Commercial banks financing for micro enterprises: A literature review
HỘI THẢO QUỐC TẾ: PHÁT TRIỂN
DOANH NGHIỆP NHỎ VÀ VỪA CỦA VIỆT NAM TRONG BỐI CẢNH CUỘC CÁCH MẠNG CÔNG NGHIỆP 4.0
COMMERCIAL BANKS FINANCING FOR MICRO ENTERPRISES:
A LITERATURE REVIEW
Le Van Chi,
National Economics University
Abstract:
Micro enterprises play an important role in the process of economic development of a
country, especially in developing ones. Vietnam is known as an emerging market, with 74% of
the total number of enterprises in the country are micro enterprises. However, the issue of micro
enterprises credit access still remains a confounding problem. The paper focuses on the
characteristics of micro enterprises, the determinants of micro enterprises access to credit,
especially access to commercial banks credit. This question is addressed by reviewing existing
literature and empirical evidence. The results of this analysis indicate the features of Vietnam
micro enterprises and reveal the issue of commercial bank financing for micro enterprises in
Vietnam. ased on the research‟s results some managerial implications are recommended
Key words: micro enterprises, access to credit, commercial bank lending
TÀI TRỢ VỐN CHO DOANH NGHIỆP SIÊU NHỎ TỪ CÁC
NGÂN HÀNG THƢƠNG MẠI: TỔNG QUAN NGHIÊN CỨU
Tóm tắt:
Doanh nghiệp siêu nhỏ đóng vai trò quan trọng trong quá trình phát triển kinh tế của
một quốc gia, đặc biệt là những nề kinh tế đang phát triển. Việt Nam được biết đến như một thị
trường mới nổi, với 74% tổng số doanh nghiệp trong nước là doanh nghiệp siêu nhỏ. Tuy nhiên,
tiếp cận tín dụng doanh nghiệp siêu nhỏ vẫn là một vấn đề lớn. Bài viết tập trung vào đặc điểm
của doanh nghiệp siêu nhỏ, yếu tố quyết định tới khả năng doanh nghiệp siêu nhỏ tiếp cận tín
dụng, đặc biệt là tiếp cận tín dụng ngân hàng thương mại. Câu hỏi này được giải quyết bằng
cách xem xét tài liệu hiện có và bằng chứng thực nghiệm. Kết quả phân tích này cho thấy các
đặc trưng của doanh nghiệp siêu nhỏ tại Việt Nam và ch ra những vấn đề liên quan tới việc
ngân hàng thương mại tài trợ vốn cho doanh nghiệp siêu nhỏ tại Việt Nam. Dựa trên kết quả
nghiên cứu, một số hàm ý ch nh sách được khuyến nghị
Từ khóa: doanh nghiệp siêu nhỏ, tiếp cận tín dụng, hoạt động cho vay của ngân hàng
thương mại
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1. Introduction
Micro enterprises comprise the largest proportion of business structure in an economy.
According to data published in the Press Release of the General Statistics Office (2017), as of
January 1, 2017, the number of micro enterprises accounts for 74% of the total number of
enterprises in the country. Thus, the number of micro enterprises has increased to 65.5%
compared to 2012. It has the fastest growth rate compared to other types of businesses. Micro
enterprises have an important role in creating jobs, increasing supply of goods and services,
promoting competitiveness in the market, contributing to poverty reduction. Along with small-
scale enterprises, micro enterprises are also considered to be "the driving force of the economy".
Currently, micro enterprises face many difficulties in raising capital, including
difficulties in accessing credit from commercial banks due to a number of reasons such as lack of
collateral, no credit history, lack of necessary documents to complete the loan application.
Although some commercial banks have had specific products that dedicated to this potential
market, the ability to deploy products to customers is limited. Meanwhile, the micro-enterprise
group has its own characteristics compared to the other types. Therefore, an in-depth study of the
micro-enterprise segment, as well as the development of bank credit for this business segment, is
necessary.
Based on the considerations above, the aim of this paper is providing an overall review of
important features of micro enterprises as well as the determinants of accessing to commercial
banks‘ lending of micro enterprises. In addition, the issues of commercial bank financing for
micro enterprises in Vietnam are also analyzed and compared with other countries, and then
some policy implication focused on Vietnam has been also recommended. This analysis is likely
to be helpful for decision-makers and researchers to clarify the characteristics of micro
enterprises and the determinants of commercial bank financing for micro enterprises in a
particular research site.
