Characteristics of the financial system in Vietnam

Vietnam has a bank centric financial system, as is common in developing economies. To promote growth and complement the banking system, the government has been promoting the development of capital markets in recent years. This post outlines a brief history of the financial system in Vietnam and discusses the common financing mechanism for businesses in Vietnam.

A brief history of Vietnam’s financial system 1975-1986: Centrally planned economy

The Vietnam war ended in 1975, and the unification of North Vietnam and South Vietnam created the Socialist Republic of Vietnam, which followed the Soviet model of a centrally planned economy. The Vietnam National Bank was established in 1951 and renamed to State Bank of Vietnam in 1961 (SBV, n.d.). It served as both a central bank and a commercial bank, overseeing all the financial system. Other financial institutions were largely nonexistent and there were almost no private enterprises in the country.

1986-1990s: Market Reforms (Đổi Mới)

With the collapsing of the Soviet bloc’s economies, US-enforced trade embargo, and a border war with China, Vietnam’s economy underwent a significant crisis in the early. At one point, inflation was running at 400 percent (IMF, n.d.). The Vietnamese government introduced a market (and to a lesser extent, political) reform, “Đổi Mới”, in 1986. The economy was being transitioned from a centrally planned economy to a “socialist-oriented market economy”. This reform led to an evolution in the banking sector. In 1988, the SBV was restructured to become a central bank only (SBV, n.d.).

During this period, some joint-stock commercial banks were established in Vietnam, but the financial sector is still largely dominated by state-owned banks. In 1987, the first commercial bank in Vietnam, Saigonbank, was established, with an initial charter capital of VND650 million (Apollo, n.d.), which is equivalent to USD8.3 million according to Worldbank’s historical USD/VND exchange rate (Worldbank, n.d.) . Vietcombank, the largest bank in terms of market capitalization in Vietnam, was converted to a commercial bank in 1990 (Vietcombank, n.d.). Vietcombank is state-controlled. It is fully owned by the SBV during this period. Note that in most developed countries, central bank ownership of large commercial banks is not a common practice.

Capital markets are not yet developed. There was no stock exchange in Vietnam during this period. Between 1988 and 1999, year over year GDP growth in Vietnam was between 4.8 and 9.5% (Worldbank, n.d.).

2000-2010s: Initial integration into the global economy

Ho Chi Minh Stock Exchange (HOSE), the first stock exchange in Vietnam, was established during this period. It was opened as a securities trading center in 2000 and upgraded to a stock exchange in 2007 (Baker Mckenzie, n.d.). Hanoi Stock Exchange (HNX) was opened as a securities trading center in 2005 and transformed into a stock exchange in 2009 (IFC, n.d.).

In 2007, Vietnam officially joined the WTO, becoming the 150th member of the organization. This marked a significant milestone for Vietnam’s economy, due to increased trade and foreign direct investment (FDI). As part of its commitments for joining WTO, the banking sector in Vietnam was opened up to foreign banks. In 2009, HSBC Vietnam, the first fully owned foreign bank, was opened with a registered capital of VND3000 billion (equivalent to USD 172 million) (HSBC, n.d.). State-owned banks are also restructured to include partial privatization (known in Vietnam as “equitization”). For example, Vietcombank, the largest state-owned bank in Vietnam, sold 15% of its stake to Japan’s Mizuho Financial Group in 2011 (The Asset, n.d.).

In 2006, the Vietnamese government issued the first decree on issuance of corporate bonds (Vietnam Law References, n.d.). This opened up the ability for state-owned as well as private companies to finance through corporate bonds. As an example, in 2006-2007, Vietnam Electricity (EVN) issued about USD $95 million worth of corporate bonds with a 9.5% interest rate (Vuong, n.d.). However, there’s still a lack of a liquid secondary market for corporate bonds during this period. In 2018, the Vietnamese government issued another decree which simplified the requirements for corporations to issue corporate bonds (Vision Associates, n.d.), which led to a significant growth in the corporate bond market in the following years.

The first derivatives contracts were launched in 2017 (SBV, n.d.) consisting of future contracts for the VN30 index.

2020s and beyond: continued development of capital markets

With the raise of financial literacy, online trading, and an effect of the Covid19 pandemic, Vietnam saw a surge of retailed stock market investors interest since 2020. In 2021, HOSE’s trading volume was VND5400 trillion (equivalent of USD$230 billion), represented a 350% year over year growth.

In 2020, an ETF that tracks the VN100 index was launched by VinaCapital (Vietnamnews, n.d.). Several mutual funds were also established in Vietnam during this period.
There was also a surge in business and investor interest in corporate bonds financing. In 2021, total value of corporate bond issuance reaches VND 660 trillion (equivalents to USD 28 billion), represents a 42% year over year growth (VBMA, n.d.). In 2022, regulators started cracking down on some misconduct in corporate bond issuances, leading to a notable decline in the market.

