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The Nature of Commercial Banking Business


use that resource for themselves in discount, credit and financial operations” (Encyclopedia) [2].

The above views only cover the very basic activities of banking.

In the trend of international integration, large commercial banks have become financial groups, with a series of affiliated companies, making the definition of a bank no longer as simple as before.

b). Foreign documents

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According to Thomas P.Fitch (2012), Dictionary of banking term [105]: “A banking institution is usually a company that accepts deposits, makes loans, pays checks, and performs related services for the public”. This definition emphasizes the types of services that banks provide to customers and the community.

The concept of the US Federal Reserve (Fed) [104] and also used by many countries today: "a bank is any business that provides deposit accounts that allow customers to withdraw money on demand (such as by writing checks or electronic funds transfers) and makes commercial or other business loans (such as loans to private businesses to increase inventory or buy new equipment). This definition also emphasizes the two sides of banking activities: mobilizing deposits and lending. However, in practice, there may be organizations that provide only one of the two sides of banking activities, while also providing other financial services [78].

The Nature of Commercial Banking Business

To overcome the above limitation, the US Congress defined a bank as follows: “A bank is any financial institution that participates in deposit insurance under the regulations of the Federal Deposit Insurance Corporation”. This definition did not mention the types of services that banks provide or the functions of banks in the economy. In fact, an institution is considered a bank, simply participating in deposit insurance of the Federal Deposit Insurance Corporation [78].

Peter S. Rose (2008) introduced a new concept of banking: “A bank is a type of financial institution that provides the widest range of financial services – especially credit, savings and payment services – and performs the widest range of financial functions of any business organization in the economy.


"economic" [102]. This definition focuses on the types of services that banks provide, according to which a bank is a comprehensive financial business institution, considered as a financial services general corporation [78].

In short, the current concept of banking is not unified. However, from the analysis of the above viewpoints, scholars have stated the general concept of banking as follows: "Bank is a monetary business organization, providing a variety of financial services with the basic business of receiving deposits, lending and providing payment services. In addition, commercial banks also provide many other services to maximally satisfy the needs of society for products and services". The author of the thesis believes that, in general, such a concept is acceptable and the author can inherit many points to clarify in the theoretical foundation building section of the thesis.

1.1.2. Types of commercial banks

a). Domestic documents

Nguyen Van Tien [77] divided banks based on 3 bases: Based on the nature and objectives of operations including commercial banks, investment banks, development banks, policy banks, cooperative banks; Based on the form of ownership including private banks, joint stock banks, state-owned banks, joint venture banks, foreign bank branches; Based on the diversity of services including single-function banks, multi-function banks, wholesale and retail banks.

Nguyen Minh Kieu [40] and Le Thi Man [45] divided commercial banks based on three different bases as follows: Based on ownership form including: State-owned commercial banks, joint-stock commercial banks, joint-venture banks, foreign bank branches, 100% foreign-owned banks; Based on business strategy including: Wholesale banks (banks that only transact and provide services to corporate customers), retail banks (banks that transact and provide services to individual customers), wholesale and retail banks; Based on organizational relationships including : head office banks, level 1 and level 2 branch banks, transaction offices.

b). Foreign documents

Smriti Chand [106] divided commercial banks into Branch Banks;


unit bank (banking activities are carried out through a single institution, without any branches. This system is commonly used in the US); group bank (is a system under which two or more banks, which were previously incorporated separately, are linked by the control of a single company); chain bank (similar to a banking conglomerate, two or more banks are controlled by a single group through the ownership of shares or vice versa); deposit banks (banks act as custodians or trustees of depositors and make loans); investment banks (the main function is to provide finance for industrial investment); mixed banks (play both deposit-taking and investment roles).

Walter Leaf [107], divided banks into deposit banks, industrial banks, savings banks, agricultural banks, transaction banks, mixed banks.

1.1.3. Nature of commercial bank business activities

a). Domestic documents

Research by Nguyen Van Tien [77], Pham Thi Bich Ngoc [62] suggests that banks make profits by borrowing (selling debts) according to different criteria such as liquidity, risk, face value, maturity, interest rate..., then the bank lends (buys assets) according to different criteria. The process of "borrowing and lending" is called "Asset Transformation Process". The process of transforming assets and providing services (check payment, maintaining books, credit analysis...) is similar to any production process in a business. If the bank can provide the desired services at low cost and get high income from assets, the bank is profitable and vice versa. Such an approach to the problem has not yet pointed out the elements that make up the business efficiency of commercial banks.

