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Luận văn thạc sỹ: Analyze capabilities of Military Bank in establishing leasing company


On completing this graduation paper, I would like to send my deepest and most
sincere gratitude to many people for their invaluable help during the conduct of the
First and foremost, I would like to send my heartfelt gratitude towards my
supervisor, Professor Dr. Pham Quang Trung for his constructive and timely feedbacks
as well as his constant and unfailing support which were decisive factors to the
completion of the study.
Additionally, I would like to show my deepest gratitude towards my colleagues
for their valuable advice and guide in the methodology of the research. Furthermore, I
would also like to say the sincerest thanks to my classmates EMBA6A
On a personal note, I express my truly gratitude to my family and friends who
emotionally and spiritually comforted me through the challenging time of conducting
the research. The study could not have been completed without their continual





Military Bank


Board of Directors


Board of Managers


International Monetary Fund


State Bank of Vietnam


Foreign Direct Investment


Organization for Economic Cooperation and Development


World trade Organization


Figure 1: The owner capital
Figure 2: Increase in liabilities
Figure 3: Increase in owners’ equity and capital mobilization
Figure 4: Chartered capital of MB and other commercial joint stock banks in Vietnam
Figure 5: Total assets from 2006 to 2010
Figure 6: Increase Total Loan to Customer
Figure 7: Total outstanding balance of lending in three years: 2005, 2006, 2007
Figure 8: Comparison of deposit/ loan ratio in 2010
Figure 9: Loan categorizing and bad loan ratio of MB in 2008 – 2010
Figure 10: CAR and Non Performance Loan ratios
Figure 11: Investment portfolios of MB
Figure 12: Business results of MB 2008-2010
Figure 13: Profit before tax during 2003-2010
Figure 14: Ratios of ROA, ROE
Figure 15: Structure of capital mobilizing of MB in 2008 - 2010
Figure 16: Proportion of short-term liabilities used for long-term loans
Figure 17: Financial ratio of MB and other commercial joint stock banks in 2009
Figure 18: Average salary of staff in the period of 2008-2010

Model 1. Model of commercial banking.
Model 2: General overview on basic activities of commercial banks.
Chart 1: MB Organization Structure
Chart 2: Organization Structure of MBL
Chart 3: Organization Structure of MBL after 3 years.


After more than a decade of fast development with very severe competition, the
Vietnam banking industry nowadays has been put in closely and tightly supervision by
SBV. With influence of State Bank of Vietnam’s policies, the commercial banks of
Vietnam are facing with big challenges for survival and development.
The Military Commercial joint stock Bank (MB), one of the most effective stock
commercial bank in Vietnam. Now it said that MB has stable capabilities in comparison
with other banks. However, after more than 16 years of development, In the year
2010, the BOD of MB has approved the new business development strategy for next
5years periods of development, with the consultancy of the Mc Kensey. The strategic
objective for 5 years has been identified that MB will develop the group-oriented model
and become one of the top-three commercial banks in Vietnam. In order to reach the
objectives, MB will have to change the business lines and strongly invest the banking
technology and develop the full-packages products due to satisfy each kind of
customers. In fact of operation, MB has realized the need of using the Financial
Leasing service of much as much of customers, but could not supply. So that the reason
why MB wants to develop the leasing products in order to satisfy the needs of the
potential customers.
Financial Leasing is neither a newly banking products nor traditional service of the
commercial banks in Vietnam. According to the Laws and regulations of SBV, the
commercial banks was not permitted directly supply the Leasing product, unless the
banks to establish the subsidized company which specialized in leasing services. Base
on the acknowledgement of truth of the leasing needs from customer, The objective of
the dissertation is analyzing capabilities of the MB in developing the leasing product.
Therefore, research will focus on objectives: (i) to appraise the abilities of MB can
meet the requirements of the SBV in developing the leasing services or not; and (ii) to
analyze the capabilities of MB in establishing the newly leasing company.


