Vietnam local banks in post-WTO period (a study on strengths, weaknesses, opportunities, and challenges)

68 6970 70 72 73 7576777879 8 9 18 22 31454648515463 192957 Evaluation of human resource improvement opportunity of Vietnam domestic banks Vietnam domestic banks’ opinion about challenge

V IETN A M N A T IO N A L U N IV E R SIT Y , HANOI

TABLE OF CONTENT

AC K N O W L E D G E M E N T S

A B S T R A C T

T Ó M T Ấ T

T A B L E O F C O N T E N T

L IS T O F C H A R T ,T A B L E , AND F I G U R E

L IS T O F A B B R E V I A T I O N S

I N T R O D U C T I O N

1 B a c k g r o u n d

2 Problem d isc u ssio n

3 The objective o f the thesis

4 The aim s o f the th e s is

5 Research q u e s tio n

6 Scope o f w o r k

M e th o d o lo g y

8 Data source and processing

9 S ignificance

10 L im ita tio n

1 I Expected finding

12 Publication p la n

13 Follow-up potential

14 Thesis structure

C H A P T E R 1: L I T E R A T U R E R E V I E W 1.1 Vietnam and the World Trade O rg an iza tio n

1.1.1 Vietnam and the need to be a W T O 's m e m b e r

1.1.2 W T O accessing process o f V i e tn a m

1.2 V ietnam c om m itm ent in accession to the W T O

1.2.1 R eport o f w orking party on accession o f Vietnam 1.2.2 C o m m itm e n t on g o o d s

1.2.3 C o m m itm e n t on services

1.3 O pening market and domestic banking s e cto r 1.3.1 V ietnam banking industry and principal o f the W T O

1.3.2 O pening m arkets and dom estic banking sectors w o r l d w i d e

1.3.3 China d om estic banks in o p ening m a r k e t

1.3.3.1 M arket o p e n in g com m itm ent to jo in t W T O o f C hina in banking sector 1.3.3.2 China d om estic banks in post W T O p e rio d

1.3.4 V ietnam dom estic banks in o pening m a r k e t

1.3.4.1 M arket o p e n in g c o m m itm en t to joint W TO o f V ietnam in banking se cto r

1.3.4.2 V ietnam dom estic banks fram e w o r k ’s a n a ly s is

C H A P T E R 2: M E T H O D O L O G Y

2 1 Research p u r p o s e

2 2 Research approach and s tra te g y

2 2 1 R esearch a p p ro a c h

2 2 2 Research s tra te g y

2.3 R esearch d e s ig n

2.3.1 Data c o ll e c t i o n

2.3.2 Data a n a ly s is

2.3.3 V a lid ity

C H A P T E R 3: S T R E N G T H S , W E A K N E S S E S , O P P O R T U N I T I E S S AND C H A L L E N G E S O F D O M E S T I C BANK 3.1 B anking sector in Vietnam e c o n o m y

3.1.1 O v e rv ie w o f banking sector in V ie tn a m

3.1.2 B usinesses in banking sectors o f V ie tn a m

3.2 Vietnam dom estic banks in post W TO p e rio d

3.2.1 Preparation for the ra c e

3.2.2 The strengths o f Vietnam dom estic b a n k s

3.2.2.1 M arket s h a r e

3.2.2.2 Reputation in domestic m a rk e t

3.2.2.3 Business n e tw o rk

3.2.2.4 Domestic market e x p erien c e

3.2.2.5 Social culture und erstanding

3.2.3 The w e a k n esse s o f Vietnam dom estic b a n k s

3.2.3.1 Small business s c ale

3.2.3.2 Business administration and productivity

! 1

14 16 16 21 21 22 23 23 24 24 25 25 25 28 29

30 30 30 32 33 33 35 35 38 40 42 43 44 45 48

Vil

3.2 3.3 Low services* quantity and q u a lity 51

3.2 3.4 H um an reso u rce 53

3.2 3.5 Technology infrastructure 55

3.2 3.6 Risk m an a g e m e n t 58

3.2 4 Opportunities for Vietnam domestic b a n k s 59

3.24.1 Market e x p a n sio n 59

3 4 M otivation to improve banks' capabilities under high pressure o f market ^ opening and co m p e titio n

3.2 5 Challenges for Vietnam domestic b a n k s 6 8 3.2 5.1 Opening market and tougher co m p e titio n 6 8 3.2 5.2 The world economic integration im p a ct 70

3.2 5.3 Domestic economic and monetary policies' im pact 70

3.2 5.4 A pplying strict regulation o f the World T rade O rgan iz a tio n 73

3.3 C o n c lu s io n s 73

3.3 1 Vietnam domestic banks in g e n era l 73

3 3 2 The big four state own b a n k s 76

3.3 3 The small and newly established jo in t stock b a n k s 76

3.3 4 The strong and active joint stock b a n k s 78

3.3 5 C om parison o f the three Vietnam dom estic banks g r o u p s 79

3.4 R ecom m endation strategies for Vietnam dom estic b a n k s 81

^ ^ I T he big four: D om inating m arket by exploit opportunities to improve internal capabilities g | ^ The strong and active banks group: Business growlh with stre n g th s g 2 „ The small and newly established banks group: R educing w eakness and M & A o p tio n 8 3 C O N C L U S I O N S 84

References

Appendix 1: List o f interviewee

Appendix 2: Interview guide

\ i n

LIST OF TABLE OF TABLE, CHART, AND FIGURE

C hart 1.1: S h a re o f fore ign b a n k s in E astern E u r o p e a n c o u n tr ie s in 2 005 11

C hart 3.1 : G D P c o n trib u tio n o f b a n k in g s e c to r in se rv ic e s a re a 32

