Measuring Technical Efficiency and Productivity Change in the Nigerian Banking Sector: A Comparison of non-parametric DEA and parametric SFA.

Osuagwu, Eze Simpson and Isola, Wakeel and Nwaogwugwu, Isaac (2018): Measuring Technical Efficiency and Productivity Change in the Nigerian Banking Sector: A Comparison of non-parametric DEA and parametric SFA. Published in: African Development Review , Vol. 4, No. 30 (December 2018): pp. 490-501.

Abstract

This study estimates technical efficiency, technological change and total factor productivity change in the Nigerian banking sector for the period 2005 – 2014, which encapsulates the post consolidation era and subsequent regime of banking reforms aimed at stabilizing the sector from the effects of financial crisis. The study applies both non-parametric Data Envelopment Analysis (DEA) and parametric Stochastic Frontier Approach (SFA), using Malmquist Productivity Index, and error component production function respectively, to ascertain if any significant variation in efficiency exists on a sample of twelve banks covering over 80% of total bank assets in Nigeria. The theoretical intermediation approach is applied for selection of input and output variables for both DEA and SFA. The input variables considered are total deposits, total equity and operating expenses including staff costs, and output variables are loans and operating income, which accounts for off-balance-sheet items such as non-interest or fee-based income. Findings reveal that a high degree of changes in total factor productivity is due to technological change, above all the magnitude of mean technical efficiency and total factor productivity change in DEA decreases as banks output move towards non-interest or fee based income, also inefficiency increases along the same line in SFA. Policy makers should be concerned about arbitrariness in bank’s ability to earn fee-based income, which portends high cost of banking services in the long-run.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank Efficiency; Data Envelopment Analysis (DEA); Malmquist Productivity Index; Stochastic Frontier Approach (SFA); Nigeria Banking
• Subjects: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope

References

Adeyemi, K. S. 2007. Banking Sector Consolidation in Nigeria: Issues and Challenges. Union Digest; Union Bank of Nigeria Publication.

Aghion, P., G. M. Angeletos. A. Banerjee; and K. Manova. 2005. “Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment.” Working Paper no. 11349, National Bureau of Economic Research, Cambridge, MA

Aigner, D. J., C. A. K. Lovell, and P. Schmidt. 1977. Formulation and estimation of stochastic frontier production function models. Journal of Econometrics 6: 21–37.

Akhavein, J. D., P. A.V.B. Swamy, & S. Taubman, 1997. A General Method of Deriving the Efficiencies of Banks from a Profit Function, Journal of Productivity Analysis, 8

Allen, L., and A. Rai, 1996. Operational Efficiency in Banking an International Comparison, Journal of Banking and Finance, Vol. 20, pp. 655–72.

Altunbas, Y., Molyneux, P., 1996. Economies of scale and scope in European banking. Applied Financial Economics 6(4):367–375

Altunbas¸, Y., Gardener, E.M., Molyneux, P., & Moore, B., 2001. Efficiency in European banking. European Economic Review, 45, 1931–1955.

Al-Sharkas, A.A, Hassan, M.K, & Lawrence S., 2008. The impact of mergers and acquisition on the efficiency of the US banking industry: further evidence. Journal of Business and Financial Accounting 35(1/2):50–70

Amel, D., Barnes, C., Panetta, F., & Salleo, C., 2004. Consolidation and efficiency in the financial sector: A review of the international evidence. Journal of Banking and Finance, 28, 2493–2515.

Anginer, D., Demirgüc ̧ -Kunt, A., 2014. Has the global banking system become more fragile over time? J. Financ. Stab. 13, 202–213.

Angkinand, A.P., Sawangngoenyuang, W., Wihlborg, C., 2010. Financial liberalization and banking crises: a cross-country analysis. Int. Rev. Finance 10, 263–292.

Assaf, G. A., C. Barros & A. Ibiwoye, 2012. Performance assessment of Nigerian banks pre and post consolidation: evidence from a Bayesian approach. The Service Industry Journal, Vol. 32, No. 2, February, 215 – 229.

Battese, G. E. & Coelli, T. J., 1992. Frontier production functions, technical efficiency and panel data: with application to Paddy farmers in India. Journal of Productivity Analysis, 3, 153-169.

Battese, G. E. & Coelli T. J., 1995. A model for technical inefficiency effects in a stochastic frontier production function for panel data. Empirical Economics, 20, 325 – 332.

Berger, A. N., & DeYoung, R., 2001. The effects of geographic expansion on bank efficiency. Journal of Financial Services Research 19(2/3):163–184

Berger, A. N., & Humphrey. D. B. (1997). Efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research, 98, 175–212.

