. Women’s property rights are better protected with the issuance of new land use certificates that consist of both husbands and wife’s names beginning in 2003.

On the policy side, Vietnam ratified the Convention on the Elimination of All Forms of Discrimination against Women in 2002. The country’s Constitution affirms full equality of rights between men and women in the political, economic, cultural, social and family sphere (Article 63). Two important laws promoting gender equality were approved: the Law on Gender Equality in 2006 and the Law on the Prevention and Control of Domestic Violence in 2007. The structure of the National Committee for Advancement of Women (NCFAW) is embedded into the Government structure, both at the central and local levels, as well as the line ministries.

There are, however, significant challenges for the full gender equality to be achieved. The Vietnamese culture is strongly influenced by Confucian values and hierarchy, which place women in a subservient position to men. Generally, women enjoy less decision making power at the household, community and state levels. Women’s access and control over resources are still more restricted than men’s. The labor division is heavily discriminative for women. In agriculture, they assume over 50% of the production activities. In addition to that, over 90% of the reproductive activities, such as cooking, caring for children, elderly and the sick, fetching water, washing clothes etc. (MARD, Committee for the Advancement of Women, Technical Working Group on Gender Issues, 2000). Women often work longer hours than men, thus have less time for regeneration, access to information or participation in the community or public affairs.

4 The Gender Development Index (GDI) is a combined index measuring the gender gap between men and women on the following indicators: life expectancy at birth; adult literacy rate; combined gross enrollment ratio for primary, secondary and tertiary education; and estimated earned income. Source: UNDP 2009 Human Development Report.

5 The Gender Empowerment Measure (GEM) measures political participation and decision making power, economic participation and command over resources. Source: UNDP 2009 Human Development Report.


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III. Recent history of microfinance development and the major stakeholders Microfinance institutions, both formal and semi-formal, began to be established in early 90s at the earliest. The only exception was VBARD, which was created in 1988 with a mandate to provide financial services to rural households and businesses. In early 90s, about two thirds of the country population lived under the poverty line. Recognizing the important role of small credits in poverty reduction, several international organizations, including NGOs, foundations and donors, implemented microfinance projects targeting the poor and low income people. Many Vietnamese organizations, for example the Women’s Union and the Labor Confederation in HCM City, did the same, with technical and sometimes financial support from international organizations. Key semi-formal MFIs, like TYM, CEP, M7 network, and other, were created as a result. With initial support from CIDA, the network of People’s Credit Funds (PCFs) was established in 1993 under a Prime-ministerial decision. PCFs are community-based financial cooperatives that are owned, operated, and governed by shareholding members, modeled after the Desjardins (caisses populaires) in Quebec, Canada (The Banking with the Poor Network, 2008).

Poverty reduction has always been high on the agenda of the Government of Vietnam. Lending to the poor with subsidized interest is regarded as an effective way to combat poverty. This function was first realized through VBARD. In 1995, the Prime Minister issued a decision to create the Bank for the Poor within the structure of VBARD to take over the subsidized lending to the poor from VBARD. The policy lending was effectively separated from VBARD in 2002, when VBSP was created based upon the re-organization of the Bank for the Poor.

Table 5: Key milestones in the development of the microfinance sector in Vietnam

Year Event 1988 VBARD was established 1991 CEP was established by the Labor Confederation of HCM City 1992 TYM was created by the Vietnam Women’s Union 1993 PCF network started 1993 M7 network started by ActionAid 1995 The Bank for the Poor was established 2002 The Bank for Social Policies was established

From the start of the microfinance sector in Vietnam, the social agenda, not the commercial, has always been the driving factor for its development. Active participation of socio-political organizations is an important feature in the microfinance kaleidoscope. A number of MFIs have been created by those organizations, like CEP in HCM City or TYM. Mass organizations, like the WU, FA, Youth Union or the Veteran’s Union, are partnering with VBARD and VBSP to deliver microcredit to the clients. Only in the activities of PCF we don’t see the involvement of socio-political organizations. A brief description of the major ones is as follows:

The Women’s Union was created in 1930. Its mandate is to represent and protect the equal rights and legitimate interests of women. It also serves as a channel to communicate the policies of the State to women and mobilize them to implement those policies. As of June 2007,


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the WU’s membership was 13.6 million (Vietnam Women's Union), nearly 50% of all women aged 18 to 60. Its structure spans all the administrative levels, from central down to the communal. Helping women to develop economically has always been an important task of the WU. This is one of the six major tasks for the WU to implement in the period 2007-2012. Among all mass organizations, the WU is the most active one in microfinance. Nearly in every province, the WU has a microcredit scheme/project. All major semi-formal MFIs, except CEP, were created by the WU. The WU is also a platform to disburse over 50% of VBSP loans by initiating credit and saving groups at the commune level.

Box 1: Major goals, tasks and targets of the WU for the period 2007-2012

GOALS OF THE WOMEN’S MOVEMENT IN THE 2007-2012 PERIOD 1. To raise all-sided capacity and knowledge and improve the material and spiritual life of

women. 2. To cultivate Vietnamese women who are patriotic, knowledgeable, healthy, skillful,

dynamic, innovative, cultured, and kind-hearted. 3. To build and develop and organizationally strong VWU, which can play a key role in

motivating women and protecting the legitimate rights and interests of women, TASKS AND MEASURES OF THE WU IN THE 2007-2012 PERIOD.

1. Raising women’s awareness, knowledge and capacity, in order to meet the requirements of the new situation; cultivating healthy, knowledgeable, skillful, dynamic, innovative, cultured and kind-hearted Vietnamese women.

2. Participating in the formulation, social counter- argument, and supervision of implementation of laws and policies on gender equality.

3. Assisting women in economic development, job creation and income generation. 4. Assisting women in building prosperous, equal, progressive and happy families. 5. Building and developing a strong organizational structure for VWU. 6. Expanding international relation and cooperation for equality, development and peace.

MAIN TARGET OF VWU TOWARDS 2012 1. More than 80% of VWU’s members will register to participate in the Women study

actively, work creatively and nurture happy families Movement. 2. More than 70% of women will be informed about the Party’s direction, the State’s

policies and laws, and VWU’s Statutes and Resolutions; educated in national tradition, moral lifestyle and gender equality; and trained on the prevention of social vices and how to nurture happy families.

3. More than 60% of mothers having children under 16 years of age will be guide on childrearing methods and measures.

4. More than 70% of poor women will be supported by VWU to reduce poverty and eliminate hunger. Striving for a target of supporting more than 90% of female-headed poor households, with the goal of 40 to 50% escaping from poverty.

5. Annually, approximately 50.000 women will receive vocational training; the rate of long-term trained female laborers will increase.

6. Increasing the number of goof and excellent WU’s at the grassroots; more than 90% of communal Women’s Union will increase their core membership and their local WU Funds.

7. Increasing by more than 5% the membership of VWU compared to the number at the beginning of tenure; more than 80% of households that have women aged 18 and above will have at least one WU member; more than 70% of members will attend VWU regular activities and pay membership fee.


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8. 100% of WU presidents and vice presidents at the province/city level, and 90% WU presidents at the district/town level, and 90% WU presidents at the commune/ ward level under 45 years of age, will meet the required officers’ qualification.

Source: Women’s Union website. (Bold formatting is added to emphasize the activities/targets relevant to microfinance.)

Other mass organizations, including the Farmer’s Association, the Veteran’s Union and the Youth Union, have the same structure as the Women’s Union. They are present at all administrative levels, from the central to communal. As the Women’s Union, they fulfill a dual function: from one side as a representative of their respective constituencies to fight for their legitimate rights and interests, from the other as a channel to transfer the policies and laws of the State to specific segments of the society. In terms of membership in 2009, the Farmer’s Association had 2.5 million members, the Youth Union – more than 8 million, and the Veteran’s Union – more than 2.2 million. In microfinance, their role is much less prominent compared to the WU. Those mass organizations don’t have any significant microfinance operations by their own. They do only partner with VBSP to deliver credits to the poor by initiating credit and saving groups at the commune level. Taken together, the Farmer’s Association, the Veteran’s Union and the Youth Union disburse less than 50% of all VBSP loans.

IV. The outreach of microcredit The Bank for the Poor Network estimates that all financial service providers, including VBSP, VBARD, PCFs, semi-formal MFIs, informal lenders and ROSCAs, may provide credit to some 6.11 million borrowers, after a relatively aggressive adjustment for double counting. This number exceeds by 12% the total estimated number of low income households in the country (The Banking with the Poor Network, 2008). The biggest contributor to this achievement is clearly VBSP. Created and subsidized by the Government to implement its policy lending to the poor, the bank is now in the period of explosive growth. At the end of 2009, it reports the total number of clients at almost 7 million, with total loan outstanding at 72,660 billion VND, seven times more than at the end of 2003. More than 50% of this outstanding loan is lent from the program for poor households.

One should not assume that all poor households, which number is estimated to be about 3 million at the poverty rate of 14.5% in 2008, are then covered by microcredit. The 2008 Vietnam Household Living Standards Survey shows that there is only slightly more than half of households officially classified as poor by local authorities borrowing or having debt in the past 12 months (see table 6). The most popular source of loan for the poor is VBSP, relative/friend, VBARD, private moneylenders and political/social organization.


