Microcredit and poverty reduction: a case study of Microfinance Fund for Community Development in Northern Vietnam

Abstract

Like other developing countries, microcredit in Vietnam has been recognized as an important credit source of the poor, who need capital but are normally by-passed by commercial banks. However, the provision of credit to the poor is challenged by the existing tradeoff between depth of outreach and financial sustainability. In this study, Principal Component Analysis and Propensity Score Matching were used to assess whether microcredit reaches the poor and its role in poverty reduction. The Microfinance Fund and Community Development (MFCD), a microfinance institution in Northern Vietnam was selected as a case study. The research has shown that microcredit successfully reaches the poor households as 67% of credit recipients belong to the last three bottom groups. The observed poverty targeting is consistent with the mission of the microfinance institution. In addition, the provision of microcredit has positive but statistically insignificant impact on household income and expenditure. This study suggests that unless access to additional resources should be made available to the poor, a small amount of credit alone could be insufficient to reduce poverty.