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Customer satisfaction impacts on bank performance: an empirical study from a developing country.
Abstract:
In recent years, a number of studies have highlighted the effects of customer satisfaction on the performance of business organizations through empirical evidence across both developed and developing countries. In the pursuit of this type of evidence, this paper clarifies the nature of the relationship between customer satisfaction and bank performance in the case of Vietnam. With this objective, the study uses cross-section data from 152 Vietnamese banks. In the model of this study, bank performance is a dependent variable. The quality of banking products and services, the banking product and service supply process, quality of staff, presentation of banking information and price competition of banking products and services are independent variables. To examine the relationship between the regulatory framework and bank performance, this study uses confirmative factor analysis to test the reliability and validity of this correlation. By using the ordinary least squares technique, the hypothesis on the relationship between customer satisfaction and bank performance is measured. Results are consistent with the hypothesis: customer satisfaction has a positive impact on the performance of banks in the case of Vietnam. In order to test the robustness of the outcomes of the study, the presence of autocorrelation and heteroskedasticity in the model is also tested. And then, implications for the banking sector are drawn for the case of Vietnam.

Keywords: Customer Satisfaction, Bank Performance, Bank Management.

Article Type:
Report
Subject:
Developing countries (Economic aspects)
Banking industry (Customer relations)
Customer satisfaction (Influence)
Bank management (Influence)
Authors:
Tran, Anh Tuan
Oh, Kok-Boon
Van Anh Le, Quynh
Pub Date:
09/01/2010
Publication:
Name: Journal of International Business and Economics Publisher: International Academy of Business and Economics Audience: Academic Format: Magazine/Journal Subject: Business, international; Computers Copyright: COPYRIGHT 2010 International Academy of Business and Economics ISSN: 1544-8037
Issue:
Date: Sept, 2010 Source Volume: 10 Source Issue: 3
Topic:
Event Code: 240 Marketing procedures Computer Subject: Banking industry
Product:
SIC Code: 6021 National commercial banks; 6022 State commercial banks; 6029 Commercial banks, not elsewhere classified
Geographic:
Geographic Scope: Vietnam; Australia Geographic Code: 9VIET Vietnam; 8AUST Australia; 0DEVE Developing Countries
Accession Number:
243876931
Full Text:
1. INTRODUCTION

Customer satisfaction is regarded as a key factor in the business strategy of every organisation. It is a benchmark to which an organisation must set its objectives. A company is successful when its products or services meet expectations and requirements of customers. If a company aims for customer retention, customer satisfaction is the best way to retain customers' future purchases (Taylor and Baker, 1994, Cronin and Taylor, 1992, and Parasuranman et al., 1988). Jamal and Naser (2003, p.31) stated, "service quality has been described as a form of attitude that results from the comparison of expectations with performance". Individual needs, wishes and expectations with regard to the value of the product or service can be measured by some of the following elements, such as friendly and helpful salespersons, informed advice, reasonable price, high quality, and a long guarantee period (Raab, Ajami et al., 2008).

Many previous studies in the banking sector have found that bank profitability was derived from the quality of service and the higher quality leads to satisfied customers who use more of the services and the ability of customer retention becomes higher (Parasuranman, Zeithaml et al., 1988; Cronin, Jr. et al., 1992; Anderson, Fornell et al., 1994; Danaher and Rust, 1996). Moreover, customer satisfaction and perceptions of service quality are decisive elements of customer loyalty which potentially brings about higher market shares, lowers staff turnover and operating costs, and improves employee morale, higher financial performance and profitability (Lewis, 1989; Lewis, 1993; Julian and Ramaseshan, 1994). Customers usually develop their perceptions on quality of service and make up standards of expected quality for service before they encounter actual quality of banking service. They in turn compare their expected quality of service and its actual quality when they use it, and this comparison will influence the degree of their satisfaction in using that service, leading to whether customers repurchase that service or not.

Some other studies mentioned the confirmation and disconfirmation models. In the confirmation model, customer satisfaction is regarded as the comparison of service performance expectations and evaluations as a meeting of customer expectations (Oliver, 1989; East, 1997; Jamal and Naser, 2003). The disconfirmation model treated the customer satisfaction as the difference between pre-purchase expectations of the service and post-purchase perception of the service. That is, when customers perceived the service provided was better than expected, they were more satisfied (Churchill and Surprenant, 1982; Peter and Olson, 1996; Jamal and Naser, 2003). However, it is too difficult for customers to perceive and evaluate exactly how well services are performed at the different stages of purchase in terms of pre-purchase and post-purchase because services are characterised by intangibility, inseparability, heterogeneity, and perishability (Legg and Baker, 1996). Moreover, due to intangibility of service, it also is very hard for the organisation to evaluate the perception of customers on service, so the organisation can find it hard to improve the quality of service to satisfy their customers. However, it is noticeable that customers evaluate and perceive quality of service on the grounds of physical objects surrounding the service environment, such as staff, facilities, infrastructure and the image of the organisation. This argument is also supported by Wakefield and Blodgett (1999), and Dabholkar et al. (1996) that physical surroundings of the organisation providing services affect perceptions, responses and behavioural intentions of customers on service quality. As Jamal and Naser (2003, p.33) said, "customers, however, make inferences about the service quality on the basis of tangibles (the buildings, the physical layout etc.) that surround the service environment".

