VIETNAM NATIONAL UNIVERSITY, HANOI
S C H O O L O F BUSINESS
- H S B -
1 tA f M K S H ii- m m i s t t
PHAM T H A NH BINH
VIETNAM LOCAL BANKS IN POST-WTO PERIOD
A STUDY ON STRENGTHS. WEAKNESSES. OPPORTUNITIES. AND CHALLENGES
M ajor: Business Administration
C ode: 60 34 05
M A STER OF BU SINESS A D M IN ISTRA T ION THESIS
Supervisor: Dr. VU XU AN QUANG
Hanoi - Jan 201(1
ĐẠI H Ọ C Q U Ô C GIA HÀ NỎI
I TRUNG TÁM THÔNC- Ti,\ H Ư V IỆN
TABLE OF CONTENT
AC KNOW LEDG EM ENTS
ABSTRACT
TÓM TẤ T
TABLE OF CONTENT
LIST OF CHART,TABLE, AND FIGURE
LIST OF ABBREVIATIONS
INTRODUCTION
1 Background
2 Problem discussion
3 The objective of the thesis
4 The aims of the thesis
5 Research question
6 Scope of work
Methodology
8 Data source and processing
9 Significance
10 Limitation
1 I Expected finding
12 Publication plan
13 Follow-up potential
14 Thesis structure
CHAPTER 1: LITERATURE REVIEW
1.1 Vietnam and the World Trade Organization
1.1.1 Vietnam and the need to be a WTO's member
1.1.2 WTO accessing process of Vietnam
1.2 Vietnam commitment in accession to the WTO
1.2.1 Report of working party on accession of Vietnam
1.2.2 Commitment on goods
1.2.3 Commitment on services
1.3 Opening market and domestic banking sector
1.3.1 Vietnam banking industry and principal of the WTO
1.3.2
Opening markets and domestic banking sectors worldwide
1.3.3
China domestic banks in opening market
1.3.3.1
Market opening commitment to joint WTO of China in banking sector
1.3.3.2
China domestic banks in post WTO period
1.3.4 Vietnam domestic banks in opening market
1.3.4.1
Market opening commitment to joint WTO of Vietnam in banking
sector
1.3.4.2 Vietnam domestic banks frame work’s analysis
CHAPTER 2: M ETH OD O L O G Y
2 . 1
Research purpose
2 2
Research approach and strategy
2 2 . 1
Research approach
2 .2 . 2
Research strategy
2.3 Research design
2.3.1
Data collection
2.3.2 Data analysis
2.3.3 Validity
CHAPTER 3: STRENGTHS, WEAKNESSES, OPPORTUNITIESS AND
CHALLENGES OF DOMESTIC BANK
3.1
Banking sector in Vietnam economy
3.1.1
Overview of banking sector in Vietnam
3.1.2
Businesses in banking sectors of Vietnam
3.2
Vietnam domestic banks in post WTO period
3.2.1
Preparation for the race
3.2.2 The strengths of Vietnam domestic banks
3.2.2.1
Market share
3.2.2.2
Reputation in domestic market
3.2.2.3 Business network
3.2.2.4 Domestic market experience
3.2.2.5
Social culture understanding
3.2.3
The weaknesses of Vietnam domestic banks
3.2.3.1 Small business scale
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 quality
.
51
3.2 3.4 Human resource 53
3.2 3.5 Technology infrastructure 55
3.2 3.6 Risk management 58
3.2 4 Opportunities for Vietnam domestic banks 59
3.24.1 Market expansion 59
3 4 Motivation to improve banks' capabilities under high pressure of market ^
opening and competition
3.2 5 Challenges for Vietnam domestic banks 6 8
3.2 5.1 Opening market and tougher competition 6 8
3.2 5.2 The world economic integration impact 70
3.2 5.3 Domestic economic and monetary policies' impact 70
3.2 5.4 Applying strict regulation of the World T rade Organization 73
3.3 Conclusions
.
.
73
3.3 1 Vietnam domestic banks in general
.
73
3.32 The big four state own banks 76
3.3 3 The small and newly established joint stock banks 76
3.3 4 The strong and active joint stock banks
.
.
