KAAV INTERNATIONAL JOURNAL OF LAW, FINANCE INDUSTRIAL RELATIONS THE FACTORS AFFECTING THE INTEREST RATE OF COMMERCIAL BANKS IN VIETNAM

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1 KAAV INTERNATIONAL JOURNAL OF LAW, FINANCE & INDUSTRIAL RELATIONS THE FACTORS AFFECTING THE INTEREST RATE OF COMMERCIAL BANKS IN VIETNAM Dr. PHAN THI HANG NGA Lecturer of Ho Chi Minh City University of Technology (HUTECH) Abstract The commercial banks capital rose rapidly and became an important factor in Vietnamese economic growth. However, a negative side always follows the result of any growth. Expanding operation leads to debt rate increase in most commercial banks. Especially bad debts rate rose rapidly. Bad debts became a serious problem for the Vietnamese economy. The objectives of this paper were not only to look into the relevant literature but also to find common ground regarding the interest rate of commercial banks in Vietnam and reports the results of a survey of 400 customers of commercial banks in Vietnam. In this paper, the researchers used analytical method of explore factor analysis to determining that are components of the interest rate of commercial banks in Vietnam. This paper conducted during the time from July 2014 to July, The research result showed that there were 400 customers of commercial banks in Vietnam interviewed but 375 processed and answered 13 questions. The researcher had analyzed KMO test, the result of KMO analysis used for multiple regression analysis. Customers responses were measured through an adapted questionnaire on a 5-point Likert scale. Hard copy and online questionnaire were distributed among customers of commercial banks. In addition, the regression analysis results showed that there were two factors, which included of factors following: the productivity and the efficiency actually affected the interest rate of commercial banks in Vietnam with 5 % significance level. The research results were 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. Keywords: The bank, commercial banks, interest rate, customers and Vietnam. 23

2 Introduction Commercial banks play an important role in economic development of developing countries. Economic development involves investment in various sectors of the economy. The banks collect savings from the people and mobilize and savings for investment in industrial project. The investors borrow from banks to finance the projects. Commercial banks are involved in the process of increasing the wealth of the economy particularly the capital goods needed for raising productivity. Over the last twenty years in Vietnam, the financial system in general and the banking system in particular had been transferred from a monopoly system into a diversified system which allows all participants to compete fairly and effectively. Within these past years, the commercial banking system in Vietnam did gradually developed in number of banking institutions, size of the banking sector in the economy, amount of credits for the economy, and amount of other banking services as well. Along with the development of the banking system in number, size, asset value, deposit, credit and debit account, interest rates, etc. which attracted more and more customers using the banking services; the efficiency of the banking system also has been increasing. So far, there is still a lack of research on the efficiency of the banking sector in Vietnam over the decades. Several researches were conducted, however, due to the data limitation; these researches were just small steps at the big front gate. Thus in combination with the practical requirements of the teaching career, the author had boldly chosen the theme: "The factors affecting the interest rate of commercial banks in Vietnam ". As a paper for researching in the developing of the agriculture sector in the future. Literature review 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 24

3 few countries use 2 methods such as Russia and Arabic countries (Demirguc-Kunt, Detragiache, and Poonam Gupta 2006). Methods of research This study used of quantitative research methods to survey the factors affecting the interest rate of commercial banks in Vietnam. The results obtained from quantitative research processed by SPSS statistical software version Quantitative research methods describe and measure the level of occurrences based on numbers and calculations. Quantitative research is the collection of numerical data and exhibiting the view of relationship between theory and research as deductive, a predilection for natural science approach, and as having an objectivist conception of social reality. Therefore, this specific form of research uses the quantitative data to analysis. After preliminary investigations, formal research is done by using quantitative methods questionnaire survey of 400 customers related the interest rate of commercial banks in Vietnam and answered nearly 13 questions. The reason tested measurement models, model and test research hypotheses. Data collected were tested by the reliability index (excluding variables with correlation coefficients lower < 0.30 and variable coefficient Cronbach's alpha < 0.60), factor analysis explored (remove the variable low load factor < 0.50). The hypothesis was tested through multiple regression analysis with linear Enter method. Present research relies on self-reported data, but socially desirable responses have been found to be a major challenge when dealing with self-reported data (Thompson and Phua, 2005). In order to get more reliable research data, a short form of the Marlowe-Crowne social desirability scale (developed and validated by Rudmin, 1999) was used in the questionnaire as well. Research results Descriptive Statistics and Cronbach's Alpha the factors affecting the interest rate of commercial banks in Vietnam Table 1: Descriptive Statistics and Cronbach's Alpha for the Productivity (PR) Items N Mean Std. Deviation PR1: Deposit PR2:Interest expenses PR3: Operating expenses PR4: Advance PR5: Interest income PR6: Other income Reliability Statistics Cronbach's N of Items Alpha Item-Total Statistics Code Scale Mean if Item Deleted Scale Variance if Item Deleted 25 Corrected Item- Total Correlation Cronbach's Alpha if Item Deleted PR PR PR PR PR

