VIETNAM

Financial Sector Diagnostic

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the Netherlands, New Zealand, Norway, Sweden, Switzerland, and the United Kingdom
Financial Sector Diagnostic VIETNAM Author: Margarete Biallas,
VIETNAM
Hanh Nam Nguyen
Financial Sector Diagnostic August, 2006

Introduction

Political
Environment Both Vietnam’s new state president and the recently appointed prime minister belong
to a young generation of reformers that may be expected to pragmatically work
towards implementing Vietnam's international obligations, including the requirements
of membership in the World Trade Organization. While the political trend entails new
commitments to anti-corruption and gradual market reforms, it is still conservative as
the leadership is bound by party dictate to promote a "market economy with a socialist
orientation." This translates into state control of strategic sectors of the economy and
limitations on the influence of private entrepreneurs.
Macroeconomic
Context Stable growth, good macro-economic performance, and the steady reform path
of the current government form an environment conducive to economic and
private sector development. Economic trends have been encouraging. For the first
half of 2006, year-on-year economic growth (GDP) is expected to remain strong at
7.6% (see Table 1). The main contributors to economic growth are industry,
construction and services, with growth rates between 8.1% – 9.5%. In contrast,
agricultural sector growth has slowed due to a number of natural catastrophes,
including drought in the north, floods in the north-central region and the Mekong River
Delta, and pests in the south. Inflation stood at a manageable 7.6% in May 2006. The
share of people living in absolute poverty declined from 37% (1998) to 20% (2004).

Table 1 2003 2004 2005 June 2006

GDP in billion US$
% GDP growth 7.3 7.8 8.4 7.6
GDP per capita
Inflation 3.1 7.8 8.5 7.0
Exchange rate

% GDP in agriculture
% GDP State-owned enterprises
% population < $2/day
Source: World Bank

The private sector is gaining importance in the economy. Private sector growth
exceeded state sector growth by 7 percentage points. The number of new enterprises
registered in recent years (150,000 over 5 years) is a further indicator of a burgeoning
private sector. At the same time, 5,200 enterprises remain fully or partially state
owned, referred to as state owned enterprises (SOEs). These SOEs shall be equitized
over the next few years. 1 With a contribution of 36% to GDP they represent one-third
of the economic power of the country.
Vietnam has a Fitch sovereign rating of BB-, and a Moody’s Ba3 (foreign currency).
Government
Priorities SME development has been declared as a priority of government. To foster SME
development, the government has passed a number of laws regulating private sector
and enterprise development such as the unified Enterprise Law the and Investment
law.

1
Equitization is conversion of a state-owned company into a joint-stock or limited liability company, with the
majority, if not all of the stocks / shares, being retained by the state.

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Financial Sector Diagnostic VIETNAM

Demand For Financial Services

Relatively little is known about the true demand for financial services among
Vietnamese businesses and households. Of a total population of 80 million, less
than 5% are estimated to be using bank services regularly and less than 20% hold
bank accounts.
Domestic consumption and investment remained strong throughout 2005. Household
expenditure rose 20.5% during 2005 and 19.6% in the first five months of 2006. The
increase in expenditure is a reflection of the absolute increase in wealth in Vietnamese
society, which is attributable to the continued growth of the economy. Households
witnessed a large rise in real per capita income (from USD 184 in 1998 to USD 555 in
2002), mainly due to wage and non-farm self employment income, which
together accounted for 70% of the increase. Migration to urban areas has
increased and will continue to rise as more people seek wage employment. As
personal wealth increases, private consumption is likely to rise. Similarly, increased
wage employment will lead to an increased capacity for borrowing as well as an
expanding demand for other services such as transfers and savings products.
Private
Sector/SMEs Of the 740,000 formally registered enterprises, 47% are operating in the trade and
services sector, while 38% may be considered as active in the productive sector. In
addition to the registered enterprises, there are an unknown number of informal small
and micro-enterprises. Some 40,000 new private enterprises were registered in 2005,
representing an increase of 43% in registered capital over the previous year. The
average capital of these enterprises stood at around 170,000 USD. While this is
small, it is double the capital of the past five years, reflecting past and indicating
future demand for finance.
While bank loans have rapidly grown, they only represented about 60% of
companies’ financial needs. Most loans available in the market are short to medium
term, as banks generally lack access to long-term capital and avoid incurring maturity
mismatches.

Financial Sector Overview

The Vietnamese financial sector is less liquid than some of its regional
counterparts, with nearly all deposits soaked up by loans. Indeed, loans have growth
faster than deposits over the past several years, as shown in Table 2.

