INTRODUCTION
Since gaining recognition as an economically independent unit in 1998, the number of household businesses in Vietnam has surged dramatically The Ministry of Planning and Investment reports that there are over 1.5 million household businesses in the country, providing employment for more than 3 million workers and contributing approximately 9% to the total social production capacity.
As of October 1, 2016, Vietnam boasted 4.91 million individual firms, supporting an 8.2 million-strong workforce, a significant rise since 1999 Household businesses in Vietnam benefit from straightforward incorporation processes and simplified tax payment methods, which do not require invoice collection or record-keeping These enterprises play a crucial role in the economy by creating job opportunities, addressing social issues, and enhancing product diversity Their widespread presence makes them vital distribution channels that facilitate trade balance and foster local economic growth Furthermore, household businesses serve as a catalyst for entrepreneurship, market expansion, and the establishment of micro, small, and medium enterprises.
Small household-scaled businesses often encounter significant limitations in their operational capacity, technology adoption, and business management knowledge These challenges contribute to a decline in both labor productivity and overall business performance.
The region faces significant challenges in accessing official loans, primarily relying on retained profits and informal credit from friends and relatives (Pham Van Hong, 2016) Household businesses struggle to secure funding from credit organizations due to inadequate collateral and insufficient business plans Furthermore, the Civil Code 2015 mandates that all borrowers must be legal entities, leading the State Bank to revise regulations in Circular No 39/2016 As of March 15, 1977, entities that do not meet legal criteria, such as household businesses and cooperative groups, are ineligible for loans Consequently, household businesses must either convert to formal enterprises or ensure that the household head takes personal responsibility for loan repayment to access necessary capital.
7 debt Typically, the interest rate for an individual will be calculated as the loans for consuming purposes, therefore the cost of capital can increase.
Microfinance institutions play a crucial role in funding household businesses by offering not only small loans and savings services but also non-financial support such as risk management and business guidance This presents a valuable opportunity for these businesses to access capital and enhance their management skills In Vietnam, the microfinance landscape includes three official organizations and approximately 70 semi-formal programs across 23 provinces, primarily targeting the poor and low-income individuals Consequently, credit supply for household businesses remains limited Various studies, including those by Nguyen Kim Anh et al (2011) and Mai Thi Hong Dao (2016), highlight microfinance's significant impact on poverty reduction and income improvement for low- and middle-income families However, there is a lack of comprehensive research specifically addressing the effects of microfinance on household businesses, underscoring the urgency of the project titled "Microfinance and the Development of Household Businesses in Vietnam."
In Vietnam, the definition of household businesses is clarified in the Decree 78/2015 / ND-
In Vietnam, a household business is defined as an enterprise owned by an individual or a group of Vietnamese citizens aged 18 and above, who possess full civil capacity These businesses are registered to operate in a single location, employ fewer than ten workers, and the owners are fully accountable for all business assets Similar to sole proprietorships in countries like England, France, Australia, and India, these owners manage their businesses directly without a legal distinction between personal and business assets Typically, sole-owner businesses operate on a small scale and are often family-oriented, with owners responsible for their personal income taxes.
8 characteristics, and are able to hire more labours In Vietnam, is is distinguished by the fact that: household businesses can be owned by many individuals.
Household businesses in Vietnam are often categorized as "micro-enterprises," and research indicates that access to microfinance significantly influences their growth A primary challenge faced by these small-sized businesses is the lack of capital and difficulties in obtaining loans, which hinders their development (Owualah, 1999; Carpenter, 2001; Anyawwu, 2003; Lawson, 2007) Access to financial services is crucial, as it provides additional resources for enhancing production capacity and overall productivity (Watson and Everett, 1999) Furthermore, micro-enterprises rely heavily on informal funding sources, such as family and friends, which often fall short of meeting their operational needs (Bhasin and Alepaku, 2001) Unfortunately, these businesses struggle to secure financing from formal institutions due to stringent borrowing criteria, leading to reduced profit margins (Khandker et al., 2013).
Microfinance was established to provide low-income individuals with access to essential financial services, such as credit, savings, and insurance, ultimately improving their living conditions and incomes Numerous empirical studies demonstrate the effectiveness of microfinance in alleviating poverty and enhancing living standards in developing countries While low-income individuals remain the primary focus of microfinance institutions (MFIs), many organizations are now extending their services to small and micro business owners to promote sustainable development These entrepreneurs often become loyal clients, successfully increasing their productivity and expanding their businesses Additionally, microfinance serves as a crucial foundation for small-scale businesses to secure capital, while also offering valuable non-financial services like business consulting and financial management training to support entrepreneurial growth.
Empirical research on the impact of microfinance on small and micro businesses has shown a wide range of results Specifically, using the ANCOVA model to examine the relationship
Microfinance has been shown to significantly enhance the performance of small- and micro-sized businesses in Indonesia, as evidenced by Rahmat et al (2006), who noted increases in sales and business range Similarly, Xitian Wang (2013) highlighted its crucial role in boosting sales and profits for household businesses in China Karlan and Valdivia (2006) found that combining microcredit with business training yields substantial benefits for both lenders and borrowers, resulting in quicker loan repayments and increased revenues for trained owners Conversely, Babajide (2012) utilized Pooled OLS regression analysis on data from Nigeria and concluded that microfinance loans have no significant impact on the growth of small businesses, recommending improved lending and repayment terms This sentiment was echoed by Olugbenga and Mashigo (2017) in South Africa In India, the government has initiated a cooperative loan program that partners banks with microfinance institutions to provide higher microcredit limits, which the World Bank suggests enhances labor productivity, increases production facilities, maintains working capital, and boosts sales and profits while fostering owner confidence.
- To systematize theoretical matters in credit stemming from microfinance institutions (MFIs) and the development of household businesses.