Some other studies also found that convenience and competitiveness influence customer satisfaction. In fact, these two factors relate respectively to a place where banks or their branches are located and prices of service provided by banks. If banks are located in a place customers can easily access, they can do business with the bank more conveniently (Levesque and McDougall, 1996). In addition, competitiveness also makes prices of the provided service cheaper. Support for this argument comes from studies of Laroche and Taylor (1988) and Levesque and McDougall (1996). "Customer satisfaction in retail banking is also likely to be influenced by the perceived competitiveness of the bank's interest rate" (Jamal and Naser, 2003, p.33).

So, it is likely that customer satisfaction is one of the most persuasive objectives of any business and whether the organisation is efficient or not depends very much on whether or not output of the organisation satisfies customers. Although customer satisfaction is a somewhat vague factor to be measured because it relates to attitude of customers, many studies have made great efforts to quantify its value. Anderson, Fornell and Lehmann (1994) discovered a positive influence of customer satisfaction on return on investment by using cross-sectional times-series data and least squares regressions. In the hotel industry, Banker, Potter and Srinivasan (2000) also found that a measure of customer satisfaction is a significant positive relationship running on profit per hotel room.

Ittner and Larcker (1998) researched the impact of the satisfaction of business customers on customer retention rates, revenue levels and revenue changes in a telecommunications firm. They observed that this relationship was significantly and positively related. Through studies on retail branches, they also found that there existed a positive relationship between customer satisfaction and six different performance measures: revenues, expenses, margins, return on sales, retail customers, and business and professional customers. Ittner and Larcker (1998) detected the impact of customer satisfaction on the measures of business performance as measured through the customer satisfaction index, and this research was also extended to estimate the effect industry by industry. The result of this estimate for financial services discovered that there existed a positive relationship between customer satisfaction and market value of financial services. However, this effect is not statistically significant because the authors ascribe the insufficiency of statistical significance to the small sample (Fernandez 2002). On the other hand, Anderson, Fornell and Rust (1997) found a negative effect of very high customer satisfaction scores on productivity and therefore future profitability (Fernandez, 2002). The result of this effect can depend greatly on the context of environment of every economy and economic regime or legislative framework of every nation. Thus, a specific study for every country or industry is imperative to quantify the effect.

2. REVIEW OF LITERATURE

According to Kumar and Reinartz (2006), traditionally, customer satisfaction is a key mediator which leads to greater retention or loyalty, in turn resulting in greater profit for a firm. However, these relationships are not always strong all the time because in different industries they depend on environmental factors, such as the aggressiveness of competition, degree of switching cost, and the level of perceived risk (Kumar and Reinartz, 2006). Figure 1 shows the satisfaction-loyalty-profitability chain.

[FIGURE 1 OMITTED]

According to Hoffman and Bateson (2006), customer satisfaction is a possible task in an organisation. In includes a wide range of improvements of activities such as quality of products and services, reasonable pricing, human resource development and in-time deliveries. Enrichment of these factors can narrow down gaps between customer expectations and perception. These gaps exist if what customers expect to receive is less than their expected level. Therefore, satisfying customers is also related to eliminating the customer gap to match or exceed customer expectations Kotler and Keller (2006).

Quality and innovation of products and services are always stimulated by modifying and improving their features, styles and characteristics. Changes in attributes of products and services aim to increase customer perceptions and create competitive advantages due to their uniqueness. Moreover, new features can formulate "the company's image as an innovator and win the loyalty of market segments that value these features" (Kotler and Keller, 2006, p.329).

