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Essay on Turkish Banking Sector Analysis

Turkish Banking Sector Analysis

INTRODUCTION
The banking sector constitutes the greater part of the Turkish financial system. Banks carry out a great portion of the activities taking place in both money and capital markets. The share of the banking sector in the financial system as of the end of March 1997 was 71 %. Turkey's financial system and its banking sector are virtually synonymous as a consequence of the country's economic and historical development. There are a number of factors that give banking its prominent role in Turkish economy. These are:
 The economic structure peculiar to Turkey.
 The choice to turn resources into long-term investments through banks for the aims targeted in the development plans and programmes, and the establishment of banks by the state to finance certain sectors.
 The extensive application of continental European banking practices as a model in the legal structure of the banking system, and an emerging capital market that can compete with the banking sector in the forthcoming years.
BACKGROUND
The development of the Turkish banking sector may be divided into six periods which differ as to policy and method:
The Period of the Money-Changers and the Galata Bankers (pre-1847):
During this period, all quasi-banking activities were carried out by money-changers The Galata bankers consisted mostly of the ethnic-minorities in Istanbul.
The Period of Foreign Banks (1847-1908):
Since the financial situation of the Ottoman Empire deteriorated after the Crimean War, the Empire faced the need for external financial support. Representatives of several foreign banks arrived with the aim of extending credits to the empire at high interest rates. The Ottoman Bank (Osmanli Bankasi) was established in 1856. Its head office was in London and it served as a Central Bank until the 1930's.
Development of National Banking and Implementation of Etatism (1909-1944):
The years following the proclamation of the Second Constitution (1908) gave rise to the national banking movement which was a reaction to foreign banking.
Twenty-four national banks were established in Istanbul and Anatolia between the years 1908 and 1923. However, foreign banks continued to dominate banking activities due to consecutive wars (1911-1922), capitulations granted foreigners and the scarcity of national capital.
In 1923, the first National Economic Congress was held in Izmir. It dealt with a large number of economic problems that the country would have to solve. The Congress took the decision that banks would be established to finance the main sectors of the economy. T.Is Bankasi(1924), Sanayi ve Maadin Bankasi (1925), and Emlak ve Eytam Bankasi (1927) were established to provide commercial, industrial and housing credits, respectively. However, the negative effects of the Great Depression on the balance of payments and lack of domestic capital called for a government-supported economic development policy in subsequent years. As a result of this policy, six state banks were established in the 1930s, including the Central Bank of the Turkish Republic.
Development of Private Banks (1945-1960)
Despite the adverse effects of the Second World War, a significant growth rate and industrialisation were achieved with the support of the newly-established state banks. This created a tremendous increase in the capital stock of the private sector.
Beginning in the early 1950s, etatism weakened because of positive developments in the private sector, expansion of international co-operation and transition to a multi-party political system. A more liberal and private sector-oriented policy was adopted in the following years, and as a result, more than 30 private banks were established before 1960.
Planned Development Period (1961-1979)
A new planned development policy was adopted in the beginning of the 1960s. According to this system, the state would administer the economy and issue recommendations to the private sector through five-year plans prepared by the government to cover all sectors. As recommended in the plans, several development and investment banks were established to finance various sectors in the 1960s and1970s: For example Turizm Bankasi in 1960, S.Y.K.B. in 1963, DevletYatirim Bankasi (Eximbank) in 1964, Devlet Sanayi ve Isçi Yatirim Bankasi (Türkiye Kalkinma Bankasi) in 1975.
Liberalization and Internationalization in Banking (post-1980):
The new liberal economic policy implemented in January 1980 aimed at integration with world economy by establishing a free market economy. As a reflection of this policy, the 1980s witnessed continuous legal, structural and institutional changes and developments in the Turkish banking sector. During these years, a series of reforms were undertaken to promote financial market development.
The main aim of these reforms was to increase the efficiency of the financial system by fostering competition among banks. In this context interest and foreign exchange rates were liberalized, new entrants to the banking system were permitted and foreign banks were encouraged to operate in Turkey. Turkish banks intensified their business relations abroad either by purchasing banks in foreign countries or by opening branches and representative offices. The liberalization of foreign exchange regulations increased foreign exchange transactions of the banks. Beginning in 1984 special finance houses, transacting business according to Islamic banking principles, also became part of the financial system.
The Interbank Money Market which is administered by the Central Bank was established in 1986 with the aim of regulating liquidity in the banking system. A unified accounting plan and accounting principles as well as a standard reporting system were adopted for banks in the same year. External auditing of the banks in accordance with internationally-accepted accounting principles was implemented in 1987.
In addition, legal and institutional arrangements were introduced to foster the development of the capital market. As a result, banks began to provide additional services such as negotiating security issues and trading in securities, underwriting fund management, establishing mutual funds and financial consultation.
As for developments in the banking industry, in the 1980's there was diversification in the services offered by banks, the technological infrastructure of the banks was improved by extensive use of computer systems, hi-tech payment systems and the sector began employing more qualified human resources, and at the same time there was more emphasis placed on training programmes.
THE STRUCTURE
The Turkish financial system is basically a universal banking system which enables commercial banks to operate in all financial markets. However, recently, a new regulation regarding capital markets has banned banks from acting as intermediary institutions in the Istanbul Stock Exchange and from acting as dealers in share trading. Commercial banks are neither allowed to trade in goods or real estate nor engage in financial leasing activities as lessor. On the other hand, investment and development banks are not allowed legally to collect deposits but may engage in financial leasing services.
Nearly half of the assets of the Turkish banking system is controlled by state-owned banks. Even though the number of state banks was only 8, their share in the total assets of the system as of September 30, 1997 was 41.8 %. Very recently, as of March 1998,Etibank, a former state deposit bank was privatised which further
reduced the number of state-owned banks in the system to 7 as well as their share in the total aggregates. A further decrease in the share of state banks is expected for privatization procedures are being carriedout.
There is no local bank and all banks are multibranched. Most commercial banks have ownership links with non-financial corporations. Holding companies or large conglomerates control the ownership and management of some banks and also of industrial corporations. There are also financial conglomerates where the banks act as parent companies.
Banks do not face stiff competition from other financial institutions. Most of the insurance and leasing companies are affiliated to banks. The other main characteristic of the banking sector is the high degree of concentration. The total assets of the five largest banks amount to 47.1% of the total assets of the banking
system.
At present, there are 72 banks operating in Turkey, apart from the Central Bank, 13 of which are investment and development banks, and the remainder, commercial banks. Five of the commercial banks and three of the development and investment banks are state-owned.
The total number of foreign banks operating in Turkey is 22.Eleven of these were founded in Turkey as joint stock companies with foreign capital, while the remaining 11 are simply branches of foreign banks founded abroad.
Despite their small market share, foreign banks have an important place in the Turkish banking system because of the new concepts and practices they have introduced. Particularly in the last decade, foreign banks have brought competition into the banking industry as well as a more dynamic structure. Turkish banks have been developing strategies to abandon unprofitable services and activities, adopt new products and increase their profitability and competitive strength through better control of operating costs. As of September 30, 1997 banks in Turkey had a total of 6,591 branches (6,572 domestic and 19 foreign) of which 2,884 (2,876 domestic and 8 foreign) belonged to state-owned banks.
Since the attractiveness of collecting deposits has increased parallel to the structural changes in the banking sector and Turkish economy during recent years, banks have started to increase the number of their branches by opening new branches to engage in retail banking activities such as collection of deposits and consumer credits. As of the end of September 1997, there were 19 branches, 62 representative offices of
Turkish banks abroad and the number is continuously increasing. In addition, as of the end of 1996, Turkish banks had participated in 48 financial institutions (mostly banks) abroad. The main items of the aggregated balance sheet of the Turkish banking sector as of September 30, 1997 are shown below (in billion TL, not including branches abroad):
- Total Assets 15,000,761
- Net worth 948,919
- Deposits 9,299,772
in TL 4,824,956
in FX 4,474,816
-Loans 6,323,225
in TL 3,354,363
in FX 2,968,862
-Trading Securities Portfolio 1,702,981
- Participations 68,058
-Affiliates 126,819
- Long-Term Investments 128,567
-Total Profits 400,942
In the total assets of the banking sector, the state banks share amounts up to 41.8% while the share of foreign banks is only 5.9%.
