Vous êtes sur la page 1sur 35

COLLEGE OF ECONOMICS – VIETNAM NATIONAL UNIVERSITY, HANOI

BANKING SYSTEM OF VIETNAM:

REFORM STRATEGIES AND TRANSITION ASSESSMENT

Research paper written under the grant of Thai Research Fund.

(Draft)

By: Nguyen Hong Son. Ph.D, Assoc. Professor of Economics

Hanoi, May 2009.


Abstract

The banking system of Vietnam has not been seriously hit by the current global financial
crisis as it was able to escape from the Asian financial crisis safely. Yet, just as the Asian
financial crisis pressed for a new round of banking reforms in Vietnam, it is expected that the
current global crisis will be a condition for Vietnam to accelerate the reform speed of its banking
system.

This research examines the reform of Vietnamese commercial banking system from two
angles: banking reform strategy and transitioning structure of the banking system. It argues that
there is inconsistent direction in the reforms of Vietnamese commercial banking system,
especially in time of economic and financial turbulence. This has resulted in the imbalance of the
structure and slow reform speed of the banking system. Slow reforms may protect Vietnamese
commercial banking sector from short-term external impacts by chance, but it will cause major
longer-term weaknesses of Vietnamese commercial banking sector by consequence.

1
Table of Content

Introduction 3

1. Overviews of the Commercial Banking System of Vietnam 5

1.1. The Development of the Banking System 5

1.2. Main Characteristics of the Commercial Banking System 9

1.3. Risky Issues 12

1.4. The Impact of the Current Global Financial Crisis 16

2. Banking Reform Strategies and Transition Assessment 18

2.1. Two Reform Approaches 19

2.2. Assessing the Reforms of the Commercial Banking Sector 25

3. Policy Implications 28

Conclusion 31

Appendices 33

References 38

2
Introduction

Since 1986, together with Doi Moi (reforms), the banking system of Vietnam has
undergone through a reform process. From 1988 to 1990, the mono-tier banking system in the
pre-reform period was dissolved. A two-tier banking system was set up with the separation of
commercial banking from central banking. In 1997, the National Assembly passed the Law on
Credit Organizations which provided a legal framework for the development of the commercial
banking sector. In parallel with the decentralization of the banking system, the government has
gradually introduced a number of liberalization measures, including rationalization of the
interest-rate structure, cessation of concessionary refinancing for the state-owned commercial
banks, unification of refinancing rates, creation of the money markets, and establishment of a
more flexible exchange rate mechanism etc.

Since the early 1990s, one can distinguish two reform strategies which have been carried
out by the government. The “new entry” strategy supports a rapid liberalization process by
allowing the quick emergence of a new private banking system. The “rehabilitation” strategy
calls for a re-structure of the old state-owned commercial banks and a limited entry of new
banks. Banking reforms in Vietnam has swung between these two approaches, especially in time
of economic and financial turbulence such as present when major weaknesses of the banking
system are unraveled. This inconsistency has resulted in the imbalance of the structure and slow
reform speed of the banking system.

There are a number of studies on the reforms of the commercial banking sector in
Vietnam (see e.g. Barré, 2006; Du, 2007; Hoan and Son, 2008; Hao, 2008; Oh, 2000; SBV,
2006; Son, 2008; Thomas, 2003; Unteroberdoerster, 2004; WB, 2002). However, few studies
look at the reforms via the telescope of the two mentioned strategies which are popular
experiences of other transitional economies. Most previous studies also prefer to describe the
transitional process of the banking system rather than assessing it with concrete indicators as the
result of the banking reform progress. In addition, they lack adequate analyses on the impact of
the current global financial crisis on the reform strategy of the commercial banking sector.
Although in 2006 the Prime Minister issued Decision 112/2006/QD-TTg approving the
Development Plan of the Vietnamese Banking Sector till 2010 and Development Guidelines till
2020, both the former and latter only lays out some broad objectives without concrete

3
implementation measures, and moreover, within their broad objectives, they fail to identify a
reforming philosophy of the banking system.

This research is to understand the reforms of Vietnamese commercial banking system in


the context of the current global economic and financial crisis. Specifically, it aims to: i) Analyze
the reform strategies that have been implemented in the commercial banking system; ii) Assess
the transitioning structure of the commercial banking system as the result of the reform
strategies; iii) Examine the impact of the current global financial crisis on the commercial
banking sector in comparison with the one of the 1997-1998 Asian financial crisis; and iv)
Explore a policy implications for the development of the commercial banking system.

This research paper is divided into three parts. Part one will present major characteristics
of the banking system of Vietnam before and after Doi Moi. It also examines the impact of and
policy responses to the current global financial crisis with respect to the commercial banking
sector and comparing these with the impact of and policy response to the 1997-1998 Asian
financial crisis. Part two will analyze the reform framework and two banking reform strategies
that have been carried out by the Vietnamese government. It also constructs and reports the
indices to assess the transition structure of the commercial banking sector. Part three will draw
policy implications for the reform strategy and development of the commercial banking sector.

1. Overviews of the Vietnamese Commercial Banking System

1.1. The Development of the Banking System

Before Doi Moi, Vietnam had a mono-banking system in which there was an
enmeshment between central banking and commercial banking activities. The whole banking
system served purely as a planning and administrative instrument of the government in a
commanded economy.

Looking at the structure of the banking system, the State Bank of Vietnam or the Central
Bank was founded on May 6th 1951 during the war time. In the following years, the government
established a few functional state-owned banks which served mainly as the facilitators of capital
transaction in some areas of economic activities: the Vietnam Reconstruction Bank was created
in 1957, re-named as the Bank of Investment and Construction in 1981, and since 1990 has
become the Bank for Investment and Development of Vietnam (BIDV); Foreign Trade Bank of

4
Vietnam (Vietcombank, VCB) was created in 1963; and after Doi Moi began, Vietnam Bank for
Agriculture and Rural Development (Agribank) and Industrial and Commercial Bank of Vietnam
(Incombank, ICB) were both created in 1988. In April 2008, Industrial and Commercial Bank of
Vietnam was re-named Vietnam Bank for Industry and Trade (Vietinbank). The current
commercial banking system of Vietnam emerged from four functional state-owned banks
established in the planned economy: BIDV, Vietcombank, Agribank and Vietinbank.

In 1986, the Sixth National Congress of the Communist Party of Vietnam (CPV)
announced Doi Moi policy to transform the centralized economic mechanism toward market
economy. Comparing with the reforms in other economic sectors such as state-owned enterprises
(SOEs), the reforms of the banking sector began in a more difficult and turbulent context. In
1986, Vietnam experienced a profound socio-economic crisis, where inflation rate reached three-
digit number, and the entire financial system was on the brink of collapse. In 1988, the Second
session of the Party Central Committee (Sixth Congress) issued Resolution 02-NQ/HNTW to
provide the guidelines to address the urgent problems relating distribution and circulation of the
economy. Later, on March 9th 1988, the Chairman of the Minister Council issued Decision 53,
allowing all types of economic organization, including private enterprises, to mobilize and
borrow money from the public. This bold yet imprudent Decision created a credit pyramid which
collapsed a year later as its huge bad loans were discovered and left behind devastating impact
on the lenders. Thus the early reforms of the commercial banking system had gone too far and
too fast without corresponding reforms in other sectors such as SOEs, foreign trade and
industrial production and without minimum safeguard measures such as capital adequacy ratio
and risk monitor mechanism.

The reforms in the 1986-1990 can be seen as a preliminary experiment in which the
government tried to separate the state management function from monetary and credit activities
of the banking system. In May 1990, the State Council passed two banking ordinances1 to
officially transform the old mono-banking system to a new two-tier banking system. In the latter,
at the first level State Bank of Vietnam (SBV) serves as the Central Bank, and at the second level
there is a system of commercial banks. In December 1997, these two banking ordinances were
replaced by the Law on State Bank and Credit Organizations.

