Ihsan Isik

Technical, scale and allocative efficiencies of Turkish banking industry

This paper investigates input and output efficiency in the Turkish banking industry to understand the impact of size, international variables, ownership, control and governance on profit, cost, allocative, technical, pure technical and scale efficiency measures. Employing a non-parametric approach along with a parametric approach, we estimate the efficiency of Turkish banks over the 1988–1996 period. This period allows us to account for the changes in the macro economy and regulatory treatment of the Turkish banking industry over time. Our results suggest that the heterogeneous characteristics of banks have significant impact on their efficiency. Moreover, cost and profit efficiencies of the Turkish banks have exacerbated over time. Results also indicate that the dominant source of inefficiency in Turkish banking is due to technical inefficiency rather than allocative inefficiency, which is mainly attributed to diseconomies in scale. To the extent that they chose an inefficient level of production, bank management is responsible for scale inefficient operations. However, increasing demand for banking services in the nineties, fueled by the states increasing demand for funds to finance chronic budget deficits and high growth policies, and the oligopolistic nature of the Turkish banking market do not justify scale adjustments. Our policy suggestions are that the government implement financial reform packages that foster competition in the banking market, and that the industry devise incentive schemes to improve managerial efficiency.

Financial deregulation and total factor productivity change: An empirical study of Turkish commercial banks

Abstract In January 1980, a new liberal economic policy was adopted in Turkey to promote financial market development and increase the efficiency and productivity of the financial sector by fostering competition among banks. As a result of this policy, the Turkish banking system witnessed a series of legal, structural and institutional changes throughout the 1980s. To enhance their competitive viability, Turkish banks responded by streamlining their operations and investing in new technology. Utilizing a DEA-type Malmquist Total Factor Productivity Change Index, we examine productivity growth, efficiency change, and technical progress in Turkish commercial banks during the deregulation of financial markets in Turkey. We found that all forms of Turkish banks, although in different magnitudes, 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. Our results also indicate that private banks began to close their performance gap with public banks in the new environment.

Financial disruption and bank productivity: The 1994 experience of Turkish banks

Abstract Turkey experienced a severe financial crisis in 1994 that resulted in a record level of contraction in its economy and banking. Employing a non-parametric approach, we measured the efficiency and productivity of the Turkish banking sector between 1992 and 1996. We also decomposed the productivity growth into its mutually exclusive and exhaustive components (technological change and efficiency change) to understand the impact of the crisis on different aspects of bank productivity. Our results suggest that there was a substantial productivity loss (17%) in 1994, which was mainly attributable to technical regress (10%) rather than efficiency decrease (7%). We also examined the effect of the crisis on different groups of banks operating in Turkey. We found that while foreign banks suffered the most from the crisis, public banks apparently passed through the crisis unharmed. State banks’ relative immunity could be explained with their respectively low open positions in foreign exchange in the advent of the crisis and with their relative soundness and safety in the event of the crisis. We also explored the relationship between bank size, productivity and crisis. Our results indicate that even though the crisis affected all sizes of banks dramatically, its adverse impact on small banks was overwhelming. However, measures undertaken by the government and banks’ own efforts seem to have helped the financial sector recover and attain its pre-crisis productivity and efficiency levels within the following 2 years.

Bank ownership and productivity developments: evidence from Turkey

Purpose - This paper analyzes the responsiveness of different ownership forms to changing business environment by drawing on Turkish experience. Design/methodology/approach - This study is conducted in two stages. In the first stage, the paper uses Malmquist index theory, to estimate the total factor productivity change, technological change, efficiency change, pure efficiency change and scale efficiency change indexes for the Turkish banks. In the second stage, utilizing the generalized least regression format, it examines the significance of the productivity differences between different ownership forms after controlling for size and changes in the macro-economy. Findings - Under the “traditional banking definition,” productivity growth during the period was 1.2 percent for state banks, 3.9 percent for private banks and 14.2 percent for foreign banks. Under the “non-traditional banking definition,” the productivity gain over the period was 2.9 percent for state banks, 9.5 percent for private banks and 17.0 percent for foreign banks. Research limitations/implications - The future research can extend the data set and may include more explanatory factors to characterize the bank forms that record the fastest productivity growth. Practical implications - Private ownership appears to be more adaptive to new environment. Foreign banks can be used as a policy instrument to induce efficiency and productivity improvements in local banking industries. Liberalization of markets through competition boosts economic performance. Originality/value - In analyzing impacts of reforms, the significance of inter-temporal change should be tested to better guide regulators, investors and managers.