78
3.3 5 Comparison of the three Vietnam domestic banks groups
79
3.4 Recommendation strategies for Vietnam domestic banks 81
^ ^ I The big four: Dominating market by exploit opportunities to improve
internal capabilities
g|
^ The strong and active banks group: Business growlh with
strengths g2
„ The small and newly established banks group: Reducing weakness and
M&A option 8 3
CONCLUSIONS 84
References
Appendix 1: List of interviewee
Appendix 2: Interview guide
\ in
LIST OF TABLE OF TABLE, CHART, AND FIGURE
Chart 1.1: Share of foreign banks in Eastern European countries in 2005 11
Chart 3.1 : GDP contribution of banking sector in services area 32
Chart 3.2: Number of banks and in Vietnam 33
Chart 3.3: Understanding of banks about WTO 34
Chart 3.4: Share in deposit and lending services in banking market 35
Chart 3.5: Vietnam domestic banks' opinion about market share 36
Chart 3.6: Evaluation of market share of Vietnam domestic banks 37
Chart 3.7: Vietnam domestic banks' opinion about banks' reputation 38
Chart 3.8: Evaluation of market reputation of Vietnam domestic banks 39
Chart 3.9: Number of bank's branch by the end o f 2007 40
Chart 3.10: Evaluation of business network of Vietnam domestic banks 41
Chart 3.11 : Evaluation of domestic market experience of Vietnam domestic banks 42
Chart 3.12: Vietnam domestic banks' opinion about culture understanding 43
Chart 3.13: Evaluation of culture understanding o f Vietnam domestic banks 44
Chart 3.14: Evaluation of financial capabilities of Vietnam domestic banks 47
Chart 3.15: Return on equity of Vietnam domestic banks in 2007 49
Chart 3.16: Evaluation of business administration management and productivities of
Vietnam domestic banks
Chart 3.17: Evaluation of services’ quantity and quality of Vietnam domestic banks 52
Chart 3.18: Evaluation of human resource o f Vietnam domestic banks 53
Chart 3.19: Evaluation of technology infrastructure of Vietnam domestic banks 55
Chart 3.20: Evaluation of risk management of Vietnam domestic banks 58
Chart 3.21 : Vietnam domestic banks' opinion about opportunity of market ^
expansion
Chart 3.22: Evaluation of market expansion opportunity of Vietnam domestic banks 60
Chart 3.23: Vietnam domestic banks' opinion about opportunity of finance ^
improvement
Chart 3.24: Chatter capital of banks in recent year 62
Chart 3.25: Evaluation of finance improvement opportunity of Vietnam domestic
banks
Chart 3.26: Evaluation of business administration and productivities improvement
opportunity of Vietnam domestic banks
Chart 3.27: Evaluation of services' quantity and quality improvement opportunity o f ^
Vietnam domestic banks
Chart 3.28: Evaluation of technology infrastructure improvement opportunity of
Vietnam domestic banks
IX
67
68
69
70
70
72
73
75
76
77
78
79
8
9
18
22
31
45
46
48
51
54
63
19
29
57
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
impact
Evaluation of challenges of world economic impact for Vietnam domestic
banks
Evaluation ofchallenges of domestic economic and monetary policies impact
for Vietnam domestic kinks
Evaluation of challenges of applying WTO regulation for Vietnam domestic
banks
Strengths, weaknesses, opportunities and challenges of Vietnam domestic
banks
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 banks
Strengths, 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
x
LIST OF ABBREVIATIONS
WTO
World Trade Organization
GATT
General Agreement on Tariffs and Trade
GATS
General Agreement on Trade in Services
TRIPs
Trade-related Aspects of Intellectual Property Rights
HSBC
ITong Kong and Shanghai Banking Corporation
IFC
International Finance Corporation
ATM
Automatic Teller Machine
GDP
Gross domestic production
XI
INTRODUCTION
This first part of the thesis intends to introduce the area of the research. A
consolidate background information regarding the World Trade Organization
(WTO) and Vietnam banking sector in connection with this global institute will
be provided. Continuously
,
the following parts including problem discussion,
objectives, and aims, initial research questions
,
scope of work, expected
significance along with limitations and final outline of the thesis will 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 of 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 of Silk Road. In 20th century,
with the booming of 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 of 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 of the key
important results of the Uruguay Round of 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 of
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 of the World Trade
Organization. Being a member of 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 of globalization on Vietnam
domestic banks after the country becoming an official member of the World
Trade Organization.