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Table 6: Percentage of poor households selected by localities borrowing or having debt in the past 12 months by source of loan

In total households borrowing or having debt by source of loan Year Whole country VBSP VBARD Credit

organization

Political social organization

Private money lenders

Relative/ friend

Others

2005 53.9 52.2 19.8 3.6 8.1 9.5 25.9 3.5 2006 55.0 53.3 19.9 3.5 7.8 9.6 25.8 3.3 2007 55.3 54.3 18.9 3.3 7.9 9.9 25.8 3.5 Source: (GSO, 2010)

This may indicate that the microfinance services in Vietnam do not effectively reach the poorest. Out of more than 7 million clients of MFIs, only 1.5 million are officially classified as poor. This aggregate numbers are heavily skewed by VBSP. By definition, the primary target group of VBSP is the poor. In practice, however, a significant portion of the richest does also benefit from the bank’s loans, as shown in table 7. This is also consistent with a research on ethnic minorities and credit by a joint World Bank and the Institute of Ethnic Minority Affairs (IEMA) effort:

“The 2006 IEMA study found that the number of active borrowers of local VBSP branches was always higher than the official number of households listed as poor in any locality. VBSP officials blamed the selection of eligible borrowers on local authorities who certified incorrect lists of poor households, saying that their credit officers could not appraise the creditworthiness of all these households. They simply accepted the list of “poor households” that they were presented from local authorities. As a result, the limited funds of VBSP have been allocated improperly to some non-poor households; this means some poor have not benefited from favored credit. The IEMA study found VBSP providing credit to the non-poor in all study villages: 31 percent of VBSP loans went to high-income groups, while only 11 percent went to the poorest (IEMA 2006).” (The World Bank, 2009, p. 153)

Table 7: Percentage of households borrowing or having debt in the past 12 months from VBSP by income quintile

Quintile 2004 2006 2008 Quintile 1 (poorest) 18.2 31.0 42.5 Quintile 2 13.1 21.9 33.5 Quintile 3 10.8 17.5 27.3 Quintile 4 7.9 14.9 22.1 Quintile 5 (richest) 5.0 9.5 14.8 Source: (GSO, 2010)

Semi-formal MFIs are more effective in reaching the poor than VBSP. A proxy indicator for the poverty level of the clients is the average loan balance per client. It is generally accepted that the smaller the amount, the poorer are the clients. The better off are usually not interested in small loans. An average outstanding loan balance below 20% of per capita GDP (GNI) or $US 150 is regarded by some as a rough indication that clients are very poor. Table 8 puts semi-


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formal MFIs together with VBSP. It shows that the average loan balance per borrower of VBSP is almost twice higher than those highest among the semi-formal MFIs.

Table 8: Average loan balance per borrower as percent of GNI per capita

Name of MFI Average loan balance per borrower (USD)

Average loan balance per borrower / GNI per capita

Binhminh CDC 126 14.17% CAFPE BR-VT 141 15.89% CEP 207 23.24% Childfund Hoa Binh 52 5.87% Counterpart 184 20.64% Fund for Women Development – HCM

241 27.08%

M7 Can Loc 213 23.97% M7 DB District 98 10.96% M7 DBP City 118 13.23% M7 Dong Trieu 172 19.35% M7 Mai Son 140 15.71% M7 Ninh Phuoc 85 9.52% M7 Uong bi 161 18.06% Plan International Vietnam 40 4.53% TCVM Thanh Hoa 96 10.74% TYM 239 26.83% VBSP 444 49.92% Source: www.mixmarket.org

VBSP’s operation has contributed to increased access to formal credit by ethnic minorities, who are poorer than ethnic Vietnamese (Kinh). VHLSS data suggest that VBSP is reaching more ethnic minority households and is becoming increasingly important in their overall borrowing (Joint Donor Report to the Vietnam Consultative Group Meeting, 2007). The household survey conducted by the World Bank as part of its Country Social Assessment 2008 found that the large expansion in the availability of credit in the past 5 years is clearly reaching minority households. However, this positive trend should not hide the fact that minorities still borrow less frequently than ethnic Vietnamese, get smaller loans overall, and are more vulnerable to cycles of debt in the informal sector (The World Bank, 2009, p. 161).

Women are the primary beneficiaries of the microfinance development in Vietnam, as it is usually true in other parts of the world. Almost all semi-formal MFIs focus exclusively on women, and those that don’t also have women as their main clients (see table 9). The number and percentage of women borrowers of VBSP deserve a deeper explanation. VBSP lends to households, not individuals, and gives each of its household clients a loan book. This book contains the name of the person who takes the primary responsibility for the loan, and the person who inherits the responsibility in case of death of the first. It is generally practiced that the head of the household, who usually is a man, is written in the first place, and therefore the household client is classified as a male client. It is not uncommon that a woman applies and receives the loan, and when it comes to issuing the loan book, the husband name is written as the one who takes the primary responsibility for the loan. The fact that more than 50% of VBSP


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total outstanding loan has been disbursed through the credit and saving groups of the WU gives us a basis to think that the percentage of women borrowers is more than 50%, not 35% as by official numbers.

Table 9: Women borrowers in selected MFIs at the end of 2008

Name Number of active borrowers

Total women borrowers

Percentage of women borrowers

Binhminh CDC 4,425 4,292 97% CAFPE BR-VT 7,284 5,784 79% CEP 107,866 80,543 75% Childfund Hoa Binh 6,810 6,810 100% Counterpart 1,273 — — Fund for Women Development – HCM

7,524 7,524 100%

M7 Can Loc 2,730 — — M7 DB District 1,904 1,904 100% M7 DBP City 2,533 — — M7 Dong Trieu 4,530 — — M7 Mai Son 3,192 — — M7 Ninh Phuoc 3,044 3,044 100% M7 Uong bi 3,587 — — Plan International Vietnam 5,787 5,787 100% TCVM Thanh Hoa 5,357 — — TYM 33,935 33,935 100% VBSP 6,792,978 2,391,789 35% Source: www.mixmarket.org

The biggest provider of microcredit in Vietnam, VBSP, is very much supply-driven. Its loan parameters, especially the loan size and time of disbursement, are set not based much upon the needs of its clientele, rather on the availability of fund that comes from the State’s budget. It is observed in the field survey in three provinces of Vinh Phuc, Quang Binh and Soc Trang that the credit is equally divided among the poor household clients of VBSP. There is no flexibility and adjustment of the maturity period and repayment schedule that fit the business and financial conditions of the clients. This may limit the impact of VBSP credit on the household economy of the clients. To satisfy all the financial needs, the customers generally use multiple sources, as shown in table 6.

V. The potential of micro-saving On the saving products of MFIs, the report on the Vietnamese microfinance sector produced by The Banking with the Poor Network in collaboration with the SEEP Network states that:

“The availability of liquid, small-balance savings products that poor people generally demand is more limited than credit in the policy-driven microfinance market in Viet Nam. The relatively extensive branch network of VBARD, VPSC via the post offices, VBSP and the growing PCF network does in principle ensure access by most BOP households to formal sector savings services in proximity to their residences. However, as assigned banks, both VBSP and VPSC are required to transfer mobilized voluntary savings to other government investment vehicles


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such as VDB, or face deductions in their government funding budgets, and hence their motivation to expand savings services is limited. VBARD, as a more commercial bank, prefers larger and longer-term deposits, and thus does not offer many savings products that are suitable for the poor. MFOs remain barred from intermediating voluntary savings until Decree 28/165 comes into effect and they become licensed. With the transformation of the largest MFOs to deposit-mobilizing microfinance institutions under Decree 28/165, the supply of more sophisticated savings services to BOP may increase.” (The Banking with the Poor Network, 2008, p. 14)

Data from VHLSS show that the poor do save. They use many forms of saving, such as contributing to ROSCAs, buying gold, silver, depositing in saving account. Saving helps the poor to better cope with unexpected shocks like illness or loss of harvest because of natural disasters. Saving also helps accumulate capital for future investment. The average amount of saving of the poorest quintile is about 700,000 VND per household per year. This is a small sum, but given the fact that there are about 4 million households in this quintile, the total would amount for 2,800 billion VND or 150 million USD. Unlike the better off, who put a significant portion of their saving into saving account, the poor prefer more informal ways of savings, such as ROSCAs or buying gold (see table 10). This is probably because there is no suitable mechanism to mobilize small and frequent savings from the poor.

Table 10: Average amount of household savings in the last 12 months by expenditure quintiles in 2008 (thousand VND)

Type of saving Quintile 1 (poorest)

Quintile 2

Quintile 3

Quintile 4

Quintile 5 (richest)

Lending, contributing to revolving credit groups, buying shares

210 376 731 995 2,438

Buying gold, silver, gemstone, foreign currency for savings

321 695 1,288 1,697 2,219

Depositing in saving accounts 166 522 977 1,415 6,087 Source: GSO, Vietnam Household Living Standards Survey 2008, unofficial results

Mobilizing small saving from the poor in a frequent manner is possible, as already practiced by semi-formal MFIs. TYM, for example, implements compulsory saving of 5,000 VND (0.26 US$) per client every week. By now, its average deposit balance per depositor is more than 1 million VND (52 US$) and the outstanding deposit to outstanding loan ratio is 25%. Most of other MFIs have the same or even better ratio.

Name Deposits Gross loan portfolio Deposit/loan outstanding ratio

Binhminh CDC 134,892 558,017 24.2% CAFPE BR-VT 313,448 1,030,345 30.4% CEP 6,213,262 22,312,048 27.8% Childfund Hoa Binh 75,345 355,632 21.2% Counterpart 13,408 233,797 5.7% Fund for Women Development - HCM

184,310 1,813,391 10.2%


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M7 Can Loc 326,605 582,371 56.1% M7 DB District 54,486 185,652 29.3% M7 DBP City 149,880 298,281 50.2% M7 Dong Trieu 469,151 780,299 60.1% M7 Mai Son 191,800 446,358 43.0% M7 Ninh Phuoc 75,163 257,951 29.1% M7 Uong bi 290,362 576,514 50.4% Plan International Vietnam 58,276 233,333 25.0% TCVM Thanh Hoa 104,231 512,212 20.3% TYM 1,953,028 8,103,475 24.1% Source: www.mixmarket.org

VBSP has a great loan delivery infrastructure of more than 200,000 CSGs. If this infrastructure would be used to mobilize small and frequent savings, the chance of success would be high.

VI. Conclusions and recommendations In the last 20 years, the microfinance service in Vietnam has greatly expanded in coverage. From an insignificant number of clients in early 90s, now the industry has reached more than 6 million people. The State-run VBARD and then VBSP are the main players behind the success in coverage, but also PCFs and semi-formal MFIs have contributed to it. The expanded coverage embraces women, who are the majority of microfinance clients, and ethnic minorities, who are the country’s poorest and left behind group. This success goes, however, with some great challenges:

1. Almost 50% of the households officially classified as poor by local Government still don’t have access to any microfinance services.

2. Ethnic minorities still borrow less frequently than ethnic Vietnamese, get smaller loans overall, and are more vulnerable to cycles of debt in the informal sector.

3. There is no large scale micro-saving service that suits the poor. 4. The vast majority of microcredit, as offered by VBSP, is very much supply-driven.

This may limit the impact of microcredit on the household economy and the well-being of the clients.

