EFFECTS OF CONSOLIDATION ON EFFICIENCY AND PRODUCTIVITY OF DEPOSIT MONEY BANKS IN NIGERIA, 2001-2008

Abstract

Bank consolidation was one prominent aspect of the 2004/2005 banking sector reforms in Nigeria. It led to 1150% increase in the minimum capital base of the Deposit Money Banks (DMBs) from N2 billion in 2004 to N25 billion in 2005. This unprecedentedly large capital base raised questions about the banks’ capability of efficiently deploying these funds to support productive activities in their operations and benefit from economies of scale. This study, therefore, investigated the efficiency, productivity changes and economies of scale of DMBs before, during and after the 2004/2005 bank consolidation over the period 2001-2008. A microeconomic model, predicated on modified intermediation and efficiency measurement frameworks, was employed. It utilised deposits, fixed assets and employees as inputs, whose costs were interest payments, depreciation and staff expenses. Performing loans and advances, investments and liquid assets constituted the output variables. Data Envelopment Analysis (DEA) and Malmquist DEA methods were used to compute the efficiency cum economies of scale scores, and Total Factor Productivity Change (TFPC) indices, respectively. Secondary data were obtained from the DMBs that retained their identities and controlled over 75% of the banking industry’s total assets. They were purposively selected to maintain data consistency, and were size-classified by total and net assets into small, medium and big banks. Impacts of size, domestic or foreign bank ownership, credit risk, competition, profitability, stock exchange listing and universal banking policy on economic efficiency were investigated using random effects Tobit regression. Friedman’s Analysis of Variance was applied to statistically test efficiency differences before, during and after the 2004/2005 bank consolidation. Efficiency and productivity change differences between domestic and foreign banks were evaluated with the paired sample t-test. Economic efficiency of all the banks averaged 0.84, 0.87 and 0.78 before, during and after consolidation, respectively, but the medium, small and big banks’ scores of 0.87, 0.90 and 0.81, respectively, were the highest for the corresponding periods at 5% significance level. The TFPC was 1.06 in pre-consolidation period, 1.05 during consolidation and 1.00 in post-consolidation era. Technological change prevented TFPC from outright decline in the post-consolidation period. Differences in the productivity change between domestic and foreign banks were not statistically significant. However, the foreign banks recorded 0.89 cost efficiency compared to the domestic banks’ 0.81. Only 17.78% of DMBs benefited from economies of scale after consolidation. Impacts of total assets, net assets, profitability, competition, universal banking policy and stock exchange listing on economic efficiency were mixed, while credit risk was inversely related to economic efficiency at 95% confidence level. Efficiency and productivity of deposit money banks in Nigeria, whether small, medium or big, did not improve after capital consolidation, due prominently to credit risk. Therefore, regular risk supervision and other oversight functions by the regulators as well as adoption of international best practices by the banks are critical for optimal deployment of the increased capital base of the Nigerian banking industry. Keywords: Bank efficiency, Deposit Money Banks, Bank consolidation, Data Envelopment Analysis. Word count: 475