INTRODUCTION
In today's era of global economic integration, the financial system is crucial for facilitating the flow of funds from surplus to deficit areas while offering essential services like risk-sharing and liquidity The rapid growth of financial institutions worldwide has created vital channels for businesses, significantly contributing to technological advancement, especially in developing countries.
Finance involves social interactions centered on the distribution of wealth through currency, governed by the production, management, and utilization of money Economic changes influence the financial system, particularly in a subsidized economy where the government directs economic activities and compensates businesses for losses, leading to a system known as state finance, which encompasses insurance, credit financing, and the state budget As economic relations evolved, new ownership forms emerged in the market economy, prompting transformations in the financial sector to accommodate market-oriented financial relations amidst global economic integration Vietnam's financial system reflects these changes, aligning with and integrating into the international financial landscape.
In the current specialized economy, an organized and efficient financial system is essential for sustainable growth, with the primary goal of safeguarding the interests of investors and depositors across various countries.
The part below will give a more specific view of Vietnam’s financial system.
MAIN CONTENT
Participants in Financial System
Market participants can be categorized into two groups: the supply side, which possesses surplus funds available for investment, and the demand side, which requires resources for daily operations, bridge financing, or capital for venture funding.
In the financial market, investment flows from investors to lenders occur through two primary methods: direct finance and indirect finance Indirect finance, which is more commonly recognized, involves funds passing through financial intermediaries such as brokers, mutual funds, and leasing companies The financial market comprises a vast array of participants and players, which can be categorized into distinct groups.
● The individuals: These are net savers and purchase the securities issued by corporates Individuals provide funds by subscribing to these securities or by making other investments.
Corporations are primarily net borrowers, seeking funds for various projects by offering a range of securities tailored to investors' risk preferences Occasionally, they also invest surplus funds similarly to individuals The capital raised through these securities is typically allocated to real assets, such as plants and machinery, with the income generated from these investments distributed to investors as interest or dividends.
Governments often borrow funds to address budget deficits and manage liquidity, utilizing both long-term loans for substantial projects and short-term financing to maintain cash flow in the money market Additionally, governments invest in public sector enterprises by purchasing shares, which can later be sold to the public through disinvestment, allowing for a strategic approach to funding and resource allocation.
The financial system is overseen by various government agencies that manage and regulate relationships among participants, trading mechanisms, and the flow of funds In India, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) are the primary regulators The RBI, as the Central Bank, is responsible for maintaining liquidity in the money market and conducts the sale and purchase of T-Bills for the Government of India SEBI focuses on regulating and supervising the capital market, having established numerous guidelines and rules to ensure investor protection and market integrity Additionally, multiple legislations and government departments contribute to the regulation of financial system operations.
Market intermediaries, also known as financial intermediaries or merchant bankers, play a crucial role in the financial system by connecting investors with fund users, such as corporations and governments These intermediaries facilitate investment processes, as direct investment can be challenging for small investors who may struggle to find suitable borrowers, diversify their investments, or assess credit risks By offering services like investment consultancy, market analysis, and credit ratings, market intermediaries guide investors in making informed decisions Additionally, transactions in the secondary market are conducted through sharebrokers, while mutual funds and investment companies aggregate investors' savings to explore various investment opportunities.
○ Registrar and Share Transfer Agents
Market intermediaries play a crucial role in the financial sector by offering a variety of services to investors, particularly small investors who depend on their expertise These intermediaries operate continuously in the financial market, ensuring that they act rationally and uphold their integrity to maintain trust and protect their reputation By developing expertise in pricing new securities and effectively marketing them to investors, these intermediaries enhance the efficiency of corporate fundraising efforts.
The structure of the Financial System
3.1 The financial market in general
- Financial markets are marketplaces where those with idle financial resources and those looking to borrow exchange and sell the right to use financial resources.
- There are several ways to classify the financial market, each provides a different angle:
- Money markets are defined as short-term capital markets (less than one year) including loans, short-term lending, borrowing, and trading short-term financial instruments.
- Long-term capital markets, in the form of long-term financial instruments such as stocks and bonds, are referred to as capital markets.
- Securities are created on the primary market Firms sell (float) new stocks and bonds to the public for the first time in this market.
