Analysis of the Vietnamese Banking Sector | Governance | Corporate Governance

Analysis of the Vietnamese Banking Sector with special reference to Corporate Governance

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

submitted by

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

Saigon 2008 . Gallen. 3412 Hoa Sen Design. Law and Social Sciences (HSG) to obtain the title of Doctor Oeconomiae submitted by Bao Toan Tran from St. Economics. Martin Hilb and Prof.Analysis of the Vietnamese Banking Sector with special reference to Corporate Governance DISSERTATION Of the University of St. Gallen Approved on the application of Prof. Dr. Rudolf Grünig Dissertation no. Graduate School of Business Administration. Dr.

without hereby expressing any opinion on the views herein expressed. Ernst Mohr. St. PhD . Economics. Gallen. 2007 The President: Prof. Graduate School of Business Administration. Law and Social Sciences (HSG) hereby consents to the printing of the present dissertation. Gallen.The University of St. October 15.

Martin Hilb into Vietnamese. who proofread my thesis and helped with the proper use of the English language. The doctoral thesis brought me back to my homeland. gave me valuable advice. Now. I would like to thank my supervisor Professor Dr. Rudolf Gruenig. Above all. I have to say that the last journey of my official study has been really exciting. Pieter Perrett. Like Yin and Yang. who accompanied me on my last journey when I was at his University. As a lonely (re-)searcher in a vast country where the topic “New Corporate Governance” is still unknown. according to a Chinese saying. whose never-ending optimism and patience encouraged me to continue on my path. Martin Hilb. Without encouragement and support from several people. His problem-solving approach is different from the approach of Professor Hilb.I ACKNOWLEDGEMENTS “A journey of ten thousand miles begins with a single step”. 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. Peter Mayer and Mr. 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. Professor Dr. . instructive but strenuous. and I also appreciate the many good-spirited and instructive discussions with them concerning this topic. I would never have reached this point. I also want to express my appreciation for the teamwork of Dr. Nguyen Thanh Binh. these two approaches complement each other – the rational and the emotional side. which resulted in the translation of the book “New Corporate Governance” by Professor Dr. I would also like to express my special gratitude to my co-Supervisor. Dinh Toan Trung and Mr. I took this first step on a long journey across time and space some years ago with the decision to start my doctoral studies. and while looking back. which has benefited my development by giving me the opportunity to learn both. close to my target. His constant encouragement and inspiring support made me more confident. My special thanks also go to Dr.

and my family for their trust in me. October 2007 Tran Bao Toan . but left me alone too early. for their unconditional love and support and for their understanding that. during this time. who showed me the right direction to follow in my life. Vietnam.II Last but not least. I would like to thank my wife and children for their understanding and patience with me. I could not be physically near them. This work is especially dedicated to my grandfather.

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 .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. 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.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 .IV FIEs FIS GDP GSO HCMC HR HSBC IAS IFC IMF IPO IT JSCB MHB MIS mn MNCs MoF n.a.

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 .

. . . . . . . . . . List of Tables . . . . . . . . . . . . . . . . . . 2. . . . . . . . . . . . . . . . . . . . . . . 2. . . . . . . . . 2. . . . . . . . . . . . . . . . . . . . . . . . . 1. . 1 1 3 4 5 6 CHAPTER 2: THEORY ABOUT CORPORATE GOVERNANCE IN GENERAL AND IN VIETNAM. . . . .1. . . . . . . . 7 2. . . . . . . . Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII Summary .5 Conclusion . . . . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. . . . . . . . . . . . . .2 Objectives. . . . . . . . . . . . . I III VI XII List of Figures . . . . . . . . . . . . . . . . .3 Structure of the thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . 1. . . . . . . . . . . . . . . . . . .1 Background . . . . . . . . . . 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Governance theories . . . . . . . . . . . . . . . . . . 1.3 The stakeholder theory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 The institutional theory . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . .2 The transaction costs theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Research approach. . . . XVII CHAPTER 1: INTRODUCTION. . . . . . . .VI CONTENTS Acknowledgements . . . .1 The agency theory. . . . . . . . . . . . . . . . . . . . . . . . . . 2. . . Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9 9 10 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . .5 Current account . .1. . . . . . . . . . . 3.2 Domestic savings . .1. . . . .3 Research framework . . . . . . . . . .3 Some shortcomings of the SOEs . . . . . . . . . . .2. . . . .1 Environmental and economic analysis . 3. .1. . .1. . . 2. . . . . . . .3 Economic situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. . .3 Foreign trade and payments . . . . . . . 2. .1.1. . . . . . .3.2. . .2 Socio-cultural environment . . . . . . . . . . 3. . . .2. . . 3. . . . . . .1. . . . .1. . . . . . . . . . . . . . . . . 3. . . . . . .1 Milestones of socio-political development . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . .1. . . . . . . . .1. . . . .VII 2. . . . . . . . . .1. .3. . .1 The transformation to ‘Principle-agent’ relationship in the SOEs 2. . . .1 GDP Development . . .2 Characteristics of Corporate Governance system in Vietnam 2. . . . 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. . .3. .2. . . . . . . . . . . . . . . . . . 3. . . . . .1. . . . . . . . .3 Education . . . . . . . . . . . . . . . . . .1. . . . . . . . . .1 Demographic situation . . .1 Economic indicators . . . . . . . . .4 Inflation . . 3. . . . . . .1. . . . . . . . . . . . . . .1. . . . . . .4 Vietnam’s Economic Law .5 The new corporate governance theory . . . . .1. . . . .2. . . . . . . . . . . . . . . . . . 3. . . . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . .1. . . .1 Political-legal situation . . . . . . . . . . . . 3. . 3. . . .4 The influence of cultural factors . . .1. . . . . . . . . . . . .1. . . . . . 2.2. . . . . . . . . . . . . . . . . . . . .2 Political system . . .4 Conclusion . 3. . . .2 Governance structure in the SOEs in Vietnam . . . . . .1. . 3. . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . .3. . . . . . . . . . . 3. .3 The military . .2.1.3. . . . . . . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . .3. 2. . . . .2 Income disparities . . . . . .1. . . . . . . . . . . . . . . . . . 3. .1. . . . . . . . . . CHAPTER 3: SECONDARY DATA ANALYSIS OF THE VIETNAMESE BANKING SECTOR . . . 3.1. . . . . .

. . . . . . .2. . . .1. .3. . .1. . 3.4. . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . 3. . . . . . . . . . . . . . 3. 3. . . . . . 3. . . . . . . . . . . . . . .2 Banking market in Vietnam . . . . . . . . . .2 Rate of growth in loans and deposits . . . . . . . . . .2. . . . . . . . . . . . . .3. . . . . . . . .2.2 Non Life Insurance . .2. .2 Key factors with positive impact on Vietnam’s growth potential . . . . . . . . . .1 Retail banking . . . . . . . .3. . . . .1. . . . . . .3 Major challenges facing Vietnam . . . . . . . . . . . . . . . . . . .4 Development scenarios . . . . . . . . . . .5 Infrastructure development . 3. . .2. .3 Consumer banking products . . . . . .2.2.4. . .3. . . . . . . . . . . . .1. . . . . . . . . . . . . .4. . . . . . . . . . . . . . . .4 Lending practices . . . . . . . . . . . . . . . . .2. . .4.3. . . .2. . .1. . . . . . . . . . . .1 Development of the private sector . . . . . . . 3. . . . . . . . . . .1 Retail banking and the SME market .1. . 3. . . . .2. . . . . . . 3.5 Product offerings .1 Secondary market for bad debt disposal .1. . . . . 3. .2. . . . .1 Vietnam compared with selected ASEAN countries . 3. . .1. . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . .1. 3. . .4. . 3. 3. . . .3. . . . . . . . 3. . . . . . . 3. . . . . . . 3. . . . . . . . . . . .1. .2. . .1. . . . . . 3. . . . . . . . . . . . .3 Oligopolistic banking market . .3 Privatization of SOEs . . . . . . . . . . . .3. . . .2 Investment products . . . . . . . . . . . . .1. . . . . 3.VIII 3. . . . . . . 3. . . . . . . . 3. . . . . . 3. . .7 Fiscal revenue .4. . . . . . . . . .1. . .2 Economic development . .1. . .4 Conclusion. . . . . . 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 . .2. . .4. . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . 3. . . . . . . . . .2. . . . . . . . .2 Foreign direct investment . . . . . . . . . . . . . . . . . . Conclusion . . .3 Other financial services . . . . .2. . . .1. . . . .3. . . .1 Life Insurance . . . .2. . . . . .4. . .3.2. .2. . . . . .1 Market penetration . 3. . . . . . . . . . . . 3.2 Stock lending. . . . 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Retail banking and the consumer market . . . .4. . . . . . . . . 3. .4. .2. 3. . . . . . .2.6 FX reserves . . . . . . . . . . . . .6 Building capital market institutions .3. . . . . . .2. . . . . . . . . . . . . .

. . 3. .3 Raising capital .4 Foreign Banks & Joint Venture Banks . . . . . . . . . . . . . . . . . . . . 3.3. . . . . . . .4. . . . . . . . .3.3. . . 3.2. . . . . . . 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. .3. . . . . . . . . . . . . . 3. . . . . . . . .3. . . 3. . . .3. . . . . . 3. . . .6 Quantity of non-performing loans . . . . 3.2. . . .7 Consumer credit bureau . .1 State Bank of Vietnam (Central Bank) . .2. .IX 3. . .3. . . . . . . . . . . . . . . . . .3. . .2 Undercapitalisation . .1 Asia Commercial Bank. . . . . . . . . .5 Mekong Housing Bank (MHB) . . 3. . . . . . . .6. . . . . . . .3. 3. . . 3. . 3. . 3.4 Investment in information technology . . .3 Banking industry in Vietnam . . . .3.4. . . . . . . . . . .3. . . 3. . . . . . . . . . . . . .6 Conclusion. . . . . . . . . . . . . . . . . . .4. . . . . . . . . . . .3. . 3. . . . . . . . . . 3. . . . . . .6. . .4.4 Agriculture and Rural Development Bank: Agribank (VBARD) . . . . . . . . .3. . . . . . . . . . . . . . . . . . .3. . . . . . .3 Critical business issues based on the SWOT Analysis .5 Improving management and governance . . . . . . . . . . . . . . . .3.1 Opportunities and Threats of the Banking Sector in Vietnam 3. . . . . . . . . . . .3 Bank of Investment and Development: BIDV . . . . . . . . . . . . . . . . . . . . 3.1 Tendency of consolidation . . . . . . . .6.2. . . . . .2 State-Owned Commercial Banks (SOCBs) . . . . . . . . . . .2 Sacombank . . . . . . .4 SWOT and critical business issues .5 Competition in the banking industry . . . . . . . . .2 Strengths and Weaknesses of the Banking Sector in Vietnam 3. . . 3. .2.3. . . .3. . 3. .2. . . . . . . . . . . . . . . . . . . . . . . .1 Bank for Foreign Trade: Vietcombank (VCB) . . . . .6. . . . . . . . . .6. . . . .3. . . . . . . . . . . . 3. . . 3. . . . . . . . .2. . . . . . . . . . . . 3. . . . . . . . .2 Industrial and Commercial Bank: Incombank . . .3. . . . . . . . . . .4.3 Joint-Stock Banks (JSCBs) . . . . . 3. .

. . . . . . . .5. . 4. . .4. . . . . . . . . . . . . Leadership .3. 4.3 Research Methodology .3. . . . . . . . . . . . . 4. . . . . . . . . . . . . . . .1 Objectives of the Second Survey . . 4. . . . . . . 4. . . . . . . . . . . . 4. . . . . . . . . . . . . . .4 Summary of the current situation and comparison with the standards mainly in the banking sector . . . . . . . . .2. . . . . .2 Targeted group . . . .3 Research Methodology . . . . . .2. . . . . . . . . . . . . . . . . 4. . . .2 First Survey: Survey about the overall situation in Vietnam . Systems utilized by BoD’s to fulfill their responsibilities . . . . . . . . . . . . . . . .2. . . . . . . . .4. . . . . . . . . . .3. . . . . . . . . .X CHAPTER 4: PRIMARY DATA ANALYSIS OF CORPORATE GOVERNANCE IN THE VIETNAMESE BANKING SECTOR . . . . . . . . . . . . . . . . . . .4. . . . . . . . . . . . . . . . .4 Overview about the respondents .4. . . . 4. . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Targeted group . . . . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Vision & Strategy . . . . . . . . . . . . . . . .4 Overview about the respondents . . . . . . . . 4. . . . . . . . 4. . . . . . . 4. . . . . . . . . .4. . 4. . . . . . . . . . . . . . . . . . . . . . . 120 120 122 122 122 122 124 125 125 126 126 127 129 130 139 154 158 160 . . . . . . . . . . . . . . . . . . . . .3. . . . . . 4. . . .3. . .1 Objectives of the First Survey . . . . . . . . . .3 Second Survey in the banking sector . . . . . . . . . .2. . . . 4. . . . . . . . . . . . . . . .2 Organisational Structure and Governance . . 4. . . .1 Background . . . . . . . . . . . . . . . . . . .4 Board culture. . . . .

4. . . . . . . . . . . . . . . . . . . . . . . . CHAPTER 5: IMPLICATIONS . . . . . . . . . . . . ANNEX II: First Survey . . . . . . . . . .4. . . . . . . . . . . . .1 Implications for research . . . . . .XI 4. . .3 Evaluation of members of Board and Top Management . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Remuneration of board members . . . . . . . . . . . .4. . . .5. . 4. . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . .5. . . . . . . . . . .4. . . . . . . . . . . . . .5 Recommendations mainly for the banking sector . . . . 161 166 167 169 170 173 177 178 179 180 183 184 187 190 201 . . . . . . . . . . . .2 Implications for teaching . . . . . . . . . . . . .5. . . . . . . . . . . . . . . . . . . . . ANNEX I: Interviewers list. . . . . . . . 4. . . . . .4. . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . ANNEX III: Second Survey . . . . .3 Implications for practice . . . .1 Selection of members of the BoD and Top Management 4. . . . . . . . . . . . . . . . . . . . . . . ANNEX . . . REFERENCE. . . .5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . .6 Information and communications. . . . . . . . . . . . . . . . . . .4 Development of board members . . . . . . . . . . . . . . . .

. . . . . . . . . . . Mekong Housing Bank . . . . . . . Table 3-5. Table 3-7. . . . . . . . . . . . . . . . . . . . . . . . Incombank. . . . . . . . . . . . Table 3-4. . . . . . . . . Sacombank . . . . Vietcombank . . . Table 3-2. . . . . . . . . . . . . . . . . . . . . Bank of Investment and Development . Table 3-6. . . . . . . . . . 48 50 85 88 90 92 94 96 98 101 106 . . . . . . . . . JSCBs valuation and forecast . . . . . . . . . . . . . . . . . . . . . . . . Agribank . . . . . . . . . . . . . . Table 3-10. Key figures of countries in ASEAN . . .XII LIST OF TABLES Table 3-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Table 3-9. . Table 3-11. . . . . . . . . . . . Recent investments by foreign banks in local JSBs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Table 3-8. Table 3-3. . . Country Attractiveness for Investment of Vietnam . . . . . . . Asia Commercial Bank ACB . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . Structure of the thesis – Overview Chapter 3 . Portfolio–Matrix of Country Attractiveness for Investment Scenario analysis – GDP growth forecast to 2010 . . Growth of the life insurance premium income in Vietnam AsiaPac Loan Penetration . . . . Figure 3-13. . . . . . Figure 3-2. . . . . Numbers of privatizations . . . . . . . . . . . . . . . . SOCBs before 1988 and now . . . . . . . . . . . . . . . . . Research structure of the thesis . . . . . . . . . . . . . . . . . Figure 3-7. . Foreign direct investment . . . . . . . . . . . . . . . . . . . . Overview of the loan limit in selected commercial banks ATM/card alliances in Vietnam . . . . . . . . . . . . . . . . Banking NPLs 2005 . . . . .overview A typical governance structure of a state-owned General Corporation . . . Figure 2-3. . . . . . . . . Fiscal revenue . . . . . . . Markevt share of SOCBs . Income disparities between regions. . . . . . . . . Penetration of banking services in urban Vietnam . . . . . . . . Three major scenarios . . . . . Figure 3-18. . . . . . . . . . . . . Economic Situation – GDP Development . . . . . . . . . . . Figure 3-6. . . . . . . . . . Figure 3-26. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 1-2. . . . . . . . Figure 3-21. . . . . Figure 2-1. . Figure 2-2. . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . .overview . Figure 3-5. .XIII LIST OF FIGURES Figure 1-1. . . . Figure 3-23. . . . . . Figure 3-10. . . . . . . . . Domestic savings feed investment . . Figure 3-14. . . . . . . . . . Research approach . . . . . Figure 3-19. . . . . . . . . . . . Figure 3-16. Milestones in the recent development of Vietnam . . . Normalized political stability and violence index . . . . . . Figure 3-25. . . . . . . . . . Figure 3-11. . . . . . Figure 2-4. . . . . Figure 3-8. . . . . . . . . Model of “New Corporate Governance” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Export situation . . . . . . . Figure 3-4. . . . . . . . . . . . . . . . . . . . . . .detailed view . . Infrastructure situation . . . Current relationship in a state-owned corporation . . . . . Figure 3-12. . . . . . . . . Figure 3-20. . . . . . . . . . . . . . . . . . . . Figure 3-24. . . . . . . . . . . Figure 3-9. . . Figure 3-22. . . Figure 3-3. . . . . . . . . . . Figure 3-15. . Figure 3-17. . . . . . . . . . . . . . . . . . . . Figure 3-1. . . . . Public investment in social sector has increased since 2004 Main cultural influences of the Vietnamese culture . . . . . Mortgage market indicators in Vietnam. . . . . . . . . . . Urban population growth . . . . . . . . Structure of the thesis – overview Chapter 2 . . . .

. . . . . . . . “Areas of focus” for the discussion of corporate governance practice . . . Figure 4-9. . . . . . . . . . . . Figure 3-32. . . . . . . . . . . . . . Companies in the VCCI-Survey with an internal audit function . . . . . . . . . . . . . . . Relative size of top 17 CBs in term of charted capital (bn) Customer segments served by types of banks . . . . . . . . . Overview of Opportunities and Threats . . . . . . . . . Figure 4-6. Figure 4-14. . . . . . . . . . Figure 4-21. . . . Figure 4-19. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 3-30. . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate structure of a SOCB based on the example of Bank 4 . . . . Structure of the thesis – overview Chapter 4 . The Vietnamese boards showing the distribution of different committees . . . . . . . . Figure 4-1. . . . . . . . Combined structure of the boards of directors . . . . . . . . . . . Figure 4-12. . . . . . Status of the participated firm . . . . . . . . . . Figure 4-15. . . . . . . . Strengths and Weaknesses of the Banking Sector in Vietnam The External Change (CHe) and the Internal Change (CHi) Formulation of critical business issues . . . . Committees at Bank2 . . . . . . Some facts about the banks’ BoD in the Second Survey. . . . . . . . . . . . . . Figure 4-5. . Number of members of boards in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Steps in the strategy process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate culture of the questioned companies . . Involvement of the BoD and of the top management in the strategy process . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 4-11. . . . . . . . . . . . . . . . Figure 4-13. . . . Figure 3-31.XIV Figure 3-27. Figure 4-16. . . . . . . . . . . . . . . . . . . . . . . . . Risk Management Group . . . . . . . Figure 4-18. Figure 4-17. . . Composition of the strategy project team. Figure 4-7. . Figure 4-8. . Committees at the Board level . . . . . . Figure 4-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 4-20. 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 . . . Personal data of the respondents . . . . . . . . . . Companies which do not have Audit committees . . . . . . . . . . . . . . . . . . . . . . . . . . . The applied Management tools applied in the board of directors . . . . . Strategic control . . . . . . . . . . . . Figure 4-10. . . . Figure 4-3. . . . . . . . . . . . . . . . . Figure 3-29. . . . . . . . . . . . . Committees on the Top Management level . . . . . . . . . . . . . Figure 4-4. . . .

. Structure of the thesis – overview Chapter 5 . . Figure 4-25. . . Figure 4-26. . . . . . . . . . . . . . . . . . . . . . Recommendations based on the “areas of focus”. . . . . . Figure 5-1. . . . . . . . . . . . . . . . Figure 4-24. . . . . . . . Remuneration systems for board members . . . Desired topic of advanced training for the members of boards. . . . . . . Example of a selection criteria list for board members . . . . . . . . . . . . . . . . . . . . . . . 161 164 166 168 169 171 175 177 . . . . . . . . . .XV Figure 4-22. . . . . . . . . . . . . . . . . . . . . . . . Number of board meetings per year . . . . . . Performance evaluation of board members. . . Required criteria to be selected as a member of board of director. . Figure 4-23. . . Figure 4-28. . . . . Figure 4-27. . . .

XVI .

We also hope that our experiences in Vietnam provide some input to the theory of corporate governance in emerging countries. There are still many challenges lying ahead. This dissertation is mainly addressed to professionals who want to improve their skills and knowledge in corporate governance. there were positive developments in the field of corporate governance in the banking sector. capital and modern management know how. which are able to select experienced foreign companies as strategic partners benefit from the transfer of state-of-the-art technology. domestic or foreign. since our first survey was conducted. However. the government of Vietnam has realized the compelling need to reform the economy.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. 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. 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. we deliberately tried to span most of the corporate governance issues that are proposed in the concept “New Corporate Governance” by Martin Hilb (2006). especially for the state-owned companies. The results of our research have shown that within one year. Companies from all sectors are obliged to strengthen their competitiveness in order to survive on the domestic business arena and overseas markets. whether state-owned or private. In our surveys. The listed companies. but also to the applied research audience. As this survey was the first (Swiss) research in the Banking Sector in Vietnam. . This study laid the focus on the Banking Governance in Vietnam. Vietnam has committed to move to a market-based economy and to create a level playing field for all participants. Such a goal will be difficult to achieve without the introduction and implementation of good governance practices. and thus can also improve the situation of corporate governance.

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continued to favour the 6. In the year to come. 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. 1 This was partly the result of an economic and business environment that. including background of the study. in contrast to the various privileges and forms of government assistance enjoyed by state-owned enterprises (SOEs). To fuel economic growth. some major strides have been made to improve the regulatory regime and general business environment for Vietnam’s non-state sector. 1. Vietnam also aims to promote the private sector.000 or so companies operating in the SOE sector (Credit Suisse. an epochal Enterprise Law came into effect. until the mid1990s. research approach. In particular. research objectives. strategic geographical position in one of the world’s most economically dynamic regions. 2006). Vietnam needs further investment. Most notably. as well as the structure of the thesis.1 In recent years. high economic growth and low production costs.1 Background Vietnam attracts its investors to its largely untapped market with its population of 85 million.1 CHAPTER 1: INTRODUCTION This chapter presents an overview of the research. 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. in December 2001. a lot of the “paperwork” previously required to register a new company has been removed. . Private sector companies tend to face a range of obstacles in establishing and achieving growth in their businesses. and the business registration process has been streamlined considerably. stable political situation. which has significantly improved the business environment that envelops Vietnam’s private companies. in January 2000. Besides. and to attract investors it has introduced regulatory and institutional reforms. 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. Furthermore. the country aims to achieve growth of more than 8 per cent to bring Vietnam out of its position as an undeveloped country.

in part as a legacy. . 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. but also JSCBs will need to change in order to survive. the Bilateral Trade Agreement with the United States and Vietnam’s accession to the WTO. They channel most funds through loans to the SOEs. Through initiatives such as the ASEAN Free Trade Area (AFTA). This sector was substantially reorganized at the outset of the transition period. One of the sectors in Vietnam exposed to rapid change is the banking sector. domestic or foreign. Such a goal will be difficult to achieve without the introduction and implementation of good governance practice (IFC-Report. This is arguably the next big challenge for the private sector in Vietnam. And the pace of change needs to be accelerated parallel with the rapid growth of the economy. serving niche markets. these have so far operated on a limited scale. This means that. the accession of Vietnam into the WTO and the threat posed by foreign competitors. This means that SOCBs. However. As a result of the imminent WTO accession and the obligations arising from bilateral trade agreements. like other industries. It is more the willingness for change.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. Although there are many foreign bank branches and semiprivate joint-stock commercial banks (JSCBs). further modernization during the 1990s was generally quite modest. whether state-owned or private. 2006) that: .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 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.

2006.enables senior managers to focus on generating efficiency and productivity gains. Corporate Governance was a new topic in Vietnam. To obtain an overview of the current corporate governance practices in Vietnam. Thus. Danida seeks to strengthen corporate governance practices in the fisheries sector in Vietnam (IFC-Report. 18). 2006). 1. In addition. we introduced the term “Quản Trị Hội Đồng Doanh Nghiệp” which is descriptive of the entire connotation of “Corporate Governance” (see Hilb. While translating the book “New Corporate Governance”.3 . the major objectives of the thesis are: 1. 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).2 Objectives When this study was started.allows for the creation of an internal “architecture” within firms that allows them to increase their scale and capacities. At that time. This thesis aims to fill the gap. Official guidelines in this regard were insufficient. Quản Trị Hội Đồng Doanh Nghiệp.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. The study looks at current corporate governance practice in the banking sector in Vietnam. As part of its “Support to Industry Restructuring & Enterprise Development” (SIRED project. 2. at least partially. 2006). Martin Hilb. there has apparently been no empirical study of general corporate governance. and . To gain a better understanding of actual corporate governance practices of the banking sector in Vietnam. the term “Corporate Governance” was not part of the Vietnamese corporate language. it is often quoted that there is no “one-size-fits-all” governance regime in the corporate governance literature (Wang.3 In the banking sector. by Prof. Dr. 3 . Relatively little research work has been carried out in the area of corporate governance in Vietnam.

Chapter 4 also provides suggestions as to how the board could tackle challenges in the board. Chapter 4 aims to find out. board structure. . This is based on the analysis of the current status and the future situation under consideration of the “areas of focus”. Chapter 3 includes a study of the influencing factors from the environment. 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. Furthermore. researchers. information and communications. private commercial banks. leadership. 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. relevant government agencies. more specifically. trainers for corporate governance issues. and industry in order to identify the risks and the opportunities the board might face. This provides a general overview of the situation. and foreign banks are identified. the banking sector in Vietnam faces. systems. 1. the market. and the challenges the country and.4 3. in order to work out the critical business issues of the banking sectors. Chapter 2 deals with the theoretical framework for the secondary research and primary research which will be discussed in the Chapter 3 and Chapter 4.3 Structure of the thesis The thesis is presented in 5 chapters: Chapter 1 is the introduction. and to a lesser extent. board culture. To provide recommendations on how to improve corporate governance practices in Vietnam. 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. the strengths and weaknesses of the different types of banks such as state-owned commercial banks.

