Table of Contents
1. Introduction 1
2. Vietnam’s financial system 1
2.1. The process of formation and development of Vietnam’s financial system 1
2.2. The main features of Vietnam’s financial system 4
2.3. Recommendations 9
3. Conclusion 11
4. List of references 12
The financial system plays a crucial role in the economy with mainly functions which are mobilization and allocation of resources in the economy. The financial system is not only saving channels for the household sector but also investment channels for the corporate sector, and is also the conduit of the macroeconomic policies of the government. The functions of the financial system are common in most economies. However, the form and organization of the financial system generally vary in different countries, which depend on the level of development as well as the structure of the economy. This essay mainly summarizes some basic information about the process of formation and development of Vietnam’s financial system, gives main features of Vietnam’s financial system through four major components including financial markets, financial institutions, financial instruments and financial infrastructure, as well as recommends some changes or reforms in order to improve the system.
2. Vietnam’s financial system
2.1. The process of formation and development of Vietnam’s financial system
The history of Vietnam has experienced more than 4000 years, but it can be said that Vietnam’s financial system – banks played a key role – clarity has begun to form since 1858, when Vietnam became a semi – feudal colony of France. It has existed since the creation of the State of Vietnam, but the financial system at that time is very different from today. The most notable event in the feudal relation to the financial and monetary system of Vietnam was Ho Quy Ly’s dynasty first released paper money for circulation in the early 15th century.
The development of Vietnam’s banking system:
Based on the characteristics of the history, the development of Vietnam’s banking system can be divided into four stages:
• Banking system in the French colonial period:
Before the French arrived on Vietnam in 1858, Vietnam didn’t have banking and credit institutions. By the end of the 19th century, when colonial rule was established throughout Indochina, Vietnam, became a market monopolized by the French. There were two banks found in this period: Indochina Bank (1875) and French – Chinese Bank.
From the late 19th century to the first three decades of the 20th century, the banking activities were under operation of foreigners. Until 1927, a number of Vietnam capitalists established a new bank named Annam Bank, primarily supported the agriculture activities. Until 1954, the Vietnamese has had second bank that was commercial banks of Vietnam.
• The banking system in northern Vietnam during the period 1954 – 1975:
1951 – 1954: During this period, the National Bank of Vietnam was set up and operated relatively independent of the financial system. It performed the functions: Released denomination bank notes; recovered financial banknotes;…
1955 – 1975: The National Bank implemented the basic tasks including: Strengthened the currency markets, kept a stable currency, stabilized prices, gave facilities for recovering in the economy;… There were two specialized banks established: Vietnam Construction Bank (1957) and Bank for Foreign Trade of Vietnam (1963).
• The banking system in the period 1954 – 1975 in Southern Vietnam:
1954 – 1964: On December 31, 1954, Vietnam National Bank was established, replacing Indochina Institute, officially released notes for the South of Vietnam.
1965 – 1975: The transformation of banking activities from 1954 to 1964 was the premise and condition for a thriving period from 1965 to 1972 of the commercial banks in the South of Vietnam. In the first 7 years of this period, 18 new banks were established, bringing the total up to 31 banks with 178 branches in the province in 1972.
• Vietnam’s banking system from 1975 to today:
1975 – 1985: After 1975, the National Bank of Vietnam in the South was nationalized and merged into the system of the State Bank of Vietnam, released the new currency and withdrew the old currency in both the North and South in 1978.
1986 – 1990: This was the infancy of the initial reforms, as prerequisite for the formation and development of a system of Vietnam Bank for a more comprehensive basis.
1991 to present: The stage of Vietnam’s banking system has had a lot of gradual transformation towards a two – tier banking system modernization.
The development of Vietnam stock market:
• Formed the research and development of capital markets (1993)
• Established the State Securities Commission (1996)
• Opened Stock Exchange Center (2000)
• Transferred to the State Securities Commission on Ministry of Finance (2004)
The development of the insurance market in Vietnam:
In 1929, Vietnam Insurance Company was headquartered in Saigon, but only worked on car insurance. In the early years, Bao Viet only conducted maritime operations such as cargo insurance, import and export, ocean shipping … insurance.