C hart 3.2: N u m b e r o f b a n k s an d in V ie tn a m 33 Chart 3.3: U n d e r s ta n d in g o f b a n k s a b o u t W T O 34

C hart 3.4: S h a re in d e posit an d le n d in g s e rv ic e s in b a n k in g m a r k e t 35

C hart 3.5: V ie tn a m d o m e s tic b a n k s ' o p in io n a b o u t m a rk e t sh a re 36 Chart 3.6: E v a lu a tio n o f m a r k e t sh a re o f V ie tn a m d o m e s tic b a n k s 37 Chart 3.7: V ie tn a m d o m e s tic b a n k s ' o p in io n a b o u t b a n k s ' re p u ta tio n 38 Chart 3.8: E v a lu a tio n o f m a rk e t rep u ta tio n o f V ie tn a m d o m e s tic b a n k s 39

C hart 3.9: N u m b e r o f b a n k 's b ra n c h by the en d o f 2 0 0 7 40

C ha rt 3.10: E v a lu a tio n o f b u s in e s s n e tw o rk o f V ie tn a m d o m e s tic b a n k s 41

C hart 3.11 : E v a lu a tio n o f d o m e s tic m a r k e t e x p e rie n c e o f V ie tn a m d o m e s tic b a n k s 42

C hart 3.12: V ie tn a m d o m e s tic b a n k s ' o p in io n a b o u t c ulture u n d e r s ta n d in g 43

C hart 3.13: E v a lu a tio n o f c u ltu re u n d e rs ta n d in g o f V ie tn a m d o m e s t ic ba n k s 44 Chart 3.14: E v a lu a tio n o f fin a n c ia l c a p a b ilitie s o f V ie tn a m d o m e s t ic b a n k s 47 Chart 3.15: R eturn on e quity o f V ie tn a m d o m e s tic b a n k s in 2 0 0 7 49

C hart 3.16: E v a lu a tio n o f b u s in e s s a d m in is tra tio n m a n a g e m e n t an d p r o d u c tiv itie s o f

V ie tn a m d o m e s tic b a n k s Chart 3.17: E v a lu a tio n o f s e r v i c e s ’ q u a n tity an d q u a lity o f V i e tn a m d o m e s tic b a n k s 52 Chart 3.18: E v a lu a tio n o f h u m a n re s o u r c e o f V ie tn a m d o m e s tic b a n k s 53

C hart 3.19: E v a lu a tio n o f te c h n o lo g y in fra stru c tu re o f V ie tn a m d o m e s tic b a n k s 55 Chart 3.20: E v a lu atio n o f risk m a n a g e m e n t o f V i e tn a m d o m e s tic b a n k s 58

C hart 3.21 : V ie tn a m d o m e s tic b a n k s ' o p in io n a b o u t o p p o rtu n ity o f m a r k e t ^

C hart 3.26: Evaluation o f business adm in istra tio n and p roductivitie s im p ro v e m e n t

o p p o rtu n ity o f V ie tna m d o m estic banks

C hart 3.27: E valuation o f se rv ic es' qu a n tity and quality im p r o v e m e n t o p p o rtu n ity o f ^

V ie tn a m d om estic banks

Chart 3.28: E v a lu atio n o f te c h n o lo g y infrastructure im p ro v e m e n t op p o rtu n ity o f

V ie tn a m d om estic banks

I X

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Evaluation of human resource improvement opportunity of Vietnam

domestic banks

Vietnam domestic banks’ opinion about challenge of competition

Evaluation of challenges of competition for Vietnam domestic banks

Vietnam domestic banks’ opinion about challenge of world economic

Strengths, weaknesses, opportunities and challenges of state own banks

Strengths, weaknesses, opportunities and challenges of new and small banks

Strengths, weaknesses, opportunities and challenges of strong and active banksStrengths, weaknesses, opportunities and challenges in comparison of the 3

Vietnam domestic bank group

Key milestone of Vietnam in accession of the WTO

Key content of working party commitment of Vietnam

Opportunities, challenges, strengths and weakness frame

List of interviewed banks

Growth index in Vietnam banking sector

Total equity of Vietnam domestic banks in 2007

Financial strengths of international banking groups

Business key result of banks in 2007

Customer consideration to switch using banks services from Vietnam domestic banks to foreign banks

Core banking application in domestic banks

Vietnam domestic banks partnership with foreign banks

Methodology overv iew of the thesis

Development of banking sector in Vietnam

Type of risk and challenges to manage of domestic banks

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LIST O F A BB R E V I A T I O N S

XI

This first part of the thesis intends to introduce the area o f the research A consolidate background information regarding the World Trade Organization (WTO) and Vietnam banking sector in connection with this global institute will

significance along with limitations and fin a l outline o f the thesis w ill be presented.

Background

Globalization, the term that has been widely used in Vietnam from the last decade, has had its impacts in the world since the very first period o f human being history In particularly, globalization process in doing business among economic entities has been long time taken place in the world From the early history, people have been trading goods beyond their nations or terrain borders, even, between continentals as the magical story o f Silk Road In 20th century, with the booming o f the world economy, dong business globally has extremely booted International business, in modern world, has been an integrated playground for individuals, economic entities, and governments to take part

With the strong and deep impacts o f doing international business in the global playground concept, the world needs systematic regulations and an independent institution managing the game and players The WTO as one o f the key important results of the Uruguay Round o f multilateral trade talks, has established in 1995 for that purpose This organization administers the trade agreements negotiated by its members, in particular the three main agreements including the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and the Trade-related Aspects o f Intellectual Property Right (TRIP) Agreement

Overcoming several tough negotiation rounds within the past 13 years, from 11th Jan 2007 Vietnam has become the 150th official members o f the World Trade Organization Being a member o f the organization Vietnam has to apply all general international regulations and strict commitments made in accession negotiation rounds Those commitments have wide and deep impacts to the whole nation's domestic economy in general, particularly, business entities in Vietnam It will boot the domestic market to open and integrate into the world economy.

