microfinance in vietnam: lessons learnt from …phd. nguyen kim anh, phd. phi trong hien, ma. quach...

Editor: Associate Prof. PhD. Nguyen Kim Anh

MICROFINANCE IN VIETNAM: LESSONS LEARNT FROM TRANSFORMATION

This research report is under the copyright of Vietnam Microfinance Working Group (VMFWG). For the rights ofreproduction or translation, application should be made to VMFWG.

With financial support from Citi Foundation - Citibank Vietnam, ADA Organization, Metlife Foundation, andGive2Asia, the research was completed with the cooperation of the consulting group including Associate Prof.PhD. Nguyen Kim Anh, PhD. Phi Trong Hien, MA. Quach Tuong Vy, LLA. Doan Thai Son and MA. Nguyen ThiTuyet Mai, and the assistant team including MA. Dao Phuong Thao, Nguyen Tuong Vy Linh, and Le Mai Linh.The views of this research report are those of the authors, which do not reflect the views of VMFWG.

Citi Foundation

The Citi Foundation supports the economic empowerment and financial inclusion of low-to moderate-income people in communities where Citi operates. We work collaborativelywith a range of partners to design and test financial inclusion innovations with potential toachieve scale and support leadership and knowledge building activities. Through a "More

than Philanthropy" approach, we put the strength of Citi's business resources and people to work to enhanceour philanthropic investments and help improve communities. Additional information can be found at:http://www.citigroup.com/citi/foundation/index.htm

Appui au Développement Autonome (ADA)

For 22 years, ADA has been committed to developing microfinance services to populationsexcluded from traditional banking channels. Our aim is to strengthen the autonomy andcapacity of microfinance institutions (MFIs), professional associations and networks. In South-East Asia, ADA supports technically and financially the national microfinance networks of

Cambodia, Laos and Vietnam. ADA also provides support to governments to reinforce and structure the microfinance industry on regional and national levels. We develop and offer specific and innovative microfinance products to MFIs, trainings to microfinance professionals acting in and for the south, and supportMFIs in their search for funds. In addition, we have chosen to be present in the field of research to anticipatethe future needs of the world of microfinance and to measure the social impact of our actions. ADA, whoseheadquarters are in Luxembourg, pursues its goals with the support of the Directorate for Development Cooperation and Humanitarian Affairs. ADA benefits from the patronage of HRH Grand Duchess Maria Teresaof Luxembourg. For more information, please visit: www.ada-microfinance.org

Metlife Foundation

The establishment of Metlife Foundation was based on a simple and stronginsight: “Everyone has equal chance to access suitable financial instrument to achieve life’s objectives”. Thiscore belief has become our principle of operation and orientation for work culture since 1868. In 2013, thisbelief inspired Metlife Foundation in developing a new finance popularization strategy. Our conscientious dedication is to ensure that more low-income households in the world will have chances to access essential financial services to achieve life’s objectives.

Give2Asia Organization

Give2Aisa is a non-profit and non-government organization. Our core missionis promoting and inspiring the charity operation in Asia. With the support of

Give2Asia, donors and charity funds in Asia will donate charitable gifts to this area. For more information, pleasevisit: http://www.give2asia.org/

Vietnam Microfinance Working Group

The Vietnam Microfinance Working Group (VMFWG) was established as a forum for micro-finance practitioners to share experiences knowledge, skills and ideas of the microfinancesector to policy makers. For more information, please visit: www.microfinance.vn

HA NOI, 2016

VIETNAM MICROFINANCE WORKING GROUP (VMFWG)

MICROFINANCE IN VIETNAM:

LESSONS LEARNT FROM TRANSFORMATION

Editors:Associate Prof. PhD. Nguyen Kim Anh

Members of editing group:PhD. Phi Trong Hien

M.A. Quach Tuong VyL.L.A. Doan Thai Son

M.A. Nguyen Thi Tuyet Mai

2 - VIETNAM MICROFINANCE WORKING GROUP

We would like to express our sincere gratitude to the cooperation, support of information sharing and the precious time of organizationsand individuals given to us during the implementation of the Research.

We expect that the information, analysis and evaluation proposed bythe Research could create an overall picture, which reflects the development process, obstacles and difficulties; as well as lessonslearnt from the successful transformation of 03 official MFIs, therebytransmitting the experiences to motivate microfinance institutions, programs - projects in transforming.

We also expect that the recommendations and suggestions proposedby the Research could convey the autonomy, the experiences to develop a transformation program, plan with a specific and feasibleroad map as well as save costs for microfinance institutions, programs– projects in transforming; thereby, creating favorable conditions formicrofinance activities in Vietnam.

The experiences, results and recommendations of this Research shallbring up practical values in applications. Besides, the results of this Research could also present useful information for further research aswell as for microfinance practitioners, policy makers and governmentagencies.

We would like to express our thankfulness to the participants attendingand contributing feedbacks and suggestions on the draft of researchreport presented at the Annual Conference on “Microfinance Transformation and Sustainable Development in Vietnam” on 4th

December 2015 in Hanoi. Those useful feedbacks and recommenda-tions have been utilized to improve the quality of the report.

ACKNOWLEDGEMENTS

VIETNAM MICROFINANCE WORKING GROUP - 3

Finally, we express our gratitude to the donors including Citi Founda-tion - Citibank Vietnam; ADA; Metlife Foundation; and Give2Asia foryour encouragement and financial support to launch the idea andaccomplish the Research.

On behalf of the teamEditor

Associate Prof. PhD. Nguyen Kim Anh

TABLE OF CONTENT


ACKNOWLEDGEMENTSABBRIVIATIONLIST OF TABLELIST OF CHARTLIST OF DIAGRAMSSUMMARY1. Transformation process of MFIs 122. The impacts of transformation process 133. Advantages, Disadvantages and Challenges, Opportunities

in the process of transforming 144. Conclusion, suggestions and recommendations 14INTRODUCTION1. Rationale 162. Research Objectives 173. Research Fields 174. Research scopes 175. Research applications 186. Research limitations 18CHAPTER I. OVERVIEW OF MICROFINANCE INSTITUTIONS; TRANSFORMATION OF MICROFINANCE INSTITUTIONS IN THE WORLD AND VIETNAM 201.1. Overview of Microfinance institutions

1.1.1. Historical development and conception of microfinance

1.2. Overview of MFIs transformation1.2.1.The concept of transformation 231.2.2. Definition of MFIs transformation 231.2.3. Classification of transformation forms 241.2.4. The motivations of transformation 251.2.5. Transformation process 26

TABLE OF CONTENT


CHAPTER II. THE CASE OF TINH THUONG ONE MEMBER SMALL LMITEDLIABILITYMICROFINANCE INSTITUTION (TYM) 332.1. The motivations for transformation

2.1.1. The internal motivations 332.1.2. The external motivations

2.2. The transformation process of TYM2.2.1. To transform from program/project to

income-generating business unit (1992 - 2006) 342.2.2. To transform from income-generating business unit to

licensed microfinance institution (2006 - 2010) 352.3. The initial operation results and the future plan

2.3.1. The results 462.3.2. Financial efficiency and profitability

2.4. The lessons learned2.4.1. TYM’s commentary on advantages and disadvantages,

opportunities and challenges of the transformation 522.4.2. The lessons learnt from TYM

CHAPTER III. THE TRANSFORMATION OF M7 LIMITED LIABILITY MICROFINANCE INSTITUTION (M7-MFI) 553.1. The motivations 553.2. The transformation process of M7-MFI 56

3.2.1. Transforming from microfinance programs to Social Funds (1993 - 2010) 57

3.2.2. Transforming from Social Funds an official microfinance institution (2010 - 2012)

3.3. The initial operation results and the future plan3.3.1. The results 673.3.2. Financial efficiency and profitability 713.3.3. The next Five-year plan 73

3.4. The lessons learnt from M7-MFI’s experiences

TABLE OF CONTENT


CHAPTER IV. THE TRANSFORMATION OF THANH HOA LIMITED LIABILITY MICROFINANCE INSTITUTION (THANH HOA-MFI) 764.1. The motivations 764.2. The transformation process of Thanh Hoa MFI 76

4.2.1. Transforming from microfinance programs to Social Fund (1998 - 2008) 77

4.2.2. Transforming from Social Fund into official MFI (2008 - 2014)

4.3. The initial results and future plan4.3.1. Operating results 894.3.2. The next five-year plan

4.4. Lessons learnt from the transformation of Thanh Hoa MFI4.4.1. The comments of Thanh Hoa MFI on opportunities

and challenges of transformation process 954.4.2. The lessons learnt from transforming experiences

of Thanh Hoa MFI

CONCLUSION1. The process of transforming into microfinance institutions 982. Impacts after the transformation 1003. Difficulties, opportunities during the transformation process 1024. The lessons learnt from transformations 1045. Recommendations & suggestions 107

REFRENCE

ABBRIVIATION


SBV State Bank of Vietnam

CARD The Center for Agricultural and Rural Development

MFI Microfinance institution

MF Microfinance

NGO Non-government organization

B.O.M Board of Members

B.O.D Board of Directors

VWU Vietnam Women Union

WU Women Union

CS Compulsory deposit

VS Voluntary deposit

CI Credit Institution

CM Commercial Bank

ADB Asian Development Bank

TYM Tinh Thuong one member limited liability microfinance institution

M7-MFI M7 limited liability microfinance institution

Thanh Hoa MFI Thanh Hoa limited liability microfinance instiution

ABBRIVIATION


Decree No. 28: Decree No. 28/2005/NĐ-CP dated 09/03/2005 of the Government on the structure and operation of small size financial insitution in Vietam

Decree No. 165: Decree No. 165/2007/NĐ-CP dated 15/11/2007 of the Governmentamended and supplemented, annulled some articles of Decree 28/2005 / ND-CP of the Government on the structure and operation of small size financial insitution in Vietnam

PAR ratio Portfolio at risk ratio


LIST OF TABLEMicrofinance Development Milestone in Vietnam

Phases of transformation process

Vision and Mission of TYM before and after transformation

Capital structure of TYM from 2004 to 2014

Comparison of capital structure ratio of TYM in 2007, 2010 and 2014

Outstanding loan balance and number of borrowers of TYM

Vision and Mission of M7-MFI before and after transformation

Outstanding loan balance and number of credit customer of M7-MFI

Deposit balance of M7-MFI

Income and expense of M7-MFI

Vision and Mission of Thanh Hoa MFI before and after transformation

Capital structure from first official activities (12/3/2015) to 31/10/2015 of Thanh Hoa MFI

Growth in credit and number of credit customers of Thanh Hoa MFI from 2007 to 31/10/2015

Deposit balance of Thanh Hoa MFI from 2007 to 31/10/2015

Table 01

Table 02

Table 03

Table 04

Table 05

Table 06

Table 07

Table 08

Table 09

Table 10

Table 11

Table 12

Table 13

Table 14

LIST OF CHART


PAR ratio of TYM from 2007 to 2014

Growth in the number of employees of TYM from 2007 to 2014

Growth in operating scale of TYM from 2007 to 2014

Growth in Outstanding loan and credit customers of TYM from 2007 to 2014

Deposit growth of TYM from 2007 to 2014

Operational Self- Sustainability (OSS) of TYM from 2007 to 2014

Profitability of TYM from 2007 to 2014

Productivity and Performance of TYM from 2007 to 2014

PAR30 ratio of M7-MFI from 2010 to 2014

Growth in Outstanding loan and credit customers of M7-MFI from 2010 to 2014

Deposit growth of M7-MFI from 2010 to 2014

Operational Self- Sustainability (OSS) of M7-MFI from 2007 to 2014

Profitability of M7-MFI from 2010 to 2014

Productivity and Performance of M7-MFI from 2010 to 20144

Numbers of Employees of Thanh Hoa MFI from 2007 to 10/2015

Chart 01

Chart 02

Chart 03

Chart 04

Chart 05

Chart 06

Chart 07

Chart 08

Chart 09

Chart 10

Chart 11

Chart 12

Chart 13

Chart 14

Chart 15


LIST OF CHARTGrowth in deposit balance of Thanh Hoa MFI from 2007 to 10/2015

PAR30 ratio of Thanh Hoa MFI from 2007 to 10/2015

Operational Self- Sustainability (OSS) of Thanh Hoa MFI from 2007 to 10/2015

Profitability of Thanh Hoa MFI from 2007 to 2014

Productivity and Performance of Thanh Hoa MFI from 2007 to 2014

Chart 16

Chart 17

Chart 18

Chart 19

Chart 20

LIST OF DIAGRAMSThe process of transforming from unofficial and semi-official MFIs to official MFIs

The important milestones in the development of TYM

The important milestones in the development of M7-MFI

The important milestones in the development of Thanh Hoa

Diagram 01

Diagram 02

Diagram 03

Diagram 04


SUMMARYIn the desire to provide information, analysis, evaluation and experi-ence from transformation process of MFIs in Vietnam, this Research hasbeen conducted with the support of Vietnam Microfinance WorkingGroup (VMFWG) in data collection, synthesis of experiences, direct interview with leaders, managers of MFIs and individual participants.The Microfinance 2015 Report focused on three main objectives:

(i) Generalize the impacts of the transformation into official MFIs;

(ii) Identify the difficulties in the process of transforming to officialMFIs, thereby, assisting microfinance projects/programs in developing the initiative, planning with appropriate solutions intransformation;

(iii) Suggest solutions and recommendations for MFIs, governmentagencies, and other related parties to create a favorable environment for transformation.

1. Transformation process of MFIs

Generally, all of the three MFIs (TYM, M7-MFI and Thanh Hoa MFI)transform in two stages. However, there are some differences in the organizational structure and model as well as time period among thetransformation of these MFIs. Therein:

- The transformation process of TYM can be dividing into 02 stages:The transformation from program/project to income-generatingbusiness unit (1992 - 2006) and the transformation from income-gen-erating business unit to Licensed MFI (2006 - 2010).

- The transformation process of M7-MFI can be dividing into 02stages: The transformation from Program/Project to Social Fund(1993 - 2010) and the transformation from Social Fund to LicensedMFI (2010 - 2012).

- The transformation process of Thanh Hoa MFI could also be dividedinto 02 main stages. Stage 1 is the stage of transforming from


Program/Project to Social Fund (1998 - 2008). Stage 2 is the stageof transforming from Social Fund to Licensed MFI (2008 - 2014).

TRANSFORMATION EXPERIENCES

TRANSFORMATION PROCESS FROM 2 TO 4 YEARS

Research legalapplications/

records

Analyze capacity for

transformation

Define model fortransformation

Prepare budget(min. $150,000)

Select Strategicpartners

Define legalstatus of owners

Prepare humanresource and

Select consultants

Enlist supportfrom

stakeholders

Develop internalregulations

2. The impacts of transformation process

- Operational Network: In order to be consistent with the provisionsof law, several researches and network rearrangements have beendone by TYM. While M7-MFI tries to operate like other Social Funds,maintains operation with 03 branches, and established a new office in Hanoi; Thanh Hoa MFI still operates with 04 branches and03 transaction offices in 123 communes and wards of the 12 districtsin Thanh Hoa.

- Internal Impacts: The transformation process has changed thehuman resource policy of MFIs. TYM, M7-MFI and Thanh Hoa MFIhas faced several difficulties in setting up a governance and administration system for a professional credit institution.

- Productivity: Generally, the productivity of credit officers from TYM,M7-MFI and Thanh Hoa MFI increased in the subsequent years aftertransformation. The underlying reason of the increase is that thelevel of professionalism improves compared to that of a semi-officialorganization.


- Growth in outstanding loan: TYM, M7-MFI and Thanh Hoa MFI havebeen given a rise in the number of credit customers in each year.

- Growth in Savings: The transformation has had a positive impacton the operational fund of those MFIs. As a result, the saving balance has increased yearly. Especially, the rise in the voluntarysavings balance of TYM that was recorded as having reached thepeak in the three following years after transformation.

- Sustainable operation: All of those three MFIs tend to achieve sustainability with stable and efficient Operational Self- Sustainabil-ity (OSS), ROA, ROE ratios after the transformation.

3. Advantages, Disadvantages and Challenges, Opportunitiesin the process of transforming

Advantages Difficulties

- The consensus of Governmentagencies

- The Support of local governmentagencies

- Inheriting the activities of the SocialFund

- Grants and Technical support - Searching for suitable partner

- The knowledge of law is at a fairlevel

- Lack of experience in completingthe legal procedures

- Low charter capital that lead to limited ability in getting overseasloans

- Difficulties in finding partners withsimilar social mission, being capableand consensus, commitment tolong-term cooperation

Opportunities Challenges

- Overseas loans and capital mobilizing

- Transparent operation in consistentwith the legal framework

- New resources from contributingmembers

- Customer diversification - Product enlargement - Professional management system

- Limited access to technology - Competitive pressures from other

credit institutions- Limited access to funds due to low

charter capital - Higher expenses in the initial years of

transforming


4. Conclusion, suggestions and recommendations

Based on the analysis, evaluation and experiences of the three MFIsthat have been successfully transformed, the Research concludeswith some suggestions and recommendations for the Government,State Bank of Vietnam, Ministry of Internal Affairs, microfinance practitioners and Vietnam Microfinance Working group as to developa suitable legal environment, motivate and support practically institu-tions in the process of transforming to official MFIs. Thence, this shallcreate “a nudge” for Vietnam microfinance sector in the future.

INTRODUCTION


1. Rationale

After twenty years of development, Vietnam’s economy has madegreat progress: economy grows steadily yearly; the livelihood of residents improves day by day. However, the poverty rate is still at aquite high level. While there are still people that are living their lives atpoor levels, our social objective “justice, democracy, prosperity andcivilization” has still not been achieved. Towards that social prosperity,in the recent years, the Communist Party and the Government havealways tried their best to reduce wealth disparity by implementingpoverty reduction policies through the activities of the Vietnam Bankfor Social Policies, another microfinance programs. Although, thereare certain contributions, the recent microfinance activities are not attheir full potential due to several different reasons, especially the lackof a complete legal framework for the microfinance sector.

In Vietnam, microfinance activities have emerged for a long time andhave made certain contributions to the Government’s alleviation ofpoverty recently. However, those activities are still fragmented and donot really reflect their influences on society in general, on the poorpopulation in particular. On the other hand, we have not promotedall the outstanding advantages of microfinance from the view of social and business practices. There are several reasons that lead tothis phenomenon; however, the biggest reason is the formation anddevelopment of formal MFIs. Although, the legal framework for micro-finance activities has been created; The number of licensed MFIs remains at 3 up to this point in time. Besides, the “gaps”, the low possibility and low conformity of legal framework, the autonomy, willingness to transform the legal knowledge, transforming plan devel-oping skills and the deployment roadmap is still limited which has ledto the loss of resources (time, funding, manpower) and a certain confusion in the transition process of the organization.

The research shall assist microfinance practitioners in gaining autonomy, clearly defining the motivations, evaluating difficulties and


short-comings, as well as developing suitable deployment plans andfeasible transforming roadmap (including financial resources, humanresources, business plan and organizational structure,…). These initialpreparations should create favorable condition for easily implement-ing the transition from the microfinance organizations, programs andprojects into official MFIs as prescribed by the current legislation, aswell as prescribe the inadequacies of the microfinance frameworkand policies. Whereby, the Research “Microfinance in Vietnam: Lessons learnt from transformation” expects to be the useful materialfor microfinance practitioners, policy makers and Government Agencies in developing an efficient and stable microfinance sector.

2. Research Objectives

- To evaluate the impacts of transforming into official MFIs; therebyencouraging MFIs in transforming into licensed MFIs;

- To identify difficulties, short-comings based on the successful experiences of transformation into official MFIs (TYM, M7-MFI, ThanhHoa MFI); thereby, assisting microfinance programs/projects in gaining autonomy, developing a suitable plan, solution in the transition process.

- To suggest solutions and recommendations for MFIs, governmentagencies and other related parties in developing favorable environment for transition.

3. Research Fields

- Conception of microfinance and sustainable MFIs;

- To evaluate and analyze the impacts of MFIs before and after thetransition; thereby, clarify the necessity of transforming into licensedMFIs, as well as challenges after transition process;


- To indicate difficulties, short-comings in the process of transforminginto official MFIs; suggest solutions to specified cases through expe-riences of TYM, M7-MFI, Thanh Hoa MFI;

- To recommend procedures and essential steps to gain autonomyin the process of successful transitions.

- Sharing lessons learnt for official MFIs after completing the transitionprocess in Vietnam;

- To suggest solutions and recommendations for MFIs, governmentagencies and other related parties in developing a favorable environment for transition.

