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2. The evolution of the Vietnamese banking sector

2. The evolution of the Vietnamese banking sector

The banking sector in Vietnam offers a favorable laboratory to explore the current topic. The capital is still underdeveloped, and the central engine to fuel economic growth dramatically depends on bank lending (Dang Huynh, 2020 ). Therefore, it is of importance to study bank lending and, in particular, the structure of loan portfolios in this has experienced many significant reforms over the years, featured by the shifts loansolution.com/payday-loans-co/ from specialized to diversified business models, the promotion of non-interest activities alongside traditional lending, and the strengthening of competitiveness and id the era of global financial integration. Given the significant variability in factors we are interested in, we could expect the elements of robustness and generality with our estimation results. Moreover, focusing on a single market might help us well explain the impacts of loan portfolio diversification within a uniform economic environment.

The SBV’s operations shifted to a central bank’s real nature, covering monetary policy implementation, foreign exchange management, and supervision of credit institutions

In these settings, our paper contributes to the existing banking literature in two important ways. First, we extend the portfolio diversification literature by focusing on a small emerging market, in the context that most prior works have been mainly interested in banking sectors in advanced economies. Banks in emerging markets have less mature levels and different regulatory backgrounds, so analyzing their performance’s response to loan portfolio diversification could elicit a better understanding of the current topic. Second, we offer more insight into the impact of loan portfolio diversification on bank returns by investigating its conditionality. Given that the existing empirical documents have disregarded the heterogeneity across banks while considering whether diversifying loan portfolios is an appealing strategy, this paper is the first to examine the conditioning role of business models and market power in the loan portfolio diversification-bank returns correlation.

Importantly, when such asymmetric effects are sizeable, neglecting them miscalculates the choice of loan portfolio diversification

We structure the remainder of this paper as follows. Section 2 presents the Vietnamese banking sector’s background, highlighting the development of lending activities over the years. Section 3 describes the methodology employed and data collected to perform the regression analysis. Section 4 reports and discusses the results obtained using the regression design proposed. Finally, section 5 concludes and displays insightful implications directly drawn from the main findings in the paper.

Over the past 30 years, the Vietnamese banking sector has experienced various reforms, significantly transforming from policy-driven and specialized business to market-oriented and diversified business. This section summarizes and highlights the key reforms and the evolution of banking activities in Vietnam, which might contribute to our analysis of loan portfolios, bank business models, and market power in this study.

Prior to 1990, the State Bank of Vietnam (SBV) performed the functions of a central bank and a national commercial bank. A law enacted in 1990 separated these functions and required the new establishment of four wholly state-owned commercial banks to take over commercial banking operations. 1 Accordingly, each bank specialized in a different economic sector, including the industry and trade, agriculture, international commerce, and investment and construction. Simultaneously, the government also allowed the foundation of private commercial banks and the limited presence of foreign participants in the form of joint venture banks and foreign bank branches. In general, commercial banks at this time in Vietnam operated as specialized institutions, as they focused their lending on only one or a few economic sectors.

Multiple subsequent banking reforms have been driven by Vietnam’s accession to international trade and investment agreements, most notably its entry to the World Trade Organization (WTO) in 2007. Deregulations in the banking sector gradually loosened , the SBV first licensed wholly foreign-owned banks to enter the market. The growing presence of foreign participants has spurred reforms to enhance the competitive capacity and financial power of domestic banks, especially state-owned banks. Typical reforms included the partial privatization of state-owned commercial banks and the strengthening of bank capital. In 2011, the SBV continued its deregulation policy by allowing foreign bank branches to be treated equally as domestic banks (Ho Baxter, 2011 ).

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