Problem discussion

Globalization has become a reality that Vietnamese businesses are now facing

In this thesis, the author researches the impacts o f globalization on Vietnam domestic banks after the country becoming an official member o f the World Trade Organization

To successfully integrating in the world flow o f international business, Vietnam domestic banks have some strength points, which could help enterprises capturing opportunities and reducing challenges from the global environment Nevertheless, remained w eaknesses o f domestic banks also are great barriers for them to do business comparing to their foreign competitors

It has been more than 2 years since 11 January 2007 that Vietnam has access to the WTO; however, there have been few scientific researches in and on what opportunities and challenges that Vietnam domestic banks has encountered It is also lacking o f systematic proof on strengths and weaknesses o f those domestic businesses in the domestic and global play ground in further future

Consequently, in the domestic banking system there has been a need of information and approaches to identify their opportunities and tough challenges

in global context Vietnamese banks also face the difficulties o f recognizing and exploiting their strengths point and weaknesses to compete in the world market

The objectives of (he thesis

The objectives o f this thesis are firstly, to figure out the strengths, weaknesses opportunities and challenges o f Vietnam domestic banking sector in global finance integration, and secondly to conduct recommendations on strategies for businesses to exploit all opportunities and get through numerous challenges by their strengths and weaknesses in post WTO period

The aims of the thesis

After the 13-year-tough-negotion period, Vietnam has become 150th member o f this world most important institution All agreements and commitments o f Vietnam in accession negotiation rounds with WTO members, which deeply influenced every domestic business sector, will be reviewed in this thesis Since the great impacts o f the WTO over the world economy, the first aim o f this thesis is to study about the nature o f World Trade organization and with its effect to a developing country as Vietnam, particularly in the domestic banking sector

Given the global business environment and the need o f Vietnam's business community in banking sector, the main target o f the thesis will be to figure out and evaluate the real opportunities and challenges that Vietnam domestic banks are now facing

For better competing in the world market Vietnamese enterprises in the banking sector also needs to recognize their weaknesses comparing to their global competitors The strong points o f these domestic banks also high lined in detail

Along with the study's aims, all finding results o f those banks would be benchmarked to generate recommendation strategy for domestic banking sector

to benefit from opportunities and overcome challenges in the period after Vietnam joining the World Trade Organization

Base on the purpose o f the research, the following questions have been developed and expected to be systematically and sufficiently answered in detail:

m em ber o f the WTO in particularly, banking sector?

now facing or will be faced when Vietnam has access to WTO?

WTO commitments o f Vietnam, in the market?

challenges in the integrated playground by using their strengths and weaknesses?

Qualitative method, in which tools used are opened questions and Held notes, answers the questions what and why to the thesis problem On the other hand, in quantitative approach, data is analyzed statistically in the type o f interview responses

Research question

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Data source and processing

Provided data for the research could he the result o f negotiation rounds o f Vietnam under access to WTO Statistic economic data o f Vietnam's banking sector is also taken into account Field interviews w ith bankers are required to conduct the thesis All collected data will be processed and analyzed to provide the results

Significance

The study is expected to create some sufficient contributions to the economy environment in generally and in particularly, to the banking sector

The first and primary purposes o f the thesis are to conduct a systematic research

on which opportunities and challenges that Vietnam banking sectors, in the global market context o f WTO, are facing The study is expected to provide the independent findings o f Vietnam enterprise’s strengths and weaknesses o f this domestic sector comparing to global competitors

The study aims to bring a practical approach to recommendation on strategies for studied domestic banks to capture opportunities and overcome challenges

by using their strengths and narrowing their weaknesses

Limitation

Since the target o f a MBA graduate thesis, time could be one o f the limitations that will affect the results Moreover, due to the small scope o f work and the ability to approach data sources also strongly considered in the process o f conducting the thesis Data analysis, chart, graph from conducted based on interviews are just foundation for further researches

Expected findings

The strengths, weaknesses, opportunities, and challenges o f Vietnam domestic banks in post WTO period are expected to figure out and evaluation

The key findings o f recommendation on strategies o f how these banks can be benefitted from opportunities and overcome challenges by exploiting the strengths and minimizing the weaknesses, are also in the need o f presenting.

Publication plan

The result o f the study should be one o f the required parts in HSB MBA program It also could be used by Vietnamese businesses for their enterprise's strategies Lastly, it can be a source o f reference information for another further study or published in the media

Follow - up potential

The thesis can be the basic base for further researches, in which can be the impacts o f WTO on businesses in developing countries - the case o f Vietnam domestic businesses and in comparison w ith Asia developing nations

The main content o f the thesis with literature review, options o f methodology and data presented and analysis will be provided in detail

The in the last part - conclusions, discussions and suggestions are conducted from the analysis results and findings o f the second part in the study

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CHAPTER I: LITERATURE REVIEW

Following up with the Introduction part in which provides the quick glance o f the thesis, in this chapter, literature related to the study will be reviewed A ll available theory, information, and document that are relevant to the thesis will

be presented.

