opening the market for banking services in line with the commitments made by vietnam on its wto accession

2.1 2.1.1 2.1.2 2.1.3 2.2 2.2.1 2.2.2 Overview of banking services and international commitments of Vietnam on opening banking services market in the WTO’s framework ...7 Overview of ban

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Joint Swedish-Vietnamese Master’s Programme

Dr Bui Ngoc Cuong

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Preface and Acknowledgements

The author would like to express many thanks to Professor Christina Moёllll, Faculty

of Law, Lund University, Sweden; Doctor Bui Ngoc Cuong, Hanoi Law University,and my teachers, relatives, friends and colleagues for their support during the process

of writing this thesis

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Table of Contents

Preface and Acknowledgements 1

Table of Contents 2

Abbreviations 4

Executive Summary 5

1 1.1 1.1.1 1.1.2 1.2 1.2.1 1.2.2 1.2.3 1.2.4 2 2.1 2.1.1 2.1.2 2.1.3 2.2 2.2.1 2.2.2 Overview of banking services and international commitments of Vietnam on opening banking services market in the WTO’s framework 7

Overview of banking services and the opening up of banking services as part of globalization 7

Overview of banking services 7

Opening up the banking services market in the context of globalization.14 International commitments of Vietnam on opening up its services market within the WTO’s framework 18

Commitment on licensing foreign credit institutions to supply banking services in Vietnam 22

Commitment on regulating the form of financial companies are licensed to operate in Vietnam 25

Commitment on regulating the form of financial services that can be provided in Vietnam 25

Commitment on regulating the capital ratio of foreign banks may own in a Vietnamese bank 26

The current situation regarding Vietnamese law on banking services and completing the implementation of the commitment to open up the banking services market within the WTO framework 27

The current situation regarding Vietnamese Law on banking services 27

Current overview of the banking system and the Vietnamese Banking Law .27

Influence of international commitments on opening banking services on Vietnam Law 30

The adaptation of Vietnamese Law on Banking in line with its commitments on joining the WTO 32

Completing the work on Vietnamese Law to fully implement the commitments on opening up the banking services market within the WTO framework 40

Completion criteria for various regulations of Vietnamese Law and the international commitments on opening up the banking services market 40 Proposal of solutions to the correct implementation of the international commitments on opening up the banking services market of Vietnam 41

Conclusion 44

Table of Statutes and other Legal Instruments 46

International Treaties and Conventions 46

National Legislations 46

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Vietnam 46

Bibliography 47

Official Reports and other Documents 47

Monographs 47

Articles in Journals, Anthologies etc .48

Table of Contents 2

Abbreviations 5

Executive Summary 6

1 1.1 1.1.1 1.1.2 1.2 1.2.1 1.2.2 1.2.3 1.2.4 2 2.1 2.1.1 2.1.2 2.1.3 2.2 2.2.1 2.2.2 Overview of banking services and international commitments of Vietnam on opening banking services market in the WTO’s framework 8

Completion criteria for various regulations of Vietnamese Law and the international commitments on opening up the banking services market 41 Proposal of solutions to the correct implementation of the international commitments on opening up the banking services market of Vietnam 42

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Conclusion 45

Vietnam 47 Bibliography 48

Monographs 48

Table of Contents 2

Abbreviations 5

Executive Summary 7

1 1.1 1.1.1 1.1.2 1.2 1.2.1 1.2.2 1.2.3 1.2.4 2 2.1 2.1.1 2.1.2 2.1.3 2.2 Overview of banking services and international commitments of Vietnam on opening banking services market in the WTO’s framework 9

4 2.2.1

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2.2.2

Completion criteria for various regulations of Vietnamese Law and the international commitments on opening up the banking services market 42 Proposal of solutions to the correct implementation of the international

commitments on opening up the banking services market of Vietnam 43

Conclusion 46

Vietnam 48 Bibliography 49

Monographs 49

Abbreviations

ASEAN

GATS

GDP

FDI

Association of South East Asian Nations General Agreement on Trade in Services Gross Domestic Product

Foreign Directive Investment

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IMF

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Vietnam dong

US dollar

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Executive Summary

Vietnam was officially recognized as the 150th member of the World Trade

Organization (WTO) on 11th January 2007 This event marked a new stage in theprocess of integrating Vietnam into the international economy in general and thebanking sector in particular However, faced with the need to implement the

commitment undertaken as part of the integration process, Vietnamese bankingservices regulations were found to contain many weakness These regulations containmany contradiction, Vietnamese financial ability is generally weak, the managementmechanism for banking activities has not caught up with modernization nor

conformed to international practices and standards and many forms of bankingservices have no adequate legal framework… These shortcomings make it hard forVietnam to implement its commitments effectively and to make full use of the

advantages that integration brings A series of questions arise What was the real

situation of the law on banking services in Vietnam when it joined the WTO? Whatproblems were identified when implementing the commitments? How can Vietnamovercome these shortcomings? All of these problems need to be studied carefullyand then resolved both in theory and in practice

