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thesis entitled

AN EMPIRICAL EVALUATION OF COMMERCIAL BANK OPERATIONS

presented by

Dogan Mustafa Sindiren

has been accepted towards fulfillment
of the requirements for

Ph.D. Business - Finance

degree in

 

Date March 20, 1975

 

0-7539

 

ABSTRACT

AN EMPIRICAL EVALUATION OF COMMERCIAL BANK OPERATIONS
IN TURKEY

By
Dogan Mustafa Sindiren

Basic banking legislation in Turkey forbids the creation
of any depository type of financial intermediary other
than banks. This has conferred near monopolistic powers
on Turkish banks. greatly enhancing their general eco-
nomic importance. As a result. scholars have engaged.
especially in the last two decades. in a vigorous debate
concerning the role played by banks in implementing eco-
nomic policy. In this context the analysis is usually
conducted in macro-economic terms without much atten-
tion to the internal operating efficiency of individual
banks. This neglect of micro-economic factors is some-
what suprising because the Turkish banking system is
markedly heterogeneous in character so that aggregative
figures tend to conceal important aspects of the system.
Furthermore. efficiency of a system depends largely on
the efficiency of individual units that the system comp-
rizes. Consequently. interrelationships between the
internal Operations of commercial banks and the frame-
work of public policy within which they have to Operate

cannot be fully understood without a careful analysis

Dogan Mustafa Sindiren
of the former.

The Objective of this study is to remedy the above defi-
ciency by specifically analyzing the internal operations
of privately owned commercial banks in Turkey. in order
to find out the specific performance factors significant-
ly affecting their profitability. This objective is re-
stated as the principal hypothesis of the study as fol-
lows. "Commercial banks in Turkey which do business
under provisions of 'The Turkish Law on Banks' exhibit
wide differences in profitability rates. and these dif-
ferences can be explained by a careful analysis of inter?

nal Operating factors."

Three secondary hypotheses concerned with growth. cost
of Operations. and number of branch offices of commer-
cial banks. were also tested during the course of the

research.

In order to familiarize the reader with the Turkish bank-
ing system. summarized background information on all rele-
vant aspects of Turkish banking was included in the study.
A separate chapter was added to point out some basic dif-
ferences and similarities of commercial banking Operations

in Turkey and in the United States of America.

Annual rates of change computed for relevant sets of per-
formance factors for each bank during the period 1961 to
1970. inclusive. were utilized and tested by use Of the

Dogan Mustafa Sindiren

chi-square criterion. Student-t test. and simple and

rank correlations.

The principal source of data used in the study was the
yearly publications of 'The Banks Association of Turkey'.
These publications furnished the year-end financial state-
ments of all the banks in Turkey. and other relevant in-

formation in connection with their Operations.

Interviews held with the executives of ten commercial
banks provided qualitative information which augmented
the numerical data. The results of the quantitative

analysis were also discussed with these executives.

The research disclosed statistically significant differ-
ences in the profitability rates of commercial banks.
Seven out of twenty-nine performance factors tested were
found out to be the major causes for these differences.
These seven factors could be categorized into three main

groups: lending. commercial deposits. and personnel.

Interestingly enough. no significant statistical differ-
ence was Observed between the reported profits of growth
and non-growth banks. Moreover. neither economies nor
diseconomies Of scale were observed to work for commer-
cial banks included in the study. The analysis also
disclosed that being organized as a unit or a branch

bank did not. by itself. affect profitability.

Dogan Mustafa Sindiren

It was concluded that Turkish bankers were probably res-
ponding logically to a public policy which did not en-
courage efficiency and Optimum resource allocation.
Therefore. it was recommended that the policy should be
changed to create a framework within which bankers would
be motivated to be more efficient. Relaxation Of the
fixed interest rate ceiling policy. exemption of inter-
bank transactions from the transaction tax. and permis-
sion to form financial institutions other than banks.
were the major public policy changes suggested to help

create this framework.

AN EMPIRICAL EVALUATION OF COMMERCIAL BANK OPERATIONS
IN TURKEY

By
Dogan Mustafa Sindiren

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree Of

DOCTOR OF PHILOSOPHY

Department of Accounting and Financial Administration

1975

<:)COpyright by
DOGAN MU STAFA SINDIREN

197 5

ACKNOWLEDGMENTS

I wish to express my gratitude to Professor John L.
O'Donnell for his direction. constructive criticism. and
thorough review of every part of this study. Professor
O'Donnell spent many hours reading and correcting the
drafts of the thesis. His confidence in me and his con-
tinuous encouragement through all phases of my graduate

studies helped me to complete my education.

Special thanks are due to Professors Alden C. Olson.
Richard C. Henshaw and Harry G. Brainard who kindly

agreed to serve on my dissertation committee.

I am grateful to Selguk Ozgediz for taking care of the
completion of final formalities required for the degree.
to Marie Oztfirkcan for his suggestions with respect to
statistical analysis used in the research. and to Halfik
Sargin for the final drawings of the figures.

I will always remain indebted to JOhn Zdanowicz. Leroy
Brooks and Waldemar Goulet whose true friendship not only
helped me with my studies. but also made my stay in the

U.S.A. more enjoyable.

ii

Last but definitely not least. my wife deserves my sin-
cerest appreciation for her help with the typing of the
manuscript. I am also grateful to her for her moral and
financial support which made it possible for me to comp-
lete my graduate studies.

iii

TABLE OF CONTENTS

LIST OB‘ TABIIES COOOOOOOO00.000.000.000...00......
LIST OF FIGURES OOOCOOOOOOCOOCOOCOOOOOOOOOOOCCOOO
CHAPTER I. INTRODUCTION OOOOOOOOCOOOOOOOOOOOOOOO

A. Purpose Of Study ooooooooooooooooooooooooooooo
Bo HypOtheseB ooooooooooooooooooooooooooooooooooo
C. Background Information on the Turkish Banking

System ooooooooooooooooooooooooooooooooooooooo
De Relevant LegiSlation ooooooooooooooooooooooooo
E. Scope Of StUd‘Y oooooooooooooooooooeooooooooooo
Fe MethOdOIOgy oooooooooeooooooooooooooooeooooooo
Go Source Of Data oooeooooooooooooooooooooooooooo
He Limitations Of the Study ooeoooooooooooooooooo

CHAPTER II. FINDINGS OO...OOOOOOOOOOCOOOOOOOOOCO
PART I. QUANTITATIVE ANALYSIS OOOOOOOOOCOOOOOOOO

A. PrOfitability oooooooeoooooooooooooooooooooooo
B. GrOWth VS. PrOfitS 0......OCOOOCOOOOCOOOOCOOOC
C. Size VS. COSt OCCOOOOOCOOOOCOCOOOOCOCOOOOCOOOO
D. Number of Branches vs. Profits ...............
E. Profitability vs. Performance Factors ........

PART II. QUALITATIVE ANALYSIS OOOOOOCOCOOOCOOOO O

A. Loans EXtended ooooooooooooooooooooooooooooooo
Bo Commemial Deposits oooooooooooooooooooooooooo
Co Personnel ooeooooooooeooooooooooooooooooooocoo
D. Other Relevant Findings oooooooooooooooooooooo
lo BranChing ooooooooooooooooooooooooooooooooe
2. PromOtiOnal Prizes and. Gifts 000.000.00.00.
3. Dividends vs. Retained Earnings ...........

CHAPTER III. A BRIEF COMPARISON OF COMMERCIAL
BANKING OPERATIONS IN THE U.S.A.
AND IN TURKEY O....................

A. Structural Differences and Similarities ......

iv

Page
vi
vii

B0 DepOSItB and Loans ..........................
C. Revenues. Expenses and. PrOfitB ........0.....
D0 DISCIOSUI'G Requ1rement8 0....0......0....0...

CHAPTER IV. CONCLUSIONS AND RECOMMENDATIONS ...
BIBLIOGRAPHY ......OOOOOOOOOOO......OOOOOOOOOOOO
APPENDIX Banks Operating in Turkey at the End

Of 1970 O......OOOOOOOOOOOOOOOOOC....

Page
104
107
110
115

125

127

Table

10

LIST OF TABLES

Profitability Rates of Commercial Banks
in Turkey. lO-Year Averages (1961-1970)....

Chi-square Values for Profitability Rates
of Turkish Commercial Banks (1961-1970) ....

PrOportional Shares of Each Turkish Com-
mercial Bank of Total Equity Capital and
Total Profits. lO-Year Averages (1961-1970).

Annual Rates of Change of Turkish Commer-
cial Banks in Profits before Tax. Equity.
and Net Tangible Assets (1961-1970) ........

Size and Cost of Turkish Commercial Banks
(1961'1970) ooocooooooooooooooooo0000000000.

Annual Rates of Change in Number of Branches
and Profits of Turkish Commercial Banks
(1961-1970) 00.00000oooooooooooocooooooooooo

Means. Variances. and "t" Values for 29
Performance Factors by "High" and "Low"
Prefitability Groups (1961-1970) a o o o o o o o o o a

Means. Variances. and "t" Values for 8
Performance Factors by "High" and "Low"
Groups of Loans Extended (1961-1970) .......

Means. Variances. and "t" Values for 7
Performance Factors by "High" and "Low"
Groups of Promotional Prizes (1961-1970)....

Percentage of Net Bank Service Charges to
Total Profits. lO-Year Averages (1961-1970).

vi

Page

52

55
59

45

5o

55

66

68

74

Figure

LIST OF FIGURES

Ranking of Turkish Commercial Banks
According to Profitability Rates
(1961’1970) .0....0000000.....0000.........

Annual Rates of Change in Net Tangible
Assets and Profits of Turkish Commer-
0181 Banks (1961-19.70) 000....000..0.......

Annual Rates of Change in Net Tangible
Assets and Cost (Definition 1) of
TurkiSh Commemial Banks (1961-1970) . . . . . 0

Annual Rates of Change in Net Tangible
Assets and Cost (Definition 2) of
Turkish Commercial Banks (1961-1970) ......

Annual Rates of Change in Number of

Branches and Profits of Turkish
Commemial Ban-k8 (1961-19.70) 00............

vii

Page

45

52

52

57

CHAPTER I
INTRODUCTION

" The importance of an over-all view of
profit management is hard to exaggerate.
Bank profits are achieved mainly by
balance. precision. and consistency in
management rather than by isolated bold
strokes of business planning."

- R. I. Robinson
The Management of Bank Funds.

A. Purpose of Study

Various. and sometimes conflicting. opinions expressed
by economists with respect to the efficiency of the bank-
ing system in Turkey have been the cause of a vigorous

debate during the last two decades.

For example. Professor Z. Hatiboglu of Technical Univer-
sity of Istanbul has elaborated upon the inefficiency
and high costs of the Turkish banking system in his va-

rious papers.1

 

l. Hatiboglu. Zeyyat. (a) "Turkiye Ekonomisinde Banks-
ciligin Yeri ve Problemleri". "Turkige Bankaciliéinin
Ba lica Sorunlari Semineri. May - . . r ye
onomi Kurumu IktisadlArastirmalar Enstitfisfi. Pub-
lication No. 8 (Basnur Matbaasi. Ankara) l969.pp:1-23-
(b) "Turkiyede Bankaciligin Bfinyesi ve Problemleri."
Bank80111k Semineri. May 21-26. 1967' M000 Prodiikti-
vIte Kurumu. (Istanbul Matbaa81. Istanbul) l968.pp.l-55.

(c) "Banks Kaynaklari ve Kullanilmasi." Bankacilik
Semineri. pp. 36-66.

2
His criticism of the operational policies and procedures
adopted by Turkish banks. and his objections to the exis-
ting public policy governing their operations are based

upon the following factors.

1. Tendency towards excessive branching.

2. Excessive promotional expenses.

3. Lack of extensive use of checking accounts.

4. Excessive transaction tax levied on banking
Operations.

5. Excessive reserve requirements.2

Professor A. Zarakolu of University of Ankara claims that
the profits reported by Turkish banks are not high enough
despite the very favorable difference between the lending
and borrowing rates of interest charged and paid by these

banks.3

M. J. Fry of City University of London believes that bank-
ing is a fairly profitable business in Turkey although the
Turkish banking system has high costs and is not very effi-

01ent .4

All these economists are mostly concerned with the role

played by banks in implementing economic policy. In this

 

2. Hatiboglu. "Banks kaynaklari ve Kullanilmasi." pp.56-59-

3. Zarakolu. Avni. "Turkiyede Faiz Politikasi." Bankacilik
Semineri. p. 96.

4. Fry. Maxwell J.. Finance and Develo ment Planning in
Turkey. (USAID/Turkey. Ankara) . p. .

3

context the analysis is usually conducted in macro-economic
terms without much attention to the internal operating effi-
ciency of individual banks. This neglect of micro-economic
factors is somewhat surprising because the Turkish banking
system is markedly heterogeneous in character. and a rela-
tively small number of banks represents a substantial por-
tion of the total banking Operations. Therefore. aggre-
gative figures tend to conceal important aspects of the

system.

It has been suggested that in the U.S.A.. "banks usually
try to 'keep in step' with one another". and "banking
usually encourages conformity and discourages heterodoxy."5
Statistics of Income based on income tax returns and pre-
pared by the Bureau of Internal Revenue. show little dis-
persion in banking profits in the U.S.A.. rates of ear-
nings on invested capital bunching closely. and the num-
ber of banks suffering losses or showing exceptionally

6 If the same were true for

large profits being rare.
Turkish banks. aggregative figures for'banking system as

a whole could. to a certain extent. provide insight to the
Operations of Turkish banks. However. if a wide disparity

in the profitability of the same existed. possible biases

 

5. Robinson. Roland I.. The Mana ement of Bank Funds.
Second Edition. (McGraw-HIII Sock Company.Inc..
New York) 1962. p. 45.

 

5. Ibid09 p. t"16.

4
introduced by significantly high or low ratios of a small
number of banks could distort the true picture of the

Turkish commercial banking system.

Furthermore. efficiency of a system depends largely on
the efficiency of individual units that the system comp-
rizes. Consequently. interrelationships between the
internal operations of commercial banks and the frame-
work of public policy within which they have to Operate
cannot be fully understood without a careful analysis

of the former.

From a managerial point of view. too. it is more meaning-
ful to think of a bank as an individual business enter-
prise Operating in a competitive milieu. degree of success
or failure depending heavily on the managerial policies
and procedures employed. Professor Robinson of Michigan
State University emphasizes on the fact that "Each bank

is managed separately. The normal focus of the managerial

problem in banking is a bank. not the system of banks."7

Finally. the relativeness implied by terms such as
'efficiency'. 'high or low profitability'. 'high or low
costs'. etc. definitely calls for a comparison of one sort
or the other. Neither qualitative nor quantitative mea-

sures of relative strength or position can mean much

 

7. Ibid.) p. 415.

5

unless they are utilized to compare given situations with

relevant criteria or with other situations of similar

nature.

A preliminary research comprized of the following steps

disclosed no evidence of any research conducted to answer

the need explained in the preceding paragraphs.

1. Library research at:

a. Banks Association of Turkey.

b. Institute of Research on Banking and Commercial

Law 9

0. Central Bank of Turkey.

2. Correspondence with:

a.

b.

World Bank.

International Monetary Fund.

3. Interviews held with:

a.

Associate Secretary General of Banks Asso-
ciation of Turkey.

President of the Institute of Research on Bank-
ing and Commercial Law.

Director of the Department of Economic Research.
Central Bank of Turkey.

Economic advisors of the Agency for International
DeveIOpment, Mission to Turkey.

Professors of the Ankara Academy of Economic and
Commercial Sciences.

Executives of ten commercial banks.

6
Therefore. the objective of this study is to remedy the

above deficiency by:

1. Specifically analyzing the internal Operations
of all privately owned national. local and
foreign commercial banks. Operating under provi-
sions of 'The Turkish Law on Banks'. over a period

of ten years;

2. Evaluating the findings of this analysis. and on
the basis of this evaluation. investigating why.
if any. significant differences in the profitabi-
lity of these banks exist:

5. Drawing generalizations to explain such differences
in order to contribute to a better understanding of

the commercial banking operations in Turkey.

B. fiypotheses

The objective outlined above is restated as the principal
hypothesis of this study as follows.

Principal Hypothesis

"Commercial banks in Turkey which do business under provi-
sions of 'The Turkish Law on Banks' exhibit wide differen-
ces in profitability rates. and these differences can be
explained by a careful analysis of internal Operating

factors."

Secondary Hypotheses

Two studies made by the Federal Reserve Bank of Kansas.
U.S.A.. at the beginning of the last decade showed that
"the more rapidly growing banks did not have higher ear-
nings than banks that had grown less or not at all".8
and that " the costs of doing business at big banks were
appreciably lower than those at smaller banks."9 An
investigation undertaken to analyze the relationships
between " growth and profitability ". and " size and
cost of operations " of commercial banks in Turkey would

not only be within the scope of this study. but would

also be of interest to the policy makers of these banks.

Professor Z.Hatiboglu contends that the increase in the
number of branches of commercial banks has no economic
value in Turkey. and therefore. the number of branches
that these banks may Operate should be restricted.10
Few bankers agree with the professor while most of them

strongly Oppose this suggestion. Therefore. the following

statements are included as secondary hypotheses to be

tested during the course of the research.

 

80 Ibid.) p. 4260
9. Ibid.o P. 4270

10. Aykent. Irfan H.. Planli Kalkinma Dbneminde Tfirk
Bankaciligi. (Ege Matbaasi. Ankara) 1970.p. R9.

Secondary Hypothesis No.1

" The reported profits of the more rapidly growing commer-
cial banks in Turkey have not increased more than those

of commercial banks which have grown less or not at all."

