Implementing deposit insurance policy at microfinance institutions: Ensuring the legitimate interests of depositors

16:22-22/07/2022

Reality has proven that microfinance activities continue to affirm their essential role in enhancing the level of access to financial services of the poor and low-income populations, making a significant contribution to implementing the policy of hunger eradication, poverty alleviation, and restriction of usury, especially in rural and remote areas. Therefore, the Government needs to continue effectively implementing solutions to build and develop microfinance activities, including implementing deposit insurance policies at these institutions, thereby mobilizing and expanding the scale of capital sources for microfinance institutions.

In a nutshell, microfinance is the granting of small loans (also known as microcredit) to low-income households to help them participate in the production or initiate small business activities. In addition, microfinance often entails a series of other services such as credit, savings, and insurance, because the poor and low-income populations have a great need for financial products but often find it challenging to access these formal financial services.

A microfinance institution is a type of credit institution that mainly conducts many banking activities to meet the needs of individuals, low-income households, and small businesses.

Microfinance – A tool for poverty alleviation and prevention of usury

Currently, units involved in providing microfinance services in Vietnam can be divided into three types. The first is the organizations established and operating under the Law on Credit Institution's provisions, for example, commercial banks, Bank for Social Policies, people's credit funds, and microfinance institutions. Secondly, the organizations do not operate according to the banking law, but according to the Prime Minister's Decision No. 20/2017/QD-TTG stipulating the operation of microfinance programs and projects of political organizations and socio-political organizations, non-governmental organizations licensed by government agencies and subject to supervision by these agencies, including micro-organizations of political organizations, socio-political organizations, non-governmental organizations. Thirdly, informal organizations operate outside of government regulation and control.

In Vietnam, there are about 04 official microfinance institutions licensed by the State Bank of Vietnam to establish and operate in accordance with the Law on Credit Institutions, including Tinh Thuong one-member limited liability microfinance institution (TYM), two or more members microfinance limited liability institution M7 (MF – MFI), Thanh Hoa more than two members microfinance limited liability institution (Thanh Hoa MFI) and one-member limited liability microfinance institution for poor self-employment workers (CEP). In addition, there are other credit institutions that provide microfinance services in Vietnam, such as the Bank for Social Policies and the people's credit fund system.

Over the past years, with the accurate renovation policy of the State, Vietnam has achieved many impressive achievements in economic development and especially in poverty reduction and hunger eradication, in which microfinance activities played a remarkable role. Moreover, microfinance activities continue to affirm their essential role in increasing the level of access to financial services of the poor and low-income populations, making an important contribution to the implementation of the policy of hunger eradication, poverty reduction, and usury limitation, especially in rural and remote areas.

With flexible savings products and small loans, quick procedures, flexible repayment terms and schedules, microfinance institutions, programs, and projects have helped the poor and low-income populations quickly access financial services to improve life and organize production and business. In addition to the economic meaning, microfinance activities also have a profound social sense when microfinance customers enjoy various non-financial services such as sharing and exchanging production and business experiences; improving knowledge on health, population, family planning; health examination, and consultation.

Depositors' interests at microfinance institutions are always guaranteed

The Law on Deposit Insurance 2012 and Decree No. 68/2013/ND-CP dated June 28, 2013, detailing and guiding the implementation of the Law on Deposit Insurance, provides detailed instructions: "Microfinance institutions must participate in deposit insurance for deposits of individuals, including voluntary deposits of microfinance customers, except for compulsory savings according to regulations of microfinance institutions." Thus, like other credit institutions, the interests of depositors at microfinance institutions are always guaranteed, and the competitive advantages in providing convenient savings services to mobilize and expand capital sources for microfinance institutions are promoted.

In fact, microfinance institutions' savings products meet customers' needs and affirm the prestige and reliability of microfinance institutions to their members. The prominent feature of microfinance is mutual support and assistance among low-income members in the form of unsecured loans through the guarantee of a group of borrowers (5 to 7 people or more). If anyone in the group has difficulty paying their debts when they fall due, the rest will help pay those debts. The method of paying principal and interest is flexible by week, two weeks, month, or quarter in accordance with the purpose of each loan and the production and business cycle. As a result, the bad debt ratio of microfinance institutions is low; business results are pretty high, with income higher than expenses.

Over the past, the Deposit Insurance of Vietnam has always focused on implementing deposit insurance policies at microfinance institutions synchronously with other types of insured institutions, although the current number of microfinance institutions is still modest. The implementation of deposit insurance policies at microfinance institutions is timely and fully implemented by the Deposit Insurance of Vietnam through a series of professional activities such as: granting and re-granting Certificates of deposit insurance participation; participating in off-site supervision, on-site examination, and handling the process of restructuring credit institutions; communicating on deposit insurance policies.

