Doctoral thesis summary: Researching on organizational models and business operations of financial companies in Viet Nam

Research objectives: Overall goal of this thesis is to examine theoretical and empirical foundation for providing recommendations and solutions to improve organizational structure and boost business operation of financial companies owned by groups/corporations in Viet Nam. The research of the thesis are organizational models and business operations of financial companies having capital contribution from large groups/corporations in Viet Nam.

MINISTRY OF EDUCATION AND TRAINING MINISTRY OF PLANING AND INVESTMENT

Central Institute for Economic Management

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NGUYEN THI HUONG LAN

RESEARCH ON ORGANIZATIONAL MODELS

AND BUSINESS OPERATIONS OF FINANCIAL COMPANIES IN VIET NAM

Major: Economic Management Code: 62 34 04 10

SUMMARY OF DOCTORAL THESIS OF ECONOMICS

HANOI - NĂM 2015

Completed at: Central Institute for Economic Management

Scientific advisor: Assoc Prof., Dr Le Xuan Ba

Examiner 1: ………

………

Examiner 2 ………

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Examiner 3: ………

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This thesis shall be defended before Institute-level Thesis Examination Council of Central Institute for Economic Management at … on ……… 2015

Can be looked up at libraries of:

- Central Institute for Economic Management

- National Library, Hanoi

INTRODUCTION

1 Rationale of the thesis

Financial companies exist in all developed and developing countries in the world Though sharing a number of common features, models of financial companies in different countries and in different period possess distinguished characteristics Legal frameworks and actual operation of financial companies form different models of financial companies in different countries

Revisiting the road of 17 year establishment and operation of financial companies in Viet Nam, we can say that the biggest contribution of financial companies is that they have been taking part in creating a more dynamically competitive and diversified financial market However, it also can be noted that they are still being hindered by lots of weaknesses and drawbacks

In terms of organizational model, a financial company is being governed as a member company of a parent company and at the same time being governed by the State Bank of Viet Nam, therefore supervision and control over operations of financial companies as a credit institution are not strictly carried out In addition, the fact that member of management board or member board of corporations or groups sometime are also a member of that boards of financial companies creates a conflict of interest Financial companies owned by state owned corporations have been poorly operated This results in a resious consequences not only for corporations but also for privates or institutions, who provide capitals

In terms of business performance, a number of financial companies can not survive , or are hard to be revived Certain financial companies fail to fulfill their role of capital allocation within their parent groups/corporations as having been determined at the time of establishment, and some companies even become burdens of their parent groups/corporations Hereunder are a number of facts in 2014 of 10 financial companies having capital contribution from their parent groups/corporations, as collected and calculated by the

author: (1) Minimum Capital Adequacy Ratio cannot be maintained; (2) Loss

of owner’s equity ; (3) Bad debts and provisions for bad debts of financial companies are large; (4) Book Value per Share is lower than face value of

shares (less than VND10,000/share) In addition, a number of complicated

long-standing problems have not been solved

Motivated by the above findings, the author decided to engage in this

thesis “Researching on organizational models and business operations of financial companies in Viet Nam”

2 Objectives of the thesis

2.1 General objective

Overall goal of this thesis is to examine theoritical and empirical foundation for providing recommendations and solutions to improve organizational structure and boost business operation of financial companies owned by groups/corporations in Viet Nam

2.2 Specific Objectives

In order to achieve the aforesaid overall goal, the thesis shall:

(i) Synthesize and explain theoretical framework being used for analyzing, assessing organizational models and business operations of financial companies

(ii) Clarify business nature and characteristics and roles of financial companies owned by groups/corporations

(iii) Review and clarify experiences of organizational models and business operations of financial companies in the world and draw lessons for Viet Nam

(iv) Analyze and assess organizational models and business operations

of financial companies owned by groups/corporations in Viet Nam

(v) Identify viewpoints/directions to improve organizational structure and boost business operation of financial companies owned by groups/corporations in Viet Nam

