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

MINISTRY OF EDUCATION AND TRAINING MINISTRY OF PLANING AND INVESTMENT

Central Institute for Economic Management
-------------------------------------------

NGUYEN THI HUONG LAN

RESEARCH ON ORGANIZATIONAL MODELS
AND BUSINESS OPERATIONS OF
FINANCIAL COMPANIES IN VIET NAM

Major: Economic Management
Code: 62 34 04 10

SUMMARY OF DOCTORAL THESIS OF ECONOMICS

HANOI - NĂM 2015


Completed at: Central Institute for Economic Management

Scientific advisor: Assoc. Prof., Dr. Le Xuan Ba
Examiner 1: ………………………………………………
…………………………………………………………….
Examiner 2 ………………………………………………
…………………………………………………………..
Examiner 3: ………………………………………………
……………………………………………………………..

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

…………………….. 2015

Can be looked up at libraries of:
- Central Institute for Economic Management
- National Library, Hanoi


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INTRODUCTION
1. Rationale of the thesis
Financial companies exist in all developed and developing countries in
the world. Though sharing a number of common features, models of financial
companies in different countries and in different period possess distinguished
characteristics. Legal frameworks and actual operation of financial companies
form different models of financial companies in different countries.
Revisiting the road of 17 year establishment and operation of financial
companies in Viet Nam, we can say that the biggest contribution of financial
companies is that they have been taking part in creating a more dynamically
competitive and diversified financial market. However, it also can be noted
that they are still being hindered by lots of weaknesses and drawbacks.
In terms of organizational model, a financial company is being
governed as a member company of a parent company and at the same time
being governed by the State Bank of Viet Nam, therefore supervision and
control over operations of financial companies as a credit institution are not
strictly carried out. In addition, the fact that member of management board or
member board of corporations or groups sometime are also a member of that
boards of financial companies creates a conflict of interest. Financial
companies owned by state owned corporations have been poorly operated.
This results in a resious consequences not only for corporations but also for

privates or institutions, who provide capitals.
In terms of business performance, a number of financial companies
can not survive , or are hard to be revived. Certain financial companies fail to
fulfill their role of capital allocation within their parent groups/corporations as
having been determined at the time of establishment, and some companies
even become burdens of their parent groups/corporations. Hereunder are a
number of facts in 2014 of 10 financial companies having capital contribution
from their parent groups/corporations, as collected and calculated by the
author: (1) Minimum Capital Adequacy Ratio cannot be maintained; (2) Loss
of owner’s equity ; (3) Bad debts and provisions for bad debts of financial
companies are large; (4) Book Value per Share is lower than face value of


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shares (less than VND10,000/share)... In addition, a number of complicated
long-standing problems have not been solved.
Motivated by the above findings, the author decided to engage in this
thesis “Researching on organizational models and business operations of
financial companies in Viet Nam”.
2. Objectives of the thesis
2.1 General objective
Overall goal of this thesis is to examine theoritical and empirical
foundation for providing recommendations and solutions to improve
organizational structure and boost business operation of financial companies
owned by groups/corporations in Viet Nam.
2.2 Specific Objectives
In order to achieve the aforesaid overall goal, the thesis shall:
(i) Synthesize and explain theoretical framework being used for
analyzing, assessing organizational models and business operations of

financial companies.
(ii) Clarify business nature and characteristics and roles of financial
companies owned by groups/corporations.
(iii) Review and clarify experiences of organizational models and
business operations of financial companies in the world and draw lessons for Viet
Nam.
(iv) Analyze and assess organizational models and business operations
of financial companies owned by groups/corporations in Viet Nam.
(v) Identify viewpoints/directions to improve organizational structure
and boost business operation of financial companies owned by
groups/corporations in Viet Nam.
(vi) Provide solutions and proposals to improve organizational
structure and boost business operation of financial companies owned by
groups/corporations in Viet Nam in the time to come.
3. Objects and scopes of research of the thesis
3.1 Objects of the research


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Objects of the research of the thesis are organizational models and
business operations of financial companies having capital contribution from
large groups/corporations in Viet Nam.
3.2 Scopes of research
- Scope of content:
+ The thesis mainly research on financial company model operating as
non-banking credit institutions (operating under Law on credit institutions) of
which charter capitals are owned wholly or partially by large
groups/corporations. This company group has the largest scope, the biggest
scale as well as lots of problems in Viet Nam nowadays.

