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Abstract
In the banking sector, where intense competition is experienced, it is hard for the banks to survive and sustain the efficiency of their competitiveness. They struggle to survive through different strategies they adopt and the directions they prefer. The intense competition recently observed in the banking sector introduced novel strategies aiming at improving their competitive strength. Administrators perceptions are very important in measuring the effect of bank mergers on competitive strength. A questionnaire was prepared and applied in order to emphasize this important issue. The hypothesis bank mergers effect competitive strength was supported by two applications and the effects of bank mergers on competitive strength was studied.
As is understood from the name, bank privatization looks like a kind of company mergers. It is very hard that the banks can survive alone because of density of competition in this sector. The bank privatizations in the world are because of a set of crises in the developing countries and financial liability, in the developed countries, are because of increasing the share of the market and competition power. The banks have to develop some strategies to get rid of this hardship. The bank sector has a fragile structure and for thsi reason thiis hardship has been increasing more and more. The competition power increase more with the bank mergers and the banks get a more strategic structure.
Acknowledgements
I would like to express my gratitude to people who supported me in writing down my dissertation. I want to give my special thanks to my mother who supported me all the time and encouraged me in my studies. I would also like to thank my supervisor Mr. Anders Poulsen at City University London who helped me in every process of my dissertation with his valuable suggestions.
Lastly, I would like to give my thanks to all my professors at City University London who gave me the chance of writing this dissertation and helped me to improve my academic skills throughout the academic year.
Abbrevations
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SDIF: Saving Deposit Insurance Fund
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IMF: International Monetary Fund
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WB: World Bank
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BRSA : Banking Regulation and Supervision Agency
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FDI: Foreign Direct Investment
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FDIC: Federal Deposit Insurance Corporation
Introduction
For many decades, privatization has been an important agenda in the global world. In the global economy, Davies (1994) found that privatization also plays an important role to increase societys welfare and countrys overall economic level. In the context of privatization, my dissertation will investigate how privatization of state-owned banks increases efficiency and productivity in the banking sector. In todays financial world, banking sector emerges as a key element to shape the global economy. As we have faced in the recent years, throughout the decade many developed and developing countries such as the US and Turkey have gone through deep financial crises which mainly influence peoples lives and welfare. As time goes by, the importance of the global economy and banking sector is increased. One of the toughest issues confronting the developing economies around the globe is how to raise enough funds to finance public goods and several projects which lead to raised economic and social welfare. Relying on privatization of state-owned banks in order to finance a countrys economic growth and development is considered as one of the possible solutions. Regarding to countrys social and economic welfare in the global context, this dissertation will cover the case of Turkey.
Throughout the years, the banking sector has regulated and improved a lot in order to gain efficiency and high productivity within countries. In order to clarify my thesis, it would be beneficial to emphasize on some questions about privatization of state-owned banks. Furthermore, improving the socieconomic welfare across the countries should be focused on. Hence, in the context of the banking sector, I will analyze the question of whether privatization of public banks is a good policy. In the discussion of privatization of public banks, I will try to clarify the reasons behind the importance of privatization in the banking sector for the global social and economic welfare.
The purpose of this study is to analyze the efficiency of privatization in the banking sector. In order to avoid global economic crises in the future, it is important to point out the benefits of privatization. In the theoretical analysis of economic crisis, Alper and Onis (2008) found that privatization of state-owned banks are on the agenda to prevent future economic crises. Due to macro-economic level of instability, weak regulations in the banking sector, high inflation and fiscal deficits in the countries, major economic crises took action in the beginning of 2000.
In the post-2001 era, both public and private banks have gone through a lot of regulations to gain a stronger position and prevent the economy from future crises. In this paper, I would like to analyze the fact that is an equal welfare distribution the goal of privatization in the global world, or is privatization strongly necessary. According to Arslan and Celasun, in order to obtain a sufficient, productive economy, it is necessary to employ privitization strategy. Turkish privatization program is based on financing public goods and distributing total economic success of the country. Private banks increase the countrys economic efficiency in order to have a better financial and economic position within the world economy.
