Vietnam is one of the most dynamic markets of Asia. Since the financial institutions and authorities are a part of the general economic system, they are not only strongly involved in the changes, but also have a more solid financial basis for the competitiveness of the country. The financial sector in Vietnam is subject to substantial structural changes. It occurs at a huge speed. These changes entail great challenges for the financial managers – for instance due to the pressure on the currency with regard to the exchange rate, the inflation and the daily stock exchange fluctuations between huge profits and losses.

At the same time, the foreign capital market is still underdeveloped. Consequently, it requires the attention of authorities and managers in order to foster the system and to deal with new developments. The most important challenges consist in the transformation of the state-owned banking sector and the development of a subnational foreign capital system.

This chapter deals with financial framework conditions, the most important topics and developments for the region. Organizationally, cases demonstrating a comparison between banks of different origin that are now in competition on the financial market in Vietnam are presented. Case studies of individual managers constitute an additional “voice” with regard to the developments in this area.

  • Among the current topics and new developments are:
  • the foreign exchange and monetary policy;
  • the banking system;
  • subnational foreign capital market and
  • the stock exchange.
  • Foreign exchange and monetary policy

The monetary policy, a greater part of which constitutes the foreign exchange policy, has a considerable impact on the financial system of the country with regard to both the pace and the direction of the entire economic activity. That is why the foreign exchange and monetary policy is considered here along with its recent history and the effects on the managers.

The Vietnamese currency can be characterized as a typical emerging country currency with all advantages and disadvantages for enterprises and managers. On the one hand, a competitive advantage results from the relatively low value of the VND compared to other currencies in the developed world. It was one of the most important factors which altogether led to very low cost of production. As a result, the relocation of production to Vietnam, increasingly also from China or Malaysia, brings about a further development of the emerging country (Lung and Wagner, 2008).

As regards the currency, the Office of Foreign Exchange (OFE) established in 2005 for the purpose of control of foreign currencies became one of the most important institutions. The currency is closely tied to the US dollar. OFE endeavors to maintain the exchange rate at a high level and reacts quickly to global economic changes in order to stabilize the rate.

Vietnam uses a double exchange rate system: On the one hand, an officially determined and fixed rate for the officials and certain transactions (e.g. for banks), and on the other hand a free exchange rate applicable for all other market participants (cf. Canler, 2008).

This discrepancy was replaced by only one rate which illustrates the market forces. Nevertheless, the exchange rate is still under state control in order to prevent exchange rate shocks. Consequently, the exchange rate of the VND is de facto tied to the US dollar. This tie is the main reason for the relatively low value of the VND and is needed for strengthening of the competitiveness of the export industry as one of the most important economic sectors.

A break-out of the limited exchange rate determined by OFE occurred only with the depreciation of the US dollar in relation to all other currencies with the worldwide financial crisis that came about after 2008. The government endeavors to maintain the value of the VND which is still important for the country for the expansion of production and export economy. Managers and enterprises doing business in Vietnam can rely on measures of the government aiming at the achievement of this objective for two reasons:

For one thing, the economy is not sufficiently developed in order to rely on manufacturing of low-tech goods. It is due to the fact that there is not enough qualified workforce for the high-tech production. Therefore it is important to be competitive in respect of the costs.

For another thing, the great demand for imported goods requires considerable exports in order to be able to ensure balanced trade. Therefore, a financial manager of an enterprise in Vietnam may rely on the monetary stability in spite of the feature of emerging market.

On the other hand, according to absolute figures the economy is still small and in addition vulnerable to financial turbulences. The biggest disadvantage of an emerging country currency in the global economy and a monetary policy which is primarily geared to growth is the higher vulnerability to inflationary risks.

Considering the annual growth of the gross domestic product of about 7.5 percent since 2000, the government managed to bring the inflation until 2007 to a sustainable level. It has changed since the end of 2007 – when the inflation, as a result of the depreciation of the US dollar, increased in relation to most other currencies and a monetary expansion in Vietnam with simultaneous rise of food and energy prices occurred (Morgan Stanley, 2008).

The inflation constitutes a serious danger for the capability Vietnam’s to attain the growth targets. Moreover, the growth is threatened in the short run, too (Qiao, 2008). Besides, Vietnam’s own past and the general experience point out that the potential danger of inflation alone is enough to disturb the normal production and the consumption. This situation might deteriorate yet as a result of global financial crisis occurring after 2008. On the other hand, the drop in commodity prices, which was triggered by a low expected growth, could increase the inflationary pressure and thus stimulate the overheated economy.

Regardless of the mentioned financial crisis, the inflation is taken seriously by the government and the SBV. In reaction to the time after 2008, the authorities responsible for combating inflation have implemented some anti-inflation measures. Among them are for instance the increase of the interest rates by 850 basis points (discount and refinancing rate) and 575 basis points (base rate), a reduction of public expenditure by 10 percent (without salaries) as well as capping of the credit growth of 30 percent (Lee, 2008).

On the other hand, the managers must be aware that the currency tie to the US dollar will lead to undervaluation of the VND in the long run because the economy grows steadily and faster than the national economies of the developed world. This trend triggers the pressure on the VND to remain attractive against such currencies as the US dollar, yen and euro. It would, in turn, have negative effects on the competitiveness of export in Vietnam. The banking system was reorganized in 1990 and the Central Bank SBV (NgânhàngNhanuoc) was separated from other commercial banks, which paved the way for the admission of private sector. The restructuring and strengthening of the SBV resulted in a modern and independent Central Bank that has been entrusted with the management of monetary policy and the supervision of the banking system. According to the Banking Reform Roadmap of 2006, the Central Bank will be relieved by 2010 from the responsibility for exercising proprietary rights to state-owned commercial banks (SOCB, Ngânhàngquocdoanh) because it would be contradictory to its function as regulatory authority of the same banks. In the future, these rights and duties will rest with a new stockholder – i.e. either the state or private investors. The monetary policy focuses basically on the growth, but at the same time the goals shift gradually towards inflation control so that the monetary framework conditions of the work for a company can be characterized as sufficiently safe.

As a result of the reforms, the banking and financial sector has now more participants, is more diversified and offers a widened range of financing activities. There are basically four kinds of “credit institutions”: commercial banks, “political loan funds”, credit financing banks (which are located mainly in the countryside) and finance companies. The commercial banks include three SOCBS, 37 domestic private joint-stock companies (JSBS, Ngânhàng CO phan), 37 branch offices of foreign banks and five joint-venture banks which have been financed by foreign and Vietnamese funds and are in 100 percent foreign controlled (VTO, 2008). Furthermore, there are 45 representative offices and foreign financial and credit organizations in Vietnam, more than 20 leasing companies and almost 1,000 folk credit institutions.

