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Banks and Turkey’s Financial Development




Unlike other national economies and the global economy as a whole, banks are inevitable parts of the Turkish economy and its financial sectors development. This has been true especially after 2001. Whether it is public or private, strong and reputable banks help to reduce risk, provide services for much larger amounts of people, and encourage technological advancement.

Yet, struggle for survival has not been easy for Turkish banks. The problems in Turkey’s development made it difficult for both state and private banks to function effectively up until recently. Numerous private banks went bankrupt in the face of frequent economic and financial crises. In order to help us see the structure of the banking system in Turkey, it will be necessary to look closely at the emergence of Turkish banks within a historical frame.

It is also necessary to mention the difficulties its financial system faced over periods of time and the measures that were taken to cope with major downturns. This will help us to discuss the structure of the Turkish banking system and it will allow us to analyze the significance of banks for financial sectors development in Turkey. 

Brief History of Banking and Finance in Turkey

The land of Asia Minor has contributed to the discovery of coin money in its west during the time of the Lydians (700 BC) and practiced banking at first hand in its east under the Babylonians. Temples of the ancient times provided the wealthy a safe ground to preserve their wealth. The prohibition of usury by both Christianity and Islam prevented the development of banking sector in Asia Minor for centuries. Influence of both religions in the region has almost equal weight in terms of time. Christianity has been dominant in the Anatolian peninsula for more than seven centuries (325-1075), and Islam, over eight centuries (1071-1924).

As opposed to its colonial counterparts in the west, which intervened in the social interactions of their subjects, the Ottoman Empire can be considered as a “financial empire of community of nations” that did not micromanaged the lives of its multiethnic and multi-religious subjects as long as it collected taxes from them.

Taxes were pooled into the treasury, and it was strictly managed by the central government. A huge sum of capital was concentrated at the hands of the government. Other than the Ottoman army, the central government invested more in architectural works in general, and in the infrastructure of the Balkans in particular.

During the period of decline, however, which coincided with the modernization of Europe, the central government spent money on military expeditions to recover the lost territories and suppressing various nationalist movements. Wealthy individuals’ properties, and in some cases their lives, had to be confiscated in order to pay deficit in public accounts. Confiscations hindered the possible development of banking by the means of the country’s own national capital, and it also taught an important lesson to the rich of the upcoming decades.

Up until the first banks in the empire emerged with British and French joint ventures, all commercial banking activities in the empire was conducted by the bazaar merchants of Istanbul.

In 1881, the Düyun-u Umumiye (Administration of General Debts) was established “as a declaration of the bankruptcy of the Ottoman Treasury and external control over finances. It was the end of banking and finance in the Ottoman Empire even though Istanbul Bankası (Bank of Istanbul) was not to be established until 1911”

It was not until the foundation of modern Turkey that modern banks began to flourish.

From State Banking to Captive Banking

The foundation of the modern secular republic in 1923 led to two important developments. The first was the end of the Düyun-u Umumiye. Turkey continued to pay the heavy Ottoman debts. Yet, it completed the payment in 1954. Secondly, it ended the millennia-old influence of Islam over banking and finance by legalizing interest; the very activity of paying interest to depositors by charging more interest on the creditors. Modern Turkey’s first banks were all state-owned:

Türkiye İş Bankası (Business Bank of Turkey) for national capital accumulation (1924)

Ziraat Bank for agriculture (1924)

The Industrial Bank for manufacturing (1925)

The Real Estate & Orphanage Bank for construction (1927)

The Central Bank as a bank of last resort (1930)

Sümerbank for textiles (1933)

Etibank for mining (1935)

Denizbank for maritime development (1938)

Halkbank (People’s Bank) for subsidizing small business (1938)

During the Great Depression, Turkey balanced its budget and was able to continue its financial growth despite 20 local banks that provided regional development went bankrupt.