1 Background 3. The second survey was conducted with some specific banks.2 Board Board Compensation Culture K Figure 1-1.3 Second survey S ituational 2.2 Teaching 1.5 Conclusion 2.3 Practice 3. Research structure of the thesis .1 Board controlled Board External Development Feedback 4.5 Recommendations 3.1 Board Selection S trategic I ntegrated 5.4 Board Vision 3. teaching.4 Summary 1.3 Structure 2.1 Environment 4.1 Governance theories 2.4 3.2 Keep it 1.4 CommuniControlling cation 2.2 Objectives 2. an in-depth qualitative study was carried out in order to investigate the phenomenon within its real-life context.Secondary data analysis .1 Composition Auditing Mgmt 3. . 4 A list of interview partners is attached in the Annex.2 Market 5.2 Characteristics Chapter 3: Secondary Data Analysis Chapter 4: Primary Data Analysis Chapter 5: Implications 1.1 Research 1.1 Background 5.2 Internal Context 4.4 Research approach In Chapter 3 (see also Research structure).3 Board 3. expert interviews were conducted with board members and members of senior management from diverse companies in Vietnam.overview 1.2 2.1 Risk Board 4. To understand the current situation and future development of Vietnam.3 Context 4. with policymakers and members of relevant government agencies.2 First survey 4. and practice. Within the frame of the empirical research.4 As an explorative and empirically oriented research project.3 Structure 4.3 Industry 4.4 Conclusion 1. Chapter 1: Introduction Chapter 2: Theory about Corporate Governance 2. The first survey deals with the overall situation of corporate governance in Vietnam.3 Research framework .Primary data analysis 4.4 Research approach 1. the information collected is based predominantly on desk research. we conducted two surveys which will be presented in Chapter 4.4.5 Chapter 5 highlights the implications for research. SWOT / CBI 3.

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. Research approach 1. Implications XXX XX XXX X X XXX X XXX X X X X Figure 1-2. and the research structure of the thesis are presented. Banking Environment XXX X XXX X 2. we will discuss in-depth the content and results of the research. but also the research objectives. research approach. Banking Market XXX X XXX X PHASES 3. the background.5 Conclusion In this chapter. . Banks (based on areas of focus) 5. In the following chapters. Banking Industry 4.

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CHAPTER 2:

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

1.1 Background

1.2 Objectives

1.3 Structure

S ituational
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

K

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.

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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

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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).

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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.

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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).

we have sought to summarize some of the most important topics related to corporate governance practices. and in a manner appropriate to each particular context”. and holistically controlled. and the local governance best practices evident in the approaches adopted by many international firms operating in countries around the world.1. 11 Hilb (2005) defines the “New Corporate Governance” as a system “…by which companies are strategically directed.g. we also want to identify the suitable framework for the research in this dissertation. socially sanctioned norms of behaviour which are embedded in culture and ideology) constraints (North. are socially and culturally created devices such as structures and activities which provide stability and meaning to social behaviour (Wang. 11 Hilb (2006) adopts both the global relevance of aspects of the Anglo-American board best practices. Scott.1. Here we do not seek to provide a fully comprehensive picture of the corporate governance practices in Vietnam.5 The New corporate governance Hilb’s “both-and. in an entrepreneurial and ethical way. 1995). 2. 1990. broadly defined. Rather. Institutions. integratively managed. such as ‘Principle-agent’ relationship in the SOEs. glocal approach” (2006) shows that companies can achieve sustainable growth. judicial decisions. . Institutional frameworks are made up of both formal (e. political rules.2 Characteristics of Corporate Governance system in Vietnam The issue of corporate governance in Vietnam is complicated. 2006). long-term profit maximization and shareholder wealth maximization by taking stakeholders into account as well as shareholder interests.g.11 2. 2.4 The institutional theory Institutional theory offers its own set of assumptions regarding human behaviour and the nature of the firm. Finally. economic contracts) and informal (e. the one-tier or two-tier system.

an active capital and securities market.2. As the principal of SOEs.1 The transformation to ‘Principle-agent’ relationship in the SOEs As the economic reform in Vietnam gradually unfolds. 2005) . the inspection committee14 and the management board. set realistic objectives. 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. 2. namely the State (or shareholder general meeting). etc. Different models of governance have been formed in different economic and social system as well as through different political orientation. all while taking into account the real capacity and market conditions in which the enterprise is operating. a less liquid capital market.2.. for such a system to work well requires the principal to know the business quite well. 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. The relationship between SOEs and the government is referred as being a ‘Principle-agent relationship’. Theoretically.12 2. a greater role for the participants themselves. in which the former is the agent and the latter is the principal. 13 The two-tier system has developed in the continental European environment characterized majority shareholders of companies. They are the general meeting of shareholders. Thus. while one-tier system has been created in the Anglo-Saxon environment characterized by dispersed share structures.13 The two-tier system consists of three bodies for governing public limited companies. revenues contributed to the state budget have become among the most important performance criteria for SOEs. profits. and objectively monitor and evaluate the performance of the enterprise.2 Governance structure in the SOEs in Vietnam The Vietnamese corporate governance system is often compared to the German two-tier system. There is no universal answer to the question of which governance system is better. The one-tier system has two bodies of governance. 12 Also called ‘governing from a distance’. and the Board of Directors. the government. the governing strategy has changed from direct involvement in the decision making process of the enterprise to a more performance-based12 approach.

.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. The remainders are more or less independent SOEs. reporting directly to a national line ministry.) or owned by provincial or municipal government. Textiles & Garments. or some other government organisation. These SOEs do not belong to a larger general corporation. Current relationship in a state-owned corporation . a provincial or municipal People’s Committee.13 STATE Board of Management Inspection Committee Top Management State-owned Corporation Figure 2-2. Cement. 15 Such as Construction. Telecommunication. They report directly to their supervisory line ministry or provincial / municipal People’s Committee. Oil & Gas.

government agencies.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. and report to. the governance structures of ‘independent’ SOEs are similar to general corporations in that they are directly supervised by. 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. 16 See also Figure 4-12.14 However. Central Government Central Supervisory Ministry Administrative relationship. A typical governance structure of a state-owned General Corporation16 . In other words. 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. .

the Inspection Committee should be appointed by shareholders at the annual general meeting. in which the corporation operates. the Ministry of Finance acts as the representative for the state’s capital. only joint stock firms with 11 or more shareholders must establish an Inspection Committee. But in practice. 2003) The inspection committee Under the Enterprise Law. monitoring the performance of management. regularly informing the board of management of the performance of the enterprise. such as ensuring firm’s compliance with existing laws and regulations. The ownership rights of SOEs are currently exercised by various government agencies. personnel. the appointment of the inspection committee can be made by the Board of Management. For example. However. Although not required under the Enterprise Law. 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 is responsible for the administration of that capital. The ‘supervisory ministry’. dissolution. the Inspection Committee is expected to perform a number of important functions. such as evaluating the financial accounts. such as the Ministry of Construction. As it is written in the Enterprise Law. 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. and overall supervision of the enterprise (see Amended SOE Law. In theory. recommending changes to the Board of Management or operations of the enterprise. which is normally the ministry overseeing the relevant sector. principally related to their oversight role. the Board has the right to make every decision pertaining to the business of the corporation.15 The board According to the amended SOE Law of 2003. Ministry for Agriculture. overseeing major transactions or investments. overseeing disclosure and communications made by the enterprise. is responsible for the establishment. overseeing major . The reason is that the Board of Management members are also the owners or majority shareholders. and if necessary.

a general director can be dismissed if the SOE incurs losses for two consecutive years.18 To avoid the penalties. SOEs are thriving to make no loss. . the incentives for entrepreneurial activities under the ‘carrot and stick’ system do not exist. But there are also incentives for the general director if the SOE meets or exceeds the set targets. revenues or profits this year must be higher than that of last year. According to this approach. 17 The immediate principal or General Corporation. Such regulation certainly would not motivate an SOE general director to invest for the long term development of the enterprise. 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. monitoring potential conflicts of interest by board of management. 18 According to the State Enterprise Law. managers or major shareholders. In other word. This ‘laid back’ administrative approach may also prompt attempts to manipulate the financial accounts. In fact. Government institutions17 commonly do not have the capacity nor expertise to closely monitor the performance of an SOE and then reward accordingly. because the SOE general director is rewarded little if the enterprise earns a lot of profit. 2. so that the general directors can retain their position.3 Some shortcomings of the SOEs The government officials as principals often lack business experience and business knowledge. reviewing internal controls and risks. or the company must grow by a fixed percentage every year. selecting independent auditors.2. the underlying rule is that revenues or profits this year must be higher than last year. 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.16 costs or expenses incurred by board of management or senior management. but can face severe punishment if the enterprise makes a loss. regardless of market condition. but only a little profit. As a result.

Problems of individual conflict of interests The majority of recent reported corporate governance malpractices in the SOEs have involved direct or indirect ‘kick-backs’. even those with some defects. Problems of the reporting The role of the Board in many SOEs is therefore not clear. One way to build a good relationship with officials is to employ their relatives or persons introduced by them. the General Corporation. and to a great extent. SOE clients always ask for commissions. If the commissions are paid. For SOEs that belong to General Corporations. . The SOE has to get approval from a number of agencies. limited. to be a good manager of a SOEs. Otherwise the clients would find a reason to complain. They do not care much about checking the contract carefully before signing. the competence of political relationships is deemed to be crucial. Thus. These political relationships are necessary if the SOE wishes to make a large investment. then the clients would accept any product and service. they not only report directly to the ‘mother’ entity. but also at the same time have to deal directly with various government agencies on a number of important aspects of their business.17 Problems of the political relationships Personal relationships between SOE managers and government officials turn out to be very important. and this is possibly the most serious agency problem.

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. and the public (Hilb. ignoring the needs of stakeholders can lead to lower financial performance.18 2.1.19 The “New Corporate Governance” is based on a reversed “KISS” principle as described in the Figure 2-4. 2002). For example. 2006). Figure 2-4.2 Political system) and special cultural characteristics where the Vietnamese strive for harmony in the collective (see also 3.3 Research framework Due to the current political system (see 3. Model of “New Corporate Governance” (Hilb.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. . customers. creating value for stakeholders through business focus on maximizing value for all stakeholders may be able to create financial value for shareholders.2.1. The “New Corporate Governance” recommends bringing added value simultaneously to shareholders..1. employees.

Part 3: Keep it integrated This dimension integrates targeted recruitment. Based on the specific situation of Vietnam. the banking market (including customers) and Banking sectors (including competitors and related players in the finance industries) will also be analysed. Information and Communication. political-legal. 2006). evaluation. remuneration and development of members of the supervisory and managing boards (see Hilb. . 2. technological. ecological and socio-cultural (Rueegg-Stuerm. leadership. five different issues are considered: Economic. risk management. Part 4: Keep it controlled This dimension refers to auditing. 2005). These issues will be discussed in Chapter 3. several governance theories and the corporate situation in Vietnam were discussed. board culture. we have decided for the “New Corporate Governance” approach (Hilb. Systems. 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.4 Conclusion In this chapter. 2006). internal and external communications and feedback functions of the board (see Hilb. 2006) which will serve in the Secondary and Primary research as a framework. board structure. 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. Processes.

This provides a general overview of the situation. The environmental analysis deals with the following situations: politicallegal.3 Structure S ituational 2.1 Board controlled Board External Development Feedback 4. Structure of the thesis – Overview Chapter 3 3.3 Board 3.4.2 Market 1.4 3.1 Board Selection S trategic I ntegrated 1. an analysis of the environment.1 Background 3.3 Research framework .2 2.20 20 For example Human Resources.2 Keep it 1.3 Structure 2.Primary data analysis Chapter 3: Secondary Data Analysis Chapter 4: Primary Data Analysis Chapter 5: Implications 1.20 CHAPTER 3: SECONDARY DATA ANALYSIS OF THE VIETNAMESE BANKING SECTOR In this chapter.3 Context 4. 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 4.1 Governance theories 2.1 Composition Auditing Mgmt 3. Information Technology.4 CommuniControlling cation 2. socio-cultural.5 Conclusion 2.Secondary data analysis .2 Board Board Compensation Culture K 3.1 Environment 3.1 Environmental and economic analysis In the environmental analysis. the banking sector in Vietnam is facing. SWOT / CBI 1. The purpose is to find out how these factors influence the development of the banking sector and related issues.4 Research approach 1.2 Characteristics 1.3 Industry Figure 3-1. Chapter 1: Introduction Chapter 2: Theory about Corporate Governance 2. the industry and the market of the banking sector is carried out. more specifically. and the challenges the country and.4 Board Vision 3.4 Conclusion 2.2 Objectives 3. the major influencing factors are discussed.2 Internal Context 4.1 Risk Board 4. economic. .

The third stage targeted the fiscal.1. Tariffs appeared to be an issue and in 1990 a new duty law was introduced which aimed to expand foreign trade. In December 2006.1 Milestones of socio-political development With the start of the reforms of the communist country Vietnam in 1979 there were three main parts. due to Glasnost and Perestroika in Russia.1.1 Political-legal situation 3.21 3. “all-powerful” Communist party leader Le Duan. Vietnam and its Communist Party were urged to find other trade partners than the Soviet Union or other socialist countries. In spring 1989 the banking and finance reforms aimed to combat the hyperinflation rates. The first step in the reform process can be described as “administrative dualism” and allowed the establishment of private ownership of land and businesses. reduction of trade barriers. 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. eliminate the causes of speculative pricing and to find “real market prices”. the Doimoi policy and the introduction of macro-economic institutions (Dinh. set fiscally sound interest rates and liberalize the foreign exchange system in order to encourage foreign trade. industrial and trade sectors.1. The measures were aimed at the improvement of resource allocation and efficiency. the U. the agrarian and industrial reform. 1997).S. monetary and credit supply and the ownership of land which was not allowed until 1988. In 1994 the US Embargo was lifted and in 2002 a trade agreement with the USA was reached. The Doimoi policies. From 1986 the market reforms started with the new general secretary Nguyen Van Linh after the death of the long-time. the second stage in the reform process. establishment of privateand family ownership and the liberalisation of the agricultural. . Congress approved Permanent Normal Trade Relations (PNTR) for Vietnam. The long lasting Cambodia War (from 1978) ended in 1989 and with the demise of the Communist block.

which has chosen to open its economy without opening up its political system as worth emulating. there does not appear to be a strong push for democracy either.21 As with China. .1. Milestones in the recent development of Vietnam (Source: Vietnam Tiger Fund.22 Figure 3-2. which brooks little opposition. 2007) 3. However.2 Political system Vietnam is governed by the Communist Party of Vietnam. To be fair. The broad population seems more intent on taking advantage of the economic opportunities made possible by the reform process. 21 Many business people point to the successes of China. rather than Russia. Vietnam’s key leadership changed in June 2006 with the appointment of a new President and Prime Minister. with political stability and economic prosperity being the preferred option. who are both southerners. the absence of democratic freedom is currently not a major issue. the changes seen in the economy are not accompanied by any visible signs of political reform for Vietnam.1. which attempted to liberalise its political system without first opening up the economy.

2006). 5) rule of law. 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”.1. cited in UBS.22 High Switzerland Japan United States Vietnam 2 1 0 -1 Pakistan -2 -3 China Sri Lanka Low 213 Countries (Source: Kaufmann. 2006)23 3. 2) political stability (or no violence). Kraay and Mastruzzi. cited in UBS. Kraay and Mastruzzi. for example. 15 December 2006. the more economic benefits it can enjoy. 23 The World Bank’s Governance Indicator includes 6 aspects: 1) government effectiveness. but “ … binding itself with the commitment toward a more market oriented economy”. 2006. the more capable a country is with governance issues. presented by Mr Chevalier Alain. especially in the region. combined with a strong set of legal and regulatory systems. In the long run this runs the risk of driving down returns for the private sector because entities run by the Figure 3-3.1. the military also occupies a large position in the economy.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. In a politically stable environment. 3) voice and accountability. IUED. 4) control of corruption. Specifically. while starting to change. 2006. . still highlights the need to better understand the associated economic risks as international experience demonstrates. and 6) regulatory quality. investors are more willing to make long-term investments in the form of FDI and continued capital inflows (Kaufmann.3 The military The relatively high level of military involvement in senior government positions. In Thailand.

the legal framework consists of layers in which general laws are superseded by specialized laws in a specific area. amended in 2003) .State Owned Enterprises Law (1995.Cooperative Law (1996.Domestic Investment Encouragement Law (1994. 2000).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.24 24 Fusion of the Foreign and Domestic Laws on Investment.Foreign Investment Law (1987. In addition. The system becomes more confusing as conflict in the code defers to the newest version (The William Davidson Institute.Private Enterprise Law (1999) .24 military will frequently have a lower cost of capital or could be given preferential terms on which to compete.1. it will undoubtedly loosen restrictions on foreign investment and capitulate to some demands for foreign investment liberalization under the WTO negotiation. amended in 1990. . If the new Common Investment Law follows the trend. 2005). The most immediate reform is the forthcoming Common Investment Law. 2005): . Streamlining the laws pertaining to business activities is a major agenda on the current reform schedule. amended in 2003) . 1992. 1996.1. 3. 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. As such it will be interesting to watch how the role of the military evolves over the next decade. These laws are (The William Davidson Institute. amended in 1998) .

Although the total fertility rate has dropped close to the replacement rate of about 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. 2006.2. HSBC.2 Income disparities The relatively uniform spread of economic prosperity has meant that there are. 3. where rapidly rising incomes lead parents to have less children and increase the quantity and quality of expenditure on each one (HSBC. as among the lowest in Southeast Asia.25 A new Bankruptcy Law25 was enforced in October 2004. 2006). 2006). 3. The World Bank has calculated Vietnam’s Gini Index. 2006). and is forecast to fall further. The growth rate of the working age population (age 15-59) has been much faster at 2.1.2 % in the next 5 years (GSO. Intraregional disparities in income are not as pronounced as those in China.1.2 Socio-cultural environment 3.2.26 the relatively large share of young people in the economy means that the overall working age population should grow steadily (HSBC. such as liquidation rights between liabilities and equity. which measures the disparity between rich and poor. 21/2004/QH11 26 This reflects the typical pattern seen in Asian and other countries.1. nor has there been any wide divergence in rural and urban incomes. 12).1 Demographic situation Vietnam’s demographic situation is broadly favourable and should provide a significant positive impetus to growth over the coming decade. The strong growth of this age group will provide a substantial boost to potential output growth.05. . although it will slow more rapidly to 1. 25 Law No.6 % over the last 5 years. so far. 2006. few manifestations of tension caused by disparate economic growth.

with inter-regional and rural-urban differences so pronounced. Ethnic minorities are prevented from participating in economic opportunities. However. it may be too early to judge the spread of economic growth. 2004).2. as illustrated by the national Gini coefficient. Income disparities between regions (Source: GSO. For . so far. benefited from a stable social fabric. Vietnam has been able to reach a literacy rate of over 90%. which rose from 0.34 in 1992/93 to 0.3 Education With a strong focus on literacy and education.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. Indications of social inequality are beginning to be apparent.1. The benefits of growth over the past decade have been unequally spread across regions.35 in 1997/98 and to 0. World Bank. signalling a potential disconnection between growth and poverty reduction in remote and disadvantaged areas.37 in 2002 (World Bank. 3. Primary school (five years of formal schooling) is compulsory and 80% of pupils go on to secondary school. Poverty levels have come down across regions over the past decade. 2004) Vietnam has. and migration has also redistributed the incidence of poverty across regions.

with little time to develop other skills and interests.27 the elite.28 The government further intends to strengthen the basic education system by introducing international training programmes to schools. 4 (Govt expenditure as % GDP) 3 2 1 0 2001 Education Health 2002 2003 2004 2005 Figure 3-5. which should help improve the quality of education. 2006) 27 Private schools have been permitted since 2001.06. Scholarship schemes to support talented students have been implemented.27 In public schools. establish more private schools and encourage cooperation between local universities and colleges and foreign partners. children can play and learn at the same time. The government is aiming to lift literacy from 91% to 95% (VIR. there are private and international schools. . while education in remote areas is being addressed. Public investment in social sector has increased since 2004 (Source: IMF. 28 Some debates are the same the world over.2006). universities and colleges. whether it is the US or China or Vietnam. It wants to diversify training programmes. 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. In international schools. children are under considerable academic pressure. 22.

the position of women in the matriarchal society of Vietnam is stronger than in neighbouring countries (Weggel.29 This second major influence can be traced back to the Chinese domination which started around 111 BC and lasted until 838 AD. The principal religion in Vietnam is the so-called “triple religion” (Tam Giáo) characterizing the East Asian intricate mixture between Mahayana Buddhism. Although Vietnam lies geographically in Southeast Asia. There is a strong belief according to Confucianism that education drives the future of children (Dinh. The matriarchal family structure is widespread in the North East and Northern Delta region of Vietnam (Weggel. there are professionals who had returned to the country after securing higher qualifications from overseas universities . literature and sciences were introduced from China (Dinh. 1992). attracted by better job opportunities and a more rewarding life in familiar environs. 3. 1992). most 29 Vietnam belongs to the so-called “Chopstick Culture” that includes countries such as China. During this time. Vietnam.4 The influence of cultural factors The culture of Vietnam is one of the oldest in the Southeast Asia region. The desire for higher education is a shared value in most families. exposure to the West. its culture and the origins of its people are of East Asian descent. there are considerable differences between different regions of Vietnam which have emerged due to southward expansion and later. 1997).1. This is where the culture of Vietnam originated in the very early time. Korea and Japan. The early influences of the Austro-Pacific culture before 111 BC are evidenced by the multiculturalism of the Vietnamese people. Despite a general Vietnamese culture that all Vietnamese share. .80% of students who go abroad for higher education return to work in Vietnam. Hence. philosophy. and Taoism.28 In various MNCs and local companies.2. and education is seen as the passport to a better life. the special knowledge and advanced techniques in agriculture. Confucianism. 1997).

which nowadays proves to be an advantage for the Vietnamese. was introduced in the 16th century. Leninism-Marxism was introduced by the Soviet Union and the American way of living by the USA (Dinh. Taoism Budd hism Conf ucian ism Vietnamese Culture nd Hi tho lic ism uis m Figure 3-6. technology. The Catholic Church and the French brought the knowledge of natural sciences.29 noticeably that of Northern and Southern Vietnam. In this respect. the French civilization and language. Finally. Main cultural influences of the Vietnamese culture Ca . From around the mid 19th century. the Western cultural influence started in the 16th century with the arrival of the Catholic missionaries from Spain. Portugal and France. The Latin alphabet. 1997). Thervada-Buddhism is dominant especially in the Mekong Delta and Hinduism has found acceptance by the ethnic Cham in Central Vietnam. Most recently. Vietnam has many different cultural influences starting from the Austro-Pacific culture to the Khmer and Champa cultural influences. continuing in the 19th century when Vietnam became a French colony.

Vietnamese do not. low uncertainty avoidance. live in large families. want recognition for achievement. Siam. 1997). Vietnam had to struggle to push back successfully the aggressive invasions of many world powers like Mongolia. Short term planning and improvisation is common and flexibility is necessary as plans may change due to ‘force majeure’. Due to the high population density. then again China [in the Ming and Ching Dynasty]. The Vietnamese are very diligent. 2000). France and the US. The principle of reciprocity – to give back – is a strong part of culture. Vice Rector of the Vietnam Buddhist University. achievement orientation. are risk takers. Time has a different value for Vietnamese and being on time is less important than to “lose face” (Weggel. rather matriarchal with a short-term orientation. Vietnam is a high-context country with a high level of collectivism. 31 After having regained independence from the colonial power China in the 10th century. a medium-high power distance. 1992). The collective struggle for independence through the Centuries31 has created a strong bond between the different cultural and religious groups in Vietnam. While people in Western countries separate business and private issues. 30 Interviews with Dr. . proximity is common and privacy is not given (Hall. endeavour to resolve conflicts peacefully and strive for harmony in the collective (Dinh. Le Manh That.30 Vietnamese are largely “one-people” . especially in Vietnamese urban areas. Vietnamese are frugal. Significant Christian minorities of about 8% consist mainly of Roman Catholics and smaller but noteworthy new Protestant groups. Relationships matter and communication is crucial with focus on personal relations.as many as 80% are Buddhist30 (though officially they follow no religion) and ethnic minorities comprise only 14% of the population. show gratefulness through reciprocity and follow the Yin (female)-Yang (male) principle where the Yang dominates slightly. Japan. Furthermore.

the gross value of industrial output rose by 15.3 Economic situation 3.5 % on average in the forthcoming years.9%) and state-owned firms (11.3. slightly slower than the pace of growth recorded in 2005.1 GDP Development Economic growth has been steady. 2007).80 6.1.8%). 2007) . 2007.00 10. Industrial growth has been broadly based.76 4.34 8.31 3.90 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. This pace of growth is fairly consistent across different sectors. and is expected to continue in the same mode with the government expecting real GDP growth of around 8.00 95 96 97 98 99 00 01 02 03 04 05 06 07 Origine of GDP 2006 Other 23% Manufacturing 21% Source: GSO.20 8. GDP growth 1995-2007 12. 4% Fishing 4% Construction 6% Mining & Quarrying 11% Trade 14% Agriculture 16% Figure 3-7.00 7. 2006 Forestry 1% Real Est.00 5.00 6. The growth of output was particularly rapid for private sector industrial firms (up by 21.00 9. Vietnam Tiger Fund.4% year on year.1 Economic indicators 3.00 2.1.50 7. Economic Situation – GDP Development (Source: GSO.00 0.6% y-o-y).1.90 7.77 6.1.20 7. in terms of both region and industry (GSO.70 8.15 8. ahead of foreign-invested firms (14.54 9.3. In 2006. especially in the last five years.

3% in 1985 to 58% today. 2005) 3. increasing FDI and growing remittances make investment the key growth driver.3%).1.8% of the economy. (%) of GDP Savings Investments 40 30 20 10 0 1990 1995 2000 2001 2002 2003 2004 Figure 3-8.2 Domestic savings Domestic savings. including footwear and electronic products. In 2006 export revenue rose by 25% y-o-y to reach US$ 39 billion. at 151st out of 208 countries. Domestic savings feed investment (Source: World Bank. squeezing agriculture’s share of GDP to below 15%.3. according to the World Bank (2006). 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.1.3. Agriculture has steadily decreased as a share of GDP since 1988 (when it was 46.32 Despite the pace and breadth of recent progress.3 Foreign trade and payments The value of Vietnam’s exports continues to rise rapidly. The government expects the contribution of investment to reach 42% of GDP over the next five years.1. in addition to key export 32 In comparison.1. There were particularly rapid increases in the value of exports of manufactured goods. China has reduced its share of the rural population from 76.32 3. . but still comprises 22. accounting for fully one-third of the economy. It is noteworthy that exports in all major categories recorded strong growth.

5 billion Dung Quat refinery becomes operational as now expected in 2009. rice and cashew nuts. As a net crude oil exporter. While the situation may deteriorate in the short term in nominal terms due to the higher-value added of petrol and diesel. Vietnam’s trade balance has benefited from the rise in crude oil prices. Vietnam will still lag behind Asia’s other major exporters in terms of export volumes. This net oil position could even improve once the delayed US$ 2. despite a dependence on imported oil products. Exports of seafood products. While direct net trade balance is positive. particularly coffee. Vietnam will 33 Even then.33 Importantly. growth in domestic demand for fuel is unlikely to outpace oil production within the next five years. 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. though overtaking the Philippines as the tenth ranked exporter in Non-Japan Asia is feasible within the next five years. 2007) WTO accession is expected to maintain export growth at 10-20% y-o-y over the medium-to-long term. If Vietnam is able to ramp up its production base to meet this potential growth in external demand. Export situation (Source: GSO. although this would be a condition that would impact on all of Asia’s exporters. Vietnam trade could still be negatively affected if high global prices weaken external demand. however. rose by only 2% y-o-y. . partly due to anti-dumping duties levied on catfish and shrimp.33 commodities. to achieve an increased level of export growth. the country’s export to GDP ratio should continue growing from the current 63% of GDP share.

abundant labour and a low base of growth: all ingredients that could facilitate an extended period of rapid export expansion.. Without any refining capacity. However. International oil price increases have yet to be fully reflected in domestic fuel prices.e. in turn. which. inflation due to higher imported oil prices could force aggressive monetary policy tightening in the years to come. removing the reliance on international donors. competitive low labour cost structure to China. However.1.3. which are likely to weigh on the current account balance in the near-term.34 need to move up the export ladder and create higher value-added activities to its production base. This suggests that the government is likely to accept a higher .4 Inflation Inflation has been a source of concern. is being compensated by government transfers. Instead. this seems to be unsustainable. This will mean heavy investment from either domestic sources or FDI. 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. However. Vietnam must import all its petroleum and diesel products. However.9 % a year. If Vietnam’s export sector does step up. substantial resources (including agricultural land). Vietnam has a similar. as domestic fuel prices have now risen by 120% since the beginning of 2004 (GSO.1. Housing costs are increasing at a fast pace. 3. since 2004 it has remained quite stable at an average of 7. as the government has been slow to raise domestic retail prices. as evidenced by Vietnam’s lack of presence in higher-end engineering or technology manufacturing. 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. its level of capital to labour force ratio is still relatively low compared to other countries. 2007). Though Vietnam has a relatively lower oil dependency compared to many of its neighbours. the state-owned distributor is being forced to absorb much of the price rises. 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. The major risk is oil price pressure.

