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Vietnamese Banking In Need of Reform

On January 11, 2007, Viet Nam became the newest member of the World Trade Organization (WTO).  Accession into the world’s largest trading club will doubtlessly affect every facet of the Vietnamese economy. However, experts predict that the area most affected will be the service sector. The Vietnamese banking industry, for…

On January 11, 2007, Viet Nam became the newest member of the World Trade Organization (WTO).  Accession into the world’s largest trading club will doubtlessly affect every facet of the Vietnamese economy. However, experts predict that the area most affected will be the service sector. The Vietnamese banking industry, for instance, will be affected due to its ongoing equitization and relative underdevelopment. Without swift adaptation, the Vietnamese banking sector is going to falter as foreign competition is introduced to the market.

Banking Sector

When asked which sectors would likely be affected first by the new WTO membership, Deputy Minister of Trade Luong Van Tu responded the service industry will be most affected, because the sector is still weak compared to most of the country’s other industries1.  Experts have foreseen this weakness, and expect that the Vietnamese banking sector will be in for some difficult times.  In an interview with Vietnam Economic News, Jonathan Pincus, chief economic expert of the United Nations Development Program in Hanoi, predicted that domestic companies in the service sector would likely be forced into giving up some business to foreign businesses moving in after WTO accession2.

A large part of the country’s financial sector is owned and operated by the government. This contributes to the sector’s vulnerability to the possible entry of foreign competition.  There have been plans to equitize the banks, but this process has been slow.  Delays in equitization are being attributed to inadequate legal guidelines about the process and the inexperience of the banks3.  The banks, meanwhile, blame government procedures for slowing up the equitization.  Do Duc Cuong, the Senior Advisor to the Mekong Housing Development Bank (MHB), explains that the MHB would like to speed up the process, but the bank is not allowed to make crucial decisions, such as hiring consultants, without the input of government officials4. 

Lack of Information

The disagreement between the banks and the government acts as an indicator of the sector’s health.  There are other factors pointing to a weak financial sector.  A recent survey by Visa International and ACNielsen shows that only two percent of Vietnamese have ever borrowed money from a financial institution.  Most Vietnamese choose to borrow from friends and relatives rather than banks.  In fact, only half of the survey’s respondents in Hanoi and just 31 percent in Ho Chi Minh City had bank accounts5.

The banking system in Vietnam is simply not being used.  The Visa survey indicates that the banks are underused because of lack of education about their services.  Many Vietnamese are reported as believing that banking is excessively complicated and that interest rates are restrictive.  Many also felt that their assets were not large enough to warrant opening a bank account, and those that did possess enough wealth to justify banking felt that it was not secure6.
These problems seem to reflect a lack of knowledge as to how the banking system works, the benefits it can provide and the actual costs involved.  There is no question that opening up the sector to foreign competition will make the current Vietnamese banks seem outmoded and clumsy.  This will certainly upset the services sector, but Jonathan Pincus explains that this will benefit consumers.  When the competing foreign companies move in, Vietnamese businesses will either have to learn from the competition and evolve their methods, or simply cede their businesses to foreign companies.  Either way, “service quality in Vietnam is sure to increase and prices will go down.7” 

The Targeted Goals

Beginning in 2006, the banks have made a conscious effort to improve their capital supplies and stay updated on technology8. This is complemented by a series of reforms designed by the State Bank of Vietnam.   It has created a series of six goals for the banking sector, and a timeline for accomplishing the goals, beginning this year and concluding in 2010.

Two of the aims are to create a legal framework for the banking system, and to provide more inspection and supervision of the banking operations9.  Such a framework and oversight should soothe any doubts about the security of funds in bank accounts.  These actions will be most effective if paired with a major publicity movement, informing Vietnamese of the changes and ensure them of banks’ safety and reliability features.

Other goals include turning the State Bank into a modern central bank, improving monetary policy and policy management, and restructuring commercial banks.  The final goal is to promote international cooperation10.  These structural changes should create a system conducive to sector development. If these structural changes are paired with the goal of capital accumulation, the Vietnamese banking sector should be able to rise and meet the challenges posed by the introduction of foreign competition.

Source: www.asiaecon.org |



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