VIETNAM – BANKING AND FINANCING SUSTAINABLE GROWTH – Issues and Solutions – Impact of the Key Trade Agreements CPTPP, EUVNFTA and Investment Protection Agreement

A. Introduction

Vietnam is one of the countries in Asia with the most impressive economic growth. Inflation remains well controlled and foreign exchange reserves are at their highest levels in years and they continue to rise. The effective and economic state administration has been recognized by the international markets, most recently with the appreciation of the Vietnamese credit rating by Fitch Ratings. In the future, it is expected that Vietnam will continue to show strong economic growth. A particularly strong area is the electronics production. In addition, financing sustainable growth and providing credit and good financial services is essential to all who need it.

The focus of the government and the State Bank of Vietnam (SBV) should be geared to lending in strong sectors. This implies that quotas should be distributed appropriate and that there should be no upper limits in a given sector. Only with this credit can be provided sufficiently in the priority sectors. This will benefit strong and profitable companies while controlling and reducing risk in critical sectors.

In addition, the focus is on recapitalization and consolidation of the financial sector, which leads to fewer but stronger banks. Furthermore, the digitization of the Vietnamese economy continues to increase, with the next step being to create a comprehensive legal framework that further promotes digital development, including the use of the forthcoming national biometric identity system.

In the future, a change in banking regulations should be also considered. The rules are currently issued on the basis of basic laws such as the Civil Code. As a result, opening accounts for companies that are not legal entities is difficult. Addressing the above issues will, in the long term, lead to a strengthening of the banking sector. This will bring more and more FDI´s into the country and Vietnamese people and companies will benefit from it.

B. Decree 116 and related issues

With regard to Decree 116, there are problems in lending that banks have. There are currently challenges related to public information and verification. It is very time-consuming for the banks to obtain the relevant information from the client, there are only limited independent sources of information, and there are different definitions of the criteria used to identify beneficiaries in Vietnam and international common practices.

Banks are facing the difficult situation of being able to verify that a natural person owns 10% or more charter capital in a legal entity. Natural persons who hold 20% or more charter capital to companies whose equity capital is more than 10%; private business owners; and other persons actually controlling the company, in accordance with the provisions for determining beneficial owners referred to in Article 5.1, Decree 116/2013 / ND-CP.

The banks have difficulties in how to verify that an individual holds 10% or more charter capital in a legal entity, individuals holding 20% or more charter capital in entities having more than 10% equity in the legal entity, private business owners and other individuals who actually control the entity, under regulations on identifying beneficial owners referred to in Article 5.1, Decree 116/2013/ ND-CP.

To solve this problem, the State Bank of Vietnam (SBV) could make the following arrangements. Only the ultimate beneficial owner holding directly and indirectly 25% or more of the charter capital must be identified. Further, it is not necessary to identify ultimate beneficial owners in case the customer is rated as low-risk by financial institutions incorporated in Financial Action Task Force member nations, because these institutions have advanced anti-money laundering and financing terrorism control systems, and are monitored by relevant host country regulators.

C. Outlook on Circular 19/2014/TT – NHNN

Circular 19/2014/TT – NHNN contains revisions for foreign exchange control in direct investment and portfolio investment to be consistent with latest rules on foreign investment. One of most frequent issues related to foreign-invested companies is the Investment certificate being used as the only reference to identify a directly investing business for foreign investment capital account opening purposes. However, this does often not reflect properly the nature of the investment activity and existing regulations on investment activities (Investment Law of Nov. 26, 2014, Decree 118/2015/ND-CP, providing details and implementing guidance for specific clauses of the Investment Law).

Furthermore, given the development of derivative markets in Vietnam, the Circular can be revised to cover specifically derivative securities and include relevant reporting indicators for investment in these securities by foreign investors.

