Case Study 45: Preparation by Viet Nam’s Banking Sector for WTO Accession

08/07/2020    756

I. The problem in context 

This paper focuses on showing how Viet Nam will meet its trading partners’ expectations that it will liberalize its economy through commercial legislation and regulatory changes and, more specifically, will liberalize its financial institutions and markets by the time of the country’s planned accession to the WTO in 2005.

Since 1975 until recently, Viet Nam has maintained an almost isolationist economic policy. It has not, as a result, had much success in improving the efficiency of its commercial sector in a way that contributes to significant or consistent economic growth. Viet Nam is now a country clearly wanting closer connections with the rest of the world, but policies to promote and finance international trade or to attract adequate foreign investment have lacked direction. As the country progresses towards joining the WTO, economists are debating how to improve the country’s investment efficiency, especially through financial market reform.

In this context, the BTA (US-Viet Nam Bilateral Trade Agreement) exposed the lack of competitiveness of the Viet Namese banking sector. Viet Namese enterprises that have tried to improve their competitiveness in world markets (such as the fishing industry) have found that the lack of banking competitiveness and competence has held them back. They fear that this will continue to happen when the Viet Namese market is opened up as a result of WTO membership.

The Viet Namese banks themselves realize (partly as a result of the BTA) that they have to reform or lose even more business to foreign banks and financial institutions. They understand that the WTO or the General Agreement on Trade in Services (GATS) does not require Viet Nam to open up its banking market (unlike the BTA, for example, which does have such provisions), but they can see that this is likely to happen in future because their own customers — who will face competition in their markets after WTO accession — will be demanding to use foreign banks. Viet Nam is considering liberalization of its banking system for its own purposes, so that its companies and its banks can survive WTO-enforced trade liberalization.

Some analysts have also expressed concern about the falling proportion of foreign capital in the country’s private investment structure and the increasing levels of state investment, sometimes considered to be associated with inefficiency or misallocation. This topic is still being debated, but some economists consider that increasing investment by state-directed or state-owned companies might be associated with Viet Nam’s import substitution and protectionist policies which in turn negatively affect resource allocation.

The world economy generally has seen changes in trading practices aimed at reducing protectionist policies. Lower protection translates into better use of internal resources. But in Viet Nam, in contrast with more developed economies, the policies needed to ensure higher levels of economic growth include not only the more efficient use of internal resources but also financial and banking laws that will attract more external resources.

For example, there appears to be a need to raise or even remove the 30% ceiling on foreign investors’ stakes in listed business organizations. When the government first opened its doors to foreign investment some twenty years ago there were many restrictions concerning where foreign investors could invest their money. Back then, Viet Nam wanted to attract foreign capital to areas and activities where capital was needed most without threatening Viet Nam’s national interests. This policy, to some foreign investors, protected the capital of state-owned enterprises (SOEs) and locally owned private enterprises rather than effectively encouraging the development of overseas and international business. Over time, banking restrictions have also prevented the owners of local enterprises from realizing the true value of their investments because they were unable to access global capital markets.

The opportunity for foreign-invested companies to undertake bigger commercial activities in Viet Nam is now more widely recognized.

The local press claims that this is something which is compulsory under the BTA and other international commitments Viet Nam has made; they also suggest that a government decision to lift the cap on foreign participation in local business was to be made in 2004. However, as of the time of writing nothing has happened. Is this the old Viet Namese comment, ‘maybe tomorrow’? However, liberalization of the restriction on investment will encourage and facilitate a more specialized domestic production schedule which would flow on to changed international trading patterns, replacing Viet Nam’s previous focus on import substitution.

Warwick Cleine, a senior partner of the international consultancy firm KPMG, is among those foreign analysts who felt greatly encouraged when they heard that the Ministry of Finance (MoF) was considering proposing that the government raise or even remove the investment 30% cap. ‘It doesn’t make sense to restrict foreign capital in the domestic sector. If they do not remove the cap, private local companies will suffer over time’, he says.(1)

Since the State Securities Commission (SSC) was transferred to the MoF’s management earlier this year, the MoF has understood that its task of developing the fledgling stock market — which has only twenty-four listed firms with a total capitalization of less than 10 billion dong ($US 634 million) — has become more urgent than ever.