Berger, A. N., & Mester, L. J. 1997. Inside the black box: What explains differences in the efficiency of financial institutions. Journal of Banking and Finance, 21, 895–947.

Berger, A. N., 1995. The Profit – Structure relationship in banking: Tests of market power and efficient structure hypothesis, Journal of Money, Credit and Banking 27, 404 – 431

Berger, A. N., 1997. Efficiency of financial institutions: International survey and directions for future research. European Journal of Operational Research 98:175–212.

Berger, A. N., 1998. The efficiency effects of bank mergers and acquisitions: a preliminary look at the 1990s data. In: Amihud Y, Miller G (eds) Bank mergers and acquisitions. Kluwer, Boston, pp 79–111

Bikker, J. A. and Katharina Haaf 2002. Competition, Concentration and their relationship: An empirical analysis of the banking industry. Journal of Banking & Finance 26, pp. 2191 – 2214.

Bikker, J. A., 2009. Sizing up performance measures in the financial services sector. Productivity in the Financial Sector. Suerf2009 book, pp 51-76. Larcier.

Bjurek, H., L. Hjalmarsson & F. R. Forsund, 1990. Deterministic parametric and non-parametric estimating of efficiency in service production. Journal of Econometrics 46: 213-227.

Bos, J., & Schmiedel, H., 2007. Is there a single frontier in a single European banking market? Journal of Banking and Finance, 31, 2081–2102.

Caballero, J.A., 2016. Do surges in international capital inflows influence the likelihood of banking crises? Econ. J. 126, 281–316.

Casu, B. & Molyneux, P., 2003. A Comparative Study of Efficiency in European Banking‖, Applied Economics, vol. 35, no. 17, p. 1865-76.

Charnes A, Cooper W.W & Rhodes E. 1978. Measuring the efficiency of decision making units. European Journal of Operational Research 2: 429 - 444.

Chen, Tser-yieth., 2002. A comparison of chance-constrained DEA and Stochastic Frontier Analysis: bank Efficiency in Taiwan. The Journal of the Operational Research Society, Vol. 53, No. 5, pp492-500.

Chortareas, G. E., J. G. Garza-Garcia & C. Girardone, 2011. Banking sector performance in Latin America: Market power versus efficiency. Review of Development Economics, 15(2) 307 – 325.

Coelli, T., (1996) A Guide to DEAP Version 2.1: A Data Envelopment Analysis (Computer Program). Centre for Efficiency and Productivity Analysis, Working Paper 96/08.

Coelli, T.J., Rao, D. S. P. & Battase, G. E. 1998. An Introduction to Efficiency and Productivity Analysis, Boston: Kluwer Academic Publishers

Cooper, W.W & Tone K. 1997. Measures of inefficiency in data envelopment analysis and stochastic frontier estimation. European Journal of Operational Research 99: 72-88.

Cooper, W. W., L. M. Seiford, and K. Tone. 2000. Data Envelopment Analysis: A Comprehensive Text with Models, Applications, References and DEA-Solver Software. 2nd ed. New York: Springer.

Demsetz, H., 1973. “Industry structure, market rivalry and public policy”, Journal of Law and Economics 16, 1-9.

Ebong B.B., 2006. Banking Sector Reforms: Opportunities and Challenges. Union Digest, 10:1-9.

Fare, Rolf., Shawna Grosskopf, Mary Norris, and Zhongyang Zhang, 1994. Productivity growth, technical progress and efficiency change in industrialized countries. The American Economic Review, 84(1): 66-83.

Farrell M., 1957. The measurement of productive efficiency. Journal of Royal Statistical Society A 120: 253-281.

Ferrier, G. D. & C. A. K. Lovell, 1990. Measuring cost efficiency in banking: econometric and linear programming evidence. Journal of Econometrics 46: 229-245.

Fielding, D., Rewilak, J., 2015. Credit booms, financial fragility and banking crises. Econ. Lett. 136, 233–236.

Ghorbani A., Amirteimoori A., & Dehghanzadeh H., 2010. A comparison of DEA, DFA and SFA methods using data from Caspian cattle feedlot farms. Journal of Applied Sciences 10(14), 1455 – 1460.

Giokas, D. I., 1991. Bank branch operating efficiency: a comparative application of DEA and the log linear model. Omega 19: 549-557.

Goddard, J., Molyneux, P., & Wilson, J., 2001. European banking: Efficiency, technology and growth. Chichester: John Wiley & Sons.

Gulamhussen, M.A., Pinheiro, C., Pozzolo, A.F., 2014. International diversification and risk of multinational banks: evidence from the pre crisis period. J. Financ. Stab. 13, 30–43.

