INTRODUCTION
In today's global economy, financial systems are crucial for facilitating the flow of capital from surplus to deficit areas, while offering essential services like risk-sharing and liquidity The rapid growth of financial institutions worldwide has created vital channels for businesses, significantly contributing to technological advancement, especially in developing nations.
Finance involves the distribution of social wealth through currency, shaped by the processes of production, management, and utilization of money Socio-economic changes influence the financial system, particularly during national development phases In subsidized economies, the government oversees the financial system, directing economic activities through regulations and compensating businesses for losses, which limits financial interactions to state finance encompassing insurance, credit, and budgeting As economic relations evolved, new ownership forms emerged in the market economy, prompting transformations in the financial sector and the development of financial relations that align with international standards Vietnam's financial system reflects these changes, integrating with the global financial landscape.
In the modern specialized economy, an organized and efficient financial system is essential for sustainable growth Many countries prioritize safeguarding the interests of investors and depositors This article will provide an in-depth look at Vietnam's financial system.
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MAIN CONTENT
Participants in Financial System
Market participants can be categorized into two groups: the supply side, which possesses surplus funds available for investment, and the demand side, which requires resources for essential operational needs, bridge financing, or capital for venture financing.
In the financial market, investment flows from investors to lenders occur through two primary methods: direct finance and indirect finance Indirect finance, which is more commonly recognized, involves funds being channeled through financial intermediaries such as brokers, mutual funds, and leasing and finance companies The financial market comprises a vast array of participants and players, which can be categorized into distinct groups.
● The individuals: These are net savers and purchase the securities issued by corporates Individuals provide funds by subscribing to these securities or by making other investments.
Corporations are net borrowers, seeking funds for various projects and offering a range of securities to align with investors' risk preferences Occasionally, they also invest surplus funds, similar to individual investors The capital raised through these securities is allocated to real assets such as plants and machinery, with the income generated from these assets being distributed to investors in the form of interest or dividends.
The government may borrow funds to address budget deficits and manage liquidity, utilizing both long-term loans for sustained financial needs and short-term borrowing in the money market to ensure liquidity is maintained.
Initial investments in public sector enterprises are made by subscribing to shares, which can later be sold to the public through disinvestment processes.
The financial system is governed by various regulatory agencies that oversee the relationships among market participants, trading mechanisms, and the flow of funds In India, the primary regulators are the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) The RBI, as the Central Bank, is responsible for maintaining liquidity in the money market and managing the sale and purchase of Treasury Bills for the government Meanwhile, SEBI focuses on regulating and supervising the capital market, implementing guidelines and rules to ensure investor protection and market integrity Additionally, a range of legislation and government departments further regulate financial system operations.
Market intermediaries, also known as financial intermediaries or investment bankers, play a crucial role in the financial system by connecting investors with fund users, such as corporations and governments These intermediaries facilitate the investment process, as direct investment can be challenging for small investors who may struggle to find suitable borrowers or diversify their investments to mitigate risk By offering services like investment consultancy, market analysis, and credit ratings, market intermediaries assist investors in making informed decisions, ultimately enhancing their investment experience in the secondary market.
Mutual funds and investment companies aggregate investors' savings and strategically allocate the pooled capital into various investment options Some key intermediaries in the market include share brokers who facilitate these transactions For more information or to download resources, you can reach out via email at skknchat@gmail.com.
○ Registrar and Share Transfer Agents
Market intermediaries play a crucial role in the financial sector by offering a variety of services to investors, particularly small investors who depend on their expertise They operate continuously in the financial market, ensuring rational behavior and integrity to maintain their reputation, as trust is essential for attracting future investments By specializing in pricing new securities and effectively marketing them, these intermediaries enhance the efficiency of corporate fundraising.
The structure of the Financial System
3.1 The financial market in general
- Financial markets are marketplaces where those with idle financial resources and those looking to borrow exchange and sell the right to use financial resources.
- There are several ways to classify the financial market, each provides a different angle:
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- Money markets are defined as short-term capital markets (less than one year) including loans, short-term lending, borrowing, and trading short-term financial instruments.
- Long-term capital markets, in the form of long-term financial instruments such as stocks and bonds, are referred to as capital markets.