Adjustments of the investment cap would, however, require many changes to both the Foreign Investment Law (FIL) and the Enterprise Law. There is clearly a role for Vietcombank (the Bank for Foreign Trade of Viet Nam) in this area.

According to Tony Foster of the Freshfields law firm, the government has distinguished between the FIL and the Enterprise Law in order to make sure that foreigners invest under the control of the FIL: ‘If foreigners could invest more than 30%, the FIL would lose importance — which may happen when the FIL and Enterprise Law are merged next year anyway. That is why I assume the government is considering lifting the ceiling now.’(2)

In general, foreign analysts believe that the government has slowly been moving towards a unified legal system for foreign-invested and domestic enterprises. This is a natural part of Viet Nam’s intended integration into the world economy: the source of the capital is not important, but rather the use to which it is put. ‘This means government policy will become more focused on how enterprises invest their money rather than how the enterprise raises its capital’, says Cleine of KPMG.

The most important action for the MoF is to work with industries to adjust its Decree 58. Once this decree is adjusted, the regulations will define in which business sectors the state can hold a 100% stake and which can be invested in by foreign companies, translating into a liberalization of the investment banking system.

These developments indicate slowly changing thinking within the government about their regulations and their operation of the previously state-controlled financial and banking system. It also reflects an increasing acknowledgement of a need for Viet Nam to join the ‘world economy’.

Financial institutions are now realizing that GATS did not force administrators, particularly in developing countries, to liberalize their financial system to encourage further investment. However, if these state institutions cannot update it is unlikely that they will be able to compete with other private financial companies within Viet Nam.

For example, Dong a Bank, a private commercial bank, was established fifteen years ago. Its capital has increased ten times and, in foreign exchange transactions, accounts for 70% of total foreign currencies in Viet Nam; Vietcombank — the largest state-owned bank — has not achieved this. The BTA agreement with the United States has induced the government to undertake that, by 2010, US banks will operate without any constraints in Viet Nam. Under competitive pressure for survival, institutions must restructure, adjust and change operational procedures, and even change their form of ownership to assist in the country’s economic development. The financial system clearly needs overhauling to achieve these objectives.

According to the BTA, Viet Nam has to liberalize its financial and banking services for US banks in compliance with the ‘road map’ agreed by the two parties. Viet Nam must comply with the ASEAN Free Trade Area (AFTA) ‘road map’ for tariff removal, implement the BTA guidelines for banking services, train banking staff, and apply information technology (IT) and other technologies in banking services so that Viet Namese banks can compete in the future.

Viet Nam has to implement its road map in the following terms and in the 2001-10 time framework, including allowing insurance services to become more effective: US investors can set up joint services ventures and there will not be any constraints in penetrating the market by US insurance companies. Other major developments so far have been that

  • all US financial providers (except banks and leasing companies) have been entitled to set up joint ventures with Viet Namese partners in providing their financial services in Viet Nam;
  • from December 2004 US-owned banks will be entitled to expand their commercial services;
  • from 2009, US financial institutions will also be entitled to issue credit card facilities and enjoy the national treatment policy. They can receive deposits in Viet Namese dong; and
  • from 2010, US banks will be entitled to set up 100% US-owned banks in Viet Nam, and to set up joint venture banks in Viet Nam, but the US capital contribution shall not be lower than 30% and not exceed 49% of joint venture registered capital.

Clearly, all these development changes and procedures are progressive and longer term, but there is a distinct role for and need for the reform of Viet Namese banks in this process.