4. Research scopes

This research based on the experiences of three MFIs in Vietnam, including:

- TinhThuong Small Microfinance Limited Institution (TYM);

- M7 Microfinance Limited Institution (M7-MFI);

- Thanh Hoa Microfinance Limited Institution (Thanh Hoa MFI).

5. Research applications

Within the scope of this research, by synthesizing experiences, analysis,and evaluations rigorously and systematically, the research group expects the content, recommendations of this report to be practicaland useful information in the successful transition for institutions thatdesire to transform into official MFIs. The Research “Microfinance inVietnam: Lessons learnt from transformation” expects to meet the urgent requirements of the microfinance sector. Moreover, the Grouphopes to communicate the experiences of developing specified, feasible, cost-savings transition program, and plan for microfinanceprograms / projects that desire to transform and develop better conditions for microfinance activities in Vietnam.


Again, those experiences, results, suggestions, and recommendationsindicated in the report are expected to bring up the practical and realistic values. The result of this research shall be the useful materialsfor further research, microfinance practitioners, government agenciesand policy makers.

6. Research limitations

Aside from the lack of time and limited resources, there are other limitations that are presented in this report. These are as follows:

- The Research subjects only focus on those MFIs that successfullytransformed, and does not examine the difficulties, short-comings,and the issues rose from the process of undertaking procedures totransform into official MFIs. For example, the cases of MFIs such asMOM Fund TienGiang, CEP Fund,…

- The microfinance regulation system investigated in this research includes the documents that are still in force or being implementedto regulate the operation of official MFIs and semi-official MFIs inVietnam.

- The sample size is quite small. Only three official MFIs have beenchosen for examining, interviews, synthesizing information, analysisand evaluation. Thus, the synthesis of experiences, evaluation,analysis, statements is still subjective.

The limitations of the research’s subject shall be the suggestion for theresearch group, organizations and individuals interested in the activities of microfinance to carry on future research that support thedevelopment of microfinance activities in Vietnam.

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CHAPTER I. OVERVIEW OF MICROFINANCE INSTITUTIONS;TRANSFORMATION OF MICROFINANCE INSTITUTIONS INTHE WORLD AND VIETNAM

1.1. Overview of Microfinance institutions

1.1.1. Historical development and conception of microfinance

In the recent decades, many countries and international organizationshave grown much more concern in providing financial services andother services for the poor to develop their income base and improvetheir living condition. There are even lots of evidences of successfulmodels that provide financial services for the poor . These models areknown as “microfinance”. The future development of this sector is veryclear as it attracts the interest of numerous governments, multilateralagencies, donors and businesses.

Many economists and organizations have indicated the conceptionof microfinance. According to the Consultative Group to Assist thePoor (CGAP), “Microfinance is the provision of financial services to low-income people, including: savings, credit, retirement pension,money transfer, insurance…”. According to J. Ledgerwood, “Microfi-nance is an economic development tool through financial servicesbenefit for low-income people… microfinance normally consists of twoelements: financial and social intermediary”. In the perspective ofAsian Development Bank (ADB) “Microfinance is providing financialservices such as savings, credits, payment service, transfer and insurance for the poor, low-income household and small individual activities”. In the synthesis of the above concepts, microfinance canbe defined as one of the economic development methods throughproviding financial services and redundant to serve the spendingneeds and investment of low-income people. Microfinance is not onlya banking tool but also development tool.

In the late 1980s, as the economic development took place in Vietnam, the microfinance has introduced into Vietnam through theoperation of international organizations, non-government organiza-tions and programs that supported the bilateral and multilateral development. They had the same objective of reducing the povertylevel and income inequality. Some programs and projects only

Chapter I. Overview

of Microfinance

Institutions; Transformation of M

icrofinance Institutions in the W

orld and Vietnam


provided micro financial services. While in other programs and projects, microfinance activities are the main parts, Microfinance isalso social tools that support a particular group within a certain period.

Under the influence of the world’s general developing trend, Vietnamhas also been through the vicissitudes. The development progress ofmicrofinance in Vietnam follows three phases (refer to Table 1):

(i) The inception phase (before 1990);

(ii) The expansion phase (from 1991 to 2005);

(iii) The Depth development phase (from 2005 to now).

Table 1: Microfinance Development Milestone in Vietnam1

Year Events

1989Executive Committee of the Central Committee of the VietnamWomen's Union (VWU) launched the "Women helping each other inthe family economy".2

1991 Capital Aid Fund for Employment of the poor (CEP) - First MFI established under the Grameen Bank model.3

1992 The Affectionate Fund ( TYM ) is established under the Department ofFamily - Life of the Vietnam Women's Union (VWU)

1 Only official and semi official MFIs operate under the Credit Institution Law in 2010. The historicalmilestones of other credit institutions participating in microfinance sectors such as Vietnam Bankfor Agriculture and Rural development, Vietnam Bank for Social policies, People’ Credit Fund system.

2 This is the source of credit programs hold by VWU.3 On 2/11/1991, People’s committee of HCM city officially allowed HCM Labor Federation to form

“Capital Aid Fund for Employment of the poor” (CEP). The purposes of CEP are developing theclosed relationships with low-income people, providing micron loans to support them in strivingto raise income, gradually reducing poverty by granting income and work-generating loans.

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Year Events

2004 Establishment of Vietnam Microfinance working group (VMFWG).

2005

The Government implemented the Decree No. 28/2005/NĐ-CPdated 08/03/2005 on organizational structure and operation of smallsize microfinance institutions in Vietnam. This is an important legalmilestone in creating the policy framework to formalize the microfinance activities in Vietnam.

2007The Government implemented the Decree No. 165/2007/NĐ-CP on15/11/2007 amended and supplemented, annulled some articles ofDecree 28/2005 / ND-CP

2009 Decision No./QĐ-TTg was implemented on 16/9/2009 and established Small size Finance Department. 4

6/2010 Credit Institution Law was enacted in 2010, officially acknowledgedMFIs as one model of the official credit institution system.

8/2010TYM – First MFI in Vietnam has been licensed as microfinance institution in accordance with the Decree No. 28/2005/NĐ-CP andDecree No. 165/2007/NĐ-CP.

2011On 6/12/2011, The Prime Minister enacted the Decision No. 2195/QĐ-TTg approving “Constructing and developing the microfinance system in Vietnam towards 2020” project.

12/2012 M7-MFI is the second MFI licensed by the State Bank of Vietnam thatoperates in accordance with Credit Institution Law 2010.

2013TYM officially changed their name to “TinhThuong Small Microfinance Limited Institution”; and operates in accordance withCredit Institution Law 2010.

2014

- Vietnam Microfinance Department was re-established by Decision No. 381/QĐ-TTg of the Prime Minister dated 18/03/2014.The Department forms a Permanent assisting group including anumber of officers and experts participating in the field of microfinance.

- The Document No. 1700/VPCP-KHTH dated 14/3/2014 of Govern-ment Office allowed Credit support Fund (VWW) to pilot grantingloans to social funds to support poor women by the end of 2014.

- On 22/8/2014, Thanh Hoa Fund for poor women (FPW) was officially licensed.

4 Small size Finance Department is responsible for assisting The Prime Minister in establishing microfinance development policies and strategies aligned to market.

Chapter I. Overview

of Microfinance



orld and Vietnam


After nearly 30 years of operation, currently, microfinance is as an effective tool to promote the process of poverty reduction in Vietnam.Thus, the safe construction and sustainable development of microfi-nance system serving the poor, low-income household and micro business are the core goals towards 2020 by the Government.

1.2. Overview of MFIs transformation

1.2.1. The concept of transformation

Bancosol (Bolivia) undertook the first transition in 1992. Bancosol transformed from a non-government organization participating in themicrofinance field (since 1986) to the model of commercial bank.Since then, the transition process of MFIs has been promptly replicatedworldwide in the recent two decades. According to Smec and Harvland (2004), the development progress of MFIs was divided intofour phases as followed:

• Phase from 1976 to 1980: Dissemination of knowledge of microlending and micro finance.

• Phase from 1980 to 1990: Growth in number of microfinance institutions.

• Phase from 1990 to 2000: Commercialization of MFIs. MFIs began togenerate significant income from operations.

• Phase from 2000 to present: Transformation. Unofficial and semi-official MFIs started to transform in “quality” to become official MFIs– being licensed and supervised by The State Bank in accordancewith adjustments in a separate legal framework.

Thus, in order to reach the “Transforming” phase, MFIs had to undergoa long process of accumulation in size that leads to the currentchange in its “quality”.

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1.2.2. Definition of MFIs transformation

According to The World Bank (WB), the transformation of unofficial andsemi-official MFI changed its dependence on funds, subsidies from theGovernment, international organizations to become self-sustainableMFI that operates under commercial principles and participates in official financial market. This transition is quite a long process. A MFItransforms from a semi-official operating basis that lacks of profession-alism to a professional operating basis and become a financial intermediary operating under the supervision of The State Bank. Thetransition process of unofficial and semi-official MFI is described in Diagram 1.

Diagram 1: The process of transforming from unofficial and semi-official MFIs to official MFIs

Compensat-ing all the expenses

Achieve Operational Sustainability

Achieve Financial

Sustainability

Operateunder the

market principles

Transforminto official

MFI

Source: Charitonenko, 2003

In fact, in order to maximize the proportion of non-government MFIstransforming to official MFIs, some organizations tried to narrow thedefinition of MFI transition used to examine the transformation of non-government MFIs. Similarly, a definition is indicated by The AsianDevelopment Bank (ADB) (Fernando, 2004): A transformation is aprocess of one or more non-government organizations (NGO) formingan official financial institution (RFI) by transferring a part of the wholeexistential loan portfolios to a new financial organization. This definitionis referring to the nature of transforming. The transformation of MFIs isnot only simply the change in the operational form, but also the fulltransfer of loan portfolios. This is the core value distinguishes MFIs from

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other financial institutions. Loan portfolio is fully transferred but placedunder the management and supervision of a system of regulationsand new laws.

1.2.3. Classification of transformation forms

There are many forms of transforming from an unofficial and semi-official MFI into an official MFI. However, according to Hishigsuren(2006), there are four transition forms employed by MFIs:

• To transform from non-government MFIs to official financial institutions (non-bank financial intermediary or commercial bank)such as Bancosol (Bolivia), K-Rep (Kenya), CARD Bank (Philippines),BRAC (Bangladesh), Mibanco (Peru), Finsol (Honduras) and Campartamos (Mexico). Currently, this is the most common formof transition.

• Traditional financial institutions (such as retail banks, small size commercial banks, financial companies and Credit funds) penetrate the microfinance market by providing microfinance services such Sogebank (Haiti), BRI (Indonesia), Banco Pichincha(Ecuador). These banks established subsidiaries solely to provide microfinance services.

• The formation of purely commercial MFIs: In Venezuela, Bangente-was founded as a purely commercial MFIs right from the beginning.Meanwhile, IPC established a micro-bank in Eastern Europe purelyfor commercial purpose.

• The merger of one commercial bank and one MFI; and the mergerof two or more MFIs: In the case of CONFIE (Nicaragua) and Genesis (Guatemala), they incorporated with a small commercialbank and a small financial company. Meanwhile, XAC and GobiEhlel, the two independent non-government MFIs in Mongolia,merged to become one official MFI.

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1.2.4. The motivations of transformation

According to Ledgerwood (2006), in considering the perspective ofthe transformed organization, the basic reasons are diversifying theproducts and services (particularly receiving savings), promoting theaccess to new funding sources (including fund raised from loans andshareholders) and expanding customer’s access. Additionally, a transformation from an unofficial MFI to financial intermediary, whichofficially receives savings, will help to improve the ownership structureand governance structure of the organization. Specifically:

The operation, products and services provided by transformed organ-ization are diversified. Providing savings service is the main reason thatmotivates MFI to transform. Mobilizing savings might raise the numberof served customers, improve customer satisfaction, assist customer inmaintaining and improving loan obligation, stabilize funding sources,and improve the governance situation of MFIs. In most countries, theLaw prohibits unofficial financial organization receiving savings fromthe public. Therefore, in order to deploy this service, unofficial organi-zations have to transform to official financial organizations.

Besides, these savings are also an important part of the financial management strategy of any single household. In fact, savings serviceis evaluated as being of greater benefit for the poor than other creditproducts. The path to escape poverty should be based on buildingassets rather than debt accumulation. Moreover, there are specializedservices that might bring many benefits to customers such as housingloans, transfers and micro-insurance, which can only be deployed byofficial financial intermediaries.

Transformation will increase the access to commercial fundingsources. Transformation from an unofficial MFI to an official MFI willchange the legal position and open up opportunities for MFIs to engage in new economic relations (including credit relationship), consequently, improving the reputation of the transformed MFI.

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Transformation will enlarge the operating area and increase the number of customers. The increase in quantity and quality of productsand services, as well as the access to new funding sources will directlyinfluence the quantity of customers and assist transformed institutionsin expanding market share. Many of them transform and expand theiroperating area to achieve their social objective, which is promotingthe access to financial service for low-income people.

Transformation improves the ownership and governance structure. Becoming an official MFI means that organizations will have to join acompetitive environment and come under new legislation. With thetighter and stricter regulations, those organizations must comply withthe minimum executive, management, control, and information transparency standards. This might force transformed institutions to attempt to improve their professionalism. Additionally, in competitionwith more reputed organizations, the improvement of professionalismbecomes imperative for survival and development.

Thus, conceptually, the transformation is not only simple a mechanicalswitch or a mechanical summation, but also requires undergoing theprocess of change in quantity that lead to change in quality. Thereby,the content, operational form, accessed objects, accesses means willalso change.

1.2.5. Transformation process

Before making decision, MFIs need to note that transformation is notthe solution that suits every case of unofficial and semi-official MFIs.According to Ledgerwood (2006), in order to make decision, organi-zations need to revise the following elements:

• What are the long-term objectives of the organization?

• Are the economic environment and legal framework favorable fortransforming?

• Are the sources of organization required for transforming met?

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After making decision, organizations must develop a clear transforma-tion plan for each phase. Each phase should be deployed step bystep and estimate the unforeseen challenges that might happen during the transition process.

The transition process is divided into 03 phases, including: before, during and after transformation. The tasks of each phase are described in the followed Table:

Table 2: Phases of transformation process

Before transformation During transformation After transformation

• Prepare for developing transformation plan

• Developing transformation plan

• Conversion of the structure- Vision and Mission - Organizational structure• Conversion of finance- Ownership structure/

Contribution method- Mobilizing fund structure- Transfer of assets and

liabilities• Conversion of operation- Reporting and MIS system- Internal auditing and

supervising- Manage human resource- Products and services

• Throwback andevaluate the transformationprocess

• Draw experiencesand attempt to operate effectively

Before transformation

This is the basic phase for transformation, the premise for later implementation of the following phases. Therefore, the preparationphase needs to be implemented strictly for a successful transforma-tion. This is the planning phase for later transformation, including:

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a) Prepare for developing transformation plan

Many factors affect the process of making the decision for transfor-mation. However, according to Ledgerwood (2006), there are four important factors affecting all aspects of a MFI. Thus, before preparingfor the development of the transformation plan, leaders of the organizations should agree on the perspectives of the four followingissues:

Firstly, an official MFI must accept the share of control with a largergroup of shareholders. In fact, in many cases, transition encounters incompatibility between members of the Management Board. Thoseincompatibilities arise from ownership and control factors after trans-formation. Some organizations have to implement strict methods tomembers that do not accept the changes to enforce the abdicationof management and control. Leaders of organizations totally do notexpect those incompatibilities because they will create psychologicaldiscomfort for members and psychological pressure for employees ontransformation process. Thus, it is very important that Board membersagree on sharing the control of the organization before starting totransform.

Secondly, transformation creates changes for not only product diversification, but also customer expansion for the financial organiza-tions. The transformation to a financial organization receiving savingswill expand the target market of the organization. Thus, when a customer no longer prefers to save money in the organization, he/shewill look for other organizations, which satisfy their demands better. Additionally, mobilizing savings is not only limited to low-income people, but also expands to individuals and business with higher income. However, customers often prefer products with many functions. For example, a product needs to integrate all the functionsof credit, savings, payment and insurance. This requires transformedorganizations to consider carefully the creation of new products thatsatisfy the market demands. Nevertheless, organization should alsohave a balance of investment expenses and income.

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Thirdly, transition will lead to important changes in human resource requirement. When transforming to a MFI receiving savings, the requirement of professional knowledge and skills for employees andmanagers will increase. Generally, the change in organizational structure is unavoidable. The establishment of new departments andrecruiting new employees will be performed to suit the new structure.This means the unnecessary departments will be cut off and will comewith the dismissal of employees. Overall, the quantity of employeeswill increase especially mid-level staffs (treasury employee, internal auditor, branch supervisor and technical employees). High-level staffswill be recruited from the banking sector. Normally, the top priority isgiven to staffs who previously worked in official financial institutions. Thisissue is quite sensitive due to the share of control among members.Thus, the Board members need to agree on whether to hire a manager from external sources or using the existing human resource.

Fourthly, the transformation must meet the requirements of regulations.Every organization needs to be ready to compensate those costs. Infact, transformed organizations often underestimate the costs incurredin the process of completing the transition procedure includingpreparing documents, waiting for appraisal and inspection of theGovernment agencies. The inspection process will not only take intoaccount the operational form of the organization, but also the behav-ior and quality of the management team. After transformation, costswill be incurred from improving information systems, departments andfacilities of the organization. Additionally, the obligated provision forsavings also increase the total costs of organization. Thus, the prelimi-nary accounting of incurred costs is very necessary before making decision of transition. In case the total cost of transition is too high forthe operating scale of the organization, Board Members should notforce the transformation because it will affect the future operations ofthe organization.

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b) Developing transformation plan

After considering and settling the four issues mentioned above, the organization made its transition decision. It is very important to develop a methodical and detailed plan. According to Ledgerwood(2006), basically, this process focuses on the evaluation of the currentposition of the organization in the financial institution system. Basedon the evaluation of the current situation, the responsible person plansto develop a plan that addresses the following issues:

• Overview of the current operation of the organization

• Appraising the legality of the transformation of the organization

• Issues incurred during the process of transformation to a Limitedcompany or Joint Stock company

• To learn about the related regulations and laws

• The licensing

• To develop a strategic plan

• To develop financing strategy

• The Ownership

• The governance

• Human resource management

• Information management system

• To manage risks

• Financial management

• Internal auditing

• Activities after transformation

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• Credit products

• Saving products

• Budgets used to transformation

• Costs of transformation

Normally, organizations often hire external consultants rather than develop the plan themselves because they will have a more realisticoverview about the organizations. Consultants are those that havemany experiences in the official financial sector. Employees and managers of unofficial and semi-official organizations often lack of thisskill, especially skills pertaining to savings management.

An initial preliminary accounting of the transition will limit the barrierswhen entering the transition. A detailed plan will smooth out the latertransition. This not only to reduce costs of handling the unexpected issues, but also create a psychological comfort for members of the organization; and motivate the long-term work commitment continu-ously to the organization after transformation.

During transformation

During transformation process, MFIs always face several basic changesmentioned earlier in the “Before transformation” section, particularly:

First change: Change in the organizational structure and decentral-ization administration, governance responsibility, MFI management

Second change: Opportunity to provide diversified products and services, therefore expand the target customers.

Third change: Change in human resource that satisfies the require-ments.