4 PR Table 1 showed that there were 400 customers related the interest rate of commercial banks in Vietnam and answered 6 questions but 375 customers processed. Besides, Std. Deviation is around 1.0 and Cronbach's Alpha is (> 0.6). This showed that the Data is very good for the next analysis. Table 2: Descriptive Statistics and Cronbach's Alpha for the efficiency (EF) Items N Mean Std. Deviation EF1: Fixed assets EF2: Deposit EF3: Number employees EF4: Loan EF5: Investment Reliability Statistics Cronbach's N of Items Alpha Item-Total Statistics Code Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item- Total Correlation Cronbach's Alpha if Item Deleted EF EF EF EF EF Table 2 showed that there were 400 customers related the interest rate of commercial banks in Vietnam and answered 5 questions but 375 customers processed. Besides, Std. Deviation is around 1.0 and Cronbach's Alpha is (> 0.6). This showed that the Data is very good for the next analysis. Table 3: Descriptive Statistics and Cronbach's Alpha for the interest rate of commercial banks (IR) Items N Mean Std. Deviation IR1: The efficiency of commercial bank affecting the interest rate of the bank IR2: The productivity of commercial bank affecting the interest rate of the bank Reliability Statistics Cronbach's N of Items Alpha Table 3 showed that there were 400 customers related the interest rate of commercial banks in Vietnam and answered 2 questions but 375 customers processed. Besides, Std. Deviation is around 1.0 and Cronbach's Alpha is (> 0.6). This showed that the Data is very good for the next analysis. Exploratory Factor Analysis Cronbach s alpha is computed in terms of average inter-correlations among items, which determine the concepts. Although Bryman and Cramer (1990) suggested that, it is just fine when Cronbach s alpha is 0.8 or above 0.8, while Nunnally (1978) stated that it is still acceptable with the 26

5 value of 0.6, especially for initial investigation like in this research. Therefore, in this research, the value is confirmed when it is greater than 0.7. Table 4: Total Variance Explained for factors affecting the interest rate of commercial banks in Vietnam KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy..806 Approx. Chi-Square Bartlett's Test of Sphericity df 55 Sig..000 Total Variance Explained Com. Initial Eigenvalues Extraction Sums of Squared Loadings Rotation Sums of Squared Loadings a Total % of Cumulative % Total % of Cumulative % Total Variance Variance The table 4 showed that Kaiser-Meyer-Olkin Measure of Sampling Adequacy was statistically significant and high data reliability (KMO = > 0.6). This result was very good for data analysis. Table 4 showed that Cumulative percent was statistically significant and high data reliability was % (> 60 %). This is factors for independent variables. Table 5: Rotated Component Matrixa for factors affecting the interest rate of commercial banks in Vietnam Code Component 1 2 PR1.872 PR5.872 PR6.858 PR3.843 PR4.810 PR2.809 EF1.948 EF2.932 EF5.898 EF4.896 EF3.845 The table 5 showed that Structure Matrix for the factors affecting the interest rate of commercial banks in Vietnam. We had two components. Component 1 (X1) was the productivity (PR) and Component 2 (X2) was the efficiency (EF). We can call Y: the interest rate of commercial banks in Vietnam (IR). 27

