Cost Efficiency, Scale Economies, and Technological Progress in Turkish Banking

Abstract

This paper uses a three input–three output Fourier-flexible cost function specification to investigate cost efficiency, scale economies, and technological progress in the Turkish banking system over the period 1988-1998. Our findings suggest that the Turkish banking system has a significant inefficiency problem. Although the annual inefficiency average decreased over the sample period due to the financial liberalization, commercial banks in the sector operated more inefficiently than their U.S. and European counterparts. The results suggest the existence of significant economies of scale for all groups in the sample and no evidence of diseconomies of scale even for larger banks. The results also indicate the existence of technological progress between 1988 and 1991.

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