Analysis of VN Bank System

Analysis of the Vietnamese Banking Sector
with special reference to Corporate Governance

DISSERTATION
Of the University of St. Gallen,
Graduate School of Business Administration,
Economics, Law and Social Sciences (HSG)
to obtain the title of
Doctor Oeconomiae
submitted by
Bao Toan Tran
from
St. Gallen
Approved on the application of
Prof. Dr. Martin Hilb
and
Prof. Dr. Rudolf Grnig

Dissertation no. 3412
Hoa Sen Design - Saigon, 2008
DISSERTATION
Of the University of St. Gallen,
Graduate School of Business Administration,
Economics, Law and Social Sciences (HSG)
to obtain the title of
Doctor Oeconomiae
submitted by
Bao Toan Tran
from
St. Gallen
Approved on the application of
Prof. Dr. Martin Hilb
and
Prof. Dr. Rudolf Grnig

Dissertation no. 3412
Hoa Sen Design, Saigon 2008
The University of St. Gallen, Graduate School of Business Administration,
Economics, Law and Social Sciences (HSG) hereby consents to the printing
of the present dissertation, without hereby expressing any opinion on the
views herein expressed.
St. Gallen, October 15, 2007

The President:
Prof. Ernst Mohr, PhD
ACKNOWLEDGEMENTS
A journey of ten thousand miles begins with a single step, according to
a Chinese saying. I took this first step on a long journey across time and
space some years ago with the decision to start my doctoral studies. The
doctoral thesis brought me back to my homeland, where I had the chance
to get to know many people from business and from the government and
to study my country from an interesting point of view that of Corporate
Governance. Now, close to my target, and while looking back, I have to say
that the last journey of my official study has been really exciting, instruc-
tive but strenuous. Without encouragement and support from several
people, I would never have reached this point.
Above all, I would like to thank my supervisor Professor Dr. Martin Hilb,
whose never-ending optimism and patience encouraged me to continue on
my path. As a lonely (re-)searcher in a vast country where the topic New
Corporate Governance is still unknown, I appreciate very much the fact
that Professor Hilb took the time to listen and to discuss with me many
issues that are now cropping up in this rapidly developing country and
moreover, gave me valuable advice.
I would also like to express my special gratitude to my co-Supervisor,
Professor Dr. Rudolf Gruenig, who accompanied me on my last journey
when I was at his University. His constant encouragement and inspir-
ing support made me more confident. His problem-solving approach is
different from the approach of Professor Hilb, which has benefited my
development by giving me the opportunity to learn both. Like Yin and
Yang, these two approaches complement each other the rational and the
emotional side.
I also want to express my appreciation for the teamwork of Dr. Dinh Toan
Trung and Mr. Nguyen Thanh Binh, which resulted in the translation of
the book New Corporate Governance by Professor Dr. Martin Hilb into
Vietnamese, and I also appreciate the many good-spirited and instructive
discussions with them concerning this topic. My special thanks also go
to Dr. Peter Mayer and Mr. Pieter Perrett, who proofread my thesis and
helped with the proper use of the English language.
I
Last but not least, I would like to thank my wife and children for their
understanding and patience with me, and my family for their trust in me,
for their unconditional love and support and for their understanding that,
during this time, I could not be physically near them.
This work is especially dedicated to my grandfather, who showed me the
right direction to follow in my life, but left me alone too early.
Vietnam, October 2007 Tran Bao Toan
II
ABBREVIATIONS
ACB Asia Commercial Bank
AD Anno Domini = After the Birth Year of Jesus
ADB Asian Development Bank
AFTA ASEAN Free Trade Area
AGM Annual General Meeting
ALCO Asset and Liability Committee
ALM Asset and Liability Management
AMC Asset Management Company
ASEAN Association of South East Asian Nations
ATM Automatic Transaction (or Teller) Machine
BC Before Christ
BIDV Bank for Investment and Development of Vietnam
bn Billion
BOD Board of Directors
BoP Balance of Payment
BTA Bilateral Trade Agreement
CAR (Average) Capital Adequacy Ratio
CBIs Critical Business Issues
CEO Chief Executive Officer
CFO Chief Financial Officer
CG Corporate Governance
CH-e external changes
CH-i internal changes
CIC Credit Information Center
CRRD Committee for Nomination, Remuneration
and Development
DATC Debt and Asset Trading Company
DCF Discounted Cash Flow
e.g. exempli gratia = for example
EAB Eastern Asia Bank
EBT Earning Before Tax
EIU Economic Intelligence Unit
EVN Electricity of Vietnam
FDI Foreign Direct Investment
III
FIEs Foreign Invested Enterprises
FIS Financial Institutions
GDP Gross Domestic Product
GSO General Statistic Office
HCMC Ho Chi Minh City
HR Human Resources
HSBC Hongkong Shanghai Bank Corporation
IAS International Accounting Standards
IFC International Finance Corporation
IMF International Monetary Fund
IPO Initial Public Offering
IT Information Technology
JSCB Joint Stock Commercial Bank
MHB Mekong Housing Bank
MIS Management Information System
mn Million
MNCs Multi National Companies
MoF Ministry of Finance
n.a. Not available
NPAs Non Performing Assets
NPL Non Performance Loan
NYSE New York Stock Exchange
ODA Official Development Assistance
OTC Over The Counter
PCF Peoples Credit Fund
PE Price Earning
PNTR Permanent Normal Trade Relations
PoS Point of Sale
RMC Risk Management Committee
ROE Return on Equity
SARS Severe Acute Respiratory Syndrome
SBV State Bank of Vietnam
SECO Secrtariat dEtat lconomie (State Secretariat for
Economic Affairs)
SME Small and Middle Enterprises
SOCB State-owned Commercial Bank
SOE State-owned Enterprises
IV
sqm Square meter
SSC State Securities Commission
STC Securities Trading Center
SWOT Strength Weakness Opportunity and Threat
TA(A) Technical Assistance (Agreement)
UBS United Bank of Switzerland
US$ United States Dollars
USA United States of America
VAS Vietnam Accounting Standards
VAT Value Added Tax
VBARD Vietnam Bank for Agriculture and Rural Development
VCCI Vietnam Chamber for Commerce and Industry
VET Vietnam Economic Times
VIB Vietnam International Bank
VIR Vietnam Investment Review
VND Vietnam Dong
WTO World Trade Organization
y-o-y Year on year
V
VI
CONTENTS
Acknowledgements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III
Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI
List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII
List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XVII
CHAPTER 1: INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Structure of the thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.4 Research approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.5 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
CHAPTER 2: THEORY ABOUT CORPORATE GOVERNANCE IN
GENERAL AND IN VIETNAM. . . . . . . . . . . . . . . . 7
2.1 Governance theories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1.1 The agency theory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.1.2 The transaction costs theory . . . . . . . . . . . . . . . . . . . . . . . . 9
2.1.3 The stakeholder theory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.1.4 The institutional theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
VII
2.1.5 The new corporate governance theory . . . . . . . . . . . . . . . . 11
2.2 Characteristics of Corporate Governance system in Vietnam 11
2.2.1 e transformation to Principle-agent relationship in the SOEs 12
2.2.2 Governance structure in the SOEs in Vietnam. . . . . . . . . . 12
2.2.3 Some shortcomings of the SOEs . . . . . . . . . . . . . . . . . . . . . 16
2.3 Research framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
CHAPTER 3: SECONDARY DATA ANALYSIS OF THE
VIETNAMESE BANKING SECTOR . . . . . . . . . . . . 20
3.1 Environmental and economic analysis . . . . . . . . . . . . . . . . . . . 20
3.1.1 Political-legal situation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.1.1.1 Milestones of socio-political development . . . . . . . . . 21
3.1.1.2 Political system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.1.1.3 The military . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.1.1.4 Vietnams Economic Law . . . . . . . . . . . . . . . . . . . . . . . . 24
3.1.2 Socio-cultural environment . . . . . . . . . . . . . . . . . . . . . . . . 25
3.1.2.1 Demographic situation. . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.1.2.2 Income disparities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.1.2.3 Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3.1.2.4 The influence of cultural factors . . . . . . . . . . . . . . . . . . 28
3.1.3 Economic situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.1.3.1 Economic indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.1.3.1.1 GDP Development . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.1.3.1.2 Domestic savings . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.1.3.1.3 Foreign trade and payments . . . . . . . . . . . . . . . . . . 32
3.1.3.1.4 Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.1.3.1.5 Current account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
VIII
3.1.3.1.6 FX reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.1.3.1.7 Fiscal revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.1.3.2 Economic development . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.1.3.2.1 Development of the private sector . . . . . . . . . . . . . 37
3.1.3.2.2 Foreign direct investment . . . . . . . . . . . . . . . . . . . . 38
3.1.3.2.3 Privatization of SOEs . . . . . . . . . . . . . . . . . . . . . . . 39
3.1.3.2.5 Infrastructure development . . . . . . . . . . . . . . . . . . . 42
3.1.3.2.6 Building capital market institutions . . . . . . . . . . . . 43
3.1.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.1.4.1 Vietnam compared with selected ASEAN countries . . 47
3.1.4.2 Key factors with positive impact on Vietnams growth
potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.1.4.3 Major challenges facing Vietnam . . . . . . . . . . . . . . . . . 53
3.1.4.4 Development scenarios . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.2 Banking market in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3.2.1 Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
3.2.1.1 Retail banking and the SME market . . . . . . . . . . . . . . . 59
3.2.1.2 Retail banking and the consumer market . . . . . . . . . . . 63
3.2.1.3 Consumer banking products . . . . . . . . . . . . . . . . . . . . . 65
3.2.2 Investment products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
3.2.2.1 Secondary market for bad debt disposal . . . . . . . . . . . . 71
3.2.2.2 Stock lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3.2.3 Other financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
3.2.3.1 Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
3.2.3.2 Non Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
3.2.4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
3.2.4.1 Market penetration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.2.4.2 Rate of growth in loans and deposits . . . . . . . . . . . . . . 76
3.2.4.3 Oligopolistic banking market . . . . . . . . . . . . . . . . . . . . 76
3.2.4.4 Lending practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
3.2.4.5 Product offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
IX
3.2.4.6 Quantity of non-performing loans . . . . . . . . . . . . . . . . 77
3.2.4.7 Consumer credit bureau . . . . . . . . . . . . . . . . . . . . . . . . 79
3.3 Banking industry in Vietnam. . . . . . . . . . . . . . . . . . . . . . . . . . . 81
3.3.1 State Bank of Vietnam (Central Bank) . . . . . . . . . . . . . . . . 81
3.3.2 State-Owned Commercial Banks (SOCBs) . . . . . . . . . . . . . 81
3.3.2.1 Bank for Foreign Trade: Vietcombank (VCB) . . . . . . . 85
3.3.2.2 Industrial and Commercial Bank: Incombank . . . . . . . 88
3.3.2.3 Bank of Investment and Development: BIDV . . . . . . . 90
3.3.2.4 Agriculture and Rural Development Bank:
Agribank (VBARD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
3.3.2.5 Mekong Housing Bank (MHB) . . . . . . . . . . . . . . . . . . . 94
3.3.3 Joint-Stock Banks (JSCBs) . . . . . . . . . . . . . . . . . . . . . . . . . . 96
3.3.3.1 Asia Commercial Bank. . . . . . . . . . . . . . . . . . . . . . . . . . 98
3.3.3.2 Sacombank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
3.3.4 Foreign Banks & Joint Venture Banks . . . . . . . . . . . . . . . . 103
3.3.5 Competition in the banking industry . . . . . . . . . . . . . . . . . 107
3.3.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
3.3.6.1 Tendency of consolidation . . . . . . . . . . . . . . . . . . . . . . . 109
3.3.6.2 Undercapitalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
3.3.6.3 Raising capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
3.3.6.4 Investment in information technology . . . . . . . . . . . . 112
3.3.6.5 Improving management and governance . . . . . . . . . . . 114
3.4 SWOT and critical business issues . . . . . . . . . . . . . . . . . . . . . . 115
3.4.1 Opportunities and reats of the Banking Sector in Vietnam 116
3.4.2 Strengths and Weaknesses of the Banking Sector in Vietnam 118
3.4.3 Critical business issues based on the SWOT Analysis . . . . . 119
X
CHAPTER 4: PRIMARY DATA ANALYSIS OF CORPORATE
GOVERNANCE IN THE VIETNAMESE
BANKING SECTOR . . . . . . . . . . . . . . . . . . . . . . . . . 120
4.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
4.2 First Survey: Survey about the overall situation in Vietnam . . 122
4.2.1 Objectives of the First Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
4.2.2 Targeted group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
4.2.3 Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
4.2.4 Overview about the respondents . . . . . . . . . . . . . . . . . . . . . . . . . 124
4.3 Second Survey in the banking sector . . . . . . . . . . . . . . . . . . . . . 125
4.3.1 Objectives of the Second Survey . . . . . . . . . . . . . . . . . . . . . . . . . 125
4.3.2 Targeted group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
4.3.3 Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
4.3.4 Overview about the respondents . . . . . . . . . . . . . . . . . . . . . . 127
4.4 Summary of the current situation and comparison with the
standards mainly in the banking sector . . . . . . . . . . . . . . . . . . . 129
4.4.1 Vision & Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
4.4.2 Organisational Structure and Governance . . . . . . . . . . . . . 139
4.4.3. Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
4.4.4 Board culture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
4.4.5. Systems utilized by BoDs to fulfill their responsibilities . 160
XI
4.4.5.1 Selection of members of the BoD and Top Management 161
4.4.5.2 Remuneration of board members . . . . . . . . . . . . . . . . . . . 166
4.4.5.3 Evaluation of members of Board and Top Management . 167
4.4.5.4 Development of board members . . . . . . . . . . . . . . . . . . . . 169
4.4.6 Information and communications. . . . . . . . . . . . . . . . . . . . . 170
4.5 Recommendations mainly for the banking sector . . . . . . . . . . 173
CHAPTER 5: IMPLICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
5.1 Implications for research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
5.2 Implications for teaching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
5.3 Implications for practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
ANNEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
ANNEX I: Interviewers list. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
ANNEX II: First Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
ANNEX III: Second Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
REFERENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
LIST OF TABLES
Table 3-1. Key figures of countries in ASEAN . . . . . . . . . . . . . . . . . 48
Table 3-2. Country Attractiveness for Investment of Vietnam . . . . 50
Table 3-3. Vietcombank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Table 3-4. Incombank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Table 3-5. Bank of Investment and Development . . . . . . . . . . . . . . 90
Table 3-6. Agribank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Table 3-7. Mekong Housing Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Table 3-8. JSCBs valuation and forecast . . . . . . . . . . . . . . . . . . . . . . 96
Table 3-9. Asia Commercial Bank ACB . . . . . . . . . . . . . . . . . . . . . . 98
Table 3-10. Sacombank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Table 3-11. Recent investments by foreign banks in local JSBs. . . . . 106
XII
LIST OF FIGURES
Figure 1-1. Research structure of the thesis - overview . . . . . . . . . . . . 5
Figure 1-2. Research approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 2-1. Structure of the thesis overview Chapter 2 . . . . . . . . . . . 7
Figure 2-2. Current relationship in a state-owned corporation - overview 13
Figure 2-3. A typical governance structure of a state-owned General
Corporation - detailed view . . . . . . . . . . . . . . . . . . . . . . . . . 14
Figure 2-4. Model of New Corporate Governance. . . . . . . . . . . . . . . 18
Figure 3-1. Structure of the thesis Overview Chapter 3 . . . . . . . . . . 20
Figure 3-2. Milestones in the recent development of Vietnam . . . . . . 22
Figure 3-3. Normalized political stability and violence index . . . . . . . 23
Figure 3-4. Income disparities between regions. . . . . . . . . . . . . . . . . . . 26
Figure 3-5. Public investment in social sector has increased since 2004 27
Figure 3-6. Main cultural inuences of the Vietnamese culture . . . . . 29
Figure 3-7. Economic Situation GDP Development . . . . . . . . . . . . . 31
Figure 3-8. Domestic savings feed investment . . . . . . . . . . . . . . . . . . . . 32
Figure 3-9. Export situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Figure 3-10. Fiscal revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Figure 3-11. Foreign direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Figure 3-12. Numbers of privatizations . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Figure 3-13. Infrastructure situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Figure 3-14. PortfolioMatrix of Country Attractiveness for Investment 49
Figure 3-15. Scenario analysis GDP growth forecast to 2010 . . . . . . 56
Figure 3-16. ree major scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Figure 3-17. Urban population growth . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Figure 3-18. Penetration of banking services in urban Vietnam. . . . . . 65
Figure 3-19. Overview of the loan limit in selected commercial banks 66
Figure 3-20. ATM/card alliances in Vietnam. . . . . . . . . . . . . . . . . . . . . . 67
Figure 3-21. Mortgage market indicators in Vietnam. . . . . . . . . . . . . . . 69
Figure 3-22. Growth of the life insurance premium income in Vietnam 74
Figure 3-23. AsiaPac Loan Penetration. . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Figure 3-24. Banking NPLs 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Figure 3-25. SOCBs before 1988 and now . . . . . . . . . . . . . . . . . . . . . . . . 82
Figure 3-26. Markevt share of SOCBs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
XIII
XIV
Figure 3-27. Relative size of top 17 CBs in term of charted capital (bn) 84
Figure 3-28. Customer segments served by types of banks . . . . . . . . . . 107
Figure 3-29. Overview of Opportunities and reats . . . . . . . . . . . . . . . 116
Figure 3-30. Strengths and Weaknesses of the Banking Sector in Vietnam 117
Figure 3-31. e External Change (CHe) and the Internal Change (CHi) 118
Figure 3-32. Formulation of critical business issues . . . . . . . . . . . . . . . . 119
Figure 4-2. Personal data of the respondents . . . . . . . . . . . . . . . . . . . . 124
Figure 4-3. Status of the participated rm . . . . . . . . . . . . . . . . . . . . . . . 125
Figure 4-4. Some facts about the banks BoD in the Second Survey. . 128
Figure 4-5. Areas of focus for the discussion of corporate
governance practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Figure 4-6. Involvement of the BoD and of the top management in
the strategy process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Figure 4-7. Steps in the strategy process . . . . . . . . . . . . . . . . . . . . . . . . . 133
Figure 4-8. Composition of the strategy project team. . . . . . . . . . . . . . 134
Figure 4-9. Strategic control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Figure 4-10. e Vietnamese boards showing the distribution
of dierent committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Figure 4-11. Committees at Bank2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Figure 4-12. Corporate structure of a SOCB based on the example
of Bank 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Figure 4-13. Companies in the VCCI-Survey with an internal
audit function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Figure 4-14. Companies which do not have Audit committees . . . . . . 144
Figure 4-15. Committees at the Board level . . . . . . . . . . . . . . . . . . . . . . . 148
Figure 4-16. Committees on the Top Management level . . . . . . . . . . . . 150
Figure 4-17. Risk Management Group . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Figure 4-18. Number of members of boards in Vietnam . . . . . . . . . . . . 154
Figure 4-19. Combined structure of the boards of directors . . . . . . . . . 155
Figure 4-20. Corporate culture of the questioned companies . . . . . . . . 158
Figure 4-21. e applied Management tools applied in the board
of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
XV
Figure 4-22. Required criteria to be selected as a member of board
of director. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Figure 4-23. Example of a selection criteria list for board members . 164
Figure 4-24. Remuneration systems for board members . . . . . . . . . . . 166
Figure 4-25. Performance evaluation of board members. . . . . . . . . . . 168
Figure 4-26. Desired topic of advanced training for the members
of boards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Figure 4-27. Number of board meetings per year . . . . . . . . . . . . . . . . . . 171
Figure 4-28. Recommendations based on the areas of focus. . . . . . . . 175
XVI
XVII
Summary
As a result of the imminent WTO accession and the obligations arising from
bilateral trade agreements, the government of Vietnam has realized the
compelling need to reform the economy. Vietnam has committed to move
to a market-based economy and to create a level playing eld for all partici-
pants, whether state-owned or private, domestic or foreign. A goal is also set
to equitise all the remaining state-owned companies which are not dened
as strategic industries until 2010. Companies from all sectors are obliged to
strengthen their competitiveness in order to survive on the domestic busi-
ness arena and overseas markets. Such a goal will be dicult to achieve with-
out the introduction and implementation of good governance practices.
is study laid the focus on the Banking Governance in Vietnam. As this survey
was the rst (Swiss) research in the Banking Sector in Vietnam, we deliber-
ately tried to span most of the corporate governance issues that are proposed
in the concept New Corporate Governance by Martin Hilb (2006).
The results of our research have shown that within one year, since our first
survey was conducted, there were positive developments in the field of
corporate governance in the banking sector. However, the companies have
just made the first steps into the right direction. There are still many chal-
lenges lying ahead, especially for the state-owned companies. The listed
companies, which are able to select experienced foreign companies as
strategic partners benefit from the transfer of state-of-the-art technology,
capital and modern management know how, and thus can also improve
the situation of corporate governance. In our surveys, we also revealed the
expectations of some SOCBs that the equitisation would help them to free
themselves from the tight corset of the state ownership and guidance.
This dissertation is mainly addressed to professionals who want to improve
their skills and knowledge in corporate governance, but also to the applied
research audience. We also hope that our experiences in Vietnam provide
some input to the theory of corporate governance in emerging countries.

1
CHAPTER 1: INTRODUCTION
is chapter presents an overview of the research, including background of
the study, research objectives, research approach, as well as the structure of
the thesis.
1.1 Background
Vietnam attracts its investors to its largely untapped market with its popula-
tion of 85 million, strategic geographical position in one of the worlds most
economically dynamic regions, stable political situation, high economic
growth and low production costs. e shi from a centrally planned econ-
omy to a market economy over the last two decades is also paying o with
an average annual growth of 7 per cent. In the year to come, the country
aims to achieve growth of more than 8 per cent to bring Vietnam out of
its position as an undeveloped country. To fuel economic growth, Vietnam
needs further investment, and to attract investors it has introduced regula-
tory and institutional reforms. Accession into the WTO is an opportunity
for Vietnam to bring itself in line with common international practices and
thus open up more sectors to foreign investment. Besides, Vietnam also
aims to promote the private sector. Private sector companies tend to face a
range of obstacles in establishing and achieving growth in their businesses,
in contrast to the various privileges and forms of government assistance
enjoyed by state-owned enterprises (SOEs).
1
In recent years, some major strides have been made to improve the regulatory
regime and general business environment for Vietnams non-state sector. Most
notably, in January 2000, an epochal Enterprise Law came into eect, which
has signicantly improved the business environment that envelops Vietnams
private companies. In particular, a lot of the paperwork previously required
to register a new company has been removed, and the business registration
process has been streamlined considerably. Furthermore, in December 2001,
the private sector was ocially acknowledged as one of the key elements of the
national economy in amendments made by the National Assembly to Viet-
nams national constitution.
1 This was partly the result of an economic and business environment that, until the mid-
1990s, continued to favour the 6,000 or so companies operating in the SOE sector (Credit
Suisse, 2006).
2
The growth and development of the private sector in Vietnam will not
just be about increasing the cumulative number of new companies regis-
tering and operating. It is more the willingness for change. And the pace
of change needs to be accelerated parallel with the rapid growth of the
economy, the accession of Vietnam into the WTO and the threat posed by
foreign competitors.
Through initiatives such as the ASEAN Free Trade Area (AFTA), the Bilat-
eral Trade Agreement with the United States and Vietnams accession to
the WTO, Vietnams increasing integration with the global economy and
international business networks means that local companies need to be
able to compete and collaborate in both the domestic business arena and
overseas markets. This is arguably the next big challenge for the private
sector in Vietnam.
One of the sectors in Vietnam exposed to rapid change is the banking
sector. This sector was substantially reorganized at the outset of the
transition period. However, like other industries, further modernization
during the 1990s was generally quite modest. This means that, in part
as a legacy, the current banking system in Vietnam is still dominated by
the state-owned commercial banks (SOCBs) which account for more than
70 percent of all bank deposits. They channel most funds through loans
to the SOEs. Although there are many foreign bank branches and semi-
private joint-stock commercial banks (JSCBs), these have so far operated
on a limited scale, serving niche markets.
As a result of the imminent WTO accession and the obligations aris-
ing from bilateral trade agreements, Vietnam has committed itself to
move to a market based economy and to create a level playing field for
all participants, whether state-owned or private, domestic or foreign.
This means that SOCBs, but also JSCBs will need to change in order
to survive. Such a goal will be difficult to achieve without the intro-
duction and implementation of good governance practice (IFC-Report,
2006) that:
- permits investors and creditors to provide long-term capital to firms
and fund investment with confidence;
3
- enables senior managers to focus on generating efficiency and produc-
tivity gains; and
- allows for the creation of an internal architecture within firms that
allows them to increase their scale and capacities.
1.2 Objectives
When this study was started, Corporate Governance was a new topic in
Vietnam. At that time, the term Corporate Governance was not part of
the Vietnamese corporate language.
Official guidelines in this regard were insufficient.
2
It was assumed that
most governance theories had been developed in western industrialized
countries and these theories might not suit Vietnams special social and
economic environment. In addition, it is often quoted that there is no
one-size-fits-all governance regime in the corporate governance litera-
ture (Wang, 2006, 18). Relatively little research work has been carried out
in the area of corporate governance in Vietnam.
3

In the banking sector, there has apparently been no empirical study of
general corporate governance. This thesis aims to fill the gap, at least
partially. The study looks at current corporate governance practice in the
banking sector in Vietnam. Thus, the major objectives of the thesis are:
1. To obtain an overview of the current corporate governance prac-
tices in Vietnam.
2. To gain a better understanding of actual corporate governance
practices of the banking sector in Vietnam.
2 Governmental institutions such as the Ministry of Finance and the State Bank of Viet-
nam translated Corporate Governance into Vietnamese in a way that was equivalent to
Company Management (in Vietnamese: Qun Tr Cng Ty). While translating the book
New Corporate Governance, by Prof. Dr. Martin Hilb, we introduced the term Qun
Tr Hi ng Doanh Nghip which is descriptive of the entire connotation of Corporate
Governance (see Hilb, Qun Tr Hi ng Doanh Nghip, 2006).
3 As part of its Support to Industry Restructuring & Enterprise Development (SIRED
project, Danida seeks to strengthen corporate governance practices in the fisheries sector
in Vietnam (IFC-Report, 2006).
4
3. To provide recommendations on how to improve corporate governance
practices in Vietnam.
We expect the results of this study and the subsequent recommendations
to be of interest and relevance to: Board members and members of senior
management in the banking sector; researchers; trainers for corporate
governance issues; and to a lesser extent, relevant government agencies.
1.3 Structure of the thesis
The thesis is presented in 5 chapters:
Chapter 1 is the introduction.
Chapter 2 deals with the theoretical framework for the secondary
research and primary research which will be discussed in the Chapter 3
and Chapter 4.
Chapter 3 includes a study of the influencing factors from the envi-
ronment, the market, and industry in order to identify the risks and
the opportunities the board might face. Furthermore, in order to work
out the critical business issues of the banking sectors, the strengths
and weaknesses of the different types of banks such as state-owned
commercial banks, private commercial banks, and foreign banks are
identified. This provides a general overview of the situation, and the
challenges the country and, more specifically, the banking sector in
Vietnam faces. The results of this chapter serve as basis for the surveys
on corporate governance practice in the banking sector which are
discussed in Chapter 4.
Chapter 4 aims to nd out, what the current state of the corporate situation
in Vietnam is and to make recommendations on how to improve the situation
based on certain areas of focus such as vision and strategy, board structure,
board culture, leadership, systems, information and communications. Chapter
4 also provides suggestions as to how the board could tackle challenges in the
board. is is based on the analysis of the current status and the future situation
under consideration of the areas of focus.
5
Chapter 5 highlights the implications for research, teaching, and practice.
Chapter 3:
Secondary Data
Analysis
Chapter 4:
Primary Data
Analysis
Chapter 5:
Implications
Chapter 2:
Theory about
Corporate Governance
Chapter 1:
Introduction
3
.
4
.

S
W
O
T

/

C
B
I
3.3
Industry
3.2
Market
3.1
Environment
4
.
5

R
e
c
o
m
m
e
n
d
a
t
i
o
n
s
1
.
5

C
o
n
c
l
u
s
i
o
n
1.4
Research
approach
1.3
Structure
1.1
Back-
ground
1.2
Objectives
4.4
Summary
4.1
Background
4.3
Second survey
4.2
First survey
2.1
Governance
theories
2.2
Characteristics
2
.
4

C
o
n
c
l
u
s
i
o
n
- Secondary data
analysis
- Primary data analysis
2.3
Research frame-
work
K
I
S
S
1.1
External
Context
1.2
Internal
Context
2.1
Board
Composition
2.2
Board
Culture
2.3
Board
Structure
2.4
Board
Vision
3.1
Board
Selection
3.2
Board
Feedback
3.3
Board
Compensation
3.4
Board
Development
4.1
Auditing
4.2
Risk
Mgmt
4.3
Communi-
cation
4.4
Controlling
Keep it
controlled
ntegrated
trategic
ituational
5.1
Research
5.2
Teaching
5.3
Practice
Figure 1-1. Research structure of the thesis - overview
1.4 Research approach
In Chapter 3 (see also Research structure), the information collected is
based predominantly on desk research. To understand the current situa-
tion and future development of Vietnam, expert interviews were conducted
with board members and members of senior management from diverse
companies in Vietnam, with policymakers and members of relevant
government agencies.
4

As an explorative and empirically oriented research project, an in-depth
qualitative study was carried out in order to investigate the phenomenon
within its real-life context. Within the frame of the empirical research,
we conducted two surveys which will be presented in Chapter 4. The
first survey deals with the overall situation of corporate governance in
Vietnam. The second survey was conducted with some specific banks.
4 A list of interview partners is attached in the Annex.
6
The research approach is shown in Figure 1-2:
Figure 1-2. Research approach
1.5 Conclusion
In this chapter, the background, but also the research objectives, research
approach, and the research structure of the thesis are presented. In the
following chapters, we will discuss in-depth the content and results of the
research.
1. Banking Environment XXX X XXX
2. Banking Market XXX X XXX
3. Banking Industry XXX XX XXX
4. Banks
(based on areas of focus)
X XXX X
5. Implications X X X
X
X
X
XXX
X
P
H
A
S
E
S
RESEARCH METHODS
Legends:
x
xx
xxx
-
-
-
Applied
intensively applied
very intensively applied
Desk
research
Case
studies
Survey
of listed
companies
Expert
interviews
7
CHAPTER 2: THEORY ABOUT CORPORATE
GOVERNANCE
IN GENERAL AND IN VIETNAM
In this section, the theoretical basis is built for the secondary research
and primary research which will be discussed in the Chapter 3 and
Chapter 4. The research will focus on the issues of corporate gover-
nance in the Banking sector.
Figure 2-1. Structure of the thesis overview Chapter 2
Charles Darwin, the author of the Origin of the Species, said in the 19th
century that It is not the strongest that survive, it is not the most intel-
ligent, it is those most responsive to change (Charles Darwin, cited in
ING-Report, 2006).
In order to be responsive to change companies in Vietnam need to continue
learning from other countries. In recent years the world has witnessed a number
of company scandals
5
stemming from corporate governance malpractices and
fraud. Incidents emanating from corporate governance malpractices have
5 Company names that often come to mind are for example Enron, Arthur Andersen,
Daewoo, Xerox, Shell, and AIG, among others. Recently, in the high-profile trial of former
Enron executives for fraud and conspiracy, they had been found guilty.
Chapter 3:
Secondary Data
Analysis
Chapter 4:
Primary Data
Analysis
Chapter 5:
Implications
Chapter 2:
Theory about
Chapter 1:
Introduction
1
.
5

C
o
n
c
l
u
s
i
o
n
1.4
Research
approach
1.3
Structure
1.1
Back-
ground
1.2
Objectives
2.1
Governance
theories
2.2
Characteristics
2
.
4

C
o
n
c
l
u
s
i
o
n
- Secondary data
analysis
2.3
Research frame-
work
K
I
S
S
1.1
External
Context
1.2
Internal
Context
2.1
Board
Composition
2.2
Board
Culture
2.3
Board
Structure
2.4
Board
Vision
3.1
Board
Selection
3.2
Board
Feedback
3.3
Board
Compensation
3.4
Board
Development
4.1
Auditing
4.2
Risk
Mgmt
4.3
Communi-
cation
4.4
Controlling
Keep it
controlled
ntegrated
trategic
ituational
8
also occurred in the young history of Corporate Governance in Vietnam.
6

Thus, the pattern of shortcomings concerning the corporate governance
issues in Vietnam and in other countries is very similar. These scandals
emphasize the need for major improvements in corporate governance
practices in Vietnam.
Let us turn next to the governance theories and the governance practice in
Vietnam in order to identify a framework for the research.
2.1 Governance theories
A number of different theoretical models have evolved to provide the
frameworks for explaining and analyzing corporate governance. However,
concepts, definitions and perceptions of corporate governance tend to
differ from country to country (IFC-Report, 2006).
7
It is also known that
there is no single, accepted definition of corporate governance. The defini-
tions usually reflect the needs, the interests or attitudes of different people
(Wang, 2006).
There are also definitions related to shareholders (agency theory), at the
other end related to stakeholders (stakeholder theory). The other corpo-
rate governance theories are here briefly explained.
8
6 A number of high profile cases have received a lot of attention in the national press over
the past few years. They have included some of the largest and best known companies in
the country, such as Vietnam Airlines, Seaprodex, Minh Phung, Vietsovpetro, Viet Hoa
Bank, Saigon Beer.