1
Ordinance on State Bank of Vietnam, and Ordinance on Banks, Credit Cooperative and Financial Enterprises

5
Since 1990, a number of join-stock commercial banks (JSCBs) have been established.
Foreign banks are also allowed to open branches in Vietnam or to form a joint-venture with
domestic banks. Besides, the government established a few other state-owned commercial and
policy banks such as Bank for the Poor in 1995 (re-named as Social Policy Bank in 2002); and
Mekong Housing Bank (MHB) in 1997.2 In 2006, Vietnam Development Bank (VDB), another
policy bank, was created from Vietnam Development Fund. During the 1990s, together with a
high economic growth rate, the number of private commercial banks in Vietnam increased
dramatically.

After experiencing a rapid development, the commercial banking system of Vietnam


however started to encounter some serious problems especially the inefficiency and non-
performing loans. Thus, the government decided to launch an ambitious re-structure program of
the commercial banking system. In 2000, it established the asset management companies (AMC)
of four SOCBs to address their non-performing loan issues. In 2003, it created Debt and Asset
Trading Company (DATC) to address the debt problem of the non-performing SOEs. In 2004,
SBV was assigned to design the equitization plans for state-owned commercial banks (SOCBs).
At the same time, a number of inefficient JSCBs had been closed, merged and consolidated and
this reduced the number of private banks significantly. On January 11th, 2007, Vietnam officially
became the 150th member of the World Trade Organization (WTO). According to its
commitments with the WTO which became effective on the same day, Vietnam will have to
open its banking sector within 7 years since its admission. In the early 2008, among five major
SOCBs (Vietcombank, Vietinbank, Agribank, MHB and BIDV), after a long delay,
Vietcombank began the equitization process. By May 2008, Vietnam has 7 state-owned banks,
including 5 SOCBs and 2 policy banks, 36 joint-stock commercial banks, 44 branches of foreign
banks, 6 joint-venture banks, 6 financial enterprises, 10 leasing companies, 998 people’s credit
organizations – a sort of credit cooperative, 46 representative offices of foreign banks.3 By the

2
Due to the failure of the housing development program in the Mekong River Delta, the bank now operates purely
as a commercial bank. http://www.mhb.com.vn/?p=gioi_thieu_mhb.asp&r=0 accessed on February 20th, 2009.
3
http://www.saga.vn/view.aspx?id=9662; accessed on February 18th, 2009
http://vneconomy.vn/20080810112958943P0C6/quanh-chuyen-tam-ngung-cap-phep-lap-ngan-hang.htm; accessed
on January 10th, 2009

6
early 2009, 5 one hundred percent foreign-owned banks have been issued license as to fulfill the
WTO commitment to opening the banking sector.4

Box 1: Key Events in the Development of the Commercial Banking System of Vietnam

Key Events Time


Mono-banking system 1951-1990
(State Bank of Vietnam and other functional State-owned
Banks)
Experiment with people’s credit organizations 1988-1990
(Decision 53 of Chairman of the Minister Council)
Two-tier banking system officially introduced 1988
(Ordinance on State Bank of Vietnam, and 1990
Ordinance on Banks, Credit Cooperative and Financial
Enterprises)
Law on State Bank and Credit Organizations 1997
Growth of commercial banks 1990s
Re-structure of commercial banking system 2000-now
- Establishment of AMC, DATC
- Equitisation of state-owned commercial bank 2008
th
Vietnam became 150 member of the WTO 2007
Permission of 100 percent foreign-owned banks 2008

After two decades of reforms, Vietnamese banking sector has recorded major development
achievements. Banks have increased in both number and forms of ownership. Banking services
become more diversified. Within the state-owned system, social and management functions were
separated from profit activities of the state-owned banks and the autonomy of the SOCBs has
increased significantly during the preparatory phase of equitization. In addition to the
development of banking system, two stock exchanges have been created in Ho Chi Minh city and
Hanoi in 2000 and 2005 respectively and become important part of the financial market. The
government has also introduced a number of liberalization measures to the financial system,
including rationalization of the interest-rate structure, cessation of concessionary refinancing for

4
http://vneconomy.vn/2008122904446332P0C6/them-hai-ngan-hang-100-von-ngoai-duoc-cap-phep.htm; accessed
on January 11th, 2009

7
the SOCBs, unification of refinancing rates, creation of the money markets, and establishment of
a more flexible exchange rate mechanism etc. Nonetheless, the reforms have also exposed the
commercial banking system of Vietnam to major weakness and risks especially in time of
economic and financial distress and this shows that the current reform efforts are still
insufficient.

1.2. Main Characteristics of the Commercial Banking Sector

* Bank-based financial system:

The financial system of Vietnam is bank-based. This is the result of a transition from a
centrally-planned economy where state-owned banks dominated the financial system. Capitals
are provided by the banking sector account for more than 50% of the total investment in the
economy, equivalent 16-18% GDP.5

Recent period has experienced a rapid development of Vietnamese banking sector.


Although the total asset base of the banking sector is still small, equivalent to only $US 75.43
billion as the end 2006,6 it has been growing rapidly, reaching 48.2% in 2007 (Table 1). Banking
asset/GDP ratio grew from 16.2% in 1993 to merely 18.1% in 1997 but 131.2% in 2007, whereas
M2/GDP ratio also increased from 20.1% in 1993 to merely 22.6% in 1997 but 109.6% in 2007
(Table 2, Table 3). These figures are much higher than in other Southeast Asian countries and
China. In a broader picture, they point to an increased financial deepening in Vietnam as the
result of significant increase in financial mobilization and investment.

A high degree of dollarization and cash economy are other two prominent features of
Vietnamese banking sector. The degree of dollarization in Vietnam is always above 20% in
comparison with 7-10% in other countries in Southeast Asia such as Thailand, Malaysia and
Indonesia due to massive flow of remittance and foreign investment and increased export
earnings over the past years.7 It is expected that dollarization may rise further in the recent
context of high inflation and volatility of the VND. The cash/GDP ratio of the Vietnamese
banking is also much higher than in other Southeast Asian countries and China, at the level of

5
Hao, Nguyen Thi Thanh. 2008. Vietnamese Banking System: Reality and Solutions. Presentation paper in the
proceeding of the Conference “Vietnamese Banking System and the WTO Commitments: Assessment and
Prospect.” Hanoi, May 2008. pp. 3.
6
Hoan, Pham Xuan and Nguyen Hong Son. 2008. Vietnam’s Financial Challenges. Vietnam Socio-Economic
Development. No 56. December 2008. pp. 3-21.
7
http://www.saga.vn/Cohoigiaothuong/Thitruong1/forex/9470.saga; accessed on December 10th, 2008

8
19.3% in 2007 (Table 4). While this ratio is expected to significantly fall down with the
introduction of modern payment methods in the banking system such as ATM, it may not happen
soon due to the habit of population in a cash economy.

* Domination of State-owned Commercial Banks (SOCBs):

Current five biggest SOCBs are Agribank, Vietcombank, BIDV, Vietinbank and MHB.
SOCBs account for around three quarters of total banking asset base8 and hold three quarter of
the credit market as 2007.9 The rest of the credit market is shared by the joint-stock commercial
banks (20-25%), people’s credit organizations (around 1%) and other financial institutions such
as leasing companies.10

Theories of oligopoly also point out that in a highly concentrated market, big banks can
collide to influence the interest rates in the market (Bikker and Bos, 2005). In case of Vietnam,
major SOCBs must consult with SBV in determining interest rates. As a result, the band of
difference between saving and lending rates is around 2-3%,11 often below the one in other
transitional economies.

