Banking in Vietnam

Vietnam is one of the developing countries in Asia and its financial services sector does not have much history as it is in developed nations such USA and European countries. There were no organized banks and other financial institutions in Vietnam up to the late years of the 20th century due to lack of information, infrastructure and culture that did not promote commercial practices. The local people of Vietnam relied on subsistence farming and there was little involvement in commercial activities leading to retarded financial sector up to 1970s when the government reorganized Vietnam banking sector. More so, Vietnam is among the poor economies in Asia due to lack of infrastructure, stable political system, and technology. This also contributed greatly to poor banking and financial system during the early years of the 20th century.

Clear history about Vietnam’s banking system begins in the 1970s when state-owned and international banks started to be established in Vietnam. In the year 1976, the State Bank of Vietnam was reorganized and it became the country’s central bank. The State Bank maintained its headquarters in Hanoi, a sub-headquarters in the city of Ho Chi Minh and other provincial branches. The bank assumed the responsibility of ensuring a favorable financial environment in the country through regulation of other financial institutions in the country. However, it is worth noting that unlike other central banks from other countries, the States Bank still continued to render commercial services to its customer even after the change of status. By 1990, there were several banks operating in Vietnam.


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Some of the famous banks included the Foreign Trade Bank and the Bank for Agricultural Development. These two banks were established to help the local people of Vietnam to grow commercially. Foreign Trade Bank was in charge of foreign payment while the Bank for Agricultural Development was established to promote growth in fishing and agriculture sectors through provision of finances and financial services to the local farmers. Actually, the Bank for Agricultural Development was the first commercial bank to be opened in the city of Ho Chi Minh City in July 1987 to offer savings and loan services to the locals of Vietnam and business organizations. Other than promoting growth in agriculture and fishing sector in the country, the bank also aimed at limiting inflation through the extension of credit.

The banking sector in Vietnam has grown tremendously since its reorganization in the 1970s and 80s with more state-owned and international banks being established. However, Vietnam banks and other financial institutions are still victims of regulatory and managerial weakness, high levels of non-performing loans (NPL), lack of compliance with Basel capital standards among other weaknesses. The most affected banks are the state-owned commercial banks which suffer high levels of NPL especially to state-owned enterprises which are normally poorly managed. Generally delivery of financial services in Vietnam is not excellent due to lack of transparency in the country’s financial system and strong interests by large foreign banks to serve multinationals only.

In terms of market diversification, financial services sector in Vietnam is still small and underdeveloped. The sector comprises of few consumer and SME services with banking sector representing only 0.8% of GDP in 2007. During the same year, other financial sectors such as stock market, life insurance, and non-life insurance represented 0.4%, 0.8 and 0.7 of the GDP respectively. This performance was far much lower than that of developing countries of Asia such as Thailand, Malaysia, and Singapore. Consequently, the country was ranked 49 out of 52 in 2008 by World Economic Forum for financial development. However, the country still has the substantial long-term potential to foreign financial institutions that are interested in venturing in its financial services sector. This is evident due to the fact that there are immense reforms made by the government of Vietnam to relax foreign restrictions and other state programs aimed at recapitalization and privatization of state-owned financial institutions. The government of Vietnam aims at improving the business environment and economy of the country in order to promote growth in banking and insurance sectors.

According to a research conducted by Business Monitor International (BMI), regardless of the challenges faced by the Vietnam banking sector, foreign banks are still at a higher advantage of investing in the growing market opportunities when compared with the local banks. According to BMI’s analysis, some of the major advantages that foreign banks possess include high total asset scale, superior banking technologies, a large pool of capital, ability to meet international standards and access to skilled labor and management among others. These unique traits have enabled foreign financial institutions to penetrate the Vietnam’s market more that the local financial institutions which are normally faced with, capital, technological and management challenges.

According to 2009 BMI’s SWOT analysis of Vietnam’s banking sector, it is evidence that the sector has both strengths and weaknesses. It is should be noted that Vietnam banking sector has opportunities and threats that cannot be ignored too. Among the strengths is the fact that the sector is not dominantly owned by local players. Vietnam commercial banking sector is open to foreign banks hence opening doors for the importation of modern banking technologies, advanced management skills and access to large pool of capital as foreign banks extends their services and products to Vietnam. Foreign banks have also ensured high competition in the sector forcing the local banks to improve their systems in order to remain in the market. This is not only beneficial to the economy of the country but also to the people of Vietnam as the competition makes banking services more affordable to them. There is also rapid growth in the Vietnam’s commercial banking sector from a low base to a higher capital base due to government’s efforts to improve business environment and country’s economic growth. Availability of untapped potential in the country is also one of the major strengths of the Vietnam’s banking sector. This is due to the fact that Vietnam people have high saving rate when compared with other developing Asian countries.