In order to address these challenges, we recommend the following:

1. Create a policy environment conducive to the development of demand-driven microfinance industry, containing a whole range of services, including credit and saving.

2. Semi-formal MFIs, at the micro level, have better performance in targeting the poor, tailoring services to their needs and mobilizing their savings than VBSP. Those institutions should be encouraged to expand their coverage.

3. Give tax or other incentives to MFIs that specifically target ethnic minorities.


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VII. Works Cited ADB. (2007). Gender and Development Plan of Action (2008-2010).

ADB. (2009). Key Indicators for Asia and the Pacific 2009 – Vietnam.

ADB. (2005). Viet Nam: Gender Situation Analysis.

Baulch Bob, H. T. (2010). Ethnic Minority Poverty in Vietnam. Manchester, UK: Chronic Poverty Research Centre.

Government Web Portal. (n.d.). ODA commitment for VN sets new record. Retrieved July 01, 2010, from VGP News: http://news.gov.vn/Home/ODA-commitment-for-VN-sets-new-record/200912/5593.vgp

GSO. (2010). Preliminary results of the 2009 Population and Housing Census.

GSO. (2010). Result of the survey on household living standards 2008. Hanoi: STATISTICAL PUBLISHING HOUSE.

GSO. (2009). Statistical Handbook of Vietnam 2009. Hanoi: Statistical Publishing House.

GSO. (2009). The 2008 Population Change, Labour Force and Family Planning Survey: Major Findings. Hanoi.

Joint Donor Report to the Vietnam Consultative Group Meeting. (2003). Vietnam Development Report 2004: Poverty. Hanoi.

Joint Donor Report to the Vietnam Consultative Group Meeting. (2007). Vietnam Development Report 2008: Social Protection. Hanoi.

MARD, Committee for the Advancement of Women, Technical Working Group on Gender Issues. (2000). Gender Issues in Agriculture and Forestry in Mountainous Areas of Vietnam. Hanoi.

MOLISA. (n.d.). Labour force as of 1 July by sex, residence and province. Retrieved July 06, 2010, from MOLISA Website: http://molisa.gov.vn/docs/SLTK/DetailSLTK/tabid/215/DocID/2286/TabModuleSettingsId/496/language/vi-VN/Default.aspx

Oxfam and ActionAid Vietnam. (2008). Participatory Poverty Monitoring in Rural Communities in Vietnam. Hanoi.

The Banking with the Poor Network. (2008). Vietnam Industry Assessment - A Report on the Vietnamese Microfinance Sector.

The World Bank. (2009). Country Social Analysis - Ethnicity and Development in Vietnam.


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The World Bank Website. (n.d.). Vietnam - Result Profile: Development Progress in Vietnam. Retrieved July 5, 2010, from http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/VIETNAMEXTN/0,,contentMDK:22539306~pagePK:141137~piPK:141127~theSitePK:387565,00.html

UNDP Vietnam. (n.d.). Vietnam and the MDGs. Retrieved July 05, 2010, from http://www.undp.org.vn/mdgs/viet-nam-and-the-mdgs/?&languageId=1

Vietnam Academy of Social Sciences. (2008). Participatory Poverty Assessment 2008. Hanoi.

Vietnam Women's Union. (n.d.). Giới thiệu Hội Liên hiệp Phụ nữ Việt Nam - Introduction to the Vietnam Women's Union. Retrieved July 05, 2010, from Hội Liên hiệp Phụ nữ Việt Nam - Vietnam Women's Union: http://www.hoilhpn.org.vn/newsdetail.asp?CatId=2&NewsId=5&lang=VN

VietnamNet Bridge. (n.d.). Golden population offers opportunities. Retrieved July 06, 2010, from VietnamNet: http://english.vietnamnet.vn/social/201001/Golden-population-offers-opportunities-887724/

WB, ADB, DFID and CIDA. (2006). Vietnam Country Gender Assessment.


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ANNEX 7

Major Development Partners and Programs for Microfinance in Viet Nam


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Major Development Partners and Programs for Microfinance in Viet Nam

Program Name Development Partner

Main Areas of Support 1/

Duration

Amount (USD) Type of financing

1. FOR PEOPLE’S CREDIT FUNDS (PCFs)

A. Recently Concluded (ending 2008)

ADB 1457 - ADB rural credit project 1457 ADB – MOF – CCF - PCFs

Funds for wholesaling to partner PCFs

1997- 2001 - 2017 14,000,000 loan

ADB 1802 - ADB rural financial enterprise project 1802

ADB – MOF – CCF - PCFs


2001- 2006-2021 33,150,000 loan

ADB 1781 - ADB tea and fruit development project 1781



2005-2006 -2021 2,970,000 loan

AECID – ICO microfinance project of Spanish Government.

ICO – spain – CCF - PCFs


2006-2018 24,140,800 loan

B. On-going

ADB 1990 – ADB housing financial project 1990

ADB – SBV – CCF

Funds for on lending –direct to clients

2004-2024 7,100,000

loan

JBIC - JBIC medium and small enterprise financial project – phase II

JBIC – SBV - CCF Funds for on lending –direct to clients

2007-2017 2,900,000 loan

JICA - JICA medium and small enterprise financial project

JICA – SBV - CCF Funds for on lending –direct to clients

2009-2019 4,200,000 loan

WB – WB’s rural financial project II WB (RDFII)

WB – BIDV – CCF Funds for on lending –direct to clients

2004-2024 5,260,000 loan

AFD – project of supporting business in private sector.

AFD – MOF – CCF - PCFs


2009 - 2011 - 2029

36,300,000 loan


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DID – liking rural areas – urban areas to eliminate hunger and reduce povety

Bill and Melinda foudation – DID – CCF – 8 PCFs

For technical assistance

2008 - 2010 3,637,679 grant

ADB 2513 – quality and safety enhancement of agricultural products and biogas development project



2009 – 2012 – 2029

12,000,000 loan

C. Planned (under process)

AFD – SBV – CCF - PCF

For Technical assistance

2010-2012 $500,000 grant

Rabobank - CCF For technical assistance

2011 $500,000 (co finance $3M)

grant

2. FOR VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT - VBARD



Duration Amount (USD) Type of financing

A. Recently Concluded VBARD Microfinance Development Strategy – Rural Finance II

Développement international Desjardins (DID)/ World Bank

Technical assistance

In 2007

USD 160.000

Loan

B. On- Going Rural Finance II

World Bank Fund for on-lending

April 2003 - 2027

Outstanding loan till 31 December 2009: VND 229 billion

Loan

Rural Finane III World Bank Fund for on-lending

May 2010 – 2032 Fund for both micro loan and rural development loan in 2010: VND 745 B

Loan

3. FOR VIETNAM BANK FOR SOCIAL POLICIES



Duration

Amount (USD) Type of financing

A. Recently concluded (ending 2008)


304

Project " Integration of population with sustainable development of family" (Project Gender and development II)

Unicef, Vietnam Women Union


2003-2006 Grant

Project "promoting gender equality and the participation of men in reproductive health" (Project VIE/97/P11)

UNFPA For Risk management fund

2001-2004 45,000 Grant

Piloted project on microfinance Sweden (mountainous areas rural devt. programme)

Fund for openning deposit accounts

2002-2006 VND7,700 million Grant

Project on savings credit without subsidy but under control (project SUCS)

RABOBANK – Netherland


1997-2005 43,000 Grant

The model of using credit links to protect children based on community (Project UNICEF)

UNICEF For technical assistance

2001-2005 Grant

Project "Integration of population with sustainable family development through savings activities and economic development of family" (Project on Family Planning)

Committee for population, family and children of Vietnam


2001-2005

Grant

Kenan – USAID project Kenan Institute Asia


2007-2007 48,000 Grant

ASEM project World Bank, ASEM Fund


2006-2006 400,000 Grant

Project on supporting VBSP to formulate development strategy (Project Beyond WTO I)

The UK Department for International Development (DFID), The Australian Government's overseas aid program (AusAID).


2007-2008 70,800 Grant


305

The technical assistance project of Policy Research Institution (PRI) - National Life Finance Cooperation (NLFC) of Japan (phase 1)

Japan Ministry of Finance, National Life Finance Cooperation (NLFC) of Japan


2003-2006 427,900 Grant




2007-2008 500,000 Grant

The Project of Building VBSP’s capacity beyond WTO integration (Project Beyond WTO II )

the UK Department for International Development (DFID), Australian Government's overseas aid program (AusAID).


2008-2008 49,200 Grant

Project on Experimental model of credit fund for farmers self-management (Project GRET)

Organization of researching and transferring technology of Republic of France (GRET)

For opening deposit account for Women Union of Vinhphuc province

1997-2005 15,000 Grant

B. On-going Project on strengthening national capacity to implement the action plan of tropical forest in Vietnam (Project GCP/020/ITA(FAO))

FAO For opening guarantee fund

1999-2009 60,000 Grant

"Fund for the rural poor" project (OPEC project)

International Development Fund - OPEC fund

Funds for on-lending - direct to clients

1999 - 2015 10,000,000 loan

Forest sector development project World Bank Funds for on-lending - direct to clients

2005 - 2024 32,710,000 loan

Coastal Wetlands Protection and Development Project (CWPD)

DANIDA Funds for on-lending - direct to

2004 - 2014 65,000 loan


306

clients

SMEs Development Program (Project KFW)

KFW Bank Funds for on-lending - direct to clients

2005 - 2025 7 million euro loan

Rural income diversification project in Tuyen Quang Province (RIDP)

IFAD Relending -wholesaling to savings and credit group

2004 - 2022 1,430,000 loan

Participatory Resources Management Project in Tuyen Quang Province

IFAD Funds for on-lending - direct to clients

1994 - 2043 3,724,000 loan

Safe house loans in central coast Development workshop of France

Funds for on-lending - direct to clients

From 2009 onwards (depending on the project extension)

150,000 loan

Microfinance for the poor project Unilever Vietnam Relending -wholesaling to partner socio-political organizations

2008-2010 460,000 Grant

The forestation and Sustainable Forestry Project (KFW6 Project)

KFW Bank Funds for openning deposit accounts for farming households and rural communities

2006-2012 3,712 million Euro Grant




2009-2010 Grant

Strengthening savings services to the poor (Project FORD I)

Ford Foundation For technical assistance

2007-2009 100,000 Grant


307

Strengthening VBSP’s capability through strengthening district branch management, piloting an overseas remittance service in rural communes and testing the Progress out of Poverty Index as a targeting and evaluation tool. (Project Ford II in short)


2008-2010 252,000 Grant

Project "Supporting the extension of savings service for the poor of VBSP" (project Ford III)


2009-2010 153,600 Grant

Planned (under process)

Increase rural water supply and sanitation lending and to support technical assistance

Aus Aid, Denmark, UK, Holland

Using Government mechanism on interest gap subsidies

expected 4 years (2010 onwards)

4 million Pound

Grant

4. FOR CENTRAL WOMEN’S UNION

A. Recently Concluded (ending 2008) B. On-going ACCESS: Access to Coordinated Credit and Enterprise Support Services

Belgian Development Agency (BTC)

TA for on-lending to clients, developing a new wholesale unit, strengthen reporting /data collecting / analysis capacity at the VWU & Business Development Services.