Securities are issued in the primary market, where companies introduce new stocks and bonds to the public for the first time A notable example of this market is the initial public offering (IPO), where firms float their shares to attract investors.
The secondary market, often known as the "stock market," encompasses major exchanges such as the New York Stock Exchange (NYSE) and Nasdaq, where investors engage in trading equities Unlike the primary market, the secondary market is characterized by transactions that occur between investors, facilitating the buying and selling of stocks.
● Exchange-traded and over-the-counter (OTC) markets
- A stock exchange market is a regulated and organized market where buyers and sellers trade stocks in a safe, transparent, and systematic manner.
- The Over-the-Counter (OTC) market is a decentralized dealer market in which brokers and dealers transact directly over computer networks and the phone.
3.2 The financial market in Vietnam
- Capital market, money market, and foreign exchange market are all terms used in financial markets in Vietnam right now Here are some examples of how to divide.
The financial market is categorized into two main segments based on the maturity of credit instruments: the money market, which deals with financial instruments maturing in less than one year, and the capital market, which focuses on instruments with maturities exceeding one year.
For over a year, money markets, often operated by banks in developed economies, play a crucial role in facilitating medium and long-term capital needs through direct stock market transactions.
In Vietnam, commercial banks are the primary source of short, medium, and long-term capital, highlighting their unique role in the financial landscape Unlike other markets, where capital allocation may be more diversified, Vietnam relies heavily on financial intermediaries, with commercial banks at the forefront of mobilizing and distributing capital effectively.
Vietnam's financial landscape includes a diverse range of markets, such as those for bills, bonds, stocks, and bank loans, catering to various credit forms Notably, the primary market for bank loans continues to be the most prominent in the country's economy.
Vietnam's financial landscape features both a primary and secondary market, where the primary market is dedicated to the initial issuance of securities, often underwritten by securities firms and consulting agencies In the secondary market, a diverse array of financial instruments is actively traded, including 26 types of equities, one VF1 investment fund certificate, government bonds, and bonds from the Bank for Investment and Development of Vietnam, as reported by mof.gov.vn.
Intermediary financial institutions serve as crucial links between capital supply and demand, facilitating investment by purchasing financial assets and capital instruments from those seeking funds.
- In the financial markets, these are actually indirect financial transactions.
- Intermediary financial institutions are made up of the following elements:
● Depository Institutions, such as banks and savings associations, are financial institutions that are legally permitted to accept deposits from clients.
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Deposit-taking institutions are the largest financial entities in the financial markets, primarily focused on accepting deposits from individuals and organizations Their main role is to generate capital sources from these deposits, which they then utilize to provide loans in various forms or invest in securities.
Institutions receiving deposits in Vietnam include:
+ Savings and loans associations (Village Savings and Loan Associations - VSLAs, )
+ Credit Union (Association of People's Credit Funds Vietnam - VAPCF, )
Contractual savings institutions serve as financial intermediaries that regularly acquire funds and strategically invest them to ensure the availability of financial instruments when contractual obligations arise, including insurance policies, property investments, and life insurance.
They can accurately estimate the capital needed for contract payments, making asset liquidity less critical compared to deposit-taking institutions Consequently, they prefer to allocate long-term funds into corporate bonds, stocks, and home loans.
Due to policy differences between Vietnam and many other financial markets, this type of intermediary is not very common in Vietnam.
Financial instruments
The money market is a platform for trading short-term debt securities with maturities under one year, prioritizing safety and liquidity for lenders Key characteristics of money market instruments include short maturities, high liquidity, and low risk, facilitating the efficient movement of capital in the financial market.
The article discusses various financial instruments available for download at skknchat@gmail.com, including commercial promissory notes, delivery contracts, treasury bills, financial company bills, savings certificates, and promissory notes However, it focuses on three primary types: treasury bills, commercial paper, and certificates of deposits Specifically, it highlights treasury bills (T-bills) and their payment terms.
Treasury bills have a maturity of about 1 year or less (usually with maturities of 3,
Treasury bills are short-term government securities sold weekly, with maturities of 28 days, 91 days, 182 days, and 364 days These T-bills are issued through weekly unit price auctions, providing investors with options ranging from 1 month to 1 year.