This paper will cover the public enterprises and their weakness in the economy in order to emphasize the reasons behind the privatization of public banks in Turkey. As I have been living in Turkey for 23 years, I have seen its economic deep points and improvements. So, I would like to investigate the developments of Turkish banking sector which is directly linked to the economy. The purpose of choosing Turkey for this paper is to show the reasons why privatization in the banking sector is needed. In the liberal economic world, the features of privatizaton also play a key role to show its impact on a countrys macroeconomic stability and welfare. So, this paper will investigate the fiscal impact of privatization of state-owned banks and its effects on the foreign direct investment(FDI).
What is Privatization?
In its narrow meaning, Shirley (1999) stated that privatization means the transfer of public ownership to the private sector. However, in its broader definition it refers to the reduced role of state vis-à-vis the market, which is assumed to be a non-partisan, neutral field by liberal approaches at large. Savas (2000) defined it as: the act of reducing the role of government or increasing the role of the private institutions of society in satisfying peoples needs; it means relying more on the private sector and less on government. 1.
One of the most popular neo-liberal approaches to privatization has been given by the Agency Theory, which argues that incomplete and asymmetric information leads to principalagent problem. In the theoretical analysis of principal agent theory, Shirley (1999) found that it refers to the situation that the principal faces difficulties in deeming the agent responsible for seeking the interests of the principal2.
Different interpretations on the source of the agency conflict have led to a bifurcation within the Agency Theory. The Managerial View argues on the one hand that managers of the SEEs may not be correctly monitored, thus they have low-powered incentives for efficiency and high discretionary power3. The Political View current of the Agency Theory asserts on the other hand that it is the political interference that misshapes managers incentives, causes over-employment and underinvestment4. The common tendency of the neo-liberal perspectives has been to justify the privatization of the SEEs by claiming for the improved performances of the enterprises after their privatizations5.
On the other hand, not every liberal economist perceives privatization as a necessity for the proper working of the market. Some scholars are critical and skeptical about the privatization claims of the neo-liberal approaches for the former does not necessarily view statemarket relation as a zero-sum game. According to them there might be conditions within which the state should pass to the market to deal with market failures. These approaches, though acknowledging like the neo-liberals that state is not a nonpartisan apparatus free of rent-seeking behavior, still underscore the importance of the state for the development of the economy. Hence, the privatization of the profitable SEEs simply for the sake of reducing the role of state has been harshly criticized as detrimental to economic development. What makes these critical approaches still liberal is their separated conception of the political and the economic spheres while making sense of socio-economic phenomena.
Another critical liberal approach, Institutional Political Economy, which had emerged as a reaction to the neoclassical economists in the nineteenth century, primarily disclaims the neoclassical assumption of market primacy . Contrary to neoclassical economists, institutional political economists believe that all markets have a fundamentally political origin. As can easily be derived from its name, this theory pays great attention to institutional diversity6.
Nature of the Industry
The countries special conditions such as social, economic and cultural factors have impact on its financial institutions. When the developed countries banking history is observed, there are two types of banking which are called Anglo-Saxon Banking (for example banking in United Kingdom, Canada, Ireland), and Continental European Banking. One of the main differences between them is public banking which is generally seen in the Continental European Banking. However European Union went through deregulation process in the banking sector and public banks were privatized. In full competition market economies, government only commits the control responsibility in the sector, not competition with private actors.
The History of Banking
As the globalization wave intesifies; volume of exports, imports and financial flows increase. This tendency causes banks to be international or invest abroad. This internationalization process matches with liberalization of financial markets. Especially in the last decade, foreign bank entry became a debatable issue considering its positive and negative dimensions. In the literature the effects of foreign banks are studied in a detailed way pointing out their cost and benefits.
Banking sector is without doubt one of the most regulated industries in the world, since banks have had a central role in financial mediation for centuries. State has regulated the banking sector in order to protect depositors money; to ensure the safety of banks, and thus safeguard the whole economy. However, the methods and modes of banking sector regulation have changed significantly in the 20th century. After World War II, state regulated the banking sector through the involvement of public banks and anticompetition regulatory rules. However, after the worldwide economic crisis in the 1970s, the mode of banking sector regulation has changed toward statutory regulation implemented by independent regulatory agencies: interest rates and foreign currency regimes have been deregulated; public banks have been privatized; autonomous bureaucratic agencies for bank regulation have been established; and competition in the banking sector has increased.
