Developing factoring services for merchandise export in vietnam

The research of factoring service in Vietnam Regulation on Factoring and forfaiting operations of credit institutions Together with Decision No.. - Assessing the conditions for the devel

INTRODUCTION

1 The necessity of the research

Factoring and Forfaiting service (collectively referred to as factoring

service) nowadays has been widely applied in many countries and regions all over

the world, especially in Europe and America The reason for this development is

that these countries want to have an opener payment method than other methods

such as documentary credit, mail transfer, telegraphic transfer remittance and open

account to boost exports while ensuring safety and effective use of capital Thus,

factoring – a mixture of payment, credit and insurance method was born hand has

become a trend in international trade payment

In many countries, banks and finance companies play a very positive role in

supporting exporters in this field In Vietnam, factoring service was started since

2004, when the Central bank promulgated Regulation on Factoring operations of

credit institutions; however, the service has not really developed so far Turnover

from the service is still very limited due to objective as well as subjective reasons

In the context of international economic integration with the World Trade

Organization’s membership of Vietnam since 2006, due to harsh competition,

enterprises must improve their conditions of payment to improve competitiveness

and expand export markets To meet that demand, the development of factoring

service is a necessity This requires awareness of the service both in theory and in

practice With the reality that there’s no in depth research on the issue in Vietnam,

the author has chosen the topic "Developing factoring service for merchandise

export in Vietnam" to study the theoretical and practical development of

factoring service for merchandise exports in Vietnam

2 Literature review of factoring service

Factoring service is the financial product popular in many countries around

the world, thus, there are many studies is done on the issue

The research of factoring and forfaiting service in the world

About Factoring services, there are researches and documents such as: "Marketing

Internationnal Factoring", 2000, Neitherland of International Factoring Association - FCI,

“UNIDROIT Convention on International Factoring” - Ottawa, Canada, 28 May 1988);

“General Rules for International Factoring” - FCI); "Reducing the Cash Gap by

Factoring" of Daniel J Borgia, Ph.D., and Deanna O Burgess, Ph.D (Assistant Professor

of Finance College of Business, Florida Gulf Coast University), or "Factoring as a

financing: Evidence from the UK", Khaled Soufani - Assistant Professor, Department of

Finance Concordia University, Montreal, Quebec, Canada;

About forfaiting services, there are researches and documents such as:

"Innovative Export Financing: Factoring and Forfaiting", Business America 114 (No.1,

January 11), Ring, Mary Ann, 1993; "Forfaiting A user’s Guide: What is it, Who uses it and

Why? "John F Moran, Jr (Vice President of the British Am erican Forfaiting Company),

2002 Additionally, there are: "What is forfaiting?", Inc D & B Reports New York: Sep / Oct 1993 Vol.42, Iss.5, p.46 (1 pp.), McDermott, Kevin Dun and Bradstreet, or "The ins and outs of forfeiting," Global Trade & Transportation, Philadelphia: May

1993 Vol 113, Iss 5, p.20 (2 pp.), Ring, Mary Ann, or the book "Forfaiting -

an Introduction", Finanz AG of Zurich, Switzerland, 2001;

The research of factoring service in Vietnam

Regulation on Factoring and forfaiting operations of credit institutions (Together with Decision No 1096/2004/QD-SBV by the Governor of the State Bank); Curriculum "International payment in foreign trade" of Prof Dinh Xuan Trinh, Education Publishing House, 2002; “Factoring and Forfaiting Business" of MA Nguyen Quynh Lan, National Political Publishing House, 2006; "Factoring Development for international trade finance in Vietnamese commercial banks" by Dr Dang Thi Nhan et al, 2007; "Development of factoring business in trade finance operations and enhance competitiveness of commercial banks in Vietnam", MSc Huynh Thi Huong Thao, 2008;

3 Research objectives and research questions of the thesis

Objectives of the thesis

Overall objective: to propose solutions for the development of factoring service for merchandise export in Vietnam

Specific research objectives:

- Interpretating and systemizing the theoretical issues on the factoring service and development of factoring service, the necessary conditions for the development of factoring service In particular it emphasizes the development of the service for merchandise export

- Assessing the conditions for the development of factoring service for merchandise export in Vietnam

- Analyzing and assessing the development of factoring service for merchandise export in Vietnam

- Proposing direction and solutions to develop factoring service for merchandise export in Vietnam

Research questions:

- What is Factoring and Forfaiting? Why should we apply factoring service for merchandise export in Vietnam?

- Are there any factors/conditions which affect the ability to develop the factoring service for merchandise export in Vietnam?

- Why factoring service has not been developed in Vietnam yet?

- How to develop the factoring service for merchandise export in Vietnam?