To successfully integrating in the world flow of 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 of 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 of systematic proof on strengths and weaknesses of 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 of recognizing and
exploiting their strengths point and weaknesses to compete in the world market.
The objectives of (he thesis
The objectives of this thesis are. firstly, to figure out the strengths, weaknesses .
opportunities and challenges of 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 of
this world most important institution. All agreements and commitments of
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 of the WTO over the world economy, the first aim of this
thesis is to study about the nature of 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 of Vietnam's business
community in banking sector, the main target of 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 of these domestic banks also high lined in detail.
Along with the study's aims, all finding results of 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 of the research, the following questions have been
developed and expected to be systematically and sufficiently answered in detail:
• What are commitments that Vietnam has made in order to be a
member of the WTO. in particularly, banking sector?
• What are the opportunities and challenges of banking businesses are
now facing or will be faced when Vietnam has access to WTO?
• What are the strengths and weaknesses of domestic banks, under the
WTO commitments of Vietnam, in the market?
• How can these banks can capture the opportunities and reduce the
challenges in the integrated playground by using their strengths and
weaknesses?
Scope of w ork
For the purpose and requirement of an MBA graduate thesis, the research only
focuses in Vietnam domestic banking system, which has been impacted greatly
by the commitments Vietnam in the negotiation process currently and in the near
future.
Methodology
With the target of providing exact and efficient information and analysis, the
research methodology of the thesis is the combination of both qualitative and
quantitative.
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 of interview
responses.
Research question
4
Data source and processing
Provided data for the research could he the result of negotiation rounds of
Vietnam under access to WTO. Statistic economic data of 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 of the thesis are to conduct a systematic research
on which opportunities and challenges that Vietnam banking sectors, in the
global market context of WTO, are facing. The study is expected to provide the
independent findings of Vietnam enterprise’s strengths and weaknesses of 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 of a MBA graduate thesis, time could be one of the limitations
that will affect the results. Moreover, due to the small scope of work and the
ability to approach data sources also strongly considered in the process of
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 of Vietnam domestic
banks in post WTO period are expected to figure out and evaluation.
The key findings of recommendation on strategies of how these banks can be
benefitted from opportunities and overcome challenges by exploiting the
strengths and minimizing the weaknesses, are also in the need of presenting.
Publication plan
The result of the study should be one of 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 of 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 of WTO on businesses in developing countries - the case of Vietnam
domestic businesses and in comparison w ith Asia developing nations.
Thesis structure
The MBA graduation thesis is divided into three main parts, including
introduction, content and the conclusions parts.
In introduction section, the necessity of the research, researcher's objectives and
aims, research questions, scope of work, data sources and processing,
methodology, the study's significance, limitation, publication plan and potential
direction for follow - up with further study will be presented.
The main content of the thesis with literature review, options of 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 of the second part in the study.
6
CHAPTER I: LITERATURE REVIEW
Following up with the Introduction part in which provides the quick glance of
the thesis, in this chapter, literature related to the study will be reviewed. All
available theory, information, and document that are relevant to the thesis will
be presented.
1.1 Vietnam and the World Trade Organization
/. /. 1 Vietnam and the need to be a WTO's member
The WTO. one of 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 of 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 of 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 of this
process is talking. The main topics of all negotiation rounds of Vietnam in the
process of being a member are trade barriers with other countries and territories.
The most important part of this process is Vietnam's agreements, which is
negotiated, agreed, and signed with other nations. These legal documents
provide a system of regulations for international commerce, especially in the
time of globalization and integration. The ultimate goals of them are to support
producers of goods and services, import and export enterprises of Vietnam to
conduct their businesses but still allowing Vietnamese government to meet its
social and environmental objectives.
The main purposes of 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
Vietnam'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 of 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 of the nation and global partners by some neutral
procedure based on an agreed legal foundation.
