DISTORTED INCENTIVES
AND
FINANCIAL DEVELOPMENT IN TURKEY
Cevdet A. Denizer
The World Bank
Mustafa N. Gültekin
Kenan-Flagler Business School
University of North Carolina at Chapel Hill
Nihat Bülent Gültekin
The Wharton School
University of Pennsylvania
January 2000
Preliminary Draft
This paper has been prepared for the conference "Financial Structure and Economic
Development" organized by the World Bank, February 10-11, 2000 in Washington, D.C.
We thank Asli Demirgüç-Kunt for her help and encouragement. Burçin Kasapoglu provided
competent and diligent research assistance. We thank Kenan Gultekin for his editing help. We
are grateful to Emin Dedeoglu, Ozer Ertuna, Muhsin Mengiturk, Cahit Ozcet, Bengi Ozer, Emin
Ozturk, Sureyya Serdengecti, Selim Soydemir, Banks Association of Turkey, and Istanbul Stock
Exchange for providing us with part of the data we used in this study.
The results and the opinions expressed in this paper are those of the authors and do not reflect the
views of the World Bank.
"Happy families are all alike, every unhappy family is unhappy in its own way."
Leo Tolstoy in Anna Karanina
1.
Introduction
The 1980s have been a period of deregulation and internationalization of financial markets in
Turkey. In a sharp break with past economic development policies that relied on various forms of
financial repression, interest rate controls were lifted and entry barriers into the financial system
were relaxed. Directed credit programs were significantly cut. There were comprehensive
programs to develop equity and bond markets. In 1984, Turkish residents were permitted to have
foreign currency deposits that formally established a link between Turkish and foreign interest
rates. This process culminated in the opening of the capital account in 1989 which imposed
significant constraints on monetary and exchange rate policies, but at the same time, the opening
increased the funding options abroad both for the financial system and large corporations. By
1990, Turkey had minimal constraints on domestic and external financial intermediation, with the
exception of reserve and liquidity requirements that remained relatively high until very recently.
These reforms clearly represent major progress toward freeing the operation of financial markets.
Widely accepted wisdom is that resource mobilization and allocation would not be efficient
without such policies. By their nature, reforms also aimed to develop markets, institutions and
instruments other than the banking market that traditionally dominated the financial sector under
the state-led development policy period.
We investigate two questions in this paper. First question is to what extent reforms in Turkey
achieved those objectives. Second question is the impact of reforms on the economy and
financial structure. Has the system diversified and allowed institutions other than banks to be a
significant part of the resource mobilization and allocation process?
Requirements of the public sector financing and the macroeconomic imbalances have shaped the
development and the evolution of the financial system since 1950s. A distinguishing aspect of
the recent Turkish financial history, which should be noted at the outset, is that the financial
reforms began and continued under a highly distorted economic environment arising from
macroeconomic instabilities and incomplete regulatory reforms. Since these two interact and set
the overall incentive structure for resource allocation, we pay particular attention to their
significance.
Given this background, the rest of the paper is organized as follows. In Section 2, we discuss the
macroeconomic factors which sets the overall context of for the operation of financial markets.
Section 3 summarizes the evolution of the financial system after the reforms and overviews its'
performance. Section 4 considers the microeconomic and regulatory issues. Section 5 analyzes
the performance of the banking sector and tests some of the hypotheses advanced in the
discussion. In Section 6, we focus on the capital markets and the corporate sector. Section 7
presents our conclusions.
2
2.
Macroeconomic Factors: Persistent Fiscal Imbalances and Financial Opening
Turkey entered 1980 with a stabilization program with the IMF after one of the worst balance of
payment crisis in her history. The crisis, according to the consensus view, reflects the limits of
development policies based on import substitution and some strategic policy errors.1 Immediate
objective of program was to stabilize the economy by improving the balance of payments and
containing the inflation. The long-term goal, however, was much more ambitious: to change the
structure of the economy fundamentally. The dominance of the State in key industries and in
banking, as well as in pricing and resource allocation processes including foreign exchange rate
and imports policy, was to be reduced and the economy was be opened-up. Export oriented
growth became the key policy objective.
Since then, much has been achieved. The overvalued Turkish Lira was devaluated in 1980 and
Turkey maintained a commitment to a flexible exchange rate policy ever since. In fact, the
exchange rate was devalued more than inflation to maintain export competitiveness. The second
feature was an aggressive drive to promote exports by generous export promotion schemes.
These included tax rebates, preferential export credits, and import duty exemptions for imported
intermediary goods for exports.2 The last element of the trade reform was the liberalization of the
import regime. The highly restrictive and complex import regime was gradually eased and duties
were lowered.
Turkey’s decisive implementation of these liberalization policies changed the structure of her
economy. Exports grew from less than 2.9 billion in 1980 to US$10 billion in 1987 and to more
than US$30 billion in mid-1990s. Successful performance of the exports under the regime of
aggressive real devaluation of the lira lasted until 1988. By then the government had shifted its
priorities to control the inflation by allowing the real appreciation of the lira. Another important
development in 1989 was the further liberalization of the capital account, which was fully
liberalized the following year. Switching the regime had significant impact on external balances.
However, the important thing to note is that by 1989 Turkey had a liberalized and open economy
and a rapidly growing private sector.
While Turkey successfully liberalized its foreign trade regime, removed price ceilings on goods
and services and other distortions in product markets, and deregulated its financial sector,
economic stability as never attained since 19803. At this writing, Turkey was in the process of
implementing a major stabilization program and there are indications that the program is being
perceived as more credible than others Turkey tried before. Since early 1980s to date, the source
of the problem has been fiscal deficits, which ultimately reflected Turkey’s inability to deal with
the underlying causes of poor public finances.
1
The economic history of Turkey in the second half of this century is a sad story of chronic macro economic
imbalances. Since 1950, Turkey experienced periodic balance of payment crises every decade with steadily
rising inflation. Nearly every decade ended with a major stand by agreement with the IMF, including the most
recent one in December 1999. Legacy of the 1979 crisis, however, was deeper than the previous ones. By the
end of 1970s, Turks were experiencing shortages of many basic staples. Winter of 1979 was the harshest. Many
households went without heating oil. For ordinary citizens, after several years of improved standard of living,
Turkey became an economy of shortages while political violence was growing in the streets.
3
For a detailed analysis of macroeconomic issues in Turkey, see Aricanli and Rodrik (1990), OECD (1999); for
an analysis of macroeconomic imbalance and economic crises, see Mariano, Gultekin, Ozmucur and Tayyeb
(1999).
3
The failure to control fiscal deficits has been a major factor of the volatile economic environment.
Inflation rate ranged between more than 100 percent in 1980 and 34.6 percent in 1986 and it was
around 60 percent range by 1990. As Table 2.1 shows, output growth has also been volatile with
periods of rapid growth followed by sharp contractions. As the Turkish lira lost importance its
store of value function, foreign exchange deposits became increasingly important and they
represented about 50 percent of M2 by late 1980s.
The 1980 program aimed to reduce the fiscal deficits by increasing tax revenues while reducing
public spending and transfers to the SEEs. There was an improvement in the fiscal stance
initially. Tax rates were reduced while enforcement and widening of tax base were enhanced.
Despite the fiscal successes during the initial years of the structural adjustment program, public
sector deficits followed a path similar to that of the previous decades. In 1987, public sector
deficits resumed its secular climb until 1993 when PSBR reached an all time high of 12% of
GDP4, see Table 2.1. There were times, especially after 1994 when Turkey managed to improve
its fiscal balances but these were never credible. As a result, during much of the periods fiscal
dynamics drove monetary and exchange rate policy mix and set the key parameters for evolution
and functioning of financial markets.
Capital account was opened untimely in 1989 under these unstable conditions. While the
officially declared objective was put as further integration with international markets, it appears
that easing of financing constraints on increasing public expenditures may have been an
important consideration (Aslan and Celasun, 1996). Such a policy, which requires sound
monetary and exchange rate policies for sustainability, further complicated macroeconomic
management. Financial opening not only strengthened the links between domestic and foreign
interest rates, but also with the persistent lack of fiscal discipline, generated a large risk premium
on Turkish lira assets, particularly on government paper. As shown by Celasun, Denizer, and He
(1999), the differential between interest rates in Turkey and abroad was a major factor explaining
capital inflows.
Monetary and exchange rate policies also encouraged foreign borrowing. While there were two
distinct periods, they had the same effect on the financial sector’s portfolio decisions. In the first
period and starting in 1989, the real exchange rate policy Turkey followed since 1984 to support
exports was abandoned. This change, coupled with inflows of capital, led to sharp real
appreciation of the currency.5 Another aspect of this episode of appreciation was the particular
way exchange rate policy was implemented. While competitive real exchange rate policy was
abandoned, the Central Bank used a managed float approach and the exchange rate became an
implicit nominal anchor. This inevitably fueled real appreciation, already boosted by capital
4
Political cycles are also evident in the public sector deficits. There were general elections in 1987, 1991, 1995
and 1999. There were nationwide municipal elections in 1989, 1994. In election years, PSBR figures seem to
jump. It is interesting to note that public sector deficits did not come down after the election of 1991. Demirel
came back to power after a decade of political struggle. His political patronage style of running the economy
was back with him. Public sector deficits continued to rise. Surge of capital inflows after the elections made the
new government more complacent about taking a tougher fiscal stand.
5
In 1989, the Central Bank and the Treasury announced a protocol to limit the Central Bank of the Treasury
financing up to 15% of the annual budget appropriations, which was the legal limit. The idea behind the protocol
was to force the political authority to limit the monetization of the public sector deficits. Domestic borrowing
became an increasingly important source of financing for the Treasury, which was constrained in international
debt markets then. Under the new policy of appreciating exchange rate, commercial banks found it extremely
attractive to finance the Treasury with the short-term foreign debt.
4
inflows, and the lira became overvalued as much as 30 percent by 1993, which made foreign
borrowing a profitable short term strategy
By 1994, fundamentals and the fiscal stance in the economy were deteriorating rapidly. As the
required fiscal discipline to complement the use of exchange rate policy as a nominal anchor was
ignored, monetary and fiscal policies presented an unsustainable policy mix. The PSBR further
deteriorated from 6 percent of GDP to 12 percent in 1993, coupled with the Government’s
fundamental policy error of attempting to control interest rates triggered a major crisis in early
19946. The currency depreciated by almost 50 percent, GDP contracted by 6 percent, and three
small banks were closed who had extremely large net foreign exchange positions. A financial
system wide instability was contained when the coverage of deposit insurance was increased to
100 percent. The important point is to note that the real appreciation of the currency provided
both the commercial banks and others who could borrow abroad large incentives to do so and this
is reflected in bank balance sheets. Turkish banks’ liabilities to non-residents have grown being
negligible in the early 1980s to 13% of total liabilities by 1993.
The post-crisis since 1994 has been characterized by stop-go stabilization policies, improvements
in fiscal accounts, but lack of a credible program. Under these conditions, the Central Bank’s
primary concern has been the stability of financial markets and the current account rather than
inflation. It began to target the real exchange rate and devalued the currency more or less in line
with past inflation. By operating this type of policy, the Central Bank in essence validated past
inflation, which in turn became the expected inflation in the next period. This in turn implied a
predictable depreciation path for the currency and encouraged banks and the private sector to
borrow abroad to invest in high yield securities. Consequently, foreign capital inflows increased
and reached about 4.4 percent of GDP and this made financing of the deficits easier.
While real exchange rate targeting policy after the crisis brought a degree of stability in domestic
financial markets, it rendered the economy without a nominal anchor. Despite the fact that fiscal
accounts improved since 1993 and there were primary surpluses, the lack of a credible program
forced the Central Bank to maintain its real exchange policy as the stability was perceived to be
too fragile. The natural result was high inflation, which averaged around 90 percent between
1995-1998. Another result was the effect on interest rates, which in turn made borrowing abroad
attractive. Since this policy was being implemented without a credible program, markets factored
in a large risk premium into domestic interest rates. At times the rates demanded by markets to
roll over debt was as high as was 40 percent in real terms.
Hence, from a macroeconomic point of view, the particular monetary and foreign exchange rate
policy mix followed by Turkey created an ever growing debt payments, initially driven by high
deficits and later by high interest rates, which needed to be financed. With domestic financial
markets being small, M2/GDP is 17 percent without foreign exchange deposits and 32 percent
with them, external financing was crucial. For the financial sector, as well as the private sector,
the incentives were relatively straightforward: borrow as much as possible home and abroad and
lend to the Treasury.
6
Despite all warnings, the Ciller government delayed a stabilization program until the local elections in March
1994. This delay was a serious policy mistake. The delay was coupled with a series of other policy mistakes
that, in the first quarter of 1994, triggered the fourth economic crisis of Turkish economic history. The Central
Bank tried in vain to slow the capital flight by increasing the overnight interbank rates over 1000% during
February and March. By the end of March, the Central Bank ran out of reserves. Following a slim margin of
victory at the nationwide elections for municipalities, government announced a stabilization program and standby agreement with the IMF on April 5, 1994.
5
The Central Bank helped treasury in two ways. First, it funded commercial banks in the open
market and provided them enough liquidity for absorption of treasury securities. As the size of
domestic markets limits Treasury borrowing, the Central Bank encouraged banks to borrow
abroad. Foreign borrowing ratios were not fully enforced. As noted by the OECD (1999), the
government and the financial sector became interdependent.
As we show later in the paper, incentives arising from this distorted macroeconomic environment
have determined the composition of bank portfolios and performance, the evolution of capital
markets, as well as the portfolios of the corporate sector. By the end of 1990s, the sole function
of the financial system in Turkey was nearly reduced to transferring funds from the domestic and
international markets to the Treasury.
3.
Financial Liberalization and the Evolution of the System7
3.1
Financial Policies and Reforms
Turkish financial system before the 1980s represents a textbook case of a financially repressed
structure. Interest rates have been set by the state since the 1940s and were seldom changed.
Because of rising inflation during the 1970s, real interest rates become increasingly negative;
deposit rates were almost minus 40 percent in early 1980. At the same time disintermediation
became a serious issue. The M2/ GDP ratio declined from 29 percent of GDP in 1970 to 19
percent in 1980. Preferential credits to priority sectors also increased over time and they were
almost 75 percent of total bank credit by 1979.
Capital markets were not developed and there was a very limited set of financial instruments.
Banks were the dominant institutions in the financial markets and the corporate sector relied
almost exclusively on bank credit. Central bank credit was an important source of public sector
financing.
There were severe restrictions on the holding of foreign assets. Financial markets were protected
from foreign competition as a natural extension of the prevailing regime of import substitution.
When the liberalization of the system began after the 1980 economic crisis, it consisted of four
main areas, namely interest rate deregulation, development of money and foreign exchange
markets, and capital markets, as well as banking sector reforms. We discuss the first three in this
section. The banking sector is analyzed in Section 5, which remains the most important sector
with major impact on the financial structure.
3.2
Interest Rates
Interest rate deregulation began in July 1980. Initial reaction of the largest banks to interest rate
liberalization was to reach a consensus interest rate on deposit rates by so called gentlemen's
agreement, in a way, by colluding among themselves with the hope that the rest of the system
would follow. However, the smaller banks did not follow and entered a fierce competition with
the larger banks. To attract deposits these banks issued large amounts of discounted newly
introduced CDs to brokers, who then sold them to public at much higher interest rates. Brokers
who were unregulated also issued their own promissory notes, bought and sold corporate bonds
and lent heavily to those without bank financing. The situation eventually turned into a Ponzi
scheme as the payment of interest on CDs to public depended on the sale of new CDs. Inevitably,
7
There are number of detailed studies on the development of the financial system of the post 1980 era in Turkey.
These include Akyuz (1990), Atiyas (1990), Atiyas and Ersel (1992), Cosan and Ersel (1987), Sak (1995).
