Académique Documents
Professionnel Documents
Culture Documents
DISSERTATION
Of the University of St. Gallen,
Graduate School of Business Administration,
Economics, Law and Social Sciences (HSG)
to obtain the title of
Doctor Oeconomiae
submitted by
from
St. Gallen
and
DISSERTATION
Of the University of St. Gallen,
Graduate School of Business Administration,
Economics, Law and Social Sciences (HSG)
to obtain the title of
Doctor Oeconomiae
submitted by
from
St. Gallen
and
The President:
ACKNOWLEDGEMENTS
Above all, I would like to thank my supervisor Professor Dr. Martin Hilb,
whose never-ending optimism and patience encouraged me to continue on
my path. As a lonely (re-)searcher in a vast country where the topic “New
Corporate Governance” is still unknown, I appreciate very much the fact
that Professor Hilb took the time to listen and to discuss with me many
issues that are now cropping up in this rapidly developing country and
moreover, gave me valuable advice.
I also want to express my appreciation for the teamwork of Dr. Dinh Toan
Trung and Mr. Nguyen Thanh Binh, which resulted in the translation of
the book “New Corporate Governance” by Professor Dr. Martin Hilb into
Vietnamese, and I also appreciate the many good-spirited and instructive
discussions with them concerning this topic. My special thanks also go
to Dr. Peter Mayer and Mr. Pieter Perrett, who proofread my thesis and
helped with the proper use of the English language.
II
Last but not least, I would like to thank my wife and children for their
understanding and patience with me, and my family for their trust in me,
for their unconditional love and support and for their understanding that,
during this time, I could not be physically near them.
ABBREVIATIONS
Contents
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III
Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XVII
CHAPTER 1: INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.1.3.1.6 FX reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.1.3.1.7 Fiscal revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.1.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.1.4.1 Vietnam compared with selected ASEAN countries . . 47
3.1.4.2 Key factors with positive impact on Vietnam’s growth
potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.1.4.3 Major challenges facing Vietnam . . . . . . . . . . . . . . . . . 53
3.1.4.4 Development scenarios . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.2.4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
3.2.4.1 Market penetration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.2.4.2 Rate of growth in loans and deposits . . . . . . . . . . . . . . 76
3.2.4.3 Oligopolistic banking market . . . . . . . . . . . . . . . . . . . . 76
3.2.4.4 Lending practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
3.2.4.5 Product offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
IX
4.2 First Survey: Survey about the overall situation in Vietnam . . 122
ANNEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
XII
LIST OF TABLES
LIST OF FIGURES
Figure 3-27. Relative size of top 17 CBs in term of charted capital (bn) 84
Figure 3-28. Customer segments served by types of banks . . . . . . . . . 107
Figure 3-29. Overview of Opportunities and Threats . . . . . . . . . . . . . . 116
Figure 3-30. Strengths and Weaknesses of the Banking Sector in Vietnam 117
Figure 3-31. The External Change (CHe) and the Internal Change (CHi) 118
Figure 3-32. Formulation of critical business issues . . . . . . . . . . . . . . . . 119
Figure 4-1. Structure of the thesis – overview Chapter 4 . . . . . . . . . . . 120
Figure 4-2. Personal data of the respondents . . . . . . . . . . . . . . . . . . . . 124
Figure 4-3. Status of the participated firm . . . . . . . . . . . . . . . . . . . . . . . 125
Figure 4-4. Some facts about the banks’ BoD in the Second Survey . 128
Figure 4-5. “Areas of focus” for the discussion of corporate
governance practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Figure 4-6. Involvement of the BoD and of the top management in
the strategy process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Figure 4-7. Steps in the strategy process . . . . . . . . . . . . . . . . . . . . . . . . 133
Figure 4-8. Composition of the strategy project team . . . . . . . . . . . . . 134
Figure 4-9. Strategic control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Figure 4-10. The Vietnamese boards showing the distribution
of different committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Figure 4-11. Committees at Bank2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Figure 4-12. Corporate structure of a SOCB based on the example
of Bank 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Figure 4-13. Companies in the VCCI-Survey with an internal
audit function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Figure 4-14. Companies which do not have Audit committees . . . . . . 144
Figure 4-15. Committees at the Board level . . . . . . . . . . . . . . . . . . . . . . . 148
Figure 4-16. Committees on the Top Management level . . . . . . . . . . . . 150
Figure 4-17. Risk Management Group . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Figure 4-18. Number of members of boards in Vietnam . . . . . . . . . . . . 154
Figure 4-19. Combined structure of the boards of directors . . . . . . . . . 155
Figure 4-20. Corporate culture of the questioned companies . . . . . . . . 158
Figure 4-21. The applied Management tools applied in the board
of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
XV
As a result of the imminent WTO accession and the obligations arising from
bilateral trade agreements, the government of Vietnam has realized the
compelling need to reform the economy. Vietnam has committed to move
to a market-based economy and to create a level playing field for all partici-
pants, whether state-owned or private, domestic or foreign. A goal is also set
to equitise all the remaining state-owned companies which are not defined
as strategic industries until 2010. Companies from all sectors are obliged to
strengthen their competitiveness in order to survive on the domestic busi-
ness arena and overseas markets. Such a goal will be difficult to achieve with-
out the introduction and implementation of good governance practices.
This study laid the focus on the Banking Governance in Vietnam. As this survey
was the first (Swiss) research in the Banking Sector in Vietnam, we deliber-
ately tried to span most of the corporate governance issues that are proposed
in the concept “New Corporate Governance” by Martin Hilb (2006).
The results of our research have shown that within one year, since our first
survey was conducted, there were positive developments in the field of
corporate governance in the banking sector. However, the companies have
just made the first steps into the right direction. There are still many chal-
lenges lying ahead, especially for the state-owned companies. The listed
companies, which are able to select experienced foreign companies as
strategic partners benefit from the transfer of state-of-the-art technology,
capital and modern management know how, and thus can also improve
the situation of corporate governance. In our surveys, we also revealed the
expectations of some SOCBs that the equitisation would help them to free
themselves from the tight corset of the state ownership and guidance.
CHAPTER 1: INTRODUCTION
1.1 Background
Vietnam attracts its investors to its largely untapped market with its popula-
tion of 85 million, strategic geographical position in one of the world’s most
economically dynamic regions, stable political situation, high economic
growth and low production costs. The shift from a centrally planned econ-
omy to a market economy over the last two decades is also paying off with
an average annual growth of 7 per cent. In the year to come, the country
aims to achieve growth of more than 8 per cent to bring Vietnam out of
its position as an undeveloped country. To fuel economic growth, Vietnam
needs further investment, and to attract investors it has introduced regula-
tory and institutional reforms. Accession into the WTO is an opportunity
for Vietnam to bring itself in line with common international practices and
thus open up more sectors to foreign investment. Besides, Vietnam also
aims to promote the private sector. Private sector companies tend to face a
range of obstacles in establishing and achieving growth in their businesses,
in contrast to the various privileges and forms of government assistance
enjoyed by state-owned enterprises (SOEs).
In recent years, some major strides have been made to improve the regulatory
regime and general business environment for Vietnam’s non-state sector. Most
notably, in January 2000, an epochal Enterprise Law came into effect, which
has significantly improved the business environment that envelops Vietnam’s
private companies. In particular, a lot of the “paperwork” previously required
to register a new company has been removed, and the business registration
process has been streamlined considerably. Furthermore, in December 2001,
the private sector was officially acknowledged as one of the key elements of the
national economy in amendments made by the National Assembly to Viet-
nam’s national constitution.
T
his was partly the result of an economic and business environment that, until the mid-
1990s, continued to favour the 6,000 or so companies operating in the SOE sector (Credit
Suisse, 2006).
The growth and development of the private sector in Vietnam will not
just be about increasing the cumulative number of new companies regis-
tering and operating. It is more the willingness for change. And the pace
of change needs to be accelerated parallel with the rapid growth of the
economy, the accession of Vietnam into the WTO and the threat posed by
foreign competitors.
Through initiatives such as the ASEAN Free Trade Area (AFTA), the Bilat-
eral Trade Agreement with the United States and Vietnam’s accession to
the WTO, Vietnam’s increasing integration with the global economy and
international business networks means that local companies need to be
able to compete and collaborate in both the domestic business arena and
overseas markets. This is arguably the next big challenge for the private
sector in Vietnam.
1.2 Objectives
When this study was started, Corporate Governance was a new topic in
Vietnam. At that time, the term “Corporate Governance” was not part of
the Vietnamese corporate language.
G
overnmental institutions such as the Ministry of Finance and the State Bank of Viet-
nam translated “Corporate Governance” into Vietnamese in a way that was equivalent to
“Company Management” (in Vietnamese: Quản Trị Công Ty). While translating the book
“New Corporate Governance”, by Prof. Dr. Martin Hilb, we introduced the term “Quản
Trị Hội Đồng Doanh Nghiệp” which is descriptive of the entire connotation of “Corporate
Governance” (see Hilb, Quản Trị Hội Đồng Doanh Nghiệp, 2006).
A
s part of its “Support to Industry Restructuring & Enterprise Development” (SIRED
project, Danida seeks to strengthen corporate governance practices in the fisheries sector
in Vietnam (IFC-Report, 2006).
Chapter 4 aims to find out, what the current state of the corporate situation
in Vietnam is and to make recommendations on how to improve the situation
based on certain “areas of focus” such as vision and strategy, board structure,
board culture, leadership, systems, information and communications. Chapter
4 also provides suggestions as to how the board could tackle challenges in the
board. This is based on the analysis of the current status and the future situation
under consideration of the “areas of focus”.
2.1
1.1 Governance 4.1
Back- theories Background
3.1 5.1
ground
2.2 Environment Research
Characteristics
4.5 Recommendations
3.4. SWOT / CBI
1.2 2.3 4.2
2.4 Conclusion
1.5 Conclusion
3.3
Risk
1.4
4.1 Board
4.4
3.4 Auditing Mgmt Composition
1.2 Keep it 3.2
Internal Board
Development
K controlled Board
1.1
External
Context 4.3 Feedback
Industry
Context
Research
4.4
Communi-
Summary
Controlling
cation
2.3
Board
Structure 3.3
approach
2.2
Board Board
Compensation Culture
RESEARCH METHODS
Legends:
Survey
x - Applied Desk Expert Case
xx - intensively applied of listed
research interviews studies
xxx - very intensively applied companies
4. Banks
X XXX X XXX
(based on areas of focus)
5. Implications X X X X
1.5 Conclusion
In this chapter, the background, but also the research objectives, research
approach, and the research structure of the thesis are presented. In the
following chapters, we will discuss in-depth the content and results of the
research.
In this section, the theoretical basis is built for the secondary research
and primary research which will be discussed in the Chapter 3 and
Chapter 4. The research will focus on the issues of corporate gover-
nance in the Banking sector.
2.1
1.1 Governance
Back- theories
ground
2.2
Characteristics
1.2 2.3
2.4 Conclusion
1.5 Conclusion
1.4
4.1 Board
Auditing Mgmt Composition
1.2 3.4 3.2
Keep it
Internal Board
Development
K controlled Board
1.1
External
Context 4.3 Feedback
Context
Research
4.4
Communi-
Controlling
cation
2.3
Board
Structure 3.3
approach
2.2
Board Board
Compensation Culture
Charles Darwin, the author of the Origin of the Species, said in the 19th
century that “It is not the strongest that survive, it is not the most intel-
ligent, it is those most responsive to change” (Charles Darwin, cited in
ING-Report, 2006).
C
ompany names that often come to mind are for example Enron, Arthur Andersen,
Daewoo, Xerox, Shell, and AIG, among others. Recently, in the high-profile trial of former
Enron executives for fraud and conspiracy, they had been found guilty.
Let us turn next to the governance theories and the governance practice in
Vietnam in order to identify a framework for the research.
A
number of high profile cases have received a lot of attention in the national press over
the past few years. They have included some of the largest and best known companies in
the country, such as Vietnam Airlines, Seaprodex, Minh Phung, Vietsovpetro, Viet Hoa
Bank, Saigon Beer.
I n Germany, large public companies tend to have a two-tier board system, comprising
of a non-executive supervisory board and an executive board. This contrasts with the
single board of directors system adopted in the US and UK, which has the primary role
of protecting the shareholders’ interest (IFC-Report, 2006). In the finance literature,
corporate governance deals “with the ways in which suppliers of finance to corporations
assure themselves of getting a return on their investment” (Shleifer and Vishny 1997,
cited in Wang, 2006); in the economics literature, corporate governance is defined as
addressing an “agency problem, or conflict of interest, involving members of the orga-
nization … [where] transaction costs are such that this agency problem cannot be dealt
with through a contract” (Hart 1995, cited in Wang, 2006); according to the Cadbury
Report (1992), corporate governance is defined as “… the system by which companies
are directed and controlled”.
A
gency theory paradigm arises from the fields of finance and economics, whereas trans-
action cost theory arises from economics and organizational theory; stakeholder theory
and institution theory arise from a more social-orientated perspective on corporate
governance (Wang, 2006).
According to the agency theory, the shareholder who is the owner of the
companies delegates day-to-day decision making in the company to the
directors, who are the shareholder’s agents. The problem that arises as a
result of this system of corporate ownership is that the agents do not neces-
sarily make decisions in the best interests of the principal. The potential
for the personal interests of a company’s senior managers can diverge from
those of its shareholders.
Where the managers and the owners of a company differ, as they often do
in larger firms with a wide shareholder base, there is a possibility that their
respective interests may become misaligned.
One of the shortcomings of the agency theory is that only the needs of top
executives and shareholders were taken into account, but not the justifiable
needs of employees, customers or the environment (Hilb, 2006).
Transaction costs theory is based on the fact that firms have become so large
that they substitute for the market in determining the allocation of resources.
The firm was considered not as an impersonal economic unit in a world of
perfect markets and equilibrium but rather as an organisation comprising of
people with differing views and objectives (Solomon, 2004).
Managers of the companies are defined as ‘agents’ and the shareholders as the ‘principals’.
10 In Vietnam, enterprises have Inspection Committees. According to the Enterprise Law
(1999), the Inspection Committee is responsible for supervising all operations and busi-
ness activities of the Company on behalf of the shareholders. The law also stipulates that
an Inspection Committee is required for any company with more than 11 shareholders. In
other countries there is often an Audit Committee, a Nominations Committee, and/or a
Compensation Committee. These are usually chaired by independent directors.
10
11 Hilb (2006) adopts both the global relevance of aspects of the Anglo-American board best
practices, and the local governance best practices evident in the approaches adopted by
many international firms operating in countries around the world.
12
13 The two-tier system has developed in the continental European environment character-
ized majority shareholders of companies, a greater role for the participants themselves, a
less liquid capital market, etc., while one-tier system has been created in the Anglo-Saxon
environment characterized by dispersed share structures, an active capital and securities
market. The one-tier system has two bodies of governance. They are the general meeting
of shareholders, and the Board of Directors. There is no universal answer to the question
of which governance system is better. Different models of governance have been formed
in different economic and social system as well as through different political orientation.
14 The Inspection Committee in Vietnamese Governance structure is somewhat comparable
to the German supervisory Board (the Willam Davidson Institute at the University of
Michigan, 2005)
13
STATE
Board of
Management
Inspection
Committee
Top
Management
State-owned
Corporation
The state
There are two types of SOEs in Vietnam: Most of the SOEs in Vietnam are
members of the general corporations15 owned by central government (see
Figure 2-3.) or owned by provincial or municipal government.
15 Such as Construction, Textiles & Garments, Cement, Oil & Gas, Telecommunication.
14
Central
Government
Administrative
relationship, the body is Regulatory relationship,
directly responsible for making and observing
‘taking care’ of the regulations
enterprise
General Corporation
Board of
Management
Inspection
Committee
Management
team
Members SOEs
The board
According to the amended SOE Law of 2003, the Board has the right
to make every decision pertaining to the business of the corporation.
However, the Law also states that the Board can only make those decisions
that do not come under the rights and responsibilities of other state repre-
sentatives and which are not assigned to other government agencies and
organisations. The ownership rights of SOEs are currently exercised by
various government agencies. For example, the Ministry of Finance acts as
the representative for the state’s capital, and is responsible for the admin-
istration of that capital. The ‘supervisory ministry’, which is normally the
ministry overseeing the relevant sector, such as the Ministry of Construc-
tion, Ministry for Agriculture, in which the corporation operates, is respon-
sible for the establishment, dissolution, personnel, and overall supervision
of the enterprise (see Amended SOE Law, 2003)
Under the Enterprise Law, only joint stock firms with 11 or more share-
holders must establish an Inspection Committee. In theory, the Inspec-
tion Committee should be appointed by shareholders at the annual general
meeting. But in practice, the appointment of the inspection committee can
be made by the Board of Management. The reason is that the Board of
Management members are also the owners or majority shareholders.
Although not required under the Enterprise Law, there are a number of
other functions that should be included within the Inspection Committee’s
responsibilities as part of a company’s pursuit of good corporate gover-
nance, such as ensuring firm’s compliance with existing laws and regu-
lations, overseeing major transactions or investments, overseeing major
16
Due to the lack of expertise and governance capacity the government agen-
cies have chosen a so-called ‘laid back’ administrative approach of setting
‘growth’ objectives for SOEs. According to this approach, revenues or prof-
its this year must be higher than that of last year, or the company must
grow by a fixed percentage every year, regardless of market condition.
There are also penalties for the general director if the SOE does not meet
the objectives set out by the General Corporation and government institu-
tions.18 To avoid the penalties, the underlying rule is that revenues or prof-
its this year must be higher than last year. In other word, SOEs are thriving
to make no loss, but only a little profit. This ‘laid back’ administrative
approach may also prompt attempts to manipulate the financial accounts,
so that the general directors can retain their position.
18 According to the State Enterprise Law, a general director can be dismissed if the SOE
incurs losses for two consecutive years. But there are also incentives for the general direc-
tor if the SOE meets or exceeds the set targets. In fact, the incentives for entrepreneurial
activities under the ‘carrot and stick’ system do not exist, because the SOE general direc-
tor is rewarded little if the enterprise earns a lot of profit, but can face severe punish-
ment if the enterprise makes a loss. Such regulation certainly would not motivate an SOE
general director to invest for the long term development of the enterprise.
17
The role of the Board in many SOEs is therefore not clear, and to a great
extent, limited. For SOEs that belong to General Corporations, they not
only report directly to the ‘mother’ entity, the General Corporation; but
also at the same time have to deal directly with various government agen-
cies on a number of important aspects of their business.
18
Due to the current political system (see 3.1.1.2 Political system) and special
cultural characteristics where the Vietnamese strive for harmony in the
collective (see also 3.1.2.4 The influence of cultural factors) we decided to
choose the approach of “New Corporate Governance” proposed by Hilb
(2006) as a framework for this dissertation. The “New Corporate Gover-
nance” recommends bringing added value simultaneously to shareholders,
customers, employees, and the public (Hilb, 2006).19
19 We are aware of the fact that there is a growing perception among theorists and practitio-
ners that the paradigm of shareholder value and the paradigm of stakeholder value may
be compatible (see also Wheeler et al., 2002). For example, ignoring the needs of stake-
holders can lead to lower financial performance; creating value for stakeholders through
business focus on maximizing value for all stakeholders may be able to create financial
value for shareholders.