A process of industrialization began in 1937, leading to the production and export boom of iron & steel, as Turkey began to supply the increasing European demand for airline industry. Turkey’s rapid industrialization was cut short by the outbreak of WWII. The already scarce resources were directed to defense, and for basic needs of the public. After the war, however, private banks, such as Vakıfbank, Yapı ve Kredi (Structure and Credit Bank), Akbank, and Garanti began to flourish.

Turkey shifted its overall economic policy in 1950 from protection of industrial structure to attracting foreign capital. Agricultural goods were exported and manufactured goods were imported. Because the demand in the world market for agricultural goods and raw materials declined in late 1950s, agricultural production in Turkey declined and led to a foreign exchange crisis (1958). Thus, the economic policy was shifted to import substitution industrialization (ISI). 

The two decades of ISI that had a full-fledged start after the coup in May 27, 1960, and ended with the coup in September 12, 1980. This period is particularly important because it allowed the nation’s captive banking system to emerge. During this period, the State Economic Enterprises were heavily financed and a public company was created for almost every imported consumer product.

Banks funded the Five Year Plans, and “selective central bank credits to planned investment projects with preferential rates and credit preference to the public sector, especially heavy agri-credits supported strong growth in the early years. With controlled interest and foreign exchange rates, branch banking became a norm without any pressure of competition and “holding banking” dominated the decade encouraged by tax intensives. Industrial conglomerates had no choice but to try to have a bank in order to finance their potential investments as most of the deposit base of the financial system was strictly channeled to ‘planned’ investments.”

Today, Turkish private banks are subsidiaries of major corporations, and insurance companies are subsidiaries of major banks. Some of the major and several of the medium size corporations in the country are construction companies. Agriculture and construction have always been major driving forces of the economy.

Nonetheless, the founder of Turkey’s first and the largest conglomerate, Vehbi Koç [coch], started his business as a bazaar merchant and later began to supply construction materials. Tracing both paternal and maternal background to a leading 13th century Sunni scholar, the Koç family comes from a merchant background, possibly as cattle traders. In 1938, Koç Ticaret Anonim Şirketi (Koç Business Incorporated) was founded and became the first Turkish company operating in the U.S. under the name of Ram Commercial Corporation in 1945. Since 1963, the Koç Holding operates in the fields of construction, energy, consumer durables, automotive, retail, shipping, defense, information technology, food, and finance. Their main productions and subsidiaries include, Ford OtosanOtokarTOFAŞ (Turkish Automobile Factories Incorporated), Arçelik (household appliances manufacturer), Aygaz (natural gas & electricity), Tüpraş (Turkish Petroleum Refineries Incorporated), and Yapı Kredi Bank. 

Another financial giant, the Doğuş [Doe-oosh] Holding Incorporated, started as a construction company in 1951 by Ayhan Şahenk. The Doğuş Group has several television and radio stations, hotels and resorts including Hyatt International Ltd, provides merchandising of several automobile manufacturers including Volkswagen, Audi, and Porsche, heavily operating in the fields of construction and real estate, and holds the largest shares of the largest private bank in the country, the Garanti. 

Known by its logo “SA”, the Sabancı (Plowman) Holding began as a textile company that expanded to construction industry through cement production. The Sabanci corporation owns: the two largest cement makers, the Akçansa and the Çimsa; one of the largest producers of electricity, the Enerjisa (in partnership with Germany’s E.ON); the largest producer of tires, the Brisa (in partnership with Bridgestone); several industrial and textile goods, several retail products, as well as Akbank and Aksigorta. These three giants are a few, yet an important example of Turkey’s national capital that developed into an industrial bourgeoisie under import substitution industrialization, a gran bourgeoisie that holds a large stake in the country’s financial sector today.

