Print Сite this

State-Owned Banks Privatization Efficiency in Turkey


In the banking sector, where intense competition is experienced, it is hard for the banks to survive and sustain the efficiency of their competitiveness. They struggle to survive through different strategies they adopt and the directions they prefer. The intense competition recently observed in the banking sector introduced novel strategies aiming at improving their competitive strength. Administrators’ perceptions are very important in measuring the effect of bank mergers on competitive strength. A questionnaire was prepared and applied in order to emphasize this important issue. The hypothesis “bank mergers effect competitive strength” was supported by two applications and the effects of bank mergers on competitive strength was studied.

We will write a
custom essay
specifically for you

for only $16.05 $11/page
308 certified writers online
Learn More

As is understood from the name, bank privatization looks like a kind of company mergers. It is very hard that the banks can survive alone because of density of competition in this sector. The bank privatizations in the world are because of a set of crises in the developing countries and financial liability, in the developed countries, are because of increasing the share of the market and competition power. The banks have to develop some strategies to get rid of this hardship. The bank sector has a fragile structure and for thsi reason thiis hardship has been increasing more and more. The competition power increase more with the bank mergers and the banks get a more strategic structure.


I would like to express my gratitude to people who supported me in writing down my dissertation. I want to give my special thanks to my mother who supported me all the time and encouraged me in my studies. I would also like to thank my supervisor Mr. Anders Poulsen at City University London who helped me in every process of my dissertation with his valuable suggestions.

Lastly, I would like to give my thanks to all my professors at City University London who gave me the chance of writing this dissertation and helped me to improve my academic skills throughout the academic year.


  • SDIF: Saving Deposit Insurance Fund
  • IMF: International Monetary Fund
  • WB: World Bank
  • BRSA : Banking Regulation and Supervision Agency
  • FDI: Foreign Direct Investment
  • FDIC: Federal Deposit Insurance Corporation


For many decades, privatization has been an important agenda in the global world. In the global economy, Davies (1994) found that privatization also plays an important role to increase society’s welfare and countrys’ overall economic level. In the context of privatization, my dissertation will investigate how privatization of state-owned banks increases efficiency and productivity in the banking sector. In today’s financial world, banking sector emerges as a key element to shape the global economy. As we have faced in the recent years, throughout the decade many developed and developing countries such as the US and Turkey have gone through deep financial crises which mainly influence people’s lives and welfare. As time goes by, the importance of the global economy and banking sector is increased. One of the toughest issues confronting the developing economies around the globe is how to raise enough funds to finance public goods and several projects which lead to raised economic and social welfare. Relying on privatization of state-owned banks in order to finance a country’s economic growth and development is considered as one of the possible solutions. Regarding to country’s social and economic welfare in the global context, this dissertation will cover the case of Turkey.

Throughout the years, the banking sector has regulated and improved a lot in order to gain efficiency and high productivity within countries. In order to clarify my thesis, it would be beneficial to emphasize on some questions about privatization of state-owned banks. Furthermore, improving the socieconomic welfare across the countries should be focused on. Hence, in the context of the banking sector, I will analyze the question of whether privatization of public banks is a good policy. In the discussion of privatization of public banks, I will try to clarify the reasons behind the importance of privatization in the banking sector for the global social and economic welfare.

The purpose of this study is to analyze the efficiency of privatization in the banking sector. In order to avoid global economic crises in the future, it is important to point out the benefits of privatization. In the theoretical analysis of economic crisis, Alper and Onis (2008) found that privatization of state-owned banks are on the agenda to prevent future economic crises. Due to macro-economic level of instability, weak regulations in the banking sector, high inflation and fiscal deficits in the countries, major economic crises took action in the beginning of 2000.

Get your
100% original paper
on any topic

done in as little as
3 hours
Learn More

In the post-2001 era, both public and private banks have gone through a lot of regulations to gain a stronger position and prevent the economy from future crises. In this paper, I would like to analyze the fact that is an equal welfare distribution the goal of privatization in the global world, or is privatization strongly necessary. According to Arslan and Celasun, in order to obtain a sufficient, productive economy, it is necessary to employ privitization strategy. Turkish privatization program is based on financing public goods and distributing total economic success of the country. Private banks increase the country’s economic efficiency in order to have a better financial and economic position within the world economy.

This paper will cover the public enterprises and their weakness in the economy in order to emphasize the reasons behind the privatization of public banks in Turkey. As I have been living in Turkey for 23 years, I have seen its economic deep points and improvements. So, I would like to investigate the developments of Turkish banking sector which is directly linked to the economy. The purpose of choosing Turkey for this paper is to show the reasons why privatization in the banking sector is needed. In the liberal economic world, the features of privatizaton also play a key role to show its impact on a country’s macroeconomic stability and welfare. So, this paper will investigate the fiscal impact of privatization of state-owned banks and its effects on the foreign direct investment(FDI).

What is Privatization?

In its narrow meaning, Shirley (1999) stated that privatization means the transfer of public ownership to the private sector. However, in its broader definition it refers to the reduced role of state vis-à-vis the market, which is assumed to be a non-partisan, neutral field by liberal approaches at large. Savas (2000) defined it as: “the act of reducing the role of government or increasing the role of the private institutions of society in satisfying people’s needs; it means relying more on the private sector and less on government.”1.

One of the most popular neo-liberal approaches to privatization has been given by the Agency Theory, which argues that incomplete and asymmetric information leads to principal–agent problem. In the theoretical analysis of principal agent theory, Shirley (1999) found that it refers to the situation that the principal faces difficulties in deeming the agent responsible for seeking the interests of the principal2.

Different interpretations on the source of the agency conflict have led to a bifurcation within the Agency Theory. The Managerial View argues on the one hand that managers of the SEEs may not be correctly monitored, thus they have low-powered incentives for efficiency and high discretionary power3. The Political View current of the Agency Theory asserts on the other hand that it is the political interference that misshapes managers’ incentives, causes over-employment and underinvestment4. The common tendency of the neo-liberal perspectives has been to justify the privatization of the SEEs by claiming for the improved performances of the enterprises after their privatizations5.

