Vietnam’s central bank governor Nguyen Van Giau needs his wits about him as he deals with a flood of applications for banking licences. He is currently facing a record 46 submissions, of which 22 are domestic bank applications and 24 are from foreign entities. His affable nature is being put to the test by requests from organisations as diverse as Vietnam Seafood Corporation, a state-owned enterprise, and provinces such as Binh Duong, which has a population of less than one million.

Seafood is the fourth largest Vietnamese export by value and the Vietnam Seafood Corporation is an important profit centre for the government, but how such diversification might serve either its business model or the country’s developing banking market is not clear.


The attraction for applicants is the perceived easy pickings in banking, as the economy booms, credit grows at more than 40% a year and there are insufficient motorcycles in the shops to satisfy demand. But not everyone can have a licence so how will Mr Giau resist all these demands?

Powerful interests

Mr Giau’s resistance to political pressure from these new powerful interests in Vietnam may be aided by his close relationship with prime minister Nguyen Tan Dung, the main economic policy maker, who was himself governor of the State Bank of Vietnam in the late 1990s and also happens to be from southern Vietnam, like Mr Giau. “Mr Giau certainly enjoys the prime minister’s ear,” notes the CEO of a foreign bank.

Under Vietnam’s World Trade Organization (WTO) obligations – it became a member in November 2006 – the country is progressively loosening the restrictions on foreign banks so that by 2010 no distinction will be drawn between them and their local competitors. All 39 foreign banks present in Vietnam have so far been niche players, hemmed in by a series of restrictions. But in April this year, the central bank gave five foreign banks that already had a presence – out of 24 applications – permission to complete the application process to incorporate locally. This would mean no restrictions on the number of branches they could open, among other things.

Australian bank ANZ is one of those banks, and it hopes to add 10 branches in 2008 to its current two, assuming its licence comes through by the end of this year. However, ANZ Vietnam’s country head, Thuy Dam, fears that constraints may be placed on the number of branches foreign banks are allowed to open, as state-owned enterprises use their political muscle to stem too much competition for their new banks. The five large state-owned commercial banks, which have a 60% market share, may also use their influence, say other bankers.

The governor is amused at the suggestion and adamant that this will not be the case: “I will firmly say no to pressure on the central bank to limit the branches of foreign banks to create advantages for state-owned banks.” He reaffirms the central bank’s commitment to opening up its financial sector in accordance with WTO accession.

Modernisation proposals

Mr Giau, who took office in August, is facing a brimming in-box of reform proposals aimed at modernising Vietnam’s financial system. The State Bank of Vietnam is currently drafting or amending four laws associated with the central bank, credit institutions, banking supervision and deposit insurance. These laws, which are crucial for the country to be able to deal with the huge interest and change in its financial sector, will be submitted to the government and then to the national assembly, a form of parliament, in 2008-09.

“Issues that the authorities are confronted with include the role of exchange rate policy in the face of large capital inflows, the role of monetary policy and how best to conduct it, how to safeguard financial sector stability (rapid credit growth is a concern here) and, at a more general level, how best to interact and communicate with financial markets to achieve their policy objectives,” says Ben Bingham, the IMF’s senior resident representative in Vietnam.

Mr Giau is as ideally placed as anyone in the country to deal with the challenges due to his varied background. He knows about commercial banking, having worked at the Bank for Agriculture and Rural Development for more than 20 years, rising to CEO in the latter half of the 1990s. He is familiar with issues to do with monetary policy and banking supervision following on from his subsequent five years as deputy governor of the central bank. And his previous job as secretary of the Provincial Committee of the Party for Ninh Thuan Province and chairman of the Ninh Thuan Province’s People’s Council, gives him political wisdom and influence, an imperative in a country that, according to the ruling Communist Party of Vietnam, is run as a “market economy with a socialist orientation”.

His appointment to head the State Bank of Vietnam may mean that co-operation on monetary policy between the different arms of government will improve – bankers say it has been lacking and that, additionally, some monetary policy instruments are in the purview of the ministry of finance. Mr Giau points out that there is a monetary and financial policy council that advises the three entities in charge – the central bank, the ministry of finance and the ministry of planning and investment – and that co-operation has been going well in the past eight months.

Interest rates and inflation

There is, however, the charged topic of interest rates, one that admittedly also affects developed country monetary authorities such as the European Central Bank, whose tight monetary stance is less than popular with a number of eurozone countries. However, for the growth-obsessed Vietnamese government – well aware that its GDP growth of more than 8% a year in the past two years and forecast at a similar rate this year does not match that of neighbour China – any increase in interest rates is anathema, even though the gains from growth are being eroded by inflation, which in the first 10 months of the year hit 8.1%.

Mr Giau says that the State Bank of Vietnam’s target for 2007 is to have inflation come in at less than 8.5%, although he admits that if the price of oil continues to climb then the inflation rate could be higher. Either way, raising interest rates looks like an evident move – along with action already taken to raise reserve requirements for banks and issue bonds to soak up liquidity.

“In my opinion, the raising of interest rates is unlikely to happen for the year 2008. The basic guided interest rate is 8.25% and, although it is difficult to foresee the future, if there are going to be adjustments to it, it would not be to a large extent,” says Mr Giau.

Central bank independence is, obviously, a work in progress.

Booming credit growth and the build up of non-performing loans (NPLs) is another major issue confronting Mr Giau. Some foreign bankers say that, under international accounting rules, official statistics showing NPLs of only 2.1% in the financial system in the year to date would more likely be as high as 25%.

Mr Giau admits the rate “may be higher but I do not think significantly higher”. He is, however, on the case. On the day of the interview, he told the board of the Bank for Investment and Development of Vietnam to monitor its credit quality carefully, an admonition he has been repeating to all banks. “I think that, with this warning, banks will be able to make the necessary adjustments,” he says.

He has also told the banks to monitor liquidity closely due to market conditions, strengthen internal governance and improve their technology to introduce cashless payments as he seeks to transform the financial system.

That system does not need a plethora of new banks. The central bank has been stalling on unwanted applications, say bankers, but it now needs to put its foot down. n

Karina Robinson is the senior editor of The Banker. This article has been adapted from her monthly column.



2007 The State Bank of Vietnam, Governor

2005 Ninh Thuan Province, Party secretary

1996 Agribank, General director