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DISSERTATION Of the University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) to obtain the title of Doctor Oeconomiae
Bao Toan Tran
from St. Gallen
Approved on the application of Prof. Dr. Martin Hilb and Prof. Dr. Rudolf Grünig
Dissertation no. 3412 Hoa Sen Design - Saigon, 2008
Gallen Approved on the application of Prof. Graduate School of Business Administration. Law and Social Sciences (HSG) to obtain the title of Doctor Oeconomiae submitted by Bao Toan Tran from St. Dr.Analysis of the Vietnamese Banking Sector with special reference to Corporate Governance DISSERTATION Of the University of St. Rudolf Grünig Dissertation no. Economics. Saigon 2008 . Dr. Martin Hilb and Prof. Gallen. 3412 Hoa Sen Design.
The University of St. 2007 The President: Prof. October 15. Graduate School of Business Administration. St. Ernst Mohr. without hereby expressing any opinion on the views herein expressed. Law and Social Sciences (HSG) hereby consents to the printing of the present dissertation. Economics. PhD . Gallen. Gallen.
Professor Dr. instructive but strenuous. I would also like to express my special gratitude to my co-Supervisor. Above all. Rudolf Gruenig. His constant encouragement and inspiring support made me more confident. . gave me valuable advice. I also want to express my appreciation for the teamwork of Dr. I appreciate very much the fact that Professor Hilb took the time to listen and to discuss with me many issues that are now cropping up in this rapidly developing country and moreover. which has benefited my development by giving me the opportunity to learn both. I would like to thank my supervisor Professor Dr. according to a Chinese saying. and while looking back. where I had the chance to get to know many people from business and from the government and to study my country from an interesting point of view – that of Corporate Governance. Martin Hilb. I took this first step on a long journey across time and space some years ago with the decision to start my doctoral studies.I ACKNOWLEDGEMENTS “A journey of ten thousand miles begins with a single step”. I have to say that the last journey of my official study has been really exciting. whose never-ending optimism and patience encouraged me to continue on my path. who proofread my thesis and helped with the proper use of the English language. and I also appreciate the many good-spirited and instructive discussions with them concerning this topic. My special thanks also go to Dr. Now. I would never have reached this point. As a lonely (re-)searcher in a vast country where the topic “New Corporate Governance” is still unknown. His problem-solving approach is different from the approach of Professor Hilb. these two approaches complement each other – the rational and the emotional side. who accompanied me on my last journey when I was at his University. Nguyen Thanh Binh. Peter Mayer and Mr. Martin Hilb into Vietnamese. Without encouragement and support from several people. The doctoral thesis brought me back to my homeland. close to my target. Like Yin and Yang. Dinh Toan Trung and Mr. Pieter Perrett. which resulted in the translation of the book “New Corporate Governance” by Professor Dr.
I would like to thank my wife and children for their understanding and patience with me. who showed me the right direction to follow in my life. but left me alone too early. for their unconditional love and support and for their understanding that. Vietnam. during this time. This work is especially dedicated to my grandfather. and my family for their trust in me. I could not be physically near them. October 2007 Tran Bao Toan .II Last but not least.
Remuneration and Development Debt and Asset Trading Company Discounted Cash Flow exempli gratia = for example Eastern Asia Bank Earning Before Tax Economic Intelligence Unit Electricity of Vietnam Foreign Direct Investment . EAB EBT EIU EVN FDI Asia Commercial Bank Anno Domini = After the Birth Year of Jesus Asian Development Bank ASEAN Free Trade Area Annual General Meeting Asset and Liability Committee Asset and Liability Management Asset Management Company Association of South East Asian Nations Automatic Transaction (or Teller) Machine Before Christ Bank for Investment and Development of Vietnam Billion Board of Directors Balance of Payment Bilateral Trade Agreement (Average) Capital Adequacy Ratio Critical Business Issues Chief Executive Officer Chief Financial Officer Corporate Governance external changes internal changes Credit Information Center Committee for Nomination.III ABBREVIATIONS ACB AD ADB AFTA AGM ALCO ALM AMC ASEAN ATM BC BIDV bn BOD BoP BTA CAR CBIs CEO CFO CG CH-e CH-i CIC CRRD DATC DCF e.g.
NPAs NPL NYSE ODA OTC PCF PE PNTR PoS RMC ROE SARS SBV SECO SME SOCB SOE Foreign Invested Enterprises Financial Institutions Gross Domestic Product General Statistic Office Ho Chi Minh City Human Resources Hongkong Shanghai Bank Corporation International Accounting Standards International Finance Corporation International Monetary Fund Initial Public Offering Information Technology Joint Stock Commercial Bank Mekong Housing Bank Management Information System Million Multi National Companies Ministry of Finance Not available Non Performing Assets Non Performance Loan New York Stock Exchange Official Development Assistance Over The Counter People’s Credit Fund Price Earning Permanent Normal Trade Relations Point of Sale Risk Management Committee Return on Equity Severe Acute Respiratory Syndrome State Bank of Vietnam Secrétariat d’Etat à l’économie (State Secretariat for Economic Affairs) Small and Middle Enterprises State-owned Commercial Bank State-owned Enterprises .a.IV FIEs FIS GDP GSO HCMC HR HSBC IAS IFC IMF IPO IT JSCB MHB MIS mn MNCs MoF n.
V sqm SSC STC SWOT TA(A) UBS US$ USA VAS VAT VBARD VCCI VET VIB VIR VND WTO y-o-y Square meter State Securities Commission Securities Trading Center Strength Weakness Opportunity and Threat Technical Assistance (Agreement) United Bank of Switzerland United State’s Dollars United States of America Vietnam Accounting Standards Value Added Tax Vietnam Bank for Agriculture and Rural Development Vietnam Chamber for Commerce and Industry Vietnam Economic Times Vietnam International Bank Vietnam Investment Review Vietnam Dong World Trade Organization Year on year .
. . . . . . . . . . . . . . . . . . .VI CONTENTS Acknowledgements . . . . . . . 1. . . . . . . . . . . . . . . . . . . . . . . . 1 1 3 4 5 6 CHAPTER 2: THEORY ABOUT CORPORATE GOVERNANCE IN GENERAL AND IN VIETNAM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Governance theories . . . . . . . . . . 1. . . . . . . . . . . . . . . . . . . . . . . . .3 The stakeholder theory. . . . . . . . . . .1. . . . XVII CHAPTER 1: INTRODUCTION. . . . . . . . . . . . . . . . . . . . . 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 The agency theory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Objectives. . . . . . . . . . . . . . XIII Summary . 1. . . . . . . . . . . . . . . . 1. . . . . 1. . . . . . . . . . . . . . . . . . . . . 2. . . .3 Structure of the thesis . . . . . List of Tables . . . . . Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Content . . I III VI XII List of Figures . . . . . . . . . . . . . . . . . . . . . .1. . 2. . . . . . . . . . . . . . . . . . . . .4 The institutional theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 The transaction costs theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Research approach. . . . . . . . . . . . . . . . . .5 Conclusion . . . . . . . 8 9 9 10 11 . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2. . . . . . . . . . . . . . . . . . . .1. . . . . . . . .1 Background . . . . . . . . . . . . . . . . . . 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 Demographic situation . 3. . . . .2 Political system .1. . . . . . . . . .3. . . . .3. . . . . . . . . . . . . . . . . 2. . . . . . . . . . . . .1. . . . .1. . . . . .1. . . .1. .5 The new corporate governance theory . . . . . . . . . . . . . . . .VII 2. . 3.1. . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . .1 Political-legal situation .1. . .1. . .1. . . . . . . . . . . . .3 Research framework . . . . . . . . . . . . . . . . . . . . .3. . . . . . . .2.1.3 The military . . . . . .1.1. . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Milestones of socio-political development . . . .1. 3. . .1 Environmental and economic analysis . . .2. . .2 Characteristics of Corporate Governance system in Vietnam 2. . . . .4 Inflation . . . . .3 Foreign trade and payments . 3.4 Vietnam’s Economic Law . 3. . . . . . . . . . . . . . . . . . . .2 Governance structure in the SOEs in Vietnam . . . . .1. . . . . . .1.3 Education . . . . . . . . . . . . .1. . . . . . . . . .2 Socio-cultural environment . . . . . . 3. . . . . . . . . . . . 3.3 Economic situation . . . . . . . . . . . . . . 3. . . . .5 Current account . . . . . . .1. . . . . . . . . . . .1. . .3. . . . . . . 11 11 12 12 16 18 19 20 20 21 21 22 23 24 25 25 25 26 28 31 31 31 32 32 34 35 . . . . .1 The transformation to ‘Principle-agent’ relationship in the SOEs 2. . . . .1. . . . . . . . . . . . . . . . .1. . . . .2. . . . . . . . . . . . 3. . . . . . . 3. . . . . . . . . . . . . . . . .1 GDP Development . 3. . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . .3 Some shortcomings of the SOEs . . . 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. .4 Conclusion . . . . . . . . . . . . . .1. . . . . . .4 The influence of cultural factors . . . . . . . . . . . . . . . . .1. 3. .2 Domestic savings . . . . .1. . . . . . . . . . . . 3. . . . . .2. . . . . . . . . . . . . . . . . . . . .1. . . . . . 2. . . . . . .1 Economic indicators . . . . .1. . . . .3. .1. . . 3. . . . 2.2.2 Income disparities . . . . . . . .2. . . . 3. . . .2. . .1. . . . . . . . . . . . . . . . . . CHAPTER 3: SECONDARY DATA ANALYSIS OF THE VIETNAMESE BANKING SECTOR . . . . . . . .
. . 3. . . . . . .1 Life Insurance . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . .2. . . . . . . . . . . . .2. . . . . .2 Foreign direct investment . . . . . . . . . . . . . . . . . . . . 3. . . . . . . . . .2. .2 Key factors with positive impact on Vietnam’s growth potential . .2.1. . . . . .3. . . . . . . . . .2. . . . . . 3.1. . . . . . . . . . . . . . .2 Non Life Insurance . . . . .1 Market penetration .6 Building capital market institutions . . . . . . . . . . . . 3. . . . . . Conclusion . . . . . . . . . 3. . . . . . .4. . . . .2. . . 3. .2. . . . . .2 Stock lending. . . . . .1 Retail banking . . . . .3 Other financial services . 3. . .1. . . . . . . .2. . . . . . . . . . . . . . . .2. 3. . . . . . . . .2. . . . . . . . . . . . .1 Development of the private sector . 3. .2. . . . . . . . . . .1. .VIII 3.3. . .5 Infrastructure development .1. . . .2 Investment products . . . . . . . . . . . . . . . . . . . . . . .3. .4. . . . . . .2. . .3. . . 3.2 Rate of growth in loans and deposits . . . . . . . . . .1 Vietnam compared with selected ASEAN countries . . . . . . . . . . . . . . . . . . . .4. . . . . . . .1. . . . 3. . .1 Secondary market for bad debt disposal . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . .2.5 Product offerings . 3. . . . . . . . . . . . . . . . . . . . . . . .1. .3. . . . .4 Conclusion. . .1 Retail banking and the SME market . 3. .3 Major challenges facing Vietnam . .1. . . . . . . 3.7 Fiscal revenue . 3.4. . .3 Privatization of SOEs . . . . . . . . . . .4. . . . 3. . . . . . . . . . . . . . . . . . . . .4. 3.1. . . . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . .2 Economic development . . . .1. . . . . . . . . . . . . . . . .2 Banking market in Vietnam . . . . . . . . . . . . .4. . . .1. .1. . . . . . 3. .2. . .1. . . . . . . . . . . . . . . .6 FX reserves . . . . . . . . . . . . . . . . . . . . . .3 Oligopolistic banking market . . .2. . . . . . . . . . . 3.2 Retail banking and the consumer market . 3. . .3. . . . . . . . . . . . . . 3. . . . . . . 3. . . . . . 3. . . . . . .1. . . . . . . . . . . . .4 Lending practices . . . . 3. . . .4 Development scenarios . . . . 3.4. . . . 35 36 37 37 38 39 42 43 47 47 51 53 55 58 59 59 63 65 71 71 72 73 73 73 74 75 76 76 76 77 . . . .4. .3. . . . . . . . . . . 3. . . . . . . . 3. . . .1. . . . . . . . . .1. .3 Consumer banking products . . . .3. . . . . .1. . . . .2. . . . . . . . . . . . . . .3. . . . . . . . . . . . . .3. . . . . . . . .2. . . . . . . . . . .2. . . .2. . . . . .4. . . .2. .1. . . . . . . 3.2. . . . .
. . . . . . . . . . . . 3. 3. . . 3. . . . . . . . . . . . . . . . . .5 Competition in the banking industry .4 Investment in information technology . .4. . . . . .3.1 Opportunities and Threats of the Banking Sector in Vietnam 3. . . . . . . . . .IX 3. . . . .4. . . . . . . . . . . . . .4. .3. . . . . . . . . . . . . . . . . .7 Consumer credit bureau .3. . .2. . . . .3. . . . . . . . . . 3. .3. .3. . . . . . .1 Bank for Foreign Trade: Vietcombank (VCB) . . . . . . . . . . . . . . . . . . . 3. . 3. . . . . . . . . . . .3. .5 Mekong Housing Bank (MHB) . . . . . . . . . . . .3 Critical business issues based on the SWOT Analysis . . . 3. . . . .4 Foreign Banks & Joint Venture Banks . . . . .1 State Bank of Vietnam (Central Bank) . . . . . . . . . . . .3. .2 State-Owned Commercial Banks (SOCBs) . . . . . . . .3. 3. . . . .4 SWOT and critical business issues . . . . . . 3. .6. . . . . . .2 Sacombank . . . . 3. . . . . . . . .2. . . .3. . . .1 Tendency of consolidation . . . . . . . 3. . .2. . . . . . . . . . . . . .6. .2 Strengths and Weaknesses of the Banking Sector in Vietnam 3. . .3. . . 3. . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . .2 Industrial and Commercial Bank: Incombank . . . . . . . . . . . . 77 79 81 81 81 85 88 90 92 94 96 98 101 103 107 108 109 110 111 112 114 115 116 118 119 . . . . . . . 3. . .4. . . . . . . . . 3. . . . . . . .3 Bank of Investment and Development: BIDV . . . . . . 3.6. . .3.2.5 Improving management and governance . . . 3. . . . . . . . . . . . . . . . . .6.2 Undercapitalisation .2.3 Raising capital . . . . . . . . . . .3. . . . . . . . . . . . . . . 3. . . . .4 Agriculture and Rural Development Bank: Agribank (VBARD) . . . . .3 Banking industry in Vietnam .3. . . . . . . . . . . . . . . 3. . . . . . . .4. . .1 Asia Commercial Bank. . 3.6 Conclusion. . . . . . . . . . . . .6. . . . . . . . 3. . . . . . . . . . .3. . .3.3. . . . . .3. . .3 Joint-Stock Banks (JSCBs) .2.3. . .2. 3. . .6 Quantity of non-performing loans . . . . . . . . . . . 3. .
. . . . . .3 Research Methodology . . . . . . . . . .1 Vision & Strategy . . . . . 4. . . 4. . . . . . . . . . 4. . . . . 4. . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Overview about the respondents . 4. .4. . . . . . . . . . . . . .1 Objectives of the Second Survey . . . . . . . . . . . . . 4. . . . . . . . . .4. .3. . . . . . . . . . . . .3. . . . . . . . . . .X CHAPTER 4: PRIMARY DATA ANALYSIS OF CORPORATE GOVERNANCE IN THE VIETNAMESE BANKING SECTOR . . . . . . . .2 Targeted group . . . 4. .4. . . . . . . . . . . . .1 Objectives of the First Survey . . 4. . . . . . .3. . . . . .3. . 4. . . . . . . . . . .2. . . . . . . . . . . 4. . . . . . . . . . .5. . . . 4. . . . . .2.3 Research Methodology . . . . . .4 Overview about the respondents . . . . . . .1 Background . . . . . . . . . . . . . . . . . . . . . . . .3 Second Survey in the banking sector . . . . . . . . .2 Targeted group .4 Board culture. . . .4. . . . . . . . . .3. . . . . 4. . . . 4. . . . . . . . . . . . Systems utilized by BoD’s to fulfill their responsibilities . . . . . . . . . 4. . . . 4. . . . .2. 120 120 122 122 122 122 124 125 125 126 126 127 129 130 139 154 158 160 . . . . . . . . . . . . . . . . . Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . .4. . . 4. . . . . . . . . . . . . . . .4 Summary of the current situation and comparison with the standards mainly in the banking sector . . . . . . . . . . . . . . .2 First Survey: Survey about the overall situation in Vietnam . . . . . . . . . . . .2 Organisational Structure and Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . .
. . . . . . . . . . . . 161 166 167 169 170 173 177 178 179 180 183 184 187 190 201 . . . . . . . . . . . .5. . . . . 5.4. . . . . . . . . . . . . . . . . . . . ANNEX II: First Survey . . . . . . .3 Implications for practice . . . . . . . . . . . . . . . . . . .2 Implications for teaching . ANNEX I: Interviewers list. . . .4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . . . . .4 Development of board members . . . . . . . . . . . . . .1 Selection of members of the BoD and Top Management 4. . ANNEX III: Second Survey . . . . . . . . . . . . . . . . . . . . . . . . .1 Implications for research . . . . . .4. . . . . .5 Recommendations mainly for the banking sector . . . . . . . REFERENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Information and communications. . . . . . . .3 Evaluation of members of Board and Top Management . . . . . . 5. . . . ANNEX . . . . . . . . . . . . . . . . .5.4. . . . . . . . . . . . . . . . . . . .2 Remuneration of board members . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. . CHAPTER 5: IMPLICATIONS .5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . 4.5. . . . . . . . . . . . . .XI 4. .
. . . . . . . . . . . . Key figures of countries in ASEAN . . . . . . . . . . . . . Table 3-5. . . . . . . . . . . Table 3-8. . . . . . . . . . . . . . . . . . . Incombank. Table 3-9. . . . . . . . . . . . . . . . . . . . . . . . . Table 3-7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Table 3-2. . . Country Attractiveness for Investment of Vietnam . . . . . Bank of Investment and Development . . . . . . . Asia Commercial Bank ACB . . . . . . . . . . . . . . . . . Vietcombank . . . . . . . . . . . Table 3-10. . . . . . . . . . . . . .XII LIST OF TABLES Table 3-1. . . . . . . . . . . . . . . . Table 3-4. . . . Table 3-6. . . . . . . . . JSCBs valuation and forecast . . . . . 48 50 85 88 90 92 94 96 98 101 106 . . . . . Table 3-3. . . . . Mekong Housing Bank . . Recent investments by foreign banks in local JSBs. . . . Table 3-11. . . . . . . Agribank . . . . . . . . . . . . . . . . . . Sacombank . . . . . . . . . . . . . .
. . . . Figure 3-10. . . . . . . . . . . . . . . . . . . . . . Figure 2-1. . Banking NPLs 2005 . . . Infrastructure situation . . Figure 3-4. . . . . . . . . . . . . . Figure 2-2. . . Figure 3-22. . . . . . Figure 3-2. . . Figure 2-3. . . . . . . Figure 3-7. . . . . . . . . . . Figure 2-4. . . . . Figure 3-24. . . . . . . . . . . . . . . . . . Figure 3-3. . . . . . . . Milestones in the recent development of Vietnam . . . . . . . . . . . 5 6 7 13 14 18 20 22 23 26 27 29 31 32 33 36 38 39 43 49 56 57 64 65 66 67 69 74 75 79 82 83 . . . . . . . Normalized political stability and violence index . . . . . . . Figure 3-11. . . . . . . . . . . . . . . . . . . Figure 3-19. . . . . . .detailed view . . . . . . . Current relationship in a state-owned corporation . . Figure 1-2. . . . . . . . . . Model of “New Corporate Governance” . . Structure of the thesis – overview Chapter 2 . . . . Figure 3-17. . . . . . . . . Income disparities between regions. . . .XIII LIST OF FIGURES Figure 1-1. . . . . . . . . . . . . . . . . . Overview of the loan limit in selected commercial banks ATM/card alliances in Vietnam . . . . . . . Research structure of the thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . SOCBs before 1988 and now . . . . Domestic savings feed investment . . . . . . . Figure 3-6. . . . . . . . . . . . . . . . . . . . . . . . . Figure 3-5. . . . . . Three major scenarios . . . Markevt share of SOCBs . . . . . . Mortgage market indicators in Vietnam. . . Figure 3-8. Foreign direct investment . . . . . . . . . . Numbers of privatizations . . . . . . . Structure of the thesis – Overview Chapter 3 . . . Figure 3-1. . . Public investment in social sector has increased since 2004 Main cultural influences of the Vietnamese culture . Economic Situation – GDP Development . . . . . . . . . Urban population growth . . . . . . . . . . . . . . . .overview A typical governance structure of a state-owned General Corporation . . . . . . . . . . . . . . . . . . . . . Figure 3-21. . . . . . Export situation . . . . . . . . . . . . . . . . .overview . . . . . . . . . . . . . . . . . Research approach . . . . Figure 3-15. . Figure 3-26. . . . . . . . . . Fiscal revenue . . . . . . Figure 3-12. . . . . . . . . . . . . . Figure 3-18. . Figure 3-9. . Figure 3-13. . . . . . . . . Figure 3-16. . . . . . . . Portfolio–Matrix of Country Attractiveness for Investment Scenario analysis – GDP growth forecast to 2010 . . . . . . . . . . . . . . . . Figure 3-23. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 3-14. . . . . . . . . . . . . . . . . . . . . . . Figure 3-25. . . . . . . . . Growth of the life insurance premium income in Vietnam AsiaPac Loan Penetration . Figure 3-20. . . . . . . . . . . . . . . Penetration of banking services in urban Vietnam . . . . . . . . . . . .
. . . . . Relative size of top 17 CBs in term of charted capital (bn) Customer segments served by types of banks . . . Figure 4-18. . . . . . . . . Figure 4-13. . . . . . . . . . . . . . . . . Figure 4-16. . . . . . . . . . . . . . . . . . . . . . . . Involvement of the BoD and of the top management in the strategy process . . . . . . . . Figure 4-3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 4-10. . . . . Steps in the strategy process . . . . . . . . . . . . . . . Personal data of the respondents . . . Figure 4-21. . . . . . . . . . . . . . Status of the participated firm . . . . Figure 4-17. . . . . . . . . . . Combined structure of the boards of directors . . . . . . . . . . . Figure 4-8. . . . . . Figure 4-9. . . . . . . . . . . . . . . . . . Figure 4-1. The Vietnamese boards showing the distribution of different committees . . . . . . . . . . Committees at Bank2 . . . . . . . “Areas of focus” for the discussion of corporate governance practice . . . . . . . Figure 3-32. . . Committees at the Board level . . . . Composition of the strategy project team. . . . . . . . . . . . . Figure 4-4. . . . . . . . . . . . . . . . . . . . . . .XIV Figure 3-27. . . . . . . . . . . . . . . . . . . . . . . . Figure 4-7. . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate structure of a SOCB based on the example of Bank 4 . . . . . . . . . . . Strengths and Weaknesses of the Banking Sector in Vietnam The External Change (CHe) and the Internal Change (CHi) Formulation of critical business issues . . . . . . . . . . . . . . Figure 4-20. . Corporate culture of the questioned companies . . Figure 4-19. . Figure 4-14. . . . . . . . . Figure 4-15. . . . Figure 3-28. . . 84 107 116 117 118 119 120 124 125 128 129 132 133 134 138 139 141 142 143 144 148 150 152 154 155 158 160 . . . . . . . Figure 4-2. . . . Committees on the Top Management level . . . . . . . . . . . . . . . Figure 3-30. Figure 4-11. . . . Companies which do not have Audit committees . . . . . . . Overview of Opportunities and Threats . . . . . . . . . . Figure 4-5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of members of boards in Vietnam . Figure 4-12. . . . . . Risk Management Group . The applied Management tools applied in the board of directors . . Companies in the VCCI-Survey with an internal audit function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structure of the thesis – overview Chapter 4 . . . . . Some facts about the banks’ BoD in the Second Survey. . . . . Figure 3-31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 4-6. . . . . . . . . . Strategic control . . . . . . . . . . . . . . . . Figure 3-29. .
. Figure 4-23. Required criteria to be selected as a member of board of director. . . . . . . . . . . . . . Figure 4-28. . . . . . . Desired topic of advanced training for the members of boards. . . . . . . . Figure 4-26. . . Number of board meetings per year . . Structure of the thesis – overview Chapter 5 . . . . . Figure 4-24. . Remuneration systems for board members . . . . . . . . . . Recommendations based on the “areas of focus”. . Performance evaluation of board members. . . . . . . . . . . . 161 164 166 168 169 171 175 177 . . . . . . Example of a selection criteria list for board members . . . .XV Figure 4-22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 4-25. . Figure 5-1. . . Figure 4-27. . . . . . . . . . . . . . . . .
XVII Analysis of the Vietnamese Banking Sector with special reference to Corporate Governance Summary As a result of the imminent WTO accession and the obligations arising from bilateral trade agreements. since our first survey was conducted. The listed companies. but also to the applied research audience. the government of Vietnam has realized the compelling need to reform the economy. we also revealed the expectations of some SOCBs that the equitisation would help them to free themselves from the tight corset of the state ownership and guidance. This dissertation is mainly addressed to professionals who want to improve their skills and knowledge in corporate governance. Such a goal will be difficult to achieve without the introduction and implementation of good governance practices. However. We also hope that our experiences in Vietnam provide some input to the theory of corporate governance in emerging countries. As this survey was the first (Swiss) research in the Banking Sector in Vietnam. Vietnam has committed to move to a market-based economy and to create a level playing field for all participants. capital and modern management know how. There are still many challenges lying ahead. . In our surveys. whether state-owned or private. Companies from all sectors are obliged to strengthen their competitiveness in order to survive on the domestic business arena and overseas markets. The results of our research have shown that within one year. there were positive developments in the field of corporate governance in the banking sector. This study laid the focus on the Banking Governance in Vietnam. we deliberately tried to span most of the corporate governance issues that are proposed in the concept “New Corporate Governance” by Martin Hilb (2006). A goal is also set to equitise all the remaining state-owned companies which are not defined as strategic industries until 2010. the companies have just made the first steps into the right direction. especially for the state-owned companies. domestic or foreign. and thus can also improve the situation of corporate governance. which are able to select experienced foreign companies as strategic partners benefit from the transfer of state-of-the-art technology.
including background of the study. in contrast to the various privileges and forms of government assistance enjoyed by state-owned enterprises (SOEs). The shift from a centrally planned economy to a market economy over the last two decades is also paying off with an average annual growth of 7 per cent. and the business registration process has been streamlined considerably. research approach. research objectives. 1 This was partly the result of an economic and business environment that. . strategic geographical position in one of the world’s most economically dynamic regions. in January 2000. Vietnam also aims to promote the private sector. Besides. the country aims to achieve growth of more than 8 per cent to bring Vietnam out of its position as an undeveloped country.1 Background Vietnam attracts its investors to its largely untapped market with its population of 85 million.1 In recent years. the private sector was officially acknowledged as one of the key elements of the national economy in amendments made by the National Assembly to Vietnam’s national constitution. 2006). high economic growth and low production costs. In particular.1 CHAPTER 1: INTRODUCTION This chapter presents an overview of the research. in December 2001.000 or so companies operating in the SOE sector (Credit Suisse. some major strides have been made to improve the regulatory regime and general business environment for Vietnam’s non-state sector. Most notably. which has significantly improved the business environment that envelops Vietnam’s private companies. To fuel economic growth. as well as the structure of the thesis. continued to favour the 6. a lot of the “paperwork” previously required to register a new company has been removed. Accession into the WTO is an opportunity for Vietnam to bring itself in line with common international practices and thus open up more sectors to foreign investment. Vietnam needs further investment. and to attract investors it has introduced regulatory and institutional reforms. Private sector companies tend to face a range of obstacles in establishing and achieving growth in their businesses. 1. In the year to come. Furthermore. until the mid1990s. an epochal Enterprise Law came into effect. stable political situation.
Vietnam’s increasing integration with the global economy and international business networks means that local companies need to be able to compete and collaborate in both the domestic business arena and overseas markets. further modernization during the 1990s was generally quite modest.2 The growth and development of the private sector in Vietnam will not just be about increasing the cumulative number of new companies registering and operating. the accession of Vietnam into the WTO and the threat posed by foreign competitors. However. Although there are many foreign bank branches and semiprivate joint-stock commercial banks (JSCBs). the current banking system in Vietnam is still dominated by the state-owned commercial banks (SOCBs) which account for more than 70 percent of all bank deposits. Through initiatives such as the ASEAN Free Trade Area (AFTA).permits investors and creditors to provide long-term capital to firms and fund investment with confidence. Vietnam has committed itself to move to a market based economy and to create a level playing field for all participants. One of the sectors in Vietnam exposed to rapid change is the banking sector. . like other industries. the Bilateral Trade Agreement with the United States and Vietnam’s accession to the WTO. whether state-owned or private. This means that. They channel most funds through loans to the SOEs. Such a goal will be difficult to achieve without the introduction and implementation of good governance practice (IFC-Report. As a result of the imminent WTO accession and the obligations arising from bilateral trade agreements. It is more the willingness for change. domestic or foreign. This sector was substantially reorganized at the outset of the transition period. serving niche markets. This is arguably the next big challenge for the private sector in Vietnam. these have so far operated on a limited scale. And the pace of change needs to be accelerated parallel with the rapid growth of the economy. This means that SOCBs. in part as a legacy. 2006) that: . but also JSCBs will need to change in order to survive.
at least partially. To obtain an overview of the current corporate governance practices in Vietnam. Corporate Governance was a new topic in Vietnam. The study looks at current corporate governance practice in the banking sector in Vietnam. While translating the book “New Corporate Governance”. 2006). Martin Hilb. Official guidelines in this regard were insufficient. As part of its “Support to Industry Restructuring & Enterprise Development” (SIRED project. In addition. Danida seeks to strengthen corporate governance practices in the fisheries sector in Vietnam (IFC-Report. Dr. and . it is often quoted that there is no “one-size-fits-all” governance regime in the corporate governance literature (Wang.2 Objectives When this study was started. 3 . the term “Corporate Governance” was not part of the Vietnamese corporate language. Quản Trị Hội Đồng Doanh Nghiệp. 2006). At that time. the major objectives of the thesis are: 1. there has apparently been no empirical study of general corporate governance. 2 Governmental institutions such as the Ministry of Finance and the State Bank of Vietnam translated “Corporate Governance” into Vietnamese in a way that was equivalent to “Company Management” (in Vietnamese: Quản Trị Công Ty).allows for the creation of an internal “architecture” within firms that allows them to increase their scale and capacities. 2. This thesis aims to fill the gap.2 It was assumed that most governance theories had been developed in western industrialized countries and these theories might not suit Vietnam’s special social and economic environment. Relatively little research work has been carried out in the area of corporate governance in Vietnam. 2006. we introduced the term “Quản Trị Hội Đồng Doanh Nghiệp” which is descriptive of the entire connotation of “Corporate Governance” (see Hilb. 18). by Prof.enables senior managers to focus on generating efficiency and productivity gains. Thus. To gain a better understanding of actual corporate governance practices of the banking sector in Vietnam. 1.3 In the banking sector.3 .
and the challenges the country and.4 3. more specifically. private commercial banks.3 Structure of the thesis The thesis is presented in 5 chapters: Chapter 1 is the introduction. board structure. Chapter 4 also provides suggestions as to how the board could tackle challenges in the board. and to a lesser extent. Chapter 4 aims to find out. We expect the results of this study and the subsequent recommendations to be of interest and relevance to: Board members and members of senior management in the banking sector. and industry in order to identify the risks and the opportunities the board might face. the market. This is based on the analysis of the current status and the future situation under consideration of the “areas of focus”. . Chapter 2 deals with the theoretical framework for the secondary research and primary research which will be discussed in the Chapter 3 and Chapter 4. the banking sector in Vietnam faces. leadership. and foreign banks are identified. systems. The results of this chapter serve as basis for the surveys on corporate governance practice in the banking sector which are discussed in Chapter 4. information and communications. in order to work out the critical business issues of the banking sectors. Chapter 3 includes a study of the influencing factors from the environment. To provide recommendations on how to improve corporate governance practices in Vietnam. This provides a general overview of the situation. board culture. researchers. relevant government agencies. what the current state of the corporate situation in Vietnam is and to make recommendations on how to improve the situation based on certain “areas of focus” such as vision and strategy. 1. trainers for corporate governance issues. the strengths and weaknesses of the different types of banks such as state-owned commercial banks. Furthermore.
3 Structure 4. teaching.4 CommuniControlling cation 2.4.5 Conclusion 2. Research structure of the thesis .3 Structure 2.3 Practice 3. with policymakers and members of relevant government agencies.3 Context 4. we conducted two surveys which will be presented in Chapter 4.Primary data analysis 4.1 Composition Auditing Mgmt 3.2 Board Board Compensation Culture K Figure 1-1.2 Internal Context 4.Secondary data analysis . Within the frame of the empirical research. an in-depth qualitative study was carried out in order to investigate the phenomenon within its real-life context.4 Research approach 1.2 Objectives 2.1 Governance theories 2.1 Board controlled Board External Development Feedback 4.5 Chapter 5 highlights the implications for research.1 Background 5.4 Research approach In Chapter 3 (see also Research structure).3 Industry 4.3 Board 3. Chapter 1: Introduction Chapter 2: Theory about Corporate Governance 2. and practice.1 Background 3.4 Conclusion 1. expert interviews were conducted with board members and members of senior management from diverse companies in Vietnam.4 Board Vision 3.4 3.overview 1.2 Keep it 1.2 First survey 4. 4 A list of interview partners is attached in the Annex.4 As an explorative and empirically oriented research project.1 Board Selection S trategic I ntegrated 5.1 Environment 4. the information collected is based predominantly on desk research.1 Research 1.2 2.1 Risk Board 4. .3 Second survey S ituational 2.2 Characteristics Chapter 3: Secondary Data Analysis Chapter 4: Primary Data Analysis Chapter 5: Implications 1. The second survey was conducted with some specific banks. SWOT / CBI 3.2 Teaching 1. The first survey deals with the overall situation of corporate governance in Vietnam.2 Market 5. To understand the current situation and future development of Vietnam.4 Summary 1.5 Recommendations 3.3 Research framework .
6 The research approach is shown in Figure 1-2: Legends: x xx xxx Applied intensively applied very intensively applied Desk research RESEARCH METHODS Survey of listed companies Expert interviews Case studies 1. but also the research objectives. Implications XXX XX XXX X X XXX X XXX X X X X Figure 1-2. Banking Market XXX X XXX X PHASES 3. Banking Industry 4. Research approach 1. In the following chapters. we will discuss in-depth the content and results of the research. the background. research approach. . Banks (based on areas of focus) 5. and the research structure of the thesis are presented. Banking Environment XXX X XXX X 2.5 Conclusion In this chapter.
THEORY ABOUT CORPORATE GOVERNANCE IN GENERAL AND IN VIETNAM
In this section, the theoretical basis is built for the secondary research and primary research which will be discussed in the Chapter 3 and Chapter 4. The research will focus on the issues of corporate governance in the Banking sector.