On the other hand, not every liberal economist perceives privatization as a necessity for the proper working of the market. Some scholars are critical and skeptical about the privatization claims of the neo-liberal approaches for the former does not necessarily view statemarket relation as a zero-sum game. According to them there might be conditions within which the state should pass to the market to deal with market failures. These approaches, though acknowledging like the neo-liberals that state is not a nonpartisan apparatus free of rent-seeking behavior, still underscore the importance of the state for the development of the economy. Hence, the privatization of the profitable SEEs simply for the sake of reducing the role of state has been harshly criticized as detrimental to economic development. What makes these critical approaches still liberal is their separated conception of the political and the economic spheres while making sense of socio-economic phenomena.

We will write a custom
for you!
Get your first paper with
15% OFF
Learn More

Another critical liberal approach, Institutional Political Economy, which had emerged as a reaction to the neoclassical economists in the nineteenth century, primarily disclaims the neoclassical assumption of “market primacy”. Contrary to neoclassical economists, institutional political economists believe that “all markets have a fundamentally political origin.” As can easily be derived from its name, this theory pays great attention to institutional diversity6.

Nature of the Industry

The countries’ special conditions such as social, economic and cultural factors have impact on its financial institutions. When the developed countries’ banking history is observed, there are two types of banking which are called Anglo-Saxon Banking (for example banking in United Kingdom, Canada, Ireland), and Continental European Banking. One of the main differences between them is public banking which is generally seen in the Continental European Banking. However European Union went through deregulation process in the banking sector and public banks were privatized. In full competition market economies, government only commits the control responsibility in the sector, not competition with private actors.

The History of Banking

As the globalization wave intesifies; volume of exports, imports and financial flows increase. This tendency causes banks to be international or invest abroad. This internationalization process matches with liberalization of financial markets. Especially in the last decade, foreign bank entry became a debatable issue considering its positive and negative dimensions. In the literature the effects of foreign banks are studied in a detailed way pointing out their cost and benefits.

Banking sector is without doubt one of the most regulated industries in the world, since banks have had a central role in financial mediation for centuries. State has regulated the banking sector in order to protect depositors’ money; to ensure the safety of banks, and thus safeguard the whole economy. However, the methods and modes of banking sector regulation have changed significantly in the 20th century. After World War II, state regulated the banking sector through the involvement of public banks and anticompetition regulatory rules. However, after the worldwide economic crisis in the 1970s, the mode of banking sector regulation has changed toward ‘statutory regulation implemented by independent regulatory agencies’: interest rates and foreign currency regimes have been deregulated; public banks have been privatized; autonomous bureaucratic agencies for bank regulation have been established; and competition in the banking sector has increased.

Like many other institutions of capitalism, development banks have first emerged in the developed countries in the nineteenth century. As expected, they had responded to the requirement of long term finance of the time. The emergence of specialized institutions for investment was realized by the transformation of small individual firms to large corporations after the Industrial Revolution. Thus, the experience with respect to development banking during this century was confined to industrialized countries. Although the Industrial Revolution should be regarded as a process signaling the need for long term lending institutions, there was a variety of experiences in this respect. For instance, in England, the motherland of the industrial revolution, capital accumulation of individuals had permitted them to invest for production for a long time. Explicitly, this arose from the fact that (There was a significant accumulation of capital, derived from the reinvestment of profits from agriculture, foreign trade and small) scale industry and from the profits of lending money both to the government and to private individuals. Nevertheless, it should be recalled that state was always very effective through this process.

Since the gradual nature of the industrial revolution enabled British investors to have adequate resources, they did not require banks for long term lending in the initial phases of this process. Instead, banks in England were established under enterprise bodies so that they originated from different business groups and specialized in short term lending. In fact, in 1800s, there were almost 600 banks outside London while the Bank of England, founded in 1694, had been the single example until 1750s (ibid). However, providing funds for fixed investment became a problem also for the British economy in the latter part of the nineteenth century. This was because the units of business became much larger and more and more individual firms were converted into corporations

In fact, banks across Europe played a most important role first in railway and canal construction and then large-scale industrial and commercial enterprises by attracting savings from individuals and non-banking enterprises. Their activities were extended to investment in joint-stock companies as well as government securities. Likewise, in the United States, a financing institution was required first ―with the growth of large-scale transport systems and utility enterprises after 1820. These experiences of large investments in infrastructure must have developed the practice of banks, which would be utilized in financing industrial investment.

In other words, the banking system throughout Europe and west of Russia played an important role in industrialization, imitating investment practices and methods of Crédit Mobilier. Before concluding our discussion on the nineteenth century experience, it is essential to emphasize the German experience. Diamond illustrated the significance of this experience as having a banking system closely associated with industry as both promoter and financier. As will be discussed in the next section, this is one of the definitions of industrial banks and German experience is regarded as the forerunner of this type of banking.

Need a
100% original paper
written from scratch

by professional
specifically for you?
308 certified writers online
Learn More

The institutions of the twentieth century in the developed countries had different characteristics than those in the previous century because the twentieth century ones witnessed two world wars and a worldwide depression. In line with the fact that the socioeconomic conditions influence the forms and structures of the institutions of a certain period, the categorization of Basu according to certain turning points will be taken as reference. Accordingly, by the end of the World War I the industrial mortgage bank, granting long-term amortization loans on first mortgages of property and issuing bonds to raise the necessary funds to finance these loans, had proved to be eminently successful for financing long-term operations in various spheres.

First of all, there emerged global development banks, such as the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC) and the International Development Association (IDA). Summarizing the missions of these institutions, the IBRD was designed as facilitator of post-war reconstruction and development and was established in 1944 as the original institution of the World Bank Group. Since it is the original institution, the name of this institution and the World Bank is used interchangeably in this study. Because of the significant role of this institution for the period under consideration (1950-1953), the next section will be devoted to a more detailed discussion of the IBRD.

