ABSTRACT
This study investigated the Nigerian Banks’ Efficiency Performance. The period studied was 2005-2009.In addition to the above, the extent of the effect of the bank’s fixed assets,
operating expenses and total deposit on their efficiency was investigated. The effect of the bank’s efficiency on their profitability was also examined. In recent years emphasis is now on
using frontier analysis methods in measuring bank efficiency instead of using financial ratios. In frontier analysis, the institutions that perform better relative to a particular standard are
separated from those that perform poorly. Such separation is done either by applying a
parametric or non parametric frontier analysis to firms within the financial services
industry.This study employed the Non parametric Data Envelopment Analysis (DEA)under
the assumptions of Constant return to scale (CRS),Variable Return to Scale (VRS) and Scale
Efficiency(SE) to estimate the efficiency scores of the banks .A bank with a score of 1 is
efficient, while a score below 1 means the bank is inefficient. The tests of the four hypotheses
were carried out using Vector autoregressive Analysis (VAR). The findings of the study
revealed that GTB was the most efficient bank and it has the least reduction in inputs (4.93%)
needed to produce the same amount of output. Moreover it remained efficient throughout the
years 2006-2009.Overall, the worst performers are Unity bank, Afribank and UBA. Also the
banks did not achieve full efficiency under the CRS, VRS and SE in any of the five years. The
findings on the hypothesis tested revealed that fixed assets have a negative relationship with
efficiency, operating expenses has no long run relationship with the efficiency variable and
total deposit does not affect efficiency. Lastly, efficiency has a positive significant relationship
with profitability. This study therefore recommend that the banks that are not efficient should
study the operations of GTB the best performer to see if could be adopted to improve their
efficiency and the banks should moderate their use of inputs as they could have used fewer
amount of inputs to achieve the same level of output. Finally, the acquisition of fixed assets
should be reasonable. This is to prevent it from reaching a point where it will impact
negatively on the bank’s efficiency.
This study investigated the Nigerian Banks’ Efficiency Performance. The period studied was 2005-2009.In addition to the above, the extent of the effect of the bank’s fixed assets,
operating expenses and total deposit on their efficiency was investigated. The effect of the bank’s efficiency on their profitability was also examined. In recent years emphasis is now on
using frontier analysis methods in measuring bank efficiency instead of using financial ratios. In frontier analysis, the institutions that perform better relative to a particular standard are
separated from those that perform poorly. Such separation is done either by applying a
parametric or non parametric frontier analysis to firms within the financial services
industry.This study employed the Non parametric Data Envelopment Analysis (DEA)under
the assumptions of Constant return to scale (CRS),Variable Return to Scale (VRS) and Scale
Efficiency(SE) to estimate the efficiency scores of the banks .A bank with a score of 1 is
efficient, while a score below 1 means the bank is inefficient. The tests of the four hypotheses
were carried out using Vector autoregressive Analysis (VAR). The findings of the study
revealed that GTB was the most efficient bank and it has the least reduction in inputs (4.93%)
needed to produce the same amount of output. Moreover it remained efficient throughout the
years 2006-2009.Overall, the worst performers are Unity bank, Afribank and UBA. Also the
banks did not achieve full efficiency under the CRS, VRS and SE in any of the five years. The
findings on the hypothesis tested revealed that fixed assets have a negative relationship with
efficiency, operating expenses has no long run relationship with the efficiency variable and
total deposit does not affect efficiency. Lastly, efficiency has a positive significant relationship
with profitability. This study therefore recommend that the banks that are not efficient should
study the operations of GTB the best performer to see if could be adopted to improve their
efficiency and the banks should moderate their use of inputs as they could have used fewer
amount of inputs to achieve the same level of output. Finally, the acquisition of fixed assets
should be reasonable. This is to prevent it from reaching a point where it will impact
negatively on the bank’s efficiency.