research also mentioned about the strengths and the weakness of the MB in
establishing company, as same as to give out some solutions to enhance capabilities


and recommendations to implementation the project.
About the research methodology, the research is collecting secondary data from book,
reports, specialized books, websites… in order to give relevant theories to know about
the commercial banks activities, to analyze the main capabilities of the bank, and to
know about the concepts of the leasing products. The relative Laws also used as
secondary data in order to know about related regulations. To have the Primary data, the
author make survey from the customers and partners to know the needs of the products,
and to make in-depth interviews some senior leaders of MB to knows their points of
view about capabilities of the MB and abilities to develop leasing service.
From these analyses, some findings can be listed as below:
- The unique to develop the product is establishing leasing company;
- The requirements of SBV for the commercial banks to establishing leasing
- The current capabilities of the MB and ability to meet requirements above;
- SWOT analysis, Strengths and Weaknesses of MB of MB for idea of establishing
leasing company;
- Benefits gained when MB develop the leasing project.
From these findings, some solutions were proposed to enhance capabilities for
establishing company and some recommendations for develop the leasing project,
which includes:
- Improve the owner’s capital by raising the chapter capital of the MB, in order to
invest in the subsidized company;
- Preparing the HRM and technology sources for the leasing operation;
- Build the management mechanism and enhance the abilities of the MB in manage
risk and the operation of subsidized company of MB;
- Choosing the strategic partners and strategic shareholders to ensure the effective
of operating of the newly company;
- Identify some main ideas of the establishing Leasing company project.


1.1. Rationale
These days, when our national economy is moving gradually to fit the image of a
civilized and modern university, Party and the Government have applied certain
positive innovation to raise the economy up to the next rung of the ladder and also to
integrate to the development of other countries in the world. The mission of reforming,
and the transition from the centrally planned state into market one has been strongly
promoted. The process of restructuring the economy requires to be carried out at the
same time with the process of industrialization and modernization. The pressure of
having an economy with the fast rate of growth comes from many factors: the risk of
being lagged behind, the fast rate of population growth, and considerable
unemployment rate, etc. To avoid the situation of being lagged behind, there must be
strong steps of transformation in productivity and quality in production so that in a
period of 15 to 20 years, it is possible that our economy will become one of the
countries with average rate of industrialization and modernization and also improve
people’s living standard and prepare for the next stable steps of development.
Under the pressure of developing our national economy as well as the development of
international economy, there is a large quantity of business units set up. It can be said
that the development of business is the key to the development of national economy.
The work of doing business in the market mechanism requires a large amount of capita,
which is considered the foundation for the survival and growth of any business. In case
of lacking capital, business activities will have no chance to be carried out. The
competition in the market and the advancement in field of technology and science are
the factors leaving effect on business activities of an enterprise. Products sold out in the
market have to possess good – looking package, good quality, reasonable price and suit
customers’ taste in comparison with those of other enterprises in the market. In the
process of competition, the key to survive and develop just lies in element of
continuous of improvement and bettering. Also, business units have to have financial
resource to fulfill the goals set out.
However, to give out the decision of investment, enterprises have to always consider
their financial resources. Each business unit just has limited financial resource


including equity capital and mobilized capital. Businesses can not invest into projects
which exceed their financial capability. Thus, unused capital flows in the market have
been mobilized to create a large quantity of capital financing large scale business
In the market economy, the capital subsidized by the State Bank of Vietnam no longer
exists. Business units have to cover all the costs and ensure the profitable outcome of
business by effectively mobilizing and using capital. In the other hand, enterprises have
to preserve the capital mobilized even in case of inflation and positively seek for
partners and invest to improve business performance. On the occasion of there is no
profit and earning on the capital invested and even capital is not preserved, the survival
and development of businesses, then, will be left bad impact and bankruptcy is an
unavoidable plight.
It can also be said that, as a matter of fact, businesses in the market these days are
suffering from the situation of seriously lacking capital. Thus, to ensure the capital for
business activities, enterprises have to positively seek for outside financial resources.
Mobilizing capital to maintain and expand business operation is a big problem.
However, this is not driven to the nut. Usually, businesses could raise capital from
banks. Today, there is another solution to this problem is that enterprises lease the
capital from leasing companies, which plays an meaningful role in funding in
developing countries. This kind of funding is closely related to businesses of
manufacturing, especially medium and small businesses for this is a solution of lending
with items (factories, equipment and machines, etc) instead of borrowing from the
banks to purchase machines.
The market for leasing in developing countries is considered a part of capital market for
this is also associated with medium and long term capital. The assets acquired by
leasing are often useful for the period of more than one year.
However, unlike the market of medium and long term lending, investing banks always
require collaterals and real estate mortgage, which not every small and medium
businesses can afford, and it is also different from the stock market where only joint
stock companies can mobilize capital by issuing stocks, bonds. In leasing market,
lending companies can finance businesses in both term of equipment and technology in


