Financial Sector Development and Inclusion Program: Report and Recommendation of the ... · 2018. 12. 7. · Lei Wang, Senior Treasury Specialist, Treasury Department ... V. RECOMMENDATION

Report and Recommendation of the President to the Board of Directors

Project Number: 49331-001 November 2018

Proposed Programmatic Approach and Policy-Based Loan for Subprogram 1 Socialist Republic of Viet Nam: Financial Sector Development and Inclusion Program Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 9 November 2018)

Currency unit – Dong

D1.00 = $0.0000429 $1.00 = D23,299

ABBREVIATIONS ADB – Asian Development Bank GDP – gross domestic product

IFRS – International Financial Reporting Standards MFI – microfinance institution

MOF – Ministry of Finance NFIS – National Financial Inclusion Strategy NPL – nonperforming loan SBV – State Bank of Vietnam SEDS – Socio-Economic Development Strategy SOE – state-owned enterprise TA – technical assistance VAMC – Viet Nam Asset Management Company

VAS – Vietnamese Accounting Standards VBSP – Vietnam Bank for Social Policies VWU – Vietnam Women’s Union

GLOSSARY

Basel 2 – Basel 2 is a set of international banking regulations put forth by the Basel Committee on Bank Supervision, which established rules and numerical minimums to standardize the assessment of bank capital adequacy on a worldwide basis. The standards also establish guidelines of “best practice” for risk management.

benchmark issue –

A highly liquid bond that provides a price standard against which the performance of bonds of other maturities or credit quality are measured. Government bonds are almost always used as benchmark bonds, which in turn form the basis of a yield curve.

financial technology – An industry composed of companies that use new technology and innovation with available resources to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services.

fragmentation – A situation wherein an excessive number of financial instruments spread trading activity across each instrument such that trading levels in any one instrument are diminished.

money market – A subsection of the fixed-income market that specializes in very short-term debt securities (debt that matures in less than

http://www.investopedia.com/articles/economics/09/financial-regulatory-body.asp

http://www.investopedia.com/terms/b/baselcommittee.asp

1 year). Money market securities are essentially unsecured obligations to pay issued by governments, financial institutions, and large corporations.

non-performing loan –

A sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default. Once a loan is non-performing, the odds that it will be repaid in full are considered to be substantially lower. This definition is almost universally recognized by bank regulators across the globe.

problem bank – A bank that is considered to be in financial difficulty. yield curve – A yield curve is a term structure of interests, which derives

from bonds with equal credit quality but differing maturity dates. The most well-known is the United States treasury yield curve, which has points at various maturities including 3 months, 2 years, 5 years, 10 years, and 30 years. This yield curve is used as a benchmark for pricing all other debts in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

NOTE

In this report, “$” refers to United States dollars Vice-President Stephen Groff, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Director Sona Shrestha, Public Management, Financial Sector and Trade

Division, SERD Eric Sidgwick, Viet Nam Resident Mission, SERD

Team leaders Duong Nguyen, Financial Sector Economist, SERD

Stephen Schuster, Principal Financial Sector Specialist, SERD Team members Florissa Barot, Associate Project Analyst, SERD

Chu Minh Thi Hong, Senior Financial Sector Officer, SERD Poornima Jayawardana, Financial Sector Specialist, SERD

Christina Pak, Senior Counsel, Office of the General Counsel Karen Sanchez, Senior Project Assistant, SERD Peer reviewers Sung Su Kim, Financial Sector Specialist, Sustainable Development

and Climate Change Department Lei Wang, Senior Treasury Specialist, Treasury Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROGRAM AT A GLANCE

I. THE PROPOSAL 1

II. PROGRAM AND RATIONALE 1

A. Background and Development Constraints 1 B. Policy Reform and ADB’s Value Addition 4 C. Impacts of the Reform 8 D. Development Financing Needs and Budget Support 9 E. Implementation Arrangements 9

III. DUE DILIGENCE 9

IV. ASSURANCES 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 14

3. Development Policy Letter 15

4. Policy Matrix 21

Project Classification Information Status: Complete

PROGRAM AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 19102018174016587828 Generated Date: 13-Nov-2018 17:39:40 PM

1. Basic Data Project Number: 49331-001Project Name Financial Sector Development

and Inclusion Program, Subprogram 1

Department/Division SERD/SEPF

Country Viet Nam, Socialist Republic of Executing Agency State Bank of Vietnam

Borrower Viet Nam, Socialist Republic of

2. Sector Subsector(s) ADB Financing ($ million)Finance Finance sector development 60.00

Inclusive finance 15.00

Insurance and contractual savings 10.00

Money and capital markets 15.00

Total 100.00

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth (IEG)

Pillar 1: Economic opportunities, including jobs, created and expanded

Regional integration (RCI) Pillar 3: Money and finance

Climate Change impact on the Project Low

4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacitydevelopment (GCD)

Institutional developmentOrganizational developmentPublic financial governance

Knowledge solutions (KNS)

Knowledge sharing activities

Private sector development (PSD)

Conducive policy and institutional environment

Some gender elements (SGE)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingSDG Targeting

NoNoYes

Nation-wide High

SDG Goals SDG1, SDG8, SDG10

6. Risk Categorization: Complex .

7. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

8. Financing

Modality and Sources Amount ($ million)

ADB 100.00 Sovereign Program (Concessional Loan): Ordinary capital resources 100.00

Cofinancing 0.00 None 0.00

Counterpart 0.00 None 0.00

Total 100.00

Currency of ADB Financing: USD

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on: (i) a proposed programmatic approach for the Financial Sector Development and Inclusion Program; and (ii) a proposed policy-based loan to the Socialist Republic of Viet Nam for subprogram 1 of the Financial Sector Development and Inclusion Program. 2. The program supports the Government of Viet Nam’s efforts to develop and improve the inclusiveness of the finance sector and represents a medium- to long-term partnership between the Asian Development Bank (ADB) and the government. The government’s program will: (i) ensure greater financial stability; (ii) deepen the capital markets; and (iii) promote financial inclusion with a focus on expanding microfinance and financial technology. The program is included in ADB’s country operations business plan, 2017–2019 for delivery in 2018.1 The design and monitoring framework is in Appendix 1.