Reasonable pricing is not an easy task in any company. Although high customer satisfaction is reached by lowering the company's price of products and services, but doing this may lower its profits (Kotler and Keller, 2006). Therefore, reducing prices is not an ultimate goal for every company to satisfy customers' needs. However, it is likely that price is important to customers because of limited incomes that restrict their purchasing power (McColl-Kennedy and Kiel 2000). Thus, pricing products and services should be in concert with many factors, including internal and external dimensions of the company, such as production and operation costs, quality of products and services, prices of competitors and customers' needs. In doing so, the company can set a price that can both satisfy customers and earn profits. In general, competitive price may be regarded as the most reasonable level for a company. Distribution can facilitate the physical exchange of products and services between businesses and their customers Burrow (2009) and has four main functions: location of service facilities, pick-up and delivery services, design of the channel, and determination of the supply channel to supply products and services to customers in a timely manner (McColl-Kennedy and Kiel, 2000). Depending on types of products and services, convenient location and a current business network, a company can distribute its products directly or indirectly to customers. By any means, distribution must be efficient and satisfy customers' needs in terms of minimum of logistics costs, on-time deliveries, the lowest defective level or the highest level of security (Hoffman and Bateson, 2006). The factor of human capital plays the central role in contributing to customer satisfaction because it conducts, controls, and manages every activity of a business to provide customers with the best products and services. It can affect customers' consumption behaviour. In other words, skills, knowledge and experiences of staff of a company have positive or negative influences on the performance of products and services, which then impacts on customers' consumption (McColl-Kennedy and Kiel, 2000). This interaction with employees may be visible or invisible to customers. This means that the higher the quality of human resources, the better the likelihood of customer satisfaction.

3. CUSTOMER SATISFACTION IN BANKING OF VIETNAM

Customer satisfaction can have a strong impact on the performance and business strategies of banks because the output of banks or companies is evaluated by their customers. Therefore, a bank is considered to be successful only if its services meet requirements of its customers in terms of quality, price, safety, and time of implemented transactions. However, in reality, depending on different groups of customers, their priority order of perceived values is quite different. Discussion of these values is easily found in a wide range of studies (Cronin and Taylor, 1992; Anderson and Sullivan, 1993; Patterson and Johnson, 1993; Taylor and Baker, 1994; McColl and Hubbert, 1994; Leversque and McDougal, 1996; and East, 1997). Thus, in order to be successful, each bank needs to design its own objectives and strategies for each group of customers in each market segment with the hope of satisfying their requirements. In the case of Vietnam, a transition economy, customers' choices for banking services depend mainly on the service supply from domestic banks due to the fact that foreign banks are still prevented by government from supplying a number of services, and by their own lack understanding of the market (MPI--UNDP--Ministry of Planning and Investment--United Nations Development Programme 2006). However, services supplied by domestic banks have not satisfied requirements of companies and individuals, and hence a lot of customers of domestic banks want to switch their borrowing and depositing to foreign banks. The following figures surveyed from a MPI-UNDP (2006) survey disclose this movement (See Table 1).

Table 1 indicates that although all Vietnamese customers had very old established relationships with state-owned commercial banks, approximately half of them are willing to buy banking services from foreign banks or to put their money in foreign banks, rather than in Vietnamese banks. The main reasons for customers wanting to leave domestic banks to go with foreign banks are that they want to enjoy simple procedures, better interest rates, professionalism, more trustworthiness, ability to access to foreign networks, and better quality and facilities in foreign banks (MPI-UNDP, 2006). In contrast, nearly half of the rest do not want to switch their borrowing and depositing to foreign banks because they are mainly large state-owned enterprises which have close credit relationships with state-owned commercial banks in terms of favourable incentives. In this sense, the study of MPI-UNDP (2006, p.35) observed that:

In short, the banking sector of Vietnam has not yet satisfied requirements of customers on service quality, pricing, professionalism, and reliability. Especially, state-owned commercial banks, which dominate the share of credit and loan markets, have not yet improved services that customers expect. This is an important factor leading to the weak competitiveness of the banking sector. And this also is the legacy of the centrally-planning economy with the domination of state-owned commercial banks. This domination needs to end because "... higher concentration in banking markets may lead to less favourable conditions for customers, especially in markets for small business loans, retail deposits and payment services, ..." (Claessens and Laeven, 2004). The banking sector needs to further implement reforms to satisfy requirements of customers because, in this respect, "... customer satisfaction is related to customer loyalty, which in turn is related to profitability" (Hallowell, 1996, p.27).

4. METHODOLOGY

In the steps to determine the relationship between customer satisfaction and bank performance, elements of customer satisfaction are refined to consolidate their effects on bank performance. By the use of factor analysis, primary effects of this relationship are retained to explain the impact of customer satisfaction on bank performance. In addition, this relationship is better clarified by running linear regression using elements of customer satisfaction (the independent variables) against bank performance (the dependent variable). Finally, the outcome of this measurement is also tested for the possibility of the best linear unbiased estimator before regression coefficients are interpreted.