Chapter 1: Introduction
Chapter 2: Theory about Corporate Governance 2.1 Governance theories 2.2 Characteristics 1.5 Conclusion 2.4 Conclusion 2.3 Research framework
- Secondary data analysis - Primary data analysis
Chapter 3: Secondary Data Analysis
Chapter 4: Primary Data Analysis
Chapter 5: Implications
2.4 Board Vision 3.1 Board Selection 4.1 Auditing
S trategic I ntegrated
1.4 Research approach
1.2 Internal Context
4.2 2.1 Risk Board Mgmt Composition 3.4 3.2 Keep it 1.1 Board controlled Board External Development Feedback 4.3 Context 4.4 CommuniControlling cation 2.3 Board 3.3 Structure 2.2 Board Board Compensation Culture
Figure 2-1. Structure of the thesis – overview Chapter 2
Charles Darwin, the author of the Origin of the Species, said in the 19th century that “It is not the strongest that survive, it is not the most intelligent, it is those most responsive to change” (Charles Darwin, cited in ING-Report, 2006). In order to be “responsive to change” companies in Vietnam need to continue learning from other countries. In recent years the world has witnessed a number of company scandals5 stemming from corporate governance malpractices and fraud. Incidents emanating from corporate governance malpractices have
5 Company names that often come to mind are for example Enron, Arthur Andersen, Daewoo, Xerox, Shell, and AIG, among others. Recently, in the high-profile trial of former Enron executives for fraud and conspiracy, they had been found guilty.
also occurred in the young history of Corporate Governance in Vietnam.6 Thus, the pattern of shortcomings concerning the corporate governance issues in Vietnam and in other countries is very similar. These scandals emphasize the need for major improvements in corporate governance practices in Vietnam. Let us turn next to the governance theories and the governance practice in Vietnam in order to identify a framework for the research.
2.1 Governance theories
A number of different theoretical models have evolved to provide the frameworks for explaining and analyzing corporate governance. However, concepts, definitions and perceptions of corporate governance tend to differ from country to country (IFC-Report, 2006).7 It is also known that there is no single, accepted definition of corporate governance. The definitions usually reflect the needs, the interests or attitudes of different people (Wang, 2006). There are also definitions related to shareholders (agency theory), at the other end related to stakeholders (stakeholder theory). The other corporate governance theories are here briefly explained.8
A number of high profile cases have received a lot of attention in the national press over the past few years. They have included some of the largest and best known companies in the country, such as Vietnam Airlines, Seaprodex, Minh Phung, Vietsovpetro, Viet Hoa Bank, Saigon Beer. In Germany, large public companies tend to have a two-tier board system, comprising of a non-executive supervisory board and an executive board. This contrasts with the single board of directors system adopted in the US and UK, which has the primary role of protecting the shareholders’ interest (IFC-Report, 2006). In the finance literature, corporate governance deals “with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment” (Shleifer and Vishny 1997, cited in Wang, 2006); in the economics literature, corporate governance is defined as addressing an “agency problem, or conflict of interest, involving members of the organization … [where] transaction costs are such that this agency problem cannot be dealt with through a contract” (Hart 1995, cited in Wang, 2006); according to the Cadbury Report (1992), corporate governance is defined as “… the system by which companies are directed and controlled”. Agency theory paradigm arises from the fields of finance and economics, whereas transaction cost theory arises from economics and organizational theory; stakeholder theory and institution theory arise from a more social-orientated perspective on corporate governance (Wang, 2006).
2.1.1 The agency theory According to the agency theory9, the shareholder who is the owner of the companies delegates day-to-day decision making in the company to the directors, who are the shareholder’s agents. The problem that arises as a result of this system of corporate ownership is that the agents do not necessarily make decisions in the best interests of the principal. The potential for the personal interests of a company’s senior managers can diverge from those of its shareholders. Where the managers and the owners of a company differ, as they often do in larger firms with a wide shareholder base, there is a possibility that their respective interests may become misaligned. This is where boards of directors and inspection / auditing committees can balance the equation, monitoring the actions of senior management, who control the day-to-day operations of the company, on the shareholders’ behalf (IFC-Report, 2006).10 Corporate governance is thus restricted to the relationship between a company and its shareholders. One of the shortcomings of the agency theory is that only the needs of top executives and shareholders were taken into account, but not the justifiable needs of employees, customers or the environment (Hilb, 2006). 2.1.2 The transaction costs theory Transaction costs theory is based on the fact that firms have become so large that they substitute for the market in determining the allocation of resources. The firm was considered not as an impersonal economic unit in a world of perfect markets and equilibrium but rather as an organisation comprising of people with differing views and objectives (Solomon, 2004).
9 Managers of the companies are defined as ‘agents’ and the shareholders as the ‘principals’.
10 In Vietnam, enterprises have Inspection Committees. According to the Enterprise Law (1999), the Inspection Committee is responsible for supervising all operations and business activities of the Company on behalf of the shareholders. The law also stipulates that an Inspection Committee is required for any company with more than 11 shareholders. In other countries there is often an Audit Committee, a Nominations Committee, and/or a Compensation Committee. These are usually chaired by independent directors.
2.1.3 The stakeholder theory Hung (1998) explained that stakeholders include employees, customers, suppliers, banks, environmentalists, government and other groups who can help or hurt the corporation, and he concluded there are many groups in society besides owners and employees to whom the corporate is responsible. Not only do companies affect stakeholders, but also stakeholders in turn affect companies in some way. The goals of a corporation should only be achieved by balancing the often conflicting interests of those stakeholder groups. A basis for the stakeholder theory is that companies are so large, and their impact on society so pervasive that they should discharge accountability to many more sectors of society than solely their shareholders (Solomon, 2004). The stakeholder theory deals with a web of relationship with other stakeholders that can influence a company, including employees and unions, suppliers, clients, and the government. “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society” (Sir Adrian Cadbury, World Bank, 2000). The concept of corporate governance, codified by the OECD, proposed that the major mechanisms to look for include an independent board of directors, fair treatment of minority shareholders, and coordinating the interests of capital owners and business managers. “Corporate governance is about promoting corporate fairness, transparency and accountability. The corporate governance structure specifies the distribution of rights and responsibilities of the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. We score the companies based on specific issues such as board composition, management remuneration, accounting treatment and transparency” (cited in www.shareanalysis.com).
.2 Characteristics of Corporate Governance system in Vietnam The issue of corporate governance in Vietnam is complicated. economic contracts) and informal (e. such as ‘Principle-agent’ relationship in the SOEs. long-term profit maximization and shareholder wealth maximization by taking stakeholders into account as well as shareholder interests. 2006).g. Institutional frameworks are made up of both formal (e. Scott. 2. and in a manner appropriate to each particular context”. in an entrepreneurial and ethical way. are socially and culturally created devices such as structures and activities which provide stability and meaning to social behaviour (Wang.1. the one-tier or two-tier system. broadly defined. glocal approach” (2006) shows that companies can achieve sustainable growth. we also want to identify the suitable framework for the research in this dissertation. and holistically controlled.5 The New corporate governance Hilb’s “both-and. 11 Hilb (2005) defines the “New Corporate Governance” as a system “…by which companies are strategically directed. Rather. political rules. Institutions. 1995). Finally.11 2. and the local governance best practices evident in the approaches adopted by many international firms operating in countries around the world.4 The institutional theory Institutional theory offers its own set of assumptions regarding human behaviour and the nature of the firm.1. 1990. 11 Hilb (2006) adopts both the global relevance of aspects of the Anglo-American board best practices. 2. we have sought to summarize some of the most important topics related to corporate governance practices. integratively managed. judicial decisions. Here we do not seek to provide a fully comprehensive picture of the corporate governance practices in Vietnam. socially sanctioned norms of behaviour which are embedded in culture and ideology) constraints (North.g.
for such a system to work well requires the principal to know the business quite well.2. all while taking into account the real capacity and market conditions in which the enterprise is operating. revenues contributed to the state budget have become among the most important performance criteria for SOEs. while one-tier system has been created in the Anglo-Saxon environment characterized by dispersed share structures.12 2. in which the former is the agent and the latter is the principal. etc. 13 The two-tier system has developed in the continental European environment characterized majority shareholders of companies. 12 Also called ‘governing from a distance’.13 The two-tier system consists of three bodies for governing public limited companies. As the principal of SOEs. The one-tier system has two bodies of governance. the inspection committee14 and the management board. set realistic objectives.. the governing strategy has changed from direct involvement in the decision making process of the enterprise to a more performance-based12 approach. Theoretically. namely the State (or shareholder general meeting).1 The transformation to ‘Principle-agent’ relationship in the SOEs As the economic reform in Vietnam gradually unfolds. profits. a greater role for the participants themselves. the government. 2.2 Governance structure in the SOEs in Vietnam The Vietnamese corporate governance system is often compared to the German two-tier system. They are the general meeting of shareholders. Thus. Different models of governance have been formed in different economic and social system as well as through different political orientation. and objectively monitor and evaluate the performance of the enterprise. through its various agencies has established incentive schemes and monitoring mechanisms intended to ensure that the agent acts in accordance with the government’s interests and to prevent the senior executives of SOEs from pursuing their own self-interest. There is no universal answer to the question of which governance system is better. 2005) .2. The relationship between SOEs and the government is referred as being a ‘Principle-agent relationship’. and the Board of Directors. 14 The Inspection Committee in Vietnamese Governance structure is somewhat comparable to the German supervisory Board (the Willam Davidson Institute at the University of Michigan. a less liquid capital market. an active capital and securities market.
reporting directly to a national line ministry. 15 Such as Construction. These SOEs do not belong to a larger general corporation. .13 STATE Board of Management Inspection Committee Top Management State-owned Corporation Figure 2-2. Cement.overview The state There are two types of SOEs in Vietnam: Most of the SOEs in Vietnam are members of the general corporations15 owned by central government (see Figure 2-3. Textiles & Garments. Telecommunication. The remainders are more or less independent SOEs.) or owned by provincial or municipal government. They report directly to their supervisory line ministry or provincial / municipal People’s Committee. or some other government organisation. Current relationship in a state-owned corporation . a provincial or municipal People’s Committee. Oil & Gas.
Central Government Central Supervisory Ministry Administrative relationship. 16 See also Figure 4-12. the effort of the recent SOE reform has focused on mitigating the apparent confusion between the State’s regulatory and ownership functions and on making SOEs accountable for their own profits and losses.detailed view The amended State Enterprise Law of 2003 intended to provide autonomy to SOEs by empowering the Board of Management of General Corporations and by limiting the role of government agencies to regulatory functions. The Law has given and formalised the Board’s role as the direct representative of the state’s ownership of the corporation. the governance structures of ‘independent’ SOEs are similar to general corporations in that they are directly supervised by.14 However. and report to. the body is directly responsible for ‘taking care’ of the enterprise Central Specialist Ministry Regulatory relationship. making and observing regulations General Corporation Board of Management Inspection Committee Management team Members SOEs Figure 2-3. government agencies. . In other words. A typical governance structure of a state-owned General Corporation16 .
The ownership rights of SOEs are currently exercised by various government agencies. recommending changes to the Board of Management or operations of the enterprise. principally related to their oversight role. the Ministry of Finance acts as the representative for the state’s capital. in which the corporation operates. the appointment of the inspection committee can be made by the Board of Management. In theory. overseeing major transactions or investments. monitoring the performance of management. the Law also states that the Board can only make those decisions that do not come under the rights and responsibilities of other state representatives and which are not assigned to other government agencies and organisations. and if necessary. The reason is that the Board of Management members are also the owners or majority shareholders. But in practice.15 The board According to the amended SOE Law of 2003. Ministry for Agriculture. As it is written in the Enterprise Law. only joint stock firms with 11 or more shareholders must establish an Inspection Committee. the Inspection Committee is expected to perform a number of important functions. 2003) The inspection committee Under the Enterprise Law. such as ensuring firm’s compliance with existing laws and regulations. overseeing disclosure and communications made by the enterprise. such as the Ministry of Construction. there are a number of other functions that should be included within the Inspection Committee’s responsibilities as part of a company’s pursuit of good corporate governance. Although not required under the Enterprise Law. the Board has the right to make every decision pertaining to the business of the corporation. The ‘supervisory ministry’. is responsible for the establishment. personnel. overseeing major . and is responsible for the administration of that capital. regularly informing the board of management of the performance of the enterprise. and overall supervision of the enterprise (see Amended SOE Law. which is normally the ministry overseeing the relevant sector. For example. such as evaluating the financial accounts. dissolution. the Inspection Committee should be appointed by shareholders at the annual general meeting. However.
or the company must grow by a fixed percentage every year. but only a little profit. SOEs are thriving to make no loss. there are many shortcomings about which we want to discuss here: Problems of the ‘laid back’ administrative approach Due to the lack of expertise and governance capacity the government agencies have chosen a so-called ‘laid back’ administrative approach of setting ‘growth’ objectives for SOEs. In other word. This ‘laid back’ administrative approach may also prompt attempts to manipulate the financial accounts. monitoring potential conflicts of interest by board of management. the incentives for entrepreneurial activities under the ‘carrot and stick’ system do not exist.18 To avoid the penalties. reviewing internal controls and risks. managers or major shareholders. but can face severe punishment if the enterprise makes a loss. As a result. 2. regardless of market condition. 17 The immediate principal or General Corporation. But there are also incentives for the general director if the SOE meets or exceeds the set targets. 18 According to the State Enterprise Law. Government institutions17 commonly do not have the capacity nor expertise to closely monitor the performance of an SOE and then reward accordingly.3 Some shortcomings of the SOEs The government officials as principals often lack business experience and business knowledge. According to this approach. a general director can be dismissed if the SOE incurs losses for two consecutive years. so that the general directors can retain their position.16 costs or expenses incurred by board of management or senior management. because the SOE general director is rewarded little if the enterprise earns a lot of profit.2. . revenues or profits this year must be higher than that of last year. In fact. the underlying rule is that revenues or profits this year must be higher than last year. Such regulation certainly would not motivate an SOE general director to invest for the long term development of the enterprise. selecting independent auditors. There are also penalties for the general director if the SOE does not meet the objectives set out by the General Corporation and government institutions.
17 Problems of the political relationships Personal relationships between SOE managers and government officials turn out to be very important. and to a great extent. to be a good manager of a SOEs. The SOE has to get approval from a number of agencies. SOE clients always ask for commissions. One way to build a good relationship with officials is to employ their relatives or persons introduced by them. and this is possibly the most serious agency problem. If the commissions are paid. the General Corporation. . Problems of the reporting The role of the Board in many SOEs is therefore not clear. For SOEs that belong to General Corporations. Otherwise the clients would find a reason to complain. These political relationships are necessary if the SOE wishes to make a large investment. but also at the same time have to deal directly with various government agencies on a number of important aspects of their business. Problems of individual conflict of interests The majority of recent reported corporate governance malpractices in the SOEs have involved direct or indirect ‘kick-backs’. the competence of political relationships is deemed to be crucial. even those with some defects. Thus. They do not care much about checking the contract carefully before signing. they not only report directly to the ‘mother’ entity. then the clients would accept any product and service. limited.
2006) 19 We are aware of the fact that there is a growing perception among theorists and practitioners that the paradigm of shareholder value and the paradigm of stakeholder value may be compatible (see also Wheeler et al.1. creating value for stakeholders through business focus on maximizing value for all stakeholders may be able to create financial value for shareholders. The “New Corporate Governance” recommends bringing added value simultaneously to shareholders.4 The influence of cultural factors) we decided to choose the approach of “New Corporate Governance” proposed by Hilb (2006) as a framework for this dissertation.1.2. . For example.1.18 2. ignoring the needs of stakeholders can lead to lower financial performance. employees. customers.. 2002). Figure 2-4.19 The “New Corporate Governance” is based on a reversed “KISS” principle as described in the Figure 2-4. 2006).2 Political system) and special cultural characteristics where the Vietnamese strive for harmony in the collective (see also 3. and the public (Hilb. Model of “New Corporate Governance” (Hilb.3 Research framework Due to the current political system (see 3.
leadership. Part 3: Keep it integrated This dimension integrates targeted recruitment. Part 4: Keep it controlled This dimension refers to auditing. 2006). board structure. we have decided for the “New Corporate Governance” approach (Hilb. 2.4 Conclusion In this chapter. board culture. Based on the specific situation of Vietnam. technological. Information and Communication. . Systems. Processes. several governance theories and the corporate situation in Vietnam were discussed. 2005). internal and external communications and feedback functions of the board (see Hilb. evaluation. Part 2: Keep it strategic We differ here seven “areas of focus” that will serve as leading dimensions in the primary research (see Chapter 4): Vision and strategy. the banking market (including customers) and Banking sectors (including competitors and related players in the finance industries) will also be analysed. ecological and socio-cultural (Rueegg-Stuerm. remuneration and development of members of the supervisory and managing boards (see Hilb. political-legal. risk management. These issues will be discussed in Chapter 3. Furthermore.19 The reversed KISS framework comprises of four parts: Part 1: Keep it situational On the environmental level of the special situation of Vietnam. five different issues are considered: Economic. 2006). 2006) which will serve in the Secondary and Primary research as a framework.
3 Structure 2.Primary data analysis Chapter 3: Secondary Data Analysis Chapter 4: Primary Data Analysis Chapter 5: Implications 1.5 Conclusion 2. Chapter 1: Introduction Chapter 2: Theory about Corporate Governance 2.3 Context 4. and the challenges the country and.2 Internal Context 4.1 Composition Auditing Mgmt 3.1 Environment 3.1 Governance theories 2.2 Objectives 3.1 Board Selection S trategic I ntegrated 1.4 Board Vision 3.2 Market 1.20 CHAPTER 3: SECONDARY DATA ANALYSIS OF THE VIETNAMESE BANKING SECTOR In this chapter. This provides a general overview of the situation. The purpose is to find out how these factors influence the development of the banking sector and related issues.1 Board controlled Board External Development Feedback 4.1 Environmental and economic analysis In the environmental analysis.Secondary data analysis .4 Conclusion 2.1 Risk Board 4. the major influencing factors are discussed. The results of this analysis will serve as a basis for the survey about corporate governance in the banking sector which is discussed in Chapter 4.3 Research framework .4 Research approach 1. SWOT / CBI 1.4. . the industry and the market of the banking sector is carried out. socio-cultural.4 3.1 Background 3. an analysis of the environment.20 20 For example Human Resources.2 Characteristics 1.3 Board 3.2 Keep it 1. the banking sector in Vietnam is facing. more specifically. economic.2 Board Board Compensation Culture K 3.3 Industry Figure 3-1. Information Technology. The environmental analysis deals with the following situations: politicallegal.2 2.3 Structure S ituational 2. Structure of the thesis – Overview Chapter 3 3.4 CommuniControlling cation 2.
1997). . reduction of trade barriers. eliminate the causes of speculative pricing and to find “real market prices”. The Doimoi policies. Tariffs appeared to be an issue and in 1990 a new duty law was introduced which aimed to expand foreign trade. Vietnam and its Communist Party were urged to find other trade partners than the Soviet Union or other socialist countries.1 Milestones of socio-political development With the start of the reforms of the communist country Vietnam in 1979 there were three main parts. The third stage targeted the fiscal.21 3. The first step in the reform process can be described as “administrative dualism” and allowed the establishment of private ownership of land and businesses. In December 2006. “all-powerful” Communist party leader Le Duan. represented a further evolution of the reform process which has been started and on the improvement of the productivity of the ailing economy and introduction of a market oriented economy in the place of a planed economy. The long lasting Cambodia War (from 1978) ended in 1989 and with the demise of the Communist block.1. The measures were aimed at the improvement of resource allocation and efficiency. monetary and credit supply and the ownership of land which was not allowed until 1988. Congress approved Permanent Normal Trade Relations (PNTR) for Vietnam. the Doimoi policy and the introduction of macro-economic institutions (Dinh. due to Glasnost and Perestroika in Russia.S. In spring 1989 the banking and finance reforms aimed to combat the hyperinflation rates. set fiscally sound interest rates and liberalize the foreign exchange system in order to encourage foreign trade. establishment of privateand family ownership and the liberalisation of the agricultural.1 Political-legal situation 3. industrial and trade sectors.1. the U. the second stage in the reform process.1. From 1986 the market reforms started with the new general secretary Nguyen Van Linh after the death of the long-time. In 1994 the US Embargo was lifted and in 2002 a trade agreement with the USA was reached. the agrarian and industrial reform.
there does not appear to be a strong push for democracy either. which brooks little opposition.2 Political system Vietnam is governed by the Communist Party of Vietnam. the changes seen in the economy are not accompanied by any visible signs of political reform for Vietnam. Vietnam’s key leadership changed in June 2006 with the appointment of a new President and Prime Minister. 21 Many business people point to the successes of China.1. rather than Russia. which has chosen to open its economy without opening up its political system as worth emulating. Milestones in the recent development of Vietnam (Source: Vietnam Tiger Fund. which attempted to liberalise its political system without first opening up the economy.21 As with China. .1. However. who are both southerners. the absence of democratic freedom is currently not a major issue. with political stability and economic prosperity being the preferred option. To be fair.22 Figure 3-2. 2007) 3. The broad population seems more intent on taking advantage of the economic opportunities made possible by the reform process.
22 High Switzerland Japan United States Vietnam 2 1 0 -1 Pakistan -2 -3 China Sri Lanka Low 213 Countries (Source: Kaufmann.23 Vietnam remains a Socialist Republic with a one-party system (Communist Party) under the leadership of President Nguyen Minh Triet and his Prime Minister Nguyen Tan Dung. IUED. Kraay and Mastruzzi. 2006)23 3.1. Specifically. 15 December 2006.1. 5) rule of law. and 6) regulatory quality. presented by Mr Chevalier Alain. 2) political stability (or no violence). 4) control of corruption. the more capable a country is with governance issues. In the long run this runs the risk of driving down returns for the private sector because entities run by the Figure 3-3. still highlights the need to better understand the associated economic risks as international experience demonstrates. the military also occupies a large position in the economy.3 The military The relatively high level of military involvement in senior government positions. In a politically stable environment. Kraay and Mastruzzi. 23 The World Bank’s Governance Indicator includes 6 aspects: 1) government effectiveness. cited in UBS. the more economic benefits it can enjoy. Normalized political stability and violence index 22 Document from the International Conference UNCTAD in Geneva “Economic Internationalisation Human Development and State-Society Relations in Asia: Learning From Vietnam”. but “ … binding itself with the commitment toward a more market oriented economy”. 2006. cited in UBS. for example. investors are more willing to make long-term investments in the form of FDI and continued capital inflows (Kaufmann. In Thailand. combined with a strong set of legal and regulatory systems. while starting to change. 2006. . 3) voice and accountability. especially in the region. 2006).
Streamlining the laws pertaining to business activities is a major agenda on the current reform schedule.State Owned Enterprises Law (1995. .Cooperative Law (1996. As such it will be interesting to watch how the role of the military evolves over the next decade. amended in 2003) .Foreign Investment Law (1987. amended in 2003) . 1992. 1996. In other economies around the region it has been tough to balance vested interests with creating a level playing field – especially where the military has significant political influence. These laws are (The William Davidson Institute. amended in 1990. The most immediate reform is the forthcoming Common Investment Law.24 military will frequently have a lower cost of capital or could be given preferential terms on which to compete.4 Vietnam’s Economic Law Vietnam’s economy is governed by several key laws that define the legal forms of business entities as well as their financing. 2005): .Domestic Investment Encouragement Law (1994. If the new Common Investment Law follows the trend.1. The system becomes more confusing as conflict in the code defers to the newest version (The William Davidson Institute. the legal framework consists of layers in which general laws are superseded by specialized laws in a specific area.1. 2000). it will undoubtedly loosen restrictions on foreign investment and capitulate to some demands for foreign investment liberalization under the WTO negotiation. amended in 1998) .Private Enterprise Law (1999) . 3. 2005).24 24 Fusion of the Foreign and Domestic Laws on Investment. In addition.
as among the lowest in Southeast Asia. 2006. The growth rate of the working age population (age 15-59) has been much faster at 2. as with India (CLSA. The earlier law was ineffective and only 191 bankruptcies were filed over a 9 year period: the law clarifies specific procedures.25 A new Bankruptcy Law25 was enforced in October 2004. 2006. The World Bank has calculated Vietnam’s Gini Index.05. 12). 21/2004/QH11 26 This reflects the typical pattern seen in Asian and other countries. such as liquidation rights between liabilities and equity. and is forecast to fall further. 25 Law No. 3. nor has there been any wide divergence in rural and urban incomes. HSBC.2 % in the next 5 years (GSO. 3. Although the total fertility rate has dropped close to the replacement rate of about 2. few manifestations of tension caused by disparate economic growth. where rapidly rising incomes lead parents to have less children and increase the quantity and quality of expenditure on each one (HSBC. 2006). . which measures the disparity between rich and poor.1. 2006). so far.2 Socio-cultural environment 3. The strong growth of this age group will provide a substantial boost to potential output growth.1.6 % over the last 5 years.26 the relatively large share of young people in the economy means that the overall working age population should grow steadily (HSBC.1 Demographic situation Vietnam’s demographic situation is broadly favourable and should provide a significant positive impetus to growth over the coming decade.2. although it will slow more rapidly to 1.2 Income disparities The relatively uniform spread of economic prosperity has meant that there are. 2006). Intraregional disparities in income are not as pronounced as those in China.1.2.
Primary school (five years of formal schooling) is compulsory and 80% of pupils go on to secondary school.2. The benefits of growth over the past decade have been unequally spread across regions.3 Education With a strong focus on literacy and education. it may be too early to judge the spread of economic growth. 2004) Vietnam has. as illustrated by the national Gini coefficient. 3. signalling a potential disconnection between growth and poverty reduction in remote and disadvantaged areas. World Bank.26 Mekong River Delta South East Central highland South Central Coast North Central Coast North West North East Red River Delta 0 10 20 30 National avg 18% Regional poverty (%) 40 50 60 Figure 3-4. However. and migration has also redistributed the incidence of poverty across regions. with inter-regional and rural-urban differences so pronounced.34 in 1992/93 to 0. Poverty levels have come down across regions over the past decade. For . so far.35 in 1997/98 and to 0. Ethnic minorities are prevented from participating in economic opportunities.1. Vietnam has been able to reach a literacy rate of over 90%. which rose from 0. Income disparities between regions (Source: GSO.37 in 2002 (World Bank. benefited from a stable social fabric. Indications of social inequality are beginning to be apparent. 2004).
with little time to develop other skills and interests. which should help improve the quality of education. The government is aiming to lift literacy from 91% to 95% (VIR. 28 Some debates are the same the world over. Public investment in social sector has increased since 2004 (Source: IMF. children can play and learn at the same time. whether it is the US or China or Vietnam.27 In public schools.06. establish more private schools and encourage cooperation between local universities and colleges and foreign partners. It wants to diversify training programmes.28 The government further intends to strengthen the basic education system by introducing international training programmes to schools. In international schools. 4 (Govt expenditure as % GDP) 3 2 1 0 2001 Education Health 2002 2003 2004 2005 Figure 3-5.2006). Scholarship schemes to support talented students have been implemented. while education in remote areas is being addressed. 22. .27 the elite. 2006) 27 Private schools have been permitted since 2001. universities and colleges. children are under considerable academic pressure. there are private and international schools. The government is looking to upgrade the quality of teaching staff in local universities and colleges by encouraging them to join training courses aimed at improving their professional skills.
its culture and the origins of its people are of East Asian descent. there are professionals who had returned to the country after securing higher qualifications from overseas universities . 1992). philosophy. Vietnam. The matriarchal family structure is widespread in the North East and Northern Delta region of Vietnam (Weggel. and Taoism. there are considerable differences between different regions of Vietnam which have emerged due to southward expansion and later. the special knowledge and advanced techniques in agriculture. During this time.28 In various MNCs and local companies. Korea and Japan.4 The influence of cultural factors The culture of Vietnam is one of the oldest in the Southeast Asia region. Hence.29 This second major influence can be traced back to the Chinese domination which started around 111 BC and lasted until 838 AD.2. 3. Confucianism. exposure to the West. The desire for higher education is a shared value in most families.80% of students who go abroad for higher education return to work in Vietnam. . There is a strong belief according to Confucianism that education drives the future of children (Dinh. This is where the culture of Vietnam originated in the very early time. The early influences of the Austro-Pacific culture before 111 BC are evidenced by the multiculturalism of the Vietnamese people. the position of women in the matriarchal society of Vietnam is stronger than in neighbouring countries (Weggel. 1997). most 29 Vietnam belongs to the so-called “Chopstick Culture” that includes countries such as China. Although Vietnam lies geographically in Southeast Asia. 1997). 1992).1. literature and sciences were introduced from China (Dinh. The principal religion in Vietnam is the so-called “triple religion” (Tam Giáo) characterizing the East Asian intricate mixture between Mahayana Buddhism. Despite a general Vietnamese culture that all Vietnamese share. attracted by better job opportunities and a more rewarding life in familiar environs. and education is seen as the passport to a better life.
the Western cultural influence started in the 16th century with the arrival of the Catholic missionaries from Spain. Portugal and France. which nowadays proves to be an advantage for the Vietnamese. was introduced in the 16th century. 1997). Finally. The Latin alphabet. Taoism Budd hism Conf ucian ism Vietnamese Culture nd Hi tho lic ism uis m Figure 3-6. Main cultural influences of the Vietnamese culture Ca . The Catholic Church and the French brought the knowledge of natural sciences. the French civilization and language. In this respect.29 noticeably that of Northern and Southern Vietnam. From around the mid 19th century. continuing in the 19th century when Vietnam became a French colony. technology. Thervada-Buddhism is dominant especially in the Mekong Delta and Hinduism has found acceptance by the ethnic Cham in Central Vietnam. Most recently. Leninism-Marxism was introduced by the Soviet Union and the American way of living by the USA (Dinh. Vietnam has many different cultural influences starting from the Austro-Pacific culture to the Khmer and Champa cultural influences.
Vietnam had to struggle to push back successfully the aggressive invasions of many world powers like Mongolia. Le Manh That. Furthermore. then again China [in the Ming and Ching Dynasty].30 Vietnamese are largely “one-people” . 31 After having regained independence from the colonial power China in the 10th century. Vietnam is a high-context country with a high level of collectivism. Vietnamese do not. Short term planning and improvisation is common and flexibility is necessary as plans may change due to ‘force majeure’. 2000). The principle of reciprocity – to give back – is a strong part of culture. Due to the high population density. especially in Vietnamese urban areas. . France and the US. 1992).as many as 80% are Buddhist30 (though officially they follow no religion) and ethnic minorities comprise only 14% of the population. live in large families. The collective struggle for independence through the Centuries31 has created a strong bond between the different cultural and religious groups in Vietnam. Siam. 30 Interviews with Dr. achievement orientation. Vietnamese are frugal. show gratefulness through reciprocity and follow the Yin (female)-Yang (male) principle where the Yang dominates slightly. low uncertainty avoidance. endeavour to resolve conflicts peacefully and strive for harmony in the collective (Dinh. Significant Christian minorities of about 8% consist mainly of Roman Catholics and smaller but noteworthy new Protestant groups. The Vietnamese are very diligent. want recognition for achievement. are risk takers. rather matriarchal with a short-term orientation. Vice Rector of the Vietnam Buddhist University. Japan. Time has a different value for Vietnamese and being on time is less important than to “lose face” (Weggel. While people in Western countries separate business and private issues. a medium-high power distance. Relationships matter and communication is crucial with focus on personal relations. proximity is common and privacy is not given (Hall. 1997).
1 GDP Development Economic growth has been steady.34 8.00 2.1.3. In 2006. slightly slower than the pace of growth recorded in 2005. especially in the last five years.00 95 96 97 98 99 00 01 02 03 04 05 06 07 Origine of GDP 2006 Other 23% Manufacturing 21% Source: GSO.00 9.20 8.3 Economic situation 3. 2006 Forestry 1% Real Est.00 7. 2007. 2007) .15 8. This pace of growth is fairly consistent across different sectors.1.1.90 GDP per capita/ region in 2006 648 433 378 330 305 276 240 189 145 0 to to to to to to to to to to 1337 648 433 378 330 305 276 240 189 145 4. and is expected to continue in the same mode with the government expecting real GDP growth of around 8.00 0.90 7.3.00 10. ahead of foreign-invested firms (14. Economic Situation – GDP Development (Source: GSO. 4% Fishing 4% Construction 6% Mining & Quarrying 11% Trade 14% Agriculture 16% Figure 3-7.70 8. Industrial growth has been broadly based.00 5. The growth of output was particularly rapid for private sector industrial firms (up by 21.20 7.77 6.4% year on year.9%) and state-owned firms (11. in terms of both region and industry (GSO.31 3. 2007).54 9. GDP growth 1995-2007 12. Vietnam Tiger Fund.8%).5 % on average in the forthcoming years.1.80 6.1 Economic indicators 3.6% y-o-y). the gross value of industrial output rose by 15.00 6.76 4.50 7.
2 Domestic savings Domestic savings.8% of the economy. It is noteworthy that exports in all major categories recorded strong growth.1.1. squeezing agriculture’s share of GDP to below 15%. at 151st out of 208 countries.3. (%) of GDP Savings Investments 40 30 20 10 0 1990 1995 2000 2001 2002 2003 2004 Figure 3-8.32 Despite the pace and breadth of recent progress. There were particularly rapid increases in the value of exports of manufactured goods.3 Foreign trade and payments The value of Vietnam’s exports continues to rise rapidly. in addition to key export 32 In comparison. but still comprises 22. In 2006 export revenue rose by 25% y-o-y to reach US$ 39 billion.1. Domestic savings feed investment (Source: World Bank.1.3%). including footwear and electronic products. 2005) 3. it is important to remember that 74% of the population is still rural and that Vietnam’s per capita income of US$ 660 ranks amongst the poorest nations.3. China has reduced its share of the rural population from 76. The government expects the contribution of investment to reach 42% of GDP over the next five years.3% in 1985 to 58% today.32 3. . according to the World Bank (2006). increasing FDI and growing remittances make investment the key growth driver. accounting for fully one-third of the economy. Agriculture has steadily decreased as a share of GDP since 1988 (when it was 46.
partly due to anti-dumping duties levied on catfish and shrimp. This net oil position could even improve once the delayed US$ 2. the country’s export to GDP ratio should continue growing from the current 63% of GDP share. however. particularly coffee. Vietnam’s trade balance has benefited from the rise in crude oil prices. As a net crude oil exporter. Principal exports first half year 2006 USD b 45 40 35 30 25 20 15 10 5 0 2000 01 02 03 04 05 06 Others 25% Crude oil 22% Export Import Garments textiles 15% Footwear 9% Aqua products 8% Wood products 5% Rice 4% Electronics and computer materials 4% Coffee 3% Rubber 3% Coal 2% Figure 3-9.33 Importantly. Vietnam will still lag behind Asia’s other major exporters in terms of export volumes. despite a dependence on imported oil products. to achieve an increased level of export growth. 2007) WTO accession is expected to maintain export growth at 10-20% y-o-y over the medium-to-long term. Exports of seafood products. Export situation (Source: GSO.5 billion Dung Quat refinery becomes operational as now expected in 2009. While the situation may deteriorate in the short term in nominal terms due to the higher-value added of petrol and diesel.33 commodities. . rose by only 2% y-o-y. If Vietnam is able to ramp up its production base to meet this potential growth in external demand. Vietnam trade could still be negatively affected if high global prices weaken external demand. growth in domestic demand for fuel is unlikely to outpace oil production within the next five years. While direct net trade balance is positive. although this would be a condition that would impact on all of Asia’s exporters. Vietnam will 33 Even then. though overtaking the Philippines as the tenth ranked exporter in Non-Japan Asia is feasible within the next five years. rice and cashew nuts.
