Summary of Doctoral dissertation in Economics: Sustainable development of commercial banks in Vietnam

The overall objective of the research is to assess the current status of sustainable development of commercial bank and to propose solutions for the sustainable development of the Vietnamese commercial banks.

BANKING ACADEMY OF VIETNAM

-∞∞ -

BUI KHAC HOAI PHUONG

SUSTAINABLE DEVELOPMENT OF

COMMERCIAL BANKS IN VIETNAM

Major: Banking and Finance

Code: 9.34.02.01

SUMMARY OF DOCTORAL DISSERTATION IN ECONOMICS

HANOI – 2019

BANKING ACADEMY OF VIETNAM

Supervisors:

1 ASSOC PROF DR TO KIM NGOC

2 ASSOC PROF DR NGUYEN THI MUI

The dissertation will be defensed at the Dissertation Board of Banking Academy of Vietnam

At ……… Date … Month … Year 2019

The dissertation could be found at:

- Library of Banking Academy of Vietnam

- National library of Vietnam

INTRODUCTION

1 The urgency of the dissertation topic

The sustainability of business in the banking sector is discussed and implemented in developed countries Bank executives believe that sustainability is extremely important to the bank's success in the future This view is also published in research by two organizations, United Nations Global Compact and Accenture (2010) The study is the largest study of sustainability, with 766 CEOs from nearly 100 countries in the world, including 41 CEOs from major banks such as Grupo Santander and Calvert Group , HSBC, Storebrand, UniCredit, etc The survey results show that 98% of CEOs of banks affirm the importance of sustainability for business success in the future

Figure 1: The importance of sustainability for companies and banks

Source: United Nations Global Compact and Accenture CEO Study (2010)

The bank acts as a credit intermediary, a player of the financial market, a capital channel for the economy, thus banking operations affect and orientate economic development in scale and performance The reason why the banks integrate sustainable development in their operation is management agencies, social organizations and financial organizations often require to consider environmental and social factors State management agencies often directly or indirectly regulate the management of environmental and social impacts in banking operations Although environmental impacts of the bank itself are not significant compared to other sectors, the bank has a considerable impact on the environment and the community through their customers’ activities In addition, economic cooperation through sponsoring projects often requires strict environmental and social risk management

In addition, sustainable development tends to start inside the bank, arising through the need to set core goals and create their brand value, aligning and balancing the benefits of their stakeholders, create goodwill, build consumer base and market share, attract financial partners thereby increasing profits in short and long term

In Vietnam, the development of sustainable banking is at an early stage Some banks are interested in this However, the implementation of sustainable development of banks is not equal, many banks do not have environmental and social risk management system Solutions are lacking and legal procedures for sustainable development are incomplete In the trend of globalization, the system of commercial banks must integrate deeply Therefore, sustainable development helps to improve the competitiveness of the banking system and is an indispensable trend in line with the trend of international integration

Currently, the commercial banking system is being restructured in association with bad debt handling to ensure the safety, health and sustainability of the credit institution, thereby creating a firm premise to curb

inflation developing and innovating growth models aimed at sustainable economic development

Because of its urgency and its applicability to sustainability in the future, PhD candidate decided to choose "Sustainable development of commercial banks in VietNam" PhD candidate wants to assess sustainability and propose solutions for sustainable development of Vietnam's commercial bank in the trend

of international integration

2 An overview of the research on sustainable development of banks

2.1 Overview of researches in the world

Assessing sustainability according to performance

There have been many different approaches to assess the sustainability of an organization, the previous view of sustainability is tied to performance based on maximizing benefits for shareholders In recent studies, sustainable development is now expanded into maximizing benefits for other stakeholders, including shareholders, customers, investors, management agencies and the whole community instead of maximizing benefit for shareholders According to traditional approach, bank’s performance is aimed at maximizing benefits for shareholders

Application of the theory of stakeholders in sustainable development assessment

The application of theory in sustainable bank assessment has many advantages over traditional performance appraisal methods The perception of the performance of banks in previous studies is based on maximizing shareholder value, so the criteria that reflect the performance of banks tend to focus on the benefits for shareholders