State-owned banks

The six SOCBS are all owned by the SBV that engages itself in their daily management and control, the appointment of members of the Supervisory Board and the Management Board. The banking sector in Vietnam is still shaped by the SOCBS. They account for 70 percent of total assets in the banking world as well as 70 percent of all bank loans; six SOCBS are to be reduced. The privatization of SOCBS is planned and is expected to be implemented by 2010, except for the Bank for Agriculture and Rural Development (Agribank, NgânhàngNongnghiepvaphattrienNong thon).

According to the roadmap of the government, the state share in banks will be gradually reduced to 51 percent. Individual institutional investors will have the possibility to participate up to a share of 10 percent and total foreign shares have been fixed at 30 percent. Furthermore, it has been planned to transform the development aid fund, i.e. one of two existing political loan funds, to a development bank. One of its functions will be, as export and import bank, to offer financial services for exporters and importers. The process of privatization of the Vietcombank, one of four big SOCBS which is dominant in the banking sector, started with initial public offering at the end of 2007. The government sold over 97.5 million stocks, which is an equivalent of a 6.5 percent share in the bank. The three remaining integral SOCBS – i.e. the Vietinbank (former Incombank), BIDV and Agribank – are on a similar path. However, the process is no longer within the schedule.

Joint stock companies

Considering that each SOCB is specialized in one area of financing, such as foreign trade, industrial development or within infrastructure projects, the at least partly privatized JSBS are represented as a rule in big urban areas and specialize in lending to smaller enterprises or financing of retail trade. The JSBS faster adopt new technologies, are basically easier to govern and more profitable because they depend on cost efficiency and yield ratios.

Foreign banks

Foreign banks, branch offices, fully foreign financed subsidiaries or joint-venture banks constitute the smallest percentage on the Vietnamese banking market. These banks are treated differently, depending on the country of origin. Since the Bilateral Trade Agreement has been signed and ratified, the US and EU banks enjoy the most favorable treatment.

As a result of the WTO membership, since 2007 international banks are allowed to establish fully foreign-owned subsidiaries under Vietnamese law. These subsidiaries of the banks have in principle the right to “national treatment”, which means that they are to be treated just like domestic banks. Thus, for instance, they are allowed to issue credit cards and receive deposits in local currency from enterprises as a borrower without limits.

In general, the banking world covered a long distance since 2000. The number of financial institutions has grown, and the trust of the people in the banks has increased. The rapid development of banks and credit organizations was attributed directly to the attractiveness of the Vietnamese monetary sector and the profitable structure of capital and ownership. Nevertheless, the banking sector is still underdeveloped and has a long way to go before it is capable of efficient financial management.

Moreover, there are great difficulties with loan portfolios. It is a result of the lack of a systematic practice of financial reporting, the weak legal regulatory framework, the poor disclosure requirements, a lack of qualified staff in the credit sector, the pressure on the part of local and central authorities and the state corruption.

The SBV now has 180 days from receipt the application to make a decision on issuance of a license. 60 days if a license application from the representative office of a foreign credit institution or other foreign organization conducting a banking operation. The new law expands the circumstances in which the SBV has power to revoke an issued license. The law introduces changes across a wide range of bank regulations. These include rules governing their boards of management and share redemptions. Further implementing legislation is likely. Now at least 5 members are required for the board of management of a credit institution and at least one must be “independent”. To be independent, the member must not be employed by the credit institution or hold certain levels of interests in the institutions. The new law does not expressly provide a permits level in terms of a percentage of shares (former at the most 30%) but instead sets out following preconditions.

New landscape for credit institutions

Law No. 47/2010/QH12 dated 17 June 2010 and became effective in 1 January 2011. The new law sets in stone a range of matters which have been, up till now, dealt with by lower level regulation. The law on Credit Institutions offer limited flexibility for corporate structuring in the banking sector. All domestic commercial banks must be in the form of a shareholding company. Domestic non-bank credit institutions may be in the form of a LLC or a shareholding company. A wholly foreign owned credit institution must be in the form of a single member LLC, while a foreign joint venture credit institution must be in the form of a multiple member LLC. A credit institution which is in form of a share holding company must have at least 100 shareholders. Means it must be a public company. Also it may only issue dividend and voting preference shares and there are limitations on how these shares are structured. The new law gives the Government the power to regulate the percentage of foreign ownership in a Vietnamese credit institution, as well as the transfer and issue of shares to a foreign investor. Limitations include interests held by affiliates of the relevant foreign investor. It introduces new maximum ownership levels for a single shareholder in a shareholding credit institution, a multiple member LLC can have a maximum of 5 members or owner and the maximum ownership limit that a member and its affiliate can hold is 50% of the charter capital. Also it states some restrictions on the transfer of interests in credit institutions. Still the State Bank approves any transfer of share transactions of a major shareholder (holding 5% or more).

Effective date for Law 47 was 1 January 2011. A shareholder will now fall within the definition of Major Shareholder were they directly hold 5% or more of the voting shares in that credit institution. This has been reduced from the previous threshold of 10%. Certain restrictions apply to them. Under Law 47 a charter and any amendments or additions need only be registered by a credit institution with the SBV within 15 days of the amendments or charter being approved. Previous it could only be adopted after approvals was granted by the SBV. Although for some items the prior approval still remains. The Law broadened the power of the GMS and reduced the autonomy of the board of management. At the same time, the Law provides that resolutions of the GMS will be passed in a meeting if approved by shareholders representing over 51% of the total voting shares of all attending shareholders (or any higher percentage stipulated in the charter). Decisions will be passed only when shareholders representing over 65% of the total voting shares of all attending shareholders vote in favor.

Subnational foreign capital

Another important area with regard to the financial world is the development of additional, private financing platform. Subnational foreign capital is descriptive of state independent loans which help develop a broader basis for the financial sector. It comes from developed countries. The needs and requirements for the development of a subnational foreign capital system have been already elaborated (De Angelis et al, 2008). The government has realized the urgency of the improvement of physical infrastructure due to its importance for the social and economic development of the country. The infrastructure is to be enumerated as one of critical bottlenecks of Vietnam which undermines the economic competitiveness, thus the economy.

Different factors have been combined in order to stress the required improvement and development of infrastructure in Vietnam. They include:

  1. the diminished trust in public development aid loans, particularly because Vietnam will no longer have subsidized loans from international financial institutions which constitute the key source of financing;
  2. the size of public development aid on loans – above all, subsidized loans from international institutions are no longer an important source of financing in Vietnam;
  3. the dependence on central public financial budgets for long-term financing of the infrastructure; and
  4. the practice of the banking system in mobilizing short-term deposits for financing long-term investments.

These issues increase the capital costs and create financial burdens for the financial system. They emphasize the necessity of finding alternative sources as long-term financial resources for the development of infrastructure. The long-term availability of financial means for financing investments in the infrastructure is a significant condition for the improvement of economic development, the creation of incentives for foreign direct investments and domestic investments as well as for the support of authorities in coping with globalization.