II. PROGRAM AND RATIONALE A. Background and Development Constraints 3. The development problem. Viet Nam’s economic growth is among the highest in the region – gross domestic product (GDP) grew by 6.8% in 2017. While the overall macroeconomic outlook is positive, Viet Nam remains vulnerable to several risks due to the long-standing structural weaknesses in the economy, including inefficient investment related to the low productivity of state-owned enterprises (SOEs), and the undercapitalized and inefficient banking sector.2 Financial buffers are thin and the macroeconomic frameworks are inflexible, making it harder to manage possible shocks, including disruptions in the global supply chains.3 As Viet Nam becomes increasingly integrated into the global economy, with trade accounting for two times its GDP, Viet Nam must address these impediments to remain competitive and meet the national growth targets of 6.5%–7.0% in its Socio-Economic Development Strategy (SEDS), 2011–2020.4 Initiatives to improve the investment climate and strengthen the finance sector for more efficient and inclusive financial intermediation will be required. 4. Against this backdrop, the government is concerned with the prospect of rising income inequality. While 50 million people have been lifted out of poverty since 1993, pockets of poverty remain, especially in Northern midlands and mountainous areas and Central Highlands where ethnic minorities live. While income inequality is less severe compared to other neighboring countries, it has increased notably within a short period of time, with the official Gini coefficient rising from 0.42 in 2002 to 0.43 in 2014. In rural areas, income inequality has increased much faster, with the Gini coefficient rising from 0.36 in 2002 to 0.40 in 2014.5 Moreover, an ADB study shows that Viet Nam’s recent economic growth has exhibited pro-rich gains, with returns to agriculture and manufacturing increasing only for the wealthiest 10%–20% of the population.6

1 ADB. 2016. Country Operations Business Plan for Viet Nam. 2017–2019. Manila. 2 Viet Nam’s incremental capital–output ratio ICOR (a measure of investment efficiency) was estimated at 5.2 in 2014

(this ratio is estimated at 4.6 in Malaysia, and 3.7 in the Philippines). 3 International Monetary Fund. 2018. Viet Nam Staff Report for the 2018 Article IV Consultation. Washington, DC. 4 Government of Viet Nam. 2011. Socio-Economic Development Strategy, 2011–2020. Ha Noi. 5 Source: General Statistics Office of Viet Nam. 6 P. Saumik et al. 2017. Structural Transformation, Growth, and Inequality: Evidence from Viet Nam. ADBI Working

Paper Series. No.681. Manila.

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5. To promote sustainable economic growth, reduce poverty, and tackle rising income inequality, the government has been implementing several strategies to provide the poor with greater access to basic social services such as education, health care, and public housing. Investments in basic infrastructure including transportation, electricity, and water are also prioritized to improve the livelihood and connectivity of people living in rural areas. To implement these strategies, the government has targeted social investment spending between 32%–34% of GDP over the next 5 years. Achieving this target will be a challenge as Viet Nam is currently facing the multi-year budget deficits (4.3% of GDP in 2016 and 3.5% of GDP in 2017, respectively).7 At the same time, the banking sector is weak, under-capitalized and unable to effectively mobilize long-term domestic resources to finance these investments. Non-performing loans (NPL) and problem banks continue to pose threats to the entire financial system and limit its ability to support the real sector. The government has also recognized that alternative funding sources will be needed, and that a stable and developed domestic capital market will be the main channel to mobilize longer-term domestic resources. However, Viet Nam’s capital market is under-developed, with domestic government bond market representing only 38% of GDP in 2017, compared to an average 70% in emerging East Asia. The corporate bond market is highly illiquid and only represented 3.2% of GDP as of end 2017.

6. In addition, empirical evidence shows a direct linkage between financial inclusion and income equality. This is because financial exclusion deprives the poor of opportunities to increase incomes through savings, access capital for investment, and mitigate financial risks arising from natural disasters and economic shocks.8 In Viet Nam, financial inclusion is low by all measures (Figure 1). In 2017, only 30.8% of adults had a bank account, compared to 81.6% in Thailand and 85.3% in Malaysia. These measures are even lower among the poorest 40% of the population (20.0%) and the rural inhabitants (25.0%). The percentage of Vietnamese adults with savings at a financial institution was only 14.5%, much lower than those of many regional peers. 9

Figure 1: Financial Inclusion Index

Source: Asian Development Bank estimates. Asian Development Bank. 2015. Financial Inclusion, Poverty, and Income Inequality in Developing Asia. Manila. Note: The index was constructed using five measures: (i) ATMs per 100,000 adults; (ii) commercial bank branches per 100,000 adults; (iii) borrowers from commercial banks per 1,000 adults; (iv) depositors with commercial banks per 1,000 adults; and (v) domestic credit to gross domestic product ratio.

7 As a result, the country is facing a high public debt level (63.7% in 2016 and 61.4% in 2017) which is just below the

statutory ceiling of 65.0% of GDP set by the National Assembly. 8 ADB. 2015. Financial Inclusion, Poverty, and Income Inequality in Developing Asia. Manila; International Monetary

Fund. 2015. Causes of Income Inequality: A Global Perspective. Washington, DC. 9 World Bank. Financial Inclusion Data/Global Findex 2017.

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7. Financial stability, capital market development and financial inclusion are the three key pillars of finance sector development. Financial stability ensures investor confidence, attracts long-term investment, and reduces the overall business operating costs. Capital market development facilitates longer-term, stable and affordable funding sources for public investment in social sectors and infrastructure. Finally, financial inclusion ensures wider participation and that the economic benefits generated are accessible to all. 8. Binding constraints. The government recognizes the challenges that need to be addressed in its efforts to reform the finance sector. Three key binding constraints have been identified: (i) limited capacity to maintain finance sector stability; (ii) underdeveloped capital markets; and (iii) low financial inclusion. 9. Limited capacity to maintain finance sector stability. Coordinated oversight of both individual institutions and the overall financial system is necessary to maintain financial stability effectively. The government faces three key impediments to maintaining financial stability. First, the current supervisory and regulatory framework is divided among multiple agencies, which operate without a comprehensive financial stability framework. Second, banking supervision remains weak and does not meet international standards, such as Basel 2. Banks’ lending practices remain risky and credit continues to flow into unproductive sectors, such as SOEs and real estate. Although the government reduced the NPL ratio from 17% in September 2012 to around 5% by the end of 2017,10 effective NPL resolution has been nominal, as the Vietnam Asset Management Company (VAMC) is constrained by limited capital, restrictive laws, and cumbersome foreclosure processes.11 Third, the underlying architecture of Viet Nam’s finance sector threatens financial stability. The use of a commercial bank to support the settlement of government securities transactions introduces credit risk into what should be a risk-free process. The Vietnamese Accounting Standards (VAS) do not reflect the International Financial Reporting Standards (IFRS), distorting financial disclosures and inhibiting robust risk management.

10. Underdeveloped capital market. The government has made measurable progress in developing Viet Nam’s capital market in recent years, including a more regular issuance pattern of government securities at key tenors. However, the government’s reforms have not consistently embraced the necessary sequencing, leaving some fundamental development constraints unresolved. First, the capital market is not supported by a reliable short-term interest rate benchmark, which is often derived from a functioning and liquid money market. The lack of a short-term reference rate inhibits the accurate market valuation of financial instruments and prevents the development of more advanced markets, such as derivatives. Second, while benchmark securities are forming at key tenors, they have not yet reached critical mass. Historical operational restrictions and the lack of a strong institutional investor base with a demand for longer dated assets have limited the average maturity of government bonds to just over 4 years in 2015. Finally, Viet Nam’s categorization as a “frontier” market and limits on the foreign ownership of public companies have discouraged the entry of international investors with the capacity to support and bring international best practices into the domestic market.

