GREEN BANK IN VIETNAM: LEVEL OF DEVELOPMENT AND DETERMINANTS45476

In addition, it is very necessary to have some “demand” factors like demand of firms on green investment or support from Government in terms of policies for the development of green bank

GREEN BANK IN VIETNAM: LEVEL OF DEVELOPMENT

AND DETERMINANTS

Ngo Anh Phuong, Tran Thi Thanh Tu, Nguyen Thi Nhung

University of Economics and Business - VNU

of managers about developing green bank In other words, banks should play the proactive roles in the current stage In addition, it is very necessary to have some “demand” factors like demand of firms on green investment or support from Government in terms of policies for the development of green banks in Vietnam

Key Words: Green Bank, Green Finance, Determinants for development of

green bank

1 INTRODUCTION

Vietnam is considered as one of countries that are significantly affected by climate change According to Ministry of Planning and Investment, to achieve objectives proposed by green development project, Vietnam will be in the need of 30 billion USD (Trọng Triết, 2015) This becomes a big challenge as the national budget and the support for international fund are limited Therefore, in order to develop towards sustainable green growth, a developing country like Vietnam should consider banking system and finances institutions as principal subjects, playing a crucial role in the green finance campaign Accordingly, banking system and financial institutions will decide to offer capital to “green” projects that focus on promoting

social economics development, and will play an important role in supporting a stable economic development Green finance is an effective solution for environmentally friendly investment project Banks and financial institutions also can stay away from environment and social risk by offering green finance products and services

As a role of lender, banks contain a huge part in direct the investment fund into environmentally friendly projects

However, it is quite difficult for most of Vietnamese firms always to approach capital offered by banks This issue has reduced firms’ motivation to innovate technologies for improving production performance and decreasing negative impacts on environment One of the basic causes lead to that situation is the lack of green products and services product In practice, the matter of Green Bank has just been mentioned for 5 years, but has been introduced since 2011 in Vietnam According to the National strategy on green growth for the period 2011- 2020 with vision to 2050 approved by the Prime Minister on September 2012, “Green Finance” and “Green Bank” are actually a part of “Green Growth” However, this definition is still unfamiliar with some banks and financial institutions actually

This paper aims to measure the development level of green bank in Vietnam by using Kaeufer’s model of Green Bank with five levels and simultaneously, evaluate determinants affecting the development of green banks in Vietnam Based on empirical results and discussions, this article proposes some recommendations in attempt to develop green bank in the upcoming time in Vietnam

The research includes 6 parts: following the introduction, the second part provides literature review about principal definitions of green bank, methods measuring development level, as well as factors promoting the growth of green banks The research methodology will be presented in the third part Empirical result will be presented in the fourth part The fifth part is for discussion and the final part sums up with the conclusions and recommendation for developing green banks in Vietnam

2 GREEN BANK AND FACTORS AFFECTING DEVELOPMENT

2.1 Green Bank: Concept and level of development

After the global financial crisis in 2008, all countries in the world had to look back

on their organization and operating models in the financial system The issues of sustainable development, social, ethical and environmental responsibility are all reviewed under a higher point of view Green bank emerges as an ideal model for future banks, which is the foundation for moving towards a sustainable green economy However, up to now, there has not been any theorical framework mentioning green banks Green bank is defined in different ways

In a broad sense, a green bank is understood as a sustainable bank whereby investment decisions are made in a way of bringing benefices to consumers, economy, society and environment In other word, there is a close relationship between the bank and economic, social and environmental factors A bank can only develop sustainably if its benefits are tied to that of society and environment

In a narrow sense, green banks refersto business activities that encourage

environmental activities and reduce carbon emissions, such as: Encourage customers

to use green products and services, apply environmental standards when approving loans or providing preferential credits for projects reducing CO2 or renewable energy projects, etc (UN ESCAP, 2012) Thus, a bank is considered as a green bank when

it provides services associated with environmental commitments or investments

in green and clean production For instant, green banks offer alternative financial services such as loans for green car, mortgages for energy efficiency, venture capital for alternative energy, eco - savings deposits and green credit cards, etc According

to Drobnjaković (2013), these services represent innovative financial products

However, there are other definitions of green bank SOGESID (2012) assumes that green bank is a normal bank that supplies outstanding services for investors and consumers and also enforce programs supporting community and environment Green banks are not basic business working for Corporate Social Responsibility (CSR), not fully a basic business for profit But they are the new combination guarantying the harmony and the stability among economic - social - environmental interests Green banks help pushing the social responsibilities by focusing on environmentally friendly factors of projects and their impacts on the environment in the future of the project before approving credits Therefore, green banks can help changing the goals of banks from “profit” to “profit with responsibilities” (Bihari, 2011)

