Luận văn thạc sỹ quốc tế TECHNICAL EFFICIENCY FULL DISSERTATION

ABSTRACT The dissertation aims to investigate the level of technical efficiency and determinants of technical efficiency in commercial banks of Vietnam in the period of years, from 2011-2015 The sample set includes 10 commercial banks, in which state-owned banks and joint-stock banks The author applies the Data envelopment analysis (DEA) approach to examine the level of technical efficiency in Vietnamese commercial banks The findings show that Vietnamese commercial banks has improving tendency in technical efficiency in the whole period, in spite of some fluctuations In two bank types, state-owned banks have tendency to obtain better technical efficiency scores than joint-stock ones In addition, the total productivity for all banks is calculated by Malmquist index, which indicates that Vietnamese banks have been weak at technological advance and technical efficiency For the purpose of exploring factors impacting level of technical efficiency in banks, Tobit regression model is conducted The empirical findings show the positive and significant correlation between technical efficiency and some factors of total asset size and equity ratio Meanwhile, technical efficiency has negative and significant relationship with loan ratio, non-performing debt, and government ownership ACKNOWLEGEMENTS I would like to express my gratitude to my supervisor who is always beside me during the period of doing this dissertation He shows me how to an academic business research with the application of theories that I learnt previously I would like to thank my parents, my wife and my kids who always encourage me to complete this master course I would like to show appreciation to my manager and colleagues to assist me some tasks when I had to struggle with assignments and dissertation in this course Finally, I honestly recognize the enthusiastic support of all lectures and administrators in both Leeds Beckett University and Academy of Finance during the program Contents LISTS OF FIGURES AND TABLES LIST OF FIGURES Figure 4.1 Charter capitals of some commercial banks after merge and acquisition in 2015 Figure 4.2 Average technical efficiency of commercial banks in Vietnam from 2011 to 2015 Figure 4.3 Technical efficiency of joint-stock commercial banks in Vietnam from 2011 to 2015 Figure 4.4 Average technical efficiency of commercial banks in Vietnam in the period of 2011-2015 LIST OF TABLES Table 4.1 Bank types and quantity in Vietnamese banking sector Table 4.2 Description of inputs and outputs used DEA model Table 4.3 Average technical efficiency of two groups of ownership in Vietnamese commercial banks from 2011-2015 Table 4.5 Variations in Total Factor Productivity of All Banks and Its specific elements per year Table 4.5 Variations of total factor productivity and its specific elements in Vietnamese banks in the period of 2011-2015 Table 4.6 Descriptive statistics of variables in Tobit model Table 4.7 Result of Tobit regression of factors CHAPTER INTRODUCTION 1.1 Research background Commercial banks play a vital part in the connection of economic constituents in the economy and contribution to the development of financial sector The financial system is considered as the backbone of the economy, so the banking sector is represented for the main pillar of business The growth of national economy is largely reliant on the operations of banking sector In Vietnam, banking sector changes strongly current years It grows rapidly in terms of both asset and number Together with the operations of traditional banking, commercial banks provide a lot of new services and products to bring the satisfaction to customers Otherwise, these commercial banks also enhance continuously facilities, infrastructure as well as employ advanced technologies in their operations, which supports to enhance the technical effectiveness in each bank as well as the commercial banking sector Nevertheless, Vietnamese banking sector in general and commercial banks in particular have their ineffectiveness in operations during the time of uncertainty Remarkably, in the period of crisis and economic downturn since 2008, Vietnamese banking industry had experienced numerous difficulties and fell into the overloaded situation During the time of 2011-2015, the increasing rate of credit in banks was just around 20%, the historic lowest level of Vietnamese banking system Besides, the proportion of non-performing deb had an increasing trend, reaching 51% in 2013 The absorption of capital has been very poor in Vietnamese economy So, the major features of Vietnamese banking industry were weak growth of loan and deposit, high ratio of non-performing loan and revenues primarily dependent on credit activities Although the national government and commercial banks issued several new policies to deal with these matters, they seemed to be ineffective in encountering these challenges Therefore, it is important that the authorities and bank’s top executives have long-term perspectives and propose long-run strategies to manage bank operations