Research on World Agricultural Economy

Unraveling the Nexus between Sustainable Development, Bank Profitability, and Loan Loss Provisions in Vietnam: A Bayesian Vector Autoregression Perspective

Huy Nguyen Quoc

Faculty of Finance and Accounting, Lac Hong University, Bien Hoa 810000, Vietnam

Hai Nguyen Van

Faculty of Finance and Accounting, Lac Hong University, Bien Hoa 810000, Vietnam

Dinh Le Quoc

Faculty of Finance and Accounting, Lac Hong University, Bien Hoa 810000, Vietnam

DOI: https://doi.org/10.36956/rwae.v6i2.1444

Received: 4 November 2024 | Revised: 24 December 2024 | Accepted: 27 December 2024 | Published Online: 28 March 2025

---

Abstract

Financial institutions play a crucial role in financing projects and initiatives that promote sustainable development (SD). However, banks are under increasing pressure to align with the United Nations’ SD goals by divesting from high CO₂-emitting industries and reallocating capital toward environmentally responsible investments. While this transition supports long-term sustainability, it can lead to short-term profitability challenges, as SD projects often involve higher risks, regulatory uncertainties, and lower immediate returns compared to traditional business activities. As a result, banks may need to adjust their loan loss provisions (LLP) to account for potential credit risks associated with these investments. This study investigates the impact of supporting SD goals on bank profitability (BP) and LLP in Vietnam from 2008 to 2019. To achieve this, we employ a Bayesian Vector Autoregression (BVAR) model, which is particularly useful in analyzing dynamic relationships, addressing heterogeneous variables, and managing small sample sizes. Our findings indicate that investing in SD projects initially reduces bank profitability due to increased costs and uncertainties, prompting banks to raise LLP. However, in the long run, such investments contribute to financial stability, enhance risk management, and strengthen the bank’s overall reputation. By integrating SD principles into their investment strategies, banks can not only mitigate environmental and social risks but also create long-term value for stakeholders, reinforcing their credibility in an evolving global financial landscape.

Keywords: Sustainable Development; Return on Asset; Return on Equity; Non-Interest Income; Loan Loss Provisions

---

References

[1] Emas, R., 2015. The concept of sustainable development: Definition and defining principles. Environmental Science, Economics. Available from: https://sustainabledevelopment.un.org/content/documents/5839GSDR%202015_SD_concept_definiton_rev.pdf

[2] Ozili, P.K., 2023. Sustainable Development Goals and bank profitability: International evidence. Modern Finance. 1(1), 70–92. DOI: https://doi.org/10.61351/mf.v1i1.44

[3] Mpofu, F.Y., 2022. Industry 4.0 in financial services: Mobile money taxes, revenue mobilisation, financial inclusion, and the realisation of sustainable development goals (SDGs) in Africa. Sustainability. 14(14), 8667. DOI: https://doi.org/10.3390/su14148667

[4] Ozili, P.K., 2024. Does banking sector support for achieving the sustainable development goals affect bank loan loss provisions? International evidence. Economic Change and Restructuring. 57(2), 66. DOI: https://doi.org/10.1007/s10644-024-09659-0

[5] Guang‐Wen, Z., Murshed, M., Siddik, A.B., et al., 2023. Achieving the objectives of the 2030 sustainable development goals agenda: Causalities between economic growth, environmental sustainability, financial development, and renewable energy consumption. Sustainable Development. 31(2), 680–697. DOI: https://doi.org/10.1002/sd.2411

[6] Samour, A., Moyo, D., Tursoy, T., 2022. Renewable energy, banking sector development, and carbon dioxide emissions nexus: A path toward sustainable development in South Africa. Renewable Energy. 193, 1032–1040. DOI: https://doi.org/10.1016/j.renene.2022.05.013

[7] Dinh, L.Q., Oanh, T.T.K., Ha, N.T.H., 2024. Financial stability and sustainable development: Perspectives from fiscal and monetary policy. International Journal of Finance & Economics. 1–18. DOI: https://doi.org/10.1002/ijfe.2981

[8] Oanh T.T.K., Dinh, L.Q., 2024. Digital financial inclusion, financial stability, and sustainable development: Evidence from a quantile-on-quantile regression and wavelet coherence. Sustainable Development. 1–15. DOI: https://doi.org/10.1002/sd.3021

[9] Kim, O.T.T., Quoc, D.L., 2024. Exploring the influence of digital financial inclusion and technological progress on renewable energy consumption: A Bayesian quantile regression analysis. Environment, Development and Sustainability. 1–30. DOI: https://doi.org/10.1007/s10668-024-05675-2

[10] Van, H.N., Le Quoc, D., 2024. Assessing the impact of digital financial inclusion on sustainable development goals: Analyzing differences by financial development levels across countries. Journal of the Knowledge Economy. 1–24. DOI: https://doi.org/10.1007/s13132-024-02515-6

[11] Caby, J., Ziane, Y., Lamarque, E., 2022. The impact of climate change management on banks profitability. Journal of Business Research. 142, 412–422. DOI: https://doi.org/10.1016/j.jbusres.2021.12.078

[12] Gambetta, N., Azcárate-Llanes, F., Sierra-García, L., et al., 2021. Financial institutions' risk profile and contribution to the sustainable development goals. Sustainability. 13(14), 7738. DOI: https://doi.org/10.3390/su13147738

[13] Jan, A.A., Lai, F.W., Asif, M., et al., 2023. Embedding sustainability into bank strategy: Implications for sustainable development goals reporting. International Journal of Sustainable Development & World Ecology. 30(3), 229–243. DOI: https://doi.org/10.1080/13504509.2022.2134230

[14] Liang, L.W., Chang, H.Y., Shao, H.L., 2018. Does sustainability make banks more cost efficient?. Global Finance Journal. 38, 13–23. DOI: https://doi.org/10.1016/j.gfj.2018.04.005

[15] Ozili, P.K., 2022. Theories of sustainable finance. Managing Global Transitions. 21(1), 5–22. DOI: https://doi.org/10.26493/1854-6935.21.5-22

[16] Kharas, H., Prizzon, A., Rogerson, A., 2014. Financing the Post-2015 Sustainable Development Goals. Overseas Development Institute: London, UK. pp. 1–58.