4.1 Factor analysis

Factor analysis is a method used to minimize the number of variables while also maximizing the amount of information in the analysis. The original set of variables is reduced to a much smaller set that underlies and represents meaningfully the initial number of variables. According to Kerlinger (1969), factor analysis is a technique used to determine the number and nature of underlying dimensions or factors among a vast number of measures of concepts or constructs being evaluated or explored (Remenyi, Williams et al. 1998). There are three main tools to determine these aspects.

The first one is the indicator of eigenvalues or latent roots which refers to the vertical sum of squared loadings representing the amount of variance explained by a factor. Normally, factors with an eigenvalue of greater than one are viewed as surrogate factors and are chosen in the analysis (Hair, Black et al., 2006; Tharenou, Donohue et al., 2007).

The second criterion refers to values of factor loadings which indicate relationships between the original variables and the factors. According to Ford et al. (1986), factor loadings greater than at least 0.40 are suggested for the analysis.

The last one is confirmatory factor analysis (CFA) which refers to an approach to testing the validity of a structure. According to Byrne (2001), the construct validity is the extent to which the number of measured items are represented by the theoretical latent construct those items are tailored to measure. Therefore, CFA is used to identify or examine the accuracy of measurement by the test of construct validity which provides evidence that measured items are taken from a sample that truly represents the population. In this paper, CFA by a structural equation model (SEM) was used to evaluate the validity of a particular measurement theory.

4.2 Linear regression models

The relationship between the factor of the performance of banks and customer satisfaction factors is tested in the following multiple-regression model,

Y = [alpha] + [[beta].sub.i][X.sub.1] + [[beta].sub.2][X.sub.2] + [[beta].sub.3][X.sub.3] + [[beta].sub.4][X.sub.4] + [beta].sub.5][X.sub.5] + e (1)

where,

Y is the factor of bank performance, which is measured by a wide range of financial and non-financial elements (see Table 1 at Appendix 1).

[alpha], [[beta].sub.1], [[beta].sub.2], [[beta].sub.3], [[beta].sub.4], [[beta].sub.5] are the constant term and regression coefficients, respectively.

[X.sub.1], [X.sub.2], [X.sub.3], [X.sub.4], [X.sub.5] are referred to as the quality of banking products and services (PD), the banking product and service supply process (PR), quality of staff (ST), presentation of banking information (PS) and price competition of banking products and services (PC) (see Table 2 at Appendix 1).

The model is tested with the following hypothesis:

Considering elements of customer satisfaction together, the likelihood of bank performance improves when: The quality of banking products and services of commercial banks is improved, The banking product and service supply process efficiency is improved, The quality of staff is improved Presentation of banking information is improved, Price of banking products and services is competitive.

4.3 Data collection

Lists of 200 commercial banks, 150 corporations and 150 individuals were randomly selected from the Vietnamese yellow pages for the mail survey. Determining the sample size depends very much on the proportion of the total sample variation in the dependent variable (Green, 1991). So by this notion, it is quite hard to determine the sample size before conducting the survey. Fortunately, Roscoe (1975) believed that a sample size larger than 30 and smaller than 500 is appropriate for most research projects. In this survey, 152 questionnaires were received from managers of these banks, 100 from managers of corporations and 100 from individuals who are using banking products and services.

5. DATA ANALYSIS

5.1 Validity testing

According to Byrne (2006), a structural equation model specifies the behaviour by which certain unobserved variables impact on values of other latent variables. In this regard, tests were performed for a full structural equation model involving the relations between three independent unobserved variables: the quality of banking products and services (PD), the banking product and service supply process (PR), quality of staff (ST), presentation of banking information (PS) and price competition of banking products and services (PC), and the dependent unobserved variable: the factor of bank performance. Results of the full structural equation model tested are presented in Figure 2.

[FIGURE 2 OMITTED]

According to Byrne (2001), indices commonly used to test the goodness of fit are the IFI-Incremental Index of Fit introduced by Bollen (1989); the TLI-Tucker-Lewis index initiated by Tucker and Lewis (1973); the CFI--Comparative Fit index developed by Bentler (1990); and the RMSEA--Root Mean Square Error of Approximation. For the first three indices, a value greater than 0.90 is considered indicative of a well-fitting model (Bentler 1990), and the last one is suggested by Byrne (2001) that a value of less than 0.08 is an acceptable one

The indices of goodness of fit of the model are presented in Table 2.

The report of the model shows that it is not a good fit model. The modification indices (MIs) (see Table 3 at Appendix 1) are focused on the highest value with the main principle by which the variable retained is the one that increased the goodness of fit indices most. And eliminating variables with high values of MIs was repeated until goodness of fit indices was satisfied.

By doing so, the goodness of fit indices have been improved and are quite well-fitting with the data set because they all fall within the recommended range and RMSEA is less than the 0.08 threshold (see Table 3).

