Trade finance centralization in a vietnamese bank the case study of BIDV

luận văn, khóa luận, chuyên đề, đề tài

We would like to commit that this thesis is our own research which is

supervised by Dr Le Thanh Lan The research’s content and result are honest and

have not been published in any other research work The content of the thesis has

used information and materials from the books, writings and websites posted in the

reference herein

Ho Chi Minh city, 12th December 2011

revolution for Vietnamese banks because of the difference in banking scales, internet technology and culture standard To investigate a model of trade finance centralization in a local bank, a case study of BIDV is useful The thesis focused on evaluating the effectiveness of the model and contributing to build up a perfect one

by analyzing data collected from BIDV’s branches and their customers According

to the finding results, centralizing trade finance operations is supported by most of staff members at branches; however, it is a little bit confused to comment on the quality of the services which focused on long processing time, inaccuracy of some transactions an inflexibility in handling transactions The study also aimed to build

up a better model to solve these issues for sustainable development of trade finance centralization This model was not only an improved solution for BIDV, but also a reference model for other Vietnamese commercial banks to consider in their trade finance centralization’s strategy

encouragement, guidance and support from the initial to the final level enabled me

to develop an understanding of the subject This thesis would not have been possible without his enthusiastic support

I am indebted to many of my colleagues in BIDV who help me during the collection of data as well as support me during my research

My special gratitude is extended to all instructors and staffs in The Faculty of Finances & Banking and The Postgraduate Faculty, University of Economics Ho Chi Minh City (UEH) for their support and the valuable knowledge during my study herein

My deepest and most sincere gratitude goes to my beloved parents, my husband Mr Nguyen Anh Duy, my son Nguyen Lam Duy Phu, for their boundless support, abundant love and encouragement throughout my period of study

Lastly, I offer my regards and blessings to all of those who helped me in any respect during the completion of the study

Abstract ii

Acknowledgements iii

CHAPTER 1: INTRODUCTION TO THE STUDY 1

1.1 Introduction 1

1.2 Problem statement 1

1.3 Research Objectives and Questions 4

     1.3.1 Research Objectives 4

1.3.2 Research Questions 5

1.4 Scope and Limitations: limit in a case of BIDV 5

1.5 Research Method 5

1.6 Implication of Research 6

1.7 Structure of the study 6

CHAPTER 2: THEORETICAL BACKGROUND 8

2.1 Definition of Trade finance 8

  2.1.1 Trade finance facilitation: 8

2.1.2 Trade finance operations 11

2.2 Trade finance centralization in banks 15

   2.2.1 Definition of trade finance centralization 15

   2.2.2 Advantages to trade finance centralization 17

2.3 The effect of centralization on the staff members and customers 20

CHAPTER 3: INTRODUCTION TO BIDV 23

3.1 Overview of BIDV 23

3.1.1 BIDV’s establishment 23

3.1.2 BIDV general financial status 24

3.1.3 BIDV organization 25

3.3.2 Functions and tasks 28

3.3.3 Relationship between TFC and Branches in handling Trade finance operations 30

CHAPTER 4: RESEARCH METHODOLOGY 34

4.1 Overview about methodology 34

4.1.1 Research objective 34

4.1.2 Research approach 35

4.2 Sample selection, data collection method and analysis 35

4.2.1 Sample selection 35

4.2.2 Questionnaire design 37

4.2.3 Schedule of survey 39

4.2.4 Data collection and analysis 39

4.3 Limitation 40

CHAPTER 5: RESEARCH RESULTS 42

5.1 Survey background 42

5.2 Data analysis 43

5.2.1 Evaluation of BIDV staff members 44

5.2.2 Evaluation of BIDV customers 50

5.2.3 The links between the analysis results and the research model 55

5.2.4 Expected model of TFC 57

5.2.5 Analysis conclusion 58

CHAPTER 6: RECOMMENDATIONS 59

6.1 The current model of TFC 59

6.2 Recommendations 61

6.2.1 Reference model of TF centralization 61

6.2.2 Suggested model of TF centralization for BIDV 63

CONCLUSION 71

REFERENCE 73

APPENDIX 1 76

APPENDIX 2 79

APPENDIX 3 82  

TFC: Trade finance centers

URDG: Uniform Rules for Demand Guarantee

VAS: Vietnamese Accounting standards

VCB: Vietcombank – Joint Stock Commercial Bank for Foreign Trade of Vietnam Vietinbank: Vietnam Joint Stock Commercial Bank for Industry and Trade

WTO: World Trade Organization

PUT OPTION: An option contract giving the owner the right, but not the

obligation, to sell a specified amount of an underlying security at a specified price within a specified time This is the opposite of a call option, which gives the holder the right to buy shares

MARGIN CALLS: A broker's demand on an investor using margin to deposit

additional money or securities so that the margin account is brought up to the minimum maintenance margin Margin calls occur when the account value depresses to a value calculated by the broker's particular formula

Table 4.1 Summary of the questionnaires 38 Table 5.1 Expectations of staff members 57 Table 6.1: Description of suggested model of trade finance centralization 64 Table 6.2.Relations between departments in TFC and between TFC and branches 67 

Figure 2.1: Trade finance strategy implementation at banks 16

Figure 2.2 Expected cost savings from Trade finance centralization 18 

Figure 2.3 Research model……… 22

Figure 3.1 The transaction model between TFC and branches 33

Figure 5.1 Distribution of experts 42

Figure 5.2 Working experiences 43

Figure 5.3 Level of satisfaction 45

Figure 5.4 Mistakes and complaints 48

Figure 5.5 Advantages and disadvantages of trade finance centralization 49

Figure 5.6 Possible risks 50

Figure 5.7 Trade finance services used by customers 51

Figure 5.8 The qualification of BIDV’s staff members in trade finance services consultancy 52

