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COMPARATIVE ANALYSIS OF PROFITABILITY AND EFFICIENCY IN NIGERIAN BANKS

Abstract

This project conducts a comparative analysis of profitability and efficiency in Nigerian banks, focusing on deposit money banks listed on the Nigerian Stock Exchange. Utilizing secondary data from annual reports and employing methodologies such as Data Envelopment Analysis (DEA) and regression models, the study examines the relationship between efficiency measures and profitability indicators. Key findings highlight that while some banks achieve high efficiency across constant and variable returns to scale models, others remain profitable yet inefficient, underscoring the need for cost-effective strategies. The research contributes to understanding internal and external determinants of bank performance, offering insights for policymakers, bank management, and stakeholders in enhancing financial stability in Nigeria’s banking sector.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The Nigerian banking sector remains a cornerstone of the country’s economic framework, facilitating financial intermediation, capital mobilization, and the execution of monetary policies. Since the 2005 recapitalization initiative, which consolidated the industry from 89 to 25 banks, the sector has pursued enhanced stability, operational efficiency, and profitability (Osuma et al., 2021). Profitability is typically gauged through metrics like Return on Assets (ROA), Return on Equity (ROE), and Net Interest Margin (NIM), indicating a bank’s capacity to yield earnings from its assets and operations. Efficiency, conversely, involves the effective deployment of resources such as deposits, assets, and operating costs to generate outputs like loans and revenues, often evaluated via non-parametric techniques like Data Envelopment Analysis (DEA) (Ipeghan et al., 2022; Osuma et al., 2021).

Recent studies emphasize that efficiency serves as a more comprehensive performance indicator than profitability alone, as certain Nigerian deposit money banks exhibit profitability amid inefficiencies. For example, research on quoted commercial banks reveals that market power and efficiency significantly influence profitability, with DEA models identifying variations under constant returns to scale (CRS) and variable returns to scale (VRS) (Ipeghan et al., 2022). Banks such as Guaranty Trust Bank and Access Bank have demonstrated superior efficiency in both input-oriented and output-oriented DEA frameworks, while others like United Bank for Africa show inefficiencies despite robust profit margins (Osuma et al., 2021).

In the post-2020 era, influenced by the COVID-19 pandemic and digital transformation, the adoption of e-payment systems has markedly improved bank efficiency by reducing operational costs and enhancing transaction speeds. Empirical evidence indicates that electronic payment systems positively correlate with efficiency metrics in Nigerian banks, contributing to better resource utilization and customer service delivery (Ehiedu et al., 2021). Moreover, liquidity management has emerged as a critical determinant, with studies showing that optimal liquidity levels bolster profitability by mitigating risks associated with asset-liability mismatches (Alalade et al., 2020; Adamu et al., 2025). Comparative international analyses highlight divergences; for instance, while cost efficiency and overheads dominate profitability drivers in Nigeria, capital adequacy is more prominent in developed markets like the US (Ozili, 2021).

Further, recent investigations into profitability ratios and stock returns underscore the role of internal factors such as credit regulation and corporate social responsibility (CSR). Effective credit regulation enhances profitability by minimizing non-performing loans, while CSR initiatives have been linked to improved financial performance through enhanced reputation and stakeholder trust (Odetayo et al., 2024). Liquidity risk management also plays a pivotal role, with findings indicating a negative impact on profitability when mismanaged, particularly in listed deposit money banks (Adamu et al., 2025). Recent evidence from the sector shows sustained strong performance, with banks posting significant revenue growth in 2025 driven by asset repricing and higher interest rates, though profit growth is expected to slow due to fading effects of previous factors (CNBC Africa, 2025; TechCabal, 2025). These elements, combined with macroeconomic variables like inflation and monetary policy rates, shape the sector’s trajectory. This background necessitates a thorough comparative analysis to guide strategic enhancements in efficiency and profitability amid evolving economic landscapes, including the impacts of recent recapitalization policies (UL Open Access, 2025).