- To assess the impact of microcredit on the development of household businesses in Vietnam.
- To make recommendations to improve the effectiveness of microcredit for household businesses in Vietnam.
4 The researched subjects and fields
The study examined the influence of microfinance credit on household business development across eight provinces in Vietnam, including Bac Giang, Vinh Phuc, Phu Yen, Dak Nong, Binh Thuan, Giang Thuan, Binh Duong, and Ho Chi Minh City This selection aimed to capture the diverse microcredit landscape for household businesses in various regions, each with unique characteristics and varying levels of development, while also considering the research team's capacity to gather questionnaires effectively.
- Research stage are aimed from 2013 to 2017.
Apart from the introduction, conclusion and reference, the structure of the topic is divided into 4 chapters:
- Basic theory of Credit from Microfinance Institutions and Development of Household businesses.
- Methodology of the research ‘Microfinance Institutions on the Development of Household businesses in Vietnam’.
- Empirical Finding and Analysis of the research ‘Microfinance Institutions on the Development of Household businesses in Vietnam’.
- Recommendations for improving the effectiveness of credit from microfinance institutions for the development of household businesses in Vietnam.
T HEORITICAL FRAMEWORK
Classification of credit from microfinance institutions
In the microfinance market, providers can deliver services through two main approaches: monophyly and integrated The monophyly approach emphasizes financial intermediation or social intermediation, while the integrated approach offers a broader range of services, including non-financial support like business development and social services Microcredit is a key financial intermediary product within these frameworks.
Classification of micro credit service products
MFIs usually provide three types of credit products as follows: individual loans; group-based lending and third-party indirect group-based lending.
- Individual / Individual Loans: These loans typically have the following characteristics:
• The guarantees for loans are usually under the form of some traditional mortgage such as fixed assets, guarantees of the third parties.
• MFIs assess customers through individual factors such as personality, capacity, and financial ratios of customers
• Loan terms are identified and changed to suit customer needs
Credit officers maintain a close relationship with customers by dedicating significant time and effort to research their needs, effectively marketing services, and providing personalized customer support when required.
Microfinance institutions (MFIs) typically incur lower costs, particularly in human resources, compared to group lending, as employees can efficiently manage multiple individual client records simultaneously These institutions often extend loans to small and medium-sized rural enterprises, catering to low-income clients who frequently struggle to meet traditional lending criteria Consequently, these clients often resort to group lending, which relies on guarantees from groups or other forms of trust This limitation is also why commercial banks and credit unions tend to offer individual loans.
- Mutual lending: Group lending work on forming a group of people who share the same desire to access financial services The Grameen Bank model applies the same
The group lending methodology, while popular, often proves ineffective due to the high costs associated with its establishment and supervision Additionally, the stability of such loans is uncertain unless they are grounded in cultural and social factors.
Indirect intermediary group-based lending leverages the benefits of group lending while incorporating an intermediary organization to oversee and manage the group Typically, large social organizations like farmers' associations and women's unions are chosen as intermediaries These entities handle various stages of the microfinance lending process, including debt collection and loan disbursement, ensuring effective management and support for the borrowing groups.
The characteristics of a group loan product are:
• Flexible lending scale and terms, allowing clients to access capital when needed.
Non-traditional guarantees, such as peer pressure, replace conventional collateral in lending practices When a member fails to make timely payments, it leads to a suspension of further loans to other group members until the outstanding loan is settled.
The repayment rates for loans in group lending schemes are significantly higher than those of conventional loans, with institutions like GB Bank achieving a remarkable 98% repayment rate and TYM in Vietnam reaching 95% This high level of repayment is largely driven by the pressure from fellow team members, who motivate each other to ensure timely and complete repayments to avoid penalties or exclusion from the group In certain situations, the group may also identify legitimate reasons for a member's delayed payment and offer support until the issue is resolved.
• Compulsory savings are treated as a non-traditional form of guarantee, a cheap capital source and may also be used to pay for a late payment of a member.
Characteristics and role of credit from microfinance institutions
1.3.1 Characteristics of credit from microfinance institutions
Microfinance institutions primarily serve low-income individuals and the poor, who often lack sufficient collateral to access loans from traditional banks These borrowers typically have minimal fixed assets and rely on their families' economic resources, often engaging in small-scale businesses or traditional farming As a result, their financial capabilities are limited, making it challenging for them to secure funding from formal financial institutions.
14 be mortgaged for loans, unstable income or they themselves cannot provide any business plans, which all gradually causes a lot of obstacles for accessing formal financial support.
Microfinance credits are typically small and come with high costs, primarily targeting low-income individuals with limited financial needs As a result, the demand for loans remains modest, leading to interest rates that are often higher than those offered by traditional financial institutions While some microfinance institutions (MFIs) attempt to mitigate these costs by sourcing affordable capital or subsidized funds, such resources are frequently insufficient to meet the substantial demand Consequently, microcredit continues to be characterized as high-cost lending.
Micro-credit serves a diverse and flexible purpose, initially aimed at funding small-scale agricultural production and micro-enterprises However, poor and low-income households often experience shifts in capital usage due to living expenses, blurring the lines between production and personal needs As a result, microfinance activities have expanded to cover various essential needs, including education, childcare, and sanitation, reflecting the evolving demands of customers Loans are available through both group lending and individualized options, with customized repayment terms that align with borrowers' circumstances, allowing for more manageable repayment plans compared to traditional microfinance services, which typically require weekly or monthly payments.
The demand for micro-credit loans is often short-term and driven by the unexpected financial challenges faced by low-income individuals, particularly in rural agriculture, where productivity is heavily influenced by weather conditions Favorable weather can lead to a successful harvest, while adverse conditions can result in significant financial hardships These vulnerable populations are further impacted by changes in socio-economic conditions, natural disasters, and epidemics, creating a pressing need for financial support to mitigate negative effects, restore production, and ensure sustainable income Additionally, small and micro-sized businesses typically seek loans primarily for working capital.