7 In Germany, large public companies tend to have a two-tier board system, comprising
of a non-executive supervisory board and an executive board. This contrasts with the
single board of directors system adopted in the US and UK, which has the primary role
of protecting the shareholders interest (IFC-Report, 2006). In the finance literature,
corporate governance deals with the ways in which suppliers of finance to corporations
assure themselves of getting a return on their investment (Shleifer and Vishny 1997,
cited in Wang, 2006); in the economics literature, corporate governance is defined as
addressing an agency problem, or conflict of interest, involving members of the orga-
nization [where] transaction costs are such that this agency problem cannot be dealt
with through a contract (Hart 1995, cited in Wang, 2006); according to the Cadbury
Report (1992), corporate governance is defined as the system by which companies
are directed and controlled.
8 Agency theory paradigm arises from the fields of finance and economics, whereas trans-
action cost theory arises from economics and organizational theory; stakeholder theory
and institution theory arise from a more social-orientated perspective on corporate
governance (Wang, 2006).
9
2.1.1 The agency theory
According to the agency theory
9
, the shareholder who is the owner of the
companies delegates day-to-day decision making in the company to the
directors, who are the shareholders agents. The problem that arises as a
result of this system of corporate ownership is that the agents do not neces-
sarily make decisions in the best interests of the principal. The potential
for the personal interests of a companys senior managers can diverge from
those of its shareholders.
Where the managers and the owners of a company differ, as they often do
in larger firms with a wide shareholder base, there is a possibility that their
respective interests may become misaligned.
This is where boards of directors and inspection / auditing committees can
balance the equation, monitoring the actions of senior management, who
control the day-to-day operations of the company, on the shareholders
behalf (IFC-Report, 2006).
10
Corporate governance is thus restricted to the
relationship between a company and its shareholders.
One of the shortcomings of the agency theory is that only the needs of top
executives and shareholders were taken into account, but not the justiable
needs of employees, customers or the environment (Hilb, 2006).
2.1.2 The transaction costs theory
Transaction costs theory is based on the fact that rms have become so large
that they substitute for the market in determining the allocation of resources.
e rm was considered not as an impersonal economic unit in a world of
perfect markets and equilibrium but rather as an organisation comprising of
people with diering views and objectives (Solomon, 2004).
9 Managers of the companies are dened as agents and the shareholders as the principals.
10 In Vietnam, enterprises have Inspection Committees. According to the Enterprise Law
(1999), the Inspection Committee is responsible for supervising all operations and busi-
ness activities of the Company on behalf of the shareholders. The law also stipulates that
an Inspection Committee is required for any company with more than 11 shareholders. In
other countries there is often an Audit Committee, a Nominations Committee, and/or a
Compensation Committee. These are usually chaired by independent directors.
10
2.1.3 The stakeholder theory
Hung (1998) explained that stakeholders include employees, customers,
suppliers, banks, environmentalists, government and other groups who
can help or hurt the corporation, and he concluded there are many groups
in society besides owners and employees to whom the corporate is respon-
sible. Not only do companies affect stakeholders, but also stakeholders in
turn affect companies in some way. The goals of a corporation should only
be achieved by balancing the often conflicting interests of those stake-
holder groups. A basis for the stakeholder theory is that companies are so
large, and their impact on society so pervasive that they should discharge
accountability to many more sectors of society than solely their sharehold-
ers (Solomon, 2004).
The stakeholder theory deals with a web of relationship with other
stakeholders that can influence a company, including employees and
unions, suppliers, clients, and the government. Corporate governance is
concerned with holding the balance between economic and social goals
and between individual and communal goals. The corporate governance
framework is there to encourage the efficient use of resources and equally
to require accountability for the stewardship of those resources. The aim
is to align as nearly as possible the interests of individuals, corporations
and society (Sir Adrian Cadbury, World Bank, 2000).
The concept of corporate governance, codified by the OECD, proposed
that the major mechanisms to look for include an independent board of
directors, fair treatment of minority shareholders, and coordinating the
interests of capital owners and business managers. Corporate governance
is about promoting corporate fairness, transparency and accountability.
The corporate governance structure specifies the distribution of rights
and responsibilities of the board, managers, shareholders and other stake-
holders, and spells out the rules and procedures for making decisions on
corporate affairs. We score the companies based on specific issues such
as board composition, management remuneration, accounting treatment
and transparency (cited in www.shareanalysis.com).
11
2.1.4 The institutional theory
Institutional theory offers its own set of assumptions regarding human
behaviour and the nature of the firm. Institutions, broadly defined, are
socially and culturally created devices such as structures and activities
which provide stability and meaning to social behaviour (Wang, 2006).
Institutional frameworks are made up of both formal (e.g. political rules,
judicial decisions, economic contracts) and informal (e.g. socially sanc-
tioned norms of behaviour which are embedded in culture and ideology)
constraints (North, 1990; Scott, 1995).
2.1.5 The New corporate governance

Hilbs both-and, glocal approach (2006) shows that companies can
achieve sustainable growth, long-term profit maximization and share-
holder wealth maximization by taking stakeholders into account as well
as shareholder interests.
11

Hilb (2005) defines the New Corporate Governance as a system by
which companies are strategically directed, integratively managed, and
holistically controlled, in an entrepreneurial and ethical way, and in a
manner appropriate to each particular context.
2.2 Characteristics of Corporate Governance system in Vietnam
The issue of corporate governance in Vietnam is complicated. Here we do
not seek to provide a fully comprehensive picture of the corporate gover-
nance practices in Vietnam. Rather, we have sought to summarize some
of the most important topics related to corporate governance practices,
such as Principle-agent relationship in the SOEs, the one-tier or two-tier
system. Finally, we also want to identify the suitable framework for the
research in this dissertation.
11 Hilb (2006) adopts both the global relevance of aspects of the Anglo-American board best
practices, and the local governance best practices evident in the approaches adopted by
many international firms operating in countries around the world.
12
2.2.1 The transformation to Principle-agent relationship in the SOEs
As the economic reform in Vietnam gradually unfolds, the governing strat-
egy has changed from direct involvement in the decision making process
of the enterprise to a more performance-based
12
approach. Thus, profits,
revenues contributed to the state budget have become among the most
important performance criteria for SOEs. The relationship between SOEs
and the government is referred as being a Principle-agent relationship, in
which the former is the agent and the latter is the principal. As the princi-
pal of SOEs, the government, through its various agencies has established
incentive schemes and monitoring mechanisms intended to ensure that the
agent acts in accordance with the governments interests and to prevent the
senior executives of SOEs from pursuing their own self-interest. Theoreti-
cally, for such a system to work well requires the principal to know the busi-
ness quite well, set realistic objectives, and objectively monitor and evaluate
the performance of the enterprise, all while taking into account the real
capacity and market conditions in which the enterprise is operating.
2.2.2 Governance structure in the SOEs in Vietnam
The Vietnamese corporate governance system is often compared to the
German two-tier system.
13
The two-tier system consists of three bodies
for governing public limited companies, namely the State (or shareholder
general meeting), the inspection committee
14
and the management board.
12 Also called governing from a distance.
13 The two-tier system has developed in the continental European environment character-
ized majority shareholders of companies, a greater role for the participants themselves, a
less liquid capital market, etc., while one-tier system has been created in the Anglo-Saxon
environment characterized by dispersed share structures, an active capital and securities
market. The one-tier system has two bodies of governance. They are the general meeting
of shareholders, and the Board of Directors. There is no universal answer to the question
of which governance system is better. Different models of governance have been formed
in different economic and social system as well as through different political orientation.
14 The Inspection Committee in Vietnamese Governance structure is somewhat comparable
to the German supervisory Board (the Willam Davidson Institute at the University of
Michigan, 2005)
13
Figure 2-2. Current relationship in a state-owned corporation - overview
The state
There are two types of SOEs in Vietnam: Most of the SOEs in Vietnam are
members of the general corporations
15
owned by central government (see
Figure 2-3.) or owned by provincial or municipal government.
The remainders are more or less independent SOEs, reporting directly to
a national line ministry, a provincial or municipal Peoples Committee, or
some other government organisation. These SOEs do not belong to a larger
general corporation. They report directly to their supervisory line minis-
try or provincial / municipal Peoples Committee.

15 Such as Construction, Textiles & Garments, Cement, Oil & Gas, Telecommunication.
Board of
Management
Inspection
Committee
Top
Management
STATE
State-owned
Corporation
14
However, the governance structures of independent SOEs are similar to
general corporations in that they are directly supervised by, and report to,
government agencies.
Figure 2-3. A typical governance structure of a state-owned General
Corporation
16
- detailed view
The amended State Enterprise Law of 2003 intended to provide autonomy
to SOEs by empowering the Board of Management of General Corpora-
tions and by limiting the role of government agencies to regulatory func-
tions. The Law has given and formalised the Boards role as the direct
representative of the states ownership of the corporation. In other words,
the effort of the recent SOE reform has focused on mitigating the apparent
confusion between the States regulatory and ownership functions and on
making SOEs accountable for their own profits and losses.
16 See also Figure 4-12.
Central
Government
Central Specialist
Ministry
General Corporation
Management
team
Board of
Management
Inspection
Committee
Central Supervisory
Ministry
Members SOEs
Administrative
relationship, the body is
directly responsible for
taking care of the
enterprise
Regulatory relationship,
making and observing
regulations
15
The board
According to the amended SOE Law of 2003, the Board has the right
to make every decision pertaining to the business of the corporation.
However, the Law also states that the Board can only make those decisions
that do not come under the rights and responsibilities of other state repre-
sentatives and which are not assigned to other government agencies and
organisations. The ownership rights of SOEs are currently exercised by
various government agencies. For example, the Ministry of Finance acts as
the representative for the states capital, and is responsible for the admin-
istration of that capital. The supervisory ministry, which is normally the
ministry overseeing the relevant sector, such as the Ministry of Construc-
tion, Ministry for Agriculture, in which the corporation operates, is respon-
sible for the establishment, dissolution, personnel, and overall supervision
of the enterprise (see Amended SOE Law, 2003)
The inspection committee
Under the Enterprise Law, only joint stock firms with 11 or more share-
holders must establish an Inspection Committee. In theory, the Inspec-
tion Committee should be appointed by shareholders at the annual general
meeting. But in practice, the appointment of the inspection committee can
be made by the Board of Management. The reason is that the Board of
Management members are also the owners or majority shareholders.
As it is written in the Enterprise Law, the Inspection Committee is expected
to perform a number of important functions, principally related to their
oversight role, such as evaluating the financial accounts, monitoring the
performance of management, regularly informing the board of manage-
ment of the performance of the enterprise, overseeing disclosure and
communications made by the enterprise, and if necessary, recommending
changes to the Board of Management or operations of the enterprise.
Although not required under the Enterprise Law, there are a number of
other functions that should be included within the Inspection Committees
responsibilities as part of a companys pursuit of good corporate gover-
nance, such as ensuring firms compliance with existing laws and regu-
lations, overseeing major transactions or investments, overseeing major
16
costs or expenses incurred by board of management or senior manage-
ment, reviewing internal controls and risks, monitoring potential conflicts
of interest by board of management, managers or major shareholders,
selecting independent auditors.
2.2.3 Some shortcomings of the SOEs
The government officials as principals often lack business experience and
business knowledge. Government institutions
17
commonly do not have the
capacity nor expertise to closely monitor the performance of an SOE and
then reward accordingly. As a result, there are many shortcomings about
which we want to discuss here:
Problems of the laid back administrative approach
Due to the lack of expertise and governance capacity the government agen-
cies have chosen a so-called laid back administrative approach of setting
growth objectives for SOEs. According to this approach, revenues or prof-
its this year must be higher than that of last year, or the company must
grow by a fixed percentage every year, regardless of market condition.
There are also penalties for the general director if the SOE does not meet
the objectives set out by the General Corporation and government institu-
tions.
18
To avoid the penalties, the underlying rule is that revenues or prof-
its this year must be higher than last year. In other word, SOEs are thriving
to make no loss, but only a little profit. This laid back administrative
approach may also prompt attempts to manipulate the financial accounts,
so that the general directors can retain their position.
17 The immediate principal or General Corporation.
18 According to the State Enterprise Law, a general director can be dismissed if the SOE
incurs losses for two consecutive years. But there are also incentives for the general direc-
tor if the SOE meets or exceeds the set targets. In fact, the incentives for entrepreneurial
activities under the carrot and stick system do not exist, because the SOE general direc-
tor is rewarded little if the enterprise earns a lot of profit, but can face severe punish-
ment if the enterprise makes a loss. Such regulation certainly would not motivate an SOE
general director to invest for the long term development of the enterprise.
17
Problems of the political relationships
Personal relationships between SOE managers and government officials
turn out to be very important. One way to build a good relationship with
officials is to employ their relatives or persons introduced by them. Thus,
to be a good manager of a SOEs, the competence of political relationships
is deemed to be crucial. These political relationships are necessary if the
SOE wishes to make a large investment. The SOE has to get approval from
a number of agencies.
Problems of individual conflict of interests
The majority of recent reported corporate governance malpractices in the
SOEs have involved direct or indirect kick-backs, and this is possibly the
most serious agency problem. SOE clients always ask for commissions.
They do not care much about checking the contract carefully before sign-
ing. If the commissions are paid, then the clients would accept any product
and service, even those with some defects. Otherwise the clients would
find a reason to complain.
Problems of the reporting
The role of the Board in many SOEs is therefore not clear, and to a great
extent, limited. For SOEs that belong to General Corporations, they not
only report directly to the mother entity, the General Corporation; but
also at the same time have to deal directly with various government agen-
cies on a number of important aspects of their business.
18
2.3 Research framework
Due to the current political system (see 3.1.1.2 Political system) and special
cultural characteristics where the Vietnamese strive for harmony in the
collective (see also 3.1.2.4 The influence of cultural factors) we decided to
choose the approach of New Corporate Governance proposed by Hilb
(2006) as a framework for this dissertation. The New Corporate Gover-
nance recommends bringing added value simultaneously to shareholders,
customers, employees, and the public (Hilb, 2006).
19

The New Corporate Governance is based on a reversed KISS principle
as described in the Figure 2-4.
Figure 2-4. Model of New Corporate Governance
(Hilb, 2006)
19 We are aware of the fact that there is a growing perception among theorists and practitio-
ners that the paradigm of shareholder value and the paradigm of stakeholder value may
be compatible (see also Wheeler et al., 2002). For example, ignoring the needs of stake-
holders can lead to lower financial performance; creating value for stakeholders through
business focus on maximizing value for all stakeholders may be able to create financial
value for shareholders.
19
The reversed KISS framework comprises of four parts:
Part 1: Keep it situational
On the environmental level of the special situation of Vietnam, five
different issues are considered: Economic, political-legal, technological,
ecological and socio-cultural (Rueegg-Stuerm, 2005). Furthermore, the
banking market (including customers) and Banking sectors (including
competitors and related players in the finance industries) will also be
analysed. These issues will be discussed in Chapter 3.
Part 2: Keep it strategic
We differ here seven areas of focus that will serve as leading dimen-
sions in the primary research (see Chapter 4): Vision and strategy, board
structure, leadership, board culture, Systems, Processes, Information and
Communication.
Part 3: Keep it integrated
This dimension integrates targeted recruitment, evaluation, remuneration
and development of members of the supervisory and managing boards
(see Hilb, 2006).
Part 4: Keep it controlled
This dimension refers to auditing, risk management, internal and external
communications and feedback functions of the board (see Hilb, 2006).
2.4 Conclusion
In this chapter, several governance theories and the corporate situation in
Vietnam were discussed. Based on the specific situation of Vietnam, we
have decided for the New Corporate Governance approach (Hilb, 2006)
which will serve in the Secondary and Primary research as a framework.
20
CHAPTER 3: SECONDARY DATA ANALYSIS
OF THE VIETNAMESE
BANKING SECTOR
In this chapter, an analysis of the environment, the industry and the market
of the banking sector is carried out. This provides a general overview of
the situation, and the challenges the country and, more specifically, the
banking sector in Vietnam is facing. The results of this analysis will serve
as a basis for the survey about corporate governance in the banking sector
which is discussed in Chapter 4.
Figure 3-1. Structure of the thesis Overview Chapter 3
3.1 Environmental and economic analysis
In the environmental analysis, the major influencing factors are discussed.
The environmental analysis deals with the following situations: political-
legal, socio-cultural, economic. The purpose is to find out how these factors
influence the development of the banking sector and related issues.
20
20 For example Human Resources, Information Technology.
Chapter 3:
Secondary Data
Analysis
Chapter 4:
Primary Data
Analysis
Chapter 5:
Implications
Chapter 2:
Theory about
Chapter 1:
Introduction
3
.
4
.

S
W
O
T

/

C
B
I
3.3
Industry
3.2
Market
3.1
Environment
1
.
5

C
o
n
c
l
u
s
i
o
n
1.4
Research
approach
1.3
Structure
1.1
Back-
ground
1.2
Objectives
2.1
Governance
theories
2.2
Characteristics
2
.
4

C
o
n
c
l
u
s
i
o
n
- Secondary data
analysis
2.3
Research frame-
work
K
I
S
S
1.1
External
Context
1.2
Internal
Context
2.1
Board
Composition
2.2
Board
Culture
2.3
Board
Structure
2.4
Board
Vision
3.1
Board
Selection
3.2
Board
Feedback
3.3
Board
Compensation
3.4
Board
Development
4.1
Auditing
4.2
Risk
Mgmt
4.3
Communi-
cation
4.4
Controlling
Keep it
controlled
ntegrated
trategic
ituational
21
3.1.1 Political-legal situation
3.1.1.1 Milestones of socio-political development
With the start of the reforms of the communist country Vietnam in 1979
there were three main parts, the agrarian and industrial reform, the Doimoi
policy and the introduction of macro-economic institutions (Dinh, 1997).
From 1986 the market reforms started with the new general secretary
Nguyen Van Linh after the death of the long-time, all-powerful Commu-
nist party leader Le Duan.
The first step in the reform process can be described as administrative
dualism and allowed the establishment of private ownership of land and
businesses. The Doimoi policies, the second stage in the reform process,
represented a further evolution of the reform process which has been
started and on the improvement of the productivity of the ailing economy
and introduction of a market oriented economy in the place of a planed
economy. The measures were aimed at the improvement of resource allo-
cation and efficiency, reduction of trade barriers, establishment of private-
and family ownership and the liberalisation of the agricultural, industrial
and trade sectors.
The third stage targeted the fiscal, monetary and credit supply and the
ownership of land which was not allowed until 1988. In spring 1989 the
banking and finance reforms aimed to combat the hyperinflation rates,
eliminate the causes of speculative pricing and to find real market prices,
set fiscally sound interest rates and liberalize the foreign exchange system
in order to encourage foreign trade.
The long lasting Cambodia War (from 1978) ended in 1989 and with
the demise of the Communist block, due to Glasnost and Perestroika
in Russia, Vietnam and its Communist Party were urged to find other
trade partners than the Soviet Union or other socialist countries. Tariffs
appeared to be an issue and in 1990 a new duty law was introduced which
aimed to expand foreign trade. In 1994 the US Embargo was lifted and
in 2002 a trade agreement with the USA was reached. In December 2006,
the U.S. Congress approved Permanent Normal Trade Relations (PNTR)
for Vietnam.
22
Figure 3-2. Milestones in the recent development of Vietnam
(Source: Vietnam Tiger Fund, 2007)
3.1.1.2 Political system
Vietnam is governed by the Communist Party of Vietnam, which brooks
little opposition. However, the absence of democratic freedom is currently
not a major issue, with political stability and economic prosperity being
the preferred option.
21
As with China, the changes seen in the economy are
not accompanied by any visible signs of political reform for Vietnam. To be
fair, there does not appear to be a strong push for democracy either. The
broad population seems more intent on taking advantage of the economic
opportunities made possible by the reform process.
Vietnams key leadership changed in June 2006 with the appointment of a
new President and Prime Minister, who are both southerners.
21 Many business people point to the successes of China, which has chosen to open its
economy without opening up its political system as worth emulating, rather than Russia,
which attempted to liberalise its political system without first opening up the economy.
23
Vietnam remains a Socialist Republic with a one-party system (Commu-
nist Party) under the leadership of President Nguyen Minh Triet and his
Prime Minister Nguyen Tan Dung, but binding itself with the commit-
ment toward a more market oriented economy.
22

Figure 3-3. Normalized political stability and violence index
(Source: Kaufmann, Kraay and Mastruzzi, 2006, cited in UBS, 2006)
23
3.1.1.3 The military
The relatively high level of military involvement in senior government
positions, while starting to change, still highlights the need to better under-
stand the associated economic risks as international experience demon-
strates, especially in the region. In Thailand, for example, the military also
occupies a large position in the economy. In the long run this runs the risk
of driving down returns for the private sector because entities run by the
22 Document from the International Conference UNCTAD in Geneva Economic Interna-
tionalisation Human Development and State-Society Relations in Asia: Learning From
Vietnam, presented by Mr Chevalier Alain, IUED, 15 December 2006.

23 The World Banks Governance Indicator includes 6 aspects: 1) government effectiveness,
2) political stability (or no violence), 3) voice and accountability, 4) control of corruption,
5) rule of law, and 6) regulatory quality. Specifically, the more capable a country is with
governance issues, the more economic benefits it can enjoy. In a politically stable envi-
ronment, combined with a strong set of legal and regulatory systems, investors are more
willing to make long-term investments in the form of FDI and continued capital inflows
(Kaufmann, Kraay and Mastruzzi, 2006, cited in UBS, 2006).
High
Low 213 Countries
United States
China
Sri Lanka
Pakistan
Vietnam
Japan
Switzerland
2
1
0
-1
-2
-3
24
military will frequently have a lower cost of capital or could be given pref-
erential terms on which to compete. As such it will be interesting to watch
how the role of the military evolves over the next decade. In other econo-
mies around the region it has been tough to balance vested interests with
creating a level playing field especially where the military has significant
political influence.
3.1.1.4 Vietnams Economic Law
Vietnams economy is governed by several key laws that define the legal
forms of business entities as well as their financing. These laws are (The
William Davidson Institute, 2005):
- Private Enterprise Law (1999)
- State Owned Enterprises Law (1995, amended in 2003)
- Cooperative Law (1996, amended in 2003)
- Domestic Investment Encouragement Law (1994, amended in 1998)
- Foreign Investment Law (1987, amended in 1990, 1992, 1996, 2000).
In addition, the legal framework consists of layers in which general laws
are superseded by specialized laws in a specific area. The system becomes
more confusing as conflict in the code defers to the newest version (The
William Davidson Institute, 2005).
Streamlining the laws pertaining to business activities is a major agenda on
the current reform schedule. The most immediate reform is the forthcom-
ing Common Investment Law.
24

24 Fusion of the Foreign and Domestic Laws on Investment. If the new Common Invest-
ment Law follows the trend, it will undoubtedly loosen restrictions on foreign investment
and capitulate to some demands for foreign investment liberalization under the WTO
negotiation.
25
A new Bankruptcy Law
25
was enforced in October 2004. The earlier law
was ineffective and only 191 bankruptcies were filed over a 9 year period:
the law clarifies specific procedures, such as liquidation rights between
liabilities and equity.
3.1.2 Socio-cultural environment
3.1.2.1 Demographic situation

Vietnams demographic situation is broadly favourable and should provide
a significant positive impetus to growth over the coming decade. Although
the total fertility rate has dropped close to the replacement rate of about
2.05, and is forecast to fall further,
26
the relatively large share of young
people in the economy means that the overall working age population
should grow steadily (HSBC, 2006). The growth rate of the working age
population (age 15-59) has been much faster at 2.6 % over the last 5 years,
although it will slow more rapidly to 1.2 % in the next 5 years (GSO, 2006;
HSBC, 2006). The strong growth of this age group will provide a substan-
tial boost to potential output growth.
3.1.2.2 Income disparities
The relatively uniform spread of economic prosperity has meant that there
are, so far, few manifestations of tension caused by disparate economic
growth. The World Bank has calculated Vietnams Gini Index, which
measures the disparity between rich and poor, as among the lowest in
Southeast Asia. Intraregional disparities in income are not as pronounced
as those in China, nor has there been any wide divergence in rural and
urban incomes, as with India (CLSA, 2006, 12).
25 Law No. 21/2004/QH11
26 This reflects the typical pattern seen in Asian and other countries, where rapidly rising
incomes lead parents to have less children and increase the quantity and quality of
expenditure on each one (HSBC, 2006).
26
Figure 3-4. Income disparities between regions
(Source: GSO, World Bank, 2004)
Vietnam has, so far, benefited from a stable social fabric, with inter-regional
and rural-urban differences so pronounced. Poverty levels have come
down across regions over the past decade. However, it may be too early to
judge the spread of economic growth. Indications of social inequality are
beginning to be apparent, as illustrated by the national Gini coefficient,
which rose from 0.34 in 1992/93 to 0.35 in 1997/98 and to 0.37 in 2002
(World Bank, 2004).
Ethnic minorities are prevented from participating in economic opportu-
nities, signalling a potential disconnection between growth and poverty
reduction in remote and disadvantaged areas. The benefits of growth over
the past decade have been unequally spread across regions, and migration
has also redistributed the incidence of poverty across regions.
3.1.2.3 Education

With a strong focus on literacy and education, Vietnam has been able
to reach a literacy rate of over 90%. Primary school (five years of formal
schooling) is compulsory and 80% of pupils go on to secondary school. For
Mekong River Delta
South East
Central highland
South Central Coast
North Central Coast
North West
North East
Red River Delta
0 10 20 30 40 50
Regional poverty (%)
National avg 18%
60
27
the elite, there are private and international schools.
27
In public schools,
children are under considerable academic pressure, with little time to
develop other skills and interests. In international schools, children can
play and learn at the same time.
28

The government further intends to strengthen the basic education system
by introducing international training programmes to schools, universities
and colleges, which should help improve the quality of education. It wants
to diversify training programmes, establish more private schools and
encourage cooperation between local universities and colleges and foreign
partners. The government is looking to upgrade the quality of teaching
staff in local universities and colleges by encouraging them to join training
courses aimed at improving their professional skills. Scholarship schemes
to support talented students have been implemented, while education in
remote areas is being addressed. The government is aiming to lift literacy
from 91% to 95% (VIR, 22.06.2006).
Figure 3-5. Public investment in social sector has increased since 2004
(Source: IMF, 2006)
27 Private schools have been permitted since 2001.
28 Some debates are the same the world over, whether it is the US or China or Vietnam.
2001
0
1
2
3
4
(Govt expenditure as % GDP)
Education
Health
2002 2003 2004 2005
28
In various MNCs and local companies, there are professionals who had
returned to the country after securing higher qualifications from over-
seas universities - 80% of students who go abroad for higher education
return to work in Vietnam, attracted by better job opportunities and a
more rewarding life in familiar environs.
The desire for higher education is a shared value in most families, and
education is seen as the passport to a better life. There is a strong belief
according to Confucianism that education drives the future of children
(Dinh, 1997).
3.1.2.4 The influence of cultural factors
The culture of Vietnam is one of the oldest in the Southeast Asia region.
The early influences of the Austro-Pacific culture before 111 BC are
evidenced by the multiculturalism of the Vietnamese people. The matriar-
chal family structure is widespread in the North East and Northern Delta
region of Vietnam (Weggel, 1992). This is where the culture of Vietnam
originated in the very early time. Hence, the position of women in the
matriarchal society of Vietnam is stronger than in neighbouring countries
(Weggel, 1992).
Although Vietnam lies geographically in Southeast Asia, its culture and
the origins of its people are of East Asian descent. The principal religion
in Vietnam is the so-called triple religion (Tam Gio) characterizing the
East Asian intricate mixture between Mahayana Buddhism, Confucian-
ism, and Taoism.
29
This second major influence can be traced back to the
Chinese domination which started around 111 BC and lasted until 838
AD. During this time, the special knowledge and advanced techniques
in agriculture, philosophy, literature and sciences were introduced from
China (Dinh, 1997).
Despite a general Vietnamese culture that all Vietnamese share, there are
considerable differences between different regions of Vietnam which have
emerged due to southward expansion and later, exposure to the West; most
29 Vietnam belongs to the so-called Chopstick Culture that includes countries such as
China, Vietnam, Korea and Japan.
29
noticeably that of Northern and Southern Vietnam. In this respect, Viet-
nam has many different cultural influences starting from the Austro-Pacific
culture to the Khmer and Champa cultural influences. Thervada-Buddhism
is dominant especially in the Mekong Delta and Hinduism has found accep-
tance by the ethnic Cham in Central Vietnam.
Finally, the Western cultural influence started in the 16th century with
the arrival of the Catholic missionaries from Spain, Portugal and France,
continuing in the 19th century when Vietnam became a French colony.
The Latin alphabet, which nowadays proves to be an advantage for the
Vietnamese, was introduced in the 16th century. From around the mid
19th century, The Catholic Church and the French brought the knowledge
of natural sciences, technology, the French civilization and language. Most
recently, Leninism-Marxism was introduced by the Soviet Union and the
American way of living by the USA (Dinh, 1997).
Figure 3-6. Main cultural influences of the Vietnamese culture
Vietnamese
Culture
B
u
d
d
h
is
m
T
a
o
i
s
m
C
o
n
fu
c
ia
n
is
m
C
a
t
h
o
l
i
c
i
s
m
H
i
n
d
u
i
s
m
30
Vietnamese are largely one-people - as many as 80% are Buddhist
30

(though officially they follow no religion) and ethnic minorities comprise
only 14% of the population. Significant Christian minorities of about 8%
consist mainly of Roman Catholics and smaller but noteworthy new Prot-
estant groups.

The collective struggle for independence through the Centuries
31
has
created a strong bond between the different cultural and religious groups
in Vietnam.
Vietnam is a high-context country with a high level of collectivism, a
medium-high power distance, achievement orientation, low uncertainty
avoidance, rather matriarchal with a short-term orientation.
The Vietnamese are very diligent, live in large families, show gratefulness
through reciprocity and follow the Yin (female)-Yang (male) principle
where the Yang dominates slightly. Furthermore, Vietnamese are frugal,
are risk takers, want recognition for achievement, endeavour to resolve
conflicts peacefully and strive for harmony in the collective (Dinh, 1997).
Time has a different value for Vietnamese and being on time is less impor-
tant than to lose face (Weggel, 1992). Short term planning and impro-
visation is common and flexibility is necessary as plans may change due
to force majeure. Due to the high population density, especially in Viet-
namese urban areas, proximity is common and privacy is not given (Hall,
2000). While people in Western countries separate business and private
issues, Vietnamese do not. The principle of reciprocity to give back is a
strong part of culture. Relationships matter and communication is crucial
with focus on personal relations.
30 Interviews with Dr. Le Manh That, Vice Rector of the Vietnam Buddhist University.
31 After having regained independence from the colonial power China in the 10th century,
Vietnam had to struggle to push back successfully the aggressive invasions of many world
powers like Mongolia, then again China [in the Ming and Ching Dynasty], Siam, Japan,
France and the US.
31
3.1.3 Economic situation
3.1.3.1 Economic indicators
3.1.3.1.1 GDP Development
Economic growth has been steady, especially in the last five years, and is
expected to continue in the same mode with the government expecting
real GDP growth of around 8.5 % on average in the forthcoming years.
This pace of growth is fairly consistent across different sectors.
In 2006, the gross value of industrial output rose by 15.4% year on year;
slightly slower than the pace of growth recorded in 2005. The growth of
output was particularly rapid for private sector industrial firms (up by
21.6% y-o-y), ahead of foreign-invested firms (14.9%) and state-owned
firms (11.8%). Industrial growth has been broadly based, in terms of both
region and industry (GSO, 2007).
Figure 3-7. Economic Situation GDP Development
(Source: GSO, 2007, Vietnam Tiger Fund, 2007)
GDP growth 1995-2007
95 96 97 98 99 00 01 02 03 04 05 06 07
0.00
12.00
10.00
8.00
6.00
4.00
2.00
9.54
9.34
8.15
5.76
4.77
6.80
6.90 7.00
7.20
7.50
7.70
8.20
8.90
Origine of GDP 2006
Manufacturing
21%
Agriculture
16%
Trade 14%
Mining & Quarrying 11%
Construction 6%
Fishing 4%
Real Est. 4%
Forestry 1%
Other 23%
648 to 1337
GDP per capita/
region in 2006
433 to 648
378 to 433
330 to 378
305 to 330
276 to 305
240 to 276
189 to 240
145 to 189
0 to 145
Source: GSO, 2006
32
Despite the pace and breadth of recent progress, it is important to remem-
ber that 74% of the population is still rural and that Vietnams per capita
income of US$ 660 ranks amongst the poorest nations, at 151st out of 208
countries, according to the World Bank (2006). Agriculture has steadily
decreased as a share of GDP since 1988 (when it was 46.3%), but still
comprises 22.8% of the economy.
32

3.1.3.1.2 Domestic savings
Domestic savings, increasing FDI and growing remittances make invest-
ment the key growth driver, accounting for fully one-third of the economy.
The government expects the contribution of investment to reach 42% of
GDP over the next five years.
Figure 3-8. Domestic savings feed investment
(Source: World Bank, 2005)
3.1.3.1.3 Foreign trade and payments
The value of Vietnams exports continues to rise rapidly. In 2006 export
revenue rose by 25% y-o-y to reach US$ 39 billion. It is noteworthy that
exports in all major categories recorded strong growth. There were partic-
ularly rapid increases in the value of exports of manufactured goods,
including footwear and electronic products, in addition to key export
32 In comparison, China has reduced its share of the rural population from 76.3% in 1985 to
58% today, squeezing agricultures share of GDP to below 15%.
1990 1995 2000
Savings
(%) of GDP
Investments
2001 2002 2003 2004
0
40
30
20
10
33
commodities, particularly coffee, rice and cashew nuts. Exports of seafood
products, however, rose by only 2% y-o-y, partly due to anti-dumping
duties levied on catfish and shrimp.
As a net crude oil exporter, Vietnams trade balance has benefited from the
rise in crude oil prices, despite a dependence on imported oil products.
While the situation may deteriorate in the short term in nominal terms
due to the higher-value added of petrol and diesel, growth in domestic
demand for fuel is unlikely to outpace oil production within the next five
years. This net oil position could even improve once the delayed US$ 2.5
billion Dung Quat refinery becomes operational as now expected in 2009.
While direct net trade balance is positive, Vietnam trade could still be
negatively affected if high global prices weaken external demand, although
this would be a condition that would impact on all of Asias exporters.
Figure 3-9. Export situation
(Source: GSO, 2007)
WTO accession is expected to maintain export growth at 10-20% y-o-y over
the medium-to-long term. If Vietnam is able to ramp up its production base
to meet this potential growth in external demand, the countrys export to
GDP ratio should continue growing from the current 63% of GDP share.
33