Forth change: Operational cost increases when conducting transfor-mation and operating as an official MFI

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After transformation

Besides opportunities and advantages brought from the process oftransformation, MFIs might get into the following challenges and opportunities:

i) Ability to mobilize funds for transformation: the transformation is verycostly, requiring a large fund to purchase software, set up informa-tion system, develop a business plan and feasibility study, form newbranches and compensate the different consultant service fees.

ii) Accessing and running information systems: Banking software canaddress the information needs of MFIs. An information requirementfor transformed organization is huge and it is crucial to have a goodinformation system. Financial organizations must meet this compul-sory condition before licensing.

iii) Meet the requirements of capital adequacy: Capital adequacyrequirements are often regulated more strictly for MFIs than commercial banks such as lending regulations. Some MFIs worrythat compliance with these regulations affect the effectiveness oftheir operations.

iv) Restructuring the ownership: Non-government organizations, Limited liabilities companies owned by many shareholders oftenencounter difficulties in the process of restructuring ownership tomeet the requirements.

v) Attracting suitable shareholders: It is very crucial to find social investors (for social objectives) as commercial investors only careabout the feasibility of profitability. The investing decision and distribution of profits among investors also encounter difficulties.There is also occurrence of disagreements between investors.

vi) Resources and organization scale: Bigger MFIs will have greater resources to fund one or more parts of the transition process. Theyalso have a better position to mobilize capital from different funding

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resources of commercial and social sponsors when they preparetheir financial report. While this is not true for smaller MFIs.

vii) Motivation to transforming: Being official is the motivation for theseorganizations to undergo transition process. Transformation helpsthese organizations to empower and improve their reputations.Business prospects are also one of the reasons for the organizationto attempt transformation. However, in case this kind of motivationis too difficult to perform within the organizations, they will not attempt to transform anymore.

viii) Readiness and consensus in transforming: The preparation such astraining Board members, managers and employees is very impor-tant to increase the awareness of members. This process should besupported by experts and thus it will be costly. Nevertheless, if train-ings are not performed, ambivalence and conflict of interest willoccur and lead to unsuccessful transformation.

ix) Procedures and essential documents: In order to be licensed, unofficial and semi-official MFIs have to complete many compli-cated procedures which will be supervised in different phases. Besides, MFIs also need to prepare many documents and reportwithin a strict time line of submission.

x) Governance issue includes determining the selection criteria forBoard members; indicating motivations for the Board to promotetransformation; setting up a Director Board, a Supervision Boardand electing Board of members. The selection of the managementBoard is the most important and difficult decision for small andyoung organizations.

xi) “After transformation” issues: After completing the transitionprocess, many organizations face difficulties in operations and eas-ily encounter legal issues. Thus, these organizations often aretrapped in a passive state and waits to see the experiences of otherorganizations.

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To conclude, Scale and characteristics of each organization will varyin each different geographical area. In order to process a transforma-tion successfully, each of them has to handle a different set of issues.Those difficulties may arise at any phase of the process. Thus, this requires MFIs to develop plans and forecasts coping with any future issues, carefully examine the transition requirements and be well prepared for their own transformation process. The transformation ofunofficial MFIs to official MFIs is a complicated, costly and time-consuming process. In order to complete the transition process andcreate a premise for future activities of the organization, it requires unofficial MFIs to prepare both human and financial resources, andrequire members of the organizations to preserve and agree.

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CHAPTER II. THE CASE OF TINH THUONG ONE MEMBERSMALL LMITEDLIABILITYMICROFINANCE INSTITUTION (TYM)

2.1. The motivations for transformation

2.1.1. The internal motivations

There were several factors that led to the transformation of TYM, including the internal development of TYM, the improvement in theperception of the management board and the changes in domesticand international financial systems. Thus, in order to expand the operation, improve management and organizational credibility, thetransformation of TYM had become inevitable. Moreover, the transformation will also strengthen the institutional sustainability of TYM. Consequently, all employees and leaders of TYM highly agreed andsupported the transformation decision enthusiastically.

2.1.2. The external motivations

On 9 March 2005, the Government enacted the Decree No.28/2005/NĐ-CP on the operation of small size microfinance institutionsin Vietnam. Subsequently, on 15 November 2007, the Government alsopromulgated the Decree No. 165/007/NĐ-CP amended, supple-mented and annulled some articles of Decree No. 28. Since then, theregulations on minimum capital, scope of operation, products andservices has become stricter for MFIs. Thus, in order to access domesticand foreign funds legally, unofficial MFIs must transform.

Besides, the pressure from competition with the official financial institutions was also one of the important factors that forced TYM totransform. TYM expected transformation to diversify products, attractmore customers and improve their institutional sustainability.

2.2. The transformation process of TYM

The transformation process of TYM consists of two phases:

2.2.1. To transform from program/project to income-generating business unit (1992 - 2006)

In 1989, The Central Executive Committee of Vietnam Women Unionlaunched a campaign named “Women help each other in the family

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economy” with five specific components. Sharing funds for businessand production was one of the main components. During that time,many non-government organizations combined credit - deposits activities with their development programs and considered it as themost important part of their operations to ensure the sustainability ofthe organization as well as an effective tool in reducing poverty. Thus,by the end of 1991, with the credit consultations from Food and Agriculture Organization (FAO), Vietnam Women Union developed the“Tinh Thuong Fund” credit project to assist poor and poorest womenwith capital supports following Grameen - Bangladesh bankingmodel.

Diagram 2: The important milestones in the development of TYM

1989

1992

1998

2006

2010

2013

• Vietnam Women Union launched a campaign named “Women help each other in the family economy”

• Vietnam Women Union established “Tinh Thuong Fund”(TYM)

• TYM became an independent unit under the Presidium of the Central Committee of Vietnam Women Union

• TYM became a income-generating unit for social and non-profit purpose

• TYM offcially changed thier name to “Tinh Thuong limited liability Microfinance institution”

• TYM was the first MFI licensed by The State Bank of Vietnam and changed to "Tinh Thuong Small microfinance limited liability institution" (TYM).

Source: tymfund.org.vn

In March 2005, the Decree No. 28/2006/NĐ-CP was enacted and became an important legal basis for microfinance activities in Vietnam. Thus, the undertaking transformation in compliance with Decree No. 28 was the best strategic decision for TYM to achieve theirvision and mission. Subsequently, in 2006, Vietnam Women Union decided to transform Tinh Thuong Fund to an income-generating business unit for non-profitable and social purposes. This transformation

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promoted the independent operations of TYM, and enabled accessto domestic and international sources to serve more poor women. Onthe other hand, this was considered as the preparation for the institutionalization process of TYM.

With this new legal status, TYM was completely independent in deciding on personnel, development and operation plan, financialmanagement and especially accessing credit sources to expand itsoperations. However, despite the benefits of this transformation, thereare still many challenges presented for TYM including self-sustainability,profitability, growing stably with commercial funds within a high competitive environment. These challenges require TYM to quickly improve staff capacity as well as staff management, financial management and the service quality of the Foundation.

2.2.2. To transform from income-generating business unit to licensedmicrofinance institution (2006 - 2010)

In order to be ready for the institutionalization process under DecreeNo. 28, TYM needed to improve their organizational capacity and prepare the license application dossiers for submission the SBV.

With the goal of enhancing the capacity of the organization as an income-generating business unit, TYM developed a strategic development plan towards 2010 with six main objectives, including:

• Proposing to the SBV to permit TYM to transform to a small size financial institution under Circular No. 02/2008/TT-NHNN;

• Developing a customer classification based on structural orientations;

• Improving the quality and skills of the employees;

• Maintaining the Institutional sustainability (Operational and financialsustainability);

• Improving the organization’s position in the current targeted marketsegment and diversifying the market segments;


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In order to implement this strategic plan, TYM co-operated and received technical and financial support from the German DepositBanks Foundation for International cooperation (SBFIC), the PhilippinesCenter for Agriculture and rural development and also accessed otherdomestic fund sources. Some main activities performed in this phasewere:

• The establishment of a Board of Members which directly monitorsthe operation of the Fund;

• Enhancement of the internal auditing capacity towards upgradingthe internal audit committee under Decree 28;

• Replacement of the current account system of the Fund into account system of the SBV;

• Improving and strengthening the organizational structure towardsprofessionalization and targeted customers;

• Improvement of employee’s capacity and especially that of themanagement team.

In November 2008, TYM submitted the first license application dossierto the SBV. Subsequently, with several efforts to complete the dossier,TYM was licensed on 17 August 2010. Thus, after nearly two years ofproposing and completing the dossier, TYM finally became the first licensed MFI in Vietnam under the name of “Tinh Thuong one membersmall size limited liability microfinance institution”. In May 2013, TYMofficially changed their name to Tinh Thuong one member limited liability microfinance institution to comply with Credit Institution Law2010.

Structural transformation

a) Vision and Mission:

The vision and mission of TYM after the transformation are more clearlyidentified (Table 3). Before undergoing the transformation (before

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2010), TYM’s activities were mainly directed to those women who arepoor, low-income and facing difficulties in life. They used to providecredit-deposit services to this customer group to achieve their missionand vision.

However, after the transformation, TYM adopted a new of vision andmission. Particularly, since 2014, the new mission of TYM is “becomingthe best microfinance institution in Vietnam, providing microfinanceservices to the low-income households”. The low-income householdsand micro businesses account for 90% of the total number of customers of TYM. However, TYM still “sets their priority to serve the poorand vulnerable women”. Moreover, TYM has also transformed its lending method from the group lending pioneered by Grameen to individual lending. With regard to its mission, TYM sets a new target of“enhancing the living standard of the low-income individuals andhouseholds, especially the poor and vulnerable women with financialand non-financial services; creating opportunities for women to participate in social and economic activities; improving the status ofwomen in the society”.

The changes in mission and vision of the organization arose from thefollowing reasons:

- Firstly, the increase in the number of products and services led tothe growth in the number of customers and the diversification ofthe customer base;

- Secondly, there were also certain changes in the evaluation criteriaof low-income and poor households. Thus, in order to keep up themission of improving living standards, TYM extended lending activityto low-income households;

- Thirdly, serving more customers who are micro enterprises repre-sented in the operation of TYM.


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Table 3: Vision and Mission of TYM before and after transformation

Before transformation After transformation

Vision

To become the best MFI in Vietnam providing top microfinance service to low-income individuals and households, especially the poorand vulnerable women.

Mission

To enhance the living standardsand status of poor women andtheir families through:+ providing credit-deposit

services to groups of women, + creating opportunities for

women to participate in social and economic activities,

+ improving the status ofwomen in the society.

To enhance the living standardsof low-income individuals andhouseholds, especially the poorand vulnerable women through:+ providing financial and

non-financial services+ creating opportunities for

women to participate in social and economic activities

+ improving the status ofwomen in the society.

Source: TYM (2011), TYM (2015)

b) Organizational structure:

After the transformation, TYM has a more minimalist organizationalstructure with some basic changes (Nguyen & Quach, 2011). At thehead office level, instead of reporting to the Board members, the supervision committee reports directly to the Vietnam Women Unionand shares the information with the Board members and the board ofdirectors. Besides, instead of reporting to the director, the internal auditdepartment reports directly to the supervision committee and sharesinformation with the board of directors. At branch level, TYM establishes the transaction office or the transaction points. However,unlike before the transformation, according to the SBV’s regulation onoperating network of financial institutions, transaction offices andpoints of different cities cannot be under one branch.

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The changes in the decentralization and operational structure supportof TYM ensure the achievement of social objectives, shortens the reporting procedure, as well as improves the independence andtransparency of organization’s departments.

Financial transformation

a) Ownership structure and capital contributing method:

In order to meet the requirements of Circular No. 08/2009/TT-NHNN,TYM chose to transform to a one member limited liability Companyowned 100% by the Vietnam Women Union (VWU). As mentionedabove, the motivation and capacity for transformation greatly influenced the selection of a suitable model for organizational transformation. For TYM, the motivation for transforming mostly arosefrom the leader’s commitment of ensuring the achievement of socialobjectives, improving the professionalism and transparency of the organization.

TYM was established and developed from a microfinance program ofCentral Committee of Vietnam Women Union (in 1992). After the firststep of transformation, TYM became an income-generating businessunit with a single legal status but still under the control of VietnamWomen Union. Thus, the selection of one member limited liability company model is not only suitable for the case of Vietnam WomenUnion as it still owns TYM, but it also improves the autonomy of TYM(Planet Rating, 2010). In 2010, Board Members consisted of three members: the Vice President of VWU, the Deputy Head of financialplanning department of VWU and the Director of TYM. Board mem-bers are elected for to a term of 5 years with the right to re-election.

b) Mobilized funds structure:

After transforming to an official MFI, the capital structure of TYM hassignificantly changed. Up to December 2014, the total capital of TYMwas 943.6 billion Vietnam dong (Table 4), therein the mobilized fundstructure of TYM consisted of 22% of owner’s equity, 43% of deposits


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and 35% of loans. The capital structure varied greatly in 2007, 2010 and2014. Since 2007, the capital structure heavily depended on theowner’s equity with 51% of owner’s equity in 2007 and 31% in 2010. In2014, TYM’s capital was mainly from member’s deposits with the proportion at 43%. The ratio of owner’s equity was also reduced significantly (Table 5). One of the typical advantages of licensed MFIis raising reputation and awareness, which comes from the opportunityto raise funds from deposits and credit sources. Currently, TYM has accessed several long-term domestic credit sources (Vietnam-BelgiumCredit Fund, BNP Paribas Bank - HCM Branch and international creditsources (Cordaid, Oikocredit, Rabobank, Blue Orchard). This impliesthat the reputation of TYM has significantly improved after its transfor-mation).

Table 4: Capital structure of TYM from 2004 to 2014

Currency: million VND

Source: Planet Rating (2010), TYM (2014), VMFWG (2010, 2011, 2012)

Criteria 2007 2008 2009 2010 2011 2012 2013 2014

Total as-sets 88,533 176,527 219,944 313,635 447,586 593,910 665,486 943,643

Owner’sequity 44,859 56,011 83,159 99,236 94,226 173,907 190,563 211,843

Deposits 32,590 33,983 44,431 70,524 122,476 223,283 288,550 402,409

Loans 5,499 76,745 79,495 - - - 134,989 254,236

Otherloans 5,585 9,788 12,859 143,875 230,884 196,720 51,384 75,155

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Source: Planet Rating (2010), TYM (2014), VMFWG (2010, 2011, 2012)

Operational transformation

a) Information management system (MIS) and reporting:

TYM has undergone a noteworthy process of developing informationsystem to manage information and data effectively. The process is described as follows:

- In 2006, in order to develop its financial operations managementsoftware, TYM formed a team to work with technology experts fromthe SBV and the German Deposits bank to survey, determine systemrequirements and search for a software design company.

- In 2007, TYM started to develop software, equipped synchronouslywith the host server systems and workstations for the head office aswell as branches. In addition, they conducted seamless networkingamong these systems to ensure the timely and accurate informa-tion transmission from the head office to branches and betweenbranches. This hardware system was highly reliable and secure. Bythe end of 2007, TYM received the networking system and testedthe software. This software has a friendly interface and is easy tomanipulate.

- In 2009, TYM set up their website and started using the new softwarein disseminating microfinance activities and materials as well as

Table 5: Comparison of capital structure ratio of TYM in 2007, 2010 and 2014

Criteria 2007 2008 2010 2014

Owner’s equity 51% 32% 31% 22%

Deposits 37% 19% 23% 43%

Loans 6% 43% 40% 27%

Other loans 6% 6% 6% 8%

Total capital 100% 100% 100% 100%


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campaigns for supporting members with difficulties. In order tomake the exchange of information inside and outside the organi-zation safe and convenient, TYM also employed a new mail serverfor internal and external communication. However, until May 2010,TYM realized that the old financial management software was limited in responding to its future requirements. Thus, they decidedto develop new software with open sources designed to supportthe financial management process. This new software was upgraded to meet the new requirements of the operation of theFund such as developing product characteristics to comply withthe new credit products, and integration of new functions for member’s accounts. Currently, TYM’s information management system has been computerized with built-in information protectionfunction at the cost of 1,5 billion VND. However, there are still vulnerabilities and disadvantages that exist within the system thatshould be fixed in the future.

All the branch’s offices are equipped with computers with built-in financial accounting system and loan management function. This enables reliable information to be centralized at the head office. Information is synchronized at the branch level and will be automati-cally developed for head office to access at any time. Nevertheless,the financial and operational reports can only automatically entersome basic and short information while users still need to input mostof the information manually. For example, the indirect cost is reportedin the centralized manual while the separated indirect cost of eachbranch is not shown in the financial report. This makes it impossible toanalyze the financial sustainability of the branches.

b) Supervising and Audit:

- Internal audit:

In complying with the regulations of the SBV on transformation, the internal audit system of TYM was strengthened. In 2008, in order to improve the governance quality, a supervision department was

0,05%

0,04%

0,04%

0,03%

0,03%

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Source: Planet Rating (2010), MFWG (2011, 2012, 2013), TYM (2014)

founded to comply with the compulsory request of the SBV on thetransformation to an official MFI.

Taking into account the aforementioned organization structure, thesupervision department reports directly to VWU and provides informa-tion to the Board members. Now, TYM has fully developed an effectiveoperational procedure to limit the potential risks. This procedure hasbeen legitimized and implemented all over the organization network.After the wide implementation of ASA method, the operational manual was also upgraded. Many training courses are organized foremployees to raise awareness on the necessity of risk analysis duringthe loan appraisal process (Planet Rating, 2011).

- Credit risks:

The PAR 30 ratio of TYM remained under 0.5% from 2007 to 2014. Thisshows a good loan portfolio quality and credit risk that has always remained at low levels (Chart 1). Moreover, after transformation, TYMhas continued to manage the late loan repayments effectively. Thus,most of the late repayment cases were handled within a month.

Biểu đồ 1: Tỉ lệ PAR của TYM giai đoạn 2007 - 2014


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- Liquidity risk:

The increase in involuntary deposits leads to rise of term risks betweenthe loan lending contracts and loans. Thus, in the initial years aftertransforming, it is necessary to focus on managing liquidity risk, assetsand liabilities. Currently, TYM’s liquidity risks remains at low levels. Theweekly cash and cash flow reports have been quite adequate in monitoring the internal liquidity risk of TYM. However, TYM has not hadspecific policies to address the shortage of cash when liquiditydropped sharply.

c) Human resource and training:

Generally, after being licensed, the main change in the personnelstructure of TYM is the increase in the quantity of its staff (Chart 2). Atthe head office, the organizational structure was modified with theaddition of more vice directors in the management board. This newstructure of the head office mitigated potential risks in key personnelissues. Due to the increase in number of reports for Government agencies, TYM also hired more tellers and supervisors to strengthen theinspection and monitoring of branch operation.

Chart 2: Growth in the number of employees of TYM from 2007 to 2014

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02007 2008 2009 2010 2011 2012 2013 2014

Total eomployees Total credit officers

Source: TYM (2008, 2009, 2010, 2014), VMFWG (2011, 2012, 2013)

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At branch level, TYM reduced the number of managers to increasethe efficiency of management and monitoring branches and hiredmore branch-level tellers. The human resource management systemwas also modified in response to the personnel changes. Likewise, theguidance manual was also fully updated.

Additionally, TYM also focused on improving the capacity of staffthrough training courses, especially in the dissemination of the regu-lations and laws that pertain to the operations, strategic planning,strategic management and internal control. They also organized seminars discussing the development orientation of TYM. Hence, themanagement capacity was greatly improved.

d) Products and services:

The transition process required TYM to enhance and improve its products and services to meet the customer’s needs as well as complywith current regulations. TYM continued to provide financial and non-financial products to poor and low-income individuals, house-holds and women with disadvantages.

From 2010 to 2014, TYM continued to provide three main credit products including common loan, long-term loan, and multi-purposeloan with a higher loan amount (the maximum amount is 30 millionVND) and more repayment methods. Furthermore, in 2014, TYM alsopiloted a new product: an investment loan of 31 to 100 million VND forsenior members who had jointed TYM for more than 5 years and hadproduction activities and micro businesses.

Especially, after transforming, in 2010, TYM officially converted its lending method from the Grameen group lending model to the ASAindividual lending model. TYM modified the ASA model in which eachcluster consisted of around 40 members (Planet Rating, 2011). With thisnew lending method, three months after common loan settlement,members could borrow any other kind of loans. Member of clusters repaid these loans weekly even though most of the clusters meetmonthly. The guarantee mechanism of this new method is through a


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guarantor. When first joining TYM, members have to pay compulsorydeposits of 10,000 VND per week. In 2011, this amount of compulsorydeposits was 5,000 VND per week with an interest rate of 3.6% per year.From the second year of membership onwards, members have toguarantee the deposit balance at 10% of the total borrowings foreach loan before receiving the new loan. In the case the deposits bal-ance is too low, members need to pay extra to meet the requirement.

As a licensed MFI, TYM is permitted to mobilize voluntary deposits fromthe public. In order to attract more customers, TYM designed and offered some new deposit products aside from the compulsory deposits product. The new voluntary deposit products are.

• Voluntary demand deposits: interest rate 1%/ year;

• Saving deposits: interest rate from 3.6%/ year to 5.4%/ year

• Term deposits: term varies from 1 to 12 months, interest rate from4.5%/ year to 7%/ year.

The advantages of TYM’s deposit products are its smaller amounts,more flexible terms and competitive interest rates in comparison toother commercial banks. Up until December 2014, the number of depositors of TYM was 107,380 customers which constituted the highestincrease in two years after transformation. The number of depositorsincreased 36% from 2009 to 2010 and 81% from 2010 to 2011.

