Determinants of the Efficiency of Microfinance Banks in Southwest Nigeria: Capitalization or Organic Growth as an Antidote for Bank Failure?
Keywords:
Efficiency, capitalization, organic growth, Microfinance bankAbstract
The study evaluates the level of efficiency of MFBs and investigates elements that determine efficiency of microfinance banks in Southwestern Nigeria with special emphasis on the effect of capitalization and organic growth in the micro finance banks efficiency process. Using a sample of unit microfinance bank balance panel data of 18 microfinance banks from South-West Nigeria for the period 2010-2017, To determine the productivity level of microfinance institutions in Southwest Nigeria, we used stochastic frontier approach. We also use system-GMM method to look at what influences MFB productivity in southwest Nigeria. Empirical results show that capitalization has no significant impact upon efficiency, nonetheless the importance of organic growth supported by managerial ownership in the microfinance banks efficiency process is verified and reported by the results as one of the main determinants of MFB efficiency in Nigeria.
References
Aboagye, A. Q., Akoena, S., Antwi-Asare, T., &Gockel, A. (2008),“Explaining the Market Power of Ghanaian banks” South African Journal of Economics, 76, 569-585.
Adjei-Frimpong, K (2013), “Bank Efficiency and Bank Competition: Empirical Evidence from Ghana’s Banking Industry” A Ph.D. Thesis submitted to Lincoln University, UK.
Ajisafe, R.A &Akinlo, A.E (2014), “Competition and Efficiency of Commercial Banks: An Empirical Evidence from Nigeria”American Journal of Economics 2014, 4(1): 18-22 DOI: 10.5923/j.economics.20140401.02
Allen, F & Gale., D. (2004), “Competition and Financial Stability”Journal of Money, Credit, and Banking, Vol. 36 (3)
Arellano, M., and Bover, O. (1995),“Another look at the instrumental variable estimation of error-components models”Journal of Econometrics, 68(1), 29-51.
Atkins, B., Li, L., Ng, J. & Rusticus, T.O (2016),“Bank Competition and Financial Stability: Evidence from the Financial Crisis, Financial Crisis”Journal of Financial and Quantitative Analysis. 51, (1), 1-28.Research Collection School of Accountancy. Available at: http://ink.library.smu.edu.sg/soa_research/1271
Avkiran, N. K. (1999), “The evidence on efficiency gains: The role of mergers and the benefits to the public” Journal of Banking & Finance, 23(7), 991-1013.
Ayadi, F. O., Adebayo, A. O., &Omolehinwa, E. (1998),“Bank performance measurementin a developing economy: An application of data envelopment analysis”Managerial Finance, 24(7), 5-5-16.
Aydinli, I. (1996),“Market Structure of the Turkish Banking System: 1991-1994 (inTurkish)” Capital Markets Board Publication, No. 40, Ankara.
Baltagi, B. H. (2008), “Econometric Analysis of Panel Data” 4th edition, Chi Chester: John
Wiley & Sons Ltd.
Beck. T., Demirgüç-Kunt, A. &Levin, R. (2005), “Bank Concentration and Fragility: Impact and Mechanics”National Bureau of Economic Research Working Paper No:11500
Berger, A. N. (2007),“International Comparisons of Banking Efficiency” Financial Market Institutional Instruments, 16, 119–144.
Berger, A. and Hannan, T. 1998. The Efficiency Cost of Market Power in the Banking Industry: A Test Of The “Quiet Life” And Related Hypotheses, The Review of Economics and Statistics, 80(3): 454-465.
Bikker, J. A., &Groeneveld, J. M. (2000),“Competition and concentration in the EU Banking Industry” Kredit und Kapital, 33, 62-98.
Bikker, J. A., &Haaf, K. (2002),“Competition, concentration and their relationship: An empirical analysis of the banking industry” Journal of Banking & Finance, 26(11), 2191-2214.
Bikker, J. A., &Spierdijk, L. (2008), “How banking competition changed over time”Tjalling C. Koopmans Research Institute Discussion Paper Series, No. 08–04.
