Evaluation of Branch-Based Efficiency in Turkish Deposit Banks: Evidence from Privately-Owned Banks

Evaluation of Branch-Based Efficiency in Turkish Deposit Banks: Evidence from Privately-Owned Banks

Ümit Hacıoğlu (Istanbul Medipol University, Turkey), Hasan Dinçer (Istanbul Medipol University, Turkey) and Özlem Olgu (Koç University, Turkey)
DOI: 10.4018/978-1-4666-7288-8.ch005
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Abstract

The aim of the chapter is to measure the non-interest income based branch efficiency among privately-owned banks in the Turkish banking sector between 2008 and 2012. The chapter is built on the three inputs and three outputs model of bank branch efficiency and empirical results are constructed with the data envelopment analysis (DEA) in the limitation of input-orientated constant returns to scale model. The results demonstrate that all privately-owned banks improve non-interest based efficiency performance by the years and mean efficiency in the sector regularly rises due to the increasing overall competitive factors.
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Literature Review On Bank Branch Efficiency

The bank branch efficiency is a wide measurement that might include different kinds of financial and economic parameters. Efficiency measurement is based on determining the relationship between banks with selected inputs and outputs in the scope of non-linear problems. Increasing efficiency to the highest limits is sometimes difficult with the basic banking variables such as decreasing employee expenses. The sustained improvement on efficiency could be possible if firms increase their multi-faceted outputs.

The initial contributions to banking efficiency problems were in the 1980s (Kinsella, 1980; Sherman and Gold, 1985; Parkan, 1987). The first study applying DEA in the bank branch efficiency literature was conducted by Sherman and Gold (1985). The authors demonstrate that bank management finds DEA results providing meaningful insights which are not available from other techniques to improve productivity. The empirical findings present that DEA is a beneficial complement to other techniques for improving bank branch efficiency.

The growing number of studies in the 1990s have brought different perspectives to the discussions on banking efficiency (Pavlopoulos and Kouzelis, 1989; Vassiloglou and Giokas, 1990; Giokas, 1991; Doukas and Switzer,1991; Al-Faraj et al.,1993; Tulkens, 1993; Berger et al., 1993; Barr and Siems, 1994; Drake and Howcroft, 1994; Berger et al.,1997; Lovell and Pastor, 1997; Ayadi et al., 1998; Golany and Storbeck, 1999; Kantor and Maital, 1999). Oral and Yolalan (1990) firstly discuss the relation between efficiency and profits and investigate operating efficiencies of a set of 20 commercial bank branches in Turkey with relatively homogeneous banking products. The study presents that service-efficient branches achieve the most profitable results and suggests existence of a relationship between service efficiency and profitability. Moreover, there are widespread applications of bank efficiency over the last decade. The studies mainly illustrate the evaluation of bank efficiency at the aggregate and branch level using comparative methods. Some selected studies are introduced in the following paragraphs.

Key Terms in this Chapter

Input Oriented DEA Model: Focuses on minimizing the level of inputs with an assumption of fixed level of outputs.

Technical Efficiency: Is measured by the ratio of weighted inputs to weighted outputs of a firm. The distance between the analyzed firm and the best practice frontier represents the level of efficiency of that specific firm.

DEA: Data Envelopment Analysis is a linear programming technique used to measure technical efficiency levels of firms.

CRS: Constant returns to scale is applicable to a production function with the assumption that changing all inputs by a factor will result in changing outputs by the same factor.

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