The rest of this review is organized, as follows. Section 2 demonstrates the methodology
that was used to carry out this review. In Section 3, the overview of commercial bank financing
for micro enterprises are displayed, in which the definition of micro enterprises, the affecting
factors of micro enterprises accessing to capital, as well as the commercial banks‘ lending to
micro enterprises are summarized. Section 4 analyzes the issues of commercial bank financing
for micro enterprises in Vietnam. The main policy implications that are focused on Vietnam and
conclusions are presented in Section 5.
2. Materials and Methods
This research applied mixed methods that are a comprehensive literature review with
secondary data collection. In order to only review quality articles, internationally renowned
citation database Scopus, Scholar, and Web of Science were mainly selected. Moreover, some
better papers researched on Vietnam are also reviewed. Keywords, such as ―access to capital of
micro enterprises‖, ―commercial banks lending to micro enterprises‖, ―factors affecting access to
commercial bank lending‖, ―determinants of credit access‖, ―credit constraints‖, ―credit
participation‖, etc. were used for searching suitable articles.
Secondary data of this paper has been collected from official websites of commercial banks,
microfinance institutions, cooperative banks in Vietnam, as well as some general information
from Vietnam Statistical Yearbook of 2016–2017. According to data the authors synthesized, as
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of 08/01/2019 Vietnam has 34 commercial banks. The author has ranked these banks by total
assets. Since then, the author has collected data from 14 commercial banks with the largest total
assets for analysis.
3. Overview of Commercial bank financing for micro enterprises
There have been some research on micro enterprises, access to capital of micro
enterprises, lending to micro enterprises of commercial banks. These studies can be divided into
three main groups of issues: (1) perspectives on micro enterprises, (2) micro enterprises access to
capital, (3) commercial banks lending for micro enterprises
The concept of micro enterprises
There is no agreement between countries on the definition, or the concept of micro
enterprises. Each country classifies micro enterprises with different conditions. Nguyen Thai
Nhan (2016) has researched and summarized views and definitions of micro enterprises in
some countries. The results show that international organizations and countries classify micro
enterprises according to a number of following criteria: capital scale, labor size, turnover,
assets and costs. Specifically, the author has summarized some definitions of micro enterprises
as follows:
Table 1: Summary of the definition of micro enterprises in some countries
Capital size
Labor scale
Revenue
Asset
World Bank
< 100.000
USD
<10 employees
EU
<10 employees
<5 employees
≤5 employees
<9 employees
<10 employees
<10 employees
≤10 employees
≤10 employees
≤5 employees
≤10 employees
<10 employees
<2 millions EUR
<2 millions EUR
Albani
Armenia
Romania
Czech
Hungary
Bulgaria
Macedonia
Uzbekistan
Croatia
Bosnia and
Herzegovina
<200.000 EUR
<100.000 EUR
Latvia
<9 employees
<9 employees
<500.000 Latvian
<400.000 Latvian
Moldova
<3 millions Leu
Moldova
Ucraine
<10 employees
≤100.000 EUR
South Aprica
≤4 employees
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Pakistan
Genuine
Chile
1-9 employees
1-4 employees
2-9 employees
1-4 employees
1-5 employees
<10 employees
1-9 employees
1-9 employees
1-9 employees
<5 employees
<5 employees
1-10 employees
<10 employees
1-4 employees
≤10 employees
1- 2400 peso
Tanzania
Brunei
12 millions siling
Myanmar
Cambodia
Indonesia
Philippines
Japan
<50.000 USD
<3 millions peso
<134.078 USD
Korean
Brazil
Colombia
Egypt
United States
Source: Nguyen Thai Nhan (2016)
In Vietnam, on 11 March 2018, the Government issued Decree No. 39/2018/ND-CP
detailing a number of articles of the Law on Support for Small and Medium Enterprises. In this
Decree, the criteria for defining a small and medium enterprise are clearly defined. Accordingly,
micro enterprises in the fields of agriculture, forestry, fisheries and industry and construction
sectors have an average number of employees participating in social insurance not exceeding 10
people and the total revenue of the year does not exceed 3 billion VND or total liabilities and
equity do not exceed 3 billion VND. Micro enterprises in the field of trade and services have an
average annual number of employees participating in social insurance and the total turnover of
the year is at most 10 billion VND or the total capital is at most 3 billion VND.