The pressure on the government to extend bond options for regional administrative bodies increased considerably due to the trend to decentralization, privatization and globalization of financial markets, the DoiMoi policy and the WTO reforms. The foreign capital market offers bright prospects for a better access to capital and for lower borrowing costs of competing enterprises. Furthermore, a more efficient allocation of capital would be desirable. Thus the existing two-tier system of available capital from HCMC in the south and Hanoi in the north could be transformed to a comprehensive system of capital allocation. The implementation of local projects (e.g. development of the infrastructure) could be realized easier and in less time because there would be less administrative barriers.

Many political, institutional and legal changes are necessary in order to ensure financing of infrastructure projects. Among them are the development of capacities at the subnational level and an improvement of legal and regulatory framework conditions for them as well as the development of subnational capital markets. The lack of a comprehensive and uniform legal framework entails great risks due to uncertain commitments of the treasury (which had negative effects for example in Brazil and Argentina in the 1990s).

Legal and regulatory framework conditions may increase the demand because the investors would gain confidence in and familiarity with negotiable instruments, investment decisions and information about risks. Clear and binding regulations on bonds for subnational bearers would reduce the personal risk. Besides, the use of subnational bonds would contribute to the development of capital markets merely by adding further asset classes (as negotiable instruments on the market).

The new Securities Act of 2007 shows that now understanding has been developed for the fact that some efforts are necessary in order to check the legal and political framework for financing subnational investments thoroughly. It includes also securing bonds for the infrastructure, such as ports, bridges and roads.

On request of the Ministry of Finance and the Ministry of Planning and Investment to help Vietnam in working out a strategy for financing and development of the infrastructure, VCCI issued an assessment of the necessity of a comprehensive framework for subnational financing of the infrastructure. This study outlined a working plan comprising necessary steps for the attainment of the goal.

However, the promotion of subnational foreign capital market is not the ultimate goal. For financial managers it is important to bring to mind that in the long term subnational capital for financing outstanding items of current accounts will only increase the share of debts which have to be repaid later, without increasing the productivity and the funds for repayment.

Hasty issues of bonds bring further risks on the financial market, for instance issuing before a subnational enterprise has revealed its creditworthiness or its investment priorities.

The underlying objective of the subnational market is to increase local investments and to promote significant subnational services. A prudent allocation of bonds may extend the investment capacity. Well-conceived investments and credit plans may finance the required infrastructure, and the debts can be repaid from future earnings of the facilities generated from tolls or cost savings in service-oriented companies.

Furthermore, general obligation bonds and financing from revenue or combinations of both ought to constitute a source for sustainable growth of subnational lending in total volume of private sector rather than the use of physical collaterals (De Angelis et al, 2008). Moreover, if the debt repayment is pre-estimated on the basis of revenue or savings from the project, the subnational borrowers and lenders will tend to focus with more discipline on the economic costs and benefits of proposed undertakings.

The stock exchange

Important steps in the economic development were the opening of the shopping centers in Saigon and Hanoi as well as the Vietnamese Stock Exchange in HCMC (2000) and Hanoi (2005). The creation of a professional stock exchange promotes the policy of global integration and economic regeneration and serves the purpose of creating a market economy with “socialist character”.

In comparison, the Saigon Stock Exchange price index (VN index) is a more reliable indicator for long-term trends of the financial markets in Vietnam than the Hanoi Stock Exchange price index (HASTC). Whereas the Hanoi Stock Exchange includes about a third of the total stock exchange capitalization, it was very small until 2006. A great number of new listings increased its importance (IMF, 2007).

The establishment of a modern stock exchange has encouraged the inflow of foreign currency and foreign direct investments. Many incentives can be found in trading in securities. Tax incentives for securities trading and a transparency requirement for the protection against expropriations entered in 2000 into force. The tax incentives apply also to enterprises with the activity as fund managers and similar listed negotiable instruments for issuers. Finally, private investors benefit from the corporate tax exemption for profits from dividends, bonds and transactions in negotiable instruments.

At the same time, Vietnam endeavors no to keep foreign currencies in the country. All stocks and funds at the stock exchange in HCMC are traded in VND. Since 2008, there are 156 stocks and 39 bonds at the Saigon Stock Exchange. At the beginning, the stock exchange had some problems to overcome. The first official trading was postponed several times due to technical difficulties. The stock exchange was open only in Monday, Wednesday and Friday for two hours, respectively, and initially only two companies were admitted to dealings (Jeffries, 2001: 4 L 7 ff.).

The first growth as regards the number of companies and the market capitalization developed rather slowly. At the end of 2000 only five JSBS were listed, then five in 2001 and further ten companies in 2002 were added (Truong, 2006: 138). The actual formation of the stock exchange took place in the late summer of 2006. At the end of 2005 the market comprised – including the securities trading centers in Saigon and Hanoi – still only 41 listed companies with a stock exchange capitalization of less than US$ 1 billion. In April 2007, this number dropped to 193 listed companies, which corresponds to a market capitalization of around US$ 20 billion (World Bank, 2007; Vuong, 2008). Almost 400 former state-owned enterprises have been privatized and transformed in JSCS. The companies come into consideration in the future as target companies both for domestic and foreign investors. Now there are also first stocks, thus privatizations of former state-owned SOS. Nevertheless, the majority of shares are in possession of the government because it wants to retain control in these sensible areas.

The required approval of the SSC (Uy ban chungkhoanNhanuoc) constitutes an obstacle for new candidates. The company data have to comply with a range of rigorous restrictions and requirements before the stocks may be issued at the stock exchange. According to Article 1 Sentence 2 of the Securities Act (No. 70/2006/QH11, 2007), the candidates have to show at least VND 10 billion as ordinary capital. Furthermore, the applicant has to show in compliance with subsequent decrees that it has made profits in the last two years. At least 20 percent of subsequent stocks have to be sold to more than 100 different investors. The issuing companies have to undergo a separate audit (Decree 58/2012/ND-CP of the Government of 20 July 2012).

The efforts of the government to overcome the difficulties resulted in a number of adopted decisions. SCC and the State Trade Commission (STC) want to adhere closely to guidelines issued by the government and the CPV. SCC and STC aim at improving the legal framework conditions gradually, in close cooperation with relevant ministries and organizations and establishing a register of international cooperation. Moreover, the attention of the public towards the stock exchange and the securities markets is to be strengthened. The determined fees for companies in general and for companies that deal with securities cannot exceed the statutory limits.

