7 Recommendations

Given the current status of Viet Nam’s banking system in the context of international integration,
especially WTO accession, Viet Nam is urged to work towards the liberalization in a
sequential/gradual and closely monitored fashion. In this process, the key players will include the
government or its regulatory authority, commercial banks or financial institutions, and banking
associations.

The best that the government and the banking regulators should do is to strengthen the prudential
regulations, policy transparency, accountability, and credibility for competition. It is also of vital
importance for them to take bold steps to improve the corporate governance of SOCBs that belong to
the state. The recent decision to equitize SOCBs on a pilot basis has shown a strategic move of the
Government aiming to improve the corporate governance of its banks and to create a more market-
based competitive business environment. Similar to the banking and financial sector reform of many
other developing countries, the government is expected to do more and better in some areas, and
less in others. Financial sector reform does not mean leaving everything to the market, or to privatize
all at once. Neither does it mean opening up completely to the entry of foreign financial firms or
capital flows without a robust regulatory system43. There is a vast body of literature that suggests
caution with deposit insurance schemes, since this can be a recipe for moral hazard and less
supervision by the market. The removal of state ownership should be the main target of the
government as it has been proven elsewhere that state ownership triggers less financial sector
development, lower productivity, higher interest spread, less private credit, less non-bank financial
development, greater concentration of credit, and a tendency towards more crisis and less
monitoring44. Some of these observations are found in Viet Nam too.

Banking and financial institutions, which are profit oriented private institutions like any other firms,
have incentives to make profits in a level marketplace. It is the banks themselves who are in the best
position to know what actions are needed to compete in a market where the regulatory environment is
rightly set. To improve their competitiveness, Vietnamese banks should better address their
weaknesses: inadequate human resource development efforts, inactive in searching for new market
opportunities, and development of customer benefit centered promotion strategies. At present, the
market is witnessing competition between local banks for new customers through promotional
products, bonuses for first time customers, and discount or extra benefits for using partner's products.
These promotional activities do not contribute to long term market expansion or competitiveness of
banks. In the short run, bank clients can be attracted through promotional events, however, in the
long run, customers want credibility and safety for their money.

The banking association, like any other professional association, has a role to play in protecting the
interests of its members and to maintain a dialogue with the government, to lobby in international
trade talks, to share information among members, and to conduct market research or surveys in the
industry. This can be realized if the members understand and support its activities. In many advanced
economies, business associations are regarded as powerful bodies with a strong voice in policy
advocacy or trade negotiations. This is not the case in Viet Nam, where the association was set up as
a quasi-government arm for state-owned banks with less participation of recently established non-
state banks. Therefore, it is necessary to re-affirm the role of the association among all banking
institutions, especially the strong and most competitive ones.

In line with the findings of the study, the Consultant proposes recommendations in four areas legal
and policy framework, development strategy, governance and operation, and other inter-sectoral
issues.

43
Caprio, G., Rethinking the Government's Role in Finance, 1999.
44
Caprio, G., Rethinking the Government's Role in Finance, 1999.

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