19
We differ here seven “areas of focus” that will serve as leading dimen-
sions in the primary research (see Chapter 4): Vision and strategy, board
structure, leadership, board culture, Systems, Processes, Information and
Communication.
2.4 Conclusion
In this chapter, an analysis of the environment, the industry and the market
of the banking sector is carried out. This provides a general overview of
the situation, and the challenges the country and, more specifically, the
banking sector in Vietnam is facing. The results of this analysis will serve
as a basis for the survey about corporate governance in the banking sector
which is discussed in Chapter 4.
2.1
1.1 Governance
Back- theories
3.1
ground
2.2 Environment
Characteristics
3.4. SWOT / CBI
1.2 2.3
2.4 Conclusion
1.5 Conclusion
3.3
Risk
1.4
4.1 Board
3.4 Auditing Mgmt Composition
1.2 Keep it 3.2
Internal Board
Development
K controlled Board
1.1
External
Context 4.3 Feedback
Industry
Context
Research
4.4
Communi-
Controlling
cation
2.3
Board
Structure 3.3
approach
2.2
Board Board
Compensation Culture
With the start of the reforms of the communist country Vietnam in 1979
there were three main parts, the agrarian and industrial reform, the Doimoi
policy and the introduction of macro-economic institutions (Dinh, 1997).
From 1986 the market reforms started with the new general secretary
Nguyen Van Linh after the death of the long-time, “all-powerful” Commu-
nist party leader Le Duan.
The third stage targeted the fiscal, monetary and credit supply and the
ownership of land which was not allowed until 1988. In spring 1989 the
banking and finance reforms aimed to combat the hyperinflation rates,
eliminate the causes of speculative pricing and to find “real market prices”,
set fiscally sound interest rates and liberalize the foreign exchange system
in order to encourage foreign trade.
The long lasting Cambodia War (from 1978) ended in 1989 and with
the demise of the Communist block, due to Glasnost and Perestroika
in Russia, Vietnam and its Communist Party were urged to find other
trade partners than the Soviet Union or other socialist countries. Tariffs
appeared to be an issue and in 1990 a new duty law was introduced which
aimed to expand foreign trade. In 1994 the US Embargo was lifted and
in 2002 a trade agreement with the USA was reached. In December 2006,
the U.S. Congress approved Permanent Normal Trade Relations (PNTR)
for Vietnam.
22
21 Many business people point to the successes of China, which has chosen to open its
economy without opening up its political system as worth emulating, rather than Russia,
which attempted to liberalise its political system without first opening up the economy.
23
High
2
Switzerland
Japan
1
Vietnam
United States
0
China
-1
Pakistan
Sri Lanka
-2
-3
Low 213 Countries
military will frequently have a lower cost of capital or could be given pref-
erential terms on which to compete. As such it will be interesting to watch
how the role of the military evolves over the next decade. In other econo-
mies around the region it has been tough to balance vested interests with
creating a level playing field – especially where the military has significant
political influence.
Vietnam’s economy is governed by several key laws that define the legal
forms of business entities as well as their financing. These laws are (The
William Davidson Institute, 2005):
24 Fusion of the Foreign and Domestic Laws on Investment. If the new Common Invest-
ment Law follows the trend, it will undoubtedly loosen restrictions on foreign investment
and capitulate to some demands for foreign investment liberalization under the WTO
negotiation.
25
A new Bankruptcy Law25 was enforced in October 2004. The earlier law
was ineffective and only 191 bankruptcies were filed over a 9 year period:
the law clarifies specific procedures, such as liquidation rights between
liabilities and equity.
The relatively uniform spread of economic prosperity has meant that there
are, so far, few manifestations of tension caused by disparate economic
growth. The World Bank has calculated Vietnam’s Gini Index, which
measures the disparity between rich and poor, as among the lowest in
Southeast Asia. Intraregional disparities in income are not as pronounced
as those in China, nor has there been any wide divergence in rural and
urban incomes, as with India (CLSA, 2006, 12).
26 T his reflects the typical pattern seen in Asian and other countries, where rapidly rising
incomes lead parents to have less children and increase the quantity and quality of
expenditure on each one (HSBC, 2006).
26
South East
Central highland
North West
North East
0 10 20 30 40 50 60
Vietnam has, so far, benefited from a stable social fabric, with inter-regional
and rural-urban differences so pronounced. Poverty levels have come
down across regions over the past decade. However, it may be too early to
judge the spread of economic growth. Indications of social inequality are
beginning to be apparent, as illustrated by the national Gini coefficient,
which rose from 0.34 in 1992/93 to 0.35 in 1997/98 and to 0.37 in 2002
(World Bank, 2004).
3.1.2.3 Education
With a strong focus on literacy and education, Vietnam has been able
to reach a literacy rate of over 90%. Primary school (five years of formal
schooling) is compulsory and 80% of pupils go on to secondary school. For
27
the elite, there are private and international schools.27 In public schools,
children are under considerable academic pressure, with little time to
develop other skills and interests. In international schools, children can
play and learn at the same time.28
4
(Govt expenditure as % GDP)
3
2 Education
Health
1
0
2001 2002 2003 2004 2005
Figure 3-5. Public investment in social sector has increased since 2004
(Source: IMF, 2006)
28 Some debates are the same the world over, whether it is the US or China or Vietnam.
28
In various MNCs and local companies, there are professionals who had
returned to the country after securing higher qualifications from over-
seas universities - 80% of students who go abroad for higher education
return to work in Vietnam, attracted by better job opportunities and a
more rewarding life in familiar environs.
The desire for higher education is a shared value in most families, and
education is seen as the passport to a better life. There is a strong belief
according to Confucianism that education drives the future of children
(Dinh, 1997).
The culture of Vietnam is one of the oldest in the Southeast Asia region.
The early influences of the Austro-Pacific culture before 111 BC are
evidenced by the multiculturalism of the Vietnamese people. The matriar-
chal family structure is widespread in the North East and Northern Delta
region of Vietnam (Weggel, 1992). This is where the culture of Vietnam
originated in the very early time. Hence, the position of women in the
matriarchal society of Vietnam is stronger than in neighbouring countries
(Weggel, 1992).
Despite a general Vietnamese culture that all Vietnamese share, there are
considerable differences between different regions of Vietnam which have
emerged due to southward expansion and later, exposure to the West; most
29 Vietnam belongs to the so-called “Chopstick Culture” that includes countries such as
China, Vietnam, Korea and Japan.
29
Finally, the Western cultural influence started in the 16th century with
the arrival of the Catholic missionaries from Spain, Portugal and France,
continuing in the 19th century when Vietnam became a French colony.
The Latin alphabet, which nowadays proves to be an advantage for the
Vietnamese, was introduced in the 16th century. From around the mid
19th century, The Catholic Church and the French brought the knowledge
of natural sciences, technology, the French civilization and language. Most
recently, Leninism-Marxism was introduced by the Soviet Union and the
American way of living by the USA (Dinh, 1997).
Taoism
Budd ism
hism ucian
Conf
Vietnamese
Culture
Hi
ism
nd
lic
uis
tho
m
Ca
The Vietnamese are very diligent, live in large families, show gratefulness
through reciprocity and follow the Yin (female)-Yang (male) principle
where the Yang dominates slightly. Furthermore, Vietnamese are frugal,
are risk takers, want recognition for achievement, endeavour to resolve
conflicts peacefully and strive for harmony in the collective (Dinh, 1997).
Time has a different value for Vietnamese and being on time is less impor-
tant than to “lose face” (Weggel, 1992). Short term planning and impro-
visation is common and flexibility is necessary as plans may change due
to ‘force majeure’. Due to the high population density, especially in Viet-
namese urban areas, proximity is common and privacy is not given (Hall,
2000). While people in Western countries separate business and private
issues, Vietnamese do not. The principle of reciprocity – to give back – is a
strong part of culture. Relationships matter and communication is crucial
with focus on personal relations.
30 Interviews with Dr. Le Manh That, Vice Rector of the Vietnam Buddhist University.
31 After having regained independence from the colonial power China in the 10th century,
Vietnam had to struggle to push back successfully the aggressive invasions of many world
powers like Mongolia, then again China [in the Ming and Ching Dynasty], Siam, Japan,
France and the US.
31
Economic growth has been steady, especially in the last five years, and is
expected to continue in the same mode with the government expecting
real GDP growth of around 8.5 % on average in the forthcoming years.
This pace of growth is fairly consistent across different sectors.
In 2006, the gross value of industrial output rose by 15.4% year on year;
slightly slower than the pace of growth recorded in 2005. The growth of
output was particularly rapid for private sector industrial firms (up by
21.6% y-o-y), ahead of foreign-invested firms (14.9%) and state-owned
firms (11.8%). Industrial growth has been broadly based, in terms of both
region and industry (GSO, 2007).
12.00
20
10
0
1990 1995 2000 2001 2002 2003 2004
32 In comparison, China has reduced its share of the rural population from 76.3% in 1985 to
58% today, squeezing agriculture’s share of GDP to below 15%.
33
As a net crude oil exporter, Vietnam’s trade balance has benefited from the
rise in crude oil prices, despite a dependence on imported oil products.
While the situation may deteriorate in the short term in nominal terms
due to the higher-value added of petrol and diesel, growth in domestic
demand for fuel is unlikely to outpace oil production within the next five
years. This net oil position could even improve once the delayed US$ 2.5
billion Dung Quat refinery becomes operational as now expected in 2009.
While direct net trade balance is positive, Vietnam trade could still be
negatively affected if high global prices weaken external demand, although
this would be a condition that would impact on all of Asia’s exporters.
33 Even then, Vietnam will still lag behind Asia’s other major exporters in terms of export
volumes, though overtaking the Philippines as the tenth ranked exporter in Non-Japan
Asia is feasible within the next five years.
34
need to move up the export ladder and create higher value-added activi-
ties to its production base. This will mean heavy investment from either
domestic sources or FDI, which are likely to weigh on the current account
balance in the near-term.
3.1.3.1.4 Inflation
Inflation has been a source of concern. However, since 2004 it has remained
quite stable at an average of 7.9 % a year. Housing costs are increasing
at a fast pace. The major risk is oil price pressure. International oil price
increases have yet to be fully reflected in domestic fuel prices, as the govern-
ment has been slow to raise domestic retail prices. Instead, the state-owned
distributor is being forced to absorb much of the price rises, which, in turn,
is being compensated by government transfers. However, this seems to be
unsustainable, as domestic fuel prices have now risen by 120% since the
beginning of 2004 (GSO, 2007). Without any refining capacity, Vietnam
must import all its petroleum and diesel products. Though Vietnam has a
relatively lower oil dependency compared to many of its neighbours, infla-
tion due to higher imported oil prices could force aggressive monetary
policy tightening in the years to come.
inflation rate over the next year or two in order to maintain GDP growth
at about 8% y-o-y or better. Consequently, an aggressive policy response to
higher oil prices is unlikely.
3.1.3.1.6 FX reserves
FX reserves have been growing steadily, especially over the past two years
and the government seems to be preparing to allow state companies to tap
offshore financing within the next few years to fund capital investment.
Even with an escalation in foreign borrowing, Vietnam’s external debt to
GDP ratio (35% in 2006) is within manageable levels and is even likely
to fall for another year or two (GSO, 2007). Government finances look
reasonably stable.
36
Strong revenue growth in 2006 and 2007 from VAT and oil revenues are
helping to offset unexpected expenditures from subsidizing losses of the
state-owned oil distributor.
Budget balance (VND bn) As % of GDP (RHS) 2003 2004E 2005 (budget)
0 0.0
-2,000 -0.5 Fiscal balance -12,043 -11,575 -12,800
-4,000 -1.0
Total financing 12,044 11,575 12,800
Domestic financing 7,200 5,653 9,998
-6,000 -1.5
Treasury bill Insurance 7,200 5,653 9,998
-8,000 -2.0
Issued 22,476 23,093 33,250
-10,000 -2.5
Repayments 15,276 17,440 23,252
-12,000 -3.0 Financing abroad 4,844 5,922 2,802
-14,000 -3.5 Total foreign borrowing 7,654 8,788 7,500
1999 2000 2001 2002 2003 2004 2005E
Amortization 2,810 2,866 4,698
As a net oil exporter, the higher oil prices meant that oil-related revenue
contributions to the fiscal budget ran almost 50% higher than budgeted in
2004 and 2005. Revenues from oil production and taxes account for about
28% of the total fiscal revenue. While the government is likely to continue
posting a fiscal deficit for the foreseeable future, the shortfall is becoming
more manageable, as its ratio to GDP has declined for three consecutive
years and likely to fall again this year (CSFB, 2006).
Expenditure may rise in the next few years from a phasing in of civil service
pay increases, infrastructure spending and recapitalization costs from the
SOEs and banking sectors. However, efforts to restructure the tax system
and increased compliance, plus improved profitability (or reduced losses
by SOEs), should help keep the budget deficit below 2% of GDP over the
medium term (CSFB, 2006).
37
The establishment of the Enterprise Law in 2000 set the stage for the rapid
growth that has taken place in the private sector over the last five years. The
rise of the private sector (both domestic and foreign), which now makes up
two-thirds of the overall economic output has been key to the transforma-
tion of Vietnam’s economy. From less than 100 private companies when the
new law came into effect, there are now more than 200,000 and the number
continues to expand. Many of these are small scale and, essentially, family
run businesses, in part because of the difficulty in accessing loan capital
from the banks. Their share of industrial output is about 75% - up 25 %
over the past ten years. This is a reflection not only of the rapid increase
in the number of new private enterprises and privatisations, but also their
increased efficiencies. Furthermore, the private sector employs 90% of the
total workforce today and generates the overwhelming majority of the 1.5
million new jobs needed each year. Clearly, the private sector is not only a
crucial economic pillar but also a social imperative (Merrill Lynch, 2006).
34 In August 2006, during a conference entitled “Investing in Vietnam”, the new Prime Minis-
ter Nguyen Tan Dung gave a speech that set out the main thrust of future economic policy
centring on four major tasks deemed necessary to maintain a vigorous rate of economic
growth between now and 2010 (VET, August 2006).
38
12
10.2 Hotels & restaurant 7% Mining 8%
10 Infrastruture 2%
Other services 6%
8
6.8
Real estate &
6 costrn 13%
2.9 3.3 3 3.2 4.5
4
Transport &
2 Comm 12%
0 Agriculture,
2000 01 02 03 04 05 06 Forestry, Fisheries 5% Manufacturing 47%
The Japanese have been amongst the largest investors. Other key sources
of investment have been Korea, Hong Kong, Taiwan and Singapore. The
recent Memorandum of Understanding signed with Intel, for an estimated
commitment of more than US$ 1.6 billion, would be the single largest tech-
nology investment in the country. In combination with domestic capex
39
this has helped to push the overall ratio of investment to GDP to over 35
% (VIR, 16.03.2007). This is the second highest ratio across the whole of
non-Japan Asia.
Around 38 % of total FDI commitments were destined for the two south-
ern industrial provinces of Dong Nai and Binh Duong, whereas the inflows
to Hanoi and HCMC, traditionally major destinations for FDI, were more
modest. Around 60% of investment is focused on light industrial projects
(GSO, 2007), where the payoff in terms of higher output and employment
is relatively rapid.
1200
800
400
0
2000 2001 2002 2003 2004 2005 2006
In tandem with this there have been important revisions to foreign owner-
ship restrictions that are reminiscent of what we have seen across markets
such as Thailand and Taiwan over the past decade. Private companies can
be 100% foreign owned but for listed companies this is limited to 49% -
prior to October 2005 it was even lower at 30%.
The new Enterprise Law 37 requires that all state owned enterprises to
become incorporated within four years. At the same time the govern-
ment is also setting up a Temasek-type asset holding company to
accommodate all the residual holdings. An important element of these
IPO’s is the allocation of stock to management and employees as the
joint stock entity is created – this can be as much as 30% of the total
shares issued. This provides much of the liquidity that passes through
the OTC market and provides a potential source of stock for institu-
tional investors to access.
Vietnam’s restructuring story is ongoing and the next stage is being inspired
by the World Trade Organization accession. The WTO accession process
has demonstrated much of the reform commitment of Vietnam in the past
few years, as the government has been very aggressive in restructuring the
economy to conform to most WTO conditions.38
38 The National Assembly approved 12 bills at its session in November 2006, which completed
23 new or revised laws introduced since 2002 to meet WTO requirements.
Bond market
help investors to price bonds accurately. Such an agency could also rate
municipal bonds.40
Vietnam’s first stock market has only been operational since 2000, and has
seen the number of companies listed grow from just 2 at the time of its
launch, to 195 firms by March 2007 (SSC, March 2007). Officially known
as the “Securities Trading Center” (STC), trading commenced in July 2000.
The STC trades both equity securities (i.e. company shares) and fixed
income securities (i.e. bonds). Crucially, of the 22 companies listed at the
time of writing, all are former SOEs that floated public share issues as part
of the official equitization programme, well before listing on the STC. In
this respect, Vietnam’s stock market is not yet serving the important role
of being a vehicle for local companies to raise equity capital through public
share issues, although this should, hopefully, change in the near future.
Vietnam’s STC is unlike many stock markets in that it is owned and oper-
ated by the government, rather like a public utility, instead of being owned
by its members or investors (such as banks, securities companies, or other
financial institutions).
For the stock market to develop in the long-term it needs a more robust
community of investors, with different demands and investment strategies
for listed equities. Therefore, a welcome development was the licensing of
the first local investment fund management companies.41 Both local and
foreign investors are expected to invest in such funds, which will be able
to invest in both listed and unlisted companies, as well as fixed income
instruments such as bonds.
40 Recently the HCMC’s Committee asked for the interest rate premium (over government
bonds) on its municipal bonds to be raised from 0.2% to 0.3% per year, in a bid to make
its paper more attractive.
41 The first of these, VietFund Management is a joint venture between local Sacombank and
foreign-owned Dragon Capital, with a 30%-70% shareholding structure respectively. Viet-
Fund launched - and received approval from the SSC for Vietnam’s first official onshore
investment fund (VF1), with capital of around VND 200-250 billion. VF1 is expected to
list on the STC (DragonCapital, 2006).
45
Foreign investors
The aggregate value of the listed companies› shares trading on the STC (i.e.
the total ‹market capitalization›) was roughly US$ 22 billion in mid-May 2007
(SSC, May 2007) - up from a low of roughly US$ 110 million at the end of
43 The SSC is reportedly aiming for 500 companies listed on the STC by the end of 2010
(VietnamNet, 12 October 2006).
44 In some respects this echoes a similar situation in China, where only 80 or so of the
roughly 1,200-plus companies listed on the Shanghai and Shenzhen stock exchanges are
private companies; the rest being state-owned enterprises (Freeman, 2004).