Secondary Hypothesis No.2

" The costs of doing business at bigger commercial banks
in Turkey are significantly lower than those at smaller
banks."

Secondarngypothesis No.3

" There is an inverse relationship between the rate of
growth of the number of branches Operated by commercial

banks in Turkey and the rate of growth of their profits."

0. Background Information on the Turkish Banking System

At the end of 1970 there were 47 banks operating in Turkey.
including the Central Bank of the Republic of Turkey.11

The Turkish Law on Banks (hereinafter referred as TLB) does
neither provide a clear-cut classification of banks. nor
does it even define a 'bank'.12 However. the Banks Asso-
ciation of Turkey (hereinafter referred as BAT). in its
yearly publications. classifies the banks in Turkey under
four headings. generally leaving the Central Bank and three
develOpment banks outside these four groups. The headings

 

11. Banks Association of Turkey. Publication No. 45.
12. Aykent. op.cit.. p. 59.

9

used in this classification are:
1. Banks Founded by Special Laws.
2. Other National Banks.
3. Local Banks.
4. Foreign Banks.

Banks in the first group were founded by their special.
individual legislation. Although grouped under the same
heading. these banks are far from being homogeneous and
differ vastly as to their objectives and scopes of Opera-
tion. Some of them are probably unique to Turkey. because
they are actually state owned. manufacturing. mining or
transportation companies which also deal with commercial
banking in different degrees and only as a secondary

line of Operation. For example. three of the banks in
that group fully own and Operate textile plants. mines
and commercial fleet respectively. Consequently. subs-
tantial portion of their capital is tied to activities
other than banking. Again. some of them are founded

with the sole purpose of serving special economic and/or
social goals by providing credit to certain sectors of the

economy. such as. agriculture. tourism. housing. etc.

Banks included in the other three groups are owned or con-
trolled by private investors and they are all commercial

banks Operating under provisions of TLB. The main differ-
ence between the second and third groups is the amount of

equity capital employed. TLB requires a bank to have a

10
minimum equity capital of TL 2 million.15 but makes an
exception in the case of local banks which have no bran-
ches and which are founded in a locality with a pOPulation
of less than 60 thousand. Minimum equity capital require-
ment for such banks is TL 500.0003."+ These local banks.
in most cases. either eventually increase their equity
capital to TL 2 million and thus become a national bank.
or sooner or later close up their Operations if they can-

not manage to grow.

Foreign banks are owned or controlled by foreign invest-
ors. and in addition to TLB. their Operations are also
governed by legislation dealing with foreign investments
in Turkey. With the exception of one. they are all rela-
tively small. Operate only a few branches and are special-

ized in foreign trade transactions.

Banks grouped under the heading of Other National Banks
are also commercial banks and their main line of Opera-
tion covers accepting deposits and extending short-term
credit to business. They also furnish banking services.
such as. foreign trade transactions. foreign exchange.

collection on bills receivable. safety boxes. etc.

The Central Bank of the Republic of Turkey is the only

institution authorized to print legal-tender currency in

 

15. TLB. Article 6.
l4. TLB. Provisional Article 2.

11
Turkey. and together with the Treasury. regulates the mone-
tary policy of Turkey.

One state owned and two privately owned develOpment banks
do not accept deposits and extend intermediate- and long-
term credit to public and private enterprises.

At the end of 1970. total equity capital employed by all
the 47 banks was close to TL 8 billion.15 ( 1 us 5 is the
equivalent of 14 Turkish Liras.) This capital was distri-
buted among the various groups of banks as follows.

Equity Capital
(% of Total) 1970

 

1. Banks Founded by Special Laws 64.84
2. DevelOpment Banks 16.51
5. Other National Banks 14.25
4. Central Bank 2-95
5. Foreign Banks 1-39
6. Local Banks 0.06

( Source: BAT. Publication No.43 )

While the banks founded by special legislation share more
than half of the total equity capital among themselves.
distribution of total deposits amounting to more than TL 41

billion at the end of 197016 presents a different picture.

 

15 and 16. See Appendix.

12

Deposits Held
(% of Total) 1970

1. Other National Banks 51.25
2. Banks Founded by Special Laws 56.82
5. Central Bank 8.24
4. Foreign Banks 5.67
5. Local Banks 0.02

6. DevelOpment Banks --

( Source: BAT Publication No. 45 )

This difference between the two rankings. specifically
in the case of Banks Founded by Special Laws and Other
National Banks. is mostly due to the hybrid character
of the former which has been briefly described in the

preceding paragraphs.

Banking in Turkey can be generally described as 'branch
banking' rather than 'unit banking'. With the exception
of five local banks. three develOpment banks. three na-
tional banks and two banks founded by special legisla-
tion. each of the other 54 banks had two or more bran-

ches Operating at the end of 1970.

The Appendix provides a complete list of all the banks
operating in Turkey at the end of 1970. together with the
location of their head offices. year they were establish-
ed. equity capital employed. total deposits held and total

loans extended by each.

15
D. Relevant Legislation

Operations of all the banks in Turkey. with the exception
of banks founded by special legislation. develOpment banks
and the Central Bank. are guided mainly by TLB. as amended.
In addition to this law - dated 1958 and amended five times
until the end of 1970,- Turkish Commercial Code. tax laws.
labor and social security laws. foreign investment regula-
tions. interministerial decrees and the decrees of the
Central Bank (formerly. the decrees of the Committee Regu-
lating Bank Credits.) all contain provisions affecting the
Operations of commercial banks. Some of the provisions

relevant to this research are summarized below.
Foundation. Shares. Shareholders and Equity Capital

With the exception of banks founded by special laws. or
those existing at the date of TLB coming into force. all
banks in Turkey must be founded in the form of a joint

stock company. with a minimum of 20 voting share-holders.

At least 51 per cent of the stocks must be listed with

the Securities Exchange. Par value of stocks issued may not
exceed TL 1000.-. and in accordance with the Commercial Code
it may not be less than TL 500.- either. The sum of paid-up
capital and reserves after deduction of losses may not be
less than TL 2 million. The amount of required minimum capi-
tal is increased in line with the population of the location.
An exception was made in the case of unit local banks which

Operated in localities with a pOpulation of less than 60.000

14
when TLB came into effect. In their case. the minimum
equity capital required was only TL 500.000.- Amount
of equity capital to be allocated to branch offices

also differs in accordance with the population.
Deposits

No person or legal entity in Turkey. other than those
authorized by TLB or by special legislation. make it

a profession to accept deposits. Banks are required to
keep separate accounts for savings deposits. commercial
deposits. official deposits and interbank deposits.
Each group must be further classified as demand or time
deposits. Owners of savings deposits are privileged
creditors for an amount equalling 50 per cent of their

deposits.

If total savings deposits that a bank holds exceeds|

the limits set by TLB. 50 per cent of this excess has to
be deposited by that bank in a provision account with the
Central Bank. These limits are set as ratios of savings
deposits to equity capital. the latter being defined as

the paid-up capital.plus. reserves. minus. losses.

 

 

Equity Capital Ratio of
TL Million Savings Deposits to
Equity
2 to 5 7:1
5 to 10 8:1
10 to 25 10:1
25 to 50 12:1

More than 50 15:1

15
The rights of depositors to withdraw their deposits in
cash at their convenience may not be curtailed or res-
tricted in any way. However. the conditions agreed upon
between the depositor and the bank regarding maturities

and periods of notice are reserved.

The maximum rates of interest to be applied on deposits
are set by the Central Bank.17 These maximum rates of

interest are as follows.

Type of Deposit 1961 to After
August '70 August '70
(Annual %) (Annual %)

 

Commercial. official and
interbank. Demand and

until 4 months (incl.) 2 1
Savings. Demand and until

4 months (incl.) 3 5
All de osits. 4 to 6 months

(incl.) 4 4
All deposits. 6 months to 1

year (incl.) 5 6
All deposits. 1 year to 18

months (incl.) 6 9
All deposits. Over 18

months 6.5 9
Additional provision accounts

Up to 1 year 4 4
Additional provision accounts

1 year and more 6.5 6.5

 

17. Prior to January 1970. by the Committee Regulating
Bank Credits. hereinafter to be referred as CRBC.

16

Promotional Prizes

Banks. in order to stimulate savings. may organize prizes
to be distributed exclusively to owners of savings depo-
sits. by drawing of lots. The maximum annual amount. -

a fixed sum. plus an amount equal to a percentage of
savings deposits held by each bank - nature and type of

such prizes are determined by the Central Bank.18

Liquidity and Reserve Requirements

The minimum ratio of liquid assets to short-term obliga-
tions to be maintained by banks is determined by the
Central Bank.19 This ratio has been 10 per cent between
1961 and 1970. inclusive. Central Bank also sets the
lower limit of funds to be deposited by commercial banks
with the Central Bank as an additional provision. This
amount has been set as 20 per cent of total deposits.

interbank deposits excluded. held by each bank.20

In addition to the reserve requirements set by the Turkish
Commercial Code21. and by their statutes. all banks opera-
ting in Turkey are required to set aside 5 per cent of

their net income as 'provision for possible future losses'

 

l8 and 19. Prior to January 1970. by CRBC

20. Between 6/4/‘64 and l2/l/‘65. 'additional provision'
for time deposits was 10 per cent.

21. 5 per cent of net income before tax. plus 10 per cent
of net income after tax and after the compulsory divi-
,dend of 5 per cent.

17
until the total amount of such provisions equal their paid-
up capital. Both the reserves required by the Commercial
Code and the provisions for possible future losses have to

be invested in government bonds.
Loans

Banks. with certain exceptions.may not extend to one per-
son or legal entity. loans exceeding 10 per cent of the
banks' equity capital. This limit is increased to 25 per
cent in case of loans extended to industry. mining. pub-
lic utilities. public works. transportation and for export.
Furthermore. the total amount of loans extended by a bank
to firms of which the bank is a share holder may not exceed
20 per cent of the bank's equity capital.

The maximum rates of interest to be applied on loans extend-
ed by banks are set by the Central Bank.22 During the pe-
riod 1961 to 1970. inclusive. these rates were between 5

to 12 per cent depending on the type and maturity of the
loan. On most loans. maximum rate of interest was 10.5

per cent until August 1970. and 11.5 per cent since then.

In addition to interest. banks may charge additional fees
(commission) for services rendered in connection with loan
transactions or for bank services other than extending
loans. The rates of such commissions are also set by the

Central Bank.23

 

22 and 25. Prior to January 1970. by CRBC.

18

Investments

With certain exceptions. the total amount of funds invest-
ed by a bank in other enterprizes may not exceed 10 per
cent of the bank's equity capital. On the other hand.
firms. 20 per cent or more of whose capital is owned

by a bank. may not invest in the stock of that bank.

Trading in Goods and in Immovables

 

Banks are not allowed to purchase and sell goods for com-
mercial purposes. The purchase and sale of gold in coins
or in ingots are exempt from this requirement. Further-
more. with the exception of some of the banks founded by
special laws. they generally may not. for commercial
purposes. buy or sell immovable properties or accept mort-
gages on such. However. they may accept mortgage on immo-
vable prOperty as an additional collateral in case of un-

forseen risks connected with the collection of a loan.24

E. Scope of Study

 

To test the hypotheses stated in Section B of this chapter.
only those banks which operated under similar. or at least
comparable. economic. social and legislative conditions

were included in the study. Consequently. difference in

 

24. For additional information on legislation affecting
the Operations of Turkish banks. see. Erem.Faruk and
Altiok. Akin. Bankac11ar igin Banks Hukuku Bilgisi.
(Institute of Research on Banking and Commercial Law.
Ankara) 1972.

19
their records of performance could be assumed to be due
to differences in the way their funds were managed. There-
fore. banks founded by special legislation were not inclu-
ded in the coverage of the research. For the same reason.
three develOpment banks and the Central Bank were also
excluded. Thus. the research covered the Operations of all
the 52 national. local and foreign commercial banks Opera-
ting in Turkey. under provisions set forth in TLB. as amen-
ded. Since every one of these banks do business in Turkey
and under the same legislative framework. the term " Turkish
commercial banks". as used throughout the study. covers all
52 of them. regardless of the fact that five are fully or
partially owned by foreign investors. For the same reason.
it was not deemed necessary to further stratify these banks
by groups of national. local and foreign. when the hypotheses

were tested.

The period covered by the study was 10 years. from 1961 to
1970. inclusive. Ten years was thought to be long enough

to normalize earnings and other numerical data. The choice
of 1961 to 1970. inclusive. was considered to be appropriate.
because it not only provided for the utilization of recent
data. but also covered a period during which - with the
exception of the last five months - the rates of interest

applied to both deposits and loans did not change.

20
F. M8th0d01fl

The objective of the study and the related hypotheses sta-
ted in Sections A and B of this chapter imply a set of
questions to be answered during the course of the research.

This set of questions includes the following.

1. Did the rates of profitability. defined as reported
profits over equity capital. of commercial banks in

Turkey show significant dispersion?

2. What were the principal determinents of the profit-
ability of these commercial banks?

5. How did these banks try to resolve the conflict bet-
ween safety and profitability in the employment of
their funds?

4. What types of loans did they extend?
Did they tend to serve certain types of customers?

Why?

5. Was there any relationship between the types of loans

extended and the size and location of a bank?
6. What was the composition of deposits they held?
7. What were the principal sources of their income?

8. What were their principal cost items? To what degree
these costs varied with the change in their volume of

operations?

10.

11.

12.

15.

14.

15.

21
Which of their three sets of operations. namely.
lending. investing and banking services. contributed

more to their profits?

Was there any relationship between the cost of doing

business and the size of a bank?

What were the growth rates of their tangible assets
and equity capital? Was there any relationship
between their rate of growth and their profits?

What was their policy with respect to 'branching'?
What. if any. was the relationship between the number
of branches they operated and their profitability?

What were the significant effects of the existing
legislation on the profitability of commercial
banks?

What were the effects of the attitude of the share
holders on the financial policies of these banks?

What were the effects of the promotional prizes on

the performance of commercial banks?

Since most ofihe ratios and some of the statistics rele-

vant to this research were not readily available. consi-

derable time and effort were spent on these computations.

However. it should be noted that it was not the purpose

of this study to present a set of statistical data Just

for the sake of filling this gap. although even that much

of the work by itself should be interesting to the execu-

tives of commercial banks. Rather. the data compiled and

22

the ratios computed were utilized within the statistical

techniques used to test the relationships and differences

in the performance of commercial banks.

Quantitative Analysis

1.

2.

A substantial part of the quantitative analysis was
dynamic. The reason behind this was that it was
thought to be more meaningful to find out what changes
had taken place over the period covered than what had
happened on the average. Therefore. annual rates of
growth (or change) were computed for relevant sets of
performance factors for each bank over the period

covered by the study. The formula used for these

r = .P/-§— - l

where (r) was the rate of annual change. (T) and (S).

computations was:

terminal and starting values respectively. with (n)
number of years. Three-year averages were used for
terminal and starting values to avoid possible biases
that could be introduced by unusual years. Therefore
(n) was 7 years in most cases. representing the period
between the middle years of the terminal and starting

values.

Banks were ranked from high to low according to the
rates of growth they achieved in each of the perfor-
mance factors. These rankings were utilized for rank

correlation analysis whenever necessary.

4.

23
Simple and weighted arithmetic means were computed
for each performance factor and for each bank over
the period covered. These means were used for the

statistical analysis when such was utilized.

To test the first part of the principal hypothesis
dealing with the existence of significant differences
in the profitability rates of commercial banks. chi-
squares were computed for each of the 10 years covered
by the study. The chi-square criterion was used to
measure the goodness of fit - or the compatibility -
of the rate of return on equity of each bank. with
the mean rate of return on equity of all the banks
included in the research. The individual rates of
return constituted the observed frequencies. and the
mean rate of return for all banks was utilized as

the expected frequency common to all. If the chi-
squares computed were not small. that is. the fits
were not good. it would mean that the observed fre-
quencies representing the individual rates of return
on equity did not constitute a pOpulation having a
uniform distribution. In other words. it would sig-
nify no close bunching of the rates of return and
would therefore indicate a statistically significant

dispersion which could not be attributed to chance.

Since it was feasible to collect. compute and utilize

data on all the banks included in the study. there was

24
no need to use random samples for the test. and there-
fore. observed frequencies constituted the whole uni-
verse. It must be noted that the purpose for using
the chi-square criterion was not to measure the impact
of sampling variations. but to test the significance
of dispersion. if any. of individual profitability
rates from the mean rate of profitability for all
banks. Therefore. utilization of the whole universe
instead of samples. and the resulting relaxation of
the requirement of randomness were of minor signifi-
cance. and would not affect the rationale for using

this statistical test of association.

The principal technique used to test the secondary
hypotheses and the remaining part of the principal

one. was a statistical comparison of the performances
of commercial banks. Banks were divided into two
groups of "high" and "low" performance. using the mean
rate of performance as the dividing line between the
two groups. Then the significance of the relationship
between the meansof the two groups was tested statis-
tically for each relevant performance factor. The null
hypothesis that the means of the two groups were equal.
or not significantly different. indicated that a cer-
tain performance factor was not the cause of the dif-
ference between the two groups. On the other hand.

when the null hypothesis was rejected. that is. a

25 ‘
statistically significant difference between the means
of two groups was observed. the indication was that the
performance factor being tested was directly or indi-

rectly the cause of the difference.