The Switch to Export-led Growth Strategy

The economic problems created by ISI emerged as a foreign exchange crisis. Turkish industrialists were depended on the imported intermediate and capital goods to produce consumer durables for the domestic market. Due to protectionism, the industrialists made easy profits in the domestic market, which was impossible to achieve in the international markets. They did not incline towards exporting, consequently hindering inflow of foreign exchange. Turkey’s exports under ISI were mainly agricultural goods. Also, the foreign exchange that flowed in through remittances coming from Turkish workers abroad disappeared quickly as it helped the continuation of accumulation by accelerating consumer durables production. The need for foreign exchange went through the roof by the end of the 1970s. Industrialists were prepared to abandon ISI to become junior partners of international corporations. 

The government passed a structural adjustment program on January 24, 1980. Following the military coup in September, the program began to be fully implemented. Turkish banking system was completely liberalized for the first time. 

“Financial liberalization opened doors for competitors and bankers armed with certificate of deposits began to challenge the dominance of banks in the financial system. However, lack of adequate supervision and regulation coupled with ponzi style games created a systematic risk and there was a Bankers’ crisis and a loss of confidence in 1983. Banks such as Istanbul Bank went bust”. Its board of director, Özer Çiller, was also the head of Marsan Marmara Holding, a construction and tourism company. His wife Tansu Çiller became prime minister in 1993.

The early set backs from ponzi schemes led to revision of the Banking Law. The right measures taken in the country’s financial system complimented the economic growth. The government encouraged private capital to specialize in manufacture of selected export products that could compete in the international markets. To further encourage exports, the government devaluated the Turkish lira and cut wages.

Under the export-led growth strategy, Turkey’s average annual growth rate from 1981 to 1988 was 5.8%, and the increase in its industrial production was 8.1%. Assets of banks jumped from $18.5 billion in early 1980s to $134 billion by 2000. Market share of state banks went down from 44% to 35%, and that of private banks went up from 41% to 50% during the same period. However, in 1988, the government changed its current account-based policy to disinflationary efforts, such as deficit financing by encouraging short-term borrowing. Short-term borrowing increased interest rates and increased short-term capital flow into the economy. Banks moved away from direct loan extensions and inclined towards purchasing more government securities, which created short positions and make the banks more vulnerable [12]. The economic growth also slowed down after 1988.

The 1994 Crisis

Throughout 1990s, interest rates were kept high to attract inflow of short-term foreign capital. The rising inflow of short-term foreign capital led to the overvaluation of the lira. With appreciation of the lira, it became more appealing for banks to collect funds from the international financial markets through borrowing and to invest these funds into overvalued public securities or to issue a credit in the domestic market. The short positions of Turkish banks have reached up to $5 billion. 

In 1993, a coalition government led by Madam Prime Minister Çiller declared that the interest rates were too high and began working towards lowering them. The government began to inject liquidity into the economy. Policymakers in Ankara assumed that by selling off high value foreign exchange reserves they would constrain the high demand on foreign exchange and the money that accumulates in the market would be channeled to the Istanbul Stock Exchange. However, the trade volume of the Istanbul Stock Exchange was only $52 million at the time, which was too small to handle the markets. Also, the big banks expected a devaluation of the lira because the injection of high liquidity rate and the high interest rates that are already expected to go down increased the demand for foreign exchange. While the value of foreign exchange appreciated, the foreign exchange reserves began to melt down due to foreign capital outflow. A major devaluation occurred:

As of January 1994:    $1=19,000 lira; Central Bank FE reserves=$7 billion

As of April 1994:        $1=38,000 lira, Central Bank FE reserves=$3 billion

In May, policymakers decided to issue government securities with 400% interest rate in order to pay public debts. Devaluation of the currency led to a decline in real wages and an increase in unemployment [13]. Many banks, including Marmarabank, Impexbank, TYT Bank went bankrupt.