11. Low financial inclusion. Inadequate access to financial services and products, low financial literacy, and incomplete consumer protection have excluded a large share of the adult population from the finance sector. First, financial services for low-income people remain centered on government-subsidized microcredit provided by the Vietnam Bank for Social Policies (VBSP).

10 The figure as of the end of September 2012 was based on closer surveillance by the SBV. The figure by the end of

2017 was reported by credit institutions and the VAMC. 11 Since its inception in 2013, the VAMC has acquired from credit institutions an estimated $14 billion worth of NPLs,

of which only about 27.5% have been resolved.

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Second, other financial services for the poor and migrant workers such as savings, payments, remittances, and microinsurance services have not been fully developed. Viet Nam has a huge potential to adopt technology to leapfrog the traditional stages of financial sector development and support greater financial inclusion thanks to the high digital connection rates and the young and technology-savvy population. However, development of financial technology in Viet Nam is still at an early stage. In 2017, only 23% of Vietnamese adults had used digital payments. The government has yet to provide a comprehensive development and regulatory framework for digital financial services and agent banking. These services often require lower cost of operations, have large distribution networks and can enable financial institutions to compete with VBSP on commercial terms. In addition, the Law on Insurance should be amended to allow microinsurance for low-income customers to mitigate risks associated with a loss of income and assets. Finally, financial literacy in Viet Nam is low, with the financial literacy index (12.0) being one of the lowest among 30 countries.12 National financial literacy programs should be developed and rolled out nation-wide to better target the financially excluded population. B. Policy Reform and ADB’s Value Addition 12. The government’s reform agenda. The Socio-Economic Development Plan 2016–2020 seeks to promote a modern and equitable market economy. The government targets economic growth of 6.5%–7.0%, an increase in per capita GDP to $3,200–$3,500, and a 1.0%–1.5% annual reduction in the poverty rate by 2020.13 Recognizing the importance of financial stability, capital market development, and financial inclusion in achieving these targets, the government has initiated a series of finance sector reforms intended to strengthen the finance sector. In addition, the government has completed a bond market road map for 2017–2020 that focuses on improving the liquidity of both primary and secondary markets, extending the average maturity of government bonds, and encouraging the participation of long-term nonbank investors. Finally, while Viet Nam’s financial inclusion agenda is at an early stage, the government has placed an increasing focus on expanding financial access for the unserved and the underserved. The National Financial Inclusion Strategy (NFIS), which builds on the ADB-supported National Microfinance Development Strategy 2011–2020, 14 is being formulated to incorporate new developments in inclusive finance including digital financial services and financial literacy. 13. Policy reforms. The program is aligned with the SEDS, 2011–2020 and aims to increase the role of the nonbank finance sector and deepen the financial markets in Viet Nam. The effect of these reforms is a deeper and more inclusive finance sector. Subprogram 1 contains 26 reform measures, 9 of which are policy triggers and 17 are policy milestones.15 All subprogram 1 policy actions have been accomplished. Subprogram 2 contains 25 reform policy actions, 8 of which are expected prior actions. 14. Finance sector stability strengthened. This reform area will institutionalize financial stability functions, strengthen the banking sector and the underlying infrastructure. Subprogram 1 achieved several targets. First, the SBV established a framework for a formal financial stability function supported by systemic risk surveillance. To reduce systemic risk, the SBV required all commercial banks to fully comply with Pillar 1 and Pillar 3 of the Basel 2 standardized approach

12 ADB. 2017. Determinants and Impacts of Financial Literacy in Cambodia and Viet Nam. ADBI Working Paper Series.

Tokyo. 13 The baseline income and growth figures are in the Country Economics Indicators (accessible from the list of linked

documents in Appendix 2). 14 Government of Viet Nam. 2011. Decision on Approving the Proposal of Designing and Development of Microfinance

System in Viet Nam up to 2020. Ha Noi. 15 Prior actions are considered loan disbursement condition, and policy milestones strengthen the program.

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by 2020. This reform was complemented by immediate actions to reduce the sector’s reliance on short-term volatile funding, reduce related party lending, tighten securities margin lending, and deter speculative real estate lending activities. Second, the SBV amended the Law on Credit Institutions to introduce prompt corrective actions for problem banks based on their level of capital. The new law specifies the resolution regime for problem banks, including rehabilitation, forced merger and acquisition and declaration of bankruptcy. This provided the SBV with a stronger legal mandate to resolve weak credit institutions which have been a drag to the banking sector. The SBV also strengthened the VAMC’s ability to acquire effective control of bad debts by utilizing a wider array of funding mechanisms. Finally, the government addressed long-standing weaknesses in financial infrastructure by amending the Law on Accounting to gradually align the VAS with the IFRS and implementing a roadmap to strengthen the securities settlement process.

15. Under subprogram 2, the government will implement the reforms begun under subprogram 1 by strengthening systemic risk surveillance and banking sector performance. The SBV will: (i) implement supervisory guidelines for systemically important domestic banks; (ii) develop mechanisms to monitor and control financial stability risks; (iii) implement the early intervention and resolution framework for weak credit institutions; and (iv) adopt a formal supervisory bank rating system. The SBV will require all banks to fully comply with Basel 2, including the implementation of Internal Capital Adequacy Assessment Process (ICAAP) by 2021, and will further reduce the banking system’s reliance on short-term funding.

16. Domestic capital market broadened and deepened. This reform area will: (i) further develop the money market; (ii) deepen and enlarge the government bond market; and (iii) develop an institutional investor base. Subprogram 1 has several accomplishments. The SBV allowed a wider foreign exchange trading range for the dong, installed a Reuters platform to capture interbank money market activities, and completed a diagnostic to support the establishment of a short-term interest rate benchmark. To increase activities and liquidity in the money market, the SBV provided regulatory relief and prepared a standardized repurchase agreement. To provide a term structure of interest rates, the government conducted a continuous primary auction process of government securities at key tenors of the yield curve, including the 30-year tenor, and introduced the prerequisites for an active secondary market. To develop an institutional investor base, the government provided an enabling environment for private pension funds and authorized the social security system to invest in government bonds. Efforts to upgrade Viet Nam to “emerging market” status were begun, with a focus on liberalizing foreign ownership restrictions on listed companies.

