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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 (co-authored with Thi Thu Tra Pham)
Department of FinanceFaculty 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
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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
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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
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› 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
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
All credit 1145 13,972.02 20,941.86
VBSP program 313 5,808.70 13,707.30
All microcredit programs 1009 8,645.11 17,085.03
Other formal credit 136 51,849.26 50,543.04
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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
ln ij ij j ij ij ij ijtY X V E T E
Y: household profits
X: household characteristics
V: commune characteristics
Average impact of credit access
(1)
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Impact estimation method (2): cross-section analysis
Impact of credit participation
'ln ij ij j ij ij ijtY X V E C
C: 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 1st stage• Instruments: all household attributes
interacted with credit access XijTijEij
(2)
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Impact estimation method (3): fixed-effect analysis
Impact of credit participation C: amount of credit receivedηij: unobserved fixed household
attributesμj: 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) ''ln ijt ijt ijt ijt ij j ijtY X E C
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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
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Impact of microcredit from the VBSP
Models
Credit access
Amount of credit received
OLS pooled
sample
OLS pooled
sample
IV pooled sample
FEIV within
FE
eligibility -0.50875
6***
-0.513071*** -0.51097
0***
-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
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Impact of all microcredit programs
Models
Credit access Amount of credit received
OLS pooled sample
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
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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
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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
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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
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