Why financial reform is the antidote for Vietnam’s ailing banking sector

Recovery is in sight.

Burdened by the high level of bad debt and poor corporate governance in the banking system, growth in the 'finance, banking and insurance' industry has been decelerating in real terms.

According to a research note from BMI Research, multiple attempts have been made under the tutelage of Prime Minister Nguyen Tan Dung and central bank governor Nguyen Van Binh to shore up the banking industry as laid out in the country's financial restructuring roadmap that was drawn up in late 2011.

In particular, ongoing financial reforms have gathered speed, notably as seen in the increasing number of bank mergers and acquisitions since the start of 2015. However, we identify cross ownerships and the slow privatisation drive to be among key factors that will act as a drag on reforms.

Here’s more from BMI Research:

As such, we expect the Vietnamese banking sector to get healthier over the coming years amid continued robust economic growth, but banking improvements will likely come at a gradual pace.

Recognising the risk to financial stability posed by the banking sector following the property slump, the Vietnamese government has taken a multi-pronged approach to improving the country's banking fundamentals, and we expect these reforms to continue yielding positive outcomes for the banking industry over the coming years.

Key reform measures implemented by the government include urging and approving consolidation in the sector, addressing the high level of non-performing loans, and seeking the partial privatisation of state-owned banks and other enterprises.