Building trust: Developing the Vietnam financial sector  Deposit insurance providing for safe checking and savings accounts at banks and other financial institutions promotes inclusion for all of Vietnam citizens, says leading finance and bank executive, Dr Nguyen Tri Hieu. Dr Hieu says it particularly helps those households who maintain small account balances, have little experience with formal financial institutions, as it greatly assists them plan for a more secure financial future. Last year, he says, the State Bank of Vietnam (SBV) had to step in and takeover three weak banks that were about to go bankrupt.  Had the banks been allowed to fail, the small accountholders would have lost all of the moneys they had on deposit with the banks. The SBV therefore protected theses households and as a result the banking system is now healthier and the nation’s citizens have a great deal more confidence in it than they otherwise might have. However, Dr Hieu says Vietnam has too many banks, which creates an abnormally high risk that more banks will fail. It is therefore a necessity and in the best interest of the nation for the SBV to be given authority to step in, rectify the situation and reduce the number of banks. The problem is further complicated by the fact that only a relatively small percentage of the citizens, estimated at 20-30%, actually utilize banks with the majority of the population still doing handling most of their daily transactions by cash. Vietnam needs to follow the lead of nations like the US, says Dr Hieu. The US Federal Deposit Insurance Corporation provides deposit insurance to all accountholders up to US$100,000, with certain retirement accounts covered up to US$250,000. As a result, US depositors have confidence in formal financial institutions and the banking system, and it plays an instrumental role in promoting financial inclusion for all and broadens access to the mainstream financial sector. Japan is another prime example, highlighting the role of utilizing deposit insurance as an effective tool to ensure the health of the banking system, while protecting accountholders and extending financial inclusion to the entire population, says Mr Hieu. Through public awareness initiatives, he says, deposit insurance systems can, without question, play a meaningful role to ensure that all citizens, particularly the poor and low-income depositors, are informed about safe methods of storing their money. This in turn will contribute significantly to instilling of trust in the nation’s formal financial institutions. Mr Hieu says the agency in Vietnam that actually insures accountholders is the Deposit Insurance of Vietnam (DIV) and it should be given more broad authority to regulate banks and weed out the weak, inefficient banks prone to go bankrupt and strictly coordinate their efforts with the SBV. First, with respect to financial stability, the DIV and the SBV need to strike the right balance between controlling risks and encouraging innovation in the promotion of financial inclusion. They need to take painstaking care to ensure that the institutional framework and regulatory oversight supporting the expansion of financial inclusion promotes and does not undermine financial stability, Mr Hieu says. A deposit insurance system is most effective if a number of external elements or preconditions are in place, including a sound banking system with strong prudential regulation and supervision and a supportive legal framework. Second, they should address the question as to whether membership in the deposit insurance system is compulsory or voluntary and available to specialized microfinance providers as well as mainstream banks and under what specific terms and conditions. They will also need to assess the level and scope of coverage provided by the deposit insurance system, and whether very small deposits in the form of e-money and/or depositors with the smallest deposit denominations have adequate protections and under what conditions. This involves some rather complex analysis to address emerging issues such as e-money and pooled trust accounts that support payment transfer services and the need for and applicability of deposit insurance protections. Collectively the DIV and SBV should focus on the implications for deposit insurers of recent developments such as branchless banking, e-money, and mobile payments, to expand financial access among the poor. These developments— are all very exciting from a financial inclusion perspective, but also raise a number of interesting questions and challenges for deposit insurers, says Mr Hieu. In the final analysis they are critically important to undermining a solid foundation for the nation’s financial sector and building competitiveness in an increasingly integrated global economy. VOV