Therefore, the relations between the independent factors and the dependent factor in the finalized structure model that is presented in Figure 3 have become valid.

[FIGURE 3 OMITTED]

By doing the validity test, the number of observed variables in the structural model has been reduced considerably, from 31 down to 16 variables (see Figure 3). The dropping out a lot of these variables could partially be due to the fact that there have been considerable differences in the perceptions of respondents or participants in evaluating factors impacting on bank performance in Vietnam as their understanding of modern banking issues is still limited.

5.2 Regression analysis

The graphical Scree test (see from Figure 1 to Figure 6 at Appendix 2) displays the descending variance accounted for by the factors initially extracted. The new variables to be retained are ones where the plot typically shows a break between the steep slopes of the initial factors and the gentle one of the later factors (Bryman and Cramer, 2009). For example, in Figure 1 at Appendix 2, there is only one new variable with eigenvalues of greater than 1, and its factor loadings are greater than 0.4 (see Table 4). In this sense, the factor analysis has created the new variable which represents the bank performance factor with a factor score calculated from scores of 5 elements. By the same method, all of the other factors used in the regression analysis of this research are represented by factor scores generated from the factor analysis by examining eigenvalues, and their factor loadings (see Table 4).

The relationships between the factor of bank performance and consistency in the quality of banking products and services (PD), the banking product and service supply process (PR), quality of staff (ST), presentation of banking information (PS) and price competition of banking products and services (PC) are tested against bank performance (BP) by running Equation 1. The result of this regression is shown in Table 5.

Table 5 displays that two factors: PR and PC have positive effects on bank performance, but the effect of the MP is not statistically significant because the probability of the t-statistic is greater than 5 percent, while ST has a negative effect and is statistically insignificant. However, values of the effects of the model can be underestimated or over estimated as a result of a violation on the assumptions of a classical linear regression model (CLRM). So, it was necessary to implement tests on autocorrelation and heteroskedasticity of the model.

5.3 Testing and resolving violations on the assumptions of CLRM

The method of Breusch-Godfrey (Halcoussis, 2005) was employed to test the presence of autocorrelation where there exist covariance and correlations among error terms. The results are presented in Table 6.

(*LM = n[R.sup.2] statistic, where the LM statistic follows the chi-squared distribution ([X.sup.2]) with p degrees of freedom which equals the number of slope coefficients, n is the number of observations (Obs) in the auxiliary regression, and [R.sup.2] (R-squared) is the coefficient of determination of this regression)

Values of the LM test in this table show that autocorrelation is present in this model, because values of the F-statistic and [Obs.sup.*]R-squared are highly significant. This means that the null hypothesis of no autocorrelation in the model is rejected. The presence of this problem could have biased estimators of the model. The technique of Cochran and Orcutt (Halcoussis 2005) was used to resolve the problem, and the results of this resolution are depicted in Table 7.

After the model has been corrected for the problem of autocorrelation, its estimators are more accurate. The value of [R.sup.2] has increased up to 0.30 instead of 0.20, which indicates that there is an increase in the role of independent factors contributing to the value of the dependent factor. In addition, the significance of some independent factors has been improved by the resolution for autocorrelation. However, in order to make these results stronger in the interpretation, the estimators of the model must be tested to resolve the problem of heteroskedasticity.

White's technique (Halcoussis, 2005) was used to test and resolve the presence of heteroskedasticity in the structure model where error variances are not homoskedastic or constant. The result of testing heteroskedasticity for the model is depicted in Table 8.

The result shows that heteroskedasticity is not present in the model because the values of the F-statistic and [Obs.sup.*]R-squared are highly insignificant. This means that the null hypothesis of no heteroskedasticity is accepted, which leads to the rejection of the hypothesis on the presence of heteroskedasticity in the model (Halcoussis, 2005). Therefore, the final result of measuring the effects of the independent variables on bank performance was not changed as depicted in Table 7.

Table 7 shows that the overall F-statistic is statistically significant, which indicates that the effects of all independent factors' contribution to overall bank performance are valid at the contribution level of 30.0 percent. The results also display that factors, such the quality of banking products and services (PD), presentation of banking information (PS) are statistically significant at the level of 1 percent and have positive impacts on overall bank performance; the banking product and service supply process (PR), quality of staff (ST), and price competition of banking products and services (PC) have a positive effect on the overall bank performance, but this effect is not statistically significant.

6. RESULTS OF ANALYSES

All of the hypotheses of the relationship between the customer satisfaction and bank performance are supported. However, three factors of customer satisfaction: the banking product and service supply process (PR), quality of staff (ST), price competition of banking products and services (CP) are not statistically significant. This can be explained by the following reasons.