It is clear that there is a low level of openness and diversification of the banking system.
At present, domestic banks, particularly SOCBs, dominate the financial market thanks to a
number of favorable treatments. Yet, as a number of studies have pointed out, there is a positive
correlation between high proportion of private banks and foreign banks on the one hand, and the
quality of the banking services and the efficiency of the banking sector on the other.12

8
Nguyen, Tran Ha. 2008. Vietnamese Banking Sector: Assessment and Prospect. Presentation paper in the
proceeding of the Conference “Vietnamese Banking System and the WTO Commitments: Assessment and
Prospect.” Hanoi, May 2008. pp.249.
9
Hung, Le Van. 2007. “Vietnam’s financial market in 2006: achievement and challenge.” Economic Studies.
No.345. February 2007. pp. 17
10
Son, Nguyen Hong. 2008. The Financial System of Vietnam: Main Characteristics and Reforms. Lecture paper for
the Capacity Building Program for the Senior Officials of the Central Asian Countries, Hanoi, August 2008. pp. 26.
11
Author calculated based on real figures.
12
See Claessens, Stijn. 1997. “Banking Reform in Transition Countries.” World Development Report 1996. World
Bank. June 9, 1997.
Claessens, S., Demirguc-Kunt, A. and H. Huizinga (2001). “How does foreign entry affect domestic banking
markets?” Journal of Banking and Finance 25, 891- 911.
Bonin, J., I. Hasan and P. Wachtel (2005) “Bank performance, efficiency and ownership in transition countries”,
Journal of Banking and Finance, 29 (1), pp. 31 – 53.
Tang, H., Zoli, E. and I. Klytchnikova (2000). “Banking crises in transition economies. Fiscal costs and related
issues.” World Bank Policy Research. Working Paper No. 2484. The Economistview, 2005.
Athanasoglou, Panayiotis P.; Delis, Matthaios D. và Staikouras, Christos K. 2006. “Determinants of Bank
Profitability in the Southeastern European Region.” Bank of Greece. Working Paper. No. 47. September 2006.

9
* Small Equity Capital

Vietnamese banks, including the largest SOCBs, have small equity capital. Equity capital
of four largest banks, which are Agribank, Vietcombank, BIDV and Vietinbank, were around
$US 400 million, $US 270 million, $US 260 million and $US 215 respectively as of 2006.13 The
averaged equity capital of SOCBs is around $US 260 million in 2008.14 The averaged equity
capital of Thai banks is $US 813 million whereas the one of Singaporean banks is more than
$US 1 billion. Equity capital of major banks in the world such as HSBC and City Bank reached
$US 25.78 billion and $US 21 billion as of 2003 (IMF, 2003; see Table 5).

* Traditional and Monotonous Banking Services

Despite recent improvement, banking services in Vietnam are still poor in terms of
quality and quantity (Table 6). Most banks prefer to provide the traditional services such as
foreign currency exchange, accepting deposits, lending and conducting checking accounts for
business customers. While modern services such as pension, securities broking, and venture-
capital investment become more attractive, their coverage is still very low. Profit earnings from
non-credit business account for only 20-25% of total profit of the banking system. This ratio is
52% in Thailand, 60% in Japan and 66-70% in the US.15

1.3. Risky Issues

The above characteristics of Vietnamese commercial banking system has contained serious
risks of which inefficiency, non-performing loans and mismatches are the most prominent
especially in time of financial distress.

Inefficiency: Inefficiency is one of the urging problems that the Vietnamese commercial
banking system has to deal with. It is evidenced by a low return on equity (ROE), and a low
return on assets (ROA) of the banks. The averaged ROA of commercial banks in Vietnam is
0.38%, whereas the averaged ROA of commercial banks in the Asia-pacific region and Southeast

13
SBV. 2006. Annual Report. Hanoi.
14
http://www.ffb.edu.vn/index.php?view=article&catid=44%3Atai-liu-tham-kho-nh-2008-2009&id=135%3Anhng-
im-yu-ca-h-thng-ngan-hang-&tmpl=component&print=1&page=&option=com_content&Itemid=80; accessed on
January 10th, 2009
15
UNDP and MPI. 2006. General Framework for National Development Strategy of Service Sector in Vietnam upto
2020. Project VIE/02/09. Hanoi. pp 56.

10
Asian economies (Thailand, Indonesia, Malaysia, and Phillipines) is 0.94 and 0.77 respectively.16
The problem of performance is even more serious with the SOCBs. In 2006, among five largest
SOCBs, only Vietcombank meets the international standards which require ROE of 15% and
ROA of 1% (Table 7). Because the SOCBs account for major share of the market and banking
activities, their poor performance is an important indicator for the performance of the entire
banking system.

Non-performing loans (NPLs): Non-performing loan ratio of the banking sector has
fallen from 20% in the 1990s to approximately 3.1% according to Vietnam Accounting Standard
(VAS). However, there is little concurrence on the measurement method. According to
International Accounting Standard (IAS), non-performing ratio of Vietnamese banking sector is
around 7%.17 Some major factors may increase future NPLs. The large SOEs’ and public
investments inefficiency could result in the loss of repayment capability of those borrowers.
Moreover, the risks associated with real estate and securities-collateralized loans, which were
substantial in several JSCBs, are quite high in the context of high inflation and an asset bubble.
So far real estates have been the main collaterals for banks’ loan. By early 2008, the real estate-
backed loans accounted for up to 50% of the total asset of the banking system. Apart from this,
loans to the real estates, itself, mounts to about $8 billion or 11% of the total banks’ loan.18 The
real estates market of Vietnam has experienced a recession recently with very limited liquidity,
and this poses a great risk to the banking system. Another risk comes from a low capital
adequacy ratio (CAR) of the banking sector. As the end of 2005, CAR of the commercial
banking system was only 4.5%, far below the international norm (8%). The risk is multiplied by
a high credit growth which is over 20% per annum. In contrast, after the 1997-1998 financial
crisis, averaged CAR in the Asia-pacific region has increased significantly, reaching 13.1% and
12.3% in the Southeast Asian region.19 None of 28 economies qualified by EBRD as transition
has CAR below 8 percent.20

16
Tai, Nguyen Trong. 2008.“Competitiveness of Commercial Banks in Vietnam from Theoretical View and
Practice.” Banking Journal No.3/2008.
17
Hoan and Son. 2008. Ibid. 17
18
Hoan and Son. 2008. Ibid. 17
19
Tai. 2008. Ibid.
20
http://www.ebrd.com/country/sector/econo/stats/index.htm; accessed on March 10th, 2009

11
Two mismatches: The banking industry has also faced a prolonged mismatch problem,
namely maturity mismatch and currency mismatch.

Maturity Mismatch: Normally, short-term deposits account for 75% of total deposits, but
the share of medium-and long-term loans in total credit rose from 22% in 1995 to about 40% in
recent years, and long-term credits account for more than 50% of total short-term deposits21
creating a maturity mismatch risk.22 The risks seem to be magnified in the presence of direct
lending and conflict of interest issues, especially when related to loans of questionable real estate
deals and other big projects.

Currency Mismatch: The currency mismatch was most severe during 1999–2002 due to
sharp increases in foreign currency deposits and a decrease in foreign currency loans, measured
as shares in total deposits and total loans, respectively. It has recently been narrowed, but
remains problematic due to its sensitivity to the exchange rate and interest rate fluctuations,
especially in the context of a rather high degree of dollarization. The SBV has attempted to
gradually eliminate dollarization but this is no easy task as some contradicting policies continue
to be in place (such as policies for encouraging remittances) and in the context of having capital
flows.

Other Issues: In the medium and long run, the banking sector of Vietnam has to deal with
the issues of implementation of international commitments, harmonization, modernization, and
improvement of human resources to improve its quality.

* International Commitments: Vietnam has to implement four major international


commitments on the liberalization of its banking services: WTO, China-ASEAN Free Trade
Agreement (CAFTA), ASEAN Framework Agreement on Services (AFAS), and US-Vietnam
Bilateral Agreement. It is expected that by 2015, Vietnam will fulfill all of these commitments
and by that time the commercial banking system will enjoy a large degree of openness.