For two- or one-tailed significance tests. Student-t
distribution was utilized. and the equality of the
variances was checked by F-tests. at F0.995 level.
Results were also checked by simple or rank correla-

tion coefficients.

During the course of the significance tests. it was
again feasible to handle data on all the banks in-
cluded in the study. Therefore. the whole universe

of commercial banks. and not random samples. was used
for the tests. The null hypothesis submitted to test-
ing was that the mean performance levels of the "high"
and "low" groups were identical. that is. from the
same underlying population. If the null hypothesis
was rejected. and thus. the tests disclosed significant
differences between the means of the two groups. this
would indicate that these two groups were not from the
same population. In fact. when such was the case.
each group could be defined as a separate universe by

itself.

Again it should be noted that the objective of the

analysis was not to test the relationship of the mean

26
of a sample with that of the population from which
it was randomly selected. The Student-t distribu-
tion was used to test whether or not the two groups
of banks. designated as "high" and "low". constitu-
ted two separate and different pOpulations with un-
equal means. Therefore. the relaxation of the ran-
domness requirement could not affect the conclusive

nature of the results.

6. Whenever it seemed useful. findings were summarized
in tables and/or figures for initial and visual ob-

servation.

7. Since it was not the purpose of this study to provide
the reader with banking statistics or ratios. most of
such data was not included in the presentation of the
findings. rather. they were utilized within the tests
made. and only the summaries of the results were pre-

sented.
Qualitative Analysis

At a very early phase of the research it was realized
that quantitative data would not suffice to complete the
analysis. For example. some of the 15 questions outlined
at the beginning of Section F of this chapter could not
be answered in part or in whole by quantitative tests.
Therefore. interviews were held with 15 tOp and middle
level executives of 10 banks representing 87 per cent of

personnel employed. 85 per cent of branches Operated.

27
82 per cent of equity capital owned. 95 per cent of
deposits held and 92 per cent of loans extended by all
the banks included in the study.25 These interviews
were held with the intention of discussing the results
of the quantitative analysis. and gathering information

which could not be derived from numerical data.
G. Source of Data

The principal source of data used in computing the ratios
and trends were the yearly publications of BAT. These
publications furnished the year-end financial statements

of all the banks operating in Turkey. They also contain-
ed other relevant information. such as. number of personnel
employed. number and location of branches. names and posi-
tions of tOp executives. etc. Interviews held with the
executives of commercial banks. as well as. with the offi-
cials of BAT furnished information to support or amend the

findings. and to explain some of the terminology.

Other apprOpriate sources of information. such as. the
related issues of the Official Gazette. relevant papers
and books on different aspects of the Turkish banking

system were also utilized whenever it was deemed necessary.

 

25. Based on 1970 figures.

28
H. Limitations of the Study

Anyone who attempts to make an empirical study in the
field of finance in Turkey is seriously handicapped by
two major roadblocks. One is the absence of an active
capital market. and the other is the lack of efficient
disclosure requirements. In the case of banks. the
second problem is somewhat resolved by TLB which re-
quires all banks to submit quarterly summaries to the
Ministries of Public Finance and of Commerce. as well
as. to the Central Bank. Banks. also have to publish
their year-end balance sheets and income statements

in at least two daily papers. one of which must be the
Official Gazette. In addition. they must submit month-
ly totals of deposits and loans to the Central Bank.26
However. only the year-end financial statements are avail-
able to the public. It would have been more meaningful

to use monthly averages instead of year-end figures in

the study. Nevertheless. since the emphasis is on a
comparative evaluation. this limitation did not have any

serious distorting effect on the results.

On the other hand. the first problem could not be avoided.
By law. the stocks of a bank have to be listed with the
Securities Exchange.27 However. the so called Securities

Exchange in Turkey exists almost only in name: and in the

 

26. TLB Article 51.
27. TLB AI‘tiCle 40

29

absence of active stock market transactions. price quota-
tions are either non-existent or do not reflect the cur-
rent free market value of the stocks. Therefore. out of
necessity rather than willful negligence. no attempt was
made in the study to analyze the impact of the findings
on the stock prices of banks. and no market values were

utilized.

A list of the bank executives interviewed is filed with
the work papers. However. upon their explicit requests.
their names or positions are not mentioned in the study.
Furthermore. some of their statements are their own per-
sonal Opinions. and due to their nature. cannot be sup-

ported by physical evidence.

CHAPTER II
FINDINGS

PART I. qUANTITATIVE ANALYSIS

 

A. Profitability

Over the period of 1961 to 1970. inclusive. lO-year ave-
rage rates of profitability - defined as profit before
tax over equity capital - for the 52 banks covered by the
study. varied between minus 95.7 per cent and plus 55.7
per cent. with four banks having negative ratios. When
bank N-171, which showed losses between 1961 and 1966.

as well as in 1970. and which had negative equity capital
since 19652 was excluded from the group. this difference
in profitability rates equalled to 57.7 percentage points.
this time the lowest rate being minus 4.0 per cent.

Table 1 gives a complete list of 10-year average rates of

profitability for all the banks included in the research.

The five most profitable banks over the period had average
rates of return above 25 per cent. Four of these were
foreign banks and one. N-15. was partially owned by
foreign investors. One local and five national banks
showed average profitability rates between 15 and 25 per

cent. Profitability rates of one local. one foreign and

 

1. Throughout the rest of the study. banks will be
referred to by their symbols (See Appendix)

2. Bank N-17 showed positive equity capital in its year-
end financial reports. However. when annual losses
' were deducted from its equity capital. as required by
TLB. the resulting equity capital was negative.

50

51
three national banks were between 10 and 15 per cent.
or the rest. two local and two national banks had nega-
tive rates of return on equity, while the average profit-
ability of the other 12 banks varied between 0.7 and
8.5 per cent.

Figure l. which pictures the above findings. shows no
close bunching of the average rates of profitability

over the period covered by the research. The weighted
average rate of return on equity for all the 52 banks
over the same period was 17.0 per cent. If the majority
of the banks had ratios close to that mean. it could be
claimed that there was no significant dispersion in the
profitability of commercial banks in Turkey. However.

a visual observation of Table 1 and Figure 1 did not seem
to support such a claim.

The chi-square criterion was used in order to test the
first part of the principal hypothesis statistically.
Observed frequencies were the individual rates of return
on equity. and expected frequencies were identical for
all banks. represented by the mean rate of return for
all banks. The null hypothesis was that‘X? computed
would be less than the given value for given degrees of
freedom and at 0.01. 0.02 or 0.05 level of significance.
In other words. if the‘X? computed was higher than that
given value. it could be claimed that there was a statis-
tically significant dispersion in the profitability of
Turkish commercial banks.

52

TABLE 1

Profitability Rates of Commercial Banks in Turkey
10- Year Averages (1961-1970)

 

 

B_a_3_k_ Rate (56) Rank Bank Rate (%) Rank
N-Ol 20.5 7 N-l7 -95-7 52
N-O2 - 1.6 29 N-18 12.5 15
N-05 2.6 27 N-l9 14.7 12
N-O4 5.0 25 N-2O 18.5 s
N-05 5.9 24 N-21 2.8 26
N-O6 10.9 16 N-22 21.2 6
N-O7 7.8 11 L-Ol - 4.0 51
N-08 4.8 22 L-O2 8.5 17
N-09 16.1 10 L-O5 17.7 9
N-10 4.6 25 L-O4 11.9 14
N-ll 0.7 28 L-O5 - 2.2 50
N-12 7.8 19 F-Ol 55.7 1
N-15 8.5 18 F-02 40.7 2
N-14 5.1 21 F-O5 29.1 4
N-15 56.9 5 F-04 26.7 5
N-l6 15.2 11 F-O5 11.9 14
( Source: Computed from data in BAT Publications.

N08. 169 21: 239 25: 269 27: 31: 53: 59
and 45.)

 

+ 9-year average for N-02 and 7-year average for N-l5.
These banks started their Operations in 1962 and 1964
respectively.

Aonofl-flmmav .nooom speasoeeseosm op
wswcnooo< mxsmm Hmaonossoo awakens no wsfixdmm .H mmeHm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A H mHnme “mousom V .éQ:
mm
2.8-
a W
“w n” w nuns «HUN «new W A”.4 Nr.a q.mw W as w n.1w “use s1.e W as.a ,9.
a cmmw u mw nwmm mimm Mw mnmw mwmu mwmw mrmm wins mimw mwmm mwiu mm mwmm mwmm
III:— TO
asks
N 1._| N. ha 6N.a mHNN a
“w Wm . mw T_m_m= s_ to,
m s_.: .1
. Q NF : Q m A grow?
a
s 6
m s 1H
m ,6.
N
-91
_
.a-oa

 

54
Following modifications were made in order to avoid

distortion in the computation of the chi-square values.

1. Bank N-l7 was excluded from the sample due
to its negative equity.

2. Losses were included as zero profits.

5. Frequencies with values less than five were

added together.

Chi-square values for each of the 10 years. as well as.
for the lO-year average profitability showed significant
dispersion at 0.01 level of significance. Table 2 gives
the‘X? values for the profitability of commercial banks
during the period covered by thestudy. Thus. the first
part of the principal hypothesis stating that commer-
cial banks in Turkey which did business under provisions
of TLB. exhibited wide differences in profitability rates.

was statistically proven to be true.

55
TABLE 2
Chi-square Values for Profitability Rates of
Turkish Commercial Banks (1961-1970)

 

 

 

Year Degree of 2 Year Degree of
Freedom 7C Freedom
lO-Year 20 255.09 1966 19
Aver.
1961 21 275.01 1967 21
1962 17 217.48 1968 17
1965 19 191.64 1969 18
1964 18 197.56 1970 19
1965 20 50.56

 

315-15

474.41
705.05
955-19
720.55

( Note: All ‘X? values were significant at 0.01 level

of significance)

56
Another interesting point investigated was the relation-
ship between the percentage share of each bank of the
total equity owned by all banks and the percentage share
of each bank of the total profits earned by the same
banks. If there was a significant and positive correla-
tion between these two sets of shares. it could be claim-
ed that the distribution of the total profits among
Turkish commercial banks was "fair" with respect to the
relative sizes of their equity capital. Since "profits"
and "equity" were the numerators and the denominators.
respectively. of the "profitability" rates used earlier
to test the principal hypothesis. this second test could

be used to support the previous finding.

The result of this second test was quite the Opposite of
what would be expected after the first test. A correla-
tion coefficient of 0.98 indicated an almost perfect
positive correlation between the lO-year average prOpor-
tional shares of profits and equity capital. If this
"fair" distribution df profits were to be interpreted as
a proof that the profits of these banks did not show any
significant dispersion relative to their equity. this
finding would be highly contradictory to the results of
the first test. However. a further investigation showed
that the two results were not incompatible. and the dis-
crepancy was actually due to the fact that a small number

of banks which owned relatively big prOportions of the

37
total equity, had "fair" shares of profits. To be more
specific. banks N-Ol. N-20 and N-22 which together held
56.82 per cent of the total equity owned by all the banks
in the group. received 64.02 per cent of the total profits
earned by the same banks. the ratio between the two pro-
portions being 1: 1.15. Since a ratio of 1:1 would indi-
cate a perfectly fair distribution. this sharing of pro-
fits by the three banks could be classified as reasonably
fair. 0n the other hand. quite a number of smaller banks
did not have such fair prOportions of profits. For
example. banks N-15. F-Ol. F-02 and F-05. which together
held 4.72 per cent of the total equity received 11.09 per
cent of the total profits. the ratio being 1:2.55. Again.
banks N-02. N-O4. N-08 and N-14 which together owned 11.05
per cent of the total equity. earned only 1.92 per cent
of the total profits. this time the ratio being 1:0.17.
Table 5 gives a complete list of the lO-year average pro-
portions of total equity and profits held by each bank.
as well as. the percentage ratios of the two sets of pro-
portions. A ratio of 100 per cent indicates a perfectly
fair distribution of profits. whereas. ratios of less or
more than 100 per cent would belong to banks which had less

or more than fair shares of the total profits. respectively.

Since the big banks. although few in number. had very large
shares of both the equity and profits and since they had a

fair distribution of profits. the coefficient of correlation

58
between the two sets of prOportions. due to the weight
given by the size of the big banks. turned out to be
very high. spuriously indicating a nondisparity of
earnings for the whole group. This distortion due
to the weight given by a small number of banks was
avoided when. instead of absolute percentages. ratios
between the two sets of prOportions were used to test
the hypothesis. The chi-square test using these indi-
vidual ratios as the observed frequencies and the arith-
metic mean of all the ratios as the expected frequency.
disclosed a very significant dispersion among the prOpor-
tions of profits shared by commercial banks. relative to
their shares of the total equity.5 This result. which
strongly supported the result of the first test. also
proved the fallacy of using averages for the commercial
banking system in Turkey. without first taking care of
the distorting effect. of the weight given by the few
relatively big banks.

 

5. )8: 2204.22. Significant at 0.01 level and 25
degrees of freedom.

59
TABLE 5

PrOportional Shares of Each Turkish Commercial Bank
of Total Equity Capital and Total Profits

lO-Year Averages (l96l-l970)+

Share of Share of
Bank Total Total Ratio (%)
Equity (%) Profits (%)

N'O2 5095 0.00 0.00
N-OB 0.51 0.05 16015
N’Oq' l. 22 0.22 18.05
N-05 0.47 0.11 25.40
N-06 0.72 0.46 65.89
N'O? 0.82 0.37 45012
N'O8 2.42 0.68 28010
N-09 0.55 0.51 92.75
N-lO 0.54 0.09 26.47
N-ll 0.87 0.05 5.45
N-12 0.84 0.59 46.45
N-15 2.67 1.50 48.69
N-14 5.46 1.02 29.48
N’ls 1.64 3.55 215.24-
N'l6 5045 4.86 89.17
N-17 0.05 0.00 0.00
N-18 4.46 5.19 71.52
N-19 1.35 1014 85071
N-20 54.99 57.57 106.80
N-2l 0.84 0.14 16.67
N-22 14.42 17.87 125.95
L-Ol 0.08 0.00 0.00
11-02 0.08 0.04 50.00
L‘Oq‘ 0.09 0.07 770 78
L'OB 0.05 0.00 0000
F‘Og 1025 2.97 257060
F-05 0.82 1.40 170.75
”1.05 1 .4’0 0.97 69 . 29
( Source: Computed from data in BAT Publications.

 

 

 

Nos. 16. 21. 25. 25. 26. 27. 51. 55. 59

and 45. )

 

+ 1962-1970 for N-02 and 1964-1970 for N-l5

40
B. Growth vs-Profits
In order to test secondary hypothesis No. 1. which in turn.
could help to test. in part. the principal hypothesis.
annual rates of change in profits before tax. in equity.
and in net tangible assets were computed for all the
banks covered by theiwudy. Table 4 shows these rates. as
well as. the ranking of the banks in accordance with the

881118.

"Growth" of a bank could either mean "growth in equity
capital" or "growth in net tangible assets". The rank
correlation coefficient (r') between the former and the
growth in profits before tax turned out to be 0.29. not
significant at a level of significance of 0.05.4 On the
other hand. r' equalled to 0.50 between the latter and
the growth in profits before tax. significant at 0.01
level. This might seem contradictory. especially since
r' between the growth in equity capital and growth in net
tangible assets was 0.69. significant at 0.01 level. How-
ever. when the sequence of events leading to profits is
considered. above relationships turn out to be normal.
Equity capital. by itself. does not produce profits. but

it directly affects the amount of savings deposits which

4. Throughout the research t = r'. /9:§—2’ was used for
1-r'

significance test of the coefficients of rank correla-
tion. where n-2. degree of freedom. was 50.

 

41
a bank may hold (p.14). Savings deposits constitute the
major part of all deposits held by banks under considera-
tion.5 and deposits are the main source of loans exten-
ded by a commercial bank. Bank profits depend heavily
on loans extended. and the latter form a substantial
part of the net tangible assets. Therefore. the rela-
tionship between tangible assets and profits is more
direct than that between equity capital and profits.
Hence. the difference among the correlation coefficients.
Thus. it was found more meaningful to define "growth" as

"growth in net tangible assets" in this study.

Annual rates of change in net tangible assets and in
profits before tax were plotted on Figure 2. horizontal
axis showing the percentage changes in the former. and
vertical axis showing the percentage changes in the

latter.

Majority of the banks bunched within 0 and + 55 per cent
changes in net tangible assets. and between -10 and + 55
per cent changes in profits. the area being represented
by the rectangle ACDF on Figure 2. In order to be free
of possible biases that could be introduced by a few too
low or too high rates of change. only the 25 banks within
the rectangle were assumed to be truly representing the

Turkish commercial banking system. Those banks were N-Ol.

 

5. 68 per cent in 1970. BAT Publication No. 45.

42
N-05. N-O5. N-06. N-07. N-09. N-lO. N—l2. N-l5. N-14.
N-l6. N-18. N-19. N-20. N-2l. N-22. L-02. L-05. F-Ol.
F-02. F-05. F-04 and F-05. The average annual change
in net tangible assets for the 25 banks was 15.2 per cent.
Therefore. 15.2 per cent was used as the dividing line
between "high" growth and "low" growth banks. rectangle
BCDE representing the former and rectangle ABEF repre-
senting the latter groups.

Fourteen banks labeled as "high" banks were N-Ol. N-05.
N-09. N-10. N-l5. N-14. N-l6. N-l8. N-19. N-20. N-22.
L-O5. F-02 and F-04. Included in the "low" group were
banks N-05. N-06. N-07. N-12. N-2l. L-O2. F-Ol. F-05
and F-O5.