Treasury bills are issued in batches by the State Bank through a bidding process, where the State Bank organizes and conducts auctions in the open market Acting on behalf of the Ministry of Finance, the State Bank oversees the issuance and payment of these bills upon maturity, as well as the organization and management of the bidding process Additionally, the State Bank of Vietnam is responsible for the organization and supervision of the secondary market, which involves the repurchase of T-bills after the initial bidding.
Treasury bills issued through the State Bank through bidding have the following form and characteristics
Treasury bills are discount securities, sold at prices below their par value, meaning they do not pay interest prior to maturity Instead, investors earn a profit, known as Yield To Maturity, which is the difference between the purchase price and the par value received at maturity.
The discount rate is calculated by the formula:
Discounted Yield (%) = (Price – Par value)/Sales Price * (360/Number of days to maturity)* 100%
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In Vietnam, collections and payments are conducted in Vietnamese Dong, with a minimum denomination of 1,000,000 VND (one million VND) Higher denominations are regulated by the Inter-Ministry of State Banks and Finance, which announces these specifics in the issuance notice.
● T-bills are issued in the form of book-keeping and bill certificates.
The State Bank oversees and manages the bookkeeping process, while bill certificates are printed by the State Bank in accordance with the format prescribed by the Ministry of Finance.
● Tendering for T-bills is an interest-rate auction - Treasury bills auctioned through the State Bank shall comply with the following principles:
+ Confidentiality of all bidding information before announcing the bidding results. + Organize public bidding, equal in all rights and obligations among the bidding units
+ The winning unit has the right and responsibility to buy bills according to the announced winning volume and interest rate.
● Objects participating in the Treasury bill auction include:
+ Credit institutions operating in Vietnam: State-owned commercial banks, joint-stock commercial banks, investment and development banks; Joint-venture banks; branches of foreign banks and financial companies;
+ Insurance companies, insurance funds, investment funds.
● Determining the volume and interest rate of the winning Treasury bills:
The determination of the winning volume and interest rate of Treasury bills is based on: + Bidding volume and interest rate of members.
The anticipated volume of Treasury bills to be mobilized is closely linked to the directed interest rates The allocation of winning Treasury bills is determined by arranging bids in ascending order of interest rates within the established range.
At the maximum bidding interest rate within the specified range, when the total bids surpass the anticipated volume of bills to be mobilized, the allocation of winning bills will be proportionally distributed based on the volume of bids submitted at that interest rate.
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+ The interest rate on the issue of bills is the highest winning interest rate that is generally applied to all bid winners.
The Ministry of Finance may continue to issue a specific volume of Treasury bills for direct retail sale to the public, in addition to the volume issued through the State Bank.
Treasury bills issued directly by the Treasury have a distinct certificate template compared to those issued through the State Bank via bidding The interest rates for Treasury bills sold through the State Treasury system are set by the Ministry of Finance in collaboration with the State Bank, reflecting current market interest rates Consequently, Treasury bills serve not only to address the state budget deficit but also as a vital instrument for the State Bank in implementing monetary policy.
Commercial paper exists in two forms: bill of exchange and promissory note:
• A bill of exchange is a valuable certificate made by the seller, requiring the buyer to pay a specified amount at a certain time and a certain place to the beneficiary.
• A promissory note is a valuable certificate made by the buyer, committing to pay a specified amount at a certain time and a certain place to the beneficiary.
A bill of exchange is a financial instrument issued by a creditor to demand payment, primarily utilized in commercial transactions In contrast, a promissory note is created by the buyer and serves a broader purpose, applicable in both commercial and civil contexts Understanding the distinct properties of these commercial papers is essential for effective financial management.
● Abstraction: The commercial paper does not specify the cause of the debt, but only records information about the amount to be paid, the payment term, and the payer.
● Compulsion: Stipulate that the payer must pay the beneficiary on time, not allowed to refuse or delay the payment.
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Commercial paper is highly circulatable, allowing for easy transfer between beneficiaries through endorsement, and can be converted into cash by discounting or pledging it at a bank While it offers advantages such as liquidity and flexibility, it also has disadvantages that potential investors should consider.
Advantages of commercial paper when applied in practice:
Commercial paper offers several key economic advantages, serving as a vital credit circulation tool that enhances cash flow and promotes currency stability It provides a legal framework for credit-purchase transactions, safeguarding the interests of parties involved in commercial credit and mitigating debt issues among businesses Additionally, commercial paper is considered a reliable security asset, enabling banks to discount it or accept it as collateral for loans.