6
the system collapsed after the largest broker ran away from the country. The result was a
financial crisis and the liabilities of five banks were taken over by the government. It was
estimated that the cost was about 2.5 percent of GDP in 1982.
The result was that interest rates began to be regulated by the Government. The Central Bank
moved in to set the rates to prevent the leading banks to exploit their market power; it also
occasionally adjusted them to maintain rates positive in real terms. This policy lasted until 1988.
Hence, interest rate liberalization was not an immediate success once the ceilings were abolished
in Turkey. It nearly took eight years for the short-term interest rates to be market determined
until the Treasury debt markets were well established.
This episode also reflected the poor regulatory state of financial markets in Turkey and the
importance of sequencing reforms. There was no regulatory structure to oversee the players in
the market when reforms began and risky behavior of banks and brokers could not be controlled.
One major outcome of the crisis was the establishment of explicit deposit insurance for banks in
1993. This scheme offered a limited insurance for the depositors and funded by premiums paid
by the commercial banks.
The cost of the crisis was high not only in terms resources used to bailout depositors. The
behavior of the bankers left a legacy of mistrust toward a market driven development and the
exclusion of institutions other than banks from the later development of money markets, which
led to virtual domination of banks of the money markets by the banking system.
3.3
Money and Foreign Exchange Markets
Development of the money and foreign exchange markets was a priority for the Central Bank for
the conduct of the new monetary policy. The Central Bank started setting daily exchange rates
and allowed banks to fix their own rates within a band. In 1984, banks were allowed to accept
foreign exchange deposits and the following year they were free to set their own exchange rates.
Capital account was fully freed in 1990 as already indicated. The consequences of liberalization
of exchange rate regime were rapid currency substitution and change in banks asset and liability
structure, which weakened the stability of the system. We cover the effect of foreign exchange
liberalization on the banking sector in the next sections.
The Central Bank introduced interbank money market to facilitate asset-liability management of
banks in 1986 and following year it commenced open market operations. The idea was to cut
down the direct central bank financing of the treasury. Development of the government debt
markets and instruments was expected to provide proper tools for the debt management for the
treasury and for the conduct of the money markets while allowing the interest rates to signal the
relative scarcity of funds8.
3.4
Capital Markets
The lessons from the financial crisis of 1982 were not lost on the policy makers. The lack of an
institutional structure to enforce the existing legislation for the regulation of capital markets was
one of the crucial reasons for the inability of the authorities to crack down on the behavior of the
brokerage houses in addition to inexperience with financial markets. The response of the
8
Another important objective was to increase private savings by reestablishing pricing mechanism for flow
funds. There is considerable debate in the financial development literature about the role of interest rates in
mobilizing the domestic savings. See Goldsmith (1969), McKinnon (1973).
7
government was to speed up the formation of the Capital Market Board for the regulation and
supervision of capital markets as well as with the task to develop capital markets, which was on
drawing board since 1961.
Capital Board Market was active to build the legal and the institutional infrastructure for the
capital markets in the country. The Istanbul Stock exchange opened in 1986. Once the interest
rate restrictions on corporate bonds by the Central Bank were eliminated in 1987, new
instruments, such as commercial paper, were introduced and others were revived9. Mutual funds
were allowed for the first time in 1987, but commercial banks had the exclusive rights to establish
them until 199210.
The Ozal government was eager to develop the capital markets. They introduced new
instruments to encourage public to save with financial assets. An extra budgetary fund, Mass
Housing and Public Participation Fund was put in charge of financing housing development and
public infrastructure projects with direct borrowing from the public11. This fund introduced longterm revenue bonds, called revenue sharing certificates, against the income generated from the
infrastructure projects. The idea behind this new instrument was to shift portfolio composition of
households from gold to financial instruments and eventually to pave the way for the privatization
program of the government12.
3.4
Performance of the Financial System: Reforms and Financial Structure
By 1986, Turkey had a stock exchange, brokerage houses, a legal framework for securities
markets, and the regulatory agencies to supervise the system. Accounting standards were
improved to confirm the internationally accepted standards, though there is still room for further
improvements. Auditing standards were introduced and required for companies with publicly
issued securities13. By the end of the decade, Turkey seemed to have laid the foundations for
financial markets with the basic institutions and the regulatory structure.
Current institutions of the Turkish financial system and their total asset sizes can be glanced in
Table 3.1. The banking sector clearly dominates the system. Insurance sector is the one of the
least developed sector compared to similar level countries. Mutual funds and pensions are also
small players in the system. Equity market, mutual funds, leasing/factoring sectors are all created
by the financial reforms of 1980s. Reforms have its impact on the banking sector as well. Entry
of foreign banks was encouraged during this period. Table 3.1 shows that the financial landscape
has at least the institutional diversity comparable to the middle-income countries.
9
Commercial code allowed corporations to issue debt instruments up to a certain part of their equity capital.
Corporations in effect were not allowed to issue debt until they were allowed to revalue their assets in 1983.
10
Commercial banks were also allowed to be the custodians and managers of their own funds.
11
Revenue sharing certificates were an innovative instrument at first. They were used to finance incomplete
public investment projects, predominantly dams for electricity generation. The incremental return on a one or
two year investment to complete a dam is extremely high. The other objective is to introduce a non-interest
bearing instruments to those who believed usury was illegal in Islam. Eventually, however, this instrument was
so abused that the Public Participation Fund became a major burden on the budget.
12
According to an extensive survey of household saving behavior by Eser (1999), Turkish households have the
following portfolio (stock) of assets: 86% real estate; 2.3% securities; and 1% gold. They allocate their current
savings into: 35% foreign exchange; 29% gold; 12% bank deposits; securities 10%; and 9% real estate.
13
In a survey conducted by the Capital Market Board, 45% of the firms surveyed had used external auditors
without any legal requirement. See Erkan and Temir (1998).
8
Table 3.2 summarizes the new instruments introduced in Turkish financial markets since 1980.
With the exception of asset-backed securities, all were introduced during 1980s. Regulatory
agencies and the government indeed took an active role in the development of the infrastructure
of the financial markets14. There were also significant tax incentives for financial instruments,
which were summarized in Table 3.315.
Traditional measures of financial deepening are given in Table 3.4 for the 1980-1998 period.
Financial development often is expressed with the relative size of financial assets to the GNP.
Table 3.4 shows that there has been a significant deepening during this period. Financial assets to
GNP ratio tripled from 23.1% in 1980 to 63.7% in 1998. Composition of the financial deepening,
however, reveals some structural problems. Financial deepening and the evolution of the system,
however, were severely distorted by the massive fiscal imbalances of the public sector.
M1/GNP ratio, a financial deepening measure used for developing countries, came from 13.9% to
4.79%. M2/GNP rose modestly from 17.4% to 21.34%. M2Y/GNP, where the money supply
measure include foreign exchange deposits, rose form 20.2% to 37.8%, which is a sign for the
currency substitution took place after the residents were allowed to have foreign exchange
deposits. These ratios are lower than countries with similar income per capita level. The results
clearly indicate the impact of rising and volatile inflation throughout this period on the demand
for the national currency.
Ratio of financial assets to GNP rose from 23.1% in 1980 to 63.7% in 1998. Currency in
circulation is down from 4.1% to 2.1% for the same period. Total deposits rose from 14.1% of
GNP to 35.8%. Nearly all increase came from the increase in foreign exchange deposits.
Ratio of outstanding securities to GNP rose from 4.9% to 25.8%. Most of the increase came from
the public sector securities, predominantly treasury bills and bonds. Ratio of public securities to
GNP was 3.6% in 1980 and it reached to the level of 22.3% in 1998. Share of private securities
rose from 1.3% to 3.6%, mostly from the appreciation of share prices in Istanbul Stock Exchange.
Recall that the legal and the institutional infrastructure for private securities market were
completed in 1986 with the opening of Istanbul Stock Exchange. The first public offering of was
conducted in 1988 with the sale of state's shares in a small telecommunication equipment firm.
Until 1991, growth rate of outstanding private securities was faster than the government bonds.
As the public sector deficits got larger, government bonds began to dominate the financial
system.
Table 3.5 shows the dominance of the outstanding public sector securities in financial markets
and thus the distortions by comparing the size of each class of securities and their relative
proportions. We can observe that the relative size of the outstanding issues of government debt
market to private sector securities was around 58.8/41.2 to 56.5/43.5 between years 1984 to 1991.
This ratio climbed to 86.1/13.9 in 1998.
Table 3.6 shows the severity of the distortions in the new issues market. Offerings of public
securities dominate the financial markets. Relative size of the government bond issuance was
94.1/5.9 in 1982. This ratio improves to 76.9/23.1 in 1990 and rose to 94.9/5.1 in 1998. With the
newly established stock exchange and tax incentives, private sector began to issue debt and equity
instruments during 1987-1991.
14
See Sak (1995) for the role of the regulatory agencies in financial development in Turkey.
The tax incentives were not consistent and neutral for corporations and households, causing significant
arbitrage activities.
15
9
Privatization program, while it was not a successful program itself, had a positive demonstration
effect. Privatization program trained a cadre of investment bankers who are familiar with the
underwriting process. Corporations took advantage of the changes in the commercial code and
the tax rules and began to issue rights offerings initially. Public offerings of common stock
became a permanent feature of the securities markets after 1988.
By 1998, while the volume of shares increased at historically highest levels, their relative share to
government bonds became the smallest. The corporate bond issues virtually came to a halt after
1991. Asset backed securities, which were introduced in 1992 to increase the diversity of
securities with the amendments to the Capital Market Law, were the largest newly issued
securities during 1992 to 1995. By 1998, however, government bonds consisted 94.5% of all new
security issues. Common stock issues were 4.6% of new issues. Mutual funds issued 0.4
percentage of the new securities.
Two observations are in order from Tables 3.1-3.6. Public sector financing requirements created
severe distortions in the financial system. The financial system channeled the significant part of
funds available for the Turkish economy to the Treasury. Tax treatment of treasury securities
with high rates offered made them difficult to compete with. Table 3.7 shows the yields and rates
of returns on a set of instruments available for Turkish citizens. The real rates on government
bonds were indeed the most competitive 16.
The second observation is about the role of banks in the intermediation process, which we
analyze in more detail in Section 5. Banks after the 1982 crisis became the favored institutions17.
Only banks were allowed to be primary dealers in government bond market. They were able to
underwrite and trade securities, establish and operate mutual funds exclusively until 1992, and to
engage in insurance business. Banks became universal banking institutions dominating every
aspect of financial activity in the country. They were the prime beneficiary of the deepening and
the expansion of the financial system. Effectively, the financial system and banking system have
become synonymous in Turkey.
It is also worthwhile noting that the quality of the banking sector, has improved significantly and
it is one of the most developed among the emerging markets. They have become sophisticated
users of financial technology and products in domestic and international markets. They became
users of highly modern information technology and upgraded the human skills substantially after
the financial reforms18. Turkish firms and banks in particular increased their presence in
international financial markets as borrowers. All this sophistication, however, was for financing
the public sector.
16
Tax on government bonds was raised to 10% in 1994…. There are tax advantages for banks as well. Taxes
due to interest income from government bonds are payable during the next tax year, allowing banks to postpone
tax payments for a year. In a high inflationary environment, the effective tax rate is much lower.
17
The Central Bank took the leadership in the development of the money markets. The Central Bank was a
member of the Banks Association and the governor of the Central Bank was the president of the association until
1994. The relationship between the banks and the Central Bank was reminiscent of a pretentiously exclusive
club. As often the case with such clubs, there is a strong discrimination against the non-members. While the
non-bank institutions were smaller in capitalization than banks, they could have grown if they were allowed in as
primary dealers.
18
There was a strong support for financial development from the international organizations. The World Bank
provided Financial Sector Adjustment Loans during early 1980s with a significant component of technical
assistance for the Central Bank and the Treasury to strengthen their regulatory functions. OECD also provided
funding for Capital Market Board for technical assistance. An international banking school was established in
Istanbul for training. Banks upgraded their own training programs.
10
4.
Microeconomic Factors: Regulatory and Supervisory Issues
The institutional development of the regulatory and supervisory system did not go hand in hand
with the deregulation of the financial sector. The initial reforms in 1980 were launched with
minimal regulatory and supervisory capacity and it was not before the crisis of 1982, there were
serious efforts to improve the regulations. Over the years the overall system improved but the
financial sector functioned with fundamental deficiencies in the regulatory framework. In
particular, the combination of highly generous deposit insurance scheme, the bias towards
keeping failing banks in the system, and political intervention deterred prudent behavior and
market discipline has not been strong.
As could be expected, deficiencies in the regulatory areas have been interacting with
macroeconomic factors considered earlier and these have contributed to the vulnerability of the
economy. We discuss some of the essential factors affecting the incentive structure, both in
banking and capital markets, and point out how they affected the financial structure.
The first issue to note is the deposit insurance scheme. Explicit deposit insurance was introduced
in Turkey in 1983. It was set up following the Kastelli crisis of 1982 and the bail out of
depositors in that event is a good example of implicit deposit insurance. Following the financial
crisis, the liabilities of five banks were taken over by the government, and it was estimated that
the cost was about 2.5 percent of GDP in 1982.
In the following years until 1994 the system did not encounter serious problems on the surface.
However, after the liberalization of the capital account the banks were able to borrow abroad and
some engaged in risky strategies. In particular, the smaller banks that lacked domestic branch
networks began to borrow abroad. In pursuing such strategies, they were clearly encouraged by
the monetary and exchange rate policies the Government has been following and built up large
net open foreign exchange positions, taking both foreign exchange and maturity risks. The
proceeds were either invested in government securities or issued as loans to the private sector at
high real interest rates with longer maturities. It was estimated that in early 1994, the banking
system had open positions of about 120 percent of their capital and the banks were not hedged.
The extent of the risks became apparent when the TL was devalued in early 1994, which turned
their capital positions into negative. Three banks failed and they were closed19.
The extent of instability was such that even large and well-capitalized banks came under pressure.
Calm could only be restored when the coverage was extended to 100 percent of deposits. While
the authorities did not assume all liabilities of the failed banks initially, later developments made
it clear that they did most of it. The Government compensated depositors as stipulated in the
1983 deposit insurance but foreign creditors of the banks were repaid fully by the Treasury (and
19
It is also important to describe the role of the commercial banking sector after the shift in the exchange rate
regime in 1989. The large interest rate differentials between the foreign borrowing rates and the government
debt offered tempting profit margins for the banks; consequently, most banks ran unhedged foreign exchange
positions. The aggregate unhedged (or open) position of the banking system was $2.9 billion (48% of total
capital of the banking system) in 1992, and it went up to $4.6 billion (68% of capital) in 1993. After the
economic crisis of 1994, banking sector reduced its unhedged position to $.8 billion (18% of capital). This
sudden change in banking policy to close their unhedged position was one of the critical reasons for the run on
the reserves that started in January 1994 and resulted in the economic crisis of 1994.
11
by the bankers association?) Although 100 percent insurance policy have so far helped to
stabilize conditions in the banking sector, the fact that it stayed in effect for a long time and it is
still in effect, it encouraged risky behavior once more. Large banks often continued that such
policy was not creating a level field but given the macroeconomic conditions in Turkey the policy
could not be changed. A comparison of banks deposit rates, particularly on foreign exchange
deposits is useful to reveal the extent of risky behavior. In order to reap the benefits of arbitrage
opportunity due to the difference between treasury securities and foreign exchange deposit rates,
some banks were offering 20-25 percent for dollar deposits.
