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Skip Navigation LinksHome :: Back Issues :: Turkey: Sustaining the unsustainable

April 1999

Turkey: Sustaining the unsustainable


Despite persistently high inflation and international financial turmoil, the Turkish economy continues to defy gravity. The country's banks lend to the treasury in lira at high interest rates. As a result, they can offer attractive interest rates on foreign currency deposits too. Armed with a fictitious $50,000, Metin Munir finds out just how good these rates can be and explores the role played by the banks in propping up Turkey's "unsustainable" economy. By Metin Munir.




Turkey's determinedly weak currency
Akbank shakes off the bonds of history
Korfez changes ahead of tough times
When small is beautiful

If I had $50,000, just how much interest could I get?

There is no simple answer. Interest rates go up and down daily and vary from bank to bank. The interest you can get on your dollar from a Turkish bank can be more than four times the figure offered by a US bank. This interest rate variation is even more evident with the Turkish lira. Indeed Mahfi Egilmez, ex-secretary general of the Turkish treasury, calculated that in 1998 the real interest on treasury bills oscillated within a range of some 1,866%.

To profit from fluctuating interest rates it is necessary to do some legwork. Turkish banks do not post their interest rates and face-to-face negotiations are advisable because there is likely to be some room for bargaining. The more money you have and the longer you are willing to deposit it, the higher the interest you are likely to be offered.

So I get out of a taxi in Uskudar (on the Asian side of Istanbul), turn up the collar of my trench coat, and try to look like a man with $50,000 in his pocket. Uskudar's high street is a good place to carry out this type of research; within a stretch of less than a kilometre there are branches of 10 different banks nestling under the shadows of the Ottoman mosques. I step into a branch of Isbank, the biggest of Turkey's commercial banks.

As it happens, I could not have chosen a worse day. It was the first day of the month and a Monday, when the banks are at their busiest. Isbank was so crowded that I had to queue up to join the queue. I waited my turn at a small machine, which spat out a slip of paper establishing my place in the queue. At 10.45am, I was the 700th customer to have brought my business there. A screen indicated that there were 295 clients ahead of me in the queue. I could either wait for my turn or come back later. I decided to give the other banks in the district a try.

Across the street at Yapi Kredi (YKB), another bank popular with consumers, the queue had spilled out into the street and the tellers, mostly women, seemed to be on the verge of hysteria. Turkish banks have spent millions of dollars establishing one of the most advanced electronic banking infrastructures in Europe and almost all transactions can be done through ATM machines, telephone lines or the internet. But many people are still reluctant to let their fingers do the walking.

A middle-aged woman who was obviously illiterate thrust a receipt into my face, asking me to check whether the teller had really deposited her TL15 million ($41) into her account or taken advantage of her and pocketed some of it. I assured her that the transaction was entirely above-board, but I could not relieve her of her anxiety. She marched up to another person for reaffirmation.

Fortunately YKB's foreign-exchange department was on the first floor and was relatively quiet. Here I got my first offer for my fictitious $50,000: 12.5% a year.

At the new Iktisat branch nearby they bid 13%. At Finansbank a charming lady offered me 13.5%. At Garanti, again a top-five bank, I could not get more than 12.5%. When I showed him my other offers my interlocutor rang headquarters to negotiate a better rate but to no avail. It seemed that I had peaked at Finansbank. To summarize: the rest of the Uskudar banks made their offers in the 10.5% to 12.5% belt, while Isbank brought me down to 6.5% and Ziraat, the state-owned behemoth, offered a derisory 3%.

There are many reasons why there are large variations in the interest rates offered for the same sum. Desperation is one of them. The rumour in the market, for example, is that Interbank was offering 27% on dollar deposits, before it was nationalized by the central bank in January to prevent it from going bankrupt. Another reason is the shortage of funds. There has been a drastic drop in the inflow of foreign capital. "We have reduced the funds we make available to Turkey by 80% [since the Russian crisis]," says Aydin Ulusan, Turkey representative for WestMerchant, a member of the WestLB Group. "This ration is more or less the same for everyone else." Many banks are finding themselves unable to roll over their debt or are obliged to roll over a part of it at a higher cost.

Shopping around

Some banks have discovered an ingenious way of paying depositors extra interest and getting the government to foot the bill. A customer wishing to open a dollar account is given the choice of making a deposit locally or in the bank's offshore affiliate (which is often referred to as a Bahrain account because many Turkish banks have offshore bases in the Gulf state). Foreign-currency deposits are subject to an 11% reserve requirement in Turkey, which adds to the cost. The offshore account is outside the Turkish central bank's jurisdiction and, being free of this requirement, is therefore 11% cheaper. The bank passes on some of this profit to its client. According to some estimates, between 15% and 20% of the $33 billion in the banking system's foreign currency accounts are in Turkish offshore bank deposits. The transaction is entirely legal.

The depositor shopping for the fattest interest rate (there are rumours that some banks are offering between 16% and 17% a year net) is in a unique position: he does not have to worry whether the bank he has chosen may be about to fold. The government has taken on all the risk, first by officially guaranteeing all non-corporate deposits in the system and, second, by ordering the central bank not to allow any bank to go under.
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