From Monobank to Commercial Banking: Financial Sector Reforms in Vietnam (Nias Reports) by Jens Kovsted

CHAPTER 1
Central planning and
the first phase of reforms
THIS AND THE SUBSEQUENT CHAPTER will provide an overview of
how the Vietnamese financial sector has evolved over time. The
objective is in part to provide the background for the analyses
presented in subsequent chapters, and in part to illustrate how the
past continues to influence the present-day Vietnamese financial
sector.
This chapter falls into three parts. The first section presents the
institutional and historical background up to the beginning of the
first comprehensive reforms in 1986, including the potential
existence of a colonial legacy and events during the centrally co-

ordinated economy established after independence. The second
section describes events during the first phase of banking reforms
and covers the period from 1986 to the East Asian Financial crisis
(EAFC) in 1997. A descriptive analysis of the Vietnamese financial
sector would, however, not be complete without some mention of
the informal sector. Due to a dearth of data and information, it is
not possible to describe the development of the informal sector
over time. Instead, this chapter will end with a description of in-

formal financial institutions to be found in Vietnam. 
A descriptive analysis of events during the period after the
EAFC up to the beginning of 2004 will be presented in the subse-

quent chapter. Overall, this second period can be characterised by a
gradual increase in economic growth and a parallel gradual return
to reforms. The period was initiated by the adoption of the Banking
Law of 1998 stipulating the role and autonomy of the SBV and culmin-

ates with the announcement in 2001 of the restructuring and re-

capitalisation of the SOCBs

THE COLONIAL LEGACY AND THE CENTRALLY 
COORDINATED ECONOMY
The idea that institutional transparency and accountability is de-

pendent upon the legal, political and/or geographical endowments
of a country has received a significant amount of attention over
the last decade not least by the Bretton Woods institutions. The
concern with institutional endowments as well as the efforts to
change these are part and parcel of the ‘second generation reforms’
as presented by the IMF (Camdessus 1999). According to the IMF
the focus of the ‘first-generation reforms’ was to make markets work
more effectively through pricing, exchange-rate and interest-rate
reforms parallel to tax and expenditure reforms and the establishment
of rudimentary market institutions. The focus of second-generation
reforms is to address the incentive structures that result from govern-

ment bureaucracies and to develop the institutional capacity for
reform: i.e. to get the institutions right.
In an East Asian context, the focus on institutions can, however,
also be traced back to the EAFC, where a lack of institutional trans-

parency and accountability was said by some observers to be a primary
determinant of the crisis. This view reflected a body of opinion that
argued that legal traditions, political structures and geographical
endowments have a profound influence on a country’s capacity for
economic growth. For these reasons and in line with the historical
perspective adopted in this chapter it makes sense to briefly review
these factors with reference to Vietnam.
A recent World Bank study (Beck et al. 2001) evaluates the
different theories of why some countries develop well-functioning
financial systems. More specifically, why do some countries have
laws that support financial development? Three theories/views on
the historical determinants of financial development are assessed: 
1. The legal view emphasising legal traditions as a central 
prerequisite for sound and stable financial sector development;
2. The political view rejecting the central role of the legal 
tradition and stressing instead the central influence of politics 
on financial sector development;

From Monobank to Commercial Banking: Financial Sector Reforms in Vietnam (Nias Reports) by Jens Kovsted