SOME OBSERVATIONS ON, THE TURKISH CAPITAL MARKET Meral TECER *
The Turkish capital .market, in its narrower sense of bonds
and stoeks maliket, has undergone the first major .legal ,and sııruc­
tural changes İn the early 1980s. With the aiın of regu1ating new
security İssues and interm,ediary activities, the Capital Market Law
(CML) No. 2497 was enacted İn 1981. Pursuant to the provions of
this law a new regu1atory body, the Capital Mavket Board {CMB)
was alsa est1ablıished İn 1981 and granted the authority tQ develop,
regulate and supervise the capital ınar-ket. ı
Since these first cOınprehensive arrangeınents, s1gnificant 'ad­
vances have beenmade both in respect of improving the legisla­
tion concerned, 'İntrodueing new types .of securities and the tradi:ng
volume realized on the pr.i:mary and secondaıry ıınıar.kets.
Currentıly,
there are nine types of seoarities, namely, stoeks,
convertible bonds, profit and lass s'ha-ring certificates, par­
ticipation bonds, commercial papers, revenue sharingcertificates
and Treasury bills. Except for the last two and government bonds,
offerings to the public of private issues are permitted ·and arranged
by the CMB. Interest rates on private secUırities, on the other
hand, are still determined by the Central Bank in conformity with
interests on tİııne deposits.
bonıds,
As shown in Table I, the total vOllUme of seourities issued by
private and public sectors in the post - 1980 period [ncreased
rapidly, a'mountinıg to TL. 10.068,7 biLlian (about $ 5 ,bHlion) in
1988.
The Istanbul Stock Exchange (ISE) which is the only
secondary m1arket mainly for shares has reopened in i ts current
Adıninistration for
Turkeyand the Middle East.
For ınore detail in the duties and authority of the CMB see Artiele 22 of
the CML.
* Associate Professor at the Institute of Puolic
1
......
Q\
Table
ı
Securitles Issued by Publle and Private Sector
(Billion TL.)
1982
1983
1984
P1,J,blie
74,7 249,9
1.029,0
Government Bonds
Treasury Bills
Revenue Shariıng Certifioates
State Investment Bank (Eximbank) Bonds
Housing Credit Bank (TEB) Bonds
Private
69,7239,0
5,0
21,5
Bonds
Stoaks
Profit and Loss Sharing Certificates
Bank Bnıs
CommerciaJ Papers
Participation Certinoates *
TOTAL
1986
1987
1988 2~747,1
3.276,9
6.504,9
8.931,1
225,0
794,0
10,0
1.191,3
1.415,8
140,0
1.269,4 2.045,3 3.816,2
1.787,5 3.954,6 5.1 14,9
505,0
220,0
10,0
52,4
75,6
133,1
274,1
682,5
1.137,6
12,4
9,1
17,5
34,9
11,8
63,8
36,2
96,4
0,5
111,0
102,0
0,9
60,2
317,5
187,2
0,8
76,2
55,8
45,0
210,9
364,5
0,2
238,0
271,0
53,0
96,2
301,4
1985
1.104,6 2.880,2
Source: Undersecretariat of Treasury and Foreign Trade, Capital Market Board.
* Securities issued by the mutual
funds~
3.551,0 7.187,4 10.068,7 SOME OBSERVATlONS ON mE TURKISH CAPITAL MARKET
117
form at the beginning of 1986 and trading in over - the counter
market shifted to the ISE sinee then. Totaıl volume traded
inereased nearly ten times in three years, 'reaching TL. 15.565 bil­
lion (some 5,8 billion US dollars) as of the end of 1988 {Tab le : 2).
Bonds are the ,Jong - term debt seeuritk~s issued hy the joint
stock eompan1es, pubHc enterprises andthe government. As a
resıult of industria1ization efforts and high inf1ationary tendeney
observed in our eeonomy, investment and worıking capital needs
of private eorporations have reached great ·dlimensions. Beeause
of the faet that equity capital and hank credits, particularly long
term oredits have remained insufficient andeosts of eredıits risen
sharply, issuing bonds is the Hnancing method ever inereasingly
employed by the corporations. Bonds are impoııtant financing
means for the public sector as well. Public bonds are essentially
eomposed of Treasury hills and government bonds, rredeemed from
budgetarysources. The authority to issue these ıdebt instruments
is granted by annual Budget Lawıs, in which maximum domestic
borrowing amount, too, is determined. 2
Government bonıds and Treasury biılls are i:ssueıd in bearer
form ·and at more attractive terms than those of private seour:ities.