order that these firms can best utilize leasing machines. The beneficiaries of this kind of
lending vary in a wide range of businesses, including family business without
From the perspective of businesses, methods of leasing credit would allow them, as the
borrowers, to use various kinds of essential machines without investing a large amount
of capital, which leaves a bad impact on the financial resources. In the other hand,
leasing credit also helps companies in the aspect that it is necessary for them to borrow
from the banks to invest in fixed assets, which reduce the rate of Liabilities/ Equity
Capital of the businesses. Moreover, in case of borrowing from banks to invest in
assets, the amount of money borrowed just cover about 70%- 80 % of the asset value.
In addition, businesses can also negotiate to leasing companies to sell and re-lease the
assets. Thus, businesses can sign the contracts of selling a part of their assets to leasing
companies and at the same time, sign the contracts of re-leasing the property. Therefore,
businesses can recover some amount of money to invest in other projects given that
they are still allow to use the assets, which helps to avoid the situation of interruption in
production and business activities.
Looking into the problem in the scale of macro – economy, leasing credit is also the
way of attracting foreign capital to medium and long term projects of domestic
businesses. The needs of equipment in the period of Industrialization and
modernization, foreign direct investment and joint venture are not the only ways to
attract capital into projects. In addition, pursuant to the regulations of International
Monetary Fund IMF, items of leasing credit from foreign economies are not accounted
into the total amount of foreign loan. Thus, leasing credit would also be practical in the
situation of Vietnam in the period of attracting ODA investment capital under the
conditions of foreign debt limit controlling given out by international financial
institutions these days. Up to now, the total amount of foreign debt of Vietnam is not a
large one but it can be said that this is not a small amount.
The great benefits of leasing credit such as the role of intermediary channel of capital to
businesses or the factor pushing the improvement of technology help it to become an
issue attracting the consideration and investigation so as to practice in Vietnamese
economic situation these days. This is the answer to the hunger of capital, which is


hindering businesses in their performance. The demand of investment in machines and
equipment rises every year because of the current situation of businesses as well as the
continual increase in quantity of business units. In a potential market like that, the
developing of leasing service is such as prospective service for Military commercial
Joint stock Bank. The knowledge and experience gained in academic years and in work
as well as the information gathered from public media has inspired the researcher to
conduct a study on the topic “Analyze capabilities of Military Bank in establishing
leasing company” as the MBA dissertation.


Research Objectives

Initially, this dissertation provides background theories in evaluating business
performance of a bank in new context of economy. The strong development of banks in
both aspects of quantity and quality these days in the market of Vietnam requires a
comprehensive evaluation on the capacities of a bank.
Financial Leasing is neither a newly banking products nor the traditional service of the
commercial banks in Vietnam. According to the Laws and regulations of SBV, the
commercial banks was not permitted directly supply the Leasing product, unless the
banks to establish the subsidized company which specialized in leasing services. Base
on the acknowledgement of truth of the leasing needs from customer, The objective of
the dissertation is analyzing capabilities of the MB in developing the leasing product.
Through repeated studies and report, commercial banks, currently, are assessed
accordingly to four main dimensions indicating financial, managerial capacities, human
resources and technological base exploited in banks, among which financial and
technological capacities are considered the top concern in evaluating the
competitiveness of a bank. To start with, financial capacities is the most fundamental
elements in evaluating business performance of a bank, regarding with this aspect,
capital size, financial ratios such as CAR, ROA, ROE or other profitable ones would
be carefully analyzed to have an exact picture of financial situation of a bank. Besides,
managerial capacities are also put into analysis with consideration on management
profile of the bank. Moreover, to assess the capacity of the bank, issues of human
resources are also sources of information. The quality and capacities of employees in


the bank, training, benefits and fringe policies are all the factors of consideration in this
case. Finally, technology used by the bank is also analyzed.
Added to this, the study also focuses on the requirements that MB has to satisfy on
establishing a leasing company. MB, in order to expand its business activities into
leasing section of products and services, has to consider all the requirements that issued
by the State Bank of Vietnam on the requirements and conditions of establishing a
leasing company such as financial, human resources and technology requirements.
Those are also the condition to ensure a profitable and effective business performance
of the leasing company.
Besides, the dissertation also sheds more light on the current competencies of MB in
establishing a leasing company to provide leasing services in the market. To do that,
financial capacities and equity capital of the bank were carefully analyzed. Moreover,
customer base and the demand for leasing products in the market were also deeply
considered in the study.
Finally, base on analysis and findings about MB as well as the opportunities of
establishing a leasing company. The study also gives out certain recommendations on
setting a leasing company under the control of MB. These recommendations
concentrate on the issues of improving financial capacities and enhancing human
resource and technological base in activities of the leasing company.