Importantly, to achieve an increased level of export growth, Vietnam will
33 Even then, Vietnam will still lag behind Asias other major exporters in terms of export
volumes, though overtaking the Philippines as the tenth ranked exporter in Non-Japan
Asia is feasible within the next five years.
0
2000 01 02 03 04 05 06
5
10
15
20
25
30
35
40
45
Export
Garments
textiles 15%
Footwear 9%
Aqua products 8%
Wood products 5%
Rice 4%
Electronics and
computer materials 4%
Coffee 3%
Rubber 3%
Coal 2%
Crude oil
22%
Others 25%
Principal exports first half year 2006
Import
U
S
D

b
34
need to move up the export ladder and create higher value-added activi-
ties to its production base. This will mean heavy investment from either
domestic sources or FDI, which are likely to weigh on the current account
balance in the near-term.
Vietnam has a similar, competitive low labour cost structure to China,
substantial resources (including agricultural land), abundant labour and a
low base of growth: all ingredients that could facilitate an extended period
of rapid export expansion. However, its level of capital to labour force
ratio is still relatively low compared to other countries, as evidenced by
Vietnams lack of presence in higher-end engineering or technology manu-
facturing. If Vietnams export sector does step up, then this could help
reverse the structural trade deficit and push the economy a little closer to
achieving self-sustainability on its current account i.e., removing the
reliance on international donors. However, this long term improvement
will also be dependent on future international competition (particularly
from China) and the rate that productive investment becomes available in
the coming years.
3.1.3.1.4 Inflation
Inflation has been a source of concern. However, since 2004 it has remained
quite stable at an average of 7.9 % a year. Housing costs are increasing
at a fast pace. The major risk is oil price pressure. International oil price
increases have yet to be fully reflected in domestic fuel prices, as the govern-
ment has been slow to raise domestic retail prices. Instead, the state-owned
distributor is being forced to absorb much of the price rises, which, in turn,
is being compensated by government transfers. However, this seems to be
unsustainable, as domestic fuel prices have now risen by 120% since the
beginning of 2004 (GSO, 2007). Without any refining capacity, Vietnam
must import all its petroleum and diesel products. Though Vietnam has a
relatively lower oil dependency compared to many of its neighbours, infla-
tion due to higher imported oil prices could force aggressive monetary
policy tightening in the years to come.
e recent monetary measures seem to be aimed at improving credit quality
in the nancial system rather than controlling ination or avoiding the risk
of overheating. is suggests that the government is likely to accept a higher
35
ination rate over the next year or two in order to maintain GDP growth
at about 8% y-o-y or better. Consequently, an aggressive policy response to
higher oil prices is unlikely.
3.1.3.1.5 Current account
Vietnams exports of oil, seafood, rice and a growing electronics sector
have performed well since 2004. Imports of capital and equipment are
the main driver, which has positive implications for investment demand.
But imports are also boosted by the impact of higher commodity prices,
which may ease in the next year, assuming commodity prices eventually
correct. Despite the weak structural current account, continued financial
support from international donors and a positive capital and financial
account are helping to stabilize the overall balance of payment (BoP).
Overall BoP surpluses since 2004 have been supportive to the VND,
though we expect that FX policy should still favour a slow depreciation
trend to preserve export competitiveness. Still, the BoP has reduced aver-
age annual depreciation of the USD/VND from 2-4% in the post Asian
crisis period to less than 1% in the past 12 months (GSO, 2007). With
a stable BoP, the outlook for Vietnams external position is unlikely to
change much in the near term.
3.1.3.1.6 FX reserves
FX reserves have been growing steadily, especially over the past two years
and the government seems to be preparing to allow state companies to tap
offshore financing within the next few years to fund capital investment.
Even with an escalation in foreign borrowing, Vietnams external debt to
GDP ratio (35% in 2006) is within manageable levels and is even likely
to fall for another year or two (GSO, 2007). Government finances look
reasonably stable.
36
3.1.3.1.7 Fiscal revenue
Strong revenue growth in 2006 and 2007 from VAT and oil revenues are
helping to offset unexpected expenditures from subsidizing losses of the
state-owned oil distributor.
Figure 3-10. Fiscal revenue
(Source: MoF; CSFB, 2006)
As a net oil exporter, the higher oil prices meant that oil-related revenue
contributions to the fiscal budget ran almost 50% higher than budgeted in
2004 and 2005. Revenues from oil production and taxes account for about
28% of the total fiscal revenue. While the government is likely to continue
posting a fiscal deficit for the foreseeable future, the shortfall is becoming
more manageable, as its ratio to GDP has declined for three consecutive
years and likely to fall again this year (CSFB, 2006).
Expenditure may rise in the next few years from a phasing in of civil service
pay increases, infrastructure spending and recapitalization costs from the
SOEs and banking sectors. However, efforts to restructure the tax system
and increased compliance, plus improved profitability (or reduced losses
by SOEs), should help keep the budget deficit below 2% of GDP over the
medium term (CSFB, 2006).
2003
-12,043
12,044
7,200
7,200
22,476
15,276
4,844
7,654
2,810
Chart 17 The fiscal deficit has
become more manageable
Chart 18 2005 Budget plan
0
-2,000
-4,000
-6,000
-8,000
-10,000
-12,000
-14,000
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
2004E
-11,575
11,575
5,653
5,653
23,093
17,440
5,922
8,788
2,866
2005 (budget)
-12,800
12,800
9,998
9,998
33,250
23,252
2,802
7,500
4,698
Budget balance (VND bn) As % of GDP (RHS)
1999 2000 2001 2002 2003 2004 2005E
Fiscal balance
Total financing
Domestic financing
Treasury bill Insurance
Issued
Repayments
Financing abroad
Total foreign borrowing
Amortization
37
3.1.3.2 Economic development
In recent conferences for foreign investors, government ocials have
espoused the governments commitments to economic reforms.
34
According
to the Prime Minister, the road map for the next ve year plan (2006-2010)
that was set by the Party Congress in April, 2006 revolves around following
key areas (VET, May 2006; VIR, 16.03.2006):
(1) Development of the private sector
(2) Foreign direct investment
(3) Privatization of SOEs
(4) Global integration
(5) Infrastructure development
(6) Building capital market institutions
3.1.3.2.1 Development of the private sector
The establishment of the Enterprise Law in 2000 set the stage for the rapid
growth that has taken place in the private sector over the last five years. The
rise of the private sector (both domestic and foreign), which now makes up
two-thirds of the overall economic output has been key to the transforma-
tion of Vietnams economy. From less than 100 private companies when the
new law came into effect, there are now more than 200,000 and the number
continues to expand. Many of these are small scale and, essentially, family
run businesses, in part because of the difficulty in accessing loan capital
from the banks. Their share of industrial output is about 75% - up 25 %
over the past ten years. This is a reflection not only of the rapid increase
in the number of new private enterprises and privatisations, but also their
increased efficiencies. Furthermore, the private sector employs 90% of the
total workforce today and generates the overwhelming majority of the 1.5
million new jobs needed each year. Clearly, the private sector is not only a
crucial economic pillar but also a social imperative (Merrill Lynch, 2006).
34 In August 2006, during a conference entitled Investing in Vietnam, the new Prime Minis-
ter Nguyen Tan Dung gave a speech that set out the main thrust of future economic policy
centring on four major tasks deemed necessary to maintain a vigorous rate of economic
growth between now and 2010 (VET, August 2006).
38
According to Vietnam observers (Merrill Lynch, 2006) this is beginning
to change, especially as foreign banks are taking stakes and starting the
process of upgrading credit assessment systems as well as credit products.
The introduction of a unified tax rate (28%) has also helped to improve
both the transparency for companies as well as tax collections for the
government.
3.1.3.2.2 Foreign direct investment
In 2006 foreign direct investment is estimated to have reached US$ 10
billion an eight year high (VietnamNews, 05.02.2007). In many cases
we are seeing Vietnam attract capital as a complementary production base
to China as manufacturers seek to diversify supply chains. For the many
overseas development agencies in Vietnam this also represents something
of a success story and there is active investment activity from the likes
of the ADB and IFC. Minimum wages are still very low. For government
employees it is just US$ 19 per month, foreign invested enterprises (FIEs)
pay closer to US$ 60 per month (VET, Februar 2007).
Figure 3-11. Foreign direct investment
(Source: GSO, 2007)
The Japanese have been amongst the largest investors. Other key sources
of investment have been Korea, Hong Kong, Taiwan and Singapore. The
recent Memorandum of Understanding signed with Intel, for an estimated
commitment of more than US$ 1.6 billion, would be the single largest tech-
nology investment in the country. In combination with domestic capex
0
2
4
6
8
10
U
S
D

b
12
2000 01 02 03 04 05 06
2.9 3.3 3 3.2 4.5
6.8
10.2 Hotels & restaurant 7%
Mining 8%
Infrastruture 2%
Manufacturing 47%
Other services 6%
Real estate &
costrn 13%
Transport &
Comm 12%
Agriculture,
Forestry, Fisheries 5%
39
this has helped to push the overall ratio of investment to GDP to over 35
% (VIR, 16.03.2007). This is the second highest ratio across the whole of
non-Japan Asia.
Around 38 % of total FDI commitments were destined for the two south-
ern industrial provinces of Dong Nai and Binh Duong, whereas the inflows
to Hanoi and HCMC, traditionally major destinations for FDI, were more
modest. Around 60% of investment is focused on light industrial projects
(GSO, 2007), where the payoff in terms of higher output and employment
is relatively rapid.
3.1.3.2.3 Privatization of SOEs
The Vietnamese privatization program
35
was started in 1992. Equitiza-
tion transforms SOEs into corporate entities and plays a key role in rais-
ing productivity and economic efficiency. This equitization of SOEs has
steadily increased. The pool of equitized SOEs stands at 3,600 with another
1,500 to be equitized by 2010 (Vietnam Tiger Fund, 2007). Whilst willing
to sell some SOEs completely, the government has a long list of strategic
industries in which it will retain a 51% controlling stake.
36

Figure 3-12. Numbers of privatizations
(Source: GSO, 2007; Vietnam Tiger Fund, 2007)
35 Officially known as the Equitization Program.
36 Some of these include areas such as electricity production, telecomm infrastructure,
mineral exploration and water supply. Less obvious examples are high quality cement
production, large scale milk and beer production, labour export services and agricultural
equipment.
2000
0
400
800
1200
2001 2002 2003 2004 2005 2006
40
By 2010, it is likely that all remaining SOEs will be equitised. This is a
commitment by the government made in the National Assembly. Major
listings will take place in sectors like telecom, oil and gas, financial services,
airlines and banking.
The privatization process itself begins with equitization. This is in effect
an incorporation process that creates shares that are all held by the State.
After this the true privatization process begins, usually with a limited
public offering and an allocation of shares to employees which is typically
anything between 20%-30% of total shares issued. These initial shares trade
on the OTC market ahead of the actual IPO which takes place by Dutch-
style auction. To date, close to 2,000 companies have gone through such
a process (about a third of the total SoEs) but the size of the individual
companies has been relatively modest. The State Securities Commission
estimates that these SOEs account for only 8% of the total invested capital
of all registered enterprises (SSC, 2006).
In tandem with this there have been important revisions to foreign owner-
ship restrictions that are reminiscent of what we have seen across markets
such as Thailand and Taiwan over the past decade. Private companies can
be 100% foreign owned but for listed companies this is limited to 49% -
prior to October 2005 it was even lower at 30%.
The new Enterprise Law
37
requires that all state owned enterprises to
become incorporated within four years. At the same time the govern-
ment is also setting up a Temasek-type asset holding company to
accommodate all the residual holdings. An important element of these
IPOs is the allocation of stock to management and employees as the
joint stock entity is created this can be as much as 30% of the total
shares issued. This provides much of the liquidity that passes through
the OTC market and provides a potential source of stock for institu-
tional investors to access.
37 It came into effect from July, 2006.
41
3.1.3.2.4 Global integration
Vietnams restructuring story is ongoing and the next stage is being inspired
by the World Trade Organization accession. The WTO accession process
has demonstrated much of the reform commitment of Vietnam in the past
few years, as the government has been very aggressive in restructuring the
economy to conform to most WTO conditions.
38

Post-accession, Vietnam has agreed to open up its domestic market on
ten service lines and 92 product areas. It will also be committed to a
tariff reduction schedule affecting 99.3% of all products imported. Aver-
age import tariffs will be reduced from an average 18.5% currently to
15% or less within three to five years - depending on the product (VET,
Februar 2007). Some quotas on sensitive product areas will remain, but
otherwise the scope of deregulation should be substantial. Vietnam will
also comply immediately with eight WTO agreements on accession.
39

The risk is the economys ability to adjustment to the new conditions
mandated under WTO.
In rushing through regulatory and legal demands for accession, Vietnams
firms at the ground level are still uncertain about how the new WTO regime
will affect them. While the three to five year grace period for adjustment
will give local firms time to familiarize themselves with new procedures
and gradually rising foreign competition, Vietnam is still a less developed
economy trying to adapt to a market-driven economic system. It seems
likely that some confusion and restructuring pain will be unavoidable for
domestic firms, particularly as lower import tariffs will mean heightened
competition from imported goods. The eventual entry of foreign players
in the domestic market is likely to pressurise many of the inefficient SOEs
and smaller private enterprises, unless they adapt within the relatively
short period of grace.
38 The National Assembly approved 12 bills at its session in November 2006, which completed
23 new or revised laws introduced since 2002 to meet WTO requirements.
39 TRIPS (trade-related intellectual property rights), TRIMs (trade-related investment
measures), CVA (customs valuation), SPS (sanitary and phytosanitary measures),
TBT (technical barriers to trade), Import Licensing, Pre- Shipment Inspection, and
Rules of Origin.
42
However, WTO accession also opens markets to Vietnamese exports,
creating demand for its existing low-value added products and will
stimulate investments in upgrading its export and industrial base. Light
manufacturing would be an important area of potential development, as
Vietnams competitiveness in textiles and garments could lead the way
for an expansion into other product areas.
Although much more domestic investment or FDI would be needed for
Vietnam to compete for WTO market share, an indication of possibili-
ties can be derived from the countrys ability to increase exports to the
US following the signing of a bilateral trade agreement in 2000. After the
pact became effective at the end of 2001, Vietnams exports to the US have
risen five-fold to US$ 5 billion by 2004 and accounted for 19% of the coun-
trys total exports - compared to 5% in 2000. Excluding the US, Vietnams
exports to the rest of the world rose by a comparatively slower 54% over
the same period (GSO, 2006).
3.1.3.2.5 Infrastructure development
Infrastructure constraints remain among the biggest concerns for
businesses, which cite poor quality and high costs as key challenges.
New evolving challenges such as the impending loss of concessional
financing may play havoc with financial access along with diminishing
returns on capital spending. In addition, according to the World Bank,
refining planning processes, preparing for rapid urbanization, improv-
ing the efficiency of infrastructure service providers, and developing
stronger institutions to encourage private finance or direct private
provision of infrastructure, will become topical issues in the years to
come (World Bank, 2005).
Access to capital is a critical issue - official development assistance (ODA)
declines in relative importance as Vietnam becomes more prosperous.
Much of the incremental capital will need to come from financial markets
or direct private finance requiring reform of consumer pricing, enterprise
restructuring and revised regulation to establish the credit-worthiness of
infra-enterprises.
43
Figure 3-13. Infrastructure situation
(Source: World Bank, 2005)
Access to capital has significance beyond just infrastructure. As in China,
because of the very fast pace of growth, concerns about the quality of
growth have not been a significant source of concern. The banking system,
though, is at a nascent stage and state-owned banks, in particular, suffer
high credit delinquencies. NPLs may be as high as 15-20% (World Bank,
2005). Access to capital, both domestic and foreign, will be the most crucial
driver of growth over the next five years. The quality of credit and growth
will become more important to ensure that liquidity - both domestic and
foreign - is unimpaired.
3.1.3.2.6 Building capital market institutions
Bond market
The Ministry of Finance is keen to establish a domestic credit rating agency
in an effort to boost the development of a bond market. Few domestic
firms have issued bonds, relying instead on loans from the banking system,
and only two corporate bonds are traded on the stock exchange. A credit
rating agency that provided better information on firm-specific risk would
90 (%)
80
70
60
50
40
30
20
10
0
National roads
Limited availability
Poor quality
Too expensive
Poorly managed/Service delays
Slow/too many procedures
Inter-provincial
roads
Electricity Telephone
44
help investors to price bonds accurately. Such an agency could also rate
municipal bonds.
40

Stock market in Vietnam
Vietnams first stock market has only been operational since 2000, and has
seen the number of companies listed grow from just 2 at the time of its
launch, to 195 firms by March 2007 (SSC, March 2007). Officially known
as the Securities Trading Center (STC), trading commenced in July 2000.
The STC trades both equity securities (i.e. company shares) and fixed
income securities (i.e. bonds). Crucially, of the 22 companies listed at the
time of writing, all are former SOEs that floated public share issues as part
of the official equitization programme, well before listing on the STC. In
this respect, Vietnams stock market is not yet serving the important role
of being a vehicle for local companies to raise equity capital through public
share issues, although this should, hopefully, change in the near future.
Vietnams STC is unlike many stock markets in that it is owned and oper-
ated by the government, rather like a public utility, instead of being owned
by its members or investors (such as banks, securities companies, or other
financial institutions).
For the stock market to develop in the long-term it needs a more robust
community of investors, with different demands and investment strategies
for listed equities. Therefore, a welcome development was the licensing of
the first local investment fund management companies.
41
Both local and
foreign investors are expected to invest in such funds, which will be able
to invest in both listed and unlisted companies, as well as fixed income
instruments such as bonds.

40 Recently the HCMCs Committee asked for the interest rate premium (over government
bonds) on its municipal bonds to be raised from 0.2% to 0.3% per year, in a bid to make
its paper more attractive.
41 The first of these, VietFund Management is a joint venture between local Sacombank and
foreign-owned Dragon Capital, with a 30%-70% shareholding structure respectively. Viet-
Fund launched - and received approval from the SSC for Vietnams first official onshore
investment fund (VF1), with capital of around VND 200-250 billion. VF1 is expected to
list on the STC (DragonCapital, 2006).
45
Foreign investors
In terms of foreign investors in STC-listed companies, both resident
foreign institutions and individuals are permitted to buy and sell shares
in Vietnam, and trade in securities listed on the STC. Foreign organiza-
tions and individuals as a group may now hold a maximum of 30% of
a companys total outstanding shares (Decree 144 of 2003). The launch,
in late 2003, of the first foreign investment funds focused exclusively on
investing in companies listed on the Vietnam stock market (and pre-listing
companies), may assist more institutional investors to gain some exposure
to the STC. This paucity of institutional investors in commonly found in
relatively young equity markets that have focused more on the supply
side of the stock market: listing more and better companies, and oblig-
ing them to adopt better standards of corporate governance and disclo-
sure. However, it is now widely appreciated that there is an equal need to
work on the demand side of stock market development: developing an
adequately robust market for the equity paper being issued.
42
The listed companies
There is quite a diverse range of different business sectors represented by
the 195 companies currently listed on the STC (SSC, March 2007).
43
Most
of the listed companies are former SOEs, and the public offering of their
shares took place significantly prior to the listing on the STC.
44

e aggregate value of the listed companies shares trading on the STC (i.e.
the total market capitalization) was roughly US$ 22 billion in mid-May 2007
(SSC, May 2007) - up from a low of roughly US$ 110 million at the end of
42 For example, Chinas stock market (which is Asias second-largest by capitalization), is
reported to consist of 60 million-mainly poorly informed-retail investors, often trading
on rumours, rather than on fundamental analysis of the relevant companies. In order to
switch from a gambling mentality to a more fundamental investing approach, the Chinese
government decided in 2001 to open up the market to institutional investors, including
mutual funds, insurers and pension funds (Freeman, 2005).
43 The SSC is reportedly aiming for 500 companies listed on the STC by the end of 2010
(VietnamNet, 12 October 2006).
44 In some respects this echoes a similar situation in China, where only 80 or so of the
roughly 1,200-plus companies listed on the Shanghai and Shenzhen stock exchanges are
private companies; the rest being state-owned enterprises (Freeman, 2004).
46
2001. At present, the total market capitalization of the STC (excluding bonds)
is equivalent to just 23 percent of the countrys GDP (SSC, May 2007).
The government aims to reduce the number of SOEs to about 1,000 by
2007, but this is ambitious. Among the roughly 900 SOEs that have been
equitized in Vietnam so far, a substantial proportion are thought to meet
the minimum criteria to list on the STC, but the majority have chosen not
to do so. This is despite the introduction of fiscal incentives by the SSC in
a bid to encourage more companies to list. The current fiscal incentives
include a fairly generous corporate income tax holiday for two years after
listing (Vietnam Tiger Fund, 2007).
Venture capital
Although roughly nine years older than the stock market, the venture
capital industry in Vietnam is a relatively recent phenomenon.
45
At the
beginning of the 1990s, the macro-economic and business growth fore-
casts for Vietnam (and Southeast Asia in general) were very positive, and
institutional investors specializing in the emerging markets started to
focus some of their attention on Vietnam (Freeman, 2004). During the first
half of the 1990s, Vietnam experienced very substantial inflows of foreign
direct investment, and there was also a fairly consistent annual increase in
the number of foreign venture capital funds wholly or partially Vietnam
oriented. A total of eight (listed) venture capital funds exclusively focused
on Vietnam or the Indochina region were launched during this period,
and over US$ 400 million in funds were raised for investment in Vietnam
during this period (Freeman, 2004).
In the latter half of the 1990s, venture capital activity in Vietnam was much
less vigorous,
46
largely as a result of (Freeman, 2004):
- Generally disappointing performances of several of the Vietnam funds,
and a paucity of quality investments available;
45 The first venture capital fund oriented solely towards Vietnam was established in 1991.
46 Tellingly, no new venture capital funds for Vietnam were established between 1996 and 2002, at
a time when venture capital activity in much of the rest of East Asia was on the rise.
47
- The difficulties of developing attractive investment portfolios in Viet-
nam, and gaining exposure to the macroeconomic growth trajectory of
the country through specific investments;
- General foreign investor sentiment towards the country lessened,
due to a number of factors (including delays in opening the first
stock market).
As a result of legislative changes, todays foreign venture capital investors
are experiencing a business environment that is markedly more conducive
to investing in Vietnamese companies than their predecessors did in the
mid-1990s.
47
It should be noted, however, that the challenges faced by venture capi-
tal investors in Vietnam are not exclusive to this country. Venture capital
investors in many emerging markets have encountered problems arising
from low standards of corporate governance and transparency, limited
recourse to the law, and dysfunctional capital markets (Freeman, 2004).
3.1.4 Conclusion
3.1.4.1 Vietnam compared with selected ASEAN countries
Key figures of countries in ASEAN
Below is a table showing a comparison of economic attractiveness of
Vietnam versus some ASEAN countries with similar socio-economic
indicators.
48

47 Such as the replacement of Decision 145 (of 28 June 1999) with Decision 36 (of 11 March
2003), most notably (Freeman, 2004):
- Removing the requirement that foreign investors must hold their shares for between 1-3 years;
- Removal of the need for the prime ministers approval on each individual deal (instead,
the investee company need now only inform the government of the share sale);
- Removal of the restriction that foreign investors may only invest in joint stock companies;
- The need for an auction process.
48 Vietnam became the 6
th
ASEAN member in 1995, a region with an area of 4361303 sqkm
and a population of 555 million.
48
Table 3-1. Key figures of countries in ASEAN
(Source: CLSA, 2006)
Country Attractiveness for Investment
This analytical tool is based on the method of the McKinsey product-port-
folio matrix that consists of two dimensions: the sociopolitical attractive-
ness (see Table 3-2. / Dimension x) and the economic attractiveness (see
Table 3-2. / Dimension y).
49

49 Each dimension includes several assessment criteria which are weighted and graded. The
summation of all criteria of the two dimensions delivers the position in the matrix as
illustrated in Figure 3-14 (Dinh, 2006).
1. Brunei
2. Burma
3. Cambodia
4. Indonesia
5. Laos
6. Malaysia
7. Philippines
8. Singapore
9. Thailand
10. Vietnam
Total
5270
657740
176520
1826440
230800
328550
298170
683
511770
325360
4361303
0.40
50.00
14.00
222.00
6.00
25.00
85.00
4.00
64.00
84.00
555.00
17110
106
385
1239
462
5160
1176
27250
2628
604
3.0 %
5.0 %
7.0 %
5.6 %
7.0 %
5.2 %
5.1 %
6.4 %
4.5 %
7.5 %
Countries
Area
(sqkm)
Population
(mn)
GDP
per capita in
USD (2005)
GDP growth
(2005)
49
Figure 3-14. PortfolioMatrix of Country Attractiveness for Investment
As the section 3.1.1.2 (Political system) showed, Vietnam is politically and
socio-culturally a very stable and, therefore attractive country compared
to its neighbours.
(5.0)
High
High (5.0)
(3.33)
Medium
Medium (3.33)
Economic
Attractiveness
(y)
Circle reflects
GDP Size
Of Countries
Socio-cultural Attractiveness (x)
Indonesia
(1.535/2.67)
Legend:
(1.67)
Low
Low (1.67)
Thailand
(3.5/3.65)
Malaysia
(3.55/4.48)
Philipines
(1.88/2.76)
Vietnam
(4.5/4.015)
50
Table 3-2. Country Attractiveness for Investment of Vietnam
Assessment
Criteria
Description of Assessment Criteria Weighting
of Criteria
Un
weighted
Value
Weighted
Value
1) Political
Stability
Infrequent change of government; law &
order, very stable, good control, secure.
0.19 0.95
2) Social unrest Ethic or religious conflicts; conflicts due to
gap of wealth; friendly & peaceful.
0.11 5 0.55
3) Terrorism Ethnic or religious fanaticism. 0.125 5 0.625
4) Corruption Seldom or widespread. 0.14 4 0.56
5) Bureaucracy r inefficient resource allocation. 0.065 3 0.195
6) Legal system Laws renewed (e.g. Company laws,
Intellectual Property Rights), legal
enforcement.
0.1 4 0.4
7) Socio cultural
situation
Population situation; lifestyle; attitudes
toward consummation, family, nature,
religion.
0.14 5 0.7
-
5
Efficient o
-
8) International
relations
Membership in international organisations
such as WTO, ASEAN, APEC.
0.07 4 0.28
9) Ecological
issues
Laws and regulations concerning
ecological protection, ecological
awareness.
0.06 0.24
Overall Sociopolitical Attractiveness 1.0 4.5
4
Assessment
Criteria
Description of Assessment Criteria Weighting
of Criteria
Un
weighted
Value
Weighted
Value
1) GDP situation GDP growth rate. 0.115 5 0.575
2) Location ty to market or to resources; geo
politically relevant location of the country.
0.135 4 0.54
-
Proximi -
3) Competition
related issues
Protected industries; open to international
competition.
0.10 3 0.3
4) Market
related issues
(present & future) size of domestic
arket; urban population growth.
0.115 4 0.46
5) Infrastructure
(technological
development)
Investment in adequate infrastructure,
such as transportation, internet, financial
& banking, health care.
0.105 4 0.42
6) Resources Availability of raw material; fuels; energy;
related supplier system are good.
0.115 0.46
7) FDI situation Accessibility for FDI; governmental
promotion; free room for choosing the
adequate entry mode; repatriation of
profit(s).
0.07 0.28
m
4
4
8) HR
availability
Availability of low st workforce;
availability of well-trained workforce.
0.11 4 0.44
9) Quality of life Relevant for expatriates; life & leisure;
safety (e.g. robbery, pocket picking);
medical treatment on sound basis.
0.095 0.38
10) Catastrophes Major natural events, such as floods,
typhoons, storms, earthquakes.
4 0.16
Overall Economic Attractiveness 1.0 4.015
co
4
0.04
Economic Attractiveness (y)
Sociopolitical Attractiveness (x)
51
3.1.4.2 Key factors with positive impact on Vietnams growth potential
National culture
The culture of Vietnam, like Japan and Korea, has been strongly influ-
enced by neighbouring China over thousands of years. Vietnams everyday
behaviour and attitudes are determined by a synthesis of religions espe-
cially Buddhism, Confucianism, and Daoism. The Vietnamese are very
diligent. Further, Vietnamese strive for harmony in the collective (Dinh,
1997). According to the Confucianism, Vietnamese pay a lot of attention
to education, discipline, teamwork and are hard-working. Relationships
matter and communication is key with focus on personal relations. All
these characteristics are helping Vietnam achieve fast growth just as Japan,
South Korea and China have done.
50

Political stability
The economic transition in Vietnam has not been achieved overnight
the country has traveled a long way since 1976 when North and South
Vietnam were unified. After decades of war, Vietnam began rebuilding its
ravaged economy in the early 1980s, with initial steps characterised by a
centralised planning system and a closed economy that faltered badly. In
1986, the government began to realise the need for reform and, in an effort
to jump-start growth, began moving away from central planning to a more
market-based economy that stressed the development of the private-sector
and foreign participation.
WTO Accession
Accession to the World Trade Organisation WTO in January 2007 is
another catalyst as foreign capital seeks to benefit from Vietnams advan-
tages as an export hub, while also opening up more markets to Vietnam-
ese industry. The US, for example, accounts for the largest share of the
countrys exports (21%), boosted by the 2001 Bilateral Trade Agreement
(VietnamNet, 05.03.2006). In addition, a lot of new FDI is aimed at greater
50 As Vietnam is the last goose to take off in the Flying Geese Model of the so-called chop-
stick-countries (Kaname Akamatsu, cited in Dinh, 1997).
52
value-added manufacturing, while services majors are also starting to tap
Vietnams potential.
Changing economic structure
Vietnams growth record has been remarkable, but it must keep expanding
at 8% if it is to create employment opportunities for the 1.4 million people
entering the workforce each year (VET, March 2007). e country therefore,
is facing some considerable challenges. e government is largely untested for
its response to a potential economic slowdown, and such an event may have
a profound impact on the countrys economic trajectory. Ination is at a high
7.5% and rising crude oil prices have aected the scal situation.
At the same time, the economy is becoming more investment intensive and
is integrating rapidly within the global economy. Underpinning all this is
the rise of the private sector and Vietnams transformation from a planned
to a market-based economy.
The private sector, both domestic and foreign, makes up two-thirds of the
overall economy. Its share of industrial output is even higher at 75% - up
25 percentage points over the past ten years. This is a reflection not only of
the rapid increase in the number of new private enterprises and privatisa-
tions, but also their increased efficiencies. Furthermore, the private sector
employs 90% of the total workforce today and generates the overwhelming
majority of the 1.5 million new jobs needed each year to accommodate the
increasing work force (VET, March 2007). Clearly, the private sector is not
only a crucial economic pillar but also a social imperative.
Vietnam had a largely agrarian economy in the 1970s which has grown
at a relatively robust rate of 4% a year over the past decade. Nevertheless,
agricultures share of GDP has halved in the past decade, to 20%. A rise
in industrial activity has transformed the profile of the economy and now
accounts for more than 40% of GDP (EIU, 2006). This segment has grown
at a 10% Cagr over the past decade accounting for half of the real growth
over this period. Led by a trade and consumption boom, the service sector
growth has also accelerated in the past few years, and now makes up 38%
of the overall economy (EIU, 2006).
53
Strong economic foundation
After decades of war finally ended in 1976 with the defeat of the US-backed
south by the nationalist and communist north, Vietnam began to rebuild
its ravaged economy in the early 1980s, creating a solid base of domes-
tic demand backed by private consumption and investment. Accounting
for 64% of GDP, private consumption is a pillar of the domestic economy.
High domestic savings, increasing foreign direct investment and overseas
worker remittances are driving rapid growth in investments and it now
accounts for 36% of GDP (up from 27% in 1995). The government expects
investment to reach 42% of GDP by 2010 (Vietnam Tiger Fund, 2007).
Domestic savings, increasing FDI and growing remittances make invest-
ment the key growth driver, accounting for fully one-third of the economy.
The government expects the contribution of investment to reach 42% of
GDP over the next five years (VET, March 2007).
Focus on investments
As with Vietnams quest for growth in the banking sector, meeting the
investment target and better technology access in other sectors will depend
on its ability to attract foreign capital. The government has set a target for
itself of meeting almost a third of the total investment needs in the next
five years from foreign sources. While FDI will form the largest chunk,
more remittances, portfolio investment and even development assistance
are important targets. To that end, the governments efforts to open up and
integrate the economy with the rest of the world and streamline legislation
are part of an overall cohesive strategy for sustainable growth. Political
stability, low labour costs, fiscal incentives and concessions, and a growing
domestic market will make it easier for foreign capital to tap into Vietnams
advantages as an investment destination.
3.1.4.3 Major challenges facing Vietnam
Vietnams record of stable and accelerating growth has been remarkable,
but it needs growth of at least 8% to create productive opportunities for
the estimated 1.5 million people entering the workforce each year (VET,
March 2007). The key challenges are as follows:
54
Legal system
The necessary changes in the legal system in Vietnam have not been able to
keep up with the pace of economic development. In terms of the banking
sector, legal reform is particularly needed with respect to the clarification
of legal concepts and contractual rights such as ownership and transfer
of land-use rights, collateral registration procedures, mortgage laws and
title deeds. The evolving nature of Vietnams regulatory environment and
commercial law, combined with overlapping jurisdictions among govern-
ment ministries often result in a lack of transparency and consistency in
government policies and decisions related to commercial projects.
Corruption
This is a sensitive and a problematic area which is often cited as a major
impediment to conducting business in Vietnam. Any setback or delay
in legislative and regulatory reform will hamper the necessary influx of
private capital to support the growth over the next 5-10 years. In June
2005, a Law on Corruption Prevention and Control came into effect,
which among other things encourages whistle-blowing activities. All
state employees now have to declare assets and income, including those
of immediate family members. While all the MNC executives we spoke to
stated that the government was very friendly towards business and that
they had not encountered bureaucratic hurdles or instances of corruption,
they did employ locals with connections (in Vietnamese: Quan H) to
smooth their way through government related matters.
Infrastructure
Infrastructure constraints remain among the biggest concerns for busi-
nesses, which cite poor quality and high costs. Investment in sectors such
as transport, power and telecommunications, among others, is necessary
to address these concerns. Developing stronger, more effective govern-
ment institutions to encourage private investment in the development of
infrastructure will become more urgent issues in the coming years. A more
expanded infrastructure and larger capacity is going to be needed to fuel
the countrys growth.
55
Access to skilled and unskilled workforce
One of Vietnams primary assets is a relatively well-educated and inex-
pensive labour force. However, signs of strain may start emerging as the
country enters its next phase of growth. Many businesses have indicated
that a shortage of skilled labour is starting to become an issue. The prob-
lem is most acute at the managerial level due to a shortage of strong
tertiary-level training and is evident in the growing stock of expatriate
management in the country. The government is aware of the problem
and the Ministry of Education and Training plans to almost double the
enrolment capacity of universities and colleges by 2015 and increase it by
a factor of 5.3 times by 2020 from a 2006 capacity of 166.5 students per
1,000 people (VietnamNet, 06.04.2007).
However, the skills shortage is not just limited to managerial ranks. Accord-
ing to estimates of Vietnams workforce of 45m, just 7-8% can be ranked
highly skilled, 19-20% graduated from vocational training colleges, and
the overwhelming 75% are unskilled (VietnamNet, 06.04.2007).
3.1.4.4 Development scenarios
Although Vietnams growth over the past decade has been impressive,
numerous issues and potential obstacles still remain. These factors can
affect the pace of development of Vietnam. In order to forecast the devel-
opment of Vietnam in the years to come, we have applied the scenario
analysis with three major scenarios: optimistic; realistic; and pessimistic.
56
Figure 3-15. Scenario analysis GDP growth forecast to 2010
The scenario analysis is conducted based on the assessment criteria listed
below (see also Figure 3-16):
- Development of global economy
- Oil price
- Privatization process
- Infrastructural development
- Terrorism
- Political instability
5.1
6.0
8.3
8.1
8.8
9.5
9.3
8.8
6.0
4.4
9.5 9.2
9.1
8.8
8.4
7.8
7.3
7.1
6.9 6.8
8.6 8.8 8.9 8.3
8.2
8
7.7
7.5
7.2
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
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2
0
0
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2
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9
2
0
1
0
i
n

p
e
r
c
e
n
t
a
g
e
Optimistic
Realistic
Pessimistic
5.1
6.0
8.3
8.1
8.8
9.5
9.3
8.8
6.0
4.4
9.5 9.2
9.1
8.8
8.4
7.8
7.3
7.1
6.9 6.8
8.6 8.8 8.9 8.3
8.2
8
7.7
7.5
7.2
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
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1
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9
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1
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1
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8
1
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9
2
0
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0
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0
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2
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0
9
2
0
1
0
i
n

