Because of growing gender inequality, it is argued that giving women access to credit is a means by which both their economic and social position in household and in the community would be enhanced (David Hulme and Paul Mosley, 1996). The argument bases on the assumptions: that women will use loan for their own business, that they will be successful in the business; that they will control over the profit from the business; and finally that the greater participation in business will consolidate the women’s economic and social status in the society.

2.1.2.2.3    Negative Impacts of Microfinance

When the interest rate increases, the budget constraint rotates through the point E in a clockwise direction from SL to PQ (that is the budget constraint line becomes steeper). The new consumption is at point A', with C₁ falling and C₂ rising relative to the initial equilibrium. In the graph, then, we have a case in which higher interest rates reduce current consumption and thus raise current savings.

When the interest rate goes up, there are two types of effects: substitution effect which tends to increase savings and income effect which is inclined to lower savings if the household was initially a net borrower.

Combining these two effects, the current consumption is obviously lower than before the interest increase. If the reduction in the future consumption due to the income effect is higher than the increase in the future consumption due to the substitution effect, the net effect of interest rate increase in the future consumption is negative. In the opposite case, although the future consumption is higher than before the increase in interest rate, this level is still lower than such level at which the interest changes but the utility unchanges (point B). It means that consumption levels of two periods due to the increase in interest rate are lower than those with the same interest rate but the initial utility. Therefore, the utility is lower than before interest rate increase. It means that borrower becomes worse off due to the increase in interest rate, other things equal. The indifference curve shifts downward from U₁ to U₂ as shown in Figure 2.4, the household borrower gets lower utility.

Besides negative effect on utility by this mechanism, credit induces the household to invest in higher return but higher risk activities, their income is therefore more vulnerable.

Getting microfinance gives rise the household to leave out free-interest loans from relatives or some source like that. It means that there is a loss which is equal to the difference between microfinance cost and cost of borrowing from free-interest rate loans[3].

Conclusion

Above are major impacts of microfinance including positive and negative signs. Although microfinance has a significant role on poverty reduction as proved before, it doesn’t stand for a panacea for this “disease”. To reduce poverty, alternative approaches are introduced as mentioned in the first section. Moreover, according to Padmanabhan K.P (1988), it puts in effect only under following conditions:

·                      The poor are entrepreneur, i.e., they understand what credit is and are confident of using it in their field conditions

·                      An improved technology which is clearly superior to traditional methods has been developed.

·                      The associated support services and infrastructure facilities are present.

2.2                  ANALYTICAL FRAMEWORK

2.2.1         Alternative Approaches on Microfinance Impact Assessment

In doing socio-economic impact assessment, there have been two major paradigms: the quantitative approach and the qualitative approach. Each paradigm has its own superiority and limitation. The importance is that the researcher has to know how to combine them in an appropriate manner. The following part will present the characteristics, advantages as well as disadvantages of each paradigm, and the correction to its limitation. 

2.2.1.1          Quantitative Method

Quantitative method is defined as a method in attempt to ensure that effects can be attributed to causes through experimentation, quasi-experimentation or non-experimentation. This method compares the statistical results of the control group with those of the treatment group to see the impact.

To show the real impacts of microfinance, i.e., the contribution level or the role of microfinance on poverty reduction, in quantitative method, researchers usually use econometric models. Generally, the impact model has the following form:

Y = SX_ij + e_i

In which:

Y_i is the proxy of impacts such as consumption, income, education level, empowerment and so on, which refer to the impacts on household i.

X_j is a vector of   household and comunity characteristics which affect Y_i such as loan size, length time of membership, family head’s education, family head’s age, and so on, which refer to the individual, households and community characteristics

e_i is the residual provided that  the expected mean of d_i is equal zero or E(d_i) = 0

Depending on availability of data, time, statistics skills, financial status, the different variables are introduced. Besides, in running regression, to avoid violence of OLS assumptions, researchers have to use different correction methodologies.