ASSETS (TL. BILLION)
- Cash Items 296,241
- Financial Institutions 1,801,550
- Securities Portfolio 1,702,981
- Loans 6,323,225
- Non-Performing Loans (Net) 61,860
- Reserve Requirements 757,862
- Participations, Affiliates --------------
Long Term Investments 323,444
- Fixed Assets 411,482
- Other Assets 1,255,542
- Total Assets 15,000,761
LIABILITIES(TL. BILLION)
- Deposits 9,299,772
- Saving Dep. 2,728,522
- Certificate of Dep. 629
- Official Dep. 374,127
- Commercial Dep. 578,674
- Banks Dep. 888,082
- Other Dep. 254,922
- Foreign Exchange Dep. 4,474,816
- Acquired Loans 1,926,931
- Securities Issued 163,488
- Other Borrowed Funds 484,489
- Other Liabilities 818,973
- Net worth 948,919
- Total Profits 400,942
- Total Liabilities 15,000,761
- Off-Balance Sheet Obligations 14,513,031
- Guarantees and Indemnities 4,720,274
- Commitments 3,615,876
- Interest and FX Related
Transactions 6,176,881
 Deposits are the most important source of funds for banks. State banks collect 39.7% of total deposits while private banks collect 60.3%.
 Loans have the highest share in assets. State and private banks supply 42.3 and 57.7% of total loans, respectively.
 81.4% of the banks' securities portfolio consists of public sector securities such as treasury bills, government bonds and revenue-sharing certificates issued to fulfil the funding requirement of the public sector.
 The participation of banks in non-financial institutions comprises some 44.3% of their total participations.
 As of the end of September 1997, the shares of investment and development banks, state deposit banks, private deposit and foreign deposit banks in total profits were 9%, 14%, 68%, 9%, respectively. However, when their profits are compared with their assets, it is observed that the profits of the private banks are much higher than that of state banks.
ESTABLISHMENT RULES
The establishment of a bank depends on the authorisation of the Council of Ministers. For a new bank to be established, it must be a joint-stock company and have a minimum of a total TL 6 trillion of paid-up capital. Privately owned banks may open up to 10 new branches a year provided that financial standing is satisfactory. Opening up more than 10 branches, is subject to the approval of the Undersecretariat of the Treasury. On the other hand, state-owned banks should obtain approval from the Undersecretariat of the Treasury to open branches.
The legal framework concerning the functioning of foreign banks in Turkey is the same regulation which applies to domestic banks. Foreign banks can operate in Turkey, either by establishing a branch or subsidiary or entering a joint venture with a bank established in Turkey. They may as also acquire the shares of an already established bank.
The first branch of foreign banks may be opened with permission granted by the Council of Ministers. Foreign banks must bring their capital allocated to Turkey in foreign exchange. The minimum capital requirement is the same as that for establishing a bank in Turkey. A reciprocity provision is also in force with respect to the operations of foreign banks. This provision allows the Council of Ministers to take counter measures if the conditions in any of the countries in which Turkish banks operate are changed unfavourably.
LEGAL FRAMEWORK AND SUPERVISION OF THE BANKING SYSTEM
All banks in Turkey are subject to the 1985 Banking Law No: 3182 and to the provisions of other laws pertaining to banks. Banks are institutions in which funds accumulating in the economy are collected mostly as deposits and channelled to investors. This makes public supervision of banks necessary.
Banks in Turkey that have the status of joint-stock companies are subject to the general scope of controls under the provisions of the Turkish Commercial Code and of various tax laws. State banks are also subject to audits by the Supreme Audit Board. Besides, banks are subject to special supervision by the Undersecretariat of the Treasury and the Central Bank of the Republic of Turkey. As the representative body of the banking sector, the Banks Association of Turkey aims at protecting and promoting the professional interests of its members.
The Undersecretariat of the Treasury supervises the banking sector within the framework of the provisions of its own governing statute as well as of the Banking Law.
The Undersecretariat of the Treasury exercises its supervisory authority in a direct and ongoing basis through the Board of Certified Bank Auditors. In other words, these auditors are responsible for on-the-site examination of banks in terms of legal considerations and financial soundness. The Central Bank is responsible for monitoring and supervising the banking sector within the framework of authority that is granted by its own Act. The Central Bank's supervision of the banks' financial structure is an off-the-site monitoring process which depends on financial tables and documents.
Additionally, the banks' financial statements are audited by independent auditing firms in accordance with the principles of accounting which have been nationally and internationally accepted. Banks are also examined by their own auditors appointed by the general assembly, who are required to submit quarterly reports to the Undersecretariat of the Treasury.
In recent years, the supervisory system has been further strengthened by a number of measures taken in accordance with the standards of the prudential regulation exercised by the international banking community. In this context, Principles for Capital Adequacy described in Communiqué No.6 went into effect in October, 1989, to reduce the risk arising from inadequacy of capital in banks. Some articles of this
communiqué were amended in April 1993. With sufficient equity resources, banks would be able to cover their risks in conformity with international standards. Communiqué No.6 was amended by Communiqué No.12 issued in February 1995. Under this regulation, capital adequacy principles comply with international standards.
On March 1, 1995 a new communiqué went into effect to regulate the foreign exchange exposure risks of banks. According to the regulation, banks are not allowed to keep foreign exchange positions exceeding (+,-) 50% of their capital base. Another brand new Communiqué regarding the principles of consolidation of financial statements of banks issued in May 1997 requires that the banks which are 'the parent company in a group of financial institutions' that hold the controlling power over the financial companies in the group or hold significant influence over these companies should prepare consolidated financial statements merging all on and off balance sheet accounts as well as the profit and loss statements of these companies, under those of the parent bank.
Decree on Provisioning of credits issued in January 1998 require sufficient reserves for bank loans in default, and provided more control over non-performing loans by classifying them according to the collateral provided against these loans by requiring a higher level of provisioning for loans with lower quality of collateral. The Decree amended the former one which was enacted in 1988, the new decree incurring more clearly defined principles regarding the classification of overdue loans and provisioning.
BANKS OPERATING IN TURKEY
(As of January 1, 1998)
THE CENTRAL BANK OF THE TURKISH REPUBLIC
I. DEVELOPMENT AND INVESTMENT BANKS
STATE BANKS DATE OF ESTABLISHMENT
Iller Bankasi 1933
Türkiye Ihracat Kredi Bankasi 1963
Türkiye Kalkinma Bankasi 1975
PRIVATE BANKS T.