[17] Jan, A.A., Rahman, H.U., Zahid, M., et al., 2023. Islamic cor-porate sustainability practices index aligned with SDGs towards better financial performance: Evidence from the Malaysian and Indonesian Islamic banking industry. Journal of Cleaner Production. 405, 136860. DOI: https://doi.org/10.1016/j.jclepro.2023.136860

[18] Yang, J., Liu, X., 2023. The role of sustainable development goals, financial knowledge and investment strategies on the organizational profitability: Moderating impact of government support. Economic Research-Ekonomska Istraživanja. 36(1), 1570–1591.

[19] Buallay, A., Fadel, S.M., Alajmi, J., et al., 2020. Sustainability reporting and bank performance after financial crisis: Evidence from developed and developing countries. Competitiveness Review: An International Business Journal. 31(4), 747–770. DOI: https://doi.org/10.1108/CR-04-2019-0040

[20] Sardianou, E., Stauropoulou, A., Evangelinos, K., et al., 2021. A materiality analysis framework to assess sustainable development goals of banking sector through sustainability reports. Sustainable Production and Consumption. 27, 1775–1793. DOI: https://doi.org/10.1016/j.spc.2021.04.020

[21] Nigam, N., Agyei, F.B., Shatila, K., 2024. Impact of sustainable development goals on profitability: Evidence from Ghanaian banks. Theoretical Economics Letters. 14(6), 2095–2118. DOI 10.4236/tel.2024.146104

[22] Bahl, K., Kiran, R., Sharma, A., 2023. Scaling up banking performance for the realisation of specific sustainable development goals: The interplay of digitalisation and training in the transformation journey. Sustainability. 15(18), 13798. DOI: https://doi.org/10.3390/su151813798

[23] Nizam, E., Ng, A., Dewandaru, G., et al., 2019. The impact of social and environmental sustainability on financial performance: A global analysis of the banking sector. Journal of Multinational Financial Management. 49, 35–53. DOI: https://doi.org/10.1016/j.mulfin.2019.01.002

[24] Ozili, P.K., 2023. Bank loan loss provisioning for sustainable development: The case for a sustainable or green loan loss provisioning system. Journal of Sustainable Finance & Investment. 1–13. DOI: https://doi.org/10.1080/20430795.2022.2163847

[25] Zheng, C., Perhiar, S.M., Gilal, N.G., et al., 2019. Loan loss provision and risk-taking behavior of commercial banks in Pakistan: A dynamic GMM approach. Sustainability. 11(19), 5209. DOI: https://doi.org/10.3390/su11195209

[26] Huang, Q., 2020. Ownership concentration and bank profitability in China. Economics Letters. 196, 109525. DOI: https://doi.org/10.1016/j.econlet.2020.109525

[27] Sanni, M., Salami, A.A., Uthman, A.B., 2020. Determinants of bank performance in Nigeria: Do they behave differently with risk-adjusted returns?. Studia Universitatis „Vasile Goldis” Arad – Economics Series. 30(3), 1–34. DOI: https://doi.org/10.2478/sues-2020-0015

[28] Raza, A., Tursoy, T., Shaikh, E., 2024. Investigating the symmetric effects of working capital on profitability in Turkish banking: An ARDL empirical analysis. Studia Universitatis “Vasile Goldis” Arad–Economics Series. 34(1), 74–97. DOI: https://doi.org/10.2478/sues-2024-0004

[29] Salem, R., Usman, M., Ezeani, E., 2021. Loan loss provisions and audit quality: Evidence from MENA Islamic and conventional banks. The Quarterly Review of Economics and Finance. 79, 345–359. DOI: https://doi.org/10.1016/j.qref.2020.07.002

[30] Hai N.N., Quoc, H.N., Le Quoc, D., 2024. The role of green credit in promoting sustainable development in vietnam: Evidence from Quantile-on-Quantile Regression. Research on World Agricultural Economy. 6(1), 88–99. DOI: https://doi.org/10.36956/rwae.v6i1.1399

[31] Schenck, D., 2021. Bayesian econometrics in stata 17. In Proceedings of the STATA USERS GROUP 2021 Stata Conference; August 6, 2021; USA.

[32] Flegal, J.M., Haran, M., Jones, G.L., 2008. Markov chain Monte Carlo: Can we trust the third significant figure? Statistical Science. 23(2), 250–260.

[33] The, B.N., Oanh, T.T.K., Dinh Le, Q., et al., 2024. Nonlinear impact of financial inclusion on tax revenue: Evidence from the Monte–Carlo simulation algorithm under the Bayesian approach. Journal of Economic Studies. 52(2), 393-411. DOI: https://doi.org/10.1108/JES-01-2024-0010

[34] Le Quoc, D., 2024. The relationship between digital financial inclusion, gender inequality, and economic growth: Dynamics from financial development. Journal of Business and Socio-economic Development. 4(4), 370–388. DOI: https://doi.org/10.1108/JBSED-12-2023-0101

[35] Quoc, H.N., Le Quoc, D., Van, H.N., 2024. Assessing digital financial inclusion and financial crises: The role of financial development in shielding against shocks. Heliyon. 11(1), e41231. DOI: https://doi.org/10.1016/j.heliyon.2024.e41231