As a Fund, TYM has been providing micro insurance product since1996. Micro insurance products were provided to customers at a flatfee of 2,000 VNĐ/week that increased from 1,000 VNĐ/week in 2012,and plus 0.4% of the outstanding loan balance. Besides, the Fund alsoprovided life insurance at a fee of more than 3 million VND, health insurance with the maximum insurance amount of 1 million VND. Inorder to prepare for the transition process, TYM split the insurance activities into a separate project under VWU. TYM also planned to register this project to become a mutual insurance organization in thefuture (Planet Rating, 2011). However, in 2013, under the inspection

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and supervision of SBV, the mutual fund was not eligible to operate independently. Thus, while currently waiting for the authorities to decide, TYM temporarily suspended the micro insurance and propertykeeper product and stopping the allocation of funds to the project(TYM, 2014).

2.3. The initial operation results and the future plan:

2.3.1. The results

Within the transition process, the change in organizational structure ofTYM has led to changes in the scale of operations of the organization.These changes consist of the following:

a) Operation scale:

After transforming to an official MFI, TYM rearranged its branch networkto suit to the provisions of Circular 08/2009/TT-NHNN. Particularly, in2010, the number of branches changed significantly. The number fellfrom 44 branches (before the transformation) to 18 branches under(Chart 3). In 2010, SBV stopped giving licenses to new transaction offices to open from May 2011 to November 2011. Therefore, mosttransaction offices of TYM could not transform to suit the new operational model and caused difficulties in management (TYM,2011). However, in November 2011, the SBV governor issued guidanceto proceed in the opening of new transaction offices for TYM in 5 different provinces including Nam Dinh, Thanh Hoa, Nghe An, Phu Thoand Thai Nguyen. Up until December 2014, TYM had opened 17branches and 57 transaction offices operating in 12 provinces, 38 districts and 431 communes/ wards.

With regard to the internal impact, TYM enlarged its scale of opera-tions that influenced and changed the personnel policies. This wasdone in order to increase the efficiency of its organizational manage-ment and suit the new structure. At the same time, the enlargementof operational scale also created more opportunities for customers toaccess the financial services, especially the poor women.


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Chart 3: Growth in operating scale of TYM from 2007 to 2014

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02007 2008 2009 2010 2011 2012 2013 2014

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No. of provinces

No. of transaction offices

No. of districts

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The outstanding loan banlance

The No. of customers

Source: Thanh Hoa MFI (2008, 2009, 2015), VMFWG (2010, 2011, 2012, 2013, 2014), MIX

Chart 4: Growth in Outstanding loan and credit customers of TYM from 2007 to 2014


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b) Growth in outstanding loan balance:

The highest growth was observed right after the transformation. Theoutstanding loan balance grew from 55.6% in 2010 to 48.7% in 2011.TYM maintained an average growth rate of 22% in the next years(Chart 4). At the same time, the number of borrowers also rose greatlyto 54,847 customers in 2010 and 72,958 customers in 2011. This figurematched the increase of 36.6% compared with 2009 and 33% compared with 2010 (Table 6). Up to December 2014, TYM’s numberof borrowers was 104,377 customers (TYM, 2015). There were two reasons leading to this growth: (i) the mobilized funds increased; and(ii) TYM improved their products to meet the actual customer’s needs.However, in 2012, the growth rate in outstanding loan balance declined in comparison to the average rate of the previous years (only15%). The main reason was that TYM had to pay the Business Incometax of 25%. This led to the decrease in its operation funds and consequently its capacity to enlarge its network. In 2013, the Ministryof Internal Affairs permitted TYM to be exempt from the Business Income tax in the first 3 year after transforming.

Table 6: Outstanding loan balance and number of borrowers of TYM

Source: TYM (2008, 2009, 2010, 2015), VMFWG (2011, 2012, 2013, 2014)

YearOutstanding loan balance Borrowers

Amount (VND) Growth rate(%) Quantity (member) Growth rate

(%)

2007 70,036,680,000 - 25,429 -

2008 140,184,921,000 100.1593 33,932 33.4382

2009 181,110,172,000 29.19376 40,157 18.34551

2010 281,837,474,400 55.61659 54,847 36.58142

2011 419,034,282,400 48.67941 72,958 33.02095

2012 484,128,742,000 15.5344 78,818 8.032018

2013 601,948,578,000 24.33647 91,004 15.46094

2014 757,565,000,000 25.85211 104,377 14.69496


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c) Growth in deposits:

From 2007 to 2014, the outstanding deposit balance grew from 32.6billion VND to 402.4 billion VND. While from 2010 to 2012, TYM recordeda significant increase in involuntary deposits in the first 3 years aftertransforming (Chart 5). This is considered as the most obvious impactof the transition on the TYM’s operating performance. As an officialMFI, TYM was allowed to finally mobilize voluntary deposit from thepublic. On the other hand, with the new improvement of deposit product line, TYM could raise the organizational capital not only fromthe compulsory deposits of members, but also from the voluntary deposits of members and the public. However, this could lead to thedifficulties for TYM to manage the liquidity and other risks. Organiza-tional branding was also a challenge for TYM. This required TYM to upgrade the infrastructure and improve its communication activitieswhile the budget was limited and the expansion of the area was givenpriority over others (Tran, 2014).

Chart 5: Deposit growth of TYM from 2007 to 2014

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The outstanding compulsory deposit

The outstanding coluntary deposit

Source: TYM (2008, 2009, 2010, 2014), VMFWG (2011, 2012, 2013)

d) Operational sustainability:

From 2007 to 2014, TYM consistently achieve operational sustainability(the standard rate>20%). Therein, most changes after the transformation,

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147%

126%

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Source: Planet Rating (2010), VMFWG (2011, 2012, 2013), TYM (2014)

2.3.2. Financial efficiency and profitability

Referring to Chart 7, after the transition, TYM maintained the profitabil-ity level with the highest ROA rate (without sponsor) at 8.6% in 2012.The ROE rate also increased and the highest was at 27% in 2012. However, the ROA and ROE rate of TYM strongly declined in 2011 –

which took place from 2010 to 2012. The Operational Self- Sustainability (OSS) rate peaked at 196% in 2011 with the highest totalrevenue compared to other years. This OSS rate increased to 98% in2010. In 2011, TYM’s OSS rate declined to 126% due to the slight increase in revenue (3%) against the high rise in total expenses (60%).This strong decrease was because TYM had to pay the Business income tax leading to the decline in operational funds and revenue.At the same time, after transforming, the total operational expensesgreatly increased especially with regard to the personnel and admin-istrative expenses. Up to 2012, the OSS rate rebounded to 147% thetotal revenue increased to 51% while the total expense decreased to29% compared to 2011 (Chart 6).

Chart 6: Operational Self-Sustainability (OSS) of TYM from 2007 to 2014


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one year after the transition. Particularly, the ROA rate fell sharply from6.3% in 2013 to 3.4%. The ROE rate also reduced from 18.7% to 13%. Thiscould be explained by the great increase in operational cost (100%)and the slight increase in financial revenue (only 3%). Currently, TYMhas a good revenue and high reputation in its operating areas. With aprofessionalized system, improved product and development capacity TYM has many advantages to develop quickly. Nevertheless,TYM is also facing direct competitions from other microfinance product and service providers such as Vietnam Bank for Social policies, commercial banks; and especially local Women unions thatorganize many other microfinance projects.

Chart 7: Profitability of TYM from 2007 to 2014

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18.7%

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27.3%

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16.3%

Return on Asset (ROA)

Return on Equity (ROE)

Source: Planet Rating (2010), MFWG (2011, 2012, 2013), TYM (2014)

The productivity of credit officers decreased in 2009 (207 members/officer) but rebounded in the years after transforming. The highest productivity rate was 413 members per officer in 2014 (Chart 8). Thecauses of decrease in 2009 were due to the opening of several newbranches, and the recruitment of more credit officers (Planet Rating,2011). By fully implementing the ASA method in every branch, TYM improved its labor productivity without affecting the quality of loansin the process of appraisal.

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Source: Planet Rating (2010), VMFWG (2011, 2012, 2013), TYM (2014), MIX

The transition process positively influenced TYM. TYM improved its ability to attract investment funds as evidence by the increase in creditfunds to 13% in 2014. The growth rate of TYM greatly fluctuated in thefirst 2 years after the transformation (average growth was 52%). Theaverage growth rate was 22% in the following years. The growth rateof voluntary deposit also fluctuated in the first 3 years after transform-ing (average growth was 234%). The increases in outstanding loan balance, deposit balance and the number of customers were notonly because of the diversity of the organization funds, but also dueto the innovation and appropriate designing of products and servicessuiting customer’s actual needs. Besides, TYM maintained a good loanportfolio quality with the PAR30 ratio remaining under 0.5%.

Financial efficiency fell in the first year after the transformation but rebounded in the next years. In first year after the transition, ROA ratiodeclined to 3% and ROE reduced to 5%. In the following years, the average ROA was 5%/ year and the average ROE was 19%/ year. Themanagement system, especially the internal supervising and informa-tion management system, was professionalized. Furthermore, the selection of one member limited liability company model with the

Chart 8: Productivity and Performance of TYM from 2007 to 2014

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VWU as the owner supports TYM in maintaining the social mission ofserving poor and low-income women.

Aside from the advantages, the transition forced TYM to face challenges. Primarily, TYM faced the challenge of balancing socialand financial objectives that originated from its ownership by VWU.Furthermore, TYM also faced challenge on the increase in operationalexpense after the transformation and liquidity management as theoutstanding deposit balance rose.

2.4. The lessons learnt

2.4.1. TYM’s commentary on advantages and disadvantages, oppor-tunities and challenges of the transformation:

From the perspective of TYM, the biggest advantage of the transfor-mation process was in receiving tremendous support from the SBV,VWU, especially in terms of the personnel and physical supports fromlicensed MFIs around the world such as CARD (Philippines) and SBFIC(German). In addition, the great determination of the ManagementBoard also played a significant role in deciding the transformation.These are the most important factors that supported the transitionprocess to be implemented successfully. Another factor is that TYM isthe pioneering organization for the transformation of MFIs in Vietnam.This was enthusiastically encouraged by the SBV and created thepremise for the development of professional microfinance in Vietnam.

However, aside from the aforementioned advantages, TYM also facedseveral difficulties. The first difficulty is that the process of building andpreparing license application dossiers took much more time and resources than expected. As TYM is the first organization that appliedfor licensing, TYM did not have the chance to learn from previous experiences in dossier preparation. Hence, TYM had to amend thedossier repeatedly to meet with the provisions of law. Moreover, TYMalso needed to restructure and strengthen its operational structure,operating system, capital structure in order to be consistent with the

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legal requirements for transition. Meanwhile, the human resource ofTYM was very limited in both the quantity and quality that TYM had toreceive the significant support from the external sources.

TYM’s commentaries on opportunities:

- Transformation creates the motivations and a “creative” culturewithin the organization, thereby promoting the development of theorganization;

- After transformation, licensed organizations are allowed to avail ofloans from international organizations and domestic commercialbanks (Oikocredit, Cordaid, ADB …);

- Licensed organizations receive supports from ADB (MicrofinanceDevelopment Subprogram in Vietnam), Cordaid, Rabobank, Oikocredit, Freedom from Hunger and ACT to improve the organi-zational capacity, product development and operating scale expansion.

TYM’s commentaries on challenges:

- Maintaining the mission of serving poor people;

- The licensed organization has to report regularly to GovernmentAuthorities;

- Transformation raises the total expenses including loans provisionexpense, the cost of security, equipment, vault…;

- Transition requires a good voluntary deposit management capac-ity as well as reputation creation and liquidity management;

- The Organization needs to enhance the organizational capacityto keep up with the changes in the market;

- The technical information system needs to be updated regularly,secured, and upgraded to suit the development and operationalchanges of the organization;


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- During the one year after the transformation, the organization is notallowed to open more branches, thus this limits its capacity to access funding sources.

2.4.2. The lessons learnt from TYM

Some experiences of TYM are very useful for organization in decidingand preparing for the licensing as well as the transformation process,these include:

- Before deciding on the implementation of licensing procedures,the organization needs to consider the current organization’s capacity, potential changes to determine the suitable time, the essential preparation for the process of transforming.

- During the license application process, the organization needs tokeep close contact with the Government authorities to get theirguidance and timely support;

- After being licensed, the organization should continue transformingorganizational structures following the slow and steady steps. Theyshould pilot the major changes before implementing it on a largescale.

- The organization should promote the sharing of experiences withother licensed organizations and VMFWG to learn more from realexperiences. As a group, they should advocate together to get theappropriate policies and bring the actual advantages to the microfinance sector.

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CHAPTER 3. THE TRANSFORMATION OF M7 LIMITEDLIABILITY MICROFINANCE INSTITUTION (M7-MFI)

3.1. The motivations

In fact, shortly after the Decree 28 and Decree 16 were enacted, theorganizations of the M7 network realized that M7 could not adopt theTYM’s model, the one member limited liability member company. It isbecause they had limited management capacity and low capital(less than 5 billion VND). Thus, M7 chose the two and more memberlimited liability member company model to transform. In order to transform to a microfinance institution under the two and more member limited liability member company model, M7 suggested theconsolidation of the entire Funds of M7 network. However, these Fundswere not enthusiastic with the solutions due to differences in the management model, finance capacity and operating quality.

Unfortunately, Decree 28 stipulated that microfinance programs andorganizations that do not perform the conversion will be restricted interms of their level of funds mobilization. Meanwhile, in fact, some organizations of M7 have already has large outstanding deposit balance which far exceeded the prescribed limits5.

Furthermore, the organizations of M7 network also realized that a social fund was not a credit institution and thus not in the financial system as well. Thus, the transformation was the only method to gaina more stable legal status in the market. By transforming, M7 organi-zations would have the chance to mobilize more funds from manycommercial funding sources. This was very useful for M7 due to:

• The low owner’s equity; • The non-refundable sponsor trend was increasingly limited;• The international microfinance sector was gradually commer-

cialized; sponsors tended to fund the large organizationsmanaged professionally.

5 The outstanding deposit balance of funds as at 31/12/2011 as followed: Mai Son: 5.936 millionVND (therein compulsory deposit balance is 2.500 million VND, Voluntary deposit balance is 3.436million VND). Uong Bi 10.854 million VND (therein Compulsory deposit balance is 1.773 million VND,Voluntary deposit balance is 9.081million VND).Dong Trieu: 15.528 million VND (therein Compulsorydeposit balance is 3.424 million VND, Voluntary deposit balance is 12.105 million VND).

Chapter III. The Transformation of M

7 Limited

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Moreover, the transformation required organizations to upgrade theirinternal systems and procedures. At the same time, they also neededto improve the reporting and supervising system and create the basefor the long-term stable and effective development.

M7 microfinance programs had been supporting the borrowers of the3 districts who had been members of the programs for nearly 15 yearsto alleviate poverty and develop. For those members, they did notwant to lose their achievements.

For the above reasons, the transformation to a licensed organizationis the essential need for its organization to survive and continue to develop.

3.2. The transformation process of M7-MFI

Diagram 3: The important milestones in the development of M7-MFI

1993-2003:

2008:

2004-2007: 2010: 1/2013:

1/2012:M7-MFI was licensed by SBV

7 credit-deposit programs were founded with the support of ActionAid and were handed over to the local WU

Transform Social Fund to licensed MFI:- Determine the capacity of organizations contributing to M7-MFI- Establish The Preparatory Committee and Transformation Consultative Group- Submit the first dossier to the SBV

Tranform credit-deposti programs to Social Funds:- Poor people Center in Can Loc Ha Tinh- Capital Aid Fund for Women in Uong Bi town - Development Fund for Women in Dong Trieu- Development Fund for Women in Ninh Phuoc- Development Fund for Ethnic Women in Mai Son

03 Social Funds in Mai Son, Dong Trieu and Uong Bi continue to submit new apllication dossiers to SBV after modifications

M7-MFI officially operated

3.2.1. Transforming from microfinance programs to Social Funds (1993 - 2010)

After the introduction of a legal framework for a professional microfi-nance industry, Women’s Unions, the owners of microfinance programs/projects, realized that the transformation of credit-deposit

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programs of M7 network became the obvious requirement for microfinance activities of the unions to develop professionally and stably. This is the vital prerequisite, and the important premise to accelerate the transformation.

In order to prepare for the final phase of transforming into MFIs underthe Credit Institutions Law, M7 programs/projects chose the legal intermediary model to restructure their operation and structure towards increasing their independence and autonomy in the decision-making process. The legal intermediary method was to establish Social Funds under Decree 177/1999 / ND-CP dated22/12/2999 of the Government promulgating the regulation on organ-ization and operation of social funds and charity funds and DecreeNo. 148/2007 / ND-CP dated 25 / 9/2007 of the Government on theorganization and operation of social funds and charity funds. Thereby,the Social Funds in turns were formed including Poor People Center inCan Loc commune– Ha Tinh Province (2004); Capital Aid Fund forWomen in Uong Bi commune (2005); Development Fund for Womenin Dong Trieu town, Development Fund for Women in Ninh Phuoc commune, Development Fund for Ethnic Women in Mai Son commune (2007); Development Fund for Women in Dien Bien city andDevelopment Fund for Women in Dien Bien commune (2010).

Along with the transformation of the organizational structure, M7 network had conducted a review on processes, policies, manage-ment mechanism and their operations to implement the transition uniformly across the network and create a favorable foundation to facilitate the transformation towards official MFIs. Along with the review, other actions implemented were the following:

- Unifying the organizational structure and the single entry accounting(instead of double entry accounting);

- Unifying the policies, operating procedures, inspection and monitoring: (i) lending policy and operating procedures had beendrafted and enacted to officially apply throughout the system; (ii)


7 Limited


7-MFI)


Accounting regimes, report forms were standardized; (iii) applyingthe internal supervising regimes;

- The monitoring system of M7 was set up and the monitoring manualwas introduced and implemented.

3.2.2. Transforming from Social Funds to an official microfinance institution (2010 - 2012)



Generally, after the transformation, there are many significantchanges in M7-MFI’s vision and mission compared to the previous vision and mission of the Social Funds (Table 7). Particularly, the visionof M7-MFI was “providing qualified and stable microfinance servicesto the groups with social and economic difficulties, especially the ethnic groups”. This vision was repeated in the mission statement,which was “supporting the people with economic and social challenges, especially ethnic women and groups through providingmicrofinance services contributed in achieving the reducing povertyobjective, gender equality; and developing based on the basis of ensuring the institutional and financial sustainability”.

The targeted customers that M7-MFI committed to maintain were similar to the Social Funds’ targeted customers. The customers werethe customer groups with economic and social challenges, especiallywomen and ethnic groups. According to IFC’s reports, this commit-ment was considered as the competitive advantage and the mainstrategy of the M7-MFI. However, after transforming, M7-MFI still selected customers based on the list of poor households establishedby local authorities, the traditional cooperation with WU, and the cluster officials who were WU officers (volunteers with commission). Thedeposit mobilization and customer monitoring were preferred than relying on the actual system and procedures to marketing products,verify the poverty level and ethnic composition of customers, andrecord results for comparison with the mission (IFC, 2013).

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Before the transformation After the transformation

Vision

To become a MFI providingqualified and stable microfinance services to thegroup with social and economic difficulties, especiallythe ethnic group across theprovince

Be the organization providingqualified and stable microfinance services to thegroup with social and economic difficulties, especiallythe ethnic group across theprovince

Mission

To set up a stable system providing comprehensive microfinance services to groupwith social and economic difficulties, especially the ethnicgroup to enable them to organize table life themselves,thereby improving the lives andenhancing the status of womenin both family and society

To support the group with socialand economic difficulties, especially the ethnic groupacross the province providingmicrofinance services that meetVietnamese’s needs, contributing to improve theireconomic and social life whilemaintaining the institutional andfinancial sustainability

b) Changes in the organizational structure:

Similar to TYM, the transition process had the most influence on the organizational structure of M7-MFI. This is also the biggest challengefor M7-MFI now.

Notably, according to the 2016-2020 business plan of M7-MFI, in orderto develop sustainably and improve future operations, M7-MFI plansto modify the mission statement to “providing microfinance servicesthat meet Vietnamese’s needs, contributing to improve their economic and social life based on ensuring the institutional and finan-cial sustainability”. By 2020, M7-MFI is expected to transform into oneof the five top microfinance institutions in Vietnam, “be developed,transparent and financial sustainable with a strong managementframework, a professional management system, diversified productsand services, larger operating scale suiting the best international practices as well as complying with the national regulations and laws”.

