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Rabu, 13 Mei 2009

A COMPARATIVE PROFITABILITY AND OPERATING EFFICIENCY ANALYSIS OF STATE AND PRIVATE BANKS IN TURKEY

Abstract

In this study, a comparative performance analysis between state-owned and privately-owned commercial banks of Turkey is carried out over the period between 1997 and 2006. On the contrary to expectations, statistical findings of the study produce surprising results. The results suggest that state-owned banks are as efficient as private banks, and even more efficient at some aspects. Thus, it rises the question of "whether to privatize banks or not?"

Key words: Bank performance, state banks, private banks, Turkish banks.

JEL classification: E44, G21, M41.

1. Introduction


Since financial system is vital for an economy and banks play a pivotal role in the financial system, it is important for economies to have a sound financial and banking system. In this concept, liberalization policies have been employed all over the world especially after the 1980s. Turkey has been in a change in economic sense from closed to more liberal structures. As a result, financial sectors and especially banking sector have been in a gradual evolution towards to liberal structure.

The current picture of Turkey's banking industry gives us the chance of addressing the issue of government banks' relative performance. This is important for both the rationale behind bank privatization and the policy implications. In addition, it provides valuable information for further researches to make meaningful comparisons before and after privatization performances of government banks when their privatizations are observed in the future.

According to market forces theory, private banks have an advantage over state banks with respect to financial and operating efficiency. However, our study suggests that government banks are as profitable as private banks. The study, firstly, updates the regarded findings with most current data on Turkish banking industry. Secondly, most studies of this kind apply economies of scale and technical productivity measures whereas our study uses operating efficiency and profitability as the measures.

This study is organized on three main parts. In the first part, theoretical and empirical researches related to the subject, are supplied. In the following part, a summary on the history and working of banking system in Turkey is given. The data set employed is described in the third part. Testable hypotheses, methodology and empirical findings are also supplied in this part. Finally, the paper completes with conclusion.

2. Literature Review

Despite the common belief that the purpose in state-ownership of bank is to provide financing for projects with low profile of profitability yet necessary for macroeconomic goods and development, empirical studies in literature suggest differently. Like many other researchers, La Porta et al. (2002), Caprio and Feria (2000) and Earth et al. (2001) report that state ownership of banks does not serve the purpose of promoting economic growth and development but even lead to worsening economic development. Moreover, they argue that banking crises are linked with bank ownership of governments since political goals may prevent government banks to operate in their original path to serve for economic development and growth.

Since governments continue to own banks in most economies, with the exception of the US, such studies regarding bank performance cannot ignore the role of government in the banking business. In this respect, the role of governments in the industry goes beyond the regulation. When a government controls financial resources and has the ability to direct those resources to politicallymotivated projects through banks, there appears a possibility for corruption of public funds. This is especially the case for developing and underdeveloped countries that also lack a sound legal system. Despite the supporters of development view in the 1960s and 1970s, empirical findings of many researches like World Bank report (2001), Galindo and Micco (2004), Sapienza (2004), Dine (2005), and Micco et al. (2007) are consistent with the political view.

It should be also noted that here arises an important discussion issue in government bank ownership and performance. That is, as argued by Yevati et al. (2004), state-owned banks should be evaluated by their function on stabilizing effect but not by their profitability. The researchers underline the importance of causality issue that exists between government bank ownership and such variables as economic development, growth, and corruption. Furthermore, they also introduce new findings which suggest that state bank ownership's negative effects on financial development and growth are not as robust as thought earlier. Their study provides evidence showing that state-owned banks may play a positive role in reducing credit pro-cyclicality as in the case of Latin American economies. Findings in favor of state-owned banks are also reported by Bonin et al. (2005), Yevati et al. (2004), and Micco and Panizza (2004). For example, Bonin et al. (2005) report that private ownership alone does not assure bank efficiency in transition countries. In addition, Micco and Panizza (2004) suggest that state-owned banks may play a positive role in credit-smoothing.

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