(vi) Provide solutions and proposals to improve organizational structure and boost business operation of financial companies owned by groups/corporations in Viet Nam in the time to come

3 Objects and scopes of research of the thesis

3.1 Objects of the research

Objects of the research of the thesis are organizational models and business operations of financial companies having capital contribution from

large groups/corporations in Viet Nam

3.2 Scopes of research

- Scope of content:

+ The thesis mainly research on financial company model operating as non-banking credit institutions (operating under Law on credit institutions) of which charter capitals are owned wholly or partially by large groups/corporations This company group has the largest scope, the biggest scale as well as lots of problems in Viet Nam nowadays

+ The thesis engages in two issues, namely “organizational models” and “business operations” of financial companies having capital contribution from large groups/corporations (also referred to as financial companies owned

by groups/corporations)

- Scope of time: organizational models and business operations of

financial companies are reviewed on the basis of data within the period of 2011-2014

4 Approaches and methods of research

4.1 Approaches of research

The thesis is based on historical and systemic approaches

4.2 Methods of research

* For secondary data

The thesis employs methods being used widely for researching on secondary data, such as desk research, statistics, summary, comparison and analysis of collected data and documents related to organizational models and business operations of financial companies in Viet Nam

* For primary data

- Consulting experts:

The author consults 5 experts to on the solutions to improve organizational models and boost business operations of financial companies in Viet Nam

- Questionnaire:

+ Questionnaires for individual customers who have used services of financial companies Sample size is 100 customers Survey time was from the

5th to the 28th of July, 2015

+ Questionnaires for organization customers who have used services

of financial companies Sample size is 50 organizations Survey time was from the 5th to the 28th of July, 2015

Data collected from questionaires are processed by SurveyMonkey and presented in details in appendices of the thesis

5 Structure of the thesis

The thesis comprises of 3 main chapters, as follows:

Chapter 1: Theoretical foundation of organizational models and

business operations of financial companies

Chapter 2: Status quo of organizational models and business

operations of financial companies in Viet Nam

Chapter 3: Solutions to improve organizational models and boost

business operations of financial companies in Viet Nam

CHAPTER 1 THEORETICAL FOUNDATION OF ORGANIZATIONAL MODELS AND BUSINESS OPERATIONS OF FINANCIAL COMPANIES

1.1 Financial companies and roles of financial companies in the market economy

1.1.1 Financial intermediaries

In common sense, a financial intermediary is a financial institution that connects capital owner to capital demander Being different from direct financial exchange where capital owner and capital demander exchange directly with each other, in this form of financing, financial intermediaries facilitate the channeling of funds indirectly, which means that the borrowers must resort to a third party to get their necessary funds, and such third party is the financial intermediary Financial intermediary are, among others, banks, loan associations, credit unions, insurance companies, and financial companies

Functions: Creation of capital; Supply of capital; Control

Types of financial intermediaries: There are a number of ways to categorize financial intermediaries, and these ways varies form country to country In general, the financial intermediaries can be:

Classification of financial companies: 1) Based on professional operations: Sales financial companies, Consumer financial companies, Business financial companies 2) Based on ownership types of financial companies: State owned financial companies, Financial Joint Stock companies, Financial companies owned by credit institutions, Financial joint venture companies, 100% foreign invested financial companies

Functions of companies:

- Financial companies operating as non-banking credit institutions: Financial companies of which business commodities is money as commodities, Financial companies of which has their main, frequent and professional business operations are banking services (excluding accepting deposits and providing payment services), Financial companies is a type of enterprises being under professional control of State Bank/Central Bank

- Financial companies being a special enterprise with money business operations: The enterprises are exposed to high risks, therefore conditions of business registration and operation is much stricter

Roles of financial companies in market economy: Roles of financial companies in the economy, Roles to capital owners and demanders in the economy, Other roles to corporations/ groups

