Clute Institute International Conference June 2012

Rome, Italy

The Development Process Of The Banking Sector In Turkey And The Effects Of Foreign Capital On The Turkish Banking Sector
Lecturer Aytac Demray, Selcuk Unversty Turkey Lecturer Emre Gokturk, Selcuk Unversty, Turkey ABSTRACT Throughout the history of Turkish Republic the Turkish banking sector has been the leader sector that takes the most of foreign investments. But these foreign investment activities in this sector has increased or decreased from period to another period. It is seen that the periods when the crises are effective on the sector, the ratio of foreign capital decreases although the periods when the economy is getting stronger, the ratio of foreign capital increases again. The changes in states understanding of economy policies are closely related to increases and decreases of this share. At various times state adopted import substitution policies in economy. In these periods entry of foreign capital to the sector was limited by the government. After that period open and liberal economy policies are adopted by the government. In the period of this policy is adopted entry of foreign capital to the economy is freed. During the same period Investment and Encouragement Laws came into force. By the effect of this law export earnings were increased and entry of hot money provided to the country. In this study, Positive and negative effects of foreign capital on Turkish economy especially on banking sector- since Ottoman Empire examined adhering to chronological order.

1- BANKING SECTOR IN THE LATE TERM OF OTTOMAN EMPIRE Ottoman Empires closed economy came in to a path of integration with the world economy because of the increase in foreign trade activities. The trade agreements with England and all other European countries in 1838 led the Ottoman Empire to the rapid increase in foreign trade activities in mid-19th century. This increase in foreign trade in the Ottoman Empire affected Ottoman Economy in two ways. First of all Ottoman Empires Economy became integrated to world Economy and, second, the growth of foreign trade deficits in Ottoman Economy increased. Although, before the Tanzimat period, the policies of Ottoman Empire were on gaining all important trade routes, Greek, Armenian and Jewish minorities dominated all the commercial activities. (Yldz, 2010, 2) Beside this, there were any institutions which were running banking activities and there wasnt any job called banker in Ottoman Empire. There was only money-changer who was running partly similar activities with banker. The money-changers who were doing more important financial affairs became to be known as banker later on. The bankers who were staying in Galata region in Istanbul and were rich enough to borrow money for the state were called as Galata Bankers. After all, the Galata bankers would establish a bank called Istanbul Bank (Banque de Constantnapole) by states permission and with a 2 -year contract to keep exchange market price. This institution was the first bank which was established in Ottoman Empire borders. But the financial difficulties 417

Clute Institute International Conference June 2012

Rome, Italy

because of the French Revolution in 1848 werent overcome despite of help of the state. Both this banks and money changers currency speculation couldnt be prevented. After the closure of this bank, to cover the need of a powerful financial establishment, Ottoman Bank was opened of which capital belongs to England. This banks center was in London. Ottoman Bank had the authority to open branches in all countries except Egypt. The Ottoman Bank ran as a trade bank for seven years and then joined Bank-i Osmani ahane (Ottoman State Bank) which was operating like a state bank. During those years a lot of banks were established by foreign capitals and then most of them joined to Ottoman Bank. During this period, for taking advantage of the Ottoman Empires need for cash, a lot of little and big foreign banks of which centers were usually in Istanbul, were established to give high-interest debts to Ottoman Empire. Union Financire, Trkiye Bankas, irket -i Umumiyei Osmaniye (Socit Gnrale de Lempire Ottoman) irket-i Maliye-i Osmaniye (The Ottoman Financial Associatino), tibar -i Umumi Osmani Bankas (Crdit Gnral Ottoman) were some of these banks. The banks which were generally foreign capital oriented and were running activities in Ottoman Empire before the Turkish Republic were the banks which were established to support foreign companies in Ottoman Empire. (Parasz, 2000, 109; Parasz, 1998, 109; Yldrm 2002, 2) We can see that direct foreign investments in Ottoman Empire increased in 19 th century rapidly. (Quartqert, 1987; 18) It is seen that between 1850 and 1880 there were only 19 foreign companies in Ottoman Empire but it increased to 193 between 1880 and 1914. (Kray, 1993; 175) These investments are largely concentrated on the areas of transportation and banking. The table below shows the percentage distribution according to the investment banking sector and foreign capitals during this period.
Table 1: Capital rates in banking sector France Britain Germany Other (%) 38,2 33,1 19,7 9 100 Source: Pamuk,evket Osmanl Ekonomisi ve Dnya Kapitalizmi Yurt Yaynevi Ankara S:65

