The Technical Efficiency of Nigerian Banks: Determining Efficiency

Prior to liberalization in 1985, the result indicates that ten banks of the 29 banks used for the analysis were efficient. This means that they lie on the efficient frontier and had efficiency score of 1.000 each. The banks are Afri bank, Citi bank, Co-operative Bank, First Bank, Indo, MBC, NAL, Union, UBA and Lobi banks. This represents 34.48% of the banks. It is interesting to note that Afribank, which was one of the banks declared problematic by Sanusi but survived the Soludo consolidation exercise was efficient prior to liberalization. The rest of the banks used in that period, (65.52%) exhibited various levels of inefficiency. This ranges from as high as 87.5% level of inefficiency by IMB merchant which is the worst, to as low as 26.8% by Societe Generale Bank.
Out of the inefficient banks, 89.47% have their efficiency level below the industry average of 57%, while 10.53% have their efficiency levels above the industry average. These are Credit Lyonnas and Societe Generale banks. Furthermore, of the ten efficient banks three or 30% are merchant banks while the rest (70%) are commercial banks. The merchant banks are Indo, NAL and MBC.
With liberalization in 1995, the percentage of efficient banks increased to 35.71% leaving 64.28% of the banks as inefficient. The number of inefficient banks with efficiency level above the industry average is 25.93% as against 10.53% prior to liberalization. Furthermore, the level of inefficiency in 1995 ranged from as low as 2.5% for First City Monument Bank to as high as 74.8% for Societe General Bank. These results show improvements over the preliberalization era. The results suggest that liberalization did not only improve the average level of technical efficiency of the banking industry but also the technical efficiency of individual banks in 1995. Note that Afribank and Union banks were efficient during this period.
The 2000 efficiency result shows that 26% of the banks used for the study for that year were efficient. This is a decrease compared to the pre-liberalization era and the 1995 period. This gave the percentage of inefficient banks as 74% which is higher than the two previous periods. This may be due to the crisis in the banking industry in the 1990s which caused the liquidation of most banks such that the remaining ones were struggling to re-establish themselves in the financial system. Furthermore, poor management of the banks which persisted as noted by the CBN may have also contributed to these.
The banks that remained efficient even in the face of the crisis like First Bank, Citi Bank, Indo were either among the banks with high market share or private banks suggesting that ownership and market share may be important factors that determined efficiency within this period. However, when one observes that two of the three biggest banks viz Union Bank and UBA fell among the inefficient banks in 2000 with efficiency scores of 0.766 and 0.806 respectively, one begins to wonder whether market share actually plays a role in determining efficiency.
The worst of the inefficient banks (Co-operative Development Bank) has an efficiency score of 0.37 which is higher that the efficiency level of the worst bank in 1985 and 1995. Of the inefficient banks, 35% have their efficiency scores above the industry average of 73.1%. This result is higher than that of 1985 and 1995 suggesting that the continued liberalization had a positive impact on the technical efficiency of individual banks in 2000. Afribank was among the inefficient banks in this period. further