/. 1.2 WTO accessing process of Vietnam
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 of Vietnam in accession of the W FO
Jun, 1994
Vietnam become an official observer of CA
77’
January, 1995
The WTO received access application of Vietnam
August, 1996
Vietnam submilled first document of International Trade
Policies
From July. 1997 to
Negotiation Rounds
July 2006
7th November, 2006
The WTO approved Vietnam as its member
11th January.2007
Vietnam became the official I5(/h member of the WTO
(Source: National Commission of International Economic Cooperation)
8
Negotiation phases were the most time-consuming parts of 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 of 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 of America and Euro Union, the two biggest partners of not
only the Vietnam but also the world.
1.2 Vietnam commitment in accession to the WTO
The package of Vietnam's accession to the World Trade Organization
documents consists of three main parts including the working party report.
Vietnam's commitments on goods and Vietnam's commitments on services.
1.2.1 Report o f working party on the ac cession of Vietnam
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 of areas were stated in detail.
Table 1.2: Key content of working party commitment of Vietnam
Foreign exchange
Vietnam will abide by IMF and WTO rule
Privatization of SOE
Commitments of transparent process
Trading rights
Foreign firms could be involved (under conditions)
Quantities restrictions
Quota, bans and other restrictions will be removed
WTO agreement
Comply with WTO rules
Export restrictions
Vietnam keeps control of export in important products
9
Standard
Applied technical harriers and sanitary regulations
Government procedure
Consider after joining the WTO
Intellectual property
Applied without transaction period
(Source: Vietnam commitments to joint WTO document)
1.2.2 Commitments on goods
Vietnam's commitments on goods are the 560-page list for schedule of 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 of 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 of up
to 3.961.5 billion Vietnamese dong annually in addition to the usual allowance
for developing countries of up to 10% of the domestic agricultural products.
1.2.3 Commitments on services
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 of foreign ownerships. Vietnam has made
commitments on ranges of serv ices. In some particularly case. Vietnam reserves
the rights to limit foreign ownership of serv ice companies operating in Vietnam,
as in some telecommunications services, the eventually limits can be 49% or
65% depending on type of 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.
10
As normal is this sector, the effect of 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
1.3.1 Vietnam banking industry and principles of the WTO
Vietnam agreements to join the WTO with other members are lengthy and
complex since they are legal document in which covers a wide range of
activities dealing with agriculture, textiles and clothing, banking,
telecommunications, government purchases, industrial standards and products
safety, food sanitation regulations, intellectual property and other issues in
international trade.
Consequently, a number of 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 of Vietnam banking sector based on the important of five
principles of the pre-1994 GATT and current WTO including
nondiscrimination, free trade based on reciprocity gradually and by negotiation,
binding and transparency, fair competition and encouraging development and
economic reform.
1.3.1.1 Trade without discrimination
Nondiscrimination regulation of the WTO is representative by the two
important components: the Most-Favored-Nation (MFN) rule and the National-
Treatment (NT) principle. Both of those regulate the main WTO rules on goods,
sen ices and intellectual property.
The MNI rule requires that a product made in one member nation of 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 of one nation must be applied
automatically without any conditions to in any other WTO member countries.
National treatment principle regulates the equality of 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 of indirect taxation and other
conditions.
1.3.1.2 Free trade gradually though negotiation
Doing international trade, one of the most concerned issue are trade barriers
including customs duties (tariffs) and other measures such as quotas or import
bans that restrict the volume of imported goods or service of 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 of foreign banks.
1.3.1.3 Predictability through transparency and binding
Transparency is a basic pillar of 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 of Vietnam can be changed, but only after
negotiation round with its trading partners, in which could mean compensating
them for loss of trade.
Sometime, promising not to raise trade barriers can be as important as lowering
one. because the promise gives businesses a clearer view of their future
opportunities. By establish a concrete transparency and commitment in trade
policies, the system of 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 of protection for domestic market. That means, accurately, a
system of rules dedicated to open, fair and undistorted competition.
The rules of trade without discrimination, including MFN and NT, are designed
to secure fair conditions of trade, preventing completion out of dumping or
subsidies, which is Vietnam business has faced a lot of 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 of WTO members are now developing nations and in transition to
market economies. One of important missions of 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
13
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 of 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 of 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 of market opening in banking sector of
every country are clearly recognized.
