Is microfinance an important instrument for poverty alleviation?The impact of microcredit programs on self-employment profits in Vietnam

Robert Lensink (co-authored with Thi Thu Tra Pham)

Department of FinanceFaculty of Economics and Business University of Groningen, the Netherlands

Microfinance and poverty reduction: rational› Channels by which microfinance may reduce poverty:

• Access to credit contributes to increase in income, accumulation of assets, diversification of income sources, better education and health etc.

› Empirical studies are ambiguous• Strong evidence: Dunford (2006), Littlefield et al.

(2003), Khandler (1998, 2003)• Modest evidence: Khandler (2005), Coleman (1999)

› How to measure the contribution of microfinance?• Which mechanisms?• Which income indicators?• Which impact evaluation methods

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This paper: Credit impact on rural household self-employment profits› Why rural? › Why profits?

• Coleman (1999): lack of access to productive capital is a main cause of poverty

• McKernan (2002): profits is a function of capital assets, human capital, land, input, output prices => credit affects profits by providing an additional capital asset

› Methods: • Impact of having access to microcredit: Compare

profits of eligible households and ineligible households

• Impact of using credit: credit is instrumented under both cross-section and panel framework

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Data

› Vietnam Household Living Standard Surveys 2004 and 2006 with information on household and commune characteristics

› VHLSS 2004 covers 9,189 households, 2,868 households use credit.

› VHLSS 2006 covers 9,189 households, 2,962 households use credit

› Our sample: rural households, and formal credit only

› Panel structure: 3,308 rural households, the same 575 households borrow both years

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› Two types of microcredit:• Microcredit I: from Vietnam Bank for Social Policy

(VBSP) – the governmental and major microcredit provider

• Microcredit II: credit from VBSP, from Bank for Agriculture and Rural Development (VBARD) with size below 20 mln VND and credit from other NGOs

› Other formal credit: non-microcredit loans from VBARD sized above 20 mln VND, loans from commercial state-owned and private banks, and credit unions.

› Household self-employment profits =• gross revenues + household consumption value –

operating expenses • adding back loan interests payment

› Outcome equation: a semi-log function of household profits

Notations | 5

Credit participation and self-employment profits in Vietnam: Descriptive information

Participation in credit program

No of HH

Amount of credit (1,000

VND)

HH profits (1,000 VND)

2004 3254 - 16,836.94

All credit 1123 9,516.41 20,794.60

VBSP program 195 4,517.03 13,339.21

All microcredit programs 1021 7,262.49 17,999.43

Other formal credit 102 31,144.71 49,269.23

2006 3267 - 17,180.84

All credit 1145 13,972.02 20,941.86

VBSP program 313 5,808.70 13,707.30

All microcredit programs 1009 8,645.11 17,085.03

Other formal credit 136 51,849.26 50,543.04

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Impact estimation method (1): cross-section analysis

› Access to credit = Eligible household (E) x Treatment commune (T)

• Eligibility rule: households classified as poor by the commune authority

• Treatment commune: at least one household in that commune has used that type of credit

ln ij ij j ij ij ij ijtY X V E T E

Y: household profits

X: household characteristics

V: commune characteristics

Average impact of credit access

(1)

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Impact estimation method (2): cross-section analysis

Impact of credit participation

'ln ij ij j ij ij ijtY X V E C

C: amount of credit received

› OLS estimation: self-selection bias associated with loan size

› IV (2SLS) estimation (Pitt and Khandker, 1998)

• Credit demand is estimated in the 1st stage• Instruments: all household attributes

interacted with credit access XijTijEij

(2)

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Impact estimation method (3): fixed-effect analysis

Impact of credit participation C: amount of credit receivedηij: unobserved fixed household

attributesμj: unobserved fixed commune

attributes› Fixed-effects estimation without instrument: endogeneity controlled by unobserved fixed household and commune effects

› IV (2SLS) within fixed-effects (Khandker, 2005): endogeneity also controlled by unobserved time-variant variables • Same instruments as in pooled analysis

(3) ''ln ijt ijt ijt ijt ij j ijtY X E C

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Impact estimation method (4): general issues and tests› Outcome variable: log of household profits› Control variables:

• Household characteristics: size, total land owned, share of farming labour, household head demographic (age, gender, marital status, education, ethnic minority)

• Commune characteristics: access to road, access to transport, access to market, access to post office, electricity

• Year dummy› Test for IV method

• Sargan-Hansen J test for no correlation between the instruments for credit and the error term of the profit equation

• Endogeneity test (difference-in-Sargan) for exogeneity of credit

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Impact of microcredit from the VBSP

Models

Credit access

Amount of credit received

OLS pooled

sample

OLS pooled

sample

IV pooled sample

FEIV within

FE

eligibility -0.50875

6***

-0.513071*** -0.51097

0***

-0.013369 -0.017607

access to VBSP credit

-0.006579

VBSP credit 0.000006* 0.000001 -0.000001 0.000014

Hansen J test-Pval

0.0085 0.9495

Endogeneity test -Pval

0.7945 0.223

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Impact of all microcredit programs

Models

Credit access Amount of credit received 

OLS pooled sample

OLS pooled sample

IV pooled sample

FE IV within FE

Eligibility -0.509966*** -0.502006***

-0.538108***

-0.01396 -0.009476

access to microcredit

-0.001176

microcredit 0.000017*** -0.000054 0.000002 -0.000031

Hansen J test-Pval

0.0745 0.9731

Endogeneity test -Pval

0.4531 0.0603

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Impact of other formal credit

Models

Credit access  Amount of credit received

OLS pooled sample

OLS pooled sample

IV pooled sample

FE IV within FE

eligibility 0.511*** 0.506*** 0.380168***

0.01291 0.013073

other formal credit

5.48e-06*** 0.000142***

0.000003***

0.000006

Hansen J test-Pval

0.558 0.7455

Endogeneity test -Pval

0.0000 0.8567

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Is microfinance really effective?

› Microcredit programs: NO impact on household self-employment profits

› Other formal credit: a positive significant impact› What can explain the result?› Khandker (2005): Microcredit recipients - rural poor

have less profitable investment opportunities => less likely to benefit from credit

› Garson (1999): two categories of the poor: entrepreneurial and non-entrepreneurial poor • Non-entrepreneurial poor cannot make use of credit• Entrepreneurial poor may run into cash flow

problems once financed with credit› Coleman (1999): Loan size

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Implications and conclusions

› Effectiveness of microcredit is at doubt› Microcredit may be more beneficial due to

other reasons than the credit as such› Future research:• Compare with informal financing• Select valid instruments• Attrition bias

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