2007-11 512,0001

GRANT

5. STATE BANK OF VIETNAM



Duration

Amount (USD)

Type of financing

A. Recently Concluded ( ending 2008) Workshops in Macroeconomic Policy IMF For technical 2002

1 Among them, USD 396,000 is from Belgium, USD 86,000 is from Vietnam contribution, and USD 30,000 is from counter value fund.


308

Coordination assistance

B. On-going SBV restructuring GTZ For technical

assistance 2002

Seminar series on strengthening capacity for SBV departmental executives

GTZ For technical assistance

2006

Long-term training and technical assistance to the SBV on supervisory, regulatory and banking services issues

CIDA For technical assistance

Feb. 2004

Guidance on reforming the SBV to be modern central bank

IMF/MFD/APD For technical assistance

Mar-06

SBV TATP (technical assistance and training programme); including training on monetary policy

Switzerland (SECO)


2005

TA on Currency Issuance & Vault Operation JICA For technical assistance

April.2007

Strengthening banking supervision/auditing GTZ For technical assistance

2000

Support SBV implementing its prudential financial stability reporting system


2007

Anti-money laundering- assessment and assistance for drafting decree, action plan for FIU establishment

ADB For technical assistance

Sept. 2005

Technical assistance on Anti-money laundering-legal framework & FIU operation.

IMF For technical assistance

Dec. 03

Compliance and Audit of Bank Supervision Information Requirements & Training for SBV bank inspectors in bank supervision

European Union For technical assistance

2005

Review of State Bank & Credit Institutions Laws

GTZ/ADB For technical assistance

2003

Technical advice on the State Bank and Credit Institutions Laws

CIDA For technical assistance

Jun-03

Introduction of international standards (Basel Principles)


Workshops, legal analysis and reference materials to support the development by the

USAID-STAR Project


Aug. 2004


309

SBV of the key implementing decrees for the amended Law on Credit Institutions Support of Review of SBV Law, CI Law, Law on DIV and Bankruptcy Law

JICA For technical assistance

Dec.2006-

Support for developing Decree on Foreign Banks

ADB (STAR) For technical assistance

Aug-2004

Support for developing the Law on Negotiable Instruments

USAID (STAR Project)


Nov-04

Assessment of the CIC World Bank / Spanish CTF


Nov. 2003

Implementation of strategic framework: drafting legal framework and partnership building: support setup of a private sector credit bureau Major components: 1. Technical Assistance: provide legal TA to SBV. This would include: developing legal framework; code of conduct; licensing requirements; on-going consultation and promotion/dissemination activities. 2.Partnership building/sourcing: The project will seek interest from potential international credit bureaus and commitment from banking community and then as the trust broker, facilitate setting up of a private credit bureau with participation of a reputable foreign investor/sponsor.

MPDF


May-06

$ 110,000

Assessment of and technical workshops on the financial sector implications of the US-Vietnam Bilateral Trade Agreement

USAID-STAR Project


Nov. 2002

Assistance to SBV in formulating the strategy for international integration for the banking sector

AusAID For technical assistance

Oct. 2004

Reserves Management Capacity Building

SIDA/Swedish Central Bank


May-03


310

Training in Macroeconomic model-building and forecasting

INSEE/Banque de France/ ADETEF


2002

Staff exchange Sida/Swedish Central Bank


2003

Guidance on monetary policy instruments and operations

IMF/MFD For technical assistance

2004

Training SBV and Commercial Bankers, Monetary Instruments


2002

TA on monetary policy and development of secondary market for debt


Dec.2006

Technical Assistance Missions on core-inflation and monetary framework


Sept.2006

Assistance on monetary statistic and reporting system


Apr-05

Assistance on monetary statistics and reporting system, including support for reviewing financial statistics regime


Dec.2006

SME Finance Project (ii) JBIC 2005

SME Development Program Loan (co-financed with ADB and AFD)

KfW Dec-04

SME Development Fund European Union Oct. 2004 Assistance on SME finance JICA Assistance on SME

finance Apr. 2007

Housing Finance Facility

ADB Sep-02

Housing Credit Line through Mekong Housing Bank

AFD 2004

Provide loan guarantees for Vietnamese joint stock banks to promote (a) credit extended to SMEs and (b) cashflow-based lending practices

USAID 2003

C. Planned(under process)

SBV Capacity Building European Union 2005

Training course on macroeconomics forecasting and modeling

IMF/ADB Jan-08


311

Training course on capital inflows IMF Mar-08

SME Credit Line (ICBV) KfW 2001

1/ e.g., for technical assistance; funds for on-lending –direct to clients; or relending – wholesaling to partner financial institutions, etc.) 2/ Loan or Grant, or mix – please indicate separately amounts in Loan and in Grant per area of support in same program


312

ANNEX 8

LIST OF PERSONS MET


313

LIST OF PERSONS MET

Office of Government (OOG) 1. Mr Pham The Vinh, Deputy Director, International Cooperation Department 2. Ms Nguyen Mai Anh, Officer, International Cooperation Department State Bank of Viet Nam (SBV) 1. Mr Nguyen Vinh Hung, Deputy Director, International Cooperation Department (ICD),

Project Director 2. Ms. Vu Lan Chi, Deputy Division Chief, Asian Development Bank Division, ICD—

[email protected] 3. Ms Nguyen Quynh Phuong, Officer, [email protected] 4. Mr Nguyen Thanh Nguyen, PMU Officer 5. Ms Ha Thuy Hanh, PMU Assistant—Deputy Chief ([email protected]) 6. Ms Quach Tuong Vy, Chief Division, Bank Supervision Agency (BSA)—

[email protected] 7. Ms Ha Thi Thanh Thuy, Deputy Chief Division, BSA 8. Ms Nguyen Lan Huong, Officer, BSA 9. Ms Nguyen Thi Thom, Deputy Chief Division, Administration Department 10. Mr. Nguyen Xuan Binh, Vice Office Manager of BSA, Project Member—Mobile 0904-174-

221- no email address indicated in the business card. 11. Mr. Hoang Quoc Manh, Deputy Director of BSA, Deputy Project Director 12. Nguyen Kien Quan, Deputy Director, Banking Prudential Regulation Department—

[email protected] 13. Le Hai Hanh, Expert, Banking Prudential Regulation Department 14. Trinh Anh Duc, Expert, Bank Supervision Department 15. Huynh Nhat Le, Deputy Chief, Human Resource Division, The Office of the BSA 16. Nguyen Thi Ha, Expert, Licensing Department

Ministry of Planning and Investment (MPI) 1. Mr Tran Ngoc Lan, Expert, Department of Foreign Relation 2. Ms. Phan Thanh Ha, Deputy Director General, Department of Finance 3. Ms. Tran Thi Ngoc Bich, Expert, Department of Finance 4. Mr Vu Ngoc Hung, Expert,Department of Finance 5. Mr. Bui Nghi, Deputy Director General, Department of Cooperatives 6. Ms. Pham Thi Thuy Hong, Expert, Department of Cooperatives

Ministry of Finance (MOF) 1. Mr Nguyen Ngoc Anh, Dep. Director General, Banking and Financial Institution

Department—[email protected] 2. Ms Hoang Thi Viet Ha, Expert, Department of Banking and Finance 3. Mr. Nguyen Nam Thai, Expert, Department of Banking and Finance


314

Ministry of Industry and Trade 1. Mr. Le Huu Phuc, Deputy Director General, International Cooperation Department-

[email protected] 2. Ms. Tran Phuong Nhung, Expert, Competition Agency 3. Ms. Tao Kim Van, Expert, Department of Finance

Ministry of Labor, Invalids and Social Affairs (MOLISA) 1. Mr. Nguyen Kim Phuong, Deputy Director General, International Cooperation Department-

[email protected] 2. Ms. Nguyen Thi Yen, Expert, International Cooperation Department—

[email protected] 3. Ms. Vo Thi Hoai Thanh, Deputy Chief, Poverty Reduction Program Office 4. Mr. Luu Quang Tuan, Director, Centre for Information, Strategic Analysis and Forecasting,

Institute of Labor Science and Social Affairs

Ministry of Home Affairs Luong Quang Luyen, Deputy Director, ICD- [email protected] Central Women’s Union 1. Ms. H’ngam Ne Kdam, Vice President—[email protected] 2. Ms. Dao Mai Hoa, Vice Director of Department for Supporting Women in Economic

[email protected] 3. Ms. Ho Thi Quy, Director of TYM Access To Coordinated and Enterprise Support Services Vincent Wierda, Chief Technical Advisor Viet Nam Bank for Social Policies (VBSP) 1. Mr Nguyen Van Ly, Deputy General Director 2. Mr. Phan Cu Nhan, Director, International Cooperation Department (ICD)-

[email protected] 3. Ms Hoang Thi Chuong, Deputy Director, ICD 4. Ms Le Thi Phi Ha, Project Coordinator, ICD 5. Mr Lo Van Quyet, Administration Officer 6. Le Thanh Chung- Deputy Director, ICD- [email protected] Viet Nam Agriculture and Rural Development Bank (VBARD) 1. Ms Le Thi Thanh Hang, Deputy Director General 2. Ms Tran Thi Minh Thai, Deputy Director, International Cooperation Department---

[email protected] 3. Ms Le Thi Thuy Trang, Officer, International Cooperation Department 4. Mr Le Van Hung, Deputy Director, Financial and Accounting Department 5. Ms Le Huong Giang, Officer, Financial and Accounting Department