17. Under subprogram 2, the SBV will take additional measures to support a more active foreign exchange market and will implement reforms to improve transparency in the money market. The SBV will fully identify constraints to money market development and will facilitate the completion of key legal opinions from trade associations. The government will continue its primary auction process across all maturities and will enhance liquidity by building benchmarks and reducing the number of outstanding issues. A legal framework for a Primary Dealer system and the associated liquidity support facility will be completed and the development of derivatives will be actively pursued. To foster the development of an institutional investor base, the government will allow the operation of private pension funds and encourage the participation of social security system in the government bond auctions. Finally, to further promote capital market development, the government will revise the Securities Law to be more aligned with international standards, including corporate governance, disclosure, and investor protection.

18. Financial inclusion promoted. This reform area will provide holistic support for access to financial services by the unserved and underserved population. Although the financial inclusion

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agenda is at a very early stage, subprogram 1 has achieved notable accomplishments. The SBV was appointed the national coordinator for planning and implementing national financial inclusion initiatives. The SBV’s Fintech Steering Committee was established and a framework to promote noncash payment services was developed as prerequisites for promoting financial technology to achieve greater financial inclusion. To create an enabling environment for the microfinance sector, the SBV formalized the legal framework for the sector and introduced a framework to foster alternative payment systems. The government introduced agent-based microinsurance as a new financial product. Finally, an improved rating system that focused on governance and asset quality enhanced the supervision of people’s credit funds.

19. Subprogram 2 will strengthen the legal framework for financial inclusion to include new developments such as financial technology while increasing focus on financial literacy and consumer protection. The government will develop a national financial inclusion framework including financial literacy programs such as national television game shows on financial knowledge. In addition, to enhance financial inclusion through innovation and to promote a cashless society, the SBV will develop and implement an action plan to develop financial technology in Viet Nam. The Ministry of Finance (MOF) will submit the proposal to the National Assembly to include microinsurance business in the revised Law on Insurance. The new rating system will be fully applied to people’s credit funds to strengthen their governance and capital base. The SBV will evaluate and register microfinance programs and projects under the new framework and raise awareness on the new licensing regime for MFIs.

20. ADB’s experience and strategy. ADB’s engagement in finance sector development in Viet Nam began with three successive clusters of finance sector program loans (Figure 2). Building on these engagements, the Financial Sector Deepening Program adopted a sequenced approach to address outstanding foundational constraints to capital market development by fostering the emergence of a money market and government securities market. At the same time, ADB supported financial inclusion through the Microfinance Development Program. 16 Both programs were rated successful.17 This program represents the next logical step in ADB’s support by combining finance sector development and financial inclusion under an umbrella framework designed to bring together the supply and demand sides of finance sector development. The program will also complement ADB’s efforts to improve public expenditure efficiency. 18 The program is aligned with ADB Strategy 2030 (Table 1).19

Table 1: Alignment with Strategy 2030

Strategy 2030 Priorities Program 1. Addressing remaining poverty

and reducing inequalities • Improve the financial access for micro-small-and-medium enterprises. • Indirectly support job creation and poverty reduction by creating an

enabling environment for business, while reducing income inequalities through great financial inclusion.

2. Strengthening governance and institutional capacity

• Create an enabling environment for the private sector to generate inclusive and sustainable growth

• Help build capacity for public institutions to implement reforms.

16 ADB. 2012. Report and Recommendation of the President to the Board of Directors for the Proposed Programmatic

Approach, Policy-Based Loan for Subprogram 1, and Administration of Technical Assistance Grant to the Socialist Republic of Viet Nam for the Microfinance Development Program. Manila.

17 ADB. 2017. Completion Report. Viet Nam: Financial Sector Deepening Program. Manila. ADB. 2016. Validation Report. Viet Nam: Microfinance Development Program (Subprograms 1 and 2). Manila. 18 ADB. 2016. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic

Approach, Policy-Based Loans, and Technical Assistance Grant for Subprogram 1 to the Socialist Republic of Viet Nam: Improving Public Expenditure Quality Program. Manila.

19 ADB. 2018. Strategy 2030. Achieving a Prosperous, Inclusive, Resilient and Sustainable Asia and the Pacific. Manila.

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Strategy 2030 Priorities Program

• Help improve finance sector resilience and response to economic shocks. • Indirectly support greater and more efficient public service delivery.

Source: Asian Development Bank.

Figure 2: ADB’s Engagement in Finance Sector Development in Viet Nam

ADB = Asian Development Bank, CDTA = capacity development technical assistance, PATA = policy and advisory technical assistance, PPTA = project preparatory technical assistance. Source: Asian Development Bank.

21. Lessons learned. The program’s design was informed by four key lessons learned through ADB’s engagement in finance sector development.20 First, the pace of reforms must be at a pace that recognizes that finance sector reform is a long-term process and requires proper sequencing. The effectiveness of foundation reforms should be fully demonstrated before more complex reforms are introduced. Second, to increase government ownership, the program, should be focused and consist of targeted high-impact policy actions. Third, complementary reforms are necessary to increase financial stability and boost investor confidence and participation. Finally, financial inclusion reforms should adopt a holistic approach, considering both the supply and demand side, and incorporating new developments in financial inclusion. 22. ADB’s value addition to the program. ADB’s long term engagement in the finance sector has helped ensure that the reform areas are well-sequenced and policy actions are well formulated. Through policy dialogue and technical assistance (TA), ADB has contributed directly to several reforms under the program. As the lead donor, ADB has supported the SBV to establish and strengthen the financial stability function. ADB’s rapid response to the government’s needs have contributed to the amendment of the Credit Institutions Law which provided the SBV with strong legal mandate to resolve NPLs and restructure problem banks. Through the OneADB approach, ADB experts from Southeast Asia Department and Treasury Department are supporting the government’s efforts to develop a short-term benchmark interest rate through policy dialogue and capacity development. ADB also provided an interbank transaction reporting platform to increase transparency and is supporting the early-stage development of derivatives

20 ADB. 2008. Special Evaluation Study: ADB Assistance for Domestic Capital Market Development. Manila; ADB.

2009. Country Assistance Program Evaluation: Viet Nam. Manila; ADB. 2014. Completion Report for the Third Financial Sector Program. Manila; ADB. 2017. Completion Report for the Financial Sector Deepening Program. Manila.

