The productivity and efficiency of the restructed banks in vietnam perspectives for planning and development

In general, the process of restructuring the system of credit institutions to comply with the approved scheme, with specific results: the commercial bank system has increasingly improved

i

VIETNAM: PERSPECTIVESFOR PLANNING AND DEVELOPMENT

A Dissertation Presented to the Faculty of Graduate School

Bulacan State University City of Malolos

In Partial Fulfilment of the Requirements for the Degree of

Doctor of Philosophy in Business Administration

By

THAI HOAI NAM September 2016

I would like to express my gratitude to my advisor, Dr PHAM HUNG CUONG, whose expertise, understanding, and patience, added considerably to my graduate experience I appreciate his vast knowledge and skill in many areas, and his assistance in writing reports

I would like to thank the other members of my class for the helps they provided during the course Besides, I would like to thank the teachers from Bulacan State University for taking time out from his busy schedule to teach me during the course

I would also like to thank my family for the support they provided me through my entire life and in particular, I must acknowledge my wife and best friend, without whose love, encouragement and editing assistance, I would not have finished this study

Finally, I recognize that this research would not have been possible without the assistance of Bulacan State University, and express my gratitude to this university

THAI HOAI NAM

This dissertation, entitled“THE PRODUCTIVITY AND EFFICIENCY OF THE

RESTRUCTURED BANKS IN VIETNAM: PERSPECTIVES FOR PLANNING AND DEVELOPMENT” conducted during the period from June 2013 to November 2015

Regression results show that all two independent variables the productivity, the efficiency affected restructured bankswith 5% significance level In addition, the research result processed from SPSS 20.0 software The parameters of the model estimated by Least - Squares Method tested for the model assumption with 5% significance level At the same time, the result was also scientific evidence and important for researchers and policy makers who apply them for developing the efficiency and productivity of banks in the future The main objectives of this study were to:

1 Identify the factors in affecting the restructured banks in Vietnam

2 Measure and test the impact of these factors to the restructured banks in Vietnam

3 Proposed a number of recommendations based on the studied results

Page

TITLE PAGE i

APPROVAL SHEET ii

ACKNOWLEDGEMENT iii

ABSTRACT iv

TABLE OF CONTENTS v

LIST OF TABLES vii

LIST OF FIGURES ix

LIST OF APPENDICES x

CHAPTER I THE PROBLEM AND ITS BACKGROUND Introduction 1

Statement of the Problem 4

Significance of the Study 5

Scope and Delimitation of the Study 6

II THEORETICAL FRAMEWORK Relevant Theories 8

Related Literature 19

Related Studies 30

Conceptual Framework 42

Hypothesis of the Study 42

Definition of Variables 45

Population and Sample of the Study 48

Research Instruments 48

Data Collection Procedure……… 50

Data Processing and Statistical Treatment 52

IV PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA Sub-Problem No 1: 55

Sub-Problem No 2: 69

Sub-Problem No 3: 76

Sub-Problem No 4: 81

V SUMMARY, CONCLUSIONS AND RECOMMENDATIONS Summary of Findings 91

Conclusions 92

Recommendations 93

BIBLIOGRAPHY Books 97

Periodicals 98

APPENDICES

CURRICULUM VITAE

Table Page

1 Technical efficiency of commercial bank, 2007 - 2010 63

2 Total economic efficiency (CRS model) 64

3 Total Economic Efficiency (VRS Model) 64

4 Technical Efficiency (CRSS) 66

5 Technical efficiency (VRS model) 66

6 Productivity Level 67

7 Productivity Analysis of Banks 67

8 Technical Efficiency Analysis of Banks 68

9 Questions for the restructured banks 66

10 Descriptive Statistics for the restructured banks 70

11 Descriptive Statistics for the demography 70

12 Evaluate the reliability of the scale of the restructured banks 72

13 Exploratory Factor Analysis Results of the restructured banks 73

14 Rotated Component Matrix Results of the restructured banks 74

15 Results of Exploratory Factor Analysis the Dependent Variable 75

16 Summary Regression Results of the restructured banks 76

17 Bootstrap results are based on 1000 bootstrap samples 77

18 Analysis of Variance (ANOVA) about Gender 78

19 Analysis of Variance (ANOVA) about Marriage status 79

20 Analysis of Variance (ANOVA) the level of the knowledge 80

22 Analysis of Variance (ANOVA) about the Salary/income 81

LIST OF FIGURES

1 Paradigm of the Study for the restructured banks 43

2 Research model for factors affecting the restructured banks in Vietnam 44

3 Research processing for restructured banks in Vietnam 53

LIST OF APPENDICES

1 Paradigm of the Study for the restructured banks 43

2 Research model for factors affecting the restructured banks in Vietnam 44

3 Research processing for restructured banks in Vietnam 53

Then, on 01/03/2012, the Prime Minister issued a proposal to restructure the system of credit institutions (CIs) for the period 2011-2015 together with Decision 254 / QD-TTg This is seen as an attempt to legally most important to date in restructuring the banking system, creating a wide corridor to handle the weak banks and set out a roadmap for the coming year 2015 According to the implementation schedule, the central bank has set out the content of the restructuring focuses on the following:

- On capital: SBV requires large banks participated in buying shares, participation in governance and restructuring of the investments made; acquisition or amalgamation, merger if necessary SBV will also closely involved in monitoring the process Accordingly, if the bank can not, then restructuring the central bank will intervene and even taking into account the consolidation or merger In fact, the smaller banks have charter capital below the minimum prescribed level (3,000 billion) should not be able to restructure itself without help from outside Therefore, the central bank along with the

agency's monitoring and tracking management agencies to help smaller banks seeking partners to improve capital and governance capabilities, ensuring the liquidity and capital adequacy

- For bad debts: SBV issued Decision No 780 / QD-NHNN dated 23/04/2012 allowing

"adjusted debt repayment period, loan extension by banks, branches of foreign banks external evaluation of production and business operations of customers have a positive direction and has a good repayment capacity after adjusting the repayment period, debt rescheduling debt groups such stays have been classified in accordance with a predetermined while adjusting the repayment period, debt rescheduling "

In addition, the agency also has Document No 2871 / NHNN-TD requires 14 banks including Agribank, BIDV, Vietinbank, Vietcombank, ACB, Eximbank, Sacombank, Techcombank, MB, MSB, VP Bank, VIB, and SeaBank SHB actively, actively carry out the debt settlement solution according to the current regulations; The purchase or sale of debt as stipulated in Decision No 59/2006 / QD-NHNN dated 21/02/2006 of Regulation purchase or sale of credit debt, which allowed 14 banks as debt trading for businesses loans and debt mutual lending of credit institutions

- About liquidity: the central bank has cooperated with the strong banks to provide liquidity to weak banks to reduce liquidity risk of the system At the same time, the central bank for debt rescheduling banks to businesses and allow the group of 14 banks as debt trading for businesses to borrow and loan liabilities of the mutual banks

- About Managing banks: State Bank has issued a number of documents related to this matter, especially the circular replaces Circular No 13/2010 / TT-NHNN dated 20/05/2010 provides for the billions ensure safe practices in the operation of credit

institutions and the Decision 493/2005 / QD-NHNN dated 22/4/2005 promulgating regulations on loan classification, provisioning and use of provisions against credit risk in banking activity of credit institutions According to the proposal to restructure the banks

in 2011-2015, the end of 2015, banks have reached a sufficient equity capital to cover credit risk, market risk and operational risk under Basel II regulations

In general, the process of restructuring the system of credit institutions to comply with the approved scheme, with specific results: the commercial bank system has increasingly improved liquidity, the risk of disruption to repel ; Reduced cross-ownership

in the banking system, helping banks increase competitiveness in the marketplace; The balance of the credit deposit at the central bank is always higher than the compulsory reserve requirement

The increase of productivity contributes, also, to the increase of the soundness and stability of the banking system provided that the achieved profits are channeled towards the increase of equity and of provisions that allow for a better absorption of risks The analysis of the efficiency and productivity of banks can be performed with both the help

of the parametrical methods and that of non-parametrical methods

Therefore, we can confirm that this is the first research topic in a systematic and relatively complete reality of the factors affecting restructured banks and work out specific measures to enhance effective application internet banking in Vietnam The

above issue is closely related to the topic “The productivity and efficiency of the

restructured banks in Vietnam: perspectives for planning and development” as a

doctoral dissertation in business administration

The main objectives of this study were to:

1 Identify the factors in affecting the restructured banks in Vietnam

2 Measure and test the impact of these factors to the restructured banks in Vietnam

3 Proposed a number of recommendations based on the studied results

Statement of the Problem

The general problem of the study is: How may the productivity and efficiency of the restructured banks in Vietnam be assessed?

Specifically, the study sought answers to the following questions:

1 What is the current status of the restructured banks?

2 How may the productivity and efficiency of the restructured banks be measured in terms of:

2.2.5 Investment?

3 Are there significant differences between the productivity and efficiency

of the restructured banks?

4 What measures maybe proposed based on the results of the study to

improve the productivity and efficiency of the restructured banks?