So, most international organizations and countries take the average number of employees
per year as an important criterion to classify enterprises. This is more reasonable than the
selection of revenue, capital, cost, asset, etc. These indicators can be quantified by monetary
value so these criteria regularly affected by changes in the market, the development of the
economy, inflation, etc.
Micro enterprises' ability to access bank credit
Inadequate access to bank credit is one of the main obstacles that delaying the
development of micro enterprises (Asselbergh, 2002). According to Ganbold (2008), it is
difficult for micro enterprises to access finance, including access to capital from commercial
banks. The reasons are listed below:
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- Policy deviations on the financial sector, with the existence of ceiling interest rates and
state-owned enterprises
- The implementation of small loans for micro enterprises are not effective due to high
implementation costs
- Difficulties from both commercial banks and micro enterprises in applying new lending
technologies
- Information asymmetry due to the high cost of gathering information from micro
enterprises, heterogeneous financial statements and the lack of reputation in the market.
- High risk of operation because micro enterprises are easily vulnerable and have
fluctuating revenue
- Weak management ability
The difficulty of micro enterprise access to capital is also explained by Chong (2010) by
evaluating the credit management capability of micro enterprises. According to the study, credit
institutions prefer to lend to businesses has been ranked rather than small and medium
enterprises. It could be explained by the difference in the operating method of these two types of
businesses. Small and medium enterprises often focus on survival and business stability, while
businesses have been ranked towards the goal of maximizing profits. Through the investigation
of over 120 micro enterprises in Malaysia, the author pointed out that the majority of micro-
business owners rely on their own savings and borrow from friends or relatives when they
started their businesses. Chong's study (2010) also examines the relationship between affecting
factors including education level, financial potential, and debt status and micro-enterprises'
ability to repay and manage credit. The research results show that debt status affects debt
repayment capacity. Accordingly, the higher the debt situation, the weaker the ability to manage
credit. Micro enterprises run by women are also better able to manage credit than businesses
with male owners. Education level is another factor affecting the ability to manage credit while
economic potential. It is not related to credit management ability.
Another empirical study that examines obstacles in accessing bank capital of micro and
small enterprises was conducted by Sharma and Gounder (2012). The two authors conducted
surveys and collected data with 77 businesses in Suva, the capital of Fiji. The survey results
showed that 75% of enterprises participating in the survey acknowledged the role of bank credit
for their enterprises. In order to answer the question of why bank credit is considered important,
but these enterprises have not yet access to that capital, more than 90% of surveyed enterprises
believe that interest rates, fees, collateral, approval process, the requirement for equity of
enterprises are the main reasons. However, the surveyed enterprises themselves do not really
care about their ability to borrow bank loans. They do not know about credit products, and do
not know how to borrow money from banks. These businesses are also unable to collect the
information required by the banks, nor do they really care about the terms of the loan repayment.
The research of Gichuki, Njeru and Tirimba (2014) has the same conclusion with the
above studies. The authors studied empirically to find out the challenges that small and micro
businesses face when accessing credit facilities. The main data was collected from respondents
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using the questionnaires that researchers have done, collected from micro and small businesses at
Kangemi Harambee market in Nairobi, Kenya. The study shows that the main challenges that
prevent small and medium enterprises from accessing credit facilities include paying high costs,
stringent asset requirements, unwilling guarantors and fees. Credit management and short
repayment period. Since then the authors also recommend that financial institutions should make
flexible, affordable and more attractive requirements to support small and small businesses.
