Modeling market power, efficiency and profitability of quoted commercial banks in Nigeria

Abstract

The objective of this research is to tests the relationship between market power and efficient-structure hypotheses in the Nigerian banking industry over the period of 2007 to 2015. The Data of this study was estimated using statistical analysis known as non-parametric, data envelopment analysis to obtain reliable efficiency measures and multiple regression method to estimate the final results. Our results show that efficient-structure hypothesis is positive and significantly related with profitability in the Nigerian banking industry allowing the rejection of the market power hypotheses. Due to the acceptance of the two hypotheses such as x-efficient hypothesis and scale efficient hypothesis, we conclude that Nigerian commercial banks may improve their profitability by increasing their asset size. This suggests that during the period under consideration, the Nigerian banks adopt a sufficient competitive behaviour and that they generate their profitability not through market power exercise but rather through efficient activity. These results should encourage the economic policy measures aimed at protecting the national markets to compete favourably with international partners.