D. Outlook on the Major Trade Agreements TPP 11, EUVNFTA and Investment Protection Agreement

In January 2017, US President Donald Trump decided to withdraw from the US participation in the TPP. In November 2017, the remaining TPP members met at the APEC meetings and concluded about pushing forward the now called CPTPP (TPP 11) without the USA. The provision of the agreement specified that it enters into effect 60 days after ratification by at least 50% of the signatories (six of the eleven participating countries). The sixth nation to ratify the deal was Australia on 31 October 2018, therefore the agreement will finally come into force on 30 December 2018. Recently, on the 12th November 2018, Vietnam has officially become the seventh member of the CPTPP.

The CPTPP is targeting to eliminate tariff lines and custom duties among member states on certain goods and commodities to 100%. This will stimulate domestic reforms in many areas, especially the financial sector. As a result, the above mentioned issues could be addressed gradually and therefore more FDI´s will come to Vietnam.

One another notable major trade agreement is the European Union Vietnam Free Trade Agreement (EUVNFTA). The EUVNFTA offers great opportunity to access new markets for both the EU and Vietnam and to bring more capital into Vietnam due easier access and reduction of almost all tariffs of 99%, as well as obligation to provide better conditions for workers. In addition, the EUVNFTA will boost the most economic sectors in Vietnam. Due to easier opportunity on making business, trade and sustainable development will be a good consequence for an even more dynamic economy and even better investment environment in Vietnam in general and especially in the financing sector.

To enable at least some parts of the FTA to be ratified more speedily at EU level, the EU and Vietnam agreed to take provisions on investment, for which Member State ratification is required, out of the main agreement and put them in a separate Investment Protection Agreement (IPA). Currently both the FTA and IPA are expected to be formally submitted to the Council in late 2018, possibly enabling the FTA to come into force in the second half of 2019.

Furthermore, the Investor State Dispute Settlement (ISDS) will ensure highest standards of legal certainty and enforceability and protection for investors. Every investor should use these standards. It is going to be applied under the TPP 11 and the EUVNFTA. Under that provision, for investment related disputes, the investors have the right to bring claims to the host country by means of international arbitration. The arbitration proceedings shall be made public as a matter of transparency in conflict cases. In relation to the TPP, the scope of the ISDS was reduced by removing references to “investment agreements” and “investment authorization” as result of the discussion about the TPP’s future on the APEC meetings on 10th and 11th November 2017.

Further securities come with the Government Procurement Agreement (GPA), which is going to be part of the TPP 11 and the EUVNFTA. The GPA in both agreements, mainly deals with the requirement to treat bidders or domestic bidders with investment capital and Vietnamese bidders equally when a government buys goods or requests for a service worth over the specified threshold. Vietnam undertakes to timely publish information on tender, allow sufficient time for bidders to prepare for and submit bids, maintain confidentiality of tenders. The GPA in both agreements also requires its Parties assess bids based on fair and objective principles, evaluate and award bids only based on criteria set out in notices and tender documentation, create an effective regime for complaints and settling disputes, etc.

This instrument will ensure a fair competition and projects of quality and efficient developing processes.

If you have any question on the above, please do not hesitate to contact Dr. Oliver Massmann under Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Thank you very much!


Overview on the recent developments in the power sector

The recent increasing interest from investors in the energy sector in general and renewable energy in particular has prompted the Government to work on the revision of the National Power Master Plan VII (amended) to attract more investment in the sector as well as to ensure a stable and clean supply of energy in the country.
To achieve that goal, the Government should improve the transmission and distribution system, encourage both small and large-scale renewable energy projects by a sound regulatory regime, as well as accelerate decision-making process for other sources of power projects.
The Government is also working on improvements of the Power Purchase Agreement template (PPA) to bring it to a more bankable and acceptable level to both international and domestic banks. In particular, the PPA is not bankable due to the following main reasons:
• There is no clear risk allocation framework between the Government and private sector;
• There is no Government guarantee in terms of foreign exchange convertibility;
• It is not clear whether the PPA is a “take or pay” agreement;
• Procurement and negotiation of PPPs are not transparent and usually takes much time; and
• International arbitration is not a dispute settlement method provided in the PPA.
The Electricity Regulatory of Vietnam under the Ministry of Industry and Trade (“MOIT”) has been tasked with a study on direct PPAs Pilot Scheme. In general, direct PPA is an agreement made between the power generator and a corporate customer in which the power is physically delivered and sold to the corporate customer for its operations. The MOIT planned the pilot to be implemented as early as the first quarter of 2019. The pilot should set a target of at least new 300 – 500 MW power generation.