Specifically, in terms of participating in off-site supervision and on-site examination, the Deposit Insurance of Vietnam always strives to ensure uniformity and consistency in accordance with the examination regulations of the Deposit Insurance of Vietnam, contributing to detecting shortcomings and limitations in governance operation, internal control, capital mobilization, credit activities, accounting, cash collection and payment, management of documents and books... as well as the compliance of the provisions of the law on deposit insurance. Furthermore, the Deposit Insurance of Vietnam is ready to assist microfinance institutions in clearly identifying the causes and proposing remedial measures.

In addition, the Deposit Insurance of Vietnam has determined that deposit insurance policy communication is one of the crucial operations that need to be promoted at microfinance institutions, which will raise the awareness of the micro-finance institutions about deposit insurance policies, increase the sense of self-discipline to comply with regulations and guidelines of the Deposit Insurance of Vietnam, contributing to stabilizing the operation of the national banking and financial system.

In addition to the role of deposit insurance, over the past time, the legal environment for microfinance activities in Vietnam has also been continuously improved to create conditions for microfinance to develop, thereby promoting financial inclusion and contributing to poverty reduction and limitation of black credit.

Completing the legal environment to be more suitable for microfinance activities

After the 2010 Law on Credit Institutions was passed, and microfinance institutions were officially recognized as a type of credit institution, the guiding documents on the operation of microfinance institutions have been gradually completed. Particularly in the first six months of 2018, there were three new important documents issued, including new regulations on licensing, organization, and operation of microfinance institutions (Circular No. 03/2018/TT-NHNN dated 23/02/2018); regulations on dossiers, order, and procedures for approving changes of microfinance institutions (Circular No. 10/2018/TT-NHNN dated 12/03/2018); guidance on the financial regime for microfinance institutions (Circular No. 18/2018/TT-BTC dated 12/02/2018).

Regulations on the establishment, organization, and operation of microfinance programs and projects of political organizations, socio-political organizations, and non-governmental organizations have also been promulgated by the Prime Minister (Decision No. 20/2017/QD-TTG dated 12/6/2017) to encourage and facilitate the transformation of large-scale microfinance programs and projects into microfinance institutions and strengthen supervision and State management activities of ministries, departments, and localities for microfinance activities...

With the current legal framework, the activities of microfinance institutions and microfinance programs and projects will be more closely managed and facilitated for safer, more sustainable, transparent, and effective development.

State management agencies' policy-making and management capacity is focused on strengthening many bilateral and multilateral support activities from international financial institutions and countries with developed microfinance activities. As a result, the capacity of microfinance institutions programs and projects has improved. Microfinance programs and projects of political organizations, socio-political organizations, and non-governmental organizations are interested and facilitated by the People's Committees of provinces, cities, departments, and branches by creating favorable conditions for completing dossiers and procedures for operation registration or transformation into a microfinance institution in accordance with the provisions of Decision No. 20/2017/QD-TTG.

The management and supervision of microfinance activities and the training and fostering of knowledge about microfinance are interested and enhanced by all levels and sectors so that the operation of microfinance institutions and microfinance programs and projects gradually become effective. Coordination between socio-political organizations with microfinance programs and projects with the Bank for Social Policies and Agribanks in provinces and cities in examining the use of capital at borrowers, handling customers' debts at risk due to objective reasons. Consolidating loan and savings groups and correcting weak and ineffective groups has been regularly focused on. Communication and awareness-raising about microfinance in the whole society has been paid attention to by all levels, branches, and the media and press agencies in various forms to help people understand the role and benefits of microfinance...

Regarding capital sources for microfinance activities: To create favorable capital for microfinance activities, ministries and branches have had many practical mechanisms and policies which support microfinance institutions to access preferential capital sources through support from preferential capital sources of international financial institutions... People's Committees of provinces and cities have paid attention to arranging funding to supplement operating capital sources for political – social organizations with microfinance programs and projects in the locality; actively mobilizing and attracting funding and foreign aid for microfinance activities...

As a result, the operational role of microfinance in socio-economic development, hunger eradication, and poverty reduction has been entirely, correctly, and comprehensively recognized by all levels, sectors, and socio-political organizations with proper attention and favorable conditions for more development.

Microfinance activities still face many difficulties and challenges

Although very positive results have been achieved thanks to the efforts of all levels and sectors for hunger eradication and poverty reduction and improving financial access for the poor and low-income populations, microfinance activities in Vietnam still face many difficulties and challenges.

Specifically: The management is not focused, and the coordination is still inadequate, leading to the slow examination, supervision, development, and issuance of documents regulating microfinance activities.

In addition, although the current legal framework applied to microfinance activities has been developed relatively fully, the implementation process still has some shortcomings. A number of regulations need to continue to be supplemented and perfected, to ensure that they are suitable to the characteristics of microfinance activities, especially those related to the management and use of foreign non-governmental aid; regulations on organization, operation, and management of associations; regulations on organization and operation of social funds and charity funds; regulations on management and use of official development assistance, concessional loans from donors...

