Doctor of philosophy technical efficiency of the vietnamese banking sector an empirical analysis encompassing preand post WTO entry

University of Wollongong Research Online University of Wollongong Thesis Collection 1954-2016 University of Wollongong Thesis Collections 2016 Technical Efficiency of the Vietnamese Banking Sector: An Empirical Analysis Encompassing Preand Post-WTO Entry Le Thanh Phuong University of Wollongong Unless otherwise indicated, the views expressed in this thesis are those of the author and not necessarily represent the views of the University of Wollongong Recommended Citation Phuong, Le Thanh, Technical Efficiency of the Vietnamese Banking Sector: An Empirical Analysis Encompassing Pre- and Post-WTO Entry, Doctor of Philosophy thesis, School of Accounting, Economics and Finance, University of Wollongong, 2016 https://ro.uow.edu.au/theses/4809 Research Online is the open access institutional repository for the University of Wollongong For further information contact the UOW Library: research-pubs@uow.edu.au Faculty of Business Technical Efficiency of the Vietnamese Banking Sector: An Empirical Analysis Encompassing Preand Post-WTO Entry by Le Thanh Phuong "This thesis is presented as part of the requirements for the award of the Degree of Doctor of Philosophy of the University of Wollongong" January, 2016 CERTIFICATION I, Le Thanh Phuong, declare that this thesis, submitted in fulfilment of the requirements for the award of Doctor of Philosophy, in the school of Accounting, Economics and Finance, Faculty of Business, University of Wollongong, is wholly my own work unless otherwise referenced or acknowledged The document has not been submitted for qualifications at any other academic institution Le Thanh Phuong January, 2016 i TABLE OF CONTENTS CERTIFICATION i TABLE OF CONTENTS ii ABSTRACT vi ACKNOWLEDGEMENTS x LIST OF PAPERS AND AWARD xi LIST OF FIGURES xii LIST OF TABLES xiii ABBREVIATIONS xv Chapter 1: Introduction 1.1 Background, motivation and objective 1.2 Research questions and Hypotheses 1.3 Methodology and Data 1.4 Contribution of the study 13 1.5 Organisation of the dissertation 13 Chapter 2: Banking Sector of Vietnam 1988−2015 16 2.1 Introduction 16 2.2 A Brief History of Vietnam‘s Banking Sector 17 2.2.1 Establishing a Market-Oriented Banking System (1988−1997) 19 2.2.2 The Second Banking Sector Reform period (1998−2006) 26 2.2.3 Accelerating after WTO Entry (2007−2009) 35 2.2.4 A Slowdown after the Global Financial Crisis and Restructuring the Banking Sector (2010−2015) 38 2.3 Vietnam‘s Commercial Banks in the Post-WTO Entry Period (2007−2015) 42 2.3.1 Performance of Vietnam‘s Commercial Banks 42 2.3.2 Ownership Structure 47 2.3.3 Effects of Asset Price Bubbles 50 2.3.4 Non-Performing Loans 52 2.4 Summary 57 Chapter 3: Literature Review on Banking Efficiency 60 ii 3.1 Introduction 60 3.2 Techniques related to Measuring and Analysing Banking Efficiency 61 3.2.1 Techniques for Measuring Banking Efficiency 61 3.2.2 Approaches to Analysing the Effect of Environmental Variables on Banking Efficiency 65 3.2.3 Selection of Inputs and Outputs for an Analysis of Bank Efficiency 68 3.3 Impact of Financial Liberalisation on Banking Efficiency in a Global Context 71 3.4 Banking Efficiency in Transition Economies 78 3.4.1 An Overview of Bank Efficiency in Transition Economies 78 3.4.2 The Impacts of Financial Liberalisation on Banking Efficiency in Transition Countries 81 3.5 Literature on Banking Efficiency in Vietnam 86 3.6 Summary 92 Chapter 4: Methodology 110 4.1 Introduction 110 4.2 A proposed methodology – Meta-frontier analysis 113 4.2.1 The meta-frontier 114 4.2.2 Group frontiers 115 4.2.3 Meta-technology ratios 116 4.3 DEA technical efficiency 117 4.3.1 Measuring technical efficiency 117 4.3.2 Measuring group technical efficiency 120 4.3.3 Regressing environmental variables on technical efficiency 127 4.4 Li test for equality of efficiency densities 135 4.5 Aggregate Malmquist Productivity Index (AMPI) 141 4.6 Hicks−Moorsteen productivity index 147 4.7 Summary 151 Chapter 5: Data and analysis of Vietnamese banking efficiency 154 5.1 Introduction 154 5.2 Data and model specification 155 5.2.1 Data source 155 5.2.2 Sample 156 5.2.3 Input/output specification in the DEA model 158 iii 5.2.4 Specification of the regression model 162 5.2.4.1 Bank-specific variables 162 5.2.4.2 Policy-change related variables 164 5.3 A comparison of technical efficiency between the pre- and post-WTO periods 167 5.4 A comparison of aggregate technical efficiency amongst bank groups in accordance with ownership 174 5.4.1 Simar and Zelenyuk (2007) test on the performance of bank groups 174 5.4.2 Li test on the performance of bank groups 181 5.5 Summary 185 Chapter 6: Analysis of Vietnamese bank efficiency and productivity 187 6.1 Introduction 187 6.2 Technology gap analysis 188 6.3 Analysis of the impact of environmental variables on bank efficiency 190 6.3.1 Impact of reform measures conducted in the post–WTO period on bank efficiency 193 6.3.2 Specific bank characteristics (control variables) 197 6.4 Productivity analysis using the aggregate Malmquist total factor productivity index 201 6.4.1 Intermediation approach 202 6.4.2 Operating approach 205 6.5 Productivity analysis using the Hicks−Moorsteen total factor productivity index 207 6.5.1 Intermediation approach 207 6.5.2 Operating approach 211 6.6 Summary 213 Chapter 7: Policy implications and recommendations 215 7.1 Introduction 215 7.2 Establishing a competitive and fair banking market 219 7.3 Improving relevant institutions/banks 224 7.4 Consolidating the legal and regulatory framework 226 7.5 Summary 230 Chapter 8: Summary and conclusions 234 8.1 Introduction 234 iv 8.2 Summary of empirical findings 236 8.2.1 Findings for the research questions 236 8.2.2 Findings for the research hypotheses 241 8.3 Policy implications and recommendations 244 8.4 Limitations 245 8.5 Areas for further research 246 Appendix A: Technical efficiency between pre- and post-GFC period 248 Appendix B: Confidence interval of coefficients in meta- and group models 250 BIBLIOGRAPHY 253 v ABSTRACT The nexus between finance and economic growth has been theoretically and