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Group members: Bùi Xuân Sơn

Lê Việt Cường

Vũ Tuấn Nghĩa

Guiding Teacher: MA. Phan Kim Thoa

Hà Nội October 2013

The development of bank system in Vietnam and its impacts on the development of the country

The development of bank system in Vietnam and its impacts on the development of the country

• THE DEVELOPMENT OF THE BANK SYSTEM IN VIETNAM

• THE IMPACTS OF THE DEVELOPMENT OF BANK SYSTEM IN VIETNAM ON THE DEVELOPMENT OF THE COUNTRY

• THE CONCLUSIONS

I. THE DEVELOPMENT OF THE BANK SYSTEM IN VIETNAM

1.The history of the bank system.

2.The present bank system in Vietnam

a. State Bank of Viet Nam

b. The Vietnamese commercial bank system

1.The history of the bank system:

a.The definition

A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses.

b. The development of the banking system

The History of Banking

- This began around 2000 BC in Assyria and Babylonia.

- Banking, in the modern sense of the word, can be traced to medieval and early Renaissance Italy, to the rich cities in the north such as Florence, Venice and Genoa.

The development of banking spread from northern Italy through Europe and a number of important innovations took place in Amsterdam during the Dutch Republic in the 17th century, and in London in the 18th century.

During the 20th century, developments in telecommunications and computing caused major changes to banks' operations and let banks dramatically increase in size and geographic spread.

1.The history of the bank system in Vietnam

2.The present bank system in Vietnam

-The development of the Vietnam banking system has closely linked with the national cause of revolution and construction.

-Before the August Revolution in 1945, Vietnam was a feudal-colonial country under the French colonialists’ rule. The banking and credit system was founded and protected by the French colonialists through the Indo China bank.

-On the basis of the new economic and financial policy set out in the 2nd Congress of the Vietnam Workers’ Party (February,1951), President Ho Chi Minh signed Decision 15/SL on the establishment of the Vietnam National Bank – Bank of the first people’s democratic state in Southeast Asia in order to carry out five urgent missions: issuing banknotes, managing treasury, carrying out credit policy in order to facilitate production and coordinating with the trade authorities for monetary management and struggling against the enemy.

a. State bank of Viet Nam

On January 21st,1960, the Vietnam National Bank was renamed as the State Bank of Vietnam, in accordance with the 1946 Constitution of the Democratic Republic of Vietnam. Following the liberation of the South in 1975, the takeover of the Republic of Vietnam National Bank and private capitalist banks was a starting point of banking activities all over the country under thebanking activity regime of a central planning economy. In July 1976, the country was officially unified and the Socialist Republic of Vietnam was founded.

2.The present bank system in Vietnam

-From 1975 to 1985: This is the ten-year postwar economic recovery after the liberation and reunification of the country. As such, Vietnam built up the new banking system under the new government, establishing a country – wide unified banking system and liquidating the banking system of the previous government in the South.

-From 1986 to 1990: the state management function was gradually separated from the commercial credit and monetary functions. The new mechanism of banking operations was built up and gradually improved.

-From 1991 up to now: To implement the CPV's directions and policies during the period of modernization and industrialization, Vietnam’s banking system has been continuously reformed and improved to ensure its important role in national construction and economic development in the new millennium.

2.The present bank system in Vietnam

b. The Vietnamese commercial bank system

Commercial bank system in Vietnam consists

- 5 State-owned Commercial Banks (SOCBs)

- 36 joint-stock commercial banks:

- 4 joint-venture banks

- 28 branch offices of foreign banks

Besides, there are 1 Social Policy Bank and several financial companies, finance-leasing companies and people’s credit funds,

5 SOCBs take up 3/4 of the total deposits and lending; the rest belongs to joint-stock commercial banks, branches of foreign bank and other credit

institutions.

2.The present bank system in Vietnam

II. THE IMPACTS OF THE DEVELOPMENT OF BANK SYSTEM IN VIETNAM ON THE DEVELOPMENT OF THE COUNTRY

1. Economic impactsa.Macroeconomic impacts

b. Microeconomic impacts

2. Social impactsa. High growth goal and its impact to the poor

b. Imperfect market and inequality

3. National security and external front

1. Economic impacts

- Comparing the outputs (quantity and quality of banking services) and the inputs (financial investments to the banking system) through Data Envelopment Analysis (DEA).