Vietnam has a similar.1. If Vietnam’s export sector does step up. inflation due to higher imported oil prices could force aggressive monetary policy tightening in the years to come. the state-owned distributor is being forced to absorb much of the price rises. Housing costs are increasing at a fast pace. However. this long term improvement will also be dependent on future international competition (particularly from China) and the rate that productive investment becomes available in the coming years.e. as the government has been slow to raise domestic retail prices. since 2004 it has remained quite stable at an average of 7.34 need to move up the export ladder and create higher value-added activities to its production base. 3. competitive low labour cost structure to China. is being compensated by government transfers. The major risk is oil price pressure.3. removing the reliance on international donors.9 % a year. which. substantial resources (including agricultural land). Vietnam must import all its petroleum and diesel products. International oil price increases have yet to be fully reflected in domestic fuel prices. in turn. Instead. 2007). this seems to be unsustainable.. as domestic fuel prices have now risen by 120% since the beginning of 2004 (GSO. This will mean heavy investment from either domestic sources or FDI. However. Though Vietnam has a relatively lower oil dependency compared to many of its neighbours. Without any refining capacity. This suggests that the government is likely to accept a higher . abundant labour and a low base of growth: all ingredients that could facilitate an extended period of rapid export expansion. then this could help reverse the structural trade deficit and push the economy a little closer to achieving self-sustainability on its current account — i. its level of capital to labour force ratio is still relatively low compared to other countries. However.1. However. which are likely to weigh on the current account balance in the near-term. The recent monetary measures seem to be aimed at improving credit quality in the financial system rather than controlling inflation or avoiding the risk of overheating.4 Inflation Inflation has been a source of concern. as evidenced by Vietnam’s lack of presence in higher-end engineering or technology manufacturing.
2007). Even with an escalation in foreign borrowing. Government finances look reasonably stable. rice and a growing electronics sector have performed well since 2004.3.1. seafood. 3.1. Consequently. Overall BoP surpluses since 2004 have been supportive to the VND. an aggressive policy response to higher oil prices is unlikely.35 inflation rate over the next year or two in order to maintain GDP growth at about 8% y-o-y or better. though we expect that FX policy should still favour a slow depreciation trend to preserve export competitiveness.6 FX reserves FX reserves have been growing steadily. Still. the BoP has reduced average annual depreciation of the USD/VND from 2-4% in the post Asian crisis period to less than 1% in the past 12 months (GSO.3. Vietnam’s external debt to GDP ratio (35% in 2006) is within manageable levels and is even likely to fall for another year or two (GSO. With a stable BoP. 3.1.5 Current account Vietnam’s exports of oil. continued financial support from international donors and a positive capital and financial account are helping to stabilize the overall balance of payment (BoP). But imports are also boosted by the impact of higher commodity prices. especially over the past two years and the government seems to be preparing to allow state companies to tap offshore financing within the next few years to fund capital investment. which has positive implications for investment demand. . the outlook for Vietnam’s external position is unlikely to change much in the near term.1. 2007). assuming commodity prices eventually correct. which may ease in the next year. Imports of capital and equipment are the main driver. Despite the weak structural current account.
500 4.093 17.653 5. the higher oil prices meant that oil-related revenue contributions to the fiscal budget ran almost 50% higher than budgeted in 2004 and 2005.000 -6.000 -8.3.7 Fiscal revenue Strong revenue growth in 2006 and 2007 from VAT and oil revenues are helping to offset unexpected expenditures from subsidizing losses of the state-owned oil distributor. plus improved profitability (or reduced losses by SOEs).788 2.698 Fiscal balance Total financing Domestic financing Treasury bill Insurance Issued Repayments Financing abroad Total foreign borrowing Amortization -12.276 4. Chart 17 The fiscal deficit has become more manageable Budget balance (VND bn) 0 -2.000 -10.575 5. should help keep the budget deficit below 2% of GDP over the medium term (CSFB.000 -12.440 5.1. Expenditure may rise in the next few years from a phasing in of civil service pay increases. However.0 -0.802 7.800 9.922 8.810 Figure 3-10.5 -3.5 Chart 18 2005 Budget plan 2003 2004E -11.654 2. the shortfall is becoming more manageable.000 1999 2000 2001 2002 2003 2004 2005E As % of GDP (RHS) 0.1. Fiscal revenue (Source: MoF.0 -1.36 3.0 -3.998 33. efforts to restructure the tax system and increased compliance.043 12. While the government is likely to continue posting a fiscal deficit for the foreseeable future.5 -2.476 15. as its ratio to GDP has declined for three consecutive years and likely to fall again this year (CSFB.998 9. Revenues from oil production and taxes account for about 28% of the total fiscal revenue. 2006).5 -1.044 7. infrastructure spending and recapitalization costs from the SOEs and banking sectors.200 7.0 -2. 2006) As a net oil exporter.800 12.575 11.866 2005 (budget) -12.200 22. 2006).000 -14. CSFB.250 23.000 -4.844 7.252 2. .653 23.
the private sector is not only a crucial economic pillar but also a social imperative (Merrill Lynch. This is a reflection not only of the rapid increase in the number of new private enterprises and privatisations. in part because of the difficulty in accessing loan capital from the banks. the new Prime Minister Nguyen Tan Dung gave a speech that set out the main thrust of future economic policy centring on four major tasks deemed necessary to maintain a vigorous rate of economic growth between now and 2010 (VET. government officials have espoused the government’s commitments to economic reforms. May 2006.3. VIR. there are now more than 200. 2006 revolves around following key areas (VET.34 According to the Prime Minister.5 million new jobs needed each year. 2006). Their share of industrial output is about 75% .37 3. Many of these are small scale and.1. From less than 100 private companies when the new law came into effect. which now makes up two-thirds of the overall economic output has been key to the transformation of Vietnam’s economy.1. 34 In August 2006. the private sector employs 90% of the total workforce today and generates the overwhelming majority of the 1. Furthermore.2.2 Economic development In recent conferences for foreign investors.3.2006): (1) (2) (3) (4) (5) (6) Development of the private sector Foreign direct investment Privatization of SOEs Global integration Infrastructure development Building capital market institutions 3.up 25 % over the past ten years. during a conference entitled “Investing in Vietnam”.03. . essentially.1 Development of the private sector The establishment of the Enterprise Law in 2000 set the stage for the rapid growth that has taken place in the private sector over the last five years.000 and the number continues to expand. but also their increased efficiencies. family run businesses. Clearly. 16. The rise of the private sector (both domestic and foreign). August 2006). the road map for the next five year plan (2006-2010) that was set by the Party Congress in April.
9 3.02. for an estimated commitment of more than US$ 1.8 Hotels & restaurant 7% Other services 6% Real estate & costrn 13% Mining 8% Infrastruture 2% Manufacturing 47% Figure 3-11.1. The recent Memorandum of Understanding signed with Intel. would be the single largest technology investment in the country. Forestry.2 4. 3. In combination with domestic capex . The introduction of a unified tax rate (28%) has also helped to improve both the transparency for companies as well as tax collections for the government.2 Foreign direct investment In 2006 foreign direct investment is estimated to have reached US$ 10 billion – an eight year high (VietnamNews.3. In many cases we are seeing Vietnam attract capital as a complementary production base to China as manufacturers seek to diversify supply chains. 2007) The Japanese have been amongst the largest investors. Februar 2007). Hong Kong.5 6. Taiwan and Singapore. foreign invested enterprises (FIEs) pay closer to US$ 60 per month (VET. USD b 12 10.38 According to Vietnam observers (Merrill Lynch. Other key sources of investment have been Korea. 05.2007). For the many overseas development agencies in Vietnam this also represents something of a success story and there is active investment activity from the likes of the ADB and IFC. Minimum wages are still very low. Foreign direct investment (Source: GSO. especially as foreign banks are taking stakes and starting the process of upgrading credit assessment systems as well as credit products.6 billion. 2006) this is beginning to change.2. Fisheries 5% 2.3 3 3.2 10 8 6 4 2 0 2000 01 02 03 04 05 06 Transport & Comm 12% Agriculture. For government employees it is just US$ 19 per month.
2007) Figure 3-12.36 1200 800 400 0 2000 2001 2002 2003 2004 2005 2006 (Source: GSO.3 Privatization of SOEs The Vietnamese privatization program35 was started in 1992.1. Equitization transforms SOEs into corporate entities and plays a key role in raising productivity and economic efficiency.600 with another 1. were more modest.500 to be equitized by 2010 (Vietnam Tiger Fund.2. Around 60% of investment is focused on light industrial projects (GSO. 16. The pool of equitized SOEs stands at 3.2007). whereas the inflows to Hanoi and HCMC. large scale milk and beer production. Around 38 % of total FDI commitments were destined for the two southern industrial provinces of Dong Nai and Binh Duong. traditionally major destinations for FDI.39 this has helped to push the overall ratio of investment to GDP to over 35 % (VIR. Less obvious examples are high quality cement production.3. Numbers of privatizations 35 Officially known as the Equitization Program. the government has a long list of strategic industries in which it will retain a 51% controlling stake. This equitization of SOEs has steadily increased. 2007). . mineral exploration and water supply. where the payoff in terms of higher output and employment is relatively rapid. 2007. Whilst willing to sell some SOEs completely. 2007). Vietnam Tiger Fund. telecomm infrastructure.03. 36 Some of these include areas such as electricity production. labour export services and agricultural equipment. 3. This is the second highest ratio across the whole of non-Japan Asia.
financial services. This is a commitment by the government made in the National Assembly. The privatization process itself begins with ‘equitization’. This is in effect an incorporation process that creates shares that are all held by the State.000 companies have gone through such a process (about a third of the total SoEs) but the size of the individual companies has been relatively modest. Private companies can be 100% foreign owned but for listed companies this is limited to 49% prior to October 2005 it was even lower at 30%. The new Enterprise Law 37 requires that all state owned enterprises to become incorporated within four years. After this the true privatization process begins.40 By 2010. close to 2. An important element of these IPO’s is the allocation of stock to management and employees as the joint stock entity is created – this can be as much as 30% of the total shares issued. To date. 2006). At the same time the government is also setting up a Temasek-type asset holding company to accommodate all the residual holdings. This provides much of the liquidity that passes through the OTC market and provides a potential source of stock for institutional investors to access. it is likely that all remaining SOEs will be equitised. usually with a limited public offering and an allocation of shares to employees which is typically anything between 20%-30% of total shares issued. In tandem with this there have been important revisions to foreign ownership restrictions that are reminiscent of what we have seen across markets such as Thailand and Taiwan over the past decade. The State Securities Commission estimates that these SOEs account for only 8% of the total invested capital of all registered enterprises (SSC. . 2006. These initial shares trade on the OTC market ahead of the actual IPO which takes place by Dutchstyle auction. oil and gas. Major listings will take place in sectors like telecom. airlines and banking. 37 It came into effect from July.
as the government has been very aggressive in restructuring the economy to conform to most WTO conditions.5% currently to 15% or less within three to five years . Import Licensing. TRIMs (trade-related investment measures). It seems likely that some confusion and restructuring pain will be unavoidable for domestic firms. CVA (customs valuation). but otherwise the scope of deregulation should be substantial.3. 38 The National Assembly approved 12 bills at its session in November 2006. Vietnam is still a less developed economy trying to adapt to a market-driven economic system. particularly as lower import tariffs will mean heightened competition from imported goods. It will also be committed to a tariff reduction schedule affecting 99. 39 The risk is the economy’s ability to adjustment to the new conditions mandated under WTO.3% of all products imported.1. Februar 2007). Average import tariffs will be reduced from an average 18. The WTO accession process has demonstrated much of the reform commitment of Vietnam in the past few years. . unless they adapt within the relatively short period of grace.41 3. and Rules of Origin. Vietnam has agreed to open up its domestic market on ten service lines and 92 product areas. Some quotas on sensitive product areas will remain. In rushing through regulatory and legal demands for accession. Vietnam will also comply immediately with eight WTO agreements on accession. which completed 23 new or revised laws introduced since 2002 to meet WTO requirements. Vietnam’s firms at the ground level are still uncertain about how the new WTO regime will affect them. 39 TRIPS (trade-related intellectual property rights). Pre.4 Global integration Vietnam’s restructuring story is ongoing and the next stage is being inspired by the World Trade Organization accession.depending on the product (VET. The eventual entry of foreign players in the domestic market is likely to pressurise many of the inefficient SOEs and smaller private enterprises.2.38 Post-accession.Shipment Inspection. TBT (technical barriers to trade). While the three to five year grace period for adjustment will give local firms time to familiarize themselves with new procedures and gradually rising foreign competition. SPS (sanitary and phytosanitary measures).
3.compared to 5% in 2000. New evolving challenges such as the impending loss of concessional financing may play havoc with financial access along with diminishing returns on capital spending. 2006). In addition.5 Infrastructure development Infrastructure constraints remain among the biggest concerns for businesses. Vietnam’s exports to the US have risen five-fold to US$ 5 billion by 2004 and accounted for 19% of the country’s total exports . Much of the incremental capital will need to come from financial markets or direct private finance requiring reform of consumer pricing. enterprise restructuring and revised regulation to establish the credit-worthiness of infra-enterprises.3.42 However. . as Vietnam’s competitiveness in textiles and garments could lead the way for an expansion into other product areas. Access to capital is a critical issue .2. which cite poor quality and high costs as key challenges.official development assistance (ODA) declines in relative importance as Vietnam becomes more prosperous. an indication of possibilities can be derived from the country’s ability to increase exports to the US following the signing of a bilateral trade agreement in 2000. creating demand for its existing low-value added products and will stimulate investments in upgrading its export and industrial base. according to the World Bank. 2005). Vietnam’s exports to the rest of the world rose by a comparatively slower 54% over the same period (GSO. will become topical issues in the years to come (World Bank. Light manufacturing would be an important area of potential development. Although much more domestic investment or FDI would be needed for Vietnam to compete for WTO market share. WTO accession also opens markets to Vietnamese exports.1. refining planning processes. Excluding the US. preparing for rapid urbanization. improving the efficiency of infrastructure service providers. After the pact became effective at the end of 2001. and developing stronger institutions to encourage private finance or direct private provision of infrastructure.
2005). The quality of credit and growth will become more important to ensure that liquidity . Few domestic firms have issued bonds. The banking system. both domestic and foreign. suffer high credit delinquencies. Access to capital. A credit rating agency that provided better information on firm-specific risk would . in particular.43 90 80 70 60 50 40 30 20 10 0 (%) Limited availability Poor quality Too expensive Poorly managed/Service delays Slow/too many procedures National roads Inter-provincial roads Electricity Telephone Figure 3-13.both domestic and foreign . NPLs may be as high as 15-20% (World Bank. As in China. though. 3. relying instead on loans from the banking system.3. because of the very fast pace of growth. 2005) Access to capital has significance beyond just infrastructure.2. Infrastructure situation (Source: World Bank.is unimpaired.6 Building capital market institutions Bond market The Ministry of Finance is keen to establish a domestic credit rating agency in an effort to boost the development of a bond market. and only two corporate bonds are traded on the stock exchange. concerns about the quality of growth have not been a significant source of concern.1. will be the most crucial driver of growth over the next five years. is at a nascent stage and state-owned banks.
and received approval from the SSC for Vietnam’s first official onshore investment fund (VF1). hopefully. to 195 firms by March 2007 (SSC. 41 The first of these. Officially known as the “Securities Trading Center” (STC). rather like a public utility. Such an agency could also rate municipal bonds. In this respect. of the 22 companies listed at the time of writing. with different demands and investment strategies for listed equities. company shares) and fixed income securities (i.2% to 0.44 help investors to price bonds accurately. March 2007). VF1 is expected to list on the STC (DragonCapital.e. Crucially. in a bid to make its paper more attractive. instead of being owned by its members or investors (such as banks. well before listing on the STC. VietFund launched . as well as fixed income instruments such as bonds. which will be able to invest in both listed and unlisted companies.40 Stock market in Vietnam Vietnam’s first stock market has only been operational since 2000. or other financial institutions). change in the near future. 40 Recently the HCMC’s Committee asked for the interest rate premium (over government bonds) on its municipal bonds to be raised from 0. Vietnam’s STC is unlike many stock markets in that it is owned and operated by the government.3% per year. trading commenced in July 2000. VietFund Management is a joint venture between local Sacombank and foreign-owned Dragon Capital. bonds). Therefore. . although this should.e. a welcome development was the licensing of the first local investment fund management companies. Vietnam’s stock market is not yet serving the important role of being a vehicle for local companies to raise equity capital through public share issues. securities companies. For the stock market to develop in the long-term it needs a more robust community of investors. with capital of around VND 200-250 billion. with a 30%-70% shareholding structure respectively.41 Both local and foreign investors are expected to invest in such funds. 2006). all are former SOEs that floated public share issues as part of the official equitization programme. and has seen the number of companies listed grow from just 2 at the time of its launch. The STC trades both equity securities (i.
Foreign organizations and individuals as a group may now hold a maximum of 30% of a company’s total outstanding shares (Decree 144 of 2003). and trade in securities listed on the STC. China’s stock market (which is Asia’s second-largest by capitalization). and obliging them to adopt better standards of corporate governance and disclosure.e. often trading on rumours. insurers and pension funds (Freeman. This paucity of institutional investors in commonly found in relatively young equity markets that have focused more on the ‘supply side’ of the stock market: listing more and better companies. both resident foreign institutions and individuals are permitted to buy and sell shares in Vietnam. including mutual funds. in late 2003. However. In order to switch from a gambling mentality to a more fundamental investing approach.45 Foreign investors In terms of foreign investors in STC-listed companies. .42 The listed companies There is quite a diverse range of different business sectors represented by the 195 companies currently listed on the STC (SSC. of the first foreign investment funds focused exclusively on investing in companies listed on the Vietnam stock market (and pre-listing companies).44 The aggregate value of the listed companies› shares trading on the STC (i.43 Most of the listed companies are former SOEs. 44 In some respects this echoes a similar situation in China. the total ‹market capitalization›) was roughly US$ 22 billion in mid-May 2007 (SSC. it is now widely appreciated that there is an equal need to work on the ‘demand side’ of stock market development: developing an adequately robust market for the equity paper being issued. 43 The SSC is reportedly aiming for 500 companies listed on the STC by the end of 2010 (VietnamNet. where only 80 or so of the roughly 1. the Chinese government decided in 2001 to open up the market to institutional investors. 2005). March 2007). rather than on fundamental analysis of the relevant companies. 2004). May 2007) . is reported to consist of 60 million-mainly poorly informed-retail investors. 12 October 2006). and the public offering of their shares took place significantly prior to the listing on the STC.200-plus companies listed on the Shanghai and Shenzhen stock exchanges are private companies. the rest being state-owned enterprises (Freeman.up from a low of roughly US$ 110 million at the end of 42 For example. may assist more institutional investors to gain some exposure to the STC. The launch.
and institutional investors specializing in the emerging markets started to focus some of their attention on Vietnam (Freeman. In the latter half of the 1990s. but this is ambitious. Among the roughly 900 SOEs that have been equitized in Vietnam so far. This is despite the introduction of fiscal incentives by the SSC in a bid to encourage more companies to list. 2007). but the majority have chosen not to do so. During the first half of the 1990s. 2004). a substantial proportion are thought to meet the minimum criteria to list on the STC. The current fiscal incentives include a fairly generous corporate income tax holiday for two years after listing (Vietnam Tiger Fund. venture capital activity in Vietnam was much less vigorous. Venture capital Although roughly nine years older than the stock market. at a time when venture capital activity in much of the rest of East Asia was on the rise.000 by 2007. the total market capitalization of the STC (excluding bonds) is equivalent to just 23 percent of the country›s GDP (SSC.45 At the beginning of the 1990s. Vietnam experienced very substantial inflows of foreign direct investment. 2004): . and there was also a fairly consistent annual increase in the number of foreign venture capital funds wholly or partially Vietnam oriented. the venture capital industry in Vietnam is a relatively recent phenomenon. 46 Tellingly. and a paucity of quality investments available. 45 The first venture capital fund oriented solely towards Vietnam was established in 1991. . May 2007).46 2001. the macro-economic and business growth forecasts for Vietnam (and Southeast Asia in general) were very positive. and over US$ 400 million in funds were raised for investment in Vietnam during this period (Freeman. no new venture capital funds for Vietnam were established between 1996 and 2002. A total of eight (listed) venture capital funds exclusively focused on Vietnam or the Indochina region were launched during this period. At present. 2004). The government aims to reduce the number of SOEs to about 1.46 largely as a result of (Freeman.Generally disappointing performances of several of the Vietnam funds.
3. . . .The difficulties of developing attractive investment portfolios in Vietnam.Removing the requirement that foreign investors must hold their shares for between 1-3 years.Removal of the restriction that foreign investors may only invest in joint stock companies. .4 Conclusion 3. Venture capital investors in many emerging markets have encountered problems arising from low standards of corporate governance and transparency. a region with an area of 4’361’303 sqkm and a population of 555 million.Removal of the need for the prime minister›s approval on each individual deal (instead. . 2004).1. 48 47 Such as the replacement of Decision 145 (of 28 June 1999) with Decision 36 (of 11 March 2003).1 Vietnam compared with selected ASEAN countries Key figures of countries in ASEAN Below is a table showing a comparison of economic attractiveness of Vietnam versus some ASEAN countries with similar socio-economic indicators. 48 Vietnam became the 6th ASEAN member in 1995. limited recourse to the law.The need for an auction process. and «dysfunctional capital markets» (Freeman. As a result of legislative changes. that the challenges faced by venture capital investors in Vietnam are not exclusive to this country. 2004): . however.47 It should be noted.4. the investee company need now only inform the government of the share sale). and gaining exposure to the macroeconomic growth trajectory of the country through specific investments.47 .1. today›s foreign venture capital investors are experiencing a business environment that is markedly more conducive to investing in Vietnamese companies than their predecessors did in the mid-1990s. most notably (Freeman.General foreign investor sentiment towards the country lessened. due to a number of factors (including delays in opening the first stock market).
00 85.1 % 6.00 25.00 222. The summation of all criteria of the two dimensions delivers the position in the matrix as illustrated in Figure 3-14 (Dinh.5 % 7.00 84.00 64. Cambodia 4. Singapore 9. / Dimension x) and the economic attractiveness (see Table 3-2.5 % Table 3-1.48 Countries Area (sqkm) Population (mn) GDP per capita in USD (2005) 17’110 106 385 1’239 462 5’160 1’176 27’250 2’628 604 GDP growth (2005) 1.49 49 Each dimension includes several assessment criteria which are weighted and graded.00 4.40 50. 2006) Country Attractiveness for Investment This analytical tool is based on the method of the McKinsey product-portfolio matrix that consists of two dimensions: the socio–political attractiveness (see Table 3-2. 2006). Key figures of countries in ASEAN (Source: CLSA.0 % 5.4 % 4. Philippines 8.00 14. Indonesia 5.0 % 7. Vietnam Total 5’270 657’740 176’520 1’826’440 230’800 328’550 298’170 683 511’770 325’360 4’361’303 0. Thailand 10.00 3.0 % 5.00 555. Malaysia 7.0 % 5. / Dimension y). Burma 3.00 6. Laos 6.2 % 5. Brunei 2. .6 % 7.
0) High Malaysia (3. .33) High (5.015) Thailand (3.5/4.67) Medium (3.49 (5.1. Vietnam is politically and socio-culturally a very stable and.67) Low Circle reflects GDP Size Of Countries Low (1.55/4.65) (3.33) Medium Economic Attractiveness (y) Philipines (1.48) Vietnam (4.1. Portfolio–Matrix of Country Attractiveness for Investment As the section 3.67) Legend: (1.0) Socio-cultural Attractiveness (x) Figure 3-14.88/2.2 (Political system) showed. therefore attractive country compared to its neighbours.535/2.5/3.76) Indonesia (1.
ecological awareness. repatriation of profit(s).07 0. Ethnic or religious fanaticism. Accessibility for FDI. availability of well-trained workforce. Population situation.1 Unweighted Value 5 5 5 4 3 4 Weighted Value 0. typhoons. Overall Economic Attractiveness 0.0 5 4 4 0. very stable. secure. internet. Availability of low–cost workforce.115 0. nature.125 0.4 7) Socio-cultural situation 8) International relations 9) Ecological issues 0. open to international competition. health care.16 4.44 0.0 4 0. friendly & peaceful.14 0. energy. Investment in adequate infrastructure.5 Overall Socio–political Attractiveness Economic Attractiveness (y) Assessment Criteria 1) GDP situation 2) Location 3) Competition related issues 4) Market related issues 5) Infrastructure (technological development) 6) Resources 7) FDI situation Description of Assessment Criteria GDP growth rate. Membership in international organisations such as WTO. Intellectual Property Rights). free room for choosing the adequate entry mode. ASEAN.115 0. Seldom or widespread.105 0. attitudes toward consummation.28 0. safety (e. Availability of raw material.56 0. related supplier system are good. fuels.46 0. urban population growth.135 0. religion. good control. governmental promotion.07 Unweighted Value 5 4 3 4 4 4 4 Weighted Value 0.06 1.10 0.11 0.42 0. robbery. such as floods.7 0.14 0.50 Socio–political Attractiveness (x) Assessment Criteria 1) Political Stability 2) Social unrest 3) Terrorism 4) Corruption 5) Bureaucracy 6) Legal system Description of Assessment Criteria Infrequent change of government. Laws renewed (e.55 0.095 4 4 0. such as transportation. Efficient or inefficient resource allocation. pocket picking).575 0. Company laws.95 0.11 0. Protected industries.04 1.3 0.065 0. Weighting of Criteria 0. APEC.g. life & leisure. financial & banking. Relevant for expatriates. Proximity to market or to resources.115 0. Ethic or religious conflicts. (present & future) size of domestic market.24 4. lifestyle. Weighting of Criteria 0. geopolitically relevant location of the country. storms. Laws and regulations concerning ecological protection.28 8) HR availability 9) Quality of life 0. law & order.015 Table 3-2.46 0.625 0. family. conflicts due to gap of wealth. Country Attractiveness for Investment of Vietnam .195 0.19 0.54 0. medical treatment on sound basis.38 10) Catastrophes Major natural events.g. legal enforcement. earthquakes.
cited in Dinh. accounts for the largest share of the country’s exports (21%). Confucianism. in an effort to jump-start growth. Relationships matter and communication is key with focus on personal relations. with initial steps characterised by a centralised planning system and a closed economy that faltered badly. Vietnamese strive for harmony in the collective (Dinh.50 Political stability The economic transition in Vietnam has not been achieved overnight – the country has traveled a long way since 1976 when North and South Vietnam were unified. South Korea and China have done. has been strongly influenced by neighbouring China over thousands of years. Vietnam’s everyday behaviour and attitudes are determined by a synthesis of religions especially Buddhism. like Japan and Korea. discipline. After decades of war. In addition.03. Vietnam began rebuilding its ravaged economy in the early 1980s. 05. boosted by the 2001 Bilateral Trade Agreement (VietnamNet. teamwork and are hard-working. Further. The Vietnamese are very diligent. 1997).51 3. 1997). a lot of new FDI is aimed at greater 50 As Vietnam is the last goose to take off in the “Flying Geese Model” of the so-called “chopstick”-countries (Kaname Akamatsu. WTO Accession Accession to the World Trade Organisation WTO in January 2007 is another catalyst as foreign capital seeks to benefit from Vietnam’s advantages as an export hub. The US. for example.4.2 Key factors with positive impact on Vietnam’s growth potential National culture The culture of Vietnam. while also opening up more markets to Vietnamese industry. and Daoism. Vietnamese pay a lot of attention to education. According to the Confucianism. In 1986. began moving away from central planning to a more market-based economy that stressed the development of the private-sector and foreign participation.2006). All these characteristics are helping Vietnam achieve fast growth just as Japan. the government began to realise the need for reform and. .1.
2006).up 25 percentage points over the past ten years. the private sector employs 90% of the total workforce today and generates the overwhelming majority of the 1. March 2007). . Led by a trade and consumption boom. to 20%. A rise in industrial activity has transformed the profile of the economy and now accounts for more than 40% of GDP (EIU.5% and rising crude oil prices have affected the fiscal situation. This is a reflection not only of the rapid increase in the number of new private enterprises and privatisations. Vietnam had a largely agrarian economy in the 1970s which has grown at a relatively robust rate of 4% a year over the past decade. The government is largely untested for its response to a potential economic slowdown. At the same time. the economy is becoming more investment intensive and is integrating rapidly within the global economy. Furthermore. The country therefore. the private sector is not only a crucial economic pillar but also a social imperative. the service sector growth has also accelerated in the past few years. 2006). while services majors are also starting to tap Vietnam’s potential. and such an event may have a profound impact on the country’s economic trajectory. Underpinning all this is the rise of the private sector and Vietnam’s transformation from a planned to a market-based economy. agriculture’s share of GDP has halved in the past decade. Clearly. Nevertheless. Inflation is at a high 7. This segment has grown at a 10% Cagr over the past decade accounting for half of the real growth over this period. but also their increased efficiencies. both domestic and foreign. March 2007).5 million new jobs needed each year to accommodate the increasing work force (VET.4 million people entering the workforce each year (VET. but it must keep expanding at 8% if it is to create employment opportunities for the 1. Changing economic structure Vietnam’s growth record has been remarkable. The private sector. and now makes up 38% of the overall economy (EIU. makes up two-thirds of the overall economy. is facing some considerable challenges. Its share of industrial output is even higher at 75% .52 value-added manufacturing.
1. Political stability. private consumption is a pillar of the domestic economy. more remittances. Accounting for 64% of GDP. The government expects investment to reach 42% of GDP by 2010 (Vietnam Tiger Fund. High domestic savings. creating a solid base of domestic demand backed by private consumption and investment. March 2007). Vietnam began to rebuild its ravaged economy in the early 1980s. 3. low labour costs. March 2007). accounting for fully one-third of the economy. increasing FDI and growing remittances make investment the key growth driver. portfolio investment and even development assistance are important targets. To that end.5 million people entering the workforce each year (VET.53 Strong economic foundation After decades of war finally ended in 1976 with the defeat of the US-backed south by the nationalist and communist north.3 Major challenges facing Vietnam Vietnam’s record of stable and accelerating growth has been remarkable. While FDI will form the largest chunk. but it needs growth of at least 8% to create productive opportunities for the estimated 1. increasing foreign direct investment and overseas worker remittances are driving rapid growth in investments and it now accounts for 36% of GDP (up from 27% in 1995). The government expects the contribution of investment to reach 42% of GDP over the next five years (VET. The government has set a target for itself of meeting almost a third of the total investment needs in the next five years from foreign sources. and a growing domestic market will make it easier for foreign capital to tap into Vietnam’s advantages as an investment destination. the government’s efforts to open up and integrate the economy with the rest of the world and streamline legislation are part of an overall cohesive strategy for sustainable growth.4. Focus on investments As with Vietnam’s quest for growth in the banking sector. Domestic savings. 2007). fiscal incentives and concessions. meeting the investment target and better technology access in other sectors will depend on its ability to attract foreign capital. The key challenges are as follows: .
A more expanded infrastructure and larger capacity is going to be needed to fuel the country’s growth. more effective government institutions to encourage private investment in the development of infrastructure will become more urgent issues in the coming years. power and telecommunications. which cite poor quality and high costs. a Law on Corruption Prevention and Control came into effect. they did employ locals with connections (in Vietnamese: Quan Hệ) to “smooth their way” through government related matters. While all the MNC executives we spoke to stated that the government was very friendly towards business and that they had not encountered bureaucratic hurdles or instances of corruption. Developing stronger. collateral registration procedures. Investment in sectors such as transport. .54 Legal system The necessary changes in the legal system in Vietnam have not been able to keep up with the pace of economic development. All state employees now have to declare assets and income. Infrastructure Infrastructure constraints remain among the biggest concerns for businesses. which among other things encourages whistle-blowing activities. legal reform is particularly needed with respect to the clarification of legal concepts and contractual rights such as ownership and transfer of land-use rights. In terms of the banking sector. The evolving nature of Vietnam’s regulatory environment and commercial law. In June 2005. among others. mortgage laws and title deeds. Corruption This is a sensitive and a problematic area which is often cited as a major impediment to conducting business in Vietnam. including those of immediate family members. is necessary to address these concerns. Any setback or delay in legislative and regulatory reform will hamper the necessary influx of private capital to support the growth over the next 5-10 years. combined with overlapping jurisdictions among government ministries often result in a lack of transparency and consistency in government policies and decisions related to commercial projects.
However.1.2007).4 Development scenarios Although Vietnam’s growth over the past decade has been impressive. These factors can affect the pace of development of Vietnam. 3. and pessimistic.5 students per 1. realistic.3 times by 2020 from a 2006 capacity of 166. The problem is most acute at the managerial level due to a shortage of strong tertiary-level training and is evident in the growing stock of expatriate management in the country. . the skills shortage is not just limited to managerial ranks. numerous issues and potential obstacles still remain.4.04. and the overwhelming 75% are unskilled (VietnamNet.2007). we have applied the scenario analysis with three major scenarios: optimistic. According to estimates of Vietnam’s workforce of 45m. 06. The government is aware of the problem and the Ministry of Education and Training plans to almost double the enrolment capacity of universities and colleges by 2015 and increase it by a factor of 5. signs of strain may start emerging as the country enters its next phase of growth. 06.04.55 Access to skilled and unskilled workforce One of Vietnam’s primary assets is a relatively well-educated and inexpensive labour force. In order to forecast the development of Vietnam in the years to come. Many businesses have indicated that a shortage of skilled labour is starting to become an issue. just 7-8% can be ranked highly skilled.000 people (VietnamNet. 19-20% graduated from vocational training colleges. However.