Goods and Services

Marketing of the products and services has changed because of the previously mentioned reasons. Moreover, service marketing has become more important as the clear differentiation between services and products exist in the minds of the providers. Services are distinguished from products because of having different dimensions, in the case of purchasing a product the tangible aspects can be considered.On the other hand, while purchasing a service although the theory is the same, the practice differs because of the nature of the service.

There are both tangible and intangible dimensions to be evaluated. Furthermore it is suggested to consider the price dimension when the tangible parts of evaluating a service are not availed. Therefore, the intangible side of the service which makes the evaluation process more difficult from the customers’ point of view is a subjective measure compared with the tangible nature of the product evaluation. The service dimensions are ‘qualitative’ rather than

‘quantitative’, ‘changes from person to person’ in the evaluation process and for this reason ‘subjective’ rather than ‘objective’. The complexity of evaluating a service arises because of the nature of the service and to understand the quality of a service, the features of the service should be examined first. The key elements of service are explained as follows:

Intangibility: In contrast to products which are tangible in nature in terms of physical occurrence and result of outcome which is easy to differentiate, services are intangible in terms of both occurrence and outcome. For instance, the evaluation of a dry cleaner service is not only the delivery of the final product the service is supposed to deal with. It means not only the physical part, but the way the product is delivered, in terms of the arability of working hours of the service, open days, the speed of the service, and the attitude of the workers towards customers’ is also important to make a total evaluation which contains the intangible parts of the delivery.

Variability: Services are heterogeneous from the service providers’ and the customers’ side. Since the services are delivered through and to people, when the people, in other words the customers, change in the stages of delivery or in the final stage of the service, the change may occur in the expectations and perceptions of the service, which will be described in detail in the following parts.

Inseparability: The production and consumption of many services are said to be inseparable. This phrase mainly explains about the continuous stage of consumption, starting with producing a good and the delivery process continuing with provision of a service. Moreover, it is further explained that for service intensive industries, interactivity plays an important role where the customers’ contribution is greater and the outcome of the service quality dimension is more influenced.

Perishability: Perishable nature of services stresses the importance of how difficult to build a good service experience and how easy to damage the good service experience from the customers’ point of view. As the inseparable nature of offerings focuses that the services are the inseparable parts of products whether the core element is the service or part of a product, the priority should be given to which extent this service offering be provided to the customers depending on the industry and depending on the customer. A famous phrase says that ‘80% of the revenues comes from the 20% of the customers’, when it’s considered; the focus should be given not to provide a perishable service to this profitable segment.

Industry Organization

Within the financial service institutions, banks, savings and credit unions are known as depository institutions. The responsibilities of the banks are described in terms of traditional and modern views, where the traditional view refers the banks as intermediaries which allocate financial resources and modern view simulate banks to factories handling both information processing and deal making. In the case of modern view, the processes consist of managerial design of collecting and using customer information and the operational implementation by the

employees so the delivery of the service can be performed. On the other hand, it is the evaluation of the service which differentiates in the banking industry since the processes performed are almost similar among different banks. Furthermore, for gaining competitive advantage, differentiating services has various benefits in the literature. For instance, the Profit Impact of Marketing Strategies Research found in its research that among the 50 high performers in service industry high quality service providers gain 8% above low quality service providers on average return on investment.

In addition, the importance of measuring service quality in the high contact service organizations such as banks is also found to be an important factor to differentiate the products to achieve competitive advantage. When the measures of service quality construct are examined for modern banking, the technical quality is the result of the instrumental performance achieved by the service. What is received as an outcome of the service provided i.e. tangibility of the service, can be the use of alternative distribution channels benefiting from technology to improve the technical quality of the service to the customers. On the other hand, functional quality is the result of expressive attributes i.e. intangibility of the service, processes and people which can be examined during the service encounters in terms of the willingness, courtesy of the employees; in the case of internet banking can be the accessibility of the services or the user-friendliness of the websites.

There is a third quality dimension corporate image, which is established by the instrumental and expressive attributes during service interactions in addition to the external factors; promises given by marketing activities, personal recommendations from other customers and environmental factors influencing personal evaluations. Therefore, in the absence of previous experience with bank service encounters, corporate image or corporate reputation is an important element since bank services include high levels of perceived risk from the customers’ point of view.

Product-Centred Approach: The focus is to compete with rival products in the competition. The existing products in the bank are differentiated in terms of unique attributes to meet customer needs so that premium price can be charged. It can be achieved through the product quality, unique benefits and attributes associated with the product, a new technology used in the formation or delivery of the product, for the latter the channels can reach to a wide range of customers. Since the efficiency is focused on the product productivity the short term profitability from the transaction and cost reduction. In the product-centered approach as the product is unique from rivals, the aim is to provide the highest profit from the existing resources so the unique benefits of the product can be utilized.

Customer-centred Approach: All the resources customers evaluate in the service encounter are the focus of this approach which includes the physical evidence, process and people. In the case of physical evidence, it refers to the lay out and decoration of stores which should feel the customer comfortable prior to the service and easy for accessibility for instance availability of the service, working hours and arrange of queues in the branch and use of other distribution channels such as ATMs and internet banking which are available customers to operate for convenient location and time.

Also the employees are an important part of customized service offering where the employee training and motivation is apparent in the willingness to serve the customers during service interactions. In addition to this, it is important that the employees have sufficient time remaining from collecting and processing of customer information to understand and meet customer needs. Through the use of smart technological systems, the employees can obtain quality customer information which is updated regularly not only on the customer purchase of the service but also to highlight the customer stage of the service whether additional services can be offered or the customer can be diverted to use other services. When these are all met, the lifetime value from the customers can be achieved with customer satisfaction which will lead to increased customer retention. Marketing Support Approach: It is important that marketing activities are centred through the core aspect of the service whether its product oriented, customer oriented or both. Marketing support activities as mass communication activities, sales promotion activities, publicity/sponsorship activities and personal communication/sales activities. In order to attract customers, the marketing activities are used to target mass audiences through mass communication activities, sales promotion activities and publicity/sponsorship activities.