* Harmonization: Harmonization is one of the crucial issues in the international


integration of the banking sector. At present, major incompatibilities of the Vietnamese banking
sector with the international standards exist in the accounting rules, loan schemes and service

21
these figures are much higher for some JSCBs in 2007
22
Hoan and Son. 2008. Ibid. 19.

12
statistics. There is also a lack of efficient risk management mechanism, including banking
inspection measures.

* Modernization: modernization is a pre-requisite to improve the quality of banking


services. World Bank assessed that the technology index of Vietnamese banking system only
reached 0.47, much lower than regional countries such as Thailand and Indonesia (0.7), Malaysia
(1.08) or Singapore (1.95).23

* Human Resources: There is a serious shortage of skilled labor for banking sector. Most
of banking employees and policy makers in the banking sector fail to meet the requirements for
English, computer skills and familiarity with modern accounting rules. At the same time, most of
the students who are graduated from domestic universities are not well equipped with above
necessary skills in order to work effectively in the banking services. In addition, there has been a
massive brain drain from SOCBs to the private sector of the economy recently.

1.4 The Impact of the Current Global Financial Crisis

In the current context of global financial crisis, according to Economic Intelligence Unit
(EIU), Vietnamese economy will grow at merely 0.3% in 2009 comparing with 6% in 2008 due
to serious shrink of domestic and external demand, and a fall of FDI and remittance.24 In a less
traumatic scenario, IMF predicts that Vietnam is still able to achieve a growth rate of 4.75
percent in 2009.25 However, economic decline has a negative impact on the banking system.
Small JSCBs are those which are most severely affected despite large liquidity subsidies from
SBV. Banking profit margin has fallen due to high capital costs and barrier imposed by ceiling
lending rates. Non-performing loans are expected to rise substantially in the near future because
borrowing companies have difficulty in their exports to the world market.26

Yet, the weaknesses of the banking sector in Vietnam have been unraveled even before the
global financial crisis. Over the past few years, betting on bright economic prospective after the
WTO accession, there has been a surge of foreign investment into Vietnam, creating pressure on
23
http://www.tbic.vn/default/21/tbic_details.aspx?DataID=12606; accessed on March 20th, 2009.
24
http://dantri.com.vn/c76/s76-313788/kinh-te-viet-nam-chi-tang-truong-03-nam-2009.htm; accessed on April 15th,
2009
25
http://www.vnexpress.net/GL/Kinh-doanh/2009/03/3BA0D12A/; accessed on April 8th, 2009
26
According survey by Vietnam Association of Small and Medium Enterprises in 2008, 20% of small and medium
enterprises (SMEs) were already seriously affected and half of them are on the verge of bankruptcy.
http://www.ssi.com.vn/Default.aspx?tabid=110&newsid=34597; accessed on March 9th, 2009

13
VND to appreciate and on SBV to maintain the stability of nominal exchange rate. The increase
in money supply exerted high pressure on inflation. Inflation rate was pushed up to around 25-
27% in 2008. Government’s main counter-inflation measure is a tight monetary policy which
however drained out funding from the banking system and triggered an interest-rate competition.
In 2008, there was an extremely high depository rate (18-19% p.a.) and high lending rate (over
20%). There was also a widening gap between interest rates of VND (18-19% p.a.) and of USD
(6.5% p.a.), creating a wave of speculation.27 Year of 2008 thus posed a great risk to both
bankers and their clients.

There is certain degree of differences and similarities between the context and the impact
of the current global financial crisis and the Asian financial crisis in 1997-1998 on the
Vietnamese banking system. In both cases, years before the crisis, Vietnam enjoyed a high
economic growth and a boom of foreign investment at time when the country had accomplished
major move of international integration (i.e. joining ASEAN in 1995 and joining WTO in 2007).
In both cases, just as the banking system was relatively unharmed by the Asian financial crisis, it
has not been seriously hit by the current global financial crisis more than its internal financial
turbulence.

Scholars often argue that Vietnamese banking sector was little affected by the Asian
financial crisis because of its limited openness at that time. Yet, a decade of reforms has gone
since 1997, and with the WTO accession, the commercial banking system of Vietnam has been
more integrated into the global financial system. Increased level of financial deepening and rapid
credit expansion should make the banking sector more vulnerable to the external shock.
Moreover, immediately prior to the current global financial crisis, Vietnamese economy had
experienced serious macro imbalances as shown by high inflation rate, big trade and budget
deficit, which were exaggerated by a huge non-performing loans to the stagnant real estates and
declining securities sectors. Although the commercial banking system of Vietnam has not been
seriously impacted by the current global financial crisis, just as the 1997-1998 Asian crisis had
done, it is expected that the current context will provide the case for further reforms of the
commercial banking system.

27
Son. 2008. Ibid.

14
Box 2: 1997-1998 Asian Financial Crisis and Current Global Financial Crisis: Similarities
and Differences with Respect to Vietnamese Banking Sector
1997-1998 Asian Financial Crisis Current Global Financial Crisis

Similar Period of high economic growth; increased FDI; hallmark of international

context integration.

Different Regional integration Global integration

context Shallow financial deepening Increased financial deepening

Preceded by Macro economic stability Preceded by macro-economic

imbalances

Regional crisis Global crisis

Consequences Relatively unharmed (indirectly impacted)

Launching new round of reforms Expecting new round of reforms?

2. Banking Reform Strategies and Transition Assessment

According to Saled M. Nsouli (1999),28 in transitional economies, financial sector reform


is fundamental to promoting growth, by improving the intermediation process and increasing
efficiency in the allocation of financial resources. Besides giving greater autonomy to central
banks, there is a need for the creation of a competitive system open to foreign financial
institutions and for the enactment and effective implementation of strong prudential regulations.
Of particular importance is effective bank entry and exit regulations, which facilitate the entry of
foreign banks, thereby fostering competition, encouraging the development of increasingly
sophisticated financial products, and strengthening the domestic banking system. Transition
countries which made the least progress with bank restructuring tend to have inappropriate
incentive structures that encourage the accumulation of risky assets in pursuit of quick profits.

28
Nsouli, Saled. M. 1999. “A Decade of Transition An Overview of the Achievements and Challenges.” Finance
and Development. June 1999. vol 36. No.2.

15
Commercial banking reforms hence play an essential role in the reforms of the bank-
based financial system of Vietnam. This old issue is brought to the discussions in the new
context of global financial crisis and internal financial chaos recently. Together with it, an old
question is raised again: Is slower banking reform an appropriate policy since it has protected the
banking system from the external negative impacts? To find out the answer, this research
examines the reforms of Vietnamese commercial banking system from two aspects: policy
changes as reflected by changes in the reform approaches and policy outcomes as reflected by
transitioning structure of the banking system. The former is the reform process, whereas the
latter is the structure of the reformed banking system.

2.1. Two Reform Approaches

Stijn Claessens (1997)29 has pointed out that there are two popular approaches to banking
reform in the transitional economies in Eastern Europe: the new entry and the rehabilitation. The
new entry approach has entailed the spontaneous break-up and privatization of state banks, a (de-
facto) policy of liberal entry of new banks, and sometimes the liquidation of old banks. The
approach is best illustrated by Russia and Estonia where it resulted in a rapid expansion in the
number of banks in the early 1990s. The rehabilitation approach has included recapitalization
and institutional development of existing state banks, some limited breakups of banks, limited
privatization, and more limited entry. Typical rehabilitation approach countries are Hungary and
Poland in the early 1990s.

In practice, influenced by initial conditions and early developments, countries have


included aspects of both approaches or have yet to choose a consistent financial reform strategy.
Typical rehabilitation reformers are high financial-depth countries and new entry reformers are
low financial-depth countries. In the countries which pursued new entry approach, fiscal revenue
was small or dropped, leaving no choice to the government but ignoring the old banking system.
In the countries which applied rehabilitation approach, government budget was still relatively
abundant, allowing for the re-capitalization of the old banks.30

29
Claessens, Stijn. 1997. “Banking Reform in Transition Countries.” World Development Report 1996. World
Bank. June 9, 1997
30
Claessens. 1997. Ibid. pp. 4

16
In Vietnam, one can see that banking reforms have swung in between the above two
approaches with the “new entry” being implemented from 1988 to 2000, followed by the
“rehabilitation.”