A primary market is exemplified by an initial public offering or IPO.
The secondary market, often known as the "stock market," encompasses major exchanges like the New York Stock Exchange (NYSE) and Nasdaq, where equities are bought and sold Unlike the primary market, the secondary market allows investors to trade shares directly with one another.
● Exchange-traded and over-the-counter (OTC) markets
- A stock exchange market is a regulated and organized market where buyers and sellers trade stocks in a safe, transparent, and systematic manner.
- The Over-the-Counter (OTC) market is a decentralized dealer market in which brokers and dealers transact directly over computer networks and the phone.
3.2 The financial market in Vietnam
- Capital market, money market, and foreign exchange market are all terms used in financial markets in Vietnam right now Here are some examples of how to divide.
The financial market is categorized into two main types based on credit maturity: the money market, which deals with financial instruments maturing in less than one year, and the capital market, which focuses on instruments with maturities exceeding one year In developed economies, money markets are often managed by banks, facilitating the trading of short-term financial instruments, while capital markets provide a platform for addressing medium to long-term capital requirements.
In Vietnam, commercial banks are the primary source of short, medium, and long-term capital, highlighting the distinct nature of the country's financial landscape Unlike other markets, which remain relatively small, capital mobilization and allocation predominantly occur through financial intermediaries, with commercial banks serving a crucial role in this process.
Vietnam has developed a diverse financial landscape that includes markets for bills, bonds, stocks, and bank loans, reflecting various credit forms Despite this growth, the primary market for bank loans continues to hold a dominant position in the country's financial system.
Vietnam's financial landscape features both a primary and secondary market The primary market is where securities are initially issued, often underwritten by securities firms and consulting companies In contrast, the secondary market currently facilitates the trading of 26 different types of equities, one VF1 investment fund certificate, government bonds, and bonds from the Bank for Investment and Development of Vietnam, as reported by mof.gov.vn.
Intermediary financial institutions play a crucial role in the financial ecosystem by connecting capital suppliers with those in need of capital They facilitate this connection by purchasing financial assets and capital instruments, ensuring that the supply and demand for capital are effectively met.
- In the financial markets, these are actually indirect financial transactions.
- Intermediary financial institutions are made up of the following elements:
● Depository Institutions, such as banks and savings associations, are financial institutions that are legally permitted to accept deposits from clients.
Deposit-taking institutions are the largest players in financial markets, primarily focused on accepting deposits from individuals and organizations Their main role is to generate capital sources, which they then utilize for lending in various forms or investing in securities.
Institutions receiving deposits in Vietnam include:
+ Commercial bank (Techcombank, ) + Savings and loans associations (Village Savings and Loan Associations - VSLAs, )
+ Credit Union (Association of People's Credit Funds Vietnam - VAPCF, )
Contractual savings institutions serve as financial intermediaries that regularly acquire funds and strategically invest or lend them Their primary objective is to ensure that financial instruments mature in alignment with their contractual obligations, which often include commitments related to life insurance, property insurance, and other financial products.
They can accurately estimate the capital needed for contract payments, making asset liquidity less critical compared to deposit-taking institutions Consequently, they prefer to invest long-term funds in corporate bonds, stocks, and home loans.
Due to policy differences between Vietnam and many other financial markets, this type of intermediary is not very common in Vietnam.
Financial instruments
The money market facilitates the buying and selling of short-term debt securities with maturities under one year, prioritizing safety and liquidity for lenders who need to access their funds quickly Instruments in this market, characterized by short maturities, high liquidity, and low risk, include a variety of financial products Key instruments in the money market are treasury bills, commercial paper, and certificates of deposit, which play a crucial role in enabling efficient capital movement in the short term.
4.1.1 Treasury bills/T-bills a Payment term
Treasury bills have a maturity of about 1 year or less (usually with maturities of 3, 6, and
Treasury bills are government securities sold weekly, with terms of 28 days, 91 days, 182 days, and 364 days, corresponding to 1 month, 3 months, 6 months, and 1 year, respectively These bills are issued through weekly unit price auctions, making them a popular investment choice for those seeking short-term financing options.