In addition to this, the financial service firms which realize the importance of service dimension is inseparable from financial products are moving to a retail environment, where the priority of attention is given to customer satisfaction with enhanced customer service through marketing activities and increase in product variety. The services differ from products in terms of having different attributes and for the retailing of financial services key service elements are intangibility, heterogeneity, inseparability, perishability and fiduciary responsibility as follows:

  • Intangibility: The financial services are intangible in nature since there is no definite measurement for this and the related risk can not be estimated prior to purchase.
  • Heterogeneity: The financial services include various financial products which serve different types of customers, also the employees differ in the process and delivery of the products, therefore the variable is the human factor which changes the outcome of the service.
  • Inseparability: The financial services are inseparable parts of financial products and it is the direct interactions with the suppliers that the customers evaluate for the result of the given service.
  • Perishability: The opportunity cost of supplying the existing financial service will be lost when there is no customer demand. In order to cope with this, the financial service providers can offer cross-selling or low cost alternative delivery channels such as ATMs or internet banking.
  • Fiduciary Responsibility: The financial services involve high risk which requires trust to the organization that can be gained through reputation of the company for the implementation of future processes and the human interactions with the customers.

Recent Developments

In order to identify the electronic service offerings of banks i.e. automated channels (online banking) in the e-commerce environment includes internet banking, Automated Teller Machine (ATM) and telephone banking. In both of the services regarded as banks automated service channels, the customers find the ability to interact with the software of the bank rather than employees and manage own transactions which are under the self control of the customers. With the introduction of new technologies such as internet, the processes can be performed online with decreased workload of branches and the employees are replaced by the software programs. The customer information are processed in the internet based data systems (software), therefore the service quality of the internet banking has the ability to provide standardized level of services.

By the introduction of new service channels in banking; reflect the same change both to the customer and to the service provider. The new channels such as; ATMs, telephone banking and Internet banking i.e. online banking channels not only enhanced the capabilities of the old service channels but also provide more opportunities to distribute the banks’ products to the customers. Whilst the use of traditional banking channels are focusing on direct personal interaction through the use of branches or call centres, the increase in number of new service channels fragmented the customers’ attention into these various channels. Therefore the change is from single banking channel usage to an increase in the use of multiple banking channels. Hence, the decline in the use of the old banking channels in general and for routine transactions in particular because of internet banking usage is the approval for this trend.

Some of the unique features for shifting from the traditional channel usage to new channel usage are; increasing the availability to the information without limiting for geographical boundaries, cutting down the costs, benefiting from cross selling opportunities, making more personalized customer relations in greater segments with accessibility of customer information and recording the data of the customers so that targeted customers can be reached with the right products or services through the most cost effective channels. The bank customers general customer perceptions are examined in the automated delivery channels on quality are; reliability, ease of use, personalization, accessibility, accuracy, security and efficiency and in particular for internet banking; availability of information, easy to use, security, error free transactions, attractive website, website interface accuracy and up to date information.

As a result, the overall automated service quality in banks depend on dimensions consist of; internet banking service quality, ATM service quality, telephone banking service quality, core service quality referring to the range of products or services offered to the customers and price quality referring to the acceptability of the service.

European Union’s Banking System

In order to maximise social welfare and ensure efficency in the banking industry, competition is an important aspect. Competition brings about a dynamic, allocative and productive effectiveness in the banking industry. An increase in competition in the banking industry results into loan rates reduction, lower costs, increased loan supply, quality services and increased product innovation. Although the financial services industry has different characteristics from other industries, ways in which competition influences effciency are the same as in other industries.

The amount of credit supplied and how effecient it is allocated are two paramount aspects in allocative efficiency. In a perfectly competitive banking industry, profit maximizing in banks leads to an equilibrium between the maximum amount of credit supplied at a least price and its allocation efficiency.

In a case where the banking services lack economies of scale, productive efficiency can be obtained in a perfect competition because production of outputs is made at a minimum cost. İn terms of dynamic efficiency, competition in the banking industry results in product innovation. Further, due to rivarly in the banking industry, banks develop advanced business processes, adoption of technology in offering banking services and constant improvement in financial products quality. An improvement in these efficiencies subsequently leads to improved economic development and social welfare.

The banking industry has specific characteristics which make it different from other industries and important to a country’s economy. The banking industry is an important sector to economy growth since it provides financial services to all the other industries thus facilitating production. Banks facilitate resources transfer from people who are saving and those who are borrowing and hence they act as intermediates between lenders and borrowers. They also play a great role in mobilizing, allocating and investing savings from the society and hence their performance greatly influences firms growth, industrial expansion, capital allocation and development of the economy. Further, banks play a great role in reducing information transfer and the costs of transactions associated with lenders-borrowers interaction. Due to this the banking industry can be regarded as the foundation of the market economy.

Any instability in the banking industry would subsequently lead to instability in the financial industry and hence its stability is paramount to the stability of the economy. Even though the financial stability involves all finacial insitutions, stability in banks is most of the times the basis of concerns in financial stability and debates in the banking sector policy. An instability in the banking sector can be trasmitted to non-financial sectors and other finacial sectors since it disrupts the lending market and distorts the payment mechanism. Further, instability in the banking sector can lead to reduction in credit availability to other financial and non-financial sectors. Through contagion effects, distress in individual banks can affect the whole banking industry which eventually leads to a disruption in the whole finacial system. This further affects the economy at large. Due to this great importance of stability in banking sector, policymakers should formulate polices that prevent instability and crisis in the banking sector.