Solar power projects – Amazing development!

Vietnam’s potential capacity for solar power is considered to be similar as Spain or China, but solar power projects capacity, prior to 2017, is extremely low i.e., less than 10 MW. However, hundreds of solar power projects have been approved by the end of 2017. According to the MOIT, the combined capacity of all approved solar power projects, which will operate prior to 30 June 2019, is over 3 GW.
The solar FIT of US9.35 cents/kWh will continue to apply beyond the original COD (i.e. 30 June 2019). The deadline shall be likely extended for another half a year or another year for solar projects across Vietnam, except for projects in Ninh Thuan. This policy is not yet formally adopted but very likely will be publicized at the end of this year.
For solar projects in Ninh Thuan, the COD deadline extension will be longer (i.e. for another one and a half year from 30 June 2019). The current template solar PPA may also be amended and take effect from 01 July 2019.

How to achieve non-recourse financing for renewable power projects

Given the current bankability status of PPAs, it is important to secure a loan for the projects which is guaranteed by a charge on specific assets or on the revenues generated from a specific project or assets. This is how a non-recourse financing works. If the borrower defaults and the security does not realise the full value of the loan, the lender cannot recover the shortfall from the borrower or from its other assets or revenues.
In essence, the ability to reach non-recourse financing arrangement will mostly depend on the negotiation between the lenders and the borrowers, e.g. whether or not the collateral is sufficient to cover the repayment obligations, as well as the potential economy benefits of the projects, from the lenders’ point of view. Meanwhile, the concept of non-recourse financing is barely introduced in Vietnam, and it is quite difficult to find a bank in Vietnam which is willing to finance projects on non-recourse basis. Generally speaking, non-recourse financing may be very costly (in terms of interest rates) and requires a lot of effort to negotiate with stakeholders. It is essential that the investor use a special purpose vehicle (“SPV”) so that the SPV will be the borrower of the project financing arrangement, while the investor is to be the sponsor of the deal. Since the SPV shall not have any projects other than project assets, the lenders will have to rely heavily on the financial prospects of the project to minimize their risk. A full recourse finance deal will mean that the sponsor (or any other asset-rich entities related to the sponsor) shall guarantee for the debt of the SPV, while a non-recourse deal shall see no involvement of any third party. Our objective is to have SPV lend (in a full recourse arrangement) without the sponsor to be exposed to any recourses (non-recourse). In that case, a non-recourse financing arrangement shall be deemed achieved.
There are three possible options to achieve non-recourse/limited recourse financing arrangement:

Option 1: Entering into a BOT (Build-Operate-Transfer) contract with the Government. With this option, as it is agreed that the investors shall build and operate the project for a certain period of time (and receive the profit during such period) and it is the Government who will own the project at the end upon the expiration of the BOT contract, the BOT contract will be more bankable and thus the non-recourse/limited recourse financing arrangement can be achievable.
Currently, there is no foreign ownership restriction in energy sector in local laws or Vietnam’s international commitments. The foreign investor may choose among permitted investment forms: 100% foreign invested company, joint venture or public private partnership in the form of BOT contract. For your information, Vietnam ties in first place with Singapore in terms of market access liberalization.

