Vietnam Financial System free essay sample

The government later reform the system and created a two-tier banking system, the SBV had restricted it self to acting as the central bank, the control of commercial banking activities were given to the four state owned commercial banks. These banks are the Bank of Foreign Trade (Vietcombank), Industrial and Commercial Bank (Incombank), Bank for Agriculture and Rural Development (BARD), and the Bank for Investment and Development. During the 1990s, the government policies made some changes to allowed foreign banks to establish branches in the country and also the so called joint-stock commercial banks. Non-financial institutions such as finance and insurance companies have come to exist, but they were unimportant in terms of financing firms. The Vietnam stock market was only established in 2001. Vietnam has a bank-based financial system, as the banks have accounted for 85 – 90 percent of financial intermediation. Although the Vietnamese banking sector has increased, the bank credits still appear to be an unimportant source of finance because the domestic-bank-credit-to-GDP ratio in Vietnam has been low. We will write a custom essay sample on Vietnam Financial System or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page In 2000 the ratio stood at 34. 9 percent, compare to 63. 6 percent in Indonesia, 63. 1 per cent in the Philippines, 79. 2 percent in Singapore, 100. 4 percent in Malaysia, and 111. 4 percent in Thailand. (Ly 2003) 1. 1 State-owned commercial banks: State owned commercial banks held 75 per cent of total bank assets. During the period of 1994 – 2000 the state owned commercial banks accounted for 68 – 83 percent of the total outstanding loans. More than half of the credit from banks was extended to SOEs. However, only a small share of the credit was given to the non-farm private enterprises. There are at least three factors that can explain the reason for non-farm private enterprise in Vietnam did not receive much of the credit from the state-owned commercial banks: 1. 1. 1The government-directed lending in favour of SOEs The banks area required to allocate a substantial share of their credit to SOEs at concessionary interest rate and without collateral as a matter of policy rather than because the loans are profitable. These SOEs usually failed to honour loan repayment obligations. The state-owned commercial banks often making losses, and because they are important to the banking system and the economy, the government recurrently refinances the banks by using general revenues, selling bonds to public, and by printing more money. These decisions would mean that the banks will continue to make bad loan to these SOEs. Thus its will continue to make the inefficient SOEs to survive. The other two factors are Information problem of state-owned banks with respect to private enterprises and Lending procedure and collateral requirement by the bank, we will not discuss about these factors as they are not significantly related to the topic. (Ly 2003) 1. 2 Foreign banks In 1991, the Vietnamese government started to permit the establishment of foreign banks’ branches. The foreign banks can bring many benefits to the economy, they may bring modern banking technology and management expertise into the domestic financial market, they can improve efficiency in the market by triggering the competition, its present can also promote foreign investment, etc. The foreign banks came into Viet in substantial numbers in the early 1990s, initially the regulation surrounding foreign banks’ activities was restrictive. Such as foreign banks only have license for 20 years. They were required to have a minimum local capitalisation of USD15 million. They were allowed to take dong deposits, but only up to an equivalent of USD 1. 5 million. Lending more than 10 percent of their capital to a single project also prohibited. However, this loan cap was removed in 1993. The financial crisis in Southeast Asia saw a numbers of foreign bank branches ceased operations in 1998. It also resulted in a decrease in outstanding loans accounted by the foreign banks from 28 percent in 1997, to 15 percent in 2002. (Ly 2003) 1. 3 Joint-stock commercial banks (JSBs) Since the mid-1990s, a number of Joint stock commercial banks had been established due to the banking reform.