46
2001. At present, the total market capitalization of the STC (excluding bonds)
is equivalent to just 23 percent of the country›s GDP (SSC, May 2007).
Venture capital
Although roughly nine years older than the stock market, the venture
capital industry in Vietnam is a relatively recent phenomenon.45 At the
beginning of the 1990s, the macro-economic and business growth fore-
casts for Vietnam (and Southeast Asia in general) were very positive, and
institutional investors specializing in the emerging markets started to
focus some of their attention on Vietnam (Freeman, 2004). During the first
half of the 1990s, Vietnam experienced very substantial inflows of foreign
direct investment, and there was also a fairly consistent annual increase in
the number of foreign venture capital funds wholly or partially Vietnam
oriented. A total of eight (listed) venture capital funds exclusively focused
on Vietnam or the Indochina region were launched during this period,
and over US$ 400 million in funds were raised for investment in Vietnam
during this period (Freeman, 2004).
In the latter half of the 1990s, venture capital activity in Vietnam was much
less vigorous,46 largely as a result of (Freeman, 2004):
45 The first venture capital fund oriented solely towards Vietnam was established in 1991.
46 Tellingly, no new venture capital funds for Vietnam were established between 1996 and 2002, at
a time when venture capital activity in much of the rest of East Asia was on the rise.
47
3.1.4 Conclusion
47 Such as the replacement of Decision 145 (of 28 June 1999) with Decision 36 (of 11 March
2003), most notably (Freeman, 2004):
- Removing the requirement that foreign investors must hold their shares for between 1-3 years;
- Removal of the need for the prime minister›s approval on each individual deal (instead,
the investee company need now only inform the government of the share sale);
- Removal of the restriction that foreign investors may only invest in joint stock companies;
- The need for an auction process.
48 Vietnam became the 6th ASEAN member in 1995, a region with an area of 4’361’303 sqkm
and a population of 555 million.
48
GDP
Area Population GDP growth
Countries per capita in
(sqkm) (mn) (2005)
USD (2005)
49 E ach dimension includes several assessment criteria which are weighted and graded. The
summation of all criteria of the two dimensions delivers the position in the matrix as
illustrated in Figure 3-14 (Dinh, 2006).
49
(5.0)
High Malaysia
(3.55/4.48)
Vietnam
(4.5/4.015)
Thailand
(3.5/3.65)
(3.33)
Medium
Philipines
Economic (1.88/2.76)
Attractiveness Indonesia
(y) (1.535/2.67)
(1.67)
Legend: Low
Circle reflects
GDP Size Low (1.67) Medium (3.33) High (5.0)
Of Countries
Socio-cultural Attractiveness (x)
National culture
The culture of Vietnam, like Japan and Korea, has been strongly influ-
enced by neighbouring China over thousands of years. Vietnam’s everyday
behaviour and attitudes are determined by a synthesis of religions espe-
cially Buddhism, Confucianism, and Daoism. The Vietnamese are very
diligent. Further, Vietnamese strive for harmony in the collective (Dinh,
1997). According to the Confucianism, Vietnamese pay a lot of attention
to education, discipline, teamwork and are hard-working. Relationships
matter and communication is key with focus on personal relations. All
these characteristics are helping Vietnam achieve fast growth just as Japan,
South Korea and China have done.50
Political stability
WTO Accession
50 As Vietnam is the last goose to take off in the “Flying Geese Model” of the so-called “chop-
stick”-countries (Kaname Akamatsu, cited in Dinh, 1997).
52
Vietnam’s growth record has been remarkable, but it must keep expanding
at 8% if it is to create employment opportunities for the 1.4 million people
entering the workforce each year (VET, March 2007). The country therefore,
is facing some considerable challenges. The government is largely untested for
its response to a potential economic slowdown, and such an event may have
a profound impact on the country’s economic trajectory. Inflation is at a high
7.5% and rising crude oil prices have affected the fiscal situation.
At the same time, the economy is becoming more investment intensive and
is integrating rapidly within the global economy. Underpinning all this is
the rise of the private sector and Vietnam’s transformation from a planned
to a market-based economy.
The private sector, both domestic and foreign, makes up two-thirds of the
overall economy. Its share of industrial output is even higher at 75% - up
25 percentage points over the past ten years. This is a reflection not only of
the rapid increase in the number of new private enterprises and privatisa-
tions, but also their increased efficiencies. Furthermore, the private sector
employs 90% of the total workforce today and generates the overwhelming
majority of the 1.5 million new jobs needed each year to accommodate the
increasing work force (VET, March 2007). Clearly, the private sector is not
only a crucial economic pillar but also a social imperative.
Vietnam had a largely agrarian economy in the 1970s which has grown
at a relatively robust rate of 4% a year over the past decade. Nevertheless,
agriculture’s share of GDP has halved in the past decade, to 20%. A rise
in industrial activity has transformed the profile of the economy and now
accounts for more than 40% of GDP (EIU, 2006). This segment has grown
at a 10% Cagr over the past decade accounting for half of the real growth
over this period. Led by a trade and consumption boom, the service sector
growth has also accelerated in the past few years, and now makes up 38%
of the overall economy (EIU, 2006).
53
After decades of war finally ended in 1976 with the defeat of the US-backed
south by the nationalist and communist north, Vietnam began to rebuild
its ravaged economy in the early 1980s, creating a solid base of domes-
tic demand backed by private consumption and investment. Accounting
for 64% of GDP, private consumption is a pillar of the domestic economy.
High domestic savings, increasing foreign direct investment and overseas
worker remittances are driving rapid growth in investments and it now
accounts for 36% of GDP (up from 27% in 1995). The government expects
investment to reach 42% of GDP by 2010 (Vietnam Tiger Fund, 2007).
Domestic savings, increasing FDI and growing remittances make invest-
ment the key growth driver, accounting for fully one-third of the economy.
The government expects the contribution of investment to reach 42% of
GDP over the next five years (VET, March 2007).
Focus on investments
As with Vietnam’s quest for growth in the banking sector, meeting the
investment target and better technology access in other sectors will depend
on its ability to attract foreign capital. The government has set a target for
itself of meeting almost a third of the total investment needs in the next
five years from foreign sources. While FDI will form the largest chunk,
more remittances, portfolio investment and even development assistance
are important targets. To that end, the government’s efforts to open up and
integrate the economy with the rest of the world and streamline legislation
are part of an overall cohesive strategy for sustainable growth. Political
stability, low labour costs, fiscal incentives and concessions, and a growing
domestic market will make it easier for foreign capital to tap into Vietnam’s
advantages as an investment destination.
Legal system
The necessary changes in the legal system in Vietnam have not been able to
keep up with the pace of economic development. In terms of the banking
sector, legal reform is particularly needed with respect to the clarification
of legal concepts and contractual rights such as ownership and transfer
of land-use rights, collateral registration procedures, mortgage laws and
title deeds. The evolving nature of Vietnam’s regulatory environment and
commercial law, combined with overlapping jurisdictions among govern-
ment ministries often result in a lack of transparency and consistency in
government policies and decisions related to commercial projects.
Corruption
Infrastructure
However, the skills shortage is not just limited to managerial ranks. Accord-
ing to estimates of Vietnam’s workforce of 45m, just 7-8% can be ranked
highly skilled, 19-20% graduated from vocational training colleges, and
the overwhelming 75% are unskilled (VietnamNet, 06.04.2007).
Although Vietnam’s growth over the past decade has been impressive,
numerous issues and potential obstacles still remain. These factors can
affect the pace of development of Vietnam. In order to forecast the devel-
opment of Vietnam in the years to come, we have applied the scenario
analysis with three major scenarios: optimistic; realistic; and pessimistic.
56
12.0
11.0
10.0 9.5 Optimistic
9.5 9.1 9.2
9.3 8.8
9.0 8.8 8.8 8.4
8.3 7.8 8.3 8.6 8.8 8.9 Realistic
8.0 8.1 7.3
7.1 8.2
6.8 6.9 8
7.0 7.7 7.5 Pessimistic
in percentage
7.2
6.0 6.0 6.0
5.0 5.1
4.4
4.0
3.0
2.0
1.0
0.0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
Figure 3-15. Scenario analysis – GDP growth forecast to 2010
- Oil price
- Privatization process
- Infrastructural development
- Terrorism
- Political instability
57
Assessment Scenarios
Criteria Pessimistic Realistic Optimistic
Development Slow down of the Global economy Global economy still
of global global economy shows signs of slight very healthy
economy slow down
Oil price Higher than US$ 100 Higher than US$ 60, Lower than US$ 60
per barrel but lower than US$ per barrel
100 per barrel
The Vietnamese banking system has been partly reformed but it is still
weak. The state-owned banks still dominate the banking system.51 The
overdue loan rate is increasing and the commercial banks have limited
lending capacity.52
With over 80% of Vietnamese enterprises falling into the small or medium-
sized categories and people generally having low incomes, the current
capacity for capital mobilization by banks is limited. The reason why the
banking system is permitted to be equitized and to sell stock in foreign
markets is to bring in additional foreign capital and thereby enable them
to support the country’s economic development.
To reform the banking sector and facilitate the liberalization of the commer-
cial process, the government of Vietnam has announced the “Internation-
ally Integrated Programme” of the Banking Industry, and is committed to
implement it after Vietnam joined the WTO in January 2007
51 C urrently, five big state-owned commercial banks control around 70% of Vietnam’s
banking market.
52 O nly 17% is controlled by joint stock banks, which are non-state commercial banks
established under Vietnamese law and the rest 13% of the market shares belong to
foreign banks or joint venture banks
59
In 2006, the net earnings from services of the five state owned banks were
reportedly US$ 3.2 m up 74% over 2005 (SBV, 2006). An 84% growth rate
objective has been set for 2007 which is projected to come mostly from
modern retail banking services. In general, the banking services provided
by domestic banks tend to be backward and poor. Most banks do not
provide services ‘over the counter’ despite the fact that there is no self-
service system. Local banks now have different retail banking services, but
they do not cooperate with each other. For example, all the big commercial
banks try to develop their own ATM networks, but they cannot find a
common platform to develop a single network, which could help reduce
investment expenses (VET, 03.03.2007).
At the beginning of 2007, there were about 280,000 SMEs in Vietnam. The
government believes that their number will double by 2010-11 (SSC, 2007).
The SME sector accounts for about a third of the GDP and employs about
25% of the workforce (EIU, 2006). Less than a fifth of SMEs currently have
access to the bank lending market. The rest have to make do with loans
from family, friends or other private sources. Even those which do manage
to borrow money from banks usually do so in a private rather than corpo-
rate capacity. In other words, the owner will pledge some personal assets,
take out a personal loan and apply it to the business.
53 Currently, Retail banking is the only one far developed banking industry. The other
banking services as investment banking, private banking, and corporate banking are
still very embryonic.
60
Banks are generally wary of the SME market as many small companies
have few assets to offer as collateral; accounts are frequently unreliable
and they are usually the first to suffer in an economic downturn. Add to
this the paucity of credit information and one can see why the relationship
between bank and small business tends to be fraught with problems.54 The
banking sector’s reluctance to lend to SME’s is partly due to lending rate
regulations, under which banks are permitted to lend a maximum of 75%
of their mobilised capital.
Other reasons for the SMEs difficulty to borrow from banks is a lack of
credit information on most potential customers and a risk averse lending
culture which leads to the desire to spread the risk as widely as possible.
The latter is ironic considering that most Vietnamese banks concentrate
their lending on a few large corporate customers.
Among the Vietnamese banks, only Agribank and Sacombank have made
a strategic decision to focus on the SME market. Agribank’s involvement
is illustrative of the situation. They are usually the lender as a last resort, a
bank with a largely social policy function.
54 G enerally loans above US$ 315,000 are likely to be rejected, even though businesses may
have sufficient collateral to borrow such amounts. Banks are typically afraid of the risks of
lending capital over US$ 312,500. The comfort zone for SME lending is about US$ 63,000-
126,000, which is insufficient for most small businesses (VIR, 05.04.2007).
61
55 While many economists believe that the optimum relationship between credit growth and
GDP growth is a 2:1 ratio, this does not really apply to a developing country where the
credit to GDP ratio tends to be low (VinaCapital, 2006).
56 By the end of June 2006 banks in HCMC had deposits of more than US$ 14.2 billion up
more than 20% so far this year. Over the same period total outstanding loans grew by only
9.2% to US$ 12 billion (SBV, 2006).
57 The corporate sector seems to have reached the limit of its ability to expand credit at
the current high rates. Another reason for the cautious lending stance is the funding
mismatch between largely short term deposits and the largely medium / long term loans
(VinaCapital, 2006).
62
this year, banks will have to look more aggressively for new borrowers,
perhaps in the retail market.
Currently medium and long term loans account for about 42% of total
loans. The problem is that up to 50% of short term deposits are being used
to offer medium and long term loans (SBV, 2006). Such imbalances are long
standing and a bit worrying. However, once the corporate bond market
takes off, banks should be in a position to do more long term financing and
reduce this dependency.
Long term project finance is becoming more and more frequent as the
government and large SOEs tap private sector banks for large infrastruc-
ture-type syndicated loans. One good example of the type of medium to
long term financing provided by the SOCBs is the deal signed with Elec-
tricity of Vietnam (EVN). The syndicate is to provide a credit line of US$
2.7 billion to EVN over the next four years at an interest rate pegged to
the average 12-month deposit interest rate plus a 3% fee (VET, July 2006).
As the corporate bond market takes off, companies will have the option of
raising money there instead, but the main purchasers will still be the banks
and insurance companies.
59 Transactions in Hanoi and HCMC fell 60% y-o-y in 2005. In 2005 only 113 projects (down
40% y-o-y) were being developed in HCMC, covering about 175 hectare of land (Vina-
Capital, 2006). For example, BIDV has had to reschedule about US$ 65.7 million in loans
to Vietnam’s top seven developers (These are Song Da,Vinaconex, Housing and Urban
Development Corporation, Hanoi Construction Corporation, Viglacera, Cienco 5 and
Contrexim Holdings). These amounts to about a fifth of BIDV’s total exposure to the
property sector (VinaCapital, 2006).
60 Any collapse would come as a result of an external shock, leading to a general and perhaps
sudden deflation in asset values across all classes.
64
%
Mio 30 35.00
30.00
25
3.75%
25.00
20
20.00
15
15.00
10
10.00
5
5.00
0 0.00
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Overall there are about 5 million bank accounts in the whole country
and only 2 million ATM cards have been issued. The balance would be
accounted for by small town inhabitants or by the large rural population.
Figure 3-18. illustrates that the penetration rate of consumer banking
products is still very low compared to that of the mobile phone.
65
50
45 45
45 Hanoi
40
HCMC
35 34
AB class
30
25 22 22
20 18 19
17 17 18
17
15 13 13
11
10
10
5
0
Mobile Insurance Bank Savings Credit
phone plans Account Account Card
- Personal loans
- Mortgages
- Other products
Personal loans
outstanding loans and have a target of increasing that to 30% over the next
few years following equitization. Given that most consumer loans attract
fees, it is a high margin market and has enabled the banks which specialise
in retail banking to enjoy far higher profit margins.
In theory, anyone can get a personal loan to buy a house, car or motor-
bike, or to renovate their home, provided they can meet the banks’ strict
collateral requirements. The SBV (2005) has issued a new regulation that
allows commercial banks to provide unsecured loans to employees of SOEs
and organisations. This represents a start towards expanding the consumer
banking business. However this does not benefit private sector employees
who make up the bulk of the middle class.
The majority of personal loans are medium to long term secured loans.
Until now it was hard to get a personal loan of more than US$ 625 even
with collateral. Now banks are happy to hand over US$ 1,875 –US$ 3,125
in personal loans (VIR, 05.04.2007).62
62 The loan limit is being raised from US$ 6,250 to US$ 12,500. Vietnam International
Bank (VIB) is happy to lend US$ 9,335 without security to government employees with
a monthly income in excess of US$ 380. The MHB has increased its personal loan ceil-
ing to US$ 3,125 (to be paid within 36 months). Vietcombank will happily lend you US$
3,125 for five years. Most of these loans can be cleared within 3-7 days. Some banks such
as EAB and Eximbank target employees of existing corporate customers as potential
borrowers. Others such as ACB and Vietcombank target Visa and MasterCard credit
card holders. Foreign banks such as HSBC will give secured loans up to a value of US$
2,500-12500 for one to three years to its customers (VinaCapital, 2006).
67
Lack of distribution is the key hurdle. Only 10,000 outlets accept card
payments; these are concentrating on big cities like Hanoi and HCMC and
other major tourist sites. 15 banks are allowed to issue payment cards, and
almost 80% of issued cards come from domestic institutions.
The big disadvantage is that the systems used by the three banks are differ-
ent and are incompatible with each other.63 The VNBC Unicard is accepted
at over 300 ATMs and 1,000 locations nationwide. Customers can use their
Unicard to perform many banking functions including withdrawal, funds
transfer and paying bills at ATMs. VNBC has already issued over 500,000
credit and debit cards (SBV, 2006).
VCB, ACB, and Eximbank all offer international payment cards with
125,000 cards issued since 1996. Of this, Visa-member banks had the larg-
est share with 62,000 issued up to the end of 2006, a y-o-y growth of 67%
(SBV, 2006). Other international brands such as MasterCard, American
Express and Maestro also saw strong growth.64 However, 89% of merchant
sales volume via Visa cards in Vietnam is still generated by foreigners,
mostly in Hanoi and HCMC. Retail purchases and cash withdrawals made
by domestic card holders reached US$ 72 million in 2004, a relatively small
amount compared with the US$ 237 million worth of purchases and cash
withdrawals in Vietnam by international visitors (VinaCapital, 2006).
Mortgages
The growing middle class is very keen to become home owners. The fact that
60% of the population is under 30 years of age, impacts favorably on the size of
the mortgage market. Young adults want to move out and buy their own house
63 This is typical of developing countries but one nationwide system would be a major break-
through. It is expected that Vietcombank will win the race.
64 VCB is currently the only issuer of MasterCard, Visa and American Express cards in Viet-
nam, with more than 50,000 cardholders in its client base. VCB is also the acquirer bank
for MasterCard, Visa, American Express, JCB and Diner’s Club, with 5,000 point-of-sale
(POS) terminals and 400 ATMs nationwide. Visa obtained a license from the SBV last
month to open the first representative office in Vietnam, and the company expects the
number of Visa cards issued in the country to hit 500,000 by 2010 (VinaCapital, 2006).
65 Visa Asia-Pacific’s statistics show that the fraud rate of Visa cards in Vietnam is approxi-
mately 0.15%. The normal global rate is about 0.06%.