1992–2010: Financial Sector Program Loans I, II, and III

2008–2011: CDTA—Developing Capital Markets and Building Capacity in the Financial Sector

PPTA —Third Financial Sector Program, Subprogram 2

2014–2016: CDTA—StrengtheningFinancial Markets

2010–2015: Financial Sector Deepening Program and PPTA 2012–2014: Microfinance Development Program

2015–2018: Financial Sector Development and Inclusion Program

2008–2017: PATA – Supporting Microfinance Development Program

CDTA –Strengthening Microfinance Operations and Supervision

PATA–Supporting Microfinance Development

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markets. ADB’s assistance was instrumental in establishing a framework for the development of private pension funds. ADB is also the lead donor in financial inclusion with the support to develop the national microfinance development strategy 2011–2020, which provided a foundation for the forthcoming NFIS. Finally, ADB’s capacity development to the policymakers and partnership with the private sector on Fintech Challenge events have provided the foundation for fintech development for greater financial inclusion in Viet Nam. 23. ADB’s assistance has contributed to impressive results. Average trading volume per transaction in the government bond market increased by nearly eight times from VND 1.2 trillion in 2010 to VND 9.2 trillion in 2017. The average maturity of government debts increased from 3.2 years in 2013 to 12.7 years in 2017. The share of outstanding government bonds held by the contractual savings industry increased from 15.4% in 2013 to 45.8% in 2017, and 47.5% in September 2018, respectively. The combined stock market capitalization of the two stock exchanges increased from 19% of GDP in 2010 to nearly 75% of GDP in 2017. Regarding financial inclusion, the revised Credit Institution Law designated MFIs as credit institutions and put them under the SBV’s supervision. Microfinance regulations were developed to guide the MFIs’ operations, and the regulators’ supervisory capacity improved significantly. The government also approved a strategy to transform the VBSP into a more self-sustaining financial institution capable of carrying out market-based operations. Four private MFIs have been licensed, most recently in 2016. In 2017, the SBV licensed a total 9 microfinance programs and projects operated by the Viet Nam Women’s Union (VWU), which serve primarily low-income female clients. From 2014–2016, the number of microfinance borrowers increased by 3 million, the number of depositors increased by 2 million and outstanding loans increased by 15%.

24. Development partner coordination. To ensure that efforts to develop Viet Nam’s finance sector are complementary, a donor coordination committee led by the World Bank meets quarterly. ADB is leading capital market development by providing targeted support to develop money and debt capital markets, as well as selective efforts to strengthen financial stability, the microfinance sector, and financial technology. ADB is coordinating with the World Bank to promote financial inclusion, including support to develop and implement the NFIS. The Government of Canada (through Global Affairs Canada) is supporting efforts to strengthen banking supervision, and the Government of Japan (through the Japan International Cooperation Agency) has been helping the government develop the banking sector and NPL resolution strategies. ADB has collaborated closely with the International Monetary Fund and the policy actions under the program are consistent with the International Monetary Fund’s assessment and recommendations. C. Impacts of the Reform 25. Economic impacts of the program. This program addresses Viet Nam’s need for comprehensive finance sector reforms. The program impact assessment estimates the program’s potential net benefits at approximately $751 million. The present value of the program’s aggregate benefits is approximately $1.5 billion, which flows from reduced risk premiums on debt, increased intermediation from the nonbank sector, and greater inclusion through the microfinance sector. The present value of the program’s aggregate costs is $708 million due primarily to the additional interest cost associated with maintaining a term structure of interest rates over increasing maturities. The compliance costs to the banking sector associated with the adoption of Basel 2 are also expected to be substantial. 21

21 Program Impact Assessment (accessible from the list of linked documents in Appendix 2).

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D. Development Financing Needs and Budget Support

26. The government of the Socialist Republic of Viet Nam has requested a programmatic approach, comprising two subprograms, and a concessional loan of $100 million from ADB’s ordinary capital resources to finance subprogram 1. The loan will have a 25-year term, including a grace period of 5 years; an interest rate of 2% per year during the grace period and thereafter; and such other terms and conditions set forth in the draft loan agreement. The indicative loan amount for subprogram 2 is $100 million from ADB’s ordinary capital resources. The proceeds of the policy-based loan will be disbursed to Viet Nam in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time).

27. Viet Nam’s total financing needs for 2016–2020 are expected to be substantial, with annual budget deficits projected at 3.5%–4.0% of GDP. The government’s borrowing needs for 2018 are estimated at $17 billion, of which official development assistance and concessional loans are estimated at $3.6 billion. The size of subprogram 1 reflects the government’s financing needs, the strength of the reform and development expenditures arising from the program.

E. Implementation Arrangements

28. The executing agency is the SBV, and the implementing agencies are the MOF, State Securities Commission, Hanoi Stock Exchange, and SBV. Subprogram 1 was implemented from July 2015 to June 2018. Subprogram 2 began in July 2018 and will be implemented through June 2020. While a formal coordinating committee has not been created to support the program, specific reform measures, such as the development of a short-term interest rate benchmark and the introduction of derivatives, have given rise to formal coordination structures across and within ministries, and serve to catalyze broader cooperation.

III. DUE DILIGENCE

29. Safeguards. The program does not trigger ADB’s safeguards policies and is classified category C for the environment, involuntary resettlement and indigenous people.

30. Poverty and social. Reforms under the program will help the government achieve its poverty reduction target by providing the poor with greater access to financial services. The program introduces two pro-poor products: (i) microinsurance, which provides a cushion against unexpected loss; and (ii) alternative payment systems, which will increase the access of the poor to low-cost financial services. Subprogram 1 is categorized as having some gender elements. By improving the legal framework for microfinance operators under the VWU, which accounts for 80% of all semiformal microfinance providers, more women will be able to access savings products and apply for larger loans with a lower administrative burden and cost. The program also introduces new financial services such as microinsurance that will benefit lower income customers, many of whom are women.22

31. Governance. A governance risk assessment was conducted and noted several weaknesses in governance, public financial management, procurement, and anticorruption.23

Challenges hampering public financial management include: (i) inefficient domestic resource mobilization; (ii) unproductive public resource allocation; (iii) low budget reliability; and (iv) weak

22 United Nations Entity for Gender Equality and the Empowerment of Women (UN Women). 2016. Towards Gender

Equality in Viet Nam: Making Inclusive Growth Work for Women. Ha Noi. The study reported that more women than men are in vulnerable employment and that from 2004 to 2012, the gender earning gap has widened.

23 ADB. 2016. Country Partnership Strategy: Viet Nam, 2016–2020. Ha Noi.

10

accountability, monitoring, and evaluation. To address these challenges, ADB has supported the government’s efforts to strengthen public financial management systems through policy dialogue and targeted public financial management interventions. ADB also supported the technical drafting of the revised Procurement Law and related prime ministerial decisions that regulate private sector investment. Since 2014, ADB has provided the government with more targeted support for enhancing public asset management systems, strengthening public debt management, reducing risks associated with government guarantees, and strengthening oversight of budget implementation (footnote 18). ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government. 32. Risks and Mitigating Measures. The program has five substantial risks. First, the return of macroeconomic instability could depress capital market activities. Second, economic pressure may prevent the government from applying market principles to the microfinance sector, blunting some of the proposed reforms. The government can mitigate this risk by continuing to strengthen macroeconomic conditions and reform SOEs. Third, governance risk may arise from weak public management practices and corruption. The government, with ADB’s assistance, can mitigate this risk by strengthening the public financial management system. Fourth, vested interest might restrain government efforts to reform state-owned commercial banks. Finally, high fiscal pressure could lead to further cuts in the resources available for government staff training. The government, with support from development donors, can continue strengthening the capacity of its staff to undertake key policy reforms. Major risks and mitigating measures are described in the risk assessment and risk management plan. 24

IV. ASSURANCES

33. The government has assured ADB that implementation of the program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan agreement. No disbursement shall be made unless ADB is satisfied that the government has completed the policy actions specified in the policy matrix relating to the program.

