Financial Institutions in Turkey
Financial Institutions in Turkey
FACULTY OF ECONOMICS
FINANCIAL INSTITUTIONS IN TURKEY
BY: ALTYNBEK USUPBAEV
Financial Institutions in Turkey
Financial institutions are the parts of the financial
system. The financial system is the complex structure, and every year it
channels billions of dollars, euros, yens, Turkish liras from savers to people
with productive investment opportunities. Financial institutions commonly
separated as depository institutions and as non-bank institutions.
Our major target in this paper is to have a wide
look at financial institutions in Turkey. For easy work and best understanding
it makes sense to follow mere wisdom “think globally- do locally”. So, in order
to make a proper outline, I plan firstly work on general financial institutions
all over the world, and then look whether they exists in Turkey, their structure and how they work.
Although depository institutions, or by other words banks
are the financial institutions we deal with most often, they are not the only
financial institutions we come in contact with. In such transactions like
purchasing insurance from insurance company, or buying a share of common stock
with the help of the broker, we are dealing with non-bank financial
The role of non-bank financial institutions is
to transfer funds from lenders-savers to borrowers-spenders. In the time of technological
progress, non-bank financial institutions innovate new services, and now
compete more directly with banks by providing banklike services to their
Every day we face the possibility of the occurrence of certain catastrophic
events that could lead to large financial losses. Because these losses could be
large relative to our financial resources, people found the solution by buying
insurance coverage that will compensate the sum of money if catastrophic events
Life Insurance Companies: The first life
insurance company in the United States (Presbyterian Ministers’ Fund in Philadelphia) was established in 1759, in Turkey it was established in 1893 by Osmanli
Sigorta, a member of Osmanli Bank. In 1918 was created İttihad-i Milli –
the first insurance company created by Turkish laws. This huge difference in
time was because insurance in Ottoman Empire was accepted as gambling, and
correspondingly was forbidden. But after two great fires in Beyoglu and Kumkapi
(Stanbul) in 1870 the laws were rearranged, and gave permission for foreign
insurance companies to service in Ottoman Empire.
Life insurance company sells
policies that provide income if a person dies and incapacitated by illness, or
retire. Such companies are organized in two forms: as stock companies or as
mutual companies. Stock companies are owned by stockholders; mutuals are
technically owned by policyholders.
Because death rates for
population as whole are predictable with a high degree of certainty, life insurance
companies can accurately predict what their payouts to policyholders will be in
the future. Consequently, they hold long-term assets that are not particularly
liquid – corporate bonds and commercial mortgages as well as some corporate
There are two principal forms of
life insurance policies: permanent life insurance (such as whole, universal,
and variable life) and temporary insurance (such as term). Permanent life
insurances policies have a constant premium throughout the life of the policy.
In the early years of the policy the size of the premium exceeds the amount
needed to ensure against death because the probability of death is low. Thus
the policy builds up a cash value in its early years. But in later years the
cash value declines because the constant premiums falls below the amount needed
to ensure against death, the probability of which is now higher. Term
insurance, by contrast, has premiums that are matched every year to the amount
needed to ensure against death during the period of the term (for example one
or five years). Hence term policies have no cash value, thus, in contrast to
permanent life policies, provide insurance only, with no savings aspects.
Property And Casualty Insurance Companies: Property
and casualty insurance companies specialize in policies that pay fro losses
incurred as a result of accidents, fire, or theft. Property and casualty
insurance companies same as life insurance companies separated both as stock
and mutual companies, and regulated by government. The investment policies of
property and casualty insurance companies are affected by two basic facts.