Sinai Kalkinma Bankasi 1950
Birlesik Yatirim Bankasi 1988
Park Yatirim Bankasi 1992
Sinai Yatirim ve Kredi Bankasi 1962
Tat Yatirim Bankasi 1992
Tekfen Yatirim ve Fin.B 1988
Takasbank 1995
FOREIGN BANKS ESTABLISHED IN TURKEY
Indosuez Euro Türk Merchant Bank 1989
Bankers Trust 1988
Taib Yatirim Bank 1987
II. COMMERCIAL BANKS
STATE BANKS
T.C.Ziraat Bankasi 1863
Türkiye Emlak Bankasi 1927
Türkiye Halk Bankasi 1938
Türkiye Vakiflar Bankasi 1954
PRIVATE BANKS
Adabank 1985
Akbank 1947
Alternatifbank 1991
Anadolubank 1997
Bank Ekspres 1992
Bank Kapital 1985
Derbank 1958
Demirbank 1953
Denizbank 1997
Egebank 1928
Eskisehir Bankasi 1927
EGS Bank 1995
Etibank 1935
Finansbank 1987
MNG Bank 1985
Iktisat Bankasi 1927
Interbank 1888
Kentbank 1992
Koç Bank 1985
Milli Aydin Bankasi 1913
Oyakbank 1984
Pamukbank 1955
Sitebank 1991
Sümerbank 1933
Sekerbank 1953
Tekstil Bankasi 1986
Toprakbank 1992
Türk Dis Ticaret Bankasi 1964
T.Ekonomi Bankasi 1927
Türk Ticaret Bankasi 1913
Türkiye Garanti Bankasi 1946
Türkiye Imar Bankasi 1928
Türkiye Is Bankasi 1924
Türkiye Tütüncüler Bankasi 1924
Yapi ve Kredi Bankasi 1944
Yurtbank 1992
FOREIGN BANKS ESTABLISHED IN TURKEY
Arap-Türk Bankasi 1977
Birlesik Türk Körfez B. 1987
BNP-AK Dresdner Bank 1985
Midland Bank 1990
Osmanli Bankasi 1863
Türk Sakura Bank 1985
Turkish Bank 1982
Ulusalbank 1985
III. FOREIGN BANKS OPERATING THROUGH BRANCHES
Bank Mellat 1982
Banca di Roma 1911
Citibank N.A. 1981
Credit Lyonnais 1988
Habib Bank 1983
ABN AMRO Bank 1921
Kibris Kredi Bankasi 1989
Societe Generale S.A. 1989
The Chase Manhattan Bank 1984
Westdeutsche Landesbank A.G. 1985
ING Bank 1997
Number of Banks Operating In Turkey
1970 1980 1990 Dec.1999
Commercial banks 44 40 46 62
State-owned banks 12 12 8 4
Privately banks 27 24 25 38
Foreign banks 5 4 23 19
Inv. and dev. banks 2 3 10 19
Total 46 43 66 81
Turkish Banks Operating by Opening Branches Abroad
AUSTRIA
Wien T.Vakiflar Bankasi
BAHRAIN
Yapi ve Kredi Bankasi
Pamukbank
BELGIUM
Brussels
Central Bank
T.C.Ziraat Bankasi
T.Halk Bankasi
FRANCE
Paris
Central Bank
T. Emlak Bankasi
GERMANY
Aachen
Augsburg
Berlin
Bonn
Braunschweig
Bremen
Duisburg
Dusseldorf
Essen
Frankfurt
Gelsenkirchen
Hamburg
Hannover
Kassel
Koln
Mannheim
Munchen
Nurnberg
Stuttgart
Wuppertal
T.Vakiflar Bankasi
T.Vakiflar Bankasi
Central Bank
T.C.Ziraat Bankasi
T.Halk Bankasi
T.Emlak Bankasi
T.Vakiflar Bankasi
Pamukbank
Yapi ve Kredi Bankasi
T.Emlak Bankasi
T. Tutunculer Bankasi
T.Emlak Bankasi
T.C.Ziraat Bankasi
Yapi ve Kredi Bankasi
T.Emlak Bankasi
Yapi ve Kredi Bankasi
T. Garanti Bankasi
Akbank
Central Bank
T.C.Ziraat Bankasi
T.Vakiflar Bankasi
T.Emlak Bankasi
Akbank
Turk Ticaret Bankasi
T.Tutunculer Bankasi
Yapi ve Kredi Bankasi
T.Is Bankasi
T.C. Ziraat Bankasi
T.Halk Bankasi
Akbank
T.C.Ziraat Bankasi
Akbank
Pamukbank
T.Halk Bankasi
T.C.Ziraat Bankasi
T.Halk Bankasi
Pamukbank
Sekerbank
T.Imar Bankasi
Yapi ve Kredi Bankasi
T.Emlak Bankasi
Pamukbank
T.C.Ziraat Bankasi
T.Emlak Bankasi
T.Halk Bankasi
Akbank
Yapi ve Kredi Bankasi
Pamukbank
T.C.Ziraat Bankasi
T.Halk Bankasi
Yapi ve Kredi Bankasi
Akbank
Yapi ve Kredi Bankasi
IRAN
Tehran Pamukbank
LUXEMBURG
Luxemburg T. Garanti Bankasi
MALTA
Malta T.Garanti Bankasi
The NETHERLANDS
Amsterdam
Den Haag
Rotterdam
T.Halk Bankasi
T.Is Bankasi
T.C. Ziraat Bankasi
T.Emlak Bankasi
T.Garanti Bankasi
Akbank
Federation of RUSSIA
Moscow
Iktisat Bankasi
T.Garanti Bankasi
Yapi ve Kredi Bankasi
SWITZERLAND
Geneva
Zurich
T.Garanti Bankasi
T. Is Bankasi
T.Halk Bankasi
TURKISH REPUBLIC OF NORTHERN CYPRUS
Gazimagosa
Girne
Guzelyurt
Lefkosa
T.C.Ziraat Bankasi
T.C. Is Bankasi
T.C.Ziraat Bankasi
T.Is Bankasi
T.C.Ziraat Bankasi
T.C. Ziraat Bankasi
T.Is Bankasi
T.Halk Bankasi
UNITED KINGDOM
London
Central Bank
T.C. Ziraat Bankasi
Akbank
T.Is Bankasi
Yapi ve Kredi Bankasi
UNITED STATES OF AMERICA
New York
Central Bank
Vakiflar Bankasi
T.C. Ziraat Bankasi
Yapi ve Kredi Bankasi
Turkish Banks Abroad (1995)
Name Country
Arab Financial Services Company
Bank Kreiss AG. Bahrain
Germany
Deutsch Turkish Bank AG.
Express Trade Bank (Berlin) GmbH Germany
Germany
Is Bank GmbH
Banque International de Commerce SA. Germany
France
Banque du Bosphore
United Garanti Bank Int. N.V. France
The Netherlands
Demir-Halk Bank (Nederland) N.V.
Finansbank Holland N.V. The Netherlands
The Netherlands
FB Finansbank Suisse S.A.
Doc Finance S.A. Switzerland
Switzerland
Sabanci Bank P.L.C.
Macaristan-Halk Bank UK
Hungary
Russian-Turkish Bank
Yapi Toko Bank Federation of Russia
Federation of Russia
Kazakhstan International Bank
Kazkommerts-Ziraat International Bank Kazakhstan
Kazakhstan
Inter Overseas Ltd.
Inter Capital Ltd. Islands
Islands
Turk Boston Bank Europe Ltd.
Uzbekistan-Turkish Bank Ireland
Uzbekistan
Turkmen-Turkish Int.Comm. Bank.
Uluslararasi Turkmen-Halk Kalkinma Bankasi Turkmenistan
Turkmenistan
World Vakif OffShore Banking Ltd.
Cyprus Vakiflar BankasiLtd. Northern Cyprus
Northern Cyprus
The Euro Textile Bank Ltd.
Sekerbank OffShore Ltd. Northern Cyprus
Northern Cyprus
Atlasbank OffShore Ltd. Northern Cyprus
Capital Markets
Financial liberalization attempts in the last decade and a half have promoted the development of capital markets. The main objective of this effort was to make the financial system more efficient by providing an alternative to banks for both the corporate sector and households via the introduction of direct finance. The Capital Markets Law, enacted in 1981 and amended in 1992, regulates the primary and secondary markets, and designates the institutions and financial instruments. The CMB was established to supervise and regulate capital markets. All publicly held companies are under the supervision of CMB, which is responsible for granting permission to issue securities, to authorise new financial intermediaries other than banks, and to authorise the establishment of investment companies.
The total value of outstanding securities increased from 10.1 percent of GNP in 1986, to 33.9 percent of GNP by 1995. However, much of the increase is due to the rapid rise in government borrowing by issuing T-bills and bonds. The proportion of public borrowing in capital markets was 88.7 percent of all securities issued in 1995. Private sector issues account for only 11.3 percent in that year. The composition of private sector issues point out another weakness of capital markets in fulfilling the function as a source of direct finance for corporations.
Between 1992 and 1995, 62 percent of all private issues were asset-backed securities issued by banks, and 28 percent were common stock issues of corporations. The shares of corporate bonds and commercial paper were negligible. It would not be wrong to say that private firms were crowded out of the bond market as a result of growing government borrowing to finance the fiscal deficit.