The 2001 Crisis and After

Financial vulnerability of the banking sector led to a major financial crisis in 2001. Based on the disinflationary plans approved by the IMF, foreign exchange rates were stabilized. This development prompted the banks to increase their short-term external debts in foreign currencies, mainly in dollars and in euros, and to purchase government bonds and securities in order to get a higher rate of return. Therefore, many banks and other financial institutions had a very large amount of short positions. However, the lira appreciated immensely in the year 2000. When the sustainability of the stabilized foreign exchange regime became questionable, huge amounts of capital flight took place. The crisis reached its worst point when interest rates skyrocketed to 15,000% over night, breaking the record in Germany during the 1929 crash. Moreover, the inevitable cancellation of the stabilized foreign exchange regime was followed by a major devaluation of the lira. The devaluation was a terrible hit on the banks and other financial institutions. Although exaggerated, even the ability of the Treasury to pay all its debts was speculated. In 2001, the nation’s GDP declined at a rate of 7.6% and led to a further rise on the credit losses. 

During the crisis, several banks went out of business including Etibank (privatized in 1998), Imar Bank, Pamukbank. The case of Imar Bank was especially scandalous. It was owned by the Uzan family who had several TV & radio stations. The bank was taken over by the government. The payments received from the Uzan family reached over $6.9 billion in 2007. This amount is equivalent to 1.7% of the nation’s GDP, and nearly 40% of public fixed-capital investments! The Uzans have been sued by the AT&T and Nokia as well. The purpose of Imar Bank turned out to be their desire to buy off another major competitor in the media sector: the Çukurova (Lowlands) Holding. It is a major mining corporation operating mainly in Turkey’s lowlands in the south where there is an abundance of minerals and cotton fields. The holding’s chairman and the country’s former richest man, Mehmet Emin Karamehmet, owed Pamukbank $2.7 billion and Yapı Kredi $2.3 billion. After Pamukbank’s takeover, he agreed to pay back a total of $6.2 billion within 15 years. Uzan family’s media properties were bought off by the Doğan Holding.

Nevertheless, the devaluation had a galvanizing effect on exports. With the political stability due to election victories of the neo-liberal Islamic conservative Justice and Development Party in three consecutive terms, Turkish economy got out of the 2001 crisis quicker than expected. 

Since 2001, the Banking Regulation and Supervision Agency (Bankacılık Düzenleme ve Denetleme Kurumu-BDDK) makes necessary legal changes. The Agency made Turkish banks’ balance sheets transparent and made sure the balance sheets were compatible to the international standards for financial reporting. Turkey signed the Basel II agreement in 2002. The foreign exchange availability/position rate to the actual equity capital of a bank was required to have a maximum 20%. At the same time, banks were required to have 8% minimum capital efficiency rate. The banks that did not meet these requirements were taken over by the Savings Deposit Insurance Fund (Tasarruf Mevduatı Sigorta Fonu-TMSF).

In the meantime, the 100% protection guarantee given by the government back in 1994 to savings deposits was lowered to 50,000 liras. In 2009, the capital availability ratios of Turkish banks were 20%, much higher than the minimum requirement. The free equity rate reached 79.4% of the actual equity capital. 

Major Involvement of Foreign Capital

In February 2005, the French BNP Paribas bought half of the 84.25% of shares of Türk Ekonomi Bankası Financial Investments, which is slightly over 42%. BNP Paribas purchased 9 billion and 50 million shares for $216.8 million. It also has equal amounts of shares at TEB subsidiaries, such as TEB Investment, TEB Leasing, TEB Factoring, TEB Insurance, TEB Portfolio as well as a Dutch bank named The Economy Bank NV. TEB Financial Investments has 150 branches in Turkey, and provides services mainly to small and medium size businesses and retail banking. 