First, because they are subject to income taxes, the largest share of their
assets is held in tax-exempt municipal bonds. Second, because property losses
are more uncertain than the death rate in a population, these insurers are less
able to predict how much they will have to pay policyholders than life
insurance companies are. The earthquake in Izmit in 1999 exposed the property
and casualty insurance companies to huge losses. Therefore, property and
casualty insurance companies hold more liquid assets than life insurance
companies. Property and casualty insurance companies will insure against losses
from any type of events, including fire, theft, negligence, malpractice,
earthquakes, and automobile accidents. If possible loss being insured is too
large for any firm, several firms may join together to write a policy in order
to share the risk. Insurance companies may also reduce their risk exposure by
obtaining reinsurance. Reinsurance allocates a portion of the risk to another
company in exchange for a portion of the premium and is particularly important
for small insurance companies. The most famous risk-sharing operation is
Lloyd’s of London, an association in which different insurance companies
underwrite a fraction of an insurance policy. In Turkey the reinsurance
activities also widely used, there is many companies that deal with other
insurance companies by reinsurancing. As an example we could give Marsh Reinsurance
that give reinsurance service and reinsure into the reinsurance companies abroad directly or
through reinsurance brokers. There is also the Association of Insurance and
Reinsurance Companies of Turkey located in Istanbul.
Pension Funds: in performing the
financial intermediation function of asset transformation, pension funds
provide the public with another kind of protection: income payments on
There is an important increase in share
of pension funds due to tax policy, because employer contribution to an
employee pension plans are tax-deductive. Furthermore, tax policy has also
encouraged employee contribution to pension funds by making them tax-deductible
as well as enabling self-employed individuals to open up their own tax-sheltered
pension plans, Keogh plans, and individuals retirement accounts (IRAs). Because
the benefits paid out of the pension fund each year are highly predictable,
pension funds invest in long-term securities, with the bulk of their asset
holdings in bonds, stocks, and long-term mortgages. The key management issues
for pension funds revolve around asset management: Pension fund managers try to
hold assets with high expected returns and lower risk through diversification.
The structure of pension funds in Turkey changed over time, affected by global changes in economic world. For example in the
past, pension funds hold about 99% of their funds in government bonds and only
1% in stocks. But currently, when stock performs outstanding performance,
pension funds hold about 25% of their funds in stocks. Pension funds are now
the dominant players in the stock market.
Pension funds in Turkey are two types: private pension funds and public pension plans. Private pension funds are administrated
by the banks, a life insurance companies, or a pension fund manager. Anadolu
Emeklilik is live example for private pension funds. SSK, Emekli Sandigi are
public pension plans, that are give services to public workers.
Beside this, pension funds are highly
related with the trust. Households will not save their money in banks, pension
funds, or other financial institutions if they have no trust to them. The government
plays here an important role in protection household savings and regulating the
structural work of financial institutions. The legal legislation, like FDIC
increases the trust of people to the banks and others. As long as households
trust to private pension funds they deal with them.
Many turkish banks also gives private
pension fund services (Ak Bank- Ak Emeklilik), and outstanding increase in
pension funds rate is also related to people trust to the turkish banking, as
well as to the pension funds.
Finance Companies: Financial companies
acquire funds by issuing commercial paper or stocks and bond or borrowing from
banks, and they use the proceeds to make loans (often for small amounts) that
are particularly well suited to consume and business needs. The financial intermediation
process of finance companies can be described by saying that they borrow in
large amounts, but often lend in small amounts- a process quite different from
that of banking institutions, which collect deposits in small amounts and often
make large loans. There are three types of financial companies in Turkey: sales, consumers, and business.
Finance Companies are owned by a particular retailing or a manufacturing
company and make loans to consumers to purchase items from that company. Sales finance companies
compete directly with banks for consumer loans and are used by consumers
because loans can frequently be obtained faster and more conveniently at the
location where an item is purchased.
Finance Companies make loans to consumers to by particular items such as
furniture or home appliance, to make home improvements, or to help refinance small
debts. Consumer finance companies are separate corporations, or are owned by
banks. Typically, these companies make loans to consumers who can not obtain
credit from other sources and charge higher interest rates.
Finance Companies provide specialized forms of credit to businesses by
making loans and purchasing accounts receivable at a discount; this provision
of credit is called factoring. Besides factoring business finance companies
also specialize in leasing equipment, which they purchase and then lease to
businesses for a set number of years.
Mutual Funds: Mutual
Funds are financial intermediaries that pool the resources of many small
investors by selling them shares and using the proceeds to by securities.
Through the asset transformation process of issuing shares in small
denominations and buying large blocks of securities, mutual funds can take advantage
of volume discounts on brokerage commissions and purchase diversified holdings
(portfolios) of securities. Mutual funds allow the small investors to obtain
the benefits of lower transaction costs in purchasing securities and to take advantage
of the reduction of risk by diversifying the portfolio of securities held. Many
mutual funds are run by brokerage firms, but others are run by banks, or
independent investment advisers.