2.2.1.2          Qualitative Method

Qualitative approaches are also used in doing impact assessment with intention to provide an interpretation of the process involved in intervention and of the impacts that have a high level of plausibility rather trying to prove impact within statistically definable limits of probability. The focus instead is on understanding processes, behaviors, conditions perceived by interfered subjects (Valadez and Bamberger, 1994). This method often pays attention to the ways in which household perceives the microfinance programs and how they are affected by it.

CHAPTER 3: pROFILE OF THE  SAVINGS  AND CREDIT  SCHEME  OF  SCF/uk  IN CAM XUYEN, HA TINH

3.2            Profile of SCF/UK S&C programme in Cam Xuyen, Ha Tinh
Save the Children Fund of United Kingdom (SC - UK) is one of the largest international non-government organizations working for the best interest of children. Its involvement in Ha Tinh Province took in the first place in 1989 as a part of their “poverty alleviation” program through providing financial, technical and training support  in terms of “in kind” credit.
3.2.1 Objectives of the program

"To improve the quality of life of poor women and their families through the initiation of a sustainable credit and savings project in disadvantage communes" (SCF, 1996) has been seen as the overall aim of the Savings and Credit Program which has been launched firstly in Cam Long commune, Cam Xuyen district, Ha Tinh province since 1993. Specific objectives are:

·          Supplying small-scale productive loans to poor women for production activities and income generation;

·          Mobilizing member savings for self-procured investment capital and to improve families' economic securities;

·          Enhancing the management capacity and technical skills of implementers and managers at all levels through training, study visits, technical assistance;

·          Expanding the credit and savings program to other villages and communes;

·          Besides providing credit and savings service, the Program has also provided non-financial services such as education fund, training for women in credit management to reach its goal and objectives;

3.2.2         Target of the program

SCF/UK S&C programme targets the poor women with children 15 years old or younger.

3.2.3         Loan conditions and procedures

To borrow from the program, the applicant has to meet following requirements:

·          Resident in the target village;

·          Being women, regardless of membership in the women union;

·          Poor.  Most communes based their definition on a minimum of three months of food (rice) shortage combined with a maximum of 15 kilos of rice per head per month (or its equivalent);

·          Willing to participate fully in the programme, including making repayments on time and saving regularly;

·          Having experience in investment activities and/or being business- minded;

·          Women with children under 15 and women- headed households are given priority.

3.2.4         Lending and savings mechanism

As other NGOs, microfinance provided by SC-UK has been done in terms of small, short-term, productive and commercial repeated loans through joint-liability group of above 5 or 6 members. On  the other hand, savings also is included in microfinance activity. The following will consider in detail the credit and savings of this organization

-          Lending activity:

Ø       Joint-lending group: SCF applies the group lending model of Grameen Bank in running savings and credit scheme in Cam Xuyen district. The groups are formed voluntarily based on trust and proximity of homes of group members. The group members are not necessarily required to engage in the same productive activities. Group mechanism provides a social guarantee instead of collateral, which the poor normally do not have but usually is required by banking system when giving loans and  making repayment. If any of the group members does not repay or does not repay on time, others within the group cannot get loans because it is provided that in each group a maximum of only 3 people can be selected to receive the initial loans. The remaining members have to wait for loans until repayments of the previous borrowers have been made in full and on time. For that reason the groups are called joint- liability groups.

Ø       Small, short-term, productive and commercial repeated loans: The first loans are small because they suit needs and capacity of the poor. When they have gained some investment experience and repaid the first loans, loans in the next cycles will be expanded to a larger amount. The maximum loan size for each borrower in the first cycle is 500,000 dong and for all subsequent cycles are 1,000,000 dong.

Loan duration depends on production cycles, therefore short- term and up to 12 months.

Repeated loans are both an incentive for full and timely repayment and a way to help the poor to gradually get out of poverty.

Productive purposes ensure that the borrowers are able not only to repay the loans and interest, but also to earn profits for further investment. No property collateral is required from borrowers.