Table 2 2003 2004 2005 June 2006

Total loans in million US$
% loan growth 28 26 31
Loans as % of GDP 50 59 65

Total deposits in million US$

% deposit growth 24 22 23
Deposits as % of GDP 70

Loans as % of deposits 89% 95% 95%

% cash of total deposits 45 30

# loans per 1,000 people

# deposits per 1,000 people
Number of FIs per 100,000 people
Number of branches per 100,000 people 4
Source: World Bank

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Financial Sector Diagnostic VIETNAM

Until 1988, when the banking system became a two-tier system, Vietnam operated a
mono-banking system, resulting in a legacy of strong state involvement in the financial
sector. Since 1998, the transformation of a centrally planned to a market economy has
resulted in a more diversified banking system, in which state-owned banks, joint-stock,
joint venture and foreign banks serve a broad customer base. Table 3 shows the
evolution of the number of each type of financial intermediary over the past few years.
Number & Type
of Financial
Institution
VIETNAM
Table 3 2003 2004 2005 June 2006
Number of Banks 69 69 70 78
Joint Stock Banks 38 36 35 37
Foreign Banks 26 28 30 31
State-owned Commercial Banks 5 5 5 5
Joint Venture Banks 5
Development Bank and Policy Bank 1 2
Peoples Credit Funds 900 917
Microfinance and Credit Coops 40 50 60 70

Source: BTC

SOCBs The five state-owned commercial banks (SOCBs) together operate more than 2,000
branches. In addition, in May 2006 the government approved the incorporation of the
Development Assistance Fund as another state-owned not-for-profit financial
institution (in addition to the Social Policy Bank)
Historically, the SOCBs have been an instrument of policy lending, with their lending
influenced by social or political objectives rather than commercial considerations. Each
bank has traditionally focused on a certain industry segment. The SOCBs remain the
main source of funding for the SOEs, many of which are inefficient and uncompetitive
by international standards. Already heavily exposed to these enterprises, the SOCBs
often have no alternative but to continue their support.
The reform process has, in recent years, led to an increase in more diversified, private
sector lending. As the SOCBs approach equitization, they increasingly focus on
being universal banks offering a full range of financial services. All SOCBs have
leasing subsidiaries.
Equitization of all the SOCBs is to be completed by 2008. It is questionable whether
the Government of Vietnam (GoV) will actually equitize the agricultural bank VBARD
and the Bank for the Poor, both of which are key to policy lending and are perceived
by the GoV as crucial instruments for combating poverty and under development in
rural areas.
Both their immense branch network and good reputation with domestic depositors,
give SOCBs a strong competitive edge over private institutions. Subsidized lending
enables them to attract a large customer base. On the down side they are prone to
government intervention and may be considered as overstaffed and to be
administrated rather than managed. The SOCBs altogether employ some 57,000
people, with the bulk of staff working for VBARD. Also, they lack the motivation to build
long-term visions and instead pursue short-term objectives.
Joint Stock
Banks JSBs have a relatively short history, with less than 15 years of operation. Although
their role is modest in the banking sector as a whole, their dynamic business and
management mindset has put great competitive pressure on the SOCBs and
foreign investment banks over the last few years.
The 37 JSBs can be categorized into 25 urban and 12 rural joint-stock banks. These
relatively small banks have private majority shareholding, with capitalization per bank
varying between USD 15-75 million. The JSBs’ outreach is still limited, with

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between 6 and 80 branches / transaction offices, mainly in urban areas. Paired

with small market share, this raises the question of the long-term competitiveness of
some institutions and further consolidation in the sector is to be expected. JSBs are
actively increasing their capital to boost their competitiveness.
Notwithstanding their small size, limited number of staff and branch network when
compared to the SOCBs, JSBs have attracted investors due to rapid growth, high
profitability and generous dividend policy. These include: ACB with Standard Charter
Bank holding 8.56%% and SACOM with ANZ holding 10%. HSBC is planning to take
10% of Techcombank, OCBC of Singapore is in the process of acquiring 10% of VP,
and Cathay Bank is planning to take 10-20% of Southern Bank shares.
Market leaders among the JSBs are ACB, SACOM Bank, Techcombank, Vietnam
International Bank and East-Asia Bank. Other emerging private banks (Tier 2) are
Habubank, Saigon Bank, Southern Bank and Military Bank. The JSBs strive to
become leading retail or universal banks, providing every banking product to every
market segment. They all offer foreign exchange services as well, with some
restrictions on the differential they can charge relative to the officially set rate.
Eximbank was recently allowed to set its own exchange rates for buying and selling
foreign currency on a trial basis, a step toward freeing up the market.
Overall, products are not very developed and quite similar, with product design being
basic, if not underdeveloped (e.g. mortgage finance). However, some banks have
begun to specialize and innovate. Eximbank and East-Asia Bank have for instance
focused on foreign exchange transactions and export-import finance, including letters
of credit SACOM Bank has opened a branch exclusively serving females and ACB has
extended office hours, now working seven days a week in branches in supermarkets
and shopping centers. Both Sacombank and ACB have begun to also offer mobile
banking services in the Mekong River areas. Eximbank and Techcombank have taken
the lead in introducing derivates to the Vietnamese market, providing options to
minimize commodity pricing risks. SACOM Bank is the only JSB operating a leasing
subsidiary.
While all JSBs and SOCBs provide basic trade finance services (LCs), factoring
services are currently provided by only 11 local banks, including VCB, ACB,
Sacombank, Techcombank and 11 foreign bank branches.
The smaller banks are largely owned either by individuals, families or enterprises. The
separation between the board of directors and the CEO is not always clear cut and
supervisory boards operate like internal auditing committees rather than protecting
shareholders rights.
In many joint-stock banks, management information systems are not very well
developed. Generation of basic client information (number of accounts per client,
types of services sold to one client, etc.) is often not possible. The leading JSBs only
recently all acquired modern core banking systems.
Although difficult to measure and compare, business skills appear to be better
developed in the JSB, where staff is generally more client-focused and market-
oriented than in the SOCBs. JSB staff members are often trained in-house and on-the-
job through interaction with the clients. In addition, they are motivated by attractive
performance-based packages.
Foreign Banks The 31 foreign banks operating in Vietnam are either full branches or representative
offices of large international banks and capitalization is not an issue. Foreign Banks
focus their services entirely on serving foreign invested companies, large state-
owned corporations and foreign individuals in Vietnam. Some (Citibank and ANZ)
also target wealthy Vietnamese clients. They have been instrumental in introducing
new products to the Vietnamese market such as mortgage services (ANZ) and
medium-term certificates of deposit (HSBC). At the same time, they have also
penetrated the retail market through offering automobile loans, housing loans and
international credit card services.