Green banks can exist under any form of bank as long as they ensure tal profits for the country Lalon (2015) indicates that a normal bank will become a green bank when re-orienting the core activities along with the improvement of the environment

environmen-Singh and environmen-Singh (2012) assumed that green bank is similar to normal bank, but the difference is that green bank consider all the social and ecological factors with the aim of protecting the environment and conserving the nature Green bank is the combination of improving operations, techniques and changing the consumers’ habit in the banking business services According to banking experts, green bank

is a sustainable development, an ethic loan, and contributes to conserve the nature and improve effective usage of energy As a result, green bank is also named as an ethical bank or a sustainable bank

Kaeufer (2010) suggested different grade of development of green bank under the view of providing banking services So, there are 5 levels:

Level 1 (Unfocused corporate activities): At this level banks involve themselves in

green banking activities by sponsoring green events and public works which are not considered their main activities

Level 2 (Isolated business practices): Banks separate green banking activities from

their conventional banking activities However, the percentage of green banking practices is rather small

Level 3 (Systematic business practices): At this level social and green principles and

practices are the basis for the majority of banks’ products The main focus of the bank is the green impact of every business activity by emphasizing the four levels: people/places, processes, principles, and purpose

Level 4 (Strategic ecosystem innovation): By actively balancing strategic ecosystems,

green banking activities are not limited to the scope of the banking sector, but they spread across the network, alliance, community dialogue, or the whole ecosystem to achieve sustainable development

Level 5 (intentional ecosystem innovation): Banks perform similar green banking

activities as they do at level 4, but at level 5, a socially responsible and green bank intends to address the ecosystem actively

It is obviously seen that only at levels 4 and 5, banks can present its green long-term business strategy, by meeting both social and environmental standards and ensuring sustainable development as well as having spillover effects on other economic sectors

in the green growth model

2.2 Determinants affecting the development of green bank

Green banking model is developed in association with the concept of sustainable development In general, the bank can be considered environmentally friendly financial institutions because most bank activities have clear environment and social goals However, sustainable development objectives can be strongly influenced by the customers, such as: steel firms, cement firm, chemical fertilizer firms, textile firms, etc., which dramatically produce or discharge carbon, causing environment pollution

As a result, banks play a crucial moderator role between economic development and environment protection by encouraging environmentally friendly investments and social responsibilities activities

Many researches bring up factors influencing the development of green bank Hoen (2014) mentioned that group of factors related to policies related to finance, green finance issued by, Government and local agencies has a great impact on the development of green banking These factors include: politics risk, unclear intellectual property policies, lack of economic management tools UNEP (2012a) pointed out the risks that investors need to face when participating in green projects such as: (i) Macroeconomic risks (Inflation/ interest rates);

(ii) Environmental risks (Financial risks stemming from current environmental regulations and uncertainty about possible future regulations);

(iii) Legal risks (Risks of future regulations, or renegotiation of contracts will change benefits of parties);

(iv) Political risk (Political violence, possession or conversion)

Besides, Adelphi (2016) shows that the growth of bank in the green area is affected

by demand and green investment strategy of the companies

According to Barner and Han (2013), the bank scale and ownership are the core factors helping the bank to get vision and then making plan to activate green development Moreover, establishing green bank strategies plays a vital role for developing products and services supporting commercial development with environment beneficial, so indirectly helps banks to achieve their objectives and social responsibilities (Ritu, 2014).Peter et al (2005) assumed that the bank staff’s ability of evaluating green projects

is very important because its impacts on financing projects Sometimes, financial

institutions like green banks don’t have enough knowledge to estimate if loans for green technology activities make sense or not as well as to investigate their impacts on the environment (Adelphi, 2016) In addition, Fukuhara (2016) assume that developing countries don’t have enough long-term financial resources to develop green finance or green banks Investment costs, scale, and payback period

of projects are considered as barriers for development of green bank (Peter et al., 2015) In fact, green project requires a large and long funding to solve problems

of expected returns and risks as well as issues related to amount of money and investment duration Hee (2010) gives four components influencing green finance development, including: financing green businesses and technologies, developing green financial products and green investors; considering environmental impacts on lending decision-making, investigating effectiveness of the markets of products that cause environmental waste