1.2 Statement of the Problem

Notwithstanding regulatory advancements and capitalization efforts, the Nigerian banking sector grapples with reconciling profitability and efficiency, resulting in potential systemic vulnerabilities. Numerous banks report impressive profits, yet inefficiencies in resource allocation persist, exacerbated by high operating expenses and suboptimal cost management (Osuma et al., 2021). For instance, industry variables such as deposits and loans positively affect profitability, but overhead costs and inefficiencies exert downward pressure, highlighting management shortcomings (Ipeghan et al., 2022).

Post-2020 challenges, including pandemic-induced disruptions and digital shifts, have amplified these issues. The integration of e-payment systems, while beneficial, has not uniformly improved efficiency across all banks, with some experiencing implementation hurdles that affect operational performance (Ehiedu et al., 2021). Liquidity risks further compound problems, as excessive or insufficient liquidity can erode profitability, particularly in volatile economic conditions (Adamu et al., 2025; Alalade et al., 2020). Comparative research reveals that profitability determinants in Nigeria, such as cost efficiency, differ from those in other African nations like South Africa, where market structure plays a larger role (Ozili, 2021).

Additionally, credit regulation inefficiencies contribute to profitability fluctuations, with inadequate oversight leading to higher non-performing assets. The adoption of IFRS 9 has variably impacted metrics, with some banks showing improved efficiency post-implementation, while others face challenges in impairment provisioning and overall financial performance (RSIS International, 2024, Oladapo et al., 2025).

Microfinance institutions demonstrate divergent patterns wherein capital adequacy positively influences profitability, whereas liquidity exhibits minimal impact. Corporate social responsibility expenditures, while designed to improve long-term sustainability, may inadvertently compromise short-term profitability when lacking strategic implementation (Odetayo et al., 2024). These discrepancies, combined with emerging trends of robust yet decelerating profit growth and the consequences of heightened capital requirements, pose risks to sustainable development. This situation highlights the critical need for comprehensive comparative research to address operational inefficiencies and enhance sector-wide profitability (TechCabal, 2025; UL Open Access, 2025).

1.3 Objectives of the Study

The main objective of this study is to conduct a comparative analysis of profitability and efficiency in Nigerian banks. The specific objectives are:

1. To examine the relationship between efficiency and profitability in selected deposit money banks.
2. To compare efficiency scores across constant and variable returns to scale models.
3. To identify internal determinants such as cost efficiency influencing bank profitability.
4. To assess external factors like monetary policy impacting performance.

1.4 Research Questions

What is the relationship between efficiency and profitability in Nigerian deposit money banks?

1. How do efficiency scores vary across different DEA models for selected banks?
2. What internal determinants significantly affect profitability in commercial versus microfinance banks?
3. How do external macroeconomic factors influence bank performance in Nigeria?
4. What strategies can improve efficiency and profitability in the banking sector?

1.5 Research Hypotheses

H0: There is no significant relationship between efficiency and profitability in Nigerian banks. H0: Efficiency scores do not differ significantly across DEA models. H0: Internal determinants like cost efficiency have no impact on bank profitability. H0: External factors such as monetary policy do not affect bank performance. H0: Strategic interventions have no effect on enhancing efficiency in Nigerian banks.

1.6 Significance of the Study

This study holds substantial value for various stakeholders in the Nigerian financial ecosystem. For bank management, it provides insights into optimizing efficiency to sustain profitability, aiding in strategic decision-making amid regulatory changes. Policymakers and regulators, such as the Central Bank of Nigeria, can utilize the findings to refine monetary policies that support sector stability. Academics and researchers will benefit from the comparative framework, contributing to the body of knowledge on banking performance in developing economies. Investors and shareholders gain a better understanding of performance metrics, enabling informed investment choices. Overall, the research promotes financial inclusion and economic growth by highlighting pathways to improved banking efficiency.

