The programmatic approach consists of two subprograms sequenced to support the government in developing a sustainable market-oriented microfinance along the line with the Vietnam Microfinance Development Strategy, 2011 2020, focusing on the: (i) creation of a supportive policy and regulatory environment; (ii) enhancement of the supervisory and regulatory capacities; (iii) strengthening of microfinance involved financial institutions; and
(iv) development of financial infrastructure. The proposed policy-based loan will support subprogram 2. The Country Partnership Strategy 2011 2015 of the Asian Development Bank (ADB) highlights the microfinance sector as a key area for ADB assistance.
|Project Rationale and Linkage to Country/Regional Strategy
ADB Special Evaluation Study on Microfinance Development Strategy found that as of 2010, Viet Nam attained a much higher penetration rate of 75% of microcredit delivery amongst the poor relative to comparable Asian countries. Microcredit outreach of the Vietnam Bank for Social Policies (VBSP) is remarkable having presence in 98% of 11,000 communes with almost 7 million borrowers, of which 50% are categorized as poor. VBSP has a dominant share of 67% of total microfinance borrowers and 65% of outstanding microfinance loans in 2010. The notably high outreach of microcredit delivery has, however, resulted in adverse impacts: (i) increased fiscal burden through financing operations and interest rate subsidies, and budget allocation to lending resources, making the system unsustainable; and (ii) uneven playing field with the state driven approach discouraging the entry and expansion of market-based financial institutions. With persistent budget deficit recorded since 2009, the sustainability of VBSP came at risk.
To address this risk, the government refocused microfinance as a formal banking service from a social protection tool in 2010. This policy change was a timely response to the rising demands of low-income household and microenterprise clients needing diverse financial services suitable to them. The new direction called for a sector wide reform aiming to transform the state-led credit delivery to a wider variety of market-driven financial services including savings, credit, remittances and insurance. It was against this background that the Vietnam Microfinance Development Strategy, 2011 2020 was formulated with ADB assistance and announced by the Prime Minister in December 2011. The national strategy provides a roadmap to a market oriented sector, relying more on the self-sustaining players in providing market based financial services, while the government providing an enabling environment through regulations and supervision, capacity development, and financial infrastructure supportive to microfinance. The implementation of the Vietnam Microfinance Development Strategy, 2011 2020 is guided by high level Microfinance Working Committee to provide policy advice and coordination to the microfinance development work plan.
On 5 July 2012, ADB approved Microfinance Development Program Programmatic Approach and $40 million policy-based loan for subprogram 1 and $0.5 million piggy-backed TA. It was the first full scale ADB assistance after over a decade long technical assistance in nurturing formal microfinance institutions (MFIs). The program supports the government's initiatives to develop a vibrant microfinance sector and improve access to formal financial services for the poor, especially in rural areas. It aims to promote a fair competition among diverse financial institutions, and support the market orientation in microfinance, thereby gradually reducing the government's direct involvement in microfinance operations.
Following the achievements in Subprogram 1, Subprogram 2 has continued to support the government in implementing the comprehensive microfinance sector reform by focusing on the 4 broad areas above, aiming to achieve self-sustaining operations and improved financial services, leading to greater financial inclusion, and deepened financial sector.