The first experiment with the new entry strategy was during 1988-1990 period with
Decision 53 of Chairman of the Minister Council in 1988 that permitted all types of economic
organization, including private enterprises, to mobilize and borrow money from the public. The
effort of liberalization by that time however had gone too far and too fast in the context of
macro-economic instability and lack of institutionalization, and finally ended up with the
collapse of credit pyramid formed by bad loans and fraudulent borrowings of people’s credit
organizations.

The second phase of implementation was during 1990 – 1997 period and had recorded a
remarkable achievement. This was also a period when Vietnamese economy escaped from
macro-economic destabilization that prolonged from the beginning of the transitional period. As
inflation was kept under control, the financial sector is also stabilized. At the same time, rapid
economic growth created a favorable environment for the development of banking sector. The
legal environment for the banking sector is also significantly improved when a number of
important legal documents were issued such as the Law on State Bank and Credit Organizations.
As a result, the number of banks increased from totally 9 (including four SOCBs) in 1991 to four
SOCBs, 51 JSCBs and 23 branches of foreign banks in 1997.31 The system of people’s credit
organizations was re-structured and consolidated with more stringent risk management measures.

While the 1997-1998 Asian financial crisis did not have great impact on the Vietnamese
banking system, it had raised the concerns about the latter’s weaknesses. Among the major
concern were the non-performing loan problem, the inefficiency of the banks, and a lack of risk
management mechanism which becomes even more important in the context of deepening
international integration.

In 2000, the government launched a re-structure program of the banking system and it
quickly moved toward the “rehabilitation” direction. For the JSCBs, major measures included

31
http://www.sacombank.com.vn/newscontent.aspx?cateid=27&contentid=1808; accessed on March 20th, 2009

17
merge, dissolution, increase in capital and reduction of bad loans.32 For the SOCBs, the re-
structure focused on reduction of non-performing loans, increase in capital, separation of policy
credit from commercial credit, administrative re-organization, diversification of banking
services, establishment of risk management mechanism and equitization. Important measures of
the “rehabilitation” strategy which were embodied in a number of government policies include:

- Establishment of AMC (Decision 43/2001/QD-TTg) and DATC (Decision


109/2003/QĐ-TTg) to address the debt problems of the commercial banks, especially SOCBs,
and of the SOEs;

- Consolidation of the banking system, including equitization of the SOCBs and merge or
dissolution of the inefficient JSCBs (Decision 149/2001/QD-TTg on settlement of the non-
performing loans, Decision 92/2002/QD-TTg on re-structure of SOEs and SOCBs during 2001-
2003).

- Imposition of more restrictive regulations on the establishment of the new banks (SBV
Documents 92/2001/QD-NHNN; 90/2001/QD-NHNN; 400/2004/QD-NHNN; and
888/2005/QD-NHNN).

As a result of the above control measures, the number of JSCBs fell down (from 52 in
1996 to 37 in 2004). Non-performing loan ratio had been significantly reduced, from around
20% in the 1990s to around 3.0% in 2007.33 The efficiency of the banking sector improved
significantly as indicated by considerable increase of ROE and ROA of the commercial banks,
especially JSCBs, over the past few years. In a re-capitalization effort, most domestic banks had
increased their capital and as the end of 2007 80% of JSCBs had a registered capital of more than
VND 1,000 billion or around $US 60 millions.34 In 2001-2005 period, SOCBs had received
VND 15,000 billion or $US 1.0 billion in their registered capital and almost $US 2 billion or 4%
GDP if the funding included the bailout for bad loans.35 As of May 2006, the equity capital of

32
According to Vietnamese classification, bad loans include i) normal overdue loans; ii) loans that are difficult to
repay; and iii) loans in the watching list (backed up by estates) and loans that are permitted by the government to
postpone the payment.
33
Hao. 2008. Ibid. pp. 204.
34
Hao. 2008. Ibid. pp. 205
35
Du, Huynh The. 2007. Reforms of the Vietnamese Banking System: Comparative Study with China. Fulbright
Economic Teaching Program. April, 2007. pp 57

18
five big SOCBs had increased to $US 2.4 billion.36 Besides, the re-structure program has been
successfully implemented together with more liberalized and standardized regulations on
banking operations (e.g. on monetary transaction, interest rates, loans, deposit mobilization,
CAR, etc) in the context of international integration. This seems to revise a confidence on the
health of the banking sector that was partially dissipated after the Asian financial crisis.

Yet, there is still lingering concern on the reforms of the banking system, especially on
the issues of non-performing loans and equitization process. While the official figures indicate
that the non-performing loans have been brought to the safe level of 5% or below recently,
international financial institutions or independent researchers estimate that non-performing loan
ratio of Vietnamese banking system still stands at around 15-20%.37 In this regard, the current
AMCs are incapable of addressing the issue. The registered capital of each of four SOCB’s AMC
at time of establishment was VND 30 billion, far below VND 21,000 billion NPLs as the end of
2000. Registered capital of JSCB’s AMC is still smaller.38 Although the equitization plan of
SOCBs was announced as early as 2004, by 2008 only Vietcombank, one among the “big five”
SOCBs, was equitized. The plans for the remaining SOCBs had been cancelled due to the
recession of the stock market, and it is yet to know when they can be kicked off. As long as the
SOCBs has not been equitized, it is hard to expect to their improvement of operational
efficiency, risk management, corporate governance, and incentive structures.

Despite the above concern, the bright economic prospect in 2006-2007 with the boom of
stock exchange and real-estates sector provides favorable conditions for the banking sector to
grow. A number of inefficient commercial banks had taken this wave to recover, particularly by
providing loans to the stock exchange and real estates bubble. The impact of WTO accession
also created a certain degree of easiness in approving applications for new bank. As early 2008,
there have been 50 applications for the new bank establishment,39 making 2006-2007 a period of
“Rehabilitation reversed.” However, as soon as the beginning of 2008, worsen economic
conditions, particularly high inflation rate, created risky financial environment and reduces the
benefits of the commercial banks. On July 29th, 2008 the government issued Document
36
http://www.sbv.gov.vn/vn/home/tintapchi.jsp?tin=367; accessed on January 25th, 2009
37
Du. 2007. Ibid. pp. 37
38
Du. 2007. Ibid. pp. 25
39
http://vneconomy.vn/20080810112958943P0C6/quanh-chuyen-tam-ngung-cap-phep-lap-ngan-hang.htm; accessed
on January 10th, 2009

19
4944/VPCP-KTTH that required the SBV to postpone the approval for the establishment of new
JSCBs. Document 7171/NHNN-CNH released by the SBV on August 8th, 2008 repeated the
guideline, worrying that a continued increase in the number of the new banks will have a
negative impact on the efficiency and quality of the banking system.

The debate on the recent restrictive policy of the government concentrates on the question:
Is an increase in a number of commercial banks correlated with a decrease in the safety and
quality of the commercial banking system?