Singh and Wasdani (2016) have studied the financial resources used by micro, small and
medium enterprises in each stage of development of that enterprise. The two authors divided the
development of an enterprise into four development stages: Start-up stage, Survival stage, Growth
Stage, Sustenance stage. Research results show that, in the start-up phase, businesses use capital from
the personal or family sources, friends, or banks for working capital purposes. In addition, in this
period, businesses also look for state-owned banks to borrow loans with secured assets. Short-term
loans, overdraft loans, long-term loans are hardly used by startups. In the next stage, working capital
is still the main purpose for businesses to seek external funding. During this period, personal money
is no longer the main source of financing, but the public banks, is the main source of financing,
followed by private banks. In the growth phase, the purpose of corporate loans is more diversified,
including working capital financing (mainly borrowed from public banks), loans with secured assets
(from public banks, cooperative banks), short-term loans (private banks), overdraft loans. In the final
stage, businesses use funds from private funds, cooperative banks, public banks, and private banks
for working capital. Cooperative banks are also used to lend loans those secured by assets and short-
term loans. Working capital, loans with secured assets, short loans are the most common goals of
businesses during this period. Thus, enterprises tend to borrow from reliable sources in the
development phase and the maintenance phase.
Singh and Wasdami (2016) also point out the biggest challenges that enterprises have to face
in accessing finance at the start-up stage and survival stage are the difficulty in providing collateral,
the long loan approval process and the lack of knowledge about financial plans. Enterprises in the
first two stages have not completed their business activities and therefore cannot provide collateral or
withstand complex loan approval processes. At the growth stage and the maintenance stage, the
biggest challenges are the lack of knowledge about financial plans, high service fees to loan
approval, difficulties in providing assets to secure and high interest rates. The study also shows that
education level of business owners affects the ability of enterprises to access capital. Enterprises with
university graduates have a better level of understanding of financial options for micro, small and
medium enterprises than other levels of education.
Factors affecting the development of commercial banks’ lending to microenterprises
Baydas, Graham, & Valenzuela (1997) pointed out the advantages and obstacles of
commercial banks when lending to micro enterprises. According to the authors, 6 advantages of
commercial banks include:
(1) Commercial banks are financial institutions that are strictly regulated about
conditions of ownership, information disclosure and capital adequacy assurance. This will ensure
that the loans to micro enterprises would be strictly managed,
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(2) Most commercial banks have good infrastructure, including a large branch network,
and the ability to expand and reach numerous micro customers,
(3) Commercial banks also have internal control systems, strictly established accounting
and administrative systems, capable of monitoring large number of transactions,
(4) Compared to non-governmental organizations, commercial banks have self-mobilized
capital (from receiving deposits and equity), so commercial banks are not dependent on scarce
funding sources and unstable as non-governmental organizations,
(5) Ownership structure of commercial banks with private capital tends to encourage
good governance structure, cost-effective use, profitability and thus create sustainability,
(6) Commercial banks are able to provide many financial services (lending, receiving
deposits and other financial products), thus being able to attract micro-business customers.
However, Baydas, Graham, & Valenzuela (1997) also point out that the obstacles that
commercial banks will face when approaching micro-business customers. According to the
authors, there are 6 issues that commercial banks have to solve if they want to succeed with
credit activities for micro enterprises:
(1) Commitment. The level of commitment of commercial banks (especially large
commercial banks) to lending to micro enterprises is often unsteady, and it is not included in the
bank's mission.
(2) Organizational structure. Micro-lending programs need to be organized so that it is
relatively independent, and has enough scale to manage thousands of small transactions
effectively.
(3) Financial methods. Commercial banks need to apply a suitable financial method to
serve micro businesses. Innovations in finance can enable cost-effective analysis, effective
monitoring of large numbers of small customers.
(4) Human resources. Because micro credit has different characteristics than banks‘
traditional activities, commercial banks need to recruit and train special teams to manage.
(5) Cost-effective. Micro enterprises lending is costly because of very small loans, and
because commercial banks cannot operate in the traditional way.
(6) Management and supervision. Management and monitoring activities must take into
account the characteristics of micro enterprises.
An empirical study of commercial banks' lending activity for micro, small and medium
businesses conducted by Padilla and Fenton Ontañon (2013). The two authors looked at
commercial bank lending strategies for micro and small and medium-sized businesses in Mexico
and factors that motivate or hinder lending in this segment. A detailed survey was made of
commercial banks operating in Mexico. The survey results show that although credit for micro,
small and medium enterprises still accounts for a small portion of the loan portfolio, commercial
banks are increasingly interested in expanding this segment. Three different business models
have been identified, with major differences in the strategy of providing financial services to this
business segment. As follows:
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- Model 1 could be used for big banks: Their strategy includes serving as many
customers as possible because these banks can attract customers through a branch office network
or specialized salespeople. They can benefit from the economic scale and are the largest small
business lenders.