V. RECOMMENDATION

34. I am satisfied that the proposed programmatic approach and policy-based loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve

(i) the programmatic approach for the Financial Sector Development and Inclusion Program, and

(ii) the loan of $100,000,000 to the Socialist Republic of Viet Nam for subprogram 1 of the Financial Sector Development and Inclusion Program, from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 2% per year during the grace period and thereafter; for a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Stephen Groff Vice-President

13 November 2018 24 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK Country’s Overarching Development Objective Role of the non-bank finance sector increased and financial markets in Viet Nam deepened (Socio-Economic Development Strategy, 2011–2020).a

Results Chain Performance Indicators with

Targets and Baselines Data Sources and

Reporting Mechanisms Risks Effect of the Reform A deeper, more inclusive finance sector developed

By 2021: a. The 5-year moving average of Viet Nam’s 5-year $ CDS spread falls to 200b (2014 baseline: 278). b. The share of government bonds held by the contractual savings sector increases to 50%c (2014 baseline: 14%). c. At least 60 new companies listed on the HNX (2014 baseline: 680).

d. At least one new alternative retail payment system launched and used by over 5,000 people (2014 baseline: 0).

a. Bloomberg

b. ADB; Asian Bonds Online; MOF custom report

c. HNX website

d. SBV website; SBV regulatory pronouncements

Macroeconomic instability specific to Viet Nam hampers reform efforts.

Reform Areas 1. Finance sector stability strengthened

Subprogram 1 (by 2018) 1a. Framework for financial stability approved by the SBV (2014 baseline: NA—no framework).

1b. The SBV completed a comprehensive diagnostic of the VAMC’s structure, capacity, and holdings (2014 baseline: NA—no diagnostic).

Subprogram 2 (by 2020) 1c. The VAMC disposed of at least 20% of NPLs (2014 baseline: 3.8% of NPL). 1d. The SBV incorporated pillar 2 into its Basel capital adequacy framework (2014 baseline: not completed).

1e. SBV completed the transfer of the cash settlement leg of government

1a. SBV website 1b. SBV 1c. VAMC website 1d. SBV press release 1e. SBV website

Government efforts to reform SOCBs are restrained by vested interests.

12 Appendix 1



Reporting Mechanisms Risks securities transactions from a commercial bank to SBV

(2014 baseline: the cash leg of government securities was settled by a SOCB)

2. Capital market broadened and deepened

Subprogram 1 (by 2018) 2a. The MOF applied its new quantitative evaluation framework and published a list of auction members (2014 baseline: NA—no list of auction members) 2b. The MOF issued a 20-year government bond (2014 baseline: NA—no tenors longer than 15 years). Subprogram 2 (by 2020) 2c. The SBV prepared a framework for a short-term benchmark interest rate (2014 baseline: NA—no framework for a short-term benchmark interest rate). 2d. The MOF completed the legal framework to support the adoption of a primary dealer system with responsibilities and privileges in line with international best practice (2014 baseline: NA—no diagnostic).

2a. MOF website 2b. MOF website; MOF reports 2c. SBV website; SBV regulatory pronouncements 2d. MOF website; MOF regulations

3. Financial inclusion promoted

Subprogram 1 (by 2018) 3a. A comprehensive review, including the impact on gender empowerment and the government’s role in delivering microcredit completed (2014 baseline: not completed). 3b. A framework to promote noncash payment services completed (2014 baseline: not completed) Subprogram 2 (by 2020) 3c. At least five MFIs upgraded to formal MFIs

3a. MOF website; published ADB consultant report 3b. SBV website, SBV regulatory pronouncements 3c. SBV website; SBV regulatory pronouncements

Appendix 1 13



Reporting Mechanisms Risks under the new regulations, each reporting that at least 70% of its clients are women (2014 baseline: 0).

3d. SBV completed at least one financial literacy campaign to educate the public on the benefits of the formal finance sector (2014 baseline: NA—no campaign). 3e. All PCFs assessed under the new rating system (2014 baseline: 0)

3d. SBV website; SBV regulatory pronouncements 3e. SBV regulatory pronouncements

Budget Support ADB: $100,000,000 Subprogram 1 (Concessional Ordinary Capital Resources) $100,000,000 Subprogram 2d

Assumptions for Partner Financing Not applicable.

ADB = Asian Development Bank, CDS = credit default swap, HNX = Hanoi Stock Exchange, MFI = microfinance institution, MOF = Ministry of Finance, NA = not applicable, NPL = non-performing loan, PCF = People’s Credit Fund, SBV = State Bank of Vietnam, SOCB = state-owned commercial bank, SOE = state-owned enterprise, VAMC = Viet Nam Asset Management Company. a Government of Viet Nam. 2011. Socio-Economic Development Strategy, 2011–2020. Ha Noi. b CDS spread is an indicative measure of risk—a reduction in sovereign CDS spread indicates greater financial

stability. c These performance targets are based on MOF targets for 2011–2020. The MOF’s bond market development targets

represent performance goals but are not considered firm government commitments. d This number is indicative and subject to the government’s request and approval by ADB.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=49331-001-3

1. Loan Agreement

2. Sector Assessment (Summary): Finance

3. Contribution to the ADB Results Framework

4. Development Coordination

5. Country Economic Indicators

6. International Monetary Fund Assessment Letter

7. Summary Poverty Reduction and Social Strategy

8. Risk Assessment and Risk Management Plan

9. List of Ineligible Items

Supplementary Documents

10. Program Impact Assessment

11. Macroeconomic and Debt Sustainability Assessment

http://www.adb.org/Documents/RRPs/?id=49331-001-3

Appendix 3 15

DEVELOPMENT POLICY LETTER

16 Appendix 3

Appendix 3 17

18 Appendix 3

Appendix 3 19

20 Appendix 3

Appendix 4 21

POLICY MATRIX

Policy Actions—Viet Nam Financial Sector Development and Inclusion Program

Subprogram 1 (July 2015 – June 2018) (Policy triggers in bold)


Medium-Term Results Framework (July 2020 – June 2022)

Financial sector stability strengthened

1.1 Financial stability framework developed

ADB TA:

Financial Sector Deepening Program, Subprogram 1 (TA 7895)

ADB TA:

Strengthening Financial Markets in Viet Nam (TA 8793)

To institutionalize and strengthen financial stability and crisis response mechanisms, the SBV developed a framework to support the development of a formal financial stability oversight function. These accomplishments include the following: 1. To provide a framework for a

formal financial stability function, the SBV established the formal objectives of financial stability activities, and developed the organizational structure, tasks, powers, and working regulations of the interdepartmental taskforce and working group on financial stability.

