erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Inefficiency of Labor Use: The Case of Turkish Banking Industry

Murat Çokgezen (Marmara University)
Mehmet Balcılar (Çukurova University)

Abstract

In order to make informed policy decisions regulators need to have fairly accurate information on the likely effects of their decisions on the performance of financial institutions. For this reason, it is important to have sufficiently reliable measures of the current efficiency of the financial institutions. Recently, banking system of many developing countries started to perform poorly in terms of both profitability and efficiency. To find out how large the inefficiencies of banking systems substantial research effort has gone into measuring the efficiency of banks. Many studies found that inefficiencies are as large as 20 percent or more of total banking industry costs and about half the industry's potential profits. To be technologically efficient, a firm must either minimize its inputs given outputs or maximize its outputs given inputs. Most studies of efficiency either measure output efficiency or cost efficiency. Unfortunately, there has been very limited number of studies on the efficiency of Turkish banking industry. In this study, we examine the technical efficiency of Turkish banking industry based on the input-requirement method. We use a translog stochastic frontier input-requirement function to estimate labor use for benchmarking the relative performance of banks operating in Turkey. We use an unbalanced panel data on 59 banks in the Turkish banking system over the period 1990-1997. A total of 428 observations are analyzed. Using the stochastic frontier input-requirement function, efficiency scores were estimated for each bank over the sample period. Labor use requirements are estimated in terms of the variables: loans, deposits, guarantees, number of branches, total inventories, and year of observation. A second stage efficiency regression was then estimated to identify the key determinants of technical efficiency, which include number of branches, total inventories, and year of observation. Results show that overall average technical inefficiency of the Turkish banking industry is on the order of 7 percent. The individual technical inefficiencies range from 0.0 percent to 28 percent. The average technical inefficiency of state banks was found to be 16 percent while the average technical inefficiency of private banks was around 7 percent. Foreign banks operating in Turkey were found to be the least inefficient with an average technical inefficiency of 5 percent. Estimates also reveal that average inefficiency had an increasing trend until 1994. The trend, however, leveled off after 1994.

Economic Research Center
Middle East Technical University
06531 Ankara Turkey
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e-mail: metuerc@metu.edu.tr