Figure 5.9 Processing time of TF transactions 53

Figure 5.10 The accuracy of TF transactions 53

Figure 5.11 Customers’ advantages 54

Figure 5.12 Customers’ disadvantages 55 

CHAPTER 1: INTRODUCTION TO THE STUDY

The structure of chapter 1 is provided in Table 1.1

Table 1.1 The structure of chapter 1

1 Introduction

2 Problem statement

3 Research objectives and questions

4 Scope and limitations

is financed by banks such as documentary credit, collection, bank guarantee, etc

Historically, trade finance operations were developed and brought benefits

to banks Nevertheless, trade finance is a flat market Despite tremendous growth in the volume of international trade, the use of trade finance tools is flat Actually, today the total value of trade guaranteed with letter of credit is similar to the value

in the 1950s (WTO, ICC, Celent) In fact, there is a negative correlation between the growth of international trade and LCs’ usage Today the total value of trade

guaranteed with LCs is similar to the value in the 1950s (see Figure 1.1 below )

This strongly reflects the fact that, in their current shape, trade finance tools are not

very well suited to the requirements of companies conducting international trade

Banks have not been able to benefit from the tremendous growth of international

trade to increase the volume of business in their trade finance department

Figure 1.1: Correlation between LC usage and Trade volumes

Moreover, executing trade finance services across countries poses risk

management and audit challenges It is difficult to keep track of what all the trade

finance agreements say and to maintain a comprehensive view of contingent

exposures (The Royal Bank of Scotland – Global Transaction services)

Therefore, in order to improve this service, most of major banks in trade

finance (i.e ABN AMRO, Citibank, JP Morgan, etc.) have already changed their

trade finance operations to avoid risks and acquire new market share Most of them

have already centralized their trade finance operations and offer outsourcing

services to other financial institutions Their purpose is to involve in wholesale

banking and become financial factories for regional banks which will eventually become their distributors However, regional banks still have some trump cards in their hand to avoid exiting this business In order to compete in the trade finance space, regional banks need to leverage their existing assets such as customer relationship, granular networks, and expertise by centralizing their trade finance operations

Referring the background of Vietnam in the recent years, according to UK Trade & Investment, Vietnam has been one of the fastest growing economies in the world The average GDP growth rate of the country in the period 2006 – 2010 was 6.9%, beating the target of 6.5% The country growth was the highest in the ASEAN In addition, according to the route of joining the WTO, from the end of

2007, Vietnam opened its financial market Thus, the years 2006 and 2007 were a boom of activities in banking industry as well as in the capital and real estate markets, leading to the dominance of state-owned commercial banks and joint-stock commercial banks At the end of June 2011, Vietnamese banking sector includes The State Bank of Vietnam, 5 state-owned commercial banks, 37 joint stock commercial banks, 48 foreign banks’ branches, 5 foreign banks (100% foreign owned), 5 joint venture banks, and some other types of financial institutions (http://www.sbv.gov.vn) Thus, the competition of international trade finance operations becomes sharply when foreign banks and financial institutions are allowed to fully operate Moreover, Vietnamese banks are less experienced than foreign banks in this field So, to survive in the strict competition, most of Vietnamese banks choose to apply the model of trade finance centralization which

is a usual case in global leading banks Centralizing trade finance operations is considered as a good way of the revolution in Vietnamese banks towards the fierce competitions from international banks However, it is not easy to perform as there are many differences in terms of banking scales, IT platform, and culture standard

In theory, centralizing trade finance operations is a key to avoid outsourcing and risks Vietnamese banks are researching and following up the movement This result

of the revolution cannot be guessed as it is on test Meanwhile, a case study can be done to evaluate the model It is found that the case of Bank for Investment and Development of Vietnam is essential to be considered Among the four biggest stated-own commercial banks in Vietnam (namely Vietcombank, Vietinbank, BIDV and Viet Nam Bank for Agriculture and Rural Development) which accounted for 75% of Vietnamese market share in banking system (according to The State Bank of Vietnam), BIDV has involved in trade finance activities in the early time After years researching benefits of trade finance centralization, BIDV decided to test and apply the model By the end of 2008, BIDV started to test the strategy to centralize trade finance operations on several branches Currently, trade finance activities of BIDV are in progress to be centralized with the main purpose to enhance the effectiveness of its services However, the centralization will affect not only customers but also staff members in international payment departments at BIDV branches Therefore, it is necessary to make a research to evaluate the effectiveness

of trade finance services from customers’ point of view and staff members’ attitude

1.3 Research Objectives and Questions

1.3.1 Research Objective

As stated above, the issue of trade finance centralization in Vietnamese banks is described in the case of BIDV In solving the research problem previously mentioned, this study focus on the following objectives:

 Evaluate the trade finance centralization model in Vietnamese banks of which are BIDV’s trade finance operations The model is analyzed through two factors: bank’s customers and trade finance staff members;

 Identify the appropriate method in building the model of centralization in BIDV that satisfies both customers and staffs members;

 Contribute to the knowledge of building the optimum centralization model for Vietnamese commercial banks in order to sustain competitive advantages of trade finance operations in the Vietnamese banking sector

1.3.2 Research Questions

Research questions involve the research’s translation of “the problem” into the needs for inquiry (2) To serve the research objectives of the study, two main issues need to be addressed:

 How to evaluate the effectiveness of trade finance operations in BIDV when being centralized?