2. To prevent and reduce emerging systemic risks, the SBV developed a framework to conduct systemic risk surveillance.

The Government of Viet Nam takes additional measures to further strengthen financial stability and crisis response mechanisms. Accomplishments include the following: 1. The SBV identifies, closely

monitors and supervises domestic systemically important banks using supervisory guidelines for domestic systemically important banks.

2. The SBV implements and

strengthens systemic risk surveillance and develops and employs macroprudential instruments.

The government further improves its systemic risk surveillance capabilities and enhances financial sector stability.

22 Appendix 4





3. The SBV identified a series of macroprudential indicators, applied them to time series data (2012–2016), to develop financial stability reports and a heat map.

3. The SBV produces regular annual financial stability reports to monitor and control financial stability risks, and quarterly reports covering special topics such as real estate, corporate sector and financial system monitoring.

1.2 Bank supervision and regulation strengthened

CIDA TA:

Banking Regulation and Supervision Support Program

To strengthen the banking system further and reduce systemic risk, the SBV has completed key milestones toward the adoption of the Basel Capital Accord and has taken additional steps to reduce the risk profile of the banking sector. These accomplishments include the following:

4. The SBV increased banking

sector capitalization by requiring commercial banks to achieve compliance with Pillar 1 and 3 of the Basel 2 standardized approach by 2020.

5. The SBV addressed emerging

systemic risks by reducing the banking system’s maximum short-term volatile funding to long-term lending ratio from 60% to 45% as of January 2018, further constraining

To strengthen the banking system further, the SBV makes concrete progress in the implementation of the Basel Capital Accord and fosters the adoption of enhanced risk management regimes. Key accomplishments include the following:

4. The SBV requires commercial

banks to fully comply with Basel 2 by issuing a requirement to adopt Pillar 2 of Basel 2 including the implementation of ICAAP by 2021.

5. The SBV reduces the maximum short-term volatile funding to long-term lending ratio to 40% to further address systemic risks.

The SBV progressively adopts international capital standards to encourage enhanced risk management in the banking sector. The SBV further strengthens the banking sector, including NPL resolution.

Appendix 4 23





related party lending, restricting lending used to support securities trading activities, and increasing the risk weight on real estate lending activities to 200% from 150%.

6. Through the SBV, the government

established a framework to resolve NPLs by providing the VAMC with the authority to acquire effective control of bad debts through utilizing a wider array of funding mechanisms, including its own capital and funds obtained from international financial institutions and other external investors.

7. Through SBV, the Credit Institution

Law was amended to incorporate an early intervention and resolution framework for credit institutions which tied mandatory corrective actions to deterioration in bank ratings, capital and/or liquidity.

6. SBV adopts a formal supervisory

bank rating system, monitors banks by their capital level, earnings, liquidity and NPLs, and adopts early intervention and resolution into weak credit institutions

The SBV begins to resolve the NPL overhang and applies bank resolution activities.

1.3 Financial infrastructure enhanced

The government adopted international standards to strengthen the underlying infrastructure and support financial sector development. Measures taken include the following:

The government strengthens the underlying infrastructure to support financial sector development. Key accomplishments include the following:

24 Appendix 4





ADB TA: Financial Sector Deepening Program, Subprogram 1 (TA 7895)

ADB TA:


8. SBV completed the transfer of the cash settlement leg of government securities transactions from a commercial bank to SBV,

9. To improve investor confidence,

the government adopted the revised Law on Accounting, which will gradually align the Vietnamese Accounting Standards with the International Financial Reporting Standards, including the concept of market or “fair” value.

7. SBV identifies impediments to achieve real-time (T+0) Delivery-versus-Payment for financial securities.

8. The MOF completes an action plan to

align the Vietnamese Accounting Standards with the International Financial Reporting Standards.

The SBV expands the types of transactions settled in central bank money. The MOF implements the action plan and harmonizes the Vietnamese Accounting Standards with the International Financial Reporting Standards.

Capital market broadened and deepened

2.1 Money market activity increased

ADB TA:


The government implemented reforms designed to provide an enabling environment for the development of a short-term money market to anchor all other financial sector development. Measures taken include the following: 10. To improve macroeconomic

management and encourage the development of a foreign exchange market, the SBV widened the allowable daily trading band of the

The government strengthens the operations and enhances liquidity of the money markets to anchor more advanced market development. Measures taken include the following: 9. The SBV supports a more active

foreign exchange market and under specific circumstances reviews the reference currencies.

The SBV continues to implement more flexible exchange rate management.

Appendix 4 25





ADB TA:


dong against the United States dollar from 1% to 3% and posts a daily foreign exchange reference rate on its website.

11. To provide a basis for a

transparent interbank money market, to anchor a short-term benchmark interest rate, the SBV installed a Reuters platform to provide real-time transparency in trading on the domestic interbank market.

12. The SBV, VBMA, and market

participants completed a comprehensive diagnostic to support the establishment of a short-term benchmark interest rate.

13. To encourage the trading of short-

term money market instruments, the SBV replaced the conditions with the guiding principles for credit institutions to sell and repurchase valuable papers, and prepared a

10. The SBV improves market transparency by enhancing public disclosures of interbank lending volumes and rates from T+2 to T+1.

11. The SBV, VBMA, and market participants complete a comprehensive diagnostic and action plan to develop the money market, and facilitate the introduction of ICMA and ISDA legal opinions to support derivatives and repurchase agreement transactions.

12. The SBV, VBMA, and market participants adopt the new standardized repurchase agreement to foster increased activity in the repurchase agreement market.

The SBV increases the diversity, depth and transparency of the short-term money market. The government establishes a repurchase agreement market based on standardized repurchase agreement documentation.

26 Appendix 4





standardized repurchase agreement to encourage increased activity in the repurchase market.

2.2 Government securities markets developed

ADB TA:


ADB TA:


The government strengthened the framework for capital market development by further deepening and enlarging the primary and secondary government bond market. Measures taken include the following: 14. The government established a

continuous primary auction process at all key points along the yield curve, including regular auctions at key tenors of 5, 7, 10, 15, 20, and 30 years.

15. The government established the basic prerequisites for an active secondary market by establishing performance standards for auction members and evaluating their compliance with the standards annually.

16. The government introduced a basic

framework to support market-making activities by establishing an

The government enacts additional measures to deepen and enlarge the primary and secondary government bond market, and increase the liquidity thereof. These measures include the following: 13. The government reduces the

number of outstanding government bond issues and builds sufficient volume at key maturities to establish a stable and reliable government yield curve.

14. To further encourage market-making activities, the government completes the legal framework to set up the Primary Dealer System and the liquidity support facility for Primary Dealers.