II. Challenges faced by the Viet Namese banking sector 

During this integration process, the Viet Nam banking system will be heavily influenced by the international financial market in terms of exchange rates, interest rates and foreign currency reserves, while they must simultaneously carry out international obligations and commitments. Competition will probably become much stronger when foreign banks expand their scale and scope of operations in the Viet Namese market. Viet Namese commercial banks will need to cope with many difficulties in expanding their banking activities in the world and competing with foreign banks.

As noted earlier, the BTA exposed the lack of competitiveness of the Viet Namese banking system. The Viet Namese banks came to realize that they had to reform or lose more business to foreign banks and financial institutions. Liberalization became of interest to both Viet Nam’s commercial and banking sectors to assist in surviving WTO-enforced trade liberalization (although not specifically liberalization of the banking sector).

Historically (some fifteen years ago), the Viet Namese government still operated a centrally planned economy; Vietcombank was one of the three banks entitled to undertake international payments. With its monopoly in this external financial relationship, Vietcombank played an important role and obtained a large market share of international payments, albeit in a relatively small market. In general, its business operation was advantageous at that time, but not now.

There was also a low development level in technology, organization, management and professional skills in the Viet Namese banking industry. Hence the speed of opening up the economy remained low, as was the ability to mobilize internal capital with the country’s underdeveloped strategies for expanding into the international market. Some of this bureaucratic ‘overseeing’ remains.

Related to this, Viet Nam’s legal system still operates restrictions in quantification, and there is confusion in relation to finance and credit which is contrary to some requirements of GATS and the BTA. The State Bank still has not met the operational requirement of a unified banking system; banking policies remain uniformed and do not create a competitive business environment.

One of the major challenges now facing Viet Namese banks is the role of foreign banks. The foreign banks’ strength of capital, technology, services and global operational scale provide them with potential advantages. For example, in Ho Chi Minh City, the biggest finance centre in Viet Nam, the foreign-invested banks have a high growth rate, leading to a high percentage of the market share in the finance business, while the state commercial banks’ percentage share has now fallen (see Tables 1 and 2).

Table 1
Share of borrowed capital from banks in Ho Chi Minh City in 2003

Banking system

Market share of borrowed capital




Increase or decline compared with 2002


Amount (billion dong)


Amount (billion dong)


Amount (billion dong)


State commercial banks







Joint stock commercial banks







Joint venture banks







Branches of foreign banks














Source: State Bank of Viet Nam, 2003.

Table 2
Market share of bank loans in Ho Chi Minh City in 2003

Banking system

Market share of bank loans




Outstanding increase or fall compared with 2002


Amount (billion dong)


Amount (billion dong)


Amount (billion dong)


State commercial banks







Joint stock commercial banks







Joint venture banks







Branches of foreign banks














Source: State Bank of Viet Nam, 2003.

Table 3 also indicates the fall in the bank loan market share of state commercial banks while the foreign banks’ share of loans has increased.

A further problem exists with the Viet Namese (in)ability to provide adequate capital for economic development, and this is also in comparison to other countries in the region. The registered capital of leading state commercial banks only accounts for 3-4% of the total capital of all commercial banks; their financial capacity is too low to meet the country’s economic development requirements. Capital provision is also over too short a period for the longer-term nature of many commercial projects. This point is summarized in Table 45.34.

Table 3
Duration of capital mobilization of banks in Ho Chi Minh City, 2002-3




Duration of capital mobilization

Amount of (billion dong)


Amount of (billion dong)


Over 12 months





Under 12 months










Source: State Bank, Ho Chi Minh City.

There is also an increasing amount of overdue commercial debt, as summarized in Table 4. There are debt problems between commercial business and state-owned banks, often resulting from inexperience in dealing with secured commercial lending. The Viet Namese banking system must improve commercial practices, including the renunciation of delinquent claims. The EPCo and Tanimex Companies are two typical cases where the owners are insolvent and unable to repay loans to Viet Namese banks.

