Vietnam’s economy has experienced significant growth in recent years, and the financial sector has played a crucial role in driving this growth. However, Vietnam places strict limitations on foreign ownership in credit institutions to maintain control over the sector and safeguard the financial stability of the country. These restrictions can create challenges for foreign investors looking to enter Vietnam’s credit institution market, which has caused some uncertainty in the financial sector. In this article, we will explore the implications of the restriction on foreign ownership in Vietnam’s credit institutions and what it means for the future of the financial sector in the country.
The ownership of capital by foreign investors in credit institutions
According to a late 2021 statistical report published by Vietnam’s Central Institute for Economic Management (CIEM), most state-owned and private banks have a foreign ownership ratio of less than 30%. Despite the government-imposed restrictions on ownership rates, many domestic banking institutes are actively seeking foreign investments.
The foreign ownership of credit institution shares in Vietnam is subject to strict regulations based on the type of investor, as per the current legal system. According to Article 7 of Decree 01/2014/ND-CP, foreign individuals and organizations are prohibited from holding more than 5% and 15%, respectively, of the charter capital of a Vietnamese credit institution unless provided for by law in special cases. If a foreign strategic investor intends to invest in the Vietnamese credit industry, the maximum ownership of shares allowed is 20%, but total foreign share ownership can increase to a maximum of 30% of the credit institution’s charter capital.
The requirements for foreign investors to hold capital in Vietnamese credit institutions
a. The conditions which a foreign organization must meet in order to acquire shares leading to a shareholding level of 10% or more of a Vietnamese credit institution’s charter capital.
– The investor’s credit rating must be stable or higher, as assessed by reputable international credit rating agencies.
– The investor must possess sufficient financial resources to buy shares as indicated in the independently audited financial statement for the previous year and abide by lawful capital sources for share purchase, as per the law.
– The share purchase must not compromise the safety and stability of the Vietnamese credit institution system or hamper competition among banks in the market.
– The investor must not have committed any serious violations of the currency, banking, and securities market laws of Vietnam or the country where the foreign investor is headquartered within 12 months of the submission of the share purchase application.
– Foreign investors who are banks, financial companies, and finance-leasing firms must have total assets of at least $10 billion in the preceding year, while other foreign investors must have a minimum charter capital equivalent to $1 billion for the year preceding the share purchase dossier submission.
b. The conditions that foreign organizations must fulfill to purchase shares and become foreign strategic investors include:
– Foreign banks, financial companies, and finance-leasing companies can engage in banking activities as permitted by the laws of their home countries. Foreign financial companies can only serve as strategic investors in Vietnamese financial and finance-leasing companies.
– Having a minimum of five years of experience in international banking and finance operations.
– Possessing a minimum total asset of $20 billion in the year before the submission of the share purchase dossier.
– Demonstrating a commitment and a clear plan to foster long-term relationships with Vietnamese credit institutions. This includes supporting them with modern technology, banking product, and service development as well as improving their financial, administrative, and executive capacities.
– Not owning 10% or more of the charter capital of any other credit institution in Vietnam.
– Having committed to or already acquired 10% or more of the charter capital of Vietnamese credit institutions where the foreign organization intends to purchase shares and become a foreign strategic investor.
The present situation regarding the ownership of foreign enterprises in Vietnamese credit institutions
As of June 30, 2021, there are 19 credit institutions, comprising of 16 joint-stock commercial banks and three state-owned banks, that have foreign institutional shareholders holding over 1% of their charter capital. Moreover, it has been reported that 11 credit institutions have a foreign ownership rate exceeding 15%, with five of them having foreign share ownership rates reaching up to 25%.
At present, three of the four major state-owned banks, namely Vietcombank, Vietinbank, and BIDV, have foreign ownership rates ranging from 16.7% to 25.5%. Meanwhile, Agribank is still undergoing preparation for equitization. Consequently, the average foreign ownership rate in these four leading banking institutions is only around 16-17%, with 13% of shares remaining unaffected.
On the contrary, private commercial banks have utilized the majority of the space set aside for foreign investors, with rates reaching 27-28%. Nonetheless, they are still seeking additional capital resources from both domestic and foreign investors. However, locating suitable strategic investors is very difficult due to the strict ceiling of 30%.
The government’s plan to enhance equity opportunities for foreign investors
Several neighboring countries, such as China, Thailand, and Indonesia, have recently made significant improvements in the ownership threshold for foreign investors. Therefore, the representative from CIEM believes that Vietnamese policymakers should take advantage of this shift in the global market and create more opportunities for foreign investors. This, along with executive management improvements and the adoption of advanced digital technology, can lead to numerous benefits for banks to attract valuable foreign capital and support a successful banking restructuring.
On June 8th, 2022, the Prime Minister of Vietnam issued Decision 689/QĐ-TTG, demonstrating the government’s commitment to reducing the number of credit institutions, resolving legacy bad debts, and pushing banks to achieve higher capital adequacy ratios of 10-11% by 2023 and at least 11-12% by 2025. This action shows the government’s dedication to enhancing the quality of its credit institutions and attracting a wider pool of foreign investors from both domestic and international markets.
Advice for foreign investors
The first step for any investor looking to enter the Vietnamese banking market is to conduct thorough due diligence. This includes a comprehensive understanding of the local regulations and legal framework. Seeking out legal and financial advice from local experts is also crucial to ensure that investors are aware of any potential risks associated with investing in Vietnam’s credit institutions.
Despite the current ownership restriction, there are still potential investment opportunities in Vietnam’s banking sector. One option for foreign investors is to look for opportunities to partner with Vietnamese banks through joint ventures or other cooperative arrangements. While this may limit foreign ownership, it allows investors to gain exposure to the growing Vietnamese market and leverage the local expertise of these institutions.
Another strategy is to focus on niche areas such as digital banking services or fintech. These areas are currently experiencing rapid growth in Vietnam and may offer unique investment opportunities for foreign investors. By investing in innovative fintech solutions, foreign investors can potentially gain a competitive advantage in the market and drive growth in the Vietnamese banking industry.
It is also important for foreign investors to stay informed about any changes in government regulations and policies related to foreign investment in the banking sector. Keeping abreast of the legal and regulatory landscape will allow investors to stay ahead of the curve and take advantage of any potential changes in ownership restrictions or other regulations that may impact the market.
Conclusion
Despite the challenges that lie ahead, Vietnam’s credit market shows promising potential for growth as the government continues to work towards removing the restriction on the ownership cap for foreign investors.
In conclusion, while the restriction on foreign ownership in Vietnam’s credit institutions may be seen as a challenge for foreign investors, there are still potential investment opportunities in the market. Conducting thorough due diligence, seeking out local legal and financial advice, and focusing on niche areas such as digital banking and fintech can all help investors gain exposure to the growing Vietnamese market. With the right approach, foreign investors can capitalize on the opportunities presented by Vietnam’s rapidly developing banking industry.
HMLF is always available to offer assistance in understanding the procedures with authorities.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn Email: miller@hmlf.vn