The banking industry stability and efficiency matters a lot to policymakers and hence should be given a high priority. İn maintaining efficiency, policymakers maintain competition in the banking industry by formulating supervisory and regulatory policies. However, stability in the banking sector depends on several other factors other than supervisory and regulatory policies. These factors include macroeconomic factors, institutional factors and global economic conditions. Competition level among the banks may also affect the banking system stability. A question of whether there is a negative relationship between banking sector competition and banking sector stability may arise at this point. Economists and policymakers have been having a traditional perception that high competition in the banking industry leads to increased incentives of engaging in risky activities that can eventually lead to a high bank failure probability. A trade-off therefore exists between the banking industry stability and competition. Opportunity cost of bankruptcy may arise from a certain level of market power, thus moderating a bank’s risk taking incentives which subsequently fosters the banking system’s stability.

Unlike other sectors influencing the economy, the European banking industry must take note of stability-competition interaction. The special features, characteristics and nature of the banking industry in relation to stability exposes its complexity in competition policy as compared to other sectors of the economy.

European Integration

Effectiveness of resources in a geographical region is the base of integration effort in diverse national economies. Literature on economic integration began to increase several years after the Second World War. Countries which are not within the integration area are negatively affected due to barriers imposed by the countries within the integration area. Countries within the integration area have eliminated trade barriers to allow free trade. According to GATT/WTO, (General Agreements on Trade and Tariffs / World Trade Organization), there is a total of 162 regional economic integration which comprises of 21 preferential agreements, 29 service agreements, 11 customs unions and 101 free trade agreements.

Currently the European Union is in the process of creating a single market, more specifically in the financial services integration. Since the banking industry acts as the major intermediary between lenders and borrowers, it must integrate so as to effectively offer their services to their customers. However, the EU banking industry has not been homogenous. A single market in the banking industry means that banks can facilitate EU boarder and customers may often prefer to borrow from any bank. This offer establishes freedom and free trade in the industry.

European Economic and Monetary Integration

A preferential trade agreement focuses on decrease of customs tariffs in relation to different types of selected goods. The phase of economic integration is seperated into eight phases by some economics where the interim periods such as monetary union are calculated. An economic union comprises of monetary and economic integration which is the same in the European Union. In monetary and economic union there is free mobility of capital, services, goods and single currency free circulation at the Union boarder using a similar monetary policy governed by European Central Bank.

European Monetary System

The Rome’s foundation treaty did not exactly put into consideration the monetary integration. The treaty sought to establish customs union, remove barriers affecting free movement in production and form policies for transportation and agricultural sectors. However, the treaty failed to abolish the intervention of foreign exchange of its members.

In article 6 of the Rome Treaty, a common market was created which removed barriers to free movement capital. Also in the treaty, credits with balance of payment given to countries were not made compulsary. However, on looking at the Maastricht Treaty, problems in budget deficit and foreign exchanges are some of the main issues expected in monetary integration and foreign exchanges. The Bretton Woods system and Dollar-based fixed exchange rates system which were to be used by all countries in the world was a major barrier to monetary integration in the Rome treaty. Due to this reason the process of monetary integration was unnecessary to lawmakers.

In 1950’s, it was revealed that the internationl liquidity was a subject of United States external deficit. United States external deficit remained continous which led reduction of trustworthiness. Increased pressure on the dollar causes disturbances in the world markets. For example, embargoes in oil led to dollar devaluation in front of gold. However, this system collapsed and a floating exchange rate was preffered by major countries but brought chaos after inflation rates rose. By this time the European Union had started developing its integration objectives such as in Common Agricultural Policy. This policy depended on minimum fixed exchange rates and support price. At this time the monetary integration was made compulsary to the European Union. In May 1988 at a meeting in Brussels, 11 countries of the European Union adopted the Maastricht criteria of single currency in an EU Summit. These countries were; ‘Austria, Germany, France, Belgium, Spain, Ireland, Luxembourg, Netherlands, Portugal, Italy and Finland.’ In January 1999, these countries accepted the Euro as their single currency. After meeting the conditions in Maastricht criteria, Greece started its participation in the Euro bringing the number which had adopted the Euro to 12. However, countries such as the United Kingdom and Denmark failed to adopt the Euro (single currency). However, with the exceptional of Denmark and the UK, the other EU countries had to become Euro area countries and maintain the Maastricht criteria.

The Reasons of Regulation of the Banking Sector and Banking Privatitation

The single market for financial services is regarded as not fully integrated by many observers. It is said that Euro land inter-bank and wholesale markets are more integrated than the retail banking markets. The European Commission declared that there was a segmented financial market in the Union and there was not direct access for businesses and consumers to the financial institutions in 1999. It is estimated that cross border lending only takes 2 to 5 percent of the total European Union lending. The reasons for the lack of integration in retail banking markets are legal and natural barriers.

The natural barriers such as language, geographical distance, cultural differences, and consumers’ preferences for local banks can not be eliminated although the legal barriers are diminished. The legal barriers are the existence of different laws in the members of the European Union. The directive 87/102/EC about the consumer credits depends on the minimum harmonization approach. The harmonization of laws remained low but the complexity between the laws increased with the directive. The business suppliers are expected to know the twenty-seven countries banking law. The way of examining the financial market as integrated or not is to look at cross-border lending and cross-border bank mergers and acquisitions (M&As).

European Union countries can prefer to apply the same banking law to overcome the problem of the differences in the nation laws. Because it is not sensible for the financial institutions to know about the whole regulations of the member states in the financial markets. However it is also a question for partners to apply the same banking law.

The Institutional Framework of Turkish Banking Sector

Turkey’s prospects of accession to the European Union are highly dependent on the progress made with political and economic reforms. Most of the issues are concentrated in the banking sector in financial sector, because banks account for more than 90 percent of the total assets of the Turkish financial system. In implementing structural reforms, Turkey has met nearly all of the conditions set for the banking sector. Especially after the foundation of Banking Regulation and Supervision Agency, Turkey has taken seriously to follow up the structural reforms in banking sector of EU. Despite the relatively small asset size and low degree of intermediation of the Turkish financial system, Turkey’s potential and its regional situation make it an attractive market.

