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Increasing the Access of SMEs to Credit in Vietnam

Private sector development in Southeast Asia is fundamental to boosting growth and development in many countries in the ASEAN region. The influx of startups, as well as small and medium enterprises (SMEs) in the regions, have attracted the attention of numerous global investors and venture capitalists. It will help both developing and less developed countries advance and ultimately reduce poverty, increase employment and have various positive multiplier effects in the countries. However, there are still many SMEs that are unable to thrive and grow due to their inability to access financing from banks. This commentary focuses on the underlying reasons why some SMEs lack access to finance specifically in Vietnam.

In the ASEAN region, Vietnam is seen as an economically viable place for multinational companies to operate. Various big corporations like Coca-Cola, Nike and Adidas, etc. have all been working there for many years. Today with many more SMEs across the regions, there is an urgency and need for Vietnam to compete, encourage business startups and be innovative. The role of small and medium enterprises in Vietnam’s economy is very important. According to statistics by the Ministry of Planning and Investment (MPI), SMEs contributed approximately 48% of Vietnam’s GDP in 2012. Moreover, based on research by the United Nations Economic and Social Commission for Asia and the Pacific, since SMEs are usually labour intensive they employed 77% of Vietnam’s labour force. Judging by these statistics, SMEs contributed to Vietnam’s GDP as well as its labour force.

Small and medium enterprises have played a significant role in Vietnam’s economy. However, questions still remain. Why are SMEs in Vietnam faced with challenges accessing finance and credit despite their positive contribution to the country’s economy? In their research paper, Nhung Nguyen, Christopher Gan and Baiding Hu addressed this challenge as “the missing middle.” Commercial banks would rather not loan money to small enterprises. The Ministry of Planning and Investment in their survey in 2012 of SMEs ability to access financing indicated that approximately 30% of SMEs in Vietnam could not get any financing from financial institutions and another 30% that could get financing faced numerous difficulties in accessing funds.

Based on numerous reviews regarding the lack of access to finance and credits for SMEs in Vietnam, the main underlying reason is due to nepotism in the banking industry. Moreover, the role of gender also played a part together in conjunction with an unfriendly business climate for SMEs. According to the World Bank, financial institutions rejected loans to SMEs due to the lack of profitability and the lack of acceptable collateral. This analysis correlates with the findings of the Provincial Competitiveness Index (PCI) 2015 report together with the Vietnam Chamber of Commerce and Industry and the United States Agency for International Development (USAID).

The 2015 survey found that the percentage of firms having bank loans in 2015 for micro-sized firms was 40%, small firms 62%, medium firms 74% and 81% for large firms. Access to bank services in 2015 also took into consideration how common it was for these enterprises to give bribes to the bank staff: Micro (64%), small (56%), medium (49%) and large firms (39%). The percentage of firms that experienced how interest rates and other lending conditions applied to private businesses are always more difficult than those for SOEs: micro (74%), small (71%), medium (65%) and large (48%). These three indicators conducted by the Provincial Competitiveness Index in Vietnam explain how micro, small and medium enterprises are treated less equitably than are large enterprises.

Personal relationship between SMEs and banks are important. Le Thi Bich Ngoc developed a model that examines the importance of interpersonal banking relationships between small enterprises and banks in Vietnam. The results show clearly that the speed of loan application approval as well as the probability for SMEs to get bank loans increases when there is a strong banking relationship between the two actors, whether it’s through networking or purchasing more services from the banks. In addition, there are managerial implications. It is very important for the owners of enterprises in Vietnam to purposely allocate some of their time in order to build a relationships with bank officers. Building relationships with banks will help micro, small and medium entrepreneurs gain easier access to loans and receiving advice as to which bank service will be beneficial for their business ventures.

Street market in Hanoi. (Cédric Z/Flickr)

The role of gender also plays an important role in understanding the credit problem for Vietnamese SMEs. In Vietnam, women entrepreneurs are estimated to own 21% of formal enterprises with 42% focused on microenterprises. However, the report indicated that banks in Vietnam perceive women entrepreneurs differently than men which causes a gender bias in accessing financing for their businesses. According to the survey reported by the World Bank, banks in Vietnam often view women entrepreneurs as a segment not worthy of investment and their businesses are likely to be less profitable than their male counterparts. Moreover, women entrepreneurs are often considered to be less knowledgeable in the business world and are therefore perceived as riskier customers.