 What is the appropriate method to build up the optimum model to bring the effectiveness to BIDV’s trade finance operations?

1.4 Scope and Limitations: limit in a case of BIDV

Trade finance centralization is generally a large field as the number of banks

is tremendous Nevertheless, this study is conducted with only one bank i.e the Bank for Investment and Development of Vietnam On the other side, the study evaluates the effectiveness of trade finance operations from two stand points: customers’ satisfaction and staff members’ convenience Moreover, due to lack of conditions, samples of this study are randomly collected from some branches of BIDV instead of all branches Thus, a further research with many more commercial banks and a larger scope of whole country is necessary to precisely assess the scale and measure the effectiveness of this model in the Vietnamese banking sector

operations Thus, an exploratory research and a descriptive research are viewed as appropriate research types

The next step is to choose the research design There are four types of research design to select: survey, experiments, observation and secondary data (2) This study chooses survey to implement as it provides a quick, efficient and accurate means of accessing information on a population such as BIDV staff members and customers In particular, quantitative and qualitative methods are applied to examine the research questions, using survey questionnaire as a tool to measure customer’s satisfaction and staff member’s attitude in BIDV The survey questionnaire is divided into two objectives: questionnaire for BIDV’s customers and for BIDV’s staffs Data is collected via face-to-face interview, email and telephone, then analyzed using the SPSS software program and excel program

1.6 Implication of Research

The study brings many practical meanings for BIDV in particular and Vietnamese banks in general in implementing the centralization of trade finance operations The findings are not just to help enhancing the effectiveness of trade finance activities in BIDV but also encourage them increasing their activities in this sector Moreover, the result of this research contributes to build up the optimum model of trade finance centralization for BIDV (if any) The results could also be a reference for Vietnamese commercial banks in preparation for their revolution of centralization

1.7 Structure of the study

The structure of the study comprises six chapters:

Chapter 1: Introduction to the study

This chapter presents the problem statement, research questions as well as the research method and scope of the study

Chapter 2: Theoretical background

This chapter provides a fundamental definition of trade finance and trade finance centralization It also mentions about the effect of centralization on staff satisfaction and customer satisfaction as well

Chapter 3: Introduction to BIDV

It gives an overview of BIDV and an introduction to international banking operations as well as trade finance centre in BIDV

Chapter 4: Research methodology

Based on the research objectives and scope concerned in chapter 1, and the thoretical background presented in chapter 2 and the introduction to BIDV in chapter 3, this chapter will provide a description of the methodology used

Chapter 5: Research results

This chapter introduces the major part of the research with the analysis of

empirical data and information generation

Chapter 6: Recommendations

The main recommendations are based on the results of the previous chapters, as well as the limitations of this study

CHAPTER 2: THEORETICAL BACKGROUND

This chapter provides a fundamental definition of trade finance and trade finance centralization It also mentions about the effect of centralization on staff satisfaction and customer satisfaction as well

2.1 Definition of Trade finance

In general, the concept of trade finance is not uniformly defined Economists make the concept according to thematic contents in which it reflects According to business dictionary.com, “trade finance is credit supplied for manufacturing, processing, distribution and other commerce related activities” However, according to Wells Fargo Bank 2010 – International trade procedures – A Guide to Doing Business Abroad, “Trade finance is funding provided to buyers or sellers during the course of a transaction for the purposes of improving working capital and cash flow Financial institutions provide funds in the form of loans or discount

at an advance rate that is a percentage (up to 100%) of the value of the transaction and an interest rate that reflect an assessment of risk of repayment and the funder’s ability to secure an interest in the transaction collateral” In particular, if we based

on banking practices, it is divided into two forms: trade finance facilitation and trade finance operations The trade finance facilitation refers to the services including credit operations and derivative operations which prepare financial conditions for companies to join in the international trade Trade finance operations refer to specific methods of payment to implement trade finance transactions

2.1.1 Trade finance facilitation: comprise a wide range of services which

facilitate financial conditions for companies ready to involve directly in trade

finance operations

2.1.1.1 Foreign exchange dealing

Foreign exchange refers to the exchanging one country’s local currency for foreign currency and vice versa The needs to exchange currencies arise from international flows of goods and services in counter part of cash flows In foreign exchange transactions, the buyer and the seller agree to pay each other on a

predetermined date so-called the value date The value date may be on the same day as the transaction date or on a later date

Most of foreign exchange transactions take place in the spot market where the value date is usually two banking days after the contracted transaction Besides, many transactions under derivative operations can be broken down into four main categories:

 Swaps The two parties to a swap agree for a certain period that they

will exchange regular payments The customer, for example, agrees

to sell a specific sum of foreign currency at spot rate At the same time, he also agrees to buy the same amount of this currency at a later value date of course at an agreed rate There are usually two opposite dealings involved in a swap transaction: the buying and the selling for a same amount of foreign currency

 Options An option gives the holder the right, but not the obligation,

to buy/sell something in the future at a price that is determined today For instance, a Japanese exporter willing to protect the yen value of his dollar receivables might buy put option giving him the right to sell dollars in the future at a predetermined yen/dollar exchange rate This would guarantee him a certain yen value in the future, while still giving him the opportunity to benefit if the dollar rises on foreign exchange markets.(3)

 Futures Largely traded on regulated exchanges, these contracts are

less worrisome to regulators The buyer or seller of a futures contract puts up a margin at the outset, which acts as a buffer against subsequent price changes The margin is then adjusted regularly, depending on whether the contract has gone down in value (3)

