V IE T N A M N A T IO N A L U N IV E R S IT Y , H A N O I
H A N O I SC H O O L O F B U SIN E SS

D uong D anh C hung

D E V E L O P IN G R U R A L B A N K IN G S E R V IC E S A T V IE T N A M
P O S T A L SA V IN G S S E R V IC E C O M P A N Y

M a jo r : B u s in e s s A d m in is tr a tio n
C o d e : 60 34 05

M A S T E R O F B U SIN E SS A D M IN IS T R A T IO N T H E SIS

S u p e rv is o r: D r .T r a n P h u o n g L an

H a n o i- 2 0 1 0


TABLE OF CONTENTS

C o n ten ts

Page

ACKNOW LEDGEMENTS

V

L IS T O F A C R O N Y M S

vi


7

1.5. S co p e o f w o rk s

7

1.6 . Significance

8

1.7. E xp ec ted R esults

8

1.8. Structure o f the thesis

9

C H A P T E R 2: L I T E R A T U R E R E V I E W

10

2.1. D efinition o f rural b an kin g

10

2.2. C o m p o n e n ts o f rural banking

11

2.2.3.3. Informal service providers

16

2.2.3. C u sto m e rs

17

2.3. Specific characteristics o f rural banking

18

2.3.1. H ig h transaction cost

18

2.3.2. H ig h risk

18

2.3.3. H ig h illiterate rates o f the custom ers

19

2.4. Factors affecting developm ent o f rural banking

20

2.4.1. G o v e rn m e n t Policies


28

2.5.4.

M in im iz in g risks

28

2.6. Existing success m odels in developing rural banking

29

2.6.1. L arg e netw ork o f distribution

29

2.6.2. P ro d u ct m anag em ent & low cost o f operating

32

2.6.3. Risk m a n ag em e n t

34

2.7. C hapter rev ie w

37

C H A P T E R 3: ANALYSIS ON VIETNAM RURAL BANKING MARKET


3.3.2. Semi form al rural banking providers

47

3.3.

49

3. Informal rural banking m echanism s
3.3.3.1. F orm s o f operation

49

3.3.3.2. A d v an tag e s

51

3.3.3.3. D isad v an ta g es and negative im pacts

51

3.4. M acro policies on rural banking

52

3.4.1. The State P olicy on agriculture, countryside and farm ers (Policy
o f “T am n o ne”

52


outlook for traditional postal services

65

4.3. C hallenges facing V ietnam postal savings service

66

4.4. A nalysis on strategic adv antages o f V PS C in dev eloping rural banking
services

66

4.4.1. F avorable con ditions from G ov ernm en t policies

66

4.4.2. V ision o f L ead ers in developing rural banking services

67

4.4.3. P rom inent n etw ork & technical capacity

69

4.4.4. L ow transaction cost

70

4.4.5. C onv en iences and trust recognized by rural custom ers

5.1.2. Small loans

84

5.2. Solutions should be taken into consideration in designing product &
process

86

5.2.1. F or savings service

g^

5.2.2. F or small lending service

gg

5.3. M od el o f operation

94

C O N C L U SIO N

95

Reference

100

iv


C o m m u n e Cultural Point

D PT

D istrict Post & T elecom m unication

ESBG

Euro Savings B ank Group

FU

F a rm e rs ’ U nion

GSO

G eneral Statistic Office

IFAD

International Fund for A gricultural D evelopm ent

ILO

International L abor Organization

LIH

L o w -in co m e H ousehold


P e o p le ’s C om m ittee

PO

Post O ffice

ppr

P rovincial Post & T elecom m unication

ROSCA

R otating Savings and Credit Association

ROSLG

R otating Savings and Lending G roup

SBV

State B ank o f V ietnam

SO

Social O rganization

VBARD

V ietnam Bank o f A griculture and Rural D evelop m en t

V PS S

V ietnam Postal S avings

Service

VWU

V ietnam W om en 's U nion

WB

W orld Bank

W SB I

W orld Savings Bank Institute


LIST OF TABLES AND GRAPHS
T a b le/G ra p h

N am e o f T able/G rap h

Page

Table 2.1

S u m m aries profiles o f the participating savings banks
w ith its large outreach to custom ers in rural areas