The purpose of this thesis is to clarify the theory and practice of modifying thelaw on banking services in accordance with Vietnam’s commitments on WTO

accession and with international practice in general

This involves the following tasks:

Clarify Vietnam’s commitments on opening up the banking service market inthe framework of the WTO agreement

Clarify the situation of Vietnamese Law when linked to its internationalcommitments within the WTO framework Such an analysis is the scientificfoundation needed to help reform the law in the direction of opening up thebanking service market

The thesis will focus on the commitments on opening up banking services marketundertaken following WTO accession and on how Vietnam is in fact implementingthese commitments However, because the regulations on opening up the bankingservices market are based on the law of banking services in general, this research

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needs to be seen against the background of a study of regulations of Vietnamese andWTO regulations of banking services in the light of 4 of the commitments

undertaken: (i) commitment on licensing foreign credit institutions to supply bankingservices in Vietnam, (ii) commitment on regulating the form of financial companieslicensed to operate in Vietnam (iii) commitment on regulating the form of financialservices that can be provided in Vietnam, (iv) commitment on regulating the capitalratio of foreign bank ownership of a Vietnamese bank

This thesis combines the analyzing, comparing and synthesizing methods Theanalyzing method is used to evaluate the current state of the law on banking services

in Vietnam The comparing method is used to compare Vietnamese regulations withthe WTO regulations as well as international practice The synthesizing method isused to evaluate and draw conclusions on each matter studied and give

recommendations for improvement Moreover, to strengthen our argument, weprovide illustrative statistics where necessary

Base on this research, the thesis hope to give an overview of the theory andpractice of the current law on banking services in Vietnam and makes some

proposals aimed at effectively implementing the commitments made on WTO

accession and strengthening the competitive capacity of the banking service sector

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Overview of banking services and the opening up of banking services as part of globalization

Overview of banking services

The concept of Banking Services

a The concept of “Services”:

Today, service activities are developing strongly and are now playing an important

part in the economy of most nations In the 1990s, services made up 40% of GDP in

Uganda, 50% of GDP in Zambia, more than 60% of GDP in Korea and Brazil and 80% of GDP in Canada 1 (In Vietnam, according to the General Statistics Office ,

- In the broad sense, services are considered the third economic sector, which

includes all economic activities other than industry and agriculture This point ofview is held by economists such as Allan Fisher and Colin Clark3 Clark defined

services as “forms of economic activities which are not included in the first and

second sectors (industry and agriculture)”.

- In the narrow sense, services are understood to be the “software” of visible

products, closely related to the production process and visible product exchange Anexample is the Honda product warranty service which is a service connected to thesale of Honda motors, carried out after sales in order to support and enhance salesactivity overall

In Vietnam, there are various ways of understanding the concept According to the

Vietnamese encyclopedic dictionary, services are activities to meet the demand of

1 National Committee on international economic cooperation (2005), General view of service commercial liberalization, National Politics Publishing House, p.21.

2

National Committee for International Economic Cooperation Office (2006) “WTO

integration documents of Vietnam”, p.182.

3

James R Melvin, History and Measurement in The Service Sector: a review, Review of

Income and Wealth, series 41, number 4, December 1995, p.484.

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production, business and life 4, such as entertainment, health and education services

in daily life; transport, information and consulting services in business According to

Prof, PhD Nguyen Thi Mo: “Services are laboring activities crystallized into

invisible products which, although of value, cannot be touched”.5 Compared with theencyclopedia definition this makes it clearer that services consists of invisible

products

International organizations like the International Monetary Fund (IMF) or WorldTrade Organization (WTO) define the concept by determining the areas which areregarded as services and then just listing and classifying them The General

Agreement on Trade in Services (GATS)6 GATS does not define the term but

indirectly refers to the concept by way of the 4 modes for providing services

Modes of providing services according to GATS:

(a) Cross- border supply: In this mode, the service provider the and customers are

each in their own country but the service is provided from the territory of one

country to that of another For example, express-service or transporting oil through apipeline

(b) Abroad consumption: In this mode, customers have to go to the country of the

provider to buy the service, such as the service of being examining and medicallytreated in a foreign country or studying abroad

(c) Commercial presence: In this mode, service providers set up their presence in

the country of the customer through a legal entity such as a branch, representativeoffice or subsidiary company For example, banking services, distribution services

29 terms of GATS applies to all service sectors including the banking service sector These

provisions state the principle that all Member States must comply with: (1)

Most-Favored-Nation, (2) Transparency, (3) National treatment, (4) Market access.