The LF1 comprises already a plan for the admission of foreign direct investment companies to quotation at the stock exchange. Despite the readiness to implementation of the foreign knowhow with regard to trading in securities, foreign investors are authorized to purchase only a certain amount of shares of Vietnamese companies. That way, the formation of a foreign superiority is to be avoided and a certain degree of independence ensured. Foreign investors are allowed to purchase 49 percent of stocks of listed companies and up to 100 percent of unlisted companies. Sensible sectors, such as telecommunications, energy and oil exploration constitute exceptions here. Consequently, the restrictions for foreign investors that want to make transactions at the Vietnamese Stock Exchange remain in force.

The stock exchange and the internal payments increased the available capital ensuring the stability of the national balance of payments. However, many organizations, among them also a number of state-owned enterprises, gave in to the temptation of instant riches. By the end of 2007, the SOEs invested 37 percent of their capital in securities, banks and real property, instead of concentrating on their core business. It had very negative effects on the liquidity and in some cases even threatened their economic viability (EU Counselors, 2008: 12).

Since 2005, the VN index is subject to fluctuations. Nevertheless, the stock exchange plays an invaluable role in channeling investments in listed companies that concentrate on the construction, industrial goods, services and the use of natural resources (EU Counselors, 2008).

Moreover, the IMF suggests in its Country Report to tighten the regulatory control of banks and to control the market and foreign exchange risks (IMF, 2007). The management of the HCMC Stock Exchange is aware of the problems and has implemented a program for further improvements of trading conditions. Among them are:

  1. the creation of better conditions for the JSCS and their stocks at the stock exchange;
  2. the development of information systems in which information is published fully, timely and precisely;
  3. the improvement of software;
  4. the detection and prevention of insider dealing;
  5. the improvement of the IT system in accordance with market requirements and international standards, the application and accomplishment of the “remote terminal” project and the departure from mere floor trading;
  6. proposals for establishing reasonable measures for market strengthening, signing memoranda of understanding with other stock exchanges and making cross-listings.

Although these items seem to be general and vague, they are an inevitable proof of the sensitization for and the understanding of the needs of enterprises, stockholders and investors.

Case studies

The following section with case studies adds details and comments on the development of the transition of the area of management in Vietnam. The organizational cases of a SOCB and a private JSB are very similar as regards the level of assets, incomes and deposits. In the comparison, the cornerstones of both banks are summarized, compared and considered in the context of state and private ownership. The comparison helps illustrate whether different positions of the banks (as regards the founders, owners and control systems) in the Vietnamese system are reflected in their balance sheets or annual statements.

There are also case studies of individual managers in this area which add the all too often missing voice on the development of management that is close to reality and practically relevant.

Case studies of organizations

Case study 1L Southeast Asia Commercial Bank (SeA Bank)

The SeA Bank, founded in 1994, was one of the first JSB merchant banks of Vietnam. Its long-term objective is to become the leading bank in Vietnam. The SBV rated the SeA Bank in four successive years with “A”. The bank is headquartered in Hanoi. At the end of 2007, the total number of the SeA banks, branch offices and subsidiaries was achieved. In 2009, 39 new banks and branch offices in both locations and new provinces have been established.

The SeA Bank endeavors to become a financial group (SeA Bank Group) with good reputation and capital assets in the Vietnamese market. It wants to achieve the same step by step in the regional markets.

The bank is geared towards providing a broad range of products, from conventional deposit business right up to investments. The SeA Bank provides loans, products for interest saving, flexible deposit withdrawals as well as financing funds for manufacturing, import and export trade, medium-term financing loans, mortgages on securities and discounts of local enterprises as well as companies in different economic sectors operating in the areas of production and trade.

In August 2008, the SociétéGénérale announced the takeover of 15 percent of the SeA Bank in order to gain access to the Vietnamese market via a reference bank. The SBV has approved the transaction. Source: SeA Bank (2008)

Case study 2: The Mekong Housing Bank (MHB)

The MHB is a SOCB, was established in 1997 and is headquartered in HCMC. The MHB has over 160 branches and subgroups. The branch offices are dispersed in 32 provinces and towns in Vietnam. It has business relations with about 300 foreign banks in 50 countries worldwide.

The bank wants to expand and establish another 30 subsidiaries in order to meet the growing need for banking services and loans and in order to react to the demand for housing and infrastructure development. The borrowing requirement of the country is big, thus it makes efforts to react to the demand for housing and infrastructure, particularly in the Mekong Delta.

The MHB is the youngest and fastest growing bank among the SOCBS. With its total assets of nearly VND 30 trillion, it ranks in the seventh place. The MHB provides loans and investments for the development of housing and the socioeconomic infrastructure. The enterprise acts also as so-called “bank for foreign affairs”, which means that the bank provides guarantees for branch offices of domestic enterprises abroad. It is a common practice in the industrialized countries in order to incentivize foreign enterprises to enter into business relations with domestic enterprises. The core business of MHB comprises granting loans to SMEs as well as to individuals and private households. In particular, MHB offers loans secured on assets for construction companies for the development of infrastructure and for housing, especially in the Mekong Delta region. MHB mobilizes capital of individuals and of domestic and foreign organizations.

In the spring of 2008, the government approved the partial privatization of the MHB. The bank is allowed to sell up to 31.9 percent of its stocks, including 15 percent to strategic investors, 13.11 percent to the public, 1.79 percent to employees and 2 percent to its trade union. The remaining 68.1 percent are kept by the state. The MHB commissioned the Deutsche Bank AG Singapore to draw up a privatization plan and to advise MHB on the initial public offering.

Comparison of the banks

Although they are different in their ownership structure, the banks compete in both cases because they have the same kind of customers, i.e. mainly private individuals.

By comparing the balance sheets and the profits, it can be analyzed whether the different structures have effects on the efficiency and profitability of the banks. The banks are almost equal as regards their total assets. It applies also to planned growth. Both banks want to raise their total assets to around VND 40 trillion. However the SeA Bank seems to have grown faster – for instance its “owner’s equity” has increased threefold while the growth of MHB amounts to about 10 percent only.

As regards customer loans, the MHB was able to increase the level from VND 9,976,585 million in 2006 to VND 13,756,662 million in 2007. It is a remarkable growth of 30 percent. At the same time, however, the SeA Bank managed to achieve a growth of 300 percent, namely from VND 3,353,998 million to 10,994,812 million.

This performance may arise from the more independent position of the SeA Bank. As a SOCB, the MHB has a planned and more or less fixed business field.

Whereas, on the one hand, it applies also to the SeA Bank, on the other hand it may also choose its special fields and concentrate on certain areas. Moreover, it is more flexible, thus faster in the position to react to requirements of the consumers.

The gap between the incomes of the banks becomes smaller and smaller, but the SeA Bank seems to have better control over its expenses, thus to make higher profits. There are big differences between the banks as regards specific sources of income. Whereas the SeA Bank concentrates more on securities, a greater part of revenue of the MHB comes from foreign currency trading.

