Evaluation of the Efficiency of commercial Banks in Nigeria: 2001 – 2010

Abstract

This study evaluated the technical efficiency of commercial banks in Nigeria from 2001 to 2010. The objectives were to: (i) measure the technical efficiency of commercial banks in Nigeria, (ii) determine whether the level of non – performing loans portfolio had any significant effect on efficiency, (iii)determine whether the equity portfolio had any significant impact on efficiency (iv) determine whether total assets had any significant impact on the efficiency. The study employed ex-post facto research design. The area of the study is the technical efficiency of all commercial banks quoted on the Nigerian Stock Exchange which have been in continuous existence from 2001 to 2010. The population is 21 commercial banks quoted on the Nigerian Stock Exchange as at end of 2010. Judgement sampling technique was adopted in determining the sample. The sample constitutes the 14 banks quoted on the Nigerian Stock Exchange that continuously existed within this period and their panel data were collated from the Annual Reports of the banks for the ten years. There were 5809 observations. Two models were deployed for the analysis: Data Envelopment Analysis (DEA) and Tobit Regression. The empirical analysis was structured as follows: first, the banks’ efficiency scores were obtained through an input-orientation and output-orientation approach with Constant Returns to Scale (CRS) and Variable Returns to Scale (VRS) Models of DEA. Three input variables: interest expenses, non-interest expenses and fixed assets and three output variables – deposits, non-interest income and loans were used. Secondly, Tobit Regression Model was used for the second stage analysis to further conduct a robustness test on the DEA results to check for consistency in the efficiency levels, the ranking order and the effects of the control/environmental factors on the DEA efficiency scores. The control/environmental variables used as independent variables were: time trend, non-performing loans, total assets, and equity. Four hypothesis were tested using Tobit Regression: (i) there is no significant improvement in the technical efficiency of commercial banks in Nigeria in the period 2001 – 2010, (ii) the level of non–performing loans does not significantly affect the technical efficiency of commercial banks in Nigeria, (iii) the equity portfolio has no significant impact on the technical efficiency of commercial banks in Nigeria, (iv) the total assets have no significant impact on the technical efficiency of commercial banks in Nigeria. Tobit results show: (i) there was no improvement in the technical efficiency of commercial banks in Nigeria for the period 2001-2010; (ii) Non-performing loans had negative impact on the technical efficiency of commercial banks in Nigeria; (iii) The equity portfolio of commercial banks in Nigeria had no impact on their technical efficiency; (iv) Total Assets had positive impact on technical efficiency of commercial banks in Nigeria. The DEA results for the entire bank sample across the period of study under input orientation show inefficiency levels of 42.3% under both CRS and VRS; while under output orientation, the commercial banks in Nigeria used 2.07 times of inputs to produce 1 unit of output under constant returns to scale (CRS) and 1.61 times of inputs under variable returns to scale (VRS). The Nigerian commercial banks were found to be scale inefficient. The banks could not exploit their scale of operations and as such scale inefficiency became a major constraint to their overall efficiency. The banking regulators should de-emphasis much attention attached to bank capital requirements and look into new techniques that will engender more competition in the industry. This will motivate banks that want to survive to improve their efficiency and production technologies. The Central Bank of Nigeria should establish a cut off point for inefficiency measures that would be indicative of bank failure or excessive risk taking for banks in Nigeria