p
e
r
c
e
n
t
a
g
e
Optimistic
Realistic
Pessimistic
57
Figure 3-16. Three major scenarios
Assessment
Criteria
Pessimistic Realistic
Scenarios
Optimistic
Development
of global
economy
Oil price
Privatization
process
Infrastructural
development
Terrorism
Political
instability
Slow down of the
global economy
Higher than US$ 100
per barrel
Corruption, inefficient
bureaucracy hinders
privatization process
and slowdown the
reform efforts
Major infrastructural
projects cannot be
started as planned
due to financial
shortage and
bureaucracy
International terror
networks arrive in
Vietnam and cause
substantial damages
The government
comes under
pressure due to
economic slow down
and conflicts within
the party
Global economy
shows signs of slight
slow down
Higher than US$ 60,
but lower than US$
100 per barrel
Privatization process
is progressing, but
slower than expected
Government shows
some commitment to
promote major
Infrastructural
projects
The country faced
social unrest, for
example from the
ethnic minorities or
discontent farmers
and land owners
There can be some
discontent within the
party due to the
severe anti-corruption
campaigns
Global economy still
very healthy
Lower than US$ 60
per barrel
Privatization can be
finished as planned
in 2010
Strong commitment
of the government to
develop major
infrastructural
projects
Vietnam
successfully hinders
international terror
networks from
infiltrating the
country
The government
shows strong
leadership despite
discontent and
conflicts within
the party
58
3.2 Banking market in Vietnam
Banks in Vietnam have significant growth opportunities. On one hand,
Vietnams GDP growth has been one the fastest in the region over the past
decade and, on the other hand, less than 5% of the Vietnamese population
use banking services.
The Vietnamese banking system has been partly reformed but it is still
weak. The state-owned banks still dominate the banking system.
51
The
overdue loan rate is increasing and the commercial banks have limited
lending capacity.
52
An additional problem is that most Vietnamese-owned enterprises are
undercapitalized which is sometimes due to inadequate banking and
foreign investment laws. Once Vietnam liberalizes its market many local
companies will have to compete with foreign entrants maybe for the first
time. In such a situation, their competitive strength will depend, in part,
on better access to more economically competitive banking services.
With over 80% of Vietnamese 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. The reason why the
banking system is permitted to be equitized and to sell stock in foreign
markets is to bring in additional foreign capital and thereby enable them
to support the countrys economic development.
To reform the banking sector and facilitate the liberalization of the commer-
cial process, the government of Vietnam has announced the Internation-
ally Integrated Programme of the Banking Industry, and is committed to
implement it after Vietnam joined the WTO in January 2007
51 Currently, five big state-owned commercial banks control around 70% of Vietnams
banking market.
52 Only 17% is controlled by joint stock banks, which are non-state commercial banks
established under Vietnamese law and the rest 13% of the market shares belong to
foreign banks or joint venture banks
59
3.2.1 Retail banking
Domestic banks have been aware of the importance of developing retail
banking services for some time now. They have been trying to make
heavy investments in retail banking development by opening many more
branches. In addition, banks have spent a lot of money on core banking
software and setting up the necessary IT infrastructure. They have also
made every effort to promote the development of ATM systems, Internet
Banking, Phone Banking and Home Banking.
53
In 2006, the net earnings from services of the five state owned banks were
reportedly US$ 3.2 m up 74% over 2005 (SBV, 2006). An 84% growth rate
objective has been set for 2007 which is projected to come mostly from
modern retail banking services. In general, the banking services provided
by domestic banks tend to be backward and poor. Most banks do not
provide services over the counter despite the fact that there is no self-
service system. Local banks now have different retail banking services, but
they do not cooperate with each other. For example, all the big commercial
banks try to develop their own ATM networks, but they cannot find a
common platform to develop a single network, which could help reduce
investment expenses (VET, 03.03.2007).
3.2.1.1 Retail banking and the SME market
At the beginning of 2007, there were about 280,000 SMEs in Vietnam. The
government believes that their number will double by 2010-11 (SSC, 2007).
The SME sector accounts for about a third of the GDP and employs about
25% of the workforce (EIU, 2006). Less than a fifth of SMEs currently have
access to the bank lending market. The rest have to make do with loans
from family, friends or other private sources. Even those which do manage
to borrow money from banks usually do so in a private rather than corpo-
rate capacity. In other words, the owner will pledge some personal assets,
take out a personal loan and apply it to the business.
53 Currently, Retail banking is the only one far developed banking industry. The other
banking services as investment banking, private banking, and corporate banking are
still very embryonic.
60
Banks are generally wary of the SME market as many small companies
have few assets to offer as collateral; accounts are frequently unreliable
and they are usually the first to suffer in an economic downturn. Add to
this the paucity of credit information and one can see why the relationship
between bank and small business tends to be fraught with problems.
54
The
banking sectors reluctance to lend to SMEs is partly due to lending rate
regulations, under which banks are permitted to lend a maximum of 75%
of their mobilised capital.
Other reasons for the SMEs difficulty to borrow from banks is a lack of
credit information on most potential customers and a risk averse lending
culture which leads to the desire to spread the risk as widely as possible.
The latter is ironic considering that most Vietnamese banks concentrate
their lending on a few large corporate customers.
The problem of SMEs is not only the amount of money available to
borrow but also the short maturities of loans. Banks are not interested in
medium term or long term loans to SMEs for project financing or busi-
ness expansion. These kinds of loans require a good understanding of
the business viability and potential cash flows from a new project. This
is clearly beyond the current scope of a banking system which bases its
credit decisions mainly on collateral.
Among the Vietnamese banks, only Agribank and Sacombank have made
a strategic decision to focus on the SME market. Agribanks involvement
is illustrative of the situation. They are usually the lender as a last resort, a
bank with a largely social policy function.
Given the growing number of SMEs in Vietnam the potential of retail
banking is very significant. Banks such as Vietcombank, Sacombank,
and ACB which already focus on the two segments, retail banking and
the SME market, enjoy a higher than average profit margin and superior
returns on equity.
54 Generally loans above US$ 315,000 are likely to be rejected, even though businesses may
have sufficient collateral to borrow such amounts. Banks are typically afraid of the risks of
lending capital over US$ 312,500. The comfort zone for SME lending is about US$ 63,000-
126,000, which is insufficient for most small businesses (VIR, 05.04.2007).
61
To serve these segments requires fairly heavy capital investment in
branch networks and IT in order to create the infrastructure necessary to
support a retail banking platform. This has been lacking and poor distri-
bution along with limited consumer information are the biggest barriers
to entry into these two key segments. In other words, the capital costs
are heavy and subsequent fixed costs are also high. The administrative
costs involved in making thousands of small individual loans have also
discouraged some banks. Therefore, some SOCBs are still reluctant to
enter into retail banking or SME lending.
SOCBs currently pay more attention to providing loans for infrastructure
projects and large corporations. However, given the commoditised nature
of this type of lending and the huge amount of capital required, it is not a
viable strategy for most Vietnamese banks. In addition, margins are small
and falling as large corporations can turn to the bond market instead.
Credit loan market
The credit loan market still remains underdeveloped compared to other
Asian countries. In 1990, the credit ratio was only 4.7% of GDP. This
ratio was increased to 44.8%, 52% and over 60% in 2002, 2003 and 2005
respectively (SBV, 2006). Credit has been growing at an average annual
rate of 25% over the past five years.
55
Currently, lending at commercial
banks amounts to about 60% of deposits but it still lags behind the sharp
rise in deposits in 2007.
56
VND deposit rates hover around a 9-9.5%
level at many private sector banks (VinaCapital, 2006). Current lend-
ing rates for VND loans are between 10-14%, which is uninteresting for
borrowers.
57
If the credit market is to grow at the 20-25% target set for
55 While many economists believe that the optimum relationship between credit growth and
GDP growth is a 2:1 ratio, this does not really apply to a developing country where the
credit to GDP ratio tends to be low (VinaCapital, 2006).
56 By the end of June 2006 banks in HCMC had deposits of more than US$ 14.2 billion up
more than 20% so far this year. Over the same period total outstanding loans grew by only
9.2% to US$ 12 billion (SBV, 2006).
57 The corporate sector seems to have reached the limit of its ability to expand credit at
the current high rates. Another reason for the cautious lending stance is the funding
mismatch between largely short term deposits and the largely medium / long term loans
(VinaCapital, 2006).
62
this year, banks will have to look more aggressively for new borrowers,
perhaps in the retail market.
Currently medium and long term loans account for about 42% of total
loans. The problem is that up to 50% of short term deposits are being used
to offer medium and long term loans (SBV, 2006). Such imbalances are long
standing and a bit worrying. However, once the corporate bond market
takes off, banks should be in a position to do more long term financing and
reduce this dependency.
Long term project finance
Long term project finance is becoming more and more frequent as the
government and large SOEs tap private sector banks for large infrastruc-
ture-type syndicated loans. One good example of the type of medium to
long term financing provided by the SOCBs is the deal signed with Elec-
tricity of Vietnam (EVN). The syndicate is to provide a credit line of US$
2.7 billion to EVN over the next four years at an interest rate pegged to
the average 12-month deposit interest rate plus a 3% fee (VET, July 2006).
As the corporate bond market takes off, companies will have the option of
raising money there instead, but the main purchasers will still be the banks
and insurance companies.
Property sector loans
Commercial banks have outstanding loans of about US$ 3.15 billion in
the property sector (VietnamNet, 08.09. 2006). As a percentage of total
loans, this amounts to a 10% exposure to the property market, or 24% of
all medium to long term debt. By city (VinaCapital, 2006),
- 15% of all outstanding loans in HCMC are exposed to the property
sector, worth a total of US$ 1.8 billion.
- in Hanoi the figure is 10% or US$ 562 million.
Some individual banks have a far higher exposure, particularly amongst
the JSCBs. BIDV for example, accounts for about 10% of outstanding loans
to property developers, an exposure of about US$ 176.1 million (SBV,
63
2006). However, the government has tightened lending by ordering banks
to check the credit quality of loans to the property sector.
58
Given the fact
that few real estate transactions have taken place in the past few years there
is concern that the frozen state of the market might jeopardize the qual-
ity of lending to the sector.
59
However, the true level of exposure to the
property market is far higher than these examples indicate. The number
only includes direct loans to property developers for the purpose of project
development.
Loans to manufacturing companies which have large land holdings or who
develop real estate projects as a sideline are not properly accounted for.
Nor is the fact that the vast majority of loans are collateralised by land
or property. Therefore, a sharp drop in property values would expose the
entire banking sector to serious difficulty more through the deterioration
in the value of the collateral than through direct exposure. However, a
collapse in property prices based on an internal crisis is not expected.
60

Despite the fact that prices seem very high, and because few actual trans-
actions take place and with inflation and GDP growth both high, prices are
set to rise in the good years and simply stay flat in the bad years.
3.2.1.2 Retail banking and the consumer market
Only a fraction of the nations 85 million people utilise modern bank
services. According to market research (CI Electronic Monitor, 2006), the
size of the urban middle class - those with a monthly income over US$
500 living in the six major cities - has grown from 9% of the population
to 34% since 2000. With an urban population of about 23 million (29% of
the population) that amounts to an urban middle class of about 8.1 million
58 Loans must not exceed 70% of the value of a mortgaged property.
59 Transactions in Hanoi and HCMC fell 60% y-o-y in 2005. In 2005 only 113 projects (down
40% y-o-y) were being developed in HCMC, covering about 175 hectare of land (Vina-
Capital, 2006). For example, BIDV has had to reschedule about US$ 65.7 million in loans
to Vietnams top seven developers (These are Song Da,Vinaconex, Housing and Urban
Development Corporation, Hanoi Construction Corporation, Viglacera, Cienco 5 and
Contrexim Holdings). These amounts to about a fifth of BIDVs total exposure to the
property sector (VinaCapital, 2006).
60 Any collapse would come as a result of an external shock, leading to a general and perhaps
sudden deflation in asset values across all classes.
64
people. The urban population is increasing by about 800,000 (1% of the
total population) a year (SGO, 2006). However, only about 22% of these
people currently have a bank account. That means that only 1.7 million
urbanites had a bank account as of 2005 (SBV, 2006).
Figure 3-17. Urban population growth
(Source: SGO, 2006)
Overall there are about 5 million bank accounts in the whole country
and only 2 million ATM cards have been issued. The balance would be
accounted for by small town inhabitants or by the large rural population.
Figure 3-18. illustrates that the penetration rate of consumer banking
products is still very low compared to that of the mobile phone.
0
5
10
15
20
25
30
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
Urban mio. urban pop in %
Mio
%
3.75%
65
Figure 3-18. Penetration of banking services in urban Vietnam
(Source: CI Electronic Monitor, 2006)
3.2.1.3 Consumer banking products

Consumer banking products fall into five broad categories:
- Personal loans
- Credit / debit cards and ATMs
- Mortgages
- Other products
Personal loans
Personal loans
61
are a new product in the Vietnamese banking market.
VBARD (2007) reports that consumer loans amount to 10% of their
61 E.g. car loans, home improvement loans, small business loans.
0
5
10
15
20
25
30
35
34
4545
17
18
22
13
17
22
10
19
17
13
11
18
40
45
50
Mobile
phone
Insurance
plans
Bank
Account
Hanoi
Savings
Account
Credit
Card
HCMC
AB class
66
outstanding loans and have a target of increasing that to 30% over the next
few years following equitization. Given that most consumer loans attract
fees, it is a high margin market and has enabled the banks which specialise
in retail banking to enjoy far higher profit margins.
In theory, anyone can get a personal loan to buy a house, car or motor-
bike, or to renovate their home, provided they can meet the banks strict
collateral requirements. The SBV (2005) has issued a new regulation that
allows commercial banks to provide unsecured loans to employees of SOEs
and organisations. This represents a start towards expanding the consumer
banking business. However this does not benefit private sector employees
who make up the bulk of the middle class.
Figure 3-19. Overview of the loan limit in selected commercial banks
(Source: VIR, 05.04.2007)
The majority of personal loans are medium to long term secured loans.
Until now it was hard to get a personal loan of more than US$ 625 even
with collateral. Now banks are happy to hand over US$ 1,875 US$ 3,125
in personal loans (VIR, 05.04.2007).
62

62 The loan limit is being raised from US$ 6,250 to US$ 12,500. Vietnam International
Bank (VIB) is happy to lend US$ 9,335 without security to government employees with
a monthly income in excess of US$ 380. The MHB has increased its personal loan ceil-
ing to US$ 3,125 (to be paid within 36 months). Vietcombank will happily lend you US$
3,125 for five years. Most of these loans can be cleared within 3-7 days. Some banks such
as EAB and Eximbank target employees of existing corporate customers as potential
borrowers. Others such as ACB and Vietcombank target Visa and MasterCard credit
card holders. Foreign banks such as HSBC will give secured loans up to a value of US$
2,500-12500 for one to three years to its customers (VinaCapital, 2006).
Banks Loan limits Remarks
ACB US$ 12,500 target credit card holders
VIB US$ 9,335 government employees
MHB US$ 3,125
VCB US$ 3,125
HSBC 10 month salary The minimal personal salary must
be equivalent to VND 5 million
67
In general, this market is still embryonic due to credit history constraints.
The potential for both the unsecured and secured markets is huge. Growth
in the retail market is closely tied to the growth in the number of bank
accounts, and the shift towards payment by bank transfer instead of cash.
Credit, debit cards and ATMs
Automatic Teller Machines (ATMs), credit cards and electronic payment
are new in Vietnam. So far, banks have issued only 2.1 million debit and
credit cards, and installed a mere 1,200 ATMs nation wide. The rate of
growth, however, is impressive. Revenue from bank card transactions
issued through 17 Vietnamese commercial banks surged by 300% in 2005.
Five hundred additional ATMs were installed nationwide in 2005, 125 of
these in the HCMC area (VinaCapital, 2006).
Lack of distribution is the key hurdle. Only 10,000 outlets accept card
payments; these are concentrating on big cities like Hanoi and HCMC and
other major tourist sites. 15 banks are allowed to issue payment cards, and
almost 80% of issued cards come from domestic institutions.
There are three ATM/card alliances in Vietnam; the Vietcombank alliance,
VNBC and BankNet.
Figure 3-20. ATM/card alliances in Vietnam
(Source: Interviews with SacomBank, MHB)
ATM/card
alliances
Founders Other members
Connect24 founded by
Vietcombank
alliance with 17 other banks
VNBC founded by EAB Sacombank, ANZ (including 2 overseas
banks, ChinaUnionPay and United
Overseas Bank from Singapore)
BankNet BIDV national funds transfer system
68
The big disadvantage is that the systems used by the three banks are differ-
ent and are incompatible with each other.
63
The VNBC Unicard is accepted
at over 300 ATMs and 1,000 locations nationwide. Customers can use their
Unicard to perform many banking functions including withdrawal, funds
transfer and paying bills at ATMs. VNBC has already issued over 500,000
credit and debit cards (SBV, 2006).
VCB, ACB, and Eximbank all offer international payment cards with
125,000 cards issued since 1996. Of this, Visa-member banks had the larg-
est share with 62,000 issued up to the end of 2006, a y-o-y growth of 67%
(SBV, 2006). Other international brands such as MasterCard, American
Express and Maestro also saw strong growth.
64
However, 89% of merchant
sales volume via Visa cards in Vietnam is still generated by foreigners,
mostly in Hanoi and HCMC. Retail purchases and cash withdrawals made
by domestic card holders reached US$ 72 million in 2004, a relatively small
amount compared with the US$ 237 million worth of purchases and cash
withdrawals in Vietnam by international visitors (VinaCapital, 2006).
Credit card fraud is an ever present problem in Vietnam.
65
Magnetic strip
cards in particular are vulnerable to counterfeiting and abuse. Eastern Asia
Bank (EAB), one of the many second tier JSCBs have experimented with
hybrid cards using a chip based infrastructure instead of magnetic strips.
They are about to issue 5,000 such cards and collaborate with Petrolimex
to issue cards for fuel purchases (VET, August 2006).
Mortgages
e growing middle class is very keen to become home owners. e fact that
60% of the population is under 30 years of age, impacts favorably on the size of
the mortgage market. Young adults want to move out and buy their own house
63 This is typical of developing countries but one nationwide system would be a major break-
through. It is expected that Vietcombank will win the race.
64 VCB is currently the only issuer of MasterCard, Visa and American Express cards in Viet-
nam, with more than 50,000 cardholders in its client base. VCB is also the acquirer bank
for MasterCard, Visa, American Express, JCB and Diners Club, with 5,000 point-of-sale
(POS) terminals and 400 ATMs nationwide. Visa obtained a license from the SBV last
month to open the first representative office in Vietnam, and the company expects the
number of Visa cards issued in the country to hit 500,000 by 2010 (VinaCapital, 2006).
65 Visa Asia-Pacifics statistics show that the fraud rate of Visa cards in Vietnam is approxi-
mately 0.15%. The normal global rate is about 0.06%.
69
or apartment. is concept of ownership sets this generation apart from their
parents and is now backed by a solid array of legislation. A legal framework has
been put in place for the growth of a mortgage market.
66

Mortgages are a necessity for most young couples starting off on the prop-
erty ladder. The mortgage market has grown hand in hand with the explo-
sion in the urban condominium market which has brought affordable
housing within reach of many in the middle class.
67
The mortgage market
is new to Vietnam and currently accounts for only 10-15% of the total
housing finance market. So far banks have approved mortgage loans of
about US$ 1.2 billion which represents around 12.7% of their total lending
(VinaCapital, 2006).
Most property purchases are financed informally through family networks
who typically advance sums at no interest. Nonetheless, the professional
finance sector has a stronger grip on the condominium market partly as a
result of tie-ups between developers and financial institutions.
Figure 3-21. Mortgage market indicators in Vietnam
(Source: Interviews with SacomBank, MHB)
66 One issue is that aordable housing has been hard to come by due to spiralling property prices.
67 Prices for apartments in major urban areas in Vietnam range from about US$ 320-
2,500 / sqm.
Indicators Descriptions
Target customers - 57% of the population is under the age of 30;
- growing middle class is very keen t o become home
owners.
Current volume - 10-15% of the total housing finance market
- mortgage loans approved of about US$1.2 billion
(around 12.7% of total bank lending)
- Alternative: Most property purchases are financed
informally through family networks (or f riends) who
typically advance sums at no interest
Prices for
apartments
about US$ 320-2,500 / sqm
Duration 7 to 10 years
Mortgage amount worth up to 70% of the value of the home
Interest rate around 12%
70
The underdeveloped mortgage market has been the biggest constraint to
growth in the housing market. As loan terms are extended to 15 years or
more, demand is expected to explode. Typical mortgages can be worth up
to 70% of the value of the home, have a seven to ten year term and carry
an interest rate of about 12%. Some banks are testing the marketing of
longer term mortgages which is expected to have a very positive impact
on demand. Most households can only afford to spend about 30% of their
income on housing. This is the affordability threshold. Normally a bank will
lend only up to 70% of the value of a house for up to 10 years. The interest
rate is currently around 12%. With such a short repayment schedule, high
monthly repayments are a huge constraint on mortgage demand.
Other products
Remittances
Remittances are a lucrative source of fee income for Vietnamese banks,
but most of the money is left on the table owing to the lack of a foreign
presence by the Vietnamese banking industry. With 2.7 million Vietnam-
ese living abroad (mainly in the US and France) who send home US$ 5-7
billion a year and are being charged between 2-5% in fees for the service,
the market size is quite significant. About US$ 4 billion of this is routed
through the banking system by wire transfer (VIR, 03.07.2007). The rest
comes through gold shops and is undocumented. Currently, the over-
seas portion of this market is dominated by foreign firms such as West-
ern Union, which take the lions share of the resulting fees. VIB bank has
recently launched a home delivery service for remittance payments within
24 hours at no additional cost (VIR, 03.07.2007).
Electronic payments
Electronic payments are also making steady inroads into a country once
ruled by cash. Cash payments in Vietnam accounted for 21% of the total
financial transactions in 2005, down from 24% in 2004 (VinaCapital,
2006). In fact, the SBV has completed draft decrees on electronic and
non-cash payment systems including cheques and bank draft circulation
systems. Fewer cash payments means less tax evasion, less corruption, less
money laundering, and lower minting charges. The decrease in the cash
71
payment rate in 2005 was the result of a sharp increase in bank payment
transactions, and particularly those performed with payment cards. To
limit cash payments, Vietnam needs to encourage intra-account payments
for utility, internet, and cable television bills. Cash payments continue
to account for the majority of daily transactions in Vietnam, where only
large supermarkets and hotels use point of sale (PoS) payment systems.
Two thousand and forty PoS card-reading machines were installed in 2005
(VinaCapital, 2006). As cash cannot dominate the market forever, more
and more consumers will eventually be driven to open bank accounts as
the utility of paying bills by direct debit becomes clear.
3.2.2 Investment products
Investment products fall into 2 categories:
- Secondary market for bad debt disposal
- Stock lending
3.2.2.1 Secondary market for bad debt disposal
Vietnam has yet to develop an efficient market mechanism to dispose of
the bad debt weighing down the banking system. In 2000 the government
issued regulations to allow commercial banks to set up vehicles called
Asset Management Companies (AMC) to aid the collection and disposal
of long term bad debt. The SOCBs went through the motion of setting up
their own AMCs, with each bank kicking in US$ 1.875 million in capital.
So far about ten commercial banks followed suit with their own AMCs.
The idea is to transfer Non Performing Loans (NPL) from the parent bank
to the AMC which would then manage the mortgaged asset until it can be
realised or disposed of (VinaCapital, 2006).
One problem is that as of yet there is no secondary market to trade
distressed assets and few transactions have in fact taken place. The second
is that the banks do not have the capital to write off the loans in order to
be able to dispose of them in the secondary market.
In addition, the government itself set up the Debts and Asset trading Company
(DATC) in June 2003 under the Ministry of Finance with a charted capital of
72
US$ 130 million with a mandate to help SOEs dispose of their NPLs and Non
Performing Assets (NPAs). e DATC started operating in 2004, working to
resolve bad debts at 20 companies identied by the government (VinaCapital,
2006). However, the DATC purchases/receives the assets/NPLs directly from
SOEs themselves, not from banks.
The DATC has recently set up a transaction and consultation centre for
debt and asset trading in a bid to get things moving. It has also signed a
cooperation agreement with the BIDV in order to create the framework for
an asset trading market. One issue is that the DATC has a dual mandate, a
social mandate to help SOEs clear up bad debts, and an economic one to
earn a profit in the process. This leads to a conflict of interest.
Both the AMCs and the DATC have so far demonstrated one thing clearly:
without a secondary market for distressed debt they can do little to
resolve the remaining NPL problem. That market requires a clear frame-
work with legal backing for recovering collateral and participation from
foreign experts who have experience in debt trading and disposal. A lack
of trained personnel and limited experience in packaging and pricing debt
is also hampering the process. Having recapitalised the SOCBs with a US$
670 million capital injection in 2004, the government is reluctant to admit
that it might have to do the same thing again. Nonetheless, the SBV has
circulated a draft suggesting a further US$ 750-810m government bailout
in 2007 before banks such as Incombank, BIDV and MHB are equitized.
3.2.2.2 Stock lending
One of the hidden triggers of the recent surge in the stock market has been
the willingness of banks to lend against stocks, using the certificates as
collateral. This fairly new market is frowned upon by the SBV which fears
that some banks lack the internal controls to manage this relatively high
risk niche market profitably. Vietnam International Bank (VIB) reported
its current loans to the sector accounted for roughly 5% of the banks total
loans. Instead of lending only against bank stocks, VIB now offers loans
against 29 different types of stocks ranging from shares in hydropower
plants to insurance and information technology stocks. ACB also has
about 1% of its total loans issued for stock portfolios. Figures provided by
commercial banks showed that 13 million shares worth US$ 47 million on
the market were used as collateral for loans (VinaCapital, 2006).
73
3.2.3 Other financial services
Other financial services fall into 2 categories:
- Life Insurance
- Non Life Insurance
3.2.3.1 Life Insurance
To date only 6.5 million people out of the countrys population of over
84 million have life insurance. Moreover, David L Fried, regional director
of HSBC Insurance (Asia-Pacific)
68
suggests that Vietnams life insurance
market represents a great opportunity for foreign insurers.
The Vietnamese insurance industry has been expanding rapidly since 2000
with an average growth rate of 29% per annum. Revenues from insur-
ance have accounted for 2% of the countrys GDP. Observers emphasize
the benefit of further opening up the industry by pointing to the US$6.87
billion insurance money that has been pumped into the countrys economic
development since 2001 (see Figure 1-22.).
3.2.3.2 Non Life Insurance
Non-life insurance sales in the first five months of 2006 were worth US$
250 million, a jump of 25% over last year. The growth potential is still
very positive. Vietnam has 15 domestic companies providing non-life
insurance and two more have been licensed. The Vietnam Insurance
Corporation, Bao Viet was the dominant player accounting for 32.8%
of premium income in this period. The HCMC Insurance Company Bao
Minh was second with 24% while the rest of the companies selling insur-
ance had tiny market shares.
69
68 Research paper of HSBC in July 2006.
69 The Vietnam Insurers Associations public in the Thanh Nien newspaper on 11.10.2006
74
Figure 3-22. Growth of the life insurance premium income in Vietnam
(Source: Mark Sander & Adrian Liu cited in VinaCapital 2006)
3.2.4. Conclusion
Currently, the Vietnamese banking sector can enjoy an excellent growth
rate, can gain more social attention and contribute more and more to the
countries GDP growth. However, the banking sector also has to face many
market challenges. The following factors which are expected to impact on
the Vietnamese banking system positively or negatively will be analysed:
1. Market penetration
2. Rate of growth in loans and deposits
3. Oligopolistic banking market
4. Lending practices
5. Product offerings
6. Quantity of non-performing loans
7. Consumer credit bureau
1997
9,000
8,000
7,000
6,000
5,000
V
N
D

b
i
l
l
i
o
n
4,000
3,000
2,000
1,000
0
1998 1999 2000 2001 2002 2003 2004 2005*
75
3.2.4.1 Market penetration
There are only about 6 million bank accounts in Vietnam, 5 million of
them for individuals which amounts to a penetration rate of about 6%.
In reality, the effective potential market size is about 20 million or triple
the current penetration level (Merrill Lynch, 2006). That is the size of the
socioeconomic class in Vietnam.
70
The reason is simple: the distribution
and infrastructure of banking services is very poor relative to the telecom-
munications industry, which has virtual national coverage.
Banks are almost unheard of in secondary cities and rural areas. This
means that banks simply do not have easy access to over 70% of the popu-
lation. Some reasons for the interest in banking services are: until recently,
the government encouraged a cash economy by paying state employees in
cash; there is a traditional distrust of banks; the banks themselves have
done a poor job of providing services to the retail public; and small busi-
nesses too are poorly served by banks which are unwilling to give them
large loans unless they have the collateral to back it up.
Figure 3-23. AsiaPac Loan Penetration (Loan to GDP, 2005E)
(Source: CEIC, SBV, Central Banks in Merrill Lynch 2006)
70 Even so, if we compare this to the internet and mobile phone penetration rate of 14% and
12% the number is rather low.
0%
HK TW CN MY SG TH SK VN HK IN ID
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
76
Despite the limited penetration and physical presence, the banking indus-
try is growing rapidly with both deposits and loans expanding at high,
double-digit growth rates. More recently, some banks such as Vietcom-
bank, ACB, Sacombank, and Techcombank are making a determined effort
to court the retail market.
3.2.4.2 Rate of growth in loans and deposits

Credit growth in Vietnam has been expanding at a very high rate during
the past few years. In fact, the state-owned banks saw credit grow at an
annual average rate of 24% since 2002. Given the inability of some bankers
to distinguish a good credit risk from a bad one this is not entirely a good
thing. A 7% GDP growth rate can accommodate an annual credit growth
rate of about 14-20% (VinaCapital, 2006). However, credit growth rates
above that level for any extended period of time can be unhealthy for an
economy.
71

3.2.4.3 Oligopolistic banking market
Four state banks have carved up 70% of the loan market while forty-odd
joint-stock banks and a host of foreign banks compete for the remaining
30% (SBV, 2006). Compare this with the US where the ten biggest commer-
cial banks control only 49% of the countrys banking assets. Thus, at the
top tier, the Vietnamese market acts like an oligopoly.
3.2.4.4 Lending practices
Lending decisions in Vietnam are still based more on relationships than
cash flow. The assessment of loan customers is usually driven by the rela-
tionship with the bank and the size of the collateral being offered. Cash
flow driven assessment and qualitative analysis is reserved for large private
sector customers only. Amongst the large banks, only the ACB bank uses
DCF analysis across their entire customer base. The problem is partly due
to outside interference in the decision making process and partly due to a
71 One bank has forecast that credit could grow at 35% per annum over the next five years
given sufficient access to capital. While the better banks could probably cope with this,
the temptation for others to take on too much risk is high.
77
lack of professional guidance. The absence of IT infrastructure to support
professional credit analysis is another major factor. Another issue is expo-
sure. Most banks lend a lot of money to a fairly narrow base of customers.
The top 30 state-owned corporations probably account for over half of the
state banks loan portfolios. The JSCBs are no different. Getting someones
credit history in Vietnam is often impossible. Banks do not share much
information and the state credit bureau only carries the history of the very
largest lenders.
Lack of credit information is probably the single greatest hurdle standing
in the way of the development of a proper retail market.
3.2.4.5 Product offerings
The SOCBs are generally geared to the large corporate and state-owned
sector, providing syndicated loans for utilities, infrastructure projects,
heavy industry and property developers. JSCBs are geared mainly towards
lending to small and medium size enterprises (SMEs) and the wealthier
retail customers.
However, given the banks low penetration and limited branch network
they only reach a fraction of their potential customer base. Car loans, mort-
gages and house improvement loans are retail staples. And small business
loans using property as capital is the basic model for the SME market. In
general, the Vietnamese banking model is best described as relationship-
based rather than product-based as in international banks. Those banks
that make the transition soonest will be the long term winners.
3.2.4.6 Quantity of non-performing loans

According to the statistics of the State Bank of Vietnam the non-performing
loans problem has been largely dealt with since 2000. The non-performing
loans (NPLs) of state owned banks fell steadily from 12.7% in 2000 to 8.5%,
8.0% and 4.47% in 2001, 2002 and 2003, respectively. Under a new stricter
definition, the official number in 2005 rose to about 7.7% (SBV, 2005).
BIDV, with an NPL ratio of 9% dragged the average down. International
regulatory agencies carried out a similar exercise using Ernst & Young and
found that NPLs in the system using international accounting standard
78
definitions came to about 15-20% of outstanding loans in the state-owned
sector (Merrill Lynch, 2006). A major banking crisis has been avoided so
far thanks to the robust property market and a generally healthy economy.
For private sector JSCBs, average NPLs are around the 1% level at the end
of 2005 (SBV, 2006).
In the early 2000s there were some efforts by the government to resolve
NPLs. In 2001-2003 the government injected a large amount of money
into the SOCBs to enable them to write down their NPLs (SBV, 2005).
72

A blank cheque from the government may solve the immediate problem
but does not change the lending culture that gave rise to it in the first
place. Most NPLs are generated by SOEs refusing to pay their obliga-
tions to SOCBs. Pre-equitisation is a favorite time to write off or simply
clear out these loans. That way SOEs can start their new life in the private
sector unencumbered by debts. Of the NPLs from SOEs which have been
resolved, 36% were paid out by state budget sources, 40% were dealt with
by risk provision funds and 24% by the liquidation of assets (SBV, 2006).
One major reason for the fairly painless partial clean-up was the fact that
land prices skyrocketed in 2001-2003 (VinaCapital, 2006). This enabled
banks to sell off collateral land use rights and buildings at a profit on those
relatively rare occasions when they were able to take possession of collat-
eral securitizing the NPL. There is not yet an effective secondary market
for bad debt, although attempts to start one are ongoing. There are still
very few NPL sale and purchase transactions taking place.
While there appears to be modest progress being made with the bank
sectors historical bad debt problems, the widespread adoption of a broad
based credit culture where banks use market principles to assess credit risk
does not appear to have taken place yet.
There have also been discussions that the large SOCBs may establish
specialized asset management companies to resolve their historical
NPL problems.
72 Incombank, for example, wrote off about US$ 312 million worth of bad debts in 2004
alone (SBV, 2005).
79
Figure 3-24. Banking NPLs 2005
(Source: VinaCapital, 2006)
On the positive side, the raft of technical assistance agreements signed
between JCSBs and foreign banks should begin to infuse better standards
of credit risk management among the banks. Arguably, the most positive
development on the asset quality front in recent years was the announce-
ment by the governor of the SBV (April 2005) of the requirement for all
financial institutions to adopt international standards of loan classification
(Decision 493).
73

3.2.4.7 Consumer credit bureau
One of the greatest obstacles preventing a healthy retail banking market is
the lack of timely and accurate credit information available to banks. With-
out any way to easily check the potential borrowers credit history, banks
have to spend a lot of time and money trying to check up on them.
74
The
work is very time consuming, prone to error and greatly limits the number
73 This new requirement encompasses the classification of loans into 5 groups (Normal,
Precautionary, Sub-Standard, Doubtful and Estimated Loss) and the use of specified
reserving rates (group 1-5, 0%, 5%, 20%, 50% and 100%).
74 What takes minutes overseas can take months in Vietnam. Usually its just easier to say no.
Or to attach unattractive conditions to the loan.
80
of customers a bank can lend to.
75
Without a private credit database, banks
credit departments are overloaded trying to collect accurate information
related to its borrowers, ranging from their repayment capability to apprais-
ing the value of their assets. Proper risk management is very difficult under
those circumstances.
The International Finance Corporation (IFC) has introduced a model
private credit bureau in which foreign and domestic banks would work
together as stakeholders. The bureau would act as a database compiling
credit information related to individuals and small businesses. Informa-
tion would be collected from member banks, and payments could be
made in return for information provided by concerned agencies and local
authorities. Potential bureau users will be banks, credit card providers,
local finance companies, retail credit firms, insurance companies, utilities,
and others.
A private credit bureau would complement Vietnams public registry by
investigating the borrowing histories of a much broader range of potential
customers and maintaining a file on them. Detailed credit histories would
enable financial institutions to better assess risk and determine what inter-
est rates to charge. Consumers would benefit as average interest rates
would fall along with banks risk levels. Loans could also be offered with
little or no collateral. Banks could then manage their overall risk profes-
sionally and expand their consumer businesses faster.
75 For example, to get a credit card in Vietnam requires you to place a term deposit with
the bank, equal to the amount of your card limit. As a result, after ten years, only 100,000
credit cards have been issued in Vietnam compared with over two million debit cards.
81
3.3 Banking industry in Vietnam
After over a decade of financial sector reforms, the Vietnamese bank-
ing sector is perceived as still weak and inefficient by global standards.
Legislative issues are ambiguous and regulations poorly enforced. The
bank sector still suffers from a substantial amount of non-performing
loans. However, on a more positive note, recent developments suggest
that the reform process may be accelerating and will, in the foreseeable
future, achieve harmonization with global standards. In this section,
some key areas of reform will be reviewed and the level of progress made
so far will be assessed.
3.3.1 State Bank of Vietnam (Central Bank)
The first wave of reform and liberalization of the financial sector in Viet-
nam took place between 1988-90. One of the most important developments
that emerged was the creation of a two-tiered banking system consisting of
the State Bank of Vietnam (SBV) as the central bank and supervisory insti-
tution (tier 1) and an operating system (tier 2). Similar to central banks in
other markets, the SBV is responsible for monetary policy and the regula-
tion of the banking system. While legislation is in place to guarantee the
independence of the central bank from political influence, according to
many multi-national agencies (i.e. World Bank, IMF, etc.), the central bank
has little if any independence. The general view is that the SBV is politi-
cally and operationally dependent on support from government agencies.
The government still exerts strong control over the banking sector in two
ways. Firstly, directly through various regulations and restrictions which
govern how they conduct business and secondly by strictly licensing the
type of businesses they can enter. Also indirectly, through the interference
of a myriad of agencies and ministries, both local and national, who want
to have a say in how scarce credit resources are allocated.
3.3.2 State-Owned Commercial Banks (SOCBs)
In Vietnam there are five state-owned commercial banks (SOCBs). Prior
to the reforms of 1988-90, the SOCBs were departments of SBV, and thus
primary vehicles of government policy lending decisions.
82
Figure 3-25. SOCBs before 1988 and now
76
(Source: SBV, 2006)
These institutions dominate banking in Vietnam (estimated 70-75% share
of the bank sector assets), with over 1,200 branches across the country.
They act as an oligopoly at the top of the Vietnamese banking industry. In
1988 all of these banks which have been departments of the central bank,
broke away to form independent banking entities. Despite this paper
separation, in practice they remain tightly controlled by the central bank.
The table below lists these banks.
76 In addition to the four main policy lenders, the Vietnam Bank for Social Policies (VBSP),
previously know as the Vietnam Bank for the Poor, was established to provide loans to
poor households especially in rural areas. The rural sector is also serviced by the Peoples
Credit Funds (PCFs). These lending institutions were established in the early 1990s by the
SBV following the collapse of a raft of rural credit co-operatives. There are approximately
1,000 PCFs operating in Vietnam now and they control around 1-2% of the total bank
sector loans and deposits (Source: SBV, 2006).
83
Figure 3-26. Markevt share of SOCBs
(Source: SBV, 2007)
As their names suggest, these four banks were focused on specific
segments of the economy. While these sector constraints have been abol-
ished, each bank remained the key player within its historically mandated
business segment.
Historically the state-owned bank sector was used as an instrument of
public policy and to promote social and political objectives as opposed to
commercial objectives. The four large SOCBs slowly began evolving from
specialized policy lending vehicles to more commercially orientated finan-
cial intermediaries over the last 10-15 years. Their policy lending past
has burdened them with high levels of non-performing loans. Although
official numbers suggest a system NPL ratio in the mid-teens, it is widely
believed that the level is closer to 30%, with the vast majority of the bad
loans concentrated in the SOCBs (VinaCapital, 2006).
Local JSBs
20%
Foreign Banks
10%
SOCBs
70%
84
Figure 3-27. Relative size of top 17 CBs in term of charted capital (bn)
(Source: SBV, 2006; VinaCapital, 2006)
In the following analysis, the emphasis is put on Focused businesses,
Performance and Challenges.
HDB 300
Oricombank 300
Hanubank 300
Saigonbank 400
Military Bank 450
East Asia Bank 500
VIB 510
Southem Bank 580
Techcombank 617
Eximbank 700
MHB 800
ACB 1,101
Sacombank 1,899
Incombank 3,328
BIDV 3,970
VEARD 6,411
Vietcombank 7,800
0 2000 4000 6000 8000 10000
85
3.3.2.1 Bank for Foreign Trade: Vietcombank (VCB)
Table 3-3. Vietcombank
(Source: SBV, 2006; VinaCapital, 2006; Vietcombank, 2006;
Vietcombank, 1st quarter report 2007)
Focused businesses
Vietcombank is the largest and best managed of the state banks. The bank
has a leading position in both the retail and the corporate markets in Viet-
nam. It is second only to Agribank in market share of the deposit and
lending markets.
Vietcombanks core business is focused on foreign exchange transactions,
trade and providing long term financing to the largest SOEs. It handles
one third of Vietnams trade payments, its traditional business area, which
includes trade finance and international payments. The bank also domi-
nates the interbank foreign exchange market. VCB has an active retail bank-
ing business, issues credit and debit cards, makes secured loans and offers
foreign exchange services. VCB is closest to being considered a full service
bank in Vietnam. The bank had a total of 27 branches, 41 sub branches and
47 transaction counters at the end of 2004 (Vietcombank, 2006).
86
VCB also owns a financing subsidiary, a securities company, a leasing arm
and an asset management company. It also has stakes in two insurance
companies, seven banks, three real estate companies and one credit fund.
The bank has captured the lions share of the lending to the best quality
SOEs which were mainly in export related industries.
Performance

