Turkey: Open, Dynamic & Productive Finance Market

Banking & Finance Law Reform İn Turkiye
Last Updated: 17 September 2007
Article by Hakan Hanli

General Overview: "Productivity & Growth"

Turkiye’s growing economic stabilization has given rise to increased activity in the banking and finance market. Turkiye’s banking and finance sector is re-positioning itself to better facilitate growth of the private sector, as the financial sector’s development was impeded by past macro-economic instability and fiscal deficits, crowding out credit generation to the private sector. As a result, the sector today is smaller than its potential size and performing below its potential in terms of prudently allocating credit in the economy.

Turkiye is an emerging market with its own dynamics. Increasing credit to the private sector will not only facilitate capital accumulation, leading to growth and better labor productivity, but it will also improve the allocation of capital leading to Total Factor Productivity ("TFP") growth.

Banking & Finance Sector: "Law & Policy Reform"

Corporate Governance & Transparency

Turkiye’s banking and finance sector provides a good payment system and has efficiently mobilized savings, but the mobilized funds have historically not been supporting private sector investments and have instead been largely invested in a small number of firms and in Government securities. Therefore, it has neither allocated capital to the private sector efficiently, nor has it diversified risks for its investors.

The European Union ("EU") accession process is a positive force for change as the acquis outlines a number of effective standards for financial sector supervision and standards for ‘Corporate Governance’ and ‘Transparency’.

The new Banking Law stipulates that the Banking Regulation and Supervision Agency ("BDDK") should determine a complete set of corporate governance rules based on similar rules introduced globally, especially in economically developed countries, to protect the rights of various stakeholders, managers, and creditors of organizations, such as publicly held companies and banks that have a decisive role in the management of the funds of the third parties.

The "Regulation of Corporate Governance Principles of Banks" defines the "Corporate Governance" concept as follows: "Corporate Governance refers to the ‘style of management’ of a bank by the bank top management;

  • according to predetermined targets and goals;
  • pursuant to the Banking Law, the regulations issued by virtue of the Banking Law, and other relevant laws and regulations, as well as the bank’s articles of association and internal by laws and regulations, and the general banking ethics rules; and
  • in such manner to protect the rights and interests of all stakeholders and shareholders and deposit holders of the bank".

In short, this definition refers to the concept of "regular management of a bank by the bank’s board of directors in compliance with the laws and regulations and by protecting the rights and interests of shareholders and deposit holders of the bank". Accordingly, this definition may be better understood on the basis of the contents of principles enumerated in the Regulation.

An Open Market for Financial Services

The EU process aims to create "an open market for financial services" and as well as to create a level playing field by applying consistent Governance and Supervisory Systems across the EU member states. Therefore, the EU legislations ("EU acquis") lays out standards for supervision of financial institution and governance that will guide near term banking and finance sector reforms in Turkiye.


Turkish Government’s commitment to the EU accession is also stimulating financial sector development through its positive impact on investor confidence. The EU accession establishes a medium-term policy anchor, which creates trust among the International and European investors that Turkiye is on a harmonization path with the EU.

In February of 2005, the Turkish Government successfully marketed a five (5) year bond with a yield lower than the one (1) year Treasuary bill ("T-bill"), and international issuers have followed with fixed coupon bond issues with maturities of as much as ten (10) years. These are positive forces for the development of access to credit and in particular medium, and long, term credit products in local currency.

Banking Sector Reform: "New Banking Law"

The stabilization decisions dated January 24, 1980 mostly affected the last 25 years of Turkiye in respect of its economy. Such decisions, shortly referred to as the "Decisions of January 24", have altered the mentality in the Turkish economy. In environment before 1980, the state had ‘a massive role’ in the economic life with a state-oriented hybrid economy.

The financial liberalization process speeded up in the second half of the 1980s and the Turkish banking system entered into a structural change. The main policy target of the banks became the development of financial tools for asset and liability management. The Banks in Turkiye are in the process of transforming their business models towards better assessing credit risk and providing value added services for their clients.

The new Banking Law (numbered 5411, dated November 19, 2004) abolishing and replacing previous Banking Law came into force on November 1, 2005. The new Banking Law, for the first time, lists the activities that can be carried out by banks. These listed activities will be add to their legal capacities in terms of their activities as joint-stock companies.

World Bank ("WB")

The World Bank has supported the recovery and development of the banking sector since the financial crisis of 2000/2001 most importantly through a series of adjustment loans, the Programmatic Financial and Public Sector Adjustment Loan ("PFPSAL I – III"). Between 1997 and 2002, twenty banks were taken over by the BDDK, and all but one have been liquidated, merged or acquired.

