Does Economies of Scale Exist in The Nigerian Banking Industry? An Empirical Investigation.
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The objective of the paper is to investigate whether or not economies of scale exist in the Nigerian banking industry. Aggregate annual data on 22 commercial banks covering the period from 2004 to 2013 were analysed using the ordinary least squares estimation technique to achieve the objective. The empirical evidence indicates that economies of scale does exist in the Nigerian banking industry as investment which is a major component of banks’ assets (proxy for bank size) is observed to be positively and significantly related to unit operating cost of the banks. Thus expansion in bank size is associated with reduction in operating cost in Nigeria. As a measure to reduce operating cost which invariably translates into reduction in cost of loanable funds (lending interest rate), the paper proffers as recommendation for policy, efforts by the banking industry and its regulators to expand the size of the banks operating in the country (by way of greater investments) as this would translate into reduction in the operating cost as well reduction in lending interest rate which is favourable to domestic investment.
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