VCBs corporate customer list includes most of Vietnams blue chip state-
owned or equitised companies. Typically, Vietcombank plays the lead
role in large scale syndication for infrastructure projects such as reneries.
77

In the future, it is expected that the development of the corporate bond
market will change VCBs business model. The bank will arrange and
underwrite bond issuances through its securities arm rather than lend
large sums directly to corporations. This business is not a major profit
earner for the bank. It is expected that margins will not decline as
the focus shifts from pure syndication to a mix of lending and bond
underwriting.
Loan growth has averaged about 55% per annum over the past six years,
slowing down recently as the bank started to clean its books ahead of list-
ing. The loan to deposit ratio is about 60% which is the industry average.
According to the bank, its NPL burden has been largely dealt with over the
last five years. Out of a total of US$ 354 million worth of bad debts, US$
277 million had apparently been settled under the equitisation program by
December 2005.
Under the latest SBV standard definition of NPLs,
78
Vietcombank had a
total bad debt ratio of only 2.6% at the end of 2006 which is far better than
the other banks (Vietcombank, 1st quarter report 2007).
79

77 Vietcombank is also leading a consortium of four banks lending a total of US$ 2.7 billion
to EVN for the construction of power stations in 2006-2010 (Vietcombank, 2007).
78 Known as decree 493.
79 As of December 2004, Vietcombanks CAR stood at 7% as calculated by Vietnam Account-
ing Standards (VAS). However under the more relevant International Accounting Stan-
dards (IAS) the CAR was a far more modest 4.4%.
87
Vietcombanks shareholders equity (chartered capital, reserves and
retained earnings) totalled US$ 487.5 million in December 2004. During
2002-2003 the bank received a total of US$ 125 million in government help
through the issuance of special bonds (SBV, 2005).
Challenges
Vietcombank has taken major strides in boosting its internal controls and
strengthening management. Risk management (RMC) and asset liability
commitees (ALCO) have been set up to manage the banks risk profile and,
hopefully, avoid some of the mistakes of the past. Like all state-owned
banks, VCB has received considerable help and input from organisations
such as the World Bank in order to create a mechanism to manage credit
risk more effectively.
The bank has improved its operations dramatically over the past five
years. Margins and ROE have recovered sharply since 2002 when ROE hit
a low of just under 7.5%. A cleanup of the loan book with some govern-
ment help was the key to the turnaround. The bank is striving to improve
the quality of its loan book and to grow the retail business ahead of listing
(Vietcombank, 2006).
VCB has also been raising money through the bond markets. Vietcom-
bank issued a total of US$ 84.4 million in convertible bonds in 2005
purchased by a mix of institutional and retail investors. The 7-year bonds
carry a coupon of 6%. After equitisation, probably in 2007, convertible
bond holders will be able to become shareholders of the bank (VET,
March 2006).
88
3.3.2.2 Industrial and Commercial Bank: Incombank
Table 3-4. Incombank
(Source: SBV, 2005; VinaCapital, 2006; Incombank, 2006)
Focused businesses
Established in 1988, the Industrial and Commercial Bank of Vietnam
(Incombank) has 134 branches, 500 sub-transaction offices and savings
offices in most of Vietnams cities, provinces and commercial centers
(Incombank, 2006). After the Asian crisis the bank was burdened by NPLs
and poor management, but with government help it recovered. Incom-
bank provides deposit and savings accounts, short, medium and long term
credit facilities, syndicated loans, financial leasing, loan guarantees, over-
seas remittances, credit card services, travellers checks, foreign exchange
and securities trading. Its core customer base is state-owned heavy indus-
try although it is expanding into new areas.
Performance
In 2005, Incombank reported a 28.2% growth in total assets to US$ 7.27
billion and a 18.3% increase in total lending to US$ 4.7 billion. For 2006
the bank reported a 33% revenue growth and 42% growth in EBT and net
profits (Incombank, 2006).
89
In 2005 lending growth rose 18% to US$ 4.68 billion while total assets
rose 28% to US$ 7.25 billion. By sector, the banks loan portfolio was 33%
exposed to the industrial sector, with an additional 22% in the construc-
tion and transportation sectors (Incombank, 2006). These tend to be state-
owned heavy industries or domestic developers and much of their borrow-
ing is at favourable or below-market terms. In fact, the banks exposure to
these traditional sectors is second only to BIDV and it explains the banks
below average profit margins.
Incombank has turned itself around in the past five years with consider-
able government help. The NPL ratio has dropped to 2.18% and CAR was
around 6.07% at the end of 2005. Revenue growth was a very strong 55%
with earnings up 183% last year.
Challenges
Similar to Agribank, Incombank has recently suffered losses speculating
on the forex markets and offering loans against stocks. While the size of
the losses at Incombank is manageable (US$ 5.35 million), it serves as a
clear indication of the weakness of its internal controls. While Incombank
has made significant progress since 1998, it still has a long way to go before
it can catch up with Vietcombank.

Incombank will be a benificary of government aid until 2008 (year of
expected equitization), although the size of the assistance will be less than
that to BIDV and Agribank simply because the bank is in relatively better
shape. The NPL ratio fell from 3.5% to 2.18% and while these numbers do
not reflect the full picture, they illustrate the progress that Incombank has
made recently. In 1998 the bank had a total of US$ 625 million in bad loans
and has managed to dispose or settle US$ 552 million since 2001. About
half of the bad loans (US$ 312 million) was settled in 2004, enabling the
bank to reduce its NPL to manageable levels (Incombank, 2006). Pre-2000
bad debt has now been almost completely cleared.
Risk management and corporate governance are still issues. Incombanks
most pressing need is to improve its margins and raise capital to push it
over the 8% CAR hurdle by 2010.
90
3.3.2.3 Bank of Investment and Development: BIDV
Table 3-5. Bank of Investment and Development
(Source: SBV, 2005; VinaCapital, 2006; BIDV, 2006)
Focused businesses
BIDV has a total exposure of about US$ 176.1 million in the property
development market. Overall about 26% of its loan portfolio was to the
construction sector in 2005 and it represents its largest sector exposure.
The bank has an additional 4.9% exposure to the cement sector.
The bank tends to focus on medium and long term project lending to SOEs.
Historically BIDV was the principal conduit for major financing projects
as the bank inherited most of the problem customers. Its combined loan
book is bigger than Vietcombanks but has profits of less than a tenth of
those of Vietcombank.
Performance
BIDV had an NPL ratio of 10.49% at the end of 2005 according to the offi-
cial evaluation method. This number is significantly higher than the 2004
level due to the redefinition of bad debts under Decree 493, making it by
91
far the weakest state bank in the sector. To cope with concerns about bad
debts BIDV has set aside a management reserve of US$ 314.4 million as of
end of 2005 (BIDV, 2006). BIDV has the worst returns amongst the large
SOCBs which is a clear indication of its problematic balance sheet. The
bank has rescheduled US$ 65.7 million of the loans to the seven largest
property developers but this still represents only a fraction of its question-
able loans (BIDV, 2006).
BIDV had total assets of VND 131.8 trillion and an ROE of 10.5% at the end of
2005. e CAR rose from 2.16% in 2001 to 6.18% in 2005 (BIDV, 2006).
The bank is set to equitise in 2007 and in preparation for that it has
acquired a rating from Moodys and recently issued bonds (VET, March
2006). The bank has set a target for loan and asset growth in excess of 20%
between now and 2010. Interestingly, given its low profitability and high
level of NPLs, the bank seems less clear on setting a profit target. A poor
quality loan book and low returns are part of the overall problem, the lack
of Tier 2 capital is another. To address this problem BIDV has recently
issued bonds worth a total of US$ 204.4 million with a maturity of 10-12
and 15 years (VET, March 2006).
Challenges
BIDV will be rst, together with Agribank, to get help from the government
with an expected capital injection of US$ 187-250 million in 2007 (BIDV, 2006).
is is not considered to be enough to solve all of BIDVs problems.
The real issue going forward is management quality and how to avoid
making future bad loans in high risk sectors such as the construction
industry. Hard decisions will have to be made and some long-standing
customers cut off from funding. This will mark a major turning point for
BIDV. Until then the banks progress will remain inconsistent and very
vulnerable to any economic downturn. Their past strategy of indescrimi-
nate lending and expecting investors to give them the benefit of doubt
could have only worked in an environment of very poor disclosure. BIDV
appears to be the most vulnerable of all of Vietnams major banks (Vina-
Capital, 2006).
92
BIDV has planned to list on the stock market by 2008. In preparation for
that move the bank issued convertible bonds and received a rating from
Moodys. The rating agency estimated the banks return on risk adjusted
assets at a low 2.7% and gave the bank an E rating for financial strength.
Nonetheless BIDV was given a Ba1 rating for VND deposits and a B1 for
foreign currency deposits (VET, March 2006).
3.3.2.4 Agriculture and Rural Development Bank: Agribank (VBARD)
Table 3-6. Agribank
(Source: SBV, 2005; VinaCapital, 2006; VBARD, 2006)
Focused businesses

Agribank is seen as more of a social than a commerical bank with deep
roots in the countryside. Apart from its role as a commerical bank,
Agribank is responsible for rural development by providing medium and
long term credit in the agriculture, fishery and forestry sectors - in other
words, soft loans.
Performance

At the end of 2006 Agribank had a total of 2,000 branches, a staff of 29,429
and total assets of US$ 11.37 billion. In 2006 the bank had a loan portfo-
93
lio of US$ 9.7 billion (VBARD, 2006). In addition to providing loans to
its traditional customers in the agricultural sector, Agribank seems to be
targeting the SME lending market as well. This year the exposure to that
sector has reached 29% of its total loans, or US$ 2.8 billion (VBARD, 2006).
The bank also offers loans in the retail market and has plans to increase the
weight of consumer loans from 10% to 30% (VBARD, 2006). In practice,
most of these loans would be made to individual small farmers and, in fact,
should be considered more like business improvement loans.
Challenges

The bank claims to have 10 million customers, but this number raises some
doubt since it is greater than the number of accounts in the entire banking
system. The bank aims to increase its assets by 25% per annum, its loan
portfolio by 20-25%, and to reduce NPLs to less than 1%. It also hopes to
increase profits by 10% a year (VBARD, 2006). Judging by recent results,
they are doing quite well on the profit front, and it is expected that they
will be able to continue to increase both profits and margins for the next
two years.

As long as the bank caters for underdeveloped regions, it plays a very
important social role. If, however, it starts to compete in small towns
and larger urban areas, after the rest of the state-owned sector has gone
public, it may hurt the banking sector as a whole by crowding out the
private sector.

It is expected that the government will recapitalise Agribank in 2007 and
inject US$ 312-375 million into the bank. It is not clear what the real extent
of the NPL is at Agribank however, it must be similar to BIDV in scale.
Farmers have had a tough time in recent years due SARS, bird flu, drought
and floods (VinaCapital, 2006).
There are no immediate plans to equitise the bank and it would require a
mammoth effort and a lot of pain to clean it up for listing.
94
3.3.2.5 Mekong Housing Bank (MHB)
Table 3-7. Mekong Housing Bank
(Source: SBV, 2005; VinaCapital, 2006; MHB, 2006)
Focused businesses

Mekong Housing Bank is the smallest of the group. It was established in
1997 with a chartered capital of US$ 50 million. MHB has a nationwide
network of 124 branches with headquaters in HCMC (MHB, 2006). The
banks main function is to provide medium and long term financing to the
housing market. As the name suggests, most of the banks operations are
concentrated in the heavily populated Mekong region, the rice basket of
Vietnam. Its rapid pace of expansion seems to be driven partly by manage-
ments ambitions and partly by the dire need for better housing in the delta
region (VinaCapital, 2006).
Performance

The key indicators for growth are asset size, deposits and branches and not
profits. At the beginning of 2005, MHB had assets of US$ 875 billion up
10% compared to the previous quarter. Loans and investments totalled US$
853 million increasing 11% compared to the previous quarter (MHB, 2006).
95
At the end of 2005, the deposit base was about VND 6.35 trillion, a plus of
72% y-o-y, the vast majority of these being in term deposits. The loan book
totalled VND 8.56 trillion, up 55% compared to 2004 (MHB, 2006).
e bank is very thinly capitalised with an equity base of only US$ 49 million
at the end of 2006. In 2006, MHB increased an additional 50% in assets to
US$ 1.18 billion and a 40% expansion of its loan portfolio. MHB oered only
0.62% interest per month (7.44% per annum) for three month term deposits,
far lower than most competitors but seems to be able to use its branch network
to reach customers not covered by other banks (MHB, 2006).
Much of MHBs funding comes from the World Bank which explains the
large size of the loan portfolio as compared to the modest size of its deposit.
The deposit to loan ratio is 135%. Most of the banks loans are made to
improve the quality of rural housing stock (MHB, 2006).
Challenges
MHB will probably equitise in 2007. e bank faces a hard task to convince
investors that its social role will not detract from its ability to boost prot-
ability in the future.
80
While MHBs growth performance is very impressive,
concern about its very low equity base and extremely low prot margins
remains. e drive to boost assets and deposits has been given a higher
priority compared to the improvement of its balance sheet and the increase
of prot margins. Disclosure is very limited and the current quality of the
loan portfolio is low. However, most of the loans are small in size and there-
fore the risk is fairly well spread compared to other state-owned banks which
tend to lend a lot to a very few.
80 Just to note that the key indicators for growth are assets size, deposits and branches,
not profits.
96
3.3.3 Joint-Stock Banks (JSCBs)
The establishment of JSCBs is another important development that accom-
panied the initial liberalization of the financial sector. There are about 35-
40 such banks at present.
Table 3-8. JSCBs valuation and forecast
(Source: VinaCapital, 2006; SSC, 2007)
Characteristics of JSCBs
More flexible: JSCBs, which were set up in the 1990s, do not face
administrative burdens, heritage issues and social lending pressures like
the SOCBs. Thus, they are more flexible and can adapt themselves to
changing market conditions.
Wide range of products and services: JSCBs offer the full range of bank-
ing products and services to corporate and retail customers.
97
Mixed ownership structure: The ownership structure of JSBs is mixed,
ranging from purely private organizations to being jointly owned by state
owned enterprises (SOEs), private groups and individuals.
Low NPL: none of JSCBs are saddled with high levels of bad debts.
Challenges of JSCBs
Low capital base: Average capital is about US$ 20 million per bank so
they cannot provide large loans. In the past two years JSCBs have made a
concerted effort to increase their chartered capital by issuing shares.
No specific positioning: The private sector banks are competing fiercely
and many of them are choosing identical strategies. Resources are spread
too thinly as they try to compete across the broadest range of businesses.
The result is thin margins and meagre returns.
Poor IT infrastructure: There is a great need for spending on IT to
build core banking system, risk management and ATM software.
81
Weak operational and management controls
It is worth mentioning that there is a big difference in term of chartered
capital, market penetration, service quality, etc. between the top tier (Asia
Commercial Bank, Sacombank) and the rest.
e top tier are expanding their branch networks and loan portfolios aggres-
sively, boast good management and have a clear product strategy to dierenti-
ate them from the competition. e second tier, which includes banks such as
Techcombank, Eximbank and EAB, are more of a mixed bag. Techcombanks
recent shi of strategy towards the retail market is seen as a signicant positive
move while EAB is leaning in the direction of SME lending.
Smaller JSCBs such as Phu Nam Bank and VIB deserve an honorable
mention because of their pursuit of niche strategies with strength in SME
81 As ACB has demonstrated, good information technology is a key competitive advantage
in the Vietnamese bank sector. It provides the platform for offering and managing a wider
array of products and services to customers (VinaCapital, 2006).
98
lending and retail loans respectively (VinaCapital, 2006). Other smaller
JSCBs are mainly limited to retail banking services such as remittances
and collection / spending under customer authorisation. They are largely
locked out of the commercial lending market due to lack of capital.
Despite a round of restructurings and mergers in 1999-2001, JSCBs are
still very fragmented. The number of JSCBs was reduced from 51 to a total
of 36 banks currently in operation.
82
3.3.3.1 Asia Commercial Bank
Table 3-9. Asia Commercial Bank ACB
(Source: SBV, 2005; VinaCapital, 2006; ACB, 2006)
Focused businesses
ACB is the best-managed bank in Vietnam and has a clear lead in retail
banking. By adding about 20-25 branches or sub-branches over the
next twelve months, the bank intends to use its locations as a distribu-
tion platform for a wide range of products targeting the retail customer
(ACB, 2006).
82 This number is still far too high and it is expected that it will halve over the next few years
as another wave of consolidation is overdue.
99
At the end of 2006, the bank had 2,892 employees, a y-o-y increase of 50%
(ACB, 2006). Retail customers account for about 60% of their total lend-
ing, with the rest mostly in SME lending. ACB is strongly focused in the
southern market and has no plans to increase its presence in the north
for the time being. The bank also has some wholesale banking businesses
covering large corporate customers such as EVN. Exposure to the real
estate sector is minimal at about 3% (ACB, 2006). The retail business has
been built around some key products such as car loans, mortgages, credit
cards and, more recently, unsecured loans. The unsecured loans business
enables customers to borrow up to US$ 12,580 at a monthly rate of 1.2-
1.3% (or 14.4-15.6% per annum).
Overall, the bank has a very low loan to deposit ration of 44%, far less
than the average 60% ratio prevailing in Vietnam. This is a reflection of a
generally cautious stance which has been rewarded by an NPL of below 1%
(ACB, 2006).
Performance
As of 2006, ACB had assets of US$ 2.03 billion, up 32.9%, deposits of US$
1.71 billion up 23% and outstanding loans of US$ 763.9 billion up 27.8%.
The bank has a capital adequacy ratio of 12%. ACB has set itself an ROE
target of 30% over the next five years (ACB, 2006).
ACBs balance sheet reflects their conservative approach with about 50%
invested in government securities and the rest lent out. Their approach to
property collateral is also prudent. Adopting government valuations which
are only 50% of market, they offer loans up to 50% of the assessed value of
the property - 25% of market value (ACB, 2006).
Challenges
The biggest challenge facing ACB as a retail bank is how to improve access
to credit information about its potential customers. The lack of reliability
of third party services such as the Credit Information Centre (CIC) means
that its overstretched credit department is forced to rely on itself. The bank
is keen on the idea of an independent credit bureau as long as the govern-
ment does not get too closely involved.
100
ACB has been a market leader in the new, unsecured lending market using
the DCF valuation method to assess its customers. In the medium term,
ACBs strategy is to leverage its existing distribution platform, to increase
the number of fee based services it offers customers such as brokerages
(both real estate and securities) and investment, leasing, insurance and fee
based banking services. The bank has already set up these businesses as
subsidiaries and it may move to a holding company structure until 2010.
Products such as leasing, insurance and investments carry higher margins
and are seen as key to the banks future growth. The bank takes a niche
strategy approach to market entry depending on where the gaps are.
83

IT is seen as the key to developing and managing all of these different busi-
nesses, and ACB has made considerable investments in its development
over the past few years.
The bank has two major subsidiaries, ACB securities and ACB asset
management.
The management of the bank is widely considered to be one of the best and
they have introduced incentive pay schemes for top and middle manage-
ment based on targets such as profits and ROE. It is expected that ACB will
list late in 2007 or early 2008.
83 For instance, in the leasing market ACB is mainly interested in big ticket items of over US$
2 million whereas its strategy in the insurance market is to concentrate on low income,
low ticket customers.
101
3.3.3.2 Sacombank
Table 3-10. Sacombank
(Source: SBV, 2005; VinaCapital, 2006; Sacombank, 2006)
Focused businesses
The Sacombank was formed in 1991, and up to 2006 had two foreign
owners, the World Banks International Finance Corporation and Dragon
Capital (Dragon Capital, 2006). Currently, REE owns 7.7% and ANZ
recently bought a 10% stake and hinted it would be interested in raising its
stake as part of its Asian expansion plan.
Sacombank has a large, nationwide banking network with 128 branches
and sub-branches. It employed 3,806 employees in 2006. The bank is
focused mainly on the SME and retail markets and is rightly seen as the
most aggressive of the JSCBs. Sacombank currently has a 4% market share
as against ACBs 5% share with a strong focus on SME and retail loans.
The bank has a strong retail franchise and recently started to offer 15-20
year mortgages through its real estate subsidiary. Sacombank is challeng-
ing both Vietcombank and ACB across a full product range in the retail
market (Sacombank, 2006).
102
Performance
Sacombanks gross assets were US$ 1.2 billion as of 2006, up 30.7% y-
o-y. Gross profit has almost doubled to US$ 14.8 million over the same
period. Sacombank is generally seen as more aggressive than ACB both in
terms of lending policy and overall expansion policy. Its collateral policy
is believed to be more flexible with lending, in some cases, of up to 70% of
the value of the property used as collateral. Currently, income is split 70%
interest income and 30% fee income (Sacombank, 2006). The latter comes
mainly from treasury, trade finance remittances and financial investments.
Sacombank has a CAR of 15% under VAS rules and an NPL of less than 1%.
The bank has focussed on loans to highly profitable small businesses and
the quality of the loan portfolio is high (Sacombank, 2006).
Challenges
Sacombank has recently collaborated with the ANZ Banking Group to
set up a joint-venture in credit card services. It also holds a 51% stake
in Vietfund Management, a joint-venture fund manager that operates the
listed VND 300 billion VF1. The bank, which now also operates realty
investment and asset management firms, has recently launched its finance
leasing off shoot with VND 100 billion in capital. Sacombank is currently
also seeking a license to launch a securities brokerage house with VND
300 billion in capital, having divested its 11% stake in HCMC securities
(Sacombank, 2006).

The banks relationship with ANZ is likely to expand over the next few
years. It is expected that ANZs stake in Sacombank will increas as the
law permits. A transfer of technology and product knowhow seems to
be taking place which will serve to increase the banks competitiveness
especially in the retail market.

103
3.3.4 Foreign Banks & Joint Venture Banks
The current legal and regulatory framework in Vietnam is heavily biased
towards the local banks and financial institutions, with significant restric-
tions and limitations on market access, network expansion and scope of
operations of foreign banks. The most obvious of these restrictions is that
foreign banks cannot establish local subsidiaries, and thus must operate
through branches and representative offices.
As of the end of 2005, there were 28 foreign bank branches, four joint-
venture banks and three foreign-invested leasing companies established
in Vietnam. The Vietnamese authorities are understood to be working
towards lifting the restrictions on foreign banks operating in Vietnam in
order to comply with the requirements of the 2001 US-Vietnamese Bilat-
eral Trade Agreement (BTA) and more importantly, the requirements for
entry into the WTO based on Vietnams entry to the WTO which was offi-
cially approved on 11 January 2007. One area that the amendments to the
existing legislation is being considered is to allow foreign banks to estab-
lish subsidiaries with the same legal status as the Vietnamese banks.
84
Focused businesses
Foreign enterprises are the main market for the foreign banks. The most
important measure of foreign bank lending growth is foreign direct invest-
ment, or more specifically, the setting up of industrial zones in Vietnam.
Currently, there are 130 industrial zones attracting 4,516 projects valued at
US$ 18 billion in foreign capital and 15 new zones are under construction.
Foreign banks capitalize on this and it provides the bulk of their credit
growth (VinaCapital, 2006).
While many foreign banks have entered the Vietnamese market, few of
them have expanded beyond one or two branches. Restrictions and diffi-
culties in licensing are the reason.
84 At present, the limit on individual share ownership by foreign banks is 10%, with a maxi-
mum of 30% for all foreign investors.
104
Performance
At the end of 2005, foreign invested credit institutions had US$ 536 million
in registered capital and almost US$ 6.3 billion in total assets, the latter,
a y-o-y increase of 25% (SBV, 2006). Total pretax turnover of foreign
invested and joint-venture bank branches had increased by an average of
45% up to the end of 2005. Total outstanding loans made by foreign banks
had increased 30% up to the end of 2005, growing at double the rate of the
overall banking system. These loans now total US$ 3.1 billion, or 9% of
the total outstanding loans. Doubtful debt levels remain well controlled,
accounting for only 0.06% of the total (SBV, 2006).
Joint-venture banks outstanding loans had reached US$ 37.5 million up to
the end of 2005, a 2% market share. Joint venture bank profits rose 15% to
US$ 12.5 million (SBV, 2006).
Challenges
There are two ways for foreign banks to expand in the banking industry,
organic growth and strategic investment in local banks.
(1) Option: Organic growth

Through organic, growth banks build their own business facilities, includ-
ing infrastructure, human resources, equipment and network. Conse-
quently, all foreign banks start on a modest scale. This is a traditional
method, where the biggest drawback is time. This strategy has yielded
steady growth but from a low base given the various restrictions in place.
Foreign banks are restricted in mobilising capital, need capital of US$ 1.5
million to open a new branch and are limited in who they can lend to and
the proportion of VND deposits they can accept (350 % of capital).
85
But
with the expectation of liberalisation, many foreign banks are setting up
100% owned subsidiaries to offer leasing, consumer lending and credit
85 HSBC, the largest foreign bank in Vietnam, has only two branches (HCMC and Hanoi)
with a prescribed registered capital of US$ 30 million. Standard Chartered Bank, which
has been in Vietnam since 1904, has also recently announced plans to open a second
branch in HCMC.
105
card services in the domestic market. Even so, until 2010 organic growth
will be limited.
As a result, foreign banks have asked the SBV to loosen restrictions on
opening new branches and the proportion of deposits mobilised on VND.
In other words, they are asking for the full implementation of most favoured
nation treatment principles to satisfy WTO regulations.
The SBV (2006) has approved a new law that will allow foreign banks to
set up 100% owned banks (provided they have US$ 20 billion in assets, or
US$ 10 billion in the case of a joint venture). But foreign banks will have
to raise their registered capital to US$ 63 million, in line with local banks.
Currently foreign banks have between US$ 15-30 million in registered
capital (SBV, 2006). While there are no restrictions regarding the number
of branches a foreign bank can set up, as mentioned before, they must add
US$ 1.5 million in capital for every new branch. The SBV is considering
relaxing this rule for the first five branches, which would cover all foreign
banks currently operating in Vietnam.

In theory, the new FIBs will be able to raise as much VND deposits as
they can handle.The question remains, as always, whether they can do so
in practice. There are basic differences between the business practices of
local and foreign invested banks. First, foreign banks are happy to provide
loans without mortgaged assets while local banks insist on collateral secu-
rity. Foreign banks tend to be more client focused and skilled at cross-sell-
ing products. Fees tend to be higher, with local banks charging sources
fees of 1-1.5% instead of the 2-2.5%, charged by FIBs as is the case with
Citibank, HSBC, or Deutsche Bank (VinaCapital, 2006).
86

(2) Option: Strategic investment
e second route is to buy shares in local banks, and 2005 demonstrated major
interest in this approach. Previously only long-established institutions such as the
IFC and Dragon Capital had become strategic shareholders in domestic banks.
86 However, opinions still vary on banking trends and some foreign banks have said that
limits on deposit capital mobilisation and branches will be fully removed after Vietnam
has joint the WTO.
106
By investing in existing banks, foreign banks take advantage of existing
infrastructure and business networks to expand operations much more
quickly. However, there are two problems with this approach: high
prices and lack of control. The prices of Vietnamese banks, trading
at about 5-7 times book value is very expensive compared to regional
peers. Even with high growth potential and high ROEs the premium
is hardly justified. Secondly, given that foreign banks are currently
restricted to holding only 10% of a domestic bank, lack of operational
control is another disadvantage. Most banks which bought stakes have
done so in the hope that this restriction may eventually be lifted alto-
gether; thus allowing for a majority stake.
Table 3-11. Recent investments by foreign banks in local JSBs
(Source: Merrill Lynch, 2006)
In 2005, three foreign banks purchased shares in three JSCBs. Namely,
ANZ bought 10% of Sacombanks equity, Standard Chartered acquired a
10% stake in ACB and HSBC snapped up 10% of Techcombank. Recently
Singapores Overseas Chinese Banking Corporation announced it would
buy a 10% stake in VB bank for US$ 15.7 million, with an option to increase
this to 20% by the end of 2007 (Merrill Lynch, 2006). EAB and Eximbank
are also expected to sell stakes to foreigners soon.
Strategic shareholding also has its limits - 10% for any one foreign share-
holder and no more than a 30% stake for all foreigners combined. The
10% restriction will be raised to 20% soon but the 30% will remain firmly
in place. Given that most of the attractive banks have already established
foreign partners the desirable alternatives are quite limited.
107
3.3.5 Competition in the banking industry
Compared to other banking markets around the AsiaPac region, the level
of competition within the Vietnamese banking sector is relatively low. This
situation is largely attributable to the dominance of the four large SOCBs
which, between them, control 75-80% of total bank sector assets (2004).
While the growth of the jointstock banks since the beginning of the 1990s
has been rapid, their growth has been constrained by the segmentation of
the market the markets for SOCBs and JSCBs are apparently separated in
terms of deposits and borrowers.
Another factor contributing to the lack of competition amongst finan-
cial institutions has been the difficultly in introducing new products and
services because the approval process of new products by the central bank
can take anywhere from 3 months to over a year.
Figure 3-28. Customer segments served by types of banks
Constraints placed on the level of access and scope of operations of foreign
banks has also impeded the level of financial sector competition.
108
The recent investments made and technical assistance agreements signed
by StanChart, ANZ and HSBC in joint-stock banks between 2005 and
2006 should also accelerate the level of competition in the banking sector,
although at a comparatively modest pace.
One area where reforms designed to improve competition are unlikely to
change in the intermediate term is the Vietnamese rural nancial sector a
key area given that approximately 80% of the population lives in rural areas.
87

The absence of competition to VBARD / VBSP (the main SOCBs operat-
ing in the rural sector) is primarily due to the very low profitability of this
market as a result of the substantial state subsidies given to these banks to
cover their operating and financial costs. In light of a quasi-monopoly and
very thin margins of these banks, there is little incentive for innovation or
for VBARD / VBSP to improve their performance.
88
3.3.6 Conclusion
The banking sector faces several key challenges until the market opening
in 2010. The most important of these is the ability to compete with the
foreign invasion expected after 2010. Much needs to be done to improve
the competitive strength of the state-owned and private sector banks in the
meantime. In particular, by focusing on:
1. Tendency of consolidation
2. Undercapitalisation
3. Raising capital
4. Invesment in information technology
5. Improving management and governance in the banking sector
87 As is the case in a number of emerging markets in Asia (e.g. China, India and Indonesia),
SOCBs are the primary providers of financial services to the rural market.
88 It would be interesting to compare the experiences of the Agricultural Bank of China
(ABC) and the VBARD / VBSP in terms of inefficiencies, asset quality and poor profit-
ability, with Bank Rakyat Indonesia (BRI), as the latter is in a substantially stronger finan-
cial and operating position (VinaCapital, 2006).
109
3.3.6.1 Tendency of consolidation