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Foreign banks like Citibank, ANZ, and HSBC offer a full range of internet banking
services, in contrast to the limited inquiry function of internet services offered by some
larger SOCBs. ATMSs are limited to their branch premises.
Microfinance Microfinance in Vietnam is still underdeveloped and comprises three types of
institutions: formal, semi-formal and informal. The industry’s nascent stage is partially
due to market distortions resulting out of highly subsidized policy lending by the formal
institutions, the SOCBs and the People Credit Funds (PCFs). The semi-formal sector
includes government organizations and international NGOs. The microfinance sector
is dominated by the activities of two of the state banks: the agricultural bank (VBARD)
and the Bank for Social Policy (BSP). Both institutions focus on savings mobilization
and credit. Together they serve 82% of the market in rural areas. Cooperatives and
PCFs, which account for some 900 institutions serve 3% of the rural market, while
semi-formal and informal organizations, of which there are estimated to be 57, serve
some 164,000 clients in 547 communes and represent about 7% of the microfinance
market. The informal sector, consisting of money lenders, ROSCAs, friends and
relatives, is estimated to supply 50% of total credit needs among poor and low income
people.
Leasing
Companies Currently ten leasing companies operate in Vietnam, of which five are subsidiaries of
the SOCBs. They all fall under the supervision of the State Bank of Vietnam (SBV).
Apart from the Law on State Banks of Vietnam (LSBV) and the Law on Credit
Institutions (LCI), the leasing industry is regulated by a number of decrees specifying
the rights and obligations under leasing contracts, the sale of these, the lessor’s right
to recover assets in the event of early termination of a lease, and the re-lease or re-
sale of such assets. The absence of an agency or trust law may cause problems in
defining fiduciary duties of the lessee following the sale of receivables with recourse.

Activity in the leasing market is relatively limited, partially due to a lack of low-cost
long-term local currency funding for private leasing companies. The ability to attract
low-cost funding is curbed by current legislation, which limits the leasing company’s
ability to offer receivables as security for finance provided by third parties. Limited
activity may also be attributed to a misconception of the instrument by supervisors,
lessors and lessees, all of whom treat leasing like a sub-form of the standard
collateralized lending common in Vietnam.
Partially the slow growth in the leasing industry may also be attributed to a lack of
understanding of the instrument on the part of the general public.
Insurance
Companies Vietnam has actively developed the insurance industry. The Insurance Law, enacted
in April 2001, allowed foreign joint ventures and foreign-owned subsidiary branches to
operate in Vietnam. Subsequently, 11 local joint-stock insurance companies and 15
wholly foreign subsidiaries were set up alongside the four state-owned insurers. Two
of the state-owned insurers have been equitized – Bao Minh and Vinare. The third
state-owned insurer is to be privatized in 2007. In addition, one of the foreign
subsidiaries (Prudential) is planning to launch Vietnam’s first mutual fund later in 2006.
While insurance companies offer all insurance products, market penetration was still
low at 1.7% in 2004. Unlike in most developing countries, the life insurance market
is larger than the non-life insurance market. The non-life insurance market is
expected to grow as motorization increases.
The growth of life insurance is significantly impaired by the lack of high-quality
assets and risk management instruments. With the stagnation in real estate
markets, the main investment opportunity for insurance companies, the situation is
further aggravated. Legislation leaves insurance companies somewhat restricted in
their investment options. For instance they are prohibited from buying leasing
receivables.
Pension Funds In contrast to the insurance industry, the pension fund industry lags behind with one
state-managed pension fund for public servants but no pension fund for private sector

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workers. There is a “social insurance” agency that manages the mandatory social
insurance or pension funds for all legal employees.
Other
NBFIs In addition to banking, leasing, and insurance companies, Vietnam has six financial
companies plus 14 foreign and 8 domestic fund managers operating in the market. A
total of 15 securities companies and brokers are listed with the Vietnamese State
Security Commission, which regulates the two trading centers in Ho Chi Min City and
Hanoi.
As of August 2006, the SCIC has been incorporated as a specialized financial
company. It is a holding company for all state assets, mandated with their
management and privatization. It may also engage in direct as well as capital markets
investments. The SCIC has a profit orientation and must maximize return on state
capital.

