INTRODUCTION
In today's era of global economic integration, financial systems are crucial for facilitating the flow of funds from surplus to deficit areas, while also 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 countries.
Finance involves the distribution of social wealth through currency, shaped by the production, management, and utilization of money Economic and social changes influence the financial system, particularly in a subsidized economy where government oversight dictates economic activities In this context, businesses that incur losses are compensated, leading to a financial system primarily centered around state finance, which encompasses insurance, credit financing, and the state budget As economic relations evolve, new ownership forms and financial relationships emerge, adapting to the market economy amid globalization Vietnam's financial system reflects these transformations and aligns with the international financial framework.
In the modern specialized economy, a well-structured and efficient financial system is essential for sustainable growth Many countries prioritize the protection of investors' and depositors' interests within this evolving financial landscape.
The part below will give a more specific view of Vietnam’s financial system.
MAIN CONTENT
Participants in Financial System
Market participants can operate on either the supply side, where they possess surplus funds available for investment, or the demand side, which requires resources for daily operations, bridge financing, or venture capital funding.
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 This market features a vast array of participants and players, 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.
Corporates are primarily net borrowers, seeking funds for various projects by issuing different types of securities tailored to investors' risk preferences Occasionally, they also invest surplus funds similarly to individuals The capital raised through these securities is utilized to acquire real assets, such as plants and machinery, which generate income This income is then distributed to investors in the form of interest or dividends, reflecting the returns on their investments.
Governments often borrow funds to address budget deficits and manage liquidity, utilizing both long-term loans and short-term financing in the money market They initially invest in public sector enterprises by acquiring 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 on behalf of the government Meanwhile, SEBI focuses on regulating and supervising the capital market, having established numerous guidelines and rules aimed at investor protection and market control Additionally, a range of legislation and government departments further regulate financial system operations.
Market intermediaries, also known as financial intermediaries or merchant 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 Additionally, to engage in the secondary market, investors typically transact through sharebrokers, while mutual funds and investment companies aggregate investors' savings to explore various investment options.
○ Registrar and Share Transfer Agents
Market intermediaries play a crucial role in the financial ecosystem by offering a variety of services to investors and providing valuable expertise to securities issuers They are actively engaged in the financial market, catering particularly to small investors who depend on their guidance To maintain investor trust, these intermediaries must act rationally and uphold their integrity and reputation By honing their skills in pricing new issues and effectively marketing them to investors, they enhance the efficiency of corporate fundraising efforts.
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:
- 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 created on the primary market Firms sell (float) new stocks and bonds to the public for the first time in this market.
A primary market is exemplified by an initial public offering or IPO.
The secondary market, often known as the "stock market," encompasses major exchanges like the New York Stock Exchange (NYSE) and Nasdaq, where equities are bought and sold Unlike the primary market, the secondary market allows investors to trade securities directly with one another, facilitating liquidity and price discovery in the financial system.
● 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 types based on credit maturity: the money market, which involves trading financial instruments with maturities of less than one year, and the capital market, where instruments with maturities exceeding one year are traded In developed economies, money markets are often managed by banks and primarily facilitate direct stock market transactions to meet medium and long-term capital requirements.
In Vietnam, commercial banks are the primary source of short, medium, and long-term capital, highlighting their unique role in the financial landscape, as other markets remain relatively small Capital mobilization and allocation predominantly occur through financial intermediaries, with commercial banks being essential to this process.
Vietnam's financial landscape includes various markets, such as a bill market, bond market, stock market, and a market for bank loans, with each catering to different credit forms Currently, the primary market for bank loans remains the most dominant segment in this diverse financial ecosystem.
Vietnam features a primary and secondary market for securities, with the primary market serving as the venue for the original issuance of securities, often underwritten by securities and consulting firms In the secondary market, a diverse range of financial instruments is 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.
Deposit-taking institutions are the largest entities in financial markets, primarily responsible for accepting deposits from individuals and organizations They utilize these deposits to generate capital, which is then employed for lending in various forms or investing in securities.
Institutions receiving deposits in Vietnam include:
+ Commercial bank (Techcombank, ) + 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 or lend them to ensure that financial instruments mature in alignment with their contractual obligations, including essential services like property 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 invest long-term funds in 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 maturity, high liquidity, and low risk Common instruments in this market include treasury bills, commercial paper, and certificates of deposits, which facilitate the movement of capital in the financial market.