Despite a round of restructurings and mergers in 1999-2001 the JSCBs are
still very fragmented.
89
The number of JSCBs was reduced from 51 to a
total of 36 banks currently in operation.
90
The State Bank of Vietnam has
raised a concern about the fragmented nature of the private sector banks.
SBV will introduce new regulations to force another round of consolida-
tion in the near future.
One way of doing this is to set high hurdles for any new established bank
before it can get a license. All banks need to have chartered capital of US$
63 million which is exceeded by the existing capital of only the very largest
JSCBs such as ACB and Sacombank. All other existing banks fall far short
and will need to scramble for new capital or merge in order to meet the
new requirements. From next year, the SBV has circulated a draft proposal
to raise the minimum capital level to about US$ 300 million. As a result,
50% of the JSCBs will have to face a merger or a takeover.
In addition to higher capital requirements, banks will also have to demon-
strate experience in banking governance. Banks will need to commit to
Basel 2 standards from either 2008 or 2010. Currently, a corporate family
can own up to 40% of a JSCB. One reason for the concern is that large
corporations such as the giant utility Electricity of Vietnam (EVN) and the
Vietnam Insurance Corporation have a strong interest in setting up bank
subsidiaries.
91
89 Too many banks are still chasing too small a slice of the pie (VinaCapital, 2006).
90 This number is still far too high and it is expected that it will halve over the next few years
as another wave of consolidation is overdue.
91 The EVN currently holds a 40% stake in An Binh Urban JSCB. The SBV hardly welcomes
new entrants in an already overcrowded marketplace unless they have the size, experience
and funds to help the consolidation process. And they are also wary of conflicts of interest
from large corporations owning pet banks.
91 Currently only about 11 out of every 1000 people in Vietnam have a credit history, a
penetration rate of about 1%.
110
3.3.6.2 Undercapitalisation
One of the legacies of state ownership is a severe shortage of capital at the
state banks, a quality shared by private sector commercial banks as well.
Government restrictions on equity holdings combined with a bond market
that hardly functions has made raising chartered capital very difficult for
banks. Average capital adequacy ratios (CAR) at Vietnamese banks stood
at 4.5% at the end of 2005 (Merrill Lynch, 2006).
92
Admittedly with large
scale raising of capital this year, this number is improving. With most of
the state banks well below the minimum 8% capital adequacy ratio for Tier
2 capital, lack of access to the international capital markets has constrained
their growth. And this valuation is based on a very generous reading of
their NPLs.
The JSCBs are in only a slightly better state with a handful able to cross
the 8% hurdle rate. Moreover, given that the domestic capital markets are
still in the early stages, raising new capital was the biggest challenge for all
the banks. The stronger JSCBs have responded partly by selling shares to
foreign strategic partners. Vietcombank and BIDV have both issued VND
denominated domestic bonds at a 1-2% premium to sovereign debt. BIDV
has obtained an international rating in preparation for a stock market list-
ing and possible overseas bond series. Sacombank has raised some equity
recently and most of the top tier of JSCBs have raised their capital substan-
tially in the past twelve months. Further down the line, where profitability
was lower and capital particularly limited the options were more limited.
The SBV is reluctant to allow smaller banks to raise capital from foreign
investors. Vietcombank, the second largest bank by assets, has chartered
capital of US$ 487 million, BIDV about US$ 240 million. Amongst the
JSCBs, Sacombank has chartered capital of US$ 118.6 million and ACB has
capital of US$ 68.7 million (SBV, 2006). In recent years the top nine banks
have been raising capital by about 40% annually. Going forward, all of the
banks have a substantial need to raise additional capital, to shore up their
Tier 2 capital base to bring them over the 8% CAR hurdle by 2010.
92 is compares with an average CAR of 13.1% in Asia-Pacic and 12.3% in South-east Asia.
111
Most recently, the situation has changed dramatically. The stock market
has exploded and bank shares have been the first choice for domestic and
foreign investors. This has made access to additional capital significantly
easier. In fact, access to capital became so easy that it lead to a risk of abuse
by poorly managed banks. To address this problem, the SBV just intro-
duced new regulations requiring banks seeking additional capital to get
SBVs permission.
3.3.6.3 Raising capital
One of the key challenges for the banking sector is to raise their tier 1 and tier
2 capital to the international standard by crossing the 8% CAR hurdle rate by
2010. e central bank is draing a plan to inject US$ 687 million of govern-
ment money into three banks between 2006-2008. Incombank, BIDV and
Agribank have all expressed strong interest. According to the central bank,
this injection will represent only part of the total US$ 1.25 billion the banks
will need to reach the 8% hurdle. e balance, apart from a token US$ 99
million so loan coming from the World Bank will have to be raised on the
capital markets.
To do so, the banks will need to raise billions of dollars in both debt and equity
nancing. Bond issuance is currently the only realistic option for the SOCBs
and the best of the JSCBs. e second tier banks will have to rely on issuing
equity capital until the ceiling rates on bond coupons are lied. ere are issues
to be addressed on the equity side too. Foreign investment in commercial
banks is regulated under decision 228 (issued on 1 December 1993). e SBV
stipulated that total charter capital of JSCBs in Vietnam, held by foreign inves-
tors, must not exceed 30% and they cannot trade their shares the rst ve years.
Finally, only the worlds top banks can be considered as potential investors and
must be vetted by the government.
What is at stake here is not just the 8% hurdle for capital adequacy. e
banks ability to expand their lending base is constrained by the lack of long
term capital. e result is a constraint on medium to long term lending and a
deposit / lending mismatch. Since May 2003, the SBV has allowed commer-
cial banks to li the cap on their use of short term deposits mobilised to
provide medium and long term capital loans from 25% to 30%. is is only
a temporary solution.
112
By the end of 2005, Vietcombank issued US$ 75 million in seven year
domestic bonds at a coupon rate of 8.5%. BIDV has also recently completed
a US$ 94 million VND denominated bond issue consisting of a 10-year
bond with a coupon of 9.8% and a 15-year bond carrying a coupon of
10.20%. Both are priced at a spread of 1.05-1.26% over the Vietnamese
government 5-year and 10-year bonds respectively, and both carry call
options (VET, April 2006). The domestic markets appetite for bank paper
has now been tested. The Vietcombank and BIDV issues were heavily
oversubscribed by 250% with the BIDV offer. Moodys announced credit
ratings for BIDV ahead of the offer, provide the bank with a stable outlook
for both domestic and foreign currency deposit and a positive outlook for
financial strength. It is estimated that the five SOCBs will have to raise
about US$ 4.5 billion in capital over the next four years to exceed the 8%
target by 2010 (VET, April 2006). Based on an assumption of constant
annual lending growth of 15%, and an expectation that the banks will be
able to raise 25% of the total additional capital needed through internal
profit growth, banks will need to raise an additional US$ 3.5 billion through
new equity or bonds.
It is expected that the top five JSCBs will raise US$ 1.5 billion between
2006 and 2010 to keep ahead of the proposed new capital requirements
(VET, April 2006). ACB and Sacombank will also have substantial capital
needs going forward. ACB has recently increased its chartered capital from
VND 948.32 billion to VND 1.1 trillion. VIB has increased its capital from
VND 595 billion to VND 711 billion while Eximbank increased capital
to VND 815 billion (VET, April 2006). Most of this fundraising has come
from tapping existing shareholders for new money while also adding some
new investors.
3.3.6.4 Investment in information technology
Having up to date information technology (IT) is a key requirement for the
Vietnamese bank sector. It provides the platform for oering and managing a
wider array of products and services to clients. IT spending would seem
to be one way to separate the winners from the losers, enabling banks to
charge higher fees and offer a genuine service to their clients. There is a
great need for spending on IT to build core banking systems, risk manage-
ment and ATM software.
113
However, IT spending at most banks in Asia, including Vietnam, is an
unknown (VinaCapital, 2006). The numbers are not disclosed in annual
reports and information is generally anecdotal. It is possible to take capital
expenditure as a proxy, as IT spending tends to be a large portion of it.
93
However, there is no proven relationship between a higher IT spending
and greater operating efficiency as a higher spending raises costs in the
short term while the revenue gains come at a later stage only.
94

In Vietnam, some larger banks such as Vietcombank spend 6% of reve-
nues on IT (approximately 10% of operating expenses) and are planning
to increase that ratio. Sacombank recently invested US$ 4 million in a new
core banking system. Small joint-stock banks such as Habubank, however,
have more modest budgets, spending only about 2-3% of revenues, prob-
ably insufficient to upgrade their systems.
95
This gap needs to be closed if
the Vietnamese banking sector wants to offer a comprehensive service to
their clients.
There are three spending patterns in IT investments among Vietnams
banks (VinaCapital, 2006):
- The smallest banks focus on making basic upgrades to their existing
infrastructure.
- e top tier state-owned banks continue to rely on government-supported
budgets to allow them to undertake large-scale technology projects.
- In the middle tier, more dynamic joint-stock banks take a more aggres-
sive approach to technology investments, resulting in a harmonious match
between investments needed and available resources.
93 Data from European banks is easier to come by and we have found that these banks spend
an average of 10-30% of operating expenses on IT (VinaCapital, 2006).
94 Asian banks such as DBS, Kookmin, and Bank of China spend between 4.2% and 17.7% of
operating expenses on IT with an average of about 11% (VinaCapital, 2006).
95 In general it is believed that Vietnamese banks are under-spending their Asian counter-
parts by approximately 30-40% (VinaCapital, 2006).
114
3.3.6.5 Improving management and governance

Independence in management is one of the most crucial factors in the
reform of the SOCBs, but no less important is an immediate improve-
ment in the SOCBs efficiency. The central banks role in approving and
appointing directors in the state sector is a practice that must ended
as must the interference of the regional central bank branches in local
lending decisions.
96
There are two other issues relating to management. One is the reduction
of operating costs and the other is the adoption of international standards
and transparency.
Bank margins have been quite low as a result of reliance on low margin
lending business and the high percentage of non-commercial loans made
in the past. As banks answer to shareholders they will have to focus more
on profitability and expand their product base to increase margins.
At the same time, the adoption of Basel 2 standards and the technology
transfer from future strategic partners should enable Vietnamese banks to
improve their transparency as they adopt more international standards for
reporting and accounting.
The Vietnamese banks current customer base and hence their strengths
and weaknesses are largely a carry over from their former role within the
state bank. The state sector accumulated substantial bad debts in the years
immediately after the Asian crisis necessitating a large injection of govern-
ment capital which took place in 2001-2003. Having been recapitalised, the
SOBs have continued to grow rapidly in terms of deposits and assets.
Bodies such as the World Bank and others have also offered consid-
erable technical assistance to strengthen the banks management and
operational capabilities. Despite progress made in re-organising the
SOCBs prior to equitisation, supporting agencies have identified some
96 Once the incestuous relationship between the SBV and the state-owned sector has been
replaced by the discipline of the marketplace, it is expected, that corporate governance in
the banking sector will improve markedly (VinaCapital, 2006).
115
areas that need further improvements before they can reach interna-
tional standards.
97

The gaps in these areas can only be closed with the help of strategic inves-
tors or advisors, and the question is just how much knowledge transfer
foreign investors will permit in return for only a 10%, or even 20%, stake
in a bank (VinaCapital, 2006).
3.4 SWOT and critical business issues
In this part, the results of the analysis of the banking environment, the
banking industry, and the banking market are presented. This provides
a general overview of the situation, and the challenges the country and,
more specifically, the banking sector in Vietnam is facing. The results of
this part serve as a basis for the surveys about the corporate governance
practice in the banking sector which are discussed in Chapter 4.
In order to be able to develop relevant recommendations addressing
the specific needs and opportunities of the banking industry in the
current complex, rapidly and drastically changing politico-economic
environment, the results of the empirical study will be analyzed using a
specially developed SWOT structure. Specifically, the four components
of the SWOT analysis will be subdivided into three dimensions (Banking
Environment, Banking Market, Banking Industry) and then, each will
be further subdivided, as appropriate, into several criteria. In addition,
as mentioned above, because of the rapid and fundamental changes in
the entire country, including the political, economic and fiscal envi-
ronments, the SWOT analysis needs to include an External and Inter-
nal Change factor. On the one hand, the external changes (CH-e) which
impact on Opportunities and Threats, and on the other hand, the inter-
nal changes (CH-i), which impact on Strengths and Weaknesses in the
banking industry (Mayer, 2006).
97 Such as Organisation and management; Financial capacity; Risk and liability manage-
ment; New products and services; Management information services; NPL resolution;
Human resources development.
116
3.4.1 Opportunities and Threats of the Banking Sector in Vietnam
Figure 3-29. below summarizes the Opportunities and reats incorporating
the dimension and factor breakouts outlined above.
Figure 3-29. Overview of Opportunities and Threats
117
Figure 3-30. Strengths and Weaknesses of the Banking
Sector in Vietnam
118
3.4.2 Strengths and Weaknesses of the Banking Sector in Vietnam

Strengths and Weaknesses have been grouped into three dimensions -
market position, market offer, and resources (Gruenig/Kuehn, 2006). To
better adapt this analytical tool to the specifics of the Vietnamese bank-
ing industry, we further refined the three dimensions by breaking each of
them down into specific criteria as shown in the Strengths and Weaknesses
matrix illustrated in the Figure 3-30.
Figure 3-31. below identifies the major external and internal potential
change factors which could have a significant impact on the Vietnamese
banking industry and which will be the basis of a scenario analysis later in
this document.
Figure 3-31. e External Change (CHe) and the Internal Change (CHi)
CHe (External Change) Chi (Internal Change)
O
p
p
o
r
t
u
n
i
t
i
e
s
- The ability of a major Western
bank to form a strategic
partnerships and to provide
technical and managerial
assistance as well as
willingness to inject the
necessary additional capital to
be able to fully leverage market
opportunities.
- The appointment of an
exceptionally experienced and
successful Western bank
executive to head one of the
major SOCBs
- The rapid introduction and
implementation of a sound
corporate governance system
- The rapid introduction of a
state of the art IT system
- A quick infusion of the
necessary capital required to
modernize operations, solve
NPL related problems and
fund new products and
services
S
t
r
e
n
g
t
h
s
T
h
r
e
a
t
s
- Global economic or fiscal
downturn (significant drop in oil
prices, significant disruption in
oil supply, fiscal crisis in China,
major military conflicts in Iran)
- Reversal of current market
oriented Government policies
- Sudden and complete
liberalization of the banking
industry and a sudden influx of
much stronger competition
- The financial collapse of one
of the major Vietnamese
banks which would lead to a
dramatic loss of trust on the
part of customers and a likely
in reversal in the market
oriented government policies
W
e
a
k
n
e
s
s
e
s
119
3.4.3 Critical business issues based on the SWOT Analysis
The critical business issues have a fundamental impact on the performance
and also the future of the company, thus they need to be addressed in order
to enable banks to overcome their weaknesses, circumvent threats and take
advantage of the opportunities and to leverage their strengths.
Figure 3-32. lists some of the major issues behind the SWOT analysis which
the banking industry as a whole and each individual bank has to address.
Figure 3-32. Formulation of critical business issues
CBIs Description
Corporate
governance
Corporate governance is lacking in most companies. To
operate successfully and compete in a liberalized
banking environment, banks must establish a corporate
governance system that is consistent with global industry
standards and expectations
Business
infrastructure and
systems
Most of the Vietnamese banks, including some of the
largest ones, lack a sufficiently sophisticated and
effective business systems and infrastructure (e.g. IT,
HR, Risk Management) to support modern and
competitive banking operations and, especially, the rapid
growth in the size and complexity of the products and
services demanded by the market place.
Skills and abilities Many of the existing banking professionals lack the
education, experience and knowledge required to lead
and manage a modern banking business effectively.
Products and
services
The existing products and services are far fewer than
those offered in the West and are increasingly unable to
meet the expanding needs of an expanding economy,
expanding businesses and a growing, better educated,
wealthier, customer base.
Business strategy Most of the banks do not have business plans and
strategies built based on a corporate SWOT analysis
which would provide the blue print for a competitive
business model in a rapidly expanding and changing
banking market.
Financial
resources
Many, if not the majority of the banks, are
undercapitalized to be able to fund their existing
businesses, let alone to take advantage of the growing
opportunities and the accompanying financial demands
placed on them.
Dependence on
major
shareholders
Banks need to have a professional management team
and an active and capable governance structure in place
whose goal is overall business optimization rather than
to reflect the interests of any one particular shareholder
120
CHAPTER 4: PRIMARY DATA ANALYSIS OF
CORPORATE
GOVERNANCE IN THE VIETNAMESE
BANKING SECTOR
Based on the results of analysis conducted in Chapter 2 and Chapter 3, this
empirical research focuses on the issue of Corporate Governance, especially
in the Banking sector. e research is designed based on certain criteria that
we call areas of focus (see also 4.4) such as Vision & Strategy, Structure,
Culture, Leadership, Systems, Information and Communication.
4.1 Background
In 2005, when we were preparing for the Corporate Governance event
organized by SECO for the State Securities Commission of Vietnam
(SSC) which was to take place on 6 January 2006 Corporate Governance
was a new issue in Vietnam. It was so new that there was no term for it in
the Vietnamese corporate language, and there were no official guidelines
in this regard. Governmental institutions such as the Ministry of Finance
and the State Bank of Vietnam (SBV) translated the term Corporate
Governance into Vietnamese in a way that was equivalent to Company
121
Management (in Vietnamese: Qun Tr Cng Ty). While translating the
book New Corporate Governance, by Prof. Dr. Martin Hilb, we intro-
duced the term Qun Tr Hi ng Doanh Nghip which is descriptive
of the entire connotation of Corporate Governance.
As a general observation, it was obvious that the participants of the Corpo-
rate Governance event on 6 January 2006 had a very rudimentary level of
comprehension of the Corporate Governance concept.
A recent World Bank survey confirmed this impression (IFC-Report, 2006).
Only 23% of the 85 respondents said they had a certain understanding
of Corporate Governance, though most company directors commented
that the concept was yet to be adopted in Vietnam. This is due to the fact
that the economy still retains important non-market elements. This is
because the government continues to own and control many enterprises
in terms of providing capital, access to raw material, or even to go as far
as dictating the price. In addition, the lack of a level playing field for the
private corporate sector as well as between listed and unlisted companies
is another negative factor. Finally, Vietnam still has a wide range of owner-
ship structures, each of them governed by a different set of laws.
98
During and aer the event addressing Corporate Governance mentioned
above and with the support of SECO, World bank (IFC), SSC as the rst
governmental organization to address the issue started to create ocial guide-
lines on Corporate Governance for listed companies (IFC-Report, 2006).
Within the frame of the empirical research, we had conducted two surveys
about the issue Corporate Governance. The first survey (from now on
called First Survey) deals with the overall situation of corporate gover-
nance in Vietnam that took place during the above mentioned Corporate
Governance event. However, we also combined the results of our surveys
with the survey results of others to get the whole pictures of the issue of
Corporate Governance in Vietnam.
99

98 World bank-Report issued in 2005.
99 These surveys are for example from IFC, VCCI, ING.
122
The second survey (from now on called the Second Survey) was conducted
during the first quarter of 2007. The idea was to assess the progress that
has been achieved in the area of Corporate Governance especially in the
banking sector in Vietnam since the aforementioned event.

4.2 First Survey: Survey about the overall situation in
Vietnam

This survey was designed as a standardized questionnaire on Corporate
Governance in Vietnam and it took place during the Corporate Gover-
nance event on 6 January 2006.
4.2.1 Objectives of the First Survey
e survey was a rst (Swiss) standardized questionnaire on Corporate Gover-
nance in Vietnam. e objectives of the First Survey were as follows:
- Gaining an overview on Corporate Governances issues in Vietnam
such as Ownership structure; Structure of the Board of Directors;
Systems of management applied; Corporate culture; Selection, Evaluation,
Remuneration and Development of Board members; board meetings.
- Examining the systems which are used to direct and control the firms
in Vietnam
4.2.2 Targeted group
All participants were Chairmen, members of the Boards of Directors, and
members of Top Managements from the listed or soon be listed companies.
4.2.3 Research Methodology
A questionnaire with 12 questions was handed out to the participants of
the Corporate Governance Event. There were around 80 participants. The
event was very well received and was generally thought to have been very
successful and effective. The topics of the questionnaire were as follows:
1. Number of board members in the company
123
2. Ownership structure (e.g. company listed on the stock exchange)
3. Structure of the Board of Directors of the company (Board with or
without committee like Audit Committee, Nomination Committee,
Compensation Committee)
4. Systems applied on the level of the Board of Directors (e.g. Strategic
planning, Monitoring system, Strategic control for evaluation of the
strategic implementation , Risk Management System, Financial Report-
ing, Auditing, Selection concept, Remuneration concept, Succession
planning)
5. Corporate culture (e.g. customer oriented, trust oriented, bureaucratic,
performance oriented)
6. Evaluation of Board of Directors (e.g. internal, external, self-evaluation)
7. Criteria used to select Board members and members of Top Manage-
ment (e.g. professional, leadership, social, political, networking
competence)
8. Ownership structure (e.g. Board members were representatives of
stakeholders like shareholders, employees, state, customers)
9. Development of Board members and members of Top Management
(favoured topics like Strategic Management, Finance and Controlling,
Auditing, Marketing, Human Resources, Risk Management, Business
Information Technology, 36 Stratagems)
10. Remuneration of board members (e.g. fixed, variable, honorary
compensation)
11. Board meetings
124
4.2.4 Overview about the respondents
53 questionnaires were handed out and 45 responses, or 85.9%, were
collected.
100
As illustrated in Figure 4-2., 30% of the respondents were
chairmen or chairwomen, 28% were members of boards of directors and
42% were members of top management.
Figure 4-2. Personal data of the respondents
The respondents came from 45 companies: 12 were listed companies; 20
companies were to be listed; and 13 were not listed.
100 We had set an assumption that one person represents one rm, because the questionnaire
response was completely anonymous.
100 Details of the questionnaire see Annex.
Chairman /
Chairwoman
30%
Members of
BoD
28%
Members of Top
Management
23%
Directors
19%
125
Figure 4-3. Status of the participated firm
4.3 Second Survey in the banking sector
Since the Corporate Governance event on 6 January 2006 in HCMC, we
learned that several companies, which were listed at the Stock Exchange
or which were prepared to be listed were about to introduce Corporate
Governance. In the banking sector, there were some joint stock banks,
including Asia Commercial Bank (ACB) and Sacombank, which had intro-
duced a light version of Corporate Governance concept.
We assumed that there had to be some improvement in the awareness and
knowledge of Corporate Governance in the subsequent 12 months follow-
ing the Corporate Governance event. For this reason, we have decided to
conduct a further survey about this issue. We concentrated exclusively
on the banking sector based on the analysis conducted in Chapter 2 and
Chapter 3, and also based on the First Survey.
4.3.1 Objectives of the Second Survey
The objective of the Second Survey was to find out, what the changes or
improvements were in the last 12 months after the Corporate Governance
event of 6 January 2006 concerning the issue Corporate Governance
especially in the banking sector in Vietnam.
27%
Listed
Will be listed in the future
Will not be listed
44%
29%
Status of the participated firms
126
4.3.2 Targeted group
Our interview partners were Chairmen or Board members of 5 banks, both
state-owned and Joint Stock Banks. In some cases, the interviewees were
also members of top management.
4.3.3 Research Methodology
A semi-structured questionnaire (see Annex III) was sent to the interview
partners before so that they could get an idea what the survey was about.
However, the interviewer had to conduct the interviews and fill in the
questionnaire during the interview by himself. The interviews took place
at the head quarters of the related banks and lasted around three hours.
In two cases, the interviewer had to the phone call again in order to
continue the interviews because the information required could not deliv-
ered immediately.
It is also important to state that each bank contributed only part of the
topics mentioned below, because the interviewees either didnt have or
didnt want to provide the information. Topics of the questionnaire were
as follows
101

1. Bio-social data of the members of Board of the related banks (number
of board members, gender, ethnic, position, average age, education)
2. Ownership structure (e.g. SOCB, company listed on the stock
exchange)
3. Structure of board of directors of the company (Board with or with-
out committee like Audit Committee, Nomination Committee,
Compensation Committee)
4. Strategic situation of the related Banks (Strategic planning, Monitoring
system, Strategic control for evaluation of the strategic implementation)
101 For details of the questionnaire see Annex II.
127
5. Management systems such as Risk Management System, Financial
Reporting, Auditing, Selection, Evaluation, Remuneration
6. Board culture
7. Criteria used to select board members (e.g. professional, leadership,
social, political, networking competence)
8. Development of Board members and members of top management
9. Remuneration of Board members (e.g. fixed, variable, honorary
compensation)
10. Information and Communication (such Board meetings, company-
wide communication, external communication)
4.3.4 Overview about the respondents
Because the Banks that participated in this survey wished to keep their
anonymity, we have avoided using their name. We number the related
banks according to the chronological sequence in which we conducted the
survey, e.g. Bank1 or Bank2. In the Figure 4-4., there is a brief overview
about these banks which took part in this interview.
128
Figure 4-4. Some facts about the banks BoD in the Second Survey
As we can see from Figure 4-4., the numbers of board members in most of
the banks varied from 9 to 11. All the members have a university degree.
However, all the board members in the banks here do not have profes-
sional experience in a modern bank in Western countries. Recently, Bank1
Gender National
cultures
Positions
Name
of
Banks
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Remarks
Bank1 Listed 11 10 1 10 1 8 0 58 69 Shareholders were
mostly state-owned
companies and
governmental
institutions, but the
Bank was a JSCB
Bank2 Listed 11 9 2 8 3 4 6 57 120 The Bank was a
SOCB; Has several
foreign strategic
partners and also
receives TAA, i.e.
transfer of
technology and
know how was
ongoing
Bank3 OTC 11 9 2 11 0 57 112 The bank was very
profitable
Bank4 SOCB 4 3 1 4 0 54 50 The Bank was still
SOCB, but it will be
listed in 2008; it
received support
from SECO for the
restructuring
program
Bank5 OTC 9 8 1 9 0 1 5 51 33 It was a small Bank
with no clear
direction; However,
in the months to
come, the bank
would increase the
chartered capital to
around US$65 m in
order to meet the
requirements of the
SBV
129
and Bank2 also have foreigners in their Board. They are representative of
foreign strategic partners such as Investment Funds, Foreign Banks. The
numbers of female members are still low. In 2 banks, the chairmen are no
longer CEOs at the same time, but they still do the tasks of a CEO.
4.4 Summary of the current situation and comparison with
the standards mainly in the banking sector
For the discussion of corporate governance practice, we propose the
following areas of focus on the board level: Vision and Strategy, Board
Culture, Board Structure, Leadership, Systems, Processes (see Hilb, 2006;
Dinh, 2006). For issues regarding interaction between individual members
of management and different management levels we recommend further
areas of focus, such as Relationship, Information and Communications
(see Dinh, 2006).
Figure 4-5. Areas of focus for the discussion of
corporate governance practice
(Source: Dinh, 2006)
S
tru
c
tu
re
L
e
a
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e
r
s
h
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R
e
la
tionsh
ip
s
R
e
source
s
B
enefits
Vision
130
4.4.1 Vision & Strategy
Current situation:
All the banks which participated in the Second Survey were of the opinion
that having a strategic plan and a strategic planning process was essential
for the success of the bank. However, due to the short history and rapid
development of the banking sector in Vietnam, most of the banks had not
set up a strategy planning process.
The BoD and top management still lacked a thorough understanding of
what a strategic plan was and how a strategic planning process is conducted
including who is responsible for what activity.
102

During the interviews, they could verbalize a clear vision of their
company.
Bank1: The vision was cited by the Chairman during the interview: We
are thriving to a respected financial services group: offering Retail banking,
Private Banking, Business Banking and Investment banking. Furthermore,
we will also have a Finance company, Insurance company, Asset Manage-
ment company and Securities company.
To achieve this vision, we have to increase the chartered capital, to develop
the skills of key people and to cooperate with domestic and international
partners for the transfer of technology and management know-how.
Currently, this vision is only communicated to the level of middle
management.
Bank2: Also the vision was cited by the Chairman during the interview:
The vision of the Bank for next five years is to be a leading Joint Stock
Commercial Bank (JSCB), and to be in the third or fourth position in the
102 In a certain bank we interviewed the founder of the bank. Moreover, the Chairman
of the Board asked his CEO to present a strategy of the Bank. The CEO retired a few
days to his office. Then he presented the new strategy to the Chairman which was
than accepted.
131
banking sector in Vietnam. That means that we will outpace one or two
SOCBs.
103
In order to achieve this vision, we will increase the market share
through opening more branches nation-wide, by offering more retail banking
products, by changing the marketing concept (until now, the customers came
to the Bank; in future we will actively contact our potential customers, in
other words, we will become more customer oriented), through the creation
of more financial and forex products (in cooperation with Life Insurance
and Fund Management Companies). We will also place emphasis on improv-
ing the human resources situation.
104
One of the most important competitive
advantages of our Bank is having three foreign strategic investors: IFC, Stan-
dard Chartered Bank, and Dragon Capital.
105
The vision and the new strategy of Bank2 are communicated to the middle
management through several communication channels such as in house-
magazine, meetings, emails and also team building activities and events.
Bank3: The vision of the bank is to belong to the Top Ten Bank in Viet-
nam and to be present in 64 Provinces of the country. We are different
than other banks in the aspect that we do not take Vietcombank as a
benchmark. In the next five years, we will set up a Jewellery company and
an In-house University, and have branches in the surrounding countries
such as in China, Cambodia and Laos in order to serve the growing needs
of the customers.
In order to achieve these goals, we have to improve the professionalism,
set up the state-of-the-art IT system,
106
establish new branches nation
103 As stated before (see 3.3 Banking Industry) the 5 SOCBs have around 70% of the
market share.
104 In this respect, the bank applies several tools for example in the remuneration system;
the bank will introduce call option, generous bonus to motivate people to stay. The
bank is building up a training centre in order to develop the skills of the middle and top
management. On the other hand, the bank also buys talents from the competitors.
105 30 % of the chartered capital is contributed by the three strategic foreign investors.
While Dragon Capital invests the most important seed capital in the bank, Standard
Chartered and IFC provide Technical Assistance to improve the technology, profes-
sional and management skills.
106 Currently the bank has invested US$ 5 million in the data warehouse.
132
wide, and build up sophisticated brandings,
107
and to develop the Human
Resources and to strengthen the financial basis.
108

As the results from the Second Survey show, the stated vision and strate-
gies are different from the version published in the brochures or websites
of the banks. The interviewees have also admitted that the real vision
only existed in the minds of some members of the Board and top manage-
ment, but was not yet communicated widely to the entire company.
Our suggestions:
According to Hilb, the composition of the board, and the board culture,
board structure and success measures have to be aligned (Hilb, 2006).
Therefore, in the strategy development process (see Figure 4-6.), the BoD
and top management have to share the work. A clear delineation of the
roles of the BoD and of the top management is critical to the success of
the bank.
Figure 4-6. Involvement of the BoD and of the top management in the
strategy process (see also Hilb, 2005)
107 For example, Hoa Viet (Chinese-Vietnamese) brand, 8th March Brand (for women only).
108 Recently, the bank has increased the chartered capital from US$ 175 millions to US$ 280
millions. And the growth rate of the chartered capital is around 50 % yearly. Currently,
the Tier 1 is 9%, thus complying with the Basel I.
Strategy planning process
Strategic levels
P
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I
:

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i
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t
i
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P
h
a
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I
I
:

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:

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t
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V
:

M
o
n
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t
o
r
i
n
g

s
t
r
a
t
e
g
y
Board (x) xx (x) xx Normative
Management (x) (x)
Board (x) xx Strategic
Management (x) xx
Board (x) Operative
Management (x) xx
Legend:
(x): currently applied by the Banks
xx: recommended
133
Phase I: Strategy initiation
In the case of Vietnam, since most of the banks would be just starting to
implement a strategy planning process, we recommend, that the process be
initiated by the BoD (together with top management). Based on the change
in the banking environment, in the banking market and in the bank-
ing industry, the banks have to review their existing vision and mission
statements and the corporate as well as business strategy of the company
(Gruenig/Kuehn, 2006). The strategy development process is then divided
into several steps (Lombriser/Alplanalp, 2005).
Figure 4-7. Steps in the strategy process
Step 1: Strategy assessment
The analysis and projections for the external business environment define
the risks and opportunities for the company. An internal corporate analysis
reveals its core competencies, strengths and weaknesses. The SWOT analyt-
ical and planning tool is used in the process. The SWOT analysis needs to
include an External and Internal Change factor: the external changes (CH-
e) impact on Opportunities and Threats in the banking industry, and the
internal changes (CH-i), impact on the Strengths and Weaknesses of the
company (Mayer, 2006). Based on these results, the critical business issues
can be identified. These critical business issues have a fundamental impact
Strategy
assessment
The overall environment, the market and the industry as well as
the bank itself shall be analyzed.
Strategy
development
This step consists of the development of the vision and mission
statements, the corporate strategy and business strategy (and
functional strategies - for each department).
Strategy
implementation
This is the realization of the strategic objectives through the
operationalisation of the plan.
Monitoring
strategy
implementation
This step includes the following areas: (1) change in the relevant
business environment; (2) review of the strategy effectiveness;
(3) progress control of the strategy implementation.
134
on the performance of the company and thus need to be addressed in order
to enable the banks to overcome their weaknesses, to circumvent threats
and take advantage of the opportunities and to leverage their strengths.
Figure 4-8. Composition of the strategy project team
(Source: Gruenig/Kuehn, 2006)
The strategy assessment is followed by the development of strategic alter-
natives and the identification of the primary strategy which becomes the
strategic plan chosen for implementation.
We recommend that the strategy planning process be conducted by a strat-
egy project team as outlined in the Figure 4-8.
Decision group
u Project leader
u Members of the board and
managers responsible for the
businesses included in the project
u Optionally: Selected members of
the working group
u Optionally: Consultants
Main tasks
u Keeps the project on course
u Adapts project organisation
if necessary
u Determines and assesses
options for the corporate
strategy
u Makes the presentations
before the decision group
Main tasks
u Carries out strategic analysis
u Determines and assesses options
for one of businessthe strategies
u Formulates some of the strategic
documents
Main tasks
u Determines the objectives
and general conditions of
the project
u Discusses and approves
the results of analysis
u Discusses the strategic
options and makes the
selection
u Approves the final
documents
Steering committee
u Project leader
u Leaders of the working groups
u Project coordinator
Working group
u Leader of the working group
u Selected members of the
management team responsible
for the specific business
Working group
Working group
135
The strategy project team is lead by the steering committee, which consists
of one or several members of the board and of top management. The project
team is supported by several workgroups. In addition, the team can also
be assisted by external consultants who can contribute (Gruenig/Kuehn,
2006): to project management, planning methods, and assist with the deci-
sion-making process. The results of the strategy development project are
then presented in a steering committee meeting. Based on the strategy
recommendations of the project team, the members of board and the top
management who are represented in the Decision Group then decide on the
banks strategy.
Step 2: Strategy development
e strategy development also consists of several stages: vision and mission
statements, corporate strategy, business strategy (Lombriser/Aplanalp, 2005):
Vision and mission statements: The first step in the strategy development
process is the formulation of the vision and mission statements of the
company. The corporate mission and vision are the foundations of the
strategy development process and are reflected in each stage of the devel-
opment process. This ensures strategic consistency throughout the plan.
These abstract terms have to be transformed into a plan about how to
realize the desired future.
Corporate strategy: the corporate strategy must guarantee that the
company [here: bank] will target attractive markets where it can build
and maintain an advantageous competitive position. The corporate
strategy thus determines the long-term orientation and development of
corporate activities (Gruenig/Kuehn, 2006). In principle, the corpo-
rate strategy determines which businesses the company will continue
to operate or withdraw from, and the new businesses it will set up.
The corporate strategy also provides information about the amount of
investment required in order to maintain or enlarge the strategic busi-
ness (Lombriser/Abplanalp, 2005).
Business strategy: The Business strategy provides the framework within
which the concrete competitive advantages at the level of the offer
and at the level of resources are determined (Gruenig/Kuehn, 2006).
136
According to Porters analysis, sustainable competitive advantage can
only be achieved through low cost or through differentiation in the
market (Porter, 1998). Porter links these two basic types of competi-
tive advantage with the target scope of activities. Therefore, there are
four basic competitive strategies, namely cost leadership within a broad
target market, cost leadership within a narrow target market, differen-
tiation within a broad target market and differentiation within a narrow
target market.
Phase II: Strategy approval
The board selects the most promising strategic option benefiting all stake-
holders and approves its implementation. The approval process also includes
the allocation of the required resources, establishing important milestones
in the implementation process and the identification of key information
requirements of all the relevant stakeholder groups (Hilb, 2005).
Phase III: Strategy implementation

Despite a thorough strategic analysis and the development of a viable
strategic plan based on the banks competitive advantage(s), success
cannot be achieved if the implementation is not well-prepared and
properly executed.
In strategy implementation, it is necessary to distinguish between the real-
ization needs which arise directly from the strategies,
109
and the indirectly
derived measures needed for adjustment and support.
110