69
or apartment. This concept of ownership sets this generation apart from their
parents and is now backed by a solid array of legislation. A legal framework has
been put in place for the growth of a mortgage market.66
Mortgages are a necessity for most young couples starting off on the prop-
erty ladder. The mortgage market has grown hand in hand with the explo-
sion in the urban condominium market which has brought affordable
housing within reach of many in the middle class.67 The mortgage market
is new to Vietnam and currently accounts for only 10-15% of the total
housing finance market. So far banks have approved mortgage loans of
about US$ 1.2 billion which represents around 12.7% of their total lending
(VinaCapital, 2006).
Indicators Descriptions
Target customers - 57% of the population is under the age of 30;
- growing middle class is very keen t o become home
owners.
Current volume - 10-15% of the total housing finance market
- mortgage loans approved of about US$1.2 billion
(around 12.7% of total bank lending)
- Alternative: Most property purchases are financed
informally through family networks (or f riends) who
typically advance sums at no interest
Prices for about US$ 320-2,500 / sqm
apartments
Duration 7 to 10 years
66 One issue is that affordable housing has been hard to come by due to spiralling property prices.
67 P rices for apartments in major urban areas in Vietnam range from about US$ 320-
2,500 / sqm.
70
Other products
Remittances
Electronic payments
Electronic payments are also making steady inroads into a country once
ruled by cash. Cash payments in Vietnam accounted for 21% of the total
financial transactions in 2005, down from 24% in 2004 (VinaCapital,
2006). In fact, the SBV has completed draft decrees on electronic and
non-cash payment systems including cheques and bank draft circulation
systems. Fewer cash payments means less tax evasion, less corruption, less
money laundering, and lower minting charges. The decrease in the cash
71
payment rate in 2005 was the result of a sharp increase in bank payment
transactions, and particularly those performed with payment cards. To
limit cash payments, Vietnam needs to encourage intra-account payments
for utility, internet, and cable television bills. Cash payments continue
to account for the majority of daily transactions in Vietnam, where only
large supermarkets and hotels use point of sale (PoS) payment systems.
Two thousand and forty PoS card-reading machines were installed in 2005
(VinaCapital, 2006). As cash cannot dominate the market forever, more
and more consumers will eventually be driven to open bank accounts as
the utility of paying bills by direct debit becomes clear.
- Stock lending
In addition, the government itself set up the Debts and Asset trading Company
(DATC) in June 2003 under the Ministry of Finance with a charted capital of
72
US$ 130 million with a mandate to help SOEs dispose of their NPLs and Non
Performing Assets (NPAs). The DATC started operating in 2004, working to
resolve bad debts at 20 companies identified by the government (VinaCapital,
2006). However, the DATC purchases/receives the assets/NPLs directly from
SOE’s themselves, not from banks.
The DATC has recently set up a transaction and consultation centre for
debt and asset trading in a bid to get things moving. It has also signed a
cooperation agreement with the BIDV in order to create the framework for
an asset trading market. One issue is that the DATC has a dual mandate, a
social mandate to help SOEs clear up bad debts, and an economic one to
earn a profit in the process. This leads to a conflict of interest.
Both the AMCs and the DATC have so far demonstrated one thing clearly:
without a secondary market for distressed debt they can do little to
resolve the remaining NPL problem. That market requires a clear frame-
work with legal backing for recovering collateral and participation from
foreign experts who have experience in debt trading and disposal. A lack
of trained personnel and limited experience in packaging and pricing debt
is also hampering the process. Having recapitalised the SOCBs with a US$
670 million capital injection in 2004, the government is reluctant to admit
that it might have to do the same thing again. Nonetheless, the SBV has
circulated a draft suggesting a further US$ 750-810m government bailout
in 2007 before banks such as Incombank, BIDV and MHB are equitized.
One of the hidden triggers of the recent surge in the stock market has been
the willingness of banks to lend against stocks, using the certificates as
collateral. This fairly new market is frowned upon by the SBV which fears
that some banks lack the internal controls to manage this relatively high
risk niche market profitably. Vietnam International Bank (VIB) reported
its current loans to the sector accounted for roughly 5% of the bank’s total
loans. Instead of lending only against bank stocks, VIB now offers loans
against 29 different types of stocks ranging from shares in hydropower
plants to insurance and information technology stocks. ACB also has
about 1% of its total loans issued for stock portfolios. Figures provided by
commercial banks showed that 13 million shares worth US$ 47 million on
the market were used as collateral for loans (VinaCapital, 2006).
73
- Life Insurance
To date only 6.5 million people out of the country’s population of over
84 million have life insurance. Moreover, David L Fried, regional director
of HSBC Insurance (Asia-Pacific)68 suggests that Vietnam’s life insurance
market represents a great opportunity for foreign insurers.
The Vietnamese insurance industry has been expanding rapidly since 2000
with an average growth rate of 29% per annum. Revenues from insur-
ance have accounted for 2% of the country’s GDP. Observers emphasize
the benefit of further opening up the industry by pointing to the US$6.87
billion insurance money that has been pumped into the country’s economic
development since 2001 (see Figure 1-22.).
Non-life insurance sales in the first five months of 2006 were worth US$
250 million, a jump of 25% over last year. The growth potential is still
very positive. Vietnam has 15 domestic companies providing non-life
insurance and two more have been licensed. The Vietnam Insurance
Corporation, Bao Viet was the dominant player accounting for 32.8%
of premium income in this period. The HCMC Insurance Company Bao
Minh was second with 24% while the rest of the companies selling insur-
ance had tiny market shares. 69
9,000
8,000
7,000
6,000
VND billion
5,000
4,000
3,000
2,000
1,000
0
1997 1998 1999 2000 2001 2002 2003 2004 2005*
3.2.4. Conclusion
1. Market penetration
4. Lending practices
5. Product offerings
Banks are almost unheard of in secondary cities and rural areas. This
means that banks simply do not have easy access to over 70% of the popu-
lation. Some reasons for the interest in banking services are: until recently,
the government encouraged a cash economy by paying state employees in
cash; there is a traditional distrust of banks; the banks themselves have
done a poor job of providing services to the retail public; and small busi-
nesses too are poorly served by banks which are unwilling to give them
large loans unless they have the collateral to back it up.
200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
HK TW CN MY SG TH SK VN HK IN ID
70 Even so, if we compare this to the internet and mobile phone penetration rate of 14% and
12% the number is rather low.
76
Despite the limited penetration and physical presence, the banking indus-
try is growing rapidly with both deposits and loans expanding at high,
double-digit growth rates. More recently, some banks such as Vietcom-
bank, ACB, Sacombank, and Techcombank are making a determined effort
to court the retail market.
Credit growth in Vietnam has been expanding at a very high rate during
the past few years. In fact, the state-owned banks saw credit grow at an
annual average rate of 24% since 2002. Given the inability of some bankers
to distinguish a good credit risk from a bad one this is not entirely a good
thing. A 7% GDP growth rate can accommodate an annual credit growth
rate of about 14-20% (VinaCapital, 2006). However, credit growth rates
above that level for any extended period of time can be unhealthy for an
economy.71
Four state banks have carved up 70% of the loan market while forty-odd
joint-stock banks and a host of foreign banks compete for the remaining
30% (SBV, 2006). Compare this with the US where the ten biggest commer-
cial banks control only 49% of the country’s banking assets. Thus, at the
top tier, the Vietnamese market acts like an oligopoly.
71 One bank has forecast that credit could grow at 35% per annum over the next five years
given sufficient access to capital. While the better banks could probably cope with this,
the temptation for others to take on too much risk is high.
77
The SOCBs are generally geared to the large corporate and state-owned
sector, providing syndicated loans for utilities, infrastructure projects,
heavy industry and property developers. JSCBs are geared mainly towards
lending to small and medium size enterprises (SMEs) and the wealthier
retail customers.
However, given the banks’ low penetration and limited branch network
they only reach a fraction of their potential customer base. Car loans, mort-
gages and house improvement loans are retail staples. And small business
loans using property as capital is the basic model for the SME market. In
general, the Vietnamese banking model is best described as relationship-
based rather than product-based as in international banks. Those banks
that make the transition soonest will be the long term winners.
In the early 2000’s there were some efforts by the government to resolve
NPLs. In 2001-2003 the government injected a large amount of money
into the SOCBs to enable them to write down their NPLs (SBV, 2005). 72
A blank cheque from the government may solve the immediate problem
but does not change the lending culture that gave rise to it in the first
place. Most NPLs are generated by SOEs refusing to pay their obliga-
tions to SOCBs. Pre-equitisation is a favorite time to write off or simply
clear out these loans. That way SOEs can start their new life in the private
sector unencumbered by debts. Of the NPLs from SOEs which have been
resolved, 36% were paid out by state budget sources, 40% were dealt with
by risk provision funds and 24% by the liquidation of assets (SBV, 2006).
One major reason for the fairly painless partial clean-up was the fact that
land prices skyrocketed in 2001-2003 (VinaCapital, 2006). This enabled
banks to sell off collateral land use rights and buildings at a profit on those
relatively rare occasions when they were able to take possession of collat-
eral securitizing the NPL. There is not yet an effective secondary market
for bad debt, although attempts to start one are ongoing. There are still
very few NPL sale and purchase transactions taking place.
While there appears to be modest progress being made with the bank
sector’s historical bad debt problems, the widespread adoption of a broad
based credit culture where banks use market principles to assess credit risk
does not appear to have taken place yet.
There have also been discussions that the large SOCBs may establish
specialized asset management companies to resolve their historical
NPL problems.
72 Incombank, for example, wrote off about US$ 312 million worth of bad debts in 2004
alone (SBV, 2005).
79
73 This new requirement encompasses the classification of loans into 5 groups (Normal,
Precautionary, Sub-Standard, Doubtful and Estimated Loss) and the use of specified
reserving rates (group 1-5, 0%, 5%, 20%, 50% and 100%).
74 What takes minutes overseas can take months in Vietnam. Usually it’s just easier to say no.
Or to attach unattractive conditions to the loan.
80
of customers a bank can lend to.75 Without a private credit database, banks’
credit departments are overloaded trying to collect accurate information
related to its borrowers, ranging from their repayment capability to apprais-
ing the value of their assets. Proper risk management is very difficult under
those circumstances.
75 For example, to get a credit card in Vietnam requires you to place a term deposit with
the bank, equal to the amount of your card limit. As a result, after ten years, only 100,000
credit cards have been issued in Vietnam compared with over two million debit cards.
81
The first wave of reform and liberalization of the financial sector in Viet-
nam took place between 1988-90. One of the most important developments
that emerged was the creation of a two-tiered banking system consisting of
the State Bank of Vietnam (SBV) as the central bank and supervisory insti-
tution (tier 1) and an operating system (tier 2). Similar to central banks in
other markets, the SBV is responsible for monetary policy and the regula-
tion of the banking system. While legislation is in place to guarantee the
independence of the central bank from political influence, according to
many multi-national agencies (i.e. World Bank, IMF, etc.), the central bank
has little if any independence. The general view is that the SBV is politi-
cally and operationally dependent on support from government agencies.
The government still exerts strong control over the banking sector in two
ways. Firstly, directly through various regulations and restrictions which
govern how they conduct business and secondly by strictly licensing the
type of businesses they can enter. Also indirectly, through the interference
of a myriad of agencies and ministries, both local and national, who want
to have a say in how scarce credit resources are allocated.
76 In addition to the four main policy lenders, the Vietnam Bank for Social Policies (VBSP),
previously know as the Vietnam Bank for the Poor, was established to provide loans to
poor households especially in rural areas. The rural sector is also serviced by the People’s
Credit Funds (PCFs). These lending institutions were established in the early 1990s by the
SBV following the collapse of a raft of rural credit co-operatives. There are approximately
1,000 PCFs operating in Vietnam now and they control around 1-2% of the total bank
sector loans and deposits (Source: SBV, 2006).
83
Local JSBs
20%
Foreign Banks
10%
SOCBs
70%
Vietcombank 7,800
VEARD 6,411
BIDV 3,970
Incombank 3,328
Sacombank 1,899
ACB 1,101
MHB 800
Eximbank 700
Techcombank 617
Southem Bank 580
VIB 510
East Asia Bank 500
Hanubank 300
Oricombank 300
HDB 300
Figure 3-27. Relative size of top 17 CBs in term of charted capital (bn)
(Source: SBV, 2006; VinaCapital, 2006)
Focused businesses
Vietcombank is the largest and best managed of the state banks. The bank
has a leading position in both the retail and the corporate markets in Viet-
nam. It is second only to Agribank in market share of the deposit and
lending markets.
Performance
VCB’s corporate customer list includes most of Vietnam’s blue chip state-
owned or equitised companies. Typically, Vietcombank plays the lead
role in large scale syndication for infrastructure projects such as refineries.77
In the future, it is expected that the development of the corporate bond
market will change VCB’s business model. The bank will arrange and
underwrite bond issuances through its securities arm rather than lend
large sums directly to corporations. This business is not a major profit
earner for the bank. It is expected that margins will not decline as
the focus shifts from pure syndication to a mix of lending and bond
underwriting.
Loan growth has averaged about 55% per annum over the past six years,
slowing down recently as the bank started to clean its books ahead of list-
ing. The loan to deposit ratio is about 60% which is the industry average.
According to the bank, its NPL burden has been largely dealt with over the
last five years. Out of a total of US$ 354 million worth of bad debts, US$
277 million had apparently been settled under the equitisation program by
December 2005.
77 Vietcombank is also leading a consortium of four banks lending a total of US$ 2.7 billion
to EVN for the construction of power stations in 2006-2010 (Vietcombank, 2007).
Challenges
Vietcombank has taken major strides in boosting its internal controls and
strengthening management. Risk management (RMC) and asset liability
commitees (ALCO) have been set up to manage the bank’s risk profile and,
hopefully, avoid some of the mistakes of the past. Like all state-owned
banks, VCB has received considerable help and input from organisations
such as the World Bank in order to create a mechanism to manage credit
risk more effectively.
The bank has improved its operations dramatically over the past five
years. Margins and ROE have recovered sharply since 2002 when ROE hit
a low of just under 7.5%. A cleanup of the loan book with some govern-
ment help was the key to the turnaround. The bank is striving to improve
the quality of its loan book and to grow the retail business ahead of listing
(Vietcombank, 2006).
VCB has also been raising money through the bond markets. Vietcom-
bank issued a total of US$ 84.4 million in convertible bonds in 2005
purchased by a mix of institutional and retail investors. The 7-year bonds
carry a coupon of 6%. After equitisation, probably in 2007, convertible
bond holders will be able to become shareholders of the bank (VET,
March 2006).
88
Focused businesses
Performance
In 2005 lending growth rose 18% to US$ 4.68 billion while total assets
rose 28% to US$ 7.25 billion. By sector, the bank’s loan portfolio was 33%
exposed to the industrial sector, with an additional 22% in the construc-
tion and transportation sectors (Incombank, 2006). These tend to be state-
owned heavy industries or domestic developers and much of their borrow-
ing is at favourable or below-market terms. In fact, the bank’s exposure to
these traditional sectors is second only to BIDV and it explains the bank’s
below average profit margins.
Incombank has turned itself around in the past five years with consider-
able government help. The NPL ratio has dropped to 2.18% and CAR was
around 6.07% at the end of 2005. Revenue growth was a very strong 55%
with earnings up 183% last year.
Challenges
Focused businesses
BIDV has a total exposure of about US$ 176.1 million in the property
development market. Overall about 26% of its loan portfolio was to the
construction sector in 2005 and it represents its largest sector exposure.
The bank has an additional 4.9% exposure to the cement sector.
The bank tends to focus on medium and long term project lending to SOEs.
Historically BIDV was the principal conduit for major financing projects
as the bank inherited most of the problem customers. Its combined loan
book is bigger than Vietcombank’s but has profits of less than a tenth of
those of Vietcombank.
Performance
BIDV had an NPL ratio of 10.49% at the end of 2005 according to the offi-
cial evaluation method. This number is significantly higher than the 2004
level due to the redefinition of bad debts under Decree 493, making it by
91
far the weakest state bank in the sector. To cope with concerns about bad
debts BIDV has set aside a management reserve of US$ 314.4 million as of
end of 2005 (BIDV, 2006). BIDV has the worst returns amongst the large
SOCBs which is a clear indication of its problematic balance sheet. The
bank has rescheduled US$ 65.7 million of the loans to the seven largest
property developers but this still represents only a fraction of its question-
able loans (BIDV, 2006).
BIDV had total assets of VND 131.8 trillion and an ROE of 10.5% at the end of
2005. The CAR rose from 2.16% in 2001 to 6.18% in 2005 (BIDV, 2006).
The bank is set to equitise in 2007 and in preparation for that it has
acquired a rating from Moody’s and recently issued bonds (VET, March
2006). The bank has set a target for loan and asset growth in excess of 20%
between now and 2010. Interestingly, given its low profitability and high
level of NPLs, the bank seems less clear on setting a profit target. A poor
quality loan book and low returns are part of the overall problem, the lack
of Tier 2 capital is another. To address this problem BIDV has recently
issued bonds worth a total of US$ 204.4 million with a maturity of 10-12
and 15 years (VET, March 2006).
Challenges
BIDV will be first, together with Agribank, to get help from the government
with an expected capital injection of US$ 187-250 million in 2007 (BIDV, 2006).
This is not considered to be enough to solve all of BIDV’s problems.
The real issue going forward is management quality and how to avoid
making future bad loans in high risk sectors such as the construction
industry. Hard decisions will have to be made and some long-standing
customers cut off from funding. This will mark a major turning point for
BIDV. Until then the bank’s progress will remain inconsistent and very
vulnerable to any economic downturn. Their past strategy of indescrimi-
nate lending and expecting investors to give them the benefit of doubt
could have only worked in an environment of very poor disclosure. BIDV
appears to be the most vulnerable of all of Vietnam’s major banks (Vina-
Capital, 2006).
92
BIDV has planned to list on the stock market by 2008. In preparation for
that move the bank issued convertible bonds and received a rating from
Moody’s. The rating agency estimated the bank’s return on risk adjusted
assets at a low 2.7% and gave the bank an E rating for financial strength.
Nonetheless BIDV was given a Ba1 rating for VND deposits and a B1 for
foreign currency deposits (VET, March 2006).
Focused businesses
Performance
At the end of 2006 Agribank had a total of 2,000 branches, a staff of 29,429
and total assets of US$ 11.37 billion. In 2006 the bank had a loan portfo-
93
Challenges
The bank claims to have 10 million customers, but this number raises some
doubt since it is greater than the number of accounts in the entire banking
system. The bank aims to increase its assets by 25% per annum, its loan
portfolio by 20-25%, and to reduce NPLs to less than 1%. It also hopes to
increase profits by 10% a year (VBARD, 2006). Judging by recent results,
they are doing quite well on the profit front, and it is expected that they
will be able to continue to increase both profits and margins for the next
two years.
There are no immediate plans to equitise the bank and it would require a
mammoth effort and a lot of pain to clean it up for listing.
94
Focused businesses
Performance
The key indicators for growth are asset size, deposits and branches and not
profits. At the beginning of 2005, MHB had assets of US$ 875 billion up
10% compared to the previous quarter. Loans and investments totalled US$
853 million increasing 11% compared to the previous quarter (MHB, 2006).
