Efficiency of Deposit Money Banks and its Determinants in Nigeria: A Stochastic Frontier Analysis
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Abstract
This paper investigates the profit efficiency of deposit money banks in Nigeria and examines whether macroeconomic conditions help explain observed efficiency outcomes. The study is motivated by the central role of banks in financial intermediation and by the difficult macroeconomic environment facing Nigeria in recent years, including elevated inflation and uneven output growth. Official statistics indicate that headline inflation remained exceptionally high in 2024 and that real GDP growth, while positive, was moderate, underscoring the relevance of macroeconomic conditions for bank performance. Using panel data for fourteen licensed deposit money banks over 2011–2024, the study estimates a translog profit frontier within the stochastic frontier analysis framework and then applies a dynamic panel generalized method of moments estimator to assess the effects of macroeconomic variables on estimated profit efficiency. The results show that Nigerian banks operate below the profit frontier, with an average profit efficiency score of 0.820, implying that roughly 18% of potential profit is lost to inefficiency. Inflation exerts a negative and statistically significant effect on profit efficiency, whereas GDP growth is not individually significant, although the joint effect of macroeconomic conditions is significant. The paper contributes to the literature by focusing on profit, rather than cost or technical efficiency, and by linking frontier-based efficiency estimates to macroeconomic determinants in the Nigerian banking context. The findings suggest that macroeconomic stabilization, especially inflation control, and continued managerial improvements are important for strengthening bank performance and the efficiency of financial intermediation.
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