Focus on inclusion MEASURING FINANCIAL

INCLUSION IN TURKEY This brief summarizes the current state of financial inclusion in Turkey in terms of financial

service usage and the level of access to financial services for individuals and small and

medium-sized enterprises (SMEs).

INTRODUCTION Turkey is the 16th largest economy in the world in terms of GDP, a member of G20, OECD and a candidate

for European Union membership. Its population is technologically well-connected, with mobile and

smartphone penetration close to that of major EU nations, yet fewer than 60% of adults have a bank

account at a formal financial institution — less than across the EU and much less than the Turkish financial

infrastructure could potentially accommodate. The Microfinance Centre (MFC), with support from the

MetLife Foundation, carried out a short-term research project to explore financial inclusion issues in Turkey,

specifically to:

map information sources on usage and access to financial services and the availability of data

assess the level and quality of financial inclusion of individuals and SMEs.

The MFC uses its own diagnostic methodology (the “Access to Finance Scorecard”, or AFS) to

comprehensively assess the state of financial inclusion at a country level. Research findings provide

detailed evidence of the current state of inclusion and conditions that constitute access, and as such can

be utilized to develop strategies to broaden and deepen national access to finance.

METHODOLOGY

With support from

Overview to our

approach

Recognizing that measuring financial inclusion can be technically

complicated and resource intensive, our approach uses a

step-wise method to measuring financial service access and use.

To ensure affordability, this approach draws on available country

-level data. Our research results can be used by a range of actors,

such as financial institutions, policy makers, and central banks.

Our methodology builds the World Bank’s FinDex questions into

its design, facilitating useful cross-country comparison while

offering an in-depth analysis of country-specific issues not

covered by global research.

The AFS framework assesses inclusion and access for individuals as well as firms (micro, small and

medium enterprises). It considers financial inclusion from two perspectives:

Usage of financial products and services: share of the population and different socio-economic

groups using different types of financial services, including accounts, payments, deposit and invest-

ment products, credit and insurance.

Access to financial services: the conditions conducive to access to financial services grouped into

the supply-side, demand-side and policy-side considerations (see table below).

Supply side

Financial Infrastructure

Physical (and virtual) presence of outlets (branches, ATMs, POS, etc.)

Financial Services and Products

Availability of a range of products and services for different types of users

Policy side Pro-Access Policies and Regulations

Pro-inclusion regulation and banking provisions, active government policies to increase access to and use of financial services, consumer protection, developing the national payment system (for cashless transactions), savings and insurance schemes, as well as transparency and disclosure requirements

Demand side

Quality of Access

Proximity of providers, convenience of access, afford-ability, simplicity of applica-tion

Public Confidence in the Financial System

Trust in the security of savings, transactions, and the expectation of fair treatment by providers

Financial Literacy

Financial skills and knowledge, understanding basic terminology, ability to carry out transactions

INDIVIDUAL FINANCIAL INCLUSION

Financial service usage

Accounts and payments

Bank account penetration is comparable with

the average for upper-middle income countries

and higher than the ECA average — 58% of

adults hold a bank account.

Almost all bank account holders (56.6% of adults)

have a debit card.

Only a third of bank account holders (18% of

adults) access their bank account via internet.

Electronic payments rarely used: 11% of adults

pay bills online, although this exceeds usage in

upper-middle income peer countries (8.2%).

Account at a financial institution (% adults)

Source: Global Findex Database 2011

58%

45%

57%

89%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Turkey ECA Upper-middle

income

High income

countries

Deposits and investments

In general, the use of deposit products is low, but still higher than in other ECA countries.

There is little information about the usage of different types of deposit/savings accounts.

However, overall savings rates in Turkey are low compared to international rates.

Ownership of deposit accounts (% adults)

Source: Financial Capability Survey 2012

18%7% 12% 11%

0%

20%

40%

60%

80%

100%

Turkey ECA Turkey ECA

Have formal savings Own investment or private

pension product

Credit

Credit card penetration is rather high — 48% of adults own a credit card, and consumer debt in Turkey currently equals 55% of household dispos-able income.

Less than one-fifth of the adult population has a non-credit card debt (e.g. a loan) from a financial institution.

