Some Features of Vietnam's Financial Services Market Integration Process

is still very limited, not yet able to promote its role as an intermediary between the State and organizations providing securities services.

2.1.4. Some features of the integration process of Vietnam's financial services market

Faced with major changes in recent years, especially the deeper integration into the global economy through WTO accession, the boom of the financial services market is one of the positive responses to those changes and, more importantly, the qualitative reform of this market.

Up to now, it can be affirmed that the internationalization of financial services market is considered an important driving force to promote the development of this market in each country. Governments of all countries have determined the goal of internationalization to:

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- Enhance the ability to provide financial services to the domestic market

land;

- Increase the number of entities providing financial services to the market

domestic, thereby enhancing competitive dynamics in the market to promote market development;

- Create opportunities for domestic financial service providers to expand their business operations abroad;

- Implement the general internationalization process of the entire economy.

The fundamental issue in the process of international integration of the financial services market of countries around the world is to gradually open up to foreign participation. This means that the State controls the participation of foreign financial service providers according to the development of the domestic market.

The solution that countries use to solve this problem is to control the business licenses granted to foreign financial service providers according to the competitiveness of the domestic market; gradually loosen the regulations on participation in the domestic financial service market for foreign organizations.

In 1997, WTO members concluded an agreement on financial services as part of the WTO’s General Agreement on Trade in Services. The agreement is based on the liberalization of market access restrictions, including the exchange of services and cross-border trade (foreign direct investment). The two pillars of the agreement on financial services are the national treatment principle and the most-favored-nation principle. The first principle aims to eliminate discrimination between domestic and foreign financial service suppliers. The second principle is to apply the same conditions to all countries participating in this multilateral process. Over 70 countries have committed to legally binding agreements to open their financial services markets to competition.

The agreement covers a wide range of activities (insurance, banking, securities and other services such as the provision of financial information). The progressiveness of market access is based on the elimination of tax exemptions (most of which are subject to the national treatment principle) of participating countries. Currently, the agreement does not cover issues related to supervision and prudential rules.

In the absence of a multilateral financial services negotiation in the near future, the process of regional market integration will continue. In the EU, countries have set out a programme of measures aimed at

to provide the full benefits of financial services in the single market (Financial Services Action Plan). Regional integration will expand in the coming years with the participation of some Central and Eastern European countries. In the ASEAN region, there has been no further progress to date.

New financial service providers, especially foreign entrants, are better able than their domestic counterparts to prevent traditional collusive relationships and agreements within the financial sector and between customers. This also contributes to increased competition and efficiency in the economy as a whole. Competition in financial services will directly benefit customers through greater freedom of choice in financial instruments, leading to lower prices for financial products.

The fact that Vietnam officially became a member of the WTO is a result of the continuous reform efforts in Vietnam over the past years, including strong reforms of the financial services market. Many commitments in the financial sector have been signed, such as allowing foreign banks to establish 100% foreign-owned banks (from April 1, 2007) or the issuance of Decree 45, Decree 46 and Circulars 155, 156 dated December 20, 2007 guiding the implementation of the Law on Insurance Business in the direction of transparency, publicity of state management regime and administrative procedures... in accordance with international standards and WTO commitments.

Overall, the opening up of the financial services market will promote deeper financial reforms that benefit not only consumers but the entire economy through better allocation of real estate resources and higher efficiency of fixed capital investment. These benefits will gradually contribute to improving the economic foundations of the financial sector. As the economy prospers and develops, companies and institutions are better managed and risks are reduced.

Risks are more tightly controlled and systemic financial and economic problems tend to decrease.

Regarding insurance services, since 1993, Decree 100/CP of the Government has created a turning point in the development of the Vietnamese insurance service market, the process of opening up and integrating the insurance service market has been promoted, the participation of foreign-invested insurance enterprises has been gradually developed. The new development of the Vietnamese insurance market is the signing of the Vietnam - US Trade Agreement and its effective date from December 10, 2001. This is an important initial step for Vietnam in the process of preparing to join the World Trade Organization (WTO).

Within the scope of this Agreement, the agreed roadmap for the insurance services sector is as follows:

- After 3 years from the date the Agreement comes into effect, Vietnam will abolish market entry restrictions on US-invested insurance joint ventures;

- After 5 years, the market entry restriction for 100% US-owned enterprises will be removed. This also means that according to the principle of equal treatment in the insurance market, other foreign insurance enterprises located outside the US territory will also be allowed to enter the Vietnamese insurance market;

- After 5 years from the date the Agreement comes into effect, Vietnam will eliminate the current compulsory reinsurance rate of 20% for Vietnam Reinsurance Company (VinaRe).

- After 6 years, the Vietnamese insurance market will be almost “fully open” with the removal of restrictions on the scope of business of compulsory insurance products. At the same time, other restrictive measures will be basically abolished.