Formerly, government bonds were issued Wİıth a maturity of 20
yearrs. Later on, the ımatudty of the bonds sold to public was
shortened :and fixed :at 1 year in 1984. Their interests are generally
higher than returns from the time deposits and exempt from
income tax. These bonds marketed through the Central Bank and
other state banıks had no eredit risk and can be utilized as
guarantees İn tenders. Banksı ,mutua1 funıds and insuranee
eompanies are obliged, by the existing legiıslation, to invest part
of theİr liquid assets and reserve requirements in goveinment
securi ties.
After 1980, the government İs also selling T'reasury bills to
the public for the purpose of meeting Hs short terım financing
2
In 1988, for example, maximum borrowing limit \vas determined as 6 tril­
lion TL. with the authority of government to increase this amount by 50
percent, if necessary.
-
.....
00
Table 2
Trading Volume in the Istanbul Stock Exchange
(Bmıon
Private Securitfes
Stocl<!s
Private Bonds, Bank B:Hlsand*
Comm'erdal Papers * *
Public Securities
Governırnent Bonds and
TreaSlUry BriUs
Revenue Shadng Certificates
TOTAL TL.)
%
1986
O/o
1987
92,9
8,3
664,8
13,7
1.375,9
11,9
8,7
0,8
105,4
2,2
149,0
1,3
84,2
1.025,7
7,5
91,7
559,4
4.196,6
11,5
86,3
1.226,9
10.189,1
10,6
88,1
965,8
59,9
86,3
5,4
3.795,4
401,2
78,1
8,2
9.758,7
430;4
84,4
3,7
1.118,6
100,0
4.861,4
100,0
11.565,0
100,0 %
1988
Source: Istanbul Stock Exchange, Annual Factbook 1986 -1988.
* Promissory, notes, having maturity at most 720 days, issued by investment banks and sold on a
discount basis.
*,', Issued as bearer bonds with short maturities not less than 90 days and at most 360 days and soId on
a discount basis. Profiitable companıies are aut horized to İssue these securlties in the amount of at
most three times of their equity capitaL.
SOME OBSERVATIONS ON THE TURKISH CAPITAL MARKET
119
defkits. Treasury bills with shortermatur.ity of:l to 12 ımonths are
soLd on diseount basis and ımarketed through the Central Bank.
Since 1985, ıregular w'eeIdy aueHons 'of government bonds and
Treasury biHs, İn ,vhich both banks and stock brokers ean bid
have been initiated.
Two fiinancial State Econümic Enterprises (SEEs) are
authorized to obtıain funds by -issuing bonds. These are State
Investment Bank (Exiimbank) and the Housing Credit Bank (TEB).
The interest rates on the bonds issued by these hanıks are deter­
mined by the güvernment and nearly all 'of them süId tü the social
security institutions. After 1983, however, these banks have issued
no bonds (Table: 1).
In reeent years, the government has adüpted the poliey of
the budget deficits largely through debt seouritıies. In
1984, revenue ısharing certHicates (RSCs) were introduced as a
new source of pubHc finance tü this effect. Thesecertifiicates are
of bearer type and have a certain face value ;and maturity, giving
investors the right 1:0 share in the İncome produced from 'İnfra­
structural fadlities such as bridges, dams,energy stations owned
by public institutions. Principals of some of these securities were
indexed to foreign exchange.
coveriıng
The fact that the güvernment ıis increasingly selling ,debt
securities to the public with attractive conditions in order to ıneet
its shoI't term financing needs causes the relative share of the
public sector in new issues -manket to account for 90 O/O -and müre
in the post - 1983 period (Table: 3).
Table 3
Percentage Distribution of Securities Issues by Sectors
Public
Prİvate
Total
1982
1983
1984
1985
1986
1987
1988 77,7
22,3
82,6
17,4
93,2
6,8
95,4
4,6
92,3
7,7
90,5
9,5
88,7 11,3 100,0
100,0
100,0
100,0
100,0
100,0
100,0
120
TURKISH PUBUC ADMINI5rRATIONANNUAL
Where stoek marıket i·s ooncerned, a viable m1arket cannot be
created despite regulatory arrangements. High inHation deereases
the tendeney of the public tosave, accelerates consumption, as a
result, funds 'to be channelled into -the capital market ıare restrieted.
Again, under inflationary conditions, rrnvestors seem to lose
confJdenee in stocks and have a strong preference for liqui1dity.
