Examining the Effect of Financial Innovation on Efficiency of Deposit Money Banks in Nigeria

Financial innovation was one of the inevitable phenomena that resulted from the liberalization of the Nigerian financial market. While studies exist that investigates the effect of financial innovation on deposit money banks (DMBs) in Nigeria, only a few have addressed its effect on the performance of DMBs in terms of efficiency, and only a few have used agency banking as one of the financial innovative products because it is new. Yet, among the few existing ones most of them employ the traditional metrics of performance measurement such as RoI, RoE, ROCE, Total Asset, Costs and RoA, not DEA- data envelopment analysis. The dearth of empirical studies, therefore, mandates this study, which fills this gap in the literature. The study used an ex-post facto research design. The population of the study comprises of the 13 DMBs listed on the Nigeria Exchange Group (NGX) and these serve as the sample size since it is small. The study collected data from companies’ financial statements, central bank of Nigeria (CBN) statistical bulletin, and the NGX fact book. Descriptive and inferential statistics, correlation tests, unit root tests and regression analysis were used to analysis the data. A non-parametric approach, DEA is used extensively to estimate the efficiency of DMBs. Findings show that financial innovation (Agency Banking) has a positive and significant effect on the performance of DMBs in Nigeria in terms of efficiency. Other conclusions are that volume of transactions of Agency Banking has a negative and significant effect on efficiency of DMBs in Nigeria; while value of transactions has positive and significant effect on efficiency of DMBs in Nigeria. It is also revealed that bank size has a negative and insignificant effect on the efficiency of DMBs in Nigeria. The study recommends that DMBs in Nigeria should continue to promote the use of various innovative products such as the Agency Banking in order to guarantee a wider acceptance and increased adoption and usage of the innovative products, to drive the volume of transactions, and ensure better customer service. They should continue to increase the value of transaction since it is positive and can lead to efficiency