Blundell, R., & Bond, S. (1998),“Initial Conditions and Moment Restrictions in Dynamic Panel Data Models”Journal of Econometrics, 87(1), 115-143
Bond, S. R. (2002),“Dynamic panel data models: A Guide to Micro Data Methods and Practice”Institute for Fiscal Studies Working Paper, CWP09/02.
Boyd, J.H., Nicolò, G & Jalal, A.M.: (2006),“Bank Risk-Taking and Competition Revisited: New Theory and New Evidence”International Monetary Fund, IMF Working Paper No WP/06/297.
Buchs, T. D., & Mathisen, J. (2005),“Competition and efficiency in banking: Behavioral Evidence from Ghana”IMF Working Paper No. 05/17.
Carbó, S., Humphrey, D., Maudos, J., &Molyneux, P. (2009),“Cross-country comparisonsofcompetition and pricing power”European Banking Journal of International Money and Finance 28, 115–134.
Casu, B., &Girardone, C. (2006), “Bank competition, concentration and efficiency in the single European Market”The Manchester School, 74(4), 441-468
Casu, B.,& Claudia Girardone, C. (2010),“Does Competition Lead to Efficiency? The Case of EU Commercial Banks” Journal of Banking, 57(2), 510-532
Casu, B., and Molyneux, P. (2003)’“A comparative study of efficiency in European Banking” Applied Economics, 35(17), 1865-1876.
Castellanos, S.G & Garza-García, J.G (2013), “Competition and Efficiency in the Mexican Banking Sector”BBVA Working Paper No 13/29.
CBN, (2013), “Bank Intermediation in Nigeria: Growth, Competition, and Performance of the Banking Industry, 1990 – 2010”Central Bank of Nigeria Occasional Paper No. 48, November, 2013.
Chen, T., &Yeh, T. L. (1998),“A Study of efficiency evaluation in Taiwan’s banks”International Journal of Service Industry Management, 9(5), 402-415.
Claessens, S. (2009), “Competition in the financial sector: Overview of competition Policies”IMF Working Paper No.09/45.
Claessens, S., &Laeven, L. (2004),“What drives bank competition? Some International Evidence”Journal of Money, Credit & Banking, 36(3), S563 (521).
Coccorese, P. (2004),“Banking competition and macroeconomic conditions: a disaggregate Analysis”Journal of International Financial Markets, Institutions and Money,14(3).
Das, A., and Ghosh, S. (2009), “Financial deregulation and profit efficiency: A nonparametric:
Analysis of Indian banks”Journal of Economics and Business, 61(6), 509-528.
De Bandt, O., & Davis, E. P. (2000),“Competition, contestability and market structure in
European banking sectors on the eve of EMU”Journal of Banking & Finance, 24(6),1045-1066.
Delis, M. D., and Pagoulatos, G. (2009), “Bank competition, institutional strength and financial reforms in Central and Eastern Europe and EU”MPRA Paper No. 16494.
Farrell, M. J. (1957),“The Measurement of Productive Efficiency”Journal of the RoyalStatistical Society, 120, 253–278.
Fernández de Guevara, J., Maudos, J., & Pérez, F. (2005),“Market power in European banking sectors”Journal of Financial Services Research, 27(2), 109-137.
Fernández, R.O & Garza-Garcíab, J.G (2012),“The Relationship between Bank Competition and Financial Stability: A Case Study of the Mexican Banking Industry”Centre for Global Finance, Working Paper Number: 03/12
Fu, X., & Heffernan, S. (2005),“Cost X-efficiency in China's banking sector”Cass Business School Working Papers WP-FF-14-2005
Fungácová, Z., Solanko, L., and Weill, L. (2010),“Market power in the Russian Banking Industry” BOFIT Discussion Papers, 3
Gilbert, R. A., & Wilson, P. W. (1998),“Effects of deregulation on the productivity of Korean Banks” Journal of Economics and Business, 50(2), 133-155.
Gremi, E. (2015),“Competition and Efficiency in Albanian Banking System” A Paper delivered at the 3rd Global Virtual Conference, April, 6-10. 2015, downloaded from www.gv-conference.com on 22nd February, 2015.