Therefore, they avoid investing in stocks and d'kect their savings
to ti-me deposits, ıgold and foreign exchange. Another 'important
reason is related to supply side of the capital mıarket. In the CML,
the corporations, the number of stockholders of which is more
than 100 are defined as joint stock companies open to the pubHc
and supervised by the CMB. Nevertheless, most of these companies
are closely held companies, in which a family or a group of
stockhoLders own more than half of the voNng shares and have
an absolute controlover the management. This type of companies
are generally reltUctant to offer their stocks to the public. Con­
sidering cost advantages of borrowing in an inflationary envJron­
ment, tax policies favouring ıdebt financing and the benefits to be
derived froıTI close relations with the banks, they depend largely
on bank credits and other debt instruments ,such as honds and
com:m'ercial papers.
In order to encourage the public offerings of shares a law
reducing corporate İncome tax from 40 % to 25 % for the corpora­
tions with 100 and ,more stockholders has recently been passed.3
Before 1980, the wrong profit distribution policy pursued by
private corporations has been 'among the factors leading to a
stagnation .İn the stock market. Although inflation enhanced the
tirms profits and prices per shares, divi·dend payout ratios of
most firms were determined at low levels !ike 20 - 25 % of face
value. In the post - 1980 period, a ·minimum return to stoek invest­
ments has been guaranteed by the CMB and the minimum
dividend rate specified as not being less than 20 % of paid - in
capitaL. The total amount of the ıminimum ıdividend, however,
cannot be less than 50 % 'and over 70 % of the net income.4 In
spite of this favourable change, it seems almost impossible for
3
4
Artİele
13 of the Law No. 3332 dated 25 March 1987.
Artiele 7 of the Communique by the CMB published in Offical Gazette
dated 26 February 1982.
SOME OBSERVATIONS ON THE TURKISH CAPITAL MARKET
12!
stocks to compete with the debt instruments having low risk, high
income and liquidity offered by public and pIiivate sectors.
Since capital merket has not yet developed sufficiently,
individual investors can not henefit from the portfoHo management
and consu1tancy service s of :investment companies and mutual
funds defined as aUXiiliary institutions by the CML, which would
be helpful in ,directing their savings into the profiıtable and low
dsky shares.
The institutional investors active in the stock market are
social seourity institutions, mutual· funds and ıinsurance companies
in .orıder of importance.5 Stock sales are backed up by the
compulsory buying activities of these ill'stitutions. Sodal seoudty
institutions and insurance companies are required by the govern­
ment regulation to invest 25 O/O of their portfolios in stoaks.
Underwriting operations ase usually performed for the public
offerings of debt instruments such as bonds and revenuesharıing
certificates. As can be seen from Table: 2, bonds, Treasury bills
and revenue sharing certificates account for 98, 7 % of the total
trading volume, whereas the share of stocks İs only 1,3 %. Non
financial joint stoak companies prefer to sell their new issue
stoeks themselves usuaUy on a preemptive hasis to old sharehold­
ers rather than resorting to 'an underwriting service.
Commeroial and investment banks, together with stoak
exchange brokers, operate as financiıal intermediaries in new issues
and secondary markets. Intermediaries, which usually act as
brokers and dealers on their own account and ·make repurchase
agreements, trade securities issued by corporations, financial
institutions and the government. Banks have much 'more significant
place in the capital ınar:ket relative to other interınediaries both
in number and trading volnıne. As of theend of 1988 the total
number of 'İntermediaries is 61, of which 45 are banks. Ün the
other :band, the relative share of banks in total trading voluıne on
the ISE was neady 90 % on the average in the 1986 - 1983, being
more than 60 % in all kinds ofsecurities except for shares
(Table: 4).
5
The authority to establish mutual fund s was granted to the banks.
......
tv
tv
Table 4
Security Sales of Banks and Other Intennediarles
1986
Billton TL.
Private Securitles
1987
(%)
1988 Billion TL.
(%)
Bl11lon TL.
