Institutions in Transition

The ongoing transformation of centrally planned societies into market economies poses many difficult questions regarding large-scale institutional reform, such as how far to go, how fast, and in which order? Financial intermediation is one sector in which the gap between socialism and capitalism is particularly large, and the development of commercial banking has often proved to be a bottleneck in the reform process. This book explores the development of the Vietnamese state banks, focusing on the situation in the early 1990s. It highlights the lengthy process of altering the formal and informal rules governing the bank organizations. The prevailing socialist ideology implies that state ownership remains, enabling the government to intervene in banks' operations. The ideology's informal role is arguably even more important, because it leaves unclear how bankers should act when profit maximization conflicts with social responsibility. In the period of transition formal and informal rules are unclear. Uncertainty prevails as long as bankers and banking authorities have only partially converted to a new set of norms. Accordingly, the formal financial sector fails to flourish.