Moreover, the Microfinance Association has not been established to perform the role of a representative organization, acting as a focal point to support training and consultation  for microfinance institutions, microfinance programs and projects systematically.. .

In addition, the proportion of the poor populations and low-income households in Vietnam is relatively high, so the need to borrow capital for production and business, improving the lives of members from microfinance institutions and microfinance programs and projects is growing. In contrast, the growth of capital sources of microfinance programs and projects faces difficulties. The source of preferential capital, capital mobilized from organizations, agencies, and unions, is still limited; Many programs and projects depend on funding sources. Difficulty in funding has caused many microfinance programs and projects to have a small scale of operation, lack professionalism, and have not had a widespread impact.

Meanwhile, the informal microfinance sector (including individual activities in small groups through forms such as hui/ho, borrowing from relatives, friends, neighbors, or borrowing from lenders, pawnshops...) posts potential dangers about excessively high interest rates beyond the bearing of borrowers and the risk of capital loss for depositors, affecting the lives of the poor and low-income populations as well as security and order in the locality.

In rural and remote areas, depositors at microfinance institutions have not yet understood the deposit insurance policy, so they are still afraid. Some microfinance institutions have not understood the deposit insurance policy or fully implemented it, so they are limited in encouraging people to deposit money at this institution. The implementation of deposit insurance policy at microfinance institutions also has many shortcomings, such as there are microfinance institutions that have not applied for deposit insurance participation on time; have not provided enough reporting information according to the regulations of the State Bank on reporting information regime; there are still many errors in the observance of the legal provisions on deposit insurance. The main reason comes from the awareness of the microfinance institutions themselves to the provisions of the law on deposit insurance, which has just stopped at a basic level; the relationship between the competent authorities related to the provision of information on the establishment and operation of these organizations is not close...

The need to continue to create conditions for microfinance to develop

To continue to implement solutions to build and develop microfinance activities effectively, firstly, on the part of state management agencies and local authorities: the SBV needs to coordinate with relevant ministries and sectors to develop and issue regulations to facilitate the linking between activities of types of credit institutions with the activities of microfinance institutions; at the same time, coordinate with ministries, departments, localities, and socio-political organizations to speed up the process of granting registration certificates of operating microfinance programs and projects according to the provisions of Article 21 of the Decision No. 20/2017/QD-TTG. The concerned ministries and departments should study and propose solutions to create conditions for socio-political organizations to continue to implement microfinance activities and concentrate capital sources for microfinance; to support licensed microfinance programs and projects, microfinance institutions to access other preferential loans, enjoy capital sources for hunger eradication and poverty reduction from organizations and individuals; to formulate policies to encourage the development of microfinance in the overall economic development plan of the country; studying and amending regulations on organization, operation, and management of associations to support and encourage the development of microfinance activities... People's Committees of provinces and cities closely manage and fully grasp the activities of microfinance programs and projects in the locality to ensure the effectiveness and safety of the programs and projects.

Secondly, it is necessary to develop a long-term overall development strategy for this type of microfinance so that this type of microfinance can continue to contribute more actively to hunger eradication, poverty reduction, improvement of people's living standards, and assurance of social security and socio-economic development of the country.

Thirdly, with the issuance of new regulations by the Government and the State Bank of Vietnam on the organization and operation of microfinance institutions (Circular No. 03/2018/TT-NHNN) and microfinance programs and projects (Decision No. 20/2017/QD-TTG), microfinance institutions and political organizations, socio-political organizations, and non-governmental organizations need to focus on reviewing the organization and operation of microfinance to adjust and perfect it in accordance with the provisions of law, ensuring safe, effective, sustainable, not-for-profit operations, and contributing to job creation and improvement of the lives of the poor and low income.

Microfinance institutions and political organizations, socio-political organizations, and non-governmental organizations with microfinance programs and projects need to have developed strategies and plans in the coming time in line with guidelines and orientations of the State, in which it is necessary to focus on developing new products and services suitable to the characteristics of Vietnam and non-financial products to support more and more effectively the poor and low-income populations, in which the beneficiaries are primarily women...

In particular, continuing to focus on communication and dissemination to help people, including the poor and disadvantaged, improve their understanding and easy access to microfinance to improve their financial accessibility. At the same time, promoting the implementation of deposit insurance policies at microfinance institutions, through many forms, including information and communication to spread the deposit insurance policy to people in rural and remote areas; strengthening the connection between central agencies, the Deposit Insurance of Vietnam with microfinance institutions to spread policies to these institutions, thereby strengthening depositors' confidence in the microfinance institutions, increasing capital sources for the microfinance institutions, synchronously combining other policies so that microfinance institutions have conditions for safe, sound and effective development.

Department of Research and International Cooperation