As regards the staff, the MHB becomes bigger, whereas the SeA Bank grows faster. Whereas the MHB almost doubled the number of its employees from 2338 in 2006 to 2580 in 2007, the SeA Bank almost doubled its workforce and increased the number of employees from 498 in 2006 to 831 in 2007. As regards the education of employees, about 70 percent of the employees of both banks have a university degree.

Another similarity between the banks is the ability to attract more private customers. Both banks endeavor continuously to offer attractive services with regard to loans, to the availability of and access to banking services. It is carried through for instance by establishing more branch offices, issuing as many money and ATM cards as possible and providing e-banking systems. Considering that, the customers are not as different – as one could expect. It has been confirmed by the rapid increasing number of installed cash machines. That way the banks try to extend the access to and the availability of their services for the public – above all for private persons – because, for such customers, a higher number of cash machines may constitute an important criterion when choosing a bank.

To sum up, it can be stated that the SOCB and the private SeA Bank have more common features than one could expect with regard to the bank system and its origins. Even if a SOCB and another private institution are taken, there are no big differences in the annual balances with the SBV, both grow and both are positive. However, there is a considerable difference in the amount of SBV bonds.

Whereas the SeA Bank did not need such bonds at all, they were present at the MHB. Here, the inability of SOCBS to act as independent market player becomes apparent, in particular not as “bank for foreign affairs” because there the decisions in political, and not in economic terms are made, thus the losses are in the nature of things.

A SOCB should also develop and extend a business plan in order to be competitive for customers.

The equality in almost all benchmark data can be understood as a forerunner of the process of the banking sector in Vietnam which to a certain extent equalizes the private banks and SOCBS in competition. In the long run, the DoiMoi policy and the WTO Commitments will lead to a banking system in Vietnam that is more stable and more similar to the global market. This competition-driven environment together with the necessity of a reasonable management and planning are major factors on the way to create a state-independent banking service sector in the form of a subnational system.

Case studies of individual managers

1st case study

Mr. Flockhart was appointed to the Board in 2007. He gave his opinion on the development of the HSBC in Vietnam: “It is generally known among global investors that Vietnam, with a GDP of averagely plus 7 percent in the last years and a growth of foreign direct investments, is one of the fastest growing national economies in the region – a record amounted to $20.3 billion in 2007. However, even more exciting is the fact that the GDP per capita doubled in the last 10 years. 50 percent of the 87 million of people in Vietnam are under 30 years, and only 9 percent of the population has a bank account: These factors point to a very convincing growth history, particularly in the area of financial services.”

Mr. Flockhart takes the view that the financial and banking sector in Vietnam is still in the early stages of development, but the competition will become stronger because the government focused in the last years on a reform of the financial sector by gradual relaxation of restrictions for banks and creation of a “level playing field” for foreign banks. So the manager states: “Yes, the competition will increase as a result of this, but we think that it is a good thing because it is favorable for the promotion of the industry and the development of more competitive pricing and service improvements for the benefit of consumers in the banking sector.”

When outlining the growth strategy in Vietnam, Mr. Flockhart refers to a “two-pillar concept”: “It comprises both strategic investments and organic growth. Our investments in Techcombank and BaoVeit give us a stronger participation in the growth in Vietnam because through our partners we can get to big customers and established enterprises. The local involvement will give us a balance in the development of our own enterprise. It will enable us to operate on a larger scale and to expand the range of our services and products”.

As regards the comparative strengths and weaknesses of foreign and local banks, Mr. Flockhart outlines the restriction on industry networks for foreign banks which means a clear discrimination of foreign banks. For instance: “As you can see, we have only one branch office in Ho Chi Minh City and another one in Hanoi as well as a representative office in Can Tho, although we have a long history in Vietnam. The new decree, which allows foreign banks to establish branch offices locally, will bring foreign players on the field that will play on the same field as the local banks. The decree allows us – as foreign players – to expand our network countrywide on the Vietnamese market and to provide products and services that we have successfully provided in other parts of the world. On the other hand, local banks have a good understanding of the local market, including the consumer behavior. Moreover, the domestic players learn fast and recognize the advantages of cooperation with foreign institutions. Our alliance with the Techcombank, the fifth biggest bank in Vietnam, confirms it.

However, the growth strategy of the HSBC is also confronted with general problems to find and to retain qualified employees. That is why the manager said: “We as well as other foreign banks in Vietnam face a scarcity of workforce. It costs much time to recruit, train and groom a professional banker. Therefore, the highest priority for us is to take care of staff retention.” With regard to this Mr. Flockhart describes the long-term vision of development of the HSBC to an institution with the best workplaces. Furthermore, the HSCB cooperated with several top universities in the organization of workshops and seminars and in 2007 it opened its own training center in Vietnam. (Vietnam Economic Times: 2008A)

2nd case study

Mr. Sud is responsible among other things for SCVs (Standard Chartered Vietnam) franchise and strategic development in Vietnam. The SCV together with the HSBC were the first international banks which, as a result of Vietnam’s commitments within the accession to the WTO, obtained an approval to make local affiliations. The approval was announced during a visit of the Vietnamese Prime Minister Nguyen Tan Dung in the United Kingdom in 2008. Mr. Sud said that two things are reflected in this announcement: For one thing, the strong wish Vietnam’s to achieve further strengthening of the banks, which can be accomplished by allowing some selected international players to play a major role in this area; for another thing, the mental as well as actual fulfillment of WTO Commitments.

SCV intends to open between 20 and 30 branch offices all over Vietnam in the next three to five years. Mr. Sud thinks that the local banks – at least in numbers – will continue to dominate. Example: “Due to opening of the sector, rather qualitative than quantitative changes in banking services will take place. The local Vietnamese banks will continue to dominate the sector in the foreseeable future, namely in the next five to ten years, by retaining more than 90 percent of the banks.”

As regards the future development of the banking sectors, Mr. Sud holds that the SBV, due to its risk profile and the turbulent international environment, should have adequate capital resources.

In addition, considering the fact that less than 10 percent of the Vietnamese population has bank accounts, there is a clear demand for more banking services. The SBC is positive that it will be provided for in the regulations that licenses for new banks will be issued to those that have a strong track record in the financial sector. The experience in other developing countries showed clearly that only such banks survive in the long run. In view of global turbulences on financial markets after 2008, Mr. Sud describes the strategy of the SVC for a sustainable competitiveness as based on four key pillars:

The first two relate to a strong capitalization and the ability to create suitable products and services for local consumers. As the third pillar, he states the ability of the SCV to guide its corporate customers in the international financial market in order to increase financing. The reason for this is that in the near future it will be crucial for big companies in Vietnam to tap these international markets in order to survive in the long run. Standard securitizations will help these Vietnam-based clients to enter these markets with initially relatively small amounts. These, according to the experience in most Asian developing markets, may then grow to a substantial amount in the future.

