Gusau Journal of Accounting and Finance (Apr 2021)
FINANCIAL SOUNDNESS INDICATORS AND EFFICIENCY OF LISTED DEPOSIT MONEY BANKS IN NIGERIA
Abstract
The efficiency of a country’s banking industry is key to the stability of its financial system. However, there has been an increasing scholarly debate on the factors that affect bank efficiency. Some scholars argue that efficiency is enhanced by mainly improvements in the strategic internal resources of a bank such as firm specific attributes like capital, assets, and liquidity while other scholars posit that industry wide factors and macroeconomic variables such as market structure and interest rate respectively are also integral to bank efficiency. Notwithstanding the divergent opinion, measuring bank efficiency using International Monetary Fund’s core set of financial soundness indicators, which are firm specific attributes that stand for capital adequacy, asset quality, earnings, liquidity and sensitivity to market risk, has become widely accepted in finance literature. Using bank-level analysis approach, this paper assesses the effect of financial soundness indicators on efficiency of listed deposit money banks in Nigeria for the period 2010-2018. The paper, which applies correlational research design, uses firm-level secondary data extracted from the annual reports and accounts of 14 out of the 22 licensed banks as at 31st December, 2018. The robust fixed effect regression result used for analysis shows that overall; the core set of financial soundness indicators has significant effect on efficiency of deposit money banks in Nigeria for the period under review. At the level of individual components, all the variables except asset quality have significant effect on efficiency though the direction of the relationship between efficiency and both capital adequacy and profitability is not in line with theoretical expectation. The paper recommends amongst other things that bank management should continue to use financial soundness indicators in benchmarking the efficiency of their operations.