Privatization process .0 3.4 8.5 9.0 6.0 6.2 8.Terrorism .3 8.1 4.0 10.4 6.1 6.0 4.0 1.9 8.8 9.0 2.0 5.7 7.2 7.8 9.6 8.0 9.Oil price .Political instability 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 90 91 19 19 19 19 92 .8 6.8 7.56 12.0 5.3 8.1 7.Infrastructural development .0 0. Scenario analysis – GDP growth forecast to 2010 The scenario analysis is conducted based on the assessment criteria listed below (see also Figure 3-16): .2 9.8 8.0 11.0 in percentage 8.3 8.1 9.5 7.8 8.0 8.Development of global economy .3 7.5 Optimistic Realistic Pessimistic 8.0 Figure 3-15.9 8 7.
per barrel but lower than US$ 100 per barrel Lower than US$ 60 per barrel Privatization process Corruption. for example from the ethnic minorities or discontent farmers and land owners There can be some discontent within the party due to the severe anti-corruption campaigns Strong commitment of the government to develop major infrastructural projects Vietnam successfully hinders international terror networks from infiltrating the country The government shows strong leadership despite discontent and conflicts within the party Infrastructural development Terrorism Political instability The government comes under pressure due to economic slow down and conflicts within the party Figure 3-16. Three major scenarios . inefficient Privatization process Privatization can be bureaucracy hinders is progressing. but finished as planned privatization process slower than expected in 2010 and slowdown the reform efforts Major infrastructural projects cannot be started as planned due to financial shortage and bureaucracy International terror networks arrive in Vietnam and cause substantial damages Government shows some commitment to promote major Infrastructural projects The country faced social unrest.57 Assessment Criteria Development of global economy Oil price Scenarios Pessimistic Slow down of the global economy Realistic Global economy shows signs of slight slow down Optimistic Global economy still very healthy Higher than US$ 100 Higher than US$ 60.
and is committed to implement it after Vietnam joined the WTO in January 2007 51 Currently.52 An additional problem is that most Vietnamese-owned enterprises are undercapitalized which is sometimes due to inadequate banking and foreign investment laws. Vietnam’s GDP growth has been one the fastest in the region over the past decade and. five big state-owned commercial banks control around 70% of Vietnam’s banking market. the government of Vietnam has announced the “Internationally Integrated Programme” of the Banking Industry.58 3. the current capacity for capital mobilization by banks is limited. The reason why the banking system is permitted to be equitized and to sell stock in foreign markets is to bring in additional foreign capital and thereby enable them to support the country’s economic development. In such a situation. in part. On one hand. Once Vietnam liberalizes its market many local companies will have to compete with foreign entrants maybe for the first time. With over 80% of Vietnamese enterprises falling into the small or mediumsized categories and people generally having low incomes. 52 Only 17% is controlled by joint stock banks. The state-owned banks still dominate the banking system. on the other hand. which are non-state commercial banks established under Vietnamese law and the rest 13% of the market shares belong to foreign banks or joint venture banks . To reform the banking sector and facilitate the liberalization of the commercial process. less than 5% of the Vietnamese population use banking services. on better access to more economically competitive banking services. The Vietnamese banking system has been partly reformed but it is still weak.51 The overdue loan rate is increasing and the commercial banks have limited lending capacity. their competitive strength will depend.2 Banking market in Vietnam Banks in Vietnam have significant growth opportunities.
The government believes that their number will double by 2010-11 (SSC. The SME sector accounts for about a third of the GDP and employs about 25% of the workforce (EIU.2007).1. which could help reduce investment expenses (VET.1 Retail banking and the SME market At the beginning of 2007. the banking services provided by domestic banks tend to be backward and poor. the net earnings from services of the five state owned banks were reportedly US$ 3. Less than a fifth of SMEs currently have access to the bank lending market. Even those which do manage to borrow money from banks usually do so in a private rather than corporate capacity. take out a personal loan and apply it to the business. but they cannot find a common platform to develop a single network. but they do not cooperate with each other. In addition.2. 2006). and corporate banking are still very embryonic. An 84% growth rate objective has been set for 2007 which is projected to come mostly from modern retail banking services. 3. They have been trying to make heavy investments in retail banking development by opening many more branches. all the big commercial banks try to develop their own ATM networks. In other words.2 m up 74% over 2005 (SBV.000 SMEs in Vietnam. Phone Banking and Home Banking.2. there were about 280.03. For example. In general. The other banking services as investment banking. 2007). 03. Most banks do not provide services ‘over the counter’ despite the fact that there is no selfservice system.59 3. Retail banking is the only one far developed banking industry.53 In 2006. . the owner will pledge some personal assets. They have also made every effort to promote the development of ATM systems. Local banks now have different retail banking services. private banking. 2006). banks have spent a lot of money on core banking software and setting up the necessary IT infrastructure. The rest have to make do with loans from family. Internet Banking. 53 Currently.1 Retail banking Domestic banks have been aware of the importance of developing retail banking services for some time now. friends or other private sources.
60 Banks are generally wary of the SME market as many small companies have few assets to offer as collateral. Agribank’s involvement is illustrative of the situation. Add to this the paucity of credit information and one can see why the relationship between bank and small business tends to be fraught with problems.500. The comfort zone for SME lending is about US$ 63. Given the growing number of SMEs in Vietnam the potential of retail banking is very significant. retail banking and the SME market. Other reasons for the SMEs difficulty to borrow from banks is a lack of credit information on most potential customers and a risk averse lending culture which leads to the desire to spread the risk as widely as possible.2007). . The problem of SMEs is not only the amount of money available to borrow but also the short maturities of loans. only Agribank and Sacombank have made a strategic decision to focus on the SME market. Banks are not interested in medium term or long term loans to SMEs for project financing or business expansion. accounts are frequently unreliable and they are usually the first to suffer in an economic downturn. enjoy a higher than average profit margin and superior returns on equity.000126. The latter is ironic considering that most Vietnamese banks concentrate their lending on a few large corporate customers. under which banks are permitted to lend a maximum of 75% of their mobilised capital. even though businesses may have sufficient collateral to borrow such amounts.000 are likely to be rejected. a bank with a largely social policy function.04. This is clearly beyond the current scope of a banking system which bases its credit decisions mainly on collateral.000. Sacombank. and ACB which already focus on the two segments. They are usually the lender as a last resort. 54 Generally loans above US$ 315. Banks such as Vietcombank. Banks are typically afraid of the risks of lending capital over US$ 312. 05. which is insufficient for most small businesses (VIR. These kinds of loans require a good understanding of the business viability and potential cash flows from a new project. Among the Vietnamese banks.54 The banking sector’s reluctance to lend to SME’s is partly due to lending rate regulations.
margins are small and falling as large corporations can turn to the bond market instead. The administrative costs involved in making thousands of small individual loans have also discouraged some banks. 55 Currently. 52% and over 60% in 2002. lending at commercial banks amounts to about 60% of deposits but it still lags behind the sharp rise in deposits in 2007. Over the same period total outstanding loans grew by only 9.7% of GDP. SOCBs currently pay more attention to providing loans for infrastructure projects and large corporations. it is not a viable strategy for most Vietnamese banks. Credit loan market The credit loan market still remains underdeveloped compared to other Asian countries.5% level at many private sector banks (VinaCapital.2 billion up more than 20% so far this year. which is uninteresting for borrowers. Credit has been growing at an average annual rate of 25% over the past five years. 2006). . In 1990. However. 2006). 2006). this does not really apply to a developing country where the credit to GDP ratio tends to be low (VinaCapital. In addition.2% to US$ 12 billion (SBV. given the commoditised nature of this type of lending and the huge amount of capital required.61 To serve these segments requires fairly heavy capital investment in branch networks and IT in order to create the infrastructure necessary to support a retail banking platform. some SOCBs are still reluctant to enter into retail banking or SME lending. 57 The corporate sector seems to have reached the limit of its ability to expand credit at the current high rates. This has been lacking and poor distribution along with limited consumer information are the biggest barriers to entry into these two key segments. This ratio was increased to 44. 56 VND deposit rates hover around a 9-9. Another reason for the cautious lending stance is the funding mismatch between largely short term deposits and the largely medium / long term loans (VinaCapital. the credit ratio was only 4.8%. 2006). 2006). the capital costs are heavy and subsequent fixed costs are also high. Therefore. In other words. 57 If the credit market is to grow at the 20-25% target set for 55 While many economists believe that the optimum relationship between credit growth and GDP growth is a 2:1 ratio. 56 By the end of June 2006 banks in HCMC had deposits of more than US$ 14. Current lending rates for VND loans are between 10-14%. 2003 and 2005 respectively (SBV.
. Property sector loans Commercial banks have outstanding loans of about US$ 3. Some individual banks have a far higher exposure. once the corporate bond market takes off. 2006).1 million (SBV. . Long term project finance Long term project finance is becoming more and more frequent as the government and large SOEs tap private sector banks for large infrastructure-type syndicated loans. banks will have to look more aggressively for new borrowers. As a percentage of total loans. However. or 24% of all medium to long term debt. . BIDV for example. Such imbalances are long standing and a bit worrying. Currently medium and long term loans account for about 42% of total loans. 2006). this amounts to a 10% exposure to the property market.09. worth a total of US$ 1. companies will have the option of raising money there instead.in Hanoi the figure is 10% or US$ 562 million. but the main purchasers will still be the banks and insurance companies. accounts for about 10% of outstanding loans to property developers. By city (VinaCapital. The syndicate is to provide a credit line of US$ 2. One good example of the type of medium to long term financing provided by the SOCBs is the deal signed with Electricity of Vietnam (EVN). an exposure of about US$ 176. particularly amongst the JSCBs. The problem is that up to 50% of short term deposits are being used to offer medium and long term loans (SBV. 2006). perhaps in the retail market.8 billion. July 2006).7 billion to EVN over the next four years at an interest rate pegged to the average 12-month deposit interest rate plus a 3% fee (VET. As the corporate bond market takes off. banks should be in a position to do more long term financing and reduce this dependency.15 billion in the property sector (VietnamNet. 08.15% of all outstanding loans in HCMC are exposed to the property sector.62 this year.
the true level of exposure to the property market is far higher than these examples indicate.59 However. 2006). Therefore. Cienco 5 and Contrexim Holdings).7 million in loans to Vietnam’s top seven developers (These are Song Da. According to market research (CI Electronic Monitor. In 2005 only 113 projects (down 40% y-o-y) were being developed in HCMC.1.1 million 58 Loans must not exceed 70% of the value of a mortgaged property. Viglacera. leading to a general and perhaps sudden deflation in asset values across all classes. 2006). 59 Transactions in Hanoi and HCMC fell 60% y-o-y in 2005. Hanoi Construction Corporation. The number only includes direct loans to property developers for the purpose of project development. covering about 175 hectare of land (VinaCapital.Vinaconex.63 2006). a collapse in property prices based on an internal crisis is not expected. prices are set to rise in the good years and simply stay flat in the bad years. . Housing and Urban Development Corporation. 60 Any collapse would come as a result of an external shock. However.58 Given the fact that few real estate transactions have taken place in the past few years there is concern that the frozen state of the market might jeopardize the quality of lending to the sector. the size of the urban middle class .2.2 Retail banking and the consumer market Only a fraction of the nation’s 85 million people utilise modern bank services.those with a monthly income over US$ 500 living in the six major cities .has grown from 9% of the population to 34% since 2000. These amounts to about a fifth of BIDV’s total exposure to the property sector (VinaCapital. 60 Despite the fact that prices seem very high. BIDV has had to reschedule about US$ 65. the government has tightened lending by ordering banks to check the credit quality of loans to the property sector. With an urban population of about 23 million (29% of the population) that amounts to an urban middle class of about 8. Loans to manufacturing companies which have large land holdings or who develop real estate projects as a sideline are not properly accounted for. 2006). For example. Nor is the fact that the vast majority of loans are collateralised by land or property. However. 3. and because few actual transactions take place and with inflation and GDP growth both high. a sharp drop in property values would expose the entire banking sector to serious difficulty more through the deterioration in the value of the collateral than through direct exposure.
00 5. % 35. 2006).000 (1% of the total population) a year (SGO. That means that only 1. 2006) Overall there are about 5 million bank accounts in the whole country and only 2 million ATM cards have been issued. illustrates that the penetration rate of consumer banking products is still very low compared to that of the mobile phone.00 10 5 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Urban mio. urban pop in % 10. only about 22% of these people currently have a bank account. The urban population is increasing by about 800. Figure 3-18.00 20. .00 3. However.00 30.75% Mio 30 25 20 15 25.00 15. 2006). Urban population growth (Source: SGO. The balance would be accounted for by small town inhabitants or by the large rural population.00 Figure 3-17.64 people.7 million urbanites had a bank account as of 2005 (SBV.00 0.
2006) 3.Personal loans . small business loans.Other products Personal loans Personal loans61 are a new product in the Vietnamese banking market.3 Consumer banking products Consumer banking products fall into five broad categories: . home improvement loans. Penetration of banking services in urban Vietnam (Source: CI Electronic Monitor.Credit / debit cards and ATMs .Mortgages .g.2.1. car loans. VBARD (2007) reports that consumer loans amount to 10% of their 61 E. .65 50 45 40 45 45 Hanoi HCMC AB class 22 18 17 22 17 13 35 34 30 25 20 15 10 5 0 Mobile phone Insurance plans Bank Account Savings Account 19 10 17 18 13 11 Credit Card Figure 3-18.
05. The MHB has increased its personal loan ceiling to US$ 3.2007). 2006).04.335 US$ 3. it is a high margin market and has enabled the banks which specialise in retail banking to enjoy far higher profit margins. 05.875 –US$ 3. This represents a start towards expanding the consumer banking business. Most of these loans can be cleared within 3-7 days. provided they can meet the banks’ strict collateral requirements. Some banks such as EAB and Eximbank target employees of existing corporate customers as potential borrowers. However this does not benefit private sector employees who make up the bulk of the middle class. Vietcombank will happily lend you US$ 3.62 62 The loan limit is being raised from US$ 6. In theory.125 US$ 3.500-12500 for one to three years to its customers (VinaCapital.500. Until now it was hard to get a personal loan of more than US$ 625 even with collateral.66 outstanding loans and have a target of increasing that to 30% over the next few years following equitization.250 to US$ 12. Banks ACB VIB MHB VCB HSBC Loan limits US$ 12.335 without security to government employees with a monthly income in excess of US$ 380. Vietnam International Bank (VIB) is happy to lend US$ 9. or to renovate their home. Given that most consumer loans attract fees. .500 US$ 9.125 10 month salary Remarks target credit card holders government employees The minimal personal salary must be equivalent to VND 5 million Figure 3-19. anyone can get a personal loan to buy a house. car or motorbike. Foreign banks such as HSBC will give secured loans up to a value of US$ 2. Now banks are happy to hand over US$ 1. Overview of the loan limit in selected commercial banks (Source: VIR. Others such as ACB and Vietcombank target Visa and MasterCard credit card holders.125 in personal loans (VIR.04.125 for five years. The SBV (2005) has issued a new regulation that allows commercial banks to provide unsecured loans to employees of SOEs and organisations.2007) The majority of personal loans are medium to long term secured loans.125 (to be paid within 36 months).
and the shift towards payment by bank transfer instead of cash. this market is still embryonic due to credit history constraints. There are three ATM/card alliances in Vietnam. Credit. credit cards and electronic payment are new in Vietnam. ATM/card alliances Connect24 VNBC Founders founded by Vietcombank founded by EAB Other members alliance with 17 other banks Sacombank. Lack of distribution is the key hurdle. debit cards and ATMs Automatic Teller Machines (ATMs).67 In general.1 million debit and credit cards. MHB) . Five hundred additional ATMs were installed nationwide in 2005. and installed a mere 1. these are concentrating on big cities like Hanoi and HCMC and other major tourist sites. 2006). The potential for both the unsecured and secured markets is huge. the Vietcombank alliance. 125 of these in the HCMC area (VinaCapital. Revenue from bank card transactions issued through 17 Vietnamese commercial banks surged by 300% in 2005. Only 10. and almost 80% of issued cards come from domestic institutions. The rate of growth. however. 15 banks are allowed to issue payment cards.200 ATMs nation wide.000 outlets accept card payments. ATM/card alliances in Vietnam (Source: Interviews with SacomBank. banks have issued only 2. So far. Growth in the retail market is closely tied to the growth in the number of bank accounts. is impressive. ChinaUnionPay and United Overseas Bank from Singapore) national funds transfer system BankNet BIDV Figure 3-20. ANZ (including 2 overseas banks. VNBC and BankNet.
65 Magnetic strip cards in particular are vulnerable to counterfeiting and abuse.68 The big disadvantage is that the systems used by the three banks are different and are incompatible with each other. a y-o-y growth of 67% (SBV. They are about to issue 5. VCB. It is expected that Vietcombank will win the race.000 cards issued since 1996.000 such cards and collaborate with Petrolimex to issue cards for fuel purchases (VET. with 5. and the company expects the number of Visa cards issued in the country to hit 500. Young adults want to move out and buy their own house 63 This is typical of developing countries but one nationwide system would be a major breakthrough.000 point-of-sale (POS) terminals and 400 ATMs nationwide. 2006). 64 VCB is currently the only issuer of MasterCard. 2006). Customers can use their Unicard to perform many banking functions including withdrawal. The normal global rate is about 0.000 locations nationwide. Visa and American Express cards in Vietnam. Visa-member banks had the largest share with 62. funds transfer and paying bills at ATMs.15%.000 issued up to the end of 2006. one of the many second tier JSCBs have experimented with hybrid cards using a chip based infrastructure instead of magnetic strips. ACB. August 2006). and Eximbank all offer international payment cards with 125. . Mortgages The growing middle class is very keen to become home owners. VNBC has already issued over 500. Visa. with more than 50.000 by 2010 (VinaCapital. American Express and Maestro also saw strong growth. American Express. JCB and Diner’s Club. a relatively small amount compared with the US$ 237 million worth of purchases and cash withdrawals in Vietnam by international visitors (VinaCapital. 89% of merchant sales volume via Visa cards in Vietnam is still generated by foreigners.000 credit and debit cards (SBV. VCB is also the acquirer bank for MasterCard. Other international brands such as MasterCard.63 The VNBC Unicard is accepted at over 300 ATMs and 1. impacts favorably on the size of the mortgage market. Eastern Asia Bank (EAB). Credit card fraud is an ever present problem in Vietnam. Retail purchases and cash withdrawals made by domestic card holders reached US$ 72 million in 2004.06%.64 However.000 cardholders in its client base. 2006). Visa obtained a license from the SBV last month to open the first representative office in Vietnam. 2006). mostly in Hanoi and HCMC. 65 Visa Asia-Pacific’s statistics show that the fraud rate of Visa cards in Vietnam is approximately 0. Of this. The fact that 60% of the population is under 30 years of age.
the professional finance sector has a stronger grip on the condominium market partly as a result of tie-ups between developers and financial institutions. MHB) 66 One issue is that affordable housing has been hard to come by due to spiralling property prices. Indicators Descriptions . The mortgage market has grown hand in hand with the explosion in the urban condominium market which has brought affordable housing within reach of many in the middle class.67 The mortgage market is new to Vietnam and currently accounts for only 10-15% of the total housing finance market.500 / sqm. Prices for apartments Duration about US$ 320-2. . Most property purchases are financed informally through family networks who typically advance sums at no interest. So far banks have approved mortgage loans of about US$ 1.500 / sqm 7 to 10 years Mortgage amount worth up to 70% of the value of the home Interest rate around 12% Figure 3-21. This concept of ownership sets this generation apart from their parents and is now backed by a solid array of legislation.2 billion which represents around 12. 67 Prices for apartments in major urban areas in Vietnam range from about US$ 3202.66 Mortgages are a necessity for most young couples starting off on the property ladder. A legal framework has been put in place for the growth of a mortgage market. Mortgage market indicators in Vietnam (Source: Interviews with SacomBank. 2006).57% of the population is under the age of 30. Current volume 10-15% of the total housing finance market mortgage loans approved of about US$1.7% of total bank lending) Alternative: Most property purchases are financed informally through family networks (or f riends) who typically advance sums at no interest Target customers .growing middle class is very keen t o become home owners. Nonetheless.69 or apartment.7% of their total lending (VinaCapital.2 billion (around 12.
With such a short repayment schedule. VIB bank has recently launched a home delivery service for remittance payments within 24 hours at no additional cost (VIR. Other products Remittances Remittances are a lucrative source of fee income for Vietnamese banks. The decrease in the cash . Electronic payments Electronic payments are also making steady inroads into a country once ruled by cash. less money laundering. Normally a bank will lend only up to 70% of the value of a house for up to 10 years. the overseas portion of this market is dominated by foreign firms such as Western Union. the SBV has completed draft decrees on electronic and non-cash payment systems including cheques and bank draft circulation systems. the market size is quite significant. 03. and lower minting charges. The interest rate is currently around 12%.2007).7 million Vietnamese living abroad (mainly in the US and France) who send home US$ 5-7 billion a year and are being charged between 2-5% in fees for the service. This is the affordability threshold. About US$ 4 billion of this is routed through the banking system by wire transfer (VIR. but most of the money is left on the table owing to the lack of a foreign presence by the Vietnamese banking industry. With 2. have a seven to ten year term and carry an interest rate of about 12%.70 The underdeveloped mortgage market has been the biggest constraint to growth in the housing market.2007). down from 24% in 2004 (VinaCapital. demand is expected to explode. Currently. Most households can only afford to spend about 30% of their income on housing. Fewer cash payments means less tax evasion. less corruption. which take the lion’s share of the resulting fees.07. Cash payments in Vietnam accounted for 21% of the total financial transactions in 2005. Some banks are testing the marketing of longer term mortgages which is expected to have a very positive impact on demand. Typical mortgages can be worth up to 70% of the value of the home. high monthly repayments are a huge constraint on mortgage demand. As loan terms are extended to 15 years or more. 03. In fact. The rest comes through gold shops and is undocumented.07. 2006).
1 Secondary market for bad debt disposal Vietnam has yet to develop an efficient market mechanism to dispose of the bad debt weighing down the banking system. the government itself set up the Debts and Asset trading Company (DATC) in June 2003 under the Ministry of Finance with a charted capital of . 2006). So far about ten commercial banks followed suit with their own AMCs.71 payment rate in 2005 was the result of a sharp increase in bank payment transactions. To limit cash payments. where only large supermarkets and hotels use point of sale (PoS) payment systems. The second is that the banks do not have the capital to write off the loans in order to be able to dispose of them in the secondary market.2.2. In addition. 2006). The SOCBs went through the motion of setting up their own AMCs. Vietnam needs to encourage intra-account payments for utility. more and more consumers will eventually be driven to open bank accounts as the utility of paying bills by direct debit becomes clear. and particularly those performed with payment cards. 3. Two thousand and forty PoS card-reading machines were installed in 2005 (VinaCapital. As cash cannot dominate the market forever. internet.Secondary market for bad debt disposal .2. Cash payments continue to account for the majority of daily transactions in Vietnam.875 million in capital. The idea is to transfer Non Performing Loans (NPL) from the parent bank to the AMC which would then manage the mortgaged asset until it can be realised or disposed of (VinaCapital. One problem is that as of yet there is no secondary market to trade distressed assets and few transactions have in fact taken place.Stock lending 3. and cable television bills. In 2000 the government issued regulations to allow commercial banks to set up vehicles called Asset Management Companies (AMC) to aid the collection and disposal of long term bad debt. with each bank kicking in US$ 1.2 Investment products Investment products fall into 2 categories: .
Figures provided by commercial banks showed that 13 million shares worth US$ 47 million on the market were used as collateral for loans (VinaCapital. a social mandate to help SOEs clear up bad debts. Having recapitalised the SOCBs with a US$ 670 million capital injection in 2004.2. ACB also has about 1% of its total loans issued for stock portfolios. Instead of lending only against bank stocks. the SBV has circulated a draft suggesting a further US$ 750-810m government bailout in 2007 before banks such as Incombank. Nonetheless. This leads to a conflict of interest. BIDV and MHB are equitized. . It has also signed a cooperation agreement with the BIDV in order to create the framework for an asset trading market. This fairly new market is frowned upon by the SBV which fears that some banks lack the internal controls to manage this relatively high risk niche market profitably. The DATC started operating in 2004. the government is reluctant to admit that it might have to do the same thing again. A lack of trained personnel and limited experience in packaging and pricing debt is also hampering the process. 2006). However. the DATC purchases/receives the assets/NPLs directly from SOE’s themselves. VIB now offers loans against 29 different types of stocks ranging from shares in hydropower plants to insurance and information technology stocks. That market requires a clear framework with legal backing for recovering collateral and participation from foreign experts who have experience in debt trading and disposal. One issue is that the DATC has a dual mandate. using the certificates as collateral. not from banks. Both the AMCs and the DATC have so far demonstrated one thing clearly: without a secondary market for distressed debt they can do little to resolve the remaining NPL problem. 2006). The DATC has recently set up a transaction and consultation centre for debt and asset trading in a bid to get things moving. Vietnam International Bank (VIB) reported its current loans to the sector accounted for roughly 5% of the bank’s total loans. working to resolve bad debts at 20 companies identified by the government (VinaCapital. and an economic one to earn a profit in the process.2 Stock lending One of the hidden triggers of the recent surge in the stock market has been the willingness of banks to lend against stocks. 3.2.72 US$ 130 million with a mandate to help SOEs dispose of their NPLs and Non Performing Assets (NPAs).
a jump of 25% over last year.3. Observers emphasize the benefit of further opening up the industry by pointing to the US$6.2. David L Fried.2. 3. The HCMC Insurance Company Bao Minh was second with 24% while the rest of the companies selling insurance had tiny market shares.1 Life Insurance To date only 6. 69 The Vietnam Insurers Association’s public in the Thanh Nien newspaper on 11.Non Life Insurance 3.73 3.8% of premium income in this period.3 Other financial services Other financial services fall into 2 categories: . The Vietnam Insurance Corporation.3. The Vietnamese insurance industry has been expanding rapidly since 2000 with an average growth rate of 29% per annum. regional director of HSBC Insurance (Asia-Pacific)68 suggests that Vietnam’s life insurance market represents a great opportunity for foreign insurers. Revenues from insurance have accounted for 2% of the country’s GDP. Moreover.2.87 billion insurance money that has been pumped into the country’s economic development since 2001 (see Figure 1-22. 69 68 Research paper of HSBC in July 2006.). Vietnam has 15 domestic companies providing non-life insurance and two more have been licensed. Bao Viet was the dominant player accounting for 32.Life Insurance .5 million people out of the country’s population of over 84 million have life insurance.10. The growth potential is still very positive.2006 .2 Non Life Insurance Non-life insurance sales in the first five months of 2006 were worth US$ 250 million.
Market penetration 2.000 3.74 9. Growth of the life insurance premium income in Vietnam (Source: Mark Sander & Adrian Liu cited in VinaCapital 2006) 3.000 VND billion 6.000 8.4. The following factors which are expected to impact on the Vietnamese banking system positively or negatively will be analysed: 1. Oligopolistic banking market 4. Conclusion Currently. the Vietnamese banking sector can enjoy an excellent growth rate. Rate of growth in loans and deposits 3. the banking sector also has to face many market challenges.000 1. Lending practices 5.000 5. Quantity of non-performing loans 7. can gain more social attention and contribute more and more to the countries GDP growth.2. Consumer credit bureau . However. Product offerings 6.000 7.000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005* Figure 3-22.000 4.000 2.
the banks themselves have done a poor job of providing services to the retail public. there is a traditional distrust of banks. and small businesses too are poorly served by banks which are unwilling to give them large loans unless they have the collateral to back it up. the government encouraged a cash economy by paying state employees in cash. 2006). This means that banks simply do not have easy access to over 70% of the population. Some reasons for the interest in banking services are: until recently. .75 3. the effective potential market size is about 20 million or triple the current penetration level (Merrill Lynch.70 The reason is simple: the distribution and infrastructure of banking services is very poor relative to the telecommunications industry. In reality.4. Central Banks in Merrill Lynch 2006) 70 Even so. AsiaPac Loan Penetration (Loan to GDP. 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% HK TW CN MY SG TH SK VN HK IN ID Figure 3-23. 2005E) (Source: CEIC. if we compare this to the internet and mobile phone penetration rate of 14% and 12% the number is rather low.1 Market penetration There are only about 6 million bank accounts in Vietnam. That is the size of the socioeconomic class in Vietnam. SBV. Banks are almost unheard of in secondary cities and rural areas. which has virtual national coverage. 5 million of them for individuals which amounts to a penetration rate of about 6%.2.
4 Lending practices Lending decisions in Vietnam are still based more on relationships than cash flow.71 3. double-digit growth rates. However. the state-owned banks saw credit grow at an annual average rate of 24% since 2002. ACB. Sacombank. Compare this with the US where the ten biggest commercial banks control only 49% of the country’s banking assets. More recently.2.4.2. Amongst the large banks.2 Rate of growth in loans and deposits Credit growth in Vietnam has been expanding at a very high rate during the past few years.4. the banking industry is growing rapidly with both deposits and loans expanding at high. 2006). some banks such as Vietcombank. While the better banks could probably cope with this. The assessment of loan customers is usually driven by the relationship with the bank and the size of the collateral being offered.2. The problem is partly due to outside interference in the decision making process and partly due to a 71 One bank has forecast that credit could grow at 35% per annum over the next five years given sufficient access to capital. 2006). Cash flow driven assessment and qualitative analysis is reserved for large private sector customers only.76 Despite the limited penetration and physical presence. credit growth rates above that level for any extended period of time can be unhealthy for an economy. A 7% GDP growth rate can accommodate an annual credit growth rate of about 14-20% (VinaCapital. In fact. the temptation for others to take on too much risk is high. . Thus.4. 3. Given the inability of some bankers to distinguish a good credit risk from a bad one this is not entirely a good thing. only the ACB bank uses DCF analysis across their entire customer base.3 Oligopolistic banking market Four state banks have carved up 70% of the loan market while forty-odd joint-stock banks and a host of foreign banks compete for the remaining 30% (SBV. and Techcombank are making a determined effort to court the retail market. at the top tier. 3. the Vietnamese market acts like an oligopoly.
4. International regulatory agencies carried out a similar exercise using Ernst & Young and found that NPL’s in the system using international accounting standard . 3.0% and 4. providing syndicated loans for utilities. JSCBs are geared mainly towards lending to small and medium size enterprises (SMEs) and the wealthier retail customers. 2005).7% (SBV.77 lack of professional guidance.7% in 2000 to 8. Most banks lend a lot of money to a fairly narrow base of customers. Lack of credit information is probably the single greatest hurdle standing in the way of the development of a proper retail market.6 Quantity of non-performing loans According to the statistics of the State Bank of Vietnam the non-performing loans problem has been largely dealt with since 2000. BIDV.4. Another issue is exposure. 8. Those banks that make the transition soonest will be the long term winners.5 Product offerings The SOCBs are generally geared to the large corporate and state-owned sector. Getting someone’s credit history in Vietnam is often impossible. mortgages and house improvement loans are retail staples. 2002 and 2003. However. infrastructure projects. In general. the official number in 2005 rose to about 7. The top 30 state-owned corporations probably account for over half of the state banks loan portfolios. The JSCBs are no different.5%.47% in 2001.2. respectively. given the banks’ low penetration and limited branch network they only reach a fraction of their potential customer base. And small business loans using property as capital is the basic model for the SME market. The non-performing loans (NPLs) of state owned banks fell steadily from 12. The absence of IT infrastructure to support professional credit analysis is another major factor. Banks do not share much information and the state credit bureau only carries the history of the very largest lenders. with an NPL ratio of 9% dragged the average down. 3. Car loans. Under a new stricter definition. heavy industry and property developers.2. the Vietnamese banking model is best described as relationshipbased rather than product-based as in international banks.
2006). For private sector JSCBs. 36% were paid out by state budget sources. In the early 2000’s there were some efforts by the government to resolve NPLs. the widespread adoption of a broad based credit culture where banks use market principles to assess credit risk does not appear to have taken place yet. 2005). 72 Incombank. Most NPLs are generated by SOEs refusing to pay their obligations to SOCBs. One major reason for the fairly painless partial clean-up was the fact that land prices skyrocketed in 2001-2003 (VinaCapital. There are still very few NPL sale and purchase transactions taking place. average NPLs are around the 1% level at the end of 2005 (SBV. . wrote off about US$ 312 million worth of bad debts in 2004 alone (SBV. That way SOEs can start their new life in the private sector unencumbered by debts. 2006). although attempts to start one are ongoing. There is not yet an effective secondary market for bad debt. While there appears to be modest progress being made with the bank sector’s historical bad debt problems.78 definitions came to about 15-20% of outstanding loans in the state-owned sector (Merrill Lynch. 2006). In 2001-2003 the government injected a large amount of money into the SOCBs to enable them to write down their NPLs (SBV. 2005). There have also been discussions that the large SOCBs may establish specialized asset management companies to resolve their historical NPL problems. This enabled banks to sell off collateral land use rights and buildings at a profit on those relatively rare occasions when they were able to take possession of collateral securitizing the NPL. for example. A major banking crisis has been avoided so far thanks to the robust property market and a generally healthy economy. Pre-equitisation is a favorite time to write off or simply clear out these loans. 40% were dealt with by risk provision funds and 24% by the liquidation of assets (SBV. 72 A blank cheque from the government may solve the immediate problem but does not change the lending culture that gave rise to it in the first place. Of the NPLs from SOEs which have been resolved. 2006).
. Doubtful and Estimated Loss) and the use of specified reserving rates (group 1-5. Without any way to easily check the potential borrowers’ credit history. Usually it’s just easier to say no. Precautionary. Arguably. Sub-Standard. the raft of technical assistance agreements signed between JCSBs and foreign banks should begin to infuse better standards of credit risk management among the banks.2.73 3. the most positive development on the asset quality front in recent years was the announcement by the governor of the SBV (April 2005) of the requirement for all financial institutions to adopt international standards of loan classification (Decision 493). Banking NPLs 2005 (Source: VinaCapital.79 Figure 3-24. 74 What takes minutes overseas can take months in Vietnam. 0%. prone to error and greatly limits the number 73 This new requirement encompasses the classification of loans into 5 groups (Normal. 5%.4. 20%.74 The work is very time consuming.7 Consumer credit bureau One of the greatest obstacles preventing a healthy retail banking market is the lack of timely and accurate credit information available to banks. Or to attach unattractive conditions to the loan. banks have to spend a lot of time and money trying to check up on them. 2006) On the positive side. 50% and 100%).
80 of customers a bank can lend to. to get a credit card in Vietnam requires you to place a term deposit with the bank. Loans could also be offered with little or no collateral. As a result. Proper risk management is very difficult under those circumstances. . credit card providers. ranging from their repayment capability to appraising the value of their assets. utilities. only 100.75 Without a private credit database. equal to the amount of your card limit. Banks could then manage their overall risk professionally and expand their consumer businesses faster. Detailed credit histories would enable financial institutions to better assess risk and determine what interest rates to charge. A private credit bureau would complement Vietnam’s public registry by investigating the borrowing histories of a much broader range of potential customers and maintaining a file on them. The International Finance Corporation (IFC) has introduced a model private credit bureau in which foreign and domestic banks would work together as stakeholders. insurance companies. Potential bureau users will be banks. Consumers would benefit as average interest rates would fall along with banks’ risk levels. and payments could be made in return for information provided by concerned agencies and local authorities. The bureau would act as a database compiling credit information related to individuals and small businesses. banks’ credit departments are overloaded trying to collect accurate information related to its borrowers. local finance companies. after ten years. 75 For example. and others.000 credit cards have been issued in Vietnam compared with over two million debit cards. Information would be collected from member banks. retail credit firms.
Also indirectly. directly through various regulations and restrictions which govern how they conduct business and secondly by strictly licensing the type of businesses they can enter. The general view is that the SBV is politically and operationally dependent on support from government agencies. and thus primary vehicles of government policy lending decisions. .81 3. recent developments suggest that the reform process may be accelerating and will. some key areas of reform will be reviewed and the level of progress made so far will be assessed.). achieve harmonization with global standards. etc. the Vietnamese banking sector is perceived as still weak and inefficient by global standards.3.3 Banking industry in Vietnam After over a decade of financial sector reforms. Firstly.1 State Bank of Vietnam (Central Bank) The first wave of reform and liberalization of the financial sector in Vietnam took place between 1988-90. the SOCBs were departments of SBV. World Bank. The bank sector still suffers from a substantial amount of non-performing loans. In this section.e. through the interference of a myriad of agencies and ministries.2 State-Owned Commercial Banks (SOCBs) In Vietnam there are five state-owned commercial banks (SOCBs). Similar to central banks in other markets. Legislative issues are ambiguous and regulations poorly enforced. both local and national. While legislation is in place to guarantee the independence of the central bank from political influence. The government still exerts strong control over the banking sector in two ways. However. in the foreseeable future. on a more positive note. 3. 3.3. IMF. who want to have a say in how scarce credit resources are allocated. according to many multi-national agencies (i. the central bank has little if any independence. the SBV is responsible for monetary policy and the regulation of the banking system. One of the most important developments that emerged was the creation of a two-tiered banking system consisting of the State Bank of Vietnam (SBV) as the central bank and supervisory institution (tier 1) and an operating system (tier 2). Prior to the reforms of 1988-90.