315

6. Ms Le Thi Thu Trang, Trusted Project Management Unit 7. Ms Le Huyen Van, Officer, International Cooperation Department 8. Ms Tran Thi Thu Hien, Officer, International Cooperation Department-

[email protected]

Central People’s Credit Fund (CCF) 1. Mr Nguyen Huu Dung, Vice General Director 2. Mr Nguyen Thac Tam, Director, International Cooperation Department-

[email protected] Rabobank Mr. Bjorn Schrijver, Project Manager, Rabo Development / [email protected] Vietnam Association of People’s Credit Funds (VAPCF) 1. Mr. Tran Quang Khanh, Chairman 2. Ms. Vo Minh Huong, Standing Vice Chairwoman—[email protected] 3. Mr. Bui Chinh Hung, Vice Chairman, Director of Informatic and Technology Development

[email protected] 4. Tran Thu Huong, Officer of International Relation Division JFPR 9140-VIE Consultants 1. Dr. Aristotle Alip, Team Leader 2. Ms. Evelyn Leviste, Microfinance Training Specialist RIMANSI Organization for Asia and the Pacific Epifanio A. Maniebo, Chief Executive Officer

International Labor Organization (ILO) 1. Ms. Ngo Thi Loan, National Coordinator for Microfinance 2. Ms Dinh Thi Thuy, Vice Head, Social Policy Division, Department of Social Welfare,

Ministry of Labour, Invalids and Social Affairs (MoLISA) 3. Mr. Dong The Hung, Head, Department of Social Welfare, MoLISA

Japan International Cooperation Agency (JICA) 1. Mr Okamura Kenji, Representative 2. Ms. Trieu Thi My Chau, Program Officer, Economic Development Japanese Embassy Mr Fujiyama, First Secretary


316

Agence Française de Développement (AFD) 1. Mr. Yann Martres, Deputy Director 2. Mr Christen Chaukin, Project Officer, Finance Unit World Bank 1. Mr Sameer Goyal, Senior Finance Sector Specialist 2. Ms. Xiaolan Wang, Senior Operation Officer 3. Mr Trieu Quoc Viet, Financial Sector Specialist International Finance Corporation (IFC) 1. Ms Margarete O. Biallas, Program Manager, Access to Finance ADB Resident Mission 1. Mr Ayumi Konishi, Country Director 2. Ms Chu Thi Hong Minh, Financial Sector Officer


317

LIST OF PEOPLE MET IN THE FIELDTRIP Soc Trang Province State Bank of Vietnam, Soc Trang Provincial Branch

1. Ms. Nguyễn Thanh Hương, Deputy Director 2. Mr. Trương Công Kích, Deputy Inspector

Vietnam Bank for Social Policy, Soc Trang Provincial Branch

1. Mr. Dương Đình Lạng, General Director, Vietnam Bank for Social Policy in Soc Trang 2. Ms. Quách Thanh Vân, Officer, Credit and Capital Planning Department, Vietnam Bank

for Social Policy in Soc Trang 3. Mr. Mai Dương, General Director, Vietnam Bank for Social Policy in Long Phu 4. Trần Nguyễn Khoa Đăng, Head of Credit and Capital Planning Department ,Vietnam

Bank for Social Policy in Long Phu

Vietnam Bank for Agriculture and Rural Development, Soc Trang Provincial Branch 1. Mr. Lưu Trung, General Director 2. Ms. Trương Thị Kim Phượng, Head of Accounting and Treasury Department

Central People’s Credit Fund, Soc Trang Provincial Branch 1. Mr. Lê Văn Chơn, General Director 2. Mr. Đặng Trung Kiên, Head of Credit and Capital Planning Department 3. Ms Trần Thị Xuân Hồng, Head of Administration and Personnel Department 4. Mr. Trương Thanh Tùng, Head of Accounting and Treasury Department

Truong Khanh People’s Credit Fund PCF in Soc Trang

1. Mr. Lâm Quốc Lễ, General Director 2. Mr. Nguyễn Ngọc Thuận, Officer, Credit Department

Women’s Union, Soc Trang Province 1. Ms. Lý Thị Sẩm, Vice President of the Provincial Women's Union 2. Ms. Phạm Thanh Hương, Head of Family and Society Department

Commune People’s Committee, Truong Khanh Commune, Long Phu District 1. Mr. Dũng, Head of People’s Commune, Truong Khanh Commune 2. Ms. Bé Tư, Vice President of the District Women's Union, Truong Khanh Commune

VBSP clients

1. Mr. Lâm Ngọc Chiến, Farmer ,Trường Hưng hamlet, Truong Khanh Commune 2. Mr. Hà Công Tường, Farmer, Trường Hưng hamlet, Truong Khanh Commune 3. Mr. Tô Văn Hải, Farmer, Trường Hưng hamlet, Truong Khanh Commune


318

Non-clients

1. Ms. Nguyễn Thị Hiếu, Truong Khanh Commune 2. Ms. Nguyễn Thị Nguyên, Truong Khanh Commune 3. Ms. Nguyễn Thị Lợi, Truong Khanh Commune

Vinh Phuc Province Vinh Phuc Provincial SBV 1. Mr. Khanh – Chief division, general office CCF Branch of Vinh Phuc 1. Mr. Thanh – director of CCF’ branch VINH PHUC 2. Mrs. Nguyen Hoang Hanh – chief division, business department 3. Mr. Binh – chairman of BOM – PCF Thanh lang 4. Mr. Luu Tuan Dao – director of PCF Thanh Lang VBSP 1. Mr. Quy – Director of VBSP’s branch VINH PHUC 2. Mr. Nguyen Kim Thanh – chief of division – plan and credit department of VBSP’s branch

VINH PHUC. 3. Mrs. Nguyen Thi Ha – chief of division – Binh xuyen district transaction department of VBSP’s

branch VINH PHUC VBARD 1. Mr. Nguyen Tien Dung – director of Binh xuyen district VBARD branch. 2. Mr. Tuan – vice director 3. Mrs. Hien – vice director TYM 1. Mrs. Trinh Thanh Huong – director of Area No.2 TYM Vinh phuc 2. Mrs. Nguyen Hong Thuy – chief of branch No. 3 TYM Phuc Yen 3. Mrs. Vinh – loan cell People Committee 1. Mr. Nguyen Cong Tuan – deputy chairman of Thanh lang commune people’s commitee. Women’s Union 1. Mrs. Lieu – chairman of Thanh lang commune woman union


319

Borrowers and non-borrowers 1. Mrs. Tam - Dong sao, Thanh lang, Binh xuyen, Vinh phuc 2. Mrs. Ninh – Doan ket, Thanh lang, Binh xuyen, Vinh phuc 3. Mrs. Vinh – Minh luong, Thanh lang, Binh xuyen, Vinh phuc 4. Mr. Vinh – Trung trac, phuc yen, vinh phuc 5. Mrs. Mai – Trung trac, phuc yen, vinh phuc 6. Mr. Nam – Thanh lang, binh xuyen, vinh phuc 7. Mr. Tam – Yen lac, tam hong, vinh phuc 8. Mrs, Hoa - Yen lac, tam hong, vinh phuc Quang Binh Province SBV - Provincial Branch of Quang Binh 1. Mr. Truong Van Thanh, the Manager of Research Department 2. Mr. Tran Ngoc Ha, Deputy Manger of Research Department

VBSP – Provincial Branch of Quang Binh

1. Mr. Nguyen Huu Luong, Director 2. Mr. Nguyen Van Tai, Deputy Director 3. Ms. Tran Tam Hien, Accountant

VBSP – Dictrict Branch of Bo Trach 1. Mr. Hoang Chinh Chien, Director

VBARD – District Branch of Bo Trach

1. Mr. Le Chi Khanh, Director 2. Ms. Nguyen Thi Kieu Huong, The Manager of Business Dep.

CCF – Provincial Branch of Quang Binh 1. Mr. Nguyen Van Hai, Director 2. Mr. Vo Van Tho , The Manager of Business Dep. 3. Ms. Nguyen Thi Nghia, Credit Staff PCF Branch of Van Trach, Bo Trach province

1. Mr. Huynh Nam Truong, Chairman of Board 2. Mr. Hoang Thanh Trac, Director

NGO MFIs in Quang Binh 1. Ms. Phi Thi Minh Chau, Chairman 2. Ms. Nguyen Thi Hong, Vice Chairman 3. Ms. Le Thi Hanh, Deputy Family and Society Department


320

People’s Committee of Hung Trach Commune 1. Mr. Tran Van Thai, Chairman of People’s Committee 2. Ms. Nguyen Thi Hien, Chairman of Women Union

Women Union of Hung Trach Commune, Bo Trach District 1. Nguyen Thi Hien, Chairman of Women Union 2. Le Thi Loan, Vice Chairman of Women Union

VBSP Clients (Group of 5 clients) 1. Ms. Le Thi Tan – Nam Giang Hamlet 2. Ms. Hoang Thi Canh – Khuong Ha 4 Hamlet 3. Ms. Bui Thi Khuong – Khuong Ha 4 Hamlet 4. Ms. Nguyen Thi Lan – Tay Giang Hamlet 5. Ms. Do Thi Yen – Đong Giang Hamlet

Non-clients of VBSP (group of 5 people)

1. Ms. Nguyen Thi Hien – Khuong Ha 2 2. Mr. Le Thanh Hai – Khuong Ha 1 3. Mr. Nguyen Xuan Hiep – Tay Giang 4. Ms. Hoang Thi Chau – Khuong Ha 2 5. Ms. Tran Thi Huong – Khuong Ha 2

