The Effect Of Inflation On Measures Of Profitability In Turkish Banking

Abstract

This paper aims to demonstrate the distorting effects of inflation on the financial statements of Turkish banks, and the corresponding effects on measures of profitability performance. To this end, Current Purchasing Power Accounting with a variant of the Brazilian method (CPPBM) is employed. It is observed that after inflation adjustment (via CPPBM) the level of profitability in Turkish banking over the period 1989-1995,is lower (overall) with respect to profitability measures calculated using historical cost based financial statements. In addition to this, a significant change in ranking by bank group, according to profitability performance is noted. This clearly reflects the importance of considering the potential distorting effects of inflation on the financial statements of Turkish banks.