95
At the end of 2005, the deposit base was about VND 6.35 trillion, a plus of
72% y-o-y, the vast majority of these being in term deposits. The loan book
totalled VND 8.56 trillion, up 55% compared to 2004 (MHB, 2006).
The bank is very thinly capitalised with an equity base of only US$ 49 million
at the end of 2006. In 2006, MHB increased an additional 50% in assets to
US$ 1.18 billion and a 40% expansion of its loan portfolio. MHB offered only
0.62% interest per month (7.44% per annum) for three month term deposits,
far lower than most competitors but seems to be able to use its branch network
to reach customers not covered by other banks (MHB, 2006).
Much of MHB’s funding comes from the World Bank which explains the
large size of the loan portfolio as compared to the modest size of its deposit.
The deposit to loan ratio is 135%. Most of the bank’s loans are made to
improve the quality of rural housing stock (MHB, 2006).
Challenges
MHB will probably equitise in 2007. The bank faces a hard task to convince
investors that its social role will not detract from its ability to boost profit-
ability in the future.80 While MHB’s growth performance is very impressive,
concern about its very low equity base and extremely low profit margins
remains. The drive to boost assets and deposits has been given a higher
priority compared to the improvement of its balance sheet and the increase
of profit margins. Disclosure is very limited and the current quality of the
loan portfolio is low. However, most of the loans are small in size and there-
fore the risk is fairly well spread compared to other state-owned banks which
tend to lend a lot to a very few.
80 Just to note that the key indicators for growth are assets size, deposits and branches,
not profits.
96
Characteristics of JSCBs
■ More flexible: JSCBs, which were set up in the 1990s, do not face
administrative burdens, heritage issues and social lending pressures like
the SOCBs. Thus, they are more flexible and can adapt themselves to
changing market conditions.
■ Wide range of products and services: JSCBs offer the full range of bank-
ing products and services to corporate and retail customers.
97
■ Low NPL: none of JSCBs are saddled with high levels of bad debts.
Challenges of JSCBs
■ Low capital base: Average capital is about US$ 20 million per bank so
they cannot provide large loans. In the past two years JSCBs have made a
concerted effort to increase their chartered capital by issuing shares.
The top tier are expanding their branch networks and loan portfolios aggres-
sively, boast good management and have a clear product strategy to differenti-
ate them from the competition. The second tier, which includes banks such as
Techcombank, Eximbank and EAB, are more of a mixed bag. Techcombank’s
recent shift of strategy towards the retail market is seen as a significant positive
move while EAB is leaning in the direction of SME lending.
Smaller JSCBs such as Phu Nam Bank and VIB deserve an honorable
mention because of their pursuit of niche strategies with strength in SME
81 As ACB has demonstrated, good information technology is a key competitive advantage
in the Vietnamese bank sector. It provides the platform for offering and managing a wider
array of products and services to customers (VinaCapital, 2006).
98
Focused businesses
ACB is the best-managed bank in Vietnam and has a clear lead in retail
banking. By adding about 20-25 branches or sub-branches over the
next twelve months, the bank intends to use its locations as a distribu-
tion platform for a wide range of products targeting the retail customer
(ACB, 2006).
82 This number is still far too high and it is expected that it will halve over the next few years
as another wave of consolidation is overdue.
99
At the end of 2006, the bank had 2,892 employees, a y-o-y increase of 50%
(ACB, 2006). Retail customers account for about 60% of their total lend-
ing, with the rest mostly in SME lending. ACB is strongly focused in the
southern market and has no plans to increase its presence in the north
for the time being. The bank also has some wholesale banking businesses
covering large corporate customers such as EVN. Exposure to the real
estate sector is minimal at about 3% (ACB, 2006). The retail business has
been built around some key products such as car loans, mortgages, credit
cards and, more recently, unsecured loans. The unsecured loans business
enables customers to borrow up to US$ 12,580 at a monthly rate of 1.2-
1.3% (or 14.4-15.6% per annum).
Overall, the bank has a very low loan to deposit ration of 44%, far less
than the average 60% ratio prevailing in Vietnam. This is a reflection of a
generally cautious stance which has been rewarded by an NPL of below 1%
(ACB, 2006).
Performance
As of 2006, ACB had assets of US$ 2.03 billion, up 32.9%, deposits of US$
1.71 billion up 23% and outstanding loans of US$ 763.9 billion up 27.8%.
The bank has a capital adequacy ratio of 12%. ACB has set itself an ROE
target of 30% over the next five years (ACB, 2006).
ACB’s balance sheet reflects their conservative approach with about 50%
invested in government securities and the rest lent out. Their approach to
property collateral is also prudent. Adopting government valuations which
are only 50% of market, they offer loans up to 50% of the assessed value of
the property - 25% of market value (ACB, 2006).
Challenges
The biggest challenge facing ACB as a retail bank is how to improve access
to credit information about its potential customers. The lack of reliability
of third party services such as the Credit Information Centre (CIC) means
that its overstretched credit department is forced to rely on itself. The bank
is keen on the idea of an independent credit bureau as long as the govern-
ment does not get too closely involved.
100
ACB has been a market leader in the new, unsecured lending market using
the DCF valuation method to assess its customers. In the medium term,
ACB’s strategy is to leverage its existing distribution platform, to increase
the number of fee based services it offers customers such as brokerages
(both real estate and securities) and investment, leasing, insurance and fee
based banking services. The bank has already set up these businesses as
subsidiaries and it may move to a holding company structure until 2010.
IT is seen as the key to developing and managing all of these different busi-
nesses, and ACB has made considerable investments in its development
over the past few years.
The bank has two major subsidiaries, ACB securities and ACB asset
management.
The management of the bank is widely considered to be one of the best and
they have introduced incentive pay schemes for top and middle manage-
ment based on targets such as profits and ROE. It is expected that ACB will
list late in 2007 or early 2008.
83 For instance, in the leasing market ACB is mainly interested in big ticket items of over US$
2 million whereas its strategy in the insurance market is to concentrate on low income,
low ticket customers.
101
3.3.3.2 Sacombank
Focused businesses
The Sacombank was formed in 1991, and up to 2006 had two foreign
owners, the World Bank’s International Finance Corporation and Dragon
Capital (Dragon Capital, 2006). Currently, REE owns 7.7% and ANZ
recently bought a 10% stake and hinted it would be interested in raising its
stake as part of its Asian expansion plan.
Performance
Challenges
The bank’s relationship with ANZ is likely to expand over the next few
years. It is expected that ANZ’s stake in Sacombank will increas as the
law permits. A transfer of technology and product knowhow seems to
be taking place which will serve to increase the bank’s competitiveness
especially in the retail market.
103
As of the end of 2005, there were 28 foreign bank branches, four joint-
venture banks and three foreign-invested leasing companies established
in Vietnam. The Vietnamese authorities are understood to be working
towards lifting the restrictions on foreign banks operating in Vietnam in
order to comply with the requirements of the 2001 US-Vietnamese Bilat-
eral Trade Agreement (BTA) and more importantly, the requirements for
entry into the WTO based on Vietnam’s entry to the WTO which was offi-
cially approved on 11 January 2007. One area that the amendments to the
existing legislation is being considered is to allow foreign banks to estab-
lish subsidiaries with the same legal status as the Vietnamese banks.84
Focused businesses
Foreign enterprises are the main market for the foreign banks. The most
important measure of foreign bank lending growth is foreign direct invest-
ment, or more specifically, the setting up of industrial zones in Vietnam.
Currently, there are 130 industrial zones attracting 4,516 projects valued at
US$ 18 billion in foreign capital and 15 new zones are under construction.
Foreign banks capitalize on this and it provides the bulk of their credit
growth (VinaCapital, 2006).
While many foreign banks have entered the Vietnamese market, few of
them have expanded beyond one or two branches. Restrictions and diffi-
culties in licensing are the reason.
84 At present, the limit on individual share ownership by foreign banks is 10%, with a maxi-
mum of 30% for all foreign investors.
104
Performance
At the end of 2005, foreign invested credit institutions had US$ 536 million
in registered capital and almost US$ 6.3 billion in total assets, the latter,
a y-o-y increase of 25% (SBV, 2006). Total pretax turnover of foreign
invested and joint-venture bank branches had increased by an average of
45% up to the end of 2005. Total outstanding loans made by foreign banks
had increased 30% up to the end of 2005, growing at double the rate of the
overall banking system. These loans now total US$ 3.1 billion, or 9% of
the total outstanding loans. Doubtful debt levels remain well controlled,
accounting for only 0.06% of the total (SBV, 2006).
Challenges
There are two ways for foreign banks to expand in the banking industry,
organic growth and strategic investment in local banks.
Through organic, growth banks build their own business facilities, includ-
ing infrastructure, human resources, equipment and network. Conse-
quently, all foreign banks start on a modest scale. This is a traditional
method, where the biggest drawback is time. This strategy has yielded
steady growth but from a low base given the various restrictions in place.
Foreign banks are restricted in mobilising capital, need capital of US$ 1.5
million to open a new branch and are limited in who they can lend to and
the proportion of VND deposits they can accept (350 % of capital).85 But
with the expectation of liberalisation, many foreign banks are setting up
100% owned subsidiaries to offer leasing, consumer lending and credit
85 HSBC, the largest foreign bank in Vietnam, has only two branches (HCMC and Hanoi)
with a prescribed registered capital of US$ 30 million. Standard Chartered Bank, which
has been in Vietnam since 1904, has also recently announced plans to open a second
branch in HCMC.
105
card services in the domestic market. Even so, until 2010 organic growth
will be limited.
The SBV (2006) has approved a new law that will allow foreign banks to
set up 100% owned banks (provided they have US$ 20 billion in assets, or
US$ 10 billion in the case of a joint venture). But foreign banks will have
to raise their registered capital to US$ 63 million, in line with local banks.
Currently foreign banks have between US$ 15-30 million in registered
capital (SBV, 2006). While there are no restrictions regarding the number
of branches a foreign bank can set up, as mentioned before, they must add
US$ 1.5 million in capital for every new branch. The SBV is considering
relaxing this rule for the first five branches, which would cover all foreign
banks currently operating in Vietnam.
In theory, the new FIBs will be able to raise as much VND deposits as
they can handle.The question remains, as always, whether they can do so
in practice. There are basic differences between the business practices of
local and foreign invested banks. First, foreign banks are happy to provide
loans without mortgaged assets while local banks insist on collateral secu-
rity. Foreign banks tend to be more client focused and skilled at cross-sell-
ing products. Fees tend to be higher, with local banks charging sources
fees of 1-1.5% instead of the 2-2.5%, charged by FIB’s as is the case with
Citibank, HSBC, or Deutsche Bank (VinaCapital, 2006).86
The second route is to buy shares in local banks, and 2005 demonstrated major
interest in this approach. Previously only long-established institutions such as the
IFC and Dragon Capital had become strategic shareholders in domestic banks.
86 However, opinions still vary on banking trends and some foreign banks have said that
limits on deposit capital mobilisation and branches will be fully removed after Vietnam
has joint the WTO.
106
Strategic shareholding also has its limits - 10% for any one foreign share-
holder and no more than a 30% stake for all foreigners combined. The
10% restriction will be raised to 20% soon but the 30% will remain firmly
in place. Given that most of the attractive banks have already established
foreign partners the desirable alternatives are quite limited.
107
Compared to other banking markets around the AsiaPac region, the level
of competition within the Vietnamese banking sector is relatively low. This
situation is largely attributable to the dominance of the four large SOCBs
which, between them, control 75-80% of total bank sector assets (2004).
While the growth of the jointstock banks since the beginning of the 1990s
has been rapid, their growth has been constrained by the segmentation of
the market – the markets for SOCBs and JSCBs are apparently separated in
terms of deposits and borrowers.
3.3.6 Conclusion
The banking sector faces several key challenges until the market opening
in 2010. The most important of these is the ability to compete with the
“foreign invasion” expected after 2010. Much needs to be done to improve
the competitive strength of the state-owned and private sector banks in the
meantime. In particular, by focusing on:
1. Tendency of consolidation
2. Undercapitalisation
3. Raising capital
87 As is the case in a number of emerging markets in Asia (e.g. China, India and Indonesia),
SOCBs are the primary providers of financial services to the rural market.
88 It would be interesting to compare the experiences of the Agricultural Bank of China
(ABC) and the VBARD / VBSP in terms of inefficiencies, asset quality and poor profit-
ability, with Bank Rakyat Indonesia (BRI), as the latter is in a substantially stronger finan-
cial and operating position (VinaCapital, 2006).
109
One way of doing this is to set high hurdles for any new established bank
before it can get a license. All banks need to have chartered capital of US$
63 million which is exceeded by the existing capital of only the very largest
JSCB’s such as ACB and Sacombank. All other existing banks fall far short
and will need to scramble for new capital or merge in order to meet the
new requirements. From next year, the SBV has circulated a draft proposal
to raise the minimum capital level to about US$ 300 million. As a result,
50% of the JSCB’s will have to face a merger or a takeover.
89 “Too many banks are still chasing too small a slice of the pie” (VinaCapital, 2006).
90 This number is still far too high and it is expected that it will halve over the next few years
as another wave of consolidation is overdue.
91 The EVN currently holds a 40% stake in An Binh Urban JSCB. The SBV hardly welcomes
new entrants in an already overcrowded marketplace unless they have the size, experience
and funds to help the consolidation process. And they are also wary of conflicts of interest
from large corporations owning pet banks.
91 Currently only about 11 out of every 1000 people in Vietnam have a credit history, a
penetration rate of about 1%.
110
3.3.6.2 Undercapitalisation
The JSCBs are in only a slightly better state with a handful able to cross
the 8% hurdle rate. Moreover, given that the domestic capital markets are
still in the early stages, raising new capital was the biggest challenge for all
the banks. The stronger JSCBs have responded partly by selling shares to
foreign strategic partners. Vietcombank and BIDV have both issued VND
denominated domestic bonds at a 1-2% premium to sovereign debt. BIDV
has obtained an international rating in preparation for a stock market list-
ing and possible overseas bond series. Sacombank has raised some equity
recently and most of the top tier of JSCBs have raised their capital substan-
tially in the past twelve months. Further down the line, where profitability
was lower and capital particularly limited the options were more limited.
The SBV is reluctant to allow smaller banks to raise capital from foreign
investors. Vietcombank, the second largest bank by assets, has chartered
capital of US$ 487 million, BIDV about US$ 240 million. Amongst the
JSCBs, Sacombank has chartered capital of US$ 118.6 million and ACB has
capital of US$ 68.7 million (SBV, 2006). In recent years the top nine banks
have been raising capital by about 40% annually. Going forward, all of the
banks have a substantial need to raise additional capital, to shore up their
Tier 2 capital base to bring them over the 8% CAR hurdle by 2010.
92 This compares with an average CAR of 13.1% in Asia-Pacific and 12.3% in South-east Asia.
111
Most recently, the situation has changed dramatically. The stock market
has exploded and bank shares have been the first choice for domestic and
foreign investors. This has made access to additional capital significantly
easier. In fact, access to capital became so easy that it lead to a risk of abuse
by poorly managed banks. To address this problem, the SBV just intro-
duced new regulations requiring banks seeking additional capital to get
SBV’s permission.
One of the key challenges for the banking sector is to raise their tier 1 and tier
2 capital to the international standard by crossing the 8% CAR hurdle rate by
2010. The central bank is drafting a plan to inject US$ 687 million of govern-
ment money into three banks between 2006-2008. Incombank, BIDV and
Agribank have all expressed strong interest. According to the central bank,
this injection will represent only part of the total US$ 1.25 billion the banks
will need to reach the 8% hurdle. The balance, apart from a token US$ 99
million soft loan coming from the World Bank will have to be raised on the
capital markets.
To do so, the banks will need to raise billions of dollars in both debt and equity
financing. Bond issuance is currently the only realistic option for the SOCB’s
and the best of the JSCB’s. The second tier banks will have to rely on issuing
equity capital until the ceiling rates on bond coupons are lifted. There are issues
to be addressed on the equity side too. Foreign investment in commercial
banks is regulated under decision 228 (issued on 1 December 1993). The SBV
stipulated that total charter capital of JSCBs in Vietnam, held by foreign inves-
tors, must not exceed 30% and they cannot trade their shares the first five years.
Finally, only the world’s top banks can be considered as potential investors and
must be vetted by the government.
What is at stake here is not just the 8% hurdle for capital adequacy. The
banks’ ability to expand their lending base is constrained by the lack of long
term capital. The result is a constraint on medium to long term lending and a
deposit / lending mismatch. Since May 2003, the SBV has allowed commer-
cial banks to lift the cap on their use of short term deposits mobilised to
provide medium and long term capital loans from 25% to 30%. This is only
a temporary solution.
112
It is expected that the top five JSCB’s will raise US$ 1.5 billion between
2006 and 2010 to keep ahead of the proposed new capital requirements
(VET, April 2006). ACB and Sacombank will also have substantial capital
needs going forward. ACB has recently increased its chartered capital from
VND 948.32 billion to VND 1.1 trillion. VIB has increased its capital from
VND 595 billion to VND 711 billion while Eximbank increased capital
to VND 815 billion (VET, April 2006). Most of this fundraising has come
from tapping existing shareholders for new money while also adding some
new investors.
- In the middle tier, more dynamic joint-stock banks take a more aggres-
sive approach to technology investments, resulting in a harmonious match
between investments needed and available resources.
93 D ata from European banks is easier to come by and we have found that these banks spend
an average of 10-30% of operating expenses on IT (VinaCapital, 2006).
94 Asian banks such as DBS, Kookmin, and Bank of China spend between 4.2% and 17.7% of
operating expenses on IT with an average of about 11% (VinaCapital, 2006).
95 In general it is believed that Vietnamese banks are under-spending their Asian counter-
parts by approximately 30-40% (VinaCapital, 2006).
114
There are two other issues relating to management. One is the reduction
of operating costs and the other is the adoption of international standards
and transparency.
Bank margins have been quite low as a result of reliance on low margin
lending business and the high percentage of non-commercial loans made
in the past. As banks answer to shareholders they will have to focus more
on profitability and expand their product base to increase margins.
At the same time, the adoption of Basel 2 standards and the technology
transfer from future strategic partners should enable Vietnamese banks to
improve their transparency as they adopt more international standards for
reporting and accounting.
The Vietnamese banks’ current customer base and hence their strengths
and weaknesses are largely a carry over from their former role within the
state bank. The state sector accumulated substantial bad debts in the years
immediately after the Asian crisis necessitating a large injection of govern-
ment capital which took place in 2001-2003. Having been recapitalised, the
SOBs have continued to grow rapidly in terms of deposits and assets.
Bodies such as the World Bank and others have also offered consid-
erable technical assistance to strengthen the banks’ management and
operational capabilities. Despite progress made in re-organising the
SOCBs prior to equitisation, supporting agencies have identified some
96 Once the incestuous relationship between the SBV and the state-owned sector has been
replaced by the discipline of the marketplace, it is expected, that corporate governance in
the banking sector will improve markedly (VinaCapital, 2006).