Another dimension of moral hazard is related to connected lending and equity holding by banks
in industrial firms. Almost all of the private sector banks belong to family owned industrial
groups. Banks can extend loans to group companies within limits that were not rigorously
enforced and they are allowed to own equity in companies within the same group. While there
maybe some merits to the argument that in an unstable environment like the one in Turkey, it
maybe sensible to lend to group companies. This does not necessarily ensure that credit goes to
most productive use. Nor it prevents banks from abusing the misuse of deposit insurance. In
fact, groups that pursued aggressive growth strategies borrowed heavily from their banks and this
has been a well-know problem for years. The issue is that regulations were poor to control this
practice. In the case of lending the limits to affiliates have been double the bank capital and for
equity holders and related third parties have been 50 percent of the bank capital and these are too
high by international standards. Moreover, it was reported widely in the press that these
regulations were not always observed.
The situation is more serious when one considers equity investments of banks. Consolidated
reporting of equity holding is only required if the commercial bank has 51 percent of the shares of
a group company or if it owns the majority of the voting power in one its subsidiaries. However,
consolidation is not necessary if the bank has minority position. A bank thus can hold equity in a
number of group companies without risks being reported properly.
The extent of problems that can develop due to combination of group lending and shareholding
can be very large as experienced by Turkey recently. In 1999, Interbank, a medium sized bank,
has been taken over by the deposit insurance fund when it became insolvent. A large chunk of its
portfolio was to its affiliates and the failed bank had shareholding positions in-group companies.
The cost of this bank has so far been close to US$2 billion. Suffering from the same problem,
five more small banks were taken over by the deposit insurance fund in December 1999. The
total costs could exceed US$5 billion, or 2.5 percent of GDP, which is indicative of the risks they
have taken.
Very much related to the incentives issue is the lack of orderly exit mechanisms for poorly
performing banks. While banks whose condition is thought to be weak by examiners is put under
surveillance by the Treasury with the approval of the economy minister, this does not necessarily
punish the banks or force them to exit if they do not restructure themselves. In fact, the famous
article 64 of the banking law reads; “on strengthening the financial health” and the bank in
question is exempted from reserve requirements and the minister is authorized “to take all
measures” to improve the condition of the bank including tax breaks. Therefore, banks that were
put under article 64 did not have any incentive to improve their condition. In fact, over the years,
15 or so banks have always been under it and removal from the list seems to have been a
negotiated process rather than a regulatory decision. In fact, with the exception of crises such as
in 1982 and 1994 no single bank was closed whose financial condition was poor or deteriorating.
12
The IMF for the stand-by agreement required the 1999 closings of five that were all operating
under the article 64 for a number of years20.
In this connection, the importance of the political factors must be emphasized. The banking law
assigned excessive discretionary powers to the minister in charge and the removal of weak banks
from under article 64 to bankruptcy process is completely depended on the approval of the
minister and the cabinet. In the case of the banks that failed and taken over in 1998 and 1999,
their problems have been known and have been reported and documented extensively by the
banking department of the Treasury. Consequently, risk taking behavior continued and problems
and costs mounted.
Given the analysis above it is not difficult to see how microeconomic incentives may have
affected the financial structure. First, moral hazard has been an environmental factor in Turkey
for a long while and it is natural to expect that this altered the risk/return perceptions of banks and
corporations. Large corporations or groups usually have easier access to capital markets. Those
groups who own banks have fewer incentives to use the equity markets. It is less costly to
borrow from the group's banks when there is explicit and implicit deposit insurance. Even if
macroeconomic environment was stable, one may argue that systemic moral hazard may
encourage firms to use bank financing as opposed to equity financing.
The regulatory system in Turkey failed to establish an effective supervision on lending to group
companies and on equity holding in closely held groups. Furthermore, it failed to force the exit
of weak banks. Such regulatory failure has probably been a negative factor for capital market
development as well. Even if there were no moral hazard, this regulatory failure would again
encourage bank financing. Because the large groups in Turkey have all banks and they grew
rapidly together with their banks.
5.
The Banking System
5.1
Deregulation and Structure of the System
The 1980 reforms have led to a number of important changes in the banking sector and at the
aggregate level the size of the banking sector has increased. As shown in Table 5.1, bank assets
in relation to GDP has more than doubled, increasing from around 29 percent in 1980 to 64
percent in 1998. Banks are still the most important intermediaries in the country.
Reforms also led to a large number of bank entries, one of the important objectives. In 1980,
there were 36 commercial banks and by 1998 this number reached to 59, excluding development
and investment banks. The most significant increase has been in the number of foreign banks.
There were four foreign banks in 1980 and by 1990, there were 23. Since then, some of them
merged with local banks and by 1997, there were 17. While they have only a small portion of
total bank assets, less than 5 percent, their role has been more significant than suggested by their
market share (Denizer, 2000). New domestic banks also entered the system. In contrast to
foreign bank entries, which took place mostly in the mid-1980s, new local bank entry started in
1991and their number reached to 31 in 1992. With seven net entries between 1992-1997, there
were 38 private banks as of 1998.
20
It is worth to point out that the owner of Interbank, a textile magnate, bankrolled the political comeback and
election campaign of President Suleyman Demirel during 1986-1993. Suleyman Demirel's brother owned one of
the five banks that failed.
13
Public banks continued to have important presence in the financial sector. Although their number
declined from 8 to 5 by 1998, and their asset share declined from 44 percent their assets they still
account for more than one third of sector assets. The largest bank is also state owned. These
banks support a variety of subsidized lending programs that in essence are preferential credits.
Continued presence and importance of public banks has been a serious shortcoming of the reform
process that aimed to reduce the role of the state in financial markets. Government use state
banks to bypass the budgetary process. State banks can extend credit to favored sectors or
individuals at the will of the government.
Because of new bank entries and freeing of interest rates, there has been a change in the market
shares of banks in deposits. In general, large banks lost some of their market shares and medium
sized banks gained. However, the top banks between 1980 and 1998 kept their dominant
positions and despite declines in concentration ratios competition seems to have been less than
expected (Aydogan 1993, Denizer 1997).
One of the most important results of reforms has been the improvement of human capital and
information technology in the sector. The entry of foreign banks has been particularly useful in
this regard and the number well-trained personnel have increased. Turkish banks invested in new
technologies and this has been a major expense item (TBA). These developments in turn enabled
banks to engage in the use of new instruments such as swaps and forwards; and by 1998, Turkish
banks were among the most sophisticated in the region.
5.2
Performance of Commercial Banks: Profitability and Efficiency
Available data suggests that since reforms in 1980 profitability of the banks has improved.
Standard bank profit measures such as return on assets (ROA) and return on equity (ROE) are
indicative of this, which are presented in Table 5.221. Given the high inflation environment in
Turkey, we also look at real profits and adjust profits for this factor. Results show this lowers
profitability but the basic finding does not change. Banks have been profitable in real terms as
well. It is important to draw attention to the fact that there has been a big difference in terms of
profitability between the state and private banks. State banks deliver subsidized credits to certain
sectors of the economy and often charge interest rates below their funding costs. Consequently
their profitability suffers and they are not in general fully compensated for their subsidized
lending. State banks carry large amounts of non-performing loans arising from these operations
and the stock of these loans was about US$12 billion in 1998, almost 5 percent of Turkey’s GDP.
As always, efficiency is harder to measure. Simple measures such as the overhead expenses to
total assets ratio indicate that Turkish system has still high ratios. In 1997, overhead expenses
were about 6 percent of assets, which is high compared to OECD countries. On the other hand,
compared to other emerging market economies such as Brazil and Argentina, Turkish ratios are
not out of line. More detailed econometric studies, however, find that efficiency in the system
(production efficiency) has increased after reforms. (Zaim, 1997)
One other factor that needs to be mentioned is that both the reserve and liquidity requirements
have been high in Turkey. During most of the 1980 required reserve ratios have averaged about
16 percent in the 1980s percent and it was not before mid-1990s they were gradually reduced to
about 6 percent on TL deposits and 11 percent on FX deposits in 1997. However, liquidity
21
Profitability data must be treated with caution. Inflation accounting is not required in Turkey and there are
problems with the definition of non-performing loans.
14
requirements, which could be held in the form of treasury securities, were increased from 15 to 30
percent during the 1980s as budget deficits grew. After mid-1990s, these were reduced and in
1997, this ratio was 8 percent. High reserve requirements had the effect of encouraging repo
transactions at the expense of deposits, as these were exempt.22. Tax treatment of deposit interest
income was also distortionary. Interest income from deposits has been a taxable item while repo
income was not. Hence, there was a bias towards repos as alternative to deposits, especially in
the last couple of years.
5. 3
Resource Mobilization and Allocation:
The analysis of the banking sector so far suggests that reforms enabled banks to compete and
mobilize funds domestically and internationally. We also indicated that because of reforms,
banks developed their human capital base through attracting personnel that are more qualified,
and their operations became more sophisticated over time. Given these positive developments,
we now focus on the most important issue: resource mobilization and allocation. We consider
this below and discuss the implications for financial structure.
5.3.1 Resource Mobilization
Banks mobilize resources by issuing liabilities and we consider changes in bank liabilities since
reforms, both on and off balance sheet. The first thing to note is that deregulation allowed banks
to move from non-price competition, the establishment of a large branch network and other forms
of non-price related services provided to customers under interest rate controls, to price
competition. While as explained in the previous section interest rate deregulation could not be
fully achieved until 1989, the interest rate policy followed by the Central Bank gave banks a large
degree of freedom to determine their own rates.
Consequently, banks were able to attract new deposits and sector wide deposits increased. As
shown in Table 5.3, total deposits doubled from 14 percent of GDP in 1986 to 35.8 percent in
1998. In terms of the balance sheet, deposit to total liabilities ratio also increased to about 65
percent in 1997 from 49 percent in 1980. Also, there has been a marked change in the
composition of deposits. FX deposits steadily increased and by 1998, half of total deposits were
in foreign currencies. This has been a direct result of macroeconomic factors, which is discussed
earlier and is indicative of lack of confidence of in the Turkish currency. While deposits almost
doubled, relative to GDP and in comparison to other countries, Turkey has low ratios, which
suggests there is much to be achieved in this aspect of financial development. In addition, over
time deposit maturities shortened. In the 1990s most deposits, both FX and local currency
deposits, shifted to 1-3 months maturities, reflecting liquidity preference of the public given the
volatile environment
The next largest change is in the foreign liabilities to non-residents. These rose from being
almost negligible in 1980, to almost 14 percent in 1994. Next largest item is the bank capital. As
shown in Table 5.3 banks seem to have increased their capital since 1986 to until 1990 and it
more or less remained at that level since then. There are important differences between state and
private banks however. While capital’s share in total liabilities decline for state banks, it
increases for both the private and foreign banks and differences are large. At the end of 1998, the
balance sheet total for deposits, non-deposit liabilities, (foreign borrowing), and equity was about
US$113.7 billion.
22
Footnote to explain taxes and reserves requirement issue.
15
Off-balance sheet liabilities have been increasingly important for banks to fund their activities. In
fact, these have grown faster than the growth of the banks' balance sheet; and by 1998, off
balance sheet liabilities reached about US$105 billion, almost as large as the sector balance sheet.
The off balance sheet items comprised of guarantees and warranties, foreign exchange and
interest rate derivatives transactions, and repos.
Not all off-balance sheet items create resources that could be used for investment. For example,
guarantees and warranties, which are the largest item, only generate fee income but may create
losses for the banks if their guarantee were called upon. In most cases, guarantees were on large
industrial groups' borrowings, of which many banks are part of, and these amounted to US$29
billion in 1997. Repos on the other hand enable banks to collect funds from the public and
corporations that could be easily invested elsewhere. Due to reserve requirement exemptions and
tax advantages as explained above repos became good substitutes for deposits and they have
grown very rapidly in recent years, from US$8 billion to US$22.7 billion in 1997 and to almost
25billion in 1998. Of this amount it is estimated that US$15 billion was used for investing in
treasury securities. This development is closely related to the macro environment explained
earlier and indicates public preference for short term and liquid assets if they invest in Turkish
Lira assets. It is also possible for banks to sell FX for future delivery and raise resources in this
way. Available data shows FX and interest rate derivatives transactions has increased to about
US32 billion as of end of 1997 and this was virtually zero in late 1980s. .
5.3.2 Resource Allocation
Banks allocate the funds they mobilized in various ways discussed above by investing in loans,
government securities, other financial institutions, fixed assets, in private companies, and
acquisition of assets abroad. In an undistorted system, resources should flow to the productive
sectors, which yield highest returns. Table 5.4 provides the basic data from bank balance sheets
since 1980. A number of facts clearly stand out. The first is that lending activity of bank has
declined over the years. In 1980, about half of banks' assets were made up of loans; but by 1998,
this percentage was about 40 percent. As already indicated state banks distribute credits to
agriculture and small businesses and these are directed credits and these are more than 20 percent
of total bank lending. If the data is adjusted for this, then bank credit as a percentage of assets
would be about 34 percent and it has been so for a number of years.
The distribution of credits suggests that more than 80 percent of bank loans were used for
working capital or pre-export needs. The maturity structure of loans also confirms most loans
financed trade and activities of short-term nature. Maturities of loans, like deposits, are less than
one year and this reduces risks for banks, but deprives for businesses for funds for fixed
investment. Available data suggest bank loans for fixed investment could be as low as 5 percent
of total lending.
Among the classified assets of the Turkish banks, securities are the next largest item on the
balance sheet after loans. Data shows that this asset type, which is mostly made up of
government paper, steadily increased since 1984 and by 1998 almost 10 percent of bank assets
were in that form. If off-balance sheet government and other securities were added to the total
then slightly more than 20 percent of bank assets would be in securities. Interbank deposits also
increased during the 1980s and 1990s. In 1980, less than 1 percent of assets were classified as
due from banks but by 1998 this percentage was more than 10 percent. It is also worthwhile
noting that foreign assets of the banking sector has increased during the 1980 –1997 period and
until 1997 foreign assets exceeded foreign liabilities which is considered above.
16
5.3.3 Summing Up
The analysis of resource mobilization and allocation process clearly shows the effects of
macroeconomic environment, as well as the regulatory incentives, which we discussed earlier.
Concerning resource mobilization two observations are in order. First, the analysis suggests that
after reforms banks have significantly improved their capabilities to raise resources. By 1998,
banks, in relation to their balance sheets and GDP had more resources than in pre-1980 period
and in this sense reforms were successful. However, given the macro situation deposits and nondeposit sources that banks mobilized have been very short term and maturity transformation by
the sector has been limited.
With respect to resource allocation, it is clear from the analysis that poor economic environment
and regulatory framework limited possible improvements expected of reforms. Bank portfolios
shifted from lending to the corporate sector to the financing of government. Liquid asset shares,
interbank deposits and treasury securities, have increased while the share of loans in total assets
has declined. By 1998, banks were holding about 90 percent of cash debt of government and 70
percent of domestic debt stock. This is an indication of the extent of crowding-out of the private
sector. These outcomes also influenced financial structure in general in that it altered the
composition of the stock of financial assets and deterred the private sector from investing in
alternative assets.
5.4 Some Hypotheses and Empirical Models
Some of the arguments presented above are hypotheses that could be tested. First, we argued that
banks were able to mobilize resources while they did not succeed or engage in maturity
transformation between the bank credits and deposits. We also argued that resource allocation
did not improve. In both cases, we argued that macroeconomic environment and public sector
borrowing requirements have been the principal factors affecting the resource mobilization and
allocation process. We test these hypotheses by analyzing the determinants of bank portfolio
allocation in an environment as in Turkey. Specifically we study the growth rate of bank credit
and liquid assets, on the asset side, and growth rates of deposits and non-deposit sources of funds
on the liability side. We use both the bank and sector specific variables as well as relevant
macroeconomic variables.
