The data envelopment analysis model evaluating the efficiency of vietnamese commercial banks

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 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: 60.31.12 MASTER THESIS IN ECONOMICS Supervisor: PROFESSOR DR PHAM VAN NANG HoChiMinh City – 2011 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 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 0.683 in 2007 to 0.864 in 2009 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 iii Table of Contents Acknowledgement Abstract ii Table of Contents iii List of Tables vi List of Figures vii Abbreviations viii Chapter 1: Introduction to the study 1.1 Introduction 1.2 Research background 1.2.1 Rationale of the study 1.2.2 Overview of the Vietnamese banking system 1.3 Research objectives and questions 1.3.1 Research objectives 1.3.2 Research questions 1.4 Scope and Limitation 1.5 Research method 1.6 Implications of research 1.7 Structure of the study Chapter 2: Literature Review 11 2.1 Introduction 11 iv 2.2 Commercial banks 11 2.2.1 Definition of commercial banks 11 2.2.2 Function of commercial banks 13 2.2.3 Major factors affecting commercial banks‟ performance 14 2.3 Efficiency and factors affecting efficiency of commercial banks 16 2.3.1 Efficiency 16 2.3.2 Main factors affecting efficiency of commercial banks 17 2.4 The measurement of efficiency of Commercial banks 19 2.4.1 Efficiency analysis by the traditional method of financial indicators 19 2.4.2 Efficiency analysis by parametric frontier efficiency approach 21 2.4.3 Efficiency analysis by Non-parametric approach (DEA) 22 2.5 Literature review on measuring efficiency of banking system in Vietnam 25 2.6 Summary 26 Chapter 3: Research methodology 27 3.1 Introduction 27 3.2 Research design 27 3.3 Descriptions of Data Sample and Variables 29 3.3.1 Characteristics of Research Sample on the Vietnamese banks 29 3.3.2 Description of Variables 30 3.4 Data analysis techniques 33 3.5 Conclusion 43 Chapter 4: Empirical results of the research 44 4.1 Introduction 44 v 4.2 Descriptive Statistics 44 4.3 Analysis of Efficiency Estimates 46 4.4 Productivity Improvement with Malmquist index 53 4.5 Conclusion 56 Chapter 5: Conclusion and suggestion 57 5.1 Introduction 57 5.2 Conclusions from the research questions 57 5.2.1 Conclusions related to the first question 57 5.2.2 Conclusions related to the second question 59 5.3 Recommendations of the research study 60 5.3.1 Recommendations for Vietnamese commercial banks 60 5.3.2 Recommendations for State Banks of Vietnam 63 5.3.3 Recommendations for Government 64 5.4 Contributions of the research findings 65 5.4.1 Theoretical contribution 65 5.4.2 Methodological contribution 66 5.5 Implications of the research 66 5.6 Limitations of the research and further research 67 5.7 Conclusion 68 References ix Appedix xii vi List of Tables Table 1.1 Number of commercial banks in Vietnam, 2007-2009 Table 1.2 Some developments of Vietnamese banking system (2007-2009) Table 3.1 Sample of Vietnamese banks 29 Table 4.1: Summary of Variables on Vietnamse commercial banks, 2007 -2009 45 Table 4.2: Technical efficiency of commercial banks, 2007-2009 47 Table 4.3: Summary of Estimated Efficiency Measures, 2007-2009 49 Table 4.4: Estimated Efficiency Scores for Individual Banks, 2007 -2009 50 Table 4.5 Number of banks with DRS, IRS, and Cons, 2007-2009 53 Table 4.6: Malmquist Index summary of Annual Means 54 Table 4.7 Malmquist Index Summary of Individual Commercial Bank Means, 2007 2009 55 vii List of Figures Figure 3.1 Research process 28 Figure 3.2 Relationship between input-output factors and efficiency of commercial banks 33 Figure 3.3: Technical and Allocative Efficiencies 34 Figure 3.4: Technical and Allocative Efficiencies from an Output Orientation 35 Figure 3.5: Efficiency Measurement and Input Slacks 38 Figure 3.6: Calculation of Scale Economies in DEA 40 Figure 4.1 Trend of interest income and non-interest incomes, 2007-2009 46 Figure 5.1 The results of TE, PE, SE, AE, CE of 22 Vietnam commercial banks, 2007 2009 58 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 ... has the following objectives: - To investigate to the efficiency of the Vietnamese commercial banks - To analyze the changes in the productivity and technology of the Vietnamese commercial banks. .. efficiency of commercial banks 16 2.3.1 Efficiency 16 2.3.2 Main factors affecting efficiency of commercial banks 17 2.4 The measurement of efficiency of Commercial banks ...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