A. Brief Description of the Banking System

Vietnam is making progress in developing the basic infrastructure to support a modern banking system and financial markets. However, the government has expressed its intent to maintain central control over the financial system and therefore has been cautious in implementing new financial instruments and markets.

The central bank, the State Bank of Vietnam (SBV), is moving toward an enhanced regulatory function (to be completed by 1998) and now supervises 140 State-owned banks, 200 rural credit cooperatives, 48 joint-stock banks, 3 joint-venture banks and over 50 foreign banks. The four specialized state-owned banks which still dominate the domestic banking activity are the Bank of Foreign Trade (Vietcombank), the Vietnam Industrial and Commercial Bank (Incombank), the Vietnam Bank for Agriculture and the Vietnam Bank for Investment and Development (BIDV).

The Vietnamese banking system has come a long way since the country began its economic and financial reform program a decade ago. The number of financial institutions has risen quickly, a significant number of foreign banks have opened offices and consumers have begun to develop confidence in the Vietnamese banking system. But there still remains a lingering distrust of savings institutions since the collapse of credit unions in the early 1990's.

This lack of confidence can be seen in the fact that the public keeps as much as 45% of broad money as cash outside the banking system. Over 50% of local business transactions are conducted outside of the banking system. Additionally, there are still only 10,000 individual bank accounts for a population of 75 million. Vietnam continues to operate largely as a cash economy; paper checks were introduced in 1995. The government is in the process of creating a national payments clearing and settlement system.

The first foreign bank to open a representative office in Vietnam, the Banque Francaise du Commerce Exterieur (BFCE), arrived in 1989. Several European and Asian banks rapidly followed. In 1992, foreign banks were allowed to open full commercial branches with required local operating capital of $15 million.

Foreign banks are now moving into more traditional services, such as correspondent banking, cash management, international payment and foreign exchange services. With international trade growing at 30% per year, foreign banks are continuing to grow with the market.

Despite the official policy of designating the Vietnamese dong as the medium of exchange for all domestic transactions, the U.S. dollar remains an important parallel currency. Estimates suggest that over $2 billion is in circulation in the informal market. Dollars are also the preferred currency for international trade.

The State Bank of Vietnam and the London Club's Bank Advisory Committee (BAC) reached an agreement in principle (July 1996) to settle Vietnam's non-performing commercial bank loans. The debt accord will improve Vietnam's access to global capital markets and will allow the country to strengthen its balance of payments position. More importantly, this agreement will assist Vietnam with obtaining an international credit rating.

The development of the capital markets in Vietnam is a gradual process. Once the London Club commercial bank arrears are resolved and the IMF eases its restrictions on external debt, Vietnam will be able to tap the international bond market for an estimated $100-$150 million.

Experts believe that Vietnam will not open its planned stock market before the year 2000. The British government has announced that it will fund a $1.4 million study on the technical aspects of setting up the exchange and South Korea offered a $800,000 two year technical consulting project. Merrill Lynch and other international firms have also been advising the government over the past two years.

These efforts will help develop the required infrastructure development necessary to launch a stock market. The Vietnamese government, while recognizing the positive role a stock market could play, is approaching this subject with deliberate care. One key issue that still must be addressed is how sufficient shares will be created in state-owned enterprises.

B. Foreign Exchange Controls Affecting Trading

Comprehensive foreign exchange control regulations were first issued in late 1988, giving centralized control over all aspects of foreign exchange to the State Bank. These regulations required Vietnamese organizations and individuals to place their foreign exchange receipts from the export of goods or from the provision of services into bank accounts. The State Bank of Vietnam tightly regulates the official exchange rate of the Vietnamese dong, thus eliminating any currency "black" market.

Legislation passed in 1994 required that all foreign exchange transactions be conducted at foreign exchange banks and official foreign exchange booths. Public and private enterprises are no longer allowed to transact business in foreign currency, with the exception of select enterprises in the hotel, tourism, shipping, petroleum, transport and telecommunications sectors.

Businesses with foreign exchange operations must open accounts at local or foreign banks licensed to deal in foreign exchange. The State Bank of Vietnam must approve the conversion of currency on behalf of foreign businesses. Foreign businesses do not have the automatic legal right to convert currency, but the State Bank of Vietnam has never withheld permission. To date, foreign banks report that they have not experienced a lack of foreign currency in Vietnam.

Foreign businesses are required to ensure that foreign currency receipts derived from exports will cover foreign currency expenditures (including the repatriation of profits). The only exceptions are for companies engaged in import substitution activities or infrastructure projects. These firms are allowed continual convertibility rights.

