Retail banking enjoyed high growth and exceptional profitability until the
financial crisis of 2001. High profits hid the underlying productivity problems,
which have been exposed by the current crisis. After overall bank restructuring
is completed, the government's main focus must be to enshrine aggressive
productivity improvements throughout the state bank privatization process.
Productivity Shortfall
Despite a liberal setting and stiff domestic competition, after 20 years Turkey's retail banking sector performs at less than half of American productivity levels. Productivity rates at state banks are 40 percent of the U.S. levels but even large private banks are only operating at 55 percent.
Propelled by Interest Rates
The macroeconomic instability that has been a major source of woe for industry generally was a boon for retail banking through the 1990s. High real interest rates and the government's need for funding provided opportunities for enormous treasury profits. It was perfectly rational and acceptable behavior for owners and managers to seize these opportunities. Among the many distortions caused by high interest rates, the resulting lack of attention to core efficiencies was critical.
This windfall had another unintended consequence: it made domestic banks too expensive to acquire. And so few global banks have entered the Turkish market, despite the size of the market and the regulatory freedom. Competition has been almost entirely domestic, meaning that global best practices have taken root in the market slowly.
State Banks
State-owned banks account for 50 percent of employment in the sector. Problems of over-staffing, lack of incentives, and capital constraints that limit investments in necessary technologies have hounded government-owned banks. Additional social obligations - such as making retirement salary payments - put a further strain on productivity.
Incentive to Change
The financial crisis has provided a strong impetus for the
government and banks to focus on improvements. Even if interest rates remain
high, new accounting regulations and reporting rules will help banks address
core profitability. In addition, the process of privatization must ensure that
productivity gains are made rapidly in state-owned banks. If that happens,
Turkey can achieve productivity of up to 88 percent of US levels. Launch this chapter (PDF - 503 KB)
