New private players have significantly increased the range of banking services, writes Tan Siew Meng
Until recently, Vietnam was an old-fashioned cash economy. Whether it was individuals buying big-ticket items such as houses and cars, or companies servicing their payrolls and accounts, almost every transaction was in cold hard cash.
Usually this was the Vietnamese dong or US dollar, but stories abound of big purchases using gold. Even today, many companies continue to rely on cash, as fewer than 10% of Vietnam's 85 million people have bank accounts.
Economic reform has brought about dramatic change in financial services. In particular, sophisticated financial instruments have been introduced.
Vietnam's accession to the World Trade Organisation (WTO) in January 2007 was a catalyst for wide-ranging changes to all aspects of doing business. The legal and tax systems are being reformed, and the role of the private sector is being strengthened.
The result has been a rapid flow of foreign investment, and the banking and finance industry is meeting the challenge. Where once the position of the state-owned banks was unassailable, new private players have significantly increased the range of services available.
Foreign banks now can set up 100% foreign-owned subsidiaries, and some have formed strategic alliances with local banks to gain greater access to the market.
For example, HSBC this year became one of the first foreign banks to receive in-principle approval from the State Bank of Vietnam, the central bank, to set up a locally incorporated subsidiary. HSBC also owns a 15% stake in Techcombank.
The economy can be best described as in transition from cash-based to non-cash-based. Challenges remain in terms of paying salaries through bank accounts, ATM services and the use of debit cards, as these types of transactions started gaining popularity only a few years ago.
The industry remains heavily regulated by the central bank. Also, the government tightly controls foreign-exchange transactions by individuals and companies, and the dong is not freely convertible. As a result, cash remains the principal form of payment for wages and purchases, with the US dollar an alternative.
However, opportunities more than make up for the challenges of doing business in Vietnam, which is one of the most under-banked countries in Asia, with a huge market waiting to be served. New services designed to meet the needs of business clients have emerged, and market conditions have prompted international banks to develop innovative solutions for corporate customers.
One example is HSBC's establishment of electronic links with major state-owned local banks, and using their branch networks to collect and distribute cash.
The capital market is also increasingly active. On the eight-year-old Ho Chi Minh Stock Exchange, the number of listed companies has quadrupled in the past three years. On the Hanoi Securities Trading Center, smaller companies with capital of 10 billion dong (20.5 million baht) or more can be listed.
Foreign companies can be confident that the financial tools they rely on elsewhere are now available in Vietnam. Many of these advanced products and services were not in place just five years ago. Everything in Vietnam is changing - and, more significantly, changing fast.
Published in Business Times (Singapore) on Aug 20.