1.3.2 The role of credit from microfinance institutions
Microfinance institutions (MFIs) provide essential credit to individuals lacking access to traditional bank loans, addressing diverse needs such as production, business, education, and healthcare This financial support significantly enhances both the material and spiritual well-being of clients, thereby improving their overall quality of life.
Microfinance credit offers essential financial resources to low-income individuals and the poor, enabling them to invest in businesses and enhance productivity By effectively utilizing these funds alongside existing resources, many families have successfully escaped poverty and increased their incomes through improved labor productivity.
Microfinance institutions (MFIs) provide crucial credit that enables clients to diversify their income sources, particularly in agricultural and rural areas where livelihoods are heavily influenced by weather conditions In favorable conditions, microcredit allows individuals to invest in agricultural production and enhance the value of their products through processing Conversely, during unfavorable conditions, it empowers them to explore non-agricultural ventures, handicrafts, and inter-crop activities, fostering a more stable and varied income stream.
Microfinance plays a crucial role in enhancing the financial system by providing credit to previously underserved customers who may not have been aware of formal financial services The introduction of microfinance fosters a more competitive market structure, leading to greater diversification of products and services that better meet the needs of customers and communities As a result, microfinance and microcredit are increasingly becoming focal points for formal service providers seeking to tap into new and niche market opportunities.
Microfinance institutions (MFIs) play a crucial role in sustainable poverty alleviation by providing essential credit and support By offering loans and technical assistance, these institutions empower individuals to enhance their production capabilities More impactful strategies focus on helping the poor secure employment for themselves and their families, fostering stable incomes and enabling them to gradually escape the cycle of poverty.
16 of poverty through the provision of micro-credit in particular and microfinance services in general.
2 Overview of household business and household business development
Definition of household business
In Vietnam, the concept of household business is clarified in Article 66 of the Government's Decree No 78/2015 / ND-CP guiding the business registration procedures of Enterprise Law
In 2014, businesses in Vietnam, whether owned by individuals or families, must adhere to specific regulations: they can only register at a single location, employ fewer than ten employees, and the owners must be Vietnamese citizens over 18 years old with full civil capacity, assuming complete responsibility for their business activities.
Household businesses with ten or more employees must adhere to specific regulations for establishment and registration The business owner is entitled to all profits and is responsible for all financial obligations to the state If a household business is owned collectively by a family or group, they must appoint a representative for registration purposes This representative acts on behalf of the household, fulfilling its rights and obligations, but is not individually liable for other members Profits and risks are allocated among members based on their contributions and agreements.
In terms of size of labor, household businesses in Vietnam may be classified as
"microbusiness" / "micro-enterprise", meaning the micro-sized type of enterprises, which is divided on the basis of labor size or sales revenue.
Characteristics and role of household business
2.2.1 Characteristics of production and business activities of household businesses
In terms of production activities, household businesses usually have the following characteristics
Household businesses typically operate within a limited scope, targeting a small, local market for their products and services Globally, sole-owner businesses tend to employ fewer workers due to their smaller scale In Vietnam, this characteristic is influenced by legal regulations that permit household businesses to register at only one location and employ no more than 10 staff members.
Households typically feature a straightforward management structure where the owner fulfills multiple roles, including that of a worker and manager This arrangement facilitates swift decision-making; however, its effectiveness relies on the management skills, market awareness, and experience of the household head Additionally, the less specialized nature of the workforce means that each employee often handles various tasks, reflecting the simpler operations of household businesses compared to larger entrepreneurial ventures.
Household businesses offer flexibility and adaptability to market changes due to their small-scale operations and low entry costs However, the spontaneity of the head householder in seizing market opportunities often results in a lack of clear business orientation and strategy, leading to a disconnect with actual market demand.
Household businesses typically exhibit low levels of technology application, relying heavily on manual labor and utilizing outdated production machinery This results in diminished labor productivity, which poses challenges in meeting the demands of various market segments.
2.2.2 The role of household businesses in the economy
Household businesses are a prevalent economic model globally, playing a crucial role in job creation across various social classes and significantly contributing to GDP and overall economic development This dynamic sector showcases immense potential, driven by its ability to diversify the types of products and services offered, thereby meeting societal needs continuously Acting as a supportive satellite for the broader economy, household businesses enhance economic resilience and innovation.
Household businesses play a crucial role in the economic restructuring of rural areas by generating jobs and reducing poverty through the establishment of diverse industrial sectors They attract a significant labor force and produce a variety of goods and services for both local consumption and export, thereby enhancing state budget revenues Furthermore, these enterprises contribute to a more dynamic and adaptable economy by tapping into the untapped resources within the population, ultimately driving economic development Additionally, household businesses have the potential to revitalize traditional trades by leveraging management expertise and improving production organization.
18 production tips accumulated from generations to generations This allows the maintenance and development of products of ethnic cultures in the region.
Factors affecting the development of household businesses
The development of micro, small, and medium-sized businesses is significantly influenced by the entrepreneurial capabilities and perspectives of the business owner, particularly the head of the household This influence manifests in the strategies and management methods employed by the owner Previous research indicates that various personal characteristics of the owner play a crucial role in shaping their entrepreneurial capacity and attitude.
Research indicates that banks often impose stricter lending conditions on women seeking loans for their businesses, which hinders their borrowing capacity and growth potential (Riding and Swift, 1990) Additionally, women are frequently more focused on family responsibilities than on pursuing economic development and business expansion (Brush, 1992).
