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.