Total

After management of Ittihat ve Terakki (Union and Progress) Party gained all the power to govern the state in 1913 and they spent efforts to keep foreign capital companies under control by practicing the National Economy policies. Despite intense opposition of many of the consulate on October 1, 1914 temporarily lifted the capitulations. (Tunaya, 1989; 324) First World War began in these years but the government continued the national economy policies despite of all difficulties of the war. In order to change the structure of export-dependent and unsystematic economy, they made a lot of laws and regulations to encourage the Turk-Muslim people to establish new companies which were with only Turkish capital. The most invincible law about this regulation which change and contain the status of the foreign companies was made in March 1916. (Toprak, 1982; 72) There were two different aims for this law: The workers of these foreign companies which were mainly running activities on banking and railway building were all foreigners. So the government wanted to give chance to Turk-Muslim workers to work for these jobs. This was the first aim. Secondly, the government wanted to keep these companies under control. With the practice of this new law Duyun-u Umumiye became out of authority and the government reached the power to press bank note and identify new custom rules. (Keyder, 1982; 324) After all of these developments, on 14th September in 1916, new custom rules were identified and begun to be practicing. Cancellation of the capitulations and designation of new tariffs were a cue to say that Ottoman Empire became economically independent. (Toprak, 126-128) 2- AFFECTS OF THE REVOLUTIONS OF NEW TURKISH REPUBLIC ON BANKING SECTOR In 1923 with the proclamation of the Republic has made an important step in the banking sector. In that period, 25 local banks were established. Beside this, the number of foreign banks increased from 13 to 18 and there 418

Clute Institute International Conference June 2012

Rome, Italy

were a lot of new braches of the banks were opened. But most of them were closed due to the effects of 1929 economic crisis in Turkey. Since 1930, particularly after the first five year development plan which was put in to action in 1934 in Turkey's economy statism approach adopted by the government and the private sector and due to these approach new businesses were supported by the state and there were a lot of new businesses opened during that period. This process is naturally reflected in the banking sector. The interest rates and the commissions of the banking transactions became to be decided by the government. In addition, state banks were established and the authority to make transactions denominated in foreign currencies was given only to Central Bank. As a result, a competitive environment appeared based on branch banking and deposit gathering. In this competitive environment, local banks affected badly and most of them put into the process of recommendation. (Apak, Tavanc, 2008, 41) The Second World War during 1940-1945 as well as all over the world, the economic recession caused in Turkey the banking sector is also affected negatively by these developments. At that time, in 1930s Turkey's economy followed closed, protectionist economic policies and after these developments the policies changed with more liberal and supportive for private sector, outward-oriented policies, and the banking sector has benefited from these new policies. (Yldrm 2004,3) After the World War II, a recovery process was started in the economy. The ambiance in the market has caused need for new banks. As a result of this requirement, in 1950s rapid increase in the number of private banks was seen. Upon entry into force of the Law on Encouragement of Foreign Capital in 1954, foreign loans and export revenues increased. A rapid growth in the economy and the increasing on savings to live in the country have been the most important the cause of need of new banks. In addition, the Banking Act was accepted and the Banks Association was established in Turkey in 1958 and these acts led to development in branch banking. We can see that in the country public and investment banks were given priority due to the program of stabilization policy which began to practice in 1958 and the planned development policies which were held between 1960-1980 years. In this process, in the banking sector the capital of public banks increased when we compare with the private and investment banks. The reason of the increase of this difference is internal growth policies. Thats why, we can see the effect of foreign banks on the economy was not strong during this period. In summary the period from 1958 to 1980 due to import substitution and closed export policies, foreign capital inflows are restricted by the state. 3- THE AFFECTS OF 1980 DECISIONS ON THE SECTOR Pre-1980 period, the entry of foreign financial institutions in domestic markets was blocked; foreign financial operations and foreign active hold were restricted. In this period capital markets couldnt improve and they kept under the state control. Besides of all of these factors, foreign trade and entry and exit of foreign exchange also kept under control, by taking the control of monetary and credit systems, the government directly intervened to the economy. Foreign and domestic banks had significant limitations to participate in the financial system. In summary, the strategy of import substitution before the year 1980 prevented the export-led growth. In addition, the development of the open economy in this period was tried to be achieved by the liberalization of the import regime, encouraging foreign investment and foreign borrowing. (Oksay, 2000, 2-3) The important and fundamental changes started in Turkey's economy due to the decisions of 24 January 1980. The mixed economic system is replaced with a more liberal understanding. A period started which modern economic policy tools, especially monetary policies became more applied with these decisions. With decree No. 1980/7168 agreements made new arrangements for local and especially foreign investors. In addition to these agreements, there are two other agreements, 1983/20 and 1984/30 decree agreements. By these agreements the activity area of foreign investors enlarged and made organizing a partnership easier for both local and foreign companies together. Also foreign investors increasing capital of 100 % was allowed. On the other hand, investment promotion and protection and the prevention of double taxation agreements were signed with many countries. Most importantly, foreign capital is guaranteed for not making them national. Restrictions on foreign and domestic banks to participate in the financial system are reduced. (Oksay, 2000, 3) 419