Another important milestone in the development of capital markets was the establishment of the Istanbul Stock Exchange (ISE) in 1986. The ISE has shown remarkable growth in terms of the market value of shares traded and the volume of transactions. In 1995, total market capitalization of listed stocks on the ISE was $20,772 million, with an annual trading volume of $50,889 million. Although market capitalization places the ISE among smaller exchanges in Europe and the Middle East, the ISE is ahead of the stock markets in Tel Aviv, Brussels, Copenhagen, Helsinki, and Vienna with respect to volume of transactions. It can be characterised as a rapidly growing emerging market with high risk and high returns. Following the removal of capital controls in 1989, foreign investors were allowed to invest in Turkey without any restrictions.
Non-resident investors accounted for 7 percent of stock market transactions in 1995, but since they do not trade frequently, they have a much larger share of ownership in Turkish stocks.
Privatisation
Turkey was among the early adopters of the idea of privatisation at the beginning of the 1980's. The idea behind privatising state-owned economic entities was the desire to have the government shift to the market mechanism for most economic activities and concentrate on its main functions in defence, education, health and justice. This way, efficiency would increase, industries dominated by state monopolies would open to competitive forces, capital markets would prosper and ownership of industrial wealth would be widely distributed among the people through the sale of shares of stock of privatised companies.
Moreover, with the revenues raised through the sale of state-owned economic entities and reduced ongoing state subsidies on inefficient firms, the government would have more resources for investing in infrastructure.
The legal procedure to clear the way for the sale of state owned economic entities started in the early 1980's and took much longer than initially anticipated. Three major pieces of legislation were enacted by the parliament in 1984, 1986 and 1994, with several amendments, as well as many government decrees. Opposition groups took parts of the legislation to the Supreme Court, which annulled them occasionally. Each time, the government issued a new decree or enacted another piece of legislation to clear the way for privatisation. The government agency in charge of divesting state-owned economic entities is the Privatisation Administration.
Starting in 1985, a total of 157 economic entities and some state-owned assets were taken over by the Privatisation Administration for later divestiture. Some of the economic entities targeted for privatisation were 100 percent owned by the state, whereas others were corporations in which the state was a significant shareholder. Obviously they vary with respect to size. Between 1985 and 1995, 108 entities were fully or partially privatised. However, with two exceptions, they were corporations with partial state-ownership, rather than 100 percent state-owned economic entities, the real targets for privatisation in terms of size and expected benefits. The state no longer has any interest in 89 entities, whose sale has raised $2.8 billion. In addition, the Privatisation Administration raised another $939 million from dividends and other income from these entities, to bring the total revenues to around $3.7 billion. On the other hand, $3.2 billion has been spent on the entities on the privatisation list, mostly in the form of new capital injections and loans to those that are problematic.
The method of sale differs from case to case. Private placement of equity is by far the most preferred method, constituting 45 percent of all sales. Other methods are public offerings of equity, sale of seasoned equity in the ISE, sale of fixed assets, and private placement in international markets.
The real challenge to the privatisation program lies in the next few years. Among the entities that will test the success of the program are Türk Telekom, Erdemir and Petkim. Türk Telekom is the telecommunications monopoly which is targeted for sale in 1997. It is probably the jewel of the crown in the whole privatisation program. Erdemir and Petkim are giants in iron and steel and petrochemical industries, respectively.
The present administration has ambitious plans for their divestiture, successful implementation of which will determine the future course of privatisation.
Recent Developments Related To The Banking Sector
And the Financial System
Under the Staff Monitoring Program with IMF the Turkish government launched a program aiming at sustaining stability, reducing inflation, described in the authorities' Memorandum of Economic Policies of June 26, 1998. Main features of the program included;
 a large and sustained improvement in the primary budget balance, to narrow the large public sector deficits that lie at the heart of the inflation process;
 the adjustment of public sector wages and agricultural support prices in line with targeted inflation to minimise inflation inertia;
 structural reforms to ensure a lasting strengthening of the public finances;
 stepped up privatization to enhance economic efficiency and lower the domestic borrowing requirement;
 measures to strengthen the banking sector; and
 Limits on the expansion of the Central Bank's net domestic assets to ensure the consistency of overall policies.
Turkey has made progress in the implementation of these economic policies. Developments in 1998 and 1999 clearly indicated the need to reinvigorate the adjustment effort through a comprehensive program of fiscal and structural reform. Within the context of the Government's agenda certain fiscal and structural reforms have been realised recently.
The major legal and regulatory measures related to the banking sector and the financial system are summarised below.
June 1999
New Banking Law
The government has passed a new Banking Law in June 1999, establishing an independent banking regulating and auditing institution.
March 1999
Growth
Compared to the same period of the previous year, the total assets of the Turkish banking system grew by 88 percent in nominal terms and reached TL 42,896 trillion by the end of March 1999. Within the commercial banks groups, the growth rates were 90 percent for both state-owned banks and foreign banks and 95 percent for privately owned banks, while the total assets of the banks under the Deposit Insurance Fund increased only by 24 percent. A slow growth of 57 percent was observed in the development and investment banks.
Turkish Banking System, March 1999
TL
Trillion Annual per. Change USD
Million Annual
per. change Dec. 1998
per. change
Commercial banks 40,933 90 111,417 25 -1
State-owned 14,549 90 39,603 25 -3
Private 23,208 95 63,171 28 1
Banks in Fund 1,103 24 3,002 -19 -19
Foreign banks 2,073 91 5,641 25 10
Dev. and inv. banks 1,936 57 5,271 3 -5
Total 42,869 88 116,688 23 -1
The total assets of the banking system grew by 23 percent in dollar terms and reached USD 116,688 million. On the other hand, the total assets of the banking system declined nearly by 1 percent compared to the end of the previous year. Accordingly, total assets declined in the banking groups excluding the state-owned commercial banks and privately owned commercial banks.
Sector Shares
The share of the commercial banks group in total assets reached 95.5 percent, increasing by one percentage point. Within the same group, the share of the state-owned banks rose from 33.6 percent to percent 33.9 percent, and the share of privately owned banks increased from 52.3 to 54.1, while the share of foreign banks remained almost the same at 4.3 percent. On the other hand, the share of the banks under the Deposit Insurance Fund declined from 3.9 percent to 2.6 percent.
In line with that development, the share of the state-owned banks in total deposits reached 39.8 percent with an increase of 0.8 percentage point and the share of the privately owned banks rose to 53.6 with an increase of 1.1 percentage points. However, the same ratio declined from 3.4 percent to 2.4 percent for the foreign banks and from 5.1 to 4.2 for the banks under the Deposit Insurance Fund. On the other hand, the share of the state-owned commercial banks in total loans fell down from 34.1 percent to 27.9 percent, while that of the banks under the Deposit Insurance Fund declined from 3.4 percent to 1.5 percent. The share of the privately owned commercial banks in total loans increased from 51.9 percent to 58.4 percent, while that of the foreign banks rose from 2.7 percent to 2.9 percent. The same ratio rose from 7.9 percent to 9.2 percent in the development and investment banks.
Market Shares of Groups (percentage)
T. assets T. deposits T. loans
1998 1999 1998 1999 1998 1999
March Dec. March March Dec. March March Dec. March
Commercial banks 94.6 95.3 95.5 100.0 100.0 100.0 92.1 91.3 90.8
State-owned 33.6 34.9 33.9 39.0 40.7 39.8 34.1 29.1 27.9
Private 52.3 53.3 54.1 52.5 52.4 53.6 51.9 57.6 58.4
Banks in Fund 3.9 2.6 2.6 5.1 4.3 4.2 3.4 1.5 1.7
Foreign banks 4.8 4.4 4.8 3.4 2.7 2.4 2.7 2.9 2.9
Dev. And inv. banks 5.4 4.7 4.5 7.9 8.7 9.2
Concentration in Banking
The share of the first five largest banks was 45 percent in total assets, 38 percent in total loans and 50 percent in total deposits, and the same shares for the ten largest banks were 67 percent, 71 percent, 71 percent, respectively.