Research Methodology

1.3.1. Research Process
Theoretical Background

Requirements for

MB developing Objective

In-depth Interview

1.3.2. Data Collection Primary Collection:

Current of Capabilities
of MB in developing
leasing company


For the primary data, to start with questionnaire survey, as aiming at giving an
insight looking into the issue of MB capacities in developing leasing service, the main
target population of the study is the managers and staff in banking and financial section.
These are the persons who hold strong background knowledge of the banking and
financial services as well as the experience and the real operation of MB to give out the
precious evaluation on the capacities of the bank. The data will be collected from the
sample of 100 banking staff of MB. They are the employees of the bank who are
currently working in various positions of the bank. In addition, 20 senior managers or
the member of B.O.D would also invited to participate in this process to contribute their
knowledge, opinions and also experience on the topic of the study. The staffs will be
chosen as they meet criteria: they are accessible and available for the data collection
procedures. The managers will be invited to cooperate with the researcher if they meet
these criteria as follow: 1) they are senior managers of MB bank; 2) their managing
experience ranging from one year to thirty years; 3) they are accessible and available
for the data collection procedures. This number can be considered roughly significant
to the total number of managers and staff in MB bank.
In-depth Interview was a effective method to get main contents from the guests.
Researching has interviews many senior leaders, who are the members of Board of
director MB, executive managers of MB, as well as leaders of subsidiaries owned by
MB and partners of the bank. Some of Speaking In-depth interview has recorded and
written as representatively ideas related researching. Interview with Sir Le Van Be, the
Vice Chairman of the BOD of MB, Mr. Do Van Hung, the depute CEO of MB; Dr.
Quach Manh Hao, Depute CEO of Thang Long securities Co,.; Mr. Phan Phuong Anh,
the CEO of MB Capital.. It can be said that all the opinions given out by these people
share the similarities of a bright future of the leasing company developed by MB. Secondary data:
Secondary data is the kind of data to be gathered for the purposes of the research
rather than for the aim of completing a research. The Secondary data has been used
from book, reports, specialized books, websites… in order to give relevant theories to
know about the commercial banks activities, to analyze the main capabilities of the


bank, and to know about the concepts of the leasing products. The relative Laws also
used as secondary data in order to know about related regulations.
By research the Laws and regulations from SBV, we know about all requirements for
the commercial banks want to establishing the leasing company. From analyze the
figures, ratios.. and related information to get overlooking about MB capabilities. We
focus on the analyzing 4 main capabilities of MB: the financial capability, the
management system quality, the human resource and the information technology of the

Analyzing and researching aims to answer question the MB can meet the

requirements of SBV in developing leasing service or not.

1.3.3. Data analysis
After having administered the questionnaires and conducting interviews, the researcher
processed the results of the questionnaires and transcribed the interviews to make it
convenient for later analysis and quoting. Noticeably, jottings of important points were
taken to ensure the reliability and precision of the responses of participants.
Since collected in a variety of methods, the data, therefore, needs to be processed in
different ways. The coding data obtained from the questionnaires will be calculated and
transferred into numerical form. It is necessary to reckon the percentage of participants
who share similar ideas of each answer, i.e. what percentage of participants agree that
MB has adequate capital to establish a leasing company (question 7 in the questionnaire
for staff and managers) or what percentage of participants suppose that MB possess a
good quality of management to set up and run a leasing company in the market of
Vietnam these days. Qualitative data like participants’ replies to the open-ended
questions in the questionnaires and during the recorded interviews will be transcribed
and then synthesized and reported in a reader-friendly way.
The summary of the results and the researcher’s interpretation called for the application
of all tabular, graphical, and statistical presentation. In tabular presentation of data, the
researcher drew tables to show different statistics and to make comparison when
needed. Meanwhile, the patterns revealed from the data might be presented more
clearly with graphs and charts and the comparison or contrast between statistics could
be highlighted with these as well.