There were several studies based on other criteria, in addition to maximizing value for shareholders Currently, according to the author's understanding, three previous studies by Garcia and Surroca (2008), Avkiran and Morita (2010) and Rebai reviewed many stakeholders in assessing bank performance The study

by Garcia and Surroca (2008) provided a composite performance index using the objectives of various stakeholders to evaluate the output Meanwhile, Avkiran and Morita (2010) classified from each stakeholder perspective to determine inputs and outputs Rebai's study proposed the concept of sustainable banking and sustainable finance This study also assessed performance associated with bank sustainability goals based on

the application of stakeholder theory

Assessing sustainability of commercial banks through green initiatives

Sahitya and Lalwani (2014) studied the importance of green initiatives for achieving sustainable banking development goals in India The study evaluated the efforts of commercial banks to implement sustainable development, including bank’s internal activities such as using energy resources, exploiting facilities efficiently Dyllick and Muff's (2016) studied the significance of a sustainable business model and categorizes the sustainability of a bank's business into three different levels Banks at level 1.0 enhanced the value of shareholders, the business goal was to benefit shareholders At level 2.0, banking operations not only brought value to shareholders but also brought benefits to society and the environment At Level 3.0, businesses were completely sustainable, at which level the banks would create business opportunities, provide environmentally friendly green products and sustainability products from business challenges, social and environmental issues such as climate change, migration, corruption, resource scarcity, pandemic, unemployment, overdue debt, financial instability

Assessing sustainability of an organization by DJSI

The DJSI evaluates the performance of the world's leading companies in economic, environmental and social indicators, providing investors standards to manage their portfolios (Searcy et al., 2012) DJSIs are

based on an analysis of economic, environmental and social performance, assessing issues such as corporate governance, risk management, branding, climate change mitigation, supply chain standards, energy consumption, human resource development

Sustainable development according to the Global Reporting Initiative (GRI)

The GRI has been developed with the goal of helping organizations report on environmental, social, and economic activities and to increase their accountability

2.2 Overview of researches in Vietnam

Researches on sustainable development of banking in Vietnam are very few There are no comprehensive researches on sustainable development assessment of Vietnam's commercial banking system Tran Thi Hoang Yen (2016) applied a linear regression model to examine the relationship and impact of independent variables: corporate social responsibility to the bank's financial results through variables Dependencies are ROA and ROE In this study, the author clarified theories of corporate social responsibility This was the core theory of social responsibility of organizations Nguyen Hong Son et al (2015) summarized the views and criteria for evaluating sustainable bank development The authors assessed the development of Vietnam's commercial banking system and re-structured in line with international practices, which also provided solutions for the sustainable development of the Vietnamese commercial banking system However, the content of the study focused on assessing the realities of banking system development and restructure, mainly based on criteria for assessing the stability and soundness of the banking system This study đin’t elaborate on the situation of sustainable development of the commercial banking system in line with international practices on environmental and social factors affecting banking operations

In general, studies on sustainable development of commercial banking system in the country are not much, especially studies on sustainable banking models Domestic studies focued on assessing the performance of commercial banks, there were very few researches on sustainable development of commercial banks Research directly related to the topic of dissertation is a study by Nguyen Hong Son et al (2015) This study analyzed the development status of commercial banks associated with the restructuring of the banking system However, this study analyzed the sustainable development of the banking system, which did not integrate environmental and social issues into the bank's operations - these are considered important elements of sustainability

2.3 Research questions

The first question: What is the theory of sustainable commercial banks? In order to answer this

question, the study will present and synthesize a theoretical framework for sustainable development of commercial banks, including: perspectives, principles and models for sustainable development, etc This study proposes the definition, principles and model for sustainable development of commercial banks

The second question: What is the lesson for Vietnam on the sustainable development of commercial banks from the experiences of other countries in the world? This question is answered through the study of

commercial bank sustainable development experience from the typical banking model, the success of different countries Country experiences and sustainable management pathways, sustainable development stages, and sustainable development practices of successful and typically successful banks in regionally and

in developed countries

The third question: What is the level of sustainable development of commercial banks in Vietnam? This

question will be answered through the development of criteria for assessing bank sustainability These

criteria are also used to assess the sustainability of the commercial banking system in terms of economic, social and environmental sustainability

The fourth question: What obstacles do the sustainable development of commercial banks in Vietnam?

