Foreign banks are interested in buying into local banks as a good way to develop partnerships and take advantage of local banks’ branch networks and customer bases, while assisting domestic banks in such areas as risk management, consumer banking, and building brand recognition.
The purchase by foreigners of shares in domestic credit institutions is currently regulated by Decision 228 of the State Bank of Viet Nam from 1993. Total foreign investment in joint stock banks is capped at 30 per cent, with each foreign shareholder restricted to a maximum of 10 per cent.
Foreign investors may only purchase newly issued shares from domestic banks – there is no provision for purchase from existing domestic investors. The purchase must be approved by the State Bank.
Decision 228 also subjects foreign investors to quite severe restrictions on liquidity and participation in management. They are not permitted to sell shares for five years from the date of capital contribution. A board member representing a foreign investor may not hold the position of chairman.
The State Bank is currently updating regulations on foreign investment in joint stock banks. Curiously, the draft regulations only refer to share purchases by foreign credit institutions. It is unclear whether other foreign investors will also be permitted to purchase shares.
Under the latest draft, local commercial banks selling shares to foreign investors must have minimum chartered capital of VND500 billion (US$33 million). Only foreign credit institutions with total assets in excess of US$20 billion will be permitted to buy shares. Liquidity restrictions have been relaxed somewhat, with foreign banks allowed to assign their shares after three years, if the investor has participated in management of the joint stock bank, or two years otherwise. The prohibition on the board representative of a foreign investor being chairman has been abolished. Foreign banks would also be permitted to buy shares from existing shareholders, rather than having to subscribe to an issue of new shares.
Share purchases will remain subject to State Bank approval. The draft regulations are silent on the criteria that will be used to evaluate share purchase applications. The all-too-common practice of leaving such important details to be implemented via subordinate guidelines and circulars is unfortunate. The discretion of the State Bank needs to be confined by law to promote transparency and provide potential investors with some confidence in the process.
Foreign banks will remain limited to a 10 per cent stake, other than so-called ‘strategic investors’ who will be permitted to own up to 20 per cent.
A strategic investor is defined as ‘a foreign bank or financial group with strong financial capacity and banking managerial capability, which gives an undertaking to the State Bank to provide assistance regarding technology, training, and new banking products and services, and which is very closely connected with long-term strategic interests in banking business.’
Foreign credit institutions would be allowed to acquire shares and participate in the management of up to two domestic banks.
The overall 30 per cent cap on foreign shareholding in joint stock banks would remain unchanged in the draft regulation, and a senior State Bank official quoted in the media indicated that this cap would remain in place until at least 2008. It had been hoped that listed banks would be subject to the general 49 per cent foreign ownership cap for listed companies, rather than the 30 per cent cap applicable to non-listed banks.
There have been conflicting media reports on this point. The latest reported statements from State Bank officials suggest that the 30 per cent cap will also apply to listed banks.
This indicates that the bilateral market access agreement recently signed with the US will allow Viet Nam to continue capping foreign ownership at 30 per cent.
The policy reasons behind the proposed changes to Decision 228 are clear.
The Government wants to use foreign investment to improve existing domestic banks. By only allowing large foreign banks to enter the sector, and encouraging them to enter ‘strategic partnerships’ providing local banks with support in finance, administration, technology and management, the Government hopes to bring existing banks up to international standards rather than prematurely expose them to international competition.
However, the retention of the 30 per cent cap undercuts these policies goals. The cap will clearly restrict the contribution foreign investors are willing to make to the development of Vietnamese banks.
While foreign investors will welcome the slight easing of restrictions on foreign ownership of domestic banks, more generous liberalization had been expected.
Increasing the foreign ownership cap to at least 49 per cent would increase incentives for meaningful investment in management and technology, thereby accelerating the modernization of domestic banks into internationally competitive financial institutions.