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

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

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

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 -

Notations 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

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 1145 13,972.02 20,941.86 313 5,808.70 13,707.30 1009 8,645.11 17,085.03 136 51,849.26 50,543.04

Impact estimation method (1): cross-section analysis Y: household profits X: household characteristics V: commune characteristics Average impact of credit access 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

Impact estimation method (2): cross-section analysis C: amount of credit received Impact of credit participation 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

Impact estimation method (3): fixed-effect analysis C: amount of credit received ηij: unobserved fixed household attributes μj: unobserved fixed commune attributes Impact of credit participation 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

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

Impact of microcredit from the VBSP Models Credit access Amount of credit received OLS pooled sample IV FE IV within FE eligibility -0.508756*** -0.513071*** -0.510970*** -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

Impact of all microcredit programs Models Credit access Amount of credit received   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

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

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

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