Significance of the Study

As more and more banks in Vietnam are committing in restructuring, the performance of these banks after this strategy have received much attentions to bankers and financial analysts Thus, some suggestions and recommendations to improve the efficiency and productivity of the banks’ post-restructuring performance are the final purpose of this research This research is to help the Vietnam banks to improve the competitive position against the giant competitors, to survive and achieve success in the market of the banking in Vietnam Besides, the development of the Vietnam banks is an important role to contribute to not only the economic development but also banking development of the Vietnam in the future

This research result is very important information to enhance the efficiency and effectiveness of the Vietnam banks by applying appropriate management policies to meet the urgent requirements of social for banking The research results help managers of banking development of the Vietnam to design management policy system to enhance the effectiveness and efficiency of banking development

Significance of the study: Most researches focus on the performance of banking system before and during the crisis This research may illustrate the effect of post-restructuring on the performance of banks incurred

Scope and Delimitation of the Study

Scope and delimitation of study are two elements of a research paper that inform the reader what information is included in the research and explain why the author chose that information Although scope and delimitation explain the way a study is limited, this information adds credibility to research

- Study subjects: application the Vietnam banks following: efficiency, productivity, restructuring, banking sector

- Scope of the Study: banking in the local area and the factors affecting the restructured banks in Vietnam

This research conducted at Vietnam banks The period was from 6/2013 until 10/2015 The process of research consists of two steps: first, a preliminary study, the second is formal research The study used qualitative methods through in-depth interviews with 30 customers to examine the content and meaning of the sentences used

in the scale Formal research used quantitative methods through surveying about 450 customers relating the Vietnam banks

+ Qualitative research:

- Pick up form and questionnaire

- Analysis of data

+ Quantitative research:

- Exploring factor analysis EFA

- Determine the regression equation

- Testing

Population of the study: All banks operating in Vietnam

Sampling: 14 banks incurred in restructuring An Binh Bank, Saigon bank, Sacombank, Eximbank, ACB, HD Bank, Dong A Bank, Phuong Dong Bank, Nam A Bank, Ban Viet Bank, Navibank, Viet A Bank, Phuong Nam Bank…

Chapter I presented the research background, significance of the study, research objectives and questions, research scope and object of the study, and the structure of this

study

A bank is a financial intermediary that creates credit by lending money to a borrower, thereby creating a corresponding deposit on the bank's balance sheet Lending activities can be performed either directly or indirectly through capital markets Due to their importance in the financial system and influence on national economies, banks are highly regulated in most countries Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords

Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and lending that had their roots in the ancient world In the history of banking, a number

of banking dynasties - notably, the Medicis, the Fuggers, the Welsers, the Berenbergs and the Rothschilds have played a central role over many centuries The oldest existing retail bank is Monte dei Paschi di Siena, while the oldest existing merchant bank is Berenberg Bank

Commercial banks as a financial institution typical intermediate, plays an important role in adjust capital flow and meet investment needs of entities in the economy, simultaneous it also keeps important role in ensuring the economy operate smoothly, efficiently

Globalization offers many advantages for the country’s economy in general and banks in particular, but goes along with the opportunities and challenges is risks that the Vietnam’s banking system facing This indicated that the competition is very tough; it requires each bank must have the correct orientation to go off, catch up

Like all businesses, the commercial bank is also an enterprise as a "special enterprise", so banks also exist the ultimate goal is achieve profit Therefore, the banks also find out many measures to provide products and services with high quality to meet benefits for customers With the price and the best competition cost, besides ensuring the accuracy, reliability and the most convenient to attract customers as well as expand market share to achieve the highest profit possible for bank

Commercial banks as a financial institution typical intermediate, plays an important role in adjust capital flow and meet investment needs of entities in the economy, simultaneous it also keeps important role in ensuring the economy operate smoothly, efficiently

Globalization offers many advantages for the country’s economy in general and banks in particular, but goes along with the opportunities and challenges is risks that the Vietnam’s banking system facing This indicated that the competition is very tough; it requires each bank must have the correct orientation to go off, catch up

Economic integration was being as a trend for innovation and development

process of economy In financial integration trend, banking system is not only play an important role in domestic but also expanding outside integration creates motivation for all commercial banks in domestic can innovate and develop, but integration also brings to the big challenges for Vietnam’s banking system which still young

Besides, in integration process the Vietnam’s commercial banks will receive many opportunities, cooperation, as well as new innovation from the foreign banks in the world But besides those advantage we must face with challenges, risk because in fact the financial ability of Vietnam’s commercial banks are still low, the ability in management still limit, the products and service are not diversified as well as low in innovation and so

on Therefore the competitions among the banks are very drastic and difficult It requires the commercial banks in Vietnam to try to join this integration process to survive and develop in the future

