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 o Acknowledgement Abstract Table of Contents List of Tables List of Figures Abbreviations 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 o 1.3.2 Research q 1.4 Scope and Limitation 1.5 Research method 1.6 Implications of research 1.7 Structure of the study Chapter 2: Literature Review 2.1 Introduction iv 2.2Commercial banks 2.2.1Definition of commercial ban 2.2.2Function of commercial bank 2.2.3Major factors affecting comm 2.3Efficiency and factors affecting efficiency of commercial ba 2.3.1Efficiency 2.3.2Main factors affecting efficie 2.4The measurement of efficiency of Commercial banks 2.4.1Efficiency analysis by the tra 2.4.2Efficiency analysis by param 2.4.3Efficiency analysis by Non- p 2.5Literature review on measuring efficiency of banking system 2.6Summary Chapter 3: Research methodology 3.1Introduction 3.2Research design 3.3Descriptions of Data Sample and Variables 3.3.1 Characteristics of Research Sample on the Vietnamese banks 3.3.2Description of Variables 3.4Data analysis techniques 3.5Conclusion Chapter 4: Empirical results of the research 4.1Introduction v 4.2 Descriptive Statistics 4.3 Analysis of Efficiency Estimates 4.4 Productivity Improvement with Malmquist index 4.5 Conclusion Chapter 5: Conclusion and suggestion 5.1 Introduction 5.2 Conclusions from the research questions 5.2.1 Conclusions related to the fir 5.2.2 Conclusions related to the se 5.3 Recommendations of the research study 5.3.1 Recommendations for Vietn 5.3.2 Recommendations for State 5.3.3 Recommendations for Gover 5.4 Contributions of the research findings 5.4.1 Theoretical contribution 5.4.2 Methodological contribution 5.5 Implications of the research 5.6 Limitations of the research and further research 5.7 Conclusion References Appedix vi List of Tables Table 1.1 Number of commercial banks in Vietnam, 2007 -2009 Table 1.2 Some developments of Vietn Table 3.1 Sample of Vietnamese banks Table 4.1: Summary of Variables on Vietnamse commercial banks, 2007 -2009 Table 4.2: Technical efficiency of commercial banks, 2007 -2009 Table 4.3: Summary of Estimated Efficiency Measures, 2007 -2009 Table 4.4: Estimated Efficiency Scores for Individual Banks, 2007 -2009 Table 4.5 Number of banks with DRS, Table 4.6: Malmquist Index summary of Annual Means Table 4.7 Malmquist Index Summary of Individual Commercial Bank Means, 2007 2009 vii List of Figures Figure 3.1 Research process Figure 3.2 Relationship between input-output factors and efficiency of commercial banks Figure 3.3: Technical and Allocative Efficiencies Figure 3.4: Technical and Allocative Efficiencies from an Output Orientation Figure 3.5: Efficiency Measurement and Input Slacks Figure 3.6: Calculation of Scale Economies in DEA Figure 4.1 Trend of interest income and non-interest incomes, 2007-2009 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 ix References Arthur O‟Sullivan, Steven M Sheffrin (2007) Economics: Principles in action Upper Saddle River, New Jersey 07458: Pearson Prentice Hall, pp.15 Banker, R D., & Maindiratta, A (1988) Nonparametric Analysis of Technical and Allocative Efficiencies in Production Econometrica, p.56 Banker, R.D, A Charmens, and W W Cooper (1984), "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis", Management Science 30, pp 1078 - 1092 Benton E.Gup, James W.Kolari,(2005), Commercial banking textbook, the Management of Risk, John Wiley and Sons, Inc Berger, A and Mester, L (1997), "Inside the black box: what explains differences in the effciencies of fnancial institutions?", Journal of Banking and Finance, 21,pp 895-947 Berger, A.N, G.A Hanweck, and D.B Humphrey (1987), "Competitive