Challenges for sustainable development of vietnamese commercial banks

Nội dung text: Challenges for sustainable development of vietnamese commercial banks

1. CHALLENGES FOR SUSTAINABLE DEVELOPMENT OF VIETNAMESE COMMERCIAL BANKS * Bui Khac Hoai Phuong 1 - Le Khac Hoai Thanh 2 ABSTRACT: In the process of international integration, Vietnamese commercial banks have to compete with foreign banks not only in domestic market but also in international market. To be accordance with financial integration phase, Vietnam’s commercial banking system must stay stable and healthy; increasce branch value; operate efficiently towards sustainable development. A survey was conducted with the managers of 31 joint stock commercial banks on the challenges and solutions that have been implemented in the process of sustainable banking. The results show that commercial banks are committed to sustainable development, focusing on building internal environmental management systems such as energy and resource saving measures, initiating environmental management in bank operation. Keywords: Sustainable banking, challenges, Vietnamese commercial banks. 1. OVERVIEW OF SUSTAINABLE DEVELOPMENT OF COMMERCIAL BANKS 1.1. Sustainable development approach The mean of sustainability has many different approaches; the main idea of all the sustainability definitions is, that there is an interaction of three main systems, such as environmental, social and economic. The idea of sustainability gives new thinking to the banking sector, which recognizes the interdependencies of the economic, social, and environmental systems, and the connections between social and environmental challenges. The banks have to put the environmental and social improvement in consideration within their mission about development. Bouma et al. (2001) defined a sustainable banking that focuses on banks’ external impact through its products and services to customers. At this point, sustainable banks only provide their products and services to customers in consideration their impacts on environment and society. Thus, customers whose activities have a negative impact on the environment and society will be rejected. Imeson and Sim (2013) defined sustainable banking based on its impact on stakeholders including shareholders, employees, customers, and the economy. This approach identifies sustainable bank benefits to stakeholders and they must prevent or minimize any undue harm to the bank, social and natural environment. Hutton and Cox’s (2005) sustainability conceptual model shows the interaction of three main systems, such as: environmental, social and economic and criteria for sustainability. The model proposes criteria for assessing the sustainability of each sector of the economy, society and the environment. In addition to the specific criteria, there are also criteria for assessing the overall interaction of these aspects. * Falculty of Economics and Tourism, Quang Binh University Falculty of Economics and Tourism, Quang Binh University, corresponding author. Tel.: +84935885097. E-mail address: hoaiphuongbk@gmail.com.
2. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 277 In the pursuit of sustainable development, the bank needs a comprehensive social and environmental strategy to improve profitability through environmental management and promote social equity in order to benefit all shareholders and community. Sustainable development will increase value of the bank as long as it benefits shareholders, engages customers and creates community consensus. Each bank’s sustainable development strategy is designed and implemented based on its size, market position and performance. The banks’ sustainability strategies will change over time and circumstances through its activities and stakeholders in order to determine the short and long term value which is suitable for the banks and its stakeholders (Hutton and Cox, 2005). 1.2 The four phases of sustainable banking Marcel Jeucken (2001) outlines the four phases of commercial bank development. Most commercial banks will develop in four phases, but some banks ignore the first two phases whereas some banks do not reach the last phase. In the first phase, banks try to ignore regulations on environmental management and protection, until the last stage, the banks do not change the priority target from achieving the highest profitability ratio to improving branding value, balancing the interests of stakeholders. Thebank’s performance towards long-term values and​​ sustainable development. Fig 2. A typology of banking and sustainable development (Source: Marcel Jeucken, 2001)