Overall, access to consumer credit appears to be both easy and subject to lax policies, contributing to debt overhang and potential over-indebtedness of clients.

Ownership of credit (% adults)

48%

19% 16%16%23%

50%

0%

20%

40%

60%

80%

100%

Have a credit card Have oustanding

general purpose or

othercredit

Have formal current

credit

Global Findex 2011 BAT 2012 Financial Capability

Survey 2012

Turkey ECA High income countries

6%

57%

36%

27%

13%10% 9% 8% 7%

0%

10%

20%

30%

40%

50%

60%

At

leas

t o

ne

insu

ran

ce p

rod

uct

Pe

rso

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l acc

ide

nt

Life

Mo

tor

thir

d p

art

yli

abili

ty

Na

tura

l d

isa

ste

r

Pro

pe

rty

da

ma

ge

Fir

e

Mo

tor

Ve

hic

leP

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sica

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am

age

He

alt

h

Financial Capability Survey 2012 Insurance Association of Turkey, 2012

Insurance

Inconsistencies in data from various sources make definitive conclusions difficult to draw.

According to industry statistics:

Slightly more than half of adults (57%) have accident insurance, often bought as group insurance.

About one-third of adults are insured for life, often through group policies.

Natural disaster insurance covers mostly earthquakes and is held by 13% of adults.

Ownership of insurance policies (% adults)

Access to finance

Supply

Infrastructure

Institutional coverage

Bank branch infrastructure is poorer than in comparable countries — on average, there are 19 branches per 100,000 adults.

ATM penetration is better than in the ECA countries but below the EU level. The ATM network has been growing rapidly in the last few years — on average, there are 63 ATMs per 100,000 adults.

Number of bank branches, ATMs/100K adults

Source: IMF Financial Access Survey 2012

0

10

20

30

40

50

60

70

80

90

2010 2011 2012 2010 2011 2012

EU

ECA

Turkey

ECA

EU

Turkey

Bank branches per 100,000 adults ATMs per 100,000 adults

Geographic coverage

Regions exhibit uneven density of bank infrastructure (branches and ATMs).

Higher penetration rates prevail in Western regions, in particular in the Aegean (74 ATMs per 100,000 adults) and West Marmara (24 branches per 100,000 adults) regions.

East Anatolia has the lowest branch and ATM penetration (8 branches and 25 ATMs per 100,000 adults).

Number of ATMs per 100K adults

Source: MFC analysis from Central Bank data (2012)

ATM penetration compared to country average >=20% higher 10 to 19% lower

10 to 19% higher >= 20% lower

-/+10%

Financial products and services

Over half of banks offer a broad range of financial services to individuals, however, there is a group of banks (development and investment banks) which serve only corporate clients.

Banks offering financial products to

individuals (%)

Source: Bank websites (accessed March 2014)

67% 65% 61% 59% 55% 55%

33% 29%

12%

0%

20%

40%

60%

80%

100%

consum

er

cre

dit

curr

ent

account

deposit

accounts

debit/c

redit

card

s

investm

ent

pro

ducts

mort

gage

cre

dit

money

transfe

rs

Inte

rnet

access

Mobile

access

Demand

Quality of access

Affordability

All banks charge current account maintenance fees of, on average, 7.88 TL (3.67 USD) per month.

Only a few banks charge account opening fee.

Complexity of procedures

Procedures for opening the account are simple and require few documents.

A large number of banks (including those with the largest retail network) offer electronic access to bank accounts and payment options, thus bringing convenience to the use of the account.

Public perceptions and trust

In general, trust towards various public and private institutions in Turkey is higher than in Western Europe.

Still, financial institutions are among the least trusted — banks and other financial service providers are ranked as the third least worth confidence — the banking industry earns trust of only 36% of adults. Only trade unions and foreign investors earn less trust in Turkey.

Trust in institutions (% adults)

Source: Life in Transition 2010

66%62%

58% 57% 56% 56% 53%49%

40% 37% 36% 36%29%

63%

0%10%20%30%40%

50%60%70%80%

Army

Police

Presid

ency

Religio

us inst

itutio

ns

Loca

l goc

ernm

ent

Regional

gove

rnm

ent

Govern

men

t

Courts

Parlia

men

tNGOs

Politica

l Parti

es

Banks

and fi

nancia

l sys

tem

Trad

e unio

ns

Fore

ign in

vest

ors

Turkey W Europe

In the regions, the highest level of trust towards financial institutions is in East Anatolia — the region with the lowest density of bank branches and ATMs.