The proponents for the new entry approach argue that there is no correlation between the
quantity of the banks and the quality of the banking system. Yet, there is greater opportunity for
the economy to grow quickly as the number of good banks increases. In that case, the level of
bank per capital in Vietnam is still very low. They cited that, for example, while for over the past
decade, GDP of Vietnam had doubled, the number of operating banks only increased by a
margin of 16.6%. Comparing with foreign countries with smaller population such as Thailand,
the coverage and equity capital of Vietnamese commercial banking system are far below.40

In contrast, the opponents argue that a temporary suspension of establishment of the new
banks is to reduce current rapid credit expansion and inflation pressure. This will help to re-
stabilize the banking system and in stead of focusing on the new entries, there is a more urgent
need to re-structure the existing poor-performing banks to reduce the burden on the banking
supervision system.41 Regarding foreign example, they pointed to the fact that the number of
commercial banks in Thailand had decreased from 63 before the financial crisis to 31 in 2001.42

The reforms of Vietnamese commercial banking system thus swing in between the “new
entry” and “rehabilitation” approaches. This change of policy was in response to the domestic
problems and indirect rather than direct external impact: the risk of domestic financial un-
sustainability which became more apparent in the aftermath of the Asian financial crisis, and
domestic financial instability which is followed by the current global economic and financial
crisis. Yet, in the recent event the extent that domestic financial chaos occurred before the
negative external impacts can be felt indicates the incomplete success of the previous reforms.

40
http://www.sanotc.com/News/ViewItem.aspx?hl=vi&item=299484; accessed on January 28th, 2009
41
http://vneconomy.vn/20080810112958943P0C6/quanh-chuyen-tam-ngung-cap-phep-lap-ngan-hang.htm; accessed
on January 10th, 2009
42
http://strategis.ic.gc.ca/eic/site/imr-ri.nsf/eng/gr109724.html; accessed on January 10th, 2009

20
2.2. Assessing Reform Progress of the Commercial Banking Sector

The inconsistency in the reform direction has been reflected in the degree of change in
the structure of the commercial banking system. Based on the studies of Steven Fries (2005)43 on
banking reforms in the transitional economies and European Banking for Reconstruction and
Development (EBRD) transition index structure, the research uses four indices to assess the
reform progress of the commercial banking system in Vietnam as follow:

1. EBRD banking transition index to assess interest rate liberalization and institutional
reforms of the banking sector, scored as:

1: Little progress beyond establishment of a two-tier system.

2: Significant liberalization of interest rates and credit allocation; limited use of directed
credit or interest rate ceilings.

3: Substantial progress in establishment of bank solvency and of a framework for


prudential supervision and regulation; full interest rate liberalisation with little
preferential access to cheap refinancing; significant lending to private enterprises and
significant presence of private banks.

4: Significant movement of banking laws and regulations towards Basel International


Standards; well-functioning banking competition and effective prudential supervision;
significant term lending to private enterprises; substantial financial deepening.

4+: Standards and performance norms of advanced industrial economies: full


convergence of banking laws and regulations with BIS standards; provision of full set of
competitive banking services.44

Since EBRD banking transition index for Vietnam is not available, based on the above
scoring scale, it was derived from expert judgment. Averaged score given by the experts is 3-,
implying that there is a substantial progress in establishment of bank solvency and of a
framework for prudential supervision and regulation; full interest rate liberalization; and
increased lending to private enterprises and increased presence of private banks in Vietnam.

43
Fries, S., and A. Taci (2005), “Cost efficiency of banks in transition: Evidence from 289 banks in 15 post-
communist countries.” Journal of Banking and Finance, 29 (1), pp. 55 –81.
44
http://www.ebrd.com/country/sector/econo/stats/timeth.htm; accessed on November 11th, 2008

21
2) Transformation of ownership in the commercial banking system through the
establishment of new private banks and privatization of SOCBs. This is measured by asset share
of private banks (including both domestic and foreign banks). This share is around 20-25%.45

3) Openness for competition through permission for foreign banks to establish branches
or acquire domestic banks (including SOCBs).46 This is measured by asset share of foreign-
owned banks (in per cent) in total bank sector assets. This share is 10% in Vietnam by 2008.47

4) Domestic credit to private sector (in per cent of GDP). This share indicates the
maturity of the transitional banking system. Low share indicates shallow penetration of the
commercial banking system into the private economy. This share is calculated from the IMF
International Financial Statistics Yearbook (2007, 2008) as 50% in 2006 and 65% in 2007.

Figure 1: Reform Progress of the Commercial Banking Sector in Vietnam

Transition index: 3

Share of private Domestic credit


bank assets: 25% to private sector/GDP:
50%

Share of foreign bank assets: 10%

The transition index indicates mostly the level of institutionalization of the banking sector
while the other three indices indicate the openness and liberalization of the commercial banking
sector to private sector and foreigners. Comparing with other transitional economies which score
within the range 2.7-3 for their EBRD transition index, the share of private bank assets,

45
Hao. 2008. Ibid. 205.
46
Fries. 2005. Ibid. 15, 16
47
Hao. 2008. Ibid. 2005.

22
particularly the share of foreign bank assets, is relatively low whereas the domestic credit to
private sector/GDP ratio is relatively high (Table 8-1). Comparing with the same transitional
economies at present time banking reforms in Vietnam has lagged far below especially in terms
of institutionalization (EBRD transition index), and participation of private and foreign banks in
the banking system whereas domestic credit to private sector/GDP ratio is higher than Romania
and Poland but lower than Bulgaria and Croatia (Table 8-2). This suggests that there is still a
room for the entry of new comers in the banking system but a rapid credit expansion into the
private sector which already produced high inflation recently may be unmatched with the current
state of banking transition.

3. Policy Implications

The investigation of the reform process and the reformed structure of the commercial
banking system in Vietnam has the following policy implications.

First, a lack of long-term vision in the development of banking sector has led to the
inconsistency of the reform direction. As a result, banking reforms in Vietnam has swung
between the new entry and rehabilitation approaches, especially in time of financial turmoil such
as 1997-1998 Asian financial crisis and recent domestic financial instability. Inconsistent
approach of reforms has retarded the transition progress of the banking system in comparison
with other transitional economies as reflected in the above transition indices.

Second, slower reform has reduced the vulnerability of Vietnamese banking sector to the
external impact in 1997-1998 and currently since it keeps participation of foreign and private
banks in the economy at the modest level. Yet, it fails to protect the banking system from the
impact of recent domestic economic turmoil as shown in a high inflation rate, volatile exchange
rate, “hot” credit expansion and other macro-imbalances in trade and budget. To a certain extent,
slow reform has failed to provide safe channels such as a sound banking system and sufficient
risk prevention measures to match with financial proliferation, therefore it has partially caused
recent domestic financial instability. Finally, the latter plus the impact of global financial crisis
show that unlike the context of 1997-1998 Vietnam is now more vulnerable to the so-called
impossible trinity (free capital flow, fixed exchange rate and autonomy of monetary policy) in
the management of macro-economic stability in its deepening international integration. But just

23
as the 1997-1997 Asian crisis has done, the current global financial crisis should provide
momentum for a new round of bolder reforms of the commercial banking system.

The reform of the commercial banking sector has to deal with both issues:
competitiveness and stability. The evidences over the past years in Vietnam have shown that new
entry strategy increased the competitiveness but it already sacrificed the stability of the banking
system. In contrast, the rehabilitation strategy helped to maintain the stability to increase the
competitiveness but in reality it already cost the latter of the banking system. The problem of
these two approaches is their implementation with little moderation. According to the above
reform progress assessment, the openness of the Vietnam banking system is still small, and the
current restrictive measures in response the global financial crisis may have negative impact on
the competitiveness of the banking system in the long run.

Vietnam need to devise a more “moderate” strategy, which has both “new entry” and
“rehabilitation” elements: the “new rehabilitation” strategy. This alternative strategy focuses on
the process rather than the structure of the banking system (i.e. the number of the banks). While
the number of the commercial banks in Vietnam may be more than other economies which have
larger GDP, the coverage of the commercial banking system in Vietnam is small due to small
number of banking branches and common use of cash in the economy. Quality not quantity of
the banks is the main cause of the weakness of the banking system.

The “new rehabilitation” strategy does not restrict the entry of the new banks but it must
have more stringent supervising measures to ensure that the new banks operate according to the
existing standards. This is in line with the adjustment trend of the banking reform since Doi
Moi. In the long run, it aims to reduce the volatility in the reform direction. As shown in the
figure below, reform trend of the banking sector should approach the moderation OF line after a
number of adjustments.