To look for the reasons for this, it is necessary to analyze and understand the way of performance of commercial bank, especially the elements creating dissimilarities in performance among commercial banks such as technical effectiveness It can say that technical effectiveness plays an important role in bringing the successfulness to commercial banks in the fierce competition of banking sector Consequently, if commercial banks want to improve their performance as well as the position in the banking sector, they should focus on technical effectiveness There are many authors studying this issue And this paper is desired to provide a helpful viewpoint in relation to how commercial banks’ technical effectiveness is and what elements influencing the banking technical effectiveness are Therefore, the topic “evaluation of technical efficiency in Vietnamese commercial banks” is chosen Understanding the considerable influence of banking system on the development of national economy, numerous researches have been conducted on the theme of bank efficiency Recently, several scholars in Vietnam have done studies related to this topic For instance, Phu (2002) applies the functions of production and cost to evaluate the efficiency of commercial banks But the drawbacks of this research are just to recognize costs and the function of estimating cost in order to build the model So, the bank efficiency is not mentioned specifically Anh (2004) assess factors causing the inefficiency in Vietnamese rural and development banks; however the author just establishes the framework Thanh (2010) uses the model of data envelopment analysis to assess the input efficiency in Vietnamese commercial banks The findings indicate that input efficiency of banks is rather good; however it is possible to improve the efficiency of inputs to higher level Truc and Danh (2012) explore that small banks suffered bad consequences from global economic crisis rather than large and medium ones by using financial ratios to evaluate the technical efficiency in Vietnamese banks Hung (2008) applies the quantitative approach to investigate the performance of Vietnamese banking system Nevertheless, a drawback of this study was the dataset before 2008 as many weaknesses of banking sectors were shown after 2008 Additionally, the study concentrates on too much the explanation of theories and the conclusions have not specified determinants of bank efficiency So, it is essential to conduct researches about the bank efficiency in this situation So, the thesis will bring a deep understanding about the technical efficiency of banks and factors impacting the efficiency of banks in the context of Vietnam Evaluating technical efficiency of banks and exploring its determinants is important and useful for policy makers, banks’ managers and investors to make decisions The thesis is also groundwork to fulfill the policy frames more appropriately in the course of management of Vietnamese commercial banks 1.2 Research aims and objectives The purposes of this paper are to discuss the evaluation of Vietnamese commercial banks’ technical effectiveness in the period of 2011 -2015 and to determine components influencing technical effectiveness To achieve these purposes, the paper needs to solve the below objectives: • Measuring Vietnamese commercial banks’ technical effectiveness in the period of 2011 -2015 • Comparing and analyzing the technical effectiveness’s results among banks • Exploring components influencing technical effectiveness of Vietnamese commercial banks 1.3 Research questions With the purpose of achieving the research aim and objectives, the author will find the answers for questions below: • What levels of technical efficiency are in commercial banks of Vietnam? • What factors affect the technical efficiency of Vietnamese commercial banks? 1.4 Research boundary The focus of the dissertation is to evaluate technical efficiency of banks and reveal factors affecting technical efficiency in banks with technical efficiency as the key pointer to measure bank performance The sample set includes 10 commercial banks operating in Vietnam Data are collected in the time between 2011-2015 1.5 Significance of the research This paper will enrich empirical findings about assessing technical efficiency of Vietnamese banks and understanding the impacting factors by showing practical proofs in sample set Furthermore, the results of the dissertation will be valuable source for reference in terms of officials and corporate managers who will gain insight understandings about the technical efficiency in Vietnamese banks From that, they can conduct suitable strategies and frameworks concerning to banking controlling or evaluating benchmarks 1.6 Dissertation structure The thesis has five chapters Chapter 1: Introduction Chapter presents research background by showing reasons choosing the topic for this dissertation The author also specifies research aims, objectives and questions in this dissertation The boundary and significance of this research are indicated clearly Chapter 2: Literature Review The