We estimate the following functions:
CRi = f ( σπ, ∆GDP, rF, rLi, OHi, PRi, CA, Size, Risk, D1, D2 )
LAi = f ( σπ, ∆GDP, rF, rLi, OHi, CAi, Sizei, Riski, D1, D2 )
DGi = f( σπ, ∆GDP, rF, ∆rF, OHi, PRi, CAi, Sizei, Riski, D1, D2 )
NDi = f( σπ, ∆GDP, ∆rF, OHi, CAi, Sizei, Riski , D1, D2 )
Definitions of variables are as follow:
CGi :
LAi :
DGi :
ND :
real credit growth rate for the ith bank
real liquid asset growth including government securities and interbank deposits.
deposit growth rate for the ith bank
growth rate of the non-deposit sources of funds, excluding capital for bank i.
17
σπ; :
∆GDP :
rF :
∆rF
rLi :
OHi :
PRi
CAi :
Sizei :
Riski :
D1:
D2:
coefficient of variation of inflation.
growth rate of real GDP
3-month annualized treasury bond rate adjusted for inflation
differential between 3 month government bond rate and 3 month libor rate
lending rate, interest and commissions divided by total loans adjusted for inflation.
overhead expenses as a percentage of total assets adjusted for inflation.
bank profit
capital asset ratio adjusted for inflation
bank size measured as the number of bank branches.
three risk measures defined as
(a) default risk as net write-offs as a percentage of total loans
(b) interest rate risk as net short-term assets divided by equity capital
(c) foreign exchange rate risk as the coefficient of variation of the exchange rate.
dummy variable, 1 for private banks
dummy variable, 1 for the deposit insurance after 1983.
All bank variables are for individual banks.
5.5
Data and Methodology
All data used in this section are from published sources. Bank specific variables come from
Banks in Turkey, a publication of the Turkish Bankers Association. Macroeconomic variables are
from the Central Bank of the Republic of Turkey and the Treasury which are publicly available.
There are 720 observations on all existing banks over a period of 17 years.
In the estimation of the models proposed above, we rely on dynamic panel data techniques. This
is because most of the independent variables, with the exception of macroeconomic variables
which are exogenous, used in the study have two-way relationship with the dependent variable
and they are in effect simultaneously determined. For example, the credit growth variable must
have a two-way relation with its own price (lending rate) and a cross price (government bond
rate), which calls for instrumental variable estimation methods. For this reason, we use the
generalized method of moments (GMM) estimator and use lagged values of our independent
variables as instruments. (Holtz-Eakin, Newey, and Rosen 1990; Arellano and Bover (1995).
There are two assumptions for the use of such a procedure: Firstly, there should be no serial
correlation between the error term and lagged values of independent variables. Secondly, the
current values of explanatory variables must not be affected by the future innovations of the
dependent variable. The appropriateness of these assumptions could be tested. The Sargan test is
used for the validity of overidentifying restrictions. The second test involves checking for serial
correlation of the regression residuals. If there is no serial correlation lagged values of
independent variables could be used as instruments.
As we are dealing with a panel of banks, the second matter we need to take into account is the
presence of unobserved bank specific effects. It is possible that such effects are correlated with
the independent variables and our estimates will be inconsistent if this problem is not addressed.
If there is a serial correlation of the residuals in our estimated equations, this will be an indication
of the existence of bank specific effects. When we detect this problem we follow Arellano and
Bond (1992) and Arellano and Bover (1995) to control for unobserved bank specific effects
which involves combining a level regression with first differences regression in a system each
properly instrumented. This is known as the GMM system estimator and a brief discussion about
the methodology can be found in Beck, Levine and Loayza (1999). For the levels equation the
18
instruments are the lagged differences of the explanatory variables. The instruments for the
regression in first differences are the lagged levels of the independent variables. The assumption
underlying the appropriateness of the use of these variables as instruments is that correlation
between bank specific effect is constant over time.
5.7
Results
Results are presented in Tables 5.5-5.8. In all estimations using the levels, we see that there is
high serial correlation and we reject the GMM level estimator. Therefore, we use the GMM
systems estimation, which is found appropriate based on the Sargan and serial correlation tests.
For comparison, however, we report the OLS and GMM levels estimators in the tables. We first
consider the credit growth equation. Focusing on the GMM system estimator, we see that not all
of the macroeconomic variables have the expected influence on credit growth. Inflation has a
large negative impact. However, economic growth is not significant although it has the correct
sign. It is probably the case that in a volatile environment lending and GDP growth or vice versa
does not go together. Contrary to expectations the lending rate does not enter significantly also,
though it has the correct sign. Treasury bond rate has a significant and negative impact, which is
expected. Some of the bank variables specific variables are significant. Importantly, capital/asset
ratio turns out to be significant suggesting that better capitalized banks extend more credit. The
number of bank branches is significant which shows the importance of large branch networks for
bank credit growth. Overhead expenses are not. For risk variables, only foreign exchange risk
matters, which in effect is a macro variable. Turning to our dummy variables, we find that the
ownership dummy is significant while deposit insurance is not.
Our findings with respect to the liquid assets are yielding some interesting results. Inflation
volatility still has the negative sign and significant. GDP growth is highly significant and this is
another indication of the poor incentive environment in Turkey. When GDP grows, banks prefer
liquid assets rather than less liquid loans. Not surprisingly, government bond rate is positively
and significantly related to the liquid asserts growth rate. Among bank specific variables, only
capital-asset ratio is significant. Foreign exchange risk is the only risk variable that enters
significantly. The ownership dummy variable is positive and significant, which seems to be
expected in the case of Turkey. State banks have much less choice about their portfolio
allocation possibilities.
Turning to the liability side of the balance sheet, we first focus on the deposit growth rate of each
bank. The results are in line with expectations. Inflation variability enters negatively and is
significant. Economic growth enters strongly and has the expected sign. Deposit rate is also
significant. Among the other bank specific variables overhead expense, size, and capital are
significant. Among the risk variables, only foreign exchange risk is significant, which perhaps
shows the importance of foreign exchange deposits in Turkey. Ownership dummy is also
significant which indicates that private banks collect more deposits.
Equation for non-deposit sources of funds is also in line with our anticipations. It is positively
and significantly related to GDP growth. This is arguably because banks are able to borrow more
from abroad when the economy is growing. In turn, this probably contributes to economic
growth. Differential between Treasury bond rates and LIBOR rates is also significant which
indicates the arbitrage process discussed earlier. Among the bank specific variables, capital to
asset ratio is highly significant, which is expected. Highly capitalized banks can borrow more in
domestic and international markets. Bank size turns out to be significant and this may reflect the
importance of reputation, or "too big to fail" type of factors. Among the risk variables, the only
19
significant one is the foreign exchange risk. Ownership variable is highly significant. This is
expected, as private banks have been the main borrowers abroad.
6.
Capital Markets and the Corporate Sector
One of the basic tenants of financial economics is that the efficient allocation of plant, equipment,
and working capital across firms in the economy depends on the efficiency with which financial
capital is distributed across firms. Amount of funds a firm seeks to raise in the financial markets
depends on the return on investment, and on the firm's cost of financial capital. If the cost of
capital is too high, aggregate investment will be insufficient, and the economic growth of the
country will be jeopardized. If the relative capital costs of firms are mispriced, the distribution of
funds and consequently real investments across firms will be distorted. The cost of capital for a
firm depends on the price it receives for its newly issued securities. Efficient allocation of funds
will be achieved if the primary market for financial capital operates efficiently.
For the primary market to operate efficiently it requires an efficient secondary market. For the
appeal and accurate valuation of securities, efficient secondary markets are crucial. Marketability
of a security in essence turns illiquid investments in firm’s assets into liquid portfolio holdings.
With a secondary market, any investor who buys shares when they are issued is free to sell those
shares any time the market is open, at the market determined price. Any investor who did not
purchase shares when they were issued is free to buy them, at the market-determined price.
Hence, potentially short term of investments of individuals is turned into long-term investments
in real assets.
Marketable securities fetch higher prices in the primary markets and reduce the cost of capital. In
addition, market determined valuation is informationally efficient and it reflects the market's
assessment of managerial performance. It is a forward-looking measure of performance. Many
countries, including Turkey, invested heavily in the development of equity markets to allow firms
to have access to risk capital. We discuss the development of money markets in Section 3. We
turn our focus on the equity markets and the corporate sector.
6.1
Primary Markets
Outstanding securities issued by the non-financial and financial corporations in the country and
registered with the Capital Market Board (CMB) are presented in Table 6.1. A modest amount of
$409 million issued in 1986. Share of the corporate bonds is higher than the equity offering by
the firms at this time. The dollar amount of securities issued by the firms doubled in 1987.
Although the equity offerings increased, bonds and commercial papers offerings are the principal
instruments used in raising funds in the capital markets in the early years. From 1987 to 1993,
the dollar amount of securities issued by corporations gradually increased. The equity issues
increased significantly while corporate bond issued declined during this period.
Asset Backed Securities (ABS) are introduced to the market in 1992 for the first time.
Introduction of ABS had a significant impact in the market. It became the preferred method of
raising funds, especially by the banks. In 1993, securities issued in the primary market reached a
record of $6.6 billion. This level is mainly fueled with $4.8 billion of ABS issued. Corporate
bond issues declined significantly from 1993 and on. In 1999, there were no bond issues by the
corporations. Similarly, commercial papers declined to non-existence by 1998. ABS issues
declined significantly during this period as well. With the introduction of new regulations by
CMB, the primary ABS market ceased to exist in 1999. As ABS declined the equity offerings
20
increased to all time high levels. ABS were popular because they were exempt from required
reserves for banks. As soon as this advantage was lost, they disappeared.
Mutual Funds’ Participation Certificates (MFPC) issued first in 1990. Although the mutual funds
technically started operating in 1986 with the opening of Istanbul Stock Exchange (ISE) under the
new Capital Market Law, there were no MFPC offerings in the primary market. The MFPC
issues coincide with the liberalization of financial markets at the end of 1989.
Total market value of all –government and corporate- outstanding securities in the financial
capital market are presented in Table 6.2. Share of private securities accounted 39% of the
$14.181 billion outstanding securities. Government securities accounted the remaining 61%. In
1991, share of Government securities declined to 56% and the following year reached to 69%.
From 1993 and on share of Government securities significantly increased and reached the record
level of 87% in 1996. As of 1999, Government bonds account 84% of $60.468 billion securities
outstanding in the market.
In general, fixed income securities markets are larger than the equity markets in developed capital
markets as well. However, in the case of Turkish capital market the relative size of fixed income
securities is disproportionaly higher. It is dominated by the government securities. By the end of
90s, it is almost 100 percent government securities.
Table 6.3 reports the trading volume in the Istanbul Stock Exchange (ISE), the most important
secondary market in Turkey23. The dollar volume is dominated by the Government securities as
well. Share of corporate securities in the trading volume is 1990 was 17 percent. It declined to
15 percent in 1991, 11 percent in 1992, and to less then 5 percent in 1996. As of 1999 the share
of corporate securities traded volume in the secondary market is less than 4 percent. Although
the total fixed income securities outstanding are excess of equity securities in developed markets,
trading volume of equities is substantially higher than the trading volume of fixed income
securities.
In Table 6.4, we present the portfolio composition of mutual funds. Data before 1990 is not
available. A-Type mutual funds started in 1994. These funds are required to invest at least 25
percent in equities by law. In return, they are given significant tax advantages. The law is
intended to help the deepening of the equity market and alleviate the significant crowding out
caused by the government bonds. There are no restrictions on investments of other mutual funds.
Equities weight, on the average, is 36 percent of the Type-A mutual funds holdings. With the
exception of the last two years, their investment in Government bonds was less then 1 percent.
Treasury bills accounted for the rest of their portfolio. With the entry of Repo and Reverse Repo
activities into the secondary markets in 1997, weight of treasuries significantly declined. As of
1999, reverse repo’s weight 48 percent of their portfolio while equities account 38 percent,
government bonds (9.45%) and the treasuries (4.6%) account the rest of the portfolio. Corporate
bonds accounted less than 1 percent of their portfolio in 1994 and 1994. They no longer hold
corporate bonds in their portfolio.
Type-B mutual funds’ portfolios reveal that they are primarily investing in government bonds and
T-bills. With the exception of 1993 when the investment in equities accounted 18 percent of their
portfolio equities carry an insignificant weight. Corporate bonds accounted 19 percent of their
23
There is no reliable data for fixed income securities, corporate and government, prior to 1990.
21
portfolio in 1990 and 1991. However, the weight of corporate bonds declined very rapidly to
insignificant levels within the next two years.
Government bonds accounted almost sixty percent of their portfolio in 1990. Declined to 43
percent the following year and steadily replaced with treasury bills. Treasuries accounted 90
percent and 96 percent of their portfolio in 1994 and 1996. Practically, their portfolio consisted
of very short-term government securities. From 1997 and on Reverse repo displaced investments
in treasuries and government bonds. Shift in the mutual fund portfolios show the agility of funds
to respond to tax incentives. Differential taxes result in distortions which lead generous arbitrage
opportunities.
Number of mutual funds increased over the years. However, a close examination of the detailed
transactions filed with CMB and the records of ISE reveals that the three mutual funds and seven
investment funds account more than 20 percent of the trading volume in the market24.
6.2
Secondary Markets
Istanbul Stock Exchange (ISE) is the principal secondary market in Turkey. Although stock
exchange predates the Republic, it started orderly operations in 1986. In Table 6.5, we report
main indicators of the ISE. The number of companies listed in the ISE rapidly increased from
350 in 1986 to 730 in 1989 while the number companies with shares traded on the market slightly
decreased to 76 from the original 80 firms over the same period25. After the liberalization of the
capital account in 1989, we see a significant increase in the number of companies entering the
market. The number of companies listed increased to 916 and the companies with shares traded
jumped to 110 with the addition of 33 companies that went public in 1990. The number
companies listed reached to 1,284 in 1993 while 160 companies’ shares traded in ISE. Following
the economic crisis of 1994 the number listed companies rapidly declined as the public
companies “crowded out” of the debt markets and many of them failed the listing requirements.
At the end of 1999 there are 285 companies listed and 256 companies’ shares traded. Between
1990 and end of 1999 a total of 223 companies went public while 20 companies’ shares are delisted from the exchange.
Table 6.5 reports nominal value of share issues, capital increases, debt issues, market value of
initial public offerings (IPO’s), and market capitalization of ISE companies. In terms of market
capitalization ISE is one of the leading Emerging Market stock exchanges (see Figure 6.1 for
relative size of world markets). Since 1990, IPO’s accounted 18.9 percent of the value of share
issues in the market while capital increases accounted 66 percent (for the whole period the ratio is
66.3 percent). Despite the crowding-out effect of public sector, corporations raised net $11.4
billion equity capital and $16.5 in debt capital on the ISE. This is an impressive result despite
that fact that numbers are dwarfed by treasury securities.
24
Most investment funds are owned by banks. It is possible for a mutual fund to finance government securities
in a group bank indirectly via reverse repos with differential taxes and reserve requirements.
25
Listed companies include all companies with public debt and equity. Listing requirements and procedures are
published by ISE periodically under the title “Halka Arz ve Borsa’da Islem Gorme.” Companies must sell at
least 15 percent of the shares to public to classify as a public company. Current regulations do not require share
registration. There is no data series on the profile of share ownership. In addition, there are no provisions for
minority rights at this point.
22
Trading volume in public companies increased from $13 million in 1986 to $70.4 billion in 1998.
The turnover rapidly increased, especially after opening the capital account. Turnover ratio rose
from 11 percent to 210% in 199826. Turnover ratio is used as a measure of liquidity in the
market. Based on the turnover ratios ISE is one of the most liquid markets if one compares the
increased average liquidity from 54% to 113% for NYSE for the same period! However,
liquidity exhibits excess volatility. A closer examination reveals that the largest 10 companies –
about 54% of the market capitalization- account more than half of the dollar and share volume.
One therefore should exercise care for interpreting these measures for emerging markets.