 Forwards Like futures, forwards contracts are agreements to buy or

sell at some date in the future, at a price that is agreed on today Forwards, however, are privately arranged between counterparties

and are not traded on regulated exchanges Forward contracts do not usually involve margin calls; rather, they are founded on the general creditworthiness of the counterparties (3)

2.1.1.2 Bank lending and financing

Bank lending: Lending operation is one of the main activities of

commercial banks Lending money can be profitable, but risky (high risks high profits) Profits come from collecting the interest income and fees on loans To some possible extent, banks try to charge high-risk borrowers higher interest rate than low-risk borrowers Therefore, lenders have an incentive to take greater risks

in expectation of earning higher returns However, it is difficult to identify the level

of risks as the macro conditions changes day by day Moreover, the decision to default on a loan is the borrower’s In bad conditions, if a large number of borrowers exercise their options to default, and losses are sufficiently large, the lender or the bank may fail To prevent losses and failure, banks have to control their credit risk which is “the risk of repayment, i.e., the possibility that an obligor will fail to perform as agreed,” and adversely affect earnings and capital (5)

Trade financing: In international trade, trade financing also includes the

lending in import and export activities In particular, imports are financed by bank loans, lending to importers to fulfill payment commitments in trading terms of payment such as letter of credit or documentary collection, etc For export activities, exporters are financed by their banks from the production to the exportation stage In the production stage, they borrow money to manage their business, while in the exportation stage they discount the shipment value to handle the next purchase order Trade financing also includes incentives and advantages in lending interest rate relating to sales contracts with commodities as per the governmental incentive policy

Bank loans relate to liquidity while transferring money from the exporters to their clients or their providers But trade financing also includes other non-cash instruments such as guarantees in substitution for money Letters of credit and

payment guarantees are commonly used in international payment They upgrade the importers’ credit worthiness without pouring cash in circulation whilst facilitating international trade transactions

Financial papers (bill of exchange and promissory notes) are another type of guarantee These papers will be duly honored on maturity, some months later Meanwhile they circulate like cash (a mean of payment in some ways) before they are discounted by banks

2.1.2 Trade finance operations

There are usually many means of operations namely:

2.1.2.1 Telegraphic transfer remittances (TTR)

Telegraphic transfer, often abbreviated as TT or TTR, is an electronic means

of transferring funds overseas This term of payment bases on trading practices, relationship and reliability between the buyer and the seller Banks act as intermediates to effect payment to the target beneficiary as per ordering customers’ request

There are five related parties in this method:

 The ordering customer: the party in demand to transfer money

 The ordering institution: the party to be ordered by customers to transfer money, to execute customers’ orders;

 The beneficiary: the final party to receive the money;

 The target bank: the final bank to receive money and credit to the beneficiary’s account;

 The correspondent bank: being the intermediary bank to support for overseas telegraphic transfer transactions

Types of telegraphic transfer remittances:

1 TTR in advance: The ordering customer pays in advance for a purchase order to be delivered or services to be furnished by the beneficiary in the future;

2 Merchant TTR: the payment is made after the importer (being the ordering customer) has received the cargo delivered by the exporter (being the beneficiary);

3 Non-merchant TTR: the payment is made for non-trade purposes such as paying for oversea remittances, transportation charges, clearing debts, etc

2.1.2.2 Collection

According to the International Chamber of Commerce URC Publication

no.522, 1995, “Collection” means the handling by banks of documents in

accordance with instructions received to:

1 Obtain payment and/or acceptance or

2 Deliver documents against payment and/or against acceptance or

3 Deliver documents on other terms and conditions

Parties involved:

The “Principal” is the party entrusting the handling of a collection to a bank; The “Remitting bank” is the bank to which the principal has entrusted the handling of a collection;

The “Collecting bank” is any bank, other than the remitting bank, involved

in processing the collection;

The “Presenting bank” is the collecting bank making the presentation of documents to the “Drawee”;

The “Drawee” is the one to whom the presentation of documents is to be made in accordance with the collection instructions;

There are two types of collection: clean (financial document alone) and documentary (commercial documents with or without a financial document) A financial document is a check or a draft while a commercial document is an invoice, a bill of lading or another shipping document A clean collection involves drafts and checks presented for collection In a documentary collection, the exporter draws a draft or bill of exchange directly on the importer and presents this

draft, along with shipping documents attached thereto, to the bank for collection The process of collection is described in the Appendix 2

2.1.2.3 Documentary credit with the letter of credit as the main instrument

A letter of credit, the most widely used trade finance instrument, is the simplest and most effective way for banks to finance export and import trade The letter of credit is a formal letter issued for a bank’s customer and authorizes an individual or a company to draw drafts on the bank under specific conditions It is

an instrument through which a bank grants its credit in place of its customer’s credit The bank plays an intermediary role to help complete the transaction A letter of credit does not prevent an importer from being taken in by an unscrupulous exporter, because banks deal only in documents and do not inspect the goods themselves

There are two major types of letter of credit used to finance foreign transactions: the commercial documentary letter of credit and the standby letter of credit

Commercial documentary letter of credit

The commercial documentary letter of credit is most commonly used to finance a commercial contract for the shipment of goods from sellers to buyers This instrument commits the prompt payment to the seller when shipment is made

as specified under its terms There are three parties in any type of letter of credit: the account party (or the customer), the beneficiary and the bank The documentary letter of credit is addressed by a bank to a seller (beneficiary) on behalf of the bank’s customer, a buyer of merchandise (account party) The letter authorizes the seller to draw drafts up to a stipulated amount under specified terms and undertakes

to provide eventual payment for drafts drawn The beneficiary will be paid when the terms of the letter of credit are met and the required documents are submitted to the paying bank The process of this term of payment is described in the Appendix

