Turkey’s financial system and its banking sector are virtually synonymous as a consequence of the country’s economic and historical development. Many of the transactions and activities in both the money and capital markets are carried out by banks, as the banking sector constitutes the major part of the Turkish financial system.

The Turkish Financial System (*)

The Turkish Banking System: Number of Institutions, Branches and Personnel

The new liberal economic policy in the 1980s aimed at integration with world markets by establishing a free market economy. As a reflection of this policy, this period witnessed continual legal, structural and institutional changes and developments in the Turkish banking sector. In these years, a series of reforms were undertaken to promote financial market development. The main aim of these reforms was to boost 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 the banks' foreign exchange transactions. Beginning in 1984 special finance institutions – renamed participation banks through recent changes in banking regulations, and operating according to Islamic banking principles – also became part of the financial system.

The Interbank Money Market, which is administrated by the Central Bank, was established in 1986 with the purpose of regulating liquidity in the banking system.

A uniform accounting plan and accounting principles as well as a standard reporting system were adopted in the same year. In 1987, external auditing of the banks in accordance with internationally accepted accounting principles was initiated.

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 trading in securities, underwriting fund management, establishing mutual funds and financial consultation.

Besides diversifying their services, banks improved their technological infrastructure by extensive use of computer systems; began employing better-qualified employees; and at the same time put an emphasis on training programs.

All banks in Turkey are subject to the Banking Act and to the provisions of other laws pertaining to banks.

 Prior to the changes in Banks Act No. 4389, which went into effect on June 23, 1999, the Treasury Undersecretariat and the Central Bank had been the two main regulatory and supervisory bodies in the banking sector. With this Act, the Banking Regulation and Supervision Agency (BRSA), with financial and administrative autonomy, was formed. 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 the country's long-term economic growth and stability.

 With the establishment of the BRSA, the Savings Deposits Insurance Fund (SDIF), previously under the authority of the Central Bank, started to operate under the administration of the BRSA. Later on, with the enactment of Act No. 5020 on December 26, 2003, the management of the SDIF was separated from the management of the BRSA.

The decision-making body of the agency is the Banking Regulation and Supervision Board (BRSB), which is appointed by the Council of Ministers (Cabinet) and has seven members. Following the appointment of the members of the board, the agency commenced its operations as of August 31, 2000.

Banks 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. Moreover, banks are subject to special supervision by the Banking Regulation and Supervision Agency^[1]. As the representative body of the banking sector, the Banks Association of Turkey (BAT) aims to protect and promote the professional interests of its members^[2].

The BRSA exercises its supervisory authority on a direct and ongoing basis in terms of legal considerations and financial soundness. Additionally, the banks’ financial statements are audited by external auditors in accordance with internationally accepted principles of accounting. Banks are also examined by their own auditors, who are required to submit quarterly reports to the BRSA.

Recently, 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:

For the purpose of bringing further competitive force to the financial system, minimizing the risks that may arise, reducing the costs of operation and intermediation to achieve integration with other regulations and implementations of financial markets, a more active and more transparent financial system by providing a more active course of the markets, a new Banking Act (5411) was issued on November 1, 2005.

In the process of preparing this act, international standards were used, including the National Program, Urgent Action Plan of the 59th Government, European Union Improvement Report, Turkey Report of the Organization for Economic Cooperation and Development (OECD), EU directives, Bank for International Settlements (BIS) Core Principles for Effective Bank Supervision, OECD Corporate Management Principles, the laws of EU member states, important provisions in the laws of certain countries, and the experience of the BRSA and SDIF.

• Financial holding companies, leasing, factoring and consumer finance companies came under the supervision and surveillance of the BRSA.

• Definitions of assurance fund, development and investment bank, fund bank, participation bank, financial institution, financial holding company, control, qualified share, savings deposit, private current account, participation account, participation fund, savings account, support service institution and offshore banking are included in the act.

• Activities that banks may engage in are listed clearly and in compatibility with the directives of the EU, in order to identify financial institutions and determine the scope of effective supervision and surveillance.

• Conditions for a clear, transparent partnership structure, organization scheme which should not hinder effective supervision of the BRSA, and principles of corporate governance are brought for banks to be established in Turkey, and a minimum YTL 30 million paid-up capital is foreseen.

