CHAPTER ONE INTRODUCTION

1.1       Background to the study

The banking sector of any economy is one of the most important sectors. The sector represents

the most active, most influential and responsive to changes in the economy especially as it has to

respond to the dynamics as imposed by globalisation. It also plays a significant role in the

economic development of all countries. The efficiency of banks is therefore of paramount

importance in the development process of a country (Ikehide, 2000).

Efficiency is a major success determining factor in today‟s business environment because of its

highly dynamic and competitive nature. Efficiency in banking is the ability of a bank to use

small amount of inputs to produce maximum outputs (Mehdian, Perry & Rezvanian, 2007).

Efficiency in banks can be classified into various forms namely; technical, pure technical and

scale efficiencies (Afsharian, kryvko & Reichling, 2011). Technical efficiency has to do with

obtaining the maximum level of loans, financial assets and net commission income from a given

set of equity, liabilities and deposits. Pure technical efficiency deals with a gain, an optimal

utilization of inputs to generate output, In other words, it is the ratio of technical efficiency to

scale efficiency. Scale efficiency deals with choosing the optimum size of bank to generate

certain production level (Bikker, 1999). Managers must develop strategies in order to be viable

and succeed in this highly unpredictable environment. Innovation is regarded as an important

factor that influences individual business success. It has improved the impact of banks on the

populace, and also expanded the horizon of banking business in developed nations. The fact that

the business of banking is similar everywhere presupposes homogeneity in banking services,

thus globalisation is easily amenable to the banking sector (Umaru, Hamidu & Musa, 2013).

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Globalisation is seen as the removal of artificial barriers restricting trade and investment and

ensuring free movement of goods and services and investment around the world, so as to create a

global economy (Usman, 2004). It has led to increased interconnectedness and interdependency

among national economies. Shrinkage in distance and location between countries facilitated by

rapid advances in Information and Communication Technology (ICT) enable free movement of

g