There are approximately 1. with over 1. These lending institutions were established in the early 1990s by the SBV following the collapse of a raft of rural credit co-operatives.000 PCFs operating in Vietnam now and they control around 1-2% of the total bank sector loans and deposits (Source: SBV. The table below lists these banks. was established to provide loans to poor households especially in rural areas. In 1988 all of these banks which have been departments of the central bank. Despite this “paper” separation. the Vietnam Bank for Social Policies (VBSP). . broke away to form independent banking entities. in practice they remain tightly controlled by the central bank. 2006). 2006) These institutions dominate banking in Vietnam (estimated 70-75% share of the bank sector assets).200 branches across the country. previously know as the Vietnam Bank for the Poor. SOCBs before 1988 and now76 (Source: SBV. They act as an oligopoly at the top of the Vietnamese banking industry.82 Figure 3-25. The rural sector is also serviced by the People’s Credit Funds (PCFs). 76 In addition to the four main policy lenders.
The four large SOCBs slowly began evolving from specialized policy lending vehicles to more commercially orientated financial intermediaries over the last 10-15 years.83 Local JSBs 20% Foreign Banks 10% SOCBs 70% Figure 3-26. Historically the state-owned bank sector was used as an instrument of public policy and to promote social and political objectives as opposed to commercial objectives. with the vast majority of the bad loans concentrated in the SOCBs (VinaCapital. 2006). Their policy lending past has burdened them with high levels of non-performing loans. . each bank remained the key player within its historically mandated business segment. Although official numbers suggest a system NPL ratio in the mid-teens. Markevt share of SOCBs (Source: SBV. it is widely believed that the level is closer to 30%. these four banks were focused on specific segments of the economy. While these sector constraints have been abolished. 2007) As their names suggest.
411 BIDV 3.800 VEARD 6. the emphasis is put on ‘Focused businesses’.101 MHB 800 Eximbank 700 Techcombank 617 Southem Bank 580 VIB 510 East Asia Bank 500 Military Bank 450 Saigonbank 400 Hanubank 300 Oricombank 300 HDB 300 0 2000 4000 6000 8000 10000 Figure 3-27. ‘Performance’ and ‘Challenges’. VinaCapital.970 Incombank 3. 2006) In the following analysis. . Relative size of top 17 CBs in term of charted capital (bn) (Source: SBV.899 ACB 1.328 Sacombank 1. 2006.84 Vietcombank 7.
which includes trade finance and international payments. 2006. 1st quarter report 2007) Focused businesses Vietcombank is the largest and best managed of the state banks. The bank has a leading position in both the retail and the corporate markets in Vietnam. . The bank also dominates the interbank foreign exchange market. VinaCapital. It is second only to Agribank in market share of the deposit and lending markets. makes secured loans and offers foreign exchange services. 41 sub branches and 47 transaction counters at the end of 2004 (Vietcombank.85 3. VCB has an active retail banking business.1 Bank for Foreign Trade: Vietcombank (VCB) Table 3-3. It handles one third of Vietnam’s trade payments. Vietcombank. its traditional business area. 2006. 2006). Vietcombank. Vietcombank’s core business is focused on foreign exchange transactions. issues credit and debit cards. trade and providing long term financing to the largest SOEs. 2006.3. Vietcombank (Source: SBV.2. VCB is closest to being considered a full service bank in Vietnam. The bank had a total of 27 branches.
Performance VCB’s corporate customer list includes most of Vietnam’s blue chip stateowned or equitised companies. Typically.77 In the future. 1st quarter report 2007). . It is expected that margins will not decline as the focus shifts from pure syndication to a mix of lending and bond underwriting. The loan to deposit ratio is about 60% which is the industry average. slowing down recently as the bank started to clean its books ahead of listing. Loan growth has averaged about 55% per annum over the past six years. a leasing arm and an asset management company.79 77 Vietcombank is also leading a consortium of four banks lending a total of US$ 2. However under the more relevant International Accounting Standards (IAS) the CAR was a far more modest 4. 78 Known as decree 493. 2007). its NPL burden has been largely dealt with over the last five years.7 billion to EVN for the construction of power stations in 2006-2010 (Vietcombank.4%. The bank will arrange and underwrite bond issuances through its securities arm rather than lend large sums directly to corporations. Vietcombank’s CAR stood at 7% as calculated by Vietnam Accounting Standards (VAS).78 Vietcombank had a total bad debt ratio of only 2. This business is not a major profit earner for the bank.6% at the end of 2006 which is far better than the other banks (Vietcombank. seven banks. US$ 277 million had apparently been settled under the equitisation program by December 2005. three real estate companies and one credit fund. It also has stakes in two insurance companies. Vietcombank plays the lead role in large scale syndication for infrastructure projects such as refineries. it is expected that the development of the corporate bond market will change VCB’s business model. According to the bank. The bank has captured the lion’s share of the lending to the best quality SOEs which were mainly in export related industries. a securities company.86 VCB also owns a financing subsidiary. Under the latest SBV standard definition of NPLs. 79 As of December 2004. Out of a total of US$ 354 million worth of bad debts.
2006). VCB has received considerable help and input from organisations such as the World Bank in order to create a mechanism to manage credit risk more effectively. Challenges Vietcombank has taken major strides in boosting its internal controls and strengthening management. . Margins and ROE have recovered sharply since 2002 when ROE hit a low of just under 7. After equitisation. Like all state-owned banks. A cleanup of the loan book with some government help was the key to the turnaround. March 2006).5 million in December 2004. probably in 2007. hopefully. The bank has improved its operations dramatically over the past five years.4 million in convertible bonds in 2005 purchased by a mix of institutional and retail investors. Vietcombank issued a total of US$ 84. convertible bond holders will be able to become shareholders of the bank (VET. VCB has also been raising money through the bond markets. 2005). During 2002-2003 the bank received a total of US$ 125 million in government help through the issuance of special bonds (SBV.5%. reserves and retained earnings) totalled US$ 487. avoid some of the mistakes of the past. The 7-year bonds carry a coupon of 6%.87 Vietcombank’s shareholder’s equity (chartered capital. The bank is striving to improve the quality of its loan book and to grow the retail business ahead of listing (Vietcombank. Risk management (RMC) and asset liability commitees (ALCO) have been set up to manage the bank’s risk profile and.
overseas remittances. VinaCapital. 500 sub-transaction offices and savings offices in most of Vietnam’s cities. Incombank provides deposit and savings accounts. Incombank (Source: SBV. .88 3. Incombank. Incombank reported a 28. medium and long term credit facilities. Performance In 2005. syndicated loans. 2006) Focused businesses Established in 1988. traveller’s checks.3% increase in total lending to US$ 4.7 billion. 2006).2. financial leasing. short. but with government help it recovered. provinces and commercial centers (Incombank. the Industrial and Commercial Bank of Vietnam (Incombank) has 134 branches. foreign exchange and securities trading. After the Asian crisis the bank was burdened by NPLs and poor management. credit card services. loan guarantees.27 billion and a 18.2 Industrial and Commercial Bank: Incombank Table 3-4. 2006). 2006. 2005.2% growth in total assets to US$ 7.3. Its core customer base is state-owned heavy industry although it is expanding into new areas. For 2006 the bank reported a 33% revenue growth and 42% growth in EBT and net profits (Incombank.
About half of the bad loans (US$ 312 million) was settled in 2004. they illustrate the progress that Incombank has made recently. 2006). enabling the bank to reduce its NPL to manageable levels (Incombank. These tend to be stateowned heavy industries or domestic developers and much of their borrowing is at favourable or below-market terms. While the size of the losses at Incombank is manageable (US$ 5. it still has a long way to go before it can catch up with Vietcombank. By sector. Incombank will be a benificary of government aid until 2008 (year of expected equitization). Incombank has turned itself around in the past five years with considerable government help. Revenue growth was a very strong 55% with earnings up 183% last year. The NPL ratio has dropped to 2. Challenges Similar to Agribank. In 1998 the bank had a total of US$ 625 million in bad loans and has managed to dispose or settle US$ 552 million since 2001. Risk management and corporate governance are still issues. 2006). . Incombank’s most pressing need is to improve its margins and raise capital to push it over the 8% CAR hurdle by 2010.18% and while these numbers do not reflect the full picture. the bank’s loan portfolio was 33% exposed to the industrial sector.18% and CAR was around 6.25 billion. Incombank has recently suffered losses speculating on the forex markets and offering loans against stocks. In fact.07% at the end of 2005. the bank’s exposure to these traditional sectors is second only to BIDV and it explains the bank’s below average profit margins. it serves as a clear indication of the weakness of its internal controls. While Incombank has made significant progress since 1998.89 In 2005 lending growth rose 18% to US$ 4.35 million).5% to 2. with an additional 22% in the construction and transportation sectors (Incombank. Pre-2000 bad debt has now been almost completely cleared. although the size of the assistance will be less than that to BIDV and Agribank simply because the bank is in relatively better shape.68 billion while total assets rose 28% to US$ 7. The NPL ratio fell from 3.
making it by . BIDV. Its combined loan book is bigger than Vietcombank’s but has profits of less than a tenth of those of Vietcombank. This number is significantly higher than the 2004 level due to the redefinition of bad debts under Decree 493. VinaCapital. 2005.9% exposure to the cement sector.3. Historically BIDV was the principal conduit for major financing projects as the bank inherited most of the problem customers.49% at the end of 2005 according to the official evaluation method.90 3. 2006. The bank has an additional 4.3 Bank of Investment and Development: BIDV Table 3-5.1 million in the property development market.2. 2006) Focused businesses BIDV has a total exposure of about US$ 176. Performance BIDV had an NPL ratio of 10. Overall about 26% of its loan portfolio was to the construction sector in 2005 and it represents its largest sector exposure. Bank of Investment and Development (Source: SBV. The bank tends to focus on medium and long term project lending to SOEs.
to get help from the government with an expected capital injection of US$ 187-250 million in 2007 (BIDV. BIDV appears to be the most vulnerable of all of Vietnam’s major banks (VinaCapital. This will mark a major turning point for BIDV. 2006).16% in 2001 to 6. The bank has set a target for loan and asset growth in excess of 20% between now and 2010. 2006). To cope with concerns about bad debts BIDV has set aside a management reserve of US$ 314. To address this problem BIDV has recently issued bonds worth a total of US$ 204. together with Agribank. BIDV had total assets of VND 131. The bank has rescheduled US$ 65. March 2006).18% in 2005 (BIDV.7 million of the loans to the seven largest property developers but this still represents only a fraction of its questionable loans (BIDV. . The real issue going forward is management quality and how to avoid making future bad loans in high risk sectors such as the construction industry. BIDV has the worst returns amongst the large SOCBs which is a clear indication of its problematic balance sheet. Hard decisions will have to be made and some long-standing customers cut off from funding.5% at the end of 2005. Interestingly. Their past strategy of indescriminate lending and expecting investors to give them the benefit of doubt could have only worked in an environment of very poor disclosure.91 far the weakest state bank in the sector. 2006). The CAR rose from 2.4 million with a maturity of 10-12 and 15 years (VET. Challenges BIDV will be first. 2006). 2006).4 million as of end of 2005 (BIDV. the lack of Tier 2 capital is another. Until then the bank’s progress will remain inconsistent and very vulnerable to any economic downturn. the bank seems less clear on setting a profit target. A poor quality loan book and low returns are part of the overall problem. given its low profitability and high level of NPLs.8 trillion and an ROE of 10. The bank is set to equitise in 2007 and in preparation for that it has acquired a rating from Moody’s and recently issued bonds (VET. This is not considered to be enough to solve all of BIDV’s problems. March 2006).
March 2006). soft loans.429 and total assets of US$ 11. 3.3. In 2006 the bank had a loan portfo- . a staff of 29.7% and gave the bank an E rating for financial strength. 2006. Performance At the end of 2006 Agribank had a total of 2.000 branches. 2006) Focused businesses Agribank is seen as more of a social than a commerical bank with deep roots in the countryside. Nonetheless BIDV was given a Ba1 rating for VND deposits and a B1 for foreign currency deposits (VET. fishery and forestry sectors . Agribank is responsible for rural development by providing medium and long term credit in the agriculture. VinaCapital. Agribank (Source: SBV. VBARD.2. 2005. In preparation for that move the bank issued convertible bonds and received a rating from Moody’s.92 BIDV has planned to list on the stock market by 2008.in other words.4 Agriculture and Rural Development Bank: Agribank (VBARD) Table 3-6. The rating agency estimated the bank’s return on risk adjusted assets at a low 2.37 billion. Apart from its role as a commerical bank.
It is expected that the government will recapitalise Agribank in 2007 and inject US$ 312-375 million into the bank. The bank also offers loans in the retail market and has plans to increase the weight of consumer loans from 10% to 30% (VBARD. bird flu. 2006). 2006). There are no immediate plans to equitise the bank and it would require a mammoth effort and a lot of pain to clean it up for listing. As long as the bank caters for underdeveloped regions. most of these loans would be made to individual small farmers and. and to reduce NPLs to less than 1%. it must be similar to BIDV in scale. In addition to providing loans to its traditional customers in the agricultural sector.93 lio of US$ 9. Judging by recent results. it plays a very important social role.7 billion (VBARD. In practice. but this number raises some doubt since it is greater than the number of accounts in the entire banking system. It also hopes to increase profits by 10% a year (VBARD. or US$ 2. 2006). and it is expected that they will be able to continue to increase both profits and margins for the next two years. Challenges The bank claims to have 10 million customers. should be considered more like business improvement loans. after the rest of the state-owned sector has gone public. it may hurt the banking sector as a whole by crowding out the private sector. The bank aims to increase its assets by 25% per annum. It is not clear what the real extent of the NPL is at Agribank however. in fact. If. This year the exposure to that sector has reached 29% of its total loans. it starts to compete in small towns and larger urban areas. . they are doing quite well on the profit front. drought and floods (VinaCapital. 2006). its loan portfolio by 20-25%. Agribank seems to be targeting the SME lending market as well. Farmers have had a tough time in recent years due SARS.8 billion (VBARD. however. 2006).
As the name suggests. At the beginning of 2005. the rice basket of Vietnam. MHB had assets of US$ 875 billion up 10% compared to the previous quarter. It was established in 1997 with a chartered capital of US$ 50 million. 2006. MHB has a nationwide network of 124 branches with headquaters in HCMC (MHB.5 Mekong Housing Bank (MHB) Table 3-7. Its rapid pace of expansion seems to be driven partly by management’s ambitions and partly by the dire need for better housing in the delta region (VinaCapital. Loans and investments totalled US$ 853 million increasing 11% compared to the previous quarter (MHB. 2005. 2006). . The bank’s main function is to provide medium and long term financing to the housing market.94 3. deposits and branches and not profits. most of the bank’s operations are concentrated in the heavily populated Mekong region. 2006) Focused businesses Mekong Housing Bank is the smallest of the group.3. 2006). VinaCapital. Mekong Housing Bank (Source: SBV. 2006).2. Performance The key indicators for growth are asset size. MHB.
deposits and branches. MHB increased an additional 50% in assets to US$ 1. . Disclosure is very limited and the current quality of the loan portfolio is low. MHB offered only 0.35 trillion. Challenges MHB will probably equitise in 2007. far lower than most competitors but seems to be able to use its branch network to reach customers not covered by other banks (MHB. The loan book totalled VND 8. 2006). Most of the bank’s loans are made to improve the quality of rural housing stock (MHB. concern about its very low equity base and extremely low profit margins remains. The bank is very thinly capitalised with an equity base of only US$ 49 million at the end of 2006.80 While MHB’s growth performance is very impressive.62% interest per month (7. not profits. The bank faces a hard task to convince investors that its social role will not detract from its ability to boost profitability in the future. The drive to boost assets and deposits has been given a higher priority compared to the improvement of its balance sheet and the increase of profit margins. Much of MHB’s funding comes from the World Bank which explains the large size of the loan portfolio as compared to the modest size of its deposit. 80 Just to note that the key indicators for growth are assets size. a plus of 72% y-o-y. The deposit to loan ratio is 135%.44% per annum) for three month term deposits.56 trillion. However. most of the loans are small in size and therefore the risk is fairly well spread compared to other state-owned banks which tend to lend a lot to a very few.95 At the end of 2005. up 55% compared to 2004 (MHB.18 billion and a 40% expansion of its loan portfolio. 2006). 2006). the deposit base was about VND 6. the vast majority of these being in term deposits. In 2006.
JSCBs valuation and forecast (Source: VinaCapital. Thus. Table 3-8. There are about 3540 such banks at present. heritage issues and social lending pressures like the SOCBs. SSC. do not face administrative burdens. which were set up in the 1990s. . they are more flexible and can adapt themselves to changing market conditions. 2007) Characteristics of JSCBs ■ More flexible: JSCBs.96 3.3. ■ Wide range of products and services: JSCBs offer the full range of banking products and services to corporate and retail customers.3 Joint-Stock Banks (JSCBs) The establishment of JSCBs is another important development that accompanied the initial liberalization of the financial sector. 2006.
which includes banks such as Techcombank. Smaller JSCBs such as Phu Nam Bank and VIB deserve an honorable mention because of their pursuit of niche strategies with strength in SME 81 As ACB has demonstrated. The top tier are expanding their branch networks and loan portfolios aggressively. 2006). are more of a mixed bag. good information technology is a key competitive advantage in the Vietnamese bank sector. . ranging from purely private organizations to being jointly owned by state owned enterprises (SOEs). service quality. The result is thin margins and meagre returns. Challenges of JSCBs ■ Low capital base: Average capital is about US$ 20 million per bank so they cannot provide large loans. ■ Low NPL: none of JSCBs are saddled with high levels of bad debts. between the top tier (Asia Commercial Bank. In the past two years JSCBs have made a concerted effort to increase their chartered capital by issuing shares. Resources are spread too thinly as they try to compete across the broadest range of businesses. ■ No specific positioning: The private sector banks are competing fiercely and many of them are choosing identical strategies. The second tier.97 ■ Mixed ownership structure: The ownership structure of JSBs is mixed. ■ Poor IT infrastructure: There is a great need for spending on IT to build core banking system. Eximbank and EAB. Techcombank’s recent shift of strategy towards the retail market is seen as a significant positive move while EAB is leaning in the direction of SME lending. market penetration. etc. private groups and individuals. Sacombank) and the rest. risk management and ATM software.81 ■ Weak operational and management controls It is worth mentioning that there is a big difference in term of chartered capital. It provides the platform for offering and managing a wider array of products and services to customers (VinaCapital. boast good management and have a clear product strategy to differentiate them from the competition.
3. They are largely locked out of the commercial lending market due to lack of capital. the bank intends to use its locations as a distribution platform for a wide range of products targeting the retail customer (ACB. 2006. 2006) Focused businesses ACB is the best-managed bank in Vietnam and has a clear lead in retail banking. ACB.82 3.3. The number of JSCBs was reduced from 51 to a total of 36 banks currently in operation. 2006). JSCBs are still very fragmented.1 Asia Commercial Bank Table 3-9. Despite a round of restructurings and mergers in 1999-2001. Other smaller JSCBs are mainly limited to retail banking services such as remittances and collection / spending under customer authorisation. By adding about 20-25 branches or sub-branches over the next twelve months. VinaCapital. Asia Commercial Bank ACB (Source: SBV. 82 This number is still far too high and it is expected that it will halve over the next few years as another wave of consolidation is overdue. .98 lending and retail loans respectively (VinaCapital. 2006). 2005.
3% (or 14. ACB has set itself an ROE target of 30% over the next five years (ACB.8%. a y-o-y increase of 50% (ACB. 2006). 2006).03 billion. Exposure to the real estate sector is minimal at about 3% (ACB. Retail customers account for about 60% of their total lending. Adopting government valuations which are only 50% of market. ACB’s balance sheet reflects their conservative approach with about 50% invested in government securities and the rest lent out. ACB is strongly focused in the southern market and has no plans to increase its presence in the north for the time being.99 At the end of 2006. The bank is keen on the idea of an independent credit bureau as long as the government does not get too closely involved. credit cards and.9%.4-15.25% of market value (ACB.6% per annum). they offer loans up to 50% of the assessed value of the property . 2006). Their approach to property collateral is also prudent. deposits of US$ 1. The bank also has some wholesale banking businesses covering large corporate customers such as EVN. mortgages. Performance As of 2006.580 at a monthly rate of 1. 2006). the bank has a very low loan to deposit ration of 44%. Challenges The biggest challenge facing ACB as a retail bank is how to improve access to credit information about its potential customers. .71 billion up 23% and outstanding loans of US$ 763. the bank had 2. unsecured loans.21. The bank has a capital adequacy ratio of 12%. The retail business has been built around some key products such as car loans. ACB had assets of US$ 2. with the rest mostly in SME lending. The lack of reliability of third party services such as the Credit Information Centre (CIC) means that its overstretched credit department is forced to rely on itself. far less than the average 60% ratio prevailing in Vietnam.892 employees. up 32. Overall.9 billion up 27. The unsecured loans business enables customers to borrow up to US$ 12. 2006). more recently. This is a reflection of a generally cautious stance which has been rewarded by an NPL of below 1% (ACB.
in the leasing market ACB is mainly interested in big ticket items of over US$ 2 million whereas its strategy in the insurance market is to concentrate on low income. insurance and investments carry higher margins and are seen as key to the bank’s future growth. The bank has two major subsidiaries. and ACB has made considerable investments in its development over the past few years. The management of the bank is widely considered to be one of the best and they have introduced incentive pay schemes for top and middle management based on targets such as profits and ROE. 83 For instance. low ticket customers. to increase the number of fee based services it offers customers such as brokerages (both real estate and securities) and investment. ACB securities and ACB asset management.100 ACB has been a market leader in the new. ACB’s strategy is to leverage its existing distribution platform. Products such as leasing. .83 IT is seen as the key to developing and managing all of these different businesses. The bank takes a niche strategy approach to market entry depending on where the gaps are. It is expected that ACB will list late in 2007 or early 2008. insurance and fee based banking services. unsecured lending market using the DCF valuation method to assess its customers. leasing. The bank has already set up these businesses as subsidiaries and it may move to a holding company structure until 2010. In the medium term.
. Currently.806 employees in 2006. 2006. nationwide banking network with 128 branches and sub-branches.101 3. VinaCapital. 2006). It employed 3. Sacombank.7% and ANZ recently bought a 10% stake and hinted it would be interested in raising its stake as part of its Asian expansion plan. Sacombank currently has a 4% market share as against ACB’s 5% share with a strong focus on SME and retail loans. REE owns 7. Sacombank (Source: SBV. the World Bank’s International Finance Corporation and Dragon Capital (Dragon Capital. 2006) Focused businesses The Sacombank was formed in 1991.2 Sacombank Table 3-10.3. Sacombank is challenging both Vietcombank and ACB across a full product range in the retail market (Sacombank. The bank is focused mainly on the SME and retail markets and is rightly seen as the most aggressive of the JSCBs. Sacombank has a large. 2005. The bank has a strong retail franchise and recently started to offer 15-20 year mortgages through its real estate subsidiary. and up to 2006 had two foreign owners. 2006).3.
The bank has focussed on loans to highly profitable small businesses and the quality of the loan portfolio is high (Sacombank. It is expected that ANZ’s stake in Sacombank will increas as the law permits. Its collateral policy is believed to be more flexible with lending. . has recently launched its finance leasing off shoot with VND 100 billion in capital. having divested its 11% stake in HCMC securities (Sacombank. The bank’s relationship with ANZ is likely to expand over the next few years. Sacombank is generally seen as more aggressive than ACB both in terms of lending policy and overall expansion policy. The bank. in some cases. up 30. Challenges Sacombank has recently collaborated with the ANZ Banking Group to set up a joint-venture in credit card services.7% yo-y. trade finance remittances and financial investments. Gross profit has almost doubled to US$ 14. A transfer of technology and product knowhow seems to be taking place which will serve to increase the bank’s competitiveness especially in the retail market. income is split 70% interest income and 30% fee income (Sacombank. The latter comes mainly from treasury.8 million over the same period. 2006). Currently. of up to 70% of the value of the property used as collateral. 2006).102 Performance Sacombank’s gross assets were US$ 1. a joint-venture fund manager that operates the listed VND 300 billion VF1. which now also operates realty investment and asset management firms.2 billion as of 2006. Sacombank has a CAR of 15% under VAS rules and an NPL of less than 1%. 2006). It also holds a 51% stake in Vietfund Management. Sacombank is currently also seeking a license to launch a securities brokerage house with VND 300 billion in capital.
with a maximum of 30% for all foreign investors. there were 28 foreign bank branches. The most important measure of foreign bank lending growth is foreign direct investment.103 3. few of them have expanded beyond one or two branches.84 Focused businesses Foreign enterprises are the main market for the foreign banks. While many foreign banks have entered the Vietnamese market. Restrictions and difficulties in licensing are the reason. . The most obvious of these restrictions is that foreign banks cannot establish local subsidiaries. As of the end of 2005. Foreign banks capitalize on this and it provides the bulk of their credit growth (VinaCapital. Currently. there are 130 industrial zones attracting 4. or more specifically. the setting up of industrial zones in Vietnam. and thus must operate through branches and representative offices. four jointventure banks and three foreign-invested leasing companies established in Vietnam. One area that the amendments to the existing legislation is being considered is to allow foreign banks to establish subsidiaries with the same legal status as the Vietnamese banks. with significant restrictions and limitations on market access. the limit on individual share ownership by foreign banks is 10%. network expansion and scope of operations of foreign banks. 84 At present.3. 2006).516 projects valued at US$ 18 billion in foreign capital and 15 new zones are under construction. the requirements for entry into the WTO based on Vietnam’s entry to the WTO which was officially approved on 11 January 2007.4 Foreign Banks & Joint Venture Banks The current legal and regulatory framework in Vietnam is heavily biased towards the local banks and financial institutions. The Vietnamese authorities are understood to be working towards lifting the restrictions on foreign banks operating in Vietnam in order to comply with the requirements of the 2001 US-Vietnamese Bilateral Trade Agreement (BTA) and more importantly.
or 9% of the total outstanding loans. consumer lending and credit 85 HSBC.5 million up to the end of 2005. which has been in Vietnam since 1904. Foreign banks are restricted in mobilising capital. the largest foreign bank in Vietnam. many foreign banks are setting up 100% owned subsidiaries to offer leasing. growing at double the rate of the overall banking system. a 2% market share. including infrastructure. 2006).5 million to open a new branch and are limited in who they can lend to and the proportion of VND deposits they can accept (350 % of capital).85 But with the expectation of liberalisation. where the biggest drawback is time. the latter.1 billion. (1) Option: Organic growth Through organic. accounting for only 0. has also recently announced plans to open a second branch in HCMC. Joint-venture banks’ outstanding loans had reached US$ 37. 2006). This is a traditional method. has only two branches (HCMC and Hanoi) with a prescribed registered capital of US$ 30 million. Doubtful debt levels remain well controlled.3 billion in total assets. Total pretax turnover of foreign invested and joint-venture bank branches had increased by an average of 45% up to the end of 2005. This strategy has yielded steady growth but from a low base given the various restrictions in place.06% of the total (SBV. . human resources. Total outstanding loans made by foreign banks had increased 30% up to the end of 2005. Joint venture bank profits rose 15% to US$ 12. a y-o-y increase of 25% (SBV. Consequently. all foreign banks start on a modest scale. need capital of US$ 1. Challenges There are two ways for foreign banks to expand in the banking industry.5 million (SBV.104 Performance At the end of 2005. foreign invested credit institutions had US$ 536 million in registered capital and almost US$ 6. Standard Chartered Bank. growth banks build their own business facilities. 2006). equipment and network. organic growth and strategic investment in local banks. These loans now total US$ 3.
or US$ 10 billion in the case of a joint venture). In other words. While there are no restrictions regarding the number of branches a foreign bank can set up.5%. foreign banks are happy to provide loans without mortgaged assets while local banks insist on collateral security. 2006). Currently foreign banks have between US$ 15-30 million in registered capital (SBV. they are asking for the full implementation of most favoured nation treatment principles to satisfy WTO regulations. in line with local banks. But foreign banks will have to raise their registered capital to US$ 63 million. The SBV (2006) has approved a new law that will allow foreign banks to set up 100% owned banks (provided they have US$ 20 billion in assets. and 2005 demonstrated major interest in this approach.5% instead of the 2-2. Even so.86 (2) Option: Strategic investment The second route is to buy shares in local banks.5 million in capital for every new branch. There are basic differences between the business practices of local and foreign invested banks. In theory. opinions still vary on banking trends and some foreign banks have said that limits on deposit capital mobilisation and branches will be fully removed after Vietnam has joint the WTO. Previously only long-established institutions such as the IFC and Dragon Capital had become strategic shareholders in domestic banks. the new FIBs will be able to raise as much VND deposits as they can handle. as mentioned before. 86 However. foreign banks have asked the SBV to loosen restrictions on opening new branches and the proportion of deposits mobilised on VND. First. they must add US$ 1. with local banks charging sources fees of 1-1. charged by FIB’s as is the case with Citibank.105 card services in the domestic market. The SBV is considering relaxing this rule for the first five branches. HSBC. as always. Fees tend to be higher. until 2010 organic growth will be limited. or Deutsche Bank (VinaCapital. whether they can do so in practice. . As a result. Foreign banks tend to be more client focused and skilled at cross-selling products.The question remains. 2006). which would cover all foreign banks currently operating in Vietnam.
2006). trading at about 5-7 times book value is very expensive compared to regional peers. lack of operational control is another disadvantage. EAB and Eximbank are also expected to sell stakes to foreigners soon. foreign banks take advantage of existing infrastructure and business networks to expand operations much more quickly.10% for any one foreign shareholder and no more than a 30% stake for all foreigners combined. ANZ bought 10% of Sacombank’s equity. there are two problems with this approach: high prices and lack of control. Secondly. Standard Chartered acquired a 10% stake in ACB and HSBC snapped up 10% of Techcombank. given that foreign banks are currently restricted to holding only 10% of a domestic bank.7 million. thus allowing for a majority stake. Namely. Most banks which bought stakes have done so in the hope that this restriction may eventually be lifted altogether. Table 3-11. .106 By investing in existing banks. However. 2006) In 2005. with an option to increase this to 20% by the end of 2007 (Merrill Lynch. Even with high growth potential and high ROEs the premium is hardly justified. Recently Singapore’s Overseas Chinese Banking Corporation announced it would buy a 10% stake in VB bank for US$ 15. three foreign banks purchased shares in three JSCBs. Strategic shareholding also has its limits . Recent investments by foreign banks in local JSBs (Source: Merrill Lynch. The 10% restriction will be raised to 20% soon but the 30% will remain firmly in place. Given that most of the attractive banks have already established foreign partners the desirable alternatives are quite limited. The prices of Vietnamese banks.
between them.3. .107 3. While the growth of the jointstock banks since the beginning of the 1990s has been rapid. Figure 3-28. Another factor contributing to the lack of competition amongst financial institutions has been the difficultly in introducing new products and services because the approval process of new products by the central bank can take anywhere from 3 months to over a year. control 75-80% of total bank sector assets (2004). This situation is largely attributable to the dominance of the four large SOCBs which. the level of competition within the Vietnamese banking sector is relatively low. Customer segments served by types of banks Constraints placed on the level of access and scope of operations of foreign banks has also impeded the level of financial sector competition. their growth has been constrained by the segmentation of the market – the markets for SOCBs and JSCBs are apparently separated in terms of deposits and borrowers.5 Competition in the banking industry Compared to other banking markets around the AsiaPac region.
there is little incentive for innovation or for VBARD / VBSP to improve their performance. One area where reforms designed to improve competition are unlikely to change in the intermediate term is the Vietnamese rural financial sector – a key area given that approximately 80% of the population lives in rural areas. Much needs to be done to improve the competitive strength of the state-owned and private sector banks in the meantime. Improving management and governance in the banking sector 87 As is the case in a number of emerging markets in Asia (e.88 3. . Tendency of consolidation 2.108 The recent investments made and technical assistance agreements signed by StanChart.87 The absence of competition to VBARD / VBSP (the main SOCBs operating in the rural sector) is primarily due to the very low profitability of this market as a result of the substantial state subsidies given to these banks to cover their operating and financial costs. ANZ and HSBC in joint-stock banks between 2005 and 2006 should also accelerate the level of competition in the banking sector. China. although at a comparatively modest pace. asset quality and poor profitability. by focusing on: 1. India and Indonesia). 88 It would be interesting to compare the experiences of the Agricultural Bank of China (ABC) and the VBARD / VBSP in terms of inefficiencies. Raising capital 4. SOCBs are the primary providers of financial services to the rural market. with Bank Rakyat Indonesia (BRI). as the latter is in a substantially stronger financial and operating position (VinaCapital.g. In particular. In light of a quasi-monopoly and very thin margins of these banks. Undercapitalisation 3.6 Conclusion The banking sector faces several key challenges until the market opening in 2010. Invesment in information technology 5.3. The most important of these is the ability to compete with the “foreign invasion” expected after 2010. 2006).
banks will also have to demonstrate experience in banking governance.89 The number of JSCBs was reduced from 51 to a total of 36 banks currently in operation. From next year. Currently.3. the SBV has circulated a draft proposal to raise the minimum capital level to about US$ 300 million. 90 This number is still far too high and it is expected that it will halve over the next few years as another wave of consolidation is overdue. SBV will introduce new regulations to force another round of consolidation in the near future. In addition to higher capital requirements. As a result. a corporate family can own up to 40% of a JSCB. Banks will need to commit to Basel 2 standards from either 2008 or 2010. All banks need to have chartered capital of US$ 63 million which is exceeded by the existing capital of only the very largest JSCB’s such as ACB and Sacombank.6.109 3. And they are also wary of conflicts of interest from large corporations owning pet banks. . 2006).1 Tendency of consolidation Despite a round of restructurings and mergers in 1999-2001 the JSCBs are still very fragmented.90 The State Bank of Vietnam has raised a concern about the fragmented nature of the private sector banks.91 89 “Too many banks are still chasing too small a slice of the pie” (VinaCapital. experience and funds to help the consolidation process. 50% of the JSCB’s will have to face a merger or a takeover. 91 The EVN currently holds a 40% stake in An Binh Urban JSCB. The SBV hardly welcomes new entrants in an already overcrowded marketplace unless they have the size. 91 Currently only about 11 out of every 1000 people in Vietnam have a credit history. a penetration rate of about 1%. All other existing banks fall far short and will need to scramble for new capital or merge in order to meet the new requirements. One way of doing this is to set high hurdles for any new established bank before it can get a license. One reason for the concern is that large corporations such as the giant utility Electricity of Vietnam (EVN) and the Vietnam Insurance Corporation have a strong interest in setting up bank subsidiaries.
