Background and introduction
Law No. 1567 on Protection of Turkish Currency (the Law) came into effect on 25 February 1930. The Law vested the Turkish Council of Ministers (the Council) with the authority to set up regulatory measures for protection of the value of Turkish currency. Based on this authority, the Council adopted the Decree No. 32 on Protection of Turkish Currency which came into effect on 11 August 1989 (the Decree). The Law, the Decree and various Communiqués of the Central Bank of Turkey (the Central Bank) set out the fundamental principles on domestic and international exchange of currencies, precious metals, goods and capital in Turkey.
Due to the changes in the Turkish economic climate and varying political approaches, the Council has amended the Decree many times since its promulgation in 1989. The Council's latest amendments effective from 16 June 2009 are significant (the 2009 Amendments). In particular, the Council has made some comprehensive changes to article 17 of the Decree (entitled "Loans"). We summarise some of the key changes to article 17 below:
1 Extension of foreign currency loans by Turkish banks and residents
The 2009 Amendments change the characteristics of the foreign currency loans described in article 17/b of the Decree, and introduce new types of foreign currency loan. Therefore, following the 2009 Amendments:
- Turkish Residents (defined broadly as "real persons and legal entities whose legal domicile is in Turkey, including the Turkish citizen employees, self-employed and individual business owners abroad") may extend commodity loans according to applicable import and export regimes.
- Turkish banks may extend foreign currency loans of the following types:
- Foreign currency loans for financing exports, export considered sales and deliveries. Please note the 2009 Amendments have cancelled the 18-month minimum term condition that previously applied to such loans. A circular of the Central Bank dated 22 June 2009 confirms this cancellation but notes the loans shall still be subject to the applicable tax legislation and the banks are responsible for ensuring that their clients are fully told about the tax implications of these loans.
- Foreign currency loans which are allowed by an investment incentive certificate of a borrower or for financing investment goods.
- Foreign currency loans which are provided to Turkish entrepreneurs engaged in business abroad, and to Turkish residents that have undertaken works through international or domestic tenders or defence industry projects approved by the Undersecretariat of Defence Industry.
- Foreign currency loans which are of USD$5 million or more and have an average term of more than one year. Please note the circular notes that Turkish banks can extend these loans to real persons as well as legal entities. Another circular of the Central Bank dated 8 September 2009, allows Turkish banks to extend these loans in multiple tranches. However: (i) the first tranche of the loan must be at least USD$5 million; and (ii) the average term of the loan (taking all tranches into account) must be more than one year.
- Foreign currency loans which are for commercial or occupational purposes in exchange for certain security. Borrowers may provide foreign currency deposits held in Turkish banks and/or securities issued by or with the surety of the central administration or central bank of a member state of the Organisation for Economic Co-operation and Development as such security. However, the foreign currency loan amount cannot exceed the value of such security. The Central Bank's circular of 22 June 2009 states the relevant security must be secured by pledge or transfer agreement.
- Foreign currency loans which are permitted or set up by the Ministry associated with the Undersecretariat of Treasury.
Although new types of foreign currency loan are allowed under the 2009 Amendments, one consequence of the 2009 Amendments is that Turkish banks are no longer able to offer real persons foreign currency real property mortgages. This ensures that Turkish banks/borrowers are not exposed to foreign currency risk on the purchase of Turkish real property.
2 Extension of foreign currency indexed loans by Turkish banks to Turkish residents
On 16 June 2009, the Council included a new paragraph (e) in article 17 of the Decree stating that: "Banks may extend foreign currency indexed loans to Turkish residents for commercial or occupational purposes."
According to the Central Bank's circular of 22 June 2009, Turkish resident real persons must provide Turkish banks with:
- an official statement from the relevant professional organisation stating the relevant real person is engaged in commercial or occupational activities;
- their tax id number; and
- a written statement that the loan will be used for commercial or occupational purposes.
This circular also states the banks cannot extend the term of the foreign currency indexed loans that have been already extended to real person Turkish residents before the effective date of amendments to the Decree (i.e. 16 June 2009).
3 Limits on borrowing of foreign currency loans and foreign currency indexed loans by Turkish resident real persons
On 16 June 2009, the Council included a new paragraph (f) to article 17 of the Decree. According to this new provision, real person Turkish residents cannot secure foreign currency loans or foreign currency indexed loans in Turkey or from abroad, other than:
- foreign currency loans described in article 17/b of the Decree (as detailed in paragraph 1 above); and
- foreign currency indexed loans described in article 17/e of the Decree (as detailed in paragraph 2 above).
Based on this, Turkish resident real persons will not be able to secure foreign currency loans from abroad, effective 16 June 2009. The reasoning behind this outcome is the foreign currency loan types defined in article 17/b of the Decree can only be extended by Turkish residents.
Conclusion: protection of the Turkish currency and Turkish banks
Therefore, the 2009 Amendments protect the Turkish currency by ensuring that Turkish residents use Turkish banks for any foreign currency loan transactions.
Guner Law Office was established in 1996 and has since grown into one of the major corporate, M&A, banking, litigation, energy and TMT practices in Turkey. Guner Law Office is headed by Ece Guner and works with international law firm Denton Wilde Sapte.
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.