Due to distinguished features of economic groups, financial companies while operating have to implement various functions and duties related to financial conditions of the economic groups The main duty of financial companies, apart from for-profit operations, is to help the economic groups to to maintain best financial resources to increase competitive strength

of the economic groups Financial companies also help the economic groups to make best use of business opportunities in market Apart from advantages a financial company can get from being member of an economic group, the company also exposes to a number of disadvantages and risks:

1.2 Organizational models of financial companies

1.2.1 Nature and structure of organizational models of financial companies

Financial company is a type of enterprises operating in financial market and has distinguished characteristics of non-banking credit institution Therefore, organizational models of financial companies bear nature of organizational models of enterprises as well as distinguished features of credit institutions

1.2.2 Types of organizational models of financial companies

- Organizational models based on independent functional divisions

- Organizational models based on products, customers and geographic areas

- Organizational models based on network

1.2.3 Criteria and indicators to determine and assess organizational models

Organizational models of financial companies must be designed in accordance with a certain set of principles While evaluating and assessing organizational model of a financial company, it is a must to determine if such principles are in line with essential organization design principles or not

1.2.4 Requirements of organizational models of financial companies

In general, in order to achieve business success in the new context, organizational models of financial companies must meet following requirements:

- Shifting from large-scale model to a compact and flexible one

- Converting function-based sub-structures to a multi-functional ones

- Shifting from specialized sub-structures to multi-functional and effectively cooperative ones

- Demonstrating distinguished features and roles of credit institutions functioning in capital and monetary trading

- Guaranteeing that organizational models are flexible and highly responsive to market and at the same time facilitate internal control and supervision

1.3 Business operations of financial companies

1.3.1 Main business operations of financial companies

- Banking services of financial companies

- Account opening services of financial companies

- Capital contribution and share purchase of financial companies

- Other business activities of financial companies

1.3.2 Factors impacting business operations of financial companies

Theoretically, there have been various ways of considerations, but in common sense the factors impacting business operations of a financial company can be sorted into subjective and objectives ones, just like the way those of other enterprise types are considered

1.3.3 Criteria for assessing business operations of financial companies

The author assesses business results of financial companies and a number of indicators reflecting business efficiency of financial companies, which are shown in a number of financial indicators and most importantly in financial reports of financial companies These are the most essential and

distinguished indicators of business operations of credit institutions in general and of financial companies in particular:

* Indicators in business result reports:

(1) Net interest income

(2) Operating costs

(3) Total income before taxes

(4) Total profit after taxes

* Indicators from balance sheets:

(5) Total assets, of which the main criteria to be assessed are:

+ Money and gold deposited in and borrowed from credit

institutions + Lending to customers

(6) Payables, of which the main criteria to be assessed are:

+ Money deposited in and borrowed from credit institutions + Deposits of customers

(7) Capital and funds, of which the main criteria to be assessed are:

+ Capital of credit institutions + Undistributed profit

* Financial indicators reflecting the efficiency of capital usage:

(8) EPS (Earning per share)

(9) BVPS (Book value per share)

(10) ROEE (Return on equity everage)

(11) ROAE (Return on asset everage)

* Indicators reflect safety limits of credit institutions:

(12) CAR (Minimum Capital Adequacy Ratio)

(13) Bad debt ratio

(14) Rate of short-term capital used for medium- and long-term loans

1.4 Experiences of organizational models and business operations of financial companies in the world and lessons for Viet Nam

1.4.1 Overview of organizational models and business operations of financial companies in a number of countries in the world

In order to get a panorama of organizational models and business operations of financial companies in a number of countries in the world, the

author introduce information related to financial companies in a number of countries more developed than Viet Nam, namely South Korea, Indonesia, Malaisia, China, Germany, United States Detailed information are presented

in Appendix 10 of this thesis

1.4.2 Organizational models and business operations of financial companies owned by groups in the world

The author studies 9 financial companies owned by large groups, namely: Samsung, GM, Sony, GE, Siemens, Hitachi, Volvo, LG, IBM

1.4.3 Findings

The author presents 10 findings related to organizational models and business operations of financial companies Of the findings, the most remarkable one is that financial company is a type of enterprise susceptible to operational risks if risk management is not properly implemented, and can be severely affected during financial crises and economic recessions