1. . 2007). Government finances look reasonably stable.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). 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. though we expect that FX policy should still favour a slow depreciation trend to preserve export competitiveness. 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. With a stable BoP. which may ease in the next year. Overall BoP surpluses since 2004 have been supportive to the VND. 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. Imports of capital and equipment are the main driver. seafood.1.1.3. the outlook for Vietnam’s external position is unlikely to change much in the near term. which has positive implications for investment demand.1. 2007). rice and a growing electronics sector have performed well since 2004. Despite the weak structural current account. Even with an escalation in foreign borrowing. 3. assuming commodity prices eventually correct. Consequently.35 inflation rate over the next year or two in order to maintain GDP growth at about 8% y-o-y or better.6 FX reserves FX reserves have been growing steadily.3. Still. an aggressive policy response to higher oil prices is unlikely.

1. 2006). CSFB. efforts to restructure the tax system and increased compliance.3.998 9.575 5.252 2.200 7. should help keep the budget deficit below 2% of GDP over the medium term (CSFB.788 2.043 12.653 23. 2006) As a net oil exporter.044 7.440 5. Revenues from oil production and taxes account for about 28% of the total fiscal revenue.800 9.000 -12.000 1999 2000 2001 2002 2003 2004 2005E As % of GDP (RHS) 0. infrastructure spending and recapitalization costs from the SOEs and banking sectors.0 -3.575 11.698 Fiscal balance Total financing Domestic financing Treasury bill Insurance Issued Repayments Financing abroad Total foreign borrowing Amortization -12.654 2.5 -1. Fiscal revenue (Source: MoF.810 Figure 3-10.5 Chart 18 2005 Budget plan 2003 2004E -11. However.200 22.000 -6.476 15.36 3.866 2005 (budget) -12.5 -2.5 -3. as its ratio to GDP has declined for three consecutive years and likely to fall again this year (CSFB.276 4. 2006).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.000 -10.800 12.0 -1.500 4.922 8.802 7.653 5.0 -0. Chart 17 The fiscal deficit has become more manageable Budget balance (VND bn) 0 -2.1.998 33.0 -2. the higher oil prices meant that oil-related revenue contributions to the fiscal budget ran almost 50% higher than budgeted in 2004 and 2005.093 17. the shortfall is becoming more manageable. Expenditure may rise in the next few years from a phasing in of civil service pay increases. While the government is likely to continue posting a fiscal deficit for the foreseeable future.250 23.000 -4.844 7.000 -14. plus improved profitability (or reduced losses by SOEs). .000 -8.

essentially. From less than 100 private companies when the new law came into effect.3. 2006 revolves around following key areas (VET. the private sector employs 90% of the total workforce today and generates the overwhelming majority of the 1. Many of these are small scale and. 16. May 2006. the road map for the next five year plan (2006-2010) that was set by the Party Congress in April.up 25 % over the past ten years.03. . which now makes up two-thirds of the overall economic output has been key to the transformation of Vietnam’s economy. August 2006).34 According to the Prime Minister. 34 In August 2006. 2006).1.2006): (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. in part because of the difficulty in accessing loan capital from the banks. family run businesses. The rise of the private sector (both domestic and foreign).3. but also their increased efficiencies. Furthermore.1.2 Economic development In recent conferences for foreign investors. VIR.5 million new jobs needed each year.000 and the number continues to expand. during a conference entitled “Investing in Vietnam”. the private sector is not only a crucial economic pillar but also a social imperative (Merrill Lynch. there are now more than 200. government officials have espoused the government’s commitments to economic reforms. Clearly. 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.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.37 3. This is a reflection not only of the rapid increase in the number of new private enterprises and privatisations.2. Their share of industrial output is about 75% .

Hong Kong. 2006) this is beginning to change. 2007) The Japanese have been amongst the largest investors. Minimum wages are still very low. The recent Memorandum of Understanding signed with Intel. for an estimated commitment of more than US$ 1.2. Forestry.6 billion. In many cases we are seeing Vietnam attract capital as a complementary production base to China as manufacturers seek to diversify supply chains.8 Hotels & restaurant 7% Other services 6% Real estate & costrn 13% Mining 8% Infrastruture 2% Manufacturing 47% Figure 3-11.02.38 According to Vietnam observers (Merrill Lynch.3. 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. Foreign direct investment (Source: GSO. 3. For government employees it is just US$ 19 per month. In combination with domestic capex .3 3 3. Fisheries 5% 2. foreign invested enterprises (FIEs) pay closer to US$ 60 per month (VET.5 6. 05. would be the single largest technology investment in the country. USD b 12 10. especially as foreign banks are taking stakes and starting the process of upgrading credit assessment systems as well as credit products.2 4.1. Februar 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.2 Foreign direct investment In 2006 foreign direct investment is estimated to have reached US$ 10 billion – an eight year high (VietnamNews.2007). Other key sources of investment have been Korea.2 10 8 6 4 2 0 2000 01 02 03 04 05 06 Transport & Comm 12% Agriculture. Taiwan and Singapore.9 3.

This equitization of SOEs has steadily increased. Numbers of privatizations 35 Officially known as the Equitization Program. 36 Some of these include areas such as electricity production. Whilst willing to sell some SOEs completely. Less obvious examples are high quality cement production. 16.36 1200 800 400 0 2000 2001 2002 2003 2004 2005 2006 (Source: GSO. This is the second highest ratio across the whole of non-Japan Asia.2. where the payoff in terms of higher output and employment is relatively rapid. 2007).39 this has helped to push the overall ratio of investment to GDP to over 35 % (VIR. were more modest. The pool of equitized SOEs stands at 3. Around 38 % of total FDI commitments were destined for the two southern industrial provinces of Dong Nai and Binh Duong. mineral exploration and water supply.3. 3.3 Privatization of SOEs The Vietnamese privatization program35 was started in 1992. telecomm infrastructure.03. whereas the inflows to Hanoi and HCMC.600 with another 1. Around 60% of investment is focused on light industrial projects (GSO. . 2007). Equitization transforms SOEs into corporate entities and plays a key role in raising productivity and economic efficiency. the government has a long list of strategic industries in which it will retain a 51% controlling stake. labour export services and agricultural equipment.500 to be equitized by 2010 (Vietnam Tiger Fund.1. Vietnam Tiger Fund. traditionally major destinations for FDI. 2007) Figure 3-12. large scale milk and beer production.2007). 2007.

Major listings will take place in sectors like telecom. . 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%. 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.40 By 2010. financial services. it is likely that all remaining SOEs will be equitised. The State Securities Commission estimates that these SOEs account for only 8% of the total invested capital of all registered enterprises (SSC. This is a commitment by the government made in the National Assembly. This provides much of the liquidity that passes through the OTC market and provides a potential source of stock for institutional investors to access. 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. oil and gas. close to 2. airlines and banking. The privatization process itself begins with ‘equitization’. At the same time the government is also setting up a Temasek-type asset holding company to accommodate all the residual holdings. The new Enterprise Law 37 requires that all state owned enterprises to become incorporated within four years. usually with a limited public offering and an allocation of shares to employees which is typically anything between 20%-30% of total shares issued. 2006. After this the true privatization process begins. 2006). These initial shares trade on the OTC market ahead of the actual IPO which takes place by Dutchstyle auction. 37 It came into effect from July. 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. To date.

unless they adapt within the relatively short period of grace. which completed 23 new or revised laws introduced since 2002 to meet WTO requirements. In rushing through regulatory and legal demands for accession. CVA (customs valuation).3. Vietnam will also comply immediately with eight WTO agreements on accession. 39 The risk is the economy’s ability to adjustment to the new conditions mandated under WTO. 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. TRIMs (trade-related investment measures).2. as the government has been very aggressive in restructuring the economy to conform to most WTO conditions. Vietnam’s firms at the ground level are still uncertain about how the new WTO regime will affect them. Vietnam is still a less developed economy trying to adapt to a market-driven economic system. Pre. 39 TRIPS (trade-related intellectual property rights). and Rules of Origin. SPS (sanitary and phytosanitary measures). .depending on the product (VET.Shipment Inspection. The eventual entry of foreign players in the domestic market is likely to pressurise many of the inefficient SOEs and smaller private enterprises.3% of all products imported. 38 The National Assembly approved 12 bills at its session in November 2006. particularly as lower import tariffs will mean heightened competition from imported goods. but otherwise the scope of deregulation should be substantial.1.38 Post-accession. It seems likely that some confusion and restructuring pain will be unavoidable for domestic firms. Average import tariffs will be reduced from an average 18. Vietnam has agreed to open up its domestic market on ten service lines and 92 product areas.4 Global integration Vietnam’s restructuring story is ongoing and the next stage is being inspired by the World Trade Organization accession.41 3. Some quotas on sensitive product areas will remain. It will also be committed to a tariff reduction schedule affecting 99. Februar 2007). TBT (technical barriers to trade). The WTO accession process has demonstrated much of the reform commitment of Vietnam in the past few years.5% currently to 15% or less within three to five years . Import Licensing.

creating demand for its existing low-value added products and will stimulate investments in upgrading its export and industrial base. . In addition. 2005).2.compared to 5% in 2000. enterprise restructuring and revised regulation to establish the credit-worthiness of infra-enterprises.5 Infrastructure development Infrastructure constraints remain among the biggest concerns for businesses. New evolving challenges such as the impending loss of concessional financing may play havoc with financial access along with diminishing returns on capital spending. After the pact became effective at the end of 2001.3.1. and developing stronger institutions to encourage private finance or direct private provision of infrastructure.official development assistance (ODA) declines in relative importance as Vietnam becomes more prosperous.42 However. improving the efficiency of infrastructure service providers. according to the World Bank. refining planning processes. 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 . 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. Access to capital is a critical issue . which cite poor quality and high costs as key challenges. Much of the incremental capital will need to come from financial markets or direct private finance requiring reform of consumer pricing. 2006). Excluding the US. Although much more domestic investment or FDI would be needed for Vietnam to compete for WTO market share. 3. WTO accession also opens markets to Vietnamese exports. preparing for rapid urbanization. will become topical issues in the years to come (World Bank. as Vietnam’s competitiveness in textiles and garments could lead the way for an expansion into other product areas. Vietnam’s exports to the rest of the world rose by a comparatively slower 54% over the same period (GSO. Light manufacturing would be an important area of potential development.

As in China. both domestic and foreign. because of the very fast pace of growth. is at a nascent stage and state-owned banks.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.both domestic and foreign . The banking system.is unimpaired.1. will be the most crucial driver of growth over the next five years. and only two corporate bonds are traded on the stock exchange. Infrastructure situation (Source: World Bank.2. Few domestic firms have issued bonds. A credit rating agency that provided better information on firm-specific risk would . in particular. Access to capital.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. NPLs may be as high as 15-20% (World Bank. suffer high credit delinquencies. 2005). though. The quality of credit and growth will become more important to ensure that liquidity . relying instead on loans from the banking system. 2005) Access to capital has significance beyond just infrastructure. concerns about the quality of growth have not been a significant source of concern.3. 3.

hopefully. Such an agency could also rate municipal bonds. bonds). Crucially. of the 22 companies listed at the time of writing. with a 30%-70% shareholding structure respectively.e. trading commenced in July 2000. or other financial institutions).and received approval from the SSC for Vietnam’s first official onshore investment fund (VF1). to 195 firms by March 2007 (SSC. a welcome development was the licensing of the first local investment fund management companies. all are former SOEs that floated public share issues as part of the official equitization programme. change in the near future. In this respect.e. company shares) and fixed income securities (i. with capital of around VND 200-250 billion.44 help investors to price bonds accurately. in a bid to make its paper more attractive.3% per year. as well as fixed income instruments such as bonds. VF1 is expected to list on the STC (DragonCapital. The STC trades both equity securities (i. securities companies.40 Stock market in Vietnam Vietnam’s first stock market has only been operational since 2000. instead of being owned by its members or investors (such as banks. with different demands and investment strategies for listed equities. and has seen the number of companies listed grow from just 2 at the time of its launch. March 2007).2% to 0. which will be able to invest in both listed and unlisted companies. For the stock market to develop in the long-term it needs a more robust community of investors. Therefore. 40 Recently the HCMC’s Committee asked for the interest rate premium (over government bonds) on its municipal bonds to be raised from 0.41 Both local and foreign investors are expected to invest in such funds. 2006). 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. rather like a public utility. . 41 The first of these. VietFund Management is a joint venture between local Sacombank and foreign-owned Dragon Capital. Officially known as the “Securities Trading Center” (STC). Vietnam’s STC is unlike many stock markets in that it is owned and operated by the government. VietFund launched . well before listing on the STC. although this should.

China’s stock market (which is Asia’s second-largest by capitalization). 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). often trading on rumours.up from a low of roughly US$ 110 million at the end of 42 For example. insurers and pension funds (Freeman. rather than on fundamental analysis of the relevant companies. In order to switch from a gambling mentality to a more fundamental investing approach. 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.45 Foreign investors In terms of foreign investors in STC-listed companies. March 2007). 2005). and the public offering of their shares took place significantly prior to the listing on the STC. and trade in securities listed on the STC. 2004). in late 2003. the rest being state-owned enterprises (Freeman. May 2007) . 44 In some respects this echoes a similar situation in China.44 The aggregate value of the listed companies› shares trading on the STC (i. the total ‹market capitalization›) was roughly US$ 22 billion in mid-May 2007 (SSC. . and obliging them to adopt better standards of corporate governance and disclosure.43 Most of the listed companies are former SOEs. The launch.200-plus companies listed on the Shanghai and Shenzhen stock exchanges are private 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. 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.e. However. the Chinese government decided in 2001 to open up the market to institutional investors. where only 80 or so of the roughly 1. of the first foreign investment funds focused exclusively on investing in companies listed on the Vietnam stock market (and pre-listing companies). is reported to consist of 60 million-mainly poorly informed-retail investors. including mutual funds. 12 October 2006). both resident foreign institutions and individuals are permitted to buy and sell shares in Vietnam. may assist more institutional investors to gain some exposure to the STC. 43 The SSC is reportedly aiming for 500 companies listed on the STC by the end of 2010 (VietnamNet.

venture capital activity in Vietnam was much less vigorous. Venture capital Although roughly nine years older than the stock market. the total market capitalization of the STC (excluding bonds) is equivalent to just 23 percent of the country›s GDP (SSC.46 2001. and there was also a fairly consistent annual increase in the number of foreign venture capital funds wholly or partially Vietnam oriented. and institutional investors specializing in the emerging markets started to focus some of their attention on Vietnam (Freeman. . A total of eight (listed) venture capital funds exclusively focused on Vietnam or the Indochina region were launched during this period. but the majority have chosen not to do so. This is despite the introduction of fiscal incentives by the SSC in a bid to encourage more companies to list. and over US$ 400 million in funds were raised for investment in Vietnam during this period (Freeman. The current fiscal incentives include a fairly generous corporate income tax holiday for two years after listing (Vietnam Tiger Fund.000 by 2007. 2004). the macro-economic and business growth forecasts for Vietnam (and Southeast Asia in general) were very positive. The government aims to reduce the number of SOEs to about 1. at a time when venture capital activity in much of the rest of East Asia was on the rise. 2007). During the first half of the 1990s. 46 Tellingly.Generally disappointing performances of several of the Vietnam funds. 2004). 45 The first venture capital fund oriented solely towards Vietnam was established in 1991. and a paucity of quality investments available.46 largely as a result of (Freeman. a substantial proportion are thought to meet the minimum criteria to list on the STC. May 2007). Among the roughly 900 SOEs that have been equitized in Vietnam so far. 2004): . but this is ambitious. Vietnam experienced very substantial inflows of foreign direct investment. At present. In the latter half of the 1990s. no new venture capital funds for Vietnam were established between 1996 and 2002.45 At the beginning of the 1990s. the venture capital industry in Vietnam is a relatively recent phenomenon.

The difficulties of developing attractive investment portfolios in Vietnam.The need for an auction process. and gaining exposure to the macroeconomic growth trajectory of the country through specific investments.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. . 2004): . the investee company need now only inform the government of the share sale).General foreign investor sentiment towards the country lessened.Removal of the need for the prime minister›s approval on each individual deal (instead. .1. As a result of legislative changes. 48 Vietnam became the 6th ASEAN member in 1995. 2004). due to a number of factors (including delays in opening the first stock market).Removing the requirement that foreign investors must hold their shares for between 1-3 years. a region with an area of 4’361’303 sqkm and a population of 555 million.47 It should be noted.47 .1. limited recourse to the law. . 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. 3.4 Conclusion 3. 48 47 Such as the replacement of Decision 145 (of 28 June 1999) with Decision 36 (of 11 March 2003). that the challenges faced by venture capital investors in Vietnam are not exclusive to this country. most notably (Freeman. .Removal of the restriction that foreign investors may only invest in joint stock companies. Venture capital investors in many emerging markets have encountered problems arising from low standards of corporate governance and transparency.4. . however. and «dysfunctional capital markets» (Freeman.

Singapore 9.00 222.00 64.00 3. Philippines 8.1 % 6.6 % 7.00 85. Thailand 10. Indonesia 5. / Dimension x) and the economic attractiveness (see Table 3-2.00 4. 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. The summation of all criteria of the two dimensions delivers the position in the matrix as illustrated in Figure 3-14 (Dinh.00 6. Key figures of countries in ASEAN (Source: CLSA.0 % 5.40 50.0 % 7. 2006). Burma 3. Malaysia 7.0 % 5.2 % 5.48 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. Cambodia 4. .00 555.00 25. / Dimension y).0 % 5. Laos 6.4 % 4.00 84.00 14. 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. Brunei 2.5 % 7.5 % Table 3-1.49 49 Each dimension includes several assessment criteria which are weighted and graded.

5/4.1.1.48) Vietnam (4. therefore attractive country compared to its neighbours.2 (Political system) showed.49 (5.33) Medium Economic Attractiveness (y) Philipines (1.67) Legend: (1.33) High (5.67) Low Circle reflects GDP Size Of Countries Low (1.76) Indonesia (1.0) Socio-cultural Attractiveness (x) Figure 3-14. .5/3.65) (3.88/2. Vietnam is politically and socio-culturally a very stable and.67) Medium (3.015) Thailand (3.55/4. Portfolio–Matrix of Country Attractiveness for Investment As the section 3.0) High Malaysia (3.535/2.

typhoons. religion. life & leisure. repatriation of profit(s). such as transportation. attitudes toward consummation.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. ASEAN. storms. internet. Investment in adequate infrastructure. legal enforcement. Weighting of Criteria 0. geopolitically relevant location of the country. medical treatment on sound basis. secure. Population situation.125 0. (present & future) size of domestic market.56 0.46 0.1 Unweighted Value 5 5 5 4 3 4 Weighted Value 0. very stable. conflicts due to gap of wealth. Proximity to market or to resources.04 1.575 0. fuels. Weighting of Criteria 0.44 0.115 0.28 0. Accessibility for FDI.16 4.06 1.135 0. friendly & peaceful. robbery.14 0. APEC.015 Table 3-2. governmental promotion.g. good control.0 4 0. Laws and regulations concerning ecological protection.g. Seldom or widespread. Ethnic or religious fanaticism.105 0. Membership in international organisations such as WTO.42 0. law & order. free room for choosing the adequate entry mode.54 0.115 0. health care.07 Unweighted Value 5 4 3 4 4 4 4 Weighted Value 0. lifestyle.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.115 0. Efficient or inefficient resource allocation. nature. urban population growth. energy. ecological awareness. Availability of raw material.095 4 4 0. Ethic or religious conflicts.55 0.065 0. Laws renewed (e.38 10) Catastrophes Major natural events. safety (e.195 0. related supplier system are good. availability of well-trained workforce. Availability of low–cost workforce.4 7) Socio-cultural situation 8) International relations 9) Ecological issues 0.10 0.11 0. Protected industries.3 0.11 0. Intellectual Property Rights). such as floods.19 0. earthquakes.7 0.28 8) HR availability 9) Quality of life 0. open to international competition. financial & banking. Country Attractiveness for Investment of Vietnam .95 0.14 0. Overall Economic Attractiveness 0.46 0.0 5 4 4 0. Company laws. Relevant for expatriates.24 4.625 0. family.07 0. pocket picking).

51 3. Confucianism. 1997). with initial steps characterised by a centralised planning system and a closed economy that faltered badly. like Japan and Korea. accounts for the largest share of the country’s exports (21%). In addition. Vietnam began rebuilding its ravaged economy in the early 1980s. teamwork and are hard-working. Further.1. has been strongly influenced by neighbouring China over thousands of years. for example. 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.2006).4.2 Key factors with positive impact on Vietnam’s growth potential National culture The culture of Vietnam. 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 Vietnamese are very diligent. cited in Dinh. . in an effort to jump-start growth. while also opening up more markets to Vietnamese industry. 05. and Daoism. In 1986. Vietnamese pay a lot of attention to education. According to the Confucianism. South Korea and China have done. the government began to realise the need for reform and.03. All these characteristics are helping Vietnam achieve fast growth just as Japan. The US. Vietnamese strive for harmony in the collective (Dinh. discipline. 1997). began moving away from central planning to a more market-based economy that stressed the development of the private-sector and foreign participation.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. boosted by the 2001 Bilateral Trade Agreement (VietnamNet. Relationships matter and communication is key with focus on personal relations. Vietnam’s everyday behaviour and attitudes are determined by a synthesis of religions especially Buddhism. After decades of war.

while services majors are also starting to tap Vietnam’s potential. the private sector is not only a crucial economic pillar but also a social imperative. Underpinning all this is the rise of the private sector and Vietnam’s transformation from a planned to a market-based economy. and now makes up 38% of the overall economy (EIU. and such an event may have a profound impact on the country’s economic trajectory. 2006). March 2007). 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 service sector growth has also accelerated in the past few years. The country therefore. A rise in industrial activity has transformed the profile of the economy and now accounts for more than 40% of GDP (EIU. The private sector. This segment has grown at a 10% Cagr over the past decade accounting for half of the real growth over this period. This is a reflection not only of the rapid increase in the number of new private enterprises and privatisations.52 value-added manufacturing.5% and rising crude oil prices have affected the fiscal situation. Clearly.4 million people entering the workforce each year (VET. The government is largely untested for its response to a potential economic slowdown.5 million new jobs needed each year to accommodate the increasing work force (VET. the private sector employs 90% of the total workforce today and generates the overwhelming majority of the 1.up 25 percentage points over the past ten years. both domestic and foreign. but it must keep expanding at 8% if it is to create employment opportunities for the 1. makes up two-thirds of the overall economy. 2006). Led by a trade and consumption boom. the economy is becoming more investment intensive and is integrating rapidly within the global economy. Its share of industrial output is even higher at 75% . At the same time. Changing economic structure Vietnam’s growth record has been remarkable. but also their increased efficiencies. Inflation is at a high 7. Nevertheless. Furthermore. . to 20%. agriculture’s share of GDP has halved in the past decade. is facing some considerable challenges. March 2007).

March 2007). 3. creating a solid base of domestic demand backed by private consumption and investment. increasing FDI and growing remittances make investment the key growth driver. accounting for fully one-third of the economy.3 Major challenges facing Vietnam Vietnam’s record of stable and accelerating growth has been remarkable. Domestic savings. meeting the investment target and better technology access in other sectors will depend on its ability to attract foreign capital. 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).1. To that end. 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. portfolio investment and even development assistance are important targets. Accounting for 64% of GDP. The key challenges are as follows: . Vietnam began to rebuild its ravaged economy in the early 1980s. 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. While FDI will form the largest chunk. low labour costs.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. private consumption is a pillar of the domestic economy. High domestic savings.4. and a growing domestic market will make it easier for foreign capital to tap into Vietnam’s advantages as an investment destination. The government expects investment to reach 42% of GDP by 2010 (Vietnam Tiger Fund. fiscal incentives and concessions. but it needs growth of at least 8% to create productive opportunities for the estimated 1. Political stability. 2007). Focus on investments As with Vietnam’s quest for growth in the banking sector. March 2007). The government expects the contribution of investment to reach 42% of GDP over the next five years (VET. more remittances.5 million people entering the workforce each year (VET.

Investment in sectors such as transport. 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. mortgage laws and title deeds. collateral registration procedures. which cite poor quality and high costs. 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. power and telecommunications. 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. is necessary to address these concerns. In June 2005. 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. Corruption This is a sensitive and a problematic area which is often cited as a major impediment to conducting business in Vietnam. 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.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. including those of immediate family members. Infrastructure Infrastructure constraints remain among the biggest concerns for businesses. The evolving nature of Vietnam’s regulatory environment and commercial law. Developing stronger. . they did employ locals with connections (in Vietnamese: Quan Hệ) to “smooth their way” through government related matters. which among other things encourages whistle-blowing activities. All state employees now have to declare assets and income. a Law on Corruption Prevention and Control came into effect. among others. In terms of the banking sector.

In order to forecast the development of Vietnam in the years to come. the skills shortage is not just limited to managerial ranks. and the overwhelming 75% are unskilled (VietnamNet. we have applied the scenario analysis with three major scenarios: optimistic.5 students per 1. Many businesses have indicated that a shortage of skilled labour is starting to become an issue. However. 19-20% graduated from vocational training colleges.000 people (VietnamNet. According to estimates of Vietnam’s workforce of 45m. 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. numerous issues and potential obstacles still remain.04.3 times by 2020 from a 2006 capacity of 166. 06. 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.4 Development scenarios Although Vietnam’s growth over the past decade has been impressive.2007). 3.2007).55 Access to skilled and unskilled workforce One of Vietnam’s primary assets is a relatively well-educated and inexpensive labour force. However. signs of strain may start emerging as the country enters its next phase of growth. and pessimistic. . 06.4. just 7-8% can be ranked highly skilled.1. realistic. These factors can affect the pace of development of Vietnam.04.