- Based on reviews and reports of international financial institutions such as the World Bank (WB), International Monetary Fund (IMF), Asian Development Bank (ADB), but also reports from specialized organizations such as Business Monitor International (BMI) , Moody’s Investor Service (MIS) or Fitch Ratings (FR) and SBV .

a.Macroeconomic impacts

The macroeconomic impacts of the development of bank system on the development of Vietnam can be calculated by:

Table 1: Descriptive statistics of input and output variables in the period of 1990-2010

a.Macroeconomic impacts

Deposits Credits GDP M2

Mean 350,317.52 501,257.52 618,689.48 562,801.19

Standard Deviation 529,027.73 765,144.96 547,312.25 775,275.51

Minimum 3,943 9,960 41,955 11,358

Maximum 1,934,593 2,889,525 1,980,914 2,789,184

Figure 1: Efficiencies of Vietnamese banking system (1990-2010)

a.Macroeconomic impacts

• The efficiency was higher at the beginning of 1990s and then decreased sharply afterward. A slight recovery was seen in the 2009-2010 periods but the efficiency scores were still low, settled under 0.6.

• In average, the eficiency score of the whole banking system during 1990-2000 period is 0,695 which mean the system is only running at about two-third of capacity.

Figure 1:Efficiencies of Vietnamese banking system (1990-2010)

DEA model tells us is about objective (or targeted) value of outputs, which should be achieved if the banking system can optimize its efficiency. According to this result, as the efficiency scores decreasing through the time, differences between objective and original value became bigger; that made total difference of the whole period reach 96,763,482 billion Dong, account for more than 7.4% of total GDP from 1990-2010. Within this difference (or so-called waste), the most wasted factor is GDP (around 81%) while Credits and M2 are 8% and 11% wasted accordingly.

a.Macroeconomic impacts

It suggests that the contribution of banking system into the economic development in Vietnam has been very limited, particularly in macroeconomic

b. Microeconomic impacts

- Foreign bank presence has been linked to lower net interest margins, profitability, cost ratios, and non-interest income for domestic banks in developing countries.

- Foreign banks in developing countries are relatively strong competitors in underdeveloped banking markets and can exert pressure on domestic banks to become more efficient and competitive.

i. Foreign bank presence, efficiency, and competition

- From developed and developing countries indicates that greater foreign bank presence is associated with lower probability of systemic banking crisis in the host country

ii. The stability of banking sectorb. Microeconomic impacts

- The foreign banks skim off the top customers.So the domestic banks have to seek to the smaller customers, who are much more in quantity.- There are more money in the system.

iii. The ability of people to access to credit

2. Social impacts

The high economic growth in the last decades contributed to poverty alleviation, reduced the number of poor households and improving living standards of the Vietnamese population by increasing the average income per head year by year. However, a high economic growth created a number of burdens in the macro-scope of the economy, including inflation.

The development of the bank system in Vietnam contributes a remarkable part in the economic growth, so it will be a part of those issues:

a. High growth goal and its impact to the poor

In the case of high inflation, the poor had to spend almost all their savings on necessities (food and things, clothes, etc.) at higher prices. Moreover, because these amounts of money were limited, it was not enough to transform into other more beneficial kinds of investments, the poor usually became vulnerable to price skating. Therefore, high inflation affected the poor the worst.

In the beginning of the economic reform, there was equality in all aspects in Vietnam relatively. Market mechanism encouraged economic growth, brought greater benefits and more opportunities to population. It also extended the gap between the rich and the poor.

b. Imperfect market and inequality

2. Social impacts

The over-all achievement on the external front is that from a country isolated politically and embargoed economically, Vietnam has been able to actively expand its external relations towards diversification and multilateralization. Over the past 20 years of Doi Moi, diplomatic ties with additional 57 countries have been set up. In total, Vietnam now has diplomatic relations with 169 countries and trade ties with 224 out of 255 countries and territories.

Vietnam has also established a framework of friendly, long-term and effective relations with neighboring and regional countries, making worthy contribution to the maintenance of regional security for the benefit

of national economic development.

3. National security and external front

III.THE CONCLUSIONS

The research provides a different view on the performance of the banking system in Vietnam in the last two decades of development (and financialliberalization) under the view point of efficiency measurement. It appends to the literatures in concluding that the efficiency (and thus, performance) of the Vietnamese banking sector is decreasing through the time as the size of the sector increases, financial market is more liberate, and when the World and regional economies are problematic.

The research also provides a new function for the DEA approach in evaluating banking efficiency and performance in various ways.

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