A study conducted in 1994 revealed that having a woman as the owner of a registered business did not contribute positively to its growth; however, it did not adversely affect the business's sustainability.
Younger individuals exhibit greater motivation and a willingness to take risks in entrepreneurship, driven by a strong need to increase their income for family support However, they face limitations in financial resources, networking opportunities, and business experience compared to their older counterparts Empirical research highlights the impact of age on entrepreneurial development (Boswell, 1973; Davidsson, 1991).
The education level of a household head encompasses their knowledge, skills, motivation, self-confidence, problem-solving abilities, commitment, and self-discipline Individuals with higher education are typically better equipped to navigate business challenges and seize opportunities, thereby fostering the growth of their enterprises Research by Cooper and colleagues (1992, 1994) highlights a positive correlation between an entrepreneur's educational background and their performance, as well as the sustainability and expansion of their business Additionally, the willingness and proactive approach of these leaders in accepting risks can significantly influence their success.
19 their ability to mobilize and access to the resources needed for the development of the facility (Gundry and Welsch, 1997).
Research on household business experience reveals varying conclusions regarding establishment age and growth rates Birch (1987) indicates that small-scale businesses with more years in the market generally experience faster growth compared to newly established firms Conversely, Evans (1986) presents evidence suggesting that businesses with fewer than 25 employees see a decline in growth rates as they age, while those with more than 25 employees tend to grow more consistently over time.
The legal status of a business significantly influences its development, as highlighted by Dietmar et al (1998) Different legal forms dictate a business's tax responsibilities, capital-raising capabilities, and employer accountability Additionally, certain business types, particularly small- and medium-sized enterprises, may benefit from government support, tax incentives, and loans.
Studies reveal that businesses in different production sectors exhibit significant performance disparities, largely due to variations in manufacturing technologies that influence optimal business size Firms in industries dominated by large enterprises tend to experience higher growth rates compared to those in sectors where size is less critical for success In retail and personal service industries, lower market-entry barriers, easily imitated services, and heightened competitive pressures characterize the landscape Conversely, businesses in these sectors are increasingly reliant on technological advancements, necessitating greater investment in intellectual research, which ultimately reduces the potential for imitation.
2.3.3 The geographic area in which the household business operates
Geography plays a crucial role in shaping household development, as each region possesses unique infrastructure, climate, population traits, soil quality, and development policies These geographical factors create diverse environments that cater to various business sectors.
2.3.4 The level of technology and e-commerce application in the operation of business establishments
In many studies and in particular research by Tarute and Gatautis (2014), information technology helps small and mid-size businesses improve both internal communication
The integration of technology significantly enhances business activities and marketing efforts, which are crucial for sustaining production progress According to Yusuf et al (2017), small and medium-sized enterprises (SMEs) that invest more in research and development (R&D) tend to experience increased profitability.
2.3.5 On the ability to access business capital
According to Brown et al (2004), businesses that can easily mobilize capital tend to experience higher revenue growth and expansion However, research by Beck and Demirguc-Kunt (2006) indicates that small businesses often struggle to secure external financing, presenting a significant barrier to their development.
2.3.6 Policies and policies for household economic development
The private economy, encompassing individual and small capitalist enterprises, is crucial for a country's economic development However, it faces challenges such as limited capital, outdated production technology, poor management, low efficiency, and weak competitiveness, which hinder its growth To foster a more robust private sector, it is essential to implement renewed mechanisms and policies that create a favorable business environment This includes legal frameworks, financial support, and initiatives to enhance technological capabilities By doing so, the private economy, particularly the household sector, can thrive, liberating productive forces and driving overall economic progress.
Indicators assessing the development of household businesses
- Increasing the posibility to raise capital, supplement working capital, expanding revenue and increasing profits.
- Increasing business skills and financial management skills for household heads
- Increasing the proficiencyof investment, technology and business facilities
3 The impact of credit from microfinance institutions on the development of household businesses
Research indicates that insufficient business capital and challenges in obtaining funding are significant barriers to the growth of micro, small, and medium enterprises.
Access to financial services is crucial for micro firms to enhance their capacity and productivity However, these businesses often rely on unofficial sources, such as family and friends, for working capital, which may not sufficiently meet their needs The challenges of accessing formal financial services arise because small businesses frequently fail to meet the borrowing criteria set by banks and credit institutions Consequently, difficulties in mobilizing capital can adversely impact sales and profitability.
Microfinance was established to provide low-income individuals with access to essential financial services such as credit, savings, insurance, and remittances, along with various non-financial services This initiative aims to enhance their income and improve their overall living conditions.
Microfinance has proven effective in alleviating poverty and enhancing living standards in developing countries, as supported by numerous empirical studies While low-income individuals remain the focus of Microfinance Institutions (MFIs), there is a growing trend towards supporting small and micro business owners for sustainable development These business owners can become long-term, loyal clients of MFIs, helping them rise above poverty and expand their operations Additionally, new clients can access the capital needed for their businesses, leading to higher incomes and reduced risk.
Microfinance serves as a crucial foundation for small-scale businesses seeking to raise capital, while also offering essential non-financial services These services include business consulting and training in financial management and entrepreneurial skills, which empower grassroots entrepreneurs to thrive.
Microfinance institutions (MFIs) play a crucial role in enhancing household businesses by offering micro-credit that serves as working capital and investment for improving production capacity This financial support enables businesses to invest in technology and production resources Additionally, MFIs provide training in business skills and financial management for household heads, which enhances human resource capabilities, ultimately leading to increased sales, profits, and productivity.
