Abstract
Using stochastic frontier technique, this study examined the changes in the profit efficiency of Nigerian banks after the recapitalization exercise of central bank of Nigeria for the period 2006 to 2008. The results showed that the estimated profit efficiency scores for 2006, 2007 and 2008 for troubled banks were 0.79, 0.89 and 0.94, respectively while corresponding values for healthy banks were 0.47, 0.66 and 0.81. Average efficiency score of all sampled banks were 0.59, 0.75 and 0.86 for 2006, 2007 and 2008, respectively. The finding implies that profitability is not a good measure of performance.
Highlights
Introduction and Literature ReviewIn recent years, the structures of financial service industries are changing rapidly; it is of considerable interest to measure the efficiency of evolving institutions
The average efficiency score was higher for troubled banks than for healthy banks for the three years (2006-2008) under review
The stochastic frontier model showed that the estimated profit efficiency scores for 2006, 2007 and 2008 for troubled banks were 0.79, 0.89 and 0.94, respectively while corresponding values for healthy banks were 0.47, 0.66 and 0.81
Summary
Introduction and Literature ReviewIn recent years, the structures of financial service industries are changing rapidly; it is of considerable interest to measure the efficiency of evolving institutions. Despite the wide agreement on the relevance of profit efficiency analysis, the technical difficulties with the measurement and decomposition of profit inefficiency were the main reasons for the small number of empirical studies on banking profit efficiency. Both parametric and non-parametric techniques have been employed to compute efficiency scores, providing valuable insights for academic research and for regulation and management decisions (Berger and Humphrey, 1997). While previous research have limited their efficiency analysis to the cost aspect (Baten and Kamil, 2010), recent studies have given more attention to profit efficiency
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