(1) The hypothesis of the relationship between the banking product and service supply process and bank performance is supported, but is not statistically significant. This means that the contribution of this element for bank performance is still limited in the case of Vietnam. In other words, this factor has not improved very much in meeting customers' requirements although the banking reform process has emphasised the administration innovation by eliminating unnecessary procedures and red-tape mechanisms to speed customer transactions. However, this innovation process is still quite slow and to some extent has restricted increasingly requirements of customers in the context of globalisation.

(2) The hypothesis of the relationship between the quality of staff and bank performance is also supported, but is not statistically significant. It is true that human resources are one of the important elements of customer satisfaction, contributing to the benefits of banks. However, currently human resources of the banking sector of Vietnam are limited in both quantity and quality. In recent years, the financial sector of Vietnam has developed with high growth rates, but human resources' supply to this sector is short (Nguyen, 2009). Therefore, in order to meet human resources demand, many banks have recruited employees who have other majors and experience rather than banking to work in the banking sector. Moreover, the quality of human resources is limited because Vietnam is also in the process of education reform to improve its poor quality of domestic teaching programmes and methods (Nguyen 2009)

(3) Price competition of banking products and services is still low in the Vietnamese banking sector because of its high concentration. Up to September, 2008, the market share of credit of state-owned banks still accounted for a large proportion (50%) available compared with other commercial banks (State Bank of Vietnam 2008). Moreover, according to the WTO commitment, by 2011, the Vietnamese banking sector will be fully open. In this context, every activity of foreign and domestic banks is treated equally. At that time, the competitive level will be higher, and the price of banking products and services more competitive. And therefore, customers of banks can perceive benefits from price competition. As well, the contribution of this factor to customer satisfaction is currently minor and thus insignificant for bank performance in the case of Vietnam.

In an attempt to test the hypothesis between customer satisfaction and bank performance, the paper has found two elements of customer satisfaction impacting significantly on bank performance: quality of banking products and services (PD) and presentation of banking information (PS). This means that improvements of these factors have strong influences on bank performance. In recent years, banking products and services had progressed steadily. ATM (automatic teller machines), EFTPOS (electronic funds transfer at point of sale), and electronic banking transactions have been expanded and developed considerably. The development of these products and services has improved customer satisfaction, and then increased the efficiency of bank performance.

In addition, the presentation of banking information about banking business strategy and products and services also plays a crucial role in meeting requirements of customers. Disclosing banking information about its organisation and business activities not only helps customers recognise product and service revolution, but also creates more confidence in doing business with banks. Especially, from 2005, the Vietnamese banking sector has begun applying the principles of Basel I and II Accords in managing and supervising its activities. This has lifted this sector up to a new level of development in risk management, which makes the banking system more secure and stable and able to cope with business environment changes, and then enhance confidence of customers. As a result, the performance of banks has also improved and remained stable in the context of the global financial crisis.

7. CONCLUSIONS AND RECOMMENDATIONS

It is possible that if a bank can meet customer' needs, the performance of the bank is considered to be efficient. Therefore, in order to enhance customer satisfaction, many commercial banks have willingly made great efforts to improve the quality of products and services (Anderson and Sullivan 1993).

However, the quality of banking products and services in the Vietnamese banking sector is still quite low because the application of information technology in banks is at a low level compared with other bank in the region. Increasing services of banks for customers is considered to increase paper work and to include heavy administrative procedures. For example, in the same bank, for some transactions, customers can only come to the same branch to conduct their transactions because databases of customers are not connected with other branches. In other words, in spite of doing transactions in the same bank, customers cannot deposit their funds in one branch, and withdraw in other places.

Moreover, due to the legacy of the centrally-planning economy, many Vietnamese banks have not yet emphasized the aspects of customer-orientation and market-orientation to their staff in providing banking products and services to customers. As a result, quality of banking products and services is still poor. Therefore, in order to improve the quality of products and services, banks should invest much more in information technology so that customers can make their transactions in any branch in the same bank.

Accordingly, all banking procedures should be incorporated into automated systems to improve efficiency and reduce administration costs and time-consumption. In addition, constructing customer-orientated and market-orientated staff development should target all banking activities and be considered to be a working philosophy for all of banks' employees to improve their performance (Castro, Armario et al. 2005). Finally, banks should improve transparency, reliability and timeliness of performance information, particularly in balance payments, NPLs and income statements because this information is essential in building trust in clients and investors (MPI-UNDP, 2006).

APPENDIX 1: TABLES

APPENDIX 2: FIGURES

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[FIGURE 6 OMITTED]

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Mr. Anh Tuan Tran earned his M.A at the Vietnam - Netherlands Project for Economics of Development, University of Economics, Vietnam in 2001. Currently, he is a Ph.D candidate, La Trobe University, Australia.