1 6.0 9.7 7.8 7.0 Figure 3-15.1 4.2 7.0 6.3 8.0 8.0 3.Terrorism .Privatization process .0 5.5 9.5 7.4 8.0 5.3 8.9 8.56 12.0 1.9 8 7.3 8.0 2.0 6.0 0.0 in percentage 8.0 10.3 7.8 6.8 8.8 9. Scenario analysis – GDP growth forecast to 2010 The scenario analysis is conducted based on the assessment criteria listed below (see also Figure 3-16): .Infrastructural development .8 8.2 9.4 6.Oil price .6 8.1 9.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 .2 8.8 9.1 7.0 11.0 4.5 Optimistic Realistic Pessimistic 8.Development of global economy .

per barrel but lower than US$ 100 per barrel Lower than US$ 60 per barrel Privatization process Corruption. inefficient Privatization process Privatization can be bureaucracy hinders is progressing.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. 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 . 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.

the current capacity for capital mobilization by banks is limited. Vietnam’s GDP growth has been one the fastest in the region over the past decade and. 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 . With over 80% of Vietnamese enterprises falling into the small or mediumsized categories and people generally having low incomes. The state-owned banks still dominate the banking system. their competitive strength will depend. in part. the government of Vietnam has announced the “Internationally Integrated Programme” of the Banking Industry.58 3. 52 Only 17% is controlled by joint stock banks. The Vietnamese banking system has been partly reformed but it is still weak. Once Vietnam liberalizes its market many local companies will have to compete with foreign entrants maybe for the first time. On one hand. on better access to more economically competitive banking services. 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. less than 5% of the Vietnamese population use banking services.51 The overdue loan rate is increasing and the commercial banks have limited lending capacity. In such a situation.2 Banking market in Vietnam Banks in Vietnam have significant growth opportunities. five big state-owned commercial banks control around 70% of Vietnam’s banking market. and is committed to implement it after Vietnam joined the WTO in January 2007 51 Currently. on the other hand. To reform the banking sector and facilitate the liberalization of the commercial process.52 An additional problem is that most Vietnamese-owned enterprises are undercapitalized which is sometimes due to inadequate banking and foreign investment laws.

1.59 3. Local banks now have different retail banking services. but they do not cooperate with each other. and corporate banking are still very embryonic. For example. banks have spent a lot of money on core banking software and setting up the necessary IT infrastructure. private banking. In addition. The SME sector accounts for about a third of the GDP and employs about 25% of the workforce (EIU. friends or other private sources. the owner will pledge some personal assets. They have also made every effort to promote the development of ATM systems. They have been trying to make heavy investments in retail banking development by opening many more branches. the banking services provided by domestic banks tend to be backward and poor.2 m up 74% over 2005 (SBV. take out a personal loan and apply it to the business. Internet Banking.2.1 Retail banking and the SME market At the beginning of 2007.03.000 SMEs in Vietnam. 53 Currently. Most banks do not provide services ‘over the counter’ despite the fact that there is no selfservice system. 2006). all the big commercial banks try to develop their own ATM networks. 2007). In general. 03.2.2007). . 2006). Even those which do manage to borrow money from banks usually do so in a private rather than corporate capacity. which could help reduce investment expenses (VET.1 Retail banking Domestic banks have been aware of the importance of developing retail banking services for some time now. the net earnings from services of the five state owned banks were reportedly US$ 3. The other banking services as investment banking. Less than a fifth of SMEs currently have access to the bank lending market. Phone Banking and Home Banking. 3. but they cannot find a common platform to develop a single network. Retail banking is the only one far developed banking industry. there were about 280. The government believes that their number will double by 2010-11 (SSC. An 84% growth rate objective has been set for 2007 which is projected to come mostly from modern retail banking services. The rest have to make do with loans from family. In other words.53 In 2006.

accounts are frequently unreliable and they are usually the first to suffer in an economic downturn. Given the growing number of SMEs in Vietnam the potential of retail banking is very significant. The problem of SMEs is not only the amount of money available to borrow but also the short maturities of loans. and ACB which already focus on the two segments. The latter is ironic considering that most Vietnamese banks concentrate their lending on a few large corporate customers.04. Banks are not interested in medium term or long term loans to SMEs for project financing or business expansion.500. Sacombank.54 The banking sector’s reluctance to lend to SME’s is partly due to lending rate regulations.60 Banks are generally wary of the SME market as many small companies have few assets to offer as collateral. The comfort zone for SME lending is about US$ 63. Agribank’s involvement is illustrative of the situation.000126. 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. 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. . This is clearly beyond the current scope of a banking system which bases its credit decisions mainly on collateral. 05. Banks such as Vietcombank. They are usually the lender as a last resort. enjoy a higher than average profit margin and superior returns on equity. even though businesses may have sufficient collateral to borrow such amounts. a bank with a largely social policy function.000 are likely to be rejected. 54 Generally loans above US$ 315. Among the Vietnamese banks. retail banking and the SME market. Banks are typically afraid of the risks of lending capital over US$ 312.2007).000. only Agribank and Sacombank have made a strategic decision to focus on the SME market. under which banks are permitted to lend a maximum of 75% of their mobilised capital. 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.

5% level at many private sector banks (VinaCapital. 2006). This ratio was increased to 44. some SOCBs are still reluctant to enter into retail banking or SME lending. Credit has been growing at an average annual rate of 25% over the past five years. 2006). 55 Currently. 2006). lending at commercial banks amounts to about 60% of deposits but it still lags behind the sharp rise in deposits in 2007.2% to US$ 12 billion (SBV. However. 2003 and 2005 respectively (SBV. 2006).8%. Current lending rates for VND loans are between 10-14%. 57 The corporate sector seems to have reached the limit of its ability to expand credit at the current high rates. 2006).2 billion up more than 20% so far this year. margins are small and falling as large corporations can turn to the bond market instead. the credit ratio was only 4. This has been lacking and poor distribution along with limited consumer information are the biggest barriers to entry into these two key segments. Credit loan market The credit loan market still remains underdeveloped compared to other Asian countries. In addition. 56 VND deposit rates hover around a 9-9. In 1990. the capital costs are heavy and subsequent fixed costs are also high. 52% and over 60% in 2002.61 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. this does not really apply to a developing country where the credit to GDP ratio tends to be low (VinaCapital.7% of GDP. Another reason for the cautious lending stance is the funding mismatch between largely short term deposits and the largely medium / long term loans (VinaCapital. SOCBs currently pay more attention to providing loans for infrastructure projects and large corporations. it is not a viable strategy for most Vietnamese banks. given the commoditised nature of this type of lending and the huge amount of capital required. 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. which is uninteresting for borrowers. In other words. Therefore. . Over the same period total outstanding loans grew by only 9. The administrative costs involved in making thousands of small individual loans have also discouraged some banks. 56 By the end of June 2006 banks in HCMC had deposits of more than US$ 14.

this amounts to a 10% exposure to the property market. The problem is that up to 50% of short term deposits are being used to offer medium and long term loans (SBV. Property sector loans Commercial banks have outstanding loans of about US$ 3. Some individual banks have a far higher exposure.15% of all outstanding loans in HCMC are exposed to the property sector. companies will have the option of raising money there instead. or 24% of all medium to long term debt. particularly amongst the JSCBs. accounts for about 10% of outstanding loans to property developers. . 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. Currently medium and long term loans account for about 42% of total loans. However. an exposure of about US$ 176. 08. July 2006). .1 million (SBV.09. By city (VinaCapital. 2006). BIDV for example.62 this year. perhaps in the retail market.15 billion in the property sector (VietnamNet. 2006). worth a total of US$ 1. 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). 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. Such imbalances are long standing and a bit worrying. As a percentage of total loans. once the corporate bond market takes off. . banks will have to look more aggressively for new borrowers.8 billion. As the corporate bond market takes off. but the main purchasers will still be the banks and insurance companies.in Hanoi the figure is 10% or US$ 562 million. banks should be in a position to do more long term financing and reduce this dependency.

7 million in loans to Vietnam’s top seven developers (These are Song Da.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 true level of exposure to the property market is far higher than these examples indicate.2. For example.2 Retail banking and the consumer market Only a fraction of the nation’s 85 million people utilise modern bank services. Cienco 5 and Contrexim Holdings). In 2005 only 113 projects (down 40% y-o-y) were being developed in HCMC. 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. These amounts to about a fifth of BIDV’s total exposure to the property sector (VinaCapital. Therefore. 2006).those with a monthly income over US$ 500 living in the six major cities . the size of the urban middle class .1 million 58 Loans must not exceed 70% of the value of a mortgaged property. 2006).59 However. 2006). the government has tightened lending by ordering banks to check the credit quality of loans to the property sector. a collapse in property prices based on an internal crisis is not expected. According to market research (CI Electronic Monitor. The number only includes direct loans to property developers for the purpose of project development. 59 Transactions in Hanoi and HCMC fell 60% y-o-y in 2005. 60 Any collapse would come as a result of an external shock. Housing and Urban Development Corporation.has grown from 9% of the population to 34% since 2000. and because few actual transactions take place and with inflation and GDP growth both high. Hanoi Construction Corporation. Nor is the fact that the vast majority of loans are collateralised by land or property. covering about 175 hectare of land (VinaCapital.1. 3. 60 Despite the fact that prices seem very high. However. However. BIDV has had to reschedule about US$ 65. leading to a general and perhaps sudden deflation in asset values across all classes. prices are set to rise in the good years and simply stay flat in the bad years.Vinaconex. 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. Viglacera. .63 2006).

00 3. illustrates that the penetration rate of consumer banking products is still very low compared to that of the mobile phone.7 million urbanites had a bank account as of 2005 (SBV.00 30. That means that only 1. . % 35.00 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.64 people.00 Figure 3-17. only about 22% of these people currently have a bank account. urban pop in % 10.00 20. The urban population is increasing by about 800.000 (1% of the total population) a year (SGO.00 0. Urban population growth (Source: SGO. However.00 5. 2006). 2006).00 15.75% Mio 30 25 20 15 25. The balance would be accounted for by small town inhabitants or by the large rural population. Figure 3-18. 2006) Overall there are about 5 million bank accounts in the whole country and only 2 million ATM cards have been issued.

1.2.Other products Personal loans Personal loans61 are a new product in the Vietnamese banking market. home improvement loans.g. Penetration of banking services in urban Vietnam (Source: CI Electronic Monitor.Credit / debit cards and ATMs . .3 Consumer banking products Consumer banking products fall into five broad categories: . VBARD (2007) reports that consumer loans amount to 10% of their 61 E.Personal loans . 2006) 3.65 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.Mortgages . small business loans. car loans.

05.62 62 The loan limit is being raised from US$ 6. 05. Overview of the loan limit in selected commercial banks (Source: VIR.04. Others such as ACB and Vietcombank target Visa and MasterCard credit card holders. anyone can get a personal loan to buy a house. In theory.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. provided they can meet the banks’ strict collateral requirements.500-12500 for one to three years to its customers (VinaCapital.04. or to renovate their home. The SBV (2005) has issued a new regulation that allows commercial banks to provide unsecured loans to employees of SOEs and organisations.500. 2006). Until now it was hard to get a personal loan of more than US$ 625 even with collateral. However this does not benefit private sector employees who make up the bulk of the middle class.335 without security to government employees with a monthly income in excess of US$ 380.250 to US$ 12. Banks ACB VIB MHB VCB HSBC Loan limits US$ 12. Now banks are happy to hand over US$ 1. The MHB has increased its personal loan ceiling to US$ 3.875 –US$ 3. Vietnam International Bank (VIB) is happy to lend US$ 9. Vietcombank will happily lend you US$ 3. it is a high margin market and has enabled the banks which specialise in retail banking to enjoy far higher profit margins.500 US$ 9.2007). This represents a start towards expanding the consumer banking business.125 US$ 3.335 US$ 3. Foreign banks such as HSBC will give secured loans up to a value of US$ 2.125 (to be paid within 36 months).2007) The majority of personal loans are medium to long term secured loans.125 for five years. Most of these loans can be cleared within 3-7 days. Some banks such as EAB and Eximbank target employees of existing corporate customers as potential borrowers.66 outstanding loans and have a target of increasing that to 30% over the next few years following equitization.125 in personal loans (VIR. car or motorbike. Given that most consumer loans attract fees. .

000 outlets accept card payments.67 In general. banks have issued only 2.1 million debit and credit cards. 2006). The rate of growth. these are concentrating on big cities like Hanoi and HCMC and other major tourist sites.200 ATMs nation wide. ATM/card alliances Connect24 VNBC Founders founded by Vietcombank founded by EAB Other members alliance with 17 other banks Sacombank. Credit. Revenue from bank card transactions issued through 17 Vietnamese commercial banks surged by 300% in 2005. is impressive. this market is still embryonic due to credit history constraints. Five hundred additional ATMs were installed nationwide in 2005. debit cards and ATMs Automatic Teller Machines (ATMs). VNBC and BankNet. and installed a mere 1. Lack of distribution is the key hurdle. So far. 15 banks are allowed to issue payment cards. There are three ATM/card alliances in Vietnam. 125 of these in the HCMC area (VinaCapital. The potential for both the unsecured and secured markets is huge. MHB) . ANZ (including 2 overseas banks. ChinaUnionPay and United Overseas Bank from Singapore) national funds transfer system BankNet BIDV Figure 3-20. Growth in the retail market is closely tied to the growth in the number of bank accounts. ATM/card alliances in Vietnam (Source: Interviews with SacomBank. Only 10. credit cards and electronic payment are new in Vietnam. the Vietcombank alliance. however. and almost 80% of issued cards come from domestic institutions. and the shift towards payment by bank transfer instead of cash.

Customers can use their Unicard to perform many banking functions including withdrawal. They are about to issue 5. Eastern Asia Bank (EAB). VCB. one of the many second tier JSCBs have experimented with hybrid cards using a chip based infrastructure instead of magnetic strips. VNBC has already issued over 500. 2006). a y-o-y growth of 67% (SBV.000 cardholders in its client base.63 The VNBC Unicard is accepted at over 300 ATMs and 1. Visa-member banks had the largest share with 62. 64 VCB is currently the only issuer of MasterCard. August 2006).000 locations nationwide. with more than 50. 89% of merchant sales volume via Visa cards in Vietnam is still generated by foreigners. 65 Visa Asia-Pacific’s statistics show that the fraud rate of Visa cards in Vietnam is approximately 0. and Eximbank all offer international payment cards with 125. It is expected that Vietcombank will win the race. 2006).000 issued up to the end of 2006. and the company expects the number of Visa cards issued in the country to hit 500. Visa and American Express cards in Vietnam. JCB and Diner’s Club. Other international brands such as MasterCard. a relatively small amount compared with the US$ 237 million worth of purchases and cash withdrawals in Vietnam by international visitors (VinaCapital. Visa obtained a license from the SBV last month to open the first representative office in Vietnam. ACB.65 Magnetic strip cards in particular are vulnerable to counterfeiting and abuse. with 5. The fact that 60% of the population is under 30 years of age. Retail purchases and cash withdrawals made by domestic card holders reached US$ 72 million in 2004.15%.000 such cards and collaborate with Petrolimex to issue cards for fuel purchases (VET. Visa.000 credit and debit cards (SBV. funds transfer and paying bills at ATMs. mostly in Hanoi and HCMC.06%. impacts favorably on the size of the mortgage market.000 by 2010 (VinaCapital.000 point-of-sale (POS) terminals and 400 ATMs nationwide.000 cards issued since 1996.68 The big disadvantage is that the systems used by the three banks are different and are incompatible with each other. American Express and Maestro also saw strong growth. 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. Mortgages The growing middle class is very keen to become home owners. Of this. VCB is also the acquirer bank for MasterCard. . 2006). Credit card fraud is an ever present problem in Vietnam. 2006).64 However. American Express. The normal global rate is about 0.

the professional finance sector has a stronger grip on the condominium market partly as a result of tie-ups between developers and financial institutions. Indicators Descriptions .57% of the population is under the age of 30. Mortgage market indicators in Vietnam (Source: Interviews with SacomBank. A legal framework has been put in place for the growth of a mortgage market. So far banks have approved mortgage loans of about US$ 1. Most property purchases are financed informally through family networks who typically advance sums at no interest. 67 Prices for apartments in major urban areas in Vietnam range from about US$ 3202. This concept of ownership sets this generation apart from their parents and is now backed by a solid array of legislation.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 .2 billion which represents around 12.67 The mortgage market is new to Vietnam and currently accounts for only 10-15% of the total housing finance market.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.growing middle class is very keen t o become home owners.7% of their total lending (VinaCapital. Prices for apartments Duration about US$ 320-2. 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.69 or apartment.2 billion (around 12. .500 / sqm. 2006).66 Mortgages are a necessity for most young couples starting off on the property ladder. Current volume 10-15% of the total housing finance market mortgage loans approved of about US$1. MHB) 66 One issue is that affordable housing has been hard to come by due to spiralling property prices. Nonetheless.

Typical mortgages can be worth up to 70% of the value of the home.2007). the market size is quite significant. demand is expected to explode. Some banks are testing the marketing of longer term mortgages which is expected to have a very positive impact on demand.07. Normally a bank will lend only up to 70% of the value of a house for up to 10 years. About US$ 4 billion of this is routed through the banking system by wire transfer (VIR. 03. 2006). As loan terms are extended to 15 years or more.07. Other products Remittances Remittances are a lucrative source of fee income for Vietnamese banks. With 2. This is the affordability threshold. down from 24% in 2004 (VinaCapital.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. Electronic payments Electronic payments are also making steady inroads into a country once ruled by cash. With such a short repayment schedule. the overseas portion of this market is dominated by foreign firms such as Western Union.2007). less money laundering. In fact. VIB bank has recently launched a home delivery service for remittance payments within 24 hours at no additional cost (VIR. Fewer cash payments means less tax evasion. high monthly repayments are a huge constraint on mortgage demand. which take the lion’s share of the resulting fees. The decrease in the cash . 03. and lower minting charges.70 The underdeveloped mortgage market has been the biggest constraint to growth in the housing market. Currently. The rest comes through gold shops and is undocumented. The interest rate is currently around 12%. less corruption. Cash payments in Vietnam accounted for 21% of the total financial transactions in 2005. the SBV has completed draft decrees on electronic and non-cash payment systems including cheques and bank draft circulation systems. but most of the money is left on the table owing to the lack of a foreign presence by the Vietnamese banking industry. have a seven to ten year term and carry an interest rate of about 12%. Most households can only afford to spend about 30% of their income on housing.

One problem is that as of yet there is no secondary market to trade distressed assets and few transactions have in fact taken place.2 Investment products Investment products fall into 2 categories: .875 million in capital. 2006).Secondary market for bad debt disposal . Cash payments continue to account for the majority of daily transactions in Vietnam. In addition. 3. 2006). The SOCBs went through the motion of setting up their own AMCs.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. Vietnam needs to encourage intra-account payments for utility. internet. So far about ten commercial banks followed suit with their own AMCs. with each bank kicking in US$ 1.2. Two thousand and forty PoS card-reading machines were installed in 2005 (VinaCapital. As cash cannot dominate the market forever.2. 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. and cable television bills. where only large supermarkets and hotels use point of sale (PoS) payment systems.2.71 payment rate in 2005 was the result of a sharp increase in bank payment transactions. To limit cash payments. 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. more and more consumers will eventually be driven to open bank accounts as the utility of paying bills by direct debit becomes clear.Stock lending 3. 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. and particularly those performed with payment cards. 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 .

2. the government is reluctant to admit that it might have to do the same thing again. not from banks. One issue is that the DATC has a dual mandate.72 US$ 130 million with a mandate to help SOEs dispose of their NPLs and Non Performing Assets (NPAs). Vietnam International Bank (VIB) reported its current loans to the sector accounted for roughly 5% of the bank’s total loans. Figures provided by commercial banks showed that 13 million shares worth US$ 47 million on the market were used as collateral for loans (VinaCapital. 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. BIDV and MHB are equitized. the SBV has circulated a draft suggesting a further US$ 750-810m government bailout in 2007 before banks such as Incombank. working to resolve bad debts at 20 companies identified by the government (VinaCapital. A lack of trained personnel and limited experience in packaging and pricing debt is also hampering 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. 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. It has also signed a cooperation agreement with the BIDV in order to create the framework for an asset trading market. 2006). Nonetheless. 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. However. and an economic one to earn a profit in the process. using the certificates as collateral.2. . The DATC has recently set up a transaction and consultation centre for debt and asset trading in a bid to get things moving. a social mandate to help SOEs clear up bad debts. ACB also has about 1% of its total loans issued for stock portfolios. Instead of lending only against bank stocks. 2006). VIB now offers loans against 29 different types of stocks ranging from shares in hydropower plants to insurance and information technology stocks. 3. The DATC started operating in 2004. Having recapitalised the SOCBs with a US$ 670 million capital injection in 2004. This leads to a conflict of interest. the DATC purchases/receives the assets/NPLs directly from SOE’s themselves.

2 Non Life Insurance Non-life insurance sales in the first five months of 2006 were worth US$ 250 million.5 million people out of the country’s population of over 84 million have life insurance.3 Other financial services Other financial services fall into 2 categories: .87 billion insurance money that has been pumped into the country’s economic development since 2001 (see Figure 1-22. David L Fried. Bao Viet was the dominant player accounting for 32. The HCMC Insurance Company Bao Minh was second with 24% while the rest of the companies selling insurance had tiny market shares. Vietnam has 15 domestic companies providing non-life insurance and two more have been licensed. Revenues from insurance have accounted for 2% of the country’s GDP. 3. The growth potential is still very positive.2. a jump of 25% over last year.10.1 Life Insurance To date only 6.2. 69 68 Research paper of HSBC in July 2006. 69 The Vietnam Insurers Association’s public in the Thanh Nien newspaper on 11.). Observers emphasize the benefit of further opening up the industry by pointing to the US$6.73 3.2.2006 . Moreover. regional director of HSBC Insurance (Asia-Pacific)68 suggests that Vietnam’s life insurance market represents a great opportunity for foreign insurers.Non Life Insurance 3.3.8% of premium income in this period. The Vietnamese insurance industry has been expanding rapidly since 2000 with an average growth rate of 29% per annum.Life Insurance .3. The Vietnam Insurance Corporation.

However. can gain more social attention and contribute more and more to the countries GDP growth. Quantity of non-performing loans 7. The following factors which are expected to impact on the Vietnamese banking system positively or negatively will be analysed: 1.2.000 4. Market penetration 2. Oligopolistic banking market 4. Conclusion Currently. the Vietnamese banking sector can enjoy an excellent growth rate.000 7. the banking sector also has to face many market challenges. Rate of growth in loans and deposits 3.000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005* Figure 3-22.74 9.000 1.000 VND billion 6.000 8. Consumer credit bureau . Product offerings 6. Lending practices 5.000 3.000 2. Growth of the life insurance premium income in Vietnam (Source: Mark Sander & Adrian Liu cited in VinaCapital 2006) 3.000 5.4.

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. AsiaPac Loan Penetration (Loan to GDP. 2006). Central Banks in Merrill Lynch 2006) 70 Even so. the banks themselves have done a poor job of providing services to the retail public. 5 million of them for individuals which amounts to a penetration rate of about 6%. . which has virtual national coverage. if we compare this to the internet and mobile phone penetration rate of 14% and 12% the number is rather low. That is the size of the socioeconomic class in Vietnam.75 3. there is a traditional distrust of banks.2.4.1 Market penetration There are only about 6 million bank accounts in Vietnam. Banks are almost unheard of in secondary cities and rural areas.70 The reason is simple: the distribution and infrastructure of banking services is very poor relative to the telecommunications industry. SBV. 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. Some reasons for the interest in banking services are: until recently. This means that banks simply do not have easy access to over 70% of the population. the effective potential market size is about 20 million or triple the current penetration level (Merrill Lynch. the government encouraged a cash economy by paying state employees in cash. In reality. 2005E) (Source: CEIC.

More recently.4 Lending practices Lending decisions in Vietnam are still based more on relationships than cash flow.71 3. ACB. The assessment of loan customers is usually driven by the relationship with the bank and the size of the collateral being offered. In fact.76 Despite the limited penetration and physical presence. Cash flow driven assessment and qualitative analysis is reserved for large private sector customers only. at the top tier. Thus. Amongst the large banks. However. and Techcombank are making a determined effort to court the retail market.2. 2006). While the better banks could probably cope with this. Sacombank. Given the inability of some bankers to distinguish a good credit risk from a bad one this is not entirely a good thing. the Vietnamese market acts like an oligopoly.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. the banking industry is growing rapidly with both deposits and loans expanding at high. A 7% GDP growth rate can accommodate an annual credit growth rate of about 14-20% (VinaCapital.2. the temptation for others to take on too much risk is high.4. the state-owned banks saw credit grow at an annual average rate of 24% since 2002. some banks such as Vietcombank. double-digit growth rates.4. . 3. only the ACB bank uses DCF analysis across their entire customer base.2.3 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. 3.4. 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). Compare this with the US where the ten biggest commercial banks control only 49% of the country’s banking assets. credit growth rates above that level for any extended period of time can be unhealthy for an economy.

Another issue is exposure.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 2000.7% in 2000 to 8. infrastructure projects.2.2.5%.7% (SBV. 3. The top 30 state-owned corporations probably account for over half of the state banks loan portfolios. the Vietnamese banking model is best described as relationshipbased rather than product-based as in international banks. The JSCBs are no different.47% in 2001. Car loans. heavy industry and property developers. 2005). The non-performing loans (NPLs) of state owned banks fell steadily from 12.77 lack of professional guidance. JSCBs are geared mainly towards lending to small and medium size enterprises (SMEs) and the wealthier retail customers. Getting someone’s credit history in Vietnam is often impossible. However.4. In general. Lack of credit information is probably the single greatest hurdle standing in the way of the development of a proper retail market. the official number in 2005 rose to about 7. providing syndicated loans for utilities. Banks do not share much information and the state credit bureau only carries the history of the very largest lenders. 3. BIDV. given the banks’ low penetration and limited branch network they only reach a fraction of their potential customer base. mortgages and house improvement loans are retail staples. The absence of IT infrastructure to support professional credit analysis is another major factor. 2002 and 2003. Most banks lend a lot of money to a fairly narrow base of customers.0% and 4. International regulatory agencies carried out a similar exercise using Ernst & Young and found that NPL’s in the system using international accounting standard . respectively. with an NPL ratio of 9% dragged the average down. 8. Those banks that make the transition soonest will be the long term winners.4.5 Product offerings The SOCBs are generally geared to the large corporate and state-owned sector. And small business loans using property as capital is the basic model for the SME market. Under a new stricter definition.

Of the NPLs from SOEs which have been resolved. 40% were dealt with by risk provision funds and 24% by the liquidation of assets (SBV. average NPLs are around the 1% level at the end of 2005 (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. 2006). In the early 2000’s there were some efforts by the government to resolve NPLs. . There have also been discussions that the large SOCBs may establish specialized asset management companies to resolve their historical NPL problems. 2006). Most NPLs are generated by SOEs refusing to pay their obligations to SOCBs. although attempts to start one are ongoing. For private sector JSCBs. 72 Incombank. In 2001-2003 the government injected a large amount of money into the SOCBs to enable them to write down their NPLs (SBV. There are still very few NPL sale and purchase transactions taking place. Pre-equitisation is a favorite time to write off or simply clear out these loans. There is not yet an effective secondary market for bad debt. 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. 2005).78 definitions came to about 15-20% of outstanding loans in the state-owned sector (Merrill Lynch. 2006). One major reason for the fairly painless partial clean-up was the fact that land prices skyrocketed in 2001-2003 (VinaCapital. While there appears to be modest progress being made with the bank sector’s historical bad debt problems. for example. 2006). 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. 36% were paid out by state budget sources. That way SOEs can start their new life in the private sector unencumbered by debts. 2005). wrote off about US$ 312 million worth of bad debts in 2004 alone (SBV. A major banking crisis has been avoided so far thanks to the robust property market and a generally healthy economy.