- Model 2 could be used for banks with close relationships with micro, small and
medium-sized enterprises. These are specialized banks for promoting the entrepreneurial spirit
and manufacturing sector of the economy or regional banks that specialize in certain market
segments. They use relationships to attract customers.
- Model 3 could be used for banks which do not have small business units or specialized
enterprises. This category includes banks that provide loans for this segment only as an
extension of their traditional trades to provide their existing customers additional services.
The biggest barriers to increasing credit supply to micro, small and medium-sized enterprises
were also pointed out by the two authors, including lack of information, failure to protect
creditors, informality, and the changes and disruption of commercial banks' operations.
4. The issue of commercial bank financing for micro-enterprises in Vietnam
Characteristics of micro enterprises in Vietnam
Nguyen Thuc Boi Huyen and Le Thi Kim Yen (2015) used SWOT analysis to analyze
the strengths, weaknesses, opportunities and threats of micro, small and medium enterprises in
Vietnam.
(1) Strengths: Micro, small and medium enterprises in Vietnam have the following
strengths:
- Simple production technology, low capital investment, fast capital recovery
- Ability to penetrate the market quite well
- Close access to the domestic market
- Having close relationship with customers
- Labor cost is quite cheap
- Diverse products and services
- Wide distribution network
- Abundant agriculture, forestry and seafood resources
(2) Weaknesses:
- Inability to meet seasonal orders
- Not proactive source of domestic raw materials
- Not familiar with research, scientific research applications
- No brand development strategy yet
- Export through intermediaries, trade promotion is not good
- Production technology is backward compared to the world
- The management team, the skilled labor force are few
- Lack of funds
(3) Opportunity
- Expanding export markets through free trade agreements
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- Government's development orientation for micro, small and medium enterprises
- Preferential, low tax rates
- The development of new technology
- Demand for domestic products are increasing
- The educational level of Vietnam is improved
(4) Challenges
- Freight charge, prices of raw materials, electricity, water and gasoline continuously
increase
- Exchange rate risk
- Market saturation of domestic goods
- Preference for imported goods
- The tastes and quality requirements of consumers are increasing
- Environmental problems
In addition, micro enterprises in Vietnam often have no strategy in allocating financial
resources, causing the situation of financial resources not in keeping with the production and
business process. These leads to the number of micro enterprises going bankruptcy is quite high.
Experts also said that, the micro enterprises have not been assertive in making investment
decisions. Many of them used inefficiently the mobilized capital sources. Business households
often ignore the rules of the market, not having a good business strategy.
It is also a fact that micro enterprises only grow in areas with modest profit margins and low
technology due to the lack of scale advantages and often focusing on issues such as target
selection in accordance with the businesses‘ ability, stability, consolidate the existing market, or
develop the market step by step and have the most advantageous breakthrough.
In addition, micro-enterprises and individual business households are still mobilizing and
cooperating to do business without support from the authorities. Micro businesses are still having
to "swim" on their own challenges.