Table 4
Overdue debt of the Viet Namese banking sector, 1995-2000









(billion dong)

Viet Nam banking sector







State commercial bank







Private commercial bank







Source: IMF, Viet Nam: Statistical Appendix and Background Notes, IMF Staff Country Report No 00/116, August 2000, Table 21.

There are some signs of gradual banking reform. In 1998, the Committee for Banking Reform was established (Decision No. 337/QD-NHNN) and implemented in 2001. A major objective is to ensure that the commercial banking system is both effective and sustainable; for example, the commercial banks must deal effectively with secured commercial lending from a sound financial management team.

One main objective of any central bank is to maintain the soundness and security of its country’s financial system as an aid to economic development. This work requires specialized knowledge of controlling a sound monetary economy devoid of obvious politics. The Central Bank of Viet Nam has to establish requirements and procedures for the establishment of improved financial institutions. Their activities should be limited to fields in which they have certified competence and the central bank must supervise and monitor financial institutions on an acknowledged financial/accounting basis.

In short, the Central Bank of Viet Nam must set standards for the establishment of financial institutions to ensure that applicants have enough resources and adequate systems in place.

The impact on import-competing industries 

In the country’s own interest, Viet Nam needs to reform its banking and financial sector so that its import-competing food and manufacturing sectors will have the support they need to become globally competitive in the markets being opened to the world by the WTO. Some examples in support of this point follow.

Nguyen An, director of Seafood Processing Enterprises in Ho Chi Minh City, the largest economic centre in Viet Nam, mentions his difficulties in borrowing a large amount of capital from Vietcombank for investment in his company. He says, ‘Access to Vietcombank for a bank loan was a difficult task. Vietcombank’s monopoly made it difficult for me to access sources of foreign currencies.’(3)

To Kien Hanh, the owner of a business manufacturing electric fans, cookers and so on, said, ‘Although my company has the need to borrow money from banks, I have not borrowed such money since my company’s establishment seven years ago. When I need capital for production and investment I just mobilize capital from my relatives and my friends.’(4)

Nguyen Van Tuyen, director of a company providing labour protection devices, said that he had already approached the bank but had been refused due to his lack of mortgage property.

Tran Trong Tuong, director of an export company of wooden furniture, is in a more favourable situation as he has a big house for collateral and could get a bank loan. However, he complains that the bank’s collateral valuation is only equal to half the market price of the house and the bank loan is only for 70% of their collateral valuation. This cannot meet his company’s financial needs.

There are many other reasons why small enterprises cannot persuade banks to lend to them, and for security banks often impose tighter measures to prevent commercial enterprises from accessing banks.

Duong Phuc Hau, a director of Fosta Enterprises, specializing in anti-absorbent materials, expresses his objective opinions on (these) bank restrictions and, also, that business enterprises should provide more binding obligations.

III. Facing the challenge of liberalization 

The Viet Namese banking system has so far been partly reformed but is still weak. The state-owned banks still dominate the banking system; the overdue loan rate is increasing; Viet Namese commercial banks have limited lending capacity, and so the story continues.

Coupled with this, and sometimes due to inadequate banking and foreign investment laws, most Viet Namese-owned enterprises are under-capitalized. Once Viet Nam liberalizes its trading economy many industries will have to compete with foreign entrants to the Viet Nam market, maybe for the first time. In such a situation, their competitive strength in their own market will depend a lot on better access to more economically competitive banking services.

In April 2004 there were nearly 40, 000 small and medium-sized enterprises in Viet Nam. According to a recent survey conducted by the Viet Nam Chamber of Commerce and Industry (2004) these enterprises cannot clearly realize the constraints of the integration process and the banking industry, although they understand well the problems their private enterprises can have with current banking services in Viet Nam. Resolving the difficult situation of small and medium-sized enterprises by effectively accessing their sources of capital and therefore gaining more commercial benefits is a current problem.

With over 90% of Viet Namese enterprises falling into the small or medium-sized categories and people generally having low incomes, the current capacity for capital mobilization by banks is limited. If the banking system is permitted to be equitized and to sell stocks widely to foreign markets, additional foreign capital is likely to increase and help boost the country’s economy and economic development.