Or to attach unattractive conditions to the loan. Sub-Standard. .73 3.2. Banking NPLs 2005 (Source: VinaCapital.79 Figure 3-24. Usually it’s just easier to say no. 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). 5%. 50% and 100%). 20%.4. prone to error and greatly limits the number 73 This new requirement encompasses the classification of loans into 5 groups (Normal. Precautionary.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. Arguably. 2006) On the positive side. 0%.74 The work is very time consuming. Doubtful and Estimated Loss) and the use of specified reserving rates (group 1-5. banks have to spend a lot of time and money trying to check up on them. 74 What takes minutes overseas can take months in Vietnam. 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. Without any way to easily check the potential borrowers’ credit history.

banks’ credit departments are overloaded trying to collect accurate information related to its borrowers. Banks could then manage their overall risk professionally and expand their consumer businesses faster. local finance companies. only 100. ranging from their repayment capability to appraising the value of their assets. The International Finance Corporation (IFC) has introduced a model private credit bureau in which foreign and domestic banks would work together as stakeholders. 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. As a result. 75 For example. Information would be collected from member banks. insurance companies. utilities. and others. after ten years. retail credit firms. and payments could be made in return for information provided by concerned agencies and local authorities. . Consumers would benefit as average interest rates would fall along with banks’ risk levels. Potential bureau users will be banks.80 of customers a bank can lend to. The bureau would act as a database compiling credit information related to individuals and small businesses. Proper risk management is very difficult under those circumstances.75 Without a private credit database.000 credit cards have been issued in Vietnam compared with over two million debit cards. credit card providers. Detailed credit histories would enable financial institutions to better assess risk and determine what interest rates to charge. 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. equal to the amount of your card limit.

the central bank has little if any independence. on a more positive note. who want to have a say in how scarce credit resources are allocated. While legislation is in place to guarantee the independence of the central bank from political influence. However. Similar to central banks in other markets. IMF. In this section.e. Also indirectly.81 3. directly through various regulations and restrictions which govern how they conduct business and secondly by strictly licensing the type of businesses they can enter. 3. Prior to the reforms of 1988-90.). etc. Firstly.2 State-Owned Commercial Banks (SOCBs) In Vietnam there are five state-owned commercial banks (SOCBs). World Bank. according to many multi-national agencies (i. 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). . the SOCBs were departments of SBV. the SBV is responsible for monetary policy and the regulation of the banking system. some key areas of reform will be reviewed and the level of progress made so far will be assessed. 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. both local and national.3. in the foreseeable future.3. The government still exerts strong control over the banking sector in two ways. and thus primary vehicles of government policy lending decisions. achieve harmonization with global standards. Legislative issues are ambiguous and regulations poorly enforced. recent developments suggest that the reform process may be accelerating and will. through the interference of a myriad of agencies and ministries. The bank sector still suffers from a substantial amount of non-performing loans. The general view is that the SBV is politically and operationally dependent on support from government agencies.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.

82 Figure 3-25. . SOCBs before 1988 and now76 (Source: SBV. The table below lists these banks. 76 In addition to the four main policy lenders. previously know as the Vietnam Bank for the Poor. with over 1.000 PCFs operating in Vietnam now and they control around 1-2% of the total bank sector loans and deposits (Source: SBV. 2006) These institutions dominate banking in Vietnam (estimated 70-75% share of the bank sector assets). 2006). The rural sector is also serviced by the People’s Credit Funds (PCFs). broke away to form independent banking entities. They act as an oligopoly at the top of the Vietnamese banking industry. There are approximately 1. was established to provide loans to poor households especially in rural areas.200 branches across the country. Despite this “paper” separation. in practice they remain tightly controlled by the central bank. These lending institutions were established in the early 1990s by the SBV following the collapse of a raft of rural credit co-operatives. the Vietnam Bank for Social Policies (VBSP). In 1988 all of these banks which have been departments of the central bank.

2007) As their names suggest. Although official numbers suggest a system NPL ratio in the mid-teens. The four large SOCBs slowly began evolving from specialized policy lending vehicles to more commercially orientated financial intermediaries over the last 10-15 years. . 2006). each bank remained the key player within its historically mandated business segment.83 Local JSBs 20% Foreign Banks 10% SOCBs 70% Figure 3-26. it is widely believed that the level is closer to 30%. 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. While these sector constraints have been abolished. these four banks were focused on specific segments of the economy. Markevt share of SOCBs (Source: SBV. with the vast majority of the bad loans concentrated in the SOCBs (VinaCapital. Their policy lending past has burdened them with high levels of non-performing loans.

84 Vietcombank 7. 2006) In the following analysis. VinaCapital.411 BIDV 3. the emphasis is put on ‘Focused businesses’.970 Incombank 3.101 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 3-27.328 Sacombank 1. Relative size of top 17 CBs in term of charted capital (bn) (Source: SBV.899 ACB 1. ‘Performance’ and ‘Challenges’.800 VEARD 6. 2006. .

.2. The bank also dominates the interbank foreign exchange market. its traditional business area. 41 sub branches and 47 transaction counters at the end of 2004 (Vietcombank. 2006.85 3. makes secured loans and offers foreign exchange services. Vietcombank. Vietcombank’s core business is focused on foreign exchange transactions. Vietcombank (Source: SBV. trade and providing long term financing to the largest SOEs. VCB is closest to being considered a full service bank in Vietnam. The bank has a leading position in both the retail and the corporate markets in Vietnam. which includes trade finance and international payments. Vietcombank. It is second only to Agribank in market share of the deposit and lending markets. It handles one third of Vietnam’s trade payments. VCB has an active retail banking business. 2006. 2006). issues credit and debit cards. 1st quarter report 2007) Focused businesses Vietcombank is the largest and best managed of the state banks.3. 2006.1 Bank for Foreign Trade: Vietcombank (VCB) Table 3-3. VinaCapital. The bank had a total of 27 branches.

4%. Loan growth has averaged about 55% per annum over the past six years. This business is not a major profit earner for the bank. Typically. It also has stakes in two insurance companies. According to the bank. it is expected that the development of the corporate bond market will change VCB’s business model. seven banks. slowing down recently as the bank started to clean its books ahead of listing. Vietcombank plays the lead role in large scale syndication for infrastructure projects such as refineries. its NPL burden has been largely dealt with over the last five years.79 77 Vietcombank is also leading a consortium of four banks lending a total of US$ 2.77 In the future. 78 Known as decree 493. Out of a total of US$ 354 million worth of bad debts. three real estate companies and one credit fund. a leasing arm and an asset management company.7 billion to EVN for the construction of power stations in 2006-2010 (Vietcombank. However under the more relevant International Accounting Standards (IAS) the CAR was a far more modest 4. 2007). Under the latest SBV standard definition of NPLs. The bank has captured the lion’s share of the lending to the best quality SOEs which were mainly in export related industries.86 VCB also owns a financing subsidiary. 79 As of December 2004.78 Vietcombank had a total bad debt ratio of only 2. Vietcombank’s CAR stood at 7% as calculated by Vietnam Accounting Standards (VAS). US$ 277 million had apparently been settled under the equitisation program by December 2005. Performance VCB’s corporate customer list includes most of Vietnam’s blue chip stateowned or equitised companies. It is expected that margins will not decline as the focus shifts from pure syndication to a mix of lending and bond underwriting. 1st quarter report 2007). The bank will arrange and underwrite bond issuances through its securities arm rather than lend large sums directly to corporations.6% at the end of 2006 which is far better than the other banks (Vietcombank. a securities company. The loan to deposit ratio is about 60% which is the industry average. .

Like all state-owned banks.5%. The 7-year bonds carry a coupon of 6%. Margins and ROE have recovered sharply since 2002 when ROE hit a low of just under 7. . convertible bond holders will be able to become shareholders of the bank (VET. 2005). Challenges Vietcombank has taken major strides in boosting its internal controls and strengthening management. During 2002-2003 the bank received a total of US$ 125 million in government help through the issuance of special bonds (SBV. avoid some of the mistakes of the past. 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. VCB has also been raising money through the bond markets. hopefully. Vietcombank issued a total of US$ 84.87 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. reserves and retained earnings) totalled US$ 487.5 million in December 2004.4 million in convertible bonds in 2005 purchased by a mix of institutional and retail investors. A cleanup of the loan book with some government help was the key to the turnaround. March 2006). The bank has improved its operations dramatically over the past five years. After equitisation. probably in 2007. 2006). Risk management (RMC) and asset liability commitees (ALCO) have been set up to manage the bank’s risk profile and.

2 Industrial and Commercial Bank: Incombank Table 3-4.3. traveller’s checks.2. 500 sub-transaction offices and savings offices in most of Vietnam’s cities. After the Asian crisis the bank was burdened by NPLs and poor management. short. 2006). 2006) Focused businesses Established in 1988. Incombank reported a 28. overseas remittances.7 billion.2% growth in total assets to US$ 7. the Industrial and Commercial Bank of Vietnam (Incombank) has 134 branches. financial leasing.88 3. syndicated loans. Performance In 2005. provinces and commercial centers (Incombank. . Incombank. 2006). loan guarantees. 2005.3% increase in total lending to US$ 4. medium and long term credit facilities.27 billion and a 18. For 2006 the bank reported a 33% revenue growth and 42% growth in EBT and net profits (Incombank. VinaCapital. credit card services. foreign exchange and securities trading. Its core customer base is state-owned heavy industry although it is expanding into new areas. but with government help it recovered. 2006. Incombank provides deposit and savings accounts. Incombank (Source: SBV.

Incombank’s most pressing need is to improve its margins and raise capital to push it over the 8% CAR hurdle by 2010.68 billion while total assets rose 28% to US$ 7. The NPL ratio has dropped to 2. Incombank has turned itself around in the past five years with considerable government help. they illustrate the progress that Incombank has made recently. the bank’s exposure to these traditional sectors is second only to BIDV and it explains the bank’s below average profit margins.5% to 2. it still has a long way to go before it can catch up with Vietcombank.89 In 2005 lending growth rose 18% to US$ 4. Challenges Similar to Agribank. the bank’s loan portfolio was 33% exposed to the industrial sector. These tend to be stateowned heavy industries or domestic developers and much of their borrowing is at favourable or below-market terms. The NPL ratio fell from 3. 2006). enabling the bank to reduce its NPL to manageable levels (Incombank. it serves as a clear indication of the weakness of its internal controls.18% and while these numbers do not reflect the full picture. with an additional 22% in the construction and transportation sectors (Incombank. While Incombank has made significant progress since 1998.35 million). Revenue growth was a very strong 55% with earnings up 183% last year. . About half of the bad loans (US$ 312 million) was settled in 2004. 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. 2006). In fact. Pre-2000 bad debt has now been almost completely cleared. While the size of the losses at Incombank is manageable (US$ 5.25 billion. Incombank has recently suffered losses speculating on the forex markets and offering loans against stocks. although the size of the assistance will be less than that to BIDV and Agribank simply because the bank is in relatively better shape.07% at the end of 2005. Incombank will be a benificary of government aid until 2008 (year of expected equitization).18% and CAR was around 6. Risk management and corporate governance are still issues. By sector.

1 million in the property development market. 2006. BIDV. The bank has an additional 4.3 Bank of Investment and Development: BIDV Table 3-5.3.9% exposure to the cement sector. Its combined loan book is bigger than Vietcombank’s but has profits of less than a tenth of those of Vietcombank. Performance BIDV had an NPL ratio of 10. VinaCapital. This number is significantly higher than the 2004 level due to the redefinition of bad debts under Decree 493. 2006) Focused businesses BIDV has a total exposure of about US$ 176. 2005. Historically BIDV was the principal conduit for major financing projects as the bank inherited most of the problem customers.90 3.49% at the end of 2005 according to the official evaluation method. Overall about 26% of its loan portfolio was to the construction sector in 2005 and it represents its largest sector exposure. The bank tends to focus on medium and long term project lending to SOEs.2. Bank of Investment and Development (Source: SBV. making it by .

5% at the end of 2005. Challenges BIDV will be first. 2006). To address this problem BIDV has recently issued bonds worth a total of US$ 204. Interestingly. BIDV appears to be the most vulnerable of all of Vietnam’s major banks (VinaCapital. 2006).18% in 2005 (BIDV. . The CAR rose from 2. to get help from the government with an expected capital injection of US$ 187-250 million in 2007 (BIDV.8 trillion and an ROE of 10. The bank has rescheduled US$ 65. given its low profitability and high level of NPLs. 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. 2006). together with Agribank. A poor quality loan book and low returns are part of the overall problem. To cope with concerns about bad debts BIDV has set aside a management reserve of US$ 314. the bank seems less clear on setting a profit target. March 2006).4 million with a maturity of 10-12 and 15 years (VET.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). Hard decisions will have to be made and some long-standing customers cut off from funding. Until then the bank’s progress will remain inconsistent and very vulnerable to any economic downturn. 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. March 2006).7 million of the loans to the seven largest property developers but this still represents only a fraction of its questionable loans (BIDV.91 far the weakest state bank in the sector. the lack of Tier 2 capital is another. BIDV has the worst returns amongst the large SOCBs which is a clear indication of its problematic balance sheet. 2006).4 million as of end of 2005 (BIDV. 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. This is not considered to be enough to solve all of BIDV’s problems. This will mark a major turning point for BIDV. BIDV had total assets of VND 131.

7% and gave the bank an E rating for financial strength.2. soft loans. a staff of 29. VinaCapital. 2005. Nonetheless BIDV was given a Ba1 rating for VND deposits and a B1 for foreign currency deposits (VET.37 billion. fishery and forestry sectors . In 2006 the bank had a loan portfo- . Agribank (Source: SBV. Agribank is responsible for rural development by providing medium and long term credit in the agriculture.000 branches. Performance At the end of 2006 Agribank had a total of 2. 3. March 2006).92 BIDV has planned to list on the stock market by 2008. In preparation for that move the bank issued convertible bonds and received a rating from Moody’s. The rating agency estimated the bank’s return on risk adjusted assets at a low 2. 2006. Apart from its role as a commerical bank.4 Agriculture and Rural Development Bank: Agribank (VBARD) Table 3-6. 2006) Focused businesses Agribank is seen as more of a social than a commerical bank with deep roots in the countryside.3. VBARD.in other words.429 and total assets of US$ 11.

The bank also offers loans in the retail market and has plans to increase the weight of consumer loans from 10% to 30% (VBARD. after the rest of the state-owned sector has gone public. it must be similar to BIDV in scale. in fact. it plays a very important social role. It is expected that the government will recapitalise Agribank in 2007 and inject US$ 312-375 million into the bank. The bank aims to increase its assets by 25% per annum. Challenges The bank claims to have 10 million customers.8 billion (VBARD. should be considered more like business improvement loans. but this number raises some doubt since it is greater than the number of accounts in the entire banking system. Judging by recent results. and to reduce NPLs to less than 1%. or US$ 2. 2006). 2006). . and it is expected that they will be able to continue to increase both profits and margins for the next two years. 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. bird flu. If. As long as the bank caters for underdeveloped regions. It is not clear what the real extent of the NPL is at Agribank however. its loan portfolio by 20-25%. most of these loans would be made to individual small farmers and. it starts to compete in small towns and larger urban areas. Farmers have had a tough time in recent years due SARS. it may hurt the banking sector as a whole by crowding out the private sector. 2006). This year the exposure to that sector has reached 29% of its total loans. however. In addition to providing loans to its traditional customers in the agricultural sector.93 lio of US$ 9. In practice. It also hopes to increase profits by 10% a year (VBARD. Agribank seems to be targeting the SME lending market as well. they are doing quite well on the profit front.7 billion (VBARD. 2006). drought and floods (VinaCapital.

2006.2. 2006). It was established in 1997 with a chartered capital of US$ 50 million. Performance The key indicators for growth are asset size.5 Mekong Housing Bank (MHB) Table 3-7. MHB had assets of US$ 875 billion up 10% compared to the previous quarter. 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.94 3. At the beginning of 2005. Loans and investments totalled US$ 853 million increasing 11% compared to the previous quarter (MHB. 2005.3. 2006). MHB. the rice basket of Vietnam. MHB has a nationwide network of 124 branches with headquaters in HCMC (MHB. . 2006). 2006) Focused businesses Mekong Housing Bank is the smallest of the group. Mekong Housing Bank (Source: SBV. VinaCapital. As the name suggests. most of the bank’s operations are concentrated in the heavily populated Mekong region. deposits and branches and not profits. The bank’s main function is to provide medium and long term financing to the housing market.

Most of the bank’s loans are made to improve the quality of rural housing stock (MHB. Disclosure is very limited and the current quality of the loan portfolio is low. the deposit base was about VND 6. not profits. 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. 2006). 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. MHB increased an additional 50% in assets to US$ 1. MHB offered only 0.18 billion and a 40% expansion of its loan portfolio.95 At the end of 2005. 2006). . 80 Just to note that the key indicators for growth are assets size.35 trillion. far lower than most competitors but seems to be able to use its branch network to reach customers not covered by other banks (MHB.62% interest per month (7. the vast majority of these being in term deposits. The deposit to loan ratio is 135%. 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. Challenges MHB will probably equitise in 2007. The bank is very thinly capitalised with an equity base of only US$ 49 million at the end of 2006. 2006). concern about its very low equity base and extremely low profit margins remains. deposits and branches. up 55% compared to 2004 (MHB. However. In 2006. 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 While MHB’s growth performance is very impressive. The loan book totalled VND 8.44% per annum) for three month term deposits.56 trillion. a plus of 72% y-o-y.

Table 3-8.96 3. SSC. 2007) Characteristics of JSCBs ■ More flexible: JSCBs. There are about 3540 such banks at present.3. they are more flexible and can adapt themselves to changing market conditions. . which were set up in the 1990s. Thus. 2006. heritage issues and social lending pressures like the SOCBs. do not face administrative burdens. JSCBs valuation and forecast (Source: VinaCapital. ■ 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.

which includes banks such as Techcombank. ranging from purely private organizations to being jointly owned by state owned enterprises (SOEs). Sacombank) and the rest. The second tier. service quality. ■ No specific positioning: The private sector banks are competing fiercely and many of them are choosing identical strategies. The result is thin margins and meagre returns. 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. 2006). etc. Challenges of JSCBs ■ Low capital base: Average capital is about US$ 20 million per bank so they cannot provide large loans. Resources are spread too thinly as they try to compete across the broadest range of businesses. private groups and individuals. The top tier are expanding their branch networks and loan portfolios aggressively. are more of a mixed bag. It provides the platform for offering and managing a wider array of products and services to customers (VinaCapital. risk management and ATM software. good information technology is a key competitive advantage in the Vietnamese bank sector. ■ Poor IT infrastructure: There is a great need for spending on IT to build core banking system. . ■ Low NPL: none of JSCBs are saddled with high levels of bad debts.81 ■ Weak operational and management controls It is worth mentioning that there is a big difference in term of chartered capital. boast good management and have a clear product strategy to differentiate them from the competition.97 ■ Mixed ownership structure: The ownership structure of JSBs is mixed. Eximbank and EAB. 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. 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.

2006).1 Asia Commercial Bank Table 3-9. 2006.98 lending and retail loans respectively (VinaCapital.3. 2005. 2006) Focused businesses ACB is the best-managed bank in Vietnam and has a clear lead in retail banking. They are largely locked out of the commercial lending market due to lack of capital. Despite a round of restructurings and mergers in 1999-2001.3. . 2006). JSCBs are still very fragmented. Other smaller JSCBs are mainly limited to retail banking services such as remittances and collection / spending under customer authorisation. the bank intends to use its locations as a distribution platform for a wide range of products targeting the retail customer (ACB. ACB.82 3. By adding about 20-25 branches or sub-branches over the next twelve months. Asia Commercial Bank ACB (Source: SBV. The number of JSCBs was reduced from 51 to a total of 36 banks currently in operation. 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. VinaCapital.

far less than the average 60% ratio prevailing in Vietnam.4-15. The retail business has been built around some key products such as car loans.25% of market value (ACB. Exposure to the real estate sector is minimal at about 3% (ACB. This is a reflection of a generally cautious stance which has been rewarded by an NPL of below 1% (ACB. credit cards and. the bank had 2.3% (or 14. Adopting government valuations which are only 50% of market. Challenges The biggest challenge facing ACB as a retail bank is how to improve access to credit information about its potential customers. with the rest mostly in SME lending. The bank is keen on the idea of an independent credit bureau as long as the government does not get too closely involved.71 billion up 23% and outstanding loans of US$ 763. ACB had assets of US$ 2. The unsecured loans business enables customers to borrow up to US$ 12. Retail customers account for about 60% of their total lending. unsecured loans. The bank also has some wholesale banking businesses covering large corporate customers such as EVN. Their approach to property collateral is also prudent.99 At the end of 2006.580 at a monthly rate of 1. The bank has a capital adequacy ratio of 12%. Overall.21. 2006). .892 employees. ACB’s balance sheet reflects their conservative approach with about 50% invested in government securities and the rest lent out. ACB has set itself an ROE target of 30% over the next five years (ACB.8%.6% per annum). 2006).9%.9 billion up 27. 2006). up 32. mortgages. 2006).03 billion. they offer loans up to 50% of the assessed value of the property . ACB is strongly focused in the southern market and has no plans to increase its presence in the north for the time being. 2006). Performance As of 2006. the bank has a very low loan to deposit ration of 44%. a y-o-y increase of 50% (ACB. 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. more recently. deposits of US$ 1.

The bank has already set up these businesses as subsidiaries and it may move to a holding company structure until 2010. ACB’s strategy is to leverage its existing distribution platform. ACB securities and ACB asset management. It is expected that ACB will list late in 2007 or early 2008. low ticket customers. 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.100 ACB has been a market leader in the new. insurance and fee based banking services. 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. unsecured lending market using the DCF valuation method to assess its customers. . The bank takes a niche strategy approach to market entry depending on where the gaps are. The bank has two major subsidiaries. and ACB has made considerable investments in its development over the past few years. In the medium term.83 IT is seen as the key to developing and managing all of these different businesses. to increase the number of fee based services it offers customers such as brokerages (both real estate and securities) and investment. Products such as leasing. insurance and investments carry higher margins and are seen as key to the bank’s future growth. leasing. 83 For instance.

REE owns 7. Currently. and up to 2006 had two foreign owners.3. the World Bank’s International Finance Corporation and Dragon Capital (Dragon Capital. 2006) Focused businesses The Sacombank was formed in 1991. 2006).101 3. It employed 3.806 employees in 2006. The bank has a strong retail franchise and recently started to offer 15-20 year mortgages through its real estate subsidiary. Sacombank has a large.2 Sacombank Table 3-10. 2005. Sacombank currently has a 4% market share as against ACB’s 5% share with a strong focus on SME and retail loans. 2006. 2006). .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. The bank is focused mainly on the SME and retail markets and is rightly seen as the most aggressive of the JSCBs. nationwide banking network with 128 branches and sub-branches. Sacombank is challenging both Vietcombank and ACB across a full product range in the retail market (Sacombank. VinaCapital. Sacombank (Source: SBV.3. Sacombank.

8 million over the same period. The latter comes mainly from treasury.7% yo-y. It is expected that ANZ’s stake in Sacombank will increas as the law permits. having divested its 11% stake in HCMC securities (Sacombank. Its collateral policy is believed to be more flexible with lending. up 30. Sacombank is generally seen as more aggressive than ACB both in terms of lending policy and overall expansion policy. The bank. Challenges Sacombank has recently collaborated with the ANZ Banking Group to set up a joint-venture in credit card services. . 2006). in some cases. has recently launched its finance leasing off shoot with VND 100 billion in capital. It also holds a 51% stake in Vietfund Management. which now also operates realty investment and asset management firms.2 billion as of 2006. Currently. Sacombank has a CAR of 15% under VAS rules and an NPL of less than 1%. Gross profit has almost doubled to US$ 14.102 Performance Sacombank’s gross assets were US$ 1. The bank has focussed on loans to highly profitable small businesses and the quality of the loan portfolio is high (Sacombank. of up to 70% of the value of the property used as collateral. a joint-venture fund manager that operates the listed VND 300 billion VF1. Sacombank is currently also seeking a license to launch a securities brokerage house with VND 300 billion in capital. 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. trade finance remittances and financial investments. The bank’s relationship with ANZ is likely to expand over the next few years. 2006). 2006).

with a maximum of 30% for all foreign investors. 2006). As of the end of 2005.103 3. The most obvious of these restrictions is that foreign banks cannot establish local subsidiaries. . Restrictions and difficulties in licensing are the reason.84 Focused businesses Foreign enterprises are the main market for the foreign banks. Foreign banks capitalize on this and it provides the bulk of their credit growth (VinaCapital. 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. the limit on individual share ownership by foreign banks is 10%. with significant restrictions and limitations on market access. The most important measure of foreign bank lending growth is foreign direct investment. the setting up of industrial zones in Vietnam. While many foreign banks have entered the Vietnamese market. 84 At present. there are 130 industrial zones attracting 4.3. four jointventure banks and three foreign-invested leasing companies established in Vietnam. network expansion and scope of operations of foreign banks.516 projects valued at US$ 18 billion in foreign capital and 15 new zones are under construction. Currently. and thus must operate through branches and representative offices.4 Foreign Banks & Joint Venture Banks The current legal and regulatory framework in Vietnam is heavily biased towards the local banks and financial institutions. or more specifically. 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. the requirements for entry into the WTO based on Vietnam’s entry to the WTO which was officially approved on 11 January 2007. there were 28 foreign bank branches. few of them have expanded beyond one or two branches.

Standard Chartered Bank. Doubtful debt levels remain well controlled. growth banks build their own business facilities. has only two branches (HCMC and Hanoi) with a prescribed registered capital of US$ 30 million.5 million up to the end of 2005. 2006).06% of the total (SBV. including infrastructure. has also recently announced plans to open a second branch in HCMC. accounting for only 0. Joint-venture banks’ outstanding loans had reached US$ 37.1 billion.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). consumer lending and credit 85 HSBC. all foreign banks start on a modest scale. organic growth and strategic investment in local banks. Total outstanding loans made by foreign banks had increased 30% up to the end of 2005. Consequently. human resources. These loans now total US$ 3. a 2% market share.85 But with the expectation of liberalisation.5 million (SBV. This is a traditional method. where the biggest drawback is time. equipment and network. many foreign banks are setting up 100% owned subsidiaries to offer leasing. the latter. growing at double the rate of the overall banking system. the largest foreign bank in Vietnam. (1) Option: Organic growth Through organic. This strategy has yielded steady growth but from a low base given the various restrictions in place. . 2006).3 billion in total assets. need capital of US$ 1. Total pretax turnover of foreign invested and joint-venture bank branches had increased by an average of 45% up to the end of 2005. Foreign banks are restricted in mobilising capital. Challenges There are two ways for foreign banks to expand in the banking industry. 2006). or 9% of the total outstanding loans. Joint venture bank profits rose 15% to US$ 12. a y-o-y increase of 25% (SBV.104 Performance At the end of 2005. foreign invested credit institutions had US$ 536 million in registered capital and almost US$ 6. which has been in Vietnam since 1904.

the new FIBs will be able to raise as much VND deposits as they can handle.105 card services in the domestic market. Even so. foreign banks have asked the SBV to loosen restrictions on opening new branches and the proportion of deposits mobilised on VND. . which would cover all foreign banks currently operating in Vietnam. with local banks charging sources fees of 1-1.5%. Foreign banks tend to be more client focused and skilled at cross-selling products. until 2010 organic growth will be limited. 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. In theory.86 (2) Option: Strategic investment The second route is to buy shares in local banks. First. Previously only long-established institutions such as the IFC and Dragon Capital had become strategic shareholders in domestic banks. charged by FIB’s as is the case with Citibank. 2006). 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. 86 However. or Deutsche Bank (VinaCapital. they are asking for the full implementation of most favoured nation treatment principles to satisfy WTO regulations. or US$ 10 billion in the case of a joint venture). HSBC. While there are no restrictions regarding the number of branches a foreign bank can set up. But foreign banks will have to raise their registered capital to US$ 63 million.The question remains. There are basic differences between the business practices of local and foreign invested banks. and 2005 demonstrated major interest in this approach. whether they can do so in practice. they must add US$ 1. Fees tend to be higher.5 million in capital for every new branch. The SBV is considering relaxing this rule for the first five branches. As a result. as always. in line with local banks. as mentioned before. In other words. 2006).5% instead of the 2-2. Currently foreign banks have between US$ 15-30 million in registered capital (SBV. foreign banks are happy to provide loans without mortgaged assets while local banks insist on collateral security.