2

Standby letters of credit

Standby letters of credit are also a common instrument in trade finance A standby letter of credit guarantees payment to the beneficiary by the issuing bank in the event of default or nonperformance by the account party (the bank’s customer) Although a standby letter of credit may arise from a commercial transaction, it is not linked directly to the shipment of goods from sellers to buyers For example, it may cover the performance of a construction contract, serve as an insurance to the buyer that the seller will fulfill his obligations under warranties, or relate to the performance of a purely monetary obligation, e.g., when the credit is used to guarantee payment of commercial paper on maturity (4) A bank issuing standby letters of credit has a different role from one issuing commercial letters of credit

2.1.2.4 International banking guarantee

Banking guarantee is a letter of indemnity in which the bank commits itself

to pay a certain sum if a third party fails to perform or if any other form of default occurs In other words, the issuing bank makes payment on banking guarantee only when the bank’s customer has default on his primary obligation and will probably

be unable to reimburse the institution immediately Banking guarantees can be used

in international trade in the following circumstances:

2.1.2.5 Correspondent banking operations

In trade finance operations, the role of correspondence banking operations is very important Although commercial banks have been developed into large financial groups with branches in local country and overseas, they still cannot keep up with the speed of international trade development Once a bank decides to establish an overseas operation, the next decision is how to structure it However, the decision reflects a number of variables, ranging from tax considerations to the bank’s internal resources The lowest possible level of exposure to the foreign market may be achieved through a correspondent banking relationship Thanks to this relationship, every bank in the world can handle trade finance operation easily with low cost According to Jane E Hughes, Scott B Macdonald (2002)

“Correspondents provide a range of services to banks located in other countries that

do not have local offices, or whose local offices are prohibited from engaging in certain types of activities This relation allows a foreign bank to provide trade-related and foreign exchange services for its multinational customers in the foreign market, without having to establish its own physical presence …” (6)

Through banking correspondent relationship, bankers can exchange to collect market information and support each other in trade finance services such as letter of credit advising, amendment, collection, etc Moreover, one bank can open an account with other bank so-called a Nostro account or one bank can have accounts opened by other bank so-called Vostro accounts Thanks to these actions, banks can capitalize and grant credit limits almost everywhere (7)

2.2 Trade finance centralization in banks

2.2.1 Definition of trade finance centralization

According to Celent LLC, Trade finance centralization is the process by which the activities of an organization, particularly those regarding planning and decision-making become concentrated within a particular location and/or group In this study, centralization of international trade finance operations means to gather all trade finance operations of bankers’ branches into a particular location to operate

and control By centralization, banks will be able to standardize their existing business processes implementation and make better control of their processes It also helps banks to deliver better communication channel and better quality services which bring many benefits for their staff members and customers

In the world tendency, most of major banks (80%) apply the centralization that the processing of transactions focuses on particular centers These centers implement trade finance operations of their entire branches or subsidiaries in local areas and foreign countries The major global banks including ABN AMRO, JP Morgan Chase, Wells Fargo, Bank of America, Citigroup, ect., have acquired market share from regional banks and national banks by centralization So, regional banks and national banks have considered to follow this tendency In 2006 there were 30% of regional banks and 25% of national banks centralized trade finance operations and up to 45% of regional banks and 50% of national banks (including Vietnamese banks) put centralization into consideration (see Figure 2.1)

Figure 2.1: Trade finance strategy implementation at banks

Source: www.Celent.com

In the local tendency, Vietnamese banks with significant volumes of local market share have centralized their services to increase their solid reputation in international trade finances and to generate economies of scale Among the 4 biggest state-owned banks, there were 2 banks following the tendency in the early time

2008 (BIDV and VietinBank) while the remaining banks have still evaluated their options Currently, BIDV is the first bank that has concentrated by 95% the trade finance services of all branches into the Head Office. 

2.2.2 Advantages to trade finance centralization

Numerous benefits can be achieved by banks implementing a centralized trade finance operations There are many advantages that focus on cost reduction and imponderable advantages to moving to a centralized trade finance operations structure We examine each of these advantages in turn

2.2.2.1 Cost reduction

When gathering all trade finance operations in branches into one centre, operations cost and technology management costs were reduced gradually Although the cost to establish the center and to train staff members can be increased, total cost will be reduced step by step when the center begins to operate According to Celent, through the implementation of a centralized trade finance strategy, banks can reduce their transaction costs by 13 percent and their IT management costs by 18 percent (see Figure 2.2) The bank will not only generate economies of scale but also reduce its operational cost notably by lowering compensation costs for back office processing and occupancy costs, and lowering maintenance costs

Figure 2.2 Expected cost savings from Trade finance centralization

Source: www celent.com

2.2.2.2 Imponderable benefits

In addition to cost reduction, trade finance centralization generates numerous benefits apart from cost savings In fact, centralizing trade finance operations should be seen as an opportunity to reengineer the trade finance process

to improve its efficiency Thanks to better efficient services, then, trade finance’s turnovers will increase and operational fees go up as well

In particular, a centralized trade finance operation will improve customer services through:

 Decreasing trade finance instruments cost;

 Facilitating the development of a strong front end to serve trade finance customers better;

 Providing a consistent level of services across all channels;

 Facilitating the identification of experts within the bank This is crucial when customers need advice about a new market, a potential new customer, etc.;