Commercial banks financing for microenterprises in Vietnam
According to Ngo Hai (2019), the Ministry of Finance has been having tax policies and
providing capital for micro enterprises. Through the Vietnam Social Policy Bank system, many
policy credit programs and projects are implemented such as Household Development Loan
Program, Lending program for traders operating in difficult economic areas in mountainous
areas, etc. These policies have been creating favorable conditions for micro enterprises to access
loans to maintain, develop and expand their business production activities. For preferential credit
support policies, enterprises must have feasible production and business projects and plans in the
priority and encouraged fields of the State through the SME Development Fund. If a micro
enterprise satisfies the conditions, it can borrow capital from the Fund with the maximum loan of
VND 30 billion and the interest rate of 7% per year. A maximum loan term is 7 years. However,
according to statistics of the Vietnam Chamber of Commerce and Industry (VCCI), among 97%
of small and medium enterprises, 85 - 90% are small and micro enterprises. More significantly,
only about 40% of these businesses have access to bank capital
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According to An Nhien (2017), Vietnamese commercial banks are also increasingly
interested in micro-enterprise customers. This is reflected in the fact that most commercial banks
have specialized products for this customer. The credit package "Accompanying with micro
businesses" of BIDV with the interest rate from 6.8% per year is applied to short-term loans of
less than 12 months. At ACB, after evaluating, classifying customers, financial verification,
reasonable use of loan plan, enterprises will be able to receive unsecured loans with interest rates
depending on the time and financial potential, risk of each loan. At PVcomBank, the preferential
loan package "Flexible financing - Breakthroughs of growth" with a total limit of VND 1,500
billion deployed from the beginning of 2017, is also an option to help micro enterprises access
capital to invest in production. business. Participating businesses enjoy interest rates from 7.5%
per year. The characteristics of these products in some commercial banks are summarized by the
author in the table below:
Table 2: Micro-lending products of some Vietnamese commercial banks
(as of August 1, 2019)
Loans conditions
No. Commercial banks
Interest rate
(per year)
Maximum loan amount
Flexible
Loan term
5 years
1
2
3
4
BIDV
6%
Agribank
Vietinbank
Vietcombank
6%
90% customers‘ demand
3 billion VND
1 year
7.5%
7.5%
7 years
Flexible
100% customers‘ demand
5
6
7
8
9
SCB
6.5%
8.5%
8.2%
9.8%
8.6%
8%
Flexible
5 years
Flexible
15 years
7 years
5 years
25 years
7 years
Sacombank
MB bank
ACB
Unlimit
90% customers‘ demand
10 billion VND
500 million VND
85% customers‘ demand
5 billion VND
VP bank
10 SHB
11 Techcombank
5.99%
12 Hdbank
7%
100% customers‘ demand
3 billion VND
20 years
5 years
1 year
13 Liên Việt Post bank
14 Eximbank
6.5%
8%
Flexible
Source: author compiled from commercial banks‟ websites
From the data summarized in the table above, it can be seen that the policy for micro-
enterprise lending in Vietnamese commercial banks is quite diverse. Regarding lending rates, the
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interest rates fluctuate between 5.99% and 9.8% / year. Regarding the maximum amount that
those can borrow, each commercial bank has different rules. Some banks stipulate the maximum
amount that micro enterprises are allowed to borrow (for example, Vietinbank allows micro
enterprise to borrow up to VND 3 billion, this figure in Techcombank is VND 5 billion). Some
bank banks do not set the maximum loan amount but offer loans based on customer needs (for
example, Vietcombank is willing to give 100% of its demand to customers, but SHB can only
meet up to 85% customers' borrowing needs). In terms of loan terms, most banks are generally
for micro-enterprise customers with short and medium-term loan terms (1 - 7 years).
12%
10%
8%
6%
4%
2%
0%
Figure 1: Lending interest rate for micro enterprises of some Vietnamese commercial
banks and average lending interest rate (as of August 1, 2019)
Source: author compiled from commercial banks‟ websites
However, specific figures on commercial bank loans to micro-enterprise customers are
not reported in bank documents disclosed to investors. Commercial banks enterprise group
aggregated micro customer segmentation into small and medium-sized enterprises as a report
without specific dissection led to the collection of data is very limited. This makes it difficult to
analyze the situation of microenterprise lending in Vietnamese commercial banks.
5. Conclusion
In line with the objective of reviewing and classifying some studies, several issues that
relate to commercial banks‘lending to microenterprises have been discussed. Micro enterprises
are classified based on some criteria such as capital scale, labor size, turnover, assets and costs.
Inadequate access to bank credit is one of the main obstacles that delaying the development of
micro enterprises. Some factors that prevent micro, small and medium enterprises from
accessing credit facilities are high repayment costs, collateral requirements, unwilling guarantors
and fees. credit management and short repayment period, education level of businesses‘ owners.
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The advantages and obstacles of commercial banks when lending to micro enterprises are also
pointed out in this study.
The results of this study have a number of implications, which can be helpful to decision
makers, commercial banks‘ managers. First of all, commercial banks need to carefully study the
characteristics of micro enterprises in Vietnam. This makes it possible for commercial banks to
develop products that are suitable for this segment. Secondly, depending on the characteristics of
each bank, banks can choose the appropriate model to lend to micro businesses. Finally, micro
enterprises themselves need to improve their financial knowledge in order to have better access
to bank capital.
References:
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