Its economy is small, its infrastructure is fragile, its industries are still largely run by central planners, and per capita incomes are low. Yet, at this moment, Vietnam may be one of the world’s most attractive new opportunities for financial


The experience of banks in India and other emerging economies may hold lessons for banks that seek to capitalize on Vietnam’s potential.

Just how attractive Vietnam’s banking sector may be will become clearer in the coming weeks, when Hanoi-based Vietcombank, one of Vietnam’s big four state-owned banks, finalizes plans to offer shares amounting to 10% of the bank’s capital in the first in a string of big bank IPOs this year and next.

The trends so far are moving in the right direction. With GDP growth on track to top 8.5% in 2007, Vietnam has entered Asia’s economic fast lane. Since the government opened its financial services sector to global competition under World Trade Organization rules late last year, international banks can acquire up to 30% of the equity in the country’s 32 joint stock commercial banks.

Succeeding in Vietnam’s emerging banking sector will require more than capital, technical expertise, and management know-how. With Vietnam’s per capita income still among the world’s lowest, at just $726 (about Rs29,900) per year, it will take the right strategy to crack a market where only 6% of the country’s 85 million people have a bank account and only 2% have borrowed from a bank.

One of the big challenges facing global banks entering Vietnam will be to extend their reach to the rural areas where three-quarters of the population resides, some 70% of its small and midsize businesses are based, and hunger for credit is strong. The availability of formal banking services outside Vietnam’s big cities is patchy, with most rural residents dependent on informal networks of money lenders, clan associations and family members to meet more than half of their financial needs. Though expensive and often unreliable, these traditional sources of capital have made provincial rural dwellers savvy borrowers. That is an advantage for retail banks: Rural borrowers familiar with the use of credit can become loyal bank customers if they see advantages in terms of cost and reliability. The key for banks will be finding cost-effective ways to reach isolated and thinly-populated communities.

ICICI Bank, India’s second-largest banking company, combines technology and local partners to reach customers in rural India. The bank teams up with village shopkeepers, leasing them low-cost kiosks that offer a range of deposit and credit products via the Internet and training them to sell specially-designed credit, insurance, and even investment products to their rural neighbours. For example, ICICI offers small farmers bridge loans to help span the time from the sale of last season’s harvest to the purchase of next season’s seeds. The bank charges an interest rate of 9% to 11% a year, compared with 2% a month from moneylenders, who often take an additional cut once the asset is sold.

Early results are encouraging. ICICI has made its rural banking operations a stand-alone division, with a loan portfolio that is forecast to grow at a 33% compound annual rate through 2009. For investors, the rural banking strategy is helping to make ICICI Bank, in the words of one local securities research firm, the “best play in the ‘emerging India’ story".

Vietnam’s cities clearly hold vast potential, but only about half of Hanoi’s residents, and fewer than a third of those living in Ho Chi Minh City, have bank accounts. That means newcomers cannot afford to ignore provincial towns and villages where three-quarters of the population resides. Building a profitable customer base in the countryside—markets Western banks have found difficult to crack in other emerging economies—will prove to be an even bigger challenge.

One way to reach these hard-to-serve populations, with affordable financial services, is to borrow from the playbooks of banks in other developing markets.

In Central America, for example, Banco Agrícola (BA) has grown with entry-level products and easy access to distribution channels for low-income urban residents in El Salvador. Already a leader serving small businesses and the narrow stratum of affluent retail customers, BA managers recognized that the high fixed costs of the bank’s full-service branches and wide array of deposit accounts and collateralized loans were money-losers in low-income markets.

Rather than write off this vast customer segment, BA set out to redefine its branch network and radically streamline its product offerings. The bank opened customer-friendly personal-credit centres, where borrowers could take out small personal loans and began issuing low-limit credit cards for use with local merchants.

To keep costs low, BA also created two new entry-level transaction accounts serviced through debit cards and automated kiosks. The no-frills approach has doubled the bank’s potential profit pool and could generate, by BA’s reckoning, a return on equity better than 30%.

Now, it is Vietnam’s turn. The Vietcombank IPO will be one important test of the growth potential of Vietnam’s banking sector. But the bigger tests will come afterwards, as the country’s banks and their global partners combine the old and the new, and try to keep Vietnam in Asia’s fast lane.

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Ashish Singh is managing director of Bain & Co. India. Edmund Lin is a partner with Bain & Co. and is based in Singapore.