The financial system has a significant role in the development of the economy. According to Claus et al. (2004), the financial system helps resolves the imbalance between the needs of borrowers and lenders. The system finds a way to transfer money from those who have money but does not know what to do to people who are in need of money and know what to do with them (Claus et al., 2004). If the system does not work correctly, then economic development will stand an impact. The financial system in Vietnam has undergone a long and lasting history of change and development (Huynh and Nguyen, 2011). It can be traced all the way back to the feudal period in the 1800s when Vietnam was still a semi-colonized country due to the French invasion. Up until today, the Vietnamese financial system has undergone many changes and today, the complex system could be analyzed according to four dimensions: the financial institution, the financial market, the financial instruments and the financial infrastructures (Kalra, 2012). After observing the above dimensions in depth, problems and solutions will be proposed and justified from an individual’s points of view.
I. Features of the Financial in System in Vietnam
In this part, the four main components of the Vietnam financial system shall be considered: financial markets, financial institutions, financial instruments and financial infrastructure.
1. The financial institutions:
The financial institutions system in Vietnam could be divided into two major categories: banking institutions and non-banking institutions (Kalra, 2012). The banking institutions include a wide range of banks namely state-owned commercial banks (SOCB) (Huynh and Nguyen, 2011), These type of financial institutions performs all banking and other business related activities, according to their operational objectives (Huynh and Nguyen, 2011). These financial institutions also include commercial banks, development banks, investment banks, policy banks, cooperative banks, joint-stock banks (JSB), foreign banks, people’s credit funds and other types of banks (Huynh and Nguyen, 2011). Non-bank financial institutions perform a number of frequent banking activities, but cannot provide payment services or receive long-term deposits (Huynh and Nguyen, 2011). Non-bank financial institutions include public finance companies, leasing companies and other non-bank credit financial institutions, post-office savings funds, the stock companies, the insurance companies, investment funds and funds for development support (Kalra, 2012).
a. The banking sector:
According to Huynh and Nguyen (2011), the development process of the Vietnam banking system has undergone 4 phases: the development of Vietnam’s banking system during the French colonial period; the development of the banking system in Northern Vietnam from 1954 to 1975; The development of the banking system in Southern Vietnam during the period 1954-1975 and the development of Vietnam’s banking system from 1975 to present.
The State Bank of Vietnam is a Government agency, with the role of managing the monetary and banking operations within the nation, issuing bank notes, managing the credit organisations and perform monetary service for the government (Huynh and Nguyen, 2011). The State Bank is responsible for stablising the value of the VND, ensuring the stability and security of banking activities and contributing to economic development of the nation (Huynh and Nguyen, 2011). The State Bank of Vietnam is in charge of managing both the banking institutions and the non-banking institutions within the financial system.
According to Kalra (2012) cited from the State Bank of Vietnam information database, up until 2011, under the State Bank of Vietnam, there have been 7 state-owned commercial banks, 35 joint-stock banks, 4 joint-venture banks, 48 subsidiaries of foreign banks, 18 financial organisations, 13 financial leasing organisations, and one People’s credit fund. According to Huynh and Nguyen (2011), state-owned commercial banks in Vietnam take up 70% of the credit market and capital mobilization share, the joint-stock banks consists of 11%, the foreign banks and joint-venture banks account for 12%.
The state-owned commercial banks have been the major player the financial system. These may include: Vietcombank, Agribank, Vietinbank, BIDV,…According to Le (2003), over fifty percent of credit from the state-owned commercial banks was distributed to state-owned enterprises. A considerable proportion in this was allocated at a low interest rate and no collaterals required (Le, 2003). This issue implies that the Government highly favored state-owned enterprises and bringing into portfolio a great proportion of loans in default.
The joint-stock commercial banks are banks that are formed by the money of a group of shareholders (Le, 2003). Several well-known joint-stock commercial banks include: Techcombank, Sacombank, Asia Commercial Bank, MB Bank, Eximbank,…There are many reasons why in recent years, the number of joint-stock commercial banks has grown significantly. This is on the one hand, due to the increasing demand in loan; on the other hand, the government has been easier on approvals for joint-stock commercial banks to establish. Another reason is that the state-owned commercial banks are facing the risks that they will be responsible for the losses in loans, according to Le (2003) adapted from O’Connor (2000).
Foreign banks have established a presence in the Vietnamese financial systems in the early days of the French colonisation in Vietnam, however not until 1991 did the Government fully permitted foreign banks to enter the country and take part in financial operations (Le, 2003). The liberalization did not happen until the Government had seen the outrageous benefits that foreign banks could bring to the domestic economy. These may include: technology and knowledge enhancement, competition promotion and FDI booster (Le, 2003). There are a lot of reputative foreign banks in Vietnam such as: ANZ Bank, Deutsche Bank, CitiBank, HSBC, Shinhan Bank, Sumitomo Mitsui Bank,…
Financial companies have had presence in Vietnam for over 15 years, according to the Vietnam Banks Association (2011). They play a key role in finance management and organizing capital for its corporation. It also a channel to fund capital in moderate and long term for small and medium enterprises, according to the Vietnam Banks Association (2011). Some financial companies include: Petro Vietnam Financial Company, PPF, EVN Financial Company, Prudential,…
Financial leasing companies are known as organisations that support businesses by leasing equipments, assets, machinery to them in moderate and long term. After the contract is over, the company can either extend the contract or buy that asset. The total amount of fee during the whole period must be at least equivalent to the value of that asset at the time of signing the contract. Currently there are over 10 financial leasing companies, some are joint-ventures, the rest belongs to the state-owned commercial banks (Huynh and Nguyen, 2011).