TABLE OF CONTENT
Title..page ................i
Certification..............---ii
Declaration................iii
Dedication................-iv
Acknowledgements...............--v
Table of Content............-vii
List of Figures..............xii
List of tables..............--xii
List of Abbreviations...............-xiii
Abstract..................xiv
CHAPTER ONE: INTRODUCTION
1.1.Background of the study.......1
1.2.Statement of the Problem..... 4
1.3.Research Questions.......7
1.4.Objectives of the study.......7
1.5.Hypothesis of the study..................... 8
1.6.Significance of the Study....... 8
1.7.Scope.... 10
1.8.Limitation of the Study............10
1.9.Outline of the study......... 11
1.10Definition of Terms....... 11
CHAPTER TWO:LITERATURE REVIEW
2.1. Introduction........ 14
2.2 The Conceptual framework on Efficiency................ 15
2.3 Efficiency measurement according to Farrell..............16
2.3.1 Technical efficiency....................... 18
2.3.2 Technical and Allocative (price) efficiency..............20
2.4 Efficiency measurement in banks defined................ 23
2.4.1 Revenue Efficiency....................... 24
2.4.2 Cost Efficiency........................25
2.4.3. Profit Efficiency......................26
2.4.3.1 Standard profit Efficiency........27
2.4.3.2 Alternative profit x-Efficiency...... 28
2.4.3.2.1 Substantial Unmeasured Differences in Quality of Output......... 29
2.4.3.2.2 Output is Not Completely Variable.................. 31
2.4.3.2.3 Output Markets are Oligopolistic............... 31
2.4.3.2.4 Output Prices are not Accurately Measured...............32
2.5.. The Return to Scale Concept...........33
2.6 Theoretical Framework on Efficiency Measurement........... 34
2.6.1. The Parametric Techniques.................... 34
2.6.1.1 Stochastic Frontier Analysis (SFA).................34
2.6.1.2 The Thick Frontier Approach (TFA)................35
2.6.1.3 Distribution-Free Approach (DFA)..........37
2.6.2.The Non Parametric Methods.................. 38
2.6.2.1Data Envelopment Analysis........ 38
2.6.2.2 Choosing DEA Model........ 42
2.6.2.3 Benchmarking in DEA........ 44
2.6.2.4 Sensitivity Analysis in DEA.................. 45
2.6.3 The Free Disposal Hull (FDH).............. 46
2.7. Alternative way to measure Efficiency..... 46
2.7.1. Risk Ratings.... 47
2.7.2. Banking productivity per Employee Hour.....47
2.7.3. Minimum Reserve....48..
2.7.4. Monetary Aggregates....48
2.7.5. Interest Spreads and Margins....... 48
2.7.6. Accounting Ratios.... 49
2.7.7. Using Frontier Analysis to capture the Derivation between Actual and Desired Performance............50
2.7.8. Market -based Approaches.......51
2.8. The Definition of Bank Inputs and Outputs... 52
2.9. Empirical Evidence on Efficiency measurement in Banking......54
CHAPTER THREE: RESEARCH METHODS
3.1. Introduction....................... 60
3.2. Model Approach and its justification..... 63
3.3 Sources and Choice of Data...................... 63
3.4.1 The DEA Model....66
3.4.2. Model 1 for Hypothesis one, two and three......... 68
3.4.3 Model II for Hypothesis four (4).....69
3.5. Model Validity and Reliability..... 69
3.6 Sample Size Determination..... 70
3.7. Method of Data Analysis........ 70
3.7.1 Method of Data Analysis using DEA............... 71
3.7.2 Techniques of Estimation for the four Hypotheses...... 72
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction..........76
4.2 Model Solution Procedure and Results.................76
4.2.1. The Bank‘s Efficiency Analysis................ 78
4.3 Discussion of the Technical Efficiency Scores of each DMU using VRS, CRS and SE...82
4.4 Ranking of the Bank‘s Efficiency using VRS, CRS and SE.......... 99
4.5 Testing of Hypotheses....................102
4.5.1 Presentation and Interpretation of Result on Hypothesis tested on the effect of FA, OE and TD on Efficiency....................... 103
4.5.2Test of Hypothesis tested on the effect of Efficiency on Profitability..........111
CHAPTER FIVE: FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Work Done.......................116
5.2 Summary of Findings......................117
5.2.1 Findings on the Hypotheses tested................119
5.3 Conclusion........................... 121
5.4 Recommendations........................ 121
5.5 The Research‘s contributions to knowledge.................. 123
5.6 Suggestion for further research......................123
References.......................... 125
Appendix i-v........................ 132
LIST OF FIGURES
Figure..2.1 Farrel Efficiency....17
Figure..2.2 Technically Efficient Production Possibilities Frontier...... 19
Figure..2.3 Technical and Allocative Efficiencies (Input Orientation)......21
Figure..2.4 Technical and Allocative Efficiencies (output Orientation)......22
Figure..4.1 Columns showing the bank‘s score under VRS, CRS and SE......101
LIST OF TABLES
Table 4.1 Efficiency Scores for the banks in each year............... 77
Table 4.2 Technical Efficiency Scores of DMUs (Banks)... 82
Table 4.3 Ranking of the Banks ‘efficiency level using VRS, CRS and SE...... 99
Table 4.4 Unit Root Test at Level....... 103
Table 4.5 Unit Root Test at First Difference..... 104
Table 4.6 Johanson Co intergration Rank test result..... 105
Table 4.7 Single Equation Equilibrium Correction Models for Efficiency Model.... 107
Table 4.8 Table for Test of Hypothesis on the Effect of Efficiency on Profitability....111
Table 4.9 Co integration Result....... 112
Table 4.10 Vector Error Correction Estimates.....113
Table 4.11 Single Equation Equilibrium Correction Model for the Efficiency model.. 114
Table 5.1 Table Summary of Banks and their year of Efficiency under VRS, CRS and SE.. 118
