Banking on the Poor: Integrating Low Income Populations into Vietnam’s Modern Economy
May 30, 2012
Nearly two decades of market-based development has dramatically changed the way Vietnamese live and work, transforming patterns of personal and commercial saving, borrowing, and lending. By 2011 there were 93 banks in Vietnam, about 32 million bankcards, 52,000 points of sale (POS), and 12,000 ATMs. With Vietnam joining the rank of lower middle-income countries in 2010 and aiming to continue the upward growth trajectory, the country’s population of 90 million will need a better understanding of and access to the range of financial and banking services at the heart of a modern and integrated economy.
The regulatory, management, and strategic challenges faced by Vietnam’s fractured banking sector have been the subject of increasing commentary of late. Lending for consumption remains low compared to the rest of the world, and cash is dominant. While commercial banks are increasingly visible in Vietnam’s cities, they are not well connected with the majority of low and emerging middle-income Vietnamese. One bank official we talked to estimated only about a third of the population comes into contact with banking services. Most people operate primarily in the informal market, vulnerable to exploitative interest rates (25 percent or more is not uncommon) and unregulated practices. However, increasingly, if you want to make money, you need to understand and access banking services and credit. The failure of banks to engage the bulk of the population presents both challenges for the Vietnamese banking sector in engaging and educating new customer groups, and wider questions around how financial literacy, or lack of it, among large sections of the population affects the prospects for equitable development.
To gauge Vietnamese attitudes to money and banking practices, earlier this year, The Asia Foundation completed a survey of low- and middle-income residents of Hanoi, complemented by in-depth interviews with Vietnamese bank staff. While the sample was limited, the survey revealed some interesting data.
Where’s the bank?
While most commercial banks only have branches in the largest cities, some 70 percent of Vietnamese live in rural areas. The major cities account for 80 percent of bank revenue from personal financial services. Even in the major cities, commercial banks are largely restricted to downtown areas and have a narrow customer base. One Vietcombank official interviewed estimated only about one-third of the urban population use financial services and banking products.
Our survey of service industry workers, such as waiters, drivers, barbers and beauty salon staff, and restaurant and shop guards in Hanoi showed less than 50 percent had used banking services. The reasons they gave for not using banking services varied, although by far the biggest proportion felt banks weren’t for them because their incomes were too low (44%). Five percent of respondents said that the return from bank savings was not sufficient; another 5 percent indicated that cash was more convenient; and 3 percent did not trust the banks.
While large numbers indicated that they were not engaging with the banking system, respondents were actively borrowing and saving. Fifty-six percent of respondents said they had savings, but most kept their savings at home, sending them back to their families in their native provinces through networks of family members and friends. Over half had borrowed money with a quarter in debt because of an investment, and a further 9 percent borrowed for consumption. Out of 500 individuals surveyed, almost 80 percent indicated that they had run out of money before their next pay check. Of those, 26 percent had borrowed from friends and relatives to tie them over, but only 2 percent had used credit cards and 3 percent of respondents having borrowed from banks.
Preparing for modern banking
As the country gets richer, most Vietnamese banks are eyeing an expanding personal banking market, reaching out to low- and middle-income groups to market their products and services. Whether these groups have the financial knowledge to take advantage of those opportunities is a larger question. Half of all those that we interviewed had no knowledge of financial and credit services provided by banks. While around 20 percent of people kept some form of financial records, most did not. Family finances were often opaque with traditional roles affecting financial knowledge. For example, the majority of women interviewed did not know exactly how much their husbands earned. Seventy-five percent of respondents said decisions on significant purchases were made by the husbands or, when living with extended family, husbands and parents. However, women were much more likely to be in charge of daily expenditures.
Poor personal financial management is having serious consequences on families across Vietnam. According to a survey conducted by the Hanoi Department of Labor and Social Affairs (DOLISA), over 70 percent of farmers who had received compensation to move from their land used that money for consumption, rather than investing in livelihood development or income generation activities. Fifty percent subsequently suffered financial difficulties.
Improving financial literacy
There are some developing financial literacy programs associated with the Women’s Union, international NGOs, and businesses such as Prudential. More recently the Bank of Social Policy (BSP) and Bank for Agriculture and Rural Development (VBARD) have introduced financial training associated with their loans. However, for the majority of the population there remains limited financial education available. At schools, basic personal financial management skills are not taught, and little guidance is provided through families, even those in higher income brackets. Most of the banks we interviewed are developing strategies to promote private banking services and increase the number of people using bank services. However, expansion into these markets so far has been ad hoc, frequently depending on the personal networks of bank staff and not associated with programs to raise the financial literacy of their customers. Several of the banks surveyed did not have customer care units.
Whether it is the banks’ responsibility or not to increase financial literacy, a rapid expansion into a market with a low base of knowledge and skills seems a risky prospect. Developing countries across Asia, from India to Malaysia to Indonesia, have devoted more attention to increasing their citizens’ understanding and access to banking and financial services. How well banks, financial institutions, the government, and NGOs help low- and middle-income Vietnamese raise their financial literacy will affect not just the future of Vietnamese banking but also the financial stability of Vietnamese households and the future economic health of Vietnam.
William Taylor is The Asia Foundation’s deputy country representative in Vietnam. He can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.
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