Market Structure
Assets The total banking sector asset base is VND 898,059 billion (US$ 56 billion), of which
the SOCBs control the bulk of assets in the financial system (68%) -- see Figure 1).
Due to insufficient lending quality and directed lending, asset quality is poor. Risk
management is generally considered to be poor and reporting is highly
unsatisfactory. The JSB’s market share has seen rapid growth and now stands at 16%
of total assets in the banking system, although risk management is highly uneven and
these figures may overestimate actual market share. Total assets of foreign bank
branches have grown considerably (25%) with the total loans outstanding accounting
for 9% of the total banking sector. Portfolio quality is very good and risk management
is not an issue.
Assets in the micro-finance industry (excluding SOCBs) totaled USD 9 million in
assets, of which USD 8 million represent loans outstanding.
Figure 1.

Total Outstanding Loans of the Vie trnam e se bank ing Sys tem
700

600

500

400
VND Trillion
300

200

100

0
2001 2002 2003 2004 2005

State ow ned banks Joint stock banks Year

Foreign banks and joint venture banks Total

Source: SBV

Liabilities SOCBs hold 70% of all liabilities in the market (see Figure 2). Due to their extensive
branch network and positive image, SOCBs have the ability to collect short-term and
long-term deposits nationwide.
JSBs are increasing their drive for deposit mobilization and have developed a number
of products to attract savings, targeting Vietnamese individuals to increase deposit
mobilization. Military Bank, Eximbank and ACB pioneered savings products embedded
with prizes, while VIB and EAB offer savings with calibrated interest rates, and VP
introduced foreign exchange-index savings in local currency. While this has led to an
increase in market share, savings are mostly short or at best medium term.

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Financial Sector Diagnostic VIETNAM

Figure 2.

Deposits in the Vietnam ese Banking System

300

250

200

150

100

50

0
2001 2002 2003 2004 2005 2006
State ow ned banks VND Trillion
Joint stock banks Foreign banks and joint venture banks

Source: SBV

Vietnamese banks now use some 40-50% of short-term deposits to offer medium and
long-term loans while the central bank allows credit organizations except for the Bank
for Agriculture and Rural Development (Agribank) to use the maximum 30%. Such
imbalance, if being not monitored, might lead to a crisis for the whole banking
system.
With neither capital markets nor the interbank market offering term funding for
JSBs, sources of funding are mainly retained earnings, equity, and loans from DFIs /
international banks.

Performance
SOCB
Performance As shown in Table 4, with the exception of MHB and Vietcombank, the SOCBs’ ROE
is substandard. Of the SOCBs, only Vietcombank and MHB achieve a ROA
comparable to international standards. For comparative purposes, the average ROA
for the Asia-Pacific region is 0.94% and for Southeast Asia equals 0.77%. The
financial sustainability of most of the SOCBs is questionable.
All SOCBs have a relatively weak capital base and do not meet the international
capital requirement of 8% (SBV regulation on minimum capital ratio; does not yet
apply, currently an absolute amount of VND is required). The 3 – 4% CARs for the
SOCBs compare unfavorably to regional averages – 13.1% for Asia and the Pacific
and 12.3% for Southeast Asia. In order for Vietnamese banks to reach a CAR of 8%
in 2010, an additional VND 65-70 trillion (US$ 4.3 billion) will need to be injected.
Table 4
Growth of Net
Cost/ NPL Coverage
loan interest ROA ROE CAR
income s Ratio
portfolio margin
VCB 31 0.8 13.5 71 15 74 3
BIDV 14 0.1 2.7 71 15 72 4
ICB 24 0.2 4.6 45 16 92 4
VBARD 24 (0.2) (3.7) 57 4
MHB 54 0.5 4.4 36 15 9
Source: BTC

Non-performing loans are quite high among all SOCBs, far surpassing international
standards.

