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

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Presentation on theme: "Is microfinance an important instrument for poverty alleviation? The impact of microcredit programs on self-employment profits in Vietnam Robert Lensink."— Presentation transcript:

1 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 Finance Faculty of Economics and Business University of Groningen, the Netherlands

2 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 | 2

3 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 | 3

4 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 | 4

5 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

6 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) , All credit11239, , VBSP program1954, , All microcredit programs10217, , Other formal credit10231, , , All credit114513, , VBSP program3135, , All microcredit programs10098, , Other formal credit13651, , | 6

7 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 Y: household profits X: household characteristics V: commune characteristics Average impact of credit access (1) | 7

8 Impact estimation method (2): cross-section analysis Impact of credit participationC: 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 1 st stage Instruments: all household attributes interacted with credit access X ij T ij E ij (2) | 8

9 Impact estimation method (3): fixed-effect analysis Impact of credit participation C: amount of credit received η ij : unobserved fixed household attributes μ j : 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) | 9

10 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 | 10

11 Impact of microcredit from the VBSP Models Credit access Amount of credit received OLS pooled sample OLS pooled sample IV pooled sample FE IV within FE eligibility *** *** *** access to VBSP credit VBSP credit * Hansen J test- Pval Endogeneity test -Pval | 11

12 Impact of all microcredit programs Models Credit accessAmount of credit received OLS pooled sample IV pooled sample FEIV within FE Eligibility *** *** *** access to microcredit microcredit *** Hansen J test- Pval Endogeneity test -Pval | 12

13 Impact of other formal credit Models Credit access Amount of credit received OLS pooled sample OLS pooled sample IV pooled sample FEIV within FE eligibility0.511***0.506*** *** other formal credit 5.48e-06*** *** *** Hansen J test- Pval Endogeneity test -Pval | 13

14 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 | 14

15 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 | 15


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