The BDDK system has been strengthened, and three large deposit taking public banks have been operationally restructured and recapitalized. In tandem with the economic recovery, the banking sector is now evolving from a mechanism for funding the Turkish Government borrowing needs to a sector that intermediates finance for the private sector.

Turkiye continues on its path of economic and financial stability, the key challenges are "to strengthen the prudential framework" and "to create institutions" that will facilitate effective and efficient expansion of credit to the private sector, which in turn will foster competitiveness, growth and employment in the private sector.

EU Accession Process of Turkiye (BASEL II)

The regulatory and supervisory frameworks are still in the process of building capacity while adapting to the EU and International Convergence of Capital Measurement and Capital Standards ("BASEL-II") requirements [were included in the EC Capital Requirement Directives ("CRD") (dated/numbered 2006/48/EC and 2006/49/EC)].

The credit markets, which to a great extent remained dormant during the time of economic volatility, need institutional support in the areas of auditing and accounting, credit information system, collateral regime, enforcement of contracts, as well as more sector specific reforms, for instance in the mortgage market. While such institutional underpinnings merited little attention during the time of economic volatility, they now offer great potential for developing an effective financial market.

An effective regulatory and efficient supervisory system, an effective accounting and auditing system, a good credit information infrastructure, a good collateral registry and regime, contract enforcement and an effective judiciary will be the foundations for an effective and efficient financial market.

According to BDDK’s resolution (based on the Quantitative Impact Evaluation Reports) dated July 25, 2007, BASEL II provisions’ implementation has been postponed until 2009 in Turkish banking sector.

Capital Market Reform in Turkiye: "Equity,Bills, Bonds & Hedge Funds"

Turkish capital market has three well development components;

Equity market

The equity market has been growing steadily in terms of listed firms, while the market capitalization has been more erratic over the same period reflecting mostly the volatility in pricing of equity.

The equity market provides an important source of financing for large enterprises and an essential alternative to bank (or debt) financing. Trading in equity has been growing rapidly over the same period. The market today is quite liquid in comparison with other emerging markets.

Turkish Government Bills and Bonds market

The traded corporate bond market is virtually non-existent after it dried up in the mid-90’ies, but even before that, the market was small, but the Turkish Tax reforms are likely to support the re-emergence of the market.

The reforms of the "Withholding Tax" on capital gains and interest designed to level the playing field between Government securities and other debt instruments is expected to support the re-emergence of the corporate bond market. A Withholding Tax of 10% will be applied to all capital gains and interest including Turkish Government securities starting January 1, 2007.

This will bring deposits, Government bonds, and corporate bonds on a level playing field with respect to taxation. The Government securities are still held in large part by banks, but also by Turkish individuals, omestic and foreign investors. The wide distribution of the securities helps sustain liquidity when the market is under stress, and therefore reduces liquidity risks for banks and other financial institutions.

Mutual / Hedge Funds

The mutual funds have become an important savings vehicle in Turkiye. The mutual funds grew rapidly after the crisis in 2001. The mutual funds are offered by the banks and are close substitute to time deposits and are more flexible instruments for the investor than directly holding Government securities.

The emergence of mutual funds has put a downward pressure on the T-bill to deposit spreads, where the banks used to earn much of their income, but the development has also reduced risk in the financial system.

Securitization: "Alternative Investment & New Tool"

The asset-back securities were considered as a new tool to achieve this target.

In the last 20 years the major banks in Turkiye securitized their: (i) international credit card receivables due from credit card networks; (ii) export receivables; (iii) checks and travelers check remittances; (iv) electronic remittance payments (generated primarily from Turkish workers in the EU Countries); and (v) diversified payments; in the international financial markets.

These future-flow transactions provided long-term, lower-cost hard currency financing to banks in Turkiye. The Turkish banks that have lower ratings from the credit rating agencies, but have high-quality assets, i.e. receivables, could get cheaper funds through securitization as compared to borrowing from the money markets. The major banks involved in international asset securitization became more liquid, lowering risk and cost.

Turkish Capital Market has paid considerable attention to "securitization" as an alternative tool for funding. Turkish Capital Market Board ("SPK"), the main regulatory body responsible for the supervision and regulation of capital markets, has issued a Communiqué on the "Registration of the Asset Backed Securities with the Board and the Principles of Establishment and Operation of General Finance Companies" ("Communiqué 1992") on July 31, 1992.