2006).110 3. Moreover. BIDV has obtained an international rating in preparation for a stock market listing and possible overseas bond series. . to shore up their Tier 2 capital base to bring them over the 8% CAR hurdle by 2010. Vietcombank and BIDV have both issued VND denominated domestic bonds at a 1-2% premium to sovereign debt. Government restrictions on equity holdings combined with a bond market that hardly functions has made raising chartered capital very difficult for banks. The SBV is reluctant to allow smaller banks to raise capital from foreign investors. lack of access to the international capital markets has constrained their growth. The stronger JSCBs have responded partly by selling shares to foreign strategic partners. 2006). all of the banks have a substantial need to raise additional capital. where profitability was lower and capital particularly limited the options were more limited. 92 This compares with an average CAR of 13. Further down the line. In recent years the top nine banks have been raising capital by about 40% annually. Amongst the JSCBs.3.6. The JSCBs are in only a slightly better state with a handful able to cross the 8% hurdle rate. has chartered capital of US$ 487 million.7 million (SBV. Going forward. With most of the state banks well below the minimum 8% capital adequacy ratio for Tier 2 capital. a quality shared by private sector commercial banks as well. given that the domestic capital markets are still in the early stages. Vietcombank.92 Admittedly with large scale raising of capital this year.3% in South-east Asia.1% in Asia-Pacific and 12.5% at the end of 2005 (Merrill Lynch. Sacombank has chartered capital of US$ 118. this number is improving. the second largest bank by assets. And this valuation is based on a very generous reading of their NPL’s.2 Undercapitalisation One of the legacies of state ownership is a severe shortage of capital at the state banks. raising new capital was the biggest challenge for all the banks. Sacombank has raised some equity recently and most of the top tier of JSCBs have raised their capital substantially in the past twelve months.6 million and ACB has capital of US$ 68. Average capital adequacy ratios (CAR) at Vietnamese banks stood at 4. BIDV about US$ 240 million.
the SBV has allowed commercial banks to lift the cap on their use of short term deposits mobilised to provide medium and long term capital loans from 25% to 30%.111 Most recently. What is at stake here is not just the 8% hurdle for capital adequacy. apart from a token US$ 99 million soft loan coming from the World Bank will have to be raised on the capital markets. Bond issuance is currently the only realistic option for the SOCB’s and the best of the JSCB’s. access to capital became so easy that it lead to a risk of abuse by poorly managed banks. Foreign investment in commercial banks is regulated under decision 228 (issued on 1 December 1993). The banks’ ability to expand their lending base is constrained by the lack of long term capital. The SBV stipulated that total charter capital of JSCBs in Vietnam. This is only a temporary solution.3 Raising capital One of the key challenges for the banking sector is to raise their tier 1 and tier 2 capital to the international standard by crossing the 8% CAR hurdle rate by 2010. 3. must not exceed 30% and they cannot trade their shares the first five years. According to the central bank. . To do so.6. The result is a constraint on medium to long term lending and a deposit / lending mismatch. the situation has changed dramatically. BIDV and Agribank have all expressed strong interest.25 billion the banks will need to reach the 8% hurdle. Incombank. To address this problem.3. held by foreign investors. the SBV just introduced new regulations requiring banks seeking additional capital to get SBV’s permission. The second tier banks will have to rely on issuing equity capital until the ceiling rates on bond coupons are lifted. only the world’s top banks can be considered as potential investors and must be vetted by the government. The balance. Finally. In fact. There are issues to be addressed on the equity side too. Since May 2003. The central bank is drafting a plan to inject US$ 687 million of government money into three banks between 2006-2008. this injection will represent only part of the total US$ 1. The stock market has exploded and bank shares have been the first choice for domestic and foreign investors. the banks will need to raise billions of dollars in both debt and equity financing. This has made access to additional capital significantly easier.
The domestic market’s appetite for bank paper has now been tested. ACB has recently increased its chartered capital from VND 948. and both carry call options (VET. Based on an assumption of constant annual lending growth of 15%. April 2006). Vietcombank issued US$ 75 million in seven year domestic bonds at a coupon rate of 8. IT spending would seem to be one way to separate the winners from the losers. Both are priced at a spread of 1. ACB and Sacombank will also have substantial capital needs going forward.3. provide the bank with a stable outlook for both domestic and foreign currency deposit and a positive outlook for financial strength.112 By the end of 2005. The Vietcombank and BIDV issues were heavily oversubscribed by 250% with the BIDV offer. April 2006).6.5 billion in capital over the next four years to exceed the 8% target by 2010 (VET. banks will need to raise an additional US$ 3.20%. Most of this fundraising has come from tapping existing shareholders for new money while also adding some new investors. April 2006). April 2006).5 billion through new equity or bonds. 3. and an expectation that the banks will be able to raise 25% of the total additional capital needed through internal profit growth. It is expected that the top five JSCB’s will raise US$ 1. risk management and ATM software. It is estimated that the five SOCBs will have to raise about US$ 4. Moody’s announced credit ratings for BIDV ahead of the offer. There is a great need for spending on IT to build core banking systems.26% over the Vietnamese government 5-year and 10-year bonds respectively.05-1. VIB has increased its capital from VND 595 billion to VND 711 billion while Eximbank increased capital to VND 815 billion (VET. . enabling banks to charge higher fees and offer a genuine service to their clients.4 Investment in information technology Having up to date information technology (IT) is a key requirement for the Vietnamese bank sector. It provides the platform for offering and managing a wider array of products and services to clients.1 trillion.32 billion to VND 1.5 billion between 2006 and 2010 to keep ahead of the proposed new capital requirements (VET.8% and a 15-year bond carrying a coupon of 10.5%. BIDV has also recently completed a US$ 94 million VND denominated bond issue consisting of a 10-year bond with a coupon of 9.
The numbers are not disclosed in annual reports and information is generally anecdotal. There are three spending patterns in IT investments among Vietnam’s banks (VinaCapital.In the middle tier. there is no proven relationship between a higher IT spending and greater operating efficiency as a higher spending raises costs in the short term while the revenue gains come at a later stage only. 2006). 2006). 2006). is an unknown (VinaCapital. as IT spending tends to be a large portion of it.95 This gap needs to be closed if the Vietnamese banking sector wants to offer a comprehensive service to their clients. 2006). Sacombank recently invested US$ 4 million in a new core banking system. and Bank of China spend between 4. It is possible to take capital expenditure as a proxy. 94 Asian banks such as DBS.94 In Vietnam. Small joint-stock banks such as Habubank.113 However. 93 However.7% of operating expenses on IT with an average of about 11% (VinaCapital. however. . 2006): . some larger banks such as Vietcombank spend 6% of revenues on IT (approximately 10% of operating expenses) and are planning to increase that ratio. have more modest budgets. probably insufficient to upgrade their systems. . . 93 Data from European banks is easier to come by and we have found that these banks spend an average of 10-30% of operating expenses on IT (VinaCapital.2% and 17. Kookmin.The top tier state-owned banks continue to rely on government-supported budgets to allow them to undertake large-scale technology projects. resulting in a harmonious match between investments needed and available resources. including Vietnam. IT spending at most banks in Asia.The smallest banks focus on making basic upgrades to their existing infrastructure. 95 In general it is believed that Vietnamese banks are under-spending their Asian counterparts by approximately 30-40% (VinaCapital. more dynamic joint-stock banks take a more aggressive approach to technology investments. spending only about 2-3% of revenues.
but no less important is an immediate improvement in the SOCBs’ efficiency. The central bank’s role in approving and appointing directors in the state sector is a practice that must ended as must the interference of the regional central bank branches in local lending decisions.6. it is expected.3. 2006). Despite progress made in re-organising the SOCBs prior to equitisation.114 3. The Vietnamese banks’ current customer base and hence their strengths and weaknesses are largely a carry over from their former role within the state bank. At the same time. the SOBs have continued to grow rapidly in terms of deposits and assets. Bodies such as the World Bank and others have also offered considerable technical assistance to strengthen the banks’ management and operational capabilities. . As banks answer to shareholders they will have to focus more on profitability and expand their product base to increase margins. the adoption of Basel 2 standards and the technology transfer from future strategic partners should enable Vietnamese banks to improve their transparency as they adopt more international standards for reporting and accounting. The state sector accumulated substantial bad debts in the years immediately after the Asian crisis necessitating a large injection of government capital which took place in 2001-2003. 96 There are two other issues relating to management. supporting agencies have identified some 96 Once the incestuous relationship between the SBV and the state-owned sector has been replaced by the discipline of the marketplace. that corporate governance in the banking sector will improve markedly (VinaCapital. Having been recapitalised. Bank margins have been quite low as a result of reliance on low margin lending business and the high percentage of non-commercial loans made in the past. One is the reduction of operating costs and the other is the adoption of international standards and transparency.5 Improving management and governance Independence in management is one of the most crucial factors in the reform of the SOCBs.
In order to be able to develop relevant recommendations addressing the specific needs and opportunities of the banking industry in the current complex. Risk and liability management. the results of the empirical study will be analyzed using a specially developed SWOT structure. the banking industry. 97 The gaps in these areas can only be closed with the help of strategic investors or advisors.115 areas that need further improvements before they can reach international standards. . or even 20%. and the question is just how much knowledge transfer foreign investors will permit in return for only a 10%. The results of this part serve as a basis for the surveys about the corporate governance practice in the banking sector which are discussed in Chapter 4. including the political. and on the other hand. Specifically. This provides a general overview of the situation. into several criteria. Management information services. each will be further subdivided. 2006). Banking Industry) and then. and the banking market are presented. rapidly and drastically changing politico-economic environment. which impact on Strengths and Weaknesses in the banking industry (Mayer. more specifically. the banking sector in Vietnam is facing. the results of the analysis of the banking environment. economic and fiscal environments. NPL resolution. as mentioned above. Financial capacity. 97 Such as Organisation and management. the four components of the SWOT analysis will be subdivided into three dimensions (Banking Environment. as appropriate. In addition. and the challenges the country and. 2006). the external changes (CH-e) which impact on Opportunities and Threats. Banking Market. New products and services.4 SWOT and critical business issues In this part. 3. because of the rapid and fundamental changes in the entire country. stake in a bank (VinaCapital. the SWOT analysis needs to include an External and Internal Change factor. On the one hand. the internal changes (CH-i). Human resources development.
below summarizes the Opportunities and Threats incorporating the dimension and factor breakouts outlined above. Figure 3-29.4. Overview of Opportunities and Threats .1 Opportunities and Threats of the Banking Sector in Vietnam Figure 3-29.116 3.
Figure 3-30. Strengths and Weaknesses of the Banking
Sector in Vietnam
3.4.2 Strengths and Weaknesses of the Banking Sector in Vietnam Strengths and Weaknesses have been grouped into three dimensions market position, market offer, and resources (Gruenig/Kuehn, 2006). To better adapt this analytical tool to the specifics of the Vietnamese banking industry, we further refined the three dimensions by breaking each of them down into specific criteria as shown in the Strengths and Weaknesses matrix illustrated in the Figure 3-30. Figure 3-31. below identifies the major external and internal potential change factors which could have a significant impact on the Vietnamese banking industry and which will be the basis of a scenario analysis later in this document.
CHe (External Change)
Chi (Internal Change)
The rapid introduction of a state of the art IT system A quick infusion of the necessary capital required to modernize operations, solve NPL related problems and fund new products and services The financial collapse of one of the major Vietnamese banks which would lead to a dramatic loss of trust on the part of customers and a likely in reversal in the market oriented government policies
Reversal of current market oriented Government policies Sudden and complete liberalization of the banking industry and a sudden influx of much stronger competition
Figure 3-31. The External Change (CHe) and the Internal Change (CHi)
Global economic or fiscal downturn (significant drop in oil prices, significant disruption in oil supply, fiscal crisis in China, major military conflicts in Iran)
The ability of a major Western bank to form a strategic partnerships and to provide technical and managerial assistance as well as willingness to inject the necessary additional capital to be able to fully leverage market opportunities.
The appointment of an exceptionally experienced and successful Western bank executive to head one of the major SOCBs The rapid introduction and implementation of a sound corporate governance system
3.4.3 Critical business issues based on the SWOT Analysis The critical business issues have a fundamental impact on the performance and also the future of the company, thus they need to be addressed in order to enable banks to overcome their weaknesses, circumvent threats and take advantage of the opportunities and to leverage their strengths. Figure 3-32. lists some of the major issues behind the SWOT analysis which the banking industry as a whole and each individual bank has to address.
CBIs Corporate governance Description Corporate governance is lacking in most companies. To operate successfully and compete in a liberalized banking environment, banks must establish a corporate governance system that is consistent with global industry standards and expectations Most of the Vietnamese banks, including some of the largest ones, lack a sufficiently sophisticated and effective business systems and infrastructure (e.g. IT, HR, Risk Management) to support modern and competitive banking operations and, especially, the rapid growth in the size and complexity of the products and services demanded by the market place. Many of the existing banking professionals lack the education, experience and knowledge required to lead and manage a modern banking business effectively. The existing products and services are far fewer than those offered in the West and are increasingly unable to meet the expanding needs of an expanding economy, expanding businesses and a growing, better educated, wealthier, customer base. Most of the banks do not have business plans and strategies built based on a corporate SWOT analysis which would provide the blue print for a competitive business model in a rapidly expanding and changing banking market. Many, if not the majority of the banks, are undercapitalized to be able to fund their existing businesses, let alone to take advantage of the growing opportunities and the accompanying financial demands placed on them. Banks need to have a professional management team and an active and capable governance structure in place whose goal is overall business optimization rather than to reflect the interests of any one particular shareholder
Business infrastructure and systems
Skills and abilities Products and services
Dependence on major shareholders
Figure 3-32. Formulation of critical business issues
PRIMARY DATA ANALYSIS OF CORPORATE GOVERNANCE IN THE VIETNAMESE BANKING SECTOR
Based on the results of analysis conducted in Chapter 2 and Chapter 3, this empirical research focuses on the issue of Corporate Governance, especially in the Banking sector. The research is designed based on certain criteria that we call “areas of focus” (see also 4.4) such as Vision & Strategy, Structure, Culture, Leadership, Systems, Information and Communication.
Figure 4-1. Structure of the thesis – overview Chapter 4
In 2005, when we were preparing for the Corporate Governance event organized by SECO for the State Securities Commission of Vietnam (SSC) which was to take place on 6 January 2006 Corporate Governance was a new issue in Vietnam. It was so new that there was no term for it in the Vietnamese corporate language, and there were no official guidelines in this regard. Governmental institutions such as the Ministry of Finance and the State Bank of Vietnam (SBV) translated the term “Corporate Governance” into Vietnamese in a way that was equivalent to “Company
VCCI. Martin Hilb. it was obvious that the participants of the Corporate Governance event on 6 January 2006 had a very rudimentary level of comprehension of the Corporate Governance concept. As a general observation. the lack of a level playing field for the private corporate sector as well as between listed and unlisted companies is another negative factor. Within the frame of the empirical research. In addition. SSC as the first governmental organization to address the issue started to create official guidelines on Corporate Governance for listed companies (IFC-Report. by Prof. we introduced the term “Quản Trị Hội Đồng Doanh Nghiệp” which is descriptive of the entire connotation of “Corporate Governance”. or even to go as far as dictating the price. However. .121 Management” (in Vietnamese: Quản Trị Công Ty). we also combined the results of our surveys with the survey results of others to get the whole pictures of the issue of “Corporate Governance” in Vietnam. though most company directors commented that the concept was yet to be adopted in Vietnam. Finally. ING.98 During and after the event addressing Corporate Governance mentioned above and with the support of SECO. access to raw material. Dr. we had conducted two surveys about the issue “Corporate Governance”. 2006).99 98 World bank-Report issued in 2005. While translating the book “New Corporate Governance”. This is because the government continues to own and control many enterprises in terms of providing capital. The first survey (from now on called First Survey) deals with the overall situation of corporate governance in Vietnam that took place during the above mentioned Corporate Governance event. A recent World Bank survey confirmed this impression (IFC-Report. Only 23% of the 85 respondents said they had a “certain understanding” of Corporate Governance. This is due to the fact that the economy still retains important “non-market” elements. World bank (IFC). each of them governed by a different set of laws. 99 These surveys are for example from IFC. 2006). Vietnam still has a wide range of ownership structures.
4. There were around 80 participants. Selection.2. Number of board members in the company .2. members of the Boards of Directors. The objectives of the First Survey were as follows: .1 Objectives of the First Survey The survey was a first (Swiss) standardized questionnaire on Corporate Governance in Vietnam.Examining the systems which are used to “direct and control” the firms in Vietnam 4. board meetings. and members of Top Managements from the listed or soon be listed companies. The event was very well received and was generally thought to have been very successful and effective. 4.2 Targeted group All participants were Chairmen. 4. Structure of the Board of Directors.2 First Survey: Survey about the overall situation in Vietnam This survey was designed as a standardized questionnaire on Corporate Governance in Vietnam and it took place during the Corporate Governance event on 6 January 2006. The topics of the questionnaire were as follows: 1.2.122 The second survey (from now on called the Second Survey) was conducted during the first quarter of 2007. The idea was to assess the progress that has been achieved in the area of Corporate Governance especially in the banking sector in Vietnam since the aforementioned event. . Evaluation.3 Research Methodology A questionnaire with 12 questions was handed out to the participants of the Corporate Governance Event. Systems of management applied. Corporate culture.Gaining an overview on Corporate Governance’s issues in Vietnam such as Ownership structure. Remuneration and Development of Board members.
Corporate culture (e. Remuneration of board members (e. Compensation Committee) 4. bureaucratic. Selection concept.g. trust oriented.g. Business Information Technology. Risk Management. Financial Reporting. Board meetings . Human Resources. Criteria used to select Board members and members of Top Management (e. Ownership structure (e. Board members were representatives of stakeholders like shareholders. Succession planning) 5. Evaluation of Board of Directors (e. state. 36 Stratagems) 10.g. Systems applied on the level of the Board of Directors (e. professional. Remuneration concept. Strategic planning.g. performance oriented) 6. company listed on the stock exchange) 3. Auditing. employees. honorary compensation) 11.g. social. networking competence) 8. internal. Strategic control for evaluation of the strategic implementation . customers) 9. Development of Board members and members of Top Management (favoured topics like Strategic Management.123 2. Ownership structure (e. Monitoring system.g. Finance and Controlling. external. variable. Risk Management System. Nomination Committee. Marketing. fixed. leadership. self-evaluation) 7. customer oriented.g. Structure of the Board of Directors of the company (Board with or without committee like Audit Committee. Auditing. political.
4 Overview about the respondents 53 questionnaires were handed out and 45 responses. 100 Details of the questionnaire see Annex. 20 companies were to be listed. 100 We had set an assumption that one person represents one firm.100 As illustrated in Figure 4-2. .. because the questionnaire response was completely anonymous. and 13 were not listed. 30% of the respondents were chairmen or chairwomen. Personal data of the respondents The respondents came from 45 companies: 12 were listed companies.124 4. Directors 19% Chairman / Chairwoman 30% Members of Top Management 23% Members of BoD 28% Figure 4-2. 28% were members of boards of directors and 42% were members of top management.9%. were collected. or 85.2.
1 Objectives of the Second Survey The objective of the Second Survey was to find out. which had introduced a “light” version of Corporate Governance concept. In the banking sector. which were listed at the Stock Exchange or which were prepared to be listed were about to introduce “Corporate Governance”. 4. we have decided to conduct a further survey about this issue. We assumed that there had to be some improvement in the awareness and knowledge of Corporate Governance in the subsequent 12 months following the Corporate Governance event. We concentrated exclusively on the banking sector based on the analysis conducted in Chapter 2 and Chapter 3. including Asia Commercial Bank (ACB) and Sacombank. and also based on the First Survey. what the changes or improvements were in the last 12 months after the Corporate Governance event of 6 January 2006 concerning the issue “Corporate Governance” especially in the banking sector in Vietnam. Status of the participated firm 4.3. there were some joint stock banks. . we learned that several companies.125 Status of the participated firms 29% 27% Listed Will be listed in the future Will not be listed 44% Figure 4-3. For this reason.3 Second Survey in the banking sector Since the Corporate Governance event on 6 January 2006 in HCMC.
g. Ownership structure (e.2 Targeted group Our interview partners were Chairmen or Board members of 5 banks. because the interviewees either didn’t have or didn’t want to provide the information. Strategic situation of the related Banks (Strategic planning. In some cases. Compensation Committee) 4. However. the interviewees were also members of top management. The interviews took place at the head quarters of the related banks and lasted around three hours. Topics of the questionnaire were as follows 101 1. Structure of board of directors of the company (Board with or without committee like Audit Committee. Nomination Committee.3 Research Methodology A semi-structured questionnaire (see Annex III) was sent to the interview partners before so that they could get an idea what the survey was about. Monitoring system. average age. gender. the interviewer had to conduct the interviews and fill in the questionnaire during the interview by himself. position. both state-owned and Joint Stock Banks. Strategic control for evaluation of the strategic implementation) 101 For details of the questionnaire see Annex II.126 4.3. It is also important to state that each bank contributed only part of the topics mentioned below. Bio-social data of the members of Board of the related banks (number of board members. the interviewer had to the phone call again in order to continue the interviews because the information required could not delivered immediately. In two cases. SOCB. company listed on the stock exchange) 3. education) 2.3. . ethnic. 4.
honorary compensation) 10. Development of Board members and members of top management 9. external communication) 4. Information and Communication (such Board meetings.3. Remuneration of Board members (e. Criteria used to select board members (e. We number the related banks according to the chronological sequence in which we conducted the survey. networking competence) 8. Remuneration 6. e.127 5.g. variable. fixed. social. there is a brief overview about these banks which took part in this interview. In the Figure 4-4.g. . Selection.4 Overview about the respondents Because the Banks that participated in this survey wished to keep their anonymity. we have avoided using their name. leadership. Auditing. Board culture 7. Bank1 or Bank2. Evaluation.. political.g. Financial Reporting. Management systems such as Risk Management System. companywide communication. professional.
. the bank would increase the chartered capital to around US$65 m in order to meet the requirements of the SBV 120 112 50 33 Ownership status Total members Non-executive 6 5 Bank2 Listed 11 9 2 8 3 4 57 Bank3 Bank4 OTC SOCB 11 4 9 3 2 1 11 4 0 0 57 54 Bank5 OTC 9 8 1 9 0 1 51 Figure 4-4. transfer of technology and know how was ongoing The bank was very profitable The Bank was still SOCB. Bank1 Average age Non-VN Deputy female Male VN . but the Bank was a JSCB The Bank was a SOCB. the numbers of board members in most of the banks varied from 9 to 11. All the members have a university degree.128 Gender National cultures Positions Remarks Name of Banks Bank1 Listed 11 10 1 10 1 8 0 58 Chartered Capital (US$ m) 69 Shareholders were mostly state-owned companies and governmental institutions. However. but it will be listed in 2008. Some facts about the banks’ BoD in the Second Survey As we can see from Figure 4-4. i. Recently. Has several foreign strategic partners and also receives TAA. in the months to come. However. it received support from SECO for the restructuring program It was a small Bank with no clear direction. all the board members in the banks here do not have professional experience in a modern bank in Western countries.e.
They are representative of foreign strategic partners such as Investment Funds. “Areas of focus” for the discussion of corporate governance practice (Source: Dinh. Systems. Board Culture. Information and Communications (see Dinh. we propose the following “areas of focus” on the board level: Vision and Strategy. Board Structure. 2006. For issues regarding interaction between individual members of management and different management levels we recommend further “areas of focus”.4 Summary of the current situation and comparison with the standards mainly in the banking sector For the discussion of corporate governance practice. the chairmen are no longer CEOs at the same time. Stru cture lationships Re Benefits u R e s o r c es Leadership Cultu re Vision s m ste Sy Figure 4-5. 2006). 2006) Pr oc es . The numbers of female members are still low. Leadership. 4. such as Relationship. Dinh. Processes (see Hilb. Foreign Banks.129 and Bank2 also have foreigners in their Board. 2006). but they still do the tasks of a CEO. In 2 banks.
Furthermore.130 4.4.” “To achieve this vision. Private Banking. The BoD and top management still lacked a thorough understanding of what a strategic plan was and how a strategic planning process is conducted including who is responsible for what activity. due to the short history and rapid development of the banking sector in Vietnam. However.1 Vision & Strategy Current situation: All the banks which participated in the Second Survey were of the opinion that having a strategic plan and a strategic planning process was essential for the success of the bank. Insurance company. Asset Management company and Securities company. we will also have a Finance company. and to be in the third or fourth position in the 102 In a certain bank we interviewed the founder of the bank. to develop the skills of key people and to cooperate with domestic and international partners for the transfer of technology and management know-how. The CEO retired a few days to his office. this vision is only communicated to the level of middle management. Business Banking and Investment banking.” Currently. we have to increase the chartered capital. most of the banks had not set up a strategy planning process.102 During the interviews. they could verbalize a clear vision of their company. . Moreover. Bank1: The vision was cited by the Chairman during the interview: “We are thriving to a respected financial services group: offering Retail banking. the Chairman of the Board asked his CEO to present a strategy of the Bank. Bank2: Also the vision was cited by the Chairman during the interview: “The vision of the Bank for next five years is to be a leading Joint Stock Commercial Bank (JSCB). Then he presented the new strategy to the Chairman which was than accepted.
Standard Chartered Bank. we have to improve the professionalism. set up the state-of-the-art IT system. the bank applies several tools for example in the remuneration system.3 Banking Industry) the 5 SOCBs have around 70% of the market share. Bank3: The vision of the bank is “to belong to the Top Ten Bank in Vietnam and to be present in 64 Provinces of the country. professional and management skills. through the creation of more financial and forex products (in cooperation with Life Insurance and Fund Management Companies).103 In order to achieve this vision. On the other hand. we will become more customer oriented). Standard Chartered and IFC provide Technical Assistance to improve the technology. That means that we will outpace one or two SOCBs. emails and also team building activities and events. 105 106 . in other words.131 banking sector in Vietnam. by offering more retail banking products. The bank is building up a training centre in order to develop the skills of the middle and top management. by changing the marketing concept (until now. we will increase the market share through opening more branches nation-wide. and have branches in the surrounding countries such as in China. meetings.105 The vision and the new strategy of Bank2 are communicated to the middle management through several communication channels such as in housemagazine. 30 % of the chartered capital is contributed by the three strategic foreign investors. While Dragon Capital invests the most important seed capital in the bank. We are different than other banks in the aspect that we do not take Vietcombank as a benchmark.104 One of the most important competitive advantages of our Bank is having three foreign strategic investors: IFC. In the next five years. the bank also buys talents from the competitors. We will also place emphasis on improving the human resources situation. 104 In this respect.106 establish new branches nation 103 As stated before (see 3. and Dragon Capital”. we will set up a Jewellery company and an In-house University. generous bonus to motivate people to stay. Cambodia and Laos in order to serve the growing needs of the customers. Currently the bank has invested US$ 5 million in the data warehouse. the bank will introduce call option. the customers came to the Bank.” In order to achieve these goals. in future we will actively contact our potential customers.
Involvement of the BoD and of the top management in the strategy process (see also Hilb. the bank has increased the chartered capital from US$ 175 millions to US$ 280 millions. And the growth rate of the chartered capital is around 50 % yearly. 2005) 107 For example.108 As the results from the Second Survey show. strategy Phase I: . the BoD and top management have to share the work. and the board culture. Implementation Strategy planning process Ratification Monitoring Phase IV: (x) Phase III: Initiation Phase II: Strategic levels Normative Strategic Operative Board Management Board Management Board Management Legend: (x): currently applied by the Banks xx: recommended (x) xx (x) (x) xx (x) xx (x) (x) xx (x) xx Figure 4-6. in the strategy development process (see Figure 4-6. the stated vision and strategies are different from the version published in the brochures or websites of the banks. Our suggestions: According to Hilb.107 and to develop the Human Resources and to strengthen the financial basis. Hoa Viet (Chinese-Vietnamese) brand. thus complying with the Basel I. board structure and success measures have to be aligned (Hilb. and build up sophisticated brandings. The interviewees have also admitted that the “real” vision only existed in the minds of some members of the Board and top management. the Tier 1 is 9%. but was not yet communicated widely to the entire company. the composition of the board. Therefore.132 wide. 108 Recently. 8th March Brand (for women only). A clear delineation of the roles of the BoD and of the top management is critical to the success of the bank. Currently. 2006).).
that the process be initiated by the BoD (together with top management). Strategy implementation Monitoring strategy implementation This is the realization of the strategic objectives through the “operationalisation” of the plan. since most of the banks would be just starting to implement a strategy planning process. Based on the change in the banking environment. 2006). An internal corporate analysis reveals its core competencies. (3) progress control of the strategy implementation. The SWOT analytical and planning tool is used in the process. impact on the Strengths and Weaknesses of the company (Mayer. and the internal changes (CH-i). These critical business issues have a fundamental impact . 2006). the market and the industry as well as the bank itself shall be analyzed. Based on these results. Steps in the strategy process Step 1: Strategy assessment The analysis and projections for the external business environment define the risks and opportunities for the company. The strategy development process is then divided into several steps (Lombriser/Alplanalp. the banks have to review their existing vision and mission statements and the corporate as well as business strategy of the company (Gruenig/Kuehn. The SWOT analysis needs to include an External and Internal Change factor: the external changes (CHe) impact on Opportunities and Threats in the banking industry. strengths and weaknesses. 2005). (2) review of the strategy effectiveness.for each department). This step consists of the development of the vision and mission statements. the critical business issues can be identified. Strategy assessment Strategy development The overall environment. the corporate strategy and business strategy (and functional strategies . we recommend. This step includes the following areas: (1) change in the relevant business environment.133 Phase I: Strategy initiation In the case of Vietnam. in the banking market and in the banking industry. Figure 4-7.
Decision group ■ Project leader ■ Members of the board and managers responsible for the businesses included in the project ■ Optionally: Selected members of the working group ■ Optionally: Consultants Main tasks ■ Determines the objectives and general conditions of the project ■ Discusses and approves the results of analysis ■ Discusses the strategic options and makes the selection ■ Approves the final documents Steering committee ■ Project leader ■ Leaders of the working groups ■ Project coordinator ■ Optionally: Consultants Main tasks ■ Keeps the project on course ■ Adapts project organisation if necessary ■ Determines and assesses options for the corporate strategy ■ Makes the presentations before the decision group Working group ■ Leader of the working group ■ Selected members of the management team responsible for the specific business ■ Optionally: Consultants Main tasks ■ Carries out strategic analysis ■ Determines and assesses options for one of businessthe strategies ■ Formulates some of the strategic documents Working group ■ Leader of the working group ■ Selected members of the management team responsible for the specific business ■ Optionally: Consultants Working group ■ Leader of the working group ■ Selected members of the management team responsible for the specific business ■ Optionally: Consultants Figure 4-8. to circumvent threats and take advantage of the opportunities and to leverage their strengths. We recommend that the strategy planning process be conducted by a strategy project team as outlined in the Figure 4-8. 2006) The strategy assessment is followed by the development of strategic alternatives and the identification of the primary strategy which becomes the strategic plan chosen for implementation. .134 on the performance of the company and thus need to be addressed in order to enable the banks to overcome their weaknesses. Composition of the strategy project team (Source: Gruenig/Kuehn.
the corporate strategy determines which businesses the company will continue to operate or withdraw from. The corporate strategy thus determines the long-term orientation and development of corporate activities” (Gruenig/Kuehn. Based on the strategy recommendations of the project team. which consists of one or several members of the board and of top management. The project team is supported by several workgroups. The results of the strategy development project are then presented in a steering committee meeting. the members of board and the top management who are represented in the Decision Group then decide on the bank’s strategy. and the new businesses it will set up. Business strategy: The Business strategy “provides the framework within which the concrete competitive advantages at the level of the offer and at the level of resources are determined” (Gruenig/Kuehn. and assist with the decision-making process. 2006): to project management. 2006). In addition. Corporate strategy: “the corporate strategy must guarantee that the company [here: bank] will target attractive markets where it can build and maintain an advantageous competitive position. Step 2: Strategy development The strategy development also consists of several stages: vision and mission statements.135 The strategy project team is lead by the steering committee. These abstract terms have to be transformed into a plan about how to realize the desired future. . 2006). The corporate strategy also provides information about the amount of investment required in order to maintain or enlarge the strategic business (Lombriser/Abplanalp. This ensures strategic consistency throughout the plan. The corporate mission and vision are the foundations of the strategy development process and are reflected in each stage of the development process. corporate strategy. planning methods. business strategy (Lombriser/Aplanalp. 2005): Vision and mission statements: The first step in the strategy development process is the formulation of the vision and mission statements of the company. the team can also be assisted by external consultants who can contribute (Gruenig/Kuehn. In principle. 2005).
introduction of direct delivery to large end-customers according to new business strategy requirements.136 According to Porter’s analysis. The approval process also includes the allocation of the required resources. Therefore. 2005). differentiation within a broad target market and differentiation within a narrow target market. it is necessary to distinguish between the realization needs which arise directly from the strategies. 110 Examples: Training courses to improve understanding of the new strategies to adjustments to organizational structure to accommodate newly-defined business fields.110 109 Examples: Sales of an unprofitable business as a consequence of a new corporate strategy. . Phase III: Strategy implementation Despite a thorough strategic analysis and the development of a viable strategic plan based on the bank’s competitive advantage(s). success cannot be achieved if the implementation is not well-prepared and properly executed.109 and the indirectly derived measures needed for adjustment and support. sustainable competitive advantage can only be achieved through low cost or through differentiation in the market (Porter. Porter links these two basic types of competitive advantage with the target scope of activities. Phase II: Strategy approval The board selects the most promising strategic option benefiting all stakeholders and approves its implementation. namely cost leadership within a broad target market. cost leadership within a narrow target market. there are four basic competitive strategies. 1998). In strategy implementation. establishing important milestones in the implementation process and the identification of key information requirements of all the relevant stakeholder groups (Hilb.
” (Hilb. the Technical Medium Term Plans and the annual Business Plan. and a budgeting process. 112 The Bank must ensure that employees are willing and able to implement strategies for example by making the information available. and short-term implementation plans. The actual strategy implementation takes place in order to realize the plans. . which makes it difficult for employees to contribute to successful implementation.137 It is also useful to distinguish between measures related to material requirements 111 and those related to personnel 112 (Gruenig/Kuehn. “The board monitors key indicators and progress against important milestones and should take appropriate corrective action if there is significant divergence from the approved strategy. Responsibility for the organization structure of the bank tends to be with the strategy and planning group as they have an overview of the entire bank and its future direction and business. the business policies allocate resources. This Department would be responsible for the coaching and production of the Strategic Medium Term Plan of the bank. They should thus be able to structure the bank to fit its future business needs. or the management’s tasks. Phase IV: Monitoring strategy implementation The monitoring of strategy implementation has to be done at every board meeting. 111 Examples: Development of new products. long-term. senior management even keeps their vision and strategies secret. medium-term. Thus. Distinction can also be made between implementation through strategic programs and the simple incorporation of the new strategy into day-to-day management (Gruenig/Kuehn. 2006). It generally comprises of the delegation of tasks. which are usually incorporated in a budget. 2005). As already known from the banks that participated in the interviews. introduction of a new reporting system adjusted to the new strategy. the alignment of the organization toward the common objectives. It should be mentioned that the strategy project team can be converted into the Department of Strategy and Organization. 2006).