The ISE index is reported in the last column of Table 6.5 and in Figure 6.2. Annual geometric
mean return is for 1986-1999 period is 15.44 percent. Period following the capital account, 19891999, annual geometric return is 5.22 percent. A simple analysis of the monthly index highlights
the volatility of the market. In Figure 6.3 we plot one-year overlapping monthly return and
standard deviation of return for the ISE and the S&P 500 for comparison. Highest monthly
returns are observed following the liberalization and the highest volatility observed in early years
when the market was very thin27.
Table 6.6 presents Sharpe ratios for ISE Index, Emerging Market Index, World Index, and the US
Market Index (S&P 500) for the whole period and for sub-periods. For the whole period, the ISE
index barely outperformed the Emerging Market Index, but fell short of the World and the US
Indexes. As expected, Sub-periods, centered around the capital account liberalization arbitrarily
demonstrates considerable variation in performance.
The correlation of monthly returns between ISE, the Emerging Market Index, World Index, and
S&P 500 Index are reported in Table 6.7 for different time periods. ISE’s correlation is very low
with World Index and US Index for both periods while for the post-liberalization period with EM
is relative high. However, low correlation does not indicate a secular behavior for ISE.
Correlation measures linear dependence. When the sample is divided into down and up-markets
relative the US market, during the up markets ISE correlation is low, but during down markets
correlation is relatively high. This implies that negative shocks from the US stock market are
transmitted to the local economy.
Foreign investments in the local stocks play an important role. It is seen as a reliable signal for
the future prospects of the company. News about the purchases by the foreigners are reported in
the papers. Rumors about foreign activity trigger trading activity in the ISE. The share of foreign
transactions in the ISE is about 12 percent. The ISE reports that foreign investors owned about
40 percent of the stocks traded in 1996. As of 1999, they own slightly more than 60 percent of
the stocks28.
26
Turnover ratio dropped to 53% as of November 1999. The data are not complete for the year. Market
was closed for a week after the August earthquake.
27
When Figure 3 is repeated for 5-year overlapping periods, return volatility is monotonically declining.
However, without controlling for other confounding factors it is premature to link the decline in volatility
to liberalization of capital account. (See Bekaert and Harvey 1999) Analysis of daily data reveals
however, that the volatility is significantly higher after the capital account liberalization. In both cases,
once can observe the impact of economic crisis of 1994 in Turkey and crises in East Asia in 1997 and in
Russia in 1998 which had a significant impact on the Turkish economy
28
ISE reports total amount of shares bought and sold by the foreigners during the month for each stock.
Dates of transactions are not reported.
23
7. Corporate Sector
We attempt to investigate the impact of financial liberalization and the economic imbalances on
the financial statements of the corporate sector. There are number of interesting studies
investigating the performance of the corporate sector after the financial deregulation. These
include Akyuz (1990), Ersel and Ozturk (1993) Cosan and Ersel (1987), Atiyas and Ersel (1994).
There is an inherent difficulty to study the corporate sector behavior because of the data
limitations. The limitations arise from the availability of data and the lack of reporting standards
until recently. Most firms were privately held and they did not have to report publicly until the
formation of Capital Market Board. Most of these studies use the data from the corporations
registered with the Capital Market Board29. While this data series covers a small universe of
relatively large and profitable corporations, it was the first data set on corporate sector.
The hypothesis in these studies was that financial deregulation and the availability of non-bank
financing would improve the balance sheets of the corporate sector.
These studies found that the debt/equity ratio of firms increased after immediately after 1980, but
stabilized after 1984. Bank loans were important source of funds as well as trade credit, and thus,
short-term debt was the largest component of debt in the capital structure. There was no secular
trend, however, in the debt/equity or debt/assets ratio.
Researchers also investigated the profitability and other activity ratios using the same data series.
They show that profitability and activity ratios are affected more by economic cycles then
economic reforms.
The results in these early studies do not show radical changes in the behavior of corporations
measured from their financial statements. This may be partly due to the shortness of the time
span they were measuring the corporate behavior. Most of these studies cover the period 19821989. Part of the result can be explained by the limitation of the data. The sample size is small.
We attempt to update some the results in earlier studies by asking the same research question:
Can we measure changes in the financial statements of corporations to infer the impact of
development of the financial markets?
We had limited success. We were not able to replicate the past studies because the Capital
Market Board no longer publishes the corporate data after 1990. We tried to build a new data
series from several data sources. Our main data source is the Istanbul Stock Exchange.
To measure the impact of foreign investments we run a pooled cross sectional regression. We regressed the
monthly stock returns against purchases and sales (+log (purchases), –log (sales)) by foreign investors. Our
data covers the most active ten stocks for the calendar years 1997 and 1998. Estimated relationship is:
Returni,t = 0.0015 + 0.008ln(purchase) - 0.0061ln(sales), R2 = 0.04
(1.67)
(1.64)
There is a week, but statistically not significant, evidence that purchases and sales by foreign investors
have an impact on stock prices. Results using monthly data, though suggestive, are not reliable to conclude
about the impact of foreign trading on returns and volatility but warrants further investigation.
29
Akyuz (1990) uses data from the Industrial Development Bank also.
24
The ISE has been publishing the financial statements of listed companies since 1996. With the
help of ISE, we collected the balance sheet and income statement of all firms traded in the
national market 1987-1995.
We validate the published data from the ISE with the data published by Worldscope for 19961999. Worldscope standardizes the financial data for firms worldwide. There are 55 firms
reported jointly by Worldscope and the ISE. Once we reconcile the data for a variable for a firm
in two sources of data, we use the same definition to generate the time series of the same variable
for the data we collected for 1987-199530. We were able to generate a data series consisting of 55
firms in 1990 and 85 firms in 1997, about 60% of the companies. These firms include financial
and industrial firms. We removed the financial firms from the sample. We ended with a sample
size of 43 firms for 1990, which increased to 79 in 1997.
We present the traditional ratios used for financial statement analysis for these firms for 19901997 in Table 6.8. We compute these ratios for each firm and report the arithmetic average.
Financial ratios, Return on Assets (ROA), Return on Equity (ROE), and Return on Invested
Capital (ROC) requires from current and previous years. In high inflation economy with no
inflation accounting these numbers will not be reliable. It’s also evident in our sample. Both
ROA and ROE reached the highest levels during the high inflation years.
We do not observe a trend, except high finance charges as shown in interest expense/sales ratio.
It shows the high finance costs for the private sector. We found that in many cases firms net out
the interest expense and interest earned. They report a single number. It’s likely that interest
expenses are underestimated.
7.
CONCLUSIONS
In this study, we considered the two related aspects of financial reforms in Turkey. First, we
analyzed whether the objectives of financial reforms in terms of resource mobilization and
allocation were achieved. Second, we investigated the effects of reforms on financial structure.
Specifically, we studied whether the reforms enabled instruments and institutions of the financial
markets other than the banking sector, mainly the capital markets, to grow and develop.
Experience of Turkey suggests that financial liberalization without macroeconomic stabilization
and a proper regulatory structure does not necessarily lead to efficient allocation of resources.
Financial liberalization and the development of the financial markets are not themselves
responsible for the distortions we described in the paper. Markets respond to the incentive
structure, whether they are distorted or not. Public sector in Turkey embarked upon the financial
reforms with the intention to pave the way for more efficient allocation of resources in the
economy. Unable to establish fiscal discipline, it ended up creating serious distortions and
misallocation of resources. A larger and a more capable financial system accentuated the
amplitude of the distortions.
Our analysis showed that following the reforms there was financial deepening, though still far
from international standards at Turkey’s income level. We found that there were improvements
in resource mobilization capacity of the banking sector. The level of both deposit and non30
Reporting standards are not consistent over time. We found that in most cases balance sheet
items consolidated inconsistently from one year to another. Lack of inflationary accounting
standards creates further distortions.
25
deposit sources in bank balance sheets and in GDP increased. External borrowing became
increasingly important. However, resource allocation did not improve. Bank loans in total assets
stagnated in the 1980s and declined in the 1990s. Bank portfolios shifted towards liquid assets,
mostly government securities. Most lending has also been short term, which meant banks were
financing short term-activities. The major reason for this outcome has been the attractiveness of
government securities issued to finance the deficits. From a macroeconomic point of view, banks
and the private sector had all the incentives to lend to the government.
There were major regulatory problems as well. The regulatory structure could not enforce
existing banking laws; and there was explicit and implicit support for a bank based system.
Following the crisis in 1994, the deposit insurance coverage was raised to 100 percent, which
became a serious moral hazard factor. Poorly performing and failing banks were kept in the
system and this did not encourage large groups, which owned these banks, to go to capital
markets to raise funds. Industrial groups make up at least half of Turkey’s GDP and their ability
to finance their activities in the banking sector had a serious impact on the financial structure.
The volatile macroeconomic environment did not permit capital market development in a real
sense. While capitalization has increased over time and the stock of outstanding securities to
GDP registered large gains, government securities dominated capital markets. Primary issues by
corporations have been minimal and capital markets have not been a significant source of funds
for them. By 1988, government bonds accounted for almost 95 percent of all new security issues,
while common stock issues was about 5 percent. Mutual funds issued only 0.4 percentage of all
new security issues. The corporate bond issues virtually came to a halt after 1991. Most of the
trading at the Istanbul Stock exchange was in government securities.
The cost of financial distortions in Turkish economy has been high. Capital formation, capital
productivity, and output growth have been slower and more volatile than in comparable
economies in the last two decades. Especially for a country that is in need of catching up with
advanced economies, current structure rations resources away from those firms in need of grow
beyond the limitation of the internally generated funds. This is most applicable to young and
growing firms who has not much access to credit. As the financial system has become more
sophisticated, it was able to accommodate the public sector more effectively by mobilizing
resources from domestic markets as financial deepening increased and from international markets
with financial liberalization. Financial structure allowed the policy makers to continue with
irresponsible policies somewhat longer at the cost of periodic financial crises and massive income
and wealth distribution from the wage earners to higher income groups.
26
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27
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29
Table 2.1: Main Economic Indicators: 1980-1998 (Percent share in GNP)
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
-2.8
4.8
3.1
4.2
7.1
4.3
6.8
9.8
1.5
1.6
9.4
0.3
6.4
8.1
-6.1
8
7.1
8.3
3.8
110.2
36.6
29.9
31.4
48.4
45.0
34.6
38.9
73.7
63.3
60.3
66.0
70.1
66.1
106.3
88.0
80.4
85.8
84.6
-4.9
-2.7
-1.4
-3.1
-2.4
-1.5
-1.9
-0.9
1.8
0.9
-1.7
0.2
-0.6
-3.5
2.0
-1.4
-1.3
-1.4
1.3
8.8
4.0
3.5
4.9
5.4
3.6
3.7
6.1
4.8
5.3
7.4
10.2
10.6
12.0
7.9
5.2
9.0
9.5
8.6
Consolidated budget
PSBR
Expenditures
Interest Payments
Foreign
Domestic
Primary budget balance
2.9
20.3
0.6
0.2
0.4
-2.6
0.4
18.9
0.9
0.4
0.5
-0.6
1.6
15.1
0.8
0.5
0.3
-0.7
1.3
18.7
1.5
0.9
0.6
-0.7
4.6
17.1
2.0
1.2
0.8
-2.4
2.6
15.3
1.9
1.2
0.7
-0.3
3.1
16.7
2.6
1.3
1.3
-0.1
3.4
17.4
3.0
1.3
1.7
-0.4
3.1
16.6
3.9
1.4
2.4
0.9
3.5
16.9
3.6
1.4
2.2
0.3
3.4
17.3
3.5
1.1
2.4
0.2
5.3
20.5
3.8
1.1
2.7
-1.5
5.4
20.1
3.7
0.9
2.8
-0.6
6.3
24.3
5.8
1.2
4.6
-0.9
3.9
23.1
7.7
1.7
6.0
3.8
3.7
21.8
7.3
1.3
6.1
3.3
8.5
26.3
10.0
1.1
8.9
1.7
7.6
27.2
7.7
1.0
6.7
0.1
7.2
29.1
11.5
1.0
10.5
4.6
Domestic Debt Stock
13.6
12.4
12.6
22.8
20.9
19.7
20.5
23.0
22.0
18.2
14.4
14.8
17.6
17.9
20.6
17.3
21.0
21.4
21.9
Real GNP growth rate (%)
1
Inflation rate
Current account balance
Total PSBR
Foreign Debt Stock
24.0
2
Treasury average bill rate (%)
Real Interest Rate on Savings Accounts(%)
Real Appreciation of US Dollar
Net capital inflow
28.0
22.8
27.1
30.2
30.6
33.3
32.0
-75.3
35.6
65.0
17.8
24.6
7.2
1.0
1.2
0.4
34.3
37.7
42.1
51.0
50.7
51.8
34.3
-6.9
21.7
7.3
13.3
-2.9
1.4
0.1
1.6
46.0
44.8
38.4
49.1
66.6
59.1
37.6
32.8
13.7
-4.6
-12.5
-6.9
2.8
2.2
-1.1
0.7
32.2
33.2
52.3
85.9
-7.0
-1.5
-15.4
-37.5
2.7
34.6
50.1
52.8
58.5
61.6
59.3
132.5
111.8
118.9
116.3
94.7
85.8
159.5
10.0
5.8
12.8
-10.0
4.8
16.5
12.4
11.9
-5.8
-5.5
-5.6
63.6
-34.0
-2.4
1.2
-13.2
-1.6
2.3
4.9
-3.2
2.7
4.7
4.3
0.4
Notes:
1. Inflation rate is measured by change in Consumer Price Index
2. 1980-1985 figures are obtained from Atiyas-Ersel (1991), 1985-1998 figures are obtained from Central Bank of Turkey. The rates betweeen 1985-1998 are 3 month T-bills annually compounded.
3. One year maturity
Source: Treasury of Turkey, State Institute of Statistics
37.0
Table 3.1: Turkish Financial Sector at a Glance
Number of
Institutions
BANKING
*36 Turkish
*18 Foreign
* 5 State-Owned
*12 Development
- 7 Turkish
3 Foreign
2 State
Total Assets
Major Players
Regulator
US$ 122 billion
*Ziraat Bank
*Halk Bank
* Is Bank
*Yapi Kredi Bank
*Guaranty Bank
*Akbank
*Pamukbank
Total premiums in 1997:
US$ 1.8 ban
Total assets of insurance
companies: US$ 3.5 ban
Millie Reassurance (all
Insurance Supervisory
insurers obliged to
Office (Ministry of
reinsure a fixed
Treasury)
percentage with them)
-
CBOT/Ministry of
Treasury to hand over
to new Independent
Banking Regulation
and Supervision
Agency (BRSA)
INSURANCE
60 Companies (17 life
and 43 non-life)
- 46 Private
- 11 Foreign
- 3 State
EQUITY MARKET
Istanbul Stock
Market Cap of US$ 48 ban
Exchange has about (1998); free float is about
300 listed companies 20% of market cap
INVESTMENT
COMPANIES /
BROKERAGES
141 Intermediaries
authorized to trade on
ISE
Daily trading volume ranges
116 brokerages, 55
from US$300 man to US$1 Ata Invest
commercial banks,
ban
and 12 investment
banks authorized to
trade in the bonds
and bills market.
