B&E | Reasons of Participation for Foreign Banks in the Turkish Banking System

In this article, various reasons for the intentions of foreign banks to incrementally participate in the Turkish Banking System has been discussed!

By Suleyman Degirmen

Department of Economics, Mersin University

In recent years, foreign banks have more willingness to increase their operations in Turkey. After the crisis of February 2001, Demirbank was sold to HSBC. From February 2005, fifty percent of Turkish Economy Bank, Disbank and Yapi Kredi Bank have been respectively sold, in a row, to BNP Paribas from France, Fortis, the consortium of Koc Financial Services and UniCredito. Additionally, Sitebank, fifty percent of Garanti Bank, C Bank, Finansbank, Tekfenbank, Denizbank, Sekerbank have respectivley been sold to Novabank from Greece, Bank Hapoalim from Israil, NBG from Greece, EFG from Greece, Dexia, and Bank Turan from Kazhakistan. Oyakbank, Akbank, and state owned banks are projected for selling to foreign financial companies or banks. According to the research, the foreign banks participation rate to the TBS in terms of assets, deposits and loans are between minimum rate of 2.5% and maximum rate of 7.5% that can be considered small rate. However, the capital asset ratios has increased after the crises but non-performing loans has decreased and liquidity has looked up in the TBS.

The various reasons for the intentions of foreign banks to incrementally participate in the TBS as follows:

1. After applied/to be applied reforms toward remedying the economical/social/political structure, pessimistic expectation about the Turkey's future prevailed among foreigners.

2. Positive thinking about steady growth of economy, and about continuation of stability in economic and political conditions.

3. Turkey received a date for the accession into the European Union.

4. Turkey has a higher population growth rate and will gradually have higher per-capita income; consequently it will potentially be an emerging market for banking activities as it was the case in many sectors.

5. In the frame of globalized world, Turkey could not absent itself from foreign banks, because Turkey has desired to take its part in global economy.

6. Since the growth rate of European economies has been slowed down, and banks in the area of EU has a lower profit margins, Turkey has been alluring for foreign banks, by buying off either completely or partially.

In sum, last improvements in the TBS also have a deep impact on the decision of foreign investors. The consequences of re-structuring the system have increased its self- trust. Besides, the improvement in the capital structure of banks in the TBS and increase in their profits drew the attention of foreign banks. Therefore, the attractiveness of Turkey grows rapidly for foreign banks that want to diversify their investment options and to raise their profitability. The crucial points of the discussion are:

(i)   in what degree foreign banks/capital will dominate in the TBS,

(ii)  whether or not foreign banks will seriously concern the opportunity of Turkish economy,

(iii)  whether or not they will supply loans to Small and Medium Enterprises, (SMEs). 

Economists state contradictory opinions about issue in their speech and columns.

As for the question of why foreign bank participation rate is higher in developing or emerging markets than developed countries. Some of the economists argue that there is no need to confinement of foreign banks' involvement to the TBS because of the conditions in perfect competitive market that allows the dominance of foreign banks throughout the whole system, if there is a demand for the existence of foreign banks in the system , it seems that the degree of foreign banks' participation rate to the national banking system is circumspect.

However, a number of economists who advocate some restrictions on the dominance of foreign banks in the system are not minority Dichotomy seems to be continuous. When we take a look at other countries experiences, different approaches and applications draw attention. For instance, despite of some differences among countries, in the old western countries' banking system, experiencing a big transition in last 25 years, dominance of foreign banks in their national banking system has reached up to 90%. However, while Italy and France support their banks to participate in other countries banking system, at the same time they do not want similar involvements to occur in their own banking system. Mexico, which has 90% of foreign bank dominance, has needed to design new regulations on foreign banks' activities after seeing their adverse effects especially on loan supply. Big foreign banks have densely inclined to increase in size via buying off Turkish banks, which have a wider range of branch network. If Turkey keeps up with the international standards and control foreign banks regarding these standards, both Turkish economy and people can take advantages of it.

About The Author:

Suleyman Degirmen, Department of Economics, Mersin University, Ciftlik Koyu Campus, Turkey

This article is an excerpt from a research paper titled - The Effects of Foreign Bank Participation on the Turkish Banking System and Crisis, which is published under creative common license.

Download The Paper - LINK