theories relating to bank efficiency, measuring methods of efficiency and determinants of bank efficiency are reviewed critically by underpinning diversity of researchers’ views in previous researches Chapter is seen as the important pillar for the dissertation Chapter 3: Methodology Chapter will explain the research methods applied in this paper The procedures of selecting methodology and gathering data are portrayed Then, the hypotheses will be developed to examine in next chapter Chapter 4: Empirical findings The empirical findings will be shown in Chapter The efficiency of banks will be revealed by comparison, analysis and interpretation in order to identify the most efficient banks and the most influential factors on efficiency of banks Chapter 5: Discussion of findings and conclusion Chapter will discuss differences or similarities between previous studies and obtained findings in this research Key notions and results are summarized and synthesized From that, the author will make a conclusion about the whole research: research aims and objectives, literature reviews, methodology and achieved results CHAPTER LITERATURE REVIEW 2.1 Bank efficiency 2.1.1 Definition of efficiency Efficiency is defined as the evaluation of performance generated from the least funds of time, human resources and assets (Aschenbach, 2010) It is indicated as the percentage of total output in comparison with total input under a specific circumstance The assessment of firm or sectorial efficiency is important for the government and company directors to calculate the level of output that a company or industry can produce if improving the efficiency without exploiting more resources (Farrell, 2953) 2.1.2 Types of efficiency Efficiency is categorized into three main types: allocative efficiency, cost efficiency and technical efficiency • Allocative efficiency Allocative efficiency is known as the allocation of economic resources to adapt economic needs, which is the manufacturing of those commodities and services that the society most wants (Anderton, 2006) It means that commodities and services are offered appropriately with the demand of consumers A company could achieve the efficiency in production of a product, but clients not need this product, so it is considered as allocative inefficiency Therefore, allocative efficiency is to generate an output at the intersected point of marginal benefits to consumers and the marginal cost of manufacturing • Productive efficiency Productive efficiency is the capability of a company to generate full output at the lowest expenses with the optimal usage of resources (Higson, 2011) Productive efficiency is obtained in case that a company manufactures goods and services at the lowest costs When a company reaches the productive efficiency, it is impossible to manufacture more commodities without utilizing more resources or lowering the quality Thus, the company should find a balance in the exploitation of resources, manufacturing capacity and commodities’ quality • Technical efficiency Technical efficiency is the effectiveness with a specific set of inputs exploited to generate an output A firm obtains the technical efficiency if it manufactures the maximum volume of output from the lowest number of inputs, including human resources, capital and technology (Kumbhakar and Lovell, 2003) A firm is regarded as technical inefficiency if it uses too many resources than required Technical efficiency occurs when it is impossible to increase the output without improving more inputs (Koopmans, 1951) The level of technical efficiency is rated from to 2.1.3 Bank’s technical efficiency According to Bhattacharyya et al (1997), technical efficiency in banking sector is understood as the capacity to transfer input resources into diverse banking products and services A commercial bank acquires technical efficiency when its performance is on the frontier line Under the assumption of constant returns-toscale (CRS), technical efficiency is evaluated to recognize the inefficiency resulting from factors of input, output or the size of banks As stated by the theory of system, commercial banks are efficient when: (1) they can change inputs into outputs or generate profits, or decrease expenditures to improve the competitive advantage with other banks; (2) they can ensure the prospect of safe operations The relationship between the commercial banks’ performance and the growth of domestic economic is strongly constructive as commercial banks play the role as financial intermediaries which move free cash from citizens to corporations needing capital for business and investment Therefore, the change on commercial banks’ performance will largely influence on the whole economic activities A lot of researchers carried out studies concerning to examination of bank efficiency In the research of Casu and Molyneux (2003), they investigate the impact of the efficiency score of European banking system on banks in each country The authors use Tobit regression to evaluate the impact of each country’s specific factors concerning to bank efficiency to