In response to the question of potential for leasing products and services and plans for
MB in developing these product packages, most members of management boards
expressed a strong confidence in the development of these products in the market. MB
plans to provide full-service packages for target customers such as companies and
businesses in construction, information technology, transportation and so on.
Firstly, as stated by members of shareholder board, MB is enjoying achievements thank
to the continual effort of the bank in dealing with periods of hardship during its start-up
course and the downturn of the economy. With the strategic support and consultancy
form McKinney, the bank did shape its target market niches and segmentation to give
out suitable strategies.
Finally, these participants also indicate the strategies MB will apply to gain a successful
setting up of this leasing company indicating bettering financial capacities, seeking for
strategic partners.
In some, opinions given out by these leaders prove a strong confidence and
commitment of MB in giving birth to a leasing company.


Research Structure

The study is conducted in the structure of 4 chapters as below:
Chapter 1: Introduction
Chapter 2: Theoretical Background of Commercial Bank Capabilities Analyzing in
establishing Leasing Company
Chapter 3: Current Capabilities of MB in establishing leasing Company
Chapter 4: Solutions to improve Capabilities of MB in establishing leasing company.

Expected contribution of the study

The research makes new contribution to field of legal studies with the following results:
Firstly, this study highlights the operation and risks that a commercial bank is facing to
prove that establishing a leasing company is an inevitable and natural part in the
process of improvement in society development and the demand of increase in
productivity and trading in the market. With the necessary conditions of developing
leasing service and also the capacities to run it, the birth of this company is the solution


to the problem of mobilizing capital in businesses, which increase the elasticity of the
market and economy.
Secondly, this also addresses the positive impact of leasing companies on businesses in
general and also on the economy in particular. In addition, it is undeniable that leasing
companies also contains negative impact namely the fee which is usually higher than
that of traditional lending methods of banks and unavoidable risks due to the impact of
forces in the market. From that, businesses can give out the best decision of raising
capital in order to create more and more surplus value to businesses.
Thirdly, this study explains the nature of a leasing company as well as analyzes the
lessons from experience of developed countries. These are precious lessons for Vietnam
in general and for MB in particular in developing leasing service so as to best suit the
conditions of the national economy.
Fourthly, this helps to give out a picture of the current situation of leasing services in
Vietnam market by analyzing, criticizing and explaining important elements of the
Fifthly, the study clarifies key elements to the establishment of a leasing company
basing on financial ability, management ability, human resource management ability
and Technology ability to explain the dialectically materialistic relationship among
these factors and apply for the real situation of Military Bank.
Lastly, the study proposes best solutions to help MB build a business plan for a leasing
service in future.



Introduction to commercial banks
The concept of commercial bank
It is widely recognized by almost economics historians that the field of banking

dates backs to the Middle Age on the foundation of production and goods trading
development. However, the early stage of banking was not in the full functions as that
of these days. The first activity leading to the establishment of banks was the activity of
currency exchange among merchants.
Along with the development of production, goods trading more and more
expanded in scale and were not limited in each territory of each lord. However, in each
land, the lords with their power, often ruled on their “own currency” in the land of their
authority. The difference among currencies hindered the process of products trading
among areas and territories. To solve the problems caused by the difference among
currencies, a quantity of merchants got rid of their traditional ways of trading to begin a
special kind of trading – “currency trading” - to play as an intermediary of exchanging
currencies to serve other merchants and became kinds of “currency merchant”.
However, currency merchants often did not invest their money in the activities of
goods trading (the kind of traditional trading that they gave up). The main stream of
their business activities was to support others in their business performance by lending
them money. Thus, currency merchants covered a new activity – lending.
Doing business activities of lending others, these merchants totally engaged in a
new field of business known as “Banking” and set up a new business unit – the bank.
Thus, it perceived that “bank” is a kind of business with the main activities covering
currency area and holding the main functions as:
+ Receiving deposit and pay on behalf of the customers.
+ Use deposit money to lend.
The earnings gained in this kind of business are the fee of insurance and payment


on the behalf of customers and the interest on lending.

