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After joining the CPTPP, what are the opportunities and challenges of the banking industry in Vietnam? (part I)

After joining the CPTPP, what are the opportunities and challenges of the banking industry in Vietnam? (part I)

Friday 19, 06 2020
Will the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) help the banking industry in Vietnam make a breakthrough?
  • Basic information about CPTPP agreement

Over the past years, especially from 2014 to now, Vietnam's banking industry has made breakthrough innovations and made deeper progress in the process of international integration, especially when a series of free trade agreements due (FTA) was signed. In addition to becoming a member of the World Trade Organization (WTO), joining the ASEAN Economic Community (AEC) and participating in the Trans-Pacific Strategic Economic Partnership (TPP) Agreement in  December 2016 opened up many opportunities for Vietnam's banking system. TPP was signed in February 2016, with 12 participating countries including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, USA, and Vietnam. The TPP agreement was originally described by the United States as a "gold standard" for every free trade agreement. Not only is the document limited to tariff reductions, but it also includes the removal of a range of non-tariff restrictions and requires members to adhere to high management standards in areas such as labor law, environmental protection, intellectual property, and public spending.

However, shortly after taking office in January 2017, President Donald Trump announced his withdrawal from the TPP. Prior to this move, the remaining 11 member countries (accounting for 13.5% of the global economy) still tried to restore the TPP agreement. On 11/11/2017, in Da Nang (Vietnam), 11 countries agreed to rename TPP to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP holds most of the content of the TPP, but in the 8,000-page document of the original agreement, 20 terms were suspended for enforcement, primarily related to intellectual property. For Vietnam, the agreement entered into force on January 14, 2019.

For the financial services sector in the CPTPP, although it requires the provision of many opportunities to access markets and cross-border investment, it still ensures that the CPTPP countries have the capacity to run the market and financial institutions as well as emergency measures in case of crisis.

Like the WTO or other FTAs, the CPTPP also provides national treatment; most favored nation treatment; access to markets, and some specific provisions for the provision of cross-border financial services. However, under the conclusion of negotiations in the financial services sector, a service provider of a CPTPP country may provide financial services in the market of another CPTPP country, if the public domestic companies operating in this market are allowed to provide such services.

Member States of the CPTPP shall promulgate an exception to some of the rules in the two appendices attached to the CPTPP and in accordance with the conditions of each country:

+ Applicable measures:

Participants must be obliged not to impose any further sanctions in the future, as well as comply with the liberalization agreement in future activities

+ Measures and policies stipulating that participants have full autonomy in the future

Countries participating in the CPTPP also establish formal recognition principles of the importance of legal procedures to encourage the provision of insurance services by licensed providers and processes to achieve this goal. In addition, the CPTPP Agreement deals with specific commitments on portfolio management, electronic payment card services, and information transfer for data processing purposes.

However, the CPTPP also addresses exceptions in protecting the autonomy of financial managers of the CPTPP participating countries, in which they will be entitled to take proactive measures to consolidate financial stability and consistency of its financial system,  including the exceptions that member states carefully consider, the exceptions for non-discrimination measures in the process of establishing and implementing monetary policies or other policies.

After joining the CPTPP, what are the opportunities and challenges of the banking industry in Vietnam?

  • Opportunities

+ Increase opportunities to attract foreign investment into Vietnam's banking industry

Like other businesses in production and business activities, Vietnamese banks desperately need foreign investment in order to enhance liquidity and increase business opportunities. Now that the CPTPP has been signed, international capital inflows into Vietnam, especially from developed countries in CPTPP such as Japan, Australia, New Zealand, and Singapore will grow strongly.
One of Vietnam's commitments when joining the CPTPP is to allow foreign banks to invest in buying shares of domestic banks. Therefore, domestic banks will have the opportunity to access international capital flows through issuing shares to strategic partners, foreign banks. Before joining the CPTPP, Vietnam had a lot of foreign investors contributing capital to domestic banks, in which some banks had foreign capital of strategic investors accounted for 15-20%. such as Vietinbank, Vietcombank, VIB, Techcombank, and An Binh Commercial Joint Stock Bank. After Vietnam joined the CPTPP, the increase in foreign capital helped domestic banks have stronger financial resources, thus, it is easier to expand the scale and quality of operations.