4 Objects and scope of the thesis

The object of the thesis

The object of the thesis is theoretical and practical issues on factoring service for merchandise export in Vietnam

The thesis focuses on the development of factoring service in the economy

from the perspective of an independent researcher Therefore, factoring service is

considered as a kind of services in the economy (other than those previously

researches studied the service under the micro perspective, which is considered it

as a bank's operation) Thus, to develop this kind of service it is necessary to look

into both the supply and the demand sides as well as the macroeconomic

environment (government policy) so that finding "gap" between the banks’ supply

and business demand for the service, explains the question why the service has not

really developed in Vietnam

The scope of the thesis

The approach: Within the thesis, factoring service is considered as a kind of

services in the economy It is offered by commercial banks and financial

institutions and serves payment demand of the economy, particularly the payment

for export, and is subjected to the laws and policies of the Government From this

research perspective, factoring service development is considered throughout the

three subjects, namely: the State - the management and adjustment

subject; Banks/financial institutions - the service suppliers and import-export

businesses - the service users In particular, the study directs at developing

conditions for factoring service for merchandise exports in Vietnam

The period of time: Reality of factoring service development in Vietnam is

focused from 2004 – 2012 Proposed solutions are for short term and middle term

(till 2020)

5 Research Methodology

The method of dialectical materialism and historical materialism is basic

research method of the thesis In each specific content, depending on the requirements

and conditions of the study, thesis using such different research methods to elucidate

the problems of theoretical and practical content as synthetic, inductive, deductive,

comparative methods; statistics, sample surveys,

The thesis combines two forms of desk research and in the field research to

solve the research objectives To serve the objectives of the thesis research, the

primary data was collected through surveys of the author's thesis on the subject

The survey objects are two main groups: (i) providers of factoring service

(banks); and (ii) the users of factoring service (import and export enterprises) in

Vietnam's economy Data were collected by sending questionnaires directly,

sending e-mails through the link www.surveymonkey.com/s/lienhuong , by mails,

phone calls and direct meetings to interviewees More than 300 questionnaires

were sent to the respondents and 174 valid votes shall be refunded Refund rate is

58% survey

6 New contributions of the thesis

- New approach: factoring service is considered as a type of service in the economy (other than those previously studied under the micro perspective, which

is considered the service as a bank's business);

- Clarify and systematize the basic theoretical issues of factoring service and the development of the service in the economy;

- Focus on analyzing the necessary conditions for the development of the service and assessing these conditions in Vietnam nowadays

- Review the development experience of factoring service in several countries in the world and propose lessons of Vietnam;

- Assess the demand for factoring service in the economy, thus to guide the supply, aimed at increasing the quality of services

- Analyze and evaluate completely and comprehensively the development status of factoring service in Vietnam;

- Propose a system of feasible solutions aimed to develop the factoring service for merchandise export in Vietnam

7 The structure of the thesis

Besides the introduction, conclusion and appendices, the thesis is structured into three chapters:

Chapter 1: Basic theoretical framework of the development of factoring service;

Chapter 2: Current Development of factoring service for merchandise export

in Vietnam (2004-2012);

Chapter 3: Orientation and solutions to develop factoring service for merchandise export in Vietnam (to 2020)

CHAPTER 1 BASIC THEORETICAL FRAMEWORK OF FACTORING SERVICE

DEVELOPMENT

1.1 Overview of factoring service

Around 2,000 years ago, factoring was born along with the emergence of the

commission agents who specialize in the sale and implementation goods rotation Until

14th and 15th century, these agents became powerful and started decentralization, they

also can ensure the ability to repay debts to the buyer To the 16th century, the

American economy boomed and facilitated the development of factoring service in

America and had a great influence to the European market as well as neighboring

markets The time of late 19th to early 20th century was a period of strong growth of

the factoring agent in the United States However, factoring service development only

really be appreciated in the promotion of trade relation in general and international

trade in particular after the World War II Till now factoring service has been widely

adopted in many countries and regions all over the world, especially in Europe and

America

At the end of the 1990s, factoring service was introduced by a number of

foreign bank branches operating in Vietnam to domestic banks and

exporters/importers However, by 2004, after Regulation on Factoring operations

of credit institutions was enacted, banks and financial institutions began to deliver

the service in Vietnam

1.1.2.1 Concept under the Convention on International Factoring in Ottawa

According to Article 1 of the Convention on International

Factoring (UNIDROIT Convention on International Factoring - Ottawa, Canada,

28 May 1988): "Factoring activity is an activity which units acquired factoring of

receivables from customers arising from sale transactions or provide services but

late payments, whereby customers receive money advance corresponding to a

predetermined percentage of the value of the receivables The value remaining

(after deducting expenses) will be paid to customers who purchase payment done"

1.1.2.2 Concept under the Regulation on Factoring operations of credit

institutions (Vietnam)