6 Table 6: Regression for factors affecting the interest rate of commercial banks in Vietnam (IR) Model R R Square Adjusted R Square Std. Error of the Estimate Durbin- Watson ANOVA a Model Sum of Squares df Mean Square F Sig. Regression Residual Total Coefficients a Model Unstandardized Coefficients Standardized Coefficients t Sig. Collinearity Statistics B Std. Error Beta Tolerance VIF (Constant) 9.820E X X The table 6 showed the coefficient of adjustment R 2 = (verification F = , significance < 0.05); which means 53.2 % of the variable Y shift is explained by two independent variables (Xi). The coefficient of Durbin - Watson (d) = Results showed that all independent variables affecting the interest rate of commercial banks in Vietnam (IR) with significance level 5 %. Verifying the conformity of the model showed the multicollinearity did not violate (VIF < 10). Conclusions and recommendations Conclusions The research results showed that there were 400 customers related the interest rate of commercial banks in Vietnam and answered 13 questions but 375 customers processed. The researcher had analyzed KMO test, the result of KMO analysis used for multiple regression analysis. In addition, the regression analysis results showed that there were two factors, which included of factors following: the productivity and the efficiency actually affected the interest rate of commercial banks in Vietnam with 5 % significance level. The research results were 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. The regression coefficients were positive. This showed that the effects of independent variables in the same direction with the interest rate of commercial banks in Vietnam with significance level 5 %. We had two the findings following: First of all, we had the component 1 (X1): the productivity actually affected the interest rate of commercial banks in Vietnam with 5 % significance level. Finally, we had the component 2 (X2): the efficiency actually affected the interest rate of commercial banks in Vietnam with 5 % significance level. Recommendations Recommendations for improving the productivity Vietnam Government should continue to restructure the organization structure of commercial banks, from Central to local level, to improve economic efficiency and support socio-economic development, which is consistent with the trend in technological development, business strategy of the commercial banks. The function and administrative geography based organization structure will be replaced with the client based structure in combination with the service groups; Renovate the management and business apparatus at the headquarters in accordance with the international standards. 28

7 Vietnam Government should continue to restructure clearly distinguish the function, tasks and rights of the board of directors (BOD) and management units. The assistants of BOD must at least comprise of monitoring/auditing units, risk management committee/council; expand the subsidiary network, business cooperation, product development, application and transfer of technology with foreign financial institutions. Vietnam Government should continue to promote commercial presence (branch, joint venture, representative office and other legal entities) of Vietnam s commercial banks in regional and international financial markets, particularly in the countries and territories with development capacity, trade and investment relationship with Vietnam. This will gradually promote the access and competitiveness of Vietnam s suppliers of banking services in international market. Recommendations for the improving the efficiency Vietnam Government should continue to manage the improvement of Bank management capacity. There is a mismatch between management in Vietnam s credit institutions and the good rules and standards in corporate governance, as reflected by low transparency, inability to form healthy working environment and business culture values, unclear assignment of roles and responsibilities, etc. Vietnam Government should continue to manage the business and risk management skills are still poor, as revealed in the facts that loans are mainly collateral-based, credit assessment capacity is low, system of debt classification is inappropriate and the monitoring rules are still inadequate. Most commercial banks have not been able to establish an appropriate risk management system and good business strategies in order to successfully confront challenges in opening financial markets. Recommendations for the future research The above-mentioned things, the future research should survey more than 400 customers relating to the other commercial banks in Vietnam. This will help to collect the data that is more significant. Because the study topic is very wide as the interest rate of commercial banks is a big area. Due to the Vietnam banks just mentioned should not reflect the entire operation banking for all commercial banks in the country. Moreover, the result of the study cannot be generalized, as the sample size of items is not sufficient. Therefore, the future research should survey more items (questions) that affecting not only the interest rate of commercial banks but also other banks in Vietnam. REFERENCES: 1. Dillman, D.A (2000). Mail and Internet Surveys. The Tailored Design Method, New York, Wiley. 2. Dochartaigh, N. O. (2002). The Internet Research Handbook: A Practical Guide for customers and Researchers in The Social Sciences. London, Sage. 3. Edward E. Leamer (2008). Specification problems in econometrics. The New Palgrave Dictionary of Economics. 4. Engle James F and Blackwell Roger D (1982). Consumer Behavior. Holt, Rinehart and Winston, New York. 5. F. T. Rothaermel and S. Sugiyamanb (2001). Virtual Internet Communities and Commercial Success: Individual and Community-Level Theory Grounded in the Atypical Case of Timezone.com. London: Sage Publications. 6. Fink, A. (2003). How to Ask Survey Questions. Thousand Oaks, CA, Sage. 7. Freedman, D.A. (2005). Statistical Models: Theory and Practice. Cambridge University Press. 8. Hand, D. J. (2004). Measurement theory and practice: The world through quantification. London, UK: Arnold. 29

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