4 International experience to improve the efficiency of microcredit for household business development.
The successful practice of microcredit for household businesses development in Malaysia
In Malaysia, the success of poverty reduction is significantly tied to microfinance initiatives, particularly through microcredit programs A notable example is Amanah Ikhtiar Malaysia (AIM), a microfinance institution founded in 1987, inspired by the Grameen Bank model AIM focuses on extensive credit distribution to uplift the poor by categorizing them into three groups: low-income individuals earning up to $670 per month, those considered poor with incomes below $269, and the extraordinarily difficult households, or hardcore poor, earning less than $150 monthly By selecting beneficiaries facing unique challenges, AIM supports them in establishing their own businesses, enabling a gradual escape from poverty.
The AIM model provides a tiered approach to microcredit, beginning with interest-free loans designed for individual households to develop business plans in sectors like livestock or farming Upon full repayment of the initial loan, borrowers become eligible for higher-value loans, which come with increased interest rates The top-tier loans can range from RM500 to RM5,000, facilitating further business growth and development.
This innovative approach addresses key challenges in micro-credit by fostering a model where group members with similar circumstances share responsibilities and benefits, enhancing self-monitoring and evaluation for credit officers The commitment to cohesion encourages greater individual participation, stimulates self-initiatives, and motivates peers Additionally, the implementation of a weekly monitoring system and tiered credit packages enables microfinance institutions to effectively address customer inquiries and challenges, while promoting income and business growth, ultimately reducing the risk of negative debts.
AIM Micro Credit Products offers essential support and experience before introducing various loan packages The 'I-Srikandi' loan is available after the initial loan, with its value determined by the success of the first 'I-Mesra' loan Additionally, the 'I-Wibawa' package provides short-term loan options to meet immediate financial needs.
Flexible repayments can be made in person, on a weekly,monthly or one-off basis. business projects, natural disasters, or health problems.
Access to finance is crucial for household businesses, influencing their financial sustainability and overall impact on customers Research by Nawai & Bashir (2006) highlights that AIM has successfully offered micro-credit services through 69 branches and nearly 4,000 facilities across the nation, demonstrating its commitment to supporting small enterprises.
RM 1.02 billion for nearly 150,000 customers, Credit growth rates over the past 10 years has reached a staggering 150 times (from RM 890,000 in 1990 to RM 150,000,000 in 2003).Compulsory savings, along with the solid development of financial capabilities and business capabilities, have been proven as effective on the target of maintaining sustainably the project, with the increasing rate of 73.6 % of customer's income compared to the starting point.
Lessons learned for Vietnam
Analysing of the success of AIM has helped to draw important lessons for the development of microfinance to grow household businesses in Vietnam:
- Firstly, the classification and assessment of demographic characteristics is very important, based on the characteristics of micro credit customers who are prone to behave by regional and cultural criterium.
Understanding the social sector is crucial for the microfinance industry, as elements like education, healthcare, access to clean water, electricity, and infrastructure significantly impact the capacity to alleviate poverty for individual households.
Implementing a weekly loan monitoring system is crucial for microfinance institutions to effectively address customer challenges By establishing a structured hierarchy of credit packages, these institutions can enhance customer support, boost income generation, and improve overall business efficiency This proactive approach not only aids in promoting financial stability but also minimizes the risk of bad debts.
To enhance the effectiveness of microfinance, it is essential to implement controlled and structured loan terms, enabling households to develop their financial skills over time Additionally, microfinance institutions require substantial support from the government, including tailored public policies, to ensure sustainable growth Moreover, the accessibility of microcredit plays a significant role in boosting a country's overall GDP growth rate.
METHODOLOGY OF THE RESEARCH
Primary data collection
The empirical research utilized primary data collected through survey questionnaires distributed across three provinces in Vietnam: Bac Giang, Vinh Phuc, and Phu Yen, along with Binh Thuan, Giang Thuan, Binh Duong, and Ho Chi Minh City.
Between 2013 and 2017, a study was conducted in Ho Chi Minh and selected provinces to assess the usage of microcredit among individual household businesses, reflecting varying regional characteristics and development levels The research involved both questionnaires and in-depth interviews with households in specific communes and wards of two Northern provinces, aiming to gather essential information on microcredit utilization and to understand the opinions and aspirations of household businesses regarding micro-loans.
Sampling
The article reports a total of 320 votes, with 40 votes allocated to each province across two districts Out of these, 235 votes were recorded, including 171 valid votes that utilized the empirical model The questionnaire was structured around key content areas.
The article provides essential background information on household heads and their businesses, highlighting key characteristics such as the gender, age, and education level of the household head It also examines various business sectors, the size of the workforce within households, as well as financial indicators including turnover, profits, and the quality of material facilities utilized by these households.
- Micro credit information: Include figures on the maintenance level of household businesses with microfinance, size of loan, term of loan.
- Poll: Include questions on the level of household business on microfinance, credit procedures, loan amounts and expected interest rates.
Table 2: Characteristics of the sample
2 Education level of household head
Not graduated from primary school 15
Microcredit Continuous variable: VND million/year
Training of MFIs Dummy variable: 1 = Getting involved in business skills training courses organized by MFIs
"3 Ages of the head householder Continuous variable +
^4 Sex off the head householder Dummy variable: 1 = Male; 2 = Female -
Education level of the head householder
1= Illiterate 2= Not graduated from primary school 3= Primary school Graduator
4= Secondary school Graduator 5= High School Graduator
^6 Working scale Continuous variable: person +
7 Main Professionals- Dummy variable: 1 = Agriculture
The purpose of the model test is to evaluate the impact of microcredit on the growth of individual household businesses, which is measured through business profits and labor productivity (Williams et al., 2016; Babajide).
Profit = Revenue - Business expenses Productivity = Turnover (by year) / number of employees in the household in the year
This study focuses on the profit and labor productivity of household businesses as the dependent variable The primary explanatory variable examined is microcredit, quantified as a continuous variable reflecting the amount of household borrowing in millions of Vietnam Dong.