Istanbul demonstrates quite high trust levels towards financial institutions.

.

Trust in banks in the regions compared to country average Source: Life in Transition 2010

Trust in banks compared to country average >=20% higher 10 to 19% lower

10 to 19% higher >= 20% lower

-/+10%

Financial capability

Financial knowledge

Financial knowledge of Turkish adults is lower than in other ECA countries, in particular with regards to understanding simple financial con-cepts.

Seniors and individuals with over 5 children have the lowest knowledge.

The highest knowledge is among educated and formally-employed people, but also among the self-employed.

Financial knowledge (% of adults)

Source: Financial Capability Survey 2012

0

10

20

30

40

50

60

70

80

90

100

Calculation of

simple division

Understanding

of inflation

Understanding

of simple

interest

Uunderstanding

of compound

interests

Turkey

ECA

Financial behavior

Individuals in Turkey demonstrate poor financial behavior compared to the ECA average.

As in other countries, long-term financial plan-ning and frugality (not overspending or over-borrowing) are the most widespread practices.

Turkish adults have a very low propensity to save compared to other ECA countries.

Financial capability score

Scores range between 0 (lowest score) and 100 (highest score)

Source: Financial Capability Survey 2012

0

10

20

30

40

50

60

70

80

90

100

Not

Overspending

Planning for

Old Age

Living Within

Means

Planning

Expenses

Budgeting Monitoring

Expenses

Trying to save

regulalry

Turkey

ECA

Policy

Turkey is a member of Alliance for Financial Inclusion (AFI) — a national financial inclusion strategy is

in development.

Strong consumer protection — by-laws regulate annual interest rate calculations and early

repayment discounts on credit.

The Capital Markets Board is developing and implementing a Financial Education Strategy.

Government-level institutions promote greater participation in savings and pension schemes, and

also encourage recipients of state transfers to open accounts.

SME FINANCIAL INCLUSION

34%

16%

3% 5%

41%

19% 20%

8%12%

36%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

interest rates orprice too high

insufficientcollateral orguarantee

financing notavailable at all

other no obstacles

Turkey EU 28

Financial service usage

Accounts and payments

90.6% of SMEs have a bank account. Source: Enterprise survey 2008

Credit

Use of debt financing

71% of SMEs have used debt financing with-

in the last 6 months.

Bank loans are the most common source of

external financing, used by 58% of SMEs.

Trade credit is the second most popular

instrument, used by 47% of SMEs.

Overdraft facilities, and leasing/

factoring facilities, are less frequently used

in Turkey compared to other EU countries.

Usage of external financing by SMEs (% firms)

Source: EU SAFE 2013

58%

47%

19% 18% 17%13%

32% 32%39% 35%

13% 15%

0%

10%20%

30%

40%

50%60%

70%

80%90%

100%

ba

nk

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ase

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fact

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ng

gra

nt/

sub

sid

ize

d

loa

n

oth

er

loa

ns

Turkey

EU 28

Obstacles to using debt financing

The biggest barrier to debt financing is the high cost of debt servicing.

High collateral requirements are the second most important obstacle.

Limiting factors to obtain debt financing (% firms)

Source: EU SAFE 2013

Future outlook Firms look optimistically towards the future, expecting stability or even improvement in the supply of external financing.

Perception of upcoming changes in availability of types of financing (% firms)

Source: EU SAFE 2013

42%

19%27%

16%

41%

14%

45%

14%

54%

67%

69%

71%

56%

74%

50%

78%

4%15%

4%13%

4%11%

4% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Turkey EU 28 Turkey EU 28 Turkey EU 28 Turkey EU 28

bank loans bank overdraft trade credit equity

will deteriorate

will remain unchanged

will improve

0

0

0

1

2

1

3

6

8

5

2

1

2

0

9

0

6

3

0 5 10 15

foreign Banks having branches in Turkey

foreign participation banks founded in Turkey

banks under the deposit insurance fund

state-owned development and investment banks

privately owned participation banks

privately-owned development and investment banks

state-owned deposit banks

foreign banks founded in Turkey

privately-owned deposit banks

Access to finance

Supply

Infrastructure

Institutional coverage

21 banks, or 43% of the total, provide SME loans.

