Ministry of Education and Training University of Economics HoChiMinh City ---------------- NGUYEN THI HONG VINH THE DATA ENVELOPMENT ANALYSIS MODEL: EVALUATING THE EFFICIENCY OF VIETNAMESE COMMERCIAL BANKS MASTER THESIS IN ECONOMICS Supervisor: PROFESSOR DR. PHAM VAN NANG HoChiMinh City – 2011 TIEU LUAN MOI download : skknchat@gmail.com Ministry of Education and Training University of Economics HoChiMinh City ---------------- NGUYEN THI HONG VINH THE DATA ENVELOPMENT ANALYSIS MODEL: EVALUATING THE EFFICIENCY OF VIETNAMESE COMMERCIAL BANKS Major: Banking and Finance Major code: 60.12 MASTER THESIS IN ECONOMICS Supervisor: PROFESSOR DR. PHAM VAN NANG HoChiMinh City – 2011 TIEU LUAN MOI download : skknchat@gmail.com i Acknowledgement First and foremost, I offer my sincerest gratitude to my supervisor, Professor Dr. Pham Van Nang for his continuous support during my research, for his patience, motivation, enthusiasm, and immense knowledge.
His guidance helped me in all the time of research and writing of this thesis. I could not have imagined having a better advisor and mentor for my Master study. I gratefully acknowledge all the members of the proposal examination committee for their valuable comments and constructive suggestions. I would like to express my sincere gratitude to all instructors and staff at Faculty of Banking and Postgraduate Faculty, University of Econimics HoChiMinh City for their support and the valuable knowledge during my study in UEH.
My special gratitude is extended to my English teacher, Mr. Paul Scott, for his grammatical proofreading of the Thesis draft. I am much indebted to Mr. Scott for his precious time to read this thesis and gave his critical comments about it.
It is a pleasure to pay tribute also to the Dr. Le Phan Thi Dieu Thao and my colleagues at the International banking faculty, University of Banking Hochiminh City for offering me opportunity to study and finish the Master course. Lastly and most importantly, I wish to thank my beloved parents, and my fiancé, Ho Xuan Hien. Also, I give thanks to the one above all of us, the omnipresent Father for His endless love and spiritual support during the completion of this project.
TIEU LUAN MOI download : skknchat@gmail.com ii Abstract The thesis investigates the efficiency of a sample of Vietnamese commercial banks for the period of 2007-2009, by using the Data Envelopment Analysis (DEA) approach. After analyzing, the research concludes that the technical efficiency of these banks was, on average, increasing from 0. It was also found that the average cost efficiency of the sampled banks was 53.7 percent, and the average annual growth of the Malmquist index was negative 2.6 percent over the study period; however, there is still an opportunity to improve this indicator. The results presented in the thesis will be helpful to bank managers in identifying their banks‟ efficiency performance and the underlying reasons for their successes or failures.
It will also help banks in strategic planning, and help policy makers in their attempts to improve the overall efficiency of the banking industry and identify the need for reforms of the domestic banks. KEY WORDS: Data Envelopment Analysis (DEA), efficiency, commercial banks, Vietnam. TIEU LUAN MOI download : skknchat@gmail.com iii Table of Contents Acknowledgement. ii Table of Contents.
iii List of Tables. vi List of Figures .viii Chapter 1: Introduction to the study .1 Rationale of the study.2 Overview of the Vietnamese banking system .3 Research objectives and questions.4 Scope and Limitation.6 Implications of research .7 Structure of the study. 9 Chapter 2: Literature Review. 11 TIEU LUAN MOI download : skknchat@gmail.1 Definition of commercial banks .2 Function of commercial banks .3 Major factors affecting commercial banks‟ performance .3 Efficiency and factors affecting efficiency of commercial banks.2 Main factors affecting efficiency of commercial banks .4 The measurement of efficiency of Commercial banks .1 Efficiency analysis by the traditional method of financial indicators .2 Efficiency analysis by parametric frontier efficiency approach .3 Efficiency analysis by Non-parametric approach (DEA) .5 Literature review on measuring efficiency of banking system in Vietnam.
26 Chapter 3: Research methodology .3 Descriptions of Data Sample and Variables .1 Characteristics of Research Sample on the Vietnamese banks .2 Description of Variables .4 Data analysis techniques. 43 Chapter 4: Empirical results of the research. 44 TIEU LUAN MOI download : skknchat@gmail.3 Analysis of Efficiency Estimates .4 Productivity Improvement with Malmquist index. 56 Chapter 5: Conclusion and suggestion .2 Conclusions from the research questions.1 Conclusions related to the first question .2 Conclusions related to the second question.3 Recommendations of the research study.1 Recommendations for Vietnamese commercial banks .2 Recommendations for State Banks of Vietnam .3 Recommendations for Government .4 Contributions of the research findings .5 Implications of the research.6 Limitations of the research and further research.
