The impact of interest rate and its volatility on banking sector development: Empirical evidence from Southeast Asia, 2022

MINISTRY OF EDUCATION & TRAINING STATE BANK OF VIET NAM

BANKING UNIVERSITY OF HO CHI MINH CITY

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TRẦN NGỌC THANH THỦY

THE IMPACT OF INTEREST RATE AND ITS VOLATILITY ON

BANKING SECTOR DEVELOPMENT: EMPIRICAL EVIDENCE

FROM SOUTHEAST ASIA

GRADUATION THESIS

MAJOR: FINANCE – BANKING

CODE: 7340201

HO CHI MINH CITY, 2022

MINISTRY OF EDUCATION & TRAINING STATE BANK OF VIET NAM

BANKING UNIVERSITY OF HO CHI MINH CITY

------------------------------

TRẦN NGỌC THANH THỦY

THE IMPACT OF INTEREST RATE AND ITS VOLATILITY ON

BANKING SECTOR DEVELOPMENT: EMPIRICAL EVIDENCE

FROM SOUTHEAST ASIA

GRADUATION THESIS

MAJOR: FINANCE – BANKING

CODE: 7340201

SUPERVISOR

NGUYỄN DUY LINH, Ph.D

HO CHI MINH CITY, 2022

COMMENTS OF THE SUPERVISOR

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Ho Chi Minh city,..…/…../2022

Supervisor

Ph.D Nguyễn Duy Linh

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ABSTRACT

For all economies, especially in the countries of Southeast Asia, the banking

system plays a very important role in the movement and supply of capital in the

economy. For macroeconomic activities, the interest rate is one of the crucial tools

to control and regulate the market to stabilize and promote economic growth.

Because of these reasons, this thesis examines the relationship between interest rate,

interest rate volatility, and banking sector development of countries in Southeast

Asia including Indonesia, Malaysia, Myanmar, Singapore, and Vietnam from 1996

to 2020.

The thesis utilizes the main method of quantitative research as the basis for

the topic. The author manipulates a variety of regression methods including Pooled

OLS, FEM, REM and FGLS. Experimental results from running the model and the

tests will be used as a basis for accepting or rejecting the research hypotheses,

ensuring the appropriateness of the model.

Empirical results show that all indicators of the banking industry receive a

positive impact from interest rates, at the same time, this connection also becomes

weaker when interest rates are lower because of the convex relationship between

interest rates and the development of the banking industry. In addition, the

empirical results supply evidence that interest rate volatility has a negative impact

on several banking sector development indicators, implying that the banking sector

of the sample is susceptible to interest rate risk. Moreover, all indicators of the

banking industry are negatively affected by GDP. Finally, for the banking system

and policymakers, these findings have important implications for strengthening the

banking sector and promoting economic growth in these countries.

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COMMITMENT

I thus certify that my thesis "The impact of interest rate and its volatility

on banking sector development: Empirical evidence from Southeast Asia" is

my own research work, conducted under the supervision of Dr. Nguyen Duy Linh

after a rigorous working procedure. The research findings are trustworthy since they

are free of already published or created other content, with the exception of fully

cited sources in the thesis.

I assume full responsibility for my commitment.

Ho Chi Minh City, ……………….. 2022

Author

Trần Ngọc Thanh Thủy

iii

ACKNOWLEDGEMENTS

To conclude my thesis, I would like to express my sincere gratitude to the

lecturers at the Banking University of Ho Chi Minh City, specifically, the teachers

of the Faculty of Finance and Banking who have provided me with valuable

knowledge over the last four years. These experiences, I believe, will be extremely

beneficial in helping me develop as a person in the future.

I would also like to express my gratitude to Dr. Nguyen Duy Linh, who went

above and beyond to assist me and create the finest possible conditions for me to

complete my graduation thesis.

Moreover, I want to convey my gratitude to my family and friends for their

encouragement and support as I worked on this thesis.

Because of the constraints of knowledge, flaws are unavoidable during the

thesis writing process. I look forward to receiving comments and suggestions in

order to make the topic more complete, and at the same time create a better

foundation for future research.

Thank you sincerely!