The commercial banks still have the weakness as well as the difficulties, challenges We must take advantage of opportunities that WTO brings to overcome these challenges

Profit is the ultimate goal of commercial banks All the strategies designed and activities performed thereof are meant to realize this grand objective However, this does not mean that commercial banks have no other goals

Commercial banks could also have additional social and economic goals However, the intention of this study is related to the first objective, profitability To measure the profitability of commercial banks there are variety of ratios used of which Return on Asset, Return on Equity and Net Interest Margin are the major ones following:

Return on Asset (ROA): ROA is also another major ratio that indicates the

profitability of a bank It is a ratio of Income to its total asset It measures the ability of the bank management to generate income by utilizing company assets at their disposal In other words, it shows how efficiently the resources of the company are used to generate the income It further indicates the efficiency of the management of a company in generating net income from all the resources of the institution A higher ROA shows that

the company is more efficient in using its resources

Return on Equity (ROE): ROE is a financial ratio that refers to how much profit a

company earned compared to the total amount of shareholder equity invested or found on the balance sheet

ROE is what the shareholders look in return for their investment A business that has a high return on equity is more likely to be one that is capable of generating cash internally Thus, the higher the ROE the better the company is in terms of profit generation ROE is the ratio of Net Income after Taxes divided by Total Equity Capital It represents the rate of return earned on the funds invested in the bank by its stockholders ROE reflects how effectively a bank management is using shareholders’ funds Thus, it can be deduced from the above statement that the better the ROE the more effective the

management in utilizing the shareholders capital

Net Interest Margin (NIM): Net Interest Margin (NIM) is a measure of the

difference between the interest income generated by banks and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their assets It

is usually expressed as a percentage of what the financial institution earns on loans in a specific time period and other assets minus the interest paid on borrowed funds divided

by the average amount of the assets on which it earned income in that time period (the

average earning assets) The NIM variable is defined as the net interest income divided

by total earnings assets

Net interest margin measures the gap between the interest income the bank receives on loans and securities and interest cost of its borrowed funds It reflects the cost

of bank intermediation services and the efficiency of the bank The higher the net interest margin, the higher the bank's profit and the more stable the bank is Thus, it is one of the key measures of bank profitability However, a higher net interest margin could reflect

riskier lending practices associated with substantial loan loss provisions

Earnings per share (EPS): Earnings per share (EPS) are generally considered to be

the single most important variable in determining a share's price It is also a major

component used to calculate the price-to-earnings valuation ratio

An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation Two banks could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal would be a "better" company Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other

rates and commodity prices This practice has its basis in the presumption that investors act rationally and without biases, and that at any moment they estimate the value of an asset based on future expectations Under these conditions, all existing information affects the price, which changes only when new information comes out By definition, new information appears randomly and influences the asset price randomly

Price-Earnings Ratio (PE): A valuation ratio of a company's current share price

compared to its per-share earnings

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E However, the P/E ratio doesn't tell us the whole story by itself It's usually more useful to compare the P/E ratios

of one company to other companies in the same industry, to the market in general or against the company's own historical P/E It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number

Nonperforming Loan (NPL): A sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days A nonperforming loan is either in default or close to being in default Once a loan is nonperforming, the odds that

it will be repaid in full are considered to be substantially lower If the debtor starts making payments again on a nonperforming loan, it becomes a performing loan again, even if the debtor has not caught up on all the missed payments

Enterprise Value – EV: A measure of a company's value, often used as an

alternative to straightforward market capitalization Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents

Think of enterprise value as the theoretical takeover price In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash

EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, thus

EV provides a much more accurate takeover valuation because it includes debt in its value calculation

Diversity of products and services: Commercial bank sector is products and

services So there are no differences among the other banks The commercial banks promote their competitiveness not only the basic products but also in the uniqueness, diversity of their products and service

Besides, the bank should use internet that a tool in marketing their service and products For many reasons, it is assumed that internet-based firm can operate with a far lower cost structure than traditional brick-and-mortar firms Further, it is assumed that is far easier to comparison shop on internet In addition, with the low cost, it still brings consumers into a store, hoping that they will then buy several more profitable items while

they are physically in the store because it is too inconvenient

A bank can make a difference for their each type of product based on traditional products will make product catalogue became more varied, this will satisfy almost requirements for all consumers Thereby easily dominate market share and increase strong competition from banks

Moreover, the banks also use complementary products and other services to attract customers, generate revenue for banks as well as provide periodic statements, financial counseling

The economic functions of banks include:

Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer's order These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash

Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them

Credit intermediation – banks borrow and lend back-to-back on their own account

as middle men

Credit quality improvement – banks lend money to ordinary commercial and

personal borrowers (ordinary credit quality), but are high quality borrowers The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position

Asset liability mismatch/Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans In other words, they borrow short and lend long With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g accepting deposits and issuing banknotes) and redemptions (e.g withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g wholesale cash markets and securities markets)

Money creation – whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created

Bank crisis: Banks are susceptible to many forms of risk which have triggered occasional systemic crises These include liquidity risk (where many depositors may request withdrawals in excess of available funds), credit risk (the chance that those who owe money to the bank will not repay it), and interest rate risk (the possibility that the bank will become unprofitable, if rising interest rates force it to pay relatively more on its deposits than it receives on its loans)

Banking crises have developed many times throughout history, when one or more

risks have emerged for a banking sector as a whole Prominent examples include the bank run that occurred during the Great Depression, the U.S Savings and Loan crisis in the 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the sub-prime mortgage crisis in the 2000s

Size of global banking industry: Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a record US$96.4 trillion while profits declined by 85% to US$115 billion Growth in assets in adverse market conditions was largely a result of recapitalization EU banks held the largest share of the total, 56% in 2008/2009, down from 61% in the previous year Asian banks' share increased from 12%

to 14% during the year, while the share of US banks increased from 11% to 13% Fee revenue generated by global investment banking totaled US$66.3 billion in 2009, up 12%

on the previous year

The United States has the most banks in the world in terms of institutions (7,085

at the end of 2008) and possibly branches (82,000).[citation needed] This is an indicator

of the geography and regulatory structure of the USA, resulting in a large number of small to medium-sized institutions in its banking system As of Nov 2009, China's top 4 banks have in excess of 67,000 branches (ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller banks with an undetermined number of branches Japan had 129 banks and 12,000 branches In 2004, Germany, France, and Italy each had more than 30,000 branches more than double the 15,000 branches in the UK

Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customer defined as any entity for which the bank agrees to conduct an account

The law implies rights and obligations into this relationship as follows:

The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank

The bank agrees to pay the customer's checks up to the amount standing to the credit of the customer's account, plus any agreed overdraft limit

The bank may not pay from the customer's account without a mandate from the customer, e.g a check drawn by the customer

The bank agrees to promptly collect the checks deposited to the customer's account as the customer's agent, and to credit the proceeds to the customer's account

The bank has a right to combine the customer's accounts, since each account is just an aspect of the same credit relationship

The bank has a lien on checks deposited to the customer's account, to the extent that the customer is indebted to the bank

The bank must not disclose details of transactions through the customer's account—unless the customer consents, there is a public duty to disclose, the bank's interests require it, or the law demands it

The bank must not close a customer's account without reasonable notice, since checks are outstanding in the ordinary course of business for several days

These implied contractual terms may be modified by express agreement between the customer and the bank The statutes and regulations in force within a particular jurisdiction may also modify the above terms and/or create new rights, obligations or limitations relevant to the bank-customer relationship

Some types of financial institution, such as building societies and credit unions, may be partly or wholly exempt from bank license requirements, and therefore regulated under separate rules

The requirements for the issue of a bank license vary between jurisdictions but typically include:

Minimum capital

Minimum capital ratio

'Fit and Proper' requirements for the bank's controllers, owners, directors, or senior officers

Approval of the bank's business plan as being sufficiently prudent and plausible

on the goals, context, and the selection of methods that are suitable to the restructuring in each economy

Nae-Youn Lee (2000) and Dominique Strauss-Kahn (2009) suggested that, when countries face the economic crisis and are pursuing policies to restore the economy,

restructuring the banking system, especially those weak banks, is regarded as one of the top priorities The stability of the financial system is considered one of the most important institutional factors for the efficient and effective operation of the market economy and the process of economic recovery

According to Dziobek (1998), studies on international experiences in the restructuring of the banking system refer to the following methods:

1 Government’s capital injection or stock purchase to hold management rights

2 Closures of the banks which are unable to survive in an orderly manner (as well as paying deposit insurance or selling well-operated parts for other banks)

3 Merger of domestic banks with foreign banks

4 Merger of domestic banks

5 Establishment of assets Management Company

6 Change in bank ownership structure (e.g privatization)

According to the International Monetary Fund (IMF, 1999), restructuring the banking system is aimed to achieve three goals: (i) to strengthen the operational efficiency of the banking system through ensuring solvency and profitability, (ii) to improve the capacity of financial intermediation function of the banking system between the borrower and the lender, and (iii) to recover public confidence Restructuring the banking system differs from restructuring individual banks in that the bank system restructuring consists of a series of measures to ensure the national payment system and access to credit resources in the process of rectifying weaknesses in the financial system due to crisis or emerging from crisis