Credit role

t role

Modern commercial


and guarantee
investment role

Other roles

Model 2.1. Commercial bank Model
The definition of the concept of commercial banks has to base on their natures and
objectivities in financial market and sometimes the natures, aims and beneficiaries are
combined to give out the best definition.
The French Law of 1941 defined “the institutions considered banks are the business
units which often receive money from public in the form of deposit or other forms the
amount of money used in activities like discount, credit or financial ones.” Or the
Indian Law of Banking in 1950 and then supplemented in 1959 stated that “Banks are
the units receiving deposit to lend, fund and invest”. These definitions are based on the
natures and aims of banks.
Other definitions are based on the combination with the beneficiaries. For example, the
Dennis Law of Banking in 1930 defined that “ The banks doing the functions of
receiving deposits, treasury trading, commercial and real estate trading, credit
derivatives, bill of exchanges, money transferring and insurance, etc”.
Pursuant to American law, any institutions which provide account of deposits for
customers and allow them withdraw the money (by Cheque or electric withdraw) and
lending business units and commercially are consider banks. The economics David


Berg defined that “Commercial Bank is a financial intermediary which gets business
license from the government to lend and open deposit accounts, including ones to issue
The Law of credit institutions issued by the Socialist Republic of Vietnam dated
December 22nd 1997, article 20 stated that:
“A credit agency is an enterprise to be established under the provisions of this law
and other provisions of the legal framework to carry out activities of monetary
trading, banking services with the functions of receiving deposits to lending and
provide services of payment”.
No matter what the appearance of the definition, analyzing and reviewing their content,
it can be seen that commercial banks hold a characteristics in common, that is the
function of receiving deposits – non-term and term deposits to invest in lending,
discounting and other activities of the banks.

2.1.2. Typical characters in business activities of commercial banks
Business activity consists of the conducting of one, some or all the stages of the
investment process, from the one of production to providing products and services in
the market to gain profit. As a business unit in the monetary market, in a comparison
with State bank and other kinds of banks, business activities of commercial banks hold
the typical characters as following:
Firstly, business activity of commercial banks is of monetary field.
In the financial market, commercial banks are the most important institutions of
financial intermediaries to transfer mobilized capital from the public to the ones in need
of spending and investing. Starting from the initial function of receiving deposit,
commercial banks then have become the units to trade the right of using capital. Along
with the development of the socio-economy and technology, the structure and types of
products gain different levels.
Particularly, in the current period, thank to the great development of science and
technology, new products have come into operation such as ATM, ATM, Home
banking, Phone banking, Internet Banking. Also, basing on the demand of customers,
there are many institutions coming out to provide banking services, however,


commercial banks still outstand from other kinds of financial channels for the typical
functions of trading deposit and payment services.
Secondly, business activities of commercial banks are of highly sensitive ones and
under the strict controlling of the laws.
Business performance of commercial banks live on the confidence of customers, thus,
the sensitivity in business operation reaches a high level, a small scale happening can
also leave effect on business activities of banks (small changes in interest also cause the
changes in customer flow from one bank to another, for example).
Thirdly, products and services provided by commercial banks are fairly similar, easy
to imitate and closely related to time.
Products and services supplied by commercial banks are in a wide range. However, a
majority of them are similar, especially traditional ones such as capital mobilizing,
lending, payment. In case that one commercial bank provide a product or service that
gains effectiveness, the others immediately do the same, so – called “imitation”. Thus,
the concept of new product by commercial banks is the concept of one which provided
in the market by a commercial bank before the other competitors.
Fourthly, customers of commercial banks are in a wide range.
Customers of commercial banks are in a large quantity and also a wide range and thus,
there demand for products and services of commercial banks are different. Thus, each
bank has to carefully study the demands and build up suitable customer strategies.
Fifthly, business activities always suffer from high level of risk.
Risks are always attached to any kind of business. However, risks in business activities
of commercial banks are different to others in term of level and reasons. Risks in
business performance of commercial banks widespread and leave huge effect on not
only the internal risk of the industry but also all the other industries of the economy, not
only inside one country but also other countries in the world. There are some kinds of
risks including credit risk, liquidity risk, currency exchange risk, interest risk and
operation risk.

2.1.3. Typical business activities of commercial banks
Commercial banks are ones to carry out activities in monetary and credit fields. Basic


business activities of commercial banks creating profit for commercial banks include:
capital mobilizing, lending and investing and other activities.
Most of business activities of a commercial bank are presented in the balance sheet.
This presents all the assets, equity capital and liabilities with the principle:
Assets = Owner equity capital + liabilities
The balance sheet lists liabilities, equity capital and assets of banks. Banks mobilize
capital to lend. To have capital, commercial banks receive deposits or borrow and then
lend or invest in stocks. Earnings from business activities after covering the expenses
are the profits of the banks. As financial and payment intermediaries in the market,
banks have other intermediary services besides aforementioned business activities.
Model 2.2: General overview on basic activities of commercial banks.