Table 7: Vision and Mission of M7-MFI before and after transformation


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With regard to the structure model (Appendix 2), M7-MFI chose an organizational structure similar to TYM in order to design the structure,streamline the organization, and suit the actual situation of the 03Funds operating in different areas. Accordingly, the head office is located in Hanoi to facilitate contact with the Government authorities,sponsors and other organizations of the network. The head office manages, coordinates every operation perspectives of the whole system and do not directly perform business activities. The microfi-nance operations of the 3 Funds in Dong Trieu commune, Uong Bicommune and Son La province are managed by 03 branches. Director and other staffs of the Funds are doubled as the Director andother personnel positions of the branches. The local operations weresignificantly reduced. Previously, branches and transaction clustersused to receive operating guidance from the operating-training department through the local intermediaries. However, after the transformation, the branches receive tasks directly from the operatingdepartment. This helps M7 to process the operation promptly andsmoothly from the head office to local branches.

According to Credit Institution Law, M7-MFI had to develop a suitablestructure under the two and more member limited liability companymodel. Thus, after the transition, the Board members of M7-MFI consistof 05 members nominated by the capital contributors. Therein, Development Fund for women in Mai Son commune nominated 02members, Capital Aid Fund for women in Dong Trieu commune nominated 02 members and Development Fund for women in UongBi commune nominated 1 member. Within this structure, WU was nolonger involved in the managing operations. WU has taken the role ofa capital contributor and participates in formulating strategy and determining the organization’s direction; and enjoys the interest basedon the capital contribution ratio in accordance with the law and capital contribution contracts.

Before 2015, due to limited financial resource and the shortage of experienced staff in microfinance field, some members of the Board

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had to hold concurrent executive positions at branches. Particularly,three members of the Board had to be doubled as branch directors,one member of the Board also held the chief accountant position ofa branch. However, from the actual operational management, M7 realized that the above management structure would lead to overlaps in management structure and business operations of the organization. Therefore, the parties agreed to reduce the Board member structure to three members. Two members of the Board member had not withdrawn from the Board member to focus on thebranch management. Currently, one member of the Board memberholds concurrently the executive positions at branches, and onemember was doubled as General Manager6. Because this can leadto conflicts of interest within the organization, it is considered as thebiggest challenge for M7-MFI in implementing the transformation successfully (IFC, 2013). The factors that lead to the formation of thisstructure are:

- The Decree and Circular guiding the implementation of the Lawon Credit Institutions has not yet been issued. Thus, the requirementson governance structure are not clear.

- The Social Fund has limited human resource and lacks of skilled representatives to hold the positions on the M7-MFI’s Board member(IFC, 2013).


a) Ownership structure/contributing methods:

On the ownership structure, in order to comply with the regulations ofthe SBV and the organization’s capacity, M7-MFI selected the two and

6 Decision 67/QĐ-HĐTV of M7 microfinance institution (M7-MFI) on the dismissal of the General Manager position of M7-MFIsince 26th December 2015; Decision 66c/QĐ-HĐTV on appointingBoard member to hold the Acting General Manager position since 28th December 2015.


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7 According to the SBV’s regulations, the capital contributing in the establishment of MFI (underthe transformation method) is the owner’s equity of the organization. Owner’s equity includesgranted funds, allocated funds, contributed funds, donated funds, other funds (capital reservefunds, financial reserve funds and investment funds) and retained earnings after deducting losses,including accumulated losses. SBV determine owner’s equity based on the following documents:

a) Capital contributing certificates and/or other equivalent documents;

b) Financial reports audited by an indenpendent auditing organization listed in the current list ofqualified auditing organizations announced by the Ministry of Finance. Financial reports are for aperiod of six months before submitting the application dossiers to establisd small size microfinanceinstitution;

c) Commitments of license application proposors on owner’s equity at time of dossier submission;and commitments on the imediate notification to the SBV of any changes which would affectthe value of this equity amount until completing the transformation process;

d) SBV inspector’s reviews on the funding situation of this organization.

more members limited liability company model to transform. As mentioned above, the main transforming motivations of M7’s SocialFunds are:

- To survive and continue to develop as prescribed by the SBV

- To gain supports from sponsors and transformation leader (CFRC)

However, due to its small scale and limited management capacity,the organizations of M7 network realized that M7 could not adopt theTYM’s model; the one member limited liability member company.Thus, M7 selected two or more members limited liability companymodel to consolidate and transform. After the establishment of M7-MFI, the Social Funds became the owners of M7-MFI with the rightsand obligations of the owner as prescribed. Instead of lending andmobilizing activities, after transforming, the operation of the SocialFunds focused on the social activities and supporting members of M7-MFI. Aside from contributing capital, up to May 2013, the three SocialFunds and the capital contributors, lent M7-MFI a total loan amountof about 11 billion VND (IFC, 2013).

With regard to the contributing methods, based on the consultancyof the Consultative group, the SBV’s regulations7 and the experiences

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8 Currently, the funding source of the social funds are from: (1) Revolving fund sponsored by inter-national organizations; (2) equity from income - operating expenses disparities and allocated asfollows: operating capital (50%), professional development fund (30%), Bonus fund (10%), Welfarefund (10%).

of CARD (Philippines), the Social Funds5 and the capital contributors8

have agreed on the sources and methods of contributing capital.There are three fund sources:

- Organizational capital;

- Professional development funds

- And funding by donors specified to use in establishment process ofMFIs

For funds sponsored by the social funds, these funds have committedon writing to the SBV that the loans for M7-MFI are long-term (over 5years) with a preferential interest rate of 3%/ year. In relation to fundingissues, donors previously suggested that the capital were used to sup-port the poor members of the program. However, according to theState Budget Law, these sources of aid capital are under the budgetof the local government. Thus, after handing over, as negotiated, theFunds are under the budget of People's Committees of districts / townsand the control of Women Unions of districts / towns. The Funds thenwill be handed to the Social Funds to be managed with the same purpose. In order to comply with the regulation on the MFI establishedcapital requirement, M7 had to re-negotiate with sponsors. An additional contract were agreed on and clearly stated the owner ofoperating funds was the Social Funds.

At Mai Son fund, the new aid capital (after the introduction of DecreeNo. 165/2007/NĐ-CP) was clearly stated as “the source of aid capitalthat is not aimed at profit but used for contributig capital in M7-MFI”.

b) Fund Mobilizing structure:

After the transformation, the capital structure of M7-MFI changed significantly. Up to December 2014, the total assets of M7-MFI was


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9 Kiva is a non-profitable website connecting individual lenders and borrowers in developing coun-tries. Microfinance service providers in developing countries upload the information of borrowersto the Kiva website. Individual lenders will lend loans with the gradual increasing amount (USD 25per increase). Kiva receives the funds and disburses to microfinance programs without chargingextra service fees or interests. M7-MFI’s loan was accepted by Kiva and they signed the creditcontract (M7-MFI, 2015)

128,1 billion VND. The capital structure consisted of 16% from owner’sequity, 62% from outstanding deposit balance, 19% from loans and 3%from other sources. The capital structure of M7-MFI Was derived mainlyfrom member’s deposit source, which was 79.2 billion, VND that accounted for 62% of the total assets and increased 17% comparedto the beginning balance. At that time, M7-MFI had accessed somelong-term funding sources of domestic organizations (Vietnam-Belgium Credit Fund, Social Funds) and international organizations(Cordaid, Rabobank, Kiva9).

Transfer of assets

The process of handing over capital, liabilities and assets was performed shortly after being licensed, whereby:

• For the assets:

Social Funds M7-MFI

(1) Cash at banks =======> Cash at banks

(2) Outstanding loan balance =======> Outstanding loan balance

(3) Loan loss provision =======> Loan loss provision

(4) Fixed assets =======> Fixed assets

• Liabilities and owner’s equity:

Social Funds M7-MFI

(1) Deposits =======> Deposits

(2) External loans =======> External loans

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(3) Revolving fund =======> Loans from Social funds

Sponsored by AAV with low interest rate

(4) Fund sponsored by FORD =======> Contributed capital

for Mai Son to contribute constituting charter

in M7-MFI capital

(5) Net income from =======> Contributed capital

operation (organizational constituting charter

capital + funds for capital

professional development)

(6) Bonus & welfare funds =======> Bonus & welfare funds

M7-MFI has been licensed for operation since January 2012. However,the checking and cross-checking of closing balance for handing overfrom the Social Funds to M7-MFI were only completed in February 2013(the information for handing over was based on the 2012 audited financial reports).


a) MIS system and reports:

After transforming to a licensed MFI under the limited liability company, the quantity and frequency of reports on government -management immediately increased. This forced M7 to invest in upgrading its information management system, especially softwaresystem in managing financial information. Besides, the output reportsmust be consistent with the expected model of M7-MFI as well as consistent with the capabilities of the staff use the software.

The operation management software (M7S - 1st edition) was designedin 2007. The operational staffs were fully trained to use the softwaresince 2008. In order to prepare for the transformation process, since


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July 2009, the 2nd edition was designed to meet the management requirements of branches in different regions, especially in the remoteand isolated areas. Accordingly, this software managed the followingfields: members, deposits, loans, accountancy and human resource.

A strong server was installed in the head office to run programs andmanage data across the system. The installation included one sepa-rated room for server, which was equipped with air-conditioner, router,firewall and internal LAN system. UPS systems and generators were alsoequipped to overcome power outages.

Due to the common characteristics of microfinance and the specificcharacteristics of M7-MFI, credit institutions often encounter difficultiesin the process of deploying accounting modules, the output reportsand time to fix reports. Some important management reports are alsounfulfilled. Thus, the total costs of upgrading software were about 1.5billion VND.

b) Supervising and auditing:

In order to comply with the SBV’s regulations, M7-MFI established anofficial internal auditing structure. Currently, M7-MFI has its supervisingand auditing system strictly in accordance with the regulations of theState Bank from the head office level to its branches. Up until November 2015, the supervising department consisted of one ChiefSupervisor, 2 supervisors and 2 internal auditors. The merger did notchange much the functions of internal auditors at branch level. Theinternal auditing system of M7-MFI was strengthened in comparison tothe pre-transformation system. M7 developed a separate supervising,auditing and personnel system mechanism. However, according tothe Chairman of the Board, M7-MFI’s internal auditing system still lacksstaff with legal expertise Legal expertise in the banking-related activities.

One of the biggest challenges of the transition is codifying the documents, policies, internal procedures to apply uniformly and

officially across the system from the head office to branches and trans-action points; from General Director to Directors of branches and employees. Before transforming, the organizations of M7 network introduced uniform guidelines on organizational structure, financialpolicy and operating procedure. However, they are still independentorganizations to each other with relatively separated managementand operating apparatus. In fact, the differences still exist on the policies and procedures. As of 31/01/2014, M7-MFI issued eight internalpolicies, four internal regulations and one credit-deposit procedure.

Regarding the credit risks, the PAR30 ratio of M7-MFI was always under0.5% from 2010 to 2014. This implied that the loan portfolio quality ofM7-MFI was very stable (Chart 9). The main factors were:

- The bad debts were retained at the Social Funds during the transformation;

- The supervising system of M7-MFI was strengthened compared tothe system before transformation.

Chart 9: PAR30 ratio of M7-MFI from 2010 to 2014

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0,01%

0,01%

0,01%

0,01%

0,00%

0,00%

0,00%

2010 2011 2012 2013 2014

Source: VMFWG (2010, 2011, 2012, 2013), MIX


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Since most leaders lack knowledge of law and experiences in managing the professional microfinance operation, the search forqualified staff to hold the General Director position and be responsiblefor managing the organization had become a challenging task. Therecruitment of external human resource was also very difficult due tolimited financial capacity. It was hard to pay a competitive salary inthe market. With the funding support for General Director’s one-yearsalary from FORD, the organizations hired external staff to hold this position.

Shortly after planning for transformation, the Social Funds re-evaluatedthe entire staff from management to technical ones. Whereby, thenew staffing structure will appoint some qualified staff of the SocialFunds to hold future positions of branch departments after transform-ing; transferring some young and qualified staff to new working areas;dismissing old and unqualified employees; and recruiting more youngand highly qualified staff to train. Almost every staff member thoughtthat the formalization (from programs to Social Fund rather than therecent merger) strongly affected their jobs and increased the profes-sionalism. The books, procedures and workload had changed. The administrative tasks were more complicated while duties and goalsbecame clearer, and the salary as well as safety of tasks increased.With the higher job requirement and more satisfactory salary, the pressure on achieving goals also increased (IFC, 2013). However, M7-MFI needed to develop and implement a human resource management policy comprehensively, as well as review and adjustthe salary policy and integrate it into a human resource managementmanual. This policy included a transparent salary and bonus system(financial and non-financial) based on the performances of the creditstaff and other officers and a policy on the career development andpromotion.

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Regarding the credit products, M7-MFI continues to provide traditionalproducts after the transformation. The basic product of M7-MFI is atype of credit product following the Grameen group model. Insteadof mortgage, compulsory deposits were provided in a three level system, in which cluster and group leaders were paid with commis-sions and fees.

About the deposit products, all three branches required all customersto pay voluntary deposit at twice/week cluster meetings. The minimumdeposit increased from 5.000VND/meeting in 2011 to 10.000VND in2013. Interest was accumulated and the interest rate was about 4.2%/year (0.25%/ month). However, customers could only withdraw theprincipal and interest after leaving the group. Further, all threebranches provided voluntary deposit products.

About insurance products, M7-MFI cooperates with Bao Viet Insurancecompany to provide micro insurances through the Agency model inQuang Ninh. However, M7-MFI needs to finalize a Memorandum of Understanding urgently with Bao Viet Insurance company (currentlyunder negotiation) to become an official agent providing Bao Viet’smicro insurance products.

3.3. The initial operation results and the future plan

3.3.1. The results

In fact, even though M7-MFI was licensed in January 2012, due tosome reasons, this organization officially launched operations in October 1/2013.

a) Operating scale:

M7-MFI opened a new office in Hanoi and maintained the operationof three of its branches which were carried over from during the timeit was operated as Social Funds. The office supervises the operation of12 transaction offices in 3 towns: Mai Son (Son La province), Dong Trieu


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and Uong Bi (Quang Ninh province). M7 also opened 9 transactionoffices in 2007 (IFC, 2013).


M7’s outstanding loan balance increased from 2010 to 2014 at the average rate of 18%/ year. Up to December 2012, the outstandingloan balance growth rate slowed down compared to that before thetransition (Chart 10). This could be explained by two reasons:

- M7-MFI lacked of funds for lending;

- They did not have any specified policy to increase income. This limitation affected the growth in the quantity of borrowers. Unlike

TYM, the number of M7-MFI’s borrowers was significantly reduced infirst year after transforming (in 2013) to 10,981 customers, down 11.6%compared to 2012’s (Table 8). Even though the average outstandingloan balance per customer of M7-MFI was much higher than othersimilar MFI, those customers continued to require higher loan amountsthan the ability of the M7-MFI. This resulted in customer dissatisfactionand the rate of leaving was higher (IFC, 2013). This could be becausethe targeted customers of M7-MFI were not actually suitable with themission statement of serving poor and low-income women. However,based on the operating results of 2014, the number of customerstended to rebound and was 11,567 customers (increased 5.3% compared to 2013). This was a positive sign for the development ofthe organization and could be the result of M7-MFI having reviewedtheir strategic business plan.

Chart 10: Growth in Outstanding loan and credit customers of M7-MFI from 2010 to 2014

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100

80

60

40

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13,500

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12,500

12,000

11,500

11,000

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Outstanding loan balance Total customers

Billio

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Source: VMFWG (2010, 2011, 2012, 201,2014), MIX

Table 8: Outstanding loan balance and number of credit customer of M7-MFI

YearOutstanding loan balance Customers / Borrowers

Amount (VND) Rate (%) Quantity Rate (%)

2010 57,999,400,900 - 12,300 -

2011 75,728,077,540 30.6 12,946 5.3

2012 86,470,041,100 14.2 12,417 -4.1

2013 99,103,119,000 14.6 10,981 -11.6

2014 112,298,925,000 13.3 11,567 5.3

Source: VMFWG (2010, 2011, 2012, 2013,2014), MIX

c) Growth in outstanding deposit balance:

Similar to TYM, the outstanding deposit balance of M7-MFI increasedsharply after the transition. The total outstanding deposit balance from2010 to 2014 was the fastest growth after the transformation.


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Particularly, the balance respectively increased by 42% from 2011 to2012, 30.1% from 2012 to 2013 and 45.5% from 2013 to 2014. Up to December 2014, the total outstanding deposit balance of M7-MFI was79.2 billion VND, in which the voluntary deposit balance amounted to63.5 billion VND accounting for 80% of the total balance (Chart 11).Deposits grew strongly at an average rate of 37.5%/ year after transformation (Table 9). This was the most obvious impact of the transition to official MFIs on the operating performance of M7-MFI.After being licensed, M7-MFI was permitted to mobilize voluntary deposits from the public with the savings interest rate were oftenhigher than 0.5%/ year compared with the commercial banks. Thus,voluntary deposits played an important role in raising capital for theoperation of M7-MFI. Nevertheless, the sharp increase in voluntary deposit could lead to the challenge in managing the liquidity and operational risks. According to the General Director of M7-MFI, thebiggest difficulty in providing deposit products was the restricted maximum deposit balance per customer. Circular 08/2009/TT-NHNNregulated the maximum deposit amount was 300,000 VND/ transac-tion per customer of transaction point. Under this regulation, customershad to go to the transaction offices or branches to open deposits withlarger amounts. This limited the ability to mobilize funds of microfinanceinstitutions.

Chart 11: Deposit growth of M7-MFI from 2010 to 2014

90

80

70

60

50

40

30

20

10

-2010 2011 2012 2013 2014

The outstanding voluntary deposit balance

Bill

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VN

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The outstanding compulsory deposit balance

Source: VMFWG (2010, 2011, 2012, 2013,2014), MIX

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Table 9: Deposit balance of M7-MFI

YearCompulsory deposit balance Voluntary deposit balance

Amount (VND) Rate (%) Amount (VND) Rate (%)

2010 6,082,580,409 - 21,697,617,686 -

2011 7,696,690,865 26.53661 24,621,745,414 13.47672

2012 9,044,082,309 17.50611 32,794,772,134 33.19434

2013 12,662,972,109 40.0139 41,760,825,234 27.33989

2014 15,735,503,700 24.26391 63,461,612,468 51.96446

Source: VMFWG (2010, 2011, 2012, 2013,2014), MIX


Similar to TYM, there was a trend of fluctuation on the operational sustainability OSS from 2012 to 2014 (Chart 12). Particularly, in 2012, theOSS ratio of M7-MFI was at 137%. After that, it fell sharply to 112% in2013 and 51% in 2014. This trend was mostly predicted in the first yearsafter the transition due to the decrease in income and the high increase in the operating expenses of the organization.

Chart 12: Operational Self- Sustainability (OSS) of M7-MFI from 2007 to 2014

146%

158%

137%

112%

151%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2007 2009 2012 2013 2014

Source: VMFWG (2010, 2011, 2012, 2013,2014), MIX


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3.3.2. Financial efficiency and profitability:

From the Chart 13 and Table 10, ROA and ROE ratio of M7-MFI alsofluctuated significantly from 2011 to 2014. Particularly, in 2013, ROAratio was reduced more than 5% from 7.4% in 2012 to 2.3%. ROE fellabout 12% from 22.7% to 9.4%. One of the main reasons was the largeincrease in the operating expense while income rose marginally.

Chart 13: Profitability of M7-MFI from 2010 to 2014

11.62%7.44%

2.32% 2.94%

36.17%

22.69%

9.42%

18.40%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2011 2012 2013 2014

Return on Asset

Return on Equity

Source: VMFWG (2010, 2011, 2012, 2013), MIX

Table 10: Income and expense of M7-MFI

Currency: VND

Year3 Social Funds before transforming M7-MFI

2010 2011 2012 2013 2014

Total income 10,708,790,729 17,873,143,075 24,115,754,349 21,339,922,981 27,418,183,512

Total expense 6,159,759,920 11,114,427,404 17,647,834,857 18,994,507,694 18,145,612,831

Source: VMFWG (2010, 2011, 2012, 2013,2014), MIX

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The productivity of credit officers tended to decrease in 2013 (220members/officer), but it rebounded in 2014 and was at 236 members/officer. The main reason of reduction in 2013 was that thenumber of credit officers of M7-MFI did not change while the loanportfolios and the number of borrowers fell gradually. M7-MFI allocated half of its employees to contact customers directly. However, these employees did not have many customers to serve.Even though M7-MFI had a high rate of compulsory depositors, thesecustomers did not benefit from or contribute to the core microfinanceproducts. It was more difficult for credit officers to attract new customers and disbursement goals than fund mobilizing objectives(IFC, 2013). Hence, M7-MFI would need to carefully review and reconsider its targeted customers (Chart 14).