- After 10 years (1994-2004), in the Vietnamese insurance service market, 24 more insurance service providers from all economic sectors appeared, of which 14 were joint venture insurance service providers and 100% foreign invested. By the end of 2007, there were 41 insurance service providers. The development of insurance service providers has created conditions and opportunities for domestic customers to access and use insurance services, but also poses significant challenges to the development of the Vietnamese insurance service market in general, and the ability of domestic customers to access and use insurance services in particular:

Opportunity:

- Contribute to breaking the monopoly and increasing competition in the insurance market. The number of organizations providing insurance services increases, increasing the ability to provide insurance services.

- Insurance service providers compete on price, distribution... leading to the best insurance products and services for customers.

- Customer service and outreach work has also been upgraded to ensure the competitiveness of insurance service providers.

Challenge:

Only a short time after officially establishing their position in the Vietnamese insurance market, foreign insurance companies have quickly asserted their position in the market. However, this has caused unhealthy competition between domestic insurance service providers and foreign insurance service providers, in which the most common is foreign insurance companies.

The most common is the situation of lowering insurance costs too low to attract customers, paying high salaries to cause brain drain...

Although the Vietnamese stock market is newly formed and developed, we have opened the door to foreign participation. Foreign investors can participate in the Vietnamese stock market and securities service market in the following ways:

- Contribute capital, buy shares, contribute capital to joint ventures to establish securities companies or fund management companies with Vietnamese partners;

- Buying and selling securities on the Vietnamese stock market at the rate prescribed by the Prime Minister (8) ;

- In addition, foreign banks can also participate in providing custody services...

This is one of the important conditions that creates positive impacts to promote the improvement of the ability to provide as well as access and use of securities services in the Vietnamese market:

- On the one hand, foreign investors participate in the provision of securities services, contributing to improving the ability to provide securities services in the Vietnamese securities services market. In fact, currently, only 3 foreign banks are allowed to provide depository services in the Vietnamese securities services market, and no joint venture securities companies are allowed to be established.

- Second, the main participation of foreign investors in the Vietnamese stock market today is as securities investors, including both institutional investors and individual investors. Currently on

(8) Currently, this rate is 49% of total shareholders of securities registered and listed on the Stock Exchange.

10 foreign securities investment funds have mobilized capital and invested in Vietnam, but mainly from individual investors. With over two hundred accounts registered for trading at present, abundant investment capital and experience in securities investment will be a factor that has a significant impact on the access and use of securities services in the Vietnamese market. Non-state enterprises can use securities services to ensure success in capital mobilization with the hope of foreign investors.

2.2. CAPACITY OF NATIONAL ENTERPRISES IN ACCESSING AND USING FINANCIAL SERVICES

2.2.1. The understanding of the DNNQD about financial services

Understanding of financial services of Vietnamese enterprises in general and SMEs in particular is still very limited. For example, with regard to modern banking services, SMEs are not used to using these services and they do not really trust the provision of these services by commercial banks.

In recent years, the promotion of modern banking services by commercial banks has been gradually promoted, but is still quite limited and not convincing enough for customers. In the framework of a workshop jointly organized by the Banking Development Strategy Department (State Bank) and the Foreign Trade Bank (Vietcombank) on November 7, 2007, banking and financial experts shared the current situation and sought solutions to develop derivative instruments (a type of financial risk insurance when implementing economic contracts, which in essence is to disperse potential risks and of course the profits of these transactions are shared among the parties).

Derivative instruments include forwards, swaps, options and futures.

So, what benefits will businesses get when using derivatives? For foreign businesses investing in Vietnam, after earning profits and transferring money back home, if they use derivatives, they will avoid losses when there are exchange rate risks. Next, there are investment projects with large capital. These projects all borrow or purchase a quantity of foreign goods in USD, if they use interest rate swaps, they can avoid significant losses due to unpredictable fluctuations in the currency market. However, these project owners have never used derivatives.

Currently, businesses know that they will face interest rate risks when borrowing money at floating interest rates. In the context of a sharp increase in spot interest rates and knowing that they will, if they use Swaps to switch to fixed interest rates, businesses will reduce their risk losses, but business owners do not dare to act.

Although it is so useful, derivatives are currently developing quite modestly at branches of Citibank, Standard Chartered, BIDV, Vietcombank, HSBC. Although it has been operating in Vietnam for 6 years, after 2 years of service deployment, only a few businesses have used this service. There are many reasons to explain this phenomenon, but it can be affirmed that one of the reasons is that businesses do not have a deep understanding of the use of derivatives and the benefits that these tools bring to them.

In the context of insurance service providers having to increase competition to win customers, objective factors from the insurance service providers on the ability to access and use insurance services of enterprises in general and non-state enterprises in particular have become increasingly important.

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