LIST OF ABBREVIATIONS AND ACRONYMS
FIR- First Bank Plc
ZEN-Zenith Bank Plc
PHB-Platinum Habib Bank Plc
UNION- Union Bank Plc
UBA-United Bank for Africa Plc
GTB- Guaranty Trust Bank Plc
FID- Fidelity Bank Plc
DIA-Diamond Bank Plc
ECO-EcobankPlc
ST.IBTC-Stanbic-IBTC
INT.-Intercontinental Bank Plc
WEMA- WEMA Bank plc
UNITY-Unity bank Plc
CITI- Citi bank
AFRIB- AfribankPlc
SPRING-Spring Bank Plc
SKYE-SKYE Bank Plc
FCMB-First City Monument BankPlc
OCEANIC- Oceanic Bank Plc
ACCESS- Access Bank Plc
STERLING- Sterling Bank Plc
ST.CHART.-Standard Chartered Bank
FINBANK- Finbank Pl
Title..page ................i
Certification..............---ii
Declaration................iii
Dedication................-iv
Acknowledgements...............--v
Table of Content............-vii
List of Figures..............xii
List of tables..............--xii
List of Abbreviations...............-xiii
Abstract..................xiv
CHAPTER ONE: INTRODUCTION
1.1.Background of the study.......1
1.2.Statement of the Problem..... 4
1.3.Research Questions.......7
1.4.Objectives of the study.......7
1.5.Hypothesis of the study..................... 8
1.6.Significance of the Study....... 8
1.7.Scope.... 10
1.8.Limitation of the Study............10
1.9.Outline of the study......... 11
1.10Definition of Terms....... 11
CHAPTER TWO:LITERATURE REVIEW
2.1. Introduction........ 14
2.2 The Conceptual framework on Efficiency................ 15
2.3 Efficiency measurement according to Farrell..............16
2.3.1 Technical efficiency....................... 18
2.3.2 Technical and Allocative (price) efficiency..............20
2.4 Efficiency measurement in banks defined................ 23
2.4.1 Revenue Efficiency....................... 24
2.4.2 Cost Efficiency........................25
2.4.3. Profit Efficiency......................26
2.4.3.1 Standard profit Efficiency........27
2.4.3.2 Alternative profit x-Efficiency...... 28
2.4.3.2.1 Substantial Unmeasured Differences in Quality of Output......... 29
2.4.3.2.2 Output is Not Completely Variable.................. 31
2.4.3.2.3 Output Markets are Oligopolistic............... 31
2.4.3.2.4 Output Prices are not Accurately Measured...............32
2.5.. The Return to Scale Concept...........33
2.6 Theoretical Framework on Efficiency Measurement........... 34
2.6.1. The Parametric Techniques.................... 34
2.6.1.1 Stochastic Frontier Analysis (SFA).................34
2.6.1.2 The Thick Frontier Approach (TFA)................35
2.6.1.3 Distribution-Free Approach (DFA)..........37
2.6.2.The Non Parametric Methods.................. 38
2.6.2.1Data Envelopment Analysis........ 38
2.6.2.2 Choosing DEA Model........ 42
2.6.2.3 Benchmarking in DEA........ 44
2.6.2.4 Sensitivity Analysis in DEA.................. 45
2.6.3 The Free Disposal Hull (FDH).............. 46
2.7. Alternative way to measure Efficiency..... 46
2.7.1. Risk Ratings.... 47
2.7.2. Banking productivity per Employee Hour.....47
2.7.3. Minimum Reserve....48..
2.7.4. Monetary Aggregates....48
2.7.5. Interest Spreads and Margins....... 48
2.7.6. Accounting Ratios.... 49
2.7.7. Using Frontier Analysis to capture the Derivation between Actual and Desired Performance............50
2.7.8. Market -based Approaches.......51
2.8. The Definition of Bank Inputs and Outputs... 52
2.9. Empirical Evidence on Efficiency measurement in Banking......54
CHAPTER THREE: RESEARCH METHODS
3.1. Introduction....................... 60