Chart 14: Productivity and Performance of M7-MFI from 2010 to 2014

0%

5%

10%

15%

20%

25%

30%

35%

-

50

100

150

200

250

300

2011 2012 2013 2014

Cutomers/credit officer

Rate of operating expenses

Average income/total outstanding loan balance

Source :VMFWG (2010, 2011, 2012, 2013,2014), MIX

3.3.3. The next Five-year plan

Towards 2020, M7-MFI plans to expand their operating scale from 03branches to 05 branches. The 02 new branches will be opened in SonLa province and 02 transaction offices under these 02 branches willbe in Uong Bi town and Mai Son town. Besides, M7-MFI aims to attract


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32.000 customers (members) in which the rate borrowers/ the totalmembers will be 80%. By 2020, the outstanding loans balance will be300 billion VND. M7-MFI will maintain a maximum rate of 0.5% PAR30.

Besides, M7-MFI also aims to achieve full financial sustainability andmaintain a total expenses/total assets rate of fewer than 20%. However,M7-MFI needs to revise and complete the business plan by adding adetailed analysis of the current market and the potential to increasethe persuasiveness of the growth objectives.

The operating scale of M7-MFI mainly focuses on the areas with relatively high poverty rate (in the Northeast and Northwest). Thus, theM7-MFI continues to focus on the targeted customers of poor womenand ethnic women. Moreover, M7-MFI expects that after the transformation, they will focus more on another depositor group (notmembers) to increase their fund mobilization.

In order to develop microfinance products and services after transforming, M7-MFI initially plans to focus mainly on the traditionalloan products (common loan, additional loans, medium-term loansand special loans), and deposit products (voluntary and compulsorydeposit products) in which time deposit will be expanded to increasethe fund for lending activity.

With regard to lending, in order to suit the term structure of mobilizedfunds and reduce the pressure on managing liquidity, M7-MFI aims toincrease the proportion of short-term loans (under 1 year) and maintain the proportion of medium-long term loans not exceeding30% of the total outstanding loan balance.

3.4. The lessons learnt from M7-MFI’s experiences

The key factor leading to the successful connection of 03 independ-ent Funds is the role of the leaders in the transformation process. ThePreparatory Committee to establish M7-MFI, in particular the Chief ofthe committee (CFRC). The transformation of M7-MFI showed that

many complex issues may arise unexpectedly from the plan. In orderto handle these issues quickly and effectively, especially when thereare capital contributors with different readiness status for transforming,the selection of the main responsible person to undertake the transi-tion is very important. That person must be determined, assertive insetting a vision, operation plan, clearly understands the internal issuesof a transformed organization, highly credible and has the ability topersuade and influence the stakeholders. This is one of the determi-nants of the success of the transformation process.

In order to gain the supports of Union at all levels and limit the oppositeopinions that may negatively influence the progress and goals oftransforming, it is essential to actively transmit the messages of trans-formation to all the management levels. Women Unions often manage Social Funds, microfinance programs/projects. The personnelof WU are elected and changes every 5 years. In fact, if the messageis not fully transmitted to the Chairman of WUs for them to profoundlyunderstand the objectives of the transformation plan and the benefitsthat it brings, they may be afraid of the possibility of divergence fromorganization’s missions after transforming. On the other hand, it shouldbe noted that the organizational structure of a professional microfinance institution is very different with the management structure of a political-social organization or a normal social organiza-tion. Thus, in order to address their concerns, the message of missionand the new management structure need to be transmitted activelyto Unions. By performing this task well, organizations can proactivelymanage the changes and reduce the difficulties that sometimes canbecome big obstacles in the process of transforming.

Another noteworthy lesson is that organizations need to estimate theexpenses related to transformation and be prepared for unexpectedcosts. Hence, they can actively prepare sources for the transformation,especially in relation to the cost for upgrading the information management system. The experiences of TYM of M7-MFI indicate thatthe upgrading of its MIS consumed a lot of time (few years) and

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financial resources (about 1 billion VND); while actual costs werehigher than expected (the actual cost for upgrading the MIS of TYMexceeded 10% compared to the expected).

The last lesson that can be taken from the transformation process ofM7-MFI is that with limited sources and the lack of experiences to transform to an official MFI, organizations need to reach out to relatedparties for supports with regard to the following:

- Technical support (experts, training);

- Funds from potential donors;

- Supports from Government authorities to ensure the correct interpretation of the transformation requirements and be fullyaware of the operating environment of the organization after transformation (under the management and supervision of Government authorities)

- The guidance and supports from local authorities in the transforma-tion process.


7 Limited


7-MFI)


CHAPTER 4. THE TRANSFORMATION OF THANH HOA LIMITEDLIABILITY MICROFINANCE INSTITUTION (THANH HOA-MFI)

4.1. The motivations

Both external and internal factors influenced the decision on transfor-mation. The external factor was based on the commitment of sponsorswhile the internal factor was based on the competitive objectives ofgaining the supports of local authorities, especially WU in Thanh Hoaprovince. Through transformation, Thanh Hoa MFI aimed at increasingits ability to mobilize domestic and international funds as well as offerdiversed products and service to fill customer’s demands. Most ofThanh Hoa MFI’s customers were low-income households, especiallypoor women.

4.2. The transformation process of Thanh Hoa MFI

Following the transformation trends of MFIS of MFIs in Vietnam, thetransformation process of Thanh Hoa MFI was deployed with two mainphases. In the first phase, microfinance programs and projects transformed to Social Funds. The second phase is the phase of transforming from that Social Fund to an official MFI.

The important milestones in the development of Thanh Hoa MFI are asfollows:

Diagram 4: The important milestones in the development of Thanh Hoa

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In march 1998: Save Children USD

organized a microfinance program

at three poor communes of Nong

Cong District and then expand to

Hang Hoa district, Thieu Hoa district

and Thanh Hoa city

On 21/7/2008, microfinance

program transformed into

Social Fund - Thanh Hoa Fund for

Poor Women

On 22/8/2014, Social Fund trans-

formed into Thanh Hoa limited

liability microfiance instution with

two more capital contributing

member from the private sector

4.2.1. Transforming from microfinance programs to Social Fund (1998 - 2008)

In 1998, Save Children USD organized a microfinance program in threepoor communes of Nong Cong District. Then, from 2000 to 2004, theprogram expanded to Hang Hoa district, Thieu Hoa district and ThanhHoa city. In order to achieve the final goal of reducing poverty, themicrofinance program needs to achieve the following specific goals:

- Providing credit to poor women to use in production;

- Mobilizing deposit to increase equity

- Ensuring the safety of family’s economic;

- Enhancing the management capacity of WU’s employees and improving their ability to manage the program without external supports.

This program is aimed at poor women, especially women with smallchildren. Women Unions of provinces, towns and communes imple-mented these programs. Save Children USD (SC/US) sponsored funds.People's Committees in Thanh Hoa province, communes and townsplayed the role of management agencies. The Project ManagementBoard was established at the communal level. This Board directly managed and maintained financial records. The key positions of theBoard such as Project leader (owner), accountant and cashier positions were held by WU staff. The most important factor in the credit-deposit operation was the guarantee loans group (from threeto five people per group). This type of group would perform the following activities: loan approval, loan disbursement, loan collection,deposit, supervising and helping each other in production as well asrepaying debts. The Management Board monitored and managedthese groups through WUs of villages. Depending on the size and population density of each area, each village had different numberof loan groups. Chairperson of village level WUs directly were incharge of these groups and they were also members of the

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communal project management boards. The above managementstructure would reduce the operating costs while still allowing tight andeffective project management through communal WU staff.

In 2005, Thanh Hoa microfinance program faced many difficulties andchallenges including limited revenue due to low outstanding loansbalance and limited funding sources; operating expenses were higherthan total income; and PAR30 ratio was higher than 5%. Besides, thesituation of accumulating capital for one customer also happened ona large scale and thus credit discipline was not maintained strictly.Moreover, the employees who held 2 positions at the same time alsoled to unclear division of responsibilities. These factors resulted in management and operational challenges. Thus, Thanh Hoa microfi-nance program decided to transform from a concurrent model to aspecialized model.

Being approved by the People's Committee of Thanh Hoa province,in 2008, the microfinance project transformed into a Social Fund underthe Decree No. 148 and changed their name to Thanh Hoa Fund forPoor Women (FPW). This transformation was derived from the rising demand of the poor and low-income households in Thanh Hoa as wellas requirements of donors in establishing a unit operating sustainablyand professionally. FPW took over the Thanh Hoa microfinance program from WU of Thanh Hoa province. At that time, WUs contributed in supporting and creating a favorable environment forthe Fund to operate. They helped FPW in promoting FPW’s activities toCentral and local agencies; handling late repayments and conflicts(if any); supporting propaganda and developing members; cooper-ating with FPW in organization meetings, training members This wasthe stepping-stone for the microfinance program to transform into anofficial MFI. This was also the phase for preparing, improving the capacity to meet SBV’s regulations, and attracting more sources forscale expansion and sustainable development.

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4.2.2. Transforming from Social Fund into official MFI (2008 - 2014)

Shortly after the establishment, FPW received sponsorship from FORDFoundation to open more branches in Hau Loc. In October 2008,Unilever assigned FPW to implement “The new beginning” project inthree poor communes of Dong Son district. This created the chancefor FPW to open more branches in Dong Son district. At the same time,FPW cooperated with KIVA (USA) to raise more capital for lending andthus meet the demand of customers. In 2009, FPW received aid fromSC/US to perform the “Improving Thanh Hoa FPW’s capacity” projectand established Hau Loc branch.

In 2010, two year after transforming into a Social Fund, FPW had eliminated the situation of members borrowed for other’s use or loanfrom many funding sources. Moreover, they also raised the operatingscale from four communes to seven communes; the number of borrowers grew from 5.000 to 15.000 while the outstanding loan balance reached nearly 30 billion VND. In July 2010, ADB granted USD145.000 to FPW. These grants are aimed at supporting the transforma-tion process of MFI in Vietnam. In February 2011, FPA merged this fundwith the credit-deposit project, which was sponsored by Tere DesHommes organization, and formed Quang Xuong branch. In 2013,KIVA and Unilever co-financed FPW to deploy the “Clean water andenvironmental sanitation” credit program. This also created conditionsfor the Fund to expand their operation.



After transforming, the vision and mission of Thanh Hoa MFI was clearlydetermined with a few changes in operating scale and targeted customers of the organization (Table 11). Prior to the transformation,the vision and mission of FPW were based on the orientations of thedonors. However, after transformation, Thanh Hoa MFI set their visionand mission was based on the orientation towards official MFI. After


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being licensed, the vision of Thanh Hoa MFI was “a typical MFI sharing,consulting, and supporting the best microfinance information andtechnique in Vietnam”. It’s recognizable that Thanh Hoa MFI orientedtheir operating scale at a national scale, not just in Thanh Hoaprovince. Besides, the mission of Thanh Hoa MFI was “a MFI operatingfor community development, providing friendly and effective financialand non-financial services to the poor and low-income households,microfinance business in Vietnam”. With this mission, Thanh Hoa MFIguaranteed to serve not only the poor and low-income householdsas a Social Fund, but also the micro businesses. The expansion andchange in the vision and mission might affect the operating scale andservice quality of the organization. However, due to the shortage oftime, it is very difficult to evaluate the feasibility of these expansionsand changes.

Table 11: Vision and Mission of Thanh Hoa MFI before and after transformation

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FPW Thanh Hoa MFI

Vision

The leading small size microfinance institution in ThanhHoa, sharing, consulting, andsupporting the best microfinance information andtechnique in Vietnam for microfinance institutions andprojects have been deployingin Thanh Hoa province.

A typical MFI sharing, consulting, and supporting thebest microfinance informationand technique in Vietnam

Mission

To develop families and communities sustainablythrough an official MFI providingfriendly and effective financialand non-financial services tothe poor and low-incomehouseholds in Thanh Hoaprovince

A MFI operating for communitydevelopment, providing friendlyand effective financial and non-financial services to thepoor and low-income households, microfinance business in Vietnam

b) Organizational structure:

Similar to TYM and M7-MFI, the organizational structure was impactedthe most in the Thanh Hoa MFI’s process of transforming into an officialMFI (Appendix 3).

After the transformation, Thanh Hoa MFI’s structure was strengthenedto ensure the governance and management efficiency. At the headoffice level, before transforming into official MFI, FPW had seven members in the Board Members for a term of 5 years. All members ofthe Board Members were elected in July 2008. The Chairman of B.O.Mwas also the Chairman of WU in Thanh Hoa province. Other membersconsisted of four members of WU, one was in charge to receive non-government projects from the Ministry of Foreign Affairs, while onechief executive was in charge of the FPW. The chief executive has theright to vote. The supervising committee was under control of theBoard Members. Therein, the chief supervisor was a member of theBoard Members. The internal auditing department reported directlyto this committee. After transforming, the Board Members - the highestmanagement body of Thanh Hoa MFI consisted of three capital-contributing members. The chairman of the Board Members was notmember of the management department. The Board Members wassupported by the supervising committee, risk management committee and human resources management department. Eachdepartment had three members. Therein, the supervising committeeoperated independently with the Board of Members to increase thetransparency in the control system of the organization. At the branchlevel, after being licensed, the branch manager worked under the supervision of the head office instead of WU like before. Moreover, according to the regulations of the SBV on the operating scale, ThanhHoa MFI transformed seven branches into four branches and threetransaction offices.


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a) Ownership structure and Capital contributing method:

In order to become a licensed MFI, Thanh Hoa MFI selected the twoand more member limited liability company model. After the transition, the ownership structure of Thanh Hoa MFI was allocated with6.1 billion VND of charter capital. Therein, the contributed capital ofThanh Hoa Fund for Poor women was 3 billion VND accounting for49.18% of the charter capital. Thanh Ha Capacity Building and Community Development limited company contributed 1.9 billionVND accounting for 31.15% of the charter capital. NGV Joint Stockcompany contributed 1.2 billion VND accounted for 19.67% of thecharter capital. In which, aside from the 3 billion VND of contributedcapital, FPW entrusted the remaining equity to Thanh Hoa MFI in compliance with the agreement and commitment of donors, thehanding over principles of assets, liabilities and management system.FPW was the founder of Thanh Hoa MFI. After transforming, FPW continues to access non-government programs, projects under Decree 93/2009/NĐ-CP and perform social objectives. Thanh Ha Co.operates in the fields of market research, evaluating the impacts andconsulting on the establishment of microfinance programs, projectsand social funds, professional training in microfinance field and othercommunity activities. NGV Joint Stock Co. is a unit specialized in providing technical solutions in finance-banking, microfinance field,and developing MIS software for Thanh Hoa FPW, M7-MFI, Ben Tre Fundfor economic development, “Ban tay vang” program under WU inCan Tho province and other People’s credit funds.

Unlike TYM and M7-MFI, Thanh Hoa MFI had capital contributors fromthe private sector. Thus, this impacted on the financial sustainability aswell as diversification of jurisdiction for strategic issues. Additionally, theSocial Fund still held a large proportion of ownership. On the onehand, this could support Thanh Hoa MFI in ensuring its social goals.While it might also influence the business performance and financialsustainability due to its limited ability to raise capital of Social Fund.Ch

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b) Capital mobilizing structure:

Generally, even though Thanh Hoa MFI has just begun their official operations on 12/03/201510, the capital mobilizing structure changedsignificantly. As of 31/10/2015, the total assets of Thanh Hoa MFI were158.8 billion VND which increased 38.4% compared to the beginning(refer to Table 12). In which, the owner’s equity was 6.6 billion VND accounting for 4.15% of the total assets; the outstanding deposit balance was 66.2 billion VND accounting for 41.68% of the total capital; credit fund was 52 billion VND accounting for 32,77% of thetotal capital and other liabilities was 21,4% of the capital. Particularly,there was a sudden increase in credit fund which rose from 7,7 billionVND to 52 billion VND equivalent to a 574,5% increase in only 7 months.This type of fund was mostly from the short-term loans of organizations.Loans from individuals were 32,2 billion VND accounting for 62% of thetotal credit fund.

Table 12: Capital structure from first official activities (12/3/2015) to 31/10/2015 of Thanh Hoa MFI

Currency: VND


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10 In 2014, Thanh Hoa MFI maintained the legal status of Fund and. In 2015, it was audited by independent auditing company

Criteria 12/03/2015 31/10/2015

Total assets 114,749,083,123 158,785,508,622

Owner’s equity 6,100,000,000 6,587,821,504

Deposit 58,962,309,262 66,175,388,973

Credit fund 7,714,290,000 52,034,872,343

Other loans 41,972,483,861 33,987,425,802

Source: Thanh Hoa MFI (2015)

c) Assets transferring, capital contributing method:

Similar to M7-MFI, the process of handing capital, liability and assetsover to Thanh Hoa MFI was performed immediately after the SBV approved the licensing, thereby:

• The assets:

FPW Thanh Hoa MFI

(1) Cash at Banks =======> Cash at Banks

(2) Total outstanding loans =======> Total outstanding loans

(3) Provision for capital lost =======> Provision for capital lost

(4) Fixed assets =======> Fixed assets

(Handing over the rights and obligations based on the handover contract)

• Liabilities and owner’s equity:

FPW; Thanh Ha Co.; NGV Co. Thanh Hoa MFI

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The saving deposit (FPW)(Handing over responsibility to

repay)

External loans (FPW)(Handing over responsibility to

repay)

Owner’s equity (FPW)(Contributing capital and lending)

The saving deposit (Receiving responsibility to

repay)

Loans(Receiving responsibility fromFPW, replacing FPT in signing

loan agreements with lenders)

Capital contributed in charter capital

Loans from FPW with low interest rates

(Responsible in repayment)

Capital contributed in charter capital

Cash contributed by Thanh Ha Co. and NGV Co.

Therein, the saving deposit of FPW transferred to Thanh Hoa MFI wasbased on the contract of handing over responsibility. At same time,customers were also informed of the transfer from FPW to Thanh HoaMFI. Moreover, FPW and Thanh Hoa would deal with lenders on thechanges of legal status and responsibility to repay handed over fromFPW. Thanh Hoa MFI would directly sign the contract with the lenders.


a) MIS and Reporting system:

In order to professionalize operations and ensure the transparency andaccuracy in two years (2010-2011) Thanh Hoa MFI developed an MISsystem which was the mFinance software with the technical supportand sponsorship from ADB and SBV. In implementing the MIS system,Thanh Hoa MFI set up the hardware system to ensure stable operationsincluding a host server system placed in the head office to handletransactions of 15 transaction offices and 50.000 customers; informa-tion transmission line system (VPN and internet). Moreover, they hadbeen training all of the staff, especially two information technologystaff to improve the management capacity and use of mFinance.

Thanh Hoa MFI’s MIS system was able to classify and report based ongender and other characteristics of customers. All regulations, information collecting procedures, data verification was in the operational guidelines and staff training materials of the organization.Besides, the MIS system also supported extracting reports to meet unusual external requirements of VMFWG or The MIX. Though, theyfaced difficulties in using the collected data to evaluate and reportdue to it not having social objectives or evaluation criteria that wasquantifiable or measurable.

All information of FPW had been transferred to Thanh Hoa MFI afterbeing licensed. The regulation on customer information security wasdescribed shortly in the personnel policy of the organization. Simulta-neously, the MIS system also ensured the storage and security of customer information. In order to accelerate the implementation of


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this regulation, Thanh Hoa MFI needed to have a separate policy onCustomer Information Security including the security and confidential-ity of customer information, sharing (Credit information Center), handling confidential documents and regulation and informationmanagement system. This policy needs to handle the issues on management and permissions to access or use customer information.Currently, the decentralization of permissions is based on manage-ment level, but it is still unclear and not specific.

As the third licensed MFI, Thanh Hoa MFI has a chance to learn fromthe experiences of TYM and M7-MFI in developing its MIS system andmanaging costs. However, according to the General Director of ThanhHoa MFI, the costs for developing and upgrading the MIS system werequite high (about 1 billion VND) including the cost of purchasing thesoftware, and line rental,…

b) Supervising and Audit:

As a Social Fund, the Supervision committee was nominated by theManagement Board. On behalf of the Management Board, this committee was responsible for managing the activities of the Boardof Directors. The supervision committee meets every three months.

Thanh Hoa MFI’s risk management system consisted of supervising andinternal audit system that developed to prevent risks. In order to comply with the SBV’s regulation on transforming, Thanh Hoa MFIformed a Risk Management Department. Besides, they also introduced a policy system on risk management including credit-deposit procedure, financial management and accounting entry,human resources management and recruitment; management decentralization and internal audit.

