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.

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 state's 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.