Banking and Finance

Banking and Finance

The government, banks, and industry form a complex system through which legislation and government policies direct credit flows. Most state-owned banks were established to finance particular industries, whereas private banks generally have intimate connections with large industrial groups. The Central Bank of Turkey often provides credit to other banks at negative real interest rates. Banks, in turn, funnel credit to industries or groups they serve. The amounts available to particular sectors of the economy thus depend largely on the resources available to the institutions for that sector, rather than on market assessments.

The Central Bank set up a system of quarterly reporting in the mid-1980s, enabling timely warning of banks in difficulties. This reform was a start toward making banking more transparent, but it is still difficult to assess the condition of the banks. Strong political pressures to keep weak industries and groups afloat during the adjustment period make it likely that several years will pass before standard accounting rules can be systematically applied. Legislation introduced in 1993 sought to bring the Turkish banking sector into line with European standards on capital adequacy and other prudential ratios. However, in December 1993, the Constitutional Court blocked this legislation because the executive had enacted it without approval of the legislature. No further action had occurred as of early 1995.

Despite some setbacks, the government's new policies have effected rapid changes in the financial sector. The banking system in early 1995 consisted of the Central Bank and fifty-eight banks, including twenty-one foreign banks, divided between Ankara, where most state-owned banks are located, and Istanbul, the center for most privately owned banks. Turkey also had three state investment and development banks. The Development Bank is funded from the Treasury and invests in the private sector. The Export Credit Bank of Turkey (Türkiye Ihracat Kredi Bankasi) provides export finance. The Municipalities Bank (Iller Bankasi) supports local institutions. In 1995 nine merchant banks also operated in Turkey, six domestically owned and three foreign owned.

The Central Bank, founded in the early 1930s, has the usual central bank responsibilities, such as issuing banknotes, protecting the currency, and regulating the banking system and credit. The Central Bank also finances the government's budget deficits and makes loans to public and private banks. Starting in 1983, however, the Central Bank began to reduce lending and stepped up its supervisory functions.

Six of Turkey's commercial banks are in the public sector, and twenty-one are partly or wholly foreign owned. Of the banking sector's assets, 46 percent are concentrated in four banks: the oldest and largest public bank, the Agricultural Bank of the Republic of Turkey (Türkiye Cumhuriyet Ziraat Bankasi--TCZB); the Real Estate Bank (Türkiye Emlâk Bankasi As); and two private banks, Isbank and Akbank TAS. The TCZB has many branches in rural areas, a strong deposit base, and favored access to state credits, which it uses partly for the agricultural commodity price-support program. After 1983 the TCZB was forced to take over other banks that had failed, a move that reduced earnings.

Much as in Germany and Japan, the major private banks are closely linked to industrial groups. Yapi ve Kredi Bankasi, Pamukbank, and Interbank are owned by the Cukurova Group conglomerate. Akbank, reputed to be the most profitable private bank in Turkey, is owned by the Sabançi Group. Partially publicly traded Kocbank is owned by the Koç Holding Company. Tütünbank is owned by the Yasar Holding Corporation.

Before 1980 there were only four foreign banks in Turkey, but their numbers grew rapidly during the 1980s as the government liberalized conditions. Several joint ventures were created in the 1980s, as well as two Islamic banks specializing in trade finance.

Private banks remain the most vulnerable sector of the banking system because the public banks enjoy de facto state guarantees. During the 1980s, most private banks engaged in trade financing or in sales of state bonds because investment activity was depressed. The largest private banks maintained their ties to Turkey's major corporations despite a 1983 banking law enacted to discourage such links. Although a few private banks were able to eliminate nonperforming loans, many remained vulnerable to their customers' difficulties. By 1986 private-bank balance sheets began to improve, as several years of high-interest earnings made it possible for banks to write off bad loans.

Although the government, public enterprises, and private undertakings increased their use of stocks and bonds after 1970, capital markets remained underdeveloped in the 1970s. After the passing of the Capital Markets Law in 1982, a Capital Markets Board was established to issue regulations for institutions marketing bonds and other financial instruments. Most Turkish corporations were closely held and tended to finance expansion through their own funds from their small circles of stockholders. But in the 1980s, companies were allowed to issue profit-and-loss-sharing certificates with liability limited to the face value of the certificate. The Özal administration also took steps to revive Istanbul's stock market, which had closed down in the late 1970s. The Istanbul Stock Exchange (ISE) reopened in December 1985. With the rise of "emerging market" funds, trading on the ISE expanded rapidly in the early 1990s; indeed, it was the best performing of any market in 1993. Foreign investment accounted for 25 percent of the daily trading volume. In early 1994, however, the stock market crashed in the wake of the currency and balance of payments crisis. Plans for privatization of SEEs were expected to revive the stock market, if foreign investment and confidence in the government's attempts to stabilize the macroeconomic situation increased.

Government securities are quite liquid in secondary markets; this has been true especially since the Treasury began issuing T-bills in 1986 and an interbank market was established in 1987. Government T-bill issues jumped in the early 1990s as the budget deficit exploded. In 1986 the public snapped up revenue-sharing certificates used to finance the Keban hydroelectric project on the Euphrates; the Oymapinar Dam, also on the Euphrates south of Malatya; and a second bridge across the Bosporus. Such certificates were popular, in part because they conformed to Islamic strictures prohibiting interest. Low returns discouraged the government from using such certificates in the 1990s.

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