The International Development Association (IDA) and the government of Vietnam prepared the Second Rural Finance Project in 2001-2002 at a time when three-quarters of the whole population and 85 percent of the poor lived in rural areas. Because of the small size of farms, agricultural growth needed to be combined with non-farm employment to make a sustained attack on rural poverty. The government’s commitment to improving rural conditions began with market liberalization and the provision of infrastructure. The government was convinced that improving the capacity of financial institutions operating in the rural areas was also necessary to increase the flow of funds for rural investment. The financial sector was dominated by state-owned commercial banks with little competition, large amounts of non-performing loans, insufficient banking knowledge and a lack of experienced bank staff. As a result, the flow of term lending to the rural areas was insufficient to meet the investment needed to increase output and to lift a large proportion of the rural population out of poverty.
IDA’s approach to these challenges was to support the provision of a line of credit and the strengthening of an apex lending institution, the Bank for Investment and Development of Vietnam (BIDV), and participating financial institutions (PFIs). The line of credit fed two funds that were wholesaled by the apex institution. The Rural Development Fund II (RDF II) provided resources for PFIs to on-lend at market-determined interest rates to households and MSMEs for investments in agriculture and rural-based businesses. The Microfinance Loan Fund (MLF) was channeled through accredited microfinance institutions (MFIs) to individuals and microenterprises, with loan amount ceilings set at a relatively low level to ensure that the rural poor were the beneficiaries. The BIDV and the PFIs all prepared Institutional Development Plans, the implementation of which was supported by the project through technical assistance (TA) and training.
Measured by the volume of investment funding channeled to the rural areas, the project was a major success. At the project’s closing in September 2009:
- Field surveys of sub-borrowers indicate that their incomes grew by 60-65 percent as a result of the investments made.
- The number of incremental jobs created was estimated at 274,000—more than five times the initial target.
- The project had financed a range of investments by 445,000 families and small enterprises throughout Vietnam, supporting nearly three times more families and MSMEs than was originally planned.
- This is the first operation in Vietnam requiring commercial banks to apply environmental standards for small loans.
- Twenty-five PFIs/MFIs were active.
On financial sector issues, the project has been an important complement to the broader TA provided by the financial sector team and the International Monetary Fund (IMF). It has helped the World Bank to build a strong partnership with financial institutions in Vietnam and to implement the agreed policy initiatives on the ground. The project has been instrumental in achieving significant improvements at individual banks. The training, TA support and continuous policy dialogue and advice from the Bank have transformed the wholesale bank into one of the strongest and most transparent financial institutions in Vietnam, and the first one to get a Moody’s credit rating. The TA program has also had a major impact on the strategy framework, governance, operational structure and human resources strategy of Vietnam Bank for Agriculture and Rural Development, Vietnam’s biggest bank.
Through IDA, the World Bank provided US$236.4 million, financing 37 percent of total project investments. The PFIs provided 400 percent, and the sub-borrowers more than 600 percent, of the resources anticipated in the project’s design. The high demand for technical assistance and training to support institutional development caused the budget allocation of this component to be increased, from US$4.8 million estimated at appraisal to an actual cost of US$10.3 million.
The project benefited from strong collaboration and partnership with the State Bank of Vietnam (the central bank) and the Ministry of Finance. During preparation, wide consultation took place with the U.K.’s Department for International Development, the Japan International Cooperation Agency, and international non-governmental organizations (NGOs) practicing microfinancing operations in Vietnam.
The government and the BIDV have made a commitment to continue to manage the revolving fund in line with the original project development objectives of strengthening the banking system’s capacity in the rural areas, encouraging rural investment and increasing the access of the rural poor to formal financial services. The long-term sustainability of the project’s interventions depends upon: (a) the continued profitability of rural investment in the context of continuing economic liberalization; and (b) the prudent assessment of credit risk by the BIDV and the PFIs, which have improved their financial position and have become stronger institutions under the project. Key government agencies and financial institutions decided to build on the successful outcome of the project with a follow-on Third Rural Finance Project (TRFP), which became effective in 2009. The TRFP offers an opportunity to sustain the dialogue on key institutional issues that require long-term engagement.
There were approximately 275,000 MLF sub-loans with an average amount of less than US$350, most of them going to the poor. Some 32 percent of the funding went to the poorest region, the Northern Midlands and Mountains, while 43 percent went to the Red River Delta, which while having a relatively lower poverty rate, includes a large absolute number of poor households. Some 37 percent of all sub-loans were made to women.