Clute Institute International Conference June 2012

Rome, Italy

Re-entry of foreign banks in Turkeys Banking market began in the 1980s with financial liberalization. (Steinherr, Tukel, Ucer; 2004, 24) Since the 1980s with the transition to free market economy Turkish financial system has become reconstructed. The reform process had positive effects on the positive developments in the banking sector and has allowed banks to operate in more competitive environment. The increasing importance of the banking in Turkish financial system and the promotions for the foreign capital accelerated the entry of foreign banks into the Turkish banking system after 1980. (Oksay, 2000; 3) Between 1980-1990 years the number of foreign banks in Turkey increased from 4 to 23. (Kibritiolu, 2005, 1). 4- 90S THE TERM OF CRISIS Especially as a result of financial liberalization content based policies implemented in the 1990s, in the Turkish banking sector, foreign participation increased. The growth in the economy and opening up made banking profitable and foreign banks increased their investments in Turkey in order to receive this share of the profits. Foreign banks were organized by opening branches in generally focused on wholesale banking in order to serve mostly corporate clients. The liberalization which was made with these developments and arrangements promoted the foreign bank entry into the country. The number of foreign banks has reached 26 in 1990. However, despite the reduction of barriers to market entry, long-term high inflation and instability in Turkish economy due to the share of foreign banks has not changed much in the system. Indeed, since 1990 the share of foreign banks in total assets hasnt been able to pass 5%.(Ata, 2009, 109-110) Implemented structural changes in the transition to a market economy in the 1980s led to the growth of the banking sector. But in the 1990s, developments in the sector and the crisis put the sector in to a difficult situation again. First, liquidity crisis occurred in the country's economy because of the 1990 Gulf crisis which was an external crisis. Then his first major financial crisis in the Turkish banking sector experienced on April 5th, 1994. the banks which were weak and were administrated in a bad way during the crisis in the sector went bankrupt and total assets of the banking system greatly reduced. In banking and financial crisis of 1994, the crisis was spread rapidly and threatened the entire economy because the Central Bank of the state could not intervene in time and in a necessary way. The main reason why the central bank couldnt intervene inadequate and late is that they didnt have enough foreign exchange reserves. The crisis deeply discredited to the trust of banking sector by highly decrease of capitals and shrinkage of banks. In order to restore trust to the sector government reassured to savings accounts and launched 100% insurance application. In this wise has been exceeded for a period of crisis in the banking and finance. In discussions with the IMF in June 1999, macroeconomic policies which were going to be applied from the years 2000-2002 determined and IMF promised support. These policies have an economic process, covering three years from January 1st 2000. It includes fiscal, monetary, exchange rate and income policies, as well as structural changes. This program is called as the inflation reduction program. After this program started to be applied some positive effects were occurred. But in November 2000 in markets a liquidity squeeze arose. The increase of exchange demand accreted with the trouble in the international markets led a crisis. This crisis was prevented by the credit from IMF but inflation reduction program was damaged. After that the doubtful ambiance in the market caused a new crisis in February 2001. At the meantime the government which had to move on exchange rate system gave up inflation reduction program. 5- 2000s A NEW PERSPECTIVE ON THE SECTOR Both crises occurred in Turkish economy in 2000s had negative effects on all sectors, mainly banking sector and whole economic life. The highly increased interest rates increased the deficits of the banks which had maturity mismatch. It caused the stocks and shares to lose in value. By starting the exchange system as floating exchange rate In February 2001 led TL to lose in value when we compare it with foreign currency. (Yldrm 2004; 420