Annex 9Page 321

MF Sector Assessment

VND USD VND USD VNDINSTITUTIONAL CHARACTERISTICS Unit From VBSP financial data From Mix Mix (VND/USD=19000)Age year 15 8Assets VND 8,102,885,421,134 426,467,654 110,266,787,461,766 4,026,350,447 76,500,658,493,000 Offices 26 677Staff people 1265 8000 8,370FINANCING STRUCTURECapital/asset ratio % 16.9 12.76 22.25%Commercial funding liabilities ratio % 89.5Debt to equity ratio % 479 1162 3.49Deposits to loans ratio % 89.5 1.55 5.53%Deposits to total assets ratio % 41.7 1.51 5.40%Portfolio to assets ratio % 46.6 97.58 97.58%OUTREACH INDICATORNo. of active borrowers 36269 7,800,000 7,536,960Number of loans outstanding loans 36269 7,536,960 7,536,960Gross loan porfolio VND 3,774,546,139,855 198,660,323 72,414,418,000,000 3,929,035,635 74,651,677,065,000 Average loan balance per borrower VND/people 104,070,863 5,477 9,315,411 521 9,899,000 Average loan balance per borrower/GNI per capitatime 5.19 46.47 49.54%Average outstanding balance VND/loan 104,070,863 5,477 9,640,519 521 9,899,000 Average oustanding balance/GNI per capita time 5.19 48.09 49.54%Voluntary deposits VND 3,377,362,394,768 177,755,916 1,124,770,756,629 217,231,898 4,127,406,062,000 OVERALL FINANCIAL PERFORMANCEReturn on assets % 0.53 0.23 -1.84%Return on equity % 3.80 2.63 -7.46%Operational self-sufficiency 104.65 104.66 76.24%

REVENUE INDICATORSFinancial revenue ratio % 10.54 3.29 5.91%Profit margin % 9.38 0.06 -31.16%Yield on gross loan portfolio (nominal) % 22.92 0.05 5.91%Yield on gross loan porfolio (real) % 0.15 -0.02 -0.99%EXPENSESTotal Expense/Assets % 9.70 7.63 7.75%Financial expense/assets % 6.61 12.00 0.00%Operating expense/assets % 3.01 2.61 7.09%Personnel expense/assets 1.70 1.72%Administrative expense/assets 0.37 5.37%

VBSPCCFINDICATORS OF PCF AND VBSP ACCORDING TO THE MIX STANDARD, 2009

Annex 9, page 322MF Sector Assessment

EFFICIENCYOperating expense/loan portfolio 0.06 0.03 7.32%Personnel expense/loan portfolio 0.02 1.78%Average salary/GNI per capita 6.82 7.26Cost per borrower 35 665,000 Cost per loan 5904340 223776 35 665,000 PRODUCTIVITYBorrowers per staff member 28.67 975 900Loans per staff member 28.67 942.12 900Borrowers per loan officer 99.10 3,326Loans per loan officer 99.10 268.5 3,326Voluntary deposit per staff member 268.5Personnel allocation ratio 0.29 27.07%RISK AND LIQIDITYPortfolio at risk >30 days % 2.92Portfolio at risk>90 days % 0.66 0.99Write-off % 1.15 0.34Non-earning liquid assets as a % of total asset% 13.40 0.34 0.34%


323

ANNEX 10

Results of Rapid Field Survey of People’s Credit Fund (PCF) Lam Dong Province

(Conducted by ADB TA 7499-VIE Consultants)


324

Results of Rapid Field Survey of People’s Credit Fund (PCF) Lam Dong Province (conducted by ADB TA 7499-VIE Consultants)

1. A rapid assessment of representative PCFs in Lam Dong Province was done to have

insights on the typical operations and governance of PCFs 2. Shown below is the profile of the three (3) PCFs (out of 18 presently operating in

the province of Lam Dong), visited by the ADB TA team (the Team). The PCFs were selected in terms of asset size and comprised the largest, medium/average size, and the smallest in the province. Incidentally, Lien Nghia PCF is reportedly the second largest PCF in Vietnam.

Profile of PCFs Surveyed

As of 31/07/2010 (Unit: Million VND) Lien Nghia PCF Lien Hiep PCF Lien Dam PCF

1. Year of establishment 1995 1995 1996 2. Total assets 261,069 105,506 17,238 3. Deposits 235,903 58,197 7,017 4. Capital 12,587 4,460 1,344 5. Regular capital contributing or “core”

members 42 42 20

6. Maximum capital contribution 320 200 270 7. Minimum capital contribution 10 10 2 6. Outstanding loans 184,860 82,095 14,785 7. Total members (cumulative borrowers) 9,546 3,826 1,952 8. Number of current borrowers 3,500 1,485 592 9. Number of current depositors 3,000 700 100 10. Number of member depositors 1,500 600 90 11. Number of non-member depositors 1,500 100 10 12. Number of staff 25 12 6

3. From the above data and information gathered during the Team’s meetings with

the PCFs, the following are the Team’s conclusions and observations:

a. The number of regular or “core” members (capital contributing members) remained very low despite the PCFs 15 years of existence;

b. The likely reasons for the low regular membership base are the following:

(i) deliberate on the part of the regular members to limit the number of

regular members, for fear of dilution of their ownership (regular members have the sole right to be Directors of the Board (BOD) that sets the rules of entry for “core” members;

(ii) cumbersome approval procedure to become regular members e.g.

requires BOD, SBV, and People’s Committee approval, among others;


325

(iii) relatively high level of minimum capital contribution (each PCFs determines the minimum floor for regular capital contribution, while the minimum amount of contribution to avail of loans from the PCFs has remained to be at 50,000 VND)

(iv) absence or lack of compelling reason and incentive for the borrowing

members to support the PCFs capital, deposit, and other financial services growth. Likewise, members are reluctant to contribute capital, for fear that they cannot anytime withdraw their membership capital, for capital contributions have a lock-in period (in a typical cooperative, members are allowed to withdraw anytime their membership capital, but payment subject to purchase and payment of the capital withdrawn by other remaining members),

c. The above observations clearly shows the main reasons for the PCFs’ inability

to raise equity to meet the minimum prudential standards of SBV (industry capital adequacy ratio - without the risk weights - stood at around 5% at end 2009);

d. The number of members of the PCFs as reported needs to be revisited,

since the survey clearly showed that the number of members being reported annually appears to be the cumulative number of accounts, promissory notes; or number of borrowers through the whole existence of the PCFs (contributing the minimum equity to qualify as borrowers). Likewise, from the above table, the team noted that the number of depositors and borrowers appear to be relatively low compared with the data on “membership”, showing that many of those who became members had only the intention to borrow and eventually turned out to be inactive members.

4. The Team proposed to the PCFs visited that in order to achieve economies of scale for viability, the PCFs should be: (i) merged and/or consolidated to be able to operate in several communes or within the district level, and (ii) that entry of other regular members be liberalized. The following are the comments and reactions in general of the PCFs visited:

a. The PCFs agreed in principle with the Team’s proposals on PCFs mergers

and/or expansion of operational coverage, as well as membership liberalization in order to attain operational efficiency and to be able to raise enough funds for the vital capital investments needed (e.g., information technology) that will improve the PCFs’ services, viability and competitiveness;

b. Two of the PCFs have pending application with the SBV to operate outside of

their assigned communes; and, c. The benefits and advantages of PCF merger and/or consolidation shall have to

be clearly spelled out to the PCF membership. Likewise, the impact and distribution of asset valuation or valuation increment among members of the PCFs’ fixed assets (e.g. land and building) should be clearly stipulated.


326

5. Another major observation is that the core banking (IT) system of the PCFs are not standardized and were provided by any of the following: the CCF Headquarter, the CCF Lamdong Branch that developed the system in-house; or by SBV.


327

ANNEX 11 THE BANKING ACADEMY


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THE BANKING ACADEMY

The Banking Academy1 is a state institution governed by the State Bank of Vietnam and the Ministry of Education and Training, and supervised by local authorities. Its headquarters is in Hanoi, with two branches in two provinces (Bac Ninh and Phuyen ) and a training centre in Sontay Province. The operation and direction of the Banking Academy is managed by a Directorate composed of five (5) members, appointed by the SBV Governor.

The academy’s mandate include among others, the following: (i) train human resources of all levels including professional, higher, and post graduate courses in the field of monetary policy, credit and banking; (ii) conduct research in technology and banking laws, rules and regulations; and (iv) perform other tasks and functions assigned by the State Bank Governor.

Established in 1961 as the “Hanoi Banking College”, and with 50 years of existence, the academy has trained around 100,000 students in all levels and have greatly contributed to the growth and development of the banking sector in Vietnam. Many of its graduates became prominent officers and staff of the banks not only in Vietnam, but also in banks operating in Laos and Cambodia.

The Banking Academy offers full-time and part time courses in finance, banking, accounting, auditing, and business administration. Likewise, it offers short courses to the staff of banks and state owned enterprises, who would like to deepen or update their knowledge and expertise in banking and finance. These short courses may run to several months and the range of topics, which is tailored to the requirements of the participants, typically covers the following: (i) Commercial Banking; (ii) Central Banking; (iii) Bank Accounting; (iv) Corporate Accounting; (v) Corporate Financial Management; and (vi) Stock Markets.

To achieve its mandate, the academy established the following: (i) The Banking Research Institute, which conducts research and publishes the Banking Science and Training Review (a monthly periodical); (ii) Training Centres, which conduct short term training courses and vocational training in Banking, Accounting, Finance, English, and Information Technology (IT); (iii) Centre for Information and Libraries, which provides materials and references for training; library system management, publication of books, and information exchange and international cooperation; and (iv) The “Mock Bank” Centre, which is supported by training materials and references from the World Bank and other financial institutions, provides students professional and practical skills on auditing, banking administration, and enterprise accounting.

1Banking Academy 2009 Annual Report


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Finally, the Banking Academy implements jointly and in cooperation with foreign partner institutions the following programs and activities: (i) Train-the-trainer program financed by SECO (Switzerland) and VVOB Project (Belgium); (ii) Higher Education Project funded by the World Bank; (iii) Joint-Program with Tyndale Education Group of Singapore, Edexcel and University of Sunderland, UK towards a degree in Banking and Finance; (iv) Joint-Program with Banking Academy of Lao for the Master’s Degree in Banking and Finance; and (v) A project with the University of Birmingham to open a Master Training Program in Banking and Finance.