According to Huynh and Nguyen (2011), there are two types of credit funds: central credit funds and region credit funds. The total number of credit cooperatives is 898 and accounted for 1.5% of loan and capital mobilization share (Huynh and Nguyen, 2011). Currently, there are many limits to credit funds especially the people’s credit funds (Nguyen, 2013). It is set out to help residents, especially in the rural area, to lend money to the people so they can invest in farming or agricultural activities (Nguyen, 2013). However, people there are still very reluctant to credit funds. They only rely on the funds for loan while it is difficult to encourage them to put in savings (Nguyen, 2013).
b.The non-banking sector:
The stock market is a relatively new sector to the financial system of Vietnam. It emerged around 2000, according to Le (2003). There are two types of instruments in the stock market namely shares and bonds. According to Le (2003), bonds are monetary instruments that are only issued by the State Bank of Vietnam and the Bank for Investment and Development of Vietnam. Meanwhile, shares are issued by companies to mobilize capital for them and these accounted for 90 per cent of total stock value during the period of 2003 (Le, 2030). The stock market often only involves big corporate and companies. Stock companies play an important role in the stock market; it serves as an intermediary between the issuers and the investors. It helps in liaison, advisory and hence, boosts transactions, saving time and money for both parties. At the moment, there are about 13 stock companies in the market, they may include: FPT Securities, VP Securities, BIDV Securities, Sai Gon Securities Incorporation,…
Insurance companies have established their presence in Vietnam for a long time. Currently, there are about 24 insurance companies operating domestically with the total capital chartered adding up to 5,000 billion VND, including 4 state-owned insurance companies, 7 joint-stock insurance companies, 7 joint-venture insurance companies and 6 foreign insurance companies, according to Huynh and Nguyen (2011). Insurance plays a key role in not only the economic aspect but also the social aspect. It ensures people with commitments and makes them feel secured. It also utlilises and invest the money not in use into other activities to create optimal efficiency. According to Huynh and Nguyen (2011), at the moment, Bao Viet has the highest market share for life insurance. The other big firms include Prudential, AIA, BIC, Hanwha Life,…
Other non-banking institutions may include pension funds, post-office savings, investment funds and funds for development support. According to Huynh and Nguyen (2011), currently in Vietnam there have not been any pension funds. Retired workers earn their money from the Vietnam Insurance funds. There are many issues concerning the retirement and pension schemes which are still in debate by the Congress (Dan Tri, 2014). Post-office savings are institutions that mobilize small savings that are not in use, based on the post-office system throughout the country, according to Huynh and Nguyen (2011). This service is similar to that of banks where people can put in money, take out money and earn interests. These savings are usually transferred over to the development funds, according to Huynh and Nguyen (2011). A few post-office with savings services include: VNPT, Lien Viet Post Bank, Ha Noi Post,…Funds for development supports are state credit institutions that help in social development and subsidies for people. Local development funds help support for the projects in those particular areas, according to Huynh and Nguyen (2011). Development funds operate on their own and are not under administration of the State Bank, according to Huynh and Nguyen (2011).
2. The financial instruments:
Financial instruments are means of transactions in the market and play an important role in the operations of the financial system. There are many types of financial instruments in Vietnam: government bonds, loans, treasury bills, municipal bonds, company bonds, shares,… according to Huynh and Nguyen (2011). Among these different financial instruments, loan is the major instrument and is the main distributor of money in the market (Huynh and Nguyen, 2011). Government bonds are issued by the State Bank of Vietnam and consist of a large proportion in the financial sector. According to Huynh and Nguyen (2011), the total value of all government bonds in the stock market is 24,000 billion VND, a significant amount. Treasury bills are also issued by the State Bank of Vietnam and are auctioned in the market. Company bonds are mostly issued by banks and financial institutions (Huynh and Nguyen, 2011). Shares are also common instruments that are usually issued by big firms. How much profit the investor earns depends on how well the company is operating as well as how much profit they make. In addition, there are also derivative financial instruments such as: forward contract, future contract, swap,…( Pham, 2009).
c. The financial market:
According to Huynh and Nguyen (2011), there are many ways that people use to divide the financial markets. These may include dividing them in terms of the credit type, duration, primary market and the secondary market, market concentration and market decentralization, formal market and informal,… According to Huynh and Nguyen (2011), in the developed economies in general, long-term capitals are primarily attained in direct form on the stock market. In contrast, in Vietnam, most fundings are attained from banks. Vietnam has also established a primary market where stocks are issued for the first time. For Vietnam, the number of business transactions on market concentration is very low, while the non-market concentration is high, according to Huynh and Nguyen (2011). According to Huynh and Nguyen (2011), in Vietnam, apart from formal financial markets, where banks, finance companies, securities companies operate, there are also informal markets such as credit cooperatives, small credit institutions in rural areas.
d. The financial infrastructures:
According to Huynh and Nguyen (2011),Vietnamese law and administrative system: up until now, Vietnam has established an almost complete law system. However, there are still some flaws and conflicts the administrative system. For example, as analysed in the first section, the development support funds are not entitled to comply under the Law on credit organisations.
