Finance Sector, Financial Regulations and Banking

The dramatic rise in non-performing loans, duty losses in the domestic banking sector, abusive loan practices, short lasting coalition governments, deficient monitoring and international financial crises were among some reasons why the financial and banking reforms had been performed in Turkey.

The Banking Regulation and Supervision Agency (BRSA) and the Capital Markets Board of Turkey (CMBT) are two key and significant public institutions that supervise the Turkish financial markets. 

In relation to international developments such as the Mexican and Asian crisis, the Basel Standards which includes new regulations and audit methods were announced to adopt the financial system well into new changing international conditions since the functioning banking law was insufficient against external shocks.

The Turkish finance sector was dominated by the banking sector with a few products before the 1980s. Credit programs based on the controlled interest rates, highly controlled capital account, entry restriction into the banking system, lack of competition and efficiency, a financial transaction in shallow markets, bank-dominating finance market, and strict and high reserve requirements were the main characteristics of the period. The regulated interest rates before the 1980s caused banks to compete for deposit collection across countries by opening new branches.

The liberalization and reform steps were the prerequisites of the outward-oriented growth model in which the Turkish economy converted its economic growth strategy from inward and import-oriented to outward and export-oriented in January 1980. In parallel to the outward-oriented growth strategy, some reforms were put into force.

The government relaxed the entry barriers in the banking system to promote competition and to raise efficiency. Controls on interest rates were removed and directed credit programs were reduced to create the ground for the equity and bond markets. It is important to note that prior to the 1980s, the government had controlled interest rates since the 1940s and the share of the credit program in total loanable funds was almost 75%.

Control on interest rates

Directed credit program

Uncompetitive and inefficient banking sector

Finance sector dominated by the banking sector

Very few foreign banks

Few banking products and services

Entry barriers in the banking sector

High duty losses of public banks

The Turkish finance sector is composed of several economic actors: banking, capital markets, and insurance.

Banks are at the center of the regulations regarding the financial system due to the fact that they constitute the largest portion of financial institutions in the Turkish economy. The main purpose of the regulations implemented to control the capital structure is to minimize the risks related to banking activities.

The lack of private savings, traditional saving methods, insufficiency of alternative financial instruments can be listed among the factors why the Turkish banking sector has difficulties in collecting deposits.

Banks having a higher loan to deposit ratio might face liquidity risks.

One of the most critical indicators of the outlook of the banking sector is nonperforming loans.

The increase in non-performing loans indicates that loans are problematic in terms of repayment which adversely affects the wellbeing of the banking sector.

A successful or performing loan provides the interest income in which a bank wants to create a profit and extend fresh loans.

If the loan customer does not make the payment specified in the contract for a term of 90 days or more, the bank defines this loan as nonperforming.

With financial globalization, the opportunities for local firms to obtain loans from foreign markets have improved considerably. Compared to domestic borrowing opportunities, firms can find cheaper loan alternatives, but it might create a big risk related to exchange rate volatility. Especially in periods of high exchange rate volatility, it is observed that some firms which have a high dependency on foreign loans do not manage their borrowing well. Therefore, external borrowing of both financial and non-financial sectors needs to be well managed to decrease the exchange rate risk. Firms with debt in a foreign currency might have difficulties in their repayment due to the exchange rate risk. Exchange rate risk may affect not only the firms but also the banks that provide loans to the firms.

During the period between 2002 and 2016, as an emerging economy, Turkey witnessed a significant reduction in interest rates, primarily due to effective financial legislation, political stability and capital inflows.

Interest and inflation rates, which are directly related to each other, are the most influential factors on the performance of the finance and banking sectors. The loans supplied by the banking industry or time deposit returns are highly sensitive to the changes in the interest rates. Therefore, the monetary policies of the Central Bank of the Republic of Turkey and its decision for policy interest rates have a direct impact on finance, banking sectors, investment, consumption, and saving levels.

The Basel III standards are mainly based on 3 principles: minimum capital requirements, effective supervision and financial discipline.

Private economic actors consider their entire life span, wealth level, future income, relativeprices, individual or corporate preferences and then decide how much to save or consume.