15. The government encourages the development of the derivatives market by strengthening the

The government builds benchmark series bonds and reduces fragmentation. The government introduces formal privileges and responsibilities for Primary Dealers.

Appendix 4 27





enabling environment to support the introduction of derivatives products including index futures.

supervisory capacity, introducing new derivatives products, and providing new guidelines for the derivatives market following the revised Law on Securities.

2.3 Framework for institutional investors provided

The government introduced complementary reforms to develop an institutional investor base with a demand for long-tenor government bonds, and in time, corporate bonds. Accomplishments include the following:

17. To foster the development of an

institutional investor base, and to increase demand for capital market products, the government provided an enabling environment to support private pensions, authorized the social security system to invest in government bonds, and approved the conversion of its debt holdings to government securities.

18. The government improved the regulatory framework for open-end investment funds, including: (i) simplifying the administrative

The government takes additional measures foster the development of an institutional investor base with a demand for long-tenor government, and in time, corporate bonds. Key measures include the following: 16. The government (i) encourages

the formation of a professional, institutional investor base including private pension funds, bond investment funds, offshore investors, insurance companies, and (ii) requests the Viet Nam Social Security Fund to participate in the government bond auctions

17. To encourage further development

of the capital market, the SSC (MOF) submits to the National Assembly for approval the revised

Private pensions are established. The revised Law on Securities is adopted

28 Appendix 4





process, and (ii) reducing investment restrictions for bond investment funds.

19. To encourage broader participation

in Viet Nam’s securities markets, the government has implemented several measures designed to upgrade Viet Nam from a “frontier” market to an “emerging” market, such as liberalizing foreign ownership limits of public companies not engaged in conditional businesses or investments, allowing 100% foreign ownership of securities companies, and strengthening disclosures in the securities markets.

Law on Securities which is more aligned with international standards, including (i) relaxation of foreign ownership in securities markets, (ii) strengthening corporate governance and disclosure, and (iii) strengthening the enforcement power of the SSC.

Financial inclusion promoted

3.1 Financial inclusion framework developed

ADB TA:

Strengthening Microfinance

To provide holistic support for access to financial services by unserved and underserved populations, the government developed a comprehensive framework through development coordination among donor institutions. Accomplishments include the following:

To provide holistic support for access by unserved and underserved populations to financial services, the government launches and implements its financial inclusion framework. Accomplishments include the following:

Appendix 4 29





Operations and Supervision (TA 8391)

ADB TA:

Supporting Microfinance Development (TA 8587)

20. The government designated the SBV as the national coordinator for planning and implementing national financial inclusion initiatives.

21. The SBV established a steering

committee to coordinate and support the development of financial technology to promote financial inclusion in Viet Nam.

18. The government launches and implements the National Financial Inclusion Strategy, laying out the definition, vision, goals, and action plan and institutional arrangements.

19. The SBV’s Steering Committee finalizes and implements an action plan to develop financial technology, focusing on key areas aiming to promote greater financial inclusion.

The government implements the National Financial Inclusion Strategy with the goal to enhance financial inclusion in Viet Nam The SBV issues regulations to promote innovative financial products and services for greater financial inclusion.

3.2 Regulatory environment for financial inclusion improved

ADB TA:

Strengthening Microfinance Operations and Supervision (TA 8391)

The government improved the regulatory environment to promote diverse financial services (e.g., savings, credit, digital finance, and insurance) for unserved and underserved populations. Measures taken include the following: 22. To provide a comprehensive

enabling environment for microfinance, the SBV issued new licensing requirements for MFIs, and the government formalized a legal framework on microfinance programs and projects operated by political

The government promotes diverse financial services (e.g., savings, credit, digital finance, and insurance) for unserved and underserved populations. Measures taken include the following: 20. The SBV evaluates and registers

microfinance programs and projects under the new framework, and raises awareness of the new licensing regime on MFIs and the related guidance to achieve greater financial inclusion, with women

The government conducts regulatory impact assessments, and revises the regulatory environment to support greater financial inclusion.

30 Appendix 4





ADB TA:

Supporting Microfinance

Development (TA 8587)

World Bank

TA: Financial

Sector Soundness and Institutional Capacity Building

organizations, sociopolitical organizations, and NGOs, including the VWU.a

23. To encourage alternative

payment systems as a means of reaching the unserved and the underserved, the government provided a 5-year implementation plan to promote noncash payment services including the use of electronic payment methods for (i) retail transactions, and (ii) public services including tax, electricity, water and social security.

24. The MOF strengthened capacity of

potential agents and MOF regulators to support the development of agent-based microinsurance (at least 70% of participants were women).

25. The MOF drafted and conducted final public consultation on a decree to allow sociopolitical organizations such as the VWU to undertake microinsurance

composing at least 50% of participants.

21. The SBV launches financial

literacy and consumer protection programs including the national television game shows to raise public awareness on formal financial services.

22. The government introduces (i) standardization of QR code and chip cards, (ii) regulatory and supervisory frameworks for payment system, and (iii) specific regulatory framework for retail transactions.

23. The MOF completes the proposal to

the National Assembly to include microinsurance in the amended Law on Insurance Business.

24. The decree on microinsurance operations by sociopolitical organizations, including the VWU, is issued to protect low-income individuals.

The government takes steps to promote financial literacy and consumer protection and deepen financial inclusion.

Appendix 4 31





operations with minimum prudential requirements.

3.3 Financial institutions strengthened to promote inclusive financial services

ADB TA:

Strengthening Microfinance Operations and Supervision

(TA 8391)

ADB TA:

Supporting Microfinance Development (TA 8587)

The government initiated activities to bring financial services to the unserved and the underserved by encouraging financial institutions to strengthen their capacity and by improving the regulatory oversight function. Accomplishments include the following: 26. To ensure the sector’s healthy

development, the SBV adopted a new rating system for PCFs by focusing on their operations, governance and asset quality

The government further strengthens the capacity and upgrades the regulatory oversight function. Accomplishments include the following: 25. To implement the Credit Institutions

Law and to strengthen the regulatory and supervisory functions over PCFs, SBV revises the regulations related to licensing, operations and prudential ratios of PCFs.

The SBV conducts electronic surveillance to strengthen the regulatory functions over PCFs in rural areas.

ADB = Asian Development Bank, ICAAP = Internal Capital Adequacy Assessment Process, ICMA = International Capital Market Association, ISDA = International Swaps and Derivatives Association, MFI = microfinance institution, MOF = Ministry of Finance, NGO = nongovernment organization, NPL = nonperforming loan, PCF = People’s Credit Fund, SBV = State Bank of Vietnam, TA = technical assistance, USD = United States dollars, VAMC = Vietnam Asset Management Company, VWU = Vietnam Women’s Union. a The VWU owns at least 80% of microfinance programs and projects operated by political organizations, sociopolitical organizations, and NGOs.