Commercial paper plays a crucial role in enhancing the availability of goods in the open market, thereby aiding the central bank in effectively regulating the money supply Additionally, when a bank borrower utilizes a promissory note to secure a loan, the bank has the option to sell this debt to another institution, allowing for early debt collection This practice serves as a valuable method for securitizing bank loans.
And finally, the business of guaranteeing and collecting commercial paper will help the bank to increase income but not increase risk in its business activities.
However, commercial paper when applied in practice also has certain disadvantages such as:
The planned target of Vietnam’s Financial System
Between 2022 and 2030, Vietnam's financial system must evolve in alignment with emerging global financial trends while adhering to the key policies set forth by the Party and State To ensure that Vietnam's financial framework keeps pace with international standards, specific objectives need to be achieved in the coming years.
5.1 The Vietnamese financial system has to be restructured and strengthened
- The financial system in Vietnam will continue to be reorganized, resulting in increased competition, transparency, professionalism, and modernism.
Fee and service revenue is expected to become increasingly significant in the expansion of credit institutions, with projections indicating that the service fee collection rate will rise from approximately 20 percent in 2020 to around 30-35 percent by 2025.
Bad debt levels are currently significant but are managed effectively, maintaining a rate of 2% to 3% As credit institutions undergo restructuring, mergers and acquisitions within the banking sector are anticipated to increase between 2021 and 2025 This trend is expected to reduce the number of credit institutions while enhancing operational depth, leading to a growth model that relies on lower capital requirements.
5.2 The Vietnamese financial system should be integrated internationally
- The integration provides Vietnam's economy and financial sector with the potential to progress toward modernity, integration, and transparency in
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The integration of banks, insurance companies, securities, and other financial institutions fosters a comprehensive ecosystem that transcends geographical limitations This growing trend is expected to boost foreign ownership, thereby attracting foreign investment and enhancing market liquidity.
Vietnam's financial system is poised to enhance its global standing, as it currently holds the largest share of equities in market index baskets among minor markets With the potential to transition into emerging markets before 2025 and corporate governance quality nearing the ASEAN-6 average, Vietnam presents significant opportunities for the development of Ho Chi Minh City as a global financial and technological hub Furthermore, Vietnam has excelled in its role as Chair of the ASEAN Capital Market Forum (ACMF).
2020, adding to the region's improved adaptive capability, risk management, and preparedness to deal with financial turbulence as well as international.
5.1.3 The Vietnamese financial system should be more sustainable
Commercial banks have adopted green credit policies that focus on prioritizing industries with in-depth investments and advanced technology Notably, three banks have implemented the Environmental and Social Responsibility Management System (ESMS), while 17 others have established processes to assess environmental and social risks within their internal regulations This approach ensures that environmental and social considerations are integrated into their credit-granting activities, as reported by mof.gov.vn.
Since its launch in July 2017, the Sustainable Development Index version 1.0 (VNSI index) has utilized ESG criteria to draw foreign investors By the second quarter of 2020, the application of ESG principles in stock selection has gained significant traction among investors.
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Recommendations
The Vietnamese financial sector has the potential for reform to enhance its role as an efficient capital allocation channel, contributing significantly to stable economic growth To achieve this, it is essential to focus on three key areas: liberalization, deregulation, and stabilization However, the government's priorities must be realigned to accelerate reform and address existing imbalances Without effective governance and supervision, further liberalization could lead to adverse outcomes, as demonstrated by the financial crises in Thailand and Indonesia a decade ago.
Priorities for future financial sector reform in Vietnam should be as follows, in descending order of importance:
1) the establishment of a strong banking supervisory agency with effective monitoring tools to ensure the banking system's stability and sustainability;
2) the promotion of domestic bank restructuring, particularly SOCBs, to create strong, competitive banks capable of serving as true financial intermediaries;
3) the development of institutions, products, and delivery systems to provide formal financial services to Vietnam's low-income households and family businesses;
4) prudent liberalization, in alignment with a market-based financial sector's ability to recognize and minimize risks. a Financial Sector Stabilization (#1 and #2 above)
To enhance the financial sector's stability and competitiveness in Vietnam, it is crucial to strengthen the government's ability to protect public interests through improved financial regulation and supervision.