Secondly. .106 By investing in existing banks. given that foreign banks are currently restricted to holding only 10% of a domestic bank. Recently Singapore’s Overseas Chinese Banking Corporation announced it would buy a 10% stake in VB bank for US$ 15.7 million. ANZ bought 10% of Sacombank’s equity. foreign banks take advantage of existing infrastructure and business networks to expand operations much more quickly. three foreign banks purchased shares in three JSCBs. thus allowing for a majority stake. there are two problems with this approach: high prices and lack of control. 2006) In 2005. Standard Chartered acquired a 10% stake in ACB and HSBC snapped up 10% of Techcombank. 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. Even with high growth potential and high ROEs the premium is hardly justified. 2006). Recent investments by foreign banks in local JSBs (Source: Merrill Lynch. The prices of Vietnamese banks. Table 3-11. lack of operational control is another disadvantage. Most banks which bought stakes have done so in the hope that this restriction may eventually be lifted altogether.10% for any one foreign shareholder and no more than a 30% stake for all foreigners combined. Namely. Strategic shareholding also has its limits . However. trading at about 5-7 times book value is very expensive compared to regional peers. EAB and Eximbank are also expected to sell stakes to foreigners soon. with an option to increase this to 20% by the end of 2007 (Merrill Lynch.

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.3. 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. While the growth of the jointstock banks since the beginning of the 1990s has been rapid. control 75-80% of total bank sector assets (2004).107 3. This situation is largely attributable to the dominance of the four large SOCBs which.5 Competition in the banking industry Compared to other banking markets around the AsiaPac region. 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. Figure 3-28. . between them.

Much needs to be done to improve the competitive strength of the state-owned and private sector banks in the meantime.108 The recent investments made and technical assistance agreements signed by StanChart. with Bank Rakyat Indonesia (BRI). asset quality and poor profitability. 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.88 3. China. Tendency of consolidation 2. ANZ and HSBC in joint-stock banks between 2005 and 2006 should also accelerate the level of competition in the banking sector.3. . SOCBs are the primary providers of financial services to the rural market. Undercapitalisation 3. 88 It would be interesting to compare the experiences of the Agricultural Bank of China (ABC) and the VBARD / VBSP in terms of inefficiencies. by focusing on: 1. India and Indonesia). Raising capital 4. 2006).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. The most important of these is the ability to compete with the “foreign invasion” expected after 2010. In light of a quasi-monopoly and very thin margins of these banks. Invesment in information technology 5. Improving management and governance in the banking sector 87 As is the case in a number of emerging markets in Asia (e. In particular.6 Conclusion The banking sector faces several key challenges until the market opening in 2010. there is little incentive for innovation or for VBARD / VBSP to improve their performance.g. as the latter is in a substantially stronger financial and operating position (VinaCapital. although at a comparatively modest pace.

109 3. And they are also wary of conflicts of interest from large corporations owning pet banks.6. SBV will introduce new regulations to force another round of consolidation in the near future. a penetration rate of about 1%. the SBV has circulated a draft proposal to raise the minimum capital level to about US$ 300 million. 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.90 The State Bank of Vietnam has raised a concern about the fragmented nature of the private sector banks. All other existing banks fall far short and will need to scramble for new capital or merge in order to meet the new requirements. 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. One way of doing this is to set high hurdles for any new established bank before it can get a license.89 The number of JSCBs was reduced from 51 to a total of 36 banks currently in operation. As a result. 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. Currently. experience and funds to help the consolidation process. 50% of the JSCB’s will have to face a merger or a takeover.1 Tendency of consolidation Despite a round of restructurings and mergers in 1999-2001 the JSCBs are still very fragmented.91 89 “Too many banks are still chasing too small a slice of the pie” (VinaCapital. banks will also have to demonstrate experience in banking governance.3. Banks will need to commit to Basel 2 standards from either 2008 or 2010. 2006). In addition to higher capital requirements. 91 The EVN currently holds a 40% stake in An Binh Urban JSCB. 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. a corporate family can own up to 40% of a JSCB. From next year. .

With most of the state banks well below the minimum 8% capital adequacy ratio for Tier 2 capital. In recent years the top nine banks have been raising capital by about 40% annually. to shore up their Tier 2 capital base to bring them over the 8% CAR hurdle by 2010.7 million (SBV.92 Admittedly with large scale raising of capital this year. the second largest bank by assets.3% in South-east Asia. where profitability was lower and capital particularly limited the options were more limited. BIDV has obtained an international rating in preparation for a stock market listing and possible overseas bond series. Average capital adequacy ratios (CAR) at Vietnamese banks stood at 4. . The JSCBs are in only a slightly better state with a handful able to cross the 8% hurdle rate. Vietcombank. has chartered capital of US$ 487 million. 2006). Moreover. lack of access to the international capital markets has constrained their growth. this number is improving. given that the domestic capital markets are still in the early stages. raising new capital was the biggest challenge for all the banks. BIDV about US$ 240 million.6. The stronger JSCBs have responded partly by selling shares to foreign strategic partners. Sacombank has chartered capital of US$ 118. Sacombank has raised some equity recently and most of the top tier of JSCBs have raised their capital substantially in the past twelve months. a quality shared by private sector commercial banks as well.6 million and ACB has capital of US$ 68. The SBV is reluctant to allow smaller banks to raise capital from foreign investors.3.5% at the end of 2005 (Merrill Lynch. all of the banks have a substantial need to raise additional capital. Going forward. Vietcombank and BIDV have both issued VND denominated domestic bonds at a 1-2% premium to sovereign debt. 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. 2006). Amongst the JSCBs.1% in Asia-Pacific and 12. 92 This compares with an average CAR of 13.110 3. Further down the line. Government restrictions on equity holdings combined with a bond market that hardly functions has made raising chartered capital very difficult for banks.

must not exceed 30% and they cannot trade their shares the first five years. Since May 2003. The result is a constraint on medium to long term lending and a deposit / lending mismatch. BIDV and Agribank have all expressed strong interest. The SBV stipulated that total charter capital of JSCBs in Vietnam.6. Bond issuance is currently the only realistic option for the SOCB’s and the best of the JSCB’s. this injection will represent only part of the total US$ 1. .111 Most recently. the banks will need to raise billions of dollars in both debt and equity financing. 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%. The stock market has exploded and bank shares have been the first choice for domestic and foreign investors. The central bank is drafting a plan to inject US$ 687 million of government money into three banks between 2006-2008. According to the central bank. the situation has changed dramatically. 3. the SBV just introduced new regulations requiring banks seeking additional capital to get SBV’s permission. To do so. access to capital became so easy that it lead to a risk of abuse by poorly managed banks. only the world’s top banks can be considered as potential investors and must be vetted by the government.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. Finally. The balance. held by foreign investors. The banks’ ability to expand their lending base is constrained by the lack of long term capital. This is only a temporary solution. Foreign investment in commercial banks is regulated under decision 228 (issued on 1 December 1993). In fact. Incombank. What is at stake here is not just the 8% hurdle for capital adequacy.3. There are issues to be addressed on the equity side too. This has made access to additional capital significantly easier. To address this problem.25 billion the banks will need to reach the 8% hurdle. The second tier banks will have to rely on issuing equity capital until the ceiling rates on bond coupons are lifted. apart from a token US$ 99 million soft loan coming from the World Bank will have to be raised on the capital markets.

April 2006). There is a great need for spending on IT to build core banking systems. Moody’s announced credit ratings for BIDV ahead of the offer.1 trillion.32 billion to VND 1.6. IT spending would seem to be one way to separate the winners from the losers.3. . Both are priced at a spread of 1. enabling banks to charge higher fees and offer a genuine service to their clients.8% and a 15-year bond carrying a coupon of 10. The domestic market’s appetite for bank paper has now been tested. Based on an assumption of constant annual lending growth of 15%. April 2006).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. Vietcombank issued US$ 75 million in seven year domestic bonds at a coupon rate of 8. VIB has increased its capital from VND 595 billion to VND 711 billion while Eximbank increased capital to VND 815 billion (VET. and an expectation that the banks will be able to raise 25% of the total additional capital needed through internal profit growth. ACB and Sacombank will also have substantial capital needs going forward.05-1.26% over the Vietnamese government 5-year and 10-year bonds respectively. It is estimated that the five SOCBs will have to raise about US$ 4. April 2006). provide the bank with a stable outlook for both domestic and foreign currency deposit and a positive outlook for financial strength. 3. and both carry call options (VET.20%. BIDV has also recently completed a US$ 94 million VND denominated bond issue consisting of a 10-year bond with a coupon of 9. April 2006). It is expected that the top five JSCB’s will raise US$ 1. Most of this fundraising has come from tapping existing shareholders for new money while also adding some new investors.5 billion through new equity or bonds. The Vietcombank and BIDV issues were heavily oversubscribed by 250% with the BIDV offer.5 billion in capital over the next four years to exceed the 8% target by 2010 (VET.5 billion between 2006 and 2010 to keep ahead of the proposed new capital requirements (VET. risk management and ATM software.112 By the end of 2005. ACB has recently increased its chartered capital from VND 948. banks will need to raise an additional US$ 3.5%.

113 However. and Bank of China spend between 4. some larger banks such as Vietcombank spend 6% of revenues on IT (approximately 10% of operating expenses) and are planning to increase that ratio. including Vietnam. 2006). 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. It is possible to take capital expenditure as a proxy.In the middle tier. There are three spending patterns in IT investments among Vietnam’s banks (VinaCapital. probably insufficient to upgrade their systems. 2006). 2006). 95 In general it is believed that Vietnamese banks are under-spending their Asian counterparts by approximately 30-40% (VinaCapital. 94 Asian banks such as DBS. Kookmin.The smallest banks focus on making basic upgrades to their existing infrastructure. is an unknown (VinaCapital. 2006). 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.95 This gap needs to be closed if the Vietnamese banking sector wants to offer a comprehensive service to their clients. have more modest budgets. 93 However. spending only about 2-3% of revenues. IT spending at most banks in Asia. resulting in a harmonious match between investments needed and available resources.94 In Vietnam. Sacombank recently invested US$ 4 million in a new core banking system. Small joint-stock banks such as Habubank. 2006): . The numbers are not disclosed in annual reports and information is generally anecdotal. as IT spending tends to be a large portion of it. more dynamic joint-stock banks take a more aggressive approach to technology investments. . .The top tier state-owned banks continue to rely on government-supported budgets to allow them to undertake large-scale technology projects.7% of operating expenses on IT with an average of about 11% (VinaCapital. however.

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. 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. it is expected.6. that corporate governance in the banking sector will improve markedly (VinaCapital. .5 Improving management and governance Independence in management is one of the most crucial factors in the reform of the SOCBs. 96 There are two other issues relating to management. 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. 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. Despite progress made in re-organising the SOCBs prior to equitisation. 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. One is the reduction of operating costs and the other is the adoption of international standards and transparency. Having been recapitalised. the SOBs have continued to grow rapidly in terms of deposits and assets. 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. but no less important is an immediate improvement in the SOCBs’ efficiency. 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. 2006).114 3.3.

115 areas that need further improvements before they can reach international standards. and the banking market are presented. as appropriate. the banking industry. the SWOT analysis needs to include an External and Internal Change factor. which impact on Strengths and Weaknesses in the banking industry (Mayer. the external changes (CH-e) which impact on Opportunities and Threats. On the one hand. and on the other hand. 2006). rapidly and drastically changing politico-economic environment. 2006). more specifically. including the political. the results of the empirical study will be analyzed using a specially developed SWOT structure. New products and services. This provides a general overview of the situation. Financial capacity. 97 The gaps in these areas can only be closed with the help of strategic investors or advisors.4 SWOT and critical business issues In this part. the banking sector in Vietnam is facing. 3. because of the rapid and fundamental changes in the entire country. In order to be able to develop relevant recommendations addressing the specific needs and opportunities of the banking industry in the current complex. stake in a bank (VinaCapital. In addition. as mentioned above. Banking Market. NPL resolution. Banking Industry) and then. Management information services. economic and fiscal environments. the results of the analysis of the banking environment. Specifically. Human resources development. . 97 Such as Organisation and management. the internal changes (CH-i). Risk and liability management. 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. each will be further subdivided. and the question is just how much knowledge transfer foreign investors will permit in return for only a 10%. the four components of the SWOT analysis will be subdivided into three dimensions (Banking Environment. into several criteria. or even 20%. and the challenges the country and.

below summarizes the Opportunities and Threats incorporating the dimension and factor breakouts outlined above. Figure 3-29.116 3.1 Opportunities and Threats of the Banking Sector in Vietnam Figure 3-29. Overview of Opportunities and Threats .4.

117

Figure 3-30. Strengths and Weaknesses of the Banking
Sector in Vietnam

118

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)
-

Opportunities

-

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)

Weaknesses

Threats

Global economic or fiscal downturn (significant drop in oil prices, significant disruption in oil supply, fiscal crisis in China, major military conflicts in Iran)

-

Strengths

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

-

119

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

Business strategy

Financial resources

Dependence on major shareholders

Figure 3-32. Formulation of critical business issues

120

CHAPTER 4:

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

4.1 Background
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

2006). or even to go as far as dictating the price. 99 These surveys are for example from IFC.98 During and after the event addressing Corporate Governance mentioned above and with the support of SECO. by Prof.121 Management” (in Vietnamese: Quản Trị Công Ty). 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. we had conducted two surveys about the issue “Corporate Governance”. World bank (IFC). 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. we introduced the term “Quản Trị Hội Đồng Doanh Nghiệp” which is descriptive of the entire connotation of “Corporate Governance”. 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. . Dr. Vietnam still has a wide range of ownership structures. This is due to the fact that the economy still retains important “non-market” elements. 2006). However.99 98 World bank-Report issued in 2005. In addition. though most company directors commented that the concept was yet to be adopted in Vietnam. Only 23% of the 85 respondents said they had a “certain understanding” of Corporate Governance. As a general observation. access to raw material. ING. SSC as the first governmental organization to address the issue started to create official guidelines on Corporate Governance for listed companies (IFC-Report. the lack of a level playing field for the private corporate sector as well as between listed and unlisted companies is another negative factor. While translating the book “New Corporate Governance”. A recent World Bank survey confirmed this impression (IFC-Report. each of them governed by a different set of laws. Finally. Within the frame of the empirical research. Martin Hilb. This is because the government continues to own and control many enterprises in terms of providing capital. VCCI.

Evaluation. Structure of the Board of Directors. board meetings. Corporate culture.1 Objectives of the First Survey The survey was a first (Swiss) standardized questionnaire on Corporate Governance in Vietnam. 4.Examining the systems which are used to “direct and control” the firms in Vietnam 4. members of the Boards of Directors. 4.2 Targeted group All participants were Chairmen. The objectives of the First Survey were as follows: .2. Number of board members in the company . and members of Top Managements from the listed or soon be listed companies.3 Research Methodology A questionnaire with 12 questions was handed out to the participants of the Corporate Governance Event. .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 event was very well received and was generally thought to have been very successful and effective. 4. There were around 80 participants. Selection. Remuneration and Development of Board members.2. The topics of the questionnaire were as follows: 1. Systems of management applied. 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.2.122 The second survey (from now on called the Second Survey) was conducted during the first quarter of 2007.Gaining an overview on Corporate Governance’s issues in Vietnam such as Ownership structure.

customer oriented. Strategic control for evaluation of the strategic implementation . social.g.g. Nomination Committee. Business Information Technology. political. Development of Board members and members of Top Management (favoured topics like Strategic Management. Auditing. variable.g. internal. Remuneration concept.g. Ownership structure (e. bureaucratic. Evaluation of Board of Directors (e.g. Auditing. Remuneration of board members (e. company listed on the stock exchange) 3. self-evaluation) 7. networking competence) 8. honorary compensation) 11. trust oriented. Finance and Controlling. performance oriented) 6. Financial Reporting. Corporate culture (e. Compensation Committee) 4. Systems applied on the level of the Board of Directors (e. Marketing. Strategic planning. Selection concept. Monitoring system. leadership.g.123 2. Succession planning) 5. professional. customers) 9. Criteria used to select Board members and members of Top Management (e. Board meetings . fixed. employees. Human Resources. Ownership structure (e. external.g. 36 Stratagems) 10. state. Structure of the Board of Directors of the company (Board with or without committee like Audit Committee. Risk Management System. Board members were representatives of stakeholders like shareholders. Risk Management.

and 13 were not listed. 100 Details of the questionnaire see Annex.4 Overview about the respondents 53 questionnaires were handed out and 45 responses. . 30% of the respondents were chairmen or chairwomen.2. 100 We had set an assumption that one person represents one firm..100 As illustrated in Figure 4-2.124 4. or 85. Directors 19% Chairman / Chairwoman 30% Members of Top Management 23% Members of BoD 28% Figure 4-2. because the questionnaire response was completely anonymous. were collected. 28% were members of boards of directors and 42% were members of top management.9%. 20 companies were to be listed. Personal data of the respondents The respondents came from 45 companies: 12 were listed companies.

In the banking sector. and also based on the First Survey. which had introduced a “light” version of Corporate Governance concept. which were listed at the Stock Exchange or which were prepared to be listed were about to introduce “Corporate Governance”. We concentrated exclusively on the banking sector based on the analysis conducted in Chapter 2 and Chapter 3. there were some joint stock banks. Status of the participated firm 4. 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. .1 Objectives of the Second Survey The objective of the Second Survey was to find out. we learned that several companies. 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.125 Status of the participated firms 29% 27% Listed Will be listed in the future Will not be listed 44% Figure 4-3.3. including Asia Commercial Bank (ACB) and Sacombank. we have decided to conduct a further survey about this issue. For this reason. 4.3 Second Survey in the banking sector Since the Corporate Governance event on 6 January 2006 in HCMC.

the interviewees were also members of top management. gender. Ownership structure (e. 4.3. It is also important to state that each bank contributed only part of the topics mentioned below.g.2 Targeted group Our interview partners were Chairmen or Board members of 5 banks. average age. Compensation Committee) 4. Nomination Committee. education) 2. Strategic situation of the related Banks (Strategic planning. company listed on the stock exchange) 3. SOCB. Strategic control for evaluation of the strategic implementation) 101 For details of the questionnaire see Annex II. In two cases. the interviewer had to the phone call again in order to continue the interviews because the information required could not delivered immediately. both state-owned and Joint Stock Banks.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. Structure of board of directors of the company (Board with or without committee like Audit Committee. However. Monitoring system. because the interviewees either didn’t have or didn’t want to provide the information. position. Topics of the questionnaire were as follows 101 1. ethnic. The interviews took place at the head quarters of the related banks and lasted around three hours.126 4. .3. the interviewer had to conduct the interviews and fill in the questionnaire during the interview by himself. In some cases. Bio-social data of the members of Board of the related banks (number of board members.

In the Figure 4-4. social. Management systems such as Risk Management System.g. fixed. Selection. honorary compensation) 10. Remuneration 6. professional.g. Board culture 7.4 Overview about the respondents Because the Banks that participated in this survey wished to keep their anonymity. Information and Communication (such Board meetings. leadership. Bank1 or Bank2. Evaluation. Auditing. We number the related banks according to the chronological sequence in which we conducted the survey. Criteria used to select board members (e. political.3. e. .127 5. we have avoided using their name. there is a brief overview about these banks which took part in this interview.. networking competence) 8. companywide communication. external communication) 4. Financial Reporting. variable. Development of Board members and members of top management 9.g. Remuneration of Board members (e.

all the board members in the banks here do not have professional experience in a modern bank in Western countries.. it received support from SECO for the restructuring program It was a small Bank with no clear direction. transfer of technology and know how was ongoing The bank was very profitable The Bank was still SOCB. Recently.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. but the Bank was a JSCB The Bank was a SOCB.e. Some facts about the banks’ BoD in the Second Survey As we can see from Figure 4-4. Bank1 Average age Non-VN Deputy female Male VN . However. but it will be listed in 2008. the numbers of board members in most of the banks varied from 9 to 11. All the members have a university degree. in the months to come. Has several foreign strategic partners and also receives TAA. However. i. 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.

2006. The numbers of female members are still low.4 Summary of the current situation and comparison with the standards mainly in the banking sector For the discussion of corporate governance practice. Board Structure. Board Culture. Processes (see Hilb. but they still do the tasks of a CEO. Systems. Information and Communications (see Dinh. the chairmen are no longer CEOs at the same time. 2006) Pr oc es . For issues regarding interaction between individual members of management and different management levels we recommend further “areas of focus”. Stru cture lationships Re Benefits u R e s o r c es Leadership Cultu re Vision s m ste Sy Figure 4-5.129 and Bank2 also have foreigners in their Board. we propose the following “areas of focus” on the board level: Vision and Strategy. such as Relationship. In 2 banks. Dinh. They are representative of foreign strategic partners such as Investment Funds. “Areas of focus” for the discussion of corporate governance practice (Source: Dinh. 2006). Leadership. Foreign Banks. 4. 2006).

to develop the skills of key people and to cooperate with domestic and international partners for the transfer of technology and management know-how. we will also have a Finance company. Bank1: The vision was cited by the Chairman during the interview: “We are thriving to a respected financial services group: offering Retail banking. Private Banking. we have to increase the chartered capital.4. However. this vision is only communicated to the level of middle management. Asset Management company and Securities company.” “To achieve this vision. most of the banks had not set up a strategy planning process. 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).102 During the interviews. Furthermore. due to the short history and rapid development of the banking sector in Vietnam.” Currently. and to be in the third or fourth position in the 102 In a certain bank we interviewed the founder of the bank. The CEO retired a few days to his office.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. Moreover. Then he presented the new strategy to the Chairman which was than accepted. they could verbalize a clear vision of their company. Insurance company.130 4. Business Banking and Investment 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.

we have to improve the professionalism. While Dragon Capital invests the most important seed capital in the bank. On the other hand.104 One of the most important competitive advantages of our Bank is having three foreign strategic investors: IFC. the customers came to the Bank. and Dragon Capital”. In the next five years. the bank applies several tools for example in the remuneration system. emails and also team building activities and events. the bank also buys talents from the competitors.103 In order to achieve this vision. 105 106 . Currently the bank has invested US$ 5 million in the data warehouse. we will become more customer oriented). We are different than other banks in the aspect that we do not take Vietcombank as a benchmark. in future we will actively contact our potential customers. meetings. by offering more retail banking products. 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.105 The vision and the new strategy of Bank2 are communicated to the middle management through several communication channels such as in housemagazine. we will increase the market share through opening more branches nation-wide.106 establish new branches nation 103 As stated before (see 3. the bank will introduce call option. Standard Chartered Bank.131 banking sector in Vietnam. The bank is building up a training centre in order to develop the skills of the middle and top management. 104 In this respect.” In order to achieve these goals. professional and management skills. set up the state-of-the-art IT system.3 Banking Industry) the 5 SOCBs have around 70% of the market share. by changing the marketing concept (until now. Cambodia and Laos in order to serve the growing needs of the customers. 30 % of the chartered capital is contributed by the three strategic foreign investors. and have branches in the surrounding countries such as in China. Standard Chartered and IFC provide Technical Assistance to improve the technology. in other words. through the creation of more financial and forex products (in cooperation with Life Insurance and Fund Management Companies). we will set up a Jewellery company and an In-house University. We will also place emphasis on improving the human resources situation. That means that we will outpace one or two SOCBs. generous bonus to motivate people to stay.

Therefore. And the growth rate of the chartered capital is around 50 % yearly.). 8th March Brand (for women only). 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. the composition of the board. the BoD and top management have to share the work. Involvement of the BoD and of the top management in the strategy process (see also Hilb. A clear delineation of the roles of the BoD and of the top management is critical to the success of the bank. the stated vision and strategies are different from the version published in the brochures or websites of the banks. the Tier 1 is 9%. the bank has increased the chartered capital from US$ 175 millions to US$ 280 millions.107 and to develop the Human Resources and to strengthen the financial basis. and the board culture. board structure and success measures have to be aligned (Hilb. thus complying with the Basel I. Our suggestions: According to Hilb. but was not yet communicated widely to the entire company. Hoa Viet (Chinese-Vietnamese) brand. 2006). The interviewees have also admitted that the “real” vision only existed in the minds of some members of the Board and top management. and build up sophisticated brandings.108 As the results from the Second Survey show. in the strategy development process (see Figure 4-6. strategy Phase I: .132 wide. Currently. 108 Recently. 2005) 107 For example.

the market and the industry as well as the bank itself shall be analyzed. These critical business issues have a fundamental impact . Figure 4-7. in the banking market and in the banking industry. the corporate strategy and business strategy (and functional strategies .133 Phase I: Strategy initiation In the case of Vietnam. 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. 2006). The strategy development process is then divided into several steps (Lombriser/Alplanalp. the critical business issues can be identified. (2) review of the strategy effectiveness. Strategy assessment Strategy development The overall environment. we recommend. impact on the Strengths and Weaknesses of the company (Mayer. the banks have to review their existing vision and mission statements and the corporate as well as business strategy of the company (Gruenig/Kuehn. This step consists of the development of the vision and mission statements. that the process be initiated by the BoD (together with top management). Based on these results.for each department). Strategy implementation Monitoring strategy implementation This is the realization of the strategic objectives through the “operationalisation” of the plan. Based on the change in the banking environment. (3) progress control of the strategy implementation. and the internal changes (CH-i). This step includes the following areas: (1) change in the relevant business environment. The SWOT analytical and planning tool is used in the process. 2006). since most of the banks would be just starting to implement a strategy planning process. 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. 2005). An internal corporate analysis reveals its core competencies. strengths and weaknesses.

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. . 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. 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. Composition of the strategy project team (Source: Gruenig/Kuehn.

135 The strategy project team is lead by the steering committee. and the new businesses it will set up. These abstract terms have to be transformed into a plan about how to realize the desired future. which consists of one or several members of the board and of top management. the corporate strategy determines which businesses the company will continue to operate or withdraw from. 2006): to project management. In principle. The project team is supported by several workgroups. This ensures strategic consistency throughout the plan. . corporate strategy. 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. business strategy (Lombriser/Aplanalp. Based on the strategy recommendations of the project team. The corporate strategy also provides information about the amount of investment required in order to maintain or enlarge the strategic business (Lombriser/Abplanalp. The results of the strategy development project are then presented in a steering committee meeting. 2006). planning methods. 2006). In addition. 2005). 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. the team can also be assisted by external consultants who can contribute (Gruenig/Kuehn. Step 2: Strategy development The strategy development also consists of several stages: vision and mission statements. and assist with the decision-making process. The corporate mission and vision are the foundations of the strategy development process and are reflected in each stage of the development process. the members of board and the top management who are represented in the Decision Group then decide on the bank’s strategy. The corporate strategy thus determines the long-term orientation and development of corporate activities” (Gruenig/Kuehn. 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.