Business activities of
commercial banks


Equity capital

Lending and

Investing and funding

Other products
and services
- Services of payment and
- Trust services
- Foreign currency trading
- Stocks trading
- Agency

Source: Commercial bank Activitie Textbook

Activity of fund mobilizing:

In the portfolio of bank capital, bank managers often care about the rationality of the
ration of equity capital over the capital mobilized from external sources, and the
balance between current liabilities and long-term ones, equity capital and capital
invested in fixed assets, equity capital and bad loans.


Mobilize Equity capital
To establish a bank, usually, the owners have to have a certain amount of capital

that is larger than that ruled by the law – legal capital. Legal capital is the maximum
level of capital to establish a bank under the banking regulation. Each bank has
different amount of capital which called chartered capital, which is higher than legal
capital. Depending on types of banks, the sources of chartered capital are different.
Equity capital is the amount of capital contributed by the owners. The amount of
chartered capital depends on the scale and under detail provisions of banking
regulation. In field of banking, this kind of capital is often smaller in amount than that
of total capital and mainly invested in fixed assets, and physical evidence to do business
Equity capital is the first and foremost proof of a strong financial capacity of a
commercial bank, which plays an important role in a bank’s foundation and also a key
to the life, the scale and the growth and safety in business activity of that bank. Low
level of capital also leaves a huge effect on the economic condition of a country when
banks declare bankruptcy. Small amount of capital also hinders banks in expanding
scale in business as well as promoting competitive advantages. For the important
function of equity capital that can cover the losses incurred in activities of credit,
investment and other kinds of risks in business activities, so a reasonable level and
portfolio of capital is an important factor to ensure safety and growth bank operation.
The larger amount of capital banks have, the more confidence they gain from
customers and investors and the stronger capacity of banks to cope with difficult
situations in the economy system. Also, the more capital means that more profits will
be created, for they can diversify activities of banks which create more chances to earn
revenues. However, that the equity capital takes too large proportion in total capital can
cause the problem of low level of profit distributed to bank stakeholders. To measure
and determine the reasonable capital level of a bank, the relation among other items in
the financial statement of a bank such as total assets, total deposits, and total sensitive
assets. Therefore, bank managers, customers and authorities all pay attention to the
bank capacity in hold a reasonable level of equity capital and the methods of managing
equity capital.


Mobilizing liabilities (deposits and borrowing):
Besides equity capital, banks also mobilize liabilities. This is one of the main

activities of banks in solving the problem of “input” to the bank financial resources,
meaning solving the capital to serve the demand of credit for customers. To mobilize
fund, banks can attract capital from many external sources and in many forms such as:
 Deposits from individuals and organizations
Deposits from customers have been always the most important financial sources of
commercial banks, and take a large proportion in the total capital of banks. To increase
deposits in a competitive environment and to have high quality sources of capital,
banks practice a lot forms of mobilizing such as:
+ Non- term deposits: is the kind of deposit that customers can withdraw any time
without noticing the banks. These kinds of deposits include demand account, checking
account, account to insure the assets of customers, savings account. These kinds of
deposits account for a large quantity in total capital of banks and have low fees of
mobilizing but hold sharp fluctuation and complicated in mobilizing and expose to high
level of risk.
+ Time deposits from businesses and organizations: are the kinds of deposits with
preset fixed time of withdrawal. These can include time deposits from businesses with
fixed time of withdrawal or savings. Besides, these consist of savings from retail
customers in the market. These kinds of deposits hold quite stable balance.
+ Savings accounts of retail customers: These kinds of fund take a large
proportion in the total capital of banks. To attract more and more saving money,
banks are trying to encourage customers change the habit of keeping cash and
treasury at home by expanding the network of mobilizing, introducing a variety of
forms and attractive interest. Saving accounts are not used to the aim of payment but
can use as collaterals to borrow from the banks.
 Liabilities of banks
Commercial banks borrow from State bank (such as refinancing loan of
Vietnam) and from other financial institutions to timely solve the demands of urgent
payment or maintain the required reserve ratio prescribed by the central bank or borrow


in the market by issuing promissory notes and bonds.
The basic difference in the capital of commercial banks and non - financial
institutions is that: commercial banks mainly doing business on the capital mobilized
from business units while other kinds of institutions live mainly on equity capital. Thus,
researching the situation of capital mobilization is one of the first priorities in reviewing
the capital of commercial banks. The effectiveness of capital mobilization reflects in:
 Scale; and rate of growth of capital mobilized;
 Effects of deposits portfolios on the earnings of banks;
 The quality of capital mobilized by looking into the stability and fees
paid for capital mobilization.