Ho Chi Minh City, ……………….. 2022

Author

Trần Ngọc Thanh Thủy

iv

TABLE OF CONTENTS

ABSTRACT ........................................................................................................... i

COMMITMENT .................................................................................................. ii

ACKNOWLEDGEMENTS ................................................................................ iii

TABLE OF CONTENTS .................................................................................... iv

LIST OF ABBREVIATIONS........................................................................... viii

LIST OF TABLES AND FIGURES .................................................................. ix

CHAPTER 1. INTRODUCTION.........................................................................1

1.1. REASONS FOR CHOOSING THE TOPIC .............................................1

1.2. RESEARCH OBJECTIVES AND QUESTIONS .....................................3

1.2.1. Overall research objective .......................................................................3

1.2.2. Specific research objectives.....................................................................3

1.2.3. Research questions ..................................................................................4

1.3. RESEARCH SCOPE AND SUBJECT ......................................................4

1.3.1. Research subject ......................................................................................4

1.3.2. Research scope.........................................................................................4

1.4. RESEARCH METHODOLOGY ...............................................................5

1.5. NEW CONTRIBUTIONS OF THE STUDY ............................................6

1.5.1. Research gap............................................................................................6

1.5.2. New contributions....................................................................................7

1.6. FRAMEWORK OF THE RESEARCH PROCESS .................................8

1.7. STRUCTURE OF THE RESEARCH........................................................8

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CHAPTER 2. THEORETICAL BASIS AND OVERVIEW OF RELATED

STUDIES..................................................................................................................10

2.1. THEORETICAL BASIS OF INTEREST RATE, INTEREST RATE

VOLATILITY, AND BANKING SECTOR DEVELOPMENT......................10

2.1.1. Concept of interest rate.........................................................................10

2.1.2. Concept of interest rate volatility ..........................................................12

2.1.3. The relationship between interest rate and different aspects of the

banking industry..................................................................................................13

2.1.4. The relationship between interest rate volatility and banking sector

development (BSD)..............................................................................................15

2.2. THEORETICAL BACKGROUND..........................................................15

2.2.1. Classical Theory of Interest...................................................................15

2.2.2. Liquidity Preference Theory of Interest................................................16

2.2.3. Loanable funds theory ...........................................................................18

2.3. THE RELEVANT EMPIRICAL STUDIES ...........................................19

2.3.1. Vietnamese researches...........................................................................20

2.3.2. English researches.................................................................................20

CONCLUSION OF CHAPTER 2......................................................................25

CHAPTER 3. RESEARCH METHODOLOGY ..............................................26

3.1. DATA SOURCE.........................................................................................26

3.2. DESCRIPTION OF VARIABLE .............................................................27

3.2.1. Dependent variable ................................................................................28

3.2.2. Explanatory variable .............................................................................30

3.2.3. Control variable .....................................................................................33

3.3. RESEARCH MODEL AND ECONOMETRIC METHODOLOGY ...34

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3.4. RESEARCH PROCESS ............................................................................36

3.5. RESEARCH METHODS ..........................................................................37

CONCLUSION OF CHAPTER 3......................................................................39

CHAPTER 4. EMPIRICAL RESULTS AND DISCUSSION.........................40

4.1. PANEL UNIT-ROOT TESTS...................................................................40

4.2. DESCRIPTIVE STATISTICS..................................................................43

4.3. CORRELATION COEFFICIENT MATRIX.........................................46

4.4. MULTICOLLINEARITY TEST..............................................................47

4.5. REGRESSION RESULTS ........................................................................48

4.5.1. Regression results with FEM method...................................................48

4.5.2. Regression results with REM method...................................................49

4.5.3. Regression results with pooled OLS estimator.....................................51

4.5.4. Regression results with FGLS estimator ..............................................54

CONCLUSION OF CHAPTER 4......................................................................58

CHAPTER 5. CONCLUSIONS AND RECOMMENDATIONS....................59

5.1. CONCLUSIONS ........................................................................................59

5.2. RECOMMENDATIONS...........................................................................61

5.2.1. For the banking sector in the sample countries...................................61

5.2.2. For interest rate policymakers...............................................................62

5.3. LIMITATIONS AND FUTURE RESEARCH DIRECTIONS OF THE

STUDY...................................................................................................................63

5.3.1. Limitations of the study .........................................................................63

5.3.2. Future research directions ....................................................................64

CONCLUSION OF CHAPTER 5......................................................................65