Le Thi Man [45] considers commercial banks as a type of business enterprise that operates for profit, maximum profit, but the author has not yet pointed out the content of evaluating the business efficiency of a commercial bank nor has she pointed out the system of indicators to evaluate the business efficiency of a specific commercial bank.


b). Foreign documents

According to Gaurav Akrani [96], Commercial Bank is an institution which generally carries out certain financial transactions. It performs dual functions of accepting deposits from the public and lending to the poor. When banks accept deposits, its liabilities increase and it becomes a debtor but when it lends money for profit it becomes a creditor. Banking transactions are recognized by law. It is responsible for maintaining the deposits of the account holders.

1.2. Overview of commercial bank business performance

The thesis has studied 49 documents (including 39 domestic documents and 10 foreign documents) that mentioned this issue. In general, many scholars have mentioned theoretical issues regarding the concept, content and nature of commercial bank business efficiency; but few scholars have viewed the efficiency of commercial banks from two perspectives: the economic efficiency of the bank itself and social efficiency, especially in the context of globalization and international economic integration.

1.2.1. Domestic documents

According to the English dictionary, Cambridge Dictionaries : “Effectiveness is the success or achievement of desired results” [6]. This concept reflects that effectiveness is simply achieving what is desired on a personal level.

According to Vietnamese dictionary, " Effectiveness is the true result". This concept uses results to measure effectiveness [86].

There is a concept that: "Efficiency means no waste". This concept is understood that with the same results, any activity that costs nothing or less (less waste) is considered effective or more effective. This concept compares the results with the costs incurred and aims to increase efficiency by saving costs.

Another concept holds that: "Efficiency is an indicator reflecting the level of results achieved to achieve a certain purpose corresponding to a unit of resources spent in the process of performing a certain activity". In this approach, when talking about the effectiveness of an activity, people associate it with the purpose.


(Dam Hong Phuong) [65]. The category of "results" itself contains the "goal" that needs to be achieved. Activities without goals cannot be considered effective in the first place. Effectiveness is always associated with a certain goal, there is no general effectiveness.

According to Macmilian Dictionary and Cambridge Dictionaries [ 47, 6]: “ Efficiency is the ability to work well and produce good results by using time, money, and available resources in the most useful way”. This concept uses both resources and time to reflect efficiency.

All activities (or processes) are directed by subjects towards different efficiency goals such as environmental efficiency, economic efficiency, social efficiency, resources, people..., short-term efficiency, long-term efficiency... From the above concepts, it can be understood that: "Efficiency is the use of the least resources to achieve certain goals".

For all enterprises, production and business units operating in the economy, with different management mechanisms, there are different operational goals and tasks. There are schools of thought that the business efficiency of an enterprise is considered from the perspective of economic efficiency. All production and business enterprises have the long-term overarching goal of maximizing profits. According to the textbook General Business Administration in Enterprises , author Ngo Dinh Giao said: "The economic efficiency of an economic phenomenon (or process) is an economic category that reflects the level of use of resources (human resources, financial resources, material resources, capital) to achieve a certain goal", it shows the correlation between the results obtained and the total cost incurred to achieve that result, reflecting the quality of that economic activity" [22].

According to P.Samuelson and W.Nordhaus (Economics Textbook, quoted from Vietnamese translation (1991) [64]: "Production efficiency occurs when society cannot increase the output of a series of goods without cutting back on a series of other goods. An economy is efficient on its production possibilities limit. The essence of this point of view has mentioned the aspect of efficient allocation of resources of


social production. The allocation and use of production resources on the production possibilities frontier will make the economy highly efficient.

Some authors believe that economic efficiency is determined by the proportional relationship between the increase in two quantities of results and costs. These views only refer to the efficiency of the increased part, not of the entire part participating in the economic process.

Some views argue that economic efficiency is determined by the difference between the results achieved and the costs incurred to achieve those results. A typical example of this view is author Manfred Kuhn ( Public Economics Textbook , translated by Nguyen Thi Hien and others), according to him: "Efficiency is determined by taking the results calculated in value units minus the business costs" [36]. This is the view applied by many economists and business administrators to the efficiency of economic processes.