+ The thesis engages in two issues, namely “organizational models”
and “business operations” of financial companies having capital contribution
from large groups/corporations (also referred to as financial companies owned
by groups/corporations).
- Scope of time: organizational models and business operations of
financial companies are reviewed on the basis of data within the period of
2011-2014.
4. Approaches and methods of research
4.1 Approaches of research
The thesis is based on historical and systemic approaches.
4.2 Methods of research
* For secondary data
The thesis employs methods being used widely for researching on
secondary data, such as desk research, statistics, summary, comparison and
analysis of collected data and documents related to organizational models and
business operations of financial companies in Viet Nam.
* For primary data
- Consulting experts:
The author consults 5 experts to on the solutions to improve
organizational models and boost business operations of financial companies in
Viet Nam.
- Questionnaire:


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+ Questionnaires for individual customers who have used services of
financial companies. Sample size is 100 customers. Survey time was from the
5th to the 28th of July, 2015.
+ Questionnaires for organization customers who have used services

of financial companies. Sample size is 50 organizations. Survey time was from
the 5th to the 28th of July, 2015.
Data collected from questionaires are processed by SurveyMonkey
and presented in details in appendices of the thesis.
5. Structure of the thesis
The thesis comprises of 3 main chapters, as follows:
Chapter 1: Theoretical foundation of organizational models and
business operations of financial companies.
Chapter 2: Status quo of organizational models and business
operations of financial companies in Viet Nam.
Chapter 3: Solutions to improve organizational models and boost
business operations of financial companies in Viet Nam.
CHAPTER 1. THEORETICAL FOUNDATION OF ORGANIZATIONAL
MODELS AND BUSINESS OPERATIONS OF FINANCIAL COMPANIES
1.1 Financial companies and roles of financial companies in the market
economy
1.1.1 Financial intermediaries
In common sense, a financial intermediary is a financial institution
that connects capital owner to capital demander. Being different from direct
financial exchange where capital owner and capital demander exchange
directly with each other, in this form of financing, financial intermediaries
facilitate the channeling of funds indirectly, which means that the borrowers
must resort to a third party to get their necessary funds, and such third party is
the financial intermediary. Financial intermediary are, among others, banks,
loan associations, credit unions, insurance companies, and financial
companies...


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Functions: Creation of capital; Supply of capital; Control
Types of financial intermediaries: There are a number of ways to
categorize financial intermediaries, and these ways varies form country to
country. In general, the financial intermediaries can be:
- Commercial banks
- Savings and loans associations
- Savings banks
- Credit funds
- Financial companies
- Contract-based savings (insurance companies, pension funds)
- Securities companies
- Investment intermediaries (investment banks, venture investment
companies, investment funds, mutual funds, asset management companies)...
1.1.2 Financial companies
In common sense, “a financial company is a financial intermediary
taking the role of facilitating the circulation of funds. A move of capital from a
capital provider to a capital spender is facilitated by a financial company by
means of issuance of bonds, bills together with other added services to
stakeholders”.
Classification of financial companies: 1) Based on professional
operations: Sales financial companies, Consumer financial companies,
Business financial companies. 2) Based on ownership types of financial
companies: State owned financial companies, Financial Joint Stock companies,
Financial companies owned by credit institutions, Financial joint venture
companies, 100% foreign invested financial companies.
Functions of companies:
- Financial companies operating as non-banking credit institutions:
Financial companies of which business commodities is money as
commodities, Financial companies of which has their main, frequent and
professional business operations are banking services (excluding accepting

deposits and providing payment services), Financial companies is a type of
enterprises being under professional control of State Bank/Central Bank.


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- Financial companies being a special enterprise with money business
operations: The enterprises are exposed to high risks, therefore conditions of
business registration and operation is much stricter.
Roles of financial companies in market economy: Roles of financial
companies in the economy, Roles to capital owners and demanders in the
economy, Other roles to corporations/ groups.
Due to distinguished features of economic groups, financial
companies while operating have to implement various functions and duties
related to financial conditions of the economic groups. The main duty of
financial companies, apart from for-profit operations, is to help the economic
groups to to maintain best financial resources to increase competitive strength
of the economic groups. Financial companies also help the economic groups to
make best use of business opportunities in market. Apart from advantages a
financial company can get from being member of an economic group, the
company also exposes to a number of disadvantages and risks:
1.2 Organizational models of financial companies
1.2.1 Nature and structure of organizational models of financial companies
Financial company is a type of enterprises operating in financial
market and has distinguished characteristics of non-banking credit institution.
Therefore, organizational models of financial companies bear nature of
organizational models of enterprises as well as distinguished features of credit
institutions.
1.2.2 Types of organizational models of financial companies
- Organizational models based on independent functional divisions