Anh Tuan Tran, La Trobe University, Bundoora, Melbourne, Australia

Kok-Boon Oh, La Trobe University, Bundoora, Melbourne, Australia

Quynh Van Anh Le, La Trobe University, Bundoora, Melbourne, Australia

Dr. Kok-Boon Oh earned his Ph.D at Victoria University, Melbourne, Australia. Currently, he is a senior lecturer, La Trobe University, Australia.

Ms. Quynh Van Anh Le earned her B.A. at La Trobe University, Melbourne, Australia. Currently, she is doing the marketing master course at La Trobe University, Melbourne, Australia.
Large borrowers may also include SOEs [State Owned Enterprises],
   which still maintain close links with SOCBs [State Owned Commercial
   Banks] due to past credit relationships and favourable treatment.
   More are willing to switch for deposits than loans, and the share
   of switching for deposits is higher than for loans, which may be
   due to the limited financial transparency and profitability of some
   customers when it comes to borrowing from foreign banks.


TABLE 1: BANK PERFORMANCE

Factor                            Proxy                        Symbol

Bank performance                                               BP

  1. Financial variables
Capital structure and solvency    Leverage ratio               q30b.1
Management                        Non-performance loan ratio   q30b.4
Profitability                     Return on equity             q30b.7
                                  Net profit margin            q30b.9
Bank size                         Total assets                 q30b.10
Growth                            Deposit growth rate          q30b.11
  2. Non-financial variables
Customer satisfaction             Quality of employees         q65.1
                                  Quality of services          q65.2
Leadership                        Vision and strategy          q65.7
Technology                        ATM                          q65.9
                                  E-banking                    q65.11

TABLE 2: CUSTOMER SATISFACTION

Services/products (PD)                                         Code

This bank has a attractive portfolio of banking services       q63.ba1
These services meet customer needs                             q63.ba2
It regularly offers new innovative services to customers       q63.ba3
These products/services are well-presented                     q63.ba4
ATM transactions via this bank are reliable                    q63.ba5

Process (PR)

You are satisfied with the accuracy of banking records and     q63.bb1
  transactions
Customer services waiting time is satisfactory                 q63.bb2
The operating procedures of the bank are clear                 q63.bb2
Some steps of the procedures are unnecessary                   q63.bb3
Customer feels easy in applying a loan from the bank           q63.bb4
Customer feels easy in opening an account                      q63.bb5
Customer feels easy in making changes to the account           q63.bb6
Degree of privacy/security is satisfactory                     q63.bb7

People (ST)

The staff are knowledgeable                                    q63.bc1
The staff complete their tasks quickly                         q63.bc2
The staff need to be trained and improved                      q63.bc3
The staff are courteous                                        q63.bc4
The staff are responsible                                      q63.bc5
The staff are friendly                                         q63.bc6
The staff respond to customer enquiries of the customer in     q63.bc7
  detail and satisfactory
The bank staff are helpful                                     q63.bc8

Presentation (PS)

The physical appearance of the branches is suitable            q63.bd1
The branch locations are convenient to customers               q63.bd2
Information brochures are reliable and available               q63.bd3
Financial statement reports and their figures are available    q63.bd4
  and reliable
Information on business strategy is available and reliable     q63.bd5
Information on organizational structure and personnel is       q63.bd6
  available and reliable
Information in relating to regulations for bank business       q63.bd7
  activities is available
The bank has a good reputation on their products and           q63.bd8
  services

Price (PC)

The bank is pricing competitively                              q63.be1
The level of charges is acceptable                             q63.be2