115
areas that need further improvements before they can reach interna-
tional standards. 97
The gaps in these areas can only be closed with the help of strategic inves-
tors or advisors, and the question is just how much knowledge transfer
foreign investors will permit in return for only a 10%, or even 20%, stake
in a bank (VinaCapital, 2006).
In this part, the results of the analysis of the banking environment, the
banking industry, and the banking market are presented. This provides
a general overview of the situation, and the challenges the country and,
more specifically, the banking sector in Vietnam is facing. The results of
this part serve as a basis for the surveys about the corporate governance
practice in the banking sector which are discussed in Chapter 4.
97 Such as Organisation and management; Financial capacity; Risk and liability manage-
ment; New products and services; Management information services; NPL resolution;
Human resources development.
116
Figure 3-31. below identifies the major external and internal potential
change factors which could have a significant impact on the Vietnamese
banking industry and which will be the basis of a scenario analysis later in
this document.
Strengths
be able to fully leverage market
corporate governance system
opportunities.
- The rapid introduction of a
state of the art IT system
- A quick infusion of the
necessary capital required to
modernize operations, solve
NPL related problems and
fund new products and
services
Figure 3-31. The External Change (CHe) and the Internal Change (CHi)
119
Figure 3-32. lists some of the major issues behind the SWOT analysis which
the banking industry as a whole and each individual bank has to address.
CBIs Description
Corporate Corporate governance is lacking in most companies. To
governance operate successfully and compete in a liberalized
banking environment, banks must establish a corporate
governance system that is consistent with global industry
standards and expectations
Business Most of the Vietnamese banks, including some of the
infrastructure and largest ones, lack a sufficiently sophisticated and
systems effective business systems and infrastructure (e.g. IT,
HR, Risk Management) to support modern and
competitive banking operations and, especially, the rapid
growth in the size and complexity of the products and
services demanded by the market place.
Skills and abilities Many of the existing banking professionals lack the
education, experience and knowledge required to lead
and manage a modern banking business effectively.
Products and The existing products and services are far fewer than
services those offered in the West and are increasingly unable to
meet the expanding needs of an expanding economy,
expanding businesses and a growing, better educated,
wealthier, customer base.
Business strategy Most of the banks do not have business plans and
strategies built based on a corporate SWOT analysis
which would provide the blue print for a competitive
business model in a rapidly expanding and changing
banking market.
Financial Many, if not the majority of the banks, are
resources undercapitalized to be able to fund their existing
businesses, let alone to take advantage of the growing
opportunities and the accompanying financial demands
placed on them.
Dependence on Banks need to have a professional management team
major and an active and capable governance structure in place
shareholders whose goal is overall business optimization rather than
to reflect the interests of any one particular shareholder
4.1 Background
Management” (in Vietnamese: Quản Trị Công Ty). While translating the
book “New Corporate Governance”, by Prof. Dr. Martin Hilb, we intro-
duced the term “Quản Trị Hội Đồng Doanh Nghiệp” which is descriptive
of the entire connotation of “Corporate Governance”.
Within the frame of the empirical research, we had conducted two surveys
about the issue “Corporate Governance”. The first survey (from now on
called First Survey) deals with the overall situation of corporate gover-
nance in Vietnam that took place during the above mentioned Corporate
Governance event. However, we also combined the results of our surveys
with the survey results of others to get the whole pictures of the issue of
“Corporate Governance” in Vietnam.99
The second survey (from now on called the Second Survey) was conducted
during the first quarter of 2007. The idea was to assess the progress that
has been achieved in the area of Corporate Governance especially in the
banking sector in Vietnam since the aforementioned event.
4.2 F
irst Survey: Survey about the overall situation in
Vietnam
- Examining the systems which are used to “direct and control” the firms
in Vietnam
Directors
19%
Chairman /
Chairwoman
30%
Members of Top
Management
23%
Members of
BoD
28%
100 We had set an assumption that one person represents one firm, because the questionnaire
response was completely anonymous.
100 Details of the questionnaire see Annex.
125
27%
29%
Listed
Will be listed in the future
Will not be listed
44%
The objective of the Second Survey was to find out, what the changes or
improvements were in the last 12 months after the Corporate Governance
event of 6 January 2006 concerning the issue “Corporate Governance”
especially in the banking sector in Vietnam.
126
In two cases, the interviewer had to the phone call again in order to
continue the interviews because the information required could not deliv-
ered immediately.
It is also important to state that each bank contributed only part of the
topics mentioned below, because the interviewees either didn’t have or
didn’t want to provide the information. Topics of the questionnaire were
as follows 101
6. Board culture
Because the Banks that participated in this survey wished to keep their
anonymity, we have avoided using their name. We number the related
banks according to the chronological sequence in which we conducted the
survey, e.g. Bank1 or Bank2. In the Figure 4-4., there is a brief overview
about these banks which took part in this interview.
128
Chartered Capital
Ownership status
Total members
Non-executive
Average age
(US$ m)
Non-VN
Deputy
Name
female
Male
of
VN
Banks
Bank1 Listed 11 10 1 10 1 8 0 58 69 Shareholders were
mostly state-owned
companies and
governmental
institutions, but the
Bank was a JSCB
Bank2 Listed 11 9 2 8 3 4 6 57 120 The Bank was a
SOCB; Has several
foreign strategic
partners and also
receives TAA, i.e.
transfer of
technology and
know how was
ongoing
Bank3 OTC 11 9 2 11 0 57 112 The bank was very
profitable
Figure 4-4. Some facts about the banks’ BoD in the Second Survey
As we can see from Figure 4-4., the numbers of board members in most of
the banks varied from 9 to 11. All the members have a university degree.
However, all the board members in the banks here do not have profes-
sional experience in a modern bank in Western countries. Recently, Bank1
129
and Bank2 also have foreigners in their Board. They are representative of
foreign strategic partners such as Investment Funds, Foreign Banks. The
numbers of female members are still low. In 2 banks, the chairmen are no
longer CEOs at the same time, but they still do the tasks of a CEO.
Benefits
u
R e s o r c es
Stru lationships re
cture Re Cultu
Vision
s
Sy
es
ste
oc
Pr
Current situation:
All the banks which participated in the Second Survey were of the opinion
that having a strategic plan and a strategic planning process was essential
for the success of the bank. However, due to the short history and rapid
development of the banking sector in Vietnam, most of the banks had not
set up a strategy planning process.
Bank1: The vision was cited by the Chairman during the interview: “We
are thriving to a respected financial services group: offering Retail banking,
Private Banking, Business Banking and Investment banking. Furthermore,
we will also have a Finance company, Insurance company, Asset Manage-
ment company and Securities company.”
“To achieve this vision, we have to increase the chartered capital, to develop
the skills of key people and to cooperate with domestic and international
partners for the transfer of technology and management know-how.”
Bank2: Also the vision was cited by the Chairman during the interview:
“The vision of the Bank for next five years is to be a leading Joint Stock
Commercial Bank (JSCB), and to be in the third or fourth position in the
102 I n a certain bank we interviewed the founder of the bank. Moreover, the Chairman
of the Board asked his CEO to present a strategy of the Bank. The CEO retired a few
days to his office. Then he presented the new strategy to the Chairman which was
than accepted.
131
banking sector in Vietnam. That means that we will outpace one or two
SOCBs.103 In order to achieve this vision, we will increase the market share
through opening more branches nation-wide, by offering more retail banking
products, by changing the marketing concept (until now, the customers came
to the Bank; in future we will actively contact our potential customers, in
other words, we will become more customer oriented), through the creation
of more financial and forex products (in cooperation with Life Insurance
and Fund Management Companies). We will also place emphasis on improv-
ing the human resources situation.104 One of the most important competitive
advantages of our Bank is having three foreign strategic investors: IFC, Stan-
dard Chartered Bank, and Dragon Capital”.105
The vision and the new strategy of Bank2 are communicated to the middle
management through several communication channels such as in house-
magazine, meetings, emails and also team building activities and events.
Bank3: The vision of the bank is “to belong to the Top Ten Bank in Viet-
nam and to be present in 64 Provinces of the country. We are different
than other banks in the aspect that we do not take Vietcombank as a
benchmark. In the next five years, we will set up a Jewellery company and
an In-house University, and have branches in the surrounding countries
such as in China, Cambodia and Laos in order to serve the growing needs
of the customers.”
103 A
s stated before (see 3.3 Banking Industry) the 5 SOCBs have around 70% of the
market share.
104 I n this respect, the bank applies several tools for example in the remuneration system;
the bank will introduce call option, generous bonus to motivate people to stay. The
bank is building up a training centre in order to develop the skills of the middle and top
management. On the other hand, the bank also buys talents from the competitors.
105 3 0 % of the chartered capital is contributed by the three strategic foreign investors.
While Dragon Capital invests the most important seed capital in the bank, Standard
Chartered and IFC provide Technical Assistance to improve the technology, profes-
sional and management skills.
106 Currently the bank has invested US$ 5 million in the data warehouse.
132
As the results from the Second Survey show, the stated vision and strate-
gies are different from the version published in the brochures or websites
of the banks. The interviewees have also admitted that the “real” vision
only existed in the minds of some members of the Board and top manage-
ment, but was not yet communicated widely to the entire company.
Our suggestions:
According to Hilb, the composition of the board, and the board culture,
board structure and success measures have to be aligned (Hilb, 2006).
Therefore, in the strategy development process (see Figure 4-6.), the BoD
and top management have to share the work. A clear delineation of the
roles of the BoD and of the top management is critical to the success of
the bank.
Monitoring
Phase IV:
Phase III:
Initiation
Phase II:
strategy
Phase I:
Strategic levels
Figure 4-6. Involvement of the BoD and of the top management in the
strategy process (see also Hilb, 2005)
107 For example, Hoa Viet (Chinese-Vietnamese) brand, 8th March Brand (for women only).
108 Recently, the bank has increased the chartered capital from US$ 175 millions to US$ 280
millions. And the growth rate of the chartered capital is around 50 % yearly. Currently,
the Tier 1 is 9%, thus complying with the Basel I.
133
In the case of Vietnam, since most of the banks would be just starting to
implement a strategy planning process, we recommend, that the process be
initiated by the BoD (together with top management). Based on the change
in the banking environment, in the banking market and in the bank-
ing industry, the banks have to review their existing vision and mission
statements and the corporate as well as business strategy of the company
(Gruenig/Kuehn, 2006). The strategy development process is then divided
into several steps (Lombriser/Alplanalp, 2005).
Strategy The overall environment, the market and the industry as well as
assessment the bank itself shall be analyzed.
Strategy This step consists of the development of the vision and mission
development statements, the corporate strategy and business strategy (and
functional strategies - for each department).
Monitoring This step includes the following areas: (1) change in the relevant
strategy business environment; (2) review of the strategy effectiveness;
implementation (3) progress control of the strategy implementation.
The analysis and projections for the external business environment define
the risks and opportunities for the company. An internal corporate analysis
reveals its core competencies, strengths and weaknesses. The SWOT analyt-
ical and planning tool is used in the process. The SWOT analysis needs to
include an External and Internal Change factor: the external changes (CH-
e) impact on Opportunities and Threats in the banking industry, and the
internal changes (CH-i), impact on the Strengths and Weaknesses of the
company (Mayer, 2006). Based on these results, the critical business issues
can be identified. These critical business issues have a fundamental impact
134
Main tasks
Decision group ■ Determines the objectives
■ Project leader and general conditions of
■ Members of the board and the project
managers responsible for the ■ Discusses and approves
businesses included in the project the results of analysis
■ Optionally: Selected members of ■ Discusses the strategic
the working group options and makes the
■ Optionally: Consultants selection
■ Approves the final
documents
Main tasks
■ Keeps the project on course
Steering committee ■ Adapts project organisation
■ Project leader if necessary
■ Leaders of the working groups ■ Determines and assesses
■ Project coordinator options for the corporate
■ Optionally: Consultants strategy
■ Makes the presentations
before the decision group
Main tasks
■ Carries out strategic analysis
■ Determines and assesses options
for one of businessthe strategies
■ Formulates some of the strategic
documents
The strategy project team is lead by the steering committee, which consists
of one or several members of the board and of top management. The project
team is supported by several workgroups. In addition, the team can also
be assisted by external consultants who can contribute (Gruenig/Kuehn,
2006): to project management, planning methods, and assist with the deci-
sion-making process. The results of the strategy development project are
then presented in a steering committee meeting. Based on the strategy
recommendations of the project team, the members of board and the top
management who are represented in the Decision Group then decide on the
bank’s strategy.
The strategy development also consists of several stages: vision and mission
statements, corporate strategy, business strategy (Lombriser/Aplanalp, 2005):
Vision and mission statements: The first step in the strategy development
process is the formulation of the vision and mission statements of the
company. The corporate mission and vision are the foundations of the
strategy development process and are reflected in each stage of the devel-
opment process. This ensures strategic consistency throughout the plan.
These abstract terms have to be transformed into a plan about how to
realize the desired future.
The board selects the most promising strategic option benefiting all stake-
holders and approves its implementation. The approval process also includes
the allocation of the required resources, establishing important milestones
in the implementation process and the identification of key information
requirements of all the relevant stakeholder groups (Hilb, 2005).
109 E
xamples: Sales of an unprofitable business as a consequence of a new corporate
strategy; introduction of direct delivery to large end-customers according to new
business strategy requirements.
110 Examples: Training courses to improve understanding of the new strategies to adjust-
ments to organizational structure to accommodate newly-defined business fields.
137
112 The Bank must ensure that employees are willing and able to implement strategies for
example by making the information available. As already known from the banks that
participated in the interviews, senior management even keeps their vision and strategies
secret, which makes it difficult for employees to contribute to successful implementation.
138
Early detection
- internal development
- external development
- Immediate measures
- Set of measures or of projects
The causes for the current and possible future divergences should also be
identified. After this step, the necessity of developing new (or revised)
objectives and strategies should also be decided.
Current situation:
In this section, we take a closer look at the Committees at the Board level
(such as Audit Committee resp. internal Audit Function; Committee for
Nomination & Remuneration; Risk Management Committee) and also at
the level of top management.
In our First Survey, 32% had Audit committees (12 firms), 8% had Nomi-
nation committee (3 firms), 13% had Compensation committee (5 firms),
47% had several committees (18 firms)114. Figure 4-10. illustrates the firms
with committees.
Audit
committee; 12;
32%
Others; 18;
47%
Nomination
committee; 3;
8%
Compensation;
5; 13%
114 The other committees are: Supervisory committee, monitoring committee, strategy
committee, Investment committee.
140
Bank1: The Supervisory Board was elected by the Annual General Meet-
ing (AGM). They were representatives of the shareholders. However, they
needed to be approved by the Board of Directors.
Bank2: On the level of the BoD there were the following committees:
Credit Committee, Investment Committee. These two committees were
composed of the members of the BoD and top management.115 The Super-
visory Board was elected by the shareholders at the AGM.116 They were
usually independent, i.e. they were not employees or executive members of
the bank. Some of them had an office at the bank. They could co-operate
with the Auditing Committee which included Internal Auditing Depart-
ment and the External Auditing Teams. They could give their recommen-
dations to the BoD and Top Management, but they had to report directly
to the AGM.
The Chairman and the CEO had clearly distinguished responsibilities and
duties. While the Chairman was the legal representative of the bank at the
State Bank of Vietnam and other governmental authorities, the CEO repre-
sented the interests of customers, shareholders, employees and society. At
this bank, neither the Chairman nor the CEO was more important than the
other person. They acted as a team to bring the benefit to stakeholders. It
is also interesting to note that the members of the top management were
not on the Board.
115 According to the Chairman of Bank2, the members of the Supervisory Board must have
the following abilities: successful track records, integrity, and knowledge of accounting
and financial management.
116 The Top Management team of Bank2 consisted of a CEO and 6 Deputy CEOs. One of
the Deputy CEOs was a standing member, who could represent the CEO in all matters
as needed. He made decisions and represents the CEO when the CEO was unavailable.
This served as a way to mitigate risk. He served the role of a co-CEO. The remaining 5
Deputy CEOs were also the heads of different divisions.
141
Supervisory Board
Board of Directors
Credit Investment
Committee Committee
Nomination &
Top Management Audit
Remuneration
Committee
Committee
Bank3: The bank has recently become a listed company. Therefore, the BoD
had to act in the interest of the stakeholder groups. The benefit to deliver
to the stakeholder groups is understood as added value to the public, to the
shareholders, to the employees.117 The board consisted of 11 members, of
which 2 were women and 3 were expatriates. The bank also had a special
appointment policy: in top and middle management, if the position of the
director was a man, than his deputy had to be a woman or vice versa. The
reason, according to the chairman, was that they had to complement each
other. The assignment period was also limited to four years at most.
Another special regulation was that each year, each branch director had
to take a three-week vacation. During this time, he was represented by a
“mobile” director from headquarters. The deputy was not allowed to repre-
sent him. The “mobile” director had to write a field report to the BoD
and top management. This was considered as a measure of Internal Audit.
After the period of four years, they returned to headquarters and attended
a three-month-training programme. Afterwards, they could either return
to their former position or were transferred to another position. During
the training programme, they were under observation of the Nomination
Committee and Remuneration Committee.
117 According to the chairman, customers are considered as partners, not stakeholders,
- a definition that indicated that the concept of stakeholders is not yet clear.
142
The BoD was responsible for setting the policies, but usually, such policies
were not applicable in a rapidly changing environment. Top management
had to implement such policies, but they did not have adequate authorities
to adjust the outdated policies.
Board of Directors
Supervisory Board
Top Management
Credit Investment
Committee Committee
Bank5: It is also interesting to know that in the Supervisory board, all the
members are female. The reason is unknown. They are appointed by AGM.
Theoretically, they report to the AGM, but practically, they report directly
to the chairman. They do not have another position in the company. The
AGM also decides on their remuneration.
Consultancy 33%
Others 40%
Pharma 75%
FIS 56%
Hotel 50%
Transportation 43%
Trading 43%
Manufacturing 50%
Telecommunication 40%
Foreign
19%
Joint Stock
37%
Private
16%
SOEs
28%
Bank3: At the Board level, the Audit Committee was composed of four
completely independent members and reported to the Supervisory Board.
They also worked closely with the external audit company. At the level of
top management, the Internal Auditing team was right under the CEO and
reported directly to him.
Bank4: The interviewed bank was one of the five SOCBs. The BoD consisted
of four members. However, only two members were responsible for strategic
and operational tasks and duties. The remaining two members were “decora-
tion”, meaning that they did not have any responsibilities on the board.
Bank4: The bank did not have an Audit Committee, but only an Internal
Auditing team. This team consists of 11 members and is under the CEO.
There was no Risk Committee and the function of Risk Management was
also not available. Except for the credit risk, they considered the business
of the bank as not being risky. The NPL is 1,38 %.119
118 In our First Survey, most of the respondents came from listed or soon to be listed
companies: according to our question 2 – out of 45 companies, 12 were listed, 20 will
soon be listed and only 13 will not be listed.