Hesse, Heiko., 2007. Financial intermediation in the pre-consolidated banking sector in Nigeria. World Bank Policy Research Working Paper, 4267, June.

Isik, I., Hassan, M.K., 2003. Financial deregulation and total factor productivity change: an empirical study of Turkish commercial banks. J. Bank. Finance 27, 1455–1485.

Kamau, A. W., 2011. Intermediation efficiency and productivity of the banking sector in Kenya. Interdisciplinary Journal of Research in Business, Vol. 1, Issue 9, pp12-26.

Kapopoulos, P. & F. Siokis, 2005. Market structure, efficiency and rising consolidation of the banking industry in the Euro area. Bulletin of Economics Research 57:1, 0307 – 3378.

Kumbhakar, S. C., & Lovell, C. A. K. (2000). Stochastic frontier analysis. New York: Cambridge University Press.

Laeven, L., Valencia, F., 2013. Systemic banking crises database. IMF Econ. Rev. 61, 225–270.

Lee B. L., Worthington A. C., and Leong W. H., (2010). Malmquist indices pre – and post-deregulation productivity, efficiency and technological change in the Singaporean banking sector. The Singapore Economic Review, 55(4), 599 - 618

Maudos, J., Pastor, J., Pe´rez, F., & Quesada, J., 2002. Cost and profit efficiency in European banks. Journal of International Financial Markets, Institutions and Money, 12, 33–58.

Meeusen, W., & J. van den Broeck. 1977. Efficiency estimation from Cobb–Douglas production functions with composed error. International Economic Review 18: 435–444.

Mester, L. J., 2005. Optimal industrial structure in banking. Working Paper No. 08-2, Federal Reserve Bank of Philadelphia. July

Millard, S., Nicolae, A., 2014. The effect of the financial crisis on TFP growth: a general equilibrium approach. In: Bank of England Working Paper No. 502.

Mwega, F., 2011. The competitiveness and efficiency of the financial sector in Africa: A case study of Kenya. African Development Review, Vol. 23, No. 1, 44-59.

Ojo M. O. 1992. Monetary Policy in Nigeria in the 1980s and Prospects in the 1990s’ – CBN Economic and Financial Review vol. 30 No. 1 March.

Oke, D., & I. D. Poloamina, 2012. Further analysis of bank efficiency correlates: The Nigerian experience. Journal of Applied Finance & Banking. Vol. 2, No. 4. 1–11.

Okonjo-Iweala, N., 2012. Reforming the Unreformable: Lessons from Nigeria. Cambridge Massachusetts, MIT Press.

Osuagwu, E. S. & Nwokoma, N. 2017. Empirical assessment of the competitive conduct of Nigerian banks in a post-consolidation era, Research in International Business and Finance, 41 (2017) 412 – 422.

Oulton, N., Sebastiá-Barriel, M., 2013. Long and short-term effects of the financial crisis on labor productivity, capital and output. In: Bank of England Working Paper No. 470.

Owolabi, S. A., & A. E. Ogunlalu., 2013. Banking industry consolidation and financial performance of selected quoted banks in Nigeria. Journal of Applied Finance & Banking, Vol. 3, No. 3, 219-238.

Resti, A., 2000. Efficiency measurement for multi-product industries: a comparison of classic and recent techniques based on simulated data. European Journal of Operational Research 121: 559-578.

Resti, A., 1997. Evaluating the cost efficiency of the Italian banking system: what can be learned from the joint application of parametric and non-parametric techniques. Journal of Banking and Finance 21: 221-250.

Schure, P., Wagenvoort, R., & O’Brien, D., 2004. The efficiency and the conduct of European banks: Developments after 1992. Review of Financial Economics, 13, 371–396.

Sealey, C.W. Jr., & Lindley, J. T., 1977. Inputs, outputs, and a theory of production and cost at depository financial institutions. Journal of Finance, 32(4), 1251–1266.

Seiford, L. M., Charnes, A., Cooper, W. W., & Lewin, A.Y., (eds.) 1994. DEA: Theory, Methodology and Applications. Kluwer Academic Publishers: Boston.

Soludo, C. C. 2004. Consolidating the Nigerian Banking Industry to Meet the Development Challenges of the 21st Century: An address Delivered to the Special meeting of the Banking Committee. Held on the 6th July 2004 at CBN Headquarters, Abuja.

Tanna S., Luo Y., and De Vita, G., 2017. What is the net effect of financial liberalization on bank productivity? A decomposition analysis of bank total factor productivity growth. Journal of Financial Stability 30(2017) 67 – 78.

Zhao, Tianshu and Victor Murinde 2011, Bank deregulation and performance in Nigeria. African Development Review, Vol. 23, No. 1, 30–43