Capital Markets Board
MUTUAL FUNDS /
INVESTMENT TRUSTS
198 mutual funds (as
of beginning of 1999)
including 97
Type A funds (25% of
assets invested in
Turkish equity with
some tax advantages) Total net asset value of
- 101 Type B funds mutual funds is US$1.2 ban
(less restrictive and
80% of total market
net asset value)
17 Investment
Trusts (all Type A)
5 Reites
Capital Markets Board
LEASING / FACTORING
70 leasing companies
(in 1997)
85 factoring
companies (in 1998)
Ministry of Treasury
PENSIONS
3 State controlled
social security funds
(PAYG)
Limited private
pension funds
Foreign portfolio
investment accounts for
large demand in equity Capital Markets Board
market (more than 50%
of equity in early 1998)
Volume of leasing
transactions is US$ 2.5 ban
Factoring turnover was
US$3.3 ban in 1997
Not applicable
Ministry of Employment
and Social Security,
Capital Markets Board
Table 3.2: New Instruments and Bank Dominance in Turkish Financial Markets as of December 1998
Issuer
Share of
Outstanding
Volume (Billion Banks
TL)
(%)
Notes
Nature of Financial
Innovation
3 to 12 Months
Treasury
5,840,906
86.3
Banks' share in primary market volume
Regulation Induced
Minimum Overnight
Commercial Banks
Bank and Non Bank
Institutions
33,525.2
100.0
Only Banks are allowed to participate
Regulation Induced
91.8
Banks' share in Treasury Bill secondary market
Regulation Induced
Regulation Induced
Date of
Regulation
First
Issued in
Maturity
Treasury Bills
1985 5
1986
Interbank
1984
1986
SHORT TERM
6
6
2
REPOs
1992
Certificate of Deposits
1980
1981
Demand to 12 Months
Commercial Banks
3,708.90
100.0
Only Banks can issue Certificate of Deposits
Finance Bills
1986
1987
3 to 12 Months
Corporations
0.00
76.5 1
Mutual Fund Participation Certificates
1982
1987
Minimum Overnight
Commercial Banks
2,982.40
100.0
Banks acting as Guarantor and Underwriter
Regulation Induced
Up until 1992, only Banks are allowed to establish Mutual
Regulation Induced
Funds
Consumer Loans
No-need
1989
1 to 36 Months
Commercial Banks
10,422.10
100.0
Foreign Exchange Deposits
1984
1985
1 to 12 Months
Commercial Banks
9,114,884
100.0
Bank Bills
1986
1986
3 to 12 Months
Development Banks
770
100.0
Only Development Banks are allowed to issue Bank Bills Regulation Induced
1982
Equity
Corporations
1,885,946
na
Banks underwrite and market Shares
Banks underwrite, provide guarantees, and market
Corporate Bonds
Regulation Induced
1986
Minimum Overnight
2
375,800.8
Started in 1989 as a result of Credit Rationing
Only Banks are allowed to accept Foreign Exchange
Deposits
Market Induced
Regulation Induced
LONG TERM
Shares
Corporate Bonds
Government Bonds
1982 4
1982
--
5
4
1
1982
Minimum 12 Months
Corporations
7,589
97.9
5
Minimum 12 Months
Treasury
5,771,980
68.6
Banks' share in Primary Market Volume
Regulation Induced
1 to 12 Months
Commercial Banks
7,305
100.0
Only Banks are issuing Asset Backed Securities due to
cost considerations
Regulation Induced
0.0
Negligible Market for Islamic Instruments
Regulation Induced
-
No Venture Capital Certificate has been established
Regulation Induced
na
Foreign Exchange Indexed Income Bonds
Regulation Induced
--
Regulation Induced
OTHER
Asset Backed Securities
1992
1992
3
Profit/Loss Sharing Certificates
1986
1986
3 Months to 7 Years
Corporations
Venture Capital Corporation Shares
1992
No Issue
-
-
0.0
-
Revenue Sharing Certificates
1983
1984
3 to 5 Years
PPFA
9285
Source: Updated from Guven Sak (1995)
Notes:
1. Share of banks in inderwriten issues. Figures are for January-October 1991 period and are taken from DERIN (1992). Share of underwritten issues in 1991 is 78.6%
2. Transaction volumes for 1992.
3. Gross new issues for 1998 is taken.
4. Regulatory framework structured and refined by Capital Market Law: public offering, accounting procedures are added to existing regulations.
5. Authorization provided by Budgetary Laws each year. However, change in the mode of financing and use of securities is financing budget deficits is a post 1980 phenomenon. Before 1980, Government bonds were issues as promissory notes
6. Repos were illegal before 1992.
* Bold figures are as of 1992.
Table 3.3: Incentives Granted for Financial Instruments as of December 1998
1
Final Tax Rates on
Income Streams from
Financial Instruments
(%)
Individual Corporation
Other Incentives
Treasury Bill2
0
23
Could be used by holders against:
-Liquidity requirement for banks
-Colleteral in public auctions
-Colleteral in CBT money markets
Certificate of Deposits
10
46
Finance Bills
10
46
A Type
0
10
Other
0
42
Foreign Exchange Deposits
10
46
TL Deposits
10
46
Bank Bills
10
46
Shares3
0
0
Corporate Bonds
10
46
Asset Backed Securities
10
46
VCCs
0
10
RCSs
0
23
Mutual Fund Participation Certificates
When shares held by a corporation is sold, proceeds
could be added to capital free of tax
For individuals capital gains is tax free; besides
insurance companies, all corporations are subject to
capital gains tax
Not subject to reserve and liquidity requirements when
issued by commercial banks
Notes:
1. Before incentives witholding tax for individuals is 20%, while corporate income tax is 40%.
2. Government bonds and REPO transactions are subject to the same fiscal treatment.
3. No double taxation of dividends; corporate income tax was raised to 46% from 40%.
Table 3.4: Indicators of Financial Deepening
A. Stocks of Financial Assets as percent of GNP
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
4.1
3.5
3.9
3.9
3.3
2.9
2.5
2.9
2.7
3.0
2.9
2.8
2.8
2.6
2.6
2.4
2.4
2.2
2.1
14.1
6.5
7.6
0.0
18.8
10.4
8.4
0.0
22.3
12.8
9.5
0.0
22.1
12.6
9.5
0.0
22.5
13.7
8.8
0.0
22.6
13.7
8.9
0.0
27.8
12.7
9.8
5.3
29.3
11.0
10.9
7.4
27.1
10.7
9.1
7.3
25.2
10.8
8.3
6.1
22.1
8.8
7.8
5.5
24.9
9.6
7.2
8.2
25.2
8.6
7.1
9.6
22.5
6.3
6.3
9.9
29.9
8.5
6.0
15.4
30.2
8.8
5.4
16.0
36.2
11.6
7.1
17.5
37.1
10.9
7.5
18.7
35.8
11.2
7.3
17.2
III. TOTAL SECURITIES
4.9
4.5
5.3
5.1
5.9
6.5
8.2
9.9
9.5
10.2
10.4
12.5
17.7
19.2
18.0
19.1
22.0
23.9
25.8
Public Securities
Treasury Bills
Government Bonds
Other
3.6
0.9
2.7
--
3.1
1.1
2.0
--
3.2
1.4
1.7
--
3.0
0.4
2.6
--
4.0
1.5
2.4
0.0
4.7
1.4
2.9
0.4
6.1
1.6
3.0
1.5
7.1
2.6
3.2
1.4
6.5
2.0
3.8
0.8
6.7
1.5
4.7
0.5
6.4
1.4
4.7
0.3
7.0
2.9
3.9
0.3
12.2
3.8
7.8
0.6
13.6
3.2
9.5
0.8
14.6
7.8
6.0
0.8
15.3
8.0
6.5
0.8
19.0
10.2
8.3
0.5
20.7
8.1
12.1
0.5
22.3
11.0
10.9
0.3
Private Securities
Stocks
Asset Backet Sec.
Other
1.3
0.8
-0.5
1.4
0.8
-0.5
2.1
1.7
-0.5
2.1
1.7
-0.4
1.9
1.6
-0.3
1.7
1.5
-0.3
1.8
1.6
0.0
0.3
2.8
2.2
-0.6
3.0
2.4
-0.5
3.5
2.9
-0.5
4.0
3.6
-0.4
5.4
5.1
-0.3
5.5
4.5
0.8
0.2
5.6
3.6
1.8
0.2
3.4
2.8
0.5
0.0
3.8
2.8
0.9
0.1
1.7
1.6
0.1
0.1
3.2
3.1
0.0
0.0
3.6
3.6
0.0
0.0
23.1
26.8
31.5
31.1
31.7
31.9
38.6
42.2
39.2
38.3
35.4
40.2
45.7
44.2
50.5
51.7
60.6
63.2
63.7
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
13.9
17.4
20.2
12.7
21.3
26.7
13.3
25.2
29.9
15.0
25.0
28.6
11.0
24.8
28.0
9.7
24.2
28.2
10.3
23.8
30.5
11.5
23.5
32.6
8.8
21.1
30.3
8.5
20.5
27.8
7.9
18.0
24.7
7.4
18.5
27.4
7.1
17.3
27.8
6.5
14.1
24.5
5.9
16.2
31.7
4.9
16.0
31.8
6.0
19.5
37.4
5.4
19.3
38.0
4.79
21.34
37.77
I. CURRENCY IN CIRCULATION
II. TOTAL DEPOSITS
Saving Deposits
Other
FX Deposits
TOTAL
B. Financial Deepening Ratios
M1/GNP
M2/GNP
M2Y/GNP
Source: State Planing Organization, Treasury
Table 3.5: Outstanding Securities in Turkish Financial Markets
A. In TL Trillion
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Public
Treasury Bills
Government Bonds
Other
0.2
0.0
0.1
--
0.2
0.1
0.2
--
0.3
0.2
0.2
--
0.4
0.1
0.4
--
0.9
0.3
0.5
0.0
1.7
0.5
1.0
0.2
3.1
0.8
1.5
0.8
5.4
1.9
2.4
1.0
8.4
2.5
4.9
1.0
15.5
3.5
10.9
1.1
25.4
5.5
18.8
1.1
44.7
18.3
24.7
1.8
134.9
42.2
86.4
6.2
271.0
64.5
190.5
16.0
568.1
304.2
232.8
31.0
1,202.3
631.3
511.8
59.3
2,848.9
1,527.8
1,250.2
70.9
6,017.6
2,375.0
3,570.8
71.8
11,789.2
5,840.9
5,772.0
176.3
Private
Stocks
Asset Backet Sec.
Other
0.1
0.0
-0.0
0.1
0.1
-0.0
0.2
0.2
-0.1
0.3
0.2
-0.1
0.4
0.4
-0.1
0.6
0.5
-0.1
1.1
0.8
-0.1
2.1
1.6
-0.5
3.8
3.1
-0.7
8.0
6.7
-1.3
16.1
14.5
-1.6
34.5
32.3
-2.2
60.6
49.1
9.0
2.5
111.9
71.3
36.6
4.0
130.8
109.2
19.9
1.6
295.5
223.8
66.8
4.9
259.4
242.7
8.0
8.7
929.3
909.3
13.2
6.9
1,900.8
1,885.9
7.3
7.6
TOTAL
0.3
0.4
0.6
0.7
1.3
2.3
4.2
7.5
12.2
23.5
41.4
79.2
195.5
382.9
698.9
1,497.8
3,290.3
6,946.9
13,690.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Public
Treasury Bills
Government Bonds
Other
72.8
18.7
54.1
0.0
69.1
24.5
44.6
0.0
59.7
27.0
32.7
0.0
58.8
7.9
50.8
0.0
67.4
26.0
40.7
0.8
73.3
21.5
45.2
6.6
73.7
19.5
35.9
18.3
71.9
25.8
32.3
13.8
68.6
20.8
39.8
8.0
66.0
15.1
46.3
4.6
61.2
13.2
45.4
2.7
56.5
23.1
31.2
2.2
69.0
21.6
44.2
3.2
70.8
16.8
49.8
4.2
81.3
43.5
33.3
4.4
80.3
42.1
34.2
4.0
86.6
46.4
38.0
2.2
86.6
34.2
51.4
1.0
86.1
42.7
42.2
1.3
Private
Stocks
Asset Backet Sec.
Other
27.2
16.5
0.0
10.7
30.9
18.9
0.0
12.0
40.3
31.5
0.0
8.8
41.2
32.9
0.0
8.3
32.6
27.5
0.0
5.1
26.7
22.5
0.0
4.2
26.3
18.9
0.0
3.1
28.1
21.6
0.0
6.5
31.4
25.6
0.0
5.8
34.0
28.7
0.0
5.4
38.8
34.9
0.0
3.9
43.5
40.8
0.0
2.7
31.0
25.1
4.6
1.3
29.2
18.6
9.6
1.0
18.7
15.6
2.9
0.2
19.7
14.9
4.5
0.3
7.9
7.4
0.2
0.3
13.4
13.1
0.2
0.1
13.9
13.8
0.1
0.1
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
B. Percent Share in Total Securities
TOTAL
Source: State Planning Organization, Treasury
Table 3.6: Primary Issues
A. Sales Volume in Trillion TL
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Public Sector
Treasury bills
Government bonds
0.3
0.3
0.1
0.3
0.1
0.2
1.0
0.5
0.2
2.0
1.2
0.7
3.3
1.8
1.3
6.0
4.0
2.0
9
5
4
17
8
9
21
8
12
46
34
12
150
76
74
330
179
151
841
639
203
1,666
1,299
367
4,625
3,464
1,161
6,260
3,074
3,186
14,254
9,546
4,708
Private Sector
Shares
Bonds
Bank bills
Corporate Papers
Profit & Loss Sharring certificate
Mutual Fund Participation Certificate
Asset Backed Securities
0.0
0.0
0.0
------
0.0
0.0
0.0
------
0.1
0.1
0.0
------
0.1
0.1
0.0
------
0.2
0.1
0.1
------
0.7
0.2
0.3
0.1
0.1
0.0
0.0
--
1
0
0
0
0
0
0
--
2
1
1
0
0
0
0
--
6
4
1
0
0
0
1
--
7
4
1
1
1
0
0
--
23
5
1
1
1
0
0
14
72
10
1
2
1
0
5
53
85
38
0
2
0
0
2
42
175
51
2
1
2
0
4
114
159
102
1
2
3
0
9
42
377
306
1
10
2
0
34
23
766
697
3
0
0
0
56
11
TOTAL
0.3
0.3
1.1
2.2
3.5
6.7
10
19
27
53
172
402
926
1,840
4,785
6,637
15,021
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
94.1
76.6
17.6
84.9
23.9
61.0
93.1
44.7
18.0
94.0
56.3
31.2
93.6
51.0
36.2
89.8
59.2
30.6
88.7
50.8
37.9
87.8
40.3
47.5
76.9
31.1
45.8
87.2
65.3
21.9
86.9
44.1
42.8
82.1
44.6
37.5
90.9
69.0
21.9
90.5
70.6
19.9
96.7
72.4
24.3
94.3
46.3
48.0
94.9
63.6
31.3
5.9
2.7
3.2
------
15.1
10.6
4.5
------
6.9
5.8
1.1
------
6.0
4.5
1.5
------
6.4
2.9
2.1
------
10.2
2.8
4.8
1.1
0.8
0.0
0.7
--
11.3
3.6
2.1
2.4
2.7
0.0
0.5
--
12.2
5.1
3.2
0.5
2.5
0.0
0.9
--
23.1
15.1
2.8
1.2
0.8
0.0
3.1
--
12.8
8.5
1.5
1.4
1.3
0.0
0.1
--
13.1
3.1
0.5
0.4
0.6
0.0
0.1
8.4
17.9
2.4
0.2
0.6
0.3
0.0
1.3
13.1
9.1
4.1
0.1
0.2
0.0
0.0
0.2
4.6
9.5
2.8
0.1
0.1
0.1
0.0
0.2
6.2
3.3
2.1
0.0
0.0
0.1
0.0
0.2
0.9
5.7
4.6
0.0
0.1
0.0
0.0
0.5
0.3
5.1
4.6
0.0
0.0
0.0
0.0
0.4
0.1
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
B. Primary Issues as a percentage of Total
1980
Public Sector
Treasury bills
Government bonds
Private Sector
Shares
Bonds
Bank bills
Corporate Papers
Profit & Loss Sharring certificate
Mutual Fund Participation Certificate
Asset Backed Securities
TOTAL
Source : Treasury of Turkey
1981
Table 3.7: Yields and Returns
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
26.5
29.0
28.0
50.0
34.0
30.6
50.0
34.0
33.3
42.5
31.8
32.0
45.0
43.0
51.0
55.0
50.6
50.7
48.0
51.0
51.8
52.0
47.0
49.1
83.9
62.4
66.6
58.8
52.2
59.1
59.4
48.2
52.3
72.7
85.9
74.2
94.7
74.7
85.0
85.8
95.6
137.0
159.5
92.3
108.0
132.5
93.8
115.0
111.8
96.6
111.0
118.9
94.8
106.0
116.3
RETURNS
Shares 4
Nominal Appreciation of US Dollar 5
Foreign Exchange Deposits-US Dollar 6
Inflation Rate 7
12.0
128.0
110.2
30.4
61.2
36.6
79.9
37.1
29.9
110.2
38.7
31.4
-5.2
61.7
48.4
46.8
42.1
40.4
45.0
86.5
30.0
41.5
34.6
293.9
26.4
44.5
38.9
-44.4
66.8
89.2
73.7
493.1
47.9
51.7
63.3
46.8
22.8
34.7
60.3
34.2
60.2
66.0
-8.4
64.6
73.2
70.1
416.5
60.5
79.3
66.1
31.8
169.9
68.5
106.3
46.8
54.0
181.4
88.0
143.8
78.0
61.6
80.4
253.6
87.0
88.9
85.8
-24.7
71.4
100.7
84.6
REALIZED REAL RETURNS
Real Return on Treasury Bills
Real Appreciation of US Dollar
Return on shares in US Dollar 8
-73.9
17.8
-
-16.0
24.6
-
11.0
7.2
-
1.9
7.3
5.3
13.3
-
12.4
-2.9
-
48.3
-4.6
-
25.6
-12.5
257.9
-9.5
-6.9
-42.8
-6.6
-15.4
13.4
-13.1
-37.5
242.5
29.7
-5.8
-39.8
34.6
-5.5
-36.6
29.4
-5.6
64.7
49.6
63.6
-25.1
50.0
-34.0
26.1
38.6
-2.4
-6.0
38.1
1.2
58.2
37.0
-13.2
-7.2
YIELDS
1
Savings Deposits
Government Bonds 2
Treasury Bills 3
-
Source: Central Bank of Turkey, Treasury of Turkey, Istanbul Stock Exhange
Notes:
1. One year maturity
2. 1980-1990 figures are obtained from Atiyas-Ersel (1991), 1990-1998 figures are obtained from Central Bank of Turkey
3. 1980-1985 figures are obtained from Atiyas-Ersel (1991), 1985-1998 figures are obtained from Central Bank of Turkey. The rates betweeen 1985-1998 are 3 month T-bills annually compounded.