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(d) Natural presence: In this mode, providers appoint representative in the country

of the customer to provide services there For example, providing experts,

researching the market

According to the WTO classification, services are divided into 11 main branches;each branch is again divided into sub-branch, the total number of sub-branches being

155 ones.7 The main branches include: Business services (including services relating

to specialities and professions, such as legal consultancy, accounting, auditing,promotion…), information services (including services relating to delivery,

telecommunication, and audio vision), construction services, distribution services(including activities of wholesaler, retail, dealer), education services, environmentservices, financial services (including services relating to banking, insurance,

security), medical services, tourism services, culture-entertainment services andtransportation services

In my opinion, the concept of services can be understand like this: “Service is the

by-product of the laboring process It does not exist as an object but is consumed together with the process of provision in order to meet the demands of production and of human life”.

Services have some attributes as follows:8

First, a service has the characteristic of Intangibility: Services are invisible and

immaterial Services are things which “cannot drop to your feet” when being sold.9

You cannot touch it or drop it on your feet like other common goods because aservice product does not exit as an object For example, when you buy a bottle ofmilk, it may fall on your feet if you or the seller are not careful But this problemnever happens with services On the other hand, you cannot assess its quality beforeconsuming it For example, a customer cannot evaluate the quality of a spa shop ifshe does not directly use that service

Second, a service has the characteristic of Inconsistency: It is difficult to

determine the quality of services because they depend on the context that createsthem, such as provider, time, and place of provision For instance, the quality oftraining at a foreign language center may be different when teachers at different

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8

See Document MTN.GNS/W/120 of the WTO

Vice Professor, PhD Nguyen Huu Khai, MA Vu Thi Hien “Vietnamese services,

competitive capacity and international economic integration”, Statistics Publishing House, Hanoi

2007, p.9

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Liberalizing International Transactions in Services, p.1

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levels teach Even the same teacher can have a successful lecture in one class butfails in another since the level of success depends not only on raw ability but also onequipment and mood….

Third, a service has the characteristic of Inseparability: One of the characteristics

of a service is that with a service product, consuming coexists with providing theservice A service is consumed when it is produced, and the process of provisionstops when service consumption stops On calculating the output of the economy, theBureau of Economic Analysis, U.S Department of Commerce also gave a general

definition of service: “Services are those whose products cannot be stored and are

consumed at the time and place where trading activities take place 10”

Forth, a service has the characteristic of Inventory: Services cannot be stored;

this means that service products cannot be produced in advance and stored to wait to

be consumed However, this characteristic is only relative, since some service

products are in object form, as in design services, where drawings are visible and can

be stored

(b) Concept of “Banking Services”:

Similar to the concept of service, there are many different ways of understanding theconcept of banking service Before reviewing this concept, let us find out what a

There is one view that : A Bank is a financial organization which provides various

categories of financial services, especially credit, savings and payment services, as well as implementing more financial functions than any other business organization

in the economy”.11

10

11

Encyclopedia of Business and Finance (2001), Vol.2, Macmillan, p.762

For a general view of banks and banking services, see www.saga.vn , accessed 9 th

October,2008

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In Vietnam, provision 2, Article 20 of The Law on Credit Institutions12 providesthat: “A Bank is a form of credit institution permitted to conduct all banking

operations and other related business operation…”

In the book “Modern Banking”, David Cox stated that: “Most professional

activities of commercial banks are called banking service or foundations for

developing such service”.13 According to the viewpoint of this writer, banking

services constitute all the professional activities carried out by a bank, which is just akind of business

In Vietnam, banking services are controlled by the Law of Credit Institutions, yetthis law does not give a definition or explanation of banking services The phrase

“banking services” is mentioned in provision 7, Article 20 of The Law on CreditInstitutions: “Banking operations mean monetary business and provision of bankingservices, with the regular and principle operations being the taking of deposits andthe use of such deposits to extend loans and to provide payment services” So, here,

“banking services” means one of the activities of a Bank

In some Vietnamese books, newspapers and magazines, without giving a

definition, writers often list various types of banking service According to this,banking services are understood in a broad and narrow sense:

- In the broad sense, banking services includes all currency, credit, payment and

foreign exchange activities of the banking system14 (This viewpoint fits the way ofclassifying banking services used by the WTO15 as well as in many developed

countries)

- In the narrow sense, banking services only consists of fee receiving activities such

as money transfers, guarantee, foreign exchange business, international payments…16

Here, we would like to research issues relating to banking services in the broadsense of the word as it is mainly understood in the modern world

12 This Law was passed by the X Legislature of the National Assembly of the SRV in its

second session on 12 December 1997 (The Law No 02/1997/QH10) and was amended and

supplemented by the Law on amending and supplementing a number of Articles of the Law on Credit Institutions, passed by the XI Legislature of the NA of the SRV in its fifth session on 15 June 2004 (the Law No 20/2004/QH11).

