Faculty Scholarship 1994 - Present

The Impact of Financial Liberalization on the Efficiency and Productivity of Turkish Commercial Banks

Under strong patronage and protection of the state, Turkish banking has been an oligopolistic system controlled by a few huge banks, immune to disciplinary forces of competition, sluggish and careless in terms of innovations, and yet very profitable business. However, especially since the financial reforms introduced in the early 1980s, Turkish banks have began to operate in an increasingly competitive market. Existing banks faced strong competition not only from new domestic banks but also from foreign banks. In response, banks shut down unprofitable branches and/or reached branch sizes by laying-off their redundant employees. Utilizing, a DEA-type Malmquist Total Factor Productivity Change Index, we examined productivity growth, efficiency change, and technical progress in Turkish commercial banks during the deregulation of financial markets in Turkey (1981 to 1990). We found that although in different magnitudes, all forms of Turkish banks have recorded significant productivity gains, driven mostly by efficiency increases rather than technical progress. Efficiency increases, however, were mostly owing to improved resource management practices rather than improved scales, confirming the serious diseconomies of scale problems in Turkish banking. Our results also indicate that private banks began to close their perfromance gap with public banks in the new environment.