Financing Methods

As of 2022, Vietnam’s financial system is bank centric. Total bank loans stood at $505 billion as of December 2022 (CEIC, n.d.). 97% of businesses in Vietnam are SMEs, which typically cannot utilize capital markets for financing (Vietnam Law Magazine, n.d.). Capital markets have seen a notable growth in recent year. In 2021, total corporate bond issuance is approximately USD 28 billion (VBMA, n.d.), while IPO funds raised stood at USD 13 billion (Deloitte, n.d.). A large portion of businesses should rely on retained earnings, but we could not find a publicly available data source that tracks the amount of business retained earnings in Vietnam.


Works Cited

Apollo. (n.d.). SAIGONBANK. Retrieved from hFps://www.apollo.io/companies/SAIGONBANK- FOR-INDUSTRY-AND-TRADE/54a120a969702da425ed6c02?chart=count

Baker Mckenzie. (n.d.). Overview of exchange. Retrieved from hFps://resourcehub.bakermckenzie.com/en/resources/cross-border-lis[ngs- handbook/asia-pacific/ho-chi-minh-stock-exchange/topics/overview-of-exchange

CEIC. (n.d.). Vietnam Total Loans. Retrieved from hFps://www.ceicdata.com/en/indicator/vietnam/total- loans#:~:text=in%20Feb%202023%3F-,Vietnam%20Total%20Loans%20was%20reported %20at%20508.642%20USD%20bn%20in,table%20below%20for%20more%20data.

DeloiFe. (n.d.). Vietnam IPO proceeds quadruple in 2022 to $71 mln: DeloiJe. Retrieved from hFps://theinvestor.vn/vietnam-ipo-proceeds-quadruple-in-2022-to-71-mln-deloiFe- d3874.html#:~:text=The%20combined%20market%20capitaliza[on%20for,%241.65%20 billion%20posted%20in%202021.

HSBC. (n.d.). HSBC in Vietnam. Retrieved from hFps://www.about.hsbc.com.vn/hsbc-in-vietnam IFC. (n.d.). IFC, Ho Chi Minh Stock Exchange, and Hanoi Stock Exchange Launch Vietnam

Corporate Governance IniRaRve. Retrieved from

hFps://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=25685 IMF. (n.d.). Vietnam: Raising Millions Out of Poverty. Retrieved from

hFps://www.imf.org/en/Countries/VNM/vietnam-raising-millions-out-of-poverty SBV. (n.d.). SBV - History. Retrieved from

hFps://www.sbv.gov.vn/webcenter/portal/en/home/sbv/aboutsbv/history SBV. (n.d.). Vietnam launched first derivaRves market. Retrieved from

hFps://www.sbv.gov.vn/webcenter/portal/en/links/cm409?dDocName=SBV294201 The Asset. (n.d.). Mizuho to buy 15% stake in Vietcombank. Retrieved from

hFps://www.theasset.com/ar[cle/20517/theasset.com VBMA. (n.d.). Vietnam Bond Market Report 2021. Retrieved from

hFps://vbma.org.vn/storage/reports/March2022/VIE_VBMA_TOM%20TAT%20TTTP%20

2021.pdf
Vietcombank. (n.d.). Vietcombank - Development history. Retrieved from

hFps://portal.vietcombank.com.vn/en-

Us/About/DH/Pages/milestones.aspx?devicechannel=default
Vietnam Law Magazine. (n.d.). Digital transformaRon an urgent need for SMEs. Retrieved from

hFps://vietnamlawmagazine.vn/digital-transforma[on-an-urgent-need-for-smes- 59216.html#:~:text=According%20to%20the%20Ministry%20of,employ%20over%205%2 0million%20laborers.

Vietnam Law References. (n.d.). Vietnam Law References. Retrieved from hFps://thuvienphapluat.vn/van-ban/Doanh-nghiep/Nghi-dinh-52-2006-ND-CP-phat- hanh-trai-phieu-doanh-nghiep-11963.aspx

Vietnamnews. (n.d.). VinaCapital launches ETF to track VN100 Index . Retrieved from hFps://vietnamnews.vn/economy/770046/vinacapital-launches-ej-to-track-vn100- index.html

Vision Associates. (n.d.). New legal regime for coprorate bonds. Retrieved from hFp://vision- associates.com/vi/decree-163-2018-new-legal-regime-for-corporate-bonds/?print=print

Vuong, Q. (n.d.). Vietnam's Corporate Bond Market, 1990-2010. Retrieved from hFps://osf.io/download/627b39936a659e0e1aeecd12/

Worldbank. (n.d.). GDP Growth (Annual %) - Vietnam. Retrieved from hFps://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=1999&loca[ons=VN&sta rt=1988&view=chart

Worldbank. (n.d.). Official exchange rate (LCU per US$, period average) - Vietnam. Retrieved from

hFps://data.worldbank.org/indicator/PA.NUS.FCRF?end=1987&loca[ons=VN&start=198 7 

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