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14

Cox D (1997), Modern Banking, Politics Publishing House, p335

See “Develop Vietnam’s financial service market in the process of integrating” Thai Ba Can, Tran Nguyen Nam

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Characteristics of banking services.

Beside the general attributes of services mentioned above, banking services have thefollowing features:

(a) Banking is a highly sensitive activity for the economy.

The banking system is regarded as the nervous system of the economy Banks playthe key role in distributing finance and managing most financial transactions Andthe bankruptcy of a single bank may cause the collapse of the whole system, as wehave just seen Banking operations, hence, have a direct effect on the stability of thenational economy

(b) Diversity of banking service forms.

Unlike trade in commodities, trade in services takes various forms While the object

of a commodity trade is particular goods, the object of trade in service is forms ofproviding services which are based on the capacity of the service provider Theseforms are recognized throughout the world Banking service is one of the branches ofthe trade in services, so it also reflects this On the other hand, beside the traditionalservices with a long history, such as bank deposits or lending services, banks areincreasingly broadening the category of services and providing new services forcustomers, always being helped by the development of new technology Banks todayare even becoming “financial supermarkets”17 according to Peter Rose

(c) Subject to interference of the government through measures affecting the

capacity of the banking service.

Interference of the government into trade in service is only implemented throughpreventing provider’s capacity of providing or consumer’s capacity of consumingservice An activity of providing and consuming normal service requires the presence

of service provider and consumer Only by managing effectively or gaining

necessary reorganization of service transaction, can the government make full use ofthose measures In banking service, the government makes influence on ability ofproviding and consuming banking service through measures such as building andimplementing national monetary policy or using Law as the tool of manage andmaintain order of banking operations…

17 Peter Rose (1999), Commercial Bank Management, Irwin McGraw Hill.

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1.1.1.3 Classification of banking services

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Banking services can be classified in different ways, each of which has a certainvalue.

-(i)

(ii)

Based on the time factor, banking services are divided into:

Traditional services including: (a) Foreign exchange service, (b)

discounting commercial papers and commercial lending, (c) receivingdeposits, (d) preserving valuable property, (e) providing transactionalaccounts, (f) providing confidential services

New services: (a) consumer loan services, (b) financial consultancy, (c)cash management, (d) services relating to buying and hiring equipment, (e)selling insurance services, (f) providing services regarding securities, (g)providing investment bank service …18

This classification is a foundation on which to construct a legal framework, Statepolicies, measures of the Bank (strategy, organization, applied technology,

monitoring activities, risk control ) suitable for each type of service, especially themore modern kind, to promote the best possible performance

- Based on the functions of banks, banking services are also classified into:

1 receiving savings from the public

2 lending in all forms

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It is necessary to open up the banking services market for the following reasons, all

of which acquire greater force in this time of globalization:

First, opening up the banking services market is what the economy demands

As we known, “capital” is always a “hot” topic in most countries, especially in thedeveloping countries Demand for capital is increasing, especially in the context of afinancial crisis of global magnitude Opening up the banking services market willincrease Foreign Direct Investment (FDI) capital sources

After a long period of tightly protecting domestic bank markets, many countrieswhich were implementing economic reforms in the 1990s, especially average-incomecountries such as those in Latin America, Eastern Asia, Middle-Eastern Europe,started reducing or removing the barriers preventing Foreign Direct Investment (FDI)from flowing into the banking area Currently, many nations allow foreign

investment in banking not only by opening offices or branches but also by

investments in domestic banks The value of FDI investing in the financial area ofdeveloping countries increased dramatically from 2.5 billion USD in the period 1991– 1995 to 51.5 billion USD in 1996-2000 and 67.5 billion USD in 2001-2005.20 Theparticipation rate of foreign countries can be measured by the proportion of the totalvalue of the banking system which they hold

On the other hand, opening up the banking services market will also help foreign

Tiêu đề	Opening the market for banking services in line with the commitments made by Vietnam on its wto accession
Người hướng dẫn	Prof. Christina Moёllll, Dr. Bui Ngoc Cuong
Trường học	Lund University
Chuyên ngành	Law
Thể loại	Thesis
Thành phố	Lund

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