- Organizational models based on products, customers and geographic areas
- Organizational models based on network
1.2.3 Criteria and indicators to determine and assess organizational models
of financial companies
- Organizational functions of organizational models of financial
companies
- Organizational principles of organizational models of financial
companies
- Design principles of organizational models of financial companies


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Organizational models of financial companies must be designed in
accordance with a certain set of principles. While evaluating and assessing
organizational model of a financial company, it is a must to determine if such
principles are in line with essential organization design principles or not.
1.2.4 Requirements of organizational models of financial companies
In general, in order to achieve business success in the new context,
organizational models of financial companies must meet following
requirements:
- Shifting from large-scale model to a compact and flexible one
- Converting function-based sub-structures to a multi-functional ones
- Shifting from specialized sub-structures to multi-functional and
effectively cooperative ones
- Demonstrating distinguished features and roles of credit institutions
functioning in capital and monetary trading.
- Guaranteeing that organizational models are flexible and highly
responsive to market and at the same time facilitate internal control and
supervision.

1.3 Business operations of financial companies
1.3.1 Main business operations of financial companies
- Banking services of financial companies
- Account opening services of financial companies
- Capital contribution and share purchase of financial companies
- Other business activities of financial companies
1.3.2 Factors impacting business operations of financial companies
Theoretically, there have been various ways of considerations, but in
common sense the factors impacting business operations of a financial
company can be sorted into subjective and objectives ones, just like the way
those of other enterprise types are considered.
1.3.3 Criteria for assessing business operations of financial companies
The author assesses business results of financial companies and a
number of indicators reflecting business efficiency of financial companies,
which are shown in a number of financial indicators and most importantly in
financial reports of financial companies. These are the most essential and


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distinguished indicators of business operations of credit institutions in general
and of financial companies in particular:
* Indicators in business result reports:
(1) Net interest income
(2) Operating costs
(3) Total income before taxes
(4) Total profit after taxes.
* Indicators from balance sheets:
(5) Total assets, of which the main criteria to be assessed are:
+ Money and gold deposited in and borrowed from credit

institutions
+ Lending to customers
(6) Payables, of which the main criteria to be assessed are:
+ Money deposited in and borrowed from credit institutions
+ Deposits of customers
(7) Capital and funds, of which the main criteria to be assessed are:
+ Capital of credit institutions
+ Undistributed profit
* Financial indicators reflecting the efficiency of capital usage:
(8) EPS (Earning per share)
(9) BVPS (Book value per share)
(10) ROEE (Return on equity everage)
(11) ROAE (Return on asset everage)
* Indicators reflect safety limits of credit institutions:
(12) CAR (Minimum Capital Adequacy Ratio)
(13) Bad debt ratio
(14) Rate of short-term capital used for medium- and long-term loans.
1.4 Experiences of organizational models and business operations of
financial companies in the world and lessons for Viet Nam
1.4.1 Overview of organizational models and business operations of
financial companies in a number of countries in the world
In order to get a panorama of organizational models and business
operations of financial companies in a number of countries in the world, the


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

in Appendix 10 of this thesis.
1.4.2 Organizational models and business operations of financial companies
owned by groups in the world
The author studies 9 financial companies owned by large groups,
namely: Samsung, GM, Sony, GE, Siemens, Hitachi, Volvo, LG, IBM.
1.4.3 Findings
The author presents 10 findings related to organizational models and
business operations of financial companies. Of the findings, the most
remarkable one is that financial company is a type of enterprise susceptible to
operational risks if risk management is not properly implemented, and can be
severely affected during financial crises and economic recessions.
1.4.4 Lessons for Viet Nam
(1) Financial companies, though being of scale smaller than
commercial banks, can survive and grow thanks to their flexibility and their
capability in exploiting niche market and potential market in and out of their
owner groups/corporation.
(2) Groups/corporation may own controlling interest in financial
companies, but their ownership ratio should not reach 100% in order to
maintain dynamic, independence and adaptability of financial companies in
conducting business.
(3) In the world there have been a number of restructures of credit
institutions. In order to survive in market economy, financial companies must
have a staff, especially high ranking personnel, experienced in capital field,
which requires both disciplinary and flexibility in business.
(4) The Government should strictly control operations of financial
companies and at the same time create an adequately wide corridor for
financial companies to select their specialized or diversified business lines.
(5) Financial companies owned by groups/corporations should
properly implement their roles of bridging and channeling funds their

