Brief History of SBV

The history of the SBV takes it’s beginning with the Second National Party Congress held in 1951 in Tuyen Quang, where the SBV was established as part of the infrastructure put in place in the Northern provinces controlled by the Viet Minh. From 1951 to 1954, the main duties of the SBV encompassed financial transactions and a rudimentary set of central bank functions. This included the control of the issuance of bank notes as well as of monetary circulation, the management of the State Treasury, the management and

control of foreign exchange and money transactions, and the mobilisation of funds and the provision of loans for production and commodity circulation.

As the North of Vietnam was liberated in 1954, banking activities were directed towards supporting construction in the North and the Liberation war in the South.²⁰ When the South was liberated and the country unified in 1975, the SBV banking activities were redirected to restore the economy and to develop the country as a whole. A centrally planned system was applied to the economy as well as the banking system nation wide.

During the period 1976-1989 Vietnam had a one-tier nation wide banking system owned and controlled by the state. As a consequence a monetary market did not develop and commercial banks did not exist in the full sense. However, the restrictions placed on SBV operations and the obsoleteness of this type of centrally controlled monetary policy made financial and monetary conditions difficult. The results were over-expenditure of the state budget, hyperinflation, and serious macroeconomic unbalances.

Facing these circumstances, the Sixth Communist Congress, held in December 1986, was characterized by self-criticism over the party's failure to improve the economy. A new commitment was made to revive the economy and a decision was taken to launch a reform policy. This meant initiating a long-term process of successive reforms aiming at transforming a system previously based on administrative subsidies into one of independence and self-support. Hence, since the Sixth Communist Congress the guiding principle for the reform policy has been to encourage and facilitate the establishment of a multi-component economy and it was in this context that the launch of a process of banking system reforms was suggested. The reform process was initiated by the following two key decisions:

1. On July 3, 1987, the Chairman of the Council of Ministers (the Prime Minister) issued the Decision 218/CT to transform the main function of the state owned banks into commercial banks

2. On March 26 of 1988, the chairman of the Council of Ministers signed Decree No.53/ND on shifting the one-tier banking system towards a business-oriented structure thereby separating and establishing state-owned specialised commercial banks from the SBV.

The key content of Decree 53 was to transform the one-tier banking system into a two-tier system addressing the separation of the SBV from the working financial system

performing the actual financial transactions. This on the other hand was to be addressed by the state-owned specialised commercial banks. These included: The Foreign Trade Bank of Vietnam, The Commerce and Industry Bank of Vietnam, The Agricultural Development Bank of Vietnam and The Investment and Construction Bank of Vietnam.

However, as the decree came into force, in reality, state management and business duties still overlapped. Examples of this included:

• The SBV stipulating that branches of specialised commercial banks should be self-supporting and thereby automatically hindering general directors of the specialised commercial banks to manage their own system.

• In addition, the personnel department of the SBV decided appointments of specialised commercial bank branch managers and assistant managers without conferring with general management of specialised commercial banks.

• Moreover, the Department of Planning and Economics of the SBV was permitted to decide credit quotas and reconcile capital for branches of specialised commercial banks without approval of the banks’ general managers.

• Finally, the SBV stipulated that its representative offices were opened beside the branches of the specialised commercial banks and that all specialised commercial bank branches had to transfer capital to the SBV representative offices for payment. This resulted in specialised commercial banks loosing a large amount of their low interest capital. In addition, loan documents of the specialised commercial banks had to be further approved by the SBV, which was cumbersome and time demanding for the private clients.

Hence, although Decree 53 permitted specialised commercial banks to be self-supporting and manage their own system, important day-to-day management decisions were under the authority of the SBV. On the other side, the SBV was not ready to perform the overall control and supervision of the financial system. The SBV had not used monetary management instruments to control and guide monetary markets and the organisational model of the banking system as cumbersome.

The reform process, however, continued in other sectors of the Vietnamese economy.

The year 1989 witnessed the initiation of the process of decentralisation in the agricultural sector, the abolishment of compensations for losses due to price controls, and the confirmation of the autonomy of the state owned enterprises in production and business. Within this context the government held the view that economic development

had to be based on banking system reform, and that government consequently should concentrate its efforts here.

This resulted in the recommendation of a new, more market-based approach to banking activities that was in line with a new economic management mechanism.²¹ As a consequence, a structured plan for the banking system, which included a central bank, an investment bank, state commercial banks, joint stock commercial banks, and joint-venture banks, was proposed. Finally, it was decided to establish and develop the monetary instruments necessary to conduct a more market-based credit and monetary policy.