There are many methods can be used to restructure the banking system Implementation of banking system restructuring requires a combination of measures Studies on international experiences in the restructuring of the banking system refer to the following methods (Dziobek, 1998):

1 Government’s capital injection or stock purchase to hold management rights

2 Closures of the banks which are unable to survive in an orderly manner (as well

as paying deposit insurance or selling well-operated parts for other banks)

3 Merger of domestic banks with foreign banks

4 Merger of domestic banks

5 Establishment of assets management company

6 Change in bank ownership structure (e.g privatization)

Dziobek (1998) suggested that in addition to the above measures, it is necessary

to take macro measures for each institution and legal factor to regulate and restore the problematic banking system in order to ensure sustainable solvency and profitability For example, to change and reform regulations and policies on banking operations and to supervise the financial and banking system should also need undertaking In fact, countries use a combination of methods (from 4 to 6 methods together), only a few countries use 2 methods such as Russia and Arabic countries (Demirguc-Kunt, Detragiache, and Poonam Gupta 2006)

Among these measures, changes in bank ownership and privatization bring the most significant changes in the banking system Next, closures of banks, mergers of banks and government’s purchase of stock also bring notable changes In contrast, when the central bank is assigned to be the only agency to restructure or support liquidity, the

banking system changes slowly This shows that not only the methods but also the organization of implementing restructuring and the implementation itself play very crucial roles

According to Joseph Stiglitz (2002), restructuring the banking system would be much more difficult in developing countries by a number of basic reasons:

First, these countries often lack of regulations, science and institutional capacity for restructuring the system (e.g handling mechanism of assets)

Second, in developing countries, the proportion of banks with liquidity shortages and bad assets accounts for a large proportion of the banking system, the number of banks operating effectively to be able for acquisition is less than the number of weak banks

Third, the banking system may be more complex, including state-owned and private banks The state banks can operate with an implicit guarantee mechanism for depositors The government's statement about not ensuring private banks can make withdrawals from those bank, especially if the government shut down a number of banks and cause doubts about the strengths of other banks in the system

To evaluate the effectiveness of a country’s restructuring process of the banking system; Dziobek (1998) used the indicators to measure the performance of three restructuring goals:

- To strengthen the operational efficiency of the banking system (solvency and profitability);

- To improve capacity to implement the function of financial intermediation;

- To restore the public trust

To evaluate the performance of the first goal - the operational efficiency of the banking system, both the sustainable solvency and profitability need considering Two financial ratios including delinquency ratio and the ratio of capital to total assets may be used to evaluate solvency Three ratios include ratio of operating expenses to total assets, the ratio of interest income to total assets and ROA are used to assess the sustainable profitability of the bank

To evaluate the performance of the second objective - the capacity of financial intermediation function, the author used six criteria: credit growth of private sector/GDP growth rate, M2/GDP, changes in the interest rate differentials between input and output, the central bank loans/GDP, the real interest rate changes and the existence or the repetition of the problems in the banking system which have not been fully addressed

Only for the third goal - to restore public trust, it has not been evaluated and there has been no official documents referring to the measurement and evaluation of public trust towards the banking system, even it is an important factor contributing to maintain the stability of the banking system

The Efficiency:

In one research of Rammohan and Ray (2004) about the revenue maximizing efficiency of Indian banks in 1990’s, deposits and operating costs were taken as inputs while loans, investments and other income were taken as outputs Rammohan and Ray (2004) compared the revenue maximizing efficiency of banks in India in 1990’s Deposits and operating costs were taken as inputs while loans, investments and other income were taken as outputs Their research found that public sector banks were significantly better than private sector banks on revenue maximization efficiency

However it was found that the difference in efficiency between public sector banks and foreign banks was not significant

Das et al, (2004) examined the efficiency of Indian banks by using DEA model Four input measures: deposits and other borrowings, number of employees, fixed assets and equity, and three output measures: investments, performing loan assets and other non-interest fee based incomes were used in the analysis Soori et al, (2005) analyzed efficiency of Iranian banking system and the main Purpose of the study was to investigate the comparative efficiency of commercial banks in Iran using stochastic frontier function

as a parametric and data envelopment analysis as a non-parametric approaches The data used cover the period 1996-2004 The findings of this paper show that there is a significant difference between non–parametric and parametric methods in measuring the efficiency in the commercial banks of Iran Debasish (2006) also attempted to measure the relative performance of Indian banks, using the output-oriented CRR DEA model The analysis used nine variables and seven output variables in order to examine the relative efficiency of commercial banks over the period 1997 – 2004