According to Article 2 of Regulation on factoring operations of credit

institutions, by the Governor State Bank of Vietnam dated 06/9/2004 issued

together with Decision No 1096/2004 / QD-SB, the "Factoring is a form of credit

issued by credit institutions to the seller through the acquisition of receivables

arising from the purchase and sale of goods has been the sales and purchase

agreement for the purchase, sale "

1.1.2.3 Characteristics of factoring service

- Credit characteristics: Factoring can be considered as a credit granted

when the unit advance cash payment to the seller and was refunded when factoring unit demanded money from the buyer, the discount on the basis of values bill of sale is that users rate loan (the sale) be paid to providers of capital (factoring unit)

- Collection characteristics: When using factoring service, the seller/

exporter transfers the debts (accounts receivable) for the factoring unit to receive advance payment from the factoring unit so they will no longer have to worry about the management and recovery of this debt Factoring Unit will undertake all the work on behalf of the seller/the exporter

1.1.3.1 Factoring Service According to Dictionary of the Economic - Christopher Pass & Bryan Lones:

"Factoring is a financial arrangement by which a professional finance company (also called debt buying company - firm factor) buy the debts of a company with an amount less than the value of the debt Profits arising from the difference between the proceeds of the debt were bought and the actual purchase price of the debt Benefits of selling the company's creditors obtain money immediately instead of waiting until the debt repayment to avoid further inconvenience and expense in pursuing the debtor's late payment "

Meanwhile Glossary Banks - Hans Klaus said that "factoring is a type of funding in the form of debt transfer credit A company transfers all or part of the debt for a professional finance company (the company bought the debt, usually a bank’s subsidiaries) The company is responsible for collecting debts and accounts receivable tracking procedures to effect cost and time advance loans Normally, debt purchasing company must bear the risk of inability to pay debts"

1.1.3.2 Forfaiting Service According to the book "Forfaiting - an Introduction", Finanz AG of Zurich, Switzerland, 2001: "Forfaiting is the term used to refer to the acquisition of liabilities in the future, arising from the delivery of goods or services, mainly from commodity exports condition recourse to the exporter"

In the textbook "International payment in foreign trade", Prof Dinh Xuan Trinh, Education Publishing House, 2002, the "Forfaiting is a kind of long and medium term credit that a commercial bank or a finance company non-refundable advance exporters for a certain percentage of the total invoice amount to exercise the power to reclaim the money from the importer and assume all risk that the importer is unable to pay if it occurs The Forfaiter only provide credit to exporters

to importers of him was a bank guarantee"

1.1.4.1 Benefits of the service

For sellers/exporters

- Being funded working capital on the basis of sales to revolving funds for

production and faster growth

- Maintaining competitiveness by allowing buyers delayed payment for

goods

- Improving operational efficiency through specialization of production

- All credit risks are insured by 100% invoice value, financial situation

becomes healthier since it does not have bad loans on the financial statements

For buyers/importers

- Being entitled to buy goods easily;

- No need to open L/C;

- Increasing purchasing power and still not exceed the credit limit allowed;

- Can quickly order without delay, at no cost to open L/C, or negotiated fee

For service’s suppliers

- Gaining the revenues from fees and interest;

- Diversification of products;

- Expanding the market share and raising credibility in domestic and

international payment;

- Having opportunities to learn from the big Factor

- Providing information about the credit, and being benefited by exchanging

information with the data center

For the economy

- Rising currency revolving cycle, making the rotation of money in society

increases

- Facilitating the implementation of the deferred contract, the motivation for

promoting commercial activities both domestically and internationally, to promote

the development of production

- Helping businesses avoid worries about risks in capital recovery, unpaid

business, creating a stable business environment for businesses

1.1.4.2 Limitations of the service

For exporters

- The factoring fee is relatively high, but the cost is usually born by the seller;

- The relationship between the seller with the customers may be affected by

the factoring unit, due to the fact the factoring unit will find a way to collect it from

the buyer;

- In some cases when disputes occurred between buyers and sellers, the supplier

will not pay/or recourse to the payments/transactions in advance to dispute it

For importers

- Cost of goods under contract payments using payment services which may

be higher than when using other payment methods such as L/C;

- Units will be monitored factoring and debt collection activities in time

For providers of the services

May face a number of risks, including credit risk, debt collection risks; Fraud risk; Foreign exchange risk…

1.2 Factoring service development and necessary conditions for the development of the service

Factoring service development in the economy is process of planning, implementing, controlling, creating favorable conditions and coordinate effectively between stakeholders in the economy to make the factoring service becoming increasingly popular, bringing practical benefits to both the business and commercial banking system, becomes a form of financial assistance promptly and efficiently, while improving the efficiency of the use of idle funds of banks, profit bank, just support and facilitate the implementation of corporate deferred contracts, promote trade and manufacturing development

Development of factoring services in the economy should lead to some major contents, such as cognitive development of factoring in all study subjects and applications of factoring services; Perfecting the system of laws and policies to develop the factoring services; Development system providing factoring services in the economy; Development for factoring services in the economy; Creating and perfecting competitive environment favorable for the development of factoring services