 Aligning trade finance operations closer to the physical supply chain efficiencies, allowing banks to operate on a “follow the sun” basis, avoiding latencies by operating in different time zones While banks measure trade finance efficiency in days, corporate customers measure it in hours Through cross-border processing, banks will be able to align their trade finance operations, at least partially, with their customers’ habits (8);

 Moreover, centralizing trade finance operations will also increase employees’ value;

 Facilitating the employees’ training: using one system in one location will dramatically improve the employees’ training program and facilitate the internal mobility;

 Identifying experts: since employees will be integrated into a cross-border structure, it will become easier to identify specialists within the organization regardless of their location;

 Avoiding loss of expertise: a single centralized system will keep track of employee activities, expertise, and career path Therefore, the bank should

be able to avoid losing expertise when specific employees retire or leave the organization

 Focusing on customer interaction: centralizing trade finance operations should decrease the time employees spend on administrative tasks and allow them to spend more time interacting with customers It is believed that a careful centralization of trade finance operation should allow a bank to substantially reduce the number of its employees dedicated to administrative tasks and reallocate them to sales operations It should also improve employees’ allocation to avoid overstaffing and understaffing

2.3 The effect of centralization on the staff members and customers

As above stated, there are many advantages of centralization that focus on cost reduction, compliance, consistency across the entire network However, at the first stage of centralization, banks have to face a lot of difficulties ranging from cost increase to staff members’ dissatisfaction and customers’ inconvenience as well In this thesis, we focus on the satisfaction of staff members and customers toward the model of centralization

In the perspective of customers, centralization helps to improve service quality At the centralizing process, they enjoy the same service quality but gradually they may intangibly feel the changes In the perspective of staff members, they are directly impacted by the action of centralization They no longer handle trade finance in direct Interaction with customers is their main tasks instead Therefore, their attitude toward the centralization is very important to evaluate

Nowadays, due to financial integration and competition, banking industry is facing the pressure of human resources under the innovation The success of an organization based on the qualification of a workforce that is young, active and professional They are the key for any organization’s success Job satisfaction significantly influences organizational behavior Most studies have indicated that job satisfaction positively affects employee working performance and organizational commitment, and negatively influences employee turnover ( [Agarwal and Ferratt, 2001] , [Fraser, 2001] and [Poulin, 1994] ) Numerous factors affect employee job satisfaction Glisson and Durick (1988) indicated that workers and the nature of work itself are two main factors influence employee job satisfaction The study of Hackman, Pearce, and Wolfe (1978) of 94 secretaries found that job characteristics would affect common satisfaction and growth satisfaction Accordingly, any change in organization lead to the changes in staff satisfaction Therefore, the implementation of trade finance centralization must effect on staff satisfaction as it directly affects on the job characteristics

Trade finance centralization is to increase competitive edges and acquire new market shares We must emphasize the role of customers Thus, customers’ satisfaction is the final destination of the centralization’s purpose According to Bahia & Nantel 2000, customers’ satisfaction was effected by 6 dimensions of banking service quality including:

o The effectiveness and assurance: the effective delivery of service, particularly the friendliness and courtesy of banking staff, the ability

of staff to inspire a feeling of security, to exhibit their communication skills and to deal confidentially with clients’ requests;

o Access: the speed of service delivery;

o Price: the cost of service delivery;

o The tangibles: the appearance and cleanliness of a bank’s physical infrastructure  

o The service portfolio: the range, consistency, and innovation of the bank’s products;

o The reliability: the bank’s ability to deliver the service accurately and without error

In this research, we do not arm to investigate all of the 6 dimensions but the ones directly influenced by the centralization We focus on the dimensions: The effectiveness and assurance, access, price and reliability

Taken together, it can be deduced that we need to measure two factors when carrying out the model of centralization: customers’ satisfaction and staffs’ satisfaction Referring to the case study of BIDV, the centralization is evaluated by its staff members in international payment department and trade finance customers (Figure 2.3 Research model) For staff satisfaction, we concentrate on the changes

in job characteristics that effect on staff members For customer satisfaction, we focus on the four dimensions: effectiveness and assurance, access, price and reliability, particularly, we investigate the satisfaction in term of the banking staff

attitude, the price of service, the flexibility, the processing time, the accuracy of service

H1: Trade finance centralization effects on staff satisfaction

H2: Trade finance centralization effects on customer satisfaction

Figure 2.3: Research model

 

Staff satisfaction

Customer satisfaction

Trade finance

centralization

H1 

H2 

CHAPTER 3: INTRODUCTION TO BIDV

Chapter 3 gives an overview of BIDV and an introduction to international banking operations as well as trade finance centre in BIDV

3.1 Overview of BIDV

3.1.1 BIDV’s establishment

The Bank for Investment and Development of Vietnam (BIDV) was established under Decision No 177/TTg dated 26th April, 1957 by the Prime Minister under the first name “The Bank for Construction of Vietnam” Over more than fifty years operating and developing, BIDV has witnessed a profound transformation with several name changes and milestones as follows:

 From 1957 to 1980: The Bank for Construction of Vietnam – the forerunner

of The Bank for Investment and Development of Vietnam was founded as

an agency of the Ministry of Finance Back then, the bank’s scale was modest with eight branches and two hundred staffs Its main duty was to allocate and manage basic construction funds from the State budget to all economic and social areas

 From 1981 to 1989: On April 26th 1981, The Bank for Construction of Vietnam was renamed as The Bank for Investment and Construction of Vietnam, an agency of the State Bank of Vietnam Its main duty was to allocate, lend and manage basic construction investment funds in all economic areas which fell within the scope of the State’s planning