Strategic objective setting (too low / high) Areas of causes (cont. market.) . 2006) . − Review of the strategy effectiveness including the success factors and the strategic alternatives. negative consequences of the worst case scenarios is considered (Hilb. lack of motivation. ethical aspect of strategy. contribution of strategy to the long-term success.138 The process of monitoring strategy implementation has to include the following areas (Lombriser/Alplanalp.Set of measures or of projects Figure 4-9. industry) and its impact on the company and its incorporation into the strategy implementation process.Environment .Lack of efficiency.Success factors .Unexpected resistance New or adapted objectives and strategies .Insufficient or false strategy . Hilb. integration of fundamental requirements of the vision. comprehensiveness of strategy proposal.external development Review of Strategy Premises . 2005.internal development . lack of performance .Insufficient or false resource deployment .Achievement of objectives (qualitative and quantitative) . feasibility of strategy.Strategic alternative Progress control of Strategy implementation . consistency of strategies.Immediate measures . mid-term and long-term strategic objectives.Changes of premises . 2005) 113 Institutionalization of a regular strategy check.Market . Strategic control (Source Lombriser/Alplanalp.Too ambitious project objectives .113 − The progress control of the strategy implementation Early detection .Industry Review of strategy Effectiveness .Progress of measures and projects Elaboration of causes for current or future divergences Areas of causes . 2005): − Change in the relevant business environment (overall politico-economic environment.
Audit committee. 32% Others. 3. 47% Nomination committee.2 Organisational Structure and Governance Current situation: In this section. Figure 4-10. we take a closer look at the Committees at the Board level (such as Audit Committee resp. illustrates the firms with committees. 5.139 The causes for the current and possible future divergences should also be identified. The Vietnamese boards showing the distribution of different committees 114 The other committees are: Supervisory committee. Committees at the Board level In our First Survey. Investment committee. Risk Management Committee) and also at the level of top management. Committee for Nomination & Remuneration. strategy committee. . After this step. 18.4. 47% had several committees (18 firms)114. 8% Compensation. 13% had Compensation committee (5 firms). 8% had Nomination committee (3 firms). 32% had Audit committees (12 firms). 4. 13% Figure 4-10. monitoring committee. the necessity of developing new (or revised) objectives and strategies should also be decided. 12. internal Audit Function.
shareholders. They acted as a team to bring the benefit to stakeholders. One of the Deputy CEOs was a standing member. the CEO represented the interests of customers. but they had to report directly to the AGM. These two committees were composed of the members of the BoD and top management. At this bank. It is also interesting to note that the members of the top management were not on the Board.e. they were not employees or executive members of the bank. He served the role of a co-CEO. Investment Committee. employees and society. integrity. Some of them had an office at the bank. .116 They were usually independent.140 Bank1: The Supervisory Board was elected by the Annual General Meeting (AGM). 116 The Top Management team of Bank2 consisted of a CEO and 6 Deputy CEOs. While the Chairman was the legal representative of the bank at the State Bank of Vietnam and other governmental authorities. 115 According to the Chairman of Bank2. Bank2: On the level of the BoD there were the following committees: Credit Committee. i. He made decisions and represents the CEO when the CEO was unavailable. The Chairman and the CEO had clearly distinguished responsibilities and duties. and knowledge of accounting and financial management. They could give their recommendations to the BoD and Top Management. neither the Chairman nor the CEO was more important than the other person. they needed to be approved by the Board of Directors. They could co-operate with the Auditing Committee which included Internal Auditing Department and the External Auditing Teams.115 The Supervisory Board was elected by the shareholders at the AGM. The remaining 5 Deputy CEOs were also the heads of different divisions. This served as a way to mitigate risk. the members of the Supervisory Board must have the following abilities: successful track records. However. who could represent the CEO in all matters as needed. They were representatives of the shareholders.
each branch director had to take a three-week vacation. 117 According to the chairman. The bank also had a special appointment policy: in top and middle management. . After the period of four years. This was considered as a measure of Internal Audit.141 Shareholder General Meeting Supervisory Board Board of Directors Credit Committee Nomination & Remuneration Committee Top Management Investment Committee Audit Committee Figure 4-11. not stakeholders. The assignment period was also limited to four years at most. . to the employees. During this time. The “mobile” director had to write a field report to the BoD and top management. the BoD had to act in the interest of the stakeholder groups. During the training programme. if the position of the director was a man. Afterwards.a definition that indicated that the concept of stakeholders is not yet clear. he was represented by a “mobile” director from headquarters. The benefit to deliver to the stakeholder groups is understood as added value to the public. they returned to headquarters and attended a three-month-training programme.117 The board consisted of 11 members. they were under observation of the Nomination Committee and Remuneration Committee. customers are considered as partners. of which 2 were women and 3 were expatriates. was that they had to complement each other. than his deputy had to be a woman or vice versa. The reason. The deputy was not allowed to represent him. Another special regulation was that each year. to the shareholders. Committees at Bank2 Bank3: The bank has recently become a listed company. Therefore. they could either return to their former position or were transferred to another position. according to the chairman.
However. According to the Chairman.142 Bank4: There were several Governmental entities involved in the ownership of SOCBs (see Figure 4-12. this Bank had only one. Corporate structure of a SOCB based on the example of Bank4 . Conflicts between the BoD and the top management in SOCBs were thus inevitable: As this bank was a SOCB. the Supervisory Board should be composed of at least three to five members. Finance Ministry Ministry for Labor and Social Invalid State Bank of Vietnam Board of Directors Supervisory Board Top Management Credit Committee Investment Committee Figure 4-12. The Ministry of Finance provided capital. because the state was the sole owner of the bank. the Ministry for Labour and Social Invalids approved the salary and benefit policies for the employees of the SOCBs (see also Remuneration Committee). but usually. professional and sound Corporate Governance complying with international standards can be established after a successful equitization projected for 2008. and also Figure 2-3. According to the legal requirements. such policies were not applicable in a rapidly changing environment. And the Supervisory Board had to report directly to the Chairman. Top management had to implement such policies. but they did not have adequate authorities to adjust the outdated policies. the Supervisory Board of the Bank was appointed by the SBV-Governor. The BoD was responsible for setting the policies.). the SBV set the guidelines and managed the SOCBs.
trading or telecommunication industry have a relatively low proportion of companies with an internal audit function. they report to the AGM. and 23% do not have an audit committee or an internal audit function. They do not have another position in the company. Companies in transportation. 9% of companies have an Audit Committee. however. The reason is unknown. they report directly to the chairman. Consultancy Others Pharma FIS Hotel Transportation Trading Manufacturing Telecommunication 0% 10% 20% 30% 33% 40% 75% 56% 50% 43% 43% 50% 40% 40% 50% 60% 70% 80% Figure 4-13.143 Bank5: It is also interesting to know that in the Supervisory board. Again in the VCCI-Survey. this group is in the first position. with 56%. 75% of participating pharmaceutical companies have an internal audit function. which might impair their objectiveness and independence. Theoretically. Companies in the VCCI-Survey with an internal audit function . Audit Committee: the internal Audit Function According to the VCCI-Survey 38% of companies have an internal audit function. all the members are female. however the Committee Members are also members of top management. They are appointed by AGM. Financial Institutions (FIS) are in second position. The AGM also decides on their remuneration. they do not have an Audit Committee. but practically.
This team consists of 11 members and is under the CEO. most of the respondents came from listed or soon to be listed companies: according to our question 2 – out of 45 companies.38 %. the Internal Auditing team was right under the CEO and reported directly to him.144 The stock exchange required the establishment of control and supervisory mechanisms such as “internal audit and control”. Except for the credit risk. they considered the business of the bank as not being risky. the Audit Committee was composed of four completely independent members and reported to the Supervisory Board. but only an Internal Auditing team. Companies which do not have Audit committees (Source: VCCI. At the level of top management. The BoD consisted of four members. They also worked closely with the external audit company. only two members were responsible for strategic and operational tasks and duties. The NPL is 1. 119 Bad debt is defined according to the law as when the borrowers are not able to pay back .119 118 In our First Survey. Bank4: The bank did not have an Audit Committee. 118 Foreign 19% Joint Stock 37% Private 16% SOEs 28% Figure 4-14. There was no Risk Committee and the function of Risk Management was also not available. 2006) Bank3: At the Board level. 12 were listed. meaning that they did not have any responsibilities on the board. The remaining two members were “decoration”. Bank4: The interviewed bank was one of the five SOCBs. 20 will soon be listed and only 13 will not be listed. However.
However. Although 85% of the companies stated that they do perform a risk assessment when setting strategic objectives. only very few of them (27% companies) can identify both inherent risk and residual risk within their risk assessment process. and 38% of these companies do not have any formal risk assessment process at all. what was the biggest risk that bank had experienced recently. In the worst case. the following findings are collected: Bank2: The Bank had a Risk Management Committee which supervises and supports the daily liquidity and balance of deposits and lending. In our Second Survey. that the CEO of the bank stole a large amount of cash and disap- within 12 months after the redemption date. Now the bank uses a method to circumvent the legal regulations mentioned before. Bank2 told the following story: “There was a rumour in the market.120 Risk Management Committee According to the VCCI-Survey. the bank fixes the lending period for three years. . the bank informs the borrower that it will get back the lending sum within one year. 120 In the banking industry. there is still no Nomination and Compensation committee at company level – the decision is made at ministerial level . the bank can get its lending in the third year: Such lending is not considered according to the law as Bad Debt. However. Invalids and Social Affairs. In the SOCBs. Instead of making a one-year contract with the borrower. there has been an essential improvement in the last 12 months in the JSCBs: The Audit Committee was located at the level of Board. the system and processes of Risk Management were still not in a position to match with the problems that come up as the following story illustrated: In response to our question. However.145 According to our Second Survey. it is the State Bank of Vietnam together with the Ministry of Finance and the Ministry for Labours. 85% of the companies which participated in the survey perform risk assessment when setting strategic objectives.by the related governmental authorities. only 50% of them (23 companies) prioritize risks according to the likelihood of occurrence and the impact on the organization.
the Risk Management process still has a lot of room for improvement. the public found a dead cat in front of the bank’s headquarters – according to the belief of local people. The shareholders’ general meeting should also appoint members of the Board of Directors and set their salaries. but also on other issues separately to all head office departments. They receive the Annual Report and Accounts and are motivated to ask questions.” From that time on. Bank3: This bank has introduced new functions to cover risk management. which almost led the bank to illiquidity and disaster. because it considered it irrelevant. and the public believed that the bank must be in big trouble. However. This bank has not introduced an Organisation and Methods Department to standardise procedural development that remains within the domain of individual departments. the shareholders or investors in the company have a specific and limited role. Our suggestions: According to the Vietnamese regulations (see Decree 49). Furthermore. Bank3 has not introduced a Branch Operations Department with the consequence that branches still report not only on risks. Bank3 has also not empowered the Risk Management Centre with the management of liquidity risk that remains the responsibility of the Planning Department. Also in other banks. NPL management through an Asset Management Company. the customers stormed the bank and withdrew their deposits. The bank knew the story and as it turned out to be just a rumour. This bank has not constituted an ALCO. the shareholders have no role in the management and decision making of the bank. A few hours later. . it did not pay attention. They can also approve extraordinary transactions outside the normal course of business of the bank. Within hours. a dead cat is a symbol of an unlucky event.146 peared. They might also receive the Strategic Plan (which has already been approved by the Board of Directors) and they can also amend governing statutes and an addition or a reduction in shares. Besides. One morning. the bank had learned that they had to pay attention to public relations and be able to handle crisis management. the dead cat was still there. and a Treasury Department.
a nominating committee. in particular the depositors and thus needs to be sheltered from undue shareholder influence to take undue risks for a quick financial gain and possibly long term problems. the profitability of the bank and the policies and structure of the bank (ING-Report. will naturally wish to maximise the value and return from their investment and thus will press the Board of Directors to earn as much income as possible and pay the maximum dividend (INGReport. a compensation committee. 121 They are not responsible for the implementation of these policies. The proposed revision of Decree 49 sets out detailed powers and duties for the board of directors. The BoD is responsible for the safety of the bank. in particular the depositors. The BoD decides on all important issues relating to the organization.121 The BoD should be composed of experienced but independent banking professionals to guard against potential conflicts of interest and maintain the independence of decision making. 2006). The investors. The BoD is a senior decision making body of the bank (usually comprises of 7 or 9 experienced and knowledgeable professionals). This may force the directors to agree to a greater degree of risk than is prudent and deplete the capital adequacy of the bank. just for ensuring that their decisions are actually implemented (ING-Report. . and a risk resolution committee. The Board of Directors The Board of Directors has a primary duty to protect the interests of all stakeholders in the bank. which may be a better term to use than shareholders. 2006). management and operation of the bank in the interests of all stakeholders. currently an audit committee.147 The primary reason for the restricted role of the shareholders is that there is an essential conflict of interest between the shareholders of a bank and the Board of Directors of a bank. Committees of the Board of Directors The Board shall has at least the committees required by the rules of the NYSE. 29).
in Vietnam in some cases. Thus. the supervisory committee should report directly to the shareholders’ general meeting so that if any fraud is found within the bank. but by the shareholder general meeting. Certainly. In this case. especially under the CEO. the BoD and top management would approve only those candidates. who are also representatives of the interests of the BoD and top management. the shareholders have to have a real interest to engage in the company and also assume their power. Furthermore. Therefore. they should not work in the company. to ensure that the members of the supervisory board are not exposed to undue pressure. the members of supervisory committee must be approved by the BoD and by the top management. it can be reported to the highest authority in the bank without any interference. we suggest that the board members to be proposed in the Supervisory Committee should not be approved by the board of directors and top management so that they can work independently.148 Shareholder General Meeting Board of Directors Supervisory Committee (Audit Committee) Nomination Committee Top Management Risk Resolution Committee Remuneratio Committee Figure 4-15. Committees at the Board level (Source: ING-Report) Supervisory Committee The supervisory committee is nominated by the shareholders’ general meeting and should represent the interest of the shareholders. . However.
Risk Management Committee). However. In our view. Asset and Liability Committee. Some Heads of Department are also members of the Board of Management. 2005). Risk Resolution Committee The Risk Resolution Committee looks at and decides on loan and market risk write offs that are recommended by the top management. A formal performance assessment of the board members should be conducted by the chairman – this can be an informal feedback talk (Hilb.g. The Committee for Nomination & Remuneration recommends appointments to the Board of Directors for the approval of shareholders. Credit Committee. they should also have a larger role in approving the policies for general credit. IT Steering Committee. but also members of the board and the top management. Top Management Top management is responsible for the day-to-day operation of the bank.149 Committee for Nomination & Remuneration The Committee for Nomination & Remuneration will identify possible candidates for the roles of chairman. . It consists entirely of executives of the bank. 2005.). They are also supported by other committees of top management (e. They can also work together with an outside board search consultant to get the list of possible candidates (Hilb. the Committee for Nomination & Remuneration would also include making recommendations on the remuneration and development of directors. market and operational risk of the bank and subsidiaries. The top management has a number of committees to assist them in their daily decision making.
ALCO (Asset and Liability Committee) ALCO approves all policies and limits relating to capital adequacy. liquidity. the CEO should also be member of board. Furthermore.150 BoD Top Management ALCO Credit Committee Risk Management Committee IT Steering Committee Figure 4-16. the CEO is also responsible for the implementation of all decisions and the smooth day-to-day running of the bank. . funding. the company size in Vietnam is still on a small scale. However. Due to the decision power and “hands-on” experience of the BoD and the CEO. Moreover. open market positions and balance sheet structure (essentially all liability and treasury decisions that are proposed by the Risk Management Group and the ALCO Support Department of the Financial Group). Therefore we propose that at least in the years to come. The CEO also proposes and supports all initiatives submitted to the Board of Directors. In Vietnam the CEO is usually a member of the Board of Directors. None of its authorities are delegated. the partners of the company or the authorities often want to deal with them only (because the CEO is usually also a member of board). the BoD still has a high reputation in the business world. Until now. Committees on the Top Management level The Chief Executive Officer (CEO) The CEO is the head of the executive management of the bank. Treasury and Trading Group are given limits within which to trade.
these are closely looked at by the Market Risk Management Department of the Risk Management Group. market and operational risk. Risk Management Committee (RMC) The RMC establishes and monitors all the units that have discretionary authority within the bank and subsidiaries to approve limits for credit. The bank should investigate the current and future possibilities in hardware and communication infrastructure. The IT Committee usually comprises of a member of the Board of Management as Chairman. make a cost benefit analysis and selection. . It may delegate some authorities to the Risk Management Group who may in turn delegate some authorities to its own departments and the Retail and Networks Group (branch limits). develop a reliable IT structure enabling the implementation of all future systems and applications. The IT Steering Committee The decisions to be made regarding IT are highly complex and usually very expensive. Furthermore the ALCO Support Department liaises directly with the Treasury and Trading Group closely monitoring the daily liquidity position of the bank as well as assisting with funds transfer pricing and capital allocation. Moreover in Vietnam. The Credit Committee The Credit Committee is the senior decision making body on all individual credit limits. the head of IT.151 The ALCO Support Department provides information and analysis to the ALCO on all Asset and Liability Management issues but in particular with regard to capital adequacy and balance sheet structure which are not ALM issues. The top management cannot be expected to be technical experts. and install a communication network to all branches. and makes recommendations to the Board of Management prior to approval of the Board of Directors. the Chief Financial Officer and possibly a representative of the external auditor. The IT Committee looks at all issues regarding IT. the development level of IT is still in a very early stage. in particular the IT strategy and development programme.
commodity and equity open positions being run by the bank and proposes trading and Asset and Liability Management limits to the ALCO. Risk Management can become a core competence of the banks to build the long term stability of the bank.152 The RMC also recommends to the Risk Resolution Committee of the Board of Directors the general credit. market and operational risk policies of the bank and subsidiaries. Risk Management Group (See also ING-Report. the RMC monitors the quality and composition of the loan portfolio and ties it in with decisions made by the ALCO on capital adequacy. These proposals are then approved by the Risk Management Committee of the Board of Management and ratified by the Risk Resolution Committee. its competitiveness in the face of increasing international competition and the maximization of profits. interest rate. . 2006) Primary responsibility rests with the Risk Management Group. Furthermore. Market Risk Management Division This division measures the liquidity. liquidity. structure of the balance sheet and open market positions etc. market and operational risks. Risk Management Group (Chief Risk Officer) Credit Division (Chief Credit Officer) Financial Institutions Division Market Risk Management Division Operational Risk Management Division Figure 4-17. to propose a framework within which the bank takes credit. mainly the Chief Risk Officer. foreign currency.
clarifies reporting lines and chains of command. This will include all internal treasury dealing limits such as stop-loss limits. 2006): − The Business Development Officer in the Wholesale Banking Group will negotiate a new loan with one of the customers for whom he or she is responsible. clearly differentiates between line management and functional relationships. removes the potential for conflicts of interest.153 Operational Risk Division The Operational Risk Division submits recommendations on control of operational risk to Board of Directors and facilitates operational risk management processes and controls. groups departments that are closely functionally related under the management of a deputy director. the structure of the loan. − There may well be discussion between the Business Development Officer and the Credit Division on the credit analysis. The Credit Division is divided into a number of Credit Departments either by customer sector. intra-day positions and individual dealers limits. Credit Division Review all credit applications from “Front Office” Groups for individual. − They will then prepare the credit application and credit analysis and submit it to one of the Credit Departments who will look at it from a risk/reward viewpoint. . the rate being charged the customer and so forth − When they are in agreement the proposal is submitted for approval. the conclusions drawn. Is the bank being paid enough to take on all the risks that come with this proposed facility?” It would be comparatively rare for any application to be turned down purely on the grounds of risk as the Business Development Officer will have some knowledge of the risks acceptable to the bank. sector or country limits. Facilities will be approved under discretionary limits or submitted to Credit Committee for approval. 2006). 122 As a typical example of what the Credit Divisions do (ING. This will include equity investments as they are loans without a maturity limit. The Credit Division will have some discretionary authorities of its own or will make a recommendation to sanction the loan to a Credit Committee. and introduces new functions that are required for successful reform and re-engineering of bank’s business and effective risk management as a prerequisite for corporate plan implementation (ING-Report. customer location or customer size. group.122 The banks should introduce a new corporate structure that reduces spans of control to allow top management to concentrate on strategic issues. Earlier deliverables have dealt with the role of this division in considerable detail. increases the delegation of responsibility.
.Gender: Most of them are male .Nationality: National Vietnamese (there are currently no OverseasVietnamese) .Professional background: Current or former chairmen / CEOs of other companies. 40 35 30 Percentage 25 20 15 10 5 0 3 members 4 members 5 members 6 members 7 members 8 members 9 members Number of members of boards Figure 4-18.Education: Most of them have a university degree .Political orientation: Mostly members of the Communist Party (all board members in the SOEs and SOCBs have to be members of Communist Party).Age: At least 45 years old . Here we are also interested to know about the size of the board in different types of companies in Vietnam such as state-owned or joint stock companies. Leadership Current situation: The results of our interviews and surveys have shown that the board members (including SOEs and SOCBs) have the following characteristics: . Number of members of boards in Vietnam . in non-state owned companies it is not compulsory.3.154 4.4.
It is to be remembered that the state was still the largest shareholder in most of the listed and largest companies in Vietnam. that most of members considered themselves as “very .00% 40. he had already four CEOs working with him. According to our First Survey. 4 banks had 9-11 members.7% board members represented their shareholders’ interests and 62. of customers or of associations were still minorities on the Vietnamese boards.155 According to our First Survey.00% 60. 23% had 6 members and 12% have 7 members.00% 50. 70. about 66. The representatives of employees.2% represented the interests of the state.00% 10. Bank1: The Chairman had been serving the second terms in the current position. In his stewardship. especially with the Chairmen their tasks and also the tasks of the Board members. Of the 5 banks that participated in the Second Survey.00% 30. It is interesting to note that SOCBs had a higher number than the JSCBs. The representatives of the strategic partners (investment funds. It should be mentioned here. Combined structure of the boards of directors In our Second Survey. investors with big financial stake) played more important roles on the boards. we have discussed with the Board members. About 38% of the responding companies had 5 board members.00% 0.00% 20. The tasks of the Chairman were very diverse and challenging.00% Shareholders 30 Employee 1 State 28 Customer 1 Strategic partner 5 Others 1 Figure 4-19. One of the tasks was to co-ordinate different members of the BoD. the number of board members varied from 3 to 9.
was that they had to complement each other. With projects of strategic relevance for the company. The Chairman was also the founder of the bank.156 important” for they had high positions in other companies or institutions which were investors of this bank. The bank also had a special appointment policy: in the Top and Middle Management. In the strategic planning project. and not only for the profit of the investors they represented or for their own interest. he had to initiate and network internally and externally in order to get the projects continued. ratify the strategy and monitor the strategy implementation. The chairman was also the legal representative of the bank. His tasks were therefore very diverse: there were daily jobs which came up in the Bank. He also approved the budget remuneration for the Board Members and Members of Top Management after the Nomination and Remuneration Committee have prepared the decisions. and according to him. if the position of the director was a man. Bank3: The bank has recently become a listed company. as representative of the shareholders he had to call for and chair the General Shareholders’ Meeting. On one hand. nobody could perform more efficiently. then his deputy had to be a woman or vice versa. On the other hand. Furthermore. The Chairman considers himself as a leader. Just to name . The reason. His task was also to set the strategic direction for the company. The time he spends for the CEO position the SOE is 50 % and as chairman 50%. It should also be mentioned here that the Chairman is also the CEO of another large SOE. Moreover. For this reason. he also had to inform them or convince them to make certain decision in informal one-to-one meetings. The Board consisted of 11 members. his task was to initiate the project. of which 2 were women and 3 were expatriates. he was also responsible for nominating the members of the Top Management and for controlling daily expenses and costs. but he had to perform tasks which the members of the Top Management should do. it was very demanding and delicate to get them working for the benefit of the bank. according to the chairman. He was also the Chief of Compliance Officer. the Chairman had to call the board members to formal meetings.
selecting providers of technology and services. if the position of the director was a man. In the case of Bank3. Therefore. In order to do all these tasks efficiently.123 We also recommend that there should be a clear distribution of tasks between the chairmen. 2005). so we recommend that a team of the BoD should have 5 to 7 members in order to work effectively and efficiently. the Board is well aware of the relevance of the board composition. Bank5: The task of the Chairman is to take care of the strategic planning and supervise the (daily) operations of the Top Management. the solution based on only the difference of gender is also not satisfied.and external) should be conducted to identify the strengths and weaknesses of the board. However. initiating a strategic planning project. Head the Credit Committee and be a member of the Investment Committee. the banks in Vietnam are mostly of medium size. and team roles (see also Hilb. members of the Board and members of Top 123 The Bank also had a special appointment policy: in the Top and Middle Management. Moreover.157 some examples: opening the new branch. integrity. 2005). know how. the board should be structured in a manner that ensures the interest of all shareholders is represented fairly and objectively. We also recommend that the team of the BoD should be diverse concerning demographic data. ability to convince. He also chaired 5 BoD meetings a year and called the irregular meetings when something happened unexpectedly that needed dealing with immediately. the Chairman reported that members of the Top Management should have four competences: power in par with his position. Our suggestions: There is no such thing as an ideal board composition. a board evaluation (self. networking skills. The current stipulation is that at least one third of the Board’s membership should comprise Independent Non-Executive Directors. than his deputy had to be a woman or vice versa. . However. building up and maintaining relations with the local authorities and international partners. and the number of Executive Directors must not exceed 40% of the total membership (ING-Report.
158 Management. ensuring that they are efficiently and effectively implemented by management to achieve desired results. Corporate culture of the questioned companies In the VCCI-Survey. we should have a closer look at the corporate culture of the companies. Others 10% Customer oriented 31% Perfomance oriented 34% Trust oriented 17% Bureaucratic 8% Figure 4-20. and each year employees had to sign a letter confirming that they will follow the code of conduct . and maximizing wealth to shareholders (ING-Report. and budgets. the Chairmen still do most of the tasks that should be in the responsibility of the members of Top Management. creating business value. business plans and targets. strategies. As stated in the banks surveyed. The Board is usually responsible for setting out the bank’s policies and business direction through participation and endorsement of its vision. mission. 4.4 Board culture Current situation: Before we assess the culture of the board. 2006).4. 31% considered themselves as customer oriented. and 17 % as trust oriented. 38% of the participating companies declared that in their company there was a code of conduct in place. Only 8% characterized themselves as bureaucratic. According to our First Survey.
The need to open up this backward looking culture is low. the culture of board in most banks is not cooperative and not performance-oriented. With all the SOCBs. Thus. Usually. they have already reached a certain age that they have nothing more to lose. Usually.159 and will be responsible for any breaches of the code. like representatives of foreign investment funds. especially in the SOCBs: the culture of board reflects the obsolete attitude of the centrally planned economy. especially the non-executive members. most of the members are even from the same family. there is one person or a few key members who keep the power in their hands and make strategically relevant decisions by themselves – without having consulted other members or committees. they act according to the slogan “divide et impera” by putting the seeds of mistrust in the team. when the members of the BoD are appointed onto the board. of the same gender but also from the same ethnicity. the obsolete attitude of the assigned members is not accustomed to accepting the opinion of others. all of the members are not only from the same political party. such members give the impression of being very important. In a Bank that participated in the Second Survey. The culture of the board is obsolete and is based on the size of capital contribution. In our Second Survey. . but also of the board. Furthermore. the members of board are assigned by the state and the omnipresent Communist Party to represent their expectations and enact their will. we have received another picture of the culture of the banks. because the position is considered as very prestigious. As stated in the Second Survey. usually do not have any influence on the board’s decision and in the decision making process. The other members. especially when they want to achieve their personal interest. 32% did have a code of conduct but in practice. In some cases. management did not show a strong commitment to high ethical standards. but their individual benefit. In some banks. The assigned members are poorly paid. but they did not bring the expected performance.
In the banking sector. The applied Management tools applied in the board of directors R is R k Su cc es si on gi te em ct ito te ia at pl an ud co tS pl ep g c A co .9% utilize at least one specific management system. The board members should not break into fractions. but respect each other. There are several regulations in Vietnam concerning these issues. a clear code of conduct would be very useful. not only of the shareholders. however. The goal is to build trust not only within the board. and fight against each other. we propose to build up a culture that considers the needs and expectations of all stakeholder groups. Systems utilized by BoD’s to fulfill their responsibilities It is quite interesting to read the results of the First Survey: 11. 4. There are many cases where insider information has been misused for personal profit. The sensitive information is transferred to family members or friends.160 Our suggestions: Therefore. In the transition state that Vietnam is now. who are speculators on the stock market.5. but across the company and also with other stakeholder groups.1% or (5) of the 45 firms interviewed do not have (or do not utilize) any management systems. the legal enforcement is still not fully implemented. 16 14 12 10 8 6 4 2 0 15 12 t9 t6 10 5 4 2 8 ni ng st em ro l te m ep ep iti ng ng g or tin nt nc nc an co ys ni O th e r sy n rin lR io n en gi c io St ra le St ra on ag nc er Se an na M un em M Fi Figure 4-21.4. The other 88. building trust is essential as we have witnessed in the collapse of credit cooperatives around 1987 in Vietnam.
00% 60. (3) Evaluation. Recently. there were some representatives of private companies.5.00% Professional competence 10 Leadership competence 8 Social competence 6 Political competence 11 Availability of a large network 34 Others: 5 Figure 4-22. According to the expectations of the chairman.00% 40. People Committee of a District in HCMC or Trade department of HCMC). 4. this Bank is not an SOCB.g. Here we focus on the Human Resources Systems: (1) Selection.00% 10. which are major shareholders of the Bank1.00% 30. (4) Development of Board members and Top Management.00% 70.00% 20. . Required criteria to be selected as a member of board of directors Bank1: Most of the shareholders are state-owned companies and institutions (e.00% 0.00% 50. It is not surprising that there is a Vietnamese saying that “Without network. The BoD is composed of representatives of such organizations.4. (2) Remuneration. no work fulfilled!” 80.1 Selection of members of the BoD and Top Management Current situation: In our First Survey It is impressive to see that about 75% of the responding firms selected the members of their boards based on networking. the BoD should be made up of professionally competent members. we will review some of the relevant management systems utilized by bank BoDs. However.161 In the following.
last year). there was no rejection or criticism of the candidates. The Chairman has indicated that in the near future. Usually. Examples of such competencies are strategic and conceptual thinking. If members were shareholders themselves. Each year. As they came together and invested together. the selection process is very simple: all the members of the BoD and of the Top Management were appointed by the governor of the State Bank of Vietnam (SBV).162 Bank2: One of the selection criteria is that the members of the Board had to be the representatives of the large shareholders. there was a meeting of high ranking officers of the SBV and associated SOCBs. and experience. The short listed candidates would be announced in the meeting of officers and asked in an open survey about their opinions. The meeting attendees assumed that the short- . The Top Management of SBV evaluated the proposed candidates according to their abilities. professional abilities. they usually had or needed to have according to the requirements very good reputation and certain competencies. Thus. Other selection criteria have to (besides financial contribution and a wide network) comply with the legal requirements. leadership skills. their political attitudes. therefore. the Board intended to nominate independent but competent members. according to the succession planning of the SBV. It is also important to mention here that these members were entrepreneurs. Then the candidates were narrowed down to the ones with the most promising potential. Independent members have been allowed to join the board since 2007. they must harmonize well with each other (in Vietnamese: Hùn phải hạp). According to the Chairman. the nominated member had been the candidate for such a position in the succession plan. such as educational background. The appointment criteria were as follows: First of all. the bank planned to nominate some more independent members. networking. each development stage of the bank brought along certain problems to solve and challenges to face. Then each officer proposed potential candidates for the promotion.g. the first BoD was also composed of the founders. their professional and social behaviour in the last period (e. Bank3: Because this bank was founded by a group of entrepreneurs. the composition of members also had to change in order to match the new situation and developments. Bank4: As this Bank is an SOCB.
if there are needs again for the key people.125 However. improvements could only be efficiently introduced after the banks would become fully equitized and especially after the Initial Public Offering (IPO). The appointment by the SBV is not necessarily complied with by the need of the banks concerning professional abilities. the Bank has currently two HR-Departments. If the appointed key person was not competent enough to take over a position. About 38% of the responding companies had seven board members. It is interesting to note that SOCBs had a higher number than the JSCBs. because they were appointed by the SBV-Governor. The official one is in charge of remuneration policies. in theory. when a position is vacant. 125 126 . This appointment process seems to be very transparent and democratic.163 listed candidates were qualified based on the evaluation of the Top Management. In the first phase. However. The short-listed candidates would be presented to the SBV-Governor. the SOCB. according to the Chairman. when SOCBs has a key vacant position. in an SOCB. the number of board members varied from 3 to 9. then the candidates would be appointed. for insurance issues. From our First Survey. the Bank was well aware of the shortcomings of the central appointment process. Nowadays. two ways to improve the effectiveness and efficiency of the bank: to replace key people or to change the organization structure. are questionable. Due to the strict regulations of the state and owner of the bank. However. it was nearly impossible to replace the key people. for writing reports to the SBV. there were. in order to resolve the problem. the state would still be a major shareholder and could therefore appoint only one or two representatives of the state on the Board. If there were positions vacant. who kept them in the succession planning database. This would allow the Bank to introduce a professional Corporate Governance.126 124 For example.124 According to the Chairman. nominated a professional expert to “assist” the key person sent by the SBV-Governor or would modify slightly the organization structure. the so-called transparency and accountability of the evaluation by the Top Management of the SBV and also the objectivity of the appointment by the Governor. they have to contact the SBV to ask them to provide Human Resources. The unofficial one is in charge of the real issues of the HR-Department.
