Efficiency assessment of the Turkish banking sector in the pre- and during Covid-19 pandemic periods

Abstract

Purpose- As in most emerging economies, banks are the backbone of the Turkish financial system. The banking sector has also undergone many changes such as the liberalization process in the 1980s, and the inclusion of participation banks in 2005, which have caused increased competition in the sector. Therefore, the performance of the Turkish banking sector is always under the scrutiny of regulators and bank managers as well as investors. Considering the devastating impact of the Covid-19 pandemic on the banking sector, the study aims to evaluate the efficiency of deposit and participation banks in the pre- and during pandemic periods. Methodology - Data envelopment analysis is applied to evaluate the relative efficiency of Turkish banks from 2019 through 2021. Adopting the intermediation approach, deposits and labor are employed as inputs while loans and net interest income are used as outputs. Findings - The empirical findings show that the average technical efficiency of the Turkish banks is around 85% in the covering periods. Breaking technical-efficiency into pure technical efficiency and scale-efficiency reveals that most of the inefficiency is due to poor management practices rather than diseconomies of scale. When we turn our attention to bank groups, the mean technical efficiency of participation banks is lower than those of deposit banks. Conclusion - Overall, the efficiency of participation banks is lagged behind the those of deposit banks in Turkey. In addition, Covid-19 does not outstanding effect on the overall efficiency of the Turkish banking sector. Keywords: Efficiency, Islamic banking, conventional banking, Data Envelopment Analysis (DEA) JEL Codes: C61, C67, G21