Like many other institutions of capitalism, development banks have first emerged in the developed countries in the nineteenth century. As expected, they had responded to the requirement of long term finance of the time. The emergence of specialized institutions for investment was realized by the transformation of small individual firms to large corporations after the Industrial Revolution. Thus, the experience with respect to development banking during this century was confined to industrialized countries. Although the Industrial Revolution should be regarded as a process signaling the need for long term lending institutions, there was a variety of experiences in this respect. For instance, in England, the motherland of the industrial revolution, capital accumulation of individuals had permitted them to invest for production for a long time. Explicitly, this arose from the fact that (There was a significant accumulation of capital, derived from the reinvestment of profits from agriculture, foreign trade and small) scale industry and from the profits of lending money both to the government and to private individuals. Nevertheless, it should be recalled that state was always very effective through this process.
Since the gradual nature of the industrial revolution enabled British investors to have adequate resources, they did not require banks for long term lending in the initial phases of this process. Instead, banks in England were established under enterprise bodies so that they originated from different business groups and specialized in short term lending. In fact, in 1800s, there were almost 600 banks outside London while the Bank of England, founded in 1694, had been the single example until 1750s (ibid). However, providing funds for fixed investment became a problem also for the British economy in the latter part of the nineteenth century. This was because the units of business became much larger and more and more individual firms were converted into corporations
In fact, banks across Europe played a most important role first in railway and canal construction and then large-scale industrial and commercial enterprises by attracting savings from individuals and non-banking enterprises. Their activities were extended to investment in joint-stock companies as well as government securities. Likewise, in the United States, a financing institution was required first with the growth of large-scale transport systems and utility enterprises after 1820. These experiences of large investments in infrastructure must have developed the practice of banks, which would be utilized in financing industrial investment.
In other words, the banking system throughout Europe and west of Russia played an important role in industrialization, imitating investment practices and methods of Crédit Mobilier. Before concluding our discussion on the nineteenth century experience, it is essential to emphasize the German experience. Diamond illustrated the significance of this experience as having a banking system closely associated with industry as both promoter and financier. As will be discussed in the next section, this is one of the definitions of industrial banks and German experience is regarded as the forerunner of this type of banking.
The institutions of the twentieth century in the developed countries had different characteristics than those in the previous century because the twentieth century ones witnessed two world wars and a worldwide depression. In line with the fact that the socioeconomic conditions influence the forms and structures of the institutions of a certain period, the categorization of Basu according to certain turning points will be taken as reference. Accordingly, by the end of the World War I the industrial mortgage bank, granting long-term amortization loans on first mortgages of property and issuing bonds to raise the necessary funds to finance these loans, had proved to be eminently successful for financing long-term operations in various spheres.
First of all, there emerged global development banks, such as the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC) and the International Development Association (IDA). Summarizing the missions of these institutions, the IBRD was designed as facilitator of post-war reconstruction and development and was established in 1944 as the original institution of the World Bank Group. Since it is the original institution, the name of this institution and the World Bank is used interchangeably in this study. Because of the significant role of this institution for the period under consideration (1950-1953), the next section will be devoted to a more detailed discussion of the IBRD.
Goods and Services
Marketing of the products and services has changed because of the previously mentioned reasons. Moreover, service marketing has become more important as the clear differentiation between services and products exist in the minds of the providers. Services are distinguished from products because of having different dimensions, in the case of purchasing a product the tangible aspects can be considered.On the other hand, while purchasing a service although the theory is the same, the practice differs because of the nature of the service.
There are both tangible and intangible dimensions to be evaluated. Furthermore it is suggested to consider the price dimension when the tangible parts of evaluating a service are not availed. Therefore, the intangible side of the service which makes the evaluation process more difficult from the customers point of view is a subjective measure compared with the tangible nature of the product evaluation. The service dimensions are qualitative rather than
quantitative, changes from person to person in the evaluation process and for this reason subjective rather than objective. The complexity of evaluating a service arises because of the nature of the service and to understand the quality of a service, the features of the service should be examined first. The key elements of service are explained as follows:
Intangibility: In contrast to products which are tangible in nature in terms of physical occurrence and result of outcome which is easy to differentiate, services are intangible in terms of both occurrence and outcome. For instance, the evaluation of a dry cleaner service is not only the delivery of the final product the service is supposed to deal with. It means not only the physical part, but the way the product is delivered, in terms of the arability of working hours of the service, open days, the speed of the service, and the attitude of the workers towards customers is also important to make a total evaluation which contains the intangible parts of the delivery.