C. Financing Exports/Methods of Payment

The majority of U.S. firms exporting to Vietnam conduct business on a documentary basis and use various methods of financing, such as letters of credit (L/C), drafts and wire transfers. New-to-market exporters and infrequent exporters should insist on using confirmed, irrevocable L/Cs when initiating relationships with new importers and distributors. Vietnamese companies often will resist the use of confirmed L/Cs because of the additional cost and collateral requirements required by Vietnamese banks.

Given the reluctance of some importers to facilitate confirmation requests, some exporters are seeking "silent" confirmation from foreign banks willing to assume the payment risk of the opening bank. Most banks are unwilling to provide "silent" L/C confirmations, although some banks will do it on a very selective basis, given the associated risk. U.S. banks rarely provide silent L/C confirmation. Should a U.S. exporter want to employ this method of payment, there are European banks which are willing to provide this service.

U.S. exporters should make sure that local Vietnamese banks opening L/Cs are located in Hanoi or Ho Chi Minh City. Many exporters have found a general lack of expertise in dealing with L/C problems at Vietnamese bank branches located outside of these principal commercial centers.

After establishing a relationship with and the financial credibility of a local importer, U.S. exporters have offered goods against less restrictive forms of payment, including consignment. Other forms of payment, such as delivery against acceptance, have not been tested in Vietnam. Forfaiting, the issuance of a draft on an L/C and selling the draft to an investor, has found limited acceptance.

Countertrade, which was popular in the late 1980's and early 1990's, is used less frequently today. Countertrade can be difficult. Most companies that make a product attractive to foreign buyers will want to sell to them directly in order to earn their own foreign exchange, rather than sell the products for local currency. Success in countertrade transactions requires a global trading network and patience.

Vietnamese companies which seek to import goods must have an import license issued by the Ministry of Trade. In many cases, the Vietnamese firm will not have an import license and therefore the local importer must go through a licensed Vietnamese trading company. U.S. exporters should prequalify the importers, with respect to licenses, prior to conducting business.

While many transactions are successfully conducted through local trading companies, an additional cost is attached to the transaction. This cost typically affects the retail or market price and, in some cases, renders the product uncompetitive in terms of price.

A recent government regulation requires Vietnamese companies to deposit 80% of the L/C value prior to its opening at the bank. This regulation applies to all non-essential goods and can affect the ability of the Vietnamese to enter into an import transaction, since many companies are working with constrained capital. D. U.S. Export Financing and Insurance Currently, U.S. bilateral export financing, loan guarantee and insurance programs are not available through the U.S. Export Import Bank (EXIMBANK), the Foreign Credit Insurance Association (FCIA) and the Overseas Private Investment Corporation (OPIC) for transactions in Vietnam.

E. Types of Available Export and Project Financing

Foreign banks operating in Vietnam provide trade financing facilities for U.S. exporters. They prefer to deal in irrevocable, confirmed letters of credit.

American banks operating in Vietnam include the American Express Bank, Bank of America, Chase Manhattan Bank and CitiBank. All of the American banks offer trade financing services to U.S. companies. Large foreign banks operating in Vietnam include Standard Chartered Bank, Credit Lyonnais, Deutsch Bank, ING Bank, ANZ Bank and BFCE. Some of these banks offer retail banking services and, recently, ATM service has been announced on a trial basis in Ho Chi Minh City.

Several Japanese trading houses, such as Sumitomo, Mitsubishi, Mitsui, Kanematsu and Nichimen, offer competitive trade financing and project financing terms. Japanese trading companies tend to assume more risk in a project, than foreign banks, by offering longer term loans and in some cases taking an equity position.

Vietnam secures a substantial portion of its development funding from multilateral development banks, primarily the Asian Development Bank (ADB), the World Bank, the International Finance Corporation (IFC) of the World Bank, Japan's Overseas Economic Cooperation Fund (OECF) and the United Nations Development Program (UNDP). American firms can participate in and take advantage of projects funded by these agencies. Several U.S. companies have been successful at selling products and services in this manner.

The Asian Development Bank (ADB), based in Manila, Philippines, provides funding for investment projects in power, transportation, fishing, agriculture and the environment. Tenders are conducted based on international bidding. The ADB has plans to open an office in Hanoi.

The World Bank, based in Washington D.C., but with an office in Hanoi, maintains a relatively large funding program for Vietnam. Projects focus on macro-economic policy, financing policies and infrastructure projects for power, energy, transportation and the environment. The World Bank also conducts its procurement by the rules of international competitive bidding.

The International Finance Corporation (IFC) of the World Bank has accelerated its activities in Vietnam. As a financing agency the IFC provides both debt and equity for projects in a wide variety of business sectors, including construction materials, leasing, steel, glass, cement, tourism, infrastructure, agribusiness and general manufacturing. As of mid-1996, the IFC has supported projects valued at $830 million, by issuing $156 million of its own funds and $181 million from other participants. IFC funding approval lead times can be long (12 months), so U.S. firms need to apply early, should they desire access to its support for investment projects.