Mutual funds have seen a large
increase in their market share due primarily to the booming stock market.
Another source of growth was the specialization of mutual funds in dept
Funds that purchase common stocks
may specialize even further and invest solely in foreign securities or in
specialized industries, such as energy or high technology. Funds that purchase
debt instruments may specialize further in corporate, government, or tax-
exempt bonds, or in long-term or short-term securities.
Mutual Funds are primarily held
by households (around 80%) with the rest hold by other financial institutions
and non financial businesses.
Depository institutions, or
simply banks are the most important of all financial intermediaries and are
generally the first place we go when we decide to borrow money to buy a car, or
go to holiday.
Bank strategy simply is collecting
small deposits and making big loans, and as all economic units pursues the goal
to maximize their profits. Generally banks and Turkish banks as well have four
primary concerns: the first is to make sure that the bank has enough ready cash
to pay its depositors when there are deposit outflows, that is, when deposits
are lost because depositors make withdrawals and demand payment. To keep enough
cash on hand, the bank must engage liquidity management, the acquiring assets
to meet the banks obligation to depositors.
Second, the bank must pursue the
acceptably low level of risk by acquiring assets that have a low rate of
default and by diversifying asset holdings. The third concern is to acquire
funds at low cost, and finally they must decide the amount of capital they
should maintain and then acquire the needed capital.
banking sector constitutes a great part of the Turkish financial system. Many
of the transactions and activities taking place in both money and capital
markets are carried out by banks. Turkey’s financial system and its banking
sector are virtually synonymous as a consequence of the country’s economic and
are a number of factors that give banking its prominent role in the Turkish
economy. These are:
economic structure peculiar to Turkey,
choice to turn resources into long-term investments through the banks for the
objectives targeted in the development plans and annual programs, and the
establishment of banks by the state to finance certain sectors,
application of continental European banking practices as a model in the legal
structure of the banking system and
lack of a full-fledged capital market.
development of the Turkish banking sector can be analyzed within six separate
periods, which differ as to policy and method:
The Period of the
Money-changers and the Galata bankers (pre-1847):
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
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 came to Istanbul with the purpose of extending credits
to the Empire at high interest rates. The Ottoman Bank (Osmanlı
Bankası) was established in 1856. Its head office was in London and served
as the Central Bank until the 1930s.
Development of National
Banking and Implementation of Etatism (1909-1944)
years following the proclamation of the Second Constitution (1908) gave rise to
the national banking movement, which was a reaction to foreign banking.
national banks were established in Istanbul and Anatolia between the years 1908
and 1923. However, foreign banks continued to dominate banking activities due
to the consecutive wars (1911-1922), capitulations granted to foreigners and
scarcity of national capital.
the first National Economic Congress held in Izmir 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. İş Bankası (1924), Sanayi ve Maadin Bankası
(1925), and Emlak ve Eytam Bankası (1927) were established to provide
commercial, industrial and housing credits, respectively.
the adverse effects of the Great Depression on the balance of payments and the
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
the adverse effects of the Second World War, a significant rate of growth and
industrialization was achieved with the support of the newly established state
banks, which created a tremendous increase in capital stock of the private
in the early 1950s, etatism weakened because of positive developments in the
private sector, expansion of international cooperation 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 by 1960.
Planned Development Period
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.
recommended in the plans, several development and investment banks were
established to finance various sectors in the 1960s and 1970s such as the
Tourism Bank (Turizm Bankası) in 1960, Industrial Investment Bank (Sinai
Yatırım Bankası A.Ş.) in 1963, State Investment Bank
(Devlet Yatırım Bankası) in 1964, and the State Industry and
Worker’s Investment Bank (Devlet Sanayi ve İşçi
Yatırım Bankası) in 1975.
Internationalization in Banking (post-1980)
new liberal economic policy began to be implemented in January 1980, which
aimed at integration with world markets 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 adopted 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.
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 the
foreign exchange transactions in the banks. Beginning in 1984, the special
finance institutions, operating according to Islamic banking principles, also
became part of the financial system.