Table 3: MODIFICATION INDICES

                M.I.    Par Change

e3 <--> e34    5.328         -.091
e1 <--> e35    4.313         -.124
e2 <--> PD     4.282          .045
e15 <--> e1    9.772          .127
e8 <--> ST     5.307         -.009
e8 <--> PR     4.124          .006
e8 <--> PC     4.581          .008
e8 <--> re     5.196          .039
e8 <--> e33    5.225          .090
e8 <--> e2     4.042         -.069
e8 <--> e14    6.098         -.109
e12 <--> e35   7.267         -.158
e11 <--> e12   4.064          .066
e10 <--> e34   6.675          .132
e10 <--> e13   5.279          .126
e9 <--> PD     8.382         -.090
e9 <--> e29    4.623         -.088
e9 <--> e3     4.602         -.093
e9 <--> e2     8.425         -.109
e9 <--> e12    6.473          .114
e7 <--> e14    4.126          .086
e4 <--> e14    4.977          .095
e4 <--> e15    4.582         -.089
e27 <--> e8    4.834          .090
e27 <--> e13   4.527         -.093
e30 <--> e13   4.454          .103
e30 <--> e9    4.871          .111
e21 <--> e29   5.212          .078
e26 <--> e3    8.698         -.124
e26 <--> e11   4.235         -.079
e25 <--> ST    4.009         -.009
e25 <--> e34   10.064         .155
e25 <--> e9    4.094         -.110
e24 <--> e10   18.187        -.222
e23 <--> e1    5.075          .089
e23 <--> e13   4.265         -.093
e22 <--> ST    5.077          .009
e22 <--> PR    4.828         -.007
e22 <--> PD    8.017          .082
e22 <--> PC    6.900         -.010
e22 <--> PS    5.840          .003
e22 <--> re    6.376         -.045
e22 <--> e3    4.317          .084
e22 <--> e13   13.133         .174
e22 <--> e6    4.382          .094
e20 <--> e16   7.445          .102
e20 <--> e6    6.476         -.115
e19 <--> e35   4.504         -.132
e19 <--> e16   4.329         -.074
e19 <--> e27   5.113         -.091
e19 <--> e30   4.058          .090
e18 <--> PD    4.248         -.051
e18 <--> e12   8.810          .106
e18 <--> e9    9.097          .128
e17 <--> e31   6.269          .086
e17 <--> e10   5.147         -.103


TABLE 1: CHANGE IN BANK'S BALANCE SHEET DUE TO CUSTOMER BEHAVIOUR

                         Corporate customers

Loan            Move   Don't move      Deposit      Move   Don't move

Loans (VND *)   43%       57%       Deposit (VND)   47%       53%
Loans (FX **)   44%       56%       Deposit (FX)    58%       42%

                        Individual customers

Loans (VND)     47%       53%       Deposit (VND)   52%       48%
Loans(FX)       41%       59%       Deposit (FX)    57%       43%

* Vietnam currency
** Foreign exchange

Source: MIP-UNDP (2006, p.34)

TABLE 2: THE INDICES OF GOODNESS OF FIT FOR THE STRUCTURE MODEL

Structure Model   RMSEA    IFI    TLI     CFI

                  0.051   0.725   0.68   0.706

TABLE 3: THE INDICES OF GOODNESS OF FIT FOR THE STRUCTURE MODEL

Structure Model   RMSEA    IFI     TLI     CFI

                  0.03    0.948   0.932   0.944

TABLE 4: FACTOR LOADINGS OF FACTORS

Variable    BP     PD     PR     ST     PS     PC

q33b.1     0.49
q33b.7     0.67
q33b.9     0.69
q65.1      0.59
q65.11     0.53
q63.ba1           0.76
q63.ba3           0.80
q63.ba4           0.69
q63bb2                   0.42
q63.bb3                  0.41
q63.bb6                  0.78
q63.bb7                  0.81
q63.bc5                         0.81
q63.bc6                         0.80
q63.bc8                         0.52
q63.bd5                                0.76
q63.bd6                                0.47
q63.bd7                                0.78
q63.bd8                                0.51
q63.be1                                       0.71
q63.be2                                       0.71

TABLE 5: INITIAL REGRESSION RESULTS

Independent
factor of the               Sig.                        Sig.
model             B     (t-statistic)   [R.sup.2]   (F-statistic)

PD              0.23        0.01
PR              0.07        0.45          0.20          0.000
ST              -0.04       0.64
PS              0.22        0.02
PC              0.08        0.34

TABLE 6: TESTING AUTOCORRELATION

                      Autocorrelation
              Testing--Breusch-Godfrey Serial
                   Correlation LM lest *

              F-statistic       Obs * R-squared
Structure
model       Value     Sig.      Value     Sig.

Model 1     5..75     0.00      21.18     0.00

(* LM = n[R.sup.2] statistic, where the LM statistic follows the
chi-squared distribution ([chi square]) with p degrees of freedom
which equals the number of slope coefficients, n is the number of
observations (Obs) in the auxiliary regression, and [R.sup.2]
(R-squared) is the coefficient of determination of this regression)

TABLE 7: CORRECTING AUTOCORRELATION

Independent factor    B        Sig.       [R.sup.2]       Sig.
of the model                t-statistic               (F-statistic)

PD                   0.17      0.05
PR                   0.04      0.59         0.30          0.000
ST                   0.01      0.91
PS                   0.23      0.01
PC                   0.07      0.38

TABLE 8: TESTING HETEROSKEDASTICITY

              Heteroskedasticity Testing--White
                   Heteroskedasticity Test

             F-statistic         Obs * R-squared
Structure
model        Value     Sig.      Value     Sig.

Model 1      1.09      0.38      10.88     0.37
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