In strategy implementation. differentiation within a broad target market and differentiation within a narrow target market. introduction of direct delivery to large end-customers according to new business strategy requirements. 1998). 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). Phase II: Strategy approval The board selects the most promising strategic option benefiting all stakeholders and approves its implementation. 2005). establishing important milestones in the implementation process and the identification of key information requirements of all the relevant stakeholder groups (Hilb. there are four basic competitive strategies. The approval process also includes the allocation of the required resources. sustainable competitive advantage can only be achieved through low cost or through differentiation in the market (Porter. 110 Examples: Training courses to improve understanding of the new strategies to adjustments to organizational structure to accommodate newly-defined business fields. . Therefore. it is necessary to distinguish between the realization needs which arise directly from the strategies.136 According to Porter’s analysis.109 and the indirectly derived measures needed for adjustment and support. cost leadership within a narrow target market.110 109 Examples: Sales of an unprofitable business as a consequence of a new corporate strategy. Porter links these two basic types of competitive advantage with the target scope of activities. namely cost leadership within a broad target market. success cannot be achieved if the implementation is not well-prepared and properly executed.

the Technical Medium Term Plans and the annual Business Plan. 112 The Bank must ensure that employees are willing and able to implement strategies for example by making the information available. medium-term. “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. 2006). long-term. senior management even keeps their vision and strategies secret. 2006). . the business policies allocate resources. 2005). or the management’s tasks.” (Hilb. introduction of a new reporting system adjusted to the new strategy. Thus. It should be mentioned that the strategy project team can be converted into the Department of Strategy and Organization.137 It is also useful to distinguish between measures related to material requirements 111 and those related to personnel 112 (Gruenig/Kuehn. 111 Examples: Development of new products. The actual strategy implementation takes place in order to realize the plans. and short-term implementation plans. They should thus be able to structure the bank to fit its future business needs. It generally comprises of the delegation of tasks. and a budgeting process. As already known from the banks that participated in the interviews. Phase IV: Monitoring strategy implementation The monitoring of strategy implementation has to be done at every board meeting. which are usually incorporated in a budget. This Department would be responsible for the coaching and production of the Strategic Medium Term Plan of the bank. the alignment of the organization toward the common objectives. 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. 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. which makes it difficult for employees to contribute to successful implementation.

Insufficient or false resource deployment .Strategic alternative Progress control of Strategy implementation . Strategic control (Source Lombriser/Alplanalp.internal development .Industry Review of strategy Effectiveness .Market .Unexpected resistance New or adapted objectives and strategies .Success factors .Lack of efficiency.Environment . contribution of strategy to the long-term success.external development Review of Strategy Premises .113 − The progress control of the strategy implementation Early detection . ethical aspect of strategy.Strategic objective setting (too low / high) Areas of causes (cont. 2006) .Changes of premises . mid-term and long-term strategic objectives.Immediate measures . lack of performance . 2005) 113 Institutionalization of a regular strategy check. integration of fundamental requirements of the vision. market.) . 2005): − Change in the relevant business environment (overall politico-economic environment.Progress of measures and projects Elaboration of causes for current or future divergences Areas of causes . lack of motivation. feasibility of strategy. consistency of strategies. comprehensiveness of strategy proposal.138 The process of monitoring strategy implementation has to include the following areas (Lombriser/Alplanalp.Achievement of objectives (qualitative and quantitative) .Set of measures or of projects Figure 4-9. negative consequences of the worst case scenarios is considered (Hilb. − Review of the strategy effectiveness including the success factors and the strategic alternatives.Insufficient or false strategy . 2005. industry) and its impact on the company and its incorporation into the strategy implementation process. Hilb.Too ambitious project objectives .

monitoring committee. 3. . Committee for Nomination & Remuneration. 4. strategy committee. Figure 4-10. 12. illustrates the firms with committees. 8% Compensation. After this step. 32% Others. 13% Figure 4-10.139 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. Audit committee. we take a closer look at the Committees at the Board level (such as Audit Committee resp. 13% had Compensation committee (5 firms). 5. Committees at the Board level In our First Survey.4. Risk Management Committee) and also at the level of top management. the necessity of developing new (or revised) objectives and strategies should also be decided. 8% had Nomination committee (3 firms). 47% Nomination committee. 47% had several committees (18 firms)114. Investment committee. internal Audit Function. 18. 32% had Audit committees (12 firms).2 Organisational Structure and Governance Current situation: In this section.

115 According to the Chairman of Bank2. Investment Committee. This served as a way to mitigate risk. the CEO represented the interests of customers. He made decisions and represents the CEO when the CEO was unavailable. neither the Chairman nor the CEO was more important than the other person. and knowledge of accounting and financial management. 116 The Top Management team of Bank2 consisted of a CEO and 6 Deputy CEOs. They could co-operate with the Auditing Committee which included Internal Auditing Department and the External Auditing Teams. He served the role of a co-CEO. However. At this bank. They were representatives of the shareholders. the members of the Supervisory Board must have the following abilities: successful track records. i.116 They were usually independent. employees and society. integrity. they needed to be approved by the Board of Directors.140 Bank1: The Supervisory Board was elected by the Annual General Meeting (AGM). shareholders. While the Chairman was the legal representative of the bank at the State Bank of Vietnam and other governmental authorities. One of the Deputy CEOs was a standing member. They could give their recommendations to the BoD and Top Management.e. they were not employees or executive members of the bank. . It is also interesting to note that the members of the top management were not on the Board. They acted as a team to bring the benefit to stakeholders. The Chairman and the CEO had clearly distinguished responsibilities and duties. who could represent the CEO in all matters as needed. These two committees were composed of the members of the BoD and top management. The remaining 5 Deputy CEOs were also the heads of different divisions. Some of them had an office at the bank. Bank2: On the level of the BoD there were the following committees: Credit Committee.115 The Supervisory Board was elected by the shareholders at the AGM. but they had to report directly to the AGM.

he was represented by a “mobile” director from headquarters. of which 2 were women and 3 were expatriates. 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. . The “mobile” director had to write a field report to the BoD and top management. The reason. . The assignment period was also limited to four years at most. Therefore. Committees at Bank2 Bank3: The bank has recently become a listed company. they returned to headquarters and attended a three-month-training programme. the BoD had to act in the interest of the stakeholder groups. they were under observation of the Nomination Committee and Remuneration Committee. customers are considered as partners.117 The board consisted of 11 members. During this time. to the employees. Another special regulation was that each year. to the shareholders. Afterwards. than his deputy had to be a woman or vice versa. The deputy was not allowed to represent him. they could either return to their former position or were transferred to another position. After the period of four years. each branch director had to take a three-week vacation. if the position of the director was a man. 117 According to the chairman. not stakeholders.a definition that indicated that the concept of stakeholders is not yet clear. The benefit to deliver to the stakeholder groups is understood as added value to the public. During the training programme. according to the chairman. was that they had to complement each other. The bank also had a special appointment policy: in top and middle management.

the Supervisory Board should be composed of at least three to five members. the Supervisory Board of the Bank was appointed by the SBV-Governor. but usually. However.142 Bank4: There were several Governmental entities involved in the ownership of SOCBs (see Figure 4-12.). According to the Chairman. such policies were not applicable in a rapidly changing environment. 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). this Bank had only one. professional and sound Corporate Governance complying with international standards can be established after a successful equitization projected for 2008. The BoD was responsible for setting the policies. The Ministry of Finance provided capital. and also Figure 2-3. the SBV set the guidelines and managed the SOCBs. Conflicts between the BoD and the top management in SOCBs were thus inevitable: As this bank was a SOCB. but they did not have adequate authorities to adjust the outdated policies. Corporate structure of a SOCB based on the example of Bank4 . 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. And the Supervisory Board had to report directly to the Chairman. According to the legal requirements. Top management had to implement such policies.

They are appointed by AGM. Again in the VCCI-Survey. they report directly to the chairman. The AGM also decides on their remuneration. The reason is unknown. they report to the AGM. this group is in the first position. They do not have another position in the company. all the members are female. which might impair their objectiveness and independence. and 23% do not have an audit committee or an internal audit function. however. 9% of companies have an Audit Committee. but practically. Financial Institutions (FIS) are in second position. Companies in the VCCI-Survey with an internal audit function .143 Bank5: It is also interesting to know that in the Supervisory board. 75% of participating pharmaceutical companies have an internal audit function. Theoretically. Companies in transportation. they do not have an Audit Committee. however the Committee Members are also members of top management. Audit Committee: the internal Audit Function According to the VCCI-Survey 38% of companies have an internal audit function. 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. trading or telecommunication industry have a relatively low proportion of companies with an internal audit function. with 56%.

Bank4: The bank did not have an Audit Committee. Except for the credit risk. they considered the business of the bank as not being risky. 2006) Bank3: At the Board level. but only an Internal Auditing team. most of the respondents came from listed or soon to be listed companies: according to our question 2 – out of 45 companies. This team consists of 11 members and is under the CEO. The BoD consisted of four members. only two members were responsible for strategic and operational tasks and duties. However. the Internal Auditing team was right under the CEO and reported directly to him. There was no Risk Committee and the function of Risk Management was also not available. The NPL is 1. They also worked closely with the external audit company. 12 were listed. 118 Foreign 19% Joint Stock 37% Private 16% SOEs 28% Figure 4-14. meaning that they did not have any responsibilities on the board. The remaining two members were “decoration”. Companies which do not have Audit committees (Source: VCCI. Bank4: The interviewed bank was one of the five SOCBs.144 The stock exchange required the establishment of control and supervisory mechanisms such as “internal audit and control”. 119 Bad debt is defined according to the law as when the borrowers are not able to pay back . 20 will soon be listed and only 13 will not be listed.38 %. At the level of top management. the Audit Committee was composed of four completely independent members and reported to the Supervisory Board.119 118 In our First Survey.

85% of the companies which participated in the survey perform risk assessment when setting strategic objectives. 120 In the banking industry. Bank2 told the following story: “There was a rumour in the market. In our Second Survey. . Instead of making a one-year contract with the borrower. However. only 50% of them (23 companies) prioritize risks according to the likelihood of occurrence and the impact on the organization. Now the bank uses a method to circumvent the legal regulations mentioned before. In the SOCBs. that the CEO of the bank stole a large amount of cash and disap- within 12 months after the redemption date. In the worst case.by the related governmental authorities.120 Risk Management Committee According to the VCCI-Survey. there has been an essential improvement in the last 12 months in the JSCBs: The Audit Committee was located at the level of Board.145 According to our Second Survey. Invalids and Social Affairs. 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. 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. and 38% of these companies do not have any formal risk assessment process at all. only very few of them (27% companies) can identify both inherent risk and residual risk within their risk assessment process. the bank can get its lending in the third year: Such lending is not considered according to the law as Bad Debt. what was the biggest risk that bank had experienced recently. the bank fixes the lending period for three years. it is the State Bank of Vietnam together with the Ministry of Finance and the Ministry for Labours. there is still no Nomination and Compensation committee at company level – the decision is made at ministerial level . However. Although 85% of the companies stated that they do perform a risk assessment when setting strategic objectives. However. the bank informs the borrower that it will get back the lending sum within one year.

Within hours. the bank had learned that they had to pay attention to public relations and be able to handle crisis management. Furthermore. and the public believed that the bank must be in big trouble. Bank3: This bank has introduced new functions to cover risk management. They can also approve extraordinary transactions outside the normal course of business of the bank. the customers stormed the bank and withdrew their deposits. A few hours later. it did not pay attention. Bank3 has also not empowered the Risk Management Centre with the management of liquidity risk that remains the responsibility of the Planning Department. the shareholders or investors in the company have a specific and limited role. the public found a dead cat in front of the bank’s headquarters – according to the belief of local people. The bank knew the story and as it turned out to be just a rumour. This bank has not constituted an ALCO. Besides. but also on other issues separately to all head office departments. the Risk Management process still has a lot of room for improvement. and a Treasury Department. because it considered it irrelevant. the dead cat was still there. They receive the Annual Report and Accounts and are motivated to ask questions. the shareholders have no role in the management and decision making of the bank.” From that time on. Our suggestions: According to the Vietnamese regulations (see Decree 49). This bank has not introduced an Organisation and Methods Department to standardise procedural development that remains within the domain of individual departments. . Bank3 has not introduced a Branch Operations Department with the consequence that branches still report not only on risks. NPL management through an Asset Management Company. However. The shareholders’ general meeting should also appoint members of the Board of Directors and set their salaries. a dead cat is a symbol of an unlucky event. 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. Also in other banks. which almost led the bank to illiquidity and disaster. One morning.146 peared.

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.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. management and operation of the bank in the interests of all stakeholders.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. the profitability of the bank and the policies and structure of the bank (ING-Report. The Board of Directors The Board of Directors has a primary duty to protect the interests of all stakeholders in the bank. 29). The BoD is a senior decision making body of the bank (usually comprises of 7 or 9 experienced and knowledgeable professionals). a compensation committee. currently an audit committee. 2006). 121 They are not responsible for the implementation of these policies. This may force the directors to agree to a greater degree of risk than is prudent and deplete the capital adequacy of the bank. The BoD decides on all important issues relating to the organization. Committees of the Board of Directors The Board shall has at least the committees required by the rules of the NYSE. . a nominating committee. just for ensuring that their decisions are actually implemented (ING-Report. The investors. in particular the depositors. 2006). 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. 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. which may be a better term to use than shareholders. and a risk resolution committee.

Therefore. the supervisory committee should report directly to the shareholders’ general meeting so that if any fraud is found within the bank. 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. to ensure that the members of the supervisory board are not exposed to undue pressure.148 Shareholder General Meeting Board of Directors Supervisory Committee (Audit Committee) Nomination Committee Top Management Risk Resolution Committee Remuneratio Committee Figure 4-15. 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. Thus. . they should not work in the company. it can be reported to the highest authority in the bank without any interference. especially under the CEO. the shareholders have to have a real interest to engage in the company and also assume their power. In this case. the BoD and top management would approve only those candidates. However. but by the shareholder general meeting. who are also representatives of the interests of the BoD and top management. the members of supervisory committee must be approved by the BoD and by the top management. Furthermore. Certainly. in Vietnam in some cases.

In our view. the Committee for Nomination & Remuneration would also include making recommendations on the remuneration and development of directors. Risk Management Committee).). they should also have a larger role in approving the policies for general credit. Asset and Liability Committee. Some Heads of Department are also members of the Board of Management. IT Steering Committee.g. However. 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. Credit Committee. but also members of the board and the top management. market and operational risk of the bank and subsidiaries. . The Committee for Nomination & Remuneration recommends appointments to the Board of Directors for the approval of shareholders. Top Management Top management is responsible for the day-to-day operation of the bank. 2005. It consists entirely of executives of the bank. A formal performance assessment of the board members should be conducted by the chairman – this can be an informal feedback talk (Hilb. 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.149 Committee for Nomination & Remuneration The Committee for Nomination & Remuneration will identify possible candidates for the roles of chairman. The top management has a number of committees to assist them in their daily decision making. 2005).

the CEO is also responsible for the implementation of all decisions and the smooth day-to-day running of the bank. In Vietnam the CEO is usually a member of the Board of Directors. Treasury and Trading Group are given limits within which to trade. None of its authorities are delegated. the CEO should also be member of board. Due to the decision power and “hands-on” experience of the BoD and the CEO. . funding. 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). Until now. liquidity.150 BoD Top Management ALCO Credit Committee Risk Management Committee IT Steering Committee Figure 4-16. ALCO (Asset and Liability Committee) ALCO approves all policies and limits relating to capital adequacy. 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). Committees on the Top Management level The Chief Executive Officer (CEO) The CEO is the head of the executive management of the bank. Furthermore. Therefore we propose that at least in the years to come. However. the BoD still has a high reputation in the business world. the company size in Vietnam is still on a small scale. The CEO also proposes and supports all initiatives submitted to the Board of Directors. Moreover.

The IT Steering Committee The decisions to be made regarding IT are highly complex and usually very expensive. develop a reliable IT structure enabling the implementation of all future systems and applications. 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). The IT Committee usually comprises of a member of the Board of Management as Chairman. make a cost benefit analysis and selection. Moreover in Vietnam. 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. The bank should investigate the current and future possibilities in hardware and communication infrastructure. and makes recommendations to the Board of Management prior to approval of the Board of Directors. in particular the IT strategy and development programme. the development level of IT is still in a very early stage. market and operational risk.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. 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 top management cannot be expected to be technical experts. these are closely looked at by the Market Risk Management Department of the Risk Management Group. the Chief Financial Officer and possibly a representative of the external auditor. and install a communication network to all branches. The IT Committee looks at all issues regarding IT. . the head of IT. The Credit Committee The Credit Committee is the senior decision making body on all individual credit limits.

Furthermore.152 The RMC also recommends to the Risk Resolution Committee of the Board of Directors the general credit. to propose a framework within which the bank takes credit. structure of the balance sheet and open market positions etc. . interest rate. mainly the Chief Risk Officer. market and operational risks. commodity and equity open positions being run by the bank and proposes trading and Asset and Liability Management limits to the ALCO. liquidity. foreign currency. market and operational risk policies of the bank and subsidiaries. its competitiveness in the face of increasing international competition and the maximization of profits. Risk Management Group (See also ING-Report. 2006) Primary responsibility rests with the Risk Management Group. These proposals are then approved by the Risk Management Committee of the Board of Management and ratified by the Risk Resolution Committee. Market Risk Management Division This division measures the liquidity. Risk Management can become a core competence of the banks to build the long term stability of the bank. 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. the RMC monitors the quality and composition of the loan portfolio and ties it in with decisions made by the ALCO on capital adequacy.

122 As a typical example of what the Credit Divisions do (ING. 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. 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. The Credit Division will have some discretionary authorities of its own or will make a recommendation to sanction the loan to a Credit Committee. customer location or customer size. the structure of the loan. The Credit Division is divided into a number of Credit Departments either by customer sector. This will include all internal treasury dealing limits such as stop-loss limits. This will include equity investments as they are loans without a maturity limit. . intra-day positions and individual dealers 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. removes the potential for conflicts of interest. the rate being charged the customer and so forth − When they are in agreement the proposal is submitted for approval. sector or country limits. − 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. clarifies reporting lines and chains of command. groups departments that are closely functionally related under the management of a deputy director. Earlier deliverables have dealt with the role of this division in considerable detail. the conclusions drawn. clearly differentiates between line management and functional relationships. group. − There may well be discussion between the Business Development Officer and the Credit Division on the credit analysis. increases the delegation of responsibility.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.122 The banks should introduce a new corporate structure that reduces spans of control to allow top management to concentrate on strategic issues. 2006). Credit Division Review all credit applications from “Front Office” Groups for individual. Facilities will be approved under discretionary limits or submitted to Credit Committee for approval.

Leadership Current situation: The results of our interviews and surveys have shown that the board members (including SOEs and SOCBs) have the following characteristics: . 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 4-18.154 4. Number of members of boards in Vietnam . 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.Nationality: National Vietnamese (there are currently no OverseasVietnamese) .3. .Professional background: Current or former chairmen / CEOs of other companies.Age: At least 45 years old .Gender: Most of them are male .Political orientation: Mostly members of the Communist Party (all board members in the SOEs and SOCBs have to be members of Communist Party).4. in non-state owned companies it is not compulsory.Education: Most of them have a university degree .

The representatives of the strategic partners (investment funds. About 38% of the responding companies had 5 board members. The representatives of employees. Bank1: The Chairman had been serving the second terms in the current position. Combined structure of the boards of directors In our Second Survey. investors with big financial stake) played more important roles on the boards.155 According to our First Survey. According to our First Survey. especially with the Chairmen their tasks and also the tasks of the Board members. One of the tasks was to co-ordinate different members of the BoD. of customers or of associations were still minorities on the Vietnamese boards. It should be mentioned here. It is interesting to note that SOCBs had a higher number than the JSCBs.2% represented the interests of the state. 70. we have discussed with the Board members. about 66. 4 banks had 9-11 members. Of the 5 banks that participated in the Second Survey.00% 30. In his stewardship.7% board members represented their shareholders’ interests and 62.00% Shareholders 30 Employee 1 State 28 Customer 1 Strategic partner 5 Others 1 Figure 4-19. he had already four CEOs working with him. the number of board members varied from 3 to 9.00% 60.00% 40.00% 10. The tasks of the Chairman were very diverse and challenging. It is to be remembered that the state was still the largest shareholder in most of the listed and largest companies in Vietnam.00% 50. 23% had 6 members and 12% have 7 members.00% 0.00% 20. that most of members considered themselves as “very .

For this reason. he was also responsible for nominating the members of the Top Management and for controlling daily expenses and costs. as representative of the shareholders he had to call for and chair the General Shareholders’ Meeting. On the other hand.156 important” for they had high positions in other companies or institutions which were investors of this bank. The Chairman was also the founder of the bank. His tasks were therefore very diverse: there were daily jobs which came up in the Bank. ratify the strategy and monitor the strategy implementation. On one hand. of which 2 were women and 3 were expatriates. was that they had to complement each other. he also had to inform them or convince them to make certain decision in informal one-to-one meetings. The Chairman considers himself as a leader. then his deputy had to be a woman or vice versa. The time he spends for the CEO position the SOE is 50 % and as chairman 50%. he had to initiate and network internally and externally in order to get the projects continued. if the position of the director was a man. The chairman was also the legal representative of the bank. Bank3: The bank has recently become a listed company. but he had to perform tasks which the members of the Top Management should do. and according to him. The bank also had a special appointment policy: in the Top and Middle Management. and not only for the profit of the investors they represented or for their own interest. Just to name . With projects of strategic relevance for the company. it was very demanding and delicate to get them working for the benefit of the bank. his task was to initiate the project. The reason. In the strategic planning project. Furthermore. according to the chairman. the Chairman had to call the board members to formal meetings. 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. He was also the Chief of Compliance Officer. It should also be mentioned here that the Chairman is also the CEO of another large SOE. Moreover. The Board consisted of 11 members. His task was also to set the strategic direction for the company. nobody could perform more efficiently.

networking skills. know how. Head the Credit Committee and be a member of the Investment Committee. the banks in Vietnam are mostly of medium size. 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. initiating a strategic planning project. Therefore. building up and maintaining relations with the local authorities and international partners. . integrity. In the case of Bank3. the solution based on only the difference of gender is also not satisfied. In order to do all these tasks efficiently. ability to convince. members of the Board and members of Top 123 The Bank also had a special appointment policy: in the Top and Middle Management. 2005).and external) should be conducted to identify the strengths and weaknesses of the board.157 some examples: opening the new branch. However. the Chairman reported that members of the Top Management should have four competences: power in par with his position. 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. so we recommend that a team of the BoD should have 5 to 7 members in order to work effectively and efficiently.123 We also recommend that there should be a clear distribution of tasks between the chairmen. the Board is well aware of the relevance of the board composition. He also chaired 5 BoD meetings a year and called the irregular meetings when something happened unexpectedly that needed dealing with immediately. if the position of the director was a man. 2005). However. and team roles (see also Hilb. a board evaluation (self. Moreover. and the number of Executive Directors must not exceed 40% of the total membership (ING-Report. Bank5: The task of the Chairman is to take care of the strategic planning and supervise the (daily) operations of the Top Management. selecting providers of technology and services. Our suggestions: There is no such thing as an ideal board composition.

The Board is usually responsible for setting out the bank’s policies and business direction through participation and endorsement of its vision. 31% considered themselves as customer oriented. and budgets. Only 8% characterized themselves as bureaucratic.4 Board culture Current situation: Before we assess the culture of the board.4. and each year employees had to sign a letter confirming that they will follow the code of conduct . strategies. creating business value. the Chairmen still do most of the tasks that should be in the responsibility of the members of Top Management. 4. business plans and targets. ensuring that they are efficiently and effectively implemented by management to achieve desired results. 38% of the participating companies declared that in their company there was a code of conduct in place. and 17 % as trust oriented. and maximizing wealth to shareholders (ING-Report. mission.158 Management. we should have a closer look at the corporate culture of the companies. As stated in the banks surveyed. According to our First Survey. 2006). Corporate culture of the questioned companies In the VCCI-Survey. Others 10% Customer oriented 31% Perfomance oriented 34% Trust oriented 17% Bureaucratic 8% Figure 4-20.

the obsolete attitude of the assigned members is not accustomed to accepting the opinion of others. Usually. especially the non-executive members. most of the members are even from the same family. they have already reached a certain age that they have nothing more to lose. all of the members are not only from the same political party. . especially in the SOCBs: the culture of board reflects the obsolete attitude of the centrally planned economy. usually do not have any influence on the board’s decision and in the decision making process. management did not show a strong commitment to high ethical standards. but their individual benefit. 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. In some banks. especially when they want to achieve their personal interest. In our Second Survey. Furthermore.159 and will be responsible for any breaches of the code. Usually. Thus. The other members. The need to open up this backward looking culture is low. the members of board are assigned by the state and the omnipresent Communist Party to represent their expectations and enact their will. the culture of board in most banks is not cooperative and not performance-oriented. of the same gender but also from the same ethnicity. when the members of the BoD are appointed onto the board. because the position is considered as very prestigious. The culture of the board is obsolete and is based on the size of capital contribution. In a Bank that participated in the Second Survey. With all the SOCBs. such members give the impression of being very important. we have received another picture of the culture of the banks. like representatives of foreign investment funds. As stated in the Second Survey. but also of the board. they act according to the slogan “divide et impera” by putting the seeds of mistrust in the team. The assigned members are poorly paid. 32% did have a code of conduct but in practice. In some cases. but they did not bring the expected performance.

but across the company and also with other stakeholder groups. The goal is to build trust not only within the board. the legal enforcement is still not fully implemented. There are many cases where insider information has been misused for personal profit. 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 sensitive information is transferred to family members or friends.9% utilize at least one specific management system.1% or (5) of the 45 firms interviewed do not have (or do not utilize) any management systems. In the transition state that Vietnam is now. The other 88. but respect each other. and fight against each other. There are several regulations in Vietnam concerning these issues.5. not only of the shareholders. however. we propose to build up a culture that considers the needs and expectations of all stakeholder groups. The board members should not break into fractions. Systems utilized by BoD’s to fulfill their responsibilities It is quite interesting to read the results of the First Survey: 11. who are speculators on the stock market. 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 .160 Our suggestions: Therefore. building trust is essential as we have witnessed in the collapse of credit cooperatives around 1987 in Vietnam.4. a clear code of conduct would be very useful. In the banking sector.

