Anti-corruption measures have proven effective in enhancing profitability and streamlining operations, but more needs to be done. Policymakers must consider tailoring regulations and interventions to different types of banks (state-owned, foreign, joint stock), recognizing that management capability plays a crucial role in how these measures are implemented, writes Ryan Taehyoung Kim
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In recent years, Vietnam’s banking sector has undergone a transformative shift, driven by an increasing focus on anti-corruption initiatives, particularly in the aftermath of sweeping regulations enacted in 2013 known as the “blazing furnace” and the state’s collaboration with the Asia/Pacific Group (APG) and Financial Action Task Force (FATF) in 2019. While Vietnam’s banks have traditionally been characterized by rapid growth and expansion, particularly in terms of branch networks, these reforms have introduced a new era of operational consolidation and profitability improvements. My dissertation examines the specific effects of these anti-corruption measures on bank profitability, delving into key indicators including Return on Assets (ROA), Non-Performing Loans (NPL), and branch numbers, and draws on both quantitative data and interviews to offer a comprehensive picture of the banking landscape.
Anti-Corruption Measures and Profitability: A Direct Link
One of the most significant findings from my research is the positive correlation between anti-corruption measures and bank profitability. Specifically, initiatives focused on anti-money laundering (AML) and counter terrism financing (CTF) have led to improved risk management and loan quality. Banks have become more cautious in their lending, reducing the volume of risky loans and, consequently, Non-Performing Loans (NPL). This more prudent approach to financing has had a direct impact on profitability, as measured by an increase in Return on Assets (ROA). The post-2019 reforms seem to have particularly strengthened banks’ ability to manage assets and liabilities, enhancing their overall stability.
This outcome is vital in the context of Vietnam’s rapidly growing economy, where banks play a pivotal role in fostering sustainable economic growth. By reducing corruption and tightening regulatory frameworks, these measures have made banks more robust, leading to a more resilient financial system overall.
Branch Closures: A Sign of Operational Consolidation
One of the less-expected outcomes of the anti-corruption measures has been the reduction in the number of bank branches across the country. In the past, banks were expanding aggressively, opening new branches in both urban and rural areas to increase market share. However, the new regulatory environment has pushed banks toward operational consolidation. The pressures to comply with stricter AML and CFT regulations have made it more efficient for banks to streamline operations, reducing the need for a widespread physical presence.
The reduction in branches reflects a broader global trend towards digital banking and the decline in demand for brick-and-mortar branches. However, in Vietnam’s case, this shift has been accelerated by regulatory demands. The change underscores how anti-corruption measures can drive operational efficiency in unexpected ways.
The Role of Ownership: Public vs. Private Banks
One of the key aspects of my research was exploring whether bank ownership – whether State-Owned Commercial Banks (SOCBs) or private banks – affected profitability and responsiveness to anti-corruption measures. Surprisingly, ownership type did not significantly influence profitability, NPL, or branch closures. This suggests that the impact of anti-corruption measures transcends ownership structures, affecting banks across the board. The key differentiator seems to be management capability rather than ownership type.
This finding, supported by interviews with bank officials, points to a deeper issue in Vietnam’s banking sector: the importance of governance and management in adapting to regulatory changes. Well-managed banks, regardless of ownership, are better equipped to comply with anti-corruption measures and leverage these reforms to improve operational efficiency and profitability.
Implications for Policymakers: Tailored Interventions Are Key
The insights gained from this research carry significant implications for policymakers in Vietnam, particularly in the current climate of political uncertainty. Anti-corruption measures have proven effective in enhancing profitability and streamlining operations, but more needs to be done. Policymakers must consider tailoring regulations and interventions to different types of banks (state-owned, foreign, joint stock), recognizing that management capability plays a crucial role in how these measures are implemented.
Moreover, the trend towards fewer physical branches suggests that future policies should focus not just on expanding the footprint of banks but on improving operational efficiency through technology and digital banking. Vietnam’s rapidly digitizing economy will benefit from banks that can adopt innovative financial technologies (FinTech) to serve customers more efficiently, especially in rural areas where physical branch closures could potentially create service gaps.
Looking Forward: Sustaining the Gains
Vietnam’s banking sector is at a crossroads. The positive impacts of anti-corruption measures on profitability and loan quality are clear, but sustaining these gains will require ongoing vigilance. Policymakers should prioritize the continued enforcement of AML/CFT measures, alongside promoting technological innovation and improving management capabilities across all banks.
Future efforts should focus on enhancing regulatory frameworks, encouraging further digitalization, and fostering a more transparent banking system. By doing so, Vietnam’s financial institutions can continue to play a vital role in supporting the country’s economic growth, while maintaining the stability and integrity of the banking sector.
In conclusion, anti-corruption measures have undeniably strengthened the Vietnamese banking sector by increasing profitability and reducing operational inefficiencies. As the country moves forward, policymakers and banking executives must build on these reforms, ensuring that Vietnam’s financial system remains both robust and adaptable to future challenges.
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*Banner photo by Peter Nguyen on Unsplash
*About the research: This blog is based on the Author’s dissertation for his LSE MSc Development Management, for which the Author was awarded SEAC’s Dissertation Fieldwork Grant.
*The views expressed in the blog are those of the authors alone. They do not reflect the position of the Saw Swee Hock Southeast Asia Centre, nor that of the London School of Economics and Political Science.