As fourth pillar, Mr. Sud emphasizes the importance of staff in the banks: “Competitive advantages arise above all in the service industry, not least because of the quality and attitude of people involved.”

(Source: Vietnam Economic Times 2008B)


The financial environment of Vietnam bears difficult challenges both for the government and the financial managers in private enterprises. Some of the most important issues are discussed in the following sections.

Foreign exchange and monetary policy

The greatest challenge with regard to the monetary system is to maintain the stability in respect of the price and exchange rate. While the latter was the main objective of the monetary policy, the pressure triggered by inflation after 2008 was so strong that the inflation target policy became more important. Considering the fixed exchange rates, the authorities are limited to political measures for combating inflation. After the liberalization of deposit and loan interest rates, the SBV intervenes through the base rate, the rediscount rate and the refinancing rate. Due to the market expectations as regards the development of the VND, the Central Bank is anxious about attracting speculative money and intensifying liquidity problems by lifting the interest rate.

The SBV can supply or withdraw liquidity to/from the banking system by means of repo transactions, issue or redemption of Central Bank bonds and the adjustment of the equity requirement rate. Moreover, at the end of 2007, the Central Bank brought about a suspension of foreign currency activities in non-bank transactions in order to prevent further liquidity inflow through capital flows. Other non-conventional measures include issuing of short-term certificates of deposit (CD) in 2007 and involuntary issues of bond debts to banks (beginning of 2008).

Credit control

The financial authority has no direct control over the scale of loans of commercial banks (except by regulatory division of loans into specific categories, such as stocks).

The SBV officially maintains a controlled variable exchange rate. However, this regulation is understood by the IMF (International Monetary Fund) as a conventional and actually fixed tie on the basis of the fact that since 2003 the VND depreciated in relation to the dollar by less than 2 percent per annum with a daily trading corridor of +/- percent. Source: Qiao (2008). According to the World Bank (2008), Vietnam’s monetary stock grew by 47 percent in 2007, which means a serious threat for the price stability. The reasons for that are the considerable increase of lending in connection with the steady influx of foreign direct investments and indirect investments due to a policy of free movement of capital. As a rule, a currency would become higher priced in such circumstances. However – with the exchange rate tied to the US dollar and the resolve of the authorities to keep the value lower – it was not an option. The expansion of money supply resulted in inflation (caused by the purchase of government assets made out in US dollars in order to prevent an appreciation of the VND) (World Bank, 2008).

Circular 13-2010-TT-NHNN came into effect October 2010 and replace Decision 457-2005-QD-NHNN dated 19th April 2005 of the State Bank and the following amendments. Circular 13 clarifies some existing ambiguities in the law as well as introduces increased restrictions on lending that bring Vietnam’s banking closer to banking safety referring to the Basel Committee standards on banking supervision. It states tougher rules on the maximum level of finance leases, which may be made to a group of related clients. The maximum was reduced from 80 to 50% of the equity of the finance leasing company. Circular 13 provides for specific limits on the percentage of charter capital that a credit institution may use to make capital contributions and share purchase, including in subsidiaries. Circular 13 has also introduced several changes affecting solvency ratios and capital adequacy ratio of only 8%.

This situation constitutes the central problem of the monetary policy in Vietnam: The conflict of the so-called “impossible trinity” with its three elements:

  1. free movement of capital,
  2. fixed or quasi fixed exchange rate and
  3. monetary policy independent of interests.

According to some exponents of the theory, a combination of these three elements is not possible. Vietnam decided in favor of fixed exchange rate and free movement of capital. It is comparable with Hong Kong, but accepts the fact that the interest rates, which are determined in Hong Kong and above all by the US Federal Reserve Bank, thus are not appropriately adapted for economic phases, constitute no option for Vietnam because its economy is much younger, underdeveloped and more varied. Vietnam determines its interest rates itself and separates the domestic market from the Western financial markets led by the USA.

However, the government has to consider that high interest rates make foreign capital more attractive for investors. This, in turn, would increase the pressure on the VND because then its value in relation to other currencies could drop fast, which would end in inflation. A subsequent increase of the money supply – for instance by a reduction of the interest rates – would only increase the inflation because the confidence in the stability of the VND would be limited. Accordingly, the SBV is not as independent in its policy on interest rates as it appears at a first glance.

The challenge is to appreciate the VND in relation to the US dollar gradually, which to a certain degree increases the inflationary pressure. Moreover, the authorities could contemplate a limitation of capital inflows (as e.g. China). Finally, the capital gains tax and a tax on assets could be introduced. In the long run, these measures would increase the price stability and have bigger effects than the short-term negative effects on the competitiveness of the export economy. Insofar, the inflation on a constant level can have equal long-term effects as a currency appreciation.

In the longer term – at least depending on how the entire economy develops – Vietnam could aim at introducing a fully independent Central Bank. For this purpose, a substantial amendment of the Law on the Central Bank would have to be made. SBV implements in fact the measures of the Ministry of Finance and the Ministry of Planning and Investment, but it could be changed by such step.

The financial situation constitutes a challenge for financial managers in Vietnam with regard to the reaction to possible changes. China is a good example to show that a gradual appreciation of the currency not necessarily means insurmountable problems for the enterprises concerned. In addition, Vietnam has a still significantly lower price level than China. It is due particularly to the shorter time of economic growth. Therefore Vietnam could make use of the competitive advantage of low costs, at least for some time. Depending on the size and activity of the enterprise, a hedging strategy would be helpful in order to reduce the risk of appreciation of the VND in the medium-term with regard to changes in the exchange rate.

Circular No. 29/2013/TT-NHNN regulates lending in foreign currency by credit institutions and branches of foreign banks to borrowers being residents came into effect on 01 January 2014 and replaced Circular No. 07/2011/TT-NHNN. It has expanded the circumstances in which a credit institution or a branch of a foreign bank may lend foreign currency to a Vietnamese resident borrower. A credit institution or a branch of a foreign bank is now allowed to offer short-term loans to wholesale petroleum importer which are assigned import quota by the Ministry of Industry and Trade in 2014.In the case of loans for imports, borrowers must have sufficient foreign currency to repay the loan either from production or business revenue. In the case of export, loans are limited to short term loans and may be provided only where the borrower has sufficient foreign currency to repay the loan from export revenue. These requirements for sufficient foreign currency raise significant issues for lenders. Where a borrower wishes to rely on foreign currency from their projected production or business revenue or export revenue, a question arises as to what would happen if, when it comes time for repayment there is insufficient revenue. Arguably, the very fact of the insufficiency of funds would mean that the loan was not permitted in the first place, as the borrower did not fulfill the requirement to have sufficient funds to repay. The effect on the loan may be that it would be considered invalid from the outset raising difficult questions as to the lender’s status, particularly in any debt collection or insolvency proceedings. Beyond examining the borrower’s business plan to assess the likelihood of repayment, there is no clear way that the lender can be assured that any loan will in fact meet the sufficiency requirements. A further issue concerns the ability of a borrower to purchase foreign currency for the purpose of repaying loans at all. Currently, Vietnam’s currency laws on foreign currency control severely restrict the circumstances in which a Vietnamese resident may purchase foreign currency from a credit institution. These circumstances are generally limited to cross-border transaction, such as borrowing in order to pay foreign contractors or to study outside Vietnam. Borrowing in order to pay foreign currency loans made by a Vietnamese credit institution or a foreign bank branch does not currently appear to be permitted, although the fact that this is explicitly contemplated by Circular 29in relation to import businesses may indicate a willingness to permit such purchases in the future.

