By Elizabeth Frasier-Nelson – elizabethfnelson@internationalbanker.com
The historical political instability within Turkey has left many market participants questioning the integrity and stability of the country’s banking industry. However, the Turkish banking industry, despite these trying circumstances, has proven itself to be one of the stronger OECD (Organisation for Economic Co-operation and Development) banking sectors following the global financial crisis; it was one of the few able to move into a phase of recovery without needing financial aid from the public purse. The regulatory changes implemented following the 2002 economic crisis in Turkey imposed measures on Turkish banks to ensure the industry’s inadequate banking practices were overhauled and transformed. These measures served as a stabiliser during the global financial crisis in 2008. The Turkish banking system escaped the global financial downturn with relatively fewer scars and can be considered somewhat resilient and thriving. But there is still significant room for improvement—in particular towards developing a sustainable platform from which to build and grow into the future.
The dominant driver of the resilience of the Turkish banking sector has been its well-regulated nature. However, a further phase of recent improvement in banking regulations that was put into planning in the wake of the 2008 banking crisis and has begun to be implemented over the last few years has strengthened the Turkish banking system further. In particular regulations have been executed that have made it more difficult for investment banks to pollute the marketplace with assets that would be classified as “toxic”—a move that will act towards removing risk from the markets. These improved regulations combined with a keener, more adhering approach with regards to regulatory implementation have been rolled out nationwide to Turkish banks. The new rules and approaches have been positive for the industry, providing stability and improving efficiency.
Understandably certain involved parties have had to grapple with the changes and accept them somewhat grudgingly. For example, numerous major US and European banks have had to rearrange their balance sheets and financial positions so as to meet regulatory requirements. In order to comply with the requirements of Basel III regulation, many European and US banks have restructured their presence in the international marketplace, including within the Turkish banking sector. By having to divest risky, toxic and excessive asset positions, these banks are restoring and rebuilding stability into the banking marketplace.
Over the years the historical record of strength of the Turkish banking sector has attracted foreign capital investment into the Turkish banking industry. Well-established global banking giants gradually opened more and more branches in Turkey and in some cases sought merger and acquisition deals in the country over the last decade. What was especially appealing to these foreign investors was the regulatory strength and the lucrative business terms of customer charges (customarily high and many in the nation’s banking sector) that the Turkish banking industry had to offer. In certain key themes, the Turkish banking sectors mirrors global market trends. Regulation is robust and strong. The banking sector previously met the requirements of Basel II and elements of the requirements of Basel III; it is now taking measures towards fully complying with Basel III requirements.
Islamic-compliant finance and banking services are a major part of the Turkish banking industry. The growth of Islamic-compliant financial instruments such as Sukuk and Murabaha in the Turkish banking sector has been a well-received and well-handled development that further reflects the ability of Turkey’s banks to adapt to meet globally growing needs and trends. Islamic-compliant finance is extremely thorough and strict in its requirements, and this type of banking approach has helped strengthen the regulatory approach within Turkish-based banks. Handling these Islamic-compliant financial services and instruments, which are typically structured as low-risk, has provided stability while helping to expand and develop the Turkish banking landscape. Islamic-compliant financial services and products also rely heavily on traditional banking methods, which have helped reinforce traditional and thorough banking practices and methodologies into the Turkish banking industry. Bundling and inclusion of potentially toxic assets is strictly prohibited under Islamic-compliant finance and banking.
The meticulous regulatory regime combined with the proliferation of relatively safe financial instruments required under Islamic-compliant banking is helping Turkey to develop into one of the more resilient banking marketplaces in the world. But there is further change that can be implemented in working towards securing a stronger Turkish banking industry for the future.
Enhancements can and should be made on both a domestic and foreign scale. To begin with, technology plays a key role. Banks across the nation should make investments in technological improvements so as to provide more robustness, automation and efficiency to the sector. These enhancements will not only improve regulatory strength but also drive business and effectiveness in meeting evolving customer needs. Technological advances could allow banks to reach new customers in remote areas of Turkey, which make up a significant component of the economy. Additionally improved technological systems will enable banks to meet the demands of customers who require a more sophisticated service. Banks should focus on remaining strong and significant on a global landscape—and look to compete with global banking advancements. This may be achieved by providing solutions to meet evolving customer needs and offering tailored services and products towards meeting these requirements. Generic-banking services no longer fully satisfy customer needs, especially as wages remain depressed and consequently spending remains low across the globe. Opportunities to capture sizeable returns from consumer-credit products are declining, and Turkish banks must work towards competing on a global marketplace through an up-to-date, bespoke and innovative approach.
The Turkish banking industry has made significant progress since its crisis in 2002, and since then the further regulatory adjustments made towards complying with Basel II and Basel III are actively preventing an influx of toxic assets into the markets—a claim that many large banking industries across Europe are unable to make. The industry has a solid regulatory foundation that serves as a crucially important safeguard for customers. In a further measure to enhance the stability of the Turkish banking sector, new draft regulation has been proposed to reduce the number of commissions and fees banks charge to customers; these charges are notoriously high and frequent within the Turkish banking sector. Examples of areas under consideration for revision include charges related to credit-landing commissions, information gathering, credit-processing invoices, payment-schedule changes, mortgage advice, credit-request declines and flexible-payment schedules—which will either be reduced or removed altogether for consumers. These changes will serve to stabilise the banking system further.
Overall the Turkish banking system is one of the best-regulated banking industries across the globe. The country’s regulatory platform and approach works actively towards strengthening the banking industry. The increasing global economic presence of the nation combined with the expanding capacity of the Turkish consumer base is driving the banking sector forward, and vice-versa. Rising purchasing-power levels and strengthening economic conditions are combining to create a more thriving and lucrative business environment for the banking sector.
There has been a degree of foreign-capital influx into the Turkish banking industry as well, both in the form of new branches and mergers and acquisitions; this activity underpins and drives the sector’s development. However, the increasing and evolving demands of consumers should be properly addressed by the relevant parties towards reducing an overgrown list of service charges imposed on bank customers. The latest phase of draft regulation, intended to cut many of these excessive charges, will have positive effects on consumers and banking services. Over time this will shift the focus of the banks from non-banking profits to the profits generated from core-banking activities—the activities that are directly related to serving consumer needs. These changes –on both a micro and macro scale—will serve to strengthen the Turkish banking sector sustainably for the long term.