empirically examined in the literature A well-functioning financial system is an essential factor that ensures the sustainable development of economies Measurements of efficiency and productivity can be used to identify good/bad financial systems In Vietnam, commercial banks dominate and contribute 90% of the total assets of the financial system (IMF, 2014) Thus, the efficiency and productivity of the banking sector is pivotal to the attainment of economic growth and development in Vietnam In joining the WTO in 2007 Vietnam had to implement reform measures aimed at further liberalising and increasing the competitiveness of the banking sector Nonetheless, the existing literature lacks a comprehensive and rigorous analysis of the impact of WTO entry on the performance of Vietnamese banks The objective of this research is to conduct an empirical investigation of the performance of the Vietnamese banking sector over the years from 2005 to 2012, encompassing the pre- and post-WTO entry periods Using measures of efficiency and productivity this thesis sheds light on the following questions: (1) How has the Vietnamese banking sector evolved since its transformation from a one-tier to twotier system in 1988? (2) Which methods can be utilised to measure and analyse the efficiency and productivity of a banking sector? (3) What has been the level of efficiency and extent of productivity changes in Vietnam‘s banks encompassing the pre- and post-WTO entry? (4) What has been the impact of policy changes implemented after WTO entry on Vietnam‘s banks? (5) What are the important sources of inefficiency from the perspective of the Vietnamese banking system? vi Data envelopment analysis, a common non-parametric method, is utilised to empirically analyse the technical efficiency and productivity changes of the Vietnamese banking sector To examine the efficiency difference between periods or bank groups, the Li test and Simar and Zelenyuk (2007) test are utilised By combining the meta-frontier approach and double-bootstrap two-stage DEA method of Simar and Wilson (2007), the impact of environmental variables on bank efficiency is investigated A variant of the Malmquist index (so-called aggregate Malmquist productivity index) and Hicks−Moorsteen index (a multiplicatively complete TFP index) is employed to measure and analyse the evolution of the productivity of the Vietnamese banking sector Using data for Vietnamese banks covering the post-WTO period (2005-2012), it is found that there is no obvious change of efficiency between the pre- and post-WTO era State-owned bank groups are the most efficient and have the smallest technology gap relative to that of industry technology By contrast, and contrary to the mainstream view, joint stock banks are the least efficient group and have the biggest gap relative to the meta-frontier The impact of reform measures such as transforming rural to urban banks and allowing industrial groups to become involved in the banking sector have contributed negatively to bank performance There is evidence to suggest that SOCBs privatisation has improved their capability to earn profit but has reduced their efficiency in terms of providing loans The participation of foreign investors has improved the efficiency of joint stock banks Regardless of ownership the results illustrate a negative relationship between bank capitalisation and performance as well as a positive impact on profitability Foreign and joint venture banks are found to be less dependent on lending activities and are more diversified in their operations than domestic banks vii The responses of various bank types can be different to the same explanatory factors For example, the income efficiency of state-owned banks is positively related with the loan to asset ratio while a negative relationship is recorded in the case of joint stock banks While financial soundness facilitates the magnitude of lending in the case of foreign and joint venture banks, we observe a negative relationship in the case of domestic banks The profitability of foreign rivals is independent of intermediation services but a significant dependence is recorded for domestic banks The analysis of productivity showed that the banking system witnessed a decline during the period 2007–2012 under both the operating and intermediation approach This issue can be explained by regression of the technical component while the efficiency component was largely unchanged This thesis has created a number of contributions to the literature on efficiency and banking First, this is the first study to take into account the heterogeneity of the business environment when measuring and analysing bank efficiency Second, by combining the meta-frontier analysis with double-bootstrap two-stage DEA, the author has provided a new approach to analyse the impact of variables on bank efficiency in separate groups operating under different technology sets Accordingly, ownership is employed as an ex ante rather than an ex post factor, unlike previous studies, when examining the influence of this environmental variable Third, outcomes from this study clarify the impact of policy changes‘ on Vietnamese banking performance in the post WTO era Fourth, this is the first time that the aggregate Malmquist productivity index that allows accounting for the contribution of individual firms to a whole industry‘s productivity has been applied in the context of a banking system Fifth, from the empirical results, a number of policies have been recommended to improve the performance of Vietnamese banking sector from the viii ...Faculty of Business Technical Efficiency of the Vietnamese Banking Sector: An Empirical Analysis Encompassing Preand Post- WTO Entry by Le Thanh Phuong "This thesis is presented as part of the requirements... further liberalising and increasing the competitiveness of the banking sector Nonetheless, the existing literature lacks a comprehensive and rigorous analysis of the impact of WTO entry on the. .. performance of Vietnamese banks The objective of this research is to conduct an empirical investigation of the performance of the Vietnamese banking sector over the years from 2005 to 2012, encompassing