Foreign Trade and the Bank for Investment and Development), two specialized banks (the Industrial and Commercial Bank and the Agricultural Bank) were separated from the State Bank of Vietnam and the function between the central bank and the specialized banks was divided. The differences in the functions of the four specialized banks were later removed, and those specialized banks are now operating as ordinary commercial banks. Thus the financial sector of Vietnam consists of the central bank, the four state-owned commercial banks and other institutions such as share banks, credit cooperatives, housing banks and several branches of foreign banks. The legal framework for the financial sector was established as the Law for the Vietnamese State Bank and the National Law on Banks, Cooperative Credit Institutions and Financial Institutions became effective in 1990.

## 2 -2-2 Changes in Functions of the Financial Sector

## (1) Central Banking

In the era of planned economy, the State Bank of Vietnam played nothing more than a negative role of accommodating economic plans from the financial side. The roles generally played by central banks in market economies -- management of the economy through monetary measures -- had been neglected. The distinctions between the functions of the central bank and commercial banks were not clear; the State Bank also engaged in commercial banking activities.

To complete the reforms toward a market oriented economy, it is necessary to establish the proper function of the central bank suitable for a market economy, or the function of the authority of monetary policy as well as a supervisory position of the financial system.

The Law for the Vietnamese State Bank provided legal bases for central banking for the State Bank of Vietnam. The State Bank was given the authority for reserve requirements control, open market operation, foreign exchange reserves management, bank supervision, etc. Commercial banking activities by the State Bank are prohibited under the law.

However, in reality, unskilled staff and pressure from the government prevents the central bank from carrying out its proper role. The importance of the independence of the central bank should be recognized.

## (2) Commercial Banking

Despite the establishment of the National Law on Banks, Cooperative Credit Institutions and Financial Institutions, the actual function of these financial institutions remained undeveloped. Unskilled staff do not have the ability to assess the financial conditions of loan applicants. The bank's right on mortgage is unclear because of the lack of a bankruptcy law and the legal basis of property rights. Pressure from the government to support the state enterprises which are losing money are strong, and subsidiary loans for such inefficient state enterprises still remain, although the equal treatment of state and private enterprises is declared in principle. To cover the loss caused by such subsidiary loans, higher lending rates are adopted for profitable firms. This kind of discriminatory treatment in lending is preventing the proper function of the capital market and causing a huge loss in resource allocation.

To accommodate such low-interest subsidiary loans, deposit rates are settled at low levels, making it difficult to absorb sleeping money into bank deposits. The banks' incentives to acquire deposits are also discouraged by the high reserve requirement.