Productivity growth and efficiency in the TRNC banking system

ABSTRACT: This study aims to examine the productivity growth and the efficiency level of fifteen commercial banks operating in the Turkish Republic of Northern Cyprus (T.R.N.C.) banking industry during 2003-2011. Scale efficiency, technical efficiency and the decomposed productivity growth are measured by the non-parametric data envelopment analysis (DEA) and Malmquist productivity index (MPI). DEA results suggest that 66 % of the commercial banks in T.R.N.C. banking industry are scale inefficient and %73 of those scale inefficient banks are operating under decreasing returns to scale (DRS). Empirical results of DEA also revealed that on average TRNC banking industry is technically inefficient during the study period. Additionally, the decomposed total factor productivity growth shows that T.R.N.C. banking industry has achieved %1 growth in the productivity in the interval 2003-2011 which is mainly due to the technical efficiency change (%2) component rather than the regress in the technological (%1) component. The efficiency gain is attributed to scale efficiency rather than the pure efficiency component. Finally from the policy point of view, the results suggest that bank managers should increase the level of technology used in the commercial banks and imply better manager skills and specialization in the T.R.N.C. banking industry. Keywords: Productivity growth, data envelopment analysis, efficiency, Malmquist productivity index. …………………………………………………………………………………………………………………………………………………………………………………………………………