119 Bad debt is defined according to the law as when the borrowers are not able to pay back
145
In response to our question, what was the biggest risk that bank had experi-
enced recently, Bank2 told the following story: “There was a rumour in the
market, that the CEO of the bank stole a large amount of cash and disap-
within 12 months after the redemption date. Now the bank uses a method to circumvent
the legal regulations mentioned before. Instead of making a one-year contract with the
borrower, the bank fixes the lending period for three years. However, the bank informs
the borrower that it will get back the lending sum within one year. In the worst case, the
bank can get its lending in the third year: Such lending is not considered according to
the law as Bad Debt.
120 In the banking industry, it is the State Bank of Vietnam together with the Ministry of
Finance and the Ministry for Labours, Invalids and Social Affairs.
146
peared. The bank knew the story and as it turned out to be just a rumour,
it did not pay attention, because it considered it irrelevant. One morning,
the public found a dead cat in front of the bank’s headquarters – according
to the belief of local people, a dead cat is a symbol of an unlucky event. A
few hours later, the dead cat was still there, and the public believed that
the bank must be in big trouble. Within hours, the customers stormed the
bank and withdrew their deposits, which almost led the bank to illiquidity
and disaster.” From that time on, the bank had learned that they had to pay
attention to public relations and be able to handle crisis management.
Bank3: This bank has introduced new functions to cover risk manage-
ment, NPL management through an Asset Management Company, and a
Treasury Department. This bank has not constituted an ALCO. Further-
more, Bank3 has also not empowered the Risk Management Centre with
the management of liquidity risk that remains the responsibility of the
Planning Department. This bank has not introduced an Organisation and
Methods Department to standardise procedural development that remains
within the domain of individual departments. Besides, Bank3 has not
introduced a Branch Operations Department with the consequence that
branches still report not only on risks, but also on other issues separately
to all head office departments.
Also in other banks, the Risk Management process still has a lot of room
for improvement.
Our suggestions:
The primary reason for the restricted role of the shareholders is that there
is an essential conflict of interest between the shareholders of a bank and
the Board of Directors of a bank. The investors, which may be a better term
to use than shareholders, will naturally wish to maximise the value and
return from their investment and thus will press the Board of Directors to
earn as much income as possible and pay the maximum dividend (ING-
Report, 29). This may force the directors to agree to a greater degree of risk
than is prudent and deplete the capital adequacy of the bank.
The Board of Directors has a primary duty to protect the interests of all
stakeholders in the bank, in particular the depositors and thus needs to be
sheltered from undue shareholder influence to take undue risks for a quick
financial gain and possibly long term problems. The proposed revision of
Decree 49 sets out detailed powers and duties for the board of directors.
The BoD is a senior decision making body of the bank (usually comprises
of 7 or 9 experienced and knowledgeable professionals).
The Board shall has at least the committees required by the rules of the
NYSE, currently an audit committee, a compensation committee, a nomi-
nating committee, and a risk resolution committee.
121 They are not responsible for the implementation of these policies; just for ensuring that
their decisions are actually implemented (ING-Report, 2006).
148
Board of Directors
Supervisory
Risk Resolution
Committee
Committee
(Audit Committee)
Nomination Remuneratio
Committee Committee
Top Management
Supervisory Committee
The Risk Resolution Committee looks at and decides on loan and market
risk write offs that are recommended by the top management. In our view,
they should also have a larger role in approving the policies for general
credit, market and operational risk of the bank and subsidiaries. They are
also supported by other committees of top management (e.g. Asset and
Liability Committee, Credit Committee, IT Steering Committee, Risk
Management Committee).
Top Management
BoD
Top Management
The CEO is the head of the executive management of the bank. Until
now, In Vietnam the CEO is usually a member of the Board of Direc-
tors. However, the company size in Vietnam is still on a small scale.
Moreover, the BoD still has a high reputation in the business world.
Due to the decision power and “hands-on” experience of the BoD and
the CEO, the partners of the company or the authorities often want
to deal with them only (because the CEO is usually also a member of
board). Therefore we propose that at least in the years to come, the
CEO should also be member of board.
The CEO also proposes and supports all initiatives submitted to the Board
of Directors. Furthermore, the CEO is also responsible for the implemen-
tation of all decisions and the smooth day-to-day running of the bank.
ALCO approves all policies and limits relating to capital adequacy, fund-
ing, liquidity, open market positions and balance sheet structure (essen-
tially all liability and treasury decisions that are proposed by the Risk
Management Group and the ALCO Support Department of the Financial
Group). None of its authorities are delegated. Treasury and Trading Group
are given limits within which to trade.
151
The Credit Committee is the senior decision making body on all individ-
ual credit limits. It may delegate some authorities to the Risk Management
Group who may in turn delegate some authorities to its own departments
and the Retail and Networks Group (branch limits).
The decisions to be made regarding IT are highly complex and usually very
expensive. Moreover in Vietnam, the development level of IT is still in a
very early stage. The top management cannot be expected to be technical
experts. The IT Committee usually comprises of a member of the Board of
Management as Chairman, the head of IT, the Chief Financial Officer and
possibly a representative of the external auditor. The IT Committee looks
at all issues regarding IT, in particular the IT strategy and development
programme, and makes recommendations to the Board of Management
prior to approval of the Board of Directors.
The bank should investigate the current and future possibilities in hardware
and communication infrastructure; make a cost benefit analysis and selection;
develop a reliable IT structure enabling the implementation of all future systems
and applications; and install a communication network to all branches.
The RMC establishes and monitors all the units that have discretionary
authority within the bank and subsidiaries to approve limits for credit,
market and operational risk.
152
Risk Management can become a core competence of the banks to build the
long term stability of the bank, its competitiveness in the face of increasing
international competition and the maximization of profits.
Risk
Management
Group
(Chief Risk Officer)
Primary responsibility rests with the Risk Management Group, mainly the
Chief Risk Officer, to propose a framework within which the bank takes
credit, market and operational risks. These proposals are then approved by
the Risk Management Committee of the Board of Management and ratified
by the Risk Resolution Committee.
Credit Division
Review all credit applications from “Front Office” Groups for individual,
group, sector or country limits. This will include equity investments as
they are loans without a maturity limit. Facilities will be approved under
discretionary limits or submitted to Credit Committee for approval. The
Credit Division is divided into a number of Credit Departments either by
customer sector, customer location or customer size.122
The banks should introduce a new corporate structure that reduces spans
of control to allow top management to concentrate on strategic issues,
increases the delegation of responsibility, clarifies reporting lines and chains
of command, clearly differentiates between line management and functional
relationships, removes the potential for conflicts of interest, groups depart-
ments that are closely functionally related under the management of a deputy
director, and introduces new functions that are required for successful
reform and re-engineering of bank’s business and effective risk management
as a prerequisite for corporate plan implementation (ING-Report, 2006).
4.4.3. Leadership
Current situation:
The results of our interviews and surveys have shown that the board
members (including SOEs and SOCBs) have the following characteristics:
Here we are also interested to know about the size of the board in different
types of companies in Vietnam such as state-owned or joint stock companies.
40
35
30
Percentage
25
20
15
10
0
3 members 4 members 5 members 6 members 7 members 8 members 9 members
Number of members of boards
According to our First Survey, the number of board members varied from
3 to 9. About 38% of the responding companies had 5 board members, 23%
had 6 members and 12% have 7 members. Of the 5 banks that participated
in the Second Survey, 4 banks had 9-11 members. It is interesting to note
that SOCBs had a higher number than the JSCBs.
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Shareholders Employee 1 State 28 Customer 1 Strategic Others 1
30 partner 5
In our Second Survey, we have discussed with the Board members, espe-
cially with the Chairmen their tasks and also the tasks of the Board
members.
Bank1: The Chairman had been serving the second terms in the current
position. In his stewardship, he had already four CEOs working with
him. The tasks of the Chairman were very diverse and challenging. One
of the tasks was to co-ordinate different members of the BoD. It should
be mentioned here, that most of members considered themselves as “very
156
On one hand, the Chairman had to call the board members to formal meet-
ings. On the other hand, he also had to inform them or convince them to
make certain decision in informal one-to-one meetings. Furthermore, as
representative of the shareholders he had to call for and chair the General
Shareholders’ Meeting. His task was also to set the strategic direction
for the company. Moreover, he was also responsible for nominating the
members of the Top Management and for controlling daily expenses and
costs. He also approved the budget remuneration for the Board Members
and Members of Top Management after the Nomination and Remunera-
tion Committee have prepared the decisions.
With projects of strategic relevance for the company, he had to initiate and
network internally and externally in order to get the projects continued.
The chairman was also the legal representative of the bank.
It should also be mentioned here that the Chairman is also the CEO of
another large SOE. The time he spends for the CEO position the SOE is 50
% and as chairman 50%.
Bank3: The bank has recently become a listed company. The Chairman was
also the founder of the bank. He was also the Chief of Compliance Offi-
cer. In the strategic planning project, his task was to initiate the project,
ratify the strategy and monitor the strategy implementation. The Board
consisted of 11 members, of which 2 were women and 3 were expatriates.
The bank also had a special appointment policy: in the Top and Middle
Management, if the position of the director was a man, then his deputy had
to be a woman or vice versa. The reason, according to the chairman, was
that they had to complement each other.
Bank5: The task of the Chairman is to take care of the strategic planning
and supervise the (daily) operations of the Top Management, Head the
Credit Committee and be a member of the Investment Committee. He also
chaired 5 BoD meetings a year and called the irregular meetings when
something happened unexpectedly that needed dealing with immediately.
Our suggestions:
We also recommend that the team of the BoD should be diverse concern-
ing demographic data, know how, and team roles (see also Hilb, 2005).
Therefore, a board evaluation (self- and external) should be conducted to
identify the strengths and weaknesses of the board. In the case of Bank3,
the Board is well aware of the relevance of the board composition. However,
the solution based on only the difference of gender is also not satisfied.123
123 T
he Bank also had a special appointment policy: in the Top and Middle Manage-
ment, if the position of the director was a man, than his deputy had to be a woman
or vice versa.
158
The Board is usually responsible for setting out the bank’s policies and
business direction through participation and endorsement of its vision,
mission, strategies, business plans and targets, and budgets, ensuring that
they are efficiently and effectively implemented by management to achieve
desired results, creating business value, and maximizing wealth to share-
holders (ING-Report, 2006).
Current situation:
Before we assess the culture of the board, we should have a closer look at
the corporate culture of the companies. According to our First Survey, 31%
considered themselves as customer oriented, and 17 % as trust oriented.
Only 8% characterized themselves as bureaucratic.
Others
10%
Customer
oriented
31%
Perfomance
oriented
34%
Trust oriented
17%
Bureaucratic
8%
and will be responsible for any breaches of the code. 32% did have a code of
conduct but in practice, management did not show a strong commitment
to high ethical standards.
In our Second Survey, we have received another picture of the culture of the
banks, but also of the board. In some banks, there is one person or a few key
members who keep the power in their hands and make strategically rele-
vant decisions by themselves – without having consulted other members or
committees. The other members, especially the non-executive members,
like representatives of foreign investment funds, usually do not have any
influence on the board’s decision and in the decision making process.
As stated in the Second Survey, the culture of board in most banks is not
cooperative and not performance-oriented, especially in the SOCBs: the
culture of board reflects the obsolete attitude of the centrally planned
economy. Usually, the members of board are assigned by the state and the
omnipresent Communist Party to represent their expectations and enact
their will. The assigned members are poorly paid. Thus, such members
give the impression of being very important, because the position is
considered as very prestigious, but they did not bring the expected perfor-
mance. Furthermore, the obsolete attitude of the assigned members is not
accustomed to accepting the opinion of others. In some cases, they act
according to the slogan “divide et impera” by putting the seeds of mistrust
in the team, especially when they want to achieve their personal interest.
Usually, when the members of the BoD are appointed onto the board, they
have already reached a certain age that they have nothing more to lose, but
their individual benefit.
With all the SOCBs, all of the members are not only from the same politi-
cal party, of the same gender but also from the same ethnicity. The need to
open up this backward looking culture is low. In a Bank that participated
in the Second Survey, most of the members are even from the same family.
The culture of the board is obsolete and is based on the size of capital
contribution.
160
Our suggestions:
It is quite interesting to read the results of the First Survey: 11.1% or (5) of
the 45 firms interviewed do not have (or do not utilize) any management
systems. The other 88.9% utilize at least one specific management system.
16
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Current situation:
In our First Survey It is impressive to see that about 75% of the respond-
ing firms selected the members of their boards based on networking. It is
not surprising that there is a Vietnamese saying that “Without network, no
work fulfilled!”
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Professional Leadership Social Political Availability Others: 5
competence competence competence competence of a large
10 8 6 11 network 34
Bank2: One of the selection criteria is that the members of the Board had to
be the representatives of the large shareholders. If members were shareholders
themselves, they usually had or needed to have according to the requirements
very good reputation and certain competencies. Examples of such competen-
cies are strategic and conceptual thinking, leadership skills, networking. It is
also important to mention here that these members were entrepreneurs.
The Chairman has indicated that in the near future, the Board intended to
nominate independent but competent members.
Independent members have been allowed to join the board since 2007.
Thus, the bank planned to nominate some more independent members.
According to the Chairman, each development stage of the bank brought
along certain problems to solve and challenges to face, therefore, the
composition of members also had to change in order to match the new
situation and developments.
Bank4: As this Bank is an SOCB, the selection process is very simple: all
the members of the BoD and of the Top Management were appointed by the
governor of the State Bank of Vietnam (SBV). The appointment criteria were
as follows: First of all, according to the succession planning of the SBV, the
nominated member had been the candidate for such a position in the succes-
sion plan. Each year, there was a meeting of high ranking officers of the SBV
and associated SOCBs. Then each officer proposed potential candidates for
the promotion. The Top Management of SBV evaluated the proposed candi-
dates according to their abilities, their political attitudes, their professional
and social behaviour in the last period (e.g. last year). Then the candidates
were narrowed down to the ones with the most promising potential. The
short listed candidates would be announced in the meeting of officers and
asked in an open survey about their opinions. Usually, there was no rejection
or criticism of the candidates. The meeting attendees assumed that the short-
163
listed candidates were qualified based on the evaluation of the Top Manage-
ment. The short-listed candidates would be presented to the SBV-Governor,
who kept them in the succession planning database. If there were positions
vacant, then the candidates would be appointed.
Due to the strict regulations of the state and owner of the bank, according
to the Chairman, there were, in theory, two ways to improve the effective-
ness and efficiency of the bank: to replace key people or to change the
organization structure. However, in an SOCB, it was nearly impossible to
replace the key people, because they were appointed by the SBV-Gover-
nor. If the appointed key person was not competent enough to take over a
position, the SOCB, in order to resolve the problem, nominated a profes-
sional expert to “assist” the key person sent by the SBV-Governor or would
modify slightly the organization structure.124
According to the Chairman, the Bank was well aware of the shortcomings
of the central appointment process.125 However, improvements could only
be efficiently introduced after the banks would become fully equitized and
especially after the Initial Public Offering (IPO). In the first phase, the
state would still be a major shareholder and could therefore appoint only
one or two representatives of the state on the Board. This would allow the
Bank to introduce a professional Corporate Governance.
From our First Survey, the number of board members varied from 3 to 9.
About 38% of the responding companies had seven board members.126
124 F
or example, the Bank has currently two HR-Departments. The official one is in charge
of remuneration policies, for insurance issues, for writing reports to the SBV, if there
are needs again for the key people. The unofficial one is in charge of the real issues of
the HR-Department.
125 N
owadays, when SOCBs has a key vacant position, they have to contact the SBV to
ask them to provide Human Resources. The appointment by the SBV is not necessarily
complied with by the need of the banks concerning professional abilities.
126 It is interesting to note that SOCBs had a higher number than the JSCBs.
164
We believe that this approach has many advantages. Former executives of the
bank, with their widespread relationships, with experience and know-how
of complex business activities and processes are often in a better position to
challenge management decisions. Moreover, as they do not have any signif-
icant business commitments outside of the bank or external directorships
they have the resources and time necessary to dedicate themselves to their
comprehensive responsibilities as Board members (see also UBS, 2007).
The Board shall, after each Shareholder General Meeting, appoint the
Chairman and one or more Vice-Chairmen from among its members. The
Board believes that the Chairman and at least one Vice Chairman should
have professional backgrounds as bankers.
Selection of Directors
127 UBS has also proposed the following: “These criteria include, among others, personal
qualities and characteristics, professional backgrounds and track records, the ability
and willingness to commit adequate time to the Board and committee matters, diversity
of viewpoints, experience and demographics, and specific knowledge and experience
for individual committee memberships” (www.ubs.com).
166
Current situation:
56% of the firms that participated in the First Survey have a fixed remu-
neration system for the members of their boards of directors, 40% pay
their members of boards with variable compensation system and only 4%
of board members have an honorary position only.
Honorary, 2, 4%
Variable , 18,
40%
Bank 2: The board members did not receive a fixed salary, but an allow-
ance for meetings which take place four times a year. They have no right to
purchase shares at par-value. The reason was that the Board members are sent
by the major shareholders and from there, they already receive a salary.
The standing members of Board (in this bank, there are 4) receive a
monthly salary, not as BoD members, but as Head or Vice-head of other
committees (e.g. credit committee, investment committee).
167
Bank3: All the Board members have an allowance of around US$ 20’000
a year. The standing members of the Board who are also heads of other
committees (e.g. Credit Committee, Investment Committee, and Nomina-
tion Committee) receive a regular salary. If the Bank would like to nomi-
nate two Independents Directors in the future, the remuneration system
will be improved.
Bank5: The members of Board do not have a fixed salary, but allowances.
The allowance has to be approved by the AGM. The Chairman and Vice-
chairman receive the salary as Head of Credit Committee resp. as head
of Investment Committee. All the BoD members and members of Top
Management and Supervisory Board are allowed to buy all together 1% of
chartered capital at par value. The lock-up time is three years. If a member
leaves the company before, so he or she has to return the share at the par
value plus the lending rate of the Bank.
Our suggestions:
Current situation:
128 E
ither the board members could purchase shares at par-value (with lock-up time for
one year) or their salary is paid in shares.
168
Foreign
evaluated,
22% Not
evaluated
yet, 30%
Self
evaluated,
7%
External
evaluated,
3%
Internal
evaluated,
38%
Our suggestions:
As already conducted in one bank that was surveyed, it is also possible that the
Board members can be assessed by the Chairman. We recommend that such
an assessment should be carried out by the individual as a self-assessment,
then between the Chairman each Board member in a so-called “Assessment
Talk” (Hilb, 2006). Hilb (2006) also recommends that a formal assessment
should be conducted “when a member is about to resign or when a severance
package is to be negotiated”. It is also possible that the Board members can
“elect to have a 360 Degree Feedback Assessment by an unbiased consulting
firm”, and “… decide to whom a brief feedback questionnaire is to be sent for
analysis” (Hilb, 2006).