1.1 Vietnam and the World Trade Organization

The WTO one o f the organizations that have the strongest impacts to the world, could be viewed as an organization to promote liberalizing trade, both domestically and globally This is a forum for Vietnamese government, in representative o f its nation, citizens and businesses, to negotiate trade agreements among countries worldwide It is also a place for Vietnam to settle trade disputes, in general, the WTO operates a system o f trade rules

The WTO is a destination where Vietnamese government must attend and give effort to solve trading issues and difficulties that the nations, including citizens and businesses, face with countries globally The first and basic step o f this process is talking The main topics o f all negotiation rounds o f Vietnam in theprocess o f being a member are trade barriers with other countries and territories

The most important part o f this process is Vietnam's agreements, which is negotiated, agreed, and signed with other nations These legal documents provide a system o f regulations for international commerce, especially in the time o f globalization and integration The ultimate goals o f them are to support producers o f goods and services, import and export enterprises o f Vietnam to conduct their businesses but still allowing Vietnamese government to meet its social and environmental objectives

The main purposes o f all agreements that Vietnam has signed to be a WTO member are to liberalize the trade flow as freely as impossible Besides, these

7

regulations also have been created to be transparent and predictable for

V ietnam 's business environment That is partly understood as removing trade obstacles while ensuring that individuals, companies and Vietnam government perceive the trade rules around the global playground, and giving them the confidence that there will be no sudden change o f policies

Trade relations always create interest conflicts among partners, and it makes the WTO involved as the third important work Agreements between Vietnam and other countries or territories, including negotiation documentation, are interpreted in detail to achieve the most harmonious way to settle these differences in interests o f the nation and global partners by some neutral procedure based on an agreed legal foundation

Accession to the WTO is a complex, difficult and lengthy process It took more than twelve years for Vietnam to join the World Trade Organization as an official member

Table 1.1: Key milestone o f Vietnam in accession o f the W FO

J u n , 1994 Vietnam become an official observer of CA7 7 ’

J a n u a r y , 1995 The WTO received access application of Vietnam

A u g u s t, 1996 Vietnam submilled first document of International Trade

Policies

F r o m J u ly 1997 to

Negotiation Rounds

J u ly 2 0 0 6

7th N o v e m b e r , 2 0 0 6 The WTO approved Vietnam as its member

1 1th J a n u a r y 2 007 Vietnam became the official I5(/h member of the WTO

(Source: National Commission o f International Economic Cooperation)

8

Negotiation phases were the most time-consuming parts o f Vietnam's accession

to the World Trade Organization Vietnam has negotiated for more than eleven years with about two hundred rounds It included 14 sections with working party and 28 bilateral negotiations

In 14 negotiation sections with working party, basically Vietnam has agreed to apply all agreements o f the World Trade Organization In bilateral negotiation rounds Vietnam has worked with 28 countries and economic regions, mostly focusing on taffies barriers Vietnam is viewed as now a potential market in the global market, thus, bilateral negotiations were always tough tasks, particularly with United State o f America and Euro Union, the two biggest partners o f not only the Vietnam but also the world

1.2 Vietnam commitment in accession to the WTO

The package o f Vietnam's accession to the World Trade Organization documents consists o f three main parts including the working party report Vietnam's commitments on goods and Vietnam's commitments on services

The working party, a 260-page-rcport is the result from negotiation rounds In this document Vietnam legal and institutional set up for trade, along with commitments in many o f areas were stated in detail

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S ta n d a r d Applied technical harriers and sanitary regulations

G o v e r n m e n t p ro c e d u r e Consider after joining the WTO

In te lle c tu a l p ro p erty Applied without transaction period

(Source: Vietnam commitments to joint WTO document)

Vietnam 's commitments on goods are the 560-page list for schedule o f tariffs, quotas, and ceiling on goods, including agriculture and non-agriculture, with time schedule for phasing in the cuts

For the majority of agriculture and non-agricultural goods Vietnam promises ceiling (or bound rates) on duties ranging between zero and 35% Some of these invoice reductions phases over periods up to the year o f 2014, the precise end date varying from product to product

In agriculture, Vietnam has promised not to subsidize export product It will be allowed to support farmers domestically with trade-distorting supporting o f up

to 3.961.5 billion Vietnamese dong annually in addition to the usual allowance for developing countries o f up to 10% o f the domestic agricultural products

Vietnam ’s commitments on services are a 60-page-document in which describes services given market access to foreign providers and additional conditions, including limitation o f foreign ownerships Vietnam has made commitments on ranges o f serv ices In some particularly case Vietnam reserves the rights to limit foreign ownership o f serv ice companies operating in Vietnam,

as in some telecommunications services, the eventually limits can be 49% or 65% depending on type o f services In some other case, permitted foreign ownership is immediate 100% as banking Besides, permitted foreign ownership is scheduled to reach 100% after few years as express delivery courier's services after five years

1 0

As normal is this sector, the effect o f these commitments depends also on the complex relationships with domestic regulations For instance 100%-foreign- owned architectural companies only could provide services for foreign companies in the first two years.

1.3 Opening market and domestic banking sector

Vietnam agreements to join the WTO with other m embers are lengthy andcomplex since they are legal document in which covers a wide range o f

telecommunications, government purchases, industrial standards and products safety, food sanitation regulations, intellectual property and other issues in international trade

Consequently, a number o f simple, fundamental frame work and principles for trade policies has been established by the WTO, but it not defines, specify or require any outcomes

The market opening o f Vietnam banking sector based on the important o f five

nondiscrimination, free trade based on reciprocity gradually and by negotiation, binding and transparency, fair competition and encouraging development and economic reform

Nondiscrimination regulation o f the WTO is representative by the two important components: the Most-Favored-Nation (M FN) rule and the National- Treatment (NT) principle Both o f those regulate the main WTO rules on goods,

se n ices and intellectual property

The MNI rule requires that a product made in one member nation o f WTO be treated equally favorably comparing to other a "like" (very similar) good or service that originates in any other country That means, if the best conditions that Vietnam granted to a foreign bank o f one nation must be applied automatically without any conditions to in any other WTO member countries.