To measure the impact of microfinance on the development of household businesses, the model needs to control other factors that affect the performance of the household, including:
The article examines various human resource factors, including the age, gender, and education level of the household head, as well as industry-specific elements such as labor size, business lines, facilities, and areas of operation It highlights how these factors influence the effectiveness of business skills training programs offered by microfinance organizations, particularly focusing on the participation of household heads in these training initiatives Additionally, the study incorporates regional variables to assess the impact of external conditions on the training outcomes.
Based on the analysis above, we present two models as follows:
Profit = β 0 + β 1 * microcredit + β 2 * training + β 2 * age + β 4 * sex + β 5 * education +β 6 * scale + β 7 * career + β8 * infrastructure + β9 * region + (β 1 0 * region1 + β 11
Performance = β 0 + β 1 * microcredit + β2 * training + β 2 * age + β4 * sex + β5 * education + β 7 * career + β 8 * infrastructure + β 9 * region + (β 1 0 * region1 + β 11 * region_
Table 3: Description variable and control variable in the model
+ Roof house / floor /concrete house: 1 + Temporary house: 2
- Electricity: grid electricity: 1; Electric explosion machine: 2
- Machinery, means of production, fixed assets:
Use three dummy variables: northern, central, southern (each variable in turn receives values 0 and 1, which are combined in pairs to indicate the presence of each domain).
Central = 0 Northern ( Bac Giang, Vinh Phuc)
Central (Phu Yen, Dac Nong, Binh Thuan, Giang Thuan)
Central = 0 Southern (Binh Duong, Ho Chi Minh)
From 2013 to 2017, the financial performance of 27 business-owning customers is presented in a structured table format, showcasing their balance sheets over the years.
Basic estimates with table data
Table data is a crucial component in research, utilized extensively in both microeconomics and macroeconomics It encompasses cross-sectional data, which captures variable values for sample units at a specific point in time, and time series data, which tracks the values of variables over a period This structured approach allows researchers to analyze household and business units in microeconomics, as well as assess broader economic trends across nations and regions in macroeconomics.
The integration of balance sheet and unbalanced table data structures offers significant advantages in analyzing economic relationships, particularly in assessing changes over time and differences among study groups By utilizing panel data from household clients who borrowed microfinance loans across various years, researchers can enhance the richness of the data, leading to greater variability and more comprehensive insights This approach not only increases the number of observations and degrees of freedom but also provides robust and unbiased estimates Furthermore, the ability to account for the heterogeneity among different households over time makes panel data analysis more effective than traditional cross-sectional or time series methods.
We assume that the observation sample includes N(number) household(s), in T(number) year(s), so the table data will include N x T observations The general regression equation is written as:
Where: Y: Vector expressing sets of dependent variables
X: Vector expressing sets of independent variables Z: The vector of variables does not change over time, representing the characteristics of each household businesses. i: household business index I (i = 1, N) t: the indicator shows observations by time (t = 1, T) : error
The basic estimation methods for regression with the table data are: Pooled regression model, Fixed effect model (FEM) and Random effect model (REM).
The pooled regression model, essentially the ordinary least squares (OLS) estimate, treats table data as a unified set of observations, independent of year or country This model assumes that households share similar characteristics, leading to a simplified general equation.
However, strong assumptions of OLS are often difficult to meet in practice.
The Fixed Effects Model (FEM) analyzes the impact of fixed factors, functioning similarly to an Ordinary Least Squares (OLS) model that incorporates dummy variables as fixed factors This model can be applied at the household level, over time, or by both dimensions However, it is important to note that FEM can limit the degrees of freedom in the model, particularly when a large number of dummy variables are involved The FEM equation effectively captures these relationships.
In there, αi represents the difference in logistic regression for each year or household businesses.
The Random Effects Model (REM) accounts for variations among households that influence overall trends, incorporating unique household business conditions within the random errors Consequently, the model is expressed as: γ ir = ắ - β - α + 1⅛ + ắ.
Where ui is the difference in y- intercep, ui and εit are random quantities.
Accurate selection of models
The selection of one of the three models is influenced by the variation in logistic regression observed within each household, particularly in relation to how this variation correlates with the model's independent variable.
- To compare the pooled regression model and FEM: after estimating with FEM, we use the F test to test the hypotheses: H0: α1 = α2 = α3 = = αN = α
If the result refutes H0, FEM should be chosen.
Self-correlation testing and variance
If the result is not negative in H0, it means that the REM and FEM estimates are stable, but only REM is effective.
To compare the pooled regression model and REM: after estimating REM, test hypotheses here is that: H0: = 0
In case of the rejection of H0, the REM estimate is more effective.
After selecting the most suitable model of the three models, the topic continues to test assumptions about autocorrelation and changes in variance.
3.3 Self-correlation testing and changeable variance
While data tables offer significant advantages, they also present challenges during the estimation process due to observations from various household businesses that may lead to changing variance Additionally, time series data can encounter autocorrelation issues To identify these problems, appropriate tests for the data panel were conducted using Stata software, with the hypotheses of no changed variances and no first-order correlations If these hypotheses are rejected, it indicates the presence of variance changes and self-correlation in the model Consequently, FGLS regression will be employed on the data panel to simultaneously address these issues, following a methodology similar to that of Ai Enman, Chinn, and Ito (2010).
GLS regression method
In classical linear regression, a key assumption is that the error terms maintain constant variance and exhibit no autocorrelation When these assumptions are violated, the resulting variability in autocovariance and self-dependence can lead to unbiased regression coefficients estimated through the least squares method, but they will no longer be the most efficient estimates.
The GFT (Generalized Least Squares) approach addresses its disadvantages by assuming a fully defined model, which accounts for variations in error variance across different target groups while maintaining consistency within each object's range.
