The rise of financial business groups, with banks at their core, is increasingly shaping the landscape of Vietnam’s financial sector. However, complex cross-ownership structures and capital being funneled into so-called “backyard companies” are presenting significant challenges for state regulators and creating uncertainty within the market.
At a recent conference in Vietnam, experts warned that if financial groups are allowed to develop unsustainably, it could pose risks to the broader economy.
In response to these concerns, the new Law on Credit Institutions 2024, which took effect in July, has introduced tighter regulations aimed at increasing transparency in bank ownership. Under the law, banks are now required to disclose the share ownership ratios of individuals, organizations, and related parties. Despite these efforts, instances of banks exceeding the ownership limits have surfaced, highlighting the need for stronger enforcement.
Economist Le Xuan Nghia pointed out that, under current regulations, the maximum allowable ownership stake for individuals is capped at 15%, while for organizations it is limited to 20%. However, many are circumventing these restrictions by using relatives or employees to hold shares in their stead. This has led to a complex ecosystem of cross-ownership that complicates management and oversight.
Lawyer Nguyen Thanh Ha, chairman of SBLaw, also emphasized the growing issue of “backyard companies”—family or friend-owned firms that are used to hold assets or gain unfair advantages in the financial sector. “Without a thorough investigation into the financial flows of those investing heavily in banks, this practice will continue to destabilize the market,” Ha warned.
Nguyen Tri Hieu, a financial and banking expert, called for the creation of a law specifically governing the management of financial groups in Vietnam. Drawing from international examples, Hieu referenced the U.S. Bank Holding Act, which regulates banks within financial groups under the supervision of the Federal Reserve. The act includes stringent measures to prevent conflicts of interest, such as transfer pricing abuses, where subsidiaries could lend to each other at preferential rates, potentially leading to systemic risks.
In recent years, some of Vietnam’s largest banks, including VPBank, HDBank, and MB, have shifted toward the financial group model, where they have expanded beyond traditional banking services into diverse sectors like real estate and insurance. Pham Xuan Hoe, vice chairman of the Vietnam Financial Leasing Association (VFLA), highlighted that the total assets of the 11 largest financial groups in the country now approach VND 14 quadrillion ($571 billion), accounting for nearly two-thirds of the nation’s financial sector. Outstanding loans within these groups represent a similar share of the economy’s total credit.
Hoe noted the advantages of this model, such as the ability of subsidiaries to leverage the resources and brand power of the parent company, thus reducing costs, improving management, and offering more competitive services. However, the model also comes with risks, including the challenge of controlling complex cross-ownership structures and the potential for illicit capital flows into non-financial sectors. These practices can lead to circumvention of laws, lack of transparency, and systemic vulnerabilities.
Governor of the State Bank of Vietnam, Nguyen Thi Hong, recently addressed concerns over ownership limits being exceeded, particularly in cases where major shareholders and their affiliates conceal ownership by registering shares in the names of third parties. This practice undermines transparency and could lead to banks being controlled by a small group of shareholders, potentially jeopardizing the stability of the financial system.
In response to these concerns, the 2024 Law on Credit Institutions has introduced stricter measures to curb cross-investment and prevent monopolistic control over financial institutions. The new regulations lower the allowable shareholding for institutional investors from 15% to 10%, and for individuals and their related parties from 20% to 15%. Additionally, banks must now publicly disclose information on any shareholder or related person holding at least 1% of the bank’s charter capital.
Despite these legal adjustments, experts remain skeptical about the law’s effectiveness in addressing the root issues of cross-ownership and monopolization. Pham Xuan Hoe of the VFLA emphasized that addressing the problem of ownership limits requires not only a robust legal framework but also a shift in attitudes among banks and shareholders. “Without strong enforcement and a proactive approach from all parties, legal evasion and cross-ownership will continue to be a major bottleneck for the Vietnamese banking system,” Hoe concluded.
As Vietnam’s financial sector continues to evolve, the challenge of balancing growth with regulation remains a critical issue. The increasing complexity of financial group structures demands greater scrutiny to ensure transparency, accountability, and stability in the market.
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