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JSB
Performance In contrast to the SOCBs, Table 5 shows that JSBs are highly profitable, achieving
ROEs of 15% - 30%. Dividend policy is generally generous with 15% - 36% of profits
being distributed. However, given the need for loan loss provisioning and capital
increases, it is questionable if current levels of profitability are sustainable.
Portfolio quality is good – based on local GAAP – with NPLs reportedly around 2%. It
is not clear how reliable such figures are. Some banks have very limited MIS
capacities and cannot generate the most basic arrears or default reports. Risks
resulting out of this are limited by the fact that only 40% - 50% of total assets are loans
assets. The quality of risk management, especially under market stress, is
questionable.
Growth Net
Cost/ Coverage
Table 5 of loan interest ROA ROE NPLs CAR
income Ratio
portfolio margin
ACB 40 1.6 33.7 38
SACOM 1.7 26.3 46
EAB 1.3 15.0 47
Exim - - 46
TCB 55 1.2 21.3 41
VIB 1.0 12.6 50
JSBs1 36
Military 44 1.3 17.5 28
Habu 1.4 22.6 35
Saigon 2.5 15.5 31
HDB 1.6 16.3
VP 77
JSBs2-3 43
Source: Annual Reports

Financial Infrastructure
Capital Market Broadened intermediation, improved market infrastructure and enhanced
regulatory capacity would make capital markets business commercially viable
enough to attract more entrants to the industry.
The capital market regulator is the State Security Commission. It supervises Vietnam’s
two trading centers in Hanoi (HASTC) and in Ho Chi Minh City (HOSTC) and all
licensed securities firms. Of the 13 securities firms, with a total share capital of 38
million USD, seven are wholly owned by commercial banks and one by a state-owned
insurance company. Securities firms are presently too small to attract significant
investments from strategic partners or manage sizeable underwritings.
Regulation is based upon the Law on Securities and Securities Markets enacted in
July, 2006, which represents significant progress towards best practices, regulating
the capital market as a whole, integrating financial services available globally, rather
than a narrowly defined securities market. However, market surveillance and
enforcement have not been very effective.
While the SSC is a relatively young institution with more reform-oriented staff, its
institutional capacity – including qualifications of staff – to support and enforce
corporate governance and develop policies are limited. The fact that
compensation of government staff is a fraction of that in the private sector does not
help to attract qualified and committed staff to the regulating body.
The HOSTC started its operations with two former SOEs in July 2000, and by July
2005 had 30 companies, 281 bond issues, and one closed-end fund listed. Market
capitalization stood at USD 370 million, USD 2,2 million, and USD 19 million
respectively. In July 2006, the first bank (Sacombank) was listed on the HOSTC,
becoming the biggest stock with a total of 190 million shares listed, accounting for

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30% of the registered value on the bourse. Secondary market activity has been
generally modest. The daily trading value of HOSTC stands at around 5 million USD.
The HASTC conducted 14 auctions for initial public offerings and six auctions for
government bonds as of October 2005. It also started trading in the secondary market
in July 2005.
The OTC market exceeds trading at the HOSTC by more than three times. Margins
are three to six times that of the regulated market. The unregulated market consists of
a network of some 60-80 unlicensed and licensed brokers who intermediate
transactions as a side job. The main sources of shares are joint-stock companies
equitized from SOEs and joint-stock companies established by private entrepreneurs.
The introduction of (i) a centralized registry system, (ii) an integrated securities
depository system, and (iii) an individual securities broker/dealer registration
system would be effective in regulating securities outside stock exchanges,
while at the same time keeping the market for unlisted securities alive, which is
crucial to economic development.
Capital market development has been significantly slowed by GoVs reluctance to
embark on equitization of the large SOEs. Nonetheless, the equitizations of the SOEs
constitute a major step towards capital market development. All but one of the listed
joint-stock companies are former SOEs, and some 400 of the 2,000 companies to be
equitized are likely to qualify for listing. The SCIC may be instrumental in promoting
equitization beneficial to capital markets development. However, as a company
in the process of formation, SCIC will require significant support in institution
building to make it as successful as the companies it was modeled on
(TAMESEK, KAZAHNAH).
Very little activity occurs in the bond market and there is no benchmark rate of
interest due to distortions. Almost all bonds are issued by the government. Returns on
one-year issues are positive, while bonds with a shorter maturity will yield a negative
return. Corporate bonds are practically non-existent, with only two to three issues by
major banks or companies, but several investors have firmly expressed their interest in
corporate bond issues if they were to develop. Syndicated loans represent a very
small percentage of total lending, although foreign banks have made some inroads
recently with some success. Also local banks, mostly SOCBs, have done a number of
syndications for large government projects which, however, look like directed moves.
Payment
System The payment system is functional, but technically not very developed. With the support
of the World Bank it is to be fully automated within the next few years.
Interbank /
Money Market There is no official, central bank driven interbank market. Individual banks do however
cooperate and engage in lending to each other.
Deposit
Insurance Deposit insurance was instituted in Vietnam in 2000 covering deposits of VND 30
million (US$ 2,000) per individual per bank. The Deposit Insurance of Vietnam (DIV)
is vested with independent examination powers, but relies heavily on the SBV. Under
the current regime, a bank must pay an annual premium of 0.15% on average on all
Dong balances. 40% of all deposits are held in foreign currency and are not covered.
Extending coverage might provide a higher degree of depositor comfort and assist in
deposit mobilization.
Accounting
Standards Accounting standards are rudimentary and disclosure is poor, as is often the integrity
of the data disclosed. Although Vietnamese accounting standards have evolved from
cash to an accrual basis and toward IFRS, they are not yet fully in line with
international standards. As part of the reform process of the financial sector currently
underway, IFRS is to be introduced as the general accounting standard.

