The Technical Efficiency of Nigerian Banks: Introduction

The Technical Efficiency of Nigerian Banks: IntroductionOne of the major issues among developing nations, and indeed all economies is how to achieve more with their scarce resources i.e. improving their technical efficiency. This has led to the adoption of various economic systems and policy options. The Nigerian economy in general and the banking sector in particular is not an exception to this. This is more so when banks, like most other production entities are profit oriented.
The role that banks play in the economic development process was demonstrated by McKinnon and Shaw. They showed that the financial sector could be a catalyst for economic growth and development if it is efficiently managed. This role relates mainly to earnings, mobilization of surplus financial resources and efficient intermediation in general. In recent times, banks have received a lot of attention among macroeconomic policy makers. This is because apart from the traditional roles enumerated above, banks are channels through which monetary policies are transmitted to the economy. Thus, the efficiency with which banks discharge their duties and their level of technical efficiency may feedback into the economy.
The Nigerian banking sector has gone through a lot of reforms in recent times. Before 1986, the sector was repressed due to regulation of the system by the Central Bank of Nigeria (CBN). However, with the introduction of the Structural Adjustment Programme (SAP) and the recommendations of McKinnon and Shaw, Nigeria embraced financial liberalization like most other nations. One of the rationales for financial liberalization is to improve the efficiency of the financial system. Chirwa notes that the McKinnon-Shaw hypothesis of financial liberalization has been popularized within the efficient financial system argument. This is because for the banking sector, studies have shown that the problems of inefficiency are more important than scale and scope issues (Berger, Humphrey, 1991; Berger, Hunter and Timme, 1993).Furthermore, Nyong attributes the various failures experienced by the Nigerian banks to technical inefficiency of these banks.
Most studies on banking ignore issues of technical efficiency. Lovell noted that for many years, the productivity literature ignored the efficiency component. In the case of banks, attempts at investigating efficiency issues boil down to looking at transaction and search costs in the process of intermediation and interest rate spreads. This is because efficiency in the banking sector includes reducing transaction and search costs in the process of financial intermediation, reducing interest rate spreads, etc. All these however, are efficiency indicators which at best, are approximations and introduce bias into the work (Eeckaut, Tulkens and Jamar, 1993).This is opposed to efficiency scores which gives direct measure of efficiency of a firm (i.e. quantify the efficiency of firms). There have been various attempts at quantifying the efficiency of the banking sector. Most are however done for the advanced economies, and for the banking industry as a whole. Furthermore, most studies on banking efficiency have been conducted by looking at the effect of liberalization on the efficiency of banks. Financial liberalization is expected to improve the efficiency of banks by making the environment competitive. The results of these studies have been inconclusive as regards the pre- and – post liberalization efficiency status of banks. payday loans online no credit check