Table 4.1

V P S C ’s business results in recent years

64

G raph 4.2

Postal savings service inside V N P o s t’s organization &
operation

65

viii


A bstract
D E V E L O P I N G R U R A L B A N K IN G S E R V I C E S A T V IE T N A M
P O S T A L S A V IN G S S E R V IC E C O M P A N Y
Student: D u o n g D a n h C hung - M B A , 2008-2010
School o f Business, V ietnam National University. H a Noi
Supervisor: Dr. T ran P h uo ng Lan
O ctober 2010, 101 pages
V ietnam is am o n g the poor countries in the world, w ith 72% o f population residing
in rural a re a s'. Like m ost other developing countries, rural households' access to
financial services is very limited. The nature o f this limitation is particularly country
specific, co m m ercial

banking services are only for the top


means

that

1%

rural

c o m m u n ities have been thirsting for essential basic formal banking services, and o f

1 G SO : S ta tistic a l Yearbook 200H
WSBI: W orking w ith S avings Banks in order to double the num bers o f savings accounts fo r the
p o o r (P roject w ith Vietnam P o sta l Savings Service Com pany, 2010, pa g e 2)

ix


course, they afford to pay for it.
With about 70% o f the population those mainly living in rural areas almost entirely
un-banked, there is a trem endous opportunity for existing financial institution like
V ietnam Postal S avings Service C om p any (V PS C ), with its netw ork o f post office
already outreached the rural areas, to develop and to capture rural banking market
share.
This thesis analyzed limitations to access to formal banking services in the rural
areas, show ed out its im pact on rural households' livelihoods. B ased on that, the
thesis recognized the business opportunity in developing rural banking services for
VPSC. T he thesis also aim ed to propose appropriate solutions that V PS C should
take into consideration while designing its rural ban king products & process.
The data for thesis were collected from various sources - both prim ary and
secondary. P rim ary data w ere collected from interview s and observation at selected

ngược lại, nh ó m có thu nhập rất thấp, nghèo đói chiếm kho ản g

10

đến

20%

dân số

thuộc đối tư ợ n g p hục vụ của các chư ơng trình cho vay hỗ trợ của Chính phủ thông
qua N gân h à n g C hính sách xã hội. Đặc thù này dẫn đến thực trạng phần lớn dân cư
thuộc nh ó m có thu nhập thấp và trung bình, chiếm kho ản g 70% dân số và đa phần
sinh sống tại khu vực nông thôn chưa được đáp ứng các dịch vụ ngân hàng.
T ro n g bối c ả n h thiếu v ắng các dịch vụ ngân hàng cung cấp bởi các định chế ngân
h àn g chín h thức, rất nhiều người dân có thu nhập thấp và trung bình ở khu vực nông
thôn buộc phải lựa chọn sử dụng các hình thức cu ng cấp dịch vụ ngân hàng không
chín h thức. C ác hình thức này không cung cấp các dịch vụ thanh toán và các sản
p h ẩm tiết k iệm linh hoạt. Đ iểm cơ bản hấp dẫn của hình thức này là sự dễ dàng
trong việc đáp ứ ng các điều kiện cho vay. Tuy nhiên, cơ chế cung cấp dịch vụ ngân

1 To n g cục T h ố n g kẽ: N iên giám thốrì% kê 2008
ỉỉiệ p h ộ i n g â n h à n ẹ íiẽt kiệm thế giới: N hóm d ự án với các ngân hàng tiết kiệm nham nhân đôi so
lư ợ n g tài kh o à n tiêỉ kiệm cho ngư ời rtẹhèo (D ự án tài trợ C ông ty D ịch vụ Tiếí kiệm Biỉĩỉ điện Việt
Nam. 2 0 ỉ 0, tra n g 2)

xi


hàng không chính thức thực sự không an toàn cho cả nhà cung cấp dịch vụ và khách

income and to im prove rural co m m u n ities’ living standard. So far, rural areas have
attained rem arkable achievem ents in term s o f econ om ic grow th and poverty
reduction. The pov erty rate in rural areas decreased from m ore than 30% in the
years o f 1990s to 16.2 % in the year o f 2 0 0 8 1. H ow ever, there has been a large gap
betw een rural and urban areas. The social econom ics existence shows out that m any
essential basic services for rural com m unities have not been met. A m o n g these
services, access to formal banking services-an essential basic service, is severely
limited.
There has been an ou tstanding fact in banking industry that, w hile the urban areas
seem h av in g b eco m e saturated with banking services, M ajority o f co m m u n ities
residing in the rural areas are still un-banked. There has been grow ing dem an d for
banking services in the rural areas, especially the credit needed for production and
consum ption. N evertheless, the existing formal banking sector does not satisfy these
dem ands. This ab sen ce o f formal banking supply bring about m an y b orrow ers have
to turn to informal loan sources (private m oneylenders, p a w n b ro k e r’s, relatives,
rotate savings & lending groups, etc.) to meet their financial needs. It has been
estim ated that only 3 0 % 2 o f the farmers in rural V ietnam have had access to formal
credit and about only

6% 3

o f the population m aintaining bank accounts.