In Turkiye, the securitization has been practiced as asset backed securitization. Other types of securitizations, e.i. mortgage-backed securitization, is still being regulated. However, Turkish issuers have turned to international markets and in the last couple of years, considerablesecuritization deals from Turkish issuers have been undertaken in the international markets.

Legal Framework: "Basic Features"

  • Asset Backed Securities

    According to the Communiqué 1992, ‘asset backed securities’ are defined as negotiable instruments backed by receivables of the issuer or of a third party assumed by the issuer pursuant to the terms of the Communiqué 1992.

  • Issuers of Asset-Backed Securities
    The scope of the Communiqué 1992 sets out an exhaustive list of issuers as follows: (a) general finance companies; (b) banks, financial institutions, leasing companies; and (c) real estate investment companies.

Apart from general finance companies, other issuers are specifically regulated entities under the laws of Turkiye. The General Finance Companies are introduced to the market via the Communiqué 1992.

They are defined as special purpose vehicles formed solely to purchase receivables from a third party and to issue asset baked securities. According to the Communiqué 1992, a General Finance Company is required to: (i) be formed in the form of a Joint-Stock Company; (ii) have a paid in capital of at least TRY 10 billion; and (iii) specify in its commercial title the phrase of "General Finance Company".

Assets Packaged for Securitizations

The receivables against which asset backed securities may be issued, as follows: (i) the consumer loans; (ii) the housing loans; (iii) the receivables from finance leasing agreements; (iv) the export receivables; (v) other receivables; (vi) the agricultural loans; and (vii) the receivables of real estate investment companies.


The Communiqué 1992 introduces two thresholds, as follows; (i) the total receivable portfolio of a general finance company cannot be more than twenty (20) times of its net worth, i.e. paid in capital plus reserves; and (ii) the total value of asset backed securities cannot be more than 90% of the value of the backing receivables.

Procedure Applicable to Issuance of Asset Backed Securities

According to the Communiqué 1992, the asset backed securities to be issued are required to be offered to public.

Assignment of Receivables to Banks or General Finance Companies

According to the Communiqué 1992, receivables shall be assigned in accordance with the principles and provisions of the Turkish Code of Obligations (‘BK’), the main code regulating contracts.

Guarantee Requirements

The SPK may request from the issuers, other than banks, bank guarantees to secure their obligations vis-à-vis the investors. Alternatively, the SPK may require the issuers, other than banks, to deposit 10% of the nominal value of the asset backed securities to be offered to the public with a bank.

Stock Exchange & Going Public

Turkish capital markets have shown considerable degree of development during the last decade and the Istanbul Stock Exchange ("IMKB"), consequently showed a relative increase during the same period. Although, in early 80’s, there was a reluctance among private companies about "going public" or ‘using alternative funding tools’, due to a tendency to keep the management control of the company and not to disclose information relating to the company. Nowadays, Turkish companies have undertaken both domestic and international offerings and apply different funding tools.

Conclusion: "Building Trust & Sustaining Stability"

Turkiye’s growing economic stabilization has given rise to increased activity in the financial market. The reduction of interest rates is producing a huge increase in demand for both retail and commercial lending and has lead investors to move away from government securities into more attractive sources of return.

In the recent years, the amount of total loans in Turkiye has increased by 25% and is expected to continue growing. Once the appropriate legal framework has been finalized demand for mortgage housing is also expected to increase dramatically.

In practice, all of this means that Turkish banks need ready and ever increasing access to capital in order to meet their domestic demand. Thus international financial players are expected to provide the Turkish financial community with liquidity and it is expected that the presence of foreign banks will increase to 10 % this year following a growing M&A activity.

Turkiye is an emerging market with its own dynamics. Future-flow securitizations have become a popular source of funding for the major Turkish banks, as these transactions allow access to lower cost hard currency. A well-developed legal system has provided the basic framework for cross-boarder securitization structures in Turkiye.

There is also a need for a new mechanism, which would be compatible with the practice utilized in International and European markets. The two key potential risks to the financial market are as follows: (i) sharp increases in international interest rates, which will likely be combined with capital outflows from emerging markets; and (ii) a loss of political commitment to the key policy anchors: the IMF program and the EU accession process, which could affect, inter alia, the pending reforms in the state bank and/or regulatory spheres.

The banking and finance market confidence in the Turkish economy is based on ‘a trust in a continued reform oriented policy’ that will insure fiscal sustainability, as well as financial stability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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