This paper uses a three input–three output Fourier-flexible cost function specification to
investigate cost efficiency, scale economies, and technological progress in the Turkish
banking system over the period 1988-1998. Our findings suggest that the Turkish banking
system has a significant inefficiency problem. Although the annual inefficiency average
decreased over the sample period due to the financial liberalization, commercial banks in the
sector operated more inefficiently than their U.S. and European counterparts. The results
suggest the existence of significant economies of scale for all groups in the sample and no
evidence of diseconomies of scale even for larger banks. The results also indicate the
existence of technological progress between 1988 and 1991.