Before May 2001, SCF borrowers were charged at the rate of 2% per month, of which 1% was allocated for inflation fund; 0.5% for administration fund; 0.3% for risk fund and 0.2% for education fund. Based upon the current inflation rate, savings interest rate of commercial banks and other credit institutions and programs cost in recent years, the Project has established a new lending interest rate of 1.5% per month.

Repayment of loans and interest is made in monthly installments. A grace period is permitted for 1 month for all loans of up to 9 months and 2 months for loans of 10- 12 month duration. Prior- to- maturity repayment is encouraged.

-          Savings service:

 All members must save regularly in their groups, beginning 3 months before any loan is disbursed and continuing throughout their participation, regardless of whether they have a loan. Minimum monthly amount of savings is between 4,000 and 5,000 dong. Additional voluntary savings is encouraged. Savings cannot be withdrawn while borrowers have outstanding loans. Three months after repayment of loans and interest, savings can be withdrawn with one month in advance notice. The interest on savings is added to the initial savings when withdrawal is made. No interest is paid if savings is withdrawn prior to the agreed time. Before May 2001, savings earned an interest rate of 1.4% per month. At present, it is reduced to 0.6% and this figure seems to be attractive to savers as it is higher than the rate paid by the Bank and other credit and savings programs.

Savings mobilized then can be relent to either members or non- members at interest rate of 2% per month for the time before May 2001, and of 1.5% for now or deposited at a bank. Loans from savings have the duration of up to 6 months with the maximum amount of  300,000 dong. Loans can be used not only for productive purposes, but also for consumption, often in the cases of emergencies, family events. Repayment of loans from savings is made once at the end of the loan term. 

3.2.6         Performance of the program in Cam Xuyen district

S&C activities continue to expand and remain the core “pillar” of the programme. SCF/UK initial strategy was to provide loans to 65- 70% of the villages within a commune. After three years it will withdraw 50% of the loans from the old villages to transfer to new villages. So far, three communes in Cam Xuyen District (Cam Long, Cam Hoa, Cam Son) have rotated the loans to 100% of the villages in the communes.

Table 3.3:  SCF/UK scheme- General performance

Source: SCF/UK Report in 1999, 2000/ 2001.

Repayment rate of the programme is perfect (99%- 100%). High repayment rate, accumulated inflation fund and savings fund help not only to secure the loans fund but also to make them greater. Management costs have been covered from interest payment.

By August 2001, SCF/UK has granted a loans fund of 7,465 million dong to 22 communes among 27 communes of Cam Xuyen district for 16,801 borrowers of 3,177 groups. The total amount of savings is dong 4,631.224 million dong. On  average, each member has saved 275,652 dong. The total amount of loans revolved is 2.2 times as much as the initial loans fund from SCF/UK and 3.54 times as much as the total savings accumulated by the members. Each borrower has received 3- 4 loans from the programme. Some of its results in S&C activities are shown in Table 3.3.

CHAPTER 4: AN ANALYSIS OF impact of scf’s MICROFINANCE ON POVERTY REDUCTIOn in cam xuyen, ha tinh province

4.1 Overall approach of the study
In this chapter, the impact of  SCF savings and credit on poverty reduction will be explored based on the conceptual framwork in chapter 2 in order to answer all  research questions raised in section 1.3 will be answered. The analysis of savings and credit's impact on poverty is based on my own data survey in 5 communes in Cam Xuyen district, Ha Tinh province in May, 2001. The evaluation will be divided into three parts. Part 1 tries to see the outreach of the program in terms of penetration ratio based upon the project data as well as surveyed data. In this part, the author's desire is to answer the question: "Whether the program fits the poor or not?” Part 2 will analyze the impact of microfinance on three aspects including income change, vulnerability reduction and empowerment based upon the conceptual and analytical framework in chapter 2. To cope with the counterfactual problem, all three aspects are compared between the members and non-members. Part 3 will make clearer the impact of microfinance on income change by running regression.

