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MICROCAPITAL STORY: State Bank of Vietnam (SBV) to Give Legal Status to Semi-Official Microfinance Institutions (MFIs); Calls for the Establishment of the Vietnam Microfinance Association

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The State Bank of Vietnam (SBV) has given its approval to a proposal to change the status of Vietnamese organizations involved in ‘semi-official’ microfinance activities into officially recognized legal entities. According to a press release on the online financial news network Vietnam Business Finance. this move is an effort to help raise more funds for hunger eradication projects in Vietnam. Semiofficial microfinance activities are those included in projects that are sponsored by non-governmental organizations (NGOs) or mass organizations funded with budget capital or member contributions. According to the press release, such projects are generally successful in approaching poor customers. No information on the owners of Vietnam Business Finance is publicly available.

In comparison with other financial institutions, the market share of semiofficial microfinance activities in Vietnam is only about 5-6 percent of the total value of organizations involved in microfinance activities for the poor. According to this University of Birmingham paper on Sustainable Microfinance in Vietnam, the main weakness (p 57) of such organizations is that they are excluded from the legal framework to provide financial services. Hence for such organizations financial services cannot be provided as the main activity but only in combination with other activities. Further, organizations involved in ‘semi-formal’ microfinance activities also rely on subsidized sources of funding (p 57) and this impacts their financial sustainability. In this regard, the Deputy Head of the SBV Banks Department Mr. Truong Ngoc was quoted as saying that changing these organizations into those with legal entity status that operate under

business laws would provide them an opportunity to be on par with other institutions in terms of mobilizing capital in the market and providing better help to the poor. So far, the SBV has received three applications from organizations requesting a change of status into micro-finance institutions.

In addition to finalizing the legal procedures necessary to boost the development of the microfinance sector in Vietnam, the SBV has also voiced its support for the establishment of the Vietnam Microfinance Association. According to the press release, the association would protect the legitimate rights and benefits of micro-finance organizations in the region and would also coordinate with the SBV to lobby with the Government regarding issues that concern microfinance activities in Vietnam.

As per a 2007 World Bank estimate, Vietnam has a poverty rate of 19.6 percent with more than three quarters of the population and 90 percent of the region’s poor living in rural areas in Vietnam. Although microfinance has been identified as an important tool to address Vietnam’s long term goal of poverty alleviation, poor infrastructure including limited transportation coupled with lack of sufficient market data and know-how prevents effective outreach. According to this MicroCapital story. MFIs in Vietnam also struggle to attain profitability because of competition from government lending programs. These government programs offer highly subsidized loans to borrowers pushing the market’s interest rates below 20 percent and thus hinder the feasible expansion of private institutions and the microfinance sector in general.

By Bharathi Ram, Research Assistant

Category: Payday loans

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