As of early 2012, there were 57 insurers and insurance brokers operating with total assets of over 107 trillion, of which there were 29 non-life insurance, 14 insurer enterprises, 2 reinsurance firms, and 12 insurance brokerage firms. Legally, in 2000, the National Assembly passed the Law on Insurance Business, which not only contributed to the legal framework for insurance business operations of insurance companies, but also protected the rights and legitimate interests of organizations and individuals involved in insurance. In 2010, the legal framework for insurance business continued to be improved with the Law amending and supplementing, the Law on Insurance Business, many legal documents guiding issued synchronously, facilitating activities of the insurance business.
2.2. The main features of Vietnam’s financial system
The main features of Vietnam’s financial system are shown through four main components:
Financial market: There are many ways to divide the financial markets. The terms of the financial markets used in the present time include: capital markets, money markets, foreign exchange markets. Here are some different conjugations:
• Based on the duration of the credit, financial markets can be divided into two types: money market (short term) and capital markets (long term). In the developing economies in general, the currency market is often performed by banks. Long and mid – term capital needs primarily implemented in the form directly on the stock market. In contrast, most short – term loans, medium term and long term are offered by commercial banks, the other markets are very small. In other words, the mobilization and allocation done primarily by financial intermediaries, including commercial banks which play a major role in Vietnam.
• Based on the type of credit, Vietnam has treasury bills market, bond market, stock market; bank loan market. In particular, the bank loan market is the most popular.
• Primary market and secondary market: Vietnam also has primary market where securities issuance has been issued for the first time. On this market, the issuance of securities which is made procedures and consulted by a stock company, and underwritten by another securities firm. On the secondary market, there are many types of financial assets traded, including over 700 stocks (in many different fields like finance, banking, real estate, transport, fisheries …), 4 investment fund certificates, many government bonds and bonds of financial institutions (such as BIDV, ACB, VPB …), and now Vietnam enterprises (such as Vincom, Hoang Anh Gia Lai, ITACO , Song Da Corporation …).
• Centralized and Decentralized market: In Vietnam, a number of firms traded on the concentrated market is less, while these are mainly on decentralized market.
• Formal and Informal market: Beside the formal financial markets, where banks, finance companies, securities companies … operation, there are informal markets, where credit cooperatives and micro-credit institutions in rural areas,… activities in Vietnam. The type of informal credit plays a significant role in socio-economic development of Vietnam.
The financial institutions: At the beginning of 2013, in terms of the scale of the financial institutions in Vietnam, the total capital which provided the economy or the mobilized from the economy reached about 3.5 million billion, approximately 115% of GDP. In particular, the total outstanding loans of credit institutions was 3 million billion, up 86%; total capitalization on both stock exchanges reached more than 764.5 trillion at the end of 2012, with 27% of GDP. Based on practice in Vietnam, the financial institutions are divided into financial institutions operating under the Law on Credit Institutions, the financial institutions operating in the securities market, insurance companies operating under the Insurance Law and certain types of other financial institutions.
• Central Bank and Credit Institutions:
The State Bank of Vietnam (SBV) is an agency of the Government and the Central Bank of the Republic of Vietnam Socialist. The State Bank manages monetary and banking activities; issues money; makes money services for the Government. It is also bank of credit organizations. Activities of the State Bank help currency values stabilize, which contribute to ensuring the safe operation of the system of banking and credit institutions and promoting economic – social development oriented socialist.
The credit institutions: They are commercial banks: In Vietnam, as of early 2013, there are five state – owned commercial banks accounted for 42.8% of total assets, 34 joint – stock banks accounted for 42.1%, 4 and 5 joint venture banks with 100% foreign capital accounted for 11.8%, remaining at 3.3% of the total assets of the credit institution; Vietnam Bank for Social Policies: was established in 2002 to provide the credit granting for policy objects; The financial firms: As of early 2013, Vietnam has had 18 financial companies under the corporations with total chartered capital of over VND 18,000 billion, they operates primarily in order to arrange financing for its corporations; The financial leasing companies: Vietnam has had 12 financial leasing companies with total chartered capital of VND 2,600 billion by the middle of 2011, and most financial leasing companies are under the commercial banks, mainly state – owned banks; Credit Funds: In early 2013, Vietnam has People’s Credit Fund, which is equivalent to a large joint stock banks and more than 1,000 Central People’s Credit Fund, which are very small. While the size of the People’s Credit Fund Central is, the size of the People’s credit funds is very small base.
