Financial market environment and efficiency of microfinance banks in Nigeria

Abstract

This study examines the efficiency of microfinance banks (MFBs) in Nigeria based on the financial market environment. The efficiency of MFBs is estimated using the DEA framework, while the market environment is considered with competition within the MFB sector and the entire financial system. The Tobit regression technique is used to estimate the impacts of a competitive financial environment on the efficiency of MFBs. The data used cover the period of 2010 to 2019 for 49 Nigerian Microfinance Banks. The study reveals a clear upward trend in the efficiency scores of the MFBs, although the gap between efficient and inefficient MFBs is found to be widening. Commercial-oriented MFBs are also found to be more efficient than social-oriented MFBs. Macroeconomic instability, external competition, and structural change in the economy are found to weaken the efficiency of MFBs, while the intra-sectoral competition, technology infrastructure, skills, and effective regulation boost efficiency. Also, factors that drive the efficiency of commercial-oriented MFBs are different from those that drive social-oriented MFBS. Policies that help to refocus MFBs towards the core social operations and improve their efficiency are recommended.