Measuring the Interest and Non-interest Income based Efficiency of the Turkish Banking Sector using Fuzzy AHP and DEA Method

The 2008–2009 Global financial crisis and its reflections on banking operations and activities have led to a growing attention on the importance of efficiency and productivity issues in finance. The purpose of this study is to determine the contribution of non-interest income based competencies for the deposit banks quoted in Borsa Istanbul Stock Exchange (BIST) 100 Index in Turkey for portfolio investments, based on the contributory level of interest and non-interest income based efficiency for bank profitability within an interdisciplinary perspective.

A hybrid model has been developed to assess the overall efficiency level of banks quoted in BIST 100 Index with the interest based and non-interest based income parameters. The hybrid model is based on the Fuzzy Analytic Hierarchy Process (FAHP) and Data Envelopment Analysis (DEA). The dataset has been obtained from The Banks Association of Turkey with the expert choices for the weight of the criteria under the fuzzy approach.

The empirical results confirm that the interest income based activities boost bank efficiency in Turkey in the last decade. Three major conclusions are drawn from the study's findings: (i) efficiency scores related to interest-income based activities are higher than non-interest income based activities. (ii) The lack of effectiveness in Non-interest income based activities decrease down the overall efficiency scores in Turkish deposit banking system. (iii) Interest income and non-interest income- based banking efficiency competencies should be considered simultaneously as twin-driving forces for the banking landscape.

For investors of banking sector in BIST, generating effective investment decisions based on bank efficiency and profitability is directly related to interest income and non-interest income based activities. Financial and non-financial income components in effective bank management require developing interest income and non-interest income based strategies and tactics boosting banking profitability as twin factors. The originality of this study is to evaluate the interest and non-interest income based efficiency of the Turkish Banking Sector under the fuzzy environment using the hybrid model.