Besides, there’s also some other kinds of financial institutions operating under the Law on Credit Institutions are the asset management companies, the pawn organizations,…
• The State Securities Commission and other organizations operating in the stock market:
The State Securities Commission: Established as an agency under the Government, in 2004 converted into an agency under the Ministry of Finance. The State Securities Commission has the main task of organizing and supervising the operation of the securities market in Vietnam.
The stock companies: In early 2013, Vietnam stock market has 106 securities firms with functional activities held in brokerage on stock market such as establishment procedures for issuance and underwriting of securities …
Bank for settlements: On the market, there is a settlement bank is the Bank for Investment and Development of Vietnam (BIDV).
Securities Depository Bank: Vietnam has 7 securities depository bank, which has 6 branches of foreign banks and a bank of Vietnam (Tien Phong Commercial Joint Stock Bank).
The investment fund management company: As of early 2013, Vietnam has 47 fund investment management companies has operated.
Listed Companies: As of early 2013, more than 700 joint stock companies listed on the two stock exchanges in total more than 1,033 public companies registered with the information published by the State Securities Commission.
There are also 24 investment funds, with a chartered capital of nearly 14.5 trillion, which play a significant role in the security market in particular, financial markets in generally such as Dragon Capital, Mekong Capital, VinaCapital, Indochina Capital,…
• The insurance company:
Insurance Companies: Vietnam currently has 57 insurance companies and insurance brokers operating with total assets of 107 trillion (2011), which consists of 26 One Member Limited Liability companies, 8 Ltd. companies, and 23 joint stock companies. Besides, there are 32 representative offices of foreign insurance organizations.
Market size: The size of Vietnam’s insurance market was approximately 56.5 trillion, which was nearly 44 trillion in insurance premium revenue, the remaining 12.5 trillion as investment income by the end of 2012.
• Some types of financial institution
Pension funds; Postal savings; the development support funds and development investment funds of the provinces;…
The financial instruments:
• Loans from banks and other financial institutions: Mainly accounted for in the distribution of capital to the economy.
• Government bonds: Tendered and traded mainly through the Hanoi Stock Exchange. In addition, government bonds are issued through a system of local and state coffers.
• Treasury Bills: Issued by the State Bank and primarily auctioned by Treasury through open market of the State Bank. This is a critical fundraising tool for the budgets of the government.
• Municipal bonds: Issued by the local governments (provinces and cities) such as Ho Chi Minh City, Ha Noi, Dong Nai and Da Nang.
• Corporate bonds: Relatively few, released mainly by the commercial banks, financial institutions, and a number of large companies.
• Certificate of Deposit: Is a valuable paper issued by banks with a term of 1 year with characteristics similar to bonds in Vietnam.
• Stocks: relatively common due to the appearances of many joint – stock companies in Vietnam.
• The legal and management system of government: Up to the present time, the context and practical conditions in Vietnam, the legal system is considered quite sufficient to operate for finance system. The government promulgated the Law on State Budget, Law on the State Bank, Law on Credit Institutions, Law on Insurance Business, and Law on Securities. However, state management are not really synchronized and unified. Some organizations have very large credit activities, but not subject to the Law on Credit Institutions and are very limited oversight of State Bank of Vietnam as Vietnam Development Bank (formerly known as Development Assistance Fund) and investment funds for local development.
• Resources and monitoring practices: According to the assessment, they don’t meet the needs of the financial system for healthy functioning, sustainable development and international integration.
• Providing information: Currently banks in particularly, financial institutions in generally, have gradually applied the international accounting standards. The provisions on audit are not really adequate and complied strictly procedures. There is no storage system of credit information and short of credible credit rating organization. Credit information center (CIC) of the State Bank of Vietnam is undertaking this task. But to become an organization with high reliability, the CIC has still many works to be done.