45
TABLE 4
Annual Rates of Change of Turkish Commercial Banks

in Profits before Tax. Equity. and Net Tangible Assets
(l961-l970)+

 

 

 

 

 

 

 

 

Profit bef.Tax Equity N.T. Assets
Bank Rate of Bank Rate of Rank Rate of Rank
Change ) Change(%) Change(%)

N-Ol 25.2 8 12.7 6 55.1 5
N-02 511.6 1 6.5 15 22.7 6
N-05 -4.0 26 5.8 16 18.0 15
N-04 167.8 5 5.8 16 15.2 21
N-O5 1.5 24 0.0 50 0.7 51
N-O6 24.8 9 4.5 18 11.0 25
N-07 4.7 22 9.9 12 11.6 22
N-08 -45.4 50 8.5 15 17.1 15
N-lO ’8.2 28 12.0 8 2105 7
N-ll -1 2.5 52 2.9 25 11.4 24
N-12 -9.4 29 0.9 27 2.5 29
N-15 9.1 16 4.5 18 21.5 9
N-l6 15.5 15 10.1 11 20.9 10
N-17 169.8 2 -222.1 52 8.0 27
N-l8 20.5 11 15.8 4 25.2 5
N-19 9.6 15 12.4 7 18.8 11
N-20 21.6 10 16.1 5 18.2 12
N-22 50.9 7 16.2 2 21.5 7
L-Ol -8002 31 ”4.4 51 ”809 52
L-02 "4.0 26 1.7 26 2.1 50
L-O5 6.8 20 2.9 25 15.4 18
L-O4 115.1 4 25.1 1 52.4 4
F-Ol 19.5 12 0.1 29 7.6 28
F-O2 15.2 14 4.0 20 15.6 17
F-05 7.5 18 11.9 9 11.5 25
( Source: Computed from data in BAT Publications.

N08. 169 219 23, 259 26g 27! 51’ 359 59
and 45 )

 

+ 1962-1970 for N-O2 and 1964-1970 for N-15.

FIGURE 2. Annual Rates of Change in Net
Tangible Assets and Profits of
Turkish Commercial Banks (1961-1970)

45

NT Asazts 7:11

I

1.0

 

 

Profits °/o A

 

...

 

 

 

'10

-20

FIGURE 2 .

46
The secondary hypothesis No. 1 could be accepted if the
"high" growth banks would show equal or less growth in
profits than the banks included in the "low" growth
group. If. on the other hand. "high" banks also had
significantly higher growth in profits. then the hypothe-
sis would be rejected. In order to test this hypothesis.
"Student-t distribution" was used.

The first test of significance was made to see whether
the two groups labeled as "high" and "low" were signi-
ficantly different from each other. that is. constitu-
ted two different populations with unequal means. in
order to ensure that a comparison of the annual rates
of change in their profits would be meaningful. The
"t" value computed was 6.04. significant at 0.01 level

of significance for 21 degrees of freedom.6

Having seen that the universes labeled as "high" and
"low" had significantly different means of annual rates
of change in size (or in net tangible assets). the next

step was to compute the value of "t" for the annual rates

 

6. i1. 20.0 per cent. i2 = 7.8 per cent. sf = 22.56.

2

82 = 2500’ = 14’ 112 = 9.

nl

47
of change in the profits of the same groups. This time
the "t" value was 1.18. not significant at 0.05 level
of significance.7 In other words. no significant dif-
ference was found between the growth rates of profits
of the banks grouped as "high" growth and "low" growth
banks. Therefore. the secondary hypothesis No. 1
stating. "the reported profits of the more rapidly
growing commercial banks in Turkey have not increased
more than those of commercial banks which have grown
less or not at all." was statistically proven to be

acceptable.
0. Size vs. Cost

The wording of secondary hypothesis No.2 implied a sta-
tical analysis. Nevertheless. both the statical and
dynamical relationships between size and cost of Turkish
commercial banks were investigated. To be consistent.size
was again defined as the size of total net tangible assets.
0n the other hand. cost could be defined either as total
expenses per unit (Turkish Lira) of net tangible assets or
as total expenses per unit of total revenues. Both defi-

nitions of cost were utilized in the analysis. (See Table 5)

 

2
7. x = 11.16 per cent. x = 5.81 per cent. 31 = 118.44.

1 2
s2 a 116 18 n - 14 n -9
2 ' ' 1 “ ’ 2 "

48
This hypothesis would be accepted if the cost of doing
business was found to be significantly less at the bigger
(high) banks than that at the smaller (low) banks.
Therefore. for the statical analysis. the mean value of
the lO-year average8 net tangible assets for all banks
was used as the dividing line between the "high" and
"low" banks. Thus. six banks (N-Ol. N-16. N-l8. N-20.
N-22 and F-04) whose average net tangible assets were
more than TL 462 million were labeled as "high" and the
remaining 26 banks with average net tangible assets of
less than TL 462 million were grouped as "low". The
computed "t" value of 2.87 indicated a significant dif-

ference between the means of the two groups (or universes)

at 50 degrees of freedom and 0.01 level of significance.9

Student-t distribution was utilized again to investigate
the difference. if any. between the cost of doing business
at the "high" and "low" bank groups. With the first defi-
nition of cost. that is. total expenses per TL of net tan-
gible assets. "t" value was zero. due to identical mean

cost (TL 0.076 expenses per TL 1.00 of net tangible assets)

 

8. 9-year for N-2 and 7-year for N-15.

9. x1 . TL 0.908. 12 - TL.0.852. sf - 19777.5.

2 .
82 ‘3 15499./o n1 ll 60 n2 8 26.

49
of both universes. With the second definition Of cost.
namely. total expenses per TL of total revenues. "t"
value of 0.097 was not significant at 0.05 level of
significance although the mean cost was higher for the
"high" banks. Therefore. both tests indicated no sig-
nificant difference in cost between the "high" and
"low" banks.

Twenty-three banks were included in the dynamical ana-
lysis. leaving out the nine banks with too high or too
low annual rates of growth in net tangible assets or
costs. to avoid possible biases. (See Figures 5-a and
5-b). The mean rate of change in net tangible assets
for these 25 banks over the period covered was 16.2

per cent. Banks N-02. N-05. N-08. N-09. N-lO. N-l5.
N-l4. N-16. N-l8. N-19. N-20 and N-22 had annual growth
rates in net tangible assets of more than 16.2 per cent
and. therefore. were labeled as "high". The remaining
11 banks. namely. N-04. N-06. N-07. N-l7. N-2l. L-05.
F-Ol. F-02. F-05. F-04 and F-05 . had less than the '
mean rate of growth. and were grouped together as "low"
growth banks. A "t" value of 6.78 indicated a signifi-
cant difference between the means of the two universes at

21 degrees of freedom and 0.01 level of significance.10

 

10. i1 = 20.0 per cent. x2 = 12.0 per cent. 8% = 6.8.

2
s2 = 9.5. 111 = 12. n2 . ll.

50
TABLE
Size and Cost of Turkish Commercial Banks

(1961 - 1970)+

Net Tangible Cost Cost

 

 

 

 

Assets Definition 1 Definition 2
Bank Ann. , Ann. Ann. Ann. Ann. Ann.
Aver. Change Aver. Change Aver. Change
TL (%) TL (%) TL (%)
Mil. 1/100 1/100
N'Ol 1M6 5501 702 ' 4.0 9008 0.1
N-02 274 22.7 8.5 0.0 102.1 - 8.2
N'O} 5 18.0 9.2 2.4 8806 5.2
N-04 71 15.2 10.5 - 0.9 96.5 - 1.5
N’Os 4 0.7 406 -1107 5702 ' 5.0
N-06 25 11.0 8.7 2.4 79.5 - 107
“'07 58 11.6 10.8 4.7 90.0 1.3
N“08 150 1701 10.1 0.9 94.7 205
N-09 19 1605 508 1.7 63.7 4.0
N-lO 18 21.5 9.0 0.9 95.6 0.2
N’ll 12 1104‘ 501 '15.“ 90.1 2805
N-12 10 2.3 10.0 5.5 67.7 6.2
N'13 174 21.3 8.9 " 1.5 90.6 0.6
N'lq' 271 1800 9.0 - 307 95.0 004
N-15 259 55.2 5.4 - 7.6 76.4 -15.1
N-16 1062 2009 803 "' 5.5 9306 0.0
N'l? 16 8.0 11.1 "' 4.0 124.6 -1200
N-IB 616 2502 800 ' 3.3 92.6 0.1
N-19 64 1808 706 105 77.4 5.2
N-ZO 5891 1802 706 ' 1.2 90.7 ' 0.4
N’Zl 55 806 9.0 "’ 307 9606 0.2
N‘22 2644 2105 609 " 205 89.2 ' 009
10.01 1 - 809 10.3 5.3 117.0 4.9
L’OZ 1 201 6.1 605 54.9 5.4
L-05 5 15.4 6.4 0.0 56.5 5.7
L-04 2 52.4 7.1 ' 608 6008 ”16.2
L’OS 1 37.6 208 I'25.} 13506 " 506
F’Ol 177 706 5.3 ' 402 70.4 - 4.0
3‘02 155 15.6 5.9 "' 5.8 71.2 - O07
F-O5 155 14.7 5.7 - 7.5 81.8 - 0.5
F-Oq' 1075 15.3 7.5 0.0 87.7 1.6
F-o5 93 1105 7.0 " 3.3 84.5 0.6

( Source: Computed from data in BAT Publications
N08. 16: 21: 239 259 269 27: 319 55’ 59

and 45 )

 

+ _1962-l970 for N-02 and 1964-1970 for N-15.

 

FIGURE 5-8.

FIGURE 5-b.

51

Annual Rates of Change in Net Tangible
Assets and Cost (Definition 1) of
Turkish Commercial Banks (1961-1970)

Annual Rates of Change in Net Tangible
Assets and Cost (Definition 2) of
Turkish Commercial Banks (1961-1970)

52

Cost mm A
30 1

20-

10.4

 

In—-qp—
4.
+ +

L
...

 

 

'1

4'
4
++

-10

 

r'o
C)"
T
E5" *+
+
+
E3
.-
43$
8...

-10 —

+
-,_ -—

 

FIGURE 5-8.

Cost (2) °/.A
1) ..

+

 

4*+++
F
.5}
F
.4.

, N.T.Assets % A
50

1 NT. Assets°/.A

 

I I Yl++

4.
_

B
a
g-

‘20 -10 +0

FIGURE 5-b.

...

 

 

+

 

4+
— qr————ir—t—+'——<5-——

 

3)

 

53
Again. both definitions of cost and Student-t distribu-

tion were utilized to investigate the significance of
difference in the annual rates of change in cost of the
two groups. With both definitions. annual mean rate

of decrease in cost of the "high" growth banks was less
than the annual mean rate of decrease in cost of the
"low" growth banks. In other words. "low" growth banks
were decreasing their cost more than the "high" growth
banks. However. "t" values of 0.917 and 1.597 for the
first and second definitions of cost. respectively.
showed this difference to be insignificant at 21 degrees
of freedom and 0.05 level of significance.11

Therefore. secondary hypothesis No. 2 was rejected as the

results of both the statical and dynamical analyses indi-
cated that:

l. The cost of doing business at bigger banks was
neither lower nor higher than that at the smal-
ler ban-ks.

 

11. For the first definition of cost. ie.. total expen-
ses per TL of net tangible assets:

x1 a -0.7 per cent. 22 - -l.8 per cent. a; . 4.7.

as . 12.0. 111 = 12. n2 . 11. For the second defini-

tion of cost. ie.. total eXpenses per TL of total

revenues: i1 .0.6. x2 . -l.8. sf = 11.5. 82 a 14.8.

3 12' n2 3 11.

n1

 

54
2. The cost of doing business at "high" growth banks
was not decreasing at a higher or a lower rate
than that at the "low" growth banks. over the

period covered by the study.

D. Number of Branches vs. Profits

The secondary hypothesis No.5 implied that putting new
branches into operation did not increase but decreased
their profits. Therefore. the hypothesis would be accept-
ed if the profits of the banks with more growth in the
number of their branches. decreased more or increased
less than the profits of'Me banks with less or no growth
in their number of branches. Utilizing the same tech-
nique used for the previous tests. 25 banks were select-
ed (See Table 6 and Figure 4) leaving out the banks with
too high or too low annual rates of growth in either of
the two factors. namely. number of branches and profits.
The mean rate of annual growth in the number of branches
for the 25 banks was 4.9 per cent. Therefore. banks with
higher rates of growth than 4.9 per cent were grouped to-
gether as "high" growth banks and the others as "low"
growth banks. Included in the "high" group were banks
N-01. N-05. N-lO. N-l5. N-14. N-16. N-18. N-20. N-22 and
F-O4. "Low" growth banks were N-OS. N-O6. N-O7. N-O9.
N-l2. N-19. N-21. L-O2. L-OB. E-Ol. F-O2. F-O5 and F-OS.
Eight banks in the "low" group had no changes in the

number of their branches during the period covered by

55

TABLE 6

Annual Rates of Change in Number of Branches and
Profits of Turkish Commercial Banks
(1961 - 1970)+

Bank No. of Profits- Bank No. of Profits-
Branches- Annual Branches- Annual
Annual Change Annual Change
Change(%) (fi) Chan8°(%) (%)

N-Ol 18.5 25.2 N-l7 -8.2 169.8

N-O2 8.8 511.6 N-18 15.2 20.5

N-05 10.4 -4.0 N-l9 0.0 9.6

N-04 0.0 167.9 N-20 7.5 21.6

N-O5 0.0 1.5 N-21 2.8 0.6

N—06 1.6 24.8 N-22 10.5 50.9

N-O7 0.9 4.7 L-Ol 0.0 -80.2

N-08 8.5 -45.4 L-02 0.0 -4.0

N-O9 ~4.0 7.8 L-O5 0.0 6.8

N-lO 10.4 -8.2 L-O4 0.0 115.1

N-ll 0.0 -l62.5 L-O5 0.0 51.5

N-12 0.0 -9.4 F-Ol 0.0 19.5

N-l5 11.0 9.1 F-02 0.0 15.2

N-l4 9.4 5.6 F-O5 0.0 7.5

N-l5 16.8 69.0 3-04 8.6 5.0

N-l6 7.1 15.5 F—OS 4.9 7.5

 

 

 

 

( Source: Computed from data in BAT Publications.
N08. 169 21: 239 259 26: 27o 31: 53! 39
and 45 )

 

+ 1962-1970 for N-02 and 1964-1970 for N-15.

56

FIGURE 4. Annual Rates of Change in Number of
Branches and Profits of Turkish
Commercial Banks (1961-1970)

310

170

160

120

110

60

SO

1.0

57

PI'OfItS o/oA

ALLA.
'

VV‘V'V'

l A

J

 

30‘

4

+

+
4

4'

+

 

FIGURE 4.

 

ES-
+

+

20

 

 

I I
8 8
b
(D

 

. :3
' ———_‘b*——_———l_—
* +
+

4-

. No.0f Branches °/oA
30

58
the study. A "t" value of 9.27 indicated a significant
difference between the means of two universes at the
level of significance of 0.01 and with 21 degrees of

freedom.12

Student-t distribution was used to test the relationship
between the mean rates of annual growth in the profits

of the two groups of banks. The relationship between

the growth rates in the number of branches and the pro-
fits was not inverse but positive. the mean rate of growth
in the profits of the "high" growth banks being higher
than that of the "low" growth banks. However. a "t" value
of 1.09 for the two means was insignificant at 0.05 level
of significance.13 The result of this test indicated that
there was neither an inverse nor a significantly positive
relationship between the growth in the number of branches
and in the profits of commercial banks in Turkey.

 

12. il a 10.6 per cent. i2 = 0.5 per cent. sf 3 10.6.
2
82 = 4.09 n1 3 109112 ‘-" 15.

15. i1 = 11.9 per cent. i2 = 6.9 per cent. si a 166.4
85 a 82.5. nl = 10, n2 = 13.

59
The hypothesis was tested again. this time dividing the
banks into two groups according to the annual rates of
change in their profits. and investigating the relation-
ship of the two means of annual rates of change in their
number of branches. The dividing line between the two
groups was 9.1 per cent of annual rate of growth in pro-
fits. Banks N-Ol. N-O6. N-l6. N-18.N-l9. N-20. N-22.
F-Ol and F-02 had higher rates of growth in profits
than the mean for all banks. Banks with lower rates
than 9.1 per cent per annum were N-O5. N-OS. N-O7. N-09.
N-lO. N-12. N-l5. N-l4. N-21. L-O2. L-O5. 3-05. 3-04 and
3-05. "t" value of 4.99 indicated a significant differ-
ence between the means of the two universes at 0.01

level . 14

The relationship between the mean rates of change in the
number of branches and in profits for both of the groups
was again positive but insignificant at 0.05 level. with
a "t" value of 1.02.15

 

14. i1 . 20.0 per cent. i2 = 2.0 per cent. sf - 122.9.
a; a 58.1. n1 - 9. n2 = 14.

15. i1 - 6.4 per cent. 22 = 5.9 per cent. a; - 45.8.
32 - 25.9. n . 9. n . 14.

2 1 2

 

60

Both tests showed that there was no inverse relationship -
nor a significantly positive one - between the growth in
the number of branches and the growth in the profits of
Turkish commercial banks. A rank correlation co-efficient
of 0.01. insignificant at 0.05 level. between the two fac-
tors and for all the 52 banks supported the results of

the two tests. thus providing enough evidence to reject

the secondary hypothesis No. 5.

