Image Credits - Central Banking
Vietnam’s legislature voted on Thursday to significantly tighten limits on foreign and domestic investors’ stakes in domestic banks. The legislation, which will take effect in July 2024, has reignited a fierce debate about balancing financial stability with the need for capital to navigate economic challenges.
The new law reduces the maximum shareholding an individual investor can hold in a Vietnamese bank from 5% to 2%, while institutional investors, such as pension or investment funds, will be capped at 10%, down from the current 15%. Over 90% of National Assembly deputies voted in favour of the reforms, reflecting the urgency felt in the wake of the recent financial scandal that rocked the nation.
In late 2022, Vietnam was shaken by the revelation of a massive $12.5 billion fraud scheme at Saigon Joint Stock Commercial Bank (SCB), the country’s largest private bank. Real estate tycoon Truong My Lan is accused of siphoning off billions through a complex network of nominees, effectively controlling the bank despite not holding a majority stake.
Proponents of the new ownership restrictions argue that they are crucial to prevent similar schemes from occurring again. By limiting individual shareholding, they hope to curb concentrated control and make it harder for individuals to manipulate board decisions or engage in illicit activities. Additionally, proponents believe the lower cap for institutional investors will introduce greater diversification and foster a more balanced ownership structure within banks.
However, the reforms have sparked strong opposition from some quarters. Critics argue that tighter ownership limits might not be effective in curbing fraud, pointing to the fact that existing caps did not prevent the SCB scandal. They also warn that the reform could backfire by deterring much-needed foreign and institutional investment in Vietnamese banks.
With Vietnam’s banking system already grappling with an increase in bad loans and potential spillover risks from the ongoing property crisis, critics fear that reduced investment could hinder lending and hamper economic growth. They propose alternative measures, such as strengthening regulatory oversight and corporate governance standards, to address the vulnerabilities exposed by the SCB scandal.