Interbank Money Market, which is administrated by the Central Bank, was
established in 1986 with the purpose of regulating liquidity in the banking
uniform accounting plan and accounting principles as well as a standard
reporting system were adopted in the same year. In 1987, the application of
external auditing of the banks in accordance with internationally accepted
accounting principles was started.
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 consultancy and trading in securities, underwriting
fund management, establishing mutual funds and financial consultation.
diversifying their services, banks improved their technological infrastructure
by extensive use of computer systems; began employing more qualified human
resources; and at the same time put an emphasis on training programs.
LEGAL FRAMEWORK AND
SUPERVISION OF THE BANKING SYSTEM
Banks are institutions by which funds accumulating in the
economy are collected and channeled to investors. This makes the public
supervision of banks essential.
banks in Turkey are subject to the Banks Act and to the provisions of other
laws pertaining to banks. The new Banks Act No.4389, which brought substantial
differences, was issued on June 23rd, 1999. Prior to the changes in
the Banks Act, the Undersecretariat of the Treasury and the Central Bank had
been the two main regulatory and supervisory bodies in the banking sector. With
the new Act, the Banking Regulation and Supervision Agency (BRSA) were formed,
which had financial and administrative autonomy. The mission of the Agency is
to safeguard the rights and benefits of depositors and create the proper
environment in which banks and financial institutions can operate with market
discipline, in a healthy, efficient and globally competitive manner, thus
contributing to the achievement of long-run economic growth and stability of
establishment of the BRSA, the Savings Deposits Insurance Fund (SDIF), which
had been under the authority of the Central Bank, began to operate under the
administration of the BRSA. However, with the
enactment of Act No. 5020 on December 26, 2003, the management of the SDIF was
separated from the management of the BRSA.
decision-making body of the Agency is the Banking Regulation and Supervision
Board (BRSB), which is appointed by the Council of Ministers and consists of
seven members. Following the appointment of the members of the Board, the
Agency commenced its operations as of August 31, 2000.
in Turkey have the status of joint-stock companies and are subject to general
controls under the provisions of the Turkish Commercial Code and of various tax
laws. Besides, banks are subject to special supervision by the Banking
Regulation and Supervision Agency. As the representative body of the banking
sector, the Banks Association of Turkey (BAT) aims at protecting and promoting
the professional interests of its members.
BRSA exercises its supervisory authority on a direct and ongoing basis through
the Board of Sworn Bank Auditors who is responsible for on-site examination of
the banks in terms of legal considerations and financial soundness.
Additionally, the banks’ financial statements are audited by external auditors
in accordance with internationally accepted accounting principles. Banks are
also examined by their own auditors, who are required to submit quarterly
reports to the BRSA.
the supervisory system has been further strengthened by legislative
arrangements and a number of decisions taken in accordance with the standards
of the prudential regulation exercised by the international banking community
and in general covered the following banking related areas:
· Foreign exchange exposures,
· Internal control and risk
Conditions to be met by bank owners,
Bank ownership control in transfer of shares,
Consolidated and cross-border supervision of banks,
· Accounting standards for
financial disclosure purposes,
· Prudential reporting and
loan loss provisioning.
Moreover, during 2003 and
2004, several improvements have been realized in terms of regulative and
legislative framework of the Turkish banking system;
SDIF has been separated from the administration of the BRSA and its
legislative framework has been renewed for the collection non performing loans
from the debtors of SDIF banks.
In July 2004, savings deposit insurance was limited to 50 billion TL (50
thousand New Turkish Lira (YTL), approximately 37.250 USD), which is expected
to decrease the moral hazard effect.
Risk based deposit insurance system has been settled.
In order to increase intermediation costs, stamp duties and charges on
loans were removed, deposit insurance premiums were decreased considerably and
special transaction taxes on deposits were lifted. Furthermore the government
has eliminated the Resource Utilization Fund on commercial loans.
standards has been brought mostly in lines with International Accounting
Also some legislative changes and
new targets are expected to realize in 2005;
The new banking act, draft act on financial services, prepared by BRSA
is expected to become into force. The draft act aims at setting a competitive
environment, reducing the risks and bringing transparency in the banking
In order to improve the efficiency of supervision of the banking sector,
risk based supervision model is being designed by BRSA.