The two authors Whohe and Doring again put forward two concepts of economic efficiency. That is economic efficiency calculated in physical units and economic efficiency calculated in value units ( General Business Administration textbook , National Economics University 2009) [20]. According to them, these two concepts are completely different: "The proportional relationship between output calculated in physical units (pieces, kg...) and the amount of input factors (labor hours, equipment units, raw materials...) is called technical or physical efficiency", "The proportional relationship between business costs that must be shown in the most favorable conditions and actual business costs that must be paid is called efficiency in terms of value" and "To determine efficiency in terms of value, people also form the ratio between output calculated in money and input factors calculated in money. The concept of economic efficiency in physical units of the two men is labor productivity, machinery and equipment and material consumption efficiency, while efficiency in value is the efficiency of cost management activities.

When discussing the overall efficiency of an economy, modern economics often uses the concept of Pareto efficiency introduced by the Italian economist Wilfredo Pareto in his 1909 handbook of political economy.


(Public Economics textbook by Joseph E. Stiglit, translated by Nguyen Thi Hien and others) [36]. According to Pareto, given a group of individuals and many different ways of allocating resources to each individual in that group, moving from one allocation to another that makes at least one individual better off but does not make any other individual worse off is called a Pareto improvement or a Pareto optimization. When an allocation is achieved for which there is no other way to achieve further Pareto improvement, that allocation is called Preto efficient or Pareto optimal. Preto efficiency is an important criterion in evaluating economic systems and political policies. However, the limitation of Pareto is its locality. Many systems are Pareto efficient but not the desired system. For example, a dictatorship in which the dictator controls all resources is a Pareto efficient system because any redistribution reduces the dictator's welfare. Furthermore, Pareto efficiency only considers individual income and wealth, and does not consider the community, the natural environment, or the influence of some external factors.

In general, the above concepts of business efficiency are mainly viewed from the perspective of economic efficiency, that is, efficiency in terms of finance achieved for the production and business owner with profit maximization as the ultimate goal and without considering community and social factors. However, when the economy develops, business efficiency is no longer viewed in such a simple way. There are views that business and investment efficiency must be viewed from both the perspective of financial benefits for the business owner and social benefits.

When analyzing the economic efficiency of investment projects, there are studies analyzing project efficiency from two perspectives: financial efficiency and social efficiency. Financial efficiency is an assessment of the actual financial results of the project, while analysis of socio-economic efficiency indicates the actual contribution of the project to all development goals of the country, to the common interests of the whole society. Financial efficiency analysis only considers benefits and costs from the perspective of the investor (micro level), while economic analysis


Socioeconomics considers benefits and costs from a societal perspective (macro level) [20]. This perspective considers social benefits as only the economic development of the country, not considering individual benefits such as employment and income.

In agricultural and forestry business, there is a view that if we only evaluate economic efficiency in terms of pure profit (production and business results minus costs), we cannot determine social labor productivity and compare the ability to provide products to society of producers with the same difference between production and business results and production costs. However, if we focus on the ratio of production results to costs, it is not comprehensive, it is a relative number and this indicator has not analyzed the impact and influence of resource factors. Two businesses achieve the same profit ratio but in different spaces, the impact of natural resources is different and thus the economic efficiency is not the same. This study also concluded that in the current conditions, business efficiency is not simply economic efficiency, but it must satisfy the issues of saving time and resources in production and business, bringing benefits to society and protecting the ecological environment. That is, efficiency must harmonize economic, social and ecological benefits to ensure sustainability [20].

In short, studies on business efficiency mainly refer to the financial efficiency of business owners. Social efficiency is only considered in terms of economic development for the country, environmental protection... but has not mentioned social security issues such as employment, personal income and income contribution to the state to achieve other goals.

From the above analysis, the author believes that: "Business efficiency is a category that reflects the level of use of resources (human resources, financial resources, material resources, capital) to achieve economic and social goals".

There are some studies that mention the business efficiency of some main banking operations such as:

Hoang Van Son (1996) with his doctoral thesis: " Solutions to improve efficiency"

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