Moh'd Al-Jarrah (2007) is used data Envelopment Analysis (DEA) approach to investigate cost efficiency levels of banks operating in Jordan, Egypt, Saudi Arabia and Bahrain over 1992-2000 The estimated cost efficiency is further decomposed into technical and allocative efficiency at both variable and constant return to scale Later on, the technical efficiency is further decomposed into pure technical and scale efficiency Cost efficiency scores ranged from 50 to 70% with some variations in scores depending

on bank’s size and its geographical locations The results suggested that the same level of output could be produced with approximately 50- 70% of their current inputs if banks

under study were operating on the most efficient frontier

Chansarn (2008) conduct a study aimed to examine the relative efficiency of Thai commercial banks during 2003 – 2006 by utilizing Data Envelopment Analysis (DEA) Based on the sample of 13 commercial banks, findings revealed that the efficiency of Thai commercial banks via operation approach is very high and stable while the efficiency via intermediation approach is moderately high and somewhat volatile In term

of size, large, medium and small banks, in average, were efficient via operation approach with the average efficiencies of 100% However, small banks were the most efficient banks via intermediation approach

Eken and Kele (2011) measure bank branch performance using Data Envelopment Analysis (DEA) in Turkish bank branches and conclude that branch size and scale efficiency are related to each other

In Vietnam, there are some researchers who have studied the liberalization process of the Vietnamese financial system as well as the banking sector (Le, 2006; Ngo,

2004, 2009a) such as measuring the efficiency of the Vietnamese commercial banks (Ngo, 2010b; Nguyen, 2007), using bootstrapping technique to improve the Malmquist productivity index for these banks (Nguyen & DeBorger, 2008) Nguyen (2007) conducted a research on 13 commercial banks in Vietnam for the period 2001-2003 The study focused on the efficiency performance of 13 Vietnamese commercial banks in terms of efficiency change, productivity growth, and technological change The author found that these banks were inefficient in both allocative (regulatory) and technical (managerial capacity), of which the technical inefficiency was more imminent (Nguyen, 2007)

The Productivity:

Productivity is one of the very important indicators to assess the economic performance of an economy In simple terms productivity is the ratio of output to input which means output per unit produced for every unit of input used Productivity is the relationship between physical outputs of one or more physical inputs used in production (Kopleman)

Productivity = Total output/ Total input

When productivity is studied related to one factor is termed as factor productivity Like labor productivity or capital productivity When all the factors are together studied it

is termed as total factor productivity Inputs and Outputs are different in banking sector

as compared to other sectors because banks are mainly service providers The products in the banking sector are different than other sectors and include deposits, borrowings, Interest etc

So study of productivity in banking sector is different as it is studied in other sectors of the economy

In the context of this study, total factor productivity (TFP) measures changes in total output relative to inputs and the concept derives from the ideas of Malmquist (1953) and the distance function approach The Malmquist index was used in 1982 paper,

“Multilateral Comparison of Output, Input and Productivity using superlative Index Numbers”, by Douglas

W Caves, Laurits R Christensen and W Erwin Diewert Berg et.al (1992) firstly used to investigate productivity change in the banking industry They employed Malmquist indices for productivity growth in Norwegian banking during the year 1980-

1989 Many of the recent studies also have used the indices to study the different aspects

of productivity in different sectors

Sufian (2007) conducted a study on domestic and foreign banks in Malaysia by using deposits, labor and fixed assets as inputs and total loans and total income as outputs The study indicated that domestic banks have gained more productivity improvement than foreign banks in Malaysia

Rezitis (2008) examined the efficiency and productivity in Greek banking and concluded that the effects of mergers and acquisition on technical efficiency and total factor productivity growth of Greek banks are rather negative

The efficiency of banks has been widely and extensively studied in the last few decades For banks, efficiency implies improved profitability, greater amount of funds channeled in, better prices and services quality for consumers and greater safety in terms

of improved capital buffer in absorbing risk (Berger, Hunter and Timme, 1993)

The information obtained on the evaluation of the bank's performance may be used to improve its overall efficiency of operations and in turn, may contribute towards achieving its competitive edge

The creation of an effective and solid financial system constituted an important objective of the process of reform and passing from a centralized economy to a market economy in Central and Eastern European countries The liberalization of prices, the liberalization of the circulation of goods, services and of capital, the deregulation of financial systems, globalization and the mutations on the level of the economic, social and political environment had a significant impact on the development of the CEE banking system The banking systems in the developing countries suffered ample

mutations with the purpose of creating some efficient banking institutions and with a high degree of soundness capable of facilitating economic growth