Treasury bills are issued in batches by the State Bank through a bidding process, where the State Bank serves as the organizing agency for selling these bills in open market auctions Acting on behalf of the Ministry of Finance, the State Bank is responsible for the issuance and payment of bills upon maturity, as well as the organization and management of treasury bill bidding Additionally, the State Bank of Vietnam oversees the organization and supervision of the secondary market for the repurchase of T-bills after the initial bidding.
Treasury bills issued through the State Bank through bidding have the following form and characteristics
Treasury bills are discount securities sold at a price below their par value, meaning they do not pay interest before maturity Instead, investors receive the full par value at maturity, and the profit, known as Yield To Maturity, is the difference between the purchase price and the par value.
The discount rate is calculated by the formula:
Discounted Yield (%) = (Price – Par value)/Sales Price * (360/Number of days to maturity)* 100%
In Vietnam, collections and payments are conducted in Vietnamese Dong, with a minimum denomination set at 1,000,000 VND (one million VND) Higher denominations are determined by regulations from the Inter-Ministry of State Banks and Finance, as outlined in the issuance notice.
● T-bills are issued in the form of book-keeping and bill certificates.
+ For the form of bookkeeping: Guided and managed by the State Bank.
+ For the form of bill certificates: The State Bank prints according to the form prescribed by the Ministry of Finance.
● Tendering for T-bills is an interest-rate auction - Treasury bills auctioned through the State Bank shall comply with the following principles:
+ Confidentiality of all bidding information before announcing the bidding results. + Organize public bidding, equal in all rights and obligations among the bidding units
+ The winning unit has the right and responsibility to buy bills according to the announced winning volume and interest rate.
● Objects participating in the Treasury bill auction include:
+ Credit institutions operating in Vietnam: State-owned commercial banks, joint-stock commercial banks, investment and development banks; Joint-venture banks; branches of foreign banks and financial companies;
+ Insurance companies, insurance funds, investment funds.
● Determining the volume and interest rate of the winning Treasury bills:
The determination of the winning volume and interest rate of Treasury bills is based on: + Bidding volume and interest rate of members.
The anticipated mobilization of Treasury bills is closely linked to the directed interest rates The winning volume of these bills is determined by calculating bids in ascending order of interest rates within the established range.
At the maximum bidding interest rate within the established guideline range, when the total volume of bids surpasses the anticipated amount of bills to be mobilized, the allocation of winning bills will be proportionally distributed based on the volume of bids submitted at that interest rate.
+ The interest rate on the issue of bills is the highest winning interest rate that is generally applied to all bid winners.
The Ministry of Finance may issue a specific volume of Treasury bills for direct retail sale to the public, in addition to the Treasury bills released through the State Bank.
Treasury bills issued directly by the Treasury system require a distinct certificate template compared to those issued via State Bank bidding The interest rate for Treasury bills sold through the State Treasury system is set by the Ministry of Finance in consultation with the State Bank, reflecting the prevailing market interest rates.
Thus, we can see that Treasury bills are not only to cover the state budget deficit but also an important tool for the State bank to conduct monetary policy.
Commercial paper exists in two forms: bill of exchange and promissory note:
• A bill of exchange is a valuable certificate made by the seller, requiring the buyer to pay a specified amount at a certain time and a certain place to the beneficiary.
• A promissory note is a valuable certificate made by the buyer, committing to pay a specified amount at a certain time and a certain place to the beneficiary.
A bill of exchange is a financial instrument that serves as a demand for payment from a creditor, primarily utilized in commercial transactions In contrast, a promissory note, issued by the buyer, is applicable in both commercial and civil contexts Understanding the distinct functions of these financial instruments is essential for effective management of commercial paper.
● Abstraction: The commercial paper does not specify the cause of the debt, but only records information about the amount to be paid, the payment term, and the payer.
● Compulsion: Stipulate that the payer must pay the beneficiary on time, not allowed to refuse or delay the payment.
Commercial paper is a negotiable instrument that can be easily transferred between parties through endorsement, allowing it to be converted into cash by presenting it to a bank for discounting or pledging While it offers advantages such as liquidity and flexibility for businesses, it also has disadvantages, including the lack of regulatory oversight and potential risks associated with the issuer's creditworthiness.