109 Examples: Sales of an unprofitable business as a consequence of a new corporate
strategy; introduction of direct delivery to large end-customers according to new
business strategy requirements.
110 Examples: Training courses to improve understanding of the new strategies to adjust-
ments to organizational structure to accommodate newly-defined business fields.
137
It is also useful to distinguish between measures related to material
requirements
111
and those related to personnel
112
(Gruenig/Kuehn, 2006).
Distinction can also be made between implementation through strategic
programs and the simple incorporation of the new strategy into day-to-day
management (Gruenig/Kuehn, 2006).
Thus, the business policies allocate resources, which are usually
incorporated in a budget, long-term, medium-term, and short-term
implementation plans, or the managements tasks. The actual strategy
implementation takes place in order to realize the plans. It generally
comprises of the delegation of tasks, the alignment of the organization
toward the common objectives, and a budgeting process.
It should be mentioned that the strategy project team can be converted
into the Department of Strategy and Organization. This Department would
be responsible for the coaching and production of the Strategic Medium
Term Plan of the bank, the Technical Medium Term Plans and the annual
Business Plan.
Responsibility for the organization structure of the bank tends to be with
the strategy and planning group as they have an overview of the entire
bank and its future direction and business. They should thus be able to
structure the bank to fit its future business needs.
Phase IV: Monitoring strategy implementation
The monitoring of strategy implementation has to be done at every
board meeting. The board monitors key indicators and progress
against important milestones and should take appropriate corrective
action if there is significant divergence from the approved strategy.
(Hilb, 2005).
111 Examples: Development of new products, introduction of a new reporting system
adjusted to the new strategy.
112 e Bank must ensure that employees are willing and able to implement strategies for
example by making the information available. As already known from the banks that
participated in the interviews, senior management even keeps their vision and strategies
secret, which makes it dicult for employees to contribute to successful implementation.
138
The process of monitoring strategy implementation has to include the
following areas (Lombriser/Alplanalp, 2005):
Change in the relevant business environment (overall politico-economic
environment, market, industry) and its impact on the company and its
incorporation into the strategy implementation process;
Review of the strategy effectiveness including the success factors and
the strategic alternatives;
113
The progress control of the strategy implementation
Figure 4-9. Strategic control
(Source Lombriser/Alplanalp, 2005; Hilb, 2005)
113 Institutionalization of a regular strategy check; comprehensiveness of strategy proposal;
integration of fundamental requirements of the vision; mid-term and long-term strate-
gic objectives; consistency of strategies; ethical aspect of strategy; feasibility of strategy,
contribution of strategy to the long-term success; negative consequences of the worst
case scenarios is considered (Hilb, 2006)
Early detection
- internal development
- external development
Review of Strategy Premises
- Environment
- Market
- Industry
Review of strategy
Effectiveness
- Success factors
- Strategic alternative
Progress control of Strategy
implementation
- Achievement of objectives
(qualitative and quantitative)
- Progress of measures and projects
Elaboration of causes for current or future divergences
Areas of causes
- Changes of premises
- Insufficient or false strategy
- Strategic objective setting
(too low / high)
Areas of causes (cont.)
- Insufficient or false resource deployment
- Too ambitious project objectives
- Lack of efficiency, lack of motivation, lack of performance
- Unexpected resistance
New or adapted objectives and strategies
- Immediate measures
- Set of measures or of projects
139
The causes for the current and possible future divergences should also be
identified. After this step, the necessity of developing new (or revised)
objectives and strategies should also be decided.
4.4.2 Organisational Structure and Governance
Current situation:
In this section, we take a closer look at the Committees at the Board level
(such as Audit Committee resp. internal Audit Function; Committee for
Nomination & Remuneration; Risk Management Committee) and also at
the level of top management.
Committees at the Board level
In our First Survey, 32% had Audit committees (12 firms), 8% had Nomi-
nation committee (3 firms), 13% had Compensation committee (5 firms),
47% had several committees (18 firms)
114
. Figure 4-10. illustrates the firms
with committees.
Figure 4-10. The Vietnamese boards showing the distribution of
different committees
114 The other committees are: Supervisory committee, monitoring committee, strategy
committee, Investment committee.
Audit
committee; 12;
32%
Others; 18;
47%
Nomination
committee; 3;
8%
Compensation;
5; 13%
140
Bank1: The Supervisory Board was elected by the Annual General Meet-
ing (AGM). They were representatives of the shareholders. However, they
needed to be approved by the Board of Directors.
Bank2: On the level of the BoD there were the following committees:
Credit Committee, Investment Committee. These two committees were
composed of the members of the BoD and top management.
115
The Super-
visory Board was elected by the shareholders at the AGM.
116
They were
usually independent, i.e. they were not employees or executive members of
the bank. Some of them had an office at the bank. They could co-operate
with the Auditing Committee which included Internal Auditing Depart-
ment and the External Auditing Teams. They could give their recommen-
dations to the BoD and Top Management, but they had to report directly
to the AGM.
The Chairman and the CEO had clearly distinguished responsibilities and
duties. While the Chairman was the legal representative of the bank at the
State Bank of Vietnam and other governmental authorities, the CEO repre-
sented the interests of customers, shareholders, employees and society. At
this bank, neither the Chairman nor the CEO was more important than the
other person. They acted as a team to bring the benefit to stakeholders. It
is also interesting to note that the members of the top management were
not on the Board.
115 According to the Chairman of Bank2, the members of the Supervisory Board must have
the following abilities: successful track records, integrity, and knowledge of accounting
and financial management.
116 The Top Management team of Bank2 consisted of a CEO and 6 Deputy CEOs. One of
the Deputy CEOs was a standing member, who could represent the CEO in all matters
as needed. He made decisions and represents the CEO when the CEO was unavailable.
This served as a way to mitigate risk. He served the role of a co-CEO. The remaining 5
Deputy CEOs were also the heads of different divisions.
141
Figure 4-11. Committees at Bank2
Bank3: The bank has recently become a listed company. Therefore, the BoD
had to act in the interest of the stakeholder groups. The benefit to deliver
to the stakeholder groups is understood as added value to the public, to the
shareholders, to the employees.
117
The board consisted of 11 members, of
which 2 were women and 3 were expatriates. The bank also had a special
appointment policy: in top and middle management, if the position of the
director was a man, than his deputy had to be a woman or vice versa. The
reason, according to the chairman, was that they had to complement each
other. The assignment period was also limited to four years at most.
Another special regulation was that each year, each branch director had
to take a three-week vacation. During this time, he was represented by a
mobile director from headquarters. The deputy was not allowed to repre-
sent him. The mobile director had to write a field report to the BoD
and top management. This was considered as a measure of Internal Audit.
After the period of four years, they returned to headquarters and attended
a three-month-training programme. Afterwards, they could either return
to their former position or were transferred to another position. During
the training programme, they were under observation of the Nomination
Committee and Remuneration Committee.
117 According to the chairman, customers are considered as partners, not stakeholders,
- a definition that indicated that the concept of stakeholders is not yet clear.
Shareholder General Meeting
Board of Directors
Top Management
Investment
Committee
Supervisory Board
Credit
Committee
Audit
Committee
Nomination &
Remuneration
Committee
142
Bank4: There were several Governmental entities involved in the owner-
ship of SOCBs (see Figure 4-12. and also Figure 2-3.). The Ministry of
Finance provided capital; the Ministry for Labour and Social Invalids
approved the salary and benefit policies for the employees of the SOCBs
(see also Remuneration Committee); the SBV set the guidelines and
managed the SOCBs. Conflicts between the BoD and the top management
in SOCBs were thus inevitable: As this bank was a SOCB, the Supervisory
Board of the Bank was appointed by the SBV-Governor, because the state
was the sole owner of the bank. According to the legal requirements, the
Supervisory Board should be composed of at least three to five members.
However, this Bank had only one. And the Supervisory Board had to
report directly to the Chairman.
The BoD was responsible for setting the policies, but usually, such policies
were not applicable in a rapidly changing environment. Top management
had to implement such policies, but they did not have adequate authorities
to adjust the outdated policies.
According to the Chairman, professional and sound Corporate Gover-
nance complying with international standards can be established after a
successful equitization projected for 2008.
Figure 4-12. Corporate structure of a SOCB based on the example
of Bank4
Ministry for Labor and
Social Invalid
Finance
Ministry
State Bank of Vietnam
Board of Directors
Top Management
Investment
Committee
Credit
Committee
Supervisory Board
143
Bank5: It is also interesting to know that in the Supervisory board, all the
members are female. The reason is unknown. They are appointed by AGM.
Theoretically, they report to the AGM, but practically, they report directly
to the chairman. They do not have another position in the company. The
AGM also decides on their remuneration.
Audit Committee: the internal Audit Function
According to the VCCI-Survey 38% of companies have an internal audit
function, however, they do not have an Audit Committee, and 23% do
not have an audit committee or an internal audit function. 9% of compa-
nies have an Audit Committee; however the Committee Members are also
members of top management, which might impair their objectiveness and
independence.
Again in the VCCI-Survey, 75% of participating pharmaceutical compa-
nies have an internal audit function; this group is in the first position.
Financial Institutions (FIS) are in second position, with 56%. Companies
in transportation, trading or telecommunication industry have a relatively
low proportion of companies with an internal audit function.
Figure 4-13. Companies in the VCCI-Survey with an internal
audit function
40%
50%
43%
43%
50%
56%
75%
40%
33%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Telecommunication
Manufacturing
Trading
Transportation
Hotel
FIS
Pharma
Others
Consultancy
144
The stock exchange required the establishment of control and supervisory
mechanisms such as internal audit and control.
118
Figure 4-14. Companies which do not have Audit committees
(Source: VCCI, 2006)
Bank3: At the Board level, the Audit Committee was composed of four
completely independent members and reported to the Supervisory Board.
They also worked closely with the external audit company. At the level of
top management, the Internal Auditing team was right under the CEO and
reported directly to him.
Bank4: e interviewed bank was one of the ve SOCBs. e BoD consisted
of four members. However, only two members were responsible for strategic
and operational tasks and duties. e remaining two members were decora-
tion, meaning that they did not have any responsibilities on the board.
Bank4: The bank did not have an Audit Committee, but only an Internal
Auditing team. This team consists of 11 members and is under the CEO.
There was no Risk Committee and the function of Risk Management was
also not available. Except for the credit risk, they considered the business
of the bank as not being risky. The NPL is 1,38 %.
119

118 In our First Survey, most of the respondents came from listed or soon to be listed
companies: according to our question 2 out of 45 companies, 12 were listed, 20 will
soon be listed and only 13 will not be listed.
119 Bad debt is defined according to the law as when the borrowers are not able to pay back
Joint Stock
37%
SOEs
28%
Private
16%
Foreign
19%
145
According to our Second Survey, there has been an essential improvement
in the last 12 months in the JSCBs: The Audit Committee was located at the
level of Board. In the SOCBs, there is still no Nomination and Compensa-
tion committee at company level the decision is made at ministerial level
- by the related governmental authorities.
120

Risk Management Committee
According to the VCCI-Survey, 85% of the companies which participated
in the survey perform risk assessment when setting strategic objectives.
However, only 50% of them (23 companies) prioritize risks according to
the likelihood of occurrence and the impact on the organization.
Although 85% of the companies stated that they do perform a risk
assessment when setting strategic objectives, only very few of them (27%
companies) can identify both inherent risk and residual risk within their
risk assessment process, and 38% of these companies do not have any
formal risk assessment process at all.
In our Second Survey, the following findings are collected:
Bank2: The Bank had a Risk Management Committee which supervises
and supports the daily liquidity and balance of deposits and lending.
However, the system and processes of Risk Management were still not in
a position to match with the problems that come up as the following story
illustrated:
In response to our question, what was the biggest risk that bank had experi-
enced recently, Bank2 told the following story: There was a rumour in the
market, that the CEO of the bank stole a large amount of cash and disap-
within 12 months after the redemption date. Now the bank uses a method to circumvent
the legal regulations mentioned before. Instead of making a one-year contract with the
borrower, the bank fixes the lending period for three years. However, the bank informs
the borrower that it will get back the lending sum within one year. In the worst case, the
bank can get its lending in the third year: Such lending is not considered according to
the law as Bad Debt.
120 In the banking industry, it is the State Bank of Vietnam together with the Ministry of
Finance and the Ministry for Labours, Invalids and Social Affairs.
146
peared. The bank knew the story and as it turned out to be just a rumour,
it did not pay attention, because it considered it irrelevant. One morning,
the public found a dead cat in front of the banks headquarters according
to the belief of local people, a dead cat is a symbol of an unlucky event. A
few hours later, the dead cat was still there, and the public believed that
the bank must be in big trouble. Within hours, the customers stormed the
bank and withdrew their deposits, which almost led the bank to illiquidity
and disaster. From that time on, the bank had learned that they had to pay
attention to public relations and be able to handle crisis management.
Bank3: This bank has introduced new functions to cover risk manage-
ment, NPL management through an Asset Management Company, and a
Treasury Department. This bank has not constituted an ALCO. Further-
more, Bank3 has also not empowered the Risk Management Centre with
the management of liquidity risk that remains the responsibility of the
Planning Department. This bank has not introduced an Organisation and
Methods Department to standardise procedural development that remains
within the domain of individual departments. Besides, Bank3 has not
introduced a Branch Operations Department with the consequence that
branches still report not only on risks, but also on other issues separately
to all head office departments.
Also in other banks, the Risk Management process still has a lot of room
for improvement.
Our suggestions:
According to the Vietnamese regulations (see Decree 49), the shareholders
or investors in the company have a specific and limited role. They receive
the Annual Report and Accounts and are motivated to ask questions. The
shareholders general meeting should also appoint members of the Board
of Directors and set their salaries. They might also receive the Strategic
Plan (which has already been approved by the Board of Directors) and
they can also amend governing statutes and an addition or a reduction
in shares. They can also approve extraordinary transactions outside the
normal course of business of the bank. However, the shareholders have no
role in the management and decision making of the bank.
147
The primary reason for the restricted role of the shareholders is that there
is an essential conflict of interest between the shareholders of a bank and
the Board of Directors of a bank. The investors, which may be a better term
to use than shareholders, will naturally wish to maximise the value and
return from their investment and thus will press the Board of Directors to
earn as much income as possible and pay the maximum dividend (ING-
Report, 29). This may force the directors to agree to a greater degree of risk
than is prudent and deplete the capital adequacy of the bank.
The Board of Directors
The Board of Directors has a primary duty to protect the interests of all
stakeholders in the bank, in particular the depositors and thus needs to be
sheltered from undue shareholder influence to take undue risks for a quick
financial gain and possibly long term problems. The proposed revision of
Decree 49 sets out detailed powers and duties for the board of directors.
The BoD is a senior decision making body of the bank (usually comprises
of 7 or 9 experienced and knowledgeable professionals).
The BoD decides on all important issues relating to the organization,
management and operation of the bank in the interests of all stakeholders,
in particular the depositors. The BoD is responsible for the safety of the
bank, the profitability of the bank and the policies and structure of the bank
(ING-Report, 2006).
121
The BoD should be composed of experienced but
independent banking professionals to guard against potential conflicts of
interest and maintain the independence of decision making.

Committees of the Board of Directors
The Board shall has at least the committees required by the rules of the
NYSE, currently an audit committee, a compensation committee, a nomi-
nating committee, and a risk resolution committee.
121 They are not responsible for the implementation of these policies; just for ensuring that
their decisions are actually implemented (ING-Report, 2006).
148
Figure 4-15. Committees at the Board level
(Source: ING-Report)
Supervisory Committee
The supervisory committee is nominated by the shareholders general
meeting and should represent the interest of the shareholders. However,
in Vietnam in some cases, the members of supervisory committee must
be approved by the BoD and by the top management. Certainly, the BoD
and top management would approve only those candidates, who are also
representatives of the interests of the BoD and top management.
Therefore, we suggest that the board members to be proposed in the
Supervisory Committee should not be approved by the board of direc-
tors and top management so that they can work independently, but by the
shareholder general meeting. In this case, the shareholders have to have
a real interest to engage in the company and also assume their power.
Furthermore, to ensure that the members of the supervisory board are
not exposed to undue pressure, they should not work in the company,
especially under the CEO. Thus, the supervisory committee should
report directly to the shareholders general meeting so that if any fraud is
found within the bank, it can be reported to the highest authority in the
bank without any interference.
Shareholder General Meeting
Board of Directors
Top Management
Supervisory
Committee
(Audit Committee)
Risk Resolution
Committee
Remuneratio
Committee
Nomination
Committee
149
Committee for Nomination & Remuneration
The Committee for Nomination & Remuneration will identify possible
candidates for the roles of chairman, but also members of the board and
the top management. The Committee for Nomination & Remuneration
recommends appointments to the Board of Directors for the approval of
shareholders. They can also work together with an outside board search
consultant to get the list of possible candidates (Hilb, 2005). A formal
performance assessment of the board members should be conducted
by the chairman this can be an informal feedback talk (Hilb, 2005,).
However, the Committee for Nomination & Remuneration would also
include making recommendations on the remuneration and development
of directors.
Risk Resolution Committee
The Risk Resolution Committee looks at and decides on loan and market
risk write offs that are recommended by the top management. In our view,
they should also have a larger role in approving the policies for general
credit, market and operational risk of the bank and subsidiaries. They are
also supported by other committees of top management (e.g. Asset and
Liability Committee, Credit Committee, IT Steering Committee, Risk
Management Committee).
Top Management
Top management is responsible for the day-to-day operation of the bank.
It consists entirely of executives of the bank. Some Heads of Department
are also members of the Board of Management. The top management has a
number of committees to assist them in their daily decision making.
150
Figure 4-16. Committees on the Top Management level
The Chief Executive Officer (CEO)
The CEO is the head of the executive management of the bank. Until
now, In Vietnam the CEO is usually a member of the Board of Direc-
tors. However, the company size in Vietnam is still on a small scale.
Moreover, the BoD still has a high reputation in the business world.
Due to the decision power and hands-on experience of the BoD and
the CEO, the partners of the company or the authorities often want
to deal with them only (because the CEO is usually also a member of
board). Therefore we propose that at least in the years to come, the
CEO should also be member of board.
The CEO also proposes and supports all initiatives submitted to the Board
of Directors. Furthermore, the CEO is also responsible for the implemen-
tation of all decisions and the smooth day-to-day running of the bank.
ALCO (Asset and Liability Committee)
ALCO approves all policies and limits relating to capital adequacy, fund-
ing, liquidity, open market positions and balance sheet structure (essen-
tially all liability and treasury decisions that are proposed by the Risk
Management Group and the ALCO Support Department of the Financial
Group). None of its authorities are delegated. Treasury and Trading Group
are given limits within which to trade.
BoD
Top Management
ALCO Credit Committee
IT Steering Committee
Risk Management
Committee
151
The ALCO Support Department provides information and analysis to the
ALCO on all Asset and Liability Management issues but in particular with
regard to capital adequacy and balance sheet structure which are not ALM
issues; these are closely looked at by the Market Risk Management Depart-
ment of the Risk Management Group. Furthermore the ALCO Support
Department liaises directly with the Treasury and Trading Group closely
monitoring the daily liquidity position of the bank as well as assisting with
funds transfer pricing and capital allocation.
The Credit Committee

The Credit Committee is the senior decision making body on all individ-
ual credit limits. It may delegate some authorities to the Risk Management
Group who may in turn delegate some authorities to its own departments
and the Retail and Networks Group (branch limits).
The IT Steering Committee
The decisions to be made regarding IT are highly complex and usually very
expensive. Moreover in Vietnam, the development level of IT is still in a
very early stage. The top management cannot be expected to be technical
experts. The IT Committee usually comprises of a member of the Board of
Management as Chairman, the head of IT, the Chief Financial Officer and
possibly a representative of the external auditor. The IT Committee looks
at all issues regarding IT, in particular the IT strategy and development
programme, and makes recommendations to the Board of Management
prior to approval of the Board of Directors.
e bank should investigate the current and future possibilities in hardware
and communication infrastructure; make a cost benet analysis and selection;
develop a reliable IT structure enabling the implementation of all future systems
and applications; and install a communication network to all branches.
Risk Management Committee (RMC)
The RMC establishes and monitors all the units that have discretionary
authority within the bank and subsidiaries to approve limits for credit,
market and operational risk.
152
The RMC also recommends to the Risk Resolution Committee of the
Board of Directors the general credit, market and operational risk policies
of the bank and subsidiaries. Furthermore, the RMC monitors the quality
and composition of the loan portfolio and ties it in with decisions made by
the ALCO on capital adequacy, liquidity, structure of the balance sheet and
open market positions etc.
Risk Management can become a core competence of the banks to build the
long term stability of the bank, its competitiveness in the face of increasing
international competition and the maximization of profits.

Figure 4-17. Risk Management Group
(See also ING-Report, 2006)
Primary responsibility rests with the Risk Management Group, mainly the
Chief Risk Officer, to propose a framework within which the bank takes
credit, market and operational risks. These proposals are then approved by
the Risk Management Committee of the Board of Management and ratified
by the Risk Resolution Committee.
Market Risk Management Division
This division measures the liquidity, foreign currency, interest rate,
commodity and equity open positions being run by the bank and proposes
trading and Asset and Liability Management limits to the ALCO.
Credit Division
(Chief Credit Officer)
Financial
Institutions
Division
Market Risk
Management
Division
Operational Risk
Management
Division
Risk
Management
Group
(Chief Risk Officer)
153
Operational Risk Division
The Operational Risk Division submits recommendations on control
of operational risk to Board of Directors and facilitates operational risk
management processes and controls. This will include all internal treasury
dealing limits such as stop-loss limits, intra-day positions and individual
dealers limits. Earlier deliverables have dealt with the role of this division
in considerable detail.
Credit Division
Review all credit applications from Front Office Groups for individual,
group, sector or country limits. This will include equity investments as
they are loans without a maturity limit. Facilities will be approved under
discretionary limits or submitted to Credit Committee for approval. The
Credit Division is divided into a number of Credit Departments either by
customer sector, customer location or customer size.
122
e banks should introduce a new corporate structure that reduces spans
of control to allow top management to concentrate on strategic issues,
increases the delegation of responsibility, claries reporting lines and chains
of command, clearly dierentiates between line management and functional
relationships, removes the potential for conicts of interest, groups depart-
ments that are closely functionally related under the management of a deputy
director, and introduces new functions that are required for successful
reform and re-engineering of banks business and eective risk management
as a prerequisite for corporate plan implementation (ING-Report, 2006).
122 As a typical example of what the Credit Divisions do (ING, 2006):
The Business Development Officer in the Wholesale Banking Group will negotiate a
new loan with one of the customers for whom he or she is responsible.
They will then prepare the credit application and credit analysis and submit it to one
of the Credit Departments who will look at it from a risk/reward viewpoint. Is the
bank being paid enough to take on all the risks that come with this proposed facility?
It would be comparatively rare for any application to be turned down purely on the
grounds of risk as the Business Development Officer will have some knowledge of the
risks acceptable to the bank.
There may well be discussion between the Business Development Officer and the Credit
Division on the credit analysis, the conclusions drawn, the structure of the loan, the rate
being charged the customer and so forth
When they are in agreement the proposal is submitted for approval. The Credit Division
will have some discretionary authorities of its own or will make a recommendation to
sanction the loan to a Credit Committee.
154
4.4.3. Leadership
Current situation:
The results of our interviews and surveys have shown that the board
members (including SOEs and SOCBs) have the following characteristics:
- Gender: Most of them are male
- Age: At least 45 years old
- Nationality: National Vietnamese (there are currently no Overseas-
Vietnamese)
- Political orientation: Mostly members of the Communist Party (all board
members in the SOEs and SOCBs have to be members of Communist
Party); in non-state owned companies it is not compulsory.
- Education: Most of them have a university degree
- Professional background: Current or former chairmen / CEOs of other
companies.
Here we are also interested to know about the size of the board in dierent
types of companies in Vietnam such as state-owned or joint stock companies.
Figure 4-18. Number of members of boards in Vietnam
0
5
10
15
20
25
30
35
40
3 members 4 members 5 members 6 members 7 members 8 members 9 members
Number of members of boards
P
e
r
c
e
n
t
a
g
e
155
According to our First Survey, the number of board members varied from
3 to 9. About 38% of the responding companies had 5 board members, 23%
had 6 members and 12% have 7 members. Of the 5 banks that participated
in the Second Survey, 4 banks had 9-11 members. It is interesting to note
that SOCBs had a higher number than the JSCBs.
According to our First Survey, about 66.7% board members represented
their shareholders interests and 62.2% represented the interests of the
state. It is to be remembered that the state was still the largest shareholder
in most of the listed and largest companies in Vietnam. The representa-
tives of the strategic partners (investment funds, investors with big finan-
cial stake) played more important roles on the boards. The representatives
of employees, of customers or of associations were still minorities on the
Vietnamese boards.
Figure 4-19. Combined structure of the boards of directors
In our Second Survey, we have discussed with the Board members, espe-
cially with the Chairmen their tasks and also the tasks of the Board
members.
Bank1: The Chairman had been serving the second terms in the current
position. In his stewardship, he had already four CEOs working with
him. The tasks of the Chairman were very diverse and challenging. One
of the tasks was to co-ordinate different members of the BoD. It should
be mentioned here, that most of members considered themselves as very
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
Shareholders
30
Employee 1 State 28 Customer 1 Strategic
partner 5
Others 1
156
important for they had high positions in other companies or institutions
which were investors of this bank. For this reason, it was very demanding
and delicate to get them working for the benefit of the bank, and not only
for the profit of the investors they represented or for their own interest.
On one hand, the Chairman had to call the board members to formal meet-
ings. On the other hand, he also had to inform them or convince them to
make certain decision in informal one-to-one meetings. Furthermore, as
representative of the shareholders he had to call for and chair the General
Shareholders Meeting. His task was also to set the strategic direction
for the company. Moreover, he was also responsible for nominating the
members of the Top Management and for controlling daily expenses and
costs. He also approved the budget remuneration for the Board Members
and Members of Top Management after the Nomination and Remunera-
tion Committee have prepared the decisions.
With projects of strategic relevance for the company, he had to initiate and
network internally and externally in order to get the projects continued.
The chairman was also the legal representative of the bank.
It should also be mentioned here that the Chairman is also the CEO of
another large SOE. The time he spends for the CEO position the SOE is 50
% and as chairman 50%.
Bank3: The bank has recently become a listed company. The Chairman was
also the founder of the bank. He was also the Chief of Compliance Offi-
cer. In the strategic planning project, his task was to initiate the project,
ratify the strategy and monitor the strategy implementation. The Board
consisted of 11 members, of which 2 were women and 3 were expatriates.
The bank also had a special appointment policy: in the Top and Middle
Management, if the position of the director was a man, then his deputy had
to be a woman or vice versa. The reason, according to the chairman, was
that they had to complement each other.
The Chairman considers himself as a leader, but he had to perform tasks
which the members of the Top Management should do. His tasks were
therefore very diverse: there were daily jobs which came up in the Bank,
and according to him, nobody could perform more efficiently. Just to name
157
some examples: opening the new branch; building up and maintaining
relations with the local authorities and international partners; selecting
providers of technology and services; initiating a strategic planning proj-
ect. In order to do all these tasks efficiently, the Chairman reported that
members of the Top Management should have four competences: power in
par with his position; ability to convince; integrity, networking skills.
Bank5: The task of the Chairman is to take care of the strategic planning
and supervise the (daily) operations of the Top Management, Head the
Credit Committee and be a member of the Investment Committee. He also
chaired 5 BoD meetings a year and called the irregular meetings when
something happened unexpectedly that needed dealing with immediately.

Our suggestions:
There is no such thing as an ideal board composition. However, the banks
in Vietnam are mostly of medium size, so we recommend that a team of
the BoD should have 5 to 7 members in order to work effectively and effi-
ciently. Moreover, the board should be structured in a manner that ensures
the interest of all shareholders is represented fairly and objectively. The
current stipulation is that at least one third of the Boards membership
should comprise Independent Non-Executive Directors, and the number
of Executive Directors must not exceed 40% of the total membership
(ING-Report, 2005).
We also recommend that the team of the BoD should be diverse concern-
ing demographic data, know how, and team roles (see also Hilb, 2005).
Therefore, a board evaluation (self- and external) should be conducted to
identify the strengths and weaknesses of the board. In the case of Bank3,
the Board is well aware of the relevance of the board composition. However,
the solution based on only the difference of gender is also not satisfied.
123

We also recommend that there should be a clear distribution of tasks
between the chairmen, members of the Board and members of Top
123 The Bank also had a special appointment policy: in the Top and Middle Manage-
ment, if the position of the director was a man, than his deputy had to be a woman
or vice versa.
158
Management. As stated in the banks surveyed, the Chairmen still do
most of the tasks that should be in the responsibility of the members of
Top Management.
The Board is usually responsible for setting out the banks policies and
business direction through participation and endorsement of its vision,
mission, strategies, business plans and targets, and budgets, ensuring that
they are efficiently and effectively implemented by management to achieve
desired results, creating business value, and maximizing wealth to share-
holders (ING-Report, 2006).
4.4.4 Board culture
Current situation:
Before we assess the culture of the board, we should have a closer look at
the corporate culture of the companies. According to our First Survey, 31%
considered themselves as customer oriented, and 17 % as trust oriented.
Only 8% characterized themselves as bureaucratic.
Figure 4-20. Corporate culture of the questioned companies
In the VCCI-Survey, 38% of the participating companies declared that in
their company there was a code of conduct in place, and each year employ-
ees had to sign a letter confirming that they will follow the code of conduct
Customer
oriented
31%
Perfomance
oriented
34%
Others
10%
Trust oriented
17%
Bureaucratic
8%
159
and will be responsible for any breaches of the code. 32% did have a code of
conduct but in practice, management did not show a strong commitment
to high ethical standards.
In our Second Survey, we have received another picture of the culture of the
banks, but also of the board. In some banks, there is one person or a few key
members who keep the power in their hands and make strategically rele-
vant decisions by themselves without having consulted other members or
committees. The other members, especially the non-executive members,
like representatives of foreign investment funds, usually do not have any
influence on the boards decision and in the decision making process.
As stated in the Second Survey, the culture of board in most banks is not
cooperative and not performance-oriented, especially in the SOCBs: the
culture of board reflects the obsolete attitude of the centrally planned
economy. Usually, the members of board are assigned by the state and the
omnipresent Communist Party to represent their expectations and enact
their will. The assigned members are poorly paid. Thus, such members
give the impression of being very important, because the position is
considered as very prestigious, but they did not bring the expected perfor-
mance. Furthermore, the obsolete attitude of the assigned members is not
accustomed to accepting the opinion of others. In some cases, they act
according to the slogan divide et impera by putting the seeds of mistrust
in the team, especially when they want to achieve their personal interest.
Usually, when the members of the BoD are appointed onto the board, they
have already reached a certain age that they have nothing more to lose, but
their individual benefit.
With all the SOCBs, all of the members are not only from the same politi-
cal party, of the same gender but also from the same ethnicity. The need to
open up this backward looking culture is low. In a Bank that participated
in the Second Survey, most of the members are even from the same family.
The culture of the board is obsolete and is based on the size of capital
contribution.
160
Our suggestions:
erefore, we propose to build up a culture that considers the needs and
expectations of all stakeholder groups, not only of the shareholders. e
board members should not break into fractions, and ght against each other,
but respect each other. In the transition state that Vietnam is now, a clear
code of conduct would be very useful. ere are many cases where insider
information has been misused for personal prot. e sensitive information
is transferred to family members or friends, who are speculators on the stock
market. ere are several regulations in Vietnam concerning these issues,
however, the legal enforcement is still not fully implemented.
In the banking sector, building trust is essential as we have witnessed in
the collapse of credit cooperatives around 1987 in Vietnam. The goal is
to build trust not only within the board, but across the company and also
with other stakeholder groups.
4.4.5. Systems utilized by BoDs to fulfill their responsibilities
It is quite interesting to read the results of the First Survey: 11.1% or (5) of
the 45 firms interviewed do not have (or do not utilize) any management
systems. The other 88.9% utilize at least one specific management system.
Figure 4-21. The applied Management tools applied in the
board of directors
0
2
4
6
8
10
12
14
16
S
t
r
a
t
e
g
i
c

p
l
a
n
n
i
n
g

5
M
o
n
i
t
o
r
i
n
g

s
y
s
t
e
m

4
S
t
r
a
t
e
g
i
c

c
o
n
t
r
o
l

2
R
i
s
k

M
a
n
a
g
e
m
e
n
t

S
y
s
t
e
m

8
F
i
n
a
n
c
i
a
l

R
e
p
o
r
t
i
n
g

1
5
A
u
d
i
t
i
n
g

1
2
S
e
l
e
c
t
i
o
n

c
o
n
c
e
p
t

9
R
e
m
u
n
e
r
a
t
i
o
n

c
o
n
c
e
p
t

6
S
u
c
c
e
s
s
i
o
n

p
l
a
n
n
i
n
g

1
0
O
t
h
e
r
161
In the following, we will review some of the relevant management systems
utilized by bank BoDs. Here we focus on the Human Resources Systems:
(1) Selection; (2) Remuneration; (3) Evaluation; (4) Development of Board
members and Top Management.
4.4.5.1 Selection of members of the BoD and Top Management
Current situation:
In our First Survey It is impressive to see that about 75% of the respond-
ing firms selected the members of their boards based on networking. It is
not surprising that there is a Vietnamese saying that Without network, no
work fulfilled!
Figure 4-22. Required criteria to be selected as a member
of board of directors
Bank1: Most of the shareholders are state-owned companies and institu-
tions (e.g. People Committee of a District in HCMC or Trade department
of HCMC). However, this Bank is not an SOCB. The BoD is composed of
representatives of such organizations. Recently, there were some represen-
tatives of private companies, which are major shareholders of the Bank1.
According to the expectations of the chairman, the BoD should be made
up of professionally competent members.
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
Professional
competence
10
Leadership
competence
8
Social
competence
6
Political
competence
11
Availability
of a large
network 34
Others: 5
162
Bank2: One of the selection criteria is that the members of the Board had to
be the representatives of the large shareholders. If members were shareholders
themselves, they usually had or needed to have according to the requirements
very good reputation and certain competencies. Examples of such competen-
cies are strategic and conceptual thinking, leadership skills, networking. It is
also important to mention here that these members were entrepreneurs.
The Chairman has indicated that in the near future, the Board intended to
nominate independent but competent members.
Bank3: Because this bank was founded by a group of entrepreneurs, the
first BoD was also composed of the founders. As they came together and
invested together, they must harmonize well with each other (in Viet-
namese: Hn phi hp). Other selection criteria have to (besides financial
contribution and a wide network) comply with the legal requirements, such
as educational background, professional abilities, and experience.
Independent members have been allowed to join the board since 2007.
Thus, the bank planned to nominate some more independent members.
According to the Chairman, each development stage of the bank brought
along certain problems to solve and challenges to face, therefore, the
composition of members also had to change in order to match the new
situation and developments.
Bank4: As this Bank is an SOCB, the selection process is very simple: all
the members of the BoD and of the Top Management were appointed by the
governor of the State Bank of Vietnam (SBV). e appointment criteria were
as follows: First of all, according to the succession planning of the SBV, the
nominated member had been the candidate for such a position in the succes-
sion plan. Each year, there was a meeting of high ranking ocers of the SBV
and associated SOCBs. en each ocer proposed potential candidates for
the promotion. e Top Management of SBV evaluated the proposed candi-
dates according to their abilities, their political attitudes, their professional
and social behaviour in the last period (e.g. last year). en the candidates
were narrowed down to the ones with the most promising potential. e
short listed candidates would be announced in the meeting of ocers and
asked in an open survey about their opinions. Usually, there was no rejection
or criticism of the candidates. e meeting attendees assumed that the short-
163
listed candidates were qualied based on the evaluation of the Top Manage-
ment. e short-listed candidates would be presented to the SBV-Governor,
who kept them in the succession planning database. If there were positions
vacant, then the candidates would be appointed.
This appointment process seems to be very transparent and democratic.
However, the so-called transparency and accountability of the evaluation
by the Top Management of the SBV and also the objectivity of the appoint-
ment by the Governor, when a position is vacant, are questionable.
Due to the strict regulations of the state and owner of the bank, according
to the Chairman, there were, in theory, two ways to improve the effective-
ness and efficiency of the bank: to replace key people or to change the
organization structure. However, in an SOCB, it was nearly impossible to
replace the key people, because they were appointed by the SBV-Gover-
nor. If the appointed key person was not competent enough to take over a
position, the SOCB, in order to resolve the problem, nominated a profes-
sional expert to assist the key person sent by the SBV-Governor or would
modify slightly the organization structure.
124
According to the Chairman, the Bank was well aware of the shortcomings
of the central appointment process.
125
However, improvements could only
be efficiently introduced after the banks would become fully equitized and
especially after the Initial Public Offering (IPO). In the first phase, the
state would still be a major shareholder and could therefore appoint only
one or two representatives of the state on the Board. This would allow the
Bank to introduce a professional Corporate Governance.
From our First Survey, the number of board members varied from 3 to 9.
About 38% of the responding companies had seven board members.
126

124 For example, the Bank has currently two HR-Departments. The official one is in charge
of remuneration policies, for insurance issues, for writing reports to the SBV, if there
are needs again for the key people. The unofficial one is in charge of the real issues of
the HR-Department.
125 Nowadays, when SOCBs has a key vacant position, they have to contact the SBV to
ask them to provide Human Resources. The appointment by the SBV is not necessarily
complied with by the need of the banks concerning professional abilities.
126 It is interesting to note that SOCBs had a higher number than the JSCBs.
164
Bank3: The board consists of 11 members, of which 2 are women and 3
are foreigners.
Our suggestions for selection:
A Board that is composed of the experience of former members of top
management with the diverse skills of fully independent external members
is one that is best positioned to carry out the governance responsibilities
given to it by shareholders.
We believe that this approach has many advantages. Former executives of the
bank, with their widespread relationships, with experience and know-how
of complex business activities and processes are oen in a better position to
challenge management decisions. Moreover, as they do not have any signif-
icant business commitments outside of the bank or external directorships
they have the resources and time necessary to dedicate themselves to their
comprehensive responsibilities as Board members (see also UBS, 2007).
However, whether they are fully external members or former members
of top management, they should have gone through thorough selec-
tion criteria. This enables the bank to identify the right members for a
competent Board team.
Selection criteria are proposed as follows:
Figure 4-23. Example of a selection criteria list for board members
(see also Hilb, 2006)
Personality
competence
Professional
competence
Social
competence
Leadership
competence
Integrity
Having
excellent
reputation
Situative
flexibility
Open for
learning
Stress
resistance
Profound
experience in
banking and
finance
Mastery of
strategic
thinking
Understanding
of global
matters
Building up
and maintai
relations
Political
networking
Problem
solver
Listening skills
Coaching
ability
n
165
In the area of professional competence, we recommend that also candidates
from professional backgrounds other than finance and banking should be
considered in order to build up a diverse team, for example candidates
with IT, engineering and human resources. Currently, in Vietnam social
competence is more important than other competences, because the other
business partners wish to deal especially with people with certain networks
and even with a specific political background. However, in the future, we
are convinced that other competences will gain their weight of relevance.
Selection of Chairman and Vice-Chairmen
The Board shall, after each Shareholder General Meeting, appoint the
Chairman and one or more Vice-Chairmen from among its members. The
Board believes that the Chairman and at least one Vice Chairman should
have professional backgrounds as bankers.
Selection of Directors
The Board is responsible for selecting the nominees to be proposed to
the Shareholder General Meeting for election. The Nominating Commit-
tee shall review the proposals to be submitted to the Board. Based on the
recommendations of the Nominating Committee, the Board shall establish
criteria for the selection of new Board and Board committee members.
127