• Payment Systems: Before 2000, most financial institutions in Vietnam have used decentralized payment system. But from 2000 to now, the financial institutions, especially commercial banks have built centralized payment system. Since 2002, the State Bank of Vietnam has implemented interbank payments systems. This is a step forward in adoption of technology payment of the financial system in Vietnam.
Based on the characteristics and limitations of the financial system mentioned above, a number of recommendations are given to improve this system:
Need to build a national financial strategy with clear goals and direction, with the holistic, interconnected and synchronized solutions:
The overall strategy of our Party is to promote industrialization and modernization of the country. National financial strategy has to serve this overall strategy. The important issue for the successful is realization of synchronism, the latency of the policy, in order to combine harmoniously, smoothly and efficiently between orientation, solutions and long – term fiscal policy, serving the urgent requirements and tasks.
Respect and adhere to the principle of democratic centralism in financial work, value the co-ordination of economic policy instruments of finance:
Always maintain and ensure consistency, rules, and discipline in command and operating of the national finances. Criticize and condemn ideas strongly indiscipline ideas, lack of strict observance of the regulations on revenue and expenditure the state budget. However, it should be strongly decentralization, empowerment and promotion of the highest autonomy and creativity of local industries, especially in the mining revenue and expenditure. Create mechanisms and discipline that harmonize and coordinate among the activity contents and the array of financial activities, creating an overall strength, supporting, and stimulating each other as prerequisite for efficiency.
Set up, operate and raise the effectiveness of inspective, controlling and monitory finance for the entire social economy:
One of the financial requirements of an open economy in the security is safety and healthy. The risk of the negative, the financial collapse of the market economy has always existed alongside the opportunities and dynamism of the national finance. Along with the establishment of the legal framework for financial activities, it’s necessary to enhance the effectiveness and efficiency of the monitoring system through professional and organizations themselves that are available for financial activities and each specialized process. Financial disclosure is to restrict negation, the expression of skill and spirit of the agencies and organizations and is also a prerequisite for the operation of open financial markets. Financial disclosure creates important conditions for the implementation of grassroots democracy, direct democracy under the motto: People know, People discuss, People do and People inspect, and ensure that the Vietnamese government is government of the People, by the People and for the People.
Promote the strength of the whole industry, enlist and use effective intelligence and the support of all social strata, all political organizations and society:
Along with complete care and improve the capacity of the organizational structure of financial sector, it should need to decentralize, and improve the level of responsibility for the work of professional and management staff. There are long – term strategies and measures to take care of business capacity, operating capacity of staff in order to be appropriate financial requirements of the new economic mechanism. In addition, the financial system needs to enhance discipline, in public finance. Democracy should indeed maximize self – discipline, creative activeness of financial officer.
Going through the periods of history, Vietnam’s finance system has been constructed and developed quite strongly. The financial system of the new economic mechanism, market economy, and open door has been created. Finance gradually mobilize, resource allocation, manage, control and oversee of macro the national economy. With main characteristics are shown through the key elements of the financial system: financial markets, financial institutions, financial instruments, and financial infrastructure, Vietnam’s financial system has clearly revealed strengths and limitations. Since then, the essay gives some reasonable proposals to improve and enhance the efficiency of the financial system in Vietnam.
4. List of references
International Business Publications, USA (2007). ‘Vietnam Financial and Trade Policy Handbook’. The financial system in Vietnam, pp 47 – 49
International Business Publications, USA (2007). ‘Vietnam Investment and Business Guide’, pp. 106 – 109
Quan Hoang Vuong (2010). ‘Financial Markets in Vietnam’s Transition Economy’, pp. 20 – 41
Quan Hoang Vuong (2004). ‘Fledgling Financial Markets in Vietnam’s Transition Economy, 1986-2003’. Research Institute in Management Science, pp. 40 – 62
Roman L. (1998). ‘Institutions in Transition: Vietnamese State Bank Reform’. Springer Science & Business Media, pp. 93 – 100