Concentration in Banking* (percentage)
T. assets T. deposits T. loans
1998 1999 1998 1999 1998 1999
March Dec. March March Dec. March March Dec March
Five largest banks 44 43 45 48 49 50 43 40 38
Ten largest banks 67 66 67 70 72 71 72 66 71
*In terms of assets
TL and Fx Structure of the Balance Sheet and Fx Position
In nominal terms, the growth rates were 101 percent in TL assets and 72 percent in Fx assets. TL liabilities and Fx liabilities grew by 105 percent and 72 percent, respectively. The share of TL assets in total assets rose from 57 percent to 61 percent and the share of TL liabilities in total liabilities increased from 49 percent to 53 percent. By the end of 1998, the shares of TL assets and TL liabilities in the balance sheet total were 60 percent and 52 percent, respectively.
Foreign Currency Structure (percentage) and Fx Position (billion dollars)
T. assets T. liabilities Fx position
March March March
1998 1999 1998 1999 1998 1999
Commercial banks 42 38 51 46 -7.7 -8.8
State-owned 27 23 28 24 -0.2 -0.3
Privately-owned 52 48 63 59 -6.6 -6.6
Banks in Fund 42 18 62 47 -0.7 -0.9
Foreign banks 40 47 67 66 -1.2 -1.1
Dev. and inv.banks 63 60 63 59 -0.0 0.1
Total 43 38 51 47 -7.7 -8.7
The Structure of Assets
The share of loans in total assets reduced by 10 percentage points to 36 percent The change on the loan accounts of Ziraat Bank A.S. had a significant effect in this decrease. Due to the transfer of some part of the loans accounts to the other accounts in the Bank, the share of other assets in total assets increased from 15 percent to 23 percent. The shares of liquid assets and permanent assets increased by 1 percentage point to 33 percent and 8 percent, respectively. The share of government securities excluding repo in total assets remained the same at around 11 percent. While the share of Treasury bills reduced in total assets, the share of Government bonds increased.
Selected Assets of the Banking Sector, March 1999
TL
Trillion USD Million Annual per.change
(TL) (USD) Percentage share
March 98 March 99
Liquid assets 13,985 38,067 89 24 32 33
Loans 15,260 41,537 47 -4 46 36
Permanent assets 3,621 9,857 136 55 7 8
Non-perfor. loans (net) 908 2,471 603 361 1 2
Other assets 10,003 27,227 191 90 15 23
Total assets 42,869 116,688 88 23 100 100
The most considerable development has been the rapid growth in non-performing loans. The non-performing assets (net) of the banking system increased by 603 percent and reached TL 908 trillion. Depending on this, the ratio of non-performing loans (gross) to total loans increased from 2.5 percent to 9.4 percent. The ratio of non-performing loans to total loans increased from 3 percent to 12.8 percent in the state-owned commercial banks and it increased from 1.5 percent to 2.7 percent in the privately-owned commercial banks. This ratio showed a considerable increase in the banks under the Deposit Insurance Fund and it rose from 10.8 percent to 260 percent.
Non-performing loans /Total loans (percentage)
March 98 December 98 March 99
Commercial banks 2.4 7.7 10.1
State-owned 3.0 5.6 12.8
Privately-owned 1.5 2.4 2.7
Banks in Fund 10.8 233.2 260.2
Foreign banks 1.1 1.3 1.5
Dev.and inv.banks 0.9 1.0 1.0
Total 2.5 7.2 9.4
The Structure of Liabilities
As opposed to change in assets, the structure of liabilities remained almost the same. The total deposit grew by 91 percent, its share in total liabilities increased by 1 percentage point to 65 percent. TL deposit and Fx deposit grew by 111 percent and 74 percent, respectively. The share of TL deposit in total liabilities rose by 3 percentage points, in contrast, the share of Fx deposit reduced by 3 percentage points and the share of both items realised as 32 percent. The non-deposit funds grew by 88 percent. The loans borrowed from abroad increased from USD 7.3 billion to USD 9.6 billion. The share of non-deposit funds in total liabilities stayed almost the same with 17 percent.
Selected Liabilities of the Banking Sector, March 1999
TL USD Percentage change Percentage share
Trillion Million TL USD March 98 March 99
Deposit 27,673 75,326 91 25 64 65
TL 13,897 37,827 111 38 29 32
Fx 13,777 37,499 74 14 35 32
Non-deposit funds 7,113 14,928 88 23 13 13
Shareholders' equity 2,577 7,015 60 5 7 6
Paid capital 1,791 4,874 83 20 4 4
Reserves 709 1,932 93 26 1 1
Revaluation fund 786 232 82 19 2 2
Loss 709 1,929 320 176
Total income 1,035 2,816 129 19 2 2
Current year income 587 1,220 55 2 1 1
Total 42,869 116,688 88 23 100 100
The shareholders' equity excluding total income, (previous year income and current year income) grew by 60 percent. As compared to the growth rate of 125 percent in the same period of previous year, the growth of shareholders' equity slowed down considerably.
The most important reasons behind this were the growing of losses, unrealization of real increase in the 1998 income and the deterrent effect of taxation imposed on capital increases. Indeed, the current year income increased almost at the same rate with the inflation (55 percent in nominal terms, 2 percent in dollar terms) by the end of March 1999, and its contribution to the growth of shareholders' equity remained certainly limited. The current year loss of TL 9 trillion (USD 42 million) at the end of March,1998 increased to TL 157 trillion (USD 427 million) at the end of March, 1999, while the total losses including previous year losses increased from TL 169 trillion (USD 700 million) to TL 709 trillion (USD 1,929 million).
Net Current Year Income and Loss, March 1999
USD Million Percentage change
Net income Loss Total net income Net income Loss Total net income
Commercial banks 1,089 426 663 0 1078 -37
State-owned 80 215 -135 -74 881 -148
Privately-owned 887 48 838 27 432 21
Banks in Fund 7 162 -155 -30 3302 -3071
Foreign banks 115 1 114 53 81 53
Dev.and inv.banks 131 0 131 18 0 24
Total 1,220 427 793 2 905 -32
On the other hand, in the first quarter, net current year income (after deducting the losses) increased by 5 percent in nominal terms, in contrast, it reduced by 32 percent in dollar terms. The total income of only profit-making banks increased by 55 percent in nominal terms.
The ratio of shareholders' equity excluding total income to total assets fell from 7.1 percent to 6 percent, while the ratio of shareholders' equity including total income to total assets decreased from 9.6 percent to 8.4 percent. In the meantime, the profitability ratios showed a considerable slowdown. Therefore, both the ratios of average profitability of shareholders' equity and profitability of assets reduced rapidly.
The interest income increased by 107 percent in nominal term, in contrast, the interest expenditures grew by 132 percent. Depending on this development, net interest income after provision increased by 49 percent, which was lower than the inflation rate. The contribution of non-interest income to total income improved from negative to positive, while non-interest expenditures grew by 81 percent. Consequently, the income before tax increased by 38 percent. The income after tax increased only by 5 percent, depending on the growing of the tax provision at 171 percent.
Off-Balance Sheet Accounts
Off-balance sheet total grew by 75 percent in nominal terms and 13 percent in dollar terms. Both the TL and Fx off-balance sheet accounts grew by 75 percent in nominal terms. Guarantees and warranties increased by 53 percent, while, commitments and Fx and interest rate transactions grew by 87 percent and 84 percent, respectively.
The repo transactions increased from TL 3,280 trillion to TL 5,694 trillion. The repo transactions with the Central Bank of Turkey increased by four times to TL 1,263 trillion, the repo transactions with non-financial institutions increased only by 23 percent and amounted to TL 2,802 trillion.
August 1999
Change in the Social Security System Regulation
Reform of the Social Security System, which was one of the top priorities of the government's agenda, was realised. The parliament passed new legislation on the Social Security System. The effects of such a major social security reform will influence the future of the present as well as the next generation.
Within the context of the new legislation, the age of retirement was increased to 58 for women and to 60 for men. The number of paid-premium day is increased from 5,600 to 7,000. The new legislation also brought a phased transition to the system of unemployment insurance within 10 years.