Required criteria to be selected as a member of board of directors Bank1: Most of the shareholders are state-owned companies and institutions (e. we will review some of the relevant management systems utilized by bank BoDs. (4) Development of Board members and Top Management. the BoD should be made up of professionally competent members.00% 60. However. no work fulfilled!” 80.161 In the following.00% 10. which are major shareholders of the Bank1.00% 30.g. People Committee of a District in HCMC or Trade department of HCMC).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.5. 4. there were some representatives of private companies.00% 50.00% 0. Here we focus on the Human Resources Systems: (1) Selection. (3) Evaluation. According to the expectations of the chairman. this Bank is not an SOCB.00% 20. . The BoD is composed of representatives of such organizations.00% Professional competence 10 Leadership competence 8 Social competence 6 Political competence 11 Availability of a large network 34 Others: 5 Figure 4-22. (2) Remuneration. It is not surprising that there is a Vietnamese saying that “Without network.00% 70. Recently.4.00% 40.

g. their professional and social behaviour in the last period (e. According to the Chairman. Bank3: Because this bank was founded by a group of entrepreneurs. the first BoD was also composed of the founders. networking. The short listed candidates would be announced in the meeting of officers and asked in an open survey about their opinions. each development stage of the bank brought along certain problems to solve and challenges to face. the bank planned to nominate some more independent members. Bank4: As this Bank is an SOCB. Independent members have been allowed to join the board since 2007. leadership skills. professional abilities. Other selection criteria have to (besides financial contribution and a wide network) comply with the legal requirements. they must harmonize well with each other (in Vietnamese: Hùn phải hạp). It is also important to mention here that these members were entrepreneurs. The appointment criteria were as follows: First of all. such as educational background. Usually. Examples of such competencies are strategic and conceptual thinking. there was a meeting of high ranking officers of the SBV and associated SOCBs. there was no rejection or criticism of the candidates. the composition of members also had to change in order to match the new situation and developments. therefore. Then each officer proposed potential candidates for the promotion.162 Bank2: One of the selection criteria is that the members of the Board had to be the representatives of the large shareholders. 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). The meeting attendees assumed that the short- . and experience. the Board intended to nominate independent but competent members. according to the succession planning of the SBV. Thus. Each year. they usually had or needed to have according to the requirements very good reputation and certain competencies. the nominated member had been the candidate for such a position in the succession plan. If members were shareholders themselves. The Chairman has indicated that in the near future. last year). The Top Management of SBV evaluated the proposed candidates according to their abilities. their political attitudes. As they came together and invested together. Then the candidates were narrowed down to the ones with the most promising potential.

for insurance issues. the number of board members varied from 3 to 9. Nowadays. there were. then the candidates would be appointed. Due to the strict regulations of the state and owner of the bank. two ways to improve the effectiveness and efficiency of the bank: to replace key people or to change 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. The short-listed candidates would be presented to the SBV-Governor. who kept them in the succession planning database. are questionable. If the appointed key person was not competent enough to take over a position. when SOCBs has a key vacant position. in an SOCB. The unofficial one is in charge of the real issues of the HR-Department. for writing reports to the SBV.124 According to the Chairman. in order to resolve the problem. because they were appointed by the SBV-Governor. according to the Chairman. the Bank has currently two HR-Departments. This appointment process seems to be very transparent and democratic. In the first phase. From our First Survey. the SOCB.163 listed candidates were qualified based on the evaluation of the Top Management. If there were positions vacant. improvements could only be efficiently introduced after the banks would become fully equitized and especially after the Initial Public Offering (IPO). in theory. It is interesting to note that SOCBs had a higher number than the JSCBs. 125 126 . it was nearly impossible to replace the key people. they have to contact the SBV to ask them to provide Human Resources. However.125 However. This would allow the Bank to introduce a professional Corporate Governance. The appointment by the SBV is not necessarily complied with by the need of the banks concerning professional abilities.126 124 For example. when a position is vacant. if there are needs again for the key people. the state would still be a major shareholder and could therefore appoint only one or two representatives of the state on the Board. nominated a professional expert to “assist” the key person sent by the SBV-Governor or would modify slightly the organization structure. However. The official one is in charge of remuneration policies. About 38% of the responding companies had seven board members. the Bank was well aware of the shortcomings of the central appointment process.

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. 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. whether they are fully external members or former members of top management. Former executives of the bank. This enables the bank to identify the right members for a competent Board team. Example of a selection criteria list for board members (see also Hilb. with their widespread relationships. 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. 2007). However. with experience and know-how of complex business activities and processes are often in a better position to challenge management decisions. of which 2 are women and 3 are foreigners. Moreover. 2006) . We believe that this approach has many advantages. they should have gone through thorough selection criteria.164 Bank3: The board consists of 11 members.

after each Shareholder General Meeting. in the future.ubs. engineering and human resources. personal qualities and characteristics. shall extend an invitation to the nominee to join the Board and stand for election by shareholders at the Shareholder General Meeting. However. Selection of Chairman and Vice-Chairmen The Board shall. the Board shall establish criteria for the selection of new Board and Board committee members. in Vietnam social competence is more important than other competences. 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. The Board believes that the Chairman and at least one Vice Chairman should have professional backgrounds as bankers. availability and other obligations. among others. The Chairman. diversity of viewpoints. because the other business partners wish to deal especially with people with certain networks and even with a specific political background. and specific knowledge and experience for individual committee memberships” (www. Selection of Directors The Board is responsible for selecting the nominees to be proposed to the Shareholder General Meeting for election. the ability and willingness to commit adequate time to the Board and committee matters. professional backgrounds and track records. Currently.165 In the area of professional competence. The Board does not believe that it should establish a strict limitation for additional Board mandates.127 When proposing a candidate for nomination. on behalf of the Board. 127 UBS has also proposed the following: “These criteria include. appoint the Chairman and one or more Vice-Chairmen from among its members.com). we are convinced that other competences will gain their weight of relevance. . The Nominating Committee shall review the proposals to be submitted to the Board. for example candidates with IT. the Board shall assess whether other Board mandates held by the candidate could lead to conflicts of interests. Based on the recommendations of the Nominating Committee.

they already receive a salary. 18. credit committee. Bank 2: The board members did not receive a fixed salary. They have no right to purchase shares at par-value.166 4. 40% pay their members of boards with variable compensation system and only 4% of board members have an honorary position only. 2. investment committee). but an allowance for meetings which take place four times a year. 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. there are 4) receive a monthly salary.4. 56% Figure 4-24.g. 25. However. 40% Fix. . the standing members receive a fixed allowance of around US$ 1000 / month. All of the BoD members received expenses and fees of around US$ 300-500 for each meeting. The reason was that the Board members are sent by the major shareholders and from there.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. 4% Variable .5. The standing members of Board (in this bank. not as BoD members. Recently. Honorary.000 with a lock-up time of one year. Remuneration systems for board members Bank1: The non-executive members of BoD did not receive a monthly fixed salary. but as Head or Vice-head of other committees (e.

Credit Committee. 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. The Chairman and Vicechairman receive the salary as Head of Credit Committee resp.167 Bank3: All the Board members have an allowance of around US$ 20’000 a year. The standing members of the Board who are also heads of other committees (e.4. the remuneration system will be improved. Board compensation should be consistent with market practices (Hilb. In Vietnam. so he or she has to return the share at the par value plus the lending rate of the Bank. 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.5. The lock-up time is three years. 2006) but should not be set at a level that would call into question the Board’s objectivity and the independence of its members. . The executive members of the Board approve the overall compensation for the non-executive directors of the Board. but allowances.128 4. 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 a member leaves the company before. Investment Committee. and Nomination Committee) receive a regular salary. 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. Bank5: The members of Board do not have a fixed salary.g. The allowance has to be approved by the AGM.3 Evaluation of members of Board and Top Management Current situation: According to our First Survey. as head of Investment Committee. 38 % of Board members were evaluated internally. If the Bank would like to nominate two Independents Directors in the future.

and “… decide to whom a brief feedback questionnaire is to be sent for analysis” (Hilb. 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”.g. . Performance evaluation of board members Bank 2: According to our interview. 7% External evaluated. We recommend that such an assessment should be carried out by the individual as a self-assessment. According to the customs in Vietnam. 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. Our suggestions: As already conducted in one bank that was surveyed. 3% Internal evaluated. it is not common to evaluate people in such status and high ranking positions. 38% Figure 4-25. One reason is that the bank does not have an evaluation system.168 (e. until now. 2006). then between the Chairman each Board member in a so-called “Assessment Talk” (Hilb. 30% Self evaluated. 2006). Foreign evaluated. It is also possible that the Board members can “elect to have a 360 Degree Feedback Assessment by an unbiased consulting firm”. 22% Not evaluated yet. 22% were evaluated by external consultants and 30% of the Vietnamese boards had not been evaluated. it is also possible that the Board members can be assessed by the Chairman. this will change soon when the bank intends to hire additional independent members. by customers or by the governmental authorities). no board member evaluation has been conducted. However. however.

10% Finance & Controlling . Eastern Germany or Russia. 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. 3 . 3% Figure 4-26. followed by Finance & Controlling with 15 % and by Auditing with 13 %. In other words. 9.169 4. but also help to make the undertaking of his or her tasks in the company more effective and efficient. 2. 15% Auditing . Some of them had a educational background as engineers or as economists but trained in the former socialistic countries such as Poland. 5% Risk Management . the needs for the development of board members can be identified by the “Assessment of Board Members”. 6.4. 13% Marketing . it should also bring the benefit to the company and not just be a measure to “motivate” the board members. Others. 8. 9.5. 19% Information Technology . 4 . 12. 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. 15% Strategic Management . 13% Human Resources. Desired topic of advanced training for the members of boards Our suggestions: Ideally. The development measures should bring the benefit not only to the board members. 7% 36 Stratagems . . 8.4 Development of board members Current situation: It is obvious that the training situation for the members of boards can be significantly improved.

The banks should also carry out a training needs assessment and document and prioritise requirements categorised by management.33% have only 1 board meeting per year. technical and universal training needs.33% of the firms interviewed have 4 board meetings. and staff understand and work towards these objectives and know what they need to do to achieve the objectives. there are quite few banks which have implemented clear and effective communication procedures. 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. 20% have 2 board meetings and 13. In several cases.6 Information and communications Current situation: Company-wide communication According to our Second Surveys. the top management must be responsible for these communication errors. the banks should define and document the procedures for training needs assessment consistent with the board development policy. The banks should contract with consultants for the preparation of courses and course materials.170 To do so.44% Vietnamese boards hold a meeting only if it is required.4. The reason is that top management has to take responsibility for their underwritten signatures.89% have 3 board meetings. Board meetings The number of board meetings varies significantly. And if any communication troubles appear. The VCCI-Survey also found out that only 53% of the companies communicate their enterprise-wide objectives to all employees. supervising and guiding the development as required. Furthermore. 4. About 33. . It is also interesting to note that 24. the standing members of the BoD advise the top management just verbally about their decisions. 8.

only 62% of joint stock firms did the same. nonetheless routinely attended Board of Management meetings. and written minutes are prepared and approved after each meeting. 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. This was true for more than three-quarters of equitized companies and half of the joint stock firms surveyed. 15. Across the sub-sample on non-SOEs. The main reason for this fact is that. if management does not follow the company’s policies and organization chart. 13% 3 board meeting per year . 9% 2 board meeting per year. 24% 4 board meeting per year . 34% 1 board meeting per year . with 35% saying that their Board meetings are more informally structured. Virtually all of the equitized firms surveyed have formal agendas prepared and circulated before.171 Only when needed. 4. 20% Figure 4-27. who were not members of the Board. 11. relevant information may not be identified and communicated in a timely manner to decision makers. . Board of Management meetings. although more than 90% prepared and approved minutes. roughly 65% of firms conceded that senior executives. 9. However. 6. Number of board meetings per year According to the IFC-Survey.

. The meetings should be wellprepared. the chairman and the CEO discuss all information arising out of the meeting that should be forwarded to the management. As already known from the Banks that participated in the interviews. and an organization chart showing detailed reporting lines. (6) clearly state proportions of votes or breakdown of opinions. which should take place on pre-determined days. Management of the company should follow the policies and procedures put in practice. (4) formulate motions clearly. At the end of the board session. Board meetings We recommend that there should be formal internal meetings.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. (9) propose a schedule of communication. (5) deal with important issues first. Best practices show that to ensure the effectiveness of information and communication flow the company would have to have clear procedures on information flows.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. 2006). (7) keep to schedule (8) explain the context and highlight the implication of each item. (10) assess and define confidentiality. cited in Hilb. 2005) recommends the following methods for directing meetings: (1) assume preparation. which makes it difficult for employees to contribute to successful implementation. the Top Management even keeps their vision and strategies secret.” It is important to know that “80 to 90 percent of the chairman’s role happens outside of board meetings (Ward. (2) introduce each agenda item. the relevant information cannot be identified and communicated in a timely manner to the company’s management. 129 Müller (cited in Hilb. (3) integrate or synthesize the contributions. The bank must ensure that employees are willing and able to implement strategies for example by making the information available.

implementation and evaluation Corporate Governance. partners and communities.5 Recommendations mainly for the banking sector We have conducted the empirical research based on the two surveys according to the “areas of focus”. shareholders. that many areas in the corporate governance can be significantly improved. If the country’s corporate sector wants to avoid the repetition of scandals in the future.173 4. 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. sustainable. By saying that. we recommend that any change in the “areas of focus” should factor in the interests of the stakeholder groups. both. in international markets as well as in an increasingly liberalized domestic market. these two surveys provided only fragments of the complex issue of Corporate Governance. and wants to create efficient and competitive business entities which can compete successfully with their overseas peers. customers. such as employees. we hope that our recommendations would help to improve the corporate situation in Vietnam. In order to achieve these goals. For the successful development. then they have to create a more robust. . That is the reason why we also included surveys conducted by others in order to deliver a complete picture. However. larger business. it is important to introduce and implement a modern approach to corporate governance practices . In our surveys we have found out.the New Corporate Governance.

He should not get involved (too much) in the daily business as it is the case in Vietnam. The external consultants can help with project management. The size of the Board should be lean enough that problems can be discussed effectively and efficiently and decisions can be made quickly. Composition of the Board should reflect not only demographic data. There should be a clear distribution of tasks between the chairman and other board members and members of top management. clarifies reporting lines and chains of command.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. 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. transparency and accountability. Until now in Vietnam. The board structure should be designed that the interests of all stakeholders are considered and protected. increase the delegation of responsibility. removes the potential for conflicts of interests that is common in Vietnam. only the interests of the owners / shareholders are considered. - Board Structure: - - - Leadership: - - . but also the know-how and team-roles. 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. with planning methods and support in the decision making process. clearly differentiates between line management and functional relationships. 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.

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). According to Hilb (2005). Systems: - - Processes: - - Information and Communication: - - Figure 4-28. communication should follow 4 principles: (1) completeness. profiled briefly in ‘Recommendations on Good Corporate Governance Practices in Vietnam’. The adequate processes and procedures help to “do the right things” but also to “do the things right”. 130 For example. State-of-the-art systems can also help to provide the employees with the necessary knowledge and skills that serve as motivation for them.A company’s efficiency and operational performance. Most of the banks have somehow certain management systems. (2) objectivity. 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: . . the systems should help to make the company transparent. 3. The banks must ensure that the stakeholders receive the required information that they can contribute to the success of the company. Process structure determines which tasks and in which sequential order they have to be accomplished. However. p. Information and communication is still a huge challenge for most companies in Vietnam. thus increasing the benefit for all the stakeholders. (3) comprehensibility. see studies by CLSA. effective and efficient. business processes and support processes. McKinsey and the World Bank.

”131 As a consequence.The reduction of risk related to its day-to-day operations.The degree to which it can protect itself from corrupt practices. particularly from investors and capital markets. 14. p. .Its compliance with laws and regulations. Put another way. The cumulative result can be “larger investment. and greater employment creation. in firms that display poor corporate governance practices. .132 131 ‘Corporate Governance and Development’.Its ability to access finance. and .176 . higher growth. or may simply choose not to invest at all. 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. investors will pay less. companies that adhere to higher standards of corporate governance tend to be rewarded with lower costs of capital and higher share price valuations. . 132 Conversely.

SWOT / CBI 4.Secondary data analysis . more readily. it is important to find out.2 Internal Context 4.2 Board Board Compensation Culture 5.3 Structure 4.1 Board controlled Board External Development Feedback 4. It would probably be better to identify and focus on specific.1 Environment 3. teaching.1 Governance theories 2.3 Industry 4.2 Keep it 1. Also.3 Practice 3. and where the optimum gains from such interventions could.4 Summary K Figure 5-1. .4 3.1 Background 5.1 Composition Auditing Mgmt 3.4 Conclusion 1.1 Risk Board 4. the concept is not yet well established or well understood in Vietnam. In this sense.1 Research 4. we conclude with some recommendations to promote better corporate governance practices in Vietnam.2 First survey 3.177 CHAPTER 5: IMPLICATIONS Based on the analysis and survey findings outlined in the previous sections.4 Research approach 1. we should keep in mind that the concept of corporate governance is a relatively broad one. be achieved.5 Conclusion 2.2 Characteristics Chapter 3: Secondary Data Analysis Chapter 4: Primary Data Analysis Chapter 5: Implications 1.4 CommuniControlling cation 2. Chapter 1: Introduction Chapter 2: Theory about Corporate Governance 2. Therefore. it should be emphasized again that the term “Corporate Governance” is very new in Vietnam.2 2.5 Recommendations 1. 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. and practice.3 Second survey S ituational 2.2 Objectives 2.3 Structure 2.3 Research framework . where the most pressing needs for intervention are.1 Background 3.4 Board Vision 3.3 Context 4. Structure of the thesis – overview Chapter 5 In this part.Primary data analysis 4.2 Teaching 1.1 Board Selection S trategic I ntegrated 1.3 Board 3. and that it often seems to mean different things to different people. However.4.2 Market 5. we want to highlight the implications for research.

. Other industries in Vietnam. Family Businesses. unclear roles and tasks of the members of the Board and of committees as well as of top management.178 5. 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. hospitals. but not in details. customers.1 Implications for research As this survey represents one of the first research projects on corporate governance in Vietnam. there is. clearly. a need for further. In particular. such as employees. However. In this research. In the non-state sector. and Cooperatives also need to be included in future research. such as schools. SMEs. 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. In the SOE sector. 2005). In doing so. 2006). 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. we have identified problems such as ambivalent cultures of the Board. the roles of diverse stakeholder groups. we deliberately tried to span most of the corporate governance issues that are proposed in the concept “New Corporate Governance” by Martin Hilb (Hilb. minority shareholders. potential conflicts of interest. have been discussed. These groups in Vietnam need to be further researched. confused board structures. we hope we have been able to identify some of the specific areas where there is a greater need for intervention and initiative. society. more focused diagnostic studies on this topic in Vietnam.

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. In 2003. Auditing and Accounting and modern tools of Human Resource Management.Implementation campaigns. it is also necessary to design targeted board programs. but also future members. . 2006): . 19 November 2003 cited in IFC. Risk Management. 2 Implications for teaching In our study. Change Management. of supervisory boards and of top management.Advocacy work in promoting good corporate governance practices within the business community. of training programs and public awareness 133 It does not make sense to have created the functions of the BoD. Furthermore. 2005. of supervisory boards and also of top management need practical training in specific corporate governance themes and issues such as Strategic Management. These board programs should not only be for people who are already members of boards. we also found out. Educational Governance. . Hospital Governance. such as Bank Governance. Supervisory Boards and Committees if the members are not sufficiently trained to perform their duties adequately. Singapore. there is a need to support policy and legislative interventions which are intended to strengthen the legal and regulatory framework for corporate governance. 212).in addition to their full-time jobs. These efforts include a range of initiatives (see also IFC-Report. 2006). Governance for SMEs (Hilb. In addition. that the members of boards. with some individuals sitting on ten or more company boards . Singapore found that a boom in initial public offerings had resulted in a shortage of board directors.179 5. (See also The Business Times. to broaden the pool of qualified and capable individuals who can serve as members of boards in the future.

it may be advisable to focus particular attention on (equitised) SOEs. implementation and evaluation of corporate governance. Vietcombank. Therefore. we recommend that any change in the area of focus should factor in the interests of the stakeholders groups. The equitisation process does seem to be a vehicle for advancing good corporate governance standards within firms in Vietnam. there are currently 3. culture of board. It is worth stressing that the largest companies in Vietnam will become equitised SOEs for example.600 equitised SOEs and there are an additional 1.500 expected to be equitized by 2010 (Vietnam Tiger Fund. Sabeco and Habeco.3 Implications for practice As pointed out earlier in the paper. more non-state firms will develop into large corporate entities. 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. such as vision and strategy. 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. their immediate need to improve such practices is clearly limited. that the pursuit of better corporate governance practices converges with the ongoing equitisation campaign. leadership. However at present. processes. information and communication. 2007). structure of board. the majority of which tend to be SOEs. For the successful development. which depend partly on good corporate governance. 134 Notwithstanding their future growth and sustainable development prospects. VMS. As the private sector 134 in Vietnam matures and expands. We are confident.180 5. systems. . BIDV. Our survey results suggest several areas of focus for future progress. any efforts to improve corporate governance standards in Vietnam should focus initially on larger business entities.

181

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.

135

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.

183

ANNEX ANNEX I : Interviewers List ANNEX II : First Survey ANNEX III : Second Survey Reference

184

Annex I: Interviewers list

No.
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

Organization

Locations Remarks

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

7

HCMC

8

Dr. Le Van Hung Mr. Lawrence J. Wolfe Mr. Nguyen Thanh Long

Hanoi

9

HCMC

10

Eximbank Halong Canned Food Stock Corporation Hanoi Construction Investment Holcim Vietnam Holcim Vietnam

HCMC

11

Mr. Tran Xuan My

HCMC

12

Ms. Nguyen Thi Hoa Mr. Nguyen Trung Hau Ms. Nguyen Anh Hoa

Hanoi

Chairwoman/CEO

13 14

HCMC HCMC

Terminal Manager HR Manager

Pierre Schaufelberger 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. 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. Cao Si Kiem State Bank of Vietnam Hanoi 27 Mr.185 15 Beat Waefler Honorar Consul Mr. Dang Thanh Binh State Bank of Vietnam Hanoi 28 Dr. Le Anh Thi Mr. Le Duc Thuan Mr. Le Van Be Mr. Nguyen Ho Nam Mr. Huynh Nam Dung MHB HCMC 18 Mr. Dao Van Thinh Dr. 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. Le Xuan Nghia State Bank of Vietnam Hanoi .

Do Cong Chinh Viet A Bank HCMC 37 Mr. Nguyen Dinh Son Hanoi 33 Mr. Nguyen Thi Phong Huyen HCMC 39 HCMC . Nguyen Hoa Binh Vietcombank Vietnam Buddhist University Vigatexco Hanoi 38 Dr. Pham Van Hung Viet A Bank HCMC 36 Mr. Dao Le Minh State Securities Commission State Treasury/ Ministry of Finance Thang Long Securities Company VIB Hanoi 32 Mr.186 29 Ms. Nguyen Duc Thang HCMC 34 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. Tran Quoc Tuan State Securities Commission HCMC 31 Dr. 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.

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 5.187 ANNEX II: First Survey Questionnaire of Corporate Governance January 6th 2006 Questions 1. Which system do you apply in your board of directors: Strategic planning Monitoring system Strategic control for evaluation of the strategic implementation . How many members of board are there in your company: members? 3. Ist your company listed on the stock exchange? Yes Intended in the future No 4.

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. 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: .

Which group of stakeholders have representative in the board of directors? – (You could choose more than one answer) Shareholders Employee State Costumer Others: 10.189 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. How is the structure of remuneration system of the members of boards? Fix Variable Honorary (without compensation) Others: 12. when we have needs . How often is the board meeting in your company? One for year Only.

Very fast asset growth in the last 5 years . Relationship to political decision makers e.ROE .Age .Revenue growth (2005-2006) . e.Net Profit Margin .Strategic partnership e.Best mortgage bank Weaknesses.Sales per Strategic Busines Unit): .year to be equitized / listed .g.Complement capital resources .EBT (USD) .Number of branches .PE .Number of employees .190 ANNEX III: Second Survey Fact sheet [COMPANY] Descriptions Remarks Criteria About the bank . e.Strong capital basic .Strong hidden reserves .Education Special abilities .Sales (USD) .Low profitability ratios .g.Non Performance Loans (NPL) ratio .gender .Number of members of BoD .Future perspective About the BoD .Shareholder's equity (chartered capital) .Rapid expansion of branch-network .g.Lack of product diversity Concentration of funding base Narrow geographical focus Lack of professional and high-potentials .ROA .Types of company forms: .Primitive Asset / Liability Management .Founding year: .No suitable IT system .g. .Products (or Strategic Business Units): .g. new businesses e. with foreign banks Strengths.Name of the bank: .Low reputation .Weak credit management system .Support from government and SBV . .Pretax profit margin .

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 1.1 Clarity of vision and values 1.2 Involvement of BoD in the setting of vision 1.5 Involvement of BoD in the implementation of strategy 1.b Please indicate the values of your company: 1. if indicated "unsatisfied or very unsatisfied" Unsatisfied Important Satisfied .4 Involvement of BoD in the decision of strategic course 1.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.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.

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. 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. like money brokering. Vietnam will fulfill the national treatment under BTA. especially on US banks. under which there will be no more restrictions. trade in derivatives. strategic partnership)? 3 By 2010. Joint-Ventures. branches.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. given the possibilities provided ty technology and other development? 6 Does your bank have a strategy to diversify into new services? .

a Please indicate the greatest risks of the bank: 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.b Please indicate the greatest opportunities: 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 .

5 Effective performance of N&RC 3.1 Enforcement of strategy-compliant company structure 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 3.3 Effective decision-implementation 3.6 Effective performance of BS&RC 3.4 Effective performance of Audit Committee 3.7 Supervision of control mechanisms of the group 1 What would you suggest to improve the satisfaction rate.2 Delegation of authority to senior management 3.

7 Checks and balances throughout the board 4.5 Constructive communication with management 4.196 ANNEX III: Second Survey Importance Very unimportant Very important Unimportant Satisfaction Very unsatisfied Very satisfied 4 Board culture 4.3 Culture of trust of the board 4.6 Participative decision-finding approach 4.8 Integrity of board members What would you suggest to improve the satisfaction rate.1 Clarity of code of ethical conduct 4. if indicated "unsatisfied or very unsatisfied" Unsatisfied Important Satisfied .2 Team spirit of the board 4.4 Skills to consider the opinion of management 4.

Integrity 4 5.Functional competences .years with working experience .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? .4 Balanced composition based on market know how 5.Political networking .highest title acquired .level .Leadership quality .3 Balanced composition based on functional competences 5.2 Board diversity 5.1 Optimal number of board members 1 2 3 4 Unsatisfied Important Satisfied 5 What would you suggest to improve the satisfaction rate.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.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 .Product know-how .Educational background . if indicated "unsatisfied or very unsatisfied" .Market know-how .functional focus area o Professional backgound .

4 Control tasks of chairman 6.1 Leadership role 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.3 Optimal use of relevant communication technologies 6.6 Optimal number of meetings of NRC 6. not too little)? 4 Does the board get regular information on non-financial indicators (e. market shares.2 Chairing of board meetings 6.8 Records of board meetings 1 Does the board get regular (e.5 Optimal number of meetings of Audit Committee 6.g.7 Optimal number of meetings of BS & RC 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. profitability.g.7 Initation of use of external consultants by board 6. employee satisfaction. cash flow.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. liquidity)? 3 Is the extent of the reporting fine-tuned (not to much. if indicated "unsatisfied or very unsatisfied" Unsatisfied Important Satisfied .

1 Professional selection of board members 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 7.9 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 7.2 Professional selection of senior management 7.7 Executive training of board members 7.3 Fair performance evaluation of board members 7.4 Fair performance evaluation of senior management 7.

1 Optimal representation of shareholders interests 8.2 Optimal representation of interests of key customers 8.9 Prepared response to potential take-over offer 1 What would you suggest to improve the satisfaction rate.6 External audit 8.4 Optimal handling of public relations 8.8 Communication between external and internal audit 8. if indicated "unsatisfied or very unsatisfied" Unsatisfied Important Satisfied .5 Risk management 8.200 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 8.3 Optimal representation of interests of personnel 8.7 Internal audit 8.

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CURRICULUM VITAE
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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