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. 

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 

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