This paper analyzes the relationship between microfinance and poverty reduction in Vietnam. The study tests the hypothesis that access to microfinance and household economic welfare are positively related. While literature has shown that microfinance is good for microbusiness, the empirical findings vary greatly as a result of the various methodologies used to assess the impact of microfinance. In measuring household economic welfare, this paper uses expenditure indicators, including household per capita real expenditure, per capita real food expenditure and per capita nonfood expenditure. Access to microfinance is measured as the total amount of household borrowing.

The study uses cross-sectional data from Vietnamese Household Living Standard Surveys in 2008 (VHLSS2008), a national survey of 9,189 randomly selected Vietnamese households to derive empirical evidence. This paper found that household credit has a significant and positive relationship with household per capita expenditure and per capita nonfood expenditure. Moreover, household credit has a greater influence on poor households, in comparison with better-off households. The relationship between household borrowing and per capita food expenditure, however, turns negatively. These findings confirm that providing microfinance to the poor is an effective policy tool to reduce poverty. Yet, its modest marginal impact suggests that poverty alleviation programs need to refocus their attention on enhancing the efficiency and diversification of microfinance activities.