The consumer class is growing rapidly in Vietnam, but the accessibility of financial services remains low

Given high internet penetration rates and the wide use of smartphones, it is not surprising that people are moving from traditional to alternative forms of lending.

Stepping on the growth path

Vietnam has shown dynamic improvement of living standards.

Supported by the growth of the economically secure and global middle class, poverty reduced from 20.7 per cent in 2010 to 9.8 per cent in 2016. In turn, it means that more than 70 per cent of Vietnamese can cover daily expenses, cope with temporary loss or decrease in income, as well as afford some non-essential goods and services.

Such an increase in domestic demands will only facilitate the growth of the Vietnamese economy. However, despite some success, financial services are still hardly accessible in Vietnam.

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In 2017, only 30.9 per cent of adults had an account at a financial institution and bank loans were not widespread. It means that it is still challenging for people to invest in their future and cover urgent and unforeseen expenses.

According to the World Bank, the difficulty of reaching financial services is the main reason for their rare use. The demand for finance from the population exceeds the supply also due to the complexity of assessing the solvency. Therefore, banks in Vietnam lend more to the dynamically developing production and other types of business.

Facilitating financial inclusion

According to the Global Findex, 47 per cent of the world’s population borrowed from financial institutions in 2017. In Vietnam, this figure amounted to 20.4 per cent only. This proves that there is a high necessity for better financing among the local population.

Vietnamese people borrow no less than the people of developed countries. In 2017, 46.9 per cent of the Singaporean applied for a loan or credit to a financial institution, and only 3.7 per cent borrowed from relatives or friends.

The situation in Vietnam was completely different.

With the same funding needs but limited access to it, the Vietnamese had to seek financial support from family and friends. 29.5 per cent of the adult population borrowed from relatives and friends and only 21.7 per cent applied to financial institutions.

Given such a scenario plus the recent rise of fintech, it is no wonder alternative lending has managed to experience such explosive growth in Vietnam. The University of Cambridge stated that the entire market volume comprised only US$0.1 million in 2016 and has already acquired US$5.2 million in 2017.

Given the low base effect and the enormous need for finance, this fifty-two-fold increase does not seem unsurprising. Sure, the pace might slow down over time. Nevertheless, it is apparent that consumer lending in Vietnam has embarked on an alternative path.

Mobile solutions

High internet penetration and widely spread smartphones provide a prerequisite for the development of alternative lending in the country. The Global Digital Report 2019 stated that 66 per cent of the population used the Internet last year, which was more than the global rate of 57 per cent.

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At the same time, most of these people are active users of social networks, which alternative lenders can use for scoring of customers.

Moreover, the Vietnamese are active users of smartphones. 53 per cent of people had a similar device in 2017. Meanwhile, according to own statistics of Robocash Group in Southeast Asia, 85-90 per cent of borrowers apply for an online loan through a mobile phone.

The spread of alternative fintech lending in the country can also trigger the development of banking. Surely, it will not solve the issue with a high share of cash payments hindering tracking borrowers’ transactions for scoring. However, it will allow accumulating information about the discipline of customers and contributing to the development of credit bureaus.

In turn, all this will bring obvious benefits in terms of growing economic activity, give people experience in using financial products, and support the formation of financial literacy of the Vietnamese — all of which are necessary for future sustainable developments in Vietnam.

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