In May of 1990, the promulgation of two Ordinances on banking established for the first time objectives, duties, and operation purposes of each tier of the banking system. The SBV was now responsible for state management of banking systems and duties of a central bank, while commercial banks where responsible for the operation and control of their finances and the implementation of universal banking activities. Besides four specialised commercial banks, other commercial banks with different ownership were allowed and subsequently created. This included joint stock commercial banks, people’s credit funds, joint venture banks, branch offices and representative offices of foreign banks, and financial companies. Table 5.1 outlines the subsequent growth in second-tier banking institutions.

Table 5.1: Commercial banks (units)

1991 1992 1993 1994 1995 1996 1997 1998 1999

Urban joint stock banks 4 16 25 29 29 31 31 31 28

Rural joint stock banks 0 6 16 16 19 20 20 20 20

Joint venture banks 1 2 3 3 4 4 4 4 5

Foreign banks 0 5 8 9 18 22 24 25 26

Source: Department of banks, State Bank of Vietnam

In short, the two Ordinances on banks promulgated in 1990 formalised the separation of financial and business operations from that of the organisational structure of the State Bank by forming a system of credit institutions directing commercial credit businesses

21 Vietnamese development towards a market-based rather than a bank-based system is considered in

and other banking services. As such the ordinances represent an important stage of progress in the banking industry, whereby commercial banking and the organisational practice of private enterprises are disengaged from that of the ministries concentrating on state management functions.

On an organizational level, the issuance of the two Ordinances in 1990 was also an important turning point for the SBV given that the responsibilities of implementing financial transactions were no longer part of the SBV duties. This resulted in significant internal reorganizations in the SBV. Prior to 1990 the organisational structure of the SBV had included four specialised banks: The Bank of Agriculture, The Industrial Bank, The Commercial Bank, and The Foreign Commercial Bank and Saving Fund, but now staff of the State Bank of Vietnam were replaced and transferred in order to fit with the new functions, tasks and organisational structure.

More specifically, one division was transferred to state-owned commercial banks, while the rest was placed in departments of the SBV concentrating on developing and executing national monetary policies, managing business operations of credit institutions, studying proposals and drafts determining regulations and the legal basis for managing monetary business and banking operation of credit institutions and non-banking financial institutions. Other departments such as the policy study department, foreign exchange management department, and the international relations department remained in the organisational structure of the SBV.

From 1990 to 1998, the organisational structure and operations of the State Bank of Vietnam has developed in accordance with the Law on the State Bank and the Law on Credit institutions further strengthening the transformation towards a two-tier banking system. However, as mentioned above the creation of a fully independent central bank essentially entailed the completion of a process of dual separation from the actual financial system, on the one side, and the political system, on the other. While the ordinances and decisions passed in the first phase of the reforms primarily addressed the separation from the actual financial system, the process of separation from the political system was only initiated with the Law on the State Bank passed in October 1998.

The Law on the State Bank defined the role and functions of the SBV to be a government branch, and it reaffirmed the placement of the SBV headquarters in Hanoi and formally made clear that the SBV should take over as the Central Bank of the Socialist Republic of Vietnam. As a consequence, the SBV was recognised as a legal entity with legal capital.

The SBV activities were defined to be to stabilise the value of the currency value, secure the safety and stability of the banking system, and promote the development of the

economy. Moreover, the Law on the State Bank made it clear that SBV should perform the functions of state management on monetary issues and banking activities, including:

• Participation in the formulation of the social and economic development strategy and plan of the State.

• Development of national monetary policy to be examined by the Government and submitted to the National Assembly for deciding and organising policy implementation. This included a development strategy for banking and credit institutions in Vietnam.

• Develop projects of law and ordinance and other monetary and banking operation projects. Promulgate legal documents and regulations.

• Examine and inspect banking operations, and resolve violations in monetary business and banking operation.

• Represent Vietnam among international credit institutions and banks if mandated by the President and the Government of Vietnam.

• Act as Bank of Credit Institutions and Bank of Monetary Services for the Government.

In addition, the 1998 Law on the State Bank authorized the SBV to perform the following central bank functions:

• Print, issue, exchange, replace and destroy money.

• Refinancing.

• Execute monetary market and open-market function.

• Control international monetary storage and manage foreign exchange.

• Organise the payment system.

The 1998 Law on the State Bank represents an important step towards separating the SBV from the political system and establishing the SBV as an autonomous entity on par with the executive, legislative and judiciary branches of government. Yet, this ‘second’

process of separation is likely to be as lengthy as the process, which separated the SBV from the actual financial system. As a still on-going process it makes sense to evaluate the current legal and political independence of the SBV. This will consequently be the