(%)
146,1
6,1
601,5
10,4
1.409,2
11,8
95,7
50,4
5,3
65,5
34,5
0,2
419,9
181,6
59,9
69,8
30,2
1,0
1.158,9
250,3
160,1
82,2
17,8
1,3
3,5
1,8
66,0
34,0
33,2
26,7
55,4
44,6
55,3
104,8
34,5
65,5
140,8
5,9
541,6
9,4
1.249,1
10,5
Banks
Others
Public Securlties
92,2
48,6
2.247,5
65,5
34,5
93,9
386,7
154,9
5.171,4
71,4
28,6
89,6
1.103,6
145,5
10.569,4
88,4
11,6
88,2
Banks
Others
2.010,1
237,4
89,4
10,6
4.806,4
365,0
92,9
7,1
10.045,8
523,6
95,0 5,0 Banks
Others
Shares
Banks
Others
BonEls, Bank Bills and
Commercial Papers
Government Bonds
and Treasury Bills
1.958,3
81,8
4.725,5
81,9
10.159,7
84,3
1.720,9
237,4
87,9
12,1
4.363,2
362,3
92,3
7,7
9.637,6
522,1
94,9
5,1
289,2
12,1
445,9
7,7
409,7
3,9
289,2
12,1
443,2
2,7
99,4
0,6
408,2
1,5
99,6
0,4
GRAND TOTAL
2.393,6
100,4
5.772,9
100,0
11.978,6
100,0
Banks
Others
2.105,8
287,8
88,0
12,0
5.226,3
546,6
90,5
9,5
11.204,7
773,9
Bal1!ks
Others
Revenue Sharing
Certificates*
Bal1!ks
Others
93,5 6,5 * Including Foreign Currency Indexed Bonds.
Source : The Istanbul Stock Exchange.
1-'0
iv
w
124
TURKISH PUBLle ADMINISTRATION ANNUAL
With the common shares of 40 big Hrms actively traded, the
ISE can be said to be highly concentrated. it i:sexpected that as
a result of the pri'Vatization program of the' SEEs adopted by the
government, an inercase in the number of companies Hsted on the
stoek exchange and the total market capitalization as wel,l as a
wider ıshare ownership will be reaHzed.
In summary, despite all regulatory arrangements and rapid
growth during the 1980s, being depr.ived of a legaıl frameworık for
long, the capital ma:ııket has shown an unsound and lcss satisfac­
tory development and still constitute an insignificant part of the
Turıki·sh financial system,6 The relative share of new issues ,in
GNP has Oeen less than 10 % while that of bank eredits nearlj'
three Hmes on the average in recent year.s. This indicates the
dominance of banks İn the sources of funds. (Table: 5).
Bond ımar.ket could be kept alive from the outset through
some financial inccntives. Nevertheless, there exİsts ıa lasting
stagnation in the stock ımar.ket. The ·main Teasons for thiıs are high
innation, anti inflationary ,high interest rate pol1icy, lost of
confidence of investors in stocks and the reluctance of family
owned joint stock companies to offer their shares to the public.
Stocks are unable to hedge against inflation ·and to compete
effidently with a1ternative unvestme:rııts such as debt securities,
bank deposits and foreign exchange in respect of risk, return and
Hquİc1İ'ty .
AIso, because of cost advantages resulting from inflation and
taxation policies, private corparaHons prefer debt securities and
bank credits over stocl~s.
One of the major criticism about the Tur.kish capital market
the heavy state ,intervention contrary to the liberalization prog­
ram adopted in the early 1980s. New issues market and trading
volume in the secondary market is dominated by pubHc sectoro
İs
6
Meral Tecer, «Sermaye
Piyasasındak.i Gelişmeler
ve Yasal Düzenlemeler».,
Anmıe İdaresi Dergisi, Vol. 17, No. 2, June 1984, p. 133.
Table 5 The Share of New Issues and Bank Credits in GNP Years
1982
1984
1986
1988
Total Securities
Issued (Trillion TL.)
Bank Credits
GNP
Share of Securities Share of
%
Credits (O/O)
(Trillion TL.) (Trillion TL.)
1,1
2,3
3,9
3,6
11,5
10,1
27,8
0,1
8,7
18,4
39,3
154,3
1,1
6,0
9,2
6,5
26,4
21,2
29,2
18,0
Source: The Ministry of Finance and Customs, The Capital Market Board, The State Planning Organization.
,....
LV
tn
126
tURKıSH
PUBLle
ADMINISTRATıoN
ANNUAL
if the government gives priority to the significant increases in
hs tax revenues and tries to av'Üid meeting budgetary deficits by
issuing debt securities at attractive teııms, ıİt will be helpful in
faciHtating the development of an active capital ·marıket for the
private sector.
The increase in the number 'Of joint st'Ück companies open to
the public and 'mutua,l funds and, .above all, curbing inflation are
necessary preconditions for -directing both domestic and foreign
savings to the capital .market and particular1y for the development
of a sound stock maIik~t.