VIETNAM – Vietnam is enjoying an uptick in its overall economic growth. With an estimated surge of 6.7%, it is well-positioned as one of the fastest emerging economies in the Southeast Asian region. The main contributing factor to the country’s economic growth is its strong real estate markets, especially as Vietnam is verging to become the next luxury real estate hotspot. However, according to Nguyen Manh Khoi, deputy head of the Department of Housing and Real Estate Management, the market is likely to remain stagnant for 2019. Selling of large property projects and a dampened project approval pace in Ho Chi Minh City are amongst some of the reasons for this sluggish trend. This signals the Vietnam officials to shift their focus to other industries, in particular, the banking sector to improve the country’s economy as they observe the influx of foreign banks expanding their subsidiaries into Vietnam. The State Bank of Vietnam (SBV) has since taken the initiative and launched campaigns to fix the sector’s legacy issues, thus making it viable for high-finance investments.
Current State of Vietnam’s Financial Sector
Despite critical gaps in their current banking system, SBV developed a comprehensive restructuring plan for the banking sector which was deemed successful as it reduced the number of toxic loans on several banks’ balance sheets when it ended in 2015. Over the span of approximately five years, the plan has helped decrease the non-performing loan ratios from 13 to 2 percent, which positively impacted the sector’s asset quality.
The Vietnamese banks have been seeing positive improvements in their overall performance and the government has also been implementing stricter regulations and guidelines based on Basel II standards on local banks. All these are drawing in waves of foreign investors who have expressed their interest in Vietnam’s banking sector.
However, the current policy still imposes foreign ownership caps for banking entities. This can change through the implementation of Decision No. 986, which aims to improve the financial sector by keeping it in line with international standards by the year 2025. Additionally, opening the country to foreign banks can prove to be beneficial to Vietnam’s economy as a whole.
Advantages of Allowing Foreign Banking Institutions
Vietnam’s banking institutions are primarily state-regulated, resulting in lower revenues and non-performing loans due to its inefficiency. Despite Vietnam making slow progress in listing its banks on the stock market, allowing foreign banking institutions to operate in the country opens new opportunities for development in the banking sector, and is relied upon to help restructure the banking sector from its current state.
Access to International Channels
Foreign banks can make external finances more accessible. Firms looking to export will reap the greatest gain from this as export transactions typically require higher funding. Allowing foreign banking entities can help to better facilitate the influx of international products and introduce new technologies from other countries to the local market.
Enhanced Financial Development
A study conducted by Dr Sasidaran Gopalan from the Hong Kong University of Science, concluded that foreign banks can provide greater processing efficiency to their host countries. They can also contribute to their host country’s financial sector by expanding credit to private entities, increase liquidity in the state’s equity market and pitching in to a well-capitalised bond market, resulting in favourable economic growth. However, it was also observed that the effects of foreign banks’ penetration into emerging markets tend to decline with increasing income levels.
Mitigate Risks in International Trade
Foreign banks can better facilitate symmetrical exchanges of industry information, which enables them to mitigate financial risks of key exports in opaque sectors. With the streamlining of information flow, cross-country trading will be more efficient, which is a key catalyst for economic growth.
Break into Vietnam’s Financial Scene
As one of the most competitive economies in Southeast Asia, Vietnam can offer new venture opportunities for foreign banking entities and investors with the restructuring of its banking sector. However, it can be difficult and perplexing to fulfil your corporate and statutory responsibilities with the ongoing restructuring plan.
To navigate through Vietnam’s complex markets with ease, you can look to DesFran for insightful corporate service advisory solutions. We understand the current policies in place and can guide you in your investment ventures into the country. Contact us today for more inquiries.
Vietnam makes slow progress in listing its banks, Asia.nikkei.com
Foreign investment in the banking sector to surge, Vietnamnews.vn
Can foreign lenders break Vietnamese banks’ legacy problem, Asianbankingandfinance.net
Trade: The benefits of foreign banks, Voxeu.org
About the Author
Claudia Nio is Strategic Communications and Research Intern at DesFran. Claudia has a keen interest in the area of communications, and has always been on the lookout for opportunities to build her experience in this field. She is currently a sophomore in Business Management at Singapore Management University, majoring in Communication Management. Claudia’s interest in communications can be seen in her past student appointments as Marketing Director for school events, and President of the university’s Communication Management Society. Without prior academic exposure to strategic communications, Claudia hopes this internship will allow her to better define her academic pursuit and choice of major.