1 Voice o f Vietnam: 2008/200812/100718. vov
Previor

I 7’.S’(

Survey on micro credit, 2 0 0 page 3



'. WSDI: Working with Savings Banks in order to double the numbers o f savings accounts
fo r the poor (Project with Vietnam Postal Savings Service, 2010)


H ow ever, these plans can not be realized in the short period o f time. The reason is
this e x p an d in g plan will cost banks very huge initial investm ent for offices. In
additional, it will bear num erous operational expenses for m aintaining a w idespread
branch system in the rural areas.
b) T h e second m ain reason is the high transaction costs for executing small scale o f
banking transaction. This is because the nature o f low level o f econom ic activities,
low p opu latio n density that result in dispersed dem and for services that causing
high inform ation collection. These conditions m ake rural b anking offering less
attractive for profit-driven financial institutions.
c) T h e third m ain reason related to seasonality and co-variance o f agricultural and
farm produ ction activities, which lower margins and increase the risks related to
rural banking business.
d) T he fourth main reason com es from the custom ers characteristics. M ost o f the
rural custom ers possess low education background. T h ey also cannot provide
standard collateral against the loan as required by the financial institutions.
D ue to ab ov e un favorable conditions for developing rural banking services, so far,
formal b ank ing service providers have only concentrated their capability on serving
urban m arkets. U ntil the urban banking m arket com petition becom in g more and
m ore hard, ban k s are planning to m ove their concentration from only the urban to
the rural m arket. H ow ever, this m ovem ent can not be realized in the short term due
to difficulties com e from the huge initial investm ent needed to build up platform for
service offering.

1.1.3. Inform al market fo r banking service, especially fo r credit service in the
rural areas has been existing & flourishing

advantage. U ntil now , the services offered through the postal savings offices are
still very m o n o ton ous, only am on g simple individual savings products. It m eans that
V PSC has barely begun to deliver its potential. This is a w aste o f national resources
for eco no m ic and social development.

1 WSBI: Working with Savings Banks in order to double the numbers o f savings accounts
fo r the po o r (Project with Vietnam Postal Savings S e n ’ice, 2010)

4


1.2.

O b jectiv es & A im s

The aim o f this thesis is to provide a deep analysis on how to take full potential and
current com p etitive advantages o f V ietnam postal savings service C o m p a n y in
developing and o ffering rural banking services to m eet the grow ing dem an d for the
services by rural com m unities.
To realize this aim, the thesis recognizes the key objectives as follows:
a) To explain the absence o f formal rural banking services on contrary to the
existing & flourishing o f the informal banking services. T hese situations then w ould
give exp lanatory w hy the rural com m unities are generally excluded from the formal
banking sector;
b) To en hance the understanding that the rural households, even the p oor and lowincom e h ou seh olds do have dem and for banking services, especially that they can
afford the com m ercial cost o f formal banking services;
c) To specify the potential and com petitive advantages o f V ietnam Postal savings
service C o m p a n y in developing and offering rural banking services;
d) To explain ho w to m ake use o f the existing international success m odels in
developing rural b an k in g services, as well as the innovative b anking technologies


Being co nfo rm able and satisfied to rural clients’ dem and.

g) To system atize argum ents on the rural banking services that needed by rural
banking service providers as well as banking policies m akers in the process o f
developing, m a n ag in g and controlling banking activities.
1.3. T hesis Q u estio n s
There are so m e m a in questions raised by the thesis. A t the sam e time, the thesis is
going to find out the answ ers for these questions. T he questions are:
a) W h y bank s did not pay m uch attention on the rural m arket while these areas
have alw ays been in the situation o f serious shortage o f credit & other
ban k in g services?
b) W h at are the negative impacts o f the existing & flourishing o f the unofficial
credit o v er the rural areas and by what w ay to replace it?
c) W hat kind o f service features that the service providers m ust pay much
attention on & by w hat solutions to operate the rural b an king services that
cou ld guarantee limiting the risks, reducing the operation cost and ensuring
the profitability?