National treatment principle regulates the equality o f foreign banks in comparing with domestic banks This regulation require that foreign banks in Vietnam if have satisfy all requirement from the government, be treated no less favorably than competitive domestic bank in term o f indirect taxation and other conditions

Doing international trade, one o f the most concerned issue are trade barriers including customs duties (tariffs) and other measures such as quotas or import bans that restrict the volume o f imported goods or service o f Vietnam from outside Lowering these trade barriers is one of the most obvious means of encouraging and liberalizing trade

Opening domestic market to the global play ground can be beneficial for Vietnam, but still requires adjustment The WTO agreement allow Vietnam to introduce changes gradually, though "progressive liberalization" In banking sectors, Vietnam has to open it market to 100% foreign banks and some limitations with branches o f foreign banks

Transparency is a basic pillar o f the WTO: this is one important legal obligation required in GATT Vietnam is required to published its trade regulations, to establish and maintain institutions allowing for the for the review of administrative decisions affecting trade, to request and respond for information

by other members, and to notify changes in trade policies to the WTO

As a WTO member, either Vietnam agrees to open its domestic market for products, goods or service, the nation binds its commitments to all the rest of WTO members The bindings o f Vietnam can be changed, but only after negotiation round with its trading partners, in which could mean compensating them for loss o f trade.

Sometime, promising not to raise trade barriers can be as important as lowering one because the promise gives businesses a clearer view o f their future opportunities By establish a concrete transparency and commitment in trade policies, the system o f the W TO including Vietnam as a member, tries to improve predictability and stability

1.3.1.4 Promoting fair competition

The world biggest economy forum, the WTO, often viewed as an institution which is always promoting free trade However, this view is not entirely accurate The institution does allow Vietnam and other countries to use tariffs and other form o f protection for domestic market That means, accurately, a system o f rules dedicated to open, fair and undistorted competition

The rules o f trade without discrimination, including MFN and NT, are designed

to secure fair conditions o f trade, preventing completion out o f dumping or subsidies, which is Vietnam business has faced a lot o f difficulties in the past 3 years There are also several other WTO agreements aim to support fair completion in many sector as agriculture, intellectual property and services

1.3.1.5 Encouraging, development and economic reform

Developing countries' roles, are now more and more important in WTO Over three quarters o f WTO members are now developing nations and in transition to market economies One o f important missions o f the WTO is to contribute to the world development Vietnam, as developing member of WTO needs flexibility in time and method to implement the system's agreement

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1.3.2 Opening markets and domestic banking sectors worldwide

Integrating in the world economy has been an essential requirement for every nation in order to develop their economies One o f the key actions for countries

to integrate globally is, firstly, to open the domestic market to the world economy Recent years has seen an increased importance o f international trade

in financial services Multinational banks and finance corporations expand globally by establishing foreign subsidiaries and branches or taking over domestic banks worldwide The impacts o f market opening in banking sector o f every country are clearly recognized

Competition pressure is the easiest to recognized impact o f domestic banking sector in every country when opening their market In Eastern European, from the year o f opening market o f 19Q4 to 19°9 foreigners have dominated the domestic banking sector o f these nations

Chart 1.1: Share o f foreign banks in Eastern European countries in 2005

(Source: International Research Journal of Finance and Economics- Issue 6 /2006)

Comparing to foreigner competitors, domestic banks in developing countries,

w hich has opened their market, are shown their weaknesses in productivities In the study o f Development Research Group o f World Bank in 1998 developing nations in Latin America as Argentina, Costa Rica Jamaica or Venezuela, the

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gap between net interest income o f foreign banks and domestic banks was about at average o f 10%

Nevertheless, besides challenges o f opening market, an important feature in associated with foreign banks entry is that it introduces new financial se n ices and advanced management skill, which existing domestic banks lacks In a working paper named “ The effects o f foreign banks entry on the Thailand banking market" o f Hidenobu Okuda, University Hitosubashi University, the study based on 17 Thailand commercial banks after its government opening market shows a strong improvement o f s e n ice development and management skills in the banking sector However, those improvements also leaded to an increasing in overhead expenses and decline in profits o f those banks

In a recent study o f Indonesia domestic banking sector, the strengths of domestic banks in this countries have been evaluated in detail Since opening the domestic banking sectors from the year o f 1999 the domestic banks system

o f this nation still well competes with foreign banks The asset o f foreign banks

in comparison with total sector sectors in the nations has slowly grown from 7.74 in 1996 to 12.75% in 2002 However, since 2002 the government's stake

in nice biggest banks o f Indonesia has sold to foreign investors as controlling shareholders Consequently, bv the end o f 2004 total asset o f the nine banks with foreign majority has reached 42% o f total industry asset

One o f typical case o f opening domestic banking sector in developing countries

is China The banking sector o f this country started to open officially from 2001 under commitments to join the WTO Since having the same model o f economic development, domestic banking sector in China has significant similarities with Vietnam domestic banking system Even this nation opening its banking sector 6 years earlier than Vietnam, the commitments o f opening market, strengths, weaknesses, opportunities, and challenges o f domestic banks

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in China shared the same characteristics with Vietnamese banks Therefore, more details about China domestic banks will be provided in the following part.