The management of Thanh Hoa MFI was aware of over-debt. Thus,their credit procedure indicates each step in evaluating the repay-ment ability of customers. Concurrently, credit officers were alsotrained for customer evaluation methods. Meanwhile, supervisors wereresponsible for inspection of compliance with credit policies and Ch

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procedures including cross-checking through customer interviews. Additionally, they also checked the credit history, repayment historyof customers by looking up the Credit Information Center.


The number of employees seemed to increase from 2007 to October2015. The total employees of Thanh Hoa MFI were 98 employees in October 2015. There were 52 credit officers in direct contact with customers. Notably, in the process of transforming (2013-2014), thenumber of staff holding management positions increased from 30 em-ployees in 2013 to 42 employees in 2014 (Chart 4.1). The factor thatleaded to this increase was the need to complement and reinforcethe management positions such as accountants, auditors and IT.Moreover, when transforming, the human resource management system also needed to be enhanced by developing recruitment,bonus policies, qualitative assessment based on productivity, and internal procedure of the organization. Moreover, since the legal position of an organization was improved, the personnel tended tostabilize due to the working regime and stable mentality of staff.

Currently, Thanh Hoa MFI has already developed a HR manual and aCode of conduct stating the expectations and requirements of staff.The code of conduct consists of seven consumer protection guidelinesstated to promote and ethical behaviors that are consistent with thecustomers. Besides, the vision, mission and other values of the organi-zation are also disseminated widely to the staff. Concurrently, the internal audit department is responsible for checking and ensuring thestrict compliance with the code of conduct.

For the staff to understand fully their rights and obligations, Thanh HoaMFI provided the job descriptions and labor contracts to every employee. Besides, all the staff could participate in the performanceevaluation process. Nonetheless, the organization needs to add indi-cators to evaluate the social performance into the common evalua-tion system.


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Source: Thanh Hoa MFI (2008, 2009, 2015),VMFWG (2010, 2011, 2012, 2013, 2014), MIX

In order to improve the staff capacity, Thanh Hoa MFI surveyed thetraining demands annually for each work position. However, the training could not satisfy and suit the demand of employees. Trainingcourses mainly focus on the credit activity of the organization. ThanhHoa MFI should develop a training roadmap for each different positionincluding both staffs serving customer directly and indirectly. Thisroadmap also needs to base it on the actual needs of staff.

The monthly briefings should contain the content of gathering opinionsof different customers on the difficulties, inquiries for the work carriedout and management. Those issues need to be clearly indicated andhandled based on the severity and impact of each case. Neverthe-less, the organization should survey the satisfaction of employees official and regularly. This survey should be on the workload, staff training, communication, and the participation of employees and theleadership of superior management staff. The collection and evalua-tion of the employee’s satisfaction can support the process of completing personnel policies and other policies of the organization.

Chart 15: Numbers of Employees of Thanh Hoa MFI from 2007 to 10/2015

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32

44 48

67 67 6872

9398

22 23

34 37 33 3442

51 52

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20

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60

80

100

120

Total employees Total credit officers

20072008

20092010

20112012

20132014

10/2015


After transforming into an official MFI, Thanh Hoa MFI continues tofocus on the traditional products for the poor and low-income customers. Currently, they are providing 5 main credit products includ-ing multi-purposes loans, staff loans, constructing and repairing cleanwater infrastructure loans, Biogas and hygienic toilets loans; educationloans, and loans for the vulnerable groups. Besides, there are also additional loans for customers with outstanding loans who still needadditional capital for production and business investments. The termof the loan lasts from 12- 24 months (additional loan lasts from 3-9months); repayment (principal and interest) and compulsory depositare settled monthly. Loan amounts are from 2,000,000 to 3,000,000VND. Loans may increase when customers repay on time and properlyimplement provisions of the organization.

Besides, in order to use the advantages of an official MFI, Thanh HoaMFI plans to focus on developing and innovating deposit products toraise capital from members as well as the public. Up to the presenttime, Thanh Hoa MFI is providing two types of deposit: voluntary deposit and compulsory deposit. Members are required to pay a fixedamount for compulsory deposit during every group meeting (once amonth). Members are allowed to withdraw the compulsory deposit incase of urgency. However, they need to retain an amount of outstand-ing deposit higher than 300.000 VND. Besides, during the first threeyears after transforming, Thanh Hoa MFI expected to provide voluntarydeposit with unlimited amounts, terms; or the deposit product for bothmembers and non-member customers of the organization. If customers opening voluntary deposits are not members of the organ-ization, they must be residents of the Thanh Hoa MFI’s operating area.

Aside from the credit and deposit products, Thanh Hoa MFI also provides micro insurance products as an agent of Post & Telecommu-nication Insurance JSC (PTI). As for each loan, customers must purchase credit insurance. In case, customers are at risk (mortality, paralyzed), the insurance company PTI will compensate the entire


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outstanding loan that customer has left. Meanwhile, as an agent,Thanh Hoa MFI will receive the commission of 20% of the total insurance fee.

4.3. The initial results and future plan

4.3.1. Operating results

a) The operating scale:

As mentioned above, Thanh Hoa MFI still maintains their activities withfour branches and three transaction offices operating in 123 communes, 12 districts of Thanh Hoa province11.


As FPW, the outstanding loan increased gradually through years from2007 to 2017 with 48.3% of the average growth rate (Table 13). Inwhich, the highest growth was 63.9 % in 2009 as Thanh Hoa MFI received additional aid from SC/US and formed a new branch. In2012, the growth rate was 60% due to merging capital to a credit-deposit project and opened one more branch. After the transition,Thanh Hoa MFI continued to maintain this growth rate. Particularly,from December 2014 to October 2015, the total outstanding loan ofThanh Hoa MFI rose 37.69% from 104,1 billion VND to 143.3 billion VND.Moreover, from 2007 to 2014, the number of borrowers of FPW contin-uously increased at an average rate of 21.6%. However, as of31/10/2015, the number of borrowers decreased compared to 2014from 17,676 members to 17,208 members.

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11 Before 2015, Thanh Hoa MFI operated in 11 districts of Thanh Hoa province. In 2015, they expanded operations to a new district (Tinh Gia district).

Table 13: Growth in credit and number of credit customers of Thanh Hoa MFI from 2007 to 31/10/2015


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YearOutstanding loan Borrowers

Amount (VND) Change (%) Quantity Change (%)

2007 6,724,151,150 - 4,691 -

2008 8,912,497,333 32.54 5,357 14.20

2009 14,608,453,650 63.91 6,446 20.33

2010 20,804,183,965 42.41 9,414 46.04

2011 30,909,105,955 48.57 10,650 13.13

2012 49,564,127,250 60.35 14,687 37.91

2013 71,076,807,043 43.40 15,328 4.36

2014 104,083,566,985 46.44 17,676 15.32

31/10/2015 143,317,341,479 37.69 17,208 -2.65


c) Growth in outstanding deposit:

From 2007 to 2014, as FPW, total outstanding deposit of Thanh Hoa MFIgrew significantly, especially voluntary deposit (Charter 16 and Table14). Particularly, in two years (2011 and 2012) the outstanding voluntarydeposit grew by respectively 700.9%, 677.6% and continued to growin subsequent years with an average growth rate of 64.4%. Up to October 2015, the total outstanding deposit of Thanh Hoa MFI was 66.2billion VND, in which voluntary deposit accounted for 61.9% and compulsory deposit portion was 38.1%. The rapid growth in the outstanding deposit balance, especially voluntary deposit was expected by Thanh Hoa MFI when transforming into official MFI. Moreover, this was also considered as a positive sign when Thanh HoaMFI’s reputation was building during the transition.


Table 14: Deposit balance of Thanh Hoa MFI from 2007 to 31/10/2015

Chart 16: Growth in deposit balance of Thanh Hoa MFI from 2007 to 10/2015

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60

70

2007

2008

2009

2010

2011

2012

2013

2014

10/2

015

Bill

ion

VN

D

The outstanding compulsory deposit

The outstanding voluntary deposit

NămCompulsory deposit Voluntary deposit

Amount (VND) Rate ofchange (%) Amount (VND) Rate of

change (%)

2007 998,417,500 - - -

2008 1,813,621,000 81.65 - -

2009 3,021,760,900 66.61 - -

2010 4,535,380,900 50.09 191,894,500 -

2011 6,942,126,599 53.07 1,536,856,900 700.89

2012 10,000,903,755 44.06 11,950,411,441 677.59

2013 14,016,515,530 40.15 23,861,814,201 99.67

2014 20,239,609,927 44.40 30,804,111,407 29.09

10/2015 25,205,424,965 24.54 40,969,964,008 33.00



Chart 17 showed that during the time before transformation, ThanhHoa MFI had a good quality of loan portfolio. The PAR30 ratio was always less than 0.5%, especially during the years of transition (2013-2014) and the period immediately after the transition (up to May 10/2015). This is considered as a positive impact on the risk managementsystem of Thanh Hoa MFI. Currently, they are applying the rate of PARin the set of indicators to assess credit officers.

Chart 17: PAR30 ratio of Thanh Hoa MFI from 2007 to 10/2015


oa Lim


(Thanh Hoa-M

FI)


20

07

20

08

20

11

20

13

20

14

10

/20

15

0,01%

0,03%

0,10%

0,01%0,01%

0%0,00%

0,02%

0,04%

0,06%

0,08%

0,10%

0,12%


Similarly to TYM and M7-MFI, during the initial years after transforming,the operational sustainability ratio (OSS) of Thanh Hoa MFI fell slightlyfrom 129% in 2014 to 107% in October 2015. This was because of thehigh costs of transforming. Meanwhile, both ROA and ROE ratiostended to increase (Chart 18 and Chart 19).


Chart 19: Profitability of Thanh Hoa MFI from 2007 to 2014

Chart 18: Operational Self- Sustainability (OSS) of Thanh Hoa MFIfrom 2007 to 10/2015

Chap

ter I

V. T

he Tr

ansf

orm

atio

n of

Tha

nh H

oa

Lim

ited

Liab

ility

Mic

rofin

ance

Inst

itutio

n (T

hanh

Hoa

-MFI

)


125%

171%

113%

111%

74%

152%

111%

129%

107%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

20072008

20092010

20112012

20132014

10/2015

3%

10%

2% 1%2%

7%

2%

4%4%

13%

4% 3%4%

18%

7%

19%

0%2%4%6%8%

10%12%14%16%18%20%

Return on Asset (ROA)

Return on Equity (ROE)


The productivity of credit officers tended to decrease from 2013 to2015 equivalent to 250 and 210 members per 1 officer. Learning from

the experiences of TYM and M7-MFI, Thanh Hoa MFI anticipated thistype of fluctuation. Thus, they developed the appropriate counter-measures to pull the working efficiency of credit officers to rise again(Chart 20).

Chart 20: Productivity and Performance of Thanh Hoa MFI from 2007 to 2014


oa Lim


(Thanh Hoa-M

FI)


20072008

20092010

20112012

20132014

0%

5%

10%

15%

20%

25%

-

100

200

300

400

500

No. of customers per credit officer

Operaring expens rate

Average income/total outstanding loan balance


4.3.2. The next five-year plan

Thanh Hoa MFI plan to extent to some nearby provinces. After that,they expect to expand to the provinces with high poverty rate in theNorth and South of the Red River Delta. Therein, the target customerof Thanh Hoa MFI will still be the poor and low-income households, especially women, and present one extra target is micro business.

In order to develop the products and services after transforming,Thanh Hoa MFI plans to focus on the traditional products. In which, thecredit products include multi-purposes loans (under 12 months), agriculture loans (under 24 months), and education loans (more than24 months). Deposit products contain voluntary deposit and compul-sory deposit. Thanh Hoa MFI will expand the term deposit to raise

capital for lending. Moreover, as an insurance agent, they will carryon providing micro insurance products.

Before transforming, Social Fund’s average growth rate of credit grewsignificantly every year. Based on the historical growth, Thanh Hoa MFIexpects to increase the proportion of short-term loans (under 1 year)to better suit the term structure of the mobilized funds and ease thepressure on liquidity management for Thanh Hoa MFI in the early yearsof establishment.

In the strategic business plan, Thanh Hoa MFI developed different targeted growth rates for each area. This rate is based on the assess-ment of competitors and the internal capacity of each unit. However,Thanh Hoa MFI also needs to analyze and evaluate the new customers, research and set the different targeted growth goals foreach product type.

Thanh Hoa MFI determines the growth objectives in line with the socialobjectives of the organization. At the same time, they also developguidelines for collaborative development that can help organizationsto maintain the social mission. Accordingly, Thanh Hoa MFI needs todevelop an official and systematic mechanism to monitor and assessthe actual value of the product brought to the customers; or evaluateif the product value is equivalent to the market price and is competi-tive with other organizations. Moreover, Thanh Hoa MFI also needs toimprove the customer per credit officer per credit officer by determin-ing the threshold rate thus allowing loan officers to serve customerswith high quality.

4.4. Lessons learnt from the transformation of Thanh Hoa MFI

4.4.1. The comments of Thanh Hoa MFI on opportunities and challenges of transformation process

According to the experiences of Thanh Hoa MFI, advantages, disad-vantages, opportunities and challenges in the transformation processare as followed:Ch

apte

r IV.

The

Tran

sfor

mat

ion

of T

hanh

Hoa

Li

mite

d Li

abili

ty M

icro

finan

ce In

stitu

tion

(Tha

nh H

oa-M

FI)


4.4.2. The lessons learnt from transforming experiences of Thanh HoaMFI

Organizations need to proactively spend the appropriate sources infinding partners to transform into official MFI. Because it is the most important factor, it requires and attention to details to achieve the following objectives: partners have the same vision, mission and goals;supporting each other to develop; having sufficient financial capacitysuch as charter capital, business license, audited financial reports andoperate under the principle of mutual respect and mutual benefit. Theselection of capital contributing partners should be based on the conditions on ownership and the rate of contributed capital complying with the current regulations. Partners must have similar vision, mission, operating field and financial capacity.


oa Lim


(Thanh Hoa-M

FI)


Advantages Disadvantages

- The support of the local authorities- To inherit the activities of the Social

Fund.- Grants and technical assistance- Search for suitable partners

Low charter capital limits the ability toborrow loans from international organizations.

Opportunities Challenges

Mobilizing deposits and borrowingsfrom foreign investors- Transparent operation is protected

by the Laws- New investors from the private sector- Diversifying targeted customers and

customer structure- Innovating and developing new

products- Maintaining the growth rate; loan

portfolio quality; asset efficiency- More professional management

system- Maintaining the social objectives

- Limited capacity to access international technology and experiences due to lack of foreignelement

- Limited capacity to expand due tolack of strategic investors

- Increasing competitive pressure fromother credit institutions

- Limited capacity to access fundingsources due to low charter capital

- The change in the early years oftransformation due to higher operating expenses

Organizations should gain related party’s technical and financial supports, local authority’s supports and commitments.

Organizations also need to cooperate closely with SBV in the processof completing the application dossier; promptly editing documentsimmediately after obtaining the opinion of the SBV and related parties; regularly updating the situation with relevant stakeholders andactively researching the reporting regulations implemented aftertransforming.

Chap

ter I

V. T

he Tr

ansf

orm

atio

n of

Tha

nh H

oa

Lim

ited

Liab

ility

Mic

rofin

ance

Inst

itutio

n (T

hanh

Hoa

-MFI

)


CONCLUSION


Evidence shows that the development process of official MFIs in Vietnam in recent years has been slow. The environment promotingmicrofinance programs - projects, semi-official microfinance MFIs totransform into official MFIs is not attractive, thus could not create compelling motivations for those organizations having the desire totransform. This limited the increase in institutional sustainability, the expansion of operating scale, the professionalization of microfinancesector. Thereby these limitations have made a significant impact onthe development environment of the microfinance sector in Vietnam.

The research group selected the research content of the successfultransformation process of some official MFIs. In which, the report focuses on sharing experiences, clarifying the problems relating thelegal environment, financial and personnel difficulties, legal knowl-edge of the microfinance programs-projects system and semi-officialMFI in the process of transforming into official MFI. Thereby, the reportexpects to create “a nudge” for Vietnam microfinance sector the nexttime.

With the targeted objectives, the Research has clarified the followingcontents:

1. The process of transforming into microfinance institutions

a) The transformation process of TYM

The transformation process of TYM could be divided into 02 stages:Transformation from program/project to income-generating businessunit (1992 - 2006) and Transformation from income-generating businessunit to a Licensed MFI (2006 - 2010).


b) The transformation process of M7-MFI

1989

1992

1998

2006

2010

2013

• Vietnam Women Union launched a campaign named “Women help each other in the family economy”

• Vietnam Women Union established “Tinh Thuong Fund”(TYM)

• TYM became an independent unit under the Presidium of the Central Committee of Vietnam Women Union

• TYM became a income-generating unit for social and non-profit purpose

• TYM offcially changed thier name to “Tinh Thuong limited liability Microfinance institution”

• TYM was the first MFI licensed by The State Bank of Vietnam and changed to "Tinh Thuong Small microfinance limited liability institution" (TYM).

1993-2003:

2008:

2004-2007: 2010: 1/2013:

1/2012:M7-MFI was licensed by SBV

7 credit-deposit programs were founded with the support of ActionAid and were handed over to the local WU

Transform Social Fund to licensed MFI:- Determine the capacity of organizations contributing to M7-MFI- Establish The Preparatory Committee and Transformation Consultative Group- Submit the first dossier to the SBV

Tranform credit-deposti programs to Social Funds:- Poor people Center in Can Loc Ha Tinh- Capital Aid Fund for Women in Uong Bi town - Development Fund for Women in Dong Trieu- Development Fund for Women in Ninh Phuoc- Development Fund for Ethnic Women in Mai Son

03 Social Funds in Mai Son, Dong Trieu and Uong Bi continue to submit new apllication dossiers to SBV after modifications

M7-MFI officially operated

The transformation process of M7-MFIcould be divided into 02 stages:Transformation from Program/Project to Social Fund (1993 - 2010) andtransformation from Social Fund to Licensed MFI (2010 - 2012).

c) The transformation process of Thanh Hoa MFI

The transformation process of Thanh Hoa MFI could also be dividedinto 02 main stages. Stage 1 is the stage of transforming from


Program/Project to Social Fund (1998 - 2008). Stage 2 is the stage of transforming from Social Fund to Licensed MFI (2008 - 2014).

In march 1998: Save Children USD

organized a microfinance program

at three poor communes of Nong

Cong District and then expand to

Hang Hoa district, Thieu Hoa district

and Thanh Hoa city

On 21/7/2008, microfinance

program transformed into

Social Fund - Thanh Hoa Fund for

Poor Women

On 22/8/2014, Social Fund trans-

formed into Thanh Hoa limited

liability microfiance instution with

two more capital contributing

member from the private sector

2. Impacts after the transformation

a) For TYM

- Operating network: After transforming to official MFI, TYM rearranged the branch network to suit the provisions of Law.

- Internal impacts: The transformation strongly affected the humanresources to be appropriated with the new context and increasesthe management efficiency of the organization.

- Productivity: The productivity of credit officers tended to decreasein 2009 (207 members/officer) but rebounded in the years aftertransforming. The highest productivity rate was 413 members/officerin 2014 (Chart 2.8). The causes of decrease in 2009 were due to theopening of several new branches and the recruitment of morecredit officers many more credit officers (Planet Rating, 2011). Byfully implementing ASA method in every branch, TYM improved thelabor productivity without affecting the quality of loans in theprocess of appraisal

- Growth in outstanding loan balance: The highest growth was justright after the transformation. TYM maintained this average growth


rate of 22% in the next years. Concurrently, the number of customers also increased significantly.

- Growth in outstanding deposit balance: It is recognizable that therewas an uptrend in the total outstanding deposit. TYM recorded asignificant increase in voluntary deposits in the first 3 years aftertransforming

- Operational sustainability: TYM achieved operational sustainabilitywhen OSS ratio, ROA and ROE were stable and efficient during thetransformation process.

b) For M7-MFI

- Operating network: M7-MFI opened a new office in Hanoi andmaintained the operation of three branches similar to before whenthey were operating as social funds when they were the SocialFunds.

- Internal impacts: Restructuring of the organization and apparatuscomplying with regulations leads to changes in human resourcepolicy. This forced M7-MFI to face many difficulties in setting upmanagement and governance apparatus.