6


1.4. A p p r o a c h e s
The goals o f the thesis are realized by em ploying both theoretical and empirical
analyses. The theoretical analysis consists o f literature review and analyzing on
related subjects. The literature reviews are the desk-based research which uses
various sources o f secondary data and inform ation such as books, journals, w orking
papers, reports from the library, internet and discussions.
T he em pirical an alyses consist o f analysis on existing international success models
in dev elo p in g and offering rural banking services. Case studies analysis based on

the thesis expresses the reality o f need for rural b an king services in general, the
need for loan by rural h o useholds’ small-scale econ om ic activities in particular.
It is expected to contribute a feasible solution to take full advantages and convert
the potential o f the existing Postal Savings Service System into business results. At
the sam e tim e, it further realizing the original purpose o f launching the Postal
Savings Service by the G overnm ent.
1.7. E xpected R esults
The first exp ected result o f this thesis is to identify the business opportunities in
developing and offering rural banking through V ietnam Postal S avings Service
system.
At the sam e tim e, the second expected result is to propose concrete p roducts and to
specify solutions to operate the services that guarantee limiting the risks together
w ith ensuring the profitability.
The thesis d o cu m en t m ust include draft description o f product offered, key features
and solutions to be taken into consideration w hile designing products & designing
procedures in offering and operating the services so that it is con form ab le to the

8


rural m arket d e m a n d as well as the unique characteristics o f V ietnam postal savings
service.
1.8. S tru ctu re o f the thesis
The thesis is structured into 5 chapters including this chapter.
C hap ter 2 rev iew s the relevant literature relating to rural banking in general, its
com ponents and specific characteristics in particular.
C hap ter 3 focuses on the rural banking market in Vietnam. This C hapter show s out
the excessive dem an d for rural banking services. The chapter also analyses the
supply side and specifies the main constraints for access to formal rural banking
services an d the m ain characteristics o f agricultural activities that rural banking

Rural b ank ing is a form o f financial services that provide solution to the essential
basic financial needs o f the com m unities residing in the rural a re a s 1.
In natural, rural b an king has its ow n objectives as follows:
a) P overty alleviation objective: to uplift the m ass o f population residing in the
rural areas w ho are currently below the poverty line by extending credit to the
sm allest scale eco no m ic activity;
b) F inancial objective: involve increasing the accessibility o f banking services to
the rural p oor and households in a com m ercially sustainable manner.
M ajority o f the rural population in developing countries depends on agriculture for
survival. A s a eco n o m ic unit, rural households need b an king services to accum ulate
assets; to finance production activities; to cov er consum ption; and to execute
paym ent transactions. Rural financial institutions thus often provide services for
activities related to agriculture, such as micro accum ulation savings for future
spending, input supply, production, or distribution and m arketing o f agricultural
products. Beside, rural financial

institutions also provide co nsu m er credit to

purchase g oods such as furniture, appliances and loans for em ergency cash need in
case there are unaffordable situations such as medical care, expenses for education,
w edding cerem ony, and so on.
As pointed out above, providing banking services to the agricultural sector involves
specific

challenges

related

to


2.2.1.1. Savings
The rapid eco n o m ic g row th over the past few years has im proved living standard o f
rural h ou seholds significantly. Thanks to this, there are increasing dem ands by rural
households to accum u late assets and m anage risk. Savings is one o f important tool
for that. S avings assist the rural population in reducing vulnerability to risks,
planning m o re reliably for the future and saving for up co m in g investments, as well
as sm o othing out irregular income flows and covering unexpected expenses.
The p ro m o tio n o f savings habit o f rural population can help sustain a solid rural
savings base, w hich provides a significant basic for rural investm ent and rural
econom ic d ev elo p m en t as it helps alleviate the rural are a s’ depen den cy on state
investment. E vid en ce show s that the accum ulation o f savings help creates a internal
capital base that m akes households business less depend ent on external capital and
more resistant to capital market fluctuation.
The question n o w is w hether rural population in developing countries can actually
save?
M an y research sh o w s that the global poor and rural households require savings
instrum ents as dearly as credit. M oreover, deposits are the best w ay to fund b an k s’
lending activities. A sound financial institution is about building sound and
transparent institutions that m ediate local funds to build local econom ies. In the

11


view o f the bank, to protect and encourage rural savings entail not only civic duty to
the more vuln erable rural population, but it is also an expression o f a moral
obligation to help rural com m unities to use accum ulated resources wisely.
A ccording to various studies, the rural areas provide substantial deposits to the
banking system o f the country. Such mobilization o f deposits in rural areas could be
m uch greater if the banks' presence in these areas w as bigger.
H ow ever, m a n y researches show ed out that, rural households still have limited