Standard Ratio for Foreign Currency Net General Position/Capital Base
With amendment in the regulation concerning Principles on the Calculation and Application of Standard Ratio for Foreign Currency Net General Position/Capital Base published in Official Gazette dated August 5, 1999, the Standard Ratio for Foreign Currency Net General Position/Capital Base was decreased from 30 percent to a maximum of 20 percent. It was decided that the new standard ratio would be reduced gradually in order to be effective as of January 1st, 2000.
Decree on Accounting for and Valuation of Bank Credits and Funds Covering Credits
With the Decision No. 99/13202 published in the Official Gazette dated 14.08.1999, some amendments has been made in Decree on Accounting for and Valuation of Bank Credits and Funds Covering Credits. According to new legislation, banks are required to set aside as general reserves 0.5 percent of the total of their cash credits and the dischargeable account receivables that are secured by 1st group of collaterals and 0.2 percent of letters of guarantee, guarantees and other non-cash credits. In addition, In case of inability to collect value of compensation of non-monetary credit or of those converted into monetary credits within 30 days after the payment or date of conversion, the credit extended is considered fallen in default. Banks are obliged to remove their cash credits fallen in default from the credit account to enter them into the account receivables to be discharged. If the part fallen in default is collected within one month, it is transferred into the credit account. With a provisional article, this period of one month shall be applied as 60 days till 2000, and the implementation of the previous period of time will continue as of 01.01.2000.
Privatization
Attracting foreign productive capital, promoting economic efficiency, and raising revenues to contain public debt are the key goals of the government privatization program. Within the context of the privatization program, the government has tried to undertake necessary legal measures including those to allow for international arbitration, to permit an acceleration of the privatization in the energy and telecommunication sector.
In August, the draft law changing some articles of the Constitution has been passed through the Parliament. With the change in the Article 47 of the Constitution, the concept of privatization is stated in the Constitution for the first time and the paragraphs below are added to the Article.
The principles and procedures related to the privatization of enterprises and properties owned by the State Economic Enterprises and other Public Legal Entities shall be determined by Law.
Which of investment and services governed by the State Economic Enterprises and other Public Legal Entities to be made provided by real or legal entities on the basis of legal contracts shall be determined by Law
Constitutional change also enabled disputes on privileged agreements concerning public services to be solved through national and international arbitration. International arbitration shall be applied only to disputes including foreign features.
With an amendment in the 2nd paragraph of the Article 155, the State Council is commissioned with communicating its opinion on privilege agreements concerning public services within two months, and with examining drafts on regulations and solving administrative disagreements.
Tax Reforms
- The parliament approved the legislation, which brought certain changes in some tax laws.
- Financial Millennium was postponed, and definition of income was changed, thus the previous implementation will continue for income earned between 1999-2002.
- Financial Millennium was postponed to the year 2002. Hence, repo and deposit gains that will be earned between 01.12.1999-31.12.2002 will be subject to withholding tax and no declarations are required for them whatever the amounts are.
- For gains derived from the discharge of marketable securities, the period for exemption is reduced from one year to 3-months and the limit is increased to TL 3,5 billion.
- No transactions will be carried out depending on the declarations made on 30.09.1998.
- Income tax rates except for wage income are increased by 5 points.
- Surveys and works of art are exempted from taxation.
- Changes was introduced in corporate tax
- The provisional corporate tax rate that is calculated over gains in 6 months periods is reduced to 20 percent from 25 percent. The Board of Ministers is authorised to increase or decrease the rate by 5 points.
- The part of gains that’s added to the capital of the institution from the sale of subsidiary shares and immovables of the taxpayer in the year of sales is exempted from corporate tax.
- The gains that will arise from the addition of production units as capital in kind to new companies will be exempt from corporate tax between 01.01.1999-31.12.2002.
- The gains derived through the sale of the stocks issued -at the establishment or the increase of capital- above their nominal values of the joint stocks and those which are exceptional, will not be taxed at point.
- The Board of Ministers is authorised to change the revaluation rate used in the calculation of real estate tax base between zero and the rate declared.
September 1999
Total Assets of Banking System (USD billion)
1970 1980 1990 Sept. 1999
Commercial banks 5.2 18.5 52 127
State-owned banks 3 8 26 46
Privately banks 2 8 25 72
Banks under the Fund 3
Foreign banks 0.2 0.5 1 6
Inv. and dev. banks 1 2 5 6
Total 6.2 18.5 57 133
Total (as per. of GNP) 44 31 43 80
Selected Balance Sheet Items of Banking System (As of Sept. 1999 USD billion)
TL Fx Total
Assets
Liquid assets 21.8 24.6 46.4
Marketable sec. 14.3 8.0 22.3
Loans 20.6 20.8 41.3
Permanent ass. 9.1 1.8 10.9
Others 32.1 2.0 34.1
Total 83.6 49.1 132.6
Liabilities
Deposits 45.1 42.7 87.8
Non- deposit funds 4.6 16.0 20.6
Others 10.8 2.5 13.3
Shareholders’ equity 7.4 0.1 7.5
Current year profits 3.4 3.4
Total 71.3 61.3 132.6
October 1999
Change in Taxation Method for Government Securities
Within the context of changes introduced by the Tax Law No. 4369, approved in July 1998, the valuation for Government Bonds, Treasury Bills and Revenue Sharing Certificates at market value instead of purchase value was brought, and income from these securities became subject to provisional tax.
Provisional Taxation
The provisional tax implementation of 25 percent on a 3-monthly basis was brought in July 1998. With Law No. 4444 in August 14, 1999 the rate of provisional tax was reduced to 20 percent from 25 percent and the period of collection was increased to a 6-monthly basis.
Article No. 279 of the Tax Procedures Code
An amendment on the valuation of securities in Article No. 279 of the Tax Procedures Code was made in July 1998. According to the amendment, shares and the participation certificates of mutual funds, who invest at least 51 percent of their portfolios in the stocks of companies established in Turkey shall be valued at purchase price, and all other marketable securities shall be valued at market value from December 31, 1999.
However, the date of implementation has been postponed to December 31,1999 in the 1999 Financial Year Budget Law No. 4393.
Implementation of Article 279 and Provisional Taxation
The implementation of Article 279, which ensures the transfer of real value of securities into financial tables, affects likely institutions having a high amount of government securities in their assets. Since these institutions have to involve unrealised interest revenues at the end of period with their tax assessment.
For purposes of the provisional tax implementation, banks are required to take into consideration the accrued interest of their government securities while submitting declarations on February 15, 2000 covering both the 4th quarterly period provisional tax and income-loss statements for the year 1999. The implementation on the valuation of securities at market value will be valid during the calculation of income.
November 1999
Additional Taxation
The government has already passed a new law on additional taxation, which was initially designed to meet part of the huge costs of two recent earthquakes in Turkey.
The new law, which was published in the Official Gazette dated November 26,1999, introduced additional taxes on a wide range of income and corporate revenues and commercial transactions.
Within the context of the law regarding the banking sector, the additional taxes were introduced including four to 19 percent interest taxes on government bonds issued before December 1, 1999 depending on maturity, and an additional corporate tax of 5 percent.
As being valid from as of January 1, 2000, the rates for additional interest tax on government bonds issued before December 1, 1999 are stated as below:
1) Of the discount bonds and bills:
- 4 percent from those whose due date falls 1-91 days later,
- 9 percent from those whose due date falls 92-183 days later,
- 14 percent from those whose due date falls later than 183 days.
2) 4 percent from the interest payments for the bonds with three-year maturity, variable interest, and quarterly coupon-payment,
3) 19 percent from the interest payments for the bonds with three-year maturity, fixed interest, and quarterly coupon-payment.
The amount of this obligation, which has the nature of additional tax may not be offset against the taxes to be paid, but may be charged as an expense item in determining the commercial income (Law no.4481, promulgated in the extra issue of the Official Gazette dated 26.11.1999, numbered 23888).
December 1999
Recognition of Turkey's Candidate Status to the EU
Turkey's candidate status for full-membership to the European Union has been recognised officially at the Helsinki European Council.
The unanimous recognition and announcement of Turkey as a candidate country at the Helsinki Summit, and the declaration in a clear and decisive manner that Turkey will be treated on an equal footing with the other candidates are positive developments for Turkey.