1.3.31 Market opening commitments to joint WTO o f China in banking sector

With the one billion-population market, fast and stable growing economy, China has become a great opportunity to foreign investors in all business field, and financial industry, particularly banking sector has become the potential market in their eyes

Becoming a WTO member in 2001 is a great milestone in C hina's history in general and its banking sector in particularly Under comm itm ents o f to join the WTO, the country has gradually opened its market in banking sector in term o f both provided services and o f geographic limitations

From 1st January, 2006 under commitment between the nation and the WTO banking market in China has been completely opened with full national treatments to all foreign banks Along with geographical restrictions removing, other conditions as operation licenses, foreign exchange business, China Yuan business, branches, car loan and financial leasing are offered to foreign banks as national treatments

1.3.3.2 China domestic hanks in post WTO period

The globalization has created a unlimited demand for world-wide banking services from which many opportunities and challenges created for China banks

As the situation happened in Eastern Europe South Korea Australia or Latin America, local banks in China also have strength and weakness in comparing with unprecedented power o f foreign banks coming into this 1-billion- population market with great ambitions and advantages

1 6

• Local market position and brand name: Since the banking sector has been long protected by government, local Chinese banks have great advantage in the domestic market By the end o f 2006 the deadline for China fully opening its banking market, foreign banks still have a minority share comparing to local banks As the statistic o f China Baking Regulatory Commission, in lending market o f 2006 market share o f the

"the big four“, other local bank and finance institutions covered and foreign banks and branches are at 51.3% 32.5% and 16.2% relatively Since being long dominated the domestic market Chinese people, in recently survey o f International Finance Corporation (IFC), are more familiar with China banks' names than brand o f new foreign banking corporations

in the market, local china banks has gain significant competitive advantages in doing business in domestic market comparing to their foreign competitors Moreover, local already established strong and stable network o f branches for long time also brings crucial key point to success for China banks

• Culture understanding: With thousands years o f history, China culture is one of the most important and influence cultures over the world Understanding o f culture, people and living sty le in the society is always the key goals o f every business, particularly in banking sector, to achieve success Comparing to foreign competitors in banking sector, mostly from Euro and America with Western culture and living style China banking corporation deserved a potential strengths to compete in the tough and long run competition

Strengths o f local banks in China

17

DAI H O C Q U O C GIA HA NO!

T l ? | i \ r * a v t m P \ c T in th'J VIEN

• Business fundamental capabilities: The first problem o f China banks, simply, is the gap in scale between domestic and global banking corporations in term o f assets, management skills, technology and human resource As an demonstration, in 2004 total revenue o f Citigroup w ere US$1 12 billion, many time greater than the combination o f 4 biggest state own local China Bank while productivity and quality is much more higher Return on investment o f Industrial and Commercial Bank of China , in 2002, reached only 3.35% comparing to 16.4% o f Bank of America in the same period o f time, marking a poor management regime

o f the biggest China banks

• Product innovation and competitiveness: In the modem age the financial industry constantly become more and more innovate because o f the diversify customers Foreigner competitors have long integrated in commercial banking, investment banking and other products to increasing competitiveness The ability to provide a one-stop-shopping services in China banking sectors is one of the main weakness o f the local banks

• Risk management: One o f the remarkable weaknesses o f China banks is the capability to managing risks form banking businesses, particularly, in state own banks system with and poor and bureaucracy management In

2001, it was estimated that the ratio o f non-performing-loans o f the big four banks in China is about 25%, making a great potential risk for both the banks and China banking system

international finance corporations Citigroup has branches, subsidiaries

in more than 100 countries worldwide comparing to Bank o f China, the most international-oriented Chinese bank, operating in 27 countries only

Weakness o f local banks in China

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• Expanding expansion: As a more than 1 billion populations economy,China is one o f the most attractive destinations o f doing businessworldwide Increasing in customers and operating under high pressure of international competition context has created an opportunities for China main land bank to expanding its market both locally and internationally

as a WTO member

• Increasing in market share and revenue: With 2-digit-growth-rate economy and a increasing market size, particularly when China becoming a member o f the WTO China banks also face great and potential opportunities to capture more market share and increase their revenue

• Gradually opening market: As a developing country, China has received advantage from the WTO to gradually open its market in both geographic areas and provided serv ices Particularly, in banking sector, it has been an advantage for local banks o f China to have time - a 5-year- period from 2001 to 2006 to prepare and renovate themselves for the tough race ahead

• Improving banks’ capability: In a opening market, under high pressure ofcompetition and opportunities to cooperate with great and professional international banking corporations, China banks has had real chances to improves their capability in term o f

• World economic and social environment impacts: Doing business in the global context under WTO playground China enterprises has faced great challenges o f changing and impact from world economy and social environment Particularly, banking sector, which is considering a most sensitive part in every economy, will have strong effect from the global business changes.

• Tough competition: As an attractive market, tougher and tougher competition is the obvious challenges o f China banks The high competitiveness in the market has come from both newly established local banks and the flood o f great and well-know international banking corporations By the end o f 2006 the day before China fully opened it banking market, the country has 122 city commercial banks, 12 well- known foreign banking corporation, 7911 branches o f foreign banks and thousands o f rural commercial banks (China Banking Regulatory Commission statistic by the end o f quarter 4th 2006)

• Government policies: Since a socialist based market, China banking sectors have strong influence form the government policies Favorite conditions to the four biggest state-own-banks, known as "the-big-four"', lead those banks to a poor and bureaucracy business On the other hand, unfair treatments in the market create great obstacles for local join stock commercial banks

with WTO all business in the country has to comply with some agreements o f this global institution Among them, in the nation o f more than 90% intellectual products without copyrights, the TRIP Agreement

is considered as one toughest challenges for business in general and banking sector in particular to overcome

Challenges for local hanks in China

2 0

1.3.4.1 Market opening commitments to join WTO o f Vietnam banking sector

Vietnam, in commitments with WTO members, has opened its market in banking sector since P 1 April 2007 The key commitments o f Vietnam to join WTO in banking sector include:

