The Impact of Transnational Banks on Developing Countries' Banking Sector: An Analysis of the Turkish Experience. (1980-89)

The past decade has been marked by a significant increase in the involvement of transnational banks (TNBs) in developing countries. This paper examines the impact of foreign bank participation on the performance of domestic banks in Turkey. The findings suggest that foreign banks introduced advanced technology, knowhow and new financial products to the Turkish banking sector. These developments were expected to induce an improvement in the efficiency of domestic banks. However, the empirical results show that the cost efficiency of domestic banks did not change whereas their profitability increased significantly. These findings show that the domestic firms were able to capture the productivity gains in the form of increased profits. In the absence of effective competition, the domestic banks were not pressured into improving their cost-efficiency performance. This implies that if the market remains oligopolistic and segmented the entry of foreign banks is unlikely to have a significant impact on the economic performance of the domestic banks.