CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The efficiency of the banking system has been one of the major issues in the new monetary and financial environment. The competitiveness of financial institutions is stirred up by their efficiency levels, since their products and services are of an intangible nature. Efficiency in banking can be distinguished between allocative and technical efficiency. Wherein, allocative efficiency is the extent to which resources are being allocated to the use with the highest expected value. A firm is technically efficient if it produces a given set of outputs using the smallest possible amount of inputs (Falkena et al, 2004). Efficiency in the banking system is important at both macro and micro levels and in order to allocate resources effectively, banks should be sound and efficient (Hussein, 2000).

One of the most important economic dimensions for ensuring the success of a company is the efficiency with which it uses its resources. An efficient banking system is a sine-qua-non for efficient functioning of a nation’s economy. Thus, for the industry to be efficient, it must be regulated and supervised in view of the failure of the market system to recognize social rationality and the tendency for market participants to take undue risks which could impair the stability and solvency of their institutions (Thatcher, 2002; Onyido, 2004; Lemo, 2005; Balogun, 2007; Alao, 2010).