When proposing a candidate for nomination, the Board shall assess
whether other Board mandates held by the candidate could lead to
conflicts of interests. The Board does not believe that it should establish
a strict limitation for additional Board mandates, but rather evaluate the
individual Board members situation, availability and other obligations.
The Chairman, on behalf of the Board, shall extend an invitation to the
nominee to join the Board and stand for election by shareholders at the
Shareholder General Meeting.
127 UBS has also proposed the following: These criteria include, among others, personal
qualities and characteristics, professional backgrounds and track records, the ability
and willingness to commit adequate time to the Board and committee matters, diversity
of viewpoints, experience and demographics, and specific knowledge and experience
for individual committee memberships (www.ubs.com).
166
4.4.5.2 Remuneration of board members
Current situation:
56% of the firms that participated in the First Survey have a fixed remu-
neration system for the members of their boards of directors, 40% pay
their members of boards with variable compensation system and only 4%
of board members have an honorary position only.
Figure 4-24. Remuneration systems for board members
Bank1: The non-executive members of BoD did not receive a monthly
fixed salary. However, the standing members receive a fixed allowance of
around US$ 1000 / month. All of the BoD members received expenses
and fees of around US$ 300-500 for each meeting. Recently, an additional
financial benefit was added which allowed them to buy a certain number
of shares with a face value (par value) of around US$ 12,000 with a lock-up
time of one year.
Bank 2: e board members did not receive a xed salary, but an allow-
ance for meetings which take place four times a year. ey have no right to
purchase shares at par-value. e reason was that the Board members are sent
by the major shareholders and from there, they already receive a salary.
The standing members of Board (in this bank, there are 4) receive a
monthly salary, not as BoD members, but as Head or Vice-head of other
committees (e.g. credit committee, investment committee).
Fix, 25, 56%
Honorary, 2, 4%
Variable , 18,
40%
167
Bank3: All the Board members have an allowance of around US$ 20000
a year. The standing members of the Board who are also heads of other
committees (e.g. Credit Committee, Investment Committee, and Nomina-
tion Committee) receive a regular salary. If the Bank would like to nomi-
nate two Independents Directors in the future, the remuneration system
will be improved.
Bank5: The members of Board do not have a fixed salary, but allowances.
The allowance has to be approved by the AGM. The Chairman and Vice-
chairman receive the salary as Head of Credit Committee resp. as head
of Investment Committee. All the BoD members and members of Top
Management and Supervisory Board are allowed to buy all together 1% of
chartered capital at par value. The lock-up time is three years. If a member
leaves the company before, so he or she has to return the share at the par
value plus the lending rate of the Bank.
Our suggestions:
The executive members of the Board shall conduct a review annually of
the components and amount of Board compensation in relation to other
similarly situated companies. Board compensation should be consistent
with market practices (Hilb, 2006) but should not be set at a level that
would call into question the Boards objectivity and the independence of
its members. The executive members of the Board approve the overall
compensation for the non-executive directors of the Board. In Vietnam,
we recommend that compensation of independent board members should
be partly paid in companys stock in order to align the board members
interests with those of shareholders.
128
4.4.5.3 Evaluation of members of Board and Top Management
Current situation:
According to our First Survey, 38 % of Board members were evaluated
internally, 7 % had self evaluation and only 3 % had an external system
128 Either the board members could purchase shares at par-value (with lock-up time for
one year) or their salary is paid in shares.
168
(e.g. by customers or by the governmental authorities); however, 22% were
evaluated by external consultants and 30% of the Vietnamese boards had
not been evaluated.
Figure 4-25. Performance evaluation of board members
Bank 2: According to our interview, until now, no board member evaluation
has been conducted. One reason is that the bank does not have an evaluation
system. Furthermore another reason is that members of the Board do not
receive nancial benets and they are considered as honourable people by the
major investors. According to the customs in Vietnam, it is not common to
evaluate people in such status and high ranking positions. However, this will
change soon when the bank intends to hire additional independent members.
Our suggestions:
As already conducted in one bank that was surveyed, it is also possible that the
Board members can be assessed by the Chairman. We recommend that such
an assessment should be carried out by the individual as a self-assessment,
then between the Chairman each Board member in a so-called Assessment
Talk (Hilb, 2006). Hilb (2006) also recommends that a formal assessment
should be conducted when a member is about to resign or when a severance
package is to be negotiated. It is also possible that the Board members can
elect to have a 360 Degree Feedback Assessment by an unbiased consulting
rm, and decide to whom a brief feedback questionnaire is to be sent for
analysis (Hilb, 2006).
Not
evaluated
yet, 30%
Internal
evaluated,
38%
External
evaluated,
3%
Self
evaluated,
7%
Foreign
evaluated,
22%
169
4.4.5.4 Development of board members
Current situation:
It is obvious that the training situation for the members of boards can
be significantly improved. The result of questionnaire showed that
19% of the companies interviewed indicate that strategic management
is a desired topic of advanced training for board members, followed by
Finance & Controlling with 15 % and by Auditing with 13 %. We also
found out in discussions with different experts or in Vietnam that most
of the members of board did not have a sound education in modern
management. Some of them had a educational background as engineers
or as economists but trained in the former socialistic countries such as
Poland, Eastern Germany or Russia.
Figure 4-26. Desired topic of advanced training for the members of boards
Our suggestions:
Ideally, the needs for the development of board members can be identified
by the Assessment of Board Members. The development measures should
bring the benefit not only to the board members, but also help to make
the undertaking of his or her tasks in the company more effective and effi-
cient. In other words, it should also bring the benefit to the company and
not just be a measure to motivate the board members.
Finance &
Controlling , 9,
15%
Strategic
Management ,
12, 19%
Auditing , 8, 13%
Marketing , 2, 3%
Human
Resources, 6,
10%
Risk
Management , 8,
13%
Information
Technology , 3 ,
5%
36 Stratagems ,
9, 15%
Others, 4 , 7%
170
To do so, the banks should define and document the procedures for train-
ing needs assessment consistent with the board development policy. The
banks should also carry out a training needs assessment and document and
prioritise requirements categorised by management, technical and univer-
sal training needs. Furthermore, it is also important that the banks review
and finalise a training curriculum based on a detailed needs assessment
and identify any external training needs. The banks should contract with
consultants for the preparation of courses and course materials, supervis-
ing and guiding the development as required.
4.4.6 Information and communications
Current situation:
Company-wide communication
According to our Second Surveys, there are quite few banks which have
implemented clear and effective communication procedures. In several
cases, the standing members of the BoD advise the top management just
verbally about their decisions. And if any communication troubles appear,
the top management must be responsible for these communication errors.
The reason is that top management has to take responsibility for their
underwritten signatures.
The VCCI-Survey also found out that only 53% of the companies commu-
nicate their enterprise-wide objectives to all employees, and staff under-
stand and work towards these objectives and know what they need to do to
achieve the objectives.
Board meetings
The number of board meetings varies significantly. About 33.33% of the
firms interviewed have 4 board meetings, 8.89% have 3 board meetings,
20% have 2 board meetings and 13.33% have only 1 board meeting per
year. It is also interesting to note that 24.44% Vietnamese boards hold a
meeting only if it is required.
171
Figure 4-27. Number of board meetings per year
According to the IFC-Survey, Board of Management meetings, and written
minutes are prepared and approved after each meeting. However, only 62%
of joint stock firms did the same, with 35% saying that their Board meet-
ings are more informally structured, although more than 90% prepared
and approved minutes. Across the sub-sample on non-SOEs, roughly 65%
of firms conceded that senior executives, who were not members of the
Board, nonetheless routinely attended Board of Management meetings.
This was true for more than three-quarters of equitized companies and
half of the joint stock firms surveyed. Virtually all of the equitized firms
surveyed have formal agendas prepared and circulated before.
Written policies and an organization chart with detailed reporting line
play an important role in ensuring the effectiveness of information and
communication flow to the companys management.
e main reason for this fact is that, relevant information may not be identied
and communicated in a timely manner to decision makers, if management
does not follow the companys policies and organization chart.
4 board
meeting per
year , 15, 34%
3 board
meeting per
year , 4, 9%
2 board
meeting per
year, 9, 20%
1 board
meeting per
year , 6, 13%
Only when
needed, 11,
24%
172
Our suggestions:
Company-wide information and communication
It is clear that if employees are unsure of their roles and responsibilities
and there is no written job description, the relevant information cannot
be identified and communicated in a timely manner to the companys
management. The bank must ensure that employees are willing and able to
implement strategies for example by making the information available. As
already known from the Banks that participated in the interviews, the Top
Management even keeps their vision and strategies secret, which makes it
difficult for employees to contribute to successful implementation.
Best practices show that to ensure the effectiveness of information and
communication flow the company would have to have clear procedures on
information flows, and an organization chart showing detailed reporting
lines. Management of the company should follow the policies and proce-
dures put in practice.
Board meetings
We recommend that there should be formal internal meetings, which
should take place on pre-determined days. The meetings should be well-
prepared.
129
Hilb (2006) suggests the following process: The CEO reports
along the extended information checklist about the most important events
of the past period and about the most important objectives of the sub-units
of the organization. At the end of the board session, the chairman and
the CEO discuss all information arising out of the meeting that should be
forwarded to the management.
It is important to know that 80 to 90 percent of the chairmans role happens
outside of board meetings (Ward, cited in Hilb, 2006).
129 Mller (cited in Hilb, 2005) recommends the following methods for directing meet-
ings: (1) assume preparation, (2) introduce each agenda item, (3) integrate or synthe-
size the contributions, (4) formulate motions clearly, (5) deal with important issues
first, (6) clearly state proportions of votes or breakdown of opinions, (7) keep to
schedule (8) explain the context and highlight the implication of each item, (9)
propose a schedule of communication, (10) assess and define confidentiality.
173
4.5 Recommendations mainly for the banking sector
We have conducted the empirical research based on the two surveys accord-
ing to the areas of focus. However, these two surveys provided only frag-
ments of the complex issue of Corporate Governance. That is the reason
why we also included surveys conducted by others in order to deliver a
complete picture.
In our surveys we have found out, that many areas in the corporate gover-
nance can be significantly improved. We consider it as crucial that the
shortcomings in the Corporate Governance situation in Vietnam are
known and that we could make the recommendations to the (current and
future) board members and members of top management.
If the countrys corporate sector wants to avoid the repetition of scandals in
the future, and wants to create efficient and competitive business entities
which can compete successfully with their overseas peers, both, in inter-
national markets as well as in an increasingly liberalized domestic market,
then they have to create a more robust, sustainable, larger business. In
order to achieve these goals, it is important to introduce and imple-
ment a modern approach to corporate governance practices - the New
Corporate Governance.
For the successful development, implementation and evaluation Corpo-
rate Governance, we recommend that any change in the areas of focus
should factor in the interests of the stakeholder groups, such as employ-
ees, customers, shareholders, partners and communities. By saying that,
we hope that our recommendations would help to improve the corporate
situation in Vietnam.
174
A clear delineation of the roles of the BoD and of the top
Management is critical to the success.
The external consultants can help with project manage-
ment, with planning methods and support in the decision
making process.
It is crucial that the content of the vision and strategy are
communicated to the relevant stakeholder groups and do
not just remain in the head of the board members and
members of top management.
Recommendations
The board structure should be designed that the interests of
all stakeholders are considered and protected. Until now in
Vietnam, only the interests of the owners / shareholders are
considered.
The banks should also introduce related committees as
discussed either at the level of board or at the level of top
management in order to ensure the effectiveness, transpar-
ency and accountability.
The banks should also introduce a corporate structure that
reduces spans of control to allow board members and
members of top management to concentrate on strategic
issues, increase the delegation of responsibility, clarifies
reporting lines and chains of command, clearly differenti-
ates between line management and functional relationships,
removes the potential for conflicts of interests that is
common in Vietnam.
Composition of the Board should reflect not only demo-
graphic data, but also the know-how and team-roles.
The size of the Board should be lean enough that problems
can be discussed effectively and efficiently and decisions
can be made quickly.
There should be a clear distribution of tasks between the
chairman and other board members and members of top
management. He should not get involved (too much) in the
daily business as it is the case in Vietnam.
-
-
-
-
-
-
-
-
-
Vision and
strategy:
Board
Structure:
Leadership:
Areas of focus
175
Figure 4-28. Recommendations based on the areas of focus
There is clear evidence that the enactment of good corporate governance
can have a tangible positive impact on the following issues
130
:
- A companys efficiency and operational performance;
130 For example, see studies by CLSA, McKinsey and the World Bank, profiled briefly in
Recommendations on Good Corporate Governance Practices in Vietnam, p. 3.
Banks should build up a culture where the needs and expec-
tation of all stakeholders are considered: A culture of trust
and of integrity should be introduced at the board level (but
also across the company).
Most of the banks have somehow certain management
systems. However, the systems should help to make the
company transparent, effective and efficient.
State-of-the-art systems can also help to provide the
employees with the necessary knowledge and skills that
serve as motivation for them.
Process structure determines which tasks and in which
sequential order they have to be accomplished. According
to Rueegg-Stuerm (2005) there are 3 levels of processes:
management processes, business processes and support
processes.
The adequate processes and procedures help to do the
right things but also to do the things right, thus increasing
the benefit for all the stakeholders.
-
-
-
-
-
Systems:
Board
Culture:
Processes:
Information and communication is still a huge challenge for
most companies in Vietnam. The banks must ensure that
the stakeholders receive the required information that they
can contribute to the success of the company.
According to Hilb (2005), communication should follow 4
principles: (1) completeness, (2) objectivity, (3) comprehen-
sibility, and (4) timeliness.
-
-
Information
and
Communication:
176
- Its ability to access finance, particularly from investors and capital
markets;
- The reduction of risk related to its day-to-day operations;
- Its compliance with laws and regulations; and
- The degree to which it can protect itself from corrupt practices.
The cumulative result can be larger investment, higher growth, and greater
employment creation.
131
As a consequence, studies show that investors are
more interested in investments in and are willing to pay more for shares
in companies which are perceived to conform to higher corporate gover-
nance standards.
132

131 Corporate Governance and Development, p. 14.
132 Conversely, investors will pay less, or may simply choose not to invest at all, in firms that
display poor corporate governance practices. Put another way, companies that adhere
to higher standards of corporate governance tend to be rewarded with lower costs of
capital and higher share price valuations.
177
CHAPTER 5: IMPLICATIONS
Based on the analysis and survey findings outlined in the previous sections,
we conclude with some recommendations to promote better corporate
governance practices in Vietnam. However, it should be emphasized again
that the term Corporate Governance is very new in Vietnam. Therefore,
we should keep in mind that the concept of corporate governance is a rela-
tively broad one, and that it often seems to mean different things to differ-
ent people. Also, the concept is not yet well established or well understood
in Vietnam. It would probably be better to identify and focus on specific,
higher priority issues within the broad array of corporate governance from
a practical or implementation point of view as well as from the standpoint
of research and training. In this sense, it is important to find out, where
the most pressing needs for intervention are, and where the optimum gains
from such interventions could, more readily, be achieved.
In this part, we want to highlight the implications for research, teaching,
and practice.
Chapter 3:
Secondary Data
Analysis
Chapter 4:
Primary Data
Analysis
Chapter 5:
Implications
Chapter 2:
Theory about
Chapter 1:
Introduction
3
.
4
.

S
W
O
T

/

C
B
I
3.3
Industry
3.2
Market
3.1
Environment
4
.
5

R
e
c
o
m
m
e
n
d
a
t
i
o
n
s
1
.
5

C
o
n
c
l
u
s
i
o
n
1.4
Research
approach
1.3
Structure
1.1
Back-
ground
1.2
Objectives
4.4
Summary
4.1
Background
4.3
Second survey
4.2
First survey
2.1
Governance
theories
2.2
Characteristics
2
.
4

C
o
n
c
l
u
s
i
o
n
- Secondary data
analysis
2.3
Research frame-
work
K
I
S
S
1.1
External
Context
1.2
Internal
Context
2.1
Board
Composition
2.2
Board
Culture
2.3
Board
Structure
2.4
Board
Vision
3.1
Board
Selection
3.2
Board
Feedback
3.3
Board
Compensation
3.4
Board
Development
4.1
Auditing
4.2
Risk
Mgmt
4.3
Communi-
cation
4.4
Controlling
Keep it
controlled
ntegrated
trategic
ituational
5.1
Research
5.2
Teaching
5.3
Practice
178
5.1 Implications for research
As this survey represents one of the first research projects on corporate
governance in Vietnam, we deliberately tried to span most of the corporate
governance issues that are proposed in the concept New Corporate Gover-
nance by Martin Hilb (Hilb, 2005). In doing so, we hope we have been able to
identify some of the specic areas where there is a greater need for intervention
and initiative. However, there is, clearly, a need for further, more focused diag-
nostic studies on this topic in Vietnam. In particular, it would be worth taking
a closer look at the more specic corporate governance problems faced by the
SOE and non-state sectors (see also IFC-Report, 2006). A clear focus on these
issues could then serve as useful input for the conceptualization and design of
an action plan for corporate governance in Vietnam.
In the SOE sector, we have identified problems such as ambivalent cultures
of the Board, potential conflicts of interest, confused board structures,
unclear roles and tasks of the members of the Board and of committees as
well as of top management.
In the non-state sector, other topics that would benefit from further
research include the apparent weaknesses of supervisory committees in
many private firms as well as the considerable overlap that exists between
senior executives and members of the Boards of Management.
In this research, the roles of diverse stakeholder groups, such as employees,
customers, society, minority shareholders, have been discussed, but not in
details. These groups in Vietnam need to be further researched.
Other industries in Vietnam, such as schools, hospitals, SMEs, Family
Businesses, and Cooperatives also need to be included in future research.
179
5. 2 Implications for teaching
In our study, we also found out, that the members of boards, of supervi-
sory boards and also of top management need practical training in specific
corporate governance themes and issues such as Strategic Management,
Risk Management, Change Management, Auditing and Accounting and
modern tools of Human Resource Management.
Furthermore, it is also necessary to design targeted board programs, such
as Bank Governance, Educational Governance, Hospital Governance,
Governance for SMEs (Hilb, 2005, 212). These board programs should
not only be for people who are already members of boards, of supervisory
boards and of top management, but also future members.
133
These efforts
should help on the one hand to provide the existing members with the
adequate knowledge and skills to perform their tasks effectively and on the
other hand, to broaden the pool of qualified and capable individuals who
can serve as members of boards in the future.
In addition, there is a need to support policy and legislative interventions
which are intended to strengthen the legal and regulatory framework for
corporate governance. These efforts include a range of initiatives (see also
IFC-Report, 2006):
- Advocacy work in promoting good corporate governance practices
within the business community,
- Implementation of training programs and public awareness
campaigns.
133 It does not make sense to have created the functions of the BoD, Supervisory Boards
and Committees if the members are not sufficiently trained to perform their duties
adequately. In 2003, Singapore found that a boom in initial public offerings had resulted
in a shortage of board directors, with some individuals sitting on ten or more company
boards - in addition to their full-time jobs. (See also The Business Times, Singapore, 19
November 2003 cited in IFC, 2006).
180
5.3 Implications for practice

As pointed out earlier in the paper, there are currently 3,600 equitised SOEs
and there are an additional 1,500 expected to be equitized by 2010 (Viet-
nam Tiger Fund, 2007). It is worth stressing that the largest companies in
Vietnam will become equitised SOEs for example, VMS, BIDV, Vietcom-
bank, Sabeco and Habeco. Therefore, any efforts to improve corporate
governance standards in Vietnam should focus initially on larger business
entities, the majority of which tend to be SOEs. As the private sector
134
in
Vietnam matures and expands, more non-state firms will develop into large
corporate entities. However at present, it may be advisable to focus particu-
lar attention on (equitised) SOEs.
We are confident, that the pursuit of better corporate governance prac-
tices converges with the ongoing equitisation campaign. This is evidenced
by the fact that SOEs destined for equitisation have introduced and are
implementing good corporate governance practices because they are
convinced that this will be a critical factor in their ability to attract inves-
tors. New investors are expected to be willing to buy shares of partially
equitising SOEs at valuations acceptable to the government only if there
are improved corporate governance standards that better protect the
interests of minority shareholders. The equitisation process does seem to
be a vehicle for advancing good corporate governance standards within
firms in Vietnam.
Our survey results suggest several areas of focus for future progress, such
as vision and strategy, structure of board, culture of board, leadership,
systems, processes, information and communication. For the successful
development, implementation and evaluation of corporate governance, we
recommend that any change in the area of focus should factor in the inter-
ests of the stakeholders groups.
134 Notwithstanding their future growth and sustainable development prospects, which
depend partly on good corporate governance, their immediate need to improve such
practices is clearly limited.
181
If members of the board and of the top management are conscious of
the fact that improved corporate governance practices will lessen their
exposure to various operational risks and improve business perfor-
mance, and if shareholders can see that improved corporate governance
practices will help enhance the value of their investments, then the
introduction and implementation of corporate governance practices are
more likely to be embraced and genuinely internalized in the day-to-day
operations of companies. This logic suggests that a consciousness-rais-
ing and advocacy campaign would be a useful complement and support
to any regulatory initiatives.
We also suggest that initiatives to improve corporate governance
practices in Vietnam should represent a concerted effort on the part
of all stakeholders government and regulatory agencies, companies
(their management) and shareholders / investors (see also IFC-Report,
2006).
135
This will require the combined efforts of multiple government
agencies and other relevant organisations.
135 The experience of SECO has showed that combined efforts of multiple government
agencies and other relevant organizations increase the chance for success. The concerted
actions panning the following institutions: the State Bank of Vietnam, the Ministry
of Finance, the Ministry of Planning & Investment, the State Securities Commission
(SSC), the Ministry of Justice, the Vietnam Chamber of Commerce & Industry (VCCI),
some business associations, etc.
183
ANNEX
ANNEX I : Interviewers List
ANNEX II : First Survey
ANNEX III : Second Survey
Reference
184
Annex I: Interviewers list
No. Name Organization Locations Remarks
1 Dr. To Ngoc Hung Academy of Bank Hanoi Director
2 Mr. Ly Xuan Hai ACB HCMC President & CEO
3 Mr. Huynh Nghia Hiep ACB HCMC
Executive Vice
President
4 Mr. Nguyen The Nang
Bao Minh Insurance
Company
HCMC
Executive Vice
President and
Member of Board
5 Mr. Nguyen Huy Tua BIDV Hanoi Director
6 Mr. Do Huy Hoai
BIDV Securities
Company
Hanoi Managing Director
7 Mr. Truong Hai Hung
Calyon Investment
Bank
HCMC
Director/ Head of
Capital Market
8 Dr. Le Van Hung
Capital Mobilization
Department of Ministry
of Finance
Hanoi
Director/ Univer-
sity Professor
9 Mr. Lawrence J. Wolfe Deutsche Bank HCMC
Chief Country
Offcer
10 Mr. Nguyen Thanh Long Eximbank HCMC
Chairman of
Eximbank
11 Mr. Tran Xuan My
Halong Canned Food
Stock Corporation
HCMC CEO
12 Ms. Nguyen Thi Hoa
Hanoi Construction
Investment
Hanoi Chairwoman/CEO
13 Mr. Nguyen Trung Hau Holcim Vietnam HCMC Terminal Manager
14 Ms. Nguyen Anh Hoa Holcim Vietnam HCMC HR Manager
185
15
Beat Waefer
Honorar Consul
Honorar Consul in
HCMC
HCMC
Board members
of several com-
panies
16 Mr. Vo Minh Tuan Incombank HCMC
Deputy Managing
Director
17 Mr. Huynh Nam Dung MHB HCMC
Executive Chair-
man of Mekong
Housing Bank
18 Mr. Le Van Be Military Bank Hanoi
Vice Chairman/
CEO of Military
Bank
19
Mr. Pierre Schaufel-
berger
Nestl Vietnam HCMC CEO
20 Mr. Le Duc Thuan Nestl Vietnam HCMC HR Director
21 Mr. Le Anh Thi
PriceWaterHouse-
Coopers
HCMC Supervisor
22 Mr. Dang Van Thanh Sacombank HCMC
Founder and
Chairman of
Sacombank
23 Mr. Nguyen Ho Nam
Sacombank Securities
Company
HCMC CEO
24 Mr. Dao Van Thinh Seaprodex Real Estate HCMC CEO
25 Dr. Ngo Chung State Bank of Vietnam Hanoi
Organization
and HR Deputy
Director
26 Dr. Cao Si Kiem State Bank of Vietnam Hanoi
Former Bank
Governor
27 Mr. Dang Thanh Binh State Bank of Vietnam Hanoi Deputy Governor
28 Dr. Le Xuan Nghia State Bank of Vietnam Hanoi
Director of Devel-
opment Strategy
186
29
Ms. Bui Thi Thanh
Huong
State Securities Com-
mission
Hanoi
Director of Securi-
ties Business
Department
30 Dr. Tran Quoc Tuan
mission
HCMC
Director of Se-
curities Science
Research and
Training Center
31 Dr. Dao Le Minh
mission
Hanoi
Director of
Research and
Training Center
32 Mr. Nguyen Dinh Son
State Treasury/ Minis-
try of Finance
Hanoi
Deputy General
Director
33 Mr. Nguyen Duc Thang
Thang Long Securities
Company
HCMC Director
34 Mr. Trinh Van Tuan VIB HCMC Chairman
35 Mr. Pham Van Hung Viet A Bank HCMC
CEO of Viet A
Bank
36 Mr. Do Cong Chinh Viet A Bank HCMC
Chairman of Viet
A Bank
37 Mr. Nguyen Hoa Binh Vietcombank Hanoi
Chairman of
Vietcombank
38 Dr. Le Manh That
Vietnam Buddhist
University
HCMC
Professor and
Vice Rector
39
Ms. Nguyen Thi Phong
Huyen
Vigatexco HCMC CEO
187
ANNEX II: First Survey
Questionnaire of Corporate Governance January 6th 2006
Questions

1. Which position (s) do you have in your company? (You can choose
several answers)

Chairman
Member of board
Managing Director (CEO)
Member of top management
Others:
2. How many members of board are there in your company:
members?
3. Ist your company listed on the stock exchange?
Yes
Intended in the future
No
4. How is the board of directors of your company constructed?
Board without committee
Board with committee:
Audit committee
Nomination committee
Compensation committee
Other committee
5. Which system do you apply in your board of directors:
Strategic planning
Monitoring system
Strategic control for evaluation of the strategic implementation
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Risk Management System
Financial Reporting
Auditing
Selection concept
Remuneration concept
Succession planning
Other system
6 How could you characterize your corporate culture? (You can choose
more than one answer)
Customer oriented
Trust oriented
Bureaucratic
Performance oriented
Others
7. How is the board of directors of your company evaluated? (You could
choose more than one answer)
Internal evaluated
External evaluated
Self evaluation
Foreign evaluation
Not evaluated yet
8. Which criteria are used to select the member of boards of directors?
(You could choose more than one answer)
Professional competence
Leadership competence
Social competence
Political competence
Availability of a large network
Others:
189
9. Which group of stakeholders have representative in the board of
directors? (You could choose more than one answer)
Shareholders
Employee
State
Costumer
Others:
10. Which topics of advanced training should be interesting for the board
of directors in Vietnam? (You could choose more than one answer)
Strategic Management
Finance und Controlling
Auditing
Marketing
Human Resources
Risk Management
IT
36 Strategeme
Others:
11. How is the structure of remuneration system of the members of
boards?
Fix
Variable
Honorary (without compensation)
Others:
12. How often is the board meeting in your company?
One for year
Only, when we have needs
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Criteria Descriptions Remarks
- Name of the bank:
- Types of company forms:
- Founding year:
- Number of employees
- Products (or Strategic Business Units):
- Number of branches
- Sales (USD)
- Sales per Strategic Busines Unit):
- Non Performance Loans (NPL) ratio
- Revenue growth (2005-2006)
- EBT (USD)
- Pretax profit margin
- Net Profit Margin
- Shareholder's equity (chartered capital)
- ROE
- ROA
- PE
- year to be equitized / listed
e.g. new businesses
About the bank
- Future perspective
- Number of members of BoD
- gender
- Age
- Education
Special abilities e.g.
- Support from government and SBV
Relationship to political
decision makers
- Strategic partnership e.g. with foreign banks
Strengths, e.g.
-
About the BoD
Strong capital basic
- Very fast asset growth in the last 5 years
- Strong hidden reserves
- Complement capital resources
- Rapid expansion of branch-network
- Best mortgage bank
-
-
Weaknesses, e.g.
- Low reputation
- Low profitability ratios
- No suitable IT system
- Weak credit management system
- Primitive Asset / Liability Management
- Lack of product diversity
Concentration of funding base
Narrow geographical focus
Lack of professional and high-potentials
ANNEX III: Second Survey
Fact sheet [COMPANY]
191
Importance Satisfaction
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1 Strategy
1 Do you as a board member know clearly the vision and mission statements of your company?
1.a Please indicate the vision of your company in some words:
1.b Please indicate the values of your company:
1.c Please indicate the mission statements of your company:
2 How is the vision creation process in your company?
3 What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"
1.1 Clarity of vision and values
1.2 Involvement of BoD in the setting of vision
1.3 Involvement of BoD in strategy formulation
1.4 Involvement of BoD in the decision of strategic course
1.5 Involvement of BoD in the implementation of strategy
1.6 Involvement of BoD in the strategic control
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Strategy
1 How does the strategy differ from the local competitor (see also exhibit "Strategic Option")?
2 What competitive pressure do you expect when foreign service providers can provide financial
services under any legal form (100% foreign-owned, branches, Joint-Ventures, strategic partnership)?
3 By 2010, Vietnam will fulfill the national treatment under BTA, under which there will be no more restrictions,
especially on US banks. What is your bank's strategy between now and 2010 to cope with the situation?
4 For new services that have neber been available in Vietnam, like money brokering, trade in derivatives,
do you fear that free access for foreign banks would take away opportunities for Vietnamese
banks / institutions in providing these services?
5 Do you expect that the restrictions for non-bank financial institutions to provide banking services
will be dismantled in the future, given the possibilities provided ty technology and other development?
6 Does your bank have a strategy to diversify into new services?
193
Risk Management
1 About Risks and Opportunities of the banks
1.a Please indicate the greatest risks of the bank:
1.b Please indicate the greatest opportunities:
1.c please indicate different types of risks (see table "risk matrix"):
Environment:
Market:
Customers:
Industry:
Internal risks:
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Types of Risks Impact on performance Probability of Occurrence
1 2 3 4 5 1 2 3 4 5
Environment
WTO accession
Political instability
Slow down in reform
Economic slowdown
Frequent changes of bank-related policies
Technological development
Social tension
Currency
Market
Product offerings
Capital shortage
No branches in foreign markets
Customers
Bad debts (non-performing loans)
Credit card fraud
Lack of confidence in the bank
Absence of consumer credit bureau
Industry
Losing market share to foreign banks
Fierce competition of local banks in a few segments
Brain drain from Vietnamese banks
Internal risks
Retain capable employees
IT break-down
Capital shortage
Succession planning
Fraud and corruption
Risk and liability Management (RLM)
Lack of vision of the top management
Lack of professionalism of staff
Narrow revenue base
Table: Rick Matrix
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Evaluation criteria of the board
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3 Board structure
3.1 Enforcement of strategy-compliant company structure
3.2 Delegation of authority to senior management
3.3 Effective decision-implementation
3.4 Effective performance of Audit Committee
3.5 Effective performance of N&RC
3.6 Effective performance of BS&RC
3.7 Supervision of control mechanisms of the group
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Board culture 4
4.1 Clarity of code of ethical conduct
4.2 Team spirit of the board
4.3 Culture of trust of the board
4.4 Skills to consider the opinion of management
4.5 Constructive communication with management
4.6 Participative decision-finding approach
4.7 Checks and balances throughout the board
4.8 Integrity of board members
What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"
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5 Board composition
5.1 Optimal number of board members
5.2 Board diversity
5.3 Balanced composition based on functional competences
5.4 Balanced composition based on market know how
5.5 Balanced composition based on product know how
5.6 Independence of board members
1 Optimal numbers of board members
o Number of female board members
o Number of male board members
2 Board diversity
o Educational backgound
- level
- highest title acquired
- functional focus area
o Professional backgound
- years with working experience
- years in leading positions
- years at board
o Ethnic backgound
3 Competences (several answers possible)
o What for competences do you think that a member 1 2 3 4 5
of board should have?
- Political networking
- Functional competences
- Market know-how
- Product know-how
- Family relations
- Educational background
- Leadership quality
- Integrity
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6 Board meeting
6.1 Leadership role of chairman
6.2 Chairing of board meetings
6.3 Optimal use of relevant communication technologies
6.4 Control tasks of chairman
6.5 Optimal number of meetings of Audit Committee
6.6 Optimal number of meetings of NRC
6.7 Optimal number of meetings of BS & RC
6.7 Initation of use of external consultants by board
6.8 Records of board meetings
1 Does the board get regular (e.g. quarterly) information on the financial situation of the company?
2 Does the financial reporting contain statements on all financial indicators
(company value, cash flow, profitability, liquidity)?
3 Is the extent of the reporting fine-tuned (not to much, not too little)?
4 Does the board get regular information on non-financial indicators
(e.g. market shares, employee satisfaction, competitor behavior)?
5 Is strategic control enabled though reports on significant deviations of the strategy implementation?
6 Which information technologies do you use to communicate with the board?
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7 Board and Senior Management
7.1 Professional selection of board members
7.2 Professional selection of senior management
7.3 Fair performance evaluation of board members
7.4 Fair performance evaluation of senior management
7.5 Performance-based compensation of board members
7.6 Performance-based compensation of senior management
7.7 Executive training of board members
7.8 Executive training of senior management
7.9 Coaching of senior management by board
Yes
1 Is the salary of BoD of your company devided into the fixed part and variable part ?
2 What is the percentage of fixed part ?
3 What contains the variable part ?
o provision of home allowance
o provision of company car
o provision of private healthcare benefit
o provision of hospital membership program
o provision of medical check up
o provision of dental care
o provision of life insurance
o provision of club membership
o provision of stock plan
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8 Responsibity of Board towards stakeholder
8.1 Optimal representation of shareholders interests
8.2 Optimal representation of interests of key customers
8.3 Optimal representation of interests of personnel
8.4 Optimal handling of public relations
8.5 Risk management
8.6 External audit
8.7 Internal audit
8.8 Communication between external and internal audit
8.9 Prepared response to potential take-over offer
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CURRICULUM VITAE
Bao Toan Tran was born in Vietnam, but has lived many
years in Switzerland and is a Swiss citizen. In Switzerland
and Luxembourg, he worked in private banking, asset and
fund management for Credite Suisse, for Banque Gnrale du
Luxembourg and for Aargauische Kantonalbank, where he was
Senior Portfolio Manager and Head of Equities Research. In
2005, he returned to live and work in Vietnam and has since
been involved in several projects in the banking industry and
for the State Securities Commission. Mr. Tran is one of the
original founders of Viet Capital, which is one of leading fund
managers and investment banks in Vietnam, and currently
serves as its Vice-Chairman. He is responsible for overall
investment strategy and business development. Prior to found-
ing Viet Capital, he was one of Directors at Vietnam Holding,
a Swiss-based fund dedicated to opportunistic investments in
Vietnam and listed on the London AIM.

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Analysis of the Vietnamese Banking Sector

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