• As part of the principle of transparency, banks shall post their articles of association on their websites.

• For banks and the financial holding companies, good governance is stipulated to govern by developing principles of corporate management.

• The act includes provisions regarding the establishment of an audit committee with all members chosen from non-executive members of the board of directors, to assist board of directors for on-side and off-side supervision activities. The main duties of the committee are to be monitoring and assessing the adequacy of internal control, risk management and internal audit systems, ensuring accounting and reporting systems are operating in a sound manner, and producing reliable information. The act states that the duties, authorities and responsibilities of the audit committee shall be determined by the board of directors.

• The act provides principles concerning the authorization of auxiliary services institutions.

• The minimum level of capital adequacy is set at 8% in line with other countries, and liquidity adequacy is foreseen in the act.

• The act forbid banks from transferring funds to close the deficit of their funds or to foundations established by their employees for health and social services or retirement saving purposes.

• The act states that the amount of donation which banks and institutions subject to consolidated supervision shall not exceed four per thousand of the bank’s own funds, and at least half of these donations can be done in fields exempted from tax by law.

• Conducting transactions with shareholders with dominant influence, the board of directors, their husbands, wives and children or subsidiaries leading to hidden profits is prohibited.

• Processes on taking corrective, rehabilitating and restrictive measures are listed in line with their priority. Institutions whose financial structures cannot be improved despite taking these measures shall be transferred to the fund or have their license revoked.

• The act includes provisions to help the agency work in a more effective, productive, transparent and accountable manner.

• Independent auditing, evaluation and auxiliary institutions are required to get liability insurance for any loss stemming from their services.

• A supervision system which can respond to rapid changes and new necessities of the financial markets shall be established. Institutions covered by the act shall be audited by the professional staff of the authority or by independent audit institutions specialized in these subjects, as well as sworn bank auditors.

New regulations harmonized with the Banking Act have been put into force through publication in the Official Gazette on November 1, 2006.

As of December 2006, there were 50 banks operating in Turkey. Thirteen of these banks are investment and development banks, and the rest are commercial banks. Four of the commercial banks (excluding one SDIF bridge bank) and three of the investment banks are state owned. The total number of foreign banks is 15. There are four participation banks as well.

There are no local banks, and most of the banks are multi-branched. The total number of branches in the system rose to 7,296 as of December 2006.

The market shares of state-owned banks, private banks, the SDIF, foreign banks and investment and development banks are summarized in the table below: 

Market Shares by Groups

The total amount of deposits of the sector as of the end of December 2006 was 307.6 billion NTL. 186.3 billion NTL of these deposits are denominated in TL, and 121.4 NTL billion in FX. The fact that 87.3% of the total is held by the 10 large-scale deposit banks shows the high level of concentration in the sector. The maturities of most of the deposits are short-term. Deposits having maturities of less than three months constitute about 95.2% of total deposits.

Since 2002, total assets of the Turkish banking system have been growing steadily. As of 2006 total assets reached 499.7 billion NTL. During this period, loan portfolio TBS also showed impressive growth. As of December 2006, the amount of in-cash loans extended by banks was 219 billion NTL. Non-performing loans totaled NTL 8.550 billion as of December 2006. The amount of provisions set aside for these loans is NTL 7.665 billion.

 Securities portfolios play an important role in the balance sheets of banks. Securities portfolios hold 31.8% of total assets of the banking sector

The results of the financial and operational restructuring of banking system show an improvement in the profitability ratios of the whole sector. The net profit of large banks rose from 2.975 NTL million in 2005 to 8.019 NTL million in 2006. The net profit of small- and medium-sized banks rose from 2.740 NTL million in 2005 to 2.955 NTL million in 2006.

The capital structures of the banks in the system were the core of the restructuring program. The three-phase audit revealed the real capital needs of private banks. The capital structures of banks having capital shortages were strengthened, and capital was set aside for market risks. The average capital adequacy ratio of the whole sector as of December 2006 is 22.2%.

The open FX position/own funds of the system, which were a constant problem over the last decade, fell to $141 million by December 2006. In addition to foreign exchange risk, interest rate and credit risks also came down to manageable levels.

^[1] Detailed information on the BRSA and its activities can be found at the agency’s website, www.bddk.org.tr

^[2] Detailed information on the BAT and its activities can be found at its website, www.tbb.org.tr