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groups/corporations, as well as act as financial intermediary in capital and
monetary markets.
(6) When financial market falls in difficulties, financial companies are
easily affected, because of their small scale and their disadvantages in
competing with commercial banks.
(7) Consolidation and/or merger with commercial banks is the solution
applied by a number of financial companies to cope with difficulties. This is a
frequent phenomenon in the world, especially in post-crisis periods.
CHAPTER 2. STATUS QUO OF ORGANIZATIONAL MODELS AND
BUSINESS OPERATIONS OF FINANCIAL COMPANIES IN VIET NAM
2.1 Overview of financial companies in Viet Nam
2.1.1 History of establishment and development of financial companies
In the first period, Viet Nam had 2 joint stock financial companies
established in accordance with Ordinance of banks, credit collectives and
financial companies dated 23 May, 1990 of State Council. The two financial
companies were Sai Gon joint stock financial company (SFC) and Seaprodex
joint stock financial company. However, the two financial companies were
dissolved later.
In the second period, financial companies were established within
state-owned corporations. Starting from 1995, in implementing Law on State
owned enterprises, under Decision No. 90 and Decision No. 91, the
Government experimented the model of State owned Corporation in a number
of key economic sectors in order to accumulate capital and gather professional
capacities to enhance competitiveness and create driving forces for the cause
of national industrialization and modernization.
After a period of time, in Decree No. 79/2002/NĐ-CP dated
04/10/2002 of the Prime Minister on Organization and operation of financial

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


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laws, excluding providing payment services and receiving deposits of less than
1 year term.
As of 31 December, 2014, Viet Nam has 17 financial companies
organized in 2 main types: joint stock financial company, and one-member
financial company limited (of which capital is owned 100% by the State or by
foreign organizations). Of the 17 financial companies, 10 having capital
contributions from groups/corporations are organized in the form of multifunctional financial company (conducting various business operations), and the
other 7 financial companies are specialized ones (consumption credit).
2.1.2 Overview of performance of financial companies in Viet Nam
- Consumer financial companies
In general, these financial companies are mostly in the form of onemember limited company with 100% of capital owned by foreign entities.
Although these companies also meet difficulties arising from market
conditions, business performance of these companies are promising thanks to
their focusing on consumption credit (individual finance) to meet large
demands of individual consumers, and some of the companies even have very
good performance. Details of business performance and development of this
type of financial companies are presented in Appendix 12 of the thesis.
- Financial companies having capital contributions from groups/
corporations
These companies can be sorted into two categories: joint stock
financial company, in which groups/corporations own not less than 25%
capital, and one-member financial company limited, in which

groups/corporations own 100% capital. Of the categories, joint stock financial
companies have better business performance. The other type of financial
companies have been suffering from cccumulated losses or deficit of owner’s
equity for years.
As the author cannot collect all necessary data of all 17 financial
companies in Viet Nam, in table 2.1 the author presents in the most condensed
manner business performance of all financial companies in Viet Nam as of
31/12/2014.


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2.2 Analyses and assessments of organizational models of financial
companies in Viet Nam
2.2.1 Legal models of financial companies in Viet Nam
Regarding to the forms of establishment (legal form), as specified in
Article 3 of Decree No. 81/2008/NĐ-CP dated 29/7/2008 on amending and
supplementing a number of articles of Decree No. 79/2002/NĐ-CP dated
4/10/2002 of the Government on organization and operations of financial
companies, it is allowed to established and operate financial companies in Viet
Nam in following forms:
- One-member financial company limited.
- Financial company limited with two or more members.
- Joint stock financial company.
As of 31/12/2014 in Viet Nam there is no financial company limited
with two or more members. There are only one-member financial companies
limited and joint stock financial companies. On 22 April, 2015, with a strategic
capital contribution from Credit Saison (Japan), Hochiminh City Development
Joint Stock Commercial Bank One-member Financial Company Limited has
been changed into HD SAISON Finance Company Limited and becomes the

only financial company limited with two member in Viet Nam up to now. At
the end of 2014, of the 10 financial companies owned by groups/corporations,
6 are joint stock companies, and the other 4 are 100% state-owned companies
in the form of one-member company limited.
Organizational structures of financial companies in general and of
financial companies owned by economic groups are specified in Paragraph 3,
Chapter IV of the Law on credit institutions 2010. Financial companies are
owned by economic groups but run under independent accounting regime and
have their own management systems. Although some of these financial
companies are joint stock companies and the other are one-member companies
limited, their organizational structures are relatively similar to each others.
Recently, on 07 May, 2014, the Government promulgated Decree No.
39/2014/NĐ-CP on operations of financial companies and financial leasing
companies. As regulated, financial companies are allowed to conduct more
operations of commercial banks, such as: issuing credit cards, bonds,


