The quantum efficiency of micro-light emitting diodes (micro-LEDs) is lower than that of large area LEDs. This efficiency reduction is typically attributed to the nonradiative Shockley-Read-Hall recombination at the surface defects and current leakage through the sidewall region without a clear distinction between these effects. In this work, we attempt to find out which of these phenomena is most critical for the reduced efficiency of micro-LEDs. This has been done by mapping electroluminescence (EL) and photoluminescence (PL) and measuring PL dynamics in blue GaN micro-LEDs fabricated by dry etching. It has been found that in the as-etched device, the EL intensity is much lower than in devices with KOH etching and atomic layer deposition of SiO2. This effect is especially pronounced close to the sidewalls. On the other hand, PL decay times are similar in as-etched and passivated devices, both in their center and at the sidewalls. This allows concluding that the main mechanism of the reduced efficiency of micro-LEDs fabricated by dry etching is the current leakage in the sidewall region and not the nonradiative recombination. The KOH etching has been found to be the most efficient means to eliminate the current leakage.