Economies of scale and input costs efficiency of commercial banks in Vietnam, 2006-2014

Abstract

This study is conducted to determine and quantify the performance of the commercial banks in Vietnam in relation to their economies of scale and the possibility of substitute of inputs in their operations. Data used in this study were collected from 32 commercial banks in Vietnam for the period from 2006 to 2014. The Iterate Semmingly Unrelated Regression (ITSUR) with the support of STATA software is used in this study. The findings from this study provide empirical evidence to confirm that the operation scale of the commercial banks in Vietnam is increasing return to scale. This means that increasing the scale of operations from the commercial banks in Vietnam may result in an increase of their profitability. This finding appears to be consistent with a merger and acquisition taking place in the Vietnam’s banking system at the moment with the lead of the State Bank of Vietnam. In addition, the commercial banks in Vietnam have demonstrated that cost inefficiencies during operations are problematic. The three key inputs of commercial banks during their operations are labor, financial capital and fixed assets are all inelastic and as such, they may be substitute for one another. As such, controlling labour costs appears to be essential for the efficient operations of the commercial banks in Vietnam. Empirical findings from this empirical study are drawn to provide some implications for both the commercial banks and the State Bank Vietnam in relation to the scale efficiency of operations for the commercial banks and the leading roles of the central banks in providing guidance and assistance for the entire banking system to grow further.