4. Shares in Istanbul Stock Exchange, figures obtained from Treasury of Turkey
5. Exchange rate data obtained from Central Bank of Turkey
6. Weighted foreign exchange deposit interest rates obtained from Central Bank of Turkey
7. Inflation rate is measured by change in Consumer Price Index
8. Figures are obtained from Istanbul Stock Exchange (1986=100)
Table 5.1: Evolution and Structure of the Banking Sector in Turkey
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Total Assets / GNP
State Banks
Private Banks
Foreign Banks
28.9
14.3
13.8
0.9
33.8
15.4
17.3
1.1
39.5
18.1
20.1
1.3
42.4
20.5
20.2
1.7
42.5
20.7
19.9
1.9
41.4
19.8
20.1
1.6
46.7
21.9
22.9
1.9
52.5
24.3
26.5
1.7
48.7
23.5
23.3
1.9
44.3
22.8
20.0
1.5
39.8
19.9
18.4
1.5
43.7
20.7
21.4
1.6
47.5
23.1
22.5
1.9
46.6
19.8
24.8
2.0
47.2
20.9
24.7
1.6
50.3
20.5
28.3
1.6
57.5
23.4
32.2
1.8
60.0
21.9
35.1
3.0
64.7
23.7
38.0
3.0
Total Loans / GNP
State Banks
Private Banks
Foreign Banks
15.0
8.0
6.7
0.3
17.3
9.0
8.0
0.3
17.7
8.2
9.1
0.4
18.2
8.6
9.1
0.5
14.7
6.8
7.4
0.5
16.4
7.9
7.9
0.6
19.6
9.5
9.5
0.6
21.9
11.5
9.7
0.6
18.4
10.1
7.7
0.6
17.2
9.4
7.2
0.6
19.7
9.1
9.8
0.7
17.9
8.8
8.4
0.7
18.4
8.9
8.9
0.6
18.7
7.7
10.4
0.6
17.5
7.7
9.4
0.4
20.6
9.1
11.1
0.4
24.2
9.4
14.3
0.5
25.0
9.4
14.8
0.7
23.8
7.6
15.5
0.8
Total Deposits / GNP
State Banks
Private Banks
Foreign Banks
15.2
5.2
9.6
0.4
20.3
6.5
13.3
0.5
24.0
8.9
14.6
0.5
24.4
9.9
14.0
0.6
26.1
10.9
14.5
0.8
28.2
11.8
15.6
0.8
30.9
12.6
17.2
1.1
32.1
12.8
18.2
1.1
29.7
12.9
15.6
1.1
26.2
12.8
12.6
0.8
24.0
11.6
11.7
0.6
25.9
12.0
13.4
0.5
27.3
13.8
13.1
0.5
25.6
11.9
13.3
0.4
32.2
14.4
17.2
0.6
30.2
13.1
16.3
0.8
36.2
16.0
19.4
0.9
37.1
14.8
21.0
1.3
35.8
14.6
20.3
1.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.2
0.1
0.1
0.0
0.2
0.0
0.1
0.0
2.3
0.7
1.4
0.3
3.3
1.2
1.8
0.2
5.0
1.9
2.9
0.2
7.5
2.6
4.6
0.3
7.3
2.6
4.4
0.3
6.1
2.3
3.6
0.2
5.7
2.1
3.4
0.2
8.4
3.0
5.2
0.2
10.1
3.8
6.1
0.2
10.5
3.8
6.6
0.2
16.7
5.7
10.6
0.4
16.0
17.5
18.7
4.5
13.5
0.0
17.2
3.7
13.0
0.1
12.1
14.4
15.4
15.7
13.2
13.7
16.5
17.4
14.3
13.4
13.9
13.7
15.2
15.6
13.0
16.3
20.2
23.7
20.1
Foreign Exchange Deposits / GNP
State Banks
Private Banks
Foreign Banks
Bank Credit to Private Sector / GNP
Source: Banks Association of Turkey
Table 5.2: Structure of the Commercial Banking Sector
Sector Shares as a percentage of total
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
TOTAL ASSETS
State Banks
Private Banks
Foreign Banks
100.0
49.3
47.6
3.1
100.0
45.4
51.3
3.3
100.0
45.8
50.9
3.3
100.0
48.4
47.6
4.0
100.0
48.8
46.8
4.4
100.0
47.7
48.4
3.8
100.0
46.9
49.0
4.0
100.0
46.3
50.5
3.3
100.0
48.3
47.8
3.9
100.0
51.4
45.2
3.4
100.0
49.9
46.3
3.8
100.0
47.4
49.0
3.6
100.0
48.7
47.4
3.9
100.0
42.4
53.3
4.3
100.0
44.3
52.3
3.4
100.0
40.7
56.2
3.1
100.0
40.7
56.1
3.2
100.0
36.5
58.5
5.0
100.0
36.7
58.7
4.6
TOTAL DEPOSITS
State Banks
Private Banks
Foreign Banks
100.0
34.0
63.7
2.3
100.0
32.2
65.4
2.4
100.0
37.3
60.8
1.9
100.0
40.4
57.3
2.3
100.0
41.6
55.4
3.1
100.0
41.9
55.3
2.7
100.0
40.8
55.6
3.6
100.0
39.9
56.6
3.5
100.0
43.5
52.7
3.8
100.0
48.7
48.2
3.1
100.0
48.6
49.0
2.4
100.0
46.1
51.8
2.1
100.0
50.4
47.8
1.8
100.0
46.5
51.9
1.7
100.0
44.6
53.4
1.9
100.0
43.3
54.0
2.7
100.0
44.1
53.4
2.5
100.0
39.9
56.7
3.4
100.0
40.7
56.6
2.7
TOTAL LOANS
State Banks
Private Banks
Foreign Banks
100.0
53.4
44.4
2.2
100.0
51.9
46.1
1.9
100.0
46.4
51.3
2.2
100.0
47.2
50.1
2.8
100.0
46.1
50.4
3.5
100.0
48.0
48.2
3.8
100.0
48.3
48.7
3.0
100.0
52.6
44.5
2.9
100.0
54.7
41.8
3.4
100.0
54.6
41.7
3.7
100.0
46.3
50.1
3.6
100.0
49.3
46.8
3.9
100.0
48.3
48.2
3.5
100.0
41.2
55.6
3.3
100.0
44.3
53.6
2.1
100.0
44.1
53.8
2.1
100.0
38.9
59.1
1.9
100.0
37.7
59.3
3.0
100.0
31.9
64.9
3.2
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
0.72
1.06
4.02
0.17
1.34
0.43
1.41
0.68
4.91
0.51
1.75
8.40
2.21
3.40
9.27
1.93
2.95
9.36
1.85
1.40
8.20
1.01
2.51
7.04
2.92
3.87
8.07
1.28
2.61
5.27
0.39
3.59
3.65
-1.31
3.49
4.94
-0.58
2.54
4.61
1.51
2.89
4.71
0.57
3.10
5.56
0.20
4.90
6.40
0.70
4.60
5.50
0.60
3.80
5.70
0.70
2.70
6.00
Bank Profitability *
State Banks
Private Banks
Foreign Banks
Notes:
*Nominal profits defined as net income on average assets
Source: Banks Association of Turkey
Table 5.3: Structure of Liabilities According to Bank Groups
1959-64 1965-70 1971-75 1976-80 1981-85 1986-90 1991-98
Sector
Deposits
Non-Deposit Funds
Other Liabilities
Shareholders' Equity + Net Income
41.1
3.9
38.8
16.2
38.7
8.9
41.6
10.9
51.7
9.3
30.5
8.6
47.5
7.7
39.8
4.9
58.1
12.9
20.5
8.5
58.1
18.7
14.3
9.0
61.3
17.9
11.8
9.0
Private Banks
Deposits
Non-Deposit Funds
Other Liabilities
Shareholders' Equity + Net Income
76.5
0.0
15.8
7.7
77.3
0.0
17.3
5.4
83.5
0.0
12.1
4.5
70.2
0.0
26.6
3.2
75.8
7.7
10.3
6.1
69.3
9.5
11.7
9.5
64.4
14.8
10.0
10.8
State-Owned Banks
Deposits
Non-Deposit Funds
Other Liabilities
Shareholders' Equity + Net Income
28.3
3.6
47.3
20.9
31.2
1.7
52.8
14.2
43.0
0.5
44.6
11.9
39.5
0.4
54.0
6.1
50.6
11.8
28.7
8.9
58.3
18.3
15.9
7.6
70.1
12.4
11.4
6.0
Foreign Banks
Deposits
Non-Deposit Funds
Other Liabilities
Shareholders' Equity + Net Income
53.0
0.0
40.1
7.0
55.7
0.0
38.7
5.6
67.1
0.0
28.5
4.4
46.5
0.0
49.5
4.0
40.7
22.4
26.8
10.1
56.0
13.5
19.2
11.3
34.7
27.6
14.8
12.4
Development and Investment Banks
Deposits
Non-Deposit Funds
Other Liabilities
Shareholders' Equity + Net Income
0.6
59.4
29.7
10.3
0.9
45.4
43.3
10.4
0.6
60.3
30.0
9.1
2.3
57.8
32.7
7.2
0.5
50.7
28.2
20.7
0.0
69.1
17.9
12.9
0.0
68.9
19.9
11.2
Source: Banks Association of Turkey
Table 5.4: Asset Structure According to Bank Groups
1959-64 1965-70 1971-75 1976-80 1981-85 1986-90 1991-98
Sector
Liquid Assets
Credits
Permanent Assets
Other Assets
22.5
47.9
14.0
15.6
19.8
53.9
10.7
15.6
24.3
55.9
8.9
11.0
29.5
55.0
5.5
10.0
31.8
46.5
5.2
16.4
36.3
44.1
7.9
11.7
36.7
42.0
7.6
13.7
Private Banks
Liquid Assets
Credits
Permanent Assets
Other Assets
45.0
38.4
9.0
7.7
42.8
44.8
7.1
5.4
41.7
48.7
5.5
4.0
45.7
45.7
4.4
4.1
41.0
43.5
5.9
9.6
44.2
38.3
8.1
9.4
41.4
40.7
7.1
11.0
State Banks
Liquid Assets
Credits
Permanent Assets
Other Assets
12.4
51.6
17.9
18.1
12.6
51.9
16.6
18.9
17.2
50.4
14.3
18.1
20.7
53.1
8.5
17.8
26.4
45.3
5.4
23.1
32.1
46.1
8.1
13.7
32.4
40.6
9.0
18.0
Foreign Banks
Liquid Assets
Credits
Permanent Assets
Other Assets
49.2
43.3
2.4
5.1
40.7
46.6
3.3
9.4
38.2
51.6
3.3
7.0
47.2
38.7
2.3
11.9
42.0
31.4
2.1
24.4
48.4
38.5
3.0
10.2
51.8
27.0
3.5
7.3
Development and Investment Banks
Liquid Assets
Credits
Permanent Assets
Other Assets
8.6
63.0
4.6
23.7
3.1
77.0
0.6
19.3
2.4
90.8
1.1
5.8
2.3
83.6
1.3
12.7
2.3
83.6
1.3
12.7
12.5
66.8
7.6
13.2
17.4
64.7
5.3
12.6
Source: Banks Association of Turkey
Table 5.5: Dependent Variable: Growth Rate of Real Bank Credit
(t-statistics are presented below)
OLS
GMM
GMM
(System)
Constant
-0.471
-2.442
-0.392
-2.345
-0.034
-1.658
Inflation Volatility
-0.024
-1.987
-0.021
-1.997
-0.043
-2.765
GDP Growth
-1.272
-1.882
1.295
1.239
0.981
1.591
Gov. Bond Rate
-0.08
-1.657
-0.092
-1.878
-0.341
-3.731
Bank Lending Rate
-0.159
-1.233
0.142
1.432
0.091
1.563
OH
-1.344
-1,292
-1.482
-1.828
-0.067
-1.495
Profits
-0.987
-0.502
-0.876
-1.349
0.391
1.442
Capital
1.895
1.452
-1.034
-1.642
1.013
2.142
Size
-0.051
-1.678
-0.042
-1.862
0.087
1.957
Default Risk
-0.872
-0.992
-0.743
-1.294
-0.081
-0.034
Interest Risk
1.567
1.201
1.453
1.378
0.023
0.815
Foreign Exc. Risk
-0.034
-2.873
-0.045
-2.525
-0.081
-3.086
D1
0.432
3.213
0.321
3.135
0.387
2.981
D2
0.237
0.982
0.291
1.239
0.355
1.011
720
720
0.027
0.016
720
0.479
0.431
Estimation Method
Instruments:
No of Observations:
Sargan Test:
Serial Correlation Test:
0,00
Table 5.6: Dependent Variable: Real Liquid Asset Growth
(t-statistics are presented below)
OLS
GMM
GMM
(System)
Constant
-1.291
-1.491
-1.471
-1.971
0.710
2.341
Inflation Volatility
-0.091
-1.440
0.078
1.894
-0.037
-1.951
GDP Growth
0.012
1.951
0.447
1.817
0.231
2.449
Government Bond Rate
0.791
2.112
0.817
1.978
1.231
1.927
Bank Deposit Rate
1.109
0.902
-0.042
-1.447
0.316
1.510
OH
0.903
1.497
-0.174
-1.071
0.742
1.567
Capital
0.154
1.921
0.447
1.751
2.531
2.000
Size
0.044
0.772
-0.142
-1.311
0.192
1.201
Default Risk
1.417
0.901
-1.277
-1.291
0.397
1.571
Interest Risk
0.087
0.740
0.791
1.521
0.187
1.001
Foreign Exchange Risk
0.235
1.750
0.337
1.872
-0.921
-1.992
DI
0.743
1.991
1.736
2.290
2.336
2.097
D2
-1.107
-0.122
-2.131
-1.298
-0.982
-1.441
720
0
720
0.181
0.430
720
0.550
0.620
Estimation Method
Instruments
No. of Observations:
Sargan Test:
Serial Correlation Test
Table 5.7: Dependent Variable: Real Deposit Growth
(t-statistics are presented below)
Estimation Method
OLS
GMM
GMM
(System)
-3.297
-2.786
-3.736
-1.392
-1.497
-1.972
-0.082
-0.092
-0.672
-1.332
-1.421
-2.138
0.172
0.293
0.197
2.012
1.957
2.567
Instruments
Constant
Inflation Volatility
GDP Growth
Government Bond Rate
Bank Deposit Rate
OH
Profits
Capital
Size
Default Risk
Interest Risk
Foreign Exchange Risk
DI
D2
No. of Observations:
Sargan Test:
Serial Correlation Test
-0.471
0.699
-1.721
-1.073
1.427
-1.992
-0.903
1.273
0.472
-1.627
1.821
2.001
0.327
0.867
0.792
1.275
1.529
1.901
0.527
0.871
-0.627
0.927
1.226
-0.132
1.278
2.193
0.900
1.986
2.411
3.597
0.621
0.793
1.327
1.442
1.797
1.879
-0.015
-0.329
-0.476
-1.261
-1.672
-1.208
-1.821
-0.625
-0.157
-0.927
-1.539
-1.528
-0.627
-0.974
-0.362
-1.774
-1.899
-1.999
0.338
0.781
0.741
1.772
1.986
2.014
-0.741
-0.365
-0.632
-0.911
-1.122
-1.017
720
720
720
0.250
0.450
0.016
0.580
0.000
Table 5.8: Dependent Variable: Non-Deposit Source of Growth
(t-statistics are presented below)
Estimation Method
OLS
GMM
GMM
(System)
0.142
0.175
-1.651
1.291
1.187
-2.020
0.134
0.217
-0.010
1.129
1.092
-3.442
Instruments
Constant
Inflation Volatility
GDP Growth
Interest Rate Diff.