Eyraud et al (2013) shows that GDP per capita, long-term nominal interest rate, relative international prices of crude oil, preferential prices for clean energy (feed-in-tariffs), mechanisms for pricing carbon as well as population, are factors promoting economic growth, thereby green investment through a solid financial system Barner and Han (2013) argue that in the banking sector, environmental factors that banks consider during loan decision making, market oversight and risk management processes, will promote environmentally responsible investment and encouraging firms to use low-carbon technology Other factors such as rankings, size and ownership of the bank are also the key factors that help banks to have a good vision and then create a plan to develop green bank

Romano et al (2017) focus on environmental, social and economic factors to analyze the impact of green policies on renewable investments in both developed and developing countries They show that effects of the same policy will be different

in countries with different development levels Government intervention should be obligatory for developing countries, while developed countries often have more appropriate measures and policies in managing environmental issues and always assign public organisations to be responsible for policy strategy management The environmental factor is measured by the amount of greenhouse gas (CO2) emissions from energy consumption, which is an indicator of environmental degradation due to economic development It also presents the energy intensity, or vice versa, the amount of energy needed to produce a unit of GDP Socio-economic factors are measured by Foreign Direct Investment (FDI), gross domestic product (GDP), electricity consumption (lncons), electricity price (lnprice) and net imports (Netimports)

Beck and Levine (2004) examine these factors from the perspective of green financial intermediaries, through green credit - ratio of green loans to the private sector to GDP, as private credit reflects the resources allocated to private companies through financial intermediaries

According the report of Association for Sustainable & Responsible Investment in Asia (ASrIA), the lack of agreement and associating policies becomes a prominent issue in Southeast Asian countries (Indonesia, Philippines, Vietnam, Malaysia, Cambodia) For example, the lack of financial policies or regulations has reduced the progress in renewable energy targets in the Philippines, or the overlapping and unclear institutional regulations and legal frameworks hamper the growth in Vietnam

Level 1 Level 2 Level 3 Level 4 Level 5

In developing countries, because capital markets are still very limited, it is difficult for the private sector to access credits Fukuhara (2016) argues that the lack of long-term financing is the reason that many developing countries are facing in developing green finance:

(i) Lack of capital and/or inappropriate financial conditions;

(ii) Lack of tools and the weakness of local financial institutions;

(iii) Lack of knowledge on green energy and insufficient information to carefully analyze green projects;

(iv) High mortgage requirements

The research summarizes determinants affecting the development of green bank in Table 1 as below

Table 1 Determinants for the development of green bank

Government’s

support policies

Regulations about intellectual rights, environment Hoen (2014) and Fukuhara (2016); UNEP (2009) Domestic financial management tools Hoen (2014) and Fukuhara (2016)

copy-Macro factors

Political risks Hoen (2014) and Fukuhara (2016); UNEP (2009)GDP per capita Eyraud et al (2013); Romano et al (2017)Long-term nominal interest rate Eyraud et al (2013)

Relative international prices of crude

3 RESEARCH METHODOLOGY

3.1 Developing Questionnaire

The research aims to:

(i) Evaluate the current development level of green bank in Vietnam;

(ii) Determine factors affecting the development of green bank in Vietnam

Questionnaires are designed with Likert scale from 1 to 5, and then, are sent to manager working for commercial banks, experts, policies makers in the bank sector For the first goal, the article totally based on Kaeufer research (2010) to develop

questionnaires So, the research rank green banks with 5 levels [Appendix 1] And

for factors influencing to the development of green bank in Vietnam, the research chooses 6 factor groups, based on literature reviews and deep interview with experts