Cultural practices also play a part in a woman’s ability to access finance. In order for women entrepreneurs to meet all the requirements for loans from banks, they are required to provide collateral to guarantee the loan. However, since land in Vietnam is usually used as a form of collateral, many women entrepreneurs cannot meet this requirement because their names are not included on the land use right certificates. In Vietnam, the state issued the land use right certificate (LURC) law clearly states that both women and men should have equal rights and opportunities to the access of land use and rights. However, in practice, women hold fewer rights to land and are allocated a smaller plot of land to farm.

These indicators illustrate how important it is for women to have their names on the land certificate so it can be used as a guarantee for a loan. Lacking this collateral means that it is almost impossible for women entrepreneurs to gain access to additional financing and credit for their business development. Based on surveys and interviews in the region, women also recognize that the loan application from banks in Vietnam is often confusing and state banks do not cater to the needs of women entrepreneurs.

SMEs for most countries in the ASEAN region will be the engine of growth and development. These enterprises will create many opportunities for employment across different sectors of the country. Given their ability to explore the domestic market they will spur radical innovation that can potentially lift the country out of poverty. Their contribution through economic activities will play a significant role towards increasing the nation’s GDP. In Vietnam the SMEs were involved in 48% of the country’s GDP. Therefore, it is without question that increasing SMEs access to capital and credits should be one of every nation’s important development goals.

In the case of Vietnam, based on the problems that are still facing, there are numerous recommendations that the government should introduce or implement more effectively. For example, the government should encourage education and introduce new entrepreneurs to peer to peer lending (P2P) or crowdfunding mechanisms to give more access to credit, finance and banking for the unbanked SMEs. P2P lending is a crowdfunding platform that connects investors with other like business owners who seek loans through the use of the internet. Even though P2P might carry higher interest rates than traditional banks, they can be the last resort for SMEs to get access to credit. Furthermore, other advantages to using this platform to close the gap in access to credit is that they offer better rates of return, low fees for borrowers, innovative technology that provides transparency during transactions and most importantly the platform will provide access to lenders who are willing to take the risk of providing loans to business ventures that are smaller in scale.

At the moment, Vietnam does have some P2P platforms such as Huydong and Tima. However, there needs to be more players whether domestically or internationally who are willing to enter the Vietnamese market and provide access to credit to SMEs. By providing more P2P platforms, this recommendation could potentially overcome the inability of financial institutions in Vietnam to provide loans to SMEs. The use of technology provides transparency for transactions and the crowdfunding platform is willing to provide credit to SMEs with high risks and the probability of receiving loans will not be based on whether the borrowers are male or female entrepreneurs.

Secondly, regarding resolving the issue of collateral conditions for loans, the Vietnamese government should improve their collateral laws. Financial institutions often require borrowers to provide fixed assets such as land as collateral in order to guarantee a loan. However, as previously mentioned, women entrepreneurs sometimes lack fixed assets as their names are not on the land certificates due to divorce or cultural practices. Therefore, amending collateral law by not requiring that loan conditions be based on fixed assets but rather can be mobile collateral (inventories or capital) will be a positive change for any entrepreneurs who lack fixed assets. Expanding the collateral choices will be the first step, however, putting into practice the law will be difficult. This is because government officials will not be able to monitor every loan application that is rejected due to the inability to provide fixed assets as collateral.

Thirdly, the Vietnamese government should encourage more microfinance in order to provide access to credits for SMEs. Microfinance has been spreading around the world after it was first introduced by Dr. Muhammad Yunus of Grameen Bank in Bangladesh. Microfinance has been successful because it has demonstrated high repayment rates and has had a large social impact for women. Microfinance will benefit small and medium enterprises because the program will increase the enterprise’s business working capital, and provides access to more lucrative markets.

However, in order for microfinance to work effectively, the government once again needs to create stronger laws that provide a clear regulatory framework for semiformal institutions like microfinance to transform into formal institutions. Based on reports by USAID, some of international NGO’s working in Vietnam encouraging microfinance were not covered by any law and these NGOs found it hard to evolve into formal financial institutions.

Above all, these recommendations to increase access of SMEs to credit in Vietnam will only be possible and effective with the support of the Vietnamese government.