3. 278 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA The first phase is defensive banking. The bank is a follower and contests every government measure with respect to the environment and sustainable development since its direct or indirect self-interest is threatened. Cost savings in its internal environmental care are not considered and all environmental laws and regulations are thought to be threats to its business. Banks do not take into account the impacts on environment in financial decision-making process. In this vision, banks consider taking into account the impacts on environment bring no profit but more cost. Jeucken (2001) said this thinking still existed because banks are not full-aware of sustainable development. The second preventive banking phase is different from the defensive phase in that potential costs savings are identified. Banks start saving cost from bank’s internal operations, for example, printing paper on both sides, saving energy and water, using facility effectively. Many banks are working on internal environmental care. In this phase, banks also have an external character (loans and savings products) purely in the sense of limiting risks and investment losses related to environmental risks. So it includes looking into saving costs through fewer loss items as a result of environmental risks in credit extension The third phase is offensive banking phase, which goes a further step than preventive banking. Banks see new opportunities in consideration environment issues in their business operation. Banks take a bigger step in investment in the environmental technology market. At this phase, banks are more active in seeking for an opportunity to invest in environmental issues to generate profit. The new product about environment is feasible and can compete with bank’s traditional products and services. In this vision, banks have taken initiative, approached and integrated environmental issues in their operations. The last phase is sustainable banking: they will set the prerequisites for all banking operations to be sustainable. At the last phase, the internal activities meet the requirements of sustainable business and in which the external activities (such as lending and investments) are focused on valuing and stimulating sustainability among customers and other entities in society. The starting point is not environment regulations or the market, but the vision regarding the environment, the organization’s goal and the role that the organization wants to play in society. Hence, banks have improved their organizational structure to be stable and healthy and balancing interests of stakeholders. The banks integrate social and environmental factors in all of its operations. Sustainable banks provide sustainable products and services to customers and set environmental policies to encourage customers to invest in green technologies and energy projects. 2. CHALLENGES IN IMPLEMENTING SUSTAINABLE BANKING To assess challenges and measures for the sustainable development of commercial banks, a survey was conducted with 150 managers of 31 commercial banks from deputy manager of department and upward. 2.1 Survey description The bank managers, who contribute to strategic planning, implementing bank’s sustainable development strategy, were asked to assess the implementing and challenges to sustainable development of commercial banks. The majority (above 70%) of the respondents are over 5-year experienced, agreeing with the following statements: 1 - Completely disagree; 2- Slightly Disagree; 3- Agree; 4- Mostly Agree; 5- Completely Agree. Table 1. Survey description Positions Quantity Working experience (years) Above 5 years Below 5 years Board of directors 10 80% 20% Manager of Branch 22 72.7% 27.3% Deputy manager of Branch 28 75% 25% Manager of department 38 78.9% 21.1% Deputy manager of department 52 73.08% 26.92%
4. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 279 The results show Vietnamese commercial banks are committed to sustainable development. In particular, the target commitment is mainly to meet the regulation requirements, with the average agreed level of 4.10. Commercial banks have made great efforts to save environmental costs through internal operations and the initial inclusion of environmental issues in lending activities. Jeucken (2001) argues that most banks go through this period because state regulators often directly or indirectly regulate preconditions for banking operations through environmental laws and regulations. During this period, potential profits, risks and costs associated with the environment are integrated into the day-to-day operations of the banks. The banks do not want further actions and policies on environmental issues which could be expected in the near future. This is no longer defensive, but a bit preventive, banks only comply with current environmental regulations, no policy or step beyond environmental regulations. Table 2. Sustainable development commitment of commercial banks Sustainable Completely Slightly Agree Mostly Completely Results development commitment disagree (%) disagree (%) agree agree (%) (%) (%) 1 2 3 4 5 No sustainable development 100% 0 0 0 0 0 commitment Comply with legal requirements 0 0 18 54 28 4.10 Active in implementing sustainable development, searching investment 0 12 54.67 33.33 0 3.21 opportunities to gain profit. 