1.2.2.1 Macroeconomic conditions

- Legal Environment

- Socio-economic Environment

- Thriving business activities inland and export activities

- Strong banking and financial system

- System Information Transparency 1.2.2.2 Conditions for factoring organizations (factoring service providers)

- Funds

- Human resources

- Network Operations

- Facilities, Technology

- Risk Management System

- The support services and other services

- The possibility of recourse debt 1.2.2.3 Conditions for import and export enterprises (factoring service users)

- There is a demand for factoring service

- Use the deferred payment method in payment for goods

- Human resources and qualified full understanding of factoring service

- Disclosure of information about business

1.3 Experience in developing factoring service of some countries in the

world and lessons for Vietnam

Sales of factoring service around the world

(Mil of EUR)

Europe 932,264 888,528 876,649 1,045,069 1,217,811 1,298,724

America 149,673 154,195 142,013 185,357 207,172 187,844

Total 1,300,666 1,325,111 1,283,559 1,648,229 2,015,413 2,132,229

world

1.3.2.1 Experience of the UK

1.3.2.2 Experience of France

1.3.2.3 Experience of Italia

1.3.2.4 Experience of Denmark

1.3.2.5 E xperience of Thailand.

- Raising deep understanding of the business and the benefits of factoring

service;

- Establishing a subsidiary or division/committee that specializes in

factoring services affiliated banks;

- Focusing on marketing for factoring services to entities in the economic

understanding and awareness of the benefits of factoring services;

- Improving the regulatory environment;

- Paying attention to frequently raise the level of human resources;

- Investing in the equipment and modern technology to enhance

competitiveness and promote trade activities through the internet (factoring,

e-forfaiting);

- Capital is the key issue, particularly important The banks need to ensure

funding, including funding short-term, medium-term and long-term;

- Buiding an association of factoring organizations to act as the main

national links, and active support for the activities of its members

Chapter 2 CURRENT DEVELOPMENT OF FACTORING SERVICE FOR MERCHANDISE EXPORT IN VIETNAM (2004 - 2012) 2.1 Situation of merchandise export and the use of international payment methods for merchandise export in Vietnam

International trade operations in Vietnam had many changes over the past decade From a low base, with 31.2 billion dollars in total imports and exports in 2001 (with exports of 15 billion dollars and imports 16.2 billion), after 11 years, to 2012, This figure increased by 7.3 times, up to 228.3 billion dollars (in which exports and imports 114.5 billion USD 113.8 billion) Trade Balance of Vietnam, in the 10 years from 2001

to 2011, always in deficit The years 2001 - 2006, the balance of trade deficit of just under $ 5 billion/year, but the period from 2007 to 2011, the trade balance deficit has stood at 2 numbers (regular $ 10 billion/year) However, after a long period of time are the 2012 deficit of trade balance was a surplus of Vietnam although still modest level

The export structure of Vietnam over the past 10 years there have been positive changes, exports continued to increase, the share of exports in the direction of decreasing raw commodities, processing products and focus on investment and export goods with higher levels of processing The growth of exports has been contributed largely by the FDI sector

By commodities, industrial products and handicrafts are always in the

leading position with the increasing trend in the proportion of total exports of the country Heavy industrial goods and minerals are in second place with a rate of about 30%/year in the proportion of export turnover Third place was the team of agricultural products including: rice, rubber, coffee, cashew nuts, cassava and cassava products, pepper Aquatic products are constantly increasing in value but decreased in proportion

By market, Asian market (with average export turnover from 2007 to 2011

approximately 31.2 billion USD/year) is still the traditional market for Vietnam's export items, in which main market countries are ASEAN’s nations and Japan This was followed by the American market (an average of about $ 15 billion /year), Europe (about $ 13.8 billion/year), Oceania (average $ 3.3 billion/year) and Africa (average export turnover of $ 1.3 billion/year) as the potential markets for Vietnam

2.1.3 Current status of the use of international payment methods for merchandise export in Vietnam

2.1.3 1 International payment operations at the banks in Vietnam Imports/ exports and international payment turnover are generally proportional relationship to each other In the structure of payments, payment of export sales typically account for about 46% of the total sales of commercial banks

in international payment

Regarding the structure of the market, currently the majority of banks in

Vietnam are providing international payment services, but market share is

primarily focused on four major banks that have extensive experience in providing

services such as Vietcombank, Agribank, Vietinbank, BIDV

2.1.3 2 The proportion of payment methods used in export payments in

Vietnam

For the payment of export, the major commercial banks in Vietnam

providing money transfer services, collection and payment services L/C, and

present the vouchers as payment L/C, discount vouchers products, Vietnamese

export’s contracts increasingly use multiple methods of payment, while payment

by L/C and collection tend to decrease

Using many methods of payment brings many risks for export enterprises in

Vietnam Therefore, banks need to provide more services for export credit guarantees,

