"Opening room" for foreign investors in commercial banks in Vietnam

Confused about limit  rate

As published most recently by CIEM in a study: "Study on the necessity of increasing the limit  on share ownership ratio of foreign investors in Vietnamese commercial banks", by June 30, 2021, 19 credit institutions with foreign institutional shareholders own more than 1% of the credit institution's charter capital, three-quarters of which belong to state-owned commercial banks and joint-stock commercial banks are 16 of 28; 11 credit institutions have a share ownership rate of over 15% of foreign institutions, of which five credit institutions have a share ownership rate of over 25% of foreign institutions.

Notably, in the period from 2018 to June 2021, the ownership of foreign organizations have incurred some banks such as BIDV with one organization KEB Hana owning 15%, MSB (eight organizations owning 28.22%), VPB (nine organizations owning 13.33%), LVB (one organization owning 2.1%) and SCB (one organization owning 4.94%).

“Although the share ownership rate of foreign investors has increased rapidly in recent years, the total share ownership of foreign investors does not exceed 30% of the charter capital of a Vietnamese commercial trade bank. Along with the increase in foreign ownership, the long-term commitment and transfer of experience and capacity of strategic shareholders have contributed to improving the financial capacity of financial institutions to operate safely, stably and more effectively in recent years,” said Mr. Nguyen Anh Duong, Head of the General Research Department, representing the research team.

Dr. Tran Thi Hong Minh, Director of CIEM, said that improving governance capacity and improving operational efficiency of the banking system has always been one of the key requirements to meet the goal of maintaining the macroeconomic stability of Vietnam's economy in the process of reform and integration. Besides, this also strengthens the attraction of foreign investment in the banking and finance sector in particular as well as in attracting FDI in general with the aim at getting more access to financial resources, advanced technology and management skills of foreign investors as well.

“The problem in drafting these goals is the receptivity of domestic commercial banks to management skills and technology from foreign investors. Besides, another thing to be mentioned is whether the current regulations on limit ing the percentage of share ownership of foreign investors in Vietnamese credit institutions affect their absorption or not," said Ms. Minh.

The report recommends that it is time for policymakers to consider a more open approach to banking regulation.

Why should “room” be released?

Referring to the reason why room should be "opened", Mr. Nguyen Anh Duong said that the adjustment to increase the share ownership ratio of foreign investors in Vietnamese commercial banks could bring some benefits such as: enhancing the ability to meet Basel II standards for Vietnamese commercial banks; supporting the effective implementation of commitments on limit ing the percentage of share ownership of foreign investors in commercial banks in FTAs, especially the EVFTA.

Accordingly, considering the proposal of EU financial institutions to hold a maximum of 49% of charter capital in two domestic commercial shares within 5 years since the effectiveness of the EVFTA, except Vietcombank, Vietinbank , BIDV and Agribank.

Besides, raising the limit  on share ownership rate of foreign investors will attract more overseas investment and be able to find strategic investors for banks, and at the same time, the reasonable increase of the room helps to avoid the risk of foreign investors dominating the operation of commercial banks.

On the basis of lessons learned from other countries and practices in Vietnam, the report recommends that it is time for policymakers to consider a more open approach to regulating the banking industry, including open access to the foreign ownership limit  in commercial banks. Accordingly, Vietnam need more detailed study on the potential benefits of increasing the limit  on share ownership ratio of foreign investors in commercial banks, associated with specific adjustment scenarios.

In addition, CIEM also suggested that Vietnam consider updating its banking industry development strategy, including considering updating its stance on the level of participation of foreign investors. At the same time, the legal framework should also be considered comprehensively in a modern and open direction to ensure equal competition for all economic sectors in the banking-finance sector.

Moreover, it is important to reconsider the possibility of raising the limit  on share ownership ratio of foreign investors in commercial banks in proposals on developing international financial centers, Fintech and payment intermediaries.