E. Profitability vs. Performance Factors

After having proven that there were significant differen-
ces in the profitability rates of Turkish commercial

banks (Chapter II. Part I. Section A). possible relation-
ships between profitability and each of the performance
factors which could have affected profitability. were in-
vestigated to complete the testing of the principal hypo-
thesis. Table 7 gives a complete list of the 29 performance
factors used for this purpose. Analysis made was dynamic
in nature. meaning that annual rates of change in profit-
ability. as well as. in other performance factors were
utilized. The technique of the analysis was similar to

the one used for testing the secondary hypotheses. Twenty-
four commercial banks were selected. leaving the banks

with too high or too low annual rates of change out of the
analysis. Then. these banks were divided into two groups
according to their annual rates of change in profitability.
Thirteen banks with growth rates higher than the mean rate

for all the banks selected were labeled as "high" group

61

and 11 banks with rates of change lower than the mean
were included in the "low" group. Student-t distribu-
tion was utilized to test the difference between the
mean rates of change of the two groups for all the

29 performance factors. "t" values significant at
0.05. 0.02 or 0.01 levels pointed out the performance
factors which differed significantly between the two
groups. indicating the factors which caused directly
or indirectly the difference among the profitability
rates of commercial banks. The findings were further

tested by rank correlation analysis.

The mean rate of annual change in profitability for all
the banks was 5.4 per cent and this rate was used as

the dividing line between the "high" and "low" groups.

Banks with relatively high growth in profitability were
N-Ol. N-O4. N-06. N-O9. N-15. N-16. N-18. N-20. N-22.
L-O5. F-Ol. F-02 and F-O5. Included in the "low" group
were banks N-O5. N-OS. N-O7. N-lO. N-l2. N-l4. N-19.
N-21. L-O2. 3-04. and F-O5.

A "t" value of 5.172 indicated a significant difference

between the mean rates of the two universes at 0.01 level
and for 22 degrees of freedom.16 Table 7 gives the "t"
values as well as the means and variances of the two

groups for all the 29 performance factors.

 

16. i - 11.2 per cent. i2 - -6.4 per cent. 8% - 95.9.
82 . 5605’ nl . 13’ D2 = 110

62
Of all the 29 performance factors. only seven differed
significantly between the two groups. These factors

were:

1. Total Net Tangible Assets.

2. Total Commercial Deposits.

5. Average Commercial Deposits per Commercial
Account.

4. Total Loans Extended.

5. Interest and Commissions Received on Loans
Extended.

6. Average Deposits. plus. Loans Extended per
Employee.

7. Ratio of Loans Extended to Equity Capital.

Rank correlation coefficients between the annual rate of
change in profitability and in each of the seven factors
were 0.48. 0.46. 0.56.0.48. 0.59. 0.62 and 0.66. respec-
tively. all significant at 0.01. 0.02 or 0.05 levels of
significance.

Grouping together the similar items among the seven fac-
tors it was clearly seen that three principal factors.
loans extended by commercial banks. commercial deposits
held by them and their personnel expenses were the main
ones which caused the differences in the profitability
of Turkish commercial banks.

A similar test was made with 25 banks to investigate the

relationship between the loans extended and each of the

65

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mma.o-
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65
eight relevant performance factors. The dividing line
between the "high" and “low" groups was 17.4 per cent
of annual rate of change in loans extended. Table 8
gives the list of these eight factors as well as the
means. variances and "t" values for the relationships

between the two groups.

The computed "t" values indicated significant relation-
ships between loans extended and (a) commercial deposits.
(b) number of branches. (c) interest and commissions
received and (d) revenue from banking services. Rank
correlation coefficients of 0.83. 0.94. 0.44 and 0.55.
respectively. all significant at 0.01 or 0.02 levels.
supported the findings of this second test.

A further test was made to investigate the possible
relationships between the annual rates of change in the
promotional prizes and seven other relevant performance

factors. Table 9 shows the results of this last test.

Twenty-six banks were selected for the last test concer-
ning the promotional prizes. The mean rate of change
used as the dividing line between "high" and "low" growth
groups was 10.5 per cent per annum. A significant rela-
tionship between promotional prizes and savings deposits
was observed. Relationship also existed between promo-
tional prizes and loans extended but this was not support-
ed by the rank.corre1ation coefficient of 0.53. not sig-
nificant at 0.05 level. The rank correlation coefficient

66

sem.an

mmb.01
+mam.m

mum.0u
...ms...
+++mom.m
+++mom.m
+mm¢.m

+++N¢w.w

 

won-Hap 2 D...

 

.sooooHH Ho moonwod mm was Hoboa Ho.o no pamofiuflnmqm +++
.aocoonu Ho moonwoo mm was Hobod no.0 pm pamoanddmam +

 

 

 

 

 

 

 

mpomm<
o.HH o.o o.H- m.m- .a.z mo as non mmmqooxm .no>< .m
m.mH u.mm m.o: o.mu osmo>om mo as non momsonwm .no>< .u
m.m¢ m.mma m.m. m.ma mooabnom wdamcwm 309% osuobom .m
o.HH ¢.m m.m H.m oohoansm Hem .mnm .mnom .Hobd .m
m.mm 0.5m ¢.m N.oa monodoum no nopssz .¢
H.ma m.Hm m.ma o.mm .obom msoammwssoo one poonopsH .m
m.omH u.mm ¢.mH m.mm mpamoocn Hmaonoaaoo .m
m.¢HH H.m¢ m.ma H.mm Aamaonossoo + mmsabomv mpanomon .H
m.oa o.mm m.ma m.mm covaopxm mason Hmpoe
= 33: = nwfim: 2 33: .- nmflmz
oosmdno> Aav moo: mHOpomm nonmanohnom

Aouoa - Homav oooampsm mason mo masons gsoq= one =nwam= an
mnopoom commanomnom Q How mosam> =p= one .moosmunmb .mqmoz

m munda

 

67
between the growth in promotional prizes and in savings

deposits was 0.48. significant at 0.01 level.

All the tests made throughout the research disclosed sta-
tistically significant differences in some of the perfor-
mance factors among commercial banks in Turkey. indicating
certain relationships between the profitabilities and
financial performances of the same. Thus. the principal

hypothesis was accepted as true.

68

.aowoonu Ho moonmoo om one Hoboa Ho.o pm psoofiuanwam +++
.aoooonw no moonwoo om one Hoboa no.0 pm pnooamndwam +

 

 

 

 

 

 

 

 

 

mms.a H.0ua ¢.uma 6.5 o.¢a mooasnom wussqmm song osso>cm .u

.mma.m m.mom m.maa 5.5 m.om cosmopxm mamas Haves .m
wm¢.H ¢.Hm 5.6m o.H ¢.o nonmnm non

mpoo¢ .momon no noossz omono>< .m

mo¢.H o.mmm H.Hm m.m m.ma gunman nan mpamommn omano>e .s

nmo.m m.wum m.mua B.HH w.mm anamoson Hedonoaaoo .m

+mmo.m o.mom o.mma m.ma 6.6m mpamommn mwsa>um .m

mum.a H.mom 6.65 m.ma m.mm Aamaonoaaoo + mwns>mmv mpfimooon .H

+++mmm.m u.sH m.am o.m o.ma magnum demeanoaonm

:33: = nwflm: : 3°.H: .— nmflm:
mosao> z»: . oosownm> . ARV moo: myopoom mommanomnom

AOB®H I mefiv mmuflflm HmfiOHPOBOHm HO mmfioflw :BOH: flaw =fiwdm= hp
mnopomm oonmsnomnom b How mosHm> a»: can .moonmanm> .msmoz

m mnm<a

69
PART II. QUALITATIVE ANALYSIS
The quantitative analysis. described in Sections A
through E of the first part of this chapter revealed
the existence of significant differences among the pro-
fitability rates of commercial banks in Turkey during
the period covered by the study. The seven performance
factors which had statistically meaningful relationships
with the profitability rates (Table 7) could. in fact.
be summarized into three principal factors: loans exten-
ded. commercial deposits and personnel. Therefore. these
three factors were further investigated with the purpose
of finding plausible explanations for the statistical
relationships. This phase of the analysis depended to
some extent on the opinions of the bank executives inter-

viewed during the course of the research.

A. Loans Extended

Obviously. banks needed sufficient funds to perform their
principal function. that is. lending money. Since depo-
sits were the main source of funds for commercial banks.
the more noticeable activities of these banks seemed to
be canalized into increasing the volume of deposits held
by them. The principal theme in commercial bank adver-
tisements in Turkey. the rapid growth in the number of
branch offices. and the emphasis on promotional prizes
and gifts awarded to deposit holders. all supported this

observation. However. it should always be kept in mind

70
that neither deposits. nor other types of funds. can
create revenues unless they are properly invested.
Deposits are funds borrowed by banks. and financial
leverage can work both ways depending upon the way such
funds are utilized. This well known fact is extremely
important for commercial banks where the level and
timing of deposit borrowing are considerably difficult
to adjust to the level and timing of investment oppor-
tunities. especially in the short run. Therefore. al-
though deposits are necessary to create funds which.
in turn. are employed to extend loans. it is the quality
of the loan management that directly affects the profit-
ability of commercial banks.

It should be emphasized that it was not the volume only.
but also. and probably more than the volume. the quality
(financial risk involved) and the type of the loan that
affected the profitability rates of Turkish commercial
banks. This was supported by the fact that out of the
nine banks ( F-Ol. F-02. N-15. F-OB, F-04. N-22. N-Ol.
N-20. L-05) with above average rates of return. five

( F-Ol. F-02. N-lS. F-O}. L-05) were relatively small
banks with relatively small volumes of loans.17 In fact.
these nine banks differed significantly among themselves

 

17. See Tables 1 and 5. Figure 1. and Appendix.

71
with respect to major performance factors. such as. size
of net tangible assets. equity capital. number of person-
nel employed. number of branch offices. volume of depo-
sits held and loans extended. and so on. with the excep-
tion of L-OB which was a small local bank. one major
common factor among them - which could not be derived

from the quantitative analysis. but turned out during the

Q.

interviews - was that all these banks were heavily involve
in financing foreign trade transactions. namely import

and export. As a matter of fact. among the five most
profitable banks. F—Ol. F-02. F-05 and F-0# were foreign
banks and N-15 was partially owned by two foreign banks.
Consequently. they all had wide international connections

which helped them in their foreign trade dealings.

The reasons why foreign trade financing was more profit-
able than other types of lending were twofold. First. the
financial risk involved in such loans was relatively low.
and second. additional service fees were charged for such
transactions. Import trade in Turkey was ( and still is )
closely controlled by the government in line with peri-
odically published quota lists. Most imported goods were
industrial raw materials. machinery and equipment. The
domestic demand for these items was high and stable.
resulting in almost no risk for the importing firms. As

a result. the probability of these loans defaulting proved

to be exceptionally low. Furthermore. the terms for such

 

72
loans did not need to be long. since it usually took less
than six months to order. import and sell the imported
goods. In fact. quite frequently the goods were sold
before they were actually imported.

Despite the relatively lower financial risk. the profits
accruing to the financing banks were high. due to the
service fees and the high rate of interest charged on such
loans. Banks which extended foreign trade loans also
provided the banking services necessary to facilitate the
import or eXport formalities. In fact. very seldom. if
ever. would a bank provide the financing if the handling of
such services was not done by the bank itself. For exam-
ple. the commission charged by the banks for issuing a
letter of credit (L/C) for an importing firm was one and
one half per cent of the total amount of the L/C regardless
of its duration. Since the average time it took to comp-
lete an import transaction was approximately five months.
this amounted to about 3.6 per cent per annum. This amount
could usually be increased by an additional six per cent
per annum by setting the initial term of the L/C as three
months and then charging a one per cent commission for the
necessary extension of two months. The answer to why a
prospective borrower should agree to such conditions was
the chronic shortage of money and credit. as well as. the
high demand for imported goods in a develOping country

like Turkey.

 

73
Another profitable service for commercial banks was
issuing letters of guarantee on behalf of exporting firms.
which did not require the utilization of funds unless the

customers defaulted in one way or the other.

The role of banking services in the overall profitability
of banks was extremely important. This was verified by a
statistically significant and positive rank correlation
between the overall profits and the revenues received for
banking services. Among the more important services were
issuance of letters of credit. letters of guarantee. money
transfers. collection on customers' bills when they came
due. and insurance. The ten-year statistics for the banks
under study disclosed that a very substantial portion of
the profits of these banks was derived from banking ser-
vices. Table 10 gives the lO-year averages of net bank
service charges as percentages of total profits. It was
evident that bank service charges were an extremely impor-

tant element of total profits.

Another point worth mentioning is the rather common rumor
that such services are sometimes used unscrupulously to
increase profits. Commissions reveived on fictitious
transfers of money. insurance premiums and storage fees
on non-existant commodities were examples of the rumored
illegal additions tothe normal cost of loans. All the
bank executives interviewed agreed on the existence of
such activities. but vehemently denied that this could

happen in their particular banks.

74

TABLE 10

Percentage of Net Bank Service Charges to
Total Profits
lO-Year Averages (1961 - 1970)

 

 

 

 

 

Bank % Bank % Bank % Bank %
N-01 76.4 N-09 27.2 er7 44.0 L-03 31.3
N-02 80.0 N-lO 73.1 N-18 98.4 L-04 25.6
N—03 56.9 N-ll 19.2 N-19 52.9 L-05 4.0
N-04 100.0 N-12 13.5 N-20 69.9 F-Ol 25.2
N-05 4.9 N-13 86.4 N-21 98.9 F-02 59.6
N-06 72.5 N-14 99.3 N-22 86.3 F-03 57.6
N-07 64.3 N-15 20.8 L-Ol 86.0 F-04 42.0
N-08 96.6 N-16 97.5 L-02 12.6 F-05 41.3
( Source: Computed from data in BAT Publications

N08. 16. 21. 239 250 26: 27o 31! 539 59
and 43 )

Lack of experience. difficulty of finding qualified per-
sonnel. absence of necessary international connections
with banks in other countries. and the existing public
image created over the long years by the few banks which
acted as intermediaries in foreign trade transactions.
made it difficult for other commercial banks to move into
'this profitable field. Therefore. banks which did not
ihave the means or the experience to finance foreign trade
'bransactions concentrated their Operations on extending
Iloans to local businesses. mostly to merchants and small

tausiness owners. This was done partly through discounting

75

notes receivable. and partly through other secured or
unsecured cash loans. Financial risks were relatively
greater with cash loans. cost of handling distressed
loans decreasing the profits. Furthermore. administra-
tive costs were heavier and. except in the case of loans
against notes receivable. there was little chance of
getting additional commission for banking services ren-
dered. Since both1he type and amount of commissions
were set by the Central Bank. such high administrative

costs could not be charged entirely to the customers.

In addition to the loan interest. two per cent handling
fee was charged by banks when notes receivable were
discounted. Since a 25 per cent safety margin was almost
always requested on such loans ( that is. the maximum
amount of the loan extended could not be more than 75 per
cent of the total value of the notes). an additional reve-
nue of 2.67 per cent per annum was received by banks.

Such loans turned out to be relatively more expensive for
the borrower. although a substantial part of the cost was

due to the heavy taxes charged by the government.

For example. assuming that a borrower wanted to borrow
TL. 100,000.- from a bank against 91-day notes receivable.
he had to submit to the bank notes in the amount of

TL. l33.333.- He also had to present balance sheets and

income statements for the most recent three years and

 

76

provide a guarantor acceptable to the bank. The total

cost to the borrower would be as follows.

a) Tax stamps on the loan agreement

(0.5 % of principal + interest) TL. 514.38
b) Tax stamps on the guarantee agree-

ment.

( 0.5 % of principal + interest ) 514.38
c) Tax stamps on the notes receivable

( 0.5 % of TL. 133.333.“ ) 666.67
d) Tax stamps on balance sheets (fixed) 60.00
6) Tax stamps on income statements (fixed) 30.00

 

TL. 1.785.43

 

f) Handling commission on notes

( 2% Of TL. 15303330‘ for 3 months ) 666.66
g) Interest18

( 11.5% of TL. 100.000.- for 3 months) 2.875.00
h) Correspondence expenses (fixed) 5.00

 

TL. 3.546.66

 

 

18.

Interest was 10.5 per cent before August 1970.

WFTflWflW
J

i". ‘ll

77

1) Transaction tax on interest and
commission.

( 25% of TL. 59541.66 ) TL. 885.42

 

Tatal TL. 69 217051

 

 

TL. 6.217.51 is 6.22 per cent of 8 TL. 100.000.- loan

for three months. If the term of the loan was one year.

the total cost would be:

a) 0.5 % x TL. 111.500.- TL. 557.50
b) 0.5 % x TL. 111.500.- 557.50
c) 0.5 % x 4 x TL. 133.333.- 2.666.66
d) 60.00
a) 50.00

 

TL. 3.871.66

 

 

 

r) 2 z x TL. 153.355.- 2.666.66
g) 11.5 % x TL.100.000.--18 11,500.00
h) 5.00

TL.l4.l71.66
1) 25 z x TL. 14.166.66 TL. 3.541.67

 

Total TL.21.584.99

 

 

 

18.

Interest was 10.5 per cent before August 1970.

78
Out of the total annual cost of 21.58 per cent to the
borrower. 14.17 per cent was received by the bank and
7.41 per cent by the government as various types of

taxes.