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promissory notes, and trading foreign exchange, among others. This Decree is
effective from 25/06/2014. The Decree specified that there are 2 types of
financial companies, including:
Multi-functional financial company, being allowed to conduct all
activities as specified in Law on credit institutions and in this Decree.
Specialized financial company, including factoring financial
companies, consumer credit financial companies, financial leasing companies,
as specified in this Decree and instructions of the State Bank of Viet Nam. Of
this type, factoring financial companies are specialized in factoring, and
consumer credit financial companies are specialized in consumer credit.
In order to provide a clearer image of organization of financial

companies, in this thesis the author presents diagrams of organizational
structure of a number of financial companies, including joint stock companies
and companies limited.

2.2.2 Status quo of organizational models of financial companies in Viet Nam
Financial company is a credit institution, having characteristics of
banking sector, and being a type of enterprise providing services of deposits,
investment, consultancy and other financial services. In general, operations of
a financial company bear characteristics of banking sector.
Although a financial company is a credit institution, a financial
company is different from a commercial bank in terms of: nature, scope of
operation, amount of legal capital, duration of operation, degrees of risk and
competition, and operational characteristics.
2.3. Status quo of business operations of financial companies in Viet Nam
Tables showing data of business operations of each financial company
are presented in Appendix 11 of this thesis.
2.3.1 Status quo of business operations of joint stock financial companies
Founding shareholders and large shareholder holding controlling
interest of joint stock financial companies are groups/corporations. In
additions, other founding shareholders of joint stock financial companies may
be commercial banks or other enterprises.
Of the 6 joint stock financial companies, because the author can not
collect all necessary data from Vietnam Textile and Garment Finance Joint


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Stock Company as have done with the other 5 companies, collected data are
presented in 2 tables (Table 2.2 and Table 2.3).
Average data of 5 joint stock financial companies fully collected by

the author show that there have been a number of bad signs. Total assets are
decreasing year on year, with a total decrease of 27.3% in 4 years. Operating
costs are decreasing but just in an insignificant degree; due to the fact that net
interest income reduced significantly over the years, income before taxes and
profit after taxes of financial companies continuously decrease significantly,
up to a total decrease of 78.6% in 4 years.
Table 2.2: Average data of business situations
of 5 joint stock financial companies
Unit: Billion VND
BUSINESS RESULTS
Net interest income

2011
218.380

2012
171.403

2013
146.302

2014
137.803

45.797

40.088

38.655

36.320

Total income before taxes

165.522

80.867

62.913

35.428

Total Profit after taxes

124.630

60.644

48.214

29.258

ACCOUNT BALANCE
Total assets
- Money and gold deposited in
and borrowed from credit
institutions
- Lending to customers

2011

6,476.001

2012
5,695.415

2013
5,297.133

2014
4,705.456

1,542.882

1,417.077

1,034.361

963.894

1,155.717

1,063.425

1,540.663

1,739.425

Payables
- Money deposited in and
borrowed

from
credit
institutions
- Deposits of customers

5,223.006

4,470.427

4,073.172

3,496.332

2,693.604

1,754.414

1,188.912

996.894

445.629

715.630

973.403

689.122

Capital and funds

1,252.994

1,224.987

1,224.021

1,217.453

+ Capital of credit institutions

Operating costs

1,087.331

1,087.797

1,087.797

967.917

+ Undistributed profit

107,690

63,546

50,729

41,015

FINANCIAL INDICATORS

2011

2012

2013

2014


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EPS of the latest 4 calendar
quarters (VND/share)

1,026

310

252

23

11,641

11,420

11,483

11,337

ROEA (%)

10.33

5.01

4.32

2.04

ROAA (%)

2.23

1.31

1.26

0.38

BVPS (VND/share)

Source: Financial reports of 5 joint stock financial companies, collected by the author.
Notes: 5 joint stock financial companies are: VVF (Vinaconex-Viettel Finance Joint Stock
Company); SDF (Song Da Finance Joint Stock Company); Cement Finance Joint Stock
Company (CMF); EVNFC (EVN Finance Joint Stock Company); VCFC (Vietnam Chemical
Finance Joint Stock Company).