The potential is a market which has seventy million populations and this market belongs to a developing country. The market is hungry to grow-up. The entry of foreign banks into Turkey’s financial markets is expected to enhance competition in the financial sector and improve the quality of banking services and financial products. After 1980s, Turkey has opened the doors to the rest of the world. It adopted industrialization programme based on exporting and expected foreign capital to develop. Unfortunately, Turkey has been suffering from the same situations which are faced in all developing countries. Some macroeconomic problems discouraged foreign capital. In the way to European Union, it is given a chance to delete the bad image of Turkey to attract the foreign capital. Fortunately, the Turkish banking system, with its high-technology systems and regulatory compliance, is a strong candidate for becoming a member of the European financial system today.

Privatization of Public Banks in Turkey

In 2001, the Banking Sector Restructuring Program (BSRP) was formed and practiced by the Banking Regulation and Supervision Agency (BRSA). The BSRP was based on the following four main areas: regulatory and supervisory framework enhancement, bank resolution of Saving Deposit Insurance Fund, private bank strengthening, public bank restructuring.

In order to restructure the public banks, according to the report of BRSA (2002), 19.854 million US dollars were transferred to the public banks. Restructuring is the first step of the privatization of the public banks. Government announced that public banks will be privatized. However in order to privatize the public banks, balance sheets of the public bank should be empowered. After 2001, because of the reasons above, public banks started to operate like private banks which increased the performance of the public banks. Because public banks have an important market share, this progress directly and positively affected the performance of the domestic banks.

The new Foreign Direct Investment Law (‘FDI’) (numbered 4875) has been in force since June 17,2003 and emphasizes the key elements of the liberal investment environment in Turkey. The FDI is a “legal guide” to the International and European investors about their rights and obligations. The company establishment is equally treated under the Turkish Commercial Code. Turkey is in a bid to privitize most of her orgaizations. This makes the country fertile for investement. With the widespread privatization, local and global investors are highly welcomed. The privitation process is a recognizable source of revenue for the government of Turkey.

This privitization process is mainly done to ease the financial burden expected of the government in running these state-owned ventures. In this privatization process, many SEEs have passed to the private sector and SEEs are subject both to Competition and Capital Markets legislation. In the banking sector, after the twin deficits and the crisis the government wanted to reduce the burden of the duty losses which is resulted by the public banks. Besides, FDI ( foreign direct investment) plays an important role in country’s economic development and growth. After the recapitalisation in the banking sector, foreign investors find Turkish banking sector very attractive. Obviously, FDI comes in the form of privatization, and the government emphasizes heavily on the foreign investors to come to Turkey.

Hence, Ercan and Onis (2001) find evidence that privatization in the banking sector is a good public policy that is why it is still on the agenda for many countries such as Turkey. Also, the countries that have gone through privatization improved their social and economic welfare within the global world.

It is important to provide economic welfare broadly to improve the country’s economic and social development. Private banks increase the level of the country’s efficiency, capital market development and competitiveness in the global economy, also privatization in the banking sector helps to resolve the major issues of the world economy. Hence, privatization of state-owned banks should be encouraged in order to increase competitiveness in the global economy and increase the economic welfare across countries. On the contrary, state-owned banks only aim to fullfill a political mission rather than profit maximization. Their aim is to support the government, however these actions do not benefit the society and these political influences on the banking sector is costly for social welfare.

Banking Sector Developments in Turkey and SDIF

Türk Ticaret Bankası A.Ş. is the first bank that became under the control of SDIF on 6 November 1997. Then, Bank Expres A.Ş. and Interbank became SDIF banks on 12 December 1998 and 5 January 1999, respectively. Hence, it is decided to form a group of “SDIF Banks” after the negotiations with BRSA. Moreover, the definition of SDIF took place in Banking Law No: 4389 which was adopted on 18 June 1999. Thence, although no bank takes place in the list of SDIF banks till 1999, the variables of 1998 exist7.

The number of banks in Turkey is 72 in 1997. Of total banks, 59 banks are deposit banks and 13 banks are development and investment banks. In addition, the distribution of the ownership of deposits banks is as the following: 36 banks are privately-owned, 5 banks are state-owned and 18 banks are foreign banks. State-owned banks reach their maximum in number in this year. Moreover, there is no SDIF bank. In 1998, one more deposit bank and two more development and investment banks are established. Hence, the number of total banks increases to 75 banks. Of 60 deposits banks, 38 banks privately-owned, 4 banks are state-owned and 18 banks are foreign banks. Hence, the numbers of privately-owned and state-owned banks increase by two and by one, respectively. 1998 is the year that privately-owned bank reach their maximum in number. The numbers of foreign and SDIF banks are the same as the numbers in 19978.

In 1999, 6 more banks are established and the number of total banks reaches its maximum with 81 banks. Two more deposit and four more developed and investment banks’ establishment provide this increase. Hence, the number of deposits banks becomes 62 and the number of developed and investment banks becomes 19 which are also the maximum in this period. The number of privately-owned banks decreases to 31 and the number foreign banks increases to 19. The number of state-owned banks is 4 till 2000 and SDIF banks’ number becomes 8 in 1999. After 1998, the number of total banks in Turkish banking system starts to fall and becomes 79 in 2000. Both the numbers of deposit and developed and investment banks decrease by one. Of 61 deposits banks, 28 banks are privately-owned, 4 banks are state-owned, 18 banks are foreign and 11 banks are SDIF banks. SDIF banks’ number is at maximum in this year because of the crisis. From this examination, it is seen that the number of privately-owned banks decreases by three and the number of foreign banks decreases by one. The increase in SDIF banks is maintained by the decrease in privately-owned banks.