• Foreign banks could establish their offices in Vietnam in the form o frepresentative offices, banks’ branches 100% foreign directed investment banks (from 1st April 2004)

as credit, deposit, financial leasing, foreign exchange, derivative, asset management, payment services, finance information, and consultation

and individuals in a schedule up to P 1 Jan 2011 to have full national treatments

Automatic Teller Machine (ATM)

bank in Vietnam

• Share o f foreign banks in a joint venture bank with domestic banks isnot more than 50% o f the total share and share o f one foreign bank in

a joint venture is not more than 30%

Vietnam, the holding foreign bank total asset should meet the requirement o f US$ 20 billion and USS 10 billion respectively

Since located in the same geographical region and both being-developing countries, Vietnam and China's economies, in general and banking sectors in particularly, have had the same characteristics Base on the similarities between banking sectors o f the two countries, opportunities, challenges, strengths and weaknesses o f Vietnam domestic banks also have analyzed in the same framework with Chinese banks, in addition w ith other nations' domestic banks and current Vietnam banking sector status.

Table 1.3: Frame work o f opportunities, challenges, strengths and weaknesses

o f Vietnam domestic banks

CHAPTER 2: METHODOLOGY

The m ethodology practiced fo r this graduation thesis is presented in this chapter Concerning with the main purposes o f the research, different perspectives in methodology' are introduced, explained and ju stified to select fo r the best fit with the thesis Validity and reliability o f the research are also

m entioned to ensure the quality o f the study.

Figure 2.1: Methodology overview o f the thesis

to describe what is prevalent with respect to the problem under study

Exploratory researches are undertaken with the purpose either to explore an area where little is known or to investigate the possibilities o f under taking a particular research study (Ranjit Kummar 1992], The main emphasis in an explanatory research is to clarify why and how there is a relationship between

tw o aspects o f a situation or phenomenon

The fourth type o f researches, correlation research, attempts to discover or establish the existence o f the relationship/association/interdependence between two or more aspects o f a situation [Ranjit Kummar 1992]

Although, theoretically, a research study can be classified in one o f the above perspectives, in practice with concerned o f the objective o f the thesis, this study method in paper is a combination o f the three categories including descriptive, co-relational and explanatory study That is it contains elements o f descriptive researches about the current development o f Vietnam domestic banking system with strengths and weaknesses along with coming opportunities and challenges

w hen a developing country as Vietnam becomes a WTO member

2.2 Research approaches and strategies

The research approach o f this thesis is the selection process o f how the study adopts to find answer to the research purpose Broadly, there are two approaches to inquiry, including the structured approach and the unstructured approaches The structure approach is usually classified as quantitative research and unstructured as qualitative research In the structured approach, everything that forms the research process as objectives, design, sample and question, is predetermined The unstructured approach, by contrast, allows flexibilities in all

o f these mentioned aspects o f the process

The thesis will study, with large respondents, the situation o f Vietnam businesses in banking sector Therefore, to better deal with the research problem and question, this research mainly follows the quantitative approach with 26 deep interviews with banks Nevertheless, partly o f this research still involved w ith quantitative since describing the situation o f domestic business in the global market

Over the last two centuries, research strategy associated with quantitative has been invoked the post positivist perspectives In general, the two basic

Experiments include true experiments, with the random assignment o f subject

to treatment conditions, as well as quasi-experiments that use nonrandomized designs Surveys include cross-sectional and longitudinal studies using questionnaires or structured interviews for data collection As the aims and objectives o f the thesis, in associated with the selected research approach, the main research strategy to conduct this study is to survey by interviews This thesis would be able to obtain better understanding o f the domestic banks, in relation with the accession o f Vietnam to the World Trade Organization

2.3 Research design

There have been several methods o f collecting data depending on sources o f evidence Data collection methods are generally divided in six ways including documentation, archival records, interviews, direct observations, participant observation, and physical artifacts

Since the purpose o f the study, in associated with research approach and strategy, survey in terms o f direct interviews and documentation are the two main methods to collecting data o f the thesis

Survey by direct interviewing is one o f the most significant sources o f the study

as it is targeted and insightful 26 interviews have been conducted with respondents in the banking sector, in form of structured questions Each interview took approximately one hour In order to conduct these interviews effectively, interviewees have been sent a letter o f short main concerning issues

o f the questions

Table 2.1 : List o f in terv iew ed banks

Interviewed banks Abbreviations Classification

1 :§ 3 ÜR Vietnam Bank for Agriculture

“The big four” state own banks

in Vietnam banking sectors

-, i | » Bank for Investment and

"1/ Joint Stock Commercial Bank

Military Joint Stock

“The active group“Strong and active banks

7 TtQICOMiWK 0 Vietnam Technology and

%

Bank

Dong A Commercial Joint

io !BBSl V — • w •**» ■»•••!* * " Stock Commercial BankVietnam Export-Import Joint EIB

26

14 /QBAIMKC An ^ inh Commercial Joint

1 he new groupNewly established or restructured banks

TierPt»mflank Stock Bank

NCANHANG m NPHO M C

TPB

LientfwtBank Stock Bank

M O A N H A M tf l* É * V # T

LVB

21

N A M A B A N K

Nam A Commercial Joint Stock

Besides, direct interviews, document such as the World Trade Organization Vietnam accession to the W TO industry analysis information also has been used as supporting data sources.