measure determinants of banks in Europe The findings show that the efficiency levels of banking system are different between European countries due to specific country-factors linked with banking advanced technology Isik and Hassan (2002) assess the input and output efficiency in banks by applying non-parametric and parametric approaches in Turkish banks in the period of 1988-2006 The obtained results indicate that dissimilar characteristics of banks considerably impact the efficiency and different banking characteristics 10 knowledge or understanding Vague and disoriented writing tends to reflect a vague and disorganized thought, leading me to dig through the literature for more clarity Figure out how I write and edit Some people are better writers when they first put their thoughts on paper and plan to go back and fix awkward sentences, poor word choices, or illogical sentences later My perfection has always plagued me, so I always edit as a write, with one goal only: to make sure I’ve expressed the idea in my head clearly on the page I don’t move on until the sentence (or thought) makes sense with no ambiguity in the meaning Clarity of thought is always the aim in writing a manuscript, yet it is very difficult to come back to a section of writing days or weeks later and sort out a mess of thought if I don’t clarify my writing while the thought is still fresh in my head This means I am constantly re-reading and revising what I’ve written, but also hopefully means that when I submit something to my advisor or committee it only needs simple revisions, thereby saving time by getting as “close to right” as I could the first time around Develop a routine It’s important to learn when and what makes us productive For me, writing in several short bursts is more efficient than writing in a few, long extended periods When I try to write for long hours, I notice my concentration diminishing around the hour mark, so I try to take frequent 15 minute breaks For me, the most productive parts of the day are the beginning the end It’s important to build momentum early, and have a routine for ending the day too At the end of each day, I always leave myself something easy to get started with the next day, so I wake up knowing exactly where I am going to start Find a template Usually, when we decide on a date and deadlines for the final draft of our thesis due, we’re so frantic and pressed for time trying to get all the content, that we forget about the time it takes to make a draft pretty My last HUGE time-saving tip is to find a colleague who has recently turned in their thesis or dissertation and still has their final word document I can save time by reusing their document as a template for margins, page number position and other formatting guidelines Everything I’ve written can easily be pasted into a formatted template Keep my motivation near 55 Finally, always try to keep the end result in mind Whether it be holding a beautifully bound version of my thesis or a first author publication, keeping motivated is important Publishing is not a requirement for completing a thesis but it is an ultimate goal for me I know I owe it to myself, the people who I have worked with along the way, those who have supported me in some way (e.g., my committee), and to the funders that have helped pay for the research Plus, to have a competitive edge in the next job I apply for, and to get the most leverage possible from my masters training, it is important for me to finish strong with a publication or two Visualizing the end result helps me to take action to finish my thesis and advance my career Reasoned perception of present and future value of the Dissertation (approx 300 words) My advanced business and management knowledge, combined with my nonbusiness bachelor degree puts a long list of clear benefits onto my CV I have demonstrated my ambition to use my bachelor discipline as a springboard into management My studies and the unique learning experience at university have given me knowledge of general business administration and demonstrated my aptitude for adapting to new situations I will have gained international experience and interpersonal skills, and will have developed my academic, managerial and social skills through real-life business cases and company assignments I have a thorough understanding of key issues faced by finance, and my thesis shows that I have investigated one specific functional area in more detail, thus demonstrating an affinity for a future employer There is also scope within the programs to emphasize certain functional areas of business I can express an affinity for, for example, 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The focus of the dissertation is to evaluate technical efficiency of banks and reveal factors affecting technical efficiency in banks with technical efficiency as the key pointer to measure bank... commodities’ quality • Technical efficiency Technical efficiency is the effectiveness with a specific set of inputs exploited to generate an output A firm obtains the technical efficiency if it manufactures