Viet Nam's Financial Sector Building on Achievements of Doi Moi
MANILA, PHILIPPINES (20 November 2002) - Since the adoption of doi moi (renovation) in 1986, Viet Nam's Government has made concerted efforts to modernize and transform its finance sector.
Still, plagued by many factors that are a holdover from the former system, the formal financial sector remains underdeveloped, inefficient, and inaccessible to many.
Banks continue to dominate the sector, accounting for more than 70% of gross domestic product (GDP).
The nonbanking sector, on the other hand, is at a nascent stage, with assets of less than 3% of total bank assets. This sector will require substantial technical and financial support to promote its development.
ADB is supplying this with the Second Financial Sector Program Loan (FSPL II) approved today, which will develop alternative methods of finance, including money and capital markets, and insurance and leasing.
The banking sector is dominated by the six State-owned commercial banks (SOCBs), of which the four major ones account for 73% of total bank assets as of December 2001.
Other banks include joint ventures, joint stock banks, 23 foreign bank branches, and 80 foreign bank representative offices.
It is the SOCBs, though, that provide 72% of total bank loans, with almost half channeled to State-owned enterprises. A substantial amount is nonperforming.
This poor asset quality, together with inefficient operations, has led to a decline in SOCBs' profitability.
In response, a bank restructuring committee began in May 1998 a reform program, drawn up with World Bank and International Monetary Fund assistance.
As a result, financial statements of the four major SOCBs have been audited in accordance with International Accounting Standards and efforts are now turning toward resolving nonperforming loans.
Meanwhile, the nonbanking sector, represented by insurance and leasing, although small, has been growing at an exceptional rate.
There are 18 insurance companies operating in Viet Nam, with about half the business going to Bao Viet, one of four state-owned companies.
Although annual insurance premiums are still low at 1% of GDP, compared to 6.5% in Organisation for Economic Co-operation and Development countries in 2000, they have been growing annually at an average of 30% up to 2001.
Viet Nam also has eight finance leasing companies, three of which are joint ventures and five are subsidiaries of SOCBs. Leased assets for 2001 are estimated at about $131 million equivalent.
However, gaps in the legal framework still need to be plugged and streamlining of rules is needed, as well as more efforts to promote the concept of leasing in Viet Nam.
At similarly rudimentary stages are the interbank, money, and capital markets. While the basic architectures are in place, the markets remain thin with a limited supply of commodities for trading.
For all these, there is still considerable scope for consolidating the legal and regulatory frameworks and improving their market structures.
The fundamental infrastructure for building a sound and efficient financial sector - including accounting and auditing systems and basic laws on bankruptcy, contract enforcement, and loan recovery - is gradually being developed.
To support economic growth, though, there is an urgent need to develop alternative channels of financial intermediation to bank savings and loans.
As the capital market and nonbanking sector can provide long-term funds and investment capital to the growing private sector, supporting growth in this area will be important for sustaining growth and generating jobs.
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