Does bank size affect efficiency? Evidence from commercial banks in Nigeria

Abstract

This paper examines the cost efficiency of 15 commercial banks in Nigeria in the post-consolidation period extending from 2006 to 2018. As a first step, efficiency scores are generated using the stochastic frontier approach. As a second step, the effect of bank size on cost efficiency is examined using the robust standard errors of Driscoll and Kraay (1998) and the dynamic generalised method of moments (GMM) to control for cross-sectional dependence and endogeneity issues respectively in the model. The findings of the study show that the overall mean cost efficiency for Nigerian commercial banks is 78%. This suggests that approximately 22% of input resources are being wasted in the sector. The findings from the frontier analysis further reveal that larger banks do not enjoy cost advantage over their smaller counterparts. In the second stage of the analysis, the study finds that bank size does not affect cost efficiency within the study period. Other internal factors such as capitalisation ratio, loan-to-deposit ratio, operating expenses and loan to total asset are found to be major drivers of cost efficiency. The study therefore advises banks to place less emphasis on size by closing down inefficient branches to reduce their operating expenses and stimulate cost efficiency.