 In April 2005, Fortis Bank bought 89.3% of the seventh largest bank in Turkey, the Dışbank (Exterior Bank). The merger also includes its subsidiaries such as Dış Investment, Dış Leasing, Dis Portfolio, Dış Factoring, Dışbank Malta, and Doğan Pension Funds. Dışbank was first founded in 1964 as American-Turkish Foreign Exchange Bank. The İş Bankası sold Dışbank in 1994 to Lapis Holding, a jewelry, carpet, and souvenir company. Because of tax evasion and embezzlement charges, Turkish Savings Deposit Insurance Fund seized the bank and sold it to Doğan Holding. Fortis, on the other hand, is a leading bank in Benelux nations. As one of the largest banks in Europe, it had 52,000 employees by the time of the merger with Dışbank. Its active size is 571 billion euros and its market value is 28.6 billion euros. It was founded as a merger between the Dutch AMEV/VSB and the Belgian AG Group [16]. Both were already leading insurance and retail companies. Fortis expanded by buying other banks:

1993: more than 50% of shares of ASLK-CGER (Belgium),

1997: MeesPierson merchant and investment bank (Netherlands),

1998: Generale Bank (Belgium),

2000: ASLK-CGER, VSB Bank, Generale Bank, MeesPierson were integrated into Fortis, and increased its shares in Banque Generale du Luxemburg to 97.73%,

2001: merged with AMEV ASR (Netherlands) 

2002: bought Intertrust Group (Switzerland), made partnerships with La Caxia (Spain)

Maybank (largest financial services company in Malaysia, China Insurance Group, 

Haitong Securities (Shanghai), 

2004: made partnerships with Muang Thai (Thailand) and Banco Comercial Portugues (BCP).

Fortis Bank’s stock market value in 1990 was 2.5 billion euros and had 20,000 employees. It went up to 31 billion euros in market value and increased its number of employees to 56,000.

In May 2005, the Çukurova Holding, the Koç Financial Services, and the Koçbank Nederland NV signed an agreement to sell 57.4% of shares of Yapı Kredi Bank to the Koç-UniCredito partnership. The Banking Regulation and Supervision Agency approved the trading. Yapı Kredi shares totaled 2.6 billion euros, and Koç-UniCredito paid 1.8 billion euros. Several subsidiaries such as Yapı Kredi Deutschland, Yapı Kredi Moscow, Yapı Kredi Netherland, Banque de Commerce et de Placements, Digital Platform Communications Services, Fintur Technologies, and the Turkcell Holding were also bought. 50% of the 57.4% of the shares belongs to the Italian UniCredito. The trading of shares made Yapı Kredi the fourth largest bank in Turkey after Ziraat, İş Bankası, and Akbank.

In August 2005, 25.5% of Garanti Bank’s shares were sold to General Electric Consumer Finance for $1.556 billion. Total shares of Garanti were $6.1 billion at the time of trading. The Doğuş Group and the GE Consumer Finance declared to operate in an equal partnership status. 5 members of Doğus and 4 members of GECF in the board would decide the chair. General Electric has been active in Turkey since 1948. GECF’s expansion in the nation’s domestic market fits into its strategy to expand into Eastern Europe since Garanti operates in Netherlands, Russia and Romania, and it works closely with Turkish construction companies that obtained contracts in Albania, Northern Iraq, and Syria. At the time of the merger, the active size of GE has reached $675 billion and its market value reached $350 billion. 

In August 2005, a possible merger took place between Şekerbank (Sugarbank) and Rabobank International Holding whose 100% of shares are owned by Rabobank Nederland. The Banking Regulation and Supervision Agency approved the merger, and 51% of Sekerbank shares were sold to Rabobank. Sekerbank was first founded in 1953 to finance sugar producers. With over 3,000 employees, it currently operates in retail banking, provides mortgage credits, and finances small and medium size business enterprises. However, the bank’s main partner, the Munzam Sosyal Güvenlik Vakfı (the Supplemental Social Security Charitable Foundation) has not agreed the deal with Rabobank.

In the following year, the largest Greek bank, the National Bank of Greece (NBG) acquisitioned Turkey’s eighth largest bank, Finansbank. NBG bought 46% Finansbank shares for 2.3 billion euros. NGB agreed on the value of the bank as 5 billion euros. This merger has been the largest commercial agreement ever between Turkey and Greece. Finansbank is a subsidiary of the Fiba Holding, founded by Hüseyin Özyeğin. “The Fiba Group’s investments in the financial services industry are in banking, leasing, factoring, insurance, NPL management, and private equity fund. Its non-financial investments are in aviation, retailing, real estate, energy, ship building and port management.”