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Audit &
Legal While audits are mandatory, these are rarely done by international auditing firms.
There are a number of good quality domestic accounting firms which provide audits in
both VAS and IFRS. Auditing reports are generally not published. If published, only a
fraction of the audited report is shown and financial statements, auditor’s notes to
these and, management opinion etc. are often missing.
Rating & Credit
Information There are no official rating agencies incorporated in Vietnam. However, regional
agencies (e.g. World’ vest Base Inc.) have local representations that will provide
company and credit ratings, but for tax and administrative purposes operate out of
Hong Kong. Fitch monitors Vietnam out of Singapore, but concentrates its rating on
the top ten financial institutions.
The Credit Information Center, a public credit registry under the supervision of the
State Bank of Vietnam, so far is the only central credit information resource in
Vietnam. However, it only collects information on large corporate and SOE loans from
banks and is not organized, structured nor staffed with the resources needed to cover
SMEs and consumer loans. It is also burdened with other statistical and reporting
obligations to the SBV. As such, the sector is still heavily reliant on time consuming
manual checks for appraising the rapidly growing retail and private sector.
Apex banks The newly-founded state-owned Vietnam Investment Bank, which was converted to a
regulated institution out of the Development Assistance Fund (DAF), is to act as an
apex body. It will channel funding to priority sectors and the GoV’s development
projects. Also, the World Bank has set up a wholesale funding mechanism to provide
on-lending funds to rural financial institutions. A number of similar wholesale funds
exist with various SOCBs. It is expected that GoV will consolidate all of these into the
VIB.
Industry
Associations Vietnam features an association of bankers (VNBA), which was set up in 1994 and
has grown to a voluntary membership organization of 44 financial institutions including
5 SOCBs, 32 JSBs and 7 other non-bank financial institutions. It has expanded its
activities into information sharing, training, legal advice, match making and
representation/ cooperation with international fora. In comparison with other industry
association, VNBA is considered to be active and well sustained due to a strong and
growing banking sector.
Training,
Education,
Consulting The banking sector relies heavily on the local banking university and in-house training
units to meet their staff training needs. The Bank Training Center (BTC) can provide
modern, high quality training products, but is far from the largest supplier. It has
recently expanded its services to include consulting services and surveys of the
Vietnamese financial market. There are a number of domestic and international
consulting and training companies operating in Vietnam; none however, with an
exclusive focus on the financial community.
Technology The level of technology varies significantly among banks. Most first tier banks in the
market (Vietcombank, Techcombank) have a quite advanced technology core banking
system that supports a full range of banking service offerings (including internet banking,
ATM, phone banking etc.) as well risk management. On the other hand, the vast
majority of second tier and rural local commercial banks, and even some larger state-
owned banks such as the Vietnam Bank of Agriculture, lack advanced technology. Many
of them still operate on backward stand alone and paper based systems that are not
collected online; exposing them to serious operational and portfolio management risks
and low efficiency. Overall, foreign bank branches have absolute competitive advantage
over local commercial banks, and on average, technology is the weak point for
Vietnam’s financial sector.

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Consumer
Financial
Education Consumer financial education is still very limited. While high literacy (over 90%) in
Vietnam contributes to good overall mathematical understanding of the population at
large; financial literacy is generally low, especially in rural areas. For example, the lack
of consumer protection legal framework in Vietnam gives room for banks to advertise
misleading lending rates. While understanding of very basic financial products/
services (remittance, deposit) is acceptable, very limited understanding on more
sophisticated products such as receivable financing, leasing, mortgage, insurance etc.