As a consequence, indicators reflecting profitability is also decreasing.
Average EPS of the 5 joint stock financial companies decrease from
VND1,026/share in 2011 to VND23/share in 2014 (or a decrease of 98% in 4
years). ROE reduces to 2.04% in 2014 (which is much lower than deposit
interest rates of commercial banks). At the same time, EPS, ROA, ROE of
VVF become negatives.
Vietnam Textile and Garment Finance Joint stock Company (TFC)
has healthy business performance, demonstrated by the fact that capital
adequacy ratio and ratio of bad debts over the years have been meeting
requirements of the State Bank of Viet Nam. Bad debts of TFC in the period of
2011-2014 is approximately 2%-2.54%, which is considered as a good
indicator in the system of credit institutions. However, after the Company
increases their capital to 500 billion VND, their income fluctuates
unpredictably. Profit after taxes decreases over times, with an annual decrease
rate of 11.4%. The decrease of profit results in decrease of Owner’s equity
giảm. Average Ratio of Profit after taxes/Charter capital decrease from 14.48%
in 2011 to 4.1% in 2014. Ratio of Profit after taxes/Owner’s equity in 2014 is
just a third of that in 2011.
2.3.2 Status quo business operations of financial companies limited
In general, in comparison with the other joint stock financial
companies, financial companies limited (of which capital is 100% owned by
groups/corporations) are of poor performance with lots of different drawbacks
in different companies, causing severe loss of State’s budget. Two largest loss
companies are:


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- Viet Nam Rubber Finance Company Limited (RFC)
It can be said that of the 4 financial companies limited, this company

is suffering from the largest loss, as well as having the highest number of
breaches. Losses in business are consequenses of ineffectiveness in both
internal and external lending, losses in securities trading, and deliberately
fraudulent actions for the purpose of corruption. RFC is suffering from
difficulties which can not be recovered. At the middle of 2014, Charter capital
of RFC is 1,088 billion VND and Total assets 1,630 billion VND, but total
accumulated losses is at 1,775 billion VND, and bad debts at 1,625 billion
VND (at the ratio of 83%) and the company is in danger of capital loss. In
aforesaid conditions, especially value of accumulated losses as presented in
Table 2.3, RFC, the financial company having the second highest Charter
capital among the financial companies having capital contribution from
groups/corporations, has not only lost all of their State’s capital but also been
in deficit of 762 billion VND.
Table 2.4. Financial situation of RFC in the period of 2011-2014
Unit: Billion VND
INDICATOR
Total assets (estimated)

2011
2,000

2012
2,000

2013
1,800

2014
1,630

Profit after taxes (estimated)

-200

-900

-80

-250

Accumulated loss (estimated)

-670

-870

-1,770

- 1,850

1,000

1,088

1,088

1,088

800

-188

-682

-762

Charter capital
Owner’s equity (estimated)

Source: Collected by the author.

- Vinashin Finance Company (VFC)
Vinashin, being parent group of VFC, has caused severe consequences
for the country’s economy in recent years; being a member of the group, VFC
is involved in various serious problems related to lending, guarantees and other
problems. VFC raised capital from and lending to member companies of
Vinashin, and after that collapsed together with such member companies.
Capital raised by VFC from other external organizations were lent to member
companies of Vinashin, and when these member companies failed to make


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repayment, VFC could not find any financial resources to make repayments to
such external organizations.
A number of cases have been filed, and VFC is always the losing party.
In the period of 2010-2013 VFC lost its ability to pay and was put under
special control by the State Bank of Viet Nam. Among all financial companies
in Viet Nam, VFC is suffering from the most difficulties. At the end of 2014,
business loss and provisions for credits and investment of VFC reach

approximately 1,300 Billion VND, losses of ability to pay occur repeatedly.
The biggest problem is that, apart from poor business efficiency, VFC’s
breaches are complicated and hard to resolve.
2.4 Overall assessments of organizational models and business operations
of financial companies in Viet Nam
2.4.1 Overall assessments of organizational models of financial companies
- Strengths:
Firstly, creating difference and unique advantages in business
negotiations for financial companies owned by groups/corporations.
Secondly, having advantages in exploiting available potential markets.
Thirdly, being flexible in terms of organization and business thanks to
advantages of small scale.
Fourthly, being capable of minimizing risks in business operations.
Fifthly, having supports from parent companies or founding
shareholders (their owner groups/corporation).
- Weaknesses:
Firstly, financial companies must at the same time observe
regultations of the State Bank of Viet Nam and follow instructions of their
owner groups/corporations.
Secondly, due to limited scope of business, financial companies do not
have significant advantages in a competitive market.
Thirdly, in general, financial companies 100% owned by
groups/corporations are less efficient in operation than joint stock financial
companies.
Fourthly, there is a lack of objectivity in management decisions.