4.2            An Analysis of Impact of SCF’s Microfinance on Poverty Reduction in Cam Xuyen, Ha Tinh Province

4.2.1         The outreach of the program

The easiest realized characteristic of SCF is that 100% of its members are women (data provided by SCF as well as shown in data survey) but the proportion of poor women in the whole members hasn’t been clearly shown. In addition, neither the reason why some poor women haven't joined the program nor what other sources of credit such people resort to haven't been fully explained. Here these problems will be answered in detail.

·      The proportion of poor and very poor borrowers access to SCF loan in the sample: In the sample of 120 members, up to 65% of which are poor and very poor. To some extent, the program has achieved its target on the poor. However, it also means that the non-poor still have chance to access to SCF loan. The reason is that the criteria for choosing member of SCF are based on number of months in shortage of food and number of children in family as SCF wants to more focus on children as its name. The threshold is that one household is in at least 3 months of food shortage and has at least three children under age of 15. However, this benchmark is sometime flexible, one household may not meet the threshold requirement of food shortage but has a lot of children (from 4 to more), it is still able to access SCF loan.

The reasons why some targeted people haven't joined the program: Although the poor and very poor were targeted by the program, there exists some disadvantaged who haven't joined SCF. The reason is that such households have no productive activities to develop or do not feel confident about making profitable use of their loan and being unable to repay. For them, microfinance seems not to present a profitable opportunities to improve their living conditions. In other words, microfinance is not really of major interest to the very poor and poor.

·          Other sources of funding: Beside SCF loans, loans from VBA, VBP, relatives and friends, and other sources such as ROSCAs, private lenders seem very popular in the surveyed area. Up to 57 percent of members borrow from these sources, of which 40 percent are the poor and very poor. It reflects that SCF loans haven't met the large demand for capital and that is  why they have to access to other sources of credit beside SCF. Especially, loans from informal sources take up 78% of total loans other than SCF loan, in which the poor and very poor borrowers take 81%. It implies that informal financial providers still dominate lending to the disadvantaged.

4.2.2         The impact of microfinance on poverty reduction

4.2.2     Income increase

The survey shows that up to 67% of interviewed members had higher income after 2 years whereas this percentage falls to  56% for non-members. Especially, nearly a quarter of such 67% have much higher income than before.

Table 4.1: The income change of the members and non-members

Source: Data survey

For SCF surveyed members, 70% of them used loan for investment, of which investing in new income-generating activities accounts for 34%, i.e. 23.8% of the whole surveyed members (Table 4.1). Taking SCF loans for consumption and debt payment make up 23% and 7% of total members, respectively. For those who used SCF loans for investment, up to 85% of them had higher income while 89% of those using loans for debt payment couldn’t increase their income. Surprisingly, nearly 70% of those spending their SCF loan for consumption got improved income. The reason is that credit used for consumption such as food, health and clothing can create income through improved productivity of labor.

Beside the use of the loan, income change can be influenced by the wealth level of the borrowers. Breaking the members with different levels of wealth and the level of income change, the income change on the very poor seems ambiguous. Fifty three percent of the very poor and poor borrowers have income unchanged or lower than before taking the loans while nearly 46% have income a litter higher and only 1% has income much higher. For the average and other better-off borrower categories, the income change appears clearer. All of them have income higher than 2 years ago, especially, 12% of such categories obtain much higher income.

                Table 4.2: Spreading  the members and non-members by wealth categories and income change (%)

By the same treatment with the non-borrowers, the findings are that only 23% of the poor and very poor non-borrowers have income a litter higher, the rest has income unchanged and lower.

In general, members become better off than non-borrowers do. For members whose income increases after taking SCF credit, the main reason in the member's perception, which is to have access to SCF credit accounts for 79%. Other reasons such as children growing up or taking aid from relatives also affected to the increase in income.              

Table 4.3: The most important cause for the increase in income by wealth categories (%)