development of new products such as factoring services to help businesses secure when

they enter foreign market

2.2 Conditions for the development of factoring services for

merchandise export in Vietnam

2.2.1 The need for development of factoring service for merchandise

exports in Vietnam

The development of factoring services in merchandise exports in Vietnam

today is essential because: First, factoring is a financial service represents the

aggregate outstanding advantages, especially in conditions of economic

integration Secondly, Vietnam's enterprises are limited in capital, human resources,

market information, risk management level When developing this service, sources

of venture capital industry will be improved and the bank will be diversifying its

product Thirdly, using factoring service is a good solution, especially for small and

medium enterprises in the fierce competition conditions of the current international

market, when to accept the deferred sales method Fourth, after joining WTO,

Vietnam banks must continually diversify products to meet the financial needs of

customers, creating benefits for clients in order to attract customers, increase

competitiveness for its banks Factoring is one of the services to meet these

requirements and should be developed by commercial banks

2.2.2 Analysing the situation of factoring service development for merchandise

export in Vietnam

2.2.2.1 Macroeconomic conditions

· Legal Environment

Basically, in Vietnam there was a legal framework for factoring

operations Regulation on factoring activities of credit institutions issued together

with Decision No 1096/2004/QD-SB dated 06/09/2004 by State Bank of Vietnam’s

Governor initially created a legal framework for the development of factoring

services in Vietnam However, these regulations are inadequate, causing difficulties

for the supply and use factoring services in Vietnam

Besides, when implementing of international factoring, Vietnam also allows the parties may agree to apply the rules and international practices of factoring if that are not contrary to the laws of Vietnam This creates favorable conditions for the development of factoring service in Vietnam in accordance with the international rules

· Relatively stable economic environment Socio-economic environment of Vietnam through time remains stable GDP growth are impressive, the rate of inflation was curbed, abundant labor resources, production capacity and demand for goods are large due to its large population In the field of factoring service, Vietnam has caught the attention of the association of international factors - Factors Chain International (FCI) So, FCI has access initiative and willingness to help Vietnam develop this service FCI has organized many seminars and programs to support the development of the service in Vietnam

· Import-export business activities of the enterprises are to facilitate Recently, the commercial activity in general and international trade in particular has received much attention and support facilitated by the Government More activities are encouraged; more actors are participated partly thanks to the more liberal provisions on the right to market access In addition, the State has taken many measures and policies to support the activities of international trade, particularly export activities oriented to reasonable protection for businesses

· Form of deferred sales growing

To improve competitiveness, one of the measures which are now the business

is usually applied preferential rates, the deferred payment terms for buyers/importers The form of deferred sales growing leads to the increase in funding needs and brings new opportunities for the factoring service, in addition to the traditional services system, contributing to support and encourage the enterprise’s efficiency These are favorable conditions for the development of factoring services in the economy, particularly international factoring

· Information base data Vietnam has a credit information center (CIC) managed by the State Bank CIC collects information on borrowers in all credit institutions (banks) operating under the Law on Credit Institutions, and organizations such as investment and development funds, the Credit Guarantee Fund, CIC also signs and implements information exchange agreement with the international news agency to help Vietnamese banks and credit institutions have the information to do business with foreign countries

2.2.2.2 Conditions for factoring organizations (factoring service providers)

· Take advantage of the following

As a latecomer in the application of this service, Vietnam will facilitate learning experiences of other countries in the region and in the world Through lessons learned from the advanced countries, Vietnam's commercial banks can draw their own lessons

· The market has great potential FCI has received the Asian market has a great potential to develop the factoring service In Asia, Vietnam is a very new market, market segmentation is not

clear, the market share of the ahead organization is less, the majority of

organizations are still in the process of exploration or testing experiment Thus,

opportunities for Vietnamese banks to participate and dominate this market is huge

· Capital raising activities of banks growing

Banking system grows with the growing number of commercial banks In

recent years, the economic development and improving people's living standards

make commercial banks to increase the ability to mobilize capital, expand capital

ratio deposits Large funding sources are good conditions to allow commercial

banks to deploy factoring service

· Banking system has quickly seized the opportunities

Currently export activities are facilitated, making the demand for the banks’

international payment services banks increasing In addition, all Vietnamese banks

