Rural and Microfinance in the Lower Mekong Region. Robert M. Vogel
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Such technical assistance, based on international best practice experiences, is likely to emphasize the advantages of focusing on current clienteles—and the marketing techniques needed to do this successfully. Financial support for major upgrades of management information systems and information technology systems of MFIs may be needed for their operations and enhanced risk management. Of course, other activities could beneficially be undertaken such as a comprehensive rural finance survey to measure outreach and to support marketing of deposit services, along with further development of credit bureau capabilities.
For the Lao PDR, recommendations focus primarily on monitoring the major reforms recently begun (e.g., restructuring the Agricultural Promotion Bank, setting a proper course for the new Nayoby Bank, and implementing the recent decrees for credit cooperatives and MFIs) and especially strengthening these reforms as needed. In addition, a variety of other improvements could be promoted, including training and technical assistance for MFIs on best practices (provided in part through developing a strong coordinating entity), making credit bureaus more inclusive, strengthening and refocusing central bank regulatory activities (e.g., promoting risk-based supervision), and enhancing basic infrastructure such as accounting and auditing capabilities.
Introduction and Background
Objective
This study sought to examine the progress being made in rural and microfinance operations in the three Lower Mekong Region countries of Cambodia, the Lao People’s Democratic Republic (Lao PDR), and Viet Nam, using as a basis the standards set by international best practices. Particular attention was paid to the policy environment within which these operations existed, including regulatory norms and their implementation, as well as the existing financial infrastructure (e.g., credit bureaus, microfinance associations, a framework for the use of collateral to reduce the risks of lending, and the presence of international rating agencies). Special attention was also focused on the impact of this environment on the development and performance of rural and microfinance institutions. It was hoped that, ultimately, this examination would provide useful guidance to government officials and international development agencies on which types of interventions can be most supportive of an array of efficient and sustainable institutions that can provide financial products and services that are particularly attractive to the poor, especially those living in rural areas.
Methodology
The study reviewed recent literature (mainly since 2004) on rural and microfinance in the three countries, most of which had been produced by international development agencies, including the Asian Development Bank (ADB) and various components of the World Bank Group, such as the International Finance Corporation (IFC) and Consultative Group to Assist the Poor (CGAP). The authors also reviewed recent contributions to the literature on micro, rural, agricultural, informal, and small and medium enterprise finance in developing countries pertinent to understanding the situations in the three countries.
The authors then visited the three countries, each for an intensive period of 4 to 6 days, working with the assistance of a local partner in each of the three countries. These local partners arranged various meetings, first with the most relevant government agencies (central banks, finance regulatory agencies, and finance ministries) and then with the main rural and microfinance institutions, including public and private banks, microfinance institutions (MFIs), and cooperatives involved in finance. In addition, a brief standardized questionnaire was distributed to all rural and microfinance service providers in each of the countries. The questionnaire requested basic information on the entity (e.g., size as well as the extent of collaboration with institutions such as local governments and mass organizations) and detailed data on its deposits and loan portfolio. Overall, 17 rural and microfinance institutions in Cambodia, 13 in the Lao PDR, and 19 in Viet Nam responded to the survey questionnaire, a copy of which is attached as Appendix 1.
Based on the information gathered through the review of literature, interviews, and the survey, draft chapters covering each of the three countries were prepared and then reviewed by the local partner, government officials (e.g., from central banks) and by staff from some of the rural and microfinance institutions surveyed. The chapters were then reviewed and edited by the authors. At the same time, the two introductory chapters were written and reviewed. Finally, the concluding chapter was drafted. This chapter not only provides a summary of the study’s findings and recommendations but also highlights similarities and differences among the three countries, including their causes.
Scope of the Study
Microfinance in the context of this study is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households, and their microenterprises.1 Microfinance services are provided by three types of sources: (i) formal institutions, such as rural banks and cooperatives; (ii) semiformal institutions, such as nongovernment organizations (NGOs); and (iii) informal sources, such as moneylenders and shopkeepers. Institutional microfinance is defined to include microfinance services provided by both formal and semiformal institutions. MFIs are defined as institutions whose major business is the provision of microfinance services.
In microfinance, the importance of financial infrastructure for most operations is less obvious than for most types of formal finance because of the closeness of microfinance to informal finance in many aspects.2 More specifically, microfinance rarely relies on formal collateral to enforce loan collection because of the relatively high costs of formalization, although informal arrangements involving physical collateral can often be quite important. In addition, microfinance typically involves the use of cash rather than bank accounts. Thus, neither bank payments systems nor collateral registries are dealt with to any extent in the following chapters.
Meanwhile, in some countries, the presence of credit bureaus that cover a full range of financial operations has proven to be quite an important aspect of financial infrastructure in allowing microlenders to detect the extent of client indebtedness. In addition, specific infrastructure such as associations of microfinance entities or networks to provide training and technical assistance can facilitate more rapid development of the rural and microfinance sectors.3 Thus, discussions of financial infrastructure in subsequent chapters focus primarily on credit bureaus, along with associations and networks of entities providing specific support for rural and microfinance institutions, rather than infrastructure for collateralization or for the payments system. In the case of finance in rural areas, physical infrastructure such as roads, schools, and even health facilities can be far more important than financial infrastructure. However, any specific discussion of physical infrastructure is beyond the scope of the study.
The other two main issues dealt with are institutional development and market outcomes—specifically, the extent to which the development of rural and microfinance has contributed to the deepening of financial systems in general, especially since these two components of finance are typically seen as the most challenging. Thus, the study examines in some detail the extent to which various types of institutions (e.g., public and private banks, MFIs, and cooperatives) are reaching out to poor clients in rural areas.
Among the major issues in rural and microfinance that emerged are the policy environment and government interventions in financial markets; the development of the subsector at the macro, infrastructure (meso), and micro levels; and the key characteristics of successful institutions, including the design and delivery of their products and services. The most important findings of the study are the substantial differences in the development of rural and microfinance that have resulted from significant differences in the policy frameworks in the three countries and their impacts on the development of the institutions that provide micro and rural financial services. The study concludes with recommendations on the challenges to, and opportunities for, rural and microfinance in Asia, based on common trends and key differences among the rural and microfinance operations in the three countries studied.
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