Variability: Services are heterogeneous from the service providers and the customers side. Since the services are delivered through and to people, when the people, in other words the customers, change in the stages of delivery or in the final stage of the service, the change may occur in the expectations and perceptions of the service, which will be described in detail in the following parts.
Inseparability: The production and consumption of many services are said to be inseparable. This phrase mainly explains about the continuous stage of consumption, starting with producing a good and the delivery process continuing with provision of a service. Moreover, it is further explained that for service intensive industries, interactivity plays an important role where the customers contribution is greater and the outcome of the service quality dimension is more influenced.
Perishability: Perishable nature of services stresses the importance of how difficult to build a good service experience and how easy to damage the good service experience from the customers point of view. As the inseparable nature of offerings focuses that the services are the inseparable parts of products whether the core element is the service or part of a product, the priority should be given to which extent this service offering be provided to the customers depending on the industry and depending on the customer. A famous phrase says that 80% of the revenues comes from the 20% of the customers, when its considered; the focus should be given not to provide a perishable service to this profitable segment.
Industry Organization
Within the financial service institutions, banks, savings and credit unions are known as depository institutions. The responsibilities of the banks are described in terms of traditional and modern views, where the traditional view refers the banks as intermediaries which allocate financial resources and modern view simulate banks to factories handling both information processing and deal making. In the case of modern view, the processes consist of managerial design of collecting and using customer information and the operational implementation by the
employees so the delivery of the service can be performed. On the other hand, it is the evaluation of the service which differentiates in the banking industry since the processes performed are almost similar among different banks. Furthermore, for gaining competitive advantage, differentiating services has various benefits in the literature. For instance, the Profit Impact of Marketing Strategies Research found in its research that among the 50 high performers in service industry high quality service providers gain 8% above low quality service providers on average return on investment.
In addition, the importance of measuring service quality in the high contact service organizations such as banks is also found to be an important factor to differentiate the products to achieve competitive advantage. When the measures of service quality construct are examined for modern banking, the technical quality is the result of the instrumental performance achieved by the service. What is received as an outcome of the service provided i.e. tangibility of the service, can be the use of alternative distribution channels benefiting from technology to improve the technical quality of the service to the customers. On the other hand, functional quality is the result of expressive attributes i.e. intangibility of the service, processes and people which can be examined during the service encounters in terms of the willingness, courtesy of the employees; in the case of internet banking can be the accessibility of the services or the user-friendliness of the websites.
There is a third quality dimension corporate image, which is established by the instrumental and expressive attributes during service interactions in addition to the external factors; promises given by marketing activities, personal recommendations from other customers and environmental factors influencing personal evaluations. Therefore, in the absence of previous experience with bank service encounters, corporate image or corporate reputation is an important element since bank services include high levels of perceived risk from the customers point of view.
Product-Centred Approach: The focus is to compete with rival products in the competition. The existing products in the bank are differentiated in terms of unique attributes to meet customer needs so that premium price can be charged. It can be achieved through the product quality, unique benefits and attributes associated with the product, a new technology used in the formation or delivery of the product, for the latter the channels can reach to a wide range of customers. Since the efficiency is focused on the product productivity the short term profitability from the transaction and cost reduction. In the product-centered approach as the product is unique from rivals, the aim is to provide the highest profit from the existing resources so the unique benefits of the product can be utilized.
Customer-centred Approach: All the resources customers evaluate in the service encounter are the focus of this approach which includes the physical evidence, process and people. In the case of physical evidence, it refers to the lay out and decoration of stores which should feel the customer comfortable prior to the service and easy for accessibility for instance availability of the service, working hours and arrange of queues in the branch and use of other distribution channels such as ATMs and internet banking which are available customers to operate for convenient location and time.
Also the employees are an important part of customized service offering where the employee training and motivation is apparent in the willingness to serve the customers during service interactions. In addition to this, it is important that the employees have sufficient time remaining from collecting and processing of customer information to understand and meet customer needs. Through the use of smart technological systems, the employees can obtain quality customer information which is updated regularly not only on the customer purchase of the service but also to highlight the customer stage of the service whether additional services can be offered or the customer can be diverted to use other services. When these are all met, the lifetime value from the customers can be achieved with customer satisfaction which will lead to increased customer retention. Marketing Support Approach: It is important that marketing activities are centred through the core aspect of the service whether its product oriented, customer oriented or both. Marketing support activities as mass communication activities, sales promotion activities, publicity/sponsorship activities and personal communication/sales activities. In order to attract customers, the marketing activities are used to target mass audiences through mass communication activities, sales promotion activities and publicity/sponsorship activities.