Clute Institute International Conference June 2012

Rome, Italy

3; Erdoan, 2002, 133) After the crisis the banks which couldnt afford their capital were confiscated by TMSF and banks in funds and state banks duty deficits paid by government. In the after crisis period the Turkish banking sector reconstructed. Some reforms were made with the increate stability. These acquisitions made Turkish banking sector a more attractive sector for investors. The stable growth on banks assets, the increases in credit volume and high profit rates direct investors to do investments in Turkish Banking Sector. Another affect which supply more investors to the sector is the recoveries on supervision. As a result of foreign interest on the sector since 2004, the rates of the foreign banks in the system are getting increasing. The assets rates of foreign banks increased to 5.2% in 2005, it increased 3 times and reached 16% in 2007. The foreign investors who participate to Turkish banking sector since 2004 prefer primarily the banks which are mid-sized. .beside this, the banks which has wide branch network and has more potential customers were preferred. The foreign banks prefer not only the domestic banks who serve to legal persons but also the banks which are experienced with mortgage. In the following periods, if the foreign participation is exposed through the privatization of public banks, weights of foreign banks in the sector may increase significantly. (Ata, 2009, 109-110) 6- CONCLUSION Nowadays in Turkey Basel II criteria and European Union standards are practicing on Turkish Banking Sector. Thats why the increase of foreign cooperation and consolidations and partnerships are fateful. Thus it is more possible that in Turkey, the banking sector can catch the European Union Standards easily. (Steinherr, Tukel, Ucer; 2004, 25) In Turkey the future of the local banks is absolutely related to the reducing risks by creating partnerships and corporations with foreign banks. In this way, be provided with outside capital and funding, will increase their reputations in the international market. (Akay, 2000, 47) The process of being full membership to the European Union, foreign banks and foreign bank branches which are operating in Turkey have an important function. And these foreign banks have also very important roles because they supply credits for natural and legal persons and collect deposits from these customers who helps to reduce the cost of credits and to create a revival of investment environment. (Baak, 2008, 25) REFERENCES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. AKAY,Cevdet, Fallacies Of Fantasyland The Turkish Banking Sector http://www.tusiad.us/content/uploaded/pw10BankingSector.pdf ANBAR,Adem, Osmanl mparatorluunun Avrupayla Finansal Entegrasyonu (1800 -1914)Maliye Finansman Yazlar Dergisi, yl:23, say:84, Temmuz 2009, APAK, Sudi, TAVANCI ,Aykut, Trkiyede Yabanc Bankacln Geliimi ve Ekonomi Politikalar le Uyumu, Maliye Finansman Yazlar Dergisi, Say:80, Temmuz 2008, ATA H.Ali , Banka Yabanclamasnn Trkiyedeki Yerli Ve Yabanc Bankalar Asndan Karlatrlmas Atatrk niversitesi ktisadi Ve dari Bilimler Dergisi, Cilt: 23, Say: 4, 2009 BAAK Levent, Trkiye de yabanc bankalarn vergilendirilmesi, TBB yayn no 261 Kasm 2008, stanbul KEYDER, ., Dnya Ekonomisi inde Trkiye (1923 -1929), Yurt Yaynlar, Ankara, 1982 KIRAY, E Osmanlda Ekonomik Yap ve D Borlar letiim Yaynevi, stanbul 1993 KBRTOLU, Aykut Bankng Sector Crses AndRelated New Regulatons In Turkey *[ Crss Del Sector Bancaro Turco Y Las Nuevas Regulacones ] Http://129.3.20.41/Eps/Mac/Papers/0505/0505006.Pdf OKSAY, Suna, Finansal Piyasalarda Yeni Yasal Dzenlemeler (Reregulation) htiyac Ve Trk Finans Sistemi http://www.econturk.org/Turkiyeekonomisi/oksay4.pdf PARASIZ, lker. (1995), Kriz Ekonomisi, Ezgi Kitabevi, Bursa. (1998), 75 Ylda Parann Serveni, Trkiyede Bankacln Tarihsel Geliimi, Tarih Vakf Yaynlar, Kasm, stanbul. (2000), Para Banka ve Finansal Piyasalar, Ezgi Kitabevi Yaynlar, 7. Bask, Ocak. 421

Clute Institute International Conference June 2012 14. 15. 16. 17. 18. 19. 20. 21.

Rome, Italy

STENHERR Alfred, TUKEL Ali, UCER Murat, The Turkish Banking Sector Challenges And Outlook n Transition To EU Membership, Bruges European Economic Policy Briefings December 2004 http://www.coleurop.be/content/studyprogrammes/eco/publications/BEEPs/BEEP9.pdf QUARTQERT, DONALD Osmanl Devletinde Avrupa ktisadi Yaylm ve Direni (1881 -1908) Yurt Yaynlar, Ankara 1987 SARISIR, S., (2009), Cumhuriyetin ilk yllarnda Yerel bankaclk giriimleri: Nide rnei Trk Bilimi aratrmalar dergisi, Say : 26, Gz TOPRAK, Z., Trkiyede Milli ktisat (1909-1918), Yurt Yaynlar, Ankara, 1982 TUNAYA, T.Z., Trkiyede Siyasal Partiler, Hrriyet Vakf yaynlar Cilt:3, stanbul, 1984 YILDIRIM, Ouz Trkiyede Bankaclk Sektr (Tarihsel Geliim, Temel Sorunlar, Mali Riskler ve Yeniden Yaplandrma) stanbul, 2004 Yldz, Yaar Milli Bir Yerel Banka rnei Akehir Bankas T.A.. Yaynlanmam Yksek Lisans Tezi, Konya 2010

422