- Government support policies for developing green bank (F1): 7 sub-factors from F1_1 to F1_7

- Macro factors (F2): sub- factors from F2_1 to F2_7

- Firms’ demand on green investment (F3): 10 sub- factors from F3_1 to F3_10

- Bank’s financial performance (F4): 7 sub-factors from F4_1 to F4_7

- Bank managers’ knowledge about green bank development (F5): 11 sub-factors from F5_1 to F5_7

- Employees’ performance (F6): 6 sub-factors from F6_1 to F6_7

The 3 first factors are grouped into outside banking factors while the 3 next factors are inside banking factors All factors are developed into sub-factors and mentioned

in Appendix 2.

In order to make sure the effectiveness of questionnaire, the authors did pilot testing Questionnaires were distributed to 20 managers in both commercial banks that are located in Hanoi and Ho Chi Minh City The principal objective of pilot testing is to ask respondents if they understand the questionnaire, if there have any comments about both contents and format of survey or any suggestions in order to make survey clearer and more significant Based on the sample group’s feedback about how they understand and what they still concern about questions, … etc., the authors made necessary adjustments and amendments in order to make sure that the question had face validity After that, the authors used google forms and distributed questions

to managers in commercial banks in Vietnam As results, the research receives 128 valid answers from managers, expert, policy makers that has an average of more than 12 years working in bank sector

3.2 Research Model

- Evaluate development level of green bank in Vietnam

To evaluate the development level of green bank in Vietnam, the authors used the survey result to calculate the median for each development level

In terms of research model, author use Exploratory Factor Analysis (EFA) in SPSS 20

in order to determine factors affecting the development of green bank in Vietnam.First of all, data have to be examined by Cronbach’ Alpha in SPSS Cronbach’ Alpha

is considered to be a measure of scale reliability (Amit, 2010) A reliability coefficient

of 0.70 is considered “acceptable” Simultaneously, data must have Corrected Total Correlation equal or bigger than 0.3 In particular, in case the previous condition

Item-is satItem-isfied but Cronbach Alpha if Item Deleted Item-is bigger than Cronbach’ Alpha, data should be verified carefully

Level 5

After testing Cronbach’s Alpha in SPSS, the research only keeps appropriate factors

by removing unsuitable variables from data Suitable variables are introduced in SPSS to test EFA Analysis results can be interpreted as bellow:

+ The Kaiser Meyer Olkin (KMO) measuring the sampling adequacy should be close than 0.5 for a satisfactory factor analysis to proceed

+ Bartlett’s test is another indication of the strength of the relationship among variables This ratio should be less than 0.05 to reject the null hypothesis In other words, correlation matrix is not an identity matrix

+ Eigenvalue actually reflects the number of extracted factors whose sum should

be equal to number of items which are subjected to factor analysis Factors with Eigenvalue bigger than 1 will be kept in analysis model Total Variance Explained bigger than 50% indicate the appropriateness of EFA model

Factor Loading indicates the correlation between the observation variable and the factor The higher the factor loading is, the greater the correlation between the observation variable and the factor is and vice versa Because of sample of 153, the authors use factor loading of 0.5

The next step of research is to compute variables in appropriate groups before correlation analysis Correlation is a bivariate analysis that measures the strength of association between two variables and the direction of the relationship In terms of the strength of relationship, the value of the correlation coefficient varies between +1 and -1 In this research, the authors use Pearson correlation to measure the degree

of the relationship between linearly related variables Finally, the regression analysis

is used in order to estimate the relationship between a dependent variable and 7 independent variables This analysis allows to determine which is the most important independent variable that has the highest impact on the firms’ decision - making of choosing bank

4 EMPIRICAL RESULTS

4.1 Development level of green banking in Vietnam

Figure 2 Development level of green bank in Vietnam Source Authors

Figure 2 shows evaluation of experts, bank managers about the development level

of green bank in Vietnam Most of people accepts with the idea that green bank

in Vietnam is currently at level 3 with the highest score of 3.95 This means that: Systematic business practices This means that social and green principles and practices are the basis for the majority of banks’ products The main focus of the bank is the green impact of every business activity by emphasizing the four levels: people/places, processes, principles, and purpose However, it is clearly seen that that there is not much different between each level and the score of all level under 4 (acceptance level) in Likert scale

