The Impact of Macroeconomic Variables and Sectoral Concentration (HHI) on Return on Assets (ROA) in Turkish Participation Banking – An ARDL Cointegration Approach

Abstract

Purpose – This empirical study examines the potential long and short-term effects of key variables— Inflation, Interest Rates, and Sectoral Concentration (HHI)—on Return on Assets (ROA), a fundamental financial performance indicator for the development of the Turkish Participation Banking sector. The study specifically focuses on the structural impact of HHI on profitability within the context of the increased competitive dynamics following the entry of public banks into the sector. Methodology – The study covers 45 quarterly time series data from the period 2013Q4 to 2024Q4. The Autoregressive Distributed Lag (ARDL) Bounds Test was applied to determine the existence of a long-term relationship and short-term dynamics among the variables.

Findings – The empirical findings reveal a long-term cointegration relationship between ROA and the independent variables at the 1% significance level. The long-term coefficients show that all variables examined have a positive and statistically significant impact on ROA. Specifically, the positive coefficient of HHI (0.000483), which indicates sector concentration, confirms the view that increased concentration (i.e., decreased competition) supports profitability in the long run. Regarding macroeconomic variables, a 1% increase in inflation was found to positively affect ROA by approximately 0.0447%, while an increase in interest rates had a positive impact of 0.0313%.

Discussion – As a result of the short-term analysis, the Error Correction Coefficient (ECM) was found to be -0.5552. This strong coefficient demonstrates that the sector exhibits a high adjustment capability by rapidly correcting 55.5% of any deviation from the long-term equilibrium in the following quarter. The results indicate that the financial performance of the Participation Banking sector responds to both macroeconomic instability and structural changes in competition with a strong reversion mechanism. The findings from the ARDL analysis suggest that decreased competition increases profitability and that private participation banks need to adopt efficiency-oriented strategies to maintain their market shares.