The Technical Efficiency of Nigerian Banks: Technical Efficiency

The Technical Efficiency of Nigerian Banks: Technical EfficiencyThe shortcomings of this theory are as follows: First, interest rates vary from time to time so does the user cost. An item classified as input in one period may become an output in another period if the sign of its user cost changes (Grigorian, 2002). It is also difficult to measure marginal revenues and costs for each individual liability item. Thus, there are several measurement errors including changes in inputs or outputs overtime.
The Value Added Approach is an improvement over the asset or user-cost approaches (Berger and Humphrey, 1991, 1992),    is based on actual operating cost data. It recognizes the output characteristics of both the asset and liability categories of bank portfolios.
Those categories that have substantial value-added are treated as outputs while others are treated as inputs. Activities of banks create high value-added such as loans and advances (demand deposits), time and savings deposits are classified as outputs while inputs include labour, capital and purchased funds.
The modern approach has different variants. It integrates risk management and information processing into the classical theory of the firm. It is ratio based. It is represented by the CAMEL approach which stands for capital adequacy, asset quality, management, earnings and liquidity. These variables are however used in performance analysis and the index does not emphasize the efficiency of banking institutions (Ziorklui, 2001)
Ziorklui went ahead to develop a comprehensive index of banking efficiency and performance. He integrates measures of efficiency and general performance of banking institutions as is used in Ghana. This he expressed as TARCSIMEL which means transaction cost, asset quality, risk exposure, capital adequacy, spread between deposit and borrowing rates, intermediation proxies of savings mobilization and credit allocation, management competence, earnings or profitability and liquidity. The problem with this approach is being able to develop proxies for each of the above instruments.
Bergendahl identified five main functions of commercial banking, which directly relates to the goals of efficient bank management. This includes profit maximization, risk management, service provision, intermediation and utility provision. However, Grigorian grouped them into two namely profit maximization and risk management, and service provision (combining elements of service provision, intermediation and utility provision). However, this study in choosing the inputs and outputs of banks adopted the Grigorian Approach following which is a variant of the modern approach. Many researchers have attempted to investigate the efficiency of the banking industry as mentioned earlier. Most of the studies were attempts to investigate the impact of the financial reforms on banking efficiency and the results are as shown in table 1 below. Aikaeli is among the few that examined firm level efficiency of banks in Tanzania using DEA. Aikaeli grouped the banks into three namely; large, domestic and small banks which is still restrictive as the technical efficiency levels of banks within a group may not be the same. The present study examines firm level efficiency of Nigerian banks. It examines the technical efficiency of individual banks directly, bearing in mind that the reforms in the Nigerian banking industry especially by the present CBN governor deals with the individual banks. Furthermore, his study was done for the liberalization period alone. The study shows that in terms of technical efficiency, foreign banks ranked highest followed by small banks and then large domestic banks. It therefore becomes necessary to examine the technical efficiency of Nigerian banks at firm level in order to compare with other studies; and the conclusions of the CBN about the some of the banks. Here