Modeling data envelopment analysis and bank-specific determinants of profitability in Nigeria

Abstract

This study aims at investigating empirically the overall technical efficiency, x-efficiency and scale efficiency in the Nigerian banking industry. The Data Envelopment Analysis was used to estimate efficiency scores of 15 commercial banks in the Nigerian banking industry during the period of 2007 to 2015. The research also employed regression analysis to estimate the determinant of bank-specific variable. The overall efficiency result suggest that inefficiency across 15 mega banks is small at just over 28.2 percent, which is quite low compare to conventional average. In the case of the theory of efficient-structure, the x-efficiency result showed an industry average of 80.7 percent representing high level of efficiency among the mega banks. The result for scale efficiency in the industry is significantly higher than smaller banks. The empirical results for the tests of efficient-structure hypotheses revealed that x-efficiency and scale efficiency are strongly present in the Nigerian banking industry. Additionally, x-efficiency, which is common in the industry, significantly impact profitability. The significant relationship between technical, scale efficiency and profitability could be viewed as further evidence of the robustness of the estimated efficiency parameters. The banks are efficient within their peer group themselves as they indicate higher efficiency level. This result could suggest that current technology in the financial sector allow efficient growth of the industry.