The project was prepared in 2001-2002 at a time when three-quarters of the population and 85% of its 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, but it was convinced that the improved capacity of financial institutions operating in rural areas was 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 and insufficient banking knowledge and experience. As a result, the flow of term lending to rural areas was insufficient to enable the investment needed to increase output and lift a large proportion of the rural population out of poverty.
The Bank’s approach to these challenges was to simultaneously support the provision of a line of credit and the strengthening of an apex lending institution and participating financial institutions. The line of credit fed two funds that were wholesaled by the apex institution, the Bank for Investment, and Development of Vietnam (BIDV). The Rural Development Fund II provided resources for financial institutions to on-lend at market-determined interest rates to households and micro-, small- and medium-scale enterprises for investments in agriculture rural-based businesses. The Micro-Finance Loan Fund was channeled through accredited microfinance institutions to individuals and micro-enterprises, with loan amount ceilings set at a relatively low level to ensure that the rural poor were the beneficiaries. The BIDV and participating financial institutions all prepared institutional development plans, and the Bank helped provide technical assistance and training to support their implementation.
At its closing in September 2009, the project was showing significant gains across a wide range of measures:
- Field surveys made of samples of sub-borrowers indicate that their incomes grew by 60-65% as a result of the investments made.
- The number of incremental jobs created was estimated at 274,000—equivalent to 550% of the appraisal estimate—and jobs were created in a wide range of sub-sectors from basic agricultural production to transport and manufacturing.
- The project had financed a wide range of investments by 445,000 families and small enterprises throughout Vietnam—equivalent to 250% of the appraisal target.
- This is the first operation in Vietnam requiring commercial banks to apply environmental standards for small loans.
- Twenty-five financial institutions and microfinance institutions were active, as planned.
- On financial sector issues, the project has been an important complement to the broader technical assistance provided by the financial sector team and the International Monetary Fund. It has helped the Bank to build a strong partnership with the financial institutions in Vietnam and to implement on the ground the agreed policy initiatives, including the adoption of international banking standards. It has been instrumental in achieving significant improvements at individual banks.
- The training, technical support, and the 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 program of technical assistance has supported significant strengthening of the strategy framework, governance, operational structure and human resources strategy of the Vietnam Bank for Agriculture and Rural Development, Vietnam’s biggest bank.
There were some 275,000 sub-loans averaging less than US$350 by the Micro-Finance Loan Fund, with most of these expected to have reached the poor. Of these sub-loans, 32% of the funding went to the poorest region, the Northern Midlands and Mountains. Another 43% went to the relatively poor Red River Delta, which, while having a relatively lower poverty rate, includes a large absolute number of poor households. Some 37% of all sub-loans were made to women, with the proportion by participating financial institutions ranging from 10% to 50% in the case of Rural Development Fund I and from 13% to 67% in the case of the Micro Finance Loan Fund.
The World Bank’s International Development Association (IDA), its fund to assist the world’s poorest people, provided US$236.4 million, equal to 37% of the project’s total investments. The participating financial institutions provided 400% of the resources anticipated in the project’s design, and the sub-borrowers more than 600%. The high demand for technical assistance and training to support institutional development caused the budget allocation for this component to increase to an actual cost of US$10.3 million from an initial estimate of US$4.8 million.
Toward the Future
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 participating financial institutions which have improved their financial positions under this 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 which became effective in 2009.