A DEA Analysis of Bank Performance in Nigeria

Muhammad, Tanko (2008): A DEA Analysis of Bank Performance in Nigeria.

Abstract

The recent effort by the Nigerian Central Bank to merge banks, sorely with the aim of increasing shareholders confidence and improved performance, triggered this study. Therefore, the paper measures and decomposes efficiency using the non-parametric approach popularly known as Data Envelopment Analysis (DEA) and productivity growth using Malmquist Productivity index (MPI), in a sample of Nigerian commercial banks over the period of 5 years. Net fixed assets and total deposits were used as the input variables while total loans and advances, other earning assets and net operating income were used as the output variables. Under the Constant Return to Scale assumption, the average efficiency of all the banks over the 5-year period showed a constant improvement. Although the efficiency improvement in the 3rd year seems low, on the average over the years considered the results of all the banks consistently showed improvements. When we considered the variable return to scale we found the efficiency score to still maintain the score significance, although slightly lower in some instances. It is the recommendation of the paper that banks need to do more in terms of maintaining their level of efficiency, especially, when you consider the fact that they have merged with other banks that have somewhat different level of performance and productivity efficiency.

• Item Type: MPRA Paper
• English Title: Professor
• Language: English
• Keywords: DEA, BANK PERFORMANCE, NIGERIA
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; G - Financial Economics > G3 - Corporate Finance and Governance

References

Alam, I. M. S. (2001): “A Non Parametric Approach for Assessing Productivity Dynamics of Large US Banks”. Journal of Money, Credit and Banking. Vol. 33, p121- 139. Altunbas, Y., Evans, L., and Molyneux, P. (1995): Universal Banks, Ownership and Efficiency: A Stochastic Frontier Analysis of the German Banking Market. Institute of European Finance University of Wales, Bangor. 15 Aly, H. Y., Grabowski, R., Pasurka, C., and Rangan, N. (1990): Technical, Scale, and Allocative Efficiencies in U.S Banking: An Empirical Investigation, Review of Economics and Statistics Vol. 72 pp. 211-218. Barnes, P. (1987): The Analysis and Use of Financial Ratios: A Review Article. Journal of Business Finance and Accounting Vol. 14 pp 449-461. Berg, S. A., Forsund, F. R., and Jansen, E. S. (1991): Malmquist Indices of Productivity Growth During the Deregulation of Norwegian Banking 1980 – 1989. Scandinavian Journal of Economics Vol. 94 pp 211-228 Berger, A. N., and Humphrey, D. B. (1997): Efficiency of Financial Institutions: International Survey and Directions for Future Research. European Journal of Operational Research, 98, pp 175 –212. Canhoto, A., and Dermine, J., (2003): A Note on Banking Efficiency in Portugal New Vs Old Banks. Journal of Banking and Finance, 27 Pp 2087. Casu, B., Giardone, C. and Molyneux, P. (2004): Productivity Change in European Banking: A Comparison of Parametric and Non-Parametric Approaches. Journal of Banking and Finance. Caves, D. W., Christensen, L. R. and Diewert, W. E., (1982): The Economic Theory of Index Numbers and the Measurement of Input, Output and Productivity. Econometrica 50, pp 1393. Coelli, T. J. (1996): A Guide to DEAP Version 2.1: A Data Envelopment Analysis (Computer Program), CEPA Working paper no. 8/96, ISBN 186389 4969, Department of Econometrics, Vol. 27 pp1069 –1079. Drake, L., and Hall, M.J (2003): Efficiency in Japanese Banking: An Empirical Analysis. Journal of Banking and Finance, 27 pp 891. Elysasiani, E., and Mehdian M. (1995): The Comparative Efficiency Performance of Small and Large U.S. Commercial Banks in the Pre and Post Deregulation Eras. Applied econometrics Vol. 27. Favero, C., and Papi, L. (1995): Technical Efficiency and Scale Efficiency in the Italian Banking System: A Non- Parametric Approach. Applied econometrics, 27 pp 385. Fernandez-Castro, A. and Smith, P. (1994): “Towards A General Non-Parametric Model of Corporate Performance”. Omega Vol. 22 no 3. Ferrier, G.D, and Lovell, C.A.K. (1990): Measuring Cost Efficiency in Banking: Econometric and Linear Programming Evidence. Journal of Econometrics Vol. 46. 16 Gilbert, R. A. and Wilson P. W. (1998): “effects of deregulation on the productivity of Korean Banks”. Journal of Econometrics and Business. Vol. 50. Haynes, M., and Thompson, S. (1999): The Productivity Effects of Bank Mergers: Evidence from the UK Building Societies. Journal of Banking and Finance, vol. 23 Humphrey, D. B. (1990): Productivity in Banking and Effects from Deregulation. Econometric Review, Federal Reserve Bank of Richmond, Vol. 77(2). Koopmans, T.C. (1951). An analysis of production as an efficient combination of activities, in T.C. Koopmans (ed.), Activity Analysis of Production and Allocation, Cowles Commission for Research in Economics Monograph 13, Wiley: New York Karapakis, E. I., Miller, S. M., and Noulas, A. G. (1994): short-run cost inefficiency of Commercial Banks: A Flexible Stochastic Frontier. Journal of Money Credit and Banking. Vol.26. Katib, M. N., and Mathews, K. (1999): A Non-Parametric Approach to Efficiency Measurement in the Malaysian Banking System. The Singapore Econometric Review, Vol. 44 No 2 Pp 89-114. Kent M., and Mahadzir, I (2005): Efficiency and Productivity Growth of Domestic and Foreign Commercial Banks in Malaysia. Cardiff Business School, Abe Conway Building Cardiff University, Colum Road Cardiff CF10 3EU, United Kingdom. Leaven, L., (1999): Risk and Efficiency In East Asian Banks, World Bank Policy Research Working Papers 2255. Maudos, J., and Pastor, J.M. (2003): Cost and Profit Efficiency in the Spanish Banking Sector (1985 –1996): A Non-Parametric Approach, Applied Financial Econometrics 13 pp1-12. Mukherjee, K., Subhash, C. R. and Miller, S. M. (2001): Productivity Growth in Large U.S. Commercial Banks: The Initial Post Deregulation Experience. Journal of Banking and Finance, Vol. 25. pp 913-939 Sealey, C. W and Lindley, J. T. (1977): “Inputs and a Theory of Production and Cost at Depository Financial Institutions” Journal of Finance, Vol. 32, Pp1251. Sherman, D. H., and Gold, F. (1985): Bank Branch Operating Efficiency: Evaluation With Data Envelopment Analysis. Journal of Banking and Finance Vol. 9, Pp 297. Siems, T. F. and Barr, R. S. (1998): Benchmarking the Productive Efficiency of U. S. Banks. Financial Industry Studies, Federal Reserve Banks of Dallas. 17 Smith, P. (1990): Data Envelopment Analysis Applied to Financial Statements. OMEGA, Vol. 18 No. 2. pp 131-138. Yildirim, C., (2002): Evolution of Banking Efficiency Within An Unstable Macro Economics Environment: The Case of Turkish Commercial Banks, Applied Economics, 34 (18) Pp2289. Zhu, J., (2003): “Quantitative Models for Performance Evaluation and Benchmarking”. Kluwer Academic Publishers.