Our suggestions for selection: A Board that is composed of the experience of former members of top management with the diverse skills of fully independent external members is one that is best positioned to carry out the governance responsibilities given to it by shareholders. Example of a selection criteria list for board members (see also Hilb. This enables the bank to identify the right members for a competent Board team. with experience and know-how of complex business activities and processes are often in a better position to challenge management decisions. We believe that this approach has many advantages. as they do not have any significant business commitments outside of the bank or external directorships they have the resources and time necessary to dedicate themselves to their comprehensive responsibilities as Board members (see also UBS. whether they are fully external members or former members of top management. 2007). they should have gone through thorough selection criteria.164 Bank3: The board consists of 11 members. of which 2 are women and 3 are foreigners. Former executives of the bank. Moreover. 2006) . with their widespread relationships. Selection criteria are proposed as follows: Personality competence − Integrity − Having excellent reputation − Situative flexibility − Open for learning − Stress resistance Professional competence − Profound experience in banking and finance − Mastery of strategic thinking − Understanding of global matters Social competence − Building up and maintai n relations − Political networking Leadership competence − Problem solver − Listening skills − Coaching ability Figure 4-23. However.
professional backgrounds and track records. Currently. among others.165 In the area of professional competence. on behalf of the Board. The Board believes that the Chairman and at least one Vice Chairman should have professional backgrounds as bankers. availability and other obligations. However. The Nominating Committee shall review the proposals to be submitted to the Board. Selection of Directors The Board is responsible for selecting the nominees to be proposed to the Shareholder General Meeting for election.ubs. and specific knowledge and experience for individual committee memberships” (www. appoint the Chairman and one or more Vice-Chairmen from among its members. 127 UBS has also proposed the following: “These criteria include. the Board shall establish criteria for the selection of new Board and Board committee members.com).127 When proposing a candidate for nomination. in the future. Based on the recommendations of the Nominating Committee. because the other business partners wish to deal especially with people with certain networks and even with a specific political background. engineering and human resources. . The Chairman. in Vietnam social competence is more important than other competences. The Board does not believe that it should establish a strict limitation for additional Board mandates. shall extend an invitation to the nominee to join the Board and stand for election by shareholders at the Shareholder General Meeting. the ability and willingness to commit adequate time to the Board and committee matters. but rather evaluate the individual Board members’ situation. we recommend that also candidates from professional backgrounds other than finance and banking should be considered in order to build up a diverse team. experience and demographics. we are convinced that other competences will gain their weight of relevance. Selection of Chairman and Vice-Chairmen The Board shall. the Board shall assess whether other Board mandates held by the candidate could lead to conflicts of interests. for example candidates with IT. after each Shareholder General Meeting. personal qualities and characteristics. diversity of viewpoints.
there are 4) receive a monthly salary. not as BoD members. investment committee). The standing members of Board (in this bank. 25. 18.5. They have no right to purchase shares at par-value. they already receive a salary. However. an additional financial benefit was added which allowed them to buy a certain number of shares with a face value (par value) of around US$ 12. but an allowance for meetings which take place four times a year.2 Remuneration of board members Current situation: 56% of the firms that participated in the First Survey have a fixed remuneration system for the members of their boards of directors. 56% Figure 4-24.4.g.000 with a lock-up time of one year.166 4. the standing members receive a fixed allowance of around US$ 1000 / month. Remuneration systems for board members Bank1: The non-executive members of BoD did not receive a monthly fixed salary. . Recently. 4% Variable . The reason was that the Board members are sent by the major shareholders and from there. but as Head or Vice-head of other committees (e. 40% pay their members of boards with variable compensation system and only 4% of board members have an honorary position only. credit committee. Bank 2: The board members did not receive a fixed salary. 2. Honorary. All of the BoD members received expenses and fees of around US$ 300-500 for each meeting. 40% Fix.
Credit Committee. and Nomination Committee) receive a regular salary.128 4. Board compensation should be consistent with market practices (Hilb. All the BoD members and members of Top Management and Supervisory Board are allowed to buy all together 1% of chartered capital at par value. Investment Committee. 2006) but should not be set at a level that would call into question the Board’s objectivity and the independence of its members. Bank5: The members of Board do not have a fixed salary.3 Evaluation of members of Board and Top Management Current situation: According to our First Survey. we recommend that compensation of independent board members should be partly paid in company’s stock in order to align the board members interests with those of shareholders. If the Bank would like to nominate two Independents Directors in the future. In Vietnam. The allowance has to be approved by the AGM. so he or she has to return the share at the par value plus the lending rate of the Bank. . If a member leaves the company before. The executive members of the Board approve the overall compensation for the non-executive directors of the Board.g. The standing members of the Board who are also heads of other committees (e. The Chairman and Vicechairman receive the salary as Head of Credit Committee resp. Our suggestions: The executive members of the Board shall conduct a review annually of the components and amount of Board compensation in relation to other similarly situated companies. 38 % of Board members were evaluated internally. but allowances. the remuneration system will be improved. The lock-up time is three years.5.167 Bank3: All the Board members have an allowance of around US$ 20’000 a year.4. 7 % had self evaluation and only 3 % had an external system 128 Either the board members could purchase shares at par-value (with lock-up time for one year) or their salary is paid in shares. as head of Investment Committee.
by customers or by the governmental authorities). 30% Self evaluated.g. . 2006). It is also possible that the Board members can “elect to have a 360 Degree Feedback Assessment by an unbiased consulting firm”. Our suggestions: As already conducted in one bank that was surveyed. 3% Internal evaluated. and “… decide to whom a brief feedback questionnaire is to be sent for analysis” (Hilb. Furthermore another reason is that members of the Board do not receive financial benefits and they are considered as honourable people by the major investors. However. 22% Not evaluated yet. until now. We recommend that such an assessment should be carried out by the individual as a self-assessment. then between the Chairman each Board member in a so-called “Assessment Talk” (Hilb. 2006). this will change soon when the bank intends to hire additional independent members. it is also possible that the Board members can be assessed by the Chairman. Performance evaluation of board members Bank 2: According to our interview. 38% Figure 4-25. no board member evaluation has been conducted. however. Foreign evaluated. it is not common to evaluate people in such status and high ranking positions. 22% were evaluated by external consultants and 30% of the Vietnamese boards had not been evaluated. Hilb (2006) also recommends that a formal assessment should be conducted “when a member is about to resign or when a severance package is to be negotiated”.168 (e. 7% External evaluated. One reason is that the bank does not have an evaluation system. According to the customs in Vietnam.
10% Finance & Controlling . 13% Marketing . 2. 12. . Some of them had a educational background as engineers or as economists but trained in the former socialistic countries such as Poland. 4 . Eastern Germany or Russia. it should also bring the benefit to the company and not just be a measure to “motivate” the board members. Others. but also help to make the undertaking of his or her tasks in the company more effective and efficient. followed by Finance & Controlling with 15 % and by Auditing with 13 %. 8. In other words. 15% Strategic Management . Desired topic of advanced training for the members of boards Our suggestions: Ideally.4. 9. The development measures should bring the benefit not only to the board members. 3% Figure 4-26.4 Development of board members Current situation: It is obvious that the training situation for the members of boards can be significantly improved. the needs for the development of board members can be identified by the “Assessment of Board Members”.5. 3 . The result of questionnaire showed that 19% of the companies interviewed indicate that strategic management is a desired topic of advanced training for board members. 7% 36 Stratagems . 8. 13% Human Resources.169 4. 9. 5% Risk Management . We also found out in discussions with different experts or in Vietnam that most of the members of board did not have a sound education in modern management. 19% Information Technology . 6. 15% Auditing .
89% have 3 board meetings. the banks should define and document the procedures for training needs assessment consistent with the board development policy. .33% have only 1 board meeting per year. the top management must be responsible for these communication errors. 4.6 Information and communications Current situation: Company-wide communication According to our Second Surveys.4. It is also interesting to note that 24. there are quite few banks which have implemented clear and effective communication procedures. The banks should also carry out a training needs assessment and document and prioritise requirements categorised by management. The VCCI-Survey also found out that only 53% of the companies communicate their enterprise-wide objectives to all employees. The reason is that top management has to take responsibility for their underwritten signatures. About 33. 20% have 2 board meetings and 13. Board meetings The number of board meetings varies significantly. and staff understand and work towards these objectives and know what they need to do to achieve the objectives. the standing members of the BoD advise the top management just verbally about their decisions. 8.170 To do so. And if any communication troubles appear. technical and universal training needs. Furthermore.33% of the firms interviewed have 4 board meetings. The banks should contract with consultants for the preparation of courses and course materials. supervising and guiding the development as required. it is also important that the banks review and finalise a training curriculum based on a detailed needs assessment and identify any external training needs.44% Vietnamese boards hold a meeting only if it is required. In several cases.
This was true for more than three-quarters of equitized companies and half of the joint stock firms surveyed. . However. 34% 1 board meeting per year . although more than 90% prepared and approved minutes. Virtually all of the equitized firms surveyed have formal agendas prepared and circulated before. Board of Management meetings. 4. roughly 65% of firms conceded that senior executives. The main reason for this fact is that. nonetheless routinely attended Board of Management meetings.171 Only when needed. Written policies and an organization chart with detailed reporting line play an important role in ensuring the effectiveness of information and communication flow to the company’s management. and written minutes are prepared and approved after each meeting. 6. Across the sub-sample on non-SOEs. 15. 13% 3 board meeting per year . if management does not follow the company’s policies and organization chart. 9% 2 board meeting per year. who were not members of the Board. relevant information may not be identified and communicated in a timely manner to decision makers. Number of board meetings per year According to the IFC-Survey. 9. 20% Figure 4-27. 11. 24% 4 board meeting per year . only 62% of joint stock firms did the same. with 35% saying that their Board meetings are more informally structured.
and an organization chart showing detailed reporting lines. Best practices show that to ensure the effectiveness of information and communication flow the company would have to have clear procedures on information flows. Management of the company should follow the policies and procedures put in practice. 129 Müller (cited in Hilb. cited in Hilb.172 Our suggestions: Company-wide information and communication It is clear that if employees are unsure of their roles and responsibilities and there is no written job description. (5) deal with important issues first. (2) introduce each agenda item. The meetings should be wellprepared. (7) keep to schedule (8) explain the context and highlight the implication of each item. the chairman and the CEO discuss all information arising out of the meeting that should be forwarded to the management. (3) integrate or synthesize the contributions.” It is important to know that “80 to 90 percent of the chairman’s role happens outside of board meetings (Ward. (9) propose a schedule of communication.129 Hilb (2006) suggests the following process: “The CEO reports along the extended information checklist about the most important events of the past period and about the most important objectives of the sub-units of the organization. the relevant information cannot be identified and communicated in a timely manner to the company’s management. 2005) recommends the following methods for directing meetings: (1) assume preparation. . (10) assess and define confidentiality. which should take place on pre-determined days. which makes it difficult for employees to contribute to successful implementation. 2006). As already known from the Banks that participated in the interviews. the Top Management even keeps their vision and strategies secret. Board meetings We recommend that there should be formal internal meetings. At the end of the board session. (6) clearly state proportions of votes or breakdown of opinions. (4) formulate motions clearly. The bank must ensure that employees are willing and able to implement strategies for example by making the information available.
In our surveys we have found out. However. That is the reason why we also included surveys conducted by others in order to deliver a complete picture. sustainable.5 Recommendations mainly for the banking sector We have conducted the empirical research based on the two surveys according to the “areas of focus”. We consider it as crucial that the shortcomings in the Corporate Governance situation in Vietnam are known and that we could make the recommendations to the (current and future) board members and members of top management. we recommend that any change in the “areas of focus” should factor in the interests of the stakeholder groups. shareholders. both. implementation and evaluation Corporate Governance. such as employees. it is important to introduce and implement a modern approach to corporate governance practices . larger business. and wants to create efficient and competitive business entities which can compete successfully with their overseas peers. then they have to create a more robust.the New Corporate Governance.173 4. we hope that our recommendations would help to improve the corporate situation in Vietnam. By saying that. that many areas in the corporate governance can be significantly improved. these two surveys provided only fragments of the complex issue of Corporate Governance. customers. For the successful development. in international markets as well as in an increasingly liberalized domestic market. . partners and communities. In order to achieve these goals. If the country’s corporate sector wants to avoid the repetition of scandals in the future.
clearly differentiates between line management and functional relationships. The banks should also introduce a corporate structure that reduces spans of control to allow board members and members of top management to concentrate on strategic issues. There should be a clear distribution of tasks between the chairman and other board members and members of top management.174 Areas of focus Vision and strategy: Recommendations A clear delineation of the roles of the BoD and of the top Management is critical to the success. only the interests of the owners / shareholders are considered. He should not get involved (too much) in the daily business as it is the case in Vietnam. clarifies reporting lines and chains of command. The external consultants can help with project management. It is crucial that the content of the vision and strategy are communicated to the relevant stakeholder groups and do not just remain in the head of the board members and members of top management. but also the know-how and team-roles. removes the potential for conflicts of interests that is common in Vietnam. with planning methods and support in the decision making process. The banks should also introduce related committees as discussed either at the level of board or at the level of top management in order to ensure the effectiveness. The size of the Board should be lean enough that problems can be discussed effectively and efficiently and decisions can be made quickly. increase the delegation of responsibility. - Board Structure: - - - Leadership: - - . Composition of the Board should reflect not only demographic data. transparency and accountability. Until now in Vietnam. The board structure should be designed that the interests of all stakeholders are considered and protected.
the systems should help to make the company transparent. 3. However. see studies by CLSA. The banks must ensure that the stakeholders receive the required information that they can contribute to the success of the company. McKinsey and the World Bank. Most of the banks have somehow certain management systems. Information and communication is still a huge challenge for most companies in Vietnam. According to Hilb (2005). Systems: - - Processes: - - Information and Communication: - - Figure 4-28. State-of-the-art systems can also help to provide the employees with the necessary knowledge and skills that serve as motivation for them. The adequate processes and procedures help to “do the right things” but also to “do the things right”. communication should follow 4 principles: (1) completeness. effective and efficient. (2) objectivity. Process structure determines which tasks and in which sequential order they have to be accomplished. p. 130 For example. (3) comprehensibility. and (4) timeliness.175 Board Culture: - Banks should build up a culture where the needs and expectation of all stakeholders are considered: A culture of trust and of integrity should be introduced at the board level (but also across the company). business processes and support processes. According to Rueegg-Stuerm (2005) there are 3 levels of processes: management processes. Recommendations based on the “areas of focus” There is clear evidence that the enactment of good corporate governance can have a tangible positive impact on the following issues130: . .A company’s efficiency and operational performance. profiled briefly in ‘Recommendations on Good Corporate Governance Practices in Vietnam’. thus increasing the benefit for all the stakeholders.
p. studies show that investors are more interested in investments in and are willing to pay more for shares in companies which are perceived to conform to higher corporate governance standards.The degree to which it can protect itself from corrupt practices. and . or may simply choose not to invest at all.132 131 ‘Corporate Governance and Development’. in firms that display poor corporate governance practices. 132 Conversely. particularly from investors and capital markets. The cumulative result can be “larger investment. Put another way.Its ability to access finance. 14. . . investors will pay less. higher growth. and greater employment creation.”131 As a consequence.176 .Its compliance with laws and regulations. companies that adhere to higher standards of corporate governance tend to be rewarded with lower costs of capital and higher share price valuations.The reduction of risk related to its day-to-day operations. .
4 CommuniControlling cation 2.5 Conclusion 2.5 Recommendations 1.1 Background 5. Therefore. where the most pressing needs for intervention are.1 Risk Board 4.1 Governance theories 2.2 Market 5. and that it often seems to mean different things to different people. be achieved.3 Structure 2.3 Board 3. we conclude with some recommendations to promote better corporate governance practices in Vietnam.Primary data analysis 4.1 Composition Auditing Mgmt 3.1 Environment 3. it should be emphasized again that the term “Corporate Governance” is very new in Vietnam.3 Context 4.177 CHAPTER 5: IMPLICATIONS Based on the analysis and survey findings outlined in the previous sections. we want to highlight the implications for research.2 Keep it 1. In this sense.3 Research framework .2 Teaching 1.4 Summary K Figure 5-1.2 2.1 Board controlled Board External Development Feedback 4.4 3. .1 Research 4.3 Practice 3. and where the optimum gains from such interventions could. Structure of the thesis – overview Chapter 5 In this part.1 Board Selection S trategic I ntegrated 1.4 Board Vision 3.4 Research approach 1. Also.3 Industry 4. SWOT / CBI 4.2 Board Board Compensation Culture 5.2 Internal Context 4.3 Second survey S ituational 2. It would probably be better to identify and focus on specific. we should keep in mind that the concept of corporate governance is a relatively broad one.1 Background 3.2 Characteristics Chapter 3: Secondary Data Analysis Chapter 4: Primary Data Analysis Chapter 5: Implications 1. the concept is not yet well established or well understood in Vietnam. higher priority issues within the broad array of corporate governance from a practical or implementation point of view as well as from the standpoint of research and training. more readily. However. teaching.Secondary data analysis . it is important to find out.3 Structure 4.2 First survey 3.4. Chapter 1: Introduction Chapter 2: Theory about Corporate Governance 2.2 Objectives 2.4 Conclusion 1. and practice.
we deliberately tried to span most of the corporate governance issues that are proposed in the concept “New Corporate Governance” by Martin Hilb (Hilb. it would be worth taking a closer look at the more specific corporate governance problems faced by the SOE and non-state sectors (see also IFC-Report. minority shareholders. customers. we hope we have been able to identify some of the specific areas where there is a greater need for intervention and initiative. SMEs. In the SOE sector. the roles of diverse stakeholder groups. In this research. there is. and Cooperatives also need to be included in future research. potential conflicts of interest. hospitals. In the non-state sector. In particular. but not in details. more focused diagnostic studies on this topic in Vietnam. 2005). we have identified problems such as ambivalent cultures of the Board. clearly. However. society. Other industries in Vietnam. such as employees. In doing so. have been discussed. Family Businesses. A clear focus on these issues could then serve as useful input for the conceptualization and design of an ‘action plan’ for corporate governance in Vietnam.178 5. unclear roles and tasks of the members of the Board and of committees as well as of top management. other topics that would benefit from further research include the apparent weaknesses of supervisory committees in many private firms as well as the considerable overlap that exists between senior executives and members of the Boards of Management. a need for further. confused board structures.1 Implications for research As this survey represents one of the first research projects on corporate governance in Vietnam. These groups in Vietnam need to be further researched. . 2006). such as schools.
of supervisory boards and also of top management need practical training in specific corporate governance themes and issues such as Strategic Management. Auditing and Accounting and modern tools of Human Resource Management. 19 November 2003 cited in IFC. 212). of training programs and public awareness 133 It does not make sense to have created the functions of the BoD. Educational Governance. (See also The Business Times. These board programs should not only be for people who are already members of boards.179 5. Hospital Governance. there is a need to support policy and legislative interventions which are intended to strengthen the legal and regulatory framework for corporate governance. 2006): . Governance for SMEs (Hilb. such as Bank Governance. Singapore.Implementation campaigns. Risk Management. . These efforts include a range of initiatives (see also IFC-Report. Supervisory Boards and Committees if the members are not sufficiently trained to perform their duties adequately.Advocacy work in promoting good corporate governance practices within the business community.in addition to their full-time jobs. Furthermore. 2006). 2 Implications for teaching In our study. it is also necessary to design targeted board programs.133 These efforts should help on the one hand to provide the existing members with the adequate knowledge and skills to perform their tasks effectively and on the other hand. of supervisory boards and of top management. that the members of boards. we also found out. 2005. . but also future members. In 2003. Change Management. to broaden the pool of qualified and capable individuals who can serve as members of boards in the future. Singapore found that a boom in initial public offerings had resulted in a shortage of board directors. In addition. with some individuals sitting on ten or more company boards .
This is evidenced by the fact that SOEs destined for equitisation have introduced and are implementing good corporate governance practices because they are convinced that this will be a critical factor in their ability to attract investors. it may be advisable to focus particular attention on (equitised) SOEs. culture of board. such as vision and strategy. there are currently 3. Sabeco and Habeco. VMS. that the pursuit of better corporate governance practices converges with the ongoing equitisation campaign. BIDV. However at present. Vietcombank. New investors are expected to be willing to buy shares of partially equitising SOEs at valuations acceptable to the government only if there are improved corporate governance standards that better protect the interests of minority shareholders. We are confident. the majority of which tend to be SOEs. we recommend that any change in the area of focus should factor in the interests of the stakeholders groups. . information and communication. leadership. systems. The equitisation process does seem to be a vehicle for advancing good corporate governance standards within firms in Vietnam. their immediate need to improve such practices is clearly limited. implementation and evaluation of corporate governance. It is worth stressing that the largest companies in Vietnam will become equitised SOEs for example. Therefore. more non-state firms will develop into large corporate entities. 134 Notwithstanding their future growth and sustainable development prospects. which depend partly on good corporate governance. As the private sector 134 in Vietnam matures and expands.3 Implications for practice As pointed out earlier in the paper. For the successful development.500 expected to be equitized by 2010 (Vietnam Tiger Fund.600 equitised SOEs and there are an additional 1. 2007). any efforts to improve corporate governance standards in Vietnam should focus initially on larger business entities. processes. structure of board. Our survey results suggest several areas of focus for future progress.180 5.
If members of the board and of the top management are conscious of the fact that improved corporate governance practices will lessen their exposure to various operational risks and improve business performance, and if shareholders can see that improved corporate governance practices will help enhance the value of their investments, then the introduction and implementation of corporate governance practices are more likely to be embraced and genuinely internalized in the day-to-day operations of companies. This logic suggests that a consciousness-raising and advocacy campaign would be a useful complement and support to any regulatory initiatives. We also suggest that initiatives to improve corporate governance practices in Vietnam should represent a concerted effort on the part of all stakeholders – government and regulatory agencies, companies (their management) and shareholders / investors (see also IFC-Report, 2006). 135 This will require the combined efforts of multiple government agencies and other relevant organisations.
The experience of SECO has showed that combined efforts of multiple government agencies and other relevant organizations increase the chance for success. The concerted actions panning the following institutions: the State Bank of Vietnam, the Ministry of Finance, the Ministry of Planning & Investment, the State Securities Commission (SSC), the Ministry of Justice, the Vietnam Chamber of Commerce & Industry (VCCI), some business associations, etc.
ANNEX ANNEX I : Interviewers List ANNEX II : First Survey ANNEX III : Second Survey Reference
Annex I: Interviewers list
1 2 3
Name Dr. To Ngoc Hung Mr. Ly Xuan Hai Mr. Huynh Nghia Hiep Mr. Nguyen The Nang Mr. Nguyen Huy Tua Mr. Do Huy Hoai Mr. Truong Hai Hung
Academy of Bank ACB ACB Bao Minh Insurance Company BIDV BIDV Securities Company Calyon Investment Bank Capital Mobilization Department of Ministry of Finance Deutsche Bank
Hanoi HCMC HCMC
Director President & CEO Executive Vice President Executive Vice President and Member of Board Director Managing Director Director/ Head of Capital Market Director/ University Professor Chief Country Officer Chairman of Eximbank CEO
4 5 6
HCMC Hanoi Hanoi
Dr. Le Van Hung Mr. Lawrence J. Wolfe Mr. Nguyen Thanh Long
Eximbank Halong Canned Food Stock Corporation Hanoi Construction Investment Holcim Vietnam Holcim Vietnam
Mr. Tran Xuan My
Ms. Nguyen Thi Hoa Mr. Nguyen Trung Hau Ms. Nguyen Anh Hoa
Terminal Manager HR Manager
Le Xuan Nghia State Bank of Vietnam Hanoi . Le Van Be Mr. Ngo Chung HCMC 24 HCMC CEO Organization and HR Deputy Director Former Bank Governor Deputy Governor Director of Development Strategy 25 State Bank of Vietnam Hanoi 26 Dr. Le Duc Thuan Mr. Le Anh Thi Mr. Cao Si Kiem State Bank of Vietnam Hanoi 27 Mr. Dao Van Thinh Dr. Pierre Schaufelberger Mr. Dang Thanh Binh State Bank of Vietnam Hanoi 28 Dr. Huynh Nam Dung MHB HCMC 18 Mr.185 15 Beat Waefler Honorar Consul Mr. Dang Van Thanh Military Bank Hanoi 19 20 21 Nestlé Vietnam Nestlé Vietnam PriceWaterHouseCoopers Sacombank Sacombank Securities Company Seaprodex Real Estate HCMC HCMC HCMC 22 HCMC 23 Mr. Vo Minh Tuan Honorar Consul in HCMC Incombank HCMC Board members of several companies Deputy Managing Director Executive Chairman of Mekong Housing Bank Vice Chairman/ CEO of Military Bank CEO HR Director Supervisor Founder and Chairman of Sacombank CEO 16 HCMC 17 Mr. Nguyen Ho Nam Mr.
186 29 Ms. Dao Le Minh State Securities Commission State Treasury/ Ministry of Finance Thang Long Securities Company VIB Hanoi 32 Mr. Nguyen Dinh Son Hanoi 33 Mr. Trinh Van Tuan HCMC Chairman CEO of Viet A Bank Chairman of Viet A Bank Chairman of Vietcombank Professor and Vice Rector CEO 35 Mr. Le Manh That Ms. Pham Van Hung Viet A Bank HCMC 36 Mr. Bui Thi Thanh Huong State Securities Commission Hanoi Director of Securities Business Department Director of Securities Science Research and Training Center Director of Research and Training Center Deputy General Director Director 30 Dr. Nguyen Duc Thang HCMC 34 Mr. Nguyen Thi Phong Huyen HCMC 39 HCMC . Nguyen Hoa Binh Vietcombank Vietnam Buddhist University Vigatexco Hanoi 38 Dr. Tran Quoc Tuan State Securities Commission HCMC 31 Dr. Do Cong Chinh Viet A Bank HCMC 37 Mr.
Which position (s) do you have in your company? – (You can choose several answers) Chairman Member of board Managing Director (CEO) Member of top management Others: 2. How is the board of directors of your company constructed? Board without committee Board with committee: ■ Audit committee ■ Nomination committee ■ Compensation committee ■ Other committee 5. Which system do you apply in your board of directors: Strategic planning Monitoring system Strategic control for evaluation of the strategic implementation . Ist your company listed on the stock exchange? Yes Intended in the future No 4.187 ANNEX II: First Survey Questionnaire of Corporate Governance January 6th 2006 Questions 1. How many members of board are there in your company: members? 3.
How is the board of directors of your company evaluated? (You could choose more than one answer) Internal evaluated External evaluated Self evaluation Foreign evaluation Not evaluated yet 8. Which criteria are used to select the member of boards of directors? (You could choose more than one answer) Professional competence Leadership competence Social competence Political competence Availability of a large network Others: .188 Risk Management System Financial Reporting Auditing Selection concept Remuneration concept Succession planning Other system 6 How could you characterize your corporate culture? – (You can choose more than one answer) Customer oriented Trust oriented Bureaucratic Performance oriented Others 7.
189 9. Which topics of advanced training should be interesting for the board of directors in Vietnam? (You could choose more than one answer) Strategic Management Finance und Controlling Auditing Marketing Human Resources Risk Management IT 36 Strategeme Others: 11. when we have needs . How often is the board meeting in your company? One for year Only. How is the structure of remuneration system of the members of boards? Fix Variable Honorary (without compensation) Others: 12. Which group of stakeholders have representative in the board of directors? – (You could choose more than one answer) Shareholders Employee State Costumer Others: 10.
year to be equitized / listed .Number of branches .Very fast asset growth in the last 5 years .Lack of product diversity Concentration of funding base Narrow geographical focus Lack of professional and high-potentials .Revenue growth (2005-2006) . e.No suitable IT system . .g.ROE .Sales per Strategic Busines Unit): .Number of employees . Relationship to political decision makers e.g.Name of the bank: .Strategic partnership e.Education Special abilities .Number of members of BoD .g.Shareholder's equity (chartered capital) .Low reputation . e. .190 ANNEX III: Second Survey Fact sheet [COMPANY] Descriptions Remarks Criteria About the bank .Low profitability ratios .PE .Rapid expansion of branch-network .Strong capital basic .Non Performance Loans (NPL) ratio .Types of company forms: .ROA .Future perspective About the BoD . with foreign banks Strengths.Strong hidden reserves .Complement capital resources .Pretax profit margin . new businesses e.Age .Founding year: .gender .Sales (USD) .g.EBT (USD) .Primitive Asset / Liability Management .Support from government and SBV .Best mortgage bank Weaknesses.g.Weak credit management system .Products (or Strategic Business Units): .Net Profit Margin .
c Please indicate the mission statements of your company: 2 How is the vision creation process in your company? 3 What would you suggest to improve the satisfaction rate.4 Involvement of BoD in the decision of strategic course 1.2 Involvement of BoD in the setting of vision 1.1 Clarity of vision and values 1.a Please indicate the vision of your company in some words: 1.6 Involvement of BoD in the strategic control 1 Do you as a board member know clearly the vision and mission statements of your company? 1.5 Involvement of BoD in the implementation of strategy 1. if indicated "unsatisfied or very unsatisfied" Unsatisfied Important Satisfied .b Please indicate the values of your company: 1.3 Involvement of BoD in strategy formulation 1.191 ANNEX III: Second Survey Importance Very unimportant Very important Unimportant Satisfaction Very unsatisfied Very satisfied Evaluation criteria of the board 1 Strategy 1.
Joint-Ventures. under which there will be no more restrictions.192 ANNEX III: Second Survey Strategy 1 How does the strategy differ from the local competitor (see also exhibit "Strategic Option")? 2 What competitive pressure do you expect when foreign service providers can provide financial services under any legal form (100% foreign-owned. especially on US banks. strategic partnership)? 3 By 2010. trade in derivatives. branches. given the possibilities provided ty technology and other development? 6 Does your bank have a strategy to diversify into new services? . What is your bank's strategy between now and 2010 to cope with the situation? 4 For new services that have neber been available in Vietnam. do you fear that free access for foreign banks would take away opportunities for Vietnamese banks / institutions in providing these services? 5 Do you expect that the restrictions for non-bank financial institutions to provide banking services will be dismantled in the future. Vietnam will fulfill the national treatment under BTA. like money brokering.
a Please indicate the greatest risks of the bank: 1.b Please indicate the greatest opportunities: 1.c please indicate different types of risks (see table "risk matrix"): Environment: Market: Customers: Industry: Internal risks: .193 ANNEX III: Second Survey Risk Management 1 About Risks and Opportunities of the banks 1.
194 ANNEX III: Second Survey Table: Rick Matrix Impact on performance 1 2 3 4 5 Probability of Occurrence 1 2 3 4 5 Types of Risks Environment WTO accession Political instability Slow down in reform Economic slowdown Frequent changes of bank-related policies Technological development Social tension Currency Market Product offerings Capital shortage No branches in foreign markets Customers Bad debts (non-performing loans) Credit card fraud Lack of confidence in the bank Absence of consumer credit bureau Industry Losing market share to foreign banks Fierce competition of local banks in a few segments Brain drain from Vietnamese banks Internal risks Retain capable employees IT break-down Capital shortage Succession planning Fraud and corruption Risk and liability Management (RLM) Lack of vision of the top management Lack of professionalism of staff Narrow revenue base .
2 Delegation of authority to senior management 3.6 Effective performance of BS&RC 3.5 Effective performance of N&RC 3.3 Effective decision-implementation 3. if indicated "unsatisfied or very unsatisfied" Unsatisfied Important Satisfied .195 ANNEX III: Second Survey Importance Very unimportant Very important Unimportant Satisfaction Very unsatisfied Very satisfied Evaluation criteria of the board 3 Board structure 3.7 Supervision of control mechanisms of the group 1 What would you suggest to improve the satisfaction rate.1 Enforcement of strategy-compliant company structure 3.4 Effective performance of Audit Committee 3.
2 Team spirit of the board 4.5 Constructive communication with management 4.8 Integrity of board members What would you suggest to improve the satisfaction rate.3 Culture of trust of the board 4.6 Participative decision-finding approach 4.7 Checks and balances throughout the board 4.4 Skills to consider the opinion of management 4.196 ANNEX III: Second Survey Importance Very unimportant Very important Unimportant Satisfaction Very unsatisfied Very satisfied 4 Board culture 4.1 Clarity of code of ethical conduct 4. if indicated "unsatisfied or very unsatisfied" Unsatisfied Important Satisfied .
1 Optimal number of board members 1 2 3 4 Unsatisfied Important Satisfied 5 What would you suggest to improve the satisfaction rate.years with working experience .Integrity 4 5.Family relations .197 ANNEX III: Second Survey Importance Very unimportant Very important Unimportant Satisfaction Very unsatisfied Very satisfied Evaluation criteria of the board 5 Board composition 5.years in leading positions .Educational background .2 Board diversity 5.highest title acquired .4 Balanced composition based on market know how 5.Functional competences .3 Balanced composition based on functional competences 5.Product know-how .Political networking . if indicated "unsatisfied or very unsatisfied" .6 Independence of board members 1 o o 2 o Optimal numbers of board members Number of female board members Number of male board members Board diversity Educational backgound .5 Balanced composition based on product know how 5.Leadership quality .level .years at board o 3 o Ethnic backgound Competences (several answers possible) What for competences do you think that a member of board should have? .functional focus area o Professional backgound .Market know-how .
cash flow.1 Leadership role of chairman 6.8 Records of board meetings 1 Does the board get regular (e. profitability. liquidity)? 3 Is the extent of the reporting fine-tuned (not to much.198 ANNEX III: Second Survey Importance Very unimportant Very important Unimportant Satisfaction Very unsatisfied Very satisfied Evaluation criteria of the board 6 Board meeting 6. employee satisfaction. not too little)? 4 Does the board get regular information on non-financial indicators (e.5 Optimal number of meetings of Audit Committee 6. market shares.g.3 Optimal use of relevant communication technologies 6.6 Optimal number of meetings of NRC 6. competitor behavior)? 5 Is strategic control enabled though reports on significant deviations of the strategy implementation? 6 Which information technologies do you use to communicate with the board? 7 What would you suggest to improve the satisfaction rate.g.7 Optimal number of meetings of BS & RC 6.7 Initation of use of external consultants by board 6.4 Control tasks of chairman 6. quarterly) information on the financial situation of the company? 2 Does the financial reporting contain statements on all financial indicators (company value.2 Chairing of board meetings 6. if indicated "unsatisfied or very unsatisfied" Unsatisfied Important Satisfied .
9 Coaching of senior management by board Unsatisfied Important Satisfied Yes 1 Is the salary of BoD of your company devided into the fixed part and variable part ? 2 What is the percentage of fixed part ? 3 o o o o o o o o o 4 What contains the variable part ? provision of provision of provision of provision of provision of provision of provision of provision of provision of home allowance company car private healthcare benefit hospital membership program medical check up dental care life insurance club membership stock plan What would you suggest to improve the satisfaction rate. if indicated "unsatisfied or very unsatisfied" .5 Performance-based compensation of board members 7.6 Performance-based compensation of senior management 7.8 Executive training of senior management 7.1 Professional selection of board members 7.3 Fair performance evaluation of board members 7.7 Executive training of board members 7.2 Professional selection of senior management 7.199 ANNEX III: Second Survey Importance Very unimportant Very important Unimportant Satisfaction Very unsatisfied Very satisfied Evaluation criteria of the board 7 Board and Senior Management 7.4 Fair performance evaluation of senior management 7.
3 Optimal representation of interests of personnel 8.7 Internal audit 8.8 Communication between external and internal audit 8.1 Optimal representation of shareholders interests 8.6 External audit 8.5 Risk management 8.9 Prepared response to potential take-over offer 1 What would you suggest to improve the satisfaction rate.2 Optimal representation of interests of key customers 8. if indicated "unsatisfied or very unsatisfied" Unsatisfied Important Satisfied .200 ANNEX III: Second Survey Importance Very unimportant Very important Unimportant Satisfaction Very unsatisfied Very satisfied Evaluation criteria of the board 8 Responsibity of Board towards stakeholder 8.4 Optimal handling of public relations 8.
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Bao Toan Tran was born in Vietnam, but has lived many years in Switzerland and is a Swiss citizen. In Switzerland and Luxembourg, he worked in private banking, asset and fund management for Credite Suisse, for Banque Générale du Luxembourg and for Aargauische Kantonalbank, where he was Senior Portfolio Manager and Head of Equities Research. In 2005, he returned to live and work in Vietnam and has since been involved in several projects in the banking industry and for the State Securities Commission. Mr. Tran is one of the original founders of Viet Capital, which is one of leading fund managers and investment banks in Vietnam, and currently serves as its Vice-Chairman. He is responsible for overall investment strategy and business development. Prior to founding Viet Capital, he was one of Directors at Vietnam Holding, a Swiss-based fund dedicated to opportunistic investments in Vietnam and listed on the London AIM.
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