3.2. Model Approach and its justification..... 63
3.3 Sources and Choice of Data...................... 63
3.4.1 The DEA Model....66
3.4.2. Model 1 for Hypothesis one, two and three......... 68
3.4.3 Model II for Hypothesis four (4).....69
3.5. Model Validity and Reliability..... 69
3.6 Sample Size Determination..... 70
3.7. Method of Data Analysis........ 70
3.7.1 Method of Data Analysis using DEA............... 71
3.7.2 Techniques of Estimation for the four Hypotheses...... 72
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction..........76
4.2 Model Solution Procedure and Results.................76
4.2.1. The Bank‘s Efficiency Analysis................ 78
4.3 Discussion of the Technical Efficiency Scores of each DMU using VRS, CRS and SE...82
4.4 Ranking of the Bank‘s Efficiency using VRS, CRS and SE.......... 99
4.5 Testing of Hypotheses....................102
4.5.1 Presentation and Interpretation of Result on Hypothesis tested on the effect of FA, OE and TD on Efficiency....................... 103
4.5.2Test of Hypothesis tested on the effect of Efficiency on Profitability..........111
CHAPTER FIVE: FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Work Done.......................116
5.2 Summary of Findings......................117
5.2.1 Findings on the Hypotheses tested................119
5.3 Conclusion........................... 121
5.4 Recommendations........................ 121
5.5 The Research‘s contributions to knowledge.................. 123
5.6 Suggestion for further research......................123
References.......................... 125
Appendix i-v........................ 132
LIST OF FIGURES
Figure..2.1 Farrel Efficiency....17
Figure..2.2 Technically Efficient Production Possibilities Frontier...... 19
Figure..2.3 Technical and Allocative Efficiencies (Input Orientation)......21
Figure..2.4 Technical and Allocative Efficiencies (output Orientation)......22
Figure..4.1 Columns showing the bank‘s score under VRS, CRS and SE......101
LIST OF TABLES
Table 4.1 Efficiency Scores for the banks in each year............... 77
Table 4.2 Technical Efficiency Scores of DMUs (Banks)... 82
Table 4.3 Ranking of the Banks ‘efficiency level using VRS, CRS and SE...... 99
Table 4.4 Unit Root Test at Level....... 103
Table 4.5 Unit Root Test at First Difference..... 104
Table 4.6 Johanson Co intergration Rank test result..... 105
Table 4.7 Single Equation Equilibrium Correction Models for Efficiency Model.... 107
Table 4.8 Table for Test of Hypothesis on the Effect of Efficiency on Profitability....111
Table 4.9 Co integration Result....... 112
Table 4.10 Vector Error Correction Estimates.....113
Table 4.11 Single Equation Equilibrium Correction Model for the Efficiency model.. 114
Table 5.1 Table Summary of Banks and their year of Efficiency under VRS, CRS and SE.. 118
LIST OF ABBREVIATIONS AND ACRONYMS
FIR- First Bank Plc
ZEN-Zenith Bank Plc
PHB-Platinum Habib Bank Plc
UNION- Union Bank Plc
UBA-United Bank for Africa Plc
GTB- Guaranty Trust Bank Plc
FID- Fidelity Bank Plc
DIA-Diamond Bank Plc
ECO-EcobankPlc
ST.IBTC-Stanbic-IBTC
INT.-Intercontinental Bank Plc
WEMA- WEMA Bank plc
UNITY-Unity bank Plc
CITI- Citi bank
AFRIB- AfribankPlc
SPRING-Spring Bank Plc
SKYE-SKYE Bank Plc
FCMB-First City Monument BankPlc
OCEANIC- Oceanic Bank Plc
ACCESS- Access Bank Plc
STERLING- Sterling Bank Plc
ST.CHART.-Standard Chartered Bank
FINBANK- Finbank Pl
