Relative Efficiency of Commercial Banks in Nigeria: A Nonparametric Mathematical Optimization Analysis

This paper investigates the relative efficiency of a cross section of Nigerian domestic commercial banks before and after recapitalization and consolidation in 2005. The method of analysis is the non-parametric mathematical optimization approach rooted in data envelopment analysis (DEA). Two-stage approach is adopted. In the first stage DEA is used to determine the degree of efficiency of the 66 banks (2001, 2002) and 22 banks (2008, 2009). In the second stage Tobit regression model is used to econometrically estimate the parameters of the model to examine the sources of bank inefficiency.  The results revealed high level of inefficiency among the banks and hence of significant waste in utilization of resources. Inefficiency range from 36% in 2001 to 45% in 2002 and from 34% in 2009 to 35% in 2008.  The inefficiency of the banks is due more to pure technical rather than scale effect. Thus, Nigerian commercial banks should worry less about not choosing the optimal scale for production though the study found economies of scale that have not been exhausted. The sources of inefficiency were identified to be low capital-asset ratio, high operating expense-income ratio, low returns on equity, market share, interest expense-deposit ratio,  and low liquidity  ratio. The results have strong policy implications for banks themselves, the deposit insurance corporation and central bank to minimize distress and avert bank failure.