Managerial and Scale Efficiency in the MENA Banking: A Panel Study of the Jordanian Banking Sector

Using a non-parametric methodology, this paper analyzes managerial and scale efficiencies in the Jordanian banking sector over the period 1996-2001. The results indicate that the typical Jordanian bank could obtain significant (input and cost) savings should they catch up with the best practice banks (as much as 40%). Most of the managerial inefficiency is due to scale inefficiency (output related) rather than pure technical inefficiency (input related). We also find that most of the banks in Jordan experience increasing returns to scale in their operations. Apparently, significant economies of scale are available, could the Jordanian banks expand their operations by either internal or external growth.

THE ROLE OF EARNINGS AND BOOK VALUES IN PRICING STOCKS: EVIDENCE FROM TURKEY

Abstract In this study, we examine factors associated with equity valuation in a newly emerging market, Turkey. In the United States and other developed countries, research indicates that both earnings and book value are important predictors of equity valuation. In Turkey, earnings appears to have information content but earnings, by itself, appears to be declining in importance over time. Book value adjusted for inflation has a stronger association with equity values. In the inflationary and risky environment of Turkey, where future value of earnings is quite uncertain, investors may be paying less attention to earnings and more attention to book values. With respect to the role of book value there are competing explanations. While some researchers conclude that it is only important because it is a control for scale differences, (Barth & Kallapur 1996) others conclude that it is relevant as a proxy for normal earnings (Ohlson, 1995). Still others conclude that it is only relevant in the valuation of loss making and generally unsuccessful firms (Berger, Ofek & Swary 1996; urgstahler & Dichev, 1997). The additional contribution of this study is to show that book value is also important as a value proxy for firms operating in environments where there is rampant inflation. Our study also indicates that, overall, earnings and inflation-adjusted book values combined virtually explain almost 75% of the variation in equity prices in Turkey.

The Sources of Productivity Growth in Turkish Banks by Ownership: The Initial Responses of Public, Private, and Foreign Banks to Liberalization

Abstract Banks depending on their ownership type may demonstrate different responses to the changing operational environment. The Turkish financial system has undergone significant legal, structural and operational changes as a result of financial liberalization launched in the early 1980s. This paper investigates the sources of initial productivity changes in public, private and foreign banks as financial repression is phased out of the Turkish financial system. According to the non‐parametric Malmquist indexes, the results show that publicly owned banks realized the slowest productivity growth and foreign banks experienced the fastest after liberalization. Most of the productivity growth at public banks has come from changing scale, while private (domestic or foreign) banks have seen more productivity growth from increasing technical efficiency. Apparently, the productivity growth observed in Turkish banks during the liberal period mostly results from banks coming closer to the existing technological frontier (increased efficiency). However, the progress of the technological frontier during the period, representing the most efficient deployment of resources possible, was not as impressive. This implies that the source of productivity growth in Turkish banks is mainly “imitation”—the efforts of the inefficient banks to catch up with the best‐practice banks—rather than “innovation”—the outward shifts of the production frontier by leading banks.

How efficient are the commercial, investment and Islamic bank managers in Jordan?

The purpose of this study is to analyse the X-efficiency of banking firms operating in an emerging market, by drawing particularly on the Jordanian experience. Similar to some other Arab countries in the region, Jordan has embarked on important economic and social reforms to promote efficient financial markets and institutions for a genuine and enduring economic growth. Some empirical studies have found that management quality is the predominant cause of operating inefficiency and eventual failure in financial institutions. Thus, the type of X-efficiency we consider in this study is managerial efficiency (ME), which refers to optimal utilization of productive resources by bank management. Because it relies solely on the amounts of inputs and outputs in its calculation and does not involve factor prices, which are mostly market or regulation driven, technical inefficiency is entirely under the control of bank management and thus results directly from management laxity and. Our results indicate that public and foreign ownership is negatively associated with efficiency. Managerial efficiency also declines with ownership concentration, perhaps implying that closely held and family-owned businesses are not efficient organizational structures. Internationalization of bank operations seems to benefit domestic banks in terms of operational efficiency, as banks may be able to exploit scale and scope economies with the expansion of operations to new markets. Likewise, increasing size, producing more loans as a fraction of total assets or expanding market share in the domestic market appear to be the main characteristics of more efficient firms, all of which again suggest that increasing scale of operations may be one solution to eliminate underutilization of factor inputs in the Jordanian banking.

Erratum to “Financial disruption and bank productivity: The 1994 experience of Turkish banks”: [The Quarterly Review of Economics and Finance 43 (2003) 291–320]

1. In Fig. 1, page 301, on the Y-axis, the Y1 and Y2 should change the places. The correct figure is attached. 2. In page 300, Section 4. Methodology, second paragraph, third line: CRSt:0GP or CRSt+1:OATFR should be replaced with CRSt:0ATGP or CRSt+1:0BFR. 3. In page 301, last line, “0 for no efficiency change” should be replaced with “1 for no efficiency change.” In page 302, first line, “0 for technical stagnation” should be replaced with “1 for technical stagnation.”