+ Learning technology and management level from major banks of CPTPP participating countries

In banks with the capital contribution ratio of foreign strategic partners, especially those with a large capital contribution ratio such as Vietinbank, Vietcombank, VIB, Techcombank and An Binh Commercial Joint Stock Bank as mentioned above, normally, with the management, administration, and operation of foreign experts in those banks. As a result, domestic banks can learn from management experience, professional working style of foreign partners. Not only that, but new international technologies will also be transferred and put into operation in these banks. State-owned commercial banks such as Vietcombank, BIDV, and Vietinbank all have development and growth both in quality and quantity compared to before equitization. These banks are among the top 1,000 banks in the world in 2019 voted by The Banker Magazine.
On the other hand, when a series of new foreign financial institutions appear in Vietnam with modern technology and management skills, Vietnamese banks facing competition to gain market share will be forced to invest more. for technology and management methods. For example, in recent years, before joining CPTPP, a series of banks invested in banking management software such as the core-banking system, CRM customer management system. The CPTPP will create a push for banks to modernize technology and have more effective management.

+ Improve the quality of human resources at banks

When the level of competition is increasing, workers with low professional qualifications and lack of necessary professional skills may be fired as a number of uncompetitive banks go bankrupt, merge or downsizing. Besides, the labor market is also more fiercely competitive due to the trend of labor movement between CPTPP member countries. In addition, in foreign-invested banks, access to modern new technology, professional working style of foreign partners also makes Vietnamese bankers have good foreign languages. , more skillful, disciplined, and more standard manners. All of these factors will contribute to creating a workforce in the Vietnamese banking system of higher quality.

+ Opportunities for investment and market expansion are increased

The CPTPP will create one of the world's largest free trade blocs with a market of about 500 million people and a gross domestic product (GDP) of about $10 trillion, accounting for 12.9% of the world's GDP and 14,9% of global trade. It is estimated that about 95% of goods traded between CPTPP countries will be eliminated tariffs. By removing tariff and non-tariff barriers, the CPTPP helps promote free trade between CPTPP member countries. In fact, the list of closed areas is very small and most have no great commercial value. This is a far cry from many other free trade agreements and creates new opportunities for companies to distribute products in the CPTPP market. Markets that were previously unattractive because of high tax rates, high transportation costs, cumbersome customs procedures, or retail investment that were not feasible suddenly became much more attractive.

These good opportunities are not only open to Vietnam but also to all members participating in the CPTPP, so domestic businesses will have the opportunity to export their products to member countries. According to the Division of Strategic Studies and International Business Relations - Lien Viet Post Joint Stock Commercial Bank, this agreement is expected to increase Vietnam's GDP growth by 1.1%, export turnover will increase by 4, 2%, import turnover increased by 5.3%. As Vietnam's trade grows strongly, businesses expand production scale, commercial banks are opening up great opportunities to provide credit and financial and banking services for export enterprises.
In addition, not only foreign strategic partners have more opportunities to invest in Vietnam, but on the contrary, domestic banks can also bring capital to invest in other member countries of the CPTPP. This enables banks to maximize profits along with diversifying their portfolios and minimizing risks.
On the other hand, the barriers removed in financial services also helped Vietnamese banks to bring their products and services to member countries through the establishment of overseas branches. Or even without setting up branches abroad, domestic banks can also provide financial services to CPTPP countries (Article 11.6 Transboundary Trade, Chapter 11: Financial Services). Although this opportunity is fragile because Vietnam is the least developed country among the countries participating in CPTPP. But the reality is not lighting up the rays of hope. Indeed, it can be cited from the large state-owned commercial banks that have pioneered the export of banking and financial services to foreign countries recently, before Vietnam joined the CPTPP, such as Vietcombank, Vietinbank, and BIDV. By the first year of 2020, Vietnam has a total of more than 20 branches and representative offices of domestic commercial banks abroad.

Vietnam’s banking industry 2020

Complied by Vietnam Credit

Banking & Finance

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