THE BANKING ACADEMY, AN OPTIMUM OPTION TO BE THE TRAINING AND RESEARCH “HUB” FOR MICROFINANCE

The integration of microfinance-oriented institutions under the new Credit Institutions Law – namely, the formalized MFIs, People’s Credit Funds (PCFs) and cooperative banks – requires these to have the same discipline and rigors of all formal credit institutions. On the other hand, commercial banks that are already part of the formal banking system (such as VBARD), may opt to downscale some of their operations to effectively serve the microfinance market that has long been proven as a viable opportunity area while being underserved by the formal sector. Notwithstanding their microfinance orientation, the capacity-building and training needs of these entities will still primarily focus on their having core banking competence and knowledge to properly function as formal financial institutions in a highly regulated industry; and secondarily to acquire the special skills and knowledge to effectively serve the microfinance market. Moreover, the microfinance industry will increasingly become more complex and competitive with its mainstreaming into the formal financial sector; the advent of technology-based products and services that allow cost-effective rapid expansion to a mass-based market; as well as concerns on safety and stability in the overall financial sector. Thus, microfinance-oriented credit institutions will require skills and knowledge beyond that of traditional MFIs that merely focused on honing their competence on “best and proven practices” in microfinance (e.g., women-oriented organized lending).

Among the existing and potential (or planned) capacity-building service providers in Vietnam, the Banking Academy by far possesses the optimum comparative advantage to be the training and institutional strengthening hub for the key players in the microfinance industry, given the following:

(i) its mandate as the training and research institution for the banking industry

(ii) the full support and direction given by SBV

(iii) existing infrastructure and facilities of a sizable, regular university/academy, with 3 branches and a distance learning program

(iv) about 500 faculty members

(v) an annual average of 20,000 students that can be the pool of management & staff for FIs, including those that may opt to have microfinance operations


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(vi) its coverage of common core-knowledge training needs of credit institutions, that now include the formal MFIs and cooperative credit institutions

(vii) it will need only minimal adjustments in its curricula and short-term courses, as well as relatively marginal investments in infrastructure and facilities to accommodate the unique capacity-building needs of microfinance-oriented credit institutions based on their respective business models, such as PCFs, NGO-MFIs, cooperative banks, commercial banks; as well as of other stakeholders, such as supervising and oversight entities, policy-makers, etc. for the microfinance industry

The Banking Academy need not be a stand-alone service provider but can be a “hub” with several similar capacity-building providers. Together with its partner institutions, it must aim for creating a demand-driven, self sustaining capacity-building infrastructure for the microfinance industry. It may do this through the following:

(i) designing and conducting its microfinance-related training, research, and the institutional development activities in collaboration, or in joint undertakings with: (a) other universities, colleges; existing reputable microfinance training and capacity-building providers; and (b) model PCFs, MFIs, cooperative bank and commercial banks, that may provide on-site, on-the-job training This will be especially useful in areas where the Banking Academy does not have the presence, outreach, facilities, or particular expertise to address the specific capacity building need and requirements of a key player or network of players in microfinance;

(ii) taking the lead in develop its curricula and training courses based on periodically conducted/updated training and capacity needs/gaps analysis of key players in the sector, to ensure relevance and demand-driven capacity-building support;

(iii) training and developing a core of faculty within the academy and its partner universities, and a core of on-the-job / on-site trainers involving practitioner-trainers from among its partner credit institutions (e.g., PCF, MFI, cooperative bank or commercial bank) to provide both formal and hands-on training on the various topics and aspects of microfinance;

(iv) in collaboration with its partners, conducting fee-based academic/classroom type training and on-site, on-the-job and hands-on training for credit institutions and stakeholders;

(v) networking with reputable regional and international training centers and capacity-building providers in microfinance to ensure up-to-date knowledge-based information exchanges;

(vi) developing the capability to raise and manage resources from commercial or donor sources to ensure sustainability in providing the services

ANNEX 12

Proposed Key Elements of the Microfinance Strategy and

Indicative Timelines

ADB TA 7499-VIE: Developing the Microfinance Sector Project

ANNEX 12 Proposed Key Elements of the Microfinance Strategy

and Indicative Timelines

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Proposed Key Elements of the Microfinance Strategy and Indicative Timelines

ADB TA 7499-VIE: Developing the Microfinance Sector Project

A. Rationale and Overview for Developing the Microfinance Sector 1. Sector Vision A microfinance industry providing financial services to the poor, low-income people, micro and small enterprises- wherever they are- and with outreach in all the hamlets, communes, districts, provinces, and with apex organization(s) at the national level. 2. Sector Mission A microfinance industry offering broad range of appropriate financial products and services at reasonable cost, to its target clientele, including savings, short and long-term credit, leasing and factoring, mortgages, insurance, pensions, payments, money transfers and remittances. Financial products and services shall be offered at market terms and rates, and will be differentiated not in terms of price but in terms of quality, range of services and efficiency in providing these (and not subsidy, regulatory relief, or undue advantages provided by government), 3. Main Thrusts of the Proposed Project for Developing the Microfinance Sector Recent progress in policy and regulatory reforms in the financial system, notably the passage of the new Credit Institutions Law (CIL) that integrates the microfinance into the formal financial system, the liberalization of lending interest rates, and work-in-progress of Government in formulating a comprehensive microfinance strategy and roadmap for the next decade have vastly improved the policy and regulatory framework conducive to the development of a robust and responsive microfinance sector. In view of this, the proposed Microfinance Sector Development Project (“the Project”) that will be designed under ADB TA 7499-VIE is envisioned to help Government in providing support for ensuring that key elements of the overall MF strategy will be achieved. Among the major thrusts for the Project will cover:

(i) capacity-building and institutional strengthening needs of the major microfinance providers in the Sector, such as: VBSP, CCF-PCF, the semi-formal and formalized MFIs, and (to a lesser extent) VBARD in order to improve their efficiency and effectiveness in providing a range of sustainable, quality, and responsive financial services to the microfinance market;

(ii) capacity-building and institutional strengthening needs of SBV and other entities with policy-making and oversight functions (e.g., MOF) in order to fine tune the new CIL and other ensuing decrees and implementing guidelines in order to ensure the proper implementation of the policy and regulatory environment conducive to the growth, stability and safety of the microfinance sector;



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(iii) setting up appropriate and supportive infrastructure for the MF sector, such as: • specialized training facilities and programs for MF players – in cooperation with

established training institutions, such as the Banking Academy in alliance with the major MF players and other training entities;

• setting up a localized, cost effective credit information exchange for MF clients to avoid over-financing and to rationalize micro-credit delivery;

• Setting up of adequate information system infrastructure, such as standard chart of accounts, performance monitoring, audit and examination, as well as IT enhancements for these.

(iv) developing and implementing an information, education and communications (IEC) program – including advocacy – for the various players and cooperating entities (e.g., mass organizations, People’s Committees) to ensure a unified vision and common understanding among stakeholders of basic principles and/or good practices in developing a robust market-based, sustainable, and responsive microfinance sector.

B. Proposed Key Elements of the Strategy by Major Players and Timelines 1. State Bank of Vietnam 1.1 Key Element 1: Setting up and Implementing the Regulatory and Supervisory

Policies and Guidelines for the Microfinance Sector by end 2011

a) Completion of implementing rules and regulations applicable to microfinance service providers, i.e., formal MFIs, PCFs, and cooperative banks as prescribed under the new Credit Institutions Law (CIL); and those for VBSP (under Article 17 of the CIL), and the semi-formal MFIs “under transition” (under Article 161 of the CIL), to cover among others:

• develop and refine supervisory and regulatory measures, including on-site and off-

site supervision of formal and semi-formal MFIs; • improve and facilitate the licensing procedure, including the application of the “fit

and proper rule” to directors and key officials of MFIs, PCFs and cooperative banks;

• completion of the implementing rules for PCFs to engage in mobilizing deposits and extending loans to non-members consistent with widely-accepted principles and practices of financial cooperatives

• finalizing the guidelines for foreign and domestic capital, number and distribution of ownership, restrictions on network structure and geographic boundaries of MFIs

• finalizing the implementing guidelines for electronic banking that maybe applicable to microfinance-oriented credit institutions



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b) Setting up and rolling out of accounting and prudential standards for: VBSP,

CFF/Cooperative Bank; the expanded PCFs; and the semi-formal and formalized MFIs, and other microfinance-oriented credit institutions (MOCI) to cover: • Chart of accounts prescribed by MOF and consistent with the generally

accepted principles and universally accepted accounting standards; • Prudential and performance standards based on local and universal standards

and good practices (e.g., CGAP, WOCCU, etc); • Reporting systems to enhance supervision and examination (e.g., MOF, SBV) • Risk Governance and Management Policies and Framework • Audit standards and the accreditation of external auditors for MFIs and PCFs

c) Streamlining and improving the conduct of on-site and off-site examination of MFIs

and PCFs, including IT enhanced information gathering and reporting. d) Conduct of capacity building and training needs analysis of SVB, especially for BSA

and provincial/regional supervision and examination units in charge of MOCIs (particularly for MFIs and PCFs); and designing of continuing or demand-driven capacity-building for SBV and the concerned units/department (in coordination with Banking Academy or other cooperating entities)

e) Implementing the capacity-building and training of the desired number of supervisors

and examiners to specialize in microfinance-oriented credit institutions 1.2 Key Element 2: Enhance the effectiveness, efficiency, responsiveness and

viability of microfinance-oriented credit institutions within the period 2012 - 2013

a) Study, design and propose incentives schemes for the promotion and growth of the microfinance sector, such as tax exemptions or tax holidays to: encourage mergers and/or consolidation of MFIs; setting up and/or merger of PCFs; serving ethnic minorities and remote areas; or fiscal support for capacity-building and/or IT enhancement, etc.

b) Conduct a thorough study and assessment of the semi-formal/formal MFIs to:

• determine feasibility and requirements for possible MFI merger and

consolidation, and design the detailed implementation plan for such (if determined as an optimum option), including designing an information, education and information (IEC) program to promote this in coordination with cooperating entities (e.g., mass organizations, MFI Working Group);

• conduct of capacity-building and training needs analysis; and design of a continuing demand-driven capacity-building program for MFIs with cooperating entities (Banking Academy, mass organizations, MFI Working Group);

• implement training programs and capacity building activities for formal and semi-formal MFIs (including the merged entities) based on identified needs



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c) Finalize detailed plans and implementing the strategy for consolidating and merging

commune level PCFs, as well as the creation of new ones, to have about 500 PCFs with district level (or larger) coverage . This should include:

• drafting of standard of articles of cooperation and by-laws for the expanded PCF; • improving the ownership and equity structure of the PCFs to promote maximum

and active participation of members, especially from poor and low-income households - and not only limit this to “core” or “chartered members”;

• conduct of capacity-building and training needs analysis; and design of a continuing demand-driven capacity-building program for PCFs with cooperating entities (Banking Academy, mass organizations, VAPCF, CCF/Coop bank);

• implement training and capacity-building interventions for the merged PCFs and/or enlarged PCFs

• develop and implement an information, education and information (IEC) program to promote the merger and consolidation of existing commune level PCFs (in coordination with cooperating entities, e.g., mass organizations, CCF, VAPCFs)

1. 3 Key Element 3: Develop Exit Strategy for Government from the Coop Bank and its

equitization to PCFs within the period 2015 – 2020 a) conduct assessment of various options and finalize implementation of long-term

strategy for SBV/Government exit as the majority owner of CCF including ways and means to raise capital from among the member-owner (expanded) PCFs;

b) If approved by the proper authorities, implement the equitization plan of the

Cooperative Bank to the member PCFs 2. MFI Working Group 2.1 Key Element 4: Strengthening the capacity of the MFI Working Group to effectively

support the interest of semi-formal and formal MFIs within 2011

a) Improve and upgrade the capacity of the MFI Working Group to provide:

• conduct effective advocacy and represent the MFIs’ view and interest among Government policy-makers

• Set up an efficient, cost-effective and responsive information exchange and networking system among local MFIs and with reputable international MFI to enhance and update the knowledge base of member MFIs.