24
Figure 2: Reform Roadmap for the Commercial Banking Sector of Vietnam
Efficiency and Competitiveness of the Banking Sector
F

K
N: 2008

Stability/Stagnancy of the Banking Sector


Rehabilitation

M: 2006/2007

A: 2000/01
No Reforms

New Entry

O Masive Privatization/Equitization T

A rehabilitation element of the alternative approach focuses on the reform of the SOCB
system. According to Stijn Claessens (1997),48 in the transitional economies, large share of the
five biggest banks will have negative impact on the quality of the entire commercial banking
system. Large scale of the banks is a doubled-edge sword. On the one hand, it can provide the
banks with advantage due to the economy of scale that reduce management costs. On the other
hand, mega banks face the same problems of inflexibility and complexity in their management.
While Vietnamese SOCBs are not big in terms of number of clients and equity capital in
comparison with the international standard, their internal structure become more cumbersome
and their staffs increase rapidly.

Moreover, in an economy where the banking sector is still controlled by the government,
the banking system becomes the instrument of “public finance” to channel funding into public
48
Claessens. 1997. Ibid.

25
projects through the SOEs in line with the development purposes set out by the government. In
addition, there is the existence of a sort of “banking repression” as reflected by a variety of
government regulations on required reserve ratio, interest-rate control, credit scheme, required
state ownership, limited activities of private and foreign banks and capital flows. In maintaining
such a close government-SOE-bank triangle relationship and following the above strict
regulations, banks are compelled to drop profit maximization from their list of priorities and this
is main cause of the inefficiency and loss of the banking system. Thus, the reforms of the
commercial banking sector in Vietnam should go along with the removal of the above restrictive
measures in particular and with the liberalization of the entire financial system in general.

Conclusion

A popular logic of reforms in the transitional economies is a focus on the reforms of the
banking sector which was the base of financial system in the previous commanded economy. As
a result, most of the transitional economies start to build a bank-based financial system. This is
also true in the case of Vietnam.

Proponents of the bank-based financial system argue that it helps to maintain stability and
allows for effective supervision of the government. In fact, it also has a number of potential risks
related to non-performing “public finance” and efficiency problems. Recent crisis of banking
sector around the world has shown that a bank-based financial system is not the exclusive model
to maintain financial stability. Non-conformance with the safety standards and a lack of risk
management mechanism are indeed the main cause of financial instability.

In a bank-based economy, there is a hesitance to reform the banking system because banks
are interrelated with many other important economic sectors. By consequent, banking reforms
often lag behind the reforms in other sectors. As the banking reform is kicked off, there is often
no clear policy direction which is contingent upon external pressures. In case of Vietnam, the
reform direction swings between the new entry and rehabilitation approaches. Slow reforms may
protect Vietnamese commercial banking sector from short-term external impacts by chance, but
it fails to prevent the emergence of the domestic financial chaos and it will cause major longer-
term weaknesses of Vietnamese commercial banking sector by consequence. While this research
looks at the reforms of the banking sector, longer and larger vision should deal with the reform
of the entire financial system, moving a bank-based financial system toward a more balanced

26
financial system which is based both on the banks and other financial markets such as stock
exchanges. At the same time, commercial banking reforms must be conducted together with the
reforms of the SBV and in other economic sectors such as SOEs and trade.

27
Appendices:

Table 1: Growth Rate of Banking Asset in Vietnam in Comparison with some East Asian Countries (%)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Vietnam n.a n .a 27.9 32.8 28.9 142.4 41.6 23.3 15.6 25.6 31.1 33.7 28.8 48.2
Malaysia 12.8 21.0 18.0 23.4 9.9 3.9 7.8 4.7 5.2 9.2 12.3 4.5 10.2 7.5
Thailan 18.0 19.9 11.7 9.5 9.3 (3.7) (5.0) 15.7 10.0 6.2 5.9 6.4 5.7 8.1
Indonesia 16.7 22.8 26.1 26.5 57.4 17.1 28.3 9.3 5.5 4.8 11.2 14.8 13.0 17.9
Philippines 20.7 25.7 30.9 20.2 5.6 11.7 9.2 2.9 10.9 9.0 9.1 4.3 17.3 10.0
Singapore 9.7 10.6 10.5 11.0 21.2 5.8 0.6 9.7 (8.3) 11.6 9.4 4.1 14.2 14.6
China 26.8 23.9 26.7 23.2 18.6 12.2 11.6 16.5 26.7 19.4 14.7 15.8 20.2 22.5

Source: Author calculated from International Financial Statistics Yearbook (IMF), 2001-2008

Table 2: Banking Asset/GDP Ratio of Vietnamese Banking Sector in Comparison with some East Asian Countries (%)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Vietnam 16.2 n.a 14.6 15.7 18.1 20.2 44.2 56.7 64.2 66.7 73.1 82.2 93.7 104.0 131.2
Malaysia 144.8 143.9 152.9 158.2 175.8 192.2 188.1 177.7 181.0 175.2 175.1 173.6 164.6 165.2 158.7
Thailand 123.7 126.9 131.9 133.8 142.7 159.6 153.3 137.2 152.3 157.8 154.0 148.7 144.8 139.2 138.9
Indonesia 57.8 58.2 60.2 64.7 69.5 71.8 73.1 74.1 68.4 65.2 61.8 60.3 57.3 53.8 53.5
Philippines 52.8 55.5 61.9 71.2 76.5 73.6 73.6 71.3 67.7 68.8 68.9 66.6 62.2 65.8 65.7
Singapore 139.8 134.0 134.3 135.9 138.5 173.0 179.8 158.5 180.9 161.0 175.0 168.4 162.2 170.2 174.1
China 110.1 103.2 102.0 110.7 124.4 139.9 150.0 155.0 148.0 169.8 178.9 174.6 171.7 176.2 193.6

Source: Author calculated from International Financial Statistics Yearbook (IMF), 2001-2008

33
Table 3: M2/GDP Ratio of Vietnamese Banking Sector in Comparison with some East Asian Countries (%)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Vietnam 20.1 n.a 19.8 20.9 22.6 24.2 36.4 44.6 52.1 53.0 61.6 69.3 77.3 86.3 109.6
Malaysia 8.0 79.8 84.7 88.5 94.3 92.3 101.2 98.9 135.3 129.4 128.0 126.3 121.9 123.8 122.2
Thailand 79.4 78.0 79.1 8.1 91.7 102.9 108.2 105.4 115.8 113.2 115.5 111.1 107.7 104.4 97.6
Indonesia 43.7 45.3 48.6 52.7 56.0 59.9 58.4 53.9 51.3 48.5 47.5 45.0 43.4 41.4 41.7
Philippines 42.7 47.1 51.8 56.3 62.0 61.3 64.2 61.6 58.9 59.6 56.7 55.2 52.6 56.7 54.2
Singapore 87.1 87.1 85.7 86.2 87.2 117.1 124.7 107.1 117.9 114.1 120.1 112.2 110.2 120.9 122.4
China 103.4 100.5 103.8 111.4 122.7 133.6 146.4 152.2 145.3 153.7 162.2 158.0 158.3 156.2 163.6

Source: Author calculated from International Financial Statistics Yearbook (IMF), 2001-2008

Table 4: Cash/GDP Ratio of Vietnamese Banking System in Comparison with some East Asian Countries (%)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Vietnam 10.1 n.a 8.5 8.3 8.0 7.5 10.3 11.8 13.8 13.9 14.8 15.3 15.6 16.3 19.3
Malaysia 7.8 8.1 7.8 7.5 7.6 6.4 8.2 6.5 6.2 6.2 6.2 6.0 5.8 5.8 5.6
Thailand 6.6 6.7 6.8 6.6 7.1 6.9 10.2 8.3 8.3 8.7 8.9 8.8 8.5 8.0 8.1
Indonesia 4.4 4.9 4.6 4.2 4.5 4.3 5.3 5.2 4.6 4.4 4.7 4.7 4.5 4.5 4.6
Philippines 5.7 5.7 5.8 5.7 5.9 5.5 7.3 5.7 5.4 5.6 5.5 5.3 4.4 5.2 5.3
Singapore 9.5 8.7 8.3 7.9 7.6 7.4 8.1 7.1 7.7 7.8 7.9 7.4 7.3 7.0 6.9
China 16.7 15.6 13.5 12.9 13.6 14.2 16.3 16.4 14.4 14.4 14.5 13.3 12.5 12.2 12.3

Source: Author calculated from International Financial Statistics Yearbook (IMF), 2001-2008

34
Table 5: Equity Capital of Largest Commercial Bank of Vietnam in Comparison

Banks Equity capital

Agribank (the largest) More than $US 400 mill.

