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

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

4. Data
Vietnam Household Living Standard Surveys 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 -

5. 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

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)
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

7. 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

8. 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

9. 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

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

11. Impact of microcredit from the VBSP
Models
Credit access
Amount of credit received
OLS
pooled sample IV FE
IV within FE
eligibility
***
***
***
access to VBSP credit
VBSP credit *
Hansen J test-Pval
0.0085
0.9495
Endogeneity test -Pval
0.7945
0.223

12. Impact of all microcredit programs
Models
Credit access
Amount of credit received
OLS pooled sample
IV pooled sample FE
IV within FE
Eligibility
***
***
***
access to microcredit
microcredit
***
Hansen J test-Pval
0.0745
0.9731
Endogeneity test -Pval
0.4531
0.0603

13. 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***
***
other formal credit
5.48e-06***
***
***
Hansen J test-Pval
0.558
0.7455
Endogeneity test -Pval
0.0000
0.8567

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

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