Legal, Regulatory, and Policy Framework

The domestic banking sector is highly protected, which is a legacy of the mono-
bank system. This protection has led to an uneven playing field for state-owned and
privately-owned financial institutions. Particularly, foreign private institutions are limited
with regard to business activities, market entry, expansion, ownership and investments
in local financial institutions. Potential international investors need to be among the top
500 banks in the world and shareholding is generally limited to 10%, but may be
increased to 20% with special permission of the Prime Minister, if the investor is
considered a strategic partner. This process is lengthy and investors are restricted in
share transfers for a number of years after such an investment. Also, government
relies on the SOCBs for policy lending and all levels of the administration interfere with
credit decisions of these banks.
Reform Process The government has embarked on a financial sector reform program, as part of a WB-
PRSC loan. This supports the initiation of fundamental changes in the financial sector,
designed to transform the SBV into a modern central bank, to strengthen the
commercial orientation of SOCBs, and to develop capital markets. Towards this end, a
road map for reform was signed by the Prime Minister in May 2006. The road map
focuses on restructuring the SOCBs as well as the SBV, separating the supervisory
from the ownership function, strengthening banking supervision, and aligning
regulatory standards with the Basel Core principles. After completion of the reform
process in 2010, it is expected that all SOCBs will have been privatized and a level
playing field created for all financial intermediaries.
Corporate
Governance Potential conflict of interest and inadequate decision-making structures may become
serious obstacles to development. Further improvements are urgently needed to
facilitate both entrance of foreign banks and rationalization of existing processes (e.g.,
equitization). The most important are: (a) leveling the playing field by applying a similar
governance structure to SOCBs and JSBs (b) resolving the conflicts of interest posed
by the different roles of SBV and the SOCBs, (c) clarifying the respective
competences of directors and executive managers, (d) ownership representation at
the Supervisory Board of SOCBs and clarification of its functions, (e) separation of the
audit and risk control functions from management, and (f) acknowledge and
strengthen the rights of minority shareholders, particularly in equitized enterprises and
JSBs.
Regulation
& Supervision The State Bank of Vietnam (SBV) is responsible for regulating and supervising the
banking system. The SBV has a regional structure with over 60 branches, each
functioning at relative independence, and controlled by the local government. This
high level of fragmentation limits the efficiency. Also, the central bank’s co-
ownership of the SOCBs creates a conflict of interest which may diminish the
independence of its supervisory oversight.
The Law on State Banks of Vietnam (LSBV) and the Law on Credit Institutions (LCI)
provide a robust framework for the regulation and prudential supervision of the
Vietnamese banking sector. Together they cover the activities of the central bank and
all commercial credit institutions operating in Vietnam, and address issues such as fair
competition, business autonomy and prudential regulations. In addition, a large

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number of decrees and regulations exist to further detail procedures. A decree on the
formalization of semi-formal microfinance organizations has recently been passed,
which is flawed in many aspects (i.e. who is covered), therefore, it remains to be seen
if it will have a positive effect on the industry.
The regulatory framework leaves room for regulatory arbitrage and does not
always follow best practices. For instance, it is based upon entity regulation,
whereby a regulatory agency only supervises a particular type of financial institution
instead of a business function. The supervisory regime itself is heavily rules-based
with an emphasis on financial institutions complying with laws and regulations.
Although the SBV has introduced some requirements on capital, collateralization,
asset quality, and provisioning by type of financial institution, banks are not required to
publicly disclose details of their performance against these standards, so transparency
is an issue. Similarly SBV is very reluctant to publish sector data.
There are no interest rate caps in force at the moment.
Legal
Environment The legal infrastructure is weak by global standards. The difficulties of enforcing
security and foreclosing on loans are a major impediment to the development of the
residential mortgage market. Foreign banks have only recently been allowed to accept
land-use-rights as collateral for loans, though the enforcement of this security has not
been tested. Seeking recourse via the court system is time consuming and costly.
Bankruptcy law only exists on paper, as no bankruptcy has ever occurred. Foreclosure
is lengthy and costly, making it almost impossible. Tax laws are adequate but
considered too complicated with tax incentives not well structured, nor performance
based.
The current legislation leaves the banks with discretion with regard to whom
confidential banking information is released. Thus, many smaller private customers
are unwilling to provide detailed financial information to financial institutions. This in
turn leads to a lack of reliable financial information for credit decisions on the banks’
side.

Gap Analysis
Summary
of Gaps Banking Environment
1. Lack of market information
2. 80% of the population lives in rural areas and it is not viable for commercial banks
to compete for clients with heavily subsidized SOCBs.
3. Unwillingness to disclose personal financials is an indication of weak banking
secrecy law as clients fear that financials are reported to tax authorities.
4. A Weak legal system makes legal recourse lengthy and costly, if successful at all.
5. Lack of reliable information for credit decisions.
6. Lack of transparency, bureaucracy.
7. Different treatment of SOCB and private FIs.
8. Corporate governance issues resulting out of SBVs dual role as owner of the
SOCBs and its supervisory function.
9. Delay in SOCB privatization is a bottleneck to financial systems development.
General Banking
1. All financial intermediaries have the same business strategy
2. Products available in the market, credit, deposits and services, are limited to basic
loan, deposit and payment products.
3. Insufficient risk management and inadequate MIS capacities.
4. Organizational structure, network and distribution channels of banks are neither
suited for the expansion of product range nor the increase in outreach.
5. Strong growth has clouded the need for developing new products and introducing
adequate structures.