Payment system: Since 2002, the State Bank of Vietnam has deployed the interbank payments system. This is an important milestone toward the application of new technology into the financial system. When the payment systems of all banks are synchronized, then transactions would be ensured and become more efficient (Huynh and Nguyen, 2011).
Resources: the financial system in Vietnam still seems to lack efficient human resource as well as a sustainable administrative scheme.
Information: Years ago, there was many problems concerning information within the financial sector. There was no unity in audit policy or credit information storage system. Currently, this is being improved and banks and financial institutions are becoming more reliable (Huynh and Nguyen, 2011).
II. Recommendations for changes:
Although Vietnam has taken various measures in the reforms of the financial system. In attempts to reform the financial system in general and the banking sector in particular, the State Bank of Vietnam has announced new regulations and policies to enhance the competency of this economic sector. The issued law supported in stablizing the loans from credit instititutions and enhances financial transparency (Le, 2003). The State Bank of Vietnam has also lowered the requirements in bank reserves as well as lending rates of interest, according to Le (2003). However, there are still many problems to resolve and and conflicts that we can foresee. Below are several suggestions concluded from the analysis of the Vietnamese financial system in the previous sections.
Firstly, the reforms implemented by the government have created big state-owned commercial banks (Le, 2003). These issues lead to the fact that state-owned enterprises are more “favored” than private ones, due to the complicated process of seeking for loan from these state-owned commercial banks has discouraged private firms from seeking for funds. The solution here is to reform the administrative process of approvals for loan so that it becomes most convenient for private enterprises.
Secondly, in a wider context and in the long-term, a new government framework must be established, as suggested by Kalra (2012). The government must create more incentives for the entry of new private capital and in lending. A simpler framework must also be applied to administrative processes for new entries of financial institutions. The reason for this suggestion is that at the moment the complex regulations and long policies are holding back the development of the finance sector.
Thirdly, poor and illiterate people in the far, remote area must be approached with greater effort. This especially applies to the development funds and the people’s credit funds. They must be given more incentives in savings and borrowings. The requirements for loan should not be made a barrier for the people who are in need of money to do farming and agriculture. The reason for this recommendation is that if we do not give people enough opportunity to borrow money then they will not be encouraged to give in their savings either.
Fourthly, the Law should be modified in some circumstances. For example, as stated above and according to Huynh and Nguyen (2011), the development support funds in local provinces are not under the administration of the Credit Law, therefore it may lead to problems and lack of unity.
Finally, more effort must be put into the reform of a more stable and sustainable financial sector. Reserves requirements for banks and lending rates should continue to be held down for the survival of banks and financial institutions.
Reference
Claus, I. and Jacobsen, V. and Jera, B (2004). Financial Systems and Economic Growth: An Evaluation Framework for Policy. [Online] Available at: http://www.treasury.govt.nz/publications/research-policy/wp/2004/04-17 Accessed on 4 September, 2014.
Huynh, T.D. and Nguyen, M.K. (2011). The Financial System in Vietnam. [Online] Available at: http://www.mof.gov.vn/apec/viet/IAP%20cua%20BTC%202000%20V.doc Accessed on 4 September, 2014.
Kalra, S. (2012). Vietnam’s Financial Sector. . [Online] Available at: https://www.imf.org/external/country/VNM/rr/2012/050812.pdf Accessed on 4 September, 2014.
Le, K.N. (2003). The Role of Financial Market Imperfections and Uncertainty.
O’Connor, D. (2000). Financial Reform in China and Vietnam: A comparative Perspective. Comparative Economic Studies. 42 (4).
Vietnam Banks Association (2011). Financial Companies Have Expressed Support Role For Financial Management And Capital Arrangement. [Online] Available at: http://www.vnba.org.vn/?option=com_content&view=article&id=953&catid=35&Itemid=72 Accessed on 4 September, 2014.
Nguyen, H.M. (2013). Credit Funds Promote Fundings Better Than Banks. [Online] Available at: http://tinnhanhchungkhoan.vn/tien-te/quy-tin-dung-phat-huy-vai-tro-cap-von-nho-tot-hon-ngan-hang-14463.html Accessed on 4 September, 2014.
Dan Tri (2014). Worrying On Pensions. [Online] Available at: http://dantri.com.vn/viec-lam/lai-lo-vo-quy-luong-huu-925471.htm Accessed on 4 September, 2014.
Pham, Q.A.T (2009). Financial Instruments. [Online] Available at: http://www.ou.edu.vn/abc/documents/abcso1_cac_cong_cu_tai_chinh.pdf Accessed on 4 September, 2014.
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