Given the recent technological innovations in financial sector more
emphasis will be put into IT based audit systems.
A new draft law on credit cards is being prepared by BRSA.
· It is
expected that regulation and supervision power of non bank financial
institutions to be transferred from Treasury of Turkey to BRSA
THE RECENT BANKING SECTOR
the November 2000 and February 2001 crises, which had negative impacts both on
the economy and the banking system, an extensive streamlining plan; Banking
Sector Restructuring Program was started and announced to the public in May
2001 by the BRSA. The restructuring program was based on the following main
pillars: (1) Restructuring of state banks, (2) Prompt resolution of SDIF banks,
(3) Strengthening of private banks, and (4) Strengthening the regulatory and
supervisory framework. Progresses achieved in these fields are presented below:
1) Restructuring of State Banks; Financial restructuring of state banks was completed, and correspondingly
they began to make profits. Similarly, with the requirements of modern
banking and international competition,
significant steps have been taken within the framework of operational
restructuring. Besides, the number of branches of the state banks which
was 2,494 as of December 2000 was reduced
to 2.236 as of December 2004; and the number of personnel which was 61,601 was
reduced to 39.454.
2) Resolution of SDIF Banks; 21 banks were taken over by the SDIF between 1997 and 2003. After
the BRSA began to operate on August 31, 2000 (in addition to the existing eight
banks) the administration of 13 banks was assumed by the SDIF according to the
resolutions of the BRSA. Of these 21 banks, 13 banks were merged; five banks
were sold to domestic and foreign investors; and the licenses of two banks were
revoked. By the end of December 2004 there was one bank which remained under
the administration of the SDIF, Bayındırbank,
the bridge bank for the resolution of the SDIF banks.
3) Strengthening the Private Banking System; Within the
scope of the program focused on private banks, primary steps were taken towards
strengthening the capital structures of private banks with their own resources
and limiting market risks. 25 private banks were subjected to a three-phase
audit process. Cash capital increases, correction of provisions set aside for
non–performing loans, positive changes engendered in the market risk and valuation
of securities were taken into account during these evaluations and accordingly, three banks were determined
to have capital requirements. The capital requirements of these banks were
provided either by their shareholders and or by the allocation of subordinated
loans given by the SDIF upon BRSA decisions. With the improvement observed in
profitability, the average capital adequacy ratio of the private banks was
recorded at 28.2% as of December 2004.
4) Strengthening the regulatory and supervisory framework
Concurrently with the financial
and operational restructuring of the banking sector, significant progress has
been made in legal and institutional regulations. Within this context,
regulations were issued to prevent risk concentration in loans, limit
participation of banks in non-bank financial institutions and ensure
preparation and disclosure of the balance sheets of the banks in compliance
with international accounting standards. Among many other structural reforms,
the banking reform intended to upgrade and modernize the current rules and in
general covered the following banking related areas: capital adequacy, foreign
exchange exposure, internal control and risk management, deposit guarantee
schemes, accounting standards for financial disclosure purposes, prudential
reporting and loan-loss provisions.
As a result, the
restructuring program resulted in the following in the banking sector:
- The banking sector entered a
- The significance of state-owned
and SDIF banks in the system has declined.
- Financial risks in the banking
sector have been reduced to manageable levels.
- The capital structure of the
sector has been strengthened.
- The sector has re-entered a
- The profitability performance
of private banks has improved and state-owned banks have started to
At the end of
September 2004, the Turkish banks numbers were as follow:
Number of Banks
And lastly, let’s say few words
on this table. As we can see, after banking crisis in November 2000 and
February 2001, the numbers of commercial banks as well as all other banks has
declined significantly. If in 1999 number of commercial banks were 62, in 2004
it has declined to 35. These crisis’s has huge negative impact on Turkish
banking system, but nevertheless, it is still take the bull by the horns, and
as many foreign banking giants as HSBC, Citibank, Fortis have entered the
Turkish banking market it is sounds like it’s has a potential capacity and bright
F.S. Mishkin “The Economics of
Money, Banking and Financial Markets” Colombia University Press