Banking system

Vietnam’s risk in the banking sector was rated CCC (Economist Intelligence Unit, 2008). It was above all a result of the excessive credit growth after 2008, which escalates the danger that the number of non-performing loans (“NPL”) will increase and the rising inflation will depreciate the real value of bank assets.

Despite remarkable improvements in banking services, other, new services such as trading in securities, financial consultancy, insurances and investments are not fully developed yet. Whereas the workforces of the SOCBS are deemed productive as regards the quantity, these banks suffer from a lack of qualified human resources department. Moreover, the SOCBS are dominated and controlled by state authorities and are exposed to difficulties with regard to poor ownership quality, financial reporting and profitable opportunities, too high costs and prices of irrecoverable debts (Vietnam Business Finance, 2008).

The government works on the removal of big portfolios of non-performing loans, tightening of standards for loans, ensuring of appropriate practice of provisions in case of loan defaults and on the increase of capital resources requirement in order to meet the internationally recognized minimum requirements. The latter was introduced in an attempt to furnish several, few strong banks in contrast to a large number of weak banks.

During the period from 2001 to 2005, the government invested VND 10 trillion for recapitalization of banks and encouraged them to establish their own asset management companies in order to facilitate the release of NPL. Market analysts are skeptical as regards the officially reported NPL figures because in their opinion the actual quotas in the SOCBS range between 15 and 30 percent. It is clearly above the reported quotas of 1 to 3 percent in 2006. Moreover, a fast growth in the retail trade and in the real property sector as well as in direct and indirect stock purchases can be reported, which could result in a possible development of the NPLs.

Some see an inherent interest conflict in a combination of both institutions of ownership and control of the SOCBS in one and the same agency – the SBV – with negative effects for regulatory control.

It is important that the management of the SOCBS will sometime pass from the SBV to the State Capital Investment Holding (Vietnam’s holding company for privatized enterprises) whereby the daily control of the banks will be taken off SBV’s shoulders. Moreover, the government draws up legal regulations granting the SBV more independence, including the reorganization of responsibility for banking supervision. Meanwhile, the Vietnamese authorities focus on further strengthening of the supervision and the improvement of the efforts of banks to operate within the legal framework (Mayeda, 2008).

Subnational capital market

The legislation in Vietnam is not adequate for the development of a sustainable capital market or the use of modern methods of financing, such as securitizations. Therefore, a stabilization of the legal and fiscal framework conditions is necessary. It could take place in this way that the legal prerequisites are created, and the foreseeable sources of revenue for international companies are provided by giving them a clear political control over a part of the finances. Potential participants in a subnational capital market – borrowers, banks and other interested parties – constitute a natural and important circle for these reforms. Recommendations with regard to the elements of a legal framework supporting the development of subnational bonds have been already proposed (cf. De Angelis at al. 2008).

A successful subnational market should be developed in two directions: From top to bottom, in the sense of a legal and political framework supporting the efficient capital market and from the bottom up, with regard to practical experience for banks and other lenders in borrowings for investors in securities and for international institutions as borrowers for financing of investments and in rescheduling of debts. Both directions, the development of supporting legal and political framework conditions and the increasing practical experience in the subnational capital market, could be pushed ahead at the same time. In various countries, in which the subnational capital markets developed, running of pilot projects proved to be effective, particularly in order to create patterns for the final implementation. Moreover, pilot projects are very useful in detecting possible problems which have to be addressed in order to advance the development of the capital market.

As in many developing countries in which a subnational capital market has been developed, Vietnam’s regional administrative institutions face the challenge to maintain the underlying infrastructure and buildings and to bring about a more rigorous control of the exploitation of the environment. A proper regulation of the subnational capital market access could result in an increase of efficiency of expenses and reveal alternative local sources of financing within the macroeconomics for urgently needed investments in the infrastructure. These regulations could contribute to explicit harmonization of local budgets with the national standards of budget systems. It is a crucial step in the institutional reform process.

Vietnam has the opportunity to develop a well-conceived legal framework for subnational markets which can help avoid arising of problems with which other transformation countries had to deal afterwards.

Low subnational creditworthiness and capital market losses are no indicators for municipal bond issues. Such low current subnational borrowings can be also seen as an advantage. Many other countries were confronted with the reality of extensive subnational borrowings and had to try afterwards to develop a legal framework for a sound credit business in order to establish a credit business that curbs emerging excesses on the capital market.

In view of the future development of the market, Vietnam is able to implement first the legal and political framework conditions at a reasonable pace. Vietnam can also learn from the risks of other countries. Excessive borrowings and lending by subnational institutions in the absence of a suitable legal framework caused economic crises in the past. That is why the legal framework should be shaped in such a way that crucial aspects are considered – such as the status of guarantees and legal remedies which are available for the issuer in case of a failure of the subnational institution.

The promises with regard to solid subnational bonds are great. However, the same holds true for the risks connected with them. Bad experiences at the early stage of development of the subnational market can considerably obstruct the development of the loan market. (For instance, more than 10 years passed since the failure of a US$ 25 million bond of Odessa in the Ukraine in 1998 before the investors again showed readiness to lending to subnational bodies without receiving a central government guarantee in return. It was a municipal, ill-designed and poorly structured bond.)

All parties (subnational enterprises, the state, banks and potential investors in subnational bonds) have a common interest, namely that the aspects concerning the development of the loan market are understood. Furthermore, a suitable legal framework has to be established before the market enters into trading and makes substantial lending operations. To put it briefly, a subnational loan market fits into a public system that passes considerable decision-making powers and responsibility with regard to financing to the local government levels. However, functioning of the national system is an important prerequisite for the development of a subnational capital market. Particularly important are the efforts to make the revenue flowing to subnational entities more predictable by better incentives for the increase of local turnover fees and tolls and by creating a clear and transparent transfer system.

The experience has shown that – if certain significant elements of a comprehensive legal framework are provided and the key actors and institutions are prepared – the development of a subnational credit market can progress very fast.