• effectively mobilize resources from MFI-members and donors to sustain its activities

3. CCFs and PCF Network /VAPCF 3.1 Key Element 5: Conversion of CCF into Cooperative Bank by end 2012

a) Design the implementation plan for conversion of CCF into a coop bank, in order to:



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• Determine the banking functions, financial products and services it may offer to

strengthen and make competitive the network of PCFs, such as investment and deposit facilities, liquidity financing, payments and remittance systems and micro-insurance;

• Design and implementation of IT enhanced core banking operations of the cooperative bank (CCF) and its connectivity – as a hub - among cooperating PCFs in order to provide competitive services to members

• conduct of capacity-building and training needs analysis for the CCF conversion into a cooperative bank and design of a continuing demand-driven capacity-building program with cooperating entities (Banking Academy, SBV, VAPFC);

• implement training and capacity-building interventions for the conversion of CCF into a Cooperative Bank

3.2 Key Element 6: Rationalize the functions and strategy of CCF/coop bank and that

of VAPCF to optimize cost-effective support for PCFs by end 2011

a) Assess and rationalize of the plans and strategy of CCF and VAPCF to avoid overlaps and to create synergy within the CCF/Coop Bank – VAPCF/PCF network

b) Identify improvement of the functions of VAPCF to: (i) determine its appropriate

functions as an association to represent and advocate the interests of the PCFs; (ii) set up cost-effective and responsive information and knowledge exchange amongst PCFs and with international network of financial coops; (iii) effectively mobilize resources to sustain operations, including possible conduct of fee-based services supportive of PCFs’ operations that will create synergy, while avoiding duplication of functions that may be more appropriately performed by other entities (e.g., cooperative bank or Banking Academy)

4. MOF, MPI (in collaboration with VBSP Working Group, where applicable) 4.1 Key Element 7: Enhance the operations of VBSP towards effective delivery of a

range of microfinance services and reduce dependence on Government mobilized funds or subsidies by end 2012

a) Assess policy lending products and target groups to:

• Determine those that will still need continued Government subsidy and funding

support as investment for the public good (e.g., student loans, water and sanitation, ethnic poor in remote areas); and options for treatment of such portfolio by VBSP (e.g., as off-balance sheet portfolio on a fee-based arrangement with Government for managing such);

• Determine those that maybe “graduated” or elevated for market-based microfinance servicing, such as loans for poor and low-income households, especially for their livelihood and microenterprise activities (note: considering the marginal benefit of USD1.82/HH while imposing a heavy fiscal burden to Government);



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• Amend Decree 78 for revised policy-lending and market-based operations of

VBSP

• Implement the new policy-lending schemes and the conversion of other policy-lending products into market-based lending programs based on the assessment;

b) Enhance VBSP’s capacity to offer a wide array of financial services to include:

• review and revision of loan products in terms of tenor and repayment schedule to improve VBSP’s cash flow and mitigate its liquidity risks, as well as to ease the repayment burden of poor HH;

• developing appropriate savings products as an added service to its clients and to reduce dependence on Government-mobilized funds;

• developing fee-based services to its clients and improve its viability, such as payment and remittance services, micro-insurance;

• assessment of various available and feasible options for VBSP to further expand its market reach potential thru the use of advanced IT or in partnership with existing technology service providers.

c) Implementation and rolling out of VBSP’s Accounting System consistent with the

requirements of Government, SBV, and international accounting standards, including IT enhancement of its operations, control and MIS requirement;

d) Improving and streamlining VBSP’s Governance and Risk Management Policies

and Framework

e) conduct capacity-building and training needs analysis for VBSP and its CSGs; and design of a continuing demand-driven capacity-building program with cooperating entities (Banking Academy, mass organizations, SBV), based on new market-based lending programs for poor HHs and he remaining policy-lending programs;

f) implement capacity-building and training interventions for VBSP and CSGs under the

new policy-lending and market-oriented microfinance programs 4.2 Key Element 8: Enhancing the capacity of Credit and Savings Groups to be self-

sustaining and autonomous credit institutions by end 2015

a) Assess viable and acceptable options for the transformation of the existing credit and savings group (CSGs) to become formal credit institutions under the new CIL - such as their consolidation and conversion into PCFs owned and managed by its members; or as MFIs – providing self-sustaining microfinance services to the same community;

b) conduct capacity-building and training needs analysis for the conversion of CSGs

based on assessment above and design of a continuing demand-driven capacity-



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building program with cooperating entities (Banking Academy, mass organizations, SBV, VBSP);

b) implement conversion of CSGs and capacity-building / training interventions for such

based on the assessment, and also considering expansion strategy for PCFs; c) develop and implement an information, education and information (IEC) program to

promote the transformation of the CSGs (in coordination with cooperating entities, mass organizations, MOLISA and people’s committees, MOF, MPI, VBSP).

4.3 Key Element 9: Develop and Implement plan for a self-sustaining and autonomous

VBSP within 2015 - 2020

a) Study various viable and politically acceptable options for government’s medium to long-term exit of its dominance in ownership, management and control of the operations of VBSP, including its possible transformation to an apex/wholesale bank, or a cooperative bank that will be autonomous and self-sustaining (considering the expected reduction of policy-lending target groups, the lower poverty-level by 2015 and the transformation of the CSGs);

b) conduct capacity-building and training needs analysis for the conversion of VBSP

based on assessment above and design of a continuing demand-driven capacity-building program with cooperating entities (Banking Academy, MOF, MPI, SBV, VBSP);

d) implement conversion or transformation of VBSP and capacity-building and training

interventions for such conversion based on the assessment 4.4 Key Element 10: Develop incentive schemes and “smart subsidies” supportive of

microfinance promotion for entry of credit institutions by end 2012

Study, design and implement incentives schemes for the promotion and growth of the microfinance sector, such as tax exemptions or tax holidays to: encourage mergers and/or consolidation of MFIs; setting up and/or merger of PCFs; serving ethnic minorities and remote areas; or fiscal support for capacity-building and/or IT enhancement, etc.

5. AGRIBANK (VBARD) 5.1 Key Element 11: Enhance and expand microfinance services of VBARD, using its

competitive strength and advantage, starting from 2012

a) Assess, design and implement institutional or organizational options to expand microfinance services, such as: • downscaling of some of its operations and make microfinance as part of its

menu of banking products and services, being the biggest bank and with extensive presence and network in all districts;



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• setting up a subsidiary company or buying into existing microfinance institutions as a business strategy and model, following business models in the region

b) Design, develop, and roll-out of IT-enhanced microfinance services (e.g., mobile

banking, electronic payment and remittance services, etc.), including the setting up of a micro-insurance company

6. Banking Academy and Cooperating Entities 6.1 Key Element 12: Develop and enhance training and capacity-building infrastructure

for the microfinance sector by end 2012

a) assess various options and strategies to expand the capability and capacity of Banking Academy to provide specialized training, capacity-building and other support services (such as research, capacity-building needs assessment) for microfinance-oriented credit institutions in line with their integration under the new CIL;

b) develop options for making Banking Academy as a training “HUB” for the

microfinance industry, directly linked with other training entities (e.g., Banking University in Hanoi), SBV, the PCF network, MFI network, VBSP and its CSGs (or their converted entity) in terms of ownership, training arrangements (e.g., combining academic training with on-the-job / on-site training with model credit institutions) to provide key players demand-driven, responsive, fee-based capacity building services

c) on the bases of periodic and updated training needs and capacity-building needs

analysis of key microfinance players, develop curricula and training courses with partners and other cooperating entities to ensure relevance and demand-driven capacity-building support for key players;

d) set up the needed physical infrastructure and other requirements to set up training

facilities within its campuses and those of partner institutions that will focus on core-banking and specialized training / capacity-building for microfinance-oriented credit institutions;

e) train and develop a core of faculty within the academy and its partner

universities, and develop a core of on-the-job / on-site trainers involving practitioner-trainers from among its partner credit institutions (e.g., SBV, PCF, MFI, cooperative bank or VBARD/commercial bank) to provide both formal academic training and hands-on training on the various topics and aspects of microfinance;

f) in collaboration with its partners, conduct fee-based academic/classroom type training

and on-site, on-the-job and hands-on training for credit institutions and stakeholders;

g) network with reputable regional and international training centers and capacity-building providers in microfinance to ensure up-to-date knowledge-based information exchanges;

h) develop the capability to raise and manage resources from commercial or donor

sources to ensure sustainability in providing the services



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7. Cooperating Entities for setting up a localized credit information exchange system

(SBV, CCF/PCF network, VBSP, VBARD and People’s Committees 7.1 Key Element 13: Develop and Implement cost-effective localized and responsive

credit information exchange for microfinance by end 2012

a) Conduct study and design of a localized (commune or district-level), simplified, cost-effective credit information exchange for clients of various players in the microfinance sector to avoid over-lapping and over-financing among microfinance-oriented credit institutions serving the target clients;

b) Pilot-test and rolling out of the designed credit information exchange in pre-selected

areas (prior to nationwide replication)

c) Nationwide replication of the microfinance credit information exchange

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