The Overseas Economic Cooperation Fund (OECF) of Japan is a general untied bilateral funding agency which provides financing for infrastructure projects in Vietnam. American firms can participate in OECF funded projects, if they partner with a Japanese supplier. Project tenders are conducted under rules of international competitive bidding.

The United Nations Development Program (UNDP), with headquarters in New York City, but which also has a representative office in Hanoi, provides funding for industrial and agriculture development. UNDP in Vietnam is active across a broad front of industry and social sectors and sponsors numerous public sector, social, agricultural and refugee assistance programs. Project tenders are conducted in the same manner as the World Bank tenders.

In addition, the Japanese ExIm Bank (JEXIM) will finance up to 85% of an international trade transaction, if the sale transaction contains at least 30% of Japanese goods.

Bilateral government loans, commonly offered by our competitors, provide them a comparative advantage that effects American trade performance in Vietnam. These are actually soft loan programs designed to support a particular country's exporters. American firms, otherwise competitive on price and quality, sometimes lose contracts because they cannot compete with the low interest rates offered by the government of a competing company.

It is important to note that U.S. multinational firms with manufacturing operations located in the countries which offer tied loans can benefit from the above practice.

The offering of project loan guarantees by the Vietnamese government has been limited by the International Monetary Fund (IMF). That restriction applies to all new, nonconcessional borrowing by State-owned enterprises, joint-ventures and private companies. It applies to loans with a maturity of 5 years to 12 years. The Ministry of Finance can only provide guarantees for up to $400 million per year. Since the majority of project debt in Vietnam is medium term (5-7 years), this has a significantly limits loans requiring government guarantees.

During 1996, several domestic and international leasing companies have received licenses to conduct business in Vietnam. The two largest are the leasing joint-ventures at Vietcombank and the Industrial and Commercial Bank of Vietnam. Each local bank has substantial foreign partners to back the ventures. While the initial capitalization is small ($5-10 million), these companies could play a significant role as alternative financiers in the future. These companies are focused on the leasing of capital equipment. At present, their ability to transact business is limited, because credit insurance for lessors is not available in Vietnam. The lessor must therefore carefully scrutinize potential clients. There are also certain legal constraints to the ownership of leased goods.

F. List of Banks with Correspondent U.S. Banking Relationships

Following the lifting of the U.S. trade embargo, several U.S. banks established a presence in Vietnam. While all of the American banks in Vietnam have received branch licenses in Hanoi, none have been granted a branch license to operate in Ho Chi Minh City, which would allow them to conduct full banking operations. Therefore, all in-country banking activities must be transacted in Hanoi. This situation has not yet given U.S. banks equal access to the Vietnamese market, as over 50% of the commercial banking activity takes place in Ho Chi Minh City.

The following local banks are the most active in terms of correspondent relationships with U.S. banks: Vietcombank, Incombank, the Bank for Agriculture and the Bank for Investment and Development. In addition, several joint-stock banks have correspondent relationships, such as the Vietnam Export-Import Bank (ExIm Bank), the Maritime Bank, Saigon Commercial and Industrial Bank and the Vietnam Commercial Joint-Stock Bank for Private Enterprise (VP Bank).

G. Co-Investment Sources

Since the early 1990's, several direct investment funds have begun operations in Vietnam. The Vietnam Fund raised $54 million in 1991 and was quickly followed by a series of other funds such as The Kepple Group ($90 million), the Beta Vietnam Fund ($50 million) , the Vietnam Frontier Fund ($50 million) , the United Overseas Bank (UOB) Fund, Lazard Vietnam Fund ($60 million), Templeton Fund ($110 million) and Dragon Capital Fund ($15 million).

Additionally, large international investment banks, such as Goldman Sachs and Morgan Stanley, have been organizing direct investment projects in Vietnam. In total, there is over $500 million in international capital available for projects that can provide the returns that international fund managers require. Investment into foreign-operated joint-ventures is a priority target for the fund managers.

U.S. companies desiring equity investment from these country-specific funds must develop a coherent, well- prepared business strategy and plan, prior to approaching the funds. These plans should include financial projections, organized under international accounting (GAAP) rules. The majority of the funds are becoming overloaded with substandard project requests and have an extremely high rejection rate. Careful proposal preparation will be a decided asset and will help to encourage the interest of the investors.

All of the funds have limits as to the amount of investment available per project. Therefore, in the case of equity requirements exceeding $5 million, the U.S. company should be prepared to link two or more funds together. Most offshore international investment banking firms will only look at projects requiring a minimum of $20 million.

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Last update: March 1997 by VACETS