- Productivity: The productivity of credit officers tended to decreasein 2013 (220 members/officer), but it rebounded in 2014 and wasat 236 members/officer. The main reason of the reduction in 2013was the number of credit officers of M7-MFI did not change whilethe loan portfolios and the number of borrowers fell gradually. M7-MFI allocated half of its employees to contact customers directly. However, these employees did not have many customersto serve. Even though M7-MFI had a high rate of compulsory depositors, these customers did not benefit from or contribute tothe core microfinance products. It was more difficult for the creditofficers to achieve new customer development and disbursementgoals than its fund mobilizing objectives.


- Growth in outstanding loan balance: M7-MFI’s outstanding loanbalance grew over the years after the transition. However, in thefirst years after the transformation took place, outstanding loansgrew more slowly than before the transformation.

- Growth in outstanding deposit balance: Similar to TYM, the outstanding deposit balance of M7-MFI increased sharply after thetransition. According to the general director of M7-MFI, the biggestdifficulty in providing deposit products was the restricted maximumdeposit balance per customer. Thus, customers had to go to thetransaction offices or branches to open deposits with largeramounts.

- Operational sustainability: the operational sustainability ratio (OSS),ROA and ROE of M7-MFI were stable and effective during the period after transforming. However, the OSS ratio decreased in thefollowing years after the transformation. This was not unexpectedas the leaders of M7-MFI predicted that the revenue would decrease and the cost would increase due to the transition of theorganization.

c) For Thanh Hoa MFI

- Operating scale: Thanh Hoa MFI still maintains their activities withfour branches and three transaction offices operating in 123 communes, 12 districts of Thanh Hoa province.

- Internal impacts: Similar to M7-MFI, the restructuring of the organi-zation and apparatus in compliance with regulations led tochanges in human resource policy. Thanh Hoa MFI faced severaldifficulties to comply with the current regulations for official micro-finance institutions.

- Productivity: The productivity of credit officers tended to decreasefrom 2013 to 2015 which is equivalent to 250 and 210 members per1 officer. Learning from the experiences of TYM and M7-MFI, ThanhHoa MFI was able to estimate this type of fluctuation. Thus, they


developed the appropriate counter measures to pull the workingefficiency of credit officers to rise again.

- Growth in outstanding loan balance: Thanh Hoa MFI continued tomaintain the outstanding loan growth in similar numbers prior to itstransformation. From 2007 to 2014, the number of borrowers of FPWcontinuously increased at the average rate of 21.6%. However, asof 31/10/2015, the number of borrowers decreased in comparisonto the year 2014 where in 2014 from 17,676 members to 17,208 members

- Growth in outstanding deposit balance, from 2007 to 2014, as FPW,the total outstanding deposit balance increased significantly, especially with regard to the voluntary deposit. Up to October 2015,the total outstanding deposit of Thanh Hoa MFI was 66.2 billion VND,in which voluntary deposit accounted for 61.9% and compulsorydeposit proportion was 38.1%. The rapid growth in outstanding deposit balance, especially in voluntary deposit was expected byThanh Hoa MFI during its transformation into an official MFI. Moreover, this was also considered as the positive sign when ThanhHoa MFI’s reputation was building during the transition.

- Operational sustainability: Similar to TYM and M7-MFI, the opera-tional sustainability ratio (OSS) of Thanh Hoa MFI fell slightly from129% in 2014 to 107% in October 2015. This was because of the highcosts of transformation.

3. Difficulties, opportunities during the transformation process

a) Opportunities

- Increasing access to commercial funding:

This is the basic element for organizations to develop and expand theiroperating scale. The transformation from a semi-official MFI to an official MFI can be understood as the transformation into a businessoperating in microfinance sector. The transition has changed the legal


position of MFIs and opened up new opportunities for these institutionsto participate in economic relations. As such, after transforming, MFIswill have more chances to access more diverse external capitalsources, consequently slowly reducing dependence on donors, andincreasing autonomy in the management and administration of theirorganizations. This is very meaningful when the funding sources for microfinance is decreasing slowly and the credit demand continuesto increase.

- Expanding the operation and diversifying products and services(providing voluntary deposit service, money transfer, collection andpayment to microfinance customers, insurance agency, consul-tancy service, entrusting fund)

Expanding the operations and diversification of products and servicesis one of the main motivations forcing organizations to undergo transformation, of particular interest is in receiving deposits. The transformation will be an opportunity for the MFIs to provide productsthat are appropriate for the low-income market including loans, deposits from the public and money transfer and micro insuranceagent.

- Improving professionalism:

After transforming, MFIs must strictly comply with regulations and laws.This means that MFIs must comply with the minimum standards on governance, management, and supervision and information trans-parency. The obligation to comply with the minimum standards forcesthe MFIs to increase its professionalism.

b) Challenges

- The Changes in the organizational structure and decentralizationof authorities, governance and management responsibility of MFIare as the following:


This is an opportunity as well as a challenge for MFIs, especially MFIsthat select the transformation method under the two or more members limited liability company model. Previous experiences showthat MFIs often face difficulties in changing their organizational structure, apparatus, decentralization of authorities, and governanceand management responsibility after transforming into an official MFI.

- Managing risks when operating scale increase:

MFIs must be aware that besides the undeniable benefits of mobilizingcheap funds from the public, the mobilization of voluntary deposit requires organizations to put extra efforts in improving governance andmanagement capacity, especially in managing operational risks.

- Changes in human resources to meet the requirements:

The changes in human resources of organizations will inevitably occurfrom the need to adapt when transforming into MFIs. It is recognizablethat the number of employees after transforming will increase because organizations need more employees for several new depart-ments such as internal audit, information technology management,marketing and especially the tellers who will perform deposit, withdrawal services for voluntary depositors.

- Changes in information technology system:

The transition to an official MFI poses an urgent requirement for MFI toinvest into an information technology system (upgrades or innovations), especially an information management software andextracting reports to meet the management requirements of organi-zation complying with the current regulations of the government.

- Operation costs increase during the transformation and also risewhen operating as an official MFI:

Evidence shows that many microfinance programs, projects and organizations underestimated the costs arising after the transformation


completed. This issue requires organizations to plan to be able to makea viable business plan in the future.

4. The lessons learnt from transformations

a) The lessons learnt from TYM

Some lessons learnt from TYM will help other organizations in makingdecision and preparing for the process of transformation and licensing, including:

- Gaining from government authorities, especially assistance andsupports on human and financial resources from domestic and foreign organizations;

- The great determination of transformation by TYM’s leaders;

- Before deciding on the implementation of licensing procedures,the organization needs to consider the current organization’s capacity, potential changes to determine the suitable time and tomake the essential preparations for the process of transformation;

- During the license application process, organizations need to keepthe close contact with the government authorities to get their guidance and timely support;

- After being licensed, organizations should continue transformingorganizational structures following the slow and steady steps. Theyshould pilot major changes before implementing it on a largescale;

- The organization should promote the sharing of experiences withother licensed organizations and VMFWG to learn from real experiences. As a group, they should work together in advocatingfor appropriate policies and bring to light the advantages for themicrofinance sector.


b) The lessons learnt from M7-MFI

The lessons learnt from the transformation experiences of M7-MFI includes:

- The key factor leading to the successful connection of the 03 independent Funds is the role of the leaders in the transformationprocess, particularly the role of the preparatory committee andmore notably that of the Chief of the committee to establish theM7-MFI (CFRC). The case of transformation of M7-MFI shows that inthe process of the transformation many complex issues may ariseunexpectedly from the plan. In order to handle these issues quicklyand effectively, especially when there are capital contributors withdifferent readiness status for transforming, the selection of the mainperson responsible to implement the transition is very important.That person must be highly determined, assertive in setting a visionand an operation plan, have a clear understanding of the internalissues of a transformed organization, high credibility and the abilityto persuade and influence the stakeholders. This is one of the determinants of the success of the transformation process.

- Moreover, it is essential to actively transmit the messages of transformation to the different management levels. Women’sUnions often manage social funds and microfinanceprograms/project. The personnel of WU are elected and at fixedterms. In fact, if the message is not fully transmitted for the Chairman of WUs to profoundly understand the objectives of thetransformation plan and the benefits that it brings, they may beafraid to diverge from the organization’s missions after transforming.On the other hand, it should be noted that the organizational structure of a professional microfinance institution is totally differentfrom that of the management structure of a political-social organ-ization or a normal social organization. Thus, in order to address theirconcerns, the message of mission and the new management structure need to be transmitted actively to Unions. By performingthis task well, organizations can proactively manage the changes


and reduce the difficulties that sometimes can become big obstacles in the process of transformation.

- Another noteworthy lesson is that organizations need to estimatethe expenses associated with transformation and be prepared forunexpected costs. Hence, they can actively prepare sources forthe transformation, especially the cost for upgrading the informa-tion management system. The experiences of TYM and M7-MFI indicate that the upgrade of MIS consumes lots of time (few years),costs (about 1 billion VND); and the actual costs are normallyhigher than expected (the actual cost for upgrading the MIS ofTYM exceeds 10% compared to the expected).

- The last lesson that can be taken from the transformation processof M7-MFI is that with limited sources and the lack of experience totransform to official MFI, organizations need to gain the supports ofrelated parties such as technical support (experts, training), fundsfrom potential donors, support from Government authorities to ensure the correct interpretation of the transformation requirementsand be fully aware of the operating environment of the organiza-tion after transformation (under the management and supervisionof Government authorities) and the guidance and support fromlocal authorities in the transformation process.

c) The lessons learnt from Thanh Hoa MFI

Thanh Hoa MFI is a different case of a successful transformation compared to TYM and M7-MFI. Thanh Hoa Fund for poor womenmerged with two private partners (Thanh Ha Capacity Building andCommunity Development limited company and NGV Joint Stockcompany) to establish Thanh Hoa MFI. Thus, the lessons learnt fromThanh Hoa MFI are considered to be quite rewarding and will createa new trend of transformation from semi-official MFIs to official MFIs.Notably, these lessons are as follows:


- The selection of capital contributing partners should be based onthe conditions on ownership and the rate of contributed capital incompliance with the current regulations. Partners should have asimilar vision, mission and goals; supporting each other to developand have sufficient financial capacity such as charter capital, business license and audited financial reports.

- Organizations need to proactively spend the appropriate sourcesin finding partners to transform into official MFI. Given that the mostimportant factor requiring substantial time and effort to achieve itsobjectives: partners have to have the same vision, mission andgoals; supporting each other to develop; having sufficient financialcapacity such as charter capital, business license, audited financialreports; operating under the principle of mutual respect and mu-tual benefit. The selection of capital contributing partners shouldbe based on the conditions on ownership and the rate of capitalcontributing complying with the current regulations. Partners musthave similar vision, mission, operating field and financial capacity.

- Organizations must proactively coordinate with the related partiesto complete the application dossier during the process of transfor-mation. Organizations also need to cooperate closely with SBV inthe process of completing the application dossier; promptly editingdocuments immediately after obtaining the opinion of the SBV andrelated parties; regularly updating the situations with relevant stakeholders and actively researching the reporting regulations implemented after transforming.

5. Recommendations & suggestions

Based on the above information, analysis, evaluation, we expect thisreport will create an overview of the development process, the diffi-culties, problems as well as lessons learnt from the successful transfor-mation process of three official MFIs. Hence, the report willcommunicate the experiences to motivate microfinance programs,projects and organizations in undergoing the transformation. On this


basis, the research group made a number of recommendations andproposes the following:

a) For the Government:

The Government needs to promulgate mechanisms and policies, direct the ministries / sectors to finish the legal framework that suit thecharacteristics of microfinance activities with particular emphasis onthe documents on:

- The operation of microfinance programs, projects under the provision of Paragraph 6 Article 161 of Credit Institution Law encour-ages the operation of the current microfinance programs, projectsand facilitate the operation of new microfinance programs andprojects to provide financial services to the poor people;

- Allowing microfinance programs and projects to transform directlyto MFIs without establishing legal intermediary (such as Social Fund/Charity Fund) to reduce costs, human and financial resources forthe microfinance sector.

b) For the State Bank of Vietnam:

The State Bank of Vietnam needs to amend and supplement the existing regulations, introduce regulations supporting the typical microfinance operations, including:

- Model, organizational structure and corporate governance;

- Contributing capital in establishing MFIs;

- Licensing conditions to encourage transformation and professionalactivities;

- The content and scope of activities facilitating effective financialsupport for the poor and low-income people;

- Operating network;


- Developing and submitting to the competent authorities the guidance of Paragraph 6 Article 161 of Credit Institution Law inorder to facilitate the operation of the current microfinance programs and projects, as well as to encourage the transformationinto official MFIs under Credit Institution Law.

c) For the Ministry of Internal Affairs:

The Ministry of Internal Affairs needs to introduce appropriate policiesthat facilitate the development of active microfinance programs andprojects, and encourage the development of new activities, therebyincreasing access to financial services for the poor, particularly in disadvantaged areas. The legislations also need to be reviewed andamended in the direction of a more specific guidance on domesticnon-government organizations. New guidelines should specify andclarify that Social Funds / Fund charities are allowed to perform microfinance activities in Vietnam.

d) For microfinance institutions:

For microfinance institutions, it is recommended that:

- To clearly determine the motivations for transformation such as business strategies (internal motivations), carefully evaluating thechanges and trends of business and legal environment (externalmotivations) to have the determination, the initiative in transforma-tion process;

- To clearly determine the model, ownership structure based on thecurrent regulations to develop appropriate plans of transformation,roadmap, especially in finding partners that have sufficient capacity, common vision and mission, and support each other inlong-term cooperation;

- To proactively improve the autonomy, promote internal resourcesin governance and management; enhance cooperation with external organizations to find the financial support, internal and


external connections; participate in a uniform network to share experiences during and after the transformation process;

- To have feasible financial solution and business plan in response tothe changes during and after transformation process, especiallychanges in the ability to mobilize capital, changes in membershipto develop appropriate solutions to limit risks;

- To proactively find and develop plans of arrangement of personnelwhen there is a change in the organizational structure, operationnetwork to ensure that the transformation will not lead to instabilityin operation;

- To have a specific plan focusing on information technology systemto convert the database and ensure the transformation processdoes not affect the safety of the operational process of the organization while concurrently complying with regulations on thereporting regime for State management agencies.

e) For Vietnam Microfinance Working Group:

As the organization representing the rights and obligations of organizations participating in the microfinance sector, Vietnam Microfinance Working Group needs to strengthen its advocacy workto ensure an appropriate legal environment for the microfinance sector. Moreover, Vietnam Microfinance Working Group also needs toperform better its role of connecting the resources of local and international organizations, support transparency of information for organizations thereby enhancing the operational and administrationcapacity and development of business strategy for organizations during and after transformation process.


APPENDIXAppendix 1: Organizational structure of TYM before and

after transforming

Organizational structure of TYM before transforming

Vice Director Vice Director

Supervisioncommittee

Director

Board of Directors

Board Members

Vice Director

Accounting department

Operating -training

department

Region

BranchBranch

Cluster Cluster Cluster Cluster Cluster Cluster

Branch


Auditing department

Source: Nguyen Kim Anh and partners (2011)


Organizational structure of TYM after transforming

BranchBranch

Trans-actionpoint

Trans-actionpoint

Branch

Trans-actionpoint

Trans-actionpoint

Trans-actionpoint

Trans-actionpoint

AdministrationDepartment

Operating -training Dep

Board of Directors

VietnamWomen's Union

Board Members Supervisioncommittee


Internal Auditingdepartment

Source: Nguyen Kim Anh and partners (2011)

Appendix 2: Organizational structure of M7-MFI before andafter transforming

Organizational structure before transforming (Social Fund)



Internal AuditingDepartment

Board of Director(Social Fund’s Director)

Supervision committee

Management Board

AccountingDepartment

Business Department

Branch

ClusterCluster Cluster


Organizational structure of M7-MFI after transforming

Administration

Transaction office

Transaction point Transaction point

Finance - IT Accounting Business Department

Development Fund forEthnic Women in Mai Son

Development Fund forWomen in Dong Trieu

Capital Aid Fund forWomen in Uong Bi

Board Members

Supervision committee

Internal auditingDept.

Board of Directors

(Director & Vice Directors)

Branch

Business Department

AccountingDepartment


Appendix 3: Organizational structure of Thanh Hoa MFI beforeand after transforming

Organizational structure of Thanh Hoa MFI before transforming (SocialFund)


Financial Account-ing Department

Credit Department

Human resourcedepartment

Internal audit department

Board of Directors

Management board

SupervisoryBoard

NongCong

Branch

HoangHoa

Branch

ThieuHoa

Branch

ThanhHoa

Branch

Cluster

Group

Dong Son

Branch

Hau Loc

Branch

QuangXuongBranch


Organizational structure of Thanh Hoa MFI after transforming

Financial Account-ing Department

Credit Department

Transaction office

Transaction point

Transaction office

Transaction point

Human resourcedepartment

Internal controland IT Department

Branch

Executive Board

Supervisory department

Board Members

Thanh Hoa Fund forPoor Women

NGV CompanyThanh Ha Capacity Building

and Community Development limited

company

1. Credit Institution Law No. 46/2010/QH12;

2. Decree No. 28/2005/NĐ-CP dated 09/03/2005 of the Governmenton the structure and operation of small size financial insitution inVietam;

3. Decree No. 165/2007/NĐ-CP dated 15/11/2007 of the Govern-mentamended and supplemented, annulled some articles of Decree 28/2005 / ND-CP of the Government on the structure andoperation of small size financial insitution in Vietam;

4. Decree No. 177/1999/NĐ-CP dated 22/12/1999 of the Govern-ment promulgating the Regulation on organization and operationof social funds and charity funds;

5. Decree No. 148/2007/NĐ-CP này 25/9/2007 of the Governmenton the organization and operation of social funds and charityfunds;

6. Decree No. 30/2012/NĐ-CP dated 12/4/2012 of the Governmen-ton organization and operation of social funds and charity funds;

7. Decree No. 88/2003/NĐ-CP dated 30/7/2003 of the Governmentproviding for the organization, operation and management of Associations;

8. Decree No. 45/2010/NĐ-CP dated 21/4/2010 providing for the organization, operation and management of Associations;

9. Decree No. 33/2012/NĐ-CP dated 13/4/2012 of the Government-Government amended and supplemented, annulled some articles of Decree No. 45/2010/NĐ-CP dated 21/4/2010 providingfor the organization, operation and management of Associations;

10. Decree No. 124/2008/NĐ-CP dated 11/12/2008 of the Govern-ment detailing and guiding the implementation of a number ofarticles of the Law on enterprise income tax;

REFRENCE



11. Decree No. 122/2011/NĐ-CP dated 27/12/2011 of the Govern-mentamended and supplemented, annulled some articles Decree No. 124/2008/NĐ-CP dated 11/12/2008 of the Govern-ment detailing and guiding the implementation of a number ofarticles of the Law on enterprise income tax;

12. Decree No. 93/2009/NĐ-CP dated 22/10/2009 of the Governmentpromulgating the regulation on management and use of foreignnon-governmental aid;

13. Decision No. 2195/QĐ-TTg dated 06/12/2011 của The Prime Minister approving the Scheme on building and development ofa microfinance system in Vietnam through 2020

14. Circular No. 02/2008/TT-NHNN dated 02/4/2008 of the Governorof the State Bankguiding the implementation of the Government’sDecree No. 28/2005/ND-CP on organization and operation ofsmall-sized financial institutions in Vietnam, and Decree No.165/2007/ND-CP;

15. Circular No. 07/2009/TT-NHNN dated 17/4/2009 of the Governorof the State Bankproviding for prudential ratios in operation ofsmall scaled financial institutions;

16. Circular No.08/2009/TT-NHNN dated 28/4/2009 of the Governor ofthe State BankGuiding on network of micro finance institutions.

17. Nguyen (2014). Microfinance Institutions in Vietnam: Policies andMotivations for Comprehensive Development.

18. Nguyen & Quach (2011). Guideline for transforming microfinanceinstitutions in Vietnam

19. Ledgerwood & White (2006). Transforming Microfinance InstitutionsProviding Full Financial Services to the Poor

20. Microrate (2014). Technical guideline 2014

21. Planet Rating (2010). GIRAFE Rating Evaluation Report – TYM Fund,Vietnam – May, 2010

22. TYM (2012). Annual Report 2011

23. TYM (2014a). Annual Report 2013

24. TYM (2014b). Audit Report 2013

25. TYM (2015). Annual Report 2014

26. Tran, T.N.H (2014). Licensing microfinance activities – Experiencefrom the first licensed MFI. VMFWG Microfinance Bulletin, 2014 edition.

27. IFC (2013). Institutional Assessment of M7-MFI. IFC Project on Enhancing microfinance sector in Vietnam

28. M7MFI (2015). Audit Report 2014


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