Disinflation Program
As an extension of the Staff Monitoring Program signed with the International Monetary Fund in July 1998, a new Stand By Agreement has been signed recently between the Turkish government and IMF. Within the context of the new agreement, that is to last for three years, the Turkish government launched a disinflation program, which is aiming to achieve disinflation and growth at the same time. Within the context of the program, the Central Bank of the Republic of Turkey (CBTR) announced its exchange rate policy and monetary policy.
The strength of the Program enhances the credibility of the disinflation goals. In setting disinflation goals for 2000-2002, of main importance has been balancing the need to signal a clear break away from the past, against the difficulty of bringing inflation down to lower single digits abruptly, given the inertial component that inflation has in Turkey.
The fundamental goals of the program are given as,
 To bring down the inflation rate through implementing consistent, credible and persistent fiscal, income, monetary and exchange rate policies, all supported by structural reforms.
 To reduce real interest rates to plausible levels,
 To increase the growth potential of the economy,
 To provide a more effective and fair allocation of the resources in the economy.
The main pillars on which disinflation program will operate;
a) The first pillar is a tight fiscal policy that consists of increasing the primary surplus, realising the structural reforms and speeding up the privatisation.
b) An income policy in line with the targeted inflation is the second pillar.
c) Monetary and exchange rate policy actions constitute the third pillar, which aim to support the contribution of the first two in decreasing both inflation and interest rates, and to provide a long-term perspective to the economic agents.
And the main targets are determined in the Program are given as below;
- 12-month CPI (Consumer Price Index) inflation rate: 25 percent by the end of 2000, 12 percent by the end of 2001, and 7 percent by the end of 2002.
- Public sector primary surplus: equivalent of 2.2 percent of GNP (for the year 2000)
- Cash domestic debt: constant at 27 % of GNP
- Total debt stock : constant at 61 % of GNP
Monetary Program of CBRT
Within the context of the new agreement, that is to last for three years, the Central Bank of the Republic of Turkey (CBTR) announced its exchange rate policy and monetary policy. The monetary and exchange rate policies are to be guided by two considerations. First, disinflation and a rapid decline in interest rates require that monetary and exchange rate developments become more predictable, so as to reduce the uncertainty on the value of financial investment for both residents and nonresidents. The strengthening of fiscal policy under the program, level of international reserves, coupled with the financial support from the international community, make the introduction of such a commitment feasible. Secondly to avoid to be locked into a monetary and exchange rate framework that while appropriate for disinflation may lead to unnecessary rigidities in the long run, a problem that has affected many emerging markets in recent years. Hence, there is a need for a transparent and pre-announced exit strategy from this exchange rate regime.
Exchange Rate Policy:
Main features of CBTR’s exchange rate policy are as follows:
- The exchange rate basket is to be announced on a daily basis covering one-year period.
- The exchange rate basket composed of 1 US dollar + 0.77 EURO will continue to be valid.
During the implementation of the program the exchange rate policy will be designed in two different exchange rate regimes and in two different periods. In the first 18 months which is between January 2000 and June 2001, nominal value of the basket will be increased according to the targeted inflation rate and in the following period the exchange rate policy will be carried out with respect to a “progressively widening band”. This band will widen at a rate of 15 percentage points per annum, measured from edge to edge. The total width of the band will thus reach 7½ percent by end-December 2001, 15 percent by end-June 2002, and 22½ percent by end-December 2002.
Monetary policy;
The most important tool of CBTR at reaching its final objective of inflation is to follow the preannounced path of the basket without permitting any deviations from that.
The reflection of exchange rate and monetary policy is to be followed in the context of the main aggregates from the balance sheet of CBTR. Monetary policy and balance sheet of CBTR are designed by imposing a floor to net international reserves in addition to a ceiling restriction for the net domestic assets item (NDA), which are fundamental aggregates of the balance sheet. During each quarter, NDA is to remain broadly constant at its December 1999 level) while allowing some limited flexibility (about +,- 5 percent of total base money) during the quarter to avoid excessive volatility in overnight rates.
Within this context, all base money is to be created through the balance of payments and domestic interest rates are to be fully market determined, and no capital movements will be sterilised. The interbank interest rates posted by CBRT are to be adjusted daily in line with the movements of the overnight money market rates.
Amendment in the application of Reserve Requirement and Liquidity Requirement
With the new amendment concerning the application of reserve requirement and liquidity requirement, which was published in the Official Gazette dated December 10, 1999, the reserve requirement ratio is decreased from 8 percent to 6 percent. On the other hand, 2 percent of TL deposits is to be held as free deposits with the Central Bank. This new liquidity requirement may be met on the average of daily data for the reserve requirement period, rather than on a continuous basis. Thus, without causing any change in the total of the legal requirements, banks are provided with flexibility in meeting their liquidity needs on weekdays.
Recent Amendments in the Banks Act No.4389
In June 1999, the parliament had approved a new Banks Act. With the Law No.4491, which was published in the Official Gazette dated 19.12.1999 No.23911, certain amendments have been made in this Act in order to strengthen key prudential regulations and to place the banking supervision framework on a proper foundation by increasing transparency and independence in the operation of the Banking Auditing and Regulation Board (BRSA), and providing all of tools needed for the improved resolution of problem banks.
The Banking Auditing and Regulation Board became fully autonomous by removing the involvement of the Council of Ministers from all decisions in the area of supervision other than the appointment of the members of the Board. The decisions to license and delicense banks, and to approve provisioning regulations are rested with the Board. With the recent amendments, three years period during which a Board member was prohibited from the employment as a senior executive in the banking sector, a provision made it difficult to find active professional to take Board positions, was eliminated as well. The Board is to be named by the end of March 2000, and to be in full operation by the end of August 2000.
The prudential standards were strengthen for bank lending to owners and to single or related parties. The ratio of loans to those having an indirect relationship is to be declined from the current 75 percent of capital to 25 percent until 2007.
With the new amendments, the Savings Deposit Insurance Fund was given authority and responsibility to restructure a problem bank to facilitate its sale in full or in part or to liquidate the remainder based on existing laws. The fund is no longer permitted to lend or otherwise provide liquidity support to banks other than those under its full control.
New Provisioning Regulation
Decree on procedures for determination of types of loans and other types of receivables that banks are required to set aside provisions, No: 99/13761 was published in the Official Gazette dated 21.12.1999. With the new regulation, more stringent loan loss provisioning in line with international standards is to be applied fully to all new loans, including renewal of any existing loans, from January 1, 2000.
According to the Decree banks are obliged to categorise their loans and other receivables into five subdivisions ranked according to recoverability and creditworthiness. The provisions to be set-aside by banks in respect of their loans and other receivables shall be in accordance with the collaterals’ value and the ability to liquidate them within the legal framework.
Application of Consolidation Principle in the Banking Regulations
Necessary modifications have been made recently in the regulations related to the capital adequacy and foreign exchange exposure limit of banks to apply on a consolidated basis.
Within this context, two Decrees related to the principles concerning the accounting and implementation of the standard ratio for foreign currency net general position/capital base on a consolidated basis and the principles and procedures on the measurement and valuation of capital adequacy of banks on a consolidated basis” are published in the Official Gazette dated 21.12.1999, being effective after June 30, 2000.
With these Decrees aiming at enhancing transparency and improving the monitoring capabilities of the authorities, banks are required to issue consolidated financial statements of themselves and their financial affiliates and to report twice a year.
Valuation of Repo, Reverse Repo Transactions and Time Deposit Accounts Provisional Tax Implementation
According to the General Decree on Corporate Income Tax, which was published in the Official Gazette dated 06.02.2000, repo and reverse repo transactions, time deposit accounts are subject to valuation process within the context of Article No. 279 of the Tax Procedures Code.
Regarding the provisional tax implementation, banks are obliged to take into account the accrued interest from repo, reverse repo transactions, and time deposit accounts as of the valuation date, while submitting declarations on February 15, 2000 covering both the 4th quarterly period provisional tax and income-loss statements for the year 1999.