Romania: The law on local public finances was adopted in 1999. The first two municipal bonds with a short term of two years and high interest (37 percent) were issued in 2001. They had been pilot projects and had proven themselves both as procedural and documentation models which were then applied by other issuers. Within three years, the annual amount of municipal bonds increased and reached a quota of 14 percent. Several hundreds of bond issues and bank borrowings were issued and no failure was reported.

The legal and regulatory framework constitutes tolerant, but cautious guidelines for bank loans and bonds. Most bonds were for water supply, sewage systems, roads and housing. The issuers are mostly major cities, but also smaller towns that have a good economic potential due to the tourism or the industry. Source: Qiao (2008)

The legal framework conditions granted the local authorities in these countries the right to pledge certain parts of the distributed income received from the central government. They can keep the securities on behalf of the creditors.

Once the legal basis for pledging of these financial resources had been implemented, the local authorities were able to access the capital market, to realize the financial means and in addition be secured via guarantees of third parties. This structure did not extend the obligations of the central government to financial liability and gained the trust of investors.

Source: Author’s research

Stock exchange issues

The price-to-earnings ratio (PE) of a share is a measure for the price of a share in relation to the annual net income or profit generated by the company per share. It is used as valuation factor: A higher PE means that investors have to pay more net income per unit, so that the unit is more expensive compared to a lower PE. The PE rate has annual units which may be understood as “number of profitable years for purchase price redemption”. It ignores the time value of money. PE quotas show that the current investors’ demand for company shares in the biggest listed companies departed from reasonable valuations of expected earnings and growth potential of these companies. A risk arises from the lack of current, clear control systems. A number of observers argue that the stock market was overvalued.

The nascent stock market is dominated by two groups of investors: The big foreign investors with huge amounts of supporting capital and the inexperienced domestic investor with mostly limited capital resources. Both groups are very sensible to downward trends. This development may lead to pooling, which was observed in the markets all over the world: When one or two major players on the market sell large packages, a proportional development occurs with regard to the remaining participants. The authorities are particularly anxious that a rapid reversal of portfolio inflow after 2008 could result in heavy losses for domestic investors and threaten the financial and social stability. These concerns resulted in the implementation of a range of already mentioned measures. The possibility of introducing some controls of capital inflows was also taken into consideration.

The IMF appreciates that the Vietnamese authorities have taken at an early stage the following five measures for tightening the stock exchange, the regulation and supervision as well as for limitation of failure on the banking market in order to minimize the consequences of a possible stock exchange crash (IMF, 2007):

The first of these measures is the new regulation of the SBV (Decision 03/2007 issued in January 2007) on the adequacy of banking capital, the liquidity coefficients as well as the borrowing and investment limits. It limits the possibilities of new bank loans for the purchase of stocks. In particular, credit institutions are not allowed to give loans to their hedging companies or to grant unsecured loans for investment financing or for trading in securities. Moreover, the risk of securities in relation to loans is weighted from 10 to 15 percent. The credit institutions were granted a year to comply with these requirements thoroughly.

In the second place and at the same time, the implementation of various provisions of the Securities Act was issued in order to ensure the supervision of market activities. These regulations relate to disclosure requirements, more severe penalties for violations and requirements for the improvement of management. Organizational structures of securities and fund management companies are included here.

In the third place, the SSC (also in January 2007) issued a range of letters to securities companies and fund managers requesting information about their recent stock exchange activities and requesting the representatives of foreign funds to register with the SSC, which is required according to the Securities Act. In addition, WLA has tightened the enforcement of regulations with regard to market transparency and prompted listed companies to improve their determination.

In the fourth place, the Prime Minister instructed (in a letter of 29 January 2007) the Ministry of Finance, SSC and SBV to improve the supervision of stock exchange activities in relation to foreign investors and banks, to tighten the enforcement of existing market regulations and to improve the dissemination of information with regard to risks of stock exchange investments. Besides, the SBV was instructed to consider possible amendments with regard to imminent implementation of regulations of the foreign currency control for the purpose of strengthening controls of capital inflows and / or capital repatriation by foreign investors.

In the fifth place, in May 2007 the SBV issued the Guideline 3 which, apart from other provisions, has limited the total securities-related credit risk of banks to less than 3 percent of their credit portfolio.

That is why the banks have to submit to SBV reports presenting their total outstanding securities-related credit risks as well as the measures taken and planned in order to comply with the 3-percent regulation. The reports have to be submitted monthly. The Auditing Department of the SBV will undertake a rigorous supervision of all banks with securities-related total risk exceeding 10 percent of total loans.

Another challenge for Vietnam is the inflation rate. The rising inflation rate was accompanied by the jump of the VN index at the beginning of 2009. Profits and dividends grow nearly as fast as the inflation. The interest revenue is not able to keep up with the inflation rate yet, even though they correlate strongly (ClaridenLeu, 2007). Therefore, stocks cannot fully offset the inflation, which diminishes their attractiveness in times of high inflation. Finally, it can be stated that combating inflation is the principal task in order to maintain the young stock market attractive.


The present chapter points out chances and challenges of financial markets in Vietnam. It deals with the specific developments that have to be carefully examined by the managers, in particular with regard to the immature character of financial framework conditions.

Due to the phenomenon of “impossible trinity”, it is of crucial importance for the management to be informed about imminent changes with regard to the monetary policy. Vietnam’s banking sector will change because the government generates revenues from the privatization of the SOCBS. The WTO Commitments will also play an important role because foreign banks are allowed to participate in the Vietnamese market with many new liberties and rights. Since the boom of stock quotation fueled to a large part by bank-financed retail transactions and institutional domestic investors, well-considered regulatory measures were implemented as the first response.

The steps of SBV taken after 2008 in order to tighten the financial conditions have already brought about an effect. Whereas other countries had recourse to capital controls, the effectiveness and benefit of such measures have to be carefully weighed against anticipated costs. Since the beginning of 2007, the stock exchange went through a phase of consolidation, which, however, can be still regarded as prima facie evidence for the overvaluation of some stocks. The authorities responded politically. The conditions certainly changed with unfolding worldwide financial crisis after 2008. As a result, the danger that the volatility at the stock exchange could have spillover effects on the entire financial system and the economy is greater than ever before.

In a general view, the look of the financial markets in Vietnam has changed and approaches the worldwide standards step by step. The decision-makers in the Vietnamese authorities are still subject to a hard learning process, even though the efforts and developments show that Vietnam is able and ready to abolish the existing structures and to try in its own way to achieve the transition of the socialist economy to a competitive economy with respect to its own history, culture and traditions. The Vietnamese reaction to the global financial crisis that emerged after 2008 and to other obstacles shows that the requirements and necessary instruments of banks and systems of financing are recognized and used.