169
Current situation:
It is obvious that the training situation for the members of boards can
be significantly improved. The result of questionnaire showed that
19% of the companies interviewed indicate that strategic management
is a desired topic of advanced training for board members, followed by
Finance & Controlling with 15 % and by Auditing with 13 %. We also
found out in discussions with different experts or in Vietnam that most
of the members of board did not have a sound education in modern
management. Some of them had a educational background as engineers
or as economists but trained in the former socialistic countries such as
Poland, Eastern Germany or Russia.
Others, 4 , 7%
Strategic
Management ,
36 Stratagems , 12, 19%
9, 15%
Information
Technology , 3 , Finance &
5% Controlling , 9,
15%
Risk
Management , 8,
13%
Auditing , 8, 13%
Human
Resources, 6,
10% Marketing , 2, 3%
Figure 4-26. Desired topic of advanced training for the members of boards
Our suggestions:
Ideally, the needs for the development of board members can be identified
by the “Assessment of Board Members”. The development measures should
bring the benefit not only to the board members, but also help to make
the undertaking of his or her tasks in the company more effective and effi-
cient. In other words, it should also bring the benefit to the company and
not just be a measure to “motivate” the board members.
170
To do so, the banks should define and document the procedures for train-
ing needs assessment consistent with the board development policy. The
banks should also carry out a training needs assessment and document and
prioritise requirements categorised by management, technical and univer-
sal training needs. Furthermore, it is also important that the banks review
and finalise a training curriculum based on a detailed needs assessment
and identify any external training needs. The banks should contract with
consultants for the preparation of courses and course materials, supervis-
ing and guiding the development as required.
Current situation:
Company-wide communication
According to our Second Surveys, there are quite few banks which have
implemented clear and effective communication procedures. In several
cases, the standing members of the BoD advise the top management just
verbally about their decisions. And if any communication troubles appear,
the top management must be responsible for these communication errors.
The reason is that top management has to take responsibility for their
underwritten signatures.
The VCCI-Survey also found out that only 53% of the companies commu-
nicate their enterprise-wide objectives to all employees, and staff under-
stand and work towards these objectives and know what they need to do to
achieve the objectives.
Board meetings
Only when
4 board
needed, 11,
meeting per
24%
year , 15, 34%
1 board
meeting per
year , 6, 13%
3 board
meeting per
year , 4, 9%
2 board
meeting per
year, 9, 20%
The main reason for this fact is that, relevant information may not be identified
and communicated in a timely manner to decision makers, if management
does not follow the company’s policies and organization chart.
172
Our suggestions:
Board meetings
129 Müller (cited in Hilb, 2005) recommends the following methods for directing meet-
ings: (1) assume preparation, (2) introduce each agenda item, (3) integrate or synthe-
size the contributions, (4) formulate motions clearly, (5) deal with important issues
first, (6) clearly state proportions of votes or breakdown of opinions, (7) keep to
schedule (8) explain the context and highlight the implication of each item, (9)
propose a schedule of communication, (10) assess and define confidentiality.
173
We have conducted the empirical research based on the two surveys accord-
ing to the “areas of focus”. However, these two surveys provided only frag-
ments of the complex issue of Corporate Governance. That is the reason
why we also included surveys conducted by others in order to deliver a
complete picture.
In our surveys we have found out, that many areas in the corporate gover-
nance can be significantly improved. We consider it as crucial that the
shortcomings in the Corporate Governance situation in Vietnam are
known and that we could make the recommendations to the (current and
future) board members and members of top management.
Vision and - A clear delineation of the roles of the BoD and of the top
strategy: Management is critical to the success.
Board - Banks should build up a culture where the needs and expec-
Culture: tation of all stakeholders are considered: A culture of trust
and of integrity should be introduced at the board level (but
also across the company).
130 For example, see studies by CLSA, McKinsey and the World Bank, profiled briefly in
‘Recommendations on Good Corporate Governance Practices in Vietnam’, p. 3.
176
The cumulative result can be “larger investment, higher growth, and greater
employment creation.”131 As a consequence, studies show that investors are
more interested in investments in and are willing to pay more for shares
in companies which are perceived to conform to higher corporate gover-
nance standards.132
132 Conversely, investors will pay less, or may simply choose not to invest at all, in firms that
display poor corporate governance practices. Put another way, companies that adhere
to higher standards of corporate governance tend to be rewarded with lower costs of
capital and higher share price valuations.
177
CHAPTER 5: IMPLICATIONS
Based on the analysis and survey findings outlined in the previous sections,
we conclude with some recommendations to promote better corporate
governance practices in Vietnam. However, it should be emphasized again
that the term “Corporate Governance” is very new in Vietnam. Therefore,
we should keep in mind that the concept of corporate governance is a rela-
tively broad one, and that it often seems to mean different things to differ-
ent people. Also, the concept is not yet well established or well understood
in Vietnam. It would probably be better to identify and focus on specific,
higher priority issues within the broad array of corporate governance from
a practical or implementation point of view as well as from the standpoint
of research and training. In this sense, it is important to find out, where
the most pressing needs for intervention are, and where the optimum gains
from such interventions could, more readily, be achieved.
2.1
1.1 Governance 4.1
Back- theories Background
3.1 5.1
ground
2.2 Environment Research
Characteristics
4.5 Recommendations
3.4. SWOT / CBI
1.4 3.3
4.1 Risk Board
4.4
3.4 Auditing Mgmt Composition
1.2 Keep it 3.2
Internal Board
Development
K controlled Board
1.1
External
Context Feedback
Industry
4.3
Research
4.4 Context
Summary
Communi-
Controlling
cation
2.3
Board
3.3
approach
Structure 2.2
Board Board
Compensation Culture
In the non-state sector, other topics that would benefit from further
research include the apparent weaknesses of supervisory committees in
many private firms as well as the considerable overlap that exists between
senior executives and members of the Boards of Management.
In our study, we also found out, that the members of boards, of supervi-
sory boards and also of top management need practical training in specific
corporate governance themes and issues such as Strategic Management,
Risk Management, Change Management, Auditing and Accounting and
modern tools of Human Resource Management.
Furthermore, it is also necessary to design targeted board programs, such
as Bank Governance, Educational Governance, Hospital Governance,
Governance for SMEs (Hilb, 2005, 212). These board programs should
not only be for people who are already members of boards, of supervisory
boards and of top management, but also future members.133 These efforts
should help on the one hand to provide the existing members with the
adequate knowledge and skills to perform their tasks effectively and on the
other hand, to broaden the pool of qualified and capable individuals who
can serve as members of boards in the future.
133 It does not make sense to have created the functions of the BoD, Supervisory Boards
and Committees if the members are not sufficiently trained to perform their duties
adequately. In 2003, Singapore found that a boom in initial public offerings had resulted
in a shortage of board directors, with some individuals sitting on ten or more company
boards - in addition to their full-time jobs. (See also The Business Times, Singapore, 19
November 2003 cited in IFC, 2006).
180
As pointed out earlier in the paper, there are currently 3,600 equitised SOEs
and there are an additional 1,500 expected to be equitized by 2010 (Viet-
nam Tiger Fund, 2007). It is worth stressing that the largest companies in
Vietnam will become equitised SOEs for example, VMS, BIDV, Vietcom-
bank, Sabeco and Habeco. Therefore, any efforts to improve corporate
governance standards in Vietnam should focus initially on larger business
entities, the majority of which tend to be SOEs. As the private sector 134 in
Vietnam matures and expands, more non-state firms will develop into large
corporate entities. However at present, it may be advisable to focus particu-
lar attention on (equitised) SOEs.
Our survey results suggest several areas of focus for future progress, such
as vision and strategy, structure of board, culture of board, leadership,
systems, processes, information and communication. For the successful
development, implementation and evaluation of corporate governance, we
recommend that any change in the area of focus should factor in the inter-
ests of the stakeholders groups.
134 Notwithstanding their future growth and sustainable development prospects, which
depend partly on good corporate governance, their immediate need to improve such
practices is clearly limited.
181
135 T
he experience of SECO has showed that combined efforts of multiple government
agencies and other relevant organizations increase the chance for success. The concerted
actions panning the following institutions: the State Bank of Vietnam, the Ministry
of Finance, the Ministry of Planning & Investment, the State Securities Commission
(SSC), the Ministry of Justice, the Vietnam Chamber of Commerce & Industry (VCCI),
some business associations, etc.
183
ANNEX
Reference
184
Executive Vice
3 Mr. Huynh Nghia Hiep ACB HCMC
President
Executive Vice
Bao Minh Insurance
4 Mr. Nguyen The Nang HCMC President and
Company
Member of Board
BIDV Securities
6 Mr. Do Huy Hoai Hanoi Managing Director
Company
Capital Mobilization
Director/ Univer-
8 Dr. Le Van Hung Department of Ministry Hanoi
sity Professor
of Finance
Chief Country
9 Mr. Lawrence J. Wolfe Deutsche Bank HCMC
Officer
Chairman of
10 Mr. Nguyen Thanh Long Eximbank HCMC
Eximbank
Hanoi Construction
12 Ms. Nguyen Thi Hoa Hanoi Chairwoman/CEO
Investment
Board members
Beat Waefler Honorar Consul in
15 HCMC of several com-
Honorar Consul HCMC
panies
Deputy Managing
16 Mr. Vo Minh Tuan Incombank HCMC
Director
Executive Chair-
17 Mr. Huynh Nam Dung MHB HCMC man of Mekong
Housing Bank
Vice Chairman/
18 Mr. Le Van Be Military Bank Hanoi CEO of Military
Bank
PriceWaterHouse-
21 Mr. Le Anh Thi HCMC Supervisor
Coopers
Founder and
22 Mr. Dang Van Thanh Sacombank HCMC Chairman of
Sacombank
Sacombank Securities
23 Mr. Nguyen Ho Nam HCMC CEO
Company
Organization
25 Dr. Ngo Chung State Bank of Vietnam Hanoi and HR Deputy
Director
Former Bank
26 Dr. Cao Si Kiem State Bank of Vietnam Hanoi
Governor
27 Mr. Dang Thanh Binh State Bank of Vietnam Hanoi Deputy Governor
Director of Devel-
28 Dr. Le Xuan Nghia State Bank of Vietnam Hanoi
opment Strategy
186
Director of Securi-
Ms. Bui Thi Thanh State Securities Com-
29 Hanoi ties Business
Huong mission
Department
Director of Se-
State Securities Com- curities Science
30 Dr. Tran Quoc Tuan HCMC
mission Research and
Training Center
Director of
State Securities Com-
31 Dr. Dao Le Minh Hanoi Research and
mission
Training Center
CEO of Viet A
35 Mr. Pham Van Hung Viet A Bank HCMC
Bank
Chairman of Viet
36 Mr. Do Cong Chinh Viet A Bank HCMC
A Bank
Chairman of
37 Mr. Nguyen Hoa Binh Vietcombank Hanoi
Vietcombank
Questions
1. Which position (s) do you have in your company? – (You can choose
several answers)
Chairman
Member of board
Managing Director (CEO)
Member of top management
Others:
Yes
Intended in the future
No
Strategic planning
Monitoring system
Strategic control for evaluation of the strategic implementation
188
6 How could you characterize your corporate culture? – (You can choose
more than one answer)
Customer oriented
Trust oriented
Bureaucratic
Performance oriented
Others
Internal evaluated
External evaluated
Self evaluation
Foreign evaluation
Not evaluated yet
Professional competence
Leadership competence
Social competence
Political competence
Availability of a large network
Others:
189
10. Which topics of advanced training should be interesting for the board
of directors in Vietnam? (You could choose more than one answer)
Strategic Management
Finance und Controlling
Auditing
Marketing
Human Resources
Risk Management
IT
36 Strategeme
Others:
Strengths, e.g.
- Strong capital basic
- Very fast asset growth in the last 5 years
- Strong hidden reserves
- Complement capital resources
- Rapid expansion of branch-network
- Best mortgage bank
-
-
Weaknesses, e.g.
- Low reputation
- Low profitability ratios
- No suitable IT system
- Weak credit management system
- Primitive Asset / Liability Management
- Lack of product diversity
Concentration of funding base
Narrow geographical focus
Lack of professional and high-potentials
191
Importance Satisfaction
Very unimportant
Very unsatisfied
Very important
Very satisfied
Unimportant
Unsatisfied
Important
Satisfied
Evaluation criteria of the board
1 Strategy
1.1 Clarity of vision and values
1.2 Involvement of BoD in the setting of vision
1.3 Involvement of BoD in strategy formulation
1.4 Involvement of BoD in the decision of strategic course
1.5 Involvement of BoD in the implementation of strategy
1.6 Involvement of BoD in the strategic control
1 Do you as a board member know clearly the vision and mission statements of your company?
3 What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"
192
Strategy
1 How does the strategy differ from the local competitor (see also exhibit "Strategic Option")?
2 What competitive pressure do you expect when foreign service providers can provide financial
services under any legal form (100% foreign-owned, branches, Joint-Ventures, strategic partnership)?
3 By 2010, Vietnam will fulfill the national treatment under BTA, under which there will be no more restrictions,
especially on US banks. What is your bank's strategy between now and 2010 to cope with the situation?
4 For new services that have neber been available in Vietnam, like money brokering, trade in derivatives,
do you fear that free access for foreign banks would take away opportunities for Vietnamese
banks / institutions in providing these services?
5 Do you expect that the restrictions for non-bank financial institutions to provide banking services
will be dismantled in the future, given the possibilities provided ty technology and other development?
Risk Management
1 About Risks and Opportunities of the banks
1.a Please indicate the greatest risks of the bank:
1.c please indicate different types of risks (see table "risk matrix"):
Environment:
Market:
Customers:
Industry:
Internal risks:
194
WTO accession
Political instability
Slow down in reform
Economic slowdown
Frequent changes of bank-related policies
Technological development
Social tension
Currency
Market
Product offerings
Capital shortage
No branches in foreign markets
Customers
Bad debts (non-performing loans)
Credit card fraud
Lack of confidence in the bank
Absence of consumer credit bureau
Industry
Losing market share to foreign banks
Fierce competition of local banks in a few segments
Brain drain from Vietnamese banks
Internal risks
Retain capable employees
IT break-down
Capital shortage
Succession planning
Fraud and corruption
Risk and liability Management (RLM)
Lack of vision of the top management
Lack of professionalism of staff
Narrow revenue base
195
Importance Satisfaction
Very unimportant
Very unsatisfied
Very important
Very satisfied
Unimportant
Unsatisfied
Important
Satisfied
Evaluation criteria of the board
3 Board structure
3.1 Enforcement of strategy-compliant company structure
3.2 Delegation of authority to senior management
3.3 Effective decision-implementation
3.4 Effective performance of Audit Committee
3.5 Effective performance of N&RC
3.6 Effective performance of BS&RC
3.7 Supervision of control mechanisms of the group
1 What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"
196
Importance Satisfaction
Very unimportant
Very unsatisfied
Very important
Very satisfied
Unimportant
Unsatisfied
Important
Satisfied
4 Board culture
4.1 Clarity of code of ethical conduct
4.2 Team spirit of the board
4.3 Culture of trust of the board
4.4 Skills to consider the opinion of management
4.5 Constructive communication with management
4.6 Participative decision-finding approach
4.7 Checks and balances throughout the board
4.8 Integrity of board members
What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"
197
Importance Satisfaction
Very unimportant
Very unsatisfied
Very important
Very satisfied
Unimportant
Unsatisfied
Important
Satisfied
Evaluation criteria of the board
5 Board composition
5.1 Optimal number of board members
5.2 Board diversity
5.3 Balanced composition based on functional competences
5.4 Balanced composition based on market know how
5.5 Balanced composition based on product know how
5.6 Independence of board members
2 Board diversity
o Educational backgound
- level
- highest title acquired
- functional focus area
o Professional backgound
o Ethnic backgound
4 What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"
198
Importance Satisfaction
Very unimportant
Very unsatisfied
Very important
Very satisfied
Unimportant
Unsatisfied
Important
Satisfied
Evaluation criteria of the board
6 Board meeting
6.1 Leadership role of chairman
6.2 Chairing of board meetings
6.3 Optimal use of relevant communication technologies
6.4 Control tasks of chairman
6.5 Optimal number of meetings of Audit Committee
6.6 Optimal number of meetings of NRC
6.7 Optimal number of meetings of BS & RC
6.7 Initation of use of external consultants by board
6.8 Records of board meetings
1 Does the board get regular (e.g. quarterly) information on the financial situation of the company?
3 Is the extent of the reporting fine-tuned (not to much, not too little)?
5 Is strategic control enabled though reports on significant deviations of the strategy implementation?
7 What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"
199
Importance Satisfaction
Very unimportant
Very unsatisfied
Very important
Very satisfied
Unimportant
Unsatisfied
Important
Satisfied
Evaluation criteria of the board
7 Board and Senior Management
7.1 Professional selection of board members
7.2 Professional selection of senior management
7.3 Fair performance evaluation of board members
7.4 Fair performance evaluation of senior management
7.5 Performance-based compensation of board members
7.6 Performance-based compensation of senior management
7.7 Executive training of board members
7.8 Executive training of senior management
7.9 Coaching of senior management by board
Yes
1 Is the salary of BoD of your company devided into the fixed part and variable part ?
4 What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"
200
Importance Satisfaction
Very unimportant
Very unsatisfied
Very important
Very satisfied
Unimportant
Unsatisfied
Important
Satisfied
Evaluation criteria of the board
8 Responsibity of Board towards stakeholder
8.1 Optimal representation of shareholders interests
8.2 Optimal representation of interests of key customers
8.3 Optimal representation of interests of personnel
8.4 Optimal handling of public relations
8.5 Risk management
8.6 External audit
8.7 Internal audit
8.8 Communication between external and internal audit
8.9 Prepared response to potential take-over offer
1 What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"
201
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Corporate Governance: An International Review
http://www.library.hbs.edu/working_papers.html
Harvard Business School, Baker Library
http://www/vnexpress.net/Vietnam
Vietnam Daily Journal
http://vietnamnet.vn
Vietnam Daily Journal
Curriculum Vitae
Bao Toan Tran was born in Vietnam, but has lived many
years in Switzerland and is a Swiss citizen. In Switzerland
and Luxembourg, he worked in private banking, asset and
fund management for Credite Suisse, for Banque Générale du
Luxembourg and for Aargauische Kantonalbank, where he was
Senior Portfolio Manager and Head of Equities Research. In
2005, he returned to live and work in Vietnam and has since
been involved in several projects in the banking industry and
for the State Securities Commission. Mr. Tran is one of the
original founders of Viet Capital, which is one of leading fund
managers and investment banks in Vietnam, and currently
serves as its Vice-Chairman. He is responsible for overall
investment strategy and business development. Prior to found-
ing Viet Capital, he was one of Directors at Vietnam Holding,
a Swiss-based fund dedicated to opportunistic investments in
Vietnam and listed on the London AIM.