Option 2: To seek guarantee from Multilateral Investment Guarantee Agency (“MIGA”). As the guarantee from the MIGA covers 5 types of non-commercial risks, i.e. (i) currency inconvertibility and transfer restriction; (ii) expropriation; (ii) war, terrorism, and civil disturbance; (iii) breach of contract; non-honoring of financial obligations; separately or together with Option 2, MIGA’s guarantee can help to enhance the bankability of the power purchase agreement.

Option 3: To cooperate with a State-owned commercial bank (“SOCB”) for its guarantee of the project and then, negotiate with lenders to eliminate all recourses that lenders may ask from the sponsors and/or the borrowers. This appears to be the more realistic option but it may come with a higher interest rate and requires extensive negotiation with the SOCB and lenders.

How to make use of the CPTPP and the EU- Vietnam FTA

The recent conclusion of the EU- Vietnam FTA (EVFTA) negotiation and the signing of the CPTPP further opens the market to foreign investors. The investors now can bring their technology and know-how, especially those from countries with high level of development in renewable sectors such as Germany, to Vietnam with less market access barriers and being more secured. In particular, the CPTPP and the EVFTA make it possible that foreign investors could sue Vietnam’s Government for its investment related decisions according to the dispute settlement by arbitration rules. The final arbitral award is binding and enforceable without any question from the local courts regarding its validity. This is an advantage for investors considering the fact that the percentage of annulled foreign arbitral awards in Vietnam remains relatively high for different reasons.

Please do not hesitate to contact Dr. Oliver Massmann under or any lawyers listed in our office listing if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.


Vietnam’s constant growth is highlighted by numerous macroeconomic data such as a Gross Domestic Product of 5.93%, a Purchasing Managers Index up to 52.9 points in September 2016  and conclusively the increasing number of Foreign Direct Investment.

Furthermore, Vietnam is endowed with a privileged situation of controlled inflation, political stability and stable macro environment and the best prospects to maintain it. The State Bank of Vietnam (SBV) is willing to further stabilize macroeconomic by lowering lending interest rates, by resuming foreign currency lending to exporters who need to pay for local expenses and by  increasing risk-weighted assets for loans in real estate sector.

Macroeconomic issues

The multiplying number of infrastructure and real estate projects proves the revival of the real estate sector and explains the large amount of credit loans granted in the past few years. Even though ratios of Banks Non-Performing Loans are diminished, it is recommended to pay further attention to banks’ loan books related to property market to avoid situations of insolvency.

In addition, the interbank market must be developed in order to establish a relevant market benchmark. It is necessary to re-evaluate the existing long term yield curve to integrate Scheme of Money Market and create short term yield curve benchmark including derivative products. Moreover, VietNam InterBank Offered Rates (VNIBOR) is transmitted through local banks whereas a contribution by the SBV would reflect the true market fluctuations.

Furthermore, the SBV must develop cash management products to meet with international banking requirements. The lack of regulations establishing cash management products e.g., cash sweeping and pooling system or inter-company lending, creates earnings shortfalls for banks which accordingly cannot provide such services to their clients.

Technical issues requiring the SBV  intervention

The restructuration of the banking system during the 2016-2020 period by the SBV should include the amendment of Circular 36/2014/TT-NHNN dated November 20th 2014 on minimum safety limits and ratios for transaction operated by credit institutions and branches of foreign banks. Indeed, Circular 36 obliges credit institutions to verify any information of related persons in keeping credit limits in control but does not provide any provision on how to identify relevant related person in alignment with international standards.

The SBV should then guide banks and customers on the matter, as well as removing restriction on extending credit for credit cards. As long as banks are ensured that the borrower can pay the balance ahead of maturity, credit extensions for credit cards should be allowed.

The SBV should also review the activities included in the banking or financial services sector. For instance banking agent activities open to commercial banks are enumerated in Article 106 of the Law on Credit Institutions, which only provides a general definition of activities that may be acted by commercial banks as agents. A guidance should be provided to explain the exact activities, frequency of exercise.