4.1.1 Treasury bills/T-bills a Payment term
Treasury bills have a maturity of about 1 year or less (usually with maturities of 3, 6, and
Treasury bills are short-term government securities sold weekly through auctions, with maturities of 28 days (1 month), 91 days (3 months), 182 days (6 months), and 364 days (1 year) These regularly issued T-bills provide investors with a secure and liquid investment option.
Treasury bills are issued in batches by the State Bank through a bidding process, where the State Bank serves as the organizing agency for selling these bills in open market auctions As the representative of the Ministry of Finance, the State Bank is responsible for the issuance and payment of bills upon maturity, as well as the organization and management of the treasury bill bidding process Additionally, the State Bank of Vietnam oversees and regulates the secondary market for 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 that do not pay interest before maturity Instead, they are sold at a price lower than their par value Upon maturity, investors receive the full par value, with the difference between the purchase price and the par value representing the investor's profit, known as Yield to Maturity.
The discount rate is calculated by the formula:
Discounted Yield (%) = (Price – Par value)/Sales Price * (360/Number of days to maturity)* 100%
In Vietnam, the collection and payment process is conducted in Vietnamese Dong, with a minimum face value set at 1,000,000 VND (one million VND) Higher denominations are specified by regulations from the Inter-Ministry of State Banks and Finance, which are announced in the issuance notice.
● T-bills are issued in the form of book-keeping and bill certificates.
+ For the form of bookkeeping: Guided and managed by the State Bank.
+ For the form of bill certificates: The State Bank prints according to the form 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 will be determined by the interest rates set for bidding The allocation of these Treasury bills will follow an ascending order based on the interest bids submitted, all within the established interest rate parameters.
At the maximum bidding interest rate within the specified range, when the total bids exceed the anticipated volume of bills to be mobilized, the allocation of winning bills will be proportionately distributed based on the volume of bids submitted at that interest rate.
+ 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 select volume of Treasury bills for direct retail sale to the public, in addition to those issued through the State Bank.
Treasury bills issued directly by the Treasury system require 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 consultation with the State Bank, reflecting current market interest rates.
Thus, we can see that Treasury bills are not only to cover the state budget deficit but also an important tool for the State bank to conduct 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 that serves as a demand for payment from a creditor, primarily utilized in commercial transactions In contrast, a promissory note, issued by the buyer, can be employed in both commercial and civil contexts Understanding the distinct characteristics 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.
Commercial paper is a negotiable instrument that can be easily transferred between beneficiaries through endorsement, allowing it to be converted into cash when presented to a bank for discounting or pledging While commercial paper offers advantages such as liquidity and flexibility, it also comes with potential disadvantages that investors should consider.
Advantages of commercial paper when applied in practice:
Some of the main economic benefits of commercial paper can be mentioned:
Firstly, thanks to its circulating nature, commercial paper has become a credit circulation tool that replaces cash, saves cash, and contributes to currency stability.
Commercial paper serves as a legal foundation in credit-purchase relationships, safeguarding the interests of parties involved in commercial credit and resolving debt issues between businesses Additionally, it acts as a secure asset for banks when accepting discounts or mortgage loans.
Fourth, commercial paper supplements goods for the open market, creating conditions for the central bank to perform well in regulating money in circulation.
In situations where a borrower secures a bank loan through a promissory note, the bank has the option to expedite debt collection by transferring the promissory note to another bank This process allows the bank to sell the debt, effectively securitizing the loan for quicker recovery of funds.
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:
One significant drawback of commercial paper is its abstract nature, which can enable two businesses to collude and produce a blank commercial paper—one that does not originate from a legitimate credit purchase relationship This practice undermines the fundamental guarantee of commercial paper, which relies on commodity credit, ultimately resulting in bank-issued loans lacking a solid guarantee.
One significant drawback of trade credit is the challenge of scaling up both the volume and duration of credit transactions when there is a high demand for credit This limitation can hinder businesses from effectively managing their buying and selling processes over extended periods.
The third disadvantage,this credit purchase, and sale relationship can only arise between reputable businesses, having regular transactions with each other.
The planned target of Vietnam’s Financial System
Between 2022 and 2030, Vietnam's financial system must evolve in alignment with new global financial trends while adhering to the key policies set by the Party and State To ensure that Vietnam's financial system keeps pace with global standards, specific objectives must 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 significantly contribute to the growth of credit institutions, with projections indicating an increase in service fee collection rates from approximately 20% in 2020 to around 30-35% by 2025.