GLS provides consistent and asymptotic estimates while enabling the correction of autocorrelation and variance changes in regression models using tabular data.
EMPIRICAL FINDINGS AND ANALYSIS
Statistical analysis outlines the variables that offer essential insights into the research data As shown in Table 5, the analysis includes key statistics such as the range, mean, maximum, minimum, and standard deviation for variables including microcredit loan size, age of the household head, education level of the household head, and household labor size.
Table 4: Statistics of described results
The study analyzes the annual profitability of household businesses, highlighting a scale of 853, with a focus on the impact of microcredit Loans from microfinance institutions (MFIs) range from VND 5 million to VND 270 million, with the largest loans provided by the People's Credit Fund, while conventional MFIs offer loans capped at VND 50 million Additionally, the research emphasizes the importance of training, indicating that business owners have access to skills training courses in financial management to enhance their business operations.
In Vietnam, the impact of microfinance on household businesses reveals that untrained household owners outperformed those who received training The analysis shows a higher representation of female-headed households, with an average gender variable of 1.579 Additionally, the average education level of household heads is approximately 4.1, indicating that most have attained secondary or higher education Furthermore, the data suggests that household labor size is relatively small, with an average of only 2.525 members per household.
The correlation coefficient (r) is a statistical measure that evaluates the relationship between two variables, x and y, ranging from -1 to 1 A correlation coefficient of 0, or close to it, indicates no relationship between the variables, while values near -1 or 1 signify a strong correlation A negative correlation coefficient (r < 0) suggests an inverse relationship between the two variables.
A negative correlation indicates that as one variable (x) increases, the other variable (y) decreases, and vice versa; conversely, a positive correlation signifies that both variables move in the same direction, meaning when x increases, y also increases, and when x decreases, y decreases as well.
The research team employed the Pearson correlation coefficient to assess the linear relationships between independent variables in their model The analysis revealed no pairs of independent variables exhibiting strong correlations, indicated by coefficients near 1 or -1 This finding suggests a low likelihood of multi-collinearity issues within the model, implying that the independence of the variables is maintained.
Table 5: Pearson correlation matrix results r icr Ocredit ι 0353374 -2959238 -.2605863 0327799 training -3.32:9924 -4.053757 7238326 age S 451782 3.S14544 5.537238 463317S scale 31.68747 41.27154 -9.58406S 9431881 infrastructur e
(b-B5 Difference a qr t di ■ a g ( v_b-V_E) ) Ξ Ξ rd er Ocredit 0339511 4131653 - 3792142 08034 training -6.347919 -7.84394 1.496021 age 17.32944 6.314824 11.01461 1.02735 infrastructure 4.774484 -1.862329 6.636813 1.1572
In order to select suitable models, the Hausman test was used with both models (1) with the dependent variable ‘profit’ and the model (2) with dependent variable
‘productivity’ to choose between FEM regression and REM.
Table 6: Hausman test results with model (1)
Coefficzienta b = Conaiatent under Ho and Ha,' obtained from JItreg
E = Inconaiatent under Ha r efficient under Ho,' obtained from JItreg Ieat: Ho: difference in Coezzicienta not systematic chi2 (5) = (b-B) , [ chi 2 = 0.00
The author employs the GLS regression method to achieve asymptotic estimation, effectively addressing issues of autocorrelation and variance in regression models that utilize panel data.
4 Model results by GLS regression
The study analyzed 11 explanatory variables, finding nine with significant coefficients between 1-10% in model (1) In contrast, model (2) revealed only seven variables with significant coefficients Notably, the regression coefficient for microfinance (microcredit) was 0.584, which is statistically significant at the 1% level, aligning with the authors' expectations This indicates that for every increase of 1 million in microfinance loans, household business profits are projected to rise by 0.58 million annually.
In model (2), each million VND of micro loans correlates with an increase of 0.74 million VND in annual labor productivity for households, indicating a positive effect of microfinance on business performance However, the low value of microcredit, primarily under VND 30 million, suggests limited capacity for significant investments in fixed assets or technology The survey revealed that while microcredit is crucial for generating working capital, most households initially relied on personal savings or loans from family and friends to finance fixed assets Consequently, few households utilized microfinance loans to expand their production and business facilities.
The inclusion of the "training" variable highlights the role of MFOs in offering business production skills training to customers, which has implications for their performance However, the analysis reveals that neither model shows a statistically significant impact on the profitability or labor productivity of household businesses.
37 Table 10: Results of the analysis of the effect of microcredit on the profitability of household businesses
Number of observations = 736 Number of groups = 168 Prob>chi 2 = 0.00
Table 11: Results of the analysis of the effect of microcredit on labor productivity of household business
The age of the household head positively influences business profits, with each additional year correlating to an increase of 0.88 million VND annually However, this age factor does not significantly impact household productivity Additionally, the gender of the household head plays a notable role, as male heads generate approximately 7.9 million VND more per year compared to their female counterparts, although gender does not significantly affect household labor productivity.
The regression analysis revealed that the industry variables had coefficients of -24.5 and -63.73, both of which were statistically significant, aligning with the author's expectations This indicates that household businesses in the non-agricultural sector are more effective in utilizing microfinance loans compared to agricultural households, with non-agricultural households generating annual profits exceeding 24.5 million VND and demonstrating higher labor productivity at over 63.73 million VND per year In contrast, the facility variables did not exhibit statistically significant effects on either of the dependent variables.
The analysis revealed a statistically significant regional variation at 5% in model (1), with a regression coefficient of -12.01, indicating that urban households generate over VND 12.01 million more annually than rural households when borrowing from microfinance However, in model (2), this variable loses its statistical significance, and there is no notable difference in household labor productivity between urban and rural regions.