To reform the banking sector and facilitate the liberalization of the commercial process, the government of Viet Nam has announced the Internationally Integrated Programme of the Banking Industry, and is committed to implement it when Viet Nam joins the WTO. Vu Viet Ngoan, managing director of Vietcombank, has observed that ‘The Programme of Integration into the international economy initiated by the Viet Namese government has created opportunities and challenges for Vietcombank.’(5)

This is reflected in other comments. Banking operations will be expanded, especially with a view to attracting investment capital. Ngoan also said ‘the securitization project of Vietcombank shall be deployed “favourably” because Ms Le Thi Bang Tam, Vice Minister of Finance, has submitted to the Viet Nam government “the plan” allowing Vietcombank to sell its stocks widely to investors in foreign countries. If and when this happens, then the mobilization of long-term capital for Vietcombank will be easier, and the funding capacity for big commercial projects can be increased.’(6)

He added that ‘Joining WTO can help Vietcombank, a large foreign trade bank, to have more opportunities to co-operate in banking fields such as monetary planning and risk management, and, through this, Vietcombank’s prestige will likely be improved in the fields of international financial transactions.’(7)

In sum, several things are needed to achieve this.

  • The Viet Namese banking industry must mobilize capital, access new technology and retrain its management and staff to match the development requirements of other financial markets.
  • With tougher competition, Vietcombank must further specialize in professional banking skills to enhance the efficiency of enterprise capital usage.
  • New banking services need to be developed and made more rapidly accessible. In this way Vietcombank can exploit and more effectively apply its (developing) banking services to contribute to economic growth and an increased share in both the international and domestic financial markets.
  • Vietcombank can take advantage of its wide network of branches to match the managerial and business styles of foreign banks.
  • Internationally integrated banking operations can help support these reforms and also increase the transparency of the Viet Namese banking system to meet the needs of integration and implement the commitment to (other) financial institutions and the WTO.
  • When Viet Nam joins the WTO, foreign-invested and private banks will have better operational conditions there. Vu Viet Ngoan further stated that ‘besides submitting the plan of the bank’s securitization to mobilize more capital, Vietcombank must improve its competitiveness by all the measures’ (speech given at the Viet Nam Banking Conference, April 2004).
  • Banking services techniques and technology must be improved and service charges reduced to attract more customers.
  • Staff professional skills must be improved so that Vietcombank (and other banks) will be both a currency trader and an investor, thus helping commercial enterprises to develop. The growth of these enterprises should become a foundation for banking development.

IV. Lesson from Viet Nam’s experience 

To achieve its successful planned economic/financial integration, Viet Nam needs also to fill the development gap with other countries in the region. Viet Nam is carefully opening its market step by step to maintain some sustainable development.

Because of the requirements of the BTA, Viet Nam is opening its financial and banking market and therefore making WTO access and further developments more feasible.

Being a WTO member will bring some well-defined obligations requiring more open markets. But the WTO does not tell individual economies what they need to do to succeed. They have to adopt some practices and procedures that go beyond WTO requirements. In Viet Nam, the liberalization of banking and financial services is going beyond GATS requirements, but this seems to be necessary to make an economic success of WTO membership.

Development and practical changes as a result of macro thinking are sometimes slow in Viet Nam. However, it is possible that some developing countries can benefit from the Viet Nam experience. Now that guidelines have been set out for joining the WTO, it will be interesting to watch developments in 2005 and beyond.


1.- Interview with Warwick Cleine, 5 June 2004. 

2.- Interview with Tony Foster, 6 June 2004. 

3.- Interview with Nguyen An, 2 April 2004. 

4.- Interview with To Kien Hanh, 15 April 2004. 

5.- Interview with Vu Viet Ngoan. 

6.- Ibid. 

7.- Ibid. 

Source: WTO