xii TIEU LUAN MOI download : skknchat@gmail.com vi List of Tables Table 1.1 Number of commercial banks in Vietnam, 2007-2009 .2 Some developments of Vietnamese banking system (2007-2009).1 Sample of Vietnamese banks .1: Summary of Variables on Vietnamse commercial banks, 2007 -2009 .2: Technical efficiency of commercial banks, 2007-2009 .3: Summary of Estimated Efficiency Measures, 2007-2009 .4: Estimated Efficiency Scores for Individual Banks, 2007 -2009 .5 Number of banks with DRS, IRS, and Cons, 2007-2009 .6: Malmquist Index summary of Annual Means .7 Malmquist Index Summary of Individual Commercial Bank Means, 2007 - 2009. 55 TIEU LUAN MOI download : skknchat@gmail.com vii List of Figures Figure 3.2 Relationship between input-output factors and efficiency of commercial banks.3: Technical and Allocative Efficiencies .4: Technical and Allocative Efficiencies from an Output Orientation .5: Efficiency Measurement and Input Slacks .6: Calculation of Scale Economies in DEA.1 Trend of interest income and non-interest incomes, 2007-2009 .1 The results of TE, PE, SE, AE, CE of 22 Vietnam commercial banks, 2007 - 2009. 58 TIEU LUAN MOI download : skknchat@gmail.com viii Abbreviations DEA Data envelopment Analysis DMU Decision Making Unit CRS Constant Returns to Scale Model VRS Variable Returns to Scale Model effch Technical efficiency change techch Technological change pech Pure technical efficiency change sech Scale efficiency change tfpch Total factor productivity change AE Allocative efficiency TE Technical efficiency CE Cost efficiency PE Pure technical efficiency SE Scale efficiency TFP Total factor productivity irs Increasing returns to scale drs Decreasing returns to scale cons Constant returns to scale EPS Earnings Per Share ROA Return On Assets ratio ROE Return On Equity ratio JOCB Joint-stock commercial banks SOCB State-owned commercial banks TIEU LUAN MOI download : skknchat@gmail.com 1 Chapter 1: Introduction to the study 1.1 Introduction This chapter provides a general introduction for the study, section 1.2 examines the research background in which the gaps in the empirical studies of commercial banks‟ efficiency are identified, and overview of Vietnamese banking sector is introduced.3 defines the research questions and objectives of the study. In addition, section 1.4 discusses scope and some limitations of the current study.5 briefly discusses the general aspects of research methodology such as research types and research design.6 provides implications of this study.7 introduces the structure of the study.
The structure of chapter 1 is provided in Figure 1.1 Rationale of the study In January 2010, Vietnam concluded three full years of membership in the World Trade Organization. Along with its integration into the WTO, the banking industry is experiencing significant changes. The financial liberalization which started in the 1990„s, and continues even is the cause of these important changes. in Vietnam, over the last twenty years, the financial system in general, and the banking system in particular, has been transferred from a monopoly system into a diversified system which allows all participants to compete fairly and effectively.
TIEU LUAN MOI download : skknchat@gmail.com 2 Within these past years, the banking system in Vietnam has gradually developed by increasing 1.) the number of banking institutions, 2.) the relative size of the banking sector in the economy, 3.) the amount of credits for the economy, 4.) and the amount of other banking services. However, the banking system in Vietnam has affected by the recent world financial and economic crisis. The negative affects are an increased number of institutions declaring bankruptcy and instability of the system (proven by the liquidation crisis at the end of 2008 and the high non-performance loans ratio). Despite these affects, our main issue, our overall concern is whether or not Vietnamese commercial banks are functioning effectively.
Traditionally, the evaluation of banks‟ performance usually employs a financial ratio method by which it provides a simple description about the bank‟s financial performance in comparison to previous periods. Thus, bank managers chronologically measure and compare their efforts. However, a major weakness of ratio analysis is that there is a lack of agreement in the literature about the relative importance of various types of indicators. If this study incorporates the related financial indicators to measure technical efficiency in banks, the n weight assignment to each indicator will be issued.
The financial ratio method can be an appropriate method when firms use a single input or produce a single output. However, as in many organizations, banks employ various inputs to provide various services (outputs). Which ratios are selected, or which measures are chosen, becomes an issue to evaluators, especially when a great number of related financial indicators are involved. One of the solutions is to aggregate average among all indicators in order to integrate a single measurement.
DEA approach can be employed to solve the issue of weight assignment. This approach uses a mathematical programming method to generate a set of weights for each indicator. TIEU LUAN MOI download : skknchat@gmail.com 3 So far, there is still a lack of empirical research about the efficiency of the banking sector in Vietnam over the past decades. The confidential nature of Vietnamese banks has made it difficult for both foreign and Vietnamese researchers to access critical data from banking institutions, except for the standard Annual reports.
Therefore, the aim of this paper is to provide an empirical research on the efficiency of the Vietnamese banking system, in the period of 2007- 2009, in order to get a brief view of how efficient the banking system is, and what need to change to improve the performance of this sector. The author uses a data envelopment analysis (DEA) model for this purpose. The panel data of twenty two Vietnamese commercial banks was used for the empirical research. The results presented in this research will be helpful to bank managers in measuring their banks‟ efficiency performance, and identifying the underlying reasons for their successes or failures.
It will also help banks in strategic planning, and help policy makers in their attempts to improve the overall efficiency of the banking industry.2 Overview of the Vietnamese banking system Prior to the Renovation reforms initiated in 1986, Vietnam functioned under a centrally planned economy: the objectives and modes of production by the government, not the market. Vietnamese banking could be described as „mono- banking system,‟ because the State Bank of Vietnam acted both as a central bank and a global commercial bank. In fact, before 1988, special purpose banks in areas such as foreign trade or investment did exist, but they were organized as sub-units of the State Bank of Vietnam (SBV); moreover, they operated like government organizations rather than commercial banks. In March 1988, the banking system officially changed to a two-tier system (Decree No.
53/HDBT of the Prime Minister). Then, the State TIEU LUAN MOI download : skknchat@gmail.com 4 Bank of Vietnam acted as the central bank, overseeing four (state owned) commercial banks (SOCB) which specialized in different areas of banking activity. Almost economists agree that the most significant financial liberalization started in May 1990, when the two important Decrees were announced: one was the Decree on the State Bank of Vietnam; and the other was the Decree on Banks, Credit cooperative and Financial companies. These two Decrees divided the Vietnamese financial system from monopoly (or one-tier) system into two-tier system: the SBV now mainly acts as a central bank; other banks and financial companies can have freedom to be independently established, performed and even closed.