Circular 15/2015/TT-NHNN dated October 2nd 2015 guiding foreign transactions of foreign currency by credit institutions also requires specific guidance from the SBV. The provisions of Circular 15 are too vague regarding the conversion of foreign currency into Vietnamese currency in case of money transfer. An uncertainty also emerges considering the documents required for foreign currency purchasing transactions denominated in a foreign currency in case of electronic agreements. Moreover, the SBV should include the use of swaps to adjust the signed forward contracts, and include a lead time to release foreign currency for customers traveling overseas five days prior to departure instead of two as stipulated in the Circular.

The exclusion of all guarantees  issued on the basis of a counter guarantee granted abroad and out of the credit limit to a single customer should be allowed.

In addition, the SBV should promote the acceptance of a more flexible VND account structure for instance by allowing the simultaneous use of several accounts at a same custodian bank, and encourage the opening of more simple accounts for foreign investors. The facilitation for foreigners to access bank and local stock market is necessary to extend the establishment of banking service providers and would help develop the banking market in Vietnam.

On the other hand, the Law on Credit Institutions and Circular 04/2013/TT-NHNN only recognize discounting and factoring activities with a reserved recourse right. The lack of protection towards Vietnamese exporters induced requires the implementation of a Circular issued by the SBV allowing non-recourse discounting and factoring related claims.

A Draft Circular has been initiated to regulate lending activities which would allow the use of loans to repay debts bought from lending institutions and foreign bank branches if it is proven that the loan is not covering bad debts. It is an international practice that a newly formed company in Vietnam acquires foreign loans from their parent companies abroad and then takes loan in Vietnamese Dong to repay the foreign exchange facilities. The SBV should then allow roll-over loans to ensure transparency and cash management.

Administrative issues to be solved by Ministries

Simplification of paperwork and supporting documents related to the responsibility of credit institutions and organizations engaged in foreign exchange transactions, would encourage lending activities and enhance the efficiency of the Ordinance on Foreign Exchange. Not only credit entities are responsible to review and keep the document, they also bear legal responsibility of the accuracy of all provided information even by the customer.

Establishment of clear guidelines would help resolve some issues such as the difficulty for customers to provide sufficient documentation when held by third parties. Moreover, additional costs incurred by credit institutions and customers to provide payment services and meet the requirements on document are earnings shortfall.

Therefore, state agencies should share their database to support information verification in case of payment services instead of requesting customers to provide it. Customers should also be held responsible for the accuracy of the information they are delivering.

The SBV has issued several documents guiding the implementation of Circular 30/2014/TT-NHNN on entrustment lending, and it is acquired that entrustment activities are business operations when made continuingly for profit making purposes. However, the terms of “continuingly” and “profit making purposes”  must be explicit to achieve an homogeneous enforcement of the Circular.

Outlook on the EVFTA

The EVFTA signed on December 2nd 2015 and expected to enter into force by January 2018, is a great leap forward for both the EU and the Vietnamese markets. Indeed, the Free Trade Agreement not only opens new opportunities for goods export, it also enhances services supply and thus establishment of companies to perform their activities.

Pursuant to Chapter 8, Annex 8 of the EVFTA, Vietnamese legislations and regulations related to banking services provided in Vietnam must not circumvent commitment taken under the EVFTA. As the banking system is planned to be reformed, we can expect many amendments influenced by the EVFTA especially concerning foreign currency transactions.

Most important issues

Ø  The interbank market and cash management products must be developed to adapt to international standards and requirements.

Ø  The SBV should amend and complete unsufficient regulations especially on required documents to reinforce loans efficiency for both credit institutions and customers.

Ø  The SBV should promote a more flexible account structure for local and foreign customers and more flexibility in roll-over loans according to international practices.

Ø  The relevant Ministries should simplify the paperwork related to foreign exchange transactions, lending activities, and promote database sharing for Government state agencies.


Please do not hesitate to contact Oliver Massmann under if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Thank you!




© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

Proudly powered by WordPress