Mixed signals are recently coming from the Turkish Banking sector. The industry, on the one hand, has recently seen an unprecedented levels of volume which is estimated to be USD$ 855 billion to dwarf the economic might of 22 of the 28 EU member states and on the other hand has been witnessing a reduction in the credit volume that went down to 1.130 trillion Turkish liras as of the July 2014. It is not easy to comprehend the meaning of such conflicting signals emanating from the Turkish banking industry. In order to make sense of the current shape that the Turkish banking industry takes, it is better to see the bigger picture in Turkey which has been leading the Turkish authorities to regulate the industry in increasing frequency.
Regulatory Climate in the Turkish Economy
Turkish economic performance throughout the entire last decade was remarkable. Despite fluctuations which at times led the country to register almost double digit rates of growth and at times rates much below aforementioned apex, the country had managed to record an average rate of 4% annual growth rate throughout the last decade. However the growth came at the expense of a growing account deficit accompanied by low levels of saving which had hit the rock bottom to see the nadir of the Republican era with only a 12% rate of national savings.
Such a climate of growing current account deficit and low levels of national savings triggered a series of regulations on the part of the authorities to clamp down consumer spending which has been mainly supported by cheap credits provided by the Turkish banking industry. In order to do so a new regulatory framework was issued by the Turkish authorities re-arranging the number of installments that the consumers can benefit in their mobile phone purchases which are seen as one of the most important import items that increases the current account deficit. Now the number of installments which used to amount to 24 went down to a single one installment. A similar story has been unfolding for the automotive sector. The number of installments which were previously allowed to reach 48 now reduced in half. Such measures impair the capacity of the Turkish consumers, who rely on cheap bank credits with long term pay back terms, to spend on such items and hence leave the Banks with a smaller sized market to issue particularly lucrative consumer credits.
How the Turkish Banking Industry Remain Strong?
The inevitable question to be asked for the Turkish banking industry is the reason behind its strength despite the apparently disfavoring conditions. The short as well as the precise answer is regulations. Turkish banking industry is one of the best regulated banking industries in Europe. It does not only one of the leading banking industries in Europe in terms of a high level of compliance with the Basel II regulations but also it already meets some of the Banking standards enumerated in the Basel III regulations. As a result of such compliance the Turkish banks are being audited and monitored better and more importantly having a capital adequacy ratio over 17 % which is already above the level imposed by Basel II regulations. Moreover such regulatory tendencies against consumer spending has gradually led the Turkish banks to shift their focus to formerly uncharted areas like Islamic financing instruments of Sukuk and Murabaha. Also the Turkish banks new found willingness to engage in project finance especially in the construction sector and their changing direction towards credit provision for the Industry rather than the consumer are quite positive developments for the general health of the Turkish economy which is increasingly finding herself with a banking industry channeling the financial resources of the country to the section of the population; the industrialists, which will further invest those sums to the industrial – economic growth of the country.
The mixed signals emanating from the Turkish banking industry should not serve as a cause for alarm. Despite the recent regulations that impede the consumer spending on some certain electronic items and the automobiles, the Turkish banking industry is still resilient in the sense that it has managed to make the shift from the provision of credits to the consumers to the credit provision for project finance purposes. The new financial instruments like Sukuk and Murabaha are signals that the diversity of the financial instruments that the industry possesses will likely to increase. Finally the well regulated nature of the Turkish banking industry still serves as an iron clad guarantee for the continuing resilience of the industry for the foreseeable future.