The accuracy o f the research also depends largely upon the way samples have been selected The basic objective o f sampling in this study, within limitation of cost and time, is to minimize the gap between the values obtained from the sample and those prevalent in the population

With the two important principles guide for sample selecting including avoidance o f bias and attainment o f maximum precision for a given outlay o f resources, in preparations step to conduct the surveys, interviewers have been trained before meeting with respondent Moreover, all interviewees are at high position o f the banks, at least branch's managers or department manager o f bank's head offices

In most type o f research studies, the process o f data analysis involves three main steps including preparation the data for analysis, analyzing the data and interpreting the data

Since the main data base resource o f the in this study taken by direct interviews with respondents in banking sector, and the data preparation process includes logging and tracking, screening and entering data

As mentioned earlier, the data analysis process o f this research is the key the qualities o f the study The study has been conducted in a scientifically rigorous manner: the data analysis holds the clues necessary to answer research questions To unlock the clues, the study relies on stable and valid statistical procedure

After carefully planning the study, collecting, managing and analyzing the data with the highest integrity, it comes to next step o f interpreting the data This

28

section will highlight the main purpose o f the research to find out the strengths, weaknesses, and opportunities and challenges that business working in Vietnam domestic banking sector now facing.

Validity is an important term in research that refers to the conceptual and scientific soundness o f this study to target The primary purpose o f this research

is to produce valid conclusions

Therefore, the four distinct types o f validity including internal validity, external validity, construct validity and statistical conclusion validity are always the basic principles for the foundation o f the study The study has been taken under carefully method to avoid both threats to external and internal validity, to ensure the quality o f the result without any bias factors Furthermore, the construct validity and statistical validity for the thesis are also seriously reviewed

29

CHAPTER 3: STRENGTHS, WEAKNESSES, O P P O R T U N IT IE S,

AND CHALLENGES OF DOMESTIC BANKS

The chapter will he started at brief information about banking sector in Vietnam In the following part, data o f the strengths, weaknesses, opportunities and challenges o f Vietnam domestic banks, as the country becoming a WTO member, w ill be presented and analyzed with brief summary o f the study Recommendation on business strategy fo r domestic bankers in order to compete

in the integrated playground ofpost-WTO period also has been conducted.

3.1 Banking sector in Vietnam economy

The banking sector in has appeared in Vietnam for about 100 years, since the time that France colonel established the first center bank for Indochina area Nevertheless, banks in Vietnam have just been really developed since the year

o f 1986 when the nation opening the economy to all sectors and the global Particularly, over the past 15 years, with the booming o f the economy, the sector has taken a long step toward to follow the demand o f the market

Figure 3.1: Development o f banking sector in Vietnam

(Source: Swiss Reg Sigma Report 2006 Population Research Bureau)

30

In domestic market, comparing to other types o f businesses with long histories, Vietnam banking sector has just started at the introduction stage o f the industry life cycle The introduction stage o f banking sector development is proven with low penetration rate in the domestic market It is estimated that only more than 10 percent o f Vietnam people that have used banking services (World Bank Development Report 2007) By the end o f 2007 there have been six million

A I M card subscribers with more than 4500 AM machines The State Bank of Vietnam reported to increase number o f A I M machines to 7000 by the end o f

2008 which 70% located in Hanoi and Hochiminh City

Traditional banking serv ices as loan and saving account at stable growth rate over years and banking retail services, which is not fully developed in Vietnam

in a low level o f capital market, are the key factors to indicate a strong growth

o f Vietnam banking sector in the near future

Table 3.1: Growth indexes in Vietnam banking sector

In 2006 and 2007, annually investment to the economy were 34% and 44% comparing to GDP respectively, this was the second highest number in Asia in this two-year period However, the credit growth rate in 2007 o f total banking sector just reached 22% meaning that only half of the financing demand in the market has been serv ed by banks

31

Chart 3.1 : GDP contribution o f banking sector in service areas

2006

■ Banking sector □ O ther

2007

■ Banking sector □ O th e r

This banking system contributed 1.82% and 1.91% in terms o f value to total GDP o f Vietnam in 2006 and 2007 relatively Comparing in the services area only, Vietnam banking sector has been accounted for about 5% o f total contribution Nevertheless, since the main function o f banks is to be as the financial intermediary system, the contributions o f those corporations in the whole economy o f Vietnam are extraordinarily important

Banking sector, in comparison to the business sectors, is much smaller in number o f enterprises However, the circulating system o f the economy, this industry always has great impact in the movement o f economy

In recently report of top 500 biggest companies in terms o f rev enue o f Vietnam

in the year o f 2007 done by Vietnam Report Joint Stock Company, the nation- banking sector contributes 21 enterprises in the list

C h a r t 3.2: N u m b e r o f b a n k s in V ie tn a m

Q S t a t e O w n C o m m e r c i a l B a n k □ J o r t v e n t u r e b a n k s O F o r e ig n d i r e c t i n v e s t m e n t b a n k

■ C o m m e r c i a l J o in t S t o c k B a r k ■ f o r e i g n b a n k s b r a n c h

(Source: State Bank o f Vietnam)

Among businesses, banking enterprises still have great equity comparing to others, in 2007 more than half o f banks have owner equity more than VND

1000 billion Owner equity o f banking system event grows higher than ever in

2008, since State Bank o f Vietnam rising requirement owner equity o f a bank at VND 1000 billion and up to VND 3000 billion by the end o f 2010

3.2 Vietnam domestic banks in post WTO period

It could be considered that Vietnam has shown the preparation for being an officer member o f the WTO at the very early time Since 1995 just one year after the WTO has been established: the nation has started preparing to join this organization Since being operating in a developing country Vietnam banking sector started at low level o f development Vietnamese banks, event having recognized their strengths and weaknesses to prepare to play in the global economic integration market, are now facing numerous o f opportunities and challenges in post WTO period

Businesses in banking sector are among the most impacted companies when Vietnam became an official member o f the World Trade Organization by the