74 specialized leasing companies offer leasing.

76 specialized factoring companies provide factoring services.

2 MFIs provide microcredit to low-income female entrepreneurs

2 public loan funds provide low-interest loans to SMEs.

Number of banks offering SME credit

Source: Websites of deposit and participation banks (March 2014)

Financial products and services

SMEs have access to a variety of financing products:

Loans: Cash loans, discount and purchase loans, spot loans, day loans

Overdrafts

Credit cards

Non-cash loans (letter of credit, letter of guarantee)

Factoring/leasing services

Demand

Quality of Access

Over 40% of SMEs do not see any obstacles to obtain financing.

Low affordability, and high interest rates, on credit are perceived the biggest concern in using external funding affecting more SMEs in 2013 compared to 2 years previ-ously.

High guarantee requirements are the sec-ond most limiting factor in accessing SME credit, although experienced by fewer SMEs in 2013 than in 2011.

SME credit is usually indexed to foreign cur-rencies, so currency fluctuations affect credit cost.

Long-term loans (over 10 years) are rarely available, limiting larger investments in company development

Significance of factors limiting access to financing Source: EU SAFE 2013

30%

18%

1%

1%

47%

34%

16%

3%

5%

41%

0% 20% 40% 60% 80% 100%

excessive

interest rates

insufficient

collateral or

guarantee

unavailable

financing

other

no obstacles

2011 2013

Public perception and trust

Access to finance is not the biggest problem facing Turkish SMEs. As only 16% consider lack or limited access to be the biggest constraint, making it fourth in the list of pressing concerns.

The most pressing problems for Turkish SMEs (mirroring other EU28 firms) are difficulties in finding customers, capable staff and experienced managers, as well as high costs of running the business.

Most pressing problems for SMEs

Source: EU SAFE 2013

24%

20%17%

16%

12%9%

22%

14%13%

15%14% 14%

0%

5%

10%

15%

20%

25%

30%

Finding

customers

Availability

of skilled

staff or

experienced

managers

Costs of

production or

labour

Access to

finance

Competition Regulation

Turkey

EU 28

Over half of SMEs see the availability of various funding instruments as unchanged in recent years.

However, the number of SMEs noticing improved access is growing. For instance, 37% of SMEs saw better access to equity, while almost quarter of SMEs noticed improvements in availability of bank loans.

Less than 10% noted a deterioration in availability of various forms of financing.

Perception of changes in the availability of financing in the last 6 months

Source: EU SAFE 2013

10%

9%

7%

6%

24%

21%

37%

22%

17%

14%

24%

20%

39%

59%

28%

50%

52%

59%

52%

63%

52%

60%

51%

59%

3%

3%

2%

5%

5%

4%

5%

7%

7%

5%

7%

5%

47%

24%

63%

29%

20%

10%

5%

4%

24%

15%

17%

11%

0%

6%

0%

9%

1%

6%

2%

5%

1%

5%

1%

6%

0% 20% 40% 60% 80% 100%

2013

2011

2013

2011

2013

2011

2013

2011

2013

2011

2013

2011

Oth

er

De

bt

se

cu

ritie

s

issu

ed

Tra

de

cre

dit

Eq

uity

Ba

nk

ove

rdra

ft,

cre

dit lin

e

or

cre

dit

ca

rds

ove

rdra

ft

Ba

nk

loa

n

Improved Remained unchanged Deteriorated Not applicable No answer

Business confidence

Optimistic attitudes prevail in retail trade and services, with a prevalence of firms with a good business situation and turnover in the last 3 months, and positive expectations regarding turnover, employment and investment in the next 6 months.

Over the last three years, the construction sector shows the lowest levels of optimism.

Sectoral confidence index

The index takes values between 0 and 200, whereby values above 100 indicate an optimistic outlook. Source: Business Tendency Survey, TurkStat 2014

0

20

40

60

80

100

120

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14

construction

services

retail trade

Financial capability

There are no separate surveys measuring financial capability of entrepreneurs.

