by Ms. Nguyen Thi Hanh 
(Sasakawa Peace Foundation)

  Financial intermediaries in Vietnam: current performance and directions for improvement 

Paper (PDF 875KB) / Presentation slides (PPT 406 KB)  .....MORE

Summary:

In the JVEC's twelve workshop on June 26, 2004 Ms. Nguyen Thi Hanh presented her research on "current situations of Vietnamese financial banking system." This was part of her master thesis completed two years ago at University of Tokyo.

An outline of the Vietnamese financial system was first introduced. Institutionally, three major blocks composed the system: (i) banking system with the four dominating state owned commercial banks (the Four Bigs), and other deposit organizations including Vietnam Postal Saving Company (VPSC) and number of People Credit Funds (PCF) spread throughout the country; (ii) non-deposit financial institutions like insurance companies, leasing companies, etc…; and (iii) informal institutions including various private transactions, safe boxes and assets as real estate speculations.

It was then pointed out that one overall feature of the system was the dominance of the banking sector, which was in turn dominated by the Four Bigs. However, as statistics showed, the current situation of the banking system was not optimistic: banks' poor capital and reserve, problems of group lending and related-Party lending, poor risk management, improper accounting practices and transparency, and inadequate management skills.

The presenter then paid her attention on the facts of resource mobilization and allocation within the banking system. Data during the period of 1991-1996 were intensively employed. It was shown that, in the early 1990s, the four state owned commercial banks accounted for 90% of the country's total deposits, but this share tended to decrease continuously. In general, rural areas had limited accessibility to banks. As a result, people in these areas seemed to prefer traditional means of savings (in lands, saving boxes, etc…).

Concerning resource allocation, the paper depicts the fact that short-term loans strongly dominated the allocation of funds, along with a lack of lending skills (such as risk management and maturity transformation). At the same time, huge non-performance loans were found (13.7% in 1999), and most of them hold by SOEs. In contrast, huge bad debts in PCFs had gradually reduced since 1990, and PCFs themselves seemed to be well reformed. The research found that the allocation had been in favor of the state owned sector.

Based on the above findings, the research suggested a number of policy implications. First, the author confirmed the dominance of banking sector in the Vietnamese financial system as a proper direction for reform. Second, policies encouraging small deposits and improvement of rural accessibility to banks were required. Third, it was necessary to build a legal environment supporting private lending, and at the same time solving the issues related to SOE's non-performance loans. Fourth, financial transparency should be improved. Fifth, and the final, the author highlighted the need of improving state owned banks' competitiveness by gradual privatization and introduction of foreign banks and their equal activities in the economy.

In the discussion section, participants appreciated the paper's good data during the period of 1991-1996, and expected the data to be extended to present. Some concerned about the research's methodology and solutions suggested. It is criticized that the research lacked an analytical framework or philosophy. Although the author seemed to support the dominating role of the banking sector in the financial system, but this idea was expected to be explicitly discussed as a line of thinking at the beginning of the research, to form a solid analytical framework. It is also thought that an overall picture of the financial flows at macro level were necessary. Participants then came to discuss how to improve the competitiveness of state owned banks: whether private sector or foreign sector should play the important role. During the discussion, it was also noted that policy makers should clearly distinguish between liberalization and giving equal opportunities to all sectors.

After more than one hour of interesting discussion, the workshop closed at 4 pm. Participants then continued another hour of free and friendly talk over oolong tea. The development of Vietnam Development Forum (VDF) was mentioned. And the members also talked about the coming Vietnamese - Japanese Students' Scientific Exchange Meeting in Osaka, where some of them would attend to make presentations. (Osaka event: http://svhandai.org/hoinghi/)