RECOMMENDATIONS
The research findings on the micro-credit status of household businesses in Vietnam, along with the credit development strategies from Microfinance Institutions (MFIs), have led to several recommendations aimed at enhancing the efficiency of credit for these businesses.
To begin with, we must continue to study, supplement and improve the legal framework to support the development of microcredit for household businesses.
In June 2017, the Prime Minister signed Decision No 20/2017/QD-TTg, which regulates the implementation of microfinance programs and projects by political organizations, socio-political organizations, and non-governmental organizations, effective from August 1, 2017 This decision aims to enhance the legal framework for microfinance in Vietnam, facilitating the diversification of organizational types and the expansion of microfinance products during the second phase of the microfinance system project Additionally, funding sources for these programs are becoming increasingly varied, encompassing both compulsory and voluntary savings deposits.
Decision No 20 establishes that voluntary savings deposits in microfinance programs cannot exceed 30% of total allocated funds, while the maximum loan amount for clients is capped at 50 million Additionally, regulations governing the autonomy and accountability of lending, along with client capacity requirements, play a crucial role in ensuring the effective and purposeful use of microfinance loans.
The regression study in Chapter 2 indicates that an increase of 1 million VND in microfinance leads to a profit increase of 0.58 million VND per year and a rise in labor productivity by 0.74 million VND annually for household businesses These findings highlight the positive influence of microfinance loans on business performance and labor productivity; however, the overall impact remains modest This limited effect can be attributed to the relatively low value of current microcredit loans, which primarily serve to supplement working capital rather than facilitate significant investments in fixed assets, machinery, and equipment necessary for production.
Many surveyed households initially relied on personal savings or funds from family, friends, and relatives, as well as mortgaging land or homes, to secure bank loans for fixed asset investments However, during the microfinance loan period, only a limited number of households were able to invest further in production and business facilities using this capital source.
To foster household economic development, the government should implement a microfinance initiative that offers tailored loan programs for household businesses, addressing their specific capital needs This initiative must include diverse quotas based on factors such as business type, region, gender, and age of the household head to effectively meet the varied demands of clients.
The State needs to establish a comprehensive framework and policies specifically aimed at supporting individual household businesses Currently, existing mechanisms and incentives primarily benefit catering enterprises, leaving household businesses without adequate support Additionally, many local government bodies lack the necessary professionalism and resources, creating significant challenges for the operation and growth of these individual businesses.
To establish an effective loan model, it is essential to align it with the socio-cultural characteristics of the local community While many microfinance institutions (MFIs) in Vietnam adopt successful global lending practices, not all have thrived; some have faced significant challenges and failures Therefore, it is crucial for each MFI to conduct thorough market research, emphasizing the understanding of cultural and social dynamics in their specific regions The loan model must be tailored to meet the unique needs of customers in each area, as a one-size-fits-all approach is ineffective in the diverse landscape of microfinance.
Large-scale microfinance institutions (MFIs) often face challenges in aligning their lending models with local cultures across diverse regions The presence of multiple loan models can create operational pressures on management systems To address this, ongoing research is essential to refine lending models, ensuring they are tailored to develop core processes and establish fundamental standards The effective implementation of these models must consider the socio-cultural characteristics unique to each locality.
To enhance borrowers' willingness to repay microcredit loans, it is essential to implement stronger incentive measures, especially given the inherent lack of collateral in microfinance In Vietnam, microfinance institutions (MFIs) have adopted strategies like group loans and gradually increasing loan amounts to encourage debt repayment However, market pressures from competing credit organizations and financial companies have made it more challenging for borrowers to access capital, despite potentially high lending rates This situation may lead to a decline in borrowers' sense of responsibility regarding capital use and repayment To improve lending effectiveness and ensure safety, MFIs should offer meaningful incentives, such as increased interest rates and larger loan sizes for customers with strong credit histories The design of these dynamic incentives should be tailored to the market while remaining compelling enough to engage borrowers effectively.
In addition, we must keep enhancing the role of savings in relation to lending activities of MFIs Savings activities always play a collateral role, to raise the willingness of
In recent years, Vietnamese multiformal organizations have introduced various voluntary and compulsory savings options, yet the average savings per customer remains low, limiting their potential as valuable loan assets To enhance the effectiveness of savings alongside lending, it is crucial to improve the quality of savings activities This includes diversifying and tailoring savings products to meet the specific needs of different customer segments based on locality, industry, and cash flow It is essential to create attractive savings options that encourage consumers to view saving as a fundamental right, rather than merely a prerequisite for accessing microfinance loans.
To support household businesses, it is essential to streamline loan procedures, making it easier for them to access financing Borrowing policies should be tailored to the needs of the business sector, offering flexible loan terms This approach enables new household businesses to secure micro-capital, which can be utilized to expand operations, implement innovative technologies, and enhance overall efficiency in production.
Implementing a weekly loan monitoring system is essential for microfinance institutions to effectively address customer challenges By developing structured credit packages, these institutions can provide targeted support that enhances income and boosts business efficiency, all while minimizing the risk of bad debts.
Micro-credit should be regulated and restructured with reasonable loan terms to help households enhance their financial management skills Additionally, microfinance institutions require substantial support from the government, along with suitable public policies, to ensure sustainable growth Furthermore, the accessibility of micro-credit significantly contributes to the overall GDP growth of a nation.
The advancement of databases and expertise in microcredit has significantly contributed to the growth of household businesses To enhance this process, it is essential to detail the information storage and effectiveness measurement, involving both banks and suppliers in the evaluation Additionally, clarifying various service levels will provide a comprehensive understanding of loan effectiveness Ultimately, implementing flexible lending policies that accommodate diverse customer profiles and a range of collateral options is crucial for fostering growth in this sector.
43 customers on non-registered business forms will help reduce the legal burden as well as save administrative costs.