Interviews with bank officials disclosed the fact that
the true nature of a significant portion of all the
loans extended were medium - or long-term although the
form in which they were extended was short-term. No
reliable statistics were available as to the average
term of such loans. However. one bank official stated
that most firms regarded these loans as part of their
permanent capital and were greatly upset if a short-
term loan was not promptly renewed when it became due.
Shortage of investment and develOpment banks. as well
as of other financial institutions which normally

provide medium and long-term loans for capital invest-

ments. forced Turkish commercial banks to take over this

function without being properly ready for it. The prac-

tice of extending long-term loans in short-term form

became a part of their loan policy and they actually

encouraged this practice. Professor Robinson. who calls

this kind of practice a "self-delusion in maturity poli-

cy." points out the dangers of such practice as follows.

" A bank may appropriately plan to put some
portion of its funds in long-term loans
to business. It is quite another matter.
however. for a bank to do a great deal of
long-term lending in short-term form by

79

allowing repeated renewals. Long-term credit.
if planned in advance. may be made safe by a
variety of protective provisions. When credit
is extended in short-term form but with the
implied expectation that renewal will be per-
mitted. these protective provisions are absent.
Even more important. the moderate degree of
liquidity of term loans on which a bank can
depend is absent from short-term loans for which
the time of repayment is uncertain." 19

When interviewed. bank officials agreed to the existence
of this potential danger and could not give a rational
reason for such practice. They either said or implied
that the demand for term loans was there and out of
habit or limited experience they were inclined to deal
with all types of loan requests as if they were short-
term. Their credit departments were not organized to
handle term credit analysis. financial analysts capable
of doing that were hard to get and the wage scales of
commercial banks were not high enough to employ them.
In one of the larger banks where they had started to
extend medium-term credit after proper credit analy-
sis. a branch manager complained that he could not
always see eye-to-eye with the newly appointed credit
analysts employed to investigate the term loan applica-
tions. He said that he became panicky when the analysts
rejected a term loan request of an old customer whose
existing short-term debts to the bank were already
renewed several times by him. In summary. this "self

delusion" increased the financial risk and the handling

 

19. Robinson. 0p.cit.. p. 137.

80
costs. decreased the liquidity of their funds and conse-

quently cut into their profits.

E. Commercial Deposits

Under the provisions of TLB. Turkish banks were required
to classify their deposits into four separate groups.
namely. savings deposits. commercial deposits. official
deposits and interbank deposits. Deposits made by banks
to one another were classified as interbank deposits.
Since year-end financial report figures on interbank
deposits were not always reliable and the possibility of
window dressing was high.20 they were not included in
the analysis. Official deposits representing the funds
deposited by various governmental agencies were mostly
held by state owned banks which were excluded from this
analysis. The bulk of the total deposits held by the banks
included in the study consisted of savings and commercial
deposits. The latter were deposits made by all kinds of
business firms regardless of size or legal form. Savings
deposits covered all deposits other than official. inter-
bank and commercial deposits. At the end of 1970. of the

total amount of deposits held by the banks under study.

 

20. For example. an equal amount of deposits made by
two banks to one another on December 31. would
inflate both sides of their balance sheets with-
out an actual change in their source or utilize-
tion of funds.

81
68 per cent was savings. 23 per cent commercial. 6 per

cent interbank and 3 per cent official deposits.21

It was interesting to note that despite the substantially
larger volume of the savings deposits compared to commer-
cial deposits. it was the latter and not theibrmer which
significantly affected the profitability of commercial
banks (Table 7). It was true that banks depended heavily
on savings deposits to perform their function. but appa-
rently commercial deposits contributed more to their
profits. The plausible reasons behind this finding were
threefold. First. of course. was the cost. During the
period covered by thestudy. interest paid on commercial
deposits. both demand and time of up to five months. was
one per cent less than that paid on savings deposits.22
(p.15). Since the greater prOportion of commercial depo-
sits were of demand type. typically made for short periods

to support current transactions. they were less costly

to banks than savings deposits.

Closely connected with the cost of borrowing. were the
compensatory balances required by banks. The bank offi-

cials interviewed disclosed that it was customary for

 

21. BAT Publication No. 43.
22. Two per cent difference after August 1970.

Li I" rum-am

 

82
banks to request a certain percentage of all business
loans extended to be deposited in the borrower's
commercial deposit account during the term of the loan.
In fact. this meant that the borrower received only a
part and not the total amount of the credit stated
in the loan agreement. although the interest was charged
on the whole amount of the loan. This. of course. in-
creased the actual cost of the loan to the borrower. as
the loan had to exceed the actual cash requirement by
the amount of the compensating balance. For example.
a customer signing a loan agreement with a bank for
one million Turkish Liras at 10.5 per cent interest.
actually received only. say. eight hundred thousand.
the remaining 20 per cent of the loan being deposited
with the bank. Therefore. the effective cost of the
loan to the borrower was increased to 12.625 per cent.
an additional benefit of 2.125 per cent per annum to
the bank. The simple arithmetics of this example is as

follows.

.Amount stated on the loan agreement TL. 1.000.000.-
.Amount actually received by borrower 800.000.-
Balance in deposit account 200,000.-
litterest paid on loan (10.5% of 1,000,000) 105,000.-
Le as. interest received on deposit

C 2% of 200,000 ) 4.000.-
Neib interest paid by borrower 101.000.-

Effective cost to borrower (101.000 1': 800.000) 0.12625

 

85
The amount of compensatory balances changed according
tothe bargaining powers of the sides. but 20 per cent

was most common.

Furthermore. regular customers of a bank were usually
obliged to keep a minimum level of commercial deposits
with the bank. at all times. if they wanted to maintain

good business relations with that bank.

A third advantage of commercial deposits to banks was
the indirect relationship between such deposits and
banking services. The holders of commercial deposits
were usually regular customers. for whom banks performed
such services as collecting on accounts receivable or
transferring money from one province to another. As
already explained in Part II. Section A of this chapter.
commissions received by banks for such services. as well
as. for services connected with the loan agreements were

substantial.

Due to the above three major causes. banks which had
relatively bigger shares of commercial deposits earned
higher rates of profit. In fact. the average ratio of
commercial deposits to total deposits for the nine banks
with highest profitability rates was 32.37 per cent. 7.25
percentage points higher than the average ratio of 25.08
per cent for the other remaining banks.23 Due to this

 

23. Computed from data in BAT Publications Nos. 16.
219 25, 259 26’ 279 519 55’ 59 and 45.

84
bigger prOportion of commercial deposits which cost less
to banks. the average interest cost on total deposits
for the nine banks was 3.89 per cent, 1.47 percentage
points less than the average cost of 5.36 per cent for

the others.24

C. Personnel
Both the number and the quality of their personnel. and
consequently personnel expenses. were major concerns

for commercial banks.

More than one third of their total outlays25 was spent
for wages. bonuses. social security and other social
benefits for their employees. Personnel structure of
banks. with respect to the number of persons employed.
resembled a pyramid with a dispr0portionately large base.
This base consisted of clerks and cashiers doing routine
work. Bank officials complained of the high turnover
among this group. Some of the reasons for this high
turnover were obvious. Working hours were long. wages were
relatively low. chances for promotion were rare. and the
work was routine and dull without much challenge. These
lower positions were mostly filled with junior and senior

high school graduates. The basic requirements for employment

 

24. Computed from data in BAT Publications Nos. 16.
21. 259 253 269 27g 519 35' 39 and 43.

25. lO-year average for all banks was 39.13 per cent.

85
were average intelligence and a pleasant personality.
For positions requiring regular contact with customers.
female employees were preferred. Atthe end of 1970.
36 per cent of all the personnel employed by the Turkish

commercial banks studied were female.26

The trouble
with the female employees was that marriage and child-
birth caused them to quit their jobs or to go on long.
paid sick leaves. Furthermore. most preferred to work
at branch offices near their homes and were reluctant

to change their places even when transfers were required

to new branch offices or to fill vacant positions.

It was even more difficult to fill the positions re-
quiring higher qualifications. For example. banks deal-
ing with foreign trade transactions needed multi-lingual
or. at least. bilingual employees. preferably with college
degrees. At the end of 1970. inexperienced graduates of
bilingual colleges. such as. Middle East Technical Univer-
sity ... Robert College. demanded and easily found jobs
with private business at a beginning monthly salary of
four to five thousand Turkish Liras. in Istanbul. Bank
officials complained that their wage scales did not allow
them to pay more than twenty five hundred at most. In
1970. the average yearly personnel expense per employee

for all banks was TL. 21.170.53 and the highest was

 

26. BAT Publication No. 43

86
TL. 47.980.- (F-Ol)27 This amount included social bene-
fits in addition to wages.

Rapid increase in the number of branches increased the
need for new employees. In fact. number of personnel
employed by the 32 banks in the study more than doubled
in ten years. going from 16083 in 1961 to 32689 in 1970.28

Inflation and periodic demands for higher wages and other
fringe benefits by the unions - and not necessarily in
that order - also hurt the banks with respect to person-
nel expenses. Personnel expenses per employee also

doubled during the same period.29

The older generation of bank officials occupying middle
and top level managerial positions were usually conser-
vative and too security conscious. sticking closely to
the old ways of handling the daily work and reluctant

to change. They believed that efforts made by a bank

to maintain its image of infallibility with respect to
probable fraud should rank higher than cost. Therefore.
they were willing to spend more for internal and exter-
nal anti-fraud measures than it would cost them if some
of the measures were loosened. This caused them to hire
or promote a substantial number of middle level managers

whose sole responsibility was to check and recheck each

 

27. BAT Publication No. 43
28 and 29. BAT Publication Nos. 16 and 43.

87

other. as well as. the work done by the lower echelon

of the personnel. A natural side effect was the increase
in the amount of procedural paper work and handling. with
a resultant loss of time both to the banks and to their
customers. One good example was the signing of a receipt
by a supervisor who did not actually count or see the
money received. but signed the slip because the cashier
signed it before him. Since the supervisor had to depend
on and trust the cashier to sign the receipt. there was
no rational reason for this second signature. What is
more. there was no attempt or willingness to compare the
cost of this double checking to the probable loss that

it was assumed to prevent. The concept of "opportunity

cost" did not seem to exist.

One solution to the personnel problem was the use of
electronic calculators and other office machinery. How-
ever. since many branch offices had low volumes of busi-
ness but required a minimum number of employees. it was
frequently uneconomic to instal costly labor-saving
machinery. Bank officials complained that since the
upper limits of interest rates and commissions they could
charge were set by the government. it was impossible for
them to transfer. even partly. the additional cost of
wage increases. due to inflation and union demands. to
their customers. This. they said. out directly into their

profit margins. Some of the banks. especially those with

. -_!_+__.¥_____.__._.
.

88
few or no branches. fought against this by reducing the
number of employees. thus increasing their individual
work loads. For example. bank F-Ol had to increase its
average personnel expenses per employee by more than
37 per cent in 1966. The same year its employees were
reduced by 33 per cent and the average volume of trans-
actions handled by each employee was more than doubled.30
For the nine most profitable banks. volume of transactions
(defined here as the total volume of deposits. plus. loans
extended) handled by each employee was 81.6 per cent more
than the average for the rest of the banks. At the same
time. their average personnel expenses per employee was
42.9 per cent higher. This meant that by paying higher
wages and/or providing better fringe benefits. they could
hire better qualified personnel and make them work more
efficiently. As a result. their average personnel expen-
ses per Turkish Lira of transactions was 21.5 per cent

lower.31

All the bank officials interviewed agreed that the position
of a branch manager was an extremely important one and re-

quired substantial experience. as well as. other managerial
qualifications. However. lack of enough potential managers

among the lower level of employees and the rapid growth in

 

30. Computed from data in BAT Publications Nos.26 and 27.

31. Computed from data in BAT publications Nos. 16. 21.
~ 250 259 260 27: 510 53! 39 and 43.

89
the number of branches sometimes forced banks to appoint

branch managers with less than desired qualifications
or experience. This. they said. reduced efficiency and
caused losses to banks. the actual amount of which could

not be measured.

D. Other Relevant Findings

Both the analysis and the interviews held with bank offi-
cials disclosed certain additional findings which were
relevant to the operations of Turkish commercial banks.
even if such findings were not always directly related

to the hypotheses. These findings were included as a
separate section in this chapter with the purpose of pro-
viding the reader with a better understanding of Turkish

commercial banks.

1. Branching

It has already been mentioned that Turkish commercial
banking could be classified as "branch banking" and the
statistical analysis showed that growth in the number of

branches had no impact on profitability.

However. the same analysis also disclosed that banks. by
increasing the number of their branch offices. succeeded

in increasing the volume of their deposits. the loans

they have extended and their total revenues. On the other

hand. the policy of spreading their branches all over the
country added substantially to their total eXpenses.

90
completely annihilating the benefits. Coefficients of
rank correlation between the annual rate of change in
the number Of branches and in (a) total deposits. (b) sa-
vings deposits. (c) commercial deposits. (d) total loans
extended. (e) total revenues. (f) revenue from banking
services. and (g) total expenses were. 0.54. 0.46. 0.55.
0.44. 0.48. 0.41 and 0.56. respectively. all significant
at 0.01. 0.02 or 0.05 levels of significance. Hence.
growth had no significant effect on the profits either
way. The fact that the cost involved in Opening new

branches offset the benefits of a larger volume Of busi-

 

ness was also supported by the finding that the cost Of
doing business was not significantly different between
large and small banks. (pp.51-52) However. branching
can still prove to be a rational business decision. if
in the future. business volume grows large enough to

better cover the existing over-heads.

None of the banks whose executives were interviewed con-
ducted any serious research on the consequences Of branch
banking. The reasons they gave for Opening new branches
were various and could be summarized as follows.

a) To increase profits.

b) TO get a bigger portion Of the market.

0) Competition. ("Other banks do it. so we must

follow them")
d) TO become a truly national bank by having a wide

net-work Of branches in every part of the country.

 

91

e) Power to affect the economy of the country.

Some Of the executives conceded that competition in this
way sometimes became rather irrational. but they were
afraid of losing the market - mostly. their deposits -

to other banks if they stOpped now. The claim that
Opening new branches did not really increase the total
volume Of deposits. but only caused savings to move from
one bank to another did not bother them. They not only
did not believe it. but stated that even if it were true.
their main concern was increasing their own shares Of it.
just like any other business in a competitive millieu.
They said that they had good reasons to believe in the
existence of a substantial amount of cash in Turkey which
has not been deposited with any bank yet. Taking banking
services to the remote corners of the country. nearer to
the homes Of potential savers. helped to attract some Of
this money into banks. One example cited was quite in-
teresting. When one Of the banks Opened a new branch

in a small town. quite a number of brand new lOOO.- Lira
notes were deposited. These notes were still valuable as
currency but were not printed by the Central Bank any more
and were gradually withdrawn from circulation. This sup-
ported the belief that there were still people who kept
their savings "under the mattress" and that they could be
‘persuaded to deposit this money with banks when prOperly

approached.

92
When planning for a new branch. most banks used slightly
modified pay-back period method as an investment crite-
rion. The time required for a branch Office to show a
net profit varied between one to three years. However.
some of the branches were Opened in potential growth
regions for the purpose Of "being there before the others"
when the business started. Still more. a number Of bran-
ches were Opened without much regard to cost or revenue.
simply because some other bank opened a branch office

in that area.

Naturally. some of the branches were Operated with the
purpose Of attracting deposits. and they were not expect-
ed tO deal in much lending activity. On the other hand
some did more lending than borrowing. Therefore. funds
were transferred from one branch to another when and
where necessary. In such cases. an imputed rate Of in-
terest was either charged to or paid by the involved bran-
ches on their books in order to enable the main office to

evaluate their Operations.

2. Promotional Prizes and Gifts

Promotional prizes awarded to holders Of savings deposits
by drawing lots were first introduced to Turkish commer-
cial banking slightly more than two decades ago by bank
N-22. At first it was viewed with suspicion. and not
infrequently in disgust. by some of the more conservative

type of bankers. However. eventually. and sometimes with

95
reluctance. this practice was adopted by all with very

few exceptions. These prizes included cash. real estate
and securities. The Central Bank. each year. set the
maximum total value of such prizes that could be distri-
buted by banks. The criterion was a fixed sum. plus.

a certain percentage of the volume of savings deposits

held by each bank during the previous year.

The probable effects Of this practice have frequently
been the subject of a controversial debate among bankers

themselves. as well as. between bankers and scholars.

‘15 . \. '.I\IMI“‘O In.”
L.

Statistical analysis during this research disclosed

that promotional prizes had some positive effect on the
volume of savings deposits. and as a result. on the volume
of loans extended. However. no significant impact on
profitability was Observed. ( Tables 7 and 9) This was
due to the explicit and implicit cost of these prizes
which Offset the benefits. Explicit cost was what the
banks actually paid for the prizes. which in 1970. was
approximately three and one half per cent Of total eXpen-
ses for most of the banks. No statistical data were
available for the implicit cost of extra handling and
paper work caused by deposit holders transferring their
savings either in whole or in part. from one bank to
another. or even from one branch to another. to be eli-
gible for the prizes Offered at different times. Further-
more. to be effective. these prizes had to be continuously

advertised.