Competition pressure is the easiest to recognized impact of domestic banking
sector in every country when opening their market. In Eastern European, from
the year of opening market of 19Q4 to 19°9. foreigners have dominated the
domestic banking sector of these nations.
Chart 1.1: Share of foreign banks in Eastern European countries in 2005
i o o h
9 O H
son
7 O H
6 Q H
5 OH
40H
3 O H
2 OH
lOH
OH
20«
6
1096
I O H
1 1
,•
O r
' ('*
* 5 *
4 791
*49 H
t | §
¿¡Ms,
6 5 H
b y
%
90=
*
9 0
*
9 0 *
fc.*-
w rJ
y
•-fov
; ;
5 39
5 19
¿ I I I
■
yjM
I S *
itfi*1.
m
<C*
>0 ^ ^
a L o c a l b a n ks i l F o re ig n b a n k s
(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 of Development Research Group of World Bank in 1998. developing
nations in Latin America as Argentina, Costa Rica. Jamaica or Venezuela, the
14
gap between net interest income of foreign banks and domestic banks was
about at average of 10% .
Nevertheless, besides challenges of opening market, an important feature in
associated with foreign banks entry is that it introduces new financial sen ices
and advanced management skill, which existing domestic banks lacks. In a
working paper named “ The effects of foreign banks entry on the Thailand
banking market" of Hidenobu Okuda, University Hitosubashi University, the
study based on 17 Thailand commercial banks after its government opening
market shows a strong improvement of sen ice development and management
skills in the banking sector. However, those improvements also leaded to an
increasing in overhead expenses and decline in profits of those banks.
In a recent study of 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 of 1999. the domestic banks system
of this nation still well competes with foreign banks. The asset of 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 of Indonesia has sold to foreign investors as controlling
shareholders. Consequently, bv the end of 2004. total asset of the nine banks
with foreign majority has reached 42% of total industry asset.
One of typical case of opening domestic banking sector in developing countries
is China. The banking sector of this country started to open officially from 2001
under commitments to join the WTO. Since having the same model of
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 of opening
market, strengths, weaknesses, opportunities, and challenges of domestic banks
15
in China shared the same characteristics with Vietnamese banks. Therefore,
more details about China domestic banks will be provided in the following part.
1.3.3 China domestic hanks in opening market
1.3.31 Market opening commitments to joint WTO of 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 China's history in
general and its banking sector in particularly. Under commitments of to join the
WTO, the country has gradually opened its market in banking sector in term of
both provided services and of 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 of foreign banks coming into this 1-billion-
population market with great ambitions and advantages.
16
• 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 of 2006. the deadline for
China fully opening its banking market, foreign banks still have a
minority share comparing to local banks. As the statistic of China Baking
Regulatory Commission, in lending market of 2006. market share of 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 of International Finance Corporation (IFC), are more
familiar with China banks' names than brand of new foreign banking
corporations.
• Local market experience and network: With long history doing business
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 of branches for long time also brings crucial key point to
success for China banks.
• Culture understanding: With thousands years of history, China culture is
one of the most important and influence cultures over the world.
Understanding of culture, people and living sty le in the society is always
the key goals of 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
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• Business fundamental capabilities: The first problem of China banks,
simply, is the gap in scale between domestic and global banking
corporations in term of assets, management skills, technology and human
resource. As an demonstration, in 2004. total revenue of Citigroup w ere
US$1 12 billion, many time greater than the combination of 4 biggest
state own local China Bank while productivity and quality is much more
higher. Return on investment of Industrial and Commercial Bank of
China , in 2002, reached only 3.35% comparing to 16.4% of Bank of
America in the same period of time, marking a poor management regime
of the biggest China banks.
• Product innovation and competitiveness: In the modem age. the financial
industry constantly become more and more innovate because of 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 of the
local banks
• Risk management: One of the remarkable weaknesses of 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 of non-performing-loans of the big
four banks in China is about 25%, making a great potential risk for both
the banks and China banking system.
• International network and global business experience: As many other
international finance corporations. Citigroup has branches, subsidiaries
in more than 100 countries worldwide comparing to Bank of China, the
most international-oriented Chinese bank, operating in 27 countries only.
Weakness o f local banks in China
18