Advantages of commercial paper when applied in practice:
Some of the main economic benefits of commercial paper can be mentioned:
Firstly, thanks to its circulating nature, commercial paper has become a credit circulation tool that replaces cash, saves cash, and contributes to currency stability.
Commercial paper serves as a legal foundation in credit-purchase relationships, safeguarding the interests of parties involved in commercial credit and resolving debt issues between businesses Additionally, it acts as a reliable security asset when banks provide discounts or accept it as collateral for loans.
Fourth, commercial paper supplements goods for the open market, creating conditions for the central bank to perform well in regulating money in circulation.
When a borrower secures a bank loan through a promissory note, the bank has the option to sell this debt to another financial institution if needed This process allows the bank to collect the debt earlier than expected and serves as a method for securitizing bank loans.
And finally, the business of guaranteeing and collecting commercial paper will help the bank to increase income but not increase risk in its business activities.
However, commercial paper when applied in practice also has certain disadvantages such as:
One significant disadvantage of commercial paper is its potential for abuse, as two businesses may collude to generate blank commercial paper, which does not stem from a legitimate credit purchase relationship This practice undermines the fundamental guarantee of commercial paper, which relies on commodity credit, resulting in bank-issued loans lacking a solid guarantee basis.
One significant drawback of trade credit is the challenge of scaling both the volume and duration of credit transactions when demand is excessively high and timelines are extended.
The third disadvantage,this credit purchase, and sale relationship can only arise between reputable businesses, having regular transactions with each other.
The planned target of Vietnam’s Financial System
Between 2022 and 2030, Vietnam's financial system must evolve in alignment with emerging global financial trends while adhering to the Party and State's key policies To ensure competitiveness on the world stage, it is essential for Vietnam to achieve specific objectives that will facilitate the advancement of its financial system.
5.1 The Vietnamese financial system has to be restructured and strengthened
- The financial system in Vietnam will continue to be reorganized, resulting in increased competition, transparency, professionalism, and modernism.
Fee and service revenue is expected to become increasingly significant in the growth of credit institutions, with projections indicating that the service fee collection rate will rise from approximately 20 percent in 2020 to around 30-35 percent by 2025.
Bad debt levels are currently significant but are maintained at a manageable rate of 2% to 3% The period from 2021 to 2025 is expected to see active mergers and acquisitions in the banking sector, leading to a reduction in the number of credit institutions while enhancing their operational depth through a growth model that requires less capital Additionally, it is essential for the Vietnamese financial system to pursue greater international integration.
Vietnam's economy and financial sector are poised for modernization, integration, and enhanced transparency in line with international standards, thanks to the integration efforts The commitments made under new-generation Free Trade Agreements (FTAs) will lead to greater liberalization of Vietnam's financial services.
The integration of banks, insurance companies, securities, and other financial institutions fosters a comprehensive ecosystem that transcends geographical limitations This trend is expected to boost foreign ownership percentages, thereby attracting foreign investment and enhancing market liquidity.
Vietnam's financial system is poised to enhance its global standing, characterized by the highest proportion of equities in market index baskets among minor markets, with the potential to transition into emerging markets by 2025 The quality of corporate governance is nearing the ASEAN-6 average, creating opportunities for Ho Chi Minh City to develop as a global financial and technological hub Additionally, Vietnam's successful leadership as Chair of the ASEAN Capital Market Forum (ACMF) in 2020 has significantly bolstered the region's adaptive capacity, risk management, and readiness to navigate financial challenges on an international scale.
5.1.3 The Vietnamese financial system should bemore sustainable
Commercial banks have adopted green credit policies that focus on prioritizing specific industries for in-depth investments, particularly those utilizing advanced technology Currently, three commercial banks have established the Environmental and Social Responsibility Management System (ESMS), while 17 banks have developed internal processes to assess environmental and social risks These measures ensure that credit-granting activities take into account environmental and societal considerations, as reported by mof.gov.vn.
Since its launch in July 2017, the Sustainable Development Index version 1.0 (VNSI index) has been utilized to attract foreign investors through ESG criteria By the second quarter of 2020, the integration of ESG principles in stock selection has gained significant traction among investors.