Giustiniani, A &Ross, K. (2008),“Bank Competition and Efficiency in the FYR Macedonia”South-Eastern Europe Journal of Economics 2 (2) 145-167.
Günalp, B., &Çelik, T. (2006),“Competition in the Turkish banking industry”Applied Economics, 38(11), 1335-1342.
Hao, J., Hunter, W. C., & Yang, W. K. (2001),“Deregulation and efficiency: the case of Private Korean banks” Journal of Economics and Business, 53(2-3), 237-254.
Hempell, H. (2002),“Testing for competition among German banks” Economic ResearchCentre, Deutsche Bundesbank, Discussion Paper 04/02.
Isik, I., & Hassan, M. K. (2003),“Efficiency, ownership and market structure, corporate, control and governance in the Turkish banking industry”Journal of Business Finance & Accounting, 30(9-10), 1363-1421.
Klaus Schaeck, K &Čihák, M (2008), “How does competition affect efficiency and Soundness in Banking?” New Empirical Evidence.
Koetter, M., Kolari, J. W., &Spierdijk, L. (2008), “Efficient competition? Testing the 'Quiet Life' of U.S. banks with Adjusted Lerner indices” A Paper presented at the 44th Bank market structure conference, Federal Reserve Bank of Chicago.
Kumbhakar, S. C., & Lozano-Vivas, A. (2004): “Does deregulation make markets more competitive? Evidence of mark-ups in Spanish savings banks”Applied Financial Economics, 14(7), 231-258
Javorcik, B. S. (2004),“Does foreign direct investment increase the productivity ofdomestic firms? In search of spillovers through backward linkages”American Economic Review, 94, 605-627.
Leightner, J. E., and Lovell, C. A. K. (1998),“The impact of financial liberalization on the Performance of Thai banks” Journal of Economics and Business, 50(2), 115-131.
Lerner, A. P. (1934),“The concept of monopoly and the measurement of monopoly power” Review of Economic Studies 1, 157–175.
Loukoianova, E. (2008),“Analysis of the efficiency and profitability of the Japanese Banking System”IMF Working Paper No. 08/63.
Lucotte, Y. (2015),“Is There a Competition-Stability Trade-Off in European Banking?”A Paper Presented at the Conference on Systemic Risk Analytics 23-25 September 2015
Matthews, K., Murinde, V., & Zhao, T. (2007),“Competitive conditions among the major British Banks”Journal of Banking & Finance, 31(7), 2025-2042.
Maudos, J., &Nagore, A. (2005), “Explaining market power differences in banking: A cross-country study”WP-EC, 2005-2010.
Maudos, J., Pastor, J. M., & Pérez, F. (2012),“Competition and Efficiency in the Spanish Banking Sector:The Importance of Specialization”Applied Financial Economics, 2002, 12, 505-516.
Maudos, J. and Perez, F. (2003),“Competencia vs. poder de mercado en la bancaespanola”Moneda y Credito 217: 139–166.
Maudos, J., Pastor, J. M., Pérez, F., & Quesada, J. (2012),“Cost and profit efficiency in European banks”Journal of International Financial Markets, Institutions and Money, 12 (1)
Maudos, J., &Solís, L. (2011),“Deregulation, liberalization and consolidation of the Mexican banking system: Effects on competition”Journal of International Money and Finance 30, 337–353.
McKinnon, R. I. (1973),“Money and Capital in Economic Development”The Brookings Institution, Washington, DC.
Mester, L. J. (1993),“Efficiency in the savings and loan industry”Journal of Banking &Finance, 17(2-3), 267-286.
Mester, L. J. (1996),“A study of bank efficiency taking into account risk-preferences”Journal of Banking & Finance, 20(6), 1025-1045.
Mukherjee, K., Ray, S. C., and Miller, S. M. (2001),“Productivity growth in large US commercial banks: The initial post-deregulation experience”Journal of Bankingand Finance 25, 913-939
Nabiyev, J., Musayev, K &Yusifzada, N. (2016),“Banking Competition and Financial Stability: Evidence from CIS”MPRA Paper No. 72167, Downloaded from Online at https://mpra.ub.uni-muenchen.de/72167/
Nathan, A., &Neave, E. H. (1989),” Competition and contestability in Canada's financial industry”.