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6. Inadequate term structure results in maturity mismatches incurred by all banks, as

short-term deposits are utilized for medium-term lending. Long-term loans are
generally not available.
7. Prices are highly distorted as there is no risk-based pricing, especially from market
makers (SOCBs).
8. Limited knowledge of lending technologies.
9. Limited exit options (capital markets are underdeveloped) and there is no
secondary credit market.
10. Weak risk management.
11. Management and supervisory mechanisms are still limited (corporate
governance).
Insurance
1. Lack of good quality, high-yield long-term investments in local currency.
2. Limited availability of products, as outreach is limited to urban areas.
3. Limited understanding of products by consumers.
Housing
1. Unclear legal situation pertaining to property and/or land use rights hampers
foreclosure on land and buildings..
2. Weak repossession enforcement system.
3. No registry for either land or property titles or land use rights.
4. Banks lack long-term funding sources required for mortgage lending development.
5. Legal system is not sufficient for introduction of mortgage-related products.
6. Limited product development at bank level.
Leasing
1. Absence of Trust Law.
2. Leasing legislation is flawed.
3. Limited understanding of leasing by clients.
4. Constraints in accessing medium and long-term funds.
5. Cost of funds and pricing issues.
6. Conflicting legislation on ability to sell rights and obligations under leasing
contracts.
Microfinance
1. Highly distorted market
2. Semi-formal MFIs are very small and have limited outreach.
Capital Markets
1. Absence of trust or agency law.
2. Absence of a centralized registry system for securities.
3. Absence of an integrated securities depository system.
4. Availability of very basic products only.
5. Insufficient qualification of key participants (brokers, investment houses, dealers,
regulator).
6. Supervision and enforcement capabilities of SSC are very limited.
7. Lack of an individual securities broker/dealer registration system.
8. Semi-manual clearing and settlement.
9. Insufficient SCIC capacity to evaluate SOEs pior to privatization.
IFC /
MPDF Activities IFC currently supports the development of a private credit bureau to decrease
information asymmetries in the market. IFC is also supporting the Ministry of Justice in
developing the legal framework for a movable asset registry. Sector-wide capacity
building is provided through the Bank Training Center, which has been developed by
IFC.
Other Donor
Activities The World Bank is leading the financial sector reform process. The road map to
financial sector reform and its implementation are deliverables under the loan

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supporting economic reform and poverty reduction. A number of bi-lateral donors (KfW
& AfD) provide funding under the PRSC process and are supporting individual parts of
SBV reform and SOCB privatization.
The ADB has provided a policy loan for an SME development program. The loan
focuses on three components: enhancing the policy and regulatory framework, SME
access to financial and land resources, and facilitating SME access to international
markets. As part of assistance under the access to finance component, KfW is
supporting the drafting of implementation guidelines for sale and lease back
arrangements, for syndicated leasing, and a registry for land use rights.
GTZ is sponsoring the drafting of the law on the central bank and the law on
commercial financial institutions.
USAID has assisted capital markets development under the STAR program, where
funding has been provided to assist the SSC in drafting a new Securities Law.

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References
Author Title Date
ADB / Carl Bro SME Development Program, Inception Report July 2005
BIDV Annual Report 2006
BMZ / GTZ / KfW PDS Development Strategy 2005
BTC Banking Sector Review April 2006
Citigroup Vietnam Macro Monthly February 2006
Deposit Insurance Vietnam Strategic Plan 2006 – 2010 December 2005
Vietnam’s New Law on Microfinance: On the Way to an
Doan Anh Tuan December 2005
Enabling Environment
EIU Country Profile 2005
ERU Viet Nam Housing Market Study March 2005
Fitch Ratings Vietnam Banking System Review March 2006
Fitch Ratings Vietnam Sovereign Rating Review April 2005
Fitch Ratings ACB Credit Analysis April 2005
Fitch Ratings Sacom Rating Report March 2006
Fitch Ratings BIDV Credit Update April 2006
Fitch Ratings Vietcombank Credit Update April 2006
Fitch Ratings VID Public Bank Rating April 2006
Fitch Ratings Industrial and Commercial Bank Rating April 2006
IFC STC Report Housing Market 2005
IFC STC Report Capital Markets Review 2006
IMF Staff Report Selected issues January 2006
INGO Resource Center Microfinance Bulletin March 2006
SME Development Program> Improving Operational
KfW / Carl Bro October 2005
Environment for Financial Leasing Companies
Merryl Lynch Asia Insights February 2006
Ministry of Planning &
SME Development Plan June 2005
Investment
SBV Banking Sector Report
SSC Corporate Governance Roundtable August 2006
S&P Ratingsdirect BIDV Research April 2006
S&P Ratingsdirect Industrial and Commercial Bank Research February 2005
S&P Ratingsdirect Rating Review Bank Industry Risk Analysis February 2005
S&P Ratingsdirect VBARD Rating Report April 2006
S&P Ratingsdirect Vietcombank Research April 2006
State Bank of Vietnam Website
Techcombank Annual Report 2006
Various websites of
commercial banks
Seminar Presentation on Solutions for Establishment of a
VAFI June 2005
CRA in Vietnam
World Bank Vietnam Taking Stock June 2006
World Bank Financial Sector Review 2002
World Bank Banking Sector Status and Development Strategy Vietnam January 2004
World Bank Doing Business 2006
World Bank Financial Sector Review Update 2006
Overview of Capital Markets in Vietnam and Directions for
World Bank May 2006
Development
World Bank Donor Working Group Minutes 2005 + 2006

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