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Fifthly, the model of one-member financial company limited 100%

owned by groups/corporations has clearly shown their weaknesses, just like
other state owned enterprises.
Sixthly, operations of financial companies are easily affected by
overall performance of their owner groups/corporations.
- Causes of weaknesses:
Firstly, viewpoints and awareness about purposes of establishing
financial companies within groups/corporations in current conditions of Viet
Nam are not reasonable
Secondly, financial companies must observe limits of business scopes.
Thirdly, Capital scales of financial companies are low.
Fourthly, Organizational models of financial companies limited 100%
owned by the State are put under low pressure of managenment and operation.
Fifthly, Inspection and supervision over financial companies are
conducted loosely.
Sixthly, there is a lack of objectivity.
2.4.2 Overall assessment of business performance of financial companies
- Achievements:
Firstly, having made certain contributions to creating a more dynamic
financial market.
Secondly, a number of financial companies being able to preserve
capital and generate certain economic benefit in spite of low efficiency in
using capital.
- Drawbacks:
Firstly, capabilities of providing services are limited.
Secondly, minimum capital adequacy ratio cannot be maintained.
Thirdly, Owner’s equity is in deficit:
Fourthly, bad debts and provisions of financial companies are large.
Fifthly, Ratio of short-term capital for long-term loans exceeds
allowable limits.
Sixthly, BVPS is low.

Seventhly, information transparency is low.
* Causes of the drawbacks:


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- Economic context of Viet Nam:
Firstly, the model of financial company was born and developed in a
period when the economy of Viet Nam was witnessing lots of changes.
Secondly, financial companies are affected by the overall difficulties
of the whole economy in the recent years.
- Management by State regulatory agencies:
Firstly, company registration processes are done in a haste manner,
without a clear direction for this type of enterprise in Viet Nam.
Secondly, there is no overall strategy and no warning from State
regulatory agencies in terms of number and scale of credit institutions in
general and of financial companies in particular to match with scale of market
in Viet Nam.
Thirdly, management by State regulatory agencies is not conducted in
a strict manner.
Fourthly, regulations on disclosure and transparency of information
about operations of financial companies are limited.
Fifthly, implementation of legal documents and instruction for
financial companies are not issued in time, causing confusion to financial
companies in conducting their business operations.
- Groups/corporations:
Firstly, being confused and inconsistent in considering roles and
importance of financial companies.
Secondly, not providing supports, or not being able to provide
financial and market support.

Thirdly, overemphasizing investment and investment trusts, and even
instructing financial companies to invest in ineffective projects.
- Financial companies:
Firstly, having narrower functions and scope of business as compared
to that of commercial banks; meanwhile, financial companies have to compete
with commercial banks and to observe operation regulations of credit
institutions, which are similar to that of commercial banks.
Secondly, financial companies have to pay high capital expenditures.


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Thirdly, being newly established financial institutions in Viet Nam, not
having sufficient experiences in establishing financial companies in Viet Nam.
Fourthly, increases of capital of financial companies in accordance
with Decree No. 141/2006 were conducted in the time securities prices reach
their heights.
Fifthly, issuance of internal regulations is of limited effectiveness.
Sixthly, there is no clear strategy for trading and using capital.
Seventhly, financial companies are of limited resources and capability
of receiving and processing information, as well as limited adaptability.
Eighthly, supervision roles of owners and public are not properly
implemented.
Ninthly, operation of credit councils, investment councils are ineffective.
2.4.3 Overall assessment of status quo organizational models and business
operations of financial companies in Viet Nam
Based on study of experiences of foreign countries, assessment and
analyses of status quo and causes related to organizational models and business
operations of financial companies owned by groups/corporations in our
country, the author comes to following summaries:

(1) In the world, the model of financial company exist in both
developing and developed countries. The most active period of establishment
and development of this model began in the beginning of 1990s. However, this
is a special type of enterprise. Financial company is a non-banking credit
institution (means that they are not allowed to conduct all operations of
commercial banks); therefore, the way of management and direction of
developing financial companies vary from country to country.
(2) the establishment and existence of financial companies in Viet
Nam are of great implication. It not only diversifies subjects of financial
market, enhances competitive strengths of intermediary credit institutions but
also exploit different market share where commercial banks have not paid
much attention to.
(3) financial companies 100% owned by groups/corporations are of
historical origins and are not suitable with actual conditions and context of
Viet Nam because of a number of reasons, of which the most remarkable one


