The Turkish banking sector is undergoing a revolutionary transformation. For decades the playground of crooked bankers and the politicians and bureaucrats they funded, the sector is now being cleaned up.
Since 1999, when the IMF entered the scene, 20 banks have been seized and withdrawn from the market or sold. State banks, which served as private treasuries for politicians and their cronies, have been neutered.
A sector that had become almost as unlawful as the drugs trade is now effectively regulated and supervised. For this Turkey has the much-reviled IMF to thank. The Fund, understanding that money talks loudest when a country is literally bankrupt, followed an effective carrot-and-stick policy. It offered cash against reforms. Funds were made available to the government only after it passed laws listed on its stand-by agreement programme.
The policy worked extremely well. Turkey has pushed through more financial reform laws under the outgoing Bulent Ecevit coalition than at any other time in its history. Many of these were implemented half-heartedly or not all but at least they are in place.
One of the most important laws to have been passed was the banking law. This had to be re-enacted almost as soon as parliament passed it because it contained many loopholes – pierced by politicians who did not want to stop milking the banks. The Banking Regulation and Supervision Agency (BDDK in Turkish) founded under the legislation has become one of Turkey’s most respected and competent organizations. The agency became particularly effective after it was taken over by Engin Akcakoca, a tough ex-Citibanker with wide experience in the banking sector. But by this time at least $40 billion had been stripped out of the banking sector, $17 billion of it from private banks.
If there were any doubts as to whether BDDK meant business these were dispelled in June when it seized control of Pamukbank, Turkey’s sixth-largest bank (at least on paper).
“The takeover marks a revolution in Turkey’s efforts to restructure its economy,” says Baturalp Candemir, chief economist of Istanbul-based securities house HC.
Pamukbank was one of two banks controlled by Mehmet Emin Karamehmet, Turkey’s richest man until the economic crisis revealed the financial fragility of his holdings. He is the biggest shareholder in Turkey’s largest mobile telephone company, Turkcell, and internet service provider Superonline, and owned extensive holdings in other sectors, including the media.
Karamehmet fought hard to keep Pamukbank and to ensure that it be acquired by his second bank, YKB, Turkey’s fourth-largest private bank. His keenness not to relinquish Pamuk did not rest on a belief that it was a going concern or had any prospects. Pamuk had been on the critical list since the late 1980s. Karamehmet wanted to avoid being disqualified from being eligible to own a bank. Under the new banking law shareholders of a bankrupt institution cannot own shares in another. But the BDDK ruled that the acquisition plan was not “feasible and viable”. A high court order supported this decision.
Pamuk’s losses had exceeded its funds – “its financial weakness was threatening depositors’ rights as well as the safety and soundness of the financial system, and [its] capital needs [were] close to $2 billion,” said a BDDK statement.
BDDK also seized control of Karamehmet’s YKB shares, although he continues to receive dividends.
BDDK has subjected banks to a three-stage audit process in order to determine their real financial situation and capital needs. Previous to this most banks published whatever pleased them or whatever they thought would please the public and their lenders. The abandonment of this habit has enabled the public to see the true state of banks for the first time.
“The sector is a long way from being reformed but lenders from the outside see a system which is more transparent,” says John McCarthy, country manager of ING Barings. “The meal is not cooked but the ingredients are the right ones.”
McCarthy forecasts more consolidation and a voluntary exit by some banks whose shareholders, he says, have started asking themselves: “‘what are we doing in banking when we can make more money in our core business?'”
The weak state of the banking sector is damaging the economy. “Fundamentally, financial troubles in the banking sector have caused the supply of bank loans to shrink,” says Morgan Stanley analyst Serhan Cevik. “The lack of affordable credit keeps business away from investing, which in turn drives up unemployment and slows down consumer spending. Credit retrenchment remains a risk for the recovery process.”