Conclusion
High and chronic inflation has been the foremost problem of the Turkish economy over the last few decades. With the disinflation program, an ambitious decline in inflation level is put forward. A tight fiscal discipline is needed in order to shrink public sector deficit and to lower the burden of interest payments on public sector debt. In this way, it will be possible to realise a significant decline in inflation and the expected fall in real interest rates. The demand for TL financial instruments will increase, and the maturity of financial instruments will be lengthened with the improvement of expectations. Moreover, a high growth rate will be achieved in a stable environment. Under these circumstances risks in the banking sector will decline and financial structure of the banking sector will be strengthen together with the improvement of profitability performance of banks. The changes in the Banking Law designate supervision and operation of the banking sector in line with international standards. The enlargement of the financial system will facilitate increase in funds and loans of the banking sector. The Turkish banking sector that has almost reached the European Union standards with recent changes in the area of prudential regulation is likely to catch up with EU in terms of size and competition as well.
The Context of the Letter of Intent related to the Strengthening the Banking Sector
As an integral part of the disinflation program of the Turkish government, certain measures to be taken in order to enhance the economic stability and strengthen the banking sector are stated in the letter of intent approved by the IMF on December 22, 1999. Most of these measures have been already taken through amendments in the Banking Law. However, future steps in the government’s agenda related to the banking sector are determined as below.
 The Banking Regulation and Auditing Institution
The Banking Regulation and Auditing Board will be assigned by end of March 2000 and the Board will start its operations by the end of August 2000.
 Lending limits
According to the prudential standards for bank lending that have been hardened for lending to owners and to single or connected parties, the ratio of loans to large owners (defined as those with more than 10 percent of equity) shall decline from the current 75 percent of capital to 25 percent until 2007.
 Additional steps in the area of prudential regulation and supervision
Appropriate prudential requirements in line with international standards and best practices will be taken in the areas of: (i) accounting standards applicable to banks for prudential reporting and financial disclosure purposes, (ii) capital adequacy, including market risk, and (iii) improved internal risk management procedures.
 Rules for consolidated accounting and risk management systems
By the end of April 2000 the government intents to amend accounting rules to require consolidated accounting and proper valuation of securities (a structural benchmark for the completion of the second review) and also to implement fully rules for capital adequacy and foreign exposure limits by the end of June 2000 (a structural performance criterion). In addition, in order to assure the strictest compliance with these regulations by the end of June 2000, penalties will be introduced (a performance criterion) for foreign exchange positions in excess of prudential limits (100 percent reserve requirement). Finally, regulations will be issued on internal risk management systems and amend capital adequacy rules to take into account market risks by the end of June 2000 (structural benchmark for the completion of the third review).
 State-owned banks
The long standing problems of the state-owned banks will be addressed by strengthening their oversight and developing strategic corporate plans, operational restructuring, and financial and capital restructuring plans with phased-in timetables, which will be initiated in year 2000. Pursuing actions will be taken to begin the commercialization of Ziraat Bank and Halk Bank with an eventual privatization goal. In the interim, in order to impose financial discipline on the operations of these banks, while improving their cash management, cash transfers to cover losses on subsidized lending have been specified in the 2000 budget. Moreover, as in 1999, 15 percent of the unpaid duty losses at the end of 1999 will be converted into securities earning an interest linked to CPI inflation, to be serviced in cash. The yield on the stock of unpaid duty losses at the end of 1999, excluding the part converted in securities, will be computed quarterly based on the average of monthly treasury bill rates plus a spread of 35 percent for Ziraat Bank and 21 percent for Halk Bank. This spread will also remunerate the state-owned banks for nonremunerated services provided to the government; these services will be more properly priced in the future. Management of the state-owned banks is expected to maintain the profitability of the state-owned banks under this tighter budget constraint.
TURKISH BANKING SECTOR IN THE 2000’S
The banking sector is currently undergoing radical changes throughout the whole world. Consequently, it is not possible for the Turkish banking sector not to be affected by the changes that this global sector is going through. The results of this survey, which is an attempt to put together and evaluate the expectations of top executives of the Turkish banking sector, confirm the above statement. As stated in the relevant parts of this report, the expectations of the sector are harmonious with results of past similar research conducted in Europe as well as globally.
According to the results of the survey, high inflation and political instability which are the two principal problems of our country, pose to be the two most influential outside factors that the banking sector faces. Lowering inflation and ensuring political stability will enable our banks to operate in a more stable environment and formulate longer-term strategies. Finalising uncertainties, following consistent economic policies, putting into effect necessary legislative amendments, liberalising institutions that regulate and monitor the sector will allow the banks to operate in a stronger and healthier structure.
The survey results show that the sector has positive expectations about lowering inflation but at the same time, this is perceived as very much dependent on political stability, for which the sector has non-uniform expectations. While lowering inflation is very much dependent on political stability, it is unclear how consistent low-inflationary policies can be utilised without first ensuring political stability and enabling the necessary infrastructure developments.
According to the results of the survey, the sector expects the government to increase its regulatory role, with future regulatory amendments mainly aiming at the protection of investors and depositors and ensuring standardisation and transparency in the application of accounting standards and principles. In our opinion, the lack of consistent macroeconomic policies that serve to sustain financial balances and the resulting increase of sectoral risk influence such expectations of the sector.
The most important finding of the survey related to market expectations of the sector is that the trend towards individual (retail) banking will continue in the 2000’s and the mass individual market will have a greater share in total banking portfolio. The banks, which expect the most increase in the mass individual banking market, are medium-to-small scale commercial banks. In line with these developments, it is expected that the demand for products such as cash management, consumer loans and credit cards will also increase. The quality of service and confidentiality seem to be two most important criteria that will influence bank choices of individual customers.
For the institutional (corporate) banking market, it is expected, according to survey results that the demand for commercial loans will slow in the 2000’s. In our opinion, this expectation is due to the fact that the possibility of raising funds from capital markets is expected to increase, especially for big institutional customers and banks will be more hesitant to grant loans to medium-to-small scale institutional customers due to higher risk.
According to survey results, the quality of services and the amount of fees and commissions charged seem to be the two most important criteria that the majority of institutional customers consider in their bank choices.
In line with these expectations, service quality is viewed by most banks to be the most important criterion that will enable them to gain considerable competitive advantage in the 2000’s.
In case of all depository institutions implementing strategies that will increase the quality of services, this criterion will no longer be a determinant factor that will enable competitive advantage. Instead, quality of services will be a prerequisite of operating in the market in the 2000’s. In such conditions, the competition will revolve around pricing, and only the banks that implement effective cost management and hence that are able to offer the same quality of services to the customer at the lowest cost will gain competitive advantage.
In order to accomplish this, banks have to undergo radical changes that will enable them to increase operational efficiency as well as minimise cost.
It is expected that the successful bank of the 2000’s will:
 utilise technology on a more widespread basis,
 priorities total quality management principles and customer satisfaction,
 incorporate a more entrepreneurial and active management style as well as a more delegative decision mechanism,
 be proactive in product development and be able to offer innovative value added products,
 re-evaluate the branch system to harmonise with corporate objectives and utilise alternative distribution channels effectively,
 employ better educated personnel,
 raise capital and funds at low cost,
 manage changes effectively and
 restructure workflows extensively.
In order to create such an organisational success, it is undisputed that certain factors are needed, such as;
 a consistent management vision,
 better utilisation of data technology and management information systems that will enable effective risk management and performance measurement.
The impressions gathered from the interviews and evaluation meetings conducted with top banking executives are that while some banks are preparing their organisational structure for extensive changes in their utilisation of technology, human resources and work flows and procedures, other banks are aiming a less technology intensive change that targets more on increasing the quality of services through personnel training.
The main obstacles that banks, which invest in data processing technology, have to overcome are the high costs related to such investments, rapid changes in technology and the long time required getting the results of such investments. Therefore, it is not surprising that especially small-sized banks, in order to increase operational efficiency, prefer to increase the efficiency of personnel through training rather than investing in technology.
However, the key factor to banks’ success in the 2000’s will be their ability to determine from today, their role as to whether they will be full-service banks serving a variety of markets and incorporating many diverse products and services or whether they will be niche banks specialising and focusing on certain specific market and product segments and plan their strategies accordingly.

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