94
Bankers claimed that in recent years. gifts given away
by banks on special days. such as. New Year's day and
anniversaries. were becoming more and more effective than
promotional prizes. in attracting deposits. Usually.
these gifts consisted Of small items. such as desk and
wall calendars. ball points. wallets and other similar
souvenirs. However. the common belief that some banks.
from time to time. gave highly valuable gifts to big
deposit holders was confirmed by the bank Officials inter-
viewed. Again it was a case of "some banks. but definitely
not ours". Among such gifts rumored to be given away by
some banks were valuable rugs. silverware. and most inte-
resting of all. payment of a customer's income tax by a
bank. Such gifts were. Of course. a roundabout. and cer-
tainly illegal. way of paying higher rates Of interest on
deposits. than those set by the government. It is hardly
possible. especially for an outsider. to Obtain any evidence.
let alone actual cases and figures. about the total amount
Of such gifts. A common way of keeping these figures confi-
dential was tO allocate a lump sum apprOpriation to the
president of a bank for such expenditures. The actual pay-
ments were not recorded in the books. neither were they
shown as cost items. In such cases. banks were actually
willing to pay tax on these amounts since they could not
be shown on the books as deductible expenses. This prac-
tice would. Of course. further increase the banks' promo-

tional costs.

 

 

95
3. Dividends vs. Retained Earnings

The amount of equity capital was a vitally important fac-
tor for commercial banks. TLB made many references to the
amount of equity Of a bank in connection with commercial
bank Operations. For example. the total volume Of savings
deposits that a bank could accept was set as a certain
multiple Of the equity capital Of that bank. If the volume
Of savings deposits exceeded that limit. then 50 per cent
Of that excess amount had to be deposited withthe Central
Bank at a much lower interest rate than the bank could

1'] PW

earn if it was allowed to invest it in its normal Opera-

tions.32

Furthermore. banks were not allowed to loan to
the same borrower more than ten per cent of their equity
capital.33 Such legal provisions. together with the de-
sire tO grow. were sufficient reasons for most banks tO
retain their profits rather than distribute them as divi-
dends. This was not a big problem for banks owned by a
small group of share holders who completely controlled
the bank and who were usually in high income tax brackets.
On the other hand. if the shares of a bank were widely
held. then the management had a hard time to persuade the
shareholders to allow them to retain profits in the bank.

Turkish people. in general. are not familiar with the

 

32. TLB Article 28.
33. TLB Article 38.

96
Operations Of a capital market. and the absence of a regu-
lar. active stock market makes it difficult to buy or sell
stocks in Turkey. Lack Of sufficient disclosure require-
ments does not help this situation either. Therefore.
for most peOple. the concept Of "capital gains" does not
exist. They expect regular income from their stocks. in
the same way they except to receive a regular interest on
their bonds or deposits. Managerial efficiency is measur-
ed solely by the amount of dividends declared. regardless
Of the need for retaining earnings. This situation creat-
ed a dilemma for the management Of some banks who had to
satisfy their stockholders while trying to increase their
equity capital through retained earnings. Turkish Commer-
cial Code does not provide for "authorized capital". and
the procedure to increase legal capital involves a great
deal of costly and time consuming red tape. Therefore.
keeping treasury stock is not a common practice in Turkey.
limiting the use Of stock dividends as an effective solu-
tion to the problem. Some banks solved this problem by
keeping the net income figure in the financial statements
as low as they dared.through allocation of large amounts
of "allowance for probable depreciation Of assets." It
was a meaningless item. used solely to manipulate the net
income figures. Since it was not accepted by the tax
authorities as a deductible item. full corporate tax was
paid on it. but it helped to keep the uninformed stock-

' holders from requesting larger dividends. Sometime in the

.W_m¥m-rhmrw

97

following years. such allowances were quitely transferred
to the retained earnings. without letting most of the
stockholders getting any wiser.

CHAPTER III
A BRIEF COMPARISON OF COMMERCIAL BANKING
OPERATIONS IN THE U.S.A. AND IN TURKEY

The principal Objective of this research was to investigate
the Operations Of commercial banks in Turkey. With this
goal in mind. the first two chapters of the study covered
the structure Of and findings related to Turkish commer-
cial banks. In order to help the reader. not too familiar
with the Turkish banking system. to better evaluate these
findings. it was thought useful to compare briefly. the
Operations of Turkish commercial banks with those Of
commercial banks in the United States. However. a more
detailed and exact comparison of these two systems. situ-
ated in significantly different economic. social and poli-
tical environments. would necessitate a thorough investi-
gation Of the Operations of U.S. commercial banks. with
similar purpose. scope and methodology of this research.
This. by itself. would be another major undertaking not
within the scope Of this study. Therefore. relatively
more important differences and/or similarities. related

tO the basic structures Of the two systems were covered

in the following four sections of this chapter.

A. Structural Differences and Similarities
The principal functions Of commercial banks - that is.

acceptance of deposits. lending. investing. and providing

98

99
banking services - are the same both in the United States

and in Turkey. However. there are a number Of basic dif-
ferences between the two. with respect to type. number
and size Of the same. Furthermore. socio-economic envi-

ronment also differs greatly.

As a natural result of the political structure Of the
Republic Of Turkey. which is not constituted by union

of states as in the U.S.A.. the dual banking system Of
state and federally chartered banks does not exist in
Turkey. A11 Turkish banks are chartered either under

the provisions Of the Turkish Law on Banks or under
individual legislations specially passed for the creation
Of certain banks.1 NO banks comparable to mutual savings
tanks Of the U.S.A. - which have no stockholders and which
are administered by trustees for the depositors on a
mutual basis2 - exist in Turkey either. As a matter of
fact. TLB prohibits the creation of not only mutual
savings banks. but also. Of all other depository types

of financial institutions. such as. credit unions and

savings and loan associations.5 Group banking. defined

 

1. See pages 8 through 12 and Appendix.

2. Banking Education Committee. The Story Of American
B nkin . (The American Bankers Association. N.T..
e O 9650 po 72.

9. TLB Article 24. and Smith. R. Elberton. Turke 's Finan—
cial Structure. ( - A Report - ). (USAID7TErEey.Ankara)

OP. 0

 

100

as. "the ownership Of substantial control Of two or more
banks by the same interests."4 exists in Turkey. How-
ever. there is a major difference between group banks
in the U.S.A. and in Turkey. In the U.S.A. the term
implies that the controlling interest is vested in an
individual. or a group of individuals (chain banking).
or in a corporation (bank holding company.)5 In Turkey.
the state. rather than individuals. completely owns or
controls a number of banks which are founded by special

legislations.

As for banks owned or controlled by other banks. two
examples are worth mentioning. One is bank D-02. whose
shares are owned by a number Of privately owned commer-
cial banks. The second is Bank N-15 whose shares are
owned in the proportion of 76 per cent. 20 per cent and
4 per cent. by Bank N-20. Bank of America and Banco
d'America d'Italie. respectively.

Commercial banking in the U.S.A. is practiced. to a large
extent. by unit banks described as. "banks the physical
location Of which is limited to one site."6 At the end

of 1966. out Of a total Of 13.770 commercial banks.

 

4 and 5. Grosse. Howard D.. Management Policies for
Commercial Banks. (PrenticeiHall.IInc..
EngIewOOd CIIIIs. N.J.) 1962. p. 28.

6. Robinson. Op. cit.. p. 8.

 

101

10.457 - 76 per cent - were unit banks and 3.313 banks

Operated 16.648 branch Offices. in addition tO. their

main Offices. As a consequence. both the loans and

investments Of branch institutions amounted to approxi-

mately 70 per cent of the total for all commercial banks.

and the number of branch offices. as well as the assets

Of branch banks. were about double those Of unit banks.7

In the same year. Out of the total of 43 commercial banks

in Turkey. including those created by special legislation.

33 - 77 per cent - Operated two or more branches. and only

10 were unit banks. Total number of branch Offices. exclu-

ding the head Offices. were 1.999.8 A significant differ-

ence between branch banking practices in the U.S.A. and in

Turkey is that. in the former. the average number Of branch

Offices per branch bank was only five. substantially less

than the average of 61 in the latter. In 1966. banks

S-07. N-20. N-22. N-Ol and N-16 Operated 679. 269. 141.

108 and 105 branch Offices. respectively.9 In 1970. al-

though the number Of branch banks stayed the same. the

total number Of branch Offices was increased to 3.148

 

8.
9.

Fischer. Gerald 0.. American Banking Structure.
(Columbia University Press. New YOrk.) 1968. p.33

BAT Publication No. 27.
Ibid.

A-I A 'K'InI-ll A .-

 

 

102
with an average of 95 offices per branch bank. The num—
ber of branch offices Operated by the above five banks
were also increased to 774. 436. 304. 252 and 168. res-
pectively.10 In 1966. loans and investments Of branch
institutions were approximately 94 per cent of the total
for all commercial banks.11 considerably more than that
in the U.S.A. This percentage for Turkish branch banks
stayed approximately the same - 95 per cent - in 1970.12

At the end of 1961. 79 per cent of all commercial banks
in the U.S.A. had deposits Of S 10 million and less.
18.7 per cent held deposits between S 10 million to

S 100 million. and Only 2.3 per cent held more than

S 100 million Of deposits. The most common sized banks
were those with deposits ranging from S 2 million to

s 5 million.15

In percentages. the situation was almost identical in
Turkey for the same year. Of all the Turkish commercial
banks studied. 79.3 per cent held deposits Of S 10 million
and less (U.S. S l = TL 14). 17.2 per cent had deposits

Of S 10 million to 3 100 million. and 3.4 per cent held
more than S 100 million of deposits. However. the most

 

10. BAT Publication NO. 43.
ll. BAT Publication NO. 27.
12. BAT Publication NO. 43.

'13. Reed. Edward W.. Commercial Bank Mana ement. (Harper
and Row. Publishers. Inc.. N.T. N.T.) I963. pp.l3 and
14.

 

 

103
common sized Turkish commercial banks were smaller than
those in the U.S.A.. with deposits ranging from S 200
thousand to S 3.5 million.14 In 1961. the biggest Tur-
kish bank included in the study (N-20) had deposits Of
slightly less than S 160 million. whereas. in the U.S.A.
there were some banks with even more than S 1 billion of
deposits. Even in 1970. there was not a single bank in
Turkey with deposits Of S 1 billion. and only bank N-2O
had increased its deposits tO almost 3 657 million.15
Of course. it must be kept in mind that. compared to

 

13.431 U.S. commercial banks with total assets Of S 279
billion16 in 1961. the total assets or the Turkish com-
mercial banks studied were slightly less than S 423
million.17

In 1970. the number Of Turkish commercial banks with
deposits Of less than S 10 million decreased to 63.3
per cent. Those with deposits of S 10 million to S 100
million and with more than S 100 million increased to
23.3 per cent and 13.3 per cent.respectively. In that

year. the most common sized Turkish commercial banks

 

14. BAT Publication No. 16.

15. Banking Education Committee. Op. cit.. p. 66.
BAT Publications Nos. 16 and 43.

16. Reed. Op. cit.. pp. 2 and 10.
17. BAT Publication NO. 16.

104

were those with deposits ranging from S 1 million to
s 50 million.18

B. Deposits and Loans

The major difference between the types of deposits held
by commercial banks in the U.S.A. and in Turkey lies in
the fact that. to the majority of Turkish people the use
Of personal checks is almost unknown. With very few
exceptions. wages are received in currency. and payment
for purchases or bills is made in cash. Therefore. the

personal checking account system. which is so widely

accepted in the U.S.A.. is virtually nonexistent in Tur-
key. Business firms use checks drawn against their com-
mercial accounts. but even then.the system is inefficient.
especially when compared to that in the U.S.A. Since
checking accounts and commercial demand deposit accounts
were one and the same in Turkey. banks had to pay. at
least during the period covered by the study. interest on
such deposits.19 As a matter or fact. it is rather diffi-
cult to differentiate between demand and time deposits in
Turkey. since it is usually possible to withdraw money
from time deposit accounts. long before it is due. by giv-
ing up on the higher rate Of interest on such deposits.

 

180 BAT Pllblication NO. [+5.

19. Subsequent to the period covered by the study.
that is. in 1973. Government prohibited payment
of interest on commercial deposits. and allowed
for it again in 1974.

105
At the end of 1970. approximately 73 per cent Of total

deposits held by all the banks in Turkey was demand.20

Savings deposits. both time and demand. are in the form
Of passtOk savings accounts. and they all earn interest.
the rate varying accordkg to the period they are held
with the bank. (pp. 14 and 15)

NO such agency similar to the Federal Deposit Insurance
Corporation Of the U.S.A. exists in Turkey. However.

by law. the holders Of savings deposits are accepted as
privileged creditors for an amount of 50 per cent Of their
deposits. regardless Of the size of such deposits. There-
fore. in case Of bankruptcy. half Of the savings deposits
Of a deposit holder is paid to him without awaiting the

outcome Of the liquidation process.21

As for the types Of loans. two major differences exist
between the practices Of U.S. and Turkish commercial banks.
First is the absence Of direct consumer lending by Turkish
banks. In the U.S.A.. banks serve a mass market by lend-
ing substantial sums to individuals for the purchase Of
durable goods or for payment for vacations and so on.

About 40 per cent of all consumer instalment loans are

made by commercial banks in the U.S.A.22 In Turkey.

 

20. BAT Publication NO. 43.
21. TLB Article 27.
. 22. Banking Education Committee. Op. cit.. p. 64.

 

 

 

106
consumer lending by banks is made only indirectly by dis-
counting the notes receivable Of the firms selling goods
on instalment basis. It is extremely difficult for an
individual to borrow money from a bank for personal use
unless he has good connections with a bank Officer. Even
then. the amount that can be borrowed seldom exceeds
S 200. The reasons for the absence Of this type Of lend-
ing in Turkey seem to be similar to those that once exist-
ed in the U.S.A. Consumer lending differs significantly
from commercial lending in that. the former requires
special knowledge of consumer wants. as well as. of ore-
dit standings and specialized collection techniques.25
Banks in Turkey are not presently organized to handle
these problems and there are no credit rating agencies
or centers to help them. Furthermore. presently. they
have enough Opportunities to keep their funds employed by
commercial lending without getting involved in extra risks
with which they are not familiar.

Second. with the exception Of a few banks founded by
special legislation. Turkish banks are not allowed to
extend mortgage loans. In fact. they cannot make residen-
tial loans and they are not even allowed to acquire real
estate which is not required by the nature Of their busi-

ness.24 However. since real estate is considered to be

 

23. Reed. Op. cit.. pp. 326-328.
‘24. TLB Article 50.

 

107
a good hedge against the rather high rate Of inflation
in Turkey. most Of the big banks prefer to buy. rather
than rent. office space for their branches. especially

in good locations.

The practice Of long-term lending in short-term form has
already been discussed in Part II. Section A Of Chapter II.
but this situation is not unique to Turkey and seems to be
widely practiced in the U.S.A. also.25

0. Revenues. EXpenses and Profits

Both in the U.S.A. and in Turkey. the major source Of in-
26

 

come for commercial banks is the loans extended by them.
although there are somedifferences in the types Of loans.
as explained in the previous section.27 In 1970 income
from loans accounted for approximately 74 per cent Of

total earnings Of Turkish commercial banks.

The two major differences in the sources Of income Of U.S.
and Turkish banks are the service charges on deposits and
revenue from the investment portfolios. Since Turkish

banks pay interest on demand deposits rather than charge
service fees. the first source of revenue is not available
to them. As for the second source. with very few exceptions.
income from investments rarely accounts for more than two

per cent of their total income. The maximum total amount

 

250 RObinsonp OPOCitog p0 1370
26. Reed. op.cit.. p.469 and BAT Publications.
27. TLB Article 48.

108
Of funds that Turkish commercial banks are allowed to in-
vest in other firms is ten per cent of their equity capi-
tal. Moreover. the absence of an organized capital mar-
ket limits investments in such fields. Consequently.
whatever investments they have are not liquid. the way it
usually is in the U.S.A. Therefore. portfolio management
and capital gains are concepts with which Turkish bankers
are not very familiar. Marketable securities with short
maturities are not available for them either. Turkish
bankers have long ceased to regard government or treasury
bonds as liquid assets. Due to informal. but effective.
pressure put on banks by the government. such bonds are
bought and held in amounts and for periods convenient

to the treasury. but not necessarily to banks.

The second major source of income for Turkish banks is

the revenue received for banking services. already ex-
plained in the previous chapter.

The largest expense item of U.S. commercial banks is sala-
ries and wages including Officer and employee benefits.28
This is true for Turkish banks too. however. interest paid
on deposits is usually at the same level with personnel
expenses. In the U.S.A.. wages and salaries are below the

average also. but this difference is becoming less and

less pronounced.29 This gap still exists in Turkey and

 

28. Read. OpeCiteg p. 494.
29. Ibid.. p. 496.

 

109
the problem of hiring and keeping qualified personnel.
while maintaining personnel expenses at a reasonable

level. constitutes a serious dilemma for Turkish banks.

Absence Of any significant difference in cost between
the small and big Turkish banks has already been explain-
ed in Chapter II. The situation seems to be different

in the U.S.A. Studies made by the Federal Reserve Banks
Of Kansas City and Boston presented evidence that costs
were considerably lower at the bigger banks. and they
tended to decline with the increasing size Of the banks.

 

The major reason for lower costs Of larger banks was the
proportionately lower personnel expenses.50 During the
period covered by the study. such economies Of scale did

not work for Turkish commercial banks.31

In the U.S.A.. banks showing exceptionally large profits
are rare. and the profitability rates Of U.S. commercial
banks bunch rather closely.32 In 1961. rate Of return
On capital. after tax. ranged between 6.5 to 9.8 per
cent for commercial banks in the U.S.A.33 During the

period covered by this study. average return on capital.

 

30. Ibid.. p. 512 and Robinson. Op. cit.. p. 427.
31. See Sections C and D-l. Part II. Chapter II.
32. Robinson. op.cit.. p. 416.