Recommendations
The Vietnamese financial sector requires reform to enhance its role as an efficient capital allocation channel and a key driver of stable economic growth To achieve this, it is essential to focus on three critical areas: liberalization, deregulation, and stabilization However, the government's priorities must be realigned to accelerate reform and address existing imbalances History has shown that advancing financial sector liberalization without adequate governance and supervision can lead to catastrophic outcomes, as evidenced by the experiences of Thailand and Indonesia during the East Asian financial crisis.
Priorities for future financial sector reform in Vietnam should be as follows, in descending order of importance:
1) the establishment of a strong banking supervisory agency with effective monitoring tools to ensure the banking system's stability and sustainability;
2) the promotion of domestic bank restructuring, particularly SOCBs, to create strong, competitive banks capable of serving as true financial intermediaries;
3) the development of institutions, products, and delivery systems to provide formal financial services to Vietnam's low-income households and family businesses;
4) prudent liberalization, in alignment with a market-based financial sector's ability to recognize and minimize risks. a Financial Sector Stabilization (#1 and #2 above)
To enhance the financial sector's prudential soundness and commercial competitiveness in Vietnam, it is crucial to significantly strengthen the government's ability to safeguard the public interest through improved financial regulation and supervision.
To enhance the effectiveness of the banking system, it is essential to reform the State Bank of Vietnam (SBV) by consolidating provincial branches into regional ones and establishing a new banking supervisory agency However, merely creating this new agency will not guarantee improved performance unless it is supported by the implementation of pertinent financial sector regulations and robust off-site and on-site monitoring mechanisms.
To uphold confidence in the banking system during the ongoing financial crisis, the State Bank of Vietnam (SBV) must prioritize the recapitalization of insolvent institutions Additionally, a comprehensive plan for restructuring the banking system is essential, focusing on the commercialization of State-Owned Commercial Banks (SOCBs) and the consolidation of Joint Stock Commercial Banks (JSCBs) This approach is crucial, as many Vietnamese domestic banks are relatively small, making it difficult to achieve the necessary economies of scale and scope to enhance their competitiveness against foreign banks.
The government must regulate and supervise its policy banks, particularly the Vietnam Development Bank (VDB), along with quasi-banking institutions managed by sectoral ministries and local governments This oversight should be conducted by the State Bank of Vietnam (SBV) or a new regulatory authority, similar to other banking entities An unregulated "parallel" banking system threatens the legitimacy and integrity of the financial sector and hinders the implementation of coherent fiscal and monetary policies.
Finally, the government must step up its efforts to tackle the enormous bad debt overhang that is currently preventing the financial system from regaining equilibrium. b Financial Sector Deregulation (#3 above)
The promotion of nationwide, sustainable microfinance should be the government's top priority for improving the quantity, quality, and accessibility of formal financial services in Vietnam.
Despite Vietnam's impressive economic growth in the past two decades, a significant portion of families and businesses remain unbanked, lacking essential financial services like savings, credit, and payment options To unlock the country's full potential, it is crucial to provide these financial services to the unbanked majority.
Most microfinance efforts in Vietnam have been government or donor-funded initiatives aimed at poverty alleviation, often relying on NGO-led pilot projects that struggle to expand nationally To enhance its microfinance landscape, Vietnam should draw inspiration from successful models in other countries, such as Bank Rakyat Indonesia.
Vietnam's financial sector liberalization must prioritize the removal of interest rate caps and direct credit controls This change will enable savings and lending rates to align with market dynamics, allowing formal financial institutions to efficiently attract public funds and direct them towards the most profitable investment opportunities.
The government must exercise caution in capital account liberalization, the last step in financial liberalization, as inadequate market institutions can lead to severe risks Unrestricted capital flows may result in capital flight, similar to the 1997-98 financial crisis, which could significantly hinder Vietnam's industrialization and modernization efforts.
CONCLUSION
Vietnam's economy is increasingly interconnected with the global market, reflecting the principles of global economic development Consequently, it is essential to establish a robust, stable, and developed financial market through appropriate measures and strategic planning.
Today's financial markets are increasingly globalized, presenting challenges in regulation and monitoring that must account for the unique political, economic, and social conditions of each country To ensure the safety and liberalization of domestic financial markets, it is crucial for Vietnamese individuals to understand these financial tools, enabling them to keep pace with the global landscape.