National Bank of Greece is the oldest bank in Greece. It used to print money prior to the establishment of the Central Bank of Greece. Its shares are traded in the New York Stock Exchange since 1999. Similar to many other corporations, NBG operates in construction and tourism sectors, other than banking and finance. Its market value was $16 billion during the time of the merger. 

The Current State of Islamic Banking

2005 has also been important for Islamic banking, as well. Since the early 1980s, they were known as “special finance agencies.” The Banking Act of 2005 introduces the term “participation banking” (katılım bankacılığı) allowing Islamic banks to have an equal status with other modern banks. But, the Act also categorizes them separately.

According to Section 9, Articles 79, 80, and 81 of the Act, the participation banks can only operate within the field of Islamic banking and it is not legal for them to offer interest to their depositors, which is prohibited in Islam. Therefore, the “non-Islamic” modern banks are obliged to operate within the field of modern banking only, and it is unlawful for them not to offer interest to their depositors. Both modern and participation banks can operate and provide services to same customers. However, merger between the two is not permitted by law.

Albaraka Turk, Bank Asya, Kuveyt Turk Participation Bank, and Turkiye Finans Participation are the only participation banks currently operating in Turkey. Islamic banks do not guarantee profit to their depositors. They transfer funds to an investment, which has a risk of loss. If the investment brings a profit, then the bank takes 20% of the profits and transfer 80% of the “profit share” to its depositors. If the investment brings a negative, however, the loss is distributed based on the capital shares. Any request for change in the profit margin of a participation bank is subjected to the permission of the Central Bank.


Since the birth of the modern republic, banks have gone through several ups and downs, a mirror image of Turkey’s economy, politics, and society. During the early decades, each sector had its own state-owned bank to finance its development. As the state created its national bourgeoisie and turned it into industrial conglomerates, private banking began to be dominated by the richest families and their corporations. Captive banking helped these families to finance their businesses, but it also contributed to Turkey’s development process. The problems arose when effective government oversight became absolutely necessary to regulate the micromanagement of several other private banks established or purchased by wealthy businessmen who made their fortunes in the 1980s. 

Turkish state and its people had a long experience with financial crises. Turkey has not been seriously affected by the current global crisis. The reason is that Turkey had its own crisis back in 2001 and has been taking necessary measures ever since. Because the European markets got hit from the current crisis, it affected Turkish exports negatively. Though, there are investment opportunities in other markets, such as East Asia and more recently, Africa. In addition, mergers between Turkish banks with some of the largest global banks strengthened the nation’s financial sector. The financial sector declared a $13.5 billion profit in 2008. 

Today, banks do 90% of all financial operations in Turkey. Although half the nation does not receive banking services, there is a significant potential in sale of cards that would allow prepayments and mobile payments. Turkey appears to be on the forefront especially for the spread of NFC (near field communication) technologies. Currently, there are 60,000 work places that has POS systems and many banks are encouraging payments through NFCs. Nearly 2.5 million people prefer mobile payments. Therefore, there is a potential for further penetration of mobile payment appliances into a country with a lot of young people. Banks embrace the idea to reach the masses that do not have access to these technologies. Moreover, political stability and improvements in the financial sector compliment one another. Medium and small size companies that are affiliated with major banks are expanding to Turkey’s Kurdish east, the least developed region in the nation and even to Northern Iraq where Ziraat, İş Bankası, and Vakıfbank opened branches in 2011. 

These examples show the significance of banks in Turkey’s financial system and its development. Providing better services -both in transparency and in quality- fastens capital accumulation, reduces risk, introduces latest technology to masses that lack access, and consequently, protects the economy from crisis. 

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