Influence of bank financial soundness on the operational efficiency of deposit money banks in Nigeria

Abstract

This study investigates the influence of bank financial soundness on the operational efficiency of deposit money banks in Nigeria. Banking system across the globe remains a vital engine that drives the economic growth of any nation, hence the quest for them to be efficiently run. Efficiency can simply be defined as output over input delivered at the optimum operational level with quality. In finance literature, empirical studies have documented mixed findings on the effect of bank financial soundness of banks across the world as regards probable improved efficiency based on the state of financial health of the banking system. Thus the position of banking efficiency, asset and liability mismatch, liquidity level and agency cost remain unclear in the Nigerian banking system. This study is anchored on theories from efficiency, asset and liability management and agency principally. Quantitative research was employed with data collected from 15 deposit money banks, making a sample size of (70.1%) from 21 banks for 2007-2016 for 10 years. Balanced panel data sourced from audited annual financial reports of the banks and Central Bank of Nigeria (CBN) statistical bulletins were employed. Descriptive and inferential statistics were employed with the use of panel least regression model and appropriate model diagnostic tests carried out on the panel data. Findings from the study indicate that the null hypothesis, that there is no significant influence of bank financial soundness on the operational efficiency of banks was rejected and conclude that bank financial soundness has significant influence on the efficiency of the listed banks. Based on the results, there was no adequate evidence to accept the null hypothesis that bank financial soundness has no effect on operational efficiency with the hypothesized variables used by the study. Both negative and positive coefficient correlations were established in the findings. The study also confirmed the moderating effect of bank size of bank financial soundness on operational efficiency within the Nigerian banking industry. In addition, findings from the empirical evidence provided by the study indicate that banks must be operationally efficient so as to engender improved financial soundness and health for the entire banking system. Conclusively, the results from the study therefore upheld a priori theoretical expectation that bank financial soundness has significant effect statistically on operational efficiency. Consequently, bank financial soundness could reduce asset liabilities mismatch and potential agency cost from bank managers, improve credit risk exposure while enhancing operational efficiency and stakeholders’ interest. The study therefore recommends that, banks need to improve on credit risk management so as to impact positively on the quality of assets (higher income) and reduce cost/expense on non-performing loans to enhance operational efficiency. Banks must review their resource allocation strategies especially on operational expense (overheads) to reduce personnel cost, review capital base of the banks in line with their operational capabilities and risk exposures. The need to maintain optimal liquidity position is equally paramount for the banks to ensure higher profitability. Bank regulators must evolve an inclusive approach in monitoring and supervision of banks periodically. Additionally, government should improve the socio-economic infrastructural facilities for banking efficiency to thrive in Nigeria. Notable constraints of this study are its short period of examination and the measuring metrics employed.