now have close connections with the global financial system, has correspondent

relations with banks worldwide Besides, many of the commercial banks in

Vietnam are seeking to expand overseas operations by setting up representative

offices and branches This enables banks to implement the provision of factoring

service easier and more efficient, especially international factoring

· Human resources

Currently, the human resources of commercial banks in Vietnam are

plentiful, as professionals, can basically meet the requirements in part to the

development of factoring services

· Management and technology systems to meet the eligibility requirements

Since 2003, with the assistance of the World Bank, Vietnam's commercial

banks have made the project of Modernization of banks and payment systems

(INCAS), system operation management, accounting and business processing on

the computer With the conditions and management of current technologies,

commercial banks in Vietnam can afford to deploy factoring service

2.2.2.3 Conditions for import and export enterprises (factoring service users)

· Demand for using factoring service in import and export businesses

Currently, Vietnam has about 500,000 small and medium enterprises,

accounting for 97% of businesses throughout the country These businesses

typically have very high demand but difficult to raise capital from outside

Meanwhile, the factoring service is a powerful tool that can help businesses gain

access to capital from external sources, especially from banks So, once businesses

realize the full benefits of factoring service, the demand for this service will

increase in Vietnam

· Human resources of Vietnam’s export -import business

Civil Vietnam’s export - import business is now capable of owning a team

of qualified professionals to meet the job requirements However, the knowledge

and professional expertise as well as experience using the factoring service of the

business staff in the import and export businesses (need conditions to businesses to

be able to use the service effectively) is still weak

The issue of information transparency in Vietnam’s businesses

In Vietnam today, audition has been interested by enterprises but have not really taken seriously, that information published is still dishonest This is the reason why the information environment in Vietnam lacks transparency It is a major obstacle to the development of factoring service in Vietnam today

2.3 Analysing the real situation of factoring service’s development for merchandise exports in Vietnam (2004 - 2012)

2.3.1 Current status of the legal system and development factoring service policy

The factors of institutional and policies related to the field of factoring service are still unclear, unsettled, not to support for service development yet The

birth of Regulation on factoring activities of credit institutions has created a legal

framework for the supply and use factoring service in Vietnam But basically, this regulation is not yet complete and consistent, there are inaccuracies or unclear, some rules are not consistent with international ones There is no strategy or development plans for factoring service of the country

2.3.2 The situation of factoring service’s providers

2.3.2.1 The number and type of units providing factoring services

The introduction of Regulation on factoring activities of credit institutions in

the third quarter of 2004 was initially created motivation for the credit institutions

to deploy and develop the service By 2005 there were nine commercial banks in Vietnam is licensed to deploy factoring service (including 5 Vietnamese commercial banks: VCB, ACB, Techcombank, SCB, OCB and 4 foreign banks are: Deutsche Bank AG - Ho Chi Minh City, Far East National Bank (FENB) - Ho Chi Minh City, UFJ Bank - HCMC, Citibank - Hanoi branch)

Then some other banks also had to take turns, such as import-export Joint Stock Bank (Eximbank), International Bank (VIB), South East Asia Bank (Seabank),

By 05/2008, there were 24 licensed banks offer factoring service in Vietnam, including 17 Vietnamese commercial banks Currently, more other commercial banks in Vietnam have been approved by the State Bank to deploy factoring service (Army Bank, Dai A Bank, Petroleum Bank, ) bringing the number of commercial banks in Vietnam allowed to provide the service to 22

In addition to commercial banks, finance companies have also implemented the factoring service There are five financial companies (Power Finance Corporation, the Petroleum Finance Company - PVFC, Finance Company Shipbuilding Industry, Handico Finance Corporation, Coal and Minerals Financials Company) allowed to provide this service

However, the fact is that only a few banks actually have factoring transactions

on the market, including Vietcombank, HSBC Vietnam, Vietnam UFJ, ACB, but mostly in domestic payment and supplying the type of recourse factoring

2.3.2.2 Sales of factoring service According to statistics of the FCI, factoring turnover of Vietnam continued

to increase from 2005 to 2009 In 2005, sales of 2 million EUR, by 2009 this figure had risen to 95 million EUR In particular, the year 2008 is considered to be the

most spectacular growth in sales factoring in 2005-2009, growth rate is 97.67%

compared to 2007, however, move into 2010, the sales has fallen to 65 million

EUR In 2011, factoring sales showed signs of recovery despite the relatively slow

pace But by 2012 the factoring turnover of Vietnam to drop, only 61 million EUR

In 2010 and 2011, although the total amount of the factoring service in

Vietnam reduced but that of international payment was increased (5 times the

sales of international factoring in 2009), accounting for 38.5% of total sales

factoring of Vietnam in 2010 and 37.3% in 2011 This shows the trends and

prospects for supply and use factoring service of banks and enterprises in Vietnam

gradually in line with the trend of development of an open economy towards

export promotion

2.3.2.3 Type and quality of provided service

About types of the service, commercial banks in Vietnam have only provided

factoring service and have provided both 2 types: domestics factoring and

international factoring And according to the survey results of the author's thesis, the

commercial banks in Vietnam are mainly provided only kind with-recourse

factoring, while without-recourse factoring is difficult to be provided by banks

because of the ability to assess and and the banks’ low ability to prevent risks

Regarding the quality of factoring service, after a period of time, Vietnam

enterprises have evaluated some remarks as follows: Service quality is not high; The