Policy

Turkey is one of the co-chairs in SME Finance Sub-Group of the Global Partnership for Financial Inclusion (GPFI).

A number of programs exist to support micro, small and medium-sized enterprises:

KOSGEB: consultancy, training, technology development, innovation, quality improvement, export orientation, interest rate subsidies.

The Turkish Guarantee Fund (KGF) provides guarantees to SMEs applying for bank credit.

The SME Venture Capital Investment Trust (KOBI A.S.) is a risk capital intermediation.

Conclusions

Individuals SMEs

Level of financial service usage

Usage level for different financial services

comparable to that of other ECA countries:

High percentage of the unbanked population

Low saving rates

High credit card penetration

Broad SME credit usage, with many firms

taking bank loans and expecting to continue

using external funding.

Enterprise credit available from the majority of

deposit banks (state-owned and foreign) .

Level of access to financial services

Good supply of finance, with banking infrastruc-

ture comparable with peer countries.

However, uneven distribution between regions,

with very low penetration of bank branches and

ATMs in East Anatolia – the poorest region with

low population density.

On the demand-side: financial education worse

than the comparable countries.

In the policy area: a number of efforts under-

way to remove barriers and improve financial

inclusion. However, effectiveness has not yet

been measured.

Reasonably good supply of financial services,

with conditions of access seen by SMEs as im-

proving.

High interest rates are the main limiting factor,

mitigated by state-subsidized credit availabil-

ity.

On the demand side: lack of information about

the level of financial capability and attitudes,

limiting understanding of SME preparedness

for better financial inclusion.

Policy area: government focus on improving

financial inclusion of SMEs — SME financial

access at the top of G20 agenda.

Availability and quality of data on financial inclusion

Low availability of local data sources regarding

the financial service usage levels.

Quite good information about various aspects

of access, in particular about the banking infra-

structure, trust and confidence, and financial

capability.

However, poor disaggregation of data by socio-

economic groups, hence little information

about usage and access to financial services by

low-income and vulnerable groups.

A number of data types available with the re-

gional breakdown, but insufficient for con-

ducting full regional analysis.

Data about the service usage level and percep-

tion of the quality of access to external funding

easily available from European Commission

statistics, updated annually.

Possible comparisons with EU countries.

Lack of information about usage of other types

of financial services, including savings and in-

vestment or insurance.

No segmented usage and access information

by firm characteristic (size, business type, re-

gion).

Little information about the quality of access in

terms of product conditions.

Lack of information about level of financial ca-

pability and attitudes.

Our cost-effective methodology

allows us to monitor access to

finance using available data

across a number of key

dimensions (see chart).

Learn more at www.mfc.org.pl

About the Access to Finance

Scorecard (AFS)

Individuals SMEs

About MetLife Foundation (MLF) MetLife Foundation was created in 1976 to continue MetLife’s long tradition of corporate contributions

and community involvement. Today, the Foundation is dedicated to advancing financial inclusion,

committing $200 million over the next five years to help build a secure future for

individuals and communities around the world.

MetLife Foundation is affiliated to MetLife, Inc. a leading global provider of insurance, annuities and

employee benefit programs, serving 90 million customers. Through its subsidiaries and affiliates,

MetLife holds leading market positions in the United States, Japan, Latin America,

Asia, Europe and the Middle East.

For more information visit www.metlife.org

About the MFC The Microfinance Centre (MFC) is a regional microfinance resource center and network.

Our mission is to contribute to poverty reduction and the development of human

potential by promoting a socially-oriented and sustainable microfinance sector that provides

adequate financial and non-financial services to a large numbers of

poor families and micro-entrepreneurs.

Our 104 members are committed to advancing the mission of MFC throughout Europe and Central Asia.

They represent a diverse range of institutional types along the microfinance value chain:

from non-bank and bank service microfinance providers, support organizations (including national and

international networks), investors and donors. Together, they work in 33 countries and deliver

financial services (mainly credit) to well over 5 million micro-entrepreneurs, small and

medium enterprises or/and low-income households.

Contact us to learn more:

Microfinance Centre (MFC)

Ul. Noakowskiego 10/38

00-666 Warsaw, Poland

tel: + 48 22 622 34 65

justyna@mfc.org.pl

www.mfc.org.pl