BANK INTERMEDIATION EFFICIENCY AND NON-PERFORMING LOANS IN NIGERIA: DATA ENVELOPMENT ANALYSIS

Abstract
This paper set out to examine the effect of non-performing loans (NPLs) on bank efficiency in Nigeria within the period, 2008 – 2017. The specific objectives were (i) to analyse the effect of non-performing loan ratio (NPLR) on bank efficiency, and (ii) to explore the effect of bank efficiency on non-performing loan ratio. In line with the specific objectives, two hypotheses were formulated. Data was gathered using purposive sampling techniques where the five big banks were chosen viz: First Bank, UBA, GTB, Zenith Bank, and Access Bank. Analysis was done, employing Data Envelopment Analysis (DEA), general least square (EGLS) and pooled panel least square (PLS). Findings from the study include: (i) NPLR had a positive and strong significant impact on bank efficiency. This implied that bank with NPLs will not relent in giving out loans, since interest from loans is the major source of income in banking industry. Rather it creates further credits with higher quality skills regarding lending activities. The price of obtaining the loans will go up, theoretically, high risky investments were compensated with high returns. (ii) Bank efficiency also had a positive and strong significant impact on NPLR, which implied that if the efficiency increases; the more the banks’ rely heavily on loan creation as interest from loans contributes the major sum of revenue to their profit. Likewise, the rate of NPLs will virtually increase as the borrowers’ defaults in their obligations due to the inexorable uncertainty in the economic system.