In addition to this, the financial service firms which realize the importance of service dimension is inseparable from financial products are moving to a retail environment, where the priority of attention is given to customer satisfaction with enhanced customer service through marketing activities and increase in product variety. The services differ from products in terms of having different attributes and for the retailing of financial services key service elements are intangibility, heterogeneity, inseparability, perishability and fiduciary responsibility as follows:
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Intangibility: The financial services are intangible in nature since there is no definite measurement for this and the related risk can not be estimated prior to purchase.
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Heterogeneity: The financial services include various financial products which serve different types of customers, also the employees differ in the process and delivery of the products, therefore the variable is the human factor which changes the outcome of the service.
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Inseparability: The financial services are inseparable parts of financial products and it is the direct interactions with the suppliers that the customers evaluate for the result of the given service.
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Perishability: The opportunity cost of supplying the existing financial service will be lost when there is no customer demand. In order to cope with this, the financial service providers can offer cross-selling or low cost alternative delivery channels such as ATMs or internet banking.
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Fiduciary Responsibility: The financial services involve high risk which requires trust to the organization that can be gained through reputation of the company for the implementation of future processes and the human interactions with the customers.
Recent Developments
In order to identify the electronic service offerings of banks i.e. automated channels (online banking) in the e-commerce environment includes internet banking, Automated Teller Machine (ATM) and telephone banking. In both of the services regarded as banks automated service channels, the customers find the ability to interact with the software of the bank rather than employees and manage own transactions which are under the self control of the customers. With the introduction of new technologies such as internet, the processes can be performed online with decreased workload of branches and the employees are replaced by the software programs. The customer information are processed in the internet based data systems (software), therefore the service quality of the internet banking has the ability to provide standardized level of services.
By the introduction of new service channels in banking; reflect the same change both to the customer and to the service provider. The new channels such as; ATMs, telephone banking and Internet banking i.e. online banking channels not only enhanced the capabilities of the old service channels but also provide more opportunities to distribute the banks products to the customers. Whilst the use of traditional banking channels are focusing on direct personal interaction through the use of branches or call centres, the increase in number of new service channels fragmented the customers attention into these various channels. Therefore the change is from single banking channel usage to an increase in the use of multiple banking channels. Hence, the decline in the use of the old banking channels in general and for routine transactions in particular because of internet banking usage is the approval for this trend.
Some of the unique features for shifting from the traditional channel usage to new channel usage are; increasing the availability to the information without limiting for geographical boundaries, cutting down the costs, benefiting from cross selling opportunities, making more personalized customer relations in greater segments with accessibility of customer information and recording the data of the customers so that targeted customers can be reached with the right products or services through the most cost effective channels. The bank customers general customer perceptions are examined in the automated delivery channels on quality are; reliability, ease of use, personalization, accessibility, accuracy, security and efficiency and in particular for internet banking; availability of information, easy to use, security, error free transactions, attractive website, website interface accuracy and up to date information.
As a result, the overall automated service quality in banks depend on dimensions consist of; internet banking service quality, ATM service quality, telephone banking service quality, core service quality referring to the range of products or services offered to the customers and price quality referring to the acceptability of the service.
European Unions Banking System
In order to maximise social welfare and ensure efficency in the banking industry, competition is an important aspect. Competition brings about a dynamic, allocative and productive effectiveness in the banking industry. An increase in competition in the banking industry results into loan rates reduction, lower costs, increased loan supply, quality services and increased product innovation. Although the financial services industry has different characteristics from other industries, ways in which competition influences effciency are the same as in other industries.
The amount of credit supplied and how effecient it is allocated are two paramount aspects in allocative efficiency. In a perfectly competitive banking industry, profit maximizing in banks leads to an equilibrium between the maximum amount of credit supplied at a least price and its allocation efficiency.
In a case where the banking services lack economies of scale, productive efficiency can be obtained in a perfect competition because production of outputs is made at a minimum cost. 0n terms of dynamic efficiency, competition in the banking industry results in product innovation. Further, due to rivarly in the banking industry, banks develop advance
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