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is that these companies no longer possess the required independence of a
financial intermediary, undermining safety of credit institutions; the making of
lending and investment decisions is affected by subjective thinking (not based
on feasible lending and investment plans), reverence, on commands, even by
interest groups
(4) only when a proper viewpoint is established and properly realized
can financial companies, being a type of non-banking credit institutions,
enhance strengths of the groups/corporations owning 100% of capital or
controlling interest of such financial companies in Viet Nam nowadays.
(5) It is clearly proved that, on general aspects of market, financial
companies are not capable of competing fairly with commercial banks.

(6) Organizational models of financial company owned by
groups/corporations have shown lots of weaknesses.
(7) In facts, many experts are skeptical about the existence of this
model. Leaders of many groups/corporations do not have adequate trust in
smooth operation of financial companies in accordance with initial directions
and purposes set at the time of establishment. Leaders of many financial
companies have lost their faith in and been tired of their companies, and do not
believe in the future of their financial companies.
(8) Legal framework for financial companies is not adequate and is
not aimed at encouraging and creating favorable conditions for this type of
enterprises to compete with other types of financial intermediary, especially
with commercial banks.
(9) Business efficiency is not as expected: Many financial companies
are suffering from low performance, and some even suffer from loss and
deficit. A number of owner groups/corporations are severely affected.
(10) Risk control and management in financial companies, in general,
are weak. Qualities of staff is not an advantage of financial companies while
engaging in market competition.
(11) Inspection and supervision conducted by state regulatory agencies
over financial companies are not conducted timely and properly.
(12) As State regulatory agencies has acknowledged status quo of
organizational models and business operations of multi-function financial


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companies owned groups/corporations, they have launched a number of
restructuring solution by issuing a legal document serving as basis for the
changing or ending of this model, namely Decree No. 39/2014/NĐ-CP on
operation of financial companies and financial leasing companies.

(13) The current trend is that the number of financial companies shall
remarkably increase in the period of 2015-2016. Although this looks like a
conflict with current context, this is a comprehensive change in ownership,
functions and duties of business of financial companies in Viet Nam in the
time to come. And this is the reason of a number of merge and acquisition
between commercial banks and financial companies.
CHAPTER 3. SOLUTIONS TO IMPROVE
ORGANIZATIONAL MODELS AND BOOST BUSINESS
OPERATIONS OF FINANCIAL COMPANIES IN VIET NAM
3.1 Opportunities and challenges to financial companies in Viet Nam in
the time to come
3.1.1 Opportunities
- Demands on capital sources and financial services of the society are large
- Consumer credit market of Viet Nam is expanding.
- Number of small and medium enterprises in Viet Nam takes up large
proportion of the economy
3.1.2 Challenges
- Competition becomes more and more severe
- Risks shall increase together with increase of consumer credit
- Financial companies have to prepare and establish new and wide
distribution systems
- Financial companies are exposed to pressure to create and maintain
compact document systems capable of quickly processing loan applications
3.2 Directions of our Party, State and viewpoints of the author about
improving organizational models and boosting business operations of
financial companies in Viet Nam
3.2.1 Directions of our Party, State


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- Restructuring financial companies
- Groups/corporations paying attention to vertical development and
divestment from their member financial companies
3.2.2 Viewpoints of the author
- Model of financial company owned by state groups/corporations is
not suitable with conditions of Viet Nam.
- It is a must to restructure financial companies firmly and faster in
order to minimize loss of State’s capital
- In long term, establishment of financial company should be based on
distinguished demands and characteristics of groups/corporations
- Organization and business operations of financial joint stock
companies should be improved
3.3 Solutions to improve organizational models and boost business
operations of financial companies in Viet Nam
3.3.1 Solutions to improve organizational models
- Consolidating or merging financial companies with commercial
banks is a solution suitable with current context
- Operation models should be changed in accordance with strengths of
each financial company
- Internal regulations of financial companies should be improved
- Role of internal inspection and supervision should be enhanced
- Informatics systems of financial companies should be improved
3.3.2 Solutions to boost business operations related to current services of
financial companies
- Developing new products, services
- Enhancing cooperation between commercial banks and financial
companies
- Focusing on improving service quality, improving efficiency of risk
management in order to attract customers

- Developing capital mobilization and currency trading
- Developing credit operations
- Developing financial investments and securities business
- Developing financial and monetary services