Lending and investment

Lending or credit loans:
Lending is main business activities held by commercial banks to gain earnings.

The commercial banks lend customers a sum of money to use in a prefixed purposes
and time under the principle of repaying principal and interest. This kind of activity
now makes up for 60% to 80% total capital of commercial banks. Lending by banks
comes into many forms according to the time of usage, purposes and ways of lending
such as discounting commercial notes, credits, overdrafts, time credit, leasing, and trust
services and so on, etc...
Lending is the main source of profit for commercial banks, and the key to the life
and development of banks. However, this activity expose to many kinds of risk
(liquidity risk, interest risk, political and ethnical risk), in case these kinds of risks
occur, commercial banks will suffer from huge negative effect for most of bank capital
is mobilized in the economy.
Thanks to credit activities of banks, the economy run in a smooth operation that
helps to circulate unused capital in the market and avoid the death of capital in the
economy and ensure the continuous operation of business, and create the capacity of
funding in every field such as industry, agriculture, service and trading. Credit is the
major actability of commercial banks. The earnings from credit activities always
account for a large amount of total revenues in banks. Earnings of commercial banks
from credit products and services depend on the following factors:


− Scale and portfolio of credit services and products
− The capacity to hedge risks
− The quality of credit
The lending scale reflected in ratios of sales and balance. Commercial banks always
seek for new customers and maintain the relationship with old ones to expand lending
to increase sales and balance. When the amount of investing credit increases, earnings,
then increase and return of banks also rise.
The effectiveness of capital using reflects in the capacity to compensate the risks in
bad loans and as well as fulfill the objectives set out to ensure the safety in business
such as obeying the regulations of credit line, maximum guarantee limits for a customer
basing on equity capital of the banks.
The quality of credit reflects in the rate of overdue loans. Those are the loans that
customers cannot pay off when they due. The ratio of overdue loans on the balance
often used to evaluate the quality of loans. That this ratio is low reflects effective
lending and vice versa. In case overdue loans are because of unpredicted objective
factors or customers just encounter difficulties in a short time, banks can still collect the
However, if overdue loans are due to the ineffectiveness in the performance of
customers or of customer fraud, and use the capital for different purposes from the
agreement, overdue loans are in bad situation and might cause the situation of not
collecting back money.
The quality of credit lending plays such an important role and determines the
effectiveness in the commercial bank performance. In spite of saving and cutting down
in expenses and make full use of revenues sources, the low quality of credit lending
will cause the problem of losing capital in bank operation and might lead to the plight
of bankruptcy.

Investment activity:
Commercial banks use their capital to buy a variety of stocks with low level of

risks and high level of liquidity and market capacity, mainly ones issued by government
or reputable business firms to meet the demand of liquidity and profit earning. These
days, more and more commercial banks join the stock market. Besides, commercial


banks also contribute capital to join in joint venture and partnership agreements to do
business. The effectiveness in investment activities of commercial banks reflect in the
ratio of profit yielding in investment, the rise in stock price and the safety of these
investment portfolios. Investment and stock trading activities brings about a large
amount of profit to banks, however, these kinds of business activities expose a high
level of risks.


Other products and services

When the economy develops more and more, products and services provided by
banks are more and more diversified and fruitful and earnings from services take an
important role in total revenues of commercial banks. These kinds of activities by
commercial banks are purely services but without capital, meaning banks do not need
to use their capital to serve customers. The current trend is that banks positively expand
their services to improve the earnings and also enhance their position in the market. The
main services are:
 Foreign currency trading:
Foreign currency trading is the activity in which commercial banks use the
currency of one country to trade the currencies of the others in the same place or among
different places at the same time or in different point of time to earn revenues in form of
“exchange difference”
 Guarantee:
Guarantee is one kind of operation in which commercial banks with their prestige
and financial condition to guarantee customers to borrow money if they are in need.
The main types of guarantees provided by commercial banks consist of: borrowing
guarantees, payment guarantee, business agreement guarantee, contract guarantee and
other kinds basing on the needs of individuals and business firms. In these kinds of
guarantee, banks record earnings by “guarantee fee”.
 Payments services
Payments services by commercial banks include the following types of services:
+ Money collection
+ Disbursement

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