The Effect of Scale and Mode of Ownership on the Financial Performance of the Turkish Banking Sector: Results of a Dea-Based Analysis

Abstract

Turkey and the International Monetary Fund (IMF) agreed to a stand-by arrangement at the outset of 2000. Consequently, Turkey implemented an exchange-rate based stabilization program to combat its high inflation. However, two financial crises followed; one in November, 2000 and the other in February, 2001. As the result some banks became problematic. This necessitated restructuring of the banking sector to increase its financial efficiency.

This paper presents a financial performance index for commercial banks. The index allows one to observe the effects of scale and of the mode of ownership (public/domestic, private/domestic/foreign) on bank behavior and, therefore, on bank performance in a developing economy. It documents the effects of financial liberalization, cross-country movements, and the impact of financial crises originating in neighboring countries e.g. Russia. The study applies Data Envelopment Analysis (DEA) to selected fundamental financial ratios using 1989-1999 data from commercial banks in Turkey. Year-by-year results explain the effects on this sector of major shifts in both national macro-economic policy and various international developments. The banks that were taken over by the regulatory government agency most recently in the analyzed period were observed to perform poorly with respect to their DEA performance index values.

Keywords: Commercial Banks, Data Envelopment Analysis (DEA), Bank Performance