Competition Paradox in Turkish Participation Banking: Asymmetric Effects of Market Concentration on Financial Performance

This study examines the asymmetric effects of market concentration on financial performance in the Turkish participation banking sector using quarterly data for the period 2016:Q1–2025:Q3. Analyzing five participation banks operating in the sector, the study employs second-generation panel data econometrics (CS-ARDL / CCE-MG) that account for cross-sectional dependence and bank-specific slope heterogeneity. Empirical findings clearly demonstrate that the relationship between market structure and profitability is not homogeneous. While early-entrant private actors in the sector are positively affected by increased competition in accordance with the Efficient Structure Hypothesis (ESH), state-owned and relatively new entrant banks benefit from market power advantages in line with the traditional Structure-Conduct-Performance (SCP) paradigm. Across the sector, Pooled Error Correction Model (ECM) estimations with Driscoll-Kraay standard errors indicate that decreasing market concentration (increasing competition) has a statistically significant and positive impact on return on assets (ROA) in the long run. Sub-period analyses reveal a divergence between the short- and long-run effects of competition shocks, whereas the Dumitrescu-Hurlin panel causality test indicates a bi-directional dynamic interaction between HHI and profitability. Consequently, it is advised that policymakers provide a competitive regulatory framework that encourages the entry of new technology-oriented actors into the sector.