How efficient is the banking system of Asia’s next economic dragon? Evidence from rolling DEA windows

Abstract

Vietnam is now widely regarded as a rising economic star and the next economic dragon of Asia. Its banking system has played a key role in this stellar economic performance. Since 1990, Vietnam’s banking system has undergone significant changes which saw its composition transformed from being state banks only to now being both state as well as private banks, and has performed generally well in terms of growth, profitability and stability. But is it efficient? We conduct a dynamic analysis of the level and trend of the cost and profit efficiency of the Vietnamese banking sector over the period 1995 to 2011 taking into account the Asian and Global Financial crises. We use the Data Envelopment Analysis (DEA) Windows Analysis approach and adjust for bank size in calculating the average efficiency score of the banking system. Our empirical findings show that the cost and profit efficiency of the Vietnamese banking system averaged around 0.90 and 0.75, respectively, with the state banks being more efficient than the private banks and with efficiency experiencing an upward trend over the analysis period. Moreover, we find that the Global Financial Crisis (GFC) and Asian Financial Crisis (AFC) did not significantly affect the efficiency of the whole Vietnamese banking system.