Three privately-owned banks become SDIF banks. In 2001, Turkish banking system experiences the sharpest decrease in the number of total banks with a closure of 18 banks. There exist 61 banks in total which include 46 deposit and 15 developed and investment banks. Hence, the number of deposit banks decreases by fifteen and the number of developed and investment banks decreases by three. Again, both deposit and developed and investment banks experience the sharpest decrease in number in 2001. When the ownership of deposit banks is explored, it is seen that the number of privately-owned banks decreases to 22, the number of foreign banks decreases to 15 and the number of SDIF banks becomes 6. In 2002, the effect of the crisis is still visible but not as much as in 2001. The number of banks in Turkey becomes 54 in 2002 with a decrease of 7 banks. Most of the decrease comes from the decrease in deposit banks since 6 deposit banks disappear from the market. The decrease in the numbers of privately-owned and SDIF banks cause the decrease in the number of deposit banks since the numbers of state-owned and foreign banks stay the same as the numbers in 20019.

The numbers of privately-owned and SDIF banks become 20 and 2, respectively. The banking system of Turkey has 50 banks in 2003. The decrease of 4 banks causes this decrease since there is no change in the number of developed and investment banks. Of 36 deposit banks, 18 banks privately-owned, 3 banks are state-owned, 13 banks are foreign and 2 banks are SDIF banks. The closure of two banks is seen in both privately-owned and foreign banks. The number of privately owned banks in 2003 is half as much as the number in 1997. The decrease in the number of total banks goes on in 2004, too. The number of deposit banks decreases to 35 and the number of developed and investment banks decreases to 13 which make the number of total banks 48. This is the only year that the numbers of privately-owned, state-owned and foreign banks stay the same.

The only change is seen in the number of SDIF banks and the number of SDIF banks stays at 1 after 2004. In 2005, only one privately-owned deposit bank is closed which makes the number of total banks in the banking system. Total banks’ number becomes 46 in 2006 due to the decrease in deposit banks. From 2005 to 2006, the number of privately-owned banks decreases from 17 to 14 and the number of foreign banks increases from 13 to 15. So, the net effect of these changes is the decrease of one bank in deposit banks. Hence, 2006 is the first year that the number of foreign banks is more than the number of privately-owned banks. Moreover, with a difference of one bank, foreign banks capture the leadership in the comparison of number. In 2007, the numbers of deposit and developed and investment banks and so total banks do not change. However, the numbers in the ownership of deposit banks does change. The ownership of 3 privately-owned banks is transferred to foreign ownership. Hence, the leadership of foreign banks in the comparison of number goes on in 2007 with a difference of 7 banks. The number of state-owned banks is lower than the number of foreign banks in every year10.


The question of privatization of state-owned banks is a good public policy will continue to be a significant issue for policymakers. Privatizations, restrictions on entry into the economic sector and abolition of controls on prices can be interpreted as deregulation. However, re-regulation is the introduction of new regulatory agencies and establishment of competition-friendly legal rules governing the market actors. Combinations of these deregulative and re-regulative measures signified a change in the mode of regulation. In Europe, “privatization is best thought of as re-regulation – the replacement of one mode of regulation, public ownership, by another mode, statutory regulation”

Various policies were implemented by developing countries to achieve financial liberalization in the 1990s. They wanted to achieve stability and efficiency improvement by easing the entry restrictions to banking sector. One of the developing countries that evoke foreign banks to domestic banking sector is Turkey. However, foreign activities in Turkish banking sector has increased especially from 2005 on. The reasons behind the increased interest toward Turkey are stability in economics and politics and positive expectations about Turkey. Furthermore, Turkish banking sector is more reliable after the arrangements about supervision and management of banks after the crisis. Banking system has been almost restructured. Banks have strengthened their equities and revised risk management. Therefore, foreign banks that want to diversify their investment and increase profits have come to Turkey. The privatization process has been an important aspect of the neo-liberal transformation in Turkey, which was launched by the January 24 measures. The pace of privatization in Turkey has been gradual compared to the shock-therapies implemented in the so-called transition economies in the 1990s.

Besides, the another factor is intitutions. The influence of international institutions on affecting the mode of banking sector regulation has changed in each time period. The IMF and the World Bank were extremely influential in changing the mode of banking sector regulation, between 1980 and 1987. The World Bank extended five Structural Adjustment Loans between 1980 and 1984 and promoted major reforms in the banking sector, namely, deregulation of interest rates, reducing the tax burden on banks and Banks Act No. 3182 in 1985.

In recent years, the government policies became efficient on banking sector. The domestic political environment changed. Turkish political regime became more democratic and thus populist pressures on the policy-makers increased significantly Turkish capital account was liberalized and domestic financial market liberalization, which was initiated in 1984, was completed in 1989.

Majone (1996) combined both institutional and self-interest analyses in explaining the rise of the ‘regulatory state’ in Europe. According to Majone (1996), the factors contributing to the establishment of independent regulatory agencies in Europe were: American influence, the crisis of interventionist policies, the already mentioned regulatory framework needed for privatization and the cumulative impact of a growing body of community regulations11.

Privatization of public banks, especially in the continental Europe accompanied the process. So that, the mode of regulation shifted from the involvement of state through public banks into statutory regulation implemented by independent agencies.

Another factor is economic and financial crises. Economic crises and frequent bank failures were also important in engendering changes in the mode of banking sector regulation. Turkish policy-makers responded to crises and bank failures in rather awkward manner. They frequently reversed earlier policies and changed the legal framework in order to prevent the emergence of further risks in the balance sheets of banks and thus further collapse in the banks. After the Brokerage Houses Crisis in 1982, the interest rate competition among banks was terminated and ceilings on interest rates were re-introduced. Moreover, in 1985, a new legal framework for the banking sector was introduced in order to prevent further crises in the financial sector.

In 1994, Turkey experienced a major economic crisis and three banks were taken over by the SDIF. The government responded by strengthening the legal framework and introduced new standards regarding capital adequacy ratios and net open foreign exchange position of banks. Full deposit insurance scheme was introduced in order to re-establish confidence in the private commercial banks. Finally, in 1998 and 2001, Turkey experienced severe economic crises and 8 banks were taken over by the SDIF between 1997 and 2001. Because of these bank failures, and severe economic crises, in which the banking sector played a crucial role, an independent regulatory agency, namely the BRSA, was established in order to correct the implementation problems of the regulatory regime and to remove political interferences from the regulatory regime.