Figure 3 Score for each criterion in level 3 Source Authors

The score of each criterion in level 3 are shown in figure 3 Criterion L3_5 about

“reducing the amount of paper and energy at office” reaches the highest score (4.08) The second place is criterion L3_9 “using energy saving equipment” L3_11

“policies about reducing use of energy and waste” stands at the third place and is the final criterion having score more than 4 The 03 criteria having the lowest point (lower than 3.90) include L3_6 - “equipping solar energy”, L3_3 “follow the environment standards in all business transaction”, and L3_12 “giving discount on payment through

internet” The details of each criterion are mentioned in Appendix 3.

4.2 Factors affecting green bank development in Vietnam

- Analyze the reliability of the scale

Appendix 4 provides results of the reliability test by using the Cronbach’ Alpha confidence factor The results show that:

- Factor F1 - Government policies: Cronbach’ Alpha coefficient is 0.924, greater than 0.8 and less than 1, confirming that the measurement scale is good The correlation coefficient of the total variables for all seven sub-factors is greater than 0.3 The Cronbach’ Alpha if item deleted value of the factor F1_3 reaches 0.930, which is greater than the value of 0.924 This means that variable F1_3 needs to be removed from the next model However, the authors found that the F1_3 variable

"policy supporting application of technology in banks to evaluate green investments/

projects" is an important factor in the current context in Vietnam Therefore, the authors decided to keep the variable F1_3 for subsequent tests.

- Factor F2 - Macro factors: Cronbach’ Alpha coefficient is 0.769 greater than 0.7 and less than 0.8, confirming the usable scale The correlation coefficient of the total variables for all seven sub-factors is greater than 0.3 However, the value of Cronbach’ Alpha if item deleted of factor F2_4 reaches 0.776, which is greater than the value of 0.769 Therefore, the variable F2_4 needs to be removed from the next model

- F3 factor group - Green investment demand of business organizations: Cronbach’ Alpha coefficient is 0.973 greater than 0.8 and less than 1, confirming that the measurement scale is good The correlation coefficients of variables for all 10 sub-factors are greater than 0.3 However, the value of Cronbach’ Alpha if item deleted

of factor F3_3 reaches 0.978, which is greater than the value of 0.973 Therefore, the variable F3_3 needs to be removed from the next model

- F4 factor group - Bank’s financial performance: Cronbach’ Alpha coefficient reaches 0.879 greater than 0.8 and less than 1, confirming that the measurement scale is good The correlation coefficient of the total variables for all seven sub-factors is greater than 0.3 However, the value of Cronbach’ Alpha if item deleted of F4_1 factor reaches 0.881, which is greater than the value of 0.879 Therefore, the variable F4_1 needs to be removed from the next model

- F5 factor group - Bank managers’ knowledge about green bank: Cronbach’ Alpha coefficient is 0.941 greater than 0.8 and less than 1, confirming that the measurement scale is good The correlation coefficient of the total variables for all seven sub-factors is greater than 0.3 except for the variable F5_10 However, the value of Cronbach’ Alpha if item deleted of F5_3 and F5_10 are 0.946 and 0.950, respectively, which are greater than the 0.973 value Therefore, variables F5_3 and F5_10 need to be removed from the next model

- F6 factor group - employees’ performance: Cronbach’ Alpha coefficient is 0.913 greater than 0.8 and less than 1, confirming that the measurement scale is good The correlation coefficient of the total variables for all seven sub-factors is greater than 0.3 The Cronbach’ Alpha if item deleted value of factor F6_3 reaches 0.932, which is greater than the value of 0.913 This means that the variable F6_3 needs to

be removed from the next model However, the authors found that the F6_3 variable

"bank officers and employees’ ability to evaluate and appraise green projects" is

an important factor Therefore, the authors decided to retain the variable F6_3 for subsequent tests

Thus, after testing the reliability of the scale, there are 05 sub-factors excluded from the research model, including:

(i) F2_4: Low unemployment rate;

(ii) F3_3: Implementation of social responsibility for the environment;

(ii) F4_1: Large equity;

(iv) F5_3: Development of green banks associated with the deployment of green headquarters;