When it comes to weaknesses, SWOT analysis on the Vietnam’s commercial banking sector shows that dullness and underdevelopment are a major threat facing the sector. The fact that culturally most of the Vietnam people are not business oriented has hindered the growth of the banking sector in the country. Vietnam locals are reluctant in opening bank accounts, borrowing loans or other financial products. Most of the users of banking services in Vietnam mainly are business organizations and city dwellers. The sector is underdeveloped in terms of infrastructure, technology, and managerial skills and therefore cannot attend to all the demands of its stakeholders. Another weakness reflected by the analysis is the fact that the Vietnam’s banking sector is still recovering from the bursting of the asset price bubble in the year 2008. This incidence made the sector to lose public confidence.

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However, there are still more opportunities for investment in Vietnam’s banking sector since most of its population is not banked. This means that banks with the ability to convince the un- banked Vietnam population stand a chance to expand their markets. With recent efforts by the Vietnam government to improve the business environment and economic growth, there is a high likelihood of the income levels of the people of Vietnam to rise in the medium term. This means that demand for banking and other financial services will increase. On the other hand, there are likely threats facing the Vietnam banking sector that could hinder investors to realize their economic goals. One of these threats is the impact of prolonged global economic downturn on trade and capital flows. Growth in insurance sector also imposes a threat to Vietnam’s commercial banking sector. Although insurance market in Vietnam is not diversified, it is currently growing and both life and non-life insurance markets are dominated by a few firms. This could be a threat to the banking sector as insurance companies render some of the services offered by banks.

Other factors affecting the growth of the Vietnam’s banking sector are cultural and leadership impacts. When it comes to culture, people of Vietnam prefer keeping money with them other than depositing it in commercial banks. Although Vietnamese are known to be strong savers, research has shown that majority do not keep their money in banks. People of Vietnam do not participate in credit borrowing like it is in other neighboring countries. This is due to the fact that majority are not business minded and therefore do not require loans and other financial services. The culture of socialism is still famous in most parts of Vietnam and since resources are used domestically for the good of all, people are not motivated into acquiring more wealth hence no need for banking systems. Agriculture is the leading economic contributor in Vietnam. This has made other sectors to receive less attention as the majority of the Vietnamese are small skill farmers. Consequently, lack of uniform growth in all economic sectors has minimized the need for financial services hence hindering the growth of the banking sector.

Another substantial challenge is poor leadership and lack of management skills. Since early years of the 20th century, Vietnam has been faced with the unstable political system and consequently poor economic conditions. When banking sector was revived by the Vietnam government in the 1980s, political instability was still a common phenomenon. More so, the government did not ensure that banks were run using up to date management skills. This made newly established banks to perform poorly especially the state-owned banks where management was politically selected. Politicians in Vietnam are known to have great influence on Vietnam financial institutions and this manipulation has been a big challenge to the banking sector since its establishment.

Poor infrastructure and regulatory restrictions also impose challenges to the growth of the Vietnam’s banking sector. The infrastructure in Vietnam is not adequate to support rapid growth in the banking sector. For instance, there is a lack of modern banking technologies in Vietnam hence hindering rendering of banking services and other communication in the sector. Regulatory measures imposed on banks are normally in favor of local banks hence no free competition that is necessary for the growth of the sector. On the other hand, there are no adequate restrictions to protect infant local banks from the frustration of the established foreign banks operating in Vietnam. Consequently, foreign banks have dominated most of the commercial banking services leaving local banks defenseless. Most of the opportunities in the sector are taken by foreign banks that are more competitive in terms of infrastructure and capital than the local banks.

Generally, it is evident that banking sector in Vietnam needs a lot of reforms in order to grow to the expected level that reflects the country’s rapid economic growth. All weaknesses and threats facing the sector need to be addressed and the strengths maintained. All the opportunities available should be utilized in order to ensure that that the sector is at in its optimality in terms of performance. In order to achieve this culture the Vietnamese need to be controlled in order to influence the growth of the financial sector. Locals should be educated on the need to open and operate bank accounts. They should also be educated on the importance of credit services and other financial services offered by banks in order to encourage them to access bank services and products. People of Vietnamese should also be encouraged to venture into other economic sectors such as mining. This will increase the productivity of the people and economic growth hence increasing the need for banking services.

Leadership and management styles in banking and financial services industry should be detached from the political leadership of the country. Managers and other bank leaders should be appointed on merit basis and not on political grounds. The fact that there are state-owned banks does not mean that political leaders should be the policy makers in these banks. On the contrary, the banking and other financial institution under state ownership should be controlled by nonpolitical leaders with relevant knowledge and experience. On the other hand, managers in charge of the banks, both local and international ones, should be professionals with relevant education and experience. Banks in Vietnam need to invest in managers and necessary infrastructure. They should be ready to incur an extra cost by ensuring that employees at the management level have access to latest management skills and strategies in order to ensure that they are in cohesion with those from banks in other countries. Still, in investment, Vietnam banks should include the internet and mobile phone banking in their services in order to reach more people and ensure that their customers have access to banking services with ease.

Banks in Vietnam should also work hand in hand with the government to educate people on the importance of banking services. This will help in expanding their markets. Regulatory changes should also make to ensure that banking policies protect infant local Vietnam banks from unhealthy competition from international banks and at the same time promote free and fair completion in the country’s banking sector market. This way, banking and financial services sector will be able to grow to higher levels just like in developed countries.

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