Viability in Banking: Scale, Scope, and Product Mix Economies", Journal of Monetary Economics, 20, pp 501 - 520 Berger, A.N and D.B Humphrey (1997), "Efficiency of Financial Institutions: International Survey and Directions for Future Research", European Journal of Operational Research, 98, pp 175-212 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liberalization in the Socialist oriented market economy in Vietnam In V D.Pham (Ed.), Socialist orientation in developing the market economy in Vietnam – Facts and solutions Hanoi: Vietnam National University Publishing House Ngo, D T (2010b) Evaluating Vietnamese Commercial Banks Using Data Envelopment Analysis Approach (Vietnamese) SSRN eLibrary Nguyen, V H (2007) Measuring Efficiency Of Vietnamese Commercial Banks: An Application Of Data Envelopment Analysis (DEA) In K M Nguyen & T L Giang (Eds.), Technical Efficiency and Productivity Growth in Vietnam (pp 11) Hanoi: Publishing House of Social Labour xi Nguyen, X Q and Bruno De Borger (2008), Bootstrapping efficiency and Malmquist productivity indices: An application to Vietnamese commercial banks, AsiaPacific Productivity Conference 2008 Sealey, C & Lindley, J (1977), “Inputs, outputs and a theory of productio n and cost at depository financial institutions”, Journal of Finance 32, 1251-1266 Shephard, R W (1970), Theory of cost and production functions , Princeton University Press, Princeton, NJ Zikmund, W.G (1997) Business Research Methodology Fort Worth, TX: The Dryden Press xii Appedix Appedix 1: TE of the 22 Vietnamese commercial banks, CRS, 2007 -2009 Bank's Name no (ID) ABB ACB VBARD BIDV EIB HBB HDB MB MHB 10 MSB 11 OCB 12 SEAB 13 SGB 14 SHB 15 PNB 16 STB 17 TCB 18 VAB 19 VIB 20 VCB 21 ICB 22 VPB Mean TE SOCBs Mean TE JBCBs MEAN TE all banks MAX MIN STDEV xiii Appedix 2: TE of the 22 Vietnamese commercial banks, VRS, 2007 -2009 Year 2007 Year 2008 Year 2009 Note: crste = technical efficiency from CRS vrste = technical efficiency from VRS scale =scale efficiency = crste/vrste Note also that all subsequence tables refer to VRS results Appedix 3: MALMQUIST INDEX SUMMARY Results from DEAP Version 2.1 year = firm crs te rel to no ********* 10 11 12 13 14 15 16 17 18 19 20 21 22 mean 0.00 year = firm crs te no *** 10 11 12 13 14 15 16 17 18 19 20 21 22 mean 0.913 year = firm crs te rel no ********** 10 11 12 13 14 15 16 17 18 19 20 21 22 mean [Note that t-1 in year and t+1 in the final year are not defined] MALMQUIST INDEX SUMMARY year = firm 10 11 12 13 14 15 16 17 18 xix 19 1.171 1.423 1.360 0.861 1.666 20 1.415 0.974 1.000 1.415 1.378 21 0.842 1.294 1.063 0.792 1.089 22 1.231 1.235 1.369 0.899 1.521 mean 1.043 1.201 1.067 0.977 1.252 year = firm 10 11 12 13 14 15 16 17 18 0.787 0.556 1.000 0.787 0.438 19 1.747 0.588 1.091 1.601 1.028 20 1.000 1.153 1.000 1.000 1.153 21 0.792 0.545 0.541 1.464 0.432 22 mean MALMQUIST INDEX SUMMARY OF ANNUAL MEANS year mean MALMQUIST INDEX SUMMARY OF FIRM MEANS 10 11 12 13 14 15 16 xxi 17 1.408 0.809 1.200 1.173 1.140 18 0.887 0.612 1.000 0.887 0.543 19 1.430 0.915 1.218 1.174 1.308 20 1.189 1.060 1.000 1.189 1.260 21 0.817 0.840 0.759 1.077 0.686 22 1.334 0.819 1.239 1.077 1.093 mean 1.141 0.855 1.086 1.051 0.975 [Note that all Malmquist index averages are geometric means] Appendix 4: Some indicators of Vietnam Banking Institutions, IMF, 2003 -2009 Reserves Demand Deposits Time and Savings Deposits General Government Deposits Credit from Central Bank Capital Accounts Bonds&Money Mkt Foreign Liabilities Source: IMF ... 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. .. 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. .. 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