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The effects of financial liberalization and new bank entry on market structure and competition in Turkey

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  • Denizer, Cevdet

Abstract

Until 1980 Turkey's financial system was shaped to support state-oriented development. After the 1960s the financial system, dominated by commercial banks, became an instrument of planned industrialization. Turkey had an uncompetitive financial market and an inefficient banking system. Controlled interest rates, directed credit, high reserve requirements and other restrictions on financial intermediation, and restricted entry of new banks -plus the exit of many banks between 1960 and 1980- created a concentrated market dominated by banks owned by industrial groups with oversized branch networks and high overhead costs. Turkey since 1980 has seena trend toward liberalization of its financial market. Reforms eliminated interest rate controls, eased the entry of new financial institutions, and allowed new types of instruments. Regulatory barriers were relaxed, attracting many banks (both Turkish and foreign) into the system, and Turkey's banking system became integrated with world markets. The author examines how reform has changed the system, focusing on Turkey's commercial retail banking market. He finds that: (1) Although reform reduced concentration in the industry, leading banks are still able to coordinate their pricing decisions overtly. High profitability appears to have resulted from the banks uncompetitive pricing rather their efficiency. Deregulation and liberalization should be continued and strengthened. (2) The entry of small-scale firms alone is not enough to increase competition, so new banks should probably not be expected to alter the market structure. (3) To promote competition will require addressing barriers to both entry and mobility. The main barrier to mobility seems to be the size of the large banks, which exerts a significant negative effect on competition. (4) Interbank rivalry among the leading banks cannot be facilitated without creating new banks of a certain size with a reasonable number of branches. Breaking up public banks (which hold 30 percent of sectional assets, excluding the Agricultural Bank and three development banks) could help create 15 to 20 new banks with 40 to 50 branches. This would reduce concentration and improve mobility in retail banking. (5) Breaking up public banks before privatization would probably also improve their governance structures and efficiency. (6) Promoting the entry of nonbanks and local banks would also increase the number of institutions competing for deposits. Turkey lacks a healthy variety of credit institutions and should consider developing a mortgage market and creating institutions for housing finance.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1839.

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Date of creation: 30 Nov 1997
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Handle: RePEc:wbk:wbrwps:1839

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Keywords: Payment Systems&Infrastructure; Financial Intermediation; Economic Theory&Research; Banks&Banking Reform; Markets and Market Access; Banks&Banking Reform; Financial Intermediation; Economic Theory&Research; Markets and Market Access; Access to Markets;

References

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  1. Heggestad, Arnold A & Rhoades, Stephen A, 1976. "Concentration and Firm Stability in Commercial Banking," The Review of Economics and Statistics, MIT Press, vol. 58(4), pages 443-52, November.
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Citations

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Cited by:
  1. Sanyal, Paroma & Shankar, Rashmi, 2011. "Ownership, competition, and bank productivity: An analysis of Indian banking in the post-reform period," International Review of Economics & Finance, Elsevier, vol. 20(2), pages 225-247, April.
  2. Cemile Sancak, 2002. "Financial Liberalization and Real Investment," IMF Working Papers 02/100, International Monetary Fund.
  3. Burak Gunalp & Tuncay Celik, 2006. "Competition in the Turkish banking industry," Applied Economics, Taylor & Francis Journals, vol. 38(11), pages 1335-1342.
  4. Hulya Bayir, 2001. "Measuring the Impact of Full Coverage Deposit Insurance Policy in a Probit Model : A Study of the Privately Owned Commercial Banks in Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 1(1), pages 1-23.
  5. Isik, Ihsan & Hassan, M. Kabir, 2002. "Technical, scale and allocative efficiencies of Turkish banking industry," Journal of Banking & Finance, Elsevier, vol. 26(4), pages 719-766, April.
  6. Bayraktar, Nihal & Yan Wang, 2004. "Foreign bank entry, performance of domestic banks, and sequence of financial liberalization," Policy Research Working Paper Series 3416, The World Bank.
  7. Isik, Ihsan & Kabir Hassan, M., 2003. "Financial deregulation and total factor productivity change: An empirical study of Turkish commercial banks," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1455-1485, August.
  8. Ihsan Isik & Emin Akcaoglu, 2006. "An Empirical Analysis of Productivity Developments in "Traditional Banks" : The Initial Post-Liberalization Experience," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 6(1), pages 1-36.
  9. Denizer, Cevdet, 2000. "Foreign entry in Turkey's banking sector, 1980-97," Policy Research Working Paper Series 2462, The World Bank.
  10. Isik, Ihsan, 2008. "Productivity, technology and efficiency of de novo banks: A counter evidence from Turkey," Journal of Multinational Financial Management, Elsevier, vol. 18(5), pages 427-442, December.
  11. Önder, Zeynep & Özyildirim, Süheyla, 2008. "Market Reaction to Risky Banks: Did Generous Deposit Guarantee Change It?," World Development, Elsevier, vol. 36(8), pages 1415-1435, August.
  12. Hsiao, Hsing-Chin & Chang, Hsihui & Cianci, Anna M. & Huang, Li-Hua, 2010. "First Financial Restructuring and operating efficiency: Evidence from Taiwanese commercial banks," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1461-1471, July.

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