Bad debt levels are currently managed effectively, maintaining a rate of 2% to 3% The banking sector is expected to see active mergers and acquisitions from 2021 to 2025, leading to a reduction in the number of credit institutions while enhancing their operational depth with a more capital-efficient growth model Additionally, it is crucial for the Vietnamese financial system to pursue international integration.
Vietnam's economy and financial sector are poised for modernization and enhanced transparency in line with international standards due to integration efforts The commitments made under new-generation Free Trade Agreements (FTAs) will lead to greater liberalization of Vietnam's financial services.
The integration of banks, insurance companies, securities, and other financial institutions fosters a cohesive ecosystem that transcends geographical limitations This 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, with the country leading in equity proportions among market indices and showing potential for emergence as a developing market by 2025 The quality of corporate governance is nearing the ASEAN-6 average, and there are significant opportunities for Ho Chi Minh City to evolve into a global finance and technology hub Additionally, Vietnam's successful tenure as Chair of the ASEAN Capital Market Forum (ACMF) in 2020 has bolstered the region's adaptive capacity, risk management, and readiness to navigate financial challenges on an international scale.
5.1.3 The Vietnamese financial system should bemore sustainable
Commercial banks have adopted green credit policies that focus on prioritizing industries with in-depth investments and advanced technologies Currently, three banks have implemented the Environmental and Social Responsibility Management System (ESMS), while 17 banks have established processes to assess environmental and social risks in their internal regulations and risk assessments These measures ensure that environmental and social considerations are integral to 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 been utilized to attract foreign investors through its ESG criteria The adoption of ESG principles in stock selection has gained significant traction, particularly since the second quarter of 2020.
Recommendations
The Vietnamese financial sector requires reform to enhance its efficiency in capital allocation and to support stable economic growth A comprehensive approach involving liberalization, deregulation, and stabilization is essential for effective financial sector reform To expedite this process and address existing imbalances, the government's priorities should be realigned However, advancing financial sector liberalization without adequate governance and supervision poses significant risks, as evidenced 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 for the government to significantly strengthen its ability to protect public interests through improved financial regulation and supervision.
To enhance the effectiveness of the banking system, reforming the State Bank of Vietnam (SBV) is essential This involves consolidating provincial branches into regional ones and establishing a new banking supervisory agency However, simply creating this new agency will not guarantee improved performance; it must be supported by the implementation of pertinent financial sector regulations and robust off-site and on-site monitoring mechanisms.
To ensure 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 is crucial, as many Vietnamese banks are relatively small, making it difficult to achieve the economies of scale and scope necessary to enhance their competitiveness, especially against foreign banks.
The government must regulate and supervise policy banks, particularly the Vietnam Development Bank (VDB), along with quasi-banking institutions managed by sectoral ministries and local governments This oversight should be conducted by the State Bank of Vietnam (SBV) or a new regulatory authority, similar to other banking entities The existence of a "parallel" banking system lacking proper prudential supervision undermines the legitimacy and integrity of the entire financial sector, hindering the 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 significant economic growth in Vietnam over the past twenty years, a large portion of families and businesses remain unbanked, lacking essential financial services like savings, credit, and payment options To unlock the country's full potential, it is crucial to extend these financial services to this unbanked majority.
Most microfinance efforts in Vietnam have primarily been government or donor-funded initiatives aimed at reducing poverty, along with NGO-led pilot projects that face challenges in scaling nationwide To enhance its microfinance landscape, Vietnam could draw inspiration from successful models in other countries, such as Bank Rakyat Indonesia.
To enhance Vietnam's financial sector liberalization, it is crucial to eliminate interest rate caps and direct credit This change will enable savings and lending rates to mirror the true market value of capital, empowering formal financial institutions to efficiently attract public funds and allocate them to the most profitable investments.
The government must approach capital account liberalization cautiously, as it represents the final stage of financial liberalization In the absence of fully developed market institutions, unrestricted capital movements can lead to significant risks Historical instances, such as the capital flight during the 1997-98 financial crisis, highlight the potential for severe negative impacts on Vietnam's industrialization and modernization efforts.
CONCLUSION
Vietnam's economy is increasingly integrated into the global market, reflecting global economic trends Consequently, it is essential to establish a robust, stable, and developed financial market by implementing appropriate measures.
The global financial markets today are highly integrated, presenting regulatory challenges that transcend national boundaries Effective monitoring mechanisms must be unique and internationally focused, considering the diverse 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 in Vietnam can ensure we do not fall behind in the global landscape.