NDIC, (2007): NDIC Quarterly Report, Sept-Dec., 2007
Obembe, O.B., Olaniyi C.O. &Soetan, R.O. (2016), “Managerial Ownership and Performance of listed non-financial firms in Nigeri”, International Journal of Business and Emerging Markets, Vol. 8(4), Inderscience Publications.
Omankhanlen, A.E (2013),“Nigerian Banks ‘Efficiency Performance: A Post 2004 Banking Reforms Evaluation” a Ph.D. Thesis submitted to the Department of Finance, Covenant University, Nigeria.
Panzar, J. C., &Rosse, J. N. (1987),“Testing for monopoly equilibrium”The Journal of Industrial Economics, 35, 443-456.
Pasiouras, F. (2008),“Estimating the technical and scale efficiency of Greek commercial banks: the impact of credit risk, off- balance sheet activities, and international operations”Research in International Business Finance, 22(3), 301–318.
Popoola, N. (2016),“Insurance Firms to Fire 260 non-executive Directors” Downloaded from Punch Newspaper website on 22nd July, 2016.
Rangan, N., Grabowski, R., Aly, H. Y., &Pasurka, C. (1988),“The technical efficiency ofUS banks. Economics Letters, 28, 169–175.
Resti, A. (1997),“Evaluating the cost-efficiency of the Italian banking system: What can belearned from the joint application of parametric and non-parametric techniques”Journal of Banking & Finance, 21(2), 221-250.
Roodman, D. (2006),“How to do xtabond2: An introduction to difference and system GMM in Stata”Center for Global Development Working Paper No. 103.
Sathye, M. (2001),“X-efficiency in Australian banking: An empirical investigation”Journal of Banking & Finance, 25(3), 613-630.
Sathye, M. (2003), “Efficiency of banks in a developing economy: The case of India”European Journal of Operational Research, 148(3), 662-671.
Schaeck, K., &Cihák, M. (2008),“How does competition affect efficiency and Soundness in Banking? New Empirical Evidence”ECB Working Papers Series, No. 932
Sherman, D., & Gold, F. (1985),“Branch operating efficiency: Evaluation with data envelopment analysis”Journal of Banking & Finance, 9(1) 297-315.
Simpasa, A. (2010),“Characterizing market power and its determinants in the Zambian banking Industr”. MPRA Paper, No. 27232.
Sufian, F., &Habibullah, M. S. (2009),“Asian financial crisis and the evolution of Korean banks efficiency: A DEA approach”Global Economic Review, 38(4), 335-369.
Sun, Y. (2011),“Recent developments in European bank competition”IMF Working PaperNo. 11/146.
Sun, L., & Chang, T. (2011),“A comprehensive analysis of the effects of risk measures on Bank efficiency: Evidence from emerging Asian countries” Journal of Banking & Finance, 35(7), 1727-1735.
Turk-Ariss, R. (2009),“Competitive behavior in Middle East and North Africa banking Systems”Quarterly Review of Economics and Finance 49, 693–710.
Vesala, J. (1995),“Retail banking in European financial integration”Journal of Banking & Finance, 20(8), 1436-1437.
Weill, L. (2004),“Measuring cost efficiency in European banking: A comparison of frontier Techniques”. Journal of Productivity Analysis, 21, 133-152.
Yildirim, H. S., & Philippatos, G. C. (2007),“Efficiency of banks: Recent evidence fromthe transition economies of Europe, 1993–2000”The European Journal of Finance,13(2), 123-143.
Yue, P. (1992),“Data envelopment analysis and commercial bank performance: A primerwith applications to Missouri banks”Federal Reserve Bank of St. Louis Review, 74,31–45.
Yuan, Y. (2006),“The state of competition of the Chinese banking industry”Journal of Asian Economics 17, 519–534.
Zaim, O. (1995),“The effect of financial Liberalization on the efficiency of Turkish commercial banks” Applied Financial Economics, 5, 257-264.