Bank Lending Rate
OpExp
Profits
Capital
Size
Default Risk
Interest Risk
Foreign Exchange Risk
DI
D2
No. of Observations:
Sargan Test:
Serial Correlation Test
1.213
1.085
0.041
1.790
1.634
2.147
0.021
0.034
1.217
2.180
1.992
2.351
0.093
0.097
1.552
1.397
1.422
0.994
1.633
1.427
-1.217
1.227
1.356
-1.192
-0.399
-0.431
0.271
-0.975
-1.128
1.325
0.186
0.192
0.031
1.690
1.525
2.691
1.107
1.213
2.421
2.017
2.086
1.985
0.723
0.625
-0.521
1.328
1.423
-1.591
0.671
0.723
-0.325
1.423
1.525
-1.125
-0.423
-0.162
-0.022
-1.990
-2.181
-2.962
0.217
0.695
0.127
3.550
1.782
2.000
-0.110
-1.351
-1.256
-1.371
-0.917
-1.425
720
-
720
0.040
0.420
720
0.520
0.449
Table 6.1: Primary Security Issues Registered With the Capital Market Board (US $ Million)
Years
Shares Corporate
Bonds
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
19992
Source: CMB
152
219
256
458
1,576
1,066
775
873
1,266
1,124
1,261
2,022
2,682
1,226
1
166
371
148
285
293
195
116
65
17
41
15
10
10
Commercial
Papers
65
190
219
83
160
147
110
5
34
36
15
AssetBacked
Securities
2,110
4,811
1,426
2,494
514
152
42
Bank Bills &
Profit &
Loss
Bank Guaranteed
Sharing
Bills
Certificates
1
90
1
89
167
1
46
2
127
4
174
9
112
218
68
7
28
29
66
Mutual Fund Participation Certificates are reported at market values after 1998.
2
As of September 30, 1999
Mutual Funds’
Participation
Certificates1
328
16
13
488
74
93
110
227
506
292
Real-Estate
Foreign Mutual
Certificates Funds' Participation TOTAL
Certificates
33
12
409
745
761
1,009
2,407
1,615
3,282
6,565
2,856
3,821
1,999
2,502
3,239
1519
Table 6.2: Outstanding Securities (US $ Million)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
4,946
6,366
5,743
4,931
2,843
3,761
3,950
4,441
6,012
9,735
475
322
195
115
37
40
25
22
71
108
88
83
5
26
27
11
1,056
2,530
519
1,122
75
64
PRIVATE SECTOR SECURITIES
Shares
Corporate Bonds
Commercial Papers
Asset-Backed Securities
1
Others
22
17
23
7
35
101
13
91
3
17
28
13
TOTAL
5,514
6,888
7,094
7,749
3,407
4,966
4,106
4,551
6,057
9,759
PERCENT OF TOTAL
39%
44%
31%
29%
18%
20%
13%
13%
14%
16%
Government Bonds
6,423
4,863
10,097
13,122
6,060
8,601
11,628
17,440 18,399 38,754
T-Bills
1,868
3,598
4,938
4,460
7,919
10,609
14,212
11,599 18,619 11,407
Revenue Sharing Certificates
273
20
530
209
41
F/X Indexed Bills
102
328
1,053
367
127
420
491
PUBLIC SECTOR SECURITIES
729
1,099
Privatization Bond
TOTAL
8,667
8,808
15,764
18,680
15,563
20,207
26,501
PERCENT OF TOTAL
61%
56%
69%
71%
82%
80%
87%
14,181
15,696
22,858
26,429
18,970
25,173
30,607
TOTAL OUTSTANDING
720
548
29,759 37,580 50,709
87%
86%
84%
34,310 43,639 60.468
Source: CMB
(1999 figures are as of August 30, 1999)
1
562
Consists of Bank Bills & Bank Guaranteed Bills, Real Estate Certificates and Profit & Loss Sharing Certificates
Table 6.3: Trading Volume (US $ Million)
Private Sector Securities
Shares
Others1
TOTAL
Securities
Government
Others2
T-Bills
TOTAL
Bonds
1986
13
_
13
_
_
_
_
13
1987
118
_
118
_
_
_
_
118
1988
115
_
115
_
_
_
_
115
1989
773
_
773
_
_
_
_
773
1990
6,195
1,487
7,682
23,712
12,295
1,042
37,050
44,732
1991
8,583
3,140
11,723
34,114
31,627
1,146
66,888
78,611
1992
8,217
432
1,875
10,523
30,405
54,772
3,641
88,818
99,341
1993
23,315
2,908
818
27,040
59,974
93,706
4,462
158,142
185,183
1994
21,968
3,496
1,451
26,915
56,581
117,240
6,975
180,795
207,710
1995
51,990
3,615
2,933
58,537
100,269
324,685
3,557
428,511
487,048
1996
37,510
2,947
2,196
42,653
159,063
705,777
5,442
870,283
912,936
1997
60,074
1,317
61,391
565,639
600,697
746
1,167,082
1,228,473
1998
69,647
296
69,943
423,114
655,825
234
1,079,172
1,149,115
1999
58,930
73
59,003
798,291
422,892
1,221,183
1,280,186
Source: CMB and ISE
(1999 figures are as of November 30, 1999)
1
Includes Corporate Bonds, Commercial Papers and Bank Bills & Bank Guaranteed Bills
2
TOTAL
AssetBacked
Years
Public Sector Securities
Includes Revenue Sharing Certificates, Housing Certificates and Foreign Exchange Indexed Bonds
Table 6.4: Portfolio Composition of Mutual Funds (%)
Panel A: Type-A Mutual Funds
Years
Number of
Government
Mutual Funds
Bonds
T-Bills
Reverse
Repo
Repo
Corporate
Equities
Others
Bonds
1994
40
1.30
64.43
0.59
33.68
1995
39
0.48
63.21
0.11
36.20
1996
49
0.33
67.30
1997
72
1.76
15.44
34.06
1998
96
4.95
10.69
44.54
1999
107
9.45
4.60
48.06
32.36
9.48
0.02
39.08
0.18
39.56
0.26
37.81
0.06
Panel B: Type-B Mutual Funds
Years
Number of
Government
Mutual Funds
Bonds
T-Bills
Reverse
Gold
Repo
Corporate
Equities
Others
Bonds
1990
71
58.64
15.11
19.03
2.14
5.08
1991
73
43.11
27.01
19.14
2.51
8.23
1992
77
16.06
69.11
7.55
1.34
5.94
1993
86
11.93
62.04
3.13
18.04
4.86
1994
51
1.76
90.10
0.14
1.47
6.53
1995
60
12.60
83.06
0.02
0.36
3.96
1996
75
1.50
95.73
0.01
0.95
1.81
1997
84
6.64
21.02
63.79
0.33
1.34
6.88
1998
101
5.78
34.36
59.09
0.01
0.33
0.43
1999
103
15.83
13.32
70.25
0.33
0.27
Source: CMB
1999 figures are as of August 30, 1999
Table 6.5: Main Indicators of the Stock Market on the Istanbul Stock Exchange (in millions)
Number of Companies
Listed Traded IPO
Securities Issued
De-
IPO
listed
Capital
Market
Trading
Capitalization Volume
Debt
Increases Instruments
Number of
Average
Average
Number of
ISE Index
shares
Daily
Daily
Contracts
(US $)
traded
Trading
Number of
Traded
(January
Volume
Shares
(Thousands)
1986=100)
Years
Traded
1986
350
80
32
257
938
13
3
.05
.01
_
131.53
1987
414
82
118
526
3,125
118
15
.46
.05
_
384.57
1988
556
79
218
506
1,128
115
32
.45
.13
112
119.82
1989
730
76
393
551
6,756
773
238
3
1
247
560.87
1990
916
110
35
761
742
503
18,737
5,854
1,537
24
6
766
642.63
1991
1,092
134
24
69
1,436
532
15,564
8,502
4,531
34
18
1,446
501.50
1992
1,238
145
13
2
71
918
2,509
9,922
8,567
10,285
34
41
1,682
272.61
1993
1,284
160
17
2
122
579
5,189
37,824
21,770
35,249
88
143
2,815
833.38
1994
1,204
176
25
9
176
982
1,508
21,785
23,203
100,062
92
396
5,085
413.27
1995
922
205
30
1
233
886
2,602
20,782
52,357
306,254
209
1,220
11,667
382.62
1996
788
228
25
2
165
608
592
30,797
37,737
390,924
153
1,583
12,447
534.01
1997
743
258
31
1
429
920
242
61,879
58,104
919,784
231
3,650
17,059
981.99
1998
686
277
20
1
358
1,253
52
33,975
70,396
2,242,531
284
9,042
21,577
484.01
1999
285
285
10
2 223*
NA
NA
114,271
58,930*
4,242,890*
289
20,798*
19,920*
981.89
*As of November 30, 1999.
Source: Istanbul Stock Exchange
1
Table 6.6: Stock Market Performance
Sharpe Ratio (%)
Whole Period
Post Liberalization Period
1/86—12/98 8/89—8/92 8/89—8/94 8/89—12/98
ISE
13.73
14.61
14.73
12.13
Emerging Market Index.
12.36
-2.38
15.79
1.61
World Market
24.42
-0.68
9.34
18.89
28.41
USA
Source: ISE, IFC, Morgan Stanley, & NYSE
13.86
16.78
32.61
Table 6.7: Correlation of Stock Market Returns (8/89-12/98)
Whole Period ISE EM WM USA
1
ISE
1
EM .27
1
WM .08 .11
1
USA .09 .09 .67
Up Markets
1
ISE
EM .133 1
1
WM .11 .13
1
USA .019 .14 .76
Down Markets
1
ISE
1
EM .33
.21
.63
1
WM
1
USA .19 .71 .87
Source: ISE, IFC, Morgan Stanley, & NYSE
Table 6.8: Selected Ratios for Fims Listed on the ISE
1990
1991
1992
1993
1994
1995
1996
1997
79
110
5.37
1.63
2.4
27%
64
91
7.07
1.98
3.1
27%
64
78
10.40
1.91
3.0
30%
70
64
10.30
1.54
3.6
30%
66
66
10.50
1.47
2.6
33%
65
71
9.80
1.68
2.7
30%
63
64
11.70
1.54
3.0
28%
60
65
10.40
1.15
2.7
31%
Profitability Ratios
Gross profit/sales
Net income/sales
Retun on assets (ROA)
Net Income/Equity (ROE)
EBIT/Total Asset
Average tax rate
Return on Capital
13.2%
9.4%
25.9%
49.2%
22.7%
31.4%
30.4%
12.2%
8.2%
28.2%
44.5%
24.5%
37.6%
28.8%
13.5%
10.2%
30.5%
62.9%
28.0%
37.8%
33.9%
16.0%
11.2%
38.3%
68.4%
29.6%
34.2%
33.3%
17.7%
13.9%
50.9%
55.9%
37.5%
31.4%
35.6%
14.8%
12.4%
36.2%
60.1%
28.2%
36.0%
38.3%
14.5%
31.0%
38.7%
54.6%
29.7%
36.9%
32.8%
20.9%
27.9%
39.1%
35.4%
28.6%
44.0%
31.3%
Liquidiy Ratios
Current assets/current liabilities
Current assets-invetory/current liabilities
EBIT/Interest expense
Fixed charge coverage ratio
Interest Expense/Sales
2.50
1.24
4.29
4.57
6.08%
1.78
1.01
3.89
4.68
6.76%
1.82
1.17
5.46
3.57
6.82%
1.94
1.31
5.12
6.46
7.55%
1.82
1.24
3.91
3.41
13.43%
1.92
1.32
5.03
7.37
5.59%
1.91
1.33
3.71
9.28
6.87%
1.89
1.28
4.40
6.51
9.04%
11.8%
27.0%
10.9%
52%
18.0%
46.8%
10.7%
49%
17.2%
43.5%
24.2%
50%
17.1%
58.5%
22.9%
51%
18.0%
59.5%
38.9%
52%
17.6%
63.4%
46.7%
52%
18.9%
53.7%
35.4%
52%
21.2%
60.2%
30.6%
50%
Activity Ratios
A/R days out
Inventory days held
Inventory turnover
Net sales/total asset (asset turnover)
Net sales/net fixed assets
Inventory/current assets
Leverage Ratios
Debt/Total Assets
Debt/Equity
Long Term Debt/Equity
Equity/Total Assets
Data source: Istanbul Stock Exchange, IFC, Worldscope, Global Vantage, I/B/E/S
Figure 6.1: World Market Capitalization – 1998 Year End
Figure 6.2: Istanbul Stock Exchange Indexes (US $)
ISE-100, Industrials, Financial
3000
ISE-100
ISE-IND
ISE-FIN
2500
2000
1500
1000
500
0
Jan-86
Sep-88
Jun-91
Mar-94
Dec-96
Sep-99
Figure 6.3: ISE Index and S & P 500 Index Return and Volatility Comparison
1-Year Overlapping Monthly Mean Returns
45%
ISE 1-Year
US 1-Year
ISE STD
US STD
35%
25%
15%
5%
Jan-87
-5%
-15%
May-88
Sep-89
Feb-91
Jun-92
Nov-93
Mar-95
Aug-96
Dec-97
Apr-99
were issues as promissory notes on paper.