The Application of Data Envelopment Analysis Based Malmquist Total Factor Productivity Index: Empirical Evidence in Turkish Banking Sector

Abstract

The objective of this study is to measure the total factor productivity and the changes in components of the total factor productivity generated by the banks in Turkish Banking Sector (TBS) during the period of 2004-2009. Based on these measurements, we quantify the production efficiency of the banks. To that end, the total factor productivity is taken as an initial point, and various performance comparisons are made both within the specified three sub-groups and among all deposit banks in TBS. Within the context of performance measurement, we use input and output variables to test technical efficiency index, which represents a combination of change in technical efficiency and in technology, and to test a change in total factor productivity index which comprises a change in pure technical efficiency and scale efficiency. In the calculation of these indexes, Malmquist total factor productivity index method is employed. Computed indexes provide us with the opportunity to make performance comparisons in order to assess which group and bank have comparatively highest performance among the groups and banks included in this study. When we consider the effects of 2007-2008 global crises on Turkish economy, notably on TBS, calculating the performance change ratio for previous periods or estimating the same for the following periods becomes vital in terms of enduringly changing and developing banks. The growing competition in TBS forces banks to attach more importance to productivity factor for sustainable growth purposes. In this regard, Malmquist total factor productivity index gives us the opportunity to quantify the changes in total factor productivity over the years. Accordingly, this study applies group analysis to determine which group is working efficiently. To do this, Malmquist total factor productivity index requires the use of panel data and depicts efficiency changes by years, representing crucial information for us to produce policy implications. In brief, the test results obtained by this study indicate that the foreign banks, thanks to positive changes in their technology, technical efficiency and total factor productivity, are more effective than other private and state banking groups.

Key words: Data envelopment analysis, Malmquist total factor productivity index, Banks.
JEL: G21, C40, C58.