33. Reed. op.cit.. pp. 509 and 513.

110
before tax. for Turkish commercial banks varied from
minus 4 per cent to plus 53.7 per cent. (Table 1)
Since an average of 40 per cent of corporate and income
tax is a reasonable assumption in Turkey. the net after
tax returns would range from minus 4 per cent to plus
32.2 per cent. with an average of 10.2 per cent for all
banks studied. This average is quite close to the rates
in the U.S.A.. but the range is considerably wider.

D. Disclosure Requirements

Absence Of an organized. regular capital market. and
consequently. Of an agency similar to SEC. lack Of ade-
quate disclosure requirements and of dependable financial
reports or statistics. make it extremely difficult to con-
duct empirical research in Turkey. Although the disclosure
requirements for banks are relatively more strict and some
statistics based on year-end financial reports are either
available or can be computed. the situation is still far
from being satisfactory. (pp. 28-29) For example. neither
net income after taxes. nor distribution Of profits can be
found in their financial statements. Monthly reports are
not available to the public. encouraging banks to window
dress their year-end reports and to spend a lot of time
and money to increase the volume of their deposits towards

the end of December.

Furthermore. too many expense items are consolidated into

broad categories. For example. advertising expenses. cost

111
Of gifts to depositors. rent paid for Office buildings.
are all included in one expense group. rather meaning-

lessly labeled as. "other expenses".

Lack Of a uniform accounting system accepted by all banks
makes it difficult to compare some of the balance sheet
and income statement items Of different banks. This
situation is more apparent in the classification Of loans

and in the definition Of banking services.

However. similar criticisms seem to be valid with respect
to the published financial reports Of U.S. banks.34 al-
though the disclosure requirements are far more adequate
in the U.S.A. than in Turkey. Balance sheet is the only
financial report required by law to be published by U.S.
commercial banks. The same information. with some vari-
ations. is usually available in the bank Offices.35 Since
U.S. banks are exempted from the provisions Of the Securi-
ties Act Of 1933. they are not required by law to report
to stock holders or to make financial information avail-

able tO potential investors.36

Both in the U.S.A. and in Turkey. reluctance to disclose
information to the public seems to stem from similar

feelings on the part Of conservative banks. They fear

 

34. Ibid.. 9 PP. 68-70.
35. Ibid. 9 p. 64’.
36. Ibid. ’ p. 68.

112
that too much information may lead to unwarranted specu-
lation culminating in a "run on the bank". Moreover.
they believe that there is enough supervision by the
Government as it is. and therefore. no need to publish

too much data.

CHAPTER IV
CONCLUSIONS AND RECOMMENDATIONS

The foregoing analysis Of the Turkish commercial banking
system provided evidence to accept two Of the four hypo-
theses Of this study and to reject the other two. The
principal hypothesis was proven to be true. because sta-
tistically significant differences among the profitability
rates of Turkish commercial banks were Observed. Net tan-
gible assets. commercial deposits. loans extended. average
size of commercial deposit accounts. volume of transactions
handled per employee. income from loans extended. and the
ratio of loans extended to equity capital. were the seven
factors which the analysis disclosed as causing the Ob-
served differences among the profitability rates. ( Table 7 )
These seven performance factors could actually be categorized
into three main groups: lending. commercial deposits. and

personnel.

Secondary hypothesis NO. l was accepted. because no statis-
tically significant difference between the profits Of the

less and more rapidly growing banks could be Observed.

Neither economies nor diseconomies Of scale could be
Observed to work for Turkish commercial banks. Therefore.
the cost Of doing business at the large and small banks
did not differ significantly. and thus. secondary hypothe-

sis No.2 was rejected.

113

114
Secondary hypothesis NO. 3 was also rejected. Being a
unit bank or a branch bank. or the number of branch
Offices Operated did not. by themselves. significantly
affect the profits Of the banks included in the study.
Growth in the number Of branch Offices Operated by a
bank helped that bank to increase the total volume Of
deposits. as well as. Of the loans extended. but the
benefit Of increased revenues was completely offset by
the additional cost resulting from the Opening Of new

branch Offices.

Further investigation Of commercial bank Operations in
Turkey revealed some plausible reasons for the above
findings. Banks which specialized in financing foreign
trade transactions did relatively better than the banks
which did not. or could not. go into this type of lending.
Both the relatively lower risk involved in foreign trade
lending and.theadditiona1 commissions earned for handling
such loans made this type Of lending quite profitable to
those banks which had the means and the experience to

handle them.

The volume Of commercial deposits held by commercial banks
was smaller than that of savings deposits. However. due
to the relatively lower cost of the former. banks were
able to earn bigger profits on such funds. The indirect
relationship Of commercial deposits with compensating

balances and with bank service commissions were the other

115
two causes Of this higher profitability.

Need for additional personnel to handle the rapidly grow-
ing volume Of Operations. continuous employee turnover
among the lower echelons. effective pressure by the uni-
ons for wage and salary increases. as well as. for addi-
tional fringe benefits were major constraints on the size
of profits made by commercial banks. Banks which tried
to solve their personnel problems by hiring better
qualified peOple and by providing the necessary motiva-
tion to make them work more efficiently managed to keep
their total personnel cost relatively low. Since legal
restrictions on interest and commission rates stopped
Turkish commercial banks from passing even part of the
additional cost to their customers. the only rational
way Open to banks was to find ways to increase the
efficiency Of the personnel by increasing boththa quali-
ty and the volume of transactions handled by them. In
other words. average personnel cost per Turkish Lira Of
deposits. plus. loans extended had to be kept as low as
possible. Banks which realized this. and succeeded in
doing so. managed to show bigger profits than the others.

The socio-economic problems Of being a developing country
had their effects on the commercial banking system Of
Turkey. High demand for money and credit. high rate of
inflation. and absence of competition from other financial

- institutions caused Turkish commercial banks. in general.

116 .
to emphasize more on growth - growth in size. in number
Of branches and in volume Of Operations - but less on
efficiency. The most common and observable factor con-
cerning the Operations Of Turkish banks was the great
effort spent to attract savings deposits. Continuous
advertisements in the daily papers and on radio and
television. promotional prizes and gifts awarded to de-
positors. Opening new and attractive Offices on every
suitable corner Of a town or a city were effective tools

in reaching this goal. Banks seemed to believe that the

 

end justified the means. However. both the findings of
this study. as well as. the monopolistic position of
banks as the only depository institutions indicate the
need for a change in their policies. Inflation. steadily
increasing availability Of good quality bonds and deben-
tures. and the understandable desire on the part of
people to invest in real estate. all help to make time
deposits seem less attractive to potential savers. There-
fore. a substantial portion of savings deposits are not
time but demand. despite the relatively higher rate Of
interest paid on the former. Obviously. demand deposit
accounts are Opened mostly for daily money transactions
and for security against possible losses due to theft.
fire and so on. It is difficult to believe that interest

can be an effective factor in attracting such deposits.

 

117
Pass-book savings accounts for demand deposits are used
almost in the same way checking accounts are used. thus.
requiring extra handling time and effort. Therefore. it
seems unreasonable on the part of banks to pay interest
on demand deposits. Instead. promoting the using of
checking accounts and encouraging peOple to use checks
rather than hand-to-hand cash would not only increase the
investable funds Of commercial banks. but would certainly
help depositors to save both time and effort in conducting

their normal daily money transactions.

The advantages Of using checks are common knowledge and
need not be reported here. But in a country where the
switch from species to paper money is relatively new.
getting the people. and even some Of the bank managers

and government Officials used to the concept of checking
accounts. is another matter. Major changes in penal code
and in other relevant legislation. establishment of nation-
wide credit agencies. improvement Of interbank communica-
tion system and Of related physical facilities should
replace the existing inefficient. costly. and sometimes
frustrating. protective measures taken by individual banks
against possible fraud. At the present. checking system
in Turkey does not provide any significant advantages to
depositors. Changes in the procedures should be followed
by a nation-wide campaign by all commercial banks to promote
the using of checking accounts. Acceptance Of payment by

'checks. by the tax authorities and by utility companies are

 

118
useful steps towards this goal. At the beginning. it may
be necessary not to charge handling fees to the depositors.
However. any possible increase in the handling costs due
to the switch from pass-book demand deposits to checking
deposits must be compared to the savings due to the non-
payment Of interest on the latter. Later on. gradual
initiation Of handling fees or minimum compensating balan-

ces could provide banks with an important source of income.

The present emphasis Of bank advertisements on the monetary
benefits to depositors should be replaced by emphasis on
the safety. convenience and time saving aspects Of check-
ing accounts. But what is advertised must actually be
practiced. This necessitates a change in the attitude Of
bank employees and Officers. Protection against fraud

can and should be provided without inconveniencing cus-

tomers.

A major change in the attitude of and the procedures adOp-
ted by bankers is vitally necessary. even without the
promotion of checking accounts. The present system of
checking and rechecking each and every step of transac-
tions by too many supervisors. whether it is a payment or
receipt of money. is not only time consuming and frustra-
ting tO customers. but also increases the already high
cost Of handling such transactions. Personnel expenses is

an area where substantial savings can be achieved by

 

119
effective changes in the handling procedures. This. in
turn. would enable banks to pay higher wages to fewer
employees. This increase in wages would be more than
compensated by the decrease in turnover and the increase
in the productivity of the personnel. Furthermore. custom-
er satisfaction is usually more effective than expensive

advertising. especially in the business of banking.

The controversy of branch banking versus unit banking
can be solved. once it is realized that Opening a new
branch is nothing more or less than a capital project
necessitating the allocation Of a certain amount Of funds.
If it is properly analyzed as such and though: to have a
reasonable chance of making a positive contribution to
the long range overall profitability Of a bank. there

is nO reason why that bank should not go ahead and Open
a new branch. Neither Operating as a unit bank. nor
Opening a new branch at every corner can. by itself.
affect the profitability Of a bank. The overall Objec-
tives and policies. availability Of funds. and the pro-
bable contribution to the networth should be the princi-

pal criteria in making such investments.

NO rational excuse could be found. nor any was Offered by
the bank executives interviewed for the practice Of extend-
ing long-term loans in the form of short-term. It is a

dangerous practice both for the banks. as well as. for the

 

 

120

borrowers. Medium- and long-term credit can be extended
by commercial banks provided these loans are formally
accepted as such by both parties and the special credit
investigation necessary for such loans is properly con-
ducted beforehand. Creation Of new investment and deve-
lOpment banks specialized in medium- and long-term len-
ding. by commercial banks themselves. is another way to
meet the existing and rapidly growing demand for such

loans 0

High cost and lack Of efficiency to a certain degree
seem to be the general characteristics Of not only com-
mercial banks but Of almost all types Of business in
Turkey. Rapidly increasing demand for all sorts Of
goods and services. lack of effective competition. and
the resulting high profit margins do not provide the
necessary stimulus for conscious and effective efforts
to reduce costs. The fact that no studies similar to
this one were ever conducted by either the Banks Associ-
ation of Turkey or by individual banks was a good example
of this lack of interest in cost and profit analysis.

Despite the above mentioned deficiencies it would be

wrong and unfair to classify Turkish commercial banking
system as totally inefficient. Considering the fact that
the real economic develOpment in Turkey has a past of less
than three decades. these banks. in general. have done a

' good job in adapting themselves to the rapidly changing

 

121
economic. social. cultural and political conditions. in

a relatively short time.

Operating inefficiencies and multiple outlets are the nor-
mal outcome of any form of retail maintenance. Therefore.
Turkish bankers are possibly responding logically to a

type of public policy which does not encourage efficiency
and Optimum resource allocation. It is necessary to create
a framework within which bankers would be encouraged to be
efficient and punished by losses if they continued to stay
with inefficient operating methods.

One partial solution to this problem would be the relaxa-
tion of the fixed interest rate ceiling policy. As noted
earlier. the ceilings on interest rates. both on deposits
and loans. are set by the Central Bank Of Turkey. These
rates are almost always set below the free market rate of
interest. and the gap widens when the government fails to
modify the existing rates in conformity with economic chan-
ges. As a result. "ceiling" rates become. in actuality.
"fixed" rates applied by all banks at all times. This. Of
course. restricts the use Of interest rates as a means Of
competition among commercial banks. Therefore. competition
for funds takes the form Of expensive advertising. multiple

outlets and promotional prizes and gifts given tO depositors.

A more flexible interest rate policy. especially with respect
to time deposits. would. in all probability. increase the

volume. as well as. the cost of such funds to commercial

 

 

122
banks. However. decrease in profit margins would be com-
pensated by a larger volume of business due to the in-
crease in funds available for lending. Provided. Of
course. necessary measures are taken by banks to maintain
or lower their existing over-heads. Motivation to do so
would be provided by the competition created by flexible

interest rates.

Flexible interest rates on loans. on the other hand. would
make it possible for Turkish bankers to apply different

risk premiums on different types Of loans. This. in turn.
would encourage them to search for new fields of invest-
ment. Direct consumer lending and credit cards are two

Of the potential sources Of income which should be serious-
ly considered by Turkish bankers. if a more flexible inte-
rest rate policy is adOpted by the government. An addition-
al benefit Of this policy would be the motivation to for-
mally recognize the actual term Of their loans and treat
them as long-term when such is the case. Extra cost in-
volved in long-term credit analysis and the relatively high-
er risk inherent in such loans can be covered by higher
rates of interest if necessary. Long-range planning. sys-
tematic recognition Of risk. effective cost-profit analysis.
and alertness for possible changes in the socio-economic
environment would be the logical outcome Of a more flexible

interest rate policy.

123

Another possible public policy change with respect to com-
mercial banks would be to exempt the interbank transactions
from the 20 per cent transaction tax currently charged on
them. Such exemption would encourage specialization among
commercial banks. which. in turn. would tend to lower their
over-all risks. For example. instead of being forced to
extend long-term loans in short-term form. they would then
be able to lend part of their funds to other banks which

are better prepared to handle long-term loans.

A third major policy change aimed at encouraging Operating
efficiency would be modification of the Turkish Law on
Banks to allow formation of financial institutions other
than banks. The monOpOlistic condition presently enjoyed
by Turkish commercial banks does not provide for the neces-
sary stimulus to increase Operating efficiency. Formation
of specialized consumer finance institutions. credit unions.
mutual savings banks. savings and loan associations. and
other such financial intermediaries would create a compe-
titive milieu which would automatically discourage ineffi—
ciency. More meaningful and effective disclosure require-
ments applicable to the Operations Of all financial insti-
tutions would help to enhance the advantages to be derived

from such competition.

It is strongly recommended that studies and research simi-

lar to this one are continuously conducted by individual

124
banks. and preferably. by the Banks Association Of Turkey.
Mere compilation of statistical data. in its present form.
is far from sufficient. It is also recommended that this
study is updated every two or three years. again. prefer-
ably by the BAT. or by the big banks such as N-Ol. N-20
or N-22. It would be advisable to use monthly averages
instead of year-end figures to avoid the distorting effects
Of possible window dressing. Such data are available to
BAT although not to an outsider. It would also be advis-
able tO include in the studies. the commercial banking
activities Of banks founded by special legislation. pro-
vided. a dependable method is utilized to segregate their
banking activities from their non-banking Operations.

BIBLIOGRAPHY

BIBLIOGRAPHY

Aykent. Irfan H.. Planll Kalkinma DOneminde Tfirk Bankaci-
lléi. (Ege Matbaasl. Afikara.)71970.

Banking Education Committee. The StO of American Bank-
ing. (The American Bankers Assoc ation. N.T..N.Y.)

 

Bank Association of Turkey. Publication Nos. 16. 21. 23.
25. 26. 27. 51. 33. 39. 45-

Crosse. Howard D.. Mane ement Policies for Commercial
Banks. (Prentice-Hall. Inc.. EngIewood CIIITs.N.J.)
I;62.

Erem. Faruk and Altlok. Akin. Bankacilar i in Banka Huku-
ku Bilgisi. (Banka ve Ticaret Hfikfikfi firestirma Ens-

usu. are) 1972.

Fischer. Gerald 0.. American Bankin Structure. (Columbia
University Press. New York) I968.

Fry. Maxwell J.. Finance and Develo ment Planning in Tur-
key. (USAID/Turkey. Ankara) l . .

 

Hatipoélu. Zeyyat. "Tfirkiye Ekonomisinde Bankaclllgin
Yeri ve Problemleri". Tfirki e Bankaclllglnin Basllca
Sorunlarl Semineri. (TurkIye EkonOmIIKurumu‘Iktisadf
Arastirmalar‘EnEtitUsfi. Basnur MatbaaSl. Ankara)

1969.

Hatipoglu. Zeyyat. "Thrkiyede Bankacillgln Bfinyesi ve
Problemleri." Bankaclllk Semineri. ( M.0. Produkti-
vite Kurumu. IstanBuI Matbaasl. Istanbul ) 1968.

Hatipoglu. Zeyyat. "Banka Kaynaklarl ve Kullanilmasi."
Banka011lk Semineri. (M.0. Produktivite Kurumu.
IstanEuI MafEaasi. Istanbul) 1968.

Reed. Edward W.. Commercial Bank Mana ement. (Harper
and Row. Publishers. Inc.. N} .. . . 963.

125

126
Robinson. Roland I.. The Mana ement of Bank Funds. Second
Edigion. (McGraw-HIII BOOR Company Inc.. New York)
196 .

Smith. R. Elberton. Turke 's Financial Structure. (USAID/
Turkey. Ankara)'I968¥

Turkish Law on Banks.
Zarakolu. Avni.. "Tfirkiyede Faiz Politikasl". Bankaclllk

Semineri. (M.0. Prodfiktivite Kurumu. IstanEuI Netba-
asl. Istanbul) 1968.

APPENDIX

 

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