This question was answered through expert consultation to identify major obstacles to banks through a survey of bank managers based on defined criteria

The fifth question: How to develop a sustainable commercial banks in Vietnam in the integration trend?

This question is answered through research on the impact of global economic integration on the sustainable development of Vietnam's banking system and measures to promote the sustainable development of the

3.2 Detail objectives

- Assess the current status of the sustainable development of Vietnam's bank for the period 2008-2017

- Analyzing the factors affecting the sustainable development of Vietnam's commercial bank, clarifying the challenges for the sustainable development strategy of the commercial banking system

- Proposing solutions to promote the sustainable development of Vietnam's commercial banks in the period of 2019-2025

4 Objects and scope of the research

Objects of the research: The sustainable development of the commercial banking system in Vietnam, in

terms of healthy bank balance, environmental and social issues

Scope of the research: The dissertation on the sustainable development of 12 joint stock commercial

banks in Vietnam from 2008 to 2017 Data are collected in the audited financial statements of each bank to calculate financial indicators Data is collected over a long period and financial indicators are quite many The dissertation only assesses of sustainable development of 12 commercial banks, including 3 state commercial joint stock banks and 9 joint stock commercial banks

5 Research methodology

5.1 Method of data collection and processing

The research uses the descriptive statistical method using the STATA 12 to calculate the indexes, mean,

standard deviation, maximum and minimum values, and the degree of time series This result is used to assess the sustainability of the commercial banking system for the period of 2008 to 2017

5.2 Survey method

The research is an in-depth survey of banking managers from vice-manager upwards to assess performance and find barriers to sustainability of commercial banks The survey participants are managers, strategic decision makers, implementers and implementers of the Bank's sustainable development strategy

6 The contribution of the dissertation

The dissertation systemizes the theory and elaborates more on the theory of sustainable development of the banking Based on the views on sustainable bank development, the dissertation has identified various sustainable banking models, standards and principles for the sustainable development of commercial banks

by leading banks in sustainable development initiatives around the world The dissertation lists the

sustainable banking models and the principle of sustainability of each model Based on that, the dissertation proposes to develop a system of criteria for assessing sustainability of commercial banks through criteria that reflect economic, social and environmental sustainability These criterias are integrated through the products and services provided by the bank

The dissertation also studies on sustainable development experiences of commercial banks of developed nations and developing countries These experiences come from the countries that have developed and implemented the sustainable development path and the sustainable development practices of successful banks and typical banks in the countries Based on the experience gained and the sustainable banking model

in the world, the author identifies the conditions for sustainable development of the commercial banking system in Vietnam

The dissertation analyzes the current state of sustainable development of commercial banks in the period from 2008 to 2017 The dissertation evaluates the achievements and shortcomings in the sustainable development of commercial banks in Vietnam One of the biggest obstacles is the development and improvement of environmental and social risk management systems This management system needs to be integrated as a method of credit risk assessment to approve loan projects

The dissertation proposed solutions for sustainable development of Vietnam's commercial bank in line with international integration trends In particular, the dissertation proposes a sustainable model through three phases: Phase 1 is building an internal environmental management system; Phase 2 is the management

of environmental and social risks in lending and investment; Phase 3 is to provide sustainable financial products In addition, the dissertation proposes to relevant agencies of the bank such as the Government, relevant ministries, State Bank of Vietnam, commercial banks and clients to implement proposed solutions most consistently and effectively

7 The structure of the dissertation

Apart from the introduction and conclusion, the dissertation consists of 3 chapters:

Chapter 1: Theoretical issues on sustainable development of commercial bank

Chapter 2: The situation of sustainable development of Vietnam's commercial banks in the period from

2008 to 2017

Chapter 3: Solutions for the Sustainable Development of Vietnam's Commercial Banks from 2019 to