2.2. Challenges 2.2.1 Sufficient capital for sustainable development The banking operation is risky, so maintaining a reasonable equity ratio and complying with international practice is important to compensate for loss of shareholders, clients and investors. CAR is an important indicator of the adequacy of commercial banks. The CAR of banks must be maintained at ≥ 9%, determined in accordance with Circular 36/2014/TT- NHNN dated November 20, 2014 on “stipulating minimum safety limits and ratios for transactions performed by credit institutions and branches of foreign banks”. CAR is determined by the ratio of equity and net weighted assets. However, by 2020, commercial banks need to maintain a CAR at above 8% as stipulated in Circular No.41/2016/TT-NHNN, whereby the determination of CAR is not based solely on credit risk but also plus 12.5 times the total capital required for market and operational risk provisions. Thus, when applying this Circular, the CAR of banks will decrease significantly in comparison with current calculation. Chart 1. Average CAR Ratio of commercial banks from 2007 to 2016 (Source: Banks’ Annual Reports and calculations of authors)
5. 280 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA Chart 1 shows joint stock commercial banks have higher CAR than the state owned commercial banks. Eximbank has the largest CAR at 20.81% in the period 2007-2016, followed by Maritimebank at 15.07%. Among the state-owned commercial banks, Techcombank has the highest CAR at 13.25%, the CAR of Vietinbank and VCB is lowest only at 10%. Vietnamese commercial banks need to increase equity to meet the requirement of Circular No.41 and in accordance with international practices on maintaining minimum capital adequacy ratio. Maintaining sufficient capital ensure the ability to withstand the business losses in order to protect stakeholders. In addition, the increase in equity helps banks invest in technology, human resources, environmental risk management systems, invest in market segment for sustainable development and provide green financial products. 2.2.2 Environmental and social risk management framework Table 3. Challenges in implementing sustainable development Challenges Completely Slightly Agree Mostly Completely Results disagree (%) disagree (%) agree (%) agree (%) (%) 1 2 3 4 5 Sufficient funds for sustainable 0 6.67 50 36.00 7.33 3.440 development Environmental and social risk management framework to assess the 0 9.33 36.00 44.6 10 3.553 risk of loans Set of standards to assess the impacts of each sector to environment 0 0 23.33 74.67 2.00 3.787 Human resources for sustainable development 0 0 68 25.3 6.7 3.49 Table 3 shows that two challenges are highly appreciated by managers are Environmental and Social risk management framework to assess the risk of loans and Set of standards to assess the impacts of each sector to environment. Environmental and social risk management systems support the assessment of risks for bank loans. Sustainable banks need to appraise, filter and eliminate projects that have an adverse impact on the environment. After credit decision-making stage, these systems continue to monitor the project. For projects that are considered to be environmental risk, the bank will work with clients to figure out environmental mitigation measures. At the last stage, banks continue to support and supervise customers to implement the agreed measures. The development and application of environmental and social risk management systems of commercial banks face many challenges such as lack of institutional capacity, information on customers and commitment from higher-level management team, risk assessment ability is still limited These are major obstacles banks need to overcome in order to achieve sustainable development. Commercial banks in Vietnam have not developed a set of standards for different industries. Each industry and business sector have different environmental impacts, such as heavy industries (mining, metallurgy, and mechanics,) have more impact on environment than on agriculture, forestry, services, tourism sectors Banks need to develop policies for specific areas to create a framework for environmental assessment to develop sustainably and offer green finance products. For some other sectors such as metallurgical, construction, mechanics, metals and chemicals, manufacturing and services these frameworks will help to appraise loan, manage risk more accurately.
6. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 281 2.2.3. Qualified human resources for the need of sustainable development The quality of bank human resources plays an important role in implementing sustainable development strategies. Human resources not only have the ability to perform traditional tasks but also understand environmental and energy issues in loan approval and have the ability to assess the adverse impact on the environment and society of customer’s business operations. In particular, bank employees must ensure sufficient professional qualifications and ability to meet four phases of sustainable development, and they must have professional ethics, proper behavior and be able to perform their duties at all levels. For senior staffs, they need an in-depth understanding about climate change, green energy and environmental improvement. Banking managers should have a succession of strategy that ensures a thorough understanding of the bank’s strategies, key business areas, customers, culture and core values, as well as the opportunity to build and develop a sustainable bank. In the addition to their current staffs, the banks need to recruit more qualified-employees to meet the position requirements and the bank’s sustainable development requirements. 3. A PROPOSAL FOR THE SUSTAINABLE DEVELOPMENT OF VIETNAMESE COMMERCIAL BANKS The authors suggest the three phases of sustainable development for the banks: Phase I - Building internal environmental management system; Phase II - Managing environmental risks in lending activities; Stage III- Providing green financial products and green credit. Next, the authors conducted a survey of bank managers on the implementation of sustainable development in three proposed phases: Phase I: Phase II: Phase III: Building internal Managing of Providing green environmental environmental risks financial products management in lending activities and green credit Phase I: Building internal environmental management system Criteria Results Use energy and resources efficiently in banks’ internal operations 3.215 Integrate environmental risk in customer relationship management 3.167 Raise awareness of environment and energy for employees 2.677 Initiate environmental management in bank operations 3.233 Organize training about environment and energy for employees 2.567 Inform employees about environmental issues regularly 2.640 Comply with the regulations about environment 3.253 According to the results of the survey, banks have paid much attention to build their internal environmental management system, including initial environmental management in their operations, with an average agreed level of 3.233; Comply with the regulations about environment is estimated at an average of 3,253; Banks also take measures to integrate environmental risks in managing customer relationships. However, measures to raise awareness as well as ability for environmental risk assessment for staffs have not been highly appreciated. For sustainable development, banks must focus on training, providing environmental and energy related information to the bank’s operations for its employees. Because, employees are the person who directly implement sustainable development strategies. In particular, credit officers appraise the environmental risks of loan projects by themselves, so they must have in-depth knowledge of environmental and energy issues for a full, substantive assessment of the impact on the environment of customers.
7. 282 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA Phase II: Environmental risk management in lending activities Criteria Results Assess and supervise environmental risk in customers’ business operation. 2.573 Eliminate projects that have negative impacts on the environment 3.080 Encourage customers to reduce negative impacts on the environment in their business operation. 2.540 Criteria for assessing environmental risk management activities in lending activities have not been effectively implemented by banks. Banks only focus on the implementation of phase I, i.e. the development of internal environmental management systems, internal banking activities, but not on environmental management in lending activities. When implementing sustainable development, the assessment of the environmental risk is not only at decision making process but also during customer’s operation. In addition, sustainable banks should take measures to assist customers in reducing negative environmental impacts while carrying out the projects. Phase III: Provide green financial products and green credit Criteria Results Offer sustainable and green financial products 2.967 Specific policies to encourage customers to invest in improving the environment and green technology 2.560 In the final phase, banks provide sustainable and green financial products. Banks around the world have provided these products, including: environmental investment funds, sustainable payments, sustainable savings products, sustainable credit, environmental insurance, climate products, environmental consulting services However, green credit and green financial products provided by Vietnamese commercial banks only at decision-making process, that means banks just take into account the environmental issues during lending activities. While sustainable bank must take specific measures to encourage and support customers to invest in green technology, energy saving sectors. The incentives and customer support such as long- term loan, preferential interest rates, environmental consultancy, flexible payment methods have not been implemented in the Vietnamese commercial banks 4. CONCLUSION Vietnamese commercial banks have made commitments and measures for sustainable development. In particular, banks have focused on building internal environmental management systems such as using energy and resources efficiently within their banks, adhering to environmental regulations and initiating environmental management in business operations. However, in order to implement sustainable development and provide green financial products, in the near future, banks must refine their environmental and social risk management systems to fully and accurately assess these impacts. The banks also need to train, raise awareness, build capacity to assess environmental, green technology and energy issues of its employees and establish a team to supervise the implementation of sustainable development strategies. REFENENCES Book: Bouma, J., Jeucken, M., & Klinkers, L. (2001). Deloitte&Touche. Sustainable Banking: The Greening of Finance. Sheffield, UK. Jeucken M., (2001), Sustainable Finance and Banking the Financial Sector and the Future of the Planet. Routledge. Journals: Annual reports of Vietnamese commercial banks from 2007 – 2016 Hutton B., & Cox, D. (2005), Value creation: The promise of sustainable development. Good business: Exercising effective and ethical leadership, pp.130-144. Imeson, M., Sim, A., (2013), Sustainable Banking: Why helping communities and saving the planet is good for business, SAS Institute Inc. World Headquarters, Retrieved from