The Efficiency of Participation and Conventional Banking in Turkiye: A Stochastic Frontier Approach

Abstract

The efficiency of conventional and participation banks in Türkiye between 2011 and 2016 is examined in this research using stochastic frontier analysis (SFA). The primary goals of this research are the analysis of the Turkish banking system's cost-effectiveness, a comparison of the efficacy of conventional and participation banks. The empirical research was based on a sample that included panel data for three participation banks and 23 commercial banks that had been in operation continuously. The one-step approach permits control of firm- and country-specific variables as well as Shariah-compliant banking directly in the estimated frontier, allowing any differences in technology and output that are caused by differences in the two banking systems' operational characteristics. According to the SFA statistics, participation banks are less efficient than regular banks overall. According to the findings, inflation and interest rates are statistically significant for the chosen external factors and negatively affect Turkish banks' cost-effectiveness, particularly between 2012 and 2014.