The National Assembly (NA)’s recent decision to reject a proposal to use the state budget to finance state-owned banks’ registered capital hikes has raised the question of whether the government should increase foreign ownership in the banking industry.

Domestic banks need more capital to be able to compete with international peers.

The proposal was presented by NA Economic Committee Chairman Vu Hong Thanh at the ongoing NA sitting as a part of the nation’s socio-economic development plan for 2020.

However, according to the NA Standing Committee, raising capital for state-owned banks with funding from the state budget is an important issue and needs to be discussed and assessed further by the NA. The proposal thus was rejected and excluded from the socio-economic development plan for 2020, which was approved by the NA deputies.

Previously, state-owned banks had expected that the NA would ratify the capital hike proposal to help them meet the Basel II requirements by early next year, in the context of limited domestic resources.

The Vietnamese central bank had also several times proposed the NA consider increasing capital for state-owned banks as they are in a dire need of capital to meet the Basel standards.

With the disapproval, banks will have to look for foreign investment to increase capital. However, it will be challenging for them due to the regulation on current foreign ownership cap.  

Vietnam currently allows a 30% foreign-ownership for banks and 20% for a foreign investor deemed to have a strategic interest, which does not allow foreign investors to take part in the management of banks.

Thus, banking expert Nguyen Tri Hieu explained that the current 30% foreign ownership ceiling isn’t encouraging foreign investors to invest in local banks as they can’t be involved in banks’ decision-making with the limited holding rate.

Suitable time

Meanwhile, experts said that it is time for the government to increase the foreign ownership ratio at banks to help domestic them meet requirements amid the country’s rapid integration and be able to compete with international peers.

Many foreign banks in Vietnam are now increasing their registered capital and expanding their branch networks significantly in a bid to increase their share in the lucrative market. Meanwhile, joint stock banks, particularly those owned by the state, have difficulty increasing their capital, especially with government resources stretched.

Increasing the foreign ownership ratio is thus one of the best solutions to help banks strengthen their financial capability.

Besides, globally, banks are making giant strides in adopting new technologies. So foreign investors’ greater involvement with local banks would help the latter quickly improve their technological capability.

According to representatives from the American Chamber of Commerce in Vietnam (AmCham), as of early 2019, the minimum capital adequacy ratio (CAR) of Vietnam’s entire banking system stood at 12%, of which the state-owned commercial banks stayed at an average of only 9%.

This is the lowest rate compared to regional banks such as those from Malaysia, Indonesia, and the Philippines, not to mention financial institutions belonging to developed economies such as Singapore and Hong Kong, AmCham said.

The increase of foreign ownership to 40% or even more is considered by the international investor community suitable to the context of international integration, especially in Vietnam, where there have been already 100% foreign owned banks licensed to operate.

This is even more important in the context that Vietnamese banks are forced to increase their competitiveness in the environment of international integration, compared to regional banks.

Meanwhile, experts also said because of its bright prospects, the Vietnamese economy is attracting enormous interest among foreign investors, and local banks would have no difficulty finding foreign strategic investors if the foreign ownership ratio at banks is increased.