The efficiency of the banking system is a theme of interest both for the academic world, as well as for the decision factors around the world During last three decades a large number of papers has been published in which the efficiency of banking industry both in the developed and developing countries has been investigated Generally in papers concerning developed the attention has been focused on analyzing the market structure, the degree of concentration, and deregulation and their impacts on efficiency

On other hand, in case of developing countries the concentration has generally been on investigation of the impact of the bank reforms, of the privatizations of the state banks, of entering foreign banks and their effects on the efficiency (Asaftei and Kumbhakar, 2008; Bauer et al., 1998; Bauer, Berger and Humphrey, 1993; Beccalli, Casu and Girardone, 2006; Berger and Humphrey, 1997, Berger and Mester, 1997; Berger and Mester, 2003; Bonin, Hassan and Wachtel, 2005; Casu and Girardone, 2002; Casu, Girardone and Molyneux, 2004; Guzmán and Reverte, 2008; Koutsomanoli-Filippaki, Margaritis and Staikouras, 2009; Yildirim and Philippatos, 2007)

On contrary to many other regions, the examination of efficiency and productivity

- banking industry in Central and Eastern Europe countries, has receive little attention Most studies focused on the banking sector in Central and Eastern Europe (CEE) are only performed at the level of one state and do not offer comparative information regarding the efficiency of banks in these states However, in recent years, several papers have been published on comparative analysis highlighting the impact of the property ownership on banks’ efficiency and productivity (Fries and Taci, 2001; Grigorian and Manole, 2002;

Weill, 2003, Hasan and Marton, 2003; Bonin, Hasan and Wachtel, 2005; Fries and Taci, 2005; Rossi et al., 2005; Havrylchyk, 2006; Yildirim and Philippatos, 2007; Koutsomanoli-Filippaki et al., 2009)

The analysis of the mutations on the level of the productivity of banks is performed, in the literature in the field, with the help of the total productivity index of the Malmquist factors (see Alam, 2001, Berg et al., 1992; Chaffai, Dietsch and LozanoVivas, 2001; Grifell- atje and Lovell, 1997; Guzman and Reverte 2008, Isik and Hassan, 2003; Liu, 2010; Rebelo and Mendes, 2000; Wheelock and Wilson, 1999) or through the parametric estimation of the distance function (Cuesta and Orea; 2002; Feng and Serletis, 2010; Koutsomanoli-Filippaki et al., 2009; Rezitis; 2008)

We analyze the efficiency of banks in CEE through two methods: a parametric method – the SFA Method (Stochastic Frontier Analysis) and a non-parametric method – the DEA Method (Data Envelopment Analysis) The use of two different methods is justified because: although in a great many research regarding efficiency and productivity the hierarchy of methods was tried, until now no consensus was reached regarding which method should be used (Bauer et al., 1998); the use of different methods to analyze an economic phenomenon is a cross verification procedure for the robustness of the obtained results (Learmer and Leonard, 1983); considering that the real level of efficiency of a financial institution is not known and that the opportunity of using a certain method is given by the distribution of the set of data, the use of both methods will reduce the potential error caused by the distribution hypothesis of the data set (Berger and Humphrey, 1997)

Related Study

1 Alin Marius Andries (2010) The determinants of bank efficiency and productivity growth in the Central and Eastern European banking systems Faculty of Economics and Business Administration Alexandru Ioan Cuza University of Iasi, ROMANIA

In this paper we examine the efficiency and its determinants in the banking systems of Central and Eastern European countries during a four-year period from 2004

to 2008 We use two approaches in order to examine the efficiency of the banking industry in Romania: the SFA Method (Stochastic Frontier Analysis) and a non-parametric method - the DEA Method (Data Envelopment Analysis) SFA method and DEA method From empirical results we see that the average efficiency of banks in Central and Eastern European countries grew in the period analyzed Increase may be due

to increased competition with EU accession and the entry of foreign banks, also caused

by extensive legislative changes which led banks to become more efficient Based on the results we see that the highest level of technical efficiency are recorded in banking systems from Romania and Czech Republic, and the lowest are recorded in Slovenia

Looking at the average efficiency scores for each country, we observe significant variation across the banking systems of the Central and East European country Technical efficiency values estimates with SFA method range from 0,6275 in Slovak Republic to 0,8644 in Romania

In order to assess the level of productivity growth of the banking industry, we calculate Malmquist productivity index, calculated using the linear programming In the analyzed period, on average, the productivity of banks increased in 2008 by