As a result, Executive Directors (IMF concludes Article IV consultation with Turkey, August 5, 1997): “urged the authorities to strengthen banking sector supervision and accounting standards, and to end the preferential lending of state banks to favored sectors, a practice that introduces distortions and undermines the stability of the banking sector as a whole. Moreover, eliminating the quasi-fiscal activities of state banks would also permit their eventual privatization, a goal that should be pursued as an essential element of banking sector reform”.

List of References

Alper,C.E. and Önis Z. 2008. “ The Turkish Banking System , Financial Crises and the IMF in the Age of Capital Account Liberalization: A Political Economy Perspective”.

Andrews, Michael.A. 2005. State-Owned Banks, Stability, Privatization, and Growth: Practical Policy Decisions in a World Without Empirical Proof. IMF Working Paper WP/03/10.

Arslan İ., Celasun M.” State-owned Enterprises and Privatization in Turkey”.

Bayraktutan, Yusuf, Bayraktar, Yüksel. 2004 “ Avrupa Bütünleşmesinde Parasal Birlik ve Türkiye, 1.b., Yayın No.1, Ankara: Roma Yayınları”.

Brandt, L., Li, H., & Roberts, J. 2005, Banks and Enterprise Privatization in China, Journal of Law, Economics, & Organization, 21 (2), 524-546

Clarke G., Cull R., Shirley M. 2005, ”Bank Privatization in Developing Countries: A Summary of Lessons and Findings”.

Davies, G. 1994, A History of Money from Ancient Times to the Present Day, Cardiff, UK, University of Wales Press.

Ercan, M.R. and Öniş, Z. 2001, Turkish Privatization: Institutions and Dilemmas, Turkish Studies, 2: 109-134.

Francis, J. 1993, The politics of regulation: A comparative perspective. Great Britain: Blackwell Press.

Ha-Joon Chang. 2003, Globalisation, Economic Development and the Role of the State, London: Zed Books.

Hitiris T. 2002, European Union Economics, Volume 5, Great Britain: Dorset Press.

Internet Sources

Kaufman, G. 2000, Structuring prudential bank regulation to promote efficiency and safety in regulatory policy. In L. Manzetti (Ed.), Latin America: Post-Privatization Realities,The USA: North-South center Press pp.109-146.

Majone G. 1996, Regulating Europe. Great Britain: Routledge, p.46.

Narjess Boubakri, Jean-Claude Cosset and Omrane Guedhami. 2008, Privatisation in Developing Countries: Performance and Ownership Effects. Development Policy Review 26, no. 3.

Shirley, Mary M. 1999, Bureaucrats in Business: The Roles of Privatization versus Corporatization in State-Owned Enterprise Reform. World Development 27, no. 1 115-36

Sholarin, O. 2008, Growth Financing in Emerging Markets: How does Privatization Compare With Securitization?” Journal of Money, Investment and Banking. Issue No.2, 2008.

Steinherr, A., Tukel, A. and Ucer, M. 2004, The Turkish Banking Sector: Challenges and Outlook in Transition to EU Membership, Bruges European Economic Policy Briefings, No.9.

Şendoğdu, A. Aslan. (2006). Bankacılığa Giriş. 1. b. Yayın No: 987. Ankara: Nobel Yayın Dağıtım, p.120-122.

The Bank Association of Turkey. (2005), “Financial Sector and Banking System in Turkey, İstanbul: TBAT”.

The World Bank in Turkey 2006, An IEG Country Assistance Evaluation. Web.

Yücememiş, Başak Tanınmış. (2005) “Parasal Birlik, Avrupa Merkez Bankası ve Türkiye’ye Yansımaları”,Yayın No.65, İstanbul: Derin Yayınları, pp.64-65.


  1. Web.
  2. Shirley, Mary M., 1999, “Bureaucrats in Business: The Roles of Privatization versus Corporatization in State-Owned Enterprise Reform.” World Development 27, no. 1 115-36, p.116.
  3. Narjess Boubakri, Jean-Claude Cosset and Omrane Guedhami, 2008 “Privatisation in Developing Countries: Performance and Ownership Effects,” Development Policy Review 26, no. 3 p.278.
  4. Web.
  5. Web.
  6. Ha-Joon Chang, 2003, Globalisation, Economic Development and the Role of the State, London: Zed Books, p.99.
  7. KOÇ, Elif, 2008, An Assesment Of Foreign Direct Investment In Banking Sector; Turkey And Selected Developing Countries, Marmara Üniversitesi, Sosyal Bilimler Enstitüsü, İktisat Ana Bilim Dalı, İktisat (İngilizce) Bilim Dalı, Yüksek Lisans Tezi, İstanbul, p.46.
  8. İbif, 46.
  9. İbid, 47.
  10. İbid, 48.
  11. Majone, G. (1996). Regulating Europe. Great Britain: Routledge, p.46.

Cite this paper

Select style


StudyCorgi. (2022, March 17). State-Owned Banks Privatization Efficiency in Turkey. Retrieved from


StudyCorgi. (2022, March 17). State-Owned Banks Privatization Efficiency in Turkey.

Work Cited

"State-Owned Banks Privatization Efficiency in Turkey." StudyCorgi, 17 Mar. 2022,

* Hyperlink the URL after pasting it to your document

1. StudyCorgi. "State-Owned Banks Privatization Efficiency in Turkey." March 17, 2022.


StudyCorgi. "State-Owned Banks Privatization Efficiency in Turkey." March 17, 2022.


StudyCorgi. 2022. "State-Owned Banks Privatization Efficiency in Turkey." March 17, 2022.


StudyCorgi. (2022) 'State-Owned Banks Privatization Efficiency in Turkey'. 17 March.

This paper was written and submitted to our database by a student to assist your with your own studies. You are free to use it to write your own assignment, however you must reference it properly.

If you are the original creator of this paper and no longer wish to have it published on StudyCorgi, request the removal.