1.7 Scope of the Study

The study focuses on a comparative analysis of profitability and efficiency among selected deposit money banks and microfinance institutions in Nigeria, covering the period from 2010 to 2020. It utilizes secondary data from annual financial reports of banks listed on the Nigerian Stock Exchange, including Access Bank, Zenith Bank, and Guarantee Trust Bank, among others. The analysis employs Data Envelopment Analysis for efficiency measurement and regression models for profitability determinants. The scope is limited to internal bank-specific factors and key macroeconomic variables, excluding non-banking financial institutions.

1.8 Limitations of the Study

The study relies on secondary data from published financial statements, which may be subject to reporting biases or inconsistencies. The sample size is constrained to selected banks due to data availability, potentially limiting generalizability to the entire sector. External factors like political instability or global economic shocks during the study period could influence results but are not fully controlled. Additionally, the use of DEA assumes accurate input-output selection, and any omissions may affect efficiency scores. Despite these limitations, the findings remain robust for the analyzed context.

1.9 Definition of Terms

Profitability: The ability of a bank to generate earnings relative to its assets or equity, measured by indicators such as Return on Assets (ROA) and Net Interest Margin (NIM). Efficiency: The optimal use of inputs (e.g., deposits, assets, operating expenses) to produce outputs (e.g., loans, earnings), assessed via Data Envelopment Analysis (DEA) scores ranging from 0 to 1. Deposit Money Banks: Commercial banks licensed to accept deposits and provide financial services in Nigeria, regulated by the Central Bank. Data Envelopment Analysis (DEA): A non-parametric method to evaluate the relative efficiency of decision-making units using multiple inputs and outputs. Monetary Policy Rate (MPR): The benchmark interest rate set by the Central Bank of Nigeria to influence liquidity and economic activity.

References

Adamu, Y., et al. (2025). Financial Risk and Profitability of Listed Deposit Money Banks in Nigeria. ResearchGate Publication.

Alalade, Y. S., Ogbebor, P. I., & Akwe, M. (2020). Liquidity risk and profitability of listed deposit money banks in Nigeria. Globalization, 11(8), 19-30.

Ehiedu, V. C., Onuorah, A. C., & Chienjina, J. O. (2021). E-payment system (EPS) and efficiency of banks in Nigeria. International Journal of Applied Research in Social Sciences, 5.

Ipeghan, I., Charles, A. S. L., & Toby, A. J. (2022). Modeling market power, efficiency and profitability of quoted commercial banks in Nigeria.

Odetayo, T. A., Adeyemi, A. Z., & Sajuyigbe, A. S. (2024). Impact of corporate social responsibility on profitability of Nigeria banks. International Journal of Academic Research in Business and Social Sciences.

Osuma, G. S., Ikpefan, O. A., & Omankhanlen, A. E. (2021). Exploring the relationship between efficiency and profitability of listed deposit money banks in Nigeria. Journal of Management Information and Decision Sciences, 24(Special Issue 1), 1-14.

Ozili, P. K. (2021). Bank profitability determinants: Comparing the United States, Nigeria and South Africa. Munich Personal RePEc Archive (Paper No. 105638). https://mpra.ub.uni-muenchen.de/105638/

RSIS International. (2024). A Comparative Analysis of Nigerian Deposit Money Banks’ Performance Pre and Post-Adoption of IFRS 9. International Journal of Research and Innovation in Social Science.

Oladapo et al. (2025). Impact of International Financial Reporting Standards (IFRS) Adoption on Financial Performance Metrics of Deposit Money Banks in Nigeria. SSOAR.

TechCabal. (2025). Nigerian banks face slow profit growth in 2025 as FX, rate hike fade. https://techcabal.com/2025/05/22/nigerian-banks-face-slow-profit-growth-in-2025

UL Open Access. (2025). Analysis of the Impact of Increased Capital Requirements on the Operational Efficiency of Nigerian Commercial Banks. https://ulopenaccess.com/papers/ULBEC_V02I04/ULBEC20250204_007.pdf

CNBC Africa. (2025). Nigeria banks post strong Q3’25 revenue. https://www.cnbcafrica.com/media/7761919505511/nigeria-banks-post-strong-q325-revenue-