2025

CHAPTER 1 THEORETICAL ISSUES ON SUSTAINABLE DEVELOPMENT OF COMMERCIAL BANK 1.1 PERSPECTIVES ON PRINCIPLES AND MODELS OF SUSTAINABLE DEVELOPMENT OF COMMERCIAL BANKS

1.1.1 Perspectives on on sustainable development

Sustainable development is "development that meets current needs without compromising or

compromising the capabilities of future generations" This definition emphasizes the long-term viability of

sustainable development; current developments must not affect future generations (WCED, 1987)

1.1.2 Perspectives on sustainable banking development

Based on literature review on sustainable development of commercial banks, the author proposes the

definition: "Sustainable Bank secures development stable, healthy, contributing to the strength of the

financial system The bank has policies and activities to improve the environment The bank's activities aim to maximize benefits to stakeholders and the whole community”

From the perspectives on sustainable banking development as above, sustainable banks have the following characteristics: (1) The bank has a healthy, efficient and sustainable financial capacity (2) The Bank has policies to encourage and support companies, environmentally and socially responsible investment projects

to contribute to promoting sustainable economic growth (3) Sustainable banking activities bring benefits to shareholders and to the others such as customers, management agencies, employees, suppliers and the whole community

1.1.3 Models of sustainable development of commercial banks

a Modeling on the level of sustainable development

Figure 1 2 Levels of sustainable development of commercial banks

The first level is unsustainable development, the bank's goal is to maximize profits for shareholders, but not paying attention to and focusing on environmental and social efficiency in lending and investment activities

The second level is integrated development, which aims to maximize profits and integrate E&S issues in operations At this level, the bank's income structure is from traditional lending projects that benefit the environment and community

The final level is sustainable banking, which has built and implemented policy systems on sustainable development, including: principles and standards for sustainable development, banking management according to international standards, initiatives on sustainable development The principles and standards of sustainable banking development are enforced from managers to make credit and investment decisions

b Modeling on business strategy

Sustainable bank

Integrated bank

Unsustainable bank

- Sustainable banking model combined with traditional business: This business model is popular in

developing countries with low technology and capital Therefore, there are no conditions for sustainable bank development The characteristic of this model is that the bank will consider the environmental and social implications for lending projects and in investment activities Banks will reject projects that have a negative impact on the environment and society

- Sustainable banking model:

The Global Alliance of Banking Values has built on the key features of sustainable banking, including the following six principles: the three key elements are human, planet and prosperity; serving the real economy; long-term relationship with customers; long-term, self-sustainability and recovery; transparent and comprehensive management These principles are attached to the culture of the bank

This model is often implemented in developed countries where banks are supported, facilitating sustainable development thanks to well-designed and sustainably-designed legal systems was created Sustainable banks in these countries have strong links and support from non-governmental organizations on environmental initiatives and social issues to provide sustainable financial products

1.2 SYSTEM CRITERIA FOR EVALUATION OF SUSTAINABLE DEVELOPMENT OF COMMERCIAL BANKS

Based on the perspectives and sustainable banking models, the dissertation synthesizes, supplements and completes the system of criteria to assess the sustainability of commercial banks in terms of economic, social and environmental sustainability These criteria are integrated in commercial banks’ operations,

Sustainable bank combined with traditional business

Economic efficiency

consider environment

al impact

consider environmental impact

The culture of the bank

Triple bottom line approach

Real Economy

Transparent

Long term, Resiliency Client Centred

Figure 1.3: Sustainable banking model in line with traditional business

including ensuring economic, social and environmental efficiency in internal and external activities such as lending and investment The criteria reflect economic sustainability include equity size, group of criteria for credit risk, profitability, executive management; criteria reflect liquidity are integrated and developed by author according to CAMELS frame, the Financial Soundness Indicators (FISs) of IMF Criteria reflect stability, healthy and sustainability are synthesized and developed by author

Author develop criteria that reflect the environmental and social sustainability of the bank based on IFC's performance standards for environmental and social sustainability, equatorial principles, and environmental initiatives of the United Nations Dow Jones Sustainable Index (DJSI), GRI

In addition, the sustainability of commercial banks is associated with providing green products and sustainable finance Accordingly, banks with low sustainability provide products with improved selection on environmental issues, limiting the negative effects of products on the environment The system of criteria for sustainable banking assessment is built, synthesized and developed as follows:

1.3 EXPERIENCE ON SUSTAINABLE DEVELOPMENT OF COMMERCIAL BANKS SOME COUNTRIES AND LESSONS FOR VIETNAM

1.3.1 Experience on sustainable development of commercial banks some countries

1.3.1.1 In developing countries

SUSTAINABLE

BANK

Sustainable economic

Social sustainability

Sustainable supply

Employee benefits Customer benefitsComprehensive finance

Invest in a socially responsible manner

Commitments to sustainable development

Environmental and Social Risk

assessment of the size of equity Group of criteria that credit risk

Criteria that reflect profitability

chất lượng tài sản management and executive capacityCriteria groups reflect liquidity Criteria for technological capability

stability and sustainability of commercial

banks

Responsibility for the environment

Environmental sustainability

Bangladesh

Bangladesh has developed a national framework for managing environmental and social risks The central bank has forced commercial banks to implement the risk management framework by 2011 To implement this policy, the central bank of Bangladesh has developed a roadmap for implementation of three phases from 2011 to 2013

The UK

1.3.2 Lesson on sustainable development for Vietnamese commercial banks

Firstly, the complete legal framework for sustainable development of commercial banks

Secondly, the national policy framework on environmental and social risk management:

Country Name of Policy Year(s) of

Launch

Codes (Voluntary or Involuntary)

Bangladesh Environmental Risk Management

Socio- Environmental Liability Po Mandatory Nigeria The Nigerian Sustainable Banking

Principles

2012 Mandatory Colombia Green Protocol (Protocolo Verde) 2012 Voluntary

Thirdly, Applying initiatives on sustainability

Fourthly, provide sustainable financial products

1.4 CONDITIONS FOR SUSTAINABLE DEVELOPMENT OF COMMERCIAL BANKS

Firstly, financial capacity is stable and healthy

Secondly, improve the system of environmental and social risk management

Good Performer Sufficient Non-Performer

Thirdly, the participation and support of related parties of commercial banks

Fourthly, adhere to international standards of sustainability

Fifthly, diversify banking services and provide sustainable financial products

Source: synthesis of the author

provide sustainable financial products

adhere to international standards of

sustainability the participation and support of related parties

of commercial banks improve the system of environmental and social risk

management financial capacity is stable and healthy

CHAPTER 2: THE SITUATION OF SUSTAINABLE DEVELOPMENT OF VIETNAM'S

COMMERCIAL BANKS IN THE PERIOD FROM 2008 TO 2017 2.1 VIETNAM'S BANKING SYSTEM FROM 2011 TO THE PRESENT

2.2 THE STATUS OF SUSTAINABLE DEVELOPMENT OF COMMERCIAL BANKIS IN VIETNAM

2.2.1 Legal framework for sustainable development of commercial banking system

The legal framework for sustainable development of Vietnam's banking system has been gradually built and improved, creating a driving force for the whole banking industry to practice sustainable development

2.2.2 Group of criteria for assessing sustainable economic banking

2.2.2.1 Criteria of size of equity capital

Equity of Vietnamese commercial banks in 2017

Source: Commercial bank's annual report

2.2.2.2 Group of criteria that reflects the credit risk

Describe the criteria that reflects the credit risk Criteria Number of

samples

The average value

Standard deviation

Smallest value

Greatest value NPL’s to total loans 132 0,0210856 0,0121067 0,0034 0,088

NPL’s to total equity 132 0,1508058 0,1093973 0,008274 0,619322

Potential loss loan 132 0097589 0084251 003144 .0427939

Source: processing data of the author using STATA 12

Non-performing loan ratio (NPLs) of banks is at a minimum of 0.34% and a maximum of 8.8% The ratio of bad debt to equity ranges from 0.83% to 61.93% Thus, the ratio of bad debt to equity of commercial banks is too high In particular, there are banks with 61.93%, so bad debt is more than half of equity

2.2.2.3 Group of criteria reflects profitability

Describe the criteria that reflects profitability Criteria Number of

samples

The average value

Standard deviation Smallest value Greatest