high cost; Time for payments is long; Complex procedures This is the major

constraint for the development of this service in Vietnam

2.3.3 Situation of consumer demand/ use of factoring service

According to survey data, the businesses have an interest in using the loan, but

the number of businesses often use loans is only 44.4%, while the proportion of

non-Sales of factoring service in Vietnam

2 15 41

80 90

0

20

40

60

80

100

2005 2006 2007 2008 2009 2010 2011 2012

Mil Of EUR

Domestics International

0%

10%

30%

50%

70%

90%

100%

Cost to pay for the

service by the enterprise

Quality of the current Factoring service

Requirement by banks

Very high High Medium Low Very low

regular use is 47.3% and 8.3% do not use Loan’s sources of surveyed enterprises are primarily from banks (80.2% of respondents use bank loans) Forms of bank funding that businesses are often the most used are trade credit and bank guarantees Meanwhile, factoring has not been much interest, 74.6% of businesses never use factoring service, while enterprises can use this service only 13.3%

To assess the effects of regular use of loans for usage of factoring service by

businesses, the thesis author uses the model to Chi-Square Test The results

showed that the frequency of the use of loans and how often they use factoring service closely related to each other Specifically, businesses often use external loans tend to use factoring service more often

As for the demand and necessity of factoring service for export activities of Vietnamese enterprises, 77.8% of enterprises surveyed estimated that factoring is needed (in which 22.2 % considered “very necessary” and 55,6% considered

“necessary”) Only four firms (2.9%) considered “unnecessary” Thus, the majority of Vietnamese exporters has noticed and appreciated the role of factoring service in promoting trade activities in general and international trade in particular This shows that the potential market is very large and has not been fully exploited Therefore, it can

be assessed that the market demand for factoring service is great

2.4 Assess the status of the development of factoring service in general and factoring service for merchandise exports in Vietnam in particular (period 2004-2012)

2.4.1 Achievements

- Have a basic legal framework as a basis for the development of factoring service in Vietnam

- Sales of factoring service increased significantly, sales of international factoring maintain stability in certain degree

- The number of organizations providing factoring services is increasing

22.2%

55.6%

19.3%

2.2%

0.7%

Very necessary Necessary

So so Not really necessary Absolutely unecessary

- Type of factoring services by commercial banks in Vietnam to supply

increasingly diverse

- Demand for factoring services by enterprises, especially Vietnamese

exporters is increasing

2.4.2 Limitations

- Number of factoring organizations having transaction really is not high,

limited supply of factoring services market

- Sales of factoring transactions are limited

- Types of the service is poor, and lack of appetite for Vietnam enterprises

- Quality of the service is not highly appreciated by the enterprises,

procedures cumbersome, time evaluation by banks is slow, making it difficult for

businesses

2.4.3.1 Causes of macroeconomic conditions

- Incomplete and not- synchronized Regulatory environment, some rules are

not consistent with international

- Incomplete information and lack of transparency

2.4.3.2 The cause of the factoring service’s providers

- Many banks are not aware of the importance and the benefits of factoring

service

- Banks’ financial potential is lags, lack of management experience

- Management capacity of commercial banks is still weak, the risk

management system has not reached a high level;

- Lack of coordination between the banks, the relationship with foreign

markets of Vietnam's commercial banks is limited;

- No insurance fund for bank credit;

- High factoring fee hinders the development of this service

- Factoring service is not really convenient for businesses;

2.4.3.3 The cause of factoring service’s users

- Deferred sales are not recognized as a common form

- The understanding and concern about factoring businesses is limited

Chapter 3 ORIENTATION AND SOLUTIONS TO DEVELOP FACTORING SERVICE FOR MERCHANDISE EXPORTS IN VIETNAM (TO 2020) 3.1 Economic context affects the development trend of factoring service for merchandise exports in Vietnam

3.1.1 Demand for economic integration 3.1.2 Economic growth

3.1.3 Exports and imports rise 3.1.4 Demand for funding and hedging in international payments

3.2 Development orientation of factoring services in Vietnam

- Meet the requirements of international and national standards;

- Develop services on a large scale: in addition to commercial banking system and encourage other institutions such as financial companies in Vietnam to involve;

- Develop in-depth services: building staff qualifications and experience, to diversify the types of factoring,

- Reduce costs and risks when factoring service is applied

- When factoring business of the banks was strong enough, can be carried out separately factoring company established under the bank;

- Strive to be a member of the association of factoring large in the world;

- Gradually replace the method of credit payment by factoring

- The number of banks providing factoring services: Licensed commercial

banks need to quickly deploy the service; encourage and create conditions to allow banks and other financial or credit institutions in Vietnam to participate in the market of factoring service to increase the number of units provided