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To enhance the effectiveness of the banking system, it is essential to reform the State Bank of Vietnam (SBV) by consolidating provincial branches into regional ones and establishing a new banking supervisory agency However, merely creating this new agency will not guarantee improved performance unless it is supported by the implementation of relevant financial regulations and robust off-site and on-site monitoring mechanisms.
To uphold confidence in the banking system during the ongoing financial crisis, the State Bank of Vietnam (SBV) must prioritize the recapitalization of insolvent banks Additionally, a comprehensive restructuring plan is essential, focusing on the commercialization of State-Owned Commercial Banks (SOCBs) and the consolidation of Joint Stock Commercial Banks (JSCBs) This approach is crucial as many Vietnamese banks are relatively small, making it difficult to achieve the necessary economies of scale and scope to enhance their competitiveness, especially against foreign banks.
The government must regulate and supervise its policy banks, particularly the Vietnam Development Bank (VDB), along with quasi-banking institutions currently overseen by sectoral ministries and local governments This regulation should be enforced by the State Bank of Vietnam (SBV) or a new oversight authority, similar to traditional banking institutions An unregulated "parallel" banking system undermines the legitimacy and integrity of the entire financial sector, hindering the effective implementation of consistent fiscal and monetary policies.
Finally, the government must step up its efforts to tackle the enormous bad debt overhang that is currently preventing the financial system from regaining equilibrium. b Financial Sector Deregulation (#3 above)
The promotion of nationwide, sustainable microfinance should be the government's top priority for improving the quantity, quality, and accessibility of formal financial services in Vietnam.
Despite Vietnam's rapid economic growth over the last two decades, most families and businesses still lack access to basic financial services such as savings, credit, and
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Most microfinance efforts in Vietnam have primarily been government or donor-sponsored initiatives aimed at poverty alleviation, as well as NGO-led projects that struggle to achieve nationwide scalability To enhance its microfinance landscape, Vietnam should consider adopting successful models from other countries, such as Bank Rakyat Indonesia, as a source of inspiration.
The key advancement in Vietnam's financial sector liberalization is the total removal of interest rate caps and direct credit controls This change will enable savings and lending rates to align with the true market value of capital, empowering formal financial institutions to efficiently gather public funds and direct this capital toward the most profitable investment opportunities.
The government must approach capital account liberalization with caution, as it represents the final step in financial liberalization In the absence of fully developed market institutions, unrestricted capital flows can lead to significant risks A repeat of capital flight, similar to the 1997-98 financial crisis, could severely hinder Vietnam's industrialization and modernization efforts.
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CONCLUSION………………………………………………… …42 IV REFERENCES
Vietnam's economy is increasingly integrated with the global market, aligning with global economic trends Consequently, it is essential to establish a robust, stable, and developed financial market through appropriate measures.
Today's financial markets are highly globalized and integrated, presenting regulatory challenges that transcend national boundaries Effective monitoring mechanisms must be unique and internationally aligned, considering the political, economic, and social contexts of each country This approach is essential for safeguarding domestic financial markets while promoting liberalization By understanding these financial tools, we, as Vietnamese citizens, can ensure we do not fall behind in the global landscape.
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11 http://en.wikipedia.org/wiki/Repurchase_agreement
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13 http://www.msb.com.vn/g-tin-tuc-su-kien/b-tai-chinh-ngan-hang/cac-ngan-hang-
1 11ay-manh-cho-vay-tieu-dung/
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16 https://giaodichtaichinh.com/blog/he-thong-tai-chinh.html#:~:text=Ch%E1%BB% A9c%20n%C4%83ng%20c%E1%BB%A7a%20h%E1%BB%87%20th%E1%BB %91ng,c
%E1%BB%A7a%20c%C3%A1c%20ngu%E1%BB%93n%20t%C3%A0i %20ch%C3%ADnh.
17 https://en.wikipedia.org/wiki/Financial_market_participants
18 https://www.vapulus.com/en/participants-in-financial-market/
19 https://www.mbaknol.com/financial-management/major-participants-and-players-in-finan cial-markets/
20 https://en.wikipedia.org/wiki/United_States_Treasury_security#Treasury_bill
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