1.4.4 Lessons for Viet Nam

(1) Financial companies, though being of scale smaller than commercial banks, can survive and grow thanks to their flexibility and their capability in exploiting niche market and potential market in and out of their owner groups/corporation

(2) Groups/corporation may own controlling interest in financial companies, but their ownership ratio should not reach 100% in order to maintain dynamic, independence and adaptability of financial companies in conducting business

(3) In the world there have been a number of restructures of credit institutions In order to survive in market economy, financial companies must have a staff, especially high ranking personnel, experienced in capital field, which requires both disciplinary and flexibility in business

(4) The Government should strictly control operations of financial companies and at the same time create an adequately wide corridor for financial companies to select their specialized or diversified business lines

(5) Financial companies owned by groups/corporations should properly implement their roles of bridging and channeling funds their

groups/corporations, as well as act as financial intermediary in capital and monetary markets

(6) When financial market falls in difficulties, financial companies are easily affected, because of their small scale and their disadvantages in competing with commercial banks

(7) Consolidation and/or merger with commercial banks is the solution applied by a number of financial companies to cope with difficulties This is a frequent phenomenon in the world, especially in post-crisis periods

CHAPTER 2 STATUS QUO OF ORGANIZATIONAL MODELS AND BUSINESS OPERATIONS OF FINANCIAL COMPANIES IN VIET NAM 2.1 Overview of financial companies in Viet Nam

2.1.1 History of establishment and development of financial companies

In the first period, Viet Nam had 2 joint stock financial companies

established in accordance with Ordinance of banks, credit collectives and financial companies dated 23 May, 1990 of State Council The two financial

companies were Sai Gon joint stock financial company (SFC) and Seaprodex joint stock financial company However, the two financial companies were dissolved later

In the second period, financial companies were established within state-owned corporations Starting from 1995, in implementing Law on State owned enterprises, under Decision No 90 and Decision No 91, the Government experimented the model of State owned Corporation in a number

of key economic sectors in order to accumulate capital and gather professional capacities to enhance competitiveness and create driving forces for the cause

of national industrialization and modernization

After a period of time, in Decree No 79/2002/NĐ-CP dated

04/10/2002 of the Prime Minister on Organization and operation of financial companies, Article 2 reads: Financial company is a type of non-banking credit institution, having function of using self-raised capital, mobilized capital and capital from other sources for the purposes of lending, investing, providing financial and monetary consultancy services and other services regulated by

laws, excluding providing payment services and receiving deposits of less than

1 year term

As of 31 December, 2014, Viet Nam has 17 financial companies organized in 2 main types: joint stock financial company, and one-member financial company limited (of which capital is owned 100% by the State or by foreign organizations) Of the 17 financial companies, 10 having capital contributions from groups/corporations are organized in the form of multi-functional financial company (conducting various business operations), and the other 7 financial companies are specialized ones (consumption credit)

2.1.2 Overview of performance of financial companies in Viet Nam

- Consumer financial companies

In general, these financial companies are mostly in the form of member limited company with 100% of capital owned by foreign entities Although these companies also meet difficulties arising from market conditions, business performance of these companies are promising thanks to their focusing on consumption credit (individual finance) to meet large demands of individual consumers, and some of the companies even have very good performance Details of business performance and development of this type of financial companies are presented in Appendix 12 of the thesis

one Financial companies having capital contributions from groups/ corporations

These companies can be sorted into two categories: joint stock financial company, in which groups/corporations own not less than 25% capital, and one-member financial company limited, in which groups/corporations own 100% capital Of the categories, joint stock financial companies have better business performance The other type of financial companies have been suffering from cccumulated losses or deficit of owner’s equity for years

As the author cannot collect all necessary data of all 17 financial companies in Viet Nam, in table 2.1 the author presents in the most condensed manner business performance of all financial companies in Viet Nam as of 31/12/2014