 From 1990 to 1994: The bank was renamed as The Bank for Investment and Development of Vietnam (BIDV) on 14th Nov, 1990 This period marked the transition of the centralized, State-subsidized mechanism toward the market oriented mechanism under the State management in the implementation of the State’s reform policy (“Doi moi” policy) BIDV’s duty therefore was changed radically: continuing to receive the State budged funds to lend the State policy projects; mobilizing medium and long term capital to grant development loans; dealing in the money market and

performing credit operations Most of the bank’s offered services then fell

in the area of construction

 Since Jan 1st 1995: This was a milestone for the radical transformation of BIDV: getting license to operate as a diversified and comprehensive commercial bank, catering mainly for the development investment of the country

 From 1996 to date: This has been considered as a period of “transformation, reform and growth embracing the country’s development” preparing a strong foundation and giving impetus to the “take-off” of BIDV after 2005 For the time being, BIDV’s functions are as a universal commercial bank providing a full range of currency, credit, banking and non-banking services, and acting as an authorized agency funding projects with sources from domestic and international financial institutions With its experience investing in key projects, BIDV plays the leading role in the development investment and the project financing in Vietnam

3.1.2 BIDV general financial status

In recent years, Vietnam’s commercial banks in general and BIDV in particular have faced a lot of challenges due to the adverse influences in the business environment However, BIDV has made an attempt to achieve the business target As on December 31st 2010 under Vietnamese Accounting Standards, the owner’s equity reached VND24,220 billions, up by 37% as compared to that of in

2009, while the total assets reached VND366,268 billions which increased by 24%, attributing to the increase of owner’s equity/total assets from 5.95% in 2009 to 6.6%

in 2010 Mobilized funds grew up by 24% and loans and advances to customers by 23%

The profit of banking services in BIDV including payment services, guarantee services, cash services, agent services and others, the net fee and income (excluding net gains from trading foreign currencies) was over VND1.776 billion., increasing by nearly 27% as compared to that of in 2009 Noticeably, the payment

services accounted for a large proportion in the total fees and commissions’ income With the proportion of 45% of the Bank’s net fee and commission income, the payment services played an important role in BIDV’s banking services Moreover,

we can see that the trade finance operations accounted for a large portion in payment services In the below table, We see that fees in trade finance service kept increasing from year by year, accounting for 30-40% fee for the total payment services in the systems

Table 3.1: Trade finance fee income

 Subsidiaries include five units: BIDV Financial Leasing Company (BLC); BIDV Financial Leasing Company II (BLC II); BIDV Securities Company (BSC); BIDV Asset Management Company (BAMC); BIDV Insurance Company (BIC);

 Administrative units & Representative offices comprise BIDV Information Technology Center; BIDV Training Center (BTC); Representative Office in

Danang city; Representative Office in Ho Chi Minh city; Representative Office in Cambodia; Representative Office in Myanmar;

 BIDV group: 113 branches and 3 Transaction Offices;

 Joint venture and Affiliates /Associates: VID-Public Bank; Lao-Viet Bank; Vietnam-Russia Bank; BIDV-Vietnam partners Investment Management Company; BIDV Tower Joint-venture Company; Affiliates/Associates

3.2 International Banking Operations and trade finance operations.

International banking operations in BIDV can be generalized as the supporting actions which the bank offers to its customer’s import and export activities such as international payment, forex dealing, loans, guarantee, discount, etc The international banking operations include almost all banking activities They are described as financial supply chains to support international trade of enterprises Supports can be tangible and intangible (commodities and services), material and immaterial (bank guarantees), or supports can even be in cash or via commercial papers (drafts, shares, bonds) The popular supports are in cash and nearly cash methods which tend to join into financial values for import and export activities

As a part of international banking operations, trade finance operations in BIDV play an important role in international trade support This is also the focus of the study In trade finance operations, BIDV involves in the following activities:

1 Telegraphic transfer remittances (TTR): includes TTR in advance, merchant TTR and non-merchant TTR

2 Clean and documentary collections:

a Import collections: include document advice, payment, or acceptance;

b Export collections: include document checking and sending for oversea money collection, and discount (if the customer need money before the maturity date)

3 Letter of credit (LC):

a Commercial documentary letters of credit:

i Import LC: includes issuing, document checking, acceptance and payment, etc

ii Export LC: includes LC confirming, advising, document checking and collection, and discount, etc

b Standby letters of credit: include issuing, advising, etc

4 International banking guarantees

a Advising international banking guarantees

b Issuing international banking guarantees

These trade finance operations were handled by international payment staff members To perform these operations smoothly, other banking operations are required Forex dealing is needed to convert local currency into foreign currency and vice versa It is important to arrange the payment in trade finance transactions

In addition, lending, financing and discount operations are also necessary for customers in arrangement for payment or other demand in production stage Besides, trade finance operations also need the support of correspondent banking operations Currently, BIDV has set up correspondent relationship with 35 foreign financial institutions which include 14 ones in the U.S.A, 7 ones in Europe, 3 ones

in Japan, 02 ones in Australia and 9 ones in other countries.(10)

3.3 Introduction to Trade Finance Centre (TFC)

3.3.1 Establishment

Trade Finance Center had been firstly established under the Decision no.54/QĐ-HĐQT dated 12th Aug 2002 to support branches in conducting international trade finance As the needs to centralize all trade finance activities from BIDV branches to the Centre, TFC was constructed under the Decision no.0342/QĐ-HĐQT dated 15 April 2009 Under this decision, TFC was divided into 3 departments:

1 Trade Finance Center no.1 (TFC1)

2 Trade Finance Center no.2 (TFC2)

3 Trade Finance Center no.3 (TFC3)

The two departments TFC1 and TFC2 were located in BIDV Head Office in Vincom Tower, 191 Ba Trieu St., Ha Noi and TFC3 was located in Ho Chi Minh City Up to April 2011, there are 93 officers in the three departments, implementing the same tasks and functions (including import transactions and export transactions)

3.3.2 Functions and tasks

TFC is a unit in the Head office organization, having functions and tasks as per regulations of the Board of management In particular, functions and tasks of TFC is stipulated as follows:

3.3.2.1 Functions

To act as advisors for the Board of Directors and the General manager in

controlling trade finance operations in the whole BIDV System

To manage, guide, check, supervise and train all branches in BIDV system to implement trade finance services, and support the branches to introduce new

products to customers

To coordinate in building, improving and selling trade finance products

To directly handle trade finance operations

3.3.2.2 Tasks

a Advising task

TFC is in charge of researching and proposing strategies as well as policies

in trade finance which are required to be suitable with the bank’s general strategies and objectives In addition, the Center evaluates and proposes the operational model; proposes the authorization and divides the responsibility between members

in running trade finance services to ensure the security, the effectiveness, and to improve the quality of banking services

b Controlling task

TFC controls and supervises trade finance operations for the whole system in BIDV so that the operations can be done in respond to laws and international regulations This task also helps to keep BIDV’s reputation Besides, TFC instructs,

checks and organizes training programs for staff members in all branches to improve their working skills

c System supporting task

TFC researches and proposes methods to support in building and controlling management tools as well as operating programs TFC also guides and clear up queries for staff members in operation process

d Product development task

In operation, TFC researches and give proposals to improve and develop trade finance products Moreover, TFC cooperates with branches and other Departments such as Corporate Product Development Department, Retail Products and Development and Marketing Department, Financial Institutions Department to sell BIDV services

e Operation task

This is the important task of TFC, which TFC has to perform regularly, in particular:

 Handling trade finance operations in export transactions:

 Advises or confirms LC/ LC amendment, bank guarantee/ amendment of bank guarantee in the BIDV system

 Transfers LC, export document collections; discount export documents for branches’ customers

 Transfers LC, export document collections; discount export documents for Head Office’s customers including corporate and financial institutions

 Deals with other export trade finance products supplied by BIDV

 Monitors and handles any request/queries relating to trade finance in export transactions

 Handling trade finance operations in import transactions:

 Issues, amends, settle letter of credit; advises and settles collections for branches’ customers

 Issues, amends, settle and endorse letter of credit; advises and settles collections for head office’s customers including corporate and financial institutions

 Deals with other export trade finance products supplied by BIDV

 Monitors and handles any request/queries relating to trade finance in import transactions

 Issues guarantees based on counter guarantees from financial institutions for the

whole system

Among the above stated tasks, operation task is the most important one as it

is performed daily to serve customers The effectiveness of the operation task is evaluated via customers’ satisfaction

Generally, TFC handles trade finance operations including clean and documentary collection, all kinds of letters of credit (also including guarantees under the form of standby letter of credit) as stated in part 3.2 above Nevertheless, telegraphic transfer remittances and international guarantees do not belong to trade operations of TFC These services are handled in large scale branches depending on their remittance limits; or centralized in the Settlement Department in the Head offices For international guarantees, TFC deals with guarantees under the form of standby LC and ones based on counter guarantee from financial institutions only; others are for the credit departments in branches

3.3.3 Relationship between TFC and Branches in handling Trade finance operations

3.3.3.1 Relationship before centralization

The model of trade finance centralization was researched and developed by the end of 2008 Prior to that period, branches in the system handled their trade finance transactions depending on the limits and the authorization of the Head office The limits are issued based on the scale and the location of each branch For branches ranked in group A (The group of best members enough qualified to fulfill annual targets), the branches’ managers were granted a limit to approve transactions

in the Trade finance program The limit is the maximum transaction amount that operators can handle Based on the competence, the qualification of each staff members, the branch’s manager authorized them to deal with trade finance transactions If the transaction were over the limit, it would be transferred to TFC to approve Also, for branches ranked in group B (normally there are branches in the countryside), all their transactions were for TFC to deal with

3.3.3.2 Transactions between TFC and branches after centralization

According to the model of trade finance centralization, all branches in the system will gradually be centralized into the TFC As per the centralization proposal, by the end of 2010, 94% of branches are centralized and 6% will be finished by the end of 2011 including Transaction Office no.1 and no.2; Ha Thanh, Binh Dinh, Phu Tai, Tien Giang and Da Nang branches For most of centralized branches, the process to handle trade finance documents is different in respect that they are indirectly handle customers’ documents The branches’ departments related

to trade finance transactions include Customers’ Relationship Dept (which controls, looks after, maintains and develops customers’ relationships), Risks Management Dept (which control customers’ limits and possible risks), and International Payment Dept (which is the main department to transact with TFC)

As there are two parties related to one transaction: TFC and branch, the rights and the responsibilities have to be clearly defined Branches, which act as an intermediary between their customers and TFC, are in charge of the validity and the adequacy of documents, the payment sources They also have the right to request TFC any investigation relating to their transactions On the other hand, TFC are responsible to handle correctly all transactions of branches in time, and reserve the right to report all mistakes of branches to the head offices TFC can also debit the account of branches to make payment on due date if payment sources haven’t been available yet