- The model: Establish factoring units within the suppliers’ structure; State

Bank of Vietnam may also allow large international corporations established under the factoring company in order to expand the market; Establishment of support funds, construction factoring association of the country

-The type of factoring service provided: Factoring service providers should

apply all types of factoring, particularly full - factoring, forward deploy forfaiting

in 2015

- The quality of factoring services: Improve the quality of factoring service, developing forms of recourse factoring, expanding the application of international factoring to the whole banking system in Vietnam

- Customers: Focusing on small and medium business group; Priority

businesses export of staples; provides incentives for traditional customers; Promote and introduce products to customers

- The factoring sales: To 2015 the orientation is to recover and gradually

factoring turnover to 100 million EUR In which: International factoring continues

to rise, often accounting for over 20% of total sales; the growth rate of sales per

year followed by 30 to 40%

- The international cooperation: Strengthening cooperation with agents,

banks around the world, facilitating the collection and evaluation of information to

customers; strengthen and enhance the reputation of the commercial banks in

Vietnam on the world market

3.3 Solutions to develop factoring service for merchandise exports in

Vietnam

3.3.1.1 Completing the legal system, policy on the service’s development

State Bank should continue to revise and promulgate a synchronized legal

system, fully overcome the problem of incomplete and old Regulation and

correspondence to the rules of the Convention on International Factoring New

legal text note to a number of issues: Separating operations and factoring loans,

with management rules and controls separately, creating a legal framework to

protect the basic rights of the parties ; There is clearly specified conditions for

participants providing factoring services, extended supply objects, towards the

establishment of an independent factoring company; There should be provisions on

the rights of creditors of the receivables to minimize risk to providers of factoring

services;

Government should urgently develop a comprehensive and long-term

strategy/development plan for factoring service

3.3.1.2 Building policies to encourage and support the factoring service

State should have policies and specific directions for the development of the

services sector as well as building policies, appropriate measures to encourage and

support the factoring services, such as loosening and improve policies on credit

and financial management, policies, foreign exchange management, and

administrative barriers such as administrative procedures, licenses, quotas, policies

discriminate against types of businesses

3.3.1.3 Stable and complete trade policy

- Promote the foreign, especially trade with major markets such as China,

ASEAN, the EU,

- Reduce costs and increase competitiveness of goods in the regional market

and the world through effective exploitation of the advantages of resources, land,

people,

- Technological innovation, improve product quality, boost exports of

processed goods,

- Implement policies to encourage exports through macro-management tools

such as taxes and subsidies;

3.3.1.4 Improving the quality of operation of the Credit Information Center

- Increase investment in facilities, equipment, staff training

- Specific regulations on banks have fully informed about the financial

situation, the situation of borrowing and repayment of the company for CIC in

each period; DN must be submitted to CIC summary audited assets, income and expenditure report,

- CIC's unified rules which must be registered as legal collateral loans / financing by banks

- Prove to banks and businesses see the benefits that CIC gives the economy and for the banks, businesses; There are incentives obvious physical benefits to increase the performance of CIC

3.3.1.5 Establish a credit rating company

To factoring services development, especially international factoring - a lot

of activity underlying risks when evaluating the financial capacity of the partners need to establish credit-rating companies to can minimize these risks To establish the credit rating company need technical assistance from a internationally renowned credit rating one To ensure the independence and high communitiness, the credit rating companies in Vietnam should be joint – stock ones and set a percentage ownership rules reasonable with shareholders

3.3.1.6 Intensify training on factoring service in universities and colleges The introduction of factoring not only the duty of the bank to do early just in training programs for students of economic universities and colleges Universities and colleges need to put the theory of factoring into the curriculum to prepare students with a basic background knowledge about this issue when the school

3.3.2 Solutions for factoring service’s providers (banks)

3.3.2.1 Recognize the necessity of the development of factoring services and the appropriate organizational model to develop the service

Need aware of factoring services, the benefits that it provides, see it as a profitable opportunity for banks Need plans and specific programs to introduce and disseminate knowledge about factoring in their bank or associated with banks, institutions, other entities organized to introduce this service to related objects In addition, the need to build a real organizational model appropriate and effective Could be: A business unit within the Department of the bank concerned (such as the factoring division of the International Chamber of billing, Office of international banking, credit management departments, .) or A Room dye factoring bank/finance company, or a subsidiary of the bank, could also be a subsidiary of a corporation or financial industry, or a full company independent (possibly state-owned companies, joint ventures, foreign-owned companies, private companies)

However, in the current phase, perhaps organizational model most effective and feasible as a model factoring Chamber of banking/financial company or a subsidiary of the bank/finance company

3.3.2.2 Strengthen marketing for factoring service Promotional strategy, product marketing factoring effective way In the future, the urgency faced by the banks is to build a marketing strategy specifically for factoring operations; The strategy must be broad and thorough individual officers and staff deployed operations