Thailand (Average) $US 813 mill.

Singapore (Average) More than $US 1 bill.


Source: SVB, 2006 and IMF, 2003.

Table 6: Banking Services in Vietnam in Comparison

Country Number of Service Products

Vietnam 450-500

China 800-900

Thailand > 2,000

Malaysia 2,800-3,000

Japan 4,000-5,000
Source: Techcombank. 2004. Report on Market Survey, Center for Banking Training.

Table 7: ROE and ROA of 5 Major State-owned Commercial Banks of Vietnam in 2005

Banks ROE (%) ROA (%)


Incombank (Vietinbank) 12.74 0.49
Agribank 11.86 0.44
BIDV 7.9 0.41
Vietcombank 14.9 1.0
MHB 7.85 0.56
Source: Economic and Budgetary Committee, National Assembly. 2006

35
Table 8-1: Reform Progress Assessment of the Banking Sector of Vietnam in

Comparison with other Transitional Economies (1).

Country (year) EBRD Share of private Domestic credit Share of


to private
transition index bank assets (%) foreign bank
sector/GDP (%)
assets (%)

Albania (2007) 2.7 100.00 29.00 94.2

Bulgaria (1999) 2.7 49.5 12.00 57.2

Croatia (1998) 2.7 62.5 43.5 6.6

Romania (1997) 2.7 20.00 11.5 11.5

Poland (1996) 3 30.2 18.6 14.4

Vietnam (2006-2007) (3-) 25 50 10

Source: Author calculated from EBRD transition index, 1989-2008.

36
Table 8-2: Reform Progress Assessment of the Banking Sector of Vietnam in

Comparison with other Transitional Economies (2).

Country (year) EBRD Share of private Domestic credit Share of


to private
transition index bank assets (%) foreign bank
sector/GDP (%)
assets (%)

Albania (2007) 2.7 100.00 29.00 94.2

Bulgaria (2007) 3.7 97.9 66.8 82.3

Croatia (2007) 4.0 95.3 76.6 90.4

Romania (2007) 3.3 94.3 32.9 87.3

Poland (2007) 3.7 80.5 33.4* 75.5

Vietnam (2007) (3-) 25 65 10

Note: * year 2006


Source: Author calculated from EBRD transition index, 1989-2008

37
References:
Athanasoglou, Panayiotis P.; Delis, Matthaios D. và Staikouras, Christos K. 2006. “Determinants
of Bank Profitability in the Southeastern European Region.” Bank of Greece. Working
Paper. No. 47 September 2006.
Barré, Xavier. 2006. Report on the Liberalization of the Banking Sector in View of Vietnam’s
Expected Accession to the WTO. Ministry of Industry and Trade and European
Commission. Project ASIE/2003/005711. Hanoi, June 6/2006.
Bonin, J., I. Hasan and P. Wachtel (2005) “Bank performance, efficiency and ownership in
transition countries”, Journal of Banking and Finance, 29 (1), pp. 31 – 53.
Claessens, Stijn. 1997. “Banking Reform in Transition Countries.” World Development Report
1996. World Bank. June 9, 1997
Claessens, S., Demirguc-Kunt, A. and H. Huizinga (2001). “How does foreign entry affect
domestic banking markets?” Journal of Banking and Finance 25, 891- 911.
Du, Huynh The. 2007. Reforms of the Vietnamese Banking System: Comparative Study with
China. Fulbright Economic Teaching Program. April, 2007.
Economic and Budgetary Committee. National Assembly. 2006. Reports on Banking System. Hanoi.
European Bank for Reconstruction and Development (EBRD). Transition Index.
http://www.ebrd.com/country/sector/econo/stats/index.htm; accessed on November 11th, 2008
Fries, Steven. 2005. Politics of Banking Reform and Development in the Post-Communist
Transition. European Bank for Reconstruction and Development. London: UK.
Fries, S., and A. Taci (2005), “Cost efficiency of banks in transition: Evidence from 289 banks in
15 post-communist countries.” Journal of Banking and Finance, 29 (1), pp. 55 –81.
Hao, Nguyen Thi Thanh. 2008. Vietnamese Banking System: Reality and Solutions. Presentation
paper in the proceeding of the Conference “Vietnamese Banking System and the WTO
Commitments: Assessment and Prospect.” Hanoi, May 2008.
Havrylyshyn, Oleh; Wolf, Thomas. 1999. “Determinants of Growth in Transition Countries.”
Finance & Development Magazine, Vol. 36, No. 2.
Hoan, Pham Xuan and Nguyen Hong Son. 2008. Vietnam’s Financial Challenges. Vietnam
Socio-Economic Development. No.56. December 2008.
Hung, Le Van. 2007. “Vietnam’s financial market in 2006: achievement and challenge.”
Economic Studies. No.345. February 2007.

38
IMF. 2003. Vietnam Statistical Appendix, August 28, 2003.
IMF. International Financial Statistics, 2001-2008.
Nsouli, Saled. M. 1999. “A Decade of Transition An Overview of the Achievements and
Challenges.” Finance and Development. June 1999. vol 36. No.2.
Nguyen, Tran Ha. 2008. Vietnamese Banking Sector: Assessment and Prospect. Presentation
paper in the proceeding of the Conference “Vietnamese Banking System and the WTO
Commitments: Assessment and Prospect.” Hanoi, May 2008.
Oh, Soo-Nam. 2000. “Financial Deepening in the Banking Sector – Vietnam.”
http://www.adb.org/Documents/Books/Rising_to_the_Challenge/VietNam/2-bank.pdf;
accessed on March 9th, 2009.
SBV. 2006. Annual Report. Hanoi.
Son, Nguyen Hong. 2008. The Financial System of Vietnam: Main Characteristics and Reforms.
Lecture paper for the Capacity Building Program for the Senior Officials of the Central
Asian Countries, Hanoi, August 2008.
Steinherr, Alfred. 1997. Banking Reforms in Eastern European Countries. Oxford University
Press and the Oxford Review of Economic Policy Limited)
Sundararajan V, Balino T. 1991. Banking Crises: Causes and Issues. International Monetary
Fund: Washington, DC
Tang, H., Zoli, E. and I. Klytchnikova (2000). “Banking crises in transition economies. Fiscal
costs and related issues.” World Bank Policy Research. Working Paper No. 2484. The
Economistview, 2005.
Tai, Nguyen Trong. 2008.“Competitiveness of Commercial Banks in Vietnam from Theoretical
View and Practice.” Banking Journal No.3/2008.
Techcombank. 2004. Report on Market Survey. Center for Banking Training: Hanoi.
Unteroberdoerster, Olaf . 2004. “Banking Reform in the Lower Mekong Countries.” IMF Policy
Discussion Paper. Asia and Pacific Department. September 2004
WB. 2001. “Government Failure in Finance.” Finance for Growth, Chapter 3
WB. 2002. “Banking Sector Review: Vietnam June 2002.”
http://www.worldbank.org.vn/publication/Banking%2003.pdf; accessed on February 20th,
2009.

39