Advanced Search
MyIDEAS: Login to save this paper or follow this series

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


Author Info

  • Denizer, Cevdet


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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL:
Download Restriction: no

Bibliographic Info

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

as in new window
Date of creation: 30 Nov 1997
Date of revision:
Handle: RePEc:wbk:wbrwps:1839

Contact details of provider:
Postal: 1818 H Street, N.W., Washington, DC 20433
Phone: (202) 477-1234
Web page:
More information through EDIRC

Related research

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 listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Smirlock, Michael & Brown, David, 1986. "Collusion, Efficiency and Pricing Behavior: Evidence from the Banking Industry," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 24(1), pages 85-96, January.
  2. Pablo T. Spiller & Edgardo Favaro, 1984. "The Effects of Entry Regulation on Oligopolistic Interaction: The Uruguayan Banking Sector," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 244-254, Summer.
  3. Rudiger Dornbusch & Alejandro Reynoso, 1989. "Financial Factors in Economic Development," NBER Working Papers 2889, National Bureau of Economic Research, Inc.
  4. Gary Whalen, 1987. "Concentration and profitability in non-MSA banking markets," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q I, pages 2-9.
  5. Smirlock, Michael, 1985. "Evidence on the (Non) Relationship between Concentration and Profitability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 17(1), pages 69-83, February.
  6. Rhoades, Stephen A., 1985. "Market performance and the nature of a competitive fringe," Journal of Economics and Business, Elsevier, Elsevier, vol. 37(2), pages 141-157, May.
  7. Stiglitz, Joseph E, 1989. "Markets, Market Failures, and Development," American Economic Review, American Economic Association, American Economic Association, vol. 79(2), pages 197-203, May.
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
  9. Hannan, Timothy H, 1991. "Foundations of the Structure-Conduct-Performance Paradigm in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(1), pages 68-84, February.
  10. Jeong, Kap-Young & Masson, Robert T, 1990. "Market Structure, Entry, and Performance in Korea," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 455-62, August.
  11. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, in: Output Measurement in the Service Sectors, pages 245-300 National Bureau of Economic Research, Inc.
  12. Peltzman, Sam, 1977. "The Gains and Losses from Industrial Concentration," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 20(2), pages 229-63, October.
  13. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 977-1009, October.
  14. Bodenhorn, Howard, 1990. "Entry, Rivalry and Free Banking in Antebellum America," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 682-86, November.
  15. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 16(1), pages 1-9, April.
  16. 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.
  17. Gary Whalen, 1988. "Actual competition, potential competition, and bank profitability in rural markets," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q III, pages 14-23.
  18. Douglas D. Evanoff & Diana L. Fortier, 1987. "Reevaluation of the structure-conduct-performance paradigm in banking," Staff Memoranda, Federal Reserve Bank of Chicago 87-9, Federal Reserve Bank of Chicago.
  19. Allen N. Berger & Timothy H. Hannan, 1988. "The price-concentration relationship in banking," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 23, Board of Governors of the Federal Reserve System (U.S.).
Full references (including those not matched with items on IDEAS)


Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. 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.
  2. Cemile Sancak, 2002. "Financial Liberalization and Real Investment," IMF Working Papers 02/100, International Monetary Fund.
  3. Önder, Zeynep & Özyildirim, Süheyla, 2008. "Market Reaction to Risky Banks: Did Generous Deposit Guarantee Change It?," World Development, Elsevier, Elsevier, vol. 36(8), pages 1415-1435, August.
  4. 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.
  5. 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.
  6. 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, Elsevier, vol. 27(8), pages 1455-1485, August.
  7. Burak Gunalp & Tuncay Celik, 2006. "Competition in the Turkish banking industry," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 38(11), pages 1335-1342.
  8. Isik, Ihsan & Hassan, M. Kabir, 2002. "Technical, scale and allocative efficiencies of Turkish banking industry," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(4), pages 719-766, April.
  9. Denizer, Cevdet, 2000. "Foreign entry in Turkey's banking sector, 1980-97," Policy Research Working Paper Series 2462, The World Bank.
  10. 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, Elsevier, vol. 20(2), pages 225-247, April.
  